[Congressional Record Volume 150, Number 126 (Thursday, October 7, 2004)]
[House]
[Pages H8411-H8640]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page H8411]]

House of Representatives

                  Conference Report (H. Rept. 108-755)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     4520), to amend the Internal Revenue Code of 1986 to remove 
     impediments in such Code and make our manufacturing, service, 
     and high-technology businesses and workers more competitive 
     and productive both at home and abroad, having met, after 
     full and free conference, have agreed to recommend and do 
     recommend to their respective Houses as follows:
       That the House recede from its disagreement to the 
     amendment of the Senate and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:

                      SECTION 1. SHORT TITLE; ETC.

       (a) Short Title.--This Act may be cited as the ``American 
     Jobs Creation Act of 2004''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--The table of contents of this Act 
     is as follows:

        TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR 
                        EXTRATERRITORIAL INCOME

Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Deduction relating to income attributable to domestic 
              production activities.

                   TITLE II--BUSINESS TAX INCENTIVES

                  Subtitle A--Small Business Expensing

Sec. 201. 2-year extension of increased expensing for small business.

                        Subtitle B--Depreciation

Sec. 211. Recovery period for depreciation of certain leasehold 
              improvements and restaurant property.

                  Subtitle C--Community Revitalization

Sec. 221. Modification of targeted areas and low-income communities for 
              new markets tax credit.
Sec. 222. Expansion of designated renewal community area based on 2000 
              census data.
Sec. 223. Modification of income requirement for census tracts within 
              high migration rural counties.

          Subtitle D--S Corporation Reform and Simplification

Sec. 231. Members of family treated as 1 shareholder.
Sec. 232. Increase in number of eligible shareholders to 100.
Sec. 233. Expansion of bank S corporation eligible shareholders to 
              include IRAs.
Sec. 234. Disregard of unexercised powers of appointment in determining 
              potential current beneficiaries of ESBT.
Sec. 235. Transfer of suspended losses incident to divorce, etc.
Sec. 236. Use of passive activity loss and at-risk amounts by qualified 
              subchapter S trust income beneficiaries.
Sec. 237. Exclusion of investment securities income from passive income 
              test for bank S corporations.
Sec. 238. Relief from inadvertently invalid qualified subchapter S 
              subsidiary elections and terminations.
Sec. 239. Information returns for qualified subchapter S subsidiaries.
Sec. 240. Repayment of loans for qualifying employer securities.

                 Subtitle E--Other Business Incentives

Sec. 241. Phaseout of 4.3-cent motor fuel excise taxes on railroads and 
              inland waterway transportation which remain in general 
              fund.
Sec. 242. Modification of application of income forecast method of 
              depreciation.
Sec. 243. Improvements related to real estate investment trusts.
Sec. 244. Special rules for certain film and television productions.
Sec. 245. Credit for maintenance of railroad track.
Sec. 246. Suspension of occupational taxes relating to distilled 
              spirits, wine, and beer.
Sec. 247. Modification of unrelated business income limitation on 
              investment in certain small business investment 
              companies.
Sec. 248. Election to determine corporate tax on certain international 
              shipping activities using per ton rate.

   Subtitle F--Stock Options and Employee Stock Purchase Plan Stock 
                                Options

Sec. 251. Exclusion of incentive stock options and employee stock 
              purchase plan stock options from wages.

     TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS

            Subtitle A--Volumetric Ethanol Excise Tax Credit

Sec. 301. Alcohol and biodiesel excise tax credit and extension of 
              alcohol fuels income tax credit.
Sec. 302. Biodiesel income tax credit.
Sec. 303. Information reporting for persons claiming certain tax 
              benefits.

                  Subtitle B--Agricultural Incentives

Sec. 311. Special rules for livestock sold on account of weather-
              related conditions.
Sec. 312. Payment of dividends on stock of cooperatives without 
              reducing patronage dividends.
Sec. 313. Apportionment of small ethanol producer credit.
Sec. 314. Coordinate farmers and fishermen income averaging and the 
              alternative minimum tax.
Sec. 315. Capital gain treatment under section 631(b) to apply to 
              outright sales by landowners.
Sec. 316. Modification to cooperative marketing rules to include value 
              added processing involving animals.
Sec. 317. Extension of declaratory judgment procedures to farmers' 
              cooperative organizations.
Sec. 318. Certain expenses of rural letter carriers.
Sec. 319. Treatment of certain income of cooperatives.
Sec. 320. Exclusion for payments to individuals under National Health 
              Service Corps loan repayment program and certain State 
              loan repayment programs.
Sec. 321. Modification of safe harbor rules for timber REITs.
Sec. 322. Expensing of certain reforestation expenditures.

             Subtitle C--Incentives for Small Manufacturers

Sec. 331. Net income from publicly traded partnerships treated as 
              qualifying income of regulated investment companies.
Sec. 332. Simplification of excise tax imposed on bows and arrows.
Sec. 333. Reduction of excise tax on fishing tackle boxes.
Sec. 334. Sonar devices suitable for finding fish.

[[Page H8412]]

Sec. 335. Charitable contribution deduction for certain expenses 
              incurred in support of Native Alaskan subsistence 
              whaling.
Sec. 336. Modification of depreciation allowance for aircraft.
Sec. 337. Modification of placed in service rule for bonus depreciation 
              property.
Sec. 338. Expensing of capital costs incurred in complying with 
              Environmental Protection Agency sulfur regulations.
Sec. 339. Credit for production of low sulfur diesel fuel.
Sec. 340. Expansion of qualified small-issue bond program.
Sec. 341. Oil and gas from marginal wells.

  TITLE IV--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES

Sec. 401. Interest expense allocation rules.
Sec. 402. Recharacterization of overall domestic loss.
Sec. 403. Look-thru rules to apply to dividends from noncontrolled 
              section 902 corporations.
Sec. 404. Reduction to 2 foreign tax credit baskets.
Sec. 405. Attribution of stock ownership through partnerships to apply 
              in determining section 902 and 960 credits.
Sec. 406. Clarification of treatment of certain transfers of intangible 
              property.
Sec. 407. United States property not to include certain assets of 
              controlled foreign corporation.
Sec. 408. Translation of foreign taxes.
Sec. 409. Repeal of withholding tax on dividends from certain foreign 
              corporations.
Sec. 410. Equal treatment of interest paid by foreign partnerships and 
              foreign corporations.
Sec. 411. Treatment of certain dividends of regulated investment 
              companies.
Sec. 412. Look-thru treatment for sales of partnership interests.
Sec. 413. Repeal of foreign personal holding company rules and foreign 
              investment company rules.
Sec. 414. Determination of foreign personal holding company income with 
              respect to transactions in commodities.
Sec. 415. Modifications to treatment of aircraft leasing and shipping 
              income.
Sec. 416. Modification of exceptions under subpart F for active 
              financing.
Sec. 417. 10-year foreign tax credit carryover; 1-year foreign tax 
              credit carryback.
Sec. 418. Modification of the treatment of certain REIT distributions 
              attributable to gain from sales or exchanges of United 
              States real property interests.
Sec. 419. Exclusion of income derived from certain wagers on horse 
              races and dog races from gross income of nonresident 
              alien individuals.
Sec. 420. Limitation of withholding tax for Puerto Rico corporations.
Sec. 421. Foreign tax credit under alternative minimum tax.
Sec. 422. Incentives to reinvest foreign earnings in United States.
Sec. 423. Delay in effective date of final regulations governing 
              exclusion of income from international operation of ships 
              or aircraft.
Sec. 424. Study of earnings stripping provisions.

       TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES

Sec. 501. Deduction of State and local general sales taxes in lieu of 
              State and local income taxes.

              TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM

Sec. 601. Short title.

  Subtitle A--Termination of Federal Tobacco Quota and Price Support 
                                Programs

Sec. 611. Termination of tobacco quota program and related provisions.
Sec. 612. Termination of tobacco price support program and related 
              provisions.
Sec. 613. Conforming amendments.
Sec. 614. Continuation of liability for 2004 and earlier crop years.

    Subtitle B--Transitional Payments to Tobacco Quota Holders and 
                          Producers of Tobacco

Sec. 621. Definitions.
Sec. 622. Contract payments to tobacco quota holders.
Sec. 623. Contract payments for producers of quota tobacco.
Sec. 624. Administration.
Sec. 625. Use of assessments as source of funds for payments.
Sec. 626. Tobacco Trust Fund.
Sec. 627. Limitation on total expenditures.

               Subtitle C--Implementation and Transition

Sec. 641. Treatment of tobacco loan pool stocks and outstanding loan 
              costs.
Sec. 642. Regulations.
Sec. 643. Effective date.

                  TITLE VII--MISCELLANEOUS PROVISIONS

Sec. 701. Brownfields demonstration program for qualified green 
              building and sustainable design projects.
Sec. 702. Exclusion of gain or loss on sale or exchange of certain 
              brownfield sites from unrelated business taxable income.
Sec. 703. Civil rights tax relief.
Sec. 704. Modification of class life for certain track facilities.
Sec. 705. Suspension of policyholders surplus account provisions.
Sec. 706. Certain Alaska natural gas pipeline property treated as 7-
              year property.
Sec. 707. Extension of enhanced oil recovery credit to certain Alaska 
              facilities.
Sec. 708. Method of accounting for naval shipbuilders.
Sec. 709. Modification of minimum cost requirement for transfer of 
              excess pension assets.
Sec. 710. Expansion of credit for electricity produced from certain 
              renewable resources.
Sec. 711. Certain business credits allowed against regular and minimum 
              tax.
Sec. 712. Inclusion of primary and secondary medical strategies for 
              children and adults with sickle cell disease as medical 
              assistance under the Medicaid program.
Sec. 713. Ceiling fans.
Sec. 714. Certain steam generators, and certain reactor vessel heads 
              and pressurizers, used in nuclear facilities.

                     TITLE VIII--REVENUE PROVISIONS

 Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and 
                         Corporate Expatriation

Sec. 801. Tax treatment of expatriated entities and their foreign 
              parents.
Sec. 802. Excise tax on stock compensation of insiders in expatriated 
              corporations.
Sec. 803. Reinsurance of United States risks in foreign jurisdictions.
Sec. 804. Revision of tax rules on expatriation of individuals.
Sec. 805. Reporting of taxable mergers and acquisitions.
Sec. 806. Studies.

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

Sec. 811. Penalty for failing to disclose reportable transactions.
Sec. 812. Accuracy-related penalty for listed transactions, other 
              reportable transactions having a significant tax 
              avoidance purpose, etc.
Sec. 813. Tax shelter exception to confidentiality privileges relating 
              to taxpayer communications.
Sec. 814. Statute of limitations for taxable years for which required 
              listed transactions not reported.
Sec. 815. Disclosure of reportable transactions.
Sec. 816. Failure to furnish information regarding reportable 
              transactions.
Sec. 817. Modification of penalty for failure to maintain lists of 
              investors.
Sec. 818. Penalty on promoters of tax shelters.
Sec. 819. Modifications of substantial understatement penalty for 
              nonreportable transactions.
Sec. 820. Modification of actions to enjoin certain conduct related to 
              tax shelters and reportable transactions.
Sec. 821. Penalty on failure to report interests in foreign financial 
              accounts.
Sec. 822. Regulation of individuals practicing before the Department of 
              Treasury.

                       Part II--Other Provisions

Sec. 831. Treatment of stripped interests in bond and preferred stock 
              funds, etc.
Sec. 832. Minimum holding period for foreign tax credit on withholding 
              taxes on income other than dividends.
Sec. 833. Disallowance of certain partnership loss transfers.
Sec. 834. No reduction of basis under section 734 in stock held by 
              partnership in corporate partner.
Sec. 835. Repeal of special rules for FASITS.
Sec. 836. Limitation on transfer or importation of built-in losses.
Sec. 837. Clarification of banking business for purposes of determining 
              investment of earnings in United States property.
Sec. 838. Denial of deduction for interest on underpayments 
              attributable to nondisclosed reportable transactions.
Sec. 839. Clarification of rules for payment of estimated tax for 
              certain deemed asset sales.
Sec. 840. Recognition of gain from the sale of a principal residence 
              acquired in a like-kind exchange within 5 years of sale.
Sec. 841. Prevention of mismatching of interest and original issue 
              discount deductions and income inclusions in transactions 
              with related foreign persons.
Sec. 842. Deposits made to suspend running of interest on potential 
              underpayments.
Sec. 843. Partial payment of tax liability in installment agreements.
Sec. 844. Affirmation of consolidated return regulation authority.
Sec. 845. Expanded disallowance of deduction for interest on 
              convertible debt.

                           Part III--Leasing

Sec. 847. Reform of tax treatment of certain leasing arrangements.
Sec. 848. Limitation on deductions allocable to property used by 
              governments or other tax-exempt entities.
Sec. 849. Effective date.

               Subtitle C--Reduction of Fuel Tax Evasion

Sec. 851. Exemption from certain excise taxes for mobile machinery.
Sec. 852. Modification of definition of off-highway vehicle.
Sec. 853. Taxation of aviation-grade kerosene.
Sec. 854. Dye injection equipment.
Sec. 855. Elimination of administrative review for taxable use of dyed 
              fuel. 
Sec. 856. Penalty on untaxed chemically altered dyed fuel mixtures.
Sec. 857. Termination of dyed diesel use by intercity buses.
Sec. 858. Authority to inspect on-site records.

[[Page H8413]]

Sec. 859. Assessable penalty for refusal of entry.
Sec. 860. Registration of pipeline or vessel operators required for 
              exemption of bulk transfers to registered terminals or 
              refineries.
Sec. 861. Display of registration.
Sec. 862. Registration of persons within foreign trade zones, etc.
Sec. 863. Penalties for failure to register and failure to report.
Sec. 864. Electronic filing of required information reports.
Sec. 865. Taxable fuel refunds for certain ultimate vendors.
Sec. 866. Two-party exchanges.
Sec. 867. Modifications of tax on use of certain vehicles.
Sec. 868. Dedication of revenues from certain penalties to the Highway 
              Trust Fund.
Sec. 869. Simplification of tax on tires.
Sec. 870. Transmix and diesel fuel blend stocks treated as taxable 
              fuel.
Sec. 871. Study regarding fuel tax compliance.

                  Subtitle D--Other Revenue Provisions

Sec. 881. Qualified tax collection contracts.
Sec. 882. Treatment of charitable contributions of patents and similar 
              property.
Sec. 883. Increased reporting for noncash charitable contributions.
Sec. 884. Donations of motor vehicles, boats, and airplanes.
Sec. 885. Treatment of nonqualified deferred compensation plans.
Sec. 886. Extension of amortization of intangibles to sports 
              franchises.
Sec. 887. Modification of continuing levy on payments to Federal 
              venders.
Sec. 888. Modification of straddle rules.
Sec. 889. Addition of vaccines against hepatitis A to list of taxable 
              vaccines.
Sec. 890. Addition of vaccines against influenza to list of taxable 
              vaccines.
Sec. 891. Extension of IRS user fees.
Sec. 892. COBRA fees.
Sec. 893. Prohibition on nonrecognition of gain through complete 
              liquidation of holding company.
Sec. 894. Effectively connected income to include certain foreign 
              source income.
Sec. 895. Recapture of overall foreign losses on sale of controlled 
              foreign corporation.
Sec. 896. Recognition of cancellation of indebtedness income realized 
              on satisfaction of debt with partnership interest.
Sec. 897. Denial of installment sale treatment for all readily tradable 
              debt.
Sec. 898. Modification of treatment of transfers to creditors in 
              divisive reorganizations.
Sec. 899. Clarification of definition of nonqualified preferred stock.
Sec. 900. Modification of definition of controlled group of 
              corporations.
Sec. 901. Class lives for utility grading costs.
Sec. 902. Consistent amortization of periods for intangibles.
Sec. 903. Freeze of provisions regarding suspension of interest where 
              Secretary fails to contact taxpayer.
Sec. 904. Increase in withholding from supplemental wage payments in 
              excess of $1,000,000.
Sec. 905. Treatment of sale of stock acquired pursuant to exercise of 
              stock options to comply with conflict-of-interest 
              requirements.
Sec. 906. Application of basis rules to nonresident aliens.
Sec. 907. Limitation of employer deduction for certain entertainment 
              expenses.
Sec. 908. Residence and source rules relating to United States 
              possessions.
Sec. 909. Sales or dispositions to implement Federal Energy Regulatory 
              Commission or State electric restructuring policy.
Sec. 910. Expansion of limitation on depreciation of certain passenger 
              automobiles.

        TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR 
                        EXTRATERRITORIAL INCOME

     SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

       (a) In General.--Section 114 is hereby repealed.
       (b) Conforming Amendments.--
       (1) Subpart E of part III of subchapter N of chapter 1 
     (relating to qualifying foreign trade income) is hereby 
     repealed.
       (2) The table of subparts for such part III is amended by 
     striking the item relating to subpart E.
       (3) The table of sections for part III of subchapter B of 
     chapter 1 is amended by striking the item relating to section 
     114.
       (4) The second sentence of section 56(g)(4)(B)(i) is 
     amended by striking ``114 or''.
       (5) Section 275(a) is amended--
       (A) by inserting ``or'' at the end of paragraph (4)(A), by 
     striking ``or'' at the end of paragraph (4)(B) and inserting 
     a period, and by striking subparagraph (C), and
       (B) by striking the last sentence.
       (6) Paragraph (3) of section 864(e) is amended--
       (A) by striking:
       ``(3) Tax-exempt assets not taken into account.--
       ``(A) In general.--For purposes of''; and inserting:
       ``(3) Tax-exempt assets not taken into account.--For 
     purposes of'', and
       (B) by striking subparagraph (B).
       (7) Section 903 is amended by striking ``114, 164(a),'' and 
     inserting ``164(a)''.
       (8) Section 999(c)(1) is amended by striking 
     ``941(a)(5),''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to transactions after December 31, 2004.
       (d) Transitional Rule for 2005 and 2006.--
       (1) In general.--In the case of transactions during 2005 or 
     2006, the amount includible in gross income by reason of the 
     amendments made by this section shall not exceed the 
     applicable percentage of the amount which would have been so 
     included but for this subsection.
       (2) Applicable percentage.--For purposes of paragraph (1), 
     the applicable percentage shall be as follows:
       (A) For 2005, the applicable percentage shall be 20 
     percent.
       (B) For 2006, the applicable percentage shall be 40 
     percent.
       (e) Revocation of Election To Be Treated as Domestic 
     Corporation.--If, during the 1-year period beginning on the 
     date of the enactment of this Act, a corporation for which an 
     election is in effect under section 943(e) of the Internal 
     Revenue Code of 1986 revokes such election, no gain or loss 
     shall be recognized with respect to property treated as 
     transferred under clause (ii) of section 943(e)(4)(B) of such 
     Code to the extent such property--
       (1) was treated as transferred under clause (i) thereof, or
       (2) was acquired during a taxable year to which such 
     election applies and before May 1, 2003, in the ordinary 
     course of its trade or business.

     The Secretary of the Treasury (or such Secretary's delegate) 
     may prescribe such regulations as may be necessary to prevent 
     the abuse of the purposes of this subsection.
       (f) Binding Contracts.--The amendments made by this section 
     shall not apply to any transaction in the ordinary course of 
     a trade or business which occurs pursuant to a binding 
     contract--
       (1) which is between the taxpayer and a person who is not a 
     related person (as defined in section 943(b)(3) of such Code, 
     as in effect on the day before the date of the enactment of 
     this Act), and
       (2) which is in effect on September 17, 2003, and at all 
     times thereafter.

     For purposes of this subsection, a binding contract shall 
     include a purchase option, renewal option, or replacement 
     option which is included in such contract and which is 
     enforceable against the seller or lessor.

     SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO 
                   DOMESTIC PRODUCTION ACTIVITIES.

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

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

       ``(a) Allowance of Deduction.--
       ``(1) In general.--There shall be allowed as a deduction an 
     amount equal to 9 percent of the lesser of--
       ``(A) the qualified production activities income of the 
     taxpayer for the taxable year, or
       ``(B) taxable income (determined without regard to this 
     section) for the taxable year.
       ``(2) Phasein.--In the case of any taxable year beginning 
     after 2004 and before 2010, paragraph (1) and subsections 
     (d)(1) and (d)(6) shall be applied by substituting for the 
     percentage contained therein the transition percentage 
     determined under the following table:

``For taxable years                                      The transition
beginning in:                                            percentage is:
  2005 or 2006...................................................3 ....

  2007, 2008, or 2009............................................6.....

       ``(b) Deduction Limited to Wages Paid.--
       ``(1) In general.--The amount of the deduction allowable 
     under subsection (a) for any taxable year shall not exceed 50 
     percent of the W-2 wages of the employer for the taxable 
     year.
       ``(2) W-2 wages.--For purposes of paragraph (1), the term 
     `W-2 wages' means the sum of the aggregate amounts the 
     taxpayer is required to include on statements under 
     paragraphs (3) and (8) of section 6051(a) with respect to 
     employment of employees of the taxpayer during the calendar 
     year ending during the taxpayer's taxable year.
       ``(3) Acquisitions and dispositions.--The Secretary shall 
     provide for the application of this subsection in cases where 
     the taxpayer acquires, or disposes of, the major portion of a 
     trade or business or the major portion of a separate unit of 
     a trade or business during the taxable year.
       ``(c) Qualified Production Activities Income.--For purposes 
     of this section--
       ``(1) In general.--The term `qualified production 
     activities income' for any taxable year means an amount equal 
     to the excess (if any) of--
       ``(A) the taxpayer's domestic production gross receipts for 
     such taxable year, over
       ``(B) the sum of--
       ``(i) the cost of goods sold that are allocable to such 
     receipts,
       ``(ii) other deductions, expenses, or losses directly 
     allocable to such receipts, and
       ``(iii) a ratable portion of other deductions, expenses, 
     and losses that are not directly allocable to such receipts 
     or another class of income.
       ``(2) Allocation method.--The Secretary shall prescribe 
     rules for the proper allocation of items of income, 
     deduction, expense, and loss for purposes of determining 
     income attributable to domestic production activities.
       ``(3) Special rules for determining costs.--
       ``(A) In general.--For purposes of determining costs under 
     clause (i) of paragraph (1)(B), any item or service brought 
     into the United States shall be treated as acquired by 
     purchase, and its cost shall be treated as not less than its 
     value immediately after it entered


[[Page H8414]]

     the United States. A similar rule shall apply in determining 
     the adjusted basis of leased or rented property where the 
     lease or rental gives rise to domestic production gross 
     receipts.
       ``(B) Exports for further manufacture.--In the case of any 
     property described in subparagraph (A) that had been exported 
     by the taxpayer for further manufacture, the increase in cost 
     or adjusted basis under subparagraph (A) shall not exceed the 
     difference between the value of the property when exported 
     and the value of the property when brought back into the 
     United States after the further manufacture.
       ``(4) Domestic production gross receipts.--
       ``(A) In general.--The term `domestic production gross 
     receipts' means the gross receipts of the taxpayer which are 
     derived from--
       ``(i) any lease, rental, license, sale, exchange, or other 
     disposition of--

       ``(I) qualifying production property which was 
     manufactured, produced, grown, or extracted by the taxpayer 
     in whole or in significant part within the United States,
       ``(II) any qualified film produced by the taxpayer, or
       ``(III) electricity, natural gas, or potable water produced 
     by the taxpayer in the United States,

       ``(ii) construction performed in the United States, or
       ``(iii) engineering or architectural services performed in 
     the United States for construction projects in the United 
     States.
       ``(B) Exceptions.--Such term shall not include gross 
     receipts of the taxpayer which are derived from--
       ``(i) the sale of food and beverages prepared by the 
     taxpayer at a retail establishment, and
       ``(ii) the transmission or distribution of electricity, 
     natural gas, or potable water.
       ``(5) Qualifying production property.--The term `qualifying 
     production property' means--
       ``(A) tangible personal property,
       ``(B) any computer software, and
       ``(C) any property described in section 168(f)(4).
       ``(6) Qualified film.--The term `qualified film' means any 
     property described in section 168(f)(3) if not less than 50 
     percent of the total compensation relating to the production 
     of such property is compensation for services performed in 
     the United States by actors, production personnel, directors, 
     and producers. Such term does not include property with 
     respect to which records are required to be maintained under 
     section 2257 of title 18, United States Code.
       ``(7) Related persons.--
       ``(A) In general.--The term `domestic production gross 
     receipts' shall not include any gross receipts of the 
     taxpayer derived from property leased, licensed, or rented by 
     the taxpayer for use by any related person.
       ``(B) Related person.--For purposes of subparagraph (A), a 
     person shall be treated as related to another person if such 
     persons are treated as a single employer under subsection (a) 
     or (b) of section 52 or subsection (m) or (o) of section 414, 
     except that determinations under subsections (a) and (b) of 
     section 52 shall be made without regard to section 1563(b).
       ``(d) Definitions and Special Rules.--
       ``(1) Application of section to pass-thru entities.--
       ``(A) In general.--In the case of an S corporation, 
     partnership, estate or trust, or other pass-thru entity--
       ``(i) subject to the provisions of paragraphs (2) and (3), 
     this section shall be applied at the shareholder, partner, or 
     similar level, and
       ``(ii) the Secretary shall prescribe rules for the 
     application of this section, including rules relating to--

       ``(I) restrictions on the allocation of the deduction to 
     taxpayers at the partner or similar level, and
       ``(II) additional reporting requirements.

       ``(B) Application of wage limitation.--Notwithstanding 
     subparagraph (A)(i), for purposes of applying subsection (b), 
     a shareholder, partner, or similar person which is allocated 
     qualified production activities income from an S corporation, 
     partnership, estate, trust, or other pass-thru entity shall 
     also be treated as having been allocated W-2 wages from such 
     entity in an amount equal to the lesser of--
       ``(i) such person's allocable share of such wages (without 
     regard to this subparagraph), as determined under regulations 
     prescribed by the Secretary, or
       ``(ii) 2 times 9 percent of the qualified production 
     activities income allocated to such person for the taxable 
     year.
       ``(2) Application to individuals.--In the case of an 
     individual, subsection (a)(1)(B) shall be applied by 
     substituting `adjusted gross income' for `taxable income'. 
     For purposes of the preceding sentence, adjusted gross income 
     shall be determined--
       ``(A) after application of sections 86, 135, 137, 219, 221, 
     222, and 469, and
       ``(B) without regard to this section.
       ``(3) Patrons of agricultural and horticultural 
     cooperatives.--
       ``(A) In general.--If any amount described in paragraph (1) 
     or (3) of section 1385(a)--
       ``(i) is received by a person from an organization to which 
     part I of subchapter T applies which is engaged--

       ``(I) in the manufacturing, production, growth, or 
     extraction in whole or significant part of any agricultural 
     or horticultural product, or
       ``(II) in the marketing of agricultural or horticultural 
     products, and

       ``(ii) is allocable to the portion of the qualified 
     production activities income of the organization which, but 
     for this paragraph, would be deductible under subsection (a) 
     by the organization and is designated as such by the 
     organization in a written notice mailed to its patrons during 
     the payment period described in section 1382(d),

     then such person shall be allowed a deduction under 
     subsection (a) with respect to such amount. The taxable 
     income of the organization shall not be reduced under section 
     1382 by reason of any amount to which the preceding sentence 
     applies.
       ``(B) Special rules.--For purposes of applying subparagraph 
     (A), in determining the qualified production activities 
     income which would be deductible by the organization under 
     subsection (a)--
       ``(i) there shall not be taken into account in computing 
     the organization's taxable income any deduction allowable 
     under subsection (b) or (c) of section 1382 (relating to 
     patronage dividends, per-unit retain allocations, and 
     nonpatronage distributions), and
       ``(ii) in the case of an organization described in 
     subparagraph (A)(i)(II), the organization shall be treated as 
     having manufactured, produced, grown, or extracted in whole 
     or significant part any qualifying production property 
     marketed by the organization which its patrons have so 
     manufactured, produced, grown, or extracted.
       ``(4) Special rule for affiliated groups.--
       ``(A) In general.--All members of an expanded affiliated 
     group shall be treated as a single corporation for purposes 
     of this section.
       ``(B) Expanded affiliated group.--For purposes of this 
     section, the term `expanded affiliated group' means an 
     affiliated group as defined in section 1504(a), determined--
       ``(i) by substituting `50 percent' for `80 percent' each 
     place it appears, and
       ``(ii) without regard to paragraphs (2) and (4) of section 
     1504(b).
       ``(C) Allocation of deduction.--Except as provided in 
     regulations, the deduction under subsection (a) shall be 
     allocated among the members of the expanded affiliated group 
     in proportion to each member's respective amount (if any) of 
     qualified production activities income.
       ``(5) Trade or business requirement.--This section shall be 
     applied by only taking into account items which are 
     attributable to the actual conduct of a trade or business.
       ``(6) Coordination with minimum tax.--The deduction under 
     this section shall be allowed for purposes of the tax imposed 
     by section 55; except that for purposes of section 55, the 
     deduction under subsection (a) shall be 9 percent of the 
     lesser of--
       ``(A) qualified production activities income (determined 
     without regard to part IV of subchapter A), or
       ``(B) alternative minimum taxable income (determined 
     without regard to this section) for the taxable year.

     In the case of an individual, subparagraph (B) shall be 
     applied by substituting `adjusted gross income' for 
     `alternative minimum taxable income'. For purposes of the 
     preceding sentence, adjusted gross income shall be determined 
     in the same manner as provided in paragraph (2).
       ``(7) Regulations.--The Secretary shall prescribe such 
     regulations as are necessary to carry out the purposes of 
     this section.''.
       (b) Minimum Tax.--Section 56(g)(4)(C) (relating to 
     disallowance of items not deductible in computing earnings 
     and profits) is amended by adding at the end the following 
     new clause:
       ``(v) Deduction for domestic production.--Clause (i) shall 
     not apply to any amount allowable as a deduction under 
     section 199.''.
       (c) Special Rule Relating to Election To Treat Cutting of 
     Timber as a Sale or Exchange.--Any election under section 
     631(a) of the Internal Revenue Code of 1986 made for a 
     taxable year ending on or before the date of the enactment of 
     this Act may be revoked by the taxpayer for any taxable year 
     ending after such date. For purposes of determining whether 
     such taxpayer may make a further election under such section, 
     such election (and any revocation under this section) shall 
     not be taken into account.
       (d) Technical Amendments.--
       (1) Sections 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), and 
     219(g)(3)(A)(ii) are each amended by inserting ``199,'' 
     before ``221''.
       (2) Clause (i) of section 221(b)(2)(C) is amended by 
     inserting by inserting ``199,'' before ``222''.
       (3) Clause (i) of section 222(b)(2)(C) is amended by 
     inserting ``199,'' before ``911''.
       (4) Paragraph (1) of section 246(b) is amended by inserting 
     ``199,'' after ``172,''.
       (5) Clause (iii) of section 469(i)(3)(F) is amended by 
     inserting ``199,'' before ``219,''.
       (6) Subsection (a) of section 613 is amended by inserting 
     ``and without the deduction under section 199'' after 
     ``without allowances for depletion''.
       (7) Subsection (a) of section 1402 is amended by striking 
     ``and'' at the end of paragraph (14), by striking the period 
     at the end of paragraph (15) and inserting ``, and'', and by 
     inserting after paragraph (15) the following new paragraph:
       ``(16) the deduction provided by section 199 shall not be 
     allowed.''.
       (8) The table of sections for part VI of subchapter B of 
     chapter 1 is amended by adding at the end the following new 
     item:

``Sec. 199. Income attributable to domestic production activities.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.
                   TITLE II--BUSINESS TAX INCENTIVES
                  Subtitle A--Small Business Expensing

     SEC. 201. 2-YEAR EXTENSION OF INCREASED EXPENSING FOR SMALL 
                   BUSINESS.

       Subsections (b), (c), and (d) of section 179 are each 
     amended by striking ``2006'' each place it appears and 
     inserting ``2008''.

[[Page H8415]]

                        Subtitle B--Depreciation

     SEC. 211. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN 
                   LEASEHOLD IMPROVEMENTS AND RESTAURANT PROPERTY.

       (a) 15-Year Recovery Period.--Subparagraph (E) of section 
     168(e)(3) (relating to classification of certain property) is 
     amended by striking ``and'' at the end of clause (ii), by 
     striking the period at the end of clause (iii) and inserting 
     a comma, and by adding at the end the following new clauses:
       ``(iv) any qualified leasehold improvement property placed 
     in service before January 1, 2006, and
       ``(v) any qualified restaurant property placed in service 
     before January 1, 2006.''.
       (b) Qualified Leasehold Improvement Property.--Subsection 
     (e) of section 168 is amended by adding at the end the 
     following new paragraph:
       ``(6) Qualified leasehold improvement property.--The term 
     `qualified leasehold improvement property' has the meaning 
     given such term in section 168(k)(3) except that the 
     following special rules shall apply:
       ``(A) Improvements made by lessor.--In the case of an 
     improvement made by the person who was the lessor of such 
     improvement when such improvement was placed in service, such 
     improvement shall be qualified leasehold improvement property 
     (if at all) only so long as such improvement is held by such 
     person.
       ``(B) Exception for changes in form of business.--Property 
     shall not cease to be qualified leasehold improvement 
     property under subparagraph (A) by reason of--
       ``(i) death,
       ``(ii) a transaction to which section 381(a) applies,
       ``(iii) a mere change in the form of conducting the trade 
     or business so long as the property is retained in such trade 
     or business as qualified leasehold improvement property and 
     the taxpayer retains a substantial interest in such trade or 
     business,
       ``(iv) the acquisition of such property in an exchange 
     described in section 1031, 1033, or 1038 to the extent that 
     the basis of such property includes an amount representing 
     the adjusted basis of other property owned by the taxpayer or 
     a related person, or
       ``(v) the acquisition of such property by the taxpayer in a 
     transaction described in section 332, 351, 361, 721, or 731 
     (or the acquisition of such property by the taxpayer from the 
     transferee or acquiring corporation in a transaction 
     described in such section), to the extent that the basis of 
     the property in the hands of the taxpayer is determined by 
     reference to its basis in the hands of the transferor or 
     distributor.''.
       (c) Qualified Restaurant Property.--Subsection (e) of 
     section 168 (as amended by subsection (b)) is further amended 
     by adding at the end the following new paragraph:
       ``(7) Qualified restaurant property.--The term `qualified 
     restaurant property' means any section 1250 property which is 
     an improvement to a building if--
       ``(A) such improvement is placed in service more than 3 
     years after the date such building was first placed in 
     service, and
       ``(B) more than 50 percent of the building's square footage 
     is devoted to preparation of, and seating for on-premises 
     consumption of, prepared meals.''.
       (d) Requirement To Use Straight Line Method.--
       (1) Paragraph (3) of section 168(b) is amended by adding at 
     the end the following new subparagraphs:
       ``(G) Qualified leasehold improvement property described in 
     subsection (e)(6).
       ``(H) Qualified restaurant property described in subsection 
     (e)(7).''.
       (2) Subparagraph (A) of section 168(b)(2) is amended by 
     inserting before the comma ``not referred to in paragraph 
     (3)''.
       (e) Alternative System.--The table contained in section 
     168(g)(3)(B) is amended by adding at the end the following 
     new items:

      ``(E)(iv).................................................39     
      ``(E)(v)................................................39''.    
       (f) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.
                  Subtitle C--Community Revitalization

     SEC. 221. MODIFICATION OF TARGETED AREAS AND LOW-INCOME 
                   COMMUNITIES FOR NEW MARKETS TAX CREDIT.

       (a) Targeted areas.--Paragraph (2) of section 45D(e) 
     (relating to targeted areas) is amended to read as follows:
       ``(2) Targeted populations.--The Secretary shall prescribe 
     regulations under which 1 or more targeted populations 
     (within the meaning of section 103(20) of the Riegle 
     Community Development and Regulatory Improvement Act of 1994 
     (12 U.S.C. 4702(20))) may be treated as low-income 
     communities. Such regulations shall include procedures for 
     determining which entities are qualified active low-income 
     community businesses with respect to such populations.''.
       (b) Tracts with Low Population.--Subsection (e) of section 
     45D (defining low-income community) is amended by adding at 
     the end the following:
       ``(4) Tracts with low population.--A population census 
     tract with a population of less than 2,000 shall be treated 
     as a low-income community for purposes of this section if 
     such tract--
       ``(A) is within an empowerment zone the designation of 
     which is in effect under section 1391, and
       ``(B) is contiguous to 1 or more low-income communities 
     (determined without regard to this paragraph).''.
       (c) Effective Dates.--
       (1) Targeted areas.--The amendment made by subsection (a) 
     shall apply to designations made by the Secretary of the 
     Treasury after the date of the enactment of this Act.
       (2) Tracts with low population.--The amendment made by 
     subsection (b) shall apply to investments made after the date 
     of the enactment of this Act.

     SEC. 222. EXPANSION OF DESIGNATED RENEWAL COMMUNITY AREA 
                   BASED ON 2000 CENSUS DATA.

       (a) In General.--Section 1400E (relating to designation of 
     renewal communities) is amended by adding at the end the 
     following new subsection:
       ``(g) Expansion of Designated Area Based on 2000 Census.--
       ``(1) In general.--At the request of all governments which 
     nominated an area as a renewal community, the Secretary of 
     Housing and Urban Development may expand the area of such 
     community to include any census tract if--
       ``(A)(i) at the time such community was nominated, such 
     community would have met the requirements of this section 
     using 1990 census data even if such tract had been included 
     in such community, and
       ``(ii) such tract has a poverty rate using 2000 census data 
     which exceeds the poverty rate for such tract using 1990 
     census data, or
       ``(B)(i) such community would be described in subparagraph 
     (A)(i) but for the failure to meet one or more of the 
     requirements of paragraphs (2)(C)(i), (3)(C), and (3)(D) of 
     subsection (c) using 1990 census data,
       ``(ii) such community, including such tract, has a 
     population of not more than 200,000 using either 1990 census 
     data or 2000 census data,
       ``(iii) such tract meets the requirement of subsection 
     (c)(3)(C) using 2000 census data, and
       ``(iv) such tract meets the requirement of subparagraph 
     (A)(ii).
       ``(2) Exception for certain census tracts with low 
     population in 1990.--In the case of any census tract which 
     did not have a poverty rate determined by the Bureau of the 
     Census using 1990 census data, paragraph (1)(B) shall be 
     applied without regard to clause (iv) thereof.
       ``(3) Special rule for certain census tracts with low 
     population in 2000.--At the request of all governments which 
     nominated an area as a renewal community, the Secretary of 
     Housing and Urban Development may expand the area of such 
     community to include any census tract if--
       ``(A) either--
       ``(i) such tract has no population using 2000 census data, 
     or
       ``(ii) no poverty rate for such tract is determined by the 
     Bureau of the Census using 2000 census data,
       ``(B) such tract is one of general distress, and
       ``(C) such community, including such tract, meets the 
     requirements of subparagraphs (A) and (B) of subsection 
     (c)(2).
       ``(4) Period in effect.--Any expansion under this 
     subsection shall take effect as provided in subsection 
     (b).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect as if included in the amendments made by 
     section 101 of the Community Renewal Tax Relief Act of 2000.

     SEC. 223. MODIFICATION OF INCOME REQUIREMENT FOR CENSUS 
                   TRACTS WITHIN HIGH MIGRATION RURAL COUNTIES.

       (a) In general.--Section 45D(e) (relating to low-income 
     community), as amended by this Act, is amended by inserting 
     after paragraph (4) the following new paragraph:
       ``(5) Modification of income requirement for census tracts 
     within high migration rural counties.--
       ``(A) In general.--In the case of a population census tract 
     located within a high migration rural county, paragraph 
     (1)(B)(i) shall be applied by substituting `85 percent' for 
     `80 percent'.
       ``(B) High migration rural county.--For purposes of this 
     paragraph, the term `high migration rural county' means any 
     county which, during the 20-year period ending with the year 
     in which the most recent census was conducted, has a net out-
     migration of inhabitants from the county of at least 10 
     percent of the population of the county at the beginning of 
     such period.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the amendment made by 
     section 121(a) of the Community Renewal Tax Relief Act of 
     2000.
          Subtitle D--S Corporation Reform and Simplification

     SEC. 231. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

       (a) In General.--Paragraph (1) of section 1361(c) (relating 
     to special rules for applying subsection (b)) is amended to 
     read as follows:
       ``(1) Members of family treated as 1 shareholder.--
       ``(A) In general.--For purpose of subsection (b)(1)(A)--
       ``(i) except as provided in clause (ii), a husband and wife 
     (and their estates) shall be treated as 1 shareholder, and
       ``(ii) in the case of a family with respect to which an 
     election is in effect under subparagraph (D), all members of 
     the family shall be treated as 1 shareholder.
       ``(B) Members of the family.--For purpose of subparagraph 
     (A)(ii)--
       ``(i) In general.--The term `members of the family' means 
     the common ancestor, lineal descendants of the common 
     ancestor, and the spouses (or former spouses) of such lineal 
     descendants or common ancestor.
       ``(ii) Common Ancestor--For purposes of this paragraph, an 
     individual shall not be considered a common ancestor if, as 
     of the later of the effective date of this paragraph or the 
     time the election under section 1362(a) is made, the 
     individual is more than 6 generations removed from the 
     youngest generation of shareholders who would (but for this 
     clause) be members of the

[[Page H8416]]

     family. For purposes of the preceding sentence, a spouse (or 
     former spouse) shall be treated as being of the same 
     generation as the individual to which such spouse is (or was) 
     married.
       ``(C) Effect of adoption, etc.--In determining whether any 
     relationship specified in subparagraph (B) exists, the rules 
     of section 152(b)(2) shall apply.
       ``(D) Election.--An election under subparagraph (A)(ii)--
       ``(i) may, except as otherwise provided in regulations 
     prescribed by the Secretary, be made by any member of the 
     family, and
       ``(ii) shall remain in effect until terminated as provided 
     in regulations prescribed by the Secretary.''.
       (b) Relief From Inadvertent Invalid Election or 
     Termination.--Section 1362(f) (relating to inadvertent 
     invalid elections or terminations), as amended by this Act, 
     is amended--
       (1) by inserting ``or section 1361(c)(1)(A)(ii)'' after 
     ``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
       (2) by inserting ``or section 1361(c)(1)(D)(iii)'' after 
     ``section 1361(b)(3)(C),'' in paragraph (1)(B).
       (c) Effective Dates.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2004.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to elections and terminations made after December 
     31, 2004.

     SEC. 232. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

       (a) In General.--Section 1361(b)(1)(A) (defining small 
     business corporation) is amended by striking ``75'' and 
     inserting ``100''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 233. EXPANSION OF BANK S CORPORATION ELIGIBLE 
                   SHAREHOLDERS TO INCLUDE IRAS.

       (a) In General.--Section 1361(c)(2)(A) (relating to certain 
     trusts permitted as shareholders) is amended by inserting 
     after clause (v) the following new clause:
       ``(vi) In the case of a corporation which is a bank (as 
     defined in section 581), a trust which constitutes an 
     individual retirement account under section 408(a), including 
     one designated as a Roth IRA under section 408A, but only to 
     the extent of the stock held by such trust in such bank as of 
     the date of the enactment of this clause.''.
       (b) Treatment as Shareholder.--Section 1361(c)(2)(B) 
     (relating to treatment as shareholders) is amended by adding 
     at the end the following new clause:
       ``(vi) In the case of a trust described in clause (vi) of 
     subparagraph (A), the individual for whose benefit the trust 
     was created shall be treated as a shareholder.''.
       (c) Sale of Bank Stock in IRA Relating to S Corporation 
     Election Exempt From Prohibited Transaction Rules.--Section 
     4975(d) (relating to exemptions) is amended by striking 
     ``or'' at the end of paragraph (14), by striking the period 
     at the end of paragraph (15) and inserting ``; or'', and by 
     adding at the end the following new paragraph:
       ``(16) a sale of stock held by a trust which constitutes an 
     individual retirement account under section 408(a) to the 
     individual for whose benefit such account is established if--
       ``(A) such stock is in a bank (as defined in section 581),
       ``(B) such stock is held by such trust as of the date of 
     the enactment of this paragraph,
       ``(C) such sale is pursuant to an election under section 
     1362(a) by such bank,
       ``(D) such sale is for fair market value at the time of 
     sale (as established by an independent appraiser) and the 
     terms of the sale are otherwise at least as favorable to such 
     trust as the terms that would apply on a sale to an unrelated 
     party,
       ``(E) such trust does not pay any commissions, costs, or 
     other expenses in connection with the sale, and
       ``(F) the stock is sold in a single transaction for cash 
     not later than 120 days after the S corporation election is 
     made.''.
       (d) Conforming Amendment.--Section 512(e)(1) is amended by 
     inserting ``1361(c)(2)(A)(vi) or'' before ``1361(c)(6)''.
       (e) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 234. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN 
                   DETERMINING POTENTIAL CURRENT BENEFICIARIES OF 
                   ESBT.

       (a) In General.--Section 1361(e)(2) (defining potential 
     current beneficiary) is amended--
       (1) by inserting ``(determined without regard to any power 
     of appointment to the extent such power remains unexercised 
     at the end of such period)'' after ``of the trust'' in the 
     first sentence, and
       (2) by striking ``60-day'' in the second sentence and 
     inserting ``1-year''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 235. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE, 
                   ETC.

       (a) In General.--Section 1366(d)(2) (relating to indefinite 
     carryover of disallowed losses and deductions) is amended to 
     read as follows:
       ``(2) Indefinite carryover of disallowed losses and 
     deductions.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     any loss or deduction which is disallowed for any taxable 
     year by reason of paragraph (1) shall be treated as incurred 
     by the corporation in the succeeding taxable year with 
     respect to that shareholder.
       ``(B) Transfers of stock between spouses or incident to 
     divorce.--In the case of any transfer described in section 
     1041(a) of stock of an S corporation, any loss or deduction 
     described in subparagraph (A) with respect such stock shall 
     be treated as incurred by the corporation in the succeeding 
     taxable year with respect to the transferee.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 236. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY 
                   QUALIFIED SUBCHAPTER S TRUST INCOME 
                   BENEFICIARIES.

       (a) In General.--Section 1361(d)(1) (relating to special 
     rule for qualified subchapter S trust) is amended--
       (1) by striking ``and'' at the end of subparagraph (A),
       (2) by striking the period at the end of subparagraph (B) 
     and inserting ``, and'', and
       (3) by adding at the end the following new subparagraph:
       ``(C) for purposes of applying sections 465 and 469 to the 
     beneficiary of the trust, the disposition of the S 
     corporation stock by the trust shall be treated as a 
     disposition by such beneficiary.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transfers made after December 31, 2004.

     SEC. 237. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM 
                   PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

       (a) In General.--Section 1362(d)(3) (relating to where 
     passive investment income exceeds 25 percent of gross 
     receipts for 3 consecutive taxable years and corporation has 
     accumulated earnings and profits) is amended by adding at the 
     end the following new subparagraph:
       ``(F) Exception for banks; etc.--In the case of a bank (as 
     defined in section 581), a bank holding company (within the 
     meaning of section 2(a) of the Bank Holding Company Act of 
     1956 (12 U.S.C. 1841(a))), or a financial holding company 
     (within the meaning of section 2(p) of such Act), the term 
     `passive investment income' shall not include--
       ``(i) interest income earned by such bank or company, or
       ``(ii) dividends on assets required to be held by such bank 
     or company, including stock in the Federal Reserve Bank, the 
     Federal Home Loan Bank, or the Federal Agricultural Mortgage 
     Bank or participation certificates issued by a Federal 
     Intermediate Credit Bank.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 238. RELIEF FROM INADVERTENTLY INVALID QUALIFIED 
                   SUBCHAPTER S SUBSIDIARY ELECTIONS AND 
                   TERMINATIONS.

       (a) In General.--Section 1362(f) (relating to inadvertent 
     invalid elections or terminations) is amended--
       (1) by inserting ``, section 1361(b)(3)(B)(ii),'' after 
     ``subsection (a)'' in paragraph (1),
       (2) by inserting ``, section 1361(b)(3)(C),'' after 
     ``subsection (d)'' in paragraph (1)(B),
       (3) by amending paragraph (3)(A) to read as follows:
       ``(A) so that the corporation for which the election was 
     made or the termination occurred is a small business 
     corporation or a qualified subchapter S subsidiary, as the 
     case may be, or'',
       (4) by amending paragraph (4) to read as follows:
       ``(4) the corporation for which the election was made or 
     the termination occurred, and each person who was a 
     shareholder in such corporation at any time during the period 
     specified pursuant to this subsection, agrees to make such 
     adjustments (consistent with the treatment of such 
     corporation as an S corporation or a qualified subchapter S 
     subsidiary, as the case may be) as may be required by the 
     Secretary with respect to such period,'', and
       (5) by inserting ``or a qualified subchapter S subsidiary, 
     as the case may be'' after ``S corporation'' in the matter 
     following paragraph (4).
       (b) Effective Date.--The amendments made by this section 
     shall apply to elections made and terminations made after 
     December 31, 2004.

     SEC. 239. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S 
                   SUBSIDIARIES.

       (a) In General.--Section 1361(b)(3)(A) (relating to 
     treatment of certain wholly owned subsidiaries) is amended by 
     inserting ``and in the case of information returns required 
     under part III of subchapter A of chapter 61'' after 
     ``Secretary''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 240. REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER 
                   SECURITIES.

       (a) In General.--Subsection (f) of section 4975 (relating 
     to other definitions and special rules) is amended by adding 
     at the end the following new paragraph:
       ``(7) S corporation repayment of loans for qualifying 
     employer securities.--A plan shall not be treated as 
     violating the requirements of section 401 or 409 or 
     subsection (e)(7), or as engaging in a prohibited transaction 
     for purposes of subsection (d)(3), merely by reason of any 
     distribution (as described in section 1368(a)) with respect 
     to S corporation stock that constitutes qualifying employer 
     securities, which in accordance with the plan provisions is 
     used to make payments on a loan described in subsection 
     (d)(3) the proceeds of which were used to acquire such 
     qualifying employer securities (whether or not allocated to 
     participants). The preceding sentence shall not apply in the 
     case of a distribution which is paid with respect to any 
     employer security which is allocated to a participant unless 
     the plan provides that employer securities with a fair market 
     value of not less than the amount of such distribution are 
     allocated to such participant for the year which

[[Page H8417]]

     (but for the preceding sentence) such distribution would have 
     been allocated to such participant.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions with respect to S corporation 
     stock made after December 31, 1997.
                 Subtitle E--Other Business Incentives

     SEC. 241. PHASEOUT OF 4.3-CENT MOTOR FUEL EXCISE TAXES ON 
                   RAILROADS AND INLAND WATERWAY TRANSPORTATION 
                   WHICH REMAIN IN GENERAL FUND.

       (a) Taxes on Trains.--
       (1) In general.--Clause (ii) of section 4041(a)(1)(C) is 
     amended by striking subclauses (I), (II), and (III) and 
     inserting the following new subclauses:

       ``(I) 3.3 cents per gallon after December 31, 2004, and 
     before July 1, 2005,
       ``(II) 2.3 cents per gallon after June 30, 2005, and before 
     January 1, 2007, and
       ``(III) 0 after December 31, 2006.''.

       (2) Conforming amendments.--
       (A) Subsection (d) of section 4041 is amended by 
     redesignating paragraph (3) as paragraph (4) and by inserting 
     after paragraph (2) the following new paragraph:
       ``(3) Diesel fuel used in trains.--In the case of any sale 
     for use or use after December 31, 2006, there is hereby 
     imposed a tax of 0.1 cent per gallon on any liquid other than 
     gasoline (as defined in section 4083)--
       ``(A) sold by any person to an owner, lessee, or other 
     operator of a diesel-powered train for use as a fuel in such 
     train, or
       ``(B) used by any person as a fuel in a diesel-powered 
     train unless there was a taxable sale of such fuel under 
     subparagraph (A).

     No tax shall be imposed by this paragraph on the sale or use 
     of any liquid if tax was imposed on such liquid under section 
     4081.''.
       (B) Subsection (f) of section 4082 is amended by striking 
     ``section 4041(a)(1)'' and inserting ``subsections (a)(1) and 
     (d)(3) of section 4041''.
       (C) Subparagraph (B) of section 6421(f)(3) is amended to 
     read as follows:
       ``(B) so much of the rate specified in section 
     4081(a)(2)(A) as does not exceed the rate applicable under 
     section 4041(a)(1)(C)(ii).''.
       (D) Subparagraph (B) of section 6427(l)(3) is amended to 
     read as follows:
       ``(B) so much of the rate specified in section 
     4081(a)(2)(A) as does not exceed the rate applicable under 
     section 4041(a)(1)(C)(ii).''.
       (b) Fuel Used on Inland Waterways.--Subparagraph (C) of 
     section 4042(b)(2) is amended to read as follows:
       ``(C) The deficit reduction rate is--
       ``(i) 3.3 cents per gallon after December 31, 2004, and 
     before July 1, 2005,
       ``(ii) 2.3 cents per gallon after June 30, 2005, and before 
     January 1, 2007, and
       ``(iii) 0 after December 31, 2006.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2005.

     SEC. 242. MODIFICATION OF APPLICATION OF INCOME FORECAST 
                   METHOD OF DEPRECIATION.

       (a) In General.--Section 167(g) (relating to depreciation 
     under income forecast method) is amended by adding at the end 
     the following new paragraph:
       ``(7) Treatment of participations and residuals.--
       ``(A) In general.--For purposes of determining the 
     depreciation deduction allowable with respect to a property 
     under this subsection, the taxpayer may include 
     participations and residuals with respect to such property in 
     the adjusted basis of such property for the taxable year in 
     which the property is placed in service, but only to the 
     extent that such participations and residuals relate to 
     income estimated (for purposes of this subsection) to be 
     earned in connection with the property before the close of 
     the 10th taxable year referred to in paragraph (1)(A).
       ``(B) Participations and residuals.--For purposes of this 
     paragraph, the term `participations and residuals' means, 
     with respect to any property, costs the amount of which by 
     contract varies with the amount of income earned in 
     connection with such property.
       ``(C) Special rules relating to recomputation years.--If 
     the adjusted basis of any property is determined under this 
     paragraph, paragraph (4) shall be applied by substituting 
     `for each taxable year in such period' for `for such period'.
       ``(D) Other special rules.--
       ``(i) Participations and residuals.--Notwithstanding 
     subparagraph (A), the taxpayer may exclude participations and 
     residuals from the adjusted basis of such property and deduct 
     such participations and residuals in the taxable year that 
     such participations and residuals are paid.
       ``(ii) Coordination with other rules.--Deductions computed 
     in accordance with this paragraph shall be allowable 
     notwithstanding paragraph (1)(B) or sections 263, 263A, 404, 
     419, or 461(h).
       ``(E) Authority to make adjustments.--The Secretary shall 
     prescribe appropriate adjustments to the basis of property 
     and to the look-back method for the additional amounts 
     allowable as a deduction solely by reason of this 
     paragraph.''.
       (b) Determination of Income.--Section 167(g)(5) (relating 
     to special rules) is amended by redesignating subparagraphs 
     (E) and (F) as subparagraphs (F) and (G), respectively, and 
     inserting after subparagraph (D) the following new 
     subparagraph:
       ``(E) Treatment of distribution costs.--For purposes of 
     this subsection, the income with respect to any property 
     shall be the taxpayer's gross income from such property.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.

     SEC. 243. IMPROVEMENTS RELATED TO REAL ESTATE INVESTMENT 
                   TRUSTS.

       (a) Expansion of Straight Debt Safe Harbor.--Section 856 
     (defining real estate investment trust) is amended--
       (1) in subsection (c) by striking paragraph (7), and
       (2) by adding at the end the following new subsection:
       ``(m) Safe Harbor in Applying Subsection (c)(4).--
       ``(1) In general.--In applying subclause (III) of 
     subsection (c)(4)(B)(iii), except as otherwise determined by 
     the Secretary in regulations, the following shall not be 
     considered securities held by the trust:
       ``(A) Straight debt securities of an issuer which meet the 
     requirements of paragraph (2).
       ``(B) Any loan to an individual or an estate.
       ``(C) Any section 467 rental agreement (as defined in 
     section 467(d)), other than with a person described in 
     subsection (d)(2)(B).
       ``(D) Any obligation to pay rents from real property (as 
     defined in subsection (d)(1)).
       ``(E) Any security issued by a State or any political 
     subdivision thereof, the District of Columbia, a foreign 
     government or any political subdivision thereof, or the 
     Commonwealth of Puerto Rico, but only if the determination of 
     any payment received or accrued under such security does not 
     depend in whole or in part on the profits of any entity not 
     described in this subparagraph or payments on any obligation 
     issued by such an entity,
       ``(F) Any security issued by a real estate investment 
     trust.
       ``(G) Any other arrangement as determined by the Secretary.
       ``(2) Special rules relating to straight debt securities.--
       ``(A) In general.--For purposes of paragraph (1)(A), 
     securities meet the requirements of this paragraph if such 
     securities are straight debt, as defined in section 
     1361(c)(5) (without regard to subparagraph (B)(iii) thereof).
       ``(B) Special rules relating to certain contingencies.--For 
     purposes of subparagraph (A), any interest or principal shall 
     not be treated as failing to satisfy section 1361(c)(5)(B)(i) 
     solely by reason of the fact that--
       ``(i) the time of payment of such interest or principal is 
     subject to a contingency, but only if--

       ``(I) any such contingency does not have the effect of 
     changing the effective yield to maturity, as determined under 
     section 1272, other than a change in the annual yield to 
     maturity which does not exceed the greater of \1/4\ of 1 
     percent or 5 percent of the annual yield to maturity, or

       ``(II) neither the aggregate issue price nor the aggregate 
     face amount of the issuer's debt instruments held by the 
     trust exceeds $1,000,000 and not more than 12 months of 
     unaccrued interest can be required to be prepaid thereunder, 
     or
       ``(ii) the time or amount of payment is subject to a 
     contingency upon a default or the exercise of a prepayment 
     right by the issuer of the debt, but only if such contingency 
     is consistent with customary commercial practice.
       ``(C) Special rules relating to corporate or partnership 
     issuers.--In the case of an issuer which is a corporation or 
     a partnership, securities that otherwise would be described 
     in paragraph (1)(A) shall be considered not to be so 
     described if the trust holding such securities and any of its 
     controlled taxable REIT subsidiaries (as defined in 
     subsection (d)(8)(A)(iv)) hold any securities of the issuer 
     which--
       ``(i) are not described in paragraph (1) (prior to the 
     application of this subparagraph), and
       ``(ii) have an aggregate value greater than 1 percent of 
     the issuer's outstanding securities determined without regard 
     to paragraph (3)(A)(i).
       ``(3) Look-through rule for partnership securities.--
       ``(A) In general.--For purposes of applying subclause (III) 
     of subsection (c)(4)(B)(iii)--
       ``(i) a trust's interest as a partner in a partnership (as 
     defined in section 7701(a)(2)) shall not be considered a 
     security, and
       ``(ii) the trust shall be deemed to own its proportionate 
     share of each of the assets of the partnership.
       ``(B) Determination of trust's interest in partnership 
     assets.--For purposes of subparagraph (A), with respect to 
     any taxable year beginning after the date of the enactment of 
     this subparagraph--
       ``(i) the trust's interest in the partnership assets shall 
     be the trust's proportionate interest in any securities 
     issued by the partnership (determined without regard to 
     subparagraph (A)(i) and paragraph (4), but not including 
     securities described in paragraph (1)), and
       ``(ii) the value of any debt instrument shall be the 
     adjusted issue price thereof, as defined in section 
     1272(a)(4).
       ``(4) Certain partnership debt instruments not treated as a 
     security.--For purposes of applying subclause (III) of 
     subsection (c)(4)(B)(iii)--
       ``(A) any debt instrument issued by a partnership and not 
     described in paragraph (1) shall not be considered a security 
     to the extent of the trust's interest as a partner in the 
     partnership, and
       ``(B) any debt instrument issued by a partnership and not 
     described in paragraph (1) shall not be considered a security 
     if at least 75 percent of the partnership's gross income 
     (excluding gross income from prohibited transactions) is 
     derived from sources referred to in subsection (c)(3).
       ``(5) Secretarial guidance.--The Secretary is authorized to 
     provide guidance (including through the issuance of a written 
     determination, as defined in section 6110(b)) that an 
     arrangement shall not be considered a security

[[Page H8418]]

     held by the trust for purposes of applying subclause (III) of 
     subsection (c)(4)(B)(iii) notwithstanding that such 
     arrangement otherwise could be considered a security under 
     subparagraph (F) of subsection (c)(5).''.
       (b) Clarification of Application of Limited Rental 
     Exception.--Subparagraph (A) of section 856(d)(8) (relating 
     to special rules for taxable REIT subsidiaries) is amended to 
     read as follows:
       ``(A) Limited rental exception.--
       ``(i) In general.--The requirements of this subparagraph 
     are met with respect to any property if at least 90 percent 
     of the leased space of the property is rented to persons 
     other than taxable REIT subsidiaries of such trust and other 
     than persons described in paragraph (2)(B).
       ``(ii) Rents must be substantially comparable.--Clause (i) 
     shall apply only to the extent that the amounts paid to the 
     trust as rents from real property (as defined in paragraph 
     (1) without regard to paragraph (2)(B)) from such property 
     are substantially comparable to such rents paid by the other 
     tenants of the trust's property for comparable space.
       ``(iii) Times for testing rent comparability.--The 
     substantial comparability requirement of clause (ii) shall be 
     treated as met with respect to a lease to a taxable REIT 
     subsidiary of the trust if such requirement is met under the 
     terms of the lease--

       ``(I) at the time such lease is entered into,
       ``(II) at the time of each extension of the lease, 
     including a failure to exercise a right to terminate, and
       ``(III) at the time of any modification of the lease 
     between the trust and the taxable REIT subsidiary if the rent 
     under such lease is effectively increased pursuant to such 
     modification.

     With respect to subclause (III), if the taxable REIT 
     subsidiary of the trust is a controlled taxable REIT 
     subsidiary of the trust, the term `rents from real property' 
     shall not in any event include rent under such lease to the 
     extent of the increase in such rent on account of such 
     modification.
       ``(iv) Controlled taxable reit subsidiary.--For purposes of 
     clause (iii), the term `controlled taxable REIT subsidiary' 
     means, with respect to any real estate investment trust, any 
     taxable REIT subsidiary of such trust if such trust owns 
     directly or indirectly--

       ``(I) stock possessing more than 50 percent of the total 
     voting power of the outstanding stock of such subsidiary, or
       ``(II) stock having a value of more than 50 percent of the 
     total value of the outstanding stock of such subsidiary.

       ``(v) Continuing qualification based on third party 
     actions.--If the requirements of clause (i) are met at a time 
     referred to in clause (iii), such requirements shall continue 
     to be treated as met so long as there is no increase in the 
     space leased to any taxable REIT subsidiary of such trust or 
     to any person described in paragraph (2)(B).
       ``(vi) Correction period.--If there is an increase referred 
     to in clause (v) during any calendar quarter with respect to 
     any property, the requirements of clause (iii) shall be 
     treated as met during the quarter and the succeeding quarter 
     if such requirements are met at the close of such succeeding 
     quarter.''.
       (c) Deletion of Customary Services Exception.--Subparagraph 
     (B) of section 857(b)(7) (relating to redetermined rents) is 
     amended by striking clause (ii) and by redesignating clauses 
     (iii), (iv), (v), (vi), and (vii) as clauses (ii), (iii), 
     (iv), (v), and (vi), respectively.
       (d) Conformity With General Hedging Definition.--
     Subparagraph (G) of section 856(c)(5) (relating to treatment 
     of certain hedging instruments) is amended to read as 
     follows:
       ``(G) Treatment of certain hedging instruments.--Except to 
     the extent provided by regulations, any income of a real 
     estate investment trust from a hedging transaction (as 
     defined in clause (ii) or (iii) of section 1221(b)(2)(A)) 
     which is clearly identified pursuant to section 1221(a)(7), 
     including gain from the sale or disposition of such a 
     transaction, shall not constitute gross income under 
     paragraph (2) to the extent that the transaction hedges any 
     indebtedness incurred or to be incurred by the trust to 
     acquire or carry real estate assets.''.
       (e) Conformity With Regulated Investment Company Rules.--
     Clause (i) of section 857(b)(5)(A) (relating to imposition of 
     tax in case of failure to meet certain requirements) is 
     amended by striking ``90 percent'' and inserting ``95 
     percent''.
       (f) Savings Provisions.--
       (1) Rules of application for failure to satisfy section 
     856(c)(4).--Section 856(c) (relating to definition of real 
     estate investment trust) is amended by inserting after 
     paragraph (6) the following new paragraph:
       ``(7) Rules of application for failure to satisfy paragraph 
     (4).--
       ``(A) De minimis failure.--A corporation, trust, or 
     association that fails to meet the requirements of paragraph 
     (4)(B)(iii) for a particular quarter shall nevertheless be 
     considered to have satisfied the requirements of such 
     paragraph for such quarter if--
       ``(i) such failure is due to the ownership of assets the 
     total value of which does not exceed the lesser of--

       ``(I) 1 percent of the total value of the trust's assets at 
     the end of the quarter for which such measurement is done, 
     and
       ``(II) $10,000,000, and

       ``(ii)(I) the corporation, trust, or association, following 
     the identification of such failure, disposes of assets in 
     order to meet the requirements of such paragraph within 6 
     months after the last day of the quarter in which the 
     corporation, trust or association's identification of the 
     failure to satisfy the requirements of such paragraph 
     occurred or such other time period prescribed by the 
     Secretary and in the manner prescribed by the Secretary, or
       ``(II) the requirements of such paragraph are otherwise met 
     within the time period specified in subclause (I).
       ``(B) Failures exceeding de minimis amount.--A corporation, 
     trust, or association that fails to meet the requirements of 
     paragraph (4) for a particular quarter shall nevertheless be 
     considered to have satisfied the requirements of such 
     paragraph for such quarter if--
       ``(i) such failure involves the ownership of assets the 
     total value of which exceeds the de minimis standard 
     described in subparagraph (A)(i) at the end of the quarter 
     for which such measurement is done,
       ``(ii) following the corporation, trust, or association's 
     identification of the failure to satisfy the requirements of 
     such paragraph for a particular quarter, a description of 
     each asset that causes the corporation, trust, or association 
     to fail to satisfy the requirements of such paragraph at the 
     close of such quarter of any taxable year is set forth in a 
     schedule for such quarter filed in accordance with 
     regulations prescribed by the Secretary,
       ``(iii) the failure to meet the requirements of such 
     paragraph for a particular quarter is due to reasonable cause 
     and not due to willful neglect,
       ``(iv) the corporation, trust, or association pays a tax 
     computed under subparagraph (C), and
       ``(v)(I) the corporation, trust, or association disposes of 
     the assets set forth on the schedule specified in clause (ii) 
     within 6 months after the last day of the quarter in which 
     the corporation, trust or association's identification of the 
     failure to satisfy the requirements of such paragraph 
     occurred or such other time period prescribed by the 
     Secretary and in the manner prescribed by the Secretary, or
       ``(II) the requirements of such paragraph are otherwise met 
     within the time period specified in subclause (I).
       ``(C) Tax.--For purposes of subparagraph (B)(iv)--
       ``(i) Tax imposed.--If a corporation, trust, or association 
     elects the application of this subparagraph, there is hereby 
     imposed a tax on the failure described in subparagraph (B) of 
     such corporation, trust, or association. Such tax shall be 
     paid by the corporation, trust, or association.
       ``(ii) Tax computed.--The amount of the tax imposed by 
     clause (i) shall be the greater of--

       ``(I) $50,000, or
       ``(II) the amount determined (pursuant to regulations 
     promulgated by the Secretary) by multiplying the net income 
     generated by the assets described in the schedule specified 
     in subparagraph (B)(ii) for the period specified in clause 
     (iii) by the highest rate of tax specified in section 11.

       ``(iii) Period.--For purposes of clause (ii)(II), the 
     period described in this clause is the period beginning on 
     the first date that the failure to satisfy the requirements 
     of such paragraph (4) occurs as a result of the ownership of 
     such assets and ending on the earlier of the date on which 
     the trust disposes of such assets or the end of the first 
     quarter when there is no longer a failure to satisfy such 
     paragraph (4).
       ``(iv) Administrative provisions.--For purposes of subtitle 
     F, the taxes imposed by this subparagraph shall be treated as 
     excise taxes with respect to which the deficiency procedures 
     of such subtitle apply.''.
       (2) Modification of rules of application for failure to 
     satisfy sections 856(c)(2) or 856(c)(3).--Paragraph (6) of 
     section 856(c) (relating to definition of real estate 
     investment trust) is amended by striking subparagraphs (A) 
     and (B), by redesignating subparagraph (C) as subparagraph 
     (B), and by inserting before subparagraph (B) (as so 
     redesignated) the following new subparagraph:
       ``(A) following the corporation, trust, or association's 
     identification of the failure to meet the requirements of 
     paragraph (2) or (3), or of both such paragraphs, for any 
     taxable year, a description of each item of its gross income 
     described in such paragraphs is set forth in a schedule for 
     such taxable year filed in accordance with regulations 
     prescribed by the Secretary, and''.
       (3) Reasonable cause exception to loss of reit status if 
     failure to satisfy requirements.--Subsection (g) of section 
     856 (relating to termination of election) is amended--
       (A) in paragraph (1) by inserting before the period at the 
     end of the first sentence the following: ``unless paragraph 
     (5) applies'', and
       (B) by adding at the end the following new paragraph:
       ``(5) Entities to which paragraph applies.--This paragraph 
     applies to a corporation, trust, or association--
       ``(A) which is not a real estate investment trust to which 
     the provisions of this part apply for the taxable year due to 
     one or more failures to comply with one or more of the 
     provisions of this part (other than subsection (c)(6) or 
     (c)(7) of section 856),
       ``(B) such failures are due to reasonable cause and not due 
     to willful neglect, and
       ``(C) if such corporation, trust, or association pays (as 
     prescribed by the Secretary in regulations and in the same 
     manner as tax) a penalty of $50,000 for each failure to 
     satisfy a provision of this part due to reasonable cause and 
     not willful neglect.''.
       (4) Deduction of tax paid from amount required to be 
     distributed.--Subparagraph (E) of section 857(b)(2) is 
     amended by striking ``(7)'' and inserting ``(7) of this 
     subsection, section 856(c)(7)(B)(iii), and section 
     856(g)(1).''.
       (5) Expansion of deficiency dividend procedure.--Subsection 
     (e) of section 860 is amended by striking ``or'' at the end 
     of paragraph (2), by striking the period at the end of 
     paragraph (3) and inserting ``; or'', and by adding at the 
     end the following new paragraph:

[[Page H8419]]

       ``(4) a statement by the taxpayer attached to its amendment 
     or supplement to a return of tax for the relevant tax 
     year.''.
       (g) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2000.
       (2) Subsections (c) through  (f).--The amendments made by 
     subsections (c), (d), (e), and (f) shall apply to taxable 
     years beginning after the date of the enactment of this Act.

     SEC. 244. SPECIAL RULES FOR CERTAIN FILM AND TELEVISION 
                   PRODUCTIONS.

       (a) In General.--Part VI of subchapter B of chapter 1 is 
     amended by inserting after section 180 the following new 
     section:

     ``SEC. 181. TREATMENT OF CERTAIN QUALIFIED FILM AND 
                   TELEVISION PRODUCTIONS.

       ``(a) Election To Treat Costs as Expenses.--
       ``(1) In general.--A taxpayer may elect to treat the cost 
     of any qualified film or television production as an expense 
     which is not chargeable to capital account. Any cost so 
     treated shall be allowed as a deduction.
       ``(2) Dollar limitation.--
       ``(A) In general.--Paragraph (1) shall not apply to any 
     qualified film or television production the aggregate cost of 
     which exceeds $15,000,000.
       ``(B) Higher dollar limitation for productions in certain 
     areas.--In the case of any qualified film or television 
     production the aggregate cost of which is significantly 
     incurred in an area eligible for designation as--
       ``(i) a low-income community under section 45D, or

       ``(ii) a distressed county or isolated area of distress by 
     the Delta Regional Authority established under section 
     2009aa-1 of title 7, United States Code,
     subparagraph (A) shall be applied by substituting 
     `$20,000,000' for `$15,000,000'.
       ``(b) No Other Deduction or Amortization Deduction 
     Allowable.--With respect to the basis of any qualified film 
     or television production to which an election is made under 
     subsection (a), no other depreciation or amortization 
     deduction shall be allowable.
       ``(c) Election.--
       ``(1) In general.--An election under this section with 
     respect to any qualified film or television production shall 
     be made in such manner as prescribed by the Secretary and by 
     the due date (including extensions) for filing the taxpayer's 
     return of tax under this chapter for the taxable year in 
     which costs of the production are first incurred.
       ``(2) Revocation of election.--Any election made under this 
     section may not be revoked without the consent of the 
     Secretary.
       ``(d) Qualified Film or Television Production.--For 
     purposes of this section--
       ``(1) In general.--The term `qualified film or television 
     production' means any production described in paragraph (2) 
     if 75 percent of the total compensation of the production is 
     qualified compensation.
       ``(2) Production.--
       ``(A) In general.--A production is described in this 
     paragraph if such production is property described in section 
     168(f)(3). For purposes of a television series, only the 
     first 44 episodes of such series may be taken into account.
       ``(B) Exception.--A production is not described in this 
     paragraph if records are required under section 2257 of title 
     18, United States Code, to be maintained with respect to any 
     performer in such production.
       ``(3) Qualified compensation.--For purposes of paragraph 
     (1)--
       ``(A) In general.--The term `qualified compensation' means 
     compensation for services performed in the United States by 
     actors, directors, producers, and other relevant production 
     personnel.
       ``(B) Participations and residuals excluded.--The term 
     `compensation' does not include participations and residuals 
     (as defined in section 167(g)(7)(B)).
       ``(e) Application of Certain Other Rules.--For purposes of 
     this section, rules similar to the rules of subsections 
     (b)(2) and (c)(4) of section 194 shall apply.
       ``(f) Termination.--This section shall not apply to 
     qualified film and television productions commencing after 
     December 31, 2008.''.
       (b) Conforming Amendment.--The table of sections for part 
     VI of subchapter B of chapter 1 is amended by inserting after 
     the item relating to section 180 the following new item:

``Sec. 181. Treatment of certain qualified film and television 
              productions.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to qualified film and television productions (as 
     defined in section 181(d)(1) of the Internal Revenue Code of 
     1986, as added by this section) commencing after the date of 
     the enactment of this Act.

     SEC. 245. CREDIT FOR MAINTENANCE OF RAILROAD TRACK.

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

     ``SEC. 45G. RAILROAD TRACK MAINTENANCE CREDIT.

       ``(a) General Rule.--For purposes of section 38, the 
     railroad track maintenance credit determined under this 
     section for the taxable year is an amount equal to 50 percent 
     of the qualified railroad track maintenance expenditures paid 
     or incurred by an eligible taxpayer during the taxable year.
       ``(b) Limitation.--The credit allowed under subsection (a) 
     for any taxable year shall not exceed the product of--
       ``(1) $3,500, and
       ``(2) the number of miles of railroad track owned or leased 
     by the eligible taxpayer as of the close of the taxable year.
     A mile of railroad track may be taken into account by a 
     person other than the owner only if such mile is assigned to 
     such person by the owner for purposes of this subsection. Any 
     mile which is so assigned may not be taken into account by 
     the owner for purposes of this subsection.
       ``(c) Eligible Taxpayer.--For purposes of this section, the 
     term `eligible taxpayer' means--
       ``(1) any Class II or Class III railroad, and
       ``(2) any person who transports property using the rail 
     facilities of a person described in paragraph (1) or who 
     furnishes railroad-related property or services to such a 
     person.
       ``(d) Qualified Railroad Track Maintenance Expenditures.--
     For purposes of this section, the term `qualified railroad 
     track maintenance expenditures' means expenditures (whether 
     or not otherwise chargeable to capital account) for 
     maintaining railroad track (including roadbed, bridges, and 
     related track structures) owned or leased as of January 1, 
     2005, by a Class II or Class III railroad.
       ``(e) Other Definitions and Special Rules.--
       ``(1) Class ii or Class iii railroad.--For purposes of this 
     section, the terms `Class II railroad' and `Class III 
     railroad' have the respective meanings given such terms by 
     the Surface Transportation Board.
       ``(2) Controlled groups.--Rules similar to the rules of 
     paragraph (1) of section 41(f) shall apply for purposes of 
     this section.
       ``(3) Basis adjustment.--For purposes of this subtitle, if 
     a credit is allowed under this section with respect to any 
     railroad track, the basis of such track shall be reduced by 
     the amount of the credit so allowed.
       ``(f) Application of Section.--This section shall apply to 
     qualified railroad track maintenance expenditures paid or 
     incurred during taxable years beginning after December 31, 
     2004, and before January 1, 2008.''.
       (b) Limitation on Carryback.--
       (1) In general.--Subsection (d) of section 39 is amended to 
     read as follows:
       ``(d) Transitional Rule.--No portion of the unused business 
     credit for any taxable year which is attributable to a credit 
     specified in section 38(b) or any portion thereof may be 
     carried back to any taxable year before the first taxable 
     year for which such specified credit or such portion is 
     allowable (without regard to subsection (a)).''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply with respect to taxable years ending after 
     December 31, 2003.
       (c) Conforming Amendments.--
       (1) Section 38(b) (relating to general business credit) is 
     amended by striking ``plus'' at the end of paragraph (14), by 
     striking the period at the end of paragraph (15) and 
     inserting ``, plus'', and by adding at the end the following 
     new paragraph:
       ``(16) the railroad track maintenance credit determined 
     under section 45G(a).''.
       (2) Subsection (a) of section 1016 is amended by striking 
     ``and'' at the end of paragraph (27), by striking the period 
     at the end of paragraph (28) and inserting ``, and'', and by 
     inserting after paragraph (28) the following new paragraph:
       ``(29) in the case of railroad track with respect to which 
     a credit was allowed under section 45G, to the extent 
     provided in section 45G(e)(3).''.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1 is amended by 
     inserting after the item relating to section 45F the 
     following new item:

``Sec. 45G. Railroad track maintenance credit.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 246. SUSPENSION OF OCCUPATIONAL TAXES RELATING TO 
                   DISTILLED SPIRITS, WINE, AND BEER.

       (a) In General.--Subpart G of part II of subchapter A of 
     chapter 51 is amended by redesignating section 5148 as 
     section 5149 and by inserting after section 5147 the 
     following new section:

     ``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.

       ``(a) In General.--Notwithstanding sections 5081, 5091, 
     5111, 5121, and 5131, the rate of tax imposed under such 
     sections for the suspension period shall be zero. During such 
     period, persons engaged in or carrying on a trade or business 
     covered by such sections shall register under section 5141 
     and shall comply with the recordkeeping requirements under 
     this part.
       ``(b) Suspension Period.--For purposes of subsection (a), 
     the suspension period is the period beginning on July 1, 
     2005, and ending on June 30, 2008.''.
       (b) Conforming Amendment.--Section 5117 is amended by 
     adding at the end the following new subsection:
       ``(d) Special Rule During Suspension Period.--Except as 
     provided in subsection (b) or by the Secretary, during the 
     suspension period (as defined in section 5148) it shall be 
     unlawful for any dealer to purchase distilled spirits for 
     resale from any person other than a wholesale dealer in 
     liquors who is required to keep records under section 
     5114.''.
       (c) Clerical Amendment.--The table of sections for subpart 
     G of part II of subchapter A of chapter 51 is amended by 
     striking the last item and inserting the following new items:

``Sec. 5148. Suspension of occupational tax.
``Sec. 5149. Cross references.''.
       (d) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

[[Page H8420]]

     SEC. 247. MODIFICATION OF UNRELATED BUSINESS INCOME 
                   LIMITATION ON INVESTMENT IN CERTAIN SMALL 
                   BUSINESS INVESTMENT COMPANIES.

       (a) In General.--Paragraph (6) of section 514(c) (relating 
     to acquisition indebtedness) is amended to read as follows:
       ``(6) Certain federal financing.--
       ``(A) In general.--For purposes of this section, the term 
     `acquisition indebtedness' does not include--
       ``(i) an obligation, to the extent that it is insured by 
     the Federal Housing Administration, to finance the purchase, 
     rehabilitation, or construction of housing for low and 
     moderate income persons, or
       ``(ii) indebtedness incurred by a small business investment 
     company licensed after the date of the enactment of the 
     American Jobs Creation Act of 2004 under the Small Business 
     Investment Act of 1958 if such indebtedness is evidenced by a 
     debenture--

       ``(I) issued by such company under section 303(a) of such 
     Act, and
       ``(II) held or guaranteed by the Small Business 
     Administration.

       ``(B) Limitation.--Subparagraph (A)(ii) shall not apply 
     with respect to any small business investment company during 
     any period that--
       ``(i) any organization which is exempt from tax under this 
     title (other than a governmental unit) owns more than 25 
     percent of the capital or profits interest in such company, 
     or
       ``(ii) organizations which are exempt from tax under this 
     title (including governmental units other than any agency or 
     instrumentality of the United States) own, in the aggregate, 
     50 percent or more of the capital or profits interest in such 
     company.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to indebtedness incurred after the date of the 
     enactment of this Act by a small business investment company 
     licensed after the date of the enactment of this Act.

     SEC. 248. ELECTION TO DETERMINE CORPORATE TAX ON CERTAIN 
                   INTERNATIONAL SHIPPING ACTIVITIES USING PER TON 
                   RATE.

       (a) In General.--Chapter 1 is amended by inserting after 
     subchapter Q the following new subchapter:

    ``Subchapter R--Election To Determine Corporate Tax on Certain 
          International Shipping Activities Using Per Ton Rate

``Sec. 1352. Alternative tax on qualifying shipping activities.
``Sec. 1353. Notional shipping income.
``Sec. 1354. Alternative tax election; revocation; termination.
``Sec. 1355. Definitions and special rules.
``Sec. 1356. Qualifying shipping activities.
``Sec. 1357. Items not subject to regular tax; depreciation; interest.
``Sec. 1358. Allocation of credits, income, and deductions.
``Sec. 1359. Disposition of qualifying vessels.

     ``SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING 
                   ACTIVITIES.

       ``In the case of an electing corporation, the tax imposed 
     by section 11 shall be the amount equal to the sum of--
       ``(1) the tax imposed by section 11 determined after the 
     application of this subchapter, and
       ``(2) a tax equal to--
       ``(A) the highest rate of tax specified in section 11, 
     multiplied by
       ``(B) the notional shipping income for the taxable year.

     ``SEC. 1353. NOTIONAL SHIPPING INCOME.

       ``(a) In General.--For purposes of this subchapter, the 
     notional shipping income of an electing corporation shall be 
     the sum of the amounts determined under subsection (b) for 
     each qualifying vessel operated by such electing corporation.
       ``(b) Amounts.--
       ``(1) In general.--For purposes of subsection (a), the 
     amount of notional shipping income of an electing corporation 
     for each qualifying vessel for the taxable year shall equal 
     the product of--
       ``(A) the daily notional shipping income, and
       ``(B) the number of days during the taxable year that the 
     electing corporation operated such vessel as a qualifying 
     vessel in United States foreign trade.
       ``(2) Treatment of vessels the income from which is not 
     otherwise subject to tax.--In the case of a qualifying vessel 
     any of the income from which is not included in gross income 
     by reason of section 883 or otherwise, the amount of notional 
     shipping income from such vessel for the taxable year shall 
     be the amount which bears the same ratio to such shipping 
     income (determined without regard to this paragraph) as the 
     gross income from the operation of such vessel in the United 
     States foreign trade bears to the sum of such gross income 
     and the income so excluded.
       ``(c) Daily Notional Shipping Income.--For purposes of 
     subsection (b), the daily notional shipping income from the 
     operation of a qualifying vessel is--
       ``(1) 40 cents for each 100 tons of so much of the net 
     tonnage of the vessel as does not exceed 25,000 net tons, and
       ``(2) 20 cents for each 100 tons of so much of the net 
     tonnage of the vessel as exceeds 25,000 net tons.
       ``(d) Multiple Operators of Vessel.--If for any period 2 or 
     more persons are operators of a qualifying vessel, the 
     notional shipping income from the operation of such vessel 
     for such period shall be allocated among such persons on the 
     basis of their respective ownership and charter interests in 
     such vessel or on such other basis as the Secretary may 
     prescribe by regulations.

     ``SEC. 1354. ALTERNATIVE TAX ELECTION; REVOCATION; 
                   TERMINATION.

       ``(a) In General.--A qualifying vessel operator may elect 
     the application of this subchapter.
       ``(b) Time and Manner; Years for Which Effective.--An 
     election under this subchapter--
       ``(1) shall be made in such form as prescribed by the 
     Secretary, and
       ``(2) shall be effective for the taxable year for which 
     made and all succeeding taxable years until terminated under 
     subsection (d).

     Such election may be effective for any taxable year only if 
     made before the due date (including extensions) for filing 
     the corporation's return for such taxable year.
       ``(c) Consistent Elections By Members of Controlled 
     Groups.--An election under subsection (a) by a member of a 
     controlled group shall apply to all qualifying vessel 
     operators that are members of such group.
       ``(d) Termination.--
       ``(1) By revocation.--
       ``(A) In general.--An election under subsection (a) may be 
     terminated by revocation.
       ``(B) When effective.--Except as provided in subparagraph 
     (C)--
       ``(i) a revocation made during the taxable year and on or 
     before the 15th day of the 3d month thereof shall be 
     effective on the 1st day of such taxable year, and
       ``(ii) a revocation made during the taxable year but after 
     such 15th day shall be effective on the 1st day of the 
     following taxable year.
       ``(C) Revocation may specify prospective date.--If the 
     revocation specifies a date for revocation which is on or 
     after the day on which the revocation is made, the revocation 
     shall be effective for taxable years beginning on and after 
     the date so specified.
       ``(2) By person ceasing to be qualifying vessel operator.--
       ``(A) In general.--An election under subsection (a) shall 
     be terminated whenever (at any time on or after the 1st day 
     of the 1st taxable year for which the corporation is an 
     electing corporation) such corporation ceases to be a 
     qualifying vessel operator.
       ``(B) When effective.--Any termination under this paragraph 
     shall be effective on and after the date of cessation.
       ``(C) Annualization.--The Secretary shall prescribe such 
     annualization and other rules as are appropriate in the case 
     of a termination under this paragraph.
       ``(e) Election After Termination.--If a qualifying vessel 
     operator has made an election under subsection (a) and if 
     such election has been terminated under subsection (d), such 
     operator (and any successor operator) shall not be eligible 
     to make an election under subsection (a) for any taxable year 
     before its 5th taxable year which begins after the 1st 
     taxable year for which such termination is effective, unless 
     the Secretary consents to such election.

     ``SEC. 1355. DEFINITIONS AND SPECIAL RULES.

       ``(a) Definitions.--For purposes of this subchapter--
       ``(1) Electing corporation.--The term `electing 
     corporation' means any corporation for which an election is 
     in effect under this subchapter.
       ``(2) Electing group; controlled group.--
       ``(A) Electing group.--The term `electing group' means a 
     controlled group of which one or more members is an electing 
     corporation.
       ``(B) Controlled group.--The term `controlled group' means 
     any group which would be treated as a single employer under 
     subsection (a) or (b) of section 52 if paragraphs (1) and (2) 
     of section 52(a) did not apply.
       ``(3) Qualifying vessel operator.--The term `qualifying 
     vessel operator' means any corporation--
       ``(A) who operates one or more qualifying vessels, and
       ``(B) who meets the shipping activity requirement in 
     subsection (c).
       ``(4) Qualifying vessel.--The term `qualifying vessel' 
     means a self-propelled (or a combination self-propelled and 
     non-self-propelled) United States flag vessel of not less 
     than 10,000 deadweight tons used exclusively in the United 
     States foreign trade during the period that the election 
     under this subchapter is in effect.
       ``(5) United states flag vessel.--The term `United States 
     flag vessel' means any vessel documented under the laws of 
     the United States.
       ``(6) United states domestic trade.--The term `United 
     States domestic trade' means the transportation of goods or 
     passengers between places in the United States.
       ``(7) United states foreign trade.--The term `United States 
     foreign trade' means the transportation of goods or 
     passengers between a place in the United States and a foreign 
     place or between foreign places.
       ``(8) Charter.--The term `charter' includes an operating 
     agreement.
       ``(b) Operating a Vessel.--For purposes of this 
     subchapter--
       ``(1) In general.--Except as provided in paragraph (2), a 
     person is treated as operating any vessel during any period 
     if such vessel is--
       ``(A) owned by, or chartered (including a time charter) to, 
     the person, and
       ``(B) is in use as a qualifying vessel during such period.
       ``(2) Bareboat charters.--A person is treated as operating 
     and using a vessel that it has chartered out on bareboat 
     charter terms only if--
       ``(A)(i) the vessel is temporarily surplus to the person's 
     requirements and the term of the charter does not exceed 3 
     years, or
       ``(ii) the vessel is bareboat chartered to a member of a 
     controlled group which includes such person or to an 
     unrelated person who sub-bareboats or time charters the 
     vessel to such a member (including the owner of the vessel), 
     and
       ``(B) the vessel is used as a qualifying vessel by the 
     person to whom ultimately chartered.

[[Page H8421]]

       ``(c) Shipping Activity Requirement.--For purposes of this 
     section--
       ``(1) In general.--Except as otherwise provided in this 
     subsection, a corporation meets the shipping activity 
     requirement of this subsection for any taxable year only if 
     the requirement of paragraph (4) is met for each of the 2 
     preceding taxable years.
       ``(2) Special rule for 1st year of election.--A corporation 
     meets the shipping activity requirement of this subsection 
     for the first taxable year for which the election under 
     section 1354(a) is in effect only if the requirement of 
     paragraph (4) is met for the preceding taxable year.
       ``(3) Controlled groups.--A corporation who is a member of 
     a controlled group meets the shipping activity requirement of 
     this subsection only if such requirement is met determined--
       ``(A) by treating all members of such group as 1 person, 
     and
       ``(B) by disregarding vessel charters between members of 
     such group.
       ``(4) Requirement.--The requirement of this paragraph is 
     met for any taxable year if, on average during such year, at 
     least 25 percent of the aggregate tonnage of qualifying 
     vessels used by the corporation were owned by such 
     corporation or chartered to such corporation on bareboat 
     charter terms.
       ``(d) Activities Carried on Partnerships, Etc.--In applying 
     this subchapter to a partner in a partnership--
       ``(1) each partner shall be treated as operating vessels 
     operated by the partnership,
       ``(2) each partner shall be treated as conducting the 
     activities conducted by the partnership, and
       ``(3) the extent of a partner's ownership or charter 
     interest in any vessel owned by or chartered to the 
     partnership shall be determined on the basis of the partner's 
     interest in the partnership.

     A similar rule shall apply with respect to other pass-thru 
     entities.
       ``(e) Effect of Temporarily Ceasing To Operate a Qualifying 
     Vessel.--
       ``(1) In general.--For purposes of subsections (b) and (c), 
     an electing corporation shall be treated as continuing to use 
     a qualifying vessel during any period of temporary cessation 
     if the electing corporation gives timely notice to the 
     Secretary stating--
       ``(A) that it has temporarily ceased to operate the 
     qualifying vessel, and
       ``(B) its intention to resume operating the qualifying 
     vessel.
       ``(2) Notice.--Notice shall be deemed timely if given not 
     later than the due date (including extensions) for the 
     corporation's tax return for the taxable year in which the 
     temporary cessation begins.
       ``(3) Period disregard in effect.--The period of temporary 
     cessation under paragraph (1) shall continue until the 
     earlier of the date on which--
       ``(A) the electing corporation abandons its intention to 
     resume operation of the qualifying vessel, or
       ``(B) the electing corporation resumes operation of the 
     qualifying vessel.
       ``(f) Effect of Temporarily Operating a Qualifying Vessel 
     in the United States Domestic Trade.--
       ``(1) In general.--For purposes of this subchapter, an 
     electing corporation shall be treated as continuing to use a 
     qualifying vessel in the United States foreign trade during 
     any period of temporary use in the United States domestic 
     trade if the electing corporation gives timely notice to the 
     Secretary stating--
       ``(A) that it temporarily operates or has operated in the 
     United States domestic trade a qualifying vessel which had 
     been used in the United States foreign trade, and
       ``(B) its intention to resume operation of the vessel in 
     the United States foreign trade.
       ``(2) Notice.--Notice shall be deemed timely if given not 
     later than the due date (including extensions) for the 
     corporation's tax return for the taxable year in which the 
     temporary cessation begins.
       ``(3) Period disregard in effect.--The period of temporary 
     use under paragraph (1) continues until the earlier of the 
     date of which--
       ``(A) the electing corporation abandons its intention to 
     resume operations of the vessel in the United States foreign 
     trade, or
       ``(B) the electing corporation resumes operation of the 
     vessel in the United States foreign trade.
       ``(4) No disregard if domestic trade use exceeds 30 days.--
     Paragraph (1) shall not apply to any qualifying vessel which 
     is operated in the United States domestic trade for more than 
     30 days during the taxable year.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.

     ``SEC. 1356. QUALIFYING SHIPPING ACTIVITIES.

       ``(a) Qualifying Shipping Activities.--For purposes of this 
     subchapter, the term `qualifying shipping activities' means--
       ``(1) core qualifying activities,
       ``(2) qualifying secondary activities, and
       ``(3) qualifying incidental activities.
       ``(b) Core Qualifying Activities.--For purposes of this 
     subchapter, the term `core qualifying activities' means 
     activities in operating qualifying vessels in United States 
     foreign trade.
       ``(c) Qualifying Secondary Activities.--For purposes of 
     this section--
       ``(1) In general.--The term `qualifying secondary 
     activities' means secondary activities but only to the extent 
     that, without regard to this subchapter, the gross income 
     derived by such corporation from such activities does not 
     exceed 20 percent of the gross income derived by the 
     corporation from its core qualifying activities.
       ``(2) Secondary activities.--The term `secondary 
     activities' means--
       ``(A) the active management or operation of vessels other 
     than qualifying vessels in the United States foreign trade,
       ``(B) the provision of vessel, barge, container, or cargo-
     related facilities or services to any person,
       ``(C) other activities of the electing corporation and 
     other members of its electing group that are an integral part 
     of its business of operating qualifying vessels in United 
     States foreign trade, including--
       ``(i) ownership or operation of barges, containers, 
     chassis, and other equipment that are the complement of, or 
     used in connection with, a qualifying vessel in United States 
     foreign trade,
       ``(ii) the inland haulage of cargo shipped, or to be 
     shipped, on qualifying vessels in United States foreign 
     trade, and
       ``(iii) the provision of terminal, maintenance, repair, 
     logistical, or other vessel, barge, container, or cargo-
     related services that are an integral part of operating 
     qualifying vessels in United States foreign trade, and
       ``(D) such other activities as may be prescribed by the 
     Secretary pursuant to regulations.
       ``(3) Coordination with core activities.--
       ``(A) In general.--Such term shall not include any core 
     qualifying activities.
       ``(B) Nonelecting corporations.--In the case of a 
     corporation (other than an electing corporation) which is a 
     member of an electing group, any core qualifying activities 
     of the corporation shall be treated as qualifying secondary 
     activities (and not as core qualifying activities).
       ``(d) Qualifying Incidental Activities.--For purposes of 
     this section, the term `qualified incidental activities' 
     means shipping-related activities if--
       ``(1) they are incidental to the corporation's core 
     qualifying activities,
       ``(2) they are not qualifying secondary activities, and
       ``(3) without regard to this subchapter, the gross income 
     derived by such corporation from such activities does not 
     exceed 0.1 percent of the corporation's gross income from its 
     core qualifying activities.
       ``(e) Application of Gross Income Tests in Case of Electing 
     Group.--In the case of an electing group, subsections (c)(1) 
     and (d)(3) shall be applied as if such group were 1 entity, 
     and the limitations under such subsections shall be allocated 
     among the corporations in such group.

     ``SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRECIATION; 
                   INTEREST.

       ``(a) Exclusion From Gross Income.--Gross income of an 
     electing corporation shall not include its income from 
     qualifying shipping activities.
       ``(b) Electing Group Member.--Gross income of a corporation 
     (other than an electing corporation) which is a member of an 
     electing group shall not include its income from qualifying 
     shipping activities conducted by such member.
       ``(c) Denial of Losses, Deductions, and Credits.--
       ``(1) General rule.--Subject to paragraph (2), each item of 
     loss, deduction (other than for interest expense), or credit 
     of any taxpayer with respect to any activity the income from 
     which is excluded from gross income under this section shall 
     be disallowed.
       ``(2) Depreciation.--
       ``(A) In general.--Notwithstanding paragraph (1), the 
     adjusted basis (for purposes of determining gain) of any 
     qualifying vessel shall be determined as if the deduction for 
     depreciation had been allowed.
       ``(B) Method.--
       ``(i) In general.--Except as provided in clause (ii), the 
     straight-line method of depreciation shall apply to 
     qualifying vessels the income from operation of which is 
     excluded from gross income under this section.
       ``(ii) Exception.--Clause (i) shall not apply to any 
     qualifying vessel which is subject to a charter entered into 
     before the date of the enactment of this subchapter.
       ``(3) Interest.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the interest expense of an electing corporation shall be 
     disallowed in the ratio that the fair market value of such 
     corporation's qualifying vessels bears to the fair market 
     value of such corporation's total assets.
       ``(B) Electing group.--In the case of a corporation which 
     is a member of an electing group, the interest expense of 
     such corporation shall be disallowed in the ratio that the 
     fair market value of such corporation's qualifying vessels 
     bears to the fair market value of the electing groups total 
     assets.

     ``SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DEDUCTIONS.

       ``(a) Qualifying Shipping Activities.--For purposes of this 
     chapter, the qualifying shipping activities of an electing 
     corporation shall be treated as a separate trade or business 
     activity distinct from all other activities conducted by such 
     corporation.
       ``(b) Exclusion of Credits or Deductions.--
       ``(1) No deduction shall be allowed against the notional 
     shipping income of an electing corporation, and no credit 
     shall be allowed against the tax imposed by section 
     1352(a)(2).
       ``(2) No deduction shall be allowed for any net operating 
     loss attributable to the qualifying shipping activities of 
     any person to the extent that such loss is carried forward by 
     such person from a taxable year preceding the first taxable 
     year for which such person was an electing corporation.
       ``(c) Transactions Not at Arm's Length.--Section 482 
     applies in accordance with this subsection to a transaction 
     or series of transactions--

[[Page H8422]]

       ``(1) as between an electing corporation and another 
     person, or
       ``(2) as between an person's qualifying shipping activities 
     and other activities carried on by it.

     ``SEC. 1359. DISPOSITION OF QUALIFYING VESSELS.

       ``(a) In General.--If any qualifying vessel operator sells 
     or disposes of any qualifying vessel in an otherwise taxable 
     transaction, at the election of such operator, no gain shall 
     be recognized if any replacement qualifying vessel is 
     acquired during the period specified in subsection (b), 
     except to the extent that the amount realized upon such sale 
     or disposition exceeds the cost of the replacement qualifying 
     vessel.
       ``(b) Period Within Which Property Must Be Replaced.--The 
     period referred to in subsection (a) shall be the period 
     beginning one year prior to the disposition of the qualifying 
     vessel and ending--
       ``(1) 3 years after the close of the first taxable year in 
     which the gain is realized, or
       ``(2) subject to such terms and conditions as may be 
     specified by the Secretary, on such later date as the 
     Secretary may designate on application by the taxpayer.

     Such application shall be made at such time and in such 
     manner as the Secretary may by regulations prescribe.
       ``(c) Application of Section to Noncorporate Operators.--
     For purposes of this section, the term `qualifying vessel 
     operator' includes any person who would be a qualifying 
     vessel operator were such person a corporation.
       ``(d) Time for Assessment of Deficiency Attributable to 
     Gain.--If a qualifying vessel operator has made the election 
     provided in subsection (a), then--
       ``(1) the statutory period for the assessment of any 
     deficiency, for any taxable year in which any part of the 
     gain is realized, attributable to such gain shall not expire 
     prior to the expiration of 3 years from the date the 
     Secretary is notified by such operator (in such manner as the 
     Secretary may by regulations prescribe) of the replacement 
     qualifying vessel or of an intention not to replace, and
       ``(2) such deficiency may be assessed before the expiration 
     of such 3-year period notwithstanding the provisions of 
     section 6212(c) or the provisions of any other law or rule of 
     law which would otherwise prevent such assessment.
       ``(e) Basis of Replacement Qualifying Vessel.--In the case 
     of any replacement qualifying vessel purchased by the 
     qualifying vessel operator which resulted in the 
     nonrecognition of any part of the gain realized as the result 
     of a sale or other disposition of a qualifying vessel, the 
     basis shall be the cost of the replacement qualifying vessel 
     decreased in the amount of the gain not so recognized; and if 
     the property purchased consists of more than one piece of 
     property, the basis determined under this sentence shall be 
     allocated to the purchased properties in proportion to their 
     respective costs.''
       (b) Technical Amendments.--
       (1) The second sentence of section 56(g)(4)(B)(i), as 
     amended by this Act, is further amended by inserting ``or 
     1357'' after ``section 139A''.
       (2) The table of subchapters for chapter 1 is amended by 
     inserting after the item relating to subchapter S the 
     following new item:

``Subchapter R. Election to determine corporate tax on certain 
              international shipping activities using per ton rate.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

   Subtitle F--Stock Options and Employee Stock Purchase Plan Stock 
                                Options

     SEC. 251. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE 
                   STOCK PURCHASE PLAN STOCK OPTIONS FROM WAGES.

       (a) Exclusion From Employment Taxes.--
       (1) Social security taxes.--
       (A) Section 3121(a) (relating to definition of wages) is 
     amended by striking ``or'' at the end of paragraph (20), by 
     striking the period at the end of paragraph (21) and 
     inserting ``; or'', and by inserting after paragraph (21) the 
     following new paragraph:
       ``(22) remuneration on account of--
       ``(A) a transfer of a share of stock to any individual 
     pursuant to an exercise of an incentive stock option (as 
     defined in section 422(b)) or under an employee stock 
     purchase plan (as defined in section 423(b)), or
       ``(B) any disposition by the individual of such stock.''.
       (B) Section 209(a) of the Social Security Act is amended by 
     striking ``or'' at the end of paragraph (17), by striking the 
     period at the end of paragraph (18) and inserting ``; or'', 
     and by inserting after paragraph (18) the following new 
     paragraph:
       ``(19) Remuneration on account of--
       ``(A) a transfer of a share of stock to any individual 
     pursuant to an exercise of an incentive stock option (as 
     defined in section 422(b) of the Internal Revenue Code of 
     1986) or under an employee stock purchase plan (as defined in 
     section 423(b) of such Code), or
       ``(B) any disposition by the individual of such stock.''.
       (2) Railroad retirement taxes.--Subsection (e) of section 
     3231 is amended by adding at the end the following new 
     paragraph:
       ``(12) Qualified stock options.--The term `compensation' 
     shall not include any remuneration on account of--
       ``(A) a transfer of a share of stock to any individual 
     pursuant to an exercise of an incentive stock option (as 
     defined in section 422(b)) or under an employee stock 
     purchase plan (as defined in section 423(b)), or
       ``(B) any disposition by the individual of such stock.''.
       (3) Unemployment taxes.--Section 3306(b) (relating to 
     definition of wages) is amended by striking ``or'' at the end 
     of paragraph (17), by striking the period at the end of 
     paragraph (18) and inserting ``; or'', and by inserting after 
     paragraph (18) the following new paragraph:
       ``(19) remuneration on account of--
       ``(A) a transfer of a share of stock to any individual 
     pursuant to an exercise of an incentive stock option (as 
     defined in section 422(b)) or under an employee stock 
     purchase plan (as defined in section 423(b)), or
       ``(B) any disposition by the individual of such stock.''.
       (b) Wage Withholding Not Required on Disqualifying 
     Dispositions.--Section 421(b) (relating to effect of 
     disqualifying dispositions) is amended by adding at the end 
     the following new sentence: ``No amount shall be required to 
     be deducted and withheld under chapter 24 with respect to any 
     increase in income attributable to a disposition described in 
     the preceding sentence.''.
       (c) Wage Withholding Not Required on Compensation Where 
     Option Price Is Between 85 Percent and 100 Percent of Value 
     of Stock.--Section 423(c) (relating to special rule where 
     option price is between 85 percent and 100 percent of value 
     of stock) is amended by adding at the end the following new 
     sentence: ``No amount shall be required to be deducted and 
     withheld under chapter 24 with respect to any amount treated 
     as compensation under this subsection.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to stock acquired pursuant to options exercised 
     after the date of the enactment of this Act.
     TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS
            Subtitle A--Volumetric Ethanol Excise Tax Credit

     SEC. 301. ALCOHOL AND BIODIESEL EXCISE TAX CREDIT AND 
                   EXTENSION OF ALCOHOL FUELS INCOME TAX CREDIT.

       (a) In General.--Subchapter B of chapter 65 (relating to 
     rules of special application) is amended by inserting after 
     section 6425 the following new section:

     ``SEC. 6426. CREDIT FOR ALCOHOL FUEL AND BIODIESEL MIXTURES.

       ``(a) Allowance of Credits.--There shall be allowed as a 
     credit against the tax imposed by section 4081 an amount 
     equal to the sum of--
       ``(1) the alcohol fuel mixture credit, plus
       ``(2) the biodiesel mixture credit.
       ``(b) Alcohol Fuel Mixture Credit.--
       ``(1) In general.--For purposes of this section, the 
     alcohol fuel mixture credit is the product of the applicable 
     amount and the number of gallons of alcohol used by the 
     taxpayer in producing any alcohol fuel mixture for sale or 
     use in a trade or business of the taxpayer.
       ``(2) Applicable amount.--For purposes of this subsection--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the applicable amount is 51 cents.
       ``(B) Mixtures not containing ethanol.--In the case of an 
     alcohol fuel mixture in which none of the alcohol consists of 
     ethanol, the applicable amount is 60 cents.
       ``(3) Alcohol fuel mixture.--For purposes of this 
     subsection, the term `alcohol fuel mixture' means a mixture 
     of alcohol and a taxable fuel which--
       ``(A) is sold by the taxpayer producing such mixture to any 
     person for use as a fuel, or
       ``(B) is used as a fuel by the taxpayer producing such 
     mixture.

     For purposes of subparagraph (A), a mixture produced by any 
     person at a refinery prior to a taxable event which includes 
     ethyl tertiary butyl ether or other ethers produced from 
     alcohol shall be treated as sold at the time of its removal 
     from the refinery (and only at such time) to another person 
     for use as a fuel.
       ``(4) Other definitions.--For purposes of this subsection--
       ``(A) Alcohol.--The term `alcohol' includes methanol and 
     ethanol but does not include--
       ``(i) alcohol produced from petroleum, natural gas, or coal 
     (including peat), or
       ``(ii) alcohol with a proof of less than 190 (determined 
     without regard to any added denaturants).

     Such term also includes an alcohol gallon equivalent of ethyl 
     tertiary butyl ether or other ethers produced from such 
     alcohol.
       ``(B) Taxable fuel.--The term `taxable fuel' has the 
     meaning given such term by section 4083(a)(1).
       ``(5) Termination.--This subsection shall not apply to any 
     sale, use, or removal for any period after December 31, 2010.
       ``(c) Biodiesel Mixture Credit.--
       ``(1) In general.--For purposes of this section, the 
     biodiesel mixture credit is the product of the applicable 
     amount and the number of gallons of biodiesel used by the 
     taxpayer in producing any biodiesel mixture for sale or use 
     in a trade or business of the taxpayer.
       ``(2) Applicable amount.--For purposes of this subsection--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the applicable amount is 50 cents.
       ``(B) Amount for agri-biodiesel.--In the case of any 
     biodiesel which is agri-biodiesel, the applicable amount is 
     $1.00.
       ``(3) Biodiesel mixture.--For purposes of this section, the 
     term `biodiesel mixture' means a mixture of biodiesel and 
     diesel fuel (as defined in section 4083(a)(3)), determined 
     without regard to any use of kerosene, which--

[[Page H8423]]

       ``(A) is sold by the taxpayer producing such mixture to any 
     person for use as a fuel, or
       ``(B) is used as a fuel by the taxpayer producing such 
     mixture.
       ``(4) Certification for biodiesel.--No credit shall be 
     allowed under this subsection unless the taxpayer obtains a 
     certification (in such form and manner as prescribed by the 
     Secretary) from the producer of the biodiesel which 
     identifies the product produced and the percentage of 
     biodiesel and agri-biodiesel in the product.
       ``(5) Other definitions.--Any term used in this subsection 
     which is also used in section 40A shall have the meaning 
     given such term by section 40A.
       ``(6) Termination.--This subsection shall not apply to any 
     sale, use, or removal for any period after December 31, 2006.
       ``(d) Mixture Not Used As a Fuel, Etc.--
       ``(1) Imposition of tax.--If--
       ``(A) any credit was determined under this section with 
     respect to alcohol or biodiesel used in the production of any 
     alcohol fuel mixture or biodiesel mixture, respectively, and
       ``(B) any person--
       ``(i) separates the alcohol or biodiesel from the mixture, 
     or
       ``(ii) without separation, uses the mixture other than as a 
     fuel,

     then there is hereby imposed on such person a tax equal to 
     the product of the applicable amount and the number of 
     gallons of such alcohol or biodiesel.
       ``(2) Applicable laws.--All provisions of law, including 
     penalties, shall, insofar as applicable and not inconsistent 
     with this section, apply in respect of any tax imposed under 
     paragraph (1) as if such tax were imposed by section 4081 and 
     not by this section.
       ``(e) Coordination With Exemption From Excise Tax.--Rules 
     similar to the rules under section 40(c) shall apply for 
     purposes of this section.''.
       (b) Registration Requirement.--Section 4101(a)(1) (relating 
     to registration), as amended by section 861, is amended by 
     inserting ``and every person producing or importing biodiesel 
     (as defined in section 40A(d)(1)) or alcohol (as defined in 
     section 6426(b)(4)(A))'' before ``shall register with the 
     Secretary''.
       (c) Additional Amendments.--
       (1) Section 40(c) is amended by striking ``subsection 
     (b)(2), (k), or (m) of section 4041, section 4081(c), or 
     section 4091(c)'' and inserting ``section 4041(b)(2), section 
     6426, or section 6427(e)''.
       (2) Paragraph (4) of section 40(d) is amended to read as 
     follows:
       ``(4) Volume of alcohol.--For purposes of determining under 
     subsection (a) the number of gallons of alcohol with respect 
     to which a credit is allowable under subsection (a), the 
     volume of alcohol shall include the volume of any denaturant 
     (including gasoline) which is added under any formulas 
     approved by the Secretary to the extent that such denaturants 
     do not exceed 5 percent of the volume of such alcohol 
     (including denaturants).''.
       (3) Section 40(e)(1) is amended--
       (A) by striking ``2007'' in subparagraph (A) and inserting 
     ``2010'', and
       (B) by striking ``2008'' in subparagraph (B) and inserting 
     ``2011''.
       (4) Section 40(h) is amended--
       (A) by striking ``2007'' in paragraph (1) and inserting 
     ``2010'', and
       (B) by striking ``, 2006, or 2007'' in the table contained 
     in paragraph (2) and inserting ``through 2010''.
       (5) Section 4041(b)(2)(B) is amended by striking ``a 
     substance other than petroleum or natural gas'' and inserting 
     ``coal (including peat)''.
       (6) Section 4041 is amended by striking subsection (k).
       (7) Section 4081 is amended by striking subsection (c).
       (8) Paragraph (2) of section 4083(a) is amended to read as 
     follows:
       ``(2) Gasoline.--The term `gasoline'--
       ``(A) includes any gasoline blend, other than qualified 
     methanol or ethanol fuel (as defined in section 
     4041(b)(2)(B)), partially exempt methanol or ethanol fuel (as 
     defined in section 4041(m)(2)), or a denatured alcohol, and
       ``(B) includes, to the extent prescribed in regulations--
       ``(i) any gasoline blend stock, and
       ``(ii) any product commonly used as an additive in gasoline 
     (other than alcohol).

     For purposes of subparagraph (B)(i), the term `gasoline blend 
     stock' means any petroleum product component of gasoline.''.
       (9) Section 6427 is amended by inserting after subsection 
     (d) the following new subsection:
       ``(e) Alcohol or Biodiesel Used To Produce Alcohol Fuel and 
     Biodiesel Mixtures.--Except as provided in subsection (k)--
       ``(1) Used to produce a mixture.--If any person produces a 
     mixture described in section 6426 in such person's trade or 
     business, the Secretary shall pay (without interest) to such 
     person an amount equal to the alcohol fuel mixture credit or 
     the biodiesel mixture credit with respect to such mixture.
       ``(2) Coordination with other repayment provisions.--No 
     amount shall be payable under paragraph (1) with respect to 
     any mixture with respect to which an amount is allowed as a 
     credit under section 6426.
       ``(3) Termination.--This subsection shall not apply with 
     respect to--
       ``(A) any alcohol fuel mixture (as defined in section 
     6426(b)(3)) sold or used after December 31, 2010, and
       ``(B) any biodiesel mixture (as defined in section 
     6426(c)(3)) sold or used after December 31, 2006.''.
       (10) Section 6427(i)(3) is amended--
       (A) by striking ``subsection (f)'' both places it appears 
     in subparagraph (A) and inserting ``subsection (e)(1)'',
       (B) by striking ``gasoline, diesel fuel, or kerosene used 
     to produce a qualified alcohol mixture (as defined in section 
     4081(c)(3))'' in subparagraph (A) and inserting ``a mixture 
     described in section 6426'',
       (C) by adding at the end of subparagraph (A) the following 
     new flush sentence:

     ``In the case of an electronic claim, this subparagraph shall 
     be applied without regard to clause (i).'',
       (D) by striking ``subsection (f)(1)'' in subparagraph (B) 
     and inserting ``subsection (e)(1)'',
       (E) by striking ``20 days of the date of the filing of such 
     claim'' in subparagraph (B) and inserting ``45 days of the 
     date of the filing of such claim (20 days in the case of an 
     electronic claim)'', and
       (F) by striking ``alcohol mixture'' in the heading and 
     inserting ``alcohol fuel and biodiesel mixture''.
       (11) Section 9503(b)(1) is amended by adding at the end the 
     following new flush sentence:

     ``For purposes of this paragraph, taxes received under 
     sections 4041 and 4081 shall be determined without reduction 
     for credits under section 6426.''.
       (12) Section 9503(b)(4) is amended--
       (A) by adding ``or'' at the end of subparagraph (C),
       (B) by striking the comma at the end of subparagraph 
     (D)(iii) and inserting a period, and
       (C) by striking subparagraphs (E) and (F).
       (13) Section 9503(c)(2)(A) is amended by adding at the end 
     the following: ``Clauses (i)(III) and (ii) shall not apply to 
     claims under section 6427(e).''.
       (14) The table of sections for subchapter B of chapter 65 
     is amended by inserting after the item relating to section 
     6425 the following new item:

``Sec. 6426. Credit for alcohol fuel and biodiesel mixtures.''.
       (d) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to fuel sold or used after December 31, 2004.
       (2) Registration requirement.--The amendment made by 
     subsection (b) shall take effect on April 1, 2005.
       (3) Extension of alcohol fuels credit.--The amendments made 
     by paragraphs (3), (4), and (14) of subsection (c) shall take 
     effect on the date of the enactment of this Act.
       (4) Repeal of general fund retention of certain alcohol 
     fuels taxes.--The amendments made by subsection (c)(12) shall 
     apply to fuel sold or used after September 30, 2004.
       (e) Format for Filing.--The Secretary of the Treasury shall 
     describe the electronic format for filing claims described in 
     section 6427(i)(3)(B) of the Internal Revenue Code of 1986 
     (as amended by subsection (c)(10)(C)) not later than December 
     31, 2004.

     SEC. 302. BIODIESEL INCOME TAX CREDIT.

       (a) In General.--Subpart D of part IV of subchapter A of 
     chapter 1 (relating to business related credits) is amended 
     by inserting after section 40 the following new section:

     ``SEC. 40A. BIODIESEL USED AS FUEL.

       ``(a) General Rule.--For purposes of section 38, the 
     biodiesel fuels credit determined under this section for the 
     taxable year is an amount equal to the sum of--
       ``(1) the biodiesel mixture credit, plus
       ``(2) the biodiesel credit.
       ``(b) Definition of Biodiesel Mixture Credit and Biodiesel 
     Credit.--For purposes of this section--
       ``(1) Biodiesel mixture credit.--
       ``(A) In general.--The biodiesel mixture credit of any 
     taxpayer for any taxable year is 50 cents for each gallon of 
     biodiesel used by the taxpayer in the production of a 
     qualified biodiesel mixture.
       ``(B) Qualified biodiesel mixture.--The term `qualified 
     biodiesel mixture' means a mixture of biodiesel and diesel 
     fuel (as defined in section 4083(a)(3)), determined without 
     regard to any use of kerosene, which--
       ``(i) is sold by the taxpayer producing such mixture to any 
     person for use as a fuel, or
       ``(ii) is used as a fuel by the taxpayer producing such 
     mixture.
       ``(C) Sale or use must be in trade or business, etc.--
     Biodiesel used in the production of a qualified biodiesel 
     mixture shall be taken into account--
       ``(i) only if the sale or use described in subparagraph (B) 
     is in a trade or business of the taxpayer, and
       ``(ii) for the taxable year in which such sale or use 
     occurs.
       ``(D) Casual off-farm production not eligible.--No credit 
     shall be allowed under this section with respect to any 
     casual off-farm production of a qualified biodiesel mixture.
       ``(2) Biodiesel credit.--
       ``(A) In general.--The biodiesel credit of any taxpayer for 
     any taxable year is 50 cents for each gallon of biodiesel 
     which is not in a mixture with diesel fuel and which during 
     the taxable year--
       ``(i) is used by the taxpayer as a fuel in a trade or 
     business, or
       ``(ii) is sold by the taxpayer at retail to a person and 
     placed in the fuel tank of such person's vehicle.
       ``(B) User credit not to apply to biodiesel sold at 
     retail.--No credit shall be allowed under subparagraph (A)(i) 
     with respect to any biodiesel which was sold in a retail sale 
     described in subparagraph (A)(ii).
       ``(3) Credit for agri-biodiesel.--In the case of any 
     biodiesel which is agri-biodiesel, paragraphs (1)(A) and 
     (2)(A) shall be applied by substituting `$1.00' for `50 
     cents'.
       ``(4) Certification for biodiesel.--No credit shall be 
     allowed under this section unless the taxpayer obtains a 
     certification (in such form and manner as prescribed by the 
     Secretary) from the producer or importer of the biodiesel 
     which

[[Page H8424]]

     identifies the product produced and the percentage of 
     biodiesel and agri-biodiesel in the product.
       ``(c) Coordination With Credit Against Excise Tax.--The 
     amount of the credit determined under this section with 
     respect to any biodiesel shall be properly reduced to take 
     into account any benefit provided with respect to such 
     biodiesel solely by reason of the application of section 6426 
     or 6427(e).
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Biodiesel.--The term `biodiesel' means the monoalkyl 
     esters of long chain fatty acids derived from plant or animal 
     matter which meet--
       ``(A) the registration requirements for fuels and fuel 
     additives established by the Environmental Protection Agency 
     under section 211 of the Clean Air Act (42 U.S.C. 7545), and
       ``(B) the requirements of the American Society of Testing 
     and Materials D6751.
       ``(2) Agri-biodiesel.--The term `agri-biodiesel' means 
     biodiesel derived solely from virgin oils, including esters 
     derived from virgin vegetable oils from corn, soybeans, 
     sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
     safflowers, flaxseeds, rice bran, and mustard seeds, and from 
     animal fats.
       ``(3) Mixture or biodiesel not used as a fuel, etc.--
       ``(A) Mixtures.--If--
       ``(i) any credit was determined under this section with 
     respect to biodiesel used in the production of any qualified 
     biodiesel mixture, and
       ``(ii) any person--

       ``(I) separates the biodiesel from the mixture, or
       ``(II) without separation, uses the mixture other than as a 
     fuel,

     then there is hereby imposed on such person a tax equal to 
     the product of the rate applicable under subsection (b)(1)(A) 
     and the number of gallons of such biodiesel in such mixture.
       ``(B) Biodiesel.--If--
       ``(i) any credit was determined under this section with 
     respect to the retail sale of any biodiesel, and
       ``(ii) any person mixes such biodiesel or uses such 
     biodiesel other than as a fuel,
     then there is hereby imposed on such person a tax equal to 
     the product of the rate applicable under subsection (b)(2)(A) 
     and the number of gallons of such biodiesel.
       ``(C) Applicable laws.--All provisions of law, including 
     penalties, shall, insofar as applicable and not inconsistent 
     with this section, apply in respect of any tax imposed under 
     subparagraph (A) or (B) as if such tax were imposed by 
     section 4081 and not by this chapter.
       ``(4) Pass-thru in the case of estates and trusts.--Under 
     regulations prescribed by the Secretary, rules similar to the 
     rules of subsection (d) of section 52 shall apply.
       ``(e) Termination.--This section shall not apply to any 
     sale or use after December 31, 2006.''.
       (b) Credit Treated as Part of General Business Credit.--
     Section 38(b) (relating to current year business credit), as 
     amended by this Act, is amended by striking ``plus'' at the 
     end of paragraph (15), by striking the period at the end of 
     paragraph (16) and inserting ``, plus'', and by inserting 
     after paragraph (16) the following new paragraph:
       ``(17) the biodiesel fuels credit determined under section 
     40A(a).''.
       (c) Conforming Amendments.--
       (1)(A) Section 87 is amended to read as follows:

     ``SEC. 87. ALCOHOL AND BIODIESEL FUELS CREDITS.

       ``Gross income includes--
       ``(1) the amount of the alcohol fuel credit determined with 
     respect to the taxpayer for the taxable year under section 
     40(a), and
       ``(2) the biodiesel fuels credit determined with respect to 
     the taxpayer for the taxable year under section 40A(a).''.
       (B) The item relating to section 87 in the table of 
     sections for part II of subchapter B of chapter 1 is amended 
     by striking ``fuel credit'' and inserting ``and biodiesel 
     fuels credits''.
       (2) Section 196(c) is amended by striking ``and'' at the 
     end of paragraph (9), by striking the period at the end of 
     paragraph (10) and inserting ``, and'', and by adding at the 
     end the following new paragraph:
       ``(11) the biodiesel fuels credit determined under section 
     40A(a).''.
       (3) The table of sections for subpart D of part IV of 
     subchapter A of chapter 1 is amended by adding after the item 
     relating to section 40 the following new item:

``Sec. 40A. Biodiesel used as fuel.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to fuel produced, and sold or used, after 
     December 31, 2004, in taxable years ending after such date.

     SEC. 303. INFORMATION REPORTING FOR PERSONS CLAIMING CERTAIN 
                   TAX BENEFITS.

       (a) In General.--Subpart C of part III of subchapter A of 
     chapter 32 is amended by adding at the end the following new 
     section:

     ``SEC. 4104. INFORMATION REPORTING FOR PERSONS CLAIMING 
                   CERTAIN TAX BENEFITS.

       ``(a) In General.--The Secretary shall require any person 
     claiming tax benefits--
       ``(1) under the provisions of section 34, 40, and 40A, to 
     file a return at the time such person claims such benefits 
     (in such manner as the Secretary may prescribe), and
       ``(2) under the provisions of section 4041(b)(2), 6426, or 
     6427(e) to file a quarterly return (in such manner as the 
     Secretary may prescribe).
       ``(b) Contents of Return.--Any return filed under this 
     section shall provide such information relating to such 
     benefits and the coordination of such benefits as the 
     Secretary may require to ensure the proper administration and 
     use of such benefits.
       ``(c) Enforcement.--With respect to any person described in 
     subsection (a) and subject to registration requirements under 
     this title, rules similar to rules of section 4222(c) shall 
     apply with respect to any requirement under this section.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart C of part III of subchapter A of chapter 32 is 
     amended by adding at the end the following new item:

``Sec. 4104. Information reporting for persons claiming certain tax 
              benefits.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2005.
                  Subtitle B--Agricultural Incentives

     SEC. 311. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF 
                   WEATHER-RELATED CONDITIONS.

       (a) Replacement of Livestock With Other Farm Property.--
     Subsection (f) of section 1033 (relating to involuntary 
     conversions) is amended--
       (1) by inserting ``drought, flood, or other weather-related 
     conditions, or'' after ``because of'',
       (2) by inserting ``in the case of soil contamination or 
     other environmental contamination'' after ``including real 
     property'', and
       (3) by striking ``Where There Has Been Environmental 
     Contamination'' in the heading and inserting ``in Certain 
     Cases''.
       (b) Extension of Replacement Period of Involuntarily 
     Converted Livestock.--Subsection (e) of section 1033 
     (relating to involuntary conversions) is amended--
       (1) by striking ``Conditions.--For purposes'' and inserting 
     ``Conditions.--
       ``(1) In general.--For purposes'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Extension of replacement period.--
       ``(A) In general.--In the case of drought, flood, or other 
     weather-related conditions described in paragraph (1) which 
     result in the area being designated as eligible for 
     assistance by the Federal Government, subsection (a)(2)(B) 
     shall be applied with respect to any converted property by 
     substituting `4 years' for `2 years'.
       ``(B) Further extension by secretary.--The Secretary may 
     extend on a regional basis the period for replacement under 
     this section (after the application of subparagraph (A)) for 
     such additional time as the Secretary determines appropriate 
     if the weather-related conditions which resulted in such 
     application continue for more than 3 years.''.
       (c) Income Inclusion Rules.--Section 451(e) (relating to 
     special rule for proceeds from livestock sold on account of 
     drought, flood, or other weather-related conditions) is 
     amended by adding at the end the following new paragraph:
       ``(3) Special election rules.--If section 1033(e)(2) 
     applies to a sale or exchange of livestock described in 
     paragraph (1), the election under paragraph (1) shall be 
     deemed valid if made during the replacement period described 
     in such section.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to any taxable year with respect to which the due 
     date (without regard to extensions) for the return is after 
     December 31, 2002.

     SEC. 312. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES 
                   WITHOUT REDUCING PATRONAGE DIVIDENDS.

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

     SEC. 313. APPORTIONMENT OF SMALL ETHANOL PRODUCER CREDIT.

       (a) Allocation of Alcohol Fuels Credit to Patrons of a 
     Cooperative.--Section 40(g) (relating to definitions and 
     special rules for eligible small ethanol producer credit) is 
     amended by adding at the end the following new paragraph:
       ``(6) Allocation of small ethanol producer credit to 
     patrons of cooperative.--
       ``(A) Election to allocate.--
       ``(i) In general.--In the case of a cooperative 
     organization described in section 1381(a), any portion of the 
     credit determined under subsection (a)(3) for the taxable 
     year may, at the election of the organization, be apportioned 
     pro rata among patrons of the organization on the basis of 
     the quantity or value of business done with or for such 
     patrons for the taxable year.
       ``(ii) Form and effect of election.--An election under 
     clause (i) for any taxable year shall be made on a timely 
     filed return for such year. Such election, once made, shall 
     be irrevocable for such taxable year.
       ``(B) Treatment of organizations and patrons.--
       ``(i) Organizations.--The amount of the credit not 
     apportioned to patrons pursuant to subparagraph (A) shall be 
     included in the amount determined under subsection (a)(3) for 
     the taxable year of the organization.
       ``(ii) Patrons.--The amount of the credit apportioned to 
     patrons pursuant to subparagraph (A) shall be included in the 
     amount determined under such subsection for the first taxable 
     year of each patron ending on or after the last day

[[Page H8425]]

     of the payment period (as defined in section 1382(d)) for the 
     taxable year of the organization or, if earlier, for the 
     taxable year of each patron ending on or after the date on 
     which the patron receives notice from the cooperative of the 
     apportionment.
       ``(iii) Special rules for decrease in credits for taxable 
     year.--If the amount of the credit of the organization 
     determined under such subsection for a taxable year is less 
     than the amount of such credit shown on the return of the 
     organization for such year, an amount equal to the excess 
     of--

       ``(I) such reduction, over
       ``(ii) the amount not apportioned to such patrons under 
     subparagraph (A) for the taxable year,

     shall be treated as an increase in tax imposed by this 
     chapter on the organization. Such increase shall not be 
     treated as tax imposed by this chapter for purposes of 
     determining the amount of any credit under this chapter or 
     for purposes of section 55.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

     SEC. 314. COORDINATE FARMERS AND FISHERMEN INCOME AVERAGING 
                   AND THE ALTERNATIVE MINIMUM TAX.

       (a) In General.--Section 55(c) (defining regular tax) is 
     amended by redesignating paragraph (2) as paragraph (3) and 
     by inserting after paragraph (1) the following new paragraph:
       ``(2) Coordination with income averaging for farmers and 
     fishermen.--Solely for purposes of this section, section 1301 
     (relating to averaging of farm and fishing income) shall not 
     apply in computing the regular tax.''.
       (b) Allowing Income Averaging for Fishermen.--
       (1) In general.--Section 1301(a) is amended by striking 
     ``farming business'' and inserting ``farming business or 
     fishing business''.
       (2) Definition of elected farm income.--
       (A) In general.--Clause (i) of section 1301(b)(1)(A) is 
     amended by inserting ``or fishing business'' before the 
     semicolon.
       (B) Conforming amendment.--Subparagraph (B) of section 
     1301(b)(1) is amended by inserting ``or fishing business'' 
     after ``farming business'' both places it occurs.
       (3) Definition of fishing business.--Section 1301(b) is 
     amended by adding at the end the following new paragraph:
       ``(4) Fishing business.--The term `fishing business' means 
     the conduct of commercial fishing as defined in section 3 of 
     the Magnuson-Stevens Fishery Conservation and Management Act 
     (16 U.S.C. 1802).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 315. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO 
                   APPLY TO OUTRIGHT SALES BY LANDOWNERS.

       (a) In General.--The first sentence of section 631(b) 
     (relating to disposal of timber with a retained economic 
     interest) is amended by striking ``retains an economic 
     interest in such timber'' and inserting ``either retains an 
     economic interest in such timber or makes an outright sale of 
     such timber''.
       (b) Conforming Amendments.--
       (1) The third sentence of section 631(b) is amended by 
     striking ``The date of disposal'' and inserting ``In the case 
     of disposal of timber with a retained economic interest, the 
     date of disposal''.
       (2) The heading for section 631(b) is amended by striking 
     ``With a Retained Economic Interest''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales after December 31, 2004.

     SEC. 316. MODIFICATION TO COOPERATIVE MARKETING RULES TO 
                   INCLUDE VALUE ADDED PROCESSING INVOLVING 
                   ANIMALS.

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

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

     SEC. 317. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO 
                   FARMERS' COOPERATIVE ORGANIZATIONS.

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

     SEC. 318. CERTAIN EXPENSES OF RURAL LETTER CARRIERS.

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

     SEC. 319. TREATMENT OF CERTAIN INCOME OF COOPERATIVES.

       (a) Income From Open Access and Nuclear Decommissioning 
     Transactions.--
       (1) In general.--Subparagraph (C) of section 501(c)(12) is 
     amended by striking clause (ii) and adding at the end the 
     following:
       ``(ii) from any provision or sale of electric energy 
     transmission services or ancillary services if such services 
     are provided on a nondiscriminatory open access basis under 
     an open access transmission tariff approved or accepted by 
     FERC or under an independent transmission provider agreement 
     approved or accepted by FERC (other than income received or 
     accrued directly or indirectly from a member),
       ``(iii) from the provision or sale of electric energy 
     distribution services or ancillary services if such services 
     are provided on a nondiscriminatory open access basis to 
     distribute electric energy not owned by the mutual or 
     electric cooperative company--

       ``(I) to end-users who are served by distribution 
     facilities not owned by such company or any of its members 
     (other than income received or accrued directly or indirectly 
     from a member), or
       ``(II) generated by a generation facility not owned or 
     leased by such company or any of its members and which is 
     directly connected to distribution facilities owned by such 
     company or any of its members (other than income received or 
     accrued directly or indirectly from a member),

       ``(iv) from any nuclear decommissioning transaction, or
       ``(v) from any asset exchange or conversion transaction.

     Clauses (ii) through (v) shall not apply to taxable years 
     beginning after December 31, 2006.''.
       (2) Definitions and special rules.--Paragraph (12) of 
     section 501(c) is amended by adding at the end the following 
     new subparagraphs:
       ``(E) For purposes of subparagraph (C)(ii), the term `FERC' 
     means the Federal Energy Regulatory Commission and references 
     to such term shall be treated as including the Public Utility 
     Commission of Texas with respect to any ERCOT utility (as 
     defined in section 212(k)(2)(B) of the Federal Power Act (16 
     U.S.C. 824k(k)(2)(B))).
       ``(F) For purposes of subparagraph (C)(iii), the term 
     `nuclear decommissioning transaction' means--
       ``(i) any transfer into a trust, fund, or instrument 
     established to pay any nuclear decommissioning costs if the 
     transfer is in connection with the transfer of the mutual or 
     cooperative electric company's interest in a nuclear power 
     plant or nuclear power plant unit,
       ``(ii) any distribution from any trust, fund, or instrument 
     established to pay any nuclear decommissioning costs, or
       ``(iii) any earnings from any trust, fund, or instrument 
     established to pay any nuclear decommissioning costs.
       ``(G) For purposes of subparagraph (C)(iv), the term `asset 
     exchange or conversion transaction' means any voluntary 
     exchange or involuntary conversion of any property related to 
     generating, transmitting, distributing, or selling electric 
     energy by a mutual or cooperative electric company, the gain 
     from which qualifies for deferred recognition under section 
     1031 or 1033, but only if the replacement property acquired 
     by such company pursuant to such section constitutes property 
     which is used, or to be used, for--
       ``(i) generating, transmitting, distributing, or selling 
     electric energy, or
       ``(ii) producing, transmitting, distributing, or selling 
     natural gas.''.
       (b) Treatment of Income From Load Loss Transactions, Etc.--
     Paragraph (12) of section 501(c), as amended by subsection 
     (a)(2), is amended by adding after subparagraph (G) the 
     following new subparagraph:
       ``(H)(i) In the case of a mutual or cooperative electric 
     company described in this paragraph or an organization 
     described in section 1381(a)(2)(C), income received or 
     accrued from a load loss transaction shall be treated as an 
     amount collected from members for the sole purpose of meeting 
     losses and expenses.
       ``(ii) For purposes of clause (i), the term `load loss 
     transaction' means any wholesale or retail sale of electric 
     energy (other than to members) to the extent that the 
     aggregate sales during the recovery period do not exceed the 
     load loss mitigation sales limit for such period.
       ``(iii) For purposes of clause (ii), the load loss 
     mitigation sales limit for the recovery period is the sum of 
     the annual load losses for each year of such period.
       ``(iv) For purposes of clause (iii), a mutual or 
     cooperative electric company's annual load loss for each year 
     of the recovery period is the amount (if any) by which--
       ``(I) the megawatt hours of electric energy sold during 
     such year to members of such electric company are less than

[[Page H8426]]

       ``(II) the megawatt hours of electric energy sold during 
     the base year to such members.
       ``(v) For purposes of clause (iv)(II), the term `base year' 
     means--
       ``(I) the calendar year preceding the start-up year, or
       ``(II) at the election of the mutual or cooperative 
     electric company, the second or third calendar years 
     preceding the start-up year.
       ``(vi) For purposes of this subparagraph, the recovery 
     period is the 7-year period beginning with the start-up year.
       ``(vii) For purposes of this subparagraph, the start-up 
     year is the first year that the mutual or cooperative 
     electric company offers nondiscriminatory open access or the 
     calendar year which includes the date of the enactment of 
     this subparagraph, if later, at the election of such company.
       ``(viii) A company shall not fail to be treated as a mutual 
     or cooperative electric company for purposes of this 
     paragraph or as a corporation operating on a cooperative 
     basis for purposes of section 1381(a)(2)(C) by reason of the 
     treatment under clause (i).
       ``(ix) For purposes of subparagraph (A), in the case of a 
     mutual or cooperative electric company, income received, or 
     accrued, indirectly from a member shall be treated as an 
     amount collected from members for the sole purpose of meeting 
     losses and expenses.
       ``(x) This subparagraph shall not apply to taxable years 
     beginning after December 31, 2006.''.
       (c) Exception From Unrelated Business Taxable Income.--
     Subsection (b) of section 512 (relating to modifications) is 
     amended by adding at the end the following new paragraph:
       ``(18) Treatment of mutual or cooperative electric 
     companies.--In the case of a mutual or cooperative electric 
     company described in section 501(c)(12), there shall be 
     excluded income which is treated as member income under 
     subparagraph (H) thereof.''.
       (d) Cross Reference.--Section 1381 is amended by adding at 
     the end the following new subsection:
       ``(c) Cross Reference.--

  ``For treatment of income from load loss transactions of 
organizations described in subsection (a)(2)(C), see section 
501(c)(12)(H).''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 320. EXCLUSION FOR PAYMENTS TO INDIVIDUALS UNDER 
                   NATIONAL HEALTH SERVICE CORPS LOAN REPAYMENT 
                   PROGRAM AND CERTAIN STATE LOAN REPAYMENT 
                   PROGRAMS.

       (a) In General.--Section 108(f) (relating to student loans) 
     is amended by adding at the end the following new paragraph:
       ``(4) Payments under national health service corps loan 
     repayment program and certain state loan repayment 
     programs.--In the case of an individual, gross income shall 
     not include any amount received under section 338B(g) of the 
     Public Health Service Act or under a State program described 
     in section 338I of such Act.''.
       (b) Treatment for Purposes of Employment Taxes.--Each of 
     the following provisions is amended by inserting 
     ``108(f)(4),'' after ``74(c),'':
       (1) Section 3121(a)(20).
       (2) Section 3231(e)(5).
       (3) Section 3306(b)(16).
       (4) Section 3401(a)(19).
       (5) Section 209(a)(17) of the Social Security Act.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts received by an individual in taxable 
     years beginning after December 31, 2003.

     SEC. 321. MODIFICATION OF SAFE HARBOR RULES FOR TIMBER REITS.

       (a) Expansion of Prohibited Transaction Safe Harbor.--
     Section 857(b)(6) (relating to income from prohibited 
     transactions) is amended by redesignating subparagraphs (D) 
     and (E) as subparagraphs (E) and (F), respectively, and by 
     inserting after subparagraph (C) the following new 
     subparagraph:
       ``(D) Certain sales not to constitute prohibited 
     transactions.--For purposes of this part, the term 
     `prohibited transaction' does not include a sale of property 
     which is a real estate asset (as defined in section 
     856(c)(5)(B)) if--
       ``(i) the trust held the property for not less than 4 years 
     in connection with the trade or business of producing timber,
       ``(ii) the aggregate expenditures made by the trust, or a 
     partner of the trust, during the 4-year period preceding the 
     date of sale which--

       ``(I) are includible in the basis of the property (other 
     than timberland acquisition expenditures), and
       ``(II) are directly related to operation of the property 
     for the production of timber or for the preservation of the 
     property for use as timberland,

     do not exceed 30 percent of the net selling price of the 
     property,
       ``(iii) the aggregate expenditures made by the trust, or a 
     partner of the trust, during the 4-year period preceding the 
     date of sale which--

       ``(I) are includible in the basis of the property (other 
     than timberland acquisition expenditures), and
       ``(II) are not directly related to operation of the 
     property for the production of timber, or for the 
     preservation of the property for use as timberland,

     do not exceed 5 percent of the net selling price of the 
     property,
       ``(iv)(I) during the taxable year the trust does not make 
     more than 7 sales of property (other than sales of 
     foreclosure property or sales to which section 1033 applies), 
     or
       ``(II) the aggregate adjusted bases (as determined for 
     purposes of computing earnings and profits) of property 
     (other than sales of foreclosure property or sales to which 
     section 1033 applies) sold during the taxable year does not 
     exceed 10 percent of the aggregate bases (as so determined) 
     of all of the assets of the trust as of the beginning of the 
     taxable year,
       ``(v) in the case that the requirement of clause (iv)(I) is 
     not satisfied, substantially all of the marketing 
     expenditures with respect to the property were made through 
     an independent contractor (as defined in section 856(d)(3)) 
     from whom the trust itself does not derive or receive any 
     income, and
       ``(vi) the sales price of the property sold by the trust is 
     not based in whole or in part on income or profits, including 
     income or profits derived from the sale or operation of such 
     property.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 322. EXPENSING OF CERTAIN REFORESTATION EXPENDITURES.

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

     SEC. 331. NET INCOME FROM PUBLICLY TRADED PARTNERSHIPS 
                   TREATED AS QUALIFYING INCOME OF REGULATED 
                   INVESTMENT COMPANIES.

       (a) In General.--Paragraph (2) of section 851(b) (defining 
     regulated investment company) is amended to read as follows:

[[Page H8427]]

       ``(2) at least 90 percent of its gross income is derived 
     from--
       ``(A) dividends, interest, payments with respect to 
     securities loans (as defined in section 512(a)(5)), and gains 
     from the sale or other disposition of stock or securities (as 
     defined in section 2(a)(36) of the Investment Company Act of 
     1940, as amended) or foreign currencies, or other income 
     (including but not limited to gains from options, futures or 
     forward contracts) derived with respect to its business of 
     investing in such stock, securities, or currencies, and
       ``(B) net income derived from an interest in a qualified 
     publicly traded partnership (as defined in subsection (h)); 
     and''.
       (b) Source Flow-Through Rule Not To Apply.--The last 
     sentence of section 851(b) is amended by inserting ``(other 
     than a qualified publicly traded partnership as defined in 
     subsection (h))'' after ``derived from a partnership''.
       (c) Limitation on Ownership.--Subsection (c) of section 851 
     is amended by redesignating paragraph (5) as paragraph (6) 
     and inserting after paragraph (4) the following new 
     paragraph:
       ``(5) The term `outstanding voting securities of such 
     issuer' shall include the equity securities of a qualified 
     publicly traded partnership (as defined in subsection 
     (h)).''.
       (d) Definition of Qualified Publicly Traded Partnership.--
     Section 851 is amended by adding at the end the following new 
     subsection:
       ``(h) Qualified Publicly Traded Partnership.--For purposes 
     of this section, the term `qualified publicly traded 
     partnership' means a publicly traded partnership described in 
     section 7704(b) other than a partnership which would satisfy 
     the gross income requirements of section 7704(c)(2) if 
     qualifying income included only income described in 
     subsection (b)(2)(A).''.
       (e) Definition of Qualifying Income.--Section 7704(d)(4) is 
     amended by striking ``section 851(b)(2)'' and inserting 
     ``section 851(b)(2)(A)''.
       (f) Limitation on Composition of Assets.--Subparagraph (B) 
     of section 851(b)(3) is amended to read as follows:
       ``(B) not more than 25 percent of the value of its total 
     assets is invested in--
       ``(i) the securities (other than Government securities or 
     the securities of other regulated investment companies) of 
     any one issuer,
       ``(ii) the securities (other than the securities of other 
     regulated investment companies) of two or more issuers which 
     the taxpayer controls and which are determined, under 
     regulations prescribed by the Secretary, to be engaged in the 
     same or similar trades or businesses or related trades or 
     businesses, or
       ``(iii) the securities of one or more qualified publicly 
     traded partnerships (as defined in subsection (h)).''.
       (g) Application of Special Passive Activity Rule to 
     Regulated Investment Companies.--Subsection (k) of section 
     469 (relating to separate application of section in case of 
     publicly traded partnerships) is amended by adding at the end 
     the following new paragraph:
       ``(4) Application to regulated investment companies.--For 
     purposes of this section, a regulated investment company (as 
     defined in section 851) holding an interest in a qualified 
     publicly traded partnership (as defined in section 851(h)) 
     shall be treated as a taxpayer described in subsection (a)(2) 
     with respect to items attributable to such interest.''.
       (h) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 332. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND 
                   ARROWS.

       (a) Bows.--Paragraph (1) of section 4161(b) (relating to 
     bows) is amended to read as follows:
       ``(1) Bows.--
       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any bow which has 
     a peak draw weight of 30 pounds or more, a tax equal to 11 
     percent of the price for which so sold.
       ``(B) Archery equipment.--There is hereby imposed on the 
     sale by the manufacturer, producer, or importer--
       ``(i) of any part or accessory suitable for inclusion in or 
     attachment to a bow described in subparagraph (A), and
       ``(ii) of any quiver or broadhead suitable for use with an 
     arrow described in paragraph (2),
     a tax equal to 11 percent of the price for which so sold.''.
       (b) Arrows.--Subsection (b) of section 4161 (relating to 
     bows and arrows, etc.) is amended by redesignating paragraph 
     (3) as paragraph (4) and inserting after paragraph (2) the 
     following:
       ``(3) Arrows.--
       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any arrow, a tax 
     equal to 12 percent of the price for which so sold.
       ``(B) Exception.--In the case of any arrow of which the 
     shaft or any other component has been previously taxed under 
     paragraph (1) or (2)--
       ``(i) section 6416(b)(3) shall not apply, and
       ``(ii) the tax imposed by subparagraph (A) shall be an 
     amount equal to the excess (if any) of--

       ``(I) the amount of tax imposed by this paragraph 
     (determined without regard to this subparagraph), over
       ``(II) the amount of tax paid with respect to the tax 
     imposed under paragraph (1) or (2) on such shaft or 
     component.

       ``(C) Arrow.--For purposes of this paragraph, the term 
     `arrow' means any shaft described in paragraph (2) to which 
     additional components are attached.''.
       (c) Conforming Amendments.--Section 4161(b)(2) is amended--
       (1) by inserting ``(other than broadheads)'' after 
     ``point'', and
       (2) by striking ``Arrows.--'' in the heading and inserting 
     ``Arrow components.--''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to articles sold by the manufacturer, producer, 
     or importer after the date which is 30 days after the date of 
     the enactment of this Act.

     SEC. 333. REDUCTION OF EXCISE TAX ON FISHING TACKLE BOXES.

       (a) In General.--Subsection (a) of section 4161 (relating 
     to sport fishing equipment) is amended by redesignating 
     paragraph (3) as paragraph (4) and by inserting after 
     paragraph (2) the following new paragraph:
       ``(3) 3 percent rate of tax for tackle boxes.--In the case 
     of fishing tackle boxes, paragraph (1) shall be applied by 
     substituting `3 percent' for `10 percent'.''.
       (b) Effective Date.--The amendments made this section shall 
     apply to articles sold by the manufacturer, producer, or 
     importer after December 31, 2004.

     SEC. 334. SONAR DEVICES SUITABLE FOR FINDING FISH.

       (a) Not Treated as Sport Fishing Equipment.--Subsection (a) 
     of section 4162 (relating to sport fishing equipment defined) 
     is amended by inserting ``and'' at the end of paragraph (8), 
     by striking ``, and'' at the end of paragraph (9) and 
     inserting a period, and by striking paragraph (10).
       (b) Conforming Amendment.--Section 4162 is amended by 
     striking subsection (b) and by redesignating subsection (c) 
     as subsection (b).
       (c) Effective Date.--The amendments made this section shall 
     apply to articles sold by the manufacturer, producer, or 
     importer after December 31, 2004.

     SEC. 335. CHARITABLE CONTRIBUTION DEDUCTION FOR CERTAIN 
                   EXPENSES INCURRED IN SUPPORT OF NATIVE ALASKAN 
                   SUBSISTENCE WHALING.

       (a) In General.--Section 170 (relating to charitable, etc., 
     contributions and gifts), as amended by this Act, is amended 
     by redesignating subsection (n) as subsection (o) and by 
     inserting after subsection (m) the following new subsection:
       ``(n) Expenses Paid by Certain Whaling Captains in Support 
     of Native Alaskan Subsistence Whaling.--
       ``(1) In general.--In the case of an individual who is 
     recognized by the Alaska Eskimo Whaling Commission as a 
     whaling captain charged with the responsibility of 
     maintaining and carrying out sanctioned whaling activities 
     and who engages in such activities during the taxable year, 
     the amount described in paragraph (2) (to the extent such 
     amount does not exceed $10,000 for the taxable year) shall be 
     treated for purposes of this section as a charitable 
     contribution.
       ``(2) Amount described.--
       ``(A) In general.--The amount described in this paragraph 
     is the aggregate of the reasonable and necessary whaling 
     expenses paid by the taxpayer during the taxable year in 
     carrying out sanctioned whaling activities.
       ``(B) Whaling expenses.--For purposes of subparagraph (A), 
     the term `whaling expenses' includes expenses for--
       ``(i) the acquisition and maintenance of whaling boats, 
     weapons, and gear used in sanctioned whaling activities,
       ``(ii) the supplying of food for the crew and other 
     provisions for carrying out such activities, and
       ``(iii) storage and distribution of the catch from such 
     activities.
       ``(3) Sanctioned whaling activities.--For purposes of this 
     subsection, the term `sanctioned whaling activities' means 
     subsistence bowhead whale hunting activities conducted 
     pursuant to the management plan of the Alaska Eskimo Whaling 
     Commission.
       ``(4) Substantiation of expenses.--The Secretary shall 
     issue guidance requiring that the taxpayer substantiate the 
     whaling expenses for which a deduction is claimed under this 
     subsection, including by maintaining appropriate written 
     records with respect to the time, place, date, amount, and 
     nature of the expense, as well as the taxpayer's eligibility 
     for such deduction, and that (to the extent provided by the 
     Secretary) such substantiation be provided as part of the 
     taxpayer's return of tax.''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to contributions made after December 31, 2004.

     SEC. 336. MODIFICATION OF DEPRECIATION ALLOWANCE FOR 
                   AIRCRAFT.

       (a) Aircraft Treated as Qualified Property.--
       (1) In general.--Paragraph (2) of section 168(k) is amended 
     by redesignating subparagraphs (C) through (F) as 
     subparagraphs (D) through (G), respectively, and by inserting 
     after subparagraph (B) the following new subparagraph:
       ``(C) Certain aircraft.--The term `qualified property' 
     includes property--
       ``(i) which meets the requirements of clauses (ii) and 
     (iii) of subparagraph (A),
       ``(ii) which is an aircraft which is not a transportation 
     property (as defined in subparagraph (B)(iii)) other than for 
     agricultural or firefighting purposes,
       ``(iii) which is purchased and on which such purchaser, at 
     the time of the contract for purchase, has made a 
     nonrefundable deposit of the lesser of--

       ``(I) 10 percent of the cost, or
       ``(II) $100,000, and

       ``(iv) which has--

       ``(I) an estimated production period exceeding 4 months, 
     and
       ``(II) a cost exceeding $200,000.''.

       (2) Placed in service date.--Clause (iv) of section 
     168(k)(2)(A) is amended by striking ``subparagraph (B)'' and 
     inserting ``subparagraphs (B) and (C)''.
       (b) Conforming Amendments.--
       (1) Section 168(k)(2)(B) is amended by adding at the end 
     the following new clause:

[[Page H8428]]

       ``(iv) Application of subparagraph.--This subparagraph 
     shall not apply to any property which is described in 
     subparagraph (C).''.
       (2) Section 168(k)(4)(A)(ii) is amended by striking 
     ``paragraph (2)(C)'' and inserting ``paragraph (2)(D)''.
       (3) Section 168(k)(4)(B)(iii) is amended by inserting ``and 
     paragraph (2)(C)'' after ``of this paragraph)''.
       (4) Section 168(k)(4)(C) is amended by striking 
     ``subparagraphs (B) and (D)'' and inserting ``subparagraphs 
     (B), (C), and (E)''.
       (5) Section 168(k)(4)(D) is amended by striking ``Paragraph 
     (2)(E)'' and inserting ``Paragraph (2)(F)''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 101 of the Job Creation and Worker Assistance Act of 
     2002.

     SEC. 337. MODIFICATION OF PLACED IN SERVICE RULE FOR BONUS 
                   DEPRECIATION PROPERTY.

       (a) In General.--Subclause (II) of section 
     168(k)(2)(E)(iii) (relating to syndication), as amended by 
     the Working Families Tax Relief Act of 2004 and as 
     redesignated by this Act, is amended by inserting before the 
     comma at the end the following: ``(or, in the case of 
     multiple units of property subject to the same lease, within 
     3 months after the date the final unit is placed in service, 
     so long as the period between the time the first unit is 
     placed in service and the time the last unit is placed in 
     service does not exceed 12 months)''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to property sold after June 4, 2004.

     SEC. 338. EXPENSING OF CAPITAL COSTS INCURRED IN COMPLYING 
                   WITH ENVIRONMENTAL PROTECTION AGENCY SULFUR 
                   REGULATIONS.

       (a) In General.--Part VI of subchapter B of chapter 1 
     (relating to itemized deductions for individuals and 
     corporations) is amended by inserting after section 179A the 
     following new section:

     ``SEC. 179B. DEDUCTION FOR CAPITAL COSTS INCURRED IN 
                   COMPLYING WITH ENVIRONMENTAL PROTECTION AGENCY 
                   SULFUR REGULATIONS.

       ``(a) Allowance of Deduction.--In the case of a small 
     business refiner (as defined in section 45H(c)(1)) which 
     elects the application of this section, there shall be 
     allowed as a deduction an amount equal to 75 percent of 
     qualified capital costs (as defined in section 45H(c)(2)) 
     which are paid or incurred by the taxpayer during the taxable 
     year.
       ``(b) Reduced Percentage.--In the case of a small business 
     refiner with average daily domestic refinery runs for the 1-
     year period ending on December 31, 2002, in excess of 155,000 
     barrels, the number of percentage points described in 
     subsection (a) shall be reduced (not below zero) by the 
     product of such number (before the application of this 
     subsection) and the ratio of such excess to 50,000 barrels.
       ``(c) Basis Reduction.--
       ``(1) In general.--For purposes of this title, the basis of 
     any property shall be reduced by the portion of the cost of 
     such property taken into account under subsection (a).
       ``(2) Ordinary income recapture.--For purposes of section 
     1245, the amount of the deduction allowable under subsection 
     (a) with respect to any property which is of a character 
     subject to the allowance for depreciation shall be treated as 
     a deduction allowed for depreciation under section 167.''.
       ``(d) Coordination With Other Provisions.--Section 280B 
     shall not apply to amounts which are treated as expenses 
     under this section.''.
       (b) Conforming Amendments.--
       (1) Section 263(a)(1), as amended by this Act, is amended 
     by striking ``or'' at the end of subparagraph (G), by 
     striking the period at the end of subparagraph (H) and 
     inserting ``, or'', and by adding at the end the following 
     new subparagraph:
       ``(I) expenditures for which a deduction is allowed under 
     section 179B.''.
       (2) Section 263A(c)(3) is amended by inserting ``179B,'' 
     after ``section''.
       (3) Section 312(k)(3)(B) is amended by striking ``or 179A'' 
     each place it appears in the heading and text and inserting 
     ``179A, or 179B''.
       (4) Section 1016(a) is amended by striking ``and'' at the 
     end of paragraph (28), by striking the period at the end of 
     paragraph (29) and inserting ``, and'', and by inserting 
     after paragraph (29) the following new paragraph:
       ``(30) to the extent provided in section 179B(c).''
       (5) Paragraphs (2)(C) and (3)(C) of section 1245(a) are 
     each amended by inserting ``179B,'' after ``179A,''.
       (6) The table of sections for part VI of subchapter B of 
     chapter 1, as amended by this Act, is amended by inserting 
     after the item relating to section 179A the following new 
     item:

``Sec. 179B. Deduction for capital costs incurred in complying with 
              Environmental Protection Agency sulfur regulations.''.

       (c) Effective Date.--The amendment made by this section 
     shall apply to expenses paid or incurred after December 31, 
     2002, in taxable years ending after such date.

     SEC. 339. CREDIT FOR PRODUCTION OF LOW SULFUR DIESEL FUEL.

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

     ``SEC. 45H. CREDIT FOR PRODUCTION OF LOW SULFUR DIESEL FUEL.

       ``(a) In General.--For purposes of section 38, the amount 
     of the low sulfur diesel fuel production credit determined 
     under this section with respect to any facility of a small 
     business refiner is an amount equal to 5 cents for each 
     gallon of low sulfur diesel fuel produced during the taxable 
     year by such small business refiner at such facility.
       ``(b) Maximum Credit.--
       ``(1) In general.--The aggregate credit determined under 
     subsection (a) for any taxable year with respect to any 
     facility shall not exceed--
       ``(A) 25 percent of the qualified capital costs incurred by 
     the small business refiner with respect to such facility, 
     reduced by
       ``(B) the aggregate credits determined under this section 
     for all prior taxable years with respect to such facility.
       ``(2) Reduced percentage.--In the case of a small business 
     refiner with average daily domestic refinery runs for the 1-
     year period ending on December 31, 2002, in excess of 155,000 
     barrels, the number of percentage points described in 
     paragraph (1) shall be reduced (not below zero) by the 
     product of such number (before the application of this 
     paragraph) and the ratio of such excess to 50,000 barrels.
       ``(c) Definitions and Special Rule.--For purposes of this 
     section--
       ``(1) Small business refiner.--The term `small business 
     refiner' means, with respect to any taxable year, a refiner 
     of crude oil--
       ``(A) with respect to which not more than 1,500 individuals 
     are engaged in the refinery operations of the business on any 
     day during such taxable year, and
       ``(B) the average daily domestic refinery run or average 
     retained production of which for all facilities of the 
     taxpayer for the 1-year period ending on December 31, 2002, 
     did not exceed 205,000 barrels.
       ``(2) Qualified capital costs.--The term `qualified capital 
     costs' means, with respect to any facility, those costs paid 
     or incurred during the applicable period for compliance with 
     the applicable EPA regulations with respect to such facility, 
     including expenditures for the construction of new process 
     operation units or the dismantling and reconstruction of 
     existing process units to be used in the production of low 
     sulfur diesel fuel, associated adjacent or offsite equipment 
     (including tankage, catalyst, and power supply), engineering, 
     construction period interest, and sitework.
       ``(3) Applicable epa regulations.--The term `applicable EPA 
     regulations' means the Highway Diesel Fuel Sulfur Control 
     Requirements of the Environmental Protection Agency.
       ``(4) Applicable period.--The term `applicable period' 
     means, with respect to any facility, the period beginning on 
     January 1, 2003, and ending on the earlier of the date which 
     is 1 year after the date on which the taxpayer must comply 
     with the applicable EPA regulations with respect to such 
     facility or December 31, 2009.
       ``(5) Low sulfur diesel fuel.--The term `low sulfur diesel 
     fuel' means diesel fuel with a sulfur content of 15 parts per 
     million or less.
       ``(d) Reduction in Basis.--For purposes of this subtitle, 
     if a credit is determined under this section for any 
     expenditure with respect to any property, the increase in 
     basis of such property which would (but for this subsection) 
     result from such expenditure shall be reduced by the amount 
     of the credit so determined.
       ``(e) Special Rule for Determination of Refinery Runs.--For 
     purposes this section and section 179B(b), in the calculation 
     of average daily domestic refinery run or retained 
     production, only refineries which on April 1, 2003, were 
     refineries of the refiner or a related person (within the 
     meaning of section 613A(d)(3)), shall be taken into account.
       ``(f) Certification.--
       ``(1) Required.--No credit shall be allowed unless, not 
     later than the date which is 30 months after the first day of 
     the first taxable year in which the low sulfur diesel fuel 
     production credit is determined with respect to a facility, 
     the small business refiner obtains certification from the 
     Secretary, after consultation with the Administrator of the 
     Environmental Protection Agency, that the taxpayer's 
     qualified capital costs with respect to such facility will 
     result in compliance with the applicable EPA regulations.
       ``(2) Contents of application.--An application for 
     certification shall include relevant information regarding 
     unit capacities and operating characteristics sufficient for 
     the Secretary, after consultation with the Administrator of 
     the Environmental Protection Agency, to determine that such 
     qualified capital costs are necessary for compliance with the 
     applicable EPA regulations.
       ``(3) Review period.--Any application shall be reviewed and 
     notice of certification, if applicable, shall be made within 
     60 days of receipt of such application. In the event the 
     Secretary does not notify the taxpayer of the results of such 
     certification within such period, the taxpayer may presume 
     the certification to be issued until so notified.
       ``(4) Statute of limitations.--With respect to the credit 
     allowed under this section--
       ``(A) the statutory period for the assessment of any 
     deficiency attributable to such credit shall not expire 
     before the end of the 3-year period ending on the date that 
     the review period described in paragraph (3) ends with 
     respect to the taxpayer, and
       ``(B) such deficiency may be assessed before the expiration 
     of such 3-year period notwithstanding the provisions of any 
     other law or rule of law which would otherwise prevent such 
     assessment.
       ``(g) Cooperative Organizations.--
       ``(1) Apportionment of credit.--
       ``(A) In general.--In the case of a cooperative 
     organization described in section 1381(a), any portion of the 
     credit determined under subsection (a) for the taxable year 
     may, at the election of the organization, be apportioned 
     among patrons eligible to share in patronage dividends

[[Page H8429]]

     on the basis of the quantity or value of business done with 
     or for such patrons for the taxable year.
       ``(B) Form and effect of election.--An election under 
     subparagraph (A) for any taxable year shall be made on a 
     timely filed return for such year. Such election, once made, 
     shall be irrevocable for such taxable year.
       ``(2) Treatment of organizations and patrons.--
       ``(A) Organizations.--The amount of the credit not 
     apportioned to patrons pursuant to paragraph (1) shall be 
     included in the amount determined under subsection (a) for 
     the taxable year of the organization.
       ``(B) Patrons.--The amount of the credit apportioned to 
     patrons pursuant to paragraph (1) shall be included in the 
     amount determined under subsection (a) for the first taxable 
     year of each patron ending on or after the last day of the 
     payment period (as defined in section 1382(d)) for the 
     taxable year of the organization or, if earlier, for the 
     taxable year of each patron ending on or after the date on 
     which the patron receives notice from the cooperative of the 
     apportionment.
       ``(3) Special rule.--If the amount of a credit which has 
     been apportioned to any patron under this subsection is 
     decreased for any reason--
       ``(A) such amount shall not increase the tax imposed on 
     such patron, and
       ``(B) the tax imposed by this chapter on such organization 
     shall be increased by such amount.
     The increase under subparagraph (B) shall not be treated as 
     tax imposed by this chapter for purposes of determining the 
     amount of any credit under this chapter or for purposes of 
     section 55.''.
       (b) Credit Made Part of General Business Credit.--
     Subsection (b) of section 38 (relating to general business 
     credit), as amended by this Act, is amended by striking 
     ``plus'' at the end of paragraph (16), by striking the period 
     at the end of paragraph (17) and inserting ``, plus'', and by 
     inserting after paragraph (17) the following new paragraph:
       ``(18) the low sulfur diesel fuel production credit 
     determined under section 45H(a).''.
       (c) Denial of Double Benefit.--Section 280C (relating to 
     certain expenses for which credits are allowable) is amended 
     by adding at the end the following new subsection:
       ``(d) Low Sulfur Diesel Fuel Production Credit.--No 
     deduction shall be allowed for that portion of the expenses 
     otherwise allowable as a deduction for the taxable year which 
     is equal to the amount of the credit determined for the 
     taxable year under section 45H(a).''.
       (d) Basis Adjustment.--Section 1016(a) (relating to 
     adjustments to basis), as amended by this Act, is amended by 
     striking ``and'' at the end of paragraph (29), by striking 
     the period at the end of paragraph (30) and inserting ``, 
     and'', and by inserting after paragraph (30) the following 
     new paragraph:
       ``(31) in the case of a facility with respect to which a 
     credit was allowed under section 45H, to the extent provided 
     in section 45H(d).''.
       (e) Deduction for Certain Unused Business Credits.--Section 
     196(c) (defining qualified business credits), as amended by 
     this Act, is amended by striking ``and'' at the end of 
     paragraph (10), by striking the period at the end of 
     paragraph (11) and inserting ``, and'', and by adding after 
     paragraph (11) the following new paragraph:
       ``(12) the low sulfur diesel fuel production credit 
     determined under section 45H(a).''.
       (e) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by inserting after the item relating to 
     section 45G the following new item:

``Sec. 45H. Credit for production of low sulfur diesel fuel.''.

       (f) Effective Date.--The amendments made by this section 
     shall apply to expenses paid or incurred after December 31, 
     2002, in taxable years ending after such date.

     SEC. 340. EXPANSION OF QUALIFIED SMALL-ISSUE BOND PROGRAM.

       (a) In General.--Section 144(a)(4) (relating to $10,000,000 
     limit in certain cases) is amended by adding at the end the 
     following new subparagraph:
       ``(G) Additional capital expenditures not taken into 
     account.--With respect to bonds issued after September 30, 
     2009, in addition to any capital expenditure described in 
     subparagraph (C), capital expenditures of not to exceed 
     $10,000,000 shall not be taken into account for purposes of 
     applying subparagraph (A)(ii).''.
       (b) Conforming Amendment.--Subparagraph (F) of section 
     144(a)(4) is amended by adding at the end the following new 
     sentence: ``This subparagraph shall not apply to bonds issued 
     after September 30, 2009.''.

     SEC. 341. OIL AND GAS FROM MARGINAL WELLS.

       (a) In General.--Subpart D of part IV of subchapter A of 
     chapter 1 (relating to business credits), as amended by this 
     Act, is amended by inserting after section 45H the following:

     ``SEC. 45I. CREDIT FOR PRODUCING OIL AND GAS FROM MARGINAL 
                   WELLS.

       ``(a) General Rule.--For purposes of section 38, the 
     marginal well production credit for any taxable year is an 
     amount equal to the product of--
       ``(1) the credit amount, and
       ``(2) the qualified credit oil production and the qualified 
     natural gas production which is attributable to the taxpayer.
       ``(b) Credit Amount.--For purposes of this section--
       ``(1) In general.--The credit amount is--
       ``(A) $3 per barrel of qualified crude oil production, and
       ``(B) 50 cents per 1,000 cubic feet of qualified natural 
     gas production.
       ``(2) Reduction as oil and gas prices increase.--
       ``(A) In general.--The $3 and 50 cents amounts under 
     paragraph (1) shall each be reduced (but not below zero) by 
     an amount which bears the same ratio to such amount 
     (determined without regard to this paragraph) as--
       ``(i) the excess (if any) of the applicable reference price 
     over $15 ($1.67 for qualified natural gas production), bears 
     to
       ``(ii) $3 ($0.33 for qualified natural gas production).

     The applicable reference price for a taxable year is the 
     reference price of the calendar year preceding the calendar 
     year in which the taxable year begins.
       ``(B) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2005, each of the 
     dollar amounts contained in subparagraph (A) shall be 
     increased to an amount equal to such dollar amount multiplied 
     by the inflation adjustment factor for such calendar year 
     (determined under section 43(b)(3)(B) by substituting `2004' 
     for `1990').
       ``(C) Reference price.--For purposes of this paragraph, the 
     term `reference price' means, with respect to any calendar 
     year--
       ``(i) in the case of qualified crude oil production, the 
     reference price determined under section 29(d)(2)(C), and
       ``(ii) in the case of qualified natural gas production, the 
     Secretary's estimate of the annual average wellhead price per 
     1,000 cubic feet for all domestic natural gas.
       ``(c) Qualified Crude Oil and Natural Gas Production.--For 
     purposes of this section--
       ``(1) In general.--The terms `qualified crude oil 
     production' and `qualified natural gas production' mean 
     domestic crude oil or natural gas which is produced from a 
     qualified marginal well.
       ``(2) Limitation on amount of production which may 
     qualify.--
       ``(A) In general.--Crude oil or natural gas produced during 
     any taxable year from any well shall not be treated as 
     qualified crude oil production or qualified natural gas 
     production to the extent production from the well during the 
     taxable year exceeds 1,095 barrels or barrel-of-oil 
     equivalents (as defined in section 29(d)(5)).
       ``(B) Proportionate reductions.--
       ``(i) Short taxable years.--In the case of a short taxable 
     year, the limitations under this paragraph shall be 
     proportionately reduced to reflect the ratio which the number 
     of days in such taxable year bears to 365.
       ``(ii) Wells not in production entire year.--In the case of 
     a well which is not capable of production during each day of 
     a taxable year, the limitations under this paragraph 
     applicable to the well shall be proportionately reduced to 
     reflect the ratio which the number of days of production 
     bears to the total number of days in the taxable year.
       ``(3) Definitions.--
       ``(A) Qualified marginal well.--The term `qualified 
     marginal well' means a domestic well--
       ``(i) the production from which during the taxable year is 
     treated as marginal production under section 613A(c)(6), or
       ``(ii) which, during the taxable year--

       ``(I) has average daily production of not more than 25 
     barrel-of-oil equivalents (as so defined), and
       ``(II) produces water at a rate not less than 95 percent of 
     total well effluent.

       ``(B) Crude oil, etc.--The terms `crude oil', `natural 
     gas', `domestic', and `barrel' have the meanings given such 
     terms by section 613A(e).
       ``(d) Other Rules.--
       ``(1) Production attributable to the taxpayer.--In the case 
     of a qualified marginal well in which there is more than one 
     owner of operating interests in the well and the crude oil or 
     natural gas production exceeds the limitation under 
     subsection (c)(2), qualifying crude oil production or 
     qualifying natural gas production attributable to the 
     taxpayer shall be determined on the basis of the ratio which 
     taxpayer's revenue interest in the production bears to the 
     aggregate of the revenue interests of all operating interest 
     owners in the production.
       ``(2) Operating interest required.--Any credit under this 
     section may be claimed only on production which is 
     attributable to the holder of an operating interest.
       ``(3) Production from nonconventional sources excluded.--In 
     the case of production from a qualified marginal well which 
     is eligible for the credit allowed under section 29 for the 
     taxable year, no credit shall be allowable under this section 
     unless the taxpayer elects not to claim the credit under 
     section 29 with respect to the well.''.
       (b) Credit Treated as Business Credit.--Section 38(b), as 
     amended by this Act, is amended by striking ``plus'' at the 
     end of paragraph (17), by striking the period at the end of 
     paragraph (18) and inserting ``, plus'', and by inserting 
     after paragraph (18) the following:
       ``(19) the marginal oil and gas well production credit 
     determined under section 45I(a).''.
       (c) Carryback.--Subsection (a) of section 39 (relating to 
     carryback and carryforward of unused credits generally) is 
     amended by adding at the end the following:
       ``(3) 5-year carryback for marginal oil and gas well 
     production credit.--Notwithstanding subsection (d), in the 
     case of the marginal oil and gas well production credit--
       ``(A) this section shall be applied separately from the 
     business credit (other than the marginal oil and gas well 
     production credit),
       ``(B) paragraph (1) shall be applied by substituting `5 
     taxable years' for `1 taxable years' in subparagraph (A) 
     thereof, and
       ``(C) paragraph (2) shall be applied--
       ``(i) by substituting `25 taxable years' for `21 taxable 
     years' in subparagraph (A) thereof, and
       ``(ii) by substituting `24 taxable years' for `20 taxable 
     years' in subparagraph (B) thereof.''.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A

[[Page H8430]]

     of chapter 1, as amended by this Act, is amended by inserting 
     after section 45H the following:

``Sec. 45I. Credit for producing oil and gas from marginal wells.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to production in taxable years beginning after 
     December 31, 2004.
  TITLE IV--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES

     SEC. 401. INTEREST EXPENSE ALLOCATION RULES.

       (a) Election To Allocate on Worldwide Basis.--Section 864 
     is amended by redesignating subsection (f) as subsection (g) 
     and by inserting after subsection (e) the following new 
     subsection:
       ``(f) Election To Allocate Interest, etc. on Worldwide 
     Basis.--For purposes of this subchapter, at the election of 
     the worldwide affiliated group--
       ``(1) Allocation and apportionment of interest expense.--
       ``(A) In general.--The taxable income of each domestic 
     corporation which is a member of a worldwide affiliated group 
     shall be determined by allocating and apportioning interest 
     expense of each member as if all members of such group were a 
     single corporation.
       ``(B) Treatment of worldwide affiliated group.--The taxable 
     income of the domestic members of a worldwide affiliated 
     group from sources outside the United States shall be 
     determined by allocating and apportioning the interest 
     expense of such domestic members to such income in an amount 
     equal to the excess (if any) of--
       ``(i) the total interest expense of the worldwide 
     affiliated group multiplied by the ratio which the foreign 
     assets of the worldwide affiliated group bears to all the 
     assets of the worldwide affiliated group, over
       ``(ii) the interest expense of all foreign corporations 
     which are members of the worldwide affiliated group to the 
     extent such interest expense of such foreign corporations 
     would have been allocated and apportioned to foreign source 
     income if this subsection were applied to a group consisting 
     of all the foreign corporations in such worldwide affiliated 
     group.
       ``(C) Worldwide affiliated group.--For purposes of this 
     paragraph, the term `worldwide affiliated group' means a 
     group consisting of--
       ``(i) the includible members of an affiliated group (as 
     defined in section 1504(a), determined without regard to 
     paragraphs (2) and (4) of section 1504(b)), and
       ``(ii) all controlled foreign corporations in which such 
     members in the aggregate meet the ownership requirements of 
     section 1504(a)(2) either directly or indirectly through 
     applying paragraph (2) of section 958(a) or through applying 
     rules similar to the rules of such paragraph to stock owned 
     directly or indirectly by domestic partnerships, trusts, or 
     estates.
       ``(2) Allocation and apportionment of other expenses.--
     Expenses other than interest which are not directly allocable 
     or apportioned to any specific income producing activity 
     shall be allocated and apportioned as if all members of the 
     affiliated group were a single corporation. For purposes of 
     the preceding sentence, the term `affiliated group' has the 
     meaning given such term by section 1504 (determined without 
     regard to paragraph (4) of section 1504(b)).
       ``(3) Treatment of tax-exempt assets; basis of stock in 
     nonaffiliated 10-percent owned corporations.--The rules of 
     paragraphs (3) and (4) of subsection (e) shall apply for 
     purposes of this subsection, except that paragraph (4) shall 
     be applied on a worldwide affiliated group basis.
       ``(4) Treatment of certain financial institutions.--
       ``(A) In general.--For purposes of paragraph (1), any 
     corporation described in subparagraph (B) shall be treated as 
     an includible corporation for purposes of section 1504 only 
     for purposes of applying this subsection separately to 
     corporations so described.
       ``(B) Description.--A corporation is described in this 
     subparagraph if--
       ``(i) such corporation is a financial institution described 
     in section 581 or 591,
       ``(ii) the business of such financial institution is 
     predominantly with persons other than related persons (within 
     the meaning of subsection (d)(4)) or their customers, and
       ``(iii) such financial institution is required by State or 
     Federal law to be operated separately from any other entity 
     which is not such an institution.
       ``(C) Treatment of bank and financial holding companies.--
     To the extent provided in regulations--
       ``(i) a bank holding company (within the meaning of section 
     2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 
     1841(a)),
       ``(ii) a financial holding company (within the meaning of 
     section 2(p) of the Bank Holding Company Act of 1956 (12 
     U.S.C. 1841(p)), and
       ``(iii) any subsidiary of a financial institution described 
     in section 581 or 591, or of any such bank or financial 
     holding company, if such subsidiary is predominantly engaged 
     (directly or indirectly) in the active conduct of a banking, 
     financing, or similar business,

     shall be treated as a corporation described in subparagraph 
     (B).
       ``(5) Election to expand financial institution group of 
     worldwide group.--
       ``(A) In general.--If a worldwide affiliated group elects 
     the application of this subsection, all financial 
     corporations which--
       ``(i) are members of such worldwide affiliated group, but
       ``(ii) are not corporations described in paragraph (4)(B),

     shall be treated as described in paragraph (4)(B) for 
     purposes of applying paragraph (4)(A). This subsection (other 
     than this paragraph) shall apply to any such group in the 
     same manner as this subsection (other than this paragraph) 
     applies to the pre-election worldwide affiliated group of 
     which such group is a part.
       ``(B) Financial corporation.--For purposes of this 
     paragraph, the term `financial corporation' means any 
     corporation if at least 80 percent of its gross income is 
     income described in section 904(d)(2)(D)(ii) and the 
     regulations thereunder which is derived from transactions 
     with persons who are not related (within the meaning of 
     section 267(b) or 707(b)(1)) to the corporation. For purposes 
     of the preceding sentence, there shall be disregarded any 
     item of income or gain from a transaction or series of 
     transactions a principal purpose of which is the 
     qualification of any corporation as a financial corporation.
       ``(C) Anti-abuse rules.--In the case of a corporation which 
     is a member of an electing financial institution group, to 
     the extent that such corporation--
       ``(i) distributes dividends or makes other distributions 
     with respect to its stock after the date of the enactment of 
     this paragraph to any member of the pre-election worldwide 
     affiliated group (other than to a member of the electing 
     financial institution group) in excess of the greater of--

       ``(I) its average annual dividend (expressed as a 
     percentage of current earnings and profits) during the 5-
     taxable-year period ending with the taxable year preceding 
     the taxable year, or
       ``(II) 25 percent of its average annual earnings and 
     profits for such 5-taxable-year period, or

       ``(ii) deals with any person in any manner not clearly 
     reflecting the income of the corporation (as determined under 
     principles similar to the principles of section 482),

     an amount of indebtedness of the electing financial 
     institution group equal to the excess distribution or the 
     understatement or overstatement of income, as the case may 
     be, shall be recharacterized (for the taxable year and 
     subsequent taxable years) for purposes of this paragraph as 
     indebtedness of the worldwide affiliated group (excluding the 
     electing financial institution group). If a corporation has 
     not been in existence for 5 taxable years, this subparagraph 
     shall be applied with respect to the period it was in 
     existence.
       ``(D) Election.--An election under this paragraph with 
     respect to any financial institution group may be made only 
     by the common parent of the pre-election worldwide affiliated 
     group and may be made only for the first taxable year 
     beginning after December 31, 2008, in which such affiliated 
     group includes 1 or more financial corporations. Such an 
     election, once made, shall apply to all financial 
     corporations which are members of the electing financial 
     institution group for such taxable year and all subsequent 
     years unless revoked with the consent of the Secretary.
       ``(E) Definitions relating to groups.--For purposes of this 
     paragraph--
       ``(i) Pre-election worldwide affiliated group.--The term 
     `pre-election worldwide affiliated group' means, with respect 
     to a corporation, the worldwide affiliated group of which 
     such corporation would (but for an election under this 
     paragraph) be a member for purposes of applying paragraph 
     (1).
       ``(ii) Electing financial institution group.--The term 
     `electing financial institution group' means the group of 
     corporations to which this subsection applies separately by 
     reason of the application of paragraph (4)(A) and which 
     includes financial corporations by reason of an election 
     under subparagraph (A).
       ``(F) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this 
     subsection, including regulations--
       ``(i) providing for the direct allocation of interest 
     expense in other circumstances where such allocation would be 
     appropriate to carry out the purposes of this subsection,
       ``(ii) preventing assets or interest expense from being 
     taken into account more than once, and
       ``(iii) dealing with changes in members of any group 
     (through acquisitions or otherwise) treated under this 
     paragraph as an affiliated group for purposes of this 
     subsection.
       ``(6) Election.--An election to have this subsection apply 
     with respect to any worldwide affiliated group may be made 
     only by the common parent of the domestic affiliated group 
     referred to in paragraph (1)(C) and may be made only for the 
     first taxable year beginning after December 31, 2008, in 
     which a worldwide affiliated group exists which includes such 
     affiliated group and at least 1 foreign corporation. Such an 
     election, once made, shall apply to such common parent and 
     all other corporations which are members of such worldwide 
     affiliated group for such taxable year and all subsequent 
     years unless revoked with the consent of the Secretary.''.
       (b) Expansion of Regulatory Authority.--Paragraph (7) of 
     section 864(e) is amended--
       (1) by inserting before the comma at the end of 
     subparagraph (B) ``and in other circumstances where such 
     allocation would be appropriate to carry out the purposes of 
     this subsection'', and
       (2) by striking ``and'' at the end of subparagraph (E), by 
     redesignating subparagraph (F) as subparagraph (G), and by 
     inserting after subparagraph (E) the following new 
     subparagraph:
       ``(F) preventing assets or interest expense from being 
     taken into account more than once, and''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2008.

     SEC. 402. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

       (a) General Rule.--Section 904 is amended by redesignating 
     subsections (g), (h), (i), (j), and

[[Page H8431]]

     (k) as subsections (h), (i), (j), (k), and (l) respectively, 
     and by inserting after subsection (f) the following new 
     subsection:
       ``(g) Recharacterization of Overall Domestic Loss.--
       ``(1) General rule.--For purposes of this subpart and 
     section 936, in the case of any taxpayer who sustains an 
     overall domestic loss for any taxable year beginning after 
     December 31, 2006, that portion of the taxpayer's taxable 
     income from sources within the United States for each 
     succeeding taxable year which is equal to the lesser of--
       ``(A) the amount of such loss (to the extent not used under 
     this paragraph in prior taxable years), or
       ``(B) 50 percent of the taxpayer's taxable income from 
     sources within the United States for such succeeding taxable 
     year,

     shall be treated as income from sources without the United 
     States (and not as income from sources within the United 
     States).
       ``(2) Overall domestic loss defined.--For purposes of this 
     subsection--
       ``(A) In general.--The term `overall domestic loss' means 
     any domestic loss to the extent such loss offsets taxable 
     income from sources without the United States for the taxable 
     year or for any preceding taxable year by reason of a 
     carryback. For purposes of the preceding sentence, the term 
     `domestic loss' means the amount by which the gross income 
     for the taxable year from sources within the United States is 
     exceeded by the sum of the deductions properly apportioned or 
     allocated thereto (determined without regard to any carryback 
     from a subsequent taxable year).
       ``(B) Taxpayer must have elected foreign tax credit for 
     year of loss.--The term `overall domestic loss' shall not 
     include any loss for any taxable year unless the taxpayer 
     chose the benefits of this subpart for such taxable year.
       ``(3) Characterization of subsequent income.--
       ``(A) In general.--Any income from sources within the 
     United States that is treated as income from sources without 
     the United States under paragraph (1) shall be allocated 
     among and increase the income categories in proportion to the 
     loss from sources within the United States previously 
     allocated to those income categories.
       ``(B) Income category.--For purposes of this paragraph, the 
     term `income category' has the meaning given such term by 
     subsection (f)(5)(E)(i).
       ``(4) Coordination with subsection (f).--The Secretary 
     shall prescribe such regulations as may be necessary to 
     coordinate the provisions of this subsection with the 
     provisions of subsection (f).''.
       (b) Conforming Amendments.--
       (1) Section 535(d)(2) is amended by striking ``section 
     904(g)(6)'' and inserting ``section 904(h)(6)''.
       (2) Subparagraph (A) of section 936(a)(2) is amended by 
     striking ``section 904(f)'' and inserting ``subsections (f) 
     and (g) of section 904''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to losses for taxable years beginning after 
     December 31, 2006.

     SEC. 403. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM 
                   NONCONTROLLED SECTION 902 CORPORATIONS.

       (a) In General.--Section 904(d)(4) (relating to look-thru 
     rules apply to dividends from noncontrolled section 902 
     corporations) is amended to read as follows:
       ``(4) Look-thru applies to dividends from noncontrolled 
     section 902 corporations.--
       ``(A) In general.--For purposes of this subsection, any 
     dividend from a noncontrolled section 902 corporation with 
     respect to the taxpayer shall be treated as income described 
     in a subparagraph of paragraph (1) in proportion to the ratio 
     of--
       ``(i) the portion of earnings and profits attributable to 
     income described in such subparagraph, to
       ``(ii) the total amount of earnings and profits.
       ``(B) Earnings and profits of controlled foreign 
     corporations.--In the case of any distribution from a 
     controlled foreign corporation to a United States 
     shareholder, rules similar to the rules of subparagraph (A) 
     shall apply in determining the extent to which earnings and 
     profits of the controlled foreign corporation which are 
     attributable to dividends received from a noncontrolled 
     section 902 corporation may be treated as income in a 
     separate category.
       ``(C) Special rules.--For purposes of this paragraph--
       ``(i) Earnings and profits.--

       ``(I) In general.--The rules of section 316 shall apply.
       ``(II) Regulations.--The Secretary may prescribe 
     regulations regarding the treatment of distributions out of 
     earnings and profits for periods before the taxpayer's 
     acquisition of the stock to which the distributions relate.

       ``(ii) Inadequate substantiation.--If the Secretary 
     determines that the proper subparagraph of paragraph (1) in 
     which a dividend is described has not been substantiated, 
     such dividend shall be treated as income described in 
     paragraph (1)(A).
       ``(iii) Coordination with high-taxed income provisions.--
     Rules similar to the rules of paragraph (3)(F) shall apply 
     for purposes of this paragraph.
       ``(iv) Look-thru with respect to carryover of credit.--
     Rules similar to subparagraph (A) also shall apply to any 
     carryforward under subsection (c) from a taxable year 
     beginning before January 1, 2003, of tax allocable to a 
     dividend from a noncontrolled section 902 corporation with 
     respect to the taxpayer. The Secretary may by regulations 
     provide for the allocation of any carryback of tax allocable 
     to a dividend from a noncontrolled section 902 corporation 
     from a taxable year beginning on or after January 1, 2003, to 
     a taxable year beginning before such date for purposes of 
     allocating such dividend among the separate categories in 
     effect for the taxable year to which carried.''.
       (b) Conforming Amendments.--
       (1) Subparagraph (E) of section 904(d)(1) is hereby 
     repealed.
       (2) Section 904(d)(2)(C)(iii) is amended by adding ``and'' 
     at the end of subclause (I), by striking subclause (II), and 
     by redesignating subclause (III) as subclause (II).
       (3) The last sentence of section 904(d)(2)(D) is amended to 
     read as follows: ``Such term does not include any financial 
     services income.''.
       (4) Section 904(d)(2)(E) is amended--
       (A) by inserting ``or (4)'' after ``paragraph (3)'' in 
     clause (i), and
       (B) by striking clauses (ii) and (iv) and by redesignating 
     clause (iii) as clause (ii).
       (5) Section 904(d)(3)(F) is amended by striking ``(D), or 
     (E)'' and inserting ``or (D)''.
       (6) Section 864(d)(5)(A)(i) is amended by striking 
     ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 404. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.

       (a) In General.--Paragraph (1) of section 904(d) (relating 
     to separate application of section with respect to certain 
     categories of income) is amended to read as follows:
       ``(1) In general.--The provisions of subsections (a), (b), 
     and (c) and sections 902, 907, and 960 shall be applied 
     separately with respect to--
       ``(A) passive category income, and
       ``(B) general category income.''
       (b) Categories.--Paragraph (2) of section 904(d) is amended 
     by striking subparagraph (B), by redesignating subparagraph 
     (A) as subparagraph (B), and by inserting before subparagraph 
     (B) (as so redesignated) the following new subparagraph:
       ``(A) Categories.--
       ``(i) Passive category income.--The term `passive category 
     income' means passive income and specified passive category 
     income.
       ``(ii) General category income.--The term `general category 
     income' means income other than passive category income.''.
       (c) Specified Passive Category Income.--Subparagraph (B) of 
     section 904(d)(2), as so redesignated, is amended by adding 
     at the end the following new clause:
       ``(v) Specified passive category income.--The term 
     `specified passive category income' means--

       ``(I) dividends from a DISC or former DISC (as defined in 
     section 992(a)) to the extent such dividends are treated as 
     income from sources without the United States,
       ``(II) taxable income attributable to foreign trade income 
     (within the meaning of section 923(b)), and
       ``(III) distributions from a FSC (or a former FSC) out of 
     earnings and profits attributable to foreign trade income 
     (within the meaning of section 923(b)) or interest or 
     carrying charges (as defined in section 927(d)(1)) derived 
     from a transaction which results in foreign trade income (as 
     defined in section 923(b)).''.

       (d) Treatment of Financial Services.--Paragraph (2) of 
     section 904(d), as amended by section 403(b)(3), is amended 
     by striking subparagraph (D), by redesignating subparagraph 
     (C) as subparagraph (D), and by inserting before subparagraph 
     (D) (as so redesignated) the following new subparagraph:
       ``(C) Treatment of financial services income and 
     companies.--
       ``(i) In general.--Financial services income shall be 
     treated as general category income in the case of--

       ``(I) a member of a financial services group, and
       ``(II) any other person if such person is predominantly 
     engaged in the active conduct of a banking, insurance, 
     financing, or similar business.

       ``(ii) Financial services group.--The term `financial 
     services group' means any affiliated group (as defined in 
     section 1504(a) without regard to paragraphs (2) and (3) of 
     section 1504(b)) which is predominantly engaged in the active 
     conduct of a banking, insurance, financing, or similar 
     business. In determining whether such a group is so engaged, 
     there shall be taken into account only the income of members 
     of the group that are--

       ``(I) United States corporations, or
       ``(II) controlled foreign corporations in which such United 
     States corporations own, directly or indirectly, at least 80 
     percent of the total voting power and value of the stock.

       ``(iii) Pass-thru entities.--The Secretary shall by 
     regulation specify for purposes of this subparagraph the 
     treatment of financial services income received or accrued by 
     partnerships and by other pass-thru entities which are not 
     members of a financial services group.''.
       (e) Treatment of Income Tax Base Differences.--Paragraph 
     (2) of section 904(d) is amended by redesignating 
     subparagraphs (H) and (I) as subparagraphs (I) and (J), 
     respectively, and by inserting after subparagraph (G) the 
     following new subparagraph:
       ``(H) Treatment of income tax base differences.--
       ``(i) In general.--In the case of taxable years beginning 
     after December 31, 2006, tax imposed under the law of a 
     foreign country or possession of the United States on an 
     amount which does not constitute income under United States 
     tax principles shall be treated as imposed on income 
     described in paragraph (1)(B).
       ``(ii) Special rule for years before 2007.--

       ``(I) In general.--In the case of taxes paid or accrued in 
     taxable years beginning after December 31, 2004, and before 
     January 1, 2007, a taxpayer may elect to treat tax imposed 
     under the law of a foreign country or possession of the 
     United States on an amount which does not constitute income 
     under United States tax principles as tax imposed on income 
     described in subparagraph (C) or (I) of paragraph (1).

[[Page H8432]]

       ``(II) Election irrevocable.--Any such election shall apply 
     to the taxable year for which made and all subsequent taxable 
     years described in subclause (I) unless revoked with the 
     consent of the Secretary.''.

       (f) Conforming Amendments.--
       (1) Clause (iii) of section 904(d)(2)(B) (relating to 
     exceptions from passive income), as so redesignated, is 
     amended by striking subclause (I) and by redesignating 
     subclauses (II) and (III) as subclauses (I) and (II), 
     respectively.
       (2) Clause (i) of section 904(d)(2)(D) (defining financial 
     services income), as so redesignated, is amended by adding 
     ``or'' at the end of subclause (I) and by striking subclauses 
     (II) and (III) and inserting the following new subclause:

       ``(II) passive income (determined without regard to 
     subparagraph (B)(iii)(II)).''

       (3) Section 904(d)(2)(D) (defining financial services 
     income), as so redesignated and amended by section 404(b)(3), 
     is amended by striking clause (iii).
       (4) Paragraph (3) of section 904(d) is amended to read as 
     follows:
       ``(3) Look-thru in case of controlled foreign 
     corporations.--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, dividends, interest, rents, and royalties received 
     or accrued by the taxpayer from a controlled foreign 
     corporation in which the taxpayer is a United States 
     shareholder shall not be treated as passive category income.
       ``(B) Subpart f inclusions.--Any amount included in gross 
     income under section 951(a)(1)(A) shall be treated as passive 
     category income to the extent the amount so included is 
     attributable to passive category income.
       ``(C) Interest, rents, and royalties.--Any interest, rent, 
     or royalty which is received or accrued from a controlled 
     foreign corporation in which the taxpayer is a United States 
     shareholder shall be treated as passive category income to 
     the extent it is properly allocable (under regulations 
     prescribed by the Secretary) to passive category income of 
     the controlled foreign corporation.
       ``(D) Dividends.--Any dividend paid out of the earnings and 
     profits of any controlled foreign corporation in which the 
     taxpayer is a United States shareholder shall be treated as 
     passive category income in proportion to the ratio of--
       ``(i) the portion of the earnings and profits attributable 
     to passive category income, to
       ``(ii) the total amount of earnings and profits.
       ``(E) Look-thru applies only where subpart f applies.--If a 
     controlled foreign corporation meets the requirements of 
     section 954(b)(3)(A) (relating to de minimis rule) for any 
     taxable year, for purposes of this paragraph, none of its 
     foreign base company income (as defined in section 954(a) 
     without regard to section 954(b)(5)) and none of its gross 
     insurance income (as defined in section 954(b)(3)(C)) for 
     such taxable year shall be treated as passive category 
     income, except that this sentence shall not apply to any 
     income which (without regard to this sentence) would be 
     treated as financial services income. Solely for purposes 
     of applying subparagraph (D), passive income of a 
     controlled foreign corporation shall not be treated as 
     passive category income if the requirements of section 
     954(b)(4) are met with respect to such income.
       ``(F) Coordination with high-taxed income provisions.--
       ``(i) In determining whether any income of a controlled 
     foreign corporation is passive category income, subclause 
     (II) of paragraph (2)(B)(iii) shall not apply.
       ``(ii) Any income of the taxpayer which is treated as 
     passive category income under this paragraph shall be so 
     treated notwithstanding any provision of paragraph (2); 
     except that the determination of whether any amount is high-
     taxed income shall be made after the application of this 
     paragraph.
       ``(G) Dividend.--For purposes of this paragraph, the term 
     `dividend' includes any amount included in gross income in 
     section 951(a)(1)(B). Any amount included in gross income 
     under section 78 to the extent attributable to amounts 
     included in gross income in section 951(a)(1)(A) shall not be 
     treated as a dividend but shall be treated as included in 
     gross income under section 951(a)(1)(A).
       ``(H) Look-thru applies to passive foreign investment 
     company inclusion.--If--
       ``(i) a passive foreign investment company is a controlled 
     foreign corporation, and
       ``(ii) the taxpayer is a United States shareholder in such 
     controlled foreign corporation,

     any amount included in gross income under section 1293 shall 
     be treated as income in a separate category to the extent 
     such amount is attributable to income in such category.''.
       (5) Paragraph (2) of section 904(d) is amended by adding at 
     the end the following new subparagraph:
       ``(K) Transitional rules for 2007 changes.--For purposes of 
     paragraph (1)--
       ``(i) taxes carried from any taxable year beginning before 
     January 1, 2007, to any taxable year beginning on or after 
     such date, with respect to any item of income, shall be 
     treated as described in the subparagraph of paragraph (1) in 
     which such income would be described were such taxes paid or 
     accrued in a taxable year beginning on or after such date, 
     and
       ``(ii) the Secretary may by regulations provide for the 
     allocation of any carryback of taxes with respect to income 
     from a taxable year beginning on or after January 1, 2007, to 
     a taxable year beginning before such date for purposes of 
     allocating such income among the separate categories in 
     effect for the taxable year to which carried.''.
       (6) Section 904(j)(3)(A)(i) is amended by striking 
     ``subsection (d)(2)(A)'' and inserting ``subsection 
     (d)(2)(B)''.
       (g) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2006.
       (2) Transitional rule relating to income tax base 
     difference.--Section 904(d)(2)(H)(ii) of the Internal Revenue 
     Code of 1986, as added by subsection (e), shall apply to 
     taxable years beginning after December 31, 2004.

     SEC. 405. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS 
                   TO APPLY IN DETERMINING SECTION 902 AND 960 
                   CREDITS.

       (a) In General.--Subsection (c) of section 902 is amended 
     by redesignating paragraph (7) as paragraph (8) and by 
     inserting after paragraph (6) the following new paragraph:
       ``(7) Constructive ownership through partnerships.--Stock 
     owned, directly or indirectly, by or for a partnership shall 
     be considered as being owned proportionately by its partners. 
     Stock considered to be owned by a person by reason of the 
     preceding sentence shall, for purposes of applying such 
     sentence, be treated as actually owned by such person. The 
     Secretary may prescribe such regulations as may be necessary 
     to carry out the purposes of this paragraph, including rules 
     to account for special partnership allocations of dividends, 
     credits, and other incidents of ownership of stock in 
     determining proportionate ownership.''.
       (b) Clarification of Comparable Attribution Under Section 
     901(b)(5).--Paragraph (5) of section 901(b) is amended by 
     striking ``any individual'' and inserting ``any person''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxes of foreign corporations for taxable 
     years of such corporations beginning after the date of the 
     enactment of this Act.

     SEC. 406. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF 
                   INTANGIBLE PROPERTY.

       (a) In General.--Subparagraph (C) of section 367(d)(2) is 
     amended by adding at the end the following new sentence: 
     ``For purposes of applying section 904(d), any such amount 
     shall be treated in the same manner as if such amount were a 
     royalty.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts treated as received pursuant to 
     section 367(d)(2) of the Internal Revenue Code of 1986 on or 
     after August 5, 1997.

     SEC. 407. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN 
                   ASSETS OF CONTROLLED FOREIGN CORPORATION.

       (a) In General.--Section 956(c)(2) (relating to exceptions 
     from property treated as United States property) is amended 
     by striking ``and'' at the end of subparagraph (J), by 
     striking the period at the end of subparagraph (K) and 
     inserting a semicolon, and by adding at the end the following 
     new subparagraphs:
       ``(L) securities acquired and held by a controlled foreign 
     corporation in the ordinary course of its business as a 
     dealer in securities if--
       ``(i) the dealer accounts for the securities as securities 
     held primarily for sale to customers in the ordinary course 
     of business, and
       ``(ii) the dealer disposes of the securities (or such 
     securities mature while held by the dealer) within a period 
     consistent with the holding of securities for sale to 
     customers in the ordinary course of business; and
       ``(M) an obligation of a United States person which--
       ``(i) is not a domestic corporation, and
       ``(ii) is not--

       ``(I) a United States shareholder (as defined in section 
     951(b)) of the controlled foreign corporation, or
       ``(II) a partnership, estate, or trust in which the 
     controlled foreign corporation, or any related person (as 
     defined in section 954(d)(3)), is a partner, beneficiary, or 
     trustee immediately after the acquisition of any obligation 
     of such partnership, estate, or trust by the controlled 
     foreign corporation.''.

       (b) Conforming Amendment.--Section 956(c)(2) is amended by 
     striking ``and (K)'' in the last sentence and inserting ``, 
     (K), and (L)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 408. TRANSLATION OF FOREIGN TAXES.

       (a) Elective Exception for Taxes Paid Other Than in 
     Functional Currency.--Paragraph (1) of section 986(a) 
     (relating to determination of foreign taxes and foreign 
     corporation's earnings and profits) is amended by 
     redesignating subparagraph (D) as subparagraph (E) and by 
     inserting after subparagraph (C) the following new 
     subparagraph:
       ``(D) Elective exception for taxes paid other than in 
     functional currency.--
       ``(i) In general.--At the election of the taxpayer, 
     subparagraph (A) shall not apply to any foreign income taxes 
     the liability for which is denominated in any currency other 
     than in the taxpayer's functional currency.
       ``(ii) Application to qualified business units.--An 
     election under this subparagraph may apply to foreign income 
     taxes attributable to a qualified business unit in accordance 
     with regulations prescribed by the Secretary.
       ``(iii) Election.--Any such election shall apply to the 
     taxable year for which made and all subsequent taxable years 
     unless revoked with the consent of the Secretary.''.
       (b) Special Rule for Regulated Investment Companies.--
       (1) In general.--Section 986(a)(1), as amended by 
     subsection (a), is amended by redesignating subparagraph (E) 
     as subparagraph (F) and by inserting after subparagraph (D) 
     the following:
       ``(E) Special rule for regulated investment companies.--In 
     the case of a regulated investment company which takes into 
     account income on an accrual basis, subparagraphs (A)

[[Page H8433]]

     through (D) shall not apply and foreign income taxes paid or 
     accrued with respect to such income shall be translated into 
     dollars using the exchange rate as of the date the income 
     accrues.''.
       (2) Conforming amendment.--Section 986(a)(2) is amended by 
     inserting ``or (E)'' after ``subparagraph (A)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 409. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN 
                   FOREIGN CORPORATIONS.

       (a) In General.--Paragraph (2) of section 871(i) (relating 
     to tax not to apply to certain interest and dividends) is 
     amended by adding at the end the following new subparagraph:
       ``(D) Dividends paid by a foreign corporation which are 
     treated under section 861(a)(2)(B) as income from sources 
     within the United States.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to payments made after December 31, 2004.

     SEC. 410. EQUAL TREATMENT OF INTEREST PAID BY FOREIGN 
                   PARTNERSHIPS AND FOREIGN CORPORATIONS.

       (a) In General.--Paragraph (1) of section 861(a) is amended 
     by striking ``and'' at the end of subparagraph (A), by 
     striking the period at the end of subparagraph (B) and 
     inserting ``, and'', and by adding at the end the following 
     new subparagraph:
       ``(C) in the case of a foreign partnership, which is 
     predominantly engaged in the active conduct of a trade or 
     business outside the United States, any interest not paid by 
     a trade or business engaged in by the partnership in the 
     United States and not allocable to income which is 
     effectively connected (or treated as effectively connected) 
     with the conduct of a trade or business in the United 
     States.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 411. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED 
                   INVESTMENT COMPANIES.

       (a) Treatment of Certain Dividends.--
       (1) Nonresident alien individuals.--Section 871 (relating 
     to tax on nonresident alien individuals) is amended by 
     redesignating subsection (k) as subsection (l) and by 
     inserting after subsection (j) the following new subsection:
       ``(k) Exemption for Certain Dividends of Regulated 
     Investment Companies.--
       ``(1) Interest-related dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1)(A) of subsection 
     (a) on any interest-related dividend received from a 
     regulated investment company.
       ``(B) Exceptions.--Subparagraph (A) shall not apply--
       ``(i) to any interest-related dividend received from a 
     regulated investment company by a person to the extent such 
     dividend is attributable to interest (other than interest 
     described in subparagraph (E) (i) or (iii)) received by such 
     company on indebtedness issued by such person or by any 
     corporation or partnership with respect to which such person 
     is a 10-percent shareholder,
       ``(ii) to any interest-related dividend with respect to 
     stock of a regulated investment company unless the person who 
     would otherwise be required to deduct and withhold tax from 
     such dividend under chapter 3 receives a statement (which 
     meets requirements similar to the requirements of subsection 
     (h)(5)) that the beneficial owner of such stock is not a 
     United States person, and
       ``(iii) to any interest-related dividend paid to any person 
     within a foreign country (or any interest-related dividend 
     payment addressed to, or for the account of, persons within 
     such foreign country) during any period described in 
     subsection (h)(6) with respect to such country.

     Clause (iii) shall not apply to any dividend with respect to 
     any stock which was acquired on or before the date of the 
     publication of the Secretary's determination under subsection 
     (h)(6).
       ``(C) Interest-related dividend.--For purposes of this 
     paragraph, the term `interest-related dividend' means any 
     dividend (or part thereof) which is designated by the 
     regulated investment company as an interest-related dividend 
     in a written notice mailed to its shareholders not later than 
     60 days after the close of its taxable year. If the aggregate 
     amount so designated with respect to a taxable year of the 
     company (including amounts so designated with respect to 
     dividends paid after the close of the taxable year described 
     in section 855) is greater than the qualified net interest 
     income of the company for such taxable year, the portion of 
     each distribution which shall be an interest-related dividend 
     shall be only that portion of the amounts so designated which 
     such qualified net interest income bears to the aggregate 
     amount so designated. Such term shall not include any 
     dividend with respect to any taxable year of the company 
     beginning after December 31, 2007.
       ``(D) Qualified net interest income.--For purposes of 
     subparagraph (C), the term `qualified net interest income' 
     means the qualified interest income of the regulated 
     investment company reduced by the deductions properly 
     allocable to such income.
       ``(E) Qualified interest income.--For purposes of 
     subparagraph (D), the term `qualified interest income' means 
     the sum of the following amounts derived by the regulated 
     investment company from sources within the United States:
       ``(i) Any amount includible in gross income as original 
     issue discount (within the meaning of section 1273) on an 
     obligation payable 183 days or less from the date of original 
     issue (without regard to the period held by the company).
       ``(ii) Any interest includible in gross income (including 
     amounts recognized as ordinary income in respect of original 
     issue discount or market discount or acquisition discount 
     under part V of subchapter P and such other amounts as 
     regulations may provide) on an obligation which is in 
     registered form; except that this clause shall not apply to--

       ``(I) any interest on an obligation issued by a corporation 
     or partnership if the regulated investment company is a 10-
     percent shareholder in such corporation or partnership, and
       ``(II) any interest which is treated as not being portfolio 
     interest under the rules of subsection (h)(4).

       ``(iii) Any interest referred to in subsection (i)(2)(A) 
     (without regard to the trade or business of the regulated 
     investment company).
       ``(iv) Any interest-related dividend includable in gross 
     income with respect to stock of another regulated investment 
     company.
       ``(F) 10-percent shareholder.--For purposes of this 
     paragraph, the term `10-percent shareholder' has the meaning 
     given such term by subsection (h)(3)(B).
       ``(2) Short-term capital gain dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1)(A) of subsection 
     (a) on any short-term capital gain dividend received from a 
     regulated investment company.
       ``(B) Exception for aliens taxable under subsection 
     (a)(2).--Subparagraph (A) shall not apply in the case of any 
     nonresident alien individual subject to tax under subsection 
     (a)(2).
       ``(C) Short-term capital gain dividend.--For purposes of 
     this paragraph, the term `short-term capital gain dividend' 
     means any dividend (or part thereof) which is designated by 
     the regulated investment company as a short-term capital gain 
     dividend in a written notice mailed to its shareholders not 
     later than 60 days after the close of its taxable year. If 
     the aggregate amount so designated with respect to a taxable 
     year of the company (including amounts so designated with 
     respect to dividends paid after the close of the taxable year 
     described in section 855) is greater than the qualified 
     short-term gain of the company for such taxable year, the 
     portion of each distribution which shall be a short-term 
     capital gain dividend shall be only that portion of the 
     amounts so designated which such qualified short-term gain 
     bears to the aggregate amount so designated. Such term shall 
     not include any dividend with respect to any taxable year of 
     the company beginning after December 31, 2007.
       ``(D) Qualified short-term gain.--For purposes of 
     subparagraph (C), the term `qualified short-term gain' means 
     the excess of the net short-term capital gain of the 
     regulated investment company for the taxable year over the 
     net long-term capital loss (if any) of such company for such 
     taxable year. For purposes of this subparagraph--
       ``(i) the net short-term capital gain of the regulated 
     investment company shall be computed by treating any short-
     term capital gain dividend includible in gross income with 
     respect to stock of another regulated investment company as a 
     short-term capital gain, and
       ``(ii) the excess of the net short-term capital gain for a 
     taxable year over the net long-term capital loss for a 
     taxable year (to which an election under section 4982(e)(4) 
     does not apply) shall be determined without regard to any net 
     capital loss or net short-term capital loss attributable to 
     transactions after October 31 of such year, and any such net 
     capital loss or net short-term capital loss shall be treated 
     as arising on the 1st day of the next taxable year.

     To the extent provided in regulations, clause (ii) shall 
     apply also for purposes of computing the taxable income of 
     the regulated investment company.''
       (2) Foreign corporations.--Section 881 (relating to tax on 
     income of foreign corporations not connected with United 
     States business) is amended by redesignating subsection (e) 
     as subsection (f) and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Tax Not To Apply to Certain Dividends of Regulated 
     Investment Companies.--
       ``(1) Interest-related dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1) of subsection (a) 
     on any interest-related dividend (as defined in section 
     871(k)(1)) received from a regulated investment company.
       ``(B) Exception.--Subparagraph (A) shall not apply--
       ``(i) to any dividend referred to in section 871(k)(1)(B), 
     and
       ``(ii) to any interest-related dividend received by a 
     controlled foreign corporation (within the meaning of section 
     957(a)) to the extent such dividend is attributable to 
     interest received by the regulated investment company from a 
     person who is a related person (within the meaning of section 
     864(d)(4)) with respect to such controlled foreign 
     corporation.
       ``(C) Treatment of dividends received by controlled foreign 
     corporations.--The rules of subsection (c)(5)(A) shall apply 
     to any (within the meaning of section 957(a)) to the extent 
     such dividend is attributable to interest received by the 
     regulated investment company which is described in clause 
     (ii) of section 871(k)(1)(E) (and not described in clause (i) 
     or (iii) of such section).
       ``(2) Short-term capital gain dividends.--No tax shall be 
     imposed under paragraph (1) of subsection (a) on any short-
     term capital gain dividend (as defined in section 871(k)(2)) 
     received from a regulated investment company.''.
       (3) Withholding taxes.--
       (A) Section 1441(c) (relating to exceptions) is amended by 
     adding at the end the following new paragraph:
       ``(12) Certain dividends received from regulated investment 
     companies.--
       ``(A) In general.--No tax shall be required to be deducted 
     and withheld under subsection (a)

[[Page H8434]]

     from any amount exempt from the tax imposed by section 
     871(a)(1)(A) by reason of section 871(k).
       ``(B) Special rule.--For purposes of subparagraph (A), 
     clause (i) of section 871(k)(1)(B) shall not apply to any 
     dividend unless the regulated investment company knows that 
     such dividend is a dividend referred to in such clause. A 
     similar rule shall apply with respect to the exception 
     contained in section 871(k)(2)(B).''.
       (B) Section 1442(a) (relating to withholding of tax on 
     foreign corporations) is amended--
       (i) by striking ``and the reference in section 
     1441(c)(10)'' and inserting ``the reference in section 
     1441(c)(10)'', and
       (ii) by inserting before the period at the end the 
     following: ``, and the references in section 1441(c)(12) to 
     sections 871(a) and 871(k) shall be treated as referring to 
     sections 881(a) and 881(e) (except that for purposes of 
     applying subparagraph (A) of section 1441(c)(12), as so 
     modified, clause (ii) of section 881(e)(1)(B) shall not apply 
     to any dividend unless the regulated investment company knows 
     that such dividend is a dividend referred to in such 
     clause)''.
       (b) Estate Tax Treatment of Interest in Certain Regulated 
     Investment Companies.--Section 2105 (relating to property 
     without the United States for estate tax purposes) is amended 
     by adding at the end the following new subsection:
       ``(d) Stock in a RIC.--
       ``(1) In general.--For purposes of this subchapter, stock 
     in a regulated investment company (as defined in section 851) 
     owned by a nonresident not a citizen of the United States 
     shall not be deemed property within the United States in the 
     proportion that, at the end of the quarter of such investment 
     company's taxable year immediately preceding a decedent's 
     date of death (or at such other time as the Secretary may 
     designate in regulations), the assets of the investment 
     company that were qualifying assets with respect to the 
     decedent bore to the total assets of the investment company.
       ``(2) Qualifying assets.--For purposes of this subsection, 
     qualifying assets with respect to a decedent are assets that, 
     if owned directly by the decedent, would have been--
       ``(A) amounts, deposits, or debt obligations described in 
     subsection (b) of this section,
       ``(B) debt obligations described in the last sentence of 
     section 2104(c), or
       ``(C) other property not within the United States.
       ``(3) Termination.--This subsection shall not apply to 
     estates of decedents dying after December 31, 2007.''
       (c) Treatment of Regulated Investment Companies Under 
     Section 897.--
       (1) Paragraph (1) of section 897(h) is amended by striking 
     ``REIT'' each place it appears and inserting ``qualified 
     investment entity''.
       (2) Paragraphs (2) and (3) of section 897(h) are amended to 
     read as follows:
       ``(2) Sale of stock in domestically controlled entity not 
     taxed.--The term `United States real property interest' does 
     not include any interest in a domestically controlled 
     qualified investment entity.
       ``(3) Distributions by domestically controlled qualified 
     investment entities.--In the case of a domestically 
     controlled qualified investment entity, rules similar to the 
     rules of subsection (d) shall apply to the foreign ownership 
     percentage of any gain.''
       (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
     amended to read as follows:
       ``(A) Qualified investment entity.--
       ``(i) In general.--The term `qualified investment entity' 
     means--

       ``(I) any real estate investment trust, and
       ``(II) any regulated investment company.

       ``(ii) Termination.--Clause (i)(II) shall not apply after 
     December 31, 2007.
       ``(B) Domestically controlled.--The term `domestically 
     controlled qualified investment entity' means any qualified 
     investment entity in which at all times during the testing 
     period less than 50 percent in value of the stock was held 
     directly or indirectly by foreign persons.''
       (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
     amended by striking ``REIT'' and inserting ``qualified 
     investment entity''.
       (5) The subsection heading for subsection (h) of section 
     897 is amended by striking ``REITS'' and inserting ``Certain 
     Investment Entities''.
       (d) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to dividends with respect to taxable years of regulated 
     investment companies beginning after December 31, 2004.
       (2) Estate tax treatment.--The amendment made by subsection 
     (b) shall apply to estates of decedents dying after December 
     31, 2004.
       (3) Certain other provisions.--The amendments made by 
     subsection (c) (other than paragraph (1) thereof) shall take 
     effect after December 31, 2004.

     SEC. 412. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP 
                   INTERESTS.

       (a) In General.--Section 954(c) (defining foreign personal 
     holding company income) is amended by adding after paragraph 
     (3) the following new paragraph:
       ``(4) Look-thru rule for certain partnership sales.--
       ``(A) In general.--In the case of any sale by a controlled 
     foreign corporation of an interest in a partnership with 
     respect to which such corporation is a 25-percent owner, such 
     corporation shall be treated for purposes of this subsection 
     as selling the proportionate share of the assets of the 
     partnership attributable to such interest. The Secretary 
     shall prescribe such regulations as may be appropriate to 
     prevent abuse of the purposes of this paragraph, including 
     regulations providing for coordination of this paragraph with 
     the provisions of subchapter K.
       ``(B) 25-percent owner.--For purposes of this paragraph, 
     the term `25-percent owner' means a controlled foreign 
     corporation which owns directly 25 percent or more of the 
     capital or profits interest in a partnership. For purposes of 
     the preceding sentence, if a controlled foreign corporation 
     is a shareholder or partner of a corporation or partnership, 
     the controlled foreign corporation shall be treated as owning 
     directly its proportionate share of any such capital or 
     profits interest held directly or indirectly by such 
     corporation or partnership.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 413. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES 
                   AND FOREIGN INVESTMENT COMPANY RULES.

       (a) General Rule.--The following provisions are hereby 
     repealed:
       (1) Part III of subchapter G of chapter 1 (relating to 
     foreign personal holding companies).
       (2) Section 1246 (relating to gain on foreign investment 
     company stock).
       (3) Section 1247 (relating to election by foreign 
     investment companies to distribute income currently).
       (b) Exemption of Foreign Corporations From Personal Holding 
     Company Rules.--
       (1) In general.--Subsection (c) of section 542 (relating to 
     exceptions) is amended--
       (A) by striking paragraph (5) and inserting the following:
       ``(5) a foreign corporation,'',
       (B) by striking paragraphs (7) and (10) and by 
     redesignating paragraphs (8) and (9) as paragraphs (7) and 
     (8), respectively,
       (C) by inserting ``and'' at the end of paragraph (7) (as so 
     redesignated), and
       (D) by striking ``; and'' at the end of paragraph (8) (as 
     so redesignated) and inserting a period.
       (2) Treatment of income from personal service contracts.--
     Paragraph (1) of section 954(c) is amended by adding at the 
     end the following new subparagraph:
       ``(I) Personal service contracts.--
       ``(i) Amounts received under a contract under which the 
     corporation is to furnish personal services if--

       ``(I) some person other than the corporation has the right 
     to designate (by name or by description) the individual who 
     is to perform the services, or
       ``(II) the individual who is to perform the services is 
     designated (by name or by description) in the contract, and

       ``(ii) amounts received from the sale or other disposition 
     of such a contract.

     This subparagraph shall apply with respect to amounts 
     received for services under a particular contract only if at 
     some time during the taxable year 25 percent or more in value 
     of the outstanding stock of the corporation is owned, 
     directly or indirectly, by or for the individual who has 
     performed, is to perform, or may be designated (by name or by 
     description) as the one to perform, such services.''.
       (c) Conforming Amendments.--
       (1) Section 1(h) is amended--
       (A) in paragraph (10), by inserting ``and'' at the end of 
     subparagraph (F), by striking subparagraph (G), and by 
     redesignating subparagraph (H) as subparagraph (G), and
       (B) by striking ``a foreign personal holding company (as 
     defined in section 552), a foreign investment company (as 
     defined in section 1246(b)), or'' in paragraph (11)(C)(iii).
       (2) Paragraph (2) of section 171(c) is amended--
       (A) by striking ``, or by a foreign personal holding 
     company, as defined in section 552'', and
       (B) by striking ``, or foreign personal holding company''.
       (3) Paragraph (2) of section 245(a) is amended by striking 
     ``foreign personal holding company or''.
       (4) Section 312 is amended by striking subsection (j).
       (5) Subsection (m) of section 312 is amended by striking 
     ``, a foreign investment company (within the meaning of 
     section 1246(b)), or a foreign personal holding company 
     (within the meaning of section 552)''.
       (6) Subsection (e) of section 443 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       (7) Subparagraph (B) of section 465(c)(7) is amended by 
     adding ``or'' at the end of clause (i), by striking clause 
     (ii), and by redesignating clause (iii) as clause (ii).
       (8) Paragraph (1) of section 543(b) is amended by inserting 
     ``and'' at the end of subparagraph (A), by striking ``, and'' 
     at the end of subparagraph (B) and inserting a period, and by 
     striking subparagraph (C).
       (9) Paragraph (1) of section 562(b) is amended by striking 
     ``or a foreign personal holding company described in section 
     552''.
       (10) Section 563 is amended--
       (A) by striking subsection (c),
       (B) by redesignating subsection (d) as subsection (c), and
       (C) by striking ``subsection (a), (b), or (c)'' in 
     subsection (c) (as so redesignated) and inserting 
     ``subsection (a) or (b)''.
       (11) Subsection (d) of section 751 is amended by adding 
     ``and'' at the end of paragraph (2), by striking paragraph 
     (3), by redesignating paragraph (4) as paragraph (3), and by 
     striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as 
     so redesignated) and inserting ``paragraph (1) or (2)''.
       (12) Paragraph (2) of section 864(d) is amended by striking 
     subparagraph (A) and by redesignating subparagraphs (B) and 
     (C) as subparagraphs (A) and (B), respectively.
       (13)(A) Subparagraph (A) of section 898(b)(1) is amended to 
     read as follows:

[[Page H8435]]

       ``(A) which is treated as a controlled foreign corporation 
     for any purpose under subpart F of part III of this 
     subchapter, and''.
       (B) Subparagraph (B) of section 898(b)(2) is amended by 
     striking ``and sections 551(f) and 554, whichever are 
     applicable,''.
       (C) Paragraph (3) of section 898(b) is amended to read as 
     follows:
       ``(3) United states shareholder.--The term `United States 
     shareholder' has the meaning given to such term by section 
     951(b), except that, in the case of a foreign corporation 
     having related person insurance income (as defined in section 
     953(c)(2)), the Secretary may treat any person as a United 
     States shareholder for purposes of this section if such 
     person is treated as a United States shareholder under 
     section 953(c)(1).''.
       (D) Subsection (c) of section 898 is amended to read as 
     follows:
       ``(c) Determination of Required Year.--
       ``(1) In general.--The required year is--
       ``(A) the majority U.S. shareholder year, or
       ``(B) if there is no majority U.S. shareholder year, the 
     taxable year prescribed under regulations.
       ``(2) 1-month deferral allowed.--A specified foreign 
     corporation may elect, in lieu of the taxable year under 
     paragraph (1)(A), a taxable year beginning 1 month earlier 
     than the majority U.S. shareholder year.
       ``(3) Majority u.s. shareholder year.--
       ``(A) In general.--For purposes of this subsection, the 
     term `majority U.S. shareholder year' means the taxable year 
     (if any) which, on each testing day, constituted the taxable 
     year of--
       ``(i) each United States shareholder described in 
     subsection (b)(2)(A), and
       ``(ii) each United States shareholder not described in 
     clause (i) whose stock was treated as owned under subsection 
     (b)(2)(B) by any shareholder described in such clause.
       ``(B) Testing day.--The testing days shall be--
       ``(i) the first day of the corporation's taxable year 
     (determined without regard to this section), or
       ``(ii) the days during such representative period as the 
     Secretary may prescribe.''.
       (14) Clause (ii) of section 904(d)(2)(A) is amended to read 
     as follows:
       ``(ii) Certain amounts included.--Except as provided in 
     clause (iii), the term `passive income' includes, except as 
     provided in subparagraph (E)(iii) or paragraph (3)(I), any 
     amount includible in gross income under section 1293 
     (relating to certain passive foreign investment 
     companies).''.
       (15)(A) Subparagraph (A) of section 904(h)(1), as 
     redesignated by this Act, is amended by adding ``or'' at the 
     end of clause (i), by striking clause (ii), and by 
     redesignating clause (iii) as clause (ii).
       (B) The paragraph heading of paragraph (2) of section 
     904(h), as so redesignated, is amended by striking ``foreign 
     personal holding or''.
       (16) Section 951 is amended by striking subsections (c) and 
     (d) and by redesignating subsections (e) and (f) as 
     subsections (c) and (d), respectively.
       (17) Paragraph (3) of section 989(b) is amended by striking 
     ``, 551(a),''.
       (18) Paragraph (5) of section 1014(b) is amended by 
     inserting ``and before January 1, 2005,'' after ``August 26, 
     1937,''.
       (19) Subsection (a) of section 1016 is amended by striking 
     paragraph (13).
       (20)(A) Paragraph (3) of section 1212(a) is amended to read 
     as follows:
       ``(3) Special rules on carrybacks.--A net capital loss of a 
     corporation shall not be carried back under paragraph (1)(A) 
     to a taxable year--
       ``(A) for which it is a regulated investment company (as 
     defined in section 851), or
       ``(B) for which it is a real estate investment trust (as 
     defined in section 856).''.
       (B) The amendment made by subparagraph (A) shall apply to 
     taxable years beginning after December 31, 2004.
       (21) Section 1223 is amended by striking paragraph (10) and 
     by redesignating the following paragraphs accordingly.
       (22) Subsection (d) of section 1248 is amended by striking 
     paragraph (5) and by redesignating paragraphs (6) and (7) as 
     paragraphs (5) and (6), respectively.
       (23) Paragraph (2) of section 1260(c) is amended by 
     striking subparagraphs (H) and (I) and by redesignating 
     subparagraph (J) as subparagraph (H).
       (24)(A) Subparagraph (F) of section 1291(b)(3) is amended 
     by striking ``551(d), 959(a),'' and inserting ``959(a)''.
       (B) Subsection (e) of section 1291 is amended by inserting 
     ``(as in effect on the day before the date of the enactment 
     of the American Jobs Creation Act of 2004)'' after ``section 
     1246''.
       (25) Paragraph (2) of section 1294(a) is amended to read as 
     follows:
       ``(2) Election not permitted where amounts otherwise 
     includible under section 951.--The taxpayer may not make an 
     election under paragraph (1) with respect to the 
     undistributed PFIC earnings tax liability attributable to a 
     qualified electing fund for the taxable year if any amount is 
     includible in the gross income of the taxpayer under section 
     951 with respect to such fund for such taxable year.''.
       (26) Section 6035 is hereby repealed.
       (27) Subparagraph (D) of section 6103(e)(1) is amended by 
     striking clause (iv) and redesignating clauses (v) and (vi) 
     as clauses (iv) and (v), respectively.
       (28) Subparagraph (B) of section 6501(e)(1) is amended to 
     read as follows:
       ``(B) Constructive dividends.--If the taxpayer omits from 
     gross income an amount properly includible therein under 
     section 951(a), the tax may be assessed, or a proceeding in 
     court for the collection of such tax may be done without 
     assessing, at any time within 6 years after the return was 
     filed.''.
       (29) Subsection (a) of section 6679 is amended--
       (A) by striking ``6035, 6046, and 6046A'' in paragraph (1) 
     and inserting ``6046 and 6046A'', and
       (B) by striking paragraph (3).
       (30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
     are each amended by striking ``556(b)(2),'' each place it 
     appears.
       (31) The table of parts for subchapter G of chapter 1 is 
     amended by striking the item relating to part III.
       (32) The table of sections for part IV of subchapter P of 
     chapter 1 is amended by striking the items relating to 
     sections 1246 and 1247.
       (33) The table of sections for subpart A of part III of 
     subchapter A of chapter 61 is amended by striking the item 
     relating to section 6035.
       (d) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     of foreign corporations beginning after December 31, 2004, 
     and to taxable years of United States shareholders with or 
     within which such taxable years of foreign corporations end.
       (2) Subsection (c)(27).--The amendments made by subsection 
     (c)(27) shall apply to disclosures of return or return 
     information with respect to taxable years beginning after 
     December 31, 2004.

     SEC. 414. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY 
                   INCOME WITH RESPECT TO TRANSACTIONS IN 
                   COMMODITIES.

       (a) In General.--Clauses (i) and (ii) of section 
     954(c)(1)(C) (relating to commodity transactions) are amended 
     to read as follows:
       ``(i) arise out of commodity hedging transactions (as 
     defined in paragraph (4)(A)),
       ``(ii) are active business gains or losses from the sale of 
     commodities, but only if substantially all of the controlled 
     foreign corporation's commodities are property described in 
     paragraph (1), (2), or (8) of section 1221(a), or''.
       (b) Definition and Special Rules.--Subsection (c) of 
     section 954, as amended by this Act, is amended by adding 
     after paragraph (4) the following new paragraph:
       ``(5) Definition and special rules relating to commodity 
     transactions.--
       ``(A) Commodity hedging transactions.--For purposes of 
     paragraph (1)(C)(i), the term `commodity hedging transaction' 
     means any transaction with respect to a commodity if such 
     transaction--
       ``(i) is a hedging transaction as defined in section 
     1221(b)(2), determined--

       ``(I) without regard to subparagraph (A)(ii) thereof,
       ``(II) by applying subparagraph (A)(i) thereof by 
     substituting `ordinary property or property described in 
     section 1231(b)' for `ordinary property', and
       ``(III) by substituting `controlled foreign corporation' 
     for `taxpayer' each place it appears, and

       ``(ii) is clearly identified as such in accordance with 
     section 1221(a)(7).
       ``(B) Treatment of dealer activities under paragraph 
     (1)(C).--Commodities with respect to which gains and losses 
     are not taken into account under paragraph (2)(C) in 
     computing a controlled foreign corporation's foreign personal 
     holding company income shall not be taken into account in 
     applying the substantially all test under paragraph 
     (1)(C)(ii) to such corporation.
       ``(C) Regulations.--The Secretary shall prescribe such 
     regulations as are appropriate to carry out the purposes of 
     paragraph (1)(C) in the case of transactions involving 
     related parties.''.
       (c) Modification of Exception for Dealers.--Clause (i) of 
     section 954(c)(2)(C) is amended by inserting ``and 
     transactions involving physical settlement'' after 
     ``(including hedging transactions''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after December 31, 
     2004.

     SEC. 415. MODIFICATIONS TO TREATMENT OF AIRCRAFT LEASING AND 
                   SHIPPING INCOME.

       (a) Elimination of Foreign Base Company Shipping Income.--
     Section 954 (relating to foreign base company income) is 
     amended--
       (1) by striking paragraph (4) of subsection (a) (relating 
     to foreign base company shipping income), and
       (2) by striking subsection (f) (relating to foreign base 
     company shipping income).
       (b) Safe Harbor for Certain Leasing Activities.--
     Subparagraph (A) of section 954(c)(2) is amended by adding at 
     the end the following new sentence: ``For purposes of the 
     preceding sentence, rents derived from leasing an aircraft or 
     vessel in foreign commerce shall not fail to be treated as 
     derived in the active conduct of a trade or business if, as 
     determined under regulations prescribed by the Secretary, the 
     active leasing expenses are not less than 10 percent of the 
     profit on the lease.''.
       (c) Conforming Amendments.--
       (1) Section 952(c)(1)(B)(iii) is amended by striking 
     subclause (I) and redesignating subclauses (II) through (VI) 
     as subclauses (I) through (V), respectively.
       (2) Subsection (b) of section 954 is amended--
       (A) by striking ``the foreign base company shipping 
     income,'' in paragraph (5),
       (B) by striking paragraphs (6) and (7), and
       (C) by redesignating paragraph (8) as paragraph (6).
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 416. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR 
                   ACTIVE FINANCING.

       (a) In General.--Section 954(h)(3) is amended by adding at 
     the end the following:

[[Page H8436]]

       ``(E) Direct conduct of activities.--For purposes of 
     subparagraph (A)(ii)(II), an activity shall be treated as 
     conducted directly by an eligible controlled foreign 
     corporation or qualified business unit in its home country if 
     the activity is performed by employees of a related person 
     and--
       ``(i) the related person is an eligible controlled foreign 
     corporation the home country of which is the same as the home 
     country of the corporation or unit to which subparagraph 
     (A)(ii)(II) is being applied,
       ``(ii) the activity is performed in the home country of the 
     related person, and
       ``(iii) the related person is compensated on an arm's-
     length basis for the performance of the activity by its 
     employees and such compensation is treated as earned by such 
     person in its home country for purposes of the home country's 
     tax laws.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of such foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of such foreign corporations end.

     SEC. 417. 10-YEAR FOREIGN TAX CREDIT CARRYOVER; 1-YEAR 
                   FOREIGN TAX CREDIT CARRYBACK.

       (a) General Rule.--Section 904(c) (relating to carryback 
     and carryover of excess tax paid) is amended--
       (1) by striking ``in the second preceding taxable year,'', 
     and
       (2) by striking ``, and in the first, second, third, 
     fourth, or fifth'' and inserting ``and in any of the first 
     10''.
       (b) Excess Extraction Taxes.--Paragraph (1) of section 
     907(f) is amended--
       (1) by striking ``in the second preceding taxable year,'',
       (2) by striking ``, and in the first, second, third, 
     fourth, or fifth'' and inserting ``and in any of the first 
     10'', and
       (3) by striking the last sentence.
       (c) Effective Date.--
       (1) Carryback.--The amendments made by subsections (a)(1) 
     and (b)(1) shall apply to excess foreign taxes arising in 
     taxable years beginning after the date of the enactment of 
     this Act.
       (2) Carryover.--The amendments made by subsections (a)(2) 
     and (b)(2) shall apply to excess foreign taxes which (without 
     regard to the amendments made by this section) may be carried 
     to any taxable year ending after the date of the enactment of 
     this Act.

     SEC. 418. MODIFICATION OF THE TREATMENT OF CERTAIN REIT 
                   DISTRIBUTIONS ATTRIBUTABLE TO GAIN FROM SALES 
                   OR EXCHANGES OF UNITED STATES REAL PROPERTY 
                   INTERESTS.

       (a) In General.--Paragraph (1) of section 897(h) (relating 
     to look-through of distributions) is amended by adding at the 
     end the following new sentence: ``Notwithstanding the 
     preceding sentence, any distribution by a REIT with respect 
     to any class of stock which is regularly traded on an 
     established securities market located in the United States 
     shall not be treated as gain recognized from the sale or 
     exchange of a United States real property interest if the 
     shareholder did not own more than 5 percent of such class of 
     stock at any time during the taxable year.''.
       (b) Conforming Amendment.--Paragraph (3) of section 857(b) 
     (relating to capital gains) is amended by adding at the end 
     the following new subparagraph:
       ``(F) Certain distributions.--In the case of a shareholder 
     of a real estate investment trust to whom section 897 does 
     not apply by reason of the second sentence of section 
     897(h)(1), the amount which would be included in computing 
     long-term capital gains for such shareholder under 
     subparagraph (B) or (D) (without regard to this 
     subparagraph)--
       ``(i) shall not be included in computing such shareholder's 
     long-term capital gains, and
       ``(ii) shall be included in such shareholder's gross income 
     as a dividend from the real estate investment trust.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 419. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON 
                   HORSE RACES AND DOG RACES FROM GROSS INCOME OF 
                   NONRESIDENT ALIEN INDIVIDUALS.

       (a) In General.--Subsection (b) of section 872 (relating to 
     exclusions) is amended by redesignating paragraphs (5), (6), 
     and (7) as paragraphs (6), (7), and (8), respectively, and 
     inserting after paragraph (4) the following new paragraph:
       ``(5) Income derived from wagering transactions in certain 
     parimutuel pools.--Gross income derived by a nonresident 
     alien individual from a legal wagering transaction initiated 
     outside the United States in a parimutuel pool with respect 
     to a live horse race or dog race in the United States.''.
       (b) Conforming Amendment.--Section 883(a)(4) is amended by 
     striking ``(5), (6), and (7)'' and inserting ``(6), (7), and 
     (8)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to wagers made after the date of the enactment of 
     this Act.

     SEC. 420. LIMITATION OF WITHHOLDING TAX FOR PUERTO RICO 
                   CORPORATIONS.

       (a) In General.--Subsection (b) of section 881 is amended 
     by redesignating paragraph (2) as paragraph (3) and by 
     inserting after paragraph (1) the following new paragraph:
       ``(2) Commonwealth of puerto rico.--
       ``(A) In general.--If dividends are received during a 
     taxable year by a corporation--
       ``(i) created or organized in, or under the law of, the 
     Commonwealth of Puerto Rico, and
       ``(ii) with respect to which the requirements of 
     subparagraphs (A), (B), and (C) of paragraph (1) are met for 
     the taxable year,
     subsection (a) shall be applied for such taxable year by 
     substituting `10 percent' for `30 percent'.
       ``(B) Applicability.--If, on or after the date of the 
     enactment of this paragraph, an increase in the rate of the 
     Commonwealth of Puerto Rico's withholding tax which is 
     generally applicable to dividends paid to United States 
     corporations not engaged in a trade or business in the 
     Commonwealth to a rate greater than 10 percent takes effect, 
     this paragraph shall not apply to dividends received on or 
     after the effective date of the increase.''.
       (b) Withholding.--Subsection (c) of section 1442 (relating 
     to withholding of tax on foreign corporations) is amended--
       (1) by striking ``For purposes'' and inserting the 
     following:
       ``(1) Guam, american samoa, the northern mariana islands, 
     and the virgin islands.--For purposes'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Commonwealth of puerto rico.--
       ``(A) In general.--If dividends are received during a 
     taxable year by a corporation--
       ``(i) created or organized in, or under the law of, the 
     Commonwealth of Puerto Rico, and
       ``(ii) with respect to which the requirements of 
     subparagraphs (A), (B), and (C) of section 881(b)(1) are met 
     for the taxable year,
     subsection (a) shall be applied for such taxable year by 
     substituting `10 percent' for `30 percent'.
       ``(B) Applicability.--If, on or after the date of the 
     enactment of this paragraph, an increase in the rate of the 
     Commonwealth of Puerto Rico's withholding tax which is 
     generally applicable to dividends paid to United States 
     corporations not engaged in a trade or business in the 
     Commonwealth to a rate greater than 10 percent takes effect, 
     this paragraph shall not apply to dividends received on or 
     after the effective date of the increase.''.
       (c) Conforming Amendments.--
       (1) Subsection (b) of section 881 is amended by striking 
     ``Guam and Virgin Islands Corporations'' in the heading and 
     inserting ``Possessions''.
       (2) Paragraph (1) of section 881(b) is amended by striking 
     ``In general'' in the heading and inserting ``Guam, american 
     samoa, the northern mariana islands, and the virgin 
     islands''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to dividends paid after the date of the enactment 
     of this Act.

     SEC. 421. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

       (a) In General.--
       (1) Subsection (a) of section 59 is amended by striking 
     paragraph (2) and by redesignating paragraphs (3) and (4) as 
     paragraphs (2) and (3), respectively.
       (2) Section 53(d)(1)(B)(i)(II) is amended by striking ``and 
     if section 59(a)(2) did not apply''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 422. INCENTIVES TO REINVEST FOREIGN EARNINGS IN UNITED 
                   STATES.

       (a) In General.--Subpart F of part III of subchapter N of 
     chapter 1 (relating to controlled foreign corporations) is 
     amended by adding at the end the following new section:

     ``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.

       ``(a) Deduction.--
       ``(1) In general.--In the case of a corporation which is a 
     United States shareholder and for which the election under 
     this section is in effect for the taxable year, there shall 
     be allowed as a deduction an amount equal to 85 percent of 
     the cash dividends which are received during such taxable 
     year by such shareholder from controlled foreign 
     corporations.
       ``(2) Dividends paid indirectly from controlled foreign 
     corporations.--If, within the taxable year for which the 
     election under this section is in effect, a United States 
     shareholder receives a cash distribution from a controlled 
     foreign corporation which is excluded from gross income under 
     section 959(a), such distribution shall be treated for 
     purposes of this section as a cash dividend to the extent of 
     any amount included in income by such United States 
     shareholder under section 951(a)(1)(A) as a result of any 
     cash dividend during such taxable year to--
       ``(A) such controlled foreign corporation from another 
     controlled foreign corporation that is in a chain of 
     ownership described in section 958(a), or
       ``(B) any other controlled foreign corporation in such 
     chain of ownership, but only to the extent of cash 
     distributions described in section 959(b) which are made 
     during such taxable year to the controlled foreign 
     corporation from which such United States shareholder 
     received such distribution.
       ``(b) Limitations.--
       ``(1) In general.--The amount of dividends taken into 
     account under subsection (a) shall not exceed the greater 
     of--
       ``(A) $500,000,000,
       ``(B) the amount shown on the applicable financial 
     statement as earnings permanently reinvested outside the 
     United States, or
       ``(C) in the case of an applicable financial statement 
     which fails to show a specific amount of earnings permanently 
     reinvested outside the United States and which shows a 
     specific amount of tax liability attributable to such 
     earnings, the amount equal to the amount of such liability 
     divided by 0.35.

     The amounts described in subparagraphs (B) and (C) shall be 
     treated as being zero if there is no such statement or such 
     statement fails to show a specific amount of such earnings or 
     liability, as the case may be.
       ``(2) Dividends must be extraordinary.--The amount of 
     dividends taken into account

[[Page H8437]]

     under subsection (a) shall not exceed the excess (if any) 
     of--
       ``(A) the dividends received during the taxable year by 
     such shareholder from controlled foreign corporations, over
       ``(B) the annual average for the base period years of--
       ``(i) the dividends received during each base period year 
     by such shareholder from controlled foreign corporations,
       ``(ii) the amounts includible in such shareholder's gross 
     income for each base period year under section 951(a)(1)(B) 
     with respect to controlled foreign corporations, and
       ``(iii) the amounts that would have been included for each 
     base period year but for section 959(a) with respect to 
     controlled foreign corporations.

     The amount taken into account under clause (iii) for any base 
     period year shall not include any amount which is not 
     includible in gross income by reason of an amount described 
     in clause (ii) with respect to a prior taxable year. Amounts 
     described in subparagraph (B) for any base period year shall 
     be such amounts as shown on the most recent return filed for 
     such year; except that amended returns filed after June 30, 
     2003, shall not be taken into account.
       ``(3) Reduction of benefit if increase in related party 
     indebtedness.--The amount of dividends which would (but for 
     this paragraph) be taken into account under subsection (a) 
     shall be reduced by the excess (if any) of--
       ``(A) the amount of indebtedness of the controlled foreign 
     corporation to any related person (as defined in section 
     954(d)(3)) as of the close of the taxable year for which the 
     election under this section is in effect, over
       ``(B) the amount of indebtedness of the controlled foreign 
     corporation to any related person (as so defined) as of the 
     close of October 3, 2004.

     All controlled foreign corporations with respect to which the 
     taxpayer is a United States shareholder shall be treated as 1 
     controlled foreign corporation for purposes of this 
     paragraph.
       ``(4) Requirement to invest in united states.--Subsection 
     (a) shall not apply to any dividend received by a United 
     States shareholder unless the amount of the dividend is 
     invested in the United States pursuant to a domestic 
     reinvestment plan which--
       ``(A) is approved by the taxpayer's president, chief 
     executive officer, or comparable official before the payment 
     of such dividend and subsequently approved by the taxpayer's 
     board of directors, management committee, executive 
     committee, or similar body, and
       ``(B) provides for the reinvestment of such dividend in the 
     United States (other than as payment for executive 
     compensation), including as a source for the funding of 
     worker hiring and training, infrastructure, research and 
     development, capital investments, or the financial 
     stabilization of the corporation for the purposes of job 
     retention or creation.
       ``(c) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Applicable financial statement.--The term `applicable 
     financial statement' means, with respect to a United States 
     shareholder, the most recently audited financial statement 
     (including notes and other documents which accompany such 
     statement) which includes such shareholder--
       ``(A) which is certified on or before June 30, 2003, as 
     being prepared in accordance with generally accepted 
     accounting principles, and
       ``(B) which is used for the purposes of a statement or 
     report--
       ``(i) to creditors,
       ``(ii) to shareholders, or
       ``(iii) for any other substantial nontax purpose.

     In the case of a corporation required to file a financial 
     statement with the Securities and Exchange Commission, such 
     term means the most recent such statement filed on or before 
     June 30, 2003.
       ``(2) Base period years.--
       ``(A) In general.--The base period years are the 3 taxable 
     years--
       ``(i) which are among the 5 most recent taxable years 
     ending on or before June 30, 2003, and
       ``(ii) which are determined by disregarding--

       ``(I) 1 taxable year for which the sum of the amounts 
     described in clauses (i), (ii), and (iii) of subsection 
     (b)(2)(B) is the largest, and
       ``(II) 1 taxable year for which such sum is the smallest.

       ``(B) Shorter period.--If the taxpayer has fewer than 5 
     taxable years ending on or before June 30, 2003, then in lieu 
     of applying subparagraph (A), the base period years shall 
     include all the taxable years of the taxpayer ending on or 
     before June 30, 2003.
       ``(C) Mergers, acquisitions, etc.--
       ``(i) In general.--Rules similar to the rules of 
     subparagraphs (A) and (B) of section 41(f)(3) shall apply for 
     purposes of this paragraph.
       ``(ii) Spin-offs, etc.--If there is a distribution to which 
     section 355 (or so much of section 356 as relates to section 
     355) applies during the 5-year period referred to in 
     subparagraph (A)(i) and the controlled corporation (within 
     the meaning of section 355) is a United States shareholder--

       ``(I) the controlled corporation shall be treated as being 
     in existence during the period that the distributing 
     corporation (within the meaning of section 355) is in 
     existence, and
       ``(II) for purposes of applying subsection (b)(2) to the 
     controlled corporation and the distributing corporation, 
     amounts described in subsection (b)(2)(B) which are received 
     or includible by the distributing corporation or controlled 
     corporation (as the case may be) before the distribution 
     referred to in subclause (I) from a controlled foreign 
     corporation shall be allocated between such corporations in 
     proportion to their respective interests as United States 
     shareholders of such controlled foreign corporation 
     immediately after such distribution.

     Subclause (II) shall not apply if neither the controlled 
     corporation nor the distributing corporation is a United 
     States shareholder of such controlled foreign corporation 
     immediately after such distribution.
       ``(3) Dividend.--The term `dividend' shall not include 
     amounts includible in gross income as a dividend under 
     section 78, 367, or 1248. In the case of a liquidation under 
     section 332 to which section 367(b) applies, the preceding 
     sentence shall not apply to the extent the United States 
     shareholder actually receives cash as part of the 
     liquidation.
       ``(4) Coordination with dividends received deduction.--No 
     deduction shall be allowed under section 243 or 245 for any 
     dividend for which a deduction is allowed under this section.
       ``(5) Controlled groups.--
       ``(A) In general.--All United States shareholders which are 
     members of an affiliated group filing a consolidated return 
     under section 1501 shall be treated as one United States 
     shareholder.
       ``(B) Application of $500,000,000 limit.--All corporations 
     which are treated as a single employer under section 52(a) 
     shall be limited to one $500,000,000 amount in subsection 
     (b)(1)(A), and such amount shall be divided among such 
     corporations under regulations prescribed by the Secretary.
       ``(C) Permanently reinvested earnings.--If a financial 
     statement is an applicable financial statement for more than 
     1 United States shareholder, the amount applicable under 
     subparagraph (B) or (C) of subsection (b)(1) shall be divided 
     among such shareholders under regulations prescribed by the 
     Secretary.
       ``(d) Denial of Foreign Tax Credit; Denial of Certain 
     Expenses.--
       ``(1) Foreign tax credit.--No credit shall be allowed under 
     section 901 for any taxes paid or accrued (or treated as paid 
     or accrued) with respect to the deductible portion of--
       ``(A) any dividend, or
       ``(B) any amount described in subsection (a)(2) which is 
     included in income under section 951(a)(1)(A).

     No deduction shall be allowed under this chapter for any tax 
     for which credit is not allowable by reason of the preceding 
     sentence.
       ``(2) Expenses.--No deduction shall be allowed for expenses 
     properly allocated and apportioned to the deductible portion 
     described in paragraph (1).
       ``(3) Deductible portion.--For purposes of paragraph (1), 
     unless the taxpayer otherwise specifies, the deductible 
     portion of any dividend or other amount is the amount which 
     bears the same ratio to the amount of such dividend or other 
     amount as the amount allowed as a deduction under subsection 
     (a) for the taxable year bears to the amount described in 
     subsection (b)(2)(A) for such year.
       ``(e) Increase in Tax on Included Amounts Not Reduced by 
     Credits, Etc.--
       ``(1) In general.--Any tax under this chapter by reason of 
     nondeductible CFC dividends shall not be treated as tax 
     imposed by this chapter for purposes of determining--
       ``(A) the amount of any credit allowable under this 
     chapter, or
       ``(B) the amount of the tax imposed by section 55.

     Subparagraph (A) shall not apply to the credit under section 
     53 or to the credit under section 27(a) with respect to taxes 
     attributable to such dividends.
       ``(2) Limitation on reduction in taxable income, etc.--
       ``(A) In general.--The taxable income of any United States 
     shareholder for any taxable year shall in no event be less 
     than the amount of nondeductible CFC dividends received 
     during such year.
       ``(B) Coordination with section 172.--The nondeductible CFC 
     dividends for any taxable year shall not be taken into 
     account--
       ``(i) in determining under section 172 the amount of any 
     net operating loss for such taxable year, and
       ``(ii) in determining taxable income for such taxable year 
     for purposes of the 2nd sentence of section 172(b)(2).
       ``(3) Nondeductible cfc dividends.--For purposes of this 
     subsection, the term `nondeductible CFC dividends' means the 
     excess of the amount of dividends taken into account under 
     subsection (a) over the deduction allowed under subsection 
     (a) for such dividends.
       ``(f) Election.--The taxpayer may elect to apply this 
     section to--
       ``(1) the taxpayer's last taxable year which begins before 
     the date of the enactment of this section, or
       ``(2) the taxpayer's first taxable year which begins during 
     the 1-year period beginning on such date.
     Such election may be made for a taxable year only if made 
     before the due date (including extensions) for filing the 
     return of tax for such taxable year.''
       (b) Alternative Minimum Tax.--Subparagraph (C) of section 
     56(g)(4) is amended by inserting after clause (v) the 
     following new clause:
       ``(vi) Special rule for certain distributions from 
     controlled foreign corporations.--Clause (i) shall not apply 
     to any deduction allowable under section 965.''.
       (c) Clerical Amendment.--The table of sections for subpart 
     F of part III of subchapter N of chapter 1 is amended by 
     adding at the end the following new item:

``Sec. 965. Temporary dividends received deduction.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending on or after the date of 
     the enactment of this Act.

[[Page H8438]]

     SEC. 423. DELAY IN EFFECTIVE DATE OF FINAL REGULATIONS 
                   GOVERNING EXCLUSION OF INCOME FROM 
                   INTERNATIONAL OPERATION OF SHIPS OR AIRCRAFT.

       Notwithstanding the provisions of Treasury regulation 
     Sec. 1.883-5, the final regulations issued by the Secretary 
     of the Treasury relating to income derived by foreign 
     corporations from the international operation of ships or 
     aircraft (Treasury regulations Sec. 1.883-1 through 
     Sec. 1.883-5) shall apply to taxable years of a foreign 
     corporation seeking qualified foreign corporation status 
     beginning after September 24, 2004.

     SEC. 424. STUDY OF EARNINGS STRIPPING PROVISIONS.

       (a) In General.--The Secretary of the Treasury or the 
     Secretary's delegate shall conduct a study of the 
     effectiveness of the provisions of the Internal Revenue Code 
     of 1986 applicable to earnings stripping, including a study 
     of--
       (1) the effectiveness of section 163(j) of such Code in 
     preventing the shifting of income outside the United States,
       (2) whether any deficiencies of such provisions place 
     United States-based businesses at a competitive disadvantage 
     relative to foreign-based businesses,
       (3) the impact of earnings stripping activities on the 
     United States tax base,
       (4) whether laws of foreign countries facilitate stripping 
     of earnings out of the United States, and
       (5) whether changes to the earning stripping rules would 
     affect jobs in the United States.
       (b) Report.--Not later than June 30, 2005, the Secretary 
     shall submit to the Congress a report of the study conducted 
     under this section, including specific recommendations as to 
     how to improve the provisions of such Code applicable to 
     earnings stripping.
       TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES

     SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES IN 
                   LIEU OF STATE AND LOCAL INCOME TAXES.

       (a) In General.--Subsection (b) of section 164 (relating to 
     definitions and special rules) is amended by adding at the 
     end the following:
       ``(5) General sales taxes.--For purposes of subsection 
     (a)--
       ``(A) Election to deduct state and local sales taxes in 
     lieu of state and local income taxes.--
       ``(i) In general.--At the election of the taxpayer for the 
     taxable year, subsection (a) shall be applied--

       ``(I) without regard to the reference to State and local 
     income taxes, and
       ``(II) as if State and local general sales taxes were 
     referred to in a paragraph thereof.

       ``(B) Definition of general sales tax.--The term `general 
     sales tax' means a tax imposed at one rate with respect to 
     the sale at retail of a broad range of classes of items.
       ``(C) Special rules for food, etc.--In the case of items of 
     food, clothing, medical supplies, and motor vehicles--
       ``(i) the fact that the tax does not apply with respect to 
     some or all of such items shall not be taken into account in 
     determining whether the tax applies with respect to a broad 
     range of classes of items, and
       ``(ii) the fact that the rate of tax applicable with 
     respect to some or all of such items is lower than the 
     general rate of tax shall not be taken into account in 
     determining whether the tax is imposed at one rate.
       ``(D) Items taxed at different rates.--Except in the case 
     of a lower rate of tax applicable with respect to an item 
     described in subparagraph (C), no deduction shall be allowed 
     under this paragraph for any general sales tax imposed with 
     respect to an item at a rate other than the general rate of 
     tax.
       ``(E) Compensating use taxes.--A compensating use tax with 
     respect to an item shall be treated as a general sales tax. 
     For purposes of the preceding sentence, the term 
     `compensating use tax' means, with respect to any item, a tax 
     which--
       ``(i) is imposed on the use, storage, or consumption of 
     such item, and
       ``(ii) is complementary to a general sales tax, but only if 
     a deduction is allowable under this paragraph with respect to 
     items sold at retail in the taxing jurisdiction which are 
     similar to such item.
       ``(F) Special rule for motor vehicles.--In the case of 
     motor vehicles, if the rate of tax exceeds the general rate, 
     such excess shall be disregarded and the general rate shall 
     be treated as the rate of tax.
       ``(G) Separately stated general sales taxes.--If the amount 
     of any general sales tax is separately stated, then, to the 
     extent that the amount so stated is paid by the consumer 
     (other than in connection with the consumer's trade or 
     business) to the seller, such amount shall be treated as a 
     tax imposed on, and paid by, such consumer.
       ``(H) Amount of deduction may be determined under tables.--
       ``(i) In general.--At the election of the taxpayer for the 
     taxable year, the amount of the deduction allowed under this 
     paragraph for such year shall be--

       ``(I) the amount determined under this paragraph (without 
     regard to this subparagraph) with respect to motor vehicles, 
     boats, and other items specified by the Secretary, and
       ``(II) the amount determined under tables prescribed by the 
     Secretary with respect to items to which subclause (I) does 
     not apply.

       ``(ii) Requirements for tables.--The tables prescribed 
     under clause (i)--

       ``(I) shall reflect the provisions of this paragraph,
       ``(II) shall be based on the average consumption by 
     taxpayers on a State-by-State basis (as determined by the 
     Secretary) of items to which clause (i)(I) does not apply, 
     taking into account filing status, number of dependents, 
     adjusted gross income, and rates of State and local general 
     sales taxation, and
       ``(III) need only be determined with respect to adjusted 
     gross incomes up to the applicable amount (as determined 
     under section 68(b)).

       ``(I) Application of paragraph.--This paragraph shall apply 
     to taxable years beginning after December 31, 2003, and 
     before January 1, 2006.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.
              TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM

     SEC. 601. SHORT TITLE.

       This title may be cited as the ``Fair and Equitable Tobacco 
     Reform Act of 2004''.
  Subtitle A--Termination of Federal Tobacco Quota and Price Support 
                                Programs

     SEC. 611. TERMINATION OF TOBACCO QUOTA PROGRAM AND RELATED 
                   PROVISIONS.

       (a) Marketing Quotas.--Part I of subtitle B of title III of 
     the Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et 
     seq.) is repealed.
       (b) Tobacco Inspections.--Section 213 of the Tobacco 
     Adjustment Act of 1983 (7 U.S.C. 511r) is repealed.
       (c) Tobacco Control.--The Act of April 25, 1936 (commonly 
     known as the Tobacco Control Act; 7 U.S.C. 515 et seq.), is 
     repealed.
       (d) Processing Tax.--Section 9(b) of the Agricultural 
     Adjustment Act (7 U.S.C. 609(b)), reenacted with amendments 
     by the Agricultural Marketing Agreement Act of 1937, is 
     amended--
       (1) in paragraph (2), by striking ``tobacco,''; and
       (2) in paragraph (6)(B)(i), by striking ``, or, in the case 
     of tobacco, is less than the fair exchange value by not more 
     than 10 per centum,''.
       (e) Declaration of Policy.--Section 2 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1282) is amended by striking 
     ``tobacco,''.
       (f) Definitions.--Section 301(b) of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1301(b)) is amended--
       (1) in paragraph (3)--
       (A) by striking subparagraph (C); and
       (B) by redesignating subparagraph (D) as subparagraph (C);
       (2) in paragraph (6)(A), by striking ``tobacco,'';
       (3) in paragraph (10)--
       (A) by striking subparagraph (B); and
       (B) by redesignating subparagraph (C) as subparagraph (B);
       (4) in paragraph (11)(B), by striking ``and tobacco'';
       (5) in paragraph (12), by striking ``tobacco,'';
       (6) in paragraph (14)--
       (A) in subparagraph (A), by striking ``(A)''; and
       (B) by striking subparagraphs (B), (C), and (D);
       (7) by striking paragraph (15);
       (8) in paragraph (16)--
       (A) by striking subparagraph (B); and
       (B) by redesignating subparagraph (C) as subparagraph (B);
       (9) by striking paragraph (17); and
       (10) by redesignating paragraph (16) as paragraph (15).
       (g) Parity Payments.--Section 303 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1303) is amended in the 
     first sentence by striking ``rice, or tobacco,'' and 
     inserting ``or rice,''.
       (h) Administrative Provisions.--Section 361 of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) is 
     amended by striking ``tobacco,''.
       (i) Adjustment of Quotas.--Section 371 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1371) is amended--
       (1) in the first sentence of subsection (a), by striking 
     ``rice, or tobacco'' and inserting ``or rice''; and
       (2) in the first sentence of subsection (b), by striking 
     ``rice, or tobacco'' and inserting ``or rice''.
       (j) Reports and Records.--Section 373 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1373) is amended--
       (1) by striking ``rice, or tobacco'' each place it appears 
     in subsections (a) and (b) and inserting ``or rice''; and
       (2) in subsection (a)--
       (A) in the first sentence, by striking ``all persons 
     engaged in the business of redrying, prizing, or stemming 
     tobacco for producers,''; and
       (B) in the last sentence, by striking ``$500;'' and all 
     that follows through the period at the end of the sentence 
     and inserting ``$500.''.
       (k) Regulations.--Section 375 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1375) is amended--
       (1) in subsection (a), by striking ``peanuts, or tobacco'' 
     and inserting ``or peanuts''; and
       (2) by striking subsection (c).
       (l) Eminent Domain.--Section 378 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1378) is amended--
       (1) in the first sentence of subsection (c), by striking 
     ``cotton, and tobacco'' and inserting ``and cotton''; and
       (2) by striking subsections (d), (e), and (f).
       (m) Burley Tobacco Farm Reconstitution.--Section 379 of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is 
     amended--
       (1) in subsection (a)--
       (A) by striking ``(a)''; and
       (B) in paragraph (6), by striking ``, but this clause (6) 
     shall not be applicable in the case of burley tobacco''; and
       (2) by striking subsections (b) and (c).
       (n) Acreage-Poundage Quotas.--Section 4 of the Act of April 
     16, 1955 (Public Law 89-12; 7 U.S.C. 1314c note), is 
     repealed.
       (o) Burley Tobacco Acreage Allotments.--The Act of July 12, 
     1952 (7 U.S.C. 1315), is repealed.
       (p) Transfer of Allotments.--Section 703 of the Food and 
     Agriculture Act of 1965 (7 U.S.C. 1316) is repealed.

[[Page H8439]]

       (q) Advance Recourse Loans.--Section 13(a)(2)(B) of the 
     Food Security Improvements Act of 1986 (7 U.S.C. 1433c-
     1(a)(2)(B)) is amended by striking ``tobacco and''.
       (r) Tobacco Field Measurement.--Section 1112 of the Omnibus 
     Budget Reconciliation Act of 1987 (Public Law 100-203; 101 
     Stat. 1330-8) is amended by striking subsection (c).
       (s) Burley Tobacco Import Review.--Section 3 of Public Law 
     98-59 (7 U.S.C. 625) is repealed.

     SEC. 612. TERMINATION OF TOBACCO PRICE SUPPORT PROGRAM AND 
                   RELATED PROVISIONS.

       (a) Termination of Tobacco Price Support and No Net Cost 
     Provisions.--Sections 106, 106A, and 106B of the Agricultural 
     Act of 1949 (7 U.S.C. 1445, 1445-1, 1445-2) are repealed.
       (b) Parity Price Support.--Section 101 of the Agricultural 
     Act of 1949 (7 U.S.C. 1441) is amended--
       (1) in the first sentence of subsection (a), by striking 
     ``tobacco (except as otherwise provided herein), corn,'' and 
     inserting ``corn'';
       (2) by striking subsections (c), (g), (h), and (i);
       (3) in subsection (d)(3)--
       (A) by striking ``, except tobacco,''; and
       (B) by striking ``and no price support shall be made 
     available for any crop of tobacco for which marketing quotas 
     have been disapproved by producers;''; and
       (4) by redesignating subsections (d) and (e) as subsections 
     (c) and (d), respectively.
       (c) Definition of Basic Agricultural Commodity.--Section 
     408(c) of the Agricultural Act of 1949 (7 U.S.C. 1428(c)) is 
     amended by striking ``tobacco,''.
       (d) Powers of Commodity Credit Corporation.--Section 5 of 
     the Commodity Credit Corporation Charter Act (15 U.S.C. 714c) 
     is amended by inserting ``(other than tobacco)'' after 
     ``agricultural commodities'' each place it appears.

     SEC. 613. CONFORMING AMENDMENTS.

       Section 320B(c)(1) of the Agricultural Adjustment Act of 
     1938 (7 U.S.C. 1314h(c)(1)) is amended--
       (1) by inserting ``(A)'' after ``(1)'';
       (2) by striking ``by'' at the end and inserting ``or''; and
       (3) by adding at the end the following:
       ``(B) in the case of the 2004 marketing year, the price 
     support rate for the kind of tobacco involved in effect under 
     section 106 of the Agricultural Act of 1949 (7 U.S.C. 1445) 
     at the time of the violation; by''.

     SEC. 614. CONTINUATION OF LIABILITY FOR 2004 AND EARLIER CROP 
                   YEARS.

       The amendments made by this subtitle shall not affect the 
     liability of any person under any provision of law so amended 
     with respect to the 2004 or an earlier crop of each kind of 
     tobacco.
    Subtitle B--Transitional Payments to Tobacco Quota Holders and 
                          Producers of Tobacco

     SEC. 621. DEFINITIONS.

       In this subtitle and subtitle C:
       (1) Agricultural act of 1949.--The term ``Agricultural Act 
     of 1949'' means the Agricultural Act of 1949 (7 U.S.C. 1421 
     et seq.), as in effect on the day before the date of the 
     enactment of this title.
       (2) Agricultural adjustment act of 1938.--The term 
     ``Agricultural Adjustment Act of 1938'' means the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1281 et seq.), 
     as in effect on the day before the date of the enactment of 
     this title.
       (3) Considered planted.--The term ``considered planted'' 
     means tobacco that was planted, but failed to be produced as 
     a result of a natural disaster, as determined by the 
     Secretary.
       (4) Contract.--The term ``contract'' means a contract 
     entered into under section 622 or 623.
       (5) Contract payment.--The term ``contract payment'' means 
     a payment made under section 622 or 623 pursuant to a 
     contract.
       (6) Producer of quota tobacco.--The term ``producer of 
     quota tobacco'' means an owner, operator, landlord, tenant, 
     or sharecropper that shared in the risk of producing tobacco 
     on a farm where tobacco was produced or considered planted 
     pursuant to a tobacco farm poundage quota or farm acreage 
     allotment established under part I of subtitle B of title III 
     of the Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et 
     seq.).
       (7) Quota tobacco.--The term `quota tobacco' means a kind 
     of tobacco that is subject to a farm marketing quota or farm 
     acreage allotment for the 2004 tobacco marketing year under a 
     marketing quota or allotment program established under part I 
     of subtitle B of title III of the Agricultural Adjustment Act 
     of 1938 (7 U.S.C. 1311 et seq.).
       (8) Tobacco.--The term ``tobacco'' means each of the 
     following kinds of tobacco:
       (A) Flue-cured tobacco, comprising types 11, 12, 13, and 
     14.
       (B) Fire-cured tobacco, comprising types 22 and 23.
       (C) Dark air-cured tobacco, comprising types 35 and 36.
       (D) Virginia sun-cured tobacco, comprising type 37.
       (E) Virginia fire-cured tobacco, comprising type 21.
       (F) Burley tobacco, comprising type 31.
       (G) Cigar-filler and cigar-binder tobacco, comprising types 
     42, 43, 44, 53, 54, and 55.
       (9) Tobacco quota holder.--The term ``tobacco quota 
     holder'' means a person that was an owner of a farm, as of 
     the date of enactment of this title, for which a basic 
     tobacco farm marketing quota or farm acreage allotment for 
     quota tobacco was established for the 2004 tobacco marketing 
     year.
       (10) Tobacco trust fund.--The term ``Tobacco Trust Fund'' 
     means the Tobacco Trust Fund established under section 626.
       (11) Secretary.--The term ``Secretary'' means the Secretary 
     of Agriculture.

     SEC. 622. CONTRACT PAYMENTS TO TOBACCO QUOTA HOLDERS.

       (a) Contract Offered.--The Secretary shall offer to enter 
     into a contract with each tobacco quota holder under which 
     the tobacco quota holder shall be entitled to receive 
     payments under this section in exchange for the termination 
     of tobacco marketing quotas and related price support under 
     the amendments made by sections 611 and 612. The contract 
     payments shall constitute full and fair consideration for the 
     termination of such tobacco marketing quotas and related 
     price support.
       (b) Eligibility.--To be eligible to enter into a contract 
     to receive a contract payment under this section, a person 
     shall submit to the Secretary an application containing such 
     information as the Secretary may require to demonstrate to 
     the satisfaction of the Secretary that the person is a 
     tobacco quota holder. The application shall be submitted 
     within such time, in such form, and in such manner as the 
     Secretary may require.
       (c) Base Quota Level.--
       (1) Establishment.--The Secretary shall establish a base 
     quota level applicable to each tobacco quota holder 
     identified under subsection (b).
       (2) Poundage quotas.--Subject to adjustment under 
     subsection (d), for each kind of tobacco for which the 
     marketing quota is expressed in pounds, the base quota level 
     for each tobacco quota holder shall be equal to the basic 
     quota for quota tobacco established for the 2002 tobacco 
     marketing year under a marketing quota program established 
     under part I of subtitle B of title III of the Agriculture 
     Adjustment Act of 1938 on the farm owned by the tobacco quota 
     holder.
       (3) Marketing quotas other than poundage quotas.--Subject 
     to adjustment under subsection (d), for each kind of tobacco 
     for which there is marketing quota or allotment on an acreage 
     basis, the base quota level for each tobacco quota holder 
     shall be the quantity equal to the product obtained by 
     multiplying--
       (A) the basic tobacco farm marketing quota or allotment for 
     the 2002 marketing year established by the Secretary for 
     quota tobacco owned by the tobacco quota holder; by
       (B) the average production yield, per acre, for the period 
     covering the 2001, 2002, and 2003 crop years for that kind of 
     tobacco in the county in which the quota tobacco is located.
       (d) Treatment of Certain Contracts and Agreements.--
       (1) Effect of purchase contract.--If there was an agreement 
     for the purchase of all or part of a farm described in 
     subsection (c) as of the date of the enactment of this title, 
     and the parties to the sale are unable to agree to the 
     disposition of eligibility for contract payments, the 
     Secretary, taking into account any transfer of quota that has 
     been agreed to, shall provide for the equitable division of 
     the contract payments among the parties by adjusting the 
     determination of who is the tobacco quota holder with respect 
     to particular pounds or allotment of the quota.
       (2) Effect of agreement for permanent quota transfer.--If 
     the Secretary determines that there was in existence, as of 
     the day before the date of the enactment of this title, an 
     agreement for the permanent transfer of quota, but that the 
     transfer was not completed by that date, the Secretary shall 
     consider the tobacco quota holder to be the party to the 
     agreement that, as of that date, was the owner of the farm to 
     which the quota was to be transferred.
       (e) Contract Payments.--
       (1) Calculation of total payment amount.--The total amount 
     of contract payments to which an eligible tobacco quota 
     holder is entitled under this section, with respect to a kind 
     of tobacco, shall be equal to the product obtained by 
     multiplying--
       (A) $7.00 per pound; by
       (B) the base quota level of the tobacco quota holder 
     determined under subsection (c) with respect to that kind of 
     tobacco.
       (2) Annual payment.--During each of fiscal years 2005 
     through 2014, the Secretary shall make a contract payment 
     under this section to each eligible tobacco quota holder, 
     with respect to a kind of tobacco, in an amount equal to \1/
     10\ of the amount determined under paragraph (1) for the 
     tobacco quota holder for that kind of tobacco.
       (f) Death of Tobacco Quota Holder.--If a tobacco quota 
     holder who is entitled to contract payments under this 
     section dies and is survived by a spouse or one or more 
     dependents, the right to receive the payments shall transfer 
     to the surviving spouse or, if there is no surviving spouse, 
     to the estate of the tobacco quota holder.

     SEC. 623. CONTRACT PAYMENTS FOR PRODUCERS OF QUOTA TOBACCO.

       (a) Contract Offered.--The Secretary shall offer to enter 
     into a contract with each producer of quota tobacco under 
     which the producer of quota tobacco shall be entitled to 
     receive payments under this section in exchange for the 
     termination of tobacco marketing quotas and related price 
     support under the amendments made by sections 611 and 612. 
     The contract payments shall constitute full and fair 
     consideration for the termination of such tobacco marketing 
     quotas and related price support.
       (b) Eligibility.--
       (1) Application and determination.--To be eligible to enter 
     into a contract to receive a contract payment under this 
     section, a person shall submit to the Secretary an 
     application containing such information as the Secretary may 
     require to demonstrate to the satisfaction of the Secretary 
     that the person is a producer of quota tobacco. The 
     application shall be submitted within such time, in such 
     form, and in such manner as the Secretary may require.
       (2) Effect of Multiple Producers for Same Quota Tobacco.--
     If, on the basis of the applications submitted under 
     paragraph (1) or other information, the Secretary determines 
     that two or more persons are a producer of the same

[[Page H8440]]

     quota tobacco, the Secretary shall provide for an equitable 
     distribution among the persons of the contract payments made 
     under this section with respect to that quota tobacco, based 
     on relative share of such persons in the risk of producing 
     the quota tobacco and such other factors as the Secretary 
     considers appropriate.
       (c) Base Quota Level.--
       (1) Establishment.--The Secretary shall establish a base 
     quota level applicable to each producer of quota tobacco, as 
     determined under this subsection.
       (2) Flue-cured and burley tobacco.--In the case of Flue-
     cured tobacco (types 11, 12, 13, and 14) and Burley tobacco 
     (type 31), the base quota level for each producer of quota 
     tobacco shall be equal to the effective tobacco marketing 
     quota (irrespective of disaster lease and transfers) under 
     part I of subtitle B of title III of the Agriculture 
     Adjustment Act of 1938 for the 2002 marketing year for quota 
     tobacco produced on the farm.
       (3) Other kinds of tobacco.--In the case of each kind of 
     tobacco (other than tobacco covered by paragraph (2)), for 
     the purpose of calculating a contract payment to a producer 
     of quota tobacco, the base quota level for the producer of 
     quota tobacco shall be the quantity obtained by multiplying--
       (A) the basic tobacco farm acreage allotment for the 2002 
     marketing year established by the Secretary for quota tobacco 
     produced on the farm; by
       (B) the average annual yield, per acre, of quota tobacco 
     produced on the farm for the period covering the 2001, 2002, 
     and 2003 crop years.
       (d) Contract Payments.--
       (1) Calculation of total payment amount.--Subject to 
     subsection (b)(2), the total amount of contract payments to 
     which an eligible producer of quota tobacco is entitled under 
     this section, with respect to a kind of tobacco, shall be 
     equal to the product obtained by multiplying--
       (A) subject to paragraph (2), $3.00 per pound; by
       (B) the base quota level of the producer of quota tobacco 
     determined under subsection (c) with respect to that kind of 
     tobacco.
       (2) Annual payment.--During each of fiscal years 2005 
     through 2014, the Secretary shall make a contract payment 
     under this section to each eligible producer of tobacco, with 
     respect to a kind of tobacco, in an amount equal to \1/10\ of 
     the amount determined under paragraph (1) for the producer 
     for that kind of tobacco.
       (3) Variable payment rates.--The rate for payments to a 
     producer of quota tobacco under paragraph (1)(A) shall be 
     equal to--
       (A) in the case of a producer of quota tobacco that 
     produced quota tobacco marketed, or considered planted, under 
     a marketing quota in all three of the 2002, 2003, or 2004 
     tobacco marketing years, the rate prescribed under paragraph 
     (1)(A);
       (B) in the case of a producer of quota tobacco that 
     produced quota tobacco marketed, or considered planted, under 
     a marketing quota in only two of those tobacco marketing 
     years, \2/3\ of the rate prescribed under paragraph 
     (1)(A);
       (C) in the case of a producer of quota tobacco that 
     produced quota tobacco marketed, or considered planted, under 
     a marketing quota in only one of those tobacco marketing 
     years, \1/3\ of the rate prescribed under paragraph (1)(A).
       (e) Death of Tobacco Producer.--If a producer of quota 
     tobacco who is entitled to contract payments under this 
     section dies and is survived by a spouse or one or more 
     dependents, the right to receive the contract payments shall 
     transfer to the surviving spouse or, if there is no surviving 
     spouse, to the estate of the producer.

     SEC. 624. ADMINISTRATION.

       (a) Time for Payment of Contract Payments.--Contract 
     payments required to be made for a fiscal year shall be made 
     by the Secretary as soon as practicable.
       (b) Use of County Committees to Resolve Disputes.--Any 
     dispute regarding the eligibility of a person to enter into a 
     contract or to receive contract payments, and any dispute 
     regarding the amount of a contract payment, may be appealed 
     to the county committee established under section 8 of the 
     Soil Conservation and Domestic Allotment Act (16 U.S.C. 590h) 
     for the county or other area in which the farming operation 
     of the person is located.
       (c) Role of National Appeals Division.--Any adverse 
     determination of a county committee under subsection (b) may 
     be appealed to the National Appeals Division established 
     under subtitle H of the Department of Agriculture 
     Reorganization Act of 1994 (7 U.S.C. 6991 et seq.).
       (d) Use of Financial Institutions.--The Secretary may use a 
     financial institution to manage assets, make contract 
     payments, and otherwise carry out this title.
       (e) Payment to Financial Institutions.--The Secretary shall 
     permit a tobacco quota holder or producer of quota tobacco 
     entitled to contract payments to assign to a financial 
     institution the right to receive the contract payments. Upon 
     receiving notification of the assignment, the Secretary shall 
     make subsequent contract payments for the tobacco quota 
     holder or producer of quota tobacco directly to the financial 
     institution designated by the tobacco quota holder or 
     producer of quota tobacco. The Secretary shall make 
     information available to tobacco quota holders and producers 
     of quota tobacco regarding their ability to elect to have the 
     Secretary make payments directly to a financial institution 
     under this subsection so that they may obtain a lump sum or 
     other payment.

     SEC. 625. USE OF ASSESSMENTS AS SOURCE OF FUNDS FOR PAYMENTS.

       (a) Definitions.--In this section:
       (1) Base period.--The term ``base period' means the one-
     year period ending the June 30 before the beginning of a 
     fiscal year.
       (2) Gross domestic volume.--The term ``gross domestic 
     volume'' means the volume of tobacco products--
       (A) removed (as defined by section 5702 of the Internal 
     Revenue Code of 1986); and
       (B) not exempt from tax under chapter 52 of the Internal 
     Revenue Code of 1986 at the time of their removal under that 
     chapter or the Harmonized Tariff Schedule of the United 
     States (19 U.S.C. 1202).
       (3) Market share.--The term ``market share'' means the 
     share of each manufacturer or importer of a class of tobacco 
     product (expressed as a decimal to the fourth place) of the 
     total volume of domestic sales of the class of tobacco 
     product during the base period for a fiscal year for an 
     assessment under this section.
       (b) Quarterly Assessments.--
       (1) Imposition of assessment.--The Secretary, acting 
     through the Commodity Credit Corporation, shall impose 
     quarterly assessments during each of fiscal years 2005 
     through 2014, calculated in accordance with this section, on 
     each tobacco product manufacturer and tobacco product 
     importer that sells tobacco products in domestic commerce in 
     the United States during that fiscal year.
       (2) Amounts.--Beginning with the calendar quarter ending on 
     December 31 of each of fiscal years 2005 through 2014, the 
     assessment payments over each four-calendar quarter period 
     shall be sufficient to cover--
       (A) the contract payments made under sections 622 and 623 
     during that period; and
       (B) other expenditures from the Tobacco Trust Fund made 
     during the base quarter periods corresponding to the four 
     calendar quarters of that period.
       (3) Deposit.--Assessments collected under this section 
     shall be deposited in the Tobacco Trust Fund.
       (c) Assessments for Classes of Tobacco Products.--
       (1) Initial allocation.--The percentage of the total amount 
     required by subsection (b) to be assessed against, and paid 
     by, the manufacturers and importers of each class of tobacco 
     product in fiscal year 2005 shall be as follows:
       (A) For cigarette manufacturers and importers, 96.331 
     percent.
       (B) For cigar manufacturers and importers, 2.783 percent.
       (C) For snuff manufacturers and importers, 0.539 percent.
       (D) For roll-your-own tobacco manufacturers and importers, 
     0.171 percent.
       (E) For chewing tobacco manufacturers and importers, 0.111 
     percent.
       (F) For pipe tobacco manufacturers and importers, 0.066 
     percent.
       (2) Subsequent allocations.--For subsequent fiscal years, 
     the Secretary shall periodically adjust the percentage of the 
     total amount required under subsection (b) to be assessed 
     against, and paid by, the manufacturers and importers of each 
     class of tobacco product specified in paragraph (1) to 
     reflect changes in the share of gross domestic volume held by 
     that class of tobacco product.
       (3) Effect of insufficient amounts.--If the Secretary 
     determines that the assessment imposed under subsection (b) 
     will result in insufficient amounts to carry out this 
     subtitle during a fiscal year, the Secretary shall assess 
     such additional amounts as the Secretary determines to be 
     necessary to carry out this subtitle during that fiscal year. 
     The additional amount shall be allocated to manufacturers and 
     importers of each class of tobacco product specified in 
     paragraph (1) in the same manner and based on the same 
     percentages applicable under paragraph (1) or (2) for that 
     fiscal year.
       (d) Notification and Timing of Assessments.--
       (1) Notification of assessments.--The Secretary shall 
     provide each manufacturer or importer subject to an 
     assessment under subsection (b) with written notice setting 
     forth the amount to be assessed against the manufacturer or 
     importer for each quarterly payment period. The notice for a 
     quarterly period shall be provided not later than 30 days 
     before the date payment is due under paragraph (3).
       (2) Content.--The notice shall include the following 
     information with respect to the quarterly period used by the 
     Secretary in calculating the amount:
       (A) The total combined assessment for all manufacturers and 
     importers of tobacco products.
       (B) The total assessment with respect to the class of 
     tobacco products manufactured or imported by the manufacturer 
     or importer.
       (C) Any adjustments to the percentage allocations among the 
     classes of tobacco products made pursuant to paragraph (2) or 
     (3) of subsection (c).
       (D) The volume of gross sales of the applicable class of 
     tobacco product treated as made by the manufacturer or 
     importer for purposes of calculating the manufacturer's or 
     importer's market share under subsection (f).
       (E) The total volume of gross sales of the applicable class 
     of tobacco product that the Secretary treated as made by all 
     manufacturers and importers for purposes of calculating the 
     manufacturer's or importer's market share under subsection 
     (f).
       (F) The manufacturer's or importer's market share of the 
     applicable class of tobacco product, as determined by the 
     Secretary under subsection (f).
       (G) The market share, as determined by the Secretary under 
     subsection (f), of each other manufacturer and importer, for 
     each applicable class of tobacco product.
       (3) Timing of assessment payments.--
       (A) Collection date.--Assessments shall be collected at the 
     end of each calendar year quarter, except that the Secretary 
     shall ensure that the final assessment due under this section 
     is collected not later than September 30, 2014.
       (B) Base period quarter.--The assessment for a calendar 
     year quarter shall correspond to

[[Page H8441]]

     the base period quarter that ended at the end of the 
     preceding calendar year quarter.
       (e) Allocation of Assessment Within Each Class of Tobacco 
     Product.--
       (1) Pro rata basis.--The assessment for each class of 
     tobacco product specified in subsection (c)(1) shall be 
     allocated on a pro rata basis among manufacturers and 
     importers based on each manufacturer's or importer's share of 
     gross domestic volume.
       (2) Limitation.--No manufacturer or importer shall be 
     required to pay an assessment that is based on a share that 
     is in excess of the manufacturer's or importer's share of 
     domestic volume.
       (f) Allocation of Total Assessments by Market Share.--The 
     amount of the assessment for each class of tobacco product 
     specified in subsection (c)(1) to be paid by each 
     manufacturer or importer of that class of tobacco product 
     shall be determined for each quarterly payment period by 
     multiplying--
       (1) the market share of the manufacturer or importer, as 
     calculated with respect to that payment period, of the class 
     of tobacco product; by
       (2) the total amount of the assessment for that quarterly 
     payment period under subsection (c), for the class of tobacco 
     product.
       (g) Determination of Volume of Domestic Sales.--
       (1) In general.--The calculation of the volume of domestic 
     sales of a class of tobacco product by a manufacturer or 
     importer, and by all manufacturers and importers as a group, 
     shall be made by the Secretary based on information provided 
     by the manufacturers and importers pursuant to subsection 
     (h), as well as any other relevant information provided to or 
     obtained by the Secretary.
       (2) Gross domestic volume.--The volume of domestic sales 
     shall be calculated based on gross domestic volume.
       (3) Measurement.--For purposes of the calculations under 
     this subsection and the certifications under subsection (h) 
     by the Secretary, the volumes of domestic sales shall be 
     measured by--
       (A) in the case of cigarettes and cigars, the number of 
     cigarettes and cigars; and
       (B) in the case of the other classes of tobacco products 
     specified in subsection (c)(1), in terms of number of pounds, 
     or fraction thereof, of those products.
       (h) Measurement of Volume of Domestic Sales.--
       (1) Submission of information.--Each manufacturer and 
     importer of tobacco products shall submit to the Secretary a 
     certified copy of each of the returns or forms described by 
     paragraph (2) that are required to be filed with a Federal 
     agency on the same date that those returns or forms are 
     filed, or required to be filed, with the agency.
       (2) Returns and forms.--The returns and forms described by 
     this paragraph are those returns and forms that relate to--
       (A) the removal of tobacco products into domestic commerce 
     (as defined by section 5702 of the Internal Revenue Code of 
     1986); and
       (B) the payment of the taxes imposed under charter 52 of 
     the Internal Revenue Code of 1986, including AFT Form 5000.24 
     and United States Customs Form 7501 under currently 
     applicable regulations.
       (3) Effect of failure to provide required information.--Any 
     person that knowingly fails to provide information required 
     under this subsection or that provides false information 
     under this subsection shall be subject to the penalties 
     described in section 1003 of title 18, United States Code. 
     The Secretary may also assess against the person a civil 
     penalty in an amount not to exceed two percent of the value 
     of the kind of tobacco products manufactured or imported by 
     the person during the fiscal year in which the violation 
     occurred, as determined by the Secretary.
       (i) Challenge to Assessment.--
       (1) Appeal to secretary.--A manufacturer or importer 
     subject to this section may contest an assessment imposed on 
     the manufacturer or importer under this section by notifying 
     the Secretary, not later than 30 business days after 
     receiving the assessment notification required by subsection 
     (d), that the manufacturer or importer intends to contest the 
     assessment.
       (2) Information.--Not later than 180 days after the date of 
     the enactment of this title, the Secretary shall establish by 
     regulation a procedure under which a manufacturer or importer 
     contesting an assessment under this subsection may present 
     information to the Secretary to demonstrate that the 
     assessment applicable to the manufacturer or importer is 
     incorrect. In challenging the assessment, the manufacturer or 
     importer may use any information that is available, including 
     third party data on industry or individual company sales 
     volumes.
       (3) Revision.--If a manufacturer or importer establishes 
     that the initial determination of the amount of an assessment 
     is incorrect, the Secretary shall revise the amount of the 
     assessment so that the manufacturer or importer is required 
     to pay only the amount correctly determined.
       (4) Time for review.--Not later than 30 days after 
     receiving notice from a manufacturer or importer under 
     paragraph (1), the Secretary shall--
       (A) decide whether the information provided to the 
     Secretary under paragraph (2), and any other information that 
     the Secretary determines is appropriate, is sufficient to 
     establish that the original assessment was incorrect; and
       (B) make any revisions necessary to ensure that each 
     manufacturer and importer pays only its correct pro rata 
     share of total gross domestic volume from all sources.
       (5) Immediate payment of undisputed amounts.--The 
     regulations promulgated by the Secretary under paragraph (2) 
     shall provide for the immediate payment by a manufacturer or 
     importer challenging an assessment of that portion of the 
     assessment that is not in dispute. The manufacturer and 
     importer may place into escrow, in accordance with such 
     regulations, only the portion of the assessment being 
     challenged in good faith pending final determination of the 
     claim.
       (j) Judicial Review.--
       (1) In general.--Any manufacturer or importer aggrieved by 
     a determination of the Secretary with respect to the amount 
     of any assessment may seek review of the determination in the 
     United States District Court for the District of Columbia or 
     for the district in which the manufacturer or importer 
     resides or has its principal place of business at any time 
     following exhaustion of the administrative remedies available 
     under subsection (i).
       (2) Time limits.--Administrative remedies shall be deemed 
     exhausted if no decision by the Secretary is made within the 
     time limits established under subsection (i)(4).
       (3) Excessive assessments.--The court shall restrain 
     collection of the excessive portion of any assessment or 
     order a refund of excessive assessments already paid, along 
     with interest calculated at the rate prescribed in section 
     3717 of title 31, United States Code, if it finds that the 
     Secretary's determination is not supported by a preponderance 
     of the information available to the Secretary.
       (k) Termination Date.--The authority provided by this 
     section to impose assessments terminates on September 30, 
     2014.

     SEC. 626. TOBACCO TRUST FUND.

       (a) Establishment.--There is established in the Commodity 
     Credit Corporation a revolving trust fund, to be known as the 
     ``Tobacco Trust Fund'', which shall be used in carrying out 
     this subtitle. The Tobacco Trust Fund shall consist of the 
     following:
       (1) Assessments collected under section 625.
       (2) Such amounts as are necessary from the Commodity Credit 
     Corporation.
       (3) Any interest earned on investment of amounts in the 
     Tobacco Trust Fund under subsection (c).
       (b) Expenditures.--
       (1) Authorized expenditures.--Subject to paragraph (2), and 
     notwithstanding any other provision of law, the Secretary 
     shall use amounts in the Tobacco Trust Fund, in such amounts 
     as the Secretary determines are necessary--
       (A) to make payments under sections 622 and 623;
       (B) to provide reimbursement under section 641(c);
       (C) to reimburse the Commodity Credit Corporation for costs 
     incurred by the Commodity Credit Corporation under paragraph 
     (2); and
       (D) to make payments to financial institutions to satisfy 
     contractual obligations under section 622 or 623.
       (2) Expenditures by commodity credit corporation.--
     Notwithstanding any other provision of law, the Secretary 
     shall use the funds, facilities, and authorities of the 
     Commodity Credit Corporation to make payments described in 
     paragraph (1). Not later than January 1, 2015, the Secretary 
     shall use amounts in the Tobacco Trust Fund to fully 
     reimburse, with interest, the Commodity Credit Corporation 
     for all funds of the Commodity Credit Corporation expended 
     under the authority of this paragraph. Administrative costs 
     incurred by the Secretary or the Commodity Credit Corporation 
     to carry out this title may not be paid using amounts in the 
     Tobacco Trust Fund.
       (c) Investment of Amounts.--
       (1) In general.--The Commodity Credit Corporation shall 
     invest such portion of the amounts in the Tobacco Trust Fund 
     as are not, in the judgment of the Commodity Credit 
     Corporation, required to meet current expenditures.
       (2) Interest-bearing obligations.--Investments may be made 
     only in interest-bearing obligations of the United States.
       (3) Acquisition of obligations.--For the purpose of 
     investments under paragraph (1), obligations may be 
     acquired--
       (A) on original issue at the issue price; or
       (B) by purchase of outstanding obligations at the market 
     price.
       (4) Sale of obligations.--Any obligation acquired by the 
     Tobacco Trust Fund may be sold by the Commodity Credit 
     Corporation at the market price.
       (5) Credits to fund.--The interest on, and the proceeds 
     from the sale or redemption of, any obligations held in the 
     Tobacco Trust Fund shall be credited to and form a part of 
     the Fund.

     SEC. 627. LIMITATION ON TOTAL EXPENDITURES.

       The total amount expended by the Secretary from the Tobacco 
     Trust Fund to make payments under sections 622 and 623 and 
     for the other authorized purposes of the Fund shall not 
     exceed $10,140,000,000.
               Subtitle C--Implementation and Transition

     SEC. 641. TREATMENT OF TOBACCO LOAN POOL STOCKS AND 
                   OUTSTANDING LOAN COSTS.

       (a) Disposal of Stocks.--To provide for the orderly 
     disposition of quota tobacco held by an association that has 
     entered into a loan agreement with the Commodity Credit 
     Corporation under section 106A or 106B of the Agricultural 
     Act of 1949 (7 U.S.C. 1445-1, 1445-2) (referred to in this 
     section as an ``association''), loan pool stocks for each 
     kind of tobacco held by the association shall be disposed of 
     in accordance with this section.
       (b) Disposal by Associations.--For each kind of tobacco 
     held by an association, the association shall be responsible 
     for the disposal of a specific quantity of the loan pool 
     stocks for that kind of tobacco held by the association. The 
     quantity transferred to the association for disposal shall be 
     equal to the quantity determined by dividing--
       (1) the amount of funds held by the association in the No 
     Net Cost Tobacco Fund and the

[[Page H8442]]

     No Net Cost Tobacco Account established under sections 106A 
     and 106B of the Agricultural Act of 1949 (7 U.S.C. 1445-1, 
     1445-2) for the kind of tobacco; by
       (2) the average list price per pound for the kind of 
     tobacco, as determined by the Secretary.
       (c) Disposal of Remainder by Commodity Credit 
     Corporation.--
       (1) Disposal.--Any loan pool stocks of a kind of tobacco of 
     an association that are not transferred to the association 
     under subsection (b) for disposal shall be disposed of by 
     Commodity Credit Corporation in a manner determined by the 
     Secretary.
       (2) Reimbursement.--As required by section 626(b)(1)(B), 
     the Secretary shall transfer from the Tobacco Trust Fund to 
     the No Net Cost Tobacco Fund or the No Net Cost Tobacco 
     Account of an association established under section 106A or 
     106B of the Agricultural Act of 1949 (7 U.S.C. 1445-1, 1445-
     2) such amounts as the Secretary determines will be adequate 
     to reimburse the Commodity Credit Corporation for any net 
     losses that the Corporation may sustain under its loan 
     agreements with the association.
       (d) Transfer of Remaining No Net Cost Funds.--Any funds in 
     the No Net Cost Tobacco Fund or the No Net Cost Tobacco 
     Account of an association established under sections 106A and 
     106B of the Agricultural Act of 1949 (7 U.S.C. 1445-1, 1445-
     2) that remain after the application of subsections (b) and 
     (c) shall be transferred to the association for distribution 
     to producers of quota tobacco in accordance with a plan 
     approved by the Secretary.

     SEC. 642. REGULATIONS.

       (a) In General.--The Secretary may promulgate such 
     regulations as are necessary to implement this title and the 
     amendments made by this title.
       (b) Procedure.--The promulgation of the regulations and 
     administration of this title and the amendments made by this 
     title shall be made without regard to--
       (1) the notice and comment provisions of section 553 of 
     title 5, United States Code;
       (2) the Statement of Policy of the Secretary of Agriculture 
     effective July 24, 1971 (36 Fed. Reg. 13804), relating to 
     notices of proposed rulemaking and public participation in 
     rulemaking; and
       (3) chapter 35 of title 44, United States Code (commonly 
     known as the ``Paperwork Reduction Act'').
       (c) Congressional Review of Agency Rulemaking.--In carrying 
     out this section, the Secretary shall use the authority 
     provided under section 808 of title 5, United States Code.

     SEC. 643. EFFECTIVE DATE.

       This title and the amendments made by this title shall 
     apply to the 2005 and subsequent crops of each kind of 
     tobacco.
                  TITLE VII--MISCELLANEOUS PROVISIONS

     SEC. 701. BROWNFIELDS DEMONSTRATION PROGRAM FOR QUALIFIED 
                   GREEN BUILDING AND SUSTAINABLE DESIGN PROJECTS.

       (a) Treatment as Exempt Facility Bond.--Subsection (a) of 
     section 142 (relating to the definition of exempt facility 
     bond) is amended by striking ``or'' at the end of paragraph 
     (12), by striking the period at the end of paragraph (13) and 
     inserting ``, or'', and by inserting at the end the following 
     new paragraph:
       ``(14) qualified green building and sustainable design 
     projects.''.
       (b) Qualified Green Building and Sustainable Design 
     Projects.--Section 142 (relating to exempt facility bonds) is 
     amended by adding at the end thereof the following new 
     subsection:
       ``(l) Qualified Green Building and Sustainable Design 
     Projects.--
       ``(1) In general.--For purposes of subsection (a)(14), the 
     term `qualified green building and sustainable design 
     project' means any project which is designated by the 
     Secretary, after consultation with the Administrator of the 
     Environmental Protection Agency, as a qualified green 
     building and sustainable design project and which meets the 
     requirements of clauses (i), (ii), (iii), and (iv) of 
     paragraph (4)(A).
       ``(2) Designations.--
       ``(A) In general.--Within 60 days after the end of the 
     application period described in paragraph (3)(A), the 
     Secretary, after consultation with the Administrator of the 
     Environmental Protection Agency, shall designate qualified 
     green building and sustainable design projects. At least one 
     of the projects designated shall be located in, or within a 
     10-mile radius of, an empowerment zone as designated pursuant 
     to section 1391, and at least one of the projects designated 
     shall be located in a rural State. No more than one project 
     shall be designated in a State. A project shall not be 
     designated if such project includes a stadium or arena for 
     professional sports exhibitions or games.
       ``(B) Minimum conservation and technology innovation 
     objectives.--The Secretary, after consultation with the 
     Administrator of the Environmental Protection Agency, shall 
     ensure that, in the aggregate, the projects designated 
     shall--
       ``(i) reduce electric consumption by more than 150 
     megawatts annually as compared to conventional generation,
       ``(ii) reduce daily sulfur dioxide emissions by at least 10 
     tons compared to coal generation power,
       ``(iii) expand by 75 percent the domestic solar 
     photovoltaic market in the United States (measured in 
     megawatts) as compared to the expansion of that market from 
     2001 to 2002, and
       ``(iv) use at least 25 megawatts of fuel cell energy 
     generation.
       ``(3) Limited designations.--A project may not be 
     designated under this subsection unless--
       ``(A) the project is nominated by a State or local 
     government within 180 days of the enactment of this 
     subsection, and
       ``(B) such State or local government provides written 
     assurances that the project will satisfy the eligibility 
     criteria described in paragraph (4).
       ``(4) Application.--
       ``(A) In general.--A project may not be designated under 
     this subsection unless the application for such designation 
     includes a project proposal which describes the energy 
     efficiency, renewable energy, and sustainable design features 
     of the project and demonstrates that the project satisfies 
     the following eligibility criteria:
       ``(i) Green building and sustainable design.--At least 75 
     percent of the square footage of commercial buildings which 
     are part of the project is registered for United States Green 
     Building Council's LEED certification and is reasonably 
     expected (at the time of the designation) to receive such 
     certification. For purposes of determining LEED certification 
     as required under this clause, points shall be credited by 
     using the following:

       ``(I) For wood products, certification under the 
     Sustainable Forestry Initiative Program and the American Tree 
     Farm System.

       ``(II) For renewable wood products, as credited for 
     recycled content otherwise provided under LEED certification.
       ``(III) For composite wood products, certification under 
     standards established by the American National Standards 
     Institute, or such other voluntary standards as published in 
     the Federal Register by the Administrator of the 
     Environmental Protection Agency.

       ``(ii) Brownfield redevelopment.--The project includes a 
     brownfield site as defined by section 101(39) of the 
     Comprehensive Environmental Response, Compensation, and 
     Liability Act of 1980 (42 U.S.C. 9601), including a site 
     described in subparagraph (D)(ii)(II)(aa) thereof.
       ``(iii) State and local support.--The project receives 
     specific State or local government resources which will 
     support the project in an amount equal to at least 
     $5,000,000. For purposes of the preceding sentence, the term 
     `resources' includes tax abatement benefits and contributions 
     in kind.
       ``(iv) Size.--The project includes at least one of the 
     following:

       ``(I) At least 1,000,000 square feet of building.
       ``(II) At least 20 acres.

       ``(v) Use of tax benefit.--The project proposal includes a 
     description of the net benefit of the tax-exempt financing 
     provided under this subsection which will be allocated for 
     financing of one or more of the following:

       ``(I) The purchase, construction, integration, or other use 
     of energy efficiency, renewable energy, and sustainable 
     design features of the project.
       ``(II) Compliance with certification standards cited under 
     clause (i).
       ``(III) The purchase, remediation, and foundation 
     construction and preparation of the brownfields site.

       ``(vi) Prohibited facilities.--An issue shall not be 
     treated as an issue described in subsection (a)(14) if any 
     proceeds of such issue are used to provide any facility the 
     principal business of which is the sale of food or alcoholic 
     beverages for consumption on the premises.
       ``(vii) Employment.--The project is projected to provide 
     permanent employment of at least 1,500 full time equivalents 
     (150 full time equivalents in rural States) when completed 
     and construction employment of at least 1,000 full time 
     equivalents (100 full time equivalents in rural States).

     The application shall include an independent analysis which 
     describes the project's economic impact, including the amount 
     of projected employment.
       ``(B) Project description.--Each application described in 
     subparagraph (A) shall contain for each project a description 
     of--
       ``(i) the amount of electric consumption reduced as 
     compared to conventional construction,
       ``(ii) the amount of sulfur dioxide daily emissions reduced 
     compared to coal generation,
       ``(iii) the amount of the gross installed capacity of the 
     project's solar photovoltaic capacity measured in megawatts, 
     and
       ``(iv) the amount, in megawatts, of the project's fuel cell 
     energy generation.
       ``(5) Certification of use of tax benefit.--No later than 
     30 days after the completion of the project, each project 
     must certify to the Secretary that the net benefit of the 
     tax-exempt financing was used for the purposes described in 
     paragraph (4).
       ``(6) Definitions.--For purposes of this subsection--
       ``(A) Rural state.--The term `rural State' means any State 
     which has--
       ``(i) a population of less than 4,500,000 according to the 
     2000 census,
       ``(ii) a population density of less than 150 people per 
     square mile according to the 2000 census, and
       ``(iii) increased in population by less than half the rate 
     of the national increase between the 1990 and 2000 censuses.
       ``(B) Local government.--The term `local government' has 
     the meaning given such term by section 1393(a)(5).
       ``(C) Net benefit of tax-exempt financing.--The term `net 
     benefit of tax-exempt financing' means the present value of 
     the interest savings (determined by a calculation established 
     by the Secretary) which result from the tax-exempt status of 
     the bonds.
       ``(7) Aggregate face amount of tax-exempt financing.--
       ``(A) In general.--An issue shall not be treated as an 
     issue described in subsection (a)(14) if the aggregate face 
     amount of bonds issued by the State or local government 
     pursuant thereto for a project (when added to the aggregate 
     face amount of bonds previously so issued for such project) 
     exceeds an amount designated by the Secretary as part of the 
     designation.

[[Page H8443]]

       ``(B) Limitation on amount of bonds.--The Secretary may not 
     allocate authority to issue qualified green building and 
     sustainable design project bonds in an aggregate face amount 
     exceeding $2,000,000,000.
       ``(8) Termination.--Subsection (a)(14) shall not apply with 
     respect to any bond issued after September 30, 2009.
       ``(9) Treatment of current refunding bonds.--Paragraphs 
     (7)(B) and (8) shall not apply to any bond (or series of 
     bonds) issued to refund a bond issued under subsection 
     (a)(14) before October 1, 2009, if--
       ``(A) the average maturity date of the issue of which the 
     refunding bond is a part is not later than the average 
     maturity date of the bonds to be refunded by such issue,
       ``(B) the amount of the refunding bond does not exceed the 
     outstanding amount of the refunded bond, and
       ``(C) the net proceeds of the refunding bond are used to 
     redeem the refunded bond not later than 90 days after the 
     date of the issuance of the refunding bond.

     For purposes of subparagraph (A), average maturity shall be 
     determined in accordance with section 147(b)(2)(A).''.
       (c) Exemption From General State Volume Caps.--Paragraph 
     (3) of section 146(g) (relating to exception for certain 
     bonds) is amended--
       (1) by striking ``or (13)'' and inserting ``(13), or 
     (14)'', and
       (2) by striking ``and qualified public educational 
     facilities'' and inserting ``qualified public educational 
     facilities, and qualified green building and sustainable 
     design projects''.
       (d) Accountability.--Each issuer shall maintain, on behalf 
     of each project, an interest bearing reserve account equal to 
     1 percent of the net proceeds of any bond issued under this 
     section for such project. Not later than 5 years after the 
     date of issuance, the Secretary of the Treasury, after 
     consultation with the Administrator of the Environmental 
     Protection Agency, shall determine whether the project 
     financed with such bonds has substantially complied with the 
     terms and conditions described in section 142(l)(4) of the 
     Internal Revenue Code of 1986 (as added by this section). If 
     the Secretary, after such consultation, certifies that the 
     project has substantially complied with such terms and 
     conditions and meets the commitments set forth in the 
     application for such project described in section 142(l)(4) 
     of such Code, amounts in the reserve account, including all 
     interest, shall be released to the project. If the Secretary 
     determines that the project has not substantially complied 
     with such terms and conditions, amounts in the reserve 
     account, including all interest, shall be paid to the United 
     States Treasury.
       (e) Effective Date.--The amendments made by this section 
     shall apply to bonds issued after December 31, 2004.

     SEC. 702. EXCLUSION OF GAIN OR LOSS ON SALE OR EXCHANGE OF 
                   CERTAIN BROWNFIELD SITES FROM UNRELATED 
                   BUSINESS TAXABLE INCOME.

       (a) In General.--Subsection (b) of section 512 (relating to 
     unrelated business taxable income) is amended by adding at 
     the end the following new paragraph:
       ``(18) Treatment of gain or loss on sale or exchange of 
     certain brownfield sites.--
       ``(A) In general.--Notwithstanding paragraph (5)(B), there 
     shall be excluded any gain or loss from the qualified sale, 
     exchange, or other disposition of any qualifying brownfield 
     property by an eligible taxpayer.
       ``(B) Eligible taxpayer.--For purposes of this paragraph--
       ``(i) In general.--The term `eligible taxpayer' means, with 
     respect to a property, any organization exempt from tax under 
     section 501(a) which--

       ``(I) acquires from an unrelated person a qualifying 
     brownfield property, and
       ``(II) pays or incurs eligible remediation expenditures 
     with respect to such property in an amount which exceeds the 
     greater of $550,000 or 12 percent of the fair market value of 
     the property at the time such property was acquired by the 
     eligible taxpayer, determined as if there was not a presence 
     of a hazardous substance, pollutant, or contaminant on the 
     property which is complicating the expansion, redevelopment, 
     or reuse of the property.

       ``(ii) Exception.--Such term shall not include any 
     organization which is--

       ``(I) potentially liable under section 107 of the 
     Comprehensive Environmental Response, Compensation, and 
     Liability Act of 1980 with respect to the qualifying 
     brownfield property,
       ``(II) affiliated with any other person which is so 
     potentially liable through any direct or indirect familial 
     relationship or any contractual, corporate, or financial 
     relationship (other than a contractual, corporate, or 
     financial relationship which is created by the instruments by 
     which title to any qualifying brownfield property is conveyed 
     or financed or by a contract of sale of goods or services), 
     or
       ``(III) the result of a reorganization of a business entity 
     which was so potentially liable.

       ``(C) Qualifying brownfield property.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `qualifying brownfield 
     property' means any real property which is certified, before 
     the taxpayer incurs any eligible remediation expenditures 
     (other than to obtain a Phase I environmental site 
     assessment), by an appropriate State agency (within the 
     meaning of section 198(c)(4)) in the State in which such 
     property is located as a brownfield site within the meaning 
     of section 101(39) of the Comprehensive Environmental 
     Response, Compensation, and Liability Act of 1980 (as in 
     effect on the date of the enactment of this paragraph).
       ``(ii) Request for certification.--Any request by an 
     eligible taxpayer for a certification described in clause (i) 
     shall include a sworn statement by the eligible taxpayer and 
     supporting documentation of the presence of a hazardous 
     substance, pollutant, or contaminant on the property which is 
     complicating the expansion, redevelopment, or reuse of the 
     property given the property's reasonably anticipated future 
     land uses or capacity for uses of the property (including a 
     Phase I environmental site assessment and, if applicable, 
     evidence of the property's presence on a local, State, or 
     Federal list of brownfields or contaminated property) and 
     other environmental assessments prepared or obtained by the 
     taxpayer.
       ``(D) Qualified sale, exchange, or other disposition.--For 
     purposes of this paragraph--
       ``(i) In general.--A sale, exchange, or other disposition 
     of property shall be considered as qualified if--

       ``(I) such property is transferred by the eligible taxpayer 
     to an unrelated person, and
       ``(II) within 1 year of such transfer the eligible taxpayer 
     has received a certification from the Environmental 
     Protection Agency or an appropriate State agency (within the 
     meaning of section 198(c)(4)) in the State in which such 
     property is located that, as a result of the eligible 
     taxpayer's remediation actions, such property would not be 
     treated as a qualifying brownfield property in the hands of 
     the transferee.

     For purposes of subclause (II), before issuing such 
     certification, the Environmental Protection Agency or 
     appropriate State agency shall respond to comments received 
     pursuant to clause (ii)(V) in the same form and manner as 
     required under section 117(b) of the Comprehensive 
     Environmental Response, Compensation, and Liability Act of 
     1980 (as in effect on the date of the enactment of this 
     paragraph).
       ``(ii) Request for certification.--Any request by an 
     eligible taxpayer for a certification described in clause (i) 
     shall be made not later than the date of the transfer and 
     shall include a sworn statement by the eligible taxpayer 
     certifying the following:

       ``(I) Remedial actions which comply with all applicable or 
     relevant and appropriate requirements (consistent with 
     section 121(d) of the Comprehensive Environmental Response, 
     Compensation, and Liability Act of 1980) have been 
     substantially completed, such that there are no hazardous 
     substances, pollutants, or contaminants which complicate the 
     expansion, redevelopment, or reuse of the property given the 
     property's reasonably anticipated future land uses or 
     capacity for uses of the property.
       ``(II) The reasonably anticipated future land uses or 
     capacity for uses of the property are more economically 
     productive or environmentally beneficial than the uses of the 
     property in existence on the date of the certification 
     described in subparagraph (C)(i). For purposes of the 
     preceding sentence, use of property as a landfill or other 
     hazardous waste facility shall not be considered more 
     economically productive or environmentally beneficial.
       ``(III) A remediation plan has been implemented to bring 
     the property into compliance with all applicable local, 
     State, and Federal environmental laws, regulations, and 
     standards and to ensure that the remediation protects human 
     health and the environment.
       ``(IV) The remediation plan described in subclause (III), 
     including any physical improvements required to remediate the 
     property, is either complete or substantially complete, and, 
     if substantially complete, sufficient monitoring, funding, 
     institutional controls, and financial assurances have been 
     put in place to ensure the complete remediation of the 
     property in accordance with the remediation plan as soon as 
     is reasonably practicable after the sale, exchange, or other 
     disposition of such property.
       ``(V) Public notice and the opportunity for comment on the 
     request for certification was completed before the date of 
     such request. Such notice and opportunity for comment shall 
     be in the same form and manner as required for public 
     participation required under section 117(a) of the 
     Comprehensive Environmental Response, Compensation, and 
     Liability Act of 1980 (as in effect on the date of the 
     enactment of this paragraph). For purposes of this subclause, 
     public notice shall include, at a minimum, publication in a 
     major local newspaper of general circulation.

       ``(iii) Attachment to tax returns.--A copy of each of the 
     requests for certification described in clause (ii) of 
     subparagraph (C) and this subparagraph shall be included in 
     the tax return of the eligible taxpayer (and, where 
     applicable, of the qualifying partnership) for the taxable 
     year during which the transfer occurs.
       ``(iv) Substantial completion.--For purposes of this 
     subparagraph, a remedial action is substantially complete 
     when any necessary physical construction is complete, all 
     immediate threats have been eliminated, and all long-term 
     threats are under control.
       ``(E) Eligible remediation expenditures.--For purposes of 
     this paragraph--
       ``(i) In general.--The term `eligible remediation 
     expenditures' means, with respect to any qualifying 
     brownfield property, any amount paid or incurred by the 
     eligible taxpayer to an unrelated third person to obtain a 
     Phase I environmental site assessment of the property, and 
     any amount so paid or incurred after the date of the 
     certification described in subparagraph (C)(i) for goods and 
     services necessary to obtain a certification described in 
     subparagraph (D)(i) with respect to such property, including 
     expenditures--

       ``(I) to manage, remove, control, contain, abate, or 
     otherwise remediate a hazardous substance, pollutant, or 
     contaminant on the property,
       ``(II) to obtain a Phase II environmental site assessment 
     of the property, including any expenditure to monitor, 
     sample, study, assess, or otherwise evaluate the release, 
     threat of release, or presence of a hazardous substance, 
     pollutant, or contaminant on the property,

[[Page H8444]]

       ``(III) to obtain environmental regulatory certifications 
     and approvals required to manage the remediation and 
     monitoring of the hazardous substance, pollutant, or 
     contaminant on the property, and
       ``(IV) regardless of whether it is necessary to obtain a 
     certification described in subparagraph (D)(i)(II), to obtain 
     remediation cost-cap or stop-loss coverage, re-opener or 
     regulatory action coverage, or similar coverage under 
     environmental insurance policies, or financial guarantees 
     required to manage such remediation and monitoring.

       ``(ii) Exceptions.--Such term shall not include--

       ``(I) any portion of the purchase price paid or incurred by 
     the eligible taxpayer to acquire the qualifying brownfield 
     property,
       ``(II) environmental insurance costs paid or incurred to 
     obtain legal defense coverage, owner/operator liability 
     coverage, lender liability coverage, professional liability 
     coverage, or similar types of coverage,

       ``(III) any amount paid or incurred to the extent such 
     amount is reimbursed, funded, or otherwise subsidized by 
     grants provided by the United States, a State, or a political 
     subdivision of a State for use in connection with the 
     property, proceeds of an issue of State or local government 
     obligations used to provide financing for the property the 
     interest of which is exempt from tax under section 103, or 
     subsidized financing provided (directly or indirectly) under 
     a Federal, State, or local program provided in connection 
     with the property, or
       ``(IV) any expenditure paid or incurred before the date of 
     the enactment of this paragraph.

     For purposes of subclause (III), the Secretary may issue 
     guidance regarding the treatment of government-provided funds 
     for purposes of determining eligible remediation 
     expenditures.
       ``(F) Determination of gain or loss.--For purposes of this 
     paragraph, the determination of gain or loss shall not 
     include an amount treated as gain which is ordinary income 
     with respect to section 1245 or section 1250 property, 
     including amounts deducted as section 198 expenses which are 
     subject to the recapture rules of section 198(e), if the 
     taxpayer had deducted such amounts in the computation of its 
     unrelated business taxable income.
       ``(G) Special rules for partnerships.--
       ``(i) In general.--In the case of an eligible taxpayer 
     which is a partner of a qualifying partnership which 
     acquires, remediates, and sells, exchanges, or otherwise 
     disposes of a qualifying brownfield property, this paragraph 
     shall apply to the eligible taxpayer's distributive share of 
     the qualifying partnership's gain or loss from the sale, 
     exchange, or other disposition of such property.
       ``(ii) Qualifying partnership.--The term `qualifying 
     partnership' means a partnership which--

       ``(I) has a partnership agreement which satisfies the 
     requirements of section 514(c)(9)(B)(vi) at all times 
     beginning on the date of the first certification received by 
     the partnership under subparagraph (C)(i),
       ``(II) satisfies the requirements of subparagraphs (B)(i), 
     (C), (D), and (E), if `qualified partnership' is substituted 
     for `eligible taxpayer' each place it appears therein (except 
     subparagraph (D)(iii)), and
       ``(III) is not an organization which would be prevented 
     from constituting an eligible taxpayer by reason of 
     subparagraph (B)(ii).

       ``(iii) Requirement that tax-exempt partner be a partner 
     since first certification.--This paragraph shall apply with 
     respect to any eligible taxpayer which is a partner of a 
     partnership which acquires, remediates, and sells, exchanges, 
     or otherwise disposes of a qualifying brownfield property 
     only if such eligible taxpayer was a partner of the 
     qualifying partnership at all times beginning on the date of 
     the first certification received by the partnership under 
     subparagraph (C)(i) and ending on the date of the sale, 
     exchange, or other disposition of the property by the 
     partnership.
       ``(iv) Regulations.--The Secretary shall prescribe such 
     regulations as are necessary to prevent abuse of the 
     requirements of this subparagraph, including abuse through--

       ``(I) the use of special allocations of gains or losses, or
       ``(II) changes in ownership of partnership interests held 
     by eligible taxpayers.

       ``(H) Special rules for multiple properties.--
       ``(i) In general.--An eligible taxpayer or a qualifying 
     partnership of which the eligible taxpayer is a partner may 
     make a 1-time election to apply this paragraph to more than 1 
     qualifying brownfield property by averaging the eligible 
     remediation expenditures for all such properties acquired 
     during the election period. If the eligible taxpayer or 
     qualifying partnership makes such an election, the election 
     shall apply to all qualified sales, exchanges, or other 
     dispositions of qualifying brownfield properties the 
     acquisition and transfer of which occur during the period for 
     which the election remains in effect.
       ``(ii) Election.--An election under clause (i) shall be 
     made with the eligible taxpayer's or qualifying partnership's 
     timely filed tax return (including extensions) for the first 
     taxable year for which the taxpayer or qualifying partnership 
     intends to have the election apply. An election under clause 
     (i) is effective for the period--

       ``(I) beginning on the date which is the first day of the 
     taxable year of the return in which the election is included 
     or a later day in such taxable year selected by the eligible 
     taxpayer or qualifying partnership, and
       ``(II) ending on the date which is the earliest of a date 
     of revocation selected by the eligible taxpayer or qualifying 
     partnership, the date which is 8 years after the date 
     described in subclause (I), or, in the case of an election by 
     a qualifying partnership of which the eligible taxpayer is a 
     partner, the date of the termination of the qualifying 
     partnership.

       ``(iii) Revocation.--An eligible taxpayer or qualifying 
     partnership may revoke an election under clause (i)(II) by 
     filing a statement of revocation with a timely filed tax 
     return (including extensions). A revocation is effective as 
     of the first day of the taxable year of the return in which 
     the revocation is included or a later day in such taxable 
     year selected by the eligible taxpayer or qualifying 
     partnership. Once an eligible taxpayer or qualifying 
     partnership revokes the election, the eligible taxpayer or 
     qualifying partnership is ineligible to make another election 
     under clause (i) with respect to any qualifying brownfield 
     property subject to the revoked election.
       ``(I) Recapture.--If an eligible taxpayer excludes gain or 
     loss from a sale, exchange, or other disposition of property 
     to which an election under subparagraph (H) applies, and such 
     property fails to satisfy the requirements of this paragraph, 
     the unrelated business taxable income of the eligible 
     taxpayer for the taxable year in which such failure occurs 
     shall be determined by including any previously excluded gain 
     or loss from such sale, exchange, or other disposition 
     allocable to such taxpayer, and interest shall be determined 
     at the overpayment rate established under section 6621 on any 
     resulting tax for the period beginning with the due date of 
     the return for the taxable year during which such sale, 
     exchange, or other disposition occurred, and ending on the 
     date of payment of the tax.
       ``(J) Related persons.--For purposes of this paragraph, a 
     person shall be treated as related to another person if--
       ``(i) such person bears a relationship to such other person 
     described in section 267(b) (determined without regard to 
     paragraph (9) thereof), or section 707(b)(1), determined by 
     substituting `25 percent' for `50 percent' each place it 
     appears therein, and
       ``(ii) in the case such other person is a nonprofit 
     organization, if such person controls directly or indirectly 
     more than 25 percent of the governing body of such 
     organization.
       ``(K) Termination.--Except for purposes of determining the 
     average eligible remediation expenditures for properties 
     acquired during the election period under subparagraph (H), 
     this paragraph shall not apply to any property acquired by 
     the eligible taxpayer or qualifying partnership after 
     December 31, 2009.''.
       (b) Exclusion From Definition of Debt-Financed Property.--
     Section 514(b)(1) (defining debt-financed property) is 
     amended by striking ``or'' at the end of subparagraph (C), by 
     striking the period at the end of subparagraph (D) and 
     inserting ``; or'', and by inserting after subparagraph (D) 
     the following new subparagraph:
       ``(E) any property the gain or loss from the sale, 
     exchange, or other disposition of which would be excluded by 
     reason of the provisions of section 512(b)(18) in computing 
     the gross income of any unrelated trade or business.''.
       (c) Savings Clause.--Nothing in the amendments made by this 
     section shall affect any duty, liability, or other 
     requirement imposed under any other Federal or State law. 
     Notwithstanding section 128(b) of the Comprehensive 
     Environmental Response, Compensation, and Liability Act of 
     1980, a certification provided by the Environmental 
     Protection Agency or an appropriate State agency (within the 
     meaning of section 198(c)(4) of the Internal Revenue Code of 
     1986) shall not affect the liability of any person under 
     section 107(a) of such Act.
       (d) Effective Date.--The amendments made by this section 
     shall apply to any gain or loss on the sale, exchange, or 
     other disposition of any property acquired by the taxpayer 
     after December 31, 2004.

     SEC. 703. CIVIL RIGHTS TAX RELIEF.

       (a) Deduction Allowed Whether or Not Taxpayer Itemizes 
     Other Deductions.--Subsection (a) of section 62 (defining 
     adjusted gross income) is amended by inserting after 
     paragraph (18) the following new item:
       ``(19) Costs involving discrimination suits, etc.--Any 
     deduction allowable under this chapter for attorney fees and 
     court costs paid by, or on behalf of, the taxpayer in 
     connection with any action involving a claim of unlawful 
     discrimination (as defined in subsection (e)) or a claim of a 
     violation of subchapter III of chapter 37 of title 31, United 
     States Code or a claim made under section 1862(b)(3)(A) of 
     the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The 
     preceding sentence shall not apply to any deduction in excess 
     of the amount includible in the taxpayer's gross income for 
     the taxable year on account of a judgment or settlement 
     (whether by suit or agreement and whether as lump sum or 
     periodic payments) resulting from such claim.''.
       (b) Unlawful Discrimination Defined.--Section 62 is amended 
     by adding at the end the following new subsection:
       ``(e) Unlawful Discrimination Defined.--For purposes of 
     subsection (a)(19), the term `unlawful discrimination' means 
     an act that is unlawful under any of the following:
       ``(1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 
     1202).
       ``(2) Section 201, 202, 203, 204, 205, 206, or 207 of the 
     Congressional Accountability Act of 1995 (2 U.S.C. 1311, 
     1312, 1313, 1314, 1315, 1316, or 1317).
       ``(3) The National Labor Relations Act (29 U.S.C. 151 et 
     seq.).
       ``(4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 
     et seq.).
       ``(5) Section 4 or 15 of the Age Discrimination in 
     Employment Act of 1967 (29 U.S.C. 623 or 633a).
       ``(6) Section 501 or 504 of the Rehabilitation Act of 1973 
     (29 U.S.C. 791 or 794).
       ``(7) Section 510 of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1140).
       ``(8) Title IX of the Education Amendments of 1972 (20 
     U.S.C. 1681 et seq.).

[[Page H8445]]

       ``(9) The Employee Polygraph Protection Act of 1988 (29 
     U.S.C. 2001 et seq.).
       ``(10) The Worker Adjustment and Retraining Notification 
     Act (29 U.S.C. 2102 et seq.).
       ``(11) Section 105 of the Family and Medical Leave Act of 
     1993 (29 U.S.C. 2615).
       ``(12) Chapter 43 of title 38, United States Code (relating 
     to employment and reemployment rights of members of the 
     uniformed services).
       ``(13) Section 1977, 1979, or 1980 of the Revised Statutes 
     (42 U.S.C. 1981, 1983, or 1985).
       ``(14) Section 703, 704, or 717 of the Civil Rights Act of 
     1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
       ``(15) Section 804, 805, 806, 808, or 818 of the Fair 
     Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).
       ``(16) Section 102, 202, 302, or 503 of the Americans with 
     Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 
     12203).
       ``(17) Any provision of Federal law (popularly known as 
     whistleblower protection provisions) prohibiting the 
     discharge of an employee, the discrimination against an 
     employee, or any other form of retaliation or reprisal 
     against an employee for asserting rights or taking other 
     actions permitted under Federal law.
       ``(18) Any provision of Federal, State, or local law, or 
     common law claims permitted under Federal, State, or local 
     law--
       ``(i) providing for the enforcement of civil rights, or
       ``(ii) regulating any aspect of the employment 
     relationship, including claims for wages, compensation, or 
     benefits, or prohibiting the discharge of an employee, the 
     discrimination against an employee, or any other form of 
     retaliation or reprisal against an employee for asserting 
     rights or taking other actions permitted by law.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to fees and costs paid after the date of the 
     enactment of this Act with respect to any judgment or 
     settlement occurring after such date.

     SEC. 704. MODIFICATION OF CLASS LIFE FOR CERTAIN TRACK 
                   FACILITIES.

       (a) 7-Year Property.--Subparagraph (C) of section 168(e)(3) 
     (relating to classification of certain property) is amended 
     by redesignating clause (ii) as clause (iii) and by inserting 
     after clause (i) the following new clause:
       ``(ii) any motorsports entertainment complex, and''.
       (b) Definition.--Section 168(i) (relating to definitions 
     and special rules) is amended by adding at the end the 
     following new paragraph:
       ``(15) Motorsports entertainment complex.--
       ``(A) In general.--The term `motorsports entertainment 
     complex' means a racing track facility which--
       ``(i) is permanently situated on land, and
       ``(ii) during the 36-month period following the first day 
     of the month in which the asset is placed in service, hosts 1 
     or more racing events for automobiles (of any type), trucks, 
     or motorcycles which are open to the public for the price of 
     admission.
       ``(B) Ancillary and support facilities.--Such term shall 
     include, if owned by the taxpayer who owns the complex and 
     provided for the benefit of patrons of the complex--
       ``(i) ancillary facilities and land improvements in support 
     of the complex's activities (including parking lots, 
     sidewalks, waterways, bridges, fences, and landscaping),
       ``(ii) support facilities (including food and beverage 
     retailing, souvenir vending, and other nonlodging 
     accommodations), and
       ``(iii) appurtenances associated with such facilities and 
     related attractions and amusements (including ticket booths, 
     race track surfaces, suites and hospitality facilities, 
     grandstands and viewing structures, props, walls, facilities 
     that support the delivery of entertainment services, other 
     special purpose structures, facades, shop interiors, and 
     buildings).
       ``(C) Exception.--Such term shall not include any 
     transportation equipment, administrative services assets, 
     warehouses, administrative buildings, hotels, or motels.
       ``(D) Termination.--This paragraph shall not apply to any 
     property placed in service after December 31, 2007.''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to any property placed in service after the date of the 
     enactment of this Act.
       (2) Special rule for asset class 80.0.--In the case of race 
     track facilities placed in service after the date of the 
     enactment of this Act, such facilities shall not be treated 
     as theme and amusement facilities classified under asset 
     class 80.0.
       (3) No inference.--Nothing in this section or the 
     amendments made by this section shall be construed to affect 
     the treatment of property placed in service on or before the 
     date of the enactment of this Act.

     SEC. 705. SUSPENSION OF POLICYHOLDERS SURPLUS ACCOUNT 
                   PROVISIONS.

       (a) Distributions To Shareholders From Pre-1984 
     Policyholders Surplus Account.--Section 815 (relating to 
     distributions to shareholders from pre-1984 policyholders 
     surplus account) is amended by adding at the end the 
     following:
       ``(g) Special Rules Applicable During 2005 and 2006.--In 
     the case of any taxable year of a stock life insurance 
     company beginning after December 31, 2004, and before January 
     1, 2007--
       ``(1) the amount under subsection (a)(2) for such taxable 
     year shall be treated as zero, and
       ``(2) notwithstanding subsection (b), in determining any 
     subtractions from an account under subsections (c)(3) and 
     (d)(3), any distribution to shareholders during such taxable 
     year shall be treated as made first out of the policyholders 
     surplus account, then out of the shareholders surplus 
     account, and finally out of other accounts.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 706. CERTAIN ALASKA NATURAL GAS PIPELINE PROPERTY 
                   TREATED AS 7-YEAR PROPERTY.

       (a) In General.--Section 168(e)(3)(C) (defining 7-year 
     property), as amended by this Act, is amended by striking 
     ``and'' at the end of clause (ii), by redesignating clause 
     (iii) as clause (iv), and by inserting after clause (ii) the 
     following new clause:
       ``(iii) any Alaska natural gas pipeline, and''.
       (b) Alaska Natural Gas Pipeline.--Section 168(i) (relating 
     to definitions and special rules), as amended by this Act, is 
     amended by inserting after paragraph (15) the following new 
     paragraph:
       ``(16) Alaska natural gas pipeline.--The term `Alaska 
     natural gas pipeline' means the natural gas pipeline system 
     located in the State of Alaska which--
       ``(A) has a capacity of more than 500,000,000,000 Btu of 
     natural gas per day, and
       ``(B) is--
       ``(i) placed in service after December 31, 2013, or
       ``(ii) treated as placed in service on January 1, 2014, if 
     the taxpayer who places such system in service before January 
     1, 2014, elects such treatment.

     Such term includes the pipe, trunk lines, related equipment, 
     and appurtenances used to carry natural gas, but does not 
     include any gas processing plant.''.
       (c) Alternative System.--The table contained in section 
     168(g)(3)(B) (relating to special rule for certain property 
     assigned to classes) is amended by inserting after the item 
     relating to subparagraph (C)(ii) the following new item:
     ``(C)(iii).........             22''.  

       (d) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004.

     SEC. 707. EXTENSION OF ENHANCED OIL RECOVERY CREDIT TO 
                   CERTAIN ALASKA FACILITIES.

       (a) In General.--Section 43(c)(1) (defining qualified 
     enhanced oil recovery costs) is amended by adding at the end 
     the following new subparagraph:
       ``(D) Any amount which is paid or incurred during the 
     taxable year to construct a gas treatment plant which--
       ``(i) is located in the area of the United States (within 
     the meaning of section 638(1)) lying north of 64 degrees 
     North latitude,
       ``(ii) prepares Alaska natural gas for transportation 
     through a pipeline with a capacity of at least 
     2,000,000,000,000 Btu of natural gas per day, and
       ``(iii) produces carbon dioxide which is injected into 
     hydrocarbon-bearing geological formations.''.
       (b) Alaska Natural Gas.--Section 43(c) is amended by adding 
     at the end the following new paragraph:
       ``(5) Alaska Natural Gas.--For purposes of paragraph 
     (1)(D)--
       ``(1) In general.--The term `Alaska natural gas' means 
     natural gas entering the Alaska natural gas pipeline (as 
     defined in section 168(i)(16) (determined without regard to 
     subparagraph (B) thereof)) which is produced from a well--
       ``(A) located in the area of the State of Alaska lying 
     north of 64 degrees North latitude, determined by excluding 
     the area of the Alaska National Wildlife Refuge (including 
     the continental shelf thereof within the meaning of section 
     638(1)), and
       ``(B) pursuant to the applicable State and Federal 
     pollution prevention, control, and permit requirements from 
     such area (including the continental shelf thereof within the 
     meaning of section 638(1)).
       ``(2) Natural gas.--The term `natural gas' has the meaning 
     given such term by section 613A(e)(2).''.
       (c) Effective Date.--The amendment made by this section 
     shall apply to costs paid or incurred in taxable years 
     beginning after December 31, 2004.

     SEC. 708. METHOD OF ACCOUNTING FOR NAVAL SHIPBUILDERS.

       (a) In General.--In the case of a qualified naval ship 
     contract, the taxable income of such contract during the 5-
     taxable year period beginning with the taxable year in which 
     the contract commencement date occurs shall be determined 
     under a method identical to the method used in the case of a 
     qualified ship contract (as defined in section 10203(b)(2)(B) 
     of the Revenue Act of 1987).
       (b) Recapture of Tax Benefit.--In the case of a qualified 
     naval ship contract to which subsection (a) applies, the 
     taxpayer's tax imposed by chapter 1 of the Internal Revenue 
     Code of 1986 for the first taxable year following the 5-
     taxable year period described in subsection (a) shall be 
     increased by the excess (if any) of--
       (1) the amount of tax which would have been imposed during 
     such period if this section had not been enacted, over
       (2) the amount of tax so imposed during such period.
       (c) Qualified Naval Ship Contract.--For purposes of this 
     section--
       (1) In general.--The term ``qualified naval ship contract'' 
     means any contract or portion thereof that is for the 
     construction in the United States of 1 ship or submarine for 
     the Federal Government if the taxpayer reasonably expects the 
     acceptance date will occur no later than 9 years after the 
     construction commencement date.
       (2) Acceptance date.--The term ``acceptance date'' means 
     the date 1 year after the date on which the Federal 
     Government issues a letter of acceptance or other similar 
     document for the ship or submarine.
       (3) Construction commencement date.--The term 
     ``construction commencement date'' means

[[Page H8446]]

     the date on which the physical fabrication of any section or 
     component of the ship or submarine begins in the taxpayer's 
     shipyard.
       (d) Effective Date.--This section shall apply to contracts 
     for ships or submarines with respect to which the 
     construction commencement date occurs after the date of the 
     enactment of this Act.

     SEC. 709. MODIFICATION OF MINIMUM COST REQUIREMENT FOR 
                   TRANSFER OF EXCESS PENSION ASSETS.

       (a) Amendments of ERISA.--
       (1) Section 101(e)(3) of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1021(e)(3)) is amended by 
     striking ``Pension Funding Equity Act of 2004'' and inserting 
     ``American Jobs Creation Act of 2004''.
       (2) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is 
     amended by striking ``Pension Funding Equity Act of 2004'' 
     and inserting ``American Jobs Creation Act of 2004''.
       (3) Paragraph (13) of section 408(b) of such Act (29 U.S.C. 
     1108(b)(3)) is amended by striking ``Pension Funding Equity 
     Act of 2004'' and inserting ``American Jobs Creation Act of 
     2004''.
       (b) Minimum Cost Requirements.--
       (1) In general.--Section 420(c)(3)(E) is amended by adding 
     at the end the following new clause:
       ``(ii) Insignificant cost reductions permitted.--

       ``(I) In general.--An eligible employer shall not be 
     treated as failing to meet the requirements of this paragraph 
     for any taxable year if, in lieu of any reduction of retiree 
     health coverage permitted under the regulations prescribed 
     under clause (i), the employer reduces applicable employer 
     cost by an amount not in excess of the reduction in costs 
     which would have occurred if the employer had made the 
     maximum permissible reduction in retiree health coverage 
     under such regulations. In applying such regulations to any 
     subsequent taxable year, any reduction in applicable employer 
     cost under this clause shall be treated as if it were an 
     equivalent reduction in retiree health coverage.
       ``(II) Eligible employer.--For purposes of subclause (I), 
     an employer shall be treated as an eligible employer for any 
     taxable year if, for the preceding taxable year, the 
     qualified current retiree health liabilities of the employer 
     were at least 5 percent of the gross receipts of the 
     employer. For purposes of this subclause, the rules of 
     paragraphs (2), (3)(B), and (3)(C) of section 448(c) shall 
     apply in determining the amount of an employer's gross 
     receipts.''.

       (2) Conforming amendment.--Section 420(c)(3)(E) is amended 
     by striking ``The Secretary'' and inserting:
       ``(i) In general.--The Secretary''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

     SEC. 710. EXPANSION OF CREDIT FOR ELECTRICITY PRODUCED FROM 
                   CERTAIN RENEWABLE RESOURCES.

       (a) Expansion of Qualified Energy Resources.--Subsection 
     (c) of section 45 (relating to electricity produced from 
     certain renewable resources) is amended to read as follows:
       ``(c) Qualified Energy Resources and Refined Coal.--For 
     purposes of this section--
       ``(1) In general.--The term `qualified energy resources' 
     means--
       ``(A) wind,
       ``(B) closed-loop biomass,
       ``(C) open-loop biomass,
       ``(D) geothermal energy,
       ``(E) solar energy,
       ``(F) small irrigation power, and
       ``(G) municipal solid waste.
       ``(2) Closed-loop biomass.--The term `closed-loop biomass' 
     means any organic material from a plant which is planted 
     exclusively for purposes of being used at a qualified 
     facility to produce electricity.
       ``(3) Open-loop biomass.--
       ``(A) In general.--The term `open-loop biomass' means--
       ``(i) any agricultural livestock waste nutrients, or
       ``(ii) any solid, nonhazardous, cellulosic waste material 
     which is segregated from other waste materials and which is 
     derived from--

       ``(I) any of the following forest-related resources: mill 
     and harvesting residues, precommercial thinnings, slash, and 
     brush,
       ``(II) solid wood waste materials, including waste pallets, 
     crates, dunnage, manufacturing and construction wood wastes 
     (other than pressure-treated, chemically-treated, or painted 
     wood wastes), and landscape or right-of-way tree trimmings, 
     but not including municipal solid waste, gas derived from the 
     biodegradation of solid waste, or paper which is commonly 
     recycled, or
       ``(III) agriculture sources, including orchard tree crops, 
     vineyard, grain, legumes, sugar, and other crop by-products 
     or residues.

     Such term shall not include closed-loop biomass or biomass 
     burned in conjunction with fossil fuel (cofiring) beyond such 
     fossil fuel required for startup and flame stabilization.
       ``(B) Agricultural livestock waste nutrients.--
       ``(i) In general.--The term `agricultural livestock waste 
     nutrients' means agricultural livestock manure and litter, 
     including wood shavings, straw, rice hulls, and other bedding 
     material for the disposition of manure.
       ``(ii) Agricultural livestock.--The term `agricultural 
     livestock' includes bovine, swine, poultry, and sheep.
       ``(4) Geothermal energy.--The term `geothermal energy' 
     means energy derived from a geothermal deposit (within the 
     meaning of section 613(e)(2)).
       ``(5) Small irrigation power.--The term `small irrigation 
     power' means power--
       ``(A) generated without any dam or impoundment of water 
     through an irrigation system canal or ditch, and
       ``(B) the nameplate capacity rating of which is not less 
     than 150 kilowatts but is less than 5 megawatts.
       ``(6) Municipal solid waste.--The term `municipal solid 
     waste' has the meaning given the term `solid waste' under 
     section 2(27) of the Solid Waste Disposal Act (42 U.S.C. 
     6903).
       ``(7) Refined coal.--
       ``(A) In general.--The term `refined coal' means a fuel 
     which--
       ``(i) is a liquid, gaseous, or solid synthetic fuel 
     produced from coal (including lignite) or high carbon fly 
     ash, including such fuel used as a feedstock,
       ``(ii) is sold by the taxpayer with the reasonable 
     expectation that it will be used for purpose of producing 
     steam,
       ``(iii) is certified by the taxpayer as resulting (when 
     used in the production of steam) in a qualified emission 
     reduction, and
       ``(iv) is produced in such a manner as to result in an 
     increase of at least 50 percent in the market value of the 
     refined coal (excluding any increase caused by materials 
     combined or added during the production process), as compared 
     to the value of the feedstock coal.
       ``(B) Qualified emission reduction.--The term `qualified 
     emission reduction' means a reduction of at least 20 percent 
     of the emissions of nitrogen oxide and either sulfur dioxide 
     or mercury released when burning the refined coal (excluding 
     any dilution caused by materials combined or added during the 
     production process), as compared to the emissions released 
     when burning the feedstock coal or comparable coal 
     predominantly available in the marketplace as of January 1, 
     2003.''.
       (b) Expansion of Qualified Facilities.--
       (1) In general.--Section 45 is amended by redesignating 
     subsection (d) as subsection (e) and by inserting after 
     subsection (c) the following new subsection:
       ``(d) Qualified Facilities.--For purposes of this section--
       ``(1) Wind facility.--In the case of a facility using wind 
     to produce electricity, the term `qualified facility' means 
     any facility owned by the taxpayer which is originally placed 
     in service after December 31, 1993, and before January 1, 
     2006.
       ``(2) Closed-loop biomass facility.--
       ``(A) In general.--In the case of a facility using closed-
     loop biomass to produce electricity, the term `qualified 
     facility' means any facility--
       ``(i) owned by the taxpayer which is originally placed in 
     service after December 31, 1992, and before January 1, 2006, 
     or
       ``(ii) owned by the taxpayer which before January 1, 2006, 
     is originally placed in service and modified to use closed-
     loop biomass to co-fire with coal, with other biomass, or 
     with both, but only if the modification is approved under the 
     Biomass Power for Rural Development Programs or is part of a 
     pilot project of the Commodity Credit Corporation as 
     described in 65 Fed. Reg. 63052.
       ``(B) Special rules.--In the case of a qualified facility 
     described in subparagraph (A)(ii)--
       ``(i) the 10-year period referred to in subsection (a) 
     shall be treated as beginning no earlier than the date of the 
     enactment of this clause,
       ``(ii) the amount of the credit determined under subsection 
     (a) with respect to the facility shall be an amount equal to 
     the amount determined without regard to this clause 
     multiplied by the ratio of the thermal content of the closed-
     loop biomass used in such facility to the thermal content of 
     all fuels used in such facility, and
       ``(iii) if the owner of such facility is not the producer 
     of the electricity, the person eligible for the credit 
     allowable under subsection (a) shall be the lessee or the 
     operator of such facility.
       ``(3) Open-loop biomass facilities.--
       ``(A) In general.--In the case of a facility using open-
     loop biomass to produce electricity, the term `qualified 
     facility' means any facility owned by the taxpayer which--
       ``(i) in the case of a facility using agricultural 
     livestock waste nutrients--

       ``(I) is originally placed in service after the date of the 
     enactment of this subclause and before January 1, 2006, and
       ``(II) the nameplate capacity rating of which is not less 
     than 150 kilowatts, and

       ``(ii) in the case of any other facility, is originally 
     placed in service before January 1, 2006.
       ``(B) Credit eligibility.--In the case of any facility 
     described in subparagraph (A), if the owner of such facility 
     is not the producer of the electricity, the person eligible 
     for the credit allowable under subsection (a) shall be the 
     lessee or the operator of such facility.
       ``(4) Geothermal or solar energy facility.--In the case of 
     a facility using geothermal or solar energy to produce 
     electricity, the term `qualified facility' means any facility 
     owned by the taxpayer which is originally placed in service 
     after the date of the enactment of this paragraph and before 
     January 1, 2006. Such term shall not include any property 
     described in section 48(a)(3) the basis of which is taken 
     into account by the taxpayer for purposes of determining the 
     energy credit under section 48.
       ``(5) Small irrigation power facility.--In the case of a 
     facility using small irrigation power to produce electricity, 
     the term `qualified facility' means any facility owned by the 
     taxpayer which is originally placed in service after the date 
     of the enactment of this paragraph and before January 1, 
     2006.
       ``(6) Landfill gas facilities.--In the case of a facility 
     producing electricity from gas derived from the 
     biodegradation of municipal solid waste, the term `qualified 
     facility' means any facility owned by the taxpayer which is 
     originally placed in service after the date of the enactment 
     of this paragraph and before January 1, 2006.

[[Page H8447]]

       ``(7) Trash combustion facilities.--In the case of a 
     facility which burns municipal solid waste to produce 
     electricity, the term `qualified facility' means any facility 
     owned by the taxpayer which is originally placed in service 
     after the date of the enactment of this paragraph and before 
     January 1, 2006.
       ``(8) Refined coal production facility.--The term `refined 
     coal production facility' means a facility which is placed in 
     service after the date of the enactment of this paragraph and 
     before January 1, 2009.''.
       (2) Rules for refined coal production facilities.--
     Subsection (e) of section 45, as so redesignated, is amended 
     by adding at the end the following new paragraph:
       ``(8) Refined coal production facilities.--
       ``(A) Determination of credit amount.--In the case of a 
     producer of refined coal, the credit determined under this 
     section (without regard to this paragraph) for any taxable 
     year shall be increased by an amount equal to $4.375 per ton 
     of qualified refined coal--
       ``(i) produced by the taxpayer at a refined coal production 
     facility during the 10-year period beginning on the date the 
     facility was originally placed in service, and
       ``(ii) sold by the taxpayer--

       ``(I) to an unrelated person, and
       ``(II) during such 10-year period and such taxable year.

       ``(B) Phaseout of credit.--The amount of the increase 
     determined under subparagraph (A) shall be reduced by an 
     amount which bears the same ratio to the amount of the 
     increase (determined without regard to this subparagraph) 
     as--
       ``(i) the amount by which the reference price of fuel used 
     as a feedstock (within the meaning of subsection (c)(7)(A)) 
     for the calendar year in which the sale occurs exceeds an 
     amount equal to 1.7 multiplied by the reference price for 
     such fuel in 2002, bears to
       ``(ii) $8.75.
       ``(C) Application of rules.--Rules similar to the rules of 
     the subsection (b)(3) and paragraphs (1) through (5) and (9) 
     of this subsection shall apply for purposes of determining 
     the amount of any increase under this paragraph.''.
       (3) Conforming amendments.--
       (A) Section 45(e), as so redesignated, is amended by 
     striking ``subsection (c)(3)(A)'' in paragraph (7)(A)(i) and 
     inserting ``subsection (d)(1)''.
       (B) The heading of section 45 and the item relating to such 
     section in the table of sections for subpart D of part IV of 
     subchapter A of chapter 1 are each amended by inserting 
     before the period at the end ``, etc''.
       (C) Paragraph (2) of section 45(b) is amended by striking 
     ``The 1.5 cent amount'' and all that follows through 
     ``paragraph (1)'' and inserting ``The 1.5 cent amount in 
     subsection (a), the 8 cent amount in paragraph (1), the 
     $4.375 amount in subsection (e)(8)(A), and in subsection 
     (e)(8)(B)(i) the reference price of fuel used as a feedstock 
     (within the meaning of subsection (c)(7)(A)) in 2002''.
       (c) Special Credit Rate and Period for Electricity Produced 
     and Sold After Enactment Date.--Section 45(b) is amended by 
     adding at the end the following new paragraph:
       ``(4) Credit rate and period for electricity produced and 
     sold from certain facilities.--
       ``(A) Credit rate.--In the case of electricity produced and 
     sold in any calendar year after 2003 at any qualified 
     facility described in paragraph (3), (5), (6), or (7) of 
     subsection (d), the amount in effect under subsection (a)(1) 
     for such calendar year (determined before the application of 
     the last sentence of paragraph (2) of this subsection) shall 
     be reduced by one-half.
       ``(B) Credit period.--
       ``(i) In general.--Except as provided in clause (ii), in 
     the case of any facility described in paragraph (3), (4), 
     (5), (6), or (7) of subsection (d), the 5-year period 
     beginning on the date the facility was originally placed in 
     service shall be substituted for the 10-year period in 
     subsection (a)(2)(A)(ii).
       ``(ii) Certain open-loop biomass facilities.--In the case 
     of any facility described in subsection (d)(3)(A)(ii) placed 
     in service before the date of the enactment of this 
     paragraph, the 5-year period beginning on the date of the 
     enactment of this Act shall be substituted for the 10-year 
     period in subsection (a)(2)(A)(ii).''.
       (d) Coordination With Other Credits.--Section 45(e), as 
     redesignated and amended by this section, is amended by 
     inserting after paragraph (8) the following new paragraph:
       ``(9) Coordination with credit for producing fuel from a 
     nonconventional source.--The term `qualified facility' shall 
     not include any facility the production from which is allowed 
     as a credit under section 29 for the taxable year or any 
     prior taxable year.''.
       (e) Coordination With Section 48.--Section 48(a)(3) 
     (defining energy property) is amended by adding at the end 
     the following new sentence: ``Such term shall not include any 
     property which is part of a facility the production from 
     which is allowed as a credit under section 45 for the taxable 
     year or any prior taxable year.''.
       (f) Elimination of Certain Credit Reductions.--Section 
     45(b)(3) (relating to credit reduced for grants, tax-exempt 
     bonds, subsidized energy financing, and other credits) is 
     amended--
       (1) by inserting ``the lesser of \1/2\ or'' before ``a 
     fraction'' in the matter preceding subparagraph (A), and
       (2) by adding at the end the following new sentence: ``This 
     paragraph shall not apply with respect to any facility 
     described in subsection (d)(2)(A)(ii).''.
       (g) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to electricity produced and sold after the date of the 
     enactment of this Act, in taxable years ending after such 
     date.
       (2) Certain biomass facilities.--With respect to any 
     facility described in section 45(d)(3)(A)(ii) of the Internal 
     Revenue Code of 1986, as added by subsection (b)(1), which is 
     placed in service before the date of the enactment of this 
     Act, the amendments made by this section shall apply to 
     electricity produced and sold after December 31, 2004, in 
     taxable years ending after such date.
       (3) Credit rate and period for new facilities.--The 
     amendments made by subsection (c) shall apply to electricity 
     produced and sold after December 31, 2004, in taxable years 
     ending after such date.
       (4) Nonapplication of amendments to preeffective date 
     poultry waste facilities.--The amendments made by this 
     section shall not apply with respect to any poultry waste 
     facility (within the meaning of section 45(c)(3)(C), as in 
     effect on the day before the date of the enactment of this 
     Act) placed in service before January 1, 2004.
       (5) Refined coal production facilities.--Section 45(e)(8) 
     of the Internal Revenue Code of 1986, as added by this 
     section, shall apply to refined coal produced and sold after 
     the date of the enactment of this Act.

     SEC. 711. CERTAIN BUSINESS RELATED CREDITS ALLOWED AGAINST 
                   REGULAR AND MINIMUM TAX.

       (a) In General.--Subsection (c) of section 38 (relating to 
     limitation based on amount of tax) is amended by 
     redesignating paragraph (4) as paragraph (5) and by inserting 
     after paragraph (3) the following new paragraph:
       ``(4) Special rules for specified credits.--
       ``(A) In general.--In the case of specified credits--
       ``(i) this section and section 39 shall be applied 
     separately with respect to such credits, and
       ``(ii) in applying paragraph (1) to such credits--

       ``(I) the tentative minimum tax shall be treated as being 
     zero, and
       ``(II) the limitation under paragraph (1) (as modified by 
     subclause (I)) shall be reduced by the credit allowed under 
     subsection (a) for the taxable year (other than the specified 
     credits).

       ``(B) Specified credits.--For purposes of this subsection, 
     the term `specified credits' includes--
       ``(i) for taxable years beginning after December 31, 2004, 
     the credit determined under section 40,
       ``(ii) the credit determined under section 45 to the extent 
     that such credit is attributable to electricity or refined 
     coal produced--

       ``(I) at a facility which is originally placed in service 
     after the date of the enactment of this paragraph, and
       ``(II) during the 4-year period beginning on the date that 
     such facility was originally placed in service''.

       (b) Conforming Amendments.--Paragraph (2)(A)(ii)(II) and 
     (3)(A)(ii)(II) of section 38(c) are each amended by inserting 
     ``or the specified credits'' after ``employee credit''.
       (c) Effective Date.--Except as otherwise provided, the 
     amendments made by this section shall apply to taxable years 
     ending after the date of the enactment of this Act.

     SEC. 712. INCLUSION OF PRIMARY AND SECONDARY MEDICAL 
                   STRATEGIES FOR CHILDREN AND ADULTS WITH SICKLE 
                   CELL DISEASE AS MEDICAL ASSISTANCE UNDER THE 
                   MEDICAID PROGRAM.

       (a) Optional Medical Assistance.--
       (1) In general.--Section 1905 of the Social Security Act 
     (42 U.S.C. 1396d) is amended--
       (A) in subsection (a)--
       (i) by striking ``and'' at the end of paragraph (26);
       (ii) by redesignating paragraph (27) as paragraph (28); and
       (iii) by inserting after paragraph (26), the following:
       ``(27) subject to subsection (x), primary and secondary 
     medical strategies and treatment and services for individuals 
     who have Sickle Cell Disease; and''; and
       (B) by adding at the end the following:
       ``(x) For purposes of subsection (a)(27), the strategies, 
     treatment, and services described in that subsection include 
     the following:
       ``(1) Chronic blood transfusion (with deferoxamine 
     chelation) to prevent stroke in individuals with Sickle Cell 
     Disease who have been identified as being at high risk for 
     stroke.
       ``(2) Genetic counseling and testing for individuals with 
     Sickle Cell Disease or the sickle cell trait to allow health 
     care professionals to treat such individuals and to prevent 
     symptoms of Sickle Cell Disease.
       ``(3) Other treatment and services to prevent individuals 
     who have Sickle Cell Disease and who have had a stroke from 
     having another stroke.''.
       (2) Rule of Construction.--Nothing in subsections (a)(27) 
     or (x) of section 1905 of the Social Security Act (42 U.S.C. 
     1396d), as added by paragraph (1), shall be construed as 
     implying that a State medicaid program under title XIX of 
     such Act could not have treated, prior to the date of 
     enactment of this Act, any of the primary and secondary 
     medical strategies and treatment and services described in 
     such subsections as medical assistance under such program, 
     including as early and periodic screening, diagnostic, and 
     treatment services under section 1905(r) of such Act.
       (b) Federal Reimbursement for Education and Other Services 
     Related to the Prevention and Treatment of Sickle Cell 
     Disease.--Section 1903(a)(3) of the Social Security Act (42 
     U.S.C. 1396b(a)(3)) is amended--
       (1) in subparagraph (D), by striking ``plus'' at the end 
     and inserting ``and''; and
       (2) by adding at the end the following:
       ``(E) 50 percent of the sums expended with respect to costs 
     incurred during such quarter as are attributable to 
     providing--

[[Page H8448]]

       ``(i) services to identify and educate individuals who are 
     likely to be eligible for medical assistance under this title 
     and who have Sickle Cell Disease or who are carriers of the 
     sickle cell gene, including education regarding how to 
     identify such individuals; or
       ``(ii) education regarding the risks of stroke and other 
     complications, as well as the prevention of stroke and other 
     complications, in individuals who are likely to be eligible 
     for medical assistance under this title and who have Sickle 
     Cell Disease; plus''.
       (c) Demonstration Program for the Development and 
     Establishment of Systemic Mechanisms for the Prevention and 
     Treatment of Sickle Cell Disease.--
       (1) Authority to conduct demonstration program.--
       (A) In general.--The Administrator, through the Bureau of 
     Primary Health Care and the Maternal and Child Health Bureau, 
     shall conduct a demonstration program by making grants to up 
     to 40 eligible entities for each fiscal year in which the 
     program is conducted under this section for the purpose of 
     developing and establishing systemic mechanisms to improve 
     the prevention and treatment of Sickle Cell Disease, 
     including through--
       (i) the coordination of service delivery for individuals 
     with Sickle Cell Disease;
       (ii) genetic counseling and testing;
       (iii) bundling of technical services related to the 
     prevention and treatment of Sickle Cell Disease;
       (iv) training of health professionals; and
       (v) identifying and establishing other efforts related to 
     the expansion and coordination of education, treatment, and 
     continuity of care programs for individuals with Sickle Cell 
     Disease.
       (B) Grant award requirements.--
       (i) Geographic diversity.--The Administrator shall, to the 
     extent practicable, award grants under this section to 
     eligible entities located in different regions of the United 
     States.
       (ii) Priority.--In awarding grants under this subsection, 
     the Administrator shall give priority to awarding grants to 
     eligible entities that are--

       (I) Federally-qualified health centers that have a 
     partnership or other arrangement with a comprehensive Sickle 
     Cell Disease treatment center that does not receive funds 
     from the National Institutes of Health; or
       (II) Federally-qualified health centers that intend to 
     develop a partnership or other arrangement with a 
     comprehensive Sickle Cell Disease treatment center that does 
     not receive funds from the National Institutes of Health.

       (2) Additional requirements.--An eligible entity awarded a 
     grant under this subsection shall use funds made available 
     under the grant to carry out, in addition to the activities 
     described in paragraph (1)(A), the following activities:
       (A) To facilitate and coordinate the delivery of education, 
     treatment, and continuity of care for individuals with Sickle 
     Cell Disease under--
       (i) the entity's collaborative agreement with a community-
     based Sickle Cell Disease organization or a nonprofit entity 
     that works with individuals who have Sickle Cell Disease;
       (ii) the Sickle Cell Disease newborn screening program for 
     the State in which the entity is located; and
       (iii) the maternal and child health program under title V 
     of the Social Security Act (42 U.S.C. 701 et seq.) for the 
     State in which the entity is located.
       (B) To train nursing and other health staff who provide 
     care for individuals with Sickle Cell Disease.
       (C) To enter into a partnership with adult or pediatric 
     hematologists in the region and other regional experts in 
     Sickle Cell Disease at tertiary and academic health centers 
     and State and county health offices.
       (D) To identify and secure resources for ensuring 
     reimbursement under the medicaid program, State children's 
     health insurance program, and other health programs for the 
     prevention and treatment of Sickle Cell Disease.
       (3) National coordinating center.--
       (A) Establishment.--The Administrator shall enter into a 
     contract with an entity to serve as the National Coordinating 
     Center for the demonstration program conducted under this 
     subsection.
       (B) Activities described.--The National Coordinating Center 
     shall--
       (i) collect, coordinate, monitor, and distribute data, best 
     practices, and findings regarding the activities funded under 
     grants made to eligible entities under the demonstration 
     program;
       (ii) develop a model protocol for eligible entities with 
     respect to the prevention and treatment of Sickle Cell 
     Disease;
       (iii) develop educational materials regarding the 
     prevention and treatment of Sickle Cell Disease; and
       (iv) prepare and submit to Congress a final report that 
     includes recommendations regarding the effectiveness of the 
     demonstration program conducted under this subsection and 
     such direct outcome measures as--

       (I) the number and type of health care resources utilized 
     (such as emergency room visits, hospital visits, length of 
     stay, and physician visits for individuals with Sickle Cell 
     Disease); and
       (II) the number of individuals that were tested and 
     subsequently received genetic counseling for the sickle cell 
     trait.

       (4) Application.--An eligible entity desiring a grant under 
     this subsection shall submit an application to the 
     Administrator at such time, in such manner, and containing 
     such information as the Administrator may require.
       (5) Definitions.--In this subsection:
       (A) Administrator.--The term ``Administrator'' means the 
     Administrator of the Health Resources and Services 
     Administration.
       (B) Eligible entity.--The term ``eligible entity'' means a 
     Federally-qualified health center, a nonprofit hospital or 
     clinic, or a university health center that provides primary 
     health care, that--
       (i) has a collaborative agreement with a community-based 
     SickleCell Disease organization or a nonprofit entity with 
     experience in working with individuals who have Sickle Cell 
     Disease; and
       (ii) demonstrates to the Administrator that either the 
     Federally-qualified health center, the nonprofit hospital or 
     clinic, the university health center, the organization or 
     entity described in clause (i), or the experts described in 
     paragraph (2)(C), has at least 5 years of experience in 
     working with individuals who have Sickle Cell Disease.
       (C) Federally-qualified health center.--The term 
     ``Federally-qualified health center'' has the meaning given 
     that term in section 1905(l)(2)(B) of the Social Security Act 
     (42 U.S.C. 1396d(l)(2)(B)).
       (6) Authorization of appropriations.--There is authorized 
     to be appropriated to carry out this subsection, $10,000,000 
     for each of fiscal years 2005 through 2009.
       (d) Effective Date.--The amendments made by subsections (a) 
     and (b) take effect on the date of enactment of this Act and 
     apply to medical assistance and services provided under title 
     XIX of the Social Security Act (42 U.S.C. 1396 et seq.) on or 
     after that date.

     SEC. 713. CEILING FANS.

       (a) In General.--Subchapter II of chapter 99 of the 
     Harmonized Tariff Schedule of the United States is amended by 
     inserting in numerical sequence the following new heading:

``      9902.84.14      Ceiling fans for    Free            No change       No change       On or before 12/
                         permanent                                                           31/2006          ''
                         installation                                                                          .
                         (provided for in
                         subheading
                         8414.51.00)......
----------------------------------------------------------------------------------------------------------------

       (b) Effective Date.--The amendment made by this section 
     applies to goods entered, or withdrawn from warehouse, for 
     consumption on or after the 15th day after the date of 
     enactment of this Act.

     SEC. 714. CERTAIN STEAM GENERATORS, AND CERTAIN REACTOR 
                   VESSEL HEADS AND PRESSURIZERS, USED IN NUCLEAR 
                   FACILITIES.

       (a) Certain Steam Generators.--Heading 9902.84.02 of the 
     Harmonized Tariff Schedule of the United States is amended by 
     striking ``12/31/2006'' and inserting ``12/31/2008''.
       (b) Certain Reactor Vessel Heads and Pressurizers.--
     Subchapter II of chapter 99 of the Harmonized Tariff Schedule 
     of the United States is amended by inserting in numerical 
     sequence the following new heading:

``      9902.84.03      Reactor vessel      Free            No change       No change       On or before 12/
                         heads and                                                           31/2008          ''
                         pressurizers for                                                                      .
                         nuclear reactors
                         (provided for in
                         subheading
                         8401.40.00)......
----------------------------------------------------------------------------------------------------------------

       (c) Effective Date.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall take effect on the date of the enactment of this Act.
       (2) Subsection (b).--The amendment made subsection (b) 
     shall apply to goods entered, or withdrawn from warehouse, 
     for consumption on or after the 15th day after the date of 
     the enactment of this Act.

                     TITLE VIII--REVENUE PROVISIONS

 Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and 
                         Corporate Expatriation

     SEC. 801. TAX TREATMENT OF EXPATRIATED ENTITIES AND THEIR 
                   FOREIGN PARENTS.

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

     ``SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES AND THEIR 
                   FOREIGN PARENTS.

       ``(a) Tax on Inversion Gain of Expatriated Entities.--
       ``(1) In general.--The taxable income of an expatriated 
     entity for any taxable year which includes any portion of the 
     applicable period shall in no event be less than the 
     inversion gain of the entity for the taxable year.
       ``(2) Expatriated entity.--For purposes of this 
     subsection--

[[Page H8449]]

       ``(A) In general.--The term `expatriated entity' means--
       ``(i) the domestic corporation or partnership referred to 
     in subparagraph (B)(i) with respect to which a foreign 
     corporation is a surrogate foreign corporation, and
       ``(ii) any United States person who is related (within the 
     meaning of section 267(b) or 707(b)(1)) to a domestic 
     corporation or partnership described in clause (i).
       ``(B) Surrogate foreign corporation.--A foreign corporation 
     shall be treated as a surrogate foreign corporation if, 
     pursuant to a plan (or a series of related transactions)--
       ``(i) the entity completes after March 4, 2003, the direct 
     or indirect acquisition of substantially all of the 
     properties held directly or indirectly by a domestic 
     corporation or substantially all of the properties 
     constituting a trade or business of a domestic partnership,
       ``(ii) after the acquisition at least 60 percent of the 
     stock (by vote or value) of the entity is held--

       ``(I) in the case of an acquisition with respect to a 
     domestic corporation, by former shareholders of the domestic 
     corporation by reason of holding stock in the domestic 
     corporation, or
       ``(II) in the case of an acquisition with respect to a 
     domestic partnership, by former partners of the domestic 
     partnership by reason of holding a capital or profits 
     interest in the domestic partnership, and

       ``(iii) after the acquisition the expanded affiliated group 
     which includes the entity does not have substantial business 
     activities in the foreign country in which, or under the law 
     of which, the entity is created or organized, when compared 
     to the total business activities of such expanded affiliated 
     group.

     An entity otherwise described in clause (i) with respect to 
     any domestic corporation or partnership trade or business 
     shall be treated as not so described if, on or before March 
     4, 2003, such entity acquired directly or indirectly more 
     than half of the properties held directly or indirectly by 
     such corporation or more than half of the properties 
     constituting such partnership trade or business, as the case 
     may be.
       ``(3) Coordination with subsection (b).--Paragraph (1) 
     shall not apply to any entity which is treated as a domestic 
     corporation under subsection (b).
       ``(b) Inverted Corporations Treated as Domestic 
     Corporations.--Notwithstanding section 7701(a)(4), a foreign 
     corporation shall be treated for purposes of this title as a 
     domestic corporation if such corporation would be a surrogate 
     foreign corporation if subsection (a)(2) were applied by 
     substituting `80 percent' for `60 percent'.
       ``(c) Definitions and Special Rules.--
       ``(1) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group as defined in 
     section 1504(a) but without regard to section 1504(b)(3), 
     except that section 1504(a) shall be applied by substituting 
     `more than 50 percent' for `at least 80 percent' each place 
     it appears.
       ``(2) Certain stock disregarded.--There shall not be taken 
     into account in determining ownership under subsection 
     (a)(2)(B)(ii)--
       ``(A) stock held by members of the expanded affiliated 
     group which includes the foreign corporation, or
       ``(B) stock of such foreign corporation which is sold in a 
     public offering related to the acquisition described in 
     subsection (a)(2)(B)(i).
       ``(3) Plan deemed in certain cases.--If a foreign 
     corporation acquires directly or indirectly substantially all 
     of the properties of a domestic corporation or partnership 
     during the 4-year period beginning on the date which is 2 
     years before the ownership requirements of subsection 
     (a)(2)(B)(ii) are met, such actions shall be treated as 
     pursuant to a plan.
       ``(4) Certain transfers disregarded.--The transfer of 
     properties or liabilities (including by contribution or 
     distribution) shall be disregarded if such transfers are part 
     of a plan a principal purpose of which is to avoid the 
     purposes of this section.
       ``(5) Special rule for related partnerships.--For purposes 
     of applying subsection (a)(2)(B)(ii) to the acquisition of a 
     trade or business of a domestic partnership, except as 
     provided in regulations, all partnerships which are under 
     common control (within the meaning of section 482) shall be 
     treated as 1 partnership.
       ``(6) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to determine whether a 
     corporation is a surrogate foreign corporation, including 
     regulations--
       ``(A) to treat warrants, options, contracts to acquire 
     stock, convertible debt interests, and other similar 
     interests as stock, and
       ``(B) to treat stock as not stock.
       ``(d) Other Definitions.--For purposes of this section--
       ``(1) Applicable period.--The term `applicable period' 
     means the period--
       ``(A) beginning on the first date properties are acquired 
     as part of the acquisition described in subsection 
     (a)(2)(B)(i), and
       ``(B) ending on the date which is 10 years after the last 
     date properties are acquired as part of such acquisition.
       ``(2) Inversion gain.--The term `inversion gain' means the 
     income or gain recognized by reason of the transfer during 
     the applicable period of stock or other properties by an 
     expatriated entity, and any income received or accrued during 
     the applicable period by reason of a license of any property 
     by an expatriated entity--
       ``(A) as part of the acquisition described in subsection 
     (a)(2)(B)(i), or
       ``(B) after such acquisition if the transfer or license is 
     to a foreign related person.

     Subparagraph (B) shall not apply to property described in 
     section 1221(a)(1) in the hands of the expatriated entity.
       ``(3) Foreign related person.--The term `foreign related 
     person' means, with respect to any expatriated entity, a 
     foreign person which--
       ``(A) is related (within the meaning of section 267(b) or 
     707(b)(1)) to such entity, or
       ``(B) is under the same common control (within the meaning 
     of section 482) as such entity.
       ``(e) Special Rules.--
       ``(1) Credits not allowed against tax on inversion gain.--
     Credits (other than the credit allowed by section 901) shall 
     be allowed against the tax imposed by this chapter on an 
     expatriated entity for any taxable year described in 
     subsection (a) only to the extent such tax exceeds the 
     product of--
       ``(A) the amount of the inversion gain for the taxable 
     year, and
       ``(B) the highest rate of tax specified in section 
     11(b)(1).

     For purposes of determining the credit allowed by section 
     901, inversion gain shall be treated as from sources within 
     the United States.
       ``(2) Special rules for partnerships.--In the case of an 
     expatriated entity which is a partnership--
       ``(A) subsection (a)(1) shall apply at the partner rather 
     than the partnership level,
       ``(B) the inversion gain of any partner for any taxable 
     year shall be equal to the sum of--
       ``(i) the partner's distributive share of inversion gain of 
     the partnership for such taxable year, plus
       ``(ii) gain recognized for the taxable year by the partner 
     by reason of the transfer during the applicable period of any 
     partnership interest of the partner in such partnership to 
     the surrogate foreign corporation, and
       ``(C) the highest rate of tax specified in the rate 
     schedule applicable to the partner under this chapter shall 
     be substituted for the rate of tax referred to in paragraph 
     (1).
       ``(3) Coordination with section 172 and minimum tax.--Rules 
     similar to the rules of paragraphs (3) and (4) of section 
     860E(a) shall apply for purposes of subsection (a).
       ``(4) Statute of limitations.--
       ``(A) In general.--The statutory period for the assessment 
     of any deficiency attributable to the inversion gain of any 
     taxpayer for any pre-inversion year shall not expire before 
     the expiration of 3 years from the date the Secretary is 
     notified by the taxpayer (in such manner as the Secretary may 
     prescribe) of the acquisition described in subsection 
     (a)(2)(B)(i) to which such gain relates and such deficiency 
     may be assessed before the expiration of such 3-year period 
     notwithstanding the provisions of any other law or rule of 
     law which would otherwise prevent such assessment.
       ``(B) Pre-inversion year.--For purposes of subparagraph 
     (A), the term `pre-inversion year' means any taxable year 
     if--
       ``(i) any portion of the applicable period is included in 
     such taxable year, and
       ``(ii) such year ends before the taxable year in which the 
     acquisition described in subsection (a)(2)(B)(i) is 
     completed.
       ``(f) Special Rule for Treaties.--Nothing in section 894 or 
     7852(d) or in any other provision of law shall be construed 
     as permitting an exemption, by reason of any treaty 
     obligation of the United States heretofore or hereafter 
     entered into, from the provisions of this section.
       ``(g) Regulations.--The Secretary shall provide such 
     regulations as are necessary to carry out this section, 
     including regulations providing for such adjustments to the 
     application of this section as are necessary to prevent the 
     avoidance of the purposes of this section, including the 
     avoidance of such purposes through--
       ``(1) the use of related persons, pass-through or other 
     noncorporate entities, or other intermediaries, or
       ``(2) transactions designed to have persons cease to be (or 
     not become) members of expanded affiliated groups or related 
     persons.''.
       (b) Conforming Amendment.--The table of sections for 
     subchapter C of chapter 80 is amended by adding at the end 
     the following new item:

``Sec. 7874. Rules relating to expatriated entities and their foreign 
              parents.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after March 4, 2003.

     SEC. 802. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN 
                   EXPATRIATED CORPORATIONS.

       (a) In General.--Subtitle D is amended by inserting after 
     chapter 44 end the following new chapter:

       ``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES

``Sec. 4985. Stock compensation of insiders in expatriated 
              corporations.

     ``SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPATRIATED 
                   CORPORATIONS.

       ``(a) Imposition of Tax.--In the case of an individual who 
     is a disqualified individual with respect to any expatriated 
     corporation, there is hereby imposed on such person a tax 
     equal to--
       ``(1) the rate of tax specified in section 1(h)(1)(C), 
     multiplied by
       ``(2) the value (determined under subsection (b)) of the 
     specified stock compensation held (directly or indirectly) by 
     or for the benefit of such individual or a member of such 
     individual's family (as defined in section 267) at any time 
     during the 12-month period beginning on the date which is 6 
     months before the expatriation date.
       ``(b) Value.--For purposes of subsection (a)--
       ``(1) In general.--The value of specified stock 
     compensation shall be--
       ``(A) in the case of a stock option (or other similar 
     right) or a stock appreciation right, the fair value of such 
     option or right, and
       ``(B) in any other case, the fair market value of such 
     compensation.
       ``(2) Date for determining value.--The determination of 
     value shall be made--

[[Page H8450]]

       ``(A) in the case of specified stock compensation held on 
     the expatriation date, on such date,
       ``(B) in the case of such compensation which is canceled 
     during the 6 months before the expatriation date, on the day 
     before such cancellation, and
       ``(C) in the case of such compensation which is granted 
     after the expatriation date, on the date such compensation is 
     granted.
       ``(c) Tax To Apply Only if Shareholder Gain Recognized.--
     Subsection (a) shall apply to any disqualified individual 
     with respect to an expatriated corporation only if gain (if 
     any) on any stock in such corporation is recognized in whole 
     or part by any shareholder by reason of the acquisition 
     referred to in section 7874(a)(2)(B)(i) with respect to such 
     corporation.
       ``(d) Exception Where Gain Recognized on Compensation.--
     Subsection (a) shall not apply to--
       ``(1) any stock option which is exercised on the 
     expatriation date or during the 6-month period before such 
     date and to the stock acquired in such exercise, if income is 
     recognized under section 83 on or before the expatriation 
     date with respect to the stock acquired pursuant to such 
     exercise, and
       ``(2) any other specified stock compensation which is 
     exercised, sold, exchanged, distributed, cashed-out, or 
     otherwise paid during such period in a transaction in which 
     income, gain, or loss is recognized in full.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Disqualified individual.--The term `disqualified 
     individual' means, with respect to a corporation, any 
     individual who, at any time during the 12-month period 
     beginning on the date which is 6 months before the 
     expatriation date--
       ``(A) is subject to the requirements of section 16(a) of 
     the Securities Exchange Act of 1934 with respect to such 
     corporation or any member of the expanded affiliated group 
     which includes such corporation, or
       ``(B) would be subject to such requirements if such 
     corporation or member were an issuer of equity securities 
     referred to in such section.
       ``(2) Expatriated corporation; expatriation date.--
       ``(A) Expatriated corporation.--The term `expatriated 
     corporation' means any corporation which is an expatriated 
     entity (as defined in section 7874(a)(2)). Such term includes 
     any predecessor or successor of such a corporation.
       ``(B) Expatriation date.--The term `expatriation date' 
     means, with respect to a corporation, the date on which the 
     corporation first becomes an expatriated corporation.
       ``(3) Specified stock compensation.--
       ``(A) In general.--The term `specified stock compensation' 
     means payment (or right to payment) granted by the 
     expatriated corporation (or by any member of the expanded 
     affiliated group which includes such corporation) to any 
     person in connection with the performance of services by a 
     disqualified individual for such corporation or member if the 
     value of such payment or right is based on (or determined by 
     reference to) the value (or change in value) of stock in such 
     corporation (or any such member).
       ``(B) Exceptions.--Such term shall not include--
       ``(i) any option to which part II of subchapter D of 
     chapter 1 applies, or
       ``(ii) any payment or right to payment from a plan referred 
     to in section 280G(b)(6).
       ``(4) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group (as defined in 
     section 1504(a) without regard to section 1504(b)(3)); except 
     that section 1504(a) shall be applied by substituting `more 
     than 50 percent' for `at least 80 percent' each place it 
     appears.
       ``(f) Special Rules.--For purposes of this section--
       ``(1) Cancellation of restriction.--The cancellation of a 
     restriction which by its terms will never lapse shall be 
     treated as a grant.
       ``(2) Payment or reimbursement of tax by corporation 
     treated as specified stock compensation.--Any payment of the 
     tax imposed by this section directly or indirectly by the 
     expatriated corporation or by any member of the expanded 
     affiliated group which includes such corporation--
       ``(A) shall be treated as specified stock compensation, and
       ``(B) shall not be allowed as a deduction under any 
     provision of chapter 1.
       ``(3) Certain restrictions ignored.--Whether there is 
     specified stock compensation, and the value thereof, shall be 
     determined without regard to any restriction other than a 
     restriction which by its terms will never lapse.
       ``(4) Property transfers.--Any transfer of property shall 
     be treated as a payment and any right to a transfer of 
     property shall be treated as a right to a payment.
       ``(5) Other administrative provisions.--For purposes of 
     subtitle F, any tax imposed by this section shall be treated 
     as a tax imposed by subtitle A.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Denial of Deduction.--
       (1) In general.--Paragraph (6) of section 275(a) is amended 
     by inserting ``45,'' before ``46,''.
       (2) $1,000,000 limit on deductible compensation reduced by 
     payment of excise tax on specified stock compensation.--
     Paragraph (4) of section 162(m) is amended by adding at the 
     end the following new subparagraph:
       ``(G) Coordination with excise tax on specified stock 
     compensation.--The dollar limitation contained in paragraph 
     (1) with respect to any covered employee shall be reduced 
     (but not below zero) by the amount of any payment (with 
     respect to such employee) of the tax imposed by section 4985 
     directly or indirectly by the expatriated corporation (as 
     defined in such section) or by any member of the expanded 
     affiliated group (as defined in such section) which includes 
     such corporation.''.
       (c) Conforming Amendments.--
       (1) The last sentence of section 3121(v)(2)(A) is amended 
     by inserting before the period ``or to any specified stock 
     compensation (as defined in section 4985) on which tax is 
     imposed by section 4985''.
       (2) The table of chapters for subtitle D is amended by 
     inserting after the item relating to chapter 44 the following 
     new item:

``Chapter 45. Provisions relating to expatriated entities.''.

       (d) Effective Date.--The amendments made by this section 
     shall take effect on March 4, 2003; except that periods 
     before such date shall not be taken into account in applying 
     the periods in subsections (a) and (e)(1) of section 4985 of 
     the Internal Revenue Code of 1986, as added by this section.

     SEC. 803. REINSURANCE OF UNITED STATES RISKS IN FOREIGN 
                   JURISDICTIONS.

       (a) In General.--Section 845(a) (relating to allocation in 
     case of reinsurance agreement involving tax avoidance or 
     evasion) is amended by striking ``source and character'' and 
     inserting ``amount, source, or character''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to any risk reinsured after the date of the 
     enactment of this Act.

     SEC. 804. REVISION OF TAX RULES ON EXPATRIATION OF 
                   INDIVIDUALS.

       (a) Expatriation To Avoid Tax.--
       (1) In general.--Subsection (a) of section 877 (relating to 
     treatment of expatriates) is amended to read as follows:
       ``(a) Treatment of Expatriates.--
       ``(1) In general.--Every nonresident alien individual to 
     whom this section applies and who, within the 10-year period 
     immediately preceding the close of the taxable year, lost 
     United States citizenship shall be taxable for such taxable 
     year in the manner provided in subsection (b) if the tax 
     imposed pursuant to such subsection (after any reduction in 
     such tax under the last sentence of such subsection) exceeds 
     the tax which, without regard to this section, is imposed 
     pursuant to section 871.
       ``(2) Individuals subject to this section.--This section 
     shall apply to any individual if--
       ``(A) the average annual net income tax (as defined in 
     section 38(c)(1)) of such individual for the period of 5 
     taxable years ending before the date of the loss of United 
     States citizenship is greater than $124,000,
       ``(B) the net worth of the individual as of such date is 
     $2,000,000 or more, or
       ``(C) such individual fails to certify under penalty of 
     perjury that he has met the requirements of this title for 
     the 5 preceding taxable years or fails to submit such 
     evidence of such compliance as the Secretary may require.

     In the case of the loss of United States citizenship in any 
     calendar year after 2004, such $124,000 amount shall be 
     increased by an amount equal to such dollar amount multiplied 
     by the cost-of-living adjustment determined under section 
     1(f)(3) for such calendar year by substituting `2003' for 
     `1992' in subparagraph (B) thereof. Any increase under the 
     preceding sentence shall be rounded to the nearest multiple 
     of $1,000.''.
       (2) Revision of exceptions from alternative tax.--
     Subsection (c) of section 877 (relating to tax avoidance not 
     presumed in certain cases) is amended to read as follows:
       ``(c) Exceptions.--
       ``(1) In general.--Subparagraphs (A) and (B) of subsection 
     (a)(2) shall not apply to an individual described in 
     paragraph (2) or (3).
       ``(2) Dual citizens.--
       ``(A) In general.--An individual is described in this 
     paragraph if--
       ``(i) the individual became at birth a citizen of the 
     United States and a citizen of another country and continues 
     to be a citizen of such other country, and
       ``(ii) the individual has had no substantial contacts with 
     the United States.
       ``(B) Substantial contacts.--An individual shall be treated 
     as having no substantial contacts with the United States only 
     if the individual--
       ``(i) was never a resident of the United States (as defined 
     in section 7701(b)),
       ``(ii) has never held a United States passport, and
       ``(iii) was not present in the United States for more than 
     30 days during any calendar year which is 1 of the 10 
     calendar years preceding the individual's loss of United 
     States citizenship.
       ``(3) Certain minors.--An individual is described in this 
     paragraph if--
       ``(A) the individual became at birth a citizen of the 
     United States,
       ``(B) neither parent of such individual was a citizen of 
     the United States at the time of such birth,
       ``(C) the individual's loss of United States citizenship 
     occurs before such individual attains age 18\1/2\, and
       ``(D) the individual was not present in the United States 
     for more than 30 days during any calendar year which is 1 of 
     the 10 calendar years preceding the individual's loss of 
     United States citizenship.''.
       (3) Conforming amendment.--Section 2107(a) is amended to 
     read as follows:
       ``(a) Treatment of Expatriates.--A tax computed in 
     accordance with the table contained in section 2001 is hereby 
     imposed on the transfer of the taxable estate, determined as 
     provided in section 2106, of every decedent nonresident not a 
     citizen of the United States if the date of death occurs 
     during a taxable year with respect to which the decedent is 
     subject to tax under section 877(b).''.
       (b) Special Rules for Determining When an Individual Is No 
     Longer a United States Citizen or Long-Term Resident.--
     Section 7701

[[Page H8451]]

     (relating to definitions) is amended by redesignating 
     subsection (n) as subsection (o) and by inserting after 
     subsection (m) the following new subsection:
       ``(n) Special Rules for Determining When an Individual Is 
     No Longer a United States Citizen or Long-Term Resident.--An 
     individual who would (but for this subsection) cease to be 
     treated as a citizen or resident of the United States shall 
     continue to be treated as a citizen or resident of the United 
     States, as the case may be, until such individual--
       ``(1) gives notice of an expatriating act or termination of 
     residency (with the requisite intent to relinquish 
     citizenship or terminate residency) to the Secretary of State 
     or the Secretary of Homeland Security, and
       ``(2) provides a statement in accordance with section 
     6039G.''.
       (c) Physical Presence in the United States for More Than 30 
     Days.--Section 877 (relating to expatriation to avoid tax) is 
     amended by adding at the end the following new subsection:
       ``(g) Physical Presence.--
       ``(1) In general.--This section shall not apply to any 
     individual to whom this section would otherwise apply for any 
     taxable year during the 10-year period referred to in 
     subsection (a) in which such individual is physically present 
     in the United States at any time on more than 30 days in the 
     calendar year ending in such taxable year, and such 
     individual shall be treated for purposes of this title as a 
     citizen or resident of the United States, as the case may be, 
     for such taxable year.
       ``(2) Exception.--
       ``(A) In general.--In the case of an individual described 
     in any of the following subparagraphs of this paragraph, a 
     day of physical presence in the United States shall be 
     disregarded if the individual is performing services in the 
     United States on such day for an employer. The preceding 
     sentence shall not apply if--
       ``(i) such employer is related (within the meaning of 
     section 267 and 707) to such individual, or
       ``(ii) such employer fails to meet such requirements as the 
     Secretary may prescribe by regulations to prevent the 
     avoidance of the purposes of this paragraph.

     Not more than 30 days during any calendar year may be 
     disregarded under this subparagraph.
       ``(B) Individuals with ties to other countries.--An 
     individual is described in this subparagraph if--
       ``(i) the individual becomes (not later than the close of a 
     reasonable period after loss of United States citizenship or 
     termination of residency) a citizen or resident of the 
     country in which--

       ``(I) such individual was born,
       ``(II) if such individual is married, such individual's 
     spouse was born, or
       ``(III) either of such individual's parents were born, and

       ``(ii) the individual becomes fully liable for income tax 
     in such country.
       ``(C) Minimal prior physical presence in the united 
     states.--An individual is described in this subparagraph if, 
     for each year in the 10-year period ending on the date of 
     loss of United States citizenship or termination of 
     residency, the individual was physically present in the 
     United States for 30 days or less. The rule of section 
     7701(b)(3)(D)(ii) shall apply for purposes of this 
     subparagraph.''.
       (d) Transfers Subject to Gift Tax.--
       (1) In general.--Subsection (a) of section 2501 (relating 
     to taxable transfers) is amended by striking paragraph (4), 
     by redesignating paragraph (5) as paragraph (4), and by 
     striking paragraph (3) and inserting the following new 
     paragraph:
       ``(3) Exception.--
       ``(A) Certain individuals.--Paragraph (2) shall not apply 
     in the case of a donor to whom section 877(b) applies for the 
     taxable year which includes the date of the transfer.
       ``(B) Credit for foreign gift taxes.--The tax imposed by 
     this section solely by reason of this paragraph shall be 
     credited with the amount of any gift tax actually paid to any 
     foreign country in respect of any gift which is taxable under 
     this section solely by reason of this paragraph.''.
       (2) Transfers of certain stock.--Subsection (a) of section 
     2501 is amended by adding at the end the following new 
     paragraph:
       ``(5) Transfers of certain stock.--
       ``(A) In general.--In the case of a transfer of stock in a 
     foreign corporation described in subparagraph (B) by a donor 
     to whom section 877(b) applies for the taxable year which 
     includes the date of the transfer--
       ``(i) section 2511(a) shall be applied without regard to 
     whether such stock is situated within the United States, and
       ``(ii) the value of such stock for purposes of this chapter 
     shall be its U.S.-asset value determined under subparagraph 
     (C).
       ``(B) Foreign corporation described.--A foreign corporation 
     is described in this subparagraph with respect to a donor 
     if--
       ``(i) the donor owned (within the meaning of section 
     958(a)) at the time of such transfer 10 percent or more of 
     the total combined voting power of all classes of stock 
     entitled to vote of the foreign corporation, and
       ``(ii) such donor owned (within the meaning of section 
     958(a)), or is considered to have owned (by applying the 
     ownership rules of section 958(b)), at the time of such 
     transfer, more than 50 percent of--

       ``(I) the total combined voting power of all classes of 
     stock entitled to vote of such corporation, or
       ``(II) the total value of the stock of such corporation.

       ``(C) U.S.-asset value.--For purposes of subparagraph (A), 
     the U.S.-asset value of stock shall be the amount which bears 
     the same ratio to the fair market value of such stock at the 
     time of transfer as--
       ``(i) the fair market value (at such time) of the assets 
     owned by such foreign corporation and situated in the United 
     States, bears to
       ``(ii) the total fair market value (at such time) of all 
     assets owned by such foreign corporation.''.
       (e) Enhanced Information Reporting From Individuals Losing 
     United States Citizenship.--
       (1) In general.--Subsection (a) of section 6039G is amended 
     to read as follows:
       ``(a) In General.--Notwithstanding any other provision of 
     law, any individual to whom section 877(b) applies for any 
     taxable year shall provide a statement for such taxable year 
     which includes the information described in subsection 
     (b).''.
       (2) Information to be provided.--Subsection (b) of section 
     6039G is amended to read as follows:
       ``(b) Information To Be Provided.--Information required 
     under subsection (a) shall include--
       ``(1) the taxpayer's TIN,
       ``(2) the mailing address of such individual's principal 
     foreign residence,
       ``(3) the foreign country in which such individual is 
     residing,
       ``(4) the foreign country of which such individual is a 
     citizen,
       ``(5) information detailing the income, assets, and 
     liabilities of such individual,
       ``(6) the number of days during any portion of which that 
     the individual was physically present in the United States 
     during the taxable year, and
       ``(7) such other information as the Secretary may 
     prescribe.''.
       (3) Increase in penalty.--Subsection (d) of section 6039G 
     is amended to read as follows:
       ``(d) Penalty.--If--
       ``(1) an individual is required to file a statement under 
     subsection (a) for any taxable year, and
       ``(2) fails to file such a statement with the Secretary on 
     or before the date such statement is required to be filed or 
     fails to include all the information required to be shown on 
     the statement or includes incorrect information,

     such individual shall pay a penalty of $10,000 unless it is 
     shown that such failure is due to reasonable cause and not to 
     willful neglect.''.
       (4) Conforming amendment.--Section 6039G is amended by 
     striking subsections (c), (f), and (g) and by redesignating 
     subsections (d) and (e) as subsection (c) and (d), 
     respectively.
       (f) Effective Date.--The amendments made by this section 
     shall apply to individuals who expatriate after June 3, 2004.

     SEC. 805. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

       (a) In General.--Subpart B of part III of subchapter A of 
     chapter 61 is amended by inserting after section 6043 the 
     following new section:

     ``SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS AND 
                   ACQUISITIONS.

       ``(a) In General.--According to the forms or regulations 
     prescribed by the Secretary, the acquiring corporation in any 
     taxable acquisition shall make a return setting forth--
       ``(1) a description of the acquisition,
       ``(2) the name and address of each shareholder of the 
     acquired corporation who is required to recognize gain (if 
     any) as a result of the acquisition,
       ``(3) the amount of money and the fair market value of 
     other property transferred to each such shareholder as part 
     of such acquisition, and
       ``(4) such other information as the Secretary may 
     prescribe.

     To the extent provided by the Secretary, the requirements of 
     this section applicable to the acquiring corporation shall be 
     applicable to the acquired corporation and not to the 
     acquiring corporation.
       ``(b) Nominees.--According to the forms or regulations 
     prescribed by the Secretary--
       ``(1) Reporting.--Any person who holds stock as a nominee 
     for another person shall furnish in the manner prescribed by 
     the Secretary to such other person the information provided 
     by the corporation under subsection (d).
       ``(2) Reporting to nominees.--In the case of stock held by 
     any person as a nominee, references in this section (other 
     than in subsection (c)) to a shareholder shall be treated as 
     a reference to the nominee.
       ``(c) Taxable Acquisition.--For purposes of this section, 
     the term `taxable acquisition' means any acquisition by a 
     corporation of stock in or property of another corporation if 
     any shareholder of the acquired corporation is required to 
     recognize gain (if any) as a result of such acquisition.
       ``(d) Statements To Be Furnished to Shareholders.--
     According to the forms or regulations prescribed by the 
     Secretary, every person required to make a return under 
     subsection (a) shall furnish to each shareholder whose name 
     is required to be set forth in such return a written 
     statement showing--
       ``(1) the name, address, and phone number of the 
     information contact of the person required to make such 
     return,
       ``(2) the information required to be shown on such return 
     with respect to such shareholder, and
       ``(3) such other information as the Secretary may 
     prescribe.

     The written statement required under the preceding sentence 
     shall be furnished to the shareholder on or before January 31 
     of the year following the calendar year during which the 
     taxable acquisition occurred.''.
       (b) Assessable Penalties.--
       (1) Subparagraph (B) of section 6724(d)(1) (relating to 
     definitions) is amended by redesignating clauses (ii) through 
     (xviii) as clauses (iii) through (xix), respectively, and by 
     inserting after clause (i) the following new clause:
       ``(ii) section 6043A(a) (relating to returns relating to 
     taxable mergers and acquisitions),''.

[[Page H8452]]

       (2) Paragraph (2) of section 6724(d) is amended by 
     redesignating subparagraphs (F) through (BB) as subparagraphs 
     (G) through (CC), respectively, and by inserting after 
     subparagraph (E) the following new subparagraph:
       ``(F) subsections (b) and (d) of section 6043A (relating to 
     returns relating to taxable mergers and acquisitions).''.
       (c) Clerical Amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61 is amended by 
     inserting after the item relating to section 6043 the 
     following new item:

``Sec. 6043A. Returns relating to taxable mergers and acquisitions.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to acquisitions after the date of the enactment 
     of this Act.

     SEC. 806. STUDIES.

       (a) Transfer Pricing Rules.--The Secretary of the Treasury 
     or the Secretary's delegate shall conduct a study regarding 
     the effectiveness of current transfer pricing rules and 
     compliance efforts in ensuring that cross-border transfers 
     and other related-party transactions, particularly 
     transactions involving intangible assets, service contracts, 
     or leases cannot be used improperly to shift income out of 
     the United States. The study shall include a review of the 
     contemporaneous documentation and penalty rules under section 
     6662 of the Internal Revenue Code of 1986, a review of the 
     regulatory and administrative guidance implementing the 
     principles of section 482 of such Code to transactions 
     involving intangible property and services and to cost-
     sharing arrangements, and an examination of whether increased 
     disclosure of cross-border transactions should be required. 
     The study shall set forth specific recommendations to address 
     all abuses identified in the study. Not later than June 30, 
     2005, such Secretary or delegate shall submit to the Congress 
     a report of such study.
       (b) Income Tax Treaties.--The Secretary of the Treasury or 
     the Secretary's delegate shall conduct a study of United 
     States income tax treaties to identify any inappropriate 
     reductions in United States withholding tax that provide 
     opportunities for shifting income out of the United States, 
     and to evaluate whether existing anti-abuse mechanisms are 
     operating properly. The study shall include specific 
     recommendations to address all inappropriate uses of tax 
     treaties. Not later than June 30, 2005, such Secretary or 
     delegate shall submit to the Congress a report of such study.
       (c) Effectiveness of Corporate Expatriation Provisions.--
     The Secretary of the Treasury or the Secretary's delegate 
     shall conduct a study of the effectiveness of the provisions 
     of this title on corporate expatriation. The study shall 
     include such recommendations as such Secretary or delegate 
     may have to improve the effectiveness of such provisions in 
     carrying out the purposes of this title. Not later than 
     December 31, 2006, such Secretary or delegate shall submit to 
     the Congress a report of such study.

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

     SEC. 811. PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
                   TRANSACTIONS.

       (a) In General.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by inserting 
     after section 6707 the following new section:

     ``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE 
                   TRANSACTION INFORMATION WITH RETURN.

       ``(a) Imposition of Penalty.--Any person who fails to 
     include on any return or statement any information with 
     respect to a reportable transaction which is required under 
     section 6011 to be included with such return or statement 
     shall pay a penalty in the amount determined under subsection 
     (b).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     amount of the penalty under subsection (a) shall be--
       ``(A) $10,000 in the case of a natural person, and
       ``(B) $50,000 in any other case.
       ``(2) Listed transaction.--The amount of the penalty under 
     subsection (a) with respect to a listed transaction shall 
     be--
       ``(A) $100,000 in the case of a natural person, and
       ``(B) $200,000 in any other case.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Reportable transaction.--The term `reportable 
     transaction' means any transaction with respect to which 
     information is required to be included with a return or 
     statement because, as determined under regulations prescribed 
     under section 6011, such transaction is of a type which the 
     Secretary determines as having a potential for tax avoidance 
     or evasion.
       ``(2) Listed transaction.--The term `listed transaction' 
     means a reportable transaction which is the same as, or 
     substantially similar to, a transaction specifically 
     identified by the Secretary as a tax avoidance transaction 
     for purposes of section 6011.
       ``(d) Authority To Rescind Penalty.--
       ``(1) In general.--The Commissioner of Internal Revenue may 
     rescind all or any portion of any penalty imposed by this 
     section with respect to any violation if--
       ``(A) the violation is with respect to a reportable 
     transaction other than a listed transaction, and
       ``(B) rescinding the penalty would promote compliance with 
     the requirements of this title and effective tax 
     administration.
       ``(2) No judicial appeal.--Notwithstanding any other 
     provision of law, any determination under this subsection may 
     not be reviewed in any judicial proceeding.
       ``(3) Records.--If a penalty is rescinded under paragraph 
     (1), the Commissioner shall place in the file in the Office 
     of the Commissioner the opinion of the Commissioner with 
     respect to the determination, including--
       ``(A) a statement of the facts and circumstances relating 
     to the violation,
       ``(B) the reasons for the rescission, and
       ``(C) the amount of the penalty rescinded.
       ``(e) Penalty Reported to SEC.--In the case of a person--
       ``(1) which is required to file periodic reports under 
     section 13 or 15(d) of the Securities Exchange Act of 1934 or 
     is required to be consolidated with another person for 
     purposes of such reports, and
       ``(2) which--
       ``(A) is required to pay a penalty under this section with 
     respect to a listed transaction,
       ``(B) is required to pay a penalty under section 6662A with 
     respect to any reportable transaction at a rate prescribed 
     under section 6662A(c), or
       ``(C) is required to pay a penalty under section 6662(h) 
     with respect to any reportable transaction and would (but for 
     section 6662A(e)(2)(C)) have been subject to penalty under 
     section 6662A at a rate prescribed under section 6662A(c),

     the requirement to pay such penalty shall be disclosed in 
     such reports filed by such person for such periods as the 
     Secretary shall specify. Failure to make a disclosure in 
     accordance with the preceding sentence shall be treated as a 
     failure to which the penalty under subsection (b)(2) applies.
       ``(f) Coordination With Other Penalties.--The penalty 
     imposed by this section shall be in addition to any other 
     penalty imposed by this title.''
       (b) Conforming Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6707 the following:

``Sec. 6707A. Penalty for failure to include reportable transaction 
              information with return.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to returns and statements the due date for which 
     is after the date of the enactment of this Act.
       (d) Report.--The Commissioner of Internal Revenue shall 
     annually report to the Committee on Ways and Means of the 
     House of Representatives and the Committee on Finance of the 
     Senate--
       (1) a summary of the total number and aggregate amount of 
     penalties imposed, and rescinded, under section 6707A of the 
     Internal Revenue Code of 1986, and
       (2) a description of each penalty rescinded under section 
     6707(c) of such Code and the reasons therefor.

     SEC. 812. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, 
                   OTHER REPORTABLE TRANSACTIONS HAVING A 
                   SIGNIFICANT TAX AVOIDANCE PURPOSE, ETC.

       (a) In General.--Subchapter A of chapter 68 is amended by 
     inserting after section 6662 the following new section:

     ``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON 
                   UNDERSTATEMENTS WITH RESPECT TO REPORTABLE 
                   TRANSACTIONS.

       ``(a) Imposition of Penalty.--If a taxpayer has a 
     reportable transaction understatement for any taxable year, 
     there shall be added to the tax an amount equal to 20 percent 
     of the amount of such understatement.
       ``(b) Reportable Transaction Understatement.--For purposes 
     of this section--
       ``(1) In general.--The term `reportable transaction 
     understatement' means the sum of--
       ``(A) the product of--
       ``(i) the amount of the increase (if any) in taxable income 
     which results from a difference between the proper tax 
     treatment of an item to which this section applies and the 
     taxpayer's treatment of such item (as shown on the taxpayer's 
     return of tax), and
       ``(ii) the highest rate of tax imposed by section 1 
     (section 11 in the case of a taxpayer which is a 
     corporation), and
       ``(B) the amount of the decrease (if any) in the aggregate 
     amount of credits determined under subtitle A which results 
     from a difference between the taxpayer's treatment of an item 
     to which this section applies (as shown on the taxpayer's 
     return of tax) and the proper tax treatment of such item.
     For purposes of subparagraph (A), any reduction of the excess 
     of deductions allowed for the taxable year over gross income 
     for such year, and any reduction in the amount of capital 
     losses which would (without regard to section 1211) be 
     allowed for such year, shall be treated as an increase in 
     taxable income.
       ``(2) Items to which section applies.--This section shall 
     apply to any item which is attributable to--
       ``(A) any listed transaction, and
       ``(B) any reportable transaction (other than a listed 
     transaction) if a significant purpose of such transaction is 
     the avoidance or evasion of Federal income tax.
       ``(c) Higher Penalty for Nondisclosed Listed and Other 
     Avoidance Transactions.--Subsection (a) shall be applied by 
     substituting `30 percent' for `20 percent' with respect to 
     the portion of any reportable transaction understatement with 
     respect to which the requirement of section 6664(d)(2)(A) is 
     not met.
       ``(d) Definitions of Reportable and Listed Transactions.--
     For purposes of this section, the terms `reportable 
     transaction' and `listed transaction' have the respective 
     meanings given to such terms by section 6707A(c).
       ``(e) Special Rules.--
       ``(1) Coordination with penalties, etc., on other 
     understatements.--In the case of an understatement (as 
     defined in section 6662(d)(2))--

[[Page H8453]]

       ``(A) the amount of such understatement (determined without 
     regard to this paragraph) shall be increased by the aggregate 
     amount of reportable transaction understatements for purposes 
     of determining whether such understatement is a substantial 
     understatement under section 6662(d)(1), and
       ``(B) the addition to tax under section 6662(a) shall apply 
     only to the excess of the amount of the substantial 
     understatement (if any) after the application of subparagraph 
     (A) over the aggregate amount of reportable transaction 
     understatements.
       ``(2) Coordination with other penalties.--
       ``(A) Application of fraud penalty.--References to an 
     underpayment in section 6663 shall be treated as including 
     references to a reportable transaction understatement.
       ``(B) No double penalty.--This section shall not apply to 
     any portion of an understatement on which a penalty is 
     imposed under section 6663.
       ``(C) Coordination with valuation penalties.--
       ``(i) Section 6662(e).--Section 6662(e) shall not apply to 
     any portion of an understatement on which a penalty is 
     imposed under this section.
       ``(ii) Section 6662(h).--This section shall not apply to 
     any portion of an understatement on which a penalty is 
     imposed under section 6662(h).
       ``(3) Special rule for amended returns.--Except as provided 
     in regulations, in no event shall any tax treatment included 
     with an amendment or supplement to a return of tax be taken 
     into account in determining the amount of any reportable 
     transaction understatement if the amendment or supplement is 
     filed after the earlier of the date the taxpayer is first 
     contacted by the Secretary regarding the examination of the 
     return or such other date as is specified by the 
     Secretary.''.
       (b) Determination of Other Understatements.--Subparagraph 
     (A) of section 6662(d)(2) is amended by adding at the end the 
     following flush sentence:

     ``The excess under the preceding sentence shall be determined 
     without regard to items to which section 6662A applies.''.
       (c) Reasonable Cause Exception.--
       (1) In general.--Section 6664 is amended by adding at the 
     end the following new subsection:
       ``(d) Reasonable Cause Exception for Reportable Transaction 
     Understatements.--
       ``(1) In general.--No penalty shall be imposed under 
     section 6662A with respect to any portion of a reportable 
     transaction understatement if it is shown that there was a 
     reasonable cause for such portion and that the taxpayer acted 
     in good faith with respect to such portion.
       ``(2) Special rules.--Paragraph (1) shall not apply to any 
     reportable transaction understatement unless--
       ``(A) the relevant facts affecting the tax treatment of the 
     item are adequately disclosed in accordance with the 
     regulations prescribed under section 6011,
       ``(B) there is or was substantial authority for such 
     treatment, and
       ``(C) the taxpayer reasonably believed that such treatment 
     was more likely than not the proper treatment.

     A taxpayer failing to adequately disclose in accordance with 
     section 6011 shall be treated as meeting the requirements of 
     subparagraph (A) if the penalty for such failure was 
     rescinded under section 6707A(d).
       ``(3) Rules relating to reasonable belief.--For purposes of 
     paragraph (2)(C)--
       ``(A) In general.--A taxpayer shall be treated as having a 
     reasonable belief with respect to the tax treatment of an 
     item only if such belief--
       ``(i) is based on the facts and law that exist at the time 
     the return of tax which includes such tax treatment is filed, 
     and
       ``(ii) relates solely to the taxpayer's chances of success 
     on the merits of such treatment and does not take into 
     account the possibility that a return will not be audited, 
     such treatment will not be raised on audit, or such treatment 
     will be resolved through settlement if it is raised.
       ``(B) Certain opinions may not be relied upon.--
       ``(i) In general.--An opinion of a tax advisor may not be 
     relied upon to establish the reasonable belief of a taxpayer 
     if--

       ``(I) the tax advisor is described in clause (ii), or
       ``(II) the opinion is described in clause (iii).

       ``(ii) Disqualified tax advisors.--A tax advisor is 
     described in this clause if the tax advisor--

       ``(I) is a material advisor (within the meaning of section 
     6111(b)(1)) and participates in the organization, management, 
     promotion, or sale of the transaction or is related (within 
     the meaning of section 267(b) or 707(b)(1)) to any person who 
     so participates,
       ``(II) is compensated directly or indirectly by a material 
     advisor with respect to the transaction,
       ``(III) has a fee arrangement with respect to the 
     transaction which is contingent on all or part of the 
     intended tax benefits from the transaction being sustained, 
     or
       ``(IV) as determined under regulations prescribed by the 
     Secretary, has a disqualifying financial interest with 
     respect to the transaction.

       ``(iii) Disqualified opinions.--For purposes of clause (i), 
     an opinion is disqualified if the opinion--

       ``(I) is based on unreasonable factual or legal assumptions 
     (including assumptions as to future events),
       ``(II) unreasonably relies on representations, statements, 
     findings, or agreements of the taxpayer or any other person,
       ``(III) does not identify and consider all relevant facts, 
     or
       ``(IV) fails to meet any other requirement as the Secretary 
     may prescribe.''.

       (2) Conforming amendments.--
       (A) Paragraph (1) of section 6664(c) is amended by striking 
     ``this part'' and inserting ``section 6662 or 6663''.
       (B) The heading for subsection (c) of section 6664 is 
     amended by inserting ``for Underpayments'' after 
     ``Exception''.
       (d) Reduction in Penalty for Substantial Understatement of 
     Income Tax Not To Apply to Tax Shelters.--Subparagraph (C) of 
     section 6662(d)(2) (relating to substantial understatement of 
     income tax) is amended to read as follows:
       ``(C) Reduction not to apply to tax shelters.--
       ``(i) In general.--Subparagraph (B) shall not apply to any 
     item attributable to a tax shelter.
       ``(ii) Tax shelter.--For purposes of clause (i), the term 
     `tax shelter' means--

       ``(I) a partnership or other entity,
       ``(II) any investment plan or arrangement, or
       ``(III) any other plan or arrangement,

     if a significant purpose of such partnership, entity, plan, 
     or arrangement is the avoidance or evasion of Federal income 
     tax.''.
       (e) Clerical Amendments.--
       (1) The heading for section 6662 is amended to read as 
     follows:

     ``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON 
                   UNDERPAYMENTS.''.

       (2) The table of sections for part II of subchapter A of 
     chapter 68 is amended by striking the item relating to 
     section 6662 and inserting the following new items:

``Sec. 6662. Imposition of accuracy-related penalty on underpayments.
``Sec. 6662A. Imposition of accuracy-related penalty on understatements 
              with respect to reportable transactions.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

     SEC. 813. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES 
                   RELATING TO TAXPAYER COMMUNICATIONS.

       (a) In General.--Section 7525(b) (relating to section not 
     to apply to communications regarding corporate tax shelters) 
     is amended to read as follows:
       ``(b) Section Not To Apply to Communications Regarding Tax 
     Shelters.--The privilege under subsection (a) shall not apply 
     to any written communication which is--
       ``(1) between a federally authorized tax practitioner and--
       ``(A) any person,
       ``(B) any director, officer, employee, agent, or 
     representative of the person, or
       ``(C) any other person holding a capital or profits 
     interest in the person, and
       ``(2) in connection with the promotion of the direct or 
     indirect participation of the person in any tax shelter (as 
     defined in section 6662(d)(2)(C)(ii)).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to communications made on or after the date of 
     the enactment of this Act.

     SEC. 814. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH 
                   REQUIRED LISTED TRANSACTIONS NOT REPORTED.

       (a) In General.--Section 6501(c) (relating to exceptions) 
     is amended by adding at the end the following new paragraph:
       ``(10) Listed transactions.--If a taxpayer fails to include 
     on any return or statement for any taxable year any 
     information with respect to a listed transaction (as defined 
     in section 6707A(c)(2)) which is required under section 6011 
     to be included with such return or statement, the time for 
     assessment of any tax imposed by this title with respect to 
     such transaction shall not expire before the date which is 1 
     year after the earlier of--
       ``(A) the date on which the Secretary is furnished the 
     information so required, or
       ``(B) the date that a material advisor (as defined in 
     section 6111) meets the requirements of section 6112 with 
     respect to a request by the Secretary under section 6112(b) 
     relating to such transaction with respect to such 
     taxpayer.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years with respect to which the period 
     for assessing a deficiency did not expire before the date of 
     the enactment of this Act.

     SEC. 815. DISCLOSURE OF REPORTABLE TRANSACTIONS.

       (a) In General.--Section 6111 (relating to registration of 
     tax shelters) is amended to read as follows:

     ``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

       ``(a) In General.--Each material advisor with respect to 
     any reportable transaction shall make a return (in such form 
     as the Secretary may prescribe) setting forth--
       ``(1) information identifying and describing the 
     transaction,
       ``(2) information describing any potential tax benefits 
     expected to result from the transaction, and
       ``(3) such other information as the Secretary may 
     prescribe.

     Such return shall be filed not later than the date specified 
     by the Secretary.
       ``(b) Definitions.--For purposes of this section--
       ``(1) Material advisor.--
       ``(A) In general.--The term `material advisor' means any 
     person--
       ``(i) who provides any material aid, assistance, or advice 
     with respect to organizing, managing, promoting, selling, 
     implementing, insuring, or carrying out any reportable 
     transaction, and
       ``(ii) who directly or indirectly derives gross income in 
     excess of the threshold amount (or

[[Page H8454]]

     such other amount as may be prescribed by the Secretary) for 
     such advice or assistance.
       ``(B) Threshold amount.--For purposes of subparagraph (A), 
     the threshold amount is--
       ``(i) $50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons, and
       ``(ii) $250,000 in any other case.
       ``(2) Reportable transaction.--The term `reportable 
     transaction' has the meaning given to such term by section 
     6707A(c).
       ``(c) Regulations.--The Secretary may prescribe regulations 
     which provide--
       ``(1) that only 1 person shall be required to meet the 
     requirements of subsection (a) in cases in which 2 or more 
     persons would otherwise be required to meet such 
     requirements,
       ``(2) exemptions from the requirements of this section, and
       ``(3) such rules as may be necessary or appropriate to 
     carry out the purposes of this section.''.
       (b) Conforming Amendments.--
       (1) The item relating to section 6111 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

``Sec. 6111. Disclosure of reportable transactions.''.
       (2) So much of section 6112 as precedes subsection (c) 
     thereof is amended to read as follows:

     ``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS 
                   MUST KEEP LISTS OF ADVISEES, ETC.

       ``(a) In General.--Each material advisor (as defined in 
     section 6111) with respect to any reportable transaction (as 
     defined in section 6707A(c)) shall (whether or not required 
     to file a return under section 6111 with respect to such 
     transaction) maintain (in such manner as the Secretary may by 
     regulations prescribe) a list--
       ``(1) identifying each person with respect to whom such 
     advisor acted as a material advisor with respect to such 
     transaction, and
       ``(2) containing such other information as the Secretary 
     may by regulations require.''.
       (3) Section 6112 is amended--
       (A) by redesignating subsection (c) as subsection (b),
       (B) by inserting ``written'' before ``request'' in 
     subsection (b)(1) (as so redesignated), and
       (C) by striking ``shall prescribe'' in subsection (b)(2) 
     (as so redesignated) and inserting ``may prescribe''.
       (4) The item relating to section 6112 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

``Sec. 6112. Material advisors of reportable transactions must keep 
              lists of advisees, etc.''.
       (5)(A) The heading for section 6708 is amended to read as 
     follows:

     ``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH 
                   RESPECT TO REPORTABLE TRANSACTIONS.''

       (B) The item relating to section 6708 in the table of 
     sections for part I of subchapter B of chapter 68 is amended 
     to read as follows:

``Sec. 6708. Failure to maintain lists of advisees with respect to 
              reportable transactions.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to transactions with respect to which material 
     aid, assistance, or advice referred to in section 
     6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 (as 
     added by this section) is provided after the date of the 
     enactment of this Act.

     SEC. 816. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
                   TRANSACTIONS.

       (a) In General.--Section 6707 (relating to failure to 
     furnish information regarding tax shelters) is amended to 
     read as follows:

     ``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING 
                   REPORTABLE TRANSACTIONS.

       ``(a) In General.--If a person who is required to file a 
     return under section 6111(a) with respect to any reportable 
     transaction--
       ``(1) fails to file such return on or before the date 
     prescribed therefor, or
       ``(2) files false or incomplete information with the 
     Secretary with respect to such transaction,
     such person shall pay a penalty with respect to such return 
     in the amount determined under subsection (b).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     penalty imposed under subsection (a) with respect to any 
     failure shall be $50,000.
       ``(2) Listed transactions.--The penalty imposed under 
     subsection (a) with respect to any listed transaction shall 
     be an amount equal to the greater of--
       ``(A) $200,000, or
       ``(B) 50 percent of the gross income derived by such person 
     with respect to aid, assistance, or advice which is provided 
     with respect to the listed transaction before the date the 
     return is filed under section 6111.

     Subparagraph (B) shall be applied by substituting `75 
     percent' for `50 percent' in the case of an intentional 
     failure or act described in subsection (a).
       ``(c) Rescission Authority.--The provisions of section 
     6707A(d) (relating to authority of Commissioner to rescind 
     penalty) shall apply to any penalty imposed under this 
     section.
       ``(d) Reportable and Listed Transactions.--For purposes of 
     this section, the terms `reportable transaction' and `listed 
     transaction' have the respective meanings given to such terms 
     by section 6707A(c).''.
       (b) Clerical Amendment.--The item relating to section 6707 
     in the table of sections for part I of subchapter B of 
     chapter 68 is amended by striking ``tax shelters'' and 
     inserting ``reportable transactions''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to returns the due date for which is after the 
     date of the enactment of this Act.

     SEC. 817. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN 
                   LISTS OF INVESTORS.

       (a) In General.--Subsection (a) of section 6708 is amended 
     to read as follows:
       ``(a) Imposition of Penalty.--
       ``(1) In general.--If any person who is required to 
     maintain a list under section 6112(a) fails to make such list 
     available upon written request to the Secretary in accordance 
     with section 6112(b) within 20 business days after the date 
     of such request, such person shall pay a penalty of $10,000 
     for each day of such failure after such 20th day.
       ``(2) Reasonable cause exception.--No penalty shall be 
     imposed by paragraph (1) with respect to the failure on any 
     day if such failure is due to reasonable cause.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to requests made after the date of the enactment 
     of this Act.

     SEC. 818. PENALTY ON PROMOTERS OF TAX SHELTERS.

       (a) Penalty on Promoting Abusive Tax Shelters.--Section 
     6700(a) is amended by adding at the end the following new 
     sentence: ``Notwithstanding the first sentence, if an 
     activity with respect to which a penalty imposed under this 
     subsection involves a statement described in paragraph 
     (2)(A), the amount of the penalty shall be equal to 50 
     percent of the gross income derived (or to be derived) from 
     such activity by the person on which the penalty is 
     imposed.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to activities after the date of the enactment of 
     this Act.

     SEC. 819. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY 
                   FOR NONREPORTABLE TRANSACTIONS.

       (a) Substantial Understatement of Corporations.--Section 
     6662(d)(1)(B) (relating to special rule for corporations) is 
     amended to read as follows:
       ``(B) Special rule for corporations.--In the case of a 
     corporation other than an S corporation or a personal holding 
     company (as defined in section 542), there is a substantial 
     understatement of income tax for any taxable year if the 
     amount of the understatement for the taxable year exceeds the 
     lesser of--
       ``(i) 10 percent of the tax required to be shown on the 
     return for the taxable year (or, if greater, $10,000), or
       ``(ii) $10,000,000.''.
       (b) Secretarial List.--
       (1) In general.--Section 6662(d) is amended by adding at 
     the end the following new paragraph:
       ``(3) Secretarial list.--The Secretary may prescribe a list 
     of positions which the Secretary believes do not meet the 1 
     or more of the standards specified in paragraph (2)(B)(i), 
     section 6664(d)(2), and section 6694(a)(1). Such list (and 
     any revisions thereof) shall be published in the Federal 
     Register or the Internal Revenue Bulletin.''.
       (2) Conforming amendment.--Paragraph (2) of section 6662(d) 
     is amended by striking subparagraph (D).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 820. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT 
                   RELATED TO TAX SHELTERS AND REPORTABLE 
                   TRANSACTIONS.

       (a) In General.--Section 7408 (relating to action to enjoin 
     promoters of abusive tax shelters, etc.) is amended by 
     redesignating subsection (c) as subsection (d) and by 
     striking subsections (a) and (b) and inserting the following 
     new subsections:
       ``(a) Authority To Seek Injunction.--A civil action in the 
     name of the United States to enjoin any person from further 
     engaging in specified conduct may be commenced at the request 
     of the Secretary. Any action under this section shall be 
     brought in the district court of the United States for the 
     district in which such person resides, has his principal 
     place of business, or has engaged in specified conduct. The 
     court may exercise its jurisdiction over such action (as 
     provided in section 7402(a)) separate and apart from any 
     other action brought by the United States against such 
     person.
       ``(b) Adjudication and Decree.--In any action under 
     subsection (a), if the court finds--
       ``(1) that the person has engaged in any specified conduct, 
     and
       ``(2) that injunctive relief is appropriate to prevent 
     recurrence of such conduct,
     the court may enjoin such person from engaging in such 
     conduct or in any other activity subject to penalty under 
     this title.
       ``(c) Specified Conduct.--For purposes of this section, the 
     term `specified conduct' means any action, or failure to take 
     action, which is--
       ``(1) subject to penalty under section 6700, 6701, 6707, or 
     6708, or
       ``(2) in violation of any requirement under regulations 
     issued under section 330 of title 31, United States Code.''.
       (b) Conforming Amendments.--
       (1) The heading for section 7408 is amended to read as 
     follows:

     ``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO 
                   TAX SHELTERS AND REPORTABLE TRANSACTIONS.''

       (2) The table of sections for subchapter A of chapter 76 is 
     amended by striking the item relating to section 7408 and 
     inserting the following new item:

``Sec. 7408. Actions to enjoin specified conduct related to tax 
              shelters and reportable transactions.''.
       (c) Effective Date.--The amendment made by this section 
     shall take effect on the day after the date of the enactment 
     of this Act.

     SEC. 821. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN 
                   FINANCIAL ACCOUNTS.

       (a) In General.--Section 5321(a)(5) of title 31, United 
     States Code, is amended to read as follows:

[[Page H8455]]

       ``(5) Foreign financial agency transaction violation.--
       ``(A) Penalty authorized.--The Secretary of the Treasury 
     may impose a civil money penalty on any person who violates, 
     or causes any violation of, any provision of section 5314.
       ``(B) Amount of penalty.--
       ``(i) In general.--Except as provided in subparagraph (C), 
     the amount of any civil penalty imposed under subparagraph 
     (A) shall not exceed $10,000.
       ``(ii) Reasonable cause exception.--No penalty shall be 
     imposed under subparagraph (A) with respect to any violation 
     if--

       ``(I) such violation was due to reasonable cause, and
       ``(II) the amount of the transaction or the balance in the 
     account at the time of the transaction was properly reported.

       ``(C) Willful violations.--In the case of any person 
     willfully violating, or willfully causing any violation of, 
     any provision of section 5314--
       ``(i) the maximum penalty under subparagraph (B)(i) shall 
     be increased to the greater of--

       ``(I) $100,000, or
       ``(II) 50 percent of the amount determined under 
     subparagraph (D), and

       ``(ii) subparagraph (B)(ii) shall not apply.
       ``(D) Amount.--The amount determined under this 
     subparagraph is--
       ``(i) in the case of a violation involving a transaction, 
     the amount of the transaction, or
       ``(ii) in the case of a violation involving a failure to 
     report the existence of an account or any identifying 
     information required to be provided with respect to an 
     account, the balance in the account at the time of the 
     violation.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to violations occurring after the date of the 
     enactment of this Act.

     SEC. 822. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE 
                   DEPARTMENT OF TREASURY.

       (a) Censure; Imposition of Penalty.--
       (1) In general.--Section 330(b) of title 31, United States 
     Code, is amended--
       (A) by inserting ``, or censure,'' after ``Department'', 
     and
       (B) by adding at the end the following new flush sentence:

     ``The Secretary may impose a monetary penalty on any 
     representative described in the preceding sentence. If the 
     representative was acting on behalf of an employer or any 
     firm or other entity in connection with the conduct giving 
     rise to such penalty, the Secretary may impose a monetary 
     penalty on such employer, firm, or entity if it knew, or 
     reasonably should have known, of such conduct. Such penalty 
     shall not exceed the gross income derived (or to be derived) 
     from the conduct giving rise to the penalty and may be in 
     addition to, or in lieu of, any suspension, disbarment, or 
     censure of the representative.''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to actions taken after the date of the enactment 
     of this Act.
       (b) Tax Shelter Opinions, etc.--Section 330 of such title 
     31 is amended by adding at the end the following new 
     subsection:
       ``(d) Nothing in this section or in any other provision of 
     law shall be construed to limit the authority of the 
     Secretary of the Treasury to impose standards applicable to 
     the rendering of written advice with respect to any entity, 
     transaction plan or arrangement, or other plan or 
     arrangement, which is of a type which the Secretary 
     determines as having a potential for tax avoidance or 
     evasion.''.

                       Part II--Other Provisions

     SEC. 831. TREATMENT OF STRIPPED INTERESTS IN BOND AND 
                   PREFERRED STOCK FUNDS, ETC.

       (a) In General.--Section 1286 (relating to tax treatment of 
     stripped bonds) is amended by redesignating subsection (f) as 
     subsection (g) and by inserting after subsection (e) the 
     following new subsection:
       ``(f) Treatment of Stripped Interests in Bond and Preferred 
     Stock Funds, etc.--In the case of an account or entity 
     substantially all of the assets of which consist of bonds, 
     preferred stock, or a combination thereof, the Secretary may 
     by regulations provide that rules similar to the rules of 
     this section and 305(e), as appropriate, shall apply to 
     interests in such account or entity to which (but for this 
     subsection) this section or section 305(e), as the case may 
     be, would not apply.''.
       (b) Cross Reference.--Subsection (e) of section 305 is 
     amended by adding at the end the following new paragraph:
       ``(7) Cross reference.--

  ``For treatment of stripped interests in certain accounts or entities 
holding preferred stock, see section 1286(f).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to purchases and dispositions after the date of 
     the enactment of this Act.

     SEC. 832. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON 
                   WITHHOLDING TAXES ON INCOME OTHER THAN 
                   DIVIDENDS.

       (a) In General.--Section 901 is amended by redesignating 
     subsection (l) as subsection (m) and by inserting after 
     subsection (k) the following new subsection:
       ``(l) Minimum Holding Period for Withholding Taxes on Gain 
     and Income Other Than Dividends etc.--
       ``(1) In general.--In no event shall a credit be allowed 
     under subsection (a) for any withholding tax (as defined in 
     subsection (k)) on any item of income or gain with respect to 
     any property if--
       ``(A) such property is held by the recipient of the item 
     for 15 days or less during the 31-day period beginning on the 
     date which is 15 days before the date on which the right to 
     receive payment of such item arises, or
       ``(B) to the extent that the recipient of the item is under 
     an obligation (whether pursuant to a short sale or otherwise) 
     to make related payments with respect to positions in 
     substantially similar or related property.
     This paragraph shall not apply to any dividend to which 
     subsection (k) applies.
       ``(2) Exception for taxes paid by dealers.--
       ``(A) In general.--Paragraph (1) shall not apply to any 
     qualified tax with respect to any property held in the active 
     conduct in a foreign country of a business as a dealer in 
     such property.
       ``(B) Qualified tax.--For purposes of subparagraph (A), the 
     term `qualified tax' means a tax paid to a foreign country 
     (other than the foreign country referred to in subparagraph 
     (A)) if--
       ``(i) the item to which such tax is attributable is subject 
     to taxation on a net basis by the country referred to in 
     subparagraph (A), and
       ``(ii) such country allows a credit against its net basis 
     tax for the full amount of the tax paid to such other foreign 
     country.
       ``(C) Dealer.--For purposes of subparagraph (A), the term 
     `dealer' means--
       ``(i) with respect to a security, any person to whom 
     paragraphs (1) and (2) of subsection (k) would not apply by 
     reason of paragraph (4) thereof if such security were stock, 
     and
       ``(ii) with respect to any other property, any person with 
     respect to whom such property is described in section 
     1221(a)(1).
       ``(D) Regulations.--The Secretary may prescribe such 
     regulations as may be appropriate to carry out this 
     paragraph, including regulations to prevent the abuse of the 
     exception provided by this paragraph and to treat other taxes 
     as qualified taxes.
       ``(3) Exceptions.--The Secretary may by regulation provide 
     that paragraph (1) shall not apply to property where the 
     Secretary determines that the application of paragraph (1) to 
     such property is not necessary to carry out the purposes of 
     this subsection.
       ``(4) Certain rules to apply.--Rules similar to the rules 
     of paragraphs (5), (6), and (7) of subsection (k) shall apply 
     for purposes of this subsection.
       ``(5) Determination of holding period.--Holding periods 
     shall be determined for purposes of this subsection without 
     regard to section 1235 or any similar rule.''.
       (b) Conforming Amendment.--The heading of subsection (k) of 
     section 901 is amended by inserting ``on Dividends'' after 
     ``Taxes''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or accrued more than 30 days 
     after the date of the enactment of this Act.

     SEC. 833. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

       (a) Treatment of Contributed Property With Built-In Loss.--
     Paragraph (1) of section 704(c) is amended by striking 
     ``and'' at the end of subparagraph (A), by striking the 
     period at the end of subparagraph (B) and inserting ``, 
     and'', and by adding at the end the following:
       ``(C) if any property so contributed has a built-in loss--
       ``(i) such built-in loss shall be taken into account only 
     in determining the amount of items allocated to the 
     contributing partner, and
       ``(ii) except as provided in regulations, in determining 
     the amount of items allocated to other partners, the basis of 
     the contributed property in the hands of the partnership 
     shall be treated as being equal to its fair market value at 
     the time of contribution.

     For purposes of subparagraph (C), the term `built-in loss' 
     means the excess of the adjusted basis of the property 
     (determined without regard to subparagraph (C)(ii)) over its 
     fair market value at the time of contribution.''.
       (b) Special Rules for Transfers of Partnership Interest if 
     There Is Substantial Built-In Loss.--
       (1) Adjustment of partnership basis required.--Subsection 
     (a) of section 743 (relating to optional adjustment to basis 
     of partnership property) is amended by inserting before the 
     period ``or unless the partnership has a substantial built-in 
     loss immediately after such transfer''.
       (2) Adjustment.--Subsection (b) of section 743 is amended 
     by inserting ``or which has a substantial built-in loss 
     immediately after such transfer'' after ``section 754 is in 
     effect''.
       (3) Substantial built-in loss.--Section 743 is amended by 
     adding at the end the following new subsection:
       ``(d) Substantial Built-In Loss.--
       ``(1) In general.--For purposes of this section, a 
     partnership has a substantial built-in loss with respect to a 
     transfer of an interest in a partnership if the partnership's 
     adjusted basis in the partnership property exceeds by more 
     than $250,000 the fair market value of such property.
       ``(2) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of paragraph (1) and section 734(d), including regulations 
     aggregating related partnerships and disregarding property 
     acquired by the partnership in an attempt to avoid such 
     purposes.''.
       (4) Alternative rules for electing investment 
     partnerships.--
       (A) In general.--Section 743 is amended by adding after 
     subsection (d) the following new subsection:
       ``(e) Alternative rules for electing investment 
     partnerships.--
       ``(1) No adjustment of partnership basis.--For purposes of 
     this section, an electing investment partnership shall not be 
     treated as having a substantial built-in loss with respect to 
     any transfer occurring while the election under paragraph 
     (6)(A) is in effect.

[[Page H8456]]

       ``(2) Loss deferral for transferee partner.--In the case of 
     a transfer of an interest in an electing investment 
     partnership, the transferee partner's distributive share of 
     losses (without regard to gains) from the sale or exchange of 
     partnership property shall not be allowed except to the 
     extent that it is established that such losses exceed the 
     loss (if any) recognized by the transferor (or any prior 
     transferor to the extent not fully offset by a prior 
     disallowance under this paragraph) on the transfer of the 
     partnership interest.
       ``(3) No reduction in partnership basis.--Losses disallowed 
     under paragraph (2) shall not decrease the transferee 
     partner's basis in the partnership interest.
       ``(4) Effect of termination of partnership.--This 
     subsection shall be applied without regard to any termination 
     of a partnership under section 708(b)(1)(B).
       ``(5) Certain basis reductions treated as losses.--In the 
     case of a transferee partner whose basis in property 
     distributed by the partnership is reduced under section 
     732(a)(2), the amount of the loss recognized by the 
     transferor on the transfer of the partnership interest which 
     is taken into account under paragraph (2) shall be reduced by 
     the amount of such basis reduction.
       ``(6) Electing investment partnership.--For purposes of 
     this subsection, the term `electing investment partnership' 
     means any partnership if--
       ``(A) the partnership makes an election to have this 
     subsection apply,
       ``(B) the partnership would be an investment company under 
     section 3(a)(1)(A) of the Investment Company Act of 1940 but 
     for an exemption under paragraph (1) or (7) of section 3(c) 
     of such Act,
       ``(C) such partnership has never been engaged in a trade or 
     business,
       ``(D) substantially all of the assets of such partnership 
     are held for investment,
       ``(E) at least 95 percent of the assets contributed to such 
     partnership consist of money,
       ``(F) no assets contributed to such partnership had an 
     adjusted basis in excess of fair market value at the time of 
     contribution,
       ``(G) all partnership interests of such partnership are 
     issued by such partnership pursuant to a private offering 
     before the date which is 24 months after the date of the 
     first capital contribution to such partnership,
       ``(H) the partnership agreement of such partnership has 
     substantive restrictions on each partner's ability to cause a 
     redemption of the partner's interest, and
       ``(I) the partnership agreement of such partnership 
     provides for a term that is not in excess of 15 years.

     The election described in subparagraph (A), once made, shall 
     be irrevocable except with the consent of the Secretary.
       ``(7) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of this subsection, including regulations for applying this 
     subsection to tiered partnerships.''.
       (B) Information reporting.--Section 6031 is amended by 
     adding at the end the following new subsection:
       ``(f) Electing Investment Partnerships.--In the case of any 
     electing investment partnership (as defined in section 
     743(e)(6)), the information required under subsection (b) to 
     be furnished to any partner to whom section 743(e)(2) applies 
     shall include such information as is necessary to enable the 
     partner to compute the amount of losses disallowed under 
     section 743(e).''.
       (5) Special rule for securitization partnerships.--Section 
     743 is amended by adding after subsection (e) the following 
     new subsection:
       ``(f) Exception for Securitization Partnerships.--
       ``(1) No adjustment of partnership basis.--For purposes of 
     this section, a securitization partnership shall not be 
     treated as having a substantial built-in loss with respect to 
     any transfer.
       ``(2) Securitization partnership.--For purposes of 
     paragraph (1), the term `securitization partnership' means 
     any partnership the sole business activity of which is to 
     issue securities which provide for a fixed principal (or 
     similar) amount and which are primarily serviced by the cash 
     flows of a discrete pool (either fixed or revolving) of 
     receivables or other financial assets that by their terms 
     convert into cash in a finite period, but only if the sponsor 
     of the pool reasonably believes that the receivables and 
     other financial assets comprising the pool are not acquired 
     so as to be disposed of.''
       (6) Clerical amendments.--
       (A) The section heading for section 743 is amended to read 
     as follows:

     ``SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION OR 
                   SUBSTANTIAL BUILT-IN LOSS.''

       (B) The table of sections for subpart C of part II of 
     subchapter K of chapter 1 is amended by striking the item 
     relating to section 743 and inserting the following new item:

``Sec. 743. Special rules where section 754 election or substantial 
              built-in loss.''.

       (c) Adjustment to Basis of Undistributed Partnership 
     Property if There Is Substantial Basis Reduction.--
       (1) Adjustment required.--Subsection (a) of section 734 
     (relating to optional adjustment to basis of undistributed 
     partnership property) is amended by inserting before the 
     period ``or unless there is a substantial basis reduction''.
       (2) Adjustment.--Subsection (b) of section 734 is amended 
     by inserting ``or unless there is a substantial basis 
     reduction'' after ``section 754 is in effect''.
       (3) Substantial basis reduction.--Section 734 is amended by 
     adding at the end the following new subsection:
       ``(d) Substantial Basis Reduction.--
       ``(1) In general.--For purposes of this section, there is a 
     substantial basis reduction with respect to a distribution if 
     the sum of the amounts described in subparagraphs (A) and (B) 
     of subsection (b)(2) exceeds $250,000.
       ``(2) Regulations.--

  ``For regulations to carry out this subsection, see section 
743(d)(2).''.

       (4) Exception for securitization partnerships.--Section 734 
     is amended by inserting after subsection (d) the following 
     new subsection:
       ``(e) Exception for Securitization Partnerships.--For 
     purposes of this section, a securitization partnership (as 
     defined in section 743(f)) shall not be treated as having a 
     substantial basis reduction with respect to any distribution 
     of property to a partner.''.
       (5) Clerical amendments.--
       (A) The section heading for section 734 is amended to read 
     as follows:

     ``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP 
                   PROPERTY WHERE SECTION 754 ELECTION OR 
                   SUBSTANTIAL BASIS REDUCTION.''

       (B) The table of sections for subpart B of part II of 
     subchapter K of chapter 1 is amended by striking the item 
     relating to section 734 and inserting the following new item:

``Sec. 734. Adjustment to basis of undistributed partnership property 
              where section 754 election or substantial basis 
              reduction.''.

       (d) Effective Dates.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to contributions made after the date of the 
     enactment of this Act.
       (2) Subsection (b).--
       (A) In general.--Except as provided in subparagraph (B), 
     the amendments made by subsection (b) shall apply to 
     transfers after the date of the enactment of this Act.
       (B) Transition rule.--In the case of an electing investment 
     partnership which is in existence on June 4, 2004, section 
     743(e)(6)(H) of the Internal Revenue Code of 1986, as added 
     by this section, shall not apply to such partnership and 
     section 743(e)(6)(I) of such Code, as so added, shall be 
     applied by substituting ``20 years'' for ``15 years''.
       (3) Subsection (c).--The amendments made by subsection (c) 
     shall apply to distributions after the date of the enactment 
     of this Act.

     SEC. 834. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK 
                   HELD BY PARTNERSHIP IN CORPORATE PARTNER.

       (a) In General.--Section 755 is amended by adding at the 
     end the following new subsection:
       ``(c) No Allocation of Basis Decrease to Stock of Corporate 
     Partner.--In making an allocation under subsection (a) of any 
     decrease in the adjusted basis of partnership property under 
     section 734(b)--
       ``(1) no allocation may be made to stock in a corporation 
     (or any person related (within the meaning of sections 267(b) 
     and 707(b)(1)) to such corporation) which is a partner in the 
     partnership, and
       ``(2) any amount not allocable to stock by reason of 
     paragraph (1) shall be allocated under subsection (a) to 
     other partnership property.

     Gain shall be recognized to the partnership to the extent 
     that the amount required to be allocated under paragraph (2) 
     to other partnership property exceeds the aggregate adjusted 
     basis of such other property immediately before the 
     allocation required by paragraph (2).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions after the date of the enactment 
     of this Act.

     SEC. 835. REPEAL OF SPECIAL RULES FOR FASITS.

       (a) In General.--Part V of subchapter M of chapter 1 
     (relating to financial asset securitization investment 
     trusts) is hereby repealed.
       (b) Conforming Amendments.--
       (1) Paragraph (6) of section 56(g) is amended by striking 
     ``REMIC, or FASIT'' and inserting ``or REMIC''.
       (2) Clause (ii) of section 382(l)(4)(B) is amended by 
     striking ``a REMIC to which part IV of subchapter M applies, 
     or a FASIT to which part V of subchapter M applies,'' and 
     inserting ``or a REMIC to which part IV of subchapter M 
     applies,''.
       (3) Paragraph (1) of section 582(c) is amended by striking 
     ``, and any regular interest in a FASIT,''.
       (4) Subparagraph (E) of section 856(c)(5) is amended by 
     striking the last sentence.
       (5)(A) Section 860G(a)(1) is amended by adding at the end 
     the following new sentence: ``An interest shall not fail to 
     qualify as a regular interest solely because the specified 
     principal amount of the regular interest (or the amount of 
     interest accrued on the regular interest) can be reduced as a 
     result of the nonoccurrence of 1 or more contingent payments 
     with respect to any reverse mortgage loan held by the REMIC 
     if, on the startup day for the REMIC, the sponsor reasonably 
     believes that all principal and interest due under the 
     regular interest will be paid at or prior to the liquidation 
     of the REMIC.''.
       (B) The last sentence of section 860G(a)(3) is amended by 
     inserting ``, and any reverse mortgage loan (and each balance 
     increase on such loan meeting the requirements of 
     subparagraph (A)(iii)) shall be treated as an obligation 
     secured by an interest in real property'' before the period 
     at the end.
       (6) Paragraph (3) of section 860G(a) is amended by adding 
     ``and'' at the end of subparagraph (B), by striking ``, and'' 
     at the end of subparagraph (C) and inserting a period, and by 
     striking subparagraph (D).
       (7) Section 860G(a)(3), as amended by paragraph (6), is 
     amended by adding at the end the following new sentence: 
     ``For purposes of subparagraph (A), if more than 50 percent 
     of the obligations transferred to, or purchased by, the REMIC 
     are originated by the United States or

[[Page H8457]]

     any State (or any political subdivision, agency, or 
     instrumentality of the United States or any State) and are 
     principally secured by an interest in real property, then 
     each obligation transferred to, or purchased by, the REMIC 
     shall be treated as secured by an interest in real 
     property.''.
       (8)(A) Section 860G(a)(3)(A) is amended by striking ``or'' 
     at the end of clause (i), by inserting ``or'' at the end of 
     clause (ii), and by inserting after clause (ii) the following 
     new clause:
       ``(iii) represents an increase in the principal amount 
     under the original terms of an obligation described in clause 
     (i) or (ii) if such increase--

       ``(I) is attributable to an advance made to the obligor 
     pursuant to the original terms of the obligation,
       ``(II) occurs after the startup day, and
       ``(III) is purchased by the REMIC pursuant to a fixed price 
     contract in effect on the startup day.''.

       (B) Section 860G(a)(7)(B) is amended to read as follows:
       ``(B) Qualified reserve fund.--For purposes of subparagraph 
     (A), the term `qualified reserve fund' means any reasonably 
     required reserve to--
       ``(i) provide for full payment of expenses of the REMIC or 
     amounts due on regular interests in the event of defaults on 
     qualified mortgages or lower than expected returns on cash 
     flow investments, or
       ``(ii) provide a source of funds for the purchase of 
     obligations described in clause (ii) or (iii) of paragraph 
     (3)(A).

     The aggregate fair market value of the assets held in any 
     such reserve shall not exceed 50 percent of the aggregate 
     fair market value of all of the assets of the REMIC on the 
     startup day, and the amount of any such reserve shall be 
     promptly and appropriately reduced to the extent the amount 
     held in such reserve is no longer reasonably required for 
     purposes specified in clause (i) or (ii) of this 
     subparagraph.''.
       (9) Subparagraph (C) of section 1202(e)(4) is amended by 
     striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
       (10) Clause (xi) of section 7701(a)(19)(C) is amended--
       (A) by striking ``and any regular interest in a FASIT,'', 
     and
       (B) by striking ``or FASIT'' each place it appears.
       (11) Subparagraph (A) of section 7701(i)(2) is amended by 
     striking ``or a FASIT''.
       (12) The table of parts for subchapter M of chapter 1 is 
     amended by striking the item relating to part V.
       (c) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall take effect on January 
     1, 2005.
       (2) Exception for existing fasits.--Paragraph (1) shall not 
     apply to any FASIT in existence on the date of the enactment 
     of this Act to the extent that regular interests issued by 
     the FASIT before such date continue to remain outstanding in 
     accordance with the original terms of issuance.

     SEC. 836. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN 
                   LOSSES.

       (a) In General.--Section 362 (relating to basis to 
     corporations) is amended by adding at the end the following 
     new subsection:
       ``(e) Limitations on Built-In Losses.--
       ``(1) Limitation on importation of built-in losses.--
       ``(A) In general.--If in any transaction described in 
     subsection (a) or (b) there would (but for this subsection) 
     be an importation of a net built-in loss, the basis of each 
     property described in subparagraph (B) which is acquired in 
     such transaction shall (notwithstanding subsections (a) and 
     (b)) be its fair market value immediately after such 
     transaction.
       ``(B) Property described.--For purposes of subparagraph 
     (A), property is described in this subparagraph if--
       ``(i) gain or loss with respect to such property is not 
     subject to tax under this subtitle in the hands of the 
     transferor immediately before the transfer, and
       ``(ii) gain or loss with respect to such property is 
     subject to such tax in the hands of the transferee 
     immediately after such transfer.

     In any case in which the transferor is a partnership, the 
     preceding sentence shall be applied by treating each partner 
     in such partnership as holding such partner's proportionate 
     share of the property of such partnership.
       ``(C) Importation of net built-in loss.--For purposes of 
     subparagraph (A), there is an importation of a net built-in 
     loss in a transaction if the transferee's aggregate adjusted 
     bases of property described in subparagraph (B) which is 
     transferred in such transaction would (but for this 
     paragraph) exceed the fair market value of such property 
     immediately after such transaction.
       ``(2) Limitation on transfer of built-in losses in section 
     351 transactions.--
       ``(A) In general.--If--
       ``(i) property is transferred by a transferor in any 
     transaction which is described in subsection (a) and which is 
     not described in paragraph (1) of this subsection, and
       ``(ii) the transferee's aggregate adjusted bases of such 
     property so transferred would (but for this paragraph) exceed 
     the fair market value of such property immediately after such 
     transaction,

     then, notwithstanding subsection (a), the transferee's 
     aggregate adjusted bases of the property so transferred shall 
     not exceed the fair market value of such property immediately 
     after such transaction.
       ``(B) Allocation of basis reduction.--The aggregate 
     reduction in basis by reason of subparagraph (A) shall be 
     allocated among the property so transferred in proportion to 
     their respective built-in losses immediately before the 
     transaction.
       ``(C) Election to apply limitation to transferor's stock 
     basis.--
       ``(i) In general.--If the transferor and transferee of a 
     transaction described in subparagraph (A) both elect the 
     application of this subparagraph--

       ``(I) subparagraph (A) shall not apply, and
       ``(II) the transferor's basis in the stock received for 
     property to which subparagraph (A) does not apply by reason 
     of the election shall not exceed its fair market value 
     immediately after the transfer.

       ``(ii) Election.--An election under clause (i) shall be 
     included with the return of tax for the taxable year in which 
     the transaction occurred, shall be in such form and manner as 
     the Secretary may prescribe, and, once made, shall be 
     irrevocable.''.
       (b) Comparable Treatment Where Liquidation.--Paragraph (1) 
     of section 334(b) (relating to liquidation of subsidiary) is 
     amended to read as follows:
       ``(1) In general.--If property is received by a corporate 
     distributee in a distribution in a complete liquidation to 
     which section 332 applies (or in a transfer described in 
     section 337(b)(1)), the basis of such property in the hands 
     of such distributee shall be the same as it would be in the 
     hands of the transferor; except that the basis of such 
     property in the hands of such distributee shall be the fair 
     market value of the property at the time of the 
     distribution--
       ``(A) in any case in which gain or loss is recognized by 
     the liquidating corporation with respect to such property, or
       ``(B) in any case in which the liquidating corporation is a 
     foreign corporation, the corporate distributee is a domestic 
     corporation, and the corporate distributee's aggregate 
     adjusted bases of property described in section 362(e)(1)(B) 
     which is distributed in such liquidation would (but for this 
     subparagraph) exceed the fair market value of such property 
     immediately after such liquidation.''.
       (c) Effective Dates.--
       (1) In general.--The amendment made by subsection (a) shall 
     apply to transactions after the date of the enactment of this 
     Act.
       (2) Liquidations.--The amendment made by subsection (b) 
     shall apply to liquidations after the date of the enactment 
     of this Act.

     SEC. 837. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF 
                   DETERMINING INVESTMENT OF EARNINGS IN UNITED 
                   STATES PROPERTY.

       (a) In General.--Subparagraph (A) of section 956(c)(2) is 
     amended to read as follows:
       ``(A) obligations of the United States, money, or deposits 
     with--
       ``(i) any bank (as defined by section 2(c) of the Bank 
     Holding Company Act of 1956 (12 U.S.C. 1841(c)), without 
     regard to subparagraphs (C) and (G) of paragraph (2) of such 
     section), or
       ``(ii) any corporation not described in clause (i) with 
     respect to which a bank holding company (as defined by 
     section 2(a) of such Act) or financial holding company (as 
     defined by section 2(p) of such Act) owns directly or 
     indirectly more than 80 percent by vote or value of the stock 
     of such corporation;''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 838. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                   ATTRIBUTABLE TO NONDISCLOSED REPORTABLE 
                   TRANSACTIONS.

       (a) In General.--Section 163 (relating to deduction for 
     interest) is amended by redesignating subsection (m) as 
     subsection (n) and by inserting after subsection (l) the 
     following new subsection:
       ``(m) Interest on Unpaid Taxes Attributable to Nondisclosed 
     Reportable Transactions.--No deduction shall be allowed under 
     this chapter for any interest paid or accrued under section 
     6601 on any underpayment of tax which is attributable to the 
     portion of any reportable transaction understatement (as 
     defined in section 6662A(b)) with respect to which the 
     requirement of section 6664(d)(2)(A) is not met.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions in taxable years beginning after 
     the date of the enactment of this Act.

     SEC. 839. CLARIFICATION OF RULES FOR PAYMENT OF ESTIMATED TAX 
                   FOR CERTAIN DEEMED ASSET SALES.

       (a) In General.--Paragraph (13) of section 338(h) (relating 
     to tax on deemed sale not taken into account for estimated 
     tax purposes) is amended by adding at the end the following: 
     ``The preceding sentence shall not apply with respect to a 
     qualified stock purchase for which an election is made under 
     paragraph (10).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to transactions occurring after the date of the 
     enactment of this Act.

     SEC. 840. RECOGNITION OF GAIN FROM THE SALE OF A PRINCIPAL 
                   RESIDENCE ACQUIRED IN A LIKE-KIND EXCHANGE 
                   WITHIN 5 YEARS OF SALE.

       (a) In General.--Section 121(d) (relating to special rules 
     for exclusion of gain from sale of principal residence) is 
     amended by adding at the end the following new paragraph:
       ``(10) Property acquired in like-kind exchange.--If a 
     taxpayer acquired property in an exchange to which section 
     1031 applied, subsection (a) shall not apply to the sale or 
     exchange of such property if it occurs during the 5-year 
     period beginning with the date of the acquisition of such 
     property.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales or exchanges after the date of the 
     enactment of this Act.

[[Page H8458]]

     SEC. 841. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL 
                   ISSUE DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS 
                   IN TRANSACTIONS WITH RELATED FOREIGN PERSONS.

       (a) Original Issue Discount.--Section 163(e)(3) (relating 
     to special rule for original issue discount on obligation 
     held by related foreign person) is amended by redesignating 
     subparagraph (B) as subparagraph (C) and by inserting after 
     subparagraph (A) the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--In the case of any debt instrument 
     having original issue discount which is held by a related 
     foreign person which is a controlled foreign corporation (as 
     defined in section 957) or a passive foreign investment 
     company (as defined in section 1297), a deduction shall be 
     allowable to the issuer with respect to such original issue 
     discount for any taxable year before the taxable year in 
     which paid only to the extent such original issue discount is 
     includible (determined without regard to properly allocable 
     deductions and qualified deficits under section 952(c)(1)(B)) 
     during such prior taxable year in the gross income of a 
     United States person who owns (within the meaning of section 
     958(a)) stock in such corporation.
       ``(ii) Secretarial authority.--The Secretary may by 
     regulation exempt transactions from the application of clause 
     (i), including any transaction which is entered into by a 
     payor in the ordinary course of a trade or business in which 
     the payor is predominantly engaged.''.
       (b) Interest and Other Deductible Amounts.--Section 
     267(a)(3) is amended--
       (1) by striking ``The Secretary'' and inserting:
       ``(A) In general.--The Secretary'', and
       (2) by adding at the end the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--Notwithstanding subparagraph (A), in the 
     case of any item payable to a controlled foreign corporation 
     (as defined in section 957) or a passive foreign investment 
     company (as defined in section 1297), a deduction shall be 
     allowable to the payor with respect to such amount for any 
     taxable year before the taxable year in which paid only to 
     the extent that an amount attributable to such item is 
     includible (determined without regard to properly allocable 
     deductions and qualified deficits under section 952(c)(1)(B)) 
     during such prior taxable year in the gross income of a 
     United States person who owns (within the meaning of section 
     958(a)) stock in such corporation.
       ``(ii) Secretarial authority.--The Secretary may by 
     regulation exempt transactions from the application of clause 
     (i), including any transaction which is entered into by a 
     payor in the ordinary course of a trade or business in which 
     the payor is predominantly engaged and in which the payment 
     of the accrued amounts occurs within 8\1/2\ months after 
     accrual or within such other period as the Secretary may 
     prescribe.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments accrued on or after the date of the 
     enactment of this Act.

     SEC. 842. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON 
                   POTENTIAL UNDERPAYMENTS.

       (a) In General.--Subchapter A of chapter 67 (relating to 
     interest on underpayments) is amended by adding at the end 
     the following new section:

     ``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON 
                   POTENTIAL UNDERPAYMENTS, ETC.

       ``(a) Authority To Make Deposits Other Than As Payment of 
     Tax.--A taxpayer may make a cash deposit with the Secretary 
     which may be used by the Secretary to pay any tax imposed 
     under subtitle A or B or chapter 41, 42, 43, or 44 which has 
     not been assessed at the time of the deposit. Such a deposit 
     shall be made in such manner as the Secretary shall 
     prescribe.
       ``(b) No Interest Imposed.--To the extent that such deposit 
     is used by the Secretary to pay tax, for purposes of section 
     6601 (relating to interest on underpayments), the tax shall 
     be treated as paid when the deposit is made.
       ``(c) Return of Deposit.--Except in a case where the 
     Secretary determines that collection of tax is in jeopardy, 
     the Secretary shall return to the taxpayer any amount of the 
     deposit (to the extent not used for a payment of tax) which 
     the taxpayer requests in writing.
       ``(d) Payment of Interest.--
       ``(1) In general.--For purposes of section 6611 (relating 
     to interest on overpayments), except as provided in paragraph 
     (4), a deposit which is returned to a taxpayer shall be 
     treated as a payment of tax for any period to the extent (and 
     only to the extent) attributable to a disputable tax for such 
     period. Under regulations prescribed by the Secretary, rules 
     similar to the rules of section 6611(b)(2) shall apply.
       ``(2) Disputable tax.--
       ``(A) In general.--For purposes of this section, the term 
     `disputable tax' means the amount of tax specified at the 
     time of the deposit as the taxpayer's reasonable estimate of 
     the maximum amount of any tax attributable to disputable 
     items.
       ``(B) Safe harbor based on 30-day letter.--In the case of a 
     taxpayer who has been issued a 30-day letter, the maximum 
     amount of tax under subparagraph (A) shall not be less than 
     the amount of the proposed deficiency specified in such 
     letter.
       ``(3) Other definitions.--For purposes of paragraph (2)--
       ``(A) Disputable item.--The term `disputable item' means 
     any item of income, gain, loss, deduction, or credit if the 
     taxpayer--
       ``(i) has a reasonable basis for its treatment of such 
     item, and
       ``(ii) reasonably believes that the Secretary also has a 
     reasonable basis for disallowing the taxpayer's treatment of 
     such item.
       ``(B) 30-day letter.--The term `30-day letter' means the 
     first letter of proposed deficiency which allows the taxpayer 
     an opportunity for administrative review in the Internal 
     Revenue Service Office of Appeals.
       ``(4) Rate of interest.--The rate of interest under this 
     subsection shall be the Federal short-term rate determined 
     under section 6621(b), compounded daily.
       ``(e) Use of Deposits.--
       ``(1) Payment of tax.--Except as otherwise provided by the 
     taxpayer, deposits shall be treated as used for the payment 
     of tax in the order deposited.
       ``(2) Returns of deposits.--Deposits shall be treated as 
     returned to the taxpayer on a last-in, first-out basis.''.
       (b) Clerical Amendment.--The table of sections for 
     subchapter A of chapter 67 is amended by adding at the end 
     the following new item:

``Sec. 6603. Deposits made to suspend running of interest on potential 
              underpayments, etc.''.

       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to deposits made after the date of the enactment of 
     this Act.
       (2) Coordination with deposits made under revenue procedure 
     84-58.--In the case of an amount held by the Secretary of the 
     Treasury or his delegate on the date of the enactment of this 
     Act as a deposit in the nature of a cash bond deposit 
     pursuant to Revenue Procedure 84-58, the date that the 
     taxpayer identifies such amount as a deposit made pursuant to 
     section 6603 of the Internal Revenue Code (as added by this 
     Act) shall be treated as the date such amount is deposited 
     for purposes of such section 6603.

     SEC. 843. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT 
                   AGREEMENTS.

       (a) In General.--
       (1) Section 6159(a) (relating to authorization of 
     agreements) is amended--
       (A) by striking ``satisfy liability for payment of'' and 
     inserting ``make payment on'', and
       (B) by inserting ``full or partial'' after ``facilitate''.
       (2) Section 6159(c) (relating to Secretary required to 
     enter into installment agreements in certain cases) is 
     amended in the matter preceding paragraph (1) by inserting 
     ``full'' before ``payment''.
       (b) Requirement To Review Partial Payment Agreements Every 
     Two Years.--Section 6159 is amended by redesignating 
     subsections (d) and (e) as subsections (e) and (f), 
     respectively, and inserting after subsection (c) the 
     following new subsection:
       ``(d) Secretary Required To Review Installment Agreements 
     for Partial Collection Every Two Years.--In the case of an 
     agreement entered into by the Secretary under subsection (a) 
     for partial collection of a tax liability, the Secretary 
     shall review the agreement at least once every 2 years.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to agreements entered into on or after the date 
     of the enactment of this Act.

     SEC. 844. AFFIRMATION OF CONSOLIDATED RETURN REGULATION 
                   AUTHORITY.

       (a) In General.--Section 1502 is amended by adding at the 
     end the following new sentence: ``In carrying out the 
     preceding sentence, the Secretary may prescribe rules that 
     are different from the provisions of chapter 1 that would 
     apply if such corporations filed separate returns.''.
       (b) Result Not Overturned.--Notwithstanding the amendment 
     made by subsection (a), the Internal Revenue Code of 1986 
     shall be construed by treating Treasury Regulation 
     Sec. 1.1502-20(c)(1)(iii) (as in effect on January 1, 2001) 
     as being inapplicable to the factual situation in Rite Aid 
     Corporation and Subsidiary Corporations v. United States, 255 
     F.3d 1357 (Fed. Cir. 2001).
       (c) Effective Date.--This section, and the amendment made 
     by this section, shall apply to taxable years beginning 
     before, on, or after the date of the enactment of this Act.

     SEC. 845. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON 
                   CONVERTIBLE DEBT.

       (a) In General.--Paragraph (2) of section 163(l) is amended 
     by inserting ``or equity held by the issuer (or any related 
     party) in any other person'' after ``or a related party''.
       (b) Capitalization Allowed With Respect to Equity of 
     Persons Other Than Issuer and Related Parties.--Section 
     163(l) is amended by redesignating paragraphs (4) and (5) as 
     paragraphs (5) and (6) and by inserting after paragraph (3) 
     the following new paragraph:
       ``(4) Capitalization allowed with respect to equity of 
     persons other than issuer and related parties.--If the 
     disqualified debt instrument of a corporation is payable in 
     equity held by the issuer (or any related party) in any other 
     person (other than a related party), the basis of such equity 
     shall be increased by the amount not allowed as a deduction 
     by reason of paragraph (1) with respect to the instrument.''.
       (c) Exception for Certain Instruments Issued by Dealers in 
     Securities.--Section 163(l), as amended by subsection (b), is 
     amended by redesignating paragraphs (5) and (6) as paragraphs 
     (6) and (7) and by inserting after paragraph (4) the 
     following new paragraph:
       ``(5) Exception for certain instruments issued by dealers 
     in securities.--For purposes of this subsection, the term 
     `disqualified debt instrument' does not include indebtedness 
     issued by a dealer in securities (or a related party) which 
     is payable in, or by reference to, equity (other than equity 
     of the issuer or a related party) held by such dealer in its 
     capacity as a dealer in securities. For purposes of this 
     paragraph, the term `dealer in securities' has the meaning 
     given such term by section 475.''.

[[Page H8459]]

       (d) Conforming Amendment.--Paragraph (3) of section 163(l) 
     is amended by striking ``or a related party'' in the material 
     preceding subparagraph (A) and inserting ``or any other 
     person''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to debt instruments issued after October 3, 2004.

                           Part III--Leasing

     SEC. 847. REFORM OF TAX TREATMENT OF CERTAIN LEASING 
                   ARRANGEMENTS.

       (a) Clarification of Recovery Period for Tax-Exempt Use 
     Property Subject to Lease.--Subparagraph (A) of section 
     168(g)(3) (relating to special rules for determining class 
     life) is amended by inserting ``(notwithstanding any other 
     subparagraph of this paragraph)'' after ``shall''.
       (b) Limitation on Depreciation and Amortization Periods for 
     Intangibles Leased to Tax-Exempt Entity.--
       (1) Computer software.--Paragraph (1) of section 167(f) is 
     amended by adding at the end the following new subparagraph:
       ``(C) Tax-exempt use property subject to lease.--In the 
     case of computer software which would be tax-exempt use 
     property as defined in subsection (h) of section 168 if such 
     section applied to computer software, the useful life under 
     subparagraph (A) shall not be less than 125 percent of the 
     lease term (within the meaning of section 168(i)(3)).''.
       (2) Certain interests or rights acquired separately.--
     Paragraph (2) of section 167(f) is amended by adding at the 
     end the following new sentence: ``If such property would be 
     tax-exempt use property as defined in subsection (h) of 
     section 168 if such section applied to such property, the 
     useful life under such regulations shall not be less than 125 
     percent of the lease term (within the meaning of section 
     168(i)(3)).''.
       (3) Section 197 intangibles.--Section 197(f) (relating to 
     special rules) is amended by adding at the end the following 
     new paragraph:
       ``(10) Tax-exempt use property subject to lease.--In the 
     case of any section 197 intangible which would be tax-exempt 
     use property as defined in subsection (h) of section 168 if 
     such section applied to such intangible, the amortization 
     period under this section shall not be less than 125 percent 
     of the lease term (within the meaning of section 
     168(i)(3)).''.
       (c) Lease Term To Include Related Service Contracts.--
     Subparagraph (A) of section 168(i)(3) (relating to lease 
     term) is amended by striking ``and'' at the end of clause 
     (i), by redesignating clause (ii) as clause (iii), and by 
     inserting after clause (i) the following new clause:
       ``(ii) the term of a lease shall include the term of any 
     service contract or similar arrangement (whether or not 
     treated as a lease under section 7701(e))--

       ``(I) which is part of the same transaction (or series of 
     related transactions) which includes the lease, and
       ``(II) which is with respect to the property subject to the 
     lease or substantially similar property, and''.

       (d) Expansion of Short-Term Lease Exemption for Qualified 
     Technological Equipment.--Subparagraph (A) of section 
     168(h)(3) is amended by adding at the end the following new 
     sentence: ``Notwithstanding subsection (i)(3)(A)(i), in 
     determining a lease term for purposes of the preceding 
     sentence, there shall not be taken into account any option of 
     the lessee to renew at the fair market value rent determined 
     at the time of renewal; except that the aggregate period not 
     taken into account by reason of this sentence shall not 
     exceed 24 months.''.
       (e) Treatment of Certain Indian Tribal Governments As Tax-
     Exempt Entities.--Section 168(h)(2)(A) is amended by striking 
     ``and'' at the end of clause (ii), by striking the period at 
     the end of clause (iii) and inserting ``, and'', and by 
     inserting at the end the following:
       ``(iv) any Indian tribal government described in section 
     7701(a)(40).

     For purposes of applying this subsection, any Indian tribal 
     government referred to in clause (iv) shall be treated in the 
     same manner as a State.''

     SEC. 848. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED 
                   BY GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

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

     ``SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY 
                   USED BY GOVERNMENTS OR OTHER TAX-EXEMPT 
                   ENTITIES.

       ``(a) Limitation on Losses.--Except as otherwise provided 
     in this section, a tax-exempt use loss for any taxable year 
     shall not be allowed.
       ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt 
     use loss with respect to any tax-exempt use property which is 
     disallowed under subsection (a) for any taxable year shall be 
     treated as a deduction with respect to such property in the 
     next taxable year.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Tax-exempt use loss.--The term `tax-exempt use loss' 
     means, with respect to any taxable year, the amount (if any) 
     by which--
       ``(A) the sum of--
       ``(i) the aggregate deductions (other than interest) 
     directly allocable to a tax-exempt use property, plus
       ``(ii) the aggregate deductions for interest properly 
     allocable to such property, exceed
       ``(B) the aggregate income from such property.
       ``(2) Tax-exempt use property.--The term `tax-exempt use 
     property' has the meaning given to such term by section 
     168(h), except that such section shall be applied--
       ``(A) without regard to paragraphs (1)(C) and (3) thereof, 
     and
       ``(B) as if property described in--
       ``(i) section 167(f)(1)(B),
       ``(ii) section 167(f)(2), and
       ``(iii) section 197 intangible,
     were tangible property.

     Such term shall not include property which would (but for 
     this sentence) be tax-exempt use property solely by reason of 
     section 168(h)(6) if any credit is allowable under section 42 
     or 47 with respect to such property.
       ``(d) Exception for Certain Leases.--This section shall not 
     apply to any lease of property which meets the requirements 
     of all of the following paragraphs:
       ``(1) Availability of funds.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if (at any time during the 
     lease term) not more than an allowable amount of funds are--
       ``(i) subject to any arrangement referred to in 
     subparagraph (B), or
       ``(ii) set aside or expected to be set aside,

     to or for the benefit of the lessor or any lender, or to or 
     for the benefit of the lessee to satisfy the lessee's 
     obligations or options under the lease. For purposes of 
     clause (ii), funds shall be treated as set aside or expected 
     to be set aside only if a reasonable person would conclude, 
     based on the facts and circumstances, that such funds are set 
     aside or expected to be set aside.
       ``(B) Arrangements.--The arrangements referred to in this 
     subparagraph include a defeasance arrangement, a loan by the 
     lessee to the lessor or any lender, a deposit arrangement, a 
     letter of credit collateralized with cash or cash 
     equivalents, a payment undertaking agreement, prepaid rent 
     (within the meaning of the regulations under section 467), a 
     sinking fund arrangement, a guaranteed investment contract, 
     financial guaranty insurance, and any similar arrangement 
     (whether or not such arrangement provides credit support).
       ``(C) Allowable amount.--
       ``(i) In general.--Except as otherwise provided in this 
     subparagraph, the term `allowable amount' means an amount 
     equal to 20 percent of the lessor's adjusted basis in the 
     property at the time the lease is entered into.
       ``(ii) Higher amount permitted in certain cases.--To the 
     extent provided in regulations, a higher percentage shall be 
     permitted under clause (i) where necessary because of the 
     credit-worthiness of the lessee. In no event may such 
     regulations permit a percentage of more than 50 percent.
       ``(iii) Option to purchase.--If under the lease the lessee 
     has the option to purchase the property for a fixed price or 
     for other than the fair market value of the property 
     (determined at the time of exercise), the allowable amount at 
     the time such option may be exercised may not exceed 50 
     percent of the price at which such option may be exercised.
       ``(iv) No allowable amount for certain arrangements.--The 
     allowable amount shall be zero with respect to any 
     arrangement which involves--

       ``(I) a loan from the lessee to the lessor or a lender,
       ``(II) any deposit received, letter of credit issued, or 
     payment undertaking agreement entered into by a lender 
     otherwise involved in the transaction, or
       ``(III) in the case of a transaction which involves a 
     lender, any credit support made available to the lessor in 
     which any such lender does not have a claim that is senior to 
     the lessor.

     For purposes of subclause (I), the term `loan' shall not 
     include any amount treated as a loan under section 467 with 
     respect to a section 467 rental agreement.
       ``(2) Lessor must make substantial equity investment.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if--
       ``(i) the lessor--

       ``(I) has at the time the lease is entered into an 
     unconditional at-risk equity investment (as determined by the 
     Secretary) in the property of at least 20 percent of the 
     lessor's adjusted basis in the property as of that time, and
       ``(II) maintains such investment throughout the term of the 
     lease, and

       ``(ii) the fair market value of the property at the end of 
     the lease term is reasonably expected to be equal to at least 
     20 percent of such basis.
       ``(B) Risk of loss.--For purposes of clause (ii), the fair 
     market value at the end of the lease term shall be reduced to 
     the extent that a person other than the lessor bears a risk 
     of loss in the value of the property.
       ``(C) Paragraph not to apply to short-term leases.--This 
     paragraph shall not apply to any lease with a lease term of 5 
     years or less.
       ``(3) Lessee may not bear more than minimal risk of loss.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if there is no arrangement 
     under which the lessee bears--
       ``(i) any portion of the loss that would occur if the fair 
     market value of the leased property were 25 percent less than 
     its reasonably expected fair market value at the time the 
     lease is terminated, or
       ``(ii) more than 50 percent of the loss that would occur if 
     the fair market value of the leased property at the time the 
     lease is terminated were zero.
       ``(B) Exception.--The Secretary may by regulations provide 
     that the requirements of this paragraph are not met where the 
     lessee bears more than a minimal risk of loss.
       ``(C) Paragraph not to apply to short-term leases.--This 
     paragraph shall not apply to any lease with a lease term of 5 
     years or less.
       ``(4) Property with more than 7-year class life.--In the 
     case of a lease--
       ``(A) of property with a class life (as defined in section 
     168(i)(1)) of more than 7 years, other than fixed-wing 
     aircraft and vessels, and
       ``(B) under which the lessee has the option to purchase the 
     property,


[[Page H8460]]


     the lease meets the requirements of this paragraph only if 
     the purchase price under the option equals the fair market 
     value of the property (determined at the time of exercise).
       ``(e) Special Rules.--
       ``(1) Treatment of former tax-exempt use property.--
       ``(A) In general.--In the case of any former tax-exempt use 
     property--
       ``(i) any deduction allowable under subsection (b) with 
     respect to such property for any taxable year shall be 
     allowed only to the extent of any net income (without regard 
     to such deduction) from such property for such taxable year, 
     and
       ``(ii) any portion of such unused deduction remaining after 
     application of clause (i) shall be treated as a deduction 
     allowable under subsection (b) with respect to such property 
     in the next taxable year.
       ``(B) Former tax-exempt use property.--For purposes of this 
     subsection, the term `former tax-exempt use property' means 
     any property which--
       ``(i) is not tax-exempt use property for the taxable year, 
     but
       ``(ii) was tax-exempt use property for any prior taxable 
     year.
       ``(2) Disposition of entire interest in property.--If 
     during the taxable year a taxpayer disposes of the taxpayer's 
     entire interest in tax-exempt use property (or former tax-
     exempt use property), rules similar to the rules of section 
     469(g) shall apply for purposes of this section.
       ``(3) Coordination with section 469.--This section shall be 
     applied before the application of section 469.
       ``(4) Coordination with sections 1031 and 1033.--
       ``(A) In general.--Sections 1031(a) and 1033(a) shall not 
     apply if--
       ``(i) the exchanged or converted property is tax-exempt use 
     property subject to a lease which was entered into before 
     March 13, 2004, and which would not have met the requirements 
     of subsection (d) had such requirements been in effect when 
     the lease was entered into, or
       ``(ii) the replacement property is tax-exempt use property 
     subject to a lease which does not meet the requirements of 
     subsection (d).
       ``(B) Adjusted basis.--In the case of property acquired by 
     the lessor in a transaction to which section 1031 or 1033 
     applies, the adjusted basis of such property for purposes of 
     this section shall be equal to the lesser of--
       ``(i) the fair market value of the property as of the 
     beginning of the lease term, or
       ``(ii) the amount which would be the lessor's adjusted 
     basis if such sections did not apply to such transaction.
       ``(f) Other Definitions.--For purposes of this section--
       ``(1) Related parties.--The terms `lessor', `lessee', and 
     `lender' each include any related party (within the meaning 
     of section 197(f)(9)(C)(i)).
       ``(2) Lease term.--The term `lease term' has the meaning 
     given to such term by section 168(i)(3).
       ``(3) Lender.--The term `lender' means, with respect to any 
     lease, a person that makes a loan to the lessor which is 
     secured (or economically similar to being secured) by the 
     lease or the leased property.
       ``(4) Loan.--The term `loan' includes any similar 
     arrangement.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including regulations which--
       ``(1) allow in appropriate cases the aggregation of 
     property subject to the same lease, and
       ``(2) provide for the determination of the allocation of 
     interest expense for purposes of this section.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart C of part II of subchapter E of chapter 1 is amended 
     by adding at the end the following new item:

``Sec. 470. Limitation on deductions allocable to property used by 
              governments or other tax-exempt entities.''.

     SEC. 849. EFFECTIVE DATE.

       (a) In General.--Except as provided in this section, the 
     amendments made by this part shall apply to leases entered 
     into after March 12, 2004.
       (b) Exception.--
       (1) In general.--The amendments made by this part shall not 
     apply to qualified transportation property.
       (2) Qualified transportation property.--For purposes of 
     paragraph (1), the term ``qualified transportation property'' 
     means domestic property subject to a lease with respect to 
     which a formal application--
       (A) was submitted for approval to the Federal Transit 
     Administration (an agency of the Department of 
     Transportation) after June 30, 2003, and before March 13, 
     2004,
       (B) is approved by the Federal Transit Administration 
     before January 1, 2006, and
       (C) includes a description of such property and the value 
     of such property.
       (3) Exchanges and conversion of tax-exempt use property.--
     Section 470(e)(4) of the Internal Revenue Code of 1986, as 
     added by section 848, shall apply to property exchanged or 
     converted after the date of the enactment of this Act.
       (4) Intangibles and indian tribal governments.--The 
     amendments made subsections (b)(2), (b)(3), and (e) of 
     section 847, and the treatment of property described in 
     clauses (ii) and (iii) of section 470(c)(2)(B) of the 
     Internal Revenue Code of 1986 (as added by section 848) as 
     tangible property, shall apply to leases entered into after 
     October 3, 2004.

               Subtitle C--Reduction of Fuel Tax Evasion

     SEC. 851. EXEMPTION FROM CERTAIN EXCISE TAXES FOR MOBILE 
                   MACHINERY.

       (a) Exemption From Tax on Heavy Trucks and Trailers Sold at 
     Retail.--
       (1) In general.--Section 4053 (relating to exemptions) is 
     amended by adding at the end the following new paragraph:
       ``(8) Mobile machinery.--Any vehicle which consists of a 
     chassis--
       ``(A) to which there has been permanently mounted (by 
     welding, bolting, riveting, or other means) machinery or 
     equipment to perform a construction, manufacturing, 
     processing, farming, mining, drilling, timbering, or similar 
     operation if the operation of the machinery or equipment is 
     unrelated to transportation on or off the public highways,
       ``(B) which has been specially designed to serve only as a 
     mobile carriage and mount (and a power source, where 
     applicable) for the particular machinery or equipment 
     involved, whether or not such machinery or equipment is in 
     operation, and
       ``(C) which, by reason of such special design, could not, 
     without substantial structural modification, be used as a 
     component of a vehicle designed to perform a function of 
     transporting any load other than that particular machinery or 
     equipment or similar machinery or equipment requiring such a 
     specially designed chassis.''.
       (2) Effective date.--The amendment made by this subsection 
     shall take effect on the day after the date of the enactment 
     of this Act.
       (b) Exemption From Tax on Use of Certain Vehicles.--
       (1) In general.--Section 4483 (relating to exemptions) is 
     amended by redesignating subsection (g) as subsection (h) and 
     by inserting after subsection (f) the following new 
     subsection:
       ``(g) Exemption for Mobile Machinery.--No tax shall be 
     imposed by section 4481 on the use of any vehicle described 
     in section 4053(8).''.
       (2) Effective date.--The amendments made by this subsection 
     shall take effect on the day after the date of the enactment 
     of this Act.
       (c) Exemption From Tax on Tires.--
       (1) In General.--Section 4072(b)(2) is amended by adding at 
     the end the following flush sentence: ``Such term shall not 
     include tires of a type used exclusively on vehicles 
     described in section 4053(8).''.
       (2) Effective date.--The amendment made by this subsection 
     shall take effect on the day after the date of the enactment 
     of this Act.
       (d) Refund of Fuel Taxes.--
       (1) In general.--Section 6421(e)(2) (defining off-highway 
     business use) is amended by adding at the end the following 
     new subparagraph:
       ``(C) Uses in mobile machinery.--
       ``(i) In general.--The term `off-highway business use' 
     shall include any use in a vehicle which meets the 
     requirements described in clause (ii).
       ``(ii) Requirements for mobile machinery.--The requirements 
     described in this clause are--

       ``(I) the design-based test, and
       ``(II) the use-based test.

       ``(iii) Design-based test.--For purposes of clause (ii)(I), 
     the design-based test is met if the vehicle consists of a 
     chassis--

       ``(I) to which there has been permanently mounted (by 
     welding, bolting, riveting, or other means) machinery or 
     equipment to perform a construction, manufacturing, 
     processing, farming, mining, drilling, timbering, or similar 
     operation if the operation of the machinery or equipment is 
     unrelated to transportation on or off the public highways,
       ``(II) which has been specially designed to serve only as a 
     mobile carriage and mount (and a power source, where 
     applicable) for the particular machinery or equipment 
     involved, whether or not such machinery or equipment is in 
     operation, and
       ``(III) which, by reason of such special design, could not, 
     without substantial structural modification, be used as a 
     component of a vehicle designed to perform a function of 
     transporting any load other than that particular machinery or 
     equipment or similar machinery or equipment requiring such a 
     specially designed chassis.

       ``(iv) Use-based test.--For purposes of clause (ii)(II), 
     the use-based test is met if the use of the vehicle on public 
     highways was less than 7,500 miles during the taxpayer's 
     taxable year. This clause shall be applied without regard to 
     use of the vehicle by any organization which is described in 
     section 501(c) and exempt from tax under section 501(a).''.
       (2) No tax-free sales.--Subsection (b) of section 4082 is 
     amended by inserting before the period at the end ``and such 
     term shall not include any use described in section 
     6421(e)(2)(C)''.
       (3) Annual refund of tax paid.--Section 6427(i)(2) 
     (relating to exceptions) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Nonapplication of paragraph.--This paragraph shall 
     not apply to any fuel used solely in any off-highway business 
     use described in section 6421(e)(2)(C).''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 852. MODIFICATION OF DEFINITION OF OFF-HIGHWAY VEHICLE.

       (a) In General.--Section 7701(a) (relating to definitions) 
     is amended by adding at the end the following new paragraph:
       ``(48) Off-highway vehicles.--
       ``(A) Off-highway transportation vehicles.--
       ``(i) In general.--A vehicle shall not be treated as a 
     highway vehicle if such vehicle is specially designed for the 
     primary function of transporting a particular type of load 
     other than over the public highway and because of this 
     special design such vehicle's capability to transport a load 
     over the public highway is substantially limited or impaired.
       ``(ii) Determination of vehicle's design.--For purposes of 
     clause (i), a vehicle's design is

[[Page H8461]]

     determined solely on the basis of its physical 
     characteristics.
       ``(iii) Determination of substantial limitation or 
     impairment.--For purposes of clause (i), in determining 
     whether substantial limitation or impairment exists, account 
     may be taken of factors such as the size of the vehicle, 
     whether such vehicle is subject to the licensing, safety, and 
     other requirements applicable to highway vehicles, and 
     whether such vehicle can transport a load at a sustained 
     speed of at least 25 miles per hour. It is immaterial that a 
     vehicle can transport a greater load off the public highway 
     than such vehicle is permitted to transport over the public 
     highway.
       ``(B) Nontransportation trailers and semitrailers.--A 
     trailer or semitrailer shall not be treated as a highway 
     vehicle if it is specially designed to function only as an 
     enclosed stationary shelter for the carrying on of an off-
     highway function at an off-highway site.''.
       (c) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendment made by this section shall take effect on the date 
     of the enactment of this Act.
       (2) Fuel taxes.--With respect to taxes imposed under 
     subchapter B of chapter 31 and part III of subchapter A of 
     chapter 32, the amendment made by this section shall apply to 
     taxable periods beginning after the date of the enactment of 
     this Act.

     SEC. 853. TAXATION OF AVIATION-GRADE KEROSENE.

       (a) Rate of Tax.--
       (1) In general.--Subparagraph (A) of section 4081(a)(2) is 
     amended by striking ``and'' at the end of clause (ii), by 
     striking the period at the end of clause (iii) and inserting 
     ``, and'', and by adding at the end the following new clause:
       ``(iv) in the case of aviation-grade kerosene, 21.8 cents 
     per gallon.''.
       (2) Commercial aviation.--Paragraph (2) of section 4081(a) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Taxes imposed on fuel used in commercial aviation.--
     In the case of aviation-grade kerosene which is removed from 
     any refinery or terminal directly into the fuel tank of an 
     aircraft for use in commercial aviation, the rate of tax 
     under subparagraph (A)(iv) shall be 4.3 cents per gallon.''.
       (3) Certain refueler trucks, tankers, and tank wagons 
     treated as terminal.--
       (A) In general.--Subsection (a) of section 4081 is amended 
     by adding at the end the following new paragraph:
       ``(3) Certain refueler trucks, tankers, and tank wagons 
     treated as terminal.--
       ``(A) In general.--For purposes of paragraph (2)(C), a 
     refueler truck, tanker, or tank wagon shall be treated as 
     part of a terminal if--
       ``(i) such terminal is located within a secured area of an 
     airport,
       ``(ii) any aviation-grade kerosene which is loaded in such 
     truck, tanker, or wagon at such terminal is for delivery only 
     into aircraft at the airport in which such terminal is 
     located,
       ``(iii) such truck, tanker, or wagon meets the requirements 
     of subparagraph (B) with respect to such terminal, and
       ``(iv) except in the case of exigent circumstances 
     identified by the Secretary in regulations, no vehicle 
     registered for highway use is loaded with aviation-grade 
     kerosene at such terminal.
       ``(B) Requirements.--A refueler truck, tanker, or tank 
     wagon meets the requirements of this subparagraph with 
     respect to a terminal if such truck, tanker, or wagon--
       ``(i) has storage tanks, hose, and coupling equipment 
     designed and used for the purposes of fueling aircraft,
       ``(ii) is not registered for highway use, and
       ``(iii) is operated by--

       ``(I) the terminal operator of such terminal, or
       ``(II) a person that makes a daily accounting to such 
     terminal operator of each delivery of fuel from such truck, 
     tanker, or wagon.

       ``(C) Reporting.--The Secretary shall require under section 
     4101(d) reporting by such terminal operator of--
       ``(i) any information obtained under subparagraph 
     (B)(iii)(II), and
       ``(ii) any similar information maintained by such terminal 
     operator with respect to deliveries of fuel made by trucks, 
     tankers, or wagons operated by such terminal operator.''.
       (B) List of airports with secured terminals.--Not later 
     than December 15, 2004, the Secretary of the Treasury shall 
     publish and maintain a list of airports which include a 
     secured area in which a terminal is located (within the 
     meaning of section 4081(a)(3)(A)(i) of the Internal Revenue 
     Code of 1986, as added by this paragraph).
       (4) Liability for tax on aviation-grade kerosene used in 
     commercial aviation.--Subsection (a) of section 4081 is 
     amended by adding at the end the following new paragraph:
       ``(4) Liability for tax on aviation-grade kerosene used in 
     commercial aviation.--For purposes of paragraph (2)(C), the 
     person who uses the fuel for commercial aviation shall pay 
     the tax imposed under such paragraph. For purposes of the 
     preceding sentence, fuel shall be treated as used when such 
     fuel is removed into the fuel tank.''.
       (5) Nontaxable uses.--
       (A) In general.--Section 4082 is amended by redesignating 
     subsections (e) and (f) as subsections (f) and (g), 
     respectively, and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Aviation-Grade Kerosene.--In the case of aviation-
     grade kerosene which is exempt from the tax imposed by 
     section 4041(c) (other than by reason of a prior imposition 
     of tax) and which is removed from any refinery or terminal 
     directly into the fuel tank of an aircraft, the rate of tax 
     under section 4081(a)(2)(A)(iv) shall be zero.''.
       (B) Conforming amendments.--
       (i) Subsection (b) of section 4082 is amended by adding at 
     the end the following new flush sentence:

     ``The term `nontaxable use' does not include the use of 
     aviation-grade kerosene in an aircraft.''.
       (ii) Section 4082(d) is amended by striking paragraph (1) 
     and by redesignating paragraphs (2) and (3) as paragraphs (1) 
     and (2), respectively.
       (6) Nonaircraft use of aviation-grade kerosene.--
       (A) In general.--Subparagraph (B) of section 4041(a)(1) is 
     amended by adding at the end the following new sentence: 
     ``This subparagraph shall not apply to aviation-grade 
     kerosene.''.
       (B) Conforming amendment.--The heading for paragraph (1) of 
     section 4041(a) is amended by inserting ``and kerosene'' 
     after ``diesel fuel''.
       (b) Commercial Aviation.--Section 4083 is amended by 
     redesignating subsections (b) and (c) as subsections (c) and 
     (d), respectively, and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Commercial Aviation.--For purposes of this subpart, 
     the term `commercial aviation' means any use of an aircraft 
     in a business of transporting persons or property for 
     compensation or hire by air, unless properly allocable to any 
     transportation exempt from the taxes imposed by sections 4261 
     and 4271 by reason of section 4281 or 4282 or by reason of 
     section 4261(h).''.
       (c) Refunds.--
       (1) In general.--Paragraph (4) of section 6427(l) is 
     amended to read as follows:
       ``(4) Refunds for aviation-grade kerosene.--
       ``(A) No refund of certain taxes on fuel used in commercial 
     aviation.--In the case of aviation-grade kerosene used in 
     commercial aviation (as defined in section 4083(b)) (other 
     than supplies for vessels or aircraft within the meaning of 
     section 4221(d)(3)), paragraph (1) shall not apply to so much 
     of the tax imposed by section 4081 as is attributable to--
       ``(i) the Leaking Underground Storage Tank Trust Fund 
     financing rate imposed by such section, and
       ``(ii) so much of the rate of tax specified in section 
     4081(a)(2)(A)(iv) as does not exceed 4.3 cents per gallon.
       ``(B) Payment to ultimate, registered vendor.--With respect 
     to aviation-grade kerosene, if the ultimate purchaser of such 
     kerosene waives (at such time and in such form and manner as 
     the Secretary shall prescribe) the right to payment under 
     paragraph (1) and assigns such right to the ultimate vendor, 
     then the Secretary shall pay the amount which would be paid 
     under paragraph (1) to such ultimate vendor, but only if such 
     ultimate vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (2) Time for filing claims.--Subparagraph (A) of section 
     6427(i)(4) is amended--
       (A) by striking ``subsection (l)(5)'' both places it 
     appears and inserting ``paragraph (4)(B) or (5) of subsection 
     (l)'', and
       (B) by striking ``the preceding sentence'' and inserting 
     ``subsection (l)(5)''.
       (3) Conforming amendment.--Subparagraph (B) of section 
     6427(l)(2) is amended to read as follows:
       ``(B) in the case of aviation-grade kerosene--
       ``(i) any use which is exempt from the tax imposed by 
     section 4041(c) other than by reason of a prior imposition of 
     tax, or
       ``(ii) any use in commercial aviation (within the meaning 
     of section 4083(b)).''.
       (d) Repeal of Prior Taxation of Aviation Fuel.--
       (1) In general.--Part III of subchapter A of chapter 32 is 
     amended by striking subpart B and by redesignating subpart C 
     as subpart B.
       (2) Conforming amendments.--
       (A) Section 4041(c) is amended to read as follows:
       ``(c) Aviation-Grade Kerosene.--
       ``(1) In general.--There is hereby imposed a tax upon 
     aviation-grade kerosene--
       ``(A) sold by any person to an owner, lessee, or other 
     operator of an aircraft for use in such aircraft, or
       ``(B) used by any person in an aircraft unless there was a 
     taxable sale of such fuel under subparagraph (A).
       ``(2) Exemption for previously taxed fuel.--No tax shall be 
     imposed by this subsection on the sale or use of any 
     aviation-grade kerosene if tax was imposed on such liquid 
     under section 4081 and the tax thereon was not credited or 
     refunded.
       ``(3) Rate of tax.--The rate of tax imposed by this 
     subsection shall be the rate of tax applicable under section 
     4081(a)(2)(A)(iv) which is in effect at the time of such sale 
     or use.''.
       (B) Section 4041(d)(2) is amended by striking ``section 
     4091'' and inserting ``section 4081''.
       (C) Section 4041 is amended by striking subsection (e).
       (D) Section 4041 is amended by striking subsection (i).
       (E) Section 4041(m)(1) is amended to read as follows:
       ``(1) In general.--In the case of the sale or use of any 
     partially exempt methanol or ethanol fuel the rate of the tax 
     imposed by subsection (a)(2) shall be--
       ``(A) after September 30, 1997, and before October 1, 
     2005--
       ``(i) in the case of fuel none of the alcohol in which 
     consists of ethanol, 9.15 cents per gallon, and
       ``(ii) in any other case, 11.3 cents per gallon, and
       ``(B) after September 30, 2005--
       ``(i) in the case of fuel none of the alcohol in which 
     consists of ethanol, 2.15 cents per gallon, and

[[Page H8462]]

       ``(ii) in any other case, 4.3 cents per gallon.''.
       (F) Sections 4101(a), 4103, 4221(a), and 6206 are each 
     amended by striking ``, 4081, or 4091'' and inserting ``or 
     4081''.
       (G) Section 6416(b)(2) is amended by striking ``4091 or''.
       (H) Section 6416(b)(3) is amended by striking ``or 4091'' 
     each place it appears.
       (I) Section 6416(d) is amended by striking ``or to the tax 
     imposed by section 4091 in the case of refunds described in 
     section 4091(d)''.
       (J) Section 6427(j)(1) is amended by striking ``, 4081, and 
     4091'' and inserting ``and 4081''.
       (K)(i) Section 6427(l)(1) is amended to read as follows:
       ``(1) In general.--Except as otherwise provided in this 
     subsection and in subsection (k), if any diesel fuel or 
     kerosene on which tax has been imposed by section 4041 or 
     4081 is used by any person in a nontaxable use, the Secretary 
     shall pay (without interest) to the ultimate purchaser of 
     such fuel an amount equal to the aggregate amount of tax 
     imposed on such fuel under section 4041 or 4081, as the case 
     may be, reduced by any payment made to the ultimate vendor 
     under paragraph (4)(B).''.
       (ii) Paragraph (5)(B) of section 6427(l) is amended by 
     striking ``Paragraph (1)(A) shall not apply to kerosene'' and 
     inserting ``Paragraph (1) shall not apply to kerosene (other 
     than aviation-grade kerosene)''.
       (L) Subparagraph (B) of section 6724(d)(1), as amended by 
     section 805, is amended by striking clause (xvi) and by 
     redesignating the succeeding clauses accordingly.
       (M) Paragraph (2) of section 6724(d), as amended by section 
     805, is amended by striking subparagraph (X) and by 
     redesignating the succeeding subparagraphs accordingly.
       (N) Paragraph (1) of section 9502(b) is amended by adding 
     ``and'' at the end of subparagraph (B) and by striking 
     subparagraphs (C) and (D) and inserting the following new 
     subparagraph:
       ``(C) section 4081 with respect to aviation gasoline and 
     aviation-grade kerosene, and''.
       (O) The last sentence of section 9502(b) is amended to read 
     as follows:
     ``There shall not be taken into account under paragraph (1) 
     so much of the taxes imposed by section 4081 as are 
     determined at the rate specified in section 4081(a)(2)(B).''.
       (P) Subsection (b) of section 9508 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       (Q) Section 9508(c)(2)(A) is amended by striking ``sections 
     4081 and 4091'' and inserting ``section 4081''.
       (R) The table of subparts for part III of subchapter A of 
     chapter 32 is amended to read as follows:

``Subpart A. Motor and aviation fuels.
``Subpart B. Special provisions applicable to fuels tax.''.

       (S) The heading for subpart A of part III of subchapter A 
     of chapter 32 is amended to read as follows:

                ``Subpart A--Motor and Aviation Fuels''.

       (T) The heading for subpart B of part III of subchapter A 
     of chapter 32, as redesignated by paragraph (1), is amended 
     to read as follows:

       ``Subpart B--Special Provisions Applicable to Fuels Tax''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to aviation-grade kerosene removed, entered, or 
     sold after December 31, 2004.
       (f) Floor Stocks Tax.--
       (1) In general.--There is hereby imposed on aviation-grade 
     kerosene held on January 1, 2005, by any person a tax equal 
     to--
       (A) the tax which would have been imposed before such date 
     on such kerosene had the amendments made by this section been 
     in effect at all times before such date, reduced by
       (B) the sum of--
       (i) the tax imposed before such date on such kerosene under 
     section 4091 of the Internal Revenue Code of 1986, as in 
     effect on such date, and
       (ii) in the case of kerosene held exclusively for such 
     person's own use, the amount which such person would (but for 
     this clause) reasonably expect (as of such date) to be paid 
     as a refund under section 6427(l) of such Code with respect 
     to such kerosene.
       (2) Exception for fuel held in aircraft fuel tank.--
     Paragraph (1) shall not apply to kerosene held in the fuel 
     tank of an aircraft on January 1, 2005.
       (3) Liability for tax and method of payment.--
       (A) Liability for tax.--The person holding the kerosene on 
     January 1, 2005, to which the tax imposed by paragraph (1) 
     applies shall be liable for such tax.
       (B) Method and time for payment.--The tax imposed by 
     paragraph (1) shall be paid at such time and in such manner 
     as the Secretary of the Treasury (or the Secretary's 
     delegate) shall prescribe, including the nonapplication of 
     such tax on de minimis amounts of kerosene.
       (4) Transfer of floor stock tax revenues to trust funds.--
     For purposes of determining the amount transferred to any 
     trust fund, the tax imposed by this subsection shall be 
     treated as imposed by section 4081 of the Internal Revenue 
     Code of 1986--
       (A) in any case in which tax was not imposed by section 
     4091 of such Code, at the Leaking Underground Storage Tank 
     Trust Fund financing rate under such section to the extent of 
     0.1 cents per gallon, and
       (B) at the rate under section 4081(a)(2)(A)(iv) of such 
     Code to the extent of the remainder.
       (5) Held by a person.--For purposes of this subsection, 
     kerosene shall be considered as held by a person if title 
     thereto has passed to such person (whether or not delivery to 
     the person has been made).
       (6) Other laws applicable.--All provisions of law, 
     including penalties, applicable with respect to the tax 
     imposed by section 4081 of such Code shall, insofar as 
     applicable and not inconsistent with the provisions of this 
     subsection, apply with respect to the floor stock tax imposed 
     by paragraph (1) to the same extent as if such tax were 
     imposed by such section.

     SEC. 854. DYE INJECTION EQUIPMENT.

       (a) In General.--Section 4082(a)(2) (relating to exemptions 
     for diesel fuel and kerosene) is amended by inserting ``by 
     mechanical injection'' after ``indelibly dyed''.
       (b) Dye Injector Security.--Not later than 180 days after 
     the date of the enactment of this Act, the Secretary of the 
     Treasury shall issue regulations regarding mechanical dye 
     injection systems described in the amendment made by 
     subsection (a), and such regulations shall include standards 
     for making such systems tamper resistant.
       (c) Penalty for Tampering With or Failing To Maintain 
     Security Requirements for Mechanical Dye Injection Systems.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by adding after 
     section 6715 the following new section:

     ``SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN SECURITY 
                   REQUIREMENTS FOR MECHANICAL DYE INJECTION 
                   SYSTEMS.

       ``(a) Imposition of Penalty--
       ``(1) Tampering.--If any person tampers with a mechanical 
     dye injection system used to indelibly dye fuel for purposes 
     of section 4082, such person shall pay a penalty in addition 
     to the tax (if any).
       ``(2) Failure to maintain security requirements.--If any 
     operator of a mechanical dye injection system used to 
     indelibly dye fuel for purposes of section 4082 fails to 
     maintain the security standards for such system as 
     established by the Secretary, then such operator shall pay a 
     penalty in addition to the tax (if any).
       ``(b) Amount of Penalty.--The amount of the penalty under 
     subsection (a) shall be--
       ``(1) for each violation described in paragraph (1), the 
     greater of--
       ``(A) $25,000, or
       ``(B) $10 for each gallon of fuel involved, and
       ``(2) for each--
       ``(A) failure to maintain security standards described in 
     paragraph (2), $1,000, and
       ``(B) failure to correct a violation described in paragraph 
     (2), $1,000 per day for each day after which such violation 
     was discovered or such person should have reasonably known of 
     such violation.
       ``(c) Joint and Several Liability.--
       ``(1) In general.--If a penalty is imposed under this 
     section on any business entity, each officer, employee, or 
     agent of such entity or other contracting party who willfully 
     participated in any act giving rise to such penalty shall be 
     jointly and severally liable with such entity for such 
     penalty.
       ``(2) Affiliated groups.--If a business entity described in 
     paragraph (1) is part of an affiliated group (as defined in 
     section 1504(a)), the parent corporation of such entity shall 
     be jointly and severally liable with such entity for the 
     penalty imposed under this section.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by adding after the 
     item related to section 6715 the following new item:

``Sec. 6715A. Tampering with or failing to maintain security 
              requirements for mechanical dye injection systems.''.
       (d) Effective Date.--The amendments made by subsections (a) 
     and (c) shall take effect on the 180th day after the date on 
     which the Secretary issues the regulations described in 
     subsection (b).

     SEC. 855. ELIMINATION OF ADMINISTRATIVE REVIEW FOR TAXABLE 
                   USE OF DYED FUEL.

       (a) In General.--Section 6715 is amended by inserting at 
     the end the following new subsection:
       ``(e) No Administrative Appeal for Third and Subsequent 
     Violations.--In the case of any person who is found to be 
     subject to the penalty under this section after a chemical 
     analysis of such fuel and who has been penalized under this 
     section at least twice after the date of the enactment of 
     this subsection, no administrative appeal or review shall be 
     allowed with respect to such finding except in the case of a 
     claim regarding--
       ``(1) fraud or mistake in the chemical analysis, or
       ``(2) mathematical calculation of the amount of the 
     penalty.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to penalties assessed after the date of the 
     enactment of this Act.

     SEC. 856. PENALTY ON UNTAXED CHEMICALLY ALTERED DYED FUEL 
                   MIXTURES.

       (a) In General.--Section 6715(a) (relating to dyed fuel 
     sold for use or used in taxable use, etc.) is amended by 
     striking ``or'' in paragraph (2), by inserting ``or'' at the 
     end of paragraph (3), and by inserting after paragraph (3) 
     the following new paragraph:
       ``(4) any person who has knowledge that a dyed fuel which 
     has been altered as described in paragraph (3) sells or holds 
     for sale such fuel for any use which the person knows or has 
     reason to know is not a nontaxable use of such fuel,''.
       (b) Conforming Amendment.--Section 6715(a)(3) is amended by 
     striking ``alters, or attempts to alter,'' and inserting 
     ``alters, chemically or otherwise, or attempts to so 
     alter,''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 857. TERMINATION OF DYED DIESEL USE BY INTERCITY BUSES.

       (a) In General.--Paragraph (3) of section 4082(b) (relating 
     to nontaxable use) is amended to read as follows:

[[Page H8463]]

       ``(3) any use described in section 
     4041(a)(1)(C)(iii)(II).''.
       (b) Ultimate Vendor Refund.--Subsection (b) of section 6427 
     is amended by adding at the end the following new paragraph:
       ``(4) Refunds for use of diesel fuel in certain intercity 
     buses.--With respect to any fuel to which paragraph (2)(A) 
     applies, if the ultimate purchaser of such fuel waives (at 
     such time and in such form and manner as the Secretary shall 
     prescribe) the right to payment under paragraph (1) and 
     assigns such right to the ultimate vendor, then the Secretary 
     shall pay the amount which would be paid under paragraph (1) 
     to such ultimate vendor, but only if such ultimate vendor--
       ``(A) is registered under section 4101, and
       ``(B) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (c) Payment of Refunds.--Subparagraph (A) of section 
     6427(i)(4), as amended by this Act, is amended by inserting 
     ``subsections (b)(4) and'' after ``filed under''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to fuel sold after December 31, 2004.

     SEC. 858. AUTHORITY TO INSPECT ON-SITE RECORDS.

       (a) In General.--Section 4083(d)(1)(A) (relating to 
     administrative authority), as amended by this Act, is amended 
     by striking ``and'' at the end of clause (i) and by inserting 
     after clause (ii) the following new clause:
       ``(iii) inspecting any books and records and any shipping 
     papers pertaining to such fuel, and''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 859. ASSESSABLE PENALTY FOR REFUSAL OF ENTRY.

       (a) In General.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by this Act, 
     is amended by inserting after section 6716 the following new 
     section:

     ``SEC. 6717. REFUSAL OF ENTRY.

       ``(a) In General.--In addition to any other penalty 
     provided by law, any person who refuses to admit entry or 
     refuses to permit any other action by the Secretary 
     authorized by section 4083(d)(1) shall pay a penalty of 
     $1,000 for such refusal.
       ``(b) Joint and Several Liability.--
       ``(1) In general.--If a penalty is imposed under this 
     section on any business entity, each officer, employee, or 
     agent of such entity or other contracting party who willfully 
     participated in any act giving rise to such penalty shall be 
     jointly and severally liable with such entity for such 
     penalty.
       ``(2) Affiliated groups.--If a business entity described in 
     paragraph (1) is part of an affiliated group (as defined in 
     section 1504(a)), the parent corporation of such entity shall 
     be jointly and severally liable with such entity for the 
     penalty imposed under this section.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (b) Conforming Amendments.--
       (1) Section 4083(d)(3), as amended by this Act, is 
     amended--
       (A) by striking ``entry.--The penalty'' and inserting: 
     ``entry.--
       ``(A) Forfeiture.--The penalty'', and
       (B) by adding at the end the following new subparagraph:
       ``(B) Assessable penalty.--For additional assessable 
     penalty for the refusal to admit entry or other refusal to 
     permit an action by the Secretary authorized by paragraph 
     (1), see section 6717.''.
       (2) The table of sections for part I of subchapter B of 
     chapter 68, as amended by this Act, is amended by inserting 
     after the item relating to section 6716 the following new 
     item:

``Sec. 6717. Refusal of entry.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2005.

     SEC. 860. REGISTRATION OF PIPELINE OR VESSEL OPERATORS 
                   REQUIRED FOR EXEMPTION OF BULK TRANSFERS TO 
                   REGISTERED TERMINALS OR REFINERIES.

       (a) In General.--Section 4081(a)(1)(B) (relating to 
     exemption for bulk transfers to registered terminals or 
     refineries) is amended--
       (1) by inserting ``by pipeline or vessel'' after 
     ``transferred in bulk'', and
       (2) by inserting ``, the operator of such pipeline or 
     vessel,'' after ``the taxable fuel''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on March 1, 2005.
       (c) Publication of Registered Persons.--Beginning on 
     January 1, 2005, the Secretary of the Treasury (or the 
     Secretary's delegate) shall periodically publish under 
     section 6103(k)(7) of the Internal Revenue Code of 1986 a 
     current list of persons registered under section 4101 of such 
     Code who are required to register under such section.

     SEC. 861. DISPLAY OF REGISTRATION.

       (a) In General.--Subsection (a) of section 4101 (relating 
     to registration) is amended--
       (1) by striking ``Every'' and inserting the following:
       ``(1) In general.--Every'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Display of registration.--Every operator of a vessel 
     required by the Secretary to register under this section 
     shall display proof of registration through an identification 
     device prescribed by the Secretary on each vessel used by 
     such operator to transport any taxable fuel.''.
       (b) Civil Penalty for Failure To Display Registration.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by this Act, 
     is amended by inserting after section 6717 the following new 
     section:

     ``SEC. 6718. FAILURE TO DISPLAY TAX REGISTRATION ON VESSELS.

       ``(a) Failure To Display Registration.--Every operator of a 
     vessel who fails to display proof of registration pursuant to 
     section 4101(a)(2) shall pay a penalty of $500 for each such 
     failure. With respect to any vessel, only one penalty shall 
     be imposed by this section during any calendar month.
       ``(b) Multiple Violations.--In determining the penalty 
     under subsection (a) on any person, subsection (a) shall be 
     applied by increasing the amount in subsection (a) by the 
     product of such amount and the aggregate number of penalties 
     (if any) imposed with respect to prior months by this section 
     on such person (or a related person or any predecessor of 
     such person or related person).
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68, as amended by this Act, is 
     amended by inserting after the item relating to section 6717 
     the following new item:

``Sec. 6718. Failure to display tax registration on vessels.''.

       (c) Effective Dates.--
       (1) Subsection (a).--The amendments made by subsection (a) 
     shall take effect on January 1, 2005.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to penalties imposed after December 31, 2004.

     SEC. 862. REGISTRATION OF PERSONS WITHIN FOREIGN TRADE ZONES, 
                   ETC.

       (a) In General.--Section 4101(a), as amended by this Act, 
     is amended by redesignating paragraph (2) as paragraph (3), 
     and by inserting after paragraph (1) the following new 
     paragraph:
       ``(2) Registration of persons within foreign trade zones, 
     etc.--The Secretary shall require registration by any person 
     which--
       ``(A) operates a terminal or refinery within a foreign 
     trade zone or within a customs bonded storage facility, or
       ``(B) holds an inventory position with respect to a taxable 
     fuel in such a terminal.''.
       (b) Technical Amendment.--Section 6718(a), as added by this 
     Act, is amended by striking ``section 4101(a)(2)'' and 
     inserting ``section 4101(a)(3)''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2005.

     SEC. 863. PENALTIES FOR FAILURE TO REGISTER AND FAILURE TO 
                   REPORT.

       (a) Increased Penalty.--Subsection (a) of section 7272 
     (relating to penalty for failure to register) is amended by 
     inserting ``($10,000 in the case of a failure to register 
     under section 4101)'' after ``$50''.
       (b) Increased Criminal Penalty.--Section 7232 (relating to 
     failure to register under section 4101, false representations 
     of registration status, etc.) is amended by striking 
     ``$5,000'' and inserting ``$10,000''.
       (c) Assessable Penalty for Failure to Register.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by this Act, 
     is amended by inserting after section 6718 at the end the 
     following new section:

     ``SEC. 6719. FAILURE TO REGISTER.

       ``(a) Failure to Register.--Every person who is required to 
     register under section 4101 and fails to do so shall pay a 
     penalty in addition to the tax (if any).
       ``(b) Amount of Penalty.--The amount of the penalty under 
     subsection (a) shall be--
       ``(1) $10,000 for each initial failure to register, and
       ``(2) $1,000 for each day thereafter such person fails to 
     register.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68, as amended by this Act, is 
     amended by inserting after the item relating to section 6718 
     the following new item:

``Sec. 6719. Failure to register.''.

       (d) Assessable Penalty for Failure to Report.--
       (1) In general.--Part II of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by adding at 
     the end the following new section:

     ``SEC. 6725. FAILURE TO REPORT INFORMATION UNDER SECTION 
                   4101.

       ``(a) In General.--In the case of each failure described in 
     subsection (b) by any person with respect to a vessel or 
     facility, such person shall pay a penalty of $10,000 in 
     addition to the tax (if any).
       ``(b) Failures Subject to Penalty.--For purposes of 
     subsection (a), the failures described in this subsection 
     are--
       ``(1) any failure to make a report under section 4101(d) on 
     or before the date prescribed therefor, and
       ``(2) any failure to include all of the information 
     required to be shown on such report or the inclusion of 
     incorrect information.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part II 
     of subchapter B of chapter 68

[[Page H8464]]

     is amended by adding at the end the following new item:

``Sec. 6725. Failure to report information under section 4101.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to penalties imposed after December 31, 2004.

     SEC. 864. ELECTRONIC FILING OF REQUIRED INFORMATION REPORTS.

       (a) In General.--Section 4101(d) is amended by adding at 
     the end the following new flush sentence:

     ``Any person who is required to report under this subsection 
     and who has 25 or more reportable transactions in a month 
     shall file such report in electronic format.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply on January 1, 2006.

     SEC. 865. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE VENDORS.

       (a) In General.--Paragraph (4) of section 6416(a) (relating 
     to abatements, credits, and refunds) is amended to read as 
     follows:
       ``(4) Registered ultimate vendor to administer credits and 
     refunds of gasoline tax.--
       ``(A) In general.--For purposes of this subsection, if an 
     ultimate vendor purchases any gasoline on which tax imposed 
     by section 4081 has been paid and sells such gasoline to an 
     ultimate purchaser described in subparagraph (C) or (D) of 
     subsection (b)(2) (and such gasoline is for a use described 
     in such subparagraph), such ultimate vendor shall be treated 
     as the person (and the only person) who paid such tax, but 
     only if such ultimate vendor is registered under section 
     4101.
       ``(B) Timing of claims.--The procedure and timing of any 
     claim under subparagraph (A) shall be the same as for claims 
     under section 6427(i)(4), except that the rules of section 
     6427(i)(3)(B) regarding electronic claims shall not apply 
     unless the ultimate vendor has certified to the Secretary for 
     the most recent quarter of the taxable year that all ultimate 
     purchasers of the vendor are certified and entitled to a 
     refund under subparagraph (C) or (D) of subsection (b)(2).''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2005.

     SEC. 866. TWO-PARTY EXCHANGES.

       (a) In General.--Subpart C of part III of subchapter A of 
     chapter 32, as amended by this Act, is amended by inserting 
     after section 4104 the following new section:

     ``SEC. 4105. TWO-PARTY EXCHANGES.

       ``(a) In General.--In a two-party exchange, the delivering 
     person shall not be liable for the tax imposed under of 
     section 4081(a)(1)(A)(ii).
       ``(b) Two-Party Exchange.--The term `two-party exchange' 
     means a transaction, other than a sale, in which taxable fuel 
     is transferred from a delivering person registered under 
     section 4101 as a taxable fuel registrant to a receiving 
     person who is so registered where all of the following occur:
       ``(1) The transaction includes a transfer from the 
     delivering person, who holds the inventory position for 
     taxable fuel in the terminal as reflected in the records of 
     the terminal operator.
       ``(2) The exchange transaction occurs before or 
     contemporaneous with completion of removal across the rack 
     from the terminal by the receiving person.
       ``(3) The terminal operator in its books and records treats 
     the receiving person as the person that removes the product 
     across the terminal rack for purposes of reporting the 
     transaction to the Secretary.
       ``(4) The transaction is the subject of a written 
     contract.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart C of part III of subchapter A of chapter 32, as 
     amended by of this Act, is amended by adding after the last 
     item the following new item:

``Sec. 4105. Two-party exchanges.''.

       (c) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 867. MODIFICATIONS OF TAX ON USE OF CERTAIN VEHICLES.

       (a) Proration of Tax Where Vehicle Sold.--
       (1) In general.--Subparagraph (A) of section 4481(c)(2) 
     (relating to where vehicle destroyed or stolen) is amended by 
     striking ``destroyed or stolen'' both places it appears and 
     inserting ``sold, destroyed, or stolen''.
       (2) Conforming amendment.--The heading for section 
     4481(c)(2) is amended by striking ``destroyed or stolen'' and 
     inserting ``sold, destroyed, or stolen''.
       (b) Repeal of Installment Payment.--
       (1) Section 6156 (relating to installment payment of tax on 
     use of highway motor vehicles) is repealed.
       (2) The table of sections for subchapter A of chapter 62 is 
     amended by striking the item relating to section 6156.
       (c) Electronic Filing.--Section 4481 is amended by 
     redesignating subsection (e) as subsection (f) and by 
     inserting after subsection (d) the following new subsection:
       ``(e) Electronic Filing.--Any taxpayer who files a return 
     under this section with respect to 25 or more vehicles for 
     any taxable period shall file such return electronically.''.
       (d) Repeal of Reduction in Tax for Certain Trucks.--Section 
     4483 is amended by striking subsection (f).
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable periods beginning after the date of 
     the enactment of this Act.

     SEC. 868. DEDICATION OF REVENUES FROM CERTAIN PENALTIES TO 
                   THE HIGHWAY TRUST FUND.

       (a) In General.--Subsection (b) of section 9503 (relating 
     to transfer to Highway Trust Fund of amounts equivalent to 
     certain taxes) is amended by redesignating paragraph (5) as 
     paragraph (6) and inserting after paragraph (4) the following 
     new paragraph:
       ``(5) Certain penalties.--There are hereby appropriated to 
     the Highway Trust Fund amounts equivalent to the penalties 
     paid under sections 6715, 6715A, 6717, 6718, 6719, 6725, 
     7232, and 7272 (but only with regard to penalties under such 
     section related to failure to register under section 
     4101).''.
       (b) Conforming Amendments.--
       (1) The heading of subsection (b) of section 9503 is 
     amended by inserting ``and Penalties'' after ``Taxes''.
       (2) The heading of paragraph (1) of section 9503(b) is 
     amended by striking ``In general'' and inserting ``Certain 
     taxes''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to penalties assessed on or after the date of the 
     enactment of this Act.

     SEC. 869. SIMPLIFICATION OF TAX ON TIRES.

       (a) In General.--Subsection (a) of section 4071 is amended 
     to read as follows:
       ``(a) Imposition and Rate of Tax.--There is hereby imposed 
     on taxable tires sold by the manufacturer, producer, or 
     importer thereof a tax at the rate of 9.45 cents (4.725 cents 
     in the case of a biasply tire or super single tire) for each 
     10 pounds so much of the maximum rated load capacity thereof 
     as exceeds 3,500 pounds.''
       (b) Biasply and Super Single Tires.--Section 4072 is 
     amended by adding at the end the following new subsections:
       ``(c) Biasply.--For purposes of this part, the term 
     `biasply tire'' means a pneumatic tire on which the ply cords 
     that extend to the beads are laid at alternate angles 
     substantially less than 90 degrees to the centerline of the 
     tread.
       ``(d) Super single tire.--For purposes of this part, the 
     term `super single tire' means a single tire greater than 13 
     inches in cross section width designed to replace 2 tires in 
     a dual fitment.''.
       (b) Taxable Tire.--Section 4072, as amended by subsection 
     (a), is amended by redesignating subsections (a), (b), (c), 
     and (d) as subsections (b), (c), (d), and (e) respectively, 
     and by inserting before subsection (b) (as so redesignated) 
     the following new subsection:
       ``(a) Taxable Tire.--For purposes of this chapter, the term 
     `taxable tire' means any tire of the type used on highway 
     vehicles if wholly or in part made of rubber and if marked 
     pursuant to Federal regulations for highway use.''
       (c) Exemption for Tires Sold to Department of Defense.--
     Section 4073 is amended to read as follows:

     ``SEC. 4073. EXEMPTIONS.

       ``The tax imposed by section 4071 shall not apply to tires 
     sold for the exclusive use of the Department of Defense or 
     the Coast Guard.''.
       (d) Conforming Amendments.--
       (1) Section 4071 is amended by striking subsection (c) and 
     by moving subsection (e) after subsection (b) and 
     redesignating subsection (e) as subsection (c).
       (2) The item relating to section 4073 in the table of 
     sections for part II of subchapter A of chapter 32 is amended 
     to read as follows:

``Sec. 4073. Exemptions.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to sales in calendar years beginning more than 30 
     days after the date of the enactment of this Act.

     SEC. 870. TRANSMIX AND DIESEL FUEL BLEND STOCKS TREATED AS 
                   TAXABLE FUEL.

       (a) In General.--Paragraph (3) of section 4083(a) is 
     amended to read as follows:
       ``(3) Diesel fuel.--
       ``(A) In general.--The term `diesel fuel` means--
       ``(i) any liquid (other than gasoline) which is suitable 
     for use as a fuel in a diesel-powered highway vehicle, or a 
     diesel-powered train,
       ``(ii) transmix, and
       ``(iii) diesel fuel blend stocks identified by the 
     Secretary.
       ``(B) Transmix.--For purposes of subparagraph (A), the term 
     `transmix' means a byproduct of refined products pipeline 
     operations created by the mixing of different specification 
     products during pipeline transportation.''.
       (b) Conforming Amendment.--Subsection (h) of section 6427 
     is amended to read as follows:
       ``(h) Blend Stocks Not Used for Producing Taxable Fuel.--
       ``(1) Gasoline blend stocks or additives not used for 
     producing gasoline.--Except as provided in subsection (k), if 
     any gasoline blend stock or additive (within the meaning of 
     section 4083(a)(2)) is not used by any person to produce 
     gasoline and such person establishes that the ultimate use of 
     such gasoline blend stock or additive is not to produce 
     gasoline, the Secretary shall pay (without interest) to such 
     person an amount equal to the aggregate amount of the tax 
     imposed on such person with respect to such gasoline blend 
     stock or additive.
       ``(2) Diesel fuel blend stocks or additives not used for 
     producing diesel.--Except as provided in subsection (k), if 
     any diesel fuel blend stock is not used by any person to 
     produce diesel fuel and such person establishes that the 
     ultimate use of such diesel fuel blend stock is not to 
     produce diesel fuel, the Secretary shall pay (without 
     interest) to such person an amount equal to the aggregate 
     amount of the tax imposed on such person with respect to such 
     diesel fuel blend stock.''.
       (c) Effective Date.--The amendment made by this section 
     shall apply to fuel removed, sold, or used after December 31, 
     2004.

     SEC. 871. STUDY REGARDING FUEL TAX COMPLIANCE.

       (a) In General.--Not later than January 31, 2005, the 
     Secretary of the Treasury shall submit to the Committee on 
     Finance of the Senate and the Committee on Ways and Means of 
     the House of Representatives a report regarding compliance 
     with the tax imposed under subchapter B of chapter 31 and 
     part III of subchapter A of chapter 32 of the Internal 
     Revenue Code of 1986.

[[Page H8465]]

      Such report shall include the information, analysis, and 
     recommendations specified in subsections (b), (c), and (d).
       (b) Taxable Fuel Blendstocks.--The Secretary shall identify 
     chemical products to be added to the list of blendstocks from 
     lab analysis of fuel samples collected by the Internal 
     Revenue Service which have been blended with taxable fuel but 
     are not treated as blendstocks. The Secretary shall include 
     statistics regarding the frequency in which a chemical 
     product has been collected, and whether the sample contained 
     an above normal concentration of the chemical product.
       (c) Waste Products Added to Taxable Fuels.--The report 
     shall include a discussion of Internal Revenue Service 
     findings regarding the addition of waste products to taxable 
     fuel and any recommendations to address the taxation of such 
     products.
       (d) Erroneous Claims of Fuel Tax Exemptions.--The report 
     shall include a discussion of Internal Revenue Service 
     findings regarding sales of taxable fuel to entities claiming 
     exempt status as a State or local government and the 
     frequency of erroneous certifications of tax exempt status. 
     The Secretary, in consultation with representatives of State 
     and local governments, shall provide recommendations to 
     address such erroneous claims, including recommendations on 
     the feasibility of a State maintained list of exempt 
     governmental entities within the State.

                  Subtitle D--Other Revenue Provisions

     SEC. 881. QUALIFIED TAX COLLECTION CONTRACTS.

       (a) Contract Requirements.--
       (1) In general.--Subchapter A of chapter 64 (relating to 
     collection) is amended by adding at the end the following new 
     section:

     ``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

       ``(a) In General.--Nothing in any provision of law shall be 
     construed to prevent the Secretary from entering into a 
     qualified tax collection contract.
       ``(b) Qualified Tax Collection Contract.--For purposes of 
     this section, the term `qualified tax collection contract' 
     means any contract which--
       ``(1) is for the services of any person (other than an 
     officer or employee of the Treasury Department)--
       ``(A) to locate and contact any taxpayer specified by the 
     Secretary,
       ``(B) to request full payment from such taxpayer of an 
     amount of Federal tax specified by the Secretary and, if such 
     request cannot be met by the taxpayer, to offer the taxpayer 
     an installment agreement providing for full payment of such 
     amount during a period not to exceed 5 years, and
       ``(C) to obtain financial information specified by the 
     Secretary with respect to such taxpayer,
       ``(2) prohibits each person providing such services under 
     such contract from committing any act or omission which 
     employees of the Internal Revenue Service are prohibited from 
     committing in the performance of similar services,
       ``(3) prohibits subcontractors from--
       ``(A) having contacts with taxpayers,
       ``(B) providing quality assurance services, and
       ``(C) composing debt collection notices, and
       ``(4) permits subcontractors to perform other services only 
     with the approval of the Secretary.
       ``(c) Fees.--The Secretary may retain and use--
       ``(1) an amount not in excess of 25 percent of the amount 
     collected under any qualified tax collection contract for the 
     costs of services performed under such contract, and
       ``(2) an amount not in excess of 25 percent of such amount 
     collected for collection enforcement activities of the 
     Internal Revenue Service.
     The Secretary shall keep adequate records regarding amounts 
     so retained and used. The amount credited as paid by any 
     taxpayer shall be determined without regard to this 
     subsection.
       ``(d) No Federal Liability.--The United States shall not be 
     liable for any act or omission of any person performing 
     services under a qualified tax collection contract.
       ``(e) Application of Fair Debt Collection Practices Act.--
     The provisions of the Fair Debt Collection Practices Act (15 
     U.S.C. 1692 et seq.) shall apply to any qualified tax 
     collection contract, except to the extent superseded by 
     section 6304, section 7602(c), or by any other provision of 
     this title.
       ``(f) Cross References.--

  ``(1) For damages for certain unauthorized collection actions by 
persons performing services under a qualified tax collection contract, 
see section 7433A.
  ``(2) For application of Taxpayer Assistance Orders to persons 
performing services under a qualified tax collection contract, see 
section 7811(g).''.
       (2) Conforming amendments.--
       (A) Section 7809(a) is amended by inserting ``6306,'' 
     before ``7651''.
       (B) The table of sections for subchapter A of chapter 64 is 
     amended by adding at the end the following new item:

``Sec. 6306. Qualified tax collection contracts.''.

       (b) Civil Damages for Certain Unauthorized Collection 
     Actions by Persons Performing Services Under Qualified Tax 
     Collection Contracts.--
       (1) In general.--Subchapter B of chapter 76 (relating to 
     proceedings by taxpayers and third parties) is amended by 
     inserting after section 7433 the following new section:

     ``SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED 
                   COLLECTION ACTIONS BY PERSONS PERFORMING 
                   SERVICES UNDER QUALIFIED TAX COLLECTION 
                   CONTRACTS.

       ``(a) In General.--Subject to the modifications provided by 
     subsection (b), section 7433 shall apply to the acts and 
     omissions of any person performing services under a qualified 
     tax collection contract (as defined in section 6306(b)) to 
     the same extent and in the same manner as if such person were 
     an employee of the Internal Revenue Service.
       ``(b) Modifications.--For purposes of subsection (a)--
       ``(1) Any civil action brought under section 7433 by reason 
     of this section shall be brought against the person who 
     entered into the qualified tax collection contract with the 
     Secretary and shall not be brought against the United States.
       ``(2) Such person and not the United States shall be liable 
     for any damages and costs determined in such civil action.
       ``(3) Such civil action shall not be an exclusive remedy 
     with respect to such person.
       ``(4) Subsections (c), (d)(1), and (e) of section 7433 
     shall not apply.''.
       (2) Clerical amendment.--The table of sections for 
     subchapter B of chapter 76 is amended by inserting after the 
     item relating to section 7433 the following new item:

``Sec. 7433A. Civil damages for certain unauthorized collection actions 
              by persons performing services under qualified tax 
              collection contracts.''.

       (c) Application of Taxpayer Assistance Orders to Persons 
     Performing Services Under a Qualified Tax Collection 
     Contract.--Section 7811 (relating to taxpayer assistance 
     orders) is amended by adding at the end the following new 
     subsection:
       ``(g) Application to Persons Performing Services Under a 
     Qualified Tax Collection Contract.--Any order issued or 
     action taken by the National Taxpayer Advocate pursuant to 
     this section shall apply to persons performing services under 
     a qualified tax collection contract (as defined in section 
     6306(b)) to the same extent and in the same manner as such 
     order or action applies to the Secretary.''.
       (d) Ineligibility of Individuals Who Commit Misconduct to 
     Perform Under Contract.--Section 1203 of the Internal Revenue 
     Service Restructuring Act of 1998 (relating to termination of 
     employment for misconduct) is amended by adding at the end 
     the following new subsection:
       ``(e) Individuals Performing Services Under a Qualified Tax 
     Collection Contract.--An individual shall cease to be 
     permitted to perform any services under any qualified tax 
     collection contract (as defined in section 6306(b) of the 
     Internal Revenue Code of 1986) if there is a final 
     determination by the Secretary of the Treasury under such 
     contract that such individual committed any act or omission 
     described under subsection (b) in connection with the 
     performance of such services.''.
       (e) Biennial Report.--The Secretary of the Treasury shall 
     biennially submit (beginning in 2005) to the Committee on 
     Finance of the Senate and the Committee on Ways and Means of 
     the House of Representatives a report with respect to 
     qualified tax collection contracts under section 6306 of the 
     Internal Revenue Code of 1986 (as added by this section) 
     which includes--
       (1) a complete cost benefit analysis,
       (2) the impact of such contracts on collection enforcement 
     staff levels in the Internal Revenue Service,
       (3) the impact of such contracts on the total number and 
     amount of unpaid assessments, and on the number and amount of 
     assessments collected by Internal Revenue Service personnel 
     after initial contact by a contractor,
       (4) the amounts collected and the collection costs incurred 
     (directly and indirectly) by the Internal Revenue Service,
       (5) an evaluation of contractor performance,
       (6) a disclosure safeguard report in a form similar to that 
     required under section 6103(p)(5) of such Code, and
       (7) a measurement plan which includes a comparison of the 
     best practices used by the private collectors with the 
     Internal Revenue Service's own collection techniques) and 
     mechanisms to identify and capture information on successful 
     collection techniques used by the contractors which could be 
     adopted by the Internal Revenue Service.
       (f) Effective Date.--The amendments made to this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 882. TREATMENT OF CHARITABLE CONTRIBUTIONS OF PATENTS 
                   AND SIMILAR PROPERTY.

       (a) In General.--Subparagraph (B) of section 170(e)(1) is 
     amended by striking ``or'' at the end of clause (i), by 
     adding ``or'' at the end of clause (ii), and by inserting 
     after clause (ii) the following new clause:
       ``(iii) of any patent, copyright (other than a copyright 
     described in section 1221(a)(3) or 1231(b)(1)(C)), trademark, 
     trade name, trade secret, know-how, software (other than 
     software described in section 197(e)(3)(A)(i)), or similar 
     property, or applications or registrations of such 
     property,''.
       (b) Certain Donee Income From Intellectual Property Treated 
     as an Additional Charitable Contribution.--Section 170 is 
     amended by redesignating subsection (m) as subsection (n) and 
     by inserting after subsection (l) the following new 
     subsection:
       ``(m) Certain Donee Income From Intellectual Property 
     Treated as an Additional Charitable Contribution.--
       ``(1) Treatment as additional contribution.--In the case of 
     a taxpayer who makes a qualified intellectual property 
     contribution, the deduction allowed under subsection (a) for 
     each taxable year of the taxpayer ending on or after the date 
     of such contribution shall be increased (subject to the 
     limitations under subsection (b)) by the applicable 
     percentage of qualified donee income with respect to such 
     contribution which is properly allocable to such year under 
     this subsection.

[[Page H8466]]

       ``(2) Reduction in additional deductions to extent of 
     initial deduction.--With respect to any qualified 
     intellectual property contribution, the deduction allowed 
     under subsection (a) shall be increased under paragraph (1) 
     only to the extent that the aggregate amount of such 
     increases with respect to such contribution exceed the amount 
     allowed as a deduction under subsection (a) with respect to 
     such contribution determined without regard to this 
     subsection.
       ``(3) Qualified donee income.--For purposes of this 
     subsection, the term `qualified donee income' means any net 
     income received by or accrued to the donee which is properly 
     allocable to the qualified intellectual property.
       ``(4) Allocation of qualified donee income to taxable years 
     of donor.--For purposes of this subsection, qualified donee 
     income shall be treated as properly allocable to a taxable 
     year of the donor if such income is received by or accrued to 
     the donee for the taxable year of the donee which ends within 
     or with such taxable year of the donor.
       ``(5) 10-year limitation.--Income shall not be treated as 
     properly allocable to qualified intellectual property for 
     purposes of this subsection if such income is received by or 
     accrued to the donee after the 10-year period beginning on 
     the date of the contribution of such property.
       ``(6) Benefit limited to life of intellectual property.--
     Income shall not be treated as properly allocable to 
     qualified intellectual property for purposes of this 
     subsection if such income is received by or accrued to the 
     donee after the expiration of the legal life of such 
     property.
       ``(7) Applicable percentage.--For purposes of this 
     subsection, the term `applicable percentage' means the 
     percentage determined under the following table which 
     corresponds to a taxable year of the donor ending on or after 
     the date of the qualified intellectual property contribution:

``Taxable Year of Donor Ending on or After Date oApplicable Percentage:
  1st..............................................................100 
  2nd..............................................................100 
  3rd...............................................................90 
  4th...............................................................80 
  5th...............................................................70 
  6th...............................................................60 
  7th...............................................................50 
  8th...............................................................40 
  9th...............................................................30 
  10th..............................................................20 
  11th..............................................................10 
  12th..............................................................10.

       ``(8) Qualified intellectual property contribution.--For 
     purposes of this subsection, the term `qualified intellectual 
     property contribution' means any charitable contribution of 
     qualified intellectual property--
       ``(A) the amount of which taken into account under this 
     section is reduced by reason of subsection (e)(1), and
       ``(B) with respect to which the donor informs the donee at 
     the time of such contribution that the donor intends to treat 
     such contribution as a qualified intellectual property 
     contribution for purposes of this subsection and section 
     6050L.
       ``(9) Qualified intellectual property.--For purposes of 
     this subsection, the term `qualified intellectual property' 
     means property described in subsection (e)(1)(B)(iii) (other 
     than property contributed to or for the use of an 
     organization described in subsection (e)(1)(B)(ii)).
       ``(10) Other special rules.--
       ``(A) Application of limitations on charitable 
     contributions.--Any increase under this subsection of the 
     deduction provided under subsection (a) shall be treated for 
     purposes of subsection (b) as a deduction which is 
     attributable to a charitable contribution to the donee to 
     which such increase relates.
       ``(B) Net income determined by donee.--The net income taken 
     into account under paragraph (3) shall not exceed the amount 
     of such income reported under section 6050L(b)(1).
       ``(C) Deduction limited to 12 taxable years.--Except as may 
     be provided under subparagraph (D)(i), this subsection shall 
     not apply with respect to any qualified intellectual property 
     contribution for any taxable year of the donor after the 12th 
     taxable year of the donor which ends on or after the date of 
     such contribution.
       ``(D) Regulations.--The Secretary may issue regulations or 
     other guidance to carry out the purposes of this subsection, 
     including regulations or guidance--
       ``(i) modifying the application of this subsection in the 
     case of a donor or donee with a short taxable year, and
       ``(ii) providing for the determination of an amount to be 
     treated as net income of the donee which is properly 
     allocable to qualified intellectual property in the case of a 
     donee who uses such property to further a purpose or function 
     constituting the basis of the donee's exemption under section 
     501 (or, in the case of a governmental unit, any purpose 
     described in section 170(c)) and does not possess a right to 
     receive any payment from a third party with respect to such 
     property.''.
       (c) Reporting Requirements.--
       (1) In general.--Section 6050L (relating to returns 
     relating to certain dispositions of donated property) is 
     amended to read as follows:

     ``SEC. 6050L. RETURNS RELATING TO CERTAIN DONATED PROPERTY.

       ``(a) Dispositions of Donated Property.--
       ``(1) In general.--If the donee of any charitable deduction 
     property sells, exchanges, or otherwise disposes of such 
     property within 2 years after its receipt, the donee shall 
     make a return (in accordance with forms and regulations 
     prescribed by the Secretary) showing--
       ``(A) the name, address, and TIN of the donor,
       ``(B) a description of the property,
       ``(C) the date of the contribution,
       ``(D) the amount received on the disposition, and
       ``(E) the date of such disposition.
       ``(2) Definitions.--For purposes of this subsection--
       ``(A) Charitable deduction property.--The term `charitable 
     deduction property' means any property (other than publicly 
     traded securities) contributed in a contribution for which a 
     deduction was claimed under section 170 if the claimed value 
     of such property (plus the claimed value of all similar items 
     of property donated by the donor to 1 or more donees) exceeds 
     $5,000.
       ``(B) Publicly traded securities.--The term `publicly 
     traded securities' means securities for which (as of the date 
     of the contribution) market quotations are readily available 
     on an established securities market.
       ``(b) Qualified Intellectual Property Contributions.--
       ``(1) In general.--Each donee with respect to a qualified 
     intellectual property contribution shall make a return (at 
     such time and in such form and manner as the Secretary may by 
     regulations prescribe) with respect to each specified taxable 
     year of the donee showing--
       ``(A) the name, address, and TIN of the donor,
       ``(B) a description of the qualified intellectual property 
     contributed,
       ``(C) the date of the contribution, and
       ``(D) the amount of net income of the donee for the taxable 
     year which is properly allocable to the qualified 
     intellectual property (determined without regard to paragraph 
     (10)(B) of section 170(m) and with the modifications 
     described in paragraphs (5) and (6) of such section).
       ``(2) Definitions.--For purposes of this subsection--
       ``(A) In general.--Terms used in this subsection which are 
     also used in section 170(m) have the respective meanings 
     given such terms in such section.
       ``(B) Specified taxable year.--The term `specified taxable 
     year' means, with respect to any qualified intellectual 
     property contribution, any taxable year of the donee any 
     portion of which is part of the 10-year period beginning on 
     the date of such contribution.
       ``(c) Statement To Be Furnished to Donors.--Every person 
     making a return under subsection (a) or (b) shall furnish a 
     copy of such return to the donor at such time and in such 
     manner as the Secretary may by regulations prescribe.''.
       (2) Clerical amendment.--The table of sections for subpart 
     A of part II of subchapter A of chapter 61 is amended by 
     striking the item relating to section 6050L and inserting the 
     following new item:

``Sec. 6050L. Returns relating to certain donated property.''.
       (d) Coordination With Appraisal Requirements.--Subclause 
     (I) of section 170(f)(11)(A)(ii), as added by this Act, is 
     amended by inserting ``subsection (e)(1)(B)(iii) or'' before 
     ``section 1221(a)(1)''.
       (e) Anti-Abuse Rules.--The Secretary of the Treasury may 
     prescribe such regulations or other guidance as may be 
     necessary or appropriate to prevent the avoidance of the 
     purposes of section 170(e)(1)(B)(iii) of the Internal Revenue 
     Code of 1986 (as added by subsection (a)), including 
     preventing--
       (1) the circumvention of the reduction of the charitable 
     deduction by embedding or bundling the patent or similar 
     property as part of a charitable contribution of property 
     that includes the patent or similar property,
       (2) the manipulation of the basis of the property to 
     increase the amount of the charitable deduction through the 
     use of related persons, pass-thru entities, or other 
     intermediaries, or through the use of any provision of law or 
     regulation (including the consolidated return regulations), 
     and
       (3) a donor from changing the form of the patent or similar 
     property to property of a form for which different deduction 
     rules would apply.
       (f) Effective Date.--The amendments made by this section 
     shall apply to contributions made after June 3, 2004.

     SEC. 883. INCREASED REPORTING FOR NONCASH CHARITABLE 
                   CONTRIBUTIONS.

       (a) In General.--Subsection (f) of section 170 (relating to 
     disallowance of deduction in certain cases and special rules) 
     is amended by adding after paragraph (10) the following new 
     paragraph:
       ``(11) Qualified appraisal and other documentation for 
     certain contributions.--
       ``(A) In general.--
       ``(i) Denial of deduction.--In the case of an individual, 
     partnership, or corporation, no deduction shall be allowed 
     under subsection (a) for any contribution of property for 
     which a deduction of more than $500 is claimed unless such 
     person meets the requirements of subparagraphs (B), (C), and 
     (D), as the case may be, with respect to such contribution.
       ``(ii) Exceptions.--

       ``(I) Readily valued property.--Subparagraphs (C) and (D) 
     shall not apply to cash, property described in section 
     1221(a)(1), publicly traded securities (as defined in section 
     6050L(a)(2)(B)), and any qualified vehicle described in 
     paragraph (12)(A)(ii) for which an acknowledgement under 
     paragraph (12)(B)(iii) is provided.
       ``(II) Reasonable cause.--Clause (i) shall not apply if it 
     is shown that the failure to meet such requirements is due to 
     reasonable cause and not to willful neglect.

       ``(B) Property description for contributions of more than 
     $500.--In the case of contributions of property for which a 
     deduction of more than $500 is claimed, the requirements of 
     this subparagraph are met if the individual, partnership or 
     corporation includes with the return for the taxable year in 
     which the contribution is made a description of such property 
     and such other information as the Secretary may require. The 
     requirements of this subparagraph

[[Page H8467]]

     shall not apply to a C corporation which is not a personal 
     service corporation or a closely held C corporation.
       ``(C) Qualified appraisal for contributions of more than 
     $5,000.--In the case of contributions of property for which a 
     deduction of more than $5,000 is claimed, the requirements of 
     this subparagraph are met if the individual, partnership, or 
     corporation obtains a qualified appraisal of such property 
     and attaches to the return for the taxable year in which such 
     contribution is made such information regarding such property 
     and such appraisal as the Secretary may require.
       ``(D) Substantiation for contributions of more than 
     $500,000.--In the case of contributions of property for which 
     a deduction of more than $500,000 is claimed, the 
     requirements of this subparagraph are met if the individual, 
     partnership, or corporation attaches to the return for the 
     taxable year a qualified appraisal of such property.
       ``(E) Qualified appraisal.--For purposes of this paragraph, 
     the term `qualified appraisal' means, with respect to any 
     property, an appraisal of such property which is treated for 
     purposes of this paragraph as a qualified appraisal under 
     regulations or other guidance prescribed by the Secretary.
       ``(F) Aggregation of similar items of property.--For 
     purposes of determining thresholds under this paragraph, 
     property and all similar items of property donated to 1 or 
     more donees shall be treated as 1 property.
       ``(G) Special rule for pass-thru entities.--In the case of 
     a partnership or S corporation, this paragraph shall be 
     applied at the entity level, except that the deduction shall 
     be denied at the partner or shareholder level.
       ``(H) Regulations.--The Secretary may prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this paragraph, including regulations that 
     may provide that some or all of the requirements of this 
     paragraph do not apply in appropriate cases.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to contributions made after June 3, 2004.

     SEC. 884. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRPLANES.

       (a) In General.--Subsection (f) of section 170 (relating to 
     disallowance of deduction in certain cases and special 
     rules), as amended by this Act, is amended by inserting after 
     paragraph (11) the following new paragraph:
       ``(12) Contributions of used motor vehicles, boats, and 
     airplanes.--
       ``(A) In general.--In the case of a contribution of a 
     qualified vehicle the claimed value of which exceeds $500--
       ``(i) paragraph (8) shall not apply and no deduction shall 
     be allowed under subsection (a) for such contribution unless 
     the taxpayer substantiates the contribution by a 
     contemporaneous written acknowledgement of the contribution 
     by the donee organization that meets the requirements of 
     subparagraph (B) and includes the acknowledgement with the 
     taxpayer's return of tax which includes the deduction, and
       ``(ii) if the organization sells the vehicle without any 
     significant intervening use or material improvement of such 
     vehicle by the organization, the amount of the deduction 
     allowed under subsection (a) shall not exceed the gross 
     proceeds received from such sale.
       ``(B) Content of acknowledgement.--An acknowledgement meets 
     the requirements of this subparagraph if it includes the 
     following information:
       ``(i) The name and taxpayer identification number of the 
     donor.
       ``(ii) The vehicle identification number or similar number.
       ``(iii) In the case of a qualified vehicle to which 
     subparagraph (A)(ii) applies--

       ``(I) a certification that the vehicle was sold in an arm's 
     length transaction between unrelated parties,
       ``(II) the gross proceeds from the sale, and
       ``(III) a statement that the deductible amount may not 
     exceed the amount of such gross proceeds.

       ``(iv) In the case of a qualified vehicle to which 
     subparagraph (A)(ii) does not apply--

       ``(I) a certification of the intended use or material 
     improvement of the vehicle and the intended duration of such 
     use, and
       ``(II) a certification that the vehicle would not be 
     transferred in exchange for money, other property, or 
     services before completion of such use or improvement.

       ``(C) Contemporaneous.--For purposes of subparagraph (A), 
     an acknowledgement shall be considered to be contemporaneous 
     if the donee organization provides it within 30 days of--
       ``(i) the sale of the qualified vehicle, or
       ``(ii) in the case of an acknowledgement including a 
     certification described in subparagraph (B)(iv), the 
     contribution of the qualified vehicle.
       ``(D) Information to secretary.--A donee organization 
     required to provide an acknowledgement under this paragraph 
     shall provide to the Secretary the information contained in 
     the acknowledgement. Such information shall be provided at 
     such time and in such manner as the Secretary may prescribe.
       ``(E) Qualified vehicle.--For purposes of this paragraph, 
     the term `qualified vehicle' means any--
       ``(i) motor vehicle manufactured primarily for use on 
     public streets, roads, and highways,
       ``(ii) boat, or
       ``(iii) airplane.
     Such term shall not include any property which is described 
     in section 1221(a)(1).
       ``(F) Regulations or other guidance.--The Secretary shall 
     prescribe such regulations or other guidance as may be 
     necessary to carry out the purposes of this paragraph. The 
     Secretary may prescribe regulations or other guidance which 
     exempts sales by the donee organization which are in direct 
     furtherance of such organization's charitable purpose from 
     the requirements of subparagraphs (A)(ii) and (B)(iv)(II).''.
       (b) Penalty for Fraudulent Acknowledgments.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by this Act, 
     is amended by inserting after section 6719 the following new 
     section:

     ``SEC. 6720. FRAUDULENT ACKNOWLEDGMENTS WITH RESPECT TO 
                   DONATIONS OF MOTOR VEHICLES, BOATS, AND 
                   AIRPLANES.

       ``Any donee organization required under section 
     170(f)(12)(A) to furnish a contemporaneous written 
     acknowledgment to a donor which knowingly furnishes a false 
     or fraudulent acknowledgment, or which knowingly fails to 
     furnish such acknowledgment in the manner, at the time, and 
     showing the information required under section 170(f)(12), or 
     regulations prescribed thereunder, shall for each such act, 
     or for each such failure, be subject to a penalty equal to--
       ``(1) in the case of an acknowledgment with respect to a 
     qualified vehicle to which section 170(f)(12)(A)(ii) applies, 
     the greater of--
       ``(A) the product of the highest rate of tax specified in 
     section 1 and the sales price stated on the acknowledgment, 
     or
       ``(B) the gross proceeds from the sale of such vehicle, and
       ``(2) in the case of an acknowledgment with respect to any 
     other qualified vehicle to which section 170(f)(12) applies, 
     the greater of--
       ``(A) the product of the highest rate of tax specified in 
     section 1 and the claimed value of the vehicle, or
       ``(B) $5,000.''.
       (2) Conforming amendment.--The table of sections for part I 
     of subchapter B of chapter 68, as amended by this Act, is 
     amended by inserting after the item relating to section 6719 
     the following new item:

``Sec. 6720. Fraudulent acknowledgments with respect to donations of 
              motor vehicles, boats, and airplanes.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to contributions made after December 31, 2004.

     SEC. 885. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION 
                   PLANS.

       (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. 409A. INCLUSION IN GROSS INCOME OF DEFERRED 
                   COMPENSATION UNDER NONQUALIFIED DEFERRED 
                   COMPENSATION PLANS.

       ``(a) Rules Relating to Constructive Receipt.--
       ``(1) Plan failures.--
       ``(A) Gross income inclusion.--
       ``(i) In general.--If at any time during a taxable year a 
     nonqualified deferred compensation plan--

       ``(I) fails to meet the requirements of paragraphs (2), 
     (3), and (4), or
       ``(II) is not operated in accordance with such 
     requirements,

     all compensation deferred under the plan for the taxable year 
     and all preceding taxable years shall be includible in gross 
     income for the taxable year to the extent not subject to a 
     substantial risk of forfeiture and not previously included in 
     gross income.
       ``(ii) Application only to affected participants.--Clause 
     (i) shall only apply with respect to all compensation 
     deferred under the plan for participants with respect to whom 
     the failure relates.
       ``(B) Interest and additional tax payable with respect to 
     previously deferred compensation.--
       ``(i) In general.--If compensation is required to be 
     included in gross income under subparagraph (A) for a taxable 
     year, the tax imposed by this chapter for the taxable year 
     shall be increased by the sum of--

       ``(I) the amount of interest determined under clause (ii), 
     and
       ``(II) an amount equal to 20 percent of the compensation 
     which is required to be included in gross income.

       ``(ii) Interest.--For purposes of clause (i), the interest 
     determined under this clause for any taxable year is the 
     amount of interest at the underpayment rate plus 1 percentage 
     point on the underpayments that would have occurred had the 
     deferred compensation been includible in gross income for the 
     taxable year in which first deferred or, if later, the first 
     taxable year in which such deferred compensation is not 
     subject to a substantial risk of forfeiture.
       ``(2) Distributions.--
       ``(A) In general.--The requirements of this paragraph are 
     met if the plan provides that compensation deferred under the 
     plan may not be distributed earlier than--
       ``(i) separation from service as determined by the 
     Secretary (except as provided in subparagraph (B)(i)),
       ``(ii) the date the participant becomes disabled (within 
     the meaning of subparagraph (C)),
       ``(iii) death,
       ``(iv) a specified time (or pursuant to a fixed schedule) 
     specified under the plan at the date of the deferral of such 
     compensation,
       ``(v) to the extent provided by the Secretary, a change in 
     the ownership or effective control of the corporation, or in 
     the ownership of a substantial portion of the assets of the 
     corporation, or
       ``(vi) the occurrence of an unforeseeable emergency.
       ``(B) Special rules.--
       ``(i) Specified employees.--In the case of any specified 
     employee, the requirement of subparagraph (A)(i) is met only 
     if distributions may not be made before the date which is 6 
     months after the date of separation from service (or, if

[[Page H8468]]

     earlier, the date of death of the employee). For purposes of 
     the preceding sentence, a specified employee is a key 
     employee (as defined in section 416(i) without regard to 
     paragraph (5) thereof) of a corporation any stock in which is 
     publicly traded on an established securities market or 
     otherwise.
       ``(ii) Unforeseeable emergency.--For purposes of 
     subparagraph (A)(vi)--

       ``(I) In general.--The term `unforeseeable emergency' means 
     a severe financial hardship to the participant resulting from 
     an illness or accident of the participant, the participant's 
     spouse, or a dependent (as defined in section 152(a)) of the 
     participant, loss of the participant's property due to 
     casualty, or other similar extraordinary and unforeseeable 
     circumstances arising as a result of events beyond the 
     control of the participant.
       ``(II) Limitation on distributions.--The requirement of 
     subparagraph (A)(vi) is met only if, as determined under 
     regulations of the Secretary, the amounts distributed with 
     respect to an emergency do not exceed the amounts necessary 
     to satisfy such emergency plus amounts necessary to pay taxes 
     reasonably anticipated as a result of the distribution, after 
     taking into account the extent to which such hardship is or 
     may be relieved through reimbursement or compensation by 
     insurance or otherwise or by liquidation of the participant's 
     assets (to the extent the liquidation of such assets would 
     not itself cause severe financial hardship).

       ``(C) Disabled.--For purposes of subparagraph (A)(ii), a 
     participant shall be considered disabled if the participant--
       ``(i) is unable to engage in any substantial gainful 
     activity by reason of any medically determinable physical or 
     mental impairment which can be expected to result in death or 
     can be expected to last for a continuous period of not less 
     than 12 months, or
       ``(ii) is, by reason of any medically determinable physical 
     or mental impairment which can be expected to result in death 
     or can be expected to last for a continuous period of not 
     less than 12 months, receiving income replacement benefits 
     for a period of not less than 3 months under an accident and 
     health plan covering employees of the participant's employer.
       ``(3) Acceleration of benefits.--The requirements of this 
     paragraph are met if the plan does not permit the 
     acceleration of the time or schedule of any payment under the 
     plan, except as provided in regulations by the Secretary.
       ``(4) Elections.--
       ``(A) In general.--The requirements of this paragraph are 
     met if the requirements of subparagraphs (B) and (C) are met.
       ``(B) Initial deferral decision.--
       ``(i) In general.--The requirements of this subparagraph 
     are met if the plan provides that compensation for services 
     performed during a taxable year may be deferred at the 
     participant's election only if the election to defer such 
     compensation is made not later than the close of the 
     preceding taxable year or at such other time as provided in 
     regulations.
       ``(ii) First year of eligibility.--In the case of the first 
     year in which a participant becomes eligible to participate 
     in the plan, such election may be made with respect to 
     services to be performed subsequent to the election within 30 
     days after the date the participant becomes eligible to 
     participate in such plan.
       ``(iii) Performance-based compensation.--In the case of any 
     performance-based compensation based on services performed 
     over a period of at least 12 months, such election may be 
     made no later than 6 months before the end of the period.
       ``(C) Changes in time and form of distribution.--The 
     requirements of this subparagraph are met if, in the case of 
     a plan which permits under a subsequent election a delay in a 
     payment or a change in the form of payment--
       ``(i) the plan requires that such election may not take 
     effect until at least 12 months after the date on which the 
     election is made,
       ``(ii) in the case of an election related to a payment not 
     described in clause (ii), (iii), or (vi) of paragraph (2)(A), 
     the plan requires that the first payment with respect to 
     which such election is made be deferred for a period of not 
     less than 5 years from the date such payment would otherwise 
     have been made, and
       ``(iii) the plan requires that any election related to a 
     payment described in paragraph (2)(A)(iv) may not be made 
     less than 12 months prior to the date of the first scheduled 
     payment under such paragraph.
       ``(b) Rules Relating to Funding.--
       ``(1) Offshore property in a trust.--In the case of assets 
     set aside (directly or indirectly) in a trust (or other 
     arrangement determined by the Secretary) for purposes of 
     paying deferred compensation under a nonqualified deferred 
     compensation plan, for purposes of section 83 such assets 
     shall be treated as property transferred in connection with 
     the performance of services whether or not such assets are 
     available to satisfy claims of general creditors--
       ``(A) at the time set aside if such assets (or such trust 
     or other arrangement) are located outside of the United 
     States, or
       ``(B) at the time transferred if such assets (or such trust 
     or other arrangement) are subsequently transferred outside of 
     the United States.
     This paragraph shall not apply to assets located in a foreign 
     jurisdiction if substantially all of the services to which 
     the nonqualified deferred compensation relates are performed 
     in such jurisdiction.
       ``(2) Employer's financial health.--In the case of 
     compensation deferred under a nonqualified deferred 
     compensation plan, there is a transfer of property within the 
     meaning of section 83 with respect to such compensation as of 
     the earlier of--
       ``(A) the date on which the plan first provides that assets 
     will become restricted to the provision of benefits under the 
     plan in connection with a change in the employer's financial 
     health, or
       ``(B) the date on which assets are so restricted,
     whether or not such assets are available to satisfy claims of 
     general creditors.
       ``(3) Income inclusion for offshore trusts and employer's 
     financial health.--For each taxable year that assets treated 
     as transferred under this subsection remain set aside in a 
     trust or other arrangement subject to paragraph (1) or (2), 
     any increase in value in, or earnings with respect to, such 
     assets shall be treated as an additional transfer of property 
     under this subsection (to the extent not previously included 
     in income).
       ``(4) Interest on tax liability payable with respect to 
     transferred property.--
       ``(A) In general.--If amounts are required to be included 
     in gross income by reason of paragraph (1) or (2) for a 
     taxable year, the tax imposed by this chapter for such 
     taxable year shall be increased by the sum of--
       ``(i) the amount of interest determined under subparagraph 
     (B), and
       ``(ii) an amount equal to 20 percent of the amounts 
     required to be included in gross income.
       ``(B) Interest.--For purposes of subparagraph (A), the 
     interest determined under this subparagraph for any taxable 
     year is the amount of interest at the underpayment rate plus 
     1 percentage point on the underpayments that would have 
     occurred had the amounts so required to be included in gross 
     income by paragraph (1) or (2) been includible in gross 
     income for the taxable year in which first deferred or, if 
     later, the first taxable year in which such amounts are not 
     subject to a substantial risk of forfeiture.
       ``(c) No Inference on Earlier Income Inclusion or 
     Requirement of Later Inclusion.--Nothing in this section 
     shall be construed to prevent the inclusion of amounts in 
     gross income under any other provision of this chapter or any 
     other rule of law earlier than the time provided in this 
     section. Any amount included in gross income under this 
     section shall not be required to be included in gross income 
     under any other provision of this chapter or any other rule 
     of law later than the time provided in this section.
       ``(d) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Nonqualified deferred compensation plan.--The term 
     `nonqualified deferred compensation plan' means any plan that 
     provides for the deferral of compensation, other than--
       ``(A) a qualified employer plan, and
       ``(B) any bona fide vacation leave, sick leave, 
     compensatory time, disability pay, or death benefit plan.
       ``(2) Qualified employer plan.--The term `qualified 
     employer plan' means--
       ``(A) any plan, contract, pension, account, or trust 
     described in subparagraph (A) or (B) of section 219(g)(5) 
     (without regard to subparagraph (A)(iii)),
       ``(B) any eligible deferred compensation plan (within the 
     meaning of section 457(b)), and
       ``(C) any plan described in section 415(m).
       ``(3) Plan includes arrangements, etc.--The term `plan' 
     includes any agreement or arrangement, including an agreement 
     or arrangement that includes one person.
       ``(4) Substantial risk of forfeiture.--The rights of a 
     person to compensation are subject to a substantial risk of 
     forfeiture if such person's rights to such compensation are 
     conditioned upon the future performance of substantial 
     services by any individual.
       ``(5) Treatment of earnings.--References to deferred 
     compensation shall be treated as including references to 
     income (whether actual or notional) attributable to such 
     compensation or such income.
       ``(6) Aggregation rules.--Except as provided by the 
     Secretary, rules similar to the rules of subsections (b) and 
     (c) of section 414 shall apply.
       ``(e) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including regulations--
       ``(1) providing for the determination of amounts of 
     deferral in the case of a nonqualified deferred compensation 
     plan which is a defined benefit plan,
       ``(2) relating to changes in the ownership and control of a 
     corporation or assets of a corporation for purposes of 
     subsection (a)(2)(A)(v),
       ``(3) exempting arrangements from the application of 
     subsection (b) if such arrangements will not result in an 
     improper deferral of United States tax and will not result in 
     assets being effectively beyond the reach of creditors,
       ``(4) defining financial health for purposes of subsection 
     (b)(2), and
       ``(5) disregarding a substantial risk of forfeiture in 
     cases where necessary to carry out the purposes of this 
     section.''.
       (b) Treatment of Deferred Amounts.--
       (1) W-2 forms.--
       (A) In general.--Subsection (a) of section 6051 (relating 
     to receipts for employees) is amended by striking ``and'' at 
     the end of paragraph (11), by striking the period at the end 
     of paragraph (12) and inserting ``, and'', and by inserting 
     after paragraph (12) the following new paragraph:
       ``(13) the total amount of deferrals for the year under a 
     nonqualified deferred compensation plan (within the meaning 
     of section 409A(d)).''.
       (B) Threshold.--Subsection (a) of section 6051 is amended 
     by adding at the end the following: ``In the case of the 
     amounts required to be shown by paragraph (13), the Secretary 
     may (by regulation) establish a minimum amount of deferrals 
     below which paragraph (13) does not apply.''.
       (2) Wage withholding.--Section 3401(a) (defining wages) is 
     amended by adding at the end

[[Page H8469]]

     the following flush sentence: ``The term `wages' includes any 
     amount includible in gross income of an employee under 
     section 409A and payment of such amount shall be treated as 
     having been made in the taxable year in which the amount is 
     so includible.''.
       (3) Other reporting.--Section 6041 (relating to information 
     at source) is amended by adding at the end the following new 
     subsection:
       ``(g) Nonqualified Deferred Compensation.--Subsection (a) 
     shall apply to--
       ``(1) any deferrals for the year under a nonqualified 
     deferred compensation plan (within the meaning of section 
     409A(d)), whether or not paid, except that this paragraph 
     shall not apply to deferrals which are required to be 
     reported under section 6051(a)(13) (without regard to any de 
     minimis exception), and
       ``(2) any amount includible under section 409A and which is 
     not treated as wages under section 3401(a).''.
       (c) Clerical Amendment.--The table of sections for such 
     subpart A of part I of subchapter D of chapter 1 is amended 
     by adding at the end the following new item:

``Sec. 409A. Inclusion in gross income of deferred compensation under 
              nonqualified deferred compensation plans.''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to amounts deferred after December 31, 2004.
       (2) Special rules.--
       (A) Earnings.--The amendments made by this section shall 
     apply to earnings on deferred compensation only to the extent 
     that such amendments apply to such compensation.
       (B) Material modifications.--For purposes of this 
     subsection, amounts deferred in taxable years beginning 
     before January 1, 2005, shall be treated as amounts deferred 
     in a taxable year beginning on or after such date if the plan 
     under which the deferral is made is materially modified after 
     October 3, 2004, unless such modification is pursuant to the 
     guidance issued under subsection (f).
       (3) Exception for nonelective deferred compensation.--The 
     amendments made by this section shall not apply to any 
     nonelective deferred compensation to which section 457 of the 
     Internal Revenue Code of 1986 does not apply by reason of 
     section 457(e)(12) of such Code, but only if such 
     compensation is provided under a nonqualified deferred 
     compensation plan--
       (A) which was in existence on May 1, 2004,
       (B) which was providing nonelective deferred compensation 
     described in such section 457(e)(12) on such date, and
       (C) which is established or maintained by an organization 
     incorporated on July 2, 1974.
     If, after May 1, 2004, a plan described in the preceding 
     sentence adopts a plan amendment which provides a material 
     change in the classes of individuals eligible to participate 
     in the plan, this paragraph shall not apply to any 
     nonelective deferred compensation provided under the plan on 
     or after the date of the adoption of the amendment.
       (e) Guidance Relating to Change of Ownership or Control.--
     Not later than 90 days after the date of the enactment of 
     this Act, the Secretary of the Treasury shall issue guidance 
     on what constitutes a change in ownership or effective 
     control for purposes of section 409A of the Internal Revenue 
     Code of 1986, as added by this section.
       (f) Guidance Relating to Termination of Certain Existing 
     Arrangements.--Not later than 60 days after the date of the 
     enactment of this Act, the Secretary of the Treasury shall 
     issue guidance providing a limited period during which a 
     nonqualified deferred compensation plan adopted before 
     December 31, 2004, may, without violating the requirements of 
     paragraphs (2), (3), and (4) of section 409A(a) of the 
     Internal Revenue Code of 1986 (as added by this section), be 
     amended--
       (1) to provide that a participant may terminate 
     participation in the plan, or cancel an outstanding deferral 
     election with regard to amounts deferred after December 31, 
     2004, but only if amounts subject to the termination or 
     cancellation are includible in income of the participant as 
     earned (or, if later, when no longer subject to substantial 
     risk of forfeiture), and
       (2) to conform to the requirements of such section 409A 
     with regard to amounts deferred after December 31, 2004.

     SEC. 886. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS 
                   FRANCHISES.

       (a) In General.--Section 197(e) (relating to exceptions to 
     definition of section 197 intangible) is amended by striking 
     paragraph (6) and by redesignating paragraphs (7) and (8) as 
     paragraphs (6) and (7), respectively.
       (b) Conforming Amendments.--
       (1)(A) Section 1056 (relating to basis limitation for 
     player contracts transferred in connection with the sale of a 
     franchise) is repealed.
       (B) The table of sections for part IV of subchapter O of 
     chapter 1 is amended by striking the item relating to section 
     1056.
       (2) Section 1245(a) (relating to gain from disposition of 
     certain depreciable property) is amended by striking 
     paragraph (4).
       (3) Section 1253 (relating to transfers of franchises, 
     trademarks, and trade names) is amended by striking 
     subsection (e).
       (c) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to property 
     acquired after the date of the enactment of this Act.
       (2) Section 1245.--The amendment made by subsection (b)(2) 
     shall apply to franchises acquired after the date of the 
     enactment of this Act.

     SEC. 887. MODIFICATION OF CONTINUING LEVY ON PAYMENTS TO 
                   FEDERAL VENDERS.

       (a) In General.--Section 6331(h) (relating to continuing 
     levy on certain payments) is amended by adding at the end the 
     following new paragraph:
       ``(3) Increase in levy for certain payments.--Paragraph (1) 
     shall be applied by substituting `100 percent' for `15 
     percent' in the case of any specified payment due to a vendor 
     of goods or services sold or leased to the Federal 
     Government.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 888. MODIFICATION OF STRADDLE RULES.

       (a) Rules Relating to Identified Straddles.--
       (1) In general.--Subparagraph (A) of section 1092(a)(2) 
     (relating to special rule for identified straddles) is 
     amended to read as follows:
       ``(A) In general.--In the case of any straddle which is an 
     identified straddle--
       ``(i) paragraph (1) shall not apply with respect to 
     identified positions comprising the identified straddle,
       ``(ii) if there is any loss with respect to any identified 
     position of the identified straddle, the basis of each of the 
     identified offsetting positions in the identified straddle 
     shall be increased by an amount which bears the same ratio to 
     the loss as the unrecognized gain with respect to such 
     offsetting position bears to the aggregate unrecognized gain 
     with respect to all such offsetting positions, and
       ``(iii) any loss described in clause (ii) shall not 
     otherwise be taken into account for purposes of this 
     title.''.
       (2) Identified straddle.--Section 1092(a)(2)(B) (defining 
     identified straddle) is amended--
       (A) by striking clause (ii) and inserting the following:
       ``(ii) to the extent provided by regulations, the value of 
     each position of which (in the hands of the taxpayer 
     immediately before the creation of the straddle) is not less 
     than the basis of such position in the hands of the taxpayer 
     at the time the straddle is created, and'', and
       (B) by adding at the end the following new flush sentence:
     ``The Secretary shall prescribe regulations which specify the 
     proper methods for clearly identifying a straddle as an 
     identified straddle (and the positions comprising such 
     straddle), which specify the rules for the application of 
     this section for a taxpayer which fails to properly identify 
     the positions of an identified straddle, and which specify 
     the ordering rules in cases where a taxpayer disposes of less 
     than an entire position which is part of an identified 
     straddle.''.
       (3) Unrecognized gain.--Section 1092(a)(3) (defining 
     unrecognized gain) is amended by redesignating subparagraph 
     (B) as subparagraph (C) and by inserting after subparagraph 
     (A) the following new subparagraph:
       ``(B) Special rule for identified straddles.--For purposes 
     of paragraph (2)(A)(ii), the unrecognized gain with respect 
     to any identified offsetting position shall be the excess of 
     the fair market value of the position at the time of the 
     determination over the fair market value of the position at 
     the time the taxpayer identified the position as a position 
     in an identified straddle.''.
       (4) Conforming amendment.--Section 1092(c)(2) is amended by 
     striking subparagraph (B) and by redesignating subparagraph 
     (C) as subparagraph (B).
       (b) Physically Settled Positions.--Section 1092(d) 
     (relating to definitions and special rules) is amended by 
     adding at the end the following new paragraph:
       ``(8) Special rules for physically settled positions.--For 
     purposes of subsection (a), if a taxpayer settles a position 
     which is part of a straddle by delivering property to which 
     the position relates (and such position, if terminated, would 
     result in a realization of a loss), then such taxpayer shall 
     be treated as if such taxpayer--
       ``(A) terminated the position for its fair market value 
     immediately before the settlement, and
       ``(B) sold the property so delivered by the taxpayer at its 
     fair market value.''.
       (c) Repeal of Stock Exception.--
       (1) In general.--Paragraph (3) of section 1092(d) (relating 
     to definitions and special rules) is amended to read as 
     follows:
       ``(3) Special rules for stock.--For purposes of paragraph 
     (1)--
       ``(A) In general.--In the case of stock, the term `personal 
     property' includes stock only if--
       ``(i) such stock is of a type which is actively traded and 
     at least 1 of the positions offsetting such stock is a 
     position with respect to such stock or substantially similar 
     or related property, or
       ``(ii) such stock is of a corporation formed or availed of 
     to take positions in personal property which offset positions 
     taken by any shareholder.
       ``(B) Rule for application.--For purposes of determining 
     whether subsection (e) applies to any transaction with 
     respect to stock described in subparagraph (A)(ii), all 
     includible corporations of an affiliated group (within the 
     meaning of section 1504(a)) shall be treated as 1 
     taxpayer.''.
       (2) Conforming amendment.--Section 1258(d)(1) is amended by 
     striking ``; except that the term `personal property' shall 
     include stock''.
       (d) Holding period for dividend exclusion.--The last 
     sentence of section 246(c) is amended by inserting: ``, other 
     than a qualified covered call option to which section 1092(f) 
     applies'' before the period at the end.
       (e) Effective Date.--The amendments made by this section 
     shall apply to positions established on or after the date of 
     the enactment of this Act.

[[Page H8470]]

     SEC. 889. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF 
                   TAXABLE VACCINES.

       (a) In General.--Paragraph (1) of section 4132(a) (defining 
     taxable vaccine) is amended by redesignating subparagraphs 
     (I), (J), (K), and (L) as subparagraphs (J), (K), (L), and 
     (M), respectively, and by inserting after subparagraph (H) 
     the following new subparagraph:
       ``(I) Any vaccine against hepatitis A.''
       (b) Effective Date.--
       (1) Sales, etc.--The amendments made by subsection (a) 
     shall apply to sales and uses on or after the first day of 
     the first month which begins more than 4 weeks after the date 
     of the enactment of this Act.
       (2) Deliveries.--For purposes of paragraph (1) and section 
     4131 of the Internal Revenue Code of 1986, in the case of 
     sales on or before the effective date described in such 
     paragraph for which delivery is made after such date, the 
     delivery date shall be considered the sale date.

     SEC. 890. ADDITION OF VACCINES AGAINST INFLUENZA TO LIST OF 
                   TAXABLE VACCINES.

       (a) In General.--Section 4132(a)(1) (defining taxable 
     vaccine), as amended by this Act, is amended by adding at the 
     end the following new subparagraph:
       ``(N) Any trivalent vaccine against influenza.''.
       (b) Effective Date.--
       (1) Sales, etc.--The amendment made by this section shall 
     apply to sales and uses on or after the later of--
       (A) the first day of the first month which begins more than 
     4 weeks after the date of the enactment of this Act, or
       (B) the date on which the Secretary of Health and Human 
     Services lists any vaccine against influenza for purposes of 
     compensation for any vaccine-related injury or death through 
     the Vaccine Injury Compensation Trust Fund.
       (2) Deliveries.--For purposes of paragraph (1) and section 
     4131 of the Internal Revenue Code of 1986, in the case of 
     sales on or before the effective date described in such 
     paragraph for which delivery is made after such date, the 
     delivery date shall be considered the sale date.

     SEC. 891. EXTENSION OF IRS USER FEES.

       (a) In General.--Section 7528(c) (relating to termination) 
     is amended by striking ``December 31, 2004'' and inserting 
     ``September 30, 2014''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to requests after the date of the enactment of 
     this Act.

     SEC. 892. COBRA FEES.

       (a) Use of Merchandise Processing Fee.--Section 13031(f) of 
     the Consolidated Omnibus Budget Reconciliation Act of 1985 
     (19 U.S.C. 58c(f)) is amended--
       (1) in paragraph (1), by aligning subparagraph (B) with 
     subparagraph (A); and
       (2) in paragraph (2), by striking ``commercial operations'' 
     and all that follows through ``processing.'' and inserting 
     ``customs revenue functions as defined in section 415 of the 
     Homeland Security Act of 2002 (other than functions performed 
     by the Office of International Affairs referred to in section 
     415(8) of that Act), and for automation (including the 
     Automation Commercial Environment computer system), and for 
     no other purpose. To the extent that funds in the Customs 
     User Fee Account are insufficient to pay the costs of such 
     customs revenue functions, customs duties in an amount equal 
     to the amount of such insufficiency shall be available, to 
     the extent provided for in appropriations Acts, to pay the 
     costs of such customs revenue functions in the amount of such 
     insufficiency, and shall be available for no other purpose. 
     The provisions of the first and second sentences of this 
     paragraph specifying the purposes for which amounts in the 
     Customs User Fee Account may be made available shall not be 
     superseded except by a provision of law which specifically 
     modifies or supersedes such provisions.''.
       (b) Reimbursement of Appropriations From COBRA Fees.--
     Section 13031(f)(3) of the Consolidated Omnibus Budget 
     Reconciliation Act of 1985 (19 U.S.C. 58c(f)(3)) is amended 
     by adding at the end the following:
       ``(E) Nothing in this paragraph shall be construed to 
     preclude the use of appropriated funds, from sources other 
     than the fees collected under subsection (a), to pay the 
     costs set forth in clauses (i), (ii), and (iii) of 
     subparagraph (A).''.
       (c) Sense of Congress; Effective Period for Collecting 
     Fees; Standard for Setting Fees.--
       (1) Sense of congress.--The Congress finds that--
       (A) the fees set forth in paragraphs (1) through (8) of 
     subsection (a) of section 13031 of the Consolidated Omnibus 
     Budget Reconciliation Act of 1985 have been reasonably 
     related to the costs of providing customs services in 
     connection with the activities or items for which the fees 
     have been charged under such paragraphs; and
       (B) the fees collected under such paragraphs have not 
     exceeded, in the aggregate, the amounts paid for the costs 
     described in subsection (f)(3)(A) incurred in providing 
     customs services in connection with the activities or items 
     for which the fees were charged under such paragraphs.
       (2) Effective period; standard for setting fees.--Section 
     13031(j)(3) of the Consolidated Omnibus Budget Reconciliation 
     Act of 1985 is amended to read as follows:
       ``(3)(A) Fees may not be charged under paragraphs (9) and 
     (10) of subsection (a) after September 30, 2014.
       ``(B)(i) Subject to clause (ii), Fees may not be charged 
     under paragraphs (1) through (8) of subsection (a) after 
     September 30, 2014.
       ``(ii) In fiscal year 2006 and in each succeeding fiscal 
     year for which fees under paragraphs (1) through (8) of 
     subsection (a) are authorized--
       ``(I) the Secretary of the Treasury shall charge fees under 
     each such paragraph in amounts that are reasonably related to 
     the costs of providing customs services in connection with 
     the activity or item for which the fee is charged under such 
     paragraph, except that in no case may the fee charged under 
     any such paragraph exceed by more than 10 percent the amount 
     otherwise prescribed by such paragraph;
       ``(II) the amount of fees collected under such paragraphs 
     may not exceed, in the aggregate, the amounts paid in that 
     fiscal year for the costs described in subsection (f)(3)(A) 
     incurred in providing customs services in connection with the 
     activity or item for which the fees are charged under such 
     paragraphs;
       ``(III) a fee may not be collected under any such paragraph 
     except to the extent such fee will be expended to pay the 
     costs described in subsection (f)(3)(A) incurred in providing 
     customs services in connection with the activity or item for 
     which the fee is charged under such paragraph; and
       ``(IV) any fee collected under any such paragraph shall be 
     available for expenditure only to pay the costs described in 
     subsection (f)(3)(A) incurred in providing customs services 
     in connection with the activity or item for which the fee is 
     charged under such paragraph.''.
       (d) Clerical Amendments.--Section 13031 of the Consolidated 
     Omnibus Budget Reconciliation Act of 1985 is amended--
       (1) in subsection (a)(5)(B), by striking ``$1.75'' and 
     inserting ``$1.75.'';
       (2) in subsection (b)--
       (A) in paragraph (1)(A), by aligning clause (iii) with 
     clause (ii);
       (B) in paragraph (7), by striking ``paragraphs'' and 
     inserting ``paragraph''; and
       (C) in paragraph (9), by aligning subparagraph (B) with 
     subparagraph (A); and
       (3) in subsection (e)(2), by aligning subparagraph (B) with 
     subparagraph (A).
       (e) Study of All Fees Collected by Department of Homeland 
     Security.--The Secretary of the Treasury shall conduct a 
     study of all the fees collected by the Department of Homeland 
     Security, and shall submit to the Congress, not later than 
     September 30, 2005, a report containing the recommendations 
     of the Secretary on--
       (1) what fees should be eliminated;
       (2) what the rate of fees retained should be; and
       (3) any other recommendations with respect to the fees that 
     the Secretary considers appropriate.

     SEC. 893. PROHIBITION ON NONRECOGNITION OF GAIN THROUGH 
                   COMPLETE LIQUIDATION OF HOLDING COMPANY.

       (a) In General.--Section 332 is amended by adding at the 
     end the following new subsection:
       ``(d) Recognition of Gain on Liquidation of Certain Holding 
     Companies.--
       ``(1) In general.--In the case of any distribution to a 
     foreign corporation in complete liquidation of an applicable 
     holding company--
       ``(A) subsection (a) and section 331 shall not apply to 
     such distribution, and
       ``(B) such distribution shall be treated as a distribution 
     to which section 301 applies.
       ``(2) Applicable holding company.--For purposes of this 
     subsection--
       ``(A) In general.--The term `applicable holding company' 
     means any domestic corporation--
       ``(i) which is a common parent of an affiliated group,
       ``(ii) stock of which is directly owned by the distributee 
     foreign corporation,
       ``(iii) substantially all of the assets of which consist of 
     stock in other members of such affiliated group, and
       ``(iv) which has not been in existence at all times during 
     the 5 years immediately preceding the date of the 
     liquidation.
       ``(B) Affiliated group.--For purposes of this subsection, 
     the term `affiliated group' has the meaning given such term 
     by section 1504(a) (without regard to paragraphs (2) and (4) 
     of section 1504(b)).
       ``(3) Coordination with subpart f.--If the distributee of a 
     distribution described in paragraph (1) is a controlled 
     foreign corporation (as defined in section 957), then 
     notwithstanding paragraph (1) or subsection (a), such 
     distribution shall be treated as a distribution to which 
     section 331 applies.
       ``(4) Regulations.--The Secretary shall provide such 
     regulations as appropriate to prevent the abuse of this 
     subsection, including regulations which provide, for the 
     purposes of clause (iv) of paragraph (2)(A), that a 
     corporation is not in existence for any period unless it is 
     engaged in the active conduct of a trade or business or owns 
     a significant ownership interest in another corporation so 
     engaged.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions in complete liquidation 
     occurring on or after the date of the enactment of this Act.

     SEC. 894. EFFECTIVELY CONNECTED INCOME TO INCLUDE CERTAIN 
                   FOREIGN SOURCE INCOME.

       (a) In General.--Section 864(c)(4)(B) (relating to 
     treatment of income from sources without the United States as 
     effectively connected income) is amended by adding at the end 
     the following new flush sentence:

     ``Any income or gain which is equivalent to any item of 
     income or gain described in clause (i), (ii), or (iii) shall 
     be treated in the same manner as such item for purposes of 
     this subparagraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 895. RECAPTURE OF OVERALL FOREIGN LOSSES ON SALE OF 
                   CONTROLLED FOREIGN CORPORATION.

       (a) In General.--Section 904(f)(3) (relating to 
     dispositions) is amending by adding at the end the following 
     new subparagraph:

[[Page H8471]]

       ``(D) Application to certain dispositions of stock in 
     controlled foreign corporation.--
       ``(i) In general.--This paragraph shall apply to an 
     applicable disposition in the same manner as if it were a 
     disposition of property described in subparagraph (A), except 
     that the exception contained in subparagraph (C)(i) shall not 
     apply.
       ``(ii) Applicable disposition.--For purposes of clause (i), 
     the term `applicable disposition' means any disposition of 
     any share of stock in a controlled foreign corporation in a 
     transaction or series of transactions if, immediately before 
     such transaction or series of transactions, the taxpayer 
     owned more than 50 percent (by vote or value) of the stock of 
     the controlled foreign corporation. Such term shall not 
     include a disposition described in clause (iii) or (iv), 
     except that clause (i) shall apply to any gain recognized on 
     any such disposition.
       ``(iii) Exception for certain exchanges where ownership 
     percentage retained.--A disposition shall not be treated as 
     an applicable disposition under clause (ii) if it is part of 
     a transaction or series of transactions--

       ``(I) to which section 351 or 721 applies, or under which 
     the transferor receives stock in a foreign corporation in 
     exchange for the stock in the controlled foreign corporation 
     and the stock received is exchanged basis property (as 
     defined in section 7701(a)(44)), and
       ``(II) immediately after which, the transferor owns (by 
     vote or value) at least the same percentage of stock in the 
     controlled foreign corporation (or, if the controlled foreign 
     corporation is not in existence after such transaction or 
     series of transactions, in another foreign corporation stock 
     in which was received by the transferor in exchange for stock 
     in the controlled foreign corporation) as the percentage of 
     stock in the controlled foreign corporation which the 
     taxpayer owned immediately before such transaction or series 
     of transactions.

       ``(iv) Exception for certain asset acquisitions.--A 
     disposition shall not be treated as an applicable disposition 
     under clause (ii) if it is part of a transaction or series of 
     transactions in which the taxpayer (or any member of a 
     controlled group of corporations filing a consolidated return 
     under section 1501 which includes the taxpayer) acquires the 
     assets of a controlled foreign corporation in exchange for 
     the shares of the controlled foreign corporation in a 
     liquidation described in section 332 or a reorganization 
     described in section 368(a)(1).
       ``(v) Controlled foreign corporation.--For purposes of this 
     subparagraph, the term `controlled foreign corporation' has 
     the meaning given such term by section 957.
       ``(vi) Stock ownership.--For purposes of this subparagraph, 
     ownership of stock shall be determined under the rules of 
     subsections (a) and (b) of section 958.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to dispositions after the date of the enactment 
     of this Act.

     SEC. 896. RECOGNITION OF CANCELLATION OF INDEBTEDNESS INCOME 
                   REALIZED ON SATISFACTION OF DEBT WITH 
                   PARTNERSHIP INTEREST.

       (a) In General.--Paragraph (8) of section 108(e) (relating 
     to general rules for discharge of indebtedness (including 
     discharges not in title 11 cases or insolvency) is amended to 
     read as follows:
       ``(8) Indebtedness satisfied by corporate stock or 
     partnership interest.--For purposes of determining income of 
     a debtor from discharge of indebtedness, if--
       ``(A) a debtor corporation transfers stock, or
       ``(B) a debtor partnership transfers a capital or profits 
     interest in such partnership,

     to a creditor in satisfaction of its recourse or nonrecourse 
     indebtedness, such corporation or partnership shall be 
     treated as having satisfied the indebtedness with an amount 
     of money equal to the fair market value of the stock or 
     interest. In the case of any partnership, any discharge of 
     indebtedness income recognized under this paragraph shall be 
     included in the distributive shares of taxpayers which were 
     the partners in the partnership immediately before such 
     discharge.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply with respect to cancellations of indebtedness 
     occurring on or after the date of the enactment of this Act.

     SEC. 897. DENIAL OF INSTALLMENT SALE TREATMENT FOR ALL 
                   READILY TRADABLE DEBT.

       (a) In General.--Section 453(f)(4)(B) (relating to 
     purchaser evidences of indebtedness payable on demand or 
     readily tradable) is amended by striking ``is issued by a 
     corporation or a government or political subdivision thereof 
     and''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales occurring on or after the date of the 
     enactment of this Act.

     SEC. 898. MODIFICATION OF TREATMENT OF TRANSFERS TO CREDITORS 
                   IN DIVISIVE REORGANIZATIONS.

       (a) In General.--Section 361(b)(3) (relating to treatment 
     of transfers to creditors) is amended by adding at the end 
     the following new sentence: ``In the case of a reorganization 
     described in section 368(a)(1)(D) with respect to which stock 
     or securities of the corporation to which the assets are 
     transferred are distributed in a transaction which qualifies 
     under section 355, this paragraph shall apply only to the 
     extent that the sum of the money and the fair market value of 
     other property transferred to such creditors does not exceed 
     the adjusted bases of such assets transferred.''.
       (b) Liabilities in Excess of Basis.--Section 357(c)(1)(B) 
     is amended by inserting ``with respect to which stock or 
     securities of the corporation to which the assets are 
     transferred are distributed in a transaction which qualifies 
     under section 355'' after ``section 368(a)(1)(D)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to transfers of money or other property, or 
     liabilities assumed, in connection with a reorganization 
     occurring on or after the date of the enactment of this Act.

     SEC. 899. CLARIFICATION OF DEFINITION OF NONQUALIFIED 
                   PREFERRED STOCK.

       (a) In General.--Section 351(g)(3)(A) is amended by adding 
     at the end the following: ``Stock shall not be treated as 
     participating in corporate growth to any significant extent 
     unless there is a real and meaningful likelihood of the 
     shareholder actually participating in the earnings and growth 
     of the corporation.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to transactions after May 14, 2003.

     SEC. 900. MODIFICATION OF DEFINITION OF CONTROLLED GROUP OF 
                   CORPORATIONS.

       (a) In General.--Section 1563(a)(2) (relating to brother-
     sister controlled group) is amended by striking 
     ``possessing--'' and all that follows through ``(B)'' and 
     inserting ``possessing''.
       (b) Application of Existing Rules to Other Code 
     Provisions.--Section 1563(f) (relating to other definitions 
     and rules) is amended by adding at the end the following new 
     paragraph:
       ``(5) Brother-sister controlled group definition for 
     provisions other than this part.--
       ``(A) In general.--Except as specifically provided in an 
     applicable provision, subsection (a)(2) shall be applied to 
     an applicable provision as if it read as follows:
       ```(2) Brother-sister controlled group.--Two or more 
     corporations if 5 or fewer persons who are individuals, 
     estates, or trusts own (within the meaning of subsection 
     (d)(2) stock possessing--
       ```(A) at least 80 percent of the total combined voting 
     power of all classes of stock entitled to vote, or at least 
     80 percent of the total value of shares of all classes of 
     stock, of each corporation, and
       ```(B) more than 50 percent of the total combined voting 
     power of all classes of stock entitled to vote or more than 
     50 percent of the total value of shares of all classes of 
     stock of each corporation, taking into account the stock 
     ownership of each such person only to the extent such stock 
     ownership is identical with respect to each such 
     corporation.'
       ``(B) Applicable provision.--For purposes of this 
     paragraph, an applicable provision is any provision of law 
     (other than this part) which incorporates the definition of 
     controlled group of corporations under subsection (a).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 901. CLASS LIVES FOR UTILITY GRADING COSTS.

       (a) Gas Utility Property.--Section 168(e)(3)(E) (defining 
     15-year property), as amended by this Act, is amended by 
     striking ``and'' at the end of clause (iv), by striking the 
     period at the end of clause (v) and inserting ``, and'', and 
     by adding at the end the following new clause:
       ``(vi) initial clearing and grading land improvements with 
     respect to gas utility property.''.
       (b) Electric Utility Property.--Section 168(e)(3) is 
     amended by adding at the end the following new subparagraph:
       ``(F) 20-year property.--The term `20-year property' means 
     initial clearing and grading land improvements with respect 
     to any electric utility transmission and distribution 
     plant.''.
       (c) Conforming Amendment.--The table contained in section 
     168(g)(3)(B), as amended by this Act, is amended by inserting 
     after the item relating to subparagraph (E)(v) the following 
     new items:

  ``(E)(vi)...................................................20''.....

  ``(F).......................................................25''.....

       (d) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.

     SEC. 902. CONSISTENT AMORTIZATION OF PERIODS FOR INTANGIBLES.

       (a) Start-Up Expenditures.--
       (1) Allowance of deduction.--Paragraph (1) of section 
     195(b) (relating to start-up expenditures) is amended to read 
     as follows:
       ``(1) Allowance of deduction.--If a taxpayer elects the 
     application of this subsection with respect to any start-up 
     expenditures--
       ``(A) the taxpayer shall be allowed a deduction for the 
     taxable year in which the active trade or business begins in 
     an amount equal to the lesser of--
       ``(i) the amount of start-up expenditures with respect to 
     the active trade or business, or
       ``(ii) $5,000, reduced (but not below zero) by the amount 
     by which such start-up expenditures exceed $50,000, and
       ``(B) the remainder of such start-up expenditures shall be 
     allowed as a deduction ratably over the 180-month period 
     beginning with the month in which the active trade or 
     business begins.''.
       (2) Conforming amendment.--Subsection (b) of section 195 is 
     amended by striking ``Amortize'' and inserting ``Deduct'' in 
     the heading.
       (b) Organizational Expenditures.--Subsection (a) of section 
     248 (relating to organizational expenditures) is amended to 
     read as follows:
       ``(a) Election to Deduct.--If a corporation elects the 
     application of this subsection (in accordance with 
     regulations prescribed by the Secretary) with respect to any 
     organizational expenditures--
       ``(1) the corporation shall be allowed a deduction for the 
     taxable year in which the corporation begins business in an 
     amount equal to the lesser of--
       ``(A) the amount of organizational expenditures with 
     respect to the taxpayer, or

[[Page H8472]]

       ``(B) $5,000, reduced (but not below zero) by the amount by 
     which such organizational expenditures exceed $50,000, and
       ``(2) the remainder of such organizational expenditures 
     shall be allowed as a deduction ratably over the 180-month 
     period beginning with the month in which the corporation 
     begins business.''.
       (c) Treatment of Organizational and Syndication Fees or 
     Partnerships.--
       (1) In general.--Section 709(b) (relating to amortization 
     of organization fees) is amended by redesignating paragraph 
     (2) as paragraph (3) and by amending paragraph (1) to read as 
     follows:
       ``(1) Allowance of deduction.--If a taxpayer elects the 
     application of this subsection (in accordance with 
     regulations prescribed by the Secretary) with respect to any 
     organizational expenses--
       ``(A) the taxpayer shall be allowed a deduction for the 
     taxable year in which the partnership begins business in an 
     amount equal to the lesser of--
       ``(i) the amount of organizational expenses with respect to 
     the partnership, or
       ``(ii) $5,000, reduced (but not below zero) by the amount 
     by which such organizational expenses exceed $50,000, and
       ``(B) the remainder of such organizational expenses shall 
     be allowed as a deduction ratably over the 180-month period 
     beginning with the month in which the partnership begins 
     business.
       ``(2) Dispositions before close of amortization period.--In 
     any case in which a partnership is liquidated before the end 
     of the period to which paragraph (1)(B) applies, any deferred 
     expenses attributable to the partnership which were not 
     allowed as a deduction by reason of this section may be 
     deducted to the extent allowable under section 165.''.
       (2) Conforming amendment.--Subsection (b) of section 709 is 
     amended by striking ``Amortization'' and inserting 
     ``Deduction'' in the heading.
       (d) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act.

     SEC. 903. FREEZE OF PROVISIONS REGARDING SUSPENSION OF 
                   INTEREST WHERE SECRETARY FAILS TO CONTACT 
                   TAXPAYER.

       (a) In General.--Section 6404(g) (relating to suspension of 
     interest and certain penalties where Secretary fails to 
     contact taxpayer) is amended by striking ``1-year period (18-
     month period in the case of taxable years beginning before 
     January 1, 2004)'' both places it appears and inserting ``18-
     month period''.
       (b) Exception for Gross Misstatement.--Section 6404(g)(2) 
     (relating to exceptions) is amended by striking ``or'' at the 
     end of subparagraph (C), by redesignating subparagraph (D) as 
     subparagraph (E), and by inserting after subparagraph (C) the 
     following new subparagraph:
       ``(D) any interest, penalty, addition to tax, or additional 
     amount with respect to any gross misstatement; or''.
       (c) Exception for Listed and Reportable Transactions.--
     Section 6404(g)(2) (relating to exceptions), as amended by 
     subsection (b), is amended by striking ``or'' at the end of 
     subparagraph (D), by redesignating subparagraph (E) as 
     subparagraph (F), and by inserting after subparagraph (D) the 
     following new subparagraph:
       ``(E) any interest, penalty, addition to tax, or additional 
     amount with respect to any reportable transaction with 
     respect to which the requirement of section 6664(d)(2)(A) is 
     not met and any listed transaction (as defined in 6707A(c)); 
     or''.
       (d) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2003.
       (2) Exception for reportable or listed transactions.--The 
     amendments made by subsection (c) shall apply with respect to 
     interest accruing after October 3, 2004.

     SEC. 904. INCREASE IN WITHHOLDING FROM SUPPLEMENTAL WAGE 
                   PAYMENTS IN EXCESS OF $1,000,000.

       (a) In General.--If an employer elects under Treasury 
     Regulation 31.3402(g)-1 to determine the amount to be 
     deducted and withheld from any supplemental wage payment by 
     using a flat percentage rate, the rate to be used in 
     determining the amount to be so deducted and withheld shall 
     not be less than 28 percent (or the corresponding rate in 
     effect under section 1(i)(2) of the Internal Revenue Code of 
     1986 for taxable years beginning in the calendar year in 
     which the payment is made).
       (b) Special Rule for Large Payments.--
       (1) In general.--Notwithstanding subsection (a), if the 
     supplemental wage payment, when added to all such payments 
     previously made by the employer to the employee during the 
     calendar year, exceeds $1,000,000, the rate used with respect 
     to such excess shall be equal to the maximum rate of tax in 
     effect under section 1 of such Code for taxable years 
     beginning in such calendar year.
       (2) Aggregation.--All persons treated as a single employer 
     under subsection (a) or (b) of section 52 of the Internal 
     Revenue Code of 1986 shall be treated as a single employer 
     for purposes of this subsection.
       (c) Conforming Amendment.--Section 13273 of the Revenue 
     Reconciliation Act of 1993 (Public Law 103-66) is repealed.
       (d) Effective Date.--The provisions of, and the amendment 
     made by, this section shall apply to payments made after 
     December 31, 2004.

     SEC. 905. TREATMENT OF SALE OF STOCK ACQUIRED PURSUANT TO 
                   EXERCISE OF STOCK OPTIONS TO COMPLY WITH 
                   CONFLICT-OF-INTEREST REQUIREMENTS.

       (a) In General.--Section 421 (relating to general rules for 
     certain stock options) is amended by adding at the end the 
     following new subsection:
       ``(d) Certain Sales To Comply With Conflict-of-Interest 
     Requirements.--If--
       ``(1) a share of stock is transferred to an eligible person 
     (as defined in section 1043(b)(1)) pursuant to such person's 
     exercise of an option to which this part applies, and
       ``(2) such share is disposed of by such person pursuant to 
     a certificate of divestiture (as defined in section 
     1043(b)(2)),

     such disposition shall be treated as meeting the requirements 
     of section 422(a)(1) or 423(a)(1), whichever is applicable.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales after the date of the enactment of this 
     Act.

     SEC. 906. APPLICATION OF BASIS RULES TO NONRESIDENT ALIENS.

       (a) In General.--Section 72 (relating to annuities and 
     certain proceeds of endowment and life insurance contracts) 
     is amended by redesignating subsection (w) as subsection (x) 
     and by inserting after subsection (v) the following new 
     subsection:
       ``(w) Application of Basis Rules to Nonresident Aliens.--
       ``(1) In general.--Notwithstanding any other provision of 
     this section, for purposes of determining the portion of any 
     distribution which is includible in gross income of a 
     distributee who is a citizen or resident of the United 
     States, the investment in the contract shall not include any 
     applicable nontaxable contributions or applicable nontaxable 
     earnings.
       ``(2) Applicable nontaxable contribution.--For purposes of 
     this subsection, the term `applicable nontaxable 
     contribution' means any employer or employee contribution--
       ``(A) which was made with respect to compensation--
       ``(i) for labor or personal services performed by an 
     employee who, at the time the labor or services were 
     performed, was a nonresident alien for purposes of the laws 
     of the United States in effect at such time, and
       ``(ii) which is treated as from sources without the United 
     States, and
       ``(B) which was not subject to income tax (and would have 
     been subject to income tax if paid as cash compensation when 
     the services were rendered) under the laws of the United 
     States or any foreign country.
       ``(3) Applicable nontaxable earnings.--For purposes of this 
     subsection, the term `applicable nontaxable earnings' means 
     earnings--
       ``(A) which are paid or accrued with respect to any 
     employer or employee contribution which was made with respect 
     to compensation for labor or personal services performed by 
     an employee,
       ``(B) with respect to which the employee was at the time 
     the earnings were paid or accrued a nonresident alien for 
     purposes of the laws of the United States, and
       ``(C) which were not subject to income tax under the laws 
     of the United States or any foreign country.
       ``(4) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the provisions 
     of this subsection, including regulations treating 
     contributions and earnings as not subject to tax under the 
     laws of any foreign country where appropriate to carry out 
     the purposes of this subsection.''
       (b) Basis.--Section 83 (relating to property transferred in 
     connection with the performance of services is amended by 
     adding after paragraph (3) of subsection (c) the following 
     new paragraph:
       ``(4) For purposes of determining an individual's basis in 
     property transferred in connection with the performance of 
     services, rules similar to the rules of section 72(w) shall 
     apply.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to distributions on or after the date of the 
     enactment of this Act.

     SEC. 907. LIMITATION OF EMPLOYER DEDUCTION FOR CERTAIN 
                   ENTERTAINMENT EXPENSES.

       (a) In General.--Paragraph (2) of section 274(e) (relating 
     to expenses treated as compensation) is amended to read as 
     follows:
       ``(2) Expenses treated as compensation.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     expenses for goods, services, and facilities, to the extent 
     that the expenses are treated by the taxpayer, with respect 
     to the recipient of the entertainment, amusement, or 
     recreation, as compensation to an employee on the taxpayer's 
     return of tax under this chapter and as wages to such 
     employee for purposes of chapter 24 (relating to withholding 
     of income tax at source on wages).
       ``(B) Specified individuals.--
       ``(i) In general.--In the case of a recipient who is a 
     specified individual, subparagraph (A) and paragraph (9) 
     shall each be applied by substituting `to the extent that the 
     expenses do not exceed the amount of the expenses which' for 
     `to the extent that the expenses'.
       ``(ii) Specified individual.--For purposes of clause (i), 
     the term `specified individual' means any individual who--

       ``(I) is subject to the requirements of section 16(a) of 
     the Securities Exchange Act of 1934 with respect to the 
     taxpayer, or
       ``(II) would be subject to such requirements if the 
     taxpayer were an issuer of equity securities referred to in 
     such section.''

       (b) Effective Date.--The amendment made by this section 
     shall apply to expenses incurred after the date of the 
     enactment of this Act.

     SEC. 908. RESIDENCE AND SOURCE RULES RELATING TO UNITED 
                   STATES POSSESSIONS.

       (a) Residence and Source Rules.--Subpart D of part III of 
     subchapter N of chapter 1 (relating to possessions of the 
     United States) is amended by adding at the end the following 
     new section:

[[Page H8473]]

     ``SEC. 937. RESIDENCE AND SOURCE RULES INVOLVING POSSESSIONS.

       ``(a) Bona Fide Resident.--For purposes of this subpart, 
     section 865(g)(3), section 876, section 881(b), paragraphs 
     (2) and (3) of section 901(b), section 957(c), section 
     3401(a)(8)(C), and section 7654(a), except as provided in 
     regulations, the term `bona fide resident' means a person--
       ``(1) who is present for at least 183 days during the 
     taxable year in Guam, American Samoa, the Northern Mariana 
     Islands, Puerto Rico, or the Virgin Islands, as the case may 
     be, and
       ``(2) who does not have a tax home (determined under the 
     principles of section 911(d)(3) without regard to the second 
     sentence thereof) outside such specified possession during 
     the taxable year and does not have a closer connection 
     (determined under the principles of section 
     7701(b)(3)(B)(ii)) to the United States or a foreign country 
     than to such specified possession.

     For purposes of paragraph (1), the determination as to 
     whether a person is present for any day shall be made under 
     the principles of section 7701(b).
       ``(b) Source Rules.--Except as provided in regulations, for 
     purposes of this title--
       ``(1) except as provided in paragraph (2), rules similar to 
     the rules for determining whether income is income from 
     sources within the United States or is effectively connected 
     with the conduct of a trade or business within the United 
     States shall apply for purposes of determining whether income 
     is from sources within a possession specified in subsection 
     (a)(1) or effectively connected with the conduct of a trade 
     or business within any such possession, and
       ``(2) any income treated as income from sources within the 
     United States or as effectively connected with the conduct of 
     a trade or business within the United States shall not be 
     treated as income from sources within any such possession or 
     as effectively connected with the conduct of a trade or 
     business within any such possession.
       ``(c) Reporting Requirement.--
       ``(1) In general.--If, for any taxable year, an individual 
     takes the position for United States income tax reporting 
     purposes that the individual became, or ceases to be, a bona 
     fide resident of a possession specified in subsection (a)(1), 
     such individual shall file with the Secretary, at such time 
     and in such manner as the Secretary may prescribe, notice of 
     such position.
       ``(2) Transition rule.--If, for any of an individual's 3 
     taxable years ending before the individual's first taxable 
     year ending after the date of the enactment of this 
     subsection, the individual took a position described in 
     paragraph (1), the individual shall file with the Secretary, 
     at such time and in such manner as the Secretary may 
     prescribe, notice of such position.''.
       (b) Penalty.--Section 6688 is amended--
       (1) by inserting ``under section 937(c) or'' before ``by 
     regulations'', and
       (2) by striking ``$100'' and inserting ``$1,000''.
       (c) Conforming and Clerical Amendments.--
       (1) Section 931(d) is amended to read as follows:
       ``(d) Employees of the United States.--Amounts paid for 
     services performed as an employee of the United States (or 
     any agency thereof) shall be treated as not described in 
     paragraph (1) or (2) of subsection (a).''
       (2) Section 932 is amended by striking ``at the close of 
     the taxable year'' and inserting ``during the entire taxable 
     year'' each place it appears.
       (3) Section 934(b)(4) is amended by striking ``the Virgin 
     Islands or'' each place it appears.
       (4) Section 935, as in effect before the effective date of 
     its repeal, is amended--
       (A) by striking ``for the taxable year who'' in subsection 
     (a) and inserting ``who, during the entire taxable year'',
       (B) by inserting ``bona fide'' before ``resident'' in 
     subsection (a)(1),
       (C) in subsection (b)(1)--
       (i) by inserting ``(other a bona fide resident of Guam 
     during the entire taxable year)'' after ``United States'' in 
     subparagraph (A), and
       (ii) by inserting ``bona fide'' before ``resident'' in 
     subparagraph (B), and
       (D) in subsection (b)(2) by striking ``residence and''.
       (5) Section 957(c) is amended--
       (A) in paragraph (2)(B) by striking ``conduct of an 
     active'' and inserting ``active conduct of a'', and
       (B) in the last sentence by striking ``derived from sources 
     within a possession, was effectively connected with the 
     conduct of a trade or business within a possession, or''.
       (6) The table of sections of subpart D of part III of 
     subchapter N of chapter 1 is amended by adding at the end the 
     following new item:

``Sec. 937. Residence and source rules involving possessions.''.

       (d) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to taxable years ending after the date of the enactment of 
     this Act.
       (2) 183-day rule.--Section 937(a)(1) of the Internal 
     Revenue Code of 1986 (as added by this section) shall apply 
     to taxable years beginning after the date of the enactment of 
     this Act.
       (3) Sourcing.--Section 937(b)(2) of such Code (as so added) 
     shall apply to income earned after the date of the enactment 
     of this Act.

     SEC. 909. SALES OR DISPOSITIONS TO IMPLEMENT FEDERAL ENERGY 
                   REGULATORY COMMISSION OR STATE ELECTRIC 
                   RESTRUCTURING POLICY.

       (a) In General.--Section 451 (relating to general rule for 
     taxable year of inclusion) is amended by adding at the end 
     the following new subsection:
       ``(i) Special Rule for Sales or Dispositions To Implement 
     Federal Energy Regulatory Commission or State Electric 
     Restructuring Policy.--
       ``(1) In general.--In the case of any qualifying electric 
     transmission transaction for which the taxpayer elects the 
     application of this section, qualified gain from such 
     transaction shall be recognized--
       ``(A) in the taxable year which includes the date of such 
     transaction to the extent the amount realized from such 
     transaction exceeds--
       ``(i) the cost of exempt utility property which is 
     purchased by the taxpayer during the 4-year period beginning 
     on such date, reduced (but not below zero) by
       ``(ii) any portion of such cost previously taken into 
     account under this subsection, and
       ``(B) ratably over the 8-taxable year period beginning with 
     the taxable year which includes the date of such transaction, 
     in the case of any such gain not recognized under 
     subparagraph (A).
       ``(2) Qualified gain.--For purposes of this subsection, the 
     term `qualified gain' means, with respect to any qualifying 
     electric transmission transaction in any taxable year--
       ``(A) any ordinary income derived from such transaction 
     which would be required to be recognized under section 1245 
     or 1250 for such taxable year (determined without regard to 
     this subsection), and
       ``(B) any income derived from such transaction in excess of 
     the amount described in subparagraph (A) which is required to 
     be included in gross income for such taxable year (determined 
     without regard to this subsection).
       ``(3) Qualifying electric transmission transaction.--For 
     purposes of this subsection, the term `qualifying electric 
     transmission transaction' means any sale or other disposition 
     before January 1, 2007, of--
       ``(A) property used in the trade or business of providing 
     electric transmission services, or
       ``(B) any stock or partnership interest in a corporation or 
     partnership, as the case may be, whose principal trade or 
     business consists of providing electric transmission 
     services,

     but only if such sale or disposition is to an independent 
     transmission company.
       ``(4) Independent transmission company.--For purposes of 
     this subsection, the term `independent transmission company' 
     means--
       ``(A) an independent transmission provider approved by the 
     Federal Energy Regulatory Commission,
       ``(B) a person--
       ``(i) who the Federal Energy Regulatory Commission 
     determines in its authorization of the transaction under 
     section 203 of the Federal Power Act (16 U.S.C. 824b) or by 
     declaratory order is not a market participant within the 
     meaning of such Commission's rules applicable to independent 
     transmission providers, and
       ``(ii) whose transmission facilities to which the election 
     under this subsection applies are under the operational 
     control of a Federal Energy Regulatory Commission-approved 
     independent transmission provider before the close of the 
     period specified in such authorization, but not later than 
     the close of the period applicable under subsection (a)(2)(B) 
     as extended under paragraph (2), or
       ``(C) in the case of facilities subject to the jurisdiction 
     of the Public Utility Commission of Texas--
       ``(i) a person which is approved by that Commission as 
     consistent with Texas State law regarding an independent 
     transmission provider, or
       ``(ii) a political subdivision or affiliate thereof whose 
     transmission facilities are under the operational control of 
     a person described in clause (i).
       ``(5) Exempt utility property.--For purposes of this 
     subsection--
       ``(A) In general.--The term `exempt utility property' means 
     property used in the trade or business of--
       ``(i) generating, transmitting, distributing, or selling 
     electricity, or
       ``(ii) producing, transmitting, distributing, or selling 
     natural gas.
       ``(B) Nonrecognition of gain by reason of acquisition of 
     stock.--Acquisition of control of a corporation shall be 
     taken into account under this subsection with respect to a 
     qualifying electric transmission transaction only if the 
     principal trade or business of such corporation is a trade or 
     business referred to in subparagraph (A).
       ``(6) Special rule for consolidated groups.--In the case of 
     a corporation which is a member of an affiliated group filing 
     a consolidated return, any exempt utility property purchased 
     by another member of such group shall be treated as purchased 
     by such corporation for purposes of applying paragraph 
     (1)(A).
       ``(7) Time for assessment of deficiencies.--If the taxpayer 
     has made the election under paragraph (1) and any gain is 
     recognized by such taxpayer as provided in paragraph (1)(B), 
     then--
       ``(A) the statutory period for the assessment of any 
     deficiency, for any taxable year in which any part of the 
     gain on the transaction is realized, attributable to such 
     gain shall not expire prior to the expiration of 3 years from 
     the date the Secretary is notified by the taxpayer (in such 
     manner as the Secretary may by regulations prescribe) of the 
     purchase of exempt utility property or of an intention not to 
     purchase such property, and
       ``(B) such deficiency may be assessed before the expiration 
     of such 3-year period notwithstanding any law or rule of law 
     which would otherwise prevent such assessment.
       ``(8) Purchase.--For purposes of this subsection, the 
     taxpayer shall be considered to have purchased any property 
     if the unadjusted basis of such property is its cost within 
     the meaning of section 1012.

[[Page H8474]]

       ``(9) Election.--An election under paragraph (1) shall be 
     made at such time and in such manner as the Secretary may 
     require and, once made, shall be irrevocable.
       ``(10) Nonapplication of installment sales treatment.--
     Section 453 shall not apply to any qualifying electric 
     transmission transaction with respect to which an election to 
     apply this subsection is made.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions occurring after the date of the 
     enactment of this Act, in taxable years ending after such 
     date.

     SEC. 910. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN 
                   PASSENGER AUTOMOBILES.

       (a) In General.--Section 179(b) (relating to limitations) 
     is amended by adding at the end the following new paragraph:
       ``(6) Limitation on cost taken into account for certain 
     passenger vehicles.--
       ``(A) In general.--The cost of any sport utility vehicle 
     for any taxable year which may be taken into account under 
     this section shall not exceed $25,000.
       ``(B) Sport utility vehicle.--For purposes of subparagraph 
     (A)--
       ``(i) In general.--The term `sport utility vehicle' means 
     any 4-wheeled vehicle--

       ``(I) which is primarily designed or which can be used to 
     carry passengers over public streets, roads, or highways 
     (except any vehicle operated exclusively on a rail or rails),
       ``(II) which is not subject to section 280F, and
       ``(III) which is rated at not more than 14,000 pounds gross 
     vehicle weight.

       ``(ii) Certain vehicles excluded.--Such term does not 
     include any vehicle which--

       ``(I) is designed to have a seating capacity of more than 9 
     persons behind the driver's seat,
       ``(II) is equipped with a cargo area of at least 6 feet in 
     interior length which is an open area or is designed for use 
     as an open area but is enclosed by a cap and is not readily 
     accessible directly from the passenger compartment, or
       ``(III) has an integral enclosure, fully enclosing the 
     driver compartment and load carrying device, does not have 
     seating rearward of the driver's seat, and has no body 
     section protruding more than 30 inches ahead of the leading 
     edge of the windshield.''.

       (b) Effective Date.--The amendment made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.
       And the Senate agree to the same.

     From the Committee on Ways and Means, for consideration of 
     the House bill and the Senate amendment, and modifications 
     committed to conference:
     William Thomas,
     Phil Crane,
     Jim McCrery,
     From the Committee on Agriculture, for consideration of Title 
     VII of the House bill, and subtitle B of Title XI of the 
     Senate amendment, and modifications committed to conference:
     Bob Goodlatte,
     John Boehner,
     Charlie Stenholm,
     From the Committee on Education and the Workforce, for 
     consideration of sections 489, 489, 616, 701, and 719 of the 
     Senate amendment, and modifications committed to conference:
     John Boehner,
     Sam Johnson,
     From the Committee on Energy and Commerce, for consideration 
     of sections 662 and subtitle A of Title XI of the Senate 
     amendment, and modifications committed to conference:
     Joe Barton,
     Richard Burr,
     From the Committee on the Judiciary, for consideration of 
     sections 422, 442, 1111, 1151, and 1161 of the Senate 
     amendment, and modifications committed to conference:
     Lamar Smith,
     For consideration of the House bill and the Senate amendment, 
     and modifications committed to conference:
     Tom DeLay,
                                Managers on the Part of the House.

     Chuck Grassley,
     Orrin Hatch,
     Don Nickles,
     Trent Lott,
     Olympia Snowe,
     Jon Kyl,
     Craig Thomas,
     Rick Santorum,
     Gordon Smith,
     Jim Bunning,
     Mitch McConnell,
     Max Baucus,
     Tom Daschle,
     John Breaux,
     Kent Conrad,
     Jeff Bingaman,
     Blanche L. Lincoln,
                               Managers on the Part of the Senate.

       Joint Explanatory Statement of the Committee of Conference

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the Senate to the bill (H.R. 4520), to amend the 
     Internal Revenue Code of 1986 to remove impediments in such 
     Code and make our manufacturing service, and high-technology 
     businesses and workers more competitive and productive both 
     at home and abroad, submit the following joint statement to 
     the House and the Senate in explantion of the effect of the 
     action agreed upon by the managers and recommended in the 
     accompanying conference report:
       The Senate amendment struck all of the House bill after the 
     enacting clause and inserted a substitute text.
       The House recedes from its disagreement to the amendment of 
     the Senate with an amendment that is a substitute for the 
     House bill and the Senate amendment. The differences between 
     the House bill, the Senate amendment, and the substitute 
     agreed to in conference are noted below, except for clerical 
     corrections, conforming changtes made necessary by agreements 
     reached by the conferees, and minor drafting and clarifying 
     changes.

        TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR 
                        EXTRATERRITORIAL INCOME

              A. Repeal of Extraterritorial Income Regime

     (Sec. 101 of the House bill, sec. 101 of the Senate 
         amendment, and secs. 114 and 941 through 943 of the Code)


                              present law

       Like many other countries, the United States has long 
     provided export-related benefits under its tax law. In the 
     United States, for most of the last two decades, these 
     benefits were provided under the foreign sales corporation 
     (``FSC'') regime. In 2000, the European Union succeeded in 
     having the FSC regime declared a prohibited export subsidy by 
     the World Trade Organization (``WTO''). In response to this 
     WTO finding, the United States repealed the FSC rules and 
     enacted a new regime, under the FSC Repeal and 
     Extraterritorial Income Exclusion Act of 2000.\1\ The 
     European Union immediately challenged the extraterritorial 
     income (``ETI'') regime in the WTO, and in January of 2002 
     the WTO Appellate Body held that the ETI regime also 
     constituted a prohibited export subsidy under the relevant 
     trade agreements.
---------------------------------------------------------------------------
     \1\ Transition rules delayed the repeal of the FSC rules and 
     the effective date of ETI for transactions before January 1, 
     2002. An election was provided, however, under which 
     taxpayers could adopt ETI at an earlier date for transactions 
     after September 30, 2000. This election allowed the ETI rules 
     to apply to transactions after September 30, 2000, including 
     transactions occurring pursuant to pre-existing binding 
     contracts.
---------------------------------------------------------------------------
       Under the ETI regime, an exclusion from gross income 
     applies with respect to ``extraterritorial income,'' which is 
     a taxpayer's gross income attributable to ``foreign trading 
     gross receipts.'' This income is eligible for the exclusion 
     to the extent that it is ``qualifying foreign trade income.'' 
     Qualifying foreign trade income is the amount of gross income 
     that, if excluded, would result in a reduction of taxable 
     income by the greatest of: (1) 1.2 percent of the foreign 
     trading gross receipts derived by the taxpayer from the 
     transaction; (2) 15 percent of the ``foreign trade income'' 
     derived by the taxpayer from the transaction;\2\ or (3) 30 
     percent of the ``foreign sale and leasing income'' derived by 
     the taxpayer from the transaction.\3\
---------------------------------------------------------------------------
     \2\ ``Foreign trade income'' is the taxable income of the 
     taxpayer (determined without regard to the exclusion of 
     qualifying foreign trade income) attributable to foreign 
     trading gross receipts.
     \3\ ``Foreign sale and leasing income'' is the amount of the 
     taxpayer's foreign trade income (with respect to a 
     transaction) that is properly allocable to activities that 
     constitute foreign economic processes. Foreign sale and 
     leasing income also includes foreign trade income derived by 
     the taxpayer in connection with the lease or rental of 
     qualifying foreign trade property for use by the lessee 
     outside the United States.
---------------------------------------------------------------------------
       Foreign trading gross receipts are gross receipts derived 
     from certain activities in connection with ``qualifying 
     foreign trade property'' with respect to which certain 
     economic processes take place outside of the United States. 
     Specifically, the gross receipts must be: (1) from the sale, 
     exchange, or other disposition of qualifying foreign trade 
     property; (2) from the lease or rental of qualifying foreign 
     trade property for use by the lessee outside the United 
     States; (3) for services which are related and subsidiary to 
     the sale, exchange, disposition, lease, or rental of 
     qualifying foreign trade property (as described above); (4) 
     for engineering or architectural services for construction 
     projects located outside the United States; or (5) for the 
     performance of certain managerial services for unrelated 
     persons. A taxpayer may elect to treat gross receipts from a 
     transaction as not foreign trading gross receipts. As a 
     result of such an election, a taxpayer may use any related 
     foreign tax credits in lieu of the exclusion.
       Qualifying foreign trade property generally is property 
     manufactured, produced, grown, or extracted within or outside 
     the United States that is held primarily for sale, lease, or 
     rental in the ordinary course of a trade or business for 
     direct use, consumption, or disposition outside the United 
     States. No more than 50 percent of the fair market value of 
     such property can be attributable to the sum of: (1) the fair 
     market value of articles manufactured outside the United 
     States; and (2) the direct costs of labor performed outside 
     the United States. With respect to property that is 
     manufactured outside the United States, certain rules are 
     provided to ensure consistent U.S. tax treatment with respect 
     to manufacturers.


                               house bill

       The provision repeals the ETI exclusion. For transactions 
     prior to 2005, taxpayers retain 100 percent of their ETI 
     benefits. For transactions after 2004, the provision provides 
     taxpayers with 80 percent of their otherwise-applicable ETI 
     benefits for transactions during 2005 and 60 percent of their

[[Page H8475]]

     otherwise-applicable ETI benefits for transactions during 
     2006. However, the provision provides that the ETI exclusion 
     provisions remain in effect for transactions in the ordinary 
     course of a trade or business if such transactions are 
     pursuant to a binding contract\4\ between the taxpayer and an 
     unrelated person and such contract is in effect on January 
     14, 2002, and at all times thereafter.
---------------------------------------------------------------------------
     \4\ This rule also applies to a purchase option, renewal 
     option, or replacement option that is included in such 
     contract. For this purpose, a replacement option will be 
     considered enforceable against a lessor notwithstanding the 
     fact that a lessor retained approval of the replacement 
     lessee.
---------------------------------------------------------------------------
       In addition, foreign corporations that elected to be 
     treated for all Federal tax purposes as domestic corporations 
     in order to facilitate the claiming of ETI benefits are 
     allowed to revoke such elections within one year of the date 
     of enactment of the provision without recognition of gain or 
     loss, subject to anti-abuse rules.
       Effective date.--The provision is effective for 
     transactions after December 31, 2004.


                            senate amendment

       The provision repeals the exclusion for extraterritorial 
     income. However, the provision provides that the 
     extraterritorial income exclusion provisions remain in effect 
     for transactions in the ordinary course of a trade or 
     business if such transactions are pursuant to a binding 
     contract between the taxpayer and an unrelated person and 
     such contract is in effect on September 17, 2003, and at all 
     times thereafter.
       The provision permits foreign corporations that have 
     elected to be treated as U.S. corporations pursuant to the 
     extraterritorial income exclusion provisions to revoke their 
     elections. Such revocations are effective on the date of 
     enactment of this provision. A corporation revoking its 
     election is treated as a U.S. corporation that transfers all 
     of its property to a foreign corporation in connection with 
     an exchange described in section 354 of the Code. In general, 
     the corporation shall not recognize any gain or loss on such 
     deemed transfer. However, a revoking corporation shall 
     recognize any gain on any asset held by the corporation if: 
     (1) the basis of such asset is determined (in whole or in 
     part) by reference to the basis of such asset in the hands of 
     the person from whom the corporation acquired such asset; (2) 
     the asset was acquired by an actual transfer (rather than as 
     a result of the U.S. corporation election by the corporation) 
     occurring on or after the first day on which the U.S. 
     corporation election by the corporation was effective; and 
     (3) a principal purpose of the acquisition was the reduction 
     or avoidance of tax.
       The provision also provides a deduction for taxable years 
     of certain corporations ending after the date of enactment of 
     the provision and beginning before January 1, 2007.\5\ The 
     amount of the deduction for each such taxable year is equal 
     to a specified percentage of the amount that, for the taxable 
     year of a corporation beginning in 2002, was excludable from 
     the gross income of the corporation under the 
     extraterritorial income exclusion provisions or was treated 
     by the corporation as exempt foreign trade income of related 
     FSCs from property acquired by the FSCs from the 
     corporation.\6\ However, this aggregate amount does not 
     include any amount attributable to a transaction involving a 
     lease by the corporation unless the corporation manufactured 
     or produced (in whole or in part) the leased property.
---------------------------------------------------------------------------
     \5\ The deduction also is available to cooperatives engaged 
     in the marketing of agricultural or horticultural products.
     \6\ In the case of a short taxable year that ends after the 
     date of enactment and begins before January 1, 2007, the 
     Treasury Secretary shall prescribe guidance for determining 
     the amount of the deduction, including guidance that limits 
     the amount of the deduction for a short taxable year based 
     upon the proportion that the number of days in the short 
     taxable year bears to 365.
---------------------------------------------------------------------------
       The specified percentage to be used in determining the 
     deduction is: 80 percent for calendar years 2004 and 2005; 60 
     percent for calendar year 2006; and 0 percent for calendar 
     years 2007 and thereafter. For calendar year 2003, the 
     specified percentage is the amount that bears the same ratio 
     to 100 percent as the number of days after the date of 
     enactment of this provision bears to 365. In the case of a 
     corporation with a taxable year that is not the calendar year 
     (i.e., a fiscal year corporation), a special rule is provided 
     for determining a weighted average specified percentage based 
     upon the calendar years that are included in the taxable 
     year.
       The deduction for a taxable year generally is reduced by 
     the specified percentage of exempted FSC income and excluded 
     extraterritorial income of the corporation for the taxable 
     year from transactions pursuant to a binding contract.
       Effective date.--The provision is effective for 
     transactions occurring after the date of enactment.


                          conference agreement

       The conference agreement follows the House bill, except 
     that under the conference agreement the ETI exclusion 
     provisions remain in effect for transactions in the ordinary 
     course of a trade or business if such transactions are 
     pursuant to a binding contract\7\ between the taxpayer and an 
     unrelated person and such contract is in effect on September 
     17, 2003, and at all times thereafter.
---------------------------------------------------------------------------
     \7\ This rule also applies to a purchase option, renewal 
     option, or replacement option that is included in such 
     contract. For this purpose, a replacement option will be 
     considered enforceable against a lessor notwithstanding the 
     fact that a lessor retained approval of the replacement 
     lessee.
---------------------------------------------------------------------------
       Effective date.--The effective date is the same as the 
     House bill.

     B. Deduction Relating to Income Attributable to United States 
                         Production Activities

     (Sec. 102 of the House bill, secs. 102 and 103 of the Senate 
         amendment, and sec. 11 of the Code)


                              present law

       A corporation's regular income tax liability is determined 
     by applying the following tax rate schedule to its taxable 
     income.

     TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000-...............................  15 percent of taxable
                                             income.
$50,001-$75,000--.........................  25 percent of taxable
                                             income.
$75,001-$10,000,000-......................  34 percent of taxable
                                             income.
Over $10,000,000-.........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

       The benefit of the first two graduated rates described 
     above is phased out by a five-percent surcharge for 
     corporations with taxable income between $100,000 and 
     $335,000. Also, the benefit of the 34-percent rate is phased 
     out by a three-percent surcharge for corporations with 
     taxable income between $15 million and $18,333,333; a 
     corporation with taxable income of $18,333,333 or more 
     effectively is subject to a flat rate of 35 percent.
       Under present law, there is no provision that reduces the 
     corporate income tax for taxable income attributable to 
     domestic production activities.


                               house bill

     In general
       The House bill provides that the corporate tax rate 
     applicable to qualified production activities income may not 
     exceed 32 percent (34 percent for taxable years beginning 
     before 2007) of the qualified production activities income.
       Qualified production activities income
       ``Qualified production activities income'' is the income 
     attributable to domestic production gross receipts, reduced 
     by the sum of: (1) the costs of goods sold that are allocable 
     to such receipts; (2) other deductions, expenses, or losses 
     that are directly allocable to such receipts; and (3) a 
     proper share of other deductions, expenses, and losses that 
     are not directly allocable to such receipts or another class 
     of income.\8\
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     \8\ The House bill provides that Secretary shall prescribe 
     rules for the proper allocation of items of income, 
     deduction, expense, and loss for purposes of determining 
     income attributable to domestic production activities. Where 
     appropriate, such rules shall be similar to and consistent 
     with relevant present-law rules (e.g., secs. 263A and 861).
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                   domestic production gross receipts

       Under the House bill, ``domestic production gross 
     receipts'' generally are gross receipts of a corporation that 
     are derived from: (1) any sale, exchange or other 
     disposition, or any lease, rental or license, of qualifying 
     production property that was manufactured, produced, grown or 
     extracted (in whole or in significant part) by the 
     corporation within the United States; \9\ (2) any sale, 
     exchange or other disposition, or any lease, rental or 
     license, of qualified film produced by the taxpayer; or (3) 
     construction, engineering or architectural services performed 
     in the United States for construction projects located in the 
     United States. However, domestic production gross receipts do 
     not include any gross receipts of the taxpayer derived from 
     property that is leased, licensed or rented by the taxpayer 
     for use by any related person.\10\
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     \9\ Domestic production gross receipts under the House bill 
     include gross receipts of a taxpayer derived from any sale, 
     exchange or other disposition of agricultural products with 
     respect to which the taxpayer performs storage, handling or 
     other processing activities (other than transportation 
     activities) within the United States, provided such products 
     are consumed in connection with, or incorporated into, the 
     manufacturing, production, growth or extraction of qualifying 
     production property (whether or not by the taxpayer). 
     Domestic production gross receipts also include gross 
     receipts of a taxpayer derived from any sale, exchange or 
     other disposition of food products with respect to which the 
     taxpayer performs processing activities (in whole or in 
     significant part) within the United States.
     \10\ It is intended under the House bill that principles 
     similar to those under the present-law extraterritorial 
     income regime apply for this purpose. See Temp. Treas. Reg. 
     sec. 1.927(a)-1T(f)(2)(i). For example, this exclusion 
     generally does not apply to property leased by the taxpayer 
     to a related person if the property is held for sublease, or 
     is subleased, by the related person to an unrelated person 
     for the ultimate use of such unrelated person. Similarly, the 
     license of computer software to a related person for 
     reproduction and sale, exchange, lease, rental or sublicense 
     to an unrelated person for the ultimate use of such unrelated 
     person is not treated as excluded property by reason of the 
     license to the related person.
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       ``Qualifying production property'' under the House bill 
     generally is any tangible personal property, computer 
     software, or property described in section 168(f)(4) of the 
     Code. ``Qualified film'' is any property described in section 
     168(f)(3) of the Code (other than certain sexually explicit 
     productions) if 50 percent or more of the total compensation 
     relating to the production of such film (other than 
     compensation in the form of residuals and participations) 
     constitutes compensation for services performed in the United 
     States by actors, production personnel, directors, and 
     producers.
       Under the House bill, an election under section 631(a) made 
     by a corporate taxpayer

[[Page H8476]]

     for a taxable year ending on or before the date of enactment 
     to treat the cutting of timber as a sale or exchange, may be 
     revoked by the taxpayer without the consent of the IRS for 
     any taxable year ending after that date. The prior election 
     (and revocation) is disregarded for purposes of making a 
     subsequent election.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2004.


                            senate amendment

     In general
       The Senate amendment provides a deduction equal to a 
     portion of the taxpayer's qualified production activities 
     income. For taxable years beginning after 2008, the Senate 
     amendment deduction is nine percent of such income. For 
     taxable years beginning in 2004, 2005, 2006, 2007 and 2008, 
     the deduction is five, five, five, six, and seven percent of 
     income, respectively. However, the deduction for a taxable 
     year is limited to 50 percent of the wages paid by the 
     taxpayer during such taxable year.\11\ In the case of 
     corporate taxpayers that are members of certain affiliated 
     groups, the deduction is determined by treating all members 
     of such groups as a single taxpayer.
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     \11\ For purposes of the Senate amendment, ``wages'' include 
     the sum of the aggregate amounts of wages (as defined in 
     section 3401(a) without regard to exclusions for remuneration 
     paid for services performed in possessions of the United 
     States) and elective deferrals that the taxpayer is required 
     to include on statements with respect to the employment of 
     employees of the taxpayer during the taxpayer's taxable year. 
     Elective deferrals include elective deferrals as defined in 
     section 402(g)(3), amounts deferred under section 457, and, 
     for taxable years beginning after December 31, 2005, 
     designated Roth contributions (as defined in section 402A). 
     Any wages taken into account for purposes of determining the 
     wage limitation under the Senate amendment cannot also be 
     taken into account for purposes of determining any credit 
     allowable under sections 30A or 936.
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     Qualified production activities income
       In general, ``qualified production activities income'' 
     under the Senate amendment is the modified taxable income 
     \12\ of a taxpayer that is attributable to domestic 
     production activities. Income attributable to domestic 
     production activities generally is equal to domestic 
     production gross receipts, reduced by the sum of: (1) the 
     costs of goods sold that are allocable to such receipts; \13\ 
     (2) other deductions, expenses, or losses that are directly 
     allocable to such receipts; and (3) a proper share of other 
     deductions, expenses, and losses that are not directly 
     allocable to such receipts or another class of income.\14\
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     \12\ ``Modified taxable income'' under the Senate amendment 
     is taxable income of the taxpayer computed without regard to 
     the deduction provided by the Senate amendment. Qualified 
     production activities income is limited to the modified 
     taxable income of the taxpayer.
     \13\ For purposes of determining such costs under the Senate 
     amendment, any item or service that is imported into the 
     United States without an arm's length transfer price shall be 
     treated as acquired by purchase, and its cost shall be 
     treated as not less than its fair market value when it 
     entered the United States. A similar rule shall apply in 
     determining the adjusted basis of leased or rented property 
     where the lease or rental gives rise to domestic production 
     gross receipts. With regard to property previously exported 
     by the taxpayer for further manufacture, the increase in cost 
     or adjusted basis shall not exceed the difference between the 
     fair market value of the property when exported and the fair 
     market value of the property when re-imported into the United 
     States after further manufacture.
     \14\ The Senate amendment provides that the Secretary shall 
     prescribe rules for the proper allocation of items of income, 
     deduction, expense, and loss for purposes of determining 
     income attributable to domestic production activities. Where 
     appropriate, such rules shall be similar to and consistent 
     with relevant present-law rules (e.g., secs. 263A and 861).
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       For taxable years beginning before 2013, the Senate 
     amendment provides that qualified production activities 
     income is reduced by virtue of a fraction (not to exceed 
     one), the numerator of which is the value of the domestic 
     production of the taxpayer and the denominator of which is 
     the value of the worldwide production of the taxpayer (the 
     ``domestic/worldwide fraction'').\15\ For taxable years 
     beginning in 2010, 2011, and 2012, the reduction in qualified 
     production activities income by virtue of this fraction is 
     reduced by 25, 50, and 75 percent, respectively. For taxable 
     years beginning after 2012, there is no reduction in 
     qualified production activities income by virtue of this 
     fraction.
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     \15\ For purposes of the domestic/worldwide fraction under 
     the Senate amendment, the value of domestic production is the 
     excess of domestic production gross receipts (as defined 
     below) over the cost of deductible purchased inputs that are 
     allocable to such receipts. Similarly, the value of worldwide 
     production is the excess of worldwide production gross 
     receipts over the cost of deductible purchased inputs that 
     are allocable to such receipts. For purposes of determining 
     the domestic/worldwide fraction, purchased inputs include: 
     purchased services (other than employees) used in 
     manufacture, production, growth, or extraction activities; 
     purchased items consumed in connection with such activities; 
     and purchased items incorporated as part of the property 
     being manufactured, produced, grown, or extracted. In the 
     case of corporate taxpayers that are members of certain 
     affiliated groups, the domestic/worldwide fraction is 
     determined by treating all members of such groups as a single 
     taxpayer.
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     Domestic production gross receipts
       Under the Senate amendment, ``domestic production gross 
     receipts'' are gross receipts of a taxpayer that are derived 
     in the actual conduct of a trade or business from any sale, 
     exchange or other disposition, or any lease, rental or 
     license, of qualifying production property that was 
     manufactured, produced, grown or extracted (in whole or in 
     significant part) by the taxpayer within the United States or 
     any possession of the United States.\16\ Such term also 
     includes a percentage of gross receipts derived from 
     engineering or architectural services performed in the United 
     States for construction projects in the United States.\17\ 
     Finally, such term includes gross receipts derived by the 
     taxpayer from the use of film and videotape property produced 
     in whole or in significant part by the taxpayer within the 
     United States. ``Qualifying production property'' generally 
     is any tangible personal property, computer software, or 
     property described in section 168(f)(3) or (4) of the 
     Code.\18\ However, qualifying production property does not 
     include: (1) consumable property that is sold, leased or 
     licensed as an integral part of the provision of services; 
     (2) oil or gas (other than certain primary products thereof); 
     \19\ (3) electricity; (4) water supplied by pipeline to the 
     consumer; (5) utility services; and (6) any film, tape, 
     recording, book, magazine, newspaper or similar property the 
     market for which is primarily topical or otherwise 
     essentially transitory in nature.\20\
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     \16\ Under the Senate amendment, domestic production gross 
     receipts include gross receipts of a taxpayer derived from 
     any sale, exchange or other disposition of agricultural 
     products with respect to which the taxpayer performs storage, 
     handling or other processing activities (but not 
     transportation activities) within the United States, provided 
     such products are consumed in connection with, or 
     incorporated into, the manufacturing, production, growth or 
     extraction of qualifying production property (whether or not 
     by the taxpayer).
     \17\ For taxable years beginning in 2004 through 2008, the 
     applicable percentage is 25%. For taxable years beginning in 
     2009 through 2012, the applicable percentage is 50%. For 
     taxable years beginning after 2012, the applicable percentage 
     is 100%.
     \18\ For purposes of the definition of qualified production 
     property under the Senate amendment, property described in 
     section 168(f)(3) or (4) of the Code includes underlying 
     copyrights and trademarks. In addition, gross receipts from 
     the sale, exchange, lease, rental, license or other 
     disposition of property described in section 168(f)(3) or (4) 
     are treated as domestic production gross receipts if more 
     than 50 percent of the aggregate development and production 
     costs of such property are incurred by the taxpayer within 
     the United States. For this purpose, property that is 
     acquired by the taxpayer after development or production has 
     commenced, but before such property generates substantial 
     gross receipts, shall be treated as developed or produced by 
     the taxpayer.
     \19\ Under the Senate amendment, qualifying production 
     property does not include extracted but unrefined oil or gas, 
     but generally includes primary products of oil and gas that 
     are produced by the taxpayer. Examples of primary products 
     for this purpose include motor fuels, chemical feedstocks and 
     fertilizer. However, primary products do not include the 
     output of a natural gas processing plant. Natural gas 
     processing plants generally are located at or near the 
     producing gas field that supplies the facility, and the 
     facility serves to separate impurities from the natural gas 
     liquids recovered from the field for the purpose of selling 
     the liquids for future production and preparation of the 
     natural gas for pipeline transportation.
     \20\ The topical and transitory exclusion does not apply to 
     the extent of the gross receipts from the use of film and 
     videotape property produced in whole or in significant part 
     by the taxpayer within the United States.
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     Other rules
       Qualified production activities income of passthrough 
           entities (other than cooperatives)
       With respect to domestic production activities of an S 
     corporation, partnership, estate, trust or other passthrough 
     entity (other than an agricultural or horticultural 
     cooperative), the deduction under the Senate amendment 
     generally is determined at the shareholder, partner or 
     similar level by taking into account at such level the 
     proportionate share of qualified production activities income 
     of the entity.\21\ The Senate amendment directs the Secretary 
     to prescribe rules for the application of the deduction to 
     passthrough entities, including reporting requirements and 
     rules relating to restrictions on the allocation of the 
     deduction to taxpayers at the partner or similar level.
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     \21\ However, the wage limitation described above is 
     determined at the entity level in computing the deduction 
     with respect to qualified production activities income of a 
     passthrough entity.
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       Qualified production activities income of agricultural and 
           horticultural cooperatives
       With regard to member-owned agricultural and horticultural 
     cooperatives formed under Subchapter T of the Code, the 
     Senate amendment provides the same treatment of qualified 
     production activities income derived from products marketed 
     through cooperatives as it provides for qualified production 
     activities income of other taxpayers (i.e., the cooperative 
     may claim a deduction from qualified production activities 
     income). In addition, the Senate amendment provides that the 
     amount of any patronage dividends or per-unit retain 
     allocations paid to a member of an agricultural or 
     horticultural cooperative (to which Part I of Subchapter T 
     applies), which is allocable to the portion of qualified 
     production activities income of the cooperative that is 
     deductible under the Senate amendment, is excludible from the 
     gross income of the member. In order to qualify, such amount 
     must be designated by the organization as allocable to the 
     deductible portion of qualified production activities income 
     in a written notice mailed to its patrons not later than the 
     payment period described in section 1382(d). The cooperative 
     cannot reduce its income under section 1382 (e.g., cannot 
     claim a dividends-paid deduction) for such amounts.
       Separate application to films and videotape
       Under the Senate amendment, the deduction provided by this 
     provision with respect

[[Page H8477]]

     to films and videotape is determined separately with respect 
     to qualified production activities income of the taxpayer 
     allocable to each of three markets: theatrical, broadcast 
     television, and home video. The Senate amendment provides 
     rules for making a separate determination of qualified 
     production activities allocable to each market.
       Alternative minimum tax
       The deduction provided by the Senate amendment is allowed 
     for purposes of the alternative minimum tax (including 
     adjusted current earnings). The deduction is determined by 
     reference to modified alternative minimum taxable income.
       Coordination with ETI repeal
       For purposes of the Senate amendment, domestic production 
     gross receipts does not include gross receipts from any 
     transaction that produces excluded extraterritorial income 
     pursuant to the binding contract exception to the ETI repeal 
     provisions of the Senate amendment.
       Qualified production activities income is determined 
     without regard to any deduction provided by the ETI repeal 
     provisions of the Senate amendment.
       Effective date.--The Senate amendment provision is 
     effective for taxable years ending after the date of 
     enactment.


                          Conference Agreement

     In general
       The conference agreement provides a deduction from taxable 
     income (or, in the case of an individual, adjusted gross 
     income) that is equal to a portion of the taxpayer's 
     qualified production activities income. For taxable years 
     beginning after 2009, the deduction is equal to nine percent 
     of the lesser of (1) the qualified production activities 
     income of the taxpayer for the taxable year, or (2) taxable 
     income (determined without regard to this provision) for the 
     taxable year. For taxable years beginning in 2005 and 2006, 
     the deduction is three percent of income and, for taxable 
     years beginning in 2007, 2008 and 2009, the deduction is six 
     percent of income. However, the deduction for a taxable year 
     is limited to 50 percent of the wages paid by the taxpayer 
     during the calendar year that ends in such taxable year.\22\ 
     In the case of corporate taxpayers that are members of 
     certain affiliated groups, the deduction is determined by 
     treating all members of such groups as a single taxpayer and 
     the deduction is allocated among such members in proportion 
     to each member's respective amount (if any) of qualified 
     production activities income.
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     \22\ For purposes of the conference agreement, ``wages'' 
     include the sum of the aggregate amounts of wages and 
     elective deferrals that the taxpayer is required to include 
     on statements with respect to the employment of employees of 
     the taxpayer during the taxpayer's taxable year. Elective 
     deferrals include elective deferrals as defined in section 
     402(g)(3), amounts deferred under section 457, and, for 
     taxable years beginning after December 31, 2005, designated 
     Roth contributions (as defined in section 402A).
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     Qualified production activities income
       In general, ``qualified production activities income'' is 
     equal to domestic production gross receipts, reduced by the 
     sum of: (1) the costs of goods sold that are allocable to 
     such receipts; \23\ (2) other deductions, expenses, or losses 
     that are directly allocable to such receipts; and (3) a 
     proper share of other deductions, expenses, and losses that 
     are not directly allocable to such receipts or another class 
     of income.\24\
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     \23\ For purposes of determining such costs, any item or 
     service that is imported into the United States without an 
     arm's length transfer price shall be treated as acquired by 
     purchase, and its cost shall be treated as not less than its 
     value when it entered the United States. A similar rule shall 
     apply in determining the adjusted basis of leased or rented 
     property where the lease or rental gives rise to domestic 
     production gross receipts. With regard to property previously 
     exported by the taxpayer for further manufacture, the 
     increase in cost or adjusted basis shall not exceed the 
     difference between the value of the property when exported 
     and the value of the property when re-imported into the 
     United States after further manufacture. Except as provided 
     by the Secretary, the value of property for this purpose 
     shall be its customs value (as defined in section 
     1059A(b)(1)).
     \24\ The Secretary shall prescribe rules for the proper 
     allocation of items of income, deduction, expense, and loss 
     for purposes of determining income attributable to domestic 
     production activities. Where appropriate, such rules shall be 
     similar to and consistent with relevant present-law rules 
     (e.g., sec. 263A, in determining the cost of goods sold, and 
     sec. 861, in determining the source of such items). Other 
     deductions, expenses or losses that are directly allocable to 
     such receipts include, for example, selling and marketing 
     expenses. A proper share of other deductions, expenses, and 
     losses that are not directly allocable to such receipts or 
     another class of income include, for example, general and 
     administrative expenses allocable to selling and marketing 
     expenses.
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     Domestic production gross receipts
       ``Domestic production gross receipts'' generally are gross 
     receipts of a taxpayer that are derived from: (1) any sale, 
     exchange or other disposition, or any lease, rental or 
     license, of qualifying production property that was 
     manufactured, produced, grown or extracted by the taxpayer in 
     whole or in significant part within the United States; \25\ 
     (2) any sale, exchange or other disposition, or any lease, 
     rental or license, of qualified film produced by the 
     taxpayer; (3) any sale, exchange or other disposition 
     electricity, natural gas, or potable water produced by the 
     taxpayer in the United States; (4) construction activities 
     performed in the United States; \26\ or (5) engineering or 
     architectural services performed in the United States for 
     construction projects located in the United States.
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     \25\ Domestic production gross receipts include gross 
     receipts of a taxpayer derived from any sale, exchange or 
     other disposition of agricultural products with respect to 
     which the taxpayer performs storage, handling or other 
     processing activities (other than transportation activities) 
     within the United States, provided such products are consumed 
     in connection with, or incorporated into, the manufacturing, 
     production, growth or extraction of qualifying production 
     property (whether or not by the taxpayer).
     \26\ For this purpose, construction activities include 
     activities that are directly related to the erection or 
     substantial renovation of residential and commercial 
     buildings and infrastructure. Substantial renovation would 
     include structural improvements, but not mere cosmetic 
     changes, such as painting.
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       However, domestic production gross receipts do not include 
     any gross receipts of the taxpayer that are derived from (1) 
     the sale of food or beverages prepared by the taxpayer at a 
     retail establishment,\27\ or (2) the transmission or 
     distribution of electricity, natural gas, or potable 
     water.\28\ In addition,

[[Page H8478]]

     domestic production gross receipts do not include any gross 
     receipts of the taxpayer derived from property that is 
     leased, licensed or rented by the taxpayer for use by any 
     related person.\29\
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     \27\ The conferees intend that food processing, which 
     generally is a qualified production activity under the 
     conference agreement, does not include activities carried out 
     at retail establishment. Thus, under the conference agreement 
     while the gross receipts of a meat packing establishment are 
     qualified domestic production gross receipts, the activities 
     of a master chef who creates a venison sausage for his or her 
     restaurant menu cannot be construed as a qualified production 
     activity.
     The conferees recognize that some taxpayers may own 
     facilities at which the predominant activity is domestic 
     production as defined in the conference agreement and other 
     facilities at which they engage in the retail sale of the 
     taxpayer's produced goods and also sell food and beverages. 
     For example, assume that the taxpayer buys coffee beans and 
     roasts those beans at a facility, the primary activity of 
     which is the roasting and packaging of roasted coffee. The 
     taxpayer sells the roasted coffee through a variety of 
     unrelated third-party vendors and also sells roasted coffee 
     at the taxpayer's own retail establishments. In addition, at 
     the taxpayer's retail establishments, the taxpayer prepares 
     brewed coffee and other foods. The conferees intend that to 
     the extent that the gross receipts of the taxpayer's retail 
     establishment represent receipts from the sale of its roasted 
     coffee beans to customers, the receipts are qualified 
     domestic production gross receipts, but to the extent that 
     the gross receipts of the taxpayer's retail establishment 
     represent receipts from the sale of brewed coffee or food 
     prepared at the retail establishment, the receipts are not 
     qualified domestic production gross receipts. However, the 
     conferees intend that, in this case, the taxpayer may 
     allocate part of the receipts from the sale of the brewed 
     coffee as qualified domestic production gross receipts to the 
     extent of the value of the roasted coffee beans used to brew 
     the coffee. The conferees intend that the Secretary provide 
     guidance drawing on the principles of section 482 by which 
     such a taxpayer can allocate gross receipts between qualified 
     and nonqualified gross receipts. The conferees observe that 
     in this example, the taxpayer's sales of roasted coffee beans 
     to unrelated third parties would provide a value for the 
     beans used in brewing a cup of coffee for retail sale.
     The conferees intend that the disqualification of gross 
     receipts derived from the sale of food and beverage prepared 
     by the taxpayer at a retail establishment not be construed 
     narrowly to apply only to establishments at which customers 
     dine on premises. The receipts of a facility that prepares 
     food and beverage solely for take out service would not be 
     qualified production gross receipts. Likewise, the conferees 
     intend that the disqualification of gross receipts derived 
     from the sale of food and beverages prepared by the taxpayer 
     need not be limited to retail establishments primarily 
     engaged in the dining trade. For example, if a taxpayer 
     operates a supermarket and as part of the supermarket the 
     taxpayer operates an in-store bakery, the same allocation 
     described above would apply to determine the extent to which 
     the taxpayer's gross receipts represent qualified domestic 
     production gross receipts.
     \28\ The conference agreement provides that domestic 
     production gross receipts include the gross receipts from the 
     production in the United States of electricity, gas, and 
     potable water, but excludes the gross receipts from the 
     transmission or distribution of electricity, gas, and potable 
     water. Thus, in the case of a taxpayer who owns a facility 
     for the production of electricity, whether the taxpayer's 
     facility is part of a regulated utility or an independent 
     power facility, the taxpayer's gross receipts from the 
     production of electricity at that facility are qualified 
     domestic production gross receipts. However, to the extent 
     that the taxpayer is an integrated producer that generates 
     electricity and delivers electricity to end users, any gross 
     receipts properly attributable to the transmission of 
     electricity from the generating facility to a point of local 
     distribution and any gross receipts properly attributable to 
     the distribution of electricity to final customers are not 
     qualified domestic production gross receipts. For example, 
     assume taxpayer A owns a wind turbine that generates 
     electricity and taxpayer B owns a high-voltage transmission 
     line that passes near taxpayer A's wind turbine and ends near 
     the system of local distribution lines of taxpayer C. 
     Taxpayer A sells the electricity produced at the wind turbine 
     to taxpayer C and contracts with taxpayer B to transmit the 
     electricity produced at the wind turbine to taxpayer C who 
     sells the electricity to his or her customers using taxpayer 
     C's distribution network. The gross receipts received by 
     taxpayer A for the sale of electricity produced at the wind 
     turbine constitute qualifying domestic production gross 
     receipts. The gross receipts of taxpayer B from transporting 
     taxpayer A's electricity to taxpayer C are not qualifying 
     domestic production gross receipts. Likewise the gross 
     receipts of taxpayer C from distributing the electricity are 
     not qualifying domestic production gross receipts. Also, if 
     taxpayer A made direct sales of electricity to customers in 
     taxpayer C's service area and taxpayer C receives 
     remuneration for the distribution of electricity, the gross 
     receipts of taxpayer C are not qualifying domestic production 
     gross receipts. If taxpayers A, B, and C are all related 
     taxpayer, then taxpayers A, B, and C must allocate gross 
     receipts to production activities, transmission activities, 
     and distribution activities in a manner consistent with the 
     preceding example.
     The conference agreement provides that the same principles 
     apply in the case of the natural gas and water supply 
     industries. In the case of natural gas, production activities 
     generally are all activities involved in extracting natural 
     gas from the ground and processing the gas into pipeline 
     quality gas. Such activities would produce qualifying 
     domestic production gross receipts. However gross receipts of 
     a taxpayer attributable to transmission of pipeline quality 
     gas from a natural gas field (or from a natural gas 
     processing plant) to a local distribution company's citygate 
     (or to another customer) are not qualified domestic 
     production gross receipts. Likewise gas purchased by a local 
     gas distribution company and distributed from the citygate to 
     the local customers does not give rise to domestic production 
     gross receipts.
     In the case of the production of potable water the conferees 
     intend that activities involved in the production of potable 
     water include the acquisition, collection, and storage of raw 
     water (untreated water). It also includes the transportation 
     of raw water to a water treatment facility and treatment of 
     raw water at such a facility. However, any gross receipts 
     from the storage of potable water after the water treatment 
     facility or delivery of potable water to customers does not 
     give rise to qualifying domestic production gross receipts. 
     The conferees intend that a taxpayer that both produces 
     potable water and distributes potable water will properly 
     allocate gross receipts across qualifying and non-qualifying 
     activities.
     \29\ It is intended that principles similar to those under 
     the present-law extraterritorial income regime apply for this 
     purpose. See Temp. Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For 
     example, this exclusion generally does not apply to property 
     leased by the taxpayer to a related person if the property is 
     held for sublease, or is subleased, by the related person to 
     an unrelated person for the ultimate use of such unrelated 
     person. Similarly, the license of computer software to a 
     related person for reproduction and sale, exchange, lease, 
     rental or sublicense to an unrelated person for the ultimate 
     use of such unrelated person is not treated as excluded 
     property by reason of the license to the related person.
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       ``Qualifying production property'' generally includes any 
     tangible personal property, computer software, or sound 
     recordings. ``Qualified film'' includes any motion picture 
     film or videotape \30\ (including live or delayed television 
     programming, but not including certain sexually explicit 
     productions) if 50 percent or more of the total compensation 
     relating to the production of such film (including 
     compensation in the form of residuals and participations 
     \31\) constitutes compensation for services performed in the 
     United States by actors, production personnel, directors, and 
     producers.\32\
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     \30\ The conferees intend that the nature of the material on 
     which properties described in section 168(f)(3) are embodied 
     and the methods and means of distribution of such properties 
     shall not affect their qualification under this provision.
     \31\ To the extent that a taxpayer has included an estimate 
     of participations and/or residuals in its income forecast 
     calculation under section 167(g), such taxpayer must use the 
     same estimate of participations and/or residuals for purposes 
     of determining total compensation.
     \32\ It is intended that the Secretary will provide 
     appropriate rules governing the determination of total 
     compensation for services performed in the United States.
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     Other rules
       Qualified production activities income of passthrough 
           entities (other than cooperatives)
       With respect to domestic production activities of an S 
     corporation, partnership, estate, trust or other passthrough 
     entity (other than an agricultural or horticultural 
     cooperative), although the wage limitation is applied first 
     at the entity level, the deduction under the conference 
     agreement generally is determined at the shareholder, partner 
     or similar level by taking into account at such level the 
     proportionate share of qualified production activities income 
     of the entity. The Secretary is directed to prescribe rules 
     for the application of the conference agreement to 
     passthrough entities, including reporting requirements and 
     rules relating to restrictions on the allocation of the 
     deduction to taxpayers at the partner or similar level.
       For purposes of applying the wage limitation at the level 
     of a shareholder, partner, or similar person, each person who 
     is allocated qualified production activities income from a 
     passthrough entity also is treated as having been allocated 
     wages from such entity in an amount that is equal to the 
     lesser of: (1) such person's allocable share of wages, as 
     determined under regulations prescribed by the Secretary; or 
     (2) twice the appropriate deductible percentage of qualified 
     production activities income that actually is allocated to 
     such person for the taxable year.
       Qualified production activities income of agricultural and 
           horticultural cooperatives
       With regard to member-owned agricultural and horticultural 
     cooperatives formed under Subchapter T of the Code, the 
     conference agreement provides the same treatment of qualified 
     production activities income derived from agricultural or 
     horticultural products that are manufactured, produced, 
     grown, or extracted by cooperatives,\33\ or that are marketed 
     through cooperatives, as it provides for qualified production 
     activities income of other taxpayers (i.e., the cooperative 
     may claim a deduction from qualified production activities 
     income).
---------------------------------------------------------------------------
     \33\ For this purpose, agricultural or horticultural products 
     also include fertilizer, diesel fuel and other supplies used 
     in agricultural or horticultural production that are 
     manufactured, produced, grown, or extracted by the 
     cooperative.
---------------------------------------------------------------------------
       In addition, the conference agreement provides that the 
     amount of any patronage dividends or per-unit retain 
     allocations paid to a member of an agricultural or 
     horticultural cooperative (to which Part I of Subchapter T 
     applies), which is allocable to the portion of qualified 
     production activities income of the cooperative that is 
     deductible under the conference agreement, is deductible from 
     the gross income of the member. In order to qualify, such 
     amount must be designated by the organization as allocable to 
     the deductible portion of qualified production activities 
     income in a written notice mailed to its patrons not later 
     than the payment period described in section 1382(d). The 
     cooperative cannot reduce its income under section 1382 
     (e.g., cannot claim a dividends-paid deduction) for such 
     amounts.
       Alternative minimum tax
       The deduction provided by the conference agreement is 
     allowed for purposes of computing alternative minimum taxable 
     income (including adjusted current earnings). The deduction 
     in computing alternative minimum taxable income is determined 
     by reference to the lesser of the qualified production 
     activities income (as determined for the regular tax) or the 
     alternative minimum taxable income (in the case of an 
     individual, adjusted gross income as determined for the 
     regular tax) without regard to this deduction.
       Timber cutting
       Under the conference agreement, an election made for a 
     taxable year ending on or before the date of enactment, to 
     treat the cutting of timber as a sale or exchange, may be 
     revoked by the taxpayer without the consent of the IRS for 
     any taxable year ending after that date. The prior election 
     (and revocation) is disregarded for purposes of making a 
     subsequent election.
     Exploration of fundamental tax reform
       The conferees acknowledge that Congress has not reduced the 
     statutory corporate income tax rate since 1986. According to 
     the Organisation of Economic Cooperation and Development 
     (``OECD''), the combined corporate income tax rate, as 
     defined by the OECD, in most instances is lower than the U.S. 
     corporate income tax rate.\34\ Higher corporate tax rates 
     factor into the United States' ability to attract and retain 
     economically vibrant industries, which create good jobs and 
     contribute to overall economic growth.
---------------------------------------------------------------------------
     \34\ Organisation of Economic Cooperation and Development, 
     Table 1.5, Tax Data Base Statistics, Tax Policy and 
     Administration, Summary Tables (2003).
---------------------------------------------------------------------------
       This legislation was crafted to repeal an export tax 
     benefit that was deemed inconsistent with obligations of the 
     United States under the Agreement on Subsidies and 
     Countervailing Measures and other international trade 
     agreements. This legislation replaces the benefit with tax 
     relief specifically designed to be economically equivalent to 
     a 3-percentage point reduction in U.S.-based manufacturing.
       The conferees recognize that manufacturers are a segment of 
     the economy that has faced significant challenges during the 
     nation's recent economic slowdown. The conferees recognize 
     that trading partners of the United States retain subsidies 
     for domestic manufacturers and exports through their indirect 
     tax systems. The conferees are concerned about the adverse 
     competitive impact of these subsidies on U.S. manufacturers.
       These concerns should be considered in the context of the 
     benefits of a unified top tax rate for all corporate 
     taxpayers, including manufacturing, in terms of efficiency 
     and fairness. The conferees also expect that the tax-writing 
     committees will explore a unified top corporate tax rate in 
     the context of fundamental tax reform.
       Effective date.--The conference agreement is effective for 
     taxable years beginning after December 31, 2004.

      C. Reduced Corporate Income Tax Rate for Small Corporations

     (Sec. 103 of the House bill and sec. 11 of the Code)


                              Present Law

       A corporation's regular income tax liability is determined 
     by applying the following tax rate schedule to its taxable 
     income.

     TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$10,000,000.......................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

       The benefit of the first two graduated rates described 
     above is phased out by a five-percent surcharge for 
     corporations with taxable income between $100,000 and 
     $335,000. Also, the benefit of the 34-percent rate is phased 
     out by a three-percent surcharge for corporations with 
     taxable income between $15 million and $18,333,333; a 
     corporation with taxable income of $18,333,333 or more 
     effectively is subject to a flat rate of 35 percent.


                               House Bill

       Under the House bill, a corporation's regular income tax 
     liability is determined by applying the following tax rate 
     schedules to its taxable income.

   TABLE 2.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2013 AND
                               THEREAFTER
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$20,000,000.......................  32 percent of taxable
                                             income.
Over $20,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

       The benefit of the graduated rates described above is 
     phased out by a three-percent surcharge for corporations with 
     taxable

[[Page H8479]]

     income between $20 million and $40,341,667; a corporation 
     with taxable income of $40,341,667 or more effectively is 
     subject to a flat rate of 35 percent.

   TABLE 3.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2011-2012
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$5,000,000........................  32 percent of taxable
                                             income.
$5,000,001-$10,000,000....................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

       The benefit of the first three graduated rates described 
     above is phased out by a five-percent surcharge for 
     corporations with taxable income between $5,000,000 and 
     $7,205,000. Also, the benefit of the 34-percent rate is 
     phased out by a three-percent surcharge for corporations with 
     taxable income between $15 million and $18,333,333; a 
     corporation with taxable income of $18,333,333 or more 
     effectively is subject to a flat rate of 35 percent.

   TABLE 4.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2008-2010
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$1,000,000........................  32 percent of taxable
                                             income.
$1,000,001-$10,000,000....................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable income
------------------------------------------------------------------------

       The benefit of the first three graduated rates described 
     above is phased out by a five-percent surcharge for 
     corporations with taxable income between $1,000,000 and 
     $1,605,000. Also, the benefit of the 34-percent rate is 
     phased out by a three-percent surcharge for corporations with 
     taxable income between $15 million and $18,333,333; a 
     corporation with taxable income of $18,333,333 or more 
     effectively is subject to a flat rate of 35 percent.

   TABLE 5.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2005-2007
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$1,000,000........................  33 percent of taxable
                                             income.
$1,000,001-$10,000,000....................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

       The benefit of the first three graduated rates described 
     above is phased out by a five-percent surcharge for 
     corporations with taxable income between $1,000,000 and 
     $1,420,000. Also, the benefit of the 34-percent rate is 
     phased out by a three-percent surcharge for corporations with 
     taxable income between $15 million and $18,333,333; a 
     corporation with taxable income of $18,333,333 or more 
     effectively is subject to a flat rate of 35 percent.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

   TITLE II--PROVISIONS RELATING TO JOB CREATION TAX INCENTIVES FOR 
              MANUFACTURERS, SMALL BUSINESSES, AND FARMERS

                        A. Section 179 Expensing

     (Sec. 201 of the House bill, sec. 309 of the Senate amendment 
         and sec. 179 of the Code)


                              Present Law

       Present law provides that, in lieu of depreciation, a 
     taxpayer with a sufficiently small amount of annual 
     investment may elect to deduct such costs. The Jobs and 
     Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 \35\ 
     increased the amount a taxpayer may deduct, for taxable years 
     beginning in 2003 through 2005, to $100,000 of the cost of 
     qualifying property placed in service for the taxable 
     year.\36\ In general, qualifying property is defined as 
     depreciable tangible personal property (and certain computer 
     software) that is purchased for use in the active conduct of 
     a trade or business. The $100,000 amount is reduced (but not 
     below zero) by the amount by which the cost of qualifying 
     property placed in service during the taxable year exceeds 
     $400,000. The $100,000 and $400,000 amounts are indexed for 
     inflation.
---------------------------------------------------------------------------
     \35\ Pub. L. No. 108-27, sec. 202 (2003).
     \36\ Additional section 179 incentives are provided with 
     respect to a qualified property used by a business in the New 
     York Liberty Zone (sec. 1400L(f)), an empowerment zone (sec. 
     1397A), or a renewal community (sec. 1400J).
---------------------------------------------------------------------------
       Prior to the enactment of JGTRRA (and for taxable years 
     beginning in 2006 and thereafter) a taxpayer with a 
     sufficiently small amount of annual investment could elect to 
     deduct up to $25,000 of the cost of qualifying property 
     placed in service for the taxable year. The $25,000 amount 
     was reduced (but not below zero) by the amount by which the 
     cost of qualifying property placed in service during the 
     taxable year exceeds $200,000. In general, qualifying 
     property is defined as depreciable tangible personal property 
     that is purchased for use in the active conduct of a trade or 
     business.
       The amount eligible to be expensed for a taxable year may 
     not exceed the taxable income for a taxable year that is 
     derived from the active conduct of a trade or business 
     (determined without regard to this provision). Any amount 
     that is not allowed as a deduction because of the taxable 
     income limitation may be carried forward to succeeding 
     taxable years (subject to similar limitations). No general 
     business credit under section 38 is allowed with respect to 
     any amount for which a deduction is allowed under section 
     179.
       Under present law, an expensing election is made under 
     rules prescribed by the Secretary.\37\ Applicable Treasury 
     regulations provide that an expensing election generally is 
     made on the taxpayer's original return for the taxable year 
     to which the election relates.\38\
---------------------------------------------------------------------------
     \37\ Sec. 179(c)(1).
     \38\ Under Treas. Reg. sec. 1.179-5, applicable to property 
     placed in service in taxable years ending after Jan. 25, 1993 
     (but not including property placed in service in taxable 
     years beginning after 2002 and before 2006), a taxpayer may 
     make the election on the original return (whether or not the 
     return is timely), or on an amended return filed by the due 
     date (including extensions) for filing the return for the tax 
     year the property was placed in service. If the taxpayer 
     timely filed an original return without making the election, 
     the taxpayer may still make the election by filing an amended 
     return within six months of the due date of the return 
     (excluding extensions).
---------------------------------------------------------------------------
       Prior to the enactment of JGTRRA (and for taxable years 
     beginning in 2006 and thereafter), an expensing election may 
     be revoked only with consent of the Commissioner.\39\ JGTRRA 
     permits taxpayers to revoke expensing elections on amended 
     returns without the consent of the Commissioner with respect 
     to a taxable year beginning after 2002 and before 2006.\40\
---------------------------------------------------------------------------
     \39\ Sec. 179(c)(2).
     \40\ Id. Under Prop. and Temp. Treas. Reg. sec. 179-5T, 
     applicable to property placed in service in taxable years 
     beginning after 2002 and before 2006, a taxpayer is permitted 
     to make or revoke an election under section 179 without the 
     consent of the Commissioner on an amended Federal tax return 
     for that taxable year. This amended return must be filed 
     within the time prescribed by law for filing an amended 
     return for the taxable year. T.D. 9146, Aug. 3, 2004.
---------------------------------------------------------------------------


                               House Bill

       The provision extends the increased amount that a taxpayer 
     may deduct, and other changes that were made by JGTRRA, for 
     an additional two years. Thus, the provision provides that 
     the maximum dollar amount that may be deducted under section 
     179 is $100,000 for property placed in service in taxable 
     years beginning before 2008 ($25,000 for taxable years 
     beginning in 2008 and thereafter). In addition, the $400,000 
     amount applies for property placed in service in taxable 
     years beginning before 2008 ($200,000 for taxable years 
     beginning in 2008 and thereafter). The provision extends, 
     through 2007 (from 2005), the indexing for inflation of both 
     the maximum dollar amount that may be deducted and the 
     $400,000 amount. The provision also includes off-the-shelf 
     computer software placed in service in taxable years 
     beginning before 2008 as qualifying property. The provision 
     permits taxpayers to revoke expensing elections on amended 
     returns without the consent of the Commissioner with respect 
     to a taxable year beginning before 2008. The Committee 
     expects that the Secretary will prescribe regulations to 
     permit a taxpayer to make an expensing election on an amended 
     return without the consent of the Commissioner.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       The provision provides that the $100,000 amount ($25,000 
     for taxable years beginning in 2006 and thereafter) is 
     reduced (but not below zero) by only one half of the amount 
     by which the cost of qualifying property placed in service 
     during the taxable year exceeds $400,000 ($200,000 for 
     taxable years beginning 2006 and thereafter).\41\
---------------------------------------------------------------------------
     \41\ As a result of the reduced phase-out percentage, the 
     deductible amount in the New York Liberty Zone, an enterprise 
     zone or a renewal community is correspondingly increased. See 
     sec. 1400L(f), sec. 1397A and sec. 1400J.
---------------------------------------------------------------------------
       For example, under the provision, if in 2004 an eligible 
     taxpayer places in service qualifying property costing 
     $500,000, the $100,000 amount is reduced by $50,000 (i.e., 
     one half the amount by which the $500,000 cost of qualifying 
     property placed in service during the taxable year exceeds 
     $400,000). Thus, the maximum amount eligible for section 179 
     expensing by this taxpayer for 2004 is $50,000.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2002.


                          Conference Agreement

       The conference agreement follows the House bill.

                            B. Depreciation

     1. Recovery period for depreciation of certain leasehold 
         improvements (sec. 211 of the House bill and sec. 168 of 
         the Code)


                              Present Law

     In general
       A taxpayer generally must capitalize the cost of property 
     used in a trade or business and recover such cost over time 
     through annual deductions for depreciation or amortization. 
     Tangible property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation by applying specific recovery 
     periods, placed-in-service conventions, and depreciation 
     methods to the cost of various types of depreciable property 
     (sec. 168). The cost of nonresidential real property is 
     recovered using the straight-line method of depreciation and 
     a recovery period of 39 years. Nonresidential real property 
     is subject to the mid-month placed-in-service convention. 
     Under the mid-month convention, the

[[Page H8480]]

     depreciation allowance for the first year property is placed 
     in service is based on the number of months the property was 
     in service, and property placed in service at any time during 
     a month is treated as having been placed in service in the 
     middle of the month.
     Depreciation of leasehold improvements
       Depreciation allowances for improvements made on leased 
     property are determined under MACRS, even if the MACRS 
     recovery period assigned to the property is longer than the 
     term of the lease.\42\ This rule applies regardless of 
     whether the lessor or the lessee places the leasehold 
     improvements in service.\43\ If a leasehold improvement 
     constitutes an addition or improvement to nonresidential real 
     property already placed in service, the improvement is 
     depreciated using the straight-line method over a 39-year 
     recovery period, beginning in the month the addition or 
     improvement was placed in service.\44\
---------------------------------------------------------------------------
     \42\ Sec. 168(i)(8). The Tax Reform Act of 1986 modified the 
     Accelerated Cost Recovery System (``ACRS'') to institute 
     MACRS. Prior to the adoption of ACRS by the Economic Recovery 
     Tax Act of 1981, taxpayers were allowed to depreciate the 
     various components of a building as separate assets with 
     separate useful lives. The use of component depreciation was 
     repealed upon the adoption of ACRS. The Tax Reform Act of 
     1986 also denied the use of component depreciation under 
     MACRS.
     \43\ Former sections 168(f)(6) and 178 provided that, in 
     certain circumstances, a lessee could recover the cost of 
     leasehold improvements made over the remaining term of the 
     lease. The Tax Reform Act of 1986 repealed these provisions.
     \44\ Secs. 168(b)(3), (c), (d)(2), and (i)(6). If the 
     improvement is characterized as tangible personal property, 
     ACRS or MACRS depreciation is calculated using the shorter 
     recovery periods, accelerated methods, and conventions 
     applicable to such property. The determination of whether 
     improvements are characterized as tangible personal property 
     or as nonresidential real property often depends on whether 
     or not the improvements constitute a ``structural component'' 
     of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)). 
     See, e.g., Metro National Corp v. Commissioner, 52 TCM (CCH) 
     1440 (1987); King Radio Corp Inc. v. U.S., 486 F.2d 1091 
     (10th Cir. 1973); Mallinckrodt, Inc. v. Commissioner, 778 
     F.2d 402 (8th Cir. 1985) (with respect to various leasehold 
     improvements).
---------------------------------------------------------------------------
     Qualified leasehold improvement property
       The Job Creation and Worker Assistance Act of 2002 \45\ 
     (``JCWAA''), as amended by JGTRRA, generally provides an 
     additional first-year depreciation deduction equal to either 
     30 percent or 50 percent of the adjusted basis of qualified 
     property placed in service before January 1, 2005. Qualified 
     property includes qualified leasehold improvement property. 
     For this purpose, qualified leasehold improvement property is 
     any improvement to an interior portion of a building that is 
     nonresidential real property, provided certain requirements 
     are met. The improvement must be made under or pursuant to a 
     lease either by the lessee (or sublessee), or by the lessor, 
     of that portion of the building to be occupied exclusively by 
     the lessee (or sublessee). The improvement must be placed in 
     service more than three years after the date the building was 
     first placed in service. Qualified leasehold improvement 
     property does not include any improvement for which the 
     expenditure is attributable to the enlargement of the 
     building, any elevator or escalator, any structural component 
     benefiting a common area, or the internal structural 
     framework of the building.
---------------------------------------------------------------------------
     \45\ Pub. L. No. 107-147, sec. 101 (2002), as amended by Pub. 
     L. No. 108-27, sec. 201 (2003).
---------------------------------------------------------------------------
     Treatment of dispositions of leasehold improvements
       A lessor of leased property that disposes of a leasehold 
     improvement that was made by the lessor for the lessee of the 
     property may take the adjusted basis of the improvement into 
     account for purposes of determining gain or loss if the 
     improvement is irrevocably disposed of or abandoned by the 
     lessor at the termination of the lease. This rule conforms 
     the treatment of lessors and lessees with respect to 
     leasehold improvements disposed of at the end of a term of 
     lease.


                               House Bill

       The House bill provides a statutory 15-year recovery period 
     for qualified leasehold improvement property placed in 
     service before January 1, 2006.\46\ The provision requires 
     that qualified leasehold improvement property be recovered 
     using the straight-line method.
---------------------------------------------------------------------------
     \46\ Qualified leasehold improvement property continues to be 
     eligible for the additional first-year depreciation deduction 
     under sec. 168(k).
---------------------------------------------------------------------------
       Qualified leasehold improvement property is defined as 
     under present law for purposes of the additional first-year 
     depreciation deduction,\47\ with the following modification. 
     If a lessor makes an improvement that qualifies as qualified 
     leasehold improvement property, such improvement does not 
     qualify as qualified leasehold improvement property to any 
     subsequent owner of such improvement. An exception to the 
     rule applies in the case of death and certain transfers of 
     property that qualify for non-recognition treatment.
---------------------------------------------------------------------------
     \47\ Sec. 168(k).
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective for 
     property placed in service after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     2. Recovery period for depreciation of certain restaurant 
         improvements (sec. 211 of the House bill and sec. 168 of 
         the Code)


                              Present Law

       A taxpayer generally must capitalize the cost of property 
     used in a trade or business and recover such cost over time 
     through annual deductions for depreciation or amortization. 
     Tangible property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation by applying specific recovery 
     periods, placed-in-service conventions, and depreciation 
     methods to the cost of various types of depreciable property 
     (sec. 168). The cost of nonresidential real property is 
     recovered using the straight-line method of depreciation and 
     a recovery period of 39 years. Nonresidential real property 
     is subject to the mid-month placed-in-service convention. 
     Under the mid-month convention, the depreciation allowance 
     for the first year property is placed in service is based on 
     the number of months the property was in service, and 
     property placed in service at any time during a month is 
     treated as having been placed in service in the middle of the 
     month.


                               House Bill

       The House bill provides a statutory 15-year recovery period 
     for qualified restaurant property placed in service before 
     January 1, 2006.\48\ For purposes of the provision, qualified 
     restaurant property means any improvement to a building if 
     such improvement is placed in service more than three years 
     after the date such building was first placed in service and 
     more than 50 percent of the building's square footage is 
     devoted to the preparation of, and seating for, on-premises 
     consumption of prepared meals. The provision requires that 
     qualified restaurant property be recovered using the 
     straight-line method.
---------------------------------------------------------------------------
     \48\ Qualified restaurant property would become eligible for 
     the additional first-year depreciation deduction under sec. 
     168(k) by virtue of the assigned 15-year recovery period.
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective for 
     property placed in service after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     3. Extended placed in service date for bonus depreciation for 
         certain aircraft (excluding aircraft used in the 
         transportation industry) (sec. 212 of the House bill, 
         sec. 622 of the Senate amendment, and sec. 168 of the 
         Code)


                              Present Law

     In general
       A taxpayer is allowed to recover, through annual 
     depreciation deductions, the cost of certain property used in 
     a trade or business or for the production of income. The 
     amount of the depreciation deduction allowed with respect to 
     tangible property for a taxable year is determined under the 
     modified accelerated cost recovery system (``MACRS''). Under 
     MACRS, different types of property generally are assigned 
     applicable recovery periods and depreciation methods. The 
     recovery periods applicable to most tangible personal 
     property range from three to 25 years. The depreciation 
     methods generally applicable to tangible personal property 
     are the 200-percent and 150-percent declining balance 
     methods, switching to the straight-line method for the 
     taxable year in which the depreciation deduction would be 
     maximized.
     Thirty-percent additional first year depreciation deduction
       JCWAA allows an additional first-year depreciation 
     deduction equal to 30 percent of the adjusted basis of 
     qualified property.\49\ The amount of the additional first-
     year depreciation deduction is not affected by a short 
     taxable year. The additional first-year depreciation 
     deduction is allowed for both regular tax and alternative 
     minimum tax purposes for the taxable year in which the 
     property is placed in service.\50\ The basis of the property 
     and the depreciation allowances in the placed-in-service year 
     and later years are appropriately adjusted to reflect the 
     additional first-year depreciation deduction. In addition, 
     there are generally no adjustments to the allowable amount of 
     depreciation for purposes of computing a taxpayer's 
     alternative minimum taxable income with respect to property 
     to which the provision applies. A taxpayer is allowed to 
     elect out of the additional first-year depreciation for any 
     class of property for any taxable year.\51\
---------------------------------------------------------------------------
     \49\ The additional first-year depreciation deduction is 
     subject to the general rules regarding whether an item is 
     deductible under section 162 or subject to capitalization 
     under section 263 or section 263A.
     \50\ However, the additional first-year depreciation 
     deduction is not allowed for purposes of computing earnings 
     and profits.
     \51\ A taxpayer may elect out of the 50-percent additional 
     first-year depreciation (discussed below) for any class of 
     property and still be eligible for the 30-percent additional 
     first-year depreciation.
---------------------------------------------------------------------------
       In order for property to qualify for the additional first-
     year depreciation deduction, it must meet all of the 
     following requirements. First, the property must be (1) 
     property to which MACRS applies with an applicable recovery 
     period of 20 years or less, (2) water utility property (as 
     defined in section 168(e)(5)), (3) computer software other 
     than computer software covered by section 197, or (4) 
     qualified leasehold improvement property (as defined in 
     section 168(k)(3)).\52\ Second, the

[[Page H8481]]

     original use \53\ of the property must commence with the 
     taxpayer on or after September 11, 2001. Third, the taxpayer 
     must acquire the property within the applicable time period. 
     Finally, the property must be placed in service before 
     January 1, 2005.
---------------------------------------------------------------------------
     \52\ A special rule precludes the additional first-year 
     depreciation deduction for any property that is required to 
     be depreciated under the alternative depreciation system of 
     MACRS.
     \53\ The term ``original use'' means the first use to which 
     the property is put, whether or not such use corresponds to 
     the use of such property by the taxpayer.
     If, in the normal course of its business, a taxpayer sells 
     fractional interests in property to unrelated third parties, 
     then the original use of such property begins with the first 
     user of each fractional interest (i.e., each fractional owner 
     is considered the original user of its proportionate share of 
     the property).
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       An extension of the placed-in-service date of one year 
     (i.e., January 1, 2006) is provided for certain property with 
     a recovery period of ten years or longer and certain 
     transportation property.\54\ Transportation property is 
     defined as tangible personal property used in the trade or 
     business of transporting persons or property.
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     \54\ In order for property to qualify for the extended 
     placed-in-service date, the property must be subject to 
     section 263A and have an estimated production period 
     exceeding two years or an estimated production period 
     exceeding one year and a cost exceeding $1 million.
---------------------------------------------------------------------------
       The applicable time period for acquired property is (1) 
     after September 10, 2001 and before January 1, 2005, but only 
     if no binding written contract for the acquisition is in 
     effect before September 11, 2001, or (2) pursuant to a 
     binding written contract which was entered into after 
     September 10, 2001, and before January 1, 2005.\55\ With 
     respect to property that is manufactured, constructed, or 
     produced by the taxpayer for use by the taxpayer, the 
     taxpayer must begin the manufacture, construction, or 
     production of the property after September 10, 2001. For 
     property eligible for the extended placed-in-service date, a 
     special rule limits the amount of costs eligible for the 
     additional first year depreciation. With respect to such 
     property, only the portion of the basis that is properly 
     attributable to the costs incurred before January 1, 2005 
     (``progress expenditures'') is eligible for the additional 
     first-year depreciation.\56\
---------------------------------------------------------------------------
     \55\ Property does not fail to qualify for the additional 
     first-year depreciation merely because a binding written 
     contract to acquire a component of the property is in effect 
     prior to September 11, 2001.
     \56\ For purposes of determining the amount of eligible 
     progress expenditures, it is intended that rules similar to 
     sec. 46(d)(3) as in effect prior to the Tax Reform Act of 
     1986 shall apply.
---------------------------------------------------------------------------
     Fifty-percent additional first year depreciation
       JGTRRA provides an additional first-year depreciation 
     deduction equal to 50 percent of the adjusted basis of 
     qualified property. Qualified property is defined in the same 
     manner as for purposes of the 30-percent additional first-
     year depreciation deduction provided by the JCWAA except that 
     the applicable time period for acquisition (or self 
     construction) of the property is modified. Property eligible 
     for the 50-percent additional first-year depreciation 
     deduction is not eligible for the 30-percent additional 
     first-year depreciation deduction.
       In order to qualify, the property must be acquired after 
     May 5, 2003 and before January 1, 2005, and no binding 
     written contract for the acquisition can be in effect before 
     May 6, 2003.\57\ With respect to property that is 
     manufactured, constructed, or produced by the taxpayer for 
     use by the taxpayer, the taxpayer must begin the manufacture, 
     construction, or production of the property after May 5, 
     2003. For property eligible for the extended placed-in-
     service date (i.e., certain property with a recovery period 
     of ten years or longer and certain transportation property), 
     a special rule limits the amount of costs eligible for the 
     additional first-year depreciation. With respect to such 
     property, only progress expenditures properly attributable to 
     the costs incurred before January 1, 2005 are eligible for 
     the additional first-year depreciation.\58\
---------------------------------------------------------------------------
     \57\ Property does not fail to qualify for the additional 
     first-year depreciation merely because a binding written 
     contract to acquire a component of the property is in effect 
     prior to May 6, 2003. However, no 50-percent additional 
     first-year depreciation is permitted on any such component. 
     No inference is intended as to the proper treatment of 
     components placed in service under the 30-percent additional 
     first-year depreciation provided by the JCWAA.
     \58\ For purposes of determining the amount of eligible 
     progress expenditures, it is intended that rules similar to 
     sec. 46(d)(3) as in effect prior to the Tax Reform Act of 
     1986 shall apply.
---------------------------------------------------------------------------


                               House Bill

       Due to the extended production period, the House bill 
     provides criteria under which certain non-commercial aircraft 
     can qualify for the extended placed-in-service date. 
     Qualifying aircraft are eligible for the additional first-
     year depreciation deduction if placed in service before 
     January 1, 2006. In order to qualify, the aircraft must:
       (1) Be acquired by the taxpayer during the applicable time 
     period as under present law;
       (2) Meet the appropriate placed-in-service date 
     requirements;
       (3) Not be tangible personal property used in the trade or 
     business of transporting persons or property (except for 
     agricultural or firefighting purposes);
       (4) Be purchased \59\ by a purchaser who, at the time of 
     the contract for purchase, has made a nonrefundable deposit 
     of the lesser of ten percent of the cost or $100,000; and
---------------------------------------------------------------------------
     \59\ For this purpose, it is intended that the term 
     ``purchase'' be interpreted as it is defined in sec. 
     179(d)(2).
---------------------------------------------------------------------------
       (5) Have an estimated production period exceeding four 
     months and a cost exceeding $200,000.
       Effective date.--The House bill provision is effective as 
     if included in the amendments made by section 101 of JCWAA, 
     which applies to property placed in service after September 
     10, 2001. However, because the property described by the 
     provision qualifies for the additional first-year 
     depreciation deduction under present law if placed in service 
     prior to January 1, 2005, the provision will modify the 
     treatment only of property placed in service during calendar 
     year 2005.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     for the effective date.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after the date of enactment.


                          Conference Agreement

       The conference agreement follows the House bill.
     4. Special placed in service rule for bonus depreciation for 
         certain property subject to syndication (sec. 213 of the 
         House bill, sec. 621 of the Senate amendment, and sec. 
         168 of the Code)


                              Present Law

       Section 101 of JCWAA provides generally for 30-percent 
     additional first-year depreciation, and provides a binding 
     contract rule in determining property that qualifies for it. 
     The requirements that must be satisfied in order for property 
     to qualify include that (1) the original use of the property 
     must commence with the taxpayer on or after September 11, 
     2001, and (2) the taxpayer must acquire the property (i) 
     after September 10, 2001 and before January 1, 2005, but only 
     if no binding written contract for the acquisition is in 
     effect before September 11, 2001, or (ii) pursuant to a 
     binding contract which was entered into after September 10, 
     2001, and before January 1, 2005. In addition, JCWAA provides 
     a special rule in the case of certain leased property. In the 
     case of any property that is originally placed in service by 
     a person and that is sold to the taxpayer and leased back to 
     such person by the taxpayer within three months after the 
     date that the property was placed in service, the property is 
     treated as originally placed in service by the taxpayer not 
     earlier than the date that the property is used under the 
     leaseback. JCWAA did not specifically address the syndication 
     of a lease by the lessor.
       The Working Families Tax Relief Act of 2004 (``H.R. 1308'') 
     included a technical correction regarding the syndication of 
     a lease by the lessor. The technical correction provides that 
     if property is originally placed in service by a lessor 
     (including by operation of the special rule for self-
     constructed property), such property is sold within three 
     months after the date that the property was placed in 
     service, and the user of such property does not change, then 
     the property is treated as originally placed in service by 
     the taxpayer not earlier than the date of such sale.
       JGTRRA provides an additional first-year depreciation 
     deduction equal to 50 percent of the adjusted basis of 
     qualified property. Qualified property is defined in the same 
     manner as for purposes of the 30-percent additional first-
     year depreciation deduction provided by the JCWAA except that 
     the applicable time period for acquisition (or self 
     construction) of the property is modified. Property with 
     respect to which the 50-percent additional first-year 
     depreciation deduction is claimed is not also eligible for 
     the 30-percent additional first-year depreciation deduction. 
     In order to qualify, the property must be acquired after May 
     5, 2003 and before January 1, 2005, and no binding written 
     contract for the acquisition can be in effect before May 6, 
     2003. With respect to property that is manufactured, 
     constructed, or produced by the taxpayer for use by the 
     taxpayer, the taxpayer must begin the manufacture, 
     construction, or production of the property after May 5, 
     2003.


                            House Bill \60\
---------------------------------------------------------------------------

     \60\ The House bill predated the enactment of H.R. 1308, Pub. 
     L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of technical corrections.
---------------------------------------------------------------------------
       The House bill provides that if property is originally 
     placed in service by a lessor (including by operation of the 
     special rule for self-constructed property), such property is 
     sold within three months after the date that the property was 
     placed in service, and the user of such property does not 
     change, then the property is treated as originally placed in 
     service by the taxpayer not earlier than the date of such 
     sale. The provision also provides a special rule in the case 
     of multiple units of property subject to the same lease. In 
     such cases, property will qualify as placed in service on the 
     date of sale if it is sold within three months after the 
     final unit is placed in service, so long as the period 
     between the time the first and last units are placed in 
     service does not exceed 12 months.
       Effective date.--The House bill provision is generally 
     effective as if included in the amendments made by section 
     101 of JCWAA (i.e., generally for property placed in service 
     after September 10, 2001, in taxable years ending after that 
     date). However, the special rule in the case of multiple 
     units of property subject to the same lease applies to 
     property sold after June 4, 2004.

[[Page H8482]]

                         Senate Amendment \61\
---------------------------------------------------------------------------

     \61\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of technical 
     corrections.
---------------------------------------------------------------------------
       The Senate amendment is the same as the House bill, except 
     for the effective date.
       Effective date.--The Senate amendment is effective for 
     sales occurring after the date of enactment.


                          Conference Agreement

       The conference agreement follows the House bill with the 
     following modification. The clauses that were duplicative of 
     the provisions enacted as part of H.R. 1308 were removed. 
     Thus, the conference agreement provision provides only for 
     the special rule in the case of multiple units of property 
     subject to the same lease.

               C. S Corporation Reform and Simplification

     (Secs. 221-231 of the House bill, sec. 654 of the Senate 
         amendmentand secs. 1361-1379 and 4975 of the Code)
       In general, an S corporation is not subject to corporate-
     level income tax on its items of income and loss. Instead, an 
     S corporation passes through its items of income and loss to 
     its shareholders. The shareholders take into account 
     separately their shares of these items on their individual 
     income tax returns. To prevent double taxation of these items 
     when the stock is later disposed of, each shareholder's basis 
     in the stock of the S corporation is increased by the amount 
     included in income (including tax-exempt income) and is 
     decreased by the amount of any losses (including 
     nondeductible losses) taken into account. A shareholder's 
     loss may be deducted only to the extent of his or her basis 
     in the stock or debt of the S corporation. To the extent a 
     loss is not allowed due to this limitation, the loss 
     generally is carried forward with respect to the shareholder.
     1. Members of family treated as one shareholder


                              Present Law

       A small business corporation may elect to be an S 
     corporation with the consent of all its shareholders, and may 
     terminate its election with the consent of shareholders 
     holding more than 50 percent of the stock. A ``small business 
     corporation'' is defined as a domestic corporation which is 
     not an ineligible corporation and which has (1) no more than 
     75 shareholders, all of whom are individuals (and certain 
     trusts, estates, charities, and qualified retirement plans) 
     \62\ who are citizens or residents of the United States, and 
     (2) only one class of stock. For purposes of the 75-
     shareholder limitation, a husband and wife are treated as one 
     shareholder. An ``ineligible corporation'' means a 
     corporation that is a financial institution using the reserve 
     method of accounting for bad debts, an insurance company, a 
     corporation electing the benefits of the Puerto Rico and 
     possessions tax credit, or a Domestic International Sales 
     Corporation (``DISC'') or former DISC.
---------------------------------------------------------------------------
     \62\ If a qualified retirement plan (other than an employee 
     stock ownership plan) or a charity holds stock in an S 
     corporation, the interest held is treated as an interest in 
     an unrelated trade or business, and the plan or charity's 
     share of the S corporation's items of income, loss, or 
     deduction, and gain or loss on the disposition of the S 
     corporation stock, are taken into account in computing 
     unrelated business taxable income.
---------------------------------------------------------------------------


                               House Bill

       The bill provides an election to allow all members of a 
     family be treated as one shareholder in determining the 
     number of shareholders in the corporation (for purposes of 
     section 1361(b)(1)(A)).
       A family is defined as the common ancestor and all lineal 
     descendants of the common ancestor, as well as the spouses, 
     or former spouses, of these individuals. An individual shall 
     not be a common ancestor if, as of the later of the time of 
     the election or the effective date of this provision, the 
     individual is more than three generations removed from the 
     youngest generation of shareholders who would (but for this 
     rule) be members of the family. For purposes of this rule, a 
     spouse or former spouse is treated as in the same generation 
     as the person to whom the individual is (or was) married.
       Except as provided by Treasury regulations, the election 
     for a family may be made by any family member and remains in 
     effect until terminated.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill, except that the number of generations is 
     increased from three to six.
       The conferees wish to clarify that members of a family may 
     be treated as one shareholder, for the purpose of determining 
     the number of shareholders, whether a family member holds 
     stock directly or is treated as a shareholder (under section 
     1361(c)(2)(B)) by reason being a beneficiary of an electing 
     small business trust or qualified subchapter S trust.
     2. Increase in number of eligible shareholders to 100


                              Present Law

       A small business corporation may elect to be an S 
     corporation with the consent of all its shareholders, and may 
     terminate its election with the consent of shareholders 
     holding more than 50 percent of the stock. A ``small business 
     corporation'' is defined as a domestic corporation which is 
     not an ineligible corporation and which has (1) no more than 
     75 shareholders, all of whom are individuals (and certain 
     trusts, estates, charities, and qualified retirement plans) 
     \63\ who are citizens or residents of the United States, and 
     (2) only one class of stock. For purposes of the 75-
     shareholder limitation, a husband and wife are treated as one 
     shareholder. An ``ineligible corporation'' means a 
     corporation that is a financial institution using the reserve 
     method of accounting for bad debts, an insurance company, a 
     corporation electing the benefits of the Puerto Rico and 
     possessions tax credit, or a Domestic International Sales 
     Corporation (``DISC'') or former DISC.
---------------------------------------------------------------------------
     \63\ If a qualified retirement plan (other than an employee 
     stock ownership plan) or a charity holds stock in an S 
     corporation, the interest held is treated as an interest in 
     an unrelated trade or business, and the plan or charity's 
     share of the S corporation's items of income, loss, or 
     deduction, and gain or loss on the disposition of the S 
     corporation stock, are taken into account in computing 
     unrelated business taxable income.
---------------------------------------------------------------------------


                               House Bill

       The bill increases the maximum number of eligible 
     shareholders from 75 to 100.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.
     3. Expansion of bank S corporation eligible shareholders to 
         include IRAs


                              Present Law

       An individual retirement account (``IRA'') is a trust or 
     account established for the exclusive benefit of an 
     individual and his or her beneficiaries. There are two 
     general types of IRAs: traditional IRAs, to which both 
     deductible and nondeductible contributions may be made, and 
     Roth IRAs, contributions to which are not deductible. Amounts 
     held in a traditional IRA are includible in income when 
     withdrawn (except to the extent the withdrawal is a return of 
     nondeductible contributions). Amounts held in a Roth IRA that 
     are withdrawn as a qualified distribution are not includible 
     in income; distributions from a Roth IRA that are not 
     qualified distributions are includible in income to the 
     extent attributable to earnings. A qualified distribution is 
     a distribution that (1) is made after the five-taxable year 
     period beginning with the first taxable year for which the 
     individual made a contribution to a Roth IRA, and (2) is made 
     after attainment of age 59\1/2\, on account of death or 
     disability, or is made for first-time homebuyer expenses of 
     up to $10,000.
       Under present law, an IRA cannot be a shareholder of an S 
     corporation.
       Certain transactions are prohibited between an IRA and the 
     individual for whose benefit the IRA is established, 
     including a sale of property by the IRA to the individual. If 
     a prohibited transaction occurs between an IRA and the IRA 
     beneficiary, the account ceases to be an IRA, and an amount 
     equal to the fair market value of the assets held in the IRA 
     is deemed distributed to the beneficiary.


                               House Bill

       The bill allows an IRA (including a Roth IRA) to be a 
     shareholder of a bank that is an S corporation, but only to 
     the extent of bank stock held by the IRA on the date of 
     enactment of the provision.\64\
---------------------------------------------------------------------------
     \64\ Under the bill, the present-law rules treating S 
     corporation stock held by a qualified retirement plan (other 
     than an employee stock ownership plan) or a charity as an 
     interest in an unrelated trade or business apply to an IRA 
     holding S corporation stock of a bank.
---------------------------------------------------------------------------
       The bill also provides an exemption from prohibited 
     transaction treatment for the sale by an IRA to the IRA 
     beneficiary of bank stock held by the IRA on the date of 
     enactment of the provision. Under the bill, a sale is not a 
     prohibited transaction if: (1) the sale is pursuant to an S 
     corporation election by the bank; (2) the sale is for fair 
     market value (as established by an independent appraiser) and 
     is on terms at least as favorable to the IRA as the terms 
     would be on a sale to an unrelated party; (3) the IRA incurs 
     no commissions, costs, or other expenses in connection with 
     the sale; and (4) the stock is sold in a single transaction 
     for cash not later than 120 days after the S corporation 
     election is made.
       Effective date.--The provision takes effect on date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.
     4. Disregard of unexercised powers of appointment in 
         determining potential current beneficiaries of ESBT


                              Present Law

       An electing small business trust (``ESBT'') holding stock 
     in an S corporation is taxed at the maximum individual tax 
     rate on its ratable share of items of income, deduction,

[[Page H8483]]

     gain, or loss passing through from the S corporation. An ESBT 
     generally is an electing trust all of whose beneficiaries are 
     eligible S corporation shareholders. For purposes of 
     determining the maximum number of shareholders, each person 
     who is entitled to receive a distribution from the trust 
     (``potential current beneficiary'') is treated as a 
     shareholder during the period the person may receive a 
     distribution from the trust.
       An ESBT has 60 days to dispose of the S corporation stock 
     after an ineligible shareholder becomes a potential current 
     beneficiary to avoid disqualification.


                               House Bill

       Under the bill, powers of appointment to the extent not 
     exercised are disregarded in determining the potential 
     current beneficiaries of an electing small business trust.
       The bill increases the period during which an ESBT can 
     dispose of S corporation stock, after an ineligible 
     shareholder becomes a potential current beneficiary, from 60 
     days to one year.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.
     5. Transfers of suspended losses incident to divorce, etc.


                              Present Law

       Under present law, any loss or deduction that is not 
     allowed to a shareholder of an S corporation, because the 
     loss exceeds the shareholder's basis in stock and debt of the 
     corporation, is treated as incurred by the S corporation with 
     respect to that shareholder in the subsequent taxable year.


                               House Bill

       Under the bill, if a shareholder's stock in an S 
     corporation is transferred to a spouse, or to a former spouse 
     incident to a divorce, any suspended loss or deduction with 
     respect to that stock is treated as incurred by the 
     corporation with respect to the transferee in the subsequent 
     taxable year.
       Effective date.--The provision applies to transfers after 
     December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.
     6. Use of passive activity loss and at-risk amounts by 
         qualified subchapter S trust income beneficiaries


                              Present Law

       Under present law, the share of income of an S corporation 
     whose stock is held by a qualified subchapter S trust 
     (``QSST''), with respect to which the beneficiary makes an 
     election, is taxed to the beneficiary. However, the trust, 
     and not the beneficiary, is treated as the owner of the S 
     corporation stock for purposes of determining the tax 
     consequences of the disposition of the S corporation stock by 
     the trust. A QSST generally is a trust with one individual 
     income beneficiary for the life of the beneficiary.


                               House Bill

       Under the bill, the beneficiary of a qualified subchapter S 
     trust is generally allowed to deduct suspended losses under 
     the at-risk rules and the passive loss rules when the trust 
     disposes of the S corporation stock.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.
     7. Exclusion of investment securities income from passive 
         investment income test for bank S corporations


                              Present Law

       An S corporation is subject to corporate-level tax, at the 
     highest corporate tax rate, on its excess net passive income 
     if the corporation has (1) accumulated earnings and profits 
     at the close of the taxable year and (2) gross receipts more 
     than 25 percent of which are passive investment income.
       Excess net passive income is the net passive income for a 
     taxable year multiplied by a fraction, the numerator of which 
     is the amount of passive investment income in excess of 25 
     percent of gross receipts and the denominator of which is the 
     passive investment income for the year. Net passive income is 
     defined as passive investment income reduced by the allowable 
     deductions that are directly connected with the production of 
     that income. Passive investment income generally means gross 
     receipts derived from royalties, rents, dividends, interest, 
     annuities, and sales or exchanges of stock or securities (to 
     the extent of gains). Passive investment income generally 
     does not include interest on accounts receivable, gross 
     receipts that are derived directly from the active and 
     regular conduct of a lending or finance business, 
     gross receipts from certain liquidations, or gain or loss 
     from any section 1256 contract (or related property) of an 
     options or commodities dealer.\65\
---------------------------------------------------------------------------
     \65\ Notice 97-5, 1997-1 C.B. 352, sets forth guidance 
     relating to passive investment income on banking assets.
---------------------------------------------------------------------------
       In addition, an S corporation election is terminated 
     whenever the S corporation has accumulated earnings and 
     profits at the close of each of three consecutive taxable 
     years and has gross receipts for each of those years more 
     than 25 percent of which are passive investment income.


                               House Bill

       The bill provides that, in the case of a bank (as defined 
     in section 581), a bank holding company (as defined in 
     section 2(a) of the Bank Holding Company Act of 1956), or a 
     financial holding company (as defined in section 2(p) of that 
     Act), interest income and dividends on assets required to be 
     held by the bank or holding company are not treated as 
     passive investment income for purposes of the S corporation 
     passive investment income rules.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.
     8. Treatment of bank director shares


                              Present Law

       An S corporation may have no more than 75 shareholders and 
     may have only one outstanding class of stock.\66\
---------------------------------------------------------------------------
     \66\ Another provision of the bill increases the maximum 
     number of shareholders to 100.
---------------------------------------------------------------------------
       An S corporation has one class of stock if all outstanding 
     shares of stock confer identical rights to distribution and 
     liquidation proceeds. Differences in voting rights are 
     disregarded.\67\
---------------------------------------------------------------------------
     \67\ Sec. 1361(c)(4). Treasury regulations provide that buy-
     sell and redemption agreements are disregarded in determining 
     whether a corporation's outstanding shares confer identical 
     distribution and liquidation rights unless (1) a principal 
     purpose of the agreement is to circumvent the one class of 
     stock requirement and (2) the agreement establishes a 
     purchase price that, at the time the agreement is entered 
     into, is significantly in excess of, or below, the fair 
     market value of the stock. Treas. Reg. sec. 1.1361-1(l).
---------------------------------------------------------------------------
       National banking law requires that a director of a national 
     bank own stock in the bank and that a bank have at least five 
     directors.\68\ A number of States have similar requirements 
     for State-chartered banks. Apparently, it is common practice 
     for a bank director to enter into an agreement under which 
     the bank (or a holding company) will reacquire the stock upon 
     the director's ceasing to hold the office of director, at the 
     price paid by the director for the stock.\69\
---------------------------------------------------------------------------
     \68\ 12 U.S.C. secs. 71-72.
     \69\ See Private Letter Ruling 200217048 (January 24, 2002) 
     describing such an agreement and holding that it creates a 
     second class of stock. Nonetheless, the ruling concluded that 
     the election to be an S corporation was inadvertently invalid 
     and that an amended agreement did not create a second class 
     of stock so that the corporation's election was validated.
---------------------------------------------------------------------------


                               House Bill

       Under the bill, restricted bank director stock is not taken 
     into account as outstanding stock in applying the provisions 
     of subchapter S. Thus, the stock is not treated as a second 
     class of stock; a director is not treated as a shareholder of 
     the S corporation by reason of the stock; the stock is 
     disregarded in allocating items of income, loss, etc. among 
     the shareholders; and the stock is not treated as outstanding 
     for purposes of determining whether an S corporation holds 
     100 percent of the stock of a qualified subchapter S 
     subsidiary.
       Restricted bank director stock is stock in a bank (as 
     defined in section 581), a bank holding company (within the 
     meaning of section 2(a) of the Bank Holding Company Act of 
     1956), or a financial holding company (as defined in section 
     2(p) of that Act), registered with the Federal Reserve 
     System, if the stock is required to be held by an individual 
     under applicable Federal or State law in order to permit the 
     individual to serve as a director of the bank or holding 
     company and which is subject to an agreement with the bank or 
     holding company (or corporation in control of the bank or 
     company) pursuant to which the holder is required to sell the 
     stock back upon ceasing to be a director at the same price 
     the individual acquired the stock.
       A distribution (other than a payment in exchange for the 
     stock) with respect to the restricted stock is includible in 
     the gross income of the director and is deductible by the S 
     corporation for the taxable year that includes the last day 
     of the director's taxable year in which the distribution is 
     included in income.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the provision in 
     the House bill.
     9. Relief from inadvertently invalid qualified subchapter S 
         subsidiary elections and terminations


                              Present Law

       Under present law, inadvertent invalid subchapter S 
     elections and terminations may be waived.


                               House Bill

       The bill allows inadvertent invalid qualified subchapter S 
     subsidiary elections and terminations to be waived by the 
     IRS.

[[Page H8484]]

       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill, effective for elections and terminations after 
     December 31, 2004.
     10. Information returns for qualified subchapter S 
         subsidiaries


                              Present Law

       Under present law, a corporation all of whose stock is held 
     by an S corporation is treated as a qualified subchapter S 
     subsidiary if the S corporation so elects. The assets, 
     liabilities, and items of income, deduction, and credit of 
     the subsidiary are treated as assets, liabilities, and items 
     of the parent S corporation.


                               House Bill

       The bill provides authority to the Secretary to provide 
     guidance regarding information returns of qualified 
     subchapter S subsidiaries.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill.
     11. Repayment of loans for qualifying employer securities


                              Present Law

       An employee stock ownership plan (an ``ESOP'') is a defined 
     contribution plan that is designated as an ESOP and is 
     designed to invest primarily in qualifying employer 
     securities. For purposes of ESOP investments, a ``qualifying 
     employer security'' is defined as: (1) publicly traded common 
     stock of the employer or a member of the same controlled 
     group; (2) if there is no such publicly traded common stock, 
     common stock of the employer (or member of the same 
     controlled group) that has both voting power and dividend 
     rights at least as great as any other class of common stock; 
     or (3) noncallable preferred stock that is convertible into 
     common stock described in (1) or (2) and that meets certain 
     requirements. In some cases, an employer may design a class 
     of preferred stock that meets these requirements and that is 
     held only by the ESOP. Special rules apply to ESOPs that do 
     not apply to other types of qualified retirement plans, 
     including a special exemption from the prohibited transaction 
     rules.
       Certain transactions between an employee benefit plan and a 
     disqualified person, including the employer maintaining the 
     plan, are prohibited transactions that result in the 
     imposition of an excise tax.\70\ Prohibited transactions 
     include, among other transactions, (1) the sale, exchange or 
     leasing of property between a plan and a disqualified person, 
     (2) the lending of money or other extension of credit between 
     a plan and a disqualified person, and (3) the transfer to, or 
     use by or for the benefit of, a disqualified person of the 
     income or assets of the plan. However, certain transactions 
     are exempt from prohibited transaction treatment, including 
     certain loans to enable an ESOP to purchase qualifying 
     employer securities.\71\ In such a case, the employer 
     securities purchased with the loan proceeds are generally 
     pledged as security for the loan. Contributions to the ESOP 
     and dividends paid on employer securities held by the ESOP 
     are used to repay the loan. The employer securities are held 
     in a suspense account and released for allocation to 
     participants' accounts as the loan is repaid.
---------------------------------------------------------------------------
     \70\ Sec. 4975.
     \71\ Sec. 4975(d)(3). An ESOP that borrows money to purchase 
     employer stock is referred to as a ``leveraged'' ESOP.
---------------------------------------------------------------------------
       A loan to an ESOP is exempt from prohibited transaction 
     treatment if the loan is primarily for the benefit of the 
     participants and their beneficiaries, the loan is at a 
     reasonable rate of interest, and the collateral given to a 
     disqualified person consists of only qualifying employer 
     securities. No person entitled to payments under the loan can 
     have the right to any assets of the ESOP other than (1) 
     collateral given for the loan, (2) contributions made to the 
     ESOP to meet its obligations on the loan, and (3) earnings 
     attributable to the collateral and the investment of 
     contributions described in (2).\72\ In addition, the payments 
     made on the loan by the ESOP during a plan year cannot exceed 
     the sum of those contributions and earnings during the 
     current and prior years, less loan payments made in prior 
     years.
---------------------------------------------------------------------------
     \72\ Treas. Reg. sec. 54.4975-7(b)(5).
---------------------------------------------------------------------------
       An ESOP of a C corporation is not treated as violating the 
     qualification requirements of the Code or as engaging in a 
     prohibited transaction merely because, in accordance with 
     plan provisions, a dividend paid with respect to qualifying 
     employer securities held by the ESOP is used to make payments 
     on a loan (including payments of interest as well as 
     principal) that was used to acquire the employer securities 
     (whether or not allocated to participants).\73\ In the case 
     of a dividend paid with respect to any employer security that 
     is allocated to a participant, this relief does not apply 
     unless the plan provides that employer securities with a fair 
     market value of not less than the amount of the dividend is 
     allocated to the participant for the year which the dividend 
     would have been allocated to the participant.\74\
---------------------------------------------------------------------------
     \73\ Sec. 404(k)(5)(B).
     \74\ Sec. 404(k)(2)(B).
---------------------------------------------------------------------------
       Effective for taxable years beginning after December 31, 
     1997, a qualified retirement plan (including an ESOP) may be 
     a shareholder of an S corporation.\75\ As a result, an S 
     corporation may maintain an ESOP.
---------------------------------------------------------------------------
     \75\ Sec. 1361(c)(6).
---------------------------------------------------------------------------


                               House Bill

       Under the provision, an ESOP maintained by an S corporation 
     is not treated as violating the qualification requirements of 
     the Code or as engaging in a prohibited transaction merely 
     because, in accordance with plan provisions, a distribution 
     made with respect to S corporation stock that constitutes 
     qualifying employer securities held by the ESOP is used to 
     make payments on a loan that was used to acquire the 
     securities (whether or not allocated to participants). This 
     relief does not apply in the case of a distribution with 
     respect to S corporation stock that is allocated to a 
     participant unless the plan provides that stock with a fair 
     market value of not less than the amount of such distribution 
     is allocated to the participant for the year which the 
     distribution would have been allocated to the participant.
       Effective date.--The provision is effective for 
     distributions made with respect to S corporation stock after 
     December 31, 2004.


                            Senate Amendment

       The Senate amendment is the same as House bill (other than 
     the effective date).
       Effective date.--The provision is effective on January 1, 
     1998.


                          Conference Agreement

       The conference agreement contains the provision in the 
     House bill and Senate amendment, with a modification of the 
     effective date. Thus, an ESOP maintained by an S corporation 
     is not treated as violating the qualification requirements of 
     the Code or as engaging in a prohibited transaction merely 
     because, in accordance with plan provisions, a distribution 
     made with respect to S corporation stock that constitutes 
     qualifying employer securities held by the ESOP is used to 
     make payments on a loan (including payments of interest as 
     well as principal) that was used to acquire the securities 
     (whether or not allocated to participants). This relief does 
     not apply in the case of a distribution with respect to S 
     corporation stock that is allocated to a participant unless 
     the plan provides that stock with a fair market value of not 
     less than the amount of such distribution is allocated to the 
     participant for the year which the distribution would have 
     been allocated to the participant.
       Effective date.--The provision is effective for 
     distributions made with respect to S corporation stock after 
     December 31, 1997.

                   D. Alternative Minimum Tax Relief

     1. Repeal limitation on use of foreign tax credit (sec. 241 
         of the House bill, sec. 203 of the Senate amendment, and 
         sec. 59 of the Code)


                              Present Law

     In general
       Under present law, taxpayers are subject to an alternative 
     minimum tax (``AMT''), which is payable, in addition to all 
     other tax liabilities, to the extent that it exceeds the 
     taxpayer's regular income tax liability. The tax is imposed 
     at a flat rate of 20 percent, in the case of corporate 
     taxpayers, on alternative minimum taxable income (``AMTI'') 
     in excess of an exemption amount that phases out. AMTI is the 
     taxpayer's taxable income increased for certain tax 
     preferences and adjusted by determining the tax treatment of 
     certain items in a manner that limits the tax benefits 
     resulting from the regular tax treatment of such items.
     Foreign tax credit
       Taxpayers are permitted to reduce their AMT liability by an 
     AMT foreign tax credit. The AMT foreign tax credit for a 
     taxable year is determined under principles similar to those 
     used in computing the regular tax foreign tax credit, except 
     that (1) the numerator of the AMT foreign tax credit 
     limitation fraction is foreign source AMTI and (2) the 
     denominator of that fraction is total AMTI. Taxpayers may 
     elect to use as their AMT foreign tax credit limitation 
     fraction the ratio of foreign source regular taxable income 
     to total AMTI.
       The AMT foreign tax credit for any taxable year generally 
     may not offset a taxpayer's entire pre-credit AMT. Rather, 
     the AMT foreign tax credit is limited to 90 percent of AMT 
     computed without any AMT net operating loss deduction and the 
     AMT foreign tax credit. For example, assume that a 
     corporation has $10 million of AMTI, has no AMT net operating 
     loss deduction, and has no regular tax liability. In the 
     absence of the AMT foreign tax credit, the corporation's tax 
     liability would be $2 million. Accordingly, the AMT foreign 
     tax credit cannot be applied to reduce the taxpayer's tax 
     liability below $200,000. Any unused AMT foreign tax credit 
     may be carried back two years and carried forward five years 
     for use against AMT in those years under the principles of 
     the foreign tax credit carryback and carryover rules set 
     forth in section 904(c).


                               House Bill

       The House bill repeals the 90-percent limitation on the 
     utilization of the AMT foreign tax credit.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.

[[Page H8485]]

                            Senate Amendment

       Same as House bill.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill and Senate amendment.
     2. Expansion of exemption from alternative minimum tax for 
         small corporations (sec. 242 of the House bill and sec. 
         55 of the Code)


                              Present Law

       Corporations with average gross receipts of less than $7.5 
     million for the prior three taxable years are exempt from the 
     corporate AMT. The $7.5 million threshold is reduced to $5 
     million for the corporation's first 3-taxable year period.


                               House Bill

       The House bill increases the amount of average gross 
     receipts that an exempt corporation may receive from $7.5 
     million to $20 million.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the provision in 
     the House bill.
     3. Coordinate farmer and fisherman income averaging and the 
         alternative minimum tax (sec. 243 of the House bill and 
         secs. 55 and 1301 of the Code)


                              Present Law

       An individual taxpayer engaged in a farming business (as 
     defined by section 263A(e)(4)) may elect to compute his or 
     her current year regular tax liability by averaging, over the 
     prior three-year period, all or portion of his or her taxable 
     income from the trade or business of farming. Because farmer 
     income averaging reduces the regular tax liability, the AMT 
     may be increased. Thus, the benefits of farmer income 
     averaging may be reduced or eliminated for farmers subject to 
     the AMT.


                               House Bill

       The House bill provides that, in computing AMT, a farmer's 
     regular tax liability is determined without regard to farmer 
     income averaging. Thus, a farmer receives the full benefit of 
     income averaging because averaging reduces the regular tax 
     while the AMT (if any) remains unchanged.
       Effective date.--The provision applies to taxable years 
     applies to taxable years beginning after December 31, 2003.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement extends the benefits of income 
     averaging to fishermen. The provision also includes the 
     provision in the House bill relating to the AMT, applicable 
     to both farmers and fishermen.
       Effective date.--Taxable years beginning after December 31, 
     2003.

         E. Restructuring of Incentives for Alcohol Fuels, Etc.

     1. Incentives for alcohol and biodiesel fuels (secs. 251 and 
         252 of the House bill, sec. 861 of the Senate amendment, 
         and secs. 4041, 4081, 4091, 6427, 9503 and new section 
         6426 of the Code)


                              Present Law

     Alcohol fuels income tax credit
       The alcohol fuels credit is the sum of three credits: the 
     alcohol mixture credit, the alcohol credit, and the small 
     ethanol producer credit. Generally, the alcohol fuels credit 
     expires after December 31, 2007.\76\
---------------------------------------------------------------------------
     \76\ The alcohol fuels credit is unavailable when, for any 
     period before January 1, 2008, the tax rates for gasoline and 
     diesel fuels drop to 4.3 cents per gallon.
---------------------------------------------------------------------------
       A taxpayer (generally a petroleum refiner, distributor, or 
     marketer) who mixes ethanol with gasoline (or a special fuel 
     \77\) is an ``ethanol blender.'' Ethanol blenders are 
     eligible for an income tax credit of 52 cents per gallon of 
     ethanol used in the production of a qualified mixture (the 
     ``alcohol mixture credit''). A qualified mixture means a 
     mixture of alcohol and gasoline (or of alcohol and a special 
     fuel) sold by the blender as fuel or used as fuel by the 
     blender in producing the mixture. The term alcohol includes 
     methanol and ethanol but does not include (1) alcohol 
     produced from petroleum, natural gas, or coal (including 
     peat), or (2) alcohol with a proof of less than 150. 
     Businesses also may reduce their income taxes by 52 cents for 
     each gallon of ethanol (not mixed with gasoline or other 
     special fuel) that they sell at the retail level as vehicle 
     fuel or use themselves as a fuel in their trade or business 
     (``the alcohol credit''). The 52-cents-per-gallon income tax 
     credit rate is scheduled to decline to 51 cents per gallon 
     during the period 2005 through 2007. For blenders using an 
     alcohol other than ethanol, the rate is 60 cents per 
     gallon.\78\
---------------------------------------------------------------------------
     \77\ A special fuel includes any liquid (other than gasoline) 
     that is suitable for use in an internal combustion engine.
     \78\ In the case of any alcohol (other than ethanol) with a 
     proof that is at least 150 but less than 190, the credit is 
     45 cents per gallon (the ``low-proof blender amount''). For 
     ethanol with a proof that is at least 150 but less than 190, 
     the low-proof blender amount is 38.52 cents for sales or uses 
     during calendar year 2004, and 37.78 cents for calendar years 
     2005, 2006, and 2007.
---------------------------------------------------------------------------
       A separate income tax credit is available for small ethanol 
     producers (the ``small ethanol producer credit''). A small 
     ethanol producer is defined as a person whose ethanol 
     production capacity does not exceed 30 million gallons per 
     year. The small ethanol producer credit is 10 cents per 
     gallon of ethanol produced during the taxable year for up to 
     a maximum of 15 million gallons.
       The credits that comprise the alcohol fuels tax credit are 
     includible in income. The credit may not be used to offset 
     alternative minimum tax liability. The credit is treated as a 
     general business credit, subject to the ordering rules and 
     carryforward/carryback rules that apply to business credits 
     generally.
     Excise tax reductions for alcohol mixture fuels
       In general
       Generally, motor fuels tax rates are as follows: \79\
---------------------------------------------------------------------------
     \79\ These fuels are also subject to an additional 0.1 cent-
     per-gallon excise tax to fund the Leaking Underground Storage 
     Tank Trust Fund. See secs. 4041(d) and 4081(a)(2)(B). In 
     addition, the basic fuel tax rate will drop to 4.3 cents per 
     gallon beginning on October 1, 2005.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Gasoline..................................  18.3 cents per gallon.
Diesel fuel and kerosene..................  24.3 cents per gallon.
Special motor fuels.......................  18.3 cents per gallon
                                             generally.
------------------------------------------------------------------------

       Alcohol-blended fuels are subject to a reduced rate of tax. 
     The benefits provided by the alcohol fuels income tax credit 
     and the excise tax reduction are integrated such that the 
     alcohol fuels credit is reduced to take into account the 
     benefit of any excise tax reduction.
       Gasohol
       Registered ethanol blenders may forgo the full income tax 
     credit and instead pay reduced rates of excise tax on 
     gasoline that they purchase for blending with ethanol. Most 
     of the benefit of the alcohol fuels credit is claimed through 
     the excise tax system.
       The reduced excise tax rates apply to gasohol upon its 
     removal or entry. Gasohol is defined as a gasoline/ethanol 
     blend that contains 5.7 percent ethanol, 7.7 percent ethanol, 
     or 10 percent ethanol. For the calendar year 2004, the 
     following reduced rates apply to gasohol: \80\
---------------------------------------------------------------------------
     \80\ These rates include the additional 0.1 cent-per-gallon 
     excise tax to fund the Leaking Underground Storage Tank Trust 
     Fund. These special rates will terminate after September 30, 
     2007 (sec. 4081(c)(8)).

------------------------------------------------------------------------
 
------------------------------------------------------------------------
5.7 percent ethanol.......................  15.436 cents per gallon.
7.7 percent ethanol.......................  14.396 cents per gallon.
10.0 percent ethanol......................  13.200 cents per gallon.
------------------------------------------------------------------------

       Reduced excise tax rates also apply when gasoline is 
     purchased for the production of ``gasohol.'' When gasoline is 
     purchased for blending into gasohol, the rates above are 
     multiplied by a fraction (e.g., 10/9 for 10-percent gasohol) 
     so that the increased volume of motor fuel will be subject 
     to tax. The reduced tax rates apply if the person liable 
     for the tax is registered with the IRS and (1) produces 
     gasohol with gasoline within 24 hours of removing or 
     entering the gasoline or (2) gasoline is sold upon its 
     removal or entry and such person has an unexpired 
     certificate from the buyer and has no reason to believe 
     the certificate is false.\81\
---------------------------------------------------------------------------
     \81\ Treas. Reg. sec. 48.4081-6(c). A certificate from the 
     buyer assures that the gasoline will be used to produce 
     gasohol within 24 hours after purchase. A copy of the 
     registrant's letter of registration cannot be used as a 
     gasohol blender's certificate.
---------------------------------------------------------------------------
       Qualified methanol and ethanol fuels
       Qualified methanol or ethanol fuel is any liquid that 
     contains at least 85 percent methanol or ethanol or other 
     alcohol produced from a substance other than petroleum or 
     natural gas. These fuels are taxed at reduced rates.\82\ The 
     rate of tax on qualified methanol is 12.35 cents per gallon. 
     The rate on qualified ethanol in 2004 is 13.15 cents. From 
     January 1, 2005, through September 30, 2007, the rate of tax 
     on qualified ethanol is 13.25 cents.
---------------------------------------------------------------------------
     \82\ These reduced rates terminate after September 30, 2007. 
     Included in these rates is the 0.05-cent-per-gallon Leaking 
     Underground Storage Tank Trust Fund tax imposed on such fuel. 
     (sec. 4041(b)(2)).
---------------------------------------------------------------------------
       Alcohol produced from natural gas
       A mixture of methanol, ethanol, or other alcohol produced 
     from natural gas that consists of at least 85 percent alcohol 
     is also taxed at reduced rates.\83\ For mixtures not 
     containing ethanol, the applicable rate of tax is 9.25 cents 
     per gallon before October 1, 2005. In all other cases, the 
     rate is 11.4 cents per gallon. After September 30, 2005, the 
     rate is reduced to 2.15 cents per gallon when the mixture 
     does not contain ethanol and 4.3 cents per gallon in all 
     other cases.
---------------------------------------------------------------------------
     \83\ These rates include the additional 0.1 cent-per-gallon 
     excise tax to fund the Leaking Underground Storage Tank Trust 
     Fund (sec. 4041(d)(1)).
---------------------------------------------------------------------------
       Blends of alcohol and diesel fuel or special motor fuels
       A reduced rate of tax applies to diesel fuel or kerosene 
     that is combined with alcohol as long as at least 10 percent 
     of the finished mixture is alcohol. If none of the alcohol in 
     the mixture is ethanol, the rate of tax is 18.4 cents per 
     gallon. For alcohol mixtures containing ethanol, the rate of 
     tax in 2004 is 19.2 cents per gallon and 19.3 cents per 
     gallon for 2005 through September 30, 2007. Fuel removed or 
     entered for use in producing a 10 percent diesel-alcohol fuel 
     mixture (without ethanol), is subject to a tax of 20.44 cents 
     per gallon. The rate of tax for fuel removed or entered for 
     use to produce a 10 percent diesel-ethanol fuel mixture is 
     21.333 cents per gallon for 2004 and 21.444 cents per gallon 
     for

[[Page H8486]]

     the period January 1, 2005, through September 30, 2007.\84\
---------------------------------------------------------------------------
     \84\ These rates include the additional 0.1 cent-per-gallon 
     excise tax to fund the Leaking Underground Storage Tank Trust 
     Fund.
---------------------------------------------------------------------------
       Special motor fuel (nongasoline) mixtures with alcohol also 
     are taxed at reduced rates.
       Aviation fuel
       Noncommercial aviation fuel is subject to a tax of 21.9 
     cents per gallon.\85\ Fuel mixtures containing at least 10 
     percent alcohol are taxed at lower rates.\86\ In the case of 
     10 percent ethanol mixtures, for any sale or use during 2004, 
     the 21.9 cents is reduced by 13.2 cents (for a tax of 8.7 
     cents per gallon), for 2005, 2006, and 2007 the reduction is 
     13.1 cents (for a tax of 8.8 cents per gallon) and is reduced 
     by 13.4 cents in the case of any sale during 2008 or 
     thereafter. For mixtures not containing ethanol, the 21.9 
     cents is reduced by 14 cents for a tax of 7.9 cents. These 
     reduced rates expire after September 30, 2007.\87\
---------------------------------------------------------------------------
     \85\ This rate includes the additional 0.1 cent-per-gallon 
     tax for the Leaking Underground Storage Tank Trust fund.
     \86\ Secs. 4041(k)(1) and 4091(c).
     \87\ Sec. 4091(c)(1).
---------------------------------------------------------------------------
       When aviation fuel is purchased for blending with alcohol, 
     the rates above are multiplied by a fraction (10/9) so that 
     the increased volume of aviation fuel will be subject to tax.
     Refunds and payments
       If fully taxed gasoline (or other taxable fuel) is used to 
     produce a qualified alcohol mixture, the Code permits the 
     blender to file a claim for a quick excise tax refund. The 
     refund is equal to the difference between the gasoline (or 
     other taxable fuel) excise tax that was paid and the tax that 
     would have been paid by a registered blender on the alcohol 
     fuel mixture being produced. Generally, the IRS pays these 
     quick refunds within 20 days. Interest accrues if the refund 
     is paid more than 20 days after filing. A claim may be filed 
     by any person with respect to gasoline, diesel fuel, or 
     kerosene used to produce a qualified alcohol fuel mixture for 
     any period for which $200 or more is payable and which is not 
     less than one week.
     Ethyl tertiary butyl ether (ETBE)
       Ethyl tertiary butyl ether ("ETBE") is an ether that is 
     manufactured using ethanol. Unlike ethanol, ETBE can be 
     blended with gasoline before the gasoline enters a pipeline 
     because ETBE does not result in contamination of fuel with 
     water while in transport. Treasury regulations provide that 
     gasohol blenders may claim the income tax credit and excise 
     tax rate reductions for ethanol used in the production of 
     ETBE. The regulations also provide a special election 
     allowing refiners to claim the benefit of the excise tax rate 
     reduction even though the fuel being removed from terminals 
     does not contain the requisite percentages of ethanol for 
     claiming the excise tax rate reduction.
     Highway Trust Fund
       With certain exceptions, the taxes imposed by section 4041 
     (relating to retail taxes on diesel fuels and special motor 
     fuels) and section 4081 (relating to tax on gasoline, diesel 
     fuel and kerosene) are credited to the Highway Trust Fund. In 
     the case of alcohol fuels, 2.5 cents per gallon of the tax 
     imposed is retained in the General Fund.\88\ In the case of a 
     taxable fuel taxed at a reduced rate upon removal or entry 
     prior to mixing with alcohol, 2.8 cents of the reduced rate 
     is retained in the General Fund.\89\
---------------------------------------------------------------------------
     \88\ Sec. 9503(b)(4)(E).
     \89\ Sec. 9503(b)(4)(F).
---------------------------------------------------------------------------
     Biodiesel
       If biodiesel is used in the production of blended taxable 
     fuel, the Code imposes tax on the removal or sale of the 
     blended taxable fuel.\90\ In addition, the Code imposes tax 
     on any liquid other than gasoline sold for use or used as a 
     fuel in a diesel-powered highway vehicle or diesel-powered 
     train unless tax was previously imposed and not refunded or 
     credited.\91\ If biodiesel that was not previously taxed or 
     exempt is sold for use or used as a fuel in a diesel-powered 
     highway vehicle or a diesel-powered train, tax is 
     imposed.\92\ There are no reduced excise tax rates for 
     biodiesel.
---------------------------------------------------------------------------
     \90\ Sec. 4081(b); Rev. Rul. 2002-76, 2002-46 I.R.B. 841 
     (2002). ``Taxable fuels'' are gasoline, diesel and kerosene 
     (sec. 4083). Biodiesel, although suitable for use as a fuel 
     in a diesel-powered highway vehicle or diesel-powered train, 
     contains less than four percent normal paraffins and, 
     therefore, is not treated as diesel fuel under the applicable 
     Treasury regulations. Treas. Reg. secs. 48.4081-1(c)(2)(i) 
     and (ii), and 48.4081-1(b); Rev. Rul. 2002-76, 2002-46 I.R.B. 
     841 (2002). As a result, biodiesel alone is not a taxable 
     fuel for purposes of section 4081. As noted above, however, 
     tax is imposed upon the removal or entry of blended taxable 
     fuel made with biodiesel.
     \91\ Sec. 4041. The tax imposed under section 4041 also will 
     not apply if an exemption from tax applies.
     \92\ Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002).
---------------------------------------------------------------------------
     Taxes from gasoline and special motor fuels used in 
         motorboats and gasoline used in the nonbusiness use of 
         small-engine outdoor power equipment
       The Aquatic Resources Trust Fund is funded by a portion of 
     the receipts from the excise tax imposed on motorboat 
     gasoline and special motor fuels, as well as small-engine 
     fuel taxes, that are first deposited into the Highway Trust 
     Fund. As a result, transfers to the Aquatic Resources Trust 
     Fund are governed in part by Highway Trust Fund 
     provisions.\93\
---------------------------------------------------------------------------
     \93\ Sec. 9503(c)(4) and 9503(c)(5).
---------------------------------------------------------------------------
       A total tax rate of 18.4 cents per gallon is imposed on 
     gasoline and special motor fuels used in motorboats. Of this 
     rate, 0.1 cent per gallon is dedicated to the Leaking 
     Underground Storage Tank Trust Fund. Of the remaining 18.3 
     cents per gallon, the Code currently transfers 13.5 cents per 
     gallon from the Highway Trust Fund to the Aquatics Resources 
     Trust Fund and Land and Water Conservation Fund. The 
     remainder, 4.8 cents per gallon, is retained in the General 
     Fund. In addition, the Sport Fish Restoration Account of the 
     Aquatics Resources Trust Fund receives 13.5 cents per gallon 
     of the revenues from the tax imposed on gasoline used as a 
     fuel in the nonbusiness use of small-engine outdoor power 
     equipment. The balance of 4.8 cents per gallon is retained in 
     the General Fund.\94\
---------------------------------------------------------------------------
     \94\ The Sport Fish Restoration Account also is funded with 
     receipts from an ad valorem manufacturers excise tax on sport 
     fishing equipment.
---------------------------------------------------------------------------


                               House Bill

     Overview
       The provision eliminates reduced rates of excise tax for 
     alcohol-blended fuels and imposes the full rate of excise tax 
     on alcohol-blended fuels (18.4 cents per gallon on gasoline 
     blends and 24.4 cents per gallon of diesel blended fuel). In 
     place of reduced rates, the provision permits the section 40 
     alcohol mixture credit, with certain modifications, to be 
     applied against excise tax liability. The credit may be taken 
     against the tax imposed on taxable fuels (by section 4081). 
     To the extent a person does not have section 4081 liability, 
     the provision allows taxpayers to file a claim for payment 
     equal to the amount of the credit for the alcohol used to 
     produce an eligible mixture. Under certain circumstances, a 
     tax is imposed if an alcohol fuel mixture credit is claimed 
     with respect to alcohol used in the production of any alcohol 
     mixture, which is subsequently used for a purpose for which 
     the credit is not allowed or changed into a substance that 
     does not qualify for the credit. The provision eliminates the 
     General Fund retention of certain taxes on alcohol fuels, and 
     credits these taxes to the Highway Trust Fund.
     Alcohol fuel mixture excise tax credit and payment provisions
       Alcohol fuel mixture excise tax credit
       The provision eliminates the reduced rates of excise tax 
     for alcohol-blended fuels and taxable fuels used to produce 
     an alcohol fuel mixture. Under the provision, the full rate 
     of tax for taxable fuels is imposed on both alcohol fuel 
     mixtures and the taxable fuel used to produce an alcohol fuel 
     mixture.
       In lieu of the reduced excise tax rates, the provision 
     provides that the alcohol mixture credit provided under 
     section 40 may be applied against section 4081 excise tax 
     liability (hereinafter referred to as ``the alcohol fuel 
     mixture credit''). The credit is treated as a payment of the 
     taxpayer's tax liability received at the time of the 
     taxable event. The alcohol fuel mixture credit is 52 cents 
     for each gallon of alcohol used by a person in producing 
     an alcohol fuel mixture for sale or use in a trade or 
     business of the taxpayer. The credit declines to 51 cents 
     per gallon after calendar year 2004. For mixtures not 
     containing ethanol (renewable source methanol), the credit 
     is 60 cents per gallon. As discussed further below, the 
     excise tax credit is refundable in order to provide a 
     benefit equivalent to the reduced tax rates, which are 
     being repealed under the provision.
       For purposes of the alcohol fuel mixture credit, an 
     ``alcohol fuel mixture'' is a mixture of alcohol and gasoline 
     or alcohol and a special fuel which is sold for use or used 
     as a fuel by the taxpayer producing the mixture. Alcohol for 
     this purpose includes methanol, ethanol, and alcohol gallon 
     equivalents of ETBE or other ethers produced from such 
     alcohol. It does not include alcohol produced from petroleum, 
     natural gas, or coal (including peat), or alcohol with a 
     proof of less than 190 (determined without regard to any 
     added denaturants). Special fuel is any liquid fuel (other 
     than gasoline) which is suitable for use in an internal 
     combustion engine. The benefit obtained from the excise tax 
     credit is coordinated with the alcohol fuels income tax 
     credit. For refiners making an alcohol fuel mixture with 
     ETBE, the mixture is treated as sold to another person for 
     use as a fuel only upon removal from the refinery. The excise 
     tax credit is available through December 31, 2010.
       Payments with respect to qualified alcohol fuel mixtures
       To the extent the alcohol fuel mixture credit exceeds any 
     section 4081 liability of a person, the Secretary is to pay 
     such person an amount equal to the alcohol fuel mixture 
     credit with respect to such mixture. These payments are 
     intended to provide an equivalent benefit to replace the 
     partial exemption for fuels to be blended with alcohol and 
     alcohol fuels being repealed by the provision. If claims for 
     payment are not paid within 45 days, the claim is to be paid 
     with interest. The provision also provides that in the case 
     of an electronic claim, if such claim is not paid within 20 
     days, the claim is to be paid with interest. If claims are 
     filed electronically, the claimant may make a claim for less 
     than $200.
       The provision does not apply with respect to alcohol fuel 
     mixtures sold after December 31, 2010.
     Alcohol fuel subsidies borne by General Fund
       The provision eliminates the requirement that 2.5 and 2.8 
     cents per gallon of excise taxes be retained in the General 
     Fund with the result that the full amount of tax on alcohol 
     fuels is credited to the Highway Trust Fund. The provision 
     also authorizes the full

[[Page H8487]]

     amount of fuel taxes to be appropriated to the Highway Trust 
     Fund without reduction for amounts equivalent to the excise 
     tax credits allowed for alcohol fuel mixtures, and the Trust 
     Fund is not required to reimburse any payments with respect 
     to qualified alcohol fuel mixtures.
     Motorboat and small engine fuel taxes
       The provision eliminates the General Fund retention of the 
     4.8 cents per gallon of the taxes imposed on gasoline and 
     special motor fuels used in motorboats and gasoline used as a 
     fuel in the nonbusiness use of small-engine outdoor power 
     equipment.
     Effective dates
       The provisions generally are effective for fuel sold or 
     used after September 30, 2004. The repeal of the General Fund 
     retention of the 2.5/2.8 cents per gallon of tax regarding 
     alcohol fuels is effective for taxes imposed after September 
     30, 2003. The repeal of the 4.8 cents per gallon General Fund 
     retention of the taxes imposed on fuels used in motorboats 
     and small engine equipment is effective for taxes imposed 
     after September 30, 2006. The provision regarding the 
     crediting of the full amount of tax to the Highway Trust Fund 
     without regard to credits and payments is effective for taxes 
     received after September 30, 2004, and payments made after 
     September 30, 2004.


                            Senate Amendment

     Alcohol fuels
       The Senate amendment is similar to the House bill with 
     respect to alcohol fuels, except that it also provides that 
     outlay payments are available for neat alcohol used as fuel. 
     In addition, the Senate amendment also extends the alcohol 
     fuels income tax credit (sec. 40) through December 31, 2010. 
     The Senate amendment requires importers and producers of 
     alcohol to be registered with the Secretary. Finally, the 
     provision extends the temporary additional duty on ethanol 
     through January 1, 2011.
     Biodiesel fuels
       The Senate amendment creates a refundable excise tax credit 
     for biodiesel fuel mixtures similar to that created for 
     alcohol fuel mixtures. The excise tax credit for biodiesel 
     mixtures is 50 cents for each gallon of biodiesel used by the 
     taxpayer in producing a qualified biodiesel mixture for sale 
     or use in a trade or business of the taxpayer. A qualified 
     biodiesel mixture is a mixture of biodiesel and diesel fuel 
     (determined without regard to any use of kerosene) that is 
     (1) sold for use or used by the taxpayer producing such 
     mixture as a fuel, or (2) removed from the refinery by a 
     person producing the mixture. In the case of agri-biodiesel, 
     the credit is $1.00 per gallon. No credit is allowed unless 
     the taxpayer obtains a certification (in such form and manner 
     as prescribed by the Secretary) from the producer of the 
     biodiesel that identifies the product produced and the 
     percentage of biodiesel and agri-biodiesel in the product. 
     The Senate amendment also provides for outlay payments for 
     biodiesel, not in a mixture, used as a fuel.
       The credit is not available for any sale or use for any 
     period after December 31, 2006. Credits and outlay payments 
     are paid out of the General Fund, rather than the Highway 
     Trust Fund. The excise tax credit is coordinated with the 
     income tax credit for biodiesel such that credit for the same 
     biodiesel cannot be claimed for both income and excise tax 
     purposes.
       The Senate amendment requires importers and producers of 
     biodiesel to be registered with the Secretary.
     Motorboat and small engine fuel taxes
       The Senate amendment does not change the General Fund's 
     retention of the 4.8 cents per gallon imposed on motorboat 
     and small engine fuel.
     Effective date
       The provisions generally are effective for fuel sold or 
     used after September 30, 2004. The repeal of the General Fund 
     retention of the 2.5/2.8 cents per gallon regarding alcohol 
     fuels is effective for fuel sold or used after September 30, 
     2003. The Secretary is to provide electronic filing 
     instructions by September 30, 2004. The extension of the 
     section 40 alcohol fuels credit is effective on the date of 
     enactment. The requirement that producers and importers of 
     alcohol and biodiesel be registered is effective April 1, 
     2005.


                          Conference Agreement

     Overview
       The conference agreement generally follows the Senate 
     amendment. The conference agreement does not include outlay 
     payments for neat alcohol and 100 percent biodiesel fuels. 
     The conference agreement does not change the temporary duty 
     on ethanol. In addition, the conference agreement does not 
     change the General Fund's retention of the 4.8 cents per 
     gallon imposed on motorboat and small engine fuel.
       The conference agreement eliminates reduced rates of excise 
     tax for most alcohol-blended fuels and imposes the full rate 
     of excise tax on most alcohol-blended fuels (18.3 cents per 
     gallon on gasoline blends and 24.3 cents per gallon of diesel 
     blended fuel). In place of reduced rates, the conference 
     agreement creates two new excise tax credits: the alcohol 
     fuel mixture credit and the biodiesel mixture credit. The sum 
     of these credits may be taken against the tax imposed on 
     taxable fuels (by section 4081). The conference agreement 
     allows taxpayers to file a claim for payment equal to the 
     amount of these credits for biodiesel or alcohol used to 
     produce an eligible mixture.
       Under certain circumstances, a tax is imposed if an alcohol 
     fuel mixture credit or biodiesel fuel mixture credit is 
     claimed with respect to alcohol or biodiesel used in the 
     production of any alcohol or biodiesel mixture, which is 
     subsequently used for a purpose for which the credit is not 
     allowed or changed into a substance that does not qualify for 
     the credit.
       The conference agreement eliminates the General Fund 
     retention of certain taxes on alcohol fuels, and credits 
     these taxes to the Highway Trust Fund. The Highway Trust Fund 
     is credited with the full amount of tax imposed on alcohol 
     and biodiesel fuel mixtures.
       The conference agreement also extends the present-law 
     alcohol fuels income tax credit through December 31, 2010.
     Alcohol fuel mixture excise tax credit
       The provision eliminates the reduced rates of excise tax 
     for most alcohol-blended fuels.\95\ Under the provision, the 
     full rate of tax for taxable fuels is imposed on both alcohol 
     fuel mixtures and the taxable fuel used to produce an alcohol 
     fuel mixture.
---------------------------------------------------------------------------
     \95\ The provision does not change the present-law treatment 
     of fuels blended with alcohol derived from natural gas (under 
     sec. 4041(m)), or alcohol derived from coal or peat (under 
     sec. 4041(b)(2)). The provision does not change the taxes 
     imposed to fund the Leaking Underground Storage Tank Trust 
     Fund.
---------------------------------------------------------------------------
       In lieu of the reduced excise tax rates, the provision 
     provides for an excise tax credit, the alcohol fuel mixture 
     credit. The alcohol fuel mixture credit is 51 cents for each 
     gallon of alcohol used by a person in producing an alcohol 
     fuel mixture for sale or use in a trade or business of the 
     taxpayer. For mixtures not containing ethanol (renewable 
     source methanol), the credit is 60 cents per gallon.
       For purposes of the alcohol fuel mixture credit, an 
     ``alcohol fuel mixture'' is a mixture of alcohol and a 
     taxable fuel that (1) is sold by the taxpayer producing such 
     mixture to any person for use as a fuel or (2) is used as a 
     fuel by the taxpayer producing the mixture. Alcohol for this 
     purpose includes methanol, ethanol, and alcohol gallon 
     equivalents of ETBE or other ethers produced from such 
     alcohol. It does not include alcohol produced from petroleum, 
     natural gas, or coal (including peat), or alcohol with a 
     proof of less than 190 (determined without regard to any 
     added denaturants). Taxable fuel is gasoline, diesel, and 
     kerosene.\96\ A mixture that includes ETBE or other ethers 
     produced from alcohol produced by any person at a refinery 
     prior to a taxable event is treated as sold at the time of 
     its removal from the refinery (and only at such time) to 
     another person for use as a fuel.
---------------------------------------------------------------------------
     \96\ Sec. 4083(a)(1). Under present law, dyed fuels are 
     taxable fuels that have been exempted from tax.
---------------------------------------------------------------------------
       The excise tax credit is coordinated with the alcohol fuels 
     income tax credit and is available through December 31, 2010.
     Biodiesel mixture excise tax credit
       The provision provides an excise tax credit for biodiesel 
     mixtures.\97\ The credit is 50 cents for each gallon of 
     biodiesel used by the taxpayer in producing a qualified 
     biodiesel mixture for sale or use in a trade or business of 
     the taxpayer. A qualified biodiesel mixture is a mixture of 
     biodiesel and diesel fuel that (1) is sold by the taxpayer 
     producing such mixture to any person for use as a fuel, or 
     (2) is used as a fuel by the taxpayer producing such mixture. 
     In the case of agri-biodiesel, the credit is $1.00 per 
     gallon. No credit is allowed unless the taxpayer obtains a 
     certification (in such form and manner as prescribed by the 
     Secretary) from the producer of the biodiesel that identifies 
     the product produced and the percentage of biodiesel and 
     agri-biodiesel in the product.
---------------------------------------------------------------------------
     \97\ The excise tax credit uses the same definitions as the 
     biodiesel fuels income tax credit.
---------------------------------------------------------------------------
       The credit is not available for any sale or use for any 
     period after December 31, 2006. This excise tax credit is 
     coordinated with the income tax credit for biodiesel such 
     that credit for the same biodiesel cannot be claimed for both 
     income and excise tax purposes.
     Payments with respect to qualified alcohol and biodiesel fuel 
         mixtures
       To the extent the alcohol fuel mixture credit exceeds any 
     section 4081 liability of a person, the Secretary is to pay 
     such person an amount equal to the alcohol fuel mixture 
     credit with respect to such mixture. Thus, if the person has 
     no section 4081 liability, the credit is totally refundable. 
     These payments are intended to provide an equivalent benefit 
     to replace the partial exemption for fuels to be blended with 
     alcohol and alcohol fuels being repealed by the provision. 
     Similar rules apply to the biodiesel fuel mixture credit.
       If claims for payment are not paid within 45 days, the 
     claim is to be paid with interest. The provision also 
     provides that in the case of an electronic claim, if such 
     claim is not paid within 20 days, the claim is to be paid 
     with interest. If claims are filed electronically, the 
     claimant may make a claim for less than $200. The Secretary 
     is to describe the electronic format for filing claims by 
     December 31, 2004.
       The payment provision does not apply with respect to 
     alcohol fuel mixtures sold after December 31, 2010, and 
     biodiesel fuel mixtures sold after December 31, 2006.
     Alcohol and biodiesel fuel subsidies borne by General Fund
       The provision eliminates the requirement that 2.5 and 2.8 
     cents per gallon of excise

[[Page H8488]]

     taxes be retained in the General Fund with the result that 
     the full amount of tax on alcohol fuels is credited to the 
     Highway Trust Fund. The provision also authorizes the full 
     amount of fuel taxes to be appropriated to the Highway Trust 
     Fund without reduction for amounts equivalent to the excise 
     tax credits allowed for alcohol or biodiesel fuel mixtures 
     and the Highway Trust Fund is not required to reimburse the 
     General Fund for any credits or payments taken or made with 
     respect to qualified alcohol fuel mixtures or biodiesel fuel 
     mixtures.
     Registration requirement
       Every person producing or importing biodiesel or alcohol is 
     required to register with the Secretary.
     Alcohol fuels income tax credit
       The provision extends the alcohol fuels credit (sec. 40) 
     through December 31, 2010.
     Effective dates
       The provisions generally are effective for fuel sold or 
     used after December 31, 2004. The repeal of the General Fund 
     retention of the 2.5/2.8 cents per gallon regarding alcohol 
     fuels is effective for fuel sold or used after September 30, 
     2004. The Secretary is to provide electronic filing 
     instructions by December 31, 2004. The registration 
     requirement is effective April 1, 2005.
     2. Biodiesel income tax credit (sec. 862 of the bill and new 
         sec. 40A of the Code)


                              present law

       No income tax credit or excise tax rate reduction is 
     provided for biodiesel fuels under present law. However, a 
     52-cents-per-gallon income tax credit (the ``alcohol fuels 
     credit'') is allowed for ethanol and methanol (derived from 
     renewable sources) when the alcohol is used as a highway 
     motor fuel. Registered blenders may forgo the full income tax 
     credit and instead pay reduced rates of excise tax on 
     gasoline that they purchase for blending with alcohol. These 
     present law provisions are scheduled to expire in 2007.


                               house bill

       No provision.


                            senate amendment

     In general
       The Senate amendment provides a new income tax credit for 
     biodiesel and qualified biodiesel mixtures, the biodiesel 
     fuels credit. The biodiesel fuels credit is the sum of the 
     biodiesel mixture credit plus the biodiesel credit and is 
     treated as a general business credit. The amount of the 
     biodiesel fuels credit is includable in gross income. The 
     biodiesel fuels credit is coordinated to take into account 
     benefits from the biodiesel excise tax credit and payment 
     provisions discussed above. The credit may not be carried 
     back to a taxable year ending before or on September 30, 
     2004. The provision does not apply to fuel sold or used after 
     December 31, 2006.
       Biodiesel is monoalkyl esters of long chain fatty acids 
     derived from plant or animal matter that meet (1) the 
     registration requirements established by the Environmental 
     Protection Agency under section 211 of the Clean Air Act and 
     (2) the requirements of the American Society of Testing and 
     Materials D6751. Agri-biodiesel is biodiesel derived solely 
     from virgin oils including oils from corn, soybeans, 
     sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
     safflowers, flaxseeds, rice bran, mustard seeds, or animal 
     fats.
       Biodiesel may be taken into account for purposes of the 
     credit only if the taxpayer obtains a certification (in such 
     form and manner as prescribed by the Secretary) from the 
     producer or importer of the biodiesel which identifies the 
     product produced and the percentage of the biodiesel and 
     agri-biodiesel in the product.
     Biodiesel mixture credit
       The biodiesel mixture credit is 50 cents for each gallon of 
     biodiesel used by the taxpayer in the production of a 
     qualified biodiesel mixture. For agri-biodiesel, the credit 
     is $1.00 per gallon. A qualified biodiesel mixture is a 
     mixture of biodiesel and diesel fuel that is (1) sold by the 
     taxpayer producing such mixture to any person for use as a 
     fuel, or (2) is used as a fuel by the taxpayer producing such 
     mixture. The sale or use must be in the trade or business of 
     the taxpayer and is to be taken into account for the taxable 
     year in which such sale or use occurs. No credit is allowed 
     with respect to any casual off-farm production of a qualified 
     biodiesel mixture.
     Biodiesel credit
       The biodiesel credit is 50 cents for each gallon of 100 
     percent biodiesel which is not in a mixture with diesel fuel 
     and which during the taxable year is (1) used by the taxpayer 
     as a fuel in a trade or business or (2) sold by the taxpayer 
     at retail to a person and placed in the fuel tank of such 
     person's vehicle. For agri-biodiesel, the credit is $1.00 per 
     gallon.
     Later separation or failure to use as fuel
       In a manner similar to the treatment of alcohol fuels, a 
     tax is imposed if a biodiesel fuels credit is claimed with 
     respect to biodiesel that is subsequently used for a purpose 
     for which the credit is not allowed or that is changed into a 
     substance that does not qualify for the credit.
     Effective date
       The biodiesel fuel income tax credit provision is effective 
     for fuel produced, and sold or used after September 30, 2004, 
     in taxable years ending after such date.


                          conference agreement

       The conference agreement generally follows the Senate 
     amendment, except for the effective date.
       Effective date.--The provision is effective for fuel 
     produced, and sold or used after December 31, 2004, in 
     taxable years ending after such date.

F. Exclusion of Incentive Stock Options and Employee StockPurchase Plan 
                        Stock Options from Wages

     (Sec. 261 of the House bill and secs. 421(b), 423(c), 
         3121(a), 3231, and 3306(b) of the Code)


                              present law

       Generally, when an employee exercises a compensatory option 
     on employer stock, the difference between the option price 
     and the fair market value of the stock (i.e., the ``spread'') 
     is includible in income as compensation. In the case of an 
     incentive stock option or an option to purchase stock under 
     an employee stock purchase plan (collectively referred to as 
     ``statutory stock options''), the spread is not included in 
     income at the time of exercise.\98\
---------------------------------------------------------------------------
     \98\ Sec. 421. For purposes of the individual alternative 
     minimum tax, the transfer of stock pursuant to an incentive 
     stock option is generally treated as the transfer of stock 
     pursuant to a nonstatutory option. Sec. 56(b)(3).
---------------------------------------------------------------------------
       If the statutory holding period requirements are satisfied 
     with respect to stock acquired through the exercise of a 
     statutory stock option, the spread, and any additional 
     appreciation, will be taxed as capital gain upon disposition 
     of such stock. Compensation income is recognized, however, if 
     there is a disqualifying disposition (i.e., if the statutory 
     holding period is not satisfied) of stock acquired pursuant 
     to the exercise of a statutory stock option.
       Federal Insurance Contribution Act (``FICA'') and Federal 
     Unemployment Tax Act (``FUTA'') taxes (collectively referred 
     to as ``employment taxes'') are generally imposed in an 
     amount equal to a percentage of wages paid by the employer 
     with respect to employment.\99\ The applicable Code 
     provisions\100\ do not provide an exception from FICA and 
     FUTA taxes for wages paid to an employee arising from the 
     exercise of a statutory stock option.
---------------------------------------------------------------------------
     \99\ Secs. 3101, 3111 and 3301.
     \100\ Secs. 3121 and 3306.
---------------------------------------------------------------------------
       There has been uncertainty in the past as to employer 
     withholding obligations upon the exercise of statutory stock 
     options. On June 25, 2002, the IRS announced that until 
     further guidance is issued, it would not assess FICA or FUTA 
     taxes, or impose Federal income tax withholding obligations, 
     upon either the exercise of a statutory stock option or the 
     disposition of stock acquired pursuant to the exercise of a 
     statutory stock option.\101\
---------------------------------------------------------------------------
     \101\ Notice 2002-47, 2002-28 I.R.B. 97.
---------------------------------------------------------------------------


                               House Bill

       The House bill provides specific exclusions from FICA and 
     FUTA wages for remuneration on account of the transfer of 
     stock pursuant to the exercise of an incentive stock option 
     or under an employee stock purchase plan, or any disposition 
     of such stock. Thus, under the House bill, FICA and FUTA 
     taxes do not apply upon the exercise of a statutory stock 
     option.\102\ The House bill also provides that such 
     remuneration is not taken into account for purposes of 
     determining Social Security benefits.
---------------------------------------------------------------------------
     \102\ The provision also provides a similar exclusion under 
     the Railroad Retirement Tax Act.
---------------------------------------------------------------------------
       Additionally, the House bill provides that Federal income 
     tax withholding is not required on a disqualifying 
     disposition, nor when compensation is recognized in 
     connection with an employee stock purchase plan discount. 
     Present law reporting requirements continue to apply.
       Effective date.--The House bill is effective for stock 
     acquired pursuant to options exercised after the date of 
     enactment.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement follows the House bill.

    G. Incentives to Reinvest Foreign Earnings in the United States

     (Sec. 271 of the House bill, sec. 231 of the Senate 
         amendment, and new sec. 965 of the Code)


                              present law

       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. 
     Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income generally is 
     deferred, and U.S. tax is imposed on such income when 
     repatriated. However, under anti-deferral rules, the domestic 
     parent corporation may be taxed on a current basis in the 
     United States with respect to certain categories of passive 
     or highly mobile income earned by its foreign subsidiaries, 
     regardless of whether the income has been distributed as a 
     dividend to the domestic parent corporation. The main anti-
     deferral provisions in this context are the controlled 
     foreign corporation rules of subpart F \103\ and the passive 
     foreign investment company rules.\104\ A foreign tax credit 
     generally is available to offset, in whole or in part, the 
     U.S. tax owed

[[Page H8489]]

     on foreign-source income, whether earned directly by the 
     domestic corporation, repatriated as a dividend from a 
     foreign subsidiary, or included in income under the anti-
     deferral rules.\105\
---------------------------------------------------------------------------
     \103\ Secs. 951-964.
     \104\ Secs. 1291-1298.
     \105\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------


                               House Bill

       Under the provision, certain dividends received by a U.S. 
     corporation from a controlled foreign corporation are 
     eligible for an 85-percent dividends-received deduction. At 
     the taxpayer's election, this deduction is available for 
     dividends received either: (1) during the first six months of 
     the taxpayer's first taxable year beginning on or after the 
     date of enactment of the bill; or (2) during any six-month or 
     shorter period after the date of enactment of the bill, 
     during the taxpayer's last taxable year beginning before such 
     date. Dividends received after the election period will be 
     taxed in the normal manner under present law.
       The deduction applies only to dividends and other amounts 
     included in gross income as dividends (e.g., amounts 
     described in section 1248(a)). The deduction does not apply 
     to items that are not included in gross income as dividends, 
     such as subpart F inclusions or deemed repatriations under 
     section 956. Similarly, the deduction does not apply to 
     distributions of earnings previously taxed under subpart F, 
     except to the extent that the subpart F inclusions result 
     from the payment of a dividend by one controlled foreign 
     corporation to another controlled foreign corporation within 
     a certain chain of ownership during the election period. This 
     exception enables multinational corporate groups to qualify 
     for the deduction in connection with the repatriation of 
     earnings from lower-tier controlled foreign corporations.
       The deduction is subject to a number of limitations. First, 
     it applies only to repatriations in excess of the taxpayer's 
     average repatriation level over three of the five most recent 
     taxable years ending on or before March 31, 2003, determined 
     by disregarding the highest-repatriation year and the lowest-
     repatriation year among such five years (the ``base-period 
     average''). In addition to actual dividends, deemed 
     repatriations under section 956 and distributions of earnings 
     previously taxed under subpart F are included in the base-
     period average.
       Second, the amount of dividends eligible for the deduction 
     is limited to the greatest of: (1) $500 million; (2) the 
     amount of earnings shown as permanently invested outside the 
     United States on the taxpayer's most recent audited financial 
     statement which is certified on or before March 31, 2003; or 
     (3) in the case of an applicable financial statement that 
     fails to show a specific amount of such earnings, but that 
     does show a specific amount of tax liability attributable to 
     such earnings, the amount of such earnings determined in such 
     manner as the Treasury Secretary may prescribe.
       Third, dividends qualifying for the deduction must be 
     invested in the United States pursuant to a plan approved by 
     the senior management and board of directors of the 
     corporation claiming the deduction.
       No foreign tax credit (or deduction) is allowed for foreign 
     taxes attributable to the deductible portion of any dividend 
     received during the taxable year for which an election under 
     the provision is in effect. For this purpose, the taxpayer 
     may specifically identify which dividends are treated as 
     carrying the deduction and which are not; in the absence of 
     such identification, a pro rata amount of foreign tax credits 
     will be disallowed with respect to every dividend received 
     during the taxable year.
       In addition, the income attributable to the nondeductible 
     portion of a qualifying dividend may not be offset by net 
     operating losses, and the tax attributable to such income 
     generally may not be offset by credits (other than foreign 
     tax credits and AMT credits) and may not reduce the 
     alternative minimum tax otherwise owed by the taxpayer. No 
     deduction under sections 243 or 245 is allowed for any 
     dividend for which a deduction is allowed under the 
     provision.
       Effective date.--The House bill provision is effective for 
     a taxpayer's first taxable year beginning on or after the 
     date of enactment of the bill, or the taxpayer's last taxable 
     year beginning before such date, at the taxpayer's election.


                            senate amendment

       Under the provision, certain actual and deemed dividends 
     received by a U.S. corporation from a controlled foreign 
     corporation are subject to tax at a reduced rate of 5.25 
     percent. For corporations taxed at the top corporate income 
     tax rate of 35 percent, this rate reduction is equivalent to 
     an 85-percent dividends-received deduction. This rate 
     reduction is available only for the first taxable year of an 
     electing taxpayer ending 120 days or more after the date of 
     enactment of the provision.
       The reduced rate applies only to repatriations in excess of 
     the taxpayer's average repatriation level over 3 of the 5 
     most recent taxable years ending on or before December 31, 
     2002, determined by disregarding the highest-repatriation 
     year and the lowest-repatriation year among such 5 
     years.\106\ The taxpayer may designate which of its 
     dividends are treated as meeting the base-period average 
     level and which of its dividends are treated as comprising 
     the excess.
---------------------------------------------------------------------------
     \106\ If the taxpayer has fewer than 5 taxable years ending 
     on or before December 31, 2002, then the base period consists 
     of all such taxable years, with none disregarded.
---------------------------------------------------------------------------
       In order to qualify for the reduced rate, dividends must be 
     described in a ``domestic reinvestment plan'' approved by the 
     taxpayer's senior management and board of directors. This 
     plan must provide for the reinvestment of the repatriated 
     dividends in the United States, ``including as a source for 
     the funding of worker hiring and training; infrastructure; 
     research and development; capital investments; or the 
     financial stabilization of the corporation for the purposes 
     of job retention or creation.''
       The provision disallows 85 percent of the foreign tax 
     credits attributable to dividends subject to the reduced rate 
     and removes 85 percent of the underlying income from the 
     taxpayer's foreign tax credit limitation fraction under 
     section 904. In addition, any expenses, losses, or deductions 
     of the taxpayer may not be used to reduce the tax on 
     dividends qualifying for the benefits of the provision.
       In the case of an affiliated group, an election under the 
     provision is made by the common parent on a group-wide basis, 
     and all members of the group are treated as a single 
     taxpayer. The election applies to all controlled foreign 
     corporations with respect to which an electing taxpayer is a 
     United States shareholder.
       Effective date.--The Senate amendment provision is 
     effective for the first taxable year of an electing taxpayer 
     ending 120 days or more after the provision's date of 
     enactment.


                          conference agreement

       The conference agreement follows the House bill, with 
     modifications.
       Under the conference agreement, certain dividends received 
     by a U.S. corporation from controlled foreign corporations 
     are eligible for an 85-percent dividends-received deduction. 
     At the taxpayer's election, this deduction is available for 
     dividends received either during the taxpayer's first taxable 
     year beginning on or after the date of enactment of the bill, 
     or during the taxpayer's last taxable year beginning before 
     such date.\107\ Dividends received after the election period 
     will be taxed in the normal manner under present law. The 
     conferees emphasize that this is a temporary economic 
     stimulus measure, and that there is no intent to make this 
     measure permanent, or to ``extend'' or enact it again in the 
     future.
---------------------------------------------------------------------------
     \107\ The election is to be made on a timely filed return 
     (including extensions) for the taxable year with respect to 
     which the deduction is claimed.
---------------------------------------------------------------------------
       The deduction applies only to cash dividends and other cash 
     amounts included in gross income as dividends, such as cash 
     amounts treated as dividends under sections 302 or 304 (but 
     not to amounts treated as dividends under Code sections 78, 
     367, or 1248).\108\ The deduction does not apply to items 
     that are not included in gross income as dividends, such as 
     subpart F inclusions or deemed repatriations under section 
     956. Similarly, the deduction does not apply to distributions 
     of earnings previously taxed under subpart F, except to the 
     extent that the subpart F inclusions result from the payment 
     of a dividend by one controlled foreign corporation to 
     another controlled foreign corporation within a certain chain 
     of ownership during the election period, with the result that 
     cash travels through a chain of controlled foreign 
     corporations to the taxpayer within the election period. The 
     amount of dividends eligible for the deduction is reduced by 
     any increase in related-party indebtedness on the part of a 
     controlled foreign corporation between October 3, 2004 and 
     the close of the taxable year for which the deduction is 
     being claimed, determined by treating all controlled foreign 
     corporations with respect to which the taxpayer is a U.S. 
     shareholder as one controlled foreign corporation.\109\ This 
     rule is intended to prevent a deduction from being claimed in 
     cases in which the U.S. shareholder directly or indirectly 
     (e.g., through a related party) finances the payment of a 
     dividend from a controlled foreign corporation. In such a 
     case, there may be no net repatriation of funds, and thus it 
     would be inappropriate to provide the deduction.
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     \108\ However, to the extent that the taxpayer actually 
     receives cash in an inbound liquidation that is described in 
     Code section 332 and treated as a dividend under Code section 
     367(b), such amount is treated as a dividend for these 
     purposes. The conferees note that a deemed liquidation 
     effectuated by means of a ``check the box'' election under 
     the entity classification regulations will not involve an 
     actual receipt of cash that is reinvested in the United 
     States as required for purposes of this provision.
     \109\ Thus, indebtedness between such controlled foreign 
     corporations is disregarded for purposes of this 
     determination.
---------------------------------------------------------------------------
       The deduction is subject to a number of general 
     limitations. First, it applies only to repatriations in 
     excess of the taxpayer's average repatriation level over 
     three of the five most recent taxable years ending on or 
     before June 30, 2003, determined by disregarding the highest-
     repatriation year and the lowest-repatriation year among such 
     five years (the ``base-period average''). If the taxpayer has 
     fewer than five such years, then all taxable years ending on 
     or before June 30, 2003 are included in the base period.\110\ 
     Repatriation levels are determined by reference

[[Page H8490]]

     to base-period tax returns as filed, including any amended 
     returns that were filed on or before June 30, 2003. U.S. 
     shareholders that file a consolidated tax return are treated 
     as one U.S. shareholder for all purposes of this dividends-
     received deduction provision. Thus, all such shareholders are 
     aggregated in determining the base-period average (as are all 
     controlled foreign corporations). In addition to cash 
     dividends, dividends of property, deemed repatriations under 
     section 956, and distributions of earnings previously taxed 
     under subpart F are included in the base-period average.
---------------------------------------------------------------------------
     \110\ A corporation that was spun off from another 
     corporation during the five-year period is treated for this 
     purpose as having been in existence for the same period that 
     such other corporation has been in existence. The pre-spin-
     off dividend history of the two corporations is generally 
     allocated between them on the basis of their interests in the 
     dividend-paying controlled foreign corporations immediately 
     after the spin-off. In other cases involving companies 
     entering and exiting corporate groups, the principles of Code 
     section 41(f)(3)(A) and (B) apply.
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       Second, the amount of dividends eligible for the deduction 
     is limited to the greatest of: (1) $500 million; (2) the 
     amount of earnings shown as permanently invested outside the 
     United States on the taxpayer's most recent audited financial 
     statement which is certified on or before June 30, 2003; 
     \111\ or (3) in the case of an applicable financial statement 
     that does not show a specific amount of such earnings, but 
     that does show a specific amount of tax liability 
     attributable to such earnings, the amount of such earnings 
     determined by grossing up the tax liability at a 35-percent 
     rate. If there is no applicable financial statement, or if 
     such statement does not show a specific earnings or tax 
     liability amount, then the $500 million limit applies. This 
     $500 million amount is divided among corporations that are 
     members of a controlled group, using a 50-percent standard of 
     common control. The two financial statement amounts described 
     above are divided among the U.S. shareholders that are 
     included on such statements.
---------------------------------------------------------------------------
     \111\ This rule refers to elements of Accounting Principles 
     Board Opinion 23 (``APB 23''), which provides an exception to 
     the general rule of comprehensive recognition of deferred 
     taxes for temporary book-tax differences. The exception is 
     for temporary differences related to undistributed earnings 
     of foreign subsidiaries and foreign corporate joint ventures 
     that meet the indefinite reversal criterion in APB 23.
---------------------------------------------------------------------------
       Third, in order to qualify for the deduction, dividends 
     must be described in a domestic reinvestment plan approved by 
     the taxpayer's senior management and board of directors. This 
     plan must provide for the reinvestment of the repatriated 
     dividends in the United States, including as a source for the 
     funding of worker hiring and training, infrastructure, 
     research and development, capital investments, and the 
     financial stabilization of the corporation for the purposes 
     of job retention or creation. The conferees note that this 
     list of permitted uses is not exclusive. The reinvestment 
     plan cannot, however, designate repatriated funds for use as 
     payment for executive compensation. Dividends with respect to 
     which the deduction is not being claimed are not required to 
     be included in any domestic reinvestment plan.
       No foreign tax credit (or deduction) is allowed for foreign 
     taxes attributable to the deductible portion of any dividend. 
     For this purpose, the taxpayer may specifically identify 
     which dividends are treated as carrying the deduction and 
     which dividends are not.\112\ In other words, the taxpayer is 
     allowed to choose which of its dividends are treated as 
     meeting the base-period repatriation level (and thus carry 
     foreign tax credits, to the extent otherwise allowable), and 
     which of its dividends are treated as comprising the excess 
     eligible for the deduction (and thus entail proportional 
     disallowance of any associated foreign tax credits). The 
     deduction itself will have the effect of appropriately 
     reducing the taxpayer's foreign tax credit limitation.
---------------------------------------------------------------------------
     \112\ In the absence of such a specification, a pro rata 
     amount of foreign tax credits will be disallowed with respect 
     to every dividend repatriated during the taxable year.
---------------------------------------------------------------------------
       Deductions are disallowed for expenses that are properly 
     allocated and apportioned to the deductible portion of any 
     dividend.
       The income attributable to the nondeductible portion of a 
     qualifying dividend may not be offset by expenses, losses, or 
     deductions, and the tax attributable to such income generally 
     may not be offset by credits (other than foreign tax credits 
     and AMT credits).\113\ The tax on this amount also cannot 
     reduce the alternative minimum tax that otherwise would be 
     owed by the taxpayer. However, the deduction available under 
     this provision is not treated as a preference item for 
     purposes of computing the AMT. Thus, the deduction is allowed 
     in computing alternative minimum taxable income 
     notwithstanding the fact that it may not be deductible in 
     computing earnings and profits. No deduction under sections 
     243 or 245 is allowed for any dividend for which a deduction 
     is allowed under the provision.
---------------------------------------------------------------------------
     \113\ These expenses, losses, and deductions may, however, 
     have the effect of reducing other income of the taxpayer.
---------------------------------------------------------------------------
       Effective date.--The provision is effective only for a 
     taxpayer's first taxable year beginning on or after the date 
     of enactment of the bill, or the taxpayer's last taxable year 
     beginning before such date, at the taxpayer's election. The 
     deduction available under the provision is not allowed for 
     dividends received in any taxable year beginning one year or 
     more after the date of enactment.

                     H. Other Incentive Provisions

     1. Special rules for livestock sold on account of weather-
         related conditions (sec. 281 of the House bill, sec. 649 
         of the Senate amendment, and secs. 1033 and 451 of the 
         Code)


                              present law

       Generally, a taxpayer realizes gain to the extent the sales 
     price (and any other consideration received) exceeds the 
     taxpayer's basis in the property. The realized gain is 
     subject to current income tax unless the gain is deferred or 
     not recognized under a special tax provision.
       Under section 1033, gain realized by a taxpayer from an 
     involuntary conversion of property is deferred to the extent 
     the taxpayer purchases property similar or related in service 
     or use to the converted property within the applicable 
     period. The taxpayer's basis in the replacement property 
     generally is the cost of such property reduced by the amount 
     of gain not recognized.
       The applicable period for the taxpayer to replace the 
     converted property begins with the date of the disposition of 
     the converted property (or if earlier, the earliest date of 
     the threat or imminence of requisition or condemnation of the 
     converted property) and ends two years after the close of the 
     first taxable year in which any part of the gain upon 
     conversion is realized (the ``replacement period''). Special 
     rules extend the replacement period for certain real property 
     and principal residences damaged by a Presidentially declared 
     disaster to three years and four years, respectively, after 
     the close of the first taxable year in which gain is 
     realized.
       Section 1033(e) provides that the sale of livestock (other 
     than poultry) that is held for draft, breeding, or dairy 
     purposes in excess of the number of livestock that would have 
     been sold but for drought, flood, or other weather-related 
     conditions is treated as an involuntary conversion. 
     Consequently, gain from the sale of such livestock could be 
     deferred by reinvesting the proceeds of the sale in similar 
     property within a two-year period.
       In general, cash-method taxpayers report income in the year 
     it is actually or constructively received. However, section 
     451(e) provides that a cash-method taxpayer whose principal 
     trade or business is farming who is forced to sell livestock 
     due to drought, flood, or other weather-related conditions 
     may elect to include income from the sale of the livestock in 
     the taxable year following the taxable year of the sale. This 
     elective deferral of income is available only if the taxpayer 
     establishes that, under the taxpayer's usual business 
     practices, the sale would not have occurred but for drought, 
     flood, or weather-related conditions that resulted in the 
     area being designated as eligible for Federal assistance. 
     This exception is generally intended to put taxpayers who 
     receive an unusually high amount of income in one year in the 
     position they would have been in absent the weather-related 
     condition.


                               house bill

       The House bill extends the applicable period for a taxpayer 
     to replace livestock sold on account of drought, flood, or 
     other weather-related conditions from two years to four years 
     after the close of the first taxable year in which any part 
     of the gain on conversion is realized. The extension is only 
     available if the taxpayer establishes that, under the 
     taxpayer's usual business practices, the sale would not have 
     occurred but for drought, flood, or weather-related 
     conditions that resulted in the area being designated as 
     eligible for Federal assistance. In addition, the 
     Secretary of the Treasury is granted authority to further 
     extend the replacement period on a regional basis should 
     the weather-related conditions continue longer than three 
     years. Also, for property eligible for the provision's 
     extended replacement period, the provision provides that 
     the taxpayer can make an election under section 451(e) 
     until the period for reinvestment of such property under 
     section 1033 expires.
       Effective date.--The House bill provision is effective for 
     any taxable year with respect to which the due date (without 
     regard to extensions) for the return is after December 31, 
     2002.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that it also permits the taxpayer to replace compulsorily or 
     involuntarily converted livestock with other farm property 
     if, due to drought, flood, or other weather-related 
     conditions, it is not feasible for the taxpayer to reinvest 
     the proceeds in property similar or related in use to the 
     livestock so converted.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except for the effective date.
       Effective date.--The conference agreement provision is 
     effective for any taxable year with respect to which the due 
     date (without regard to extensions) for the return is after 
     December 31, 2002.
     2. Payment of dividends on stock of cooperatives without 
         reducing patronage dividends (sec. 282 of the House bill, 
         sec. 648 of the Senate amendment, and sec. 1388 of the 
         Code)


                              Present Law

       Under present law, cooperatives generally are entitled to 
     deduct or exclude amounts distributed as patronage dividends 
     in accordance with Subchapter T of the Code. In general, 
     patronage dividends are comprised of amounts that are paid to 
     patrons (1) on the basis of the quantity or value of business

[[Page H8491]]

     done with or for patrons, (2) under a valid and enforceable 
     obligation to pay such amounts that was in existence before 
     the cooperative received the amounts paid, and (3) which are 
     determined by reference to the net earnings of the 
     cooperative from business done with or for patrons.
       Treasury Regulations provide that net earnings are reduced 
     by dividends paid on capital stock or other proprietary 
     capital interests (referred to as the ``dividend allocation 
     rule'').\114\ The dividend allocation rule has been 
     interpreted to require that such dividends be allocated 
     between a cooperative's patronage and nonpatronage 
     operations, with the amount allocated to the patronage 
     operations reducing the net earnings available for the 
     payment of patronage dividends.
---------------------------------------------------------------------------
     \114\ Treas. Reg. sec. 1.1388-1(a)(1).
---------------------------------------------------------------------------


                               House Bill

       The House bill provides a special rule for dividends on 
     capital stock of a cooperative. To the extent provided in 
     organizational documents of the cooperative, dividends on 
     capital stock do not reduce patronage income and do not 
     prevent the cooperative from being treated as operating on a 
     cooperative basis.
       Effective date.--The House bill provision is effective for 
     distributions made in taxable years ending after the date of 
     enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The Senate amendment provision is 
     effective for distributions made in taxable years ending 
     after the date of enactment.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Manufacturing relating to timber
       a. Capital gains treatment to apply to outright sales of 
           timber by landowner (sec. 283 of the House bill, sec. 
           333 of the Senate amendment, and sec. 631(b) of the 
           Code)


                              Present Law

       Under present law, a taxpayer disposing of timber held for 
     more than one year is eligible for capital gains treatment in 
     three situations. First, if the taxpayer sells or exchanges 
     timber that is a capital asset (sec. 1221) or property used 
     in the trade or business (sec. 1231), the gain generally is 
     long-term capital gain; however, if the timber is held for 
     sale to customers in the taxpayer's business, the gain will 
     be ordinary income. Second, if the taxpayer disposes of the 
     timber with a retained economic interest, the gain is 
     eligible for capital gain treatment (sec. 631(b)). Third, if 
     the taxpayer cuts standing timber, the taxpayer may elect to 
     treat the cutting as a sale or exchange eligible for capital 
     gains treatment (sec. 631(a)).


                               House Bill

       Under the House bill, in the case of a sale of timber by 
     the owner of the land from which the timber is cut, the 
     requirement that a taxpayer retain an economic interest in 
     the timber in order to treat gains as capital gain under 
     section 631(b) does not apply. Outright sales of timber by 
     the landowner will qualify for capital gains treatment in the 
     same manner as sales with a retained economic interest 
     qualify under present law, except that the usual tax rules 
     relating to the timing of the income from the sale of the 
     timber will apply (rather than the special rule of section 
     631(b) treating the disposal as occurring on the date the 
     timber is cut).
       Effective date.--The provision is effective for sales of 
     timber after December 31, 2004.


                            Senate Amendment

       The provision in the Senate amendment is the same as House 
     bill.
       Effective date.--The provision is effective for sales of 
     timber after the date of enactment.


                          Conference Agreement

       The conference agreement includes the provision in the 
     House bill and Senate amendment.
       Effective date.--The provision is effective for sales of 
     timber after December 31, 2004.
       b. Expensing of reforestation expenditures (sec. 331 of the 
           Senate amendment and secs. 48 and 194 of the Code)


                              Present Law

       Section 194 provides for an 84-month amortization period 
     for up to $10,000 of qualified reforestation expenditures. 
     Section 48(b) provides a 10-percent credit on up to $10,000 
     of qualified amortizable basis in timber property. The amount 
     amortized under section 194 is reduced by one half of the 
     amount of credit claimed under section 48(b).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits up to $10,000 of qualified 
     reforestation expenditures to be deducted in the year paid or 
     incurred (i.e., expensed). The Senate amendment permits 
     qualified reforestation expenditures above $10,000 to be 
     amortized over 84 months. The Senate amendment also repeals 
     the reforestation tax credit.
       Effective date.--Expenditures paid or incurred after the 
     date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     provision.
       c. Election to treat cutting of timber as a sale or 
           exchange (sec. 102(b) of the House bill, sec. 332 of 
           the Senate amendment, and sec. 631(a) of the Code)


                              Present Law

       Under present law, a taxpayer may elect to treat the 
     cutting of timber as a sale or exchange of the timber. If an 
     election is made, the gain or loss is recognized in an amount 
     equal to the difference between the fair market value of the 
     timber and the basis of the timber. An election, once made, 
     is effective for the taxable year and all subsequent taxable 
     years, unless the IRS, upon a showing of undue hardship by 
     the taxpayer, permits the revocation of the election. If an 
     election is revoked, a new election may be made only with the 
     consent of the IRS.


                               House Bill

       Under the House bill, an election made by a corporation for 
     a taxable year ending on or before the date of enactment, to 
     treat the cutting of timber as a sale or exchange, may be 
     revoked by the taxpayer without the consent of the IRS for 
     any taxable year ending after that date. The prior election 
     (and revocation) is disregarded for purposes of making a 
     subsequent election.
       Effective date.--The provision applies to taxable years 
     ending after the date of enactment.


                            Senate Amendment

       The provision is the same as the House bill, except the 
     provision applies to all taxpayers.
       Effective date.--The provision applies to taxable years 
     ending after the date of enactment.


                          Conference Agreement

       The conference agreement includes the provision in the 
     Senate amendment.
       d. Modified safe harbor rules for timber REITs (sec. 334 of 
           the Senate amendment and sec. 857 of the Code)


                              Present Law

     In general
       Under present law, real estate investment trusts 
     (``REITs'') are subject to a special taxation regime. Under 
     this regime, a REIT is allowed a deduction for dividends paid 
     to its shareholders. As a result, REITs generally do not pay 
     tax on distributed income. REITs are generally restricted to 
     earning certain types of passive income, primarily rents from 
     real property and interests on mortgages secured by real 
     property.
       To qualify as a REIT, a corporation must satisfy a number 
     of requirements, among which are four tests: organizational 
     structure, source of income, nature of assets, and 
     distribution of income.
     Income or loss from prohibited transactions
       A 100-percent tax is imposed on the net income of a REIT 
     from ``prohibited transactions''. A prohibited transaction is 
     the sale or other disposition of property held for sale in 
     the ordinary course of a trade or business,\115\ other than 
     foreclosure property.\116\ A safe harbor is provided for 
     certain sales of rent-producing real property. To qualify for 
     the safe harbor, three criteria generally must be met. First, 
     the REIT must have held the property for at least four years 
     for rental purposes. Second, the aggregate expenditures made 
     by the REIT during the four-year period prior to the date of 
     the sale must not exceed 30 percent of the net selling price 
     of the property. Third, either (i) the REIT must make seven 
     or fewer sales of property during the taxable year or (ii) 
     the aggregate adjusted basis of the property sold must not 
     exceed 10 percent of the aggregate bases of all the REIT's 
     assets at the beginning of the REIT's taxable year. In the 
     latter case, substantially all of the marketing and 
     development expenditures with respect to the property must be 
     made through an independent contractor.
---------------------------------------------------------------------------
     \115\ Sec. 1221(a)(l)
     \116\ Thus, the 100-percent tax on prohibited transactions 
     helps to ensure that the REIT is a passive entity and may not 
     engage in ordinary retailing activities such as sales to 
     customers of condominium units or subdivided lots in a 
     development project.
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     Certain timber income
       Some REITs have been formed to hold land on which trees are 
     grown. Upon maturity of the trees, the standing trees are 
     sold by the REIT. The Internal Revenue Service has issued 
     private letter rulings in particular instances stating that 
     the income from the sale of the trees can qualify as REIT 
     real property income because the uncut timber and the 
     timberland on which the timber grew is considered real 
     property and the sale of uncut trees can qualify as capital 
     gain derived from the sale of real property.\117\
---------------------------------------------------------------------------
     \117\ See, e.g., PLR 200052021, PLR 199945055, PLR 19927021, 
     PLR 8838016. A private letter ruling may be relied upon only 
     by the taxpayer to which the ruling is issued. However, such 
     rulings provide an indication of administrative practice.
---------------------------------------------------------------------------
     Limitation on investment in other entities
       A REIT is limited in the amount that it can own in other 
     corporations. Specifically, a REIT cannot own securities 
     (other than Government securities and certain real estate 
     assets) in an amount greater than 25 percent of the value of 
     REIT assets. In addition, it cannot own such securities of 
     any one issuer representing more than five percent of the 
     total value of REIT assets or more than 10 percent of the 
     voting securities or 10 percent of the value of the 
     outstanding securities of any one issuer. Securities for

[[Page H8492]]

     purposes of these rules are defined by reference to the 
     Investment Company Act of 1940.\118\
---------------------------------------------------------------------------
     \118\ Certain securities that are within a safe-harbor 
     definition of ``straight debt'' are not taken into account 
     for purposes of the limitation to no more than 10 percent of 
     the value of an issuer's outstanding securities.
---------------------------------------------------------------------------
       Special rules for taxable REIT subsidiaries
       Under an exception to the general rule limiting REIT 
     securities ownership of other entities, a REIT can own stock 
     of a taxable REIT subsidiary (``TRS''), generally, a 
     corporation other than a REIT \119\ with which the REIT makes 
     a joint election to be subject to special rules. A TRS can 
     engage in active business operations that would produce 
     income that would not be qualified income for purposes of the 
     95-percent or 75-percent income tests for a REIT, and that 
     income is not attributed to the REIT. Transactions between a 
     TRS and a REIT are subject to a number of specified rules 
     that are intended to prevent the TRS (taxable as a separate 
     corporate entity) from shifting taxable income from its 
     activities to the pass-through entity REIT or from absorbing 
     more than its share of expenses. Under one rule, a 100-
     percent excise tax is imposed on rents, deductions, or 
     interest paid by the TRS to the REIT to the extent such items 
     would exceed an arm's length amount as determined under 
     section 482.\120\
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     \119\  Certain corporations are not eligible to be a TRS, 
     such as a corporation which directly or indirectly operates 
     or manages a lodging facility or a health care facility or 
     directly or indirectly provides to any other person rights to 
     a brand name under which any lodging facility or health care 
     facility is operated. Sec. 856(l)(3).
     \120\ If the excise tax applies, the item is not also 
     reallocated back to the TRS under section 482.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       Under the provision, a sale of a real estate asset by a 
     REIT will not be a prohibited transaction if the following 
     six requirements are met:
       (1) The asset must have been held for at least four years 
     in the trade or business of producing timber;
       (2) The aggregate expenditures made by the REIT (or a 
     partner of the REIT) during the four-year period preceding 
     the date of sale that are includible in the basis of the 
     property (other than timberland acquisition expenditures 
     \121\) and that are directly related to the operation of the 
     property for the production of timber or for the preservation 
     of the property for use as timberland must not exceed 30 
     percent of the net selling price of the property;
---------------------------------------------------------------------------
     \121\ The timberland acquisition expenditures that are 
     excluded for this purpose are those expenditures that are 
     related to timberland other than the specific timberland that 
     is being sold under the safe harbor, but costs of which may 
     be combined with costs of such property in the same 
     ``management block'' under Treas. Reg. sec. 1.611-3(d). Any 
     specific timberland being sold must meet the requirement that 
     it has been held for at least four years by the REIT in order 
     to qualify for the safe harbor.
---------------------------------------------------------------------------
       (3) The aggregate expenditures made by the REIT (or a 
     partner of the REIT) during the four-year period preceding 
     the date of sale that are includible in the basis of the 
     property and that are not directly related to the operation 
     of the property for the production of timber or the 
     preservation of the property for use as timberland must not 
     exceed five percent of the net selling price of the property;
       (4) The REIT either (a) does not make more than seven sales 
     of property (other than sales of foreclosure property or 
     sales to which 1033 applies) or (b) the aggregate adjusted 
     bases (as determined for purposes of computing earnings and 
     profits) of property sold during the year (other than sales 
     of foreclosure property or sales to which 1033 applies) does 
     not exceed 10 percent of the aggregate bases (as determined 
     for purposes of computing earnings and profits) of property 
     of all assets of the REIT as of the beginning of the year;
       (5) Substantially all of the marketing expenditures with 
     respect to the property are made by persons who are 
     independent contractors (as defined by section 856(d)(3)) 
     with respect to the REIT and from whom the REIT does not 
     derive any income; and
       (6) The sales price on the sale of the property cannot be 
     based in whole or in part on income or profits of any person, 
     including income or profits derived from the sale of such 
     properties.
       Capital expenditures counted towards the 30-percent limit 
     are those expenditures that are includible in the basis of 
     the property (other than timberland acquisition 
     expenditures), and that are directly related to operation of 
     the property for the production of timber, or for the 
     preservation of the property for use as timberland. These 
     capital expenditures are those incurred directly in the 
     operation of raising timber (i.e., silvi
     culture), as opposed to capital expenditures incurred in the 
     ownership of undeveloped land. In general, these capital 
     expenditures incurred directly in the operation of raising 
     timber include capital expenditures incurred by the REIT to 
     create an established stand of growing trees. A stand of 
     trees is considered established when a target stand exhibits 
     the expected growing rate and is free of non-target 
     competition (e.g., hardwoods, grasses, brush, etc.) that may 
     significantly inhibit or threaten the target stand survival. 
     The costs commonly incurred during stand establishment are: 
     (1) site preparation including manual or mechanical 
     scarification, manual or mechanical cutting, disking, 
     bedding, shearing, raking, piling, broadcast and windrow/pile 
     burning (including slash disposal costs as required for stand 
     establishment); (2) site regeneration including manual or 
     mechanical hardwood coppice; (3) chemical application via 
     aerial or ground to eliminate or reduce vegetation; (4) 
     nursery operating costs including personnel salaries and 
     benefits, facilities costs, cone collection and seed 
     extraction, and other costs directly attributable to the 
     nursery operations (to the extent such costs are allocable to 
     seedlings used by the REIT); (5) seedlings including storage, 
     transportation and handling equipment; (6) direct planting of 
     seedlings; and (7) initial stand fertilization, up through 
     stand establishment. Other examples of capital expenditures 
     incurred directly in the operation of raising timber include 
     construction cost of road to be used for managing the timber 
     land (including for removal of logs or fire protection), 
     environmental costs (i.e., habitat conservation plans), and 
     any other post stand establishment capital costs (e.g., 
     ``mid-term fertilization costs).''
       Capital expenditures counted towards the five-percent limit 
     are those capital expenditures incurred in the ownership of 
     undeveloped land that are not incurred in the direct 
     operation of raising timber (i.e., silviculture). This 
     category of capital expenditures includes: (1) expenditures 
     to separate the REIT's holdings of land into separate 
     parcels; (2) costs of granting leases or easements to cable, 
     cellular or similar companies; (3) costs in determining the 
     presence or quality of minerals located on the land; (4) 
     costs incurred to defend changes in law that would limit 
     future use of the land by the REIT or a purchaser from the 
     REIT; (5) costs incurred to determine alternative uses of the 
     land (e.g., recreational use); and (6) development costs of 
     the property incurred by the REIT (e.g., engineering, 
     surveying, legal, permit, consulting, road construction, 
     utilities, and other development costs for use other than to 
     grow timber).
       Costs that are not includible in the basis of the property 
     are not counted towards either the 30-percent or five-percent 
     requirements.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
     4. Net income from publicly traded partnerships treated as 
         qualifying income of regulated investment company (sec. 
         284 of the House bill, sec. 899 of the Senate amendment, 
         and secs. 851(b), 469(k), 7704(d) and new sec. 851(h) of 
         the Code)


                              present law

     Treatment of RICs
       A regulated investment company (``RIC'') generally is 
     treated as a conduit for Federal income tax purposes. In 
     computing its taxable income, a RIC deducts dividends paid to 
     its shareholders to achieve conduit treatment.\122\ In order 
     to qualify for conduit treatment, a RIC must be a domestic 
     corporation that, at all times during the taxable year, is 
     registered under the Investment Company Act of 1940 as a 
     management company or as a unit investment trust, or has 
     elected to be treated as a business development company under 
     that Act.\123\ In addition, the corporation must elect RIC 
     status, and must satisfy certain other requirements.\124\
---------------------------------------------------------------------------
     \122\ Sec. 852(b).
     \123\ Sec. 851(a).
     \124\ Sec. 851(b).
---------------------------------------------------------------------------
       One of the RIC qualification requirements is that at least 
     90 percent of the RIC's gross income is derived from 
     dividends, interest, payments with respect to securities 
     loans, and gains from the sale or other disposition of stock 
     or securities or foreign currencies, or other income 
     (including but not limited to gains from options, futures, or 
     forward contracts) derived with respect to its business of 
     investing in such stock, securities, or currencies.\125\ 
     Income derived from a partnership is treated as meeting this 
     requirement only to the extent such income is attributable to 
     items of income of the partnership that would meet the 
     requirement if realized by the RIC in the same manner as 
     realized by the partnership (the ``look-through'' rule for 
     partnership income).\126\ Under present law, no distinction 
     is made under this rule between a publicly traded partnership 
     and any other partnership.
---------------------------------------------------------------------------
     \125\ Sec. 851(b)(2).
     \126\ Sec. 851(b).
---------------------------------------------------------------------------
       The RIC qualification rules include limitations on the 
     ownership of assets and on the composition of the RIC's 
     assets.\127\ Under the ownership limitation, at least 50 
     percent of the value of the RIC's total assets must be 
     represented by cash, government securities and securities of 
     other RICs, and other securities; however, in the case of 
     such other securities, the RIC may invest no more than five 
     percent of the value of the total assets of the RIC in the 
     securities of any one issuer, and may hold no more than 10 
     percent of the outstanding voting securities of any one 
     issuer. Under the limitation on the composition of the RIC's 
     assets, no more than 25 percent of the value of the RIC's 
     total assets may be invested in the securities of any one 
     issuer (other than Government securities), or in securities 
     of two or more controlled issuers in the same or similar 
     trades or businesses. These limitations generally are applied 
     at the end of each quarter.\128\
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     \127\ Sec. 851(b)(3).
     \128\ Sec. 851(d).

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[[Page H8493]]

     Treatment of publicly traded partnerships
       Present law provides that a publicly traded partnership 
     means a partnership, interests in which are traded on an 
     established securities market, or are readily tradable on a 
     secondary market (or the substantial equivalent thereof). In 
     general, a publicly traded partnership is treated as a 
     corporation, but an exception to corporate treatment is 
     provided if 90 percent or more of its gross income is 
     interest, dividends, real property rents, or certain other 
     types of qualifying income.\129\
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     \129\ Sec. 7704(a), (c), and (d).
---------------------------------------------------------------------------
       A special rule for publicly traded partnerships applies 
     under the passive loss rules. The passive loss rules limit 
     deductions and credits from passive trade or business 
     activities.\130\ Deductions attributable to passive 
     activities, to the extent they exceed income from passive 
     activities, generally may not be deducted against other 
     income. Deductions and credits that are suspended under these 
     rules are carried forward and treated as deductions and 
     credits from passive activities in the next year. The 
     suspended losses from a passive activity are allowed in full 
     when a taxpayer disposes of his entire interest in the 
     passive activity to an unrelated person. The special rule for 
     publicly traded partnerships provides that the passive loss 
     rules are applied separately with respect to items 
     attributable to each publicly traded partnership.\131\ Thus, 
     income or loss from the publicly traded partnership is 
     treated as separate from income or loss from other passive 
     activities.
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     \130\ Sec. 469.
     \131\ Sec. 469(k).
---------------------------------------------------------------------------


                               house bill

       The House bill modifies the 90-percent test with respect to 
     income of a RIC to include net income derived from an 
     interest in a publicly traded partnership. The House bill 
     also modifies the look-through rule for partnership income of 
     a RIC so that it applies only to income from a partnership 
     other than a publicly traded partnership.
       The House bill provides that the limitation on ownership 
     and the limitation on composition of assets that apply to 
     other investments of a RIC also apply to RIC investments in 
     publicly traded partnership interests.
       The House bill provides that the special rule for publicly 
     traded partnerships under the passive loss rules (requiring 
     separate treatment) applies to a RIC holding an interest in a 
     publicly traded partnership, with respect to items 
     attributable to the interest in the publicly traded 
     partnership.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and Senate 
     amendment. In addition, the conference agreement provides 
     that net income from an interest in a publicly traded 
     partnership is used for purposes of both the numerator and 
     denominator of the 90-percent test. As under present law, the 
     conference agreement also provides that gains from the sale 
     or other disposition of interests in publicly traded 
     partnerships constitute qualifying income of regulated 
     investment companies.
     5. Improvements related to real estate investment trusts 
         (sec. 285 of the House bill and secs. 856, 857 and 860 of 
         the Code)


                              present law

     In general
       Real estate investment trusts (``REITs'') are treated, in 
     substance, as pass-through entities under present law. Pass-
     through status is achieved by allowing the REIT a deduction 
     for dividends paid to its shareholders. REITs are generally 
     restricted to investing in passive investments primarily 
     in real estate and securities.
       A REIT must satisfy four tests on a year-by-year basis: 
     organizational structure, source of income, nature of assets, 
     and distribution of income. Whether the REIT meets the asset 
     tests is generally measured each quarter.
     Organizational structure requirements
       To qualify as a REIT, an entity must be for its entire 
     taxable year a corporation or an unincorporated trust or 
     association that would be taxable as a domestic corporation 
     but for the REIT provisions, and must be managed by one or 
     more trustees. The beneficial ownership of the entity must be 
     evidenced by transferable shares or certificates of 
     ownership. Except for the first taxable year for which an 
     entity elects to be a REIT, the beneficial ownership of the 
     entity must be held by 100 or more persons, and the entity 
     may not be so closely held by individuals that it would be 
     treated as a personal holding company if all its adjusted 
     gross income constituted personal holding company income. A 
     REIT is required to comply with regulations to ascertain the 
     actual ownership of the REIT's outstanding shares.
     Income requirements
       In order for an entity to qualify as a REIT, at least 95 
     percent of its gross income generally must be derived from 
     certain passive sources (the ``95-percent income test''). In 
     addition, at least 75 percent of its income generally must be 
     from certain real estate sources (the ``75-percent income 
     test''), including rents from real property (as defined) and 
     gain from the sale or other disposition of real property, and 
     income and gain derived from foreclosure property.
       Qualified rental income
       Amounts received as impermissible ``tenant services 
     income'' are not treated as rents from real property.\132\ In 
     general, such amounts are for services rendered to tenants 
     that are not ``customarily furnished'' in connection with the 
     rental of real property.\133\
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     \132\ A REIT is not treated as providing services that 
     produce impermissible tenant services income if such services 
     are provided by an independent contractor from whom the REIT 
     does not derive or receive any income. An independent 
     contractor is defined as a person who does not own, directly 
     or indirectly, more than 35 percent of the shares of the 
     REIT. Also, no more than 35 percent of the total shares of 
     stock of an independent contractor (or of the interests in 
     net assets or net profits, if not a corporation) can be owned 
     directly or indirectly by persons owning 35 percent or more 
     of the interests in the REIT.
     \133\ Rents for certain personal property leased in 
     connection with the rental of real property are treated as 
     rents from real property if the fair market value of the 
     personal property does not exceed 15 percent of the aggregate 
     fair market values of the real and personal property
---------------------------------------------------------------------------
       Rents from real property, for purposes of the 95-percent 
     and 75-percent income tests, generally do not include any 
     amount received or accrued from any person in which the REIT 
     owns, directly or indirectly, 10 percent or more of the vote 
     or value.\134\ An exception applies to rents received from a 
     taxable REIT subsidiary (``TRS'') (described further below) 
     if at least 90 percent of the leased space of the property is 
     rented to persons other than a TRS or certain related 
     persons, and if the rents from the TRS are substantially 
     comparable to unrelated party rents.\135\
---------------------------------------------------------------------------
     \134\ Sec. 856(d)(2)(B).
     \135\ Sec. 856(d)(8).
---------------------------------------------------------------------------
       Certain hedging instruments
       Except as provided in regulations, a payment to a REIT 
     under an interest rate swap or cap agreement, option, futures 
     contract, forward rate agreement, or any similar financial 
     instrument, entered into by the trust in a transaction to 
     reduce the interest rate risks with respect to any 
     indebtedness incurred or to be incurred by the REIT to 
     acquire or carry real estate assets, and any gain from the 
     sale or disposition of any such investment, is treated as 
     income qualifying for the 95-percent income test.
       Tax if qualified income tests not met
       If a REIT fails to meet the 95-percent or 75-percent income 
     tests but has set out the income it did receive in a schedule 
     and any error in the schedule is not due to fraud with intent 
     to evade tax, then the REIT does not lose its REIT status 
     provided that the failure to meet the 95-percent or 75-
     percent test is due to reasonable cause and not due to 
     willful neglect. If the REIT qualifies for this relief, the 
     REIT must pay a tax measured by the greater of the amount by 
     which 90 percent\136\ of the REIT's gross income exceeds the 
     amount of items subject to the 95-percent test, or the amount 
     by which 75 percent of the REIT's gross income exceeds the 
     amount of items subject to the 75-percent test.\137\
---------------------------------------------------------------------------
     \136\ Prior to 1999, the rule had applied to the amount by 
     which 95 percent of the income exceeded the items subject to 
     the 95 percent test.
     \137\ The ratio of the REIT's net to gross income is applied 
     to the excess amount, to determine the amount of tax 
     (disregarding certain items otherwise subject to a 100-
     percent tax). In effect, the formula seeks to require that 
     all of the REIT net income attributable to the failure of the 
     income tests will be paid as tax. Sec. 857(b)(5).
---------------------------------------------------------------------------
     Asset requirements
       75-percent asset test
       To satisfy the asset requirements to qualify for treatment 
     as a REIT, at the close of each quarter of its taxable year, 
     an entity must have at least 75 percent of the value of its 
     assets invested in real estate assets, cash and cash items, 
     and government securities (the ``75-percent asset test''). 
     The term real estate asset is defined to mean real property 
     (including interests in real property and mortgages on real 
     property) and interests in REITs.
       Limitation on investment in other entities
       A REIT is limited in the amount that it can own in other 
     corporations. Specifically, a REIT cannot own securities 
     (other than Government securities and certain real estate 
     assets) in an amount greater than 25 percent of the value of 
     REIT assets. In addition, it cannot own such securities of 
     any one issuer representing more than 5 percent of the total 
     value of REIT assets or more than 10 percent of the voting 
     securities or 10 percent of the value of the outstanding 
     securities of any one issuer. Securities for purposes of 
     these rules are defined by reference to the Investment 
     Company Act of 1940.
       ``Straight debt'' exception
       Securities of an issuer that are within a safe-harbor 
     definition of ``straight debt'' (as defined for purposes of 
     subchapter S)\138\ are not taken into account in applying the 
     limitation that a REIT may not hold more than 10 percent of 
     the value of outstanding securities of a single issuer, if: 
     (1) the issuer is an

[[Page H8494]]

     individual; (2) the only securities of such issuer held by 
     the REIT or a taxable REIT subsidiary of the REIT are 
     straight debt; or (3) the issuer is a partnership and the 
     trust holds at least a 20 percent profits interest in the 
     partnership.
---------------------------------------------------------------------------
     \138\ Sec. 1361(c)(5), without regard to paragraph (B)(iii) 
     thereof.
---------------------------------------------------------------------------
       Straight debt for purposes of the REIT provision\139\ is 
     defined as a written or unconditional promise to pay on 
     demand or on a specified date a sum certain in money if (i) 
     the interest rate (and interest payment dates) are not 
     contingent on profits, the borrower's discretion, or similar 
     factors, and (ii) there is no convertibility (directly or 
     indirectly) into stock.
---------------------------------------------------------------------------
     \139\ Sec. 856(c)(7).
---------------------------------------------------------------------------
       Certain subsidiary ownership permitted with income treated 
           as income of the REIT
       Under one exception to the rule limiting a REIT's 
     securities holdings to no more than 10 percent of the vote or 
     value of a single issuer, a REIT can own 100 percent of the 
     stock of a corporation, but in that case the income and 
     assets of such corporation are treated as income and assets 
     of the REIT.
       Special rules for taxable REIT subsidiaries
       Under another exception to the general rule limiting REIT 
     securities ownership of other entities, a REIT can own stock 
     of a taxable REIT subsidiary (``TRS''), generally, a 
     corporation other than a real estate investment trust\140\ 
     with which the REIT makes a joint election to be subject to 
     special rules. A TRS can engage in active business operations 
     that would produce income that would not be qualified income 
     for purposes of the 95-percent or 75-percent income tests for 
     a REIT, and that income is not attributed to the REIT. For 
     example, a TRS could provide noncustomary services to REIT 
     tenants, or it could engage directly in the active operation 
     and management of real estate (without use of an independent 
     contractor); and the income the TRS derived from these 
     nonqualified activities would not be treated as disqualified 
     REIT income. Transactions between a TRS and a REIT are 
     subject to a number of specified rules that are intended to 
     prevent the TRS (taxable as a separate corporate entity) from 
     shifting taxable income from its activities to the pass-
     through entity REIT or from absorbing more than its share of 
     expenses. Under one rule, a 100-percent excise tax is imposed 
     on rents to the extent that the amount of the rents would be 
     reduced on distribution, apportionment, or allocation under 
     section 482 to clearly reflect income as a result of services 
     furnished by a TRS of the REIT to a tenant of the REIT.\141\
---------------------------------------------------------------------------
     \140\ Certain corporations are not eligible to be a TRS, such 
     as a corporation which directly or indirectly operates or 
     manages a lodging facility or a health care facility, or 
     directly or indirectly provides to any other person rights to 
     a brand name under which any lodging facility or health care 
     facility is operated. Sec. 856(l)(3).
     \141\ If the excise tax applies, then the item is not 
     reallocated back to the TRS under section 482.
---------------------------------------------------------------------------
       The 100 percent excise tax does not apply to amounts 
     received directly or indirectly by a REIT from a TRS that 
     would be excluded from unrelated taxable income if received 
     by an organization described in section 511(a)(2). Such 
     amounts are defined in section 512(b)(3).
       Rents paid by a TRS to a REIT generally are treated as 
     rents from real property if at least 90 percent of the leased 
     space of the property is rented to persons other than the 
     REIT's TRSs and other than persons related to the REIT. In 
     such a case, the rent paid by the TRS to the REIT is treated 
     as rent from real property only to the extent that it is 
     substantially comparable to rents from other tenants of the 
     REIT's property for comparable space.
     Income distribution requirements
       A REIT is generally required to distribute 90 percent of 
     its income before the end of its taxable year, as deductible 
     dividends paid to shareholders. This rule is similar to a 
     rule for regulated investment companies (``RICs'') that 
     requires distribution of 90 percent of income. If a REIT 
     declares certain dividends after the end of its taxable year 
     but before the time prescribed for filing its return for that 
     year and distributes those amounts to shareholders within the 
     12 months following the close of that taxable year, such 
     distributions are treated as made during such taxable year 
     for this purpose. As described further below, a REIT can also 
     make certain ``deficiency dividends'' after the close of the 
     taxable year after a determination that it has not 
     distributed the correct amount for qualification as a REIT.
     Consequences of failure to meet requirements
       A REIT loses its status as a REIT, and becomes subject to 
     tax as a C corporation, if it fails to meet specified tests 
     regarding the sources of its income, the nature and amount of 
     its assets, its structure, and the amount of its income 
     distributed to shareholders.
       If a REIT fails to meet the source of income requirements, 
     but has set out the income it did receive in a schedule and 
     any error in the schedule is not due to fraud with intent to 
     evade tax, then the REIT does not lose its REIT status, 
     provided that the failure to meet the 95-percent or 75-
     percent test is due to reasonable cause and not to willful 
     neglect. If the REIT qualifies for this relief, the REIT 
     must pay the disallowed income as a tax to the 
     Treasury.\142\
---------------------------------------------------------------------------
     \142\ Secs. 856(c)(6) and 857(b)(5).
---------------------------------------------------------------------------
       Failure to satisfy the asset test is excused if the REIT 
     eliminates the discrepancy within 30 days. Failure to meet 
     distribution requirements may also be excused if the REIT was 
     unable to meet such requirement by reason of distributions 
     previously made to meet the requirements of section 4981.
       There are no similar provisions that allow a REIT to pay a 
     penalty and avoid disqualification in the case of other 
     qualification failures.
       A REIT may make a deficiency dividend after a determination 
     is made that it has not distributed the correct amount of its 
     income, and avoid disqualification. The Code provides only 
     for determinations involving a controversy with the IRS and 
     does not provide for a REIT to make such a distribution on 
     its own initiative. Deficiency dividends may be declared on 
     or after the date of ``determination''. A determination is 
     defined to include only (i) a final decision by the Tax Court 
     or other court of competent jurisdiction, (ii) a closing 
     agreement under section 7121, or (iii) under Treasury 
     regulations, an agreement signed by the Secretary and the 
     REIT.


                               House Bill

       The provision makes a number of modifications to the REIT 
     rules.
     Straight debt modification
       The provision modifies the definition of ``straight debt'' 
     for purposes of the limitation that a REIT may not hold more 
     than 10 percent of the value of the outstanding securities of 
     a single issuer, to provide more flexibility than the present 
     law rule. In addition, except as provided in regulations, 
     neither such straight debt nor certain other types of 
     securities are considered ``securities'' for purposes of this 
     rule.
       Straight debt securities
       As under present law, ``straight-debt'' is still defined by 
     reference to section 1361(c)(5), without regard to 
     subparagraph (B)(iii) thereof (limiting the nature of the 
     creditor).
       Special rules are provided permitting certain contingencies 
     for purposes of the REIT provision. Any interest or principal 
     shall not be treated as failing to satisfy section 
     1361(c)(5)(B)(i) solely by reason of the fact that the time 
     of payment of such interest or principal is subject to a 
     contingency, but only if one of several factors applies. The 
     first type of contingency that is permitted is one that does 
     not have the effect of changing the effective yield to 
     maturity, as determined under section 1272, other than a 
     change in the annual yield to maturity, but only if (i) any 
     such contingency does not exceed the greater of \1/4\ of one 
     percent or five percent of the annual yield to maturity, or 
     (ii) neither the aggregate issue price nor the aggregate face 
     amount of the debt instruments held by the REIT exceeds 
     $1,000,000 and not more than 12 months of unaccrued interest 
     can be required to be prepaid thereunder.
       Also, the time or amount of any payment is permitted to be 
     subject to a contingency upon a default or the exercise of a 
     prepayment right by the issuer of the debt, provided that 
     such contingency is consistent with customary commercial 
     practice.\143\
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     \143\ The present law rules that limit qualified interest 
     income to amounts the determination of which do not depend, 
     in whole or in part, on the income or profits of any person, 
     continue to apply to such contingent interest. See, e.g., 
     secs. 856(c)(2)(G), 856(c)(3)(G) and 856(f).
---------------------------------------------------------------------------
       The provision eliminates the present law rule requiring a 
     REIT to own a 20 percent equity interest in a partnership in 
     order for debt to qualify as ``straight debt''. The bill 
     instead provides new ``look-through'' rules determining a 
     REIT partner's share of partnership securities, generally 
     treating debt to the REIT as part of the REIT's partnership 
     interest for this purpose, except in the case of otherwise 
     qualifying debt of the partnership.
       Certain corporate or partnership issues that otherwise 
     would be permitted to be held without limitation under the 
     special straight debt rules described above will not be so 
     permitted if the REIT holding such securities, and any of its 
     taxable REIT subsidiaries, holds any securities of the issuer 
     which are not permitted securities (prior to the application 
     of this rule) and have an aggregate value greater than one 
     percent of the issuer's outstanding securities.
       Other securities
       Except as provided in regulations, the following also are 
     not considered ``securities'' for purposes of the rule that a 
     REIT cannot own more than 10 percent of the value of the 
     outstanding securities of a single issuer: (i) any loan to an 
     individual or an estate, (ii) any section 467 rental 
     agreement, (as defined in section 467(d)), other than with a 
     person described in section 856(d)(2)(B), (iii) any 
     obligation to pay rents from real property, (iv) any security 
     issued by a State or any political subdivision thereof, the 
     District of Columbia, a foreign government, or any political 
     subdivision thereof, or the Commonwealth of Puerto Rico, but 
     only if the determination of any payment received or accrued 
     under such security does not depend in whole or in part on 
     the profits of any entity not described in this category, or 
     payments on any obligation issued by such an entity, (v) any 
     security issued by a real estate investment trust; and (vi) 
     any other arrangement that, as determined by the Secretary, 
     is excepted from the definition of a security.
     Safe harbor testing date for certain rents
       The provision provides specific safe-harbor rules regarding 
     the dates for testing whether

[[Page H8495]]

     90 percent of a REIT property is rented to unrelated persons 
     and whether the rents paid by related persons are 
     substantially comparable to unrelated party rents. These 
     testing rules are provided solely for purposes of the special 
     provision permitting rents received from a TRS to be 
     treated as qualified rental income for purposes of the 
     income tests.\144\
---------------------------------------------------------------------------
     \144\ The provision does not modify any of the standards of 
     section 482 as they apply to REITs and to TRSs.
---------------------------------------------------------------------------
     Customary services exception
       The provision prospectively eliminates the safe harbor 
     allowing rents received by a REIT to be exempt from the 100 
     percent excise tax if the rents are for customary services 
     performed by the TRS\145\ or are from a TRS and are described 
     in section 512(b)(3). Instead, such payments are free of the 
     excise tax if they satisfy the present law safe-harbor that 
     applies if the REIT pays the TRS at least 150 percent of the 
     cost to the TRS of providing any services.
---------------------------------------------------------------------------
     \145\ Although a REIT could itself provide such service and 
     receive the income without receiving any disqualified income, 
     in that case the REIT itself would be bearing the cost of 
     providing the service. Under the present law exception for a 
     TRS providing such service, there is no explicit requirement 
     that the TRS be reimbursed for the full cost of the service.
---------------------------------------------------------------------------
     Hedging rules
       The rules governing the tax treatment of arrangements 
     engaged in by a REIT to reduce certain interest rate risks 
     are prospectively generally conformed to the rules included 
     in section 1221. Also, the defined income of a REIT from such 
     a hedging transaction is excluded from gross income for 
     purposes of the 95-percent of gross income requirement.
     95-percent of gross income requirement
       The provision prospectively amends the tax liability owed 
     by the REIT when it fails to meet the 95-percent of gross 
     income test by applying a taxable fraction based on 95 
     percent, rather than 90 percent, of the REIT's gross income.
     Consequences of failure to meet REIT requirements
       Under the provision, a REIT may avoid disqualification in 
     the event of certain failures of the requirements for REIT 
     status, provided that (1) the failure was due to reasonable 
     cause and not willful neglect, (2) the failure is corrected, 
     and (3) except for certain failures not exceeding a specified 
     de minimis amount, a penalty amount is paid.
       Certain de minimis asset failures of 5-percent or 10-
           percent tests
       One requirement of present law is that, with certain 
     exceptions, (i) not more than 5 percent of the value of total 
     REIT assets may be represented by securities of one issuer, 
     and (ii) a REIT may not hold securities possessing more than 
     10 percent of the total voting power or 10 percent of the 
     total value of the outstanding securities of any one 
     issuer.\146\ The requirements must be satisfied each quarter.
---------------------------------------------------------------------------
      \146\ Sec. 856(c)(4)(B)(iii). These rules do not apply to 
     securities of a TRS, or to securities that qualify for the 75 
     percent asset test of section 856(c)(4)(A), such as real 
     estate assets, cash items (including receivables), or 
     Government securities.
---------------------------------------------------------------------------
       The provision provides that a REIT will not lose its REIT 
     status for failing to satisfy these requirements in a quarter 
     if the failure is due to the ownership of assets the total 
     value of which does not exceed the lesser of (i) one percent 
     of the total value of the REIT's assets at the end of the 
     quarter for which such measurement is done or (ii) 10 million 
     dollars; provided in either case that the REIT either 
     disposes of the assets within six months after the last day 
     of the quarter in which the REIT identifies the failure (or 
     such other time period prescribed by the Treasury), or 
     otherwise meets the requirements of those rules by the end of 
     such time period.\147\
---------------------------------------------------------------------------
     \147\ A REIT might satisfy the requirements without a 
     disposition, for example, by increasing its other assets in 
     the case of the 5 percent rule; or by the issuer modifying 
     the amount or value of its total securities outstanding in 
     the case of the 10 percent rule.
---------------------------------------------------------------------------
       Larger asset test failures (whether of 5-percent or 10-
           percent tests, or of 75-percent or other asset tests)
       Under the provision, if a REIT fails to meet any of the 
     asset test requirements for a particular quarter and the 
     failure exceeds the de minimis threshold described above, 
     then the REIT still will be deemed to have satisfied the 
     requirements if: (i) following the REIT's identification of 
     the failure, the REIT files a schedule with a description of 
     each asset that caused the failure, in accordance with 
     regulations prescribed by the Treasury; (ii) the failure was 
     due to reasonable cause and not to willful neglect, (iii) the 
     REIT disposes of the assets within 6 months after the last 
     day of the quarter in which the identification occurred or 
     such other time period as is prescribed by the Treasury (or 
     the requirements of the rules are otherwise met within such 
     period), and (iv) the REIT pays a tax on the failure.
       The tax that the REIT must pay on the failure is the 
     greater of (i) $50,000, or (ii) an amount determined 
     (pursuant to regulations) by multiplying the highest rate of 
     tax for corporations under section 11, by the net income 
     generated by the assets for the period beginning on the first 
     date of the failure and ending on the date the REIT has 
     disposed of the assets (or otherwise satisfies the 
     requirements).
       Such taxes are treated as excise taxes, for which the 
     deficiency provisions of the excise tax subtitle of the Code 
     (subtitle F) apply.
       Conforming reasonable cause and reporting standard for 
           failures of income tests
       The provision conforms the reporting and reasonable cause 
     standards for failure to meet the income tests to the new 
     asset test standards. However, the provision does not change 
     the rule under section 857(b)(5) that for income test 
     failures, all of the net income attributed to the 
     disqualified gross income is paid as tax.
       Other failures
       The bill adds a provision under which, if a REIT fails to 
     satisfy one or more requirements for REIT qualification, 
     other than the 95-percent and 75-percent gross income tests 
     and other than the new rules provided for failures of the 
     asset tests, the REIT may retain its REIT qualification if 
     the failures are due to reasonable cause and not willful 
     neglect, and if the REIT pays a penalty of $50,000 for each 
     such failure.
       Taxes and penalties paid deducted from amount required to 
           be distributed
       Any taxes or penalties paid under the provision are 
     deducted from the net income of the REIT in determining the 
     amount the REIT must distribute under the 90-percent 
     distribution requirement.
       Expansion of deficiency dividend procedure
       The provision expands the circumstances in which a REIT may 
     declare a deficiency dividend, by allowing such a declaration 
     to occur after the REIT unilaterally has identified a failure 
     to pay the relevant amount. Thus, the declaration need not 
     await a decision of the Tax Court, a closing agreement, or an 
     agreement signed by the Secretary of the Treasury.
     Effective date
       The provision is generally effective for taxable years 
     beginning after December 31, 2000.
       However, some of the provisions are effective for taxable 
     years beginning after the date of enactment. These are: the 
     new ``look through'' rules determining a REIT partner's share 
     of partnership securities for purposes of the ``straight 
     debt'' rules; the provision changing the 90-percent of gross 
     income reference to 95 percent, for purposes of the tax 
     liability if a REIT fails to meet the 95-percent of gross 
     income test; the new hedging definition; the rule modifying 
     the treatment of rents with respect to customary services; 
     and the new rules for correction of certain failures to 
     satisfy the REIT requirements.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     6. Treatment of certain dividends of regulated investment 
         companies (sec. 286 of the House bill and secs. 871 and 
         881 of the Code)


                              Present Law

     Regulated investment companies
       A regulated investment company (``RIC'') is a domestic 
     corporation that, at all times during the taxable year, is 
     registered under the Investment Company Act of 1940 as a 
     management company or as a unit investment trust, or has 
     elected to be treated as a business development company under 
     that Act (sec. 851(a)).
       In addition, to qualify as a RIC, a corporation must elect 
     such status and must satisfy certain tests (sec. 851(b)). 
     These tests include a requirement that the corporation derive 
     at least 90 percent of its gross income from dividends, 
     interest, payments with respect to certain securities loans, 
     and gains on the sale or other disposition of stock or 
     securities or foreign currencies, or other income derived 
     with respect to its business of investment in such stock, 
     securities, or currencies.
       Generally, a RIC pays no income tax because it is permitted 
     to deduct dividends paid to its shareholders in computing its 
     taxable income. The amount of any distribution generally is 
     not considered as a dividend for purposes of computing the 
     dividends paid deduction unless the distribution is pro rata, 
     with no preference to any share of stock as compared with 
     other shares of the same class (sec. 562(c)). For 
     distributions by RICs to shareholders who made initial 
     investments of at least $10,000,000, however, the 
     distribution is not treated as non-pro rata or preferential 
     solely by reason of an increase in the distribution due to 
     reductions in administrative expenses of the company.
       A RIC generally may pass through to its shareholders the 
     character of its long-term capital gains. It does this by 
     designating a dividend it pays as a capital gain dividend to 
     the extent that the RIC has net capital gain (i.e., net long-
     term capital gain over net short-term capital loss). These 
     capital gain dividends are treated as long-term capital gain 
     by the shareholders. A RIC generally also can pass through to 
     its shareholders the character of tax-exempt interest from 
     State and local bonds, but only if, at the close of each 
     quarter of its taxable year, at least 50 percent of the value 
     of the total assets of the RIC consists of these obligations. 
     In this case, the RIC generally may designate a dividend it 
     pays as an exempt-interest dividend to the extent that the 
     RIC has tax-exempt interest income. These exempt-interest 
     dividends are treated as interest excludable from gross 
     income by the shareholders.

[[Page H8496]]

     U.S. source investment income of foreign persons
       In general
       The United States generally imposes a flat 30-cent tax, 
     collected by withholding, on the gross amount of U.S.-source 
     investment income payments, such as interest, dividends, 
     rents, royalties or similar types of income, to nonresident 
     alien individuals and foreign corporations (``foreign 
     persons'') (secs. 871(a), 881, 1441, and 1442). Under 
     treaties, the United States may reduce or eliminate such 
     taxes. Even taking into account U.S. treaties, however, the 
     tax on a dividend generally is not entirely eliminated. 
     Instead, U.S.-source portfolio investment dividends received 
     by foreign persons generally are subject to U.S. withholding 
     tax at a rate of at least 15 percent.
       Interest
       Although payments of U.S.-source interest that is not 
     effectively connected with a U.S. trade or business generally 
     are subject to the 30-cent withholding tax, there are 
     exceptions to that rule. For example, interest from certain 
     deposits with banks and other financial institutions is 
     exempt from tax (secs. 871(i)(2)(A) and 881(d)). Original 
     issue discount on obligations maturing in 183 days or less 
     from the date of original issue (without regard to the period 
     held by the taxpayer) is also exempt from tax (sec. 871(g)). 
     An additional exception is provided for certain interest paid 
     on portfolio obligations (secs. 871(h) and 881(c)). 
     ``Portfolio interest'' generally is defined as any U.S.-
     source interest (including original issue discount), not 
     effectively connected with the conduct of a U.S. trade or 
     business, (i) on an obligation that satisfies certain 
     registration requirements or specified exceptions thereto 
     (i.e., the obligation is ``foreign targeted''), and (ii) that 
     is not received by a 10-cent shareholder (secs. 871(h)(3) and 
     881(c)(3)). With respect to a registered obligation, a 
     statement that the beneficial owner is not a U.S. person is 
     required (secs. 871(h)(2), (5) and 881(c)(2)). This exception 
     is not available for any interest received either by a bank 
     on a loan extended in the ordinary course of its business 
     (except in the case of interest paid on an obligation of the 
     United States), or by a controlled foreign corporation from a 
     related person (sec. 881(c)(3)). Moreover, this exception is 
     not available for certain contingent interest payments (secs. 
     871(h)(4) and 881(c)(4)).
       Capital gains
       Foreign persons generally are not subject to U.S. tax on 
     gain realized on the disposition of stock or securities 
     issued by a U.S. person (other than a ``U.S. real property 
     holding corporation,'' as described below), unless the gain 
     is effectively connected with the conduct of a trade or 
     business in the United States. This exemption does not apply, 
     however, if the foreign person is a nonresident alien 
     individual present in the United States for a period or 
     periods aggregating 183 days or more during the taxable year 
     (sec. 871(a)(2)). A RIC may elect not to withhold on a 
     distribution to a foreign person representing a capital gain 
     dividend. (Treas. Reg. sec. 1.1441-3(c)(2)(D)).
       Gain or loss of a foreign person from the disposition of a 
     U.S. real property interest is subject to net basis tax as if 
     the taxpayer were engaged in a trade or business within the 
     United States and the gain or loss were effectively connected 
     with such trade or business (sec. 897). In addition to an 
     interest in real property located in the United States or the 
     Virgin Islands, U.S. real property interests include (among 
     other things) any interest in a domestic corporation unless 
     the taxpayer establishes that the corporation was not, during 
     a 5-year period ending on the date of the disposition of the 
     interest, a U.S. real property holding corporation (which is 
     defined generally to mean a corporation the fair market value 
     of whose U.S. real property interests equals or exceeds 50 
     percent of the sum of the fair market values of its real 
     property interests and any other of its assets used or held 
     for use in a trade or business).
       Estate taxation
       Decedents who were citizens or residents of the United 
     States are generally subject to Federal estate tax on all 
     property, wherever situated.\148\ Nonresidents who are not 
     U.S. citizens, however, are subject to estate tax only on 
     their property which is within the United States. Property 
     within the United States generally includes debt obligations 
     of U.S. persons, including the Federal government and State 
     and local governments (sec. 2104(c)), but does not include 
     either bank deposits or portfolio obligations, the interest 
     on which would be exempt from U.S. income tax under section 
     871 (sec. 2105(b)). Stock owned and held by a nonresident who 
     is not a U.S. citizen is treated as property within the 
     United States only if the stock was issued by a domestic 
     corporation (sec. 2104(a); Treas. Reg. sec. 20.2104-1(a)(5)).
---------------------------------------------------------------------------
     \148\ The Economic Growth and Tax Relief Reconciliation Act 
     of 2001 (``EGTRRA'') repealed the estate tax for estates of 
     decedents dying after December 31, 2009. However, EGTRRA 
     included a ``sunset'' provision, pursuant to which EGTRRA's 
     provisions (including estate tax repeal) do not apply to 
     estates of decedents dying after December 31, 2010.
---------------------------------------------------------------------------
       Treaties may reduce U.S. taxation on transfers by estates 
     of nonresident decedents who are not U.S. citizens. Under 
     recent treaties, for example, U.S. tax may generally be 
     eliminated except insofar as the property transferred 
     includes U.S. real property or business property of a U.S. 
     permanent establishment.


                               House Bill

     In general
       Under the House bill, a RIC that earns certain interest 
     income that would not be subject to U.S. tax if earned by a 
     foreign person directly may, to the extent of such income, 
     designate a dividend it pays as derived from such interest 
     income. A foreign person who is a shareholder in the RIC 
     generally would treat such a dividend as exempt from gross-
     basis U.S. tax, as if the foreign person had earned the 
     interest directly. Similarly, a RIC that earns an excess of 
     net short-term capital gains over net long-term capital 
     losses, which excess would not be subject to U.S. tax if 
     earned by a foreign person, generally may, to the extent of 
     such excess, designate a dividend it pays as derived from 
     such excess. A foreign person who is a shareholder in the RIC 
     generally would treat such a dividend as exempt from gross-
     basis U.S. tax, as if the foreign person had realized the 
     excess directly. The House bill also provides that the estate 
     of a foreign decedent is exempt from U.S. estate tax on a 
     transfer of stock in the RIC in the proportion that the 
     assets held by the RIC are debt obligations, deposits, or 
     other property that would generally be treated as situated 
     outside the United States if held directly by the estate.
     Interest-related dividends
       Under the House bill, a RIC may, under certain 
     circumstances, designate all or a portion of a dividend as an 
     ``interest-related dividend,'' by written notice mailed to 
     its shareholders not later than 60 days after the close of 
     its taxable year. In addition, an interest-related dividend 
     received by a foreign person generally is exempt from U.S. 
     gross-basis tax under sections 871(a), 881, 1441 and 1442.
       However, this exemption does not apply to a dividend on 
     shares of RIC stock if the withholding agent does not receive 
     a statement, similar to that required under the portfolio 
     interest rules, that the beneficial owner of the shares is 
     not a U.S. person. The exemption does not apply to a dividend 
     paid to any person within a foreign country (or dividends 
     addressed to, or for the account of, persons within such 
     foreign country) with respect to which the Treasury Secretary 
     has determined, under the portfolio interest rules, that 
     exchange of information is inadequate to prevent evasion of 
     U.S. income tax by U.S. persons.
       In addition, the exemption generally does not apply to 
     dividends paid to a controlled foreign corporation to the 
     extent such dividends are attributable to income received by 
     the RIC on a debt obligation of a person with respect to 
     which the recipient of the dividend (i.e., the controlled 
     foreign corporation) is a related person. Nor does the 
     exemption generally apply to dividends to the extent such 
     dividends are attributable to income (other than short-term 
     original issue discount or bank deposit interest) received by 
     the RIC on indebtedness issued by the RIC- dividend recipient 
     or by any corporation or partnership with respect to which 
     the recipient of the RIC dividend is a 10-percent 
     shareholder. However, in these two circumstances the RIC 
     remains exempt from its withholding obligation unless the RIC 
     knows that the dividend recipient is such a controlled 
     foreign corporation or 10-percent shareholder. To the extent 
     that an interest-related dividend received by a controlled 
     foreign corporation is attributable to interest income of the 
     RIC that would be portfolio interest if received by a foreign 
     corporation, the dividend is treated as portfolio interest 
     for purposes of the de minimis rules, the high-tax exception, 
     and the same country exceptions of subpart F (see sec. 
     881(c)(5)(A)).
       The aggregate amount designated as interest-related 
     dividends for the RIC's taxable year (including dividends so 
     designated that are paid after the close of the taxable year 
     but treated as paid during that year as described in section 
     855) generally is limited to the qualified net interest 
     income of the RIC for the taxable year. The qualified net 
     interest income of the RIC equals the excess of: (1) the 
     amount of qualified interest income of the RIC; over (2) the 
     amount of expenses of the RIC properly allocable to such 
     interest income.
       Qualified interest income of the RIC is equal to the sum of 
     its U.S.-source income with respect to: (1) bank deposit 
     interest; (2) short term original issue discount that is 
     currently exempt from the gross-basis tax under section 871; 
     (3) any interest (including amounts recognized as ordinary 
     income in respect of original issue discount, market 
     discount, or acquisition discount under the provisions of 
     sections 1271-1288, and such other amounts as regulations may 
     provide) on an obligation which is in registered form, unless 
     it is earned on an obligation issued by a corporation or 
     partnership in which the RIC is a 10-percent shareholder or 
     is contingent interest not treated as portfolio interest 
     under section 871(h)(4); and (4) any interest-related 
     dividend from another RIC.
       If the amount designated as an interest-related dividend is 
     greater than the qualified net interest income described 
     above, the portion of the distribution so designated which 
     constitutes an interest-related dividend will be only that 
     proportion of the amount so designated as the amount of the 
     qualified net interest income bears to the amount so 
     designated.
     Short-term capital gain dividends
       Under the House bill, a RIC also may, under certain 
     circumstances, designate all or a portion of a dividend as a 
     ``short-term capital gain dividend,'' by written notice 
     mailed

[[Page H8497]]

     to its shareholders not later than 60 days after the close of 
     its taxable year. For purposes of the U.S. gross-basis tax, a 
     short-term capital gain dividend received by a foreign person 
     generally is exempt from U.S. gross-basis tax under sections 
     871(a), 881, 1441 and 1442. This exemption does not apply to 
     the extent that the foreign person is a nonresident alien 
     individual present in the United States for a period or 
     periods aggregating 183 days or more during the taxable year. 
     However, in this circumstance the RIC remains exempt from its 
     withholding obligation unless the RIC knows that the dividend 
     recipient has been present in the United States for such 
     period.
       The aggregate amount qualified to be designated as short-
     term capital gain dividends for the RIC's taxable year 
     (including dividends so designated that are paid after the 
     close of the taxable year but treated as paid during that 
     year as described in sec. 855) is equal to the excess of the 
     RIC's net short-term capital gains over net long-term capital 
     losses. The short-term capital gain includes short-term 
     capital gain dividends from another RIC. As provided under 
     present law for purposes of computing the amount of a capital 
     gain dividend, the amount is determined (except in the case 
     where an election under sec. 4982(e)(4) applies) without 
     regard to any net capital loss or net short-term capital loss 
     attributable to transactions after October 31 of the year. 
     Instead, that loss is treated as arising on the first day of 
     the next taxable year. To the extent provided in regulations, 
     this rule also applies for purposes of computing the taxable 
     income of the RIC.
       In computing the amount of short-term capital gain 
     dividends for the year, no reduction is made for the amount 
     of expenses of the RIC allocable to such net gains. In 
     addition, if the amount designated as short-term capital gain 
     dividends is greater than the amount of qualified short-term 
     capital gain, the portion of the distribution so designated 
     which constitutes a short-term capital gain dividend is only 
     that proportion of the amount so designated as the amount of 
     the excess bears to the amount so designated.
       As under present law for distributions from REITs, the 
     House bill provides that any distribution by a RIC to a 
     foreign person shall, to the extent attributable to gains 
     from sales or exchanges by the RIC of an asset that is 
     considered a U.S. real property interest, be treated as gain 
     recognized by the foreign person from the sale or exchange of 
     a U.S. real property interest. The House bill also extends 
     the special rules for domestically-controlled REITs to 
     domestically-controlled RICs.
     Estate tax treatment
       Under the House bill, a portion of the stock in a RIC held 
     by the estate of a nonresident decedent who is not a U.S. 
     citizen is treated as property without the United States. The 
     portion so treated is based upon the proportion of the assets 
     held by the RIC at the end of the quarter immediately 
     preceding the decedent's death (or such other time as the 
     Secretary may designate in regulations) that are ``qualifying 
     assets''. Qualifying assets for this purpose are bank 
     deposits of the type that are exempt from gross-basis income 
     tax, portfolio debt obligations, certain original issue 
     discount obligations, debt obligations of a domestic 
     corporation that are treated as giving rise to foreign source 
     income, and other property not within the United States.
     Effective date
       The House bill provision generally applies to dividends 
     with respect to taxable years of RICs beginning after 
     December 31, 2004. With respect to the treatment of a RIC for 
     estate tax purposes, the House bill provision applies to 
     estates of decedents dying after December 31, 2004. With 
     respect to the treatment of RICs under section 897 (relating 
     to U.S. real property interests), the House bill provision is 
     effective after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill, except the 
     conference agreement only applies: (1) to dividends with 
     respect to taxable years of RICs beginning after December 31, 
     2004 and before January 1, 2008; (2) with respect to the 
     treatment of a RIC for estate tax purposes, to estates of 
     decedents dying after December 31, 2004 and before January 1, 
     2008; and (3) with respect to the treatment of RICs under 
     section 897 (relating to U.S. real property interests), after 
     December 31, 2004 and before January 1, 2008.
     7. Taxation of certain settlement funds (sec. 287 of the 
         House bill and sec. 468B of the Code)


                              Present Law

       In general, section 468B provides that a payment to a 
     designated settlement fund that extinguishes a tort liability 
     of the taxpayer will result in a deduction to the taxpayer. A 
     designated settlement fund means a fund which is established 
     pursuant to a court order, extinguishes the taxpayer's tort 
     liability, is managed and controlled by persons unrelated to 
     the taxpayer, and in which the taxpayer does not have a 
     beneficial interest in the trust.
       Generally, a designated or qualified settlement fund is 
     taxed as a separate entity at the maximum trust rate on its 
     modified income. Modified income is generally gross income 
     less deductions for administrative costs and other incidental 
     expenses incurred in connection with the operation of the 
     settlement fund.
       The cleanup of hazardous waste sites is sometimes funded by 
     environmental ``settlement funds'' or escrow accounts. These 
     escrow accounts are established in consent decrees between 
     the Environmental Protection Agency (``EPA'') and the 
     settling parties under the jurisdiction of a Federal district 
     court. The EPA uses these accounts to resolve claims against 
     private parties under Comprehensive Environmental Response, 
     Compensation and Liability Act of 1980 (``CERCLA'').
       Present law provides that nothing in any provision of law 
     is to be construed as providing that an escrow account, 
     settlement fund, or similar fund is not subject to current 
     income tax.


                               House Bill

       The House bill provides that certain settlement funds 
     established in consent decrees for the sole purpose of 
     resolving claims under CERCLA are to be treated as 
     beneficially owned by the United States government and 
     therefore not subject to Federal income tax.
       To qualify the settlement fund must be: (1) established 
     pursuant to a consent decree entered by a judge of a United 
     States District Court; (2) created for the receipt of 
     settlement payments for the sole purpose of resolving claims 
     under CERCLA; (3) controlled (in terms of expenditures of 
     contributions and earnings thereon) by the government or an 
     agency or instrumentality thereof; and (4) upon termination, 
     any remaining funds will be disbursed to such government 
     entity and used in accordance with applicable law. For 
     purposes of the provision, a government entity means the 
     United States, any State of political subdivision thereof, 
     the District of Columbia, any possession of the United 
     States, and any agency or instrumentality of the foregoing.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     8. Expand human clinical trials expenses qualifying for the 
         orphan drug tax credit (sec. 288 of the House bill and 
         sec. 45C of the Code)


                              Present Law

       Taxpayers may claim a 50-percent credit for expenses 
     related to human clinical testing of drugs for the treatment 
     of certain rare diseases and conditions, generally those that 
     afflict less than 200,000 persons in the United States. 
     Qualifying expenses are those paid or incurred by the 
     taxpayer after the date on which the drug is designated as a 
     potential treatment for a rare disease or disorder by the 
     Food and Drug Administration (``FDA'') in accordance with 
     section 526 of the Federal Food, Drug, and Cosmetic Act.


                               House Bill

       The House bill expands qualifying expenses to include those 
     expenses related to human clinical testing paid or incurred 
     after the date on which the taxpayer files an application 
     with the FDA for designation of the drug under section 526 of 
     the Federal Food, Drug, and Cosmetic Act as a potential 
     treatment for a rare disease or disorder, if certain 
     conditions are met. Under the provision, qualifying expenses 
     include those expenses paid or incurred after the date on 
     which the taxpayer files an application with the FDA for 
     designation as a potential treatment for a rare disease or 
     disorder, if the drug receives FDA designation before the due 
     date (including extensions) for filing the tax return for the 
     taxable year in which the application was filed with the FDA. 
     As under present law, the credit may only be claimed for such 
     expenses related to drugs designated as a potential treatment 
     for a rare disease or disorder by the FDA in accordance with 
     section 526 of such Act.
       Effective date.--The provision is effective for 
     expenditures paid or incurred after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     9. Simplification of excise tax imposed on bows and arrows 
         (sec. 289 of the House bill, sec. 305 of the Senate 
         amendment, and sec. 4161 of the Code)


                              Present Law

       The Code imposes an excise tax of 11 percent on the sale by 
     a manufacturer, producer or importer of any bow with a draw 
     weight of 10 pounds or more.\149\ An excise tax of 12.4 
     percent is imposed on the sale by a manufacturer or importer 
     of any shaft, point, nock, or vane designed for use as part 
     of an arrow which after its assembly (1) is over 18 inches 
     long, or (2) is designed for use with a taxable bow (if 
     shorter than 18 inches).\150\ No tax is imposed on finished 
     arrows. An 11-percent excise tax also is imposed on any part 
     of an accessory for taxable bows and on quivers for use with 
     arrows (1) over 18 inches long or (2) designed for use with a 
     taxable bow (if shorter than 18 inches).\151\
---------------------------------------------------------------------------
     \149\ Sec. 4161(b)(1)(A).
     \150\ Sec. 4161(b)(2).
     \151\ Sec. 4161(b)(1)(B).
---------------------------------------------------------------------------


                               House Bill

       The provision increases the draw weight for a taxable bow 
     from 10 pounds or more to

[[Page H8498]]

     a peak draw weight of 30 pounds or more.\152\ The provision 
     also imposes an excise tax of 12 percent on arrows generally. 
     An arrow for this purpose is defined as a taxable arrow shaft 
     to which additional components are attached. The present law 
     12.4-percent excise tax on certain arrow components is 
     unchanged by the bill. In the case of any arrow comprised of 
     a shaft or any other component upon which tax has been 
     imposed, the amount of the arrow tax is equal to the excess 
     of (1) the arrow tax that would have been imposed but for 
     this exception, over (2) the amount of tax paid with respect 
     to such components.\153\ Finally, the provision subjects 
     certain broadheads (a type of arrow point) to an excise tax 
     equal to 11 percent of the sales price instead of 12.4 
     percent.
---------------------------------------------------------------------------
     \152\ Draw weight is the maximum force required to bring the 
     bowstring to a full-draw position not less than 26\1/4\-
     inches, measured from the pressure point of the hand grip to 
     the nocking position on the bowstring.
     \153\ A credit or refund may be obtained when an item was 
     taxed and it is used in the manufacture or production of 
     another taxable item. Sec. 6416(b)(3). As arrow components 
     and finished arrows are both taxable, in lieu of a refund of 
     the tax paid on components, the provision suspends the 
     application of sec. 6416(b)(3) and permits the taxpayer to 
     reduce the tax due on the finished arrow by the amount of the 
     previous tax paid on the components used in the manufacture 
     of such arrow.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for articles 
     sold by the manufacturer, producer or importer after December 
     31, 2004.


                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The provision is effective for articles 
     sold by the manufacturer, producer or importer 30 days after 
     the date of enactment.


                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment with the effective date of the Senate amendment.
       Effective date.--The conference agreement follows the 
     Senate amendment.
     10. Reduce rate of excise tax on fishing tackle boxes to 
         three percent (sec. 290 of the House bill and sec. 4162 
         of the Code)


                              Present Law

       A 10-percent manufacturer's excise tax is imposed on 
     specified sport fishing equipment. Examples of taxable 
     equipment include fishing rods and poles, fishing reels, 
     artificial bait, fishing lures, line and hooks, and fishing 
     tackle boxes. Revenues from the excise tax on sport fishing 
     equipment are deposited in the Sport Fishing Account of the 
     Aquatic Resources Trust Fund. Monies in the fund are spent, 
     subject to an existing permanent appropriation, to support 
     Federal-State sport fish enhancement and safety programs.


                               House Bill

       The provision repeals the excise tax on fishing tackle 
     boxes.
       Effective date.--The provision is effective for articles 
     sold by the manufacturer, producer, or importer after 
     December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill with 
     modifications. Under the provision as modified, the rate of 
     excise tax imposed on fishing tackle boxes is reduced to 
     three percent.
     11. Repeal of excise tax on sonar devices suitable for 
         finding fish (sec. 291 of the House bill and secs. 4161 
         and 4162 of the Code)


                              Present Law

       In general, the Code imposes a 10 percent tax on the sale 
     by the manufacturer, producer, or importer of specified sport 
     fishing equipment.\154\ A three percent rate, however, 
     applies to the sale of electric outboard motors and sonar 
     devices suitable for finding fish.\155\ Further, the tax 
     imposed on the sale of sonar devices suitable for finding 
     fish is limited to $30. A sonar device suitable for finding 
     fish does not include any device that is a graph recorder, a 
     digital type, a meter readout, a combination graph recorder 
     or combination meter readout.\156\
---------------------------------------------------------------------------
     \154\ Sec. 4161(a)(1).
     \155\ Sec. 4161(a)(2).
     \156\ Sec. 4162(b).
---------------------------------------------------------------------------
       Revenues from the excise tax on sport fishing equipment are 
     deposited in the Sport Fishing Account of the Aquatic 
     Resources Trust Fund. Monies in the fund are spent, subject 
     to an existing permanent appropriation, to support Federal-
     State sport fish enhancement and safety programs.


                               House Bill

       The provision repeals the excise tax on all sonar devices 
     suitable for finding fish.
       Effective date.--The provision is effective for articles 
     sold by the manufacturer, producer, or importer after 
     December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.

       12. Income tax credit for cost of carrying tax-paid 
     distilled spirits in wholesale inventories (sec. 292 of the 
     House bill)


                              Present Law

       As is true of most major Federal excise taxes, the excise 
     tax on distilled spirits is imposed at a point in the chain 
     of distribution before the product reaches the retail 
     (consumer) level. Tax on domestically produced and/or bottled 
     distilled spirits arises upon production (receipt) in a 
     bonded distillery and is collected based on removals from the 
     distillery during each semi-monthly period. Distilled spirits 
     that are bottled before importation into the United States 
     are taxed on removal from the first U.S. warehouse where they 
     are landed (including a warehouse located in a foreign trade 
     zone).
       No tax credits are allowed under present law for business 
     costs associated with having tax-paid products in inventory. 
     Rather, excise tax that is included in the purchase price of 
     a product is treated the same as the other components of the 
     product cost, i.e., deductible as a cost of goods sold.


                               House Bill

       The provision creates a new income tax credit for eligible 
     wholesale distributors of distilled spirits. An eligible 
     wholesaler is any person who holds a permit under the Federal 
     Alcohol Administration Act as a wholesaler of distilled 
     spirits.
       The credit is calculated by multiplying the number of cases 
     of bottled distilled spirits by the average tax-financing 
     cost per case for the most recent calendar year ending before 
     the beginning of such taxable year. A case is 12 80-proof 
     750-milliliter bottles. The average tax-financing cost per 
     case is the amount of interest that would accrue at corporate 
     overpayment rates during an assumed 60-day holding period on 
     an assumed tax rate of $22.83 per case of 12 750-milliliter 
     bottles.
       The credit only applies to domestically bottled distilled 
     spirits \157\ purchased directly from the bottler of such 
     spirits. The credit is in addition to present-law rules 
     allowing tax included in inventory costs to be deducted as a 
     cost of goods sold.
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     \157\ Distilled spirits that are imported in bulk and then 
     bottled domestically qualify as domestically bottled 
     distilled spirits.
---------------------------------------------------------------------------
       The credit cannot be carried back to a taxable year 
     beginning before January 1, 2005.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     3. Suspension of occupational taxes relating to distilled 
         spirits, wine, and beer (sec. 293 of the House bill and 
         new sec. 5148 of the Code)


                              Present Law

       Under present law, special occupational taxes are imposed 
     on producers and others engaged in the marketing of distilled 
     spirits, wine, and beer. These excise taxes are imposed as 
     part of a broader Federal tax and regulatory engine governing 
     the production and marketing of alcoholic beverages. The 
     special occupational taxes are payable annually, on July 1 of 
     each year. The present tax rates are as follows:

Producers:\158\
    Distilled spirits and wines (sec.       $1,000 per year, per
     5081).                                  premise.
    Brewers (sec. 5091)...................  $1,000 per year, per
                                             premise.
Wholesale dealers (sec. 5111): Liquors,     $500 per year.
 wines, or beer.
Retail dealers (sec. 5121): Liquors,        $250 per year.
 wines, or beer.
Nonbeverage use of distilled spirits (sec.  $500 per year.
 5131).
Industrial use of distilled spirits (sec.   $250 per year.
 5276).
 
\158\ A reduced rate of tax in the amount of $500 is imposed on small
  proprietors. Secs. 5081(b), 5091(b).

       The Code requires every wholesale or retail dealer in 
     liquors, wine or beer to keep records of their 
     transactions.\159\ A delegate of the Secretary of the 
     Treasury is authorized to inspect the records of any dealer 
     during business hours.\160\ There are penalties for failing 
     to comply with the recordkeeping requirements.\161\
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     \159\ Secs. 5114, 5124.
     \160\ Sec. 5146.
     \161\ Sec. 5603.
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       The Code limits the persons from whom dealers may purchase 
     their liquor stock intended for resale. Under the Code, a 
     dealer may only purchase from:
         (1) A wholesale dealer in liquors who has paid the 
     special occupational tax as such dealer to cover the place 
     where such purchase is made; or
         (2) A wholesale dealer in liquors who is exempt, at the 
     place where such purchase is made, from payment of such tax 
     under any provision chapter 51 of the Code; or
         (3) A person who is not required to pay special 
     occupational tax as a wholesale dealer in liquors.\162\
---------------------------------------------------------------------------
     \162\ Sec. 5117. For example, purchases from a proprietor of 
     a distilled spirits plant at his principal business office 
     would be covered under item (2) since such a proprietor is 
     not subject to the special occupational tax on account of 
     sales at his principal business office. Sec. 5113(a). 
     Purchases from a State-operated liquor store would be covered 
     under item (3). Sec. 5113(b).
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       In addition, a limited retail dealer (such as a charitable 
     organization selling liquor at a picnic) may lawfully 
     purchase distilled spirits for resale from a retail dealer in 
     liquors.\163\
---------------------------------------------------------------------------
     \163\ Sec. 5117(b).
---------------------------------------------------------------------------
       Violation of this restriction is punishable by $1,000 fine, 
     imprisonment of one year, or both.\164\ A violation also 
     makes the alcohol subject to seizure and forfeiture.\165\
---------------------------------------------------------------------------
     \164\ Sec. 5687.
     \165\ Sec. 7302.
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                               House Bill

       Under the provision, the special occupational taxes on 
     producers and marketers of

[[Page H8499]]

     alcoholic beverages are suspended for a three-year period, 
     July 1, 2004 through June 30, 2007. Present law recordkeeping 
     and registration requirements continue to apply, 
     notwithstanding the suspension of the special occupation 
     taxes. In addition, during the suspension period, it shall be 
     unlawful for any dealer to purchase distilled spirits for 
     resale from any person other than a wholesale dealer in 
     liquors who is subject to the recordkeeping requirements, 
     except that a limited retail dealer may purchase distilled 
     spirits for resale from a retail dealer in liquors, as 
     permitted under present law.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill except as 
     follows. Under the provision as modified, the three-year 
     suspension period is July 1, 2005 through June 30, 2008.
     14. Modification of unrelated business income limitation on 
         investment in certain small business investment companies 
         (sec. 294 of the House bill, sec. 642 of the Senate 
         amendment, and sec. 514 of the Code)


                              Present Law

       In general, an organization that is otherwise exempt from 
     Federal income tax is taxed on income from a trade or 
     business regularly carried on that is not substantially 
     related to the organization's exempt purposes. Certain types 
     of income, such as rents, royalties, dividends, and interest, 
     generally are excluded from unrelated business taxable income 
     except when such income is derived from ``debt-financed 
     property.'' Debt-financed property generally means any 
     property that is held to produce income and with respect to 
     which there is acquisition indebtedness at any time during 
     the taxable year.
       In general, income of a tax-exempt organization that is 
     produced by debt-financed property is treated as unrelated 
     business income in proportion to the acquisition indebtedness 
     on the income-producing property. Acquisition indebtedness 
     generally means the amount of unpaid indebtedness incurred by 
     an organization to acquire or improve the property and 
     indebtedness that would not have been incurred but for the 
     acquisition or improvement of the property. Acquisition 
     indebtedness does not include, however, (1) certain 
     indebtedness incurred in the performance or exercise of a 
     purpose or function constituting the basis of the 
     organization's exemption, (2) obligations to pay certain 
     types of annuities, (3) an obligation, to the extent it is 
     insured by the Federal Housing Administration, to finance the 
     purchase, rehabilitation, or construction of housing for low 
     and moderate income persons, or (4) indebtedness incurred by 
     certain qualified organizations to acquire or improve real 
     property.
       Special rules apply in the case of an exempt organization 
     that owns a partnership interest in a partnership that holds 
     debt-financed income-producing property. An exempt 
     organization's share of partnership income that is derived 
     from such debt-financed property generally is taxed as debt-
     financed income unless an exception provides otherwise.


                               House Bill

       The House bill modifies the debt-financed property 
     provisions by excluding from the definition of acquisition 
     indebtedness any indebtedness incurred by a small business 
     investment company licensed under the Small Business 
     Investment Act of 1958 that is evidenced by a debenture (1) 
     issued by such company under section 303(a) of said Act, and 
     (2) held or guaranteed by the Small Business Administration. 
     The exclusion shall not apply during any period that any 
     exempt organization (other than a governmental unit) owns 
     more than 25 percent of the capital or profits interest in 
     the small business investment company, or exempt 
     organizations (including governmental units other than any 
     agency or instrumentality of the United States) own, in the 
     aggregate, 50 percent or more of the capital or profits 
     interest in such company.
       Effective date.--The provision is effective for small 
     business investment companies formed after the date of 
     enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill except 
     that the Senate amendment does not contain any individual or 
     aggregate ownership percentage limitations with respect to 
     exempt organizations or government units.
       Effective date.--The provision is effective for 
     acquisitions made on or after the date of enactment.


                          Conference Agreement

       The conference agreement follows the House bill, modified 
     to apply to small business investment companies licensed 
     after (rather than formed after) the date of enactment.
       Effective date.--The conference agreement provision is 
     effective for debt incurred after the date of enactment by 
     small business investment companies licensed after the date 
     of enactment.
     15. Election to determine taxable income from certain 
         international shipping activities using per ton rate 
         (sec. 295 of the House bill and new secs. 1352-1359 of 
         the Code)


                              Present Law

       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, including income from shipping operations, whether 
     derived in the United States or abroad. In order to mitigate 
     double taxation, a foreign tax credit for income taxes paid 
     to foreign countries is provided to reduce or eliminate the 
     U.S. tax owed on such income, subject to certain limitations.
       Generally, the United States taxes foreign corporations 
     only on income that has a sufficient nexus to the United 
     States. Thus, a foreign corporation is generally subject to 
     U.S. tax only on income, including income from shipping 
     operations, which is ``effectively connected'' with the 
     conduct of a trade or business in the United States (sec. 
     882). Such ``effectively connected income'' generally is 
     taxed in the same manner and at the same rates as the income 
     of a U.S. corporation.
       The United States imposes a four percent tax on the amount 
     of a foreign corporation's U.S. gross transportation income 
     (sec. 887). Transportation income includes income from 
     the use (or hiring or leasing for use) of a vessel and 
     income from services directly related to the use of a 
     vessel. Fifty percent of the transportation income 
     attributable to transportation that either begins or ends 
     (but not both) in the United States is treated as U.S. 
     source gross transportation income. The tax does not 
     apply, however, to U.S. gross transportation income that 
     is treated as income effectively connected with the 
     conduct of a U.S. trade or business. U.S. gross 
     transportation income is not treated as effectively 
     connected income unless (1) the taxpayer has a fixed place 
     of business in the United States involved in earning the 
     income, and (2) substantially all the income is 
     attributable to regularly scheduled transportation.
       The taxes imposed by section 882 and 887 on income from 
     shipping operations may be limited by an applicable U.S. 
     income tax treaty or by an exemption of a foreign 
     corporation's international shipping operations income in 
     instances where a foreign country grants an equivalent 
     exemption (sec. 883).
       Under present law, there is no provision that provides an 
     alternative to the corporate income tax for taxable income 
     attributable to international shipping activities.


                               House Bill

     In general
       The provision generally allows corporations to elect a 
     ``tonnage tax'' on their taxable income from certain shipping 
     activities in lieu of the U.S. corporate income tax. 
     Accordingly, a corporation's income from qualifying shipping 
     activities is no longer taxable under sections 11, 55, 882, 
     887 or 1201(a) under the regime, and electing entities are 
     only subject to tax at the maximum corporate income tax rate 
     on a notional amount based on the net tonnage of a 
     corporation's qualifying vessels. However, a foreign 
     corporation is not subject to tax under the tonnage tax 
     regime to the extent its income from qualifying shipping 
     activities is subject to an exclusion for certain shipping 
     operations by foreign corporations pursuant to section 
     883(a)(1) or pursuant to a treaty obligation of the United 
     States.
     Taxable income from qualifying shipping activities
       Generally, the taxable income of an electing corporation 
     from qualifying shipping activities is the corporate income 
     percentage \166\ of the sum of the taxable income from each 
     of its qualifying vessels. The taxable income from each 
     qualifying vessel is the product of (1) the daily notional 
     taxable income \167\ from the operation of the qualifying 
     vessel in United States foreign trade,\168\ and (2) the 
     number of days during the taxable year that the electing 
     entity operated such vessel as a qualifying vessel in U.S. 
     foreign trade.\169\ A ``qualifying vessel'' is described as a 
     self-propelled U.S.-flag vessel of not less than 10,000 
     deadweight tons used in U.S. foreign trade.
---------------------------------------------------------------------------
     \166\ The ``corporate income percentage'' is the least 
     aggregate share, expressed as a percentage, of any item of 
     income or gain of an electing corporation, or an electing 
     group (i.e., a controlled group of which one or more members 
     is an electing entity) of which such corporation is a member 
     from qualifying shipping activities that would otherwise be 
     required to be reported on the U.S. Federal income tax return 
     of an electing corporation during any taxable period. A 
     ``controlled group'' is any group of trusts and business 
     entities whose members would be treated as a single employer 
     under the rules of section 52(a) (without regard to 
     paragraphs (1) and (2)) and section 52(b)(1)).
     \167\ The ``daily notional taxable income'' from the 
     operation of a qualifying vessel is 40 cents for each 100 
     tons of the net tonnage of the vessel (up to 25,000 net 
     tons), and 20 cents for each 100 tons of the net tonnage of 
     the vessel, in excess of 25,000 net tons.
     \168\ ``U.S. foreign trade'' means the transportation of 
     goods or passengers between a place in the United States and 
     a foreign place or between foreign places. As a general rule, 
     the temporary operation in the U.S. domestic trade (i.e., the 
     transportation of goods or passengers between places in the 
     United States) of any qualifying vessel is disregarded. 
     However, a vessel that is no longer used for operations in 
     U.S. foreign trade (unless such non-use is on a temporary 
     basis) ceases to be a qualifying vessel when such non-use 
     begins.
     \169\ If there are multiple operators of a vessel, the 
     taxable income of such vessel must be allocated among such 
     persons on the basis of their ownership and charter interests 
     or another basis that Treasury may prescribe in regulations.
---------------------------------------------------------------------------
       An entity's qualifying shipping activities consist of its 
     (1) core qualifying activities, (2) qualifying secondary 
     activities, and (3) qualifying incidental activities. 
     Generally, core qualifying activities are activities from 
     operating vessels in U.S. foreign trade and

[[Page H8500]]

     other activities of an electing entity and an electing group 
     that are an integral part of the business of operating 
     qualifying vessels in U.S. foreign trade. Qualifying 
     secondary activities generally consist of the active 
     management or operation of vessels in U.S. foreign trade and 
     provisions for vessel, container and cargo-related facilities 
     or such other activities as may be prescribed by the 
     Secretary (which are not core activities), and may not exceed 
     20 percent of the aggregate gross income derived from 
     electing entities and other members of its electing group 
     from their core qualifying activities. Qualifying incidental 
     activities are activities that are incidental to core 
     qualifying activities and are not qualifying secondary 
     activities. The aggregate gross income from qualifying 
     incidental activities cannot exceed one-tenth of one percent 
     of the aggregate gross income from the core qualifying 
     activities of the electing entities and other members of its 
     electing group.
     Items not subject to corporate income tax
       Generally, gross income from an electing entity does not 
     include the corporate income percentage of an entity's (1) 
     income from qualifying shipping activities in U.S. foreign 
     trade, (2) income from money, bank deposits and other 
     temporary investments which are reasonably necessary to meet 
     the working capital requirements of its qualifying shipping 
     activities, and (3) income from money or other intangible 
     assets accumulated pursuant to a plan to purchase qualifying 
     shipping assets.\170\ Generally, the corporate loss 
     percentage \171\ of each item of loss, deduction, or credit 
     is disallowed with respect to any activity the income from 
     which is excluded from gross income under the provision. The 
     corporate loss percentage of an electing entity's interest 
     expense is disallowed in the ratio that the fair market value 
     of its qualifying shipping assets bears to the fair market 
     value of its total assets.
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     \170\ ``Qualifying shipping assets'' means any qualifying 
     vessel and other assets which are used in core qualifying 
     activities.
     \171\ ``Corporate loss percentage'' means the greatest 
     aggregate share, expressed as a percentage, of any item of 
     loss, deduction or credit of an electing corporation or 
     electing group of which such corporation is a member from 
     qualifying shipping activities that would otherwise be 
     required to be reported on the U.S. Federal income tax return 
     of an electing corporation during any taxable period.
---------------------------------------------------------------------------
     Allocation of credits, income, and deductions
       No deductions are allowed against the taxable income of an 
     electing corporation from qualifying shipping activities, and 
     no credit is allowed against the tax imposed under the 
     tonnage tax regime. No deduction is allowed for any net 
     operating loss attributable to the qualifying shipping 
     activities of a corporation to the extent that such loss is 
     carried forward by the corporation from a taxable year 
     preceding the first taxable year for which such corporation 
     was an electing corporation. For purposes of the provision, 
     section 482 applies to a transaction or series of 
     transactions between an electing entity and another person or 
     between an entity's qualifying shipping activities and other 
     activities carried on by it. The qualifying shipping 
     activities of an electing entity shall be treated as a 
     separate trade or business activity from all other activities 
     conducted by the entity.
     Qualifying shipping assets
       If an electing entity sells or disposes of qualifying 
     shipping assets in an otherwise taxable transaction, at the 
     election of the entity no gain is recognized if replacement 
     qualifying shipping assets are acquired during a limited 
     replacement period except to the extent that the amount 
     realized upon such sale or disposition exceeds the cost of 
     the replacement qualifying shipping assets. In the case of 
     replacement qualifying shipping assets purchased by an 
     electing entity which results in the nonrecognition of any 
     part of the gain realized as the result of a sale or other 
     disposition of qualifying shipping assets, the basis is the 
     cost of such replacement property decreased in the amount of 
     gain not recognized. If the property purchased consists of 
     more than one piece of property, the basis is allocated to 
     the purchased properties in proportion to their respective 
     costs.
       The election not to recognize gain on the disposition and 
     replacement of qualifying shipping assets is not available if 
     the replacement qualifying shipping assets are acquired from 
     a related person except to the extent that the related person 
     (as defined under section 267(b) or 707(b)(1)) acquired the 
     replacement qualifying shipping assets from an unrelated 
     person during a limited replacement period.
     Election
       Generally, any qualifying entity may elect into the tonnage 
     tax regime by filing an election with the qualifying entity's 
     income tax return for the first taxable year to which 
     the election applies. However, a qualifying entity, which 
     is a member of a controlled group, may only make an 
     election into the tonnage tax regime if all qualifying 
     entities that are members of the controlled group make 
     such an election. Once made, an election is effective for 
     the taxable year in which it was made and for all 
     succeeding taxable years of the entity until the election 
     is terminated. An election may be terminated if the entity 
     ceases to be a qualifying entity or if the election is 
     revoked. In the event that a qualifying entity elects into 
     the tonnage tax regime and subsequently revokes the 
     election, such entity is barred from electing back into 
     the regime until the fifth taxable year after the 
     termination is effective, unless the Secretary of the 
     Treasury consents to the election.
       A qualifying entity means a trust or business entity that 
     (1) operates one or more qualifying vessels and (2) meets the 
     ``shipping activity requirement.'' \172\ The shipping 
     activity requirement is met for a taxable year only by an 
     entity that meets one of the following requirements: (1) in 
     the first taxable year of its election into the tonnage tax 
     regime, for the preceding taxable year on average at least 25 
     percent of the aggregate tonnage of the qualifying vessels 
     which were operated by the entity were owned by the entity or 
     bareboat chartered to the entity; (2) in the second or any 
     subsequent taxable year of its election into the tonnage tax 
     regime, in each of the two preceding taxable years on average 
     at least 25 percent of the aggregate tonnage of the 
     qualifying vessels which were operated by the entity were 
     owned by the entity or bareboat chartered to the entity; or 
     (3) requirements (1) or (2) above would be met if the 25 
     percent average tonnage requirement was applied on an 
     aggregate basis to the controlled group of which such entity 
     is a member, and vessel charters between members of the 
     controlled group were disregarded.
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     \172\ An entity is generally treated as operating any vessel 
     owned by or chartered to the entity. However, an entity is 
     treated as operating a vessel that it has chartered out on 
     bareboat basis only if: (1) the vessel is temporarily surplus 
     to the entity's requirements and the term of the charter does 
     not exceed three years or (2) the vessel is bareboat 
     chartered to a member of a controlled group which includes 
     such entity or to an unrelated third party that sub-bareboats 
     or time charters the vessel to a member of such controlled 
     group (including the owner). Special rules apply in an 
     instance in which an electing entity temporarily ceases to 
     operate a qualifying vessel.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill with 
     modifications.
     In general
       The proposal generally allows corporations to elect a 
     ``tonnage tax'' in lieu of the corporate income tax on 
     taxable income from certain shipping activities. Accordingly, 
     an electing corporation's gross income does not include its 
     income from qualifying shipping activities, and electing 
     corporations are only subject to tax on these activities at 
     the maximum corporate income tax rate on their notional 
     shipping income, which is based on the net tonnage of the 
     corporation's qualifying vessels. An electing corporation is 
     treated as a separate trade or business activity distinct 
     from all other activities conducted by such corporation.
     Notional shipping income
       An electing corporation's notional shipping income for the 
     taxable year is the sum of the following amounts for each of 
     the qualifying vessels it operates: (1) the daily notional 
     shipping income \173\ from the operation of the qualifying 
     vessel in United States foreign trade,\174\ and (2) the 
     number of days during the taxable year that the electing 
     corporation operated such vessel as a qualifying vessel in 
     United States foreign trade.\175\ However, in the case of a 
     qualifying vessel any of the income of which is not included 
     in gross income, the amount of notional shipping income from 
     such vessel is equal to the notional shipping income from 
     such vessel (determined without regard to this provision) 
     that bears the same ratio as the gross income from the 
     operation of such vessel in the United States foreign trade 
     bears to the sum of such gross income and the income so 
     excluded. Generally, a ``qualifying vessel'' is described as 
     a self-propelled U.S.-flag vessel of not less than 10,000 
     deadweight tons used exclusively in U.S. foreign trade.
---------------------------------------------------------------------------
     \173\ The daily notional shipping income from the operation 
     of a qualifying vessel is 40 cents for each 100 tons of the 
     net tonnage of the vessel (up to 25,000 net tons), and 20 
     cents for each 100 tons of the net tonnage of the vessel, in 
     excess of 25,000 net tons.
     \174\ ``United States foreign trade'' means the 
     transportation of goods or passengers between a place in the 
     United States and a foreign place or between foreign places. 
     The temporary use in the United States domestic trade (i.e., 
     the transportation of goods or passengers between places in 
     the United States) of any qualifying vessel is deemed to be 
     the use in the United States foreign trade of such vessel, if 
     such use does not exceed 30 days in a taxable year.
     \175\ Special rules apply in the case of multiple operators 
     of a vessel.
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     Items not subject to corporate income tax
       Generally, a corporate member of an electing group \176\ 
     does not include in gross income its income from qualifying 
     shipping activities. Qualifying shipping activities consist 
     of (1) core qualifying activities, (2) qualifying secondary 
     activities, and (3) qualifying incidental activities. All of 
     an electing entity's core qualifying activities are excluded 
     from gross income. However, only a portion of an electing 
     corporation's secondary and incidental activities are treated 
     as qualifying income and thus, are excluded from gross 
     income.
---------------------------------------------------------------------------
     \176\ An electing group means any group that would be treated 
     as a single employer under subsection (a) or (b) of section 
     52 if paragraphs (1) and (2) of section 52(a) did not apply.
---------------------------------------------------------------------------
       Core qualifying activities consist of the operation of 
     qualifying vessels.\177\ Secondary

[[Page H8501]]

     activities generally consist of (1) the active management or 
     operation of vessels in U.S. foreign trade; (2) the provision 
     of vessels, barge, container or cargo-related facilities or 
     services; and (3) other activities of the electing 
     corporation and other members of its electing group that are 
     an integral part of its business of operating qualifying 
     vessels in United States foreign trade. Secondary activities 
     do not include any core qualifying activities. In addition, 
     any activities that would otherwise constitute core 
     qualifying activities of a corporation, who is a member of an 
     electing group but is not an electing corporation, are 
     treated as qualifying secondary activities. Incidental 
     activities are activities that are incidental to core 
     qualifying activities and are not qualifying secondary 
     activities.
---------------------------------------------------------------------------
     \177\ It is intended that the operation of a lighter-aboard-
     ship be treated as the operation of a vessel and not the 
     operation of a barge.
---------------------------------------------------------------------------
     Denial of credits, income and deductions
       Each item of loss, deduction, or credit of any taxpayer is 
     disallowed with respect to the income that is excluded from 
     gross income under the proposal. An electing corporation's 
     interest expense is disallowed in the ratio that the fair 
     market value of its qualifying vessels bears to the fair 
     market value of its total assets; special rules apply for 
     disallowing interest expense in the context of an electing 
     group.
       No deductions are allowed against the notional shipping 
     income of an electing corporation, and no credit is allowed 
     against the notional tax imposed under the tonnage tax 
     regime. No deduction is allowed for any net operating loss 
     attributable to the qualifying shipping activities of a 
     corporation to the extent that such loss is carried forward 
     by the corporation from a taxable year preceding the first 
     taxable year for which such corporation was an electing 
     corporation.
     Dispositions of qualifying vessels
       Generally, if an qualifying vessel operator sells or 
     disposes of a qualifying vessel in an otherwise taxable 
     transaction, at the election of the operator no gain is 
     recognized if a replacement qualifying vessel is acquired 
     during a limited replacement period except to the extent that 
     the amount realized upon such sale or disposition exceeds the 
     cost of the replacement qualifying vessels. Generally, in the 
     case of the replacement of a qualifying vessel that results 
     in the nonrecognition of any part of the gain under the rule 
     above, the basis of the replacement vessel is the cost of 
     such replacement property decreased in the amount of gain not 
     recognized.
       Generally, a qualifying vessel operator is a corporation 
     that (1) operates one or more qualifying vessels and (2) 
     meets certain requirements with respect to its shipping 
     activities.\178\ Special rules apply in determining whether 
     corporate partners in pass-through entities are treated as 
     qualifying vessel operators.
---------------------------------------------------------------------------
     \178\ A person is generally treated as operating and using 
     any vessel owned by or chartered to it and that is used as a 
     qualifying vessel during such period. Special rules apply in 
     the case of pass-through entities, and special rules apply in 
     an instance in which an electing entity temporarily ceases to 
     operate a qualifying vessel due to dry-docking, surveying, 
     inspection, repairs and the like.
---------------------------------------------------------------------------
     Election
       Generally, any qualifying vessel operator may elect into 
     the tonnage tax regime and such election is made in the form 
     prescribed by Treasury. An election is only effective if made 
     before the due date (including extensions) for filing the 
     corporation's return for such taxable year. However, a 
     qualifying vessel operator, which is a member of a controlled 
     group, may only make an election into the tonnage tax regime 
     if all qualifying vessel operators that are members of the 
     controlled group make such an election. Once made, an 
     election is effective for the taxable year in which it was 
     made and for all succeeding taxable years of the entity until 
     the election is terminated.
     Effective date
       The provision is effective for taxable years beginning 
     after the date of enactment.
     16. Charitable contribution deduction for certain expenses in 
         support of Native Alaskan subsistence whaling (sec. 296 
         of the House bill and sec. 170 of the Code)


                              Present Law

       In computing taxable income, individuals who do not elect 
     the standard deduction may claim itemized deductions, 
     including a deduction (subject to certain limitations) for 
     charitable contributions or gifts made during the taxable 
     year to a qualified charitable organization or governmental 
     entity. Individuals who elect the standard deduction may not 
     claim a deduction for charitable contributions made during 
     the taxable year.
       No charitable contribution deduction is allowed for a 
     contribution of services. However, unreimbursed expenditures 
     made incident to the rendition of services to an 
     organization, contributions to which are deductible, may 
     constitute a deductible contribution.\179\ Specifically, 
     section 170(j) provides that no charitable contribution 
     deduction is allowed for traveling expenses (including 
     amounts expended for meals and lodging) while away from home, 
     whether paid directly or by reimbursement, unless there is no 
     significant element of personal pleasure, recreation, or 
     vacation in such travel.
---------------------------------------------------------------------------
     \179\ Treas. Reg. sec. 1.170A-1(g).
---------------------------------------------------------------------------


                               House Bill

       The House bill allows individuals to claim a deduction 
     under section 170 not exceeding $10,000 per taxable year for 
     certain expenses incurred in carrying out sanctioned whaling 
     activities. The deduction is available only to an individual 
     who is recognized by the Alaska Eskimo Whaling Commission as 
     a whaling captain charged with the responsibility of 
     maintaining and carrying out sanctioned whaling activities. 
     The deduction is available for reasonable and necessary 
     expenses paid by the taxpayer during the taxable year for: 
     (1) the acquisition and maintenance of whaling boats, 
     weapons, and gear used in sanctioned whaling activities; (2) 
     the supplying of food for the crew and other provisions for 
     carrying out such activities; and (3) the storage and 
     distribution of the catch from such activities. It is 
     intended that the Secretary shall require that the taxpayer 
     substantiate deductible expenses by maintaining appropriate 
     written records that show, for example, the time, place, 
     date, amount, and nature of the expense, as well as the 
     taxpayer's eligibility for the deduction, and that such 
     substantiation be provided as part of the taxpayer's income 
     tax return, to the extent provided by the Secretary.
       For purposes of the provision, the term ``sanctioned 
     whaling activities'' means subsistence bowhead whale hunting 
     activities conducted pursuant to the management plan of the 
     Alaska Eskimo Whaling Commission.
       Effective date.--The provision is effective for 
     contributions made after December 31, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill provision, 
     modified to provide that the Secretary shall issue guidance 
     regarding substantiation of amounts claimed as deductible 
     whaling expenses.

                         I. General Provisions

     1. Modification to qualified small issue bonds (sec. 301 of 
         the Senate amendment and sec. 144 of the Code)


                              Present Law

       Qualified small-issue bonds are tax-exempt State and local 
     government bonds used to finance private business 
     manufacturing facilities (including certain directly related 
     and ancillary facilities) or the acquisition of land and 
     equipment by certain farmers. In both instances, these bonds 
     are subject to limits on the amount of financing that may be 
     provided, both for a single borrowing and in the aggregate. 
     In general, no more than $1 million of small-issue bond 
     financing may be outstanding at any time for property of a 
     business (including related parties) located in the same 
     municipality or county. Generally, this $1 million limit may 
     be increased to $10 million if all other capital expenditures 
     of the business in the same municipality or county are 
     counted toward the limit over a six-year period that begins 
     three years before the issue date of the bonds and ends three 
     years after such date. Outstanding aggregate borrowing is 
     limited to $40 million per borrower (including related 
     parties) regardless of where the property is located.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the maximum allowable amount 
     of total capital expenditures by an eligible business or a 
     related party in the same municipality or county during the 
     six-year measurement period from $10 million to $20 million. 
     As under present law, no more than $10 million of bond 
     financing may be outstanding at any time for property of an 
     eligible business (including related parties) located in the 
     same municipality or county. Other present-law limits (e.g., 
     the $40 million per borrower limit) continue to apply.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except with respect to the effective date. The conference 
     agreement increases the maximum allowable amount of total 
     capital expenditures by an eligible business (or related 
     party) in the same municipality or county from $10 million to 
     $20 million for bonds issued after September 30, 2009.
       Effective date.--The provision is effective for bonds 
     issued after September 30, 2009.
     2. Expensing of investment in broadband equipment (sec. 302 
         of the Senate amendment and new sec. 191 of the Code)


                              Present Law

       Under present law, a taxpayer generally must capitalize the 
     cost of property used in a trade or business and recover such 
     cost over time through annual deductions for depreciation or 
     amortization. Tangible property generally is depreciated 
     under the Modified Accelerated Cost Recovery System (MACRS) 
     of section 168, which determines depreciation by applying 
     specific recovery periods, placed-in-service conventions, and 
     depreciation methods to the cost of various types of 
     depreciable property.
       Personal property is classified under MACRS based on the 
     property's ``class life'' unless a different classification 
     is specifically provided in section 168. The class life 
     applicable for personal property is the asset guideline 
     period (midpoint class life as of January 1, 1986). Based on 
     the property's classification, a recovery period is 
     prescribed under MACRS. In general, there are six

[[Page H8502]]

     classes of recovery periods to which personal property can be 
     assigned. For example, personal property that has a class 
     life of four years or less has a recovery period of three 
     years, whereas personal property with a class life greater 
     than four years but less than 10 years has a recovery period 
     of five years. The class lives and recovery periods for most 
     property are contained in Revenue Procedure 87-56.\180\
---------------------------------------------------------------------------
     \180\ 1987-2 C.B. 674 (as clarified and modified by Rev. 
     Proc. 88-22, 1988-1 C.B. 785).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that the taxpayer may elect 
     to treat qualified broadband expenditures paid or incurred 
     during the one-year period beginning after the date of 
     enactment as a deduction in the taxable year in which the 
     equipment is placed in service.
       Qualified expenditures are expenditures incurred with 
     respect to equipment with which the taxpayer offers current 
     generation broadband services to qualified subscribers. In 
     addition, qualified expenditures include qualified 
     expenditures incurred by the taxpayer with respect to 
     qualified equipment with which the taxpayer offers next 
     generation broadband services to qualified subscribers. 
     Current generation broadband services are defined as the 
     transmission of signals at a rate of at least 1 million bits 
     per second to the subscriber and at a rate of at least 
     128,000 bits per second from the subscriber. Next generation 
     broadband services are defined as the transmission of signals 
     at a rate of at least 22 million bits per second to the 
     subscriber and at a rate of at least 5 million bits per 
     second from the subscriber.
       Qualified subscribers for the purposes of the current 
     generation broadband deduction include nonresidential 
     subscribers in rural or underserved areas, and residential 
     subscribers in rural or underserved areas that are not in 
     a saturated market. A saturated market is defined as a 
     census tract in which current generation broadband 
     services have been provided by a single provider to 85 
     percent or more of the total number of potential 
     residential subscribers residing within such census 
     tracts. For the purposes of the next generation broadband 
     deduction, qualified subscribers include nonresidential 
     subscribers in rural or underserved areas or any 
     residential subscriber. In the case of a taxpayer who 
     incurs expenditures for equipment capable of serving both 
     subscribers in qualifying areas and other areas, 
     qualifying expenditures are determined by multiplying 
     otherwise qualifying expenditures by the ratio of the 
     number of potential qualifying subscribers to all 
     potential subscribers the qualifying equipment would be 
     capable of serving.
       Qualifying equipment must be capable of providing broadband 
     services a majority of the time during periods of maximum 
     demand. Qualifying equipment is equipment that extends from 
     (1) the last point of switching to the outside of the 
     building in which the subscriber is located, (2) the customer 
     side of a mobile telephone switching office to a 
     transmission/reception antenna (including the antenna) of the 
     subscriber, (3) the customer side of the headend to the 
     outside of the building in which the subscriber is located, 
     or (4) a transmission/reception antenna to a transmission/
     reception antenna on the outside of the building used by the 
     subscriber. Any packet switching equipment deployed in 
     connection with other qualifying equipment is qualifying 
     equipment, regardless of location, provided that it is the 
     last such equipment in a series as part of transmission of a 
     signal to a subscriber or the first in a series in the 
     transmission of a signal from a subscriber. Also, 
     multiplexing and demultiplexing equipment are qualified 
     equipment.
       A rural area is any census tract which is not within 10 
     miles of any incorporated or census designated place with a 
     population of more than 25,000 and which is not within a 
     county with a population density of more than 500 people per 
     square mile. An underserved area is any census tract located 
     in an empowerment zone or enterprise community or any census 
     tract in which the poverty level is greater than or equal to 
     30 percent and in which the median family income is less than 
     70 percent of the greater of metropolitan area median family 
     income or Statewide median family income. A residential 
     subscriber is any individual who purchases broadband service 
     to be delivered to his or her dwelling.
       Effective date.--The provision is effective for 
     expenditures incurred after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Exemption for natural aging process from interest 
         capitalization (sec. 303 of the Senate amendment and sec. 
         263A of the Code)


                              Present Law

       Section 263A provides uniform rules for capitalization of 
     certain costs. In general, section 263A requires the 
     capitalization of the direct costs and an allocable portion 
     of the indirect costs of real or tangible personal property 
     produced by a taxpayer or real or personal property that is 
     acquired by a taxpayer for resale. Costs attributable to 
     producing or acquiring property generally must be capitalized 
     by charging such costs to basis or, in the case of property 
     which is inventory in the hands of the taxpayer, by including 
     such costs in inventory.
       Special rules apply for the allocation of interest expense 
     to property produced by the taxpayer.\181\ In general, 
     interest paid or incurred during the production period of 
     certain types of property that is allocable to the production 
     of the property must be capitalized. Property subject to the 
     interest capitalization requirement includes property 
     produced by the taxpayer for use in its trade or business or 
     in an activity for profit, but only if it (1) is real 
     property, (2) has an estimated production period exceeding 
     two years (one year if the cost of the property exceeds $1 
     million), or (3) has a class life of 20 years or more (as 
     defined under section 168). The production period of property 
     for this purpose begins when construction or production is 
     commenced and ends when the property is ready to be placed in 
     service or is ready to be held for sale. For example, in the 
     case of property such as tobacco, wine, or whiskey that is 
     aged before it is sold, the production period includes the 
     aging period. Activities such as planning or design generally 
     do not cause the production period to begin.
---------------------------------------------------------------------------
     \181\ Sec. 263A(f).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that for purposes of 
     determining the production period for purposes of 
     capitalization of interest expense under section 263A(f) that 
     the production period for distilled spirits shall be 
     determined without regard to any period allocated to the 
     natural aging process.\182\
---------------------------------------------------------------------------
     \182\ It is intended that, for purposes of the provision, the 
     natural aging process begin when the distilled spirits are 
     placed in charred barrels to lie for an extended period of 
     time to allow such product to obtain its color, much of its 
     distinctive flavor, and to mellow. The natural aging process 
     concludes when the distilled spirits are removed from the 
     barrel.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment applies to production 
     periods beginning after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Section 355 ``active business test'' applied to chains of 
         affiliated corporations (sec. 304 of the Senate amendment 
         and sec. 355 of the Code)


                              Present Law

       A corporation generally is required to recognize gain on 
     the distribution of property (including stock of a 
     subsidiary) to its shareholders as if such property had been 
     sold for its fair market value. An exception to this rule 
     applies if the distribution of the stock of a controlled 
     corporation satisfies the requirements of section 355 of the 
     Code. To qualify for tax-free treatment under section 355, 
     both the distributing corporation and the controlled 
     corporation must be engaged immediately after the 
     distribution in the active conduct of a trade or business 
     that has been conducted for at least five years and was not 
     acquired in a taxable transaction during that period.\183\ 
     For this purpose, a corporation is engaged in the active 
     conduct of a trade or business only if (1) the corporation is 
     directly engaged in the active conduct of a trade or 
     business, or (2) the corporation is not directly engaged in 
     an active business, but substantially all of its assets 
     consist of stock and securities of a corporation it controls 
     that is engaged in the active conduct of a trade or 
     business.\184\
---------------------------------------------------------------------------
     \183\ Section 355(b).
     \184\ Section 355(b)(2)(A).
---------------------------------------------------------------------------
       In determining whether a corporation satisfies the active 
     trade or business requirement, the IRS position for advance 
     ruling purposes is that the value of the gross assets of the 
     trade or business being relied on must ordinarily constitute 
     at least 5 percent of the total fair market value of the 
     gross assets of the corporation directly conducting the trade 
     or business.\185\ However, if the corporation is not directly 
     engaged in an active trade or business, then the IRS takes 
     the position that the ``substantially all'' test requires 
     that at least 90 percent of the fair market value of the 
     corporation's gross assets consist of stock and securities of 
     a controlled corporation that is engaged in the active 
     conduct of a trade or business.\186\
---------------------------------------------------------------------------
     \185\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
     \186\ Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. 
     Proc. 77-37, sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the bill, the active business test is determined by 
     reference to the relevant affiliated group. For the 
     distributing corporation, the relevant affiliated group 
     consists of the distributing corporation as the common parent 
     and all corporations affiliated with the distributing 
     corporation through stock ownership described in section 
     1504(a)(1)(B) (regardless of whether the corporations are 
     includible corporations under section 1504(b)), immediately 
     after the distribution. The relevant affiliated group for a 
     controlled corporation is determined in a similar manner 
     (with the controlled corporation as the common parent).
       Effective date.--The bill applies to distributions after 
     the date of enactment, with three

[[Page H8503]]

     exceptions. The bill does not apply to distributions (1) made 
     pursuant to an agreement which is binding on the date of 
     enactment and at all times thereafter, (2) described in a 
     ruling request submitted to the IRS on or before the date of 
     enactment, or (3) described on or before the date of 
     enactment in a public announcement or in a filing with the 
     Securities and Exchange Commission. The distributing 
     corporation may irrevocably elect not to have the exceptions 
     described above apply.
       The bill also applies to any distribution prior to the date 
     of enactment, but solely for the purpose of determining 
     whether, after the date of enactment, the taxpayer continues 
     to satisfy the requirements of section 355(b)(2)(A).\187\
---------------------------------------------------------------------------
     \187\ For example, a holding company taxpayer that had 
     distributed a controlled corporation in a spin-off prior to 
     the date of enactment, in which spin-off the taxpayer 
     satisfied the ``substantially all'' active business stock 
     test of present law section 355(b)(2)(A) immediately after 
     the distribution, would not be deemed to have failed to 
     satisfy any requirement that it continue that same qualified 
     structure for any period of time after the distribution, 
     solely because of a restructuring that occurs after the date 
     of enactment and that would satisfy the requirements of new 
     section 355(b)(2)(A).
---------------------------------------------------------------------------


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Modification to cooperative marketing rules to include 
         value-added processing involving animals (sec. 306 of the 
         Senate amendment and sec. 1388 of the Code)


                              Present Law

       Under present law, cooperatives generally are treated 
     similarly to pass-through entities in that the cooperative is 
     not subject to corporate income tax to the extent the 
     cooperative timely pays patronage dividends. Farmers' 
     cooperatives are tax-exempt and include cooperatives of 
     farmers, fruit growers, and like organizations that are 
     organized and operated on a cooperative basis for the purpose 
     of marketing the products of members or other producers and 
     remitting the proceeds of sales, less necessary marketing 
     expenses, on the basis of either the quantity or the value of 
     products furnished by them (sec. 521). Farmers' cooperatives 
     may claim a limited amount of additional deductions for 
     dividends on capital stock and patronage-based distributions 
     of nonpatronage income.
       In determining whether a cooperative qualifies as a tax-
     exempt farmers' cooperative, the IRS has apparently taken the 
     position that a cooperative is not marketing certain products 
     of members or other producers if the cooperative adds value 
     through the use of animals (e.g., farmers sell corn to a 
     cooperative which is fed to chickens that produce eggs sold 
     by the cooperative).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that marketing products of 
     members or other producers includes feeding products of 
     members or other producers to cattle, hogs, fish, chickens, 
     or other animals and selling the resulting animals or animal 
     products.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Extension of declaratory judgment procedures to farmers' 
         cooperative organizations (sec. 307 of the Senate 
         amendment and sec. 7428 of the Code)


                              Present Law

       In limited circumstances, the Code provide declaratory 
     judgment procedures, which generally permit a taxpayer to 
     seek judicial review of an IRS determination prior to the 
     issuance of a notice of deficiency and prior to payment of 
     tax. Examples of declaratory judgment procedures that are 
     available include disputes involving the initial or 
     continuing classification of a tax-exempt organization 
     described in section 501(c)(3), a private foundation 
     described in section 509(a), or a private operating 
     foundation described in section 4942(j)(3), the qualification 
     of retirement plans, the value of gifts, the status of 
     certain governmental obligations, or eligibility of an estate 
     to pay tax in installments under section 6166.\188\ In such 
     cases, taxpayers may challenge adverse determinations by 
     commencing a declaratory judgment action. For example, where 
     the IRS denies an organization's application for recognition 
     of exemption under section 501(c)(3) or fails to act on such 
     application, or where the IRS informs a section 501(c)(3) 
     organization that it is considering revoking or adversely 
     modifying its tax-exempt status, present law authorizes the 
     organization to seek a declaratory judgment regarding its tax 
     exempt status.
---------------------------------------------------------------------------
     \188\ For disputes involving the initial or continuing 
     qualification of an organization described in sections 
     501(c)(3), 509(a), or 4942(j)(3), declaratory judgment 
     actions may be brought in the U.S. Tax Court, a U.S. district 
     court, or the U.S. Court of Federal Claims. For all other 
     Federal tax declaratory judgment actions, proceedings may be 
     brought only in the U.S. Tax Court.
---------------------------------------------------------------------------
       Declaratory judgment procedures are not available under 
     present law to a cooperative with respect to an IRS 
     determination regarding its status as a farmers' cooperative 
     under section 521.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the declaratory judgment 
     procedures to cooperatives. Such a case may be commenced in 
     the U.S. Tax Court, a U.S. district court, or the U.S. Court 
     of Federal Claims, and such court would have jurisdiction to 
     determine a cooperative's initial or continuing qualification 
     as a farmers' cooperative described in section 521.
       Effective date.--The Senate amendment provision is 
     effective for pleadings filed after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     7. Temporary suspension of personal holding company tax (sec. 
         308 of the Senate amendment and sec. 541 of the Code)


                              Present Law

       Under present law, a tax is imposed on the taxable income 
     of corporations. The rates are as follows:

          TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES
------------------------------------------------------------------------
           If taxable income is:            Then the income tax rate is:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable income
$50,001-$75,000...........................  25 percent of taxable income
$75,001-$10,000,000.......................  34 percent of taxable income
Over $10,000,000..........................  35 percent of taxable income
------------------------------------------------------------------------

       The first two graduated rates described above are phased 
     out by a five-percent surcharge for corporations with taxable 
     income between $100,000 and $335,000. Also, the application 
     of the 34-percent rate is phased out by a three-percent 
     surcharge for corporations with taxable income between $15 
     million and $18,333,333.
       When a corporation distributes its after-tax earnings to 
     individual shareholders as dividends, a tax is imposed on the 
     shareholders at rates up to 15 percent.\189\ If a corporation 
     receives a dividend from another corporation, the recipient 
     corporation is entitled to a dividends-received deduction 
     that excludes a significant part of the dividend from the 
     recipient's income. The percentage of a dividend received 
     that is deducted varies from 70 percent to 100 percent, 
     depending on the level of ownership of the recipient 
     corporation in the distributing corporation.\190\ Thus, with 
     a 70 percent dividends received deduction, the tax rate 
     imposed on a dividend received by a corporation in the 35-
     percent tax bracket is 10.5 percent.\191\ For corporations at 
     lower rate brackets, the tax rates on these dividends are 
     lower.
---------------------------------------------------------------------------
     \189\ The 15-percent rate applies to dividends received in 
     taxable years beginning before January 1, 2009. Dividends 
     received on or after that date are scheduled to be taxed at 
     the rates applicable to ordinary income, which range up to 35 
     percent (39.6 percent for taxable years beginning after 
     December 31, 2010).
     \190\ If the recipient corporation owns less than 20 percent 
     of the distributing corporation, the dividends-received 
     deduction is 70 percent. If the recipient corporation owns 
     less than 80 percent but at least 20 percent of the 
     distributing corporation, the dividends-received deduction is 
     80 percent. If the recipient corporation owns 80 percent or 
     more of the distributing corporation, the dividends received 
     deduction is generally 100 percent.
     \191\ This is the 35 percent tax rate, applied to the 30 
     percent of the dividend that is taxable after a 70 percent 
     dividends-received deduction.
---------------------------------------------------------------------------
       In addition to the regular corporate income tax, a 
     corporate level penalty tax, the ``personal holding company 
     tax'' is currently imposed at 15 percent \192\ on certain 
     corporate earnings of personal holding companies that are not 
     distributed to shareholders. The personal holding company tax 
     was originally enacted to prevent so-called ``incorporated 
     pocketbooks'' that could be formed by individuals to hold 
     assets that could have been held directly by the individuals, 
     such as passive investment assets, and retain the income at 
     corporate rates that were then significantly lower than 
     individual tax rates.
---------------------------------------------------------------------------
     \192\ This rate is scheduled to return to the highest 
     individual tax rate when the lower dividend tax rate expires.
---------------------------------------------------------------------------
       Corporations are personal holding companies only if they 
     are closely held and have substantial passive income. A 
     corporation is closely held if, at any time during the last 
     half of the taxable year, more than 50 percent of the value 
     of the stock of the corporation is owned, directly or 
     indirectly, by five or fewer individuals (determined with the 
     application of specified attribution rules). A corporation 
     has substantial passive income if at least 60 percent of the 
     corporation's adjusted ordinary gross income (as defined for 
     this purpose) is ``personal holding company income,'' 
     generally, income from interest, dividends, rents, royalties, 
     compensation for use of corporate property by certain 
     shareholders, and income under contracts giving someone other 
     than the corporation the right to designate the individual 
     service provider. Numerous adjustments apply in specified 
     situations where there are specified indicia that the income 
     is active rather than passive.
       A corporation that otherwise would be subject to personal 
     holding company tax can distribute, or can agree to be deemed 
     to have distributed, its modified taxable income and avoid 
     the tax. A corporation may make such an actual dividend 
     distribution during its

[[Page H8504]]

     taxable year or, up to a specified limited amount, until the 
     15th day of the third month following the close of its 
     taxable year. In addition, if an election is filed with its 
     return for the year, its shareholders may agree to include a 
     deemed amount in their income as if a dividend had been paid 
     (``consent dividend''). A corporation may also make a 
     ``deficiency dividend'' distribution within 90 days following 
     a determination by the IRS or a court that personal holding 
     company tax liability is due. That distribution can eliminate 
     the personal holding company tax itself, though interest (and 
     penalties, if any) with respect to such tax would still be 
     owed to the IRS.\193\
---------------------------------------------------------------------------
     \193\ Section 547.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision repeals the personal holding company tax 
     until 2009, the period of time the 15 percent rate on 
     dividends received by individuals is scheduled to be in 
     effect.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.
       The provision would be treated, for purposes of section 303 
     of the Jobs and Growth Tax Relief Reconciliation Act of 2003 
     as enacted by Title III of that Act (relating to lower rates 
     on capital gains and dividends), so that the provision 
     terminates when those provisions terminate (currently 
     scheduled to be for taxable years beginning after December 
     31, 2008).


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. 5-year NOL carryback for 2003 NOLs if taxpayer elects out 
         of bonus depreciation as modified; extend temporary 
         suspension of 90-percent limit on minimum tax NOLs (sec. 
         310 of the Senate amendment and sec. 172 of the Code)


                              Present Law

       In general, a net operating loss (``NOL'') may be carried 
     back two years and carried forward 20 years to offset taxable 
     income in such years. The Job Creation and Worker Assistance 
     Act of 2002 (``JCWAA'') provides a temporary extension of the 
     general NOL carryback period to five years (from two years) 
     for NOLs arising in taxable years ending in 2001 and 2002.
       The alternative minimum tax (``AMT'') rules provide that a 
     taxpayer's NOL deduction cannot reduce the taxpayer's 
     alternative minimum taxable income (``AMTI'') by more than 90 
     percent of the AMTI (determined without regard to the NOL 
     deduction). JCWAA also provides that an NOL deduction 
     attributable to NOL carrybacks arising in taxable years 
     ending in 2001 and 2002, as well as NOL carryforwards to 
     these taxable years, may offset 100 percent of a taxpayer's 
     AMTI.
       JCWAA provides generally for an elective 30-percent 
     additional first-year depreciation deduction. The 
     requirements that must be satisfied in order for property to 
     qualify include that (1) the original use of the property 
     must commence with the taxpayer on or after September 11, 
     2001, (2) the taxpayer must acquire the property after 
     September 10, 2001 and before September 11, 2004, and (3) no 
     binding written contract for the acquisition of the property 
     is in effect before September 11, 2001 (or, in the case of 
     self-constructed property, manufacture, construction, or 
     production of the property does not begin before September 
     11, 2001).
       The Jobs and Growth Tax Relief Reconciliation Act of 2003 
     (``JGTRRA'') provides an elective additional first-year 
     depreciation deduction equal to 50 percent of the adjusted 
     basis of qualified property. Qualified property is defined in 
     the same manner as for purposes of the 30-percent additional 
     first-year depreciation deduction provided by the JCWAA 
     except that the applicable time period for acquisition (or 
     self construction) of the property is modified. Property with 
     respect to which the 50-percent additional first-year 
     depreciation deduction is claimed is not also eligible for 
     the 30-percent additional first-year depreciation deduction. 
     In order to qualify, the property must be acquired after May 
     5, 2003 and before January 1, 2005.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the application of the five-
     year carryback period to NOLs arising in taxable years ending 
     in 2003, provided that the taxpayer elects not to apply the 
     bonus depreciation provisions of section 168(k). Under the 
     provision, taxpayers with taxable years ending during January 
     are permitted to apply the provision to tax years ending 
     during January of 2004 rather than tax years ending during 
     January of 2003. The provision also allows an NOL deduction 
     attributable to NOL carrybacks arising in taxable years 
     ending in 2003, as well as NOL carryforwards to these taxable 
     years, to offset 100 percent of a taxpayer's AMTI.
       Effective date.--The Senate amendment applies to net 
     operating losses for taxable years ending after December 31, 
     2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Manufacturer's jobs credit (sec. 313 of the Senate 
         amendment)


                              Present Law

       There is no present law credit for a manufacturer's 
     employment of eligible Trade Adjustment Act (``TAA'') 
     recipients.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a 50-percent tax credit for 
     W-2 wages paid by the taxpayer to eligible TAA recipients (as 
     defined in sec. 35(c)(2) of the Code). The credit may not 
     exceed 50 percent of the lesser of: (1) the excess of the W-2 
     wages paid by the taxpayer during the taxable year over the 
     W-2 wages paid by the taxpayer during the preceding taxable 
     year, (2) the W-2 wages paid by the taxpayer during the 
     taxable year to any employee who is an eligible TAA recipient 
     for any month during such taxable year, or (3) 22.4 percent 
     of the W-2 wages paid by the taxpayer during the taxable 
     year. The amount of W-2 wages taken into account with respect 
     to any employee for any taxable year shall not exceed 
     $50,000.
       The otherwise allowable credit is limited if the value of 
     the taxpayer's non-domestic production increased from the 
     preceding taxable year. In such case, the credit is (1) 
     reduced to zero for taxpayers whose value of domestic 
     production does not exceed that from the preceding taxable 
     year, or (2) reduced by a percentage equal to the non-
     domestic share of the increase in the value of worldwide 
     production from the preceding taxable year.
       A taxpayer eligible for the credit is any taxpayer that has 
     domestic production gross receipts for the taxable year and 
     the preceding taxable year, and is not treated at any time 
     during the taxable year as an inverted domestic corporation 
     under section 7874 of the Senate amendment.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2003, and before January 1, 
     2006.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     10. Brownfields demonstration program for qualified green 
         building and sustainable design projects (sec. 314 of the 
         Senate amendment and secs. 142 and 146 of the Code)


                              Present Law

     In general
       Interest on debt incurred by States or local governments is 
     excluded from income if the proceeds of the borrowing are 
     used to carry out governmental functions of those entities or 
     the debt is repaid with governmental funds. Interest on bonds 
     that nominally are issued by States or local governments, but 
     the proceeds of which are used (directly or indirectly) by a 
     private person and payment of which is derived from funds of 
     such a private person is taxable unless the purpose of the 
     borrowing is approved specifically in the Code or in a non-
     Code provision of a revenue Act. These bonds are called 
     ``private activity bonds.'' The term ``private 
     person'' includes the Federal Government and all other 
     individuals and entities other than States or local 
     governments.
     Private activities eligible for financing with tax-exempt 
         private activity bonds
       Present law includes several exceptions permitting States 
     or local governments to act as conduits providing tax-exempt 
     financing for private activities. For example, interest on 
     bonds issued to benefit section 501(c)(3) organizations is 
     generally tax-exempt (``qualified 501(c)(3) bonds''). Both 
     capital expenditures and limited working capital expenditures 
     of section 501(c)(3) organizations may be financed with 
     qualified 501(c)(3) bonds.
       In addition, States or local governments may issue tax-
     exempt ``exempt-facility bonds'' to finance property for 
     certain private businesses.\194\ Business facilities eligible 
     for this financing include transportation (airports, ports, 
     local mass commuting, and high speed intercity rail 
     facilities); privately owned and/or privately operated public 
     works facilities (sewage, solid waste disposal, local 
     district heating or cooling, hazardous waste disposal 
     facilities, and public educational facilities); privately 
     owned and/or operated low-income rental housing;\195\ and 
     certain private facilities for the local furnishing of 
     electricity or gas. A further provision allows tax-exempt 
     financing for ``environmental enhancements of hydro-electric 
     generating facilities.'' Tax-exempt financing also is 
     authorized for capital expenditures for small manufacturing 
     facilities and land and equipment for first-time farmers 
     (``qualified small-issue bonds''), local redevelopment 
     activities (``qualified redevelopment bonds''), and eligible 
     empowerment zone and enterprise community businesses. Tax-
     exempt private activity bonds also may be issued to finance 
     limited non-business purposes: certain student loans and 
     mortgage loans for owner-occupied housing (``qualified 
     mortgage bonds'' and ``qualified veterans'' mortgage 
     bonds'').
---------------------------------------------------------------------------
     \194\  Secs. 141(e) and 142(a).
     \195\  Residential rental projects must satisfy low-income 
     tenant occupancy requirements for a minimum period of 15 
     years.
---------------------------------------------------------------------------
       Generally, tax-exempt private activity bonds are subject to 
     restrictions that do not apply to other bonds issued by State 
     or local governments. For example, most tax-exempt private 
     activity bonds are subject to annual volume limits on the 
     aggregate face amount of such bonds that may be issued.\196\
---------------------------------------------------------------------------
     \196\ Sec. 146.
---------------------------------------------------------------------------


                               House Bill

       No provision.

[[Page H8505]]

                            Senate Amendment

     In general
       The Senate amendment creates a new category of exempt-
     facility bond, the qualified green building and sustainable 
     design project bond (``qualified green bond''). A qualified 
     green bond is defined as any bond issued as part of an issue 
     that finances a project designated by the Secretary, after 
     consultation with the Administrator of the Environmental 
     Protection Agency (the ``Administrator'') as a green building 
     and sustainable design project that meets the following 
     eligibility requirements: (1) at least 75 percent of the 
     square footage of the commercial buildings that are part of 
     the project is registered for the U.S. Green Building 
     Council's LEED \197\ certification and is reasonably expected 
     (at the time of designation) to meet such certification; (2) 
     the project includes a brownfield site;\198\ (3) the project 
     receives at least $5 million dollars in specific State or 
     local resources; and (4) the project includes at least one 
     million square feet of building or at least 20 acres of land.
---------------------------------------------------------------------------
     \197\ The LEED (``Leadership in Energy and Environmental 
     Design'') Green Building Rating System is a voluntary, 
     consensus-based national standard for developing high-
     performance sustainable buildings. Registration is the first 
     step toward LEED certification. Actual certification requires 
     that the applicant project satisfy a number of requirements. 
     Commercial buildings, as defined by standard building codes 
     are eligible for certification. Commercial occupancies 
     include, but are not limited to, offices, retail and service 
     establishments, institutional buildings (e.g. libraries, 
     schools, museums, churches, etc.), hotels, and residential 
     buildings of four or more habitable stories.
     \198\ For this purpose, a brownfield site is defined by 
     section 101(39) of the Comprehensive Environmental Response, 
     Compensation, and Liability Act of 1980 (42 U.S.C. 9601), 
     including a site described in subparagraph (D)(ii)(II)(aa) 
     thereof (relating to a site that is contaminated by petroleum 
     or a petroleum product excluded from the definition of 
     'hazardous substance' under section 101).
---------------------------------------------------------------------------
       Under the provision, qualified green bonds are not subject 
     to the State bond volume limitations. Rather, there is a 
     national limitation of $2 billion of qualified green bonds 
     that the Secretary may allocate, in the aggregate, to 
     qualified green building and sustainable design projects. 
     Qualified green bonds may be currently refunded if certain 
     conditions are met, but cannot be advance refunded. The 
     authority to issue qualified green bonds terminates after 
     September 30, 2009.
     Application and designation process
       The provision requires the submission of an application 
     that meets certain requirements before a project may be 
     designated for financing with qualified green bonds. In 
     addition to the eligibility requirements listed above, each 
     project application must demonstrate that the net benefit of 
     the tax-exempt financing provided will be allocated for (i) 
     the purchase, construction, integration or other use of 
     energy efficiency, renewable energy and sustainable design 
     features of the project, (ii) compliance with LEED 
     certification standards, and/or (iii) the purchase, 
     remediation, foundation construction, and preparation of the 
     brownfield site. The application also must demonstrate that 
     the project is expected, based on independent analysis, to 
     provide the equivalent of at least 1,500 full-time permanent 
     employees (150 full-time employees in rural States) when 
     completed and the equivalent of at least 1,000 construction 
     employees (100 full-time employees in rural States). In 
     addition, each project application shall contain a 
     description of: (1) the amount of electric consumption 
     reduced as compared to conventional construction; (2) the 
     amount of sulfur dioxide daily emissions reduced compared 
     to coal generation; (3) the amount of gross installed 
     capacity of the project's solar photovoltaic capacity 
     measured in megawatts; and (4) the amount of the project's 
     fuel cell energy generation, measured in megawatts.
       Under the Senate Amendment, each project must be nominated 
     by a State or local government within 180 days of enactment 
     of this Act and such State or local government must provide 
     written assurances that the project will satisfy certain 
     eligibility requirements. Within 60 days after the end of the 
     application period, the Secretary, after consultation with 
     the Administrator, will designate the qualified green 
     building and sustainable design projects eligible for 
     financing with qualified green bonds. At least one of the 
     projects must be in or within a ten-mile radius of an 
     empowerment zone (as defined under section 1391 of the Code) 
     and at least one project must be in a rural State.\199\ No 
     more than one project is permitted in a State. A project 
     shall not be designated for financing with qualified green 
     bonds if such project includes a stadium or arena for 
     professional sports exhibitions or games.
---------------------------------------------------------------------------
     \199\ The term ``rural State'' means any State that has (1) a 
     population of less than 4.5 million according to the 2000 
     census; (2) a population density of less than 150 people per 
     square mile according to the 2000 census; and (3) increased 
     in population by less than half the rate of the national 
     increase between the 1990 and 2000 censuses.
---------------------------------------------------------------------------
       The provision requires the Secretary, after consultation 
     with the Administrator, to ensure that the projects 
     designated shall, in the aggregate: (1) reduce electric 
     consumption by more than 150 megawatts annually as compared 
     to conventional construction; (2) reduce daily sulfur dioxide 
     emissions by at least 10 tons compared to coal generation 
     power; (3) expand by 75 percent the domestic solar 
     photovoltaic market in the United States (measured in 
     megawatts) as compared to the expansion of that market from 
     2001 to 2002; and (4) use at least 25 megawatts of fuel cell 
     energy generation.
       Each project must certify to the Secretary, no later than 
     30 days after the completion of the project, that the net 
     benefit of the tax-exempt financing was used for the purposes 
     described in the project application. In addition, no bond 
     proceeds can be used to provide any facility the principal 
     business of which is the sale of food or alcoholic beverages 
     for consumption on the premises.
     Special rules
       The provision requires each issuer to maintain, on behalf 
     of each project, an interest bearing reserve account equal to 
     one percent of the net proceeds of any qualified green bond 
     issued for such project. Not later than five years after the 
     date of issuance, the Secretary, after consultation with the 
     Administrator, shall determine whether the project financed 
     with the proceeds of qualified green bonds has substantially 
     complied with the requirements and goals described in the 
     project application. If the Secretary, after such 
     consultation, certifies that the project has substantially 
     complied with the requirements and goals, amounts in the 
     reserve account, including all interest, shall be released to 
     the project. If the Secretary determines that the project has 
     not substantially complied with such requirements and goals, 
     amounts in the reserve account, including all interest, shall 
     be paid to the United States Treasury.
       Effective date.--The provision is effective for bonds 
     issued after December 31, 2004, and before October 1, 2009.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                   J. Manufacturing Relating to Films

     1. Special rules for certain film and television production 
         (sec. 321 of the Senate amendment and new sec. 181 of the 
         Code)


                              Present Law

       The modified Accelerated Cost Recovery System (``MACRS'') 
     does not apply to certain property, including any motion 
     picture film, video tape, or sound recording, or to any other 
     property if the taxpayer elects to exclude such property from 
     MACRS and the taxpayer properly applies a unit-of-production 
     method or other method of depreciation not expressed in a 
     term of years. Section 197 does not apply to certain 
     intangible property, including property produced by the 
     taxpayer or any interest in a film, sound recording, video 
     tape, book or similar property not acquired in a transaction 
     (or a series of related transactions) involving the 
     acquisition of assets constituting a trade or business or 
     substantial portion thereof. Thus, the recovery of the cost 
     of a film, video tape, or similar property that is produced 
     by the taxpayer or is acquired on a ``stand-alone'' basis by 
     the taxpayer may not be determined under either the MACRS 
     depreciation provisions or under the section 197 amortization 
     provisions. The cost recovery of such property may be 
     determined under section 167, which allows a depreciation 
     deduction for the reasonable allowance for the exhaustion, 
     wear and tear, or obsolescence of the property. A taxpayer is 
     allowed to recover, through annual depreciation deductions, 
     the cost of certain property used in a trade or business or 
     for the production of income. Section 167(g) provides that 
     the cost of motion picture films, sound recordings, 
     copyrights, books, and patents are eligible to be recovered 
     using the income forecast method of depreciation.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits qualifying film and television 
     productions to elect to deduct certain production 
     expenditures in the year the expenditure is incurred in lieu 
     of capitalizing the cost and recovering it through 
     depreciation allowances.\200\
---------------------------------------------------------------------------
     \200\ An election to deduct such costs shall be made in such 
     manner as prescribed by the Secretary and by the due date 
     (including extensions of time) for filing the taxpayer's 
     return of tax for the taxable year in which production costs 
     of such property are first incurred. An election may not be 
     revoked without the consent of the Secretary. The Committee 
     intends that, in the absence of specific guidance by the 
     Secretary, deducting qualifying costs on the appropriate tax 
     return shall constitute a valid election.
---------------------------------------------------------------------------
       The provision limits the amount of production expenditures 
     that may be expensed to $15 million for each qualifying 
     production.\201\ An additional $5 million of production 
     expenditures may be deducted (up to $20 million in total) if 
     a significant amount of the production expenditures are 
     incurred in areas eligible for designation as a low-income 
     community or eligible for designation by the Delta Regional 
     Authority as a distressed county or isolated area of 
     distress. Expenditures in excess of $15 million ($20 million 
     in distressed areas) are required to be recovered over a 
     three-year period using the straight-line method beginning in 
     the month such property is placed in service.
---------------------------------------------------------------------------
     \201\ Thus, a qualifying film that is co-produced is limited 
     to $15 million of deduction. The benefits of this provision 
     shall be allocated among the owners of a film in a manner 
     that reasonably reflects each owner's proportionate 
     investment in and economic interest in the film.
---------------------------------------------------------------------------
       The provision defines a qualified film or television 
     production as any production of a motion picture (whether 
     released

[[Page H8506]]

     theatrically or directly to video cassette or any other 
     format); miniseries; scripted, dramatic television episode; 
     or movie of the week if at least 75 percent of the total 
     compensation expended on the production are for services 
     performed in the United States.\202\ With respect to property 
     which is one or more episodes in a television series, only 
     the first 44 episodes qualify under the provision. Qualified 
     property does not include sexually explicit productions as 
     defined by section 2257 of title 18 of the U.S. Code.
---------------------------------------------------------------------------
     \202\ The term compensation does not include participations 
     and residuals.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective for 
     qualified productions commencing after the date of enactment 
     and sunsets for qualifying productions commencing after 
     December 31, 2008.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the provision does not apply to qualified 
     productions the aggregate cost of which exceeds the $15 
     million threshold. The threshold is increased to $20 million 
     if a significant amount of the production expenditures are 
     incurred in areas eligible for designation as a low-income 
     community or eligible for designation by the Delta Regional 
     Authority as a distressed county or isolated area of 
     distress.
       Effective date.--The provision is effective for qualified 
     productions commencing after the date of enactment and before 
     January 1, 2009.\203\
---------------------------------------------------------------------------
     \203\ For this purpose, a production is treated as commencing 
     on the first date of principal photography.
---------------------------------------------------------------------------
     2. Modification of application of income forecast method of 
         depreciation (sec. 322 of the Senate amendment and sec. 
         167 of the Code)


                              Present Law

       The modified Accelerated Cost Recovery System (``MACRS'') 
     does not apply to certain property, including any motion 
     picture film, video tape, or sound recording, or to any other 
     property if the taxpayer elects to exclude such property from 
     MACRS and the taxpayer properly applies a unit-of-production 
     method or other method of depreciation not expressed in a 
     term of years. Section 197 does not apply to certain 
     intangible property, including property produced by the 
     taxpayer or any interest in a film, sound recording, video 
     tape, book or similar property not acquired in a transaction 
     (or a series of related transactions) involving the 
     acquisition of assets constituting a trade or business or 
     substantial portion thereof. Thus, the recovery of the cost 
     of a film, video tape, or similar property that is produced 
     by the taxpayer or is acquired on a ``stand-alone'' basis by 
     the taxpayer may not be determined under either the MACRS 
     depreciation provisions or under the section 197 amortization 
     provisions. The cost recovery of such property may be 
     determined under section 167, which allows a depreciation 
     deduction for the reasonable allowance for the exhaustion, 
     wear and tear, or obsolescence of the property. A taxpayer is 
     allowed to recover, through annual depreciation deductions, 
     the cost of certain property used in a trade or business or 
     for the production of income. Section 167(g) provides that 
     the cost of motion picture films, sound recordings, 
     copyrights, books, and patents are eligible to be recovered 
     using the income forecast method of depreciation.
     Income forecast method of depreciation
       Under the income forecast method, a property's depreciation 
     deduction for a taxable year is determined by multiplying the 
     adjusted basis of the property by a fraction, the numerator 
     of which is the income generated by the property during the 
     year and the denominator of which is the total forecasted or 
     estimated income expected to be generated prior to the close 
     of the tenth taxable year after the year the property was 
     placed in service. Any costs that are not recovered by the 
     end of the tenth taxable year after the property was placed 
     in service may be taken into account as depreciation in such 
     year.
       The adjusted basis of property that may be taken into 
     account under the income forecast method only includes 
     amounts that satisfy the economic performance standard of 
     section 461(h). In addition, taxpayers that claim 
     depreciation deductions under the income forecast method are 
     required to pay (or receive) interest based on a 
     recalculation of depreciation under a ``look-back'' method.
       The ``look-back'' method is applied in any ``recomputation 
     year'' by (1) comparing depreciation deductions that had been 
     claimed in prior periods to depreciation deductions that 
     would have been claimed had the taxpayer used actual, rather 
     than estimated, total income from the property; (2) 
     determining the hypothetical overpayment or underpayment of 
     tax based on this recalculated depreciation; and (3) applying 
     the overpayment rate of section 6621 of the Code. Except as 
     provided in Treasury regulations, a ``recomputation year'' is 
     the third and tenth taxable year after the taxable year the 
     property was placed in service, unless the actual income from 
     the property for each taxable year ending with or before the 
     close of such years was within 10 percent of the estimated 
     income from the property for such years.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment clarifies that, solely for purposes of 
     computing the allowable deduction for property under the 
     income forecast method of depreciation, participations and 
     residuals may be included in the adjusted basis of the 
     property beginning in the year such property is placed in 
     service, but only if such participations and residuals relate 
     to income to be derived from the property before the close of 
     the tenth taxable year following the year the property is 
     placed in service (as defined in section 167(g)(1)(A)). For 
     purposes of the provision, participations and residuals are 
     defined as costs the amount of which, by contract, varies 
     with the amount of income earned in connection with such 
     property. The provision also clarifies that the income from 
     the property to be taken into account under the income 
     forecast method is the gross income from such property.
       The provision also grants authority to the Treasury 
     Department to prescribe appropriate adjustments to the basis 
     of property (and the look-back method) to reflect the 
     treatment of participations and residuals under the 
     provision.
       In addition, the provision clarifies that, in the case of 
     property eligible for the income forecast method that the 
     holding in the Associated Patentees \204\ decision will 
     continue to constitute a valid method. Thus, rather than 
     accounting for participations and residuals as a cost of the 
     property under the income forecast method of depreciation, 
     the taxpayer may deduct those payments as they are paid as 
     under the Associated Patentees decision. This may be done on 
     a property-by-property basis and shall be applied 
     consistently with respect to a given property thereafter. The 
     provision also clarifies that distribution costs are not 
     taken into account for purposes of determining the taxpayer's 
     current and total forecasted income with respect to a 
     property.
---------------------------------------------------------------------------
     \204\ Associated Patentees, Inc. v. Commissioner, 4 T.C. 979 
     (1945).
---------------------------------------------------------------------------
       Effective date.--The Senate amendment applies to property 
     placed in service after date of enactment. No inference is 
     intended as to the appropriate treatment under present law. 
     It is intended that the Treasury Department and the IRS 
     expedite the resolution of open cases. In resolving these 
     cases in an expedited and balanced manner, the Treasury 
     Department and IRS are encouraged to take into account the 
     principles of the provision.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

  TITLE III--PROVISIONS RELATING TO TAX REFORM AND SIMPLIFICATION FOR 
                        UNITED STATES BUSINESSES

     1. Interest expense allocation rules (sec. 301 of the House 
         bill, sec. 205 of the Senate amendment, and sec. 864 of 
         the Code)


                              Present Law

     In general
       In order to compute the foreign tax credit limitation, a 
     taxpayer must determine the amount of its taxable income from 
     foreign sources. Thus, the taxpayer must allocate and 
     apportion deductions between items of U.S.-source gross 
     income, on the one hand, and items of foreign-source gross 
     income, on the other.
       In the case of interest expense, the rules generally are 
     based on the approach that money is fungible and that 
     interest expense is properly attributable to all business 
     activities and property of a taxpayer, regardless of any 
     specific purpose for incurring an obligation on which 
     interest is paid.\205\ For interest allocation purposes, the 
     Code provides that all members of an affiliated group of 
     corporations generally are treated as a single corporation 
     (the so-called ``one-taxpayer rule'') and allocation must be 
     made on the basis of assets rather than gross income.
---------------------------------------------------------------------------
     \205\ However, exceptions to the fungibility principle are 
     provided in particular cases, some of which are described 
     below.
---------------------------------------------------------------------------
     Affiliated group
       In general
       The term ``affiliated group'' in this context generally is 
     defined by reference to the rules for determining whether 
     corporations are eligible to file consolidated returns. 
     However, some groups of corporations are eligible to file 
     consolidated returns yet are not treated as affiliated for 
     interest allocation purposes, and other groups of 
     corporations are treated as affiliated for interest 
     allocation purposes even though they are not eligible to file 
     consolidated returns. Thus, under the one-taxpayer rule, the 
     factors affecting the allocation of interest expense of one 
     corporation may affect the sourcing of taxable income of 
     another, related corporation even if the two corporations do 
     not elect to file, or are ineligible to file, consolidated 
     returns.
       Definition of affiliated group--consolidated return rules
       For consolidation purposes, the term ``affiliated group'' 
     means one or more chains of includible corporations connected 
     through stock ownership with a common parent corporation 
     which is an includible corporation, but only if: (1) the 
     common parent owns directly stock possessing at least 80 
     percent of the total voting power and at least 80 percent of 
     the total value of at least one other includible corporation; 
     and (2) stock meeting the same voting power and value 
     standards with respect to each includible corporation 
     (excluding the common parent) is directly owned by one or 
     more other includible corporations.

[[Page H8507]]

       Generally, the term ``includible corporation'' means any 
     domestic corporation except certain corporations exempt from 
     tax under section 501 (for example, corporations organized 
     and operated exclusively for charitable or educational 
     purposes), certain life insurance companies, corporations 
     electing application of the possession tax credit, regulated 
     investment companies, real estate investment trusts, and 
     domestic international sales corporations. A foreign 
     corporation generally is not an includible corporation.
       Definition of affiliated group--special interest allocation 
           rules
       Subject to exceptions, the consolidated return and interest 
     allocation definitions of affiliation generally are 
     consistent with each other.\206\ For example, both 
     definitions generally exclude all foreign corporations from 
     the affiliated group. Thus, while debt generally is 
     considered fungible among the assets of a group of domestic 
     affiliated corporations, the same rules do not apply as 
     between the domestic and foreign members of a group with the 
     same degree of common control as the domestic affiliated 
     group.
---------------------------------------------------------------------------
     \206\ One such exception is that the affiliated group for 
     interest allocation purposes includes section 936 
     corporations that are excluded from the consolidated group.
---------------------------------------------------------------------------
       Banks, savings institutions, and other financial affiliates
       The affiliated group for interest allocation purposes 
     generally excludes what are referred to in the Treasury 
     regulations as ``financial corporations'' (Treas. Reg. sec. 
     1.861-11T(d)(4)). These include any corporation, otherwise a 
     member of the affiliated group for consolidation purposes, 
     that is a financial institution (described in section 581 or 
     section 591), the business of which is predominantly with 
     persons other than related persons or their customers, and 
     which is required by State or Federal law to be operated 
     separately from any other entity which is not a financial 
     institution (sec. 864(e)(5)(C)). The category of financial 
     corporations also includes, to the extent provided in 
     regulations, bank holding companies (including financial 
     holding companies), subsidiaries of banks and bank holding 
     companies (including financial holding companies), and 
     savings institutions predominantly engaged in the active 
     conduct of a banking, financing, or similar business (sec. 
     864(e)(5)(D)).
       A financial corporation is not treated as a member of the 
     regular affiliated group for purposes of applying the one-
     taxpayer rule to other non-financial members of that group. 
     Instead, all such financial corporations that would be so 
     affiliated are treated as a separate single corporation for 
     interest allocation purposes.


                               House Bill

     In general
       The provision modifies the present-law interest expense 
     allocation rules (which generally apply for purposes of 
     computing the foreign tax credit limitation) by providing a 
     one-time election under which the taxable income of the 
     domestic members of an affiliated group from sources outside 
     the United States generally is determined by allocating and 
     apportioning interest expense of the domestic members of a 
     worldwide affiliated group on a worldwide-group basis (i.e., 
     as if all members of the worldwide group were a single 
     corporation). If a group makes this election, the taxable 
     income of the domestic members of a worldwide affiliated 
     group from sources outside the United States is determined 
     by allocating and apportioning the third-party interest 
     expense of those domestic members to foreign-source income 
     in an amount equal to the excess (if any) of (1) the 
     worldwide affiliated group's worldwide third-party 
     interest expense multiplied by the ratio which the foreign 
     assets of the worldwide affiliated group bears to the 
     total assets of the worldwide affiliated group,\207\ over 
     (2) the third-party interest expense incurred by foreign 
     members of the group to the extent such interest would be 
     allocated to foreign sources if the provision's principles 
     were applied separately to the foreign members of the 
     group.\208\
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     \207\ For purposes of determining the assets of the worldwide 
     affiliated group, neither stock in corporations within the 
     group nor indebtedness (including receivables) between 
     members of the group is taken into account. It is anticipated 
     that the Treasury Secretary will adopt regulations addressing 
     the allocation and apportionment of interest expense on such 
     indebtedness that follow principles analogous to those of 
     existing regulations. Income from holding stock or 
     indebtedness of another group member is taken into account 
     for all purposes under the present-law rules of the Code, 
     including the foreign tax credit provisions.
     \208\ Although the interest expense of a foreign subsidiary 
     is taken into account for purposes of allocating the interest 
     expense of the domestic members of the electing worldwide 
     affiliated group for foreign tax credit limitation purposes, 
     the interest expense incurred by a foreign subsidiary is not 
     deductible on a U.S. return.
---------------------------------------------------------------------------
       For purposes of the new elective rules based on worldwide 
     fungibility, the worldwide affiliated group means all 
     corporations in an affiliated group (as that term is defined 
     under present law for interest allocation purposes) \209\ as 
     well as all controlled foreign corporations that, in the 
     aggregate, either directly or indirectly,\210\ would be 
     members of such an affiliated group if section 1504(b)(3) did 
     not apply (i.e., in which at least 80-percent of the vote and 
     value of the stock of such corporations is owned by one or 
     more other corporations included in the affiliated group). 
     Thus, if an affiliated group makes this election, the taxable 
     income from sources outside the United States of domestic 
     group members generally is determined by allocating and 
     apportioning interest expense of the domestic members of the 
     worldwide affiliated group as if all of the interest expense 
     and assets of 80-percent or greater owned domestic 
     corporations (i.e., corporations that are part of the 
     affiliated group under present-law section 864(e)(5)(A) as 
     modified to include insurance companies) and certain 
     controlled foreign corporations were attributable to a single 
     corporation.
---------------------------------------------------------------------------
     \209\ The provision expands the definition of an affiliated 
     group for interest expense allocation purposes to include 
     certain insurance companies that are generally excluded from 
     an affiliated group under section 1504(b)(2) (without regard 
     to whether such companies are covered by an election under 
     section 1504(c)(2)).
     \210\ Indirect ownership is determined under the rules of 
     section 958(a)(2) or through applying rules similar to those 
     of section 958(a)(2) to stock owned directly or indirectly by 
     domestic partnerships, trusts, or estates.
---------------------------------------------------------------------------
       In addition, if an affiliated group elects to apply the new 
     elective rules based on worldwide fungibility, the present-
     law rules regarding the treatment of tax-exempt assets and 
     the basis of stock in nonaffiliated 10-percent owned 
     corporations apply on a worldwide affiliated group basis.
       The common parent of the domestic affiliated group must 
     make the worldwide affiliated group election. It must be made 
     for the first taxable year beginning after December 31, 2008, 
     in which a worldwide affiliated group exists that includes at 
     least one foreign corporation that meets the requirements for 
     inclusion in a worldwide affiliated group. Once made, the 
     election applies to the common parent and all other members 
     of the worldwide affiliated group for the taxable year for 
     which the election was made and all subsequent taxable years, 
     unless revoked with the consent of the Secretary of the 
     Treasury.
     Financial institution group election
       The provision allows taxpayers to apply the present-law 
     bank group rules to exclude certain financial institutions 
     from the affiliated group for interest allocation purposes 
     under the worldwide fungibility approach. The provision also 
     provides a one-time ``financial institution group'' election 
     that expands the present-law bank group. Under the provision, 
     at the election of the common parent of the pre-election 
     worldwide affiliated group, the interest expense allocation 
     rules are applied separately to a subgroup of the worldwide 
     affiliated group that consists of (1) all corporations that 
     are part of the present-law bank group, and (2) all 
     ``financial corporations.'' For this purpose, a corporation 
     is a financial corporation if at least 80 percent of its 
     gross income is financial services income (as described in 
     section 904(d)(2)(C)(i) and the regulations thereunder) that 
     is derived from transactions with unrelated persons.\211\ For 
     these purposes, items of income or gain from a transaction or 
     series of transactions are disregarded if a principal purpose 
     for the transaction or transactions is to qualify any 
     corporation as a financial corporation.
---------------------------------------------------------------------------
     \211\ See Treas. Reg. sec. 1.904-4(e)(2).
---------------------------------------------------------------------------
       The common parent of the pre-election worldwide affiliated 
     group must make the election for the first taxable year 
     beginning after December 31, 2008, in which a worldwide 
     affiliated group includes a financial corporation. Once made, 
     the election applies to the financial institution group for 
     the taxable year and all subsequent taxable years. In 
     addition, the provision provides anti-abuse rules under which 
     certain transfers from one member of a financial institution 
     group to a member of the worldwide affiliated group outside 
     of the financial institution group are treated as reducing 
     the amount of indebtedness of the separate financial 
     institution group. The provision provides regulatory 
     authority with respect to the election to provide for the 
     direct allocation of interest expense in circumstances in 
     which such allocation is appropriate to carry out the 
     purposes of the provision, prevent assets or interest expense 
     from being taken into account more than once, or address 
     changes in members of any group (through acquisitions or 
     otherwise) treated as affiliated under this provision.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2008.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Recharacterize overall domestic loss (sec. 302 of the 
         House bill, sec. 204 of the Senate amendment, and sec. 
         904 of the Code)


                              Present Law

       The United States provides a credit for foreign income 
     taxes paid or accrued. The foreign tax credit generally is 
     limited to the U.S. tax liability on a taxpayer's foreign-
     source income, in order to ensure that the credit serves the 
     purpose of mitigating double taxation of foreign-source 
     income without offsetting the U.S. tax on U.S.-source income. 
     This overall limitation is calculated by prorating a 
     taxpayer's pre-credit U.S. tax on its worldwide income 
     between its U.S.-source and foreign-source taxable income. 
     The ratio (not exceeding 100 percent) of the

[[Page H8508]]

     taxpayer's foreign-source taxable income to worldwide taxable 
     income is multiplied by its pre-credit U.S. tax to establish 
     the amount of U.S. tax allocable to the taxpayer's foreign-
     source income and, thus, the upper limit on the foreign tax 
     credit for the year.
       In addition, this limitation is calculated separately for 
     various categories of income, generally referred to as 
     ``separate limitation categories.'' The total amount of the 
     foreign tax credit used to offset the U.S. tax on income in 
     each separate limitation category may not exceed the 
     proportion of the taxpayer's U.S. tax which the taxpayer's 
     foreign-source taxable income in that category bears to its 
     worldwide taxable income.
       If a taxpayer's losses from foreign sources exceed its 
     foreign-source income, the excess (``overall foreign loss,'' 
     or ``OFL'') may offset U.S.-source income. Such an offset 
     reduces the effective rate of U.S. tax on U.S.-source income.
       In order to eliminate a double benefit (that is, the 
     reduction of U.S. tax previously noted and, later, full 
     allowance of a foreign tax credit with respect to foreign-
     source income), present law includes an OFL recapture rule. 
     Under this rule, a portion of foreign-source taxable income 
     earned after an OFL year is recharacterized as U.S.-source 
     taxable income for foreign tax credit purposes (and for 
     purposes of the possessions tax credit). Unless a taxpayer 
     elects a higher percentage, however, generally no more than 
     50 percent of the foreign-source taxable income earned in any 
     particular taxable year is recharacterized as U.S.-source 
     taxable income. The effect of the recapture is to reduce the 
     foreign tax credit limitation in one or more years following 
     an OFL year and, therefore, the amount of U.S. tax that can 
     be offset by foreign tax credits in the later year or years.
       Losses for any taxable year in separate foreign limitation 
     categories (to the extent that they do not exceed foreign 
     income for the year) are apportioned on a proportionate basis 
     among (and operate to reduce) the foreign income categories 
     in which the entity earns income in the loss year. A separate 
     limitation loss recharacterization rule applies to foreign 
     losses apportioned to foreign income pursuant to the above 
     rule. If a separate limitation loss was apportioned to income 
     subject to another separate limitation category and the loss 
     category has income for a subsequent taxable year, then that 
     income (to the extent that it does not exceed the aggregate 
     separate limitation losses in the loss category not 
     previously recharacterized) must be recharacterized as income 
     in the separate limitation category that was previously 
     offset by the loss. Such recharacterization must be made in 
     proportion to the prior loss apportionment not previously 
     taken into account.
       A U.S.-source loss reduces pre-credit U.S. tax on worldwide 
     income to an amount less than the hypothetical tax that would 
     apply to the taxpayer's foreign-source income if viewed in 
     isolation. The existence of foreign-source taxable income in 
     the year of the U.S.-source loss reduces or eliminates any 
     net operating loss carryover that the U.S.-source loss would 
     otherwise have generated absent the foreign income. In 
     addition, as the pre-credit U.S. tax on worldwide income is 
     reduced, so is the foreign tax credit limitation. Moreover, 
     any U.S.-source loss for any taxable year is apportioned 
     among (and operates to reduce) foreign income in the separate 
     limitation categories on a proportionate basis. As a result, 
     some foreign tax credits in the year of the U.S.-source loss 
     must be credited, if at all, in a carryover year. Tax on 
     U.S.-source taxable income in a subsequent year may be offset 
     by a net operating loss carryforward, but not by a foreign 
     tax credit carryforward. There is currently no mechanism for 
     recharacterizing such subsequent U.S.-source income as 
     foreign-source income.
       For example, suppose a taxpayer generates a $100 U.S.-
     source loss and earns $100 of foreign-source income in Year 
     1, and pays $30 of foreign tax on the $100 of foreign-source 
     income. Because the taxpayer has no net taxable income in 
     Year 1, no foreign tax credit can be claimed in Year 1 with 
     respect to the $30 of foreign taxes. If the taxpayer then 
     earns $100 of U.S.-source income and $100 of foreign-source 
     income in Year 2, present law does not recharacterize any 
     portion of the $100 of U.S.-source income as foreign-source 
     income to reflect the fact that the previous year's $100 
     U.S.-source loss reduced the taxpayer's ability to claim 
     foreign tax credits.


                               House Bill

       The provision applies a re-sourcing rule to U.S.-source 
     income in cases in which a taxpayer's foreign tax credit 
     limitation has been reduced as a result of an overall 
     domestic loss. Under the provision, a portion of the 
     taxpayer's U.S.-source income for each succeeding taxable 
     year is recharacterized as foreign-source income in an amount 
     equal to the lesser of: (1) the amount of the 
     unrecharacterized overall domestic losses for years prior to 
     such succeeding taxable year, and (2) 50 percent of the 
     taxpayer's U.S.-source income for such succeeding taxable 
     year.
       The provision defines an overall domestic loss for this 
     purpose as any domestic loss to the extent it offsets 
     foreign-source taxable income for the current taxable year or 
     for any preceding taxable year by reason of a loss carryback. 
     For this purpose, a domestic loss means the amount by which 
     the U.S.-source gross income for the taxable year is exceeded 
     by the sum of the deductions properly apportioned or 
     allocated thereto, determined without regard to any loss 
     carried back from a subsequent taxable year. Under the 
     provision, an overall domestic loss does not include any loss 
     for any taxable year unless the taxpayer elected the use 
     of the foreign tax credit for such taxable year.
       Any U.S.-source income recharacterized under the provision 
     is allocated among and increases the various foreign tax 
     credit separate limitation categories in the same proportion 
     that those categories were reduced by the prior overall 
     domestic losses, in a manner similar to the 
     recharacterization rules for separate limitation losses.
       It is anticipated that situations may arise in which a 
     taxpayer generates an overall domestic loss in a year 
     following a year in which it had an overall foreign loss, or 
     vice versa. In such a case, it would be necessary for 
     ordering and other coordination rules to be developed for 
     purposes of computing the foreign tax credit limitation in 
     subsequent taxable years. The provision grants the Secretary 
     of the Treasury authority to prescribe such regulations as 
     may be necessary to coordinate the operation of the OFL 
     recapture rules with the operation of the overall domestic 
     loss recapture rules added by the provision.
       Effective date.--The provision applies to losses incurred 
     in taxable years beginning after December 31, 2006.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Foreign tax credit baskets and ``base differences'' (sec. 
         303 of the House bill, sec. 225 of the Senate amendment, 
         and sec. 904 of the Code)


                              present law

     In general
       The United States taxes its citizens and residents on their 
     worldwide income. Because the countries in which income is 
     earned also may assert their jurisdiction to tax the same 
     income on the basis of source, foreign-source income earned 
     by U.S. persons may be subject to double taxation. In order 
     to mitigate this possibility, the United States provides a 
     credit against U.S. tax liability for foreign income taxes 
     paid, subject to a number of limitations. The foreign tax 
     credit generally is limited to the U.S. tax liability on a 
     taxpayer's foreign-source income, in order to ensure that the 
     credit serves its purpose of mitigating double taxation of 
     cross-border income without offsetting the U.S. tax on U.S.-
     source income.
       The foreign tax credit limitation is applied separately to 
     the following categories of income: (1) passive income, (2) 
     high withholding tax interest, (3) financial services income, 
     (4) shipping income, (5) certain dividends received from 
     noncontrolled section 902 foreign corporations (``10/50 
     companies''),\212\ (6) certain dividends from a domestic 
     international sales corporation or former domestic 
     international sales corporation, (7) taxable income 
     attributable to certain foreign trade income, (8) certain 
     distributions from a foreign sales corporation or former 
     foreign sales corporation, and (9) any other income not 
     described in items (1) through (8) (so-called ``general 
     basket'' income). In addition, a number of other provisions 
     of the Code and U.S. tax treaties effectively create 
     additional separate limitations in certain 
     circumstances.\213\
---------------------------------------------------------------------------
     \212\ Subject to certain exceptions, dividends paid by a 10/
     50 company in taxable years beginning after December 31, 2002 
     are subject to either a look-through approach in which the 
     dividend is attributed to a particular limitation category 
     based on the underlying earnings which gave rise to the 
     dividend (for post-2002 earnings and profits), or a single-
     basket limitation approach for dividends from all 10/50 
     companies that are not passive foreign investment companies 
     (for pre-2003 earnings and profits). Under the conference 
     agreement, these dividends are subject to a look-through 
     approach, irrespective of when the underlying earnings and 
     profits arose.
     \213\ See, e.g., sec. 56(g)(4)(C)(iii)(IV) (relating to 
     certain dividends from corporations eligible for the sec. 936 
     credit); sec. 245(a)(10) (relating to certain dividends 
     treated as foreign source under treaties); sec. 865(h)(1)(B) 
     (relating to certain gains from stock and intangibles treated 
     as foreign source under treaties); sec. 901(j)(1)(B) 
     (relating to income from certain specified countries); and 
     sec. 904(g)(10)(A) (relating to interest, dividends, and 
     certain other amounts derived from U.S.-owned foreign 
     corporations and treated as foreign source under treaties).
---------------------------------------------------------------------------
     Financial services income
       In general, the term ``financial services income'' includes 
     income received or accrued by a person predominantly engaged 
     in the active conduct of a banking, insurance, financing, or 
     similar business, if the income is derived in the active 
     conduct of a banking, financing or similar business, or is 
     derived from the investment by an insurance company of its 
     unearned premiums or reserves ordinary and necessary for the 
     proper conduct of its insurance business (sec. 904(d)(2)(C)). 
     The Code also provides that financial services income 
     includes income, received or accrued by a person 
     predominantly engaged in the active conduct of a banking, 
     insurance, financing, or similar business, of a kind which 
     would generally be insurance income (as defined in section 
     953(a)), among other items.
       Treasury regulations provide that a person is predominantly 
     engaged in the active conduct of a banking, insurance, 
     financing, or

[[Page H8509]]

     similar business for any year if for that year at least 80 
     percent of its gross income is ``active financing income.'' 
     \214\ The regulations further provide that a corporation that 
     is not predominantly engaged in the active conduct of a 
     banking, insurance, financing, or similar business under the 
     preceding definition can derive financial services income if 
     the corporation is a member of an affiliated group (as 
     defined in section 1504(a), but expanded to include foreign 
     corporations) that, as a whole, meets the regulatory test of 
     being ``predominantly engaged.'' \215\ In determining whether 
     an affiliated group is ``predominantly engaged,'' only the 
     income of members of the group that are U.S. corporations, or 
     controlled foreign corporations in which such U.S. 
     corporations own (directly or indirectly) at least 80 percent 
     of the total voting power and value of the stock, are 
     counted.
---------------------------------------------------------------------------
     \214\ Treas. Reg. sec. 1.904-4(e)(3)(i) and (2)(i).
     \215\ Treas. Reg. sec. 1.904-4(e)(3)(ii).
---------------------------------------------------------------------------
     ``Base difference'' items
       Under Treasury regulations, foreign taxes are allocated and 
     apportioned to the same limitation categories as the income 
     to which they relate.\216\ In cases in which foreign law 
     imposes tax on an item of income that does not constitute 
     income under U.S. tax principles (a ``base difference'' 
     item), the tax is treated as imposed on income in the general 
     limitation category.\217\
---------------------------------------------------------------------------
     \216\ Treas. Reg. sec. 1.904-6.
     \217\ Treas. Reg. sec. 1.904-6(a)(1)(iv).
---------------------------------------------------------------------------


                               house bill

     In general
       The provision generally reduces the number of foreign tax 
     credit limitation categories to two: passive category income 
     and general category income. Other income is included in one 
     of the two categories, as appropriate. For example, shipping 
     income generally falls into the general limitation category, 
     whereas high withholding tax interest generally could fall 
     into the passive income or the general limitation category, 
     depending on the circumstances. Dividends from a domestic 
     international sales corporation or former domestic 
     international sales corporation, income attributable to 
     certain foreign trade income, and certain distributions from 
     a foreign sales corporation or former foreign sales 
     corporation all are assigned to the passive income limitation 
     category. The provision does not affect the separate 
     computation of foreign tax credit limitations under special 
     provisions of the Code relating to, for example, treaty-based 
     sourcing rules or specified countries under section 901(j).
     Financial services income
       In the case of a member of a financial services group or 
     any other person predominantly engaged in the active conduct 
     of a banking, insurance, financing or similar business, the 
     provision treats income meeting the definition of financial 
     services income as general category income. Under the 
     provision, a financial services group is an affiliated group 
     that is predominantly engaged in the active conduct of a 
     banking, insurance, financing or similar business. For this 
     purpose, the definition of an affiliated group under section 
     1504(a) is applied, but expanded to include certain insurance 
     companies (without regard to whether such companies are 
     covered by an election under section 1504(c)(2)) and foreign 
     corporations. In determining whether such a group is 
     predominantly engaged in the active conduct of a banking, 
     insurance, financing, or similar business, only the income of 
     members of the group that are U.S. corporations or controlled 
     foreign corporations in which such U.S. corporations own 
     (directly or indirectly) at least 80 percent of total 
     voting power and value of the stock are taken into 
     account.
       The provision does not alter the present law interpretation 
     of what it means to be a ``person predominantly engaged in 
     the active conduct of a banking, insurance, financing, or 
     similar business.'' \218\ Thus, other provisions of the Code 
     that rely on this same concept of a ``person predominantly 
     engaged in the active conduct of a banking, insurance, 
     financing, or similar business'' are not affected by the 
     provision. For example, under the ``accumulated deficit 
     rule'' of section 952(c)(1)(B), subpart F income inclusions 
     of a U.S. shareholder attributable to a ``qualified 
     activity'' of a controlled foreign corporation may be reduced 
     by the amount of the U.S. shareholder's pro rata share of 
     certain prior year deficits attributable to the same 
     qualified activity. In the case of a qualified financial 
     institution, qualified activity consists of any activity 
     giving rise to foreign personal holding company income, but 
     only if the controlled foreign corporation was predominantly 
     engaged in the active conduct of a banking, financing, or 
     similar business in both the year in which the corporation 
     earned the income and the year in which the corporation 
     incurred the deficit. Similarly, in the case of a qualified 
     insurance company, qualified activity consists of activity 
     giving rise to insurance income or foreign personal holding 
     company income, but only if the controlled foreign 
     corporation was predominantly engaged in the active conduct 
     of an insurance business in both the year in which the 
     corporation earned the income and the year in which the 
     corporation incurred the deficit. For this purpose, 
     ``predominantly engaged in the active conduct of a banking, 
     insurance, financing, or similar business'' is defined under 
     present law by reference to the use of the term for purposes 
     of the separate foreign tax credit limitations.\219\ The 
     present-law meaning of ``predominantly engaged'' for purposes 
     of section 952(c)(1)(B) remains unchanged under the 
     provision.
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     \218\ See Treas. Reg. sec. 1.904-4(e).
     \219\ See H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-621 
     (1986); Staff of the Joint Committee on Taxation, 100th 
     Cong., 1st Sess., General Explanation of the Tax Reform Act 
     of 1986, at 984 (1987).
---------------------------------------------------------------------------
       The provision requires the Treasury Secretary to specify 
     the treatment of financial services income received or 
     accrued by pass-through entities that are not members of a 
     financial services group. The Committee expects these 
     regulations to be generally consistent with regulations 
     currently in effect.
     ``Base difference'' items
       Creditable foreign taxes that are imposed on amounts that 
     do not constitute income under U.S. tax principles are 
     treated as imposed on general limitation income.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2006. Taxes paid or 
     accrued in a taxable year beginning before January 1, 2007, 
     and carried to any subsequent taxable year are treated as if 
     this provision were in effect on the date such taxes were 
     paid or accrued. Thus, such taxes are assigned to one of the 
     two foreign tax credit limitation categories, as appropriate. 
     The Treasury Secretary is given authority to provide by 
     regulations for the allocation of income with respect to 
     taxes carried back to pre-effective-date years (in which more 
     than two limitation categories are in effect).


                            senate amendment

       Under the provision, creditable foreign taxes that are 
     imposed on amounts that do not constitute income under U.S. 
     tax principles are treated as imposed either on general 
     limitation income or on financial services income, at the 
     taxpayer's election. Once made, this election applies to all 
     such taxes and is revocable only with the consent of the 
     Secretary.
       Effective date.--The provision is effective for taxable 
     years ending after date of enactment.


                          conference agreement

       The conference agreement follows the House bill, with a 
     modification relating to base differences. As in the House 
     bill, creditable foreign taxes that are imposed on amounts 
     that do not constitute income under U.S. tax principles are 
     treated as imposed on general limitation income, as of the 
     general effective date of the House bill provision. The 
     conference agreement adds a provision under which any such 
     taxes arising in taxable years beginning after December 31, 
     2004, but before January 1, 2007 (when the number of 
     limitation categories is reduced to two), are treated as 
     imposed on either general limitation income or financial 
     services income, at the taxpayer's election. Once made, this 
     election applies to all such taxes for the taxable years 
     described above and is revocable only with the consent of the 
     Treasury Secretary.
     4. Apply look-through rules for dividends from noncontrolled 
         section 902 corporations (sec. 304 of the House bill, 
         sec. 202 of the Senate amendment, and sec. 904 of the 
         Code)


                              present law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign-source income. In general, the amount of foreign tax 
     credits that may be claimed in a year is subject to a 
     limitation that prevents taxpayers from using foreign tax 
     credits to offset U.S. tax on U.S.-source income. Separate 
     limitations are also applied to specific categories of 
     income.
       Special foreign tax credit limitations apply in the case of 
     dividends received from a foreign corporation in which the 
     taxpayer owns at least 10 percent of the stock by vote and 
     which is not a controlled foreign corporation (a so-called 
     ``10/50 company''). Dividends paid by a 10/50 company that is 
     not a passive foreign investment company out of earnings and 
     profits accumulated in taxable years beginning before January 
     1, 2003 are subject to a single foreign tax credit limitation 
     for all 10/50 companies (other than passive foreign 
     investment companies).\220\ Dividends paid by a 10/50 company 
     that is a passive foreign investment company out of earnings 
     and profits accumulated in taxable years beginning before 
     January 1, 2003 continue to be subject to a separate foreign 
     tax credit limitation for each such 10/50 company. Dividends 
     paid by a 10/50 company out of earnings and profits 
     accumulated in taxable years after December 31, 2002 are 
     treated as income in a foreign tax credit limitation category 
     in proportion to the ratio of the 10/50 company's earnings 
     and profits attributable to income in such foreign tax credit 
     limitation category to its total earnings and profits (a 
     ``look-through'' approach).
---------------------------------------------------------------------------
     \220\ Dividends paid by a 10/50 company in taxable years 
     beginning before January 1, 2003 are subject to a separate 
     foreign tax credit limitation for each 10/50 company.
---------------------------------------------------------------------------
       For these purposes, distributions are treated as made from 
     the most recently accumulated earnings and profits. 
     Regulatory authority is granted to provide rules regarding 
     the treatment of distributions out of earnings and profits 
     for periods prior to the taxpayer's acquisition of such 
     stock.


                               house bill

       The provision generally applies the look-through approach 
     to dividends paid by a 10/50 company regardless of the year 
     in which the

[[Page H8510]]

     earnings and profits out of which the dividend is paid were 
     accumulated.\221\ If the Treasury Secretary determines that a 
     taxpayer has inadequately substantiated that it assigned a 
     dividend from a 10/50 company to the proper foreign tax 
     credit limitation category, the dividend is treated as 
     passive category income for foreign tax credit basketing 
     purposes.\222\
---------------------------------------------------------------------------
     \221\ This look-through treatment also applies to dividends 
     that a controlled foreign corporation receives from a 10/50 
     company and then distributes to a U.S. shareholder.
     \222\ It is anticipated that the Treasury Secretary will 
     reconsider the operation of the foreign tax credit 
     regulations to ensure that the high-tax income rules apply 
     appropriately to dividends treated as passive category income 
     because of inadequate substantiation.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2002. The provision also 
     provides transition rules regarding the use of pre-effective-
     date foreign tax credits associated with a 10/50-company 
     separate limitation category in post-effective-date years. 
     Look-through principles similar to those applicable to post-
     effective-date dividends from a 10/50 company apply to 
     determine the appropriate foreign tax credit limitation 
     category or categories with respect to carrying forward 
     foreign tax credits into future years. The provision allows 
     the Treasury Secretary to issue regulations addressing the 
     carryback of foreign tax credits associated with a dividend 
     from a 10/50 company to pre-effective-date years.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Attribution of stock ownership through partnerships in 
         determining section 902 and 960 credits (sec. 305 of the 
         House bill, sec. 213 of the Senate amendment, and sec. 
         902 of the Code)


                              present law

       Under section 902, a domestic corporation that receives a 
     dividend from a foreign corporation in which it owns 10 
     percent or more of the voting stock is deemed to have paid a 
     portion of the foreign taxes paid by such foreign 
     corporation. Thus, such a domestic corporation is eligible to 
     claim a foreign tax credit with respect to such deemed-paid 
     taxes. The domestic corporation that receives a dividend is 
     deemed to have paid a portion of the foreign corporation's 
     post-1986 foreign income taxes based on the ratio of the 
     amount of the dividend to the foreign corporation's post-1986 
     undistributed earnings and profits.
       Foreign income taxes paid or accrued by lower-tier foreign 
     corporations also are eligible for the deemed-paid credit if 
     the foreign corporation falls within a qualified group (sec. 
     902(b)). A ``qualified group'' includes certain foreign 
     corporations within the first six tiers of a chain of foreign 
     corporations if, among other things, the product of the 
     percentage ownership of voting stock at each level of the 
     chain (beginning from the domestic corporation) equals at 
     least five percent. In addition, in order to claim indirect 
     credits for foreign taxes paid by certain fourth-, fifth-, 
     and sixth-tier corporations, such corporations must be 
     controlled foreign corporations (within the meaning of sec. 
     957) and the shareholder claiming the indirect credit must be 
     a U.S. shareholder (as defined in sec. 951(b)) with respect 
     to the controlled foreign corporations. The application of 
     the indirect foreign tax credit below the third tier is 
     limited to taxes paid in taxable years during which the payor 
     is a controlled foreign corporation. Foreign taxes paid below 
     the sixth tier of foreign corporations are ineligible for the 
     indirect foreign tax credit.
       Section 960 similarly permits a domestic corporation with 
     subpart F inclusions from a controlled foreign corporation to 
     claim deemed-paid foreign tax credits with respect to foreign 
     taxes paid or accrued by the controlled foreign corporation 
     on its subpart F income.
       The foreign tax credit provisions in the Code do not 
     specifically address whether a domestic corporation owning 10 
     percent or more of the voting stock of a foreign corporation 
     through a partnership is entitled to a deemed-paid foreign 
     tax credit.\223\ In Rev. Rul. 71-141,\224\ the IRS held that 
     a foreign corporation's stock held indirectly by two domestic 
     corporations through their interests in a domestic general 
     partnership is attributed to such domestic corporations for 
     purposes of determining the domestic corporations' 
     eligibility to claim a deemed-paid foreign tax credit with 
     respect to the foreign taxes paid by such foreign 
     corporation. Accordingly, a general partner of a domestic 
     general partnership is permitted to claim deemed-paid foreign 
     tax credits with respect to a dividend distribution from the 
     foreign corporation to the partnership.
---------------------------------------------------------------------------
     \223\ Under section 901(b)(5), an individual member of a 
     partnership or a beneficiary of an estate or trust generally 
     may claim a direct foreign tax credit with respect to the 
     amount of his or her proportionate share of the foreign taxes 
     paid or accrued by the partnership, estate, or trust. This 
     rule does not specifically apply to corporations that are 
     either members of a partnership or beneficiaries of an estate 
     or trust. However, section 702(a)(6) provides that each 
     partner (including individuals or corporations) of a 
     partnership must take into account separately its 
     distributive share of the partnership's foreign taxes paid or 
     accrued. In addition, under section 703(b)(3), the election 
     under section 901 (whether to credit the foreign taxes) is 
     made by each partner separately.
     \224\ 1971-1 C.B. 211.
---------------------------------------------------------------------------
       However, in 1997, the Treasury Department issued final 
     regulations under section 902, and the preamble to the 
     regulations states that ``[t]he final regulations do not 
     resolve under what circumstances a domestic corporate partner 
     may compute an amount of foreign taxes deemed paid with 
     respect to dividends received from a foreign corporation by a 
     partnership or other pass-through entity.'' \225\ In 
     recognition of the holding in Rev. Rul. 71-141, the preamble 
     to the final regulations under section 902 states that a 
     ``domestic shareholder'' for purposes of section 902 is a 
     domestic corporation that ``owns'' the requisite voting stock 
     in a foreign corporation rather than one that ``owns 
     directly'' the voting stock. At the same time, the preamble 
     states that the IRS is still considering under what other 
     circumstances Rev. Rul. 71-141 should apply. Consequently, 
     uncertainty remains regarding whether a domestic corporation 
     owning 10 percent or more of the voting stock of a foreign 
     corporation through a partnership is entitled to a deemed-
     paid foreign tax credit (other than through a domestic 
     general partnership).
---------------------------------------------------------------------------
     \225\ T.D. 8708, 1997-1 C.B. 137.
---------------------------------------------------------------------------


                               house bill

       The provision clarifies that a domestic corporation is 
     entitled to claim deemed-paid foreign tax credits with 
     respect to a foreign corporation that is held indirectly 
     through a foreign or domestic partnership, provided that the 
     domestic corporation owns (indirectly through the 
     partnership) 10 percent or more of the foreign corporation's 
     voting stock. No inference is intended as to the treatment of 
     such deemed-paid foreign tax credits under present law. The 
     provision also clarifies that both individual and corporate 
     partners (or estate or trust beneficiaries) may claim direct 
     foreign tax credits with respect to their proportionate 
     shares of taxes paid or accrued by a partnership (or estate 
     or trust).
       Effective date.--The provision applies to taxes of foreign 
     corporations for taxable years of such corporations beginning 
     after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Foreign tax credit treatment of deemed payments under 
         section 367(d) of the Code (sec. 306 of the House bill, 
         sec. 229 of the Senate amendment, and sec. 367(d) of the 
         Code)


                              Present Law

       In the case of transfers of intangible property to foreign 
     corporations by means of contributions and certain other 
     nonrecognition transactions, special rules apply that are 
     designed to mitigate the tax avoidance that may arise from 
     shifting the income attributable to intangible property 
     offshore. Under section 367(d), the outbound transfer of 
     intangible property is treated as a sale of the intangible 
     for a stream of contingent payments. The amounts of these 
     deemed payments must be commensurate with the income 
     attributable to the intangible. The deemed payments are 
     included in gross income of the U.S. transferor as ordinary 
     income, and the earnings and profits of the foreign 
     corporation to which the intangible was transferred are 
     reduced by such amounts.
       The Taxpayer Relief Act of 1997 (the ``1997 Act'') repealed 
     a rule that treated all such deemed payments as giving rise 
     to U.S.-source income. Because the foreign tax credit is 
     generally limited to the U.S. tax imposed on foreign-source 
     income, the prior-law rule reduced the taxpayer's ability to 
     claim foreign tax credits. As a result of the repeal of the 
     rule, the source of payments deemed received under section 
     367(d) is determined under general sourcing rules. These 
     rules treat income from sales of intangible property for 
     contingent payments the same as royalties, with the result 
     that the deemed payments may give rise to foreign-source 
     income.\226\
---------------------------------------------------------------------------
     \226\ Secs. 865(d), 862(a).
---------------------------------------------------------------------------
       The 1997 Act did not address the characterization of the 
     deemed payments for purposes of applying the foreign tax 
     credit separate limitation categories.\227\ If the deemed 
     payments are treated like proceeds of a sale, then they could 
     fall into the passive category; if the deemed payments are 
     treated like royalties, then in many cases they could fall 
     into the general category (under look-through rules 
     applicable to payments of dividends, interest, rents, and 
     royalties received from controlled foreign 
     corporations).\228\
---------------------------------------------------------------------------
     \227\ Sec. 904(d).
     \228\ Sec. 904(d)(3).
---------------------------------------------------------------------------


                               House Bill

       The provision specifies that deemed payments under section 
     367(d) are treated as royalties for purposes of applying the 
     separate limitation categories of the foreign tax credit.
       Effective date.--The provision is effective for amounts 
     treated as received on or after August 5, 1997 (the effective 
     date of the relevant provision of the 1997 Act).


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

[[Page H8511]]

     7. United States property not to include certain assets of 
         controlled foreign corporations (sec. 307 of the House 
         bill, sec. 227 of the Senate amendment, and sec. 956 of 
         the Code)


                              Present Law

       In general, the subpart F rules \229\ require U.S. 
     shareholders with a 10-percent or greater interest in a 
     controlled foreign corporation (``U.S. 10-percent 
     shareholders'') to include in taxable income their pro rata 
     shares of certain income of the controlled foreign 
     corporation (referred to as ``subpart F income'') when such 
     income is earned, whether or not the earnings are distributed 
     currently to the shareholders. In addition, the U.S. 10-
     percent shareholders of a controlled foreign corporation are 
     subject to U.S. tax on their pro rata shares of the 
     controlled foreign corporation's earnings to the extent 
     invested by the controlled foreign corporation in certain 
     U.S. property in a taxable year.\230\
---------------------------------------------------------------------------
     \229\ Secs. 951-964.
     \230\ Sec. 951(a)(1)(B).
---------------------------------------------------------------------------
       A shareholder's income inclusion with respect to a 
     controlled foreign corporation's investment in U.S. property 
     for a taxable year is based on the controlled foreign 
     corporation's average investment in U.S. property for such 
     year. For this purpose, the U.S. property held (directly or 
     indirectly) by the controlled foreign corporation must be 
     measured as of the close of each quarter in the taxable 
     year.\231\ The amount taken into account with respect to any 
     property is the property's adjusted basis as determined for 
     purposes of reporting the controlled foreign corporation's 
     earnings and profits, reduced by any liability to which the 
     property is subject. The amount determined for inclusion in 
     each taxable year is the shareholder's pro rata share of an 
     amount equal to the lesser of: (1) the controlled foreign 
     corporation's average investment in U.S. property as of the 
     end of each quarter of such taxable year, to the extent that 
     such investment exceeds the foreign corporation's earnings 
     and profits that were previously taxed on that basis; or (2) 
     the controlled foreign corporation's current or accumulated 
     earnings and profits (but not including a deficit), reduced 
     by distributions during the year and by earnings that have 
     been taxed previously as earnings invested in U.S. 
     property.\232\ An income inclusion is required only to the 
     extent that the amount so calculated exceeds the amount of 
     the controlled foreign corporation's earnings that have been 
     previously taxed as subpart F income.\233\
---------------------------------------------------------------------------
     \231\ Sec. 956(a).
     \232\ Secs. 956 and 959.
     \233\ Secs. 951(a)(1)(B) and 959.
---------------------------------------------------------------------------
       For purposes of section 956, U.S. property generally is 
     defined to include tangible property located in the United 
     States, stock of a U.S. corporation, an obligation of a U.S. 
     person, and certain intangible assets including a patent or 
     copyright, an invention, model or design, a secret formula or 
     process or similar property right which is acquired or 
     developed by the controlled foreign corporation for use in 
     the United States.\234\
---------------------------------------------------------------------------
     \234\ Sec. 956(c)(1).
---------------------------------------------------------------------------
       Specified exceptions from the definition of U.S. property 
     are provided for: (1) obligations of the United States, 
     money, or deposits with persons carrying on the banking 
     business; (2) certain export property; (3) certain trade or 
     business obligations; (4) aircraft, railroad rolling stock, 
     vessels, motor vehicles or containers used in transportation 
     in foreign commerce and used predominantly outside of the 
     United States; (5) certain insurance company reserves and 
     unearned premiums related to insurance of foreign risks; (6) 
     stock or debt of certain unrelated U.S. corporations; (7) 
     moveable property (other than a vessel or aircraft) used for 
     the purpose of exploring, developing, or certain other 
     activities in connection with the ocean waters of the U.S. 
     Continental Shelf; (8) an amount of assets equal to the 
     controlled foreign corporation's accumulated earnings and 
     profits attributable to income effectively connected with a 
     U.S. trade or business; (9) property (to the extent provided 
     in regulations) held by a foreign sales corporation and 
     related to its export activities; (10) certain deposits or 
     receipts of collateral or margin by a securities or 
     commodities dealer, if such deposit is made or received on 
     commercial terms in the ordinary course of the dealer's 
     business as a securities or commodities dealer; and (11) 
     certain repurchase and reverse repurchase agreement 
     transactions entered into by or with a dealer in securities 
     or commodities in the ordinary course of its business as a 
     securities or commodities dealer.\235\
---------------------------------------------------------------------------
     \235\ Sec. 956(c)(2).
---------------------------------------------------------------------------


                               House Bill

       The House bill adds two new exceptions from the definition 
     of U.S. property for determining current income inclusion by 
     a U.S. 10-percent shareholder with respect to an investment 
     in U.S. property by a controlled foreign corporation.
       The first exception generally applies to securities 
     acquired and held by a controlled foreign corporation in the 
     ordinary course of its trade or business as a dealer in 
     securities. The exception applies only if the controlled 
     foreign corporation dealer: (1) accounts for the securities 
     as securities held primarily for sale to customers in the 
     ordinary course of business; and (2) disposes of such 
     securities (or such securities mature while being held by the 
     dealer) within a period consistent with the holding of 
     securities for sale to customers in the ordinary course of 
     business.
       The second exception generally applies to the acquisition 
     by a controlled foreign corporation of obligations issued by 
     a U.S. person that is not a domestic corporation and that is 
     not (1) a U.S. 10-percent shareholder of the controlled 
     foreign corporation, or (2) a partnership, estate or trust in 
     which the controlled foreign corporation or any related 
     person is a partner, beneficiary or trustee immediately after 
     the acquisition by the controlled foreign corporation of such 
     obligation.
       Effective date.--The House bill provision is effective for 
     taxable years of foreign corporations beginning after 
     December 31, 2004, and for taxable years of United States 
     shareholders with or within which such taxable years of such 
     foreign corporations end.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     8. Election not to use average exchange rate for foreign tax 
         paid other than in functional currency (sec. 308 of the 
         House bill, sec. 224 of the Senate amendment, and sec. 
         986 of the Code)


                              Present Law

       For taxpayers that take foreign income taxes into account 
     when accrued, present law provides that the amount of the 
     foreign tax credit generally is determined by translating the 
     amount of foreign taxes paid in foreign currencies into a 
     U.S. dollar amount at the average exchange rate for the 
     taxable year to which such taxes relate.\236\ This rule 
     applies to foreign taxes paid directly by U.S. taxpayers, 
     which taxes are creditable in the year paid or accrued, and 
     to foreign taxes paid by foreign corporations that are deemed 
     paid by a U.S. corporation that is a shareholder of the 
     foreign corporation, and hence creditable in the year that 
     the U.S. corporation receives a dividend or has an income 
     inclusion from the foreign corporation. This rule does not 
     apply to any foreign income tax: (1) that is paid after the 
     date that is two years after the close of the taxable year to 
     which such taxes relate; (2) of an accrual-basis taxpayer 
     that is actually paid in a taxable year prior to the year to 
     which the tax relates; or (3) that is denominated in an 
     inflationary currency (as defined by regulations).
---------------------------------------------------------------------------
     \236\ Sec. 986(a)(1).
---------------------------------------------------------------------------
       Foreign taxes that are not eligible for translation at the 
     average exchange rate generally are translated into U.S. 
     dollar amounts using the exchange rates as of the time such 
     taxes are paid. However, the Secretary is authorized to issue 
     regulations that would allow foreign tax payments to be 
     translated into U.S. dollar amounts using an average exchange 
     rate for a specified period.\237\
---------------------------------------------------------------------------
     \237\ Sec. 986(a)(2).
---------------------------------------------------------------------------


                               House Bill

       For taxpayers that are required under present law to 
     translate foreign income tax payments at the average exchange 
     rate, the House bill provides an election to translate such 
     taxes into U.S. dollar amounts using the exchange rates as of 
     the time such taxes are paid, provided the foreign income 
     taxes are denominated in a currency other than the taxpayer's 
     functional currency.\238\ Any election under the provision 
     applies to the taxable year for which the election is made 
     and to all subsequent taxable years unless revoked with the 
     consent of the Secretary. The House bill authorizes the 
     Secretary to issue regulations that apply the election to 
     foreign income taxes attributable to a qualified business 
     unit.
---------------------------------------------------------------------------
     \238\ Electing taxpayers translate foreign income tax 
     payments pursuant to the same present-law rules that apply to 
     taxpayers that are required to translate foreign income taxes 
     using the exchange rates as of the time such taxes are paid.
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective with 
     respect to taxable years beginning after December 31, 2004.


                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The Senate amendment provision is 
     effective with respect to taxable years beginning after 
     December 31, 2004.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. In addition, the conference agreement 
     provides that the election does not apply to regulated 
     investment companies that take into account income on an 
     accrual basis. Instead, the conference agreement provides 
     that foreign income taxes paid or accrued by a regulated 
     investment company with respect to such income are translated 
     into U.S. dollar amounts using the exchange rate as of the 
     date the income accrues.
     9. Eliminate secondary withholding tax with respect to 
         dividends paid by certain foreign corporations (sec. 309 
         of the House bill, sec. 215 of the Senate amendment, and 
         sec. 871 of the Code)


                              Present Law

       Nonresident individuals who are not U.S. citizens and 
     foreign corporations (collectively, foreign persons) are 
     subject to U.S. tax on income that is effectively connected 
     with the conduct of a U.S. trade or business; the U.S. tax on 
     such income is calculated in the same manner and at the same 
     graduated

[[Page H8512]]

     rates as the tax on U.S. persons (secs. 871(b) and 882). 
     Foreign persons also are subject to a 30-percent gross basis 
     tax, collected by withholding, on certain U.S.-source passive 
     income (e.g., interest and dividends) that is not effectively 
     connected with a U.S. trade or business. This 30-percent 
     withholding tax may be reduced or eliminated pursuant to an 
     applicable tax treaty. Foreign persons generally are not 
     subject to U.S. tax on foreign-source income that is not 
     effectively connected with a U.S. trade or business.
       In general, dividends paid by a domestic corporation are 
     treated as being from U.S. sources and dividends paid by a 
     foreign corporation are treated as being from foreign 
     sources. Thus, dividends paid by foreign corporations to 
     foreign persons generally are not subject to withholding 
     tax because such income generally is treated as foreign-
     source income.
       An exception from this general rule applies in the case of 
     dividends paid by certain foreign corporations. If a foreign 
     corporation derives 25 percent or more of its gross income as 
     income effectively connected with a U.S. trade or business 
     for the three-year period ending with the close of the 
     taxable year preceding the declaration of a dividend, then a 
     portion of any dividend paid by the foreign corporation to 
     its shareholders will be treated as U.S.-source income and, 
     in the case of dividends paid to foreign shareholders, will 
     be subject to the 30-percent withholding tax (sec. 
     861(a)(2)(B)). This rule is sometimes referred to as the 
     ``secondary withholding tax.'' The portion of the dividend 
     treated as U.S.-source income is equal to the ratio of the 
     gross income of the foreign corporation that was effectively 
     connected with its U.S. trade or business over the total 
     gross income of the foreign corporation during the three-year 
     period ending with the close of the preceding taxable year. 
     The U.S.-source portion of the dividend paid by the foreign 
     corporation to its foreign shareholders is subject to the 30-
     percent withholding tax.
       Under the branch profits tax provisions, the United States 
     taxes foreign corporations engaged in a U.S. trade or 
     business on amounts of U.S. earnings and profits that are 
     shifted out of the U.S. branch of the foreign corporation. 
     The branch profits tax is comparable to the second-level 
     taxes imposed on dividends paid by a domestic corporation to 
     its foreign shareholders. The branch profits tax is 30 
     percent of the foreign corporation's ``dividend equivalent 
     amount,'' which generally is the earnings and profits of a 
     U.S. branch of a foreign corporation attributable to its 
     income effectively connected with a U.S. trade or business 
     (secs. 884(a) and (b)).
       If a foreign corporation is subject to the branch profits 
     tax, then no secondary withholding tax is imposed on 
     dividends paid by the foreign corporation to its shareholders 
     (sec. 884(e)(3)(A)). If a foreign corporation is a qualified 
     resident of a tax treaty country and claims an exemption from 
     the branch profits tax pursuant to the treaty, the secondary 
     withholding tax could apply with respect to dividends it pays 
     to its shareholders. Several tax treaties (including treaties 
     that prevent imposition of the branch profits tax), however, 
     exempt dividends paid by the foreign corporation from the 
     secondary withholding tax.


                               House Bill

       The provision eliminates the secondary withholding tax with 
     respect to dividends paid by certain foreign corporations.
       Effective date.--The provision is effective for payments 
     made after December 31, 2004.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     10. Equal treatment for interest paid by foreign partnerships 
         and foreign corporations (sec. 310 of the House bill, 
         sec. 228 of the Senate amendment, and sec. 861 of the 
         Code)


                              Present Law

       In general, interest income from bonds, notes or other 
     interest-bearing obligations of noncorporate U.S. residents 
     or domestic corporations is treated as U.S.-source 
     income.\239\ Other interest (e.g., interest on obligations of 
     foreign corporations and foreign partnerships) generally is 
     treated as foreign-source income. However, Treasury 
     regulations provide that a foreign partnership is a U.S. 
     resident for purposes of this rule if at any time during its 
     taxable year it is engaged in a trade or business in the 
     United States.\240\ Therefore, any interest received from 
     such a foreign partnership is U.S.-source income.
---------------------------------------------------------------------------
     \239\ Sec. 861(a)(1).
     \240\ Treas. Reg. sec. 1.861-2(a)(2).
---------------------------------------------------------------------------
       Notwithstanding the general rule described above, in the 
     case of a foreign corporation engaged in a U.S. trade or 
     business (or having gross income that is treated as 
     effectively connected with the conduct of a U.S. trade or 
     business), interest paid by such U.S. trade or business is 
     treated as if it were paid by a domestic corporation (i.e., 
     such interest is treated as U.S.-source income).\241\
---------------------------------------------------------------------------
     \241\ Sec. 884(f)(1).
---------------------------------------------------------------------------


                               House Bill

       The House bill treats interest paid by foreign partnerships 
     in a manner similar to the treatment of interest paid by 
     foreign corporations. Thus, interest paid by a foreign 
     partnership is treated as U.S.-source income only if the 
     interest is paid by a U.S. trade or business conducted by the 
     partnership or is allocable to income that is treated as 
     effectively connected with the conduct of a U.S. trade or 
     business. The House bill applies only to foreign partnerships 
     that are predominantly engaged in the active conduct of a 
     trade or business outside the United States.
       Effective date.--This House bill provision is effective for 
     taxable years beginning after December 31, 2003.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     11. Look-through treatment of payments between related 
         controlled foreign corporations (sec. 311 of the House 
         bill, sec. 222 of the Senate amendment, and sec. 954 of 
         the Code)


                              present law

       In general, the rules of subpart F (secs. 951-964) require 
     U.S. shareholders with a 10-percent or greater interest in a 
     controlled foreign corporation to include certain income of 
     the controlled foreign corporation (referred to as ``subpart 
     F income'') on a current basis for U.S. tax purposes, 
     regardless of whether the income is distributed to the 
     shareholders.
       Subpart F income includes foreign base company income. One 
     category of foreign base company income is foreign personal 
     holding company income. For subpart F purposes, foreign 
     personal holding company income generally includes dividends, 
     interest, rents and royalties, among other types of income. 
     However, foreign personal holding company income does not 
     include dividends and interest received by a controlled 
     foreign corporation from a related corporation organized and 
     operating in the same foreign country in which the controlled 
     foreign corporation is organized, or rents and royalties 
     received by a controlled foreign corporation from a related 
     corporation for the use of property within the country in 
     which the controlled foreign corporation is organized. 
     Interest, rent, and royalty payments do not qualify for this 
     exclusion to the extent that such payments reduce the subpart 
     F income of the payor.


                               house bill

       Under the provision, dividends, interest, rents, and 
     royalties received by one controlled foreign corporation from 
     a related controlled foreign corporation are not treated as 
     foreign personal holding company income to the extent 
     attributable or properly allocable to non-subpart-F income of 
     the payor. For these purposes, a related controlled foreign 
     corporation is a controlled foreign corporation that controls 
     or is controlled by the other controlled foreign corporation, 
     or a controlled foreign corporation that is controlled by the 
     same person or persons that control the other controlled 
     foreign corporation. Ownership of more than 50 percent of the 
     controlled foreign corporation's stock (by vote or value) 
     constitutes control for these purposes.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2004, and taxable years of U.S. shareholders with or within 
     which such taxable years of such foreign corporations end.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     Senate amendment provision.
     12. Look-through treatment under subpart F for sales of 
         partnership interests (sec. 312 of the House bill, sec. 
         223 of the Senate amendment, and sec. 954 of the Code)


                              present law

       In general, the subpart F rules (secs. 951-964) require 
     U.S. shareholders with a 10-percent or greater interest in a 
     controlled foreign corporation to include in income currently 
     for U.S. tax purposes certain types of income of the 
     controlled foreign corporation, whether or not such income is 
     actually distributed currently to the shareholders (referred 
     to as ``subpart F income''). Subpart F income includes 
     foreign personal holding company income. Foreign personal 
     holding company income generally consists of the following: 
     (1) dividends, interest, royalties, rents, and annuities; (2) 
     net gains from the sale or exchange of (a) property that 
     gives rise to the preceding types of income, (b) property 
     that does not give rise to income, and (c) interests in 
     trusts, partnerships, and real estate mortgages investment 
     conduits (``REMICs''); (3) net gains from commodities 
     transactions; (4) net gains from foreign currency 
     transactions; (5) income that is equivalent to interest; (6) 
     income from notional principal contracts; and (7) payments in 
     lieu of dividends. Thus, if a controlled foreign corporation 
     sells a partnership interest at a gain, the gain generally 
     constitutes foreign personal holding company income and is 
     included in the income of 10-percent U.S. shareholders of the 
     controlled foreign corporation as subpart F income.


                               house bill

       The provision treats the sale by a controlled foreign 
     corporation of a partnership interest as a sale of the 
     proportionate share of partnership assets attributable to 
     such interest for purposes of determining subpart F

[[Page H8513]]

     foreign personal holding company income. This rule applies 
     only to partners owning directly, indirectly, or 
     constructively at least 25 percent of a capital or profits 
     interest in the partnership. Thus, the sale of a partnership 
     interest by a controlled foreign corporation that meets this 
     ownership threshold constitutes subpart F income under the 
     provision only to the extent that a proportionate sale of the 
     underlying partnership assets attributable to the partnership 
     interest would constitute subpart F income. The Treasury 
     Secretary is directed to prescribe such regulations as may be 
     appropriate to prevent the abuse of this provision.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2004, and taxable years of U.S. shareholders with or within 
     which such taxable years of such foreign corporations end.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     13. Repeal of foreign personal holding company rules and 
         foreign investment company rules (sec. 313 of the House 
         bill, sec. 211 of the Senate amendment, and secs. 542, 
         551-558, 954, 1246, and 1247 of the Code)


                              present law

       Income earned by a foreign corporation from its foreign 
     operations generally is subject to U.S. tax only when such 
     income is distributed to any U.S. persons that hold stock in 
     such corporation. Accordingly, a U.S. person that conducts 
     foreign operations through a foreign corporation generally is 
     subject to U.S. tax on the income from those operations when 
     the income is repatriated to the United States through a 
     dividend distribution to the U.S. person. The income is 
     reported on the U.S. person's tax return for the year the 
     distribution is received, and the United States imposes tax 
     on such income at that time. The foreign tax credit may 
     reduce the U.S. tax imposed on such income.
       Several sets of anti-deferral rules impose current U.S. tax 
     on certain income earned by a U.S. person through a foreign 
     corporation. Detailed rules for coordination among the anti-
     deferral rules are provided to prevent the U.S. person from 
     being subject to U.S. tax on the same item of income under 
     multiple rules.
       The Code sets forth the following anti-deferral rules: the 
     controlled foreign corporation rules of subpart F (secs. 951-
     964); the passive foreign investment company rules (secs. 
     1291-1298); the foreign personal holding company rules (secs. 
     551-558); the personal holding company rules (secs. 541-547); 
     the accumulated earnings tax rules (secs. 531-537); and the 
     foreign investment company rules (secs. 1246-1247).


                               house bill

       The provision: (1) eliminates the rules applicable to 
     foreign personal holding companies and foreign investment 
     companies; (2) excludes foreign corporations from the 
     application of the personal holding company rules; and (3) 
     includes as subpart F foreign personal holding company income 
     personal services contract income that is subject to the 
     present-law foreign personal holding company rules.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2004, and taxable years of U.S. shareholders with or within 
     which such taxable years of foreign corporations end.


                            senate amendment

       The Senate amendment provision is the same as the House 
     bill provision.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     14. Determination of foreign personal holding company income 
         with respect to transactions in commodities (sec. 314 of 
         the House bill, sec. 206 of the Senate amendment, and 
         sec. 954 of the Code)


                              present law

     Subpart F foreign personal holding company income
       Under the subpart F rules, U.S. shareholders with a 10-
     percent or greater interest in a controlled foreign 
     corporation (``U.S. 10-percent shareholders'') are subject to 
     U.S. tax currently on certain income earned by the controlled 
     foreign corporation, whether or not such income is 
     distributed to the shareholders. The income subject to 
     current inclusion under the subpart F rules includes, among 
     other things, ``foreign personal holding company income.''
       Foreign personal holding company income generally consists 
     of the following: dividends, interest, royalties, rents and 
     annuities; net gains from sales or exchanges of (1) property 
     that gives rise to the foregoing types of income, (2) 
     property that does not give rise to income, and (3) interests 
     in trusts, partnerships, and real estate mortgage investment 
     conduits (``REMICs''); net gains from commodities 
     transactions; net gains from foreign currency transactions; 
     income that is equivalent to interest; income from notional 
     principal contracts; and payments in lieu of dividends.
       With respect to transactions in commodities, foreign 
     personal holding company income does not consist of gains or 
     losses which arise out of bona fide hedging transactions that 
     are reasonably necessary to the conduct of any business by a 
     producer, processor, merchant, or handler of a commodity in 
     the manner in which such business is customarily and usually 
     conducted by others.\242\ In addition, foreign personal 
     holding company income does not consist of gains or losses 
     which are comprised of active business gains or losses from 
     the sale of commodities, but only if substantially all of the 
     controlled foreign corporation's business is as an active 
     producer, processor, merchant, or handler of 
     commodities.\243\
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     \242\ For hedging transactions entered into on or after 
     January 31, 2003, Treasury regulations provide that gains or 
     losses from a commodities hedging transaction generally are 
     excluded from the definition of foreign personal holding 
     company income if the transaction is with respect to the 
     controlled foreign corporation's business as a producer, 
     processor, merchant or handler of commodities, regardless of 
     whether the transaction is a hedge with respect to a sale of 
     commodities in the active conduct of a commodities business 
     by the controlled foreign corporation. The regulations also 
     provide that, for purposes of satisfying the requirements for 
     exclusion from the definition of foreign personal holding 
     company income, a producer, processor, merchant or handler of 
     commodities includes a controlled foreign corporation that 
     regularly uses commodities in a manufacturing, construction, 
     utilities, or transportation business (Treas. Reg. sec. 
     1.954-2(f)(2)(v)). However, the regulations provide that a 
     controlled foreign corporation is not a producer, processor, 
     merchant or handler of commodities (and therefore would not 
     satisfy the requirements for exclusion) if its business is 
     primarily financial (Treas. Reg. sec. 1.954-2(f)(2)(v)).
     \243\ Treasury regulations provide that substantially all of 
     a controlled foreign corporation's business is as an active 
     producer, processor, merchant or handler of commodities if: 
     (1) the sum of its gross receipts from all of its active 
     sales of commodities in such capacity and its gross receipts 
     from all of its commodities hedging transactions that qualify 
     for exclusion from the definition of foreign personal holding 
     company income, equals or exceeds (2) 85 percent of its total 
     receipts for the taxable year (computed as though the 
     controlled foreign corporation was a domestic corporation) 
     (Treas. Reg. sec. 1.954-2(f)(2)(iii)(C)).
---------------------------------------------------------------------------
     Hedging transactions
       Under present law, the term ``capital asset'' does not 
     include any hedging transaction which is clearly identified 
     as such before the close of the day on which it was acquired, 
     originated, or entered into (or such other time as the 
     Secretary may by regulations prescribe).\244\ The term 
     ``hedging transaction'' means any transaction entered into by 
     the taxpayer in the normal course of the taxpayer's trade or 
     business primarily: (1) to manage risk of price changes or 
     currency fluctuations with respect to ordinary property which 
     is held or to be held by the taxpayer; (2) to manage risk of 
     interest rate or price changes or currency fluctuations with 
     respect to borrowings made or to be made, or ordinary 
     obligations incurred or to be incurred, by the taxpayer; or 
     (3) to manage such other risks as the Secretary may prescribe 
     in regulations.\245\
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     \244\ Sec. 1221(a)(7).
     \245\ Sec. 1221(b)(2)(A).
---------------------------------------------------------------------------


                               house bill

       The House bill modifies the requirements that must be 
     satisfied for gains or losses from a commodities hedging 
     transaction to qualify for exclusion from the definition of 
     subpart F foreign personal holding company income. Under the 
     House bill, gains or losses from a transaction with respect 
     to a commodity are not treated as foreign personal holding 
     company income if the transaction satisfies the general 
     definition of a hedging transaction under section 1221(b)(2). 
     For purposes of the House bill, the general definition of a 
     hedging transaction under section 1221(b)(2) is modified to 
     include any transaction with respect to a commodity entered 
     into by a controlled foreign corporation in the normal course 
     of the controlled foreign corporation's trade or business 
     primarily: (1) to manage risk of price changes or currency 
     fluctuations with respect to ordinary property or property 
     described in section 1231(b) which is held or to be held by 
     the controlled foreign corporation; or (2) to manage such 
     other risks as the Secretary may prescribe in regulations. 
     Gains or losses from a transaction that satisfies the 
     modified definition of a hedging transaction are excluded 
     from the definition of foreign personal holding company 
     income only if the transaction is clearly identified as a 
     hedging transaction in accordance with the hedge 
     identification requirements that apply generally to hedging 
     transactions under section 1221(b)(2).\246\
---------------------------------------------------------------------------
     \246\ Sec. 1221(a)(7) and (b)(2)(B).
---------------------------------------------------------------------------
       The House bill also changes the requirements that must be 
     satisfied for active business gains or losses from the sale 
     of commodities to qualify for exclusion from the definition 
     of foreign personal holding company income. Under the House 
     bill, such gains or losses are not treated as foreign 
     personal holding company income if substantially all of the 
     controlled foreign corporation's commodities are comprised 
     of: (1) stock in trade of the controlled foreign corporation 
     or other property of a kind which would properly be included 
     in the inventory of the controlled foreign corporation if on 
     hand at the close of the taxable year, or property held by 
     the controlled foreign corporation primarily for sale to 
     customers in the ordinary course of the controlled foreign 
     corporation's trade or business; (2) property that is used in 
     the trade or business of the controlled foreign corporation 
     and is of a character which is subject to the allowance for 
     depreciation under section 167; or (3) supplies of a type 
     regularly used or consumed by the controlled foreign 
     corporation in the ordinary course of a trade or business of 
     the controlled foreign corporation.\247\
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     \247\ For purposes of determining whether substantially all 
     of the controlled foreign corporation's commodities are 
     comprised of such property, it is intended that the 85-
     percent requirement provided in the current Treasury 
     regulations (as modified to reflect the changes made by the 
     House bill) continue to apply.

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[[Page H8514]]

       For purposes of applying the requirements for active 
     business gains or losses from commodities sales to qualify 
     for exclusion from the definition of foreign personal holding 
     company income, the House bill also provides that commodities 
     with respect to which gains or losses are not taken into 
     account as foreign personal holding company income by a 
     regular dealer in commodities (or financial instruments 
     referenced to commodities) are not taken into account in 
     determining whether substantially all of the dealer's 
     commodities are comprised of the property described above.
       Effective date.--The House bill provision is effective with 
     respect to transactions entered into after December 31, 2004.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     15. Modifications to treatment of aircraft leasing and 
         shipping income (sec. 315 of the House bill, sec. 221 of 
         the Senate amendment, and sec. 954 of the Code)


                              present law

       In general, the subpart F rules (secs. 951-964) require 
     U.S. shareholders with a 10-percent or greater interest in a 
     controlled foreign corporation (``CFC'') to include currently 
     in income for U.S. tax purposes certain income of the CFC 
     (referred to as ``subpart F income''), without regard to 
     whether the income is distributed to the shareholders (sec. 
     951(a)(1)(A)). In effect, the Code treats the U.S. 10-percent 
     shareholders of a CFC as having received a current 
     distribution of their pro rata shares of the CFC's subpart F 
     income. The amounts included in income by the CFC's U.S. 10-
     percent shareholders under these rules are subject to U.S. 
     tax currently. The U.S. tax on such amounts may be reduced 
     through foreign tax credits.
       Subpart F income includes foreign base company shipping 
     income (sec. 954(f)). Foreign base company shipping income 
     generally includes income derived from the use of an aircraft 
     or vessel in foreign commerce, the performance of services 
     directly related to the use of any such aircraft or vessel, 
     the sale or other disposition of any such aircraft or vessel, 
     and certain space or ocean activities (e.g., leasing of 
     satellites for use in space). Foreign commerce generally 
     involves the transportation of property or passengers between 
     a port (or airport) in the U.S. and a port (or airport) in a 
     foreign country, two ports (or airports) within the same 
     foreign country, or two ports (or airports) in different 
     foreign countries. In addition, foreign base company shipping 
     income includes dividends and interest that a CFC receives 
     from certain foreign corporations and any gains from the 
     disposition of stock in certain foreign corporations, to the 
     extent the dividends, interest, or gains are attributable to 
     foreign base company shipping income. Foreign base company 
     shipping income also includes incidental income derived in 
     the course of active foreign base company shipping operations 
     (e.g., income from temporary investments in or sales of 
     related shipping assets), foreign exchange gain or loss 
     attributable to foreign base company shipping operations, and 
     a CFC's distributive share of gross income of any partnership 
     and gross income received from certain trusts to the extent 
     that the income would have been foreign base company shipping 
     income had it been realized directly by the corporation.
       Subpart F income also includes foreign personal holding 
     company income (sec. 954(c)). For subpart F purposes, foreign 
     personal holding company income generally consists of the 
     following: (1) dividends, interest, royalties, rents and 
     annuities; (2) net gains from the sale or exchange of (a) 
     property that gives rise to the preceding types of income, 
     (b) property that does not give rise to income, and (c) 
     interests in trusts, partnerships, and real estate mortgage 
     investment conduits (``REMICs''); (3) net gains from 
     commodities transactions; (4) net gains from foreign currency 
     transactions; (5) income that is equivalent to interest; (6) 
     income from notional principal contracts; and (7) payments in 
     lieu of dividends.
       Subpart F foreign personal holding company income does not 
     include rents and royalties received by a CFC in the active 
     conduct of a trade or business from unrelated persons (sec. 
     954(c)(2)(A)). The determination of whether rents or 
     royalties are derived in the active conduct of a trade or 
     business is based on all the facts and circumstances. 
     However, the Treasury regulations provide certain types of 
     rents are treated as derived in the active conduct of a trade 
     or business. These include rents derived from property that 
     is leased as a result of the performance of marketing 
     functions by the lessor if the lessor (through its own 
     officers or employees located in a foreign country) maintains 
     and operates an organization in such country that regularly 
     engages in the business of marketing, or marketing and 
     servicing, the leased property and that is substantial in 
     relation to the amount of rents derived from the leasing of 
     such property. An organization in a foreign country is 
     substantial in relation to rents if the active leasing 
     expenses \248\ equal at least 25 percent of the adjusted 
     leasing profit.\249\
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     \248\ ``Active-leasing expenses'' are section 162 expenses 
     properly allocable to rental income other than (1) deductions 
     for compensation for personal services rendered by the 
     lessor's shareholders or a related person, (2) deductions for 
     rents, (3) section 167 and 168 expenses, and (4) deductions 
     for payments to independent contractors with respect to 
     leased property. Treas. Reg. sec. 1.954-2(c)(2)(iii).
     \249\Generally, ``adjusted leasing profit'' is rental income 
     less the sum of (1) rents paid or incurred by the CFC with 
     respect to such rental income; (2) section 167 and 168 
     expenses with respect to such rental income; and (3) payments 
     to independent contractors with respect to such rental 
     income. Treas. Reg. sec. 1.954-2(c)(2)(iv).
---------------------------------------------------------------------------
       Also generally excluded from subpart F foreign personal 
     holding company income are rents and royalties received by 
     the CFC from a related corporation for the use of property 
     within the country in which the CFC was organized (sec. 
     954(c)(3)). However, rent and royalty payments do not qualify 
     for this exclusion to the extent that such payments reduce 
     subpart F income of the payor.


                               House Bill

       The provision repeals the subpart F rules relating to 
     foreign base company shipping income. The bill also amends 
     the exception from foreign personal holding company income 
     applicable to rents or royalties derived from unrelated 
     persons in an active trade or business by providing a safe 
     harbor for rents derived from leasing an aircraft or vessel 
     in foreign commerce. Such rents are excluded from foreign 
     personal holding company income if the active leasing 
     expenses comprise at least 10 percent of the profit on the 
     lease. This provision is to be applied in accordance with 
     existing regulations under section 954(c)(2)(A) by comparing 
     the lessor's ``active leasing expenses'' for its pool of 
     leased assets to its ``adjusted leasing profit.''
       The safe harbor will not prevent a lessor from otherwise 
     showing that it actively carries on a trade or business. In 
     this regard, the requirements of section 954(c)(2)(A) will be 
     met if a lessor regularly and directly performs active and 
     substantial marketing, remarketing, management and 
     operational functions with respect to the leasing of an 
     aircraft or vessel (or component engines). This will be the 
     case regardless of whether the lessor engages in marketing of 
     the lease as a form of financing (versus marketing the 
     property as such) or whether the lease is classified as a 
     finance lease or operating lease for financial accounting 
     purposes. If a lessor acquires, from an unrelated or related 
     party, a ship or aircraft subject to an existing FSC or ETI 
     lease, the requirements of section 954(c)(2)(A) will be 
     satisfied if, following the acquisition, the lessor performs 
     active and substantial management, operational, and 
     remarketing functions with respect to the leased property. If 
     such a lease is transferred to a CFC lessor, it will no 
     longer be eligible for FSC or ETI benefits.
       An aircraft or vessel is considered to be leased in foreign 
     commerce if it is used for the transportation of property or 
     passengers between a port (or airport) in the United States 
     and one in a foreign country or between foreign ports (or 
     airports), provided the aircraft or vessel is used 
     predominantly outside the United States. An aircraft or 
     vessel will be considered used predominantly outside the 
     United States if more than 50 percent of the miles during the 
     taxable year are traversed outside the United States or the 
     aircraft or vessel is located outside the United States more 
     than 50 percent of the time during such taxable year.
       It is expected that the Secretary of the Treasury will 
     issue timely guidance to make conforming changes to existing 
     regulations, including guidance that aircraft or vessel 
     leasing activity that satisfies the requirements of section 
     954(c)(2)(A) shall also satisfy the requirements for avoiding 
     income inclusion under section 956 and section 367(a).
       It is anticipated that taxpayers now eligible for the 
     benefits of the ETI exclusion (or the FSC provisions pursuant 
     to the FSC Repeal and Extraterritorial Income Exclusion Act 
     of 2000), will find it appropriate, as matter of sound 
     business judgment, to restructure their business operations 
     to take into account the tax law changes brought about by the 
     bill. It is noted that courts have recognized the validity of 
     structuring operations for the purpose of obtaining the 
     benefit of tax regimes expressly intended by Congress. It is 
     intended that structuring or restructuring of operations for 
     the purposes of adapting to the repeal of the ETI exclusion 
     (or the FSC regime) will be considered to serve a valid 
     business purpose and will not constitute tax avoidance, where 
     the restructured operations conform to the requirements 
     expressly mandated by Congress for obtaining tax benefits 
     that remain available. For example, it is intended that a 
     restructuring undertaken to transfer aircraft subject to 
     existing FSC or ETI leases to a CFC lessor, to take advantage 
     of the amendments made by this bill, would serve a valid 
     business purpose and would not constitute tax avoidance, for 
     purposes of determining whether a particular tax treatment 
     (such as nonrecognition of gain) applies to such 
     restructuring. It is intended, for example, that if such a 
     restructuring meets the other requirements necessary to 
     qualify as a ``reorganization'' under section 368, the 
     transaction will also be deemed to meet the ``business 
     purpose'' requirements under section 368, and thus, qualify 
     as a reorganization under that section.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2004, and taxable

[[Page H8515]]

     years of U.S. shareholders with or within which such taxable 
     years of foreign corporations end.


                            Senate Amendment

       The provision provides that ``qualified leasing income'' 
     derived from or in connection with the leasing or rental of 
     any aircraft or vessel is not treated as foreign personal 
     holding company income or foreign base company shipping 
     income of a controlled foreign corporation. The provision 
     defines ``qualified leasing income'' as rents or gains 
     derived in the active conduct of a leasing trade or business 
     with respect to which the controlled foreign corporation 
     conducts substantial activity, provided that the leased 
     property is used by the lessee or other end-user in foreign 
     commerce and predominantly outside the United States, and 
     such lessee or other end-user is not related to the 
     controlled foreign corporation (within the meaning of sec. 
     954(d)(3)).
       In determining whether an aircraft or vessel is used in 
     foreign commerce, it is intended that foreign commerce 
     encompass the use of an aircraft or vessel in the 
     transportation of property or passengers: (1) between an 
     airport or port in the United States (including for this 
     purpose any possession of the United States) and an 
     airport or port in a foreign country; (2) between an 
     airport or port in a foreign country and another in the 
     same country; or (3) between an airport or port in a 
     foreign country and another in a different foreign 
     country. It is intended that an aircraft or vessel be 
     considered as used predominantly outside the United States 
     if more than 70 percent of its miles traveled during the 
     taxable year are traveled outside the United States, or if 
     the aircraft or vessel is located outside the United 
     States for more than 70 percent of the time during the 
     taxable year.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2006, and taxable years of U.S. shareholders with or within 
     which such taxable years of such foreign corporations end.


                          Conference Agreement

       The conference agreement follows the House bill with the 
     following clarifications. First, the terms ``aircraft or 
     vessels'' include engines that are leased separately from an 
     aircraft or vessel. Second, if a lessor acquires (from a 
     related or unrelated party) or aircraft or vessel subject to 
     an existing lease, the requirements of section 954(c)(2)(A) 
     are satisfied if, following the acquisition, the lessor 
     performs active and substantial management, operational, and 
     remarketing functions with respect to the leased property. 
     However, if an existing FSC or ETI lease is transferred to a 
     CFC lessor, the lease will no longer be eligible for FSC or 
     ETI benefits.
     116. Modification of exceptions under subpart F for active 
         financing (sec. 316 of the House bill, sec. 226 of the 
         Senate amendment, and sec. 954 of the Code)


                              Present Law

       Under the subpart F rules, U.S. shareholders with a 10-
     percent or greater interest in a controlled foreign 
     corporation (``CFC'') are subject to U.S. tax currently on 
     certain income earned by the CFC, whether or not such income 
     is distributed to the shareholders. The income subject to 
     current inclusion under the subpart F rules includes, among 
     other things, foreign personal holding company income and 
     insurance income. In addition, 10-percent U.S. shareholders 
     of a CFC are subject to current inclusion with respect to 
     their shares of the CFC's foreign base company services 
     income (i.e., income derived from services performed for a 
     related person outside the country in which the CFC is 
     organized).
       Foreign personal holding company income generally consists 
     of the following: (1) dividends, interest, royalties, rents, 
     and annuities; (2) net gains from the sale or exchange of (a) 
     property that gives rise to the preceding types of income, 
     (b) property that does not give rise to income, and (c) 
     interests in trusts, partnerships, and real estate mortgage 
     investment conduits (``REMICs''); (3) net gains from 
     commodities transactions; (4) net gains from foreign currency 
     transactions; (5) income that is equivalent to interest; (6) 
     income from notional principal contracts; and (7) payments in 
     lieu of dividends.
       Insurance income subject to current inclusion under the 
     subpart F rules includes any income of a CFC attributable to 
     the issuing or reinsuring of any insurance or annuity 
     contract in connection with risks located in a country other 
     than the CFC's country of organization. Subpart F insurance 
     income also includes income attributable to an insurance 
     contract in connection with risks located within the CFC's 
     country of organization, as the result of an arrangement 
     under which another corporation receives a substantially 
     equal amount of consideration for insurance of other country 
     risks. Investment income of a CFC that is allocable to any 
     insurance or annuity contract related to risks located 
     outside the CFC's country of organization is taxable as 
     subpart F insurance income (Treas. Reg. sec. 1.953-1(a)).
       Temporary exceptions from foreign personal holding company 
     income, foreign base company services income, and insurance 
     income apply for subpart F purposes for certain income that 
     is derived in the active conduct of a banking, financing, or 
     similar business, or in the conduct of an insurance business 
     (so-called ``active financing income'').\250\
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     \250\ Temporary exceptions from the subpart F provisions for 
     certain active financing income applied only for taxable 
     years beginning in 1998. Those exceptions were modified and 
     extended for one year, applicable only for taxable years 
     beginning in 1999. The Tax Relief Extension Act of 1999 
     (Pub.L. No. 106-170) clarified and extended the temporary 
     exceptions for two years, applicable only for taxable years 
     beginning after 1999 and before 2002. The Job Creation and 
     Worker Assistance Act of 2002 (Pub.L. No. 107-147) extended 
     the temporary exceptions for five years, applicable only for 
     taxable years beginning after 2001 and before 2007, with a 
     modification relating to insurance reserves.
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       With respect to income derived in the active conduct of a 
     banking, financing, or similar business, a CFC is required to 
     be predominantly engaged in such business and to conduct 
     substantial activity with respect to such business in order 
     to qualify for the exceptions. In addition, certain nexus 
     requirements apply, which provide that income derived by a 
     CFC or a qualified business unit (``QBU'') of a CFC from 
     transactions with customers is eligible for the exceptions 
     if, among other things, substantially all of the activities 
     in connection with such transactions are conducted directly 
     by the CFC or QBU in its home country, and such income is 
     treated as earned by the CFC or QBU in its home country for 
     purposes of such country's tax laws. Moreover, the exceptions 
     apply to income derived from certain cross border 
     transactions, provided that certain requirements are met. 
     Additional exceptions from foreign personal holding company 
     income apply for certain income derived by a securities 
     dealer within the meaning of section 475 and for gain from 
     the sale of active financing assets.
       In the case of insurance, in addition to temporary 
     exceptions from insurance income and from foreign personal 
     holding company income for certain income of a qualifying 
     insurance company with respect to risks located within the 
     CFC's country of creation or organization, temporary 
     exceptions from insurance income and from foreign personal 
     holding company income apply for certain income of a 
     qualifying branch of a qualifying insurance company with 
     respect to risks located within the home country of the 
     branch, provided certain requirements are met under each of 
     the exceptions. Further, additional temporary exceptions from 
     insurance income and from foreign personal holding company 
     income apply for certain income of certain CFCs or branches 
     with respect to risks located in a country other than the 
     United States, provided that the requirements for these 
     exceptions are met.


                               House Bill

       The House bill modifies the present-law temporary 
     exceptions from subpart F foreign personal holding company 
     income and foreign base company services income for income 
     derived in the active conduct of a banking, financing, or 
     similar business. For purposes of determining whether a CFC 
     or QBU has conducted directly in its home country 
     substantially all of the activities in connection with 
     transactions with customers, the House bill provides that an 
     activity is treated as conducted directly by the CFC or QBU 
     in its home country if the activity is performed by employees 
     of a related person and: (1) the related person is itself an 
     eligible CFC the home country of which is the same as that of 
     the CFC or QBU; (2) the activity is performed in the home 
     country of the related person; and (3) the related person is 
     compensated on an arm's length basis for the performance of 
     the activity by its employees and such compensation is 
     treated as earned by such person in its home country for 
     purposes of the tax laws of such country. For purposes of 
     determining whether a CFC or QBU is eligible to earn active 
     financing income, such activity may not be taken into account 
     by any CFC or QBU (including the employer of the employees 
     performing the activity) other than the CFC or QBU for which 
     the activities are performed.
       Effective date.--The House bill provision is effective for 
     taxable years of foreign corporations beginning after 
     December 31, 2004, and taxable years of U.S. shareholders 
     with or within which such taxable years of foreign 
     corporations end.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     17. Ten-year foreign tax credit carryover; one-year foreign 
         tax credit carryback (sec. 201 of the Senate amendment 
         and sec. 904 of the Code)


                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign-source income. The amount of foreign tax credits that 
     may be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S.-source income. The amount of foreign tax 
     credits generally is limited to a portion of the taxpayer's 
     U.S. tax which portion is calculated by multiplying the 
     taxpayer's total U.S. tax by a fraction, the numerator of 
     which is the taxpayer's foreign-source taxable income (i.e., 
     foreign-source gross income less allocable expenses or 
     deductions) and the denominator of which is the taxpayer's 
     worldwide taxable income for the year.\251\
---------------------------------------------------------------------------
     \251\ Section 904(a).
---------------------------------------------------------------------------
       In addition, this limitation is calculated separately for 
     various categories of income,

[[Page H8516]]

     generally referred to as ``separate limitation categories.'' 
     The total amount of the foreign tax credit used to offset the 
     U.S. tax on income in each separate limitation category may 
     not exceed the proportion of the taxpayer's U.S. tax which 
     the taxpayer's foreign-source taxable income in that category 
     bears to its worldwide taxable income.
       The amount of creditable taxes paid or accrued (or deemed 
     paid) in any taxable year which exceeds the foreign tax 
     credit limitation is permitted to be carried back to the two 
     immediately preceding taxable years (to the earliest year 
     first) and carried forward five taxable years (in 
     chronological order) and credited (not deducted) to the 
     extent that the taxpayer otherwise has excess foreign tax 
     credit limitation for those years. Excess credits that are 
     carried back or forward are usable only to the extent that 
     there is excess foreign tax credit limitation in such 
     carryover or carryback year. Consequently, foreign tax 
     credits arising in a taxable year are utilized before excess 
     credits from another taxable year may be carried forward or 
     backward. In addition, excess credits are carried forward or 
     carried back on a separate limitation basis. Thus, if a 
     taxpayer has excess foreign tax credits in one separate 
     limitation category for a taxable year, those excess credits 
     may be carried back and forward only as taxes allocable to 
     that category, notwithstanding the fact that the taxpayer may 
     have excess foreign tax credit limitation in another category 
     for that year. If credits cannot be so utilized, they are 
     permanently disallowed.


                               House Bill

       No provision.


                            Senate Amendment

       The provision extends the excess foreign tax credit 
     carryforward period to twenty years and limits the carryback 
     period to one year.
       Effective date.--The extension of the carryforward period 
     is effective for excess foreign tax credits that may be 
     carried to any taxable years ending after the date of 
     enactment of the provision; the limited carryback period is 
     effective for excess foreign tax credits arising in taxable 
     years beginning after the date of enactment of the provision.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     the modification that the foreign tax credit carryforward 
     period is extended to 10 years.
     18. Expand the subpart F de minimis rule to the lesser of 
         five percent of gross income or $5 million (sec. 212 of 
         the Senate amendment and sec. 954 of the Code)


                              Present Law

       Under the rules of subpart F (secs. 951-964), U.S. 10-
     percent shareholders of a controlled foreign corporation are 
     required to include in income currently for U.S. tax purposes 
     certain types of income of the controlled foreign 
     corporation, whether or not such income is actually 
     distributed currently to the shareholders (referred to as 
     ``subpart F income''). Subpart F income includes foreign base 
     company income and certain insurance income. Foreign base 
     company income includes five categories of income: foreign 
     personal holding company income, foreign base company 
     sales income, foreign base company services income, 
     foreign base company shipping income, and foreign base 
     company oil-related income (sec. 954(a)). Under a de 
     minimis rule, if the gross amount of a controlled foreign 
     corporation's foreign base company income and insurance 
     income for a taxable year is less than the lesser of five 
     percent of the controlled foreign corporation's gross 
     income or $1 million, then no part of the controlled 
     foreign corporation's gross income is treated as foreign 
     base company income or insurance income (sec. 
     954(b)(3)(A)).


                               House Bill

       No provision.


                            Senate Amendment

       The provision expands the subpart F de minimis rule to 
     provide that, if the gross amount of a controlled foreign 
     corporation's foreign base company income and insurance 
     income for a taxable year is less than the lesser of five 
     percent of the controlled foreign corporation's gross income 
     or $5 million, then no part of the controlled foreign 
     corporation's gross income is treated as foreign base company 
     income or insurance income.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2004, and taxable years of U.S. shareholders with or within 
     which such taxable years of such foreign corporations end.


                          Conference Agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     19. Limit application of uniform capitalization rules in the 
         case of foreign persons (sec. 214 of the Senate amendment 
         and sec. 263A of the Code)


                              Present Law

       Taxpayers generally may not currently deduct the costs 
     incurred in producing property or acquiring property for 
     resale. In general, the uniform capitalization rules require 
     that a portion of the direct and indirect costs of producing 
     property or acquiring property for resale be capitalized or 
     included in the cost of inventory (sec. 263A). Consequently, 
     such costs must be recovered through an offset to the sales 
     price if the property is produced for sale, or through 
     depreciation or amortization if the property is produced for 
     the taxpayer's own use in a business or investment activity. 
     The purpose of this requirement is to match the costs of 
     producing or acquiring goods with the revenues realized from 
     their sale or use in the business or investment activity.
       The uniform capitalization rules apply to foreign 
     corporations, whether or not engaged in business in the 
     United States. In the case of a foreign corporation carrying 
     on a U.S. trade or business, for example, the uniform 
     capitalization rules apply for purposes of computing the 
     corporation's U.S. effectively connected taxable income, as 
     well as computing its effectively connected earnings and 
     profits for purposes of the branch profits tax.
       When a foreign corporation is not engaged in a trade or 
     business in the United States, its taxable income and 
     earnings and profits may nonetheless be relevant under the 
     Code. For example, the subpart F income of a controlled 
     foreign corporation may be currently includible on the return 
     of a U.S. shareholder of the controlled foreign corporation. 
     Regardless of whether or not a foreign corporation is U.S.-
     controlled, its accumulated earnings and profits must be 
     computed in order to determine the amount of taxable 
     dividends and the indirect foreign tax credit carried by 
     distributions from the foreign corporation to any domestic 
     corporation that owns at least 10 percent of its voting 
     stock.
       The earnings and profits surplus or deficit of any foreign 
     corporation for any taxable year generally is determined 
     according to rules substantially similar to those applicable 
     to domestic corporations. However, proposed regulations 
     provide that, for purposes of computing a foreign 
     corporation's earnings and profits, the amount of expenses 
     that must be capitalized into inventory under the uniform 
     capitalization rules may not exceed the amount capitalized in 
     keeping the taxpayer's books and records.\252\ For this 
     purpose, the taxpayer's books and records must be prepared in 
     accordance with U.S. generally accepted accounting principles 
     for purposes of reflecting in the financial statements of a 
     domestic corporation the operations of its foreign 
     affiliates. This proposed regulation applies only for 
     purposes of determining a foreign corporation's earnings and 
     profits and does not apply for purposes of determining 
     subpart F income or income effectively connected with a U.S. 
     trade or business of a foreign corporation.
---------------------------------------------------------------------------
     \252\ Treas. Prop. Reg. sec. 1.964-1(c)(1)(ii)(B).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides that, in lieu of the uniform 
     capitalization rules, costs incurred in producing property or 
     acquiring property for resale are capitalized using U.S. 
     generally accepted accounting principles (i.e., the method 
     used to ascertain income, profit, or loss for purposes of 
     reports or statements to shareholders, partners, other 
     proprietors, or beneficiaries, or for credit purposes) for 
     purposes of determining a U.S.-owned foreign corporation's 
     earnings and profits and subpart F income. The uniform 
     capitalization rules continue to apply to foreign 
     corporations for purposes of determining income effectively 
     connected with a U.S. trade or business and the related 
     earnings and profits therefrom. Any change in the taxpayer's 
     method of accounting required as a result of this provision 
     is treated as a voluntary change initiated by the taxpayer 
     and is deemed made with the consent of the Secretary of the 
     Treasury (i.e., no application for change in method of 
     accounting is required to be filed with the Secretary). Any 
     resultant section 481(a) adjustment required to be taken into 
     account is to be taken into account in the first year.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                          Conference Agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     20. Eliminate the 30-percent tax on certain U.S.-source 
         capital gains of nonresident individuals (sec. 216 of the 
         Senate amendment and sec. 871 of the Code)


                              Present Law

       In general, resident aliens are taxed in the same manner as 
     U.S. citizens. Nonresident aliens are subject to (1) U.S. tax 
     on income from U.S. sources that are effectively connected 
     with a U.S. trade or business, and (2) a 30-percent 
     withholding tax on the gross amount of certain types of 
     passive income derived from U.S. sources, such as interest, 
     dividends, rents, and other fixed or determinable annual or 
     periodical income (sec. 871(a)(1)). Bilateral income tax 
     treaties may modify these tax rules.
       Income derived from the sale of personal property other 
     than inventory property generally is sourced based on the 
     residence of the seller (sec. 865(a)). Thus, nonresident 
     aliens generally are not taxable on capital gains because the 
     gains generally are considered to be foreign-source 
     income.\253\
---------------------------------------------------------------------------
     \253\ Nonresident individuals are subject to the 30-percent 
     gross withholding tax, for example, with respect to gains 
     from the sale or exchange of intangible property if the 
     payments are contingent on the productivity, use, or 
     disposition of the property. Secs. 871(a)(1)(D) and 
     881(a)(4).
---------------------------------------------------------------------------
       Special rules apply in the case of sales of personal 
     property by certain foreign persons. In this regard, an 
     individual who is otherwise treated as a nonresident is 
     treated as a

[[Page H8517]]

     U.S. resident for purposes of sourcing income from the sale 
     of personal property if the individual has a tax home in the 
     United States (sec. 865(g)(1)(A)(i)(II)). An individual's 
     U.S. tax home generally is the place where the individual has 
     his or her principal place of business. For example, if a 
     nonresident individual with a tax home in the United States 
     sells stocks or other securities for a gain, the individual 
     will be treated as a U.S. resident with respect to the sale 
     such that the gain will be treated as U.S.-source income 
     potentially subject to U.S. tax.
       Under the special capital gains tax of section 871(a)(2), a 
     nonresident individual who is physically present in the 
     United States for 183 days or more during a taxable year is 
     subject to a 30-percent tax on the excess of U.S.-source 
     capital gains over U.S.-source capital losses. This 30-
     percent tax is not a withholding tax. The tax under section 
     871(a)(2) does not apply to gains and losses subject to the 
     gross 30-percent withholding tax under section 871(a)(1) or 
     to gains effectively connected with a U.S. trade or business. 
     Capital gains and losses are taken into account only to the 
     extent that they would be recognized and taken into account 
     if such gains and losses were effectively connected with a 
     U.S. trade or business. Capital loss carryovers are not taken 
     into account.
       As a practical matter, the special rule under section 
     871(a)(2) applies only in a very limited set of cases. In 
     order for the rule to apply, two conditions must be 
     satisfied: (1) the individual must spend at least 183 days in 
     the United States during a taxable year without being treated 
     as a U.S. resident, and (2) the individual's capital gains 
     must be from U.S. sources. If these conditions are satisfied, 
     then the 30-percent tax applies to the excess of U.S.-source 
     capital gains over U.S.-source capital losses. However, 
     section 871(a)(2) generally is not applicable because if the 
     individual spends 183 days or more in the United States in 
     most cases he or she would be treated as a U.S. resident, or 
     if not treated as a U.S. resident, would generally not have 
     U.S.-source capital gains.
       An individual who is not a citizen and who spends 183 days 
     or more in the United States during a calendar year generally 
     would be treated as a U.S. resident under the substantial 
     presence test of section 7701(b). Thus, in most cases, the 
     individual who spends at least 183 days in the United States 
     would not be subject to section 871(a)(2).\254\ However, 
     under the substantial presence test under section 7701(b), 
     certain days of physical presence in the United States are 
     not counted for purposes of meeting the 183-day rule. This 
     includes days spent in the United States in which the 
     individual regularly commutes to employment (or self-
     employment) in the United States from Canada or Mexico; the 
     individual is in transit between two points outside the 
     United States and is physically present in the United States 
     for less than 24 hours; the individual is temporarily present 
     in the United States as a regular member of the crew of a 
     foreign vessel engaged in transportation between the United 
     States and a foreign country or U.S. possession; and certain 
     exempt individuals. These exceptions from counting physical 
     presence in the United States do not apply, however, for 
     purposes of the special rule under section 871(a)(2). Thus, 
     it is possible in certain cases for an individual to be 
     present in the United States for at least 183 days without 
     being treated as a U.S. resident under the substantial 
     presence test of section 7701(b).\255\
---------------------------------------------------------------------------
     \254\ See the American Law Institute, Federal Income Tax 
     Project, International Aspects of United States Income 
     Taxation, Proposals of the American Law Institute on United 
     States Taxation of Foreign Persons and of the Foreign Income 
     of United States Persons, at 112-113 (1987) (recommending 
     that sec. 871(a)(2) be eliminated and stating ``[u]nder 
     Section 7701(b), enacted in 1984, an individual physically 
     present in the U.S. for 183 days in a calendar year is 
     considered a resident, taxable at net income rates on all of 
     his income; and accordingly the justification for Section 
     871(a)(2) no longer exists.'' [footnotes omitted]).
     \255\ It should be noted that there also is a difference with 
     respect to the year over which the 183-day rule is measured 
     for purposes of the substantial presence test and the rule 
     under sec. 871(a)(2). The sec. 871(a)(2) tax applies to 183 
     days or more of presence in the United States during the 
     taxable year, while the substantial presence test under sec. 
     7701(b) applies to 183 days or more of presence in the United 
     States during the calendar year. In most cases, however, a 
     nonresident individual's taxable year is the calendar year. 
     Secs. 7701(b)(9) and 871(a)(2).
---------------------------------------------------------------------------
       Even if an individual spends at least 183 days in the 
     United States but is not treated as a U.S. resident under 
     section 7701(b), the nonresident individual's capital gains 
     generally will be treated as foreign-source income and, thus, 
     not subject to section 871(a)(2). In this regard, capital 
     gains generally are from foreign sources if the individual is 
     a nonresident, and from U.S. sources if the individual is a 
     U.S. resident. Under a special rule, an individual is treated 
     as a U.S. resident for sales of personal property (including 
     sales giving rise to capital gains) if the individual has a 
     tax home in the United States. This rule applies even if 
     the individual is treated as a nonresident for other U.S. 
     tax purposes. An individual's capital gains would be 
     treated as U.S.-source income and potentially subject to 
     section 871(a)(2) if the individual is treated as a U.S. 
     resident under this special rule.\256\
---------------------------------------------------------------------------
     \256\ The individual's income also could be treated as U.S.-
     source income under sec. 865(e)(2) if the individual derives 
     income from the sale of personal property that is 
     attributable to an office or other fixed place of business 
     that the individual maintains in the United States. However, 
     sec. 871(a)(2) would not apply if the income is effectively 
     connected with a U.S. trade or business, or if the sale 
     qualifies for the exception from U.S.-source treatment as a 
     result of a material participation in the sale by a foreign 
     office of the taxpayer.
---------------------------------------------------------------------------
       Even in the limited cases in which the special rule under 
     section 871(a)(2) could potentially apply, a tax treaty might 
     prevent its application.\257\
---------------------------------------------------------------------------
     \257\ Under Article 13(5) of the U.S. model income tax 
     treaty, subject to certain exceptions, the capital gains of a 
     nonresident individual are exempt from U.S. taxation.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision repeals the special tax on certain capital 
     gains of nonresident aliens under section 871(a)(2).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     21. Modify FIRPTA rules for real estate investment trusts 
         (sec. 230 of the Senate amendment and secs. 857 and 897 
         of the Code)


                              Present Law

       A real estate investment trust (``REIT'') is a U.S. entity 
     that derives most of its income from passive real estate-
     related investments. A REIT must satisfy a number of tests on 
     an annual basis that relate to the entity's organizational 
     structure, the source of its income, and the nature of its 
     assets. If an electing entity meets the requirements for REIT 
     status, the portion of its income that is distributed to its 
     investors each year generally is treated as a dividend 
     deductible by the REIT, and includible in income by its 
     investors. In this manner, the distributed income of the REIT 
     is not taxed at the entity level. The distributed income is 
     taxed only at the investor level. A REIT generally is 
     required to distribute 90 percent of its income to its 
     investors before the end of its taxable year.
       Special U.S. tax rules apply to gains of foreign persons 
     attributable to dispositions of interests in U.S. real 
     property, including certain transactions involving REITs. The 
     rules governing the imposition and collection of tax on such 
     dispositions are contained in a series of provisions that 
     were enacted in 1980 and that are collectively referred to as 
     the Foreign Investment in Real Property Tax Act (``FIRPTA'').
       In general, FIRPTA provides that gain or loss of a foreign 
     person from the disposition of a U.S. real property interest 
     is taken into account for U.S. tax purposes as if such gain 
     or loss were effectively connected with a U.S. trade or 
     business during the taxable year. Accordingly, foreign 
     persons generally are subject to U.S. tax on any gain from a 
     disposition of a U.S. real property interest at the same 
     rates that apply to similar income received by U.S. persons. 
     For these purposes, the receipt of a distribution from a REIT 
     is treated as a disposition of a U.S. real property interest 
     by the recipient to the extent that it is attributable to a 
     sale or exchange of a U.S. real property interest by the 
     REIT. These capital gains distributions from REITs generally 
     are subject to withholding tax at a rate of 35 percent (or a 
     lower treaty rate). In addition, the recipients of these 
     capital gains distributions are required to file Federal 
     income tax returns in the United States, since the recipients 
     are treated as earning income effectively connected with a 
     U.S. trade or business.
       In addition, foreign corporations that have effectively 
     connected income generally are subject to the branch profits 
     tax at a 30-percent rate (or a lower treaty rate).


                               House Bill

       No provision.


                            Senate Amendment

       The provision removes from treatment as effectively 
     connected income for a foreign investor a capital gain 
     distribution from a REIT, provided that (1) the distribution 
     is received with respect to a class of stock that is 
     regularly traded on an established securities market located 
     in the United States and (2) the foreign investor does not 
     own more than five percent of the class of stock at any time 
     during the taxable year within which the distribution is 
     received.
       Thus, a foreign investor is not required to file a U.S. 
     Federal income tax return by reason of receiving such a 
     distribution. The distribution is to be treated as a REIT 
     dividend to that investor, taxed as a REIT dividend that is 
     not a capital gain. Also, the branch profits tax no longer 
     applies to such a distribution.
       Effective date.--The provision applies to taxable years 
     beginning after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     22. Exclusion of certain horse-racing and dog-racing gambling 
         winnings from the income of nonresident alien individuals 
         (sec. 232 of the Senate amendment and sec. 872 of the 
         Code)


                              present law

       Under section 871, certain items of gross income received 
     by a nonresident alien from sources within the United States 
     are subject to a flat 30-percent withholding tax. Gambling 
     winnings received by a nonresident

[[Page H8518]]

     alien from wagers placed in the United States are U.S.-source 
     and thus generally are subject to this withholding tax, 
     unless exempted by treaty. Currently, several U.S. income tax 
     treaties exempt U.S.-source gambling winnings of residents of 
     the other treaty country from U.S. withholding tax. In 
     addition, no withholding tax is imposed under section 871 on 
     the non-business gambling income of a nonresident alien from 
     wagers on the following games (except to the extent that the 
     Secretary determines that collection of the tax would be 
     administratively feasible): blackjack, baccarat, craps, 
     roulette, and big-6 wheel. Various other (non-gambling-
     related) items of income of a nonresident alien are excluded 
     from gross income under section 872(b) and are thereby exempt 
     from the 30-percent withholding tax, without any authority 
     for the Secretary to impose the tax by regulation. In cases 
     in which a withholding tax on gambling winnings applies, 
     section 1441(a) of the Code requires the party making the 
     winning payout to withhold the appropriate amount and makes 
     that party responsible for amounts not withheld.
       With respect to gambling winnings of a nonresident alien 
     resulting from a wager initiated outside the United States on 
     a pari-mutuel \258\ event taking place within the United 
     States, the source of the winnings, and thus the 
     applicability of the 30-percent U.S. withholding tax, depends 
     on the type of wagering pool from which the winnings are 
     paid. If the payout is made from a separate foreign pool, 
     maintained completely in a foreign jurisdiction (e.g., a pool 
     maintained by a racetrack or off-track betting parlor that is 
     showing in a foreign country a simulcast of a horse race 
     taking place in the United States), then the winnings paid to 
     a nonresident alien generally would not be subject to 
     withholding tax, because the amounts received generally would 
     not be from sources within the United States. However, if the 
     payout is made from a ``merged'' or ``commingled'' pool, in 
     which betting pools in the United States and the foreign 
     country are combined for a particular event, then the portion 
     of the payout attributable to wagers placed in the United 
     States could be subject to withholding tax. The party making 
     the payment, in this case a racetrack or off-track betting 
     parlor in a foreign country, would be responsible for 
     withholding the tax.
---------------------------------------------------------------------------
     \258\ In pari-mutuel wagering (common in horse racing), odds 
     and payouts are determined by the aggregate bets placed. The 
     money wagered is placed into a pool, the party maintaining 
     the pool takes a percentage of the total, and the bettors 
     effectively bet against each other. Pari-mutuel wagering may 
     be contrasted with fixed-odds wagering (common in sports 
     wagering), in which odds (or perhaps a point spread) are 
     agreed to by the bettor and the party taking the bet and are 
     not affected by the bets placed by other bettors.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            senate amendment

       The provision provides an exclusion from gross income under 
     section 872(b) for winnings paid to a nonresident alien 
     resulting from a legal wager initiated outside the United 
     States in a pari-mutuel pool on a live horse or dog race in 
     the United States, regardless of whether the pool is a 
     separate foreign pool or a merged U.S.-foreign pool.
       Effective date.--The provision is effective for wagers made 
     after the date of enactment of the provision.


                          conference agreement

       The conference agreement follows the Senate amendment.
     23. Limitation of withholding on U.S.-source dividends paid 
         to Puerto Rico corporation (sec. 233 of the Senate 
         amendment and secs. 881 and 1442 of the Code)


                              present law

       In general, dividends paid by corporations organized in the 
     United States \259\ to corporations organized outside of the 
     United States and its possessions are subject to U.S. income 
     tax withholding at the flat rate of 30 percent. The rate may 
     be reduced or eliminated under a tax treaty. Dividends paid 
     by U.S. corporations to corporations organized in certain 
     U.S. possessions are subject to different rules.\260\ 
     Corporations organized in the U.S. possessions of the Virgin 
     Islands, Guam, American Samoa or the Northern Mariana Islands 
     are not subject to withholding tax on dividends from 
     corporations organized in the United States, provided that 
     certain local ownership and activity requirements are met. 
     Each of those possessions have adopted local internal revenue 
     codes that provide a zero rate of withholding tax on 
     dividends paid by corporations organized in the possession to 
     corporations organized in the United States.
---------------------------------------------------------------------------
     \259\ The term ``United States'' does not include its 
     possessions. Sec. 7701(a)(9).
     \260\ The usual method of effecting a mitigation of the flat 
     30 percent rate--an income tax treaty providing for a lower 
     rate--is not possible in the case of a possession. See S. 
     Rep. No. 1707, 89th Cong., 2d Sess. 34 (1966).
---------------------------------------------------------------------------
       Under the tax laws of Puerto Rico, which is also a U.S. 
     possession, a 10 percent withholding tax is imposed on 
     dividends paid by Puerto Rico corporations to non-Puerto Rico 
     corporations.\261\ Dividends paid by corporations organized 
     in the United States to Puerto Rico corporations are subject 
     to U.S. withholding tax at a 30 percent rate. Under Puerto 
     Rico law, Puerto Rico corporations may elect to credit their 
     U.S. income taxes against their Puerto Rico income taxes. 
     Creditable income taxes include the 30 percent dividend 
     withholding tax and the underlying U.S. corporate tax 
     attributable to the dividends. However, a Puerto Rico 
     corporation's tax credit for U.S. income taxes may be limited 
     because the sum of the U.S. withholding tax and the 
     underlying U.S. corporate tax generally exceeds the amount of 
     Puerto Rico corporate income tax imposed on the dividend. 
     Consequently, Puerto Rico corporations with subsidiaries 
     organized in the United States may be subject to some degree 
     of double taxation on their U.S. subsidiaries' earnings.
---------------------------------------------------------------------------
     \261\ The 10 percent withholding rate may be subject to 
     exemption or elimination if the dividend is paid out of 
     income that is subject to certain tax incentives offered by 
     Puerto Rico. These tax incentives may also reduce the rate of 
     underlying Puerto Rico corporate tax to a flat rate of 
     between two and seven percent.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision lowers the withholding income tax rate on 
     U.S. source dividends paid to a corporation created or 
     organized in Puerto Rico from 30 percent to 10 percent, to 
     create parity with the generally applicable 10 percent 
     withholding tax imposed by Puerto Rico on dividends paid to 
     U.S. corporations. The lower rate applies only if the same 
     local ownership and activity requirements are met that are 
     applicable to corporations organized in other possessions 
     receiving dividends from corporations organized in the United 
     States.
       Effective date.--The provision is effective for dividends 
     paid after date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. Under the provision as modified, if the 
     generally applicable withholding tax rate imposed by Puerto 
     Rico on dividends paid to U.S. corporations increases to 
     greater than 10 percent, the U.S. withholding rate on 
     dividends to Puerto Rico corporations reverts to 30 percent.
     24. Require Commerce Department report on adverse decisions 
         of the World Trade Organization (sec. 234 of the Senate 
         amendment)


                              present law

       The Secretary of Commerce does not have an obligation to 
     transmit any future report to the Senate Committee on Finance 
     and the House of Representatives Committee on Ways and Means, 
     in consultation with the United States Trade Representative, 
     regarding whether dispute settlement panels or the Appellate 
     Body of the World Trade Organization have (1) added to or 
     diminished the rights of the United States by imposing 
     obligations and restrictions on the use of antidumping, 
     countervailing, or safeguard measures not agreed to under the 
     World Trade Organization Antidumping Agreement, the Agreement 
     on Subsidies and Countervailing Measures, or the Agreement on 
     Safeguards; (2) appropriately applied the standard of review 
     contained in Article 17.6 of the Antidumping Agreement; or 
     (3) exceeded its authority or terms of reference.


                               house bill

       No provision.


                            senate amendment

       The provision requires that by no later than March 31, 
     2004, the Secretary of Commerce, in consultation with the 
     United States Trade Representative, shall transmit a report 
     to the Senate Committee on Finance and the House of 
     Representatives Committee on Ways and Means regarding whether 
     dispute settlement panels or the Appellate Body of the World 
     Trade Organization have (1) added to or diminished the rights 
     of the United States by imposing obligations and restrictions 
     on the use of antidumping, countervailing, or safeguard 
     measures not agreed to under the World Trade Organization 
     Antidumping Agreement, the Agreement on Subsidies and 
     Countervailing Measures, or the Agreement on Safeguards; (2) 
     appropriately applied the standard of review contained in 
     Article 17.6 of the Antidumping Agreement; or (3) exceeded 
     its authority or terms of reference.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     25. Study of impact of international tax law on taxpayers 
         other than large corporations (sec. 235 of the Senate 
         amendment)


                              present law

       The United States employs a ``worldwide'' tax system, under 
     which U.S. persons (including domestic corporations) 
     generally are taxed on all income, whether derived in the 
     United States or abroad. In contrast, foreign persons 
     (including foreign corporations) are subject to U.S. tax only 
     on U.S.-source income and income that has a sufficient nexus 
     to the United States. The United States generally provides a 
     credit to U.S. persons for foreign income taxes paid or 
     accrued.\262\ The foreign tax credit generally is limited to 
     the U.S. tax liability on a taxpayer's foreign-source income, 
     in order to ensure that the credit serves its purpose of 
     mitigating double taxation of foreign-source income without 
     offsetting the U.S. tax on U.S.-source income.\263\
---------------------------------------------------------------------------
     \262\ Sec. 901.
     \263\ Secs. 901, 904.

---------------------------------------------------------------------------

[[Page H8519]]

       Within this basic framework, there are a variety of rules 
     that affect the U.S. taxation of cross-border transactions. 
     Detailed rules govern the determination of the source of 
     income and the allocation and apportionment of expenses 
     between foreign-source and U.S.-source income. Such rules are 
     relevant not only for purposes of determining the U.S. 
     taxation of foreign persons (because foreign persons are 
     subject to U.S. tax only on income that is from U.S. sources 
     or otherwise has sufficient U.S. nexus), but also for 
     purposes of determining the U.S. taxation of U.S. persons 
     (because the U.S. tax on a U.S. person's foreign-source 
     income may be reduced or eliminated by foreign tax credits). 
     Authority is provided for the reallocation of items of income 
     and deductions between related persons in order to ensure the 
     clear reflection of the income of each person and to prevent 
     the avoidance of tax. Although U.S. tax generally is not 
     imposed on a foreign corporation that operates abroad, 
     several anti-deferral regimes apply to impose current U.S. 
     tax on certain income from foreign operations of certain 
     U.S.-owned foreign corporations.
       A cross-border transaction potentially gives rise to tax 
     consequences in two (or more) countries. The tax treatment in 
     each country generally is determined under the tax laws of 
     the respective country. However, an income tax treaty between 
     the two countries may operate to coordinate the two tax 
     regimes and mitigate the double taxation of the transaction. 
     In this regard, the United States' network of bilateral 
     income tax treaties includes provisions affecting both U.S. 
     and foreign taxation of both U.S. persons with foreign income 
     and foreign persons with U.S. income.


                               house bill

       No provision.


                            senate amendment

       The provision requires the Secretary of the Treasury or the 
     Secretary's delegate to conduct a study of the impact of 
     Federal international tax rules on taxpayers other than large 
     corporations, including the burdens placed on such taxpayers 
     in complying with such rules. In addition, not later than 180 
     days after the date of the enactment of this provision, the 
     Secretary shall report to the Committee on Finance of the 
     Senate and the Committee on Ways and Means of the House of 
     Representatives the results of the study conducted as a 
     result of this provision, including any recommendations for 
     legislative or administrative changes to reduce the 
     compliance burden on taxpayers other than large corporations 
     and for such other purposes as the Secretary determines 
     appropriate.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     26. Delay in effective date of final regulations governing 
         exclusion of income from international operations of 
         ships and aircraft (sec. 236 of the Senate amendment and 
         sec. 883 of the Code)


                              present law

       Section 883 generally provides an exemption from gross 
     income for earnings of a foreign corporation derived from the 
     international operation of ships and aircraft if an 
     equivalent exemption from tax is granted by the applicable 
     foreign country to corporations organized in the United 
     States.
       Treasury has issued regulations implementing the rules of 
     section 883 that are effective for taxable years beginning 30 
     days or more after August 26, 2003. The regulations provide, 
     in general, that a foreign corporation organized in a 
     qualified foreign country and engaged in the international 
     operation of ships or aircraft shall exclude qualified income 
     from gross income for purposes of United States Federal 
     income taxation, provided that the corporation can satisfy 
     certain ownership and related documentation requirements. The 
     proposed rules explain when a foreign country is a qualified 
     foreign country and what income is considered to be qualified 
     income.


                               house bill

       No provision.


                            senate amendment

       The provision delays the effective date for the Treasury 
     regulations so that they apply to taxable years of foreign 
     corporations seeking qualified foreign corporation status 
     beginning after December 31, 2004.
       Effective date.--The provision is effective after date of 
     enactment.


                          conference agreement

       The conference agreement follows the Senate amendment, 
     except the regulations apply to taxable years of foreign 
     corporations seeking qualified foreign corporation status 
     beginning after September 24, 2004.
     27. Interest payments deductible where taxpayer could have 
         borrowed without a guarantee (sec. 237 of the Senate 
         amendment and sec. 163(j) of the Code)


                              present law

       Present law provides rules to limit the ability of U.S. 
     corporations to reduce the U.S. tax on their U.S.-source 
     income through earnings stripping transactions. These rules 
     limit the deductibility of interest paid to certain related 
     parties (``disqualified interest''), if the payor's debt-
     equity ratio exceeds 1.5 to 1 and the payor's net interest 
     expense exceeds 50 percent of its ``adjusted taxable income'' 
     (generally taxable income computed without regard to 
     deductions for net interest expense, net operating losses, 
     and depreciation, amortization, and depletion).
       Disqualified interest for these purposes also may include 
     interest paid to unrelated parties in certain cases in which 
     a related party guarantees the debt.


                               house bill

       No provision.


                            senate amendment

       Under the provision, a foreign related-party guarantee does 
     not trigger the earnings stripping rules to the extent of the 
     amount of debt that the taxpayer establishes (to the 
     satisfaction of the Treasury Secretary) that it could have 
     borrowed without the guarantee.
       Effective date.--The provision is effective for guarantees 
     issued on or after the date of enactment.


                          conference agreement

       The conference agreement does not contain the Senate 
     amendment provision.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

     28. Nonrefundable personal credits allowed against the 
         alternative minimum tax (``AMT'') (sec. 401 of the House 
         bill, sec. 713 of the Senate amendment, and sec. 26 of 
         the Code)


                              present law

       Present law provides for certain nonrefundable personal tax 
     credits (i.e., the dependent care credit, the credit for the 
     elderly and disabled, the adoption credit, the child tax 
     credit,\264\ the credit for interest on certain home 
     mortgages, the HOPE Scholarship and Lifetime Learning 
     credits, the credit for savers, and the D.C. first-time 
     homebuyer credit).
---------------------------------------------------------------------------
     \264\ A portion of the child credit may be refundable.
---------------------------------------------------------------------------
       For taxable years beginning before 2006, all the 
     nonrefundable personal credits are allowed to the extent of 
     the full amount of the individual's regular tax and 
     alternative minimum tax.
       For taxable years beginning after 2005, the credits (other 
     than the adoption credit, child credit and credit for savers) 
     are allowed only to the extent that the individual's regular 
     income tax liability exceeds the individual's tentative 
     minimum tax, determined without regard to the minimum tax 
     foreign tax credit. The adoption credit, child credit, and 
     IRA credit are allowed to the full extent of the individual's 
     regular tax and alternative minimum tax.


                            house bill \265\

       The House bill allows all nonrefundable personal credits 
     against the AMT.
---------------------------------------------------------------------------
     \265\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--Taxable years beginning in 2004 and 2005.


                         senate amendment \266\

       The Senate amendment allows all nonrefundable personal 
     credits against the AMT.
---------------------------------------------------------------------------
     \266\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--Taxable years beginning in 2004.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     29. Extension and modification of the research credit (sec. 
         402 of the House bill, secs. 311 and 312 of the Senate 
         amendment, and sec. 41 of the Code)


                              present law

       Section 41 provides for a research tax credit equal to 20 
     percent of the amount by which a taxpayer's qualified 
     research expenses for a taxable year exceed its base amount 
     for that year. Taxpayers may elect an alternative incremental 
     research credit regime in which the taxpayer is assigned a 
     three-tiered fixed-base percentage and the credit rate 
     likewise is reduced. Under the alternative credit regime, a 
     credit rate of 2.65 percent applies to the extent that a 
     taxpayer's current-year research expenses exceed a base 
     amount computed by using a fixed-base percentage of one 
     percent but do not exceed a base amount computed by using a 
     fixed-base percentage of 1.5 percent. A credit rate of 3.2 
     percent applies to the extent that a taxpayer's current-year 
     research expenses exceed a base amount computed by using a 
     fixed-base percentage of 1.5 percent but do not exceed a base 
     amount computed by using a fixed-base percentage of two 
     percent. A credit rate of 3.75 percent applies to the extent 
     that a taxpayer's current-year research expenses exceed a 
     base amount computed by using a fixed-base percentage of two 
     percent.
       The research tax credit generally applies to amounts paid 
     or incurred before January 1, 2006.


                            house bill\267\

       The House bill extends the present-law research credit to 
     qualified amounts paid or incurred before January 1, 2006.
---------------------------------------------------------------------------
     \267\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for amounts 
     paid or incurred after June 30, 2004.

[[Page H8520]]

                         senate amendment\268\

       The Senate amendment is the same as the House bill with 
     respect to extension of the present-law research credit. In 
     addition, the Senate amendment makes the following 
     modifications:
---------------------------------------------------------------------------
     \268\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       (4) Increases the credit rates of the alternative 
     incremental credit to three percent, four percent, and five 
     percent.
       (5) Creates a third alternative for taxpayers, the 
     alternative simplified credit. The taxpayer may elect to 
     claim a credit equal to 12 percent of qualified research 
     expenses in excess of 50 percent of the average qualified 
     research expenses for the preceding three taxable years.
       (6) Permits taxpayers to claim a credit equal to 20 percent 
     of amounts paid to certain research consortia.
       The provision also permits taxpayers to include 100 percent 
     of contract research expenses (rather than 65 percent) if the 
     contractor is an eligible small business, a college or 
     university, or a Federal laboratory.
       Effective date.--With respect to extension of the present-
     law research credit, the provision is effective for amounts 
     paid or incurred after the date of enactment.
       With respect to the increase in the alternative incremental 
     credit and the alternative simplified credit, the provisions 
     are effective for taxable years beginning after December 31, 
     2004.
       With respect to payments to research consortia and certain 
     contract research, the provisions are effective for amounts 
     paid or incurred after December 31, 2004.


                          conference agreement

       The conference agreement does not include the House bill or 
     Senate amendment provision.
     30. Extension of credit for electricity produced from certain 
         renewable resources (sec. 403 of the House bill, secs. 
         714 and 801 of the Senate amendment, and sec. 45 of the 
         Code)


                              present law

       An income tax credit is allowed for the production of 
     electricity from either qualified wind energy, qualified 
     ``closed-loop'' biomass, or qualified poultry waste 
     facilities. The amount of the credit is 1.8 cents per 
     kilowatt hour for 2004. The credit amount is indexed for 
     inflation.
       The credit applies to electricity produced by a wind energy 
     facility placed in service after December 31, 1993, and 
     before January 1, 2006, to electricity produced by a closed-
     loop biomass facility placed in service after December 31, 
     1992, and before January 1, 2006, and to a poultry waste 
     facility placed in service after December 31, 1999, and 
     before January 1, 2006. The credit is allowable for 
     production during the 10-year period after a facility is 
     originally placed in service.


                            house bill\269\

       Extends the placed-in-service date for wind facilities and 
     closed-loop biomass facilities to facilities placed in 
     service after December 31, 1993 (December 31, 1992 in the 
     case of closed-loop biomass facilities) and before January 1, 
     2006. Does not extend the placed-in-service date for poultry 
     waste facilities.
---------------------------------------------------------------------------
     \269\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for facilities 
     placed in service after December 31, 2003.


                         senate amendment\270\

       With respect to extension of the present-law credit, the 
     Senate amendment extends the placed-in-service date for wind, 
     closed-loop biomass, and poultry waste facilities to 
     facilities placed in service prior to January 1, 2007.
---------------------------------------------------------------------------
     \270\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       (The Senate amendment would also expand the definition of 
     qualified facilities and make certain other modifications to 
     the operation of credit. These expansions and modifications 
     are described later in this document.)
       Effective date.--With respect to the extension of the 
     placed-in-service dates, the provision is generally effective 
     for facilities placed in service after December 31, 2003.


                          conference agreement

       The conference agreement does not include the House bill or 
     Senate amendment provision with respect to the extension of 
     present law, but it does make modifications to present law 
     that are described later in this document.
     31. Indian employment tax credit (sec. 404 of the House bill, 
         sec. 716 of the Senate amendment, and sec. 45A of the 
         Code)


                              present law

       In general, a credit against income tax liability is 
     allowed to employers for the first $20,000 of qualified wages 
     and qualified employee health insurance costs paid or 
     incurred by the employer with respect to certain employees. 
     The credit is equal to 20 percent of the excess of eligible 
     employee qualified wages and health insurance costs during 
     the current year over the amount of such wages and costs 
     incurred by the employer during 1993. The credit is an 
     incremental credit, such that an employer's current-year 
     qualified wages and qualified employee health insurance costs 
     (up to $20,000 per employee) are eligible for the credit only 
     to the extent that the sum of such costs exceeds the sum of 
     comparable costs paid during 1993. No deduction is allowed 
     for the portion of the wages equal to the amount of the 
     credit.
       Qualified wages means wages paid or incurred by an employer 
     for services performed by a qualified employee. A qualified 
     employee means any employee who is an enrolled member of an 
     Indian tribe or the spouse of an enrolled member of an Indian 
     tribe, who performs substantially all of the services within 
     an Indian reservation, and whose principal place of abode 
     while performing such services is on or near the reservation 
     in which the services are performed. An employee will not be 
     treated as a qualified employee for any taxable year of the 
     employer if the total amount of wages paid or incurred by the 
     employer with respect to such employee during the taxable 
     year exceeds an amount determined at an annual rate of 
     $30,000 (adjusted for inflation after 1993).
       The wage credit is available for wages paid or incurred on 
     or after January 1, 1994, in taxable years that begin before 
     January 1, 2006.


                            house bill \271\

       The provision extends the Indian employment credit 
     incentive for one year (to taxable years beginning before 
     January 1, 2006).
---------------------------------------------------------------------------
     \271\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective on the date of 
     enactment.


                         senate amendment \272\

       Same as the House bill.
---------------------------------------------------------------------------
     \272\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     32. Extension of the work opportunity tax credit (sec. 405 of 
         the House bill, sec. 702 of the Senate amendment, and 
         sec. 51 of the Code)


                              present law

     Work opportunity tax credit
       Targeted groups eligible for the credit
       The work opportunity tax credit is available on an elective 
     basis for employers hiring individuals from one or more of 
     eight targeted groups. The eight targeted groups are: (1) 
     certain families eligible to receive benefits under the 
     Temporary Assistance for Needy Families Program; (2) high-
     risk youth; (3) qualified ex-felons; (4) vocational 
     rehabilitation referrals; (5) qualified summer youth 
     employees; (6) qualified veterans; (7) families receiving 
     food stamps; and (8) persons receiving certain Supplemental 
     Security Income (SSI) benefits.
       A qualified ex-felon is an individual certified as: (1) 
     having been convicted of a felony under State or Federal law; 
     (2) being a member of an economically disadvantaged family; 
     and (3) having a hiring date within one year of release from 
     prison or conviction.
       Qualified wages
       Generally, qualified wages are defined as cash wages paid 
     by the employer to a member of a targeted group. The 
     employer's deduction for wages is reduced by the amount of 
     the credit.
       Calculation of the credit
       The credit equals 40 percent (25 percent for employment of 
     400 hours or less) of qualified first-year wages. Generally, 
     qualified first-year wages are qualified wages (not in excess 
     of $6,000) attributable to service rendered by a member of a 
     targeted group during the one-year period beginning with the 
     day the individual began work for the employer. Therefore, 
     the maximum credit per employee is $2,400 (40 percent of the 
     first $6,000 of qualified first-year wages). With respect to 
     qualified summer youth employees, the maximum credit is 
     $1,200 (40 percent of the first $3,000 of qualified first-
     year wages).
       Minimum employment period
       No credit is allowed for qualified wages paid to employees 
     who work less than 120 hours in the first year of employment.
     Coordination of the work opportunity tax credit and the 
         welfare-to-work tax credit
       An employer cannot claim the work opportunity tax credit 
     with respect to wages of any employee on which the employer 
     claims the welfare-to-work tax credit.
     Other rules
       The work opportunity tax credit is not allowed for wages 
     paid to a relative or dependent of the taxpayer. Similarly 
     wages paid to replacement workers during a strike or lockout 
     are not eligible for the work opportunity tax credit. Wages 
     paid to any employee during any period for which the employer 
     received on-the-job training program payments with respect to 
     that employee are not eligible for the work opportunity tax 
     credit. The work opportunity tax credit generally is not 
     allowed for wages paid to individuals who had previously been 
     employed by the

[[Page H8521]]

     employer. In addition, many other technical rules apply.
     Expiration
       The credit is effective for wages paid or incurred to a 
     qualified individual who begins work for an employer before 
     January 1, 2006.


                            house bill \273\

       The House bill extends the WOTC for two years (through 
     December 31, 2005).
---------------------------------------------------------------------------
     \273\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--Wages paid or incurred for individuals 
     beginning work after December 31, 2003.


                         senate amendment \274\

       The Senate amendment permanently extends the WOTC.
---------------------------------------------------------------------------
     \274\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''),which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment also makes the following modifications 
     to the WOTC:
       (1) repeals the requirement that a qualified ex-felon be a 
     member of an economically disadvantaged family for purposes 
     of eligibility for the tax credit;
       (2) expands the category of vocational rehabilitation 
     referrals to include certain individuals who have a physical 
     or mental disability that constitutes a substantial handicap 
     to employment and who are receiving vocational services or 
     have completed an individual work plan developed by a private 
     employment network as defined under section 1148(f) of the 
     Social Security Act qualify as members of the vocational 
     rehabilitation referral targeted group.
       (3) increases the age limit for qualified food stamp 
     recipients. Therefore a food stamp recipient is an individual 
     aged 18 but not aged 40 certified as being a member of a 
     family either currently or recently receiving assistance 
     under an eligible food stamp program.
       (4) increases the age limit for high-risk youths. Therefore 
     a high-risk youth is an individual aged 18 but not aged 40 
     having a principal place of abode within an empowerment zone, 
     enterprise community, or renewal community.
       Effective date.--The extension is effective for wages paid 
     or incurred for individuals beginning work after December 31, 
     2003. The modifications are effective for wages paid or 
     incurred for individuals beginning work after December 31, 
     2004.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     33. Extension of the welfare-to-work tax credit (sec. 406 of 
         the House bill, sec. 702 of the Senate amendment, and 
         sec. 51A of the Code)


                              Present Law

     Welfare-to-work tax credit
       Targeted group eligible for the credit
       The welfare-to-work tax credit is available on an elective 
     basis to employers of qualified long-term family assistance 
     recipients. Qualified long-term family assistance recipients 
     are: (1) members of a family that has received family 
     assistance for at least 18 consecutive months ending on the 
     hiring date; (2) members of a family that has received such 
     family assistance for a total of at least 18 months (whether 
     or not consecutive) after August 5, 1997 (the date of 
     enactment of the welfare-to-work tax credit) if they are 
     hired within 2 years after the date that the 18-month total 
     is reached; and (3) members of a family who are no longer 
     eligible for family assistance because of either Federal or 
     State time limits, if they are hired within 2 years after the 
     Federal or State time limits made the family ineligible for 
     family assistance.
       Qualified wages
       Qualified wages for purposes of the welfare-to-work tax 
     credit are defined more broadly than the work opportunity tax 
     credit. Unlike the definition of wages for the work 
     opportunity tax credit which includes simply cash wages, the 
     definition of wages for the welfare-to-work tax credit 
     includes cash wages paid to an employee plus amounts paid by 
     the employer for: (1) educational assistance excludable under 
     a section 127 program (or that would be excludable but for 
     the expiration of sec. 127); (2) health plan coverage for the 
     employee, but not more than the applicable premium defined 
     under section 4980B(f)(4); and (3) dependent care assistance 
     excludable under section 129. The employer's deduction for 
     wages is reduced by the amount of the credit.
       Calculation of the credit
       The welfare-to-work tax credit is available on an elective 
     basis to employers of qualified long-term family assistance 
     recipients during the first two years of employment. The 
     maximum credit is 35 percent of the first $10,000 of 
     qualified first-year wages and 50 percent of the first 
     $10,000 of qualified second-year wages. Qualified first-year 
     wages are defined as qualified wages (not in excess of 
     $10,000) attributable to service rendered by a member of the 
     targeted group during the one-year period beginning with the 
     day the individual began work for the employer. Qualified 
     second-year wages are defined as qualified wages (not in 
     excess of $10,000) attributable to service rendered by a 
     member of the targeted group during the one-year period 
     beginning immediately after the first year of that 
     individual's employment for the employer. The maximum credit 
     is $8,500 per qualified employee.
       Minimum employment period
       No credit is allowed for qualified wages paid to a member 
     of the targeted group unless they work at least 400 hours or 
     180 days in the first year of employment.
     Coordination of the work opportunity tax credit and the 
         welfare-to-work tax credit
       An employer cannot claim the work opportunity tax credit 
     with respect to wages of any employee on which the employer 
     claims the welfare-to-work tax credit.
     Other rules
       The welfare-to-work tax credit incorporates directly or by 
     reference many of these other rules contained on the work 
     opportunity tax credit.
     Expiration
       The welfare to work credit is effective for wages paid or 
     incurred to a qualified individual who begins work for an 
     employer before January 1, 2006.


                            House Bill \275\
---------------------------------------------------------------------------

     \275\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       The House bill extends the WWTC for two years (through 
     December 31, 2005).
       Effective date.--The provision is effective for wages paid 
     or incurred for individuals beginning work after December 31, 
     2003.


                         Senate Amendment \276\
---------------------------------------------------------------------------

     \276\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment permanently extends the WWTC.
       Effective date.--Wages paid or incurred for individuals 
     beginning work after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     34. Combination and modification of the work opportunity tax 
         credit and the welfare-to-work tax credit (sec. 703 of 
         the Senate amendment and sec. 51 of the Code)


                              Present Law

       Same as items 5 and 6, above.


                            House Bill \277\
---------------------------------------------------------------------------

     \277\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       No provision.


                         Senate Amendment \278\
---------------------------------------------------------------------------

     \278\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment combines and modifies the work 
     opportunity and welfare-to-work tax credits with the 
     following modifications:
       The combined credit uses the WOTC definition of wages; in 
     the case of first-year wages for long-term family assistance 
     recipients the maximum credit is increased to $4,000 (40 
     percent of the first $10,000 of qualified first-year wages);
       The combined credit uses the WOTC definition for the 
     minimum employment period (i.e., the combined credit is not 
     allowed for qualified wages paid to employees who work less 
     than 120 hours in the first year of employment).
       Effective date.--The provision is effective for wages paid 
     or incurred for individuals beginning work after December 31, 
     2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     35. Certain expenses of elementary and secondary school 
         teachers (sec. 407 of the House bill, sec. 707 of the 
         Senate amendment, and sec. 62 of the Code)


                              Present Law

       In general, ordinary and necessary business expenses are 
     deductible (sec. 162). However, in general, unreimbursed 
     employee business expenses are deductible only as an itemized 
     deduction and only to the extent that the individual's total 
     miscellaneous deductions (including employee business 
     expenses) exceed two percent of adjusted gross income. An 
     individual's otherwise allowable itemized deductions may be 
     further limited by the overall limitation on itemized 
     deductions, which reduces itemized deductions for taxpayers 
     with adjusted gross income in excess of $142,700 (for 2004). 
     In addition, miscellaneous itemized deductions are not 
     allowable under the alternative minimum tax.
       Certain expenses of eligible educators are allowed an 
     above-the-line deduction. Specifically, for taxable years 
     beginning prior to January 1, 2006, an above-the-line 
     deduction is allowed for up to $250 annually of expenses paid 
     or incurred by an eligible educator for books, supplies 
     (other than nonathletic supplies for courses of instruction 
     in health or physical education), computer equipment 
     (including related software and services) and other 
     equipment, and supplementary materials used by the eligible 
     educator in the classroom. To be eligible for this deduction, 
     the expenses must be otherwise deductible under section 162 
     as a trade or business expense. A deduction is allowed only 
     to the extent the amount of expenses exceeds the

[[Page H8522]]

     amount excludable from income under section 135 (relating to 
     education savings bonds), section 529(c)(1) (relating to 
     qualified tuition programs), and section 530(d)(2) (relating 
     to Coverdell education savings accounts).
       An eligible educator is a kindergarten through grade 12 
     teacher, instructor, counselor, principal, or aide in a 
     school for at least 900 hours during a school year. A school 
     means any school which provides elementary education or 
     secondary education, as determined under State law.
       The above-the-line deduction for eligible educators is not 
     allowed for taxable years beginning after December 31, 2005.


                            house Bill \279\
---------------------------------------------------------------------------

     \279\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       The House bill allows the above-the-line deduction for 
     taxable years beginning prior to January 1, 2006.
       Effective date.--The provision is effective for taxable 
     years beginning in 2004 and 2005.


                         senate amendment \280\
---------------------------------------------------------------------------

     \280\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     36. Accelerated depreciation for business property on Indian 
         reservations (sec. 408 of the House bill, sec. 717 of the 
         Senate amendment, and sec. 168 of the Code)


                              present law

       With respect to certain property used in connection with 
     the conduct of a trade or business within an Indian 
     reservation, depreciation deductions under section 168(j) 
     will be determined using the following recovery periods:

                                                                  Years
3-year property-......................................................2
5-year property.......................................................3
7-year property-......................................................4
10-year property......................................................6
15-year property......................................................9
20-year property-....................................................12
Nonresidential real property.........................................22

       ``Qualified Indian reservation property'' eligible for 
     accelerated depreciation includes property which is (1) used 
     by the taxpayer predominantly in the active conduct of a 
     trade or business within an Indian reservation, (2) not used 
     or located outside the reservation on a regular basis, (3) 
     not acquired (directly or indirectly) by the taxpayer from a 
     person who is related to the taxpayer (within the meaning of 
     section 465(b)(3)(C)), and (4) described in the recovery-
     period table above. In addition, property is not ``qualified 
     Indian reservation property'' if it is placed in service for 
     purposes of conducting gaming activities. Certain ``qualified 
     infrastructure property'' may be eligible for the accelerated 
     depreciation even if located outside an Indian reservation, 
     provided that the purpose of such property is to connect with 
     qualified infrastructure property located within the 
     reservation (e.g., roads, power lines, water systems, 
     railroad spurs, and communications facilities).
       The depreciation deduction allowed for regular tax purposes 
     is also allowed for purposes of the alternative minimum tax. 
     The accelerated depreciation for Indian reservations is 
     available with respect to property placed in service on or 
     after January 1, 1994, and before January 1, 2006.


                            house bill \281\

       The provision extends eligibility for the special 
     depreciation periods to property placed in service before 
     January 1, 2006.
---------------------------------------------------------------------------
     \281\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective on the date of 
     enactment.


                         senate amendment \282\

       Same as the House bill.
---------------------------------------------------------------------------
     \282\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     37. Charitable contributions of computer technology and 
         equipment used for educational purposes and of scientific 
         property used for research (sec. 409 of the House bill, 
         sec. 706 of the Senate amendment, and sec. 170 of the 
         Code)


                              present law

       A deduction for charitable contributions of computer 
     technology and equipment and of scientific property used for 
     research generally is limited to the taxpayer's basis in the 
     property. However, certain corporations may claim a deduction 
     in excess of basis for a qualified computer contribution or a 
     qualified research contribution. To be eligible for the 
     enhanced deduction, the contributed property must be 
     constructed by the taxpayer, among other requirements. 
     The enhanced deduction for qualified computer 
     contributions expires for contributions made during any 
     taxable year beginning after December 31, 2005.


                            house bill \283\
---------------------------------------------------------------------------

     \283\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       The House bill extends the enhanced deduction for qualified 
     computer contributions to contributions made during any 
     taxable year beginning before January 1, 2006.
       Effective date.--Taxable years beginning after December 31, 
     2003.


                         Senate Amendment \284\
---------------------------------------------------------------------------

     \284\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment expands the enhanced deduction for 
     qualified computer contributions and qualified research 
     contributions to apply to property assembled by the taxpayer 
     as well as property constructed by the taxpayer.
       The extension of the enhanced deduction for qualified 
     computer contributions is the same as the House bill.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2003.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     38. Expensing of environmental remediation costs (sec. 410 of 
         the House bill, sec. 708 of the Senate amendment, and 
         sec. 198 of the Code)-


                              present law

       Taxpayers can elect to treat certain environmental 
     remediation expenditures that would otherwise be chargeable 
     to capital account as deductible in the year paid or 
     incurred. The deduction applies for both regular and 
     alternative minimum tax purposes. The expenditure must be 
     incurred in connection with the abatement or control of 
     hazardous substances at a qualified contaminated site (so 
     called ``brownfields'').
       Eligible expenditures are those paid or incurred before 
     January 1, 2006.


                            house bill \285\
---------------------------------------------------------------------------

     \285\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       The House bill extends the present law expensing provision 
     for two years (through December 31, 2005).
       Effective date.--The provision is effective for expenses 
     paid or incurred after December 31, 2003.-


                         senate amendment \286\
---------------------------------------------------------------------------

     \286\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     Senate amendment provision.
     39. Availability of Archer medical savings accounts (sec. 411 
         of the House bill and sec. 220 of the Code)


                              present law

     In general
       Within limits, contributions to an Archer medical savings 
     account (``Archer MSA'') are deductible in determining 
     adjusted gross income if made by an eligible individual and 
     are excludable from gross income and wages for employment tax 
     purposes if made by the employer of an eligible individual. 
     Earnings on amounts in an Archer MSA are not currently 
     taxable. Distributions from an Archer MSA for medical 
     expenses are not includible in gross income. Distributions 
     not used for medical expenses are includible in gross income. 
     In addition, distributions not used for medical expenses are 
     subject to an additional 15-percent tax unless the 
     distribution is made after age 65, death, or disability.
     Eligible individuals
       Archer MSAs are available to employees covered under an 
     employer-sponsored high deductible plan of a small employer 
     and self-employed individuals covered under a high deductible 
     health plan.\287\ An employer is a small employer if it 
     employed, on average, no more than 50 employees on 
     business days during either the preceding or the second 
     preceding year. An individual is not eligible for an 
     Archer MSA if he or she is covered under any other health 
     plan in addition to the high deductible plan.
---------------------------------------------------------------------------
     \287\ Self-employed individuals include more than two-percent 
     shareholders of S corporations who are treated as partners 
     for purposes of fringe benefit rules pursuant to section 
     1372.
---------------------------------------------------------------------------
     Tax treatment of and limits on contributions
       Individual contributions to an Archer MSA are deductible 
     (within limits) in determining adjusted gross income (i.e., 
     ``above-the-line''). In addition, employer contributions are 
     excludable from gross income and wages for employment tax 
     purposes (within the same limits), except that this exclusion 
     does not apply to contributions made through a cafeteria 
     plan. In the case of an employee, contributions can be made 
     to an Archer MSA either by the individual or by the 
     individual's employer.
       The maximum annual contribution that can be made to an 
     Archer MSA for a year is

[[Page H8523]]

     65 percent of the deductible under the high deductible plan 
     in the case of individual coverage and 75 percent of the 
     deductible in the case of family coverage.
     Definition of high deductible plan
       A high deductible plan is a health plan with an annual 
     deductible of at least $1,700 and no more than $2,600 in the 
     case of individual coverage and at least $3,450 and no more 
     than $5,150 in the case of family coverage. In addition, the 
     maximum out-of-pocket expenses with respect to allowed costs 
     (including the deductible) must be no more than $3,450 in the 
     case of individual coverage and no more than $6,300 in the 
     case of family coverage.\288\ A plan does not fail to qualify 
     as a high deductible plan merely because it does not have a 
     deductible for preventive care as required by State law. A 
     plan does not qualify as a high deductible health plan if 
     substantially all of the coverage under the plan is for 
     permitted coverage (as described above). In the case of a 
     self-insured plan, the plan must in fact be insurance (e.g., 
     there must be appropriate risk shifting) and not merely a 
     reimbursement arrangement.
---------------------------------------------------------------------------
     \288\ These dollar amounts are for 2004. These amounts are 
     indexed for inflation, rounded to the nearest $50.
---------------------------------------------------------------------------
     Cap on taxpayers utilizing Archer MSAs and expiration of 
         pilot program
       The number of taxpayers benefiting annually from an Archer 
     MSA contribution is limited to a threshold level (generally 
     750,000 taxpayers). The number of Archer MSAs established has 
     not exceeded the threshold level.
       After 2005, no new contributions may be made to Archer MSAs 
     except by or on behalf of individuals who previously made (or 
     had made on their behalf) Archer MSA contributions and 
     employees who are employed by a participating employer.
       Trustees of Archer MSAs are generally required to make 
     reports to the Treasury by August 1 regarding Archer MSAs 
     established by July 1 of that year. If any year is a cut-off 
     year, the Secretary is required to make and publish such 
     determination by October 1 of such year.
       The reports required by MSA trustees for 2004 are treated 
     as timely if made within 90 days after October 4, 2004. In 
     addition, the determination of whether 2004 is a cut-off year 
     and the publication of such determination is to be made 
     within 120 days of October 4, 2004. If 2004 is a cut-off 
     year, the cut-off date will be the last day of such 120-day 
     period.


                            house bill \289\

       The House bill extends Archer MSAs through December 31, 
     2005.
---------------------------------------------------------------------------
     \289\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for January 1, 
     2004.


                         senate amendment \290\

       No provision.
---------------------------------------------------------------------------
     \290\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the House bill or 
     Senate amendment provision.
     40. Suspension of 100-percent-of-net-income limitation on 
         percentage depletion for oil and gas from marginal wells 
         (sec. 412 of the House bill, secs. 715 and 846 of the 
         Senate amendment, and sec. 613A of the Code)


                              present law

     Overview of depletion
       Depletion, like depreciation, is a form of capital cost 
     recovery. In both cases, the taxpayer is allowed a deduction 
     in recognition of the fact that an asset--in the case of 
     depletion for oil or gas interests, the mineral reserve 
     itself--is being expended in order to produce income. Certain 
     costs incurred prior to drilling an oil or gas property are 
     recovered through the depletion deduction. These include 
     costs of acquiring the lease or other interest in the 
     property and geological and geophysical costs (in advance of 
     actual drilling).
       Depletion is available to any person having an economic 
     interest in a producing property. An economic interest is 
     possessed in every case in which the taxpayer has acquired by 
     investment any interest in minerals in place, and secures, by 
     any form of legal relationship, income derived from the 
     extraction of the mineral, to which it must look for a return 
     of its capital.\291\ Thus, for example, both working 
     interests and royalty interests in an oil- or gas-producing 
     property constitute economic interests, thereby qualifying 
     the interest holders for depletion deductions with respect to 
     the property. A taxpayer who has no capital investment in the 
     mineral deposit does not possess an economic interest merely 
     because it possesses an economic or pecuniary advantage 
     derived from production through a contractual relation.
---------------------------------------------------------------------------
     \291\ Treas. Reg. sec. 1.611-1(b)(1).
---------------------------------------------------------------------------
     Cost depletion
       Two methods of depletion are currently allowable under the 
     Code: (1) the cost depletion method, and (2) the percentage 
     depletion method.\292\ Under the cost depletion method, the 
     taxpayer deducts that portion of the adjusted basis of the 
     depletable property which is equal to the ratio of units sold 
     from that property during the taxable year to the number of 
     units remaining as of the end of the taxable year plus the 
     number of units sold during the taxable year. Thus, the 
     amount recovered under cost depletion may never exceed the 
     taxpayer's basis in the property.
---------------------------------------------------------------------------
     \292\ Secs. 611-613.
---------------------------------------------------------------------------
     Percentage depletion and related income limitations
       The Code generally limits the percentage depletion method 
     for oil and gas properties to independent producers and 
     royalty owners.\293\ Generally, under the percentage 
     depletion method, 15 percent of the taxpayer's gross income 
     from an oil- or gas-producing property is allowed as a 
     deduction in each taxable year.\294\ The amount deducted 
     generally may not exceed 100 percent of the net income from 
     that property in any year (the ``net-income 
     limitation'').\295\ The 100-percent net-income limitation for 
     marginal wells has been suspended for taxable years beginning 
     after December 31, 1997, and before January 1, 2006.
---------------------------------------------------------------------------
     \293\ Sec. 613A.
     \294\ Sec. 613A(c).
     \295\ Sec. 613(a).
---------------------------------------------------------------------------


                            house bill \296\

       The provision extends the suspension of the net-income 
     limitation for marginal wells for taxable years beginning 
     before January 1, 2006.
---------------------------------------------------------------------------
     \296\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                         senate amendment \297\

       The Senate amendment extends the suspension of the net-
     income limitation for marginal wells for taxable years 
     beginning before January 1, 2007.
---------------------------------------------------------------------------
     \297\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--Same as the House bill.


                          conference agreement

       The conference agreement does not contain the House bill or 
     Senate amendment provision.
     41. Qualified zone academy bonds (sec. 413 of the House bill, 
         secs. 612 and 704 of the Senate amendment, and sec. 1397E 
         of the Code)


                              present law

       Generally, ``qualified zone academy bonds'' are bonds 
     issued by a State or local government, provided that at least 
     95 percent of the proceeds are used for one or more qualified 
     purposes with respect to a ``qualified zone academy'' and 
     private entities have promised to contribute to the qualified 
     zone academy certain equipment, technical assistance or 
     training, employee services, or other property or services 
     with a value equal to at least 10 percent of the bond 
     proceeds. Qualified purposes with respect to any qualified 
     zone academy are: (1) rehabilitating or repairing the public 
     school facility in which the academy is established; (2) 
     providing equipment for use at such academy; (3) developing 
     course materials for education at such academy, and (4) 
     training teachers and other school personnel. A total of $400 
     million of qualified zone academy bonds may be issued 
     annually in calendar years 1998 through 2005.


                            house bill \298\

       The House bill authorizes $400 million of qualified zone 
     academy bonds to be issued in 2004 and 2005.
---------------------------------------------------------------------------
     \298\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective for 
     obligations issued after the date of enactment.


                         Senate Amendment \299\

       The Senate amendment expands the qualified purposes for 
     which qualified zone academy bonds may be issued to include 
     construction of the public school facility in which the 
     qualified zone academy is established, and the acquisition of 
     land on which the facility is to be constructed.
---------------------------------------------------------------------------
     \299\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment authorizes $400 million of qualified 
     zone academy bonds to be issued in 2004 and 2005.
       Effective date.--The Senate amendment is effective for 
     obligations issued after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.

[[Page H8524]]

     42. Tax Incentives for Investment in the District of Columbia 
         (sec. 414 of the House bill, sec. 711 of the Senate 
         amendment, and secs. 1400, 1400A, and 1400C of the Code)


                              Present Law

       Certain economically depressed census tracts within the 
     District of Columbia are designated as the District of 
     Columbia Enterprise Zone (the ``D.C. Zone'') within which 
     businesses and individual residents are eligible for special 
     tax incentives. The designation expires on December 31, 2005.
       First-time homebuyers of a principal residence in the 
     District of Columbia are eligible for a nonrefundable tax 
     credit of up to $5,000 of the amount of the purchase price. 
     The credit expires for property purchased after December 31, 
     2005.


                            House Bill \300\

       The House bill extends the D.C. Zone designation and 
     related tax incentives for two years, and extends the first-
     time homebuyer credit for two years.
---------------------------------------------------------------------------
     \300\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision takes effect on the date of 
     enactment, except that the provision relating to tax-exempt 
     financing incentives, which applies to obligations issued 
     after December 31, 2003.


                         Senate Amendment \301\

       Same as the House bill.
---------------------------------------------------------------------------
     \301\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--The provision takes effect on January 1, 
     2004, except that the provision relating to tax-exempt 
     financing incentives applies to obligations issued after the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     43. Modifications to New York Liberty Zone bond provisions 
         (sec. 415 of the House bill, secs. 611 and 709 of the 
         Senate amendment, and sec. 1400L of the Code)


                              Present Law

       An aggregate of $8 billion in tax-exempt private activity 
     bonds is authorized for the purpose of financing the 
     construction and repair of infrastructure in New York City 
     (``Liberty Zone bonds''). The bonds must be issued before 
     January 1, 2010.
       Certain bonds used to fund facilities located in New York 
     City are permitted one additional advance refunding before 
     January 1, 2006 (``advance refunding bonds''). In addition to 
     satisfying other requirements, the bond refunded must be (1) 
     a State or local bond that is a general obligation of New 
     York City, (2) a State or local bond issued by the New York 
     Municipal Water Finance Authority or Metropolitan 
     Transportation Authority of the City of New York, or (3) a 
     qualified 501(c)(3) bond which is a qualified hospital bond 
     issued by or on behalf of the State of New York or the City 
     of New York.\302\ The maximum amount of advance refunding 
     bonds is $9 billion.
---------------------------------------------------------------------------
     \302\ On July 8, 2002, the IRS issued Notice 2002-42, which 
     provides that bonds issued by the Municipal Assistance 
     Corporation for the City of New York are eligible for the 
     advance refunding provisions of section 1400L(e) if they 
     otherwise satisfy the requirements of that section.
---------------------------------------------------------------------------


                            House Bill \303\

       The House bill provision extends authority to issue Liberty 
     Zone bonds through December 31, 2009.
---------------------------------------------------------------------------
     \303\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment and before January 1, 
     2010.


                         Senate Amendment \304\

       The Senate amendment extends authority to issue Liberty 
     Zone bonds through December 31, 2009, and extends the 
     additional advance refunding authority through December 31, 
     2005. The Senate amendment provides that bonds issued by the 
     Municipal Assistance Corporation are eligible for advance 
     refunding.
---------------------------------------------------------------------------
     \304\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--The provisions extending authority to 
     issue Liberty Zone bonds and an additional advance refunding 
     are effective on the date of enactment. The provision 
     relating to the advance refunding of bonds of the Municipal 
     Assistance Corporation is effective as if included in the 
     amendments made by section 301 of the Job Creation and Worker 
     Assistance Act of 2002.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     44. Qualified New York Liberty Zone leasehold improvement 
         election out (sec. 709(c) of the Senate amendment)


                              Present Law

       Qualified New York Liberty Zone leasehold improvements 
     placed in service after September 10, 2001 and before January 
     1, 2007 are depreciable over five years (rather than 39 
     years) using the straight line method of depreciation. There 
     is no election out of this provision.
       Liberty Zone leasehold improvements that are eligible for a 
     five-year recovery period are not also eligible for the 30-
     percent first-year bonus depreciation under section 168(k) or 
     1400L(b). A taxpayer may elect out of bonus depreciation. The 
     election out is made at the property class level. Section 
     168(k)(2)(C)(iii) provides that the election applies to all 
     property in the class or classes for which the election out 
     is made that is placed in service for the tax year of the 
     election.


                            House Bill \305\

       No provision.
---------------------------------------------------------------------------
     \305\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------


                         Senate Amendment \306\

       The Senate amendment permits a taxpayer to elect out of the 
     five-year recovery period for qualified New York Liberty Zone 
     leasehold improvement property under rules similar to section 
     168(k)(2)(C)(iii).
---------------------------------------------------------------------------
     \306\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective as if 
     included in the amendments made by section 301 of the Job 
     Creation and Worker Assistance Act of 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     45. Disclosures relating to terrorist activities (sec. 416 of 
         the House bill and sec. 6103 of the Code)


                              Present Law

       In connection with terrorist activities, the IRS is 
     permitted to disclose return information, other than taxpayer 
     return information, to officers and employees of Federal law 
     enforcement upon a written request. The Code requires the 
     request to be made by the head of the Federal law enforcement 
     agency (or his delegate) involved in the response to or 
     investigation of terrorist incidents, threats, or activities, 
     and set forth the specific reason or reasons why such 
     disclosure may be relevant to a terrorist incident, threat, 
     or activity. Disclosure of the information is permitted to 
     officers and employees of the Federal law enforcement agency 
     who are personally and directly involved in the response to 
     or investigation of terrorist incidents, threats, or 
     activities. The information is to be used by such officers 
     and employees solely for such response or investigation.\307\ 
     A taxpayer's identity is not treated as taxpayer return 
     information for purposes of disclosures to law enforcement 
     agencies regarding terrorist activities.
---------------------------------------------------------------------------
     \307\ Sec. 6103(i)(7)(A).
---------------------------------------------------------------------------
       The Code permits the head of the Federal law enforcement 
     agency to redisclose the information to officers and 
     employees of State and local law enforcement personally and 
     directly engaged in the response to or investigation of the 
     terrorist incident, threat, or activity. The State or local 
     law enforcement agency is required to be part of an 
     investigative or response team with the Federal law 
     enforcement agency for these disclosures to be made.\308\
---------------------------------------------------------------------------
     \308\ Sec. 6103(i)(7)(A)(ii).
---------------------------------------------------------------------------
       The Code also allows the IRS to disclose return information 
     (other than taxpayer return information) upon the written 
     request of an officer or employee of the Department of 
     Justice or Treasury who is appointed by the President with 
     the advice and consent of the Senate, or who is the Director 
     of the U.S. Secret Service, if such individual is responsible 
     for the collection and analysis of intelligence and 
     counterintelligence concerning any terrorist incident, 
     threat, or activity.\309\ Taxpayer identity information for 
     this purpose is not considered taxpayer return information. 
     Such written request is required to set forth the specific 
     reason or reasons why such disclosure may be relevant to a 
     terrorist incident, threat, or activity. Disclosures under 
     this authority are permitted to be made to those officers and 
     employees of the Department of Justice, Treasury, and Federal 
     intelligence agencies who are personally and directly engaged 
     in the collection or analysis of intelligence and 
     counterintelligence information or investigation concerning 
     any terrorist incident, threat, or activity. Such disclosures 
     are permitted solely for the use of such officers and 
     employees in such investigation, collection, or analysis.
---------------------------------------------------------------------------
     \309\ Sec. 6103(i)(7)(B).
---------------------------------------------------------------------------
       The IRS, on its own initiative, is permitted to disclose in 
     writing return information (other than taxpayer return 
     information) that may be related to a terrorist incident, 
     threat, or activity to the extent necessary to apprise the 
     head of the appropriate investigating Federal law enforcement 
     agency.\310\ Taxpayer identity information for this purpose 
     is not considered taxpayer return information. The head of 
     the agency is permitted to redisclose such information to 
     officers and employees of such agency to the extent necessary 
     to investigate or respond to the terrorist incident, threat, 
     or activity.
---------------------------------------------------------------------------
     \310\ Sec. 6103(i)(3)(C).
---------------------------------------------------------------------------
       If taxpayer return information is sought, the disclosure is 
     required to be made pursuant to the ex parte order of a 
     Federal district court judge or magistrate.
       No disclosures may be made under these provisions after 
     December 31, 2005.

[[Page H8525]]

                            house bill \311\

       The House bill provision extends all disclosure authority 
     relating to terrorist activities through December 31, 2005. 
     The House bill provision permits the disclosure of taxpayer 
     identity upon receiving a proper written request from the 
     head of a Federal law enforcement agency.
---------------------------------------------------------------------------
     \311\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The House bill generally applies to 
     disclosures made on or after the date of enactment. The 
     provision permitting the disclosure of taxpayer identity upon 
     receiving a proper written request from the head of a Federal 
     law enforcement agency is effective as if included in section 
     201 of the Victims of Terrorism Tax Relief Act of 2001.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     46. Disclosure of return information relating to student 
         loans (sec. 417 of the House bill, sec. 718 of the Senate 
         amendment, and sec. 6103(l) of the Code)


                              present law

       Present law prohibits the disclosure of returns and return 
     information, except to the extent specifically authorized by 
     the Code.\312\ An exception is provided for disclosure to the 
     Department of Education (but not to contractors thereof) of a 
     taxpayer's filing status, adjusted gross income and identity 
     information (i.e., name, mailing address, taxpayer 
     identifying number) to establish an appropriate repayment 
     amount for an applicable student loan.\313\ The Department of 
     Education disclosure authority is scheduled to expire after 
     December 31, 2005.\314\
---------------------------------------------------------------------------
     \312\ Sec. 6103.
     \313\ Sec. 6103(l)(13).
     \314\ Pub. L. No. 108-311 (2004).
---------------------------------------------------------------------------
       An exception to the general rule prohibiting disclosure is 
     also provided for the disclosure of returns and return 
     information to a designee of the taxpayer.\315\ Because the 
     Department of Education utilizes contractors for the income-
     contingent loan verification program, the Department of 
     Education obtains taxpayer information by consent under 
     section 6103(c), rather than under the specific 
     exception.\316\ The Department of Treasury has reported that 
     the Internal Revenue Service processes approximately 100,000 
     consents per year for this purpose.\317\
---------------------------------------------------------------------------
     \315\ Sec. 6103(c).
     \316\ Department of Treasury, Report to the Congress on Scope 
     and Use of Taxpayer Confidentiality and Disclosure 
     Provisions, Volume I: Study of General Provisions (October 
     2000) at 91.
     \317\ Department of Treasury, General Explanations of the 
     Administration's Fiscal Year 2004 Revenue Proposals (February 
     2003) at 133.
---------------------------------------------------------------------------


                            house bill \318\

       The House bill extends the disclosure authority relating to 
     the disclosure of return information to carry out income-
     contingent repayment of student loans. No disclosures can be 
     made after December 31, 2005.
---------------------------------------------------------------------------
     \318\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective on the date of 
     enactment.


                         senate amendment \319\

       Same as the House bill.
---------------------------------------------------------------------------
     \319\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate `amendment provision.
     47. Extension of cover over of excise tax on distilled 
         spirits to Puerto Rico and Virgin Islands (sec. 418 of 
         the House bill, sec. 705 of the Senate amendment, and 
         sec. 7652 of the Code)


                              present law

       A $13.50 per proof gallon (a proof gallon is a liquid 
     gallon consisting of 50 percent alcohol) excise tax is 
     imposed on distilled spirits produced in or imported into the 
     United States.
       The Code provides for cover over (payment) to Puerto Rico 
     and the Virgin Islands of the excise tax imposed on rum 
     imported into the United States, without regard to the 
     country of origin. The amount of the cover over is limited 
     under section 7652(f) to $10.50 per proof gallon ($13.25 
     per proof gallon during the period July 1, 1999 through 
     December 31, 2003).
       Thus, tax amounts attributable to rum produced in Puerto 
     Rico are covered over to Puerto Rico. Tax amounts 
     attributable to rum produced in the Virgin Islands are 
     covered over to the Virgin Islands. Tax amounts attributable 
     to rum produced in neither Puerto Rico nor the Virgin Islands 
     are divided and covered over to the two possessions under a 
     formula. All of the amounts covered over are subject to the 
     limitation.
       Section 305 of H.R. 1308, Pub. L. No. 108-311 (the 
     ``Working Families Tax Relief Act of 2004'') temporarily 
     suspended the $10.50 per proof gallon limitation on the 
     amount of excise taxes on rum covered over to Puerto Rico and 
     the Virgin Islands. That law extended the cover over amount 
     of $13.25 per proof gallon for rum brought into the United 
     States after December 31, 2003, and before January 1, 2006. 
     After December 31, 2005, the cover over amount reverts to 
     $10.50 per proof gallon.


                            house bill\320\

       The provision temporarily suspends the $10.50 per proof 
     gallon limitation on the amount of excise taxes on rum 
     covered over to Puerto Rico and the Virgin Islands. Under the 
     provision, the cover over amount of $13.25 per proof gallon 
     is extended for rum brought into the United States after 
     December 31, 2003, and before January 1, 2006. After December 
     31, 2005, the cover over amount reverts to $10.50 per proof 
     gallon.
---------------------------------------------------------------------------
     \320\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision applies to articles brought 
     into the United States after December 31, 2003.


                         senate amendment \321\

       Same as the House bill.
---------------------------------------------------------------------------
     \321\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the House bill 
     and the Senate amendment provision.
     48. Joint review of strategic plans and budget for the IRS 
         (sec. 419 of the House bill and secs. 8021 and 8022 of 
         the Code)


                              present law

       The Joint Committee on Taxation is required to conduct a 
     joint review \322\ of the strategic plans and budget of the 
     IRS from 1999 through 2004.\323\ The joint review required in 
     2004 is considered as timely if conducted before June 1, 
     2005. The Joint Committee was required to provide an annual 
     report \324\ from 1999 through 2003 with respect to:
---------------------------------------------------------------------------
     \322\ The joint review is required to include two members of 
     the majority and one member of the minority of the Senate 
     Committees on Finance, Appropriations, and Governmental 
     Affairs, and of the House Committees on Ways and Means, 
     Appropriations, and Government Reform and Oversight.
     \323\ Sec. 8021(f).
     \324\ Sec. 8022(3)(C).
---------------------------------------------------------------------------
      Strategic and business plans for the IRS;
      Progress of the IRS in meeting its objectives;
      The budget for the IRS and whether it supports its 
     objectives;
      Progress of the IRS in improving taxpayer service and 
     compliance;
      Progress of the IRS on technology modernization; and
      The annual filing season.
     With respect to the annual report for the joint review 
     required in 2004, the report must cover the matters addressed 
     in the joint review.


                            house bill \325\

       The Joint Committee on Taxation is required to conduct a 
     joint review before June 1, 2005, and to provide an annual 
     report with respect to such joint review. The content of the 
     annual report is the matters addressed in the joint review.
---------------------------------------------------------------------------
     \325\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective on the date of 
     enactment.


                            senate amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     49. Extension of parity in the application of certain limits 
         to mental health benefits (sec. 420 of the House bill, 
         sec. 701 of the Senate amendment, sec. 9812 of the Code, 
         sec. 712 of ERISA, and section 2705 of the PHSA)


                              Present Law

       The Mental Health Parity Act of 1996 amended the Employee 
     Retirement Income Security Act of 1974 (``ERISA'') and the 
     Public Health Service Act (``PHSA'') to provide that group 
     health plans that provide both medical and surgical benefits 
     and mental health benefits cannot impose aggregate lifetime 
     or annual dollar limits on mental health benefits that are 
     not imposed on substantially all medical and surgical 
     benefits. The provisions of the Mental Health Parity Act were 
     initially effective with respect to plan years beginning on 
     or after January 1, 1998, for a temporary period. Since 
     enactment, the mental health parity requirements in ERISA and 
     the PHSA have been extended on more than one occasion and 
     were most recently extended to apply with respect to benefits 
     for services furnished before January 1, 2006, by the Working 
     Families Tax Relief Act of 2004 (``WFTRA'').\326\
---------------------------------------------------------------------------
     \326\ Pub. L. No. 108-311 (2004).
---------------------------------------------------------------------------
       The Taxpayer Relief Act of 1997 added to the Code the 
     requirements imposed under the Mental Health Parity Act, and 
     imposed an excise tax on group health plans that fail to meet 
     the requirements. The excise tax is equal to $100 per day 
     during the period of noncompliance and is generally imposed 
     on the employer sponsoring the plan if the plan fails to meet 
     the requirements. The maximum tax that can be imposed during 
     a taxable year cannot exceed the lesser of 10 percent of the 
     employer's group health plan expenses for the prior year or 
     $500,000. No tax is imposed if the Secretary determines that 
     the employer did not know, and exercising

[[Page H8526]]

     reasonable diligence would not have known, that the failure 
     existed.-
       The mental health parity requirements in the Code were 
     initially effective with respect to plan years beginning on 
     or after January 1, 1998, for a temporary period. Since 
     enactment, the mental health parity requirements in the Code 
     have been extended on more than one occasion and were most 
     recently extended to apply with respect to benefits for 
     services furnished before January 1, 2006, by the WFTRA.


                            House Bill \327\

       The House bill extends the Code provisions relating to 
     mental health parity to benefits for services furnished on or 
     after the date of enactment and before January 1, 2006. The 
     excise tax on failures to meet the requirements imposed by 
     the Code provisions does not apply after December 31, 2003, 
     and before the date of enactment.
---------------------------------------------------------------------------
     \327\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for benefits 
     for services furnished on or after December 31, 2003.


                         Senate Amendment \328\

       The Senate amendment extends the ERISA and PHSA provisions 
     relating to mental health parity to benefits for services 
     furnished before January 1, 2006. The Senate amendment also 
     extends the Code provisions relating to mental health parity 
     to benefits for services furnished on or after the date of 
     enactment and before January 1, 2006. The excise tax on 
     failures to meet the requirements imposed by the Code 
     provisions does not apply after December 31, 2003, and before 
     the date of enactment.
---------------------------------------------------------------------------
     \328\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision extending 
     the Code provision applies to benefits for services furnished 
     on or after December 31, 2003. The ERISA and PHSA provisions 
     apply to benefits for services furnished on or after December 
     31, 2004.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     50. Combined employment tax reporting (sec. 421 of the House 
         bill and sec. 712 of the Senate amendment)


                              Present Law

       Traditionally, Federal tax forms are filed with the Federal 
     government and State tax forms are filed with individual 
     States. This necessitates duplication of items common to both 
     returns.
       The Taxpayer Relief Act of 1997 permits implementation of a 
     limited demonstration project to assess the feasibility and 
     desirability of expanding combined Federal and State 
     reporting. As enacted, it was limited to the sharing of 
     information between the State of Montana and the IRS, but any 
     State may participate in a combined reporting program under 
     present law. However, the project is limited to employment 
     tax reporting. In addition, it is limited to disclosure of 
     the name, address, TIN, and signature of the taxpayer. The 
     authority for the demonstration project expired on the date 
     five years after the date of enactment (August 5, 2002).
       The Working Families Tax Relief Act of 2004 expanded to all 
     States the authority to participate in a combined Federal and 
     State employment tax reporting program. The authority for 
     this expanded program expires December 31, 2005.


                            House Bill \329\

       The House bill provision extends the demonstration project 
     through December 31, 2005.
---------------------------------------------------------------------------
     \329\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The House bill provision takes effect on 
     the date of enactment.


                         Senate Amendment \330\

       The Senate amendment provides permanent authority for any 
     State to participate in a combined Federal and State 
     employment tax reporting program, provided that the program 
     has been approved by the Secretary.
---------------------------------------------------------------------------
     \330\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment takes effect on the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     51. Deduction for qualified clean-fuel vehicle property (sec. 
         422 of the House bill, sec. 721 of the Senate amendment, 
         and sec. 179 of the Code)


                              Present Law

       Certain costs of qualified clean-fuel vehicles may be 
     expensed and deducted when such property is placed in 
     service. Qualified clean-fuel vehicle property includes motor 
     vehicles that use certain clean-burning fuels (natural gas, 
     liquefied natural gas, liquefied petroleum gas, hydrogen, 
     electricity and any other fuel at least 85 percent of which 
     is methanol, ethanol, any other alcohol or ether). The 
     maximum amount of the deduction is $50,000 for a truck or van 
     with a gross vehicle weight over 26,000 pounds or a bus with 
     seating capacities of at least 20 adults; $5,000 in the case 
     of a truck or van with a gross vehicle weight between 10,000 
     and 26,000 pounds; and $2,000 in the case of any other motor 
     vehicle. The deduction is one quarter of the otherwise 
     allowable amount in 2006, and is unavailable for purchases 
     after December 31, 2006.


                            House Bill \331\

       The House bill repeals the phase down of the allowable 
     deduction for clean-fuel vehicles in 2004 and 2005. Thus, a 
     taxpayer who purchases a qualifying vehicle may claim 100 
     percent of the otherwise allowable deduction for vehicles 
     purchased in 2004 and 2005. For vehicles purchased in 2006 
     the deduction remains at 25 percent of the otherwise 
     allowable amount as under present law.
---------------------------------------------------------------------------
     \331\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for vehicles 
     placed in service after December 31, 2003.-


                         Senate Amendment \332\

       The Senate amendment repeals the phase down for each of 
     2004, 2005, and 2006.
---------------------------------------------------------------------------
     \332\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       (Other sections of the Senate amendment create new credits 
     for the purchase of certain vehicles that would be qualified 
     clean-fuel vehicles under present law. These modifications 
     are not described in this document.)
       Effective date.--The provision is effective for vehicles 
     placed in service after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     52. Credit for qualified electric vehicles (sec. 422 of the 
         House bill, sec. 720 of the Senate amendment, and sec. 30 
         of the Code)


                              Present Law

       A ten-percent tax credit is provided for the cost of a 
     qualified electric vehicle, up to a maximum credit of $4,000. 
     A qualified electric vehicle generally is a motor vehicle 
     that is powered primarily by an electric motor drawing 
     current from rechargeable batteries, fuel cells, or other 
     portable sources of electrical current. The full amount of 
     the credit is available for purchases prior to 2006. The 
     credit is reduced for purchases in 2006, and is unavailable 
     for purchases after December 31, 2006.


                            House Bill \333\
---------------------------------------------------------------------------

     \333\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       The House bill repeals the phase down of allowable tax 
     credit for electric vehicles in 2004 and 2005. Thus, a 
     taxpayer who purchases a qualifying vehicle may claim 100 
     percent of the otherwise allowable credit for vehicles 
     purchased in 2004 and 2005. For vehicles purchased in 2006 
     the credit remains at 25 percent of the otherwise allowable 
     amount as under present law.
       Effective date.--The provision is effective for vehicles 
     placed in service after December 31, 2003.-


                         Senate Amendment \334\
---------------------------------------------------------------------------

     \334\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       The Senate amendment repeals the phase down for each of 
     2004, 2005, and 2006.
       (Other sections of the Senate amendment modify the credit. 
     These modifications are not described in this document.)
       Effective date.--The provision is effective for vehicles 
     placed in service after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     53. Repeal of reduction of deductions for mutual life 
         insurance companies (sec. 710 of the Senate amendment and 
         sec. 809 of the Code)


                              Present Law

       The Pension Funding Equity Act of 2004 \335\ repealed the 
     rule requiring reduction in certain deductions of a mutual 
     life insurance company (sec. 809), effective for taxable 
     years beginning after 2004.
---------------------------------------------------------------------------
     \335\ Pub. L. No. 108-218
---------------------------------------------------------------------------
       For taxable years beginning in 2004, under section 809, a 
     mutual life insurance company is required to reduce its 
     deduction for policyholder dividends by the company's 
     differential earnings amount. If the company's differential 
     earnings amount exceeds the amount of its deductible 
     policyholder dividends, the company is required to reduce its 
     deduction for changes in its reserves by the excess of its 
     differential earnings amount over the amount of its 
     deductible policyholder dividends. The differential earnings 
     amount is the product of the differential earnings rate and 
     the average equity base of a mutual life insurance company.
       The differential earnings rate is based on the difference 
     between the average earnings rate of the 50 largest stock 
     life insurance companies and the earnings rate of all mutual 
     life insurance companies. The mutual

[[Page H8527]]

     earnings rate applied under the provision is the rate for the 
     second calendar year preceding the calendar year in which the 
     taxable year begins. Under present law, the differential 
     earnings rate cannot be a negative number.
       A company's equity base equals the sum of: (1) its surplus 
     and capital increased by 50 percent of the amount of any 
     provision for policyholder dividends payable in the following 
     taxable year; (2) the amount of its nonadmitted financial 
     assets; (3) the excess of its statutory reserves over its tax 
     reserves; and (4) the amount of any mandatory security 
     valuation reserves, deficiency reserves, and voluntary 
     reserves. A company's average equity base is the average of 
     the company's equity base at the end of the taxable year and 
     its equity base at the end of the preceding taxable year.
       A recomputation or ``true-up'' in the succeeding year is 
     required if the differential earnings amount for the taxable 
     year either exceeds, or is less than, the recomputed 
     differential earnings amount. The recomputed differential 
     earnings amount is calculated taking into account the average 
     mutual earnings rate for the calendar year (rather than the 
     second preceding calendar year, as above). The amount of the 
     true-up for any taxable year is added to, or deducted from, 
     the mutual company's income for the succeeding taxable year.
       For taxable years beginning in 2001, 2002, or 2003, the 
     differential earnings amount is treated as zero for purposes 
     of computing both the differential earnings amount and the 
     recomputed differential earnings amount (true-up).


                               House Bill

       No provision.


                            Senate Amendment

       The provision repeals the rule requiring reduction in 
     certain deductions of a mutual life insurance company (sec. 
     809) for taxable years beginning in 2004.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     54. Study of earnings stripping provisions (sec. 163(j) of 
         the Code)


                              Present Law

       Present law provides rules to limit the ability of U.S. 
     corporations to reduce the U.S. tax on their U.S.-source 
     income through certain earnings stripping transactions. These 
     rules limit the deductibility of interest paid to certain 
     related parties (``disqualified interest''), if the payor's 
     debt-equity ratio exceeds 1.5 to 1 and the payor's net 
     interest expense exceeds 50 percent of its ``adjusted taxable 
     income'' (generally taxable income computed without regard to 
     deductions for net interest expense, net operating losses, 
     and depreciation, amortization, and depletion). Disqualified 
     interest for these purposes also may include interest paid to 
     unrelated parties in certain cases in which a related party 
     guarantees the debt.


                               House Bill

       No provision.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement requires the Treasury Department 
     to conduct a study of the earnings stripping rules, including 
     a study of the effectiveness of these rules in preventing the 
     shifting of income outside the United States, whether any 
     deficiencies in these rules have the effect of placing U.S.-
     based businesses at a competitive disadvantage relative to 
     foreign-based businesses, the impact of earnings stripping 
     activities on the U.S. tax base, whether laws of foreign 
     countries facilitate the stripping of earnings out of the 
     United States, and whether changes to the earnings stripping 
     rules would affect jobs in the United States. This study is 
     to include specific recommendations for improving these rules 
     and is to be submitted to the Congress not later than June 
     30, 2005.
       Effective date.--The provision is effective on the date of 
     enactment.

       TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES

          A. Deduction of State and Local General Sales Taxes

     (sec. 501 of the House bill and sec. 164 of the Code)


                              present law

       An itemized deduction is permitted for certain State and 
     local taxes paid, including individual income taxes, real 
     property taxes, and personal property taxes. No itemized 
     deduction is permitted for State or local general sales 
     taxes.


                               House Bill

       The provision provides that, at the election of the 
     taxpayer, an itemized deduction may be taken for State and 
     local general sales taxes in lieu of the itemized deduction 
     provided under present law for State and local income taxes. 
     The allowable deduction would be determined under tables 
     prescribed by the Secretary. The tables would be based on the 
     average consumption of taxpayers on a State-by-State basis, 
     and would take into account filing status, number of 
     dependents, adjusted gross income, and rates of State and 
     local general sales taxes.
       The term `general sales tax' means a tax imposed at one 
     rate with respect to the sale at retail of a broad range of 
     classes of items. However, in the case of items of food, 
     clothing, medical supplies, and motor vehicles, the fact that 
     the tax does not apply with respect to some or all of such 
     items is not taken into account in determining whether the 
     tax applies with respect to a broad range of classes of 
     items, and the fact that the rate of tax applicable with 
     respect to some or all of such items is lower than the 
     general rate of tax is not taken into account in determining 
     whether the tax is imposed at one rate. Except in the case of 
     a lower rate of tax applicable with respect to food, 
     clothing, medical supplies, or motor vehicles, no deduction 
     is allowed for any general sales tax imposed with respect to 
     an item at a rate other than the general rate of tax. 
     However, in the case of motor vehicles, if the rate of tax 
     exceeds the general rate, such excess shall be disregarded 
     and the general rate is treated as the rate of tax.
       A compensating use tax with respect to an item is treated 
     as a general sales tax, provided such tax is complimentary to 
     a general sales tax and a deduction for sales taxes is 
     allowable with respect to items sold at retail in the taxing 
     jurisdiction that are similar to such item.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003, and prior to January 
     1, 2006.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill with the 
     following modification.
       Rather than requiring that taxpayers use tables prescribed 
     by the Secretary to determine their allowable sales tax 
     deduction, taxpayers would instead have two options with 
     respect to the determination of the sales tax deduction 
     amount. Taxpayers would be able to deduct the total amount of 
     general State and local sales taxes paid by accumulating 
     receipts showing general sales taxes paid. Alternatively, 
     taxpayers may use tables created by the Secretary of the 
     Treasury. The tables are to be based on average consumption 
     by taxpayers on a State-by-State basis taking into account 
     filing status, number of dependents, adjusted gross income 
     and rates of State and local general sales taxation. 
     Taxpayers who use the tables created by the Secretary may, in 
     addition to the table amounts, deduct eligible general sales 
     taxes paid with respect to the purchase of motor vehicles, 
     boats and other items specified by the Secretary. Sales taxes 
     for items that may be added to the tables would not be 
     reflected in the tables themselves.
       The IRS is currently in the process of finalizing tax forms 
     for 2004. The Code has not contained an itemized deduction 
     for State and local sales taxes for a number of years. 
     Developing the tables required by the provision will in 
     general require a significant amount of time and effort. The 
     conferees anticipate that IRS will do the best they can to 
     reasonably and accurately implement this statutory provision 
     in order to effectuate the deduction for the 2005 filing 
     season.

              TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM

                           A. Tobacco Reform

     (Secs. 701-725 of the House bill and title XI of the Senate 
         amendment)


                              Present Law

       The current tobacco program has two main components: a 
     supply management component and a price support component. In 
     addition, in 1982, Congress passed the ``No-Net-Cost Tobacco 
     Program Act'' \336\ that assured the tobacco program would 
     run at no net cost to the Federal government.
---------------------------------------------------------------------------
     \336\ Pub. L. No. 97-218 (1982).
---------------------------------------------------------------------------
     Supply management
       The supply management component limits and stabilizes the 
     quantity of tobacco marketed by farmers. This is achieved 
     through marketing quotas. The Secretary of Agriculture raises 
     or lowers the national marketing quota on an annual basis. 
     The Secretary establishes the national marketing quota for 
     each type of tobacco based upon domestic and export demand, 
     but at a price above the government support price. The 
     purpose of matching supply with demand is to keep the price 
     of tobacco high. There is a secondary market in tobacco 
     quota. Tobacco growers who do not have sufficient quota may 
     purchase or rent one.
     Support price
       Given the numerous variables that affect tobacco supply and 
     demand, marketing quotas alone have not always been able to 
     guarantee tobacco prices. Therefore, in addition to marketing 
     quotas, Federal support prices are established and guaranteed 
     through the mechanism of nonrecourse loans available on each 
     farmer's marketed crop. The loan price for each type of 
     tobacco is announced each year by the Department of 
     Agriculture using the formula specified in the law to 
     calculate loan levels. This system guarantees minimum prices 
     for the different types of tobacco.
       The national loan price on 2004 crop flue-cured tobacco is 
     $1.69 per pound; the burley loan price is $1.873 per pound.
     No-net-cost assessment
       In 1982, Congress passed the ``No-Net-Cost Tobacco Program 
     Act.'' The purpose of this program is to ensure that the 
     nonrecourse loan program is run at no net cost to the Federal 
     government.

[[Page H8528]]

       When tobacco is not contracted, it is sold at an auction 
     sale barn. At the auction sale barn, each lot of tobacco goes 
     to the highest bidder, unless that bid does not exceed the 
     government's loan price. When the bid does not exceed this 
     price, the farmer may choose to be paid the loan price by a 
     cooperative, with money borrowed from the Commodity Credit 
     Corporation (``CCC''). In such cases, the tobacco is 
     consigned to the cooperative (known as a price stabilization 
     cooperative), which redries, packs, and stores the tobacco as 
     collateral for the CCC. The cooperative, acting as an agent 
     for the CCC, later sells the tobacco, with the proceeds going 
     to repay the loan plus interest. If the cooperative does not 
     recover the cost of the loan plus interest, the Secretary of 
     Agriculture assesses growers, purchasers and importers of 
     tobacco in order to repay the difference. All growers, 
     purchasers and importers of tobacco participate in paying 
     these assessments, regardless of whether or not they 
     participate in the loan program.
       The no-net-cost assessment on 2004 crop flue-cured is $0.10 
     per pound; the burley assessment is $0.02 per pound. The no-
     net-cost assessment funds are deposited in an escrow account 
     that is held to reimburse the government for any financial 
     losses resulting from tobacco loan operations.
       Currently, over 80 percent of growers market their tobacco 
     through contracts with tobacco companies, and thus these 
     growers do not participate in the loan program. However, they 
     must still pay the no-net-cost assessment when the Secretary 
     levies it. The remaining 20 percent of growers market their 
     tobacco through the auction system, and are eligible for 
     participation in the loan program. Of this group, over 60 
     percent have consistently participated in the loan program 
     during the past several years.


                               House Bill

       The House bill repeals the Federal tobacco support program, 
     including marketing quotas and nonrecourse marketing loans. 
     The House bill also provides quota holders $7.00 per pound 
     based on their 2002 quota allotment paid in equal 
     installments over five years. Additionally, the House bill 
     provides producers transition payments of $3.00 per pound 
     based on their 2002 quota levels paid in equal installments 
     over five years. The House bill caps payments to quota 
     holders and growers at $9.6 billion over fiscal years 2005 
     through 2009. The House bill applies to the 2005 and 
     subsequent crops of tobacco.
       Effective date.--The House bill is effective on the date of 
     enactment.


                            Senate Amendment

       The Senate amendment ends the current Federal tobacco 
     program. The Senate amendment also provides quota holders 
     $8.00 per pound based on their 2002 quota levels paid over a 
     10-year period. Additionally, the Senate amendment provides 
     tobacco growers with of $4.00 per pound based on their 2002 
     quota levels, paid over a 10-year period. The payments are 
     funded by assessments on tobacco companies. The Senate 
     amendment also restricts tobacco production to traditional 
     tobacco producing counties and provides poundage and acreage 
     limitations on how much tobacco can be produced in the future 
     as determined by production boards for each type of tobacco. 
     The Senate amendment applies to the 2004 and subsequent crops 
     of tobacco.
       Additionally, the Senate amendment gives the Food and Drug 
     Administration regulatory authority over the content and 
     marketing of tobacco products.
       Effective date.--The Senate amendment is effective on the 
     date of enactment.


                          Conference Agreement

       The conference agreement repeals all aspects of the Federal 
     tobacco support program, including marketing quotas and 
     nonrecourse marketing loans. The conference agreement 
     provides eligible quota holders $7 per pound on their basic 
     quota allotment paid in equal installments over 10 years. 
     Additionally, the conference agreement provides eligible 
     producers transition payments of $3 per pound based on their 
     effective quota paid in equal installments over 10 years.
       The Managers intend the payments to producers and quota 
     holders to be made as quickly and effectively as possible. 
     The Managers expect the Secretary to evaluate and consider 
     the utilization of the proven financial and administrative 
     expertise of the Phase II settlement system to achieve 
     effective and prompt payment. The Managers further expect the 
     Secretary to use the facilities of the Farm Service Agency to 
     furnish information relating to accelerated payment options 
     offered by financial institutions.
       Manufacturers and importers of tobacco products will pay a 
     quarterly assessment into a newly formed Tobacco Trust Fund. 
     These assessments will be on the following classes of 
     tobacco: Cigarettes, Snuff, Chewing Tobacco, Pipe Tobacco, 
     Roll-your-own tobacco, and Cigars. Assessment allocations 
     will then be divided into manufacturers' and importers' 
     market share. Funds from the Tobacco Trust Fund will be used 
     to provide payments to quota holders and eligible producers 
     as well as pay for program losses incurred by the U.S. 
     Department of Agriculture.
       The conference agreement applies to the 2005 and subsequent 
     crops of tobacco.
       Effective date.--The conference agreement is effective on 
     the date of enactment.

  TITLE VII--PROTECTION OF UNITED STATES WORKERS FROM COMPETITION OF 
                           FOREIGN WORKFORCES

       The Senate amendment contained a provision relating to 
     protection of United States workers from competition of 
     foreign workforces. The conference agreement does not include 
     the Senate amendment provision.

                      TITLE VIII--OTHER PROVISIONS

                   A. Provisions Relating to Housing

     1. Treatment of qualified mortgage revenue bonds (sec. 601 of 
         the Senate amendment and sec. 143 of the Code)


                              Present Law

       Under present law, qualified mortgage bonds are tax-exempt 
     bonds used to finance owner-occupied residences. Among other 
     requirements, these bonds are subject to income and purchase 
     price limitations, as well as a requirement that the 
     homebuyer not have an ownership interest in the principal 
     residence in the preceding three years.
       Generally, in order for a bond to be a qualified mortgage 
     bond, the mortgagor's family income cannot exceed 115 percent 
     of the applicable median family income. Adjustments are made 
     for targeted area residences, for areas that have high 
     housing costs in relation to income, and for family size. 
     Further, 95 percent or more of the net proceeds of qualified 
     mortgage bonds must be used to finance residences for first-
     time homebuyers. Exceptions are made for financing of 
     targeted area residences, qualified home improvement loans, 
     and qualified rehabilitation loans.
       A residence financed with a mortgage funded by qualified 
     mortgage bonds may not have a purchase price in excess of 90 
     percent of the average area purchase price for that 
     residence. Adjustments are made for residences located in 
     certain low-income or economically distressed areas, and for 
     the number of families for which a residence is designed.
       Part or all of the interest subsidy provided by qualified 
     mortgage bonds is recaptured if the borrower experiences 
     substantial increases in income and disposes of the 
     subsidized residence within nine years after purchase. The 
     annual volume limitations imposed on most qualified private 
     activity bonds limits the aggregate face amount of qualified 
     mortgage bonds that may be issued. In addition, repayments of 
     mortgage principal received after 10 years from the date of 
     issue must be used to retire outstanding bonds (the ``10-year 
     rule'').


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment suspends the 10-year rule for one year 
     for outstanding bonds, allowing repayments of principal 
     received during this period to be used to finance new 
     mortgage loans rather than retiring outstanding bonds. The 
     Senate amendment repeals the 10-year rule for bonds 
     originally issued after the date of enactment.
       Effective date.--The provision repeals the 10-year rule for 
     bonds issued after the date of enactment and suspends the 10-
     year rule for outstanding bonds for a one-year period 
     beginning on the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Premiums for mortgage insurance (sec. 602 of the Senate 
         amendment and secs. 163(h) and 6050H of the Code)


                              Present Law

       Present law provides that qualified residence interest is 
     deductible notwithstanding the general rule that personal 
     interest is nondeductible (sec. 163(h)).
       Qualified residence interest is interest on acquisition 
     indebtedness and home equity indebtedness with respect to a 
     principal and a second residence of the taxpayer. The maximum 
     amount of home equity indebtedness is $100,000. The maximum 
     amount of acquisition indebtedness is $1 million. Acquisition 
     indebtedness means debt that is incurred in acquiring 
     constructing, or substantially improving a qualified 
     residence of the taxpayer, and that is secured by the 
     residence. Home equity indebtedness is debt (other than 
     acquisition indebtedness) that is secured by the taxpayer's 
     principal or second residence, to the extent the aggregate 
     amount of such debt does not exceed the difference between 
     the total acquisition indebtedness with respect to the 
     residence, and the fair market value of the residence.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision provides that premiums paid 
     or accrued for qualified mortgage insurance by a taxpayer 
     during the taxable year in connection with acquisition 
     indebtedness on a qualified residence of the taxpayer are 
     treated as qualified residence interest and thus deductible. 
     The amount allowable as a deduction under the provision is 
     phased out ratably by 10 percent for each $1,000 by which the 
     taxpayer's adjusted gross income exceeds $100,000 ($500 and 
     $50,000, respectively, in the case of a married individual 
     filing a separate return). Thus, the deduction is not allowed 
     if the taxpayer's adjusted gross income exceeds $110,000 
     ($55,000 in the case of married individual filing a separate 
     return).
       For this purpose, qualified mortgage insurance means the 
     Home Loan Guaranty Program of the Department of Veterans 
     Affairs, and mortgage insurance provided by the Federal 
     Housing Administration, or the Rural Housing Administration, 
     and private mortgage insurance (defined in section 2 of the 
     Homeowners Protection Act of 1998).

[[Page H8529]]

       Amounts paid for qualified mortgage insurance that are 
     properly allocable to periods after the close of the taxable 
     year are treated as paid in the period to which it is 
     allocated. No deduction is allowed for the unamortized 
     balance if the mortgage is paid before its term (except in 
     the case of qualified mortgage insurance provided by the 
     Department of Veterans Affairs or Rural Housing 
     Administration).
       Reporting rules apply under the provision.
       Effective date.--The Senate amendment provision is 
     effective for amounts paid or accrued after the date of 
     enactment in taxable years beginning after December 31, 2004, 
     and ending before January 1, 2006.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Increase in historic rehabilitation credit for residential 
         housing for the elderly (sec. 603 of the Senate amendment 
         and secs. 42 and 47 of the Code)


                              Present Law

     Rehabilitation credit
       Present law provides a credit for rehabilitation 
     expenditures (sec. 47). A 20-percent credit is provided for 
     rehabilitation expenditures with respect to a certified 
     historic structure. For this purpose, a certified historic 
     structure means any building that is listed in the National 
     Register, or that is located in a registered historic 
     district and is certified by the Secretary of the Interior to 
     the Secretary of the Treasury as being of historic 
     significance to the district.
       A building is treated as having been substantially 
     rehabilitated only if the rehabilitation expenditures during 
     the 24-month period selected by the taxpayer and ending 
     within the taxable year exceed the greater of the adjusted 
     basis of the building (and its structural components), or 
     $5,000. The taxpayer's depreciable basis in the property is 
     reduced by any rehabilitation credit claimed.
     Low-income housing credit
       The low-income housing tax credit (sec. 42) may be claimed 
     over a 10-year period for the cost of rental housing occupied 
     by tenants having incomes below specified levels. The credit 
     percentage for newly constructed or substantially 
     rehabilitated housing that is not Federally subsidized is 
     adjusted monthly by the Internal Revenue Service so that the 
     10 annual installments have a present value of 70 percent of 
     the total qualified expenditures. The credit percentage for 
     new substantially rehabilitated housing that is Federally 
     subsidized and for existing housing that is substantially 
     rehabilitated is calculated to have a present value of 30 
     percent of qualified expenditures. The aggregate credit 
     authority provided annually to each State is $1.75 per 
     resident, except in the case of projects that also receive 
     financing with proceeds of tax-exempt bonds issued subject to 
     the private activity bond volume limit and certain carry-over 
     amounts. The $1.75 per resident cap is indexed for inflation.
       Qualified basis with respect to which the credit may be 
     computed is generally determined as the portion of the 
     eligible basis of the qualified low-income building 
     attributable to the low-income rental units. Qualified basis 
     generally is the taxpayer's depreciable basis in a qualified 
     low-income building. In the case of a taxpayer who claims the 
     rehabilitation credit for a qualified low-income building, 
     the taxpayer's depreciable basis in the building is reduced 
     by the amount of the rehabilitation credit claimed. In 
     addition, eligible basis is reduced by any Federal grant 
     received with respect to the building. A qualified low-income 
     building is a building that meets certain compliance criteria 
     and is depreciable under the modified accelerated cost 
     recovery system (``MACRS'').


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the present-law 20-percent 
     credit for historic rehabilitation expenses to 25 percent in 
     the case of rehabilitation expenses incurred with respect to 
     a building which is also a low-income housing credit property 
     in which substantially all of the tenants, both those tenants 
     in rent-restricted units and in other residential units, are 
     age 65 or greater. The Senate amendment permits the 25-
     percent rehabilitation credit to be claimed with respect to 
     all parts of the building, not only those parts on which the 
     taxpayer also claims the low-income housing credit.\337\
---------------------------------------------------------------------------
     \337\ The Senate amendment also repeals a transition rule to 
     the Tax Reform Act of 1986 permitting the taxpayers who own 
     the property described as the Warrior Hotel, Ltd., the first 
     two floors of the Martin Hotel, and the 105,000 square foot 
     warehouse constructed in 1910, all in Sioux City, Iowa, to 
     use ACRS depreciation, in lieu of MACRS depreciation. This 
     change enables such property to qualify for the provision.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                    B. Provisions Relating to Bonds

     1. Modification of the authority of Indian tribal governments 
         to issue tax-exempt bonds (sec. 613 of the Senate 
         amendment and sec. 7871 of the Code)


                              present law

       Under present law, the interest on bonds issued by an 
     Indian tribal government is tax-exempt if substantially all 
     of the proceeds of are to be used in the exercise of an 
     essential government function. The term essential government 
     function does not include any function that is not 
     customarily performed by State or local governments with 
     general taxing powers. In addition, Indian tribal governments 
     are prohibited from issuing private activity bonds, with the 
     exception of bonds issued to finance certain manufacturing 
     facilities.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment expands the tax-exemption for Indian 
     tribal government bonds to include obligations 95 percent or 
     more of the proceeds of which are used to finance any 
     facility located on an Indian reservation. The tax-exemption 
     does not include any obligations used to finance any portion 
     of a building in which class II or class III gaming (as 
     defined in section 4 of the Indian Gaming Regulatory Act) is 
     conducted or housed.
       For purposes of the Senate amendment, an Indian reservation 
     means: (1) a reservation as defined in section 4(10) of the 
     Indian Child Welfare Act of 1978, and (2) lands held under 
     the provisions of the Alaska Native Claims Settlement Act by 
     a Native corporation as defined in section 3(m) of that Act.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment and before January 1, 
     2006.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Definition of manufacturing facility for qualified small 
         issue bonds (sec. 614 of the Senate amendment and sec. 
         144 of the Code)


                              present law

       Qualified small-issue bonds are bonds used to finance 
     private business manufacturing facilities or the acquisition 
     of land and equipment by certain farmers. Generally, no more 
     than $1 million of small-issue bond financing may be 
     outstanding at any time for property of a business (including 
     related parties) in the same municipality or county. This $1 
     million limit may be increased to $10 million if all other 
     capital expenditures of the business (including related 
     parties) in the same municipality or county over a six-year 
     period are counted toward the limit. In addition, 95 percent 
     or more of the net proceeds of qualified small-issue bonds 
     must be used for the acquisition, construction, 
     reconstruction, or improvement of land or property of a 
     character subject to the allowance for depreciation, or to 
     redeem a prior issue that was used for those purposes.
       Under present law, a manufacturing facility is defined as 
     any facility used in the manufacturing or production of 
     tangible personal property. Facilities that are directly 
     related and ancillary to a manufacturing facility may be 
     financed with small-issue bonds if such facilities are 
     located on the same site as the manufacturing facility and no 
     more than 25 percent of the net proceeds of the bonds are 
     used to finance such facilities.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment expands the definition of 
     manufacturing facilities eligible for small-issue bond 
     financing to include facilities: (1) used in the manufacture 
     or development of software products or processes, if it takes 
     more than six months to manufacture or develop such products 
     or processes, such manufacture or development could not with 
     due diligence be reasonably expected to occur in less than 
     six months, and the software product or process comprises 
     programs, routines, and attendant documentation developed and 
     maintained for use in computer and telecommunications 
     technology; and (2) used in the manufacture or development of 
     any biobased product or bioenergy, if it takes more than six 
     months to manufacture or develop and the manufacture or 
     development could not with due diligence be reasonably 
     expected to occur in less than six months. The term biobased 
     product means a commercial or industrial product which 
     utilizes biological products or renewable domestic 
     agricultural or forestry materials. The term bioenergy means 
     biomass used in the production of energy, including liquid, 
     solid, or gaseous fuels, electricity, and heat.
       The Senate amendment expands the definition of eligible 
     facilities to include directly and functionally related 
     offices and research and development facilities located on 
     the same site as the manufacturing facilities. Such office 
     and research and development facilities may not constitute 
     more than 40 percent of the net proceeds of the issue used to 
     finance the facility.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page H8530]]

     3. Qualified forest conservation bonds (sec. 615 of the 
         Senate amendment and sec. 142 of the Code)


                              present law

     Tax-exempt bonds
       In general
       Interest on debt incurred by States or local governments is 
     excluded from income if the proceeds of the borrowing are 
     used to carry out governmental functions of those entities or 
     the debt is repaid with governmental funds. Interest on bonds 
     that nominally are issued by States or local governments, but 
     the proceeds of which are used (directly or indirectly) by a 
     private person and payment of which is derived from funds of 
     such a private person is taxable unless the purpose of the 
     borrowing is approved specifically in the Code or in a non-
     Code provision of a revenue Act. These bonds are called 
     ''private activity bonds.'' The term ''private person'' 
     includes the Federal Government and all other individuals and 
     entities other than States or local governments.
       Private activities eligible for financing with tax-exempt 
           private activity bonds
       Present law includes several exceptions permitting States 
     or local governments to act as conduits providing tax-exempt 
     financing for private activities. Generally, interest on 
     bonds issued to benefit section 501(c)(3) organizations is 
     tax-exempt (``qualified 501(c)(3) bonds''). In addition, 
     States or local governments may issue tax-exempt ``exempt-
     facility bonds'' to finance property for certain private 
     businesses. Business facilities eligible for this financing 
     include transportation (airports, ports, local mass 
     commuting, and high speed intercity rail facilities); 
     privately owned and/or privately operated public works 
     facilities (sewage, solid waste disposal, local district 
     heating or cooling, hazardous waste disposal facilities and 
     public educational facilities); privately owned and/or 
     operated low-income rental housing; and certain private 
     facilities for the local furnishing of electricity or gas.
       Tax-exempt private activity bonds are subject to 
     restrictions that generally do not apply to other bonds 
     issued by State or local governments. In most cases, the 
     aggregate face amount of tax-exempt private activity bonds 
     that may be issued is restricted by annual volume limits. 
     Moreover, most tax-exempt private activity bonds are subject 
     to a term-to-maturity rule. Under that rule, the average 
     maturity of most tax-exempt private activity bond cannot 
     exceed 120 percent of the economic life of the property being 
     financed.
       Section 501(c)(3) organizations generally may not obtain 
     the benefits of exempt facility bonds for debt issued and 
     used to acquire forests and forest lands. In addition, 
     qualified 501(c)(3) bonds may not be issued to acquire 
     forests and forest lands to the extent such lands are used to 
     finance a trade or business that is unrelated to the exempt 
     purposes of the organization. Whether income derived by a 
     section 501(c)(3) organization from timber harvesting is 
     unrelated trade or business income depends upon a variety of 
     factors.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that qualified forest 
     conservation bonds are treated as exempt facility bonds. 
     Qualified forest conservation bonds are bonds issued for a 
     qualified organization if 95 percent or more of the net 
     proceeds of such bonds are used for qualified project costs, 
     including acquisition of forests and forest land, capitalized 
     interest, and credit enhancement fees that constitute 
     qualified guarantee fees (within the meaning of section 148 
     of the Code). The costs of acquiring forests and forest land 
     are qualified project costs if such land is acquired by a 
     qualified organization from an unrelated party and at the 
     time of acquisition or immediately thereafter such land is 
     subject to a conservation restriction. Among other 
     requirements, a qualified organization must be a nonprofit 
     organization more than half the value of which consists of 
     forests and forest land acquired with the proceeds of 
     qualified forest conservation bonds.
       The volume limitation on tax-exempt private activity bonds 
     does not apply to qualified forest conservation bonds. 
     Rather, the maximum aggregate face amount of qualified forest 
     conservation bonds that may be issued is $1.5 billion, to be 
     allocated by the Secretary of Treasury among qualified 
     organizations. For purposes of the term-to-maturity rule, the 
     land and timber acquired with qualified forest conservation 
     bonds shall have an economic life of 35 years.
       The Senate amendment provides that certain timber 
     harvesting income derived by a qualified organization from 
     forest lands acquired with proceeds from the qualified forest 
     conservation bonds is excludable from income to the extent 
     such income is used to pay debt service on the bonds and 
     satisfies other conservation restrictions.
       Effective date.--The provision is effective for bonds 
     issued on or after the date that is 180 days after the date 
     of enactment and before December 31, 2006.


                          conference agreement

       The conference agreement does not contain the Senate 
     amendment provision.
     4. Qualified tribal school modernization bonds (sec. 616 of 
         the Senate amendment)


                              present law

       Under present law, the interest on bonds issued by an 
     Indian tribal government is tax-exempt if substantially all 
     of the proceeds of are to be used in the exercise of an 
     essential government function. The term essential government 
     function does not include any function that is not 
     customarily performed by State or local governments with 
     general taxing powers. In addition, Indian tribal governments 
     are prohibited from issuing private activity bonds, with the 
     exception of bonds issued for certain manufacturing 
     facilities.
       There is no present law provision that permits Indian 
     tribal governments to issue tax-credit bonds.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment authorizes the Secretary of the 
     Interior to establish a program under which eligible Indian 
     tribes may issue qualified tribal school modernization bonds 
     (``tribal school bonds''). A tribal school bond means any 
     bond issued under the program if: (1) 95 percent of the 
     proceeds of the issue are used for the construction, 
     rehabilitation, or repair of a school facility funded by the 
     Bureau of Indian Affairs of the Department of the Interior or 
     for the acquisition of land on which such a school facility 
     is to be constructed; (2) the bond is issued by an Indian 
     tribe; (3) the issuer designates the bond for purposes of the 
     program; and (4) the term of each bond that is part of such 
     an issue does not exceed 15 years. For purposes of the 
     provision, the term Indian tribe has the same meaning as the 
     term Indian tribal government under section 7701(a)(40) of 
     the Code (including the application of section 7871(d)) and 
     any consortium of tribes approved by the Secretary of the 
     Interior.
       Under the provision, the holder of a tribal school bond 
     receives a nonrefundable tax credit, in lieu of interest. The 
     amount of the credit allowed is included in the holder's 
     gross income as interest income. Unused credits may be 
     carried forward to the succeeding taxable year.
       The Senate amendment authorizes the Secretary of the 
     Interior to establish an escrow fund to secure repayment of 
     tribal school bonds. Principal payments on tribal school 
     bonds may only be made from amounts in the escrow fund and 
     such bonds are not guaranteed by the United States, the 
     issuing Indian tribe, or the tribal school for which the bond 
     was issued.
       The Senate amendment establishes a national limitation of 
     $200 million on the amount of tribal school bonds that may be 
     designated in each of the years 2005 and 2006. The authority 
     to issue tribal school bonds shall be allocated to Indian 
     tribes by the Secretary of the Interior.
       Effective date.--The provision is effective on the date of 
     enactment with respect to bonds issued after December 31, 
     2004.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

                 C. Provisions Relating to Depreciation

     1. 7-year recovery period for certain track facilities (sec. 
         623 of the Senate amendment and sec. 168 of the Code)


                              present law

       A taxpayer generally must capitalize the cost of property 
     used in a trade or business and recover such cost over time 
     through annual deductions for depreciation or amortization. 
     Tangible property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation by applying specific recovery 
     periods, placed-in-service conventions, and depreciation 
     methods to the cost of various types of depreciable property 
     (sec. 168). The cost of nonresidential real property is 
     recovered using the straight-line method of depreciation and 
     a recovery period of 39 years. Nonresidential real property 
     is subject to the mid-month placed-in-service convention. 
     Under the mid-month convention, the depreciation allowance 
     for the first year property is placed in service is based on 
     the number of months the property was in service, and 
     property placed in service at any time during a month is 
     treated as having been placed in service in the middle of the 
     month. Land improvements (such as roads and fences) are 
     recovered over 15 years. An exception exists for the theme 
     and amusement park industry, whose assets are assigned a 
     recovery period of seven years.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides a statutory 7-year recovery 
     period for permanent motorsports racetrack complexes. For 
     this purpose, motorsports racetrack complexes include land 
     improvements and support facilities but do not include 
     transportation equipment, warehouses, administrative 
     buildings, hotels, or motels.
       Effective date.--The Senate amendment is effective for 
     property placed in service after date of enactment and before 
     January 1, 2008. No inference is intended with respect to the 
     treatment of expenses incurred prior to the effective date.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     the following modification to the effective date provisions.
       Effective date.--The conference agreement is effective for 
     property placed in service after the date of enactment and 
     before January 1, 2008. The conference agreement also

[[Page H8531]]

     excludes racetrack facilities placed in service after the 
     date of enactment from the definition of theme and amusement 
     facilities classified under Asset Class 80.0. The conferees 
     do not intend for this provision to create any inference as 
     to the treatment of property placed in service on or before 
     the date of enactment. Accordingly, the conferees do not 
     intend for the provision to affect the interpretation of the 
     scope of Asset Class 80.0 for assets placed in service prior 
     to the date of enactment. The conferees strongly urge the 
     Secretary to resolve expeditiously any taxpayer disputes with 
     respect to the scope of Class 80.0.
     2. Alternative minimum tax and credits (sec. 624 of the 
         Senate amendment and secs. 38 and 53 of the Code)


                              present law

     Election to Increase Minimum Tax Credit Limitation in Lieu of 
         Bonus Depreciation
       Under present law, corporations are entitled to a minimum 
     tax credit for the minimum tax imposed in prior taxable 
     years. The amount of the credit is limited to the excess of 
     the taxpayer's regular tax over the tentative minimum tax 
     (``minimum tax credit limitation'').
       Under present law, certain property is allowed an 
     additional depreciation allowance for the taxable year placed 
     in service. This additional allowance is known as ``bonus 
     depreciation''. Bonus depreciation is a temporary provision.
     Use of General Business Credits Against the Alternative 
         Minimum Tax
       Under present law, the general business credit for any 
     taxable year is limited to the excess of the taxpayer's 
     income tax over the tentative minimum tax (or, if greater, 25 
     percent of the regular tax liability in excess of 
     $25,000).\338\
---------------------------------------------------------------------------
     \338\  Special rules apply to the empowerment zone employment 
     credit and the New York Liberty Zone business credit.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

     Election to Increase Minimum Tax Credit Limitation in Lieu of 
         Bonus Depreciation
       The Senate amendment provides an election by a corporation 
     to increase its minimum tax credit limitation for a taxable 
     year by one half of the bonus depreciation amount. If a 
     corporation makes an election for any taxable year, no bonus 
     depreciation is allowed with respect to any property placed 
     in service by the corporation for the taxable year. The bonus 
     depreciation amount for a taxable year is an amount (not in 
     excess of $25 million) equal to 30 percent of the aggregate 
     bonus depreciation that would have been allowable but for the 
     election. Any minimum tax credit allowable by reason of the 
     election may be refundable to the extent it exceeds the 
     corporation's tax liability.
       Effective date.--Taxable years ending after December 31, 
     2003.
     Use of General Business Credits Against the Alternative 
         Minimum Tax
       The Senate amendment provides that the general business 
     credit for any taxable year beginning in 2004 shall not be 
     less than 50 percent of the lesser of (1) the amount of 
     credit that would be allowed if the tentative minimum tax 
     were zero for the taxable year or (2) the current year 
     business credit. In no event shall the credit be less than 
     the amount otherwise allowable under present law.
       Effective date.--Taxable years beginning in 2004.


                          conference agreement

       The conference agreement does not include the provisions in 
     the Senate amendment.

                    D. Expansion of Business Credit

     1. New markets tax credit for Native American reservations 
         (sec. 631 of the Senate amendment)


                              Present Law

       Section 45D provides a new markets tax credit for qualified 
     equity investments made to acquire stock in a corporation, or 
     a capital interest in a partnership, that is a qualified 
     community development entity (``CDE'').\339\ The amount of 
     the credit allowed to the investor (either the original 
     purchaser or a subsequent holder) is (1) a five-percent 
     credit for the year in which the equity interest is purchased 
     from the CDE and for each of the following two years, and (2) 
     a six-percent credit on each anniversary date thereafter for 
     the following four years. The credit is determined by 
     applying the applicable percentage (five or six percent) to 
     the amount paid to the CDE for the investment at its original 
     issue, and is available to the taxpayer who holds the 
     qualified equity investment on the date of the initial 
     investment or on the respective anniversary dates. The credit 
     is recaptured if at any time during the seven-year period 
     that begins on the date of the initial issue of the 
     investment the entity ceases to be a qualified CDE, the 
     proceeds of the investment cease to be used as required, or 
     the interest is redeemed.
---------------------------------------------------------------------------
     \339\ Section 45D was added by section 121(a) of the 
     Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 
     (December 21, 2000).
---------------------------------------------------------------------------
       A qualified CDE is any domestic corporation or partnership: 
     (1) whose primary mission is serving or providing investment 
     capital for low-income communities or low-income persons; (2) 
     that maintains accountability to residents of low-income 
     communities by their representation on any governing board or 
     any advisory board of the CDE; and (3) that is certified by 
     the Secretary as being a qualified CDE. A qualified equity 
     investment means stock or a similar equity interest acquired 
     directly from a CDE for cash. Substantially all of the 
     investment proceeds must be used by the CDE to make qualified 
     low-income community investments. For this purpose, qualified 
     low-income community investments include: (1) capital or 
     equity investments in, or loans to, qualified active 
     businesses located in low-income communities; (2) certain 
     financial counseling and other services to businesses and 
     residents in low-income communities; (3) the purchase from 
     another CDE of any loan made by such entity that is a 
     qualified low-income community investment; or (4) an equity 
     investment in, or loan to, another CDE.
       A ``low-income community'' is defined as a census tract 
     with either (1) a poverty rate of at least 20 percent or (2) 
     median family income which does not exceed 80 percent of the 
     greater of metropolitan area median family income or 
     statewide median family income (for a non-metropolitan census 
     tract, does not exceed 80 percent of statewide median family 
     income). The Secretary may designate any area within any 
     census tract as a low-income community provided that (1) the 
     boundary is continuous, (2) the area (if it were a census 
     tract) would otherwise satisfy the poverty rate or median 
     income requirements, and (3) an inadequate access to 
     investment capital exists in the area.
       A qualified active business is defined as a business that 
     satisfies, with respect to a taxable year, the following 
     requirements: (1) at least 50 percent of the total gross 
     income of the business is derived from the active conduct of 
     trade or business activities in low-income communities; (2) a 
     substantial portion of the tangible property of such business 
     is used in a low-income community; (3) a substantial portion 
     of the services performed for such business by its employees 
     is performed in a low-income community; and (4) less than 
     five percent of the average of the aggregate unadjusted bases 
     of the property of such business is attributable to certain 
     financial property or to certain collectibles.
       The maximum annual amount of qualified equity investments 
     is capped at $2.0 billion per year for calendar years 2004 
     and 2005, and $3.5 billion per year for calendar years 2006 
     and 2007.
       No special rules apply to investments in community 
     development entities that serve or provide investment capital 
     with respect to low-income Native American reservations.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides special new markets tax 
     credit rules for qualified equity investments in a 
     ``reservation development entity.'' In general, the present-
     law requirements applicable to the new markets tax credit 
     apply for purposes of the new credit, with special 
     requirements established to define the qualified investment 
     entity (i.e., for purposes of this credit, the present-law 
     ``community development entity'' is replaced with 
     ``reservation development entity''). Under the Senate 
     amendment, a reservation development entity is a domestic 
     corporation or partnership if: (A) the primary mission of the 
     entity is serving, or providing investment capital for, low-
     income reservations; (B) the entity maintains accountability 
     to residents of low-income reservations through their 
     representation on any governing board or any advisory board 
     of the entity; and (C) the entity is certified by the 
     Secretary as being a reservation development entity. A low-
     income reservation means an Indian reservation (as defined in 
     section 168(j)(6)) that has a poverty rate of at least 40 
     percent.
       The maximum annual amount of qualified equity investments 
     in reservation development entities is $50 million for each 
     of calendar years 2004 through 2007. The limitation shall be 
     allocated by the Secretary among reservation development 
     entities selected by the Secretary, giving priority to any 
     entity with a record of having successfully provided capital 
     or technical assistance to disadvantaged businesses or 
     communities, or that intends to make qualified low-income 
     reservation investments in one or more unrelated businesses.
       The Senate amendment provides that not later than January 
     31 of 2007 and 2010, the Comptroller General of the United 
     States shall, pursuant to an audit, report to Congress on the 
     new credit program, including all reservation development 
     entities that receive an allocation under the program. In 
     addition, the Senate amendment authorizes the Secretary to 
     award a grant of not more than one million dollars to the 
     First Nations Oweesta Corporation, and authorizes 
     appropriations of one million dollars for fiscal years 2004 
     through 2014.
       Effective date.--The provision is effective for investments 
     made after December 31, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.
     2. Ready Reserve-National Guard employee credit and Ready 
         Reserve-National Guard replacement employee credit (sec. 
         632 of the Senate amendment)


                              present law

       There is no employer tax credit for wages paid to Ready 
     Reserve and National Guard employees called to active duty, 
     or for wages paid to their replacements.

[[Page H8532]]

                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides an employer credit for wages 
     paid to Ready Reserve-National Guard employees called to 
     active duty. A Ready Reserve-National Guard employee means an 
     employee who is a member of the Ready Reserve of a reserve 
     component of an Armed Force of the United States as described 
     in sections 10142 and 10101 of title 10, United States Code. 
     The credit equals 50 percent of the compensation paid while 
     the employee is called up to active duty up to a maximum of 
     $30,000 of compensation. Special rules allowing refundability 
     of the credit, up to the amount of employer payroll taxes, 
     apply to employers of first responders called up to active 
     duty. Qualified first responders are persons employed as a 
     law enforcement official, a firefighter, or a paramedic, and 
     who are a Ready Reserve-National Guard employee.
       In addition, for ``small business employers'' of Ready 
     Reserve-National Guard employees called up to active duty, 
     the Senate amendment creates a replacement employee credit 
     equal to 50 percent of the wages paid to any replacement 
     employee up to a maximum credit of $6,000. Small business 
     employers are employers that employ an average of 50 or fewer 
     employees on business days during the taxable year. For small 
     business manufacturing employers, the credit rate is 
     increased to 100 percent and the maximum credit is increased 
     to $20,000.
       Self-employed contract workers called to active duty are 
     eligible for the self employed portion of the credit, but 
     businesses purchasing the services of contract workers are 
     not eligible for the replacement employee credit.
       The credits could be carried back 3 years and carried 
     forward 20 years. Rules similar to section 280C apply to deny 
     a deduction for the amount of the credits.
       Effective date.--The provision is effective for investments 
     made after September 30, 2004.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.
     3. Rural investment tax credit (sec. 633 of the Senate 
         amendment and new sec. 42A of the Code)


                              present law

       There is no present-law provision specifically targeted to 
     encourage investment in high-migration rural areas.


                               house bill

       No provision.


                            senate amendment

       The proposal provides a tax credit that may be claimed by 
     owners of certain rural residential property (i.e., qualified 
     rural investment buildings). The credit is claimed annually, 
     generally for a period of ten years. Taxpayers are eligible 
     for a maximum present-value tax credit equal to 70 percent of 
     the eligible basis of a new building and qualified 
     rehabilitation expenses (30 percent in the case of an 
     existing building).
       A qualified rural investment building is defined as any 
     building that is part of a qualified rural investment project 
     at all times during the credit period. A qualified rural 
     investment project is defined as any investment project of 
     one or more buildings; (1) located in a qualifying county 
     (and, if necessary to the project, a contiguous county); and 
     (2) selected by the State in which the county is located, 
     according to the State's qualified rural investment plan. 
     Rehabilitation expenditures are treated as a separate 
     building for purposes of the credit. A qualifying county is 
     defined as a county which: (1) is located outside a 
     metropolitan statistical area (as defined by the Office of 
     Management and Budget); and (2) during the 20-year period 
     ending with the year the most recent census was conducted, 
     has experienced a net out-migration of inhabitants of the 
     county of at least 10-percent of the population of the 
     county. Generally, the credit and compliance periods are each 
     ten years and the credit period for an existing building may 
     not begin before the credit period for the related 
     rehabilitation expenditures.
       For purposes of this credit, the eligible basis of any 
     qualified rural investment building shall be determined under 
     rules similar to the rules of section 42 (the ``low income 
     rental housing credit'') except that: (1) the determination 
     of the adjusted basis of any building shall be made at the 
     beginning of the credit period; and (2) such basis shall 
     include development costs properly attributable to such 
     building. Development costs are limited to: (1) site 
     preparation costs; (2) State and local impact fees; (3) 
     reasonable development fees; (4) professional fees related to 
     basis items; (5) construction financing costs related to 
     basis items other than land; and (6) on-site and adjacent 
     improvements required by State or local governments.
       Generally, any building eligible for the credit must 
     receive an allocation of rural investment credit authority 
     from the State rural investment credit agency in whose 
     jurisdiction the building is located. The aggregate amount of 
     such credits allocated within a State is limited by the 
     State's annual rural investment credit ceiling. The 
     ceiling for each calendar year is the sum of: (1) the 
     unused State rural investment credit ceiling (if any) of 
     such State for the preceding calendar year; (2) $185,000 
     for each qualifying county of the State; (3) the amount of 
     State rural investment credit ceiling returned in the 
     calendar year; and (4) the amount (if any) allocated to 
     the State by the Secretary of the Treasury from the pool 
     of unallocated rural investment credits unused by other 
     States. The allocation is made by a formula provided in 
     the statute. The $185,000 amount is indexed for inflation. 
     At least 10 percent of each State's rural investment 
     credit ceiling is set aside for projects in which a 
     qualified non-profit organization is to materially 
     participate (within the meaning of section 469(h) of the 
     Code) in the development and operation of the project 
     throughout the compliance period. A qualified non-profit 
     organization generally means any organization if: (1) the 
     organization is described in section 501(c) and exempt 
     from tax under 501(a); (2) it is determined by the State 
     rural investment credit agency not to be affiliated with 
     or controlled by a for-profit organization; and (3) one or 
     more of its exempt purposes includes the fostering of 
     rural investment.
       Effective date.--The provision is effective for 
     expenditures made in taxable years beginning after the date 
     of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     Amendment.
     4. Qualified small business rural investment tax credit (sec. 
         634 of the Senate amendment and new sec. 42B of the Code)


                              present law

       There is no present-law provision specifically targeted to 
     encourage rural small business investment.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides a 30-percent tax credit for 
     certain qualified expenditures paid or incurred by qualified 
     rural small businesses. A qualified taxpayer's maximum credit 
     for any taxable year may not exceed the lesser of: (1) 
     $5,000; or (2) $25,000 minus the sum of the taxpayer's 
     previous qualified rural small business investment credit 
     claimed for all prior taxable years. For purposes of this 
     credit, qualified expenditures are defined as expenditures 
     normally associated with starting or expanding a business and 
     included in a qualified business plan, including costs for 
     capital, plant and equipment, inventory expenses, and wages 
     but not including interest costs. In the case of a qualified 
     rural small business with respect to which a small business 
     rural investment credit was claimed in any previous years, 
     qualified expenditures for each taxable year are limited to 
     qualified small business expenditures for the year only to 
     the extent that those total expenditures exceed the total 
     expenditures for the immediately preceding taxable year. For 
     example, assume Taxpayer A incurs qualified expenditures of 
     $3000, in year 1, $0 in year 2, and $4,000 in year 3. 
     Taxpayer A will be eligible for a qualified rural investment 
     tax credit of $900 in year 1, $0 in year 2, and $1,200 in 
     year 3.
       A qualified rural small business is defined as any person, 
     if such person; (1) employed not more than five full-time 
     employees during the taxable year; (2) materially and 
     substantially participates in management; (3) is located in a 
     qualifying county; and (4) submitted a qualified business 
     plan with respect to which an allocation of a rural 
     investment tax credit was received. For these purposes, an 
     employee is considered full-time if such employee is employed 
     at least 30 hours per week for 20 or more calendar weeks in 
     the taxable year. A qualifying county is defined as a county 
     which: (1) is located outside a metropolitan statistical area 
     (as defined by the Office of Management and Budget); and (2) 
     during the 20-year period ending with the year the most 
     recent census was conducted, has experienced a net out-
     migration of inhabitants of the county of at least 10-percent 
     of the population of the county. A qualified business plan is 
     a business plan which: (1) has been approved by the rural 
     investment credit agency with jurisdiction over the 
     qualifying county in which the qualified rural small business 
     is located pursuant to such agency's rural investment plan; 
     and (2) meets such requirements as the agency may specify.
       Any otherwise allowable deduction or credit is reduced by 
     the amount of this credit.
       Effective date.--The provision is effective for 
     expenditures made in taxable years beginning after the date 
     of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     Amendment.
     5. Provide a tax credit for maintenance of railroad track 
         (sec. 635 of the Senate amendment and new sec. 45I of the 
         Code)


                              present law

       There is no provision that provides for a railroad track 
     maintenance tax credit.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides a 30-percent business tax 
     credit for qualified railroad track maintenance expenditures 
     paid or incurred in a taxable year by eligible taxpayers. The 
     credit is limited to the product of $3,500 times the number 
     of miles of railroad track owned or leased by an eligible 
     taxpayer as of the close of its taxable year. Qualified 
     railroad track maintenance expenditures are defined as 
     amounts expended

[[Page H8533]]

     (whether or not chargeable to a capital account) for 
     maintaining railroad track (including roadbed, bridges, and 
     related track structures) owned or leased as of January 1, 
     2005, by a Class II or Class III railroad. An 
     eligible taxpayer is defined as: (1) any Class II or Class 
     III railroad; and (2) any person who transports property 
     using the rail facilities of a Class II or Class III 
     railroad or who furnishes railroad-related property or 
     services to such person. The taxpayer's basis in railroad 
     track is reduced by the amount of the credit allowed. No 
     portion of the credit may be carried back to any taxable 
     year beginning before January 1, 2005. Other rules apply.
       This credit applies to qualified railroad track maintenance 
     expenditures paid or incurred during taxable years beginning 
     after December 31, 2004, and before January 1, 2008.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     provision with the following modification. The conference 
     agreement increases the credit percentage from 30-percent to 
     50-percent. In addition, the conference agreement clarifies 
     that each mile of railroad track may be taken into account 
     only once, either by the owner of such mile or by the owner's 
     assignee, in computing the per-mile limitation.
     6. Railroad revitalization and security investment credit 
         (sec. 636 of the Senate amendment)


                              Present Law

       There is no provision in present law for railroad 
     revitalization.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a 50-percent business tax 
     credit for qualified project expenditures paid or incurred in 
     a taxable year by eligible taxpayers. Qualified project 
     expenditures generally are defined as expenditures (whether 
     or not chargeable to a capital account) for: (1) planning; 
     (2) environmental review and environmental impact mitigation; 
     (3) track and track structure rehabilitation, relocation, 
     improvement and development; (4) railroad safety and security 
     improvements; (5) communications and signaling improvements; 
     (6) intercity passenger rail equipment acquisition; and (7) 
     rail station and intermodal facilities development. Such 
     expenditures are limited to expenditures for a project with 
     respect to intercity passenger rail transportation (as 
     defined in 49 U.S.C. 24102) that is included in a State rail 
     plan.
       The railroad revitalization and security investment credit 
     is subject to a national cap of $165 million per calendar 
     year. The annual national cap is allocated pro rata to the 
     States based on the each State's share of the national total 
     of: (1) railroad and public road grade crossings on intercity 
     passenger rail routes; (2) intercity passenger train miles; 
     and (3) intercity embarkations and disembarkations for each 
     passenger. Any credit allocations unused for a calendar year 
     will be carried-over and allocated between those States that 
     used their allocation for the calendar year and requested a 
     share of the carryover. All projects must have an allocation 
     to claim the credit.
       The taxpayer's basis in such property is reduced by the 
     amount of the credit allowed. No portion of the credit may be 
     carried back to any taxable year beginning before January 1, 
     2005. A credit under this section may be transferred (but no 
     more than once) if the taxpayer is a tax-exempt entity or if 
     the credit exceeds the taxpayer's tax liability for the year. 
     Other rules apply.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Special allocation of the railroad revitalization and 
         security investment credit for New York city rail 
         projects (sec. 636 of the Senate amendment)


                              Present Law

       There is no provision in present law that provides a 
     special allocation of the railroad revitalization and 
     security investment credit.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides an additional allocation of 
     $200 million dollars to New York City for qualified project 
     expenditures within the New York Liberty Zone (as defined in 
     Code section 1400L(h). This allocation is in addition to the 
     allocation allowed under the general railroad revitalization 
     and security investment credit, described above. Under a 
     special rule, the $200 million will be allocated as follows: 
     (1) $100 million to projects designated by the mayor of New 
     York City; and (2) $100 million to projects designated by the 
     Governor of New York. Qualified project expenditures are 
     limited to expenditures for improvements to subway systems, 
     for commuter rail systems, for rail links to airports, and 
     for public infrastructure improvements in the vicinity of 
     rail or subway stations. The taxpayer's basis in such 
     property is reduced by the amount of the credit for which 
     this credit is allowed. No portion of the credit may be 
     carried back to any taxable year beginning before January 1, 
     2005. A credit under this section may be transferred (but no 
     more than once) if the taxpayer is a tax-exempt entity or if 
     the credit exceeds the taxpayer's tax liability for the year. 
     Other rules apply.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2004.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Modification of targeted areas and low-income communities 
         designated for new markets tax credit (sec. 637 of the 
         Senate amendment and sec. 45D of the Code)


                              Present Law

       Section 45D provides a new markets tax credit for qualified 
     equity investments made to acquire stock in a corporation, or 
     a capital interest in a partnership, that is a qualified 
     community development entity (``CDE'').\340\ The amount of 
     the credit allowable to the investor (either the original 
     purchaser or a subsequent holder) is (1) a five-percent 
     credit for the year in which the equity interest is purchased 
     from the CDE and for each of the following two years, and (2) 
     a six-percent credit for each of the following four years. 
     The credit is determined by applying the applicable 
     percentage (five or six percent) to the amount paid to the 
     CDE for the investment at its original issue, and is 
     available for a taxable year to the taxpayer who holds the 
     qualified equity investment on the date of the initial 
     investment or on the respective anniversary date that occurs 
     during the taxable year. The credit is recaptured if at any 
     time during the seven-year period that begins on the date of 
     the original issue of the investment the entity ceases to be 
     a qualified CDE, the proceeds of the investment cease to be 
     used as required, or the equity investment is redeemed.
---------------------------------------------------------------------------
     \340\ Section 45D was added by section 121(a) of the 
     Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 
     (December 21, 2000).
---------------------------------------------------------------------------
       A qualified CDE is any domestic corporation or partnership: 
     (1) whose primary mission is serving or providing investment 
     capital for low-income communities or low-income persons; (2) 
     that maintains accountability to residents of low-income 
     communities by their representation on any governing board of 
     or any advisory board to the CDE; and (3) that is certified 
     by the Secretary as being a qualified CDE. A qualified equity 
     investment means stock (other than nonqualified preferred 
     stock) in a corporation or a capital interest in a 
     partnership that is acquired directly from a CDE for cash, 
     and includes an investment of a subsequent purchaser if such 
     investment was a qualified equity investment in the hands of 
     the prior holder. Substantially all of the investment 
     proceeds must be used by the CDE to make qualified low-income 
     community investments. For this purpose, qualified low-income 
     community investments include: (1) capital or equity 
     investments in, or loans to, qualified active low-income 
     community businesses; (2) certain financial counseling and 
     other services to businesses and residents in low-income 
     communities; (3) the purchase from another CDE of any loan 
     made by such entity that is a qualified low-income community 
     investment; or (4) an equity investment in, or loan to, 
     another CDE.
       A ``low-income community'' is defined as a population 
     census tract with either (1) a poverty rate of at least 20 
     percent or (2) median family income which does not exceed 80 
     percent of the greater of metropolitan area median family 
     income or statewide median family income (for a non-
     metropolitan census tract, does not exceed 80 percent of 
     statewide median family income). The Secretary may designate 
     any area within any census tract as a low-income community 
     provided that (1) the boundary is continuous, (2) the area 
     (if it were a census tract) would otherwise satisfy the 
     poverty rate or median income requirements, and (3) an 
     inadequate access to investment capital exists in the area.
       A qualified active low-income community business is defined 
     as a business that satisfies, with respect to a taxable year, 
     the following requirements: (1) at least 50 percent of the 
     total gross income of the business is derived from the active 
     conduct of trade or business activities in any low-income 
     community; (2) a substantial portion of the tangible property 
     of such business is used in a low-income community; (3) a 
     substantial portion of the services performed for such 
     business by its employees is performed in a low-income 
     community; and (4) less than five percent of the average of 
     the aggregate unadjusted bases of the property of such 
     business is attributable to certain financial property or to 
     certain collectibles.
       The maximum annual amount of qualified equity investments 
     is capped at $2.0 billion per year for calendar years 2004 
     and 2005, and at $3.5 billion per year for calendar years 
     2006 and 2007.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the Secretary's authority to 
     designate certain areas as low-income communities to provide 
     that the Secretary shall prescribe regulations to designate 
     ``targeted populations'' as low-income communities for 
     purposes of the new markets tax credit. For this purpose, a 
     ``targeted population'' is defined by reference to

[[Page H8534]]

     section 103(20) of the Riegle Community Development and 
     Regulatory Improvement Act of 1994 (12 U.S.C. 4702(20)) to 
     mean individuals, or an identifiable group of individuals, 
     including an Indian tribe, who (A) are low-income persons; or 
     (B) otherwise lack adequate access to loans or equity 
     investments. Under the Senate amendment, ``low-income'' means 
     (1) for a targeted population within a metropolitan area, 
     less than 80 percent of the area median family income; and 
     (2) for a targeted population within a non-metropolitan area, 
     less than the greater of 80 percent of the area median family 
     income or 80 percent of the statewide non-metropolitan area 
     median family income.\341\ Under the Senate amendment, a 
     targeted population is not required to be within any census 
     tract.
---------------------------------------------------------------------------
     \341\ 12. U.S.C. 4702(17) (used to define "low-income" for 
     purposes of 12. U.S.C. 4702(20)).
---------------------------------------------------------------------------
       Effective date.--The provision is effective for 
     designations made after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     respect to targeted population designations, modified to 
     provide that a population census tract with a population 
     of less than 2,000 shall be treated as a low-income 
     community for purposes of the credit if such tract is 
     within an empowerment zone, the designation of which is in 
     effect under section 1391, and is contiguous to one or 
     more low-income communities.
       Effective date.--The targeted population provision is 
     effective for designations made after the date of enactment. 
     The low-population provision is effective for investments 
     made after the date of enactment.
     9. Modification of income requirement for census tracts 
         within high migration rural counties for new markets tax 
         credit (sec. 638 of the Senate amendment and sec. 45D of 
         the Code)


                              Present Law

       Section 45D provides a new markets tax credit for qualified 
     equity investments made to acquire stock in a corporation, or 
     a capital interest in a partnership, that is a qualified 
     community development entity (``CDE'').\342\ The amount of 
     the credit allowable to the investor (either the original 
     purchaser or a subsequent holder) is (1) a five-percent 
     credit for the year in which the equity interest is purchased 
     from the CDE and for each of the following two years, and (2) 
     a six-percent credit for each of the following four years. 
     The credit is determined by applying the applicable 
     percentage (five or six percent) to the amount paid to the 
     CDE for the investment at its original issue, and is 
     available for the taxable year to the taxpayer who holds the 
     qualified equity investment on the date of the initial 
     investment or on the respective anniversary date that occurs 
     during the taxable year. The credit is recaptured if at any 
     time during the seven-year period that begins on the date of 
     the original issue of the investment the entity ceases to be 
     a qualified CDE, the proceeds of the investment cease to be 
     used as required, or the equity investment is redeemed.
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     \342\ Section 45D was added by section 121(a) of the 
     Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 
     (December 21, 2000).
---------------------------------------------------------------------------
       A qualified CDE is any domestic corporation or partnership: 
     (1) whose primary mission is serving or providing investment 
     capital for low-income communities or low-income persons; (2) 
     that maintains accountability to residents of low-income 
     communities by their representation on any governing board of 
     or any advisory board to the CDE; and (3) that is certified 
     by the Secretary as being a qualified CDE. A qualified equity 
     investment means stock (other than nonqualified preferred 
     stock) in a corporation or a capital interest in a 
     partnership that is acquired directly from a CDE for cash, 
     and includes an investment of a subsequent purchaser if such 
     investment was a qualified equity investment in the hands of 
     the prior holder. Substantially all of the investment 
     proceeds must be used by the CDE to make qualified low-income 
     community investments. For this purpose, qualified low-income 
     community investments include: (1) capital or equity 
     investments in, or loans to, qualified active low-income 
     community businesses; (2) certain financial counseling and 
     other services to businesses and residents in low-income 
     communities; (3) the purchase from another CDE of any loan 
     made by such entity that is a qualified low-income community 
     investment; or (4) an equity investment in, or loan to, 
     another CDE.
       A ``low-income community'' is defined as a population 
     census tract with either (1) a poverty rate of at least 20 
     percent or (2) median family income which does not exceed 80 
     percent of the greater of metropolitan area median family 
     income or statewide median family income (for a non-
     metropolitan census tract, does not exceed 80 percent of 
     statewide median family income). The Secretary may designate 
     any area within any census tract as a low-income community 
     provided that (1) the boundary is continuous, (2) the area 
     (if it were a census tract) would otherwise satisfy the 
     poverty rate or median income requirements, and (3) an 
     inadequate access to investment capital exists in the area.
       A qualified active low-income community business is defined 
     as a business that satisfies, with respect to a taxable year, 
     the following requirements: (1) at least 50 percent of the 
     total gross income of the business is derived from the active 
     conduct of trade or business activities in any low-income 
     community; (2) a substantial portion of the tangible property 
     of such business is used in a low-income community; (3) a 
     substantial portion of the services performed for such 
     business by its employees is performed in a low-income 
     community; and (4) less than five percent of the average of 
     the aggregate unadjusted bases of the property of such 
     business is attributable to certain financial property or to 
     certain collectibles.
       The maximum annual amount of qualified equity investments 
     is capped at $2.0 billion per year for calendar years 2004 
     and 2005, and at $3.5 billion per year for calendar years 
     2006 and 2007.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the low-income test for high 
     migration rural counties. Under the Senate amendment, in the 
     case of a population census tract located within a high 
     migration rural county, low-income is defined by reference to 
     85 percent (rather than 80 percent) of statewide median 
     family income. For this purpose, a high migration rural 
     county is any county that, during the 20-year period ending 
     with the year in which the most recent census was conducted, 
     has a net out-migration of inhabitants from the county of at 
     least 10 percent of the population of the county at the 
     beginning of such period.
       Effective date.--The provision is effective as if included 
     in the amendment made by section 121(a) of the Community 
     Renewal Tax Relief Act of 2000.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     10. Provide a tax credit for expenditures on closed 
         captioning technology in movies (sec. 639 of the Senate 
         amendment and new sec. 45T of the Code)


                              Present Law

       There is no provision that allows a tax credit for 
     expenditures made for closed captioning technology in motion 
     pictures.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a 50-percent business tax 
     credit (the ``motion picture accessibility credit'') for 
     certain qualified expenditures made in a taxable year by an 
     eligible taxpayer. Qualified expenditures are defined as 
     amounts paid or incurred for making motion pictures 
     accessible to deaf or hard-of-hearing individuals through the 
     use of captioning technology. An eligible taxpayer is defined 
     as a taxpayer who is in the business of showing motion 
     pictures to the public in theaters or producing or 
     distributing those motion pictures. The taxpayer's basis in 
     property with respect to which the credit is allowed is 
     reduced by the amount of the credit allowed. No deduction or 
     credit is permitted under any other provision of Chapter 1 
     (Normal Taxes and Surtaxes) of Subtitle A (Income Taxes) of 
     the Code for the amount of any motion picture accessibility 
     credit allowed. No portion of the credit may be carried back 
     to any taxable year beginning before January 1, 2004. Other 
     rules apply.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                      E. Miscellaneous Provisions

     1. Exclusion of gain or loss on sale or exchange of certain 
         brownfield sites from unrelated business taxable income 
         (sec. 641 of the Senate amendment and secs. 512 and 514 
         of the Code)


                              Present Law

       In general, an organization that is otherwise exempt from 
     Federal income tax is taxed on income from a trade or 
     business regularly carried on that is not substantially 
     related to the organization's exempt purposes. Gains or 
     losses from the sale, exchange, or other disposition of 
     property, other than stock in trade, inventory, or property 
     held primarily for sale to customers in the ordinary course 
     of a trade or business, generally are excluded from unrelated 
     business taxable income. Gains or losses are treated as 
     unrelated business taxable income, however, if derived from 
     ``debt-financed property.'' Debt-financed property generally 
     means any property that is held to produce income and with 
     respect to which there is acquisition indebtedness at any 
     time during the taxable year.
       In general, income of a tax-exempt organization that is 
     produced by debt-financed property is treated as unrelated 
     business income in proportion to the acquisition indebtedness 
     on the income-producing property. Acquisition indebtedness 
     generally means the amount of unpaid indebtedness incurred by 
     an organization to acquire or improve the property and 
     indebtedness that would not have been incurred but for the 
     acquisition or improvement of the property. Acquisition 
     indebtedness does not include: (1) certain indebtedness 
     incurred in the performance or exercise of a purpose or 
     function constituting the basis of the organization's 
     exemption; (2) obligations to pay certain types of annuities; 
     (3) an obligation, to the extent it is insured by the Federal 
     Housing Administration, to finance the purchase, 
     rehabilitation, or construction of housing for low and

[[Page H8535]]

     moderate income persons; or (4) indebtedness incurred by 
     certain qualified organizations to acquire or improve real 
     property.
       Special rules apply in the case of an exempt organization 
     that owns a partnership interest in a partnership that holds 
     debt-financed property. An exempt organization's share of 
     partnership income that is derived from debt-financed 
     property generally is taxed as debt-financed income unless an 
     exception provides otherwise.


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The Senate amendment provides an exclusion from unrelated 
     business taxable income for the gain or loss from the 
     qualified sale, exchange, or other disposition of a 
     qualifying brownfield property by an eligible taxpayer. The 
     exclusion from unrelated business taxable income generally is 
     available to an exempt organization that acquires, 
     remediates, and disposes of the qualifying brownfield 
     property. In addition, the Senate amendment provides an 
     exception from the debt-financed property rules for such 
     properties.
       In order to qualify for the exclusions from unrelated 
     business income and the debt-financed property rules, the 
     eligible taxpayer is required to: (a) acquire from an 
     unrelated person real property that constitutes a qualifying 
     brownfield property; (b) pay or incur a minimum level of 
     eligible remediation expenditures with respect to the 
     property; and (c) transfer the remediated site to an 
     unrelated person in a transaction that constitutes a sale, 
     exchange, or other disposition for purposes of Federal income 
     tax law.\343\
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     \343\ For purposes of the provision, a person is related to 
     another person if (1) such person bears a relationship to 
     such other person that is described in section 267(b) 
     (determined without regard to paragraph (9)), or section 
     707(b)(1), determined by substituting 25 percent for 50 
     percent each place it appears therein; or (2) if such other 
     person is a nonprofit organization, if such person controls 
     directly or indirectly more than 25 percent of the governing 
     body of such organization.
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     Qualifying brownfield properties
       Under the Senate amendment, the exclusion from unrelated 
     business taxable income applies only to real property that 
     constitutes a qualifying brownfield property. A qualifying 
     brownfield property means real property that is certified, 
     before the taxpayer incurs any eligible remediation 
     expenditures (other than to obtain a Phase I environmental 
     site assessment), by an appropriate State agency (within the 
     meaning of section 198(c)(4)) in the State in which the 
     property is located as a brownfield site within the meaning 
     of section 101(39) of the Comprehensive Environmental 
     Response, Compensation, and Liability Act of 1980 (CERCLA) 
     (as in effect on the date of enactment of the proposal). The 
     Senate amendment provision requires that the taxpayer's 
     request for certification include a sworn statement of the 
     taxpayer and supporting documentation of the presence of a 
     hazardous substance, pollutant, or contaminant on the 
     property that is complicating the expansion, redevelopment, 
     or reuse of the property given the property's reasonably 
     anticipated future land uses or capacity for uses of the 
     property (including a Phase I environmental site assessment 
     and, if applicable, evidence of the property's presence on a 
     local, State, or Federal list of brownfields or contaminated 
     property) and other environmental assessments prepared or 
     obtained by the taxpayer.
     Eligible taxpayer
       An eligible taxpayer with respect to a qualifying 
     brownfield property is an organization exempt from tax under 
     section 501(a) that acquired such property from an unrelated 
     person and paid or incurred a minimum amount of eligible 
     remediation expenditures with respect to such property. The 
     exempt organization (or the qualifying partnership of which 
     it is a partner) is required to pay or incur eligible 
     remediation expenditures with respect to a qualifying 
     brownfield property in an amount that exceeds the greater of: 
     (a) $550,000; or (b) 12 percent of the fair market value of 
     the property at the time such property is acquired by the 
     taxpayer, determined as if the property were not 
     contaminated.
       An eligible taxpayer does not include an organization that 
     is: (1) potentially liable under section 107 of CERCLA with 
     respect to the property; (2) affiliated with any other person 
     that is potentially liable thereunder through any direct or 
     indirect familial relationship or any contractual, corporate, 
     or financial relationship (other than a contractual, 
     corporate, or financial relationship that is created by the 
     instruments by which title to a qualifying brownfield 
     property is conveyed or financed by a contract of sale of 
     goods or services); or (3) the result of a reorganization of 
     a business entity which was so potentially liable.\344\
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     \344\ In general, a person is potentially liable under 
     section 107 of CERCLA if: (1) it is the owner and operator of 
     a vessel or a facility; (2) at the time of disposal of any 
     hazardous substance it owned or operated any facility at 
     which such hazardous substances were disposed of; (3) by 
     contract, agreement, or otherwise it arranged for disposal or 
     treatment, or arranged with a transporter for transport for 
     disposal or treatment, of hazardous substances owned or 
     possessed by such person, by any other party or entity, at 
     any facility or incineration vessel owned or operated by 
     another party or entity and containing such hazardous 
     substances; or (4) it accepts or accepted any hazardous 
     substances for transport to disposal or treatment facilities, 
     incineration vessels or sites selected by such person, from 
     which there is a release, or a threatened release which 
     causes the incurrence of response costs, of a hazardous 
     substance. 42 U.S.C. sec. 9607(a) (2004).
---------------------------------------------------------------------------
     Qualified sale, exchange, or other disposition
       Under the Senate amendment, a sale, exchange, or other 
     disposition of a qualifying brownfield property shall be 
     considered as qualified if such property is transferred by 
     the eligible taxpayer to an unrelated person, and within one 
     year of such transfer the taxpayer has received a 
     certification (a ``remediation certification'') from the 
     Environmental Protection Agency or an appropriate State 
     agency (within the meaning of section 198(c)(4)) in the State 
     in which the property is located that, as a result of the 
     taxpayer's remediation actions, such property would not be 
     treated as a qualifying brownfield property in the hands of 
     the transferee. A taxpayer's request for a remediation 
     certification shall be made no later than the date of the 
     transfer and shall include a sworn statement by the taxpayer 
     certifying that: (1) remedial actions that comply with all 
     applicable or relevant and appropriate requirements 
     (consistent with section 121(d) of CERCLA) have been 
     substantially completed, such that there are no hazardous 
     substances, pollutants or contaminants that complicate the 
     expansion, redevelopment, or reuse of the property given the 
     property's reasonably anticipated future land uses or 
     capacity for uses of the property; (2) the reasonably 
     anticipated future land uses or capacity for uses of the 
     property are more economically productive or environmentally 
     beneficial than the uses of the property in existence on the 
     date the property was certified as a qualifying brownfield 
     property;\345\ (3) a remediation plan has been implemented to 
     bring the property in compliance with all applicable local, 
     State, and Federal environmental laws, regulations, and 
     standards and to ensure that remediation protects human 
     health and the environment; (4) the remediation plan, 
     including any physical improvements required to remediate the 
     property, is either complete or substantially complete, and 
     if substantially complete,\346\ sufficient monitoring, 
     funding, institutional controls, and financial assurances 
     have been put in place to ensure the complete remediation of 
     the site in accordance with the remediation plan as soon as 
     is reasonably practicable after the disposition of the 
     property by the taxpayer; and (5) public notice and the 
     opportunity for comment on the request for certification (in 
     the same form and manner as required for public participation 
     required under section 117(a) of CERCLA (as in effect on the 
     date of enactment of the provision)) was completed before the 
     date of such request. Public notice shall include, at a 
     minimum, publication in a major local newspaper of general 
     circulation.
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     \345\ For this purpose, use of the property as a landfill or 
     other hazardous waste facility shall not be considered more 
     economically productive or environmentally beneficial.
     \346\ For these purposes, substantial completion means any 
     necessary physical construction is complete, all immediate 
     threats have been eliminated, and all long-term threats are 
     under control.
---------------------------------------------------------------------------
       A copy of each of the requests for certification that the 
     property was a brownfield site, and that it would no longer 
     be a qualifying brownfield property in the hands of the 
     transferee, shall be included in the tax return of the 
     eligible taxpayer (and, where applicable, of the qualifying 
     partnership) for the taxable year during which the transfer 
     occurs.
     Eligible remediation expenditures
       Under the Senate amendment, eligible remediation 
     expenditures means, with respect to any qualifying brownfield 
     property: (1) expenditures that are paid or incurred by the 
     taxpayer to an unrelated person to obtain a Phase I 
     environmental site assessment of the property; (2) amounts 
     paid or incurred by the taxpayer after receipt of the 
     certification that the property is a qualifying brownfield 
     property for goods and services necessary to obtain the 
     remediation certification; and (3) expenditures to obtain 
     remediation cost-cap or stop-loss coverage, re-opener or 
     regulatory action coverage, or similar coverage under 
     environmental insurance policies,\347\ or to obtain financial 
     guarantees required to manage the remediation and monitoring 
     of the property. Eligible remediation expenditures include 
     expenditures to (1) manage, remove, control, contain, abate, 
     or otherwise remediate a hazardous substance, pollutant, or 
     contaminant on the property; (2) obtain a Phase II 
     environmental site assessment of the property, including any 
     expenditure to monitor, sample, study, assess, or otherwise 
     evaluate the release, threat of release, or presence of a 
     hazardous substance, pollutant, or contaminant on the 
     property, or (3) obtain environmental regulatory 
     certifications and approvals required to manage the 
     remediation and monitoring of the hazardous substance, 
     pollutant, or contaminant on the property. Eligible 
     remediation expenditures do not include (1) any portion of 
     the purchase price paid or incurred by the eligible taxpayer 
     to acquire the qualifying brownfield property; (2) 
     environmental insurance costs paid or incurred to obtain 
     legal defense coverage, owner/operator liability coverage, 
     lender liability coverage, professional liability coverage, 
     or similar types of

[[Page H8536]]

     coverage;\348\ (3) any amount paid or incurred to the extent 
     such amount is reimbursed, funded or otherwise subsidized by: 
     (a) grants provided by the United States, a State, or a 
     political subdivision of a State for use in connection with 
     the property; (b) proceeds of an issue of State or local 
     government obligations used to provide financing for the 
     property, the interest of which is exempt from tax under 
     section 103; or (c) subsidized financing provided (directly 
     or indirectly) under a Federal, State, or local program in 
     connection with the property; or (4) any expenditure paid or 
     incurred before the date of enactment of the proposal.\349\
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     \347\ Cleanup cost-cap or stop-loss coverage is coverage that 
     places an upper limit on the costs of cleanup that the 
     insured may have to pay. Re-opener or regulatory action 
     coverage is coverage for costs associated with any future 
     government actions that require further site cleanup, 
     including costs associated with the loss of use of site 
     improvements.
     \348\ For this purpose, professional liability insurance is 
     coverage for errors and omissions by public and private 
     parties dealing with or managing contaminated land issues, 
     and includes coverage under policies referred to as owner-
     controlled insurance. Owner/operator liability coverage is 
     coverage for those parties that own the site or conduct 
     business or engage in cleanup operations on the site. Legal 
     defense coverage is coverage for lawsuits associated with 
     liability claims against the insured made by enforcement 
     agencies or third parties, including by private parties.
     \349\ The provision authorizes the Secretary of the Treasury 
     to issue guidance regarding the treatment of government-
     provided funds for purposes of determining eligible 
     remediation expenditures.
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     Qualified gain or loss
       The Senate amendment generally excludes from unrelated 
     business taxable income the exempt organization's gain or 
     loss from the sale, exchange, or other disposition of a 
     qualifying brownfield property. Income, gain, or loss from 
     other transfers does not qualify under the provision.\350\ 
     The amount of gain or loss excluded from unrelated business 
     taxable income is not limited to or based upon the increase 
     or decrease in value of the property that is attributable to 
     the taxpayer's expenditure of eligible remediation 
     expenditures. Further, the exclusion does not apply to an 
     amount treated as gain that is ordinary income with respect 
     to section 1245 or section 1250 property, including any 
     amount deducted as a section 198 expense that is subject to 
     the recapture rules of section 198(e), if the taxpayer had 
     deducted such amount in the computation of its unrelated 
     business taxable income.\351\
---------------------------------------------------------------------------
     \350\ For example, rent income from leasing the property does 
     not qualify under the proposal.
     \351\ Depreciation or section 198 amounts that the taxpayer 
     had not used to determine its unrelated business taxable 
     income are not treated as gain that is ordinary income under 
     sections 1245 or 1250 (secs. 1.1245-2(a)(8) and 1.1250-
     2(d)(6)), and are not recognized as gain or ordinary income 
     upon the sale, exchange, or disposition of the property. 
     Thus, an exempt organization would not be entitled to a 
     double benefit resulting from a section 198 expense deduction 
     and the proposed exclusion from gain with respect to any 
     amounts it deducts under section 198.
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     Special rules for qualifying partnerships
       In general
       In the case of a tax-exempt organization that is a partner 
     of a qualifying partnership that acquires, remediates, and 
     disposes of a qualifying brownfield property, the Senate 
     amendment provision applies to the tax-exempt partner's 
     distributive share of the qualifying partnership's gain or 
     loss from the disposition of the property.\352\ A 
     qualifying partnership is a partnership that (1) has a 
     partnership agreement that satisfies the requirements of 
     section 514(c)(9)(B)(vi) at all times beginning on the 
     date of the first certification received by the 
     partnership that one of its properties is a qualifying 
     brownfield property; (2) satisfies the requirements of the 
     proposal if such requirements are applied to the 
     partnership (rather than to the eligible taxpayer that is 
     a partner of the partnership); and (3) is not an 
     organization that would be prevented from constituting an 
     eligible taxpayer by reason of it or an affiliate being 
     potentially liable under CERCLA with respect to the 
     property.
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     \352\ The provision's exclusions do not apply to a tax-exempt 
     partner's gain or loss from the tax-exempt partner's sale, 
     exchange, or other disposition of its partnership interest. 
     Such transactions continue to be governed by present-law.
---------------------------------------------------------------------------
       The exclusion is available to a tax-exempt organization 
     with respect to a particular property acquired, remediated, 
     and disposed of by a qualifying partnership only if the 
     exempt organization is a partner of the partnership at all 
     times during the period beginning on the date of the first 
     certification received by the partnership that one of its 
     properties is a qualifying brownfield property, and ending on 
     the date of the disposition of the property by the 
     partnership.\353\
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     \353\ The provision subjects a tax-exempt partner to tax on 
     gain previously excluded by the partner (plus interest) if a 
     property subsequently becomes ineligible for exclusion under 
     the qualifying partnership's multiple-property election.
---------------------------------------------------------------------------
       Under the Senate amendment, the Secretary shall prescribe 
     such regulations as are necessary to prevent abuse of the 
     requirements of the provision, including abuse through the 
     use of special allocations of gains or losses, or changes in 
     ownership of partnership interests held by eligible 
     taxpayers.
       Certifications and multiple property elections
       If the property is acquired and remediated by a qualifying 
     partnership of which the exempt organization is a partner, it 
     is intended that the certification as to status as a 
     qualified brownfield property and the remediation 
     certification will be obtained by the qualifying partnership, 
     rather than by the tax-exempt partner, and that both the 
     eligible taxpayer and the qualifying partnership will be 
     required to make available such copies of the certifications 
     to the IRS. Any elections or revocations regarding the 
     application of the eligible remediation expenditure rules to 
     multiple properties (as described below) acquired, 
     remediated, and disposed of by a qualifying partnership must 
     be made by the partnership. A tax-exempt partner is bound by 
     an election made by the qualifying partnership of which it is 
     a partner.
     Special rules for multiple properties
       The eligible remediation expenditure determinations 
     generally are made on a property-by-property basis. An exempt 
     organization (or a qualifying partnership of which the exempt 
     organization is a partner) that acquires, remediates, and 
     disposes of multiple qualifying brownfield properties, 
     however, may elect to make the eligible remediation 
     expenditure determinations on a multiple-property basis. In 
     the case of such an election, the taxpayer satisfies the 
     eligible remediation expenditures test with respect to all 
     qualifying brownfield properties acquired during the election 
     period if the average of the eligible remediation 
     expenditures for all such properties exceeds the greater of: 
     (a) $550,000; or (b) 12 percent of the average of the fair 
     market value of the properties, determined as of the dates 
     they were acquired by the taxpayer and as if they were not 
     contaminated. If the eligible taxpayer elects to make the 
     eligible remediation expenditure determination on a multiple 
     property basis, then the election shall apply to all 
     qualifying sales, exchanges, or other dispositions of 
     qualifying brownfield properties the acquisition and transfer 
     of which occur during the period for which the election 
     remains in effect.\354\
---------------------------------------------------------------------------
     \354\ If the taxpayer fails to satisfy the averaging test for 
     the properties subject to the election, then the taxpayer may 
     not apply the exclusion on a separate property basis with 
     respect to any of such properties.
---------------------------------------------------------------------------
       An acquiring taxpayer makes a multiple-property election 
     with its timely filed tax return (including extensions) for 
     the first taxable year for which it intends to have the 
     election apply. A timely filed election is effective as of 
     the first day of the taxable year of the return in which the 
     election is included or a later day in such taxable year 
     selected by the taxpayer. An election remains effective until 
     the earliest of a date selected by the taxpayer, the date 
     which is eight years after the effective date of the 
     election, the effective date of a revocation of the election, 
     or, in the case of a partnership, the date of the termination 
     of the partnership.
       A taxpayer may revoke a multiple-property election by 
     filing a statement of revocation with a timely filed tax 
     return (including extensions). A revocation is effective as 
     of the first day of the taxable year of the return in which 
     the revocation is included or a later day in such taxable 
     year selected by the eligible taxpayer or qualifying 
     partnership. Once a taxpayer revokes the election, the 
     taxpayer is ineligible to make another multiple-property 
     election with respect to any qualifying brownfield property 
     subject to the revoked election.\355\
---------------------------------------------------------------------------
     \355\ The provision subjects a taxpayer to tax on gain 
     previously excluded (plus interest) in the event a site 
     subsequently becomes ineligible for gain exclusion under the 
     multiple-property election.
---------------------------------------------------------------------------
     Debt-financed property
       The Senate amendment provides that debt-financed property, 
     as defined by section 514(b), does not include any property 
     the gain or loss from the sale, exchange, or other 
     disposition of which is excluded by reason of the provisions 
     of the proposal that exclude such gain or loss from computing 
     the gross income of any unrelated trade or business of the 
     taxpayer. Thus, gain or loss from the sale, exchange, or 
     other disposition of a qualifying brownfield property that 
     otherwise satisfies the requirements of the provision is not 
     taxed as unrelated business taxable income merely because the 
     taxpayer incurred debt to acquire or improve the site.
       Effective date.--The Senate amendment provision applies to 
     gain or loss on the sale, exchange, or other disposition of a 
     property acquired by the taxpayer after December 31, 2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     modified to provide a termination date of December 31, 2009. 
     The conference agreement provision applies to gain or loss on 
     the sale, exchange, or other disposition of property that is 
     acquired by the eligible taxpayer or qualifying partnership 
     during the period beginning January 1, 2005, and ending 
     December 31, 2009. Property acquired during the five-year 
     acquisition period need not be disposed of by the termination 
     date in order to qualify for the exclusion. For purposes of 
     the multiple property election, gain or loss on property 
     acquired after December 31, 2009, is not eligible for the 
     exclusion from unrelated business taxable income, although 
     properties acquired after the termination date (but during 
     the election period) are included for purposes of determining 
     average eligible remediation expenditures.
       Effective date.--The conference agreement provision applies 
     to gain or loss on property that is acquired after December 
     31, 2004.
     2. Civil rights tax relief (sec. 643 of the Senate amendment 
         and sec. 62 of the Code)


                              Present Law

       Under present law, gross income generally does not include 
     the amount of any damages (other than punitive damages) 
     received (whether by suit or agreement and whether

[[Page H8537]]

     as lump sums or as periodic payments) by individuals on 
     account of personal physical injuries (including death) or 
     physical sickness.\356\ Expenses relating to recovering such 
     damages are generally not deductible.\357\
---------------------------------------------------------------------------
     \356\ Sec. 104(a)(2).
     \357\ Sec. 265(a)(1).
---------------------------------------------------------------------------
       Other damages are generally included in gross income. The 
     related expenses to recover the damages, including attorneys' 
     fees, are generally deductible as expenses for the production 
     of income,\358\ subject to the two-percent floor on itemized 
     deductions.\359\ Thus, such expenses are deductible only to 
     the extent the taxpayer's total miscellaneous itemized 
     deductions exceed two percent of adjusted gross income. Any 
     amount allowable as a deduction is subject to reduction under 
     the overall limitation of itemized deductions if the 
     taxpayer's adjusted gross income exceeds a threshold 
     amount.\360\ For purposes of the alternative minimum tax, no 
     deduction is allowed for any miscellaneous itemized 
     deduction.
---------------------------------------------------------------------------
     \358\ Sec. 212.
     \359\ Sec. 67.
     \360\ Sec. 68.
---------------------------------------------------------------------------
       In some cases, claimants will engage an attorney to 
     represent them on a contingent fee basis. That is, if the 
     claimant recovers damages, a prearranged percentage of the 
     damages will be paid to the attorney; if no damages are 
     recovered, the attorney is not paid a fee. The proper tax 
     treatment of contingent fee arrangements with attorneys has 
     been litigated in recent years. Some courts \361\ have held 
     that the entire amount of damages is income and that the 
     claimant is entitled to a miscellaneous itemized deduction 
     subject to both the two-percent floor as an expense for the 
     production of income for the portion paid to the attorney and 
     to the overall limitation on itemized deductions. Other 
     courts have held that the portion of the recovery that is 
     paid directly to the attorney is not income to the claimant, 
     holding that the claimant has no claim of right to that 
     portion of the recovery.\362\
---------------------------------------------------------------------------
     \361\ Kenseth v. Commissioner, 114 T.C. 399 (2000), aff'd 259 
     F.3d 881 (7th Cir. 2001); Coady v. Commissioner, 213 F.3d 
     1187 (9th Cir. 2000); Benci-Woodward v. Commissioner, 219 
     F.3d 941 (9th Cir. 2000); Baylin v. United States, 43 F.3d 
     1451 (Fed. Cir. 1995).
     \362\ Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959); 
     Estate of Arthur Clarks v. United States, 202 F.3d 854 (6th 
     Cir. 2000); Srivastava v. Commissioner, 220 F.3d 353 (5th 
     Cir. 2000). In some of these cases, such as Cotnam, State law 
     has been an important consideration in determining that the 
     claimant has no claim of right to the recovery.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides an above-the-line deduction 
     for attorneys' fees and costs paid by, or on behalf of, the 
     taxpayer in connection with any action involving a claim of 
     unlawful discrimination, certain claims against the Federal 
     Government, or a private cause of action under the Medicare 
     Secondary Payer statute. The amount that may be deducted 
     above-the-line may not exceed the amount includible in the 
     taxpayer's gross income for the taxable year on account of a 
     judgment or settlement (whether by suit or agreement and 
     whether as lump sum or periodic payments) resulting from such 
     claim.
       Under the proposal, ``unlawful discrimination'' means an 
     act that is unlawful under certain provisions of any of the 
     following: the Civil Rights Act of 1991; the Congressional 
     Accountability Act of 1995; the National Labor Relations Act; 
     the Fair Labor Standards Act of 1938; the Age Discrimination 
     in Employment Act of 1967; the Rehabilitation Act of 1973; 
     the Employee Retirement Income Security Act of 1974; the 
     Education Amendments of 1972; the Employee Polygraph 
     Protection Act of 1988; the Worker Adjustment and Retraining 
     Notification Act; the Family and Medical Leave Act of 1993; 
     chapter 43 of Title 38 of the United States Code; the Revised 
     Statutes; the Civil Rights Act of 1964; the Fair Housing Act; 
     the Americans with Disabilities Act of 1990; any provision of 
     Federal law (popularly known as whistleblower protection 
     provisions) prohibiting the discharge of an employee, 
     discrimination against an employee, or any other form of 
     retaliation or reprisal against an employee for asserting 
     rights or taking other actions permitted under Federal law; 
     or any provision of Federal, State or local law, or common 
     law claims permitted under Federal, State, or local law 
     providing for the enforcement of civil rights or regulating 
     any aspect of the employment relationship, including 
     claims for wages, compensation, or benefits, or 
     prohibiting the discharge of an employee, discrimination 
     against an employee, or any other form of retaliation or 
     reprisal against an employee for asserting rights or 
     taking other actions permitted by law.
       Effective date.--The Senate amendment provision applies to 
     fees and costs paid after December 31, 2002, with respect to 
     any judgment or settlement occurring after such date.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     except for the effective date.
       Effective date.--The conference agreement applies to fees 
     and costs paid after the date of enactment with respect to 
     any judgment or settlement occurring after such date.
     3. Exclusion from gross income for amounts paid under 
         National Health Service Corps loan repayment program 
         (sec. 644 of the Senate amendment and sec. 108 of the 
         Code)


                              Present Law

       The National Health Service Corps Loan Repayment Program 
     (the ``NHSC Loan Repayment Program'') provides education loan 
     repayments to participants on condition that the participants 
     provide certain services. In the case of the NHSC Loan 
     Repayment Program, the recipient of the loan repayment is 
     obligated to provide medical services in a geographic area 
     identified by the Public Health Service as having a shortage 
     of health-care professionals. Loan repayments may be as much 
     as $35,000 per year of service plus a tax assistance payment 
     of 39 percent of the repayment amount.
       States may also provide for education loan repayment 
     programs for persons who agree to provide primary health 
     services in health professional shortage areas. Under the 
     Public Health Service Act, such programs may receive Federal 
     grants with respect to such repayment programs if certain 
     requirements are satisfied.
       Generally, gross income means all income from whatever 
     source derived including income for the discharge of 
     indebtedness. However, gross income does not include 
     discharge of indebtedness income if: (1) the discharge occurs 
     in a Title 11 case; (2) the discharge occurs when the 
     taxpayer is insolvent; (3) the indebtedness discharged is 
     qualified farm indebtedness; or (4) except in the case of a C 
     corporation, the indebtedness discharged is qualified real 
     property business indebtedness.
       Because the loan repayments provided under the NHSC Loan 
     Repayment Program or similar State programs under the Public 
     Health Service Act are not specifically excluded from gross 
     income, they are gross income to the recipient. There is also 
     no exception from employment taxes (FICA and FUTA) for such 
     loan repayments.


                               House Bill

       No provision.


                            Senate Amendment

       The provision excludes from gross income and employment 
     taxes education loan repayments provided under the NHSC Loan 
     Repayment Program and State programs eligible for funds under 
     the Public Health Service Act. The provision also provides 
     that such repayments are not taken into account as wages in 
     determining benefits under the Social Security Act.
       Effective date.--The provision is effective with respect to 
     amounts received in taxable years beginning after December 
     31, 2003.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     4. Certain expenses of rural letter carriers (sec. 645 of the 
         Senate amendment and sec. 162(o) of the Code)


                              Present Law

       The deductible automobile expenses of rural letter carriers 
     equal the reimbursements that such carriers receive from the 
     U.S. Postal Service. Carriers are not allowed to document 
     their actual costs and claim itemized deductions for costs in 
     excess of reimbursements,\363\ nor are carriers required to 
     include in income reimbursements in excess of their actual 
     costs.
---------------------------------------------------------------------------
     \363\ 363 Section 162(o).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, if the reimbursements a rural 
     letter carrier receives from the U.S. Postal Service fall 
     short of the carrier's actual costs, the costs in excess of 
     reimbursements qualify as a miscellaneous itemized deduction 
     subject to the two-percent floor. Reimbursements in excess of 
     their actual costs continue not to be required to be included 
     in gross income.
       Effective date.--The provisions is effective for taxable 
     years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     5. Method of accounting for naval shipbuilders (sec. 646 of 
         the Senate amendment)


                              Present Law

       Generally, taxpayers must use the percentage-of-completion 
     method to determine taxable income from long-term 
     contracts.\364\ Under sec. 10203(b)(2)(B) of the Revenue Act 
     of 1987,\365\ an exception exists for certain ship 
     construction contracts, which may be accounted for using the 
     40/60 percentage-of-completion/ capitalized cost method 
     (``PCCM''). Under the 40/60 PCCM, 60 percent of a taxpayer's 
     long-term contract income is exempt from the requirement to 
     use the percentage-of-completion method while 40 percent 
     remains subject to the requirement. The exempt 60 percent of 
     long-term contract income must be reported by consistently 
     using the taxpayer's exempt contract method. Permissible 
     exempt contract methods include the percentage of completion 
     method, the exempt-contract percentage-of-completion method, 
     and the completed contract method.\366\
---------------------------------------------------------------------------
     \364\ Sec. 460(a).
     \365\ Pub. Law No. 100-203 (1987).
     \366\ Treas. Reg. 1.460-4(c)(1).
---------------------------------------------------------------------------


                               House Bill

       No provision.

[[Page H8538]]

                            Senate Amendment

       The Senate amendment provides that qualified naval ship 
     contracts may be accounted for using the 40/60 PCCM during 
     the first five taxable years of the contract. The cumulative 
     reduction in tax resulting from the provision over the five-
     year period is recaptured and included in the taxpayer's tax 
     liability in the sixth year. Qualified naval ship contracts 
     are defined as any contract or portion thereof that is for 
     the construction in the United States of one ship or 
     submarine for the Federal Government if the taxpayer 
     reasonably expects the acceptance date will occur no later 
     than nine years after the construction commencement date.
       Effective date.--The Senate amendment is effective for 
     contracts with respect to which the construction commencement 
     date occurs after date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     the following modification. The provision specifies that the 
     construction commencement date is the date on which the 
     physical fabrication of any section or component of the ship 
     or submarine begins in the taxpayer's shipyard.
       Effective date.--The provision is effective for contracts 
     with respect to which the construction commencement date 
     occurs after date of enactment.
     6. Distributions to shareholders from policyholders surplus 
         account of life insurance companies (sec. 647 of the 
         Senate amendment and sec. 815 of the Code)


                         Prior and Present Law

       Under the law in effect from 1959 through 1983, a life 
     insurance company was subject to a three-phase taxable income 
     computation under Federal tax law. Under the three-phase 
     system, a company was taxed on the lesser of its gain from 
     operations or its taxable investment income (Phase I) and, if 
     its gain from operations exceeded its taxable investment 
     income, 50 percent of such excess (Phase II). Federal income 
     tax on the other 50 percent of the gain from operations was 
     deferred, and was accounted for as part of a policyholder's 
     surplus account and, subject to certain limitations, taxed 
     only when distributed to stockholders or upon corporate 
     dissolution (Phase III). To determine whether amounts had 
     been distributed, a company maintained a shareholders surplus 
     account, which generally included the company's previously 
     taxed income that would be available for distribution to 
     shareholders. Distributions to shareholders were treated as 
     being first out of the shareholders surplus account, then out 
     of the policyholders surplus account, and finally out of 
     other accounts.
       The Deficit Reduction Act of 1984 included provisions that, 
     for 1984 and later years, eliminated further deferral of tax 
     on amounts (described above) that previously would have been 
     deferred under the three-phase system. Although for taxable 
     years after 1983, life insurance companies may not enlarge 
     their policyholders surplus account, the companies are not 
     taxed on previously deferred amounts unless the amounts are 
     treated as distributed to shareholders or subtracted from the 
     policyholders surplus account (sec. 815).
       Under present law, any direct or indirect distribution to 
     shareholders from an existing policyholders surplus account 
     of a stock life insurance company is subject to tax at the 
     corporate rate in the taxable year of the distribution. 
     Present law (like prior law) provides that any distribution 
     to shareholders is treated as made (1) first out of the 
     shareholders surplus account, to the extent thereof, (2) then 
     out of the policyholders surplus account, to the extent 
     thereof, and (3) finally, out of other accounts.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision suspends for a stock life 
     insurance company's taxable years beginning after December 
     31, 2003, and before January 1, 2006, the application of the 
     rules imposing income tax on distributions to shareholders 
     from the policyholders surplus account of a life insurance 
     company (sec. 815). The provision also reverses the order in 
     which distributions reduce the various accounts, so that 
     distributions would be treated as first made out of the 
     policyholders surplus account, to the extent thereof, and 
     then out of the shareholders surplus account, and lastly out 
     of other accounts.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2003.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a modification.
       The conference agreement provision suspends for a stock 
     life insurance company's taxable years beginning after 
     December 31, 2004, and before January 1, 2007, the 
     application of the rules imposing income tax on distributions 
     to shareholders from the policyholders surplus account of a 
     life insurance company (sec. 815). The conference agreement 
     includes the Senate amendment provision reversing the order 
     in which distributions reduce the various accounts, so that 
     distributions would be treated as first made out of the 
     policyholders surplus account, to the extent thereof, and 
     then out of the shareholders surplus account, and lastly out 
     of other accounts.
       Effective date.--The conference agreement provision is 
     effective for taxable years beginning after December 31, 
     2004.
     7. Motor vehicle dealer transitional assistance (sec. 650 of 
         the Senate amendment)


                              Present Law

       Under present law, no gain or loss is recognized on the 
     exchange of property used in a trade or business or held for 
     investment if the property is exchanged solely for property 
     of like kind.\367\ To qualify for nonrecognition treatment, 
     the replacement property must be identified within 45 days 
     and the exchange must be completed within 180 days after the 
     transfer of the exchanged property. The basis of the 
     replacement property is determined by reference to the basis 
     of the exchanged property.
---------------------------------------------------------------------------
     \367\ Sec. 1031(a)(1).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides an election (on either an 
     original or amended return) to defer the gain on termination 
     payments received by a taxpayer from a motor vehicle 
     manufacturer on account of the termination of a motor vehicle 
     sales and service agreement, provided the proceeds are 
     reinvested within two years in property used in a domestic 
     motor vehicle dealership. Under the provision, a dealership 
     in which the proceeds are reinvested within two years is 
     treated as like kind replacement property under sec. 1031, 
     without regard to the time limitations on identification of 
     and acquisition of such replacement property under present 
     law. The provision extends the statute of limitations for 
     assessment of any deficiency attributable to gain on 
     termination payments until three years after the taxpayer 
     notifies the Secretary of the like-kind replacement property 
     or an intention not to replace.
       The Senate amendment applies only with respect to 
     termination payments from a motor vehicle manufacturer who 
     announced in December 2000 that it would phase out the motor 
     vehicle brand to which the agreement relates.
       Effective date.--The Senate amendment is effective for 
     amounts received after December 12, 2000, in taxable years 
     ending after that date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Expansion of designated renewal community area based on 
         2000 census data (sec. 651 of the Senate amendment and 
         sec. 1400E of the Code)


                              Present Law

       Section 1400E provides for the designation of certain 
     communities as renewal communities.\368\ An area designated 
     as a renewal community is eligible for the following tax 
     incentives: (1) a zero-percent rate for capital gain from the 
     sale of qualifying assets; (2) a 15-percent wage credit to 
     employers for the first $10,000 of qualified wages; (3) a 
     ``commercial revitalization deduction'' that allows taxpayers 
     (to the extent allocated by the appropriate State agency) to 
     deduct either (a) 50 percent of qualifying expenditures for 
     the taxable year in which a qualified building is placed in 
     service, or (b) all of the qualifying expenditures ratably 
     over a 10-year period beginning with the month in which such 
     building is placed in service; (4) an additional $35,000 of 
     section 179 expensing for qualified property; and (5) an 
     expansion of the work opportunity tax credit with respect to 
     individuals who live in a renewal community.
---------------------------------------------------------------------------
     \368\ Section 1400E was added by section 101(a) of the 
     Community Renewal Tax Relief Act of 2000, P.L. No. 106-554 
     (December 21, 2000).
---------------------------------------------------------------------------
       To be designated as a renewal community, a nominated area 
     was required to meet the following criteria: (1) each census 
     tract must have a poverty rate of at least 20 percent; (2) in 
     the case of an urban area, at least 70 percent of the 
     households have incomes below 80 percent of the median income 
     of households within the local government jurisdiction; (3) 
     the unemployment rate is at least 1.5 times the national 
     unemployment rate; and (4) the area is one of pervasive 
     poverty, unemployment, and general distress. There are no 
     geographic size limitations placed on renewal communities. 
     Instead, the boundary of a renewal community must be 
     continuous. In addition, the renewal community must have a 
     minimum population of 4,000 if the community is located 
     within a metropolitan statistical area (at least 1,000 in all 
     other cases), and a maximum population of not more than 
     200,000. The population limitations do not apply to any 
     renewal community that is entirely within an Indian 
     reservation.
       The designations of renewal communities were required to be 
     made by December 31, 2001, using 1990 census data to 
     determine relevant populations and poverty rates.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits the Secretary of Housing and 
     Urban Development to expand a renewal community to include: 
     (1) any census tract that at the time such community was 
     nominated, satisfied the requirements for inclusion in such 
     community but for the failure of such tract to satisfy one or 
     more of the population and poverty rate requirements using 
     1990 census data, and that satisfies all failed population 
     and poverty rate requirements using 2000 census data; or

[[Page H8539]]

     (2) an area that is adjacent to at least one other area 
     designated as a renewal community and that has a population 
     less than the generally applicable population requirement, if 
     the area is one of pervasive poverty, unemployment, and 
     general distress that is within the jurisdiction of one or 
     more local governments and the boundary of the area is 
     continuous, or the area contains a population of less than 
     100 people.
       Effective date.--The provision is effective as if included 
     in the amendments made by section 101 of the Community 
     Renewal Tax Relief Act of 2000.


                          Conference Agreement

       The conference agreement modifies the Senate amendment to 
     authorize the Secretary of Housing and Urban Development, at 
     the request of all of the governments that nominated a 
     renewal community, to add a contiguous census tract to a 
     renewal community in the following circumstances. First, the 
     renewal community, including any tract to be added, would 
     have met the renewal community eligibility requirements at 
     the time of the community's original nomination, and any 
     tract to be added has a poverty rate using 2000 census data 
     that exceeds the poverty rate of such tract using 1990 census 
     data. Second, a tract may be added to a renewal community 
     even if the addition of such tract to such community would 
     have caused the community to fail one or more eligibility 
     requirements when originally nominated using 1990 census 
     data, provided that: (1) the renewal community after the 
     inclusion of such tract does not have a population that 
     exceeds 200,000 using either 1990 or 2000 census data; (2) 
     such tract has a poverty rate of at least 20 percent using 
     2000 census data; and (3) such tract has a poverty rate using 
     2000 census data that exceeds the poverty rate of such tract 
     using 1990 census data. Census tracts that did not have a 
     poverty rate determined by the Bureau of the Census using 
     1990 data may be added to an existing renewal community 
     without satisfying requirement (3) above. Third, a tract may 
     be added to an existing renewal community if such tract: (1) 
     has no population using 2000 census data or no poverty rate 
     for such tract is determined by the Bureau of the Census 
     using 2000 census data; (2) such tract is one of general 
     distress; and (3) the renewal community, including such 
     tract, is within the jurisdiction of one or more local 
     governments and has a continuous boundary.
       Effective date.--The conference agreement provision is 
     effective as if included in the amendments made by section 
     101 of the Community Renewal Tax Relief Act of 2000.
     9. Reduction of holding period to 12 months for purposes of 
         determining whether horses are section 1231 assets (sec. 
         652 of the Senate amendment and sec. 1231 of the Code)


                              Present Law

       Under present law, gain from the sale or exchange of horses 
     held for draft, breeding, or sporting purposes qualify for 
     long-term capital gain if the horse has been held for 24 
     months or more.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment reduces the holding period for horses 
     to 12 months or more.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment.
     10. Blue ribbon commission on comprehensive tax reform (sec. 
         653 of the Senate amendment)


                              Present Law

       Under present law, there is no specially-appointed 
     commission designated to study and report on comprehensive 
     tax reform.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment establishes a commission to study and 
     report on comprehensive tax reform. Members of the commission 
     are to be appointed by Congressional leadership and the 
     President.
       Effective date.--Members must be appointed by October 30, 
     2004. The report is due no later than 18 months after all 
     members are appointed.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     11. Temporary accumulated earnings tax safe harbor (sec. 655 
         of the Senate amendment and sec. 537 of the Code)


                              Present Law

       Present law imposes an accumulated earnings tax on the 
     accumulated taxable income of a corporation that is formed or 
     availed of for the purpose of avoiding the income tax with 
     respect to its shareholders or the shareholders of any other 
     corporation, by permitting earnings and profits to accumulate 
     instead of being distributed.\369\
---------------------------------------------------------------------------
     \369\ Under present law, corporate income is taxed at 
     graduated rates ranging from 15 percent to 35 percent. A 
     corporation is also entitled to a dividends-received 
     deduction of at least 70 percent for dividends received from 
     other corporations. Thus, the maximum corporate rate on 
     dividends received from other corporations is 10.5 percent. 
     Individual income is generally taxed at graduated rates up to 
     35 percent. However, dividends are taxed at a maximum rate of 
     15 percent. The maximum individual rates are scheduled to 
     return to 39.6 percent on dividends as well as on other 
     ordinary income after the year 2009.
---------------------------------------------------------------------------
       The accumulated earnings tax is in addition to the regular 
     corporate level tax and is imposed at the maximum rate that 
     would be imposed on a dividend to an individual shareholder. 
     A corporation is generally permitted to accumulate an 
     exempted amount of $250,000 ($150,000 in the case of certain 
     service corporations); the tax is then imposed on accumulated 
     taxable income above that amount.
       The fact that earnings and profits are permitted to 
     accumulate beyond the reasonable needs of the business is 
     determinative of the purpose to avoid tax with respect to 
     shareholders, unless the corporation by the preponderance of 
     the evidence shall prove to the contrary. If a corporation is 
     a ``mere holding or investment company,'' that fact is prima 
     facie evidence of the prohibited purpose.\370\ Treasury 
     regulations provide that even in cases of accumulation of 
     earnings beyond the reasonable needs of the business or where 
     a corporation is a mere holding or investment company, such 
     facts are not absolutely conclusive against the taxpayer if 
     the taxpayer satisfies the Commissioner that the corporation 
     was neither formed not availed of for the purpose of avoiding 
     income tax with respect to shareholders.\371\
---------------------------------------------------------------------------
     \370\ Sec. 533.
     \371\ Treas. Reg. sec. 1.533-1(a).
---------------------------------------------------------------------------
       The determination whether earnings and profits have been 
     accumulated beyond the reasonable needs of the business is 
     based on facts and circumstances. The reasonable needs of the 
     business include ``reasonably anticipated'' needs of the 
     business.\372\ Some courts have applied a business cycle 
     approach in determining the basic working capital needs of a 
     business, to which additional reasonably anticipated future 
     needs may be added. Disputes have arisen regarding the choice 
     of business cycle and the proper addition of future 
     needs.\373\
---------------------------------------------------------------------------
     \372\ Treas. Reg. secs. 1. 537-1, 1.537-2 and 1.537-3.
     \373\ See, e.g., Bardahl Manufacturing Corp., 24 TCM 1030 
     (1965); Bardahl International Corp., 25 TCM 935 (1966); 
     Empire Steel Castings, Inc., 33 TCM 155 (1974); Alma-Piston 
     Co. v. Commissioner, 579 F.2d 1000 (6th Cir. 1978); C.E. 
     Hooper, Inc. 76-1 USTC par. 9185(Ct. Cl. 1976).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The bill provides that the reasonably anticipated needs of 
     a business for any taxable year shall include working capital 
     for the business in an amount which is not less than the sum 
     of the cost of goods, operating expenses, and interest 
     expense which the business incurred during the preceding 
     taxable year. Any amounts incurred as part of a plan a 
     principal purpose of which is to increase the limitation 
     under this provision is not taken into account.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2003 and before January 1, 2009.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     12. Tax Treatment of State Ownership of Railroad REIT (sec. 
         656 of the Senate amendment and secs. 103, 115, 336 and 
         337 of the Code)


                              Present Law

       A real estate investment trust (``REIT'') is an electing 
     entity that is engaged primarily in passive real estate 
     activities (as specifically defined) and that, among other 
     requirements, must have at least 100 shareholders. If a 
     qualified entity elects REIT status, it can be taxed 
     essentially as a pass-through entity, since it can obtain a 
     deduction for amounts distributed to its shareholders and it 
     is required to distribute at least 90 percent of its income 
     to shareholders annually.
       If an entity does not qualify to be treated as a REIT, it 
     would generally be treated as a regular C corporation subject 
     to tax under subchapter C of the Code and section 11 at the 
     corporate entity level, unless it elected to be taxed as a 
     partnership or disregarded entity under Treasury regulations. 
     Even if it made such an election, the C corporation would be 
     treated as if it had liquidated and distributed its assets to 
     shareholders, with a resulting corporate tax on the excess of 
     fair market value over basis of any corporate assets. A C 
     corporation that becomes a tax-exempt entity also must pay 
     corporate tax on the excess of the fair market value over the 
     basis of its assets.
       A State or local government is not subject to Federal 
     income tax on income from an activity that is an essential 
     governmental function.\374\
---------------------------------------------------------------------------
     \374\ Sec. 115.
---------------------------------------------------------------------------
       Interest on a State or local bond is excluded from gross 
     income, with certain exceptions.\375\ Special rules are also 
     provided as requirements for tax exemption for State and 
     local bonds.\376\
---------------------------------------------------------------------------
     \375\ Sec. 103.
     \376\ Secs. 141-150.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The bill provides that a qualified railroad corporation 
     that is a REIT that meets certain qualified activity 
     requirements (described further below) and that becomes 100 
     percent owned by a State after December 31,

[[Page H8540]]

     2003 and before December 31, 2005, will not be treated as a 
     taxable C corporation, but will be taxed as if its income 
     from the qualified activities accrued directly to the State. 
     To the extent its described railroad activities qualify under 
     present law as essential governmental functions, income from 
     such activities shall be tax exempt under section 115 of the 
     Code.
       Under the bill, no gain or loss shall be recognized from 
     the deemed conversion of such a REIT to a C corporation which 
     is tax-exempt, and no change in the basis of the property of 
     the entity shall occur.
       Also, any obligation issued by an entity described above is 
     treated as an obligation of a State for purposes of applying 
     the tax exempt bond provisions.
       A qualified railroad corporation that is a REIT must be a 
     non-operating Class III railroad, and substantially all of 
     its activities must consist of the ownership, leasing, and 
     operation by such corporation of facilities, equipment, and 
     other property used by the corporation or other persons in 
     railroad transportation.
       Effective date.--The bill applies on and after the date a 
     State becomes the owner of all the outstanding stock of a 
     qualified corporation, provided that the State becomes the 
     owner of all the voting stock of the corporation on or before 
     December 31, 2003 and becomes the owner of all the 
     outstanding stock of the corporation on or before December 
     31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     13. Contribution in aid of construction (sec. 657 of the 
         Senate amendment and sec. 118 of the Code)


                              Present Law

       Section 118(a) provides that gross income of a corporation 
     does not include a contribution to its capital. In general, 
     section 118(b) provides that a contribution to the capital of 
     a corporation does not include any contribution in aid of 
     construction or any other contribution as a customer or 
     potential customer and, as such, is includible in gross 
     income of the corporation. However, for any amount of money 
     or property received by a regulated public utility that 
     provides water or sewerage disposal services, such amount 
     shall be considered a contribution to capital (excludible 
     from gross income) so long as such amount: (1) is a 
     contribution in aid of construction, and (2) is not included 
     in the taxpayer's rate base for rate-making purposes. If the 
     contribution is in property other than water or sewerage 
     disposal facilities, the amount is generally excludible from 
     gross income only if the amount is expended to acquire or 
     construct water or sewerage disposal facilities within a 
     specified time period. A contribution in aid of construction 
     does not include a customer connection fee or amounts paid as 
     service charges for starting or stopping services.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment clarifies that water and sewer service 
     laterals (amounts paid to connect the customer's water 
     service line or sewer lateral line to the utility's 
     distribution or collection system, or to extend a main water 
     or sewer line to provide service to a customer) received by a 
     regulated public utility that provides water or sewerage 
     disposal services is considered a contribution to capital and 
     excludible from gross income of such utility.
       Effective date.--The Senate amendment provision is 
     effective for contributions made after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     14. Credit for purchase and installation of agricultural 
         water conservation systems (sec. 658 of the Senate 
         amendment)


                              Present Law

       There is no provision that provides for a credit for 
     agricultural water systems.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides a 30-percent credit (not to 
     exceed $500 per acre) for water conservation system expenses 
     for taxpayers who normally derive at least 50 percent of 
     their gross income from land. The term `water conservation 
     system expenses' means expenses for the purchase and 
     installation of a water conservation system but only if (1) 
     the land served by the water conservation system is entirely 
     in a county or county-equivalent area which has received, in 
     the taxable year the expenses were paid or incurred or in any 
     of the three preceding taxable years, a primary-county 
     designation due to drought by the Secretary of Agriculture, 
     and (2) such system is certified as saving at least 5 percent 
     more irrigation water than the irrigation system which was 
     used on such land immediately prior to the installation of 
     such water conservation system.
       The term `water conservation system' means (1) new or 
     replacement irrigation equipment and machinery, including 
     sprinklers, pipes, siphons, nozzles, pumps, motors, and 
     engines, and (2) computer systems for irrigation and water 
     management.
       The irrigation water savings shall be determined and 
     certified under regulations prescribed jointly by the Natural 
     Resources Conservation Service of the Department of 
     Agriculture and the Bureau of Reclamation of the Department 
     of the Interior. Such regulations shall include a list of 
     individuals or organizations qualified to make such 
     certification.
       No deduction is allowed with respect to any expenses taken 
     into account in determining the credit, and any increase in 
     the basis of any property which would result from such 
     expense shall be reduced by the amount of credit allowed for 
     such expense.
       Effective date.--The credit is available for expenses 
     occurred after date of enactment with respect to systems 
     completed after December 31, 2004 and prior to January 1, 
     2006.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.
     15. Modification of involuntary conversion rules for 
         businesses affected by the September 11th terrorist 
         attacks (sec. 659 of the Senate amendment and sec. 1400L 
         of the Code)


                              present law

       Generally, a taxpayer realizes gain to the extent the sales 
     price (and any other consideration received) exceeds the 
     taxpayer's basis in the property. The realized gain is 
     subject to current income tax unless the gain is deferred or 
     not recognized under a special tax provision.
       Under section 1033, gain realized by a taxpayer from an 
     involuntary conversion of property is deferred to the extent 
     the taxpayer purchases property similar or related in service 
     or use to the converted property within the applicable 
     period. The taxpayer's basis in the replacement property 
     generally is the same as the taxpayer's basis in the 
     converted property, decreased by the amount of any money or 
     loss recognized on the conversion, and increased by the 
     amount of any gain recognized on the conversion.
       The applicable period for the taxpayer to replace the 
     converted property begins with the date of the disposition of 
     the converted property (or if earlier, the earliest date of 
     the threat or imminence of requisition or condemnation of the 
     converted property) and ends two years after the close of the 
     first taxable year in which any part of the gain upon 
     conversion is realized (the ``replacement period''). Special 
     rules extend the replacement period for certain real property 
     and principle residences damaged by a Presidentially declared 
     disaster to three years and four years, respectively, after 
     the close of the first taxable year in which gain is 
     realized.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides special rules for property 
     which is compulsorily or involuntarily converted as a result 
     of the terrorist attacks on September 11, 2001, in the New 
     York Liberty Zone. The special rules provide that a 
     corporation which is a member of an affiliated group filing a 
     consolidated tax return shall be treated as satisfying the 
     repurchase requirement of section 1033 with respect to such 
     property to the extent the requirement is satisfied by 
     another member of the corporation's affiliated group. In 
     addition, the provision extends the replacement period for 
     such property to five years after the close of the first 
     taxable year in which gain is realized, if substantially all 
     the use of the replacement property is in New York City.
       Effective date.--The Senate amendment is effective for 
     involuntary conversions occurring on or after September 11, 
     2001.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     16. Repeal of application of below-market loan rules to 
         amounts paid to certain continuing care facilities (sec. 
         660 of the Senate amendment and sec. 7872 of the Code)


                              present law

       Certain loans that bear interest at a below-market interest 
     rate are treated as loans bearing interest at the market rate 
     accompanied by a payment or payments from the lender to the 
     borrower which are characterized in accordance with the 
     substance of the particular transaction (e.g., gift, 
     compensation, dividend, etc.).\377\ The market rate of 
     interest for purposes of the below-market loan rules is 
     assumed to be 100 percent of the applicable Federal rate 
     (``AFR'') at the time the loan is made in the case of a term 
     loan or, in the case of a demand loan, 100 percent of the AFR 
     in effect over the time that the loan is outstanding.
---------------------------------------------------------------------------
     \377\ Sec. 7872.
---------------------------------------------------------------------------
       In general, the below-market loan rules apply to (1) loans 
     where the foregone (i.e., below-market) interest is in the 
     nature of a gift, (2) loans between an employee and an 
     employer or between an independent contractor and one for 
     whom the independent contractor provides services, (3) loans 
     between a corporation and a shareholder of the corporation, 
     (4) loans of which one of the principal purposes of the 
     interest arrangement is the avoidance of Federal tax, (5) to 
     the extent provided in Treasury regulations, any other below-
     market loans if the interest arrangement of such loan has a 
     significant effect on any Federal tax liability of either the 
     lender or borrower, and (6) loans to any qualified continuing 
     care facility pursuant to a continuing care contract.
       In the case of loans made to qualified continuing care 
     facilities,\378\ an exception from

[[Page H8541]]

     the below-market loan rules is provided for any loan as of 
     the calendar year in which the lender has attained age 65, 
     provided the loan is made by the lender to the qualified 
     continuing care facility pursuant to a continuing care 
     contract.\379\ However, the exception applies only to the 
     extent that the principal amount of the loan, when added to 
     the aggregate outstanding amount of all other previous loans 
     between the lender (or the lender's spouse) and any qualified 
     continuing care facility, does not exceed $90,000. This 
     amount is indexed for inflation, and the amount for calendar 
     year 2004 is $154,500.\380\
---------------------------------------------------------------------------
     \378\ A ``qualified continuing care facility'' is defined as 
     one or more facilities (1) which are designed to provide 
     services under continuing care contracts, and (2) 
     substantially all of the residents of which are covered by 
     continuing care contracts. However, a facility is not a 
     qualified continuing care facility unless substantially all 
     facilities which are used to provide services that are 
     required to be provided under a continuing care contract are 
     owned or operated by the borrower. In addition, nursing homes 
     do not constitute continuing care facilities (sec. 
     7872(g)(4)).
     \379\ A ``continuing care contract'' is defined as a written 
     contract between an individual and a qualified continuing 
     care facility under which (1) the individual or individual's 
     spouse may use a qualified continuing care facility for their 
     life or lives, (2) the individual or individual's spouse (a) 
     will first reside in a separate, independent living unit with 
     additional facilities outside such unit for the providing of 
     meals and other personal care, and (b) then will be provided 
     long-term and skilled nursing care as the health of such 
     individual or individual's spouse requires, and (3) no 
     additional substantial payment is required if such individual 
     or individual's spouse requires increased personal care 
     services or long-term and skilled nursing care.
     \380\ Rev. Rul. 2003-118, 2003-47 I.R.B. 1095.
---------------------------------------------------------------------------
       With regard to continuing care facilities that are not 
     qualified continuing care facilities, the IRS takes the 
     position that loans made to such facilities by residents are 
     not subject to the below-market loan rules until and unless 
     Treasury regulations are issued that treat such loans as 
     having a significant effect on any Federal tax liability 
     of either the facility or the resident.\381\
---------------------------------------------------------------------------
     \381\ Tech. Adv. Mem. 9521001 (Dec. 7, 1994).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment repeals the application of the below-
     market loan rules to loans that are made to any qualified 
     continuing care facility pursuant to a continuing care 
     contract, without regard to the principal amount of the loan 
     (including the aggregate outstanding amount of any other 
     previous loans between the resident or resident's spouse and 
     any qualified continuing care facility). The Senate amendment 
     also clarifies that the determination of whether a facility 
     is a qualified continuing care facility is to be made on an 
     annual basis at the end of each calendar year, rather than 
     only when the continuing care contract is entered into. In 
     addition, the Senate amendment modifies the definition of a 
     continuing care contract to (1) not exclude contracts that 
     require additional substantial payment for increased personal 
     care services required by the resident or resident's spouse, 
     and (2) provide authority for the Treasury to issue guidance 
     that limits such definition to contracts that provide to the 
     resident or resident's spouse only facilities, care and 
     services that are customarily offered by continuing care 
     facilities. The Senate amendment also clarifies that the 
     definition of a qualified continuing care facility requires 
     substantially all of the independent living unit residents of 
     the facility to be covered by continuing care contracts.
       The Senate amendment does not affect the present-law 
     application of the below-market loan rules to loans made to 
     any continuing care facility that is not a qualified 
     continuing care facility.
       Effective date.--The Senate amendment provision applies to 
     calendar years beginning after December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     17. Maximum capital gain rates of individuals for gold, 
         silver, platinum, and palladium (sec. 661 of the Senate 
         amendment and sec. 1(h) of the Code)


                              Present Law

       Under present law, the net capital gain of an individual is 
     generally taxed at a maximum rate of 15 percent (five percent 
     for gain otherwise taxed at the 10- or 15-percent rate). 
     However, the maximum tax rate for individuals from the sale 
     or exchange of a collectible is 28 percent. Gold, silver, 
     platinum or palladium bullion is defined as a collectible for 
     this purpose.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, gold, silver, platinum and 
     palladium bullion is not treated as a ``collectible'' for 
     purposes of applying the individual capital gain rates. Thus, 
     gain or loss from the sale of the bullion will qualify for 
     the lower five- and 15-percent capital gain rates.
       Effective date.--Taxable years beginning after December 31, 
     2003.


                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment.
     18. Inclusion of primary and secondary medical strategies for 
         children and adults with sickle cell disease as medical 
         assistance under the medicaid program (sec. 662 of the 
         Senate amendment)


                              Present Law

       Medicaid programs are generally operated by the States, in 
     part with funds received from the Federal government. Within 
     broad Federal guidelines, States can design the scope and 
     availability of Medicaid benefits. Medicaid law requires 
     States to provide certain services including, for example, 
     hospital and physician services. Federal funds are available 
     for additional optional services if States choose to include 
     them in their Medicaid plans. Within Federal guidelines, 
     States may limit the amount, duration of any Medicaid 
     service. Under present law, States may have covered some of 
     the primary and secondary medical strategies, treatments, and 
     services for Sickle Cell Disease, however such services are 
     not specifically listed in the Medicaid statute as either 
     mandatory or optional services.
       The Federal government shares in States' Medicaid service 
     costs by means of a statutory formula designed to provide a 
     higher Federal matching rate to States with lower per capita 
     incomes. The Federal share is referred to as the Federal 
     Medical Assistance Percentage (``FMAP''). For some Medicaid 
     services and activities, such as costs associated with 
     program administration, the FMAP rate is set in statute. 
     Because Medicaid is an individual entitlement, there is no 
     annual ceiling on Federal expenditures; however, in order 
     to continue receiving Federal payments, States must 
     contribute their share of the matching funds.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment amends Title XIX of the Social 
     Security Act to add primary and secondary medical strategies, 
     treatment and services for individuals who have Sickle Cell 
     Disease as a new optional medical assistance category under 
     the Medicaid program. Such strategies, treatment, and 
     services include: (1) chronic blood transfusion (with 
     deferoxamine chelation) to prevent stroke in individuals with 
     Sickle Cell Disease who have been identified as being at high 
     risk for stroke; (2) genetic counseling, testing, and 
     treatment for individuals with Sickle Cell Disease or the 
     Sickle Cell trait; and (3) other treatment and services to 
     prevent individuals who have Sickle Cell Disease and who have 
     had a stroke having another stroke. The amendment sets the 
     FMAP rate at 50 percent for costs attributable to providing: 
     (1) services to identify and educate likely Medicaid 
     enrollees who have or are carriers of Sickle Cell Disease; or 
     (2) education regarding the risks of stroke and other 
     complications, as well as the prevention of stroke and 
     complications for likely Medicaid enrollees with Sickle Cell 
     Disease.
       The Senate amendment also authorizes an appropriation in 
     the amount of $10,000,000 for each of fiscal years 2005 
     through 2009 for a demonstration program under which the 
     Administrator of the Health Resources and Services 
     Administration (through the Bureau of Primary Health Care and 
     the Maternal Child Health Bureau) would make grants up to 40 
     eligible entities in each such fiscal year for the 
     development and establishment of systemic mechanisms for the 
     prevention and treatment of the Sickle Cell Disease. Eligible 
     entities include Federally-qualified health centers as 
     defined in the Medicaid statute; nonprofit hospitals or 
     clinics, or university health centers that provide primary 
     health care that: (1) have a collaborative agreement with a 
     community-based Sickle Cell Disease organization or a 
     nonprofit entity with experience in working with individuals 
     who have the Sickle Cell Disease; and (2) demonstrate that 
     they have at least five years of experience in working with 
     individuals who have the Sickle Cell Disease. Systematic 
     mechanisms for the prevention and treatment of the Sickle 
     Cell Disease include: (1) coordination of service delivery 
     for individuals with the disease; (2) genetic counseling and 
     testing; (3) bundling of technical services related to the 
     prevention and treatment of the disease; (4) training health 
     professionals; and (5) identifying and establishing efforts 
     related to the expansion and coordination of education, 
     treatment, and continuity of care programs for individuals 
     with the disease.
       In awarding such grants to eligible entities, the 
     Administrator of Health Resources and Services Administration 
     is to take into consideration geographic diversity and to 
     give priority to: (1) Federally-qualified health centers that 
     have a partnership or other arrangement with a comprehensive 
     Sickle Cell Disease treatment center and does not receive 
     funds from the National Institutes of Health; or (2) 
     Federally-qualified health centers that intend to develop a 
     partnership or other arrangement with a comprehensive Sickle 
     Cell Disease treatment center, and that does not receive 
     funds from the National Institutes of Health. Eligible 
     entities that are awarded grants are required to use the 
     funds for the following activities: (1) to facilitate and 
     coordinate the delivery of education, treatment, and 
     continuity of care under: (a) the entity's collaborative 
     agreement with a community-based Sickle Cell Disease 
     organization or a nonprofit entity that works with 
     individuals who have Sickle Cell Disease; (b) the Sickle Cell 
     Disease newborn screening program for the State in which the 
     entity is located; and (c) the Maternal and Child Health 
     program for the State in which the entity is located; (2) to 
     train nursing and other health staff who provide care for 
     individuals with Sickle Cell Disease; (3) to enter into a 
     partnership with

[[Page H8542]]

     adult or pediatric hematologists in the region and other 
     regional experts in the Sickle Cell Disease at tertiary or 
     academic health centers and State and county health offices; 
     and (4) to identify and secure resources for ensuring 
     reimbursement under the Medicaid program, State children's 
     health insurance program, and other health programs for the 
     prevention and treatment of Sickle Cell Disease.
       The Senate amendment also requires the Administrator of 
     Health Resources and Services Administration to enter into a 
     contract with an entity and to serve as a National 
     Coordinating Center for the demonstration program. The center 
     is to: (1) collect, coordinate, monitor and distribute data, 
     best practices, and findings regarding the activities funded 
     under grants made to eligible entities under the 
     demonstration program; (2) develop a model protocol for 
     eligible entities with respect to prevention and treatment of 
     the disease; (3) develop educational materials regarding the 
     prevention and treatment of the disease; and (4) submit a 
     written report to Congress. The written report to Congress 
     should include recommendations on the effectiveness of the 
     demonstration program direct outcome measures, such as the 
     number and type of health care resources utilized (such as 
     emergency room visits, hospital visits, length of stay, and 
     physician visits for individuals with Sickle Cell Disease) 
     and the number of individuals that were tested and 
     subsequently received genetic counseling for the sickle cell 
     trait.
       Effective date.--The Senate amendment is effective on the 
     date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     provision.
     19. Mortgage payment assistance (secs. 901 and 902 of the 
         Senate amendment)


                              Present Law

       There is no provision in present law that authorizes the 
     Secretary of Housing and Urban Development to award low-
     interest loans to individuals adversely affected by 
     international economic activity to enable such individuals to 
     make mortgage payments with respect to their primary 
     residences.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment requires the Secretary of Housing and 
     Urban Development (the ``Secretary'') to establish a program 
     for awarding low-interest loans to eligible individuals to 
     enable such individuals to continue making mortgage payments 
     with respect to their primary residences. The provision 
     provides that the Secretary shall issue regulations no later 
     than six weeks after the date of enactment to implement this 
     program.
       An individual eligible to receive a loan under the program 
     must be: (1) a worker that is adversely affected by 
     international economic activity, as determined by the 
     Secretary; (2) a borrower on a loan that requires monthly 
     mortgage payments with respect to the primary residence of 
     the individual; and (3) enrolled in a training or assistance 
     program. The amount of a loan provided under the program 
     cannot exceed the aggregate amount of monthly mortgage 
     payments the borrower would owe during a 12-month period. In 
     addition, a loan provided under the program must have an 
     applicable interest rate of four percent and must provide for 
     monthly repayments over a five-year period.
       The provision authorizes appropriations of $10 million for 
     each of the years 2005 through 2009 to carry out the purposes 
     of the provision.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     20. Protection of overtime pay (secs. 489-490 of the Senate 
         amendment and sec. 13 of the Fair Labor Standards Act of 
         1938)


                              Present Law

       The Fair Labor Standards Act of 1938 (``FLSA'') establishes 
     minimum wage and overtime pay requirements that apply to 
     employees, subject to certain exemptions.\382\ On April 23, 
     2004, the Department of Labor issued revised regulations 
     implementing exemptions from the FLSA minimum wage and 
     overtime pay requirements.\383\ Among other changes, the 
     regulations increased the salary threshold for employees to 
     be exempt from these requirements.
---------------------------------------------------------------------------
     \382\ See, sections 6, 7, and 13 of the FLSA, 29 U.S.C. 
     sections 206, 207, and 213 (2004).
     \383\ 69 Fed. Reg. 22,122 (April 23, 2004).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment contains provisions relating to the 
     authority of the Secretary of Labor to issue regulations 
     implementing the overtime pay requirement and the effect of 
     recently issued regulations.
       Under the Senate amendment, the Secretary of Labor may not 
     issue any regulation that exempts from the overtime pay 
     requirement any employee who earns less than $23,660 per 
     year. In addition, the Secretary of Labor may not issue any 
     regulation concerning the right to overtime pay that is not 
     as protective, or more protective, of the overtime pay rights 
     of employees in certain specified occupations or job 
     classifications (as listed in the provision) as the 
     protections provided for such employees under the regulations 
     in effect on March 31, 2003. Any portion of a regulation 
     issued after March 31, 2003, that modifies the overtime pay 
     requirement in a manner that is inconsistent with the 
     provisions of the Senate amendment will have no force or 
     effect as it relates to the occupation or job classification 
     involved.
       The Senate amendment also provides that, notwithstanding 
     the Administrative Procedures Act or any other provision of 
     law, any portion of the Labor regulations issued on April 23, 
     2004, that exempts from the overtime pay requirement any 
     employee who would not otherwise be exempt if the regulations 
     in effect on March 31, 2003, remained in effect, will have no 
     force or effect. In addition, the portion of the regulations 
     (as in effect on March 31, 2003) that would prevent any 
     employee from being exempt shall remain in effect. 
     Nonetheless, the increased salary requirements provided for 
     in the regulations issued on April 23, 2004, will remain in 
     effect.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provisions.
     21. Report on acquisitions of goods from foreign sources 
         (sec. 1001 of the Senate amendment and sec. 43 of the 
         Office of Federal Procurement Policy Act)


                              Present Law

       Public Law 93-400, ``The Office of Federal Procurement 
     Policy Act'', as amended, created the Office of Federal 
     Procurement Policy (``OFPP'') in 1974 and placed it in the 
     Office of Management and Budget (``OMB''). The OFPP was 
     created, among other purposes, to provide Government-wide 
     procurement policies which are to be followed by Executive 
     agencies in procurement activities.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that, not later than 60 days 
     after the end of each fiscal year, each executive agency is 
     to submit to the Congress a report on the acquisitions that 
     were made of articles, materials, or supplies by the agency 
     in that fiscal year from sources outside the United States. 
     The report is to separately include the following 
     information: (1) the dollar value of any articles, materials, 
     or supplies that were manufactured outside the United States; 
     (2) an itemized list of all waivers granted with respect to 
     such articles, materials, or supplies under the Buy American 
     Act; and (2) a summary of the (a) the total procurement funds 
     expended on articles, materials and supplies manufactured 
     outside the United States and (b) the total procurement funds 
     expended on articles, materials, and supplies manufactured 
     outside the Untied States. The agency is to make the report 
     publicly available by posting the report on the Internet.
       The reporting requirement does not apply to any procurement 
     for national security purposes entered into by: (1) the 
     Department of Defense or any agency or entity thereof; (2) 
     the Departments of the Army, Navy, and Air Force or any 
     agency or entity of any of the military departments; (3) the 
     Department of Homeland Security; (4) the Department of Energy 
     or any agency or entity thereof, with respect to the national 
     security programs of the Department of Energy; or (5) any 
     element of the intelligence community.
       The Senate amendment also provides that, not later than 60 
     days after the end of each fiscal year ending after the date 
     of enactment, the Secretary of Commerce is to submit to 
     Congress a report on the acquisitions by foreign governments 
     of articles, materials, or supplies that were manufactured or 
     extracted in the United States in that fiscal year. The 
     report is to indicate the dollar value of such articles, 
     materials, or supplies and is to be made publicly available 
     by posting on the Internet.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     22. Minimum cost requirement for excess asset transfers (sec. 
         719 of the Senate amendment and sec. 420 of the Code)


                              Present Law

       Defined benefit plan assets generally may not revert to an 
     employer prior to termination of the plan and satisfaction of 
     all plan liabilities. In addition, a reversion may occur only 
     if the plan so provides. A reversion prior to plan 
     termination may constitute a prohibited transaction and may 
     result in plan disqualification. Any assets that revert to 
     the employer upon plan termination are includible in the 
     gross income of the employer and subject to an excise tax. 
     The excise tax rate is 20 percent if the employer maintains a 
     replacement plan or makes certain benefit increases in 
     connection with the termination; if not, the excise tax rate 
     is 50 percent. Upon plan termination, the accrued benefits of 
     all plan participants are required to be 100-percent vested.
       A pension plan may provide medical benefits to retired 
     employees through a separate account that is part of such 
     plan. A qualified transfer of excess assets of a defined 
     benefit plan to such a separate account within the

[[Page H8543]]

     plan may be made in order to fund retiree health 
     benefits.\384\ A qualified transfer does not result in plan 
     disqualification, is not a prohibited transaction, and is not 
     treated as a reversion. Thus, transferred assets are not 
     includible in the gross income of the employer and are not 
     subject to the excise tax on reversions. No more than one 
     qualified transfer may be made in any taxable year. No 
     qualified transfer may be made after December 31, 2013.
---------------------------------------------------------------------------
     \384\ Sec. 420.
---------------------------------------------------------------------------
       Excess assets generally means the excess, if any, of the 
     value of the plan's assets\385\ over the greater of (1) the 
     accrued liability under the plan (including normal cost) or 
     (2) 125 percent of the plan's current liability.\386\ In 
     addition, excess assets transferred in a qualified transfer 
     may not exceed the amount reasonably estimated to be the 
     amount that the employer will pay out of such account during 
     the taxable year of the transfer for qualified current 
     retiree health liabilities. No deduction is allowed to the 
     employer for (1) a qualified transfer or (2) the payment of 
     qualified current retiree health liabilities out of 
     transferred funds (and any income thereon).
---------------------------------------------------------------------------
     \385\ The value of plan assets for this purpose is the lesser 
     of fair market value or actuarial value.
     \386\ In the case of plan years beginning before January 1, 
     2004, excess assets generally means the excess, if any, of 
     the value of the plan's assets over the greater of (1) the 
     lesser of (a) the accrued liability under the plan (including 
     normal cost) or (b) 170 percent of the plan's current 
     liability (for 2003), or (2) 125 percent of the plan's 
     current liability. The current liability full funding limit 
     was repealed for years beginning after 2003. Under the 
     general sunset provision of EGTRRA, the limit is reinstated 
     for years after 2010.
---------------------------------------------------------------------------
       Transferred assets (and any income thereon) must be used to 
     pay qualified current retiree health liabilities for the 
     taxable year of the transfer. Transferred amounts generally 
     must benefit pension plan participants, other than key 
     employees, who are entitled upon retirement to receive 
     retiree medical benefits through the separate account. 
     Retiree health benefits of key employees may not be paid out 
     of transferred assets.
       Amounts not used to pay qualified current retiree health 
     liabilities for the taxable year of the transfer are to be 
     returned to the general assets of the plan. These amounts are 
     not includible in the gross income of the employer, but are 
     treated as an employer reversion and are subject to a 20-
     percent excise tax.
       In order for a transfer to be qualified, accrued retirement 
     benefits under the pension plan generally must be 100-percent 
     vested as if the plan terminated immediately before the 
     transfer (or in the case of a participant who separated in 
     the one-year period ending on the date of the transfer, 
     immediately before the separation).
       In order for a transfer to be qualified, the transfer must 
     meet the minimum cost requirement. To satisfy the minimum 
     cost requirement, an employer generally must maintain retiree 
     health benefits at the same level for the taxable year of the 
     transfer and the following four years (referred to as the 
     cost maintance period). The applicable employer cost 
     during the cost maintenance period cannot be less than the 
     higher of the applicable employer costs for each of the 
     two taxable years preceding the taxable year of the 
     transfer. The applicable employer cost is generally 
     determined by dividing the current retiree health 
     liabilities by the number of individuals provided coverage 
     for applicable health benefits during the year. The 
     Secretary is directed to prescribe regulations as may be 
     necessary to prevent an employer who significantly reduces 
     retiree health coverage during the period from being 
     treated as satisfying the minimum cost requirement.
       Under Treasury regulations,\387\ the minimum cost 
     requirement is not satisfied if the employer significantly 
     reduces retiree health coverage during the cost maintenance 
     period. Under the regulations, an employer significantly 
     reduces retiree health coverage for a year (beginning after 
     2001) during the cost maintenance period if either (1) the 
     employer-initiated reduction percentage for that taxable year 
     exceeds 10 percent, or (2) the sum of the employer-initiated 
     reduction percentages for that taxable year and all prior 
     taxable years during the cost maintenance period exceeds 20 
     percent.\388\ The employer-initiated reduction percentage is 
     percentage of the number of individuals receiving coverage 
     for applicable health benefits as of the day before the first 
     day of the taxable year over the total number of such 
     individuals whose coverage for applicable health benefits 
     ended during the taxable year by reason of employer 
     action.\389\
---------------------------------------------------------------------------
     \387\ Treas. Reg. sec. 1.420-1(a).
     \388\ Treas. Reg. sec. 1.420-1(b)(1).
     \389\ Treas. Reg. sec. 1.420-1(b)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that an eligible employer 
     does not fail the minimum cost requirement if, in lieu of any 
     reduction of health coverage permitted by Treasury 
     regulations, the employer reduces applicable employer cost by 
     an amount not in excess of the reduction in costs which would 
     have occurred if the employer had made the maximum 
     permissible reduction in retiree health coverage under such 
     regulations. An employer is an eligible employer if, for the 
     preceding taxable year, the qualified current retiree health 
     liabilities of the employer were at least five percent of 
     gross receipts.
       In applying such regulations to any subsequent taxable 
     year, any reduction in applicable employer cost under the 
     proposal is treated as if it were an equivalent reduction in 
     retiree health coverage.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                    TITLE IX--ENERGY TAX INCENTIVES

        A. Credit for Electricity Produced From Certain Sources

     (sec. 801 of the Senate amendment and sec. 45 of the Code)


                              Present Law

       An income tax credit is allowed for the production of 
     electricity from either qualified wind energy, qualified 
     ``closed-loop'' biomass, or qualified poultry waste 
     facilities (sec. 45). The amount of the credit is 1.5 cents 
     per kilowatt-hour (indexed for inflation) of electricity 
     produced. The amount of the credit is 1.8 cents per kilowatt-
     hour for 2004. The credit is reduced for grants, tax-exempt 
     bonds, subsidized energy financing, and other credits.
       The credit applies to electricity produced by a wind energy 
     facility placed in service after December 31, 1993, and 
     before January 1, 2006, to electricity produced by a closed-
     loop biomass facility placed in service after December 31, 
     1992, and before January 1, 2006, and to a poultry waste 
     facility placed in service after December 31, 1999, and 
     before January 1, 2006. The credit is allowable for 
     production during the 10-year period after a facility is 
     originally placed in service. In order to claim the credit, a 
     taxpayer must own the facility and sell the electricity 
     produced by the facility to an unrelated party. In the case 
     of a poultry waste facility, the taxpayer may claim the 
     credit as a lessee/operator of a facility owned by a 
     governmental unit.


                               House Bill

       No provision.


                            Senate Amendment

     Extension of placed in service date for existing facilities
       The Senate amendment extends the placed in service date for 
     wind facilities, closed-loop biomass facilities, and poultry 
     waste facilities to facilities placed in service after 
     December 31, 1993 (December 31, 1992, in the case of closed-
     loop biomass facilities and December 31, 1999, in the case of 
     poultry waste facilities) and before January 1, 2007.
     Modification of credit amount
       The Senate amendment modifies the credit rate applicable to 
     electricity produced from after December 31, 2004 from 
     facilities placed in service after December 31, 2004 to be 
     1.8 cents per kilowatt hour and repeals the indexing of the 
     credit amount.
     Additional qualifying facilities
       The Senate amendment also defines six new qualifying energy 
     resources: open-loop biomass including agricultural livestock 
     waste nutrients, geothermal energy, solar energy, municipal 
     biosolids and sludge, small irrigation, and municipal solid 
     waste.
       Open-loop biomass is defined as any solid, nonhazardous, 
     cellulosic waste material which is segregated from other 
     waste materials and which is derived from any of forest-
     related resources, solid wood waste materials, or 
     agricultural sources. Eligible forest-related resources are 
     mill residues, other than spent chemicals from pulp 
     manufacturing, precommercial thinnings, slash, and brush. 
     Solid wood waste materials include waste pallets, crates, 
     dunnage, manufacturing and construction wood wastes (other 
     than pressure-treated, chemically-treated, or painted wood 
     wastes), and landscape or right-of-way tree trimmings. 
     Agricultural sources include orchard tree crops, vineyard, 
     grain, legumes, sugar, and other crop by-products or 
     residues. However, qualifying open-loop biomass does not 
     include municipal solid waste (garbage), gas derived from 
     biodegradation of solid waste, or paper that is commonly 
     recycled. In addition, open-loop biomass does not include 
     closed-loop biomass or any biomass burned in conjunction with 
     fossil fuel (cofiring) beyond such fossil fuel required for 
     start up and flame stabilization.
       Agricultural livestock waste nutrients are defined as 
     agricultural livestock manure and litter, including bedding 
     material for the disposition of manure.
       Geothermal energy is energy derived from a geothermal 
     deposit which is a geothermal reservoir consisting of natural 
     heat which is stored in rocks or in an aqueous liquid or 
     vapor (whether or not under pressure).
       Municipal biosolids and sludge are the residue or solids 
     removed by a municipal wastewater treatment facility. Sludge 
     is the recycled residue byproduct created in the treatment of 
     commercial, industrial, municipal, or navigational 
     wastewater, but not including residues from incineration.
       A small irrigation power facility is a facility that 
     generates electric power through an irrigation system canal 
     or ditch without any dam or impoundment of water. The 
     installed capacity of a qualified facility is less than five 
     megawatts.
       Qualifying open-loop biomass facilities, other than 
     qualifying agricultural livestock waste nutrient facilities 
     are facilities using open-loop biomass to produce electricity 
     that are placed in service prior to January 1, 2005. 
     Qualifying agricultural livestock waste

[[Page H8544]]

     nutrient facilities are facilities using agricultural 
     livestock waste nutrients to produce electricity that are 
     placed in service after December 31, 2004 and before January 
     1, 2007. Qualifying geothermal energy facilities are 
     facilities using geothermal deposits to produce electricity 
     that are placed in service after December 31, 2004 and before 
     January 1, 2007. Qualifying solar energy facilities are 
     facilities using solar energy to generate electricity that 
     are placed in service December 31, 2004 and before January 1, 
     2007. Qualifying municipal biosolids and sludge facilities 
     are facilities using municipal biosolids or sludge to 
     generate electricity that are originally placed in service 
     after December 31, 2004, and before January 1, 2007. 
     Qualifying small irrigation power facilities are facilities 
     using small irrigation power systems to generate electricity 
     that are originally placed in service after December 31, 2004 
     and before January 1, 2007. Qualifying municipal solid waste 
     facilities are facilities or units incinerating municipal 
     solid waste placed in service after December 31, 2004 and 
     before January 1, 2007.
       In the case of qualifying open-loop biomass facilities 
     placed in service prior to January 1, 2005, taxpayers may 
     claim a credit of 1.2 cents per kilowatt hour, rather than 
     1.8 cents per kilowatt hour for the five-year period 
     beginning on January 1, 2005. the otherwise allowable credit 
     for a three-year period. For a facility placed in service 
     after the date of enactment, the three-year period commences 
     when the facility is placed in service.
       In addition, the Senate amendment modifies present law to 
     provide that qualifying closed-loop biomass facilities 
     include any facility originally placed in service before 
     December 31, 1992 and modified to use closed-loop biomass to 
     co-fire with coal, with other biomass, or both, before 
     January 1, 2007. The amount of credit the taxpayer may claim 
     credit is adjusted for the thermal value of the qualifying 
     closed-loop biomass relative to the thermal value of the 
     closed-loop biomass and the coal. The ten-year credit period 
     for such a qualifying facility commences no earlier than 
     January 1, 2005.
     Credit claimants and treatment of other subsidies
       In the case of qualifying open-loop biomass facilities and 
     qualifying closed-loop biomass facilities modified to use 
     closed-loop biomass to co-fire with coal, the Senate 
     amendment permits a lessee operator to claim the credit in 
     lieu of the owner of the facilities.
       The Senate amendment provides that certain persons (public 
     utilities, electric cooperatives, rural electric 
     cooperatives, and Indian tribes) may sell, trade, or assign 
     to any taxpayer any credits that would otherwise be allowable 
     to that person, if that person were a taxpayer, for 
     production of electricity from a qualified facility owned by 
     such person. However, any credit sold, traded, or assigned 
     may only be sold, traded, or assigned once. Subsequent trades 
     are not permitted. In addition, any credits that would 
     otherwise be allowable to such person, to the extent provided 
     by the Administrator of the Rural Electrification 
     Administration, may be applied as a prepayment to certain 
     loans or obligations undertaken by such person under the 
     Rural Electrification Act of 1936.
       The Senate amendment repeals the present-law reduction in 
     allowable credit for facilities financed with tax-exempt 
     bonds or with certain loans received under the Rural 
     Electrification Act of 1936.
       Effective date.--The Senate amendment is generally is 
     effective for electricity sold from qualifying facilities 
     after December 31, 2004. For electricity produced from 
     qualifying open-loop biomass facilities originally placed in 
     service prior to the date of enactment, the provision is 
     effective January 1, 2005.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications.
     Extension of placed in service date for existing facilities
       The conference agreement does not include the provisions of 
     the Senate amendment with respect to the extension of placed 
     in service dates for qualifying wind, closed-loop, and 
     poultry waste facilities.
     Modification of placed in service date for existing 
         facilities
       The conference agreement includes the Senate amendment 
     provision with respect to qualifying closed-loop biomass 
     facilities modified to use closed-loop biomass to co-fire 
     with coal, to co-fire with other biomass, or to co-fire with 
     coal and other biomass, with the modification that the 10-
     year credit period begin no earlier than the date of 
     enactment of the provision.
     Additional qualifying resource and facilities
       The conference agreement also defines five new qualifying 
     resources for the production of electricity: open-loop 
     biomass (including agricultural livestock waste nutrients), 
     geothermal energy, solar energy, small irrigation power, and 
     municipal solid waste. Two different qualifying facilities 
     use municipal solid waste as a qualifying resource: landfill 
     gas facilities and trash combustion facilities. In addition, 
     the conference agreement defines refined coal as a qualifying 
     resource.
       Qualifying open-loop biomass facilities are facilities 
     using biomass to produce electricity that are placed in 
     service prior to January 1, 2006. Qualifying agricultural 
     livestock waste nutrient facilities are facilities using 
     agricultural livestock waste nutrients to produce electricity 
     that are placed in service after the date of enactment and 
     before January 1, 2006. The installed capacity of a qualified 
     agricultural livestock waste nutrient facility is not less 
     than 150 kilowatts.
       Qualifying geothermal energy facilities are facilities 
     using geothermal deposits to produce electricity that are 
     placed in service after the date of enactment and before 
     January 1, 2006. Qualifying solar energy facilities are 
     facilities using solar energy to generate electricity that 
     are placed in service after the date of enactment and before 
     January 1, 2006. A qualifying geothermal energy facility or 
     solar energy facility may not have claimed any credit under 
     sec. 48 of the Code.\390\
---------------------------------------------------------------------------
     \390\ If a geothermal facility or solar facility claims 
     credit for any year under section 45 of the Code, the 
     facility is precluded from claiming any investment credit 
     under section 48 of the Code in the future.
---------------------------------------------------------------------------
       A qualified small irrigation power facility is a facility 
     originally placed in service after the date of enactment and 
     before January 1, 2006. A small irrigation power facility is 
     a facility that generates electric power through an 
     irrigation system canal or ditch without any dam or 
     impoundment of water. The installed capacity of a qualified 
     facility is not less than 150 kilowatts and less than five 
     megawatts.
       Landfill gas is defined as methane gas derived from the 
     biodegradation of municipal solid waste. Trash combustion 
     facilities are facilities that burn municipal solid waste 
     (garbage) to produce steam to drive a turbine for the 
     production of electricity. Qualifying landfill gas facilities 
     and qualifying trash combustion facilities include facilities 
     used to produce electricity placed in service after the date 
     of enactment and before January 1, 2006.
       Refined coal is a qualifying liquid, gaseous, or solid 
     synthetic fuel produced from coal (including lignite) or 
     high-carbon fly ash, including such fuel used as a feedstock. 
     A qualifying fuel is a fuel that when burned emits 20 percent 
     less SO2 and nitrogen oxides than the burning of 
     feedstock coal or comparable coal predominantly available in 
     the marketplace as of January 1, 2003, and if the fuel sells 
     at prices at least 50 percent greater than the prices of the 
     feedstock coal or comparable coal. In addition, to be 
     qualified refined coal the fuel must be sold by the taxpayer 
     with the reasonable expectation that it will be used for the 
     primary purpose of producing steam. A qualifying refined coal 
     facility is a facility producing refined coal that is placed 
     in service after the date of enactment and before January 1, 
     2009.
     Credit period and credit rates
       In general, as under present law, taxpayers may claim the 
     credit at a rate of 1.5 cents per kilowatt-hour (indexed for 
     inflation and currently 1.8 cents per kilowatt-hour) for 10 
     years of production commencing on the date the facility is 
     placed in service. In the case of open-loop biomass 
     facilities, (including agricultural livestock waste 
     nutrients), geothermal energy, solar energy, small irrigation 
     power, landfill gas facilities, and trash combustion 
     facilities the 10-year credit period is reduced to five years 
     commencing on the date the facility is placed in service. In 
     general, for facilities placed in service prior to January 1, 
     2005, the credit period commences on January 1, 2005. In the 
     case of a closed-loop biomass facilities modified to co-fire 
     with coal, to co-fire with other biomass, or to co-fire with 
     coal and other biomass, the credit period shall begin no 
     earlier than the date of enactment.
       In the case of open-loop biomass facilities (including 
     agricultural livestock waste nutrients), small irrigation 
     power, landfill gas facilities, and trash combustion 
     facilities, the otherwise allowable credit amount is reduced 
     by one half.
       An alternative credit applies for the production of refined 
     coal. A qualified refined coal facility may claim credit at a 
     rate of $4.375 per ton (indexed for inflation after 1992) of 
     refined coal sold to a unrelated person. As is the case for 
     facilities that produce electricity, the credit a taxpayer 
     may claim for the production of refined coal is phased out as 
     the market price of refined coal exceeds certain threshold 
     levels. The threshold is defined by reference to the price of 
     feedstock fuel used to produce refined coal. Thus if a 
     producer of refined coal uses Powder River Basin coal as a 
     feedstock, the threshold price is determined by reference to 
     prices of Powder River Basin coal. If the producer uses 
     Appalachian coal, the threshold price is determined by 
     reference to prices of Appalachian coal.
     Credit claimants and treatment of other subsidies
       A lessee or operator may claim the credit in lieu of the 
     owner of the qualifying facility in the case of qualifying 
     open-loop biomass facilities originally placed in service on 
     or before the date of enactment and in the case of a closed-
     loop biomass facilities modified to co-fire with coal, to co-
     fire with other biomass, or to co-fire with coal and other 
     biomass.
       In addition, for all qualifying facilities, other than 
     closed-loop biomass facilities modified to co-fire with coal, 
     to co-fire with other biomass, or to co-fire with coal and 
     other biomass, any reduction in credit by reason of grants, 
     tax-exempt bonds, subsidized energy financing, and other 
     credits cannot exceed 50 percent. In the case of closed-loop 
     biomass facilities modified to co-fire with coal, to co-fire 
     with other biomass, or to co-fire with coal and other 
     biomass, there is no reduction in credit by reason of

[[Page H8545]]

     grants, tax-exempt bonds, subsidized energy financing, and 
     other credits.
       The amendments made by the conference report do not apply 
     with respect to any poultry waste facility placed in service 
     prior to January 1, 2005. Such facilities placed in service 
     after December 31, 2004 generally may qualify for credit as 
     animal livestock waste nutrient facilities.
       No facility that previously claimed or currently claims 
     credit under section 29 of the Code is a qualifying facility 
     for purposes of section 45.
       Effective date.--The provision is effective for electricity 
     produced and sold from qualifying facilities after the date 
     of enactment in taxable years ending after the date of 
     enactment. With respect to open-loop biomass facilities 
     placed in service prior to January 1, 2005, the provisions 
     are effective for electricity produced and sold after 
     December 31, 2004.

           B. Alternative Motor Vehicles and Fuels Incentives

     1. Alternative motor vehicle credit (sec. 811 of Senate 
         amendment)


                              Present Law

       Certain costs of qualified clean-fuel vehicle may be 
     expensed and deducted when such property is placed in service 
     (sec. 179A). Qualified clean-fuel vehicle property includes 
     motor vehicles that use certain clean-burning fuels (natural 
     gas, liquefied natural gas, liquefied petroleum gas, 
     hydrogen, electricity and any other fuel at least 85 percent 
     of which is methanol, ethanol, any other alcohol or 
     ether).\391\ The maximum amount of the deduction is $50,000 
     for a truck or van with a gross vehicle weight over 26,000 
     pounds or a bus with seating capacities of at least 20 
     adults; $5,000 in the case of a truck or van with a gross 
     vehicle weight between 10,000 and 26,000 pounds; and $2,000 
     in the case of any other motor vehicle. Qualified electric 
     vehicles do not qualify for the clean-fuel vehicle deduction. 
     The deduction allowed is 25 percent of the otherwise 
     allowable amount in 2006, and is unavailable for purchases 
     after December 31, 2006.
---------------------------------------------------------------------------
     \391\ A hybrid-electric vehicle may qualify as a clean-fuel 
     vehicle under present law.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Fuel cell motor vehicles
       The Senate amendment provides a credit for the purchase of 
     qualified fuel cell motor vehicles. The base credit for the 
     purchase of new qualified fuel cell motor vehicles ranges 
     between $4,000 and $40,000 depending upon the weight class of 
     the vehicle. For automobiles and light trucks, the otherwise 
     allowable credit amount ($4,000) is increased by an amount 
     from $1,000 to $4,000 if the vehicle meets certain fuel 
     economy increases compared to a stated standard. Credit may 
     not be claimed for qualified fuel cell motor vehicles 
     purchased after December 31, 2011.
     Hybrid motor vehicles
       The Senate amendment provides a credit for the purchase of 
     qualified hybrid motor vehicles. The base credit for the 
     purchase of a new qualified hybrid motor vehicle ranges from 
     $250 to $10,000 depending upon the weight of the vehicle and 
     the maximum power available from the vehicle's rechargeable 
     energy storage system. For automobiles and light trucks, the 
     otherwise allowable credit amount ($250 to $1,000) is 
     increased by an amount from $500 to $3,000 if the vehicle 
     meets certain fuel economy increases. For heavy duty hybrid 
     motor vehicles, the otherwise allowable credit ($1,000 to 
     $10,000) is increased depending upon the vehicle's weight and 
     provided the vehicle meets certain 2007 (and beyond) 
     emissions standards. The amount of credit is increased by 
     between $2,500 and $10,000 for vehicles placed in service in 
     2004; is increased by between $2,500 and $10,000 for vehicles 
     placed in service in 2004, is increased by between $2,000 and 
     $8,000 for vehicles placed in service in 2005, and is 
     increased by between $1,500 and $6,000 for vehicles placed in 
     service in 2006. Credit may not be claimed for qualified 
     hybrid motor vehicles purchased after December 31, 2006.
     Alternative fuel motor vehicles
       The Senate amendment provides a credit for the purchase of 
     qualified alternative fuel motor vehicles. The base credit 
     for the purchase of a new alternative fuel motor vehicle 
     equals 40 percent of the incremental cost of such vehicle. 
     The otherwise allowable credit for 40 percent of the 
     incremental cost is increased by an additional 30 percent of 
     the incremental cost of the vehicle if the vehicle meets 
     certain emissions standards. For computation of the credit, 
     the incremental cost of the vehicle may not exceed between 
     $5,000 and $40,000 (resulting in a maximum total credit of 
     between $3,500 and $28,000) depending upon the weight of the 
     vehicle. For this purpose, incremental cost generally is 
     defined as the amount of the increase of the manufacturer's 
     suggested retail price of such a vehicle compared to the 
     manufacturer's suggested retail price of a comparable 
     gasoline or diesel model. Qualifying alternative fuel motor 
     vehicles are vehicles that operate only on qualifying 
     alternative fuels and are incapable of operating on gasoline 
     or diesel (except in the extent gasoline or diesel fuel is 
     part of a qualified mixed fuel). Qualifying alternative fuels 
     are compressed natural gas, liquefied natural gas, liquefied 
     petroleum gas, hydrogen, and any liquid mixture consisting of 
     at least 85 percent methanol.
       Taxpayers purchasing certain mixed-fuel vehicles also may 
     claim the alternative fuel motor vehicle credit, at a reduced 
     rate. A mixed-fuel vehicle is a vehicle with gross weight of 
     seven tons or more and is certified by the manufacturer as 
     being able to operate on a combination of alternative fuel 
     and a petroleum-based fuel. A qualifying mixed-fuel vehicle 
     must use at least 75 percent alternative fuel (a ``75/25 
     mixed-fuel vehicle'') or 90 percent alternative fuel (a ``90/
     10 mixed-fuel vehicle'') and be incapable of operating on a 
     mixture containing less than 75 percent alternative fuel in 
     the case of a 75/25 vehicle (less than 90 percent alternative 
     fuel in the case of a 90/10 vehicle). A taxpayer purchasing a 
     75/25 mixed-fuel vehicle may claim 70 percent of the 
     otherwise allowable credit. A taxpayer purchasing a 90/10 
     mixed-fuel vehicle may claim 90 percent of the otherwise 
     allowable credit.
       Credit may not be claimed for qualified alternative fuel 
     motor vehicles purchased after December 31, 2006. The 
     taxpayer's basis in the property is reduced by the amount of 
     credit claimed.
     Provisions of general application
       The Senate amendment provides that unused credits may be 
     carried forward for 20 years and three years (but not into 
     taxable years beginning before January 1, 2005).
       If a tax-exempt person purchases or leases a qualifying 
     vehicle, the seller or lessor may claim the credit.
       Effective date.--The Senate amendment is effective for 
     property placed in service after December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Modification of credit for electric vehicles (sec. 812 of 
         Senate amendment and sec. 30 of the Code)


                              Present Law

       A 10-percent tax credit is provided for the cost of a 
     qualified electric vehicle, up to a maximum credit of $4,000 
     (sec. 30). A qualified electric vehicle is a motor vehicle 
     that is powered primarily by an electric motor drawing 
     current from rechargeable batteries, fuel cells, or other 
     portable sources of electrical current, the original use of 
     which commences with the taxpayer, and that is acquired for 
     the use by the taxpayer and not for resale. The full amount 
     of the credit is available for purchases prior to 2006. The 
     credit allowed is 25 percent of the otherwise allowable 
     amount for 2006, and is unavailable for purchases after 
     December 31, 2006. There is no carry forward or carryback of 
     the credit for electric vehicles.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the present-law credit for 
     electric vehicles to provide that the credit for qualifying 
     vehicles generally ranges between $3,500 and $40,000 
     depending upon the weight of the vehicle and, for certain 
     vehicles, the driving range of the vehicle. In the case of 
     property purchased by tax-exempt persons, the seller may 
     claim the credit. The taxpayer would be ineligible for the 
     deduction allowable under present-law section 179A for a 
     qualified battery electric vehicle on which a credit is 
     allowable. The provision would repeal the reduce rate of 
     credit for vehicles purchased in 2006, permitting taxpayer to 
     claim the full amount of credit otherwise allowable for 2006. 
     The taxpayer would be able to carry forward unused credits 
     for 20 years or carry unused credits back for three years 
     (but not carried back to taxable years beginning before the 
     January 1, 2005).
       Effective date.--The Senate amendment is effective for 
     property placed in service after December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Modifications of deduction for refueling property (sec. 
         813 of Senate amendment and sec. 179A of the Code)


                              Present Law

       Certain costs of qualified clean-fuel vehicle refueling 
     property may be expensed and deducted when such property is 
     placed in service (sec. 179A). Up to $100,000 of such 
     property at each location owned by the taxpayer may be 
     expensed with respect to that location. Natural gas, 
     liquefied natural gas, liquefied petroleum gas, hydrogen, 
     electricity and any other fuel at least 85 percent of which 
     is methanol, ethanol, or any other alcohol or ether comprise 
     clean-burning fuels.
       The deduction is unavailable for property placed in service 
     after December 31, 2006.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision permits taxpayers to claim a 
     50-percent credit for the cost of installing clean-fuel 
     vehicle refueling property to be used in a trade or business 
     of the taxpayer or installed at the principal residence of 
     the taxpayer. In the case of retail clean-fuel vehicle 
     refueling property the allowable credit may not exceed 
     $30,000. In the case of residential clean-fuel vehicle 
     refueling property the allowable credit may not exceed 
     $1,000. The taxpayer's basis in the property is reduced by 
     the amount of the credit and the taxpayer may not claim 
     deductions under section 179A with respect to property for 
     which the credit is claimed.

[[Page H8546]]

       In the case of refueling property installed on property 
     owned or used by a tax-exempt person, the taxpayer that 
     installs the property may claim the credit. To be eligible 
     for the credit, the property must be placed in service before 
     January 1, 2007 (before January 1, 2012 in the hydrogen 
     refueling property). The credit allowable in the taxable year 
     cannot exceed the difference between the taxpayer's regular 
     tax (reduced by certain other credits) and the taxpayer's 
     tentative minimum tax. The taxpayer may carry forward unused 
     credits for 20 years.
       Effective date.--The Senate amendment is effective for 
     property placed in service after December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Credit for retail sale of alternative motor vehicle fuels 
         (sec. 814 of Senate amendment)


                              Present Law

       There is no retail credit for the sale of alternative motor 
     vehicle fuels. However, a 52-cents-per-gallon income tax 
     credit is allowed for alcohol fuels for 2003 and 2004 (51 
     cents for 2005-2007). The alcohol fuels credit may be claimed 
     as a reduction in excise tax payments. Such tax payments 
     generally are made before the retail level. In the case of 
     ethanol, the Code provides a separate 10-cents-per-gallon 
     credit for small producers.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits taxpayers to claim a credit 
     equal to the gasoline gallon equivalent of 50 cents per 
     gallon of alternative fuel sold in 2005 and 2006. Qualifying 
     alternative fuels are compressed natural gas, liquefied 
     natural gas, liquefied petroleum gas, hydrogen, any liquid 
     mixture consisting of at least 85 percent methanol, and any 
     liquid mixture consisting of at least 85 percent ethanol. The 
     credit may be claimed for sales prior to January 1, 2007. 
     Under the provision, the credit is part of the general 
     business credit.
       Effective date.--The Senate amendment is effective for fuel 
     sold at retail after December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Small ethanol producer credit (sec. 815 of the Senate 
         amendment and sec. 40 of the Code)


                              Present Law

     Small ethanol producer credit
       Present law provides several tax benefits for ethanol and 
     methanol produced from renewable sources (e.g., biomass) that 
     are used as a motor fuel or that are blended with other fuels 
     (e.g., gasoline) for such a use. In the case of ethanol, a 
     separate 10-cents-per-gallon credit is provided for small 
     producers, defined generally as persons whose production does 
     not exceed 15 million gallons per year and whose production 
     capacity does not exceed 30 million gallons per year. The 
     small producer credit is part of the alcohol fuels tax credit 
     under section 40 of the Code. The alcohol fuels tax credits 
     are includible in income. This credit, like tax credits 
     generally, may not be used to offset alternative minimum tax 
     liability. The credit is treated as a general business 
     credit, subject to the ordering rules and carryforward/
     carryback rules that apply to business credits generally. The 
     alcohol fuels tax credit is scheduled to expire after 
     December 31, 2007.
     Taxation of cooperatives and their patrons
       Under present law, cooperatives in essence are treated as 
     pass-through entities in that the cooperative is not subject 
     to corporate income tax to the extent the cooperative timely 
     pays patronage dividends. Under present law (sec. 38(d)(4)), 
     the only excess credits that may be passed through to 
     cooperative patrons are the rehabilitation credit (sec. 47), 
     the energy property credit (sec. 48(a)), and the 
     reforestation credit (sec. 48(b)).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment makes several modifications to the 
     rules governing the small producer ethanol credit. First, the 
     provision liberalizes the definition of an eligible small 
     producer to include persons whose production capacity does 
     not exceed 60 million gallons. Second, the provision allows 
     cooperatives to elect to pass through the small ethanol 
     producer credits to its patrons. The credit is apportioned 
     pro rata among patrons of the cooperative on the basis of the 
     quantity or value of the business done with or for such 
     patrons for the taxable year. An election to pass through the 
     credit is made on a timely filed return for the taxable year 
     and is irrevocable for such taxable year.
       Third, the provision repeals the rule that includes the 
     small producer credit in income of taxpayers claiming it. 
     Finally, the provision provides that the small producer 
     ethanol credit is not treated as derived from a passive 
     activity under the Code rules restricting credits and 
     deductions attributable to such activities.
       Effective date.--The provision is effective for taxable 
     years ending after date of enactment.


                          Conference Agreement

       The conference agreement allows cooperatives to elect to 
     pass the small ethanol producer credit through to their 
     patrons. Specifically, the credit is to be apportioned among 
     patrons eligible to share in patronage dividends on the basis 
     of the quantity or value of business done with or for such 
     patrons for the taxable year. The election must be made on a 
     timely filed return for the taxable year, and once made, is 
     irrevocable for such taxable year.
       The amount of the credit not apportioned to patrons is 
     included in the organization's credit for the taxable year of 
     the organization. The amount of the credit apportioned to 
     patrons is to be included in the patron's credit for the 
     first taxable year of each patron ending on or after the last 
     day of the payment period for the taxable year of the 
     organization, or, if earlier, for the taxable year of each 
     patron ending on or after the date on which the patron 
     receives notice from the cooperative of the apportionment.
       If the amount of the credit shown on the cooperative's 
     return for a taxable year is in excess of the actual amount 
     of the credit for that year, an amount equal to the excess of 
     the reduction in the credit over the amount not apportioned 
     to patrons for the taxable year is treated as an increase in 
     the cooperative's tax. The increase is not treated as tax 
     imposed for purposes of determining the amount of any tax 
     credit or for purposes of the alternative minimum tax.
       The conference agreement does not contain any of the other 
     modifications from the Senate amendment.
       Effective date.--The provision is effective for taxable 
     years ending after date of enactment.

            C. Conservation and Energy Efficiency Provisions

     1. Energy efficient new homes (sec. 821 of the Senate 
         amendment)


                              Present Law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat, or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law credit for the construction of new 
     energy-efficient homes.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides a credit to an eligible contractor 
     of an amount equal to the aggregate adjusted bases of all 
     energy-efficient property installed in a qualified new 
     energy-efficient home during construction. The credit cannot 
     exceed $1,000 ($2,000) in the case of a new home that has a 
     projected level of annual heating and cooling costs that is 
     30 percent (50 percent) less than a comparable dwelling 
     constructed in accordance with the latest standards of 
     chapter 4 of the International Energy Conservation Code 
     approved by the Department of Energy before the construction 
     of such qualifying new home and any applicable Federal 
     minimum efficiency standards for equipment.
       The eligible contractor is the person who constructed the 
     home, or in the case of a manufactured home, the producer of 
     such home. Energy efficiency property is any energy-efficient 
     building envelope component (insulation materials or system 
     specifically and primarily designed to reduce heat loss or 
     gain, and exterior windows, including skylights, and doors) 
     and any energy-efficient heating or cooling equipment or 
     system that can, individually or in combination with other 
     components, meet the standards for the home.
       To qualify as an energy-efficient new home, the home must 
     be: (1) a dwelling located in the United States, (2) the 
     principal residence of the person who acquires the dwelling 
     from the eligible contractor or manufacturer, and (3) 
     certified to have a projected level of annual heating and 
     cooling energy consumption that meets the standards for 
     either the 30-percent or 50-percent reduction in energy 
     usage. The home may be certified according to a component-
     based method, an energy performance based method, a 
     guarantee-based method, or, in the case of a qualifying new 
     home which is a manufactured home, by a method prescribed by 
     the Administrator of the Environmental Protection Agency 
     under the Energy Star Labeled Homes program. Manufactured 
     homes certified by a method prescribed by the Administrator 
     of the Environmental Protection Agency under the Energy Star

[[Page H8547]]

     Labeled Homes program are eligible for the $1,000 credit 
     provided criteria (1) and (2) are met.
       A component-based method of certification is a method which 
     uses the applicable technical energy efficiency 
     specifications or ratings (including product labeling 
     requirements) for the energy efficient building envelope 
     component or energy efficient heating or cooling equipment. 
     The Secretary shall, in consultation with the Administrator 
     of the Environmental Protection Agency, develop prescriptive 
     component-based packages which are equivalent in energy 
     performance to properties which qualify under the 
     performance-based method. The certification under the 
     component-based method shall be provided by a local building 
     regulatory authority, a utility, or a home energy rating 
     organization.
       A performance-based method of certification is a method 
     which calculates projected energy usage and cost reductions 
     in the qualifying new home in relation to a new home heated 
     by the same fuel type and constructed in accordance with (1) 
     the latest standards of chapter 4 of the International Energy 
     Conservation Code approved by the Department of Energy before 
     the construction of such qualifying new home, and (2) any 
     applicable Federal minimum efficiency standards for 
     equipment. Computer software shall be used in support of a 
     performance-based method certification under clause. Such 
     software shall meet procedures and methods for calculating 
     energy and cost savings in regulations promulgated by the 
     Secretary of Energy. The certification under the performance-
     based method shall be provided by an individual recognized by 
     an organization recognized by the Secretary for such 
     purposes.
       A guarantee-based method of certification is a method that 
     guarantees in writing to the homeowner energy savings of 
     either 30 percent or 50 percent over the 2000 International 
     Energy Conservation Code for heating and cooling costs. The 
     guarantee shall be provided for a minimum of 2 years and 
     shall fully reimburse the homeowner any heating and cooling 
     costs in excess of the guaranteed amount. Computer software 
     shall be selected by the provider of the guarantee to support 
     the guarantee-based method certification. Such software shall 
     meet procedures and methods for calculating energy and cost 
     savings in regulations promulgated by the Secretary of 
     Energy. The certification under the guarantee-based method 
     shall be provided by an individual recognized by an 
     organization recognized by the Secretary for such purposes.
       In prescribing regulations for performance-based and 
     guarantee-based certification methods, the Secretary shall 
     prescribe procedures for calculating annual energy usage and 
     cost reductions for heating and cooling and for the reporting 
     of the results. Such regulations shall provide that any 
     calculation procedures be fuel neutral such that the same 
     energy efficiency measures allow a qualifying new home to 
     be eligible for the credit under this section regardless 
     of whether such home uses a gas or oil furnace or boiler 
     or an electric heat pump, and require that any computer 
     software allow for the printing of the Federal tax forms 
     necessary for the credit under this section and for the 
     printing of forms for disclosure to the homebuyer. Other 
     rules apply relating to the form of the certification and 
     the manner in which it is provided to the buyer of the 
     home.
       In the case of a qualifying new home which is a 
     manufactured home, certification of compliance with energy 
     efficiency standards shall be provided by a manufactured home 
     primary inspection agency.
       The credit will be part of the general business credit. No 
     credits attributable to energy efficient homes may be carried 
     back to any taxable year ending on or before the effective 
     date of the credit. No deduction shall be allowed for that 
     portion of expenses for a qualifying new home otherwise 
     allowable as a deduction for the taxable year which is equal 
     to the amount of the credit for such taxable year.
       Effective date.--The credit applies to homes whose 
     construction is substantially completed after December 31, 
     2004, and which are purchased during the period beginning on 
     December 31, 2004, and ending on December 31, 2007 (December 
     31, 2005 in the case of the $1,000 credit).


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Energy efficient appliances (sec. 822 of the Senate 
         amendment)


                              Present Law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment: (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat; or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of: (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law credit for the manufacture of 
     energy-efficient appliances.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides a credit for the production of 
     certain energy-efficient clothes washers and refrigerators. 
     The credit equals $50 per appliance for (1) energy-efficient 
     clothes washers produced before December 31, 2007 with a 
     modified energy factor (``MEF'') of 1.42 MEF or greater, and 
     (2) refrigerators produced before December 31, 2005 that 
     consume 10 percent fewer kilowatt-hours per year than the 
     energy conservation standards promulgated by the Department 
     of Energy that took effect on July 1, 2001. The credit equals 
     $100 for (1) energy-efficient clothes washers produced before 
     December 31, 2007 with a MEF of 1.5 or greater, and (2) 
     refrigerators produced before December 31, 2007 that consume 
     at least 15 percent fewer kilowatt-hours per year (at least 
     20 percent less for production in 2007) than the energy 
     conservation standards promulgated by the Department of 
     Energy that took effect on July 1, 2001. The credit is $150 
     for refrigerators produced before January 1, 2007 that 
     consume at least 20 percent fewer kilowatt-hours per year 
     than the energy conservation standards promulgated by the 
     Department of Energy that took effect on July 1, 2001. A 
     refrigerator must be an automatic defrost refrigerator-
     freezer with an internal volume of at least 16.5 cubic feet 
     to qualify for the credit. A clothes washer is any 
     residential clothes washer, including a residential style 
     coin operated washer, that satisfies the relevant efficiency 
     standard.
       For each category of appliances (e.g., washers that meet 
     the $50 standard, washers that meet the $100 standard, 
     refrigerators that meet the $50 standard, refrigerators that 
     meet the $100 standard, and refrigerators that meet the $150 
     standard), only production in excess of average production 
     for each such category during calendar years 2001-2003 would 
     be eligible for the credit.
       The taxpayer may not claim credits in excess of $60 million 
     for all taxable years, and may not claim credits in excess of 
     $30 million with respect to appliances that only qualify for 
     the $50 credit. Additionally, the credit allowed for all 
     appliances may not exceed two percent of the average annual 
     gross receipts of the taxpayer for the three taxable years 
     preceding the taxable year in which the credit is determined.
       The credit would be part of the general business credit.


                             Effective Date

       The credit applies to appliances produced after December 
     31, 2004, and prior to January 1, 2008


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Residential solar hot water, photovoltaics and other 
         energy efficient property (sec. 823 of the Senate 
         amendment)


                              Present Law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat, or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law personal tax credit for energy 
     efficient residential property.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides a personal tax credit for the 
     purchase of qualified wind energy property, qualified 
     photovoltaic property, and qualified solar water heating 
     property that is used exclusively for purposes other

[[Page H8548]]

     than heating swimming pools and hot tubs. The credit is equal 
     to 15 percent for solar water heating property and 
     photovoltaic property, and 30 percent for wind energy 
     property. The maximum credit for each of these systems of 
     property is $2,000. The provision also provides a 30 percent 
     credit for the purchase of qualified fuel cell power plants. 
     The credit for any fuel cell may not exceed $500 for each 0.5 
     kilowatt of capacity.
       Qualifying solar water heating property means an 
     expenditure for property to heat water for use in a dwelling 
     unit located in the United States and used as a residence if 
     at least half of the energy used by such property for such 
     purpose is derived from the sun. Qualified photovoltaic 
     property is property that uses solar energy to generate 
     electricity for use in a dwelling unit. Qualified wind energy 
     property is property that uses wind energy to generate 
     electricity for use in a dwelling unit located in the United 
     States and used as a principal residence by the taxpayer. A 
     qualified fuel cell power plant is an integrated system 
     comprised of a fuel cell stack assembly and associated 
     balance of plant components that converts a fuel into 
     electricity using electrochemical means, and which has an 
     electricity-only generation efficiency of greater than 30 
     percent and that generates at least 0.5 kilowatts of 
     electricity. The qualified fuel cell power plant must be 
     installed on or in connection with a dwelling unit located in 
     the United States and used by the taxpayer as a principal 
     residence.
       The provision also provides a credit for the purchase of 
     other qualified energy efficient property, as described 
     below:
       Electric heat pump water heater with an energy factor of at 
     least 1.7. The maximum credit is $150 per unit.
       Advanced natural gas, oil, propane furnace, or hot water 
     boiler that achieves at least 95 percent annual fuel 
     utilization efficiency. The maximum credit is $125 per unit.
       Advanced natural gas, oil, propane water heater that has an 
     energy factor of at least 0.80 in the standard Department of 
     Energy test procedure. The maximum credit is $150 per unit.
       Natural gas, oil, propane water heater that has an energy 
     factor of at least 0.65 but less than 0.80 in the standard 
     Department of Energy test procedure. The maximum credit is 
     $50 per unit.
       Advanced main air circulating fan used in a new natural 
     gas, propane, or oil-fired furnace, including main air 
     circulating fans that use a brushless permanent magnet motor 
     or another type of motor which achieves similar or higher 
     efficiency at half and full speed, as determined by the 
     Secretary. The maximum credit is $50.
       Advanced combination space and water heating system that 
     has a combined energy factor of at least 0.80 and a combined 
     annual fuel utilization efficiency (AFUE) of at least 78 
     percent in the standard Department of Energy test procedure. 
     The maximum credit is $150.
       Combination space and water heating system that has a 
     combined energy factor of at least 0.65 but less than 0.80 
     and a combined annual fuel utilization efficiency (AFUE) of 
     at least 78 percent in the standard Department of Energy test 
     procedure. The maximum credit is $50.
       Geothermal heat pumps that have an EER of at least 21. The 
     maximum credit is $250 per unit.
       The credit is nonrefundable, and the depreciable basis of 
     the property is reduced by the amount of the credit. 
     Expenditures for labor costs allocable to onsite preparation, 
     assembly, or original installation of property eligible for 
     the credit are eligible expenditures. The credit is allowed 
     against the regular and alternative minimum tax.
       Certain equipment safety requirements need to be met to 
     qualify for the credit. Special proration rules apply in the 
     case of jointly owned property, condominiums, and tenant-
     stockholders in cooperative housing corporations. With the 
     exception of wind energy property, if less than 80 percent of 
     the property is used for nonbusiness purposes, only that 
     portion of expenditures that is used for nonbusiness purposes 
     is taken into account.


                             effective date

       The credit applies to expenditures after December 31, 2004, 
     and prior to January 1, 2008.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Credit for business installation of qualified fuel cells 
         and stationary microturbine power plants (sec. 824 of the 
         Senate amendment and sec. 48 of the Code)


                              present law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat, or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       There is no present-law credit for fuel cell or 
     microturbine power plant property.


                               house bill

       No provision.


                            senate amendment

       The provision provides a 30 percent business energy credit 
     for the purchase of qualified fuel cell power plants for 
     businesses. A qualified fuel cell power plant is an 
     integrated system comprised of a fuel cell stack assembly and 
     associated balance of plant components that converts a fuel 
     into electricity using electrochemical means, and which has 
     an electricity-only generation efficiency of greater than 30 
     percent and generates at least 0.5 kilowatts of electricity. 
     The credit for any fuel cell may not exceed $500 for each 0.5 
     kilowatts of capacity.
       Additionally, the provision provides a 10 percent credit 
     for the purchase of qualifying stationary microturbine power 
     plants. A qualified stationary microturbine power plant is an 
     integrated system comprised of a gas turbine engine, a 
     combustor, a recuperator or regenerator, a generator or 
     alternator, and associated balance of plant components which 
     converts a fuel into electricity and thermal energy. Such 
     system also includes all secondary components located between 
     the existing infrastructure for fuel delivery and the 
     existing infrastructure for power distribution, including 
     equipment and controls for meeting relevant power standards, 
     such as voltage, frequency and power factors. Such system 
     must have an electricity-only generation efficiency of not 
     less that 26 percent at International Standard Organization 
     conditions and a capacity of less than 2,000 kilowatts. The 
     credit is limited to the lesser of 10 percent of the basis of 
     the property or $200 for each kilowatt of capacity.
       The credit is nonrefundable. The taxpayer's basis in the 
     property is reduced by the amount of the credit claimed.
       Effective date.--The credit for businesses applies to 
     property placed in service after December 31, 2004, and 
     before January 1, 2008 (January 1, 2007 in the case of 
     microturbines), under rules similar to rules of section 48(m) 
     of the Code (as in effect on the day before the date of 
     enactment of the Revenue Reconciliation Act of 1990).


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Energy efficient commercial building deduction (sec. 825 
         of Senate amendment)


                              Present Law

       No special deduction is currently provided for expenses 
     incurred for energy-efficient commercial building property.


                               house bill

       No provision.


                            senate amendment

       The provision provides a deduction equal to energy-
     efficient commercial building property expenditures made by 
     the taxpayer. Energy-efficient commercial building property 
     expenditures are defined as amounts paid or incurred for 
     energy-efficient property installed in connection with the 
     construction or reconstruction of property: (1) which is 
     depreciable property; (2) which is located in the United 
     States, and (3) which is the type of structure to which the 
     Standard 90.1-2001 of the American Society of Heating, 
     Refrigerating, and Air Conditioning Engineers and the 
     Illuminating Engineering Society of North America (``ASHRAE/
     IESNA'') is applicable. The deduction is limited to an amount 
     equal to $2.25 per square foot of the property for which such 
     expenditures are made. The deduction is allowed in the year 
     in which the property is placed in service.
       Energy-efficient commercial building property generally 
     means any property that reduces total annual energy and power 
     costs with respect to the lighting, heating, cooling, 
     ventilation, and hot water supply systems of the building by 
     50 percent or more in comparison to a building which 
     minimally meets the requirements of Standard 90.1-2001 of 
     ASHRAE/IESNA. Because of the requirement that, in order to 
     qualify, a building must fall within the scope of the ASHRAE/
     IESNA Standard 90.1-2001, residential rental property that is 
     less than four stories does not qualify.
       Certain certification requirements must be met in order to 
     qualify for the deduction. The Secretary, in consultation 
     with the Secretary of Energy, will promulgate regulations 
     that describe methods of calculating and verifying energy and 
     power costs using qualified computer software. The methods 
     for calculation shall be fuel neutral, such that the same 
     energy efficiency features shall qualify a building for the 
     deduction under this subsection regardless of whether the 
     heating source is a gas or oil furnace or boiler or an 
     electric heat pump.
       The Secretary shall prescribe procedures for the inspection 
     and testing for compliance of buildings that are comparable, 
     given the difference between commercial and residential 
     buildings, to the requirements in the Mortgage Industry 
     National Home Energy Rating Standards. Individuals qualified 
     to determine compliance shall only be those recognized by one 
     or more organizations certified by the Secretary for such 
     purposes.
       For energy-efficient commercial building property 
     expenditures made by a public entity, such as public schools, 
     the Secretary

[[Page H8549]]

     shall promulgate regulations that will allow the value of the 
     deduction (determined without regard to the tax-exempt status 
     of such entity) to be allocated to the person primarily 
     responsible for designing the property in lieu of the public 
     entity.
       In the case of lighting systems, until such time as the 
     Secretary issues final regulations, a partial deduction shall 
     be allowed for a reduction in Lighting Power Density of 40 
     percent (50 percent in the case of a warehouse) of the 
     minimum requirements in Table 9.3.1.1 or Table 9.3.1.2 of 
     ASHRAE/IESNA Standard 90.1-2001. A pro-rated partial 
     deduction is allowed in the case of a lighting system that 
     reduces lighting power density between 25 percent and 40 
     percent. Certain lighting level and lighting control 
     requirements must also be met in order to qualify for the 
     partial lighting deductions.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004 for expenditures in 
     connection with a building whose construction is completed on 
     or before December 31, 2009.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Three-year applicable recovery period for depreciation of 
         qualified energy management devices and qualified water 
         submetering devices (secs. 826 and 827 of the Senate 
         amendment and sec. 168 of the Code)


                              present law

       No special recovery period is currently provided for 
     depreciation of qualified energy management devices or water 
     submetering devices.


                               House Bill

       No provision.


                            senate amendment

       The Senate amendment provides a three-year recovery period 
     for qualified energy management devices placed in service by 
     any taxpayer who is a supplier of electric energy or is a 
     provider of electric energy services. A qualified energy 
     management device is any energy management device that is 
     used by the taxpayer to measure and record electricity usage 
     data on a time-differentiated basis in at least four separate 
     time segments per day, and to provide such data on at least a 
     monthly basis to both consumers and the taxpayer.
       Additionally, the Senate amendment provides a three-year 
     recovery period for qualified water submetering devices 
     placed in service by any taxpayer who is an eligible 
     resupplier. An eligible resupplier is any taxpayer who 
     purchases and installs qualified water submetering devices in 
     every unit in any multi-unit property. A qualified water 
     submetering device is any water submetering device that is 
     used by the taxpayer to measure and record water usage data 
     and to provide such data on at least a monthly basis to both 
     consumers and the taxpayer.
       Effective date.--The provision is effective for any 
     qualified energy management device or water submetering 
     device placed in service after December 31, 2004, and before 
     January 1, 2008.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Energy credit for combined heat and power system property 
         (sec. 828 of the Senate amendment and sec. 48 of the 
         Code)


                              present law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat, or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general businesscredit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law credit for combined heat and power 
     (``CHP'') property.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides a 10-percent credit for the 
     purchase of CHP property.
       CHP property is property: (1) that uses the same energy 
     source for the simultaneous or sequential generation of 
     electrical power, mechanical shaft power, or both, in 
     combination with the generation of steam or other forms of 
     useful thermal energy (including heating and cooling 
     applications); (2) that has an electrical capacity of not 
     more than 15 megawatts or a mechanical energy capacity of no 
     more than 2000 horsepower or an equivalent combination of 
     electrical and mechanical energy capacities; (3) that 
     produces at least 20 percent of its total useful energy in 
     the form of thermal energy that is not used to produce 
     electrical or mechanical power, and produces at least 20 
     percent of its total useful energy in the form of electrical 
     or mechanical power (or a combination thereof); and (4) the 
     energy efficiency percentage of which exceeds 60 percent. CHP 
     property does not include property used to transport the 
     energy source to the generating facility or to distribute 
     energy produced by the facility.
       Additionally, the Senate amendment provides that systems 
     whose fuel source is at least 90 percent bagasse and that 
     would qualify for the credit but for the failure to meet the 
     efficiency standard are eligible for a credit that is reduced 
     in proportion to the degree to which the system fails to meet 
     the efficiency standard. For example, a system that would 
     otherwise be required to meet the 60-percent efficiency 
     standard, but which only achieves 30-percent efficiency, 
     would be permitted a credit equal to one-half of the 
     otherwise allowable credit (i.e., a 5-percent credit).
       Effective date.--The credit applies to property placed in 
     service after December 31, 2004, and before January 1, 2007.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Energy efficient improvements to existing homes (sec. 829 
         of the Senate amendment)


                              Present Law

       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present law credit for energy efficiency 
     improvements to existing homes.


                               House Bill

       No provision.


                            Senate Amendment

       The provision would provide a 10-percent nonrefundable 
     credit for the purchase of qualified energy efficiency 
     improvements. The maximum credit for a taxpayer with respect 
     to the same dwelling for all taxable years is $300. Unused 
     credits may be carried forward to succeeding taxable years.
       A qualified energy efficiency improvement would be any 
     energy efficiency building envelope component that is 
     certified to meet or exceed the latest prescriptive criteria 
     for such component in the International Energy Conservation 
     Code approved by the Department of Energy before the 
     installation of such component, or any combination of energy 
     efficiency measures that is certified to achieve at least a 
     30 percent reduction in heating and cooling energy usage for 
     the dwelling and that is installed in or on a dwelling that 
     (1) is located in the United States; (2) is owned and used by 
     the taxpayer as the taxpayer's principal residence; (3) has 
     not been treated as a qualifying new home for purposes of the 
     energy-efficient new homes credit . Additionally, the 
     original use of such component or combination of measures 
     commences with the taxpayer, and such component or 
     combination of measures can reasonably be expected to remain 
     in use for at least five years.
       Building envelope components are: (1) insulation materials 
     or systems which are specifically and primarily designed to 
     reduce the heat loss or gain for a dwelling, and (2) exterior 
     windows (including skylights) and doors.
       Homes shall be certified according to a component-based 
     method or a performance-based method. The component-based 
     method shall be based on applicable energy-efficiency 
     ratings, including current product labeling requirements. 
     Certification by the component method shall be provided by a 
     third party, such as a local building regulatory authority, a 
     utility, a manufactured home primary inspection agency, or a 
     home energy rating organization. The performance-based method 
     shall be based on a comparison of the projected energy 
     consumption of the dwelling in its original condition and 
     after the completion of energy efficiency measures. The 
     performance-based method of certification shall be conducted 
     by an individual or organization recognized by the Secretary 
     of the Treasury for such purposes.
       In prescribing regulations for performance-based 
     certification methods, the Secretary shall prescribe 
     procedures for calculating annual energy usage and cost 
     reductions for heating and cooling and for the reporting of 
     the results. Such regulations shall provide that any 
     calculation procedures be fuel neutral such that the same 
     energy efficiency measures allow a qualifying new home to be 
     eligible for the credit under this section regardless of 
     whether such home uses a gas or oil furnace or boiler or an 
     electric heat pump, and require that any computer software 
     allow for the printing of the Federal tax forms necessary for 
     the credit under this section and for the printing of forms 
     for disclosure to the owner of the dwelling.

[[Page H8550]]

       The taxpayer's basis in the property would be reduced by 
     the amount of the credit. Special rules would apply in the 
     case of condominiums and tenant-stockholders in cooperative 
     housing corporations.
       The credit is allowed against the regular and alternative 
     minimum tax.
       Effective date.--The credit is effective for qualified 
     energy efficiency improvements installed after December 31, 
     2004, and before January 1, 2007.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                        D. Clean Coal Incentives

     1. Credit for production from a clean coal technology unit 
         (secs. 831 and 834 of Senate amendment)


                              Present Law

       Present law does not provide a production credit for 
     electricity generated at units that use coal as a fuel. 
     However, an income tax credit is allowed for the production 
     of electricity from either qualified wind energy, qualified 
     ``closed-loop'' biomass, or qualified poultry waste units 
     placed in service prior to January 1, 2006 (sec. 45). The 
     credit allowed equals 1.5 cents per kilowatt-hour of 
     electricity sold. The 1.5-cent figure is indexed for 
     inflation and equals 1.8 cents for 2004. The credit is 
     allowable for production during the 10-year period after a 
     unit is originally placed in service. The production tax 
     credit is a component of the general business credit (sec. 
     38(b)(1)).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a production credit for 
     electricity produced from certain units that have been 
     retrofitted, repowered, or replaced with a clean coal 
     technology during the ten-year period beginning on January 1, 
     2005. The value of the credit is 0.34 cents per kilowatt-hour 
     of electricity produced and is indexed for inflation for 
     calendar years after 2005.
       A qualifying clean coal technology unit must meet certain 
     capacity standards, thermal efficiency standards, and 
     emissions standards for SO2, nitrous oxides, particulate 
     emissions, and source emissions standards as provided in the 
     Clean Air Act. To be a qualified clean coal technology unit, 
     the taxpayer must receive a certificate from the Secretary of 
     the Treasury. The Secretary may grant certificates to units 
     only to the point that 4,000 megawatts of electricity 
     production capacity qualifies for the credit. However, no 
     qualifying unit would be eligible if the unit's capacity 
     exceeded 300 megawatts.
       Certain persons (public utilities, electric cooperatives, 
     Indian tribes, and the Tennessee Valley Authority) are 
     eligible to obtain certifications from the Secretary for 
     these credits and sell, trade, or assign the credit to any 
     taxpayer. However, any credit sold, traded, or assigned may 
     only be sold, traded, or assigned once. Subsequent trades are 
     not permitted.
       Effective date.--The Senate amendment is effective for 
     production after December 31, 2004, in taxable years ending 
     after such date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Investment credit for clean coal technology units (secs. 
         832 and 834 of Senate amendment)


                              Present Law

       Present law does not provide an investment credit for 
     electricity generating units that use coal as a fuel. 
     However, a nonrefundable, 10-percent investment tax credit 
     (``business energy credit'') is allowed for the cost of new 
     property that is equipment (1) that uses solar energy to 
     generate electricity, to heat or cool a structure, or to 
     provide solar process heat, or (2) that is used to produce, 
     distribute, or use energy derived from a geothermal deposit, 
     but only, in the case of electricity generated by geothermal 
     power, up to the electric transmission stage (sec. 48). The 
     business energy tax credit is a component of the general 
     business credit (sec. 38(b)(1)).


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The Senate amendment provides a 10-percent investment tax 
     credit for qualified investments in advanced clean coal 
     technology units. Certain persons (public utilities, electric 
     cooperatives, Indian tribes, and the Tennessee Valley 
     Authority) will be eligible to obtain certifications from the 
     Secretary of the Treasury (as described below) for these 
     credits and sell, trade, or assign the credit to any 
     taxpayer. However, any credit sold, traded, or assigned may 
     only be sold, traded, or assigned once. Subsequent trades are 
     not permitted.
     Qualifying advanced clean coal technology units
       Qualifying advanced clean coal technology units must 
     utilize advanced pulverized coal or atmospheric fluidized bed 
     combustion technology, pressurized fluidized bed combustion 
     technology, integrated gasification combined cycle 
     technology, or some other technology certified by the 
     Secretary of Energy. Any qualifying advanced clean coal 
     technology unit must meet certain capacity standards, thermal 
     efficiency standards, and emissions standards for SO2, 
     nitrous oxides, particulate emissions, and source emissions 
     standards as provided in the Clean Air Act. In addition, a 
     qualifying advanced clean coal technology unit must meet 
     certain carbon emissions requirements.
       If the advanced clean coal technology unit is an advanced 
     pulverized coal or atmospheric fluidized bed combustion 
     technology unit, a pressurized fluidized bed combustion 
     technology unit, or an integrated gasification combined cycle 
     technology unit and if the unit uses a design coal with a 
     heat content of not more than 9,000 Btu per pound, the unit 
     must have a carbon emission rate less than 0.60 pound of 
     carbon per kilowatt hour of electricity produced. If the 
     advanced clean coal technology unit is an advanced pulverized 
     coal or atmospheric fluidized bed combustion technology unit, 
     a pressurized fluidized bed combustion technology unit, or an 
     integrated gasification combined cycle technology unit and if 
     the unit uses a design coal with a heat content greater than 
     9,000 Btu per pound, the unit must have a carbon emission 
     rate less than 0.54 pound of carbon per kilowatt hour of 
     electricity produced. In the case of an advanced clean 
     coal technology unit that uses another eligible technology 
     and if the unit uses a design coal with a heat content of 
     not more than 9,000 Btu per pound, the unit must have a 
     carbon emission rate less than 0.51 pound of carbon per 
     kilowatt hour of electricity produced. In the case of an 
     advanced clean coal technology unit that uses another 
     eligible technology and if the unit uses a design coal 
     with a heat content greater than 9,000 Btu per pound, the 
     unit must have a carbon emission rate less than 0.459 
     pound of carbon per kilowatt hour of electricity produced.
     Allocation of credits
       To be a qualified investment in advanced clean coal 
     technology, the taxpayer must receive a certificate from the 
     Secretary of the Treasury. The Secretary may grant 
     certificates to investments only to the point that 4,000 
     megawatts of electricity production capacity qualifies for 
     the credit. From the potential pool of 4,000 megawatts of 
     capacity, not more than 1,000 megawatts in total and not more 
     than 500 megawatts in years prior to 2009 shall be allocated 
     to units using advanced pulverized coal or atmospheric 
     fluidized bed combustion technology. From the potential pool 
     of 4,000 megawatts of capacity, not more than 500 megawatts 
     in total and not more than 250 megawatts in years prior to 
     2009 shall be allocated to units using pressurized fluidized 
     bed combustion technology. From the potential pool of 4,000 
     megawatts of capacity, not more than 2,000 megawatts in total 
     and not more than 1,000 megawatts in years prior to 2009 and 
     not more than 1,500 megawatts in year prior to 2013 shall be 
     allocated to units using integrated gasification combined 
     cycle technology, with or without fuel or chemical co-
     production. From the potential pool of 4,000 megawatts of 
     capacity, not more than 500 in total and not more than 250 
     megawatts in years prior to 2009 shall be allocated to any 
     other technology certified by the Secretary of Energy.
       Effective date.--The Senate amendment is effective for 
     periods after December 31, 2004.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Credit for production from advanced clean coal technology 
         (secs. 833 and 834 of the Senate amendment)


                              present law

       Present law does not provide a production credit for 
     electricity generated at units that use coal as a fuel. 
     However, an income tax credit is allowed for the production 
     of electricity from either qualified wind energy, qualified 
     ``closed-loop'' biomass, or qualified poultry waste units 
     placed in service prior to January 1, 2006 (sec. 45). The 
     credit allowed equals 1.5 cents per kilowatt-hour of 
     electricity sold. The 1.5-cent figure is indexed for 
     inflation and equals 1.8 cents for 2004. The credit is 
     allowable for production during the 10-year period after a 
     unit is originally placed in service. The production tax 
     credit is a component of the general business credit (sec. 
     38(b)(1)).


                               house bill

       No provision.


                            senate amendment

     In general
       The Senate amendment creates a production credit for 
     electricity produced from any qualified advanced clean coal 
     technology electricity generation unit that qualifies for the 
     investment credit for qualifying clean coal technology units, 
     as described above. Certain persons (public utilities, 
     electric cooperatives, Indian tribes, and the Tennessee 
     Valley Authority) will be eligible to obtain certifications 
     from the Secretary of the Treasury (as described below) for 
     each of these credits and sell, trade, or assign the credit 
     to any taxpayer. However, any credit sold, traded, or 
     assigned may only be sold, traded, or assigned once. 
     Subsequent trades are not permitted.
     Value of production credit for electricity produced from 
         qualifying advanced clean coal technology
       The taxpayer may claim a production credit on the sum of 
     each kilowatt-hour of electricity produced and the heat value 
     of other fuels or chemicals produced by the taxpayer at the 
     unit.\392\ The taxpayer may claim the

[[Page H8551]]

     production credit for the 10-year period commencing with the 
     date the qualifying unit is placed in service (or the date on 
     which a conventional unit was retrofitted or repowered). The 
     value of the credit varies depending upon the year the unit 
     is placed in service, whether the unit produces solely 
     electricity or electricity and fuels or chemicals, and the 
     rated thermal efficiency of the unit. In addition, the value 
     of the credit is reduced for the second five years of 
     eligible production. The maximum value of the production 
     credit from any qualifying unit during the first five years 
     of production is $0.014 per kilowatt-hour and the minimum 
     value is $0.001. During the second five years of production 
     from a qualifying unit, the maximum value of the production 
     credit is $0.0115 and the minimum value is $0.001. The value 
     of the credit is indexed for inflation for calendar years 
     after 2005.
---------------------------------------------------------------------------
     \392\ Each 3,413 Btu of heat content of the fuel or chemical 
     is treated as equivalent to one kilowatt-hour of electricity.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective for 
     production after December 31, 2004, in taxable years ending 
     after such date.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

                       E. Oil and Gas Provisions

     1. Oil and gas production from marginal wells (sec. 841 of 
         the Senate amendment and new sec. 45I of the Code)


                              Present Law

       There is no credit for the production of oil and gas from 
     marginal wells. The costs of such production may be recovered 
     under the Code's depreciation and depletion rules and in 
     other cases as a deduction for ordinary and necessary 
     business expenses.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment would create a new, $3-per-barrel 
     credit for the production of crude oil and a $0.50 credit per 
     1,000 cubic feet of qualified natural gas production. In both 
     cases, the credit is available only for production from a 
     ``qualified marginal well.'' A qualified marginal well is 
     defined as domestic well: (1) production from which is 
     treated as marginal production for purposes of the Code 
     percentage depletion rules; or (2) that during the taxable 
     year had average daily production of not more than 25 barrel 
     equivalents and produces water at a rate of not less than 95 
     percent of total well effluent. Production from any well 
     during any period in which such well is not in compliance 
     with applicable Federal pollution prevention, control, and 
     permit requirements is not considered a qualified marginal 
     well during such period. The maximum amount of production on 
     which credit could be claimed is 1,095 barrels or barrel 
     equivalents.
       The credit is not available to production occurring if the 
     reference price of oil exceeds $18 ($2.00 for natural gas). 
     The credit is reduced proportionately as for reference prices 
     between $15 and $18 ($1.67 and $2.00 for natural gas). 
     Reference prices are determined on a one-year look-back 
     basis.
       In the case of production from a qualified marginal well 
     which is eligible for the credit allowed under section 29 for 
     the taxable year, no marginal well credit is allowable unless 
     the taxpayer elects not to claim the credit under section 29 
     with respect to the well. The credit is treated as a general 
     business credit.
       Effective date.--The Senate amendment is effective for 
     production in taxable years beginning after December 31, 
     2004.


                          Conference Agreement

       The conference agreement modifies the Senate amendment. The 
     conference agreement does not include the Federal pollution 
     prevention, control, and permit requirement provisions of the 
     Senate amendment. The conference agreement treats the credit 
     as part of the general business credit; however, unused 
     credits can be carried back for up to five years rather than 
     the generally applicable carryback period of one year. The 
     credit is indexed for inflation for taxable years beginning 
     in a calendar year after 2005.
       Effective date--The provision is effective for production 
     in taxable years beginning after December 31, 2004.
     2. Natural gas gathering lines treated as seven-year property 
         (sec. 842 of the Senate amendment and sec. 168 of the 
         Code)


                              Present Law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are generally set forth 
     in Revenue Procedure 87-56.\393\ Revenue Procedure 87-56 
     includes two asset classes that could describe natural gas 
     gathering lines owned by nonproducers of natural gas. Asset 
     class 46.0, describing pipeline transportation, provides a 
     class life of 22 years and a recovery period of 15 years. 
     Asset class 13.2, describing assets used in the exploration 
     for and production of petroleum and natural gas deposits, 
     provides a class life of 14 years and a depreciation recovery 
     period of seven years. The uncertainty regarding the 
     appropriate recovery period of natural gas gathering lines 
     has resulted in litigation between taxpayers and the IRS. The 
     10th Circuit Court of Appeals and the 6th Circuit Court of 
     Appeals have held that natural gas gathering lines owned by 
     nonproducers falls within the scope of Asset class 13.2 
     (i.e., seven-year recovery period).\394\ The Tax Court has 
     held that natural gas gathering lines owned by nonproducers 
     falls within the scope of Asset class 46.0 (i.e., 15-year 
     recovery period).\395\
---------------------------------------------------------------------------
     \393\ 1987-2 C.B. 674 (as clarified and modified by Rev. 
     Proc. 88-22, 1988-1 C.B. 785).
     \394\ Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 
     1999), rev'g 109 T.C. 416 (1997). Saginaw Bay Pipeline Co. v. 
     United States, 2003 FED App. 0259P (6th Cir.) rev'g 124 F. 
     Supp. 2d 465 (E.D. Mich. 2001). See also True v. United 
     States, 97-2 U.S. Tax Cas. (CCH) par. 50,946 (D. Wyo. 1997).
     \395\ Clajon Gas Co., L.P. v. Commissioner, 119 T.C. 197 
     (2002).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment establishes a statutory seven-year 
     recovery period and a class life of 14 years for natural gas 
     gathering lines. A natural gas gathering line is defined to 
     include any pipe, equipment, and appurtenance that is (1) 
     determined to be a gathering line by the Federal Energy 
     Regulatory Commission, or (2) used to deliver natural gas 
     from the wellhead or a common point to the point at which 
     such gas first reaches (a) a gas processing plant, (b) an 
     interconnection with an interstate transmission line, (c) an 
     interconnection with an intrastate transmission line, or (d) 
     a direct interconnection with a local distribution 
     company, a gas storage facility, or an industrial 
     consumer.
       Effective date.--The Senate amendment is effective for 
     property placed in service after December 31, 2004, in 
     taxable years ending after that date. No inference is 
     intended as to the proper treatment of natural gas gathering 
     lines placed in service before the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Expensing of capital costs incurred for production in 
         complying with environmental protection agency sulfur 
         regulations for small refiners (sec. 843 of the Senate 
         amendment and new sec. 179B of the Code)


                              Present Law

       Taxpayers generally may recover the costs of investments in 
     refinery property through annual depreciation deductions.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment permits small business refiners to 
     immediately deduct as an expense up to 75 percent of the 
     costs paid or incurred for the purpose of complying with the 
     Highway Diesel Fuel Sulfur Control Requirements of the 
     Environmental Protection Agency (``EPA''). Costs qualifying 
     for the deduction are those costs paid or incurred with 
     respect to any facility of a small business refiner during 
     the period beginning on January 1, 2003 and ending on the 
     earlier of the date that is one year after the date on which 
     the taxpayer must comply with the applicable EPA regulations 
     or December 31, 2009.
       For these purposes a small business refiner is a taxpayer 
     who is in the business of refining petroleum products and 
     employs not more than 1,500 employees directly in refining 
     and has less than 205,000 barrels per day (average) of total 
     refinery capacity. The deduction is reduced, pro rata, for 
     taxpayers with capacity in excess of 155,000 barrels per day.
       Effective date.--The Senate amendment is effective for 
     expenses paid or incurred after December 31, 2002, in taxable 
     years ending after that date.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision. With respect to the definition of a small business 
     refiner, the conferees intend that, in any case in which 
     refinery through-put or retained production of the refinery 
     differs substantially from its average daily output or 
     refined product, capacity be measured by reference to the 
     average daily output of refined product.
     4. Credit for small refiners for production of diesel fuel in 
         compliance with Environmental Protection Agency sulfur 
         regulations for small refiners (sec. 844 of Senate 
         amendment and new sec. 45H of the Code)


                              Present Law

       Present law does not provide a credit for the production of 
     low-sulfur diesel fuel.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that a small business refiner 
     may claim credit equal to five cents per gallon for each 
     gallon of low sulfur diesel fuel produced during the taxable 
     year that is in compliance with the Highway Diesel Fuel 
     Sulfur Control Requirements of the Environmental Protection 
     Agency (``EPA''). The total production credit claimed by the 
     taxpayer is limited to 25 percent of the capital costs 
     incurred to come into compliance with the EPA diesel fuel 
     requirements. Costs qualifying for the credit are those costs 
     paid or incurred with respect to any facility of a small 
     business refiner during the period beginning on January 1, 
     2003 and ending on the earlier of the date that is one year 
     after the date on which the taxpayer must comply with the 
     applicable EPA regulations or December 31, 2009. The 
     taxpayer's basis in property with respect to which the credit 
     applies is reduced by the amount of production credit 
     claimed.

[[Page H8552]]

       In the case of a qualifying small business refiner that is 
     owned by a cooperative, the cooperative is allowed to elect 
     to pass any production credits to patrons of the 
     organization.
       For these purposes a small business refiner is a taxpayer 
     who is in the business of refining petroleum products, 
     employs not more than 1,500 employees directly in refining, 
     and has less than 205,000 barrels per day (average) of total 
     refinery capacity. The credit is reduced, pro rata, for 
     taxpayers with capacity in excess of 155,000 barrels per day.
       Effective date.--The Senate amendment is effective for 
     expenses paid or incurred after December 31, 2002, in taxable 
     years ending after that date.


                          Conference Agreement

       The conference agreement includes the Senate amendment 
     provision with modification as follows. The conference 
     agreement makes the low sulfur diesel fuel credit a qualified 
     business credit under section 169(c). Therefore, if any 
     portion of the credit has not been allowed to the taxpayer as 
     a general business credit (sec. 38) for any taxable year, an 
     amount equal to that portion may be deducted by the taxpayer 
     in the first taxable year following the last taxable year for 
     which such portion could have been allowed as a credit under 
     the carryback and carryforward rules (sec. 39). With respect 
     to the definition of a small business refiner, the conferees 
     intend that, in any case where refinery through-put or 
     retained production of the refinery differs substantially 
     from its average daily output of refined product, capacity be 
     measured by reference to the average daily output of refined 
     product.
     5. Determination of small refiner exception to oil depletion 
         deduction (sec. 845 of the Senate amendment and sec. 613A 
         of the Code)


                              Present Law

       Present law classifies oil and gas producers as independent 
     producers or integrated companies. The Code provides numerous 
     special tax rules for operations by independent producers. 
     One such rule allows independent producers to claim 
     percentage depletion deductions rather than deducting the 
     costs of their asset, a producing well, based on actual 
     production from the well (i.e., cost depletion).
       A producer is an independent producer only if its refining 
     and retail operations are relatively small. For example, an 
     independent producer may not have refining operations the 
     runs from which exceed 50,000 barrels on any day in the 
     taxable year during which independent producer status is 
     claimed.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the current 50,000-barrel-
     per-day limitation to 60,000. In addition, the provision 
     changes the refinery limitation on claiming independent 
     producer status from a limit based on actual daily production 
     to a limit based on average daily production for the taxable 
     year. Accordingly, the average daily refinery run for the 
     taxable year may not exceed 60,000 barrels. For this purpose, 
     the taxpayer calculates average daily production by dividing 
     total production for the taxable year by the total number of 
     days in the taxable year.
       Effective date.--The Senate amendment is effective for 
     taxable years ending after December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Suspension of 100-percent-of-net-income limitation on 
         percentage depletion for oil and gas from marginal wells 
         (sec. 412 of the House bill, sec. 846 of the Senate 
         amendment, and sec. 613A of the Code)


                              Present Law

     Overview of depletion
       Depletion, like depreciation, is a form of capital cost 
     recovery. In both cases, the taxpayer is allowed a deduction 
     in recognition of the fact that an asset-in the case of 
     depletion for oil or gas interests, the mineral reserve 
     itself-is being expended in order to produce income. Certain 
     costs incurred prior to drilling an oil or gas property are 
     recovered through the depletion deduction. These include 
     costs of acquiring the lease or other interest in the 
     property and geological and geophysical costs (in advance of 
     actual drilling).
       Depletion is available to any person having an economic 
     interest in a producing property. An economic interest is 
     possessed in every case in which the taxpayer has acquired by 
     investment any interest in minerals in place, and secures, by 
     any form of legal relationship, income derived from the 
     extraction of the mineral, to which it must look for a return 
     of its capital.\396\ Thus, for example, both working 
     interests and royalty interests in an oil- or gas-producing 
     property constitute economic interests, thereby qualifying 
     the interest holders for depletion deductions with respect to 
     the property. A taxpayer who has no capital investment in the 
     mineral deposit does not possess an economic interest merely 
     because it possesses an economic or pecuniary advantage 
     derived from production through a contractual relation.
---------------------------------------------------------------------------
     \396\ Treas. Reg. sec. 1.611-1(b)(1).
---------------------------------------------------------------------------
     Cost depletion
       Two methods of depletion are currently allowable under the 
     Code: (1) the cost depletion method, and (2) the percentage 
     depletion method.\397\ Under the cost depletion method, the 
     taxpayer deducts that portion of the adjusted basis of the 
     depletable property which is equal to the ratio of units sold 
     from that property during the taxable year to the number of 
     units remaining as of the end of taxable year plus the number 
     of units sold during the taxable year. Thus, the amount 
     recovered under cost depletion may never exceed the 
     taxpayer's basis in the property.
---------------------------------------------------------------------------
     \397\ Secs. 611-613.
---------------------------------------------------------------------------
     Percentage depletion and related income limitations
       The Code generally limits the percentage depletion method 
     for oil and gas properties to independent producers and 
     royalty owners.\398\ Generally, under the percentage 
     depletion method, 15 percent of the taxpayer's gross income 
     from an oil- or gas-producing property is allowed as a 
     deduction in each taxable year.\399\ The amount deducted 
     generally may not exceed 100 percent of the net income from 
     that property in any year (the ``net-income 
     limitation'').\400\ The 100-percent net-income limitation for 
     marginal wells has been suspended for taxable years beginning 
     after December 31, 1997, and before January 1, 2006.
---------------------------------------------------------------------------
     \398\ Sec. 613A.
     \399\ Sec. 613A(c).
     \400\ Sec. 613(a).
---------------------------------------------------------------------------


                            House Bill \401\

       The provision extends the suspension of the net-income 
     limitation for marginal wells for taxable years beginning 
     before January 1, 2006.
---------------------------------------------------------------------------
     \401\ The House bill predated the enactment of H.R. 1308, 
     Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
     2004''), which included a number of extensions to expiring 
     provisions.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                         Senate Amendment \402\

       The Senate amendment extends the suspension of the net-
     income limitation for marginal wells for taxable years 
     beginning before January 1, 2007.
---------------------------------------------------------------------------
     \402\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a number of extensions to 
     expiring provisions.
---------------------------------------------------------------------------
       Effective date.--Same as the House bill.


                          Conference Agreement

       The conference agreement does not contain the House bill or 
     Senate amendment provision.
     7. Delay rental payments (sec. 847 of the Senate amendment 
         and sec. 167 of the Code)


                              Present Law

       Present law generally requires costs associated with 
     inventory and property held for resale to be capitalized 
     rather than currently deducted as they are incurred. (sec. 
     263). Oil and gas producers typically contract for mineral 
     production in exchange for royalty payments. If mineral 
     production is delayed, these contracts provide for ``delay 
     rental payments'' as a condition of their extension. A delay 
     rental is an amount paid for the privilege of deferring 
     development of the property and which could have been avoided 
     by abandonment of the lease, or by commencement of 
     development of operations or by obtaining production. The 
     Treasury Department has taken the position that the uniform 
     capitalization rules of section 263A require delay rental 
     payments to be capitalized.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that delay rental payments 
     incurred in connection with the development of oil or gas be 
     amortized over two years. In the case of abandoned property, 
     remaining basis may no longer be recovered in the year of 
     abandonment of a property as all basis is recovered over the 
     two-year amortization period.
       Effective date.--The Senate amendment is effective for 
     amounts paid or incurred in taxable years beginning after 
     December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Geological and geophysical costs (sec. 848 of the Senate 
         amendment and sec. 167 of the Code)


                              Present Law

       Under present law, geological and geophysical expenditures 
     are costs incurred by a taxpayer for the purpose of obtaining 
     and accumulating data that will serve as the basis for the 
     acquisition and retention of mineral properties by taxpayers 
     exploring for minerals. Capital expenditures are not 
     currently deductible as ordinary and necessary expenses, but 
     are allocated to the cost of the property (sec. 263). Courts 
     have held that geological and geophysical costs are capital, 
     and therefore are allocable to the cost of property acquired 
     or retained. The costs attributable to such exploration are 
     allocable to the cost of the property acquired or retained. 
     In the case of abandoned property, exploration expenditures 
     are allowable as a loss when such property is abandoned.


                               House Bill

       No provision.

[[Page H8553]]

                            Senate Amendment

       The Senate amendment provides that geological and 
     geophysical costs incurred in connection with domestic oil 
     and gas exploration be amortized over two years. In the case 
     of abandoned property, remaining basis may no longer be 
     recovered in the year of abandonment of a property as all 
     basis is recovered over the two-year amortization period.
       Effective date.--The Senate amendment is effective for 
     costs paid or incurred in taxable years beginning after 
     December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Extension and modification of credit for producing fuel 
         from a non-conventional source (sec. 849 of the Senate 
         amendment and sec. 29 of the Code)


                              Present Law

       An income tax credit is allowed for certain fuels produced 
     from ``non-conventional sources'' and sold to unrelated 
     parties. The amount of the credit is equal to $3 (generally 
     adjusted for inflation \403\ ) per barrel or Btu oil barrel 
     equivalent (sec. 29). Qualified fuels must be produced within 
     the United States, and include: oil produced from shale and 
     tar sands; gas produced from geopressured brine, Devonian 
     shale, coal seams, tight formations (``tight sands''), or 
     biomass; and liquid, gaseous, or solid synthetic fuels 
     produced from coal (including lignite).
---------------------------------------------------------------------------
     \403\ The value of the section 29 credit for production in 
     2003 was $6.40 per barrel of oil equivalent. The $3.00 credit 
     for gas from a tight formation is not adjusted for inflation.
---------------------------------------------------------------------------
       The credit applies to fuels produced from wells drilled or 
     facilities placed in service after December 31, 1979, and 
     before January 1, 1993. An exception extends the January 1, 
     1993 expiration date for facilities producing gas from 
     biomass and synthetic fuel from coal if the facility 
     producing the fuel is placed in service before July 1, 1998, 
     pursuant to a binding contract entered into before January 1, 
     1997.
       The credit applies to qualified fuels produced and sold 
     before January 1, 2003 (in the case of non-conventional 
     sources subject to the January 1, 1993, expiration date) or 
     January 1, 2008 (in the case of biomass gas and synthetic 
     fuel facilities eligible for the extension period).


                               House Bill

       No provision.


                            Senate Amendment

     Extension of placed in service date for certain new 
         facilities
       For new wells or facilities producing qualifying fuels that 
     are oil from shale or tar sands, and gas from geopressured 
     brine, Devonian shale, coal seams, a tight formation, or 
     biomass, the credit can be claimed for production from such 
     new facilities placed in service after December 31, 2004 and 
     before January 1, 2007. The credit may be claimed for the 
     three-year period beginning on the date such well or facility 
     is placed in service. For all qualifying wells and facilities 
     the value of the credit is $3.00 per barrel or Btu equivalent 
     for production in 2003 and is indexed for inflation 
     commencing with the credit amount for 2004.
     Extension and modification for ``refined coal''
       The Senate amendment provides a credit for production of 
     ``refined coal'' from facilities placed in service after 
     December 31, 2004, and before January 1, 2007. Credit may be 
     claimed for fuel produced during the five-year period 
     beginning on the date such facility is placed in service. The 
     amount of the credit is $3.00 per barrel or Btu equivalent 
     for production in 2003 and is indexed for inflation 
     commencing with the credit amount for 2004. Refined coal is a 
     fuel that is a liquid, gaseous, or solid synthetic fuel 
     produced from coal (including lignite) or high-carbon fly 
     ash, including such fuel used as a feedstock. A facility 
     qualifies for the credit only if it produces refined coal 
     that: (1) when burned emits 20 percent less SO2 and nitrogen 
     oxides than the burning of feedstock coal or comparable coal 
     predominantly available in the marketplace as of January 1, 
     2004, and (2) sells at prices at least 50 percent greater 
     than the prices of the feedstock coal or comparable coal. 
     However, no fuel produced at a qualifying advanced clean coal 
     technology unit (as defined elsewhere) is a qualifying fuel.
     Expansion for ``viscous oil''
       The Senate amendment provides a credit for production of 
     certain viscous oil produced at wells placed in service after 
     December 31, 2004, and before January 1, 2007. ``Viscous 
     oil'' is domestic crude oil produced from any property if the 
     crude oil has a weighted average gravity of 22 degrees API or 
     less (corrected to 60 degrees Fahrenheit). The credit may be 
     claimed for fuel produced during the three-year period 
     beginning on the date such well is placed in service. The 
     amount of the credit is $3.00 per barrel or Btu equivalent 
     for production in 2003 and is indexed for inflation 
     commencing with the credit amount for 2004. The Senate 
     amendment provides that qualifying sales to related parties 
     for consumption not in the immediate vicinity of the wellhead 
     qualify for the credit.
     Credit for coalmine methane gas
       The Senate amendment provides a credit for production of 
     ``coalmine methane gas'' captured or extracted from a 
     coalmine and sold after December 31, 2004, and before January 
     1, 2007. The amount of the credit is $3.00 (indexed for 
     inflation from 2002) per barrel or Btu oil for gas utilized 
     captured or sold during the applicable period. Qualifying 
     coalmine gas is any methane gas liberated during coal mining 
     operations or extracted up to ten years in advance of coal 
     mining operations as part of a specific plan to mine a coal 
     deposit. In the case of coalmine methane gas that is captured 
     in advance of coal mining operations, the credit is allowed 
     only after the date the coal extraction occurs in the 
     immediate area where the coalmine methane gas was removed. 
     The capture or extraction of coalmine gas from coal mining 
     operations is required to be in compliance with applicable 
     State and Federal pollution prevention, control, and permit 
     requirements in order to qualify for the credit.
     Expansion for agricultural and animal wastes
       The Senate amendment adds facilities producing liquid, 
     gaseous, or solid fuels from agricultural and animal wastes 
     (including such fuels when used as feedstocks) placed in 
     service after December 31, 2004, and before January 1, 2007, 
     to the list of qualified facilities for purposes of the non-
     conventional fuel credit. The credit may be claimed for fuel 
     produced during the three-year period beginning on the date 
     such facility is placed in service. The amount of the credit 
     is $3.00 per barrel or Btu equivalent for production in 2003 
     and is indexed for inflation commencing with the credit 
     amount for 2004. Agricultural and animal waste includes by-
     products, packaging, and any materials associated with 
     processing, feeding, selling, transporting, or disposal of 
     agricultural or animal products or wastes.
     Extension of credit for certain existing facilities
       The Senate amendment extends the present law credit ($3.00 
     indexed for inflation from 1979) through December 31, 2005, 
     for production from existing facilities producing coke, coke 
     gas, or natural gas and by-products produced by coal 
     gasification from lignite. For persons (or subsidiaries of 
     such persons) engaged in furnishing electric energy, or 
     providing telephone service, to persons in rural areas, any 
     credit claimed for this purpose may be applied as a 
     prepayment of any loan, debt, or other obligation to the 
     extent provided by the Secretary of Agriculture and to the 
     extent provided by the Secretary of Energy, as a prepayment 
     not to exceed 50 percent of any obligation incurred pursuant 
     to an asset purchase agreement entered into with the 
     Secretary and dated October 7, 1988. Such credit is not 
     considered income for these purposes.
     Daily limit
       Under the Senate amendment, with respect to qualifying 
     facilities placed in service under the extended placed in 
     service dates, a taxpayer would not be able to claim any 
     credit for production in excess of a daily average \404\ of 
     200,000 cubic feet of natural gas or barrel of oil equivalent 
     (200,000 cubic feet is equivalent to approximately 35.4 
     barrels of oil) of such gas with respect to: (1) oil produced 
     from shale and tar sands and (2) gas produced from 
     geopressured brine, Devonian shale, coal seems, or a tight 
     formation. Days before the date the project is placed in 
     service are not taken into account in determining such 
     average.
---------------------------------------------------------------------------
     \404\ The daily average is computed as total production 
     divided by the total number of days the well or facility was 
     in production during the year. Days before the date the 
     project is placed in service are not taken into account in 
     determining the daily average.
---------------------------------------------------------------------------
     New phaseout adjustment
       In the case of fuels sold after 2003, with the exception of 
     fuel produced at existing facilities and for any gas from a 
     tight formation: (1) the dollar amount of the credit is $3.00 
     indexed for inflation from 2002 (without regard to a phaseout 
     adjustment), and (2) the threshold for purposes of the 
     phaseout of the credit is increased from $23.50 to $35.00 
     (indexed for inflation from 2002).
     General business credit
       The provision adds section 29 to the list of general 
     business credits and re-labels present section 29 of the Code 
     as new Code section 45R.
     Study of coalbed methane gas
       The Senate amendment provides that the Secretary of 
     Treasury undertake a study of the effect of section 29 on the 
     production of coalbed methane. The study should estimate the 
     total amount of credit claimed annually and in aggregate 
     related to the production of coalbed methane since the date 
     of enactment of section 29. The study should report the 
     annual value of the credit allowable for coalbed methane 
     compared to the average annual wellhead price of natural gas 
     (per thousand cubic feet of natural gas). The study should 
     estimate the incremental increase in production of coalbed 
     methane that has resulted from the enactment of section 29. 
     The study should also estimate the cost to the Federal 
     government, in terms of the net tax benefits claimed, per 
     thousand cubic feet of incremental coalbed methane produced 
     annually and in aggregate since the enactment of section 29.
     Effective date
       In general, except as provided below, the provision is 
     effective for fuel sold from qualifying facilities after 
     December 31, 2004, in taxable years ending after such date.
       For existing facilities, the provision is effective for 
     fuel sold after December 31, 2002, in taxable years ending 
     after such date.
       For application of the general business credit, the 
     provision is effective for taxable years ending after 
     December 31, 2003.

[[Page H8554]]

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Natural gas distribution lines treated as 15-year 
         property (sec. 850 of the Senate amendment and sec. 168 
         of the Code)


                              Present Law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are generally set forth 
     in Revenue Procedure 87-56.\405\ Natural gas distribution 
     pipelines are assigned a 20-year recovery period and a class 
     life of 35 years.
---------------------------------------------------------------------------
     \405\ 1987-2 C.B. 674 (as clarified and modified by Rev. 
     Proc. 88-22, 1988-1 C.B. 785).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment establishes a statutory 15-year 
     recovery period and a class life of 35 years for natural gas 
     distribution lines.
       Effective date.--The Senate amendment is effective for 
     property placed in service after December 31, 2004, in 
     taxable years ending after such date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Credit for production of Alaska natural gas (sec. 851 of 
         Senate amendment)


                              Present Law

       Present law does not provide a credit for conventional 
     production of natural gas or delivery of fuels to a pipeline. 
     However, certain fuels produced from ``non-conventional 
     sources'' and sold to unrelated parties are eligible for an 
     income tax credit equal to $3 (generally adjusted for 
     inflation) per barrel or BTU oil barrel equivalent (sec. 29). 
     Qualified fuels must be produced within the United States.
       Qualified fuels include:
       (1) gas produced from geopressured brine, Devonian shale, 
     coal seams, tight formations (``tight sands''), or biomass; 
     and
       (2) liquid, gaseous, or solid synthetic fuels produced from 
     coal (including lignite).
       In general, the credit is available only with respect to 
     fuels produced from wells drilled or facilities placed in 
     service after December 31, 1979, and before January 1, 1993. 
     An exception extends the January 1, 1993 expiration date for 
     facilities producing gas from biomass and synthetic fuel from 
     coal if the facility producing the fuel is placed in service 
     before July 1, 1998, pursuant to a binding contract entered 
     into before January 1, 1997.
       The credit may be claimed for qualified fuels produced and 
     sold before January 1, 2003 (in the case of non-conventional 
     sources subject to the January 1, 1993 expiration date) or 
     January 1, 2008 (in the case of biomass gas and synthetic 
     fuel facilities eligible for the extension period).


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides a credit per million British thermal 
     units (Btu) of natural gas for Alaska natural gas entering a 
     pipeline \406\ during the 25-year period beginning the later 
     of January 1, 2010 or the initial date for the interstate 
     transportation of Alaska natural gas. Taxpayers may claim the 
     credit against both the regular and minimum tax.
---------------------------------------------------------------------------
     \406\ Natural gas entering a gas processing facility is not 
     considered to have entered a pipeline. Rather, the credit 
     applies only to pipeline quality gas at the time of entry 
     into the pipeline.
---------------------------------------------------------------------------
       The credit amount for any month is a maximum of 52 cents 
     per million Btu of natural gas. The credit phases out as the 
     reference price of Alaska natural gas rises above 83 cents 
     per million Btu, at a rate of one cent of credit lost per 
     each cent by which the reference price of Alaska natural gas 
     exceeds 83 cents per million Btu. The credit is not available 
     if the reference price of Alaska natural gas rises above 
     $1.35 per million Btu. The 52-cent and 83-cent figures are 
     indexed for inflation after 2004, with the first adjustment 
     for calendar year 2006.\407\
---------------------------------------------------------------------------
     \407\ In practice, the $1.35-figure also is indexed for 
     inflation, as $1.35 is the sum of the 52-cent credit and the 
     83-cent price.The bill provides that the Secretary can 
     compute the inflation adjustment factor for a calendar year 
     in the fourth quarter of the preceding year. For example, the 
     adjustment for 2006 is calculated as the 2005 GDP deflator 
     over the 2004 GDP deflator, where the 2004 GDP deflator is 
     the value of the GDP deflator on June 30, 2004 (as determined 
     by the latest available revision from the Department of 
     Commerce prior to October 1, 2004). Likewise, the 2005 
     deflator is the value of the GDP deflator on June 30, 2005.
---------------------------------------------------------------------------
       The bill provides that the Secretary of Treasury calculate 
     the reference price of Alaska natural gas as the average 
     price of natural gas delivered in the lower 48 States less 
     certain transportation costs and gas processing costs. Alaska 
     natural gas is any gas derived from an area of the State of 
     Alaska lying north of 64 degrees North latitude, but not 
     including the Alaska National Wildlife Refuge.
       The credit is part of the general business credit.
       Effective date.--The proposal is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     12. Treat certain Alaska pipeline property as seven-year 
         property (sec. 852 of the Senate amendment and sec. 168 
         of the Code)


                              Present Law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are generally set forth 
     in Revenue Procedure 87-56.\408\ Asset class 46.0, describing 
     assets used in the private, commercial, and contract carrying 
     of petroleum, gas and other products by means of pipes and 
     conveyors, are assigned a class life of 22 years and a 
     recovery period of 15 years.
---------------------------------------------------------------------------
     \408\ 1987-2 C.B. 674 (as clarified and modified by Rev. 
     Proc. 88-22, 1988-1 C.B. 785).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment establishes a statutory seven-year 
     recovery period and a class life of 22 years for any Alaska 
     natural gas pipeline. The term ``Alaska natural gas 
     pipeline'' is defined as any natural gas pipeline system 
     (including the pipe, trunk lines, related equipment, and 
     appurtenances used to carry natural gas, but not any gas 
     processing plant) located in the State of Alaska that has a 
     capacity of more than 500 billion Btu of natural gas per day 
     and is placed in service after December 31, 2012. A taxpayer 
     who places an otherwise qualifying system in service before 
     January 1, 2013 may elect to treat the system as placed in 
     service on January 1, 2013, thus qualifying for the seven-
     year recovery period.
       Effective date.--The Senate amendment is effective for 
     property placed in service after December 31, 2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     the following modification. In order to qualify for the 
     seven-year recovery period, otherwise qualifying property 
     must be placed in service after December 31, 2013. A taxpayer 
     who places an otherwise qualifying system in service before 
     January 1, 2014 may elect to treat the system as placed in 
     service on January 1, 2014, thus qualifying for the seven-
     year recovery period.
       Effective date.--The provision is effective for property 
     placed in service after December 31, 2004.
     13. Enhanced oil recovery credit for certain gas processing 
         facilities (sec. 853 of the Senate amendment and sec. 43 
         of the Code)


                              Present Law

       The taxpayer may claim a credit equal to 15 percent of 
     enhanced oil recovery costs. Qualified enhanced oil recovery 
     costs include costs of depreciable tangible property that is 
     part of an enhanced oil recovery project, intangible drilling 
     and development costs with respect to an enhanced oil 
     recovery project, and tertiary injectant expenses incurred 
     with respect to an enhanced oil recovery project. The credit 
     is phased out when oil prices exceed a threshold amount.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that expenses in connection 
     with the construction of any qualifying natural gas 
     processing plant capable of processing two trillion British 
     thermal units of Alaskan natural gas into a natural gas 
     pipeline system on a daily basis are qualified enhanced oil 
     recovery costs eligible for the enhanced oil recovery credit. 
     A qualifying natural gas processing plant also must produce 
     carbon dioxide for re-injection into a producing oil or gas 
     field.
       Effective date.--The provision is effective for costs paid 
     or incurred in taxable years beginning after December 31, 
     2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     14. Exempt certain prepayments for natural gas from tax-
         exempt bond arbitrage rules (sec. 854 of the Senate 
         amendment and secs. 141 and 148 of the Code)


                              Present Law

       Interest on bonds issued by States or local governments to 
     finance activities carried out or paid for by those entities 
     generally is exempt from income tax. Restrictions are imposed 
     on the ability of States or local governments to invest the 
     proceeds of these bonds for profit (the ``arbitrage 
     restrictions''). One such restriction limits the use of bond 
     proceeds to acquire ``investment-type property.'' The term 
     investment-type property includes the acquisition of property 
     in a transaction involving a prepayment if a principal 
     purpose of the prepayment is to receive an investment 
     return from the time the prepayment is made until the time 
     payment otherwise would be made. A prepayment can produce 
     prohibited arbitrage profits when the discount received 
     for prepaying the costs exceeds the yield on the tax-
     exempt bonds. In general, prohibited prepayments include 
     all prepayments that are not customary in an industry by 
     both beneficiaries of tax-exempt bonds and other persons 
     using taxable financing for the same transaction.
       On August 4, 2003, the Treasury Department issued final 
     regulations deeming to be customary, and not in violation of 
     the arbitrage rules, certain prepayments for natural gas and 
     electricity.\409\ Generally, a qualified

[[Page H8555]]

     prepayment under the regulations requires that 90 percent of 
     the natural gas or electricity purchased with the prepayment 
     be used for a qualifying use. Generally, natural gas is used 
     for a qualifying use if it is to be (1) furnished to retail 
     gas customers of the issuing municipal utility who are 
     located in the natural gas service area of the issuing 
     municipal utility, however, gas used to produce electricity 
     for sale is not included under this provision (2) used by the 
     issuing municipal utility to produce electricity that will be 
     furnished to retail electric service area customers of the 
     issuing utility, (3) used by the issuing municipal utility to 
     produce electricity that will be sold to a utility owned by a 
     governmental person and furnished to the service area retail 
     electric customers of the purchaser, (4) sold to a utility 
     that is owned by a governmental person if the requirements of 
     (1), (2) or (3) are satisfied by the purchasing utility 
     (treating the purchaser as the issuing utility) or (5) used 
     to fuel the pipeline transportation of the prepaid gas 
     supply. Electricity is used for a qualifying use if it is to 
     be (1) furnished to retail service area electric customers of 
     the issuing municipal utility or (2) sold to a municipal 
     utility and furnished to retail electric customers of the 
     purchaser who are located in the electricity service area of 
     the purchaser. Both governmental gas and electric utilities 
     may take advantage of this regulatory provision.
---------------------------------------------------------------------------
     \409\ Treas. Reg. sec. 1.148-1(e)(2)(iii).
---------------------------------------------------------------------------
       State and local bonds may be classified as either 
     governmental bonds or private activity bonds. Governmental 
     bonds are bonds the proceeds of which are primarily used to 
     finance governmental functions or the debt is repaid with 
     governmental funds. Private activity bonds are bonds where 
     the State or local government serves as a conduit providing 
     financing to private businesses or individuals. The exclusion 
     from income for State and local bonds does not apply to 
     private activity bonds, unless the bonds are issued for 
     certain purposes permitted by the Code. Section 141(D) of the 
     Code provides that the term ``private activity bond'' 
     includes any bond issued as part of an issue if the amount of 
     the proceeds of the issue which are to be used (directly or 
     indirectly) for the acquisition by a governmental unit of 
     nongovernmental output property exceeds the lesser of five 
     percent of such proceeds or $5 million. ``Nongovernmental 
     output property'' generally means any property (or interest 
     therein) which before such acquisition was used (or held for 
     use) by a person other than a governmental unit in connection 
     with an output facility (other than a facility for the 
     furnishing of water). An exception applies to output property 
     which is to be used in connection with an output facility 95 
     percent or more of the output of which will be consumed in 
     (1) a qualified service area of the governmental unit 
     acquiring the property, or (2) a qualified annexed area of 
     such unit.


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The provision creates a safe harbor exception to the 
     general rule that tax-exempt bond-financed prepayments 
     violate the arbitrage restrictions. The term ``investment 
     type property'' does not include a prepayment under a 
     qualified natural gas supply contract. The provision also 
     provides that such prepayments are not treated as private 
     loans for purposes of the private business tests.
       Under the provision, a prepayment financed with tax-exempt 
     bond proceeds for the purpose of obtaining a supply of 
     natural gas for service area customers of a governmental 
     utility is not treated as the acquisition of investment-type 
     property. A contract is a qualified natural gas contract if 
     the volume of natural gas secured for any year covered by the 
     prepayment does not exceed the sum of (1) the average annual 
     natural gas purchased (other than for resale) by customers of 
     the utility within the service area of the utility (``retail 
     natural gas consumption'') during the testing period, and (2) 
     the amount of natural gas that is needed to fuel 
     transportation of the natural gas to the governmental 
     utility. The testing period is the 5-calendar-year period 
     immediately preceding the calendar year in which the bonds 
     are issued. A retail customer is one who does not purchase 
     natural gas for resale. Natural gas used to generate 
     electricity by a utility owned by a governmental unit is 
     counted as retail natural gas consumption if the electricity 
     was sold to retail customers within the service area of the 
     governmental electric utility.
     Adjustments
       The volume of gas permitted by the general rule is reduced 
     by natural gas otherwise available on the date of issuance. 
     Specifically, the amount of natural gas permitted to be 
     acquired under a qualified natural gas contract for any 
     period is to be reduced by natural gas held by the utility on 
     the date of issuance of the bonds and natural gas that the 
     utility has a right to acquire for the prepayment period 
     (determined as of the date of issuance). For purposes of the 
     preceding sentence, applicable share means, with respect to 
     any period, the natural gas allocable to such period if the 
     gas were allocated ratably over the period to which the 
     prepayment relates.
       For purposes of the safe harbor, if after the close of the 
     testing period and before the issue date of the bonds (1) the 
     government utility enters into a contract to supply natural 
     gas (other than for resale) for a commercial person for use 
     at a property within the service area of such utility and (2) 
     the gas consumption for such property was not included in the 
     testing period or the ratable amount of natural gas to be 
     supplied under the contract is significantly greater than the 
     ratable amount of gas supplied to such property during the 
     testing period, then the amount of gas permitted to be 
     purchased may be increased to accommodate the contract.
       The average annual retail natural gas consumption 
     calculation for purposes of the safe harbor, however, is not 
     to exceed the annual amount of natural gas reasonably 
     expected to be purchased (other than for resale) by persons 
     who are located within the service area of such utility 
     and who, as of the date of issuance of the issue, are 
     customers of such utility.
     Intentional acts
       The safe harbor does not apply if the utility engages in 
     intentional acts to render (1) the volume of natural gas 
     covered by the prepayment to be in excess of that needed for 
     retail natural gas consumption, and (2) the amount of natural 
     gas that is needed to fuel transportation of the natural gas 
     to the governmental utility.
     Definition of service area
       Service area is defined as (1) any area throughout which 
     the governmental utility provided (at all times during the 
     testing period) in the case of a natural gas utility, natural 
     gas transmission or distribution service, or in the case of 
     an electric utility, electric distribution service; (2) 
     limited areas contiguous to such areas; and (3) any area 
     recognized as the service area of the governmental utility 
     under State or Federal law. Contiguous areas are limited to 
     any area within a county contiguous to the area described in 
     (1) in which retail customers of the utility are located if 
     such area is not also served by another utility providing the 
     same service.
     Ruling request for higher prepayment amounts
       Upon written request, the Secretary may allow an issuer to 
     prepay for an amount of gas greater than that allowed by the 
     safe harbor based on objective evidence of growth in gas 
     consumption or population that demonstrates that the amount 
     permitted by the exception is insufficient.
     Nongovernmental output property restrictions
       A qualified natural gas supply contract as defined in the 
     Senate amendment is not nongovernmental output property for 
     purposes of subsection (d) of section 141. Subsection (d) of 
     section 141 does not apply to prepayment contracts for 
     natural gas or electricity that either under the Treasury 
     regulations or statutory safe harbor are not investment-type 
     property for purposes of the arbitrage rules under section 
     148. No inference is intended regarding the application of 
     subsection 141(d) to prepayment contracts not covered by the 
     statutory safe harbor or Treasury regulations.
     Effective date
       The provision is effective for obligations issued after 
     December 31, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

      F. Electric Utility Restructuring and Reliability Provisions

     1. Modification to special rules for nuclear decommissioning 
         costs (sec. 855 of the Senate amendment and sec. 468A of 
         the Code)


                              Present Law

     Overview
       Special rules dealing with nuclear decommissioning reserve 
     funds were adopted by Congress in the Deficit Reduction Act 
     of 1984 (``1984 Act''), when tax issues regarding the time 
     value of money were addressed generally. Under general tax 
     accounting rules, a deduction for accrual basis taxpayers is 
     deferred until there is economic performance for the item for 
     which the deduction is claimed. However, the 1984 Act 
     contains an exception under which a taxpayer responsible for 
     nuclear powerplant decommissioning may elect to deduct 
     contributions made to a qualified nuclear decommissioning 
     fund for future decommissioning costs. Taxpayers who do not 
     elect this provision are subject to general tax accounting 
     rules.
     Qualified nuclear decommissioning fund
       A qualified nuclear decommissioning fund (a ``qualified 
     fund'') is a segregated fund established by a taxpayer that 
     is used exclusively for the payment of decommissioning costs, 
     taxes on fund income, management costs of the fund, and for 
     making investments. The income of the fund is taxed at a 
     reduced rate of 20 percent for taxable years beginning after 
     December 31, 1995.\410\
---------------------------------------------------------------------------
     \410\ As originally enacted in 1984, a qualified fund paid 
     tax on its earnings at the top corporate rate and, as a 
     result, there was no present-value tax benefit of making 
     deductible contributions to a qualified fund. Also, as 
     originally enacted, the funds in the trust could be invested 
     only in certain low risk investments. Subsequent amendments 
     to the provision have reduced the rate of tax on a qualified 
     fund to 20 percent and removed the restrictions on the types 
     of permitted investments that a qualified fund can make.
---------------------------------------------------------------------------
       Contributions to a qualified fund are deductible in the 
     year made to the extent that these amounts were collected as 
     part of the cost of service to ratepayers (the ``cost of

[[Page H8556]]

     service requirement'').\411\ Funds withdrawn by the taxpayer 
     to pay for decommissioning costs are included in the 
     taxpayer's income, but the taxpayer also is entitled to a 
     deduction for decommissioning costs as economic performance 
     for such costs occurs.
---------------------------------------------------------------------------
     \411\ Taxpayers are required to include in gross income 
     customer charges for decommissioning costs (sec. 88).
---------------------------------------------------------------------------
       Accumulations in a qualified fund are limited to the amount 
     required to fund decommissioning costs of a nuclear 
     powerplant for the period during which the qualified fund is 
     in existence (generally post-1984 decommissioning costs of a 
     nuclear powerplant). For this purpose, decommissioning costs 
     are considered to accrue ratably over a nuclear 
     powerplant's estimated useful life. In order to prevent 
     accumulations of funds over the remaining life of a 
     nuclear powerplant in excess of those required to pay 
     future decommissioning costs of such nuclear powerplant 
     and to ensure that contributions to a qualified fund are 
     not deducted more rapidly than level funding (taking into 
     account an appropriate discount rate), taxpayers must 
     obtain a ruling from the IRS to establish the maximum 
     annual contribution that may be made to a qualified fund 
     (the ``ruling amount''). In certain instances (e.g., 
     change in estimates), a taxpayer is required to obtain a 
     new ruling amount to reflect updated information.
       A qualified fund may be transferred in connection with the 
     sale, exchange or other transfer of the nuclear powerplant to 
     which it relates. If the transferee is a regulated public 
     utility and meets certain other requirements, the transfer 
     will be treated as a nontaxable transaction. No gain or loss 
     will be recognized on the transfer of the qualified fund and 
     the transferee will take the transferor's basis in the 
     fund.\412\ The transferee is required to obtain a new ruling 
     amount from the IRS or accept a discretionary determination 
     by the IRS.\413\
---------------------------------------------------------------------------
     \412\ Treas. reg. sec. 1.468A-6.
     \413\ Treas. reg. sec. 1.468A-6(f).
---------------------------------------------------------------------------
     Nonqualified nuclear decommissioning funds
       Federal and State regulators may require utilities to set 
     aside funds for nuclear decommissioning costs in excess of 
     the amount allowed as a deductible contribution to a 
     qualified fund. In addition, taxpayers may have set aside 
     funds prior to the effective date of the qualified fund 
     rules.\414\ The treatment of amounts set aside for 
     decommissioning costs prior to 1984 varies. Some taxpayers 
     may have received no tax benefit while others may have 
     deducted such amounts or excluded such amounts from income. 
     Since 1984, taxpayers have been required to include in gross 
     income customer charges for decommissioning costs (sec. 88), 
     and a deduction has not been allowed for amounts set aside to 
     pay for decommissioning costs except through the use of a 
     qualified fund. Income earned in a nonqualified fund is 
     taxable to the fund's owner as it is earned.
---------------------------------------------------------------------------
     \414\ These funds are generally referred to as ``nonqualified 
     funds.''
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Repeal of cost of service requirement
       The Senate amendment repeals the cost of service 
     requirement for deductible contributions to a nuclear 
     decommissioning fund. Thus, all taxpayers, including 
     unregulated taxpayers, would be allowed a deduction for 
     amounts contributed to a qualified fund.
     Permit contributions to a qualified fund for pre-1984 
         decommissioning costs
       The Senate amendment also repeals the limitation that a 
     qualified fund only accumulate an amount sufficient to pay 
     for a nuclear powerplant's decommissioning costs incurred 
     during the period that the qualified fund is in existence 
     (generally post-1984 decommissioning costs). Thus, any 
     taxpayer is permitted to accumulate an amount sufficient to 
     cover the present value of 100 percent of a nuclear 
     powerplant's estimated decommissioning costs in a qualified 
     fund. The Senate amendment does not change the requirement 
     that contributions to a qualified fund not be deducted more 
     rapidly than level funding.
     Exception to ruling amount for certain decommissioning costs
       The Senate amendment permits a taxpayer to make 
     contributions to a qualified fund in excess of the ruling 
     amount in one circumstance. Specifically, a taxpayer is 
     permitted to contribute up to the present value of the amount 
     required to fund a nuclear powerplant's decommissioning costs 
     which under present law section 468A(d)(2)(A) is not 
     permitted to be accumulated in a qualified fund (generally 
     pre-1984 decommissioning costs).\415\ It is anticipated that 
     an amount that is permitted to be contributed under this 
     special rule shall be determined using the estimate of total 
     decommissioning costs used for purposes of determining the 
     taxpayer's most recent ruling amount. Any amount transferred 
     to the qualified fund under this special rule that has not 
     previously been deducted or excluded from gross income is 
     allowed as a deduction over the remaining useful life of the 
     nuclear powerplant.\416\ If a qualified fund that has 
     received amounts under this rule is transferred to another 
     person, the transferor will be permitted a deduction for any 
     remaining deductible amounts at the time of transfer.
---------------------------------------------------------------------------
     \415\ The ability to transfer property into a qualified fund 
     under this special rule is available only to the extent the 
     taxpayer has not obtained a new ruling amount incorporating 
     the repeal of the limitation that a qualified fund only 
     accumulate an amount sufficient to pay for decommissioning 
     costs of a nuclear powerplant incurred during the period that 
     the fund is in existence (generally post-1984 decommissioning 
     costs).
     \416\ A taxpayer recognizes no gain or loss on the 
     contribution of property to a qualified fund under this 
     special rule. The qualified fund will take a transferred 
     (carryover) basis in such property. Correspondingly, a 
     taxpayer's deduction (over the estimated life of the nuclear 
     powerplant) is to be based on the adjusted tax basis of the 
     property contributed rather than the fair market value of 
     such property.
---------------------------------------------------------------------------
     Contributions to a qualified fund after useful life of 
         powerplant
       The Senate amendment also allows deductible contributions 
     to a qualified fund subsequent to the end of a nuclear 
     powerplant's estimated useful life. Such payments are 
     permitted to the extent they do not cause the assets of the 
     qualified fund to exceed the present value of the taxpayer's 
     allocable share (current or former) of the nuclear 
     decommissioning costs of such nuclear powerplant.
     Clarify treatment of transfers of qualified funds
       The Senate amendment clarifies the Federal income tax 
     treatment of the transfer of a qualified fund. No gain or 
     loss would be recognized to the transferor or the transferee 
     as a result of the transfer of a qualified fund in connection 
     with the transfer of the power plant with respect to which 
     such fund was established
     Effective date.
       The Senate amendment is effective for taxable years 
     beginning after December 31, 2002.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Treatment of certain income of electric cooperatives (sec. 
         856 of the Senate amendment and sec. 501 of the Code)


                              present law

     In general
       Under present law, an entity must be operated on a 
     cooperative basis in order to be treated as a cooperative for 
     Federal income tax purposes. Although not defined by statute 
     or regulation, the two principal criteria for determining 
     whether an entity is operating on a cooperative basis are: 
     (1) ownership of the cooperative by persons who patronize the 
     cooperative; and (2) return of earnings to patrons in 
     proportion to their patronage. The Internal Revenue Service 
     requires that cooperatives must operate under the following 
     principles: (1) subordination of capital in control over the 
     cooperative undertaking and in ownership of the financial 
     benefits from ownership; (2) democratic control by the 
     members of the cooperative; (3) vesting in and allocation 
     among the members of all excess of operating revenues over 
     the expenses incurred to generate revenues in proportion to 
     their participation in the cooperative (patronage); and (4) 
     operation at cost (not operating for profit or below 
     cost).\417\
---------------------------------------------------------------------------
     \417\ Announcement 96-24, ``Proposed Examination Guidelines 
     Regarding Rural Electric Cooperatives,'' 1996-16 I.R.B. 35.
---------------------------------------------------------------------------
       In general, cooperative members are those who participate 
     in the management of the cooperative and who share in 
     patronage capital. As described below, income from the sale 
     of electric energy by an electric cooperative may be member 
     or non-member income to the cooperative, depending on the 
     membership status of the purchaser. A municipal corporation 
     may be a member of a cooperative.
       For Federal income tax purposes, a cooperative generally 
     computes its income as if it were a taxable corporation, with 
     one exception-the cooperative may exclude from its taxable 
     income distributions of patronage dividends. In general, 
     patronage dividends are the profits of the cooperative that 
     are rebated to its patrons pursuant to a pre-existing 
     obligation of the cooperative to do so. The rebate must be 
     made in some equitable fashion on the basis of the quantity 
     or value of business done with the cooperative.
       Except for tax-exempt farmers' cooperatives, cooperatives 
     that are subject to the cooperative tax rules of subchapter T 
     of the Code (sec. 1381, et seq.) are permitted a deduction 
     for patronage dividends from their taxable income only to the 
     extent of net income that is derived from transactions with 
     patrons who are members of the cooperative (sec. 1382). The 
     availability of such deductions from taxable income has the 
     effect of allowing the cooperative to be treated like a 
     conduit with respect to profits derived from transactions 
     with patrons who are members of the cooperative.
       Cooperatives that qualify as tax-exempt farmers' 
     cooperatives are permitted to exclude patronage dividends 
     from their taxable income to the extent of all net income, 
     including net income that is derived from transactions with 
     patrons who are not members of the cooperative, provided the 
     value of transactions with patrons who are not members of the 
     cooperative does not exceed the value of transactions with 
     patrons who are members of the cooperative (sec. 521).

       Taxation of electric cooperatives exempt from subchapter T

       In general, the cooperative tax rules of subchapter T apply 
     to any corporation operating on a cooperative basis (except 
     mutual savings banks, insurance companies, other

[[Page H8557]]

     tax-exempt organizations, and certain utilities), including 
     tax-exempt farmers' cooperatives (described in sec. 521(b)). 
     However, subchapter T does not apply to an organization that 
     is ``engaged in furnishing electric energy, or providing 
     telephone service, to persons in rural areas'' (sec. 
     1381(a)(2)(C)). Instead, electric cooperatives are taxed 
     under rules that were generally applicable to cooperatives 
     prior to the enactment of subchapter T in 1962. Under these 
     rules, an electric cooperative can exclude patronage 
     dividends from taxable income to the extent of all net income 
     of the cooperative, including net income derived from 
     transactions with patrons who are not members of the 
     cooperative.\418\
---------------------------------------------------------------------------
     \418\ See Rev. Rul. 83-135, 1983-2 C.B. 149.
---------------------------------------------------------------------------

              Tax exemption of rural electric cooperatives

       Section 501(c)(12) provides an income tax exemption for 
     rural electric cooperatives if at least 85 percent of the 
     cooperative's income consists of amounts collected from 
     members for the sole purpose of meeting losses and expenses 
     of providing service to its members. The IRS takes the 
     position that rural electric cooperatives also must comply 
     with the fundamental cooperative principles described above 
     in order to qualify for tax exemption under section 
     501(c)(12).\419\ The 85-percent test is determined without 
     taking into account any income from qualified pole rentals 
     and cancellation of indebtedness income from the 
     prepayment of a loan under sections 306A, 306B, or 311 of 
     the Rural Electrification Act of 1936 (as in effect on 
     January 1, 1987). The exclusion for cancellation of 
     indebtedness income applies to such income arising in 
     1987, 1988, or 1989 on debt that either originated with, 
     or is guaranteed by, the Federal Government.
---------------------------------------------------------------------------
     \419\  Rev. Rul. 72-36, 1972-1 C.B. 151.
---------------------------------------------------------------------------
       The receipt by a rural electric cooperative of 
     contributions in aid of construction and connection charges 
     is taken into account for purposes of applying the 85-percent 
     test.
       Rural electric cooperatives generally are subject to the 
     tax on unrelated trade or business income under section 511.


                               house bill

       No provision.


                            senate amendment

     Treatment of income from open access transactions
       The Senate amendment provides that income received or 
     accrued by a rural electric cooperative from any ``open 
     access transaction'' (other than income received or accrued 
     directly or indirectly from a member of the cooperative) is 
     excluded in determining whether a rural electric cooperative 
     satisfies the 85-percent test for tax exemption under section 
     501(c)(12). The term ``open access transaction'' is defined 
     as
       (1) The provision or sale of electric energy transmission 
     services or ancillary services on a nondiscriminatory open 
     access basis: (i) pursuant to an open access transmission 
     tariff filed with and approved by the Federal Energy 
     Regulatory Commission (``FERC'') (including acceptable 
     reciprocity tariffs), but only if (in the case of a 
     voluntarily filed tariff) the cooperative files a report with 
     FERC within 90 days of enactment of this provision relating 
     to whether or not the cooperative will join a regional 
     transmission organization (``RTO''); or (ii) under an RTO 
     agreement approved by FERC (including an agreement providing 
     for the transfer of control-but not ownership-of transmission 
     facilities);\420\
---------------------------------------------------------------------------
     \420\ Under the Senate amendment, references to FERC are 
     treated as including references to the Public Utility 
     Commission of Texas or the Rural Utilities Service.
---------------------------------------------------------------------------
       (2) The provision or sale of electric energy distribution 
     services or ancillary services on a nondiscriminatory open 
     access basis to end-users served by distribution facilities 
     owned by the cooperative or its members; or (3) The delivery 
     or sale of electric energy on a nondiscriminatory open access 
     basis, provided that such electric energy is generated by a 
     generation facility that is directly connected to 
     distribution facilities owned by the cooperative (or its 
     members) which owns the generation facility.
       For purposes of the 85-percent test, the Senate amendment 
     also provides that income received or accrued by a rural 
     electric cooperative from any ``open access transaction'' is 
     treated as an amount collected from members for the sole 
     purpose of meeting losses and expenses if the income is 
     received or accrued indirectly from a member of the 
     cooperative.
     Treatment of income from nuclear decommissioning transactions
       The Senate amendment provides that income received or 
     accrued by a rural electric cooperative from any ``nuclear 
     decommissioning transaction'' also is excluded in determining 
     whether a rural electric cooperative satisfies the 85-percent 
     test for tax exemption under section 501(c)(12). The term 
     ``nuclear decommissioning transaction'' is defined as--
       (1) Any transfer into a trust, fund, or instrument 
     established to pay any nuclear decommissioning costs if the 
     transfer is in connection with the transfer of the 
     cooperative's interest in a nuclear powerplant or nuclear 
     powerplant unit;
       (2) Any distribution from a trust, fund, or instrument 
     established to pay any nuclear decommissioning costs; or
       (3) Any earnings from a trust, fund, or instrument 
     established to pay any nuclear decommissioning costs.
     Treatment of income from asset exchange or conversion 
         transactions
       The Senate amendment provides that gain realized by a tax-
     exempt rural electric cooperative from a voluntary exchange 
     or involuntary conversion of certain property is excluded in 
     determining whether a rural electric cooperative satisfies 
     the 85-percent test for tax exemption under section 
     501(c)(12). This provision only applies to the extent that: 
     (1) the gain would qualify for deferred recognition under 
     section 1031 (relating to exchanges of property held for 
     productive use or investment) or section 1033 (relating to 
     involuntary conversions); and (2) the replacement property 
     that is acquired by the cooperative pursuant to section 1031 
     or section 1033 (as the case may be) constitutes property 
     that is used, or to be used, for the purpose of generating, 
     transmitting, distributing, or selling electricity or natural 
     gas.
     Treatment of cancellation of indebtedness income from 
         prepayment of certain loans
       The Senate amendment provides that income from the 
     prepayment of any loan, debt, or obligation of a tax-exempt 
     rural electric cooperative that is originated, insured, or 
     guaranteed by the Federal Government under the Rural 
     Electrification Act of 1936 is excluded in determining 
     whether the cooperative satisfies the 85-percent test for tax 
     exemption under section 501(c)(12).
     Treatment of income from load loss transactions
       Tax-exempt rural electric cooperatives.--The Senate 
     amendment provides that income received or accrued by a tax-
     exempt rural electric cooperative from a ``load loss 
     transaction'' is treated under 501(c)(12) as income collected 
     from members for the sole purpose of meeting losses and 
     expenses of providing service to its members. Therefore, 
     income from load loss transactions is treated as member 
     income in determining whether a rural electric cooperative 
     satisfies the 85-percent test for tax exemption under section 
     501(c)(12). The bill also provides that income from load loss 
     transactions does not cause a tax-exempt electric cooperative 
     to fail to be treated for Federal income tax purposes as a 
     mutual or cooperative company under the fundamental 
     cooperative principles described above.
       The term ``load loss transaction'' is generally defined as 
     any wholesale or retail sale of electric energy (other than 
     to a member of the cooperative) to the extent that the 
     aggregate amount of such sales during a seven-year period 
     beginning with the ``start-up year'' does not exceed the 
     reduction in the amount of sales of electric energy during 
     such period by the cooperative to members. The ``start-up 
     year'' is defined as the calendar year which includes the 
     date of enactment of this provision or, if later, at the 
     election of the cooperative: (1) the first year that the 
     cooperative offers nondiscriminatory open access; or (2) the 
     first year in which at least 10 percent of the cooperative's 
     sales of electric energy are to patrons who are not members 
     of the cooperative.
       The Senate amendment also excludes income received or 
     accrued by rural electric cooperatives from load loss 
     transactions from the tax on unrelated trade or business 
     income.
       Taxable electric cooperatives.--The Senate amendment 
     provides that the receipt or accrual of income from load loss 
     transactions by taxable electric cooperatives is treated as 
     income from patrons who are members of the cooperative. Thus, 
     income from a load loss transaction is excludible from the 
     taxable income of a taxable electric cooperative if the 
     cooperative distributes such income pursuant to a pre-
     existing contract to distribute the income to a patron who is 
     not a member of the cooperative. The Senate amendment also 
     provides that income from load loss transactions does not 
     cause a taxable electric cooperative to fail to be treated 
     for Federal income tax purposes as a mutual or cooperative 
     company under the fundamental cooperative principles 
     described above.
     Effective date
       The Senate amendment provision is effective for taxable 
     years beginning after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment with 
     the following modifications.
     Treatment of income from open access transactions
       Income received or accrued by a rural electric cooperative 
     (other than income received or accrued directly or indirectly 
     from a member of the cooperative) from the provision or sale 
     of electric energy transmission services or ancillary 
     services on a nondiscriminatory open access basis under an 
     open access transmission tariff approved or accepted by FERC 
     or under an independent transmission provider agreement 
     approved or accepted by FERC (including an agreement 
     providing for the transfer of control-but not ownership-of 
     transmission facilities) \421\ is excluded in determining 
     whether a rural electric cooperative satisfies the 85-percent 
     test for tax exemption under section 501(c)(12).
---------------------------------------------------------------------------
     \421\ Under the conference agreement, references to FERC are 
     treated as including references to the Public Utility 
     Commission of Texas.
---------------------------------------------------------------------------
       In addition, income is excluded for purposes of the 85-
     percent test if it is received or accrued by a rural electric 
     cooperative

[[Page H8558]]

     (other than income received or accrued directly or indirectly 
     from a member of the cooperative) from the provision or sale 
     of electric energy distribution services or ancillary 
     services, provided such services are provided on a 
     nondiscriminatory open access basis to distribute electric 
     energy not owned by the cooperative: (1) to end-users who are 
     served by distribution facilities not owned by the 
     cooperative or any of its members; or (2) generated by a 
     generation facility that is not owned or leased by the 
     cooperative or any of its members and that is directly 
     connected to distribution facilities owned by the cooperative 
     or any of its members.
     Treatment of cancellation of indebtedness income from 
         prepayment of certain loans
       The conference agreement does not include this provision.
     Treatment of income from load loss transactions
       For purposes of this provision, the ``start-up year'' is 
     defined in the conference agreement as the first year that 
     the cooperative offers nondiscriminatory open access or, if 
     later and at the election of the cooperative, the calendar 
     year that includes the date of enactment of this provision.
     Effective date
       The conference agreement provision is effective for taxable 
     years beginning after the date of enactment and before 
     January 1, 2007.
     3. Dispositions of transmission property to implement Federal 
         Energy Regulatory Commission restructuring policy (no 
         reinvestment obligation) (sec. 857 of the Senate 
         amendment and sec. 451 of the Code)


                              present law

       Generally, a taxpayer recognizes gain to the extent the 
     sales price (and any other consideration received) exceeds 
     the seller's basis in the property. The recognized gain is 
     subject to current income tax unless the gain is deferred or 
     not recognized under a special tax provision.


                               House Bill

       No provision.


                            senate amendment

       The Senate amendment permits a taxpayer to elect to 
     recognize gain from a qualifying electric transmission 
     transaction ratably over an eight-year period beginning in 
     the year of sale.
       A qualifying electric transmission transaction is the sale 
     or other disposition of property used by the taxpayer in the 
     trade or business of providing electric transmission 
     services, or any stock or partnership interest in a 
     corporation or partnership whose principal trade or business 
     consists of providing electrical services. In order to 
     qualify, the transaction must occur before January 1, 2008 
     and the sale or disposition must be to an independent 
     transmission company.
       In general, an independent transmission company is defined 
     as: (1) a regional transmission organization approved by the 
     Federal Entergy Regulatory Commission (``FERC''); (2) a 
     person (i) who the FERC determines under section 203 of the 
     Federal Power Act (or by declaratory order) is not a ``market 
     participant'' and (ii) whose transmission facilities are 
     placed under the operational control of a FERC-approved 
     independent transmission provider before the close of the 
     period specified in such authorization, but not later than 
     January 1, 2008; or (3) in the case of facilities subject to 
     the jurisdiction of the Public Utility Commission of Texas, a 
     person which is approved by that Commission as consistent 
     with Texas State law regarding an independent transmission 
     organization.
       An electing taxpayer is required to attach a statement to 
     that effect in the tax return for the taxable year in which 
     the transaction takes place in such manner as the Secretary 
     shall prescribe. The election shall be binding for that 
     taxable year and all subsequent taxable years. Finally, the 
     provision provides that the installment sale rules shall not 
     apply to any qualifying electric transmission transaction for 
     which a taxpayer elects the application of this provision.
       Effective date.--The Senate amendment is effective for 
     transactions occurring after December 31, 2004.


                          conference agreement

       The conference agreement follows the Senate amendment with 
     the following modifications. The provision permits taxpayers 
     to elect to recognize gain from qualifying electric 
     transmission transactions ratably over an eight-year period 
     beginning in the year of sale if the amount realized from 
     such sale is used to purchase exempt utility property within 
     the applicable period \422\ (the ``reinvestment property''). 
     If the amount realized exceeds the amount used to purchase 
     reinvestment property, any realized gain shall be recognized 
     to the extent of such excess in the year of the qualifying 
     electric transmission transaction. Any remaining realized 
     gain is recognized ratably over the eight-year period.
---------------------------------------------------------------------------
     \422\ The applicable period for a taxpayer to reinvest the 
     proceeds is four years after the close of the taxable year in 
     which the qualifying electric transmission transaction 
     occurs.
---------------------------------------------------------------------------
       A qualifying electric transmission transaction is the sale 
     or other disposition of property used by the taxpayer in the 
     trade or business of providing electric transmission 
     services, or an ownership interest in such an entity, to an 
     independent transmission company prior to January 1, 2007. In 
     general, an independent transmission company is defined as: 
     (1) an independent transmission provider \423\ approved by 
     the FERC; (2) a person (i) who the FERC determines under 
     section 203 of the Federal Power Act (or by declaratory 
     order) is not a ``market participant'' and (ii) whose 
     transmission facilities are placed under the operational 
     control of a FERC-approved independent transmission provider 
     before the close of the period specified in such 
     authorization, but not later than January 1, 2007; or (3) in 
     the case of facilities subject to the jurisdiction of the 
     Public Utility Commission of Texas, (i) a person which is 
     approved by that Commission as consistent with Texas State 
     law regarding an independent transmission organization, or 
     (ii) a political subdivision, or affiliate thereof, whose 
     transmission facilities are under the operational control of 
     an organization described in (i).
---------------------------------------------------------------------------
     \423\ For example, a regional transmission organization, an 
     independent system operator, or and independent transmission 
     company.
---------------------------------------------------------------------------
       Exempt utility property is defined as: (1) property used in 
     the trade or business of generating, transmitting, 
     distributing, or selling electricity or producing, 
     transmitting, distributing, or selling natural gas, or (2) 
     stock in a controlled corporation whose principal trade or 
     business consists of the activities described in (1).
       If a taxpayer is a member of an affiliated group of 
     corporations filing a consolidated return, the proposal 
     permits the reinvestment property to be purchased by any 
     member of the affiliated group (in lieu of the taxpayer).
       If a taxpayer elects the application of the provision, then 
     the statutory period for the assessment of any deficiency, 
     for any taxable year in which any part of the gain eligible 
     for the provision is realized, attributable to such gain 
     shall not expire prior to the expiration of three years from 
     the date the Secretary of the Treasury is notified by the 
     taxpayer of the reinvestment property or an intention not to 
     reinvest.
       An electing taxpayer is required to attach a statement to 
     that effect in the tax return for the taxable year in which 
     the transaction takes place in the manner as the Secretary 
     shall prescribe. The election shall be binding for that 
     taxable year and all subsequent taxable years.\424\ In 
     addition, an electing taxpayer is required to attach a 
     statement that identifies the reinvestment property in the 
     manner as the Secretary shall prescribe.
---------------------------------------------------------------------------
     \424\ The provision also provides that the installment sale 
     rules shall not apply to any qualifying electric transmission 
     transaction for which a taxpayer elects the application of 
     this provision.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for 
     transactions occurring after the date of enactment, in 
     taxable years ending after such date.

                        G. Additional Provisions

     1. GAO Study (sec. 897 of the Senate amendment)


                              present law

       Present law does not require study of the present law 
     provisions relating to clean fuel vehicles and electric 
     vehicles.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment directs the Comptroller General to 
     undertake an ongoing analysis of the (1) effectiveness of the 
     amendment's alternative motor vehicles, fuel incentives, and 
     conservation and energy efficiency provisions and (2) the 
     recipients of the tax benefits contained in those provisions, 
     including an identification of the recipients by income and 
     other appropriate measurements. The analysis must quantify 
     the effectiveness of the provisions by examining and 
     comparing the Federal Government's forgone revenue to the 
     aggregate amount of energy actually conserved and tangible 
     environmental benefits gained as a result of the provisions.
       The Senate amendment directs the Comptroller General to 
     report the required analysis to Congress not later than 
     December 31, 2004 and annually thereafter.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Repeal certain excise taxes on rail diesel fuel and inland 
         waterway barge fuels (sec. 898 of the Senate amendment 
         and secs. 4041, 4042, 6421, and 6427 of the Code)


                              present law

       Under present law, diesel fuel used in trains is subject to 
     a 4.4-cents-per gallon excise tax. Revenues from 4.3 cents 
     per gallon of this excise tax are retained in the General 
     Fund of the Treasury. The remaining 0.1 cent per gallon is 
     deposited in the Leaking Underground Storage Tank (``LUST'') 
     Trust Fund.
       Similarly, fuels used in barges operating on the designated 
     inland waterways system are subject to a 4.3-cents-per-gallon 
     General Fund excise tax. This tax is in addition to the 20.1-
     cents-per-gallon tax rates that are imposed on fuels used in 
     these barges to fund the Inland Waterways Trust Fund and the 
     Leaking Underground Storage Tank Trust Fund.
       In both cases, the 4.3-cents-per-gallon excise tax rates 
     are permanent. The LUST Trust Fund tax is scheduled to expire 
     after March 31, 2005.


                               house bill

       No provision.


                            senate amendment

       The 4.3-cents-per-gallon General Fund excise tax rate on 
     diesel fuel used in trains and

[[Page H8559]]

     fuels used in barges operating on the designated inland 
     waterways system is repealed. The 0.1 cent per gallon tax for 
     the LUST Trust Fund is unchanged by the provision.
       Effective date.--The Senate amendment is effective on 
     October 1, 2004.


                          conference agreement

       The conference agreement repeals the 4.3-cents-per-gallon 
     General Fund excise tax rates on diesel fuel used in trains 
     and fuels used in barges operating on the designated inland 
     waterways system over a prescribed phase-out period. The 
     4.30-cent-per-gallon tax is reduced by 1 cent per gallon for 
     the first six months of calendar year 2005 (January 1, 2005 
     through June 30, 2005). The reduction is 2 cents per gallon 
     from July 1, 2005 through December 31, 2006, and 4.3 cents/
     gallon thereafter. Thus, the tax would be fully repealed 
     effective January 1, 2007. The 0.1 cent per gallon tax for 
     the LUST Trust Fund is unchanged by the provision.
       Effective date.--The provision is effective on January 1, 
     2005.
     3. Transmission property treated as fifteen-year property 
         (sec. 899C of the Senate amendment and sec. 168 of the 
         Code)


                              present law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are generally set forth 
     in Revenue Procedure 87-56. Assets used in the transmission 
     and distribution of electricity for sale and related land 
     improvements are assigned a 20-year recovery period and a 
     class life of 30 years.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment establishes a statutory 15-year 
     recovery period and a class life of 30 years for certain 
     assets used in the transmission of electricity for sale and 
     related land improvements. For purposes of the provision, 
     section 1245 property used in the transmission of of 
     electricity for sale at 69 kilovolts and above, the 
     original use \425\ of which commences after the date of 
     enactment, will qualify for the new recovery period.
---------------------------------------------------------------------------
     \425\ The term ``original use'' means the first use to which 
     the property is put, whether or not such use corresponds to 
     the use of such property by the taxpayer. It is intended 
     that, when evaluating whether property qualifies as 
     ``original use,'' the factors used to determine whether 
     property qualified as ``new section 38 property'' for 
     purposes of the investment tax credit would apply. See 
     Treasury Regulation 1.48-2. Thus, it is intended that 
     additional capital expenditures incurred to recondition or 
     rebuild acquired property (or owned property) would satisfy 
     the ``original use'' requirement. However, the cost of 
     reconditioned or rebuilt property acquired by the taxpayer 
     would not satisfy the ``original use'' requirement. For 
     example, if on August 11, 2005, a taxpayer buys from RCM for 
     $200,000 transmission lines that have been previously used by 
     RCM. Subsequent to the purchase, the taxpayer makes an 
     expenditure on the property of $50,000 of the type that must 
     be capitalized. Regardless of whether the $50,000 is added to 
     the basis of such property or is capitalized as a separate 
     asset, such amount would be treated as satisfying the 
     ``original use'' requirement and would be eligible for the 
     reduced recovery period. No part of the $200,000 purchase 
     price qualifies for the reduced recovery period.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective for 
     property placed in service after the date of enactment and 
     prior to July 1, 2006.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Qualifying pollution control equipment credit (sec. 899B 
         of the Senate amendment)


                              present law

       The investment credit is the sum of three credits: (1) the 
     rehabilitation credit, (2) the energy credit, and (3) the 
     reforestation credit.\426\ The investment credit is part of 
     the general business credit.\427\
---------------------------------------------------------------------------
     \426\ Sec. 46.
     \427\ Sec. 38(b)(1).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment adds a credit for qualifying pollution 
     control equipment to the investment credit. The qualifying 
     pollution control equipment credit provides a 15-percent tax 
     credit for qualifying pollution control equipment placed-in-
     service at a qualifying facility during the taxable 
     year.Qualifying pollution control equipment means any 
     technology that is installed in or on a qualifying facility 
     to reduce air emissions of any pollutant regulated by the 
     Environmental Protection Agency under the Clean Air Act. A 
     qualifying facility is a facility that produces not less than 
     1,000,000 gallons of ethanol during the taxable year. A 
     qualifying facility includes any facility that produces 
     ethanol. For depreciation purposes, the basis of qualifying 
     pollution control equipment would be reduced by 50 percent of 
     the value of the credit.
       Effective date.--The credit would be available for property 
     placed-in-service after December 31, 2003, in taxable years 
     ending after such date.\428\
---------------------------------------------------------------------------
     \428\ Rules similar to the rules of section 48(m) of the 
     Internal Revenue Code of 1986 (as in effect on the day before 
     the date of enactment of the Revenue Reconciliation Act of 
     1990) apply.
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.

                      TITLE X--REVENUE PROVISIONS

A. Provisions to Reduce Tax Avoidance Through Individual and Corporate 
                              Expatriation

     1. Tax treatment of expatriated entities and their foreign 
         parents (sec. 601 of the House bill, sec. 441 of the 
         Senate amendment, and new sec. 7874 of the Code)


                              present law

     Determination of corporate residence
       The U.S. tax treatment of a multinational corporate group 
     depends significantly on whether the parent corporation of 
     the group is domestic or foreign. For purposes of U.S. tax 
     law, a corporation is treated as domestic if it is 
     incorporated under the law of the United States or of any 
     State. All other corporations (i.e., those incorporated under 
     the laws of foreign countries) are treated as foreign.
     U.S. taxation of domestic corporations
       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. In 
     order to mitigate the double taxation that may arise from 
     taxing the foreign-source income of a domestic corporation, a 
     foreign tax credit for income taxes paid to foreign countries 
     is provided to reduce or eliminate the U.S. tax owed on such 
     income, subject to certain limitations.
       Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income generally is 
     deferred, and U.S. tax is imposed on such income when 
     repatriated. However, certain anti-deferral regimes may cause 
     the domestic parent corporation to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by its foreign 
     subsidiaries, regardless of whether the income has been 
     distributed as a dividend to the domestic parent corporation. 
     The main anti-deferral regimes in this context are the 
     controlled foreign corporation rules of subpart F (secs. 951-
     964) and the passive foreign investment company rules (secs. 
     1291-1298). A foreign tax credit is generally available to 
     offset, in whole or in part, the U.S. tax owed on this 
     foreign-source income, whether repatriated as an actual 
     dividend or included under one of the anti-deferral regimes.
     U.S. taxation of foreign corporations
       The United States taxes foreign corporations only on income 
     that has a sufficient nexus to the United States. Thus, a 
     foreign corporation is generally subject to U.S. tax only on 
     income that is ``effectively connected'' with the conduct of 
     a trade or business in the United States. Such ``effectively 
     connected income'' generally is taxed in the same manner and 
     at the same rates as the income of a U.S. corporation. An 
     applicable tax treaty may limit the imposition of U.S. tax on 
     business operations of a foreign corporation to cases in 
     which the business is conducted through a ``permanent 
     establishment'' in the United States.
       In addition, foreign corporations generally are subject to 
     a gross-basis U.S. tax at a flat 30-percent rate on the 
     receipt of interest, dividends, rents, royalties, and certain 
     similar types of income derived from U.S. sources, subject to 
     certain exceptions. The tax generally is collected by means 
     of withholding by the person making the payment. This tax may 
     be reduced or eliminated under an applicable tax treaty.
     U.S. tax treatment of inversion transactions
       Under present law, a U.S. corporation may reincorporate in 
     a foreign jurisdiction and thereby replace the U.S. parent 
     corporation of a multinational corporate group with a foreign 
     parent corporation. These transactions are commonly referred 
     to as inversion transactions. Inversion transactions may take 
     many different forms, including stock inversions, asset 
     inversions, and various combinations of and variations on the 
     two. Most of the known transactions to date have been stock 
     inversions. In one example of a stock inversion, a U.S. 
     corporation forms a foreign corporation, which in turn forms 
     a domestic merger subsidiary. The domestic merger subsidiary 
     then merges into the U.S. corporation, with the U.S. 
     corporation surviving, now as a subsidiary of the new foreign 
     corporation. The U.S. corporation's shareholders receive 
     shares of the foreign corporation and are treated as having 
     exchanged their U.S. corporation shares for the foreign 
     corporation shares. An asset inversion reaches a similar 
     result, but through a direct merger of the top-tier U.S. 
     corporation into a new foreign corporation, among other 
     possible forms. An inversion transaction may be accompanied 
     or followed by further restructuring of the corporate group. 
     For example, in the case of a stock inversion, in order to 
     remove income from foreign operations from the U.S. taxing 
     jurisdiction, the U.S. corporation may transfer some or all 
     of its foreign subsidiaries directly to the new foreign 
     parent corporation or other related foreign corporations.
       In addition to removing foreign operations from the U.S. 
     taxing jurisdiction, the corporate group may derive further 
     advantage from the inverted structure by reducing U.S.

[[Page H8560]]

     tax on U.S.-source income through various earnings stripping 
     or other transactions. This may include earnings stripping 
     through payment by a U.S. corporation of deductible amounts 
     such as interest, royalties, rents, or management service 
     fees to the new foreign parent or other foreign affiliates. 
     In this respect, the post-inversion structure enables the 
     group to employ the same tax-reduction strategies that are 
     available to other multinational corporate groups with 
     foreign parents and U.S. subsidiaries, subject to the same 
     limitations (e.g., secs. 163(j) and 482).
       Inversion transactions may give rise to immediate U.S. tax 
     consequences at the shareholder and/or the corporate level, 
     depending on the type of inversion. In stock inversions, the 
     U.S. shareholders generally recognize gain (but not loss) 
     under section 367(a), based on the difference between the 
     fair market value of the foreign corporation shares received 
     and the adjusted basis of the domestic corporation stock 
     exchanged. To the extent that a corporation's share value has 
     declined, and/or it has many foreign or tax-exempt 
     shareholders, the impact of this section 367(a) ``toll 
     charge'' is reduced. The transfer of foreign subsidiaries or 
     other assets to the foreign parent corporation also may give 
     rise to U.S. tax consequences at the corporate level (e.g., 
     gain recognition and earnings and profits inclusions under 
     secs. 1001, 311(b), 304, 367, 1248 or other provisions). The 
     tax on any income recognized as a result of these 
     restructurings may be reduced or eliminated through the use 
     of net operating losses, foreign tax credits, and other tax 
     attributes.
       In asset inversions, the U.S. corporation generally 
     recognizes gain (but not loss) under section 367(a) as though 
     it had sold all of its assets, but the shareholders generally 
     do not recognize gain or loss, assuming the transaction meets 
     the requirements of a reorganization under section 368.


                               house bill

       The bill applies special tax rules to corporations that 
     undertake certain defined inversion transactions. For this 
     purpose, an inversion is a transaction in which, pursuant to 
     a plan or a series of related transactions: (1) a U.S. 
     corporation becomes a subsidiary of a foreign-incorporated 
     entity or otherwise transfers substantially all of its 
     properties to such an entity after March 4, 2003; (2) the 
     former shareholders of the U.S. corporation hold (by reason 
     of holding stock in the U.S. corporation) 60 percent or more 
     (by vote or value) of the stock of the foreign-incorporated 
     entity after the transaction; and (3) the foreign-
     incorporated entity, considered together with all companies 
     connected to it by a chain of greater than 50-percent 
     ownership (i.e., the ``expanded affiliated group'') does not 
     conduct substantial business activities in the entity's 
     country of incorporation compared to the total worldwide 
     business activities of the expanded affiliated group.
       In such a case, any applicable corporate-level ``toll 
     charges'' for establishing the inverted structure are not 
     offset by tax attributes such as net operating losses or 
     foreign tax credits. Specifically, any applicable corporate-
     level income or gain required to be recognized under sections 
     304, 311(b), 367, 1001, 1248, or any other provision with 
     respect to the transfer of controlled foreign corporation 
     stock or the transfer or license of other assets by a U.S. 
     corporation as part of the inversion transaction or after 
     such transaction to a related foreign person is taxable, 
     without offset by any tax attributes (e.g., net operating 
     losses or foreign tax credits). This rule does not apply to 
     certain transfers of inventory and similar property. These 
     measures generally apply for a 10-year period following the 
     inversion transaction.
       In determining whether a transaction meets the definition 
     of an inversion under the provision, stock held by members of 
     the expanded affiliated group that includes the foreign 
     incorporated entity is disregarded. For example, if the 
     former top-tier U.S. corporation receives stock of the 
     foreign incorporated entity (e.g., so-called ``hook'' stock), 
     the stock would not be considered in determining whether the 
     transaction meets the definition. Similarly, if a U.S. parent 
     corporation converts an existing wholly owned U.S. subsidiary 
     into a new wholly owned controlled foreign corporation, the 
     stock of the new foreign corporation would be disregarded. 
     Stock sold in a public offering related to the transaction 
     also is disregarded for these purposes.
       Transfers of properties or liabilities as part of a plan a 
     principal purpose of which is to avoid the purposes of the 
     provision are disregarded. In addition, the Treasury 
     Secretary is granted authority to prevent the avoidance of 
     the purposes of the provision, including avoidance through 
     the use of related persons, pass-through or other 
     noncorporate entities, or other intermediaries, and through 
     transactions designed to qualify or disqualify a person as a 
     related person or a member of an expanded affiliated group. 
     Similarly, the Treasury Secretary is granted authority to 
     treat certain non-stock instruments as stock, and certain 
     stock as not stock, where necessary to carry out the purposes 
     of the provision.
       Under the provision, inversion transactions include certain 
     partnership transactions. Specifically, the provision applies 
     to transactions in which a foreign-incorporated entity 
     acquires substantially all of the properties constituting a 
     trade or business of a domestic partnership, if after the 
     acquisition at least 60 percent of the stock of the entity is 
     held by former partners of the partnership (by reason of 
     holding their partnership interests), provided that the other 
     terms of the basic definition are met. For purposes of 
     applying this test, all partnerships that are under common 
     control within the meaning of section 482 are treated as one 
     partnership, except as provided otherwise in regulations. In 
     addition, the modified ``toll charge'' provisions apply at 
     the partner level.
       A transaction otherwise meeting the definition of an 
     inversion transaction is not treated as an inversion 
     transaction if, on or before March 4, 2003, the foreign-
     incorporated entity had acquired directly or indirectly more 
     than half of the properties held directly or indirectly by 
     the domestic corporation, or more than half of the properties 
     constituting the partnership trade or business, as the case 
     may be.
       Effective date.--The provision applies to taxable years 
     ending after March 4, 2003.


                            senate amendment

     In general
       The provision defines two different types of corporate 
     inversion transactions and establishes a different set of 
     consequences for each type. Certain partnership transactions 
     also are covered.
     Transactions involving at least 80 percent identity of stock 
         ownership
       The first type of inversion is a transaction in which, 
     pursuant to a plan or a series of related transactions: (1) a 
     U.S. corporation becomes a subsidiary of a foreign-
     incorporated entity or otherwise transfers substantially all 
     of its properties to such an entity; \429\ (2) the former 
     shareholders of the U.S. corporation hold (by reason of 
     holding stock in the U.S. corporation) 80 percent or more (by 
     vote or value) of the stock of the foreign-incorporated 
     entity after the transaction; and (3) the foreign-
     incorporated entity, considered together with all companies 
     connected to it by a chain of greater than 50 percent 
     ownership (i.e., the ``expanded affiliated group''), does not 
     have substantial business activities in the entity's country 
     of incorporation, compared to the total worldwide business 
     activities of the expanded affiliated group. The provision 
     denies the intended tax benefits of this type of inversion by 
     deeming the top-tier foreign corporation to be a domestic 
     corporation for all purposes of the Code.\430\
---------------------------------------------------------------------------
     \429\ It is expected that the Treasury Secretary will issue 
     regulations applying the term "substantially all" in this 
     context and will not be bound in this regard by 
     interpretations of the term in other contexts under the Code.
     \430\ Since the top-tier foreign corporation is treated for 
     all purposes of the Code as domestic, the shareholder-level 
     ``toll charge'' of sec. 367(a) does not apply to these 
     inversion transactions. However, with respect to inversion 
     transactions completed before 2004, regulated investment 
     companies and certain similar entities are allowed to elect 
     to recognize gain as if sec. 367(a) did apply.
---------------------------------------------------------------------------
       Except as otherwise provided in regulations, the provision 
     does not apply to a direct or indirect acquisition of the 
     properties of a U.S. corporation no class of the stock of 
     which was traded on an established securities market at any 
     time within the four-year period preceding the acquisition. 
     In determining whether a transaction would meet the 
     definition of an inversion under the provision, stock held by 
     members of the expanded affiliated group that includes the 
     foreign incorporated entity is disregarded. For example, if 
     the former top-tier U.S. corporation receives stock of the 
     foreign incorporated entity (e.g., so-called ``hook'' stock), 
     the stock would not be considered in determining whether the 
     transaction meets the definition. Stock sold in a public 
     offering (whether initial or secondary) or private placement 
     related to the transaction also is disregarded for these 
     purposes. Acquisitions with respect to a domestic corporation 
     or partnership are deemed to be ``pursuant to a plan'' if 
     they occur within the four-year period beginning on the date 
     which is two years before the ownership threshold under the 
     provision is met with respect to such corporation or 
     partnership.
       Transfers of properties or liabilities as part of a plan a 
     principal purpose of which is to avoid the purposes of the 
     provision are disregarded. In addition, the Treasury 
     Secretary is granted authority to prevent the avoidance of 
     the purposes of the provision, including avoidance through 
     the use of related persons, pass-through or other 
     noncorporate entities, or other intermediaries, and through 
     transactions designed to qualify or disqualify a person as a 
     related person, a member of an expanded affiliated group, or 
     a publicly traded corporation. Similarly, the Treasury 
     Secretary is granted authority to treat certain non-stock 
     instruments as stock, and certain stock as not stock, where 
     necessary to carry out the purposes of the provision.
     Transactions involving greater than 50-percent but less than 
         80 percent identity of stock ownership
       The second type of inversion is a transaction that would 
     meet the definition of an inversion transaction described 
     above, except that the 80-percent ownership threshold is not 
     met. In such a case, if a greater-than-50-percent ownership 
     threshold is met, then a second set of rules applies to the 
     inversion. Under these rules, the inversion transaction is 
     respected (i.e., the foreign corporation is treated as 
     foreign), but: (1) any applicable corporate-level ``toll 
     charges'' for establishing the inverted structure may not be 
     offset by tax attributes such as net operating losses or 
     foreign tax credits; (2) the accuracy-related penalty is 
     increased; and (3) section 163(j), relating to ``earnings 
     stripping''

[[Page H8561]]

     through related-party debt, is strengthened. These measures 
     generally apply for a 10-year period following the inversion 
     transaction. In addition, inverting entities are required to 
     provide information to shareholders or partners and the IRS 
     with respect to the inversion transaction.
       With respect to ``toll charges,'' any applicable corporate-
     level income or gain required to be recognized under sections 
     304, 311(b), 367, 1001, 1248, or any other provision with 
     respect to the transfer of controlled foreign corporation 
     stock or other assets by a U.S. corporation as part of the 
     inversion transaction or after such transaction to a related 
     foreign person is taxable, without offset by any tax 
     attributes (e.g., net operating losses or foreign tax 
     credits). To the extent provided in regulations, this rule 
     will not apply to certain transfers of inventory and 
     similar transactions conducted in the ordinary course of 
     the taxpayer's business.
       The 20-percent penalty for negligence or disregard of rules 
     or regulations, substantial understatement of income tax, and 
     substantial valuation misstatement is increased to 30 percent 
     with respect to taxpayers related to the inverted entity. In 
     addition, the 40-percent penalty for gross valuation 
     misstatement is increased to 50 percent with respect to such 
     taxpayers.
       The ``earnings stripping'' rules of section 163(j), which 
     deny or defer deductions for certain interest paid to foreign 
     related parties, are strengthened for inverted corporations. 
     With respect to such corporations, the provision eliminates 
     the debt-equity threshold generally applicable under section 
     163(j) and reduces the 50-percent thresholds for ``excess 
     interest expense'' and ``excess limitation'' to 25 percent.
       In cases in which a U.S. corporate group acquires 
     subsidiaries or other assets from an unrelated inverted 
     corporate group, the provisions described above generally do 
     not apply to the acquiring U.S. corporate group or its 
     related parties (including the newly acquired subsidiaries or 
     assets) by reason of acquiring the subsidiaries or assets 
     that were connected with the inversion transaction. The 
     Treasury Secretary is given authority to issue regulations 
     appropriate to carry out the purposes of this provision and 
     to prevent its abuse.
     Partnership transactions
       Under the provision, both types of inversion transactions 
     include certain partnership transactions. Specifically, both 
     parts of the provision apply to transactions in which a 
     foreign-incorporated entity acquires substantially all of the 
     properties constituting a trade or business of a domestic 
     partnership (whether or not publicly traded), if after the 
     acquisition at least 80 percent (or more than 50 percent but 
     less than 80 percent, as the case may be) of the stock of the 
     entity is held by former partners of the partnership (by 
     reason of holding their partnership interests), and the 
     ``substantial business activities'' test is not met. For 
     purposes of determining whether these tests are met, all 
     partnerships that are under common control within the meaning 
     of section 482 are treated as one partnership, except as 
     provided otherwise in regulations. In addition, the modified 
     ``toll charge'' provisions apply at the partner level.
     Effective date
       The regime applicable to transactions involving at least 80 
     percent identity of ownership applies to inversion 
     transactions completed after March 20, 2002. The rules for 
     inversion transactions involving greater-than-50-percent 
     identity of ownership apply to inversion transactions 
     completed after 1996 that meet the 50-percent test and to 
     inversion transactions completed after 1996 that would have 
     met the 80-percent test but for the March 20, 2002 date.


                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment with modifications.
     In general
       The provision defines two different types of corporate 
     inversion transactions and establishes a different set of 
     consequences for each type. Certain partnership transactions 
     also are covered.
     Transactions involving at least 80 percent identity of stock 
         ownership
       The first type of inversion is a transaction in which, 
     pursuant to a plan \431\ or a series of related transactions: 
     (1) a U.S. corporation becomes a subsidiary of a foreign-
     incorporated entity or otherwise transfers substantially all 
     of its properties to such an entity in a transaction 
     completed after March 4, 2003; (2) the former shareholders of 
     the U.S. corporation hold (by reason of holding stock in the 
     U.S. corporation) 80 percent or more (by vote or value) of 
     the stock of the foreign-incorporated entity after the 
     transaction; and (3) the foreign-incorporated entity, 
     considered together with all companies connected to it by a 
     chain of greater than 50 percent ownership (i.e., the 
     ``expanded affiliated group''), does not have substantial 
     business activities in the entity's country of incorporation, 
     compared to the total worldwide business activities of the 
     expanded affiliated group. The provision denies the intended 
     tax benefits of this type of inversion by deeming the top-
     tier foreign corporation to be a domestic corporation for all 
     purposes of the Code.\432\
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     \431\ Acquisitions with respect to a domestic corporation or 
     partnership are deemed to be ``pursuant to a plan'' if they 
     occur within the four-year period beginning on the date which 
     is two years before the ownership threshold under the 
     provision is met with respect to such corporation or 
     partnership.
     \432\ Since the top-tier foreign corporation is treated for 
     all purposes of the Code as domestic, the shareholder-level 
     ``toll charge'' of sec. 367(a) does not apply to these 
     inversion transactions.
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       In determining whether a transaction meets the definition 
     of an inversion under the proposal, stock held by members of 
     the expanded affiliated group that includes the foreign 
     incorporated entity is disregarded. For example, if the 
     former top-tier U.S. corporation receives stock of the 
     foreign incorporated entity (e.g., so-called ``hook'' stock), 
     the stock would not be considered in determining whether the 
     transaction meets the definition. Similarly, if a U.S. parent 
     corporation converts an existing wholly owned U.S. subsidiary 
     into a new wholly owned controlled foreign corporation, the 
     stock of the new foreign corporation would be disregarded. 
     Stock sold in a public offering related to the transaction 
     also is disregarded for these purposes.
       Transfers of properties or liabilities as part of a plan a 
     principal purpose of which is to avoid the purposes of the 
     proposal are disregarded. In addition, the Treasury Secretary 
     is granted authority to prevent the avoidance of the purposes 
     of the proposal, including avoidance through the use of 
     related persons, pass-through or other noncorporate entities, 
     or other intermediaries, and through transactions designed to 
     qualify or disqualify a person as a related person or a 
     member of an expanded affiliated group. Similarly, the 
     Treasury Secretary is granted authority to treat certain non-
     stock instruments as stock, and certain stock as not stock, 
     where necessary to carry out the purposes of the proposal.
     Transactions involving at least 60 percent but less than 80 
         percent identity of stock ownership
       The second type of inversion is a transaction that would 
     meet the definition of an inversion transaction described 
     above, except that the 80-percent ownership threshold is not 
     met. In such a case, if at least a 60-percent ownership 
     threshold is met, then a second set of rules applies to the 
     inversion. Under these rules, the inversion transaction is 
     respected (i.e., the foreign corporation is treated as 
     foreign), but any applicable corporate-level ``toll charges'' 
     for establishing the inverted structure are not offset by tax 
     attributes such as net operating losses or foreign tax 
     credits. Specifically, any applicable corporate-level income 
     or gain required to be recognized under sections 304, 311(b), 
     367, 1001, 1248, or any other provision with respect to the 
     transfer of controlled foreign corporation stock or the 
     transfer or license of other assets by a U.S. corporation as 
     part of the inversion transaction or after such transaction 
     to a related foreign person is taxable, without offset by any 
     tax attributes (e.g., net operating losses or foreign tax 
     credits). This rule does not apply to certain transfers of 
     inventory and similar property. These measures generally 
     apply for a 10-year period following the inversion 
     transaction.
       Under the proposal, inversion transactions include certain 
     partnership transactions. Specifically, the proposal applies 
     to transactions in which a foreign-incorporated entity 
     acquires substantially all of the properties constituting a 
     trade or business of a domestic partnership, if after the 
     acquisition at least 60 percent of the stock of the entity is 
     held by former partners of the partnership (by reason of 
     holding their partnership interests), provided that the other 
     terms of the basic definition are met. For purposes of 
     applying this test, all partnerships that are under common 
     control within the meaning of section 482 are treated as one 
     partnership, except as provided otherwise in regulations. In 
     addition, the modified ``toll charge'' proposals apply at the 
     partner level.
       A transaction otherwise meeting the definition of an 
     inversion transaction is not treated as an inversion 
     transaction if, on or before March 4, 2003, the foreign-
     incorporated entity had acquired directly or indirectly more 
     than half of the properties held directly or indirectly by 
     the domestic corporation, or more than half of the properties 
     constituting the partnership trade or business, as the case 
     may be.
     Effective date
       The provision applies to taxable years ending after March 
     4, 2003.
     2. Excise tax on stock compensation of insiders in 
         expatriated corporations (sec. 602 of the House bill, 
         sec. 443 of the Senate amendment, and secs. 162(m), 
         275(a), and new sec. 4985 of the Code)


                              Present Law

       The income taxation of a nonstatutory \433\ compensatory 
     stock option is determined under the rules that apply to 
     property transferred in connection with the performance of 
     services (sec. 83). If a nonstatutory stock option does not 
     have a readily ascertainable fair market value at the time of 
     grant, which is generally the case unless the option is 
     actively traded on an established market, no amount is 
     included in the gross income of the recipient with respect to 
     the option until the recipient exercises the option. \434\ 
     Upon

[[Page H8562]]

     exercise of such an option, the excess of the fair market 
     value of the stock purchased over the option price is 
     generally included in the recipient's gross income as 
     ordinary income in such taxable year.\435\
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     \433\ Nonstatutory stock options refer to stock options other 
     than incentive stock options and employee stock purchase 
     plans, the taxation of which is determined under sections 
     421-s424.
     \434\ If an individual receives a grant of a nonstatutory 
     option that has a readily ascertainable fair market value at 
     the time the option is granted, the excess of the fair market 
     value of the option over the amount paid for the option is 
     included in the recipient's gross income as ordinary income 
     in the first taxable year in which the option is either 
     transferable or not subject to a substantial risk of 
     forfeiture.
     \435\ Under section 83, such amount is includable in gross 
     income in the first taxable year in which the rights to the 
     stock are transferable or are not subject to substantial risk 
     of forfeiture.
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       The tax treatment of other forms of stock-based 
     compensation (e.g., restricted stock and stock appreciation 
     rights) is also determined under section 83. The excess of 
     the fair market value over the amount paid (if any) for such 
     property is generally includable in gross income in the first 
     taxable year in which the rights to the property are 
     transferable or are not subject to substantial risk of 
     forfeiture.
       Shareholders are generally required to recognize gain upon 
     stock inversion transactions. An inversion transaction is 
     generally not a taxable event for holders of stock options 
     and other stock-based compensation.


                               House Bill

     In general
       Under the House bill, specified holders of stock options 
     and other stock-based compensation are subject to an excise 
     tax upon certain inversion transactions. The provision 
     imposes a 15-percent excise tax on the value of specified 
     stock compensation held (directly or indirectly) by or for 
     the benefit of a disqualified individual, or a member of such 
     individual's family, at any time during the 12-month period 
     beginning six months before the corporation's expatriation 
     date. Specified stock compensation is treated as held for the 
     benefit of a disqualified individual if such compensation is 
     held by an entity, e.g., a partnership or trust, in which the 
     individual, or a member of the individual's family, has an 
     ownership interest.
     Disqualified individuals
       A disqualified individual is any individual who, with 
     respect to a corporation, is, at any time during the 12-month 
     period beginning on the date which is six months before the 
     expatriation date, subject to the requirements of section 
     16(a) of the Securities and Exchange Act of 1934 with respect 
     to the corporation, or any member of the corporation's 
     expanded affiliated group,\436\ or would be subject to such 
     requirements if the corporation (or member) were an issuer of 
     equity securities referred to in section 16(a). Disqualified 
     individuals generally include officers (as defined by section 
     16(a)),\437\ directors, and 10-percent-or-greater owners of 
     private and publicly-held corporations.
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     \436\ An expanded affiliated group is an affiliated group 
     (under section 1504) except that such group is determined 
     without regard to the exceptions for certain corporations and 
     is determined applying a greater than 50 percent threshold, 
     in lieu of the 80-percent test.
     \437\ An officer is defined as the president, principal 
     financial officer, principal accounting officer (or, if there 
     is no such accounting officer, the controller), any vice-
     president in charge of a principal business unit, division or 
     function (such as sales, administration or finance), any 
     other officer who performs a policy-making function, or any 
     other person who performs similar policy-making functions.
---------------------------------------------------------------------------
     Application of excise tax
       The excise tax is imposed on a disqualified individual of 
     an expatriated corporation (as defined in the bill) only if 
     gain (if any) is recognized in whole or part by any 
     shareholder by reason of a corporate inversion transaction as 
     previously defined in the bill.
     Specified stock compensation
       Specified stock compensation subject to the excise tax 
     includes any payment \438\ (or right to payment) granted by 
     the expatriated corporation (or any member of the 
     corporation's expanded affiliated group) to any person in 
     connection with the performance of services by a disqualified 
     individual for such corporation (or member of the 
     corporation's expanded affiliated group) if the value of the 
     payment or right is based on, or determined by reference to, 
     the value or change in value of stock of such corporation (or 
     any member of the corporation's expanded affiliated group). 
     In determining whether such compensation exists and valuing 
     such compensation, all restrictions, other than a non-lapse 
     restriction, are ignored. Thus, the excise tax applies, and 
     the value subject to the tax is determined, without regard to 
     whether the specified stock compensation is subject to a 
     substantial risk of forfeiture or is exercisable at the time 
     of the inversion transaction.
---------------------------------------------------------------------------
     \438\ Under the provision, any transfer of lproperty is 
     treated as a payment and any right to a transfer of property 
     is treated as a right to a payment.
---------------------------------------------------------------------------
       Specified stock compensation includes compensatory stock 
     and restricted stock grants, compensatory stock options, and 
     other forms of stock-based compensation, including stock 
     appreciation rights, phantom stock, and phantom stock 
     options. Specified stock compensation also includes 
     nonqualified deferred compensation that is treated as though 
     it were invested in stock or stock options of the 
     expatriating corporation (or member). For example, the 
     provision applies to a disqualified individual's nonqualified 
     deferred compensation if company stock is one of the actual 
     or deemed investment options under the nonqualified deferred 
     compensation plan.
       Specified stock compensation includes a compensation 
     arrangement that gives the disqualified individual an 
     economic stake substantially similar to that of a corporate 
     shareholder. A payment directly tied to the value of the 
     stock is specified stock compensation. The excise tax does 
     not apply if a payment is simply triggered by a target value 
     of the corporation's stock or where a payment depends on a 
     performance measure other than the value of the corporation's 
     stock. Similarly, the tax does not apply if the amount of the 
     payment is not directly measured by the value of the stock or 
     an increase in the value of the stock. For example, an 
     arrangement under which a disqualified individual would be 
     paid a cash bonus equal to $10,000 for every $1 increase in 
     the share price of the corporation's stock is subject to the 
     provision because the direct connection between the 
     compensation amount and the value of the corporation's stock 
     gives the disqualified individual an economic stake 
     substantially similar to that of a shareholder. By contrast, 
     an arrangement under which a disqualified individual would be 
     paid a cash bonus of $500,000 if the corporation's stock 
     increased in value by 25 percent over two years or $1,000,000 
     if the stock increased by 33 percent over two years is not 
     specified stock compensation, even though the amount of the 
     bonus generally is keyed to an increase in the value of the 
     stock.
       The excise tax applies to any specified stock compensation 
     previously granted to a disqualified individual but cancelled 
     or cashed-out within the six-month period ending with the 
     expatriation date, and to any specified stock compensation 
     awarded in the six-month period beginning with the 
     expatriation date. As a result, for example, if a corporation 
     cancels outstanding options three months before the inversion 
     transaction and then reissues comparable options three months 
     after the transaction, the tax applies both to the cancelled 
     options and the newly granted options. It is intended that 
     the Secretary issue guidance to avoid double counting with 
     respect to specified stock compensation that is cancelled and 
     then regranted during the applicable 12-month period.
       Specified stock compensation subject to the tax does not 
     include a statutory stock option or any payment or right from 
     a qualified retirement plan or annuity, tax-sheltered 
     annuity, simplified employee pension, or SIMPLE. In addition, 
     under the provision, the excise tax does not apply to any 
     stock option that is exercised during the six-month period 
     before the expatriation date or to any stock acquired 
     pursuant to such exercise, if income is recognized under 
     section 83 on or before the expatriation date with respect to 
     the stock acquired pursuant to such exercise. The excise tax 
     also does not apply to any specified stock compensation that 
     is exercised, sold, exchanged, distributed, cashed out, or 
     otherwise paid during such period in a transaction in which 
     income, gain, or loss is recognized in full.
     Determination of amount subject to tax
       For specified stock compensation held on the expatriation 
     date, the amount of the tax is determined based on the value 
     of the compensation on such date. The tax imposed on 
     specified stock compensation cancelled during the six-month 
     period before the expatriation date is determined based on 
     the value of the compensation on the day before such 
     cancellation, while specified stock compensation granted 
     after the expatriation date is valued on the date granted. 
     Under the provision, the cancellation of a non-lapse 
     restriction is treated as a grant.
       The value of the specified stock compensation on which the 
     excise tax is imposed is the fair value in the case of stock 
     options (including warrants or other similar rights to 
     acquire stock) and stock appreciation rights and the fair 
     market value for all other forms of compensation. For 
     purposes of the tax, the fair value of an option (or a 
     warrant or other similar right to acquire stock) or a stock 
     appreciation right is determined using an appropriate option-
     pricing model, as specified or permitted by the Secretary, 
     that takes into account (1) the stock price at the valuation 
     date; (2) the exercise price under the option; (3) the 
     remaining term of the option; (4) the volatility of the 
     underlying stock and the expected dividends on it; and (5) 
     the risk-free interest rate over the remaining term of the 
     option. Options that have no intrinsic value (or ``spread'') 
     because the exercise price under the option equals or exceeds 
     the fair market value of the stock at valuation nevertheless 
     have a fair value and are subject to tax under the provision. 
     The value of other forms of compensation, such as phantom 
     stock or restricted stock, is the fair market value of the 
     stock as of the date of the expatriation transaction. The 
     value of any deferred compensation that can be valued by 
     reference to stock is the amount that the disqualified 
     individual would receive if the plan were to distribute all 
     such deferred compensation in a single sum on the date of the 
     expatriation transaction (or the date of cancellation or 
     grant, if applicable). It is expected that the Secretary 
     issue guidance on valuation of specified stock compensation, 
     including guidance similar to the guidance issued under 
     section 280G, except that the guidance would not permit the 
     use of a term other than the full remaining term and would be 
     modified as necessary or appropriate to carry out the 
     purposes of the provision. Pending the issuance of guidance, 
     it is intended that taxpayers can rely on the

[[Page H8563]]

     guidance issued under section 280G (except that the full 
     remaining term must be used and recalculation is not 
     permitted).
     Other rules
       The excise tax also applies to any payment by the 
     expatriated corporation or any member of the expanded 
     affiliated group made to an individual, directly or 
     indirectly, in respect of the tax. Whether a payment is made 
     in respect of the tax is determined under all of the facts 
     and circumstances. Any payment made to keep the individual in 
     the same after-tax position that the individual would have 
     been in had the tax not applied is a payment made in respect 
     of the tax. This includes direct payments of the tax and 
     payments to reimburse the individual for payment of the tax. 
     It is expected that the Secretary issue guidance on 
     determining when a payment is made in respect of the tax and 
     that such guidance include certain factors that give rise to 
     a rebuttable presumption that a payment is made in respect of 
     the tax, including a rebuttable presumption that if the 
     payment is contingent on the inversion transaction, it is 
     made in respect to the tax. Any payment made in respect of 
     the tax is includible in the income of the individual, but is 
     not deductible by the corporation.
       To the extent that a disqualified individual is also a 
     covered employee under section 162(m), the $1,000,000 limit 
     on the deduction allowed for employee remuneration for such 
     employee is reduced by the amount of any payment (including 
     reimbursements) made in respect of the tax under the 
     provision. As discussed above, this includes direct payments 
     of the tax and payments to reimburse the individual for 
     payment of the tax.
       The payment of the excise tax has no effect on the 
     subsequent tax treatment of any specified stock compensation. 
     Thus, the payment of the tax has no effect on the 
     individual's basis in any specified stock compensation and no 
     effect on the tax treatment for the individual at the time of 
     exercise of an option or payment of any specified stock 
     compensation, or at the time of any lapse or forfeiture of 
     such specified stock compensation. The payment of the tax is 
     not deductible and has no effect on any deduction that might 
     be allowed at the time of any future exercise or payment.
       Under the provision, the Secretary is authorized to issue 
     regulations as may be necessary or appropriate to carry out 
     the purposes of the provision.
     Effective date
       The provision is effective as of March 4, 2003, except that 
     periods before March 4, 2003, are not taken into account in 
     applying the excise tax to specified stock compensation held 
     or cancelled during the six-month period before the 
     expatriation date.


                            senate amendment

       The Senate amendment follows the House bill except that 
     excise tax is equal to 20 percent of the value of the 
     specified stock compensation. Under the Senate amendment, the 
     excise tax does not apply to executives of the expanded 
     affiliated group.
       Effective date.--The Senate amendment is effective as of 
     July 11, 2002, except that periods before July 11, 2002, are 
     not taken into account in applying the excise tax to 
     specified stock compensation held or cancelled during the 
     six-month period before the expatriation date.


                          conference agreement

       The conference agreement follows the House bill except that 
     the excise tax is imposed at a rate equal to the maximum rate 
     of tax on the adjusted net capital gain of an individual 
     (i.e., the rate of the excise tax would be 15 percent for 
     2005 through 2008 and 20 percent for taxable years beginning 
     after December 31, 2008).
     3. Reinsurance of U.S. risks in foreign jurisdictions (sec. 
         603 of the House bill, sec. 444 of the Senate amendment, 
         and sec. 845(a) of the Code)


                              present law

       In the case of a reinsurance agreement between two or more 
     related persons, present law provides the Treasury Secretary 
     with authority to allocate among the parties or 
     recharacterize income (whether investment income, premium or 
     otherwise), deductions, assets, reserves, credits and any 
     other items related to the reinsurance agreement, or make any 
     other adjustment, in order to reflect the proper source and 
     character of the items for each party.\439\ For this purpose, 
     related persons are defined as in section 482. Thus, persons 
     are related if they are organizations, trades or businesses 
     (whether or not incorporated, whether or not organized in the 
     United States, and whether or not affiliated) that are owned 
     or controlled directly or indirectly by the same interests. 
     The provision may apply to a contract even if one of the 
     related parties is not a domestic company.\440\ In addition, 
     the provision also permits such allocation, 
     recharacterization, or other adjustments in a case in which 
     one of the parties to a reinsurance agreement is, with 
     respect to any contract covered by the agreement, in effect 
     an agent of another party to the agreement, or a conduit 
     between related persons.
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     \439\ Sec. 845(a).
     \440\ See S. Rep. No. 97-494, 97th Cong., 2d Sess., 337 
     (1982) (describing provisionss relating to the repeal of 
     modified coinsurance provisions).
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                               house bill

       The bill clarifies the rules of section 845, relating to 
     authority for the Treasury Secretary to allocate items among 
     the parties to a reinsurance agreement, recharacterize items, 
     or make any other adjustment, in order to reflect the proper 
     source and character of the items for each party. The bill 
     authorizes such allocation, recharacterization, or other 
     adjustment, in order to reflect the proper source, character 
     or amount of the item. It is intended that this authority 
     \441\ be exercised in a manner similar to the authority under 
     section 482 for the Treasury Secretary to make adjustments 
     between related parties. It is intended that this authority 
     be applied in situations in which the related persons (or 
     agents or conduits) are engaged in cross-border transactions 
     that require allocation, recharacterization, or other 
     adjustments in order to reflect the proper source, character 
     or amount of the item or items. No inference is intended that 
     present law does not provide this authority with respect to 
     reinsurance agreements.
---------------------------------------------------------------------------
     \441\ The authority to allocate, recharacterize or make other 
     adjustments was granted in connection with the repeal of 
     provisions relating to modified coinsurance transactions.
---------------------------------------------------------------------------
       No regulations have been issued under section 845(a). It is 
     expected that the Treasury Secretary will issue regulations 
     under section 845(a) to address effectively the allocation of 
     income (whether investment income, premium or otherwise) and 
     other items, the recharacterization of such items, or any 
     other adjustment necessary to reflect the proper amount, 
     source or character of the item.
       Effective date.--The provision is effective for any risk 
     reinsured after the date of enactment of the provision.


                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The provision is effective for any risk 
     reinsured after April 11, 2002.


                          conference agreement

       The Conference agreement follows the House bill.
     4. Revision of tax rules on expatriation of individuals (sec. 
         604 of the House bill, sec. 442 of the Senate amendment, 
         and secs. 877, 2107, 2501 and 6039G of the Code)


                              present law

     In general
       U.S. citizens and residents generally are subject to U.S 
     income taxation on their worldwide income. The U.S. tax may 
     be reduced or offset by a credit allowed for foreign income 
     taxes paid with respect to foreign source income. Nonresident 
     aliens are taxed at a flat rate of 30 percent (or a lower 
     treaty rate) on certain types of passive income derived from 
     U.S. sources, and at regular graduated rates on net profits 
     derived from a U.S. trade or business. The estates of 
     nonresident aliens generally are subject to estate tax on 
     U.S.-situated property (e.g., real estate and tangible 
     property located within the United States and stock in a U.S. 
     corporation). Nonresident aliens generally are subject to 
     gift tax on transfers by gift of U.S.-situated property 
     (e.g., real estate and tangible property located within the 
     United States, but excluding intangibles, such as stock, 
     regardless of where they are located).
     Income tax rules with respect to expatriates 
       For the 10 taxable years after an individual relinquishes 
     his or her U.S. citizenship or terminates his or her U.S. 
     residency \442\ with a principal purpose of avoiding U.S. 
     taxes, the individuals is subject to an alternative method of 
     income taxation than that generally applicable to nonresident 
     aliens (the ``alternative tax regime''). Generally, the 
     individual is subject to income tax only on U.S.-source 
     income \443\ at the rates applicable to U.S. citizens for the 
     10-year period.
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     \442\ Under present law, an individual's U.S. residency is 
     considered terminated for U.S. Federal tax purposes when the 
     individual ceases to be a lawful permanent resident under the 
     immigration law (or is treated as a resident of another 
     country under a tax treaty and does not waive the benefits of 
     such treaty).
     \443\ For this purpose, however, U.S.-source income has a 
     broader scope than it does typically in the Code.
---------------------------------------------------------------------------
       An individual who relinquishes citizenship or terminates 
     residency is treated as having done so with a principal 
     purpose of tax avoidance and is generally subject to the 
     alternative tax regime if: (1) the individual's average 
     annual U.S. Federal income tax liability for the five taxable 
     years preceding citizenship relinquishment or residency 
     termination exceeds $100,000; or (2) the individual's net 
     worth on the date of citizenship relinquishment or residency 
     termination equals or exceeds $500,000. These amounts are 
     adjusted annually for inflation.\444\ Certain categories of 
     individuals (e.g., dual residents) may avoid being deemed to 
     have a tax avoidance purpose for relinquishing citizenship or 
     terminating residency by submitting a ruling request to the 
     IRS regarding whether the individual relinquished citizenship 
     or terminated residency principally for tax reasons.
---------------------------------------------------------------------------
     \444\ The income tax liability and net worth thresholds under 
     section 877(a)(2) for 2004 are $124,000 and $622,000, 
     respectively. See Rev. Proc. 2003-85, 2003-49 I.R.B. 1184.
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       Anti-abuse rules are provided to prevent the circumvention 
     of the alternative tax regime.
     Estate tax rules with respect to expatriates
       Special estate tax rules apply to individual's who 
     relinquish their citizenship or long-term residency within 
     the 10 years prior to the date of death, unless he or she did 
     not have a tax avoidance purpose (as determined under the 
     test above). Under these special rules, certain closely-held 
     foreign stock owned by the former citizen or former long-

[[Page H8564]]

     term resident is includible in his or her gross estate to the 
     extent that the foreign corporation owns U.S.-situated 
     assets.
     Gift tax rules with respect to expatriates
       Special gift tax rules apply to individual's who relinquish 
     their citizenship or long-term residency within the 10 years 
     prior to the date of death, unless he or she did not have a 
     tax avoidance purpose (as determined under the rules above). 
     The individual is subject to gift tax on gifts of U.S.-
     situated intangibles made during the 10 years following 
     citizenship relinquishment or residency termination.
     Information reporting
       Under present law, U.S. citizens who relinquish citizenship 
     and long-term residents who terminate residency generally are 
     required to provide information about their assets held at 
     the time of expatriation. However, this information is only 
     required once.


                               house bill

     In general
       The bill provides: (1) objective standards for determining 
     whether former citizens or former long-term residents are 
     subject to the alternative tax regime; (2) tax-based (instead 
     of immigration-based) rules for determining when an 
     individual is no longer a U.S. citizen or long-term resident 
     for U.S. Federal tax purposes; (3) the imposition of full 
     U.S. taxation for individuals who are subject to the 
     alternative tax regime and who return to the United States 
     for extended periods; (4) imposition of U.S. gift tax on 
     gifts of stock of certain closely-held foreign corporations 
     that hold U.S.-situated property; and (5) an annual return-
     filing requirement for individuals who are subject to the 
     alternative tax regime, for each of the 10 years following 
     citizenship relinquishment or residency termination.\445\
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     \445\ These provisions reflect recommendations contained in 
     Joint Committee on Taxation, Review of the Present Law Tax 
     and Immigration Treatment of Relinquishment of Citizenship 
     and Termination of Long-Term Residency, (JCS-2-03), February 
     2003.
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     Objective rules for the alternative tax regime
       The bill replaces the subjective determination of tax 
     avoidance as a principal purpose for citizenship 
     relinquishment or residency termination under present law 
     with objective rules. Under the bill, a former citizen or 
     former long-term resident would be subject to the alternative 
     tax regime for a 10-year period following citizenship 
     relinquishment or residency termination, unless the former 
     citizen or former long-term resident: (1) establishes that 
     his or her average annual net income tax liability for the 
     five preceding years does not exceed $124,000 (adjusted for 
     inflation after 2004) and his or her net worth does not 
     exceed $2 million, or alternatively satisfies limited, 
     objective exceptions for dual citizens and minors who have 
     had no substantial contact with the United States; and (2) 
     certifies under penalties of perjury that he or she has 
     complied with all U.S. Federal tax obligations for the 
     preceding five years and provides such evidence of compliance 
     as the Secretary of the Treasury may require.
       The monetary thresholds under the bill replace the present-
     law inquiry into the taxpayer's intent. In addition, the bill 
     eliminates the present-law process of IRS ruling requests.
       If a former citizen exceeds the monetary thresholds, that 
     person is excluded from the alternative tax regime if he or 
     she falls within the exceptions for certain dual citizens and 
     minors (provided that the requirement of certification and 
     proof of compliance with Federal tax obligations is met). 
     These exceptions provide relief to individuals who have never 
     had substantial connections with the United States, as 
     measured by certain objective criteria, and eliminate IRS 
     inquiries as to the subjective intent of such taxpayers.
       In order to be excepted from the application of the 
     alternative tax regime under the bill, whether by reason of 
     falling below the net worth and income tax liability 
     thresholds or qualifying for the dual-citizen or minor 
     exceptions, the former citizen or former long-term resident 
     also is required to certify, under penalties of perjury, that 
     he or she has complied with all U.S. Federal tax obligations 
     for the five years preceding the relinquishment of 
     citizenship or termination of residency and to provide such 
     documentation as the Secretary of the Treasury may require 
     evidencing such compliance (e.g., tax returns, proof of tax 
     payments). Until such time, the individual remains subject to 
     the alternative tax regime. It is intended that the IRS will 
     continue to verify that the information submitted was 
     accurate, and it is intended that the IRS will randomly audit 
     such persons to assess compliance.
     Termination of U.S. citizenship or long-term resident status 
         for U.S. Federal income tax purposes
       Under the bill, an individual continues to be treated as a 
     U.S. citizen or long-term resident for U.S. Federal tax 
     purposes, including for purposes of section 7701(b)(10), 
     until the individual: (1) gives notice of an expatriating act 
     or termination of residency (with the requisite intent to 
     relinquish citizenship or terminate residency) to the 
     Secretary of State or the Secretary of Homeland Security, 
     respectively; and (2) provides a statement in accordance with 
     section 6039G.
     Sanction for individuals subject to the individual tax regime 
         who return to the United States for extended periods
       The alternative tax regime does not apply to any individual 
     for any taxable year during the 10-year period following 
     citizenship relinquishment or residency termination if such 
     individual is present in the United States for more than 30 
     days in the calendar year ending in such taxable year. Such 
     individual is treated as a U.S. citizen or resident for such 
     taxable year and therefore is taxed on his or her worldwide 
     income.
       Similarly, if an individual subject to the alternative tax 
     regime is present in the United States for more than 30 days 
     in any calendar year ending during the 10-year period 
     following citizenship relinquishment or residency 
     termination, and the individual dies during that year, he or 
     she is treated as a U.S. resident, and the individual's 
     worldwide estate is subject to U.S. estate tax. Likewise, if 
     an individual subject to the alternative tax regime is 
     present in the United States for more than 30 days in any 
     year during the 10-year period following citizenship 
     relinquishment or residency termination, the individual is 
     subject to U.S. gift tax on any transfer of his or her 
     worldwide assets by gift during that taxable year.
       For purposes of these rules, an individual is treated as 
     present in the United States on any day if such individual is 
     physically present in the United States at any time during 
     that day. The present-law exceptions from being treated as 
     present in the United States for residency purposes\446\ 
     generally do not apply for this purpose. However, for 
     individuals with certain ties to countries other than the 
     United States\447\ and individuals with minimal prior 
     physical presence in the United States,\448\ a day of 
     physical presence in the United States is disregarded if the 
     individual is performing services in the United States on 
     such day for an unrelated employer (within the meaning of 
     sections 267 and 707(b)), who meets the requirements the 
     Secretary of the Treasury may prescribe in regulations. No 
     more than 30 days may be disregarded during any calendar year 
     under this rule.
---------------------------------------------------------------------------
     \446\ Secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
     \447\ An individual has such a relationship to a foreign 
     country if the individual becomes a citizen or resident of 
     the country in which (1) the individual becomes fully liable 
     for income tax or (2) the individual was born, such 
     individual's spouse was born, or either of the individual's 
     parents was born.
     \448\ An individual has a minimal prior physical presence in 
     the United States if the individual was physically present 
     for no more than 30 days during each year in the ten-year 
     period ending on the date of loss of United States 
     citizenship or termination of residency. However, an 
     individual is not treated as being present in the United 
     States on a day if (1) the individual is a teacher or 
     trainee, a student, a professional athlete in certain 
     circumstances, or a foreign government-related individual or 
     (2) the individual remained in the United States because of a 
     medical condition that arose while the individual was in the 
     United States. Sec. 7701(b)(3)(D)(ii).
---------------------------------------------------------------------------
     Imposition of gift tax with respect to stock of certain 
         closely held foreign corporations
       Gifts of stock of certain closely-held foreign corporations 
     by a former citizen or former long-term resident who is 
     subject to the alternative tax regime are subject to gift tax 
     under this bill, if the gift is made within the 10-year 
     period after citizenship relinquishment or residency 
     termination. The gift tax rule applies if: (1) the former 
     citizen or former long-term resident, before making the gift, 
     directly or indirectly owns 10 percent or more of the total 
     combined voting power of all classes of stock entitled to 
     vote of the foreign corporation; and (2) directly or 
     indirectly, is considered to own more than 50 percent of (a) 
     the total combined voting power of all classes of stock 
     entitled to vote in the foreign corporation, or (b) the total 
     value of the stock of such corporation. If this stock 
     ownership test is met, then taxable gifts of the former 
     citizen or former long-term resident include that proportion 
     of the fair market value of the foreign stock transferred by 
     the individual, at the time of the gift, which the fair 
     market value of any assets owned by such foreign corporation 
     and situated in the United States (at the time of the gift) 
     bears to the total fair market value of all assets owned by 
     such foreign corporation (at the time of the gift).
       This gift tax rule applies to a former citizen or former 
     long-term resident who is subject to the alternative tax 
     regime and who owns stock in a foreign corporation at the 
     time of the gift, regardless of how such stock was acquired 
     (e.g., whether issued originally to the donor, purchased, or 
     received as a gift or bequest).
     Annual return
       The bill requires former citizens and former long-term 
     residents to file an annual return for each year following 
     citizenship relinquishment or residency termination in which 
     they are subject to the alternative tax regime. The annual 
     return is required even if no U.S. Federal income tax is due. 
     The annual return requires certain information, including 
     information on the permanent home of the individual, the 
     individual's country of residence, the number of days the 
     individual was present in the United States for the year, and 
     detailed information about the individual's income and assets 
     that are subject to the alternative tax regime. This 
     requirement includes information relating to foreign stock 
     potentially subject to the special estate tax rule of section 
     2107(b) and the gift tax rules of this bill.
       If the individual fails to file the statement in a timely 
     manner or fails correctly to include all the required 
     information, the individual is required to pay a penalty of 
     $5,000.

[[Page H8565]]

     The $5,000 penalty does not apply if it is shown that the 
     failure is due to reasonable cause and not to willful 
     neglect.
     Effective date
       The provision applies to individuals who relinquish 
     citizenship or terminate long-term residency after June 3, 
     2004.


                            senate amendment

     In general
       The provision generally subjects certain U.S. citizens who 
     relinquish their U.S. citizenship and certain long-term U.S. 
     residents who terminate their U.S. residence to tax on the 
     net unrealized gain in their property as if such property 
     were sold for fair market value on the day before the 
     expatriation or residency termination. Gain from the deemed 
     sale is taken into account at that time without regard to 
     other Code provisions; any loss from the deemed sale 
     generally would be taken into account to the extent otherwise 
     provided in the Code. Any net gain on the deemed sale is 
     recognized to the extent it exceeds $600,000 ($1.2 million in 
     the case of married individuals filing a joint return, both 
     of whom relinquish citizenship or terminate residency). The 
     $600,000 amount is increased by a cost of living adjustment 
     factor for calendar years after 2002.
     Individuals covered
       Under the provision, the mark-to-market tax applies to U.S. 
     citizens who relinquish citizenship and long-term residents 
     who terminate U.S. residency. An individual is a long-term 
     resident if he or she was a lawful permanent resident for at 
     least eight out of the 15 taxable years ending with the year 
     in which the termination of residency occurs. An individual 
     is considered to terminate long-term residency when either 
     the individual ceases to be a lawful permanent resident 
     (i.e., loses his or her green card status), or the individual 
     is treated as a resident of another country under a tax 
     treaty and the individual does not waive the benefits of the 
     treaty.
       Exceptions from the mark-to-market tax are provided in two 
     situations. The first exception applies to an individual who 
     was born with citizenship both in the United States and in 
     another country; provided that (1) as of the expatriation 
     date the individual continues to be a citizen of, and is 
     taxed as a resident of, such other country, and (2) the 
     individual was not a resident of the United States for the 
     five taxable years ending with the year of expatriation. The 
     second exception applies to a U.S. citizen who relinquishes 
     U.S. citizenship before reaching age 18 and a half, provided 
     that the individual was a resident of the United States for 
     no more than five taxable years before such relinquishment.
     Election to be treated as a U.S. citizen
       Under the provision, an individual is permitted to make an 
     irrevocable election to continue to be taxed as a U.S. 
     citizen with respect to all property that otherwise is 
     covered by the expatriation tax. This election is an ``all or 
     nothing'' election; an individual is not permitted to elect 
     this treatment for some property but not for other property. 
     The election, if made, would apply to all property that would 
     be subject to the expatriation tax and to any property the 
     basis of which is determined by reference to such property. 
     Under this election, the individual would continue to pay 
     U.S. income taxes at the rates applicable to U.S. citizens 
     following expatriation on any income generated by the 
     property and on any gain realized on the disposition of the 
     property. In addition, the property would continue to be 
     subject to U.S. gift, estate, and generation-skipping 
     transfer taxes. In order to make this election, the taxpayer 
     would be required to waive any treaty rights that would 
     preclude the collection of the tax.
       The individual also would be required to provide security 
     to ensure payment of the tax under this election in such 
     form, manner, and amount as the Secretary of the Treasury 
     requires. The amount of mark-to-market tax that would have 
     been owed but for this election (including any interest, 
     penalties, and certain other items) shall be a lien in favor 
     of the United States on all U.S.-situs property owned by the 
     individual. This lien shall arise on the expatriation date 
     and shall continue until the tax liability is satisfied, the 
     tax liability has become unenforceable by reason of lapse of 
     time, or the Secretary is satisfied that no further tax 
     liability may arise by reason of this provision. The rules of 
     section 6324A(d)(1), (3), and (4) (relating to liens arising 
     in connection with the deferral of estate tax under section 
     6166) apply to liens arising under this provision.
     Date of relinquishment of citizenship
       Under the provision, an individual is treated as having 
     relinquished U.S. citizenship on the earliest of four 
     possible dates: (1) the date that the individual renounces 
     U.S. nationality before a diplomatic or consular officer of 
     the United States (provided that the voluntary relinquishment 
     is later confirmed by the issuance of a certificate of loss 
     of nationality); (2) the date that the individual furnishes 
     to the State Department a signed statement of voluntary 
     relinquishment of U.S. nationality confirming the performance 
     of an expatriating act (again, provided that the voluntary 
     relinquishment is later confirmed by the issuance of a 
     certificate of loss of nationality); (3) the date that the 
     State Department issues a certificate of loss of nationality; 
     or (4) the date that a U.S. court cancels a naturalized 
     citizen's certificate of naturalization.
     Deemed sale of property upon expatriation or residency 
         termination
       The deemed sale rule of the provision generally applies to 
     all property interests held by the individual on the date of 
     relinquishment of citizenship or termination of residency. 
     Special rules apply in the case of trust interests, as 
     described below. U.S. real property interests, which remain 
     subject to U.S. tax in the hands of nonresident noncitizens, 
     generally are excepted from the provision. Regulatory 
     authority is granted to the Treasury to except other types of 
     property from the provision.
       Under the provision, an individual who is subject to the 
     mark-to-market tax is required to pay a tentative tax equal 
     to the amount of tax that would be due for a hypothetical 
     short tax year ending on the date the individual relinquished 
     citizenship or terminated residency. Thus, the tentative tax 
     is based on all income, gain, deductions, loss, and credits 
     of the individual for the year through such date, including 
     amounts realized from the deemed sale of property. The 
     tentative tax is due on the 90th day after the date of 
     relinquishment of citizenship or termination of residency.
     Retirement plans and similar arrangements
       Subject to certain exceptions, the provision applies to all 
     property interests held by the individual at the time of 
     relinquishment of citizenship or termination of residency. 
     Accordingly, such property includes an interest in an 
     employer-sponsored retirement plan or deferred compensation 
     arrangement as well as an interest in an individual 
     retirement account or annuity (i.e., an IRA).\449\ However, 
     the provision contains a special rule for an interest in a 
     ``qualified retirement plan.'' For purposes of the provision, 
     a ``qualified retirement plan'' includes an employer-
     sponsored qualified plan (sec. 401(a)), a qualified annuity 
     (sec. 403(a)), a tax-sheltered annuity (sec. 403(b)), an 
     eligible deferred compensation plan of a governmental 
     employer (sec. 457(b)), or an IRA (sec. 408). The special 
     retirement plan rule applies also, to the extent provided in 
     regulations, to any foreign plan or similar retirement 
     arrangement or program. An interest in a trust that is part 
     of a qualified retirement plan or other arrangement that is 
     subject to the special retirement plan rule is not subject to 
     the rules for interests in trusts (discussed below).
---------------------------------------------------------------------------
     \449\ Application of the provision is not limited to an 
     interest that meets the definition of property under section 
     83 (relating to property transferred in connection with the 
     performance of services).
---------------------------------------------------------------------------
       Under the special rule, an amount equal to the present 
     value of the individual's vested, accrued benefit under a 
     qualified retirement plan is treated as having been received 
     by the individual as a distribution under the plan on the day 
     before the individual's relinquishment of citizenship or 
     termination of residency. It is not intended that the plan 
     would be deemed to have made a distribution for purposes of 
     the tax-favored status of the plan, such as whether a plan 
     may permit distributions before a participant has severed 
     employment. In the case of any later distribution to the 
     individual from the plan, the amount otherwise includible in 
     the individual's income as a result of the distribution is 
     reduced to reflect the amount previously included in income 
     under the special retirement plan rule. The amount of the 
     reduction applied to a distribution is the excess of: (1) the 
     amount included in income under the special retirement plan 
     rule over (2) the total reductions applied to any prior 
     distributions. However, under the provision, the retirement 
     plan, and any person acting on the plan's behalf, will treat 
     any later distribution in the same manner as the distribution 
     would be treated without regard to the special retirement 
     plan rule.
       It is expected that the Treasury Department will provide 
     guidance for determining the present value of an individual's 
     vested, accrued benefit under a qualified retirement plan, 
     such as the individual's account balance in the case of a 
     defined contribution plan or an IRA, or present value 
     determined under the qualified joint and survivor annuity 
     rules applicable to a defined benefit plan (sec. 417(e)).
     Deferral of payment of tax
       Under the provision, an individual is permitted to elect to 
     defer payment of the mark-to-market tax imposed on the deemed 
     sale of the property. Interest is charged for the period the 
     tax is deferred at a rate two percentage points higher than 
     the rate normally applicable to individual underpayments. 
     Under this election, the mark-to-market tax attributable to a 
     particular property is due when the property is disposed of 
     (or, if the property is disposed of in whole or in part in a 
     nonrecognition transaction, at such other time as the 
     Secretary may prescribe). The mark-to-market tax attributable 
     to a particular property is an amount that bears the same 
     ratio to the total mark-to-market tax for the year as the 
     gain taken into account with respect to such property bears 
     to the total gain taken into account under these rules for 
     the year. The deferral of the mark-to-market tax may not be 
     extended beyond the individual's death.
       In order to elect deferral of the mark-to-market tax, the 
     individual is required to provide adequate security to the 
     Treasury to ensure that the deferred tax and interest will be 
     paid. Other security mechanisms are permitted provided that 
     the individual establishes to the satisfaction of the 
     Secretary

[[Page H8566]]

     that the security is adequate. In the event that the security 
     provided with respect to a particular property subsequently 
     becomes inadequate and the individual fails to correct the 
     situation, the deferred tax and the interest with respect to 
     such property will become due. As a further condition to 
     making the election, the individual is required to consent to 
     the waiver of any treaty rights that would preclude the 
     collection of the tax.
       The deferred amount (including any interest, penalties, and 
     certain other items) shall be a lien in favor of the United 
     States on all U.S.-situs property owned by the individual. 
     This lien shall arise on the expatriation date and shall 
     continue until the tax liability is satisfied, the tax 
     liability has become unenforceable by reason of lapse of 
     time, or the Secretary is satisfied that no further tax 
     liability may arise by reason of this provision. The rules of 
     section 6324A(d)(1), (3), and (4) (relating to liens arising 
     in connection with the deferral of estate tax under section 
     6166) apply to liens arising under this provision.
     Interests in trusts
       Under the provision, detailed rules apply to trust 
     interests held by an individual at the time of relinquishment 
     of citizenship or termination of residency. The treatment of 
     trust interests depends on whether the trust is a qualified 
     trust. A trust is a qualified trust if a court within the 
     United States is able to exercise primary supervision over 
     the administration of the trust and one or more U.S. persons 
     have the authority to control all substantial decisions of 
     the trust.
       Constructive ownership rules apply to a trust beneficiary 
     that is a corporation, partnership, trust, or estate. In such 
     cases, the shareholders, partners, or beneficiaries of the 
     entity are deemed to be the direct beneficiaries of the trust 
     for purposes of applying these provision. In addition, an 
     individual who holds (or who is treated as holding) a trust 
     instrument at the time of relinquishment of citizenship or 
     termination of residency is required to disclose on his or 
     her tax return the methodology used to determine his or her 
     interest in the trust, and whether such individual knows (or 
     has reason to know) that any other beneficiary of the trust 
     uses a different method.
       Nonqualified trusts.--If an individual holds an interest in 
     a trust that is not a qualified trust, a special rule applies 
     for purposes of determining the amount of the mark-to-market 
     tax due with respect to such trust interest. The individual's 
     interest in the trust is treated as a separate trust 
     consisting of the trust assets allocable to such interest. 
     Such separate trust is treated as having sold its net assets 
     as of the date of relinquishment of citizenship or 
     termination of residency and having distributed the assets to 
     the individual, who then is treated as having recontributed 
     the assets to the trust. The individual is subject to the 
     mark-to-market tax with respect to any net income or gain 
     arising from the deemed distribution from the trust.
       The election to defer payment is available for the mark-to-
     market tax attributable to a nonqualified trust interest. 
     Interest is charged for the period the tax is deferred at a 
     rate two percentage points higher than the rate normally 
     applicable to individual underpayments. A beneficiary's 
     interest in a nonqualified trust is determined under all the 
     facts and circumstances, including the trust instrument, 
     letters of wishes, and historical patterns of trust 
     distributions.
       Qualified trusts.--If an individual has an interest in a 
     qualified trust, the amount of unrealized gain allocable to 
     the individual's trust interest is calculated at the time of 
     expatriation or residency termination. In determining this 
     amount, all contingencies and discretionary interests are 
     assumed to be resolved in the individual's favor (i.e., the 
     individual is allocated the maximum amount that he or she 
     could receive). The mark-to-market tax imposed on such gains 
     is collected when the individual receives distributions from 
     the trust, or if earlier, upon the individual's death. 
     Interest is charged for the period the tax is deferred at a 
     rate two percentage points higher than the rate normally 
     applicable to individual underpayments.
       If an individual has an interest in a qualified trust, the 
     individual is subject to the mark-to-market tax upon the 
     receipt of distributions from the trust. These distributions 
     also may be subject to other U.S. income taxes. If a 
     distribution from a qualified trust is made after the 
     individual relinquishes citizenship or terminates residency, 
     the mark-to-market tax is imposed in an amount equal to the 
     amount of the distribution multiplied by the highest tax rate 
     generally applicable to trusts and estates, but in no event 
     will the tax imposed exceed the deferred tax amount with 
     respect to the trust interest. For this purpose, the deferred 
     tax amount is equal to (1) the tax calculated with respect to 
     the unrealized gain allocable to the trust interest at the 
     time of expatriation or residency termination, (2) increased 
     by interest thereon, and (3) reduced by any mark-to-market 
     tax imposed on prior trust distributions to the individual.
       If any individual's interest in a trust is vested as of the 
     expatriation date (e.g., if the individual's interest in the 
     trust is non-contingent and non-discretionary), the gain 
     allocable to the individual's trust interest is determined 
     based on the trust assets allocable to his or her trust 
     interest. If the individual's interest in the trust is not 
     vested as of the expatriation date (e.g., if the individual's 
     trust interest is a contingent or discretionary interest), 
     the gain allocable to his or her trust interest is determined 
     based on all of the trust assets that could be allocable to 
     his or her trust interest, determined by resolving all 
     contingencies and discretionary powers in the individual's 
     favor. In the case where more than one trust beneficiary is 
     subject to the expatriation tax with respect to trust 
     interests that are not vested, the rules are intended to 
     apply so that the same unrealized gain with respect to assets 
     in the trust is not taxed to both individuals.
       Mark-to-market taxes become due if the trust ceases to be a 
     qualified trust, the individual disposes of his or her 
     qualified trust interest, or the individual dies. In such 
     cases, the amount of mark-to-market tax equals the lesser of 
     (1) the tax calculated under the rules for nonqualified trust 
     interests as of the date of the triggering event, or (2) the 
     deferred tax amount with respect to the trust interest as of 
     that date.
       The tax that is imposed on distributions from a qualified 
     trust generally is deducted and withheld by the trustees. If 
     the individual does not agree to waive treaty rights that 
     would preclude collection of the tax, the tax with respect to 
     such distributions is imposed on the trust, the trustee is 
     personally liable for the tax, and any other beneficiary has 
     a right of contribution against such individual with respect 
     to the tax. Similar rules apply when the qualified trust 
     interest is disposed of, the trust ceases to be a qualified 
     trust, or the individual dies.
     Coordination with present-law alternative tax regime
       The provision provides a coordination rule with the 
     present-law alternative tax regime. Under the provision, the 
     expatriation income tax rules under section 877, and the 
     expatriation estate and gift tax rules under sections 2107 
     and 2501(a)(3) (described above), do not apply to a former 
     citizen or former long-term resident whose expatriation or 
     residency termination occurs on or after February 5, 2003.
     Treatment of gifts and inheritances from a former citizen or 
         former long-term resident
       Under the provision, the exclusion from income provided in 
     section 102 (relating to exclusions from income for the value 
     of property acquired by gift or inheritance) does not apply 
     to the value of any property received by gift or inheritance 
     from a former citizen or former long-term resident (i.e., an 
     individual who relinquished U.S. citizenship or terminated 
     U.S. residency), subject to the exceptions described above 
     relating to certain dual citizens and minors. Accordingly, a 
     U.S. taxpayer who receives a gift or inheritance from such an 
     individual is required to include the value of such gift or 
     inheritance in gross income and is subject to U.S. tax on 
     such amount. Having included the value of the property in 
     income, the recipient would then take a basis in the property 
     equal to that value. The tax does not apply to property that 
     is shown on a timely filed gift tax return and that is a 
     taxable gift by the former citizen or former long-term 
     resident, or property that is shown on a timely filed estate 
     tax return and included in the gross U.S. estate of the 
     former citizen or former long-term resident (regardless of 
     whether the tax liability shown on such a return is reduced 
     by credits, deductions, or exclusions available under the 
     estate and gift tax rules). In addition, the tax does not 
     apply to property in cases in which no estate or gift tax 
     return is required to be filed, where no such return would 
     have been required to be filed if the former citizen or 
     former long-term resident had not relinquished citizenship or 
     terminated residency, as the case may be. Applicable gifts or 
     bequests that are made in trust are treated as made to the 
     beneficiaries of the trust in proportion to their respective 
     interests in the trust.
     Information reporting
       The provision provides that certain information reporting 
     requirements under present law (sec. 6039G) applicable to 
     former citizens and former long-term residents also apply for 
     purposes of the provision.
     Immigration rules
       The provision amends the immigration rules that deny tax-
     motivated expatriates reentry into the United States by 
     removing the requirement that the expatriation be tax-
     motivated, and instead denies former citizens reentry into 
     the United States if the individual is determined not to be 
     in compliance with his or her tax obligations under the 
     provision's expatriation tax provisions (regardless of the 
     subjective motive for expatriating). For this purpose, the 
     provision permits the IRS to disclose certain items of return 
     information of an individual, upon written request of the 
     Attorney General or his delegate, as is necessary for making 
     a determination under section 212(a)(10)(E) of the 
     Immigration and Nationality Act. Specifically, the provision 
     would permit the IRS to disclose to the agency administering 
     section 212(a)(10)(E) whether such taxpayer is in compliance 
     with section 877A and identify the items of noncompliance. 
     Recordkeeping requirements, safeguards, and civil and 
     criminal penalties for unauthorized disclosure or inspection 
     would apply to return information disclosed under this 
     provision.
     Effective date
       The provision generally is effective for U.S. citizens who 
     relinquish citizenship or long-term residents who terminate 
     their residency on or after February 5, 2003. The provisions 
     relating to gifts and inheritances are effective for gifts 
     and inheritances received from former citizens and former 
     long-

[[Page H8567]]

     term residents on or after February 5, 2003, whose 
     expatriation or residency termination occurs on or after such 
     date. The provisions relating to former citizens under U.S. 
     immigration laws are effective on or after the date of 
     enactment.


                          conference agreement

       The conference agreement follows the House bill.
     5. Reporting of taxable mergers and acquisitions (sec. 605 of 
         the House bill, sec. 445 of the Senate amendment, and new 
         sec. 6043A of the Code)


                              present law

       Under section 6045 and the regulations thereunder, brokers 
     (defined to include stock transfer agents) are required to 
     make information returns and to provide corresponding payee 
     statements as to sales made on behalf of their customers, 
     subject to the penalty provisions of sections 6721-6724. 
     Under the regulations issued under section 6045, this 
     requirement generally does not apply with respect to taxable 
     transactions other than exchanges for cash (e.g., stock 
     inversion transactions taxable to shareholders by reason of 
     section 367(a)).\450\
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     \450\ Recently issued temporary regulations under section 
     6043 (relating to information reporting with respect to 
     liquidations, recapitalizations, and changes in control) 
     impose information reporting requirements with respect to 
     certain taxable inversion transactions, and proposed 
     regulations would expand these requirements more generally to 
     taxable transactions occurring after the proposed regulations 
     are finalized.
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                               house bill

       Under the bill, if gain or loss is recognized in whole or 
     in part by shareholders of a corporation by reason of a 
     second corporation's acquisition of the stock or assets of 
     the first corporation, then the acquiring corporation (or the 
     acquired corporation, if so prescribed by the Treasury 
     Secretary) is required to make a return containing:
       (1) A description of the transaction;
       (2) The name and address of each shareholder of the 
     acquired corporation that recognizes gain as a result of the 
     transaction (or would recognize gain, if there was a built-in 
     gain on the shareholder's shares);
       (3) The amount of money and the value of stock or other 
     consideration paid to each shareholder described above; and
       (4) Such other information as the Treasury Secretary may 
     prescribe.
       Alternatively, a stock transfer agent who records transfers 
     of stock in such transaction may make the return described 
     above in lieu of the second corporation.
       In addition, every person required to make a return 
     described above is required to furnish to each shareholder 
     (or the shareholder's nominee \451\) whose name is required 
     to be set forth in such return a written statement showing:
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     \451\ In the case of a nominee, the nominee must furnish the 
     information to the shareholder in the manner prescribed by 
     the Treasury Secretary.
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       (1) The name, address, and phone number of the information 
     contact of the person required to make such return;
       (2) The information required to be shown on that return; 
     and
       (3) Such other information as the Treasury Secretary may 
     prescribe.
       This written statement is required to be furnished to the 
     shareholder on or before January 31 of the year following the 
     calendar year during which the transaction occurred.
       The present-law penalties for failure to comply with 
     information reporting requirements are extended to failures 
     to comply with the requirements set forth under this bill.
       Effective date.--The provision is effective for 
     acquisitions after the date of enactment.


                            senate amendment

       Same as the House bill.


                          conference agreement

       The conference agreement follows both the House bill and 
     the Senate amendment.
     6. Studies (Sec. 606 of the House bill)


                              present law

       Due to the variation in tax rates and tax systems among 
     countries, a multinational enterprise, whether U.S.-based or 
     foreign-based, may have an incentive to shift income, 
     deductions, or tax credits in order to arrive at a reduced 
     overall tax burden. Such a shifting of items could be 
     accomplished by establishing artificial, non-arm's-length 
     prices for transactions between group members.
       Under section 482, the Treasury Secretary is authorized to 
     reallocate income, deductions, or credits between or among 
     two or more organizations, trades, or businesses under common 
     control if he determines that such a reallocation is 
     necessary to prevent tax evasion or to clearly reflect 
     income. Treasury regulations adopt the arm's-length standard 
     as the standard for determining whether such reallocations 
     are appropriate. Thus, the regulations provide rules to 
     identify the respective amounts of taxable income of the 
     related parties that would have resulted if the parties had 
     been uncontrolled parties dealing at arm's length. 
     Transactions involving intangible property and certain 
     services may present particular challenges to the 
     administration of the arm's-length standard, because the 
     nature of these transactions may make it difficult or 
     impossible to compare them with third-party transactions.
       In addition to the statutory rules governing the taxation 
     of foreign income of U.S. persons and U.S. income of foreign 
     persons, bilateral income tax treaties limit the amount of 
     income tax that may be imposed by one treaty partner on 
     residents of the other treaty partner. For example, treaties 
     often reduce or eliminate withholding taxes imposed by a 
     treaty country on certain types of income (e.g., dividends, 
     interest and royalties) paid to residents of the other treaty 
     country. Treaties also contain provisions governing the 
     creditability of taxes imposed by the treaty country in which 
     income was earned in computing the amount of tax owed to the 
     other country by its residents with respect to such income. 
     Treaties further provide procedures under which inconsistent 
     positions taken by the treaty countries with respect to a 
     single item of income or deduction may be mutually resolved 
     by the two countries.


                               house bill

       The bill requires the Treasury Secretary to conduct and 
     submit to the Congress three studies. The first study will 
     examine the effectiveness of the transfer pricing rules of 
     section 482, with an emphasis on transactions involving 
     intangible property. The second study will examine income tax 
     treaties to which the United States is a party, with a view 
     toward identifying any inappropriate reductions in 
     withholding tax or opportunities for abuse that may exist. 
     The third study will examine the impact of the provisions of 
     this bill on inversion transactions.
       Effective date.--The tax treaty study required under the 
     provision is due no later than June 30, 2005. The transfer 
     pricing study required under the provision is due no later 
     than June 30, 2005. The inversions study required under the 
     provision is due no later than December 31, 2005.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement follows the House bill, except the 
     inversions study required under the provision is due no later 
     than December 31, 2006.

                 B. Provisions Relating to Tax Shelters

     1. Penalty for failure to disclose reportable transactions 
         (sec. 611 of the House bill, sec. 402 of the Senate 
         amendment, and new sec. 6707A of the Code)


                              Present Law

       Regulations under section 6011 require a taxpayer to 
     disclose with its tax return certain information with respect 
     to each ``reportable transaction'' in which the taxpayer 
     participates.\452\
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     \452\ On February 27, 2003, the Treasury Department and the 
     IRS released final regulations regarding the disclosure of 
     reportable transactions. In general, the regulations are 
     effective for transactions entered into on or after February 
     28, 2003.
     The discussion of present law refers to the new regulations. 
     The rules that apply with respect to transactions entered 
     into on or before February 28, 2003, are contained in Treas. 
     Reg. sec. 1.6011-4T in effect on the date the transaction was 
     entered into.
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       There are six categories of reportable transactions. The 
     first category is any transaction that is the same as (or 
     substantially similar to) \453\ a transaction that is 
     specified by the Treasury Department as a tax avoidance 
     transaction whose tax benefits are subject to disallowance 
     under present law (referred to as a ``listed 
     transaction'').\454\
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     \453\ The regulations clarify that the term ``substantially 
     similar'' includes any transaction that is expected to obtain 
     the same or similar types of tax consequences and that is 
     either factually similar or based on the same or similar tax 
     strategy. Further, the term must be broadly construed in 
     favor of disclosure. Treas. Reg. sec. 1.6011-4(c)(4).
     \454\ Treas. Reg. sec. 1.6011-4(b)(2).
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       The second category is any transaction that is offered 
     under conditions of confidentiality. In general, a 
     transaction is considered to be offered to a taxpayer under 
     conditions of confidentiality if the advisor who is paid a 
     minimum fee places a limitation on disclosure by the taxpayer 
     of the tax treatment or tax structure of the transaction and 
     the limitation on disclosure protects the confidentiality of 
     that advisor's tax strategies (irrespective if such terms are 
     legally binding).\455\
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     \455\ Treas. Reg. sec. 1.6011-4(b)(3).
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       The third category of reportable transactions is any 
     transaction for which (1) the taxpayer has the right to a 
     full or partial refund of fees if the intended tax 
     consequences from the transaction are not sustained or, (2) 
     the fees are contingent on the intended tax consequences from 
     the transaction being sustained.\456\
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     \456\ Treas. Reg. sec. 1.6011-4(b)(4).
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       The fourth category of reportable transactions relates to 
     any transaction resulting in a taxpayer claiming a loss 
     (under section 165) of at least (1) $10 million in any single 
     year or $20 million in any combination of years by a 
     corporate taxpayer or a partnership with only corporate 
     partners; (2) $2 million in any single year or $4 million in 
     any combination of years by all other partnerships, S 
     corporations, trusts, and individuals; or (3) $50,000 in any 
     single year for individuals or trusts if the loss arises with 
     respect to foreign currency translation losses.\457\
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     \457\ Treas. Reg. sec. 1.6011-4(b)(5). Rev. Proc. 2003-24, 
     2003-11 I.R.B. 599, exempts certain types of losses from this 
     reportable transaction category.
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       The fifth category of reportable transactions refers to any 
     transaction done by certain taxpayers \458\ in which the tax 
     treatment of the transaction differs (or is expected to 
     differ) by more than $10 million

[[Page H8568]]

     from its treatment for book purposes (using generally 
     accepted accounting principles) in any year.\459\
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     \458\ The significant book-tax category applies only to 
     taxpayers that are reporting companies under the Securities 
     Exchange Act of 1934 or business entities that have $250 
     million or more in gross assets.
     \459\ Treas. Reg. sec. 1.6011-4(b)(6). Rev. Proc. 2003-25, 
     2003-11 I.R.B. 601, exempts certain types of transactions 
     from this reportable transaction category.
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       The final category of reportable transactions is any 
     transaction that results in a tax credit exceeding $250,000 
     (including a foreign tax credit) if the taxpayer holds the 
     underlying asset for less than 45 days.\460\
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     \460\ Treas. Reg. sec. 1.6011-4(b)(7).
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       Under present law, there is no specific penalty for failing 
     to disclose a reportable transaction; however, such a failure 
     can jeopardize a taxpayer's ability to claim that any income 
     tax understatement attributable to such undisclosed 
     transaction is due to reasonable cause, and that the taxpayer 
     acted in good faith.\461\
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     \461\ Section 6664(c) provides that a taxpayer can avoid the 
     imposition of a section 6662 accuracy-related penalty in 
     cases where the taxpayer can demonstrate that there was 
     reasonable cause for the underpayment and that the taxpayer 
     acted in good faith. Regulations under sections 6662 and 6664 
     provide that a taxpayer's failure to disclose a reportable 
     transaction is a strong indication that the taxpayer failed 
     to act in good faith, which would bar relief under section 
     6664(c).
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                               House Bill

     In general
       The House bill creates a new penalty for any person who 
     fails to include with any return or statement any required 
     information with respect to a reportable transaction. The new 
     penalty applies without regard to whether the transaction 
     ultimately results in an understatement of tax, and applies 
     in addition to any accuracy-related penalty that may be 
     imposed.
     Transactions to be disclosed
       The House bill does not define the terms ``listed 
     transaction'' \462\ or ``reportable transaction,'' nor does 
     it explain the type of information that must be disclosed in 
     order to avoid the imposition of a penalty. Rather, the House 
     bill authorizes the Treasury Department to define a ``listed 
     transaction'' and a ``reportable transaction'' under section 
     6011.
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     \462\ The House bill provides that, except as provided in 
     regulations, a listed transaction means a reportable 
     transaction, which is the same as, or substantially similar 
     to, a transaction specifically identified by the Secretary as 
     a tax avoidance transaction for purposes of section 6011. For 
     this purpose, it is expected that the definition of 
     ``substantially similar'' will be the definition used in 
     Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may 
     modify this definition (as well as the definitions of 
     ``listed transaction'' and ``reportable transactions'') as 
     appropriate.
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     Penalty rate
       The penalty for failing to disclose a reportable 
     transaction is $10,000 in the case of a natural person and 
     $50,000 in any other case. The amount is increased to 
     $100,000 and $200,000, respectively, if the failure is with 
     respect to a listed transaction. The penalty cannot be waived 
     with respect to a listed transaction. As to reportable 
     transactions, the IRS Commissioner or his delegate can 
     rescind (or abate) the penalty only if rescinding the penalty 
     would promote compliance with the tax laws and effective tax 
     administration. The decision to rescind a penalty must be 
     accompanied by a record describing the facts and reasons for 
     the action and the amount rescinded. There will be no 
     taxpayer right to judicially appeal a refusal to rescind a 
     penalty.\463\ The IRS also is required to submit an annual 
     report to Congress summarizing the application of the 
     disclosure penalties and providing a description of each 
     penalty rescinded under this provision and the reasons for 
     the rescission.
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     \463\ This does not limit the ability of a taxpayer to 
     challenge whether a penalty is appropriate (e.g., a taxpayer 
     may litigate the issue of whether a transaction is a 
     reportable transaction (and thus subject to the penalty if 
     not disclosed) or not a reportable transaction (and thus not 
     subject to the penalty)).
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     Effective date
       The House bill provision is effective for returns and 
     statements the due date for which is after the date of 
     enactment.


                            Senate Amendment

     In general
       The Senate amendment is the same as the House bill, with 
     certain modifications.
     Transactions to be disclosed
       Like the House bill, the Senate amendment does not define 
     the terms ``listed transaction'' or ``reportable 
     transaction'' but, rather, authorizes the Treasury Department 
     to define a ``listed transaction'' and a ``reportable 
     transaction'' under section 6011.
     Penalty rate
       Under the Senate amendment, the penalty for failing to 
     disclose a reportable transaction generally is $50,000. The 
     amount is increased to $100,000 if the failure is with 
     respect to a listed transaction. For large entities and high 
     net worth individuals, the penalty amount is doubled (i.e., 
     $100,000 for a reportable transaction and $200,000 for a 
     listed transaction).
       The penalty cannot be waived with respect to a listed 
     transaction. As to reportable transactions, the penalty can 
     be rescinded (or abated) only if: (1) the taxpayer on whom 
     the penalty is imposed has a history of complying with the 
     Federal tax laws, (2) it is shown that the violation is due 
     to an unintentional mistake of fact, (3) imposing the penalty 
     would be against equity and good conscience, and (4) 
     rescinding the penalty would promote compliance with the tax 
     laws and effective tax administration. The authority to 
     rescind the penalty can only be exercised by the IRS 
     Commissioner personally or the head of the Office of Tax 
     Shelter Analysis. Thus, the penalty cannot be rescinded by a 
     revenue agent, an Appeals officer, or any other IRS 
     personnel. The decision to rescind a penalty must be 
     accompanied by a record describing the facts and reasons for 
     the action and the amount rescinded. There will be no 
     taxpayer right to appeal a refusal to rescind a penalty. The 
     IRS also is required to submit an annual report to Congress 
     summarizing the application of the disclosure penalties and 
     providing a description of each penalty rescinded under this 
     provision and the reasons for the rescission.
       A ``large entity'' is defined as any entity with gross 
     receipts in excess of $10 million in the year of the 
     transaction or in the preceding year. A ``high net worth 
     individual'' is defined as any individual whose net worth 
     exceeds $2 million, based on the fair market value of the 
     individual's assets and liabilities immediately before 
     entering into the transaction.
       A public entity that is required to pay a penalty for 
     failing to disclose a listed transaction (or is subject to an 
     understatement penalty attributable to a non-disclosed listed 
     transaction, a non-disclosed reportable avoidance 
     transaction,\464\ or a transaction that lacks economic 
     substance) must disclose the imposition of the penalty in 
     reports to the Securities and Exchange Commission for such 
     period as the Secretary shall specify. The provision applies 
     without regard to whether the taxpayer determines the amount 
     of the penalty to be material to the reports in which the 
     penalty must appear, and treats any failure to disclose a 
     transaction in such reports as a failure to disclose a listed 
     transaction. A taxpayer must disclose a penalty in reports to 
     the Securities and Exchange Commission once the taxpayer has 
     exhausted its administrative and judicial remedies with 
     respect to the penalty (or if earlier, when paid). In 
     addition, the Secretary is required to make public the name 
     of any person that is required to pay a penalty for failing 
     to disclose a listed transaction (or is subject to an 
     understatement penalty attributable to a non-disclosed listed 
     transaction, a non-disclosed reportable avoidance 
     transaction, or a transaction that lacks economic substance), 
     as well as the amount of such penalty.
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     \464\ A reportable avoidance transaction is a reportable 
     transaction with a significant tax avoidance purpose.
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     Effective date
       The Senate amendment provision is effective for returns and 
     statements the due date for which is after the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modifications.
       In determining whether to rescind (or abate) the penalty 
     for failing to disclose a reportable transaction on the 
     grounds that doing so would promote compliance with the tax 
     laws and effective tax administration, the conferees intend 
     that the IRS Commissioner take into account whether: (1) the 
     person on whom the penalty is imposed has a history of 
     complying with the tax laws; (2) the violation is due to an 
     unintentional mistake of fact; and (3) imposing the penalty 
     would be against equity and good conscience.
       In addition, the conference agreement provides that a 
     public entity that is required to pay a penalty for failing 
     to disclose a listed transaction (or is subject to an 
     understatement penalty attributable to a non-disclosed listed 
     transaction or a non-disclosed reportable avoidance 
     transaction) must disclose the imposition of the penalty in 
     reports to the Securities and Exchange Commission for such 
     period as the Secretary shall specify. This requirement 
     applies without regard to whether the taxpayer determines the 
     amount of the penalty to be material to the reports in which 
     the penalty must appear, and treats any failure to disclose a 
     transaction in such reports as a failure to disclose a listed 
     transaction. A taxpayer must disclose a penalty in reports to 
     the Securities and Exchange Commission once the taxpayer has 
     exhausted its administrative and judicial remedies with 
     respect to the penalty (or if earlier, when paid). However, 
     the taxpayer is only required to report the penalty one time. 
     The conference agreement further provides that this 
     requirement also applies to a public entity that is subject 
     to a gross valuation misstatement penalty under section 
     6662(h) attributable to a non-disclosed listed transaction or 
     non-disclosed reportable avoidance transaction.
     2. Modifications to the accuracy-related penalties for listed 
         transactions and reportable transactions having a 
         significant tax avoidance purpose (sec. 612 of the House 
         bill, sec. 403 of the Senate amendment, and new sec. 
         6662A of the Code)


                              Present Law

       The accuracy-related penalty applies to the portion of any 
     underpayment that is attributable to (1) negligence, (2) any 
     substantial understatement of income tax, (3) any substantial 
     valuation misstatement, (4) any substantial overstatement of 
     pension liabilities, or (5) any substantial estate or gift 
     tax valuation understatement. If the correct income tax 
     liability exceeds that reported by the taxpayer by the 
     greater of 10 percent of the correct tax or $5,000 ($10,000 
     in the case of corporations), then a substantial 
     understatement exists and a penalty may be imposed

[[Page H8569]]

     equal to 20 percent of the underpayment of tax attributable 
     to the understatement.\465\ The amount of any understatement 
     generally is reduced by any portion attributable to an item 
     if (1) the treatment of the item is or was supported by 
     substantial authority, or (2) facts relevant to the tax 
     treatment of the item were adequately disclosed and there was 
     a reasonable basis for its tax treatment.\466\
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     \465\ Sec. 6662.
     \466\ Sec. 6662(d)(2)(B).
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       Special rules apply with respect to tax shelters.\467\ For 
     understatements by non-corporate taxpayers attributable to 
     tax shelters, the penalty may be avoided only if the taxpayer 
     establishes that, in addition to having substantial authority 
     for the position, the taxpayer reasonably believed that the 
     treatment claimed was more likely than not the proper 
     treatment of the item. This reduction in the penalty is 
     unavailable to corporate tax shelters.
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     \467\ Sec. 6662(d)(2)(C).
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       The understatement penalty generally is abated (even with 
     respect to tax shelters) in cases in which the taxpayer can 
     demonstrate that there was ``reasonable cause'' for the 
     underpayment and that the taxpayer acted in good faith.\468\ 
     The relevant regulations provide that reasonable cause exists 
     where the taxpayer ``reasonably relies in good faith on an 
     opinion based on a professional tax advisor's analysis of the 
     pertinent facts and authorities [that] . . . unambiguously 
     concludes that there is a greater than 50-percent likelihood 
     that the tax treatment of the item will be upheld if 
     challenged'' by the IRS.\469\
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     \468\ Sec. 6664(c).
     \469\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
     1.6664-4(c).
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                               House Bill

     In general
       The House bill modifies the present-law accuracy related 
     penalty by replacing the rules applicable to tax shelters 
     with a new accuracy-related penalty that applies to listed 
     transactions and reportable transactions with a significant 
     tax avoidance purpose (hereinafter referred to as a 
     ``reportable avoidance transaction'').\470\ The penalty rate 
     and defenses available to avoid the penalty vary depending on 
     whether the transaction was adequately disclosed.
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     \470\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meanings as used for purposes of 
     the penalty for failing to disclose reportable transactions.
---------------------------------------------------------------------------
       Disclosed transactions
       In general, a 20-percent accuracy-related penalty is 
     imposed on any understatement attributable to an adequately 
     disclosed listed transaction or reportable avoidance 
     transaction. The only exception to the penalty is if the 
     taxpayer satisfies a more stringent reasonable cause and 
     good faith exception (hereinafter referred to as the 
     ``strengthened reasonable cause exception''), which is 
     described below. The strengthened reasonable cause 
     exception is available only if the relevant facts 
     affecting the tax treatment are adequately disclosed, 
     there is or was substantial authority for the claimed tax 
     treatment, and the taxpayer reasonably believed that the 
     claimed tax treatment was more likely than not the proper 
     treatment.
       Undisclosed transactions
       If the taxpayer does not adequately disclose the 
     transaction, the strengthened reasonable cause exception is 
     not available (i.e., a strict-liability penalty applies), and 
     the taxpayer is subject to an increased penalty equal to 30 
     percent of the understatement.
     Determination of the understatement amount
       The penalty is applied to the amount of any understatement 
     attributable to the listed or reportable avoidance 
     transaction without regard to other items on the tax return. 
     For purposes of this provision, the amount of the 
     understatement is determined as the sum of (1) the product of 
     the highest corporate or individual tax rate (as appropriate) 
     and the increase in taxable income resulting from the 
     difference between the taxpayer's treatment of the item and 
     the proper treatment of the item (without regard to other 
     items on the tax return),\471\ and (2) the amount of any 
     decrease in the aggregate amount of credits which results 
     from a difference between the taxpayer's treatment of an item 
     and the proper tax treatment of such item.
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     \471\ For this purpose, any reduction in the excess of 
     deductions allowed for the taxable year over gross income for 
     such year, and any reduction in the amount of capital losses 
     which would (without regard to section 1211) be allowed for 
     such year, shall be treated as an increase in taxable income.
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       Except as provided in regulations, a taxpayer's treatment 
     of an item shall not take into account any amendment or 
     supplement to a return if the amendment or supplement is 
     filed after the earlier of when the taxpayer is first 
     contacted regarding an examination of the return or such 
     other date as specified by the Secretary.
     Strengthened reasonable cause exception
       A penalty is not imposed under the provision with respect 
     to any portion of an understatement if it shown that there 
     was reasonable cause for such portion and the taxpayer acted 
     in good faith. Such a showing requires (1) adequate 
     disclosure of the facts affecting the transaction in 
     accordance with the regulations under section 6011,\472\ (2) 
     that there is or was substantial authority for such 
     treatment, and (3) that the taxpayer reasonably believed that 
     such treatment was more likely than not the proper treatment. 
     For this purpose, a taxpayer will be treated as having a 
     reasonable belief with respect to the tax treatment of an 
     item only if such belief (1) is based on the facts and law 
     that exist at the time the tax return (that includes the 
     item) is filed, and (2) relates solely to the taxpayer's 
     chances of success on the merits and does not take into 
     account the possibility that (a) a return will not be 
     audited, (b) the treatment will not be raised on audit, or 
     (c) the treatment will be resolved through settlement if 
     raised.
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     \472\ See the previous discussion regarding the penalty for 
     failing to disclose a reportable transaction.
---------------------------------------------------------------------------
       A taxpayer may (but is not required to) rely on an opinion 
     of a tax advisor in establishing its reasonable belief with 
     respect to the tax treatment of the item. However, a taxpayer 
     may not rely on an opinion of a tax advisor for this purpose 
     if the opinion (1) is provided by a ``disqualified tax 
     advisor,'' or (2) is a ``disqualified opinion.''
       Disqualified tax advisor
       A disqualified tax advisor is any advisor who (1) is a 
     material advisor \473\ and who participates in the 
     organization, management, promotion or sale of the 
     transaction or is related (within the meaning of section 
     267(b) or 707(b)(1)) to any person who so participates, (2) 
     is compensated directly or indirectly \474\ by a material 
     advisor with respect to the transaction, (3) has a fee 
     arrangement with respect to the transaction that is 
     contingent on all or part of the intended tax benefits from 
     the transaction being sustained, or (4) as determined under 
     regulations prescribed by the Secretary, has a disqualifying 
     financial interest with respect to the transaction.
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     \473\ Under the House bill, the term ``material advisor'' 
     (defined below in connection with the new information filing 
     requirements for material advisors) means any person who 
     provides any material aid, assistance, or advice with respect 
     to organizing, managing, promoting, selling, implementing, or 
     carrying out any reportable transaction, and who derives 
     gross income in excess of $50,000 in the case of a reportable 
     transaction substantially all of the tax benefits from which 
     are provided to natural persons ($250,000 in any other case).
     \474\ This situation could arise, for example, when an 
     advisor has an arrangement or understanding (oral or written) 
     with an organizer, manager, or promoter of a reportable 
     transaction that such party will recommend or refer potential 
     participants to the advisor for an opinion regarding the tax 
     treatment of the transaction.
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       Organization, management, promotion or sale of a 
     transaction.--A material advisor is considered as 
     participating in the ``organization'' of a transaction if the 
     advisor performs acts relating to the development of the 
     transaction. This may include, for example, preparing 
     documents (1) establishing a structure used in connection 
     with the transaction (such as a partnership agreement), (2) 
     describing the transaction (such as an offering memorandum or 
     other statement describing the transaction), or (3) relating 
     to the registration of the transaction with any federal, 
     state or local government body.\475\ Participation in the 
     ``management'' of a transaction means involvement in the 
     decision-making process regarding any business activity with 
     respect to the transaction. Participation in the ``promotion 
     or sale'' of a transaction means involvement in the marketing 
     or solicitation of the transaction to others. Thus, an 
     advisor who provides information about the transaction to a 
     potential participant is involved in the promotion or sale of 
     a transaction, as is any advisor who recommends the 
     transaction to a potential participant.
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     \475\ An advisor should not be treated as participating in 
     the organization of a transaction if the advisor's only 
     involvement with respect to the organization of the 
     transaction is the rendering of an opinion regarding the tax 
     consequences of such transaction. However, such an advisor 
     may be a ``disqualified tax advisor'' with respect to the 
     transaction if the advisor participates in the management, 
     promotion or sale of the transaction (or if the advisor is 
     compensated by a material advisor, has a fee arrangement that 
     is contingent on the tax benefits of the transaction, or as 
     determined by the Secretary, has a continuing financial 
     interest with respect to the transaction).
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       Disqualified opinion
       An opinion may not be relied upon if the opinion (1) is 
     based on unreasonable factual or legal assumptions (including 
     assumptions as to future events), (2) unreasonably relies 
     upon representations, statements, finding or agreements of 
     the taxpayer or any other person, (3) does not identify and 
     consider all relevant facts, or (4) fails to meet any other 
     requirement prescribed by the Secretary.
     Coordination with other penalties
       Any understatement upon which a penalty is imposed under 
     the House bill is not subject to the accuracy-related penalty 
     under section 6662. However, such understatement is included 
     for purposes of determining whether any understatement (as 
     defined in sec. 6662(d)(2)) is a substantial understatement 
     as defined under section 6662(d)(1).
       The penalty imposed under the House bill shall not apply to 
     any portion of an understatement to which a fraud penalty is 
     applied under section 6663.
     Effective date
       The House bill provision is effective for taxable years 
     ending after the date of enactment.


                            Senate Amendment

     In general
       The Senate amendment is the same as the House bill, with 
     certain modifications.
       Disclosed transactions
       The Senate amendment is the same as the House bill with 
     regard to accuracy-related penalties for understatements 
     attributable

[[Page H8570]]

     to an adequately disclosed listed transaction or reportable 
     avoidance transaction.
       Undisclosed transactions
       Like the House bill, the Senate amendment provides that a 
     taxpayer is subject to an increased accuracy-related penalty 
     equal to 30 percent of the understatement, and the 
     strengthened reasonable cause exception is not available 
     (i.e., a strict-liability penalty applies), if the taxpayer 
     does not adequately disclose the transaction.
       Under the Senate amendment, a public entity that is 
     required to pay the 30-percent penalty also must disclose the 
     imposition of the penalty in reports to the SEC for such 
     periods as the Secretary shall specify. The disclosure to the 
     SEC applies without regard to whether the taxpayer determines 
     the amount of the penalty to be material to the reports in 
     which the penalty must appear, and any failure to disclose 
     such penalty in the reports is treated as a failure to 
     disclose a listed transaction. A taxpayer must disclose a 
     penalty in reports to the SEC once the taxpayer has exhausted 
     its administrative and judicial remedies with respect to the 
     penalty (or if earlier, when paid).
       The Senate amendment also provides that, once the 30-
     percent penalty has been included in the Revenue Agent 
     Report, the penalty cannot be compromised for purposes of a 
     settlement without approval of the Commissioner personally or 
     the head of the Office of Tax Shelter Analysis. Furthermore, 
     the IRS is required to submit an annual report to Congress 
     summarizing the application of this penalty and providing a 
     description of each penalty compromised under this provision 
     and the reasons for the compromise.
     Disqualified tax advisor
       The Senate amendment provides that a disqualified tax 
     advisor also includes ad advisor who has an arrangement with 
     respect to the transaction which provides that contractual 
     disputes between the taxpayer and the advisor are to be 
     settled by arbitration or which limits damages by reference 
     to fees paid to the advisor for such transaction.
     Determination of the understatement amount
       The Senate amendment is the same as the House bill with 
     regard to determining the amount of an understatement that is 
     subject to this provision.
     Strengthened reasonable cause exception
       The Senate amendment is the same as the House bill with 
     regard to the reasonable cause exception to accuracy-related 
     penalties under this provision.\476\
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     \476\ Under the Senate amendment, the term ``material 
     advisor'' (defined below in connection with the new 
     information filing requirements for material advisors) means 
     any person who provides any material aid, assistance, or 
     advice with respect to organizing, managing, promoting, 
     selling, implementing, insuring or carrying out any 
     reportable transaction, and who derives gross income in 
     excess of $50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons ($250,000 in any other case).
---------------------------------------------------------------------------
     Coordination with other penalties
       The Senate amendment is the same as the House bill with 
     regard to coordination between the penalty imposed under this 
     provision and other penalties.
     Effective date
       The Senate amendment provision is effective for taxable 
     years ending after the date of enactment.


                          Conference Agreement

       The conference agreement follows the House bill, except the 
     conference agreement also provides that any understatement 
     upon which a penalty is imposed under the conference 
     agreement is not subject to the valuation misstatement 
     penalties under sections 6662(e) or 6662(h).
     3. Tax shelter exception to confidentiality privileges 
         relating to taxpayer communications (sec. 613 of the 
         House bill, sec. 406 of the Senate amendment, and sec. 
         7525 of the Code)


                              Present Law

       In general, a common law privilege of confidentiality 
     exists for communications between an attorney and client with 
     respect to the legal advice the attorney gives the client. 
     The Code provides that, with respect to tax advice, the same 
     common law protections of confidentiality that apply to a 
     communication between a taxpayer and an attorney also apply 
     to a communication between a taxpayer and a federally 
     authorized tax practitioner to the extent the communication 
     would be considered a privileged communication if it were 
     between a taxpayer and an attorney. This rule is inapplicable 
     to communications regarding corporate tax shelters.


                               House Bill

       The House bill modifies the rule relating to corporate tax 
     shelters by making it applicable to all tax shelters, whether 
     entered into by corporations, individuals, partnerships, tax-
     exempt entities, or any other entity. Accordingly, 
     communications with respect to tax shelters are not subject 
     to the confidentiality provision of the Code that otherwise 
     applies to a communication between a taxpayer and a federally 
     authorized tax practitioner.
       Effective date.--The House bill provision is effective with 
     respect to communications made on or after the date of 
     enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Statute of limitations for unreported listed transactions 
         (sec. 614 of the House bill, sec. 416 of the Senate 
         amendment, and sec. 6501 of the Code)


                              Present Law

       In general, the Code requires that taxes be assessed within 
     three years \477\ after the date a return is filed.\478\ If 
     there has been a substantial omission of items of gross 
     income that totals more than 25 percent of the amount of 
     gross income shown on the return, the period during which an 
     assessment must be made is extended to six years.\479\ If an 
     assessment is not made within the required time periods, the 
     tax generally cannot be assessed or collected at any future 
     time. Tax may be assessed at any time if the taxpayer files a 
     false or fraudulent return with the intent to evade tax or if 
     the taxpayer does not file a tax return at all.\480\
---------------------------------------------------------------------------
     \477\ Sec. 6501(a).
     \478\ For this purpose, a return that is filed before the 
     date on which it is due is considered to be filed on the 
     required due date (sec. 6501(b)(1)).
     \479\ Sec. 6501(e).
     \480\ Sec. 6501(c).
---------------------------------------------------------------------------


                               House Bill

       The House bill extends the statute of limitations with 
     respect to a listed transaction if a taxpayer fails to 
     include on any return or statement for any taxable year any 
     information with respect to a listed transaction \481\ which 
     is required to be included (under section 6011) with such 
     return or statement. The statute of limitations with respect 
     to such a transaction will not expire before the date which 
     is one year after the earlier of (1) the date on which the 
     Secretary is furnished the information so required, or (2) 
     the date that a material advisor (as defined in 6111) 
     satisfies the list maintenance requirements (as defined by 
     section 6112) with respect to a request by the Secretary. For 
     example, if a taxpayer engaged in a transaction in 2005 that 
     becomes a listed transaction in 2007 and the taxpayer fails 
     to disclose such transaction in the manner required by 
     Treasury regulations, then the transaction is subject to the 
     extended statute of limitations.\482\
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     \481\ The term ``listed transaction'' has the same meaning as 
     described in a previous provision regarding the penalty for 
     failure to disclose reportable transactions.
     \482\ If the Treasury Department lists a transaction in a 
     year subsequent to the year in which a taxpayer entered into 
     such transaction and the taxpayer's tax return for the year 
     the transaction was entered into is closed by the statute of 
     limitations prior to the date the transaction became a listed 
     transaction, this provision does not re-open the statute of 
     limitations with respect to such transaction for such year. 
     However, if the purported tax benefits of the transaction are 
     recognized over multiple tax years, the provision's extension 
     of the statute of limitations shall apply to such tax 
     benefits in any subsequent tax year in which the statute of 
     limitations had not closed prior to the date the transaction 
     became a listed transaction.
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective for 
     taxable years with respect to which the period for assessing 
     a deficiency did not expire before the date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Disclosure of reportable transactions by material advisors 
         (secs. 615 and 616 of the House bill, secs. 407 and 408 
         of the Senate amendment, and secs. 6111 and 6707 of the 
         Code)


                              Present Law

     Registration of tax shelter arrangements
       An organizer of a tax shelter is required to register the 
     shelter with the Secretary not later than the day on which 
     the shelter is first offered for sale.\483\ A ``tax shelter'' 
     means any investment with respect to which the tax shelter 
     ratio \484\ for any investor as of the close of any of the 
     first five years ending after the investment is offered for 
     sale may be greater than two to one and which is: (1) 
     required to be registered under Federal or State securities 
     laws, (2) sold pursuant to an exemption from registration 
     requiring the filing of a notice with a Federal or State 
     securities agency, or (3) a substantial investment (greater 
     than $250,000 and involving at least five investors).\485\
---------------------------------------------------------------------------
     \483\ Sec. 6111(a).
     \484\ The tax shelter ratio is, with respect to any year, the 
     ratio that the aggregate amount of the deductions and 350 
     percent of the credits, which are represented to be 
     potentially allowable to any investor, bears to the 
     investment base (money plus basis of assets contributed) as 
     of the close of the tax year.
     \485\ Sec. 6111(c).
---------------------------------------------------------------------------
       Other promoted arrangements are treated as tax shelters for 
     purposes of the registration requirement if: (1) a 
     significant purpose of the arrangement is the avoidance or 
     evasion of Federal income tax by a corporate participant; (2) 
     the arrangement is offered under conditions of 
     confidentiality; and (3) the promoter may receive fees in 
     excess of $100,000 in the aggregate.\486\
---------------------------------------------------------------------------
     \486\ Sec. 6111(d).
---------------------------------------------------------------------------
       In general, a transaction has a ``significant purpose of 
     avoiding or evading Federal income tax'' if the transaction: 
     (1) is the same as or substantially similar to a ``listed 
     transaction,'' \487\ or (2) is structured to produce tax 
     benefits that constitute an important part of

[[Page H8571]]

     the intended results of the arrangement and the promoter 
     reasonably expects to present the arrangement to more than 
     one taxpayer.\488\ Certain exceptions are provided with 
     respect to the second category of transactions.\489\
---------------------------------------------------------------------------
     \487\ Treas. Reg. sec. 301.6111-2(b)(2).
     \488\ Treas. Reg. sec. 301.6111-2(b)(3).
     \489\ Treas. Reg. sec. 301.6111-2(b)(4).
---------------------------------------------------------------------------
       An arrangement is offered under conditions of 
     confidentiality if: (1) an offeree has an understanding or 
     agreement to limit the disclosure of the transaction or any 
     significant tax features of the transaction; or (2) the 
     promoter knows, or has reason to know, that the offeree's use 
     or disclosure of information relating to the transaction is 
     limited in any other manner.\490\
---------------------------------------------------------------------------
     \490\ The regulations provide that the determination of 
     whether an arrangement is offered under conditions of 
     confidentiality is based on all the facts and circumstances 
     surrounding the offer. If an offeree's disclosure of the 
     structure or tax aspects of the transaction are limited in 
     any way by an express or implied understanding or agreement 
     with or for the benefit of a tax shelter promoter, an offer 
     is considered made under conditions of confidentiality, 
     whether or not such understanding or agreement is legally 
     binding. Treas. Reg. sec. 301.6111-2(c)(1).
---------------------------------------------------------------------------
     Failure to register tax shelter
       The penalty for failing to timely register a tax shelter 
     (or for filing false or incomplete information with respect 
     to the tax shelter registration) generally is the greater of 
     one percent of the aggregate amount invested in the shelter 
     or $500.\491\ However, if the tax shelter involves an 
     arrangement offered to a corporation under conditions of 
     confidentiality, the penalty is the greater of $10,000 or 50 
     percent of the fees payable to any promoter with respect to 
     offerings prior to the date of late registration. Intentional 
     disregard of the requirement to register increases the 
     penalty to 75 percent of the applicable fees.
---------------------------------------------------------------------------
     \491\ Sec. 6707.
---------------------------------------------------------------------------
       Section 6707 also imposes (1) a $100 penalty on the 
     promoter for each failure to furnish the investor with the 
     required tax shelter identification number, and (2) a $250 
     penalty on the investor for each failure to include the tax 
     shelter identification number on a return.


                               House Bill

     Disclosure of reportable transactions by material advisors
       The House bill repeals the present law rules with respect 
     to registration of tax shelters. Instead, the House bill 
     requires each material advisor with respect to any reportable 
     transaction (including any listed transaction) \492\ to 
     timely file an information return with the Secretary (in such 
     form and manner as the Secretary may prescribe). The return 
     must be filed on such date as specified by the Secretary.
---------------------------------------------------------------------------
     \492\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meaning as previously described 
     in connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
       The information return will include (1) information 
     identifying and describing the transaction, (2) information 
     describing any potential tax benefits expected to result from 
     the transaction, and (3) such other information as the 
     Secretary may prescribe. It is expected that the Secretary 
     may seek from the material advisor the same type of 
     information that the Secretary may request from a taxpayer in 
     connection with a reportable transaction.\493\
---------------------------------------------------------------------------
     \493\ See the previous discussion regarding the disclosure 
     requirements under new section 6707A.
---------------------------------------------------------------------------
       A ``material advisor'' means any person (1) who provides 
     material aid, assistance, or advice with respect to 
     organizing, managing, promoting, selling, implementing, or 
     carrying out any reportable transaction, and (2) who directly 
     or indirectly derives gross income for such assistance or 
     advice in excess of $250,000 ($50,000 in the case of a 
     reportable transaction substantially all of the tax benefits 
     from which are provided to natural persons) or such other 
     amount as may be prescribed by the Secretary.
       The Secretary may prescribe regulations which provide (1) 
     that only one material advisor has to file an information 
     return in cases in which two or more material advisors would 
     otherwise be required to file information returns with 
     respect to a particular reportable transaction, (2) 
     exemptions from the requirements of this section, and (3) 
     other rules as may be necessary or appropriate to carry out 
     the purposes of this section (including, for example, rules 
     regarding the aggregation of fees in appropriate 
     circumstances).
     Penalty for failing to furnish information regarding 
         reportable transactions
       The House bill repeals the present-law penalty for failure 
     to register tax shelters. Instead, the House bill imposes a 
     penalty on any material advisor who fails to file an 
     information return, or who files a false or incomplete 
     information return, with respect to a reportable transaction 
     (including a listed transaction).\494\ The amount of the 
     penalty is $50,000. If the penalty is with respect to a 
     listed transaction, the amount of the penalty is increased to 
     the greater of (1) $200,000, or (2) 50 percent of the gross 
     income of such person with respect to aid, assistance, or 
     advice which is provided with respect to the transaction 
     before the date the information return that includes the 
     transaction is filed. Intentional disregard by a material 
     advisor of the requirement to disclose a listed transaction 
     increases the penalty to 75 percent of the gross income.
---------------------------------------------------------------------------
     \494\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meaning as previously described 
     in connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
       The penalty cannot be waived with respect to a listed 
     transaction. As to reportable transactions, the penalty can 
     be rescinded (or abated) only in exceptional 
     circumstances.\495\ All or part of the penalty may be 
     rescinded only if rescinding the penalty would promote 
     compliance with the tax laws and effective tax 
     administration. The decision to rescind a penalty must be 
     accompanied by a record describing the facts and reasons for 
     the action and the amount rescinded. There will be no right 
     to judicially appeal a refusal to rescind a penalty. The IRS 
     also is required to submit an annual report to Congress 
     summarizing the application of the disclosure penalties and 
     providing a description of each penalty rescinded under this 
     provision and the reasons for the rescission.
---------------------------------------------------------------------------
     \495\ The Secretary's present-law authority to postpone 
     certain tax-related deadlines because of Presidentially-
     declared disasters (sec. 7508A) will also encompass the 
     authority to postpone the reporting deadlines established by 
     the provision.
---------------------------------------------------------------------------
     Effective date
       The House bill provision requiring disclosure of reportable 
     transactions by material advisors applies to transactions 
     with respect to which material aid, assistance or advice is 
     provided after the date of enactment.
       The House bill provision imposing a penalty for failing to 
     disclose reportable transactions applies to returns the due 
     date for which is after the date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment also includes in the definition of a 
     ``material advisor'' any person who provides material aid, 
     assistance, or advice with respect to insuring any reportable 
     transaction (and who derives gross income for such assistance 
     or advice in excess of the amounts specified in the House 
     bill).


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Investor lists and modification of penalty for failure to 
         maintain investor lists (secs. 615 and 617 of the House 
         bill, secs. 407 and 409 of the Senate amendment, and 
         secs. 6112 and 6708 of the Code)


                              Present Law

     Investor lists
       Any organizer or seller of a potentially abusive tax 
     shelter must maintain a list identifying each person who was 
     sold an interest in any such tax shelter with respect to 
     which registration was required under section 6111 (even 
     though the particular party may not have been subject to 
     confidentiality restrictions).\496\ Recently issued 
     regulations under section 6112 contain rules regarding the 
     list maintenance requirements.\497\ In general, the 
     regulations apply to transactions that are potentially 
     abusive tax shelters entered into, or acquired after, 
     February 28, 2003.\498\
---------------------------------------------------------------------------
     \496\ Sec. 6112.
     \497\ Treas. Reg. sec. 301.6112-1.
     \498\ A special rule applies the list maintenance 
     requirements to transactions entered into after February 28, 
     2000 if the transaction becomes a listed transaction (as 
     defined in Treas. Reg. 1.6011-4) after February 28, 2003.
---------------------------------------------------------------------------
       The regulations provide that a person is an organizer or 
     seller of a potentially abusive tax shelter if the person is 
     a material advisor with respect to that transaction.\499\ A 
     material advisor is defined as any person who is required to 
     register the transaction under section 6111, or expects to 
     receive a minimum fee of (1) $250,000 for a transaction that 
     is a potentially abusive tax shelter if all participants are 
     corporations, or (2) $50,000 for any other transaction that 
     is a potentially abusive tax shelter.\500\ For listed 
     transactions (as defined in the regulations under section 
     6011), the minimum fees are reduced to $25,000 and $10,000, 
     respectively.
---------------------------------------------------------------------------
     \499\ Treas. Reg. sec. 301.6112-1(c)(1).
     \500\ Treas. Reg. sec. 301.6112-1(c)(2) and (3).
---------------------------------------------------------------------------
       A potentially abusive tax shelter is any transaction that 
     (1) is required to be registered under section 6111, (2) is a 
     listed transaction (as defined under the regulations under 
     section 6011), or (3) any transaction that a potential 
     material advisor, at the time the transaction is entered 
     into, knows is or reasonably expects will become a reportable 
     transaction (as defined under the new regulations under 
     section 6011).\501\
---------------------------------------------------------------------------
     \501\ Treas. Reg. sec. 301.6112-1(b).
---------------------------------------------------------------------------
       The Secretary is required to prescribe regulations which 
     provide that, in cases in which two or more persons are 
     required to maintain the same list, only one person would be 
     required to maintain the list.\502\
---------------------------------------------------------------------------
     \502\ Sec. 6112(c)(2).
---------------------------------------------------------------------------
     Penalty for failing to maintain investor lists
       Under section 6708, the penalty for failing to maintain the 
     list required under section 6112 is $50 for each name omitted 
     from the list (with a maximum penalty of $100,000 per year).


                               House Bill

     Investor lists
       Each material advisor\503\ with respect to a reportable 
     transaction (including a listed transaction)\504\ is required 
     to maintain a list

[[Page H8572]]

     that (1) identifies each person with respect to whom the 
     advisor acted as a material advisor with respect to the 
     reportable transaction, and (2) contains other information as 
     may be required by the Secretary. In addition, the provision 
     authorizes (but does not require) the Secretary to prescribe 
     regulations which provide that, in cases in which two or more 
     persons are required to maintain the same list, only one 
     person would be required to maintain the list.
---------------------------------------------------------------------------
     \503\ The term ``material advisor'' has the same meaning as 
     when used in connection with the requirement to file an 
     information return under section 6111.
     \504\ The terms ``reportable transaction'' and ``listed 
     transaction'' have the same meaning as previously described 
     in connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
     Penalty for failing to maintain investor lists
       The provision modifies the penalty for failing to maintain 
     the required list by making it a time-sensitive penalty. 
     Thus, a material advisor who is required to maintain an 
     investor list and who fails to make the list available upon 
     written request by the Secretary within 20 business days 
     after the request will be subject to a $10,000 per day 
     penalty. The penalty applies to a person who fails to 
     maintain a list, maintains an incomplete list, or has in fact 
     maintained a list but does not make the list available to the 
     Secretary. The penalty can be waived if the failure to make 
     the list available is due to reasonable cause.\505\
---------------------------------------------------------------------------
     \505\ In no event will failure to maintain a list be 
     considered reasonable cause for failing to make a list 
     available to the Secretary.
---------------------------------------------------------------------------
     Effective date
       The House bill provision requiring a material advisor to 
     maintain an investor list applies to transactions with 
     respect to which material aid, assistance or advice is 
     provided after the date of enactment. The House bill 
     provision imposing a penalty for failing to maintain investor 
     lists applies to requests made after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill. In 
     addition, the Senate amendment clarifies that, for purposes 
     of section 6112, the identity of any person is not privileged 
     under the common law attorney-client privilege (or, 
     consequently, the section 7525 federally authorized tax 
     practitioner confidentiality provision).
       Effective date.--The Senate amendment provision clarifying 
     that the identity of any person is not privileged for 
     purposes of section 6112 is effective as if included in the 
     amendments made by section 142 of the Deficit Reduction Act 
     of 1984.


                          conference agreement

       The conference agreement follows the House bill.
     7. Penalty on promoters of tax shelters (sec. 618 of the 
         House bill, sec. 415 of the Senate amendment, and sec. 
         6700 of the Code)


                              Present Law

       A penalty is imposed on any person who organizes, assists 
     in the organization of, or participates in the sale of any 
     interest in, a partnership or other entity, any investment 
     plan or arrangement, or any other plan or arrangement, if in 
     connection with such activity the person makes or furnishes a 
     qualifying false or fraudulent statement or a gross valuation 
     overstatement.\506\ A qualified false or fraudulent statement 
     is any statement with respect to the allowability of any 
     deduction or credit, the excludability of any income, or the 
     securing of any other tax benefit by reason of holding an 
     interest in the entity or participating in the plan or 
     arrangement which the person knows or has reason to know is 
     false or fraudulent as to any material matter. A ``gross 
     valuation overstatement'' means any statement as to the value 
     of any property or services if the stated value exceeds 200 
     percent of the correct valuation, and the value is directly 
     related to the amount of any allowable income tax deduction 
     or credit.
---------------------------------------------------------------------------
     \506\ Sec. 6700.
---------------------------------------------------------------------------
       The amount of the penalty is $1,000 (or, if the person 
     establishes that it is less, 100 percent of the gross income 
     derived or to be derived by the person from such activity). A 
     penalty attributable to a gross valuation misstatement can be 
     waived on a showing that there was a reasonable basis for the 
     valuation and it was made in good faith.


                               house bill

       The House bill modifies the penalty amount to equal 50 
     percent of the gross income derived by the person from the 
     activity for which the penalty is imposed. The new penalty 
     rate applies to any activity that involves a statement 
     regarding the tax benefits of participating in a plan or 
     arrangement if the person knows or has reason to know that 
     such statement is false or fraudulent as to any material 
     matter. The enhanced penalty does not apply to a gross 
     valuation overstatement.
       Effective date.--The House bill provision is effective for 
     activities occurring after the date of enactment.


                            senate amendment

       The Senate amendment modifies the penalty amount to equal 
     100 percent of the gross income derived by the person from 
     the activity for which the penalty is imposed. The new 
     penalty rate applies to (1) each instance of any activity 
     that involves a statement (including a gross valuation 
     overstatement) regarding the tax benefits of participating in 
     a plan or arrangement if the person knows or has reason to 
     know that such statement is false or fraudulent as to any 
     material matter, (2) each instance in which income was 
     derived from such activity, and (3) each person who 
     participated in such activity. In addition, the Senate 
     amendment imposes joint and several liability upon all 
     persons who are subject to a penalty for such activity. The 
     Senate amendment also provides that the payment of a penalty 
     under this provision, or the payment of any amount to settle 
     or avoid the imposition of such a penalty, is not deductible 
     for tax purposes.
       Effective date.--The Senate amendment provision is 
     effective for activities occurring after the date of 
     enactment.


                          conference agreement

       The conference agreement follows the House bill.
     8. Penalty for aiding and abetting the understatement of tax 
         liability (sec. 419 of the Senate amendment and sec. 6701 
         of the Code)


                              present law

       A penalty is imposed on a person who: (1) aids or assists 
     in or advises with respect to a tax return or other document; 
     (2) knows (or has reason to believe) that such document will 
     be used in connection with a material tax matter; and (3) 
     knows that this would result in an understatement of tax of 
     another person. In general, the amount of the penalty is 
     $1,000. If the document relates to the tax return of a 
     corporation, the amount of the penalty is $10,000.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment expands the scope of this penalty in 
     several ways. First, it applies the penalty to aiding or 
     assisting with respect to tax liability. Second, it applies 
     the penalty to each instance of aiding or abetting. Third, it 
     increases the amount of the penalty to a maximum of 100 
     percent of the gross income derived (or to be derived) from 
     the aiding or abetting. Fourth, if more than one person is 
     liable for the penalty, all such persons are jointly and 
     severally liable for the penalty. Fifth, the penalty, as well 
     as amounts paid to settle or avoid the imposition of the 
     penalty, is not deductible for tax purposes.
       Effective date.--The Senate amendment provision is 
     effective for activities after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Modifications of substantial understatement penalty for 
         nonreportable transactions (sec. 619 of the House bill, 
         sec. 405 of the Senate amendment, and sec. 6662 of the 
         Code)


                              present law

       An accuracy-related penalty equal to 20 percent applies to 
     any substantial understatement of tax. A ``substantial 
     understatement'' exists if the correct income tax liability 
     for a taxable year exceeds that reported by the taxpayer by 
     the greater of 10 percent of the correct tax or $5,000 
     ($10,000 in the case of most corporations).\507\
---------------------------------------------------------------------------
     \507\ Sec. 6662(a) and (d)(1)(A).
---------------------------------------------------------------------------


                               house bill

       The House bill modifies the definition of ``substantial'' 
     for corporate taxpayers. Under the House bill, a corporate 
     taxpayer has a substantial understatement if the amount of 
     the understatement for the taxable year exceeds the lesser of 
     (1) 10 percent of the tax required to be shown on the return 
     for the taxable year (or, if greater, $10,000), or (2) $10 
     million.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill with 
     regard to modifying the definition of ``substantial'' for 
     corporate taxpayers.
       In addition, the Senate amendment elevates the standard 
     that a taxpayer must satisfy in order to reduce the amount of 
     an understatement for undisclosed items. With respect to the 
     treatment of an item whose facts are not adequately 
     disclosed, a resulting understatement is reduced only if the 
     taxpayer had a reasonable belief that the tax treatment was 
     more likely than not the proper treatment.
       The Senate amendment also authorizes (but does not require) 
     the Secretary to publish a list of positions for which it 
     believes there is not substantial authority or there is no 
     reasonable belief that the tax treatment is more likely than 
     not the proper treatment (without regard to whether such 
     positions affect a significant number of taxpayers). The list 
     shall be published in the Federal Register or the Internal 
     Revenue Bulletin.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after the date of 
     enactment.


                          conference agreement

       The conference agreement follows the House bill, except the 
     conference agreement also modifies the requirement of the 
     Secretary to prescribe a list of positions that do not have 
     substantial authority, and authorizes (but does not require) 
     the Secretary to publish such list.

[[Page H8573]]

     10. Modification of actions to enjoin certain conduct related 
         to tax shelters and reportable transactions (sec. 620 of 
         the House bill, sec. 410 of the Senate amendment, and 
         sec. 7408 of the Code)


                              present law

       The Code authorizes civil actions to enjoin any person from 
     promoting abusive tax shelters or aiding or abetting the 
     understatement of tax liability.\508\
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     \508\ Sec. 7408.
---------------------------------------------------------------------------


                               house bill

       The House bill expands this rule so that injunctions may 
     also be sought with respect to the requirements relating to 
     the reporting of reportable transactions\509\ and the keeping 
     of lists of investors by material advisors.\510\ Thus, under 
     the House bill, an injunction may be sought against a 
     material advisor to enjoin the advisor from (1) failing to 
     file an information return with respect to a reportable 
     transaction, or (2) failing to maintain, or to timely furnish 
     upon written request by the Secretary, a list of investors 
     with respect to each reportable transaction.
---------------------------------------------------------------------------
     \509\ Sec. 6707, as amended by other provisions of this bill.
     \510\ Sec. 6708, as amended by other provisions of this bill.
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective on 
     the day after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment also permits injunctions to be sought 
     with respect to violations of any of the rules under Circular 
     230, which regulates the practice of representatives of 
     persons before the Department of the Treasury.


                          conference agreement

       The conference agreement follows the Senate amendment.
     11. Penalty on failure to report interests in foreign 
         financial accounts (sec. 621 of the House bill, sec. 412 
         of the Senate amendment, and sec. 5321 of Title 31, 
         United States Code)


                              Present Law

       The Secretary must require citizens, residents, or persons 
     doing business in the United States to keep records and file 
     reports when that person makes a transaction or maintains an 
     account with a foreign financial entity.\511\ In general, 
     individuals must fulfill this requirement by answering 
     questions regarding foreign accounts or foreign trusts that 
     are contained in Part III of Schedule B of the IRS Form 1040. 
     Taxpayers who answer ``yes'' in response to the question 
     regarding foreign accounts must then file Treasury Department 
     Form TD F 90-22.1. This form must be filed with the 
     Department of the Treasury, and not as part of the tax return 
     that is filed with the IRS.
---------------------------------------------------------------------------
     \511\ 31 U.S.C. sec. 5314.
---------------------------------------------------------------------------
       The Secretary may impose a civil penalty on any person who 
     willfully violates this reporting requirement. The civil 
     penalty is the amount of the transaction or the value of the 
     account, up to a maximum of $100,000; the minimum amount of 
     the penalty is $25,000.\512\ In addition, any person who 
     willfully violates this reporting requirement is subject to a 
     criminal penalty. The criminal penalty is a fine of not more 
     than $250,000 or imprisonment for not more than five years 
     (or both); if the violation is part of a pattern of illegal 
     activity, the maximum amount of the fine is increased to 
     $500,000 and the maximum length of imprisonment is increased 
     to 10 years.\513\
---------------------------------------------------------------------------
     \512\ 31 U.S.C. sec. 5321(a)(5).
     \513\ 31 U.S.C. sec. 5322.
---------------------------------------------------------------------------
       On April 26, 2002, the Secretary submitted to the Congress 
     a report on these reporting requirements.\514\ This report, 
     which was statutorily required,\515\ studies methods for 
     improving compliance with these reporting requirements. It 
     makes several administrative recommendations, but no 
     legislative recommendations. A further report was required to 
     be submitted by the Secretary to the Congress by October 26, 
     2002.
---------------------------------------------------------------------------
     \514\ A Report to Congress in Accordance with Sec. 361(b) of 
     the Uniting and Strengthening America by Providing 
     Appropriate Tools Required to Intercept and Obstruct 
     Terrorism Act of 2001, April 26, 2002.
     \515\ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 
     107-56).
---------------------------------------------------------------------------


                               House Bill

       The House bill adds an additional civil penalty that may be 
     imposed on any person who violates this reporting requirement 
     (without regard to willfulness). This new civil penalty is up 
     to $5,000. The penalty may be waived if any income from the 
     account was properly reported on the income tax return and 
     there was reasonable cause for the failure to report.
       Effective date.--The House bill provision is effective with 
     respect to failures to report occurring on or after the date 
     of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     the maximum additional civil penalty for a non-willful act is 
     up to $10,000. In addition, the Senate amendment increases 
     the present-law penalty for willful behavior to the greater 
     of $100,000 or 50 percent of the amount of the transaction or 
     account.
       Effective date.--The Senate amendment provision is 
     effective with respect to failures to report occurring on or 
     after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     12. Regulation of individuals practicing before the 
         Department of the Treasury (sec. 622 of the House bill, 
         sec. 414 of the Senate amendment, and sec. 330 of Title 
         31, United States Code)


                              Present Law

       The Secretary is authorized to regulate the practice of 
     representatives of persons before the Department of the 
     Treasury.\516\ The Secretary is also authorized to suspend or 
     disbar from practice before the Department a representative 
     who is incompetent, who is disreputable, who violates the 
     rules regulating practice before the Department, or who (with 
     intent to defraud) willfully and knowingly misleads or 
     threatens the person being represented (or a person who may 
     be represented). The rules promulgated by the Secretary 
     pursuant to this provision are contained in Circular 230.
---------------------------------------------------------------------------
     \516\ 31 U.S.C. sec. 330.
---------------------------------------------------------------------------


                               House Bill

       The House bill makes two modifications to expand the 
     sanctions that the Secretary may impose pursuant to these 
     statutory provisions. First, the House bill expressly permits 
     censure as a sanction. Second, the House bill permits the 
     imposition of a monetary penalty as a sanction. If the 
     representative is acting on behalf of an employer or other 
     entity, the Secretary may impose a monetary penalty on the 
     employer or other entity if it knew, or reasonably should 
     have known, of the conduct. This monetary penalty on the 
     employer or other entity may be imposed in addition to any 
     monetary penalty imposed directly on the representative. 
     These monetary penalties are not to exceed the gross income 
     derived (or to be derived) from the conduct giving rise to 
     the penalty. These monetary penalties may be in addition to, 
     or in lieu of, any suspension, disbarment, or censure of such 
     individual.
       The House bill also confirms the present-law authority of 
     the Secretary to impose standards applicable to written 
     advice with respect to an entity, plan, or arrangement that 
     is of a type that the Secretary determines as having a 
     potential for tax avoidance or evasion.
       Effective date.--The House bill modifications to expand the 
     sanctions that the Secretary may impose are effective for 
     actions taken after the date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill (except 
     for several technical drafting modifications).
       Effective date.--The Senate amendment modifications to 
     expand the sanctions that the Secretary may impose are 
     effective for actions taken after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     13. Treatment of stripped bonds to apply to stripped 
         interests in bond and preferred stock funds (sec. 631 of 
         the House bill, sec. 461 of the Senate amendment, and 
         secs. 305 and 1286 of the Code)


                              Present Law

     Assignment of income in general
       In general, an ``income stripping'' transaction involves a 
     transaction in which the right to receive future income from 
     income-producing property is separated from the property 
     itself. In such transactions, it may be possible to generate 
     artificial losses from the disposition of certain property or 
     to defer the recognition of taxable income associated with 
     such property.
       Common law has developed a rule (referred to as the 
     ``assignment of income'' doctrine) whereby if the right to 
     receive income is transferred without an accompanying 
     transfer of the underlying property, the transfer is not 
     respected. A leading judicial decision relating to the 
     assignment of income doctrine involved a case in which a 
     taxpayer made a gift of detachable interest coupons before 
     their due date while retaining the bearer bond. The U.S. 
     Supreme Court ruled that the donor was taxable on the entire 
     amount of interest when paid to the donee on the grounds that 
     the transferor had ``assigned'' to the donee the right to 
     receive the income.\517\
---------------------------------------------------------------------------
     \517\ Helvering v. Horst, 311 U.S. 112 (1940).
---------------------------------------------------------------------------
       In addition to general common law assignment of income 
     principles, specific statutory rules have been enacted to 
     address certain specific types of stripping transactions, 
     such as transactions involving stripped bonds and stripped 
     preferred stock (which are discussed below).\518\ However, 
     there are no specific statutory rules that address stripping 
     transactions with respect to common stock or other equity 
     interests (other than preferred stock).\519\
---------------------------------------------------------------------------
     \518\ Depending on the facts, the IRS also could determine 
     that a variety of other Code-based and common law-based 
     authorities could apply to income stripping transactions, 
     including: (1) sections 269, 382, 446(b), 482, 701, or 704 
     and the regulations thereunder; (2) authorities that 
     recharacterize certain assignments or accelerations of future 
     payments as financings; (3) business purpose, economic 
     substance, and sham transaction doctrines; (4) the step 
     transaction doctrine; and (5) the substance-over-form 
     doctrine. See Notice 95-53, 1995-2 C.B. 334 (accounting for 
     lease strips and other stripping transactions).
     \519\ However, in Estate of Stranahan v. Commissioner, 472 
     F.2d 867 (6th Cir. 1973), the court held that where a 
     taxpayer sold a carved-out interest of stock dividends, with 
     no personal obligation to produce the income, the transaction 
     was treated as a sale of an income interest.

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[[Page H8574]]

     Stripped bonds
       Special rules are provided with respect to the purchaser 
     and ``stripper'' of stripped bonds.\520\ A ``stripped bond'' 
     is defined as a debt instrument in which there has been a 
     separation in ownership between the underlying debt 
     instrument and any interest coupon that has not yet become 
     payable.\521\ In general, upon the disposition of either the 
     stripped bond or the detached interest coupons, the retained 
     portion and the portion that is disposed of each is treated 
     as a new bond that is purchased at a discount and is payable 
     at a fixed amount on a future date. Accordingly, section 1286 
     treats both the stripped bond and the detached interest 
     coupons as individual bonds that are newly issued with 
     original issue discount (``OID'') on the date of disposition. 
     Consequently, section 1286 effectively subjects the stripped 
     bond and the detached interest coupons to the general OID 
     periodic income inclusion rules.
---------------------------------------------------------------------------
     \520\ Sec. 1286.
     \521\ Sec. 1286(e).
---------------------------------------------------------------------------
       A taxpayer who purchases a stripped bond or one or more 
     stripped coupons is treated as holding a new bond that is 
     issued on the purchase date with OID in an amount that is 
     equal to the excess of the stated redemption price at 
     maturity (or in the case of a coupon, the amount payable on 
     the due date) over the ratable share of the purchase price of 
     the stripped bond or coupon, determined on the basis of the 
     respective fair market values of the stripped bond and 
     coupons on the purchase date.\522\ The OID on the stripped 
     bond or coupon is includible in gross income under the 
     general OID periodic income inclusion rules.
---------------------------------------------------------------------------
     \522\ Sec. 1286(a).
---------------------------------------------------------------------------
       A taxpayer who strips a bond and disposes of either the 
     stripped bond or one or more stripped coupons must allocate 
     the taxpayer's basis, immediately before the disposition, in 
     the bond (with the coupons attached) between the retained and 
     disposed items.\523\ Special rules apply to require that 
     interest or market discount accrued on the bond prior to such 
     disposition must be included in the taxpayer's gross income 
     (to the extent that it had not been previously included in 
     income) at the time the stripping occurs, and the taxpayer 
     increases the basis in the bond by the amount of such accrued 
     interest or market discount. The adjusted basis (as increased 
     by any accrued interest or market discount) is then allocated 
     between the stripped bond and the stripped interest coupons 
     in relation to their respective fair market values. Amounts 
     realized from the sale of stripped coupons or bonds 
     constitute income to the taxpayer only to the extent such 
     amounts exceed the basis allocated to the stripped coupons or 
     bond. With respect to retained items (either the detached 
     coupons or stripped bond), to the extent that the price 
     payable on maturity, or on the due date of the coupons, 
     exceeds the portion of the taxpayer's basis allocable to such 
     retained items, the difference is treated as OID that is 
     required to be included under the general OID periodic income 
     inclusion rules.\524\
---------------------------------------------------------------------------
     \523\ Sec. 1286(b). Similar rules apply in the case of any 
     person whose basis in any bond or coupon is determined by 
     reference to the basis in the hands of a person who strips 
     the bond.
     \524\ Special rules are provided with respect to stripping 
     transactions involving tax-exempt obligations that treat OID 
     (computed under the stripping rules) in excess of OID 
     computed on the basis of the bond's coupon rate (or higher 
     rate if originally issued at a discount) as income from a 
     non-tax-exempt debt instrument (sec. 1286(d)).
---------------------------------------------------------------------------
     Stripped preferred stock
       ``Stripped preferred stock'' is defined as preferred stock 
     in which there has been a separation in ownership between 
     such stock and any dividend on such stock that has not become 
     payable.\525\ A taxpayer who purchases stripped preferred 
     stock is required to include in gross income, as ordinary 
     income, the amounts that would have been includible if the 
     stripped preferred stock was a bond issued on the purchase 
     date with OID equal to the excess of the redemption price of 
     the stock over the purchase price.\526\ This treatment is 
     extended to any taxpayer whose basis in the stock is 
     determined by reference to the basis in the hands of the 
     purchaser. A taxpayer who strips and disposes the future 
     dividends is treated as having purchased the stripped 
     preferred stock on the date of such disposition for a 
     purchase price equal to the taxpayer's adjusted basis in the 
     stripped preferred stock.\527\
---------------------------------------------------------------------------
     \525\ Sec. 305(e)(5).
     \526\ Sec. 305(e)(1).
     \527\ Sec. 305(e)(3).
---------------------------------------------------------------------------


                               House Bill

       The House bill authorizes the Treasury Department to 
     promulgate regulations that, in appropriate cases, apply 
     rules that are similar to the present-law rules for stripped 
     bonds and stripped preferred stock to direct or indirect 
     interests in an entity or account substantially all of the 
     assets of which consist of bonds (as defined in section 
     1286(e)(1)), preferred stock (as defined in section 
     305(e)(5)(B)), or any combination thereof. The House bill 
     applies only to cases in which the present-law rules for 
     stripped bonds and stripped preferred stock do not already 
     apply to such interests.
       For example, such Treasury regulations could apply to a 
     transaction in which a person effectively strips future 
     dividends from shares in a money market mutual fund (and 
     disposes either the stripped shares or stripped future 
     dividends) by contributing the shares (with the future 
     dividends) to a custodial account through which another 
     person purchases rights to either the stripped shares or the 
     stripped future dividends. However, it is intended that 
     Treasury regulations issued under the House bill would not 
     apply to certain transactions involving direct or indirect 
     interests in an entity or account substantially all the 
     assets of which consist of tax-exempt obligations (as defined 
     in section 1275(a)(3)), such as a tax-exempt bond partnership 
     described in Rev. Proc. 2002-68,\528\ modifying and 
     superceeding Rev. Proc. 2002-16.\529\
---------------------------------------------------------------------------
     \528\ 2002-43 I.R.B. 753.
     \529\ 2002-9 I.R.B. 572.
---------------------------------------------------------------------------
       No inference is intended as to the treatment under the 
     present-law rules for stripped bonds and stripped preferred 
     stock, or under any other provisions or doctrines of present 
     law, of interests in an entity or account substantially all 
     of the assets of which consist of bonds, preferred stock, or 
     any combination thereof. The Treasury regulations, when 
     issued, would be applied prospectively, except in cases to 
     prevent abuse.
       Effective date.--The House bill provision is effective for 
     purchases and dispositions occurring after the date of 
     enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     14. Minimum holding period for foreign tax credit with 
         respect to withholding taxes on income other than 
         dividends (sec. 632 of the House bill, sec. 456 of the 
         Senate amendment, and sec. 901 of the Code)


                              Present Law

       In general, U.S. persons may credit foreign taxes against 
     U.S. tax on foreign-source income. The amount of foreign tax 
     credits that may be claimed in a year is subject to a 
     limitation that prevents taxpayers from using foreign tax 
     credits to offset U.S. tax on U.S.-source income. Separate 
     limitations are applied to specific categories of income.
       As a consequence of the foreign tax credit limitations of 
     the Code, certain taxpayers are unable to utilize their 
     creditable foreign taxes to reduce their U.S. tax liability. 
     U.S. taxpayers that are tax-exempt receive no U.S. tax 
     benefit for foreign taxes paid on income that they receive.
       Present law denies a U.S. shareholder the foreign tax 
     credits normally available with respect to a dividend from a 
     corporation or a regulated investment company (``RIC'') if 
     the shareholder has not held the stock for more than 15 days 
     (within a 30-day testing period) in the case of common stock 
     or more than 45 days (within a 90-day testing period) in the 
     case of preferred stock (sec. 901(k)). The disallowance 
     applies both to foreign tax credits for foreign withholding 
     taxes that are paid on the dividend where the dividend-paying 
     stock is held for less than these holding periods, and to 
     indirect foreign tax credits for taxes paid by a lower-tier 
     foreign corporation or a RIC where any of the required stock 
     in the chain of ownership is held for less than these holding 
     periods. Periods during which a taxpayer is protected from 
     risk of loss (e.g., by purchasing a put option or entering 
     into a short sale with respect to the stock) generally are 
     not counted toward the holding period requirement. In the 
     case of a bona fide contract to sell stock, a special rule 
     applies for purposes of indirect foreign tax credits. The 
     disallowance does not apply to foreign tax credits with 
     respect to certain dividends received by active dealers in 
     securities. If a taxpayer is denied foreign tax credits 
     because the applicable holding period is not satisfied, the 
     taxpayer is entitled to a deduction for the foreign taxes for 
     which the credit is disallowed.


                               House Bill

       The House bill expands the present-law disallowance of 
     foreign tax credits to include credits for gross-basis 
     foreign withholding taxes with respect to any item of income 
     or gain from property if the taxpayer who receives the income 
     or gain has not held the property for more than 15 days 
     (within a 30-day testing period), exclusive of periods during 
     which the taxpayer is protected from risk of loss. The House 
     bill does not apply to foreign tax credits that are subject 
     to the present-law disallowance with respect to dividends. 
     The House bill also does not apply to certain income or gain 
     that is received with respect to property held by active 
     dealers. Rules similar to the present-law disallowance for 
     foreign tax credits with respect to dividends apply to 
     foreign tax credits that are subject to the House bill. In 
     addition, the House bill authorizes the Treasury Department 
     to issue regulations providing that the House bill does not 
     apply in appropriate cases.
       Effective date.--The House bill provision is effective for 
     amounts that are paid or accrued more than 30 days after the 
     date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment provision, except the 30-day testing period 
     is changed to a 31-day testing period.
       In addition, the conferees intend that the Secretary will 
     prescribe regulations to adapt the holding period and hedging 
     rules of section 901(k) to property other than stock. It is

[[Page H8575]]

     anticipated that such regulations will provide that credits 
     are not disallowed merely because a taxpayer eliminates its 
     risk of loss from interest rate or currency fluctuations. In 
     addition, it is intended that such regulations might permit 
     other hedging activities, such as hedging of credit 
     risk, provided that the taxpayer does not hedge most of 
     its risk of loss with respect to the property unless there 
     has been a meaningful and unanticipated change in 
     circumstances.
     15. Treatment of partnership loss transfers and partnership 
         basis adjustments (sec. 633 of the House bill, sec. 469 
         of the Senate amendment, and secs. 704, 734, 743, and 754 
         of the Code)


                              Present Law

     Contributions of property
       Under present law, if a partner contributes property to a 
     partnership, generally no gain or loss is recognized to the 
     contributing partner at the time of contribution.\530\ The 
     partnership takes the property at an adjusted basis equal to 
     the contributing partner's adjusted basis in the 
     property.\531\ The contributing partner increases its basis 
     in its partnership interest by the adjusted basis of the 
     contributed property.\532\ Any items of partnership income, 
     gain, loss and deduction with respect to the contributed 
     property are allocated among the partners to take into 
     account any built-in gain or loss at the time of the 
     contribution.\533\ This rule is intended to prevent the 
     transfer of built-in gain or loss from the contributing 
     partner to the other partners by generally allocating items 
     to the noncontributing partners based on the value of their 
     contributions and by allocating to the contributing partner 
     the remainder of each item.\534\
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     \530\ Sec. 721.
     \531\ Sec. 723.
     \532\ Sec. 722.
     \533\ Sec. 704(c)(1)(A).
     \534\If there is an insufficient amount of an item to 
     allocate to the noncontributing partners, Treasury 
     regulations allow for curative or remedial allocations to 
     remedy this insufficiency. Treas. Reg. sec. 1.704-3(c) and 
     (d).
---------------------------------------------------------------------------
       If the contributing partner transfers its partnership 
     interest, the built-in gain or loss will be allocated to the 
     transferee partner as it would have been allocated to the 
     contributing partner.\535\ If the contributing partner's 
     interest is liquidated, there is no specific guidance 
     preventing the allocation of the built-in loss to the 
     remaining partners. Thus, it appears that losses can be 
     ``transferred'' to other partners where the contributing 
     partner no longer remains a partner.
---------------------------------------------------------------------------
     \535\ Treas. Reg. sec. 1.704-3(a)(7).
---------------------------------------------------------------------------
     Transfers of partnership interests
       Under present law, a partnership does not adjust the basis 
     of partnership property following the transfer of a 
     partnership interest unless the partnership has made a one-
     time election under section 754 to make basis 
     adjustments.\536\ If an election is in effect, adjustments 
     are made with respect to the transferee partner to account 
     for the difference between the transferee partner's 
     proportionate share of the adjusted basis of the partnership 
     property and the transferee's basis in its partnership 
     interest.\537\ These adjustments are intended to adjust the 
     basis of partnership property to approximate the result of a 
     direct purchase of the property by the transferee partner. 
     Under these rules, if a partner purchases an interest in a 
     partnership with an existing built-in loss and no election 
     under section 754 is in effect, the transferee partner may be 
     allocated a share of the loss when the partnership disposes 
     of the property (or depreciates the property).
---------------------------------------------------------------------------
     \536\ Sec. 743(a).
     \537\ Sec. 743(b).
---------------------------------------------------------------------------
     Distributions of partnership property
       With certain exceptions, partners may receive distributions 
     of partnership property without recognition of gain or loss 
     by either the partner or the partnership.\538\ In the case of 
     a distribution in liquidation of a partner's interest, the 
     basis of the property distributed in the liquidation is equal 
     to the partner's adjusted basis in its partnership interest 
     (reduced by any money distributed in the transaction).\539\ 
     In a distribution other than in liquidation of a partner's 
     interest, the distributee partner's basis in the distributed 
     property is equal to the partnership's adjusted basis in the 
     property immediately before the distribution, but not to 
     exceed the partner's adjusted basis in the partnership 
     interest (reduced by any money distributed in the same 
     transaction).\540\
---------------------------------------------------------------------------
     \538\ Sec. 731(a) and (b).
     \539\ Sec. 732(b).
     \540\ Sec. 732(a).
---------------------------------------------------------------------------
       The determination of the basis of individual properties 
     distributed by a partnership is dependent on the adjusted 
     basis of the properties in the hands of the partnership.\541\ 
     If a partnership interest is transferred to a partner and the 
     partnership has not elected to adjust the basis of 
     partnership property, a special basis rule provides for the 
     determination of the transferee partner's basis of properties 
     that are later distributed by the partnership.\542\ Under 
     this rule, in determining the basis of property distributed 
     by a partnership within 2 years following the transfer of the 
     partnership interest, the transferee may elect to determine 
     its basis as if the partnership had adjusted the basis of the 
     distributed property under section 743(b) on the transfer. 
     The special basis rule also applies to distributed property 
     if, at the time of the transfer, the fair market value of 
     partnership property other than money exceeds 110 percent of 
     the partnership's basis in such property and a liquidation of 
     the partnership interest immediately after the transfer would 
     have resulted in a shift of basis to property subject to an 
     allowance of depreciation, depletion or amortization.\543\
---------------------------------------------------------------------------
     \541\ Sec. 732 (a)(1) and (c).
     \542\ Sec. 732(d).
     \543\ Treas. Reg. sec. 1.732-1(d)(4).
---------------------------------------------------------------------------
       Adjustments to the basis of the partnership's undistributed 
     properties are not required unless the partnership has made 
     the election under section 754 to make basis 
     adjustments.\544\ If an election is in effect under section 
     754, adjustments are made by a partnership to increase or 
     decrease the remaining partnership assets to reflect any 
     increase or decrease in the adjusted basis of the distributed 
     properties in the hands of the distributee partner (or gain 
     or loss recognized by the distributee partner).\545\ To the 
     extent the adjusted basis of the distributed properties 
     increases (or loss is recognized) the partnership's adjusted 
     basis in its properties is decreased by a like amount; 
     likewise, to the extent the adjusted basis of the distributed 
     properties decrease (or gain is recognized), the 
     partnership's adjusted basis in its properties is increased 
     by a like amount. Under these rules, a partnership with no 
     election in effect under section 754 may distribute property 
     with an adjusted basis lower than the distributee partner's 
     proportionate share of the adjusted basis of all partnership 
     property and leave the remaining partners with a smaller net 
     built-in gain or a larger net built-in loss than before the 
     distribution.
---------------------------------------------------------------------------
     \544\ Sec. 734(a).
     \545\ Sec. 734(b).
---------------------------------------------------------------------------


                               House Bill

     Contributions of property
       Under the provision, a built-in loss may be taken into 
     account only by the contributing partner and not by other 
     partners. Except as provided in regulations, in determining 
     the amount of items allocated to partners other than the 
     contributing partner, the basis of the contributed property 
     is treated as the fair market value at the time of 
     contribution. Thus, if the contributing partner's partnership 
     interest is transferred or liquidated, the partnership's 
     adjusted basis in the property is based on its fair market 
     value at the time of contribution, and the built-in loss is 
     eliminated.\546\
---------------------------------------------------------------------------
     \546\ It is intended that a corporation succeeding to 
     attributes of the contributing corporate partner under 
     section 381 shall be treated in the same manner as the 
     contributing partner.
---------------------------------------------------------------------------
     Transfers of partnership interests
       The provision provides generally that the basis adjustment 
     rules under section 743 are mandatory in the case of the 
     transfer of a partnership interest with respect to which 
     there is a substantial built-in loss (rather than being 
     elective as under present law). For this purpose, a 
     substantial built-in loss exists if the partnership's 
     adjusted basis in its property exceeds by more than $250,000 
     the fair market value of the partnership property.
       Thus, for example, assume that partner A sells his 25-
     percent partnership interest to B for its fair market value 
     of $1 million. Also assume that, immediately after the 
     transfer, the fair market value of partnership assets is $4 
     million and the partnership's adjusted basis in the 
     partnership assets is $4.3 million. Under the bill, section 
     743(b) applies, so that an adjustment is required to the 
     adjusted basis of the partnership assets with respect to B. 
     As a result, B would recognize no gain or loss if the 
     partnership immediately sold all its assets for their fair 
     market value.
       The bill provides that an electing investment partnership 
     is not treated as having a substantial built-in loss, and 
     thus is not required to make basis adjustments to partnership 
     property, in the case of a transfer of a partnership 
     interest. In lieu of the partnership basis adjustments, a 
     partner-level loss limitation rule applies. Under this rule, 
     the transferee partner's distributive share of losses 
     (determined without regard to gains) from the sale or 
     exchange of partnership property is not allowed, except to 
     the extent it is established that the partner's share of such 
     losses exceeds the loss recognized by the transferor partner. 
     In the event of successive transfers, the transferee 
     partner's distributive share of such losses is not allowed, 
     except to the extent that it is established that such losses 
     exceed the loss recognized by the transferor (or any prior 
     transferor to the extent not fully offset by a prior 
     disallowance under this rule). Losses disallowed under this 
     rule do not decrease the transferee partner's basis in its 
     partnership interest. Thus, on subsequent disposition of its 
     partnership interest, the partner's gain is reduced (or loss 
     increased) because the basis of the partnership interest has 
     not been reduced by such losses. The provision is applied 
     without regard to any termination of a partnership under 
     section 708(b)(1)(B). In the case of a basis reduction to 
     property distributed to the transferee partner in a 
     nonliquidating distribution, the amount of the transferor's 
     loss taken into account under this rule is reduced by the 
     amount of the basis reduction.
       For this purpose, an electing investment partnership means 
     a partnership that satisfies the following requirements: (1) 
     it makes

[[Page H8576]]

     an election under the provision that is irrevocable except 
     with the consent of the Secretary; (2) it would be an 
     investment company under section 3(a)(1)(A) of the Investment 
     Company Act of 1940\547\ but for an exemption under paragraph 
     (1) or (7) of section 3(c) of that Act; (3) it has never been 
     engaged in a trade or business; (4) substantially all of its 
     assets are held for investment; (5) at least 95 percent of 
     the assets contributed to it consist of money; (6) no assets 
     contributed to it had an adjusted basis in excess of fair 
     market value at the time of contribution; (7) all partnership 
     interests are issued by the partnership pursuant to a private 
     offering and during the 24-month period beginning on the date 
     of the first capital contribution to the partnership; (8) the 
     partnership agreement has substantive restrictions on each 
     partner's ability to cause a redemption of the partner's 
     interest, and (9) the partnership agreement provides for a 
     term that is not in excess of 15 years.
---------------------------------------------------------------------------
     \547\ Section 3(a)(1)(A) of the Act provides, "when used in 
     this title, `investment company' means any issuer which is or 
     hold itself out as being engaged primarily, or proposes to 
     engage primarily, in the business of investing, reinvesting, 
     or trading in securities."
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       The provision requires an electing investment partnership 
     to furnish to any transferee partner the information 
     necessary to enable the partner to compute the amount of 
     losses disallowed under this rule.
     Distributions of partnership property
       The provision provides that a basis adjustment under 
     section 734(b) is required in the case of a distribution with 
     respect to which there is a substantial basis reduction. A 
     substantial basis reduction means a downward adjustment of 
     more than $250,000 that would be made to the basis of 
     partnership assets if a section 754 election were in effect.
       Thus, for example, assume that A and B each contributed 
     $2.5 million to a newly formed partnership and C contributed 
     $5 million, and that the partnership purchased LMN stock for 
     $3 million and XYZ stock for $7 million. Assume that the 
     value of each stock declined to $1 million. Assume LMN stock 
     is distributed to C in liquidation of its partnership 
     interest. Under present law, the basis of LMN stock in C's 
     hands is $5 million. Under present law, C would recognize a 
     loss of $4 million if the LMN stock were sold for $1 million.
       Under the provision, there is a substantial basis 
     adjustment because the $2 million increase in the adjusted 
     basis of LMN stock (described in section 734(b)(2)(B)) is 
     greater than $250,000. Thus, the partnership is required to 
     decrease the basis of XYZ stock (under section 734(b)(2)) by 
     $2 million (the amount by which the basis of LMN stock was 
     increased), leaving a basis of $5 million. If the XYZ stock 
     were then sold by the partnership for $1 million, A and B 
     would each recognize a loss of $2 million.
     Effective date
       The provision applies to contributions, distributions and 
     transfers (as the case may be) after the date of enactment.
       In the case of an electing investment partnership in 
     existence on June 4, 2004, the requirement that the 
     partnership agreement have substantive restrictions on 
     redemptions does not apply, and the requirement that the 
     partnership agreement provide for a term not exceeding 15 
     years is modified to permit a term not exceeding 20 years.


                            Senate Amendment

       Under the provision, adjustments to the basis of 
     partnership property in the event of a partnership 
     distribution or the transfer of a partnership interest are 
     required, not elective as under present law. However, the 
     basis adjustments are elective, as under present law, in the 
     case of the transfer of a partnership interest by reason of 
     the partner's death. Any election made by a partnership under 
     section 754 that is in effect when the provision becomes 
     effective is treated as an election to adjust the basis of 
     partnership property with respect to the transferee partner 
     in the case of a transfer of a partnership interest upon the 
     death of a partner. The provision repeals the special rule of 
     section 732(d) for determining the transferee partner's basis 
     in property that is later distributed by the partnership in 
     cases in which the partnership did not have a section 754 
     election in effect with respect to the transfer of the 
     partnership interest.
       Effective date.--The provision requiring partnership basis 
     adjustments applies to transfers and distributions after the 
     date of enactment.
       The provision repealing section 732(d) applies generally to 
     transfers after the date of enactment, except that it applies 
     to distributions made after the date which is 2 years 
     following the date of enactment in the case of any transfer 
     to which section 732(d) applies that is made on or before the 
     date of enactment.


                          Conference Agreement

       The conference agreement generally follows the House bill, 
     with modifications.
       The conference agreement modifies the qualification 
     requirements for electing investment partnerships that are 
     subject to a partner-level loss limitation rule in lieu of 
     the requirement of partnership basis adjustments following 
     certain transfers of partnership interests. Specifically, the 
     conference agreement requires that all partnership interests 
     be issued by such a partnership pursuant to a private 
     offering prior to the date that is 24 months after the date 
     of the first capital contribution to the partnership. The 
     conferees intend that ``dry'' closings in which partnership 
     interests are issued without the contribution of capital not 
     start the running of the 24-month period.
       It is intended that in applying the requirement (with 
     respect electing investment partnerships) that the 
     partnership agreement have substantive restrictions on each 
     partner's ability to cause a redemption, the following are 
     illustrative examples of substantive restrictions: a 
     violation of Federal or State law (such as ERISA or the Bank 
     Holding Company Act); and imposition of a Federal excise tax 
     on, or a change in the Federal tax-exempt status of, a tax-
     exempt partner.
       The conferees understand that electing investment 
     partnerships will generally include venture capital funds, 
     buyout funds, and funds of funds. These funds are formed to 
     raise capital from investors pursuant to a private offering 
     and to make investments during the limited term of the 
     partnership with the intention of holding the investments for 
     capital appreciation.
       With respect to the requirement that an electing investment 
     partnership furnish to any transferee partner the information 
     necessary to enable the partner to compute the amount of 
     losses disallowed under this rule, it is expected that in 
     some cases the transferor of the partnership interest will 
     furnish information relating to the amount of its loss to the 
     transferee partner. It is intended that the requirement that 
     the electing investment partnership furnish necessary 
     information to the transferee partner be administered by the 
     Treasury Secretary in a manner that (to the greatest extent 
     feasible) minimizes the need for the partnership to furnish 
     information to the transferee partner that the transferee 
     partner has obtained from the transferor.
       The conference agreement adds an exception for 
     securitization partnerships to the rules requiring 
     partnership basis adjustments in the case of transfers of 
     partnership interests and distributions of property to a 
     partner. The exceptions provide that a securitization 
     partnership is not treated as having a substantial built-in 
     loss in the case of a transfer of a partnership interest, or 
     as having a substantial basis reduction in the case of a 
     partnership distribution, and thus is not required to make 
     basis adjustments to partnership property. Partnership basis 
     adjustments remain elective for such a partnership. Unlike in 
     the case of an electing investment partnership, the partner-
     level loss limitation rule does not apply in the case of a 
     securitization partnership. For this purpose, a 
     securitization partnership is any partnership the sole 
     business activity of which is to issue securities that 
     provide for a fixed principal (or similar) amount and that 
     are primarily serviced by the cash flows of a discrete pool 
     (either fixed or revolving) of receivables or other financial 
     assets that by their terms convert into cash in a finite 
     period, but only if the sponsor of the pool reasonably 
     believes that the receivables and other financial assets 
     comprising the pool are not acquired so as to be disposed of. 
     It is intended that rules similar to those applicable to 
     sponsors of REMICs apply in determining whether the sponsor's 
     belief is reasonable.\548\ It is not intended that the rules 
     requiring partnership basis adjustments on transfers or 
     distributions be avoided through dispositions of pool assets.
---------------------------------------------------------------------------
     \548\ See Treas. Reg. sec. 1.860G-2(a)(3), providing that a 
     sponsor's belief is not reasonable if the sponsor actually 
     knows or has reason to know that the requirement is not met, 
     or if the requirement is later discovered not to have been 
     met.
---------------------------------------------------------------------------
       It is intended that an electing investment partnership or 
     securitization partnership that subsequently fails to meet 
     the definition of an electing investment partnership or of a 
     securitization partnership will be subject to the partnership 
     basis adjustment rules of the provision with respect to the 
     first transfer of a partnership interest (and, in the case of 
     a securitization partnership, the first distribution) that 
     occurs after the partnership ceases to meet the applicable 
     definition and to each subsequent transfer (and distribution, 
     in the case of a securitization partnership).
       It is not intended that the rules of the conference 
     agreement provisions be avoided through the use of tiered 
     partnerships.
       It is not intended that the provision relating to 
     contributions of built-in loss property limit the ability of 
     master-feeder structures to apply an aggregate method for 
     making allocations under section 704(c) to the extent the 
     aggregate method is permitted under present law.\549\
---------------------------------------------------------------------------
     \549\ See Rev. Proc. 2001-36, 2001-1 C.B. 1326. Definitional 
     requirements of a master-feeder structure include that there 
     is a portfolio of assets that is treated as a partnership for 
     Federal tax purposes and that is registered as an investment 
     company under the Investment Company Act of 1940, each 
     partner of which is a feeder fund that is a registered 
     investment company (RIC) for Federal tax purposes, or is an 
     investment advisor, principal underwriter, or manager of the 
     portfolio. The conferees believe that these restrictions (and 
     other applicable restrictions) serve to limit potential 
     avoidance of the section 704(c) provision of the conference 
     agreement through use of the aggregate method in the case of 
     master-feeder structures.
---------------------------------------------------------------------------
       Effective date.--The conference agreement follows the House 
     bill.

[[Page H8577]]

     16. No reduction of basis under section 734 in stock held by 
         partnership in corporate partner (sec. 634 of the House 
         bill, sec. 432 of the Senate amendment, and sec. 755 of 
         the Code)


                              Present Law

     In general
       Generally, a partner and the partnership do not recognize 
     gain or loss on a contribution of property to the 
     partnership.\550\ Similarly, a partner and the partnership 
     generally do not recognize gain or loss on the distribution 
     of partnership property.\551\ This includes current 
     distributions and distributions in liquidation of a partner's 
     interest.
---------------------------------------------------------------------------
     \550\ Sec. 721(a).
     \551\ Sec. 731(a) and (b).
---------------------------------------------------------------------------
     Basis of property distributed in liquidation
       The basis of property distributed in liquidation of a 
     partner's interest is equal to the partner's tax basis in its 
     partnership interest (reduced by any money distributed in the 
     same transaction).\552\ Thus, the partnership's tax basis in 
     the distributed property is adjusted (increased or decreased) 
     to reflect the partner's tax basis in the partnership 
     interest.
---------------------------------------------------------------------------
     \552\ Sec. 732(b).
---------------------------------------------------------------------------
     Election to adjust basis of partnership property
       When a partnership distributes partnership property, the 
     basis of partnership property generally is not adjusted to 
     reflect the effects of the distribution or transfer. However, 
     the partnership is permitted to make an election (referred to 
     as a 754 election) to adjust the basis of partnership 
     property in the case of a distribution of partnership 
     property.\553\ The effect of the 754 election is that the 
     partnership adjusts the basis of its remaining property to 
     reflect any change in basis of the distributed property in 
     the hands of the distributee partner resulting from the 
     distribution transaction. Such a change could be a basis 
     increase due to gain recognition, or a basis decrease due to 
     the partner's adjusted basis in its partnership interest 
     exceeding the adjusted basis of the property received. If the 
     754 election is made, it applies to the taxable year with 
     respect to which such election was filed and all subsequent 
     taxable years.
---------------------------------------------------------------------------
     \553\ Sec. 754.
---------------------------------------------------------------------------
       In the case of a distribution of partnership property to a 
     partner with respect to which the 754 election is in effect, 
     the partnership increases the basis of partnership property 
     by (1) any gain recognized by the distributee partner and (2) 
     the excess of the adjusted basis of the distributed property 
     to the partnership immediately before its distribution over 
     the basis of the property to the distributee partner, and 
     decreases the basis of partnership property by (1) any loss 
     recognized by the distributee partner and (2) the excess of 
     the basis of the property to the distributee partner over the 
     adjusted basis of the distributed property to the partnership 
     immediately before the distribution.
       The allocation of the increase or decrease in basis of 
     partnership property is made in a manner that has the effect 
     of reducing the difference between the fair market value and 
     the adjusted basis of partnership properties.\554\ In 
     addition, the allocation rules require that any increase or 
     decrease in basis be allocated to partnership property of a 
     like character to the property distributed. For this purpose, 
     the two categories of assets are (1) capital assets and 
     depreciable and real property used in the trade or business 
     held for more than one year, and (2) any other property.\555\
---------------------------------------------------------------------------
     \554\ Sec. 755(a).
     \555\ Sec. 755(b).
---------------------------------------------------------------------------


                               House Bill

       The provision provides that in applying the basis 
     allocation rules to a distribution in liquidation of a 
     partner's interest, a partnership is precluded from 
     decreasing the basis of corporate stock of a partner or a 
     related person. Any decrease in basis that, absent the 
     provision, would have been allocated to the stock is 
     allocated to other partnership assets. If the decrease in 
     basis exceeds the basis of the other partnership assets, then 
     gain is recognized by the partnership in the amount of the 
     excess.
       Effective date.--The provision applies to distributions 
     after the date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     for the effective date.
       Effective date.--The provision applies to distributions 
     after February 13, 2003.


                          Conference Agreement

       The conference agreement follows the House bill.
       Effective date.--The conference agreement follows the House 
     bill.
     17. Repeal of special rules for FASITs (sec. 635 of the House 
         bill, sec. 433 of the Senate amendment, and secs. 860H 
         through 860L of the Code)


                              Present Law

     Financial asset securitization investment trusts
       In 1996 Congress created a new type of statutory entity 
     called a ``financial asset securitization trust'' (``FASIT'') 
     that facilitates the securitization of debt obligations such 
     as credit card receivables, home equity loans, and auto 
     loans.\556\ A FASIT generally is not taxable; the FASIT's 
     taxable income or net loss flows through to the owner of 
     the FASIT.
---------------------------------------------------------------------------
     \556\ Sections 860H through 860L.
---------------------------------------------------------------------------
       The ownership interest of a FASIT generally is required to 
     be entirely held by a single domestic C corporation. In 
     addition, a FASIT generally may hold only qualified debt 
     obligations, and certain other specified assets, and is 
     subject to certain restrictions on its activities. An entity 
     that qualifies as a FASIT can issue one or more classes of 
     instruments that meet certain specified requirements and 
     treat those instruments as debt for Federal income tax 
     purposes. Instruments issued by a FASIT bearing yields to 
     maturity over five percentage points above the yield to 
     maturity on specified United States government obligations 
     (i.e., ``high-yield interests'') must be held, directly or 
     indirectly, only by domestic C corporations that are not 
     exempt from income tax.
       Qualification as a FASIT
       To qualify as a FASIT, an entity must: (1) make an election 
     to be treated as a FASIT for the year of the election and all 
     subsequent years;\557\ (2) have assets substantially all of 
     which (including assets that the FASIT is treated as owning 
     because they support regular interests) are specified types 
     called ``permitted assets;'' (3) have non-ownership interests 
     be certain specified types of debt instruments called 
     ``regular interests''; (4) have a single ownership interest 
     which is held by an ``eligible holder''; and (5) not qualify 
     as a regulated investment company (``RIC''). Any entity, 
     including a corporation, partnership, or trust may be treated 
     as a FASIT. In addition, a segregated pool of assets may 
     qualify as a FASIT.
---------------------------------------------------------------------------
     \557\ Once an election to be a FASIT is made, the election 
     applies from the date specified in the election and all 
     subsequent years until the entity ceases to be a FASIT. If an 
     election to be a FASIT is made after the initial year of an 
     entity, all of the assets in the entity at the time of the 
     FASIT election are deemed contributed to the FASIT at that 
     time and, accordingly, any gain (but not loss) on such assets 
     will be recognized at that time.
---------------------------------------------------------------------------
       An entity ceases qualifying as a FASIT if the entity's 
     owner ceases being an eligible corporation. Loss of FASIT 
     status is treated as if all of the regular interests of the 
     FASIT were retired and then reissued without the application 
     of the rule that deems regular interests of a FASIT to be 
     debt.
       Permitted assets
       For an entity or arrangement to qualify as a FASIT, 
     substantially all of its assets must consist of the following 
     ``permitted assets'': (1) cash and cash equivalents; (2) 
     certain permitted debt instruments; (3) certain foreclosure 
     property; (4) certain instruments or contracts that represent 
     a hedge or guarantee of debt held or issued by the FASIT; (5) 
     contract rights to acquire permitted debt instruments or 
     hedges; and (6) a regular interest in another FASIT. 
     Permitted assets may be acquired at any time by a FASIT, 
     including any time after its formation.
       ``Regular interests'' of a FASIT
       ``Regular interests'' of a FASIT are treated as debt for 
     Federal income tax purposes, regardless of whether 
     instruments with similar terms issued by non-FASITs might be 
     characterized as equity under general tax principles. To be 
     treated as a ``regular interest'', an instrument must have 
     fixed terms and must: (1) unconditionally entitle the holder 
     to receive a specified principal amount; (2) pay interest 
     that is based on (a) fixed rates, or (b) except as provided 
     by regulations issued by the Treasury Secretary, variable 
     rates permitted with respect to REMIC interests under section 
     860G(a)(1)(B)(i); (3) have a term to maturity of no more than 
     30 years, except as permitted by Treasury regulations; (4) be 
     issued to the public with a premium of not more than 25 
     percent of its stated principal amount; and (5) have a yield 
     to maturity determined on the date of issue of less than five 
     percentage points above the applicable Federal rate (``AFR'') 
     for the calendar month in which the instrument is issued.
       Permitted ownership holder
       A permitted holder of the ownership interest in a FASIT 
     generally is a non-exempt (i.e., taxable) domestic C 
     corporation, other than a corporation that qualifies as a 
     RIC, REIT, REMIC, or cooperative.
       Transfers to FASITs
       In general, gain (but not loss) is recognized immediately 
     by the owner of the FASIT upon the transfer of assets to a 
     FASIT. Where property is acquired by a FASIT from someone 
     other than the FASIT's owner (or a person related to the 
     FASIT's owner), the property is treated as being first 
     acquired by the FASIT's owner for the FASIT's cost in 
     acquiring the asset from the non-owner and then transferred 
     by the owner to the FASIT.
       Valuation rules.--In general, except in the case of debt 
     instruments, the value of FASIT assets is their fair market 
     value. Similarly, in the case of debt instruments that are 
     traded on an established securities market, the market price 
     is used for purposes of determining the amount of gain 
     realized upon contribution of such assets to a FASIT. 
     However, in the case of debt instruments that are not traded 
     on an established securities market, special valuation rules 
     apply for purposes of computing gain on the transfer of such 
     debt instruments to a FASIT. Under these rules, the value of 
     such debt instruments is the sum of the present values of the 
     reasonably expected cash flows from such obligations 
     discounted over the weighted average life of such assets. The 
     discount rate is 120 percent of the AFR, compounded 
     semiannually, or such other rate that the Treasury Secretary 
     shall prescribe by regulations.
       Taxation of a FASIT
       A FASIT generally is not subject to tax. Instead, all of 
     the FASIT's assets and liabilities are treated as assets and 
     liabilities of

[[Page H8578]]

     the FASIT's owner and any income, gain, deduction or loss of 
     the FASIT is allocable directly to its owner. Accordingly, 
     income tax rules applicable to a FASIT (e.g., related party 
     rules, sec. 871(h), sec. 165(g)(2)) are to be applied in the 
     same manner as they apply to the FASIT's owner. The taxable 
     income of a FASIT is calculated using an accrual method of 
     accounting. The constant yield method and principles that 
     apply for purposes of determining original issue discount 
     (``OID'') accrual on debt obligations whose principal 
     is subject to acceleration apply to all debt obligations 
     held by a FASIT to calculate the FASIT's interest and 
     discount income and premium deductions or adjustments.
       Taxation of holders of FASIT regular interests
       In general, a holder of a regular interest is taxed in the 
     same manner as a holder of any other debt instrument, except 
     that the regular interest holder is required to account for 
     income relating to the interest on an accrual method of 
     accounting, regardless of the method of accounting otherwise 
     used by the holder.
       Taxation of holders of FASIT ownership interests
       Because all of the assets and liabilities of a FASIT are 
     treated as assets and liabilities of the holder of a FASIT 
     ownership interest, the ownership interest holder takes into 
     account all of the FASIT's income, gain, deduction, or loss 
     in computing its taxable income or net loss for the taxable 
     year. The character of the income to the holder of an 
     ownership interest is the same as its character to the FASIT, 
     except tax-exempt interest is included in the income of the 
     holder as ordinary income.
       Although the recognition of losses on assets contributed to 
     the FASIT is not allowed upon contribution of the assets, 
     such losses may be allowed to the FASIT owner upon their 
     disposition by the FASIT. Furthermore, the holder of a FASIT 
     ownership interest is not permitted to offset taxable income 
     from the FASIT ownership interest (including gain or loss 
     from the sale of the ownership interest in the FASIT) with 
     other losses of the holder. In addition, any net operating 
     loss carryover of the FASIT owner shall be computed by 
     disregarding any income arising by reason of a disallowed 
     loss. Where the holder of a FASIT ownership interest is a 
     member of a consolidated group, this rule applies to the 
     consolidated group of corporations of which the holder is a 
     member as if the group were a single taxpayer.


                               House Bill

       The House bill repeals the special rules for FASITs. The 
     House bill provides a transition period for existing FASITs, 
     pursuant to which the repeal of the FASIT rules generally 
     does not apply to any FASIT in existence on the date of 
     enactment to the extent that regular interests issued by the 
     FASIT prior to such date continue to remain outstanding in 
     accordance with their original terms.
       For purposes of the REMIC rules, the House bill also 
     modifies the definitions of REMIC regular interests, 
     qualified mortgages, and permitted investments so that 
     certain types of real estate loans and loan pools can be 
     transferred to, or purchased by, a REMIC. Specifically, the 
     provision modifies the present-law definition of a REMIC 
     ``regular interest'' to provide that an interest in a REMIC 
     does not fail to qualify as a regular interest solely because 
     the specified principal amount of such interest or the amount 
     of interest accrued on such interest could be reduced as a 
     result of the nonoccurrence of one or more contingent 
     payments with respect to one or more reverse mortgages loans, 
     as defined below, that are held by the REMIC, provided that 
     on the startup day for the REMIC, the REMIC sponsor 
     reasonably believes that all principal and interest due under 
     the interest will be paid at or prior to the liquidation of 
     the REMIC. For this purpose, a reasonable belief concerning 
     ultimate payment of all amounts due under an interest is 
     presumed to exist if, as of the startup day, the interest 
     receives an investment grade rating from at least one 
     nationally recognized statistical rating agency.
       In addition, the provision makes three modifications to the 
     present-law definition of a ``qualified mortgage.'' First, 
     the provision modifies the definition to include an 
     obligation principally secured by real property which 
     represents an increase in the principal amount under the 
     original terms of an obligation, provided such increase: (1) 
     is attributable to an advance made to the obligor pursuant to 
     the original terms of the obligation; (2) occurs after the 
     REMIC startup day; and (3) is purchased by the REMIC pursuant 
     to a fixed price contract in effect on the startup day. 
     Second, the provision modifies the definition to generally 
     include reverse mortgage loans and the periodic advances made 
     to obligors on such loans. For this purpose, a ``reverse 
     mortgage loan'' is defined as a loan that: (1) is secured by 
     an interest in real property; (2) provides for one or more 
     advances of principal to the obligor (each such advance 
     giving rise to a ``balance increase''), provided such 
     advances are principally secured by an interest in the same 
     real property as that which secures the loan; (3) may provide 
     for a contingent payment at maturity based upon the value or 
     appreciation in value of the real property securing the loan; 
     (4) provides for an amount due at maturity that cannot exceed 
     the value, or a specified fraction of the value, of the real 
     property securing the loan; (5) provides that all payments 
     under the loan are due only upon the maturity of the loan; 
     and (6) matures after a fixed term or at the time the obligor 
     ceases to use as a personal residence the real property 
     securing the loan. Third, the provision modifies the 
     definition to provide that, if more than 50 percent of the 
     obligations transferred to, or purchased by, the REMIC are 
     (1) originated by the United States or any State (or any 
     political subdivision, agency, or instrumentality of the 
     United States or any State) and (2) principally secured by an 
     interest in real property, then each obligation transferred 
     to, or purchased by, the REMIC shall be treated as secured by 
     an interest in real property.
       In addition, the provision modifies the present-law 
     definition of a ``permitted investment'' to include 
     intangible investment property held as part of a reasonably 
     required reserve to provide a source of funds for the 
     purchase of obligations described above as part of the 
     modified definition of a ``qualified mortgage.''
       Effective date.--Except as provided by the transition 
     period for existing FASITs, the House bill is effective 
     January 1, 2005.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     for the effective date.
       Effective date.--Except as provided by the transition 
     period for existing FASITs, the Senate amendment is effective 
     on February 14, 2003.


                          Conference Agreement

       The conference agreement follows the House bill provision.
     18. Limitation on transfer and importation of built-in losses 
         (sec. 636 of the House bill, sec. 431 of the Senate 
         amendment, and secs. 362 and 334 of the Code)


                              Present Law

       Generally, no gain or loss is recognized when one or more 
     persons transfer property to a corporation in exchange for 
     stock and immediately after the exchange such person or 
     persons control the corporation.\558\ The transferor's basis 
     in the stock of the controlled corporation is the same as the 
     basis of the property contributed to the controlled 
     corporation, increased by the amount of any gain (or 
     dividend) recognized by the transferor on the exchange, and 
     reduced by the amount of any money or property received, and 
     by the amount of any loss recognized by the transferor.\559\
---------------------------------------------------------------------------
     \558\ Sec. 351.
     \559\ Sec. 358.
---------------------------------------------------------------------------
       The basis of property received by a corporation, whether 
     from domestic or foreign transferors, in a tax-free 
     incorporation, reorganization, or liquidation of a subsidiary 
     corporation is the same as the adjusted basis in the hands of 
     the transferor, adjusted for gain or loss recognized by the 
     transferor.\560\
---------------------------------------------------------------------------
     \560\ Secs. 334(b) and 362(a) and (b).
---------------------------------------------------------------------------


                               House Bill

       The House bill provides that if a residual interest (as 
     defined in section 860G(a)(2)) in a real estate mortgage 
     investment conduit (``REMIC'') is contributed to a 
     corporation and the transferee corporation's adjusted basis 
     in the REMIC residual interest would (but for the provision) 
     exceed the fair market value of the REMIC residual interest 
     immediately after the contribution, the transferee 
     corporation's adjusted basis in the REMIC residual interest 
     is limited to the fair market value of the REMIC residual 
     interest immediately after the contribution, regardless of 
     whether the fair market value of the REMIC residual interest 
     is less than, equal to, or greater than zero (i.e., the 
     provision may result in the transferee corporation having a 
     negative adjusted basis in the REMIC residual interest).
       Effective date.--The House bill provision applies to 
     transactions after the date of enactment.


                            Senate Amendment

     Importation of built-in losses
       The Senate Amendment provides that if a net built-in loss 
     is imported into the U.S in a tax-free organization or 
     reorganization from persons not subject to U.S. tax, the 
     basis of each property so transferred is its fair market 
     value.\561\ A similar rule applies in the case of the tax-
     free liquidation by a domestic corporation of its foreign 
     subsidiary.
---------------------------------------------------------------------------
     \561\ The Senate amendment also applies to transfers from a 
     tax-exempt organization where gain or loss would not be 
     subject to tax if the property were sold by the organization.
---------------------------------------------------------------------------
       Under the Senate amendment, a net built-in loss is treated 
     as imported into the U.S. if the aggregate adjusted bases of 
     property received by a transferee corporation exceed the fair 
     market value of the properties transferred. Thus, for 
     example, if in a tax-free incorporation, some properties are 
     received by a corporation from U.S. persons subject to tax, 
     and some properties are received from foreign persons not 
     subject to U.S. tax, this provision applies to limit the 
     adjusted basis of each property received from the foreign 
     persons to the fair market value of the property. In the case 
     of a transfer by a partnership (either domestic or foreign), 
     this provision applies as if the properties had been 
     transferred by each of the partners in proportion to their 
     interests in the partnership.
     Limitation on transfer of built-in losses in section 351 
         transactions
       The Senate amendment provides that if the aggregate 
     adjusted bases of property contributed by a transferor (or by 
     a control group of which the transferor is a member) to a 
     corporation exceed the aggregate fair

[[Page H8579]]

     market value of the property transferred in a tax-free 
     incorporation, the transferee's aggregate basis of the 
     properties is limited to the aggregate fair market value of 
     the transferred property. Under the Senate Amendment, any 
     required basis reduction is allocated among the transferred 
     properties in proportion to their built-in-loss immediately 
     before the transaction. In the case of a transfer in which 
     the transferor owns at least 80 percent of the vote and value 
     of the stock of the transferee corporation, any basis 
     reduction required by the provision is made to the stock 
     received by the transferor and not to the assets transferred.
     Effective date
       The Senate amendment provision applies to transactions 
     after December 31, 2003.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications to the limitation on transfer of built-in 
     losses in section 351 transactions. The conference agreement 
     eliminates the provision that requires a basis reduction to 
     be made to stock received by the transferor (rather than to 
     the assets transferred) in the case of a transfer in which 
     the transferor owns at least 80 percent of the vote and value 
     of the stock of the transferee corporation. Thus, the 
     provision that limits the transferee's aggregate basis in the 
     transferred property to the aggregate fair market value of 
     the transferred property generally applies, regardless of the 
     ownership percentage of the transferor in the stock of the 
     transferee corporation.
       In addition, the conference agreement permits the 
     transferor and transferee to elect to limit the basis in the 
     stock received by the transferor to the aggregate fair market 
     value of the transferred property, in lieu of limiting the 
     basis in the assets transferred. Such election shall 
     be included with the tax returns of the transferor and 
     transferee for the taxable year in which the transaction 
     occurs and, once made, shall be irrevocable.
     19. Clarification of banking business for purposes of 
         determining investment of earnings in U.S. property (sec. 
         637 of the House bill, sec. 451 of the Senate amendment, 
         and sec. 956 of the Code)


                              Present Law

       In general, the subpart F rules\562\ require the U.S. 10-
     percent shareholders of a controlled foreign corporation to 
     include in income currently their pro rata shares of certain 
     income of the controlled foreign corporation (referred to as 
     ``subpart F income''), whether or not such earnings are 
     distributed currently to the shareholders. In addition, the 
     U.S. 10-percent shareholders of a controlled foreign 
     corporation are subject to U.S. tax currently on their pro 
     rata shares of the controlled foreign corporation's earnings 
     to the extent invested by the controlled foreign corporation 
     in certain U.S. property.\563\
---------------------------------------------------------------------------
     \562\ Secs. 951-964.
     \563\ Sec. 951(a)(1)(B).
---------------------------------------------------------------------------
       A shareholder's current income inclusion with respect to a 
     controlled foreign corporation's investment in U.S. property 
     for a taxable year is based on the controlled foreign 
     corporation's average investment in U.S. property for such 
     year. For this purpose, the U.S. property held (directly or 
     indirectly) by the controlled foreign corporation must be 
     measured as of the close of each quarter in the taxable 
     year.\564\ The amount taken into account with respect to any 
     property is the property's adjusted basis as determined for 
     purposes of reporting the controlled foreign corporation's 
     earnings and profits, reduced by any liability to which the 
     property is subject. The amount determined for current 
     inclusion is the shareholder's pro rata share of an amount 
     equal to the lesser of: (1) the controlled foreign 
     corporation's average investment in U.S. property as of the 
     end of each quarter of such taxable year, to the extent that 
     such investment exceeds the foreign corporation's earnings 
     and profits that were previously taxed on that basis; or (2) 
     the controlled foreign corporation's current or accumulated 
     earnings and profits (but not including a deficit), reduced 
     by distributions during the year and by earnings that have 
     been taxed previously as earnings invested in U.S. 
     property.\565\ An income inclusion is required only to the 
     extent that the amount so calculated exceeds the amount of 
     the controlled foreign corporation's earnings that have been 
     previously taxed as subpart F income.\566\
---------------------------------------------------------------------------
     \564\ Sec. 956(a).
     \565\ Secs. 956 and 959.
     \566\ Secs. 951(a)(1)(B) and 959.
---------------------------------------------------------------------------
       For purposes of section 956, U.S. property generally is 
     defined to include tangible property located in the United 
     States, stock of a U.S. corporation, an obligation of a U.S. 
     person, and certain intangible assets including a patent or 
     copyright, an invention, model or design, a secret formula or 
     process or similar property right which is acquired or 
     developed by the controlled foreign corporation for use in 
     the United States.\567\
---------------------------------------------------------------------------
     \567\ Sec. 956(c)(1).
---------------------------------------------------------------------------
       Specified exceptions from the definition of U.S. property 
     are provided for: (1) obligations of the United States, 
     money, or deposits with persons carrying on the banking 
     business; (2) certain export property; (3) certain trade or 
     business obligations; (4) aircraft, railroad rolling stock, 
     vessels, motor vehicles or containers used in transportation 
     in foreign commerce and used predominantly outside of the 
     United States; (5) certain insurance company reserves and 
     unearned premiums related to insurance of foreign risks; (6) 
     stock or debt of certain unrelated U.S. corporations; (7) 
     moveable property (other than a vessel or aircraft) used for 
     the purpose of exploring, developing, or certain other 
     activities in connection with the ocean waters of the U.S. 
     Continental Shelf; (8) an amount of assets equal to the 
     controlled foreign corporation's accumulated earnings and 
     profits attributable to income effectively connected with a 
     U.S. trade or business; (9) property (to the extent provided 
     in regulations) held by a foreign sales corporation and 
     related to its export activities; (10) certain deposits or 
     receipts of collateral or margin by a securities or 
     commodities dealer, if such deposit is made or received on 
     commercial terms in the ordinary course of the dealer's 
     business as a securities or commodities dealer; and (11) 
     certain repurchase and reverse repurchase agreement 
     transactions entered into by or with a dealer in securities 
     or commodities in the ordinary course of its business as a 
     securities or commodities dealer.\568\
---------------------------------------------------------------------------
     \568\ Sec. 956(c)(2).
---------------------------------------------------------------------------
       With regard to the exception for deposits with persons 
     carrying on the banking business, the U.S. Court of Appeals 
     for the Sixth Circuit in The Limited, Inc. v. Commissioner 
     \569\ concluded that a U.S. subsidiary of a U.S. shareholder 
     was ``carrying on the banking business'' even though its 
     operations were limited to the administration of the private 
     label credit card program of the U.S. shareholder. Therefore, 
     the court held that a controlled foreign corporation of the 
     U.S. shareholder could make deposits with the subsidiary 
     (e.g., through the purchase of certificates of deposit) under 
     this exception, and avoid taxation of the deposits under 
     section 956 as an investment in U.S. property.
---------------------------------------------------------------------------
     \569\ 286 F.3d 324 (6th Cir. 2002), rev'g 113 T.C. 169 
     (1999).
---------------------------------------------------------------------------


                               house bill

       The House bill provides that the exception from the 
     definition of U.S. property under section 956 for deposits 
     with persons carrying on the banking business is limited to 
     deposits with persons at least 80-percent of the gross income 
     of which is derived in the active conduct of a banking 
     business from unrelated persons. For purposes of applying the 
     House bill, the deposit recipient and all persons related to 
     the deposit recipient are treated as one person in applying 
     the 80-percent test.
       No inference is intended as to the meaning of the phrase 
     ``carrying on the banking business'' under present law.
       Effective date.--The House bill provision is effective on 
     the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment applies the 80-percent test by reference 
     to financial services income (as defined in section 
     904(d)(2)(C)(ii) rather than the active conduct of a banking 
     business.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.


                          conference agreement

       The conference agreement provides that the exception from 
     the definition of U.S. property under section 956 for 
     deposits with persons carrying on the banking business is 
     limited to deposits with: (1) any bank (as defined by section 
     2(c) of the Bank Holding Company Act of 1956 (12 U.S.C. 
     1841(c), without regard to paragraphs (C) and (G) of 
     paragraph (2) of such section); or (2) any other corporation 
     with respect to which a bank holding company (as defined by 
     section 2(a) of such Act) or financial holding company (as 
     defined by section 2(p) of such Act) owns directly or 
     indirectly more than 80 percent by vote or value of the stock 
     of such corporation.
       No inference is intended as to the meaning of the phrase 
     ``carrying on the banking business'' under present law.
       Effective date.--The conference agreement provision is 
     effective on the date of enactment.
     20. Alternative tax for small insurance companies and 
         modification of exemption from tax for small property and 
         casualty insurance companies (sec. 638 of the House bill, 
         sec. 493 of the Senate amendment, and secs. 501(c)(15) 
         and 831(b) of the Code)


                              present law

       A property and casualty insurance company generally is 
     subject to tax on its taxable income (sec. 831(a)). The 
     taxable income of a property and casualty insurance company 
     is determined as the sum of its underwriting income and 
     investment income (as well as gains and other income items), 
     reduced by allowable deductions (sec. 832).
       A property and casualty insurance company may elect to be 
     taxed only on taxable investment income if its net written 
     premiums or direct written premiums (whichever is greater) do 
     not exceed $1.2 million (sec. 831(b)). For purposes of 
     determining the amount of a company's net written premiums or 
     direct written premiums under this rule, premiums received by 
     all members of a controlled group of corporations (as defined 
     in section 831(b)) of which the company is a part are taken 
     into account (including foreign and tax-exempt corporations).
       A property and casualty insurance company is eligible to be 
     exempt from Federal income tax if (a) its gross receipts for 
     the

[[Page H8580]]

     taxable year do not exceed $600,000, and (b) the premiums 
     received for the taxable year are greater than 50 percent of 
     its gross receipts.\570\ For purposes of determining gross 
     receipts, the gross receipts of all members of a controlled 
     group of corporations of which the company is a part are 
     taken into account (including gross receipts of foreign and 
     tax-exempt corporations).
---------------------------------------------------------------------------
     \570\ A special rule provides that a mutual property and 
     casualty insurance company is eligible to be exempt from 
     Federal income tax under the provision if (a) its gross 
     receipts for the taxable year do not exceed $150,000, and (b) 
     the premiums received for the taxable year are greater than 
     35 percent of its gross receipts, provided certain 
     requirements are met. The requirements are that no employee 
     of the company or member of the employee's family is an 
     employee of another company that is exempt from tax under 
     section 501(c)(15) (or would be, but for this rule).
---------------------------------------------------------------------------


                               house bill

       Under the provision, the $1.2 million ceiling on net 
     written premiums or direct written premiums for purposes of 
     the election to be taxed only on taxable investment income is 
     increased to $1.89 million, and is indexed for taxable years 
     beginning in a calendar year after 2004.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                            senate amendment

       The Senate amendment follows the House bill, except that 
     the $1.89 million amount is indexed for taxable years 
     beginning in a calendar year after 2005. In addition, the 
     Senate amendment modifies one of the present-law requirements 
     for a property and casualty insurance company to eligible to 
     be exempt from Federal income tax by requiring that the 
     premiums received for the taxable year be greater than 60 
     percent of its gross receipts (rather than 50 percent as 
     under present law).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004.\571\
---------------------------------------------------------------------------
     \571\ The provision preserves the transition rule that was 
     provided under section 206(e) of the Pension Funding Equity 
     Act of 2004 (Pub. L. No. 108-218) relating to companies in 
     receivership or liquidation.
---------------------------------------------------------------------------


                          conference agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.
     21. Denial of deduction for interest on underpayments 
         attributable to nondisclosed reportable transactions 
         (sec. 639 of the House bill, sec. 417 of the Senate 
         amendment, and sec. 163 of the Code)


                              present law

       In general, corporations may deduct interest paid or 
     accrued within a taxable year on indebtedness.\572\ Interest 
     on indebtedness to the Federal government attributable to an 
     underpayment of tax generally may be deducted pursuant to 
     this provision.
---------------------------------------------------------------------------
     \572\ Sec. 163(a).
---------------------------------------------------------------------------


                               house bill

       The House bill disallows any deduction for interest paid or 
     accrued within a taxable year on any portion of an 
     underpayment of tax that is attributable to an understatement 
     arising from an undisclosed listed transaction or from an 
     undisclosed reportable avoidance transaction (other than a 
     listed transaction).\573\
---------------------------------------------------------------------------
     \573\ The definitions of these transactions are the same as 
     those previously described in connection with the provision 
     elsewhere in this bill to modify the accuracy-related penalty 
     for listed and certain reportable transactions.
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective for 
     underpayments attributable to transactions entered into in 
     taxable years beginning after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment also disallows any deduction for 
     interest paid or accrued within a taxable year on any portion 
     of an underpayment of tax that is attributable to an 
     understatement arising from a transaction that lacks economic 
     substance.
       Effective date.--The Senate amendment provision is 
     effective for underpayments attributable to transactions 
     entered into in taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the House bill.
     22. Clarification of rules for payment of estimated tax for 
         certain deemed asset sales (sec. 640 of the House bill, 
         sec. 481 of the Senate amendment, and sec. 338 of the 
         Code)


                              present law

       In certain circumstances, taxpayers can make an election 
     under section 338(h)(10) to treat a qualifying purchase of 80 
     percent of the stock of a target corporation by a corporation 
     from a corporation that is a member of an affiliated group 
     (or a qualifying purchase of 80 percent of the stock of an S 
     corporation by a corporation from S corporation shareholders) 
     as a sale of the assets of the target corporation, rather 
     than as a stock sale. The election must be made jointly by 
     the buyer and seller of the stock and is due by the 15th day 
     of the ninth month beginning after the month in which the 
     acquisition date occurs. An agreement for the purchase and 
     sale of stock often may contain an agreement of the parties 
     to make a section 338(h)(10) election.
       Section 338(a) also permits a unilateral election by a 
     buyer corporation to treat a qualified stock purchase of a 
     corporation as a deemed asset acquisition, whether or not the 
     seller of the stock is a corporation (or an S corporation is 
     the target). In such a case, the seller or sellers recognize 
     gain or loss on the stock sale (including any estimated taxes 
     with respect to the stock sale), and the target corporation 
     recognizes gain or loss on the deemed asset sale.
       Section 338(h)(13) provides that, for purposes of section 
     6655 (relating to additions to tax for failure by a 
     corporation to pay estimated income tax), tax attributable to 
     a deemed asset sale under section 338(a)(1) shall not be 
     taken into account.


                               house bill

       The bill clarifies section 338(h)(13) to provide that the 
     exception for estimated tax purposes with respect to tax 
     attributable to a deemed asset sale does not apply with 
     respect to a qualified stock purchase for which an election 
     is made under section 338(h)(10).
       Under the bill if a transaction eligible for the election 
     under section 338(h)(10) occurs, estimated tax would be 
     determined based on the stock sale unless and until there is 
     an agreement of the parties to make a section 338(h)(10) 
     election.
       If at the time of the sale there is an agreement of the 
     parties to make a section 338(h)(10) election, then estimated 
     tax is computed based on an asset sale, computed from the 
     date of the sale.
       If the agreement to make a section 338(h)(10) election is 
     concluded after the stock sale, such that the original 
     computation was based on a stock sale, estimated tax is 
     recomputed based on the asset sale election.
       No inference is intended as to present law.
       Effective date.--The bill is effective for qualified stock 
     purchase transactions that occur after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The Conference agreement follows the House bill and the 
     Senate amendment.
     23. Exclusion of like-kind exchange property from 
         nonrecognition treatment on the sale or exchange of a 
         principal residence (sec. 641 of the House bill and sec. 
         492 of the Senate amendment)


                              present law

       A taxpayer may exclude up to $250,000 ($500,000 if married 
     filing a joint return) of gain realized on the sale or 
     exchange of a principal residence. There are no special rules 
     relating to the sale or exchange of a principal residence 
     that was acquired in a like-kind exchange within the prior 
     five years.


                               house bill

       The House bill provides that the exclusion for gain on the 
     sale or exchange of a principal residence does not apply if 
     the principal residence was acquired in a like-kind exchange 
     in which any gain was not recognized within the prior five 
     years.
       Effective date.--Sales or exchanges of principal residences 
     after the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     24. Prevention of mismatching of interest and original issue 
         discount deductions and income inclusions in transactions 
         with related foreign persons (sec. 642 of the House bill, 
         sec. 453 of the Senate amendment, and secs. 163 and 267 
         of the Code)


                              present law

       Income earned by a foreign corporation from its foreign 
     operations generally is subject to U.S. tax only when such 
     income is distributed to any U.S. person that holds stock in 
     such corporation. Accordingly, a U.S. person that conducts 
     foreign operations through a foreign corporation generally is 
     subject to U.S. tax on the income from such operations when 
     the income is repatriated to the United States through a 
     dividend distribution to the U.S. person. The income is 
     reported on the U.S. person's tax return for the year the 
     distribution is received, and the United States imposes tax 
     on such income at that time. However, certain anti-deferral 
     regimes may cause the U.S. person to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by the foreign 
     corporations in which the U.S. person holds stock. The main 
     anti-deferral regimes are the controlled foreign corporation 
     rules of subpart F (secs. 951-964), the passive foreign 
     investment company rules (secs. 1291-1298), and the foreign 
     personal holding company rules (secs. 551-558).
       As a general rule, there is allowed as a deduction all 
     interest paid or accrued within the taxable year with respect 
     to indebtedness, including the aggregate daily portions of 
     original issue discount (``OID'') of the issuer for the days 
     during such taxable year.\574\ However, if a debt instrument 
     is held by a related foreign person, any portion of such OID 
     is not allowable as a deduction to the payor of such 
     instrument until paid (``related-foreign-person rule''). This 
     related-foreign-person rule does not apply to the extent that 
     the OID is effectively connected with

[[Page H8581]]

     the conduct by such foreign related person of a trade or 
     business within the United States (unless such OID is exempt 
     from taxation or is subject to a reduced rate of taxation 
     under a treaty obligation).\575\ Treasury regulations further 
     modify the related-foreign-person rule by providing that in 
     the case of a debt owed to a foreign personal holding company 
     (``FPHC''), controlled foreign corporation (``CFC'') or 
     passive foreign investment company (``PFIC''), a deduction is 
     allowed for OID as of the day on which the amount is 
     includible in the income of the FPHC, CFC or PFIC, 
     respectively.\576\
---------------------------------------------------------------------------
     \574\ Sec. 163(e)(1).
     \575\ Sec. 163(e)(3).
     \576\ Treas. Reg. sec. 1.163-12(b)(3). In the case of a PFIC, 
     the regulations further require that the person owing the 
     amount at issue have in effect a qualified electing fund 
     election pursuant to section 1295 with respect to the PFIC.
---------------------------------------------------------------------------
       In the case of unpaid stated interest and expenses of 
     related persons, where, by reason of a payee's method of 
     accounting, an amount is not includible in the payee's gross 
     income until it is paid but the unpaid amounts are deductible 
     currently by the payor, the amount generally is allowable as 
     a deduction when such amount is includible in the gross 
     income of the payee.\577\ With respect to stated interest and 
     other expenses owed to related foreign corporations, Treasury 
     regulations provide a general rule that requires a taxpayer 
     to use the cash method of accounting with respect to the 
     deduction of amounts owed to such related foreign persons 
     (with an exception for income of a related foreign person 
     that is effectively connected with the conduct of a U.S. 
     trade or business and that is not exempt from taxation or 
     subject to a reduced rate of taxation under a treaty 
     obligation).\578\ As in the case of OID, the Treasury 
     regulations additionally provide that in the case of stated 
     interest owed to a FPHC, CFC, or PFIC, a deduction is allowed 
     as of the day on which the amount is includible in the income 
     of the FPHC, CFC or PFIC.\579\
---------------------------------------------------------------------------
     \577\ Sec. 267(a)(2).
     \578\ Treas. Reg. sec. 1.267(a)-3(b)(1), -3(c).
     \579\ Treas. Reg. sec. 1.267(a)-3(c)(4).
---------------------------------------------------------------------------


                               house bill

       The provision provides that deductions for amounts accrued 
     but unpaid (whether by U.S. or foreign persons) to related 
     FPHCs, CFCs, or PFICs are allowable only to the extent that 
     the amounts accrued by the payor are, for U.S. tax purposes, 
     currently includible in the income of the direct or indirect 
     U.S. owners of the related foreign corporation under the 
     relevant inclusion rules.\580\ Deductions that have accrued 
     but are not allowable under this provision are allowed 
     when the amounts are paid.
---------------------------------------------------------------------------
     \580\ Section 413 of the conference agreement repeals the 
     foreign personal holding company regime, effective for 
     taxable years of foreign corporations beginning after 
     December 31, 2004, and taxable years of U.S. shareholders 
     with or within which such taxable years of foreign 
     corporations end.
---------------------------------------------------------------------------
       For purposes of determining the amount of the deduction 
     allowable, the extent that an amount attributable to OID or 
     an item is includible in the income of a U.S. person is 
     determined without regard to (1) properly allocable 
     deductions of the related foreign corporation, and (2) 
     qualified deficits of the related foreign corporation under 
     section 952(c)(1)(B). Properly allocable deductions of the 
     related foreign corporation are those expenses, losses, and 
     other deductible amounts of the related foreign corporation 
     that are properly allocated or apportioned, under the 
     principles of section 954(b)(5), to the relevant income item 
     of the related foreign corporation.
       The provision grants the Secretary regulatory authority to 
     exempt transactions from these rules, including any 
     transactions entered into by the payor in the ordinary course 
     of a trade or business in which the payor is predominantly 
     engaged, and (in the case of items other than OID) in which 
     the payment of the accrued amounts occurs shortly after its 
     accrual.
       Effective date.--The provision is effective for payments 
     accrued on or after date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       The following examples illustrate the operation of this 
     provision. Assume the following facts. A U.S. parent 
     corporation owns 60 percent of the stock of a CFC. An 
     unrelated foreign corporation owns the remaining 40 percent 
     interest in the CFC. The U.S. parent accrues an expense item 
     of 100 to the CFC. The parent would be entitled to a current 
     deduction of 100 for the accrued amount, before taking into 
     account this provision. The item constitutes gross foreign 
     base company income in the hands of the CFC. The item is the 
     only gross income item of the CFC that has the potential to 
     result in the CFC having subpart F income, and has not been 
     paid by the end of the taxable year of the parent. The CFC 
     has deductions of 60 that are properly allocated or 
     apportioned to the 100 of gross foreign base company income 
     under the principles of section 954(b)(5), resulting in 40 
     (100 - 60) of net foreign base company income. The CFC has 
     earnings and profits for its taxable year in excess of 40, 
     and has 40 of subpart F income. Under these facts, the U.S. 
     parent is allowed a current deduction of 60 (100 60%) under 
     the provision.
       If, in the example above, the CFC has deductions of 100 (or 
     more) properly allocated or apportioned to the sole item of 
     100 of gross foreign base company income under the principles 
     of section 954(b)(5), and has no other income or deductions, 
     the same deduction is allowed to the U.S. parent. Under these 
     circumstances, the parent is allowed a deduction of 60, 
     whether the CFC has positive earnings and profits for its 
     taxable year or has a deficit in earnings and profits for 
     such year.
       If the CFC's item of net foreign base company income is 
     positive, and the earnings and profits limitation of section 
     952(c)(1)(A) reduces what would otherwise be a U.S. 
     shareholder's pro rata share of the CFC's subpart F income, 
     then the deduction will also be reduced under the provision. 
     For example, assume the facts in the first example above, in 
     which the CFC has deductions of 60 that are properly 
     allocated or apportioned to the item of 100 of gross foreign 
     base company income under the principles of section 
     954(b)(5), resulting in 40 of net foreign base company 
     income. Further assume that, due solely to other losses, the 
     CFC's earnings and profits for its taxable year are 10 
     instead of 40. In that case, the CFC's subpart F income is 
     limited to 10, and only six is includible in the gross income 
     of the U.S. parent as its pro rata share of subpart F income. 
     Under the provision, the U.S. parent is allowed a current 
     deduction in that case of 42 ((10 + 60) 60%). The conferees 
     intend that, if as a result of such other losses, the CFC has 
     no earnings and profits for its taxable year or has a deficit 
     in earnings and profits for such year, the U.S. parent is 
     instead allowed a current deduction of 36 ((0 + 60) 60%).
     25. Exclusion from gross income for interest on overpayments 
         of income tax by individuals (sec. 643 of the House bill)


                              Present Law

     Overpayment interest
       Interest is included in the list of items that are required 
     to be included in gross income (sec. 61(a)(4)). Interest on 
     overpayments of Federal income tax is required to be included 
     in taxable income in the same manner as any other interest 
     that is received by the taxpayer.
       Cash basis taxpayers are required to report overpayment 
     interest as income in the period the interest is received. 
     Accrual basis taxpayers are required to report overpayment 
     interest as income when all events fixing the right to the 
     receipt of the overpayment interest have occurred and the 
     amount can be estimated with reasonable accuracy. Generally, 
     this occurs on the date the appropriate IRS official signs 
     the pertinent schedule of overassessments.
     Underpayment interest
       A corporate taxpayer is allowed to currently take into 
     account interest paid on underpayments of Federal income tax 
     as an ordinary and necessary business expense. Typically, 
     this results in a current deduction. However, the deduction 
     may be deferred if the interest is required to be capitalized 
     or may be disallowed if and to the extent it is determined to 
     be a cost of earning tax exempt income under section 265.
       Section 163(h) of the Code prohibits the deduction of 
     personal interest by taxpayers other than corporations. 
     Noncorporate taxpayers, including individuals, generally are 
     not allowed to deduct interest on the underpayment of Federal 
     income taxes.
       Temporary regulations provide that personal interest 
     includes interest paid on underpayments of individual 
     Federal, State or local income taxes, regardless of the 
     source of the income generating the tax liability. This is 
     consistent with the statement in the General Explanation of 
     the Tax Reform Act of 1986 that ``(p)ersonal interest also 
     includes interest on underpayments of individual Federal, 
     State, or local income taxes notwithstanding that all or a 
     portion of the income may have arisen in a trade or business, 
     because such taxes are not considered derived from conduct of 
     a trade or business.'' The validity of the temporary 
     regulation has been upheld in those Circuits that have 
     considered the issue, including the Fourth, Sixth, Eighth, 
     and Ninth Circuits.
       Personal interest also includes interest that is paid by a 
     trust, S corporation, or other pass-through entity on 
     underpayments of State or local income taxes. Personal 
     interest does not include interest that is paid with respect 
     to sales, excise or similar taxes that are incurred in 
     connection with a trade or business or an investment 
     activity.


                               House Bill

       The bill excludes overpayment interest that is paid to 
     individual taxpayers on overpayments of Federal income tax 
     from gross income. Interest excluded under the provision is 
     not considered disqualified income that could limit the 
     earned income credit. Interest excluded under the provision 
     also is not considered in determining what portion of a 
     taxpayer's social security or tier 1 railroad retirement 
     benefits are subject to tax (sec. 86), whether a taxpayer has 
     sufficient taxable income to be required to file a return 
     (sec. 6012(d)), or for any other computation in which 
     interest exempt from tax is otherwise required to be added to 
     adjusted gross income.
       The exclusion from income of overpayment interest does not 
     apply if the Secretary determines that the taxpayer's 
     principal purpose for overpaying his or her tax is to take 
     advantage of the exclusion.
       For example, a taxpayer prepares his return without taking 
     into account significant itemized deductions of which he is, 
     or should be, aware. Before the expiration of the statute of 
     limitations, the taxpayer files an

[[Page H8582]]

     amended return claiming these itemized deductions and 
     requesting a refund with interest. Unless the taxpayer can 
     establish a principal purpose for originally overpaying the 
     tax other than collecting excludible interest, the Secretary 
     may determine that the principal purpose of waiting to claim 
     the deductions on an amended return was to earn interest that 
     would be excluded from income. In that case, the interest on 
     the overpayment could not be excluded from income.
       It is expected that the Secretary will indicate whether the 
     interest is eligible to be excluded from income on the Form 
     1099 it provides that taxpayer for taxable year in which the 
     underpayment interest is paid.
       Effective date.--Interest received in calendar years 
     beginning after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     26. Deposits made to suspend the running of interest on 
         potential underpayments (sec. 644 of the House bill, sec. 
         486 of the Senate amendment, and new sec. 6603 of the 
         Code))


                              Present Law

       Generally, interest on underpayments and overpayments 
     continues to accrue during the period that a taxpayer and the 
     IRS dispute a liability. The accrual of interest on an 
     underpayment is suspended if the IRS fails to notify an 
     individual taxpayer in a timely manner, but interest will 
     begin to accrue once the taxpayer is properly notified. No 
     similar suspension is available for other taxpayers.
       A taxpayer that wants to limit its exposure to underpayment 
     interest has a limited number of options. The taxpayer can 
     continue to dispute the amount owed and risk paying a 
     significant amount of interest. If the taxpayer continues to 
     dispute the amount and ultimately loses, the taxpayer will be 
     required to pay interest on the underpayment from the 
     original due date of the return until the date of payment.
       In order to avoid the accrual of underpayment interest, the 
     taxpayer may choose to pay the disputed amount and 
     immediately file a claim for refund. Payment of the disputed 
     amount will prevent further interest from accruing if the 
     taxpayer loses (since there is no longer any underpayment) 
     and the taxpayer will earn interest on the resultant 
     overpayment if the taxpayer wins. However, the taxpayer will 
     generally lose access to the Tax Court if it follows this 
     alternative. Amounts paid generally cannot be recovered by 
     the taxpayer on demand, but must await final determination of 
     the taxpayer's liability. Even if an overpayment is 
     ultimately determined, overpaid amounts may not be refunded 
     if they are eligible to be offset against other liabilities 
     of the taxpayer.
       The taxpayer may also make a deposit in the nature of a 
     cash bond. The procedures for making a deposit in the nature 
     of a cash bond are provided in Rev. Proc. 84-58.
       A deposit in the nature of a cash bond will stop the 
     running of interest on an amount of underpayment equal to the 
     deposit, but the deposit does not itself earn interest. A 
     deposit in the nature of a cash bond is not a payment of tax 
     and is not subject to a claim for credit or refund. A deposit 
     in the nature of a cash bond may be made for all or part of 
     the disputed liability and generally may be recovered by the 
     taxpayer prior to a final determination. However, a deposit 
     in the nature of a cash bond need not be refunded to the 
     extent the Secretary determines that the assessment or 
     collection of the tax determined would be in jeopardy, or 
     that the deposit should be applied against another liability 
     of the taxpayer in the same manner as an overpayment of tax. 
     If the taxpayer recovers the deposit prior to final 
     determination and a deficiency is later determined, the 
     taxpayer will not receive credit for the period in which the 
     funds were held as a deposit. The taxable year to which the 
     deposit in the nature of a cash bond relates must be 
     designated, but the taxpayer may request that the deposit 
     be applied to a different year under certain 
     circumstances.


                               House Bill

     In general
       The provision allows a taxpayer to deposit cash with the 
     IRS that may subsequently be used to pay an underpayment of 
     income, gift, estate, generation-skipping, or certain excise 
     taxes. Interest will not be charged on the portion of the 
     underpayment that is deposited for the period that the amount 
     is on deposit. Generally, deposited amounts that have not 
     been used to pay a tax may be withdrawn at any time if the 
     taxpayer so requests in writing. The withdrawn amounts will 
     earn interest at the applicable Federal rate to the extent 
     they are attributable to a disputable tax.
       The Secretary may issue rules relating to the making, use, 
     and return of the deposits.
     Use of a deposit to offset underpayments of tax
       Any amount on deposit may be used to pay an underpayment of 
     tax that is ultimately assessed. If an underpayment is paid 
     in this manner, the taxpayer will not be charged underpayment 
     interest on the portion of the underpayment that is so paid 
     for the period the funds were on deposit.
       For example, assume a calendar year individual taxpayer 
     deposits $20,000 on May 15, 2005, with respect to a 
     disputable item on its 2004 income tax return. On April 15, 
     2007, an examination of the taxpayer's year 2004 income tax 
     return is completed, and the taxpayer and the IRS agree that 
     the taxable year 2004 taxes were underpaid by $25,000. The 
     $20,000 on deposit is used to pay $20,000 of the 
     underpayment, and the taxpayer also pays the remaining 
     $5,000. In this case, the taxpayer will owe underpayment 
     interest from April 15, 2005 (the original due date of the 
     return) to the date of payment (April 15, 2007) only with 
     respect to the $5,000 of the underpayment that is not paid by 
     the deposit. The taxpayer will owe underpayment interest on 
     the remaining $20,000 of the underpayment only from April 15, 
     2005, to May 15, 2005, the date the $20,000 was deposited.
     Withdrawal of amounts
       A taxpayer may request the withdrawal of any amount of 
     deposit at any time. The Secretary must comply with the 
     withdrawal request unless the amount has already been used to 
     pay tax or the Secretary properly determines that collection 
     of tax is in jeopardy. Interest will be paid on deposited 
     amounts that are withdrawn at a rate equal to the short-term 
     applicable Federal rate for the period from the date of 
     deposit to a date not more than 30 days preceding the date of 
     the check paying the withdrawal. Interest is not payable to 
     the extent the deposit was not attributable to a disputable 
     tax.
       For example, assume a calendar year individual taxpayer 
     receives a 30-day letter showing a deficiency of $20,000 for 
     taxable year 2004 and deposits $20,000 on May 15, 2006. On 
     April 15, 2007, an administrative appeal is completed, and 
     the taxpayer and the IRS agree that the 2004 taxes were 
     underpaid by $15,000. $15,000 of the deposit is used to pay 
     the underpayment. In this case, the taxpayer will owe 
     underpayment interest from April 15, 2005 (the original due 
     date of the return) to May 15, 2006, the date the $20,000 was 
     deposited. Simultaneously with the use of the $15,000 to 
     offset the underpayment, the taxpayer requests the return of 
     the remaining amount of the deposit (after reduction for the 
     underpayment interest owed by the taxpayer from April 15, 
     2005, to May 15, 2006). This amount must be returned to the 
     taxpayer with interest determined at the short-term 
     applicable Federal rate from the May 15, 2006, to a date not 
     more than 30 days preceding the date of the check repaying 
     the deposit to the taxpayer.
     Limitation on amounts for which interest may be allowed
       Interest on a deposit that is returned to a taxpayer shall 
     be allowed for any period only to the extent attributable to 
     a disputable item for that period. A disputable item is any 
     item for which the taxpayer (1) has a reasonable basis for 
     the treatment used on its return and (2) reasonably believes 
     that the Secretary also has a reasonable basis for 
     disallowing the taxpayer's treatment of such item.
       All items included in a 30-day letter to a taxpayer are 
     deemed disputable for this purpose. Thus, once a 30-day 
     letter has been issued, the disputable amount cannot be less 
     than the amount of the deficiency shown in the 30-day letter. 
     A 30-day letter is the first letter of proposed deficiency 
     that allows the taxpayer an opportunity for administrative 
     review in the Internal Revenue Service Office of Appeals.
     Deposits are not payments of tax
       A deposit is not a payment of tax prior to the time the 
     deposited amount is used to pay a tax. Similarly, withdrawal 
     of a deposit will not establish a period for which interest 
     was allowable at the short-term applicable Federal rate for 
     the purpose of establishing a net zero interest rate on a 
     similar amount of underpayment for the same period.
       Effective date.--Deposits made after date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     27. Authorize IRS to enter into installment agreements that 
         provide for partial payment (sec. 645 of the House bill, 
         sec. 484 of the Senate amendment, and sec. 6159 of the 
         Code)


                              Present Law

       The Code authorizes the IRS to enter into written 
     agreements with any taxpayer under which the taxpayer is 
     allowed to pay taxes owed, as well as interest and penalties, 
     in installment payments if the IRS determines that doing so 
     will facilitate collection of the amounts owed (sec. 
     6159). An installment agreement does not reduce the amount 
     of taxes, interest, or penalties owed. Generally, during 
     the period installment payments are being made, other IRS 
     enforcement actions (such as levies or seizures) with 
     respect to the taxes included in that agreement are held 
     in abeyance.
       Prior to 1998, the IRS administratively entered into 
     installment agreements that provided for partial payment 
     (rather than full payment) of the total amount owed over the 
     period of the agreement. In that year, the IRS Chief Counsel 
     issued a memorandum concluding that partial payment 
     installment agreements were not permitted.


                               House Bill

       The provision clarifies that the IRS is authorized to enter 
     into installment agreements with taxpayers which do not 
     provide

[[Page H8583]]

     for full payment of the taxpayer's liability over the life of 
     the agreement. The provision also requires the IRS to review 
     partial payment installment agreements at least every two 
     years. The primary purpose of this review is to determine 
     whether the financial condition of the taxpayer has 
     significantly changed so as to warrant an increase in the 
     value of the payments being made.
       Effective date.--Installment agreements entered into on or 
     after the date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     28. Affirmation of consolidated return regulation authority 
         (sec. 646 of the House bill, sec. 421 of the Senate 
         amendment, and sec. 1502 of the Code)


                              Present Law

       An affiliated group of corporations may elect to file a 
     consolidated return in lieu of separate returns. A condition 
     of electing to file a consolidated return is that all 
     corporations that are members of the consolidated group must 
     consent to all the consolidated return regulations prescribed 
     under section 1502 prior to the last day prescribed by law 
     for filing such return.\581\
---------------------------------------------------------------------------
     \158\ Sec. 1501.
---------------------------------------------------------------------------
       Section 1502 states: ``The Secretary shall prescribe such 
     regulations as he may deem necessary in order that the tax 
     liability of any affiliated group of corporations making a 
     consolidated return and of each corporation in the group, 
     both during and after the period of affiliation, may be 
     returned, determined, computed, assessed, collected, and 
     adjusted, in such manner as clearly to reflect the income-tax 
     liability and the various factors necessary for the 
     determination of such liability, and in order to prevent the 
     avoidance of such tax liability.'' \582\
---------------------------------------------------------------------------
     \582\ Sec. 1502.
---------------------------------------------------------------------------
       Under this authority, the Treasury Department has issued 
     extensive consolidated return regulations.\583\
---------------------------------------------------------------------------
     \583\ Regulations issued under the authority of section 1502 
     are considered to be ``legislative'' regulations rather than 
     ``interpretative'' regulations, and as such are usually given 
     greater deference by courts in case of a taxpayer challenge 
     to such a regulation. See, S. Rep. No. 960, 70th Cong., 1st 
     Sess. at 15 (1928), describing the consolidated return 
     regulations as ``legislative in character''. The Supreme 
     Court has stated that ``. . . legislative regulations are 
     given controlling weight unless they are arbitrary, 
     capricious, or manifestly contrary to the statute.'' Chevron, 
     U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 
     U.S. 837, 844 (1984) (involving an environmental protection 
     regulation). For examples involving consolidated return 
     regulations, see, e.g., Wolter Construction Company v. 
     Commissioner, 634 F.2d 1029 (6th Cir. 1980); Garvey, Inc. v. 
     United States, 1 Ct. Cl. 108 (1983), aff'd 726 F.2d 1569 
     (Fed. Cir. 1984), cert. denied, 469 U.S. 823 (1984). Compare, 
     e.g., Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), 
     describing different standards of review. The case did not 
     involve a consolidated return regulation.
---------------------------------------------------------------------------
       In the recent case of Rite Aid Corp. v. United States, 
     \584\ the Federal Circuit Court of Appeals addressed the 
     application of a particular provision of certain consolidated 
     return loss disallowance regulations, and concluded that the 
     provision was invalid.\585\ The particular provision, known 
     as the ``duplicated loss'' provision, \586\ would have denied 
     a loss on the sale of stock of a subsidiary by a parent 
     corporation that had filed a consolidated return with the 
     subsidiary, to the extent the subsidiary corporation had 
     assets that had a built-in loss, or had a net operating loss, 
     that could be recognized or used later.\587\
---------------------------------------------------------------------------
     \584\ 255 F.3d 1357 (Fed. Cir. 2001), reh'g denied, 2001 U.S. 
     App. LEXIS 23207 (Fed. Cir. Oct. 3, 2001).
     \585\ Prior to this decision, there had been a few instances 
     involving prior laws in which certain consolidated return 
     regulations were held to be invalid. See, e.g., American 
     Standard, Inc. v. United States, 602 F.2d 256 (Ct. Cl. 1979), 
     discussed in the text infra. See also Union Carbide Corp. v. 
     United States, 612 F.2d 558 (Ct. Cl. 1979), and Allied 
     Corporation v. United States, 685 F. 2d 396 (Ct. Cl. 1982), 
     all three cases involving the allocation of income and loss 
     within a consolidated group for purposes of computation of a 
     deduction allowed under prior law by the Code for Western 
     Hemisphere Trading Corporations. See also Joseph Weidenhoff 
     v. Commissioner, 32 T.C. 1222, 1242-1244 (1959), involving 
     the application of certain regulations to the excess profits 
     tax credit allowed under prior law, and concluding that the 
     Commissioner had applied a particular regulation in an 
     arbitrary manner inconsistent with the wording of the 
     regulation and inconsistent with even a consolidated group 
     computation. Cf. Kanawha Gas & Utilities Co. v. Commissioner, 
     214 F.2d 685 (1954), concluding that the substance of a 
     transaction was an acquisition of assets rather than stock. 
     Thus, a regulation governing basis of the assets of 
     consolidated subsidiaries did not apply to the case. See also 
     General Machinery Corporation v. Commissioner, 33 B.T.A. 1215 
     (1936); Lefcourt Realty Corporation, 31 B.T.A. 978 (1935); 
     Helvering v. Morgans, Inc., 293 U.S. 121 (1934), interpreting 
     the term ``taxable year.''
     \586\ Treas. Reg. sec. 1.1502-20(c)(1)(iii).
     \587\ Treasury Regulation section 1.1502-20, generally 
     imposing certain ``loss disallowance'' rules on the 
     disposition of subsidiary stock, contained other limitations 
     besides the ``duplicated loss'' rule that could limit the 
     loss available to the group on a disposition of a 
     subsidiary's stock. Treasury Regulation section 1.1502-20 as 
     a whole was promulgated in connection with regulations issued 
     under section 337(d), principally in connection with the so-
     called General Utilities repeal of 1986 (referring to the 
     case of General Utilities & Operating Company v. Helvering, 
     296 U.S. 200 (1935)). Such repeal generally required a 
     liquidating corporation, or a corporation acquired in a stock 
     acquisition treated as a sale of assets, to pay corporate 
     level tax on the excess of the value of its assets over the 
     basis. Treasury regulation section 1.1502-20 principally 
     reflected an attempt to prevent corporations filing 
     consolidated returns from offsetting income with a loss on 
     the sale of subsidiary stock. Such a loss could result from 
     the unique upward adjustment of a subsidiary's stock basis 
     required under the consolidated return regulations for 
     subsidiary income earned in consolidation, an adjustment 
     intended to prevent taxation of both the subsidiary and the 
     parent on the same income or gain. As one example, absent a 
     denial of certain losses on a sale of subsidiary stock, a 
     consolidated group could obtain a loss deduction with respect 
     to subsidiary stock, the basis of which originally reflected 
     the subsidiary's value at the time of the purchase of the 
     stock, and that had then been adjusted upward on recognition 
     of any built-in income or gain of the subsidiary reflected in 
     that value. The regulations also contained the duplicated 
     loss factor addressed by the court in Rite Aid. The preamble 
     to the regulations stated: ``it is not administratively 
     feasible to differentiate between loss attributable to built-
     in gain and duplicated loss.'' T.D. 8364, 1991-2 C.B. 43, 46 
     (Sept. 13, 1991). The government also argued in the Rite Aid 
     case that duplicated loss was a separate concern of the 
     regulations. 255 F.3d at 1360.
---------------------------------------------------------------------------
       The Federal Circuit Court opinion contained language 
     discussing the fact that the regulation produced a result 
     different than the result that would have obtained if the 
     corporations had filed separate returns rather than 
     consolidated returns.\588\
---------------------------------------------------------------------------
     \588\ For example, the court stated: ``The duplicated loss 
     factor . . . addresses a situation that arises from the sale 
     of stock regardless of whether corporations file separate or 
     consolidated returns. With I.R.C. secs. 382 and 383, Congress 
     has addressed this situation by limiting the subsidiary's 
     potential future deduction, not the parent's loss on the sale 
     of stock under I.R.C. sec. 165.'' 255 F.3d 1357, 1360 (Fed. 
     Cir. 2001).
---------------------------------------------------------------------------
       The Federal Circuit Court opinion cited a 1928 Senate 
     Finance Committee Report to legislation that authorized 
     consolidated return regulations, which stated that ``many 
     difficult and complicated problems, . . . have arisen in the 
     administration of the provisions permitting the filing of 
     consolidated returns'' and that the committee ``found it 
     necessary to delegate power to the commissioner to 
     prescribe regulations legislative in character covering 
     them.'' \589\ The Court's opinion also cited a previous 
     decision of the Court of Claims for the proposition, 
     interpreting this legislative history, that section 1502 
     grants the Secretary ``the power to conform the applicable 
     income tax law of the Code to the special, myriad problems 
     resulting from the filing of consolidated income tax 
     returns;'' but that section 1502 ``does not authorize the 
     Secretary to choose a method that imposes a tax on income 
     that would not otherwise be taxed.'' \590\
---------------------------------------------------------------------------
     \589\ S. Rep. No. 960, 70th Cong., 1st Sess. 15 (1928). 
     Though not quoted by the court in Rite Aid, the same Senate 
     report also indicated that one purpose of the consolidated 
     return authority was to permit treatment of the separate 
     corporations as if they were a single unit, stating ``The 
     mere fact that by legal fiction several corporations owned by 
     the same shareholders are separate entities should not 
     obscure the fact that they are in reality one and the same 
     business owned by the same individuals and operated as a 
     unit.'' S. Rep. No. 960, 70th Cong., 1st Sess. 29 (1928).
     \590\ American Standard, Inc. v. United States, 602 F.2d 256, 
     261 (Ct. Cl. 1979). That case did not involve the question of 
     separate returns as compared to a single return approach. It 
     involved the computation of a Western Hemisphere Trade 
     Corporation (``WHTC'') deduction under prior law (which 
     deduction would have been computed as a percentage of each 
     WHTC's taxable income if the corporations had filed separate 
     returns), in a case where a consolidated group included 
     several WHTCs as well as other corporations. The question was 
     how to apportion income and losses of the admittedly 
     consolidated WHTCs and how to combine that computation with 
     the rest of the group's consolidated income or losses. The 
     court noted that the new, changed regulations approach varied 
     from the approach taken to a similar problem involving public 
     utilities within a group and previously allowed for WHTCs. 
     The court objected that the allocation method adopted by the 
     regulation allowed non-WHTC losses to reduce WHTC income. 
     However, the court did not disallow a method that would net 
     WHTC income of one WHTC with losses of another WHTC, a result 
     that would not have occurred under separate returns. Nor did 
     the court expressly disallow a different fractional method 
     that would net both income and losses of the WHTCs with those 
     of other corporations in the consolidated group. The court 
     also found that the regulation had been adopted without 
     proper notice.
---------------------------------------------------------------------------
       The Federal Circuit Court construed these authorities and 
     applied them to invalidate Treas. Reg. Sec. 1.1502-
     20(c)(1)(iii), stating that: ``The loss realized on the sale 
     of a former subsidiary's assets after the consolidated group 
     sells the subsidiary's stock is not a problem resulting from 
     the filing of consolidated income tax returns. The scenario 
     also arises where a corporate shareholder sells the stock of 
     a non-consolidated subsidiary. The corporate shareholder 
     could realize a loss under I.R.C. sec. 1001, and deduct the 
     loss under I.R.C. sec. 165. The subsidiary could then deduct 
     any losses from a later sale of assets. The duplicated loss 
     factor, therefore, addresses a situation that arises from the 
     sale of stock regardless of whether corporations file 
     separate or consolidated returns. With I.R.C. secs. 382 and 
     383, Congress has addressed this situation by limiting the 
     subsidiary's potential future deduction, not the parent's 
     loss on the sale of stock under I.R.C. sec. 165.''\591\
---------------------------------------------------------------------------
     \591\ Rite Aid, 255 F.3d at 1360.
---------------------------------------------------------------------------
       The Treasury Department has announced that it will not 
     continue to litigate the validity of the duplicated loss 
     provision of the regulations, and has issued interim 
     regulations that permit taxpayers for all years to elect a 
     different treatment, though they may apply the provision for 
     the past if they wish.\592\
---------------------------------------------------------------------------
     \592\ See Temp. Reg. Sec. 1.1502-20T(i)(2), Temp. Reg. Sec. 
     1.337(d)-2T, and Temp. Reg. Sec. 1.1502-35T. The Treasury 
     Department has also indicated its intention to continue to 
     study all the issues that the original loss disallowance 
     regulations addressed (including issues of furthering single 
     entity principles) and possibly issue different regulations 
     (not including the particular approach of Treas. Reg. Sec. 
     1.1502-20(c)(1)(iii)) on the issues in the future. See, e.g. 
     Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 
     67 F.R. 11034 (March 12, 2002); REG-102740-02, 67 F.R. 11070 
     (March 12, 2002); see also Notice 2002-18, 2002-12 I.R.B. 644 
     (March 25, 2002); REG-131478-02, 67 F.R. 65060 (October 18, 
     2002); T.D. 9048, 68 F.R. 12287 (March 14, 2003); and T.D. 
     9118, REG-153172-03 (March 17, 2004).

---------------------------------------------------------------------------

[[Page H8584]]

                               House Bill

       The provision confirms that, in exercising its authority 
     under section 1502 to issue consolidated return regulations, 
     the Treasury Department may provide rules treating 
     corporations filing consolidated returns differently from 
     corporations filing separate returns.
       Thus, under the statutory authority of section 1502, the 
     Treasury Department is authorized to issue consolidated 
     return regulations utilizing either a single taxpayer or 
     separate taxpayer approach or a combination of the two 
     approaches, as Treasury deems necessary in order that the tax 
     liability of any affiliated group of corporations making a 
     consolidated return, and of each corporation in the group, 
     both during and after the period of affiliation, may be 
     determined and adjusted in such manner as clearly to reflect 
     the income-tax liability and the various factors necessary 
     for the determination of such liability, and in order to 
     prevent avoidance of such liability.
       Rite Aid is thus overruled to the extent it suggests that 
     the Secretary is required to identify a problem created from 
     the filing of consolidated returns in order to issue 
     regulations that change the application of a Code provision. 
     The Secretary may promulgate consolidated return regulations 
     to change the application of a tax code provision to members 
     of a consolidated group, provided that such regulations are 
     necessary to clearly reflect the income tax liability of the 
     group and each corporation in the group, both during and 
     after the period of affiliation.
       The provision nevertheless allows the result of the Rite 
     Aid case to stand with respect to the type of factual 
     situation presented in the case. That is, the bill provides 
     for the override of the regulatory provision that took the 
     approach of denying a loss on a deconsolidating 
     disposition of stock of a consolidated subsidiary \593\ to 
     the extent the subsidiary had net operating losses or 
     built in losses that could be used later outside the 
     group.\594\
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     \593\ Treas. Reg. Sec. 1.1502-20(c)(1)(iii).
     \594\ The provision is not intended to overrule the current 
     Treasury Department regulations, which allow taxpayers in 
     certain circumstances for the past to follow Treasury 
     Regulations Section 1.1502-20(c)(1)(iii), if they choose to 
     do so. Temp. Reg. Sec. 1.1502-20T(i)(2).
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       Retaining the result in the Rite Aid case with respect to 
     the particular regulation section 1.1502-20(c)(1)(iii) as 
     applied to the factual situation of the case does not in any 
     way prevent or invalidate the various approaches Treasury has 
     announced it will apply or that it intends to consider in 
     lieu of the approach of that regulation, including, for 
     example, the denial of a loss on a stock sale if inside 
     losses of a subsidiary may also be used by the consolidated 
     group, and the possible requirement that inside attributes be 
     adjusted when a subsidiary leaves a group.\595\
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     \595\ See, e.g., Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 
     2002); Temp. Reg. Sec. 1.337(d)-2T, (T.D. 8984, 67 F.R. 11034 
     (March 12, 2002) and T.D. 8998, 67 F.R. 37998 (May 31, 
     2002)); REG-102740-02, 67 F.R. 11070 (March 12, 2002); see 
     also Notice 2002-18, 2002-12 I.R.B. 644 (March 25, 2002); 
     REG-131478-02, 67 F.R. 65060 (October 18, 2002); Temp. Reg. 
     Sec. 1.1502-35T (T.D. 9048, 68 F.R. 12287 (March 14, 2003)); 
     and T.D. 9118, REG-153172-03 (March 17, 2004). In exercising 
     its authority under section 1502, the Secretary is also 
     authorized to prescribe rules that protect the purpose of 
     General Utilities repeal using presumptions and other 
     simplifying conventions.
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       Effective date.--The provision is effective for all years, 
     whether beginning before, on, or after the date of enactment 
     of the provision. No inference is intended that the results 
     following from this provision are not the same as the results 
     under present law.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The Conference agreement follows the House bill and the 
     Senate Amendment.
     29. Reform of tax treatment of certain leasing arrangements 
         and limitation on deductions allocable to property used 
         by governments or other tax-exempt entities (secs. 647 
         through 649 of the bill, secs. 475 and 476 of the Senate 
         amendment, secs. 167 and 168 of the Code, and new sec. 
         470 of the Code)


                              Present Law

     Overview of depreciation
       A taxpayer is allowed to recover, through annual 
     depreciation deductions, the cost of certain property used in 
     a trade or business or for the production of income. The 
     amount of the depreciation deduction allowed with respect to 
     tangible property for a taxable year is determined under the 
     modified accelerated cost recovery system (``MACRS''). Under 
     MACRS, different types of property generally are assigned 
     applicable recovery periods and depreciation methods based on 
     such property's class life. The recovery periods applicable 
     to most tangible personal property (generally tangible 
     property other than residential rental property and 
     nonresidential real property) range from 3 to 25 years and 
     are significantly shorter than the property's class life, 
     which is intended to approximate the economic useful life of 
     the property. In addition, the depreciation methods generally 
     applicable to tangible personal property are the 200-percent 
     and 150-percent declining balance methods, switching to the 
     straight-line method for the taxable year in which the 
     depreciation deduction would be maximized.
     Characterization of leases for tax purposes
       In general, a taxpayer is treated as the tax owner and is 
     entitled to depreciate property leased to another party if 
     the taxpayer acquires and retains significant and genuine 
     attributes of a traditional owner of the property, including 
     the benefits and burdens of ownership. No single factor is 
     determinative of whether a lessor will be treated as the 
     owner of the property. Rather, the determination is based on 
     all the facts and circumstances surrounding the leasing 
     transaction.
       A sale-leaseback transaction is respected for Federal tax 
     purposes if ``there is a genuine multiple-party transaction 
     with economic substance which is compelled or encouraged by 
     business or regulatory realities, is imbued with tax-
     independent considerations, and is not shaped solely by tax-
     avoidance features that have meaningless labels attached.'' 
     \596\
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     \596\ Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 
     (1978).
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     Recovery period for tax-exempt use property
       Under present law, ``tax-exempt use property'' must be 
     depreciated on a straight-line basis over a recovery period 
     equal to the longer of the property's class life or 125 
     percent of the lease term.\597\ For purposes of this rule, 
     ``tax-exempt use property'' is tangible property that is 
     leased (other than under a short-term lease) to a tax-exempt 
     entity.\598\ For this purpose, the term ``tax-exempt entity'' 
     includes Federal, State and local governmental units, 
     charities, and, foreign entities or persons.\599\
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     \597\ Sec. 168(g)(3)(A). Under present law, section 
     168(g)(3)(C) states that the recovery period of ``qualified 
     technological equipment'' is five years.
     \598\ Sec. 168(h)(1).
     \599\ Sec. 168(h)(2).
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       In determining the length of the lease term for purposes of 
     the 125-percent calculation, several special rules apply. In 
     addition to the stated term of the lease, the lease term 
     includes options to renew the lease or other periods of time 
     during which the lessee could be obligated to make rent 
     payments or assume a risk of loss related to the leased 
     property.
       Tax-exempt use property does not include property that is 
     used by a taxpayer to provide a service to a tax-exempt 
     entity. So long as the relationship between the parties is a 
     bona fide service contract, the taxpayer will be allowed to 
     depreciate the property used in satisfying the contract under 
     normal MACRS rules, rather than the rules applicable to tax-
     exempt use property.\600\ In addition, property is not 
     treated as tax-exempt use property merely by reason of a 
     short-term lease. In general, a short-term lease means any 
     lease the term of which is less than three years and less 
     than the greater of one year or 30 percent of the property's 
     class life.\601\
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     \600\ Sec. 7701(e) provides that a service contract will not 
     be respected, and instead will be treated as a lease of 
     property, if such contract is properly treated as a lease 
     taking into account all relevant factors. The relevant 
     factors include, among others, the service recipient controls 
     the property, the service recipient is in physical possession 
     of the property, the service provider does not bear 
     significant risk of diminished receipts or increased costs if 
     there is nonperformance, the property is not used to 
     concurrently provide services to other entities, and the 
     contract price does not substantially exceed the rental value 
     of the property.
     \601\ Sec. 168(h)(1)(C).
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       Also, tax-exempt use property generally does not include 
     qualified technological equipment that meets the exception 
     for leases of high technology equipment to tax-exempt 
     entities with lease terms of five years or less.\602\ The 
     recovery period for qualified technological equipment that is 
     treated as tax-exempt use property, but is not subject to the 
     high technology equipment exception, is five years.\603\
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     \602\ Sec. 168(h)(3). However, the exception does not apply 
     if part or all of the qualified technological equipment is 
     financed by a tax-exempt obligation, is sold by the tax-
     exempt entity (or related party) and leased back to the tax-
     exempt entity (or related party), or the tax-exempt entity is 
     the United States or any agency or instrumentality of the 
     United States.
     \603\ Sec. 168(g)(3)(C).
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       The term ``qualified technological equipment'' is defined 
     as computers and related peripheral equipment, high 
     technology telephone station equipment installed on a 
     customer's premises, and high technology medical 
     equipment.\604\ In addition, tax-exempt use property does not 
     include computer software because it is intangible property.
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     \604\ Sec. 168(i)(2).
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                               House Bill

     Overview
       The House bill modifies the recovery period of certain 
     property leased to a tax-exempt entity, alters the definition 
     of lease term for all property leased to a tax-exempt entity, 
     expands the short-term lease exception for qualified 
     technological equipment, and establishes rules to limit 
     deductions associated with leases to tax-exempt entities if 
     the leases do not satisfy specified criteria.

[[Page H8585]]

     Modify the recovery period of certain property leased to a 
         tax-exempt entity
       The House bill modifies the recovery period for qualified 
     technological equipment and computer software leased to a 
     tax-exempt entity \605\ to be the longer of the property's 
     assigned class life (or assigned useful life in the case of 
     computer software) or 125 percent of the lease term. The 
     House bill does not apply to short-term leases, as defined 
     under present law with a modification described below for 
     short-term leases of qualified technological equipment.
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     \605\ The House bill defines a tax-exempt entity as under 
     present law. Thus, it includes Federal, State, local, and 
     foreign governmental units, charities, foreign entities or 
     persons.
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     Modify definition of lease term
       In determining the length of the lease term for purposes of 
     the 125-percent calculation, the House bill provides that the 
     lease term includes all service contracts (whether or not 
     treated as a lease under section 7701(e)) and other similar 
     arrangements that follow a lease of property to a tax-exempt 
     entity and that are part of the same transaction (or series 
     of transactions) as the lease.\606\
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     \606\ A service contract involving property that previously 
     was leased to the tax-exempt entity is not part of the same 
     transaction as the preceding leasing arrangement (and, thus, 
     is not included in the lease term of such arrangement) if the 
     service contract was not included in the terms and 
     conditions, or contemplated at the inception, of the 
     preceding leasing arrangement.
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       Under the House bill, service contracts and other similar 
     arrangements include arrangements by which services are 
     provided using the property in exchange for fees that provide 
     a source of repayment of the capital investment in the 
     property.\607\
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     \607\ For purposes of the House bill, a service contract does 
     not include an arrangement for the provision of services if 
     the leased property or substantially similar property is not 
     utilized to provide such services. For example, if at the 
     conclusion of a lease term, a tax-exempt lessee purchases 
     property from the taxpayer and enters into an agreement 
     pursuant to which the taxpayer maintains the property, the 
     maintenance agreement will not be included in the lease term 
     for purposes of the 125-percent computation.
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       This requirement applies to all leases of property to a 
     tax-exempt entity.
     Expand short-term lease exception for qualified technological 
         equipment
       For purposes of determining whether a lease of qualified 
     technological equipment to a tax-exempt entity satisfies the 
     present-law 5-year short-term lease exception for leases of 
     qualified technological equipment, the House bill provides 
     that the term of the lease does not include an option or 
     options of the lessee to renew or extend the lease, provided 
     the rents under the renewal or extension are based upon fair 
     market value determined at the time of the renewal or 
     extension. The aggregate period of such renewals or 
     extensions not included in the lease term under this 
     provision may not exceed 24 months. In addition, this 
     provision does not apply to any period following the failure 
     of a tax-exempt lessee to exercise a purchase option if the 
     result of such failure is that the lease renews automatically 
     at fair market value rents.
     Limit deductions for certain leases of property to tax-exempt 
         parties
       The House bill also provides that if a taxpayer leases 
     property to a tax-exempt entity, the taxpayer may not claim 
     deductions for a taxable year from the lease transaction in 
     excess of the taxpayer's gross income from the lease for that 
     taxable year. This provision does not apply to certain 
     transactions involving property with respect to which the 
     low-income housing credit or the rehabilitation credit is 
     allowable.
       This provision applies to deductions or losses related to a 
     lease to a tax-exempt entity and the leased property.\608\ 
     Any disallowed deductions are carried forward and treated as 
     deductions related to the lease in the following taxable year 
     subject to the same limitations. Under rules similar to those 
     applicable to passive activity losses (including the 
     treatment of dispositions of property in which less than all 
     of the gain or loss from the disposition is recognized),\609\ 
     a taxpayer generally is permitted to deduct previously 
     disallowed deductions and losses when the taxpayer completely 
     disposes of its interest in the property.
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     \608\ Deductions related to a lease of tax-exempt use 
     property include any depreciation or amortization expense, 
     maintenance expense, taxes or the cost of acquiring an 
     interest in, or lease of, property. In addition, this 
     provision applies to interest that is properly allocable to 
     tax-exempt use property, including interest on any borrowing 
     by a related person, the proceeds of which were used to 
     acquire an interest in the property, whether or not the 
     borrowing is secured by the leased property or any other 
     property.
     \609\ See Sec. 469(g).
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       A lease of property to a tax-exempt party is not subject to 
     the deduction limitations of this provision if the lease 
     satisfies all of the following requirements: \610\
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     \610\ Even if a transaction satisfies each of the following 
     requirements, the taxpayer will be treated as the owner of 
     the leased property only if the taxpayer acquires and retains 
     significant and genuine attributes of an owner of the 
     property under the present-law tax rules, including the 
     benefits and burdens of ownership.
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       (1) Tax-exempt lessee does not monetize its lease 
     obligations
       In general, the tax-exempt lessee may not monetize its 
     lease obligations (including any purchase option) in an 
     amount that exceeds 20 percent of the taxpayer's adjusted 
     basis \611\ in the leased property at the time the lease is 
     entered into.\612\ Specifically, a lease does not satisfy 
     this requirement if the tax-exempt lessee monetizes such 
     excess amount pursuant to an arrangement, set-aside, or 
     expected set-aside, that is to or for the benefit of the 
     taxpayer or any lender, or is to or for the benefit of the 
     tax-exempt lessee, in order to satisfy the lessee's 
     obligations or options under the lease. This determination 
     shall be made at all times during the lease term and shall 
     include the amount of any interest or other income or gain 
     earned on any amount set aside or subject to an arrangement 
     described in this provision. For purposes of determining 
     whether amounts have been set aside or are expected to be set 
     aside, amounts are treated as set aside or expected to be set 
     aside only if a reasonable person would conclude that the 
     facts and circumstances indicate that such amounts are set 
     aside or expected to be set aside.\613\
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     \611\ For purposes of this requirement, the adjusted basis of 
     property acquired by the taxpayer in a like-kind exchange or 
     involuntary conversion to which section 1031 or section 1033 
     applies is equal to the lesser of (1) the fair market value 
     of the property as of the beginning of the lease term, or (2) 
     the amount that would be the taxpayer's adjusted basis if 
     section 1031 or section 1033 did not apply to such 
     acquisition.
     \612\ Arrangements to monetize lease obligations include 
     defeasance arrangements, loans by the tax-exempt entity (or 
     an affiliate) to the taxpayer (or an affiliate) or any 
     lender, deposit agreements, letters of credit collateralized 
     with cash or cash equivalents, payment undertaking 
     agreements, prepaid rent (within the meaning of the 
     regulations under section 467), sinking fund arrangements, 
     guaranteed investment contracts, financial guaranty 
     insurance, or any similar arrangements.
     \613\ It is anticipated under the House bill that the 
     customary and budgeted funding by tax-exempt entities of 
     current obligations under a lease through unrestricted 
     accounts or funds for general working capital needs will not 
     be considered arrangements, set-asides, or expected set-
     asides under this requirement.
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       The Secretary may provide by regulations that this 
     requirement is satisfied, even if a tax-exempt lessee 
     monetizes its lease obligations or options in an amount that 
     exceeds 20 percent of the taxpayer's adjusted basis in the 
     leased property, in cases in which the creditworthiness of 
     the tax-exempt lessee would not otherwise satisfy the 
     taxpayer's customary underwriting standards. Such credit 
     support would not be permitted to exceed 50 percent of the 
     taxpayer's adjusted basis in the property. In addition, if 
     the lease provides the tax-exempt lessee an option to 
     purchase the property for a fixed purchase price (or for 
     other than the fair market value of the property determined 
     at the time of exercise of the option), such credit support 
     at the time that such option may be exercised would not be 
     permitted to exceed 50 percent of the purchase option price.
       Certain lease arrangements that involve circular cash flows 
     or insulation of the taxpayer's equity investment from the 
     risk of loss fail this requirement without regard to the 
     amount in which the tax-exempt lessee monetizes its lease 
     obligations or options. Thus, a lease does not satisfy this 
     requirement if the tax-exempt lessee enters into an 
     arrangement to monetize in any amount its lease obligations 
     or options if such arrangement involves (1) a loan (other 
     than an amount treated as a loan under section 467 with 
     respect to a section 467 rental agreement) from the tax-
     exempt lessee to the taxpayer or a lender, (2) a deposit that 
     is received, a letter of credit that is issued, or a payment 
     undertaking agreement that is entered into by a lender 
     otherwise involved in the transaction, or (3) in the case of 
     a transaction that involves a lender, any credit support made 
     available to the taxpayer in which any such lender does not 
     have a claim that is senior to the taxpayer.
       (2) Taxpayer makes and maintains a substantial equity 
     investment in the leased property
       The taxpayer must make and maintain a substantial equity 
     investment in the leased property. For this purpose, a 
     taxpayer generally does not make or maintain a substantial 
     equity investment unless (1) at the time the lease is entered 
     into, the taxpayer initially makes an unconditional at-risk 
     equity investment in the property of at least 20 percent of 
     the taxpayer's adjusted basis \614\ in the leased property at 
     that time,\615\ (2) the taxpayer maintains such equity 
     investment throughout the lease term, and (3) at all times 
     during the lease term, the fair market value of the property 
     at the end of the lease term is reasonably expected to be 
     equal to at least 20 percent of such basis.\616\ For this 
     purpose, the fair market value of the property at the end of 
     the lease term is reduced to the extent that a person other 
     than the taxpayer bears a risk of loss in the value of the 
     property.
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     \614\ For purposes of this requirement, the adjusted basis of 
     property acquired by the taxpayer in a like-kind exchange or 
     involuntary conversion to which section 1031 or section 1033 
     applies is equal to the lesser of (1) the fair market value 
     of the property as of the beginning of the lease term, or (2) 
     the amount that would be the taxpayer's adjusted basis if 
     section 1031 or section 1033 did not apply to such 
     acquisition.
     \615\ The taxpayer's at-risk equity investment shall include 
     only consideration paid, and personal liability incurred, by 
     the taxpayer to acquire the property. Cf. Rev. Proc. 2001-28, 
     2001-2 C.B. 1156.
     \616\ Cf. Rev. Proc. 2001-28, sec. 4.01(2), 2001-1 C.B. 1156. 
     The fair market value of the property must be determined 
     without regard to inflation or deflation during the lease 
     term and after subtracting the cost of removing the property.
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       This requirement does not apply to leases with lease terms 
     of 5 years or less.
       (3) Tax-exempt lessee does not bear more than a minimal 
     risk of loss

[[Page H8586]]

       The tax-exempt lessee generally may not assume or retain 
     more than a minimal risk of loss, other than the obligation 
     to pay rent and insurance premiums, to maintain the property, 
     or other similar conventional obligations of a net 
     lease.\617\ For this purpose, a tax-exempt lessee assumes or 
     retains more than a minimal risk of loss if, as a result of 
     obligations assumed or retained by, on behalf of, or pursuant 
     to an agreement with the tax-exempt lessee, the taxpayer is 
     protected from either (1) any portion of the loss that would 
     occur if the fair market value of the leased property were 25 
     percent less than the leased property's reasonably expected 
     fair market value at the time the lease is terminated, or (2) 
     an aggregate loss that is greater than 50 percent of the loss 
     that would occur if the fair market value of the leased 
     property were zero at lease termination.\618\ In addition, 
     the Secretary may provide by regulations that this 
     requirement is not satisfied where the tax-exempt lessee 
     otherwise retains or assumes more than a minimal risk of 
     loss. Such regulations shall be prospective only.
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     \617\ Examples of arrangements by which a tax-exempt lessee 
     might assume or retain a risk of loss include put options, 
     residual value guarantees, residual value insurance, and 
     service contracts. However, leases do not fail to satisfy 
     this requirement solely by reason of lease provisions that 
     require the tax-exempt lessee to pay a contractually 
     stipulated loss value to the taxpayer in the event of an 
     early termination due to a casualty loss, a material default 
     by the tax-exempt lessee (excluding the failure by the tax-
     exempt lessee to enter into an arrangement described above), 
     or other similar extraordinary events that are not reasonably 
     expected to occur at lease inception.
     \618\ For purposes of this requirement, residual value 
     protection provided to the taxpayer by a manufacturer or 
     dealer of the leased property is not treated as borne by the 
     tax-exempt lessee if the manufacturer or dealer provides such 
     residual value protection to customers in the ordinary course 
     of its business.
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       This requirement does not apply to leases with lease terms 
     of 5 years or less.
       Coordination with like-kind exchange and involuntary 
           conversion rules
       Under this provision, neither the like-kind exchange rules 
     (sec. 1031) nor the involuntary conversion rules (sec. 1033) 
     apply if either (1) the exchanged or converted property is 
     tax-exempt use property subject to a lease that was entered 
     into prior to the effective date of this provision and the 
     lease would not have satisfied the requirements of this 
     provision had such requirements been in effect when the lease 
     was entered into, or (2) the replacement property is tax-
     exempt use property subject to a lease that does not meet the 
     requirements of this provision.
       Other rules
       This provision continues to apply throughout the lease term 
     to property that initially was tax-exempt use property, even 
     if the property ceases to be tax-exempt use property during 
     the lease term.\619\ In addition, this provision is applied 
     before the application of the passive activity loss rules 
     under section 469.
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     \619\ Conversely, however, a lease of property that is not 
     tax-exempt use property does not become subject to this 
     provision solely by reason of requisition or seizure by the 
     Federal government in national emergency circumstances.
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       This provision does not alter the treatment of any 
     Qualified Motor Vehicle Operating Agreement within the 
     meaning of section 7701(h). In the case of any such 
     agreement, the second and third requirements provided by this 
     provision (relating to taxpayer equity investment and tax-
     exempt lessee risk of loss, respectively) shall be applied 
     without regard to any terminal rental adjustment clause.
     Effective date
       The House bill provision generally is effective for leases 
     entered into after March 12, 2004.\620\ However, the House 
     bill provision does not apply to property located in the 
     United States that is subject to a lease with respect to 
     which a formal application (1) was submitted for approval to 
     the Federal Transit Administration (an agency of the 
     Department of Transportation) after June 30, 2003, and before 
     March 13, 2004, (2) is approved by the Federal Transit 
     Administration before January 1, 2005, and (3) includes a 
     description and the fair market value of such property.
---------------------------------------------------------------------------
     \620\ If a lease entered into on or before March 12, 2004, is 
     transferred in a transaction that does not materially alter 
     the terms of such lease, the bill shall not apply to the 
     lease as a result of such transfer.
---------------------------------------------------------------------------
       The House bill provisions relating to coordination with the 
     like-kind exchange and involuntary conversion rules are 
     effective with respect to property that is exchanged or 
     converted after the date of enactment.
       No inference is intended regarding the appropriate present-
     law tax treatment of transactions entered into prior to the 
     effective date of the House bill provision. In addition, it 
     is intended that the House bill provision shall not be 
     construed as altering or supplanting the present-law tax 
     rules providing that a taxpayer is treated as the owner of 
     leased property only if the taxpayer acquires and retains 
     significant and genuine attributes of an owner of the 
     property, including the benefits and burdens of ownership. 
     The House bill provision also is not intended to affect the 
     scope of any other present-law tax rules or doctrines 
     applicable to purported leasing transactions.


                            Senate Amendment

     Overview
       The Senate amendment is similar to the House bill in that 
     it modifies the recovery period of certain property leased to 
     a tax-exempt entity, alters the definition of lease term for 
     all property leased to a tax-exempt entity, and establishes 
     rules to limit deductions associated with leases to tax-
     exempt entities if the leases do not satisfy specified 
     criteria.
     Modify the recovery period of certain property leased to a 
         tax-exempt entity
       The Senate amendment provision that modifies the recovery 
     period for qualified technological equipment and computer 
     software leased to a tax-exempt entity is the same as the 
     House bill provision.
     Modify definition of lease term
       The Senate amendment provision that modifies the definition 
     of a lease term is the same as the House bill provision.
     Expand short-term lease exception for qualified technological 
         equipment
       The Senate amendment does not include the House bill 
     provision that excludes certain renewals and extensions of up 
     to 24 months from the determination of whether a lease of 
     qualified technological equipment to a tax-exempt entity 
     satisfies the present-law 5-year short-term lease exception 
     for leases of qualified technological equipment.
     Limit deductions for certain leases of property to tax-exempt 
         parties
       The Senate amendment is similar to the House bill in that 
     it limits a taxpayer's deductions for a taxable year from a 
     lease transaction with a tax-exempt entity to the taxpayer's 
     gross income from the lease for that taxable year. However, 
     the Senate amendment does not exclude transactions involving 
     property with respect to which the rehabilitation credit is 
     allowable.
       Like the House bill, the Senate amendment provides that a 
     lease of property to a tax-exempt party is not subject to the 
     deduction limitations of this provision if the lease 
     satisfies a series of requirements similar to that provided 
     in the House bill, with the following modifications:
       (1) Leased property is not financed with tax-exempt bonds 
     or Federal funds
       The Senate amendment provides that the leased property must 
     not have been not directly or indirectly financed with tax-
     exempt bonds that are outstanding when the lease is entered 
     into, or with Federal funds. This requirement is not included 
     in the House bill.
       For example, a lease of rolling stock to a municipality 
     would be subject to the Senate amendment if the proceeds of 
     the municipality's general obligation bond were used to 
     finance the acquisition of the rolling stock (in whole or 
     part) and the bond is outstanding when the lease is entered 
     into.
       The Senate amendment permits the Secretary to provide a de 
     minimis exception from this requirement.
       (2) Tax-exempt lessee does not monetize its lease 
     obligations
       The Senate amendment is similar to the House bill in that 
     it provides that the tax-exempt lessee may not monetize its 
     lease obligations in an amount that exceeds 20 percent of the 
     taxpayer's adjusted basis in the leased property at the time 
     the lease is entered into. However, the Senate amendment also 
     permits the Secretary to identify arrangements (in addition 
     to those specified in the provision) to which the requirement 
     applies.
       (3) Taxpayer makes and maintains a substantial equity 
     investment in the leased property
       The Senate amendment is similar to the House bill in that 
     it requires the taxpayer to make and maintain a substantial 
     equity investment in the leased property. However, the Senate 
     amendment does not generally exclude from the application of 
     this requirement leases with lease terms of 5 years or less. 
     Instead, the Senate amendment provides that, with respect to 
     short-term leases as defined under present law, the taxpayer 
     is required to make a substantial equity investment, but is 
     not required to maintain a substantial equity investment, and 
     the leased property is not required to be reasonably expected 
     to equal 20 percent of the taxpayer's adjusted basis at the 
     time the lease is entered into.
       (4) Tax-exempt lessee does not bear more than a minimal 
     risk of loss
       The Senate amendment is similar to the House bill in that 
     it provides that the tax-exempt lessee generally may not 
     assume or retain more than a minimal risk of loss with 
     respect to the lease. However, the Senate amendment does not 
     exclude from the application of this requirement leases with 
     lease terms of 5 years or less.
       (5) Lease of certain property does not include a fixed-
     price purchase option of the tax-exempt lessee
       The Senate amendment provides that the tax-exempt lessee 
     may not have an option to purchase the leased property for 
     any stated purchase price other than the fair market value of 
     the property (as determined at the time of exercise of the 
     option). This requirement does not apply to property with a 
     class life (as defined in section 168(i)(1)) of seven years 
     or less. This requirement is not included in the House bill.
       (6) Lease meets any other requirement prescribed in 
     regulations
       The Senate amendment requires the lease to meet any other 
     requirements that the Secretary prescribes by regulations. 
     This requirement is not included in the House bill.
       Coordination with like-kind exchange and involuntary 
           conversion rules
       The Senate amendment does not include the House bill 
     provisions that coordinate the

[[Page H8587]]

     like-kind exchange and involuntary conversion rules with the 
     deduction limitation provision.
     Effective date
       The Senate amendment provision generally is effective for 
     leases entered into after November 18, 2003. However, with 
     respect to tax-exempt use property that is leased to a 
     foreign tax-exempt entity or person in a transaction entered 
     into on or before November 18, 2003, the Senate amendment 
     provision is effective for taxable years beginning after 
     January 31, 2004.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modifications.
     Definition of tax-exempt entity
       The conference agreement expands the present-law definition 
     of tax-exempt entity for this purpose to include certain 
     Indian tribal governments in addition to Federal, State, 
     local, and foreign governmental units, charities, foreign 
     entities or persons.
     Modify the recovery period of certain property leased to a 
         tax-exempt entity
       The conference agreement also modifies the recovery period 
     for certain intangibles leased to a tax-exempt entity to be 
     the no less than 125 percent of the lease term.\621\ The 
     conference agreement modification does not apply to short-
     term leases, as defined under present law with a modification 
     described below for short-term leases of qualified 
     technological equipment.
---------------------------------------------------------------------------
     \621\ In the case of computer software and intangible assets, 
     this rule is applied by substituting useful life and 
     amortization period, respectively, for class life.
---------------------------------------------------------------------------
     Limit deductions for leases of property to tax-exempt parties
       The conference agreement provides an additional requirement 
     that must be satisfied to avoid the deduction limitations for 
     certain leases of property to tax-exempt parties. This 
     requirement provides that the tax-exempt lessee may not have 
     an option to purchase the leased property for any stated 
     purchase price other than the fair market value of the 
     property (as determined at the time of exercise of the 
     option). This requirement does not apply to (1) property with 
     a class life (as defined in section 168(i)(1)) of seven years 
     or less, or (2) any fixed-wing aircraft or vessels (i.e., 
     ships).
     Effective date
       The conference agreement modifies the Federal Transit 
     Administration approval deadline to January 1, 2006.
       In addition, the conference agreement provides that the 
     provisions relating to intangible assets and Indian tribal 
     governments are effective for leases entered into after 
     October 3, 2004.
     30. Clarification of the economic substance doctrine (sec. 
         401 of the Senate amendment and sec. 7701 of the Code)


                              Present Law

     In general
       The Code provides specific rules regarding the computation 
     of taxable income, including the amount, timing, source, and 
     character of items of income, gain, loss and deduction. These 
     rules are designed to provide for the computation of taxable 
     income in a manner that provides for a degree of specificity 
     to both taxpayers and the government. Taxpayers generally may 
     plan their transactions in reliance on these rules to 
     determine the federal income tax consequences arising from 
     the transactions.
       In addition to the statutory provisions, courts have 
     developed several doctrines that can be applied to deny the 
     tax benefits of tax motivated transactions, notwithstanding 
     that the transaction may satisfy the literal requirements of 
     a specific tax provision. The common-law doctrines are not 
     entirely distinguishable, and their application to a given 
     set of facts is often blurred by the courts and the IRS. 
     Although these doctrines serve an important role in the 
     administration of the tax system, invocation of these 
     doctrines can be seen as at odds with an objective, ``rule-
     based'' system of taxation. Nonetheless, courts have applied 
     the doctrines to deny tax benefits arising from certain 
     transactions.\622\
---------------------------------------------------------------------------
     \622\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d 
     231 (3d Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. 
     denied 526 U.S. 1017 (1999).
---------------------------------------------------------------------------
       A common-law doctrine applied with increasing frequency is 
     the ``economic substance'' doctrine. In general, this 
     doctrine denies tax benefits arising from transactions that 
     do not result in a meaningful change to the taxpayer's 
     economic position other than a purported reduction in federal 
     income tax.\623\
---------------------------------------------------------------------------
     \623\ Closely related doctrines also applied by the courts 
     (sometimes interchangeable with the economic substance 
     doctrine) include the ``sham transaction doctrine'' and the 
     ``business purpose doctrine''. See, e.g., Knetsch v. United 
     States, 364 U.S. 361 (1960) (denying interest deductions on a 
     "sham transaction" whose only purpose was to create the 
     deductions).
---------------------------------------------------------------------------
       Economic substance doctrine
       Courts generally deny claimed tax benefits if the 
     transaction that gives rise to those benefits lacks economic 
     substance independent of tax considerations--notwithstanding 
     that the purported activity actually occurred. The tax court 
     has described the doctrine as follows: ``The tax law . . . 
     requires that the intended transactions have economic 
     substance separate and distinct from economic benefit 
     achieved solely by tax reduction. The doctrine of economic 
     substance becomes applicable, and a judicial remedy is 
     warranted, where a taxpayer seeks to claim tax benefits, 
     unintended by Congress, by means of transactions that serve 
     no economic purpose other than tax savings.'' \624\
---------------------------------------------------------------------------
     \624\ ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
---------------------------------------------------------------------------
       Business purpose doctrine
       Another common law doctrine that overlays and is often 
     considered together with (if not part and parcel of) the 
     economic substance doctrine is the business purpose doctrine. 
     The business purpose test is a subjective inquiry into the 
     motives of the taxpayer--that is, whether the taxpayer 
     intended the transaction to serve some useful non-tax 
     purpose. In making this determination, some courts have 
     bifurcated a transaction in which independent activities 
     with non-tax objectives have been combined with an 
     unrelated item having only tax-avoidance objectives in 
     order to disallow the tax benefits of the overall 
     transaction.\625\
---------------------------------------------------------------------------
     \625\ ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
---------------------------------------------------------------------------
     Application by the courts
       Elements of the doctrine
       There is a lack of uniformity regarding the proper 
     application of the economic substance doctrine.\626\ Some 
     courts apply a conjunctive test that requires a taxpayer to 
     establish the presence of both economic substance (i.e., the 
     objective component) and business purpose (i.e., the 
     subjective component) in order for the transaction to survive 
     judicial scrutiny.\627\ A narrower approach used by some 
     courts is to conclude that either a business purpose or 
     economic substance is sufficient to respect the 
     transaction).\628\ A third approach regards economic 
     substance and business purpose as ``simply more precise 
     factors to consider'' in determining whether a transaction 
     has any practical economic effects other than the creation of 
     tax benefits.\629\
---------------------------------------------------------------------------
     \626\ ``The casebooks are glutted with [economic substance] 
     tests. Many such tests proliferate because they give the 
     comforting illusion of consistency and precision. They often 
     obscure rather than clarify.'' Collins v. Commissioner, 857 
     F.2d 1383, 1386 (9th Cir. 1988).
     \627\ See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 
     (6th Cir. 1993) (``The threshold question is whether the 
     transaction has economic substance. If the answer is yes, the 
     question becomes whether the taxpayer was motivated by profit 
     to participate in the transaction.'')
     \628\ See, e.g., Rice's Toyota World v. Commissioner, 752 
     F.2d 89, 91-92 (4th Cir. 1985) (``To treat a transaction as a 
     sham, the court must find that the taxpayer was motivated by 
     no business purposes other than obtaining tax benefits in 
     entering the transaction, and, second, that the transaction 
     has no economic substance because no reasonable possibility 
     of a profit exists.''); IES Industries v. United States, 253 
     F.3d 350, 358 (8th Cir. 2001) (``In determining whether a 
     transaction is a sham for tax purposes [under the Eighth 
     Circuit test], a transaction will be characterized as a sham 
     if it is not motivated by any economic purpose out of tax 
     considerations (the business purpose test), and if it is 
     without economic substance because no real potential for 
     profit exists'' (the economic substance test).'') As noted 
     earlier, the economic substance doctrine and the sham 
     transaction doctrine are similar and sometimes are applied 
     interchangeably. For a more detailed discussion of the sham 
     transaction doctrine, see, e.g., Joint Committee on Taxation, 
     Study of Present-Law Penalty and Interest Provisions as 
     Required by Section 3801 of the Internal Revenue Service 
     Restructuring and Reform Act of 1998 (including Provisions 
     Relating to Corporate Tax Shelters) (JCS-3-99) at 182.
     \629\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 
     247; James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 
     1995); Sacks v. Commissioner, 69 F.3d 982, 985 (9th Cir. 
     1995) (``Instead, the consideration of business purpose and 
     economic substance are simply more precise factors to 
     consider. . . . We have repeatedly and carefully noted that 
     this formulation cannot be used as a `rigid two-step 
     analysis'.'').
---------------------------------------------------------------------------
       Profit potential
       There also is a lack of uniformity regarding the necessity 
     and level of profit potential necessary to establish economic 
     substance. Since the time of Gregory v. Helvering,\630\ 
     several courts have denied tax benefits on the grounds that 
     the subject transactions lacked profit potential.\631\ In 
     addition, some courts have applied the economic substance 
     doctrine to disallow tax benefits in transactions in which a 
     taxpayer was exposed to risk and the transaction had a profit 
     potential, but the court concluded that the economic risks 
     and profit potential were insignificant when compared to the 
     tax benefits.\632\ Under this analysis, the taxpayer's profit 
     potential must be more than nominal. Conversely, other courts 
     view the application of the economic substance doctrine as 
     requiring an objective determination of whether a 
     ``reasonable possibility of profit'' from the transaction 
     existed apart from the tax benefits.\633\

[[Page H8588]]

     In these cases, in assessing whether a reasonable possibility 
     of profit exists, it is sufficient if there is a nominal 
     amount of pre-tax profit as measured against expected net tax 
     benefits.
---------------------------------------------------------------------------
     \630\ 293 U.S. 465 (1935).
     \631\ See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. 
     Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an 
     unprofitable, leveraged acquisition of Treasury bills, and 
     accompanying prepaid interest deduction, lacked economic 
     substance); Ginsburg v. Commissioner, 35 T.C.M. (CCH) 860 
     (1976) (holding that a leveraged cattle-breeding program 
     lacked economic substance).
     \632\ See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-
     40 (disallowing deduction even though taxpayer had a 
     possibility of small gain or loss by owning Treasury bills); 
     Sheldon v. Commissioner, 94 T.C. 738, 768 (1990) (stating, 
     ``potential for gain . . . is infinitesimally nominal and 
     vastly insignificant when considered in comparison with the 
     claimed deductions'').
     \633\ See, e.g., Rice's Toyota World v. Commissioner, 752 
     F.2d at 94 (the economic substance inquiry requires an 
     objective determination of whether a reasonable possibility 
     of profit from the transaction existed apart from tax 
     benefits); Compaq Computer Corp. v. Commissioner, 277 F.3d at 
     781 (applied the same test, citing Rice's Toyota World); IES 
     Industries v. United States, 253 F.3d at 354 (the application 
     of the objective economic substance test involves determining 
     whether there was a ``reasonable possibility of profit . . . 
     apart from tax benefits.'').
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment clarifies and enhances the application 
     of the economic substance doctrine. The Senate amendment 
     provides that, in a case in which a court determines that 
     the economic substance doctrine is relevant to a 
     transaction (or a series of transactions), such 
     transaction (or series of transactions) has economic 
     substance (and thus satisfies the economic substance 
     doctrine) only if the taxpayer establishes that (1) the 
     transaction changes in a meaningful way (apart from 
     Federal income tax consequences) the taxpayer's economic 
     position, and (2) the taxpayer has a substantial non-tax 
     purpose for entering into such transaction and the 
     transaction is a reasonable means of accomplishing such 
     purpose.\634\
---------------------------------------------------------------------------
     \634\ If the tax benefits are clearly contemplated and 
     expected by the language and purpose of the relevant 
     authority, it is not intended that such tax benefits be 
     disallowed if the only reason for such disallowance is that 
     the transaction fails the economic substance doctrine as 
     defined in this provision.
---------------------------------------------------------------------------
       The Senate amendment does not change current law standards 
     used by courts in determining when to utilize an economic 
     substance analysis.\635\ Also, the Senate amendment does not 
     alter the court's ability to aggregate, disaggregate or 
     otherwise recharacterize a transaction when applying the 
     doctrine.\636\ The Senate amendment provides a uniform 
     definition of economic substance, but does not alter the 
     flexibility of the courts in other respects.
---------------------------------------------------------------------------
     \635\ See, e.g., Treas. Reg. 1.269-2, stating that 
     characteristic of circumstances in which a deduction 
     otherwise allowed will be disallowed are those in which the 
     effect of the deduction, credit, or other allowance would be 
     to distort the liability of the particular taxpayer when the 
     essential nature of the transaction or situation is examined 
     in the light of the basic purpose or plan which the 
     deduction, credit, or other allowance was designed by the 
     Congress to effectuate.
     \636\ See, e.g., Minnesota Tea Co. v. Helvering, 302 U.S. 
     609, 613 (1938) (``A given result at the end of a straight 
     path is not made a different result because reached by 
     following a devious path.'').
---------------------------------------------------------------------------
     Conjunctive analysis
       The Senate amendment clarifies that the economic substance 
     doctrine involves a conjunctive analysis--there must be an 
     objective inquiry regarding the effects of the transaction on 
     the taxpayer's economic position, as well as a subjective 
     inquiry regarding the taxpayer's motives for engaging in the 
     transaction. Under the Senate amendment, a transaction must 
     satisfy both tests--i.e., it must change in a meaningful way 
     (apart from Federal income tax consequences) the taxpayer's 
     economic position, and the taxpayer must have a substantial 
     non-tax purpose for entering into such transaction (and the 
     transaction is a reasonable means of accomplishing such 
     purpose)--in order to satisfy the economic substance 
     doctrine. This clarification eliminates the disparity that 
     exists among the circuits regarding the application of the 
     doctrine, and modifies its application in those circuits in 
     which either a change in economic position or a non-tax 
     business purpose (without having both) is sufficient to 
     satisfy the economic substance doctrine.
     Non-tax business purpose
       The Senate amendment provides that a taxpayer's non-tax 
     purpose for entering into a transaction (the second prong in 
     the analysis) must be ``substantial,'' and that the 
     transaction must be ``a reasonable means'' of accomplishing 
     such purpose. Under this formulation, the non-tax purpose 
     for the transaction must bear a reasonable relationship to 
     the taxpayer's normal business operations or investment 
     activities.\637\
---------------------------------------------------------------------------
     \637\ See, e.g., Treas. reg. sec. 1.269-2(b) (stating that a 
     distortion of tax liability indicating the principal purpose 
     of tax evasion or avoidance might be evidenced by the fact 
     that ``the transaction was not undertaken for reasons germane 
     to the conduct of the business of the taxpayer''). Similarly, 
     in ACM Partnership v. Commissioner, 73 T.C.M. (CCH) 2189 
     (1997), the court stated: ``Key to [the determination of 
     whether a transaction has economic substance] is that the 
     transaction must be rationally related to a useful nontax 
     purpose that is plausible in light of the taxpayer's conduct 
     and useful in light of the taxpayer's economic situation and 
     intentions. Both the utility of the stated purpose and the 
     rationality of the means chosen to effectuate it must be 
     evaluated in accordance with commercial practices in the 
     relevant industry. A rational relationship between purpose 
     and means ordinarily will not be found unless there was a 
     reasonable expectation that the nontax benefits would be at 
     least commensurate with the transaction costs.'' [citations 
     omitted]
     See also Martin McMahon Jr., Economic Substance, Purposive 
     Activity, and Corporate Tax Shelters, 94 Tax Notes 1017, 1023 
     (Feb. 25, 2002) (advocates ``confining the most rigorous 
     application of business purpose, economic substance, and 
     purposive activity tests to transactions outside the ordinary 
     course of the taxpayer's business--those transactions that do 
     not appear to contribute to any business activity or 
     objective that the taxpayer may have had apart from tax 
     planning but are merely loss generators.''); Mark P. Gergen, 
     The Common Knowledge of Tax Abuse, 54 SMU L. Rev. 131, 140 
     (Winter 2001) (``The message is that you can pick up tax gold 
     if you find it in the street while going about your business, 
     but you cannot go hunting for it.'').
---------------------------------------------------------------------------
       In determining whether a taxpayer has a substantial non-tax 
     business purpose, an objective of achieving a favorable 
     accounting treatment for financial reporting purposes will 
     not be treated as having a substantial non-tax purpose.\638\ 
     Furthermore, a transaction that is expected to increase 
     financial accounting income as a result of generating tax 
     deductions or losses without a corresponding financial 
     accounting charge (i.e., a permanent book-tax 
     difference)\639\ should not be considered to have a 
     substantial non-tax purpose unless a substantial non-tax 
     purpose exists apart from the financial accounting 
     benefits.\640\
---------------------------------------------------------------------------
     \638\ However, if the tax benefits are clearly contemplated 
     and expected by the language and purpose of the relevant 
     authority, such tax benefits should not be disallowed solely 
     because the transaction results in a favorable accounting 
     treatment. An example is the repealed foreign sales 
     corporation rules.
     \639\ This includes tax deductions or losses that are 
     anticipated to be recognized in a period subsequent to the 
     period the financial accounting benefit is recognized. For 
     example, FAS 109 in some cases permits the recognition of 
     financial accounting benefits prior to the period in which 
     the tax benefits are recognized for income tax purposes.''
     \640\ Claiming that a financial accounting benefit 
     constitutes a substantial non-tax purpose fails to consider 
     the origin of the accounting benefit (i.e., reduction of 
     taxes) and significantly diminishes the purpose for having a 
     substantial non-tax purpose requirement. See, e.g., American 
     Electric Power, Inc. v. U.S., 136 F. Supp. 2d 762, 791-92 
     (S.D. Ohio, 2001) (``AEP's intended use of the cash flows 
     generated by the [corporate-owned life insurance] plan is 
     irrelevant to the subjective prong of the economic substance 
     analysis. If a legitimate business purpose for the use of the 
     tax savings 'were sufficient to breathe substance into a 
     transaction whose only purpose was to reduce taxes, [then] 
     every sham tax-shelter device might succeed,''' citing Winn-
     Dixie v. Commissioner, 113 T.C. 254, 287 (1999)).
---------------------------------------------------------------------------
       By requiring that a transaction be a ``reasonable means'' 
     of accomplishing its non-tax purpose, the Senate amendment 
     reiterates the present-law ability of the courts to bifurcate 
     a transaction in which independent activities with non-tax 
     objectives are combined with an unrelated item having only 
     tax-avoidance objectives in order to disallow the tax 
     benefits of the overall transaction.\641\
---------------------------------------------------------------------------
     \641\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 
     256 n.48.
---------------------------------------------------------------------------
     Profit potential
       Under the Senate amendment, a taxpayer may rely on factors 
     other than profit potential to demonstrate that a transaction 
     results in a meaningful change in the taxpayer's economic 
     position; the Senate amendment merely sets forth a minimum 
     threshold of profit potential if that test is relied on to 
     demonstrate a meaningful change in economic position. If a 
     taxpayer relies on a profit potential, however, the present 
     value of the reasonably expected pre-tax profit must be 
     substantial in relation to the present value of the expected 
     net tax benefits that would be allowed if the transaction 
     were respected.\642\ Moreover, the profit potential must 
     exceed a risk-free rate of return. In addition, in 
     determining pre-tax profit, fees and other transaction 
     expenses and foreign taxes are treated as expenses.
---------------------------------------------------------------------------
     \642\ Thus, a ``reasonable possibility of profit'' will not 
     be sufficient to establish that a transaction has economic 
     substance.
---------------------------------------------------------------------------
       In applying the profit potential test to a lessor of 
     tangible property, depreciation, applicable tax credits (such 
     as the rehabilitation tax credit and the low income housing 
     tax credit), and any other deduction as provided in guidance 
     by the Secretary are not taken into account in measuring tax 
     benefits.
     Transactions with tax-indifferent parties
       The Senate amendment also provides special rules for 
     transactions with tax-indifferent parties. For this purpose, 
     a tax-indifferent party means any person or entity not 
     subject to Federal income tax, or any person to whom an item 
     would have no substantial impact on its income tax liability. 
     Under these rules, the form of a financing transaction will 
     not be respected if the present value of the tax deductions 
     to be claimed is substantially in excess of the present 
     value of the anticipated economic returns to the lender. 
     Also, the form of a transaction with a tax-indifferent 
     party will not be respected if it results in an allocation 
     of income or gain to the tax-indifferent party in excess 
     of the tax-indifferent party's economic gain or income or 
     if the transaction results in the shifting of basis on 
     account of overstating the income or gain of the tax-
     indifferent party.
     Other rules
       The Secretary may prescribe regulations which provide (1) 
     exemptions from the application of the Senate amendment, and 
     (2) other rules as may be necessary or appropriate to carry 
     out the purposes of the Senate amendment.
       No inference is intended as to the proper application of 
     the economic substance doctrine under present law. In 
     addition, except with respect to the economic substance 
     doctrine, the Senate amendment shall not be construed as 
     altering or supplanting any other common law doctrine 
     (including the sham transaction doctrine), and the Senate 
     amendment shall be construed as being additive to any such 
     other doctrine.
     Effective date
       The Senate amendment provision applies to transactions 
     entered into after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.

[[Page H8589]]

     31. Penalty for understatements attributable to transactions 
         lacking economic substance, etc. (sec. 404 of the Senate 
         amendment and sec. 6662B of the Code)


                              present law

       An accuracy-related penalty applies to the portion of any 
     underpayment that is attributable to (1) negligence, (2) any 
     substantial understatement of income tax, (3) any substantial 
     valuation misstatement, (4) any substantial overstatement of 
     pension liabilities, or (5) any substantial estate or gift 
     tax valuation understatement. If the correct income tax 
     liability exceeds that reported by the taxpayer by the 
     greater of 10 percent of the correct tax or $5,000 ($10,000 
     in the case of corporations), then a substantial 
     understatement exists and a penalty may be imposed equal to 
     20 percent of the underpayment of tax attributable to the 
     understatement.\643\ The amount of any understatement is 
     reduced by any portion attributable to an item if (1) the 
     treatment of the item is supported by substantial authority, 
     or (2) facts relevant to the tax treatment of the item were 
     adequately disclosed and there was a reasonable basis for its 
     tax treatment.
---------------------------------------------------------------------------
     \643\ Sec. 6662.
---------------------------------------------------------------------------
       Special rules apply with respect to tax shelters.\644\ For 
     understatements by non-corporate taxpayers attributable to 
     tax shelters, the penalty may be avoided only if the taxpayer 
     establishes that, in addition to having substantial authority 
     for the position, the taxpayer reasonably believed that the 
     treatment claimed was more likely than not the proper 
     treatment of the item. This reduction in the penalty is 
     unavailable to corporate tax shelters.
---------------------------------------------------------------------------
     \644\ Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
       The penalty generally is abated (even with respect to tax 
     shelters) in cases in which the taxpayer can demonstrate that 
     there was ``reasonable cause'' for the underpayment and that 
     the taxpayer acted in good faith.\645\ The relevant 
     regulations provide that reasonable cause exists where the 
     taxpayer ``reasonably relies in good faith on an opinion 
     based on a professional tax advisor's analysis of the 
     pertinent facts and authorities [that] . . . unambiguously 
     concludes that there is a greater than 50-percent likelihood 
     that the tax treatment of the item will be upheld if 
     challenged'' by the IRS.\646\
---------------------------------------------------------------------------
     \645\ Sec. 6664(c).
     \646\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
     1.6664-4(c).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment imposes a penalty for an 
     understatement attributable to any transaction that lacks 
     economic substance (referred to in the statute as a ``non-
     economic substance transaction understatement'').\647\ The 
     penalty rate is 40 percent (reduced to 20 percent if the 
     taxpayer adequately discloses the relevant facts in 
     accordance with regulations prescribed under section 6011). 
     No exceptions (including the reasonable cause or rescission 
     rules) to the penalty would be available under the Senate 
     amendment (i.e., the penalty is a strict-liability penalty).
---------------------------------------------------------------------------
     \647\ Thus, unlike the new accuracy-related penalty under 
     section 6662A (which applies only to listed and reportable 
     avoidance transactions), the new penalty under this provision 
     applies to any transaction that lacks economic substance.
---------------------------------------------------------------------------
       A ``non-economic substance transaction'' means any 
     transaction if (1) the transaction lacks economic substance 
     (as defined in the earlier Senate amendment provision 
     regarding the economic substance doctrine),\648\ (2) the 
     transaction was not respected under the rules relating to 
     transactions with tax-indifferent parties (as described in 
     the earlier Senate amendment provision regarding the economic 
     substance doctrine),\649\ or (3) any similar rule of law. For 
     this purpose, a similar rule of law would include, for 
     example, an understatement attributable to a transaction that 
     is determined to be a sham transaction.
---------------------------------------------------------------------------
     \648\ The provision provides that a transaction has economic 
     substance only if: (1) the transaction changes in a 
     meaningful way (apart from Federal income tax effects) the 
     taxpayer's economic position, and (2) the transaction has a 
     substantial non-tax purpose for entering into such 
     transaction and is a reasonable means of accomplishing such 
     purpose.
     \649\ The provision provides that the form of a transaction 
     that involves a tax-indifferent party will not be respected 
     in certain circumstances.
---------------------------------------------------------------------------
       For purposes of the Senate amendment, the calculation of an 
     ``understatement'' is made in the same manner as in the 
     separate Senate amendment provision relating to accuracy-
     related penalties for listed and reportable avoidance 
     transactions (new sec. 6662A). Thus, the amount of the 
     understatement under the Senate amendment provision would be 
     determined as the sum of (1) the product of the highest 
     corporate or individual tax rate (as appropriate) and the 
     increase in taxable income resulting from the difference 
     between the taxpayer's treatment of the item and the proper 
     treatment of the item (without regard to other items on the 
     tax return),\650\ and (2) the amount of any decrease in the 
     aggregate amount of credits which results from a difference 
     between the taxpayer's treatment of an item and the proper 
     tax treatment of such item. In essence, the penalty will 
     apply to the amount of any understatement attributable solely 
     to a non-economic substance transaction.
---------------------------------------------------------------------------
     \650\ For this purpose, any reduction in the excess of 
     deductions allowed for the taxable year over gross income for 
     such year, and any reduction in the amount of capital losses 
     that would (without regard to section 1211) be allowed for 
     such year, would be treated as an increase in taxable income.
---------------------------------------------------------------------------
       Except as provided in regulations, the taxpayer's treatment 
     of an item will not take into account any amendment or 
     supplement to a return if the amendment or supplement is 
     filed after the earlier of the date the taxpayer is first 
     contacted regarding an examination of such return or such 
     other date as specified by the Secretary.
       A public entity that is required to pay a penalty under the 
     Senate amendment (regardless of whether the transaction was 
     disclosed) must disclose the imposition of the penalty in 
     reports to the SEC for such periods as the Secretary shall 
     specify. The disclosure to the SEC applies without regard to 
     whether the taxpayer determines the amount of the penalty to 
     be material to the reports in which the penalty must appear, 
     and any failure to disclose such penalty in the reports is 
     treated as a failure to disclose a listed transaction. A 
     taxpayer must disclose a penalty in reports to the SEC once 
     the taxpayer has exhausted its administrative and judicial 
     remedies with respect to the penalty (or if earlier, when 
     paid).
       Prior to this penalty being asserted in the first letter of 
     proposed deficiency that allows the taxpayer an opportunity 
     for administrative review in the IRS Office of Appeals (e.g., 
     a Revenue Agent Report), the IRS Chief Counsel or his 
     delegate at the IRS National Office must approve the 
     inclusion in writing. Once a penalty (regardless of whether 
     the transaction was disclosed) has been included in the 
     Revenue Agent Report, the penalty cannot be compromised for 
     purposes of a settlement without approval of the Commissioner 
     personally or the head of the Office of Tax Shelter Analysis. 
     Furthermore, the IRS is required to submit an annual report 
     to Congress summarizing the application of this penalty and 
     providing a description of each penalty compromised under 
     the Senate amendment and the reasons for the compromise.
       Any understatement to which a penalty is imposed under the 
     Senate amendment will not be subject to the accuracy-related 
     penalty under section 6662 or under new 6662A (accuracy-
     related penalties for listed and reportable avoidance 
     transactions). However, an understatement under the Senate 
     amendment would be taken into account for purposes of 
     determining whether any understatement (as defined in sec. 
     6662(d)(2)) is a substantial understatement as defined under 
     section 6662(d)(1). The penalty imposed under the Senate 
     amendment will not apply to any portion of an understatement 
     to which a fraud penalty is applied under section 6663.
       Effective date.--The Senate amendment provision applies to 
     transactions entered into after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     32. Understatement of taxpayer's liability by income tax 
         return preparer (sec. 411 of the Senate amendment)


                              Present Law

       An income tax return preparer who prepares a return with 
     respect to which there is an understatement of tax that is 
     due to an undisclosed position for which there was not a 
     realistic possibility of being sustained on its merits, or a 
     frivolous position, is liable for a penalty of $250, provided 
     the preparer knew or reasonably should have known of the 
     position. An income tax return preparer who prepares a return 
     and engages in specified willful or reckless conduct with 
     respect to preparing such a return is liable for a penalty of 
     $1,000.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment alters the standards of conduct that 
     must be met to avoid imposition of the first penalty by 
     replacing the realistic possibility standard with a 
     requirement that there be a reasonable belief that the tax 
     treatment of the position was more likely than not the proper 
     treatment. The Senate amendment also replaces the not 
     frivolous standard with the requirement that there be a 
     reasonable basis for the tax treatment of the position, 
     increases the present-law $250 penalty to $1,000, and 
     increases the present-law $1,000 penalty to $5,000.
       Effective date.--Documents prepared after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     33. Frivolous tax submissions (sec. 413 of the Senate 
         amendment and sec. 6702 of the Code)


                              Present Law

       The Code provides that an individual who files a frivolous 
     income tax return is subject to a penalty of $500 imposed by 
     the IRS (sec. 6702). The Code also permits the Tax Court 
     \651\ to impose a penalty of up to $25,000 if a taxpayer has 
     instituted or maintained proceedings primarily for delay or 
     if the taxpayer's position in the proceeding is frivolous or 
     groundless (sec. 6673(a)).
---------------------------------------------------------------------------
     \651\ Because in general the Tax Court is the only pre-
     payment forum available to taxpayers, it deals with most of 
     the frivolous, groundless, or dilatory arguments raised in 
     tax cases.
---------------------------------------------------------------------------


                               House Bill

       No provision.

[[Page H8590]]

                            Senate Amendment

       The provision modifies the IRS-imposed penalty by 
     increasing the amount of the penalty to up to $5,000 and by 
     applying it to all taxpayers and to all types of Federal 
     taxes.
       The provision also modifies present law with respect to 
     certain submissions that raise frivolous arguments or that 
     are intended to delay or impede tax administration. The 
     submissions to which this provision applies are requests for 
     a collection due process hearing, installment agreements, 
     offers-in-compromise, and taxpayer assistance orders. First, 
     the provision permits the IRS to dismiss such requests. 
     Second, the provision permits the IRS to impose a penalty of 
     up to $5,000 for such requests, unless the taxpayer withdraws 
     the request after being given an opportunity to do so.
       The provision requires the IRS to publish a list of 
     positions, arguments, requests, and submissions determined to 
     be frivolous for purposes of these provisions.
       Effective date.--Submissions made and issues raised after 
     the date on which the Secretary first prescribes the required 
     list of frivolous positions.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     34. Authorization of appropriations for tax law enforcement 
         (sec. 418 of the Senate amendment)


                              Present Law

       There is no explicit authorization of appropriations to the 
     IRS to be used to combat abusive tax avoidance transactions.


                               House Bill

       No provision.


                            Senate Amendment

       The provision includes an authorization of an additional 
     $300 million to the IRS to be used to combat abusive tax 
     avoidance transactions.
       Effective date.--Date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     35. Declaration by chief executive officer relating to 
         Federal annual corporate income tax return (sec. 422 of 
         the Senate amendment)


                              Present Law

       The Code requires \652\ that the income tax return of a 
     corporation must be signed by either the president, the vice-
     president, the treasurer, the assistant treasurer, the chief 
     accounting officer, or any other officer of the corporation 
     authorized by the corporation to sign the return.
---------------------------------------------------------------------------
     \652\ Sec. 6062.
---------------------------------------------------------------------------
       The Code also imposes \653\ a criminal penalty on any 
     person who willfully signs any tax return under penalties of 
     perjury that that person does not believe to be true and 
     correct with respect to every material matter at the time of 
     filing. If convicted, the person is guilty of a felony; the 
     Code imposes a fine of not more than $100,000 \654\ ($500,000 
     in the case of a corporation) or imprisonment of not more 
     than three years, or both, together with the costs of 
     prosecution.
---------------------------------------------------------------------------
     \653\ Sec. 7206.
     \654\Pursuant to 18 U.S.C. 3571, the maximum fine for an 
     individual convicted of a felony is $250,000.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision requires that a corporation's Federal income 
     tax return include a declaration signed under penalties of 
     perjury by the chief executive officer of the corporation 
     that the corporation has in place processes and procedures to 
     ensure that the return complies with the Internal Revenue 
     Code and that the CEO was provided reasonable assurance of 
     the accuracy of all material aspects of the return. This 
     declaration is part of the income tax return. The provision 
     is in addition to the requirement of present law as to the 
     signing of the income tax return itself. Because a CEO's 
     duties generally do not require a detailed or technical 
     understanding of the corporation's tax return, it is 
     anticipated that this declaration of the CEO will be more 
     limited in scope than the declaration of the officer required 
     to sign the return itself.
       The Secretary of the Treasury shall prescribe the matters 
     to which the declaration of the CEO applies. It is intended 
     that the declaration help insure that the preparation and 
     completion of the corporation's tax return be given an 
     appropriate level of care. For example, it is anticipated 
     that the CEO would declare that processes and procedures have 
     been implemented to ensure that the return complies with the 
     Internal Revenue Code and all regulations and rules 
     promulgated thereunder. Although appropriate processes and 
     procedures can vary for each taxpayer depending on the size 
     and nature of the taxpayer's business, in every case the CEO 
     should be briefed on all material aspects of the 
     corporation's tax return by the corporation's chief financial 
     officer (or another person authorized to sign the return 
     under present law).
       If the corporation does not have a chief executive officer, 
     the IRS may designate another officer of the corporation; 
     otherwise, no other person is permitted to sign the 
     declaration. It is intended that the IRS issue general 
     guidance, such as a revenue procedure, to: (1) address 
     situations when a corporation does not have a chief executive 
     officer; and (2) define who the chief executive officer is, 
     in situations (for example) when the primary official bears a 
     different title, when a corporation has multiple chief 
     executive officers, or when the corporation is a foreign 
     corporation and the CEO is not a U.S. resident.\655\ It is 
     intended that, in every instance, the highest ranking 
     corporate officer (regardless of title) sign this 
     declaration.
---------------------------------------------------------------------------
     \655\ With respect to foreign corporations, it is intended 
     that the rules for signing this declaration generally 
     parallel the present-law rules for signing the return. See 
     Treas. Reg. sec. 1.6062-1(a)(3).
---------------------------------------------------------------------------
       The provision does not apply to the income tax returns of 
     mutual funds;\656\ they are required to be signed as under 
     present law.
---------------------------------------------------------------------------
     \656\ The provision does, however, apply to the income tax 
     returns of mutual fund management companies and advisors.
---------------------------------------------------------------------------
       Effective date.--Federal tax returns for taxable years 
     ending after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.
       36. Denial of deduction for certain fines, penalties, and 
     other amounts (sec. 423 of the Senate amendment and sec. 162 
     of the Code)


                              present law

       Under present law, no deduction is allowed as a trade or 
     business expense under section 162(a) for the payment of a 
     fine or similar penalty to a government for the violation of 
     any law (sec. 162(f)). The enactment of section 162(f) in 
     1969 codified existing case law that denied the deductibility 
     of fines as ordinary and necessary business expenses on the 
     grounds that ``allowance of the deduction would frustrate 
     sharply defined national or State policies proscribing the 
     particular types of conduct evidenced by some governmental 
     declaration thereof.''\657\
---------------------------------------------------------------------------
     \657\ S. Rep. 91-552, 91st Cong, 1st Sess., 273-74 (1969), 
     referring to Tank Truck Rentals, Inc. v. Commissioner, 356 
     U.S. 30 (1958).
---------------------------------------------------------------------------
       Treasury regulation section 1.162-21(b)(1) provides that a 
     fine or similar penalty includes an amount: (1) paid pursuant 
     to conviction or a plea of guilty or nolo contendere for a 
     crime (felony or misdemeanor) in a criminal proceeding; (2) 
     paid as a civil penalty imposed by Federal, State, or local 
     law, including additions to tax and additional amounts and 
     assessable penalties imposed by chapter 68 of the Code; (3) 
     paid in settlement of the taxpayer's actual or potential 
     liability for a fine or penalty (civil or criminal); or (4) 
     forfeited as collateral posted in connection with a 
     proceeding which could result in imposition of such a fine or 
     penalty. Treasury regulation section 1.162-21(b)(2) provides, 
     among other things, that compensatory damages (including 
     damages under section 4A of the Clayton Act (15 U.S.C. 15a), 
     as amended) paid to a government do not constitute a fine or 
     penalty.


                               House Bill

       No provision.


                            Senate Amendment

       The bill modifies the rules regarding the determination 
     whether payments are nondeductible payments of fines or 
     penalties under section 162(f). In particular, the bill 
     generally provides that amounts paid or incurred (whether by 
     suit, agreement, or otherwise) to, or at the direction of, a 
     government in relation to the violation of any law or the 
     investigation or inquiry into the potential violation of any 
     law \658\ are nondeductible under any provision of the income 
     tax provisions.\659\ The bill applies to deny a deduction for 
     any such payments, including those where there is no 
     admission of guilt or liability and those made for the 
     purpose of avoiding further investigation or litigation. An 
     exception applies to payments that the taxpayer establishes 
     are restitution.\660\
---------------------------------------------------------------------------
     \658\ The bill does not affect amounts paid or incurred in 
     performing routine audits or reviews such as annual audits 
     that are required of all organizations or individuals in a 
     similar business sector, or profession, as a requirement for 
     being allowed to conduct business. However, if the government 
     or regulator raised an issue of compliance and a payment is 
     required in settlement of such issue, the bill would affect 
     that payment.
     \659\ The bill provides that such amounts are nondeductible 
     under chapter 1 of the Internal Revenue Code.
     \660\ The bill does not affect the treatment of antitrust 
     payments made under section 4 of the Clayton Act, which will 
     continue to be governed by the provisions of section 162(g).
---------------------------------------------------------------------------
       The bill is intended to apply only where a government (or 
     other entity treated in a manner similar to a government 
     under the bill) is a complainant or investigator with respect 
     to the violation or potential violation of any law.\661\
---------------------------------------------------------------------------
     \661\ Thus, for example, the bill would not apply to payments 
     made by one private party to another in a lawsuit between 
     private parties, merely because a judge or jury acting in the 
     capacity as a court directs the payment to be made. The mere 
     fact that a court enters a judgement or directs a result in a 
     private dispute does not cause a payment to be made ``at the 
     direction of a government'' for purposes of the provision.
---------------------------------------------------------------------------
       It is intended that a payment will be treated as 
     restitution only if substantially all of the payment is 
     required to be paid to the specific persons, or in relation 
     to the specific property, actually harmed by the conduct of 
     the taxpayer that resulted in the payment. Thus, a payment to 
     or with respect to a class substantially broader than the 
     specific persons or property that were actually harmed (e.g., 
     to a class including similarly situated

[[Page H8591]]

     persons or property) does not qualify as restitution.\662\ 
     Restitution is limited to the amount that bears a substantial 
     quantitative relationship to the harm caused by the past 
     conduct or actions of the taxpayer that resulted in the 
     payment in question. If the party harmed is a government or 
     other entity, then restitution includes payment to such 
     harmed government or entity, provided the payment bears a 
     substantial quantitative relationship to the harm. However, 
     restitution does not include reimbursement of government 
     investigative or litigation costs, or payments to 
     whistleblowers.
---------------------------------------------------------------------------
     \662\ Similarly, a payment to a charitable organization 
     benefitting a broader class than the persons or property 
     actually harmed, or to be paid out without a substantial 
     quantitative relationship to the harm caused, would not 
     qualify as restitution. Under the provision, such a payment 
     not deductible under section 162 would also not be deductible 
     under section 170.
---------------------------------------------------------------------------
       Amounts paid or incurred (whether by suit, agreement, or 
     otherwise) to, or at the direction of, any self-regulatory 
     entity that regulates a financial market or other market that 
     is a qualified board or exchange under section 1256(g)(7), 
     and that is authorized to impose sanctions (e.g., the 
     National Association of Securities Dealers) are likewise 
     subject to the provision if paid in relation to a violation, 
     or investigation or inquiry into a potential violation, of 
     any law (or any rule or other requirement of such entity). To 
     the extent provided in regulations, amounts paid or incurred 
     to, or at the direction of, any other nongovernmental entity 
     that exercises self-regulatory powers as part of performing 
     an essential governmental function are similarly subject to 
     the provision. The exception for payments that the taxpayer 
     establishes are restitution likewise applies in these cases.
       No inference is intended as to the treatment of payments as 
     nondeductible fines or penalties under present law. In 
     particular, the Senate amendment is not intended to limit the 
     scope of present-law section 162(f) or the regulations 
     thereunder.
       Effective date.--The bill is effective for amounts paid or 
     incurred on or after April 28, 2003; however the proposal 
     does not apply to amounts paid or incurred under any binding 
     order or agreement entered into before such date. Any order 
     or agreement requiring court approval is not a binding order 
     or agreement for this purpose unless such approval was 
     obtained on or before April 27, 2003.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     37. Denial of deduction for punitive damages (sec. 424 of the 
         Senate amendment and sec. 162 of the Code)


                              Present Law

       In general, a deduction is allowed for all ordinary and 
     necessary expenses that are paid or incurred by the taxpayer 
     during the taxable year in carrying on any trade or 
     business.\663\ However, no deduction is allowed for any 
     payment that is made to an official of any governmental 
     agency if the payment constitutes an illegal bribe or 
     kickback or if the payment is to an official or employee of a 
     foreign government and is illegal under Federal law.\664\ In 
     addition, no deduction is allowed under present law for any 
     fine or similar payment made to a government for violation of 
     any law.\665\ Furthermore, no deduction is permitted for two-
     thirds of any damage payments made by a taxpayer who is 
     convicted of a violation of the Clayton antitrust law or any 
     related antitrust law.\666\
---------------------------------------------------------------------------
     \663\ Sec. 162(a).
     \664\ Sec. 162(c).
     \665\ Sec. 162(f).
     \666\ Sec. 162(g).
---------------------------------------------------------------------------
       In general, gross income does not include amounts received 
     on account of personal physical injuries and physical 
     sickness.\667\ However, this exclusion does not apply to 
     punitive damages.\668\
---------------------------------------------------------------------------
     \667\ Sec. 104(a).
     \668\ Sec. 104(a)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment denies any deduction for punitive 
     damages that are paid or incurred by the taxpayer as a result 
     of a judgment or in settlement of a claim. If the liability 
     for punitive damages is covered by insurance, any such 
     punitive damages paid by the insurer are included in gross 
     income of the insured person and the insurer is required to 
     report such amounts to both the insured person and the IRS.
       Effective date.--The Senate amendment provision is 
     effective for punitive damages that are paid or incurred on 
     or after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     38. Increase in criminal monetary penalty limitation for the 
         underpayment or overpayment of tax due to fraud (sec. 425 
         of the Senate amendment)


                              Present Law

     Attempt to evade or defeat tax
       In general, section 7201 imposes a criminal penalty on 
     persons who willfully attempt to evade or defeat any tax 
     imposed by the Code. Upon conviction, the Code provides that 
     the penalty is up to $100,000 or imprisonment of not more 
     than five years (or both). In the case of a corporation, the 
     Code increases the monetary penalty to a maximum of $500,000.
     Willful failure to file return, supply information, or pay 
         tax
       In general, section 7203 imposes a criminal penalty on 
     persons required to make estimated tax payments, pay taxes, 
     keep records, or supply information under the Code who 
     willfully fails to do so. Upon conviction, the Code provides 
     that the penalty is up to $25,000 or imprisonment of not more 
     than one year (or both). In the case of a corporation, the 
     Code increases the monetary penalty to a maximum of $100,000.
     Fraud and false statements
       In general, section 7206 imposes a criminal penalty on 
     persons who make fraudulent or false statements under the 
     Code. Upon conviction, the Code provides that the penalty is 
     up to $100,000 or imprisonment of not more than three years 
     (or both). In the case of a corporation, the Code increases 
     the monetary penalty to a maximum of $500,000.
     Uniform sentencing guidelines
       Under the uniform sentencing guidelines established by 18 
     U.S.C. 3571, a defendant found guilty of a criminal offense 
     is subject to a maximum fine that is the greatest of: (a) the 
     amount specified in the underlying provision, (b) for a 
     felony \669\ $250,000 for an individual or $500,000 for an 
     organization, or (c) twice the gross gain if a person derives 
     pecuniary gain from the offense. This Title 18 provision 
     applies to all criminal provisions in the United States Code, 
     including those in the Internal Revenue Code. For example, 
     for an individual, the maximum fine under present law upon 
     conviction of violating section 7206 is $250,000 or, if 
     greater, twice the amount of gross gain from the offense.
---------------------------------------------------------------------------
     \669\ Section 7206 states that making fraudulent or false 
     statements under the Code is a felony. In addition, this 
     offense is a felony pursuant to the classification guidelines 
     of 18 U.S.C. 3559(a)(5).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     Attempt to evade or defeat tax
       The bill increases the criminal penalty under section 7201 
     of the Code for individuals to $250,000 and for corporations 
     to $1,000,000. The bill increases the maximum prison sentence 
     to ten years.
     Willful failure to file return, supply information, or pay 
         tax
       The bill increases the criminal penalty under section 7203 
     of the Code from a misdemeanor to a felony and increases the 
     maximum prison sentence to ten years.

                       Fraud and false statements

       The bill increases the criminal penalty under section 7206 
     of the Code for individuals to $250,000 and for corporations 
     to $1,000,000. Increases the maximum prison sentence to five 
     years. The bill provides that in no event shall the amount of 
     the monetary penalty under this provision be less than the 
     amount of the underpayment or overpayment attributable to 
     fraud.
     Effective date
       Underpayments and overpayments attributable to actions 
     occurring after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     39. Expanded disallowance of deduction for interest on 
         convertible debt (sec. 434 of the Senate amendment and 
         sec. 163 of the Code)


                              Present Law

       Whether an instrument qualifies for tax purposes as debt or 
     equity is determined under all the facts and circumstances 
     based on principles developed in case law. If an instrument 
     qualifies as equity, the issuer generally does not receive a 
     deduction for dividends paid and the holder generally 
     includes such dividends in income (although corporate holders 
     generally may obtain a dividends-received deduction of at 
     least 70 percent of the amount of the dividend). If an 
     instrument qualifies as debt, the issuer may receive a 
     deduction for accrued interest and the holder generally 
     includes interest in income, subject to certain limitations.
       Original issue discount (``OID'') on a debt instrument is 
     the excess of the stated redemption price at maturity over 
     the issue price of the instrument. An issuer of a debt 
     instrument with OID generally accrues and deducts the 
     discount as interest over the life of the instrument even 
     though interest may not be paid until the instrument matures. 
     The holder of such a debt instrument also generally includes 
     the OID in income as it accrues.
       Under present law, no deduction is allowed for interest or 
     OID on a debt instrument issued by a corporation (or issued 
     by a partnership to the extent of its corporate partners) 
     that is payable in equity of the issuer or a related party 
     (within the meaning of sections 267(b) and 707(b)), including 
     a debt instrument a substantial portion of which is 
     mandatorily convertible or convertible at the issuer's option 
     into equity of the issuer or a related party.\670\ In 
     addition, a debt instrument is treated as payable in equity 
     if a substantial portion of the principal or interest is 
     required to be determined, or may be

[[Page H8592]]

     determined at the option of the issuer or related party, by 
     reference to the value of equity of the issuer or related 
     party.\671\ A debt instrument also is treated as payable in 
     equity if it is part of an arrangement that is designed to 
     result in the payment of the debt instrument with or by 
     reference to such equity, such as in the case of certain 
     issuances of a forward contract in connection with the 
     issuance of debt, nonrecourse debt that is secured 
     principally by such equity, or certain debt instruments that 
     are paid in, converted to, or determined with reference to 
     the value of equity if it may be so required at the option of 
     the holder or a related party and there is a substantial 
     certainty that option will be exercised.\672\
---------------------------------------------------------------------------
     \670\ Sec. 163(l), enacted in the Taxpayer Relief Act of 
     1997, Pub. L. No. 105-34, sec. 1005(a).
     \671\ Sec. 163(l)(3)(B).
     \672\ Sec. 163(l)(3)(C).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment expands the present-law disallowance 
     of interest deductions on certain convertible or equity-
     linked corporate debt that is payable in, or by reference to 
     the value of, equity. Under the Senate amendment, the 
     disallowance is expanded to include interest on corporate 
     debt that is payable in, or by reference to the value of, any 
     equity held by the issuer (or by any related party) in any 
     other person, without regard to whether such equity 
     represents more than a 50-percent ownership interest in such 
     person. However, the Senate amendment does not apply to debt 
     that is issued by an active dealer in securities (or by a 
     related party) if the debt is payable in, or by reference to 
     the value of, equity that is held by the securities dealer in 
     its capacity as a dealer in securities.
       Effective date.--The Senate amendment provision applies to 
     debt instruments that are issued after February 13, 2003.


                          conference agreement

       The conference agreement follows the Senate amendment, 
     except the conference agreement applies to debt instruments 
     that are issued after October 3, 2004.
     40. Expand authority to disallow tax benefits under section 
         269 (sec. 435 of the Senate amendment and sec. 269 of the 
         Code)


                              present law

       Section 269 provides that if a taxpayer acquires, directly 
     or indirectly, control (defined as at least 50 percent of 
     vote or value) of a corporation, and the principal purpose of 
     the acquisition is the evasion or avoidance of Federal income 
     tax by securing the benefit of a deduction, credit, or other 
     allowance that would not otherwise have been available, the 
     Secretary may disallow the tax benefits.\673\ Similarly, if a 
     corporation acquires, directly or indirectly, property of 
     another corporation (not controlled, directly or indirectly, 
     by the acquiring corporation or its stockholders immediately 
     before the acquisition), the basis of such property is 
     determined by reference to the basis in the hands of the 
     transferor corporation, and the principal purpose of the 
     acquisition is the evasion or avoidance of Federal income tax 
     by securing a tax benefit that would not otherwise have been 
     available, the Secretary may disallow such tax benefits.\674\
---------------------------------------------------------------------------
     \673\ Sec. 269(a)(1).
     \674\ Sec. 269(a)(2).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment expands section 269 by repealing the 
     requirement that the acquisition of property be from a 
     corporation not controlled by the acquirer. Thus, under the 
     Senate amendment, section 269 disallows the tax benefits of 
     (1) any acquisition of stock sufficient to obtain control of 
     a corporation (as under present law), and (2) any acquisition 
     by a corporation of property from a corporation in which the 
     basis of such property is determined by reference to the 
     basis in the hands of the transferor corporation, if the 
     principal purpose of such acquisition is the evasion or 
     avoidance of Federal income tax.
       Effective date.--The Senate amendment applies to stock and 
     property acquired after February 13, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     41. Modification of coordination rules for controlled foreign 
         corporation and passive foreign investment company 
         regimes (sec. 436 of the Senate amendment and sec. 1297 
         of the Code)


                              present law

       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. 
     Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income generally is 
     deferred. However, certain anti-deferral regimes may cause 
     the domestic parent corporation to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by its foreign 
     subsidiaries, regardless of whether the income has been 
     distributed as a dividend to the domestic parent corporation. 
     The main anti-deferral regimes in this context are the 
     controlled foreign corporation rules of subpart F \675\ and 
     the passive foreign investment company rules.\676\ Deferral 
     of U.S. tax is considered appropriate, on the other hand, 
     with respect to most types of active business income earned 
     abroad. A foreign tax credit generally is available to 
     offset, in whole or in part, the U.S. tax owed on foreign-
     source income, whether earned directly by the domestic 
     corporation, repatriated as an actual dividend, or included 
     under one of the anti-deferral regimes.\677\
---------------------------------------------------------------------------
     \675\ Secs. 951-964.
     \676\ Secs. 1291-1298.
     \677\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
       Subpart F,\678\ applicable to controlled foreign 
     corporations and their shareholders, is the main anti-
     deferral regime of relevance to a U.S.-based multinational 
     corporate group. A controlled foreign corporation generally 
     is defined as any foreign corporation if U.S. persons own 
     (directly, indirectly, or constructively) more than 50 
     percent of the corporation's stock (measured by vote or 
     value), taking into account only those U.S. persons that own 
     at least 10 percent of the stock (measured by vote 
     only).\679\ Under the subpart F rules, the United States 
     generally taxes the U.S. 10-percent shareholders of a 
     controlled foreign corporation on their pro rata shares of 
     certain income of the controlled foreign corporation 
     (referred to as ``subpart F income''), without regard to 
     whether the income is distributed to the shareholders.\680\
---------------------------------------------------------------------------
     \678\ Secs. 951-964.
     \679\ Secs. 951(b), 957, 958.
     \680\ Sec. 951(a).
---------------------------------------------------------------------------
       Subpart F income generally includes passive income and 
     other income that is readily movable from one taxing 
     jurisdiction to another. Subpart F income consists of foreign 
     base company income,\681\ insurance income,\682\ and certain 
     income relating to international boycotts and other 
     violations of public policy.\683\ Foreign base company income 
     consists of foreign personal holding company income, which 
     includes passive income (e.g., dividends, interest, rents, 
     and royalties), as well as a number of categories of non-
     passive income, including foreign base company sales income, 
     foreign base company services income, foreign base company 
     shipping income and foreign base company oil-related 
     income.\684\
---------------------------------------------------------------------------
     \681\ Sec. 954.
     \682\ Sec. 953.
     \683\ Sec. 952(a)(3)-(5).
     \684\ Sec. 954.
---------------------------------------------------------------------------
       In effect, the United States treats the U.S. 10-percent 
     shareholders of a controlled foreign corporation as having 
     received a current distribution out of the corporation's 
     subpart F income. In addition, the U.S. 10-percent 
     shareholders of a controlled foreign corporation are required 
     to include currently in income for U.S. tax purposes their 
     pro rata shares of the corporation's earnings invested in 
     U.S. property.\685\
---------------------------------------------------------------------------
     \685\ Secs. 951(a)(1)(B), 956.
---------------------------------------------------------------------------
       The Tax Reform Act of 1986 established an additional anti-
     deferral regime, for passive foreign investment companies. A 
     passive foreign investment company generally is defined as 
     any foreign corporation if 75 percent or more of its gross 
     income for the taxable year consists of passive income, or 50 
     percent or more of its assets consists of assets that 
     produce, or are held for the production of, passive 
     income.\686\ Alternative sets of income inclusion rules apply 
     to U.S. persons that are shareholders in a passive foreign 
     investment company, regardless of their percentage ownership 
     in the company. One set of rules applies to passive foreign 
     investment companies that are ``qualified electing funds,'' 
     under which electing U.S. shareholders currently include in 
     gross income their respective shares of the company's 
     earnings, with a separate election to defer payment of tax, 
     subject to an interest charge, on income not currently 
     received.\687\ A second set of rules applies to passive 
     foreign investment companies that are not qualified electing 
     funds, under which U.S. shareholders pay tax on certain 
     income or gain realized through the company, plus an interest 
     charge that is attributable to the value of deferral.\688\ A 
     third set of rules applies to passive foreign investment 
     company stock that is marketable, under which electing U.S. 
     shareholders currently take into account as income (or loss) 
     the difference between the fair market value of the stock as 
     of the close of the taxable year and their adjusted basis in 
     such stock (subject to certain limitations), often referred 
     to as ``marking to market.'' \689\
---------------------------------------------------------------------------
     \686\ Sec. 1297.
     \687\ Sec. 1293-1295.
     \688\ Sec. 1291.
     \689\ Sec. 1296.
---------------------------------------------------------------------------
       Under section 1297(e), which was enacted in 1997 to address 
     the overlap of the passive foreign investment company rules 
     and subpart F, a controlled foreign corporation generally is 
     not also treated as a passive foreign investment company with 
     respect to a U.S. shareholder of the corporation. This 
     exception applies regardless of the likelihood that the U.S. 
     shareholder would actually be taxed under subpart F in the 
     event that the controlled foreign corporation earns subpart F 
     income. Thus, even in a case in which a controlled foreign 
     corporation's subpart F income would be allocated to a 
     different shareholder under the subpart F allocation rules, a 
     U.S. shareholder would still qualify for the exception from 
     the passive foreign investment company rules under section 
     1297(e).


                               house bill

       No provision.

[[Page H8593]]

                            senate amendment

       The provision adds an exception to section 1297(e) for U.S. 
     shareholders that face only a remote likelihood of incurring 
     a subpart F inclusion in the event that a controlled foreign 
     corporation earns subpart F income, thus preserving the 
     potential application of the passive foreign investment 
     company rules in such cases.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after February 13, 
     2003, and for taxable years of U.S. shareholders with or 
     within which such taxable years of such foreign corporations 
     end.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

                    C. Reduction of Fuel Tax Evasion

     1. Exemption from certain excise taxes for mobile machinery 
         vehicles and modification of definition of offhighway 
         vehicle (sec. 651 of the House bill, sec. 896 of the 
         Senate amendment, and secs. 4053, 4072, 4082, 4483, 6421, 
         and 7701 of the Code)


                              Present Law

       Under present law, the definition of a ``highway vehicle'' 
     affects the application of the retail tax on heavy vehicles, 
     the heavy vehicle use tax, the tax on tires, and fuel 
     taxes.\690\ Section 4051 of the Code provides for a 12-
     percent retail sales tax on tractors, heavy trucks with a 
     gross vehicle weight (``GVW'') over 33,000 pounds, and 
     trailers with a GVW over 26,000 pounds. Section 4071 provides 
     for a tax on highway vehicle tires that weigh more than 40 
     pounds, with higher rates of tax for heavier tires. Section 
     4481 provides for an annual use tax on heavy vehicles with a 
     GVW of 55,000 pounds or more, with higher rates of tax on 
     heavier vehicles. All of these excise taxes are paid into the 
     Highway Trust Fund.
---------------------------------------------------------------------------
     \690\ Secs. 4051, 4071, 4481, 4041 and 4081.
---------------------------------------------------------------------------
       Federal excise taxes are also levied on the motor fuels 
     used in highway vehicles. Gasoline is subject to a tax of 
     18.4 cents per gallon, of which 18.3 cents per gallon is paid 
     into the Highway Trust Fund and 0.1 cent per gallon is paid 
     into the Leaking Underground Storage Tank (``LUST'') Trust 
     Fund. Highway diesel fuel is subject to a tax of 24.4 cents 
     per gallon, of which 24.3 cents per gallon is paid into the 
     Highway Trust Fund and 0.1 cent per gallon is paid into the 
     LUST Trust Fund.
       The Code does not define a ``highway vehicle.'' For 
     purposes of these taxes, Treasury regulations define a 
     highway vehicle as any self-propelled vehicle or trailer or 
     semitrailer designed to perform a function of transporting a 
     load over the public highway, whether or not also designed to 
     perform other functions. Excluded from the definition of 
     highway vehicle are (1) certain specially designed mobile 
     machinery vehicles for non-transportation functions (the 
     ``mobile machinery exception''); (2) certain vehicles 
     specially designed for off-highway transportation for which 
     the special design substantially limits or impairs the use of 
     such vehicle to transport loads over the highway (the ``off-
     highway transportation vehicle'' exception); and (3) certain 
     trailers and semi-trailers specially designed to function 
     only as an enclosed stationary shelter for the performance of 
     non-transportation functions off the public highways.\691\
---------------------------------------------------------------------------
     \691\ See Treas. Reg. sec. 48.4061-1(d)).
---------------------------------------------------------------------------
       The mobile machinery exception applies if three tests are 
     met: (1) the vehicle consists of a chassis to which jobsite 
     machinery (unrelated to transportation) has been permanently 
     mounted; (2) the chassis has been specially designed to serve 
     only as a mobile carriage and mount for the particular 
     machinery; and (3) by reason of such special design, the 
     chassis could not, without substantial structural 
     modification, be used to transport a load other than the 
     particular machinery. An example of a mobile machinery 
     vehicle is a crane mounted on a truck chassis that meets the 
     forgoing factors.
       On June 6, 2002, the Treasury Department put forth proposed 
     regulations that would eliminate the mobile machinery 
     exception.\692\ The other exceptions from the definition of 
     highway vehicle would continue to apply with some 
     modifications. Under the proposed regulations, the chassis of 
     a mobile machinery vehicle would be subject to the retail 
     sales tax on heavy vehicles unless the vehicle qualified 
     under the off-highway transportation vehicle exception. Also, 
     under the proposed regulations, mobile machinery vehicles may 
     be subject to the heavy vehicle use tax. In addition, the tax 
     credits, refunds, and exemptions from tax may not be 
     available for the fuel used in these vehicles.
---------------------------------------------------------------------------
     \692\ Prop. Treas. Reg. sec. 48.4051-1(a), 67 Fed. Reg. 
     38913, 38914-38915 (2002).
---------------------------------------------------------------------------
       On June 6, 2002, the Treasury Department put forth proposed 
     regulations that would modify the off-highway transportation 
     vehicle exception.\693\ Under the proposed regulations, a 
     vehicle is not treated as a highway vehicle if it is 
     specially designed for the primary function of transporting a 
     particular type of load other than over the public highway 
     and because of this special design its capability to 
     transport a load over the public highway is substantially 
     limited or impaired. A vehicle's design is determined solely 
     on the basis of its physical characteristics. In determining 
     whether substantial limitation or impairment exists, account 
     may be taken of factors such as the size of the vehicle, 
     whether it is subject to the licensing, safety, and other 
     requirements applicable to highway vehicles, and whether it 
     can transport a load at a sustained speed of at least 25 
     miles per hour. Under the proposed regulation, it is not 
     material that a vehicle can transport a greater load off the 
     public highway than it is permitted to transport over the 
     public highway.
---------------------------------------------------------------------------
     \693\ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(i).
---------------------------------------------------------------------------
       The proposed regulation provides an exception to the 
     definition of a highway vehicle for nontransportation 
     trailers and semitrailers.\694\ Under the proposed 
     regulation, a trailer or semitrailer is not treated as a 
     highway vehicle if it is specially designed to function only 
     as an enclosed stationary shelter for the carrying on of an 
     offhighway function at an offhighway site. For example, a 
     trailer that is capable only of functioning as an office for 
     an offhighway construction operation is not a highway 
     vehicle.
---------------------------------------------------------------------------
     \694\ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(ii).
---------------------------------------------------------------------------


                               House Bill

       The provision codifies the present-law mobile machinery 
     exemption for purposes of three taxes: the retail tax on 
     heavy vehicles, the heavy vehicle use tax, and the tax on 
     tires. Thus, if a vehicle can satisfy the three-part test, it 
     will not be treated as a highway vehicle and will be exempt 
     from these taxes.
       For purposes of the fuel excise tax, the three-part design 
     test is codified and a use test is added by the provision. 
     Specifically, in addition to the three-part design test, the 
     vehicle must not have traveled more than 7,500 miles over 
     public highways during the owner's taxable year. Refunds of 
     fuel taxes are permitted on an annual basis only. For 
     purposes of this rule, a person's taxable year is his taxable 
     year for income tax purposes.
       Effective date.--The provision generally is effective after 
     the date of enactment. As to the fuel taxes, the provision is 
     effective for taxable years beginning after the date of 
     enactment.


                            Senate Amendment

       The Senate amendment provides that mobile machinery 
     vehicles are subject to tax as highway vehicles. The 
     provision provides for the recovery of taxes paid (other than 
     fuel taxes) over a two-year period if such vehicle travels 
     less than 5,000 miles per year. Fuel taxes for mobile 
     machinery vehicles must be paid and then a refund sought if 
     the mileage requirement is met. Refunds of fuel taxes are 
     permitted on an annual basis only. Like the House bill, for 
     purposes of this rule, a person's taxable year is his taxable 
     year for income tax purposes. Vehicles owned by an 
     organization described in section 501(c), exempt from tax 
     under section 501(a), need only satisfy the three-part design 
     test to recover taxes paid with respect to such vehicles.
       Effective date.--The provision generally is effective after 
     the date of enactment. As to the fuel taxes, the provision is 
     effective for taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the House bill. Vehicles 
     owned by an organization described in section 501(c), exempt 
     from tax under section 501(a), need only satisfy the three-
     part design test to recover taxes paid with respect to such 
     vehicles.
       The conference agreement adopts the definition of an 
     offhighway transportation vehicle and a nontransportation 
     trailer and semitrailer described in Proposed Treasury 
     Regulation section 48.4051-1(a)(2).
       For example, as provided in the proposed regulations,\695\ 
     Vehicle C consists of a truck chassis on which an oversize 
     body designed to transport and apply liquid agricultural 
     chemicals on farms has been installed. It is capable of 
     transporting a load over the public highway. It is 132 inches 
     in width, which is considerably in excess of standard highway 
     vehicle width. For travel on uneven and soft terrain, it is 
     equipped with oversize wheels with high-flotation tires, and 
     nonstandard axles, brakes, and transmission. It has a special 
     fuel and carburetor air filtration system that enable it to 
     perform efficiently in an environment of dirt and dust. It is 
     not able to maintain a speed of 25 miles per hour for more 
     than one mile while fully loaded. Because Vehicle C is a 
     self-propelled vehicle capable of transporting a load over 
     the public highway, it would meet the general definition of a 
     highway vehicle. However, its considerable physical 
     characteristics for transporting its load other than over the 
     public highway, when compared with its physical 
     characteristics for transporting the load over the public 
     highway, establish that it is specially designed for the 
     primary function of transporting its load other than over the 
     public highway. Further, the physical characteristics for 
     transporting its load other than over the public highway 
     substantially limit its capability to transport a load over 
     the public highway. Therefore, Vehicle C is an offhighway 
     vehicle and is not treated as a highway vehicle.
---------------------------------------------------------------------------
     \695\ Prop. Treas. Reg. sec. 48.4051-1(c) Example (3).
---------------------------------------------------------------------------
       Effective date.--(Generally effective after the date of 
     enactment. As to the fuel taxes, effective for taxable years 
     beginning after the date of enactment.

[[Page H8594]]

     2. Taxation of aviation-grade kerosene (sec. 652 of the House 
         bill, sec. 871 of the Senate amendment, and secs. 4041, 
         4081, 4082, 4083, 4091, 4092, 4093, 4101, and 6427 of the 
         Code)


                              Present Law

     In general
       Aviation fuel is kerosene and any liquid (other than any 
     product taxable under section 4081) that is suitable for use 
     as a fuel in an aircraft.\696\ Unlike other fuels that 
     generally are taxed upon removal from a terminal rack,\697\ 
     aviation fuel is taxed upon sale of the fuel by a producer or 
     importer.\698\ Sales by a registered producer to another 
     registered producer are exempt from tax, with the result 
     that, as a practical matter, aviation fuel is not taxed until 
     the fuel is used at the airport (or sold to an unregistered 
     person). Use of untaxed aviation fuel by a producer is 
     treated as a taxable sale.\699\ The producer or importer is 
     liable for the tax. The rate of tax on aviation fuel is 21.9 
     cents per gallon.\700\
---------------------------------------------------------------------------
     \696\ Sec. 4093(a).
     \697\ A rack is a mechanism capable of delivering taxable 
     fuel into a means of transport other than a pipeline or 
     vessel. Treas. Reg. sec. 48.4081-1(b).
     \698\ Sec. 4091(a)(1).
     \699\ Sec. 4091(a)(2).
     \700\ Sec. 4091(b). This rate includes a 0.1 cent per gallon 
     Leaking Underground Storage Tank (``LUST'') Trust Fund tax. 
     The LUST Trust Fund tax is set to expire after March 31, 
     2005, with the result that on April 1, 2005, the tax rate is 
     scheduled to be 21.8 cents per gallon. Secs. 4091(b)(3)(B) 
     and 4081(d)(3). Beginning on October 1, 2007, the rate of tax 
     is reduced to 4.3 cents per gallon. Sec. 4091(b)(3)(A).
---------------------------------------------------------------------------
       The tax on aviation fuel is reported by filing Form 720--
     Quarterly Federal Excise Tax Return. Generally, semi-monthly 
     deposits are required using Form 8109B--Federal Tax Deposit 
     Coupon or by depositing the tax by electronic funds transfer.
     Partial exemptions
       In general, aviation fuel sold for use or used in 
     commercial aviation is taxed at a reduced rate of 4.4 cents 
     per gallon.\701\ Commercial aviation means any use of an 
     aircraft in a business of transporting persons or property 
     for compensation or hire by air (unless the use is allocable 
     to any transportation exempt from certain excise taxes).\702\
---------------------------------------------------------------------------
     \701\ Sec. 4092(b). The 4.4 cent rate includes 0.1 cent per 
     gallon that is attributable to the LUST Trust Fund financing 
     rate. A full exemption, discussed below, applies to aviation 
     fuel that is sold for use in commercial aviation as fuel 
     supplies for vessels or aircraft, which includes use by 
     certain foreign air carriers and for the international 
     flights of domestic carriers. Secs. 4092(a), 4092(b), and 
     4221(d)(3).
     \702\ Secs. 4092(b) and 4041(c)(2).
---------------------------------------------------------------------------
       In order to qualify for the 4.4 cents per gallon rate, the 
     person engaged in commercial aviation must be registered with 
     the Secretary \703\ and provide the seller with a written 
     exemption certificate stating the airline's name, address, 
     taxpayer identification number, registration number, and 
     intended use of the fuel. A person that is registered as a 
     buyer of aviation fuel for use in commercial aviation 
     generally is assigned a registration number with a ``Y'' 
     suffix (a ``Y'' registrant), which entitles the registrant to 
     purchase aviation fuel at the 4.4 cents per gallon rate.
---------------------------------------------------------------------------
     \703\ Notice 88-132, sec. III(D). See also, Form 637--
     Application for Registration (For Certain Excise Tax 
     Activities). A bond may be required as a condition of 
     registration.
---------------------------------------------------------------------------
       Large commercial airlines that also are producers of 
     aviation fuel qualify for registration numbers with an ``H'' 
     suffix. As producers of aviation fuel, ``H'' registrants may 
     buy aviation fuel tax free pursuant to a full exemption that 
     applies to sales of aviation fuel by a registered producer to 
     a registered producer. If the ``H'' registrant ultimately 
     uses such untaxed fuel in domestic commercial aviation, the H 
     registrant is liable for the aviation fuel tax at the 4.4 
     cents per gallon rate.
     Exemptions
       Aviation fuel sold by a producer or importer for use by the 
     buyer in a nontaxable use is exempt from the excise tax on 
     sales of aviation fuel.\704\ To qualify for the exemption, 
     the buyer must provide the seller with a written exemption 
     certificate stating the buyer's name, address, taxpayer 
     identification number, registration number (if applicable), 
     and intended use of the fuel.
---------------------------------------------------------------------------
     \704\ Sec. 4092(a).
---------------------------------------------------------------------------
       Nontaxable uses include: (1) use other than as fuel in an 
     aircraft (such as use in heating oil); (2) use on a farm for 
     farming purposes; (3) use in a military aircraft owned by the 
     United States or a foreign country; (4) use in a domestic air 
     carrier engaged in foreign trade or trade between the United 
     States and any of its possessions;\705\ (5) use in a foreign 
     air carrier engaged in foreign trade or trade between the 
     United States and any of its possessions (but only if the 
     foreign carrier's country of registration provides similar 
     privileges to United States carriers); (6) exclusive use of a 
     State or local government; (7) sales for export, or shipment 
     to a United States possession; (8) exclusive use by a 
     nonprofit educational organization; (9) use by an aircraft 
     museum exclusively for the procurement, care, or exhibition 
     of aircraft of the type used for combat or transport in World 
     War II, and (10) use as a fuel in a helicopter or a fixed-
     wing aircraft for purposes of providing transportation with 
     respect to which certain requirements are met.\706\
---------------------------------------------------------------------------
     \705\ ``Trade'' includes the transportation of persons or 
     property for hire. Treas. Reg. sec. 48.4221-4(b)(8).
     \706\ Secs. 4041(f)(2), 4041(g), 4041(h), 4041(l), and 4092.
---------------------------------------------------------------------------
       A producer that is registered with the Secretary may sell 
     aviation fuel tax-free to another registered producer.\707\ 
     Producers include refiners, blenders, wholesale distributors 
     of aviation fuel, dealers selling aviation fuel exclusively 
     to producers of aviation fuel, the actual producer of the 
     aviation fuel, and with respect to fuel purchased at a 
     reduced rate, the purchaser of such fuel.
---------------------------------------------------------------------------
     \707\ Sec. 4092(c).
---------------------------------------------------------------------------
     Refunds and credits
       A claim for refund of taxed aviation fuel held by a 
     registered aviation fuel producer is allowed \708\ (without 
     interest) if: (1) the aviation fuel tax was paid by an 
     importer or producer (the ``first producer'') and the tax has 
     not otherwise been credited or refunded; (2) the aviation 
     fuel was acquired by a registered aviation fuel producer (the 
     ``second producer'') after the tax was paid; (3) the second 
     producer files a timely refund claim with the proper 
     information; and (4) the first producer and any other person 
     that owns the fuel after its sale by the first producer and 
     before its purchase by the second producer have met certain 
     reporting requirements.\709\ Refund claims should contain the 
     volume and type of aviation fuel, the date on which the 
     second producer acquired the fuel, the amount of tax that the 
     first producer paid, a statement by the claimant that the 
     amount of tax was not collected nor included in the sales 
     price of the fuel by the claimant when the fuel was sold to a 
     subsequent purchaser, the name, address, and employer 
     identification number of the first producer, and a copy of 
     any required statement of a subsequent seller (subsequent to 
     the first producer but prior to the second producer) that the 
     second producer received. A claim for refund is filed on Form 
     8849, Claim for Refund of Excise Taxes, and may not be 
     combined with any other refunds.\710\
---------------------------------------------------------------------------
     \708\ Sec. 4091(d).
     \709\ Treas. Reg. sec. 48.4091-3(b).
     \710\ Treas. Reg. sec. 48.4091-3(d)(1).
---------------------------------------------------------------------------
       A payment is allowable to the ultimate purchaser of taxed 
     aviation fuel if the aviation fuel is used in a nontaxable 
     use.\711\ A claim for payment may be made on Form 8849 or on 
     Form 720, Schedule C. A claim made on Form 720, Schedule C, 
     may be netted against the claimant's excise tax 
     liability.\712\ Claims for payment not so taken may be 
     allowable as income tax credits \713\ on Form 4136, Credit 
     for Federal Tax Paid on Fuels.
---------------------------------------------------------------------------
     \711\ Sec. 6427(l)(1).
     \712\ Treas. Reg. sec. 40.6302(c)-1(a)(3).
     \713\ Sec. 34.
---------------------------------------------------------------------------


                               House Bill

       The provision changes the incidence of taxation of aviation 
     fuel from the sale of aviation fuel to the removal of 
     aviation fuel from a refinery or terminal, or the entry into 
     the United States of aviation fuel. Sales of not previously 
     taxed aviation fuel to an unregistered person also are 
     subject to tax.
       Under the provision, the full rate of tax--21.9 cents per 
     gallon--is imposed upon removal of aviation fuel from a 
     refinery or terminal (or entry into the United States). 
     Aviation fuel may be removed at a reduced rate--either 4.4 or 
     zero cents per gallon--only if the aviation fuel is: (1) 
     removed directly into the wing of an aircraft (i) that is 
     registered with the Secretary as a buyer of aviation fuel for 
     use in commercial aviation (e.g., a ``Y'' registrant under 
     current law), (ii) that is a foreign airline entitled to the 
     present law exemption for aviation fuel used in foreign 
     trade, or (iii) for a tax-exempt use; or (2) removed or 
     entered as part of an exempt bulk transfer.\714\ An exempt 
     bulk transfer is a removal or entry of aviation fuel 
     transferred in bulk by pipeline or vessel to a terminal or 
     refinery if the person removing or entering the aviation 
     fuel, the operator of such pipeline or vessel, and the 
     operator of such terminal or refinery are registered with the 
     Secretary.
---------------------------------------------------------------------------
     \714\ See sec. 4081(a)(1)(B).
---------------------------------------------------------------------------
       Under a special rule, the provision treats certain refueler 
     trucks, tankers, and tank wagons as a terminal if certain 
     requirements are met. For the special rule to apply, a 
     qualifying truck, tanker, or tank wagon must be loaded with 
     aviation fuel from a terminal: (1) that is located within an 
     airport, and (2) from which no vehicle licensed for highway 
     use is loaded with aviation fuel, except in exigent 
     circumstances identified by the Secretary in regulations. It 
     is intended that a terminal is located within an airport if 
     the terminal is located in a secure facility on airport 
     grounds. For example, if an access road runs between a 
     terminal and an airport's runways, and the terminal, like the 
     runways, is physically located on airport grounds and is part 
     of a secure facility, it is intended that under the provision 
     the terminal is located within the airport. It is intended 
     that an exigent circumstance under which loading a vehicle 
     registered for highway use with fuel would not disqualify a 
     terminal under the special rule would include, for example, 
     the unloading of fuel from bulk storage tanks into highway 
     vehicles in order to repair the storage tanks.
       In order to qualify for the special rule, a refueler truck, 
     tanker, or tank wagon must: (1) deliver the aviation fuel 
     directly into the wing of the aircraft at the airport where 
     the terminal is located; (2) have storage tanks, hose, and 
     coupling equipment designed and used for the purposes of 
     fueling aircraft; (3) not be registered for highway use; and 
     (4) be operated by the terminal operator (who operates the 
     terminal rack from which the fuel is unloaded) or by a person 
     that makes a daily accounting to such terminal operator of 
     each

[[Page H8595]]

     delivery of fuel from such truck, tanker, or tank wagon.\715\
---------------------------------------------------------------------------
     \715\ The provision requires that if such delivery of 
     information is provided to a terminal operator (or if a 
     terminal operator collects such information), that the 
     terminal operator provide such information to the Secretary.
---------------------------------------------------------------------------
       The provision does not change the applicable rates of tax 
     under present law, 21.9 cents per gallon for use in 
     noncommercial aviation, 4.4 cents per gallon for use in 
     commercial aviation, and zero cents per gallon for use by 
     domestic airlines in an international flight, by foreign 
     airlines, or other nontaxable use. The provision imposes 
     liability for the tax on aviation fuel removed from a 
     refinery or terminal directly into the wing of an aircraft 
     for use in commercial aviation on the person receiving the 
     fuel, in which case, such person self-assesses the tax on a 
     return. The provision does not change present-law nontaxable 
     uses of aviation fuel, or change the persons or the 
     qualifications of persons who are entitled to purchase fuel 
     at a reduced rate, except that a producer is not permitted to 
     purchase aviation fuel at a reduced rate by reason of such 
     persons' status as a producer.
       Under the provision, a refund is allowable to the ultimate 
     vendor of aviation fuel if such ultimate vendor purchases 
     fuel tax paid and subsequently sells the fuel to a person 
     qualified to purchase at a reduced rate and who waives the 
     right to a refund. In such a case, the provision permits an 
     ultimate vendor to net refund claims against any excise tax 
     liability of the ultimate vendor, in a manner similar to the 
     present law treatment of ultimate purchaser payment 
     claims.\716\
---------------------------------------------------------------------------
     \716\ For example, X is a commercial airline subsidiary of 
     airline Y. If Y sells fuel to X, X can waive its right to a 
     refund to Y as the ultimate vendor. Y would then be entitled 
     to file for a refund or net the refund against its excise tax 
     liability
---------------------------------------------------------------------------
       As under present law, if previously taxed aviation fuel is 
     used for a nontaxable use, the ultimate purchaser may claim a 
     refund for the tax previously paid. If previously taxed 
     aviation fuel is used for a taxable non aircraft use, the 
     fuel is subject to the tax imposed on kerosene (24.4 cents 
     per gallon) and a refund of the previously paid aviation fuel 
     tax is allowed. Claims by the ultimate vendor or the 
     purchaser that are not taken as refund claims may be 
     allowable as income tax credits.
       For example, for an airport that is not served by a 
     pipeline, aviation fuel generally is removed from a terminal 
     and transported to an airport storage facility for eventual 
     use at the airport. In such a case, the aviation fuel will be 
     taxed at 21.9 cents per gallon upon removal from the 
     terminal. At the airport, if the fuel is purchased from a 
     vendor by a person registered with the Secretary to use fuel 
     in commercial aviation, the purchaser may buy the fuel at a 
     reduced rate (generally, 4.4 cents per gallon for domestic 
     flights and zero cents per gallon for international flights) 
     and waive the right to a refund. The ultimate vendor 
     generally may claim a refund for the difference between 21.9 
     cents per gallon of tax paid upon removal and the rate of tax 
     paid to the vendor by the purchaser. To obtain a zero rate 
     upon purchase, a registered domestic airline must certify to 
     the vendor at the time of purchase that the fuel is for use 
     in an international flight; otherwise, the airline must pay 
     the 4.4 cents per gallon rate and file a claim for refund to 
     the Secretary if the fuel is used for international aviation. 
     If a zero rate is paid and the fuel subsequently is used in 
     domestic and not international travel, the domestic airline 
     is liable for tax at 4.4 cents per gallon. A foreign airline 
     eligible under present law to purchase aviation fuel tax-free 
     would continue to purchase such fuel tax-free.
       As another example, for an airport that is served by a 
     pipeline, aviation fuel generally is delivered to the wing of 
     an aircraft either by a refueling truck or by a ``hydrant'' 
     that runs directly from the pipeline to the airplane wing. If 
     a refueling truck that is not licensed for highway use 
     loads fuel from a terminal located within the airport (and 
     the other requirements of the provision for such truck and 
     terminal are met), and delivers the fuel directly to the 
     wing of an aircraft for use in commercial aviation, the 
     aviation fuel is taxed at 4.4 cents per gallon upon 
     delivery to the wing and the person receiving the fuel is 
     liable for the tax, which such person would be able to 
     self-assess on a return.\717\ If fuel is loaded into a 
     refueling truck that does not meet the requirements of the 
     provision, then the fuel is treated as removed from the 
     terminal into the refueling truck and tax of 21.9 cents 
     per gallon is paid on such removal. The ultimate vendor is 
     entitled to a refund of the difference between 21.9 cents 
     per gallon paid on removal and the rate paid by a 
     commercial airline purchaser (assuming the purchaser 
     waived the refund right). If fuel is removed from a 
     terminal directly to the wing of an aircraft registered to 
     use fuel in commercial aviation by a hydrant or similar 
     device, the person removing the aviation fuel is liable 
     for a tax of 4.4 cents per gallon (or zero in the case of 
     an international flight or qualified foreign airline) and 
     may self-assess such tax on a return.
---------------------------------------------------------------------------
     \717\ Alternatively, if the aviation fuel in the example is 
     for use in noncommercial aviation, the fuel is taxed at 21.9 
     cents per gallon upon delivery into the wing. Self-assessment 
     of the tax would not apply in such case.
---------------------------------------------------------------------------
       Under the provision, a floor stocks tax applies to aviation 
     fuel held by a person (if title for such fuel has passed to 
     such person) on October 1, 2004. The tax is equal to the 
     amount of tax that would have been imposed before October 1, 
     2004, if the provision was in effect at all times before such 
     date, reduced by the tax imposed by section 4091, as in 
     effect on the day before the date of enactment. The Secretary 
     shall determine the time and manner for payment of the tax, 
     including the nonapplication of the tax on de minimis amounts 
     of aviation fuel. Under the provision, 0.1 cents per gallon 
     of such tax is transferred to the LUST Trust Fund. The 
     remainder is transferred to the Airport and Airway Trust 
     Fund.
       Effective date.--(Effective for aviation fuel removed, 
     entered, or sold after September 30, 2004.


                            Senate Amendment

       The Senate amendment is similar to the House bill, except 
     that refueler trucks, tankers, and tank wagons are not 
     subject to special rules, and there is no provision for 
     liability for, and self-assessment of, tax by the person 
     receiving fuel removed from a refinery or terminal directly 
     into the wing of an aircraft (whether by refueling vehicle or 
     otherwise).
       Effective date.--Effective for aviation fuel removed, 
     entered, or sold after September 30, 2004.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modifications. The rule that permits certain 
     refueler trucks to be treated as a terminal for purposes of 
     the provision is modified to require that, in addition to the 
     requirements specified in the House bill, a qualifying truck, 
     tanker, or tank wagon must be loaded with aviation fuel from 
     a terminal that is located within a secured area of an 
     airport. The Secretary is required to publish, by December 
     15, 2004, and maintain a list of airports that include a 
     secured area in which a terminal is located.\718\ In 
     addition, the conference agreement modifes the requirement 
     that in order to qualify for the special rule, a refueler 
     truck, tanker, or tank wagon must deliver the aviation fuel 
     directly into the wing of the aircraft at the airport where 
     the terminal is located to a requirement that a refueler 
     truck, tanker, or tank wagon be loaded with aviation fuel for 
     delivery into aircraft at the airport where the terminal is 
     located.
---------------------------------------------------------------------------
     \718\ The conferees intend that the following airports, 
     subject to verification by the Secretary, be included on the 
     Secretary's initial list of airports that include a secured 
     area in which a terminal is located. The airports are listed 
     by airport name, and the terminal with respect to the airport 
     is identified by terminal control number. In maintaining the 
     list of qualified airports, the Secretary has the discretion 
     to add or remove airports from the list. Ted Stevens 
     International Airport, T-91-AK-4520; William B. Hartsfield 
     Atlanta International Airport, T-58-GA-2512; William B. 
     Hartsfield Atlanta International Airport, T-58-GA-2513; 
     William B. Hartsfield Atlanta International Airport, T-58-GA-
     2536; Bradley International Airport, T-06-CT-1271; Nashville 
     Metropolitan Airport, T-62-TN-2222; Logan International 
     Airport, T-04-MA-1171; Baltimore/Washington International 
     Airport, T-52-MD-1569; Cleveland Hopkins International 
     Airport, T-31-OH-3109; Charlotte/Douglas International 
     Airport, T-56-NC-2032; Colorado Springs Airport, T-84-CO-
     4108; Cincinnati/Northern Kentucky International Airport, T-
     61-KY-3277; Dallas Love Field Airport, T-75-TX-2663; Ronald 
     Reagan National Airport, T-54-VA-1686; Denver International 
     Airport, T-84-CO-4111; Dallas Fort Worth International 
     Airport, T-75-TX-2673; Wayne County Metropolitan Airport, T-
     38-MI-3018; Newark Liberty International Airport, T-22-NJ-
     1532; Fort Lauderdale/Hollywood International Airport; T-65-
     FL-2158; Piedmont Triad International Airport, T-56-NC-2038; 
     Honolulu International Airport, T-91-HI-4570; Dulles 
     International Airport, T-54-VA-1676; George Bush 
     Intercontinental Airport, T-76-TX-2818; Mid Continent 
     Airport, T-43-KS-3653; John F. Kennedy International Airport, 
     T-11-NY-1334; McCarren International Airport, T-86-NV-4355; 
     Kansas City International Airport, T-43-MO-3723; Orlando 
     International Airport, T-59-FL-2111; Midway Airport, T-36-IL-
     3376; Memphis International Airport, T-62-TN-2212; General 
     Mitchell International Airport, T-39-WI-3092; Minneapolis-St. 
     Paul International Airport, T-41-MN-3419; Minneapolis-St. 
     Paul International Airport, T-41-MN-3420; Minneapolis-St. 
     Paul International Airport, T-41-MN-3421; Louis Armstrong New 
     Orleans International Airport, T-72-LA-2356; Oakland 
     International Airport, T-94-CA-4702; Eppley Airfield, T-47-
     NE-3608; Ontario International Airport, T-33-CA-4792; O'Hare 
     International Airport, T-36-IL-3325; Portland International 
     Airport, T-91-OR-4450; Philadelphia International Airport, T-
     23-PA-1770; Sky Harbor International Airport, T-86-AZ-4302; 
     Pittsburgh International Airport, T-23-PA-1766; Raleigh/
     Durham International, T-56-NC-2045; Reno Cannon International 
     Airport, T-86-NV-4352; San Diego International Airport, T-33-
     CA-4788; San Antonio International Airport, pending; Seattle 
     Tacoma International Airport, T-91-WA-4425; San Francisco 
     International Airport, T-94-CA-4701; San Jose Municipal 
     Airport, T-77-CA-4650; Salt Lake City International Airport, 
     T-84-UT-4207; John Wayne Airport/Orange County, T-33-CA-4772; 
     Lambert International Airport, T-43-MO-3722; Tampa/St. 
     Petersburg International Airport, T-59-FL-2110.
---------------------------------------------------------------------------
       The conference agreement modifies the floor stocks tax. 
     Under the conference agreement, a floor stocks tax applies to 
     aviation fuel held by a person (if title for such fuel has 
     passed to such person) on January 1, 2004. The tax is equal 
     to the amount of tax that would have been imposed before 
     January 1, 2004, if the proposal was in effect at all times 
     before such date, reduced by (1) the tax imposed by section 
     4091, as in effect on the day before such date and, (2) in 
     the case of kerosene held exclusively for the holder's own 
     use, the amount which such holder would reasonably expect 
     under the proposal to be paid as a refund for a nontaxable 
     use with respect to the kerosene. The tax does not apply to 
     kerosene held in the fuel tank of an aircraft on January 1, 
     2004. The Secretary shall determine the time and manner

[[Page H8596]]

     for payment of the tax, including the nonapplication of the 
     tax on de minimis amounts of aviation fuel. Under the 
     conference agreement, 0.1 cents per gallon of such tax is 
     transferred to the LUST Trust Fund. The remainder is 
     transferred to the Airport and Airway Trust Fund.
       The conferees expect the Secretary to delay the due date of 
     the excise tax return with respect to aviation fuel for the 
     quarter beginning on January 1, 2005. It is intended that the 
     requirement of semi-monthly deposits of aviation fuel taxes 
     continue unchanged.
       Effective date.--(Effective for aviation-grade kerosene 
     removed, entered, or sold after December 31, 2004.
     3. Provide for transfer from Airport and Airway Trust Fund to 
         Highway Trust Fund to adjust for continued highway use of 
         aviation fuel (sec. 872 of the Senate amendment and secs. 
         9502 and 9503 of the Code)


                              Present Law

       Aviation fuel is kerosene and any liquid (other than any 
     product taxable under section 4081) that is suitable for use 
     as a fuel in an aircraft.\719\ In general, the rate of tax on 
     aviation fuel is 21.9 cents per gallon.\720\ Aviation fuel 
     sold for use or used in commercial aviation is taxed at a 
     reduced rate of 4.4 cents per gallon.\721\ Certain sales of 
     aviation fuel are exempt from tax.\722\
---------------------------------------------------------------------------
     \719\ Sec. 4093(a).
     \720\ Sec. 4091(b). This rate includes a 0.1 cent per gallon 
     Leaking Underground Storage Tank (``LUST'') Trust Fund tax. 
     The LUST Trust Fund tax is set to expire after March 31, 
     2005, with the result that on April 1, 2005, the tax rate is 
     scheduled to be 21.8 cents per gallon. Secs. 4091(b)(3)(B) & 
     4081(d)(3). Beginning on October 1, 2007, the rate of tax is 
     reduced to 4.3 cents per gallon. Sec. 4091(B)(3)(A).
     \721\ Sec. 4092(b). The4.4 cent rate includes 0.1 cent per 
     gallon that is attributable to the LUST Trust Fund financing 
     rate. A full exemption, discussed below applies to aviation 
     fuel that is sold for use in commercial aviation as fuel 
     supplies for vessels or aircraft, which includes use by 
     certain foreign air carriers and for the international 
     flights of domestic carriers. Secs. 4092(a), 4092(B), & 
     4221(d)(3).
     \722\  Sec. 4092.
---------------------------------------------------------------------------
       Taxes received for aviation fuel, except for the LUST Trust 
     Fund financing rate, are appropriated to the Airport and 
     Airway Trust Fund.\723\ Such appropriation occurs even if 
     aviation fuel is used for non aviation purposes.
---------------------------------------------------------------------------
     \723\ Sec. 9502(b).
---------------------------------------------------------------------------
       Taxes received on taxable fuel for transportation purposes 
     generally are appropriated to the Highway Trust Fund.\724\
---------------------------------------------------------------------------
     \724\ Sec. 9503(b).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision directs the Secretary to transfer from the 
     Airport and Airway Trust Fund to the Highway Trust Fund 
     annually an amount equivalent to amounts received in the 
     Airport and Airway Trust Fund which are attributable to fuel 
     that is used primarily for highway transportation purposes. 
     The Secretary is directed to transfer 11 percent of such 
     amount to the Mass Transit Account.
       Effective date.--(Effective on October 1, 2004.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
       4. Mechanical dye injection and related penalties (sec. 653 
     of the House bill, secs. 873, 874 and 875 of the Senate 
     amendment and secs. 4082 and 6715 and new sec. 6715A of the 
     Code)


                              Present Law

     Statutory rules
       Gasoline, diesel fuel and kerosene are generally subject to 
     excise tax upon removal from a refinery or terminal, upon 
     importation into the United States, and upon sale to 
     unregistered persons unless there was a prior taxable removal 
     or importation of such fuels.\725\ However, a tax is not 
     imposed upon diesel fuel or kerosene if all of the following 
     are met: (1) the Secretary determines that the fuel is 
     destined for a nontaxable use, (2) the fuel is indelibly dyed 
     in accordance with regulations prescribed by the 
     Secretary,\726\ and (3) the fuel meets marking requirements 
     prescribed by the Secretary.\727\ A nontaxable use is defined 
     as (1) any use that is exempt from the tax imposed by section 
     4041(a)(1) other than by reason of a prior imposition of tax, 
     (2) any use in a train, or (3) certain uses in buses for 
     public and school transportation, as described in section 
     6427(b)(1) (after application of section 6427(b)(3)).\728\
---------------------------------------------------------------------------
     \725\ Sec. 4081(a)(1)(A). If such fuel is used for a 
     nontaxable purpose, the purchaser is entitled to a refund of 
     tax paid, or in some cases, an income tax credit. See sec. 
     6427.
     \726\ Dyeing is not a requirement, however, for certain fuels 
     under certain conditions, i.e., diesel fuel or kerosene 
     exempted from dyeing in certain States by the EPA under the 
     Clean Air Act, aviation-grade kerosene as determined under 
     regulations prescribed by the Secretary, kerosene received by 
     pipeline or vessel and used by a registered recipient to 
     produce substances (other than gasoline, diesel fuel or 
     special fuels), kerosene removed or entered by a registrant 
     to produce such substances or for resale, and (under 
     regulations) kerosene sold by a registered distributor who 
     sells kerosene exclusively to ultimate vendors that resell it 
     (1) from a pump that is not suitable for fueling any diesel-
     powered highway vehicle or train, or (2) for blending with 
     heating oil to be used during periods of extreme or 
     unseasonable cold. Sec. 4082(c), (d).
     \727\ Sec. 4082(a).
     \728\ Sec. 4082(b)
---------------------------------------------------------------------------
       The Secretary is required to prescribe necessary 
     regulations relating to dyeing, including specifically the 
     labeling of retail diesel fuel and kerosene pumps.\729\
---------------------------------------------------------------------------
     \729\ Sec. 4082(e).
---------------------------------------------------------------------------
       A person who sells dyed fuel (or holds dyed fuel for sale) 
     for any use that such person knows (or has reason to know) is 
     a taxable use, or who willfully alters or attempts to alter 
     the dye in any dyed fuel, is subject to a penalty.\730\ The 
     penalty also applies to any person who uses dyed fuel for a 
     taxable use (or holds dyed fuel for such a use) and who knows 
     (or has reason to know) that the fuel is dyed.\731\ The 
     penalty is the greater of $1,000 per act or $10 per gallon of 
     dyed fuel involved. In determining the amount of the penalty, 
     the $1,000 is increased by the product of $1,000 and the 
     number of prior penalties imposed upon such person (or a 
     related person or predecessor of such person or related 
     person).\732\ The penalty may be imposed jointly and 
     severally on any business entity, each officer, employee, or 
     agent of such entity who willfully participated in any act 
     giving rise to such penalty.\733\ For purposes of the 
     penalty, the term ``dyed fuel'' means any dyed diesel fuel or 
     kerosene, whether or not the fuel was dyed pursuant to 
     section 4082.\734\
---------------------------------------------------------------------------
     \730\ Sec. 6715(a).
     \731\ Sec. 6715(a).
     \732\ Sec. 6715(b).
     \733\ Sec. 6715(d).
     \734\ Sec. 6715(c)(1).
---------------------------------------------------------------------------
     Regulations
       The Secretary has prescribed certain regulations under this 
     provision, including regulations that specify the allowable 
     types and concentration of dye, that the person claiming the 
     exemption must be a taxable fuel registrant, that the 
     terminal must be an approved terminal (in the case of a 
     removal from a terminal rack), and the contents of the notice 
     to be posted on diesel fuel and kerosene pumps.\735\ However, 
     the regulations do not prescribe the time or method of adding 
     the dye to taxable fuel.\736\ Diesel fuel is usually dyed at 
     a terminal rack by either manual dyeing or mechanical 
     injection. The regulations also provide that a terminal 
     operator is jointly and severally liable for unpaid tax if 
     undyed diesel fuel or kerosene is removed and the terminal 
     operator provides any person with documentation that such 
     fuel is dyed.\737\
---------------------------------------------------------------------------
     \735\ Treas. Reg. secs. 48.4082-1, -2.
     \736\ In March 2000, the IRS withdrew its Notice of Proposed 
     Rulemaking PS-6-95 (61 F.R. 10490 (1996)) relating to dye 
     injection systems. Announcement 2000-42, 2000-1 C.B. 949. The 
     proposed regulation established standards for mechanical dye 
     injection equipment and required terminal operators to report 
     nonconforming dyeing to the IRS. See also Treas. Reg. sec. 
     48.4082-1(c), (d).
     \737\ Treas. Reg. sec. 48.4081-2(c).
---------------------------------------------------------------------------


                               House Bill

       With respect to terminals that offer dyed fuel, the 
     provision eliminates manual dyeing of fuel and requires 
     dyeing by a mechanical system. Not later than 180 days after 
     enactment of this provision, the Secretary of the Treasury is 
     to prescribe regulations establishing standards for tamper 
     resistant mechanical injector dyeing. Such standards shall be 
     reasonable, cost-effective, and establish levels of security 
     commensurate with the applicable facility.
       The provision adds an additional set of penalties for 
     violation of the new rules. A penalty, equal to the greater 
     of $25,000 or $10 for each gallon of fuel involved, applies 
     to each act of tampering with a mechanical dye injection 
     system. The person committing the act is also responsible for 
     any unpaid tax on removed undyed fuel. A penalty of $1,000 is 
     imposed upon the operator of a mechanical dye injection 
     system for each failure to maintain the security standards 
     for such system.\738\ An additional penalty of $1,000 is 
     imposed upon such operator for each day any such violation 
     remains uncorrected after the first day such violation has 
     been or reasonably should have been discovered. For purposes 
     of the daily penalty, a violation may be corrected by 
     shutting down the portion of the system causing the 
     violation. If any of these penalties are imposed on any 
     business entity, each officer, employee, or agent of such 
     entity or other contracting party who willfully participated 
     in any act giving rise to such penalty shall be jointly and 
     severally liable with such entity for such penalty. If such 
     business entity is part of an affiliated group, the parent 
     corporation of such entity shall be jointly and severally 
     liable with such entity for the penalty.
---------------------------------------------------------------------------
     \738\ The operator remains liable under current Treas. Reg. 
     sec. 48.4081-2(c) for any unpaid tax on removed undyed fuel.
---------------------------------------------------------------------------
       Effective date.--The provision is effective 180 days after 
     the date that the Secretary issues the required regulations. 
     The Secretary must issue such regulations no later than 180 
     days after enactment.


                            Senate Amendment

       The Senate amendment contains a mechanical dyeing provision 
     similar to the provision in the House bill, except that the 
     Secretary of the Treasury is to prescribe regulations 
     establishing standards by June 30, 2004.
       The Senate amendment also contains two additional 
     provisions not in the House bill.
       The Senate amendment denies administrative appeal or review 
     for repeat offenders (more than two violations) of present 
     law after a chemical analysis of the fuel, except in the case 
     of a claim regarding fraud or mistake in the chemical 
     analysis or error in the mathematical calculation of the 
     amount of penalty.

[[Page H8597]]

       The Senate amendment also extends present-law penalties to 
     any person who knows that the strength or composition of any 
     dye or marking in any dyed fuel has been altered, chemically 
     or otherwise, and who sells (or holds for sale) such fuel for 
     any use that the person knows or has reason to know is a 
     taxable use of such fuel.
       Effective date.--Penalties relating to mechanical dyeing 
     systems are effective 180 days after the regulations are 
     issued. The prohibition of certain administrative review is 
     effective for penalties assessed after date of enactment. The 
     extension of present law penalties is effective on date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the House bill with 
     respect to mechanical dye injection systems and related 
     penalties. The conference agreement follows the Senate 
     amendment with respect to denying administrative review to 
     repeat offenders and extending present law penalties to any 
     person who knows that the strength or composition of any dye 
     or marking in any dyed fuel has been altered, chemically or 
     otherwise, and who sells (or holds for sale) such fuel for 
     any use that the person knows or has reason to know is a 
     taxable use of such fuel.
     5. Authority to inspect on-site records (sec. 654 of the 
         House bill, sec. 877 of the Senate amendment, and sec. 
         4083 of the Code)


                              Present Law

       The IRS is authorized to inspect any place where taxable 
     fuel \739\ is produced or stored (or may be stored). The 
     inspection is authorized to: (1) examine the equipment used 
     to determine the amount or composition of the taxable fuel 
     and the equipment used to store the fuel; and (2) take and 
     remove samples of taxable fuel. Places of inspection include, 
     but are not limited to, terminals, fuel storage facilities, 
     retail fuel facilities or any designated inspection 
     site.\740\
---------------------------------------------------------------------------
     \739\ ``Taxable fuel'' means gasoline, diesel fuel, and 
     kerosene. Sec. 4083(a).
     \740\ Sec. 4083(c)(1)(A).
---------------------------------------------------------------------------
       In conducting the inspection, the IRS may detain any 
     receptacle that contains or may contain any taxable fuel, or 
     detain any vehicle or train to inspect its fuel tanks and 
     storage tanks. The scope of the inspection includes the book 
     and records kept at the place of inspection to determine the 
     excise tax liability under section 4081.\741\
---------------------------------------------------------------------------
     \741\ Treas. Reg. sec. 48.4083-1(c)(1).
---------------------------------------------------------------------------


                               House Bill

       The provision expands the scope of the inspection to 
     include any books, records, or shipping papers pertaining to 
     taxable fuel located in any authorized inspection location.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment.
     6. Assessable penalty for refusal of entry (sec. 878 of the 
         Senate amendment and new sec. 6717 of the Code)


                              Present Law

       The Internal Revenue Service is authorized to inspect any 
     place where taxable fuel is produced or stored (or may be 
     stored). As part of the inspection, the Internal Revenue 
     Service is authorized to: (1) examine the equipment used to 
     determine the amount or composition of the taxable fuel and 
     the equipment used to store the fuel; and (2) take and remove 
     samples of taxable fuel. Places of inspection, include, but 
     are not limited to, terminals, fuel storage facilities, 
     retail fuel facilities or any designated inspection 
     site.\742\
---------------------------------------------------------------------------
     \742\ Sec. 4083(c)(1)(A).
---------------------------------------------------------------------------
       In conducting the inspection, the Internal Revenue Service 
     may detain any receptacle that contains or may contain any 
     taxable fuel, or detain any vehicle or train to inspect its 
     fuel tanks and storage tanks. The scope of the inspection 
     includes the book and records kept to determine the excise 
     tax liability under section 4081.\743\ The Internal Revenue 
     Service is authorized to establish inspection sites. A 
     designated inspection site includes any State highway 
     inspection station, weigh station, agricultural inspection 
     station, mobile station or other location designated by the 
     Internal Revenue Service.\744\
---------------------------------------------------------------------------
     \743\ Treas. Reg. sec. 48.4083-1(b)(2).
     \744\ Sec. 4083(c); Treas. Reg. sec. 48.4083-1(b)(1).
---------------------------------------------------------------------------
       Any person that refuses to allow an inspection is subject 
     to a penalty in the amount of $1,000 for each refusal.\745\ 
     The IRS is not able to assess this penalty in the same manner 
     as it would a tax. It must first seek the assistance of the 
     Department of Justice to obtain a judgment. Assessable 
     penalties are payable upon notice and demand by the Secretary 
     and are assessed and collected in the same manner as 
     taxes.\746\
---------------------------------------------------------------------------
     \745\ Sec. 4083(c)(3) and 7342.
     \746\ Sec. 6671.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       In addition to the $1,000 penalty under present law, the 
     Senate amendment imposes an assessable penalty with respect 
     to the refusal of entry. The assessable penalty is $1,000 for 
     such refusal. The penalty will not apply if it is shown that 
     such failure is due to reasonable cause. If the penalty is 
     imposed on a business entity, the proposal provides for joint 
     and several liability with respect to each officer, employee, 
     or agent of such entity or other contracting party who 
     willfully participated in the act giving rise to the penalty. 
     If the business entity is part of an affiliated group, the 
     parent corporation also will be jointly and severally liable 
     for the penalty.
       Effective date.--The provision is effective on October 1, 
     2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except for effective date.
       Effective date.--The provision is effective on January 1, 
     2005.
     7. Registration of pipeline or vessel operators required for 
         exemption of bulk transfers to registered terminals or 
         refineries (sec. 655 of the House bill, sec. 879 of the 
         Senate amendment, and sec. 4081 of the Code)


                              Present Law

       In general, gasoline, diesel fuel, and kerosene (``taxable 
     fuel'') are taxed upon removal from a refinery or a 
     terminal.\747\ Tax also is imposed on the entry into the 
     United States of any taxable fuel for consumption, use, or 
     warehousing. The tax does not apply to any removal or entry 
     of a taxable fuel transferred in bulk (a ``bulk transfer'') 
     to a terminal or refinery if both the person removing or 
     entering the taxable fuel and the operator of such terminal 
     or refinery are registered with the Secretary.\748\
---------------------------------------------------------------------------
     \747\ Sec. 4081(a)(1)(A).
     \748\ Sec. 4081(a)(1)(B). The sale of a taxable fuel to an 
     unregistered person prior to a taxable removal or entry of 
     the fuel is subject to tax. Sec. 4081(a)(1)(A).
---------------------------------------------------------------------------
       Present law does not require that the vessel or pipeline 
     operator that transfers fuel as part of a bulk transfer be 
     registered in order for the transfer to be exempt. For 
     example, a registered refiner may transfer fuel to an 
     unregistered vessel or pipeline operator who in turn 
     transfers fuel to a registered terminal operator. The 
     transfer is exempt despite the intermediate transfer to an 
     unregistered person.
       In general, the owner of the fuel is liable for payment of 
     tax with respect to bulk transfers not received at an 
     approved terminal or refinery.\749\ The refiner is liable for 
     payment of tax with respect to certain taxable removals from 
     the refinery.\750\
---------------------------------------------------------------------------
     \749\ Treas. Reg. sec. 48.4081-3(e)(2).
     \750\ Treas. Reg. sec. 48.4081-3(b).
---------------------------------------------------------------------------


                               House Bill

       The provision requires that for a bulk transfer of a 
     taxable fuel to be exempt from tax, any pipeline or vessel 
     operator that is a party to the bulk transfer be registered 
     with the Secretary. Transfer to an unregistered party will 
     subject the transfer to tax.
       The Secretary is required to publish periodically a list of 
     all registered persons that are required to register.
       Effective date.--(Effective on October 1, 2004, except that 
     the Secretary is required to publish the list of registered 
     persons beginning on July 1, 2004.


                            Senate Amendment

       Similar to the House bill, except that with respect to a 
     bulk transfer on which no tax is paid, the Senate amendment 
     imposes a penalty on any person who knowingly transfers 
     taxable fuel in bulk to an unregistered person. The penalty 
     is the greater of $10,000 or $1 per gallon and is increased 
     for multiple prior violations. No penalty is imposed upon a 
     showing by the taxpayer of reasonable cause.
       Effective date.--Effective on October 1, 2004, except that 
     the Secretary is required to publish the list of persons 
     required to register by June 30, 2004.


                          Conference Agreement

       The conference agreement follows the House bill, modified 
     to provide that the Secretary shall periodically publish a 
     current list of persons required to register under the 
     authority of section 6103(k)(7).
       Effective date.--(Effective on March 1, 2005, except that 
     the Secretary is required to publish the list of persons 
     required to register beginning on January 1, 2005.
     8. Display of registration and penalties for failure to 
         display registration and to register (secs. 656 and 657 
         of the House bill, secs. 880 and 882 of the Senate 
         amendment, and secs. 4101, 7232, 7272 and new secs. 6718 
         and 6719 of the Code)


                              Present Law

       Blenders, enterers, pipeline operators, position holders, 
     refiners, terminal operators, and vessel operators are 
     required to register with the Secretary with respect to fuels 
     taxes imposed by sections 4041(a)(1) and 4081.\751\ A non-
     assessable penalty for failure to register is $50.\752\ A 
     criminal penalty of $5,000, or imprisonment of not more than 
     five years, or both, together with the costs of prosecution 
     also applies to a failure to register and to certain false 
     statements made in connection with a registration 
     application.\753\
---------------------------------------------------------------------------
     \751\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1).
     \752\ Sec. 7272(a).
     \753\ Sec. 7232.
---------------------------------------------------------------------------


                               House Bill

       The provision requires that every operator of a vessel who 
     is required to register with the Secretary display on each 
     vessel used by the operator to transport fuel, proof of 
     registration through an electronic identification device 
     prescribed by the Secretary. A failure to display such proof 
     of registration

[[Page H8598]]

     results in a penalty of $500 per month per vessel. The amount 
     of the penalty is increased for multiple prior violations. No 
     penalty is imposed upon a showing by the taxpayer of 
     reasonable cause.
       The provision imposes a new assessable penalty for failure 
     to register of $10,000 for each initial failure, plus $1,000 
     per day that the failure continues. No penalty is imposed 
     upon a showing by the taxpayer of reasonable cause. In 
     addition, the provision increases the present-law non-
     assessable penalty for failure to register from $50 to 
     $10,000 and the present law criminal penalty for failure to 
     register from $5,000 to $10,000.
       Effective date.--(The provision requiring display of 
     registration is effective on October 1, 2004. The provision 
     relating to penalties is effective for penalties imposed 
     after September 30, 2004.


                            Senate Amendment

       The Senate amendment is similar to House bill, except that 
     the increase in the penalty for multiple prior violations for 
     failure to display proof of registration is determined 
     differently.
       Effective date.--Effective on October 1, 2004, except that 
     the penalties for failure to register are effective for 
     failures pending or occurring after September 30, 2004.


                          Conference Agreement

       The conference agreement follows the House bill except that 
     the identification device is not required to be electronic.
       Effective date.--The provision requiring display of 
     registration is effective on January 1, 2005. The provision 
     relating to penalties is effective for penalties imposed 
     after December 31, 2004.
     9. Registration of persons within foreign trade zones (sec. 
         881 of the Senate amendment and sec. 4101 of the Code)


                              Present Law

       Blenders, enterers, pipeline operators, position holders, 
     refiners, terminal operators, and vessel operators are 
     required to register with the Secretary with respect to fuels 
     taxes imposed by sections 4041(a)(1) and 4081.\754\
---------------------------------------------------------------------------
     \754\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) & (c)(1).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Secretary shall require registration by any person that 
     operates a terminal or refinery within a foreign trade zone 
     or within a customs bonded storage facility, or holds an 
     inventory position with respect to a taxable fuel in such a 
     terminal.


                          Conference Agreement

       The conference agreement follows the Senate amendment. It 
     is intended that the Secretary shall establish a date by 
     which persons required to register under the provision must 
     be registered.
       Effective date.--Effective on January 1, 2005.
     10. Penalties for failure to report (sec. 657 of the House 
         bill, sec. 882 of the Senate amendment, and new sec. 6725 
         of the Code)


                              present law

       A fuel information reporting program, the Excise Summary 
     Terminal Activity Reporting System (``ExSTARS''), requires 
     terminal operators and bulk transport carriers to report 
     monthly on the movement of any liquid product into or out of 
     an approved terminal.\755\ Terminal operators file Form 720-
     TO--Terminal Operator Report, which shows the monthly 
     receipts and disbursements of all liquid products to and from 
     an approved terminal.\756\ Bulk transport carriers (barges, 
     vessels, and pipelines) that receive liquid product from an 
     approved terminal or deliver liquid product to an approved 
     terminal file Form 720-CS--Carrier Summary Report, which 
     details such receipts and disbursements. In general, the 
     penalty for failure to file a report or a failure to furnish 
     all of the required information in a report is $50 per 
     report.\757\
---------------------------------------------------------------------------
     \755\ Sec. 4010(d); Treas. Reg. sec. 48.4101-2. The reports 
     are required to be filed by the end of the month following 
     the month to which the report relates.
     \756\ An approved terminal is a terminal that is operated by 
     a taxable fuel registrant that is a terminal operator. Treas. 
     Reg. sec. 48.4081-1(b).
     \757\ Sec. 6721(a).
---------------------------------------------------------------------------


                               House bill

       The provision imposes a new assessable penalty for failure 
     to file a report or to furnish information required in a 
     report required by the ExSTARS system. The penalty is $10,000 
     per failure with respect to each vessel or facility (e.g., a 
     terminal or other facility) for which information is required 
     to be furnished. No penalty is imposed upon a showing by the 
     taxpayer of reasonable cause.
       Effective date.--Effective for penalties imposed after 
     September 30, 2004.


                            senate amendment

       Similar to House bill, except for technical wording 
     differences.
       Effective date.--Effective for failures pending or 
     occurring after September 30, 2004. The electronic reporting 
     provision is effective on October 1, 2004.


                          conference agreement

       The conference agreement follows the House bill.
       Effective date.--Effective for penalties imposed after 
     December 31, 2004.
     11. Electronic filing of required information reports (sec. 
         895 of the Senate amendment and sec. 4010 of the Code)


                              present law

       A fuel information reporting program, the Excise Summary 
     Terminal Activity Reporting System (``ExSTARS''), requires 
     terminal operators and bulk transport carriers to report 
     monthly on the movement of any liquid product into or out of 
     an approved terminal.\758\ Terminal operators file Form 720-
     TO--Terminal Operator Report, which shows the monthly 
     receipts and disbursements of all liquid products to and from 
     an approved terminal.\759\ Bulk transport carriers (barges, 
     vessels, and pipelines) that receive liquid product from an 
     approved terminal or deliver liquid product to an approved 
     terminal file Form 720-CS--Carrier Summary Report, which 
     details such receipts and disbursements.
---------------------------------------------------------------------------
     \758\ Sec. 4101(d); Treas. Reg. sec. 48.4101-2. The reports 
     are required to be filed by the end of the month following 
     the month to which the report relates.
     \759\ An approved terminal is a terminal that is operated by 
     a taxable fuel registrant that is a terminal operator. Treas. 
     Reg. sec. 48.4081-1(b).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment requires information reporting with 
     respect to taxable fuels removed, entered, or transferred 
     from any refinery, pipeline, or vessel that is registered. 
     The proposal also requires that any person who must report 
     under the ExSTARs systems and who has 25 or more reportable 
     transactions in a month to report in electronic format.
       Effective date.--Effective on October 1, 2005.


                          conference agreement

       The conference agreement follows the Senate amendment 
     except that the conference agreement does not adopt the 
     information reporting requirement with respect to taxable 
     fuels removed, entered, or transferred from any refinery, 
     pipeline, or vessel that is registered.
       Effective date.--Effective on January 1, 2006.
     12. Information reporting for persons claiming certain tax 
         benefits (sec. 883 of the Senate amendment and new sec. 
         4104 of the Code)


                              Present Law

       The Code provides an income tax credit for each gallon of 
     ethanol and methanol derived from renewable sources (e.g., 
     biomass) used or sold as a fuel, or used to produce a 
     qualified alcohol fuel mixture, such as gasohol. The amount 
     of the credit is equal to 52 cents per gallon (ethanol) \760\ 
     and 60 cents per gallon (methanol).\761\ This tax credit is 
     provided to blenders of the alcohols with other taxable 
     fuels, or to the retail sellers of unblended alcohol fuels. 
     Part or all of the benefits of the income tax credit may be 
     claimed through reduced excise taxes paid, either in reduced-
     tax sales or by expedited blender refunds on fully taxed 
     sales of gasoline to obtain the benefit of the reduced rates. 
     The amount of the income tax credit determined with respect 
     to any alcohol is reduced to take into account any benefit 
     provided by the reduced excise tax rates. To obtain a partial 
     refund on fully taxed gasoline, the following requirements 
     apply: (1) the claim must be for gasohol sold or used during 
     a period of at least one week, (2) the claim must be for at 
     least $200, and (3) the claim must be filed by the last day 
     of the first quarter following the earliest quarter included 
     in the claim. If the blender cannot meet these requirements, 
     the blender must claim a credit on the blender's income tax 
     return.
---------------------------------------------------------------------------
     \760\ The 52-cents-per-gallon credit is scheduled to decline 
     to 51 cents per gallon beginning in calendar year 2005. The 
     credit is scheduled to expire after the earlier of (1) 
     expiration of the Highway Trust Fund excise taxes or (2) 
     December 31, 2007.
     \761\ Ethanol produced by certain ``small producers'' is 
     eligible for an additional producer tax credit of 10 cents 
     per gallon. Eligible small producers are defined as persons 
     whose production capacity does not exceed 30 million gallons 
     and whose annual production does not exceed 15 million 
     gallons.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment requires persons claiming the Code 
     benefits related to alcohol fuels and biodiesel fuels to 
     provide such information related to such benefits and the 
     coordination of such benefits as the Secretary may require to 
     ensure the proper administration and use of such benefits. 
     The Secretary may deny, revoke or suspend the registration of 
     any person to enforce this requirement.
       Effective date.--The provision is effective October 1, 
     2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment. 
     Persons claiming excise tax benefits are to file quarterly 
     information returns, rather than monthly.
       Effective date.--The provision is effective January 1, 
     2004.
     13. Collection from Customs bond where importer not 
         registered (sec. 658 of the House bill and sec. 884 of 
         Senate amendment)


                              Present Law

       Typically, gasoline, diesel fuel, and kerosene are 
     transferred by pipeline or barge in large quantities 
     (``bulk'') to terminal storage facilities that geographically 
     are located

[[Page H8599]]

     closer to destination retail markets. A fuel is taxed when it 
     ``breaks bulk,'' i.e., when it is removed from the refinery 
     or terminal, typically by truck or rail car, for delivery to 
     a smaller wholesale facility or a retail outlet. The party 
     liable for payment of the taxes is the ``position holder,'' 
     i.e., the person shown on the records of the terminal 
     facility as owning the fuel.
       Tax is also imposed on the entry into the United States of 
     any taxable fuel for consumption, use, or warehousing.\762\ 
     This tax does not apply to any entry of a taxable fuel 
     transferred in bulk to a terminal or refinery if the person 
     entering the taxable fuel and the operator of such terminal 
     or refinery are registered. The ``enterer'' is liable for the 
     tax. An enterer generally means the importer of record (under 
     customs law) with respect to the taxable fuel. However, if 
     the importer of record is acting as an agent (a broker for 
     example), the person for whom the agent is acting is the 
     enterer. If there is no importer of record for taxable fuel 
     entered into the United States, the owner of the taxable fuel 
     at the time it is brought into the United States is the 
     enterer. An importer's liability for Customs duties includes 
     a liability for any internal revenue taxes that attach upon 
     the importation of merchandise unless otherwise provided by 
     law or regulation.\763\
---------------------------------------------------------------------------
     \762\ Sec. 4081(a)(1)(A)(iii).
     \763\ 19 C.F.R. sec. 141.3 (2004).
---------------------------------------------------------------------------
       As a part of the entry documentation, the importer, 
     consignee, or an authorized agent usually is required to file 
     a bond with Customs. The bond, among other things, guarantees 
     that proper entry summary, with payment of estimated duties 
     and taxes when due, will be made for imported merchandise and 
     that any additional duties and taxes subsequently found to be 
     due will be paid.
       As a condition of permitting anyone to be registered with 
     the IRS, under section 4101 of the Code, the Secretary may 
     require that such person give a bond in such sum as the 
     Secretary determines appropriate.
       On July 31, 2004, the Department of Treasury issued 
     regulations providing that effective September 28, 2004, 
     importers and enterers are jointly and severally liable for 
     the tax on imported fuel if the importer is not the enterer 
     and the enterer is not registered with the Secretary.


                               House Bill

       Under the provision, the importer of record is jointly and 
     severally liable for the tax imposed upon entry of fuel into 
     the United States if, under regulations, any other person 
     that is not registered with the Secretary as a taxable fuel 
     registrant is liable for such tax. If the importer of record 
     is liable for the tax and such tax is not paid on or before 
     the last date prescribed for payment, the Secretary may 
     collect such tax from the Customs bond posted with respect to 
     the importation of the taxable fuel to which the tax relates.
       For purposes of determining the jurisdiction of any court 
     of the United States or any agency of the United States, any 
     action by the Secretary to collect the tax from the Customs 
     bond is treated as an action to collect tax from a bond 
     authorized by section 4101 of the Code, not as an action to 
     collect from a bond relating to the importation of 
     merchandise.
       Effective date.--The provision is effective for fuel 
     entered after September 30, 2004.


                            Senate Amendment

       Under the Senate amendment, for fuel entering the United 
     States (other than transfers in bulk) for consumption, use, 
     or warehousing, the proposal provides that the tax is 
     immediately due and payable at the time of entry, if the 
     enterer is not registered with the IRS. Upon the failure to 
     pay tax or post bond, the Customs Service is authorized under 
     the proposal to deny entry of the shipment into the United 
     States. The Secretary also may seize the fuel on which the 
     tax is due or detain the vehicle transporting such fuel until 
     such tax is paid. If no tax has been paid or bond filed 
     within five days of the seizure, the Secretary may sell the 
     fuel.
       Effective date.--The provision is effective upon date of 
     enactment.


                          Conference Agreement

       The conference agreement does not contain the House bill or 
     Senate amendment provisions.
     14. Reconciliation of on-loaded cargo to entered cargo (sec. 
         885 of the Senate amendment)


                              Present Law

       The Trade Act of 2002 directed the Secretary to promulgate 
     regulations pertaining to the electronic transmission to the 
     Bureau of Customs and Border Patrol (``Customs'') of 
     information pertaining to cargo destined for importation into 
     the United States or exportation from the United States, 
     prior to such importation or exportation.\764\ The Department 
     of the Treasury issued final regulations on October 31, 2002. 
     The regulations require the advance and accurate presentation 
     of certain manifest information prior to lading at the 
     foreign port and encourage the presentation of this 
     information electronically. Customs must receive from the 
     carrier the vessel's Cargo Declaration (Customs Form 1302) or 
     the electronic equivalent within 24 hours before such cargo 
     is laden aboard the vessel at the foreign port.\765\ Certain 
     carriers of bulk cargo, however, are exempt from these filing 
     requirements. Such bulk cargo includes that composed of free 
     flowing articles such as oil, grain, coal, ore and the like, 
     which can be pumped or run through a chute or handled by 
     dumping.\766\ Thus, taxable fuels are not covered by the 
     Cargo Declaration requirement.
---------------------------------------------------------------------------
     \764\ Sec. 343(a) of Pub. L. No. 107-210 (2002).
     \765\ 19 CFR sec. 4.7(b)(2).
     \766\ 19 CFR sec. 4.7(b)(4)(i)(A).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment requires that, not later than one year 
     after the date of enactment, the Secretary of Homeland 
     Security, together with the Secretary, promulgate regulations 
     providing for the transmission to the Internal Revenue 
     Service of information pertaining to cargo of taxable fuels 
     destined for importation into the United States, prior to 
     such importations. The provision requires that imports of 
     taxable fuels be subject to the Cargo Declaration and 
     electronic reporting requirements.
       Effective date.--The provision is effective upon date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     15. Modification of the use tax on heavy highway vehicles 
         (sec. 659 of the House bill, sec. 890 of the Senate 
         amendment, and secs. 4481, 4483 and 6165 of the Code)


                              Present Law

       An annual use tax is imposed on heavy highway vehicles, at 
     the rates below.\767\
---------------------------------------------------------------------------
     \767\ Sec. 4481.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Under 55,000 pounds.......................  No tax.
55,000-75,000 pounds......................  $100 plus $22 per 1,000
                                             pounds over 55,000.
Over 75,000 pounds........................  $550.
------------------------------------------------------------------------

       The annual use tax is imposed for a taxable period of July 
     1 through June 30. Generally, the tax is paid by the person 
     in whose name the vehicle is registered. In certain cases, 
     taxpayers are allowed to pay the tax in installments.\768\ 
     State governments are required to receive proof of payment 
     of the use tax as a condition of vehicle registration.
---------------------------------------------------------------------------
     \768\ Sec. 6156.
     \769\ See generally, sec. 4483.
     \770\ Sec. 4483(f): Treas. Reg. sec. 41.4483-7(a).
---------------------------------------------------------------------------
       Exemptions and reduced rates are provided for certain 
     ``transit-type buses,'' trucks used for fewer than 5,000 
     miles on public highways (7,500 miles for agricultural 
     vehicles), and logging trucks. Any highway motor vehicle that 
     is issued a base plate by Canada or Mexico and is operated on 
     U.S. highways is subject to the highway use tax whether or 
     not the vehicles are required to be registered in the United 
     States. The tax rate for Canadian and Mexican vehicles is 75 
     percent of the rate that would otherwise be imposed.


                               house bill

       The House bill eliminates the ability to pay the tax in 
     installments. It also eliminates the reduced rates for 
     Canadian and Mexican vehicles. The provision requires 
     taxpayers with 25 or more vehicles for any taxable period to 
     file their returns electronically. Finally, the provision 
     permits proration of tax for vehicles sold during the taxable 
     period.
       Effective date.--The provision is effective for taxable 
     periods beginning after the date of enactment.


                            senate amendment

       The Senate amendment eliminates the ability to pay the tax 
     in installments and allows no proration of the tax unless the 
     vehicle is destroyed, stolen, or sold. It also eliminates the 
     reduced rates for Canadian and Mexican vehicles. In addition, 
     under regulations to be prescribed by the Secretary, every 
     taxpayer that pays the heavy highway vehicle use tax to 
     receive and display on the vehicle an electronic 
     identification device as prescribed by the Secretary. The 
     device is to be received and displayed not later than one 
     month after the due date of the return of tax with respect to 
     each taxable period.
       Effective date.--The Senate amendment is generally 
     effective for taxable periods beginning after the date of 
     enactment. Requires the Secretary to issue regulations 
     regarding electronic identification devices no later than 
     October 1, 2005.


                          conference agreement

       The conference agreement follows the House bill.
     16. Modification of ultimate vendor refund claims with 
         respect to farming (sec. 660 of the House bill, sec. 887 
         of the Senate amendment, and sec. 6427 of the Code)


                              present law

       In general, the Code provides that, if diesel fuel, 
     kerosene, or aviation fuel on which tax has been imposed is 
     used by any person in a nontaxable use, the Secretary is to 
     refund (without interest) the amount of tax imposed. The 
     refund is made to the ultimate purchaser of the taxed fuel. 
     However, in the case of diesel fuel or kerosene used on a 
     farm for farming purposes or by a State or local government, 
     refund payments are paid to the ultimate, registered vendors 
     (``ultimate vendors'') of such fuels.


                               house bill

       In the case of diesel fuel or kerosene used on a farm for 
     farming purposes, the House bill provision limits ultimate 
     vendor claims for refund to sales of such fuel in amounts 
     less than 250 gallons per farmer per claim.
       Effective date.--The provision is effective for fuels sold 
     for nontaxable use after the date of enactment.

[[Page H8600]]

                            senate amendment

       The Senate amendment provision is the same as the House 
     bill except the limit on ultimate vendor claims is amounts 
     less than 500 gallons per farmer per claim.


                          conference agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision.
     17.Dedication of revenue from certain penalties to the 
         Highway Trust Fund (sec. 661 of the House bill, sec. 891 
         of the Senate amendment, and sec. 9503 of the Code)


                              present law

       Present law does not dedicate to the Highway Trust Fund any 
     penalties assessed and collected by the Secretary.


                               house bill

       The provision dedicates to the Highway Trust Fund amounts 
     equivalent to the penalties paid under sections 6715 
     (relating to dyed fuel sold for use or used in taxable use), 
     6715A (penalty for tampering or failing to maintain security 
     requirements for mechanical dye injection systems), 6717 
     (penalty for failing to display tax registration on vessels), 
     6718 (penalty for failing to register under section 4101), 
     6725 (penalty for failing to report information required by 
     the Secretary), 7232 (penalty for failing to register and 
     false representations of registration status), and 7272 (but 
     only with regard to penalties related to failure to 
     register under section 4101).
       Effective date.--The provision is effective for penalties 
     assessed after October 1, 2004.


                            senate amendment

       The Senate amendment similarly dedicates certain penalties 
     to the Highway Trust Fund.
       Effective date.--The provision is effective for penalties 
     assessed after October 1, 2004.


                          Conference Agreement

       The conference agreement generally follows the House bill 
     and the Senate amendment by dedicating certain penalties to 
     the Highway Trust Fund. The conference agreement dedicates to 
     the Highway Trust Fund amounts equivalent to the penalties 
     paid under sections 6715 (relating to dyed fuel sold for use 
     or used in taxable use), 6715A (penalty for tampering with or 
     failing to maintain security requirements for mechanical dye 
     injection systems), 6717 (assessable penalty for refusal of 
     entry), 6718 (penalty for failing to display tax registration 
     on vessels), 6719 (assessable penalty for failure to 
     register), 6725 (penalty for failing to report information 
     required by the Secretary), 7232 (penalty for failing to 
     register and false representations of registration status), 
     and 7272 (but only with regard to penalties related to 
     failure to register under section 4101).
       Effective date.--The provision is effective for penalties 
     assessed on or after the date of enactment.
     18. Taxable fuel refunds for certain ultimate vendors (sec. 
         662 of the House bill, sec. 888 of the Senate amendment, 
         and secs. 6416 and 6427 of the Code)


                              Present Law

       The Code provides that, in the case of gasoline on which 
     tax has been paid and sold to a State or local government, to 
     a nonprofit educational organization, for supplies for 
     vessels or aircraft, for export, or for the production of 
     special fuels, a wholesale distributor that sells the 
     gasoline for such exempt purposes is treated as the person 
     who paid the tax and thereby is the proper claimant for a 
     credit or refund of the tax paid. In the case of undyed 
     diesel fuel or kerosene used on a farm for farming purposes 
     or by a State or local government, a credit or payment is 
     allowable only to the ultimate, registered vendors 
     (``ultimate vendors'') of such fuels.
       In general, refunds are paid without interest. However, in 
     the case of overpayments of tax on gasoline, diesel fuel, or 
     kerosene that is used to produce a qualified alcohol mixture 
     and for refunds due ultimate vendors of diesel fuel or 
     kerosene used on a farm for farming purposes or by a State or 
     local government, the Secretary is required to pay interest 
     on certain refunds. The Secretary must pay interest on 
     refunds of $200 or more ($100 or more in the case of 
     kerosene) due to the taxpayer arising from sales over any 
     period of a week or more, if the Secretary does not make 
     payment of the refund within 20 days.


                               house bill

       The provision provides that for sales of gasoline to a 
     State or local government or to a nonprofit educational 
     organization for its exclusive use on which tax has been 
     imposed, the provision conforms the payment of refunds to 
     that procedure established under present law in the case of 
     diesel fuel or kerosene. That is, the ultimate vendor claims 
     the refund.
       For claims for refund of tax paid on diesel fuel or 
     kerosene sold to State and local governments and for claims 
     for refund of tax paid on gasoline sold to State and local 
     governments or to a nonprofit educational organization and 
     for which the ultimate purchaser utilized a credit card, the 
     provision deems the person extending the credit to the 
     ultimate purchaser to be the ultimate vendor. That is, the 
     credit card company administers claims for refund and is 
     responsible for supplying documentation required from 
     ultimate vendors.
       Effective date.--The provision is effective October 1, 
     2004.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and Senate 
     amendment, with modifications. For sales of gasoline to a 
     State or local government for the exclusive use of a State or 
     local government or to a nonprofit educational organization 
     for its exclusive use on which tax has been imposed, claims 
     for credits or refund are made by the ultimate vendor.
       The conference agreement provides that the rules for vendor 
     refunds apply to claims made under this provision, except 
     that the rules regarding electronic claims shall not apply 
     unless the ultimate vendor has certified to the Secretary for 
     the most recent quarter of the taxable year that all ultimate 
     purchasers of the vendor are State or local governments or to 
     a nonprofit educational organizations.\771\
---------------------------------------------------------------------------
     \771\ Sec. 6416(b)(2)(C) or (D).
---------------------------------------------------------------------------
       The conference agreement does not include the House bill or 
     Senate amendment provisions that deem the person extending 
     credit via a credit card to the ultimate purchaser to be the 
     ultimate vendor for purposes of refund claims.
       Effective date.--The provision is effective on January 1, 
     2005.
     19. Two party exchanges (sec. 663 of the bill and new sec. 
         4105 of the Code)


                              Present Law

       Most fuel is taxed when it is removed from a registered 
     terminal.\772\ The party liable for payment of this tax is 
     the ``position holder.'' The position holder is the person 
     reflected on the records of the terminal operator as holding 
     the inventory position in the fuel.\773\
---------------------------------------------------------------------------
     \772\ A ``terminal'' is a storage and distribution facility 
     that is supplied by pipeline or vessel, and from which fuel 
     may be removed at a rack. A ``rack'' is a mechanism capable 
     of delivering taxable fuel into a means of transport other 
     than a pipeline or vessel.
     \773\ Such person has a contractual agreement with the 
     terminal operator to store and provide services with respect 
     to the fuel. A ``terminal operator'' is any person who owns, 
     operates, or otherwise controls a terminal. A terminal 
     operator can also be a position holder if that person owns 
     fuel in its terminal.
---------------------------------------------------------------------------
       It is common industry practice for oil companies to serve 
     customers of other oil companies under exchange agreements, 
     e.g., where Company A's terminal is more conveniently located 
     for wholesale or retail customers of Company B. In such 
     cases, the exchange agreement party (Company B in the 
     example) owns the fuel when the motor fuel is removed from 
     the terminal and sold to B's customer.


                               House Bill

       The provision permits two registered parties to switch 
     position holder status in fuel within a registered terminal 
     (thereby relieving the person originally owning the fuel\774\ 
     of tax liability as the position holder) if all of the 
     following occur:
---------------------------------------------------------------------------
     \774\ In the provision, this person is referred to as the 
     ``delivering person.''
---------------------------------------------------------------------------
       (1) The transaction includes a transfer from the original 
     owner, i.e., the person who holds the original inventory 
     position for taxable fuel in the terminal as reflected in the 
     records of the terminal operator prior to the transaction.
       (2) The exchange transaction occurs before or at the same 
     time as completion of removal across the rack from the 
     terminal by the receiving person or its customer.
       (3) The terminal operator in its books and records treats 
     the receiving person as the person that removes the product 
     across a terminal rack for purposes of reporting the 
     transaction to the Internal Revenue Service.
       (4) The transaction is the subject of a written contract.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment.
     20. Simplification of tax on tires (sec. 664 of the House 
         bill and sec. 4071 of the Code)


                              Present Law

       A graduated excise tax is imposed on the sale by a 
     manufacturer (or importer) of tires designed for use on 
     highway vehicles (sec. 4071). The tire tax rates are as 
     follows:

------------------------------------------------------------------------
                Tire Weight                           Tax Rate
------------------------------------------------------------------------
Not more than 40 lbs......................  No tax.
More than 40 lbs., but not more than 70     15 cents/lb. in excess of 40
 lbs.                                        lbs.
More than 70 lbs., but not more than 90     $4.50 plus 30 cents/lb. in
 lbs.                                        excess of 70 lbs.
More than 90 lbs..........................  $10.50 plus 50 cents/lb. in
                                             excess of 90 lbs.
------------------------------------------------------------------------

       No tax is imposed on the recapping of a tire that 
     previously has been subject to tax. Tires of extruded tiring 
     with internal wire fastening also are exempt.
       The tax expires after September 30, 2005.


                               House Bill

       The House bill modifies the excise tax applicable to tires. 
     The House bill replaces the present-law tax rates based on 
     the weight of the tire with a tax rate based on the load 
     capacity of the tire. In general, the tax is 9.4 cents for 
     each 10 pounds of tire load capacity in excess of 3,500 
     pounds. In the case of a biasply tire, the tax rate is 4.7 
     cents for each

[[Page H8601]]

     10 pounds of tire load capacity in excess of 3,500 pounds.
       The House bill modifies the definition of tires for use on 
     highway vehicles to include any tire marked for highway use 
     pursuant to certain regulations promulgated by the Secretary 
     of Transportation. The provision also exempts from tax any 
     tire sold for the exclusive use of the United States 
     Department of Defense or the United States Coast Guard.
       Tire load capacity is the maximum load rating labeled on 
     the tire pursuant to regulations promulgated by the Secretary 
     of Transportation. A biasply tire is any tire manufactured 
     primarily for use on piggyback trailers.
       Effective date.--The provision is effective for sales in 
     calendar years beginning more than 30 days after the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill with the 
     following modifications. The conference agreement modifies 
     the rate of tax applicable to 9.45 cents for each 10 pounds 
     of tire load capacity in excess of 3,500 pounds. In the case 
     of a biasply tire, the conference agreement modifies the tax 
     rate is 4.725 cents for each 10 pounds of tire load capacity 
     in excess of 3,500 pounds. The conference agreement also 
     imposes tax at a rate of is 4.725 cents for each 10 pounds of 
     tire load capacity in excess of 3,500 pounds an any super 
     single tire. A super single tire is a single tire greater 
     than 13 inches in cross section width designed to replace two 
     tires in a dual fitment. The conference agreement provides 
     that a biasply tire means a pneumatic tire on which the ply 
     cords that extend to the beads are laid at alternate angles 
     substantially less than 90 degrees to the centerline of the 
     tread.
       Nothing in the amendments made by this section shall be 
     construed to have any effect on subsection (d) of section 
     48.4701-1 of Title 26, Code of Federal Regulations (relating 
     to recapped and retreaded tires). The conferees expect that 
     the Secretary will prescribe regulations implementing the 
     amendment to section 4071 but that such regulations will not 
     affect subsection (d). The conferees believe no tax should be 
     imposed on the recapping of a tire that previously has been 
     subject to tax.
       Effective date.--The provision is effective for sales in 
     calendar years beginning more than 30 days after the date of 
     enactment.
     21. Tax on sale of diesel fuel whether suitable for use or 
         not in a diesel-powered vehicle or train (sec. 886 of the 
         Senate amendment)


                              Present Law

       Under section 4081(a)(1), an excise tax is imposed upon (1) 
     the removal of any taxable fuel from a refinery or terminal, 
     (2) the entry of any taxable fuel into the United States, or 
     (3) the sale of any taxable fuel to any person who is not a 
     taxable fuel registrant under section 4101, unless there was 
     a prior taxable removal or entry.
       Under section 4083(a), taxable fuel includes diesel fuel. 
     Diesel fuel includes any liquid, other than gasoline, that 
     without further processing or blending, is suitable for use 
     as a fuel in a diesel-powered highway vehicle or train.\775\ 
     A liquid is suitable for this use if the liquid has practical 
     and commercial fitness for use in the propulsion engine of a 
     diesel-powered highway vehicle or diesel-powered train. A 
     liquid may possess this practical and commercial fitness even 
     though the specified use is not the liquid's predominant use. 
     However, a liquid does not possess this practical and 
     commercial fitness solely by reason of its possible or rare 
     use as a fuel in the propulsion engine of a diesel-powered 
     highway vehicle or diesel-powered train.
---------------------------------------------------------------------------
     \775\ Sec. 4083(a)(3).
---------------------------------------------------------------------------
       A tax is imposed on the removal or sale of blended taxable 
     fuel by the blender thereof.\776\ Tax is computed on the 
     difference between the total number of gallons of blended 
     taxable fuel removed or sold and the number of gallons of 
     previously taxed taxable fuel used to produce the blended 
     taxable fuel.\777\ Blended taxable fuel means any taxable 
     fuel that is produced outside the bulk transfer/terminal 
     system by mixing (1) taxable fuel with respect to which tax 
     has been imposed under section 4041(a)(1) or 4081(a) (other 
     than taxable fuel for which a credit or payment has been 
     allowed); and (2) any other liquid on which tax has not been 
     imposed under section 4081.\778\
---------------------------------------------------------------------------
     \776\ Sec. 4081(b).
     \777\ Treas. Reg. sec. 48.4081-3(g)(1).
     \778\ Treas. Reg. sec. 48.4081-1(c)(1)(i).
---------------------------------------------------------------------------
       The blender (the person making the blended taxable fuel) is 
     liable for the tax on the increased volume. In addition, on 
     and after April 2, 2003, a person that sells any liquid that 
     is used to produce blended taxable fuel is jointly and 
     severally liable for the tax on the removal or sale of that 
     blended taxable fuel if the liquid is a liquid on which tax 
     has not been imposed under section 4081; and is sold by that 
     person as gasoline, diesel fuel, or kerosene that has been 
     taxed under section 4081.\779\
---------------------------------------------------------------------------
     \779\ Treas. Reg. sec. 48.4081-3(g)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision modifies the definition of diesel fuel to 
     include any liquid which is sold as or offered for sale as a 
     fuel in a diesel-powered highway vehicle or diesel-powered 
     train.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     22. Nonapplication of export exemption to delivery of fuel to 
         motor vehicles removed from United States (sec. 892 of 
         the Senate amendment)


                              Present Law

       A manufacturer's excise tax is imposed upon
       (1) The removal of any taxable fuel from a refinery or 
     terminal;
       (2) The entry of any taxable fuel into the United States 
     for consumption, use or warehousing; or
       (3) The sale of any taxable fuel to any person who is not 
     registered, unless there was a prior taxable removal or 
     entry.\780\
---------------------------------------------------------------------------
     \780\ Sec. 4081(a)(1).
---------------------------------------------------------------------------
     The term ``taxable fuel'' means gasoline, diesel fuel and 
     kerosene.
       Special provisions under the Code provide for a refund of 
     tax to any person who sells gasoline to another for 
     exportation.\781\ Section 6421(c) provides ``If gasoline is 
     sold to any person for any purpose described in paragraph 
     (2), (3), (4), or (5) of section 4221(a), the Secretary shall 
     pay (without interest) to such person an amount equal to the 
     product of the number of gallons so sold multiplied by the 
     rate at which tax was imposed on such gasoline by section 
     4081.'' Section 4221 provides, in pertinent part, ``Under 
     regulations prescribed by the Secretary, no tax shall be 
     imposed under this chapter . . . on the sale by the 
     manufacturer . . . of an article--. . . for export, or for 
     resale by the purchaser to a second purchaser for export . . 
     . but only if such exportation or use is to occur before any 
     other use . . .''
---------------------------------------------------------------------------
     \781\ Secs. 6421(c) and 4221(a)(2).
---------------------------------------------------------------------------
       It is the IRS administrative position that the exemption 
     from manufacturers excise tax by reason of exportation does 
     not apply to the sale of motor fuel pumped into a fuel tank 
     of a vehicle that is to be driven, or shipped, directly out 
     of the United States.\782\
---------------------------------------------------------------------------
     \782\ Rev. Rul. 69-150.
---------------------------------------------------------------------------
       A duty-free sales facility that meets certain conditions 
     may sell and deliver for export from the customs territory of 
     the United States duty-free merchandise. Duty-free 
     merchandise is merchandise sold by a duty-free sales facility 
     on which neither Federal duty nor Federal tax has been 
     assessed pending exportation from the customs territory of 
     the United States. The statutes covering duty-free facilities 
     do not contain any limitation on what goods may qualify for 
     duty-free treatment.
       The United States Court of Federal Claims (``Claims 
     Court'') and a District Court in Michigan have taken 
     different positions on whether fuel sold from a duty-free 
     facility and placed into the tank of an automobile that is 
     then driven out of the country is exported fuel.\783\ Both 
     cases involved the same duty-free facility, which is near the 
     Canadian border and is configured in such a way that anyone 
     leaving the facility must depart the United States and enter 
     into Canada. The District Court agreed with the IRS position 
     that such fuel is not exported, while the Claims Court 
     reached the opposite conclusion. The Claims Court concluded 
     that the act of exportation began with the consumer's 
     purchase and that the fuel necessarily enters into the stream 
     of exportation at the moment it is placed into the fuel 
     supply tank and the customer drives into Canada.
---------------------------------------------------------------------------
     \783\ See, Ammex Inc. v. United States, 52 Fed. Cl. 303 
     (2002) (on cross-motions for summary judgment, the court 
     found that plaintiff established standing to proceed to trial 
     pursuant to sec. 6421(c) respecting its gasoline purchases 
     only); and Ammex Inc. v. United States, 2002 U.S. Dist. LEXIS 
     25771 (E.D. Mich. July 31, 2002) (granting defendant's motion 
     for summary judgment), reconsideration denied, Ammex, Inc. v. 
     United States, 2002 U.S. Dist. LEXIS 22893 (E.D. Mich. Oct. 
     22, 2002). Although the Claims Court ruled that Ammex had 
     standing to challenge the excise tax on gasoline, it 
     subsequently held that Ammex was not entitled to a payment 
     pursuant to sec. 6421(c) because it failed to prove at trial 
     that it did not pass the tax on to its customers. Ammex Inc. 
     v. United States, 2003 U.S. Claims LEXIS 63 (Fed. Cl. Mar. 
     26, 2003).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision reaffirms the long-standing IRS position 
     taken in Rev. Rul. 69-150 and restates present law by 
     amending the Code definition of export to exclude the 
     delivery of a taxable fuel into a fuel tank of a motor 
     vehicle that is shipped or driven out of the United States. 
     It also imposes a tax on the sale of taxable fuel at a duty-
     free sales enterprise unless there was a prior taxable 
     removal, or entry of such fuel.
       Effective date.--The provision applies to sales or 
     deliveries made after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     23. Taxation of transmix and diesel fuel blend stocks and 
         Treasury study on fuel tax compliance (secs. 893, 894 and 
         895 of the Senate amendment and sec. 4083 of the Code)


                              Present Law

     Definition of taxable fuels
       A ``taxable fuel'' is gasoline, diesel fuel (including any 
     liquid, other than gasoline,

[[Page H8602]]

     which is suitable for use as a fuel in a diesel-powered 
     highway vehicle or train), and kerosene.\784\
---------------------------------------------------------------------------
     \784\ Sec. 4083(a).
---------------------------------------------------------------------------
       Under the regulations, ``gasoline'' includes all products 
     commonly or commercially known or sold as gasoline and suited 
     for use as a motor fuel, and that have an octane rating of 75 
     or more. Gasoline also includes, to the extent provided in 
     regulations, gasoline blendstocks and products commonly used 
     as additives in gasoline. The term ``gasoline blendstocks'' 
     does not include any product that cannot be blended into 
     gasoline without further processing or fractionation 
     (``off-spec gasoline'').\785\
---------------------------------------------------------------------------
     \785\ Treas. Reg. sec. 48.4081-1(c)(3)(ii). The term 
     ``gasoline blendstocks'' means alkylate; butane; 
     catalytically cracked gasoline; coker gasoline; ethyl 
     tertiary butyl ether (ETBE); hexane; hydrocrackate; 
     isomerate; methyl tertiary butyl ether (MTBE); mixed xylene 
     (not including any separated isomer of xylene); natural 
     gasoline; pentane; pentane mixture; polymer gasoline; 
     raffinate; reformate; straight-run gasoline; straight-run 
     naphtha; tertiary amyl methyl ether (TAME); tertiary butyl 
     alcohol (gasoline grade) (TBA); thermally cracked gasoline; 
     toluene; and transmix containing gasoline. Treas. Reg. sec. 
     48.4081-1(c)(3)(i).
---------------------------------------------------------------------------
       Diesel fuel is any liquid (other than gasoline) that is 
     suitable for use as a fuel in a diesel-powered highway 
     vehicle or diesel-powered train.\786\ By regulation, diesel 
     fuel does not include kerosene, gasoline, No. 5 and No. 6 
     fuel oils (as described in ASTM Specification D 396), or F-76 
     (Fuel Naval Distillates MIL-F-16884) any liquid that contains 
     less than four percent normal parafins, or any liquid that 
     has a distillation range of 125 degrees Fahrenheit or less, 
     sulfur content of 10 ppm or less and minimum color of +27 
     Saybolt (these are known as ``excluded liquids'').\787\
---------------------------------------------------------------------------
     \786\ Sec. 4083(a)(3).
     \787\ Treas. Reg. sec. 48.4081-1(c)(2)(ii).
---------------------------------------------------------------------------
       By regulation, kerosene is defined as the kerosene 
     described in ASTM Specification D 3699 (No. 1-K and No. 2-K), 
     ASTM Specification D 1655 (kerosene-type jet fuel), and 
     military specifications MIL-DTL-5624T (Grade JP-5) and MIL-
     DTL-83133E (Grade JP-8). Kerosene does not include any liquid 
     that is an excluded liquid.\788\
---------------------------------------------------------------------------
     \788\ Treas. Reg. sec. 48.4081-1(b).
---------------------------------------------------------------------------
     Taxable events and exemptions
       An excise tax is imposed upon (1) the removal of any 
     taxable fuel from a refinery or terminal, (2) the entry of 
     any taxable fuel into the United States, or (3) the sale of 
     any taxable fuel to any person who is not registered with the 
     IRS to receive untaxed fuel, unless there was a prior taxable 
     removal or entry.\789\ The tax does not apply to any removal 
     or entry of taxable fuel transferred in bulk to a terminal or 
     refinery if the person removing or entering the taxable fuel 
     and the operator of such terminal or refinery are registered 
     with the Secretary.\790\
---------------------------------------------------------------------------
     \789\ Sec. 4081(a)(1).
     \790\ Sec. 4081(a)(1)(B).
---------------------------------------------------------------------------
       Gasoline exemptions
       If certain conditions are met, the removal, entry, or sale 
     of gasoline blendstocks is not taxable. Generally, the 
     exemption from tax applies if a gasoline blendstock is not 
     used to produce finished gasoline or is received at an 
     approved terminal or refinery. No tax is imposed on nonbulk 
     removals from a terminal or refinery, or nonbulk entries into 
     the United States or on any gasoline blendstocks if the 
     person liable for the tax is a gasoline registrant, has an 
     unexpired notification certificate, knows of no false 
     information in the certificate, and has verified the accuracy 
     of the notification certificate. The sale of a gasoline 
     blendstock that was not subject to tax on nonbulk removal or 
     entry is taxable unless the seller has an unexpired 
     certificate from the buyer and has no reason to believe that 
     any information in the certificate is false. No tax is 
     imposed on, or purchaser certification required for, off-spec 
     gasoline.
       Diesel fuel and kerosene exemptions
       Diesel fuel and kerosene that is to be used for a 
     nontaxable purpose will not be taxed upon removal from the 
     terminal if it is dyed to indicate its nontaxable purpose. 
     Undyed aviation-grade kerosene also is exempt from tax at the 
     rack if it is destined for use as a fuel in an aircraft. The 
     tax does not apply to diesel fuel asserted to be ``not 
     suitable for use'' or kerosene asserted to qualify as an 
     excluded liquid.
       Feedstock kerosene that a registered industrial user 
     receives by pipeline or vessel also is exempt from the dyeing 
     requirement. A kerosene feedstock user is defined as a person 
     that receives kerosene by bulk transfer for its own use in 
     the manufacture or production of any substance (other than 
     gasoline, diesel fuel or special fuels subject to tax). Thus, 
     for example, kerosene is used for a feedstock purpose when it 
     is used as an ingredient in the production of paint and is 
     not used for a feedstock purpose when it is used to power 
     machinery at a factory where paint is produced. The person 
     receiving the kerosene must be registered with the IRS and 
     provide a certificate noting that the kerosene will be used 
     for a feedstock purpose in order for the exemption to apply.
       Information and tax return reporting
       The IRS collects data under the ExSTARS reporting system 
     that tracks all removals across the terminal rack regardless 
     of whether or not the product is technically excluded from 
     the definition of gasoline, diesel or blendstocks. ExSTARS 
     reporting identifies the position holder at the time of 
     removal. Below the rack, no information is gathered for 
     exempt or excluded products or uses.
       Taxpayers file quarterly excise tax returns showing only 
     net taxable gallons.\791\ Taxpayers do not account for 
     gallons they claim to be exempt on such returns. Although the 
     return is a quarterly return, the excise taxes are paid in 
     semimonthly deposits.\792\ If deposits are not made as 
     required, a taxpayer may be required to file returns on a 
     monthly or semimonthly basis instead of quarterly.\793\
---------------------------------------------------------------------------
     \791\ Treas. Reg. sec. 406011(a)-1(a); Form 720, Quarterly 
     Federal Excise Tax Return.
     \792\ Treas. Reg. 40.6302(c)-1(a).
     \793\ Treas. Reg. 40.6011(a)-1(b).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment creates a new category of taxable 
     liquids, ``reportable liquids''. A reportable liquid is any 
     petroleum-based liquid other than a taxable fuel. For 
     purposes of the imposition of tax, the provision treats 
     ``reportable liquids'' in a manner similar to taxable fuels. 
     Tax is imposed upon the removal, entry, or sale of such 
     liquids, unless the removal, entry, or sale is (1) to a 
     registered person who certifies that such liquid will not be 
     used as a fuel or in the production of a fuel, or (2) the 
     sale is to the ultimate purchaser of such liquid. Under the 
     provision, the current exclusions for distillates not 
     suitable for use in a highway vehicle, excluded liquids, and 
     gasoline blendstocks requiring further processing (off-spec 
     gasoline) are eliminated. The provision also provides that 
     dyed diesel (a taxable fuel) also is taxable unless removed 
     by a taxable fuel registrant (a person registered with the 
     Secretary under section 4101).
       The provision authorizes the Secretary to pay (without 
     interest) an amount equal to the tax imposed, if a person 
     establishes that the ultimate use of a gasoline blendstock, 
     or additive, was not to produce gasoline. Similarly, if tax 
     is imposed on a reportable liquid and the person establishes 
     that the liquid was not used to produce a taxable, fuel, the 
     Secretary is authorized to pay (without interest) an amount 
     equal to the tax imposed on such person with respect to the 
     reportable liquid.
       Taxpayers are to file a monthly fuel excise tax return. Not 
     earlier than January 1, 2005, such filings shall be in 
     electronic form as prescribed by the Secretary. In addition, 
     under the provision, the Secretary is to require that all 
     persons removing refined product, whether a taxable product 
     or an untaxed product, over the terminal rack to report such 
     products on an excise tax return. The return is to 
     specifically identify the class of product and its 
     quantity.\794\
---------------------------------------------------------------------------
     \794\ Persons not liable for tax, will make their reports in 
     the same manner as taxpayers who file fuel excise tax returns 
     as described above.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for fuel sold 
     or used after September 30, 2004.


                          Conference Agreement

       The conference agreement adds two new categories to the 
     definition of diesel fuel. Under the conference agreement, 
     diesel fuel means: (1) any liquid (other than gasoline) which 
     is suitable for use as a fuel in a diesel-powered highway 
     vehicle, or a diesel-powered train; (2) transmix; and (3) 
     diesel fuel blend stocks as identified by the Secretary. 
     Transmix means a by-product of refined products pipeline 
     operations created by the mixing of different specification 
     products during pipeline transportation. Transmix generally 
     results when one fuel, such as diesel fuel, is placed in a 
     pipeline followed by another taxable fuel, such as kerosene. 
     The mixture created between the two fuels when it is neither 
     all diesel fuel nor all kerosene, is an example of a 
     transmix. Under the conference agreement, all transmix is 
     taxable as diesel fuel, regardless of whether it contains 
     gasoline.
       Under the conference agreement, it is intended that the re-
     refining of tax-paid transmix into gasoline, diesel fuel or 
     kerosene qualify as a nontaxable off-highway business use of 
     such transmix, for purposes of the refund and payment 
     provisions relating to nontaxable uses of diesel fuel.
       Not later than January 31, 2005, the Secretary shall submit 
     to the Committee on Finance of the Senate and the Committee 
     on Ways and Means of the House of Representatives a report 
     regarding fuel tax compliance, which shall include 
     information, and analysis as specified below, and 
     recommendations to address the issues identified.
       The Secretary is to identify chemical products that should 
     be added to the list of blendstocks. The Secretary is to 
     identify those chemical products, as identified by lab 
     analysis of fuel samples taken by the IRS, that have been 
     blended with taxable fuel but are not currently treated as a 
     blendstock. The report should indicate, to the extent 
     possible, any statistics as to the frequency in which such 
     chemical product has been discovered, and whether the samples 
     contained above-normal concentrations of such chemical 
     product. The report also shall include a discussion of IRS 
     findings regarding the addition of waste products to taxable 
     fuel and any recommendations to address the taxation of such 
     products. The report shall include a discussion of IRS 
     findings regarding sales of taxable fuel to entities claiming 
     exempt status as a State or local government. Such discussion 
     shall include the frequency of erroneous certifications as to 
     exempt status determined on audit. The Secretary shall 
     consult with representatives of State and

[[Page H8603]]

     local governments in providing recommendations to address 
     this issue, including the feasibility of State maintained 
     lists of their exempt governmental entities.
       Effective date.--The provision regarding the taxation of 
     transmix and diesel fuel blendstocks is effective for fuel 
     removed, sold, or used after December 31, 2004. The 
     requirement for a Treasury study is effective on the date of 
     enactment.

              D. Nonqualified Deferred Compensation Plans

     1. Treatment of nonqualified deferred compensation plans 
         (sec. 671 of the House bill, section 671 of the Senate 
         amendment, and new sec. 409A and secs. 6040 and 6051 of 
         the Code)


                              Present Law

     In general
       The determination of when amounts deferred under a 
     nonqualified deferred compensation arrangement are includible 
     in the gross income of the individual earning the 
     compensation depends on the facts and circumstances of the 
     arrangement. A variety of tax principles and Code provisions 
     may be relevant in making this determination, including the 
     doctrine of constructive receipt, the economic benefit 
     doctrine,\795\ the provisions of section 83 relating 
     generally to transfers of property in connection with the 
     performance of services, and provisions relating specifically 
     to nonexempt employee trusts (sec. 402(b)) and nonqualified 
     annuities (sec. 403(c)).
---------------------------------------------------------------------------
     \795\ See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), 
     aff'd per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-
     31, 1960-1 C.B. 174.
---------------------------------------------------------------------------
       In general, the time for income inclusion of nonqualified 
     deferred compensation depends on whether the arrangement is 
     unfunded or funded. If the arrangement is unfunded, then the 
     compensation is generally includible in income when it is 
     actually or constructively received. If the arrangement is 
     funded, then income is includible for the year in which the 
     individual's rights are transferable or not subject to a 
     substantial risk of forfeiture.
       Nonqualified deferred compensation is generally subject to 
     social security and Medicare taxes when the compensation is 
     earned (i.e., when services are performed), unless the 
     nonqualified deferred compensation is subject to a 
     substantial risk of forfeiture. If nonqualified deferred 
     compensation is subject to a substantial risk of forfeiture, 
     it is subject to social security and Medicare tax when the 
     risk of forfeiture is removed (i.e., when the right to the 
     nonqualified deferred compensation vests). Amounts deferred 
     under a nonaccount balance plan that are not reasonably 
     ascertainable are not required to be taken into account as 
     wages subject to social security and Medicare taxes until the 
     first date that such amounts are reasonably ascertainable. 
     Social security and Medicare tax treatment is not affected by 
     whether the arrangement is funded or unfunded, which is 
     relevant in determining when amounts are includible in income 
     (and subject to income tax withholding).
       In general, an arrangement is considered funded if there 
     has been a transfer of property under section 83. Under that 
     section, a transfer of property occurs when a person acquires 
     a beneficial ownership interest in such property. The term 
     ``property'' is defined very broadly for purposes of section 
     83.\796\ Property includes real and personal property other 
     than money or an unfunded and unsecured promise to pay money 
     in the future. Property also includes a beneficial interest 
     in assets (including money) that are transferred or set aside 
     from claims of the creditors of the transferor, for example, 
     in a trust or escrow account. Accordingly, if, in connection 
     with the performance of services, vested contributions are 
     made to a trust on an individual's behalf and the trust 
     assets may be used solely to provide future payments to the 
     individual, the payment of the contributions to the trust 
     constitutes a transfer of property to the individual that is 
     taxable under section 83. On the other hand, deferred amounts 
     are generally not includible in income if nonqualified 
     deferred compensation is payable from general corporate funds 
     that are subject to the claims of general creditors, as such 
     amounts are treated as unfunded and unsecured promises to pay 
     money or property in the future.
---------------------------------------------------------------------------
     \796\ Treas. Reg. sec. 1.83-3(e). This definition in part 
     reflects previous IRS rulings on nonqualified deferred 
     compensation.
---------------------------------------------------------------------------
       As discussed above, if the arrangement is unfunded, then 
     the compensation is generally includible in income when it is 
     actually or constructively received under section 451.\797\ 
     Income is constructively received when it is credited to an 
     individual's account, set apart, or otherwise made available 
     so that it may be drawn on at any time. Income is not 
     constructively received if the taxpayer's control of its 
     receipt is subject to substantial limitations or 
     restrictions. A requirement to relinquish a valuable right in 
     order to make withdrawals is generally treated as a 
     substantial limitation or restriction.
---------------------------------------------------------------------------
     \797\ Treas. Reg. secs. 1.451-1 and 1.451-2.
---------------------------------------------------------------------------
     Rabbi trusts
       Arrangements have developed in an effort to provide 
     employees with security for nonqualified deferred 
     compensation, while still allowing deferral of income 
     inclusion. A ``rabbi trust'' is a trust or other fund 
     established by the employer to hold assets from which 
     nonqualified deferred compensation payments will be made. The 
     trust or fund is generally irrevocable and does not permit 
     the employer to use the assets for purposes other than to 
     provide nonqualified deferred compensation, except that the 
     terms of the trust or fund provide that the assets are 
     subject to the claims of the employer's creditors in the case 
     of insolvency or bankruptcy.
       As discussed above, for purposes of section 83, property 
     includes a beneficial interest in assets set aside from the 
     claims of creditors, such as in a trust or fund, but does not 
     include an unfunded and unsecured promise to pay money in the 
     future. In the case of a rabbi trust, terms providing that 
     the assets are subject to the claims of creditors of the 
     employer in the case of insolvency or bankruptcy have been 
     the basis for the conclusion that the creation of a rabbi 
     trust does not cause the related nonqualified deferred 
     compensation arrangement to be funded for income tax 
     purposes.\798\ As a result, no amount is included in income 
     by reason of the rabbi trust; generally income inclusion 
     occurs as payments are made from the trust.
---------------------------------------------------------------------------
     \798\ This conclusion was first provided in a 1980 private 
     ruling issued by the IRS with respect to an arrangeament 
     covering a rabbi; hence the popular name ``rabbi trust.'' 
     Priv. Ltr. Rul. 8113107 (Dec. 31, 1980).
---------------------------------------------------------------------------
       The IRS has issued guidance setting forth model rabbi trust 
     provisions.\799\ Revenue Procedure 92-64 provides a safe 
     harbor for taxpayers who adopt and maintain grantor trusts in 
     connection with unfunded deferred compensation arrangements. 
     The model trust language requires that the trust provide that 
     all assets of the trust are subject to the claims of the 
     general creditors of the company in the event of the 
     company's insolvency or bankruptcy.
---------------------------------------------------------------------------
     \799\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by 
     Notice 2000-56, 2000-2 C.B. 393.
---------------------------------------------------------------------------
       Since the concept of rabbi trusts was developed, 
     arrangements have developed which attempt to protect the 
     assets from creditors despite the terms of the trust. 
     Arrangements also have developed which attempt to allow 
     deferred amounts to be available to individuals, while still 
     purporting to meet the safe harbor requirements set forth by 
     the IRS.


                               House Bill

       Under the House bill, all amounts deferred under a 
     nonqualified deferred compensation plan \800\ for all taxable 
     years are currently includible in gross income to the extent 
     not subject to a substantial risk of forfeiture \801\ and not 
     previously included in gross income, unless certain 
     requirements are satisfied. If the requirements of the 
     provision are not satisfied, in addition to current income 
     inclusion, interest at the underpayment rate plus one 
     percentage point is imposed on the underpayments that would 
     have occurred had the compensation been includible in income 
     when first deferred, or if later, when not subject to a 
     substantial risk of forfeiture. Actual or notional earnings 
     on amounts deferred are also subject to the provision.
---------------------------------------------------------------------------
     \800\ A plan includes an agreement or arrangement, including 
     an agreement or arrangement that includes one person.
     \801\ As under section 83, the rights of a person to 
     compensation are subject to a substantial risk of forfeiture 
     if the person's rights to such compensation are conditioned 
     upon the performance of substantial services by any 
     individual.
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       Under the provision, distributions from a nonqualified 
     deferred compensation plan may be allowed only upon 
     separation from service (as determined by the Secretary), 
     death, a specified time (or pursuant to a fixed schedule), 
     change in control in a corporation (to the extent provided by 
     the Secretary), occurrence of an unforeseeable emergency, or 
     if the participant becomes disabled. A nonqualified deferred 
     compensation plan may not allow distributions other than upon 
     the permissible distribution events and may not permit 
     acceleration of a distribution, except as provided in 
     regulations by the Secretary.
       In the case of a specified employee, distributions upon 
     separation from service may not be made earlier than six 
     months after the date of the separation from service. 
     Specified employees are key employees \802\ of publicly-
     traded corporations.
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     \802\ Key employees are defined in section 416(i) and 
     generally include officers having annual compensation greater 
     than $130,000 (adjusted for inflation and limited to 50 
     employees), five percent owners, and one percent owners 
     having annual compensation from the employer greater than 
     $150,000.
---------------------------------------------------------------------------
       Amounts payable at a specified time or pursuant to a fixed 
     schedule must be specified under the plan at the time of 
     deferral. Amounts payable upon the occurrence of an event are 
     not treated as amounts payable at a specified time. For 
     example, amounts payable when an individual attains age 65 
     are payable at a specified time, while amounts payable when 
     an individual's child begins college are payable upon the 
     occurrence of an event.
       Distributions upon a change in the ownership or effective 
     control of a corporation, or in the ownership of a 
     substantial portion of the assets of a corporation, may only 
     be made to the extent provided by the Secretary. It is 
     intended that the Secretary use a similar, but more 
     restrictive, definition of change in control as is used for 
     purposes of the golden parachute provisions of section 280G 
     consistent with the purposes of the provision. The provision 
     requires the Secretary to issue guidance defining change of 
     control within 90 days after the date of enactment.
       An unforeseeable emergency is defined as a severe financial 
     hardship to the participant resulting from a sudden and 
     unexpected illness or accident of the participant, the 
     participant's spouse, or a dependent (as defined

[[Page H8604]]

     in 152(a)) of the participant; loss of the participant's 
     property due to casualty; or other similar extraordinary and 
     unforeseeable circumstances arising as a result of events 
     beyond the control of the participant. The amount of the 
     distribution must be limited to the amount needed to satisfy 
     the emergency plus taxes reasonably anticipated as a result 
     of the distribution. Distributions may not be allowed to the 
     extent that the hardship may be relieved through 
     reimbursement or compensation by insurance or otherwise, or 
     by liquidation of the participant's assets (to the extent 
     such liquidation would not itself cause a severe financial 
     hardship).
       A participant is considered disabled if he or she (i) is 
     unable to engage in any substantial gainful activity by 
     reason of any medically determinable physical or mental 
     impairment which can be expected to result in death or can be 
     expected to last for a continuous period of not less than 12 
     months; or (ii) is, by reason on any medically determinable 
     physical or mental impairment which can be expected to result 
     in death or can be expected to last for a continuous period 
     of not less than 12 months, receiving income replacement 
     benefits for a period of not less than three months under an 
     accident and health plan covering employees of the 
     participant's employer.
       As previously discussed, except as provided in regulations 
     by the Secretary, no accelerations of distributions may be 
     allowed. For example, changes in the form of a distribution 
     from an annuity to a lump sum are not permitted. The 
     provision provides the Secretary authority to provide, 
     through regulations, limited exceptions to the general rule 
     that no accelerations can be permitted. It is intended that 
     exceptions be provided only in limited cases where the 
     accelerated distribution is required for reasons beyond the 
     control of the participant. For example, it is anticipated 
     that an exception could be provided in order to comply with 
     Federal conflict of interest requirements or court-approved 
     settlements.
       The provision requires that the plan must provide that 
     compensation for services performed during a taxable year may 
     be deferred at the participant's election only if the 
     election to defer is made no later than the close of the 
     preceding taxable year, or at such other time as provided in 
     Treasury regulations. For example, it is expected that 
     Treasury regulations provide that, in appropriate 
     circumstances, elections to defer incentive bonuses earned 
     over a period of several years may be made after the 
     beginning of the service period, as long as such elections 
     may in no event be made later than 12 months before the 
     earliest date on which such incentive bonus is initially 
     payable. The Secretary may consider other factors in 
     determining the appropriate election period, such as when the 
     amount of the bonus payment is determinable. It is expected 
     that Treasury regulations will not permit any election to 
     defer any bonus or other compensation if the timing of such 
     election would be inconsistent with the purposes of the 
     provision. Under the provision, in the first year that an 
     employee becomes eligible for participation in a nonqualified 
     deferred compensation plan, the election may be made within 
     30 days after the date that the employee is initially 
     eligible.
       The time and form of distributions must be specified at the 
     time of initial deferral. A plan could specify the time and 
     form of payments that are to be made as a result of a 
     distribution event (e.g., a plan could specify that payments 
     upon separation of service will be paid in lump sum within 30 
     days of separation from service) or could allow participants 
     to elect the time and form of payment at the time of the 
     initial deferral election. If a plan allows participants to 
     elect the time and form of payment, such election is subject 
     to the rules regarding initial deferral elections under the 
     provision.
       Under the provision, a plan may allow changes in the time 
     and form of distributions subject to certain requirements. A 
     nonqualified deferred compensation plan may allow a 
     subsequent election to delay the timing or form of 
     distributions only if: (1) the plan requires that such 
     election cannot be effective for at least 12 months after the 
     date on which the election is made; (2) except in the case of 
     elections relating to distributions on account of death, 
     disability or unforeseeable emergency, the plan requires that 
     the additional deferral with respect to which such election 
     is made is for a period of not less than five years from the 
     date such payment would otherwise have been made; and (3) the 
     plan requires that an election related to a distribution to 
     be made upon a specified time may not be made less than 12 
     months prior to the date of the first scheduled payment. It 
     is expected that in limited cases, the Secretary will issue 
     guidance, consistent with the purposes of the provision, 
     regarding to what extent elections to change a stream of 
     payments are permissible.
       If impermissible distributions or elections are made, or if 
     the nonqualified deferred compensation plan allows 
     impermissible distributions or elections, all amounts 
     deferred under the plan (including amounts deferred in prior 
     years) are currently includible in income to the extent not 
     subject to a substantial risk of forfeiture and not 
     previously included in income. In addition, interest at the 
     underpayment rate plus one percentage point is imposed on the 
     underpayments that would have occurred had the compensation 
     been includible in income when first deferred, or if later, 
     when not subject to a substantial risk of forfeiture.
       Under the provision, in the case of assets set aside 
     (directly or indirectly) in a trust (or other arrangement 
     determined by the Secretary) for purposes of paying 
     nonqualified deferred compensation, such assets are treated 
     as property transferred in connection with the performance of 
     services under section 83 (whether or not such assets are 
     available to satisfy the claims of general creditors) at the 
     time set aside if such assets are located outside of the 
     United States or at the time transferred if such assets are 
     subsequently transferred outside of the United States. Any 
     subsequent increases in the value of, or any earnings with 
     respect to, such assets are treated as additional transfers 
     of property. Interest at the underpayment rate plus one 
     percentage point is imposed on the underpayments that would 
     have occurred had the amounts been includible in income for 
     the taxable year in which first deferred or, if later, the 
     first taxable year not subject to a substantial risk of 
     forfeiture. It is expected that the Secretary will provide 
     rules for identifying the deferrals to which assets set aside 
     are attributable, for situations in which assets equal to 
     less than the full amount of deferrals are set aside. The 
     Secretary has authority to exempt arrangements from the 
     provision if the arrangements do not result in an improper 
     deferral of U.S. tax and will not result in assets being 
     effectively beyond the reach of creditors.
       Under the provision, a transfer of property in connection 
     with the performance of services under section 83 also occurs 
     with respect to compensation deferred under a nonqualified 
     deferred compensation plan if the plan provides that upon a 
     change in the employer's financial health, assets will be 
     restricted to the payment of nonqualified deferred 
     compensation. The transfer of property occurs as of the 
     earlier of when the assets are so restricted or when the plan 
     provides that assets will be restricted. It is intended that 
     the transfer of property occurs to the extent that assets are 
     restricted or will be restricted with respect to such 
     compensation. For example, in the case of a plan that 
     provides that upon a change in the employer's financial 
     health, a trust will become funded to the extent of all 
     deferrals, all amounts deferred under the plan are treated as 
     property transferred under section 83. If a plan provides 
     that deferrals of certain individuals will be funded upon a 
     change in financial health, the transfer of property would 
     occur with respect to compensation deferred by such 
     individuals. Any subsequent increases in the value of, or any 
     earnings with respect to, such assets are treated as 
     additional transfers of property. Interest at the 
     underpayment rate plus one percentage point is imposed on the 
     underpayments that would have occurred had the amounts been 
     includible in income for the taxable year in which first 
     deferred or, if later, the first taxable year not subject to 
     a substantial risk of forfeiture.
       A nonqualified deferred compensation plan is any plan that 
     provides for the deferral of compensation other than a 
     qualified employer plan or any bona fide vacation leave, sick 
     leave, compensatory time, disability pay, or death benefit 
     plan. A qualified employer plan means a qualified retirement 
     plan, tax-deferred annuity, simplified employee pension, and 
     SIMPLE.\803\ A governmental eligible deferred compensation 
     plan (sec. 457) is also a qualified employer plan under the 
     provision.\804\ Plans subject to section 457, other than 
     governmental eligible deferred compensation plans, are 
     subject to both the requirements of section 457 and the 
     provision. For example, in addition to the requirements of 
     the provision, an eligible deferred compensation plan of a 
     tax-exempt employer would still be required to meet the 
     applicable dollar limits under section 457.
---------------------------------------------------------------------------
     \803\ A qualified employer plan also includes a section 
     501(c)(18) trust.
     \804\ A governmental deferred compensation plan that is not 
     an eligible deferred compensation plan is not a qualified 
     employer plan.
---------------------------------------------------------------------------
       Interest imposed under the provision is treated as interest 
     on an underpayment of tax. Income (whether actual or 
     notional) attributable to nonqualified deferred compensation 
     is treated as additional deferred compensation and is subject 
     to the provision. The provision is not intended to prevent 
     the inclusion of amounts in gross income under any provision 
     or rule of law earlier than the time provided in the 
     provision. Any amount included in gross income under the 
     provision is not be required to be included in gross income 
     under any provision of law later than the time provided in 
     the provision. The provision does not affect the rules 
     regarding the timing of an employer's deduction for 
     nonqualified deferred compensation.
       The provision requires annual reporting to the Internal 
     Revenue Service of amounts deferred. Such amounts are 
     required to be reported on an individual's Form W-2 for the 
     year deferred even if the amount is not currently includible 
     in income for that taxable year. Under the provision, the 
     Secretary is authorized, through regulations, to establish a 
     minimum amount of deferrals below which the reporting 
     requirement does not apply. The Secretary may also provide 
     that the reporting requirement does not apply with respect to 
     amounts of deferrals that are not reasonably ascertainable. 
     It is intended that the exception for amounts not reasonable 
     ascertainable only apply to nonaccount balance plans and that 
     amounts be required to be reported when they first become 
     reasonably ascertainable.\805\
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     \805\ It is intended that the exception be similar to that 
     under Treas. Reg. sec. 31.3121(v)(2)-1(e)(4).

---------------------------------------------------------------------------

[[Page H8605]]

       The provision provides the Secretary authority to prescribe 
     regulations as are necessary to carry out the purposes of 
     provision, including regulations: (1) providing for the 
     determination of amounts of deferral in the case of defined 
     benefit plans; (2) relating to changes in the ownership and 
     control of a corporation or assets of a corporation; (3) 
     exempting from the provisions providing for transfers of 
     property arrangements that will not result in an improper 
     deferral of U.S. tax and will not result in assets being 
     effectively beyond the reach of creditors; (4) defining 
     financial health; and (5) disregarding a substantial risk of 
     forfeiture.
       It is intended that substantial risk of forfeitures may not 
     be used to manipulate the timing of income inclusion. It is 
     intended that substantial risks of forfeiture should be 
     disregarded in cases in which they are illusory or are used 
     inconsistent with the purposes of the provision. For example, 
     if an executive is effectively able to control the 
     acceleration of the lapse of a substantial risk of 
     forfeiture, such risk of forfeiture should be disregarded and 
     income inclusion should not be postponed on account of such 
     restriction.
       Effective date.--The House bill is effective for amounts 
     deferred after June 3, 2004. The provision does not apply to 
     amounts deferred after June 3, 2004, and before January 1, 
     2005, pursuant to an irrevocable election or binding 
     arrangement made before June 4, 2004. Earnings on amounts 
     deferred before the effective date are subject to the 
     provision to the extent that such amounts deferred are 
     subject to the provision.
       It is intended that amounts further deferred under a 
     subsequent election with respect to amounts originally 
     deferred before June 4, 2004, are subject to the requirements 
     of the provision.
       No later than 90 days after the date of enactment, the 
     Secretary shall issue guidance providing a limited period of 
     time during which an individual participating in a 
     nonqualified deferred compensation plan adopted before June 
     4, 2004, may, without violating the requirements of the 
     provision, terminate participation or cancel an outstanding 
     deferral election with regard to amounts earned after June 3, 
     2004, if such amounts are includible in income as earned.


                            Senate Amendment

       The Senate amendment follows the House bill with the 
     following modifications.
       Under the Senate amendment, if the requirements of the 
     provision are not satisfied, in addition to current income 
     inclusion, interest at the underpayment rate is imposed on 
     the underpayments that would have occurred had the 
     compensation been includible in income when first deferred, 
     or if later, when not subject to a substantial risk of 
     forfeiture. The amount required to be included in income is 
     also subject to an additional 10-percent tax.
       Under the Senate amendment, in the case of an individual 
     who, with respect to a corporation, is subject to the 
     requirements of section 16(a) of the Securities Act of 1934, 
     distributions upon a change in control may not be made 
     earlier than one year after the date of the change in control 
     of the corporation. Such individuals include officers (as 
     defined by section 16(a)),\806\ directors, or 10-percent 
     owners of publicly-held corporations. Under the provision, 
     distributions made to such individuals within one year of the 
     change in control (``applicable payments'') are treated as 
     excess parachute payments under section 280G (even if the 
     payment would not otherwise be treated as an excess parachute 
     payment) and therefore subject to the excise tax under 
     section 4999. As under present law, no deduction is allowed 
     for any amount treated as an excess parachute payment.
---------------------------------------------------------------------------
     \806\ An officer is defined as the president, principal 
     financial officer, principal accounting officer (or, if there 
     is no such accounting officer, the controller), any vice-
     president in charge of a principal business unit, division or 
     function (such as sales, administration or finance), any 
     other officer who performs a policy-making function, or any 
     other person who performs similar policy-making functions.
---------------------------------------------------------------------------
       If, absent the provision, an applicable payment is a 
     payment in the nature of compensation contingent on a change 
     in control, section 280G is applied as if the provision had 
     not been enacted (i.e., the applicable payments continue to 
     be taken into account under section 280G). Any resulting 
     excess parachute payment is also subject to the excise tax 
     under section 4999 (in addition to the tax imposed by the 
     provision). Under the provision, an applicable payment that, 
     absent the provision, is not a payment in the nature of 
     compensation contingent on a change in control is required to 
     be taken into account in determining if the present value of 
     the payments in the nature of compensation contingent on a 
     change in control equal or exceed three times the base 
     amount. Any resulting excess parachute payment is also 
     subject to the excise tax under section 4999 (in addition to 
     the tax imposed by the provision). Applicable payments do not 
     include payments made upon death or if the participant 
     becomes disabled. Treasury regulations shall prescribe rules 
     to prevent a deduction from being disallowed more than once.
       Under the Senate amendment, unforeseeable emergency also 
     includes hardship of a beneficiary. Unforeseeable emergency 
     is defined as severe financial hardship of the participant or 
     beneficiary resulting from a sudden and unexpected illness or 
     accident of the participant or beneficiary, the participant's 
     or beneficiary's spouse or the participant's or beneficiary's 
     dependent (as defined in 152(a)); loss of the participant's 
     or beneficiary's property due to casualty; or other similar 
     extraordinary and unforeseeable circumstances arising as a 
     result of events beyond the control of the participant or 
     beneficiary. Distributions are not allowed to the extent that 
     the hardship may be relieved by liquidation of the 
     participant's or beneficiary's assets.
       Under the Senate amendment, participants must be limited to 
     one subsequent election.
       The Senate amendment includes restrictions on investment 
     options. Under the Senate amendment, investment options 
     (including phantom or notional investment options) which a 
     participant may elect under the nonqualified deferred 
     compensation plan must be comparable to those which may be 
     elected by participants of the qualified defined contribution 
     plan of the employer that has the fewest investment options. 
     It is intended that the investment options of the 
     nonqualified deferred compensation plan may be less favorable 
     or more limited than those of the qualified defined 
     contribution employer plan. The Committee intends that open 
     brokerage windows, hedge funds, and investments in which the 
     employer guarantees a rate of return above what is 
     commercially available are prohibited. If there is no 
     qualified defined contribution employer plan, the investment 
     options of the nonqualified deferred compensation plan must 
     meet the requirements prescribed by the Secretary regarding 
     permissible investment options. It is intended that in cases 
     where there is no such qualified defined contribution 
     employer plan, the Secretary issue rules limiting the 
     available investment options.
       The Senate amendment includes an exception to the provision 
     requiring assets set aside outside of the U.S. for purposes 
     of paying deferred compensation to be treated as property 
     transferred in connection with the performance of services. 
     The provision does not apply to assets located in a foreign 
     jurisdiction if substantially all of the services to which 
     the nonqualified deferred compensation relates are performed 
     in such foreign jurisdiction. The provision is specifically 
     intended to apply to foreign trusts and arrangements that 
     effectively shield from the claims of general creditors any 
     assets intended to satisfy nonqualified deferred compensation 
     arrangements.
       The Senate amendment does not apply to a plan meeting the 
     requirements of section 457(e)(12) if the plan was in 
     existence as of May 1, 2004, and was providing nonelective 
     deferred compensation described in section 457(e)(12) on such 
     date. If the plan has a material change in the class of 
     individuals eligible to participate in the plan after May 1, 
     2004, the exception does not apply to compensation provided 
     under the plan after the date of such change.
       The Senate amendment does not includes an exception from 
     the reporting requirement for deferrals that are not 
     reasonable ascertainable.
       Effective date.--The provision is effective for amounts 
     deferred in taxable years beginning after December 31, 2004.
       Not later than 90 days after the date of enactment, the 
     Secretary is directed to issue guidance providing a limited 
     period during which an individual participating in a 
     nonqualified deferred compensation plan adopted on or before 
     December 31, 2004, may, without violating the provision, 
     terminate participation or cancel an outstanding deferral 
     election with regard to amounts earned after December 31, 
     2004, if such amounts are includible in income as earned.


                          conference agreement

     In general
       The conference agreement follows the House bill with the 
     following modifications. Under the conference agreement, all 
     amounts deferred under a nonqualified deferred compensation 
     plan \807\ for all taxable years are currently includible in 
     gross income to the extent not subject to a substantial risk 
     of forfeiture \808\ and not previously included in gross 
     income, unless certain requirements are satisfied.\809\ If 
     the requirements of the provision are not satisfied, in 
     addition to current income inclusion, interest at the 
     underpayment rate plus one percentage point is imposed on the 
     underpayments that would have occurred had the compensation 
     been includible in income when first deferred, or if later, 
     when not subject to a substantial risk of forfeiture. The 
     amount required to be included in income is also subject to a 
     20-percent additional tax.\810\
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     \807\ A plan includes an agreement or arrangement, including 
     an agreement or arrangement that includes one person. Amounts 
     deferred also include actual or notional earnings.
     \808\ As under section 83, the rights of a person to 
     compensation are subject to a substantial risk of forefeiture 
     if the person's rights to such compensation are conditioned 
     upon the performance of substantial services by any 
     individual.
     \809\ It is intended that Treasury regulations will provide 
     guidance regarding when an amount is deferred. It is intended 
     that timing of an election to defer is not determinative of 
     when the deferral is made.
     \810\ These consequences apply under the provision to amounts 
     deferred after the effective date of the provision.
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       Current income inclusion, interest, and the additional tax 
     apply only with respect to the participants with respect to 
     whom the requirements of the provision are not met. For 
     example, suppose a plan covering all executives of an 
     employer (including those subject to section 16(a) of the 
     Securities and Exchange Act of 1934) allows distributions to

[[Page H8606]]

     individuals subject to section 16(a) upon a distribution 
     event that is not permitted under the provision. The 
     individuals subject to section 16(a), rather than all 
     participants of the plan, would be required to include 
     amounts deferred in income and would be subject to interest 
     and the 20-percent additional tax.
     Permissible distributions
       In general
       Under the provision, distributions from a nonqualified 
     deferred compensation plan may be allowed only upon 
     separation from service (as determined by the Secretary), 
     death, a specified time (or pursuant to a fixed schedule), 
     change in control of a corporation (to the extent provided by 
     the Secretary), occurrence of an unforeseeable emergency, or 
     if the participant becomes disabled. A nonqualified deferred 
     compensation plan may not allow distributions other than upon 
     the permissible distribution events and, except as provided 
     in regulations by the Secretary, may not permit acceleration 
     of a distribution.
       Separation from service
       In the case of a specified employee who separates from 
     service, distributions may not be made earlier than six 
     months after the date of the separation from service or upon 
     death. Specified employees are key employees \811\ of 
     publicly-traded corporations.
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     \811\ Key employees are defined in section 416(i) and 
     generally include officers having annual compensation greater 
     than $130,000 (adjusted for inflation and limited to 50 
     employees), five percent owners, and one percent owners 
     having annual compensation from the employer greater than 
     $150,000.
---------------------------------------------------------------------------
       Specified time
       Amounts payable at a specified time or pursuant to a fixed 
     schedule must be specified under the plan at the time of 
     deferral. Amounts payable upon the occurrence of an event are 
     not treated as amounts payable at a specified time. For 
     example, amounts payable when an individual attains age 65 
     are payable at a specified time, while amounts payable when 
     an individual's child begins college are payable upon the 
     occurrence of an event.
       Change in control
       Distributions upon a change in the ownership or effective 
     control of a corporation, or in the ownership of a 
     substantial portion of the assets of a corporation, may only 
     be made to the extent provided by the Secretary. It is 
     intended that the Secretary use a similar, but more 
     restrictive, definition of change in control as is used for 
     purposes of the golden parachute provisions of section 280G 
     consistent with the purposes of the provision. The provision 
     requires the Secretary to issue guidance defining change of 
     control within 90 days after the date of enactment.
       Unforeseeable emergency
       An unforeseeable emergency is defined as a severe financial 
     hardship to the participant: (1) resulting from an illness or 
     accident of the participant, the participant's spouse, or a 
     dependent (as defined in sec. 152(a)); (2) loss of the 
     participant's property due to casualty; or (3) other similar 
     extraordinary and unforeseeable circumstances arising as a 
     result of events beyond the control of the participant. The 
     amount of the distribution must be limited to the amount 
     needed to satisfy the emergency plus taxes reasonably 
     anticipated as a result of the distribution. Distributions 
     may not be allowed to the extent that the hardship may be 
     relieved through reimbursement or compensation by insurance 
     or otherwise, or by liquidation of the participant's assets 
     (to the extent such liquidation would not itself cause a 
     severe financial hardship).
       Disability
       A participant is considered disabled if he or she (1) is 
     unable to engage in any substantial gainful activity by 
     reason of any medically determinable physical or mental 
     impairment which can be expected to result in death or can be 
     expected to last for a continuous period of not less than 12 
     months; or (2) is, by reason of any medically determinable 
     physical or mental impairment which can be expected to result 
     in death or can be expected to last for a continuous period 
     of not less than 12 months, receiving income replacement 
     benefits for a period of not less than three months under an 
     accident and health plan covering employees of the 
     participant's employer.
       Prohibition on acceleration of distributions
       As mentioned above, except as provided in regulations by 
     the Secretary, no accelerations of distributions may be 
     allowed. In general, changes in the form of distribution that 
     accelerate payments are subject to the rule prohibiting 
     acceleration of distributions. However, it is intended that 
     the rule against accelerations is not violated merely because 
     a plan provides a choice between cash and taxable property if 
     the timing and amount of income inclusion is the same 
     regardless of the medium of distribution. For example, the 
     choice between a fully taxable annuity contract and a lump-
     sum payment may be permitted. It is also intended that the 
     Secretary provide rules under which the choice between 
     different forms of actuarially equivalent life annuity 
     payments is permitted.
       It is intended that the Secretary will provide other, 
     limited, exceptions to the prohibition on accelerated 
     distributions, such as when the accelerated distribution is 
     required for reasons beyond the control of the participant 
     and the distribution is not elective. For example, it is 
     anticipated that an exception could be provided if a 
     distribution is needed in order to comply with Federal 
     conflict of interest requirements or a court-approved 
     settlement incident to divorce. It is intended that Treasury 
     regulations provide that a plan would not violate the 
     prohibition on accelerations by providing that withholding of 
     an employee's share of employment taxes will be made from the 
     employee's interest in the nonqualified deferred compensation 
     plan. It is also intended that Treasury regulations provide 
     that a plan would not violate the prohibition on 
     accelerations by providing for a distribution to a 
     participant to pay income taxes due upon a vesting event 
     subject to section 457(f), provided that such amount is not 
     more than an amount equal to the income tax withholding that 
     would have been remitted by the employer if there had been a 
     payment of wages equal to the income includible by the 
     participant under section 457(f). It is also intended that 
     Treasury regulations provide that a plan would not violate 
     the prohibition on accelerations by providing for automatic 
     distributions of minimal interests in a deferred compensation 
     plan upon permissible distribution events for purposes of 
     administrative convenience. For example, a plan could provide 
     that upon separation from service of a participant, account 
     balances less than $10,000 will be automatically 
     distributed (except in the case of specified employees).
     Requirements with respect to elections
       The provision requires that a plan must provide that 
     compensation for services performed during a taxable year may 
     be deferred at the participant's election only if the 
     election to defer is made no later than the close of the 
     preceding taxable year, or at such other time as provided in 
     Treasury regulations.\812\ In the case of any performance-
     based compensation based on services performed over a period 
     of at least 12 months, such election may be made no later 
     than six months before the end of the service period. It is 
     not intended that the provision override the constructive 
     receipt doctrine, as constructive receipt rules continue to 
     apply. It is intended that the term ``performance-based 
     compensation'' will be defined by the Secretary to include 
     compensation to the extent that an amount is: (1) variable 
     and contingent on the satisfaction of preestablished 
     organizational or individual performance criteria and (2) not 
     readily ascertainable at the time of the election. For the 
     purposes of the provision, it is intended that performance-
     based compensation may be required to meet certain 
     requirements similar to those under section 162(m), but would 
     not be required to meet all requirements under that section. 
     For example, it is expected that the Secretary will provide 
     that performance criteria would be considered preestablished 
     if it is established in writing no later than 90 days after 
     the commencement of the service period, but the requirement 
     of determination by the compensation committee of the board 
     of directors would not be required. It is expected that the 
     Secretary will issue guidance providing coordination rules, 
     as appropriate, regarding the timing of elections in the case 
     when the fiscal year of the employer and the taxable year of 
     the individual are different. It is expected that Treasury 
     regulations will not permit any election to defer any bonus 
     or other compensation if the timing of such election would be 
     inconsistent with the purposes of the provision.
---------------------------------------------------------------------------
     \812\ Under the provision, in the first year that an employee 
     becomes eligible for participation in a nonqualified deferred 
     compensation plan, the election may be made within 30 days 
     after the date that the employee is initially eligible.
---------------------------------------------------------------------------
       The time and form of distributions must be specified at the 
     time of initial deferral. A plan could specify the time and 
     form of payments that are to be made as a result of a 
     distribution event (e.g., a plan could specify that payments 
     upon separation of service will be paid in lump sum within 30 
     days of separation from service) or could allow participants 
     to elect the time and form of payment at the time of the 
     initial deferral election. If a plan allows participants to 
     elect the time and form of payment, such election is subject 
     to the rules regarding initial deferral elections under the 
     provision. It is intended that multiple payout events are 
     permissible. For example, a participant could elect to 
     receive 25 percent of their account balance at age 50 and the 
     remaining 75 percent at age 60. A plan could also allow 
     participants to elect different forms of payment for 
     different permissible distribution events. For example, a 
     participant could elect to receive a lump-sum distribution 
     upon disability, but an annuity at age 65.
       Under the provision, a plan may allow changes in the time 
     and form of distributions subject to certain requirements. A 
     nonqualified deferred compensation plan may allow a 
     subsequent election to delay the timing or form of 
     distributions only if: (1) the plan requires that such 
     election cannot be effective for at least 12 months after the 
     date on which the election is made; (2) except in the case of 
     elections relating to distributions on account of death, 
     disability or unforeseeable emergency, the plan requires that 
     the additional deferral with respect to which such election 
     is made is for a period of not less than five years from the 
     date such payment would otherwise have been made; and (3) the 
     plan requires that an election related to a distribution to 
     be made upon a specified time may not be made less than 12 
     months

[[Page H8607]]

     prior to the date of the first scheduled payment. It is 
     expected that in limited cases, the Secretary will issue 
     guidance, consistent with the purposes of the provision, 
     regarding to what extent elections to change a stream of 
     payments are permissible. The Secretary may issue regulations 
     regarding elections with respect to payments under 
     nonelective, supplemental retirement plans.
     Foreign trusts
       Under the provision, in the case of assets set aside 
     (directly or indirectly) in a trust (or other arrangement 
     determined by the Secretary) for purposes of paying 
     nonqualified deferred compensation, such assets are treated 
     as property transferred in connection with the performance of 
     services under section 83 (whether or not such assets are 
     available to satisfy the claims of general creditors) at the 
     time set aside if such assets (or trust or other arrangement) 
     are located outside of the United States or at the time 
     transferred if such assets (or trust or other arrangement) 
     are subsequently transferred outside of the United States. 
     Any subsequent increases in the value of, or any earnings 
     with respect to, such assets are treated as additional 
     transfers of property. Interest at the underpayment rate plus 
     one percentage point is imposed on the underpayments that 
     would have occurred had the amounts set aside been includible 
     in income for the taxable year in which first deferred or, if 
     later, the first taxable year not subject to a substantial 
     risk of forfeiture. The amount required to be included in 
     income is also subject to an additional 20-percent tax.
       It is expected that the Secretary will provide rules for 
     identifying the deferrals to which assets set aside are 
     attributable, for situations in which assets equal to less 
     than the full amount of deferrals are set aside. The 
     provision does not apply to assets located in a foreign 
     jurisdiction if substantially all of the services to which 
     the nonqualified deferred compensation relates are performed 
     in such foreign jurisdiction. The provision is specifically 
     intended to apply to foreign trusts and arrangements that 
     effectively shield from the claims of general creditors any 
     assets intended to satisfy nonqualified deferred compensation 
     arrangements. The Secretary has authority to exempt 
     arrangements from the provision if the arrangements do not 
     result in an improper deferral of U.S. tax and will not 
     result in assets being effectively beyond the reach of 
     creditors.
     Triggers upon financial health
       Under the provision, a transfer of property in connection 
     with the performance of services under section 83 also occurs 
     with respect to compensation deferred under a nonqualified 
     deferred compensation plan if the plan provides that upon a 
     change in the employer's financial health, assets will be 
     restricted to the payment of nonqualified deferred 
     compensation. An amount is treated as restricted even if the 
     assets are available to satisfy the claims of general 
     creditors. For example, the provision applies in the case of 
     a plan that provides that upon a change in financial health, 
     assets will be transferred to a rabbi trust.
       The transfer of property occurs as of the earlier of when 
     the assets are so restricted or when the plan provides that 
     assets will be restricted. It is intended that the transfer 
     of property occurs to the extent that assets are restricted 
     or will be restricted with respect to such compensation. For 
     example, in the case of a plan that provides that upon a 
     change in the employer's financial health, a trust will 
     become funded to the extent of all deferrals, all amounts 
     deferred under the plan are treated as property transferred 
     under section 83. If a plan provides that deferrals of 
     certain individuals will be funded upon a change in financial 
     health, the transfer of property would occur with respect to 
     compensation deferred by such individuals. The provision is 
     not intended to apply when assets are restricted for a reason 
     other than change in financial health (e.g., upon a change in 
     control) or if assets are periodically restricted under a 
     structured schedule and scheduled restrictions happen to 
     coincide with a change in financial status. Any subsequent 
     increases in the value of, or any earnings with respect to, 
     restricted assets are treated as additional transfers of 
     property. Interest at the underpayment rate plus one 
     percentage point is imposed on the underpayments that would 
     have occurred had the amounts been includible in income for 
     the taxable year in which first deferred or, if later, the 
     first taxable year not subject to a substantial risk of 
     forfeiture. The amount required to be included in income is 
     also subject to an additional 20-percent tax.
     Definition of nonqualified deferred compensation plan
       A nonqualified deferred compensation plan is any plan that 
     provides for the deferral of compensation other than a 
     qualified employer plan or any bona fide vacation leave, sick 
     leave, compensatory time, disability pay, or death benefit 
     plan.\813\ A qualified employer plan means a qualified 
     retirement plan, tax-deferred annuity, simplified employee 
     pension, and SIMPLE.\814\ A qualified governmental excess 
     benefit arrangement (sec. 415(m)) is a qualified employer 
     plan. An eligible deferred compensation plan (sec. 457(b)) is 
     also a qualified employer plan under the provision. A tax-
     exempt or governmental deferred compensation plan that is not 
     an eligible deferred compensation plan is not a qualified 
     employer plan. The application of the provision is not 
     limited to arrangements between an employer and employee.
---------------------------------------------------------------------------
     \813\ The provision does not apply to a plan meeting the 
     requirements of section 457(e)(12) if the plan was in 
     existence as of May 1, 2004, was providing nonelective 
     deferred compensation described in section 457(e)(12) on such 
     date, and is established or maintained by an organization 
     incorporation on July 2, 1974. If the plan has a material 
     change in the class of individuals eligible to participate in 
     the plan after May 1, 2004, the provision applies to 
     compensation provided under the plan after the date of such 
     change.
     \814\ A qualified employer plan also includes a section 
     501(c)(18) trust.
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       For purposes of the provision, it is not intended that the 
     term ``nonqualified deferred compensation plan'' include an 
     arrangement taxable under section 83 providing for the grant 
     of an option on employer stock with an exercise price that is 
     not less than the fair market value of the underlying stock 
     on the date of grant if such arrangement does not include a 
     deferral feature other than the feature that the option 
     holder has the right to exercise the option in the future. 
     The provision is not intended to change the tax treatment of 
     incentive stock options meeting the requirements of 422 or 
     options granted under an employee stock purchase plan meeting 
     the requirements of section 423.
       It is intended that the provision does not apply to annual 
     bonuses or other annual compensation amounts paid within 2 1/
     2 months after the close of the taxable year in which the 
     relevant services required for payment have been performed.
     Other rules
       Interest imposed under the provision is treated as interest 
     on an underpayment of tax. Income (whether actual or 
     notional) attributable to nonqualified deferred compensation 
     is treated as additional deferred compensation and is subject 
     to the provision. The provision is not intended to prevent 
     the inclusion of amounts in gross income under any provision 
     or rule of law earlier than the time provided in the 
     provision. Any amount included in gross income under the 
     provision is not be required to be included in gross income 
     under any provision of law later than the time provided in 
     the provision. The provision does not affect the rules 
     regarding the timing of an employer's deduction for 
     nonqualified deferred compensation.
     Treasury regulations
       The provision provides the Secretary authority to prescribe 
     regulations as are necessary to carry out the purposes of 
     provision, including regulations: (1) providing for the 
     determination of amounts of deferral in the case of defined 
     benefit plans; (2) relating to changes in the ownership and 
     control of a corporation or assets of a corporation; (3) 
     exempting from the provisions providing for transfers of 
     property arrangements that will not result in an improper 
     deferral of U.S. tax and will not result in assets being 
     effectively beyond the reach of creditors; (4) defining 
     financial health; and (5) disregarding a substantial risk of 
     forfeiture. It is intended that substantial risk of 
     forfeitures may not be used to manipulate the timing of 
     income inclusion. It is intended that substantial risks of 
     forfeiture should be disregarded in cases in which they are 
     illusory or are used in a manner inconsistent with the 
     purposes of the provision. For example, if an executive is 
     effectively able to control the acceleration of the lapse of 
     a substantial risk of forfeiture, such risk of forfeiture 
     should be disregarded and income inclusion should not be 
     postponed on account of such restriction. The Secretary may 
     also address in regulations issues relating to stock 
     appreciation rights.
     Aggregation rules
       Under the provision, except as provided by the Secretary, 
     employer aggregation rules apply. It is intended that the 
     Secretary issue guidance providing aggregation rules as are 
     necessary to carry out the purposes of the provision. For 
     example, it is intended that aggregation rules would apply in 
     the case of separation from service so that the separation 
     from service from one entity within a controlled group, but 
     continued service for another entity within the group, would 
     not be a permissible distribution event. It is also intended 
     that aggregation rules would not apply in the case of change 
     in control so that the change in control of one member of a 
     controlled group would not be a permissible distribution 
     event for participants of a deferred compensation plan of 
     another member of the group.
     Reporting requirements
       Amounts required to be included in income under the 
     provision are subject to reporting and Federal income tax 
     withholding requirements. Amounts required to be includible 
     in income are required to be reported on an individual's Form 
     W-2 (or Form 1099) for the year includible in income.
       The provision also requires annual reporting to the 
     Internal Revenue Service of amounts deferred. Such amounts 
     are required to be reported on an individual's Form W-2 (or 
     Form 1099) for the year deferred even if the amount is not 
     currently includible in income for that taxable year. It is 
     expected that annual reporting of annual amounts deferred 
     will provide the IRS greater information regarding such 
     arrangements for enforcement purposes. It is intended that 
     the information reported would provide an indication of what 
     arrangements should be examined and challenged. Under the 
     provision, the Secretary is authorized, through regulations, 
     to establish a minimum amount of deferrals below which the 
     reporting requirement does not apply. The Secretary

[[Page H8608]]

     may also provide that the reporting requirement does not 
     apply with respect to amounts of deferrals that are not 
     reasonably ascertainable. It is intended that the exception 
     for amounts not reasonable ascertainable only apply to 
     nonaccount balance plans and that amounts be required to be 
     reported when they first become reasonably 
     ascertainable.\815\
---------------------------------------------------------------------------
     \815\ It is intended that the exception be similar to that 
     under Treas. Reg. sec. 31.3121(v)(2)-1(e)(4).
---------------------------------------------------------------------------
     Effective date
       The provision is effective for amounts deferred in taxable 
     years beginning after December 31, 2004. Earnings on amounts 
     deferred before the effective date are subject to the 
     provision to the extent that such amounts deferred are 
     subject to the provision.
       Amounts deferred in taxable years beginning before January 
     1, 2005, are subject to the provision if the plan under which 
     the deferral is made is materially modified after October 3, 
     2004. The addition of any benefit, right or feature is a 
     material modification. The exercise or reduction of an 
     existing benefit, right, or feature is not a material 
     modification. For example, an amendment to a plan on November 
     1, 2004, to add a provision that distributions may be allowed 
     upon request if participants are required to forfeit 10 
     percent of the amount of the distribution (i.e., a 
     ``haircut'') would be a material modification to the plan so 
     that the rules of the provision would apply to the plan. 
     Similarly, accelerating vesting under a plan after October 3, 
     2004, would be a material modification. A change in the plan 
     administrator would not be a material modification. As 
     another example, amending a plan to remove a distribution 
     provision (e.g., to remove a ``haircut'') would not be 
     considered a material modification.
       Operating under the terms of a deferred compensation 
     arrangement that complies with current law and is not 
     materially modified after October 3, 2004, with respect to 
     amounts deferred before January 1, 2005, is permissible, as 
     such amounts would not be subject to the requirements of the 
     provision. For example, subsequent deferrals with respect to 
     amounts deferred before January 1, 2005, under a plan that is 
     not materially modified after October 3, 2004, would be 
     subject to present law and would not be subject to the 
     provision.\816\ No inference is intended that all deferrals 
     before the effective date are permissible under present law. 
     It is expected that the IRS will challenge pre-effective date 
     deferral arrangements that do not comply with present law.
---------------------------------------------------------------------------
     \816\ There is no inference that all subsequent deferral 
     elections under plans that are not materially modified are 
     permissible under present law.
---------------------------------------------------------------------------
       For purposes of the effective date, an amount is considered 
     deferred before January 1, 2005, if the amount is earned and 
     vested before such date. To the extent there is no material 
     modification after October 3, 2004, present law applies with 
     respect to vested rights.
       No later than 60 days after the date of enactment, the 
     Secretary shall issue guidance providing a limited period of 
     time during which a nonqualified deferred compensation plan 
     adopted before December 31, 2004, may, without violating the 
     requirements of the provision relating to distributions, 
     accelerations, and elections be amended (1) to provide that a 
     participant may terminate participation in the plan, or 
     cancel an outstanding deferral election with respect to 
     amounts deferred after December 31, 2004, if such amounts are 
     includible in income of the participant as earned, or if 
     later, when not subject to a substantial risk of forfeiture, 
     and (2) to conform with the provision with respect to amounts 
     deferred after December 31, 2004. It is expected that the 
     Secretary may provide exceptions to certain requirements of 
     the provision during the transition period (e.g., the rules 
     regarding timing of elections) for plans coming into 
     compliance with the provision. Moreover, it is expected that 
     the Secretary will provide a reasonable time, during the 
     transition period but after the issuance of guidance, for 
     plans to be amended and approved by the appropriate parties 
     in accordance with this provision.
     2. Denial of deferral of certain stock option and restricted 
         stock gains (sec. 672 of the Senate amendment and sec. 83 
         of the Code)


                              present law

       Section 83 applies to transfers of property in connection 
     with the performance of services. Under section 83, if, in 
     connection with the performance of services, property is 
     transferred to any person other than the person for whom such 
     services are performed, the excess of the fair market value 
     of such property over the amount (if any) paid for the 
     property is includible in income at the first time that the 
     property is transferable or not subject to substantial risk 
     of forfeiture.
       Stock granted to an employee (or other service provider) is 
     subject to the rules that apply under section 83. When stock 
     is vested and transferred to an employee, the excess of the 
     fair market value of the stock over the amount, if any, the 
     employee pays for the stock is includible in the employee's 
     income for the year in which the transfer occurs.
       The income taxation of a nonqualified stock option is 
     determined under section 83 and depends on whether the option 
     has a readily ascertainable fair market value. If the 
     nonqualified option does not have a readily ascertainable 
     fair market value at the time of grant, no amount is 
     includible in the gross income of the recipient with respect 
     to the option until the recipient exercises the option. The 
     transfer of stock on exercise of the option is subject to the 
     general rules of section 83. That is, if vested stock is 
     received on exercise of the option, the excess of the fair 
     market value of the stock over the option price is includible 
     in the recipient's gross income as ordinary income in the 
     taxable year in which the option is exercised. If the stock 
     received on exercise of the option is not vested, the excess 
     of the fair market value of the stock at the time of vesting 
     over the option price is includible in the recipient's income 
     for the year in which vesting occurs unless the recipient 
     elects to apply section 83 at the time of exercise.
       Other forms of stock-based compensation are also subject to 
     the rules of section 83.


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, gains attributable to stock 
     options (including exercises of stock options), vesting of 
     restricted stock, and other compensation based on employer 
     securities (including employer securities) cannot be deferred 
     by exchanging such amounts for a right to receive a future 
     payment. Except as provided by the Secretary, if a taxpayer 
     exchanges (1) an option to purchase employer securities, (2) 
     employer securities, or (3) any other property based on 
     employer securities for a right to receive future payments, 
     an amount equal to the present value of such right (or such 
     other amount as the Secretary specifies) is required to be 
     included in gross income for the taxable year of the 
     exchange. The provision applies even if the future right to 
     payment is treated as an unfunded and unsecured promise to 
     pay. The provision applies when there is in substance an 
     exchange, even if the transaction is not formally structured 
     as an exchange.
       The provision is not intended to imply that such practices 
     result in permissive deferral of income under present law.
       Effective date.--The Senate amendment applies to exchanges 
     after December 31, 2004.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.

                      E. Other Revenue Provisions

     1. Permit private sector debt collection companies to collect 
         tax debts (sec. 681 of the House bill, sec. 487 of the 
         Senate amendment, and new sec. 6306 of the Code)


                              Present Law

       In fiscal years 1996 and 1997, the Congress earmarked $13 
     million for IRS to test the use of private debt collection 
     companies. There were several constraints on this pilot 
     project. First, because both IRS and OMB considered the 
     collection of taxes to be an inherently governmental 
     function, only government employees were permitted to collect 
     the taxes.\817\ The private debt collection companies were 
     utilized to assist the IRS in locating and contacting 
     taxpayers, reminding them of their outstanding tax liability, 
     and suggesting payment options. If the taxpayer agreed at 
     that point to make a payment, the taxpayer was transferred 
     from the private debt collection company to the IRS. Second, 
     the private debt collection companies were paid a flat fee 
     for services rendered; the amount that was ultimately 
     collected by the IRS was not taken into account in the 
     payment mechanism.
---------------------------------------------------------------------------
     \817\ Sec. 7801(a).
---------------------------------------------------------------------------
       The pilot program was discontinued because of disappointing 
     results. GAO reported \818\ that IRS collected $3.1 million 
     attributable to the private debt collection company efforts; 
     expenses were also $3.1 million. In addition, there were lost 
     opportunity costs of $17 million to the IRS because 
     collection personnel were diverted from their usual 
     collection responsibilities to work on the pilot. The pilot 
     program results were disappointing because ``IRS' efforts to 
     design and implement the private debt collection pilot 
     program were hindered by limitations that affected the 
     program's results.'' The limitations included the scope of 
     work permitted to the private debt collection companies, the 
     number and type of cases referred to the private debt 
     collection companies, and the ability of IRS' computer 
     systems to identify, select, and transmit collection cases to 
     the private debt collectors.
---------------------------------------------------------------------------
     \818\ GAO/GGD-97-129R Issues Affecting IRS' Collection Pilot 
     (July 18, 1997).
---------------------------------------------------------------------------
       The IRS has in the last several years expressed renewed 
     interest in the possible use of private debt collection 
     companies; for example, IRS recently revised its extensive 
     Request for Information concerning its possible use of 
     private debt collection companies.\819\ GAO recently reviewed 
     IRS' planning and preparation for the use of private debt 
     collection companies.\820\ GAO identified five broad factors 
     critical to the success of using private debt collection 
     companies to collect taxes. GAO concluded: ``If Congress does 
     authorize PCA \821\ use, IRS's planning and preparations to 
     address the critical success factors for PCA contracting 
     provide greater assurance that the PCA program is headed in

[[Page H8609]]

     the right direction to meet its goals and achieve desired 
     results. Nevertheless, much work and many challenges remain 
     in addressing the critical success factors and helping to 
     maximize the likelihood that a PCA program would be 
     successful.'' \822\
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     \819\ TIRNO-03-H-0001 (February 14, 2003), at 
     www.procurement.irs.treas.gov. The basic request for 
     information is 104 pages, and there are 16 additional 
     attachments.
     \820\ GAO-04-492 Tax Debt Collection: IRS Is Addressing 
     Critical Success Factors for Contracting Out but Will Need to 
     Study the Best Use of Resources (May 2004).
     \821\ Private collection agencies.
     \822\ Page 19 of the May 2004 GAO report.
---------------------------------------------------------------------------
       In general, Federal agencies are permitted to enter into 
     contracts with private debt collection companies for 
     collection services to recover indebtedness owed to the 
     United States.\823\ That provision does not apply to the 
     collection of debts under the Internal Revenue Code.\824\
---------------------------------------------------------------------------
     \823\ 31 U.S.C. sec. 3718.
     \824\ 31 U.S.C. sec. 3718(f).
---------------------------------------------------------------------------
       The President's fiscal year 2004 and 2005 budget proposals 
     proposed the use of private debt collection companies to 
     collect Federal tax debts.


                               House Bill

       The bill permits the IRS to use private debt collection 
     companies to locate and contact taxpayers owing outstanding 
     tax liabilities of any type \825\ and to arrange payment of 
     those taxes by the taxpayers. There must be an assessment 
     pursuant to section 6201 in order for there to be an 
     outstanding tax liability. An assessment is the formal 
     recording of the taxpayer's tax liability that fixes the 
     amount payable. An assessment must be made before the IRS is 
     permitted to commence enforcement actions to collect the 
     amount payable. In general, an assessment is made at the 
     conclusion of all examination and appeals processes within 
     the IRS.\826\
---------------------------------------------------------------------------
     \825\ The provision generally applies to any type of tax 
     imposed under the Internal Revenue Code. It is anticipated 
     that the focus in implementing the provision will be: (a) 
     taxpayers who have filed a return showing a balance due but 
     who have failed to pay that balance in full; and (b) 
     taxpayers who have been assessed additional tax by the IRS 
     and who have made several voluntary payments toward 
     satisfying their obligation but have not paid in full.
     \826\ An amount of tax reported as due on the taxpayer's tax 
     return is considered to be self-assessed. If the IRS 
     determines that the assessment or collection of tax will be 
     jeopardized by delay, it has the authority to assess the 
     amount immediately (sec. 6861), subject to several procedural 
     safeguards.
---------------------------------------------------------------------------
       Several steps are involved in the deployment of private 
     debt collection companies. First, the private debt collection 
     company contacts the taxpayer by letter.\827\ If the 
     taxpayer's last known address is incorrect, the private debt 
     collection company searches for the correct address. Second, 
     the private debt collection company telephones the taxpayer 
     to request full payment.\828\ If the taxpayer cannot pay in 
     full immediately, the private debt collection company offers 
     the taxpayer an installment agreement providing for full 
     payment of the taxes over a period of as long as five years. 
     If the taxpayer is unable to pay the outstanding tax 
     liability in full over a five-year period, the private debt 
     collection company obtains financial information from the 
     taxpayer and will provide this information to the IRS for 
     further processing and action by the IRS.
---------------------------------------------------------------------------
     \827\ Several portions of the provision require that the IRS 
     disclose confidential taxpayer information to the private 
     debt collection company. Section 6103(n) permits disclosure 
     for ``the providing of other services . . . for purposes of 
     tax administration.'' Accordingly, no amendment to section 
     6103 is necessary to implement the provision. It is intended, 
     however, that the IRS vigorously protect the privacy of 
     confidential taxpayer information by disclosing the least 
     amount of information possible to contractors consistent with 
     the effective operation of the provision.
     \828\ The private debt collection company is not permitted to 
     accept payment directly. Payments are required to be 
     processed by IRS employees.
---------------------------------------------------------------------------
       The bill specifies several procedural conditions under 
     which the provision would operate. First, provisions of the 
     Fair Debt Collection Practices Act apply to the private debt 
     collection company. Second, taxpayer protections that are 
     statutorily applicable to the IRS are also made statutorily 
     applicable to the private sector debt collection companies. 
     In addition, taxpayer protections that are statutorily 
     applicable to IRS employees are also made statutorily 
     applicable to employees of private sector debt collection 
     companies. Third, subcontractors are prohibited from having 
     contact with taxpayers, providing quality assurance services, 
     and composing debt collection notices; any other service 
     provided by a subcontractor must receive prior approval from 
     the IRS. In addition, it is intended that the IRS require the 
     private sector debt collection companies to inform every 
     taxpayer they contact of the availability of assistance from 
     the Taxpayer Advocate.
       The bill creates a revolving fund from the amounts 
     collected by the private debt collection companies. The 
     private debt collection companies will be paid out of this 
     fund. The bill prohibits the payment of fees for all services 
     in excess of 25 percent of the amount collected under a tax 
     collection contract.\829\
---------------------------------------------------------------------------
     \829\ It is assumed that there will be competitive bidding 
     for these contracts by private sector tax collection agencies 
     and that vigorous bidding will drive the overhead costs down.
---------------------------------------------------------------------------
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that it: (1) sunsets the provision in five years; (2) 
     provides that, if the taxpayer cannot pay in full 
     immediately, the private debt collection company may offer 
     the taxpayer an installment agreement providing for full 
     payment of the taxes over three years; (3) provides that up 
     to 25 percent of amount collected may be used for IRS 
     collection enforcement activities; (4) and requires Treasury 
     to provide a biennial report to Congress.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     addition of two provisions from the Senate amendment: (1) the 
     conference agreement provides that up to 25 percent of amount 
     collected may be used for IRS collection enforcement 
     activities; and (2) the conference agreement requires 
     Treasury to provide a biennial report to Congress. The 
     conferees expect that, consistent with best management 
     practices and sound tax administration principles, the 
     Secretary will utilize this new debt collection provision to 
     the maximum extent feasible.
       The conferees expect that activities conducted by any 
     person under a qualified tax collection contract will be in 
     compliance with the Fair Debt Collection Practices Act, as 
     required by new section 6306(e) of the Code. Accordingly, the 
     conferees anticipate that the Secretary will not impose 
     requirements that would violate this provision of the Code. 
     The conferees believe that this new debt collection provision 
     will protect both taxpayers' rights and the confidentiality 
     of tax information.
     2. Modify charitable contribution rules for donations of 
         patents and other intellectual property (sec. 682 of the 
         House bill, sec. 494 of the Senate amendment, and secs. 
         170 and 6050L of the Code)


                              Present Law

       In general, a deduction is permitted for charitable 
     contributions, subject to certain limitations that depend on 
     the type of taxpayer, the property contributed, and the donee 
     organization.\830\ In the case of non-cash contributions, the 
     amount of the deduction generally equals the fair market 
     value of the contributed property on the date of the 
     contribution.
---------------------------------------------------------------------------
     \830\ Charitable deductions are provided for income, estate, 
     and gift tax purposes. Secs. 170, 2055, and 2522, 
     respectively.
---------------------------------------------------------------------------
       For certain contributions of property, the taxpayer is 
     required to reduce the deduction amount by any gain, 
     generally resulting in a deduction equal to the taxpayer's 
     basis. This rule applies to contributions of: (1) property 
     that, at the time of contribution, would not have resulted in 
     long-term capital gain if the property was sold by the 
     taxpayer on the contribution date; (2) tangible personal 
     property that is used by the donee in a manner unrelated to 
     the donee's exempt (or governmental) purpose; and (3) 
     property to or for the use of a private foundation (other 
     than a foundation defined in section 170(b)(1)(E)).
       Charitable contributions of capital gain property generally 
     are deductible at fair market value. Capital gain property 
     means any capital asset or property used in the taxpayer's 
     trade or business the sale of which at its fair market value, 
     at the time of contribution, would have resulted in gain that 
     would have been long-term capital gain. Contributions of 
     capital gain property are subject to different percentage 
     limitations than other contributions of property. Under 
     present law, certain copyrights are not considered capital 
     assets, in which case the charitable deduction for such 
     copyrights generally is limited to the taxpayer's basis.\831\
---------------------------------------------------------------------------
     \831\ See sec. 1221(a)(3), 1231(b)(1)(C).
---------------------------------------------------------------------------
       In general, a charitable contribution deduction is allowed 
     only for contributions of the donor's entire interest in the 
     contributed property, and not for contributions of a partial 
     interest.\832\ If a taxpayer sells property to a charitable 
     organization for less than the property's fair market value, 
     the amount of any charitable contribution deduction is 
     determined in accordance with the bargain sale rules.\833\ In 
     general, if a donor receives a benefit or quid pro quo in 
     return for a contribution, any charitable contribution 
     deduction is reduced by the amount of the benefit received. 
     For contributions of $250 or more, no charitable contribution 
     deduction is allowed unless the donee organization provides a 
     contemporaneous written acknowledgement of the contribution 
     that describes and provides a good faith estimate of the 
     value of any goods or services provided by the donee 
     organization in exchange for the contribution.\834\
---------------------------------------------------------------------------
     \832\ Sec. 170(f)(3).
     \833\ Sec. 1011(b) and Treas. Reg. sec. 1.1011-2.
     \834\ Sec. 170(f)(8).
---------------------------------------------------------------------------
       Taxpayers are required to obtain a qualified appraisal for 
     donated property with a value of $5,000 or more, and to 
     attach the appraisal to the tax return in certain cases.\835\ 
     Under Treasury regulations, a qualified appraisal means an 
     appraisal document that, among other things, (1) relates to 
     an appraisal that is made not earlier than 60 days prior to 
     the date of contribution of the appraised property and not 
     later than the due

[[Page H8610]]

     date (including extensions) of the return on which a 
     deduction is first claimed under section 170;\836\ (2) is 
     prepared, signed, and dated by a qualified appraiser; (3) 
     includes (a) a description of the property appraised; (b) the 
     fair market value of such property on the date of 
     contribution and the specific basis for the valuation; (c) a 
     statement that such appraisal was prepared for income tax 
     purposes; (d) the qualifications of the qualified appraiser; 
     and (e) the signature and taxpayer identification number 
     (``TIN'') of such appraiser; and (4) does not involve an 
     appraisal fee that violates certain prescribed rules.\837\
---------------------------------------------------------------------------
     \835\ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984) 
     (providing that not later than December 31, 1984, the 
     Secretary shall prescribe regulations requiring an 
     individual, a closely held corporation, or a personal service 
     corporation claiming a charitable deduction for property 
     (other than publicly traded securities) to obtain a qualified 
     appraisal of the property contributed and attach an appraisal 
     summary to the taxpayer's return if the claimed value of such 
     property (plus the claimed value of all similar items of 
     property donated to one or more donees) exceeds $5,000). 
     Under Pub. L. No. 98-369, a qualified appraisal means an 
     appraisal prepared by a qualified appraiser that includes, 
     among other things, (1) a description of the property 
     appraised; (2) the fair market value of such property on the 
     date of contribution and the specific basis for the 
     valuation; (3) a statement that such appraisal was prepared 
     for income tax purposes; (4) the qualifications of the 
     qualified appraiser; (5) the signature and TIN of such 
     appraiser; and (6) such additional information as the 
     Secretary prescribes in such regulations.
     \836\ In the case of a deduction first claimed or reported on 
     an amended return, the deadline is the date on which the 
     amended return is filed.
     \837\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------


                               House Bill

       The provision provides that if a taxpayer contributes a 
     patent or other intellectual property (other than certain 
     copyrights or inventory) to a charitable organization, the 
     taxpayer's initial charitable deduction is limited to the 
     lesser of the taxpayer's basis in the contributed property or 
     the fair market value of the property. In addition, the 
     taxpayer is permitted to deduct, as a charitable deduction, 
     certain additional amounts in the year of contribution or in 
     subsequent taxable years based on a specified percentage of 
     the qualified donee income received or accrued by the 
     charitable donee with respect to the contributed property. 
     For this purpose, ``qualified donee income'' includes net 
     income received or accrued by the donee that properly is 
     allocable to the intellectual property itself (as opposed to 
     the activity in which the intellectual property is used).
       The amount of any additional charitable deduction is 
     calculated as a sliding-scale percentage of qualified donee 
     income received or accrued by the charitable donee that 
     properly is allocable to the contributed property to the 
     applicable taxable year of the donor, determined as follows:

------------------------------------------------------------------------
                                           Deduction permitted for such
         Taxable year of donor                     taxable year
------------------------------------------------------------------------
1st year ending on or after              100 percent of qualified donee
 contribution.                            income
2nd year ending on or after              100 percent of qualified donee
 contribution.                            income
3rd year ending on or after              90 percent of qualified donee
 contribution.                            income
4th year ending on or after              80 percent of qualified donee
 contribution.                            income
5th year ending on or after              70 percent of qualified donee
 contribution.                            income
6th year ending on or after              60 percent of qualified donee
 contribution.                            income
7th year ending on or after              50 percent of qualified donee
 contribution.                            income
8th year ending on or after              40 percent of qualified donee
 contribution.                            income
9th year ending on or after              30 percent of qualified donee
 contribution.                            income
10th year ending on or after             20 percent of qualified donee
 contribution.                            income
11th year ending on or after             10 percent of qualified donee
 contribution.                            income
12th year ending on or after             10 percent of qualified donee
 contribution.                            income
Taxable years thereafter...............  No deduction permitted
------------------------------------------------------------------------

       An additional charitable deduction is allowed only to the 
     extent that the aggregate of the amounts that are calculated 
     pursuant to the sliding-scale exceed the amount of the 
     deduction claimed upon the contribution of the patent or 
     intellectual property.
       No charitable deduction is permitted with respect to any 
     revenues or income received or accrued by the charitable 
     donee after the expiration of the legal life of the patent or 
     intellectual property, or after the tenth anniversary of the 
     date the contribution was made by the donor.
       The taxpayer is required to inform the donee at the time of 
     the contribution that the taxpayer intends to treat the 
     contribution as a contribution subject to the additional 
     charitable deduction provisions of the provision. In 
     addition, the taxpayer must obtain written substantiation 
     from the donee of the amount of any qualified donee income 
     properly allocable to the contributed property during the 
     charity's taxable year.\838\ The donee is required to file an 
     annual information return that reports the qualified donee 
     income and other specified information relating to the 
     contribution. In instances where the donor's taxable year 
     differs from the donee's taxable year, the donor bases its 
     additional charitable deduction on the qualified donee income 
     of the charitable donee properly allocable to the donee's 
     taxable year that ends within the donor's taxable year.
---------------------------------------------------------------------------
     \838\ The net income taken into account by the taxpayer may 
     not exceed the amount of qualified donee income reported by 
     the donee to the taxpayer and the IRS udner the provision's 
     substantiation and reporting requirements.
---------------------------------------------------------------------------
       Under the provision, additional charitable deductions are 
     not available for patents or other intellectual property 
     contributed to a private foundation (other than a private 
     operating foundation or certain other private foundations 
     described in section 170(b)(1)(E)).
       Under the provision, the Secretary may prescribe 
     regulations or other guidance to carry out the purposes of 
     the provision, including providing for the determination of 
     amounts to be treated as qualified donee income in certain 
     cases where the donee uses the donated property to further 
     its exempt activities or functions, or as may be necessary or 
     appropriate to prevent the avoidance of the purposes of the 
     provision.
       Effective date.--Effective for contributions made after 
     June 3, 2004.


                            Senate Amendment

       The Senate amendment is similar to the House bill, except 
     that the taxpayer's initial deduction is equal to: the lesser 
     of the taxpayer's basis in the contributed property or the 
     fair market value of the property (as in the House bill) or, 
     if greater, the lesser of 5 percent of the fair market value 
     of the contributed property or $1 million. Additional 
     charitable deductions are available as in the House bill, 
     except that such additional deductions are not required to be 
     offset by the initial deductible amount.
       The Senate amendment imposes a processing fee (credited to 
     the Exempt Organizations unit with the IRS) equal to 1 
     percent of the claimed deductible amount for contributions of 
     applicable intellectual property.
       With respect to applicable intellectual property 
     contributions, the Senate amendment increases the present law 
     thresholds that trigger application of penalties for 
     substantial and gross valuation misstatements. The 
     substantial misstatement penalty applies if the taxpayer's 
     claimed value exceeds the correct amount by 50 percent or 
     more; the gross misstatement penalty applies if the 
     taxpayer's claimed value exceeds the correct amount by 100 
     percent or more.
       The Senate amendment requires that the Secretary shall 
     prescribe guidance on appraisal standards for charitable 
     contributions of intellectual property.
       Effective date.--(Contributions after the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the House bill.
       Effective date.--(Effective for contributions made after 
     June 3, 2004.
     3. Require increased reporting for noncash charitable 
         contributions (sec. 683 of the House bill and sec. 170 of 
         the Code)


                              Present Law

       In general, a deduction is permitted for charitable 
     contributions, subject to certain limitations that depend on 
     the type of taxpayer, the property contributed, and the donee 
     organization.\839\ In the case of non-cash contributions, the 
     amount of the deduction generally equals the fair market 
     value of the contributed property on the date of the 
     contribution.
---------------------------------------------------------------------------
     \839\ Charitable deductions are provided for income, estate, 
     and gift tax purposes. Secs. 170, 2055, and 2522, 
     respectively.
---------------------------------------------------------------------------
       In general, if the total charitable deduction claimed for 
     non-cash property exceeds $500, the taxpayer must file IRS 
     Form 8283 (Noncash Charitable Contributions) with the IRS. C 
     corporations (other than personal service corporations and 
     closely-held corporations) are required to file Form 8283 
     only if the deduction claimed exceeds $5,000.
       Taxpayers are required to obtain a qualified appraisal for 
     donated property (other than money and publicly traded 
     securities) with a value of more than $5,000.\840\ 
     Corporations (other than a closely-held corporation, a 
     personal service corporation, or an S corporation) are not 
     required to obtain a qualified appraisal. Taxpayers are not 
     required to attach a qualified appraisal to the taxpayer's 
     return, except in the case of contributed art-work valued at 
     more than $20,000. Under Treasury regulations, a qualified 
     appraisal means an appraisal document that, among other 
     things, (1) relates to an appraisal that is made not earlier 
     than 60 days prior to the date of contribution of the 
     appraised property and not later than the due date (including 
     extensions) of the return on which a deduction is first 
     claimed under section 170;\841\ (2) is prepared, signed, and 
     dated by a qualified appraiser; (3) includes (a) a 
     description of the property appraised; (b) the fair market 
     value of such property on the date of contribution and the 
     specific basis for the valuation; (c) a statement that such 
     appraisal

[[Page H8611]]

     was prepared for income tax purposes; (d) the qualifications 
     of the qualified appraiser; and (e) the signature and 
     taxpayer identification number of such appraiser; and (4) 
     does not involve an appraisal fee that violates certain 
     prescribed rules.\842\
---------------------------------------------------------------------------
     \840\ Pub. L. No. 98-369, sec. 155(a)(1) through 
     (6)(1984)(providing that not later than December 31, 1984, 
     the Secretary shall prescribe regulations requiring an 
     individual, a closely held corporation, or a personal service 
     corporation claiming a charitable deduction for property 
     (other than publicly tranded securities) to obtain a 
     qualified appraisal of the property contributed and attaach 
     an appraisal summary to the taxpayer's return if the claimed 
     value of such property (plus the claimed value of all similar 
     items of property donated to one or more donees) exceeds 
     $5,000). Under Pub. L. No. 98-369, a qualified appraisal 
     means an appraisal prepared by a qualified appraiser that 
     includes, among other things, (1) a description of the 
     property appraised; (2) the fair market value of such 
     property on the date of contribution and the specific basis 
     for the valuation; (3) a statement that such appraisal was 
     prepared for income tax purposes; (4) the qualifications of 
     the qualified appraiser; (5) the signature and taxpayer 
     identification number of such appraiser; and (6) such 
     additional information as the Secretary prescribes in such 
     regulations.
     \841\ In the case of a deduction first claimed or reported on 
     an amended return, the deadline is the date on which the 
     amended return is filed.
     \842\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------


                               House Bill

       The provision requires increased donor reporting for 
     certain charitable contributions of property other than cash, 
     inventory, or publicly traded securities. The provision 
     extends to all C corporations the present law requirement, 
     applicable to an individual, closely-held corporation, 
     personal service corporation, partnership, or S corporation, 
     that the donor must obtain a qualified appraisal of the 
     property if the amount of the deduction claimed exceeds 
     $5,000. The provision also provides that if the amount of the 
     contribution of property other than cash, inventory, or 
     publicly traded securities exceeds $500,000, then the donor 
     (whether an individual, partnership, or corporation) must 
     attach the qualified appraisal to the donor's tax return. For 
     purposes of the dollar thresholds under the provision, 
     property and all similar items of property donated to one or 
     more donees are treated as one property.
       The provision provides that a donor that fails to 
     substantiate a charitable contribution of property, as 
     required by the Secretary, is denied a charitable 
     contribution deduction. If the donor is a partnership or S 
     corporation, the deduction is denied at the partner or 
     shareholder level. The denial of the deduction does not apply 
     if it is shown that such failure is due to reasonable cause 
     and not to willful neglect.
       The provision provides that the Secretary may prescribe 
     such regulations as may be necessary or appropriate to carry 
     out the purposes of the provision, including regulations that 
     may provide that some or all of the requirements of the 
     provision do not apply in appropriate cases.
       Effective date.--(Effective for contributions made after 
     June 3, 2004.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill, except 
     that appraisals are not required for charitable contributions 
     of certain vehicles that are sold by the donee organization 
     without a significant intervening use or material improvement 
     of the vehicle by such organization, and for which the 
     organization provides an acknowledgement to the donor 
     containing a certification that the vehicle was sold in an 
     arm's length transaction between unrelated parties, and 
     providing the gross sales proceeds from the sale, and a 
     statement that the donor's deductible amount may not exceed 
     the amount of such gross proceeds.
       Effective date.--(Effective for contributions made after 
     June 3, 2004.
     4. Limit deduction for charitable contributions of vehicles 
         (sec. 684 of the House bill, sec. 731 of the Senate 
         amendment, and new sec. 6720 and sec. 170 of the Code)


                              Present Law

       In general, a deduction is permitted for charitable 
     contributions, subject to certain limitations that depend on 
     the type of taxpayer, the property contributed, and the donee 
     organization.\843\ In the case of non-cash contributions, the 
     amount of the deduction generally equals the fair market 
     value of the contributed property on the date of the 
     contribution.
---------------------------------------------------------------------------
     \843\ Charitable deductions are provided for income, estate, 
     and gift tax purposes. Secs. 170, 2055, and 2522, 
     respectively.
---------------------------------------------------------------------------
       For certain contributions of property, the taxpayer is 
     required to determine the deductible amount by subtracting 
     any gain from fair market value, generally resulting in a 
     deduction equal to the taxpayer's basis. This rule applies to 
     contributions of: (1) property that, at the time of 
     contribution, would not have resulted in long-term capital 
     gain if the property was sold by the taxpayer on the 
     contribution date; (2) tangible personal property that is 
     used by the donee in a manner unrelated to the donee's exempt 
     (or governmental) purpose; and (3) property to or for the use 
     of a private foundation (other than a foundation defined in 
     section 170(b)(1)(E)).
       Charitable contributions of capital gain property generally 
     are deductible at fair market value. Capital gain property 
     means any capital asset or property used in the taxpayer's 
     trade or business the sale of which at its fair market value, 
     at the time of contribution, would have resulted in gain that 
     would have been long-term capital gain. Contributions of 
     capital gain property are subject to different percentage 
     limitations than other contributions of property.
       A taxpayer who donates a used automobile to a charitable 
     donee generally deducts the fair market value (rather than 
     the taxpayer's basis) of the automobile. A taxpayer who 
     donates a used automobile generally is permitted to use an 
     established used car pricing guide to determine the fair 
     market value of the automobile, but only if the guide lists a 
     sales price for an automobile of the same make, model and 
     year, sold in the same area, and in the same condition as the 
     donated automobile. Similar rules apply to contributions of 
     other types of vehicles and property, such as boats.
       Charities are required to provide donors with written 
     substantiation of donations of $250 or more. Taxpayers are 
     required to report non-cash contributions totaling $500 or 
     more and the method used for determining fair market value.
       Taxpayers are required to obtain a qualified appraisal for 
     donated property with a value of $5,000 or more, and to 
     attach the appraisal to the tax return in certain cases.\844\ 
     Under Treasury regulations, a qualified appraisal means an 
     appraisal document that, among other things, (1) relates to 
     an appraisal that is made not earlier than 60 days prior to 
     the date of contribution of the appraised property and not 
     later than the due date (including extensions) of the return 
     on which a deduction is first claimed under section 170; 
     \845\ (2) is prepared, signed, and dated by a qualified 
     appraiser; (3) includes (a) a description of the property 
     appraised; (b) the fair market value of such property on the 
     date of contribution and the specific basis for the 
     valuation; (c) a statement that such appraisal was prepared 
     for income tax purposes; (d) the qualifications of the 
     qualified appraiser; and (e) the signature and taxpayer 
     identification number (``TIN'') of such appraiser; and (4) 
     does not involve an appraisal fee that violates certain 
     prescribed rules.\846\
---------------------------------------------------------------------------
     \844\ Pub. L. No. 98-369, sec. 155(a)(1) through (6)(1984) 
     (providing that not later than December 31, 1984, the 
     Secretary shall prescribe regulations requiring an 
     individual, a closely held corporation, or a personal service 
     corporation claiming a charitable deduction for property 
     (other than publicly traded securities) to obtain a qualified 
     appraisal of the property contributed and attach an appraisal 
     summary to the taxpayer's return if the claimed value of such 
     property (plus the claimed value of all similar items of 
     property donated to one or more donees) exceeds $5,000). 
     Under Pub. L. No. 98-369, a qualified appraisal means an 
     appraisal prepared by a qualified appraiser that includes, 
     among other things, (1) a description of the property 
     appraised; (2) the fair market value of such property on the 
     date of contribution and the specific basis for the 
     valuation; (3) a statement that such appraisal was prepared 
     for income tax purposes; (4) the qualifications of the 
     qualified appraiser; (5) the signature and TIN of such 
     appraiser; and (6) such additional information as the 
     Secretary prescribes in such regulations.
     \845\ In the case of a deduction first claimed or reported on 
     an amended return, the deadline is the date on which the 
     amended return is filed.
     \846\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------
       Appraisal fees paid by an individual to determine the fair 
     market value of donated property are deductible as 
     miscellaneous expenses subject to the 2 percent of adjusted 
     gross income limit.\847\
---------------------------------------------------------------------------
     \847\ Rev. Rul. 67-461, 1967-2 C.B. 125.
---------------------------------------------------------------------------


                               House Bill

       The provision allows a charitable deduction for 
     contributions of vehicles for which the taxpayer claims a 
     deduction of more than $250 only if the taxpayer obtains a 
     qualified appraisal of the vehicle. The provision applies to 
     automobiles and other types of motor vehicles manufactured 
     primarily for use on public streets, roads, and highways; 
     boats; and aircraft. The provision does not affect 
     contributions of inventory property. The definition of 
     qualified appraisal generally follows the definition 
     contained in present law, subject to additional 
     regulations or guidance provided by the Secretary. The 
     qualified appraisal of a donated vehicle must be obtained 
     by the taxpayer by the time the contribution is made. 
     Under the provision, the Secretary shall prescribe such 
     regulations or other guidance as may be necessary to carry 
     out the purposes of the provision.
       Effective date.--(Effective for contributions made after 
     June 3, 2004.


                            Senate Amendment

       Under the Senate amendment, the amount of deduction for 
     charitable contributions of vehicles (generally including 
     automobiles, boats, and airplanes for which the claimed value 
     exceeds $500 and excluding inventory property) depends upon 
     the use of the vehicle by the donee organization. If the 
     donee organization sells the vehicle without any significant 
     intervening use or material improvement of such vehicle by 
     the organization, the amount of the deduction shall not 
     exceed the gross proceeds received from the sale.
       The proposal imposes new substantiation requirements for 
     contributions of vehicles for which the claimed value exceeds 
     $500 (excluding inventory). A deduction is not allowed unless 
     the taxpayer substantiates the contribution by a 
     contemporaneous written acknowledgement by the donee. The 
     acknowledgement must contain the name and taxpayer 
     identification number of the donor and the vehicle 
     identification number (or similar number) of the vehicle. In 
     addition, if the donee sells the vehicle without performing a 
     significant intervening use or material improvement of such 
     vehicle, the acknowledgement must provide a certification 
     that the vehicle was sold in an arm's length transaction 
     between unrelated parties, and state the gross proceeds from 
     the sale and that the deductible amount may not exceed such 
     gross proceeds. In all other cases, the acknowledgement must 
     contain a certification of the intended use or material 
     improvement of the vehicle and the intended duration of such 
     use, and a certification that the vehicle will not be 
     transferred in exchange for money, other property, or 
     services before completion of such use or improvement. The 
     donee must notify the Secretary of the information contained 
     in an acknowledgement, in a time and manner provided by the 
     Secretary. An acknowledgement is considered contemporaneous 
     if provided within 30 days of sale of a vehicle that is not 
     significantly improved or materially used by the donee, or, 
     in all other cases, within 30 days of the contribution.

[[Page H8612]]

       A penalty applies if a donee organization knowingly 
     furnishes a false or fraudulent acknowledgement, or knowingly 
     fails to furnish an acknowledgement in the manner, at the 
     time, and showing the required information. In the case of an 
     acknowledgement provided within 30 days of sale of a vehicle 
     which is not significantly used or materially improved by the 
     donee, the penalty is the greater of the value of the tax 
     benefit to the donor or the gross proceeds from the sale of 
     the vehicle. For all other acknowledgements, the penalty is 
     the greater of the value of the tax benefit to the donor or 
     the claimed value of the vehicle or $5,000.
       The Senate amendment provides that the Secretary shall 
     prescribe such regulations or other guidance as may be 
     necessary to carry out the purposes of the proposal.
       Effective date.--(Contributions after June 30, 2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the penalty on the donee organization for 
     knowingly furnishing a false or fraudulent acknowledgement is 
     determined differently. With respect to a qualified vehicle 
     sold without a significant intervening use or material 
     improvement, the penalty is the greater of the gross proceeds 
     from the sale of the vehicle or the product of the highest 
     rate of tax specified in section 1 and the sales price stated 
     on the acknowledgement. For all other acknowledgements, the 
     penalty is the greater of $5,000 or the product of the 
     highest rate of tax specified in section 1 and the claimed 
     value of the vehicle.
       The conference agreement also provides that the Secretary 
     may prescribe regulations or other guidance that exempts 
     sales of vehicles that are in direct furtherance of the 
     donee's charitable purposes from the requirement that the 
     donor may not deduct an amount in excess of the gross 
     proceeds from the sale, and the requirement that the donee 
     certify that the vehicle will not be transferred in exchange 
     for money, other property, or services before completion of a 
     significant use or material improvement by the donee. The 
     conferees intend that such guidance may be appropriate, for 
     example, if an organization directly furthers its charitable 
     purposes by selling automobiles to needy persons at a price 
     significantly below fair market value.
       The conferees intend that in providing guidance on the 
     provision, the Secretary shall strictly construe the 
     requirement of significant use or material improvement. To 
     meet the significant use test, an organization must actually 
     use the vehicle to substantially further the organization's 
     regularly conducted activities and the use must be 
     significant. A donee will not be considered to significantly 
     use a qualified vehicle if, under the facts and 
     circumstances, the use is incidental or not intended at the 
     time of the contribution. Whether a use is significant also 
     depends on the frequency and duration of use. With respect to 
     the material improvement test, the conferees intend that a 
     material improvement would include major repairs to a 
     vehicle, or other improvements to the vehicle that improve 
     the condition of the vehicle in a manner that significantly 
     increases the vehicle's value. Cleaning the vehicle, minor 
     repairs, and routine maintenance are not considered a 
     material improvement.
       Example 1.--As part of its regularly conducted activities, 
     an organization delivers meals to needy individuals. The use 
     requirement would be met if the organization actually used a 
     donated qualified vehicle to deliver food to the needy. Use 
     of the vehicle to deliver meals substantially furthers a 
     regularly conducted activity of the organization. However, 
     the use also must be significant, which depends on the 
     nature, extent, and frequency of the use. If the organization 
     used the vehicle only once or a few times to deliver meals, 
     the use would not be considered significant. If the 
     organization used the vehicle to deliver meals every day for 
     one year the use would be considered significant. If the 
     organization drove the vehicle 10,000 miles while delivering 
     meals, such use likely would be considered significant. 
     However, use of a vehicle in such an activity for one week or 
     for several hundreds of miles generally would not be 
     considered a significant use.
       Example 2.--An organization uses a donated qualified 
     vehicle to transport its volunteers. The use would not be 
     significant merely because a volunteer used the vehicle over 
     a brief period of time to drive to or from the organization's 
     premises. On the other hand, if at the time the organization 
     accepts the contribution of a qualified vehicle, the 
     organization intends to use the vehicle as a regular and 
     ongoing means of transport for volunteers of the 
     organization, and such vehicle is so used, then the 
     significant use test likely would be met.
       Example 3.--The following example is a general illustration 
     of the provision. A taxpayer makes a charitable contribution 
     of a used automobile in good running condition and that needs 
     no immediate repairs to a charitable organization that 
     operates an elder care facility. The donee organization 
     accepts the vehicle and immediately provides the donor a 
     written acknowledgment containing the name and TIN of the 
     donor, the vehicle identification number, a certification 
     that the donee intends to retain the vehicle for a year or 
     longer to transport the facility's residents to community and 
     social events and deliver meals to the needy, and a 
     certification that the vehicle will not be transferred in 
     exchange for money, other property, or services before 
     completion of such use by the organization. A few days after 
     receiving the vehicle, the donee organization commences to 
     use the vehicle three times a week to transport some of its 
     residents to various community events, and twice a week to 
     deliver food to needy individuals. The organization continues 
     to regularly use the vehicle for these purposes for 
     approximately one year and then sells the vehicle. Under the 
     provision, the donee's use of the vehicle constitutes a 
     significant intervening use prior to the sale by the 
     organization, and the donor's deduction is not limited to the 
     gross proceeds received by the organization.
       Effective date.--Effective for contributions made after 
     December 31, 2004.
     5. Extend the present-law intangible amortization provisions 
         to acquisitions of sports franchises (sec. 685 of the 
         House bill, sec. 471 of the Senate amendment, and sec. 
         197 of the Code)


                              Present Law

       The purchase price allocated to intangible assets 
     (including franchise rights) acquired in connection with the 
     acquisition of a trade or business generally must be 
     capitalized and amortized over a 15-year period.\848\ These 
     rules were enacted in 1993 to minimize disputes regarding the 
     proper treatment of acquired intangible assets. The rules do 
     not apply to a franchise to engage in professional sports and 
     any intangible asset acquired in connection with such a 
     franchise.\849\ However, other special rules apply to certain 
     of these intangible assets.
---------------------------------------------------------------------------
     \848\ Sec. 197.
     \849\ Sec. 197(e)(6).
---------------------------------------------------------------------------
       Under section 1056, when a franchise to conduct a sports 
     enterprise is sold or exchanged, the basis of a player 
     contract acquired as part of the transaction is generally 
     limited to the adjusted basis of such contract in the hands 
     of the transferor, increased by the amount of gain, if any, 
     recognized by the transferor on the transfer of the contract. 
     Moreover, not more than 50 percent of the consideration from 
     the transaction may be allocated to player contracts unless 
     the transferee establishes to the satisfaction of the 
     Commissioner that a specific allocation in excess of 50 
     percent is proper. However, these basis rules may not apply 
     if a sale or exchange of a franchise to conduct a sports 
     enterprise is effected through a partnership.\850\ Basis 
     allocated to the franchise or to other valuable intangible 
     assets acquired with the franchise may not be amortizable if 
     these assets lack a determinable useful life.
---------------------------------------------------------------------------
     \850\ P.D.B. Sports, Ltd. v. Comm., 109 T.C. 423 (1997).
---------------------------------------------------------------------------
       In general, section 1245 provides that gain from the sale 
     of certain property is treated as ordinary income to the 
     extent depreciation or amortization was allowed on such 
     property. Section 1245(a)(4) provides special rules for 
     recapture of depreciation and deductions for losses taken 
     with respect to player contracts. The special recapture rules 
     apply in the case of the sale, exchange, or other disposition 
     of a sports franchise. Under the special recapture rules, the 
     amount recaptured as ordinary income is the amount of gain 
     not to exceed the greater of (1) the sum of the depreciation 
     taken plus any deductions taken for losses (i.e., abandonment 
     losses) with respect to those player contracts which are 
     initially acquired as a part of the original acquisition of 
     the franchise or (2) the amount of depreciation taken with 
     respect to those player contracts which are owned by the 
     seller at the time of the sale of the sports franchise.


                               House Bill

       The House bill extends the 15-year recovery period for 
     intangible assets to franchises to engage in professional 
     sports and any intangible asset acquired in connection with 
     the acquisition of such a franchise (including player 
     contracts). Thus, the same rules for amortization of 
     intangibles that apply to other acquisitions under present 
     law will apply to acquisitions of sports franchises. The 
     provision also repeals the special rules under section 
     1245(a)(4) and makes other conforming changes.
       Effective date.--The House bill is effective for property 
     acquired after the date of enactment. The amendment to 
     section 1245(a)(4) applies to franchises acquired after the 
     date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Increase continuous levy for certain federal payments 
         (sec. 686 of the House bill, sec. 734 of the Senate 
         amendment, and sec. 6331(h) of the Code)


                              Present Law

       If any person is liable for any internal revenue tax and 
     does not pay it within 10 days after notice and demand \851\ 
     by the IRS, the IRS may then collect the tax by levy upon all 
     property and rights to property belonging to the person,\852\ 
     unless there is an explicit

[[Page H8613]]

     statutory restriction on doing so. A levy is the seizure of 
     the person's property or rights to property. Property that is 
     not cash is sold pursuant to statutory requirements.\853\
---------------------------------------------------------------------------
     \851\ Notice and demand is the notice given to a person 
     liable for tax stating that the tax has been assessed and 
     demanding that payment be made. The notice and demand must be 
     mailed to the person's last known address or left at the 
     person's dwelling or usual place of business (Code sec. 
     6303).
     \852\ Code sec. 6331.
     \853\ Code secs. 6335-6343.
---------------------------------------------------------------------------
       A continuous levy is applicable to specified Federal 
     payments.\854\ This includes any Federal payment for which 
     eligibility is not based on the income and/or assets of a 
     payee. Thus, a Federal payment to a vendor of goods or 
     services to the government is subject to continuous levy. 
     This continuous levy attaches up to 15 percent of any 
     specified payment due the taxpayer.
---------------------------------------------------------------------------
     \854\ Code sec. 6331(h).
---------------------------------------------------------------------------


                               House Bill

       The bill permits a levy of up to 100 percent of a Federal 
     payment to a vendor of goods or services to the Federal 
     Government.
       Effective date.--Date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     7. Modification of straddle rules (sec. 687 of the House 
         bill, sec. 464 of the Senate amendment, and sec. 1092 of 
         the Code)


                              Present Law

     Straddle rules
       In general
       A ``straddle'' generally refers to offsetting positions 
     (sometimes referred to as ``legs'' of the straddle) with 
     respect to actively traded personal property. Positions are 
     offsetting if there is a substantial diminution in the risk 
     of loss from holding one position by reason of holding one or 
     more other positions in personal property. A ``position'' is 
     an interest (including a futures or forward contract or 
     option) in personal property. When a taxpayer realizes a loss 
     with respect to a position in a straddle, the taxpayer may 
     recognize that loss for any taxable year only to the extent 
     that the loss exceeds the unrecognized gain (if any) with 
     respect to offsetting positions in the straddle.\855\ 
     Deferred losses are carried forward to the succeeding 
     taxable year and are subject to the same limitation with 
     respect to unrecognized gain in offsetting positions.
---------------------------------------------------------------------------
     \855\ Sec. 1092.
---------------------------------------------------------------------------
       Positions in stock
       The straddle rules generally do not apply to positions in 
     stock. However, the straddle rules apply where one of the 
     positions is stock and at least one of the offsetting 
     positions is: (1) an option with respect to the stock, (2) a 
     securities futures contract (as defined in section 1234B) 
     with respect to the stock, or (3) a position with respect to 
     substantially similar or related property (other than stock) 
     as defined in Treasury regulations. In addition, the straddle 
     rules apply to stock of a corporation formed or availed of to 
     take positions in personal property that offset positions 
     taken by any shareholder.
       Although the straddle rules apply to offsetting positions 
     that consist of stock and an option with respect to stock, 
     the straddle rules generally do not apply if the option is a 
     ``qualified covered call option'' written by the 
     taxpayer.\856\ In general, a qualified covered call option is 
     defined as an exchange-listed option that is not deep-in-the-
     money and is written by a non-dealer more than 30 days before 
     expiration of the option.
---------------------------------------------------------------------------
     \856\ However, if the option written by the taxpayer is a 
     qualified covered call option that is in-the-money, then (1) 
     any loss with respect to such option is treated as long-term 
     capital loss if, at the time such loss is realized, gain on 
     the sale or exchange of the offsetting stock held by the 
     taxpayer would be treated as long-term capital gain, and (2) 
     the holding period of such stock does not include any period 
     during which the taxpayer is the grantor of the option (sec. 
     1092(f)).
---------------------------------------------------------------------------
       The stock exception from the straddle rules has been 
     largely curtailed by statutory amendment and regulatory 
     interpretation. Under proposed Treasury regulations, the 
     application of the stock exception essentially would be 
     limited to offsetting positions involving direct ownership of 
     stock and short sales of stock.\857\
---------------------------------------------------------------------------
     \857\ Prop. Treas. Reg. sec. 1.1092(d)-2(c).
---------------------------------------------------------------------------
       Unbalanced straddles
       When one position with respect to personal property offsets 
     only a portion of one or more other positions (``unbalanced 
     straddles''), the Secretary is directed to prescribe by 
     regulations the method for determining the portion of such 
     other positions that is to be taken into account for purposes 
     of the straddle rules.\858\ To date, no such regulations have 
     been promulgated.
---------------------------------------------------------------------------
     \858\ Sec. 1092(c)(2)(B).
---------------------------------------------------------------------------
       Unbalanced straddles can be illustrated with the following 
     example: Assume the taxpayer holds two shares of stock (i.e., 
     is long) in XYZ corporation--share A with a $30 basis and 
     share B with a $40 basis. When the value of the XYZ stock is 
     $45 per share, the taxpayer pays a $5 premium to purchase a 
     put option on one share of the XYZ stock with an exercise 
     price of $40. The issue arises as to whether the purchase 
     of the put option creates a straddle with respect to share 
     A, share B, or both. Assume that, when the value of the 
     XYZ stock is $100, the put option expires unexercised. 
     Taxpayer incurs a loss of $5 on the expiration of the put 
     option, and sells share B for a $60 gain. On a literal 
     reading of the straddle rules, the $5 loss would be 
     deferred because the loss ($5) does not exceed the 
     unrecognized gain ($70) in share A, which is also an 
     offsetting position to the put option--notwithstanding 
     that the taxpayer recognized more gain than the loss 
     through the sale of share B. This problem is exacerbated 
     when the taxpayer has a large portfolio of actively traded 
     personal property that may be offsetting the loss leg of 
     the straddle.
       Although Treasury has not issued regulations to address 
     unbalanced straddles, the IRS issued a private letter ruling 
     in 1999 that addressed an unbalanced straddle situation.\859\ 
     Under the facts of the ruling, a taxpayer entered into a 
     costless collar with respect to a portion of the shares of a 
     particular stock held by the taxpayer.\860\ Other shares were 
     held in an account as collateral for a loan and still other 
     shares were held in excess of the shares used as collateral 
     and the number of shares specified in the collar. The ruling 
     concluded that the collar offset only a portion of the stock 
     (i.e., the number of shares specified in the costless collar) 
     because that number of shares determined the payoff under 
     each option comprising the collar. The ruling further 
     concluded that: ``In the absence of regulations under section 
     1092(c)(2)(B), we conclude that it is permissible for 
     Taxpayer to identify which shares of Corporation stock are 
     part of the straddles and which shares are used as collateral 
     for the loans using appropriately modified versions of the 
     methods of section 1.1012-1(c)(2) and (3) [providing rules 
     for adequate identification of shares of stock sold or 
     transferred by a taxpayer] or section 1.1092(b)-3T(d)(4) 
     [providing requirements and methods for identification of 
     positions that are part of a section 1092(b)(2) identified 
     mixed straddle]''.
---------------------------------------------------------------------------
     \859\ Priv. Ltr. Rul. 199925044 (Feb. 3, 1999).
     \860\ A costless collar generally is comprised of the 
     purchase of a put option and the sale of a call option with 
     the same trade dates and maturity dates and set such that the 
     premium paid substantially equals the premium received. The 
     collar can be considered as economically similar to a short 
     position in the stock.
---------------------------------------------------------------------------
     Holding period for dividends-received deduction
       If an instrument issued by a U.S. corporation is classified 
     for tax purposes as stock, a corporate holder of the 
     instrument generally is entitled to a dividends-received 
     deduction for dividends received on that instrument.\861\ The 
     dividends-received deduction is allowed to a corporate 
     shareholder only if the shareholder satisfies a 46-day 
     holding period for the dividend-paying stock (or a 91-day 
     holding period for certain dividends on preferred 
     stock).\862\ The holding period must be satisfied for each 
     dividend over a period that is immediately before and 
     immediately after the taxpayer becomes entitled to receive 
     the dividend. The 46- or 91-day holding period generally does 
     not include any time during which the shareholder is 
     protected (other than by writing a qualified covered call) 
     from the risk of loss that is otherwise inherent in the 
     ownership of any equity interest.\863\
---------------------------------------------------------------------------
     \861\ Sec. 243. The amount of the deduction is 70 percent of 
     dividends received if the recipient owns less than 20 percent 
     (by vote and value) of stock of the payor. If the recipient 
     owns 20 percent or more of the stock, the deduction is 
     increased to 80 percent. If the recipient owns 80 percent or 
     more of the stock, the deduction is further increased to 100 
     percent for qualifying dividends.
     \862\ Sec. 246(c).
     \863\ Sec. 246(c)(4).
---------------------------------------------------------------------------


                               House Bill

     Straddle rules
       The House bill modifies the straddle rules in three 
     respects: (1) permits taxpayers to identify offsetting 
     positions of a straddle; (2) provides a special rule to 
     clarify the present-law treatment of certain physically 
     settled positions of a straddle; and (3) repeals the stock 
     exception from the straddle rules.
       Identified straddles
       Under the House bill, taxpayers generally are permitted to 
     identify the offsetting positions that are components of a 
     straddle at the time the taxpayer enters into a transaction 
     that creates a straddle, including an unbalanced 
     straddle.\864\ If there is a loss with respect to any 
     identified position that is part of an identified straddle, 
     the general straddle loss deferral rules do not apply to such 
     loss. Instead, the basis of each of the identified positions 
     that offset the loss position in the identified straddle is 
     increased by an amount that bears the same ratio to the loss 
     as the unrecognized gain (if any) with respect to such 
     offsetting position bears to the aggregate unrecognized gain 
     with respect to all positions that offset the loss position 
     in the identified straddle.\865\ Any loss with respect to an 
     identified position that is part of an identified straddle 
     cannot otherwise be taken into account by the taxpayer or any 
     other person to the extent that the loss increases the basis 
     of any identified positions that offset the loss position in 
     the identified straddle.
---------------------------------------------------------------------------
     \864\ However, to the extent provided by Treasury 
     regulations, taxpayers are not permitted to identify 
     offsetting positions of a straddle if the fair market value 
     of the straddle position already held by the taxpayer at the 
     creation of the straddle is less than its adjusted basis in 
     the hands of the taxpayer.
     \865\ For this purpose, ``unrecognized gain'' is the excess 
     of the fair market value of an identified position that is 
     part of an identified straddle at the time the taxpayer 
     incurs a loss with respect to another identified position in 
     the identified straddle, over the fair market value of such 
     position when the taxpayer identified the position as a 
     position in the identified straddle.
---------------------------------------------------------------------------
       In addition, the provision provides the Secretary authority 
     to issue regulations that would specify (1) the proper 
     methods for clearly identifying a straddle as an identified

[[Page H8614]]

     straddle (and identifying positions as positions in an 
     identified straddle), (2) the application of the identified 
     straddle rules for a taxpayer that fails to properly identify 
     the positions of an identified straddle,\866\ and (3) provide 
     an ordering rule for dispositions of less than an entire 
     position that is part of an identified straddle.
---------------------------------------------------------------------------
     \866\ For example, although the provision does not require 
     taxpayers to identify any positions of a straddle as an 
     identified straddle, it may be necessary to provide rules 
     requiring all balanced offsetting positions to be included in 
     an identified straddle if a taxpayer elects to identify any 
     of the offsetting positions as an identified straddle.
---------------------------------------------------------------------------
       Physically settled straddle positions
       The House bill also clarifies the present-law straddle 
     rules with respect to taxpayers that settle a position that 
     is part of a straddle by delivering property to which the 
     position relates. Specifically, the provision clarifies that 
     the present-law straddle loss deferral rules treat as a two-
     step transaction the physical settlement of a straddle 
     position that, if terminated, would result in the realization 
     of a loss. With respect to the physical settlement of such a 
     position, the taxpayer is treated as having terminated the 
     position for its fair market value immediately before the 
     settlement. The taxpayer then is treated as having sold at 
     fair market value the property used to physically settle the 
     position.
       Stock exception repeal
       The House bill also eliminates the exception from the 
     straddle rules for stock (other than the exception relating 
     to qualified covered call options). Thus, offsetting 
     positions comprised of actively traded stock and a position 
     with respect to substantially similar or related property 
     generally constitute a straddle.\867\
---------------------------------------------------------------------------
     \867\ It is intended that Treasury regulations defining 
     substantially similar or related property for this purpose 
     will continue to apply subsequent to repeal of the stock 
     exception and generally will constitute the exclusive 
     definition of a straddle with respect to offsetting positions 
     involving stock. See Prop. Treas. Reg. sec. 1.1092(d)-2(b). 
     However, the general straddles rules regarding substantial 
     diminution in risk of loss will continue to apply to stock of 
     corporations formed or availed of to take positions in 
     personal property that offset positions taken by the 
     shareholder.
---------------------------------------------------------------------------
     Dividends-received deduction holding period
       The House bill also modifies the required 46- or 91-day 
     holding period for the dividends-received deduction by 
     providing that the holding period does not include any time 
     during which the shareholder is protected from the risk of 
     loss otherwise inherent in the ownership of any equity 
     interest if the shareholder obtains such protection by 
     writing an in-the-money call option on the dividend-paying 
     stock.
     Effective date
       The House bill provision is effective for positions 
     established on or after the date of enactment that 
     substantially diminish the risk of loss from holding 
     offsetting positions (regardless of when such offsetting 
     position was established).


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment also limits the present-law qualified 
     covered call option exception to options traded on a national 
     securities exchange that is registered with the Securities 
     and Exchange Commission.


                          Conference Agreement

       The conference agreement follows the House bill.
       8. Add vaccines against Hepatitis A to the list of taxable 
     vaccines (sec. 688 of the House bill, sec. 491 of the Senate 
     amendment, and sec. 4132 of the Code)


                              Present Law

       A manufacturer's excise tax is imposed at the rate of 75 
     cents per dose \868\ on the following vaccines routinely 
     recommended for administration to children: diphtheria, 
     pertussis, tetanus, measles, mumps, rubella, polio, HIB 
     (haemophilus influenza type B), hepatitis B, varicella 
     (chicken pox), rotavirus gastroenteritis, and streptococcus 
     pneumoniae. The tax applied to any vaccine that is a 
     combination of vaccine components equals 75 cents times the 
     number of components in the combined vaccine.
---------------------------------------------------------------------------
     \868\ Sec. 4131.
---------------------------------------------------------------------------
       Amounts equal to net revenues from this excise tax are 
     deposited in the Vaccine Injury Compensation Trust Fund to 
     finance compensation awards under the Federal Vaccine Injury 
     Compensation Program for individuals who suffer certain 
     injuries following administration of the taxable vaccines. 
     This program provides a substitute Federal, ``no fault'' 
     insurance system for the State-law tort and private liability 
     insurance systems otherwise applicable to vaccine 
     manufacturers. All persons immunized after September 30, 
     1988, with covered vaccines must pursue compensation under 
     this Federal program before bringing civil tort actions under 
     State law.


                               House Bill

       The House bill adds any vaccine against hepatitis A to the 
     list of taxable vaccines.
       Effective date.--The provision is effective for vaccines 
     sold beginning on the first day of the first month beginning 
     more than four weeks after the date of enactment.


                            Senate Amendment

       The Senate amendment adds any vaccine against hepatitis A 
     to the list of taxable vaccines. The Senate amendment also 
     makes a conforming amendment to the trust fund expenditure 
     purposes.
       Effective date.--The provision is effective for vaccines 
     sold beginning on the first day of the first month beginning 
     more than four weeks after the date of enactment.


                          Conference Agreement

       The conference agreement includes the House bill provision.
       9. Add vaccines against influenza to the list of taxable 
     vaccines (sec. 689 of the House bill, sec. 732 of the Senate 
     amendment, and sec. 4132 of the Code)


                              Present Law

       A manufacturer's excise tax is imposed at the rate of 75 
     cents per dose \869\ on the following vaccines routinely 
     recommended for administration to children: diphtheria, 
     pertussis, tetanus, measles, mumps, rubella, polio, HIB 
     (haemophilus influenza type B), hepatitis B, varicella 
     (chicken pox), rotavirus gastroenteritis, and streptococcus 
     pneumoniae. The tax applied to any vaccine that is a 
     combination of vaccine components equals 75 cents times the 
     number of components in the combined vaccine.
---------------------------------------------------------------------------
     \869\ Sec. 4131.
---------------------------------------------------------------------------
       Amounts equal to net revenues from this excise tax are 
     deposited in the Vaccine Injury Compensation Trust Fund to 
     finance compensation awards under the Federal Vaccine Injury 
     Compensation Program for individuals who suffer certain 
     injuries following administration of the taxable vaccines. 
     This program provides a substitute Federal, ``no fault'' 
     insurance system for the State-law tort and private liability 
     insurance systems otherwise applicable to vaccine 
     manufacturers. All persons immunized after September 30, 
     1988, with covered vaccines must pursue compensation under 
     this Federal program before bringing civil tort actions under 
     State law.


                               House Bill

       The House bill adds any trivalent vaccine against influenza 
     to the list of taxable vaccines.
       Effective date.--The provision is effective for vaccines 
     sold or used beginning on the later of the first day of the 
     first month beginning more than four weeks after the date of 
     enactment or the date on which the Secretary of Health and 
     Human Services lists any such vaccine for purpose of 
     compensation for any vaccine-related injury or death 
     through the Vaccine Injury Compensation Trust Fund.


                            Senate Amendment

       The Senate amendment is identical to the House bill.


                          Conference Agreement

       The conference agreement includes the provision of the 
     House bill and the Senate amendment.
     10. Extension of IRS user fees (sec. 690 of the House bill, 
         sec. 482 of the Senate amendment, and sec. 7528 of the 
         Code)


                              Present Law

       The IRS generally charges a fee for requests for a letter 
     ruling, determination letter, opinion letter, or other 
     similar ruling or determination.\870\ These user fees are 
     authorized by statute through December 31, 2004.
---------------------------------------------------------------------------
     \870\ Sec. 7528.
---------------------------------------------------------------------------


                               House Bill

       The House bill extends the statutory authorization for 
     these user fees through September 30, 2014.
       Effective date.--Requests made after the date of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that it extends the statutory authorization for these user 
     fees through September 30, 2013.


                          Conference Agreement

       The conference agreement follows the House bill.
     11. Extension of Customs user fees (Sec. 691 of the House 
         bill and sec. 485 of the Senate amendment)


                              Present Law

       Section 13031 of the Consolidated Omnibus Budget 
     Reconciliation Act of 1985 (``COBRA'') \871\ authorized the 
     Secretary of the Treasury to collect certain service fees. 
     Section 412 of the Homeland Security Act of 2002 \872\ 
     authorized the Secretary of the Treasury to delegate such 
     authority to the Secretary of Homeland Security. Provided for 
     under 19 U.S.C. 58c, these fees include: processing fees for 
     air and sea passengers, commercial trucks, rail cars, private 
     aircraft and vessels, commercial vessels, dutiable mail 
     packages, barges and bulk carriers, merchandise, and Customs 
     broker permits. COBRA was amended on several occasions but 
     most recently by P.L. No. 108-121, which extended 
     authorization for the collection of these fees through March 
     1, 2005.\873\
---------------------------------------------------------------------------
     \871\ Pub. L. No. 99-272.
     \872\ Pub. L. No. 107-296.
     \873\ Sec. 201, 117 Stat. 1335.
---------------------------------------------------------------------------


                               House Bill

       The House bill extends the passenger and conveyance 
     processing fees and the merchandise processing fees 
     authorized under COBRA through September 30, 2014. For fiscal 
     years after September 30, 2005, the Secretary is to charge 
     fees in amounts that are reasonably related to the costs of 
     providing customs services in connection with the activity or 
     item for which the fee is charged.
       The House bill also includes a sense of the Congress 
     regarding the extent to which fees

[[Page H8615]]

     are related to the costs of providing customs services in 
     connection with the activities or items for which the fees 
     have been charged under such paragraphs. The House bill 
     further provides that the Secretary conduct a study of all 
     the fees collected by the Department of Homeland Security.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       The Senate amendment extends the fees authorized under the 
     COBRA through September 30, 2013.


                          Conference Agreement

       The conference agreement follows the House bill provision.
     12. Prohibition on nonrecognition of gain through complete 
         liquidation of holding company (sec. 452 of the Senate 
         amendment and sec. 332 of the Code)


                              Present Law

       A U.S. corporation owned by foreign persons is subject to 
     U.S. income tax on its net income. In addition, the earnings 
     of the U.S. corporation are subject to a second tax, when 
     dividends are paid to the corporation's shareholders.
       In general, dividends paid by a U.S. corporation to 
     nonresident alien individuals and foreign corporations that 
     are not effectively connected with a U.S. trade or business 
     are subject to a U.S. withholding tax on the gross amount of 
     such income at a rate of 30 percent. The 30-percent 
     withholding tax may be reduced pursuant to an income tax 
     treaty between the United States and the foreign country 
     where the foreign person is resident.
       In addition, the United States imposes a branch profits tax 
     on U.S. earnings of a foreign corporation that are shifted 
     out of a U.S. branch of the foreign corporation. The branch 
     profits tax is comparable to the second-level taxes imposed 
     on dividends paid by a U.S. corporation to foreign 
     shareholders. The branch profits tax is 30 percent (subject 
     to possible income tax treaty reduction) of a foreign 
     corporation's dividend equivalent amount. The ``dividend 
     equivalent amount'' generally is the earnings and profits of 
     a U.S. branch of a foreign corporation attributable to its 
     income effectively connected with a U.S. trade or business.
       In general, U.S. withholding tax is not imposed with 
     respect to a distribution of a U.S. corporation's earnings to 
     a foreign corporation in complete liquidation of the 
     subsidiary, because the distribution is treated as made in 
     exchange for stock and not as a dividend. In addition, 
     detailed rules apply for purposes of exempting foreign 
     corporations from the branch profits tax for the year in 
     which it completely terminates its U.S. business conducted in 
     branch form. The exemption from the branch profits tax 
     generally applies if, among other things, for three years 
     after the termination of the U.S. branch, the foreign 
     corporation has no income effectively connected with a U.S. 
     trade or business, and the U.S. assets of the terminated 
     branch are not used by the foreign corporation or a related 
     corporation in a U.S. trade or business.
       Regulations under section 367(e) provide that the 
     Commissioner may require a domestic liquidating corporation 
     to recognize gain on distributions in liquidation made to a 
     foreign corporation if a principal purpose of the liquidation 
     is the avoidance of U.S. tax. Avoidance of U.S. tax for this 
     purpose includes, but is not limited to, the distribution of 
     a liquidating corporation's earnings and profits with a 
     principal purpose of avoiding U.S. tax.


                               House Bill

       No provision.


                            Senate Amendment

       The provision treats as a dividend any distribution of 
     earnings by a U.S. holding company to a foreign corporation 
     in a complete liquidation, if the U.S. holding company was in 
     existence for less than five years.
       Effective date.--The provision is effective for 
     distributions occurring on or after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     13. Effectively connected income to include certain foreign 
         source income (sec. 454 of the Senate amendment and sec. 
         864 of the Code)


                              Present Law

       Nonresident alien individuals and foreign corporations 
     (collectively, foreign persons) are subject to U.S. tax on 
     income that is effectively connected with the conduct of a 
     U.S. trade or business; the U.S. tax on such income is 
     calculated in the same manner and at the same graduated rates 
     as the tax on U.S. persons.\874\ Foreign persons also are 
     subject to a 30-percent gross-basis tax, collected by 
     withholding, on certain U.S.-source income, such as interest, 
     dividends and other fixed or determinable annual or 
     periodical (``FDAP'') income, that is not effectively 
     connected with a U.S. trade or business. This 30-percent 
     withholding tax may be reduced or eliminated pursuant to an 
     applicable tax treaty. Foreign persons generally are not 
     subject to U.S. tax on foreign-source income that is not 
     effectively connected with a U.S. trade or business.
---------------------------------------------------------------------------
     \874\ Secs. 871(b) and 882.
---------------------------------------------------------------------------
       Detailed rules apply for purposes of determining whether 
     income is treated as effectively connected with a U.S. trade 
     or business (so-called ``U.S.-effectively connected 
     income'').\875\ The rules differ depending on whether the 
     income at issue is U.S-source or foreign-source income. Under 
     these rules, U.S.-source FDAP income, such as U.S.-source 
     interest and dividends, and U.S.-source capital gains are 
     treated as U.S.-effectively connected income if such income 
     is derived from assets used in or held for use in the active 
     conduct of a U.S. trade or business, or from business 
     activities conducted in the United States. All other types of 
     U.S.-source income are treated as U.S.-effectively connected 
     income (sometimes referred to as the ``force of attraction 
     rule'').
---------------------------------------------------------------------------
     \875\ Sec. 864(c).
---------------------------------------------------------------------------
       In general, foreign-source income is not treated as U.S.-
     effectively connected income.\876\ However, foreign-source 
     income, gain, deduction, or loss generally is considered to 
     be effectively connected with a U.S. business only if the 
     person has an office or other fixed place of business within 
     the United States to which such income, gain, deduction, or 
     loss is attributable and such income falls into one of three 
     categories described below.\877\ For these purposes, income 
     generally is not considered attributable to an office or 
     other fixed place of business within the United States unless 
     such office or fixed place of business is a material factor 
     in the production of the income, and such office or fixed 
     place of business regularly carries on activities of the type 
     that generate such income.\878\
---------------------------------------------------------------------------
     \876\ Sec. 864(c)(4).
     \877\ Sec. 864(c)(4)(B).
     \878\ Sec. 864(c)(5).
---------------------------------------------------------------------------
       The first category consists of rents or royalties for the 
     use of patents, copyrights, secret processes, or formulas, 
     good will, trademarks, trade brands, franchises, or other 
     similar intangible properties derived in the active conduct 
     of the U.S. trade or business.\879\ The second category 
     consists of interest or dividends derived in the active 
     conduct of a banking, financing, or similar business within 
     the United States, or received by a corporation whose 
     principal business is trading in stocks or securities for its 
     own account.\880\ Notwithstanding the foregoing, foreign-
     source income consisting of dividends, interest, or royalties 
     is not treated as effectively connected if the items are paid 
     by a foreign corporation in which the recipient owns, 
     directly, indirectly, or constructively, more than 50 percent 
     of the total combined voting power of the stock.\881\ The 
     third category consists of income, gain, deduction, or loss 
     derived from the sale or exchange of inventory or property 
     held by the taxpayer primarily for sale to customers in the 
     ordinary course of the trade or business where the property 
     is sold or exchanged outside the United States through the 
     foreign person's U.S. office or other fixed place of 
     business.\882\ Such amounts are not treated as effectively 
     connected if the property is sold or exchanged for use, 
     consumption, or disposition outside the United States and an 
     office or other fixed place of business of the taxpayer in a 
     foreign country materially participated in the sale or 
     exchange.
---------------------------------------------------------------------------
     \879\ Sec. 864(c)(4)(B)(i).
     \880\ Sec. 864(c)(4)(B)(ii).
     \881\ Sec. 864(c)(4)(D)(i).
     \882\ Sec. 864(c)(4)(B)(iii).
---------------------------------------------------------------------------
       The Code provides sourcing rules for enumerated types of 
     income, including interest, dividends, rents, royalties, and 
     personal services income.\883\ For example, interest income 
     generally is sourced based on the residence of the obligor. 
     Dividend income generally is sourced based on the residence 
     of the corporation paying the dividend. Thus, interest paid 
     on obligations of foreign persons and dividends paid by 
     foreign corporations generally are treated as foreign-source 
     income.
---------------------------------------------------------------------------
     \883\ Secs. 861-865.
---------------------------------------------------------------------------
       Other types of income are not specifically covered by the 
     Code's sourcing rules. For example, fees for accepting or 
     confirming letters of credit have been sourced under 
     principles analogous to the interest sourcing rules.\884\ In 
     addition, under regulations, payments in lieu of dividends 
     and interest derived from securities lending transactions are 
     sourced in the same manner as interest and dividends, 
     including for purposes of determining whether such income is 
     effectively connected with a U.S. trade or business.\885\ 
     Moreover, income from notional principal contracts (such as 
     interest rate swaps) generally is sourced based on the 
     residence of the recipient of the income, but is treated as 
     U.S.-source effectively connected income if it arises from 
     the conduct of a United States trade or business.\886\
---------------------------------------------------------------------------
     \884\ See Bank of America v. United States, 680 F.2d 142 (Ct. 
     Cl. 1982).
     \885\ Treas. Reg. sec. 1.864-5(b)(2)(ii).
     \886\ Treas. Reg. sec. 1.863-7(b)(3).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       Under the provision, each category of foreign-source income 
     that is treated as effectively connected with a U.S. trade or 
     business is expanded to include economic equivalents of such 
     income (i.e., economic equivalents of certain foreign-source 
     (1) rents and royalties, (2) dividends and interest, and (3) 
     income on sales or exchanges of goods in the ordinary course 
     of business). Thus, such economic equivalents are treated as 
     U.S.-effectively connected income in the same circumstances 
     that foreign-source rents, royalties, dividends, interest, or 
     certain inventory sales are treated as U.S.-effectively 
     connected income. For example, foreign-source

[[Page H8616]]

     interest and dividend equivalents are treated as U.S.-
     effectively connected income if the income is attributable to 
     a U.S. office of the foreign person, and such income is 
     derived by such foreign person in the active conduct of a 
     banking, financing, or similar business within the United 
     States, or the foreign person is a corporation whose 
     principal business is trading in stocks or securities for its 
     own account.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
     14. Recapture of overall foreign losses on sale of controlled 
         foreign corporation stock (sec. 455 of the Senate 
         amendment and sec. 904 of the Code)


                              present law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign-source income. The amount of foreign tax credits that 
     may be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S.-source income. The amount of foreign tax 
     credits generally is limited to a portion of the taxpayer's 
     U.S. tax which portion is calculated by multiplying the 
     taxpayer's total U.S. tax by a fraction, the numerator of 
     which is the taxpayer's foreign-source taxable income (i.e., 
     foreign-source gross income less allocable expenses or 
     deductions) and the denominator of which is the taxpayer's 
     worldwide taxable income for the year.\887\ Separate 
     limitations are applied to specific categories of income.
---------------------------------------------------------------------------
     \887\ Sec. 904(a).
---------------------------------------------------------------------------
       Special recapture rules apply in the case of foreign losses 
     for purposes of applying the foreign tax credit 
     limitation.\888\ Under these rules, losses for any taxable 
     year in a limitation category which exceed the aggregate 
     amount of foreign income earned in other limitation 
     categories (a so-called ``overall foreign loss'') are 
     recaptured by resourcing foreign-source income earned in a 
     subsequent year as U.S.-source income.\889\ The amount 
     resourced as U.S.-source income generally is limited to the 
     lesser of the amount of the overall foreign losses not 
     previously recaptured, or 50 percent of the taxpayer's 
     foreign-source income in a given year (the ``50-percent 
     limit''). Taxpayers may elect to recapture a larger 
     percentage of such losses.
---------------------------------------------------------------------------
     \888\ Sec. 904(f).
     \889\ Sec. 904(f)(1).
---------------------------------------------------------------------------
       A special recapture rule applies to ensure the recapture of 
     an overall foreign loss where property which was used in a 
     trade or business predominantly outside the United States is 
     disposed of prior to the time the loss has been 
     recaptured.\890\ In this regard, dispositions of trade or 
     business property used predominantly outside the United 
     States are treated as resulting in the recognition of 
     foreign-source income (regardless of whether gain would 
     otherwise be recognized upon disposition of the assets), in 
     an amount equal to the lesser of the excess of the fair 
     market value of such property over its adjusted basis, or the 
     amount of unrecaptured overall foreign losses. Such foreign-
     source income is resourced as U.S.-source income without 
     regard to the 50-percent limit. For example, if a U.S. 
     corporation transfers its foreign branch business assets to a 
     foreign corporation in a nontaxable section 351 transaction, 
     the taxpayer would be treated for purposes of the recapture 
     rules as having recognized foreign-source income in the year 
     of the transfer in an amount equal to the excess of the fair 
     market value of the property disposed over its adjusted basis 
     (or the amount of unrecaptured foreign losses, if smaller). 
     Such income would be recaptured as U.S.-source income to the 
     extent of any prior unrecaptured overall foreign losses.\891\
---------------------------------------------------------------------------
     \890\ Sec. 904(f)(3).
     \891\ Coordination rules apply in the case of losses 
     recaptured under the branch loss recapture rules. Sec. 
     367(a)(3)(C).
---------------------------------------------------------------------------
       Detailed rules apply in allocating and apportioning 
     deductions and losses for foreign tax credit limitation 
     purposes. In the case of interest expense, such amounts 
     generally are apportioned to all gross income under an asset 
     method, under which the taxpayer's assets are characterized 
     as producing income in statutory or residual groupings (i.e., 
     foreign-source income in the various limitation categories or 
     U.S.-source income).\892\ Interest expense is apportioned 
     among these groupings based on the relative asset values in 
     each. Taxpayers may elect to value assets based on either tax 
     book value or fair market value.
---------------------------------------------------------------------------
     \892\ Sec. 864(e) and Temp. Treas. Reg. sec. 1.861-9T.
---------------------------------------------------------------------------
       Each corporation that is a member of an affiliated group is 
     required to apportion its interest expense using 
     apportionment fractions determined by reference to all assets 
     of the affiliated group. For this purpose, an affiliated 
     group generally is defined to include only domestic 
     corporations. Stock in a foreign subsidiary, however, is 
     treated as a foreign asset that may attract the allocation of 
     U.S. interest expense for these purposes. If tax basis is 
     used to value assets, the adjusted basis of the stock of 
     certain 10-percent or greater owned foreign corporations or 
     other non-affiliated corporations must be increased by the 
     amount of earnings and profits of such corporation 
     accumulated during the period the U.S. shareholder held the 
     stock, for purposes of the interest apportionment.


                               house bill

       No provision.


                            senate amendment

       Under the provision, the special recapture rule for overall 
     foreign losses that currently applies to dispositions of 
     foreign trade or business assets applies to the disposition 
     of stock in a controlled foreign corporation controlled by 
     the taxpayer. Thus, a disposition of controlled foreign 
     corporation stock by a controlling shareholder results in the 
     recognition of foreign-source income in an amount equal to 
     the lesser of the fair market value of the stock over its 
     adjusted basis, or the amount of prior unrecaptured overall 
     foreign losses. Such income is resourced as U.S.-source 
     income for foreign tax credit limitation purposes without 
     regard to the 50-percent limit.
       Although the provision generally extends to all 
     dispositions of such stock, regardless of whether gain or 
     loss is recognized on the transfer, exceptions are made for 
     certain internal restructurings. Contributions to 
     corporations or partnerships under sections 351 and 721, 
     respectively, and certain stock and asset reorganizations do 
     not trigger recapture of overall foreign losses, provided 
     that the transferor's underlying indirect interest in the 
     disposed controlled foreign corporation does not change. 
     However, any gain recognized in connection with a transaction 
     meeting any of these exceptions, such as boot, triggers 
     recapture of overall foreign losses to the extent of such 
     gain.
       Effective date.--The provision applies to dispositions 
     after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment with 
     modifications. Under the provision as modified, a disposition 
     of controlled foreign corporation stock in a transaction in 
     which the taxpayer or a member of its consolidated group 
     acquires the assets of the controlled foreign corporation in 
     a liquidation under section 332 or a reorganization does not 
     trigger the recapture of overall foreign losses. Any gain 
     recognized in connection with a transaction meeting this 
     exception triggers recapture of overall foreign losses to the 
     extent of such gain.
     15. Application of earnings-stripping rules to partnerships 
         and S corporations (sec. 462 of the Senate amendment and 
         sec. 163 of the Code)


                              present law

       Present law provides rules to limit the ability of U.S. 
     corporations to reduce the U.S. tax on their U.S.-source 
     income through earnings stripping transactions. Section 
     163(j) specifically addresses earnings stripping involving 
     interest payments, by limiting the deductibility of interest 
     paid to certain related parties (``disqualified 
     interest''),\893\ if the payor's debt-equity ratio exceeds 
     1.5 to 1 and the payor's net interest expense exceeds 50 
     percent of its ``adjusted taxable income'' (generally taxable 
     income computed without regard to deductions for net interest 
     expense, net operating losses, and depreciation, 
     amortization, and depletion). Disallowed interest amounts can 
     be carried forward indefinitely. In addition, excess 
     limitation (i.e., any excess of the 50-percent limit over a 
     company's net interest expense for a given year) can be 
     carried forward three years.
---------------------------------------------------------------------------
     \893\ This interest also may include interest paid to 
     unrelated parties in certain cases in which a related party 
     guarantees the debt.
---------------------------------------------------------------------------
       The present-law earnings stripping provision does not apply 
     to partnerships. Proposed Treasury regulations provide that a 
     corporate partner's proportionate share of the liabilities of 
     a partnership is treated as debt of the corporate partner for 
     purposes of applying the earnings stripping limitation to its 
     own interest payments.\894\ In addition, interest paid or 
     accrued by a partnership is treated as interest expense of a 
     corporate partner, with the result that a deduction for the 
     interest expense may be disallowed if that expense would be 
     disallowed under the earnings stripping rules if paid by the 
     corporate partner itself.\895\ The proposed regulations also 
     provide that the earnings stripping rules do not apply to 
     subchapter S corporations.\896\ Thus, under present law and 
     the proposed regulations, a partnership or S corporation 
     generally is allowed a deduction for interest paid or accrued 
     on indebtedness that it issues that otherwise would be 
     disallowed under the earnings stripping rules in the case of 
     a subchapter C corporation.
---------------------------------------------------------------------------
     \894\ Prop. Treas. reg. sec. 1.163(j)-3(b)(3).
     \895\ Prop. Treas. reg. sec. 1.163(j)-2(c)(5).
     \896\ Prop. Treas. reg. sec. 1.163(j)-1(a)(i).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment incorporates a rule attributing 
     partnership debt to a corporate partner for purposes of 
     applying the earnings stripping rules to the 
     corporation.\897\
---------------------------------------------------------------------------
     \897\ This rule currently is contained in Prop. Treas. reg. 
     sec. 1.163(j)-2(c)(5).
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision generally 
     is effective for taxable years beginning on or after the date 
     of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

[[Page H8617]]

     16. Recognition of cancellation of indebtedness income 
         realized on satisfaction of debt with partnership 
         interest (sec. 463 of the Senate amendment and sec. 108 
         of the Code)


                              present law

       Under present law, a corporation that transfers shares of 
     its stock in satisfaction of its debt must recognize 
     cancellation of indebtedness income in the amount that would 
     be realized if the debt were satisfied with money equal to 
     the fair market value of the stock.\898\ Prior to enactment 
     of this present-law provision in 1993, case law provided that 
     a corporation did not recognize cancellation of indebtedness 
     income when it transferred stock to a creditor in 
     satisfaction of debt (referred to as the ``stock-for-debt 
     exception'').\899\
---------------------------------------------------------------------------
     \898\ Sec. 108(e)(8).
     \899\ E.g., Motor Mart Trust v. Commissioner, 4 T.C. 931 
     (1945), aff'd, 156 F.2d 122 (1st Cir. 1946), acq. 1947-1 C.B. 
     3; Capento Sec. Corp. v. Commissioner, 47 B.T.A. 691 (1942), 
     nonacq. 1943 C.B. 28, aff'd, 140 F.2d 382 (1st Cir. 1944); 
     Tower Bldg. Corp. v. Commissioner, 6 T.C. 125 (1946), acq. 
     1947-1 C.B. 4; Alcazar Hotel, Inc. v. Commissioner, 1 T.C. 
     872 (1943), acq. 1943 C.B. 1.
---------------------------------------------------------------------------
       When cancellation of indebtedness income is realized by a 
     partnership, it generally is allocated among the partners in 
     accordance with the partnership agreement, provided the 
     allocations under the agreement have substantial economic 
     effect. A partner who is allocated cancellation of 
     indebtedness income is entitled to exclude it if the partner 
     qualifies for one of the various exceptions to recognition of 
     such income, including the exception for insolvent taxpayers 
     or that for qualified real property indebtedness of taxpayers 
     other than subchapter C corporations.\900\ The availability 
     of each of these exceptions is determined at the partner, 
     rather than the partnership, level.
---------------------------------------------------------------------------
     \900\ Sec. 108(a).
---------------------------------------------------------------------------
       In the case of a partnership that transfers to a creditor a 
     capital or profits interest in the partnership in 
     satisfaction of its debt, no Code provision expressly 
     requires the partnership to realize cancellation of 
     indebtedness income. Thus, it is unclear whether the 
     partnership is required to recognize cancellation of 
     indebtedness income under either the case law that 
     established the stock-for-debt exception or the present-law 
     statutory repeal of the stock-for-debt exception. It also is 
     unclear whether any requirement to recognize cancellation 
     of indebtedness income is affected if the cancelled debt 
     is nonrecourse indebtedness.\901\
---------------------------------------------------------------------------
     \901\ See, e.g., Fulton Gold Corp. v. Commissioner, 31 B.T.A. 
     519 (1934); American Seating Co. v. Commissioner, 14 B.T.A. 
     328, aff'd in part and rev'd in part, 50 F.2d 681 (7th Cir. 
     1931); Hiatt v. Commissioner, 35 B.T.A. 292 (1937); Hotel 
     Astoria, Inc. v. Commissioner, 42 B.T.A. 759 (1940); Rev. 
     Rul. 91-31, 1991-1 C.B. 19.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that when a partnership 
     transfers a capital or profits interest in the partnership to 
     a creditor in satisfaction of partnership debt, the 
     partnership generally recognizes cancellation of indebtedness 
     income in the amount that would be recognized if the debt 
     were satisfied with money equal to the fair market value of 
     the partnership interest. The Senate amendment applies 
     without regard to whether the cancelled debt is recourse or 
     nonrecourse indebtedness. Any cancellation of indebtedness 
     income recognized under the Senate amendment is allocated 
     solely among the partners who held interests in the 
     partnership immediately prior to the satisfaction of the 
     debt.
       Under the Senate amendment, no inference is intended as to 
     the treatment under present law of the transfer of a 
     partnership interest in satisfaction of partnership debt.
       Effective date.--The Senate amendment is effective for 
     cancellations of indebtedness occurring on or after the date 
     of enactment.


                          conference agreement

       The conference agreement includes the Senate amendment.
     17. Denial of installment sale treatment for all readily 
         tradable debt (Sec. 465 of the Senate amendment and sec. 
         453 of the Code)


                              present law

       Under present law, taxpayers are permitted to recognize as 
     gain on a disposition of property only that proportion of 
     payments received in a taxable year which is the same as the 
     proportion that the gross profit bears to the total contract 
     price (the ``installment method'').\902\ However, the 
     installment method is not available if the taxpayer sells 
     property in exchange for a readily tradable evidence of 
     indebtedness that is issued by a corporation or a government 
     or political subdivision.\903\
---------------------------------------------------------------------------
     \902\ Sec. 453.
     \903\ Sec. 453(f)(3). Instead, the receipt of such 
     indebtedness is treated as a receipt of payment.
---------------------------------------------------------------------------
       No similar provision under present law prohibits the use of 
     the installment method where the taxpayer sells property in 
     exchange for readily tradable indebtedness issued by a 
     partnership or an individual.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment denies installment sale treatment with 
     respect to all sales in which the taxpayer receives 
     indebtedness that is readily tradable under present-law 
     rules, regardless of the nature of the issuer. For example, 
     if the taxpayer receives readily tradable debt of a 
     partnership in a sale, the partnership debt is treated as 
     payment on the installment note, and the installment method 
     is unavailable to the taxpayer.
       Effective date.--The Senate amendment provision is 
     effective for sales occurring on or after date of enactment.


                          conference agreement

       The conference agreement includes the Senate amendment.
     18. Modify treatment of transfers to creditors in divisive 
         reorganizations (sec. 466 of the Senate amendment and 
         secs. 357 and 361 of the Code)


                              present law

       Section 355 of the Code permits a corporation 
     (``distributing'') to separate its businesses by distributing 
     a controlled subsidiary (``controlled'') tax-free, if certain 
     conditions are met. In cases where the distributing 
     corporation contributes property to the controlled 
     corporation that is to be distributed, no gain or loss is 
     recognized if the property is contributed solely in exchange 
     for stock or securities of the controlled corporation (which 
     are subsequently distributed to distributing's shareholders). 
     The contribution of property to a controlled corporation that 
     is followed by a distribution of its stock and securities may 
     qualify as a reorganization described in section 
     368(a)(1)(D). That section also applies to certain 
     transactions that do not involve a distribution under section 
     355 and that are considered ``acquisitive'' rather than 
     ``divisive'' reorganizations.
       The contribution in the course of a divisive section 
     368(a)(1)(D) reorganization is also subject to the rules of 
     section 357(c). That section provides that the transferor 
     corporation will recognize gain if the amount of liabilities 
     assumed by controlled exceeds the basis of the property 
     transferred to it.
       Because the contribution transaction in connection with a 
     section 355 distribution is a reorganization under section 
     368(a)(1)(D), it is also subject to certain rules applicable 
     to both divisive and acquisitive reorganizations. One such 
     rule, in section 361(b), states that a transferor corporation 
     will not recognize gain if it receives money or other 
     property and distributes that money or other property to its 
     shareholders or creditors. The amount of property that may be 
     distributed to creditors without gain recognition is 
     unlimited under this provision.


                               House Bill

       No provision.


                            Senate Amendment

       The bill limits the amount of money plus the fair market 
     value of other property that a distributing corporation can 
     distribute to its creditors without gain recognition under 
     section 361(b) to the amount of the basis of the assets 
     contributed to a controlled corporation in a divisive 
     reorganization. In addition, the bill provides that 
     acquisitive reorganizations under section 368(a)(1)(D) are no 
     longer subject to the liabilities assumption rules of section 
     357(c).
       Effective date.--The bill is effective for transactions on 
     or after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     19. Clarify definition of nonqualified preferred stock (sec. 
         467 of the Senate amendment and sec. 351(g) of the Code)


                              Present Law

       The Taxpayer Relief Act of 1997 amended sections 351, 354, 
     355, 356, and 1036 to treat ``nonqualified preferred stock'' 
     as boot in corporate transactions, subject to certain 
     exceptions. For this purpose, preferred stock is defined as 
     stock that is ``limited and preferred as to dividends and 
     does not participate in corporate growth to any significant 
     extent.'' Nonqualified preferred stock is defined as any 
     preferred stock if (1) the holder has the right to require 
     the issuer or a related person to redeem or purchase the 
     stock, (2) the issuer or a related person is required to 
     redeem or purchase, (3) the issuer or a related person has 
     the right to redeem or repurchase, and, as of the issue date, 
     it is more likely than not that such right will be exercised, 
     or (4) the dividend rate varies in whole or in part (directly 
     or indirectly) with reference to interest rates, commodity 
     prices, or similar indices, regardless of whether such 
     varying rate is provided as an express term of the stock (as 
     in the case of an adjustable rate stock) or as a practical 
     result of other aspects of the stock (as in the case of 
     auction stock). For this purpose, clauses (1), (2), and (3) 
     apply if the right or obligation may be exercised within 20 
     years of the issue date and is not subject to a contingency 
     which, as of the issue date, makes remote the likelihood of 
     the redemption or purchase.


                               House Bill

       No provision.


                            Senate Amendment

       The provision clarifies the definition of nonqualified 
     preferred stock to ensure that stock for which there is not a 
     real and meaningful likelihood of actually participating in 
     the earnings and profits of the corporation is not considered 
     to be outside the definition of stock that is limited and 
     preferred as to dividends and does not participate in 
     corporate growth to any significant extent.
       As one example, instruments that are preferred on 
     liquidation and that are entitled to the same dividends as 
     may be declared on

[[Page H8618]]

     common stock do not escape being nonqualified preferred stock 
     by reason of that right if the corporation does not in fact 
     pay dividends either to its common or preferred stockholders. 
     As another example, stock that entitles the holder to a 
     dividend that is the greater of seven percent or the 
     dividends common shareholders receive does not avoid being 
     preferred stock if the common shareholders are not expected 
     to receive dividends greater than seven percent.
       No inference is intended as to the characterization of 
     stock under present law that has terms providing for 
     unlimited dividends or participation rights but, based on all 
     the facts and circumstances, is limited and preferred as to 
     dividends and does not participate in corporate growth to any 
     significant extent.
       Effective date.--The provision is effective for 
     transactions after May 14, 2003.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     20. Modify definition of controlled group of corporations 
         (sec. 468 of the Senate amendment and sec. 1563 of the 
         Code)


                              Present Law

       Under present law, a tax is imposed on the taxable income 
     of corporations. The rates are as follows:

               MARGINAL FEDERAL CORPORATE INCOME TAX RATES
------------------------------------------------------------------------
           If taxable income is:            Then the income tax rate is:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$10,000,000.......................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

       The first two graduated rates described above are phased 
     out by a five-percent surcharge for corporations with taxable 
     income between $100,000 and $335,000. Also, the application 
     of the 34-percent rate is phased out by a three-percent 
     surcharge for corporations with taxable income between $15 
     million and $18,333,333.
       The component members of a controlled group of corporations 
     are limited to one amount in each of the taxable income 
     brackets shown above.\904\ For this purpose, a controlled 
     group of corporations means a parent-subsidiary controlled 
     group and a brother-sister controlled group.
---------------------------------------------------------------------------
     \904\ Component members are also limited to one alternative 
     minimum tax exemption and one accumulated earnings credit.
---------------------------------------------------------------------------
       A brother-sister controlled group means two or more 
     corporations if five or fewer persons who are individuals, 
     estates or trusts own (or constructively own) stock 
     possessing (1) at least 80 percent of the total combined 
     voting power of all classes of stock entitled to vote and at 
     least 80 percent of the total value of all stock, and (2) 
     more than 50 percent of percent of the total combined voting 
     power of all classes of stock entitled to vote or more than 
     50 percent of the total value of all stock, taking into 
     account the stock ownership of each person only to the extent 
     the stock ownership is identical with respect to each 
     corporation.\905\
---------------------------------------------------------------------------
     \905\ Sec. 1563(a)(2). The Supreme Court held in United 
     States v. Vogel Fertilizer, 455 US 16 (1982), that Treas. 
     Reg. Sec. 1.1563-1(a)(3), as it was then written, was invalid 
     insofar as it would require an individual's stock to be taken 
     into account, for purposes of the 80-percent brother-sister 
     corporation ownership test, where that individual did not own 
     stock in each of the corporations in the asserted controlled 
     group. In that case, one corporation was owned 77.49 percent 
     by one shareholder and 22.51 by an unrelated shareholder. The 
     77.49 percent shareholder of that first corporation also 
     owned 87.5 percent of the voting stock and more than 90 
     percent of the value of the stock of a second corporation. 
     The Supreme Court held the corporations were not a controlled 
     group, even though they would have been one had the then 
     applicable Treasury regulations been considered valid in 
     their application to the case. The Treasury regulations were 
     subsequently changed to conform to the Supreme Court 
     decision. T.D. 8179, 53 F.R. 6603 (March 2, 1988).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the provision, a brother-sister controlled group 
     means two or more corporations if five or fewer persons who 
     are individuals, estates or trusts own (or constructively 
     own) stock possessing more than 50 percent of the total 
     combined voting power of all classes of stock entitled to 
     vote, or more than 50 percent of the total value of all 
     stock, taking into account the stock ownership of each person 
     only to the extent the stock ownership is identical with 
     respect to each corporation.
       The provision applies only for purposes of section 1561, 
     currently relating to corporate tax brackets, the accumulated 
     earnings credit, and the minimum tax. The provision does not 
     affect other Code sections or other provisions that utilize 
     or refer to the section 1563 brother-sister corporation 
     controlled group test for other purposes.\906\
---------------------------------------------------------------------------
     \906\ As one example, the provision does not change the 
     present law standards relating to deferred compensation, 
     contained in subchapter D of the Code, that refer to section 
     1563.
---------------------------------------------------------------------------
       Effective date.--The provision applies to taxable years 
     beginning after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     21. Establish specific class lives for utility grading costs 
         (sec. 472 of the Senate amendment and sec. 168 of the 
         Code)


                              Present Law

       A taxpayer is allowed a depreciation deduction for the 
     exhaustion, wear and tear, and obsolescence of property that 
     is used in a trade or business or held for the production of 
     income. For most tangible property placed in service after 
     1986, the amount of the depreciation deduction is determined 
     under the modified accelerated cost recovery system 
     (``MACRS'') using a statutorily prescribed depreciation 
     method, recovery period, and placed in service convention. 
     For some assets, the recovery period for the asset is 
     provided in section 168. In other cases, the recovery period 
     of an asset is determined by reference to its class life. The 
     class lives of assets placed in service after 1986 are 
     generally set forth in Revenue Procedure 87-56.\907\ If no 
     class life is provided, the asset is allowed a 7-year 
     recovery period under MACRS.
---------------------------------------------------------------------------
     \907\ 1987-2 C.B. 674 (as clarified and modified by Rev. 
     Proc. 88-22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
       Assets that are used in the transmission and distribution 
     of electricity for sale are included in asset class 49.14, 
     with a class life of 30 years and a MACRS recovery period of 
     20 years. The cost of initially clearing and grading land 
     improvements are specifically excluded from asset class 
     49.14. Prior to adoption of the accelerated cost recovery 
     system, the IRS ruled that an average useful life of 84 years 
     for the initial clearing and grading relating to electric 
     transmission lines and 46 years for the initial clearing and 
     grading relating to electric distribution lines, would be 
     accepted. However, the result in this ruling was not 
     incorporated in the asset classes included in Rev. Proc. 87-
     56 or its predecessors. Accordingly such costs are 
     depreciated over a 7-year recovery period under MACRS as 
     assets for which no class life is provided.
       A similar situation exists with regard to gas utility 
     pipelines and related storage facilities. Such assets are 
     included in asset class 49.24, with a class life of 22 years 
     and a MACRS recovery period of 15 years. Initial clearing and 
     grade improvements are specifically excluded from the asset 
     class, and no separate asset class is provided for such 
     costs. Accordingly such costs are depreciated over a 7-year 
     recovery period under MACRS as assets for which no class 
     life is provided.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment assigns a class life to depreciable 
     electric and gas utility clearing and grading costs incurred 
     to locate transmission and distribution lines and pipelines. 
     The provision includes these assets in the asset classes of 
     the property to which the clearing and grading costs relate 
     (generally, asset class 49.14 for electric utilities and 
     asset class 49.24 for gas utilities, giving these assets a 
     recovery period of 20 years and 15 years, respectively).
       Effective date.--The Senate amendment is effective for 
     property placed in service after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
     22. Expansion of limitation on expensing of certain passenger 
         automobiles (sec. 473 of the Senate amendment and sec. 
         179 of the Code)


                              present law

       A taxpayer is allowed to recover, through annual 
     depreciation deductions, the cost of certain property used in 
     a trade or business or for the production of income. The 
     amount of the depreciation deduction allowed with respect to 
     tangible property for a taxable year is determined under the 
     modified accelerated cost recovery system (``MACRS''). Under 
     MACRS, passenger automobiles generally are recovered over 
     five years. However, section 280F limits the annual 
     depreciation deduction with respect to certain passenger 
     automobiles.\908\
---------------------------------------------------------------------------
     \908\ The limitation is commonly referred to as the ``luxury 
     automobile depreciation limitation.'' For passenger 
     automobiles (subject to the such limitation) placed in 
     service in 2002, the maximum amount of allowable depreciation 
     is $7,660 for the year in which the vehicle was placed in 
     service, $4,900 for the second year, $2,950 for the third 
     year, and $1,775 for the fourth and later years. This 
     limitation applies to the combined depreciation deduction 
     provided under present law for depreciation, including 
     section 179 expensing and the temporary 30 percent additional 
     first year depreciation allowance. For luxury automobiles 
     eligible for the 50% additional first depreciation allowance, 
     the first year limitation is increased by an additional 
     $3,050.
---------------------------------------------------------------------------
       For purposes of the depreciation limitation, passenger 
     automobiles are defined broadly to include any 4-wheeled 
     vehicles that are manufactured primarily for use on public 
     streets, roads, and highways and which are rated at 6,000 
     pounds unloaded gross vehicle weight or less.\909\ In the 
     case of a truck or a van, the depreciation limitation applies 
     to vehicles that are rated at 6,000 pounds gross vehicle 
     weight or less. Sports utility vehicles are treated as a 
     truck for the purpose of applying the section 280F 
     limitation.
---------------------------------------------------------------------------
     \909\ Sec. 280F(d)(5). Exceptions are provided for any 
     ambulance, hearse, or any vehicle used by the taxpayer 
     directly in the trade or business of transporting persons or 
     property for compensation or hire.
---------------------------------------------------------------------------
       In lieu of depreciation, a taxpayer with a sufficiently 
     small amount of annual investment may elect to expense such 
     investment (sec. 179). The Jobs and Growth Tax Relief 
     Reconciliation Act (JGTRRA) of 2003 \910\ increased the 
     amount a taxpayer may deduct,

[[Page H8619]]

     for taxable years beginning in 2003 through 2005, to $100,000 
     of the cost of qualifying property placed in service for the 
     taxable year.\911\ In general, qualifying property is defined 
     as depreciable tangible personal property that is purchased 
     for use in the active conduct of a trade or business. The 
     $100,000 amount is reduced (but not below zero) by the amount 
     by which the cost of qualifying property placed in service 
     during the taxable year exceeds $400,000. Prior to the 
     enactment of JGTRRA (and for taxable years beginning in 2006 
     and thereafter) a taxpayer with a sufficiently small amount 
     of annual investment may elect to deduct up to $25,000 of the 
     cost of qualifying property placed in service for the taxable 
     year. The $25,000 amount is reduced (but not below zero) by 
     the amount by which the cost of qualifying property placed in 
     service during the taxable year exceeds $200,000. Passenger 
     automobiles subject to section 280F are eligible for section 
     179 expensing only to the extent of the applicable limits 
     contained in section 280F.
---------------------------------------------------------------------------
     \910\ Pub. L. No. 108-27, sec. 202 (2003).
     \911\ Additional section 179 incentives are provided with 
     respect to a qualified property used by a business in the New 
     York Liberty Zone (sec. 1400L(f)), an empowerment zone (sec. 
     1397A), or a renewal community (sec. 1400J).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment limits the ability of taxpayers to 
     claim deductions under section 179 for certain vehicles not 
     subject to section 280F to $25,000. The provision applies to 
     sport utility vehicles rated at 14,000 pounds gross vehicle 
     weight or less (in place of the present law 6,000 pound 
     rating). For this purpose, a sport utility vehicle is defined 
     to exclude any vehicle that: (1) is designed for more than 
     nine individuals in seating rearward of the driver's seat; 
     (2) is equipped with an open cargo area, or a covered box not 
     readily accessible from the passenger compartment, of at 
     least six feet in interior length; or (3) has an integral 
     enclosure, fully enclosing the driver compartment and load 
     carrying device, does not have seating rearward of the 
     driver's seat, and has no body section protruding more than 
     30 inches ahead of the leading edge of the windshield.
       The following example illustrates the operation of the 
     provision.
       Example.--Assume that during 2005, a calendar year taxpayer 
     acquires and places in service a sport utility vehicle 
     subject to the provision that costs $70,000. In addition, 
     assume that the property otherwise qualifies for the 
     expensing election under section 179. Under the provision, 
     the taxpayer is first allowed a $25,000 deduction under 
     section 179. The taxpayer is also allowed an additional 
     first-year depreciation deduction (sec. 168(k)) of $22,500 
     based on $45,000 ($70,000 original cost less the section 179 
     deduction of $25,000) of adjusted basis. Finally, the 
     remaining adjusted basis of $22,500 ($45,000 adjusted basis 
     less $22,500 additional first-year depreciation) is eligible 
     for an additional depreciation deduction of $4,500 under the 
     general depreciation rules (automobiles are five-year 
     recovery property). The remaining $18,000 of cost ($70,000 
     original cost less $52,000 deductible currently) would be 
     recovered in 2006 and subsequent years pursuant to the 
     general depreciation rules.
       Effective date.--The Senate amendment is effective for 
     property placed in service after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
     23. Provide consistent amortization period for intangibles 
         (sec. 474 of the Senate amendment and secs. 195, 248, and 
         709 of the Code)


                              present law

       At the election of the taxpayer, start-up expenditures\912\ 
     and organizational expenditures\913\ may be amortized over a 
     period of not less than 60 months, beginning with the month 
     in which the trade or business begins. Start-up expenditures 
     are amounts that would have been deductible as trade or 
     business expenses, had they not been paid or incurred before 
     business began. Organizational expenditures are expenditures 
     that are incident to the creation of a corporation (sec. 248) 
     or the organization of a partnership (sec. 709), are 
     chargeable to capital, and that would be eligible for 
     amortization had they been paid or incurred in connection 
     with the organization of a corporation or partnership with a 
     limited or ascertainable life.
---------------------------------------------------------------------------
     \912\ Sec. 195
     \913\ Secs. 248 and 709.
---------------------------------------------------------------------------
       Treasury regulations\914\ require that a taxpayer file an 
     election to amortize start-up expenditures no later than the 
     due date for the taxable year in which the trade or business 
     begins. The election must describe the trade or business, 
     indicate the period of amortization (not less than 60 
     months), describe each start-up expenditure incurred, and 
     indicate the month in which the trade or business began. 
     Similar requirements apply to the election to amortize 
     organizational expenditures. A revised statement may be filed 
     to include start-up and organizational expenditures that were 
     not included on the original statement, but a taxpayer may 
     not include as a start-up expenditure any amount that was 
     previously claimed as a deduction.
---------------------------------------------------------------------------
     \914\ Treas. Reg. sec. 1.195-1.
---------------------------------------------------------------------------
       Section 197 requires most acquired intangible assets (such 
     as goodwill, trademarks, franchises, and patents) that are 
     held in connection with the conduct of a trade or business or 
     an activity for the production of income to be amortized over 
     15 years beginning with the month in which the intangible was 
     acquired.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment modifies the treatment of start-up and 
     organizational expenditures. A taxpayer would be allowed to 
     elect to deduct up to $5,000 of start-up and $5,000 of 
     organizational expenditures in the taxable year in which the 
     trade or business begins. However, each $5,000 amount is 
     reduced (but not below zero) by the amount by which the 
     cumulative cost of start-up or organizational expenditures 
     exceeds $50,000, respectively. Start-up and organizational 
     expenditures that are not deductible in the year in which the 
     trade or business begins would be amortized over a 15-year 
     period consistent with the amortization period for section 
     197 intangibles.
       Effective date.--The Senate amendment is effective for 
     start-up and organizational expenditures incurred after the 
     date of enactment. Start-up and organizational expenditures 
     that are incurred on or before the date of enactment would 
     continue to be eligible to be amortized over a period not to 
     exceed 60 months. However, all start-up and organizational 
     expenditures related to a particular trade or business, 
     whether incurred before or after the date of enactment, would 
     be considered in determining whether the cumulative cost of 
     start-up or organizational expenditures exceeds $50,000.


                          conference agreement

       The conference agreement follows the Senate amendment.
     24. Doubling of certain penalties, fines, and interest on 
         underpayments related to certain offshore financial 
         arrangements (sec. 483 of the Senate amendment)


                              present law

       The Code contains numerous civil penalties, such as the 
     delinquency, accuracy-related and fraud penalties. These 
     civil penalties are in addition to any interest that may be 
     due.
       In January 2003, Treasury announced the Offshore Voluntary 
     Compliance Initiative (``OVCI'') running through April 15, 
     2003, to encourage the voluntary disclosure of previously 
     unreported income placed by taxpayers in offshore accounts 
     and accessed through credit card or other financial 
     arrangements. The taxpayer will pay back taxes, interest and 
     certain accuracy-related and delinquency penalties.
       A taxpayer's timely, voluntary disclosure of a substantial 
     unreported tax liability has long been an important factor in 
     deciding whether the taxpayer's case should ultimately be 
     referred for criminal prosecution. The voluntary disclosure 
     must be truthful, timely, and complete. A voluntary 
     disclosure does not guarantee immunity from prosecution.


                               house bill

       No provision.


                            senate amendment

       Increases by a factor of two the total amount of civil 
     penalties, interest and fines applicable for taxpayers who 
     would have been eligible to participate in either the OVCI or 
     the Treasury Department's voluntary disclosure initiative but 
     did not participate in either program.
       Effective date.--Taxpayers' open tax years on or after date 
     of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     25. Whistleblower reforms (sec. 488 of the Senate amendment)


                              present law

       Under section 7623, the IRS is authorized to pay such sums 
     as deemed necessary for: ``(1) detecting underpayments of 
     tax; and (2) detecting and bringing to trial and punishment 
     persons guilty of violating the internal revenue laws or 
     conniving at the same.'' Amounts are paid based on a 
     percentage of tax, fines, and penalties (but not interest) 
     actually collected based on the information provided. For 
     specific information that caused the investigation and 
     resulted in recovery, the IRS administratively has set the 
     reward in an amount not to exceed 15 percent of the amounts 
     recovered. For information, although not specific, that 
     nonetheless caused the investigation and was of value in the 
     determination of tax liabilities, the reward is not to exceed 
     10 percent of the amount recovered. For information that 
     caused the investigation, but had no direct relationship to 
     the determination of tax liabilities, the reward is not to 
     exceed one percent of the amount recovered. The reward 
     ceiling is $10 million (for payments made after November 7, 
     2002), and the reward floor is $100. No reward will be paid 
     if the recovery was so small as to call for payment of less 
     than $100 under the above formulas. Both the ceiling and 
     percentages can be increased with a Special Agreement. The 
     Code permits the IRS to disclose return information pursuant 
     to a contract for tax administration services (sec. 6103(n)).


                               house bill

       No provision.

[[Page H8620]]

                            senate amendment

       The Senate amendment creates a reward program for actions 
     in which the tax, penalties, interest, additions to tax, and 
     additional amounts in dispute exceed $20,000, and, if the 
     taxpayer is an individual, the individual's gross income 
     exceeds $200,000 for any taxable year.
       Generally, the Senate amendment establishes a reward floor 
     of 15 percent of the collected proceeds (including penalties, 
     interest, additions to tax and additional amounts) if the IRS 
     proceeds with an administrative or judicial action based on 
     information brought to the IRS's attention by an individual. 
     The Senate amendment permits awards of lesser amounts (but no 
     less than 10 percent) if the action was based principally on 
     allegations (other than information provided by the 
     individual) resulting from a judicial or administrative 
     hearing, government report, hearing, audit, investigation, or 
     from the news media. The Senate amendment caps the available 
     reward at 30 percent of the collected proceeds. Any 
     determination regarding a reward may be appealed to the U.S. 
     Tax Court.
       The Senate amendment creates a Whistleblower Office within 
     the IRS to administer this reward program. The Whistleblower 
     Office is funded with amounts equal to rewards made. The 
     Whistleblower Office may seek the assistance from the 
     individual providing information or from his legal 
     representative, and may reimburse the costs incurred by any 
     legal representative out of the funds of the Whistleblower 
     Office. To the extent the disclosure of returns or return 
     information is required to render such assistance, the 
     disclosure must be pursuant to an IRS tax administration 
     contract.
       Effective date.--Information provided on or after the date 
     of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     26. Increase in age of minor children whose unearned income 
         is taxed as if parent's income (sec. 495 of the Senate 
         amendment and sec. 1 of the Code)


                              present law

     Filing requirements for children
       A single unmarried individual eligible to be claimed as a 
     dependent on another taxpayer's return generally must file an 
     individual income tax return if he or she has: (1) earned 
     income only over $4,850 (for 2004); (2) unearned income only 
     over the minimum standard deduction amount for dependents 
     ($800 in 2004); or (3) both earned income and unearned income 
     totaling more than the smaller of (a) $4,850 (for 2004) or 
     (b) the larger of (i) $800 (for 2004), or (ii) earned income 
     plus $250.\915\ Thus, if a dependent child has less than 
     $800 in gross income, the child does not have to file an 
     individual income tax return for 2004.\916\
---------------------------------------------------------------------------
     \915\ Sec. 6012(a)(1)(C). Other filing requirements apply to 
     dependents who are married, elderly, or blind. See, Internal 
     Revenue Service, Publication 929, Tax Rules for Children and 
     Dependents, at 3, Table 1 (2003).
     \916\ A taxpayer generally need not file a return if he or 
     she has gross income in an amount less than the standard 
     dedcution (and, if allowable to the taxpyer, the personal 
     exemption amount). An individual who may be claimed as a 
     dependent of another taxpyaer is not eligible to claim the 
     dependency exemption relating to that individual. Sec. 
     151(d)(2). For taxable years beginning in 2004, the standard 
     deduction amount for an individual who may be claimed as a 
     dependent by another taxpyer may not exceed the greater of 
     $800 or the sum of $250 and the individual's earned income.
---------------------------------------------------------------------------
       A child who cannot be claimed as a dependent on another 
     person's tax return (e.g., because the support test is not 
     satisfied by any other person) is subject to the generally 
     applicable filing requirements. That is, such an individual 
     generally must file a return if the individual's gross income 
     exceeds the sum of the standard deduction and the personal 
     exemption amounts applicable to the individual.
     Taxation of unearned income under section 1(g)
       Special rules (generally referred to as the ``kiddie tax'') 
     apply to the unearned income of a child who is under age 
     14.\917\ The kiddie tax applies if: (1) the child has not 
     reached the age of 14 by the close of the taxable year; (2) 
     the child's unearned income was more than $1,600 (for 2004); 
     and (3) the child is required to file a return for the year. 
     The kiddie tax applies regardless of whether the child may be 
     claimed as a dependent on the parent's return.
---------------------------------------------------------------------------
     \917\ Sec. 1(g).
---------------------------------------------------------------------------
       For these purposes, unearned income is income other than 
     wages, salaries, professional fees, or other amounts received 
     as compensation for personal services actually rendered.\918\ 
     For children under age 14, net unearned income (for 2004, 
     generally unearned income over $1,600) is taxed at the 
     parent's rate if the parent's rate is higher than the child's 
     rate. The remainder of a child's taxable income (i.e., earned 
     income, plus unearned income up to $1,600 (for 2004), less 
     the child's standard deduction) is taxed at the child's 
     rates, regardless of whether the kiddie tax applies to the 
     child. In general, a child is eligible to use the 
     preferential tax rates for qualified dividends and capital 
     gains.\919\
---------------------------------------------------------------------------
     \918\ Sec. 1(g)(4) and sec. 911(d)(2).
     \919\ Sec. 1(h)
---------------------------------------------------------------------------
       The kiddie tax is calculated by computing the ``allocable 
     parental tax.'' This involves adding the net unearned income 
     of the child to the parent's income and then applying the 
     parent's tax rate. A child's ``net unearned income'' is the 
     child's unearned income less the sum of (1) the minimum 
     standard deduction allowed to dependents ($800 for 2004), and 
     (2) the greater of (a) such minimum standard deduction amount 
     or (b) the amount of allowable itemized deductions that are 
     directly connected with the production of the unearned 
     income.\920\ A child's net unearned income cannot exceed the 
     child's taxable income.
---------------------------------------------------------------------------
     \920\ Sec. 1(g)(4).
---------------------------------------------------------------------------
       The allocable parental tax equals the hypothetical increase 
     in tax to the parent that results from adding the child's net 
     unearned income to the parent's taxable income. If a parent 
     has more than one child subject to the kiddie tax, the net 
     unearned income of all children is combined, and a single 
     kiddie tax is calculated. Each child is then allocated a 
     proportionate share of the hypothetical increase, based upon 
     the child's net unearned income relative to the aggregate net 
     unearned income of all of the parent's children subject to 
     the tax.
       Special rules apply to determine which parent's tax return 
     and rate is used to calculate the kiddie tax. If the parents 
     file a joint return, the allocable parental tax is calculated 
     using the income reported on the joint return. In the case of 
     parents who are married but file separate returns, the 
     allocable parental tax is calculated using the income of the 
     parent with the greater amount of taxable income. In the case 
     of unmarried parents, the child's custodial parent is the 
     parent whose taxable income is taken into account in 
     determining the child's liability. If the custodial parent 
     has remarried, the stepparent is treated as the child's other 
     parent. Thus, if the custodial parent and stepparent file a 
     joint return, the kiddie tax is calculated using that joint 
     return. If the custodial parent and stepparent file separate 
     returns, the return of the one with the greater taxable 
     income is used. If the parents are unmarried but lived 
     together all year, the return of the parent with the greater 
     taxable income is used.\921\
---------------------------------------------------------------------------
     \921\ Sec. 1(g)(5); Internal Revenue Service, Publication 
     929, Tax Rules for Children and Dependents, at 6 (2003).
---------------------------------------------------------------------------
       Unless the parent elects to include the child's income on 
     the parent's return (as described below) the child files a 
     separate return to report the child's income. In this case, 
     items on the parent's return are not affected by the child's 
     income. The total tax due from a child is the greater of:
       (1) The sum of (a) the tax payable by the child on the 
     child's earned income plus (b) the allocable parental tax on 
     the child's unearned income, or
       (2) The tax on the child's income without regard to the 
     kiddie tax provisions..
     Parental election to include child's dividends and interest 
         on parent's return
       Under certain circumstances, a parent may elect to report a 
     child's dividends and interest on the parent's return. If the 
     election is made, the child is treated as having no income 
     for the year and the child does not have to file a return. 
     The parent makes the election on Form 8814, Parents' Election 
     To Report Child's Interest and Dividends. The requirements 
     for the parent's election are that:
       (1) The child has gross income only from interest and 
     dividends (including capital gains distributions and Alaska 
     Permanent Fund Dividends); \923\
---------------------------------------------------------------------------
     \923\ Internal Revenue Service, Publication 929, Tax Rules
---------------------------------------------------------------------------
       (2) Such income is more than the minimum standard deduction 
     amount for dependents ($800 in 2004) and less than 10 times 
     that amount ($8000 in 2004);
       (3) No estimated tax payments for the year were made in the 
     child's name and taxpayer identification number;
       (4) No backup withholding occurred; and
       (5) The child is required to file a return if the parent 
     does not make the election.
       Only the parent whose return must be used when calculating 
     the kiddie tax may make the election. The parent includes in 
     income the child's gross income in excess of twice the 
     minimum standard deduction amount for dependents (i.e., the 
     child's gross income in excess of $1,600 for 2004). This 
     amount is taxed at the parent's rate. The parent also must 
     report an additional tax liability equal to the lesser of: 
     (1) $80 (in 2004), or (2) 10 percent of the child's gross 
     income exceeding the child's standard deduction ($800 in 
     2004).
       Including the child's income on the parent's return can 
     affect the parent's deductions and credits that are based on 
     adjusted gross income, as well as income-based phaseouts, 
     limitations, and floors.\924\ In addition, certain deductions 
     that the child would have been entitled to take on his or her 
     own return are lost.\925\ Further, if the child received tax-
     exempt interest from a private activity bond, that item is 
     considered a tax preference of the parent for alternative 
     minimum tax purposes.\926\
---------------------------------------------------------------------------
     \924\ Internal Revenue Service, Publication 929, Tax Rules 
     for Children and Dependents, at 7 (2003).
     \925\ Internal Revenue Service, Publication 929, Tax Rules 
     for Children and Dependents, at 7 (2003).
     \926\ Sec. 1(g)(7)(B).
---------------------------------------------------------------------------
     Taxation of compensation for services under section 1(g)
       Compensation for a child's services is considered the gross 
     income of the child, not the parent, even if the compensation 
     is not received or retained by the child (e.g., is the 
     parent's income under local law).\927\ If the

[[Page H8621]]

     child's income tax is not paid, however, an assessment 
     against the child will be considered as also made against the 
     parent to the extent the assessment is attributable to 
     amounts received for the child's services.\928\
---------------------------------------------------------------------------
     \927\ Sec. 73(a).
     \928\ Sec. 6201(c).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment increases the age of minors to which 
     the kiddie tax provisions apply from under 14 to under 18.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     27. Modify holding period requirement for qualification for 
         reduced tax rate on dividends on preferred stock (sec. 
         496 of the Senate amendment and sec. 1 of the Code)


                              present law

       Section 1(h)(11) provides that if a taxpayer receives 
     ``qualified dividend income,'' the dividend income is taxed 
     as net capital gain. The maximum rate of tax on qualified 
     dividend income therefore generally is 15 percent.\929\ 
     Dividends are treated as qualified dividend income only if 
     certain conditions, including holding period requirements, 
     are satisfied. The holding period requirements under section 
     1(h)(11) are defined by reference, with modifications, to the 
     holding period requirements under section 246(c) for 
     qualification for the dividends received deduction. A 
     dividend paid on a share of common stock is qualified 
     dividend income only if, among other requirements, the 
     recipient holds the share for more than 60 days during the 
     121-day period beginning on the date that is 60 days before 
     the date on which the share becomes ex-dividend with respect 
     to the dividend.\930\ A dividend paid on a share of preferred 
     stock is qualified dividend income only if the recipient 
     holds the share for more than 90 days during the 181-day 
     period beginning 90 days before the ex-dividend date.\931\
---------------------------------------------------------------------------
     \929\ Sec. 1(h)(1)(C).
     \930\ Secs. 1(h)(11)(B)(iii)(I), 246(c)(1)(A).
     \931\ Secs. 1(h)(11)(B)(iii)(I), 246(c)(2).
---------------------------------------------------------------------------


                               house bill

       No provision.


                         Senate Amendment \932\

       The Senate amendment changes the holding period requirement 
     for treatment as qualified dividend income for dividends paid 
     on preferred stock. Under the Senate amendment, stock must be 
     held for more than 120 days during the 240-day period 
     beginning 120 days before the ex-dividend date.
---------------------------------------------------------------------------
     \932\ The Senate amendment predated the enactment of H.R. 
     1308, Pub. L. No. 108-311 (the ``Working Families Tax Relief 
     Act of 2004''), which included a technical correction to the 
     holding period requirements under sections 1(h)(11) and 
     246(c) (increasing from 120 to 121 days and from 180 to 181 
     days the periods during which the stock holding requirements 
     are tested).
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision applies to 
     taxable years beginning after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     28. Grant Treasury regulatory authority to address foreign 
         tax credit transactions involving inappropriate 
         separation of foreign taxes from related foreign income 
         (sec. 661A of Senate amendment and sec. 901 of the Code)


                              Present Law

       The United States provides a credit for foreign income 
     taxes paid or accrued. For purposes of the foreign tax 
     credit, the taxpayer ``is the person on whom foreign law 
     imposes legal liability for such tax.'' Treas. Reg. sec. 
     1.901-2(f)(1). Thus, if a U.S. corporation owns a foreign 
     partnership, the U.S. corporation can claim foreign tax 
     credits for the tax that is imposed on it as a partner in the 
     foreign entity. This is true even if the U.S. corporation 
     elects to treat the foreign entity as a corporation for U.S. 
     tax purposes. If the foreign entity does not meet the 
     definition of a controlled foreign corporation or does not 
     generate income that is subject to current inclusion under 
     the rules of an anti-deferral regime, the income generated by 
     the foreign entity may never be reported on a U.S. return, 
     despite the fact that the U.S. corporation can claim credits 
     for taxes imposed on that income.
       The Treasury Department and the IRS have expressed concern 
     about transactions that involve inappropriate foreign tax 
     credit results, including the second class of transactions 
     described in Notice 98-5.\933\ The tax benefits claimed in 
     these transactions are inconsistent with the purposes of the 
     foreign tax credit provisions.\934\
---------------------------------------------------------------------------
     \933\ 1998-1 C.B. 334.
     \934\ Notice 2004-19, 2004-11 I.R.B. 606.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision expands existing regulatory authority to 
     provide Treasury and the IRS additional mechanisms to address 
     the second class of transactions described in Notice 98-5 as 
     well as other abusive foreign tax credit schemes that involve 
     the inappropriate separation of foreign taxes from the 
     related foreign income in cases where foreign taxes are 
     imposed on any person with respect to income of an entity.
       The regulations may provide for: (1) the disallowance of a 
     credit for all or a portion of the foreign taxes; or (2) for 
     the allocation of the foreign taxes among the participants in 
     the transaction in a manner that is more consistent with the 
     underlying economics of the transaction.
       Effective date.--The provision is effective for 
     transactions entered into after the date of enactment.


                          Conference Agreement

       No provision.
     29. Freeze of provision regarding suspension of interest 
         where Secretary fails to contact taxpayer (sec. 662B of 
         the Senate amendment and sec. 6404(g) of the Code)


                              Present Law

       In general, interest and penalties accrue during periods 
     for which taxes were unpaid without regard to whether the 
     taxpayer was aware that there was tax due. The Code suspends 
     the accrual of certain penalties and interest after 1 year 
     after the filing of the tax return \935\ if the IRS has not 
     sent the taxpayer a notice specifically stating the 
     taxpayer's liability and the basis for the liability within 
     the specified period.\936\ With respect to taxable years 
     beginning before January 1, 2004, the one-year period is 
     increased to 18 months. Interest and penalties resume 21 days 
     after the IRS sends the required notice to the taxpayer. The 
     provision is applied separately with respect to each item or 
     adjustment. The provision does not apply where a taxpayer has 
     self-assessed the tax. The suspension only applies to 
     taxpayers who file a timely tax return. The provision applies 
     only to individuals and does not apply to the failure to pay 
     penalty, in the case of fraud, or with respect to criminal 
     penalties.
---------------------------------------------------------------------------
     \935\ If the return is filed before the due date, for this 
     purpose it is considered to have been filed on the due date.
     \936\ Sec. 6404(g). This provision was added to the Code by 
     sec. 3305 of the IRS Restructuring and Reform Act of 1998 
     (Pub. L. No. 105-206, July 22, 1998).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment makes the 18-month rule the permanent 
     rule. The Senate amendment also adds gross misstatements 
     \937\ and listed and reportable transactions to the list of 
     provisions to which the suspension of interest rules do not 
     apply.
---------------------------------------------------------------------------
     \937\ This includes any substantial omission of items to 
     which the six-year statute of limitations applies (sec. 
     6051(e)), gross valuation misstatements (sec. 6662(h)), and 
     similar provisions.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2003,\938\ except 
     that the addition of listed and reportable transactions 
     applies to interest accruing after May 5, 2004.
---------------------------------------------------------------------------
     \938\ It is intended that this provision apply retroactively 
     to the period beginning January 1, 2004 and ending on the 
     date of enactment. The due date for returns for the taxable 
     period beginning January 1, 2004 is generally April 15, 2005; 
     April 15, 2005 is therefore the date from which the 12-month 
     period that must pass under present-law prior to the 
     commencement of suspension is calculated. Consequently, 
     suspension of interest would generally not begin until April 
     15, 2006. Accordingly, the provision has no actual 
     retroactive effect.
---------------------------------------------------------------------------


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except: (1) the provision relating to reportable transactions 
     is made applicable only to reportable avoidance transactions; 
     \939\ and (2) that the addition of listed and reportable 
     avoidance transactions applies to interest accruing after 
     October 3, 2004.
---------------------------------------------------------------------------
     \939\ A reportable avoidance transaction is a reportable 
     transaction with a significant tax avoidance purpose.
---------------------------------------------------------------------------
     30. Increase in withholding from supplemental wage payments 
         in excess of $1 million (sec. 673 of the Senate amendment 
         and sec. 13273 of the Revenue Reconciliation Act of 1993)


                              Present Law

       An employer must withhold income taxes from wages paid to 
     employees; there are several possible methods for determining 
     the amount of income tax to be withheld. The IRS publishes 
     tables (Publication 15, ``Circular E'') to be used in 
     determining the amount of income tax to be withheld. The 
     tables generally reflect the income tax rates under the Code 
     so that withholding approximates the ultimate tax liability 
     with respect to the wage payments. In some cases, 
     ``supplemental'' wage payments (e.g., bonuses or commissions) 
     may be subject to withholding at a flat rate,\940\ based on 
     the third lowest income tax rate under the Code (25 percent 
     for 2005).\941\
---------------------------------------------------------------------------
     \940\ Sec. 13273 of the Revenue Reconciliation Act of 1993.
     \941\ Sec. 101(c)(11) of the Economic Growth and Tax Relief 
     Reconciliation Act of 2001.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, once annual supplemental wage 
     payments to an employee exceed $1 million, any additional 
     supplemental wage payments to the employee in that year are 
     subject to withholding at the highest income tax rate (35 
     percent for 2004 and 2005), regardless of any other 
     withholding rules and regardless of the employee's Form W-4.
       This rule applies only for purposes of wage withholding; 
     other types of withholding (such as pension withholding and 
     backup withholding) are not affected.

[[Page H8622]]

       Effective date.--The provision is effective with respect to 
     payments made after December 31, 2003.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     except that the conference agreement is effective for 
     payments made after December 31, 2004.
     31. Capital gain treatment on sale of stock acquired from 
         exercise of statutory stock options to comply with 
         conflict of interest requirements (sec. 674 of the Senate 
         amendment and sec. 421 of the Code)


                              Present Law

     Statutory stock options
       Generally, when an employee exercises a compensatory option 
     on employer stock, the difference between the option price 
     and the fair market value of the stock (i.e., the ``spread'') 
     is includible in income as compensation. Upon such exercise, 
     an employer is allowed a corresponding compensation 
     deduction. In the case of an incentive stock option or an 
     option to purchase stock under an employee stock purchase 
     plan (collectively referred to as ``statutory stock 
     options''), the spread is not included in income at the time 
     of exercise.\942\
---------------------------------------------------------------------------
     \942\ Sec. 421.
---------------------------------------------------------------------------
       If an employee disposes of stock acquired upon the exercise 
     of a statutory option, the employee generally is taxed at 
     capital gains rates with respect to the excess of the fair 
     market value of the stock on the date of disposition over the 
     option price, and no compensation expense deduction is 
     allowable to the employer, unless the employee fails to 
     meet a holding period requirement. The employee fails to 
     meet this holding period requirement if the disposition 
     occurs within two years after the date the option is 
     granted or one year after the date the option is 
     exercised. The gain upon a disposition that occurs prior 
     to the expiration of the applicable holding period(s) (a 
     ``disqualifying disposition'') does not qualify for 
     capital gains treatment. In the event of a disqualifying 
     disposition, the income attributable to the disposition is 
     treated by the employee as income received in the taxable 
     year in which the disposition occurs, and a corresponding 
     deduction is allowable to the employer for the taxable 
     year in which the disposition occurs.
     Sale of property to comply with conflict of interest 
         requirements
       The Code provides special rules for recognizing gain on 
     sales of property which are required in order to comply with 
     certain conflict of interest requirements imposed by the 
     Federal Government.\943\ Certain executive branch Federal 
     employees (and their spouses and minor or dependent children) 
     who are required to divest property in order to comply with 
     conflict of interest requirements may elect to postpone the 
     recognition of resulting gains by investing in certain 
     replacement property within a 60-day period. The basis of the 
     replacement property is reduced by the amount of the gain not 
     recognized. Permitted replacement property is limited to any 
     obligation of the United States or any diversified investment 
     fund approved by regulations issued by the Office of 
     Government Ethics. The rule applies only to sales under 
     certificates of divestiture issued by the President or the 
     Director of the Office of Government Ethics.
---------------------------------------------------------------------------
     \943\ Sec. 1043.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, an eligible person who, in 
     order to comply with Federal conflict of interest 
     requirements, is required to sell shares of stock acquired 
     pursuant to the exercise of a statutory stock option is 
     treated as satisfying the statutory holding period 
     requirements, regardless of how long the stock was actually 
     held. An eligible person generally includes an officer or 
     employee of the executive branch of the Federal Government 
     (and any spouse or minor or dependent children whose 
     ownership in property is attributable to the officer or 
     employee). Because the sale is not treated as a disqualifying 
     disposition, the individual is afforded capital gain 
     treatment on any resulting gains. Such gains are eligible for 
     deferral treatment under section 1043.
       The employer granting the option is not allowed a deduction 
     upon the sale of the stock by the individual.
       Effective date.--The Senate amendment is effective for 
     sales after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     32. Application of basis rules to nonresident aliens (sec. 
         675 of the Senate amendment and new sec. 72(w) and sec. 
         83 of the Code)


                              Present Law

     Distributions from retirement plans
       Distributions from retirement plans are includible in gross 
     income under the rules relating to annuities \944\ and, thus, 
     are generally includible in income, except to the extent the 
     amount received represents investment in the contract (i.e., 
     the participant's basis). The participant's basis includes 
     amounts contributed by the participant on an after-tax basis, 
     together with certain amounts contributed by the employer, 
     minus the aggregate amount (if any) previously distributed to 
     the extent that such amount was excludable from gross income. 
     Amounts contributed by the employer are included in the 
     calculation of the participant's basis only to the extent 
     that such amounts were includible in the gross income of the 
     participant, or to the extent that such amounts would have 
     been excludable from the participant's gross income if they 
     had been paid directly to the participant at the time they 
     were contributed.\945\
---------------------------------------------------------------------------
     \944\ Secs. 72 and 402.
     \945\ Sec. 72(f).
---------------------------------------------------------------------------
       Employer contributions to retirement plans and other 
     payments for labor or personal services performed outside the 
     United States by a nonresident alien generally are not 
     treated as U.S. source income. Such contributions, therefore, 
     generally would not be includible in the nonresident alien's 
     gross income if they had been paid directly to the 
     nonresident alien at the time they were contributed. 
     Consequently, the amounts of such contributions generally are 
     includible in the employee's basis and are not taxed by the 
     United States if a distribution is made when the employee is 
     a U.S. citizen or resident.\946\
---------------------------------------------------------------------------
     \946\ Rev. Rul. 58-236, 1958-1 C.B. 37.
---------------------------------------------------------------------------
       Earnings on contributions are not included in basis unless 
     previously includible in income. In general, in the case of a 
     nonexempt trust, earnings are includible in income when 
     distributed or made available.\947\ In the case of highly 
     compensated employees, the amount of the vested accrued 
     benefit under the trust (other than the employee's investment 
     in the contract) is generally required to be included in 
     income annually (to the extent not previously includible). 
     That is, earnings, as well as contributions, that are part of 
     the vested accrued benefit are currently includible in 
     income.\948\
---------------------------------------------------------------------------
     \947\ Sec. 402(b)(2).
     \948\ Sec. 402(b)(4).
---------------------------------------------------------------------------
     Property transferred in connection with the performance of 
         services
       The Code contains rules governing the amount and timing of 
     income and deductions attributable to transfers of property 
     in connection with the performance of services. If, in 
     connection with the performance of services, property is 
     transferred to any person other than the person for whom such 
     services are performed, in general, an amount is includible 
     in the gross income of the person performing the services 
     (the ``service provider'') for the taxable year in which the 
     property is first vested (i.e., transferable or not subject 
     to a substantial risk of forfeiture).\949\ The amount 
     includible in the service provider's income is the excess of 
     the fair market value of the property over the amount (if 
     any) paid for the property. Basis in such property includes 
     any amount that is included in income as a result of the 
     transfer.\950\
---------------------------------------------------------------------------
     \949\ Sec. 83(a).
     \950\ Treas. Reg. sec. 1.61-2(d)(i).
---------------------------------------------------------------------------
     U.S. income tax treaties
       Under the 1996 U.S. Model Income Tax Treaty (``U.S. 
     Model'') and some U.S. income tax treaties in force, 
     retirement plan distributions beneficially owned by a 
     resident of a treaty country in consideration for past 
     employment generally are taxable only by the individual 
     recipient's country of residence. Under the U.S. Model treaty 
     and some U.S. income tax treaties, this exclusive residence-
     based taxation rule is limited to the taxation of amounts 
     that were not previously included in taxable income in the 
     other country. For example, if a treaty country had imposed 
     tax on a resident individual with respect to some portion of 
     a retirement plan's earnings, subsequent distributions to 
     that person while a resident of the United States would not 
     be taxable in the United States to the extent the 
     distributions were attributable to such previously taxed 
     amounts.
     Compensation of employees of foreign governments or 
         international organizations
       Under section 893, wages, fees, and salaries of any 
     employee of a foreign government or international 
     organization (including a consular or other officer or a 
     nondiplomatic representative) received as compensation for 
     official services to the foreign government or international 
     organization generally are excluded from gross income when 
     (1) the employee is not a citizen of the United States, or is 
     a citizen of the Republic of the Philippines (whether or not 
     a citizen of the United States); (2) in the case of an 
     employee of a foreign government, the services are of a 
     character similar to those performed by employees of the 
     United States in foreign countries; and (3) in the case of an 
     employee of a foreign government, the foreign government 
     grants an equivalent exemption to employees of the United 
     States performing similar services in such foreign country. 
     The Secretary of State certifies the names of the foreign 
     countries which grant an equivalent exclusion to employees of 
     the United States performing services in those countries, and 
     the character of those services.
       The exclusion does not apply to employees of controlled 
     commercial entities or employees of foreign governments whose 
     services are primarily in connection with commercial activity 
     (whether within or outside the United States) of the foreign 
     government.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the present-law rules under 
     which certain contributions and earnings that have not been

[[Page H8623]]

     previously taxed are treated as basis (under sec. 72). Under 
     the Senate amendment, employee or employer contributions are 
     not included in basis if: (1) the employee was a nonresident 
     alien at the time the services were performed with respect to 
     which the contribution was made; (2) the contribution is with 
     respect to compensation for labor or personal services from 
     sources without the United States; and (3) the contribution 
     was not subject to income tax under the laws of the United 
     States or any foreign country.
       The Senate amendment authorizes the Secretary of the 
     Treasury to issue regulations to carry out the purposes of 
     the Senate amendment, including regulations treating 
     contributions as not subject to income tax under the laws of 
     any foreign country under appropriate circumstances.
       Effective date.--The Senate amendment is effective for 
     distributions occurring on or after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications.
       Under the conference agreement, employee or employer 
     contributions are not included in basis (under sec. 72) if: 
     (1) the employee was a nonresident alien at the time the 
     services were performed with respect to which the 
     contribution was made; (2) the contribution is with respect 
     to compensation for labor or personal services from sources 
     without the United States; and (3) the contribution was not 
     subject to income tax (and would have been subject to income 
     tax if paid as cash compensation when the services were 
     rendered) under the laws of the United States or any foreign 
     country.
       Additionally, earnings on employer or employee 
     contributions are not included in basis if: (1) the earnings 
     are paid or accrued with respect to any employer or employee 
     contributions which were made with respect to compensation 
     for labor or personal services; (2) the employee was a 
     nonresident alien at the time the earnings were paid or 
     accrued; and (3) the earnings were not subject to income tax 
     under the laws of the United States or any foreign country.
       The conference agreement does not change the rules 
     applicable to calculation of basis with respect to 
     contributions or earnings while an employee is a U.S. 
     resident.
       There is no inference that this conference agreement 
     applies in any case to create tax jurisdiction with respect 
     to wages, fees, and salaries otherwise exempt under section 
     893. Similarly, there is no inference that the conference 
     agreement applies where contrary to an agreement of the 
     United States that has been validly authorized by Congress 
     (or in the case of a treaty, ratified by the Senate), and 
     which provides an exemption for income.
       Most U.S. tax treaties specifically address the taxation of 
     pension distributions. The U.S. Model treaty provides for 
     exclusive residence-based taxation of pension distributions 
     to the extent such distributions were not previously included 
     in taxable income in the other country. For purposes of the 
     U.S. Model treaty, the United States treats any amount that 
     has increased the recipient's basis (as defined in section 
     72) as having been previously included in taxable income. The 
     following example illustrates how the conference agreement 
     could affect the amount of a distribution that may be taxed 
     by the United States pursuant to a tax treaty.
       Assume the following facts. A, a nonresident alien 
     individual, performs services outside the United States, in 
     A's country of residence, country Z. A's employer makes 
     contributions on behalf of A to a pension plan established in 
     country Z. For U.S. tax purposes, no portion of the 
     contributions or earnings are included in A's income (and 
     would not be included in income if the amounts were paid as 
     cash compensation when the services were performed) because 
     such amounts relate to services performed without the United 
     States.\951\ Later in time, A retires and becomes a permanent 
     resident of the United States.
---------------------------------------------------------------------------
     \951\ Sec. 872.
---------------------------------------------------------------------------
       Under the conference agreement, the employer contributions 
     to the pension plan would not be taken into account in 
     determining A's basis if A was not subject to income tax on 
     the contributions by a foreign country and the contributions 
     would have been subject to tax by a foreign country if the 
     contributions had been paid to A as cash compensation when 
     the services were performed. Thus, in those circumstances, A 
     would be subject to U.S. tax on the distribution of all of 
     the contributions, as such distributions are made. However, 
     if the contributions would not have been subject to tax in 
     the foreign country if they had been paid to A as cash 
     compensation when the services were performed, under the 
     conference agreement, the contributions would be included in 
     A's basis. Earnings that accrued while A was a nonresident 
     alien would not result in basis if not taxed under U.S. or 
     foreign law. Earnings that accrued while A was a permanent 
     resident of the United States would be subject to present-law 
     rules. This result generally is consistent with the treatment 
     of pension distributions under the U.S. Model treaty.
       The conference agreement authorizes the Secretary of the 
     Treasury to issue regulations to carry out the purposes of 
     the conference agreement, including regulations treating 
     contributions as not subject to income tax under the laws of 
     any foreign country under appropriate circumstances. For 
     example, Treasury could provide that foreign income tax that 
     was merely nominal would not satisfy the ``subject to income 
     tax'' requirement.
       The conference agreement also changes the rules for 
     determining basis in property received in connection for the 
     performance of services in the case of an individual who was 
     a nonresident alien at the time of the performance of 
     services, if the property is treated as income from sources 
     outside the United States. In that case, the individual's 
     basis in the property does not include any amount that was 
     not subject to income tax (and would have been subject to 
     income tax if paid as cash compensation when the services 
     were performed) under the laws of the United States or any 
     foreign country.
       Effective date.--The conference agreement is effective for 
     distributions occurring on or after the date of enactment. No 
     inference is intended that the earnings subject to the 
     conference agreement are included in basis under present law.
     33. Residence and source rules related to a United States 
         possession (sec. 497 of the Senate amendment and new sec. 
         937 of the Code)


                              Present Law

     In general
       Generally, U.S. citizens are subject to U.S. income 
     taxation on their worldwide income. Thus, all income earned 
     by U.S. citizens is subject to U.S. income tax, regardless of 
     its source.
       The U.S. income taxation of alien individuals varies 
     depending on whether they are resident or non-resident 
     aliens. A resident alien is generally taxed in the same 
     manner as a U.S. citizen.\952\ In contrast, a nonresident 
     alien is generally subject to U.S. tax only on certain gross 
     U.S. source income at a flat 30 percent rate (unless such 
     rate is eliminated or reduced by treaty) and on net income 
     that has a sufficient nexus to the United States at the 
     graduated rates applicable to U.S. citizens and residents 
     under section 1.
---------------------------------------------------------------------------
     \952\ Section 7701(a)(30) defines a citizen or resident of 
     the United States as ``U.S. persons.''
---------------------------------------------------------------------------
       An alien is considered a resident of the United States if 
     the individual: (1) has entered the United States as a lawful 
     permanent resident and is such a resident at any time during 
     the calendar year, (2) is present in the United States for a 
     substantial period of time (the so-called ``substantial 
     presence test''), or (3) makes an election to be treated as a 
     resident of the United States (sec. 7701(b)). An alien who 
     does not meet the definition of a ``resident alien'' is 
     considered to be a non-resident alien for U.S. income tax 
     purposes.
       Under the substantial presence test, an alien individual is 
     generally treated as a resident alien if he or she is present 
     in the United States for 31 days during the taxable year and 
     the sum of the number of days on which such individual was 
     present in the United States (when multiplied by the 
     applicable multiplier) during the current year and the 
     preceding two calendar years equals or exceeds 183 days. The 
     applicable multiplier for: the current year is one; the first 
     preceding year is one-third; and the second preceding year is 
     one-sixth.
       An alien individual who meets the above test may 
     nevertheless be a nonresident if he or she (1) is present in 
     the United States for fewer than 183 days during the current 
     year; (2) has a tax home in a foreign country during the 
     year; and (3) has a closer connection to that country than to 
     the United States.
       For purposes of the substantial presence test, the United 
     States includes the states and the District of Columbia, but 
     does not include U.S. possessions. An individual is present 
     in the United States for a particular day if he or she is 
     physically present in the United States during any time 
     during such day. However, in certain circumstances an 
     individual's presence in the United States is ignored, 
     including presence in the United States as a result of 
     certain medical emergencies.
     U.S. income taxation of residents of U.S. possessions
       Generally, special U.S. income tax rules apply with respect 
     to U.S. persons who are bona fide residents of certain U.S. 
     possessions (i.e., Puerto Rico, Virgins Islands, Guam, 
     Northern Mariana Islands and American Samoa) and who have 
     possession source income or income effectively connected to 
     the conduct of a trade or business within a possession.
       Generally, a bona fide resident of a U.S. possession 
     (regardless of whether the individual is a U.S. citizen or 
     alien) is determined using the principles of a subjective, 
     facts-and-circumstances test set forth in the regulations 
     under section 871. Prior to the adoption of present-law 
     section 7701(b), this subjective test was used to determine 
     whether an alien individual was a resident of the United 
     States. Under these rules, an individual is generally a 
     resident of the United States if an individual (1) is 
     actually present in the United States, and (2) is not a mere 
     transient or sojourner.\953\ Whether individuals are 
     transients is determined by their intentions with regard to 
     the length and nature of their stay. However, the regulations 
     provide that section 7701(b) (discussed above) provides the 
     basis for determining whether an alien individual is a 
     resident of a U.S. possession with a mirror income tax 
     code.\954\
---------------------------------------------------------------------------
     \953\ Treas. Reg. sec. 1.871-2(b).
     \954\ A U.S. possession with a mirror income tax code is ``a 
     United States possession * * * that administers income tax 
     laws that are identifical (except for the substitution of the 
     name of the possession or territory for the term `United 
     States' where appropriate) to those in the United States.'' 
     Treas. Reg. sec. 7701(b)-1(d)(1).

---------------------------------------------------------------------------

[[Page H8624]]

       Pursuant to regulations, the principles that generally 
     apply for determining income from sources within and without 
     the United States also generally apply in determining income 
     from sources within and without a U.S. possession.\955\ The 
     Code and regulations do not indicate how to determine whether 
     income is effectively connected with the conduct of a trade 
     or business within a U.S. possession. However, section 864(c) 
     provides rules for determining whether income is effectively 
     connected to a trade or business conducted within the United 
     States.
---------------------------------------------------------------------------
     \955\ Treas. Reg. sec. 1.863-6.
---------------------------------------------------------------------------
     Information reporting
       Section 7654(e) provides that Treasury may require 
     information reporting with respect to individuals that may 
     take advantage of certain special U.S. income tax rules with 
     respect to U.S. possessions. Section 6688 provides that an 
     individual may be subject to a $100 penalty if the individual 
     fails to furnish the information required by regulations 
     issued pursuant to section 7654(e).


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides the term ``bona fide resident'' 
     means a person who satisfies a test, determined by the 
     Secretary, similar to the substantial presence test of 
     section 7701(b)(3) with respect to Guam, American Samoa, the 
     Northern Mariana Islands, Puerto Rico, or the Virgin Islands.
       The provision also requires bona fide residents of the 
     Virgin Islands to file an informational income tax return 
     with the United States and imposes a penalty for the failure 
     to file such a return.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications.
       The conferees understand that certain U.S. citizens and 
     residents are claiming that they are exempt from U.S. income 
     tax on their worldwide income based on a position that they 
     are bona fide residents of the Virgin Islands or another 
     possession. However, these individuals often do not spend a 
     significant amount of time in the particular possession 
     during a taxable year and, in some cases, continue to live 
     and work in the United States. Under the Virgin Island's 
     Economic Development Program, many of these same individuals 
     secure a reduction of up to 90 percent of their Virgin 
     Islands income tax liability on income they take the position 
     is Virgin Islands source or effectively connected with the 
     conduct of a Virgin Islands trade or business. The conferees 
     are also aware that taxpayers are taking the position that 
     income earned for services performed in the United States is 
     Virgin Islands source or that their U.S. activities generate 
     income effectively connected with the conduct of a Virgin 
     Islands trade or business.
       The conferees believe that the various exemptions from U.S. 
     tax provided to residents of possessions should not be 
     available to individuals who continue to live and work in the 
     United States. The conferees also believe that the special 
     U.S. income tax rules applicable to residents in a possession 
     need to be rationalized. The conferees are further concerned 
     that the general rules for determining whether income is 
     effectively connected with the conduct of a trade or business 
     in a possession present numerous opportunities for erosion of 
     the U.S. tax base.
       Generally, the provision provides that the term ``bona fide 
     resident'' means a person who meets a two-part test with 
     respect to Guam, American Samoa, the Northern Mariana 
     Islands, Puerto Rico, or the Virgin Islands, as the case may 
     be, for the taxable year. First, an individual must be 
     present in the possession for at least 183 days in the 
     taxable year. Second, an individual must (i) not have a tax 
     home outside such possession during the taxable year and (ii) 
     not have a closer connection to the United States or a 
     foreign country during such year.
       The provision also grants authority to Treasury to create 
     exceptions to these general rules as appropriate. The 
     conferees intend for such exceptions to cover, in particular, 
     persons whose presence outside a possession for extended 
     periods of time lacks a tax avoidance purpose, such as 
     military personnel, workers in the fisheries trade, and 
     retirees who travel outside the possession for certain 
     personal reasons.
       An individual is present in a possession for a particular 
     day if he is physically present in such possession during any 
     time during such day. In certain circumstances an 
     individual's presence outside a possession is ignored (e.g., 
     certain medical emergencies) as provided under the principles 
     of section 7701(b).
       The provision provides that a taxpayer must file a notice 
     in the first taxable year they claim bona fide residence in a 
     possession. The provision imposes a penalty of $1000 for the 
     failure to file such notice or to comply with any filing 
     required by regulation under section 7654(e).
       The provision generally codifies the existing rules for 
     determining when income is considered to be from sources 
     within a possession by providing that, as a general rule, for 
     all purposes of the Code, the principles for determining 
     whether income is U.S. source are applicable for purposes of 
     determining whether income is possession source. In addition, 
     the provision provides that the principles for determining 
     whether income is effectively connected with the conduct of a 
     U.S. trade or business are applicable for purposes of 
     determining whether income is effectively connected to the 
     conduct of a possession trade or business. However, the 
     provision further provides that except as provided in 
     regulations any income treated as U.S. source income or as 
     effectively connected with the conduct of a U.S. trade or 
     business is not treated as income from within any possession 
     or as effectively connected with a trade or business within 
     any such possession.
       The provision also grants authority to the Secretary of the 
     Treasury to create exceptions to these general rules 
     regarding possession source income and income effectively 
     connected with a possession trade or business as appropriate. 
     The conferees anticipate that this authority will be used to 
     continue the existing treatment of income from the sale of 
     goods manufactured in a possession. The conferees also intend 
     for this authority to be used to prevent abuse, for example, 
     to prevent U.S. persons from avoiding U.S. tax on appreciated 
     property by acquiring residence in a possession prior to its 
     disposition.
       No inference is intended as to the present-law rules for 
     determining (1) bona fide residence in a possession, (2) 
     whether income is possession source, and (3) whether income 
     is effectively connected with the conduct of a trade or 
     business within a possession.
       Effective date.--Generally, the provision is effective for 
     taxable years ending after the date of enactment. The first 
     prong of the two-part residency test (i.e., the 183-day test) 
     is effective for taxable years beginning after date of 
     enactment. The general effective date applies with respect to 
     the second prong of such test. The rule providing that income 
     treated as U.S. source income or as effectively connected 
     with the conduct of a U.S. trade or business is not treated 
     as income from within any possession or as effectively 
     connected with the conduct of a trade or business within any 
     such possession is effective for income earned after date of 
     enactment.
     34. Include employer provided housing under foreign earned 
         income exclusion cap (sec. 632 of the Senate amendment 
         and sec. 911 of the Code)


                              Present Law

       U.S. citizens generally are subject to U.S. income tax on 
     all their income, whether derived in the United States or 
     elsewhere. A U.S. citizen who earns income in a foreign 
     country also may be taxed on such income by that foreign 
     country. However, the United States generally cedes the 
     primary right to tax income derived by a U.S. citizen from 
     sources outside the United States to the foreign country 
     where such income is derived. Accordingly, a credit against 
     the U.S. income tax imposed on foreign source income is 
     generally available for foreign taxes paid on that income, to 
     the extent of the U.S. tax otherwise owed on such income. If 
     the foreign income tax rate is lower than the U.S. income tax 
     rate, then the United States generally provides a credit up 
     to the amount of the foreign tax and imposes a residual tax 
     to the extent of the difference.
       U.S. citizens living abroad may be eligible to exclude from 
     their income for U.S. tax purposes certain foreign earned 
     income and foreign housing costs, in which case no residual 
     U.S. tax is imposed to the extent of such exclusion, 
     regardless of the foreign tax rate. In order to qualify for 
     these exclusions, an individual must be either: (1) a U.S. 
     citizen who is a bona fide resident of a foreign country for 
     an uninterrupted period that includes an entire taxable 
     year;\956\ or (2) a U.S. citizen or resident present overseas 
     for 330 days out of any 12-consecutive-month period. In 
     addition, the taxpayer must have his or her tax home in a 
     foreign country.
---------------------------------------------------------------------------
     \956\ Only U.S. citizens may qualify under the bona fide 
     residence test. However, resident aliens of the United States 
     who are citizens of foreign countries that have a treaty with 
     the United States may qualify for section 911 exclusions 
     under the bona fide residence test by application of a 
     nondiscrimination provision.
---------------------------------------------------------------------------
       The foreign earned income exclusion generally applies to 
     income earned from sources outside the United States as 
     compensation for personal services rendered by the taxpayer. 
     The maximum exclusion amount for foreign earned income is 
     $80,000 per taxable year for 2002 and thereafter. For taxable 
     years beginning after 2007, the maximum exclusion amount is 
     indexed for inflation.
       The exclusion for housing costs applies to reasonable 
     expenses, other than deductible interest and taxes, paid or 
     incurred by or on behalf of the taxpayer for housing in a 
     foreign country but only to the extent the housing costs 
     exceed a base housing amount. The base housing amount is 
     equal to 16 percent of the annual salary earned by a GS-14, 
     Step 1 U.S. government employee. In the case of housing costs 
     that are not paid or reimbursed by the taxpayer's employer, 
     the amount that would be excludible is treated instead as a 
     deduction.
       The combined foreign earned income exclusion and housing 
     cost exclusion may not exceed the taxpayer's total foreign 
     earned income for the taxable year. The taxpayer's foreign 
     tax credit is reduced by the amount of such credit that is 
     attributable to excluded income.

[[Page H8625]]

                               house bill

       No provision.


                            senate amendment

       The provision applies the annual foreign earned income 
     exclusion cap to the combined value of foreign earned income 
     and employer-provided housing amounts.
       The present-law provision providing indexation for 
     inflation for tax years beginning after 2007 remains 
     unchanged. The present law provision imposing an additional 
     foreign earned income cap on exclusions and deductions also 
     remains unchanged.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     35. Deduction for personal use of company aircraft and other 
         entertainment expenses (sec. 103(b) of the Senate 
         amendment and sec. 274(e) of the Code)


                              present law

       Under present law, no deduction is allowed with respect to 
     (1) an activity generally considered to be entertainment, 
     amusement or recreation, unless the taxpayer establishes that 
     the item was directly related to (or, in certain cases, 
     associated with) the active conduct of the taxpayer's trade 
     or business, or (2) a facility (e.g., an airplane) used in 
     connection with such activity.\957\ The Code includes a 
     number of exceptions to the general rule disallowing 
     deductions of entertainment expenses. Under one exception, 
     the deduction disallowance rule does not apply to expenses 
     for goods, services, and facilities to the extent that the 
     expenses are reported by the taxpayer as compensation and 
     wages to an employee.\958\ The deduction disallowance rule 
     also does not apply to expenses paid or incurred by the 
     taxpayer for goods, services, and facilities to the extent 
     that the expenses are includible in the gross income of a 
     recipient who is not an employee (e.g., a nonemployee 
     director) as compensation for services rendered or as a prize 
     or award.\959\ The exceptions apply only to the extent that 
     amounts are properly reported by the company as compensation 
     and wages or otherwise includible in income. In no event can 
     the amount of the deduction exceed the amount of the actual 
     cost, even if a greater amount is includible in income.
---------------------------------------------------------------------------
     \957\ Sec. 274(a).
     \958\ Sec. 274(e)(2).
     \959\ Sec. 274(e)(9).
---------------------------------------------------------------------------
       Except as otherwise provided, gross income includes 
     compensation for services, including fees, commissions, 
     fringe benefits, and similar items. In general, an employee 
     or other service provider must include in gross income the 
     amount by which the fair value of a fringe benefit exceeds 
     the amount paid by the individual. Treasury regulations 
     provide rules regarding the valuation of fringe benefits, 
     including flights on an employer-provided aircraft.\960\ In 
     general, the value of a non-commercial flight is determined 
     under the base aircraft valuation formula, also known as the 
     Standard Industry Fare Level formula or ``SIFL''.\961\ If the 
     SIFL valuation rules do not apply, the value of a flight on a 
     company-provided aircraft is generally equal to the amount 
     that an individual would have to pay in an arm's-length 
     transaction to charter the same or a comparable aircraft for 
     that period for the same or a comparable flight.\962\
---------------------------------------------------------------------------
     \960\ Treas. Reg. sec. 1.61-21.
     \961\ Treas. Reg. sec. 1.61-21(g).
     \962\ Treas. Reg. sec. 1.61-21(b)(6).
---------------------------------------------------------------------------
       In the context of an employer providing an aircraft to 
     employees for nonbusiness (e.g., vacation) flights, the 
     exception for expenses treated as compensation has been 
     interpreted as not limiting the company's deduction for 
     operation of the aircraft to the amount of compensation 
     reportable to its employees,\963\ which can result in a 
     deduction multiple times larger than the amount required to 
     be included in income. In many cases, the individual 
     including amounts attributable to personal travel in income 
     directly benefits from the enhanced deduction, resulting in a 
     net deduction for the personal use of the company aircraft.
---------------------------------------------------------------------------
     \963\ Sutherland Lumber-Southwest, Inc. v. Comm., 114 T.C. 
     197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq., AOD 
     2002-02 (Feb. 11, 2002).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, in the case of covered 
     employees, the exceptions to the general entertainment 
     expense disallowance rule for expenses treated as 
     compensation or includible in income apply only to the extent 
     of the amount of expenses treated as compensation or 
     includible in income. Covered employees are defined as under 
     section 162(m)(3) and include the chief executive officer (or 
     individual acting in such capacity) and the four highest-
     compensated officers of publicly-traded corporations. No 
     deduction is allowed with respect to expenses for (1) a 
     nonbusiness activity generally considered to be 
     entertainment, amusement or recreation, or (2) a facility 
     (e.g., an airplane) used in connection with such activity to 
     the extent that such expenses exceed the amount treated as 
     compensation or includible in income to the covered employee. 
     For example, a company's deduction attributable to 
     aircraft operating costs for a covered employee's vacation 
     use of a company aircraft is limited to the amount 
     reported as compensation to the employee. As under present 
     law, the amount of the deduction cannot exceed the actual 
     cost.
       The provision is intended to overturn Sutherland Lumber-
     Southwest, Inc. v. Commissioner with respect to covered 
     employees. As under present law, the exceptions apply only if 
     amounts are properly reported by the company as compensation 
     and wages or otherwise includible in income.
       Effective date.--The Senate amendment is effective for 
     expenses incurred after the date of enactment and before 
     January 1, 2006.


                          conference agreement

       The conference agreement follows the Senate amendment 
     except that the provision applies with respect to individuals 
     who, with respect to an employer or other service recipient, 
     are subject to the requirements of section 16(a) of the 
     Securities and Exchange Act of 1934, or would be subject to 
     such requirements if the employer or service recipient were 
     an issuer of equity securities referred to in section 16(a). 
     Such individuals generally include officers (as defined by 
     section 16(a)),\964\ directors, and 10-percent-or-greater 
     owners of private and publicly-held companies.
---------------------------------------------------------------------------
     \964\ An officer is defined as the president, principal 
     financial officer, principal accounting officer (or, if there 
     is no such accounting officer, the controller), any vice-
     president in charge of a principal business unit, division or 
     function (such as sales, administration or finance), any 
     other officer who performs a policy-making function, or any 
     other person who performs similar policy-making functions.
---------------------------------------------------------------------------
       Effective date.--The conference agreement is effective for 
     amounts deferred after the date of enactment.
     36. Treatment of contingent payment convertible debt 
         instruments (sec. 733 of the Senate Amendment and sec. 
         1275 of the Code)


                              present law

       Under present law, a taxpayer generally deducts the amount 
     of interest paid or accrued within the taxable year on 
     indebtedness issued by the taxpayer. In the case of original 
     issue discount (``OID''), the issuer of a debt instrument 
     generally accrues and deducts, as interest, the OID over the 
     life of the obligation, even though the amount of the OID may 
     not be paid until the maturity of the instrument.
       The amount of OID with respect to a debt instrument is 
     equal to the excess of the stated redemption price at 
     maturity over the issue price of the debt instrument. The 
     stated redemption price at maturity includes all amounts that 
     are payable on the debt instrument by maturity. The amount of 
     OID with respect to a debt instrument is allocated over the 
     life of the instrument through a series of adjustments to the 
     issue price for each accrual period. The adjustment to the 
     issue price is determined by multiplying the adjusted issue 
     price (i.e., the issue price increased or decreased by 
     adjustments prior to the accrual period) by the instrument's 
     yield to maturity, and then subtracting any payments on the 
     debt instrument (other than non-OID stated interest) during 
     the accrual period. Thus, in order to compute the amount of 
     OID and the portion of OID allocable to a particular period, 
     the stated redemption price at maturity and the time of 
     maturity must be known. Issuers of debt instruments with OID 
     accrue and deduct the amount of OID as interest expense in 
     the same manner as the holders of such instruments accrue and 
     include in gross income the amount of OID as interest income.
       Treasury regulations provide special rules for determining 
     the amount of OID allocated to a period with respect to 
     certain debt instruments that provide for one or more 
     contingent payments of principal or interest.\965\ The 
     regulations provide that a debt instrument does not provide 
     for contingent payments merely because it provides for an 
     option to convert the debt instrument into the stock of the 
     issuer, into the stock or debt of a related party, or into 
     cash or other property in an amount equal to the approximate 
     value of such stock or debt.\966\ The regulations also 
     provide that a payment is not a contingent payment merely 
     because of a contingency that, as of the issue date of the 
     debt instrument, is either remote or incidental.\967\
---------------------------------------------------------------------------
     \965\ Treas. reg. sec. 1.1275-4.
     \966\ Treas. reg. sec. 1.1275-4(a)(4).
     \967\ Treas. reg. sec. 1.1275-4(a)(5).
---------------------------------------------------------------------------
       In the case of contingent payment debt instruments that are 
     issued for money or publicly traded property,\968\ the 
     regulations provide that interest on a debt instrument must 
     be taken into account (as OID) whether or not the amount of 
     any payment is fixed or determinable in the taxable year. The 
     amount of OID that is taken into account for each accrual 
     period is determined by constructing a comparable yield and a 
     projected payment schedule for the debt instrument, and then 
     accruing the OID on the basis of the comparable yield and 
     projected payment schedule by applying rules similar to those 
     for accruing OID on a noncontingent debt instrument (the 
     ``noncontingent bond method''). If the actual amount of a 
     contingent payment is not equal to the projected amount, 
     appropriate adjustments are made to reflect the difference. 
     The comparable yield for a debt instrument is the yield at

[[Page H8626]]

     which the issuer would be able to issue a fixed-rate 
     noncontingent debt instrument with terms and conditions 
     similar to those of the contingent payment debt instrument 
     (i.e., the comparable fixed-rate debt instrument), including 
     the level of subordination, term, timing of payments, and 
     general market conditions.\969\
---------------------------------------------------------------------------
     \968\ Treas. reg. sec. 1.1275-4(b).
     \969\ Treas. reg. sec. 1.1275-4(b)(4)(i)(A).
---------------------------------------------------------------------------
       With respect to certain debt instruments that are 
     convertible into the common stock of the issuer and that also 
     provide for contingent payments (other than the conversion 
     feature)--often referred to as ``contingent convertible'' 
     debt instruments--the IRS has stated that the noncontingent 
     bond method applies in computing the accrual of OID on the 
     debt instrument.\970\ In applying the noncontingent bond 
     method, the IRS has stated that the comparable yield for a 
     contingent convertible debt instrument is determined by 
     reference to a comparable fixed-rate nonconvertible debt 
     instrument, and the projected payment schedule is 
     determined by treating the issuer stock received upon a 
     conversion of the debt instrument as a contingent payment.
---------------------------------------------------------------------------
     \970\ Rev. Rul. 2002-31, 2002-1 C.B. 1023.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that, in the case of a 
     contingent convertible debt instrument,\971\ any Treasury 
     regulations which require OID to be determined by reference 
     to the comparable yield of a noncontingent fixed-rate debt 
     instrument shall be applied as requiring that such comparable 
     yield be determined by reference to a noncontingent fixed-
     rate debt instrument which is convertible into stock. For 
     purposes of applying the Senate amendment, the comparable 
     yield shall be determined without taking into account the 
     yield resulting from the conversion of a debt instrument into 
     stock. Thus, the noncontingent bond method in the Treasury 
     regulations shall be applied in a manner such that the 
     comparable yield for contingent convertible debt instruments 
     shall be determined by reference to comparable noncontingent 
     fixed-rate convertible (rather than nonconvertible) debt 
     instruments.
---------------------------------------------------------------------------
     \971\ Under the bill, a contingent convertible debt 
     instrument is defined as a debt instrument that: (1) is 
     convertible into stock of the issuing corporation, or a 
     corporation in control of, or controlled by, the issuing 
     corporation; and (2) provides for contingent payments.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment provision is 
     effective for debt instruments issued on or after date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                       TITLE XI--TRADE PROVISIONS

                A. Suspension of Duties on Ceiling Fans

     (Sec. 801 of the House bill and Chapter 99, II of the 
         Harmonized Tariff Schedule of the United States)


                              Present Law

       A 4.7-percent ad valorem customs duty is collected on 
     imported ceiling fans from all sources.


                               House Bill

       The House bill suspends the present customs duty applicable 
     to ceiling fans through December 31, 2006.
       Effective date.--The provision is effective on the 
     fifteenth day after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill provision.

           B. Temporary Suspension of Certain Customs Duties

     1. Suspension of duties on nuclear steam generators (sec. 
         802(a) of the House bill and Chapter 99, II of the 
         Harmonized Tariff Schedule of the United States)


                              Present Law

       Nuclear steam generators, as classified under heading 
     9902.84.02 of the Harmonized Tariff Schedule of the United 
     States, enter the United States duty free until December 31, 
     2006. After December 31, 2006, the duty on nuclear steam 
     generators returns to the column 1 rate of 5.2 percent under 
     subheading 8402.11.00 of the Harmonized Tariff Schedule of 
     the United States.


                               House Bill

       The House bill extends the present-law suspension of 
     customs duty applicable to nuclear steam generators through 
     December 31, 2008.
       Effective date.--The provision is effective on the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill provision.
     2. Suspension of Duties on Nuclear Reactor Vessel Heads (sec. 
         802(b) of the House bill and Chapter 99, II of the 
         Harmonized Tariff Schedule of the United States)


                              Present Law

       According to section 5202 of the Trade Act of 2002, nuclear 
     reactor vessel heads are classified under subheading 
     8401.40.00 of the Harmonized Tariff Schedule of the United 
     States and enter the United States with a column 1 duty rate 
     of 3.3 percent.


                               House Bill

       The House bill temporarily suspends the present customs 
     duty applicable to nuclear reactor vessel heads for column 1 
     countries through December 31, 2008.
       Effective date.--The provision is effective on the 
     fifteenth day after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement includes the House bill provision 
     with a modification. The conference agreement also 
     temporarily suspends the customs duty applicable to nuclear 
     reactor pressurizers.

                      II. TAX COMPLEXITY ANALYSIS

       The following tax complexity analysis is provided pursuant 
     to section 4022(b) of the Internal Revenue Service Reform and 
     Restructuring Act of 1998, which requires the staff of the 
     Joint Committee on Taxation (in consultation with the 
     Internal Revenue Service (``IRS'') and the Treasury 
     Department) to provide a complexity analysis of tax 
     legislation reported by the House Committee on Ways and 
     Means, the Senate Committee on Finance, or a Conference 
     Report containing tax provisions. The complexity analysis is 
     required to report on the complexity and administrative 
     issues raised by provisions that directly or indirectly amend 
     the Internal Revenue Code and that have widespread 
     applicability to individuals or small businesses. For each 
     such provision identified by the staff of the Joint Committee 
     on Taxation, a summary description of the provision is 
     provided along with an estimate of the number and type of 
     affected taxpayers, and a discussion regarding the relevant 
     complexity and administrative issues.
       Following the analysis of the staff of the Joint Committee 
     on Taxation are the comments of the IRS and the Treasury 
     Department regarding each of the provisions included in the 
     complexity analysis, including a discussion of the likely 
     effect on IRS forms and any expected impact on the IRS.
     1. Deduction relating to income attributable to United States 
         production activities (sec. 102 of the House bill, secs. 
         102 and 103 of the Senate amendment, and sec. 11 of the 
         Code)
     Summary description of provision
       The conference agreement provides a deduction attributable 
     to certain qualified production activities in the United 
     States of a C corporation, S corporation, partnership, or 
     sole proprietorship. Such activities generally include: (1) 
     manufacturing, production, growth or extraction of certain 
     tangible personal property, computer software, property 
     described in section 168(f)(3) or (4) of the Code, and 
     electricity, natural gas, or potable water produced by the 
     taxpayer; (2) construction; and (3) engineering or 
     architectural services.
       The amount of the deduction in taxable years beginning in 
     2005, 2006, 2007, 2008, 2009, and 2010 and thereafter 
     generally is three, three, six, six, six, and nine percent, 
     respectively. The deduction is limited for a taxable year to 
     50 percent of the wages paid by the taxpayer during such 
     taxable year. In addition, the deduction cannot exceed the 
     lesser of the taxpayer's taxable income (computed without 
     regard to the deduction) or the taxpayer's qualified 
     production activities income.
       The bill is effective for taxable years beginning after 
     2004.
     Number of affected taxpayers
       It is estimated that the provision will affect more than 10 
     percent of small businesses.
     Discussion
       It is anticipated that small businesses engaged in 
     qualified production activities will need to keep additional 
     records due to this provision, and that extensive additional 
     regulatory guidance will be necessary to effectively 
     implement the provision. It is anticipated that the provision 
     will result in an increase in disputes between small 
     businesses and the IRS. Reasons for such disputes include the 
     complexity of the provision and the inherent incentive for 
     small businesses and other taxpayers to characterize their 
     activities as qualified production activities to claim the 
     deduction under the provision.
       The provision likely will increase the tax preparation 
     costs for most small businesses that are, or may be, engaged 
     in qualified production activities. Small businesses will 
     have to perform additional analysis and make subjective 
     determinations concerning whether their activities constitute 
     qualified production activities and, thus, whether income 
     attributable to such activities qualifies for the deduction 
     allowed under the provision. In this regard, the provision 
     does not provide detailed definitions of the activities that 
     produce income eligible for the deduction, and it will be 
     difficult for the Treasury Secretary to define qualified 
     production activities administratively. It should be noted 
     that a similar provision in the Canadian tax laws was found 
     to be highly complex and difficult to administer, which led 
     to numerous disputes and litigation between affected 
     taxpayers and the Canadian tax authorities. Canada recently 
     repealed the provision and provided a general reduction in 
     corporate tax rates.
       For income that is determined to be eligible for the 
     deduction under the provision, small businesses will be 
     required to perform additional and complex calculations to 
     determine the amount of the deduction under

[[Page H8627]]

     the provision. Because the deduction is based upon modified 
     taxable income rather than gross income, small businesses 
     will be required to undertake complicated calculations to 
     determine the amount of costs that are allocable to gross 
     income from qualified production activities. In many cases, 
     small businesses would not have been required otherwise to 
     perform these calculations but for the provision.
       The wage limitation on the deduction is likely to impact 
     small businesses disproportionately. After undertaking the 
     calculations and analyses to determine the amount of their 
     potential deduction, many small business will find that such 
     amount is significantly reduced, or eliminated together, by 
     the wage limitation.
       Under the provision, it may be necessary for small 
     businesses to make certain allocations of income that are not 
     required under present law, particularly with respect to 
     businesses that have both income that is directly 
     attributable to qualified production activities and income 
     that is attributable to processes associated with qualified 
     production activities (e.g., vertically integrated 
     manufacturers that also engage in the selling, storage, and 
     installation of manufactured goods). To the extent the 
     reduction under the provision is not based upon income from 
     processes associated with qualified production activities, 
     taxpayers that engage in such processes will be required to 
     allocate their aggregate income between qualified production 
     activities and processes associated with qualified production 
     activities. In general, it is expected that the multiple 
     calculations and analyses required by this provision will 
     lead to intentional or inadvertent noncompliance among small 
     businesses, as well as other taxpayers.
       Due to the detailed calculations required by the pvosion, 
     it is anticipated that the Secretary of the Treasury will 
     have to make appropriate revisions to several types of income 
     tzx forms, schedules, spreadsheets and instructions.

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[[Page H8640]]

     From the Committee on Ways and Means, for consideration of 
     the House bill and the Senate amendment, and modifications 
     committed to conference:
     William Thomas,
     Phil Crane,
     Jim McCrery,
     From the Committee on Agriculture, for consideration of Title 
     VII of the House bill, and subtitle B of Title XI of the 
     Senate amendment, and modifications committed to conference:
     Bob Goodlatte,
     John Boehner,
     Charlie Stenholm,
     From the Committee on Education and the Workforce, for 
     consideration of sections 489, 490, 616, 701, and 719 of the 
     Senate amendment, and modifications committed to conference:
     John Boehner,
     Sam Johnson,
     From the Committee on Energy and Commerce, for consideration 
     of sections 662 and subtitle A of Title XI of the Senate 
     amendment, and modifications committed to conference:
     Joe Barton,
     Richard Burr,
     From the Committee on the Judiciary, for consideration of 
     sections 422, 442, 1111, 1151, and 1161 of the Senate 
     amendment, and modifications committed to conference:
     Lamar Smith,
     For consideration of the House bill and the Senate amendment, 
     and modifications committed to conference:
     Tom DeLay,
                                Managers on the Part of the House.

     Chuck Grassley,
     Orrin Hatch,
     Don Nickles,
     Trent Lott,
     Olympia Snowe,
     Jon Kyl,
     Craig Thomas,
     Rick Santorum,
     Gordon Smith,
     Jim Bunning,
     Mitch McConnell,
     Max Baucus,
     Tom Daschle,
     John Breaux,
     Kent Conrad,
     Jeff Bingaman,
     Blanche L. Lincoln,
                               Managers on the Part of the Senate.