[Congressional Record (Bound Edition), Volume 149 (2003), Part 9]
[Senate]
[Pages 12385-12432]
[From the U.S. Government Publishing Office, www.gpo.gov]




         JOBS AND GROWTH TAX RELIEF RECOMMENDATION ACT OF 2003

  On Thursday, May 15, 2003, the Senate passed H.R. 2, the text of 
which follows:

         Resolved, That the bill from the House of Representatives 
     (H.R. 2) entitled ``An Act to provide for reconciliation 
     pursuant to section 201 of the concurrent resolution on the 
     budget for fiscal year 2004.'', do pass with the following 
     AMENDMENT:
       Strike out all after the enacting clause and insert:

     SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

       (a) Short Title.--This Act may be cited as the ``Jobs and 
     Growth Tax Relief Reconciliation Act of 2003''.
       (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:

Sec. 1. Short title; references; table of contents.

  TITLE I--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS; 
                INCREASED EXPENSING FOR SMALL BUSINESSES

Sec. 101. Acceleration of 10-percent individual income tax rate bracket 
              expansion.
Sec. 102. Acceleration of reduction in individual income tax rates.
Sec. 103. Minimum tax relief to individuals.
Sec. 104. Acceleration of increase in standard deduction for married 
              taxpayers filing joint returns.
Sec. 105. Acceleration of 15-percent individual income tax rate bracket 
              expansion for married taxpayers filing joint returns.
Sec. 106. Acceleration of increase in, and refundability of, child tax 
              credit.
Sec. 107. Increased expensing for small business.
Sec. 108. Application of EGTRRA sunset to this title.

                TITLE II--PARTIAL EXCLUSION OF DIVIDENDS

Sec. 201. Partial exclusion of dividends received by individuals.

                     TITLE III--REVENUE PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Penalty for failing to disclose reportable transaction.
Sec. 303. Accuracy-related penalty for listed transactions and other 
              reportable transactions having a significant tax 
              avoidance purpose.
Sec. 304. Penalty for understatements attributable to transactions 
              lacking economic substance, etc.
Sec. 305. Modifications of substantial understatement penalty for 
              nonreportable transactions.
Sec. 306. Tax shelter exception to confidentiality privileges relating 
              to taxpayer communications.
Sec. 307. Disclosure of reportable transactions.
Sec. 308. Modifications to penalty for failure to register tax 
              shelters.
Sec. 309. Modification of penalty for failure to maintain lists of 
              investors.
Sec. 310. Modification of actions to enjoin certain conduct related to 
              tax shelters and reportable transactions.
Sec. 311. Understatement of taxpayer's liability by income tax return 
              preparer.
Sec. 312. Penalty on failure to report interests in foreign financial 
              accounts.
Sec. 313. Frivolous tax submissions.
Sec. 314. Penalty on promoters of tax shelters.
Sec. 315. Statute of limitations for taxable years for which listed 
              transactions not reported.
Sec. 316. Denial of deduction for interest on underpayments 
              attributable to nondisclosed reportable and noneconomic 
              substance transactions.

            Subtitle B--Enron-Related Tax Shelter Provisions

Sec. 321. Limitation on transfer or importation of built-in losses.
Sec. 322. No reduction of basis under section 734 in stock held by 
              partnership in corporate partner.
Sec. 323. Repeal of special rules for FASITs.
Sec. 324. Expanded disallowance of deduction for interest on 
              convertible debt.
Sec. 325. Expanded authority to disallow tax benefits under section 
              269.
Sec. 326. Modifications of certain rules relating to controlled foreign 
              corporations.
Sec. 327. Controlled entities ineligible for REIT status.

           Subtitle C--Other Corporate Governance Provisions

                       Part I--General Provisions

Sec. 331. Affirmation of consolidated return regulation authority.
Sec. 332. Signing of corporate tax returns by chief executive officer.
Sec. 333. Denial of deduction for certain fines, penalties, and other 
              amounts.
Sec. 334. Disallowance of deduction for punitive damages.

[[Page 12386]]

Sec. 335. Increase in criminal monetary penalty limitation for the 
              underpayment or overpayment of tax due to fraud.

                 Part II--Executive Compensation Reform

Sec. 336. Treatment of nonqualified deferred compensation funded with 
              assets located outside the United States.
Sec. 337. Inclusion in gross income of funded deferred compensation of 
              corporate insiders.
Sec. 338. Prohibition on deferral of gain from the exercise of stock 
              options and restricted stock gains through deferred 
              compensation arrangements.
Sec. 339. Increase in withholding from supplemental wage payments in 
              excess of $1,000,000.

                  Subtitle D--International Provisions

             Part I--Provisions to Discourage Expatriation

Sec. 340. Revision of tax rules on expatriation.
Sec. 341. Tax treatment of inverted corporate entities.
Sec. 342. Excise tax on stock compensation of insiders in inverted 
              corporations.
Sec. 343. Reinsurance of United States risks in foreign jurisdictions.

                       Part II--Other Provisions

Sec. 344. Doubling of certain penalties, fines, and interest on 
              underpayments related to certain offshore financial 
              arrangement.
Sec. 345. Effectively connected income to include certain foreign 
              source income.
Sec. 346. Determination of basis of amounts paid from foreign pension 
              plans.
Sec. 347. Recapture of overall foreign losses on sale of controlled 
              foreign corporation.
Sec. 348. Prevention of mismatching of interest and original issue 
              discount deductions and income inclusions in transactions 
              with related foreign persons.
Sec. 349. Sale of gasoline and diesel fuel at duty-free sales 
              enterprises.
Sec. 350. Repeal of earned income exclusion of citizens or residents 
              living abroad.

                  Subtitle E--Other Revenue Provisions

Sec. 351. Extension of Internal Revenue Service user fees.
Sec. 352. Addition of vaccines against hepatitis A to list of taxable 
              vaccines.
Sec. 353. Disallowance of certain partnership loss transfers.
Sec. 354. Treatment of stripped interests in bond and preferred stock 
              funds, etc.
Sec. 355. Reporting of taxable mergers and acquisitions.
Sec. 356. Minimum holding period for foreign tax credit on withholding 
              taxes on income other than dividends.
Sec. 357. Qualified tax collection contracts.
Sec. 358. Extension of customs user fees.
Sec. 359. Clarification of exemption from tax for small property and 
              casualty insurance companies.
Sec. 360. Partial payment of tax liability in installment agreements.
Sec. 361. Extension of amortization of intangibles to sports 
              franchises.
Sec. 362. Deposits made to suspend running of interest on potential 
              underpayments.
Sec. 363. Clarification of rules for payment of estimated tax for 
              certain deemed asset sales.
Sec. 364. Limitation on deduction for charitable contributions of 
              patents and similar property.
Sec. 365. Extension of transfers of excess pension assets to retiree 
              health accounts.
Sec. 366. Proration rules for life insurance business of property and 
              casualty insurance companies.
Sec. 367. Modification of treatment of transfers to creditors in 
              divisive reorganizations.
Sec. 368. Increase in age of minor children whose unearned income is 
              taxed as if parent's income.
Sec. 369. Consistent amortization of periods for intangibles.
Sec. 370. Clarification of definition of nonqualified preferred stock.
Sec. 371. Class lives for utility grading costs.
Sec. 372. Prohibition on nonrecognition of gain through complete 
              liquidation of holding company.
Sec. 373. Lease term to include certain service contracts.
Sec. 374. Recognition of gain from the sale of a principal residence 
              acquired in a like-kind exchange within 5 years of sale.

                      Subtitle F--Other Provisions

Sec. 381. Temporary State and local fiscal relief.
Sec. 382. Review of State agency blindness and disability 
              determinations.
Sec. 383. Prohibition on use of SCHIP funds to provide coverage for 
              childless adults.
Sec. 384. Medicaid DSH allotments.

          TITLE IV--SMALL BUSINESS AND AGRICULTURAL PROVISIONS

                 Subtitle A--Small Business Provisions

Sec. 401. Exclusion of certain indebtedness of small business 
              investment companies from acquisition indebtedness.
Sec. 402. Repeal of occupational taxes relating to distilled spirits, 
              wine, and beer.
Sec. 403. Custom gunsmiths.
Sec. 404. Simplification of excise tax imposed on bows and arrows.

                  Subtitle B--Agricultural Provisions

Sec. 411. Capital gain treatment under section 631(b) to apply to 
              outright sales by landowners.
Sec. 412. Special rules for livestock sold on account of weather-
              related conditions.
Sec. 413. Exclusion for loan payments under national health service 
              corps loan repayment program.
Sec. 414. Payment of dividends on stock of cooperatives without 
              reducing patronage dividends.

              TITLE V--SIMPLIFICATION AND OTHER PROVISIONS

                Subtitle A--Uniform Definition of Child

Sec. 501. Uniform definition of child, etc.
Sec. 502. Modifications of definition of head of household.
Sec. 503. Modifications of dependent care credit.
Sec. 504. Modifications of child tax credit.
Sec. 505. Modifications of earned income credit.
Sec. 506. Modifications of deduction for personal exemption for 
              dependents.
Sec. 507. Technical and conforming amendments.
Sec. 508. Effective date.

                       Subtitle B--Simplification

Sec. 511. Consolidation of life and non-life company returns.
Sec. 512. Special rules for taxation of life insurance companies.
Sec. 513. Modification of active business definition under section 355.

                      Subtitle C--Other Provisions

Sec. 521. Civil rights tax relief.
Sec. 522. Increase in section 382 limitation for companies emerging 
              from bankruptcy.
Sec. 523. Increase in historic rehabilitation credit for certain low-
              income housing for the elderly.
Sec. 524. Modification of application of income forecast method of 
              depreciation.
Sec. 525. Additional advance refundings of certain governmental bonds.
Sec. 526. Exclusion of income derived from certain wagers on horse 
              races from gross income of nonresident alien individuals.
Sec. 527. Federal reimbursement of emergency health services furnished 
              to undocumented aliens.
Sec. 528. Premiums for mortgage insurance.
Sec. 529. Sense of the Senate on repealing the 1993 tax hike on social 
              security benefits section.
Sec. 530. Flat tax.
Sec. 531. Toll tax on excess qualified foreign distribution amount.
Sec. 532. Child support enforcement.
Sec. 533. Low-income housing tax credit.
Sec. 534. Expensing of broadband internet access expenditures.
Sec. 535. Income tax credit for distilled spirits wholesalers and for 
              distilled spirits in control state bailment warehouses 
              for costs of carrying Federal excise taxes on bottled 
              distilled spirits.
Sec. 536. Clarification of contribution in aid of construction for 
              water and sewerage disposal utilities.
Sec. 537. Restoration of deduction for travel expenses of spouse, etc. 
              accompanying taxpayer on business travel.
Sec. 538. Certain sightseeing flights exempt from taxes on air 
              transportation.
Sec. 539. Conforming the Internal Revenue Code of 1986 to requirements 
              imposed by the Women's Health and Cancer Rights Act of 
              1998.
Sec. 540. Expansion of designated renewal community area based on 2000 
              census data.
Sec. 541. Renewal community employers may qualify for employment credit 
              by employing residents of certain other renewal 
              communities.
Sec. 542. Expansion of income tax exclusion for combat zone service.
Sec. 543. Availability of certain tax benefits for members of the armed 
              forces performing services at Guantanamo Bay Naval 
              Station, Cuba, and on the island of Diego Garcia.
Sec. 544. Citrus canker tree relief.
Sec. 545. Exclusion of certain punitive damage awards.
Sec. 546. Reatment of certain imported recycled halons.
Sec. 547. Modification of involuntary conversion rules for businesses 
              affected by the September 11th terrorist attacks.

                    Subtitle D--Medicare Provisions.

Sec. 561. Equalizing urban and rural standardized payment amounts under 
              the medicare inpatient hospital prospective payment 
              system.
Sec. 562. Fairness in the Medicare Disproportionate Share Hospital 
              (DSH) adjustment for rural hospitals.
Sec. 563. Medicare inpatient hospital payment adjustment for low-volume 
              hospitals.

[[Page 12387]]

Sec. 564. Adjustment to the medicare inpatient hospital PPS wage index 
              to revise the labor-related share of such index.
Sec. 565. One-year extension of hold harmless provisions for small 
              rural hospitals and temporary treatment of certain sole 
              community hospitals to limit decline in payment under the 
              OPD PPS.
Sec. 566. Critical access hospital (CAH) improvements.
Sec. 567. Temporary increase for home health services furnished in a 
              rural area.
Sec. 568. Temporary increase in payments for certain services furnished 
              by small rural hospitals under medicare prospective 
              payment system for hospital outpatient department 
              services.
Sec. 569. Temporary increase for ground ambulance services furnished in 
              a rural area.
Sec. 570. Exclusion of certain rural health clinic and federally 
              qualified health center services from the medicare pps 
              for skilled nursing facilities.
Sec. 571. Medicare incentive payment program improvements.
Sec. 572. Two-year treatment of certain clinical diagnostic laboratory 
              tests furnished by a sole community hospital.
Sec. 573. Establishment of floor on geographic adjustments of payments 
              for physicians' services.
Sec. 574. Freeze in payments for items of durable medical equipment and 
              orthotics and prosthetics.
Sec. 575. Application of coinsurance and deductible for clinical 
              diagnostic laboratory tests.
Sec. 576. Revision in payments for covered outpatient drugs.
Sec. 577. Inapplicability of sunset.

      Subtitle E--Provisions Relating To S Corporation Reform and 
                             Simplification

       Part I--Maximum Number of Shareholders of an S Corporation

Sec. 581. Members of family treated as 1 shareholder.
Sec. 582. Increase in number of eligible shareholders to 100.
Sec. 583. Nonresident aliens allowed as beneficiaries of an electing 
              small business trust.

 Part II--Termination of Election and additions to Tax Due to Passive 
                           Investment Income

Sec. 584. Modifications to passive income rules.

           Part III--Treatment of S Corporation Shareholders

Sec. 585. Transfer of suspended losses incident to divorce.
Sec. 586. Use of passive activity loss and at-risk amounts by qualified 
              subchapter S trust income beneficiaries.
Sec. 587. Disregard of unexercised powers of appointment in determining 
              potential current beneficiaries of ESBT.
Sec. 588. Clarification of electing small business trust distribution 
              rules.

                 Part IV--Provisions Relating to Banks

Sec. 589. Sale of stock in IRA relating to S corporation election 
              exempt from prohibited transaction rules.
Sec. 590. Exclusion of investment securities income from passive income 
              test for bank S corporations.
Sec. 591. Treatment of qualifying director shares.

              Part V--Qualified Subchapter S Subsidiaries

Sec. 592. Relief from inadvertently invalid qualified subchapter S 
              subsidiary elections and terminations.
Sec. 593. Information returns for qualified subchapter S subsidiaries.

                     Part VI--Additional Provisions

Sec. 594. Elimination of all earnings and profits attributable to pre-
              1983 years.

      TITLE VI--BLUE RIBBON COMMISSION ON COMPREHENSIVE TAX REFORM

Sec. 601. Short title.
Sec. 602. Establishmment of Commission.
Sec. 603. Duties of the Commission.
Sec. 604. Powers of the Commission.
Sec. 605. Commission personnel matters.
Sec. 606. Termination of the Commission.
Sec. 607. Authorization of appropriations.

                TITLE VII--REAL ESTATE INVESTMENT TRUSTS

                      Subtitle A--REIT Corrections

Sec. 701. Revisions to REIT asset test.
Sec. 702. Clarification of application of limited rental exception.
Sec. 703. Deletion of customary services exception.
Sec. 704. Conformity with general hedging definition.
Sec. 705. Conformity with regulated investment company rules.
Sec. 706. Prohibited transactions provisions.
Sec. 707. Effective dates.

                  Subtitle B--REIT Savings Provisions

Sec. 711. Revisions to REIT provisions.

         TITLE VIII--EXTENSIONS OF CERTAIN EXPIRING PROVISIONS

             Subtitle A--Extensions of Expiring Provisions

Sec. 801. Parity in the application of certain limits to mental health 
              benefits.
Sec. 802. Allowance of nonrefundable personal credits against regular 
              and minimum tax liability.
Sec. 803. Credit for electricity produced from certain renewable 
              resources.
Sec. 804. Work opportunity credit.
Sec. 805. Welfare-to-work credit.
Sec. 806. Taxable income limit on percentage depletion for oil and 
              natural gas produced from marginal properties.
Sec. 807. Qualified zone academy bonds.
Sec. 808. Cover over of tax on distilled spirits.
Sec. 809. Deduction for corporate donations of computer technology.
Sec. 810. Credit for qualified electric vehicles.
Sec. 811. Deduction for clean-fuel vehicles and certain refueling 
              property.
Sec. 812. Deduction for certain expenses of school teachers.
Sec. 813. Availability of medical savings accounts.
Sec. 814. Expensing of environmental remediation costs.

         TITLE IX--IMPROVING TAX EQUITY FOR MILITARY PERSONNEL

Sec. 900. Short title.
Sec. 901. Exclusion of gain from sale of a principal residence by a 
              member of the uniformed services or the foreign service.
Sec. 902. Exclusion from gross income of certain death gratuity 
              payments.
Sec. 903. Exclusion for amounts received under Department of Defense 
              Homeowners Assistance Program.
Sec. 904. Expansion of combat zone filing rules to contingency 
              operations.
Sec. 905. Modification of membership requirement for exemption from tax 
              for certain veterans' organizations.
Sec. 906. Clarification of the treatment of certain dependent care 
              assistance programs.
Sec. 907. Clarification relating to exception from additional tax on 
              certain distributions from qualified tuition programs, 
              etc. on account of attendance at military academy.
Sec. 908. Suspension of tax-exempt status of terrorist organizations.
Sec. 909. Above-the-line deduction for overnight travel expenses of 
              national guard and reserve members.
Sec. 910. Tax relief and assistance for families of Space Shuttle 
              Columbia heroes.

                            TITLE X--SUNSET

Sec. 1001. Sunset.

  TITLE I--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS; 
                INCREASED EXPENSING FOR SMALL BUSINESSES

     SEC. 101. ACCELERATION OF 10-PERCENT INDIVIDUAL INCOME TAX 
                   RATE BRACKET EXPANSION.

       (a) In General.--Clause (i) of section 1(i)(1)(B) (relating 
     to the initial bracket amount) is amended by striking 
     ``($12,000 in the case of taxable years beginning before 
     January 1, 2008)''.
       (b) Inflation Adjustment Beginning in 2004.--Subparagraph 
     (C) of section 1(i)(1) (relating to inflation adjustment) is 
     amended to read as follows:
       ``(C) Inflation adjustment.--In prescribing the tables 
     under subsection (f) which apply with respect to taxable 
     years beginning in calendar years after 2003--
       ``(i) the cost-of-living adjustment used in making 
     adjustments to the initial bracket amount shall be determined 
     under subsection (f)(3) by substituting `2002' for `1992' in 
     subparagraph (B) thereof, and
       ``(ii) such adjustment shall not apply to the amount 
     referred to in subparagraph (B)(iii).

     If any amount after adjustment under the preceding sentence 
     is not a multiple of $50, such amount shall be rounded to the 
     next lowest multiple of $50.''.
       (c) Effective Dates.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2002.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall apply to taxable years beginning after December 31, 
     2003.
       (3) Tables for 2003.--The Secretary of the Treasury shall 
     modify each table which has been prescribed for taxable years 
     beginning in 2003 and which relates to the amendment made by 
     subsection (a), section 102, or section 103 to reflect each 
     such amendment.

     SEC. 102. ACCELERATION OF REDUCTION IN INDIVIDUAL INCOME TAX 
                   RATES.

       (a) In General.--The table in paragraph (2) of section 1(i) 
     (relating to reductions in rates after June 30, 2001) is 
     amended to read as follows:

------------------------------------------------------------------------
                                  The corresponding percentages shall be
              ``In the case of         substituted for the following
                taxable years                  percentages:
              beginning during   ---------------------------------------
               calendar year:       28%      31%      36%       39.6%
------------------------------------------------------------------------
            2001................   27.5%    30.5%    35.5%      39.1%
            2002................   27.0%    30.0%    35.0%      38.6%
            2003 and thereafter.   25.0%    28.0%    33.0%     35.0%''.
------------------------------------------------------------------------

       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

[[Page 12388]]



     SEC. 103. MINIMUM TAX RELIEF TO INDIVIDUALS.

       (a) In General.--So much of paragraph (1) of section 55(d) 
     (relating to exemption amount for taxpayers other than 
     corporations) as precedes subparagraph (C) thereof is amended 
     to read as follows:
       ``(1) Exemption amount for taxpayers other than 
     corporations.--In the case of a taxpayer other than a 
     corporation, the term `exemption amount' means as follows:
       ``(A) Joint return and surviving spouse.--In the case of a 
     joint return or a surviving spouse, the amount under the 
     following table:

``In the case of taxable years beginning:      The exemption amount is:
  Before 2001..................................................$45,000 
  In 2001 and 2002.............................................$49,000 
  In 2003......................................................$60,500 
  In 2004......................................................$60,500 
  In 2005......................................................$60,500 
  After 2005...................................................$45,000.
       ``(B) Individual not married and not a surviving spouse.--
     In the case of an individual who is not a married individual 
     and is not a surviving spouse, the amount under the following 
     table:

``In the case of taxable years beginning:      The exemption amount is:
  Before 2001..................................................$33,750 
  In 2001 and 2002.............................................$35,750 
  In 2003......................................................$41,500 
  In 2004......................................................$41,500 
  In 2005......................................................$41,500 
  After 2005................................................$33,750.''.
       (b) Conforming Amendments.--
       (1) Section 55(d)(1)(C) is amended--
       (A) by striking ``, and'' and inserting a period, and
       (B) by striking ``50 percent'' and inserting ``Married 
     individual filing a separate return.--50 percent''.
       (2) Section 55(d)(1)(D) is amended by striking ``$22,500'' 
     and inserting ``Estate and trust.--$22,500''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 104. ACCELERATION OF INCREASE IN STANDARD DEDUCTION FOR 
                   MARRIED TAXPAYERS FILING JOINT RETURNS.

       (a) In General.--Paragraph (7) of section 63(c) (relating 
     to standard deduction) is amended to read as follows:
       ``(7) Applicable percentage.--For purposes of paragraph 
     (2), the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning in calendarThe applicable percentage is--
      2003.........................................................195 
      2004.........................................................200 
      2005.........................................................174 
      2006.........................................................184 
      2007.........................................................187 
      2008.........................................................190 
      2009 and thereafter.......................................200.''.
       (b) Conforming Amendment.--Section 301(d) of the Economic 
     Growth and Tax Relief Reconciliation Act of 2001 is amended 
     by striking ``2004'' and inserting ``2002''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 105. ACCELERATION OF 15-PERCENT INDIVIDUAL INCOME TAX 
                   RATE BRACKET EXPANSION FOR MARRIED TAXPAYERS 
                   FILING JOINT RETURNS.

       (a) In General.--Subparagraph (B) of section 1(f)(8) 
     (relating to phaseout of marriage penalty in 15-percent 
     bracket) is amended to read as follows:
       ``(B) Applicable percentage.--For purposes of subparagraph 
     (A), the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning in calendarThe applicable percentage is--
      2003.........................................................195 
      2004.........................................................200 
      2005.........................................................180 
      2006.........................................................187 
      2007.........................................................193 
      2008 and thereafter.......................................200.''.
       (b) Conforming Amendment.--Section 302(c) of the Economic 
     Growth and Tax Relief Reconciliation Act of 2001 is amended 
     by striking ``2004'' and inserting ``2002''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 106. ACCELERATION OF INCREASE IN, AND REFUNDABILITY OF, 
                   CHILD TAX CREDIT.

       (a) Acceleration of Increase in Credit.--Subsection (a) of 
     section 24 (relating to child tax credit) is amended to read 
     as follows:
       ``(a) Allowance of Credit.--There shall be allowed as a 
     credit against the tax imposed by this chapter for the 
     taxable year with respect to each qualifying child of the 
     taxpayer an amount equal to $1,000.''.
       (b) Expansion of Credit Refundability.--Section 
     24(d)(1)(B)(i) (relating to portion of credit refundable) is 
     amended by striking ``(10 percent in the case of taxable 
     years beginning before January 1, 2005)''.
       (c) Advance Payment of Portion of Increased Credit in 
     2003.--
       (1) In general.--Subchapter B of chapter 65 (relating to 
     abatements, credits, and refunds) is amended by adding at the 
     end the following new section:

     ``SEC. 6429. ADVANCE PAYMENT OF PORTION OF INCREASED CHILD 
                   CREDIT FOR 2003.

       ``(a) In General.--Each taxpayer who claimed a credit under 
     section 24 on the return for the taxpayer's first taxable 
     year beginning in 2002 shall be treated as having made a 
     payment against the tax imposed by chapter 1 for such taxable 
     year in an amount equal to the child tax credit refund amount 
     (if any) for such taxable year.
       ``(b) Child Tax Credit Refund Amount.--For purposes of this 
     section, the child tax credit refund amount is the amount by 
     which the aggregate credits allowed under part IV of 
     subchapter A of chapter 1 for such first taxable year would 
     have been increased if--
       ``(1) the per child amount under section 24(a)(2) for such 
     year were $1,000,
       ``(2) only qualifying children (as defined in section 
     24(c)) of the taxpayer for such year who had not attained age 
     17 as of December 31, 2003, were taken into account, and
       ``(3) section 24(d)(1)(B)(ii) did not apply.
       ``(c) Timing of Payments.--In the case of any overpayment 
     attributable to this section, the Secretary shall, subject to 
     the provisions of this title, refund or credit such 
     overpayment as rapidly as possible and, to the extent 
     practicable, before October 1, 2003. No refund or credit 
     shall be made or allowed under this section after December 
     31, 2003.
       ``(d) Coordination with Child Tax Credit.--
       ``(1) In general.--The amount of credit which would (but 
     for this subsection and section 26) be allowed under section 
     24 for the taxpayer's first taxable year beginning in 2003 
     shall be reduced (but not below zero) by the payments made to 
     the taxpayer under this section. Any failure to so reduce the 
     credit shall be treated as arising out of a mathematical or 
     clerical error and assessed according to section 6213(b)(1).
       ``(2) Joint returns.--In the case of a payment under this 
     section with respect to a joint return, half of such payment 
     shall be treated as having been made to each individual 
     filing such return.
       ``(e) No Interest.--No interest shall be allowed on any 
     overpayment attributable to this section.''.
       (2) Clerical amendment.--The table of sections for 
     subchapter B of chapter 65 is amended by adding at the end 
     the following new item:

``Sec. 6429. Advance payment of portion of increased child credit for 
              2003.''.
       (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, 2002.
       (2) Subsection (c).--The amendments made by subsection (c) 
     shall take effect on the date of the enactment of this Act.

     SEC. 107. INCREASED EXPENSING FOR SMALL BUSINESS.

       (a) In General.--Paragraph (1) of section 179(b) (relating 
     to dollar limitation) is amended to read as follows:
       ``(1) Dollar limitation.--The aggregate cost which may be 
     taken into account under subsection (a) for any taxable year 
     shall not exceed $25,000 ($100,000 in the case of taxable 
     years beginning after 2002 and before 2008).''.
       (b) Increase in Qualifying Investment at Which Phaseout 
     Begins.--Paragraph (2) of section 179(b) (relating to 
     reduction in limitation) is amended by inserting ``($400,000 
     in the case of taxable years beginning after 2002 and before 
     2008)'' after ``$200,000''.
       (c) Off-the-Shelf Computer Software.--Paragraph (1) of 
     section 179(d) (defining section 179 property) is amended to 
     read as follows:
       ``(1) Section 179 property.--For purposes of this section, 
     the term `section 179 property' means property--
       ``(A) which is--
       ``(i) tangible property (to which section 168 applies), or
       ``(ii) computer software (as defined in section 
     197(e)(3)(B)) which is described in section 197(e)(3)(A)(i), 
     to which section 167 applies, and which is placed in service 
     in a taxable year beginning after 2002 and before 2008,
       ``(B) which is section 1245 property (as defined in section 
     1245(a)(3)), and
       ``(C) which is acquired by purchase for use in the active 
     conduct of a trade or business.
     Such term shall not include any property described in section 
     50(b) and shall not include air conditioning or heating 
     units.''.
       (d) Adjustment of Dollar Limit and Phaseout Threshold for 
     Inflation.--Subsection (b) of section 179 (relating to 
     limitations) is amended by adding at the end the following 
     new paragraph:
       ``(5) Inflation adjustments.--
       ``(A) In general.--In the case of any taxable year 
     beginning in a calendar year after 2003 and before 2008, the 
     $100,000 and $400,000 amounts in paragraphs (1) and (2) shall 
     each be increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 2002' for 
     `calendar year 1992' in subparagraph (B) thereof.
       ``(B) Rounding.--
       ``(i) Dollar limitation.--If the amount in paragraph (1) as 
     increased under subparagraph (A) is not a multiple of $1,000, 
     such amount shall be rounded to the nearest multiple of 
     $1,000.
       ``(ii) Phaseout amount.--If the amount in paragraph (2) as 
     increased under subparagraph (A) is not a multiple of 
     $10,000, such amount shall be rounded to the nearest multiple 
     of $10,000.''.

[[Page 12389]]

       (e) Revocation of Election.--Paragraph (2) of section 
     179(c) (relating to election irrevocable) is amended to read 
     as follows:
       ``(2) Revocation of election.--An election under paragraph 
     (1) with respect to any taxable year beginning after 2002 and 
     before 2008, and any specification contained in any such 
     election, may be revoked by the taxpayer with respect to any 
     property. Such revocation, once made, shall be 
     irrevocable.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 108. APPLICATION OF EGTRRA SUNSET TO THIS TITLE.

       Each amendment made by this title (other than section 107) 
     shall be subject to title IX of the Economic Growth and Tax 
     Relief Reconciliation Act of 2001 to the same extent and in 
     the same manner as the provision of such Act to which such 
     amendment relates.

                TITLE II--PARTIAL EXCLUSION OF DIVIDENDS

     SEC. 201. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY 
                   INDIVIDUALS.

       (a) General Rule.--Part III of subchapter B of chapter 1 is 
     amended by inserting after section 115 the following new 
     section:

     ``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY 
                   INDIVIDUALS.

       ``(a) Exclusion From Gross Income.--
       ``(1) In general.--Gross income does not include the 
     applicable percentage of qualified dividend income received 
     during the taxable year by an individual.
       ``(2) Applicable percentage.--For purposes of this 
     subsection, the applicable percentage is--
       ``(A) 50 percent in the case of taxable years beginning in 
     2003,
       ``(B) 100 percent in the case of taxable years beginning in 
     2004, 2005, and 2006, and
       ``(C) zero percent in the case of any other taxable year.
       ``(b) Qualified Dividend Income.--For purposes of this 
     subsection--
       ``(1) In general.--The term `qualified dividend income' 
     means dividends received with respect to any share of stock 
     of--
       ``(A) any domestic corporation, or
       ``(B) any foreign corporation but only if such share of 
     stock is readily tradable on an established securities 
     market.
       ``(2) Certain dividends excluded.--Such term shall not 
     include--
       ``(A) any dividend from a corporation which for the taxable 
     year of the corporation in which the distribution is made, or 
     the preceding taxable year, is a corporation exempt from tax 
     under section 501 or 521,
       ``(B) any amount allowed as a deduction under section 591 
     (relating to deduction for dividends paid by mutual savings 
     banks, etc.), and
       ``(C) any dividend described in section 404(k).
       ``(3) Exclusion of dividends of certain foreign 
     corporations.--Such term shall not include any dividend from 
     a foreign corporation which for the taxable year of the 
     corporation in which the distribution was made, or the 
     preceding taxable year, is a foreign personal holding company 
     (as defined in section 552), a foreign investment company (as 
     defined in section 1246(b)), or a passive foreign investment 
     company (as defined in section 1297).
       ``(4) Coordination with section 246(c).--Such term shall 
     not include any dividend on any share of stock--
       ``(A) with respect to which the holding period requirements 
     of section 246(c) are not met, or
       ``(B) to the extent that the taxpayer 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.
       ``(c) Special Rules.--
       ``(1) Amounts taken into account as investment income.--
     Qualified dividend income shall not include any amount which 
     the taxpayer takes into account as investment income under 
     section 163(d)(4)(B).
       ``(2) Coordination with foreign tax credit and deduction.--
     No credit shall be allowed under section 901, and no 
     deduction shall be allowed under this chapter, for any taxes 
     paid or accrued with respect to any income excludable under 
     this section.
       ``(3) Certain nonresident aliens ineligible for 
     exclusion.--In the case of a nonresident alien individual, 
     subsection (a) shall apply only in determining the tax 
     imposed for the taxable year by sections 871(b)(1) and 
     877(b).
       ``(4) Exclusion disregarded in determining income for 
     certain purposes.--Subsection (a) shall not apply for 
     purposes of determining amounts of income under sections 
     32(i), 86(b), 135(b), 137(b), 219(g), 221(b), 222(b), 
     408A(c)(3), 469(i), and 530(c), or subpart A of part IV of 
     subchapter A.
       ``(5) Treatment of dividends from regulated investment 
     companies and real estate investment trusts.--A dividend from 
     a regulated investment company or real estate investment 
     trust shall be subject to the limitations prescribed in 
     sections 854 and 857.''.
       (b) Exclusion of Dividends From Investment Income.--
     Subparagraph (B) of section 163(d)(4) (defining net 
     investment income) is amended by adding at the end the 
     following flush sentence:

     ``Such term shall include qualified dividend income (as 
     defined in section 116(b)) only to the extent the taxpayer 
     elects to treat such income as investment income for purposes 
     of this subsection.''.
       (c) Treatment of Dividends From Regulated Investment 
     Companies.--
       (1) Subsection (a) of section 854 (relating to dividends 
     received from regulated investment companies) is amended by 
     inserting ``section 116 (relating to partial exclusion of 
     dividends received by individuals) and'' after ``For purposes 
     of''.
       (2) Paragraph (1) of section 854(b) (relating to other 
     dividends) is amended by redesignating subparagraph (B) as 
     subparagraph (C) and by inserting after subparagraph (A) the 
     following new subparagraph:
       ``(B) Exclusion under section 116.--
       ``(i) In general.--If the aggregate dividends received by a 
     regulated investment company during any taxable year are less 
     than 95 percent of its gross income, then, in computing the 
     exclusion under section 116, rules similar to the rules of 
     subparagraph (A) shall apply.
       ``(ii) Gross income.--For purposes of clause (i), in the 
     case of 1 or more sales or other dispositions of stock or 
     securities, the term `gross income' includes only the excess 
     of--

       ``(I) the net short-term capital gain from such sales or 
     dispositions, over
       ``(II) the net long-term capital loss from such sales or 
     dispositions.''.

       (3) Subparagraph (C) of section 854(b)(1), as redesignated 
     by paragraph (2), is amended by striking ``subparagraph (A)'' 
     and inserting ``subparagraph (A) or (B)''.
       (4) Paragraph (2) of section 854(b) is amended by inserting 
     ``the exclusion under section 116 and'' after ``for purposes 
     of''.
       (5) Subsection (b) of section 854 is amended by adding at 
     the end the following new paragraph:
       ``(5) Coordination with section 116.--For purposes of 
     paragraph (1)(B), an amount shall be treated as a dividend 
     only if the amount is qualified dividend income (within the 
     meaning of section 116(b)).''.
       (d) Treatment of Dividends Received From Real Estate 
     Investment Trusts.--Section 857(c) (relating to restrictions 
     applicable to dividends received from real estate investment 
     trusts) is amended to read as follows:
       ``(c) Restrictions Applicable To Dividends Received From 
     Real Estate Investment Trusts.--
       ``(1) Section 243.--For purposes of section 243 (relating 
     to deductions for dividends received by corporations), a 
     dividend received from a real estate investment trust which 
     meets the requirements of this part shall not be considered a 
     dividend.
       ``(2) Section 116.--For purposes of section 116 (relating 
     to exclusion of dividends), rules similar to the rules of 
     section 854(b)(1)(B) shall apply to dividends received from a 
     real estate trust which meets the requirements of this 
     part.''.
       (e) Conforming Amendments.--
       (1) Subsection (f) of section 301 is amended adding at the 
     end the following new paragraph:
       ``(4) For partial exclusion from gross income of dividends 
     received by individuals, see section 116.''.
       (2) Paragraph (1) of section 306(a) is amended by adding at 
     the end the following new subparagraph:
       ``(D) Treatment as dividend.--For purposes of section 116, 
     any amount treated as ordinary income under this paragraph 
     shall be treated as a dividend received from the 
     corporation.''.
       (3)(A) Subpart C of part II of subchapter C of chapter 1 
     (relating to collapsible corporations) is repealed.
       (B)(i) Section 338(h) is amended by striking paragraph 
     (14).
       (ii) Sections 467(c)(5)(C), 1255(b)(2), and 1257(d) are 
     each amended by striking ``, 341(e)(12),''.
       (iii) The table of subparts for part II of subchapter C of 
     chapter 1 is amended by striking the item related to subpart 
     C.
       (4) Section 531 is amended--
       (A) by inserting ``the taxable percentage of'' after 
     ``equal to'', and
       (B) by adding at the end the following: ``For purposes of 
     this section, the taxable percentage is 100 percent minus the 
     applicable percentage (as defined in section 116(a)(2)).''
       (5) Section 541 is amended--
       (A) by inserting ``the taxable percentage of'' after 
     ``equal to'', and
       (B) by adding at the end the following: ``For purposes of 
     this section, the taxable percentage is 100 percent minus the 
     applicable percentage (as defined in section 116(a)(2)).''
       (6) Section 584(c) is amended by adding at the end the 
     following new flush sentence:

     ``The proportionate share of each participant in the amount 
     of dividends received by the common trust fund and to which 
     section 116 applies shall be considered for purposes of such 
     paragraph as having been received by such participant.''.
       (7) Section 643(a) is amended by redesignating paragraph 
     (7) as paragraph (8) and by inserting after paragraph (6) the 
     following new paragraph:
       ``(7) Excluded dividends.--There shall be included the 
     amount of any dividends excluded from gross income under 
     section 116 (relating to partial exclusion of dividends).''.
       (8) Paragraph (5) of section 702(a) is amended to read as 
     follows:
       ``(5) dividends with respect to which section 116 or part 
     VII of subchapter B applies,''.
       (9)(A) Section 1059(a) is amended by striking 
     ``corporation'' each place it appears and inserting 
     ``taxpayer''.
       (B)(i) The heading for section 1059 is amended by striking 
     ``CORPORATE''.
       (ii) The item relating to section 1059 in the table of 
     sections for part IV of subchapter O of chapter 1 is amended 
     by striking ``Corporate shareholder's'' and inserting 
     ``Shareholder's''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

[[Page 12390]]



                     TITLE III--REVENUE PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

     SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

       (a) In General.--Section 7701 is amended by redesignating 
     subsection (n) as subsection (o) and by inserting after 
     subsection (m) the following new subsection:
       ``(n) Clarification of Economic Substance Doctrine; Etc.--
       ``(1) General rules.--
       ``(A) In general.--In applying the economic substance 
     doctrine, the determination of whether a transaction has 
     economic substance shall be made as provided in this 
     paragraph.
       ``(B) Definition of economic substance.--For purposes of 
     subparagraph (A)--
       ``(i) In general.--A transaction has economic substance 
     only if--

       ``(I) the transaction changes in a meaningful way (apart 
     from Federal tax effects) the taxpayer's economic position, 
     and
       ``(II) the taxpayer has a substantial nontax purpose for 
     entering into such transaction and the transaction is a 
     reasonable means of accomplishing such purpose.

     In applying subclause (II), a purpose of achieving a 
     financial accounting benefit shall not be taken into account 
     in determining whether a transaction has a substantial nontax 
     purpose if the origin of such financial accounting benefit is 
     a reduction of income tax.
       ``(ii) Special rule where taxpayer relies on profit 
     potential.--A transaction shall not be treated as having 
     economic substance by reason of having a potential for profit 
     unless--

       ``(I) the present value of the reasonably expected pre-tax 
     profit from the transaction is substantial in relation to the 
     present value of the expected net tax benefits that would be 
     allowed if the transaction were respected, and
       ``(II) the reasonably expected pre-tax profit from the 
     transaction exceeds a risk-free rate of return.

       ``(C) Treatment of fees and foreign taxes.--Fees and other 
     transaction expenses and foreign taxes shall be taken into 
     account as expenses in determining pre-tax profit under 
     subparagraph (B)(ii).
       ``(2) Special rules for transactions with tax-indifferent 
     parties.--
       ``(A) Special rules for financing transactions.--The form 
     of a transaction which is in substance the borrowing of money 
     or the acquisition of financial capital directly or 
     indirectly from a tax-indifferent party shall not be 
     respected if the present value of the deductions to be 
     claimed with respect to the transaction is substantially in 
     excess of the present value of the anticipated economic 
     returns of the person lending the money or providing the 
     financial capital. A public offering shall be treated as a 
     borrowing, or an acquisition of financial capital, from a 
     tax-indifferent party if it is reasonably expected that at 
     least 50 percent of the offering will be placed with tax-
     indifferent parties.
       ``(B) Artificial income shifting and basis adjustments.--
     The form of a transaction with a tax-indifferent party shall 
     not be respected if--
       ``(i) it results in an allocation of income or gain to the 
     tax-indifferent party in excess of such party's economic 
     income or gain, or
       ``(ii) it results in a basis adjustment or shifting of 
     basis on account of overstating the income or gain of the 
     tax-indifferent party.
       ``(3) Definitions and special rules.--For purposes of this 
     subsection--
       ``(A) Economic substance doctrine.--The term `economic 
     substance doctrine' means the common law doctrine under which 
     tax benefits under subtitle A with respect to a transaction 
     are not allowable if the transaction does not have economic 
     substance or lacks a business purpose.
       ``(B) Tax-indifferent party.--The term `tax-indifferent 
     party' means any person or entity not subject to tax imposed 
     by subtitle A. A person shall be treated as a tax-indifferent 
     party with respect to a transaction if the items taken into 
     account with respect to the transaction have no substantial 
     impact on such person's liability under subtitle A.
       ``(C) Exception for personal transactions of individuals.--
     In the case of an individual, this subsection shall apply 
     only to transactions entered into in connection with a trade 
     or business or an activity engaged in for the production of 
     income.
       ``(D) Treatment of lessors.--A lessor of tangible property 
     subject to a lease shall be treated as satisfying the 
     requirements of paragraph (1)(B)(ii) with respect to the 
     leased property if such lease satisfies such requirements as 
     provided by the Secretary.
       ``(4) Other common law doctrines not affected.--Except as 
     specifically provided in this subsection, the provisions of 
     this subsection shall not be construed as altering or 
     supplanting any other rule of law, and the requirements of 
     this subsection shall be construed as being in addition to 
     any such other rule of law.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection. Such regulations may include 
     exemptions from the application of this subsection.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into on or after May 8, 
     2003.

     SEC. 302. PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
                   TRANSACTION.

       (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 OR 
                   STATEMENT.

       ``(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 paragraphs (2) and 
     (3), the amount of the penalty under subsection (a) shall be 
     $50,000.
       ``(2) Listed transaction.--The amount of the penalty under 
     subsection (a) with respect to a listed transaction shall be 
     $100,000.
       ``(3) Increase in penalty for large entities and high net 
     worth individuals.--
       ``(A) In general.--In the case of a failure under 
     subsection (a) by--
       ``(i) a large entity, or
       ``(ii) a high net worth individual,
     the penalty under paragraph (1) or (2) shall be twice the 
     amount determined without regard to this paragraph.
       ``(B) Large entity.--For purposes of subparagraph (A), the 
     term `large entity' means, with respect to any taxable year, 
     a person (other than a natural person) with gross receipts in 
     excess of $10,000,000 for the taxable year in which the 
     reportable transaction occurs or the preceding taxable year. 
     Rules similar to the rules of paragraph (2) and subparagraphs 
     (B), (C), and (D) of paragraph (3) of section 448(c) shall 
     apply for purposes of this subparagraph.
       ``(C) High net worth individual.--For purposes of 
     subparagraph (A), the term `high net worth individual' means, 
     with respect to a reportable transaction, a natural person 
     whose net worth exceeds $2,000,000 immediately before the 
     transaction.
       ``(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.--Except as provided in 
     regulations, 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,
       ``(B) the person on whom the penalty is imposed has a 
     history of complying with the requirements of this title,
       ``(C) it is shown that the violation is due to an 
     unintentional mistake of fact;
       ``(D) imposing the penalty would be against equity and good 
     conscience, and
       ``(E) rescinding the penalty would promote compliance with 
     the requirements of this title and effective tax 
     administration.
       ``(2) Discretion.--The exercise of authority under 
     paragraph (1) shall be at the sole discretion of the 
     Commissioner and may be delegated only to the head of the 
     Office of Tax Shelter Analysis. The Commissioner, in the 
     Commissioner's sole discretion, may establish a procedure to 
     determine if a penalty should be referred to the Commissioner 
     or the head of such Office for a determination under 
     paragraph (1).
       ``(3) No appeal.--Notwithstanding any other provision of 
     law, any determination under this subsection may not be 
     reviewed in any administrative or judicial proceeding.
       ``(4) 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 or the 
     head of the Office of Tax Shelter Analysis with respect to 
     the determination, including--
       ``(A) the facts and circumstances of the transaction,
       ``(B) the reasons for the rescission, and
       ``(C) the amount of the penalty rescinded.
       ``(5) Report.--The Commissioner shall each year report to 
     the Committee on Ways and Means of the House of 
     Representatives and the Committee on Finance of the Senate--
       ``(A) a summary of the total number and aggregate amount of 
     penalties imposed, and rescinded, under this section, and
       ``(B) a description of each penalty rescinded under this 
     subsection and the reasons therefor.
       ``(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

[[Page 12391]]

       ``(C) is required to pay a penalty under section 6662B with 
     respect to any noneconomic substance transaction,

     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 is in addition to any penalty imposed 
     under 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 or statement.''.
       (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.

     SEC. 303. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS 
                   AND OTHER REPORTABLE TRANSACTIONS HAVING A 
                   SIGNIFICANT TAX AVOIDANCE PURPOSE.

       (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.--
       ``(1) In general.--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.
       ``(2) Rules applicable to compromise of penalty.--
       ``(A) In general.--If the 1st letter of proposed deficiency 
     which allows the taxpayer an opportunity for administrative 
     review in the Internal Revenue Service Office of Appeals has 
     been sent with respect to a penalty to which paragraph (1) 
     applies, only the Commissioner of Internal Revenue may 
     compromise all or any portion of such penalty.
       ``(B) Applicable rules.--The rules of paragraphs (2), (3), 
     (4), and (5) of section 6707A(d) shall apply for purposes of 
     subparagraph (A).
       ``(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))--
       ``(A) the amount of such understatement (determined without 
     regard to this paragraph) shall be increased by the aggregate 
     amount of reportable transaction understatements and 
     noneconomic substance 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 and noneconomic substance 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 and a 
     noneconomic substance 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 6662B or 6663.
       ``(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 or noneconomic substance 
     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.
       ``(4) Noneconomic substance transaction understatement.--
     For purposes of this subsection, the term `noneconomic 
     substance transaction understatement' has the meaning given 
     such term by section 6662B(c).
       ``(5) Cross reference.--

  ``For reporting of section 6662A(c) penalty to the Securities and 
Exchange Commission, see section 6707A(e).''.
       (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 and 
     without regard to items with respect to which a penalty is 
     imposed by section 6662B.''.
       (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)) who participates in the organization, management, 
     promotion, or sale of the transaction or who 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 continuing 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 amendment.--The heading for subsection (c) 
     of section 6664 is amended by inserting ``for Underpayments'' 
     after ``Exception''.
       (d) Conforming Amendments.--
       (1) Subparagraph (C) of section 461(i)(3) is amended by 
     striking ``section 6662(d)(2)(C)(iii)'' and inserting 
     ``section 1274(b)(3)(C)''.
       (2) Paragraph (3) of section 1274(b) is amended--

[[Page 12392]]

       (A) by striking ``(as defined in section 
     6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
       (B) by adding at the end the following new subparagraph:
       ``(C) Tax shelter.--For purposes of subparagraph (B), 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.''.
       (3) Section 6662(d)(2) is amended by striking subparagraphs 
     (C) and (D).
       (4) Section 6664(c)(1) is amended by striking ``this part'' 
     and inserting ``section 6662 or 6663''.
       (5) Subsection (b) of section 7525 is amended by striking 
     ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
     1274(b)(3)(C)''.
       (6)(A) The heading for section 6662 is amended to read as 
     follows:

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

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

     SEC. 304. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO 
                   TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

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

     ``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO 
                   TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

       ``(a) Imposition of Penalty.--If a taxpayer has an 
     noneconomic substance transaction understatement for any 
     taxable year, there shall be added to the tax an amount equal 
     to 40 percent of the amount of such understatement.
       ``(b) Reduction of Penalty for Disclosed Transactions.--
     Subsection (a) shall be applied by substituting `20 percent' 
     for `40 percent' with respect to the portion of any 
     noneconomic substance transaction understatement with respect 
     to which the relevant facts affecting the tax treatment of 
     the item are adequately disclosed in the return or a 
     statement attached to the return.
       ``(c) Noneconomic Substance Transaction Understatement.--
     For purposes of this section--
       ``(1) In general.--The term `noneconomic substance 
     transaction understatement' means any amount which would be 
     an understatement under section 6662A(b)(1) if section 6662A 
     were applied by taking into account items attributable to 
     noneconomic substance transactions rather than items to which 
     section 6662A would apply without regard to this paragraph.
       ``(2) Noneconomic substance transaction.--The term 
     `noneconomic substance transaction' means any transaction 
     if--
       ``(A) there is a lack of economic substance (within the 
     meaning of section 7701(n)(1)) for the transaction giving 
     rise to the claimed benefit or the transaction was not 
     respected under section 7701(n)(2), or
       ``(B) the transaction fails to meet the requirements of any 
     similar rule of law.
       ``(d) Rules Applicable To Compromise of Penalty.--
       ``(1) In general.--If the 1st letter of proposed deficiency 
     which allows the taxpayer an opportunity for administrative 
     review in the Internal Revenue Service Office of Appeals has 
     been sent with respect to a penalty to which this section 
     applies, only the Commissioner of Internal Revenue may 
     compromise all or any portion of such penalty.
       ``(2) Applicable rules.--The rules of paragraphs (2), (3), 
     (4), and (5) of section 6707A(d) shall apply for purposes of 
     paragraph (1).
       ``(e) Coordination With Other Penalties.--Except as 
     otherwise provided in this part, the penalty imposed by this 
     section shall be in addition to any other penalty imposed by 
     this title.
       ``(f) Cross References.--

  ``(1) For coordination of penalty with understatements under section 
6662 and other special rules, see section 6662A(e).
  ``(2) For reporting of penalty imposed under this section to the 
Securities and Exchange Commission, see section 6707A(e).''.

       (b) Clerical Amendment.--The table of sections for part II 
     of subchapter A of chapter 68 is amended by inserting after 
     the item relating to section 6662A the following new item:

``Sec. 6662B. Penalty for understatements attributable to transactions 
              lacking economic substance, etc.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into on or after May 8, 
     2003.

     SEC. 305. 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) Reduction for Understatement of Taxpayer Due to 
     Position of Taxpayer or Disclosed Item.--
       (1) In general.--Section 6662(d)(2)(B)(i) (relating to 
     substantial authority) is amended to read as follows:
       ``(i) the tax treatment of any item by the taxpayer if the 
     taxpayer had reasonable belief that the tax treatment was 
     more likely than not the proper treatment, or''.
       (2) Conforming amendment.--Section 6662(d) is amended by 
     adding at the end the following new paragraph:
       ``(3) Secretarial list.--For purposes of this subsection, 
     section 6664(d)(2), and section 6694(a)(1), the Secretary may 
     prescribe a list of positions for which the Secretary 
     believes there is not substantial authority or there is no 
     reasonable belief that the tax treatment is more likely than 
     not the proper tax treatment. Such list (and any revisions 
     thereof) shall be published in the Federal Register or the 
     Internal Revenue Bulletin.''.
       (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. 306. 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 1274(b)(3)(C)).''.
       (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. 307. 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, promoting, selling, implementing, 
     or carrying out any reportable transaction, and
       ``(ii) who directly or indirectly derives gross income in 
     excess of the threshold amount for such aid, assistance, or 
     advice.
       ``(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)(A) 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.

       ``(a) In General.--Each material advisor (as defined in 
     section 6111) with respect to any reportable transaction (as 
     defined in section

[[Page 12393]]

     6707A(c)) shall 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 such a material advisor with respect to such 
     transaction, and
       ``(2) containing such other information as the Secretary 
     may by regulations require.
     This section shall apply without regard to whether a material 
     advisor is required to file a return under section 6111 with 
     respect to such transaction.''.
       (B) Section 6112 is amended by redesignating subsection (c) 
     as subsection (b).
       (C) Section 6112(b), as redesignated by subparagraph (B), 
     is amended--
       (i) by inserting ``written'' before ``request'' in 
     paragraph (1)(A), and
       (ii) by striking ``shall prescribe'' in paragraph (2) and 
     inserting ``may prescribe''.
       (D) 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.''.

       (3)(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. 308. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER 
                   TAX SHELTERS.

       (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 including the transaction 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.--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. 309. 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)(1)(A) within 20 business days after the 
     date of the Secretary's 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. 310. 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, subject to penalty under section 6700, 6701, 6707, or 
     6708.''.
       (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 67 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. 311. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME 
                   TAX RETURN PREPARER.

       (a) Standards Conformed to Taxpayer Standards.--Section 
     6694(a) (relating to understatements due to unrealistic 
     positions) is amended--
       (1) by striking ``realistic possibility of being sustained 
     on its merits'' in paragraph (1) and inserting ``reasonable 
     belief that the tax treatment in such position was more 
     likely than not the proper treatment'',
       (2) by striking ``or was frivolous'' in paragraph (3) and 
     inserting ``or there was no reasonable basis for the tax 
     treatment of such position'', and
       (3) by striking ``Unrealistic'' in the heading and 
     inserting ``Improper''.
       (b) Amount of Penalty.--Section 6694 is amended--
       (1) by striking ``$250'' in subsection (a) and inserting 
     ``$1,000'', and
       (2) by striking ``$1,000'' in subsection (b) and inserting 
     ``$5,000''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to documents prepared after the date of the 
     enactment of this Act.

     SEC. 312. 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:
       ``(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 $5,000.
       ``(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) $25,000, or
       ``(II) the amount (not exceeding $100,000) 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. 313. FRIVOLOUS TAX SUBMISSIONS.

       (a) Civil Penalties.--Section 6702 is amended to read as 
     follows:

     ``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

       ``(a) Civil Penalty for Frivolous Tax Returns.--A person 
     shall pay a penalty of $5,000 if--

[[Page 12394]]

       ``(1) such person files what purports to be a return of a 
     tax imposed by this title but which--
       ``(A) does not contain information on which the substantial 
     correctness of the self-assessment may be judged, or
       ``(B) contains information that on its face indicates that 
     the self-assessment is substantially incorrect; and
       ``(2) the conduct referred to in paragraph (1)--
       ``(A) is based on a position which the Secretary has 
     identified as frivolous under subsection (c), or
       ``(B) reflects a desire to delay or impede the 
     administration of Federal tax laws.
       ``(b) Civil Penalty for Specified Frivolous Submissions.--
       ``(1) Imposition of penalty.--Except as provided in 
     paragraph (3), any person who submits a specified frivolous 
     submission shall pay a penalty of $5,000.
       ``(2) Specified frivolous submission.--For purposes of this 
     section--
       ``(A) Specified frivolous submission.--The term `specified 
     frivolous submission' means a specified submission if any 
     portion of such submission--
       ``(i) is based on a position which the Secretary has 
     identified as frivolous under subsection (c), or
       ``(ii) reflects a desire to delay or impede the 
     administration of Federal tax laws.
       ``(B) Specified submission.--The term `specified 
     submission' means--
       ``(i) a request for a hearing under--

       ``(I) section 6320 (relating to notice and opportunity for 
     hearing upon filing of notice of lien), or
       ``(II) section 6330 (relating to notice and opportunity for 
     hearing before levy), and

       ``(ii) an application under--

       ``(I) section 6159 (relating to agreements for payment of 
     tax liability in installments),
       ``(II) section 7122 (relating to compromises), or
       ``(III) section 7811 (relating to taxpayer assistance 
     orders).

       ``(3) Opportunity to withdraw submission.--If the Secretary 
     provides a person with notice that a submission is a 
     specified frivolous submission and such person withdraws such 
     submission within 30 days after such notice, the penalty 
     imposed under paragraph (1) shall not apply with respect to 
     such submission.
       ``(c) Listing of Frivolous Positions.--The Secretary shall 
     prescribe (and periodically revise) a list of positions which 
     the Secretary has identified as being frivolous for purposes 
     of this subsection. The Secretary shall not include in such 
     list any position that the Secretary determines meets the 
     requirement of section 6662(d)(2)(B)(ii)(II).
       ``(d) Reduction of Penalty.--The Secretary may reduce the 
     amount of any penalty imposed under this section if the 
     Secretary determines that such reduction would promote 
     compliance with and administration of the Federal tax laws.
       ``(e) Penalties in Addition to Other Penalties.--The 
     penalties imposed by this section shall be in addition to any 
     other penalty provided by law.''.
       (b) Treatment of Frivolous Requests for Hearings Before 
     Levy.--
       (1) Frivolous requests disregarded.--Section 6330 (relating 
     to notice and opportunity for hearing before levy) is amended 
     by adding at the end the following new subsection:
       ``(g) Frivolous Requests for Hearing, Etc.--Notwithstanding 
     any other provision of this section, if the Secretary 
     determines that any portion of a request for a hearing under 
     this section or section 6320 meets the requirement of clause 
     (i) or (ii) of section 6702(b)(2)(A), then the Secretary may 
     treat such portion as if it were never submitted and such 
     portion shall not be subject to any further administrative or 
     judicial review.''.
       (2) Preclusion from raising frivolous issues at hearing.--
     Section 6330(c)(4) is amended--
       (A) by striking ``(A)'' and inserting ``(A)(i)'';
       (B) by striking ``(B)'' and inserting ``(ii)'';
       (C) by striking the period at the end of the first sentence 
     and inserting ``; or''; and
       (D) by inserting after subparagraph (A)(ii) (as so 
     redesignated) the following:
       ``(B) the issue meets the requirement of clause (i) or (ii) 
     of section 6702(b)(2)(A).''.
       (3) Statement of grounds.--Section 6330(b)(1) is amended by 
     striking ``under subsection (a)(3)(B)'' and inserting ``in 
     writing under subsection (a)(3)(B) and states the grounds for 
     the requested hearing''.
       (c) Treatment of Frivolous Requests for Hearings Upon 
     Filing of Notice of Lien.--Section 6320 is amended--
       (1) in subsection (b)(1), by striking ``under subsection 
     (a)(3)(B)'' and inserting ``in writing under subsection 
     (a)(3)(B) and states the grounds for the requested hearing'', 
     and
       (2) in subsection (c), by striking ``and (e)'' and 
     inserting ``(e), and (g)''.
       (d) Treatment of Frivolous Applications for Offers-in-
     Compromise and Installment Agreements.--Section 7122 is 
     amended by adding at the end the following new subsection:
       ``(e) Frivolous Submissions, Etc.--Notwithstanding any 
     other provision of this section, if the Secretary determines 
     that any portion of an application for an offer-in-compromise 
     or installment agreement submitted under this section or 
     section 6159 meets the requirement of clause (i) or (ii) of 
     section 6702(b)(2)(A), then the Secretary may treat such 
     portion as if it were never submitted and such portion shall 
     not be subject to any further administrative or judicial 
     review.''.
       (e) Clerical Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by striking the item 
     relating to section 6702 and inserting the following new 
     item:

``Sec. 6702. Frivolous tax submissions.''.

       (f) Effective Date.--The amendments made by this section 
     shall apply to submissions made and issues raised after the 
     date on which the Secretary first prescribes a list under 
     section 6702(c) of the Internal Revenue Code of 1986, as 
     amended by subsection (a).

     SEC. 314. 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. 315. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH 
                   LISTED TRANSACTIONS NOT REPORTED.

       (a) In General.--Section 6501(e)(1) (relating to 
     substantial omission of items for income taxes) is amended by 
     adding at the end the following new subparagraph:
       ``(C) 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 tax for 
     such taxable year may be assessed, or a proceeding in court 
     for collection of such tax may be begun without assessment, 
     at any time within 6 years after the time the return is 
     filed. This subparagraph shall not apply to any taxable year 
     if the time for assessment or beginning the proceeding in 
     court has expired before the time a transaction is treated as 
     a listed transaction under section 6011.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to transactions in taxable years beginning after 
     the date of the enactment of this Act.

     SEC. 316. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                   ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND 
                   NONECONOMIC SUBSTANCE 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 and Noneconomic Substance 
     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--
       ``(1) 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, 
     or
       ``(2) any noneconomic substance transaction understatement 
     (as defined in section 6662B(c)).''.
       (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.

            Subtitle B--Enron-Related Tax Shelter Provisions

     SEC. 321. 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.--

[[Page 12395]]

       ``(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) Exception for transfers within affiliated group.--
     Subparagraph (A) shall not apply to any transaction if the 
     transferor owns stock in the transferee meeting the 
     requirements of section 1504(a)(2). In the case of property 
     to which subparagraph (A) does not apply by reason of the 
     preceding sentence, the transferor's basis in the stock 
     received for such property shall not exceed its fair market 
     value immediately after the transfer.''.
       (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 Date.--The amendments made by this section 
     shall apply to transactions after February 13, 2003.

     SEC. 322. 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 which is related (within the meaning of 
     section 267(b) or 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 February 13, 2003.

     SEC. 323. 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) Paragraph (5) 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).
       (6) Subparagraph (C) of section 1202(e)(4) is amended by 
     striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
       (7) Subparagraph (C) of section 7701(a)(19) is amended by 
     adding ``and'' at the end of clause (ix), by striking ``, 
     and'' at the end of clause (x) and inserting a period, and by 
     striking clause (xi).
       (8) 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 February 
     14, 2003.
       (2) Exception for existing fasits.--The amendments made by 
     this section 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 of such interests.

     SEC. 324. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON 
                   CONVERTIBLE DEBT.

       (a) In General.--Paragraph (2) of section 163(l) is amended 
     by striking ``or a related party'' and inserting ``or equity 
     held by the issuer (or any related party) in any other 
     person''.
       (b) Exception for Certain Instruments Issued By Dealers In 
     Securities.--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) 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.''.
       (c) 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''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to debt instruments issued after February 13, 
     2003.

     SEC. 325. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER 
                   SECTION 269.

       (a) In General.--Subsection (a) of section 269 (relating to 
     acquisitions made to evade or avoid income tax) is amended to 
     read as follows:
       ``(a) In General.--If--
       ``(1)(A) any person acquires stock in a corporation, or
       ``(B) any corporation acquires, directly or indirectly, 
     property of another corporation and the basis of such 
     property, in the hands of the acquiring corporation, is 
     determined by reference to the basis in the hands of the 
     transferor corporation, and
       ``(2) the principal purpose for which such acquisition was 
     made is evasion or avoidance of Federal income tax by 
     securing the benefit of a deduction, credit, or other 
     allowance,

     then the Secretary may disallow such deduction, credit, or 
     other allowance.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to stock and property acquired after February 13, 
     2003.

     SEC. 326. MODIFICATIONS OF CERTAIN RULES RELATING TO 
                   CONTROLLED FOREIGN CORPORATIONS.

       (a) Limitation on Exception From PFIC Rules for United 
     States Shareholders of Controlled Foreign Corporations.--
     Paragraph (2) of section 1297(e) (relating to passive 
     investment company) is amended by adding at the end the 
     following flush sentence:

     ``Such term shall not include any period if there is only a 
     remote likelihood of an inclusion in gross income under 
     section 951(a)(1)(A)(i) of subpart F income of such 
     corporation for such period.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years on controlled foreign 
     corporation beginning after February 13, 2003, and to taxable 
     years of United States shareholder in which or with which 
     such taxable years of controlled foreign corporations end.

     SEC. 327. CONTROLLED ENTITIES INELIGIBLE FOR REIT STATUS.

       (a) In General.--Subsection (a) of section 856 (relating to 
     definition of real estate investment trust) is amended by 
     striking ``and'' at the end of paragraph (6), by 
     redesignating paragraph (7) as paragraph (8), and by 
     inserting after paragraph (6) the following new paragraph:
       ``(7) which is not a controlled entity (as defined in 
     subsection (l)); and''.
       (b) Controlled Entity.--Section 856 is amended by adding at 
     the end the following new subsection:
       ``(l) Controlled Entity.--
       ``(1) In general.--For purposes of subsection (a)(7), an 
     entity is a controlled entity if, at any time during the 
     taxable year, one person (other than a qualified entity)--
       ``(A) in the case of a corporation, owns stock--
       ``(i) possessing at least 50 percent of the total voting 
     power of the stock of such corporation, or
       ``(ii) having a value equal to at least 50 percent of the 
     total value of the stock of such corporation, or
       ``(B) in the case of a trust, owns beneficial interests in 
     the trust which would meet the requirements of subparagraph 
     (A) if such interests were stock.
       ``(2) Qualified entity.--For purposes of paragraph (1), the 
     term `qualified entity' means--
       ``(A) any real estate investment trust, and
       ``(B) any partnership in which one real estate investment 
     trust owns at least 50 percent of the capital and profits 
     interests in the partnership.
       ``(3) Attribution rules.--For purposes of this paragraphs 
     (1) and (2)--
       ``(A) In general.--Rules similar to the rules of 
     subsections (d)(5) and (h)(3) shall apply; except that 
     section 318(a)(3)(C) shall not be applied under such rules to 
     treat stock owned by

[[Page 12396]]

     a qualified entity as being owned by a person which is not a 
     qualified entity.
       ``(B) Stapled entities.--A group of entities which are 
     stapled entities (as defined in section 269B(c)(2)) shall be 
     treated as one person.
       ``(4) Exception for certain new reits.--
       ``(A) In general.--The term `controlled entity' shall not 
     include an incubator REIT.
       ``(B) Incubator reit.--A corporation shall be treated as an 
     incubator REIT for any taxable year during the eligibility 
     period if it meets all the following requirements for such 
     year:
       ``(i) The corporation elects to be treated as an incubator 
     REIT.
       ``(ii) The corporation has only voting common stock 
     outstanding.
       ``(iii) Not more than 50 percent of the corporation's real 
     estate assets consist of mortgages.
       ``(iv) From not later than the beginning of the last half 
     of the second taxable year, at least 10 percent of the 
     corporation's capital is provided by lenders or equity 
     investors who are unrelated to the corporation's largest 
     shareholder.
       ``(v) The corporation annually increases the value of its 
     real estate assets by at least 10 percent.
       ``(vi) The directors of the corporation adopt a resolution 
     setting forth an intent to engage in a going public 
     transaction.

     No election may be made with respect to any REIT if an 
     election under this subsection was in effect for any 
     predecessor of such REIT.
       ``(C) Eligibility period.--
       ``(i) In general.--The eligibility period (for which an 
     incubator REIT election can be made) begins with the REIT's 
     second taxable year and ends at the close of the REIT's third 
     taxable year, except that the REIT may, subject to clauses 
     (ii), (iii), and (iv), elect to extend such period for an 
     additional 2 taxable years.
       ``(ii) Going public transaction.--A REIT may not elect to 
     extend the eligibility period under clause (i) unless it 
     enters into an agreement with the Secretary that if it does 
     not engage in a going public transaction by the end of the 
     extended eligibility period, it shall pay Federal income 
     taxes for the 2 years of the extended eligibility period as 
     if it had not made an incubator REIT election and had ceased 
     to qualify as a REIT for those 2 taxable years.
       ``(iii) Returns, interest, and notice.--

       ``(I) Returns.--In the event the corporation ceases to be 
     treated as a REIT by operation of clause (ii), the 
     corporation shall file any appropriate amended returns 
     reflecting the change in status within 3 months of the close 
     of the extended eligibility period.
       ``(II) Interest.--Interest shall be payable on any tax 
     imposed by reason of clause (ii) for any taxable year but, 
     unless there was a finding under subparagraph (D), no 
     substantial underpayment penalties shall be imposed.
       ``(III) Notice.--The corporation shall, at the same time it 
     files its returns under subclause (I), notify its 
     shareholders and any other persons whose tax position is, or 
     may reasonably be expected to be, affected by the change in 
     status so they also may file any appropriate amended returns 
     to conform their tax treatment consistent with the 
     corporation's loss of REIT status.
       ``(IV) Regulations.--The Secretary shall provide 
     appropriate regulations setting forth transferee liability 
     and other provisions to ensure collection of tax and the 
     proper administration of this provision.

       ``(iv) Clauses (ii) and (iii) shall not apply if the 
     corporation allows its incubator REIT status to lapse at the 
     end of the initial 2-year eligibility period without engaging 
     in a going public transaction if the corporation is not a 
     controlled entity as of the beginning of its fourth taxable 
     year. In such a case, the corporation's directors may still 
     be liable for the penalties described in subparagraph (D) 
     during the eligibility period.
       ``(D) Special penalties.--If the Secretary determines that 
     an incubator REIT election was filed for a principal purpose 
     other than as part of a reasonable plan to undertake a going 
     public transaction, an excise tax of $20,000 shall be imposed 
     on each of the corporation's directors for each taxable year 
     for which an election was in effect.
       ``(E) Going public transaction.--For purposes of this 
     paragraph, a going public transaction means--
       ``(i) a public offering of shares of the stock of the 
     incubator REIT;
       ``(ii) a transaction, or series of transactions, that 
     results in the stock of the incubator REIT being regularly 
     traded on an established securities market and that results 
     in at least 50 percent of such stock being held by 
     shareholders who are unrelated to persons who held such stock 
     before it began to be so regularly traded; or
       ``(iii) any transaction resulting in ownership of the REIT 
     by 200 or more persons (excluding the largest single 
     shareholder) who in the aggregate own at least 50 percent of 
     the stock of the REIT.

     For the purposes of this subparagraph, the rules of paragraph 
     (3) shall apply in determining the ownership of stock.
       ``(F) Definitions.--The term `established securities 
     market' shall have the meaning set forth in the regulations 
     under section 897.''.
       (c) Conforming Amendment.--Paragraph (2) of section 856(h) 
     is amended by striking ``and (6)'' each place it appears and 
     inserting ``, (6), and (7)''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years ending after May 8, 2003.
       (2) Exception for existing controlled entities.--The 
     amendments made by this section shall not apply to any entity 
     which is a controlled entity (as defined in section 856(l) of 
     the Internal Revenue Code of 1986, as added by this section) 
     as of May 8, 2003, which is a real estate investment trust 
     for the taxable year which includes such date, and which has 
     significant business assets or activities as of such date. 
     For purposes of the preceding sentence, an entity shall be 
     treated as such a controlled entity on May 8, 2003, if it 
     becomes such an entity after such date in a transaction--
       (A) made pursuant to a written agreement which was binding 
     on such date and at all times thereafter, or
       (B) described on or before such date in a filing with the 
     Securities and Exchange Commission required solely by reason 
     of the transaction.

           Subtitle C--Other Corporate Governance Provisions

                       PART I--GENERAL PROVISIONS

     SEC. 331. AFFIRMATION OF CONSOLIDATED RETURN REGULATION 
                   AUTHORITY.

       (a) In General.--Section 1502 (relating to consolidated 
     return regulations) is amended by adding at the end the 
     following new sentence: ``In prescribing such regulations, 
     the Secretary may prescribe rules applicable to corporations 
     filing consolidated returns under section 1501 that are 
     different from other provisions of this title that would 
     apply if such corporations filed separate returns.''.
       (b) Result Not Overturned.--Notwithstanding 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 type 
     of factual situation in 255 F.3d 1357 (Fed. Cir. 2001).
       (c) Effective Date.--The provisions of this section shall 
     apply to taxable years beginning before, on, or after the 
     date of the enactment of this Act.

     SEC. 332. SIGNING OF CORPORATE TAX RETURNS BY CHIEF EXECUTIVE 
                   OFFICER.

       (a) In General.--Section 6062 (relating to signing of 
     corporation returns) is amended by striking the first 
     sentence and inserting the following new sentence: ``The 
     return of a corporation with respect to income shall be 
     signed by the chief executive officer of such corporation (or 
     other such officer of the corporation as the Secretary may 
     designate if the corporation does not have a chief executive 
     officer). The preceding sentence shall not apply to any 
     return of a regulated investment company (within the meaning 
     of section 851).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to returns filed after the date of the enactment 
     of this Act.

     SEC. 333. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, 
                   AND OTHER AMOUNTS.

       (a) In General.--Subsection (f) of section 162 (relating to 
     trade or business expenses) is amended to read as follows:
       ``(f) Fines, Penalties, and Other Amounts.--
       ``(1) In general.--Except as provided in paragraph (2), no 
     deduction otherwise allowable shall be allowed under this 
     chapter for any amount paid or incurred (whether by suit, 
     agreement, or otherwise) to, or at the direction of, a 
     government or entity described in paragraph (3) in relation 
     to the violation of any law or the investigation or inquiry 
     into the potential violation of any law.
       ``(2) Exception for amounts constituting restitution.--
     Paragraph (1) shall not apply to any amount which the 
     taxpayer establishes constitutes restitution for damage or 
     harm caused by the violation of any law or the potential 
     violation of any law. This paragraph shall not apply to any 
     amount paid or incurred as reimbursement to the government or 
     entity for the costs of any investigation or litigation.
       ``(3) Certain nongovernmental regulatory entities.--An 
     entity is described in this paragraph if it is--
       ``(A) a nongovernmental entity which exercises self-
     regulatory powers (including imposing sanctions) in 
     connection with a qualified board or exchange (as defined in 
     section 1256(g)(7)), or
       ``(B) to the extent provided in regulations, a 
     nongovernmental entity which exercises self-regulatory powers 
     (including imposing sanctions) as part of performing an 
     essential governmental function.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid or incurred after April 27, 2003, 
     except that such amendment shall not apply to amounts paid or 
     incurred under any binding order or agreement entered into on 
     or before April 27, 2003. Such exception shall not apply to 
     an order or agreement requiring court approval unless the 
     approval was obtained on or before April 27, 2003.

     SEC. 334. DISALLOWANCE OF DEDUCTION FOR PUNITIVE DAMAGES.

       (a) Disallowance of Deduction.--
       (1) In general.--Section 162(g) (relating to treble damage 
     payments under the antitrust laws) is amended by adding at 
     the end the following new paragraph:
       ``(2) Punitive damages.--No deduction shall be allowed 
     under this chapter for any amount paid or incurred for 
     punitive damages in connection with any judgment in, or 
     settlement of, any action. This paragraph shall not apply to 
     punitive damages described in section 104(c).''.
       (2) Conforming amendments.--
       (A) Section 162(g) is amended--
       (i) by striking ``If'' and inserting:
       ``(1) Treble damages.--If'', and
       (ii) by redesignating paragraphs (1) and (2) as 
     subparagraphs (A) and (B), respectively.
       (B) The heading for section 162(g) is amended by inserting 
     ``or Punitive Damages'' after ``Laws''.

[[Page 12397]]

       (b) Inclusion in Income of Punitive Damages Paid by Insurer 
     or Otherwise.--
       (1) In general.--Part II of subchapter B of chapter 1 
     (relating to items specifically included in gross income) is 
     amended by adding at the end the following new section:

     ``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR 
                   OTHERWISE.

       ``Gross income shall include any amount paid to or on 
     behalf of a taxpayer as insurance or otherwise by reason of 
     the taxpayer's liability (or agreement) to pay punitive 
     damages.''.
       (2) Reporting requirements.--Section 6041 (relating to 
     information at source) is amended by adding at the end the 
     following new subsection:
       ``(f) Section To Apply to Punitive Damages Compensation.--
     This section shall apply to payments by a person to or on 
     behalf of another person as insurance or otherwise by reason 
     of the other person's liability (or agreement) to pay 
     punitive damages.''.
       (3) Conforming amendment.--The table of sections for part 
     II of subchapter B of chapter 1 is amended by adding at the 
     end the following new item:

``Sec. 91. Punitive damages compensated by insurance or otherwise.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to damages paid or incurred on or after the date 
     of the enactment of this Act.

     SEC. 335. INCREASE IN CRIMINAL MONETARY PENALTY LIMITATION 
                   FOR THE UNDERPAYMENT OR OVERPAYMENT OF TAX DUE 
                   TO FRAUD.

       (a) In General.--Section 7206 (relating to fraud and false 
     statements) is amended--
       (1) by striking ``Any person who--'' and inserting ``(a) In 
     General.--Any person who--'', and
       (2) by adding at the end the following new subsection:
       ``(b) Increase in Monetary Limitation for Underpayment or 
     Overpayment of Tax Due To Fraud.--If any portion of any 
     underpayment (as defined in section 6664(a)) or overpayment 
     (as defined in section 6401(a)) of tax required to be shown 
     on a return is attributable to fraudulent action described in 
     subsection (a), the applicable dollar amount under subsection 
     (a) shall in no event be less than an amount equal to such 
     portion. A rule similar to the rule under section 6663(b) 
     shall apply for purposes of determining the portion so 
     attributable.''.
       (b) Increase in Penalties.--
       (1) Attempt to evade or defeat tax.--Section 7201 is 
     amended--
       (A) by striking ``$100,000'' and inserting ``$250,000'',
       (B) by striking ``$500,000'' and inserting ``$1,000,000'', 
     and
       (C) by striking ``5 years'' and inserting ``10 years''.
       (2) Willful failure to file return, supply information, or 
     pay tax.--Section 7203 is amended--
       (A) in the first sentence--
       (i) by striking ``misdemeanor'' and inserting ``felony'', 
     and
       (ii) by striking ``1 year'' and inserting ``10 years'', and
       (B) by striking the third sentence.
       (3) Fraud and false statements.--Section 7206(a) (as 
     redesignated by subsection (a)) is amended--
       (A) by striking ``$100,000'' and inserting ``$250,000'',
       (B) by striking ``$500,000'' and inserting ``$1,000,000'', 
     and
       (C) by striking ``3 years'' and inserting ``5 years''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to underpayments and overpayments attributable to 
     actions occurring after the date of the enactment of this 
     Act.

                 PART II--EXECUTIVE COMPENSATION REFORM

     SEC. 336. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION 
                   FUNDED WITH ASSETS LOCATED OUTSIDE THE UNITED 
                   STATES.

       (a) In General.--Section 83(c) (relating to special rules 
     for property transferred in connection with performance of 
     services) is amended by adding at the end the following new 
     paragraph:
       ``(4) Foreign assets funding nonqualified deferred 
     compensation arrangements.--
       ``(A) In general.--In determining whether there is a 
     transfer of property for purposes of subsection (a), if 
     assets are--
       ``(i) designated or otherwise available for the payment of 
     nonqualified deferred compensation, and
       ``(ii) located outside the United States,
     such assets shall not be treated as subject to the claims of 
     creditors.
       ``(B) Compensation for services performed in foreign 
     jurisdiction.--Subparagraph (A) 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.
       ``(C) Regulations.--The Secretary shall prescribe such 
     regulations as are necessary to carry out the provisions of 
     this paragraph, including regulations to exempt arrangements 
     from the application of this paragraph if--
       ``(i) the arrangement will not result in an improper 
     deferral of United States tax, and
       ``(ii) the assets involved in the arrangement will be 
     readily accessible in any insolvency or bankruptcy 
     proceeding.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to amounts deferred in taxable years beginning 
     after December 31, 2003.

     SEC. 337. INCLUSION IN GROSS INCOME OF FUNDED DEFERRED 
                   COMPENSATION OF CORPORATE INSIDERS.

       (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 FUNDED DEFERRED 
                   COMPENSATION OF CORPORATE INSIDERS.

       ``(a) In General.--If an employer maintains a funded 
     deferred compensation plan--
       ``(1) compensation of any disqualified individual which is 
     deferred under such funded deferred compensation plan shall 
     be included in the gross income of the disqualified 
     individual or beneficiary for the 1st taxable year in which 
     there is no substantial risk of forfeiture of the rights to 
     such compensation, and
       ``(2) the tax treatment of any amount made available under 
     the plan to a disqualified individual or beneficiary shall be 
     determined under section 72 (relating to annuities, etc.).
       ``(b) Funded Deferred Compensation Plan.--For purposes of 
     this section--
       ``(1) In general.--The term `funded deferred compensation 
     plan' means any plan providing for the deferral of 
     compensation unless--
       ``(A) the employee's rights to the compensation deferred 
     under the plan are no greater than the rights of a general 
     creditor of the employer, and
       ``(B) all amounts set aside (directly or indirectly) for 
     purposes of paying the deferred compensation, and all income 
     attributable to such amounts, remain (until made available to 
     the participant or other beneficiary) solely the property of 
     the employer (without being restricted to the provision of 
     benefits under the plan),
       ``(C) the amounts referred to in subparagraph (B) are 
     available to satisfy the claims of the employer's general 
     creditors at all times (not merely after bankruptcy or 
     insolvency), and
       ``(D) the investment options which a participant may elect 
     under the plan are the same as the investment options which a 
     participant may elect under the qualified employer plan of 
     the employer which has the fewest investment options.

     Such term shall not include a qualified employer plan.
       ``(2) Special rules.--
       ``(A) Employee's rights.--A plan shall be treated as 
     failing to meet the requirements of paragraph (1)(A) unless--
       ``(i) the compensation deferred under the plan is payable 
     only upon separation from service, death, disability (within 
     the meaning of section 1614(a)(3) of the Social Security Act 
     (42 U.S.C. 1382c(a)(3))), or at a specified time (or pursuant 
     to a fixed schedule), and
       ``(ii) the plan does not permit the acceleration of the 
     time such deferred compensation is payable by reason of any 
     event.

     If the employer and employee agree to a modification of the 
     plan that accelerates the time for payment of any deferred 
     compensation, then all compensation previously deferred under 
     the plan shall be includible in gross income for the taxable 
     year during which such modification takes effect and the 
     taxpayer shall pay interest at the underpayment rate on the 
     underpayments that would have occurred had the deferred 
     compensation been includible in gross income on the earliest 
     date that there is no substantial risk of forfeiture of the 
     rights to such compensation.
       ``(B) Creditor's rights.--A plan shall be treated as 
     failing to meet the requirements of paragraph (1)(B) with 
     respect to amounts set aside in a trust unless--
       ``(i) the employee has no beneficial interest in the trust,
       ``(ii) assets in the trust are available to satisfy claims 
     of general creditors at all times (not merely after 
     bankruptcy or insolvency), and
       ``(iii) there is no factor that would make it more 
     difficult for general creditors to reach the assets in the 
     trust than it would be if the trust assets were held directly 
     by the employer in the United States.

     Except as provided in regulations prescribed by the 
     Secretary, such a factor shall include the location of the 
     trust outside the United States unless substantially all of 
     the services to which the nonqualified deferred compensation 
     relates are performed outside the United States. Such 
     regulations may exempt any such trust if the trust will not 
     result in an improper deferral of United States tax, and the 
     assets involved in the trust will be readily accessible in 
     any insolvency or bankruptcy proceeding.
       ``(c) Disqualified Individual.--For purposes of this 
     section, the term `disqualified individual' means, with 
     respect to a corporation, any individual--
       ``(1) who is subject to the requirements of section 16(a) 
     of the Securities Exchange Act of 1934 with respect to such 
     corporation, or
       ``(2) who would be subject to such requirements if such 
     corporation were an issuer of equity securities referred to 
     in such section.
       ``(d) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) 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), 
     and
       ``(B) any other plan of an organization exempt from tax 
     under subtitle A.
       ``(2) Plan includes arrangements, etc.--The term `plan' 
     includes any agreement or arrangement.
       ``(3) Substantial risk of forfeiture.--The rights of a 
     person to compensation are subject to a substantial risk of 
     forfeiture if such person's

[[Page 12398]]

     rights to such compensation are conditioned upon the future 
     performance of substantial services by any individual.
       ``(4) Treatment of earnings.--References to deferred 
     compensation shall be treated as including references to 
     income attributable to such compensation or such income.''.
       (b) Clerical Amendment.--The table of sections for such 
     subpart A is amended by adding at the end the following new 
     item:

``Sec. 409A. Inclusion in gross income of funded deferred compensation 
              of corporate insiders.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts deferred in taxable years beginning 
     after December 31, 2003.

     SEC. 338. PROHIBITION ON DEFERRAL OF GAIN FROM THE EXERCISE 
                   OF STOCK OPTIONS AND RESTRICTED STOCK GAINS 
                   THROUGH DEFERRED COMPENSATION ARRANGEMENTS.

       (a) In General.--Section 83 (relating to property 
     transferred in connection with performance of services) is 
     amending by adding at the end the following new subsection:
       ``(i) Prohibition on Additional Deferral Through Deferred 
     Compensation Arrangements.--If a taxpayer elects to exchange 
     an option to purchase employer securities--
       ``(1) to which subsection (a) applies, or
       ``(2) which is described in subsection (e)(3),
     or any other compensation based on employer securities, for a 
     right to receive future payments, then, notwithstanding any 
     other provision of this title, there shall be included in 
     gross income for the taxable year of the exchange an amount 
     equal to the present value of such right (or such other 
     amount as the Secretary may by regulations specify). For 
     purposes of this subsection, the term `employer securities' 
     has the meaning given such term by section 409(l).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to any exchange after December 31, 2003.

     SEC. 339. 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, 2003.

                  Subtitle D--International Provisions

             PART I--PROVISIONS TO DISCOURAGE EXPATRIATION

     SEC. 340. REVISION OF TAX RULES ON EXPATRIATION.

       (a) In General.--Subpart A of part II of subchapter N of 
     chapter 1 is amended by inserting after section 877 the 
     following new section:

     ``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

       ``(a) General Rules.--For purposes of this subtitle--
       ``(1) Mark to market.--Except as provided in subsections 
     (d) and (f), all property of a covered expatriate to whom 
     this section applies shall be treated as sold on the day 
     before the expatriation date for its fair market value.
       ``(2) Recognition of gain or loss.--In the case of any sale 
     under paragraph (1)--
       ``(A) notwithstanding any other provision of this title, 
     any gain arising from such sale shall be taken into account 
     for the taxable year of the sale, and
       ``(B) any loss arising from such sale shall be taken into 
     account for the taxable year of the sale to the extent 
     otherwise provided by this title, except that section 1091 
     shall not apply to any such loss.

     Proper adjustment shall be made in the amount of any gain or 
     loss subsequently realized for gain or loss taken into 
     account under the preceding sentence.
       ``(3) Exclusion for certain gain.--
       ``(A) In general.--The amount which, but for this 
     paragraph, would be includible in the gross income of any 
     individual by reason of this section shall be reduced (but 
     not below zero) by $600,000. For purposes of this paragraph, 
     allocable expatriation gain taken into account under 
     subsection (f)(2) shall be treated in the same manner as an 
     amount required to be includible in gross income.
       ``(B) Cost-of-living adjustment.--
       ``(i) In general.--In the case of an expatriation date 
     occurring in any calendar year after 2003, the $600,000 
     amount under subparagraph (A) shall be increased by an amount 
     equal to--

       ``(I) such dollar amount, multiplied by
       ``(II) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year, determined by 
     substituting `calendar year 2002' for `calendar year 1992' in 
     subparagraph (B) thereof.

       ``(ii) Rounding rules.--If any amount after adjustment 
     under clause (i) is not a multiple of $1,000, such amount 
     shall be rounded to the next lower multiple of $1,000.
       ``(4) Election to continue to be taxed as united states 
     citizen.--
       ``(A) In general.--If a covered expatriate elects the 
     application of this paragraph--
       ``(i) this section (other than this paragraph and 
     subsection (i)) shall not apply to the expatriate, but
       ``(ii) in the case of property to which this section would 
     apply but for such election, the expatriate shall be subject 
     to tax under this title in the same manner as if the 
     individual were a United States citizen.
       ``(B) Requirements.--Subparagraph (A) shall not apply to an 
     individual unless the individual--
       ``(i) provides security for payment of tax in such form and 
     manner, and in such amount, as the Secretary may require,
       ``(ii) consents to the waiver of any right of the 
     individual under any treaty of the United States which would 
     preclude assessment or collection of any tax which may be 
     imposed by reason of this paragraph, and
       ``(iii) complies with such other requirements as the 
     Secretary may prescribe.
       ``(C) Election.--An election under subparagraph (A) shall 
     apply to all property to which this section would apply but 
     for the election and, once made, shall be irrevocable. Such 
     election shall also apply to property the basis of which is 
     determined in whole or in part by reference to the property 
     with respect to which the election was made.
       ``(b) Election To Defer Tax.--
       ``(1) In general.--If the taxpayer elects the application 
     of this subsection with respect to any property treated as 
     sold by reason of subsection (a), the payment of the 
     additional tax attributable to such property shall be 
     postponed until the due date of the return for the taxable 
     year in which such property is disposed of (or, in the case 
     of property disposed of in a transaction in which gain is not 
     recognized in whole or in part, until such other date as the 
     Secretary may prescribe).
       ``(2) Determination of tax with respect to property.--For 
     purposes of paragraph (1), the additional tax attributable to 
     any property is an amount which bears the same ratio to the 
     additional tax imposed by this chapter for the taxable year 
     solely by reason of subsection (a) as the gain taken into 
     account under subsection (a) with respect to such property 
     bears to the total gain taken into account under subsection 
     (a) with respect to all property to which subsection (a) 
     applies.
       ``(3) Termination of postponement.--No tax may be postponed 
     under this subsection later than the due date for the return 
     of tax imposed by this chapter for the taxable year which 
     includes the date of death of the expatriate (or, if earlier, 
     the time that the security provided with respect to the 
     property fails to meet the requirements of paragraph (4), 
     unless the taxpayer corrects such failure within the time 
     specified by the Secretary).
       ``(4) Security.--
       ``(A) In general.--No election may be made under paragraph 
     (1) with respect to any property unless adequate security is 
     provided to the Secretary with respect to such property.
       ``(B) Adequate security.--For purposes of subparagraph (A), 
     security with respect to any property shall be treated as 
     adequate security if--
       ``(i) it is a bond in an amount equal to the deferred tax 
     amount under paragraph (2) for the property, or
       ``(ii) the taxpayer otherwise establishes to the 
     satisfaction of the Secretary that the security is adequate.
       ``(5) Waiver of certain rights.--No election may be made 
     under paragraph (1) unless the taxpayer consents to the 
     waiver of any right under any treaty of the United States 
     which would preclude assessment or collection of any tax 
     imposed by reason of this section.
       ``(6) Elections.--An election under paragraph (1) shall 
     only apply to property described in the election and, once 
     made, is irrevocable. An election may be made under paragraph 
     (1) with respect to an interest in a trust with respect to 
     which gain is required to be recognized under subsection 
     (f)(1).
       ``(7) Interest.--For purposes of section 6601--
       ``(A) the last date for the payment of tax shall be 
     determined without regard to the election under this 
     subsection, and
       ``(B) section 6621(a)(2) shall be applied by substituting 
     `5 percentage points' for `3 percentage points' in 
     subparagraph (B) thereof.
       ``(c) Covered Expatriate.--For purposes of this section--
       ``(1) In general.--Except as provided in paragraph (2), the 
     term `covered expatriate' means an expatriate.
       ``(2) Exceptions.--An individual shall not be treated as a 
     covered expatriate if--
       ``(A) the individual--
       ``(i) became at birth a citizen of the United States and a 
     citizen of another country and, as

[[Page 12399]]

     of the expatriation date, continues to be a citizen of, and 
     is taxed as a resident of, such other country, and
       ``(ii) has not been a resident of the United States (as 
     defined in section 7701(b)(1)(A)(ii)) during the 5 taxable 
     years ending with the taxable year during which the 
     expatriation date occurs, or
       ``(B)(i) the individual's relinquishment of United States 
     citizenship occurs before such individual attains age 18\1/
     2\, and
       ``(ii) the individual has been a resident of the United 
     States (as so defined) for not more than 5 taxable years 
     before the date of relinquishment.
       ``(d) Exempt Property; Special Rules for Pension Plans.--
       ``(1) Exempt property.--This section shall not apply to the 
     following:
       ``(A) United states real property interests.--Any United 
     States real property interest (as defined in section 
     897(c)(1)), other than stock of a United States real property 
     holding corporation which does not, on the day before the 
     expatriation date, meet the requirements of section 
     897(c)(2).
       ``(B) Specified property.--Any property or interest in 
     property not described in subparagraph (A) which the 
     Secretary specifies in regulations.
       ``(2) Special rules for certain retirement plans.--
       ``(A) In general.--If a covered expatriate holds on the day 
     before the expatriation date any interest in a retirement 
     plan to which this paragraph applies--
       ``(i) such interest shall not be treated as sold for 
     purposes of subsection (a)(1), but
       ``(ii) an amount equal to the present value of the 
     expatriate's nonforfeitable accrued benefit shall be treated 
     as having been received by such individual on such date as a 
     distribution under the plan.
       ``(B) Treatment of subsequent distributions.--In the case 
     of any distribution on or after the expatriation date to or 
     on behalf of the covered expatriate from a plan from which 
     the expatriate was treated as receiving a distribution under 
     subparagraph (A), the amount otherwise includible in gross 
     income by reason of the subsequent distribution shall be 
     reduced by the excess of the amount includible in gross 
     income under subparagraph (A) over any portion of such amount 
     to which this subparagraph previously applied.
       ``(C) Treatment of subsequent distributions by plan.--For 
     purposes of this title, a retirement plan to which this 
     paragraph applies, and any person acting on the plan's 
     behalf, shall treat any subsequent distribution described in 
     subparagraph (B) in the same manner as such distribution 
     would be treated without regard to this paragraph.
       ``(D) Applicable plans.--This paragraph shall apply to--
       ``(i) any qualified retirement plan (as defined in section 
     4974(c)),
       ``(ii) an eligible deferred compensation plan (as defined 
     in section 457(b)) of an eligible employer described in 
     section 457(e)(1)(A), and
       ``(iii) to the extent provided in regulations, any foreign 
     pension plan or similar retirement arrangements or programs.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Expatriate.--The term `expatriate' means--
       ``(A) any United States citizen who relinquishes 
     citizenship, and
       ``(B) any long-term resident of the United States who--
       ``(i) ceases to be a lawful permanent resident of the 
     United States (within the meaning of section 7701(b)(6)), or
       ``(ii) commences to be treated as a resident of a foreign 
     country under the provisions of a tax treaty between the 
     United States and the foreign country and who does not waive 
     the benefits of such treaty applicable to residents of the 
     foreign country.
       ``(2) Expatriation date.--The term `expatriation date' 
     means--
       ``(A) the date an individual relinquishes United States 
     citizenship, or
       ``(B) in the case of a long-term resident of the United 
     States, the date of the event described in clause (i) or (ii) 
     of paragraph (1)(B).
       ``(3) Relinquishment of citizenship.--A citizen shall be 
     treated as relinquishing United States citizenship on the 
     earliest of--
       ``(A) the date the individual renounces such individual's 
     United States nationality before a diplomatic or consular 
     officer of the United States pursuant to paragraph (5) of 
     section 349(a) of the Immigration and Nationality Act (8 
     U.S.C. 1481(a)(5)),
       ``(B) the date the individual furnishes to the United 
     States Department of State a signed statement of voluntary 
     relinquishment of United States nationality confirming the 
     performance of an act of expatriation specified in paragraph 
     (1), (2), (3), or (4) of section 349(a) of the Immigration 
     and Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
       ``(C) the date the United States Department of State issues 
     to the individual a certificate of loss of nationality, or
       ``(D) the date a court of the United States cancels a 
     naturalized citizen's certificate of naturalization.

     Subparagraph (A) or (B) shall not apply to any individual 
     unless the renunciation or voluntary relinquishment is 
     subsequently approved by the issuance to the individual of a 
     certificate of loss of nationality by the United States 
     Department of State.
       ``(4) Long-term resident.--The term `long-term resident' 
     has the meaning given to such term by section 877(e)(2).
       ``(f) Special Rules Applicable to Beneficiaries' Interests 
     in Trust.--
       ``(1) In general.--Except as provided in paragraph (2), if 
     an individual is determined under paragraph (3) to hold an 
     interest in a trust on the day before the expatriation date--
       ``(A) the individual shall not be treated as having sold 
     such interest,
       ``(B) such interest shall be treated as a separate share in 
     the trust, and
       ``(C)(i) such separate share shall be treated as a separate 
     trust consisting of the assets allocable to such share,
       ``(ii) the separate trust shall be treated as having sold 
     its assets on the day before the expatriation date for their 
     fair market value and as having distributed all of its assets 
     to the individual as of such time, and
       ``(iii) the individual shall be treated as having 
     recontributed the assets to the separate trust.

     Subsection (a)(2) shall apply to any income, gain, or loss of 
     the individual arising from a distribution described in 
     subparagraph (C)(ii). In determining the amount of such 
     distribution, proper adjustments shall be made for 
     liabilities of the trust allocable to an individual's share 
     in the trust.
       ``(2) Special rules for interests in qualified trusts.--
       ``(A) In general.--If the trust interest described in 
     paragraph (1) is an interest in a qualified trust--
       ``(i) paragraph (1) and subsection (a) shall not apply, and
       ``(ii) in addition to any other tax imposed by this title, 
     there is hereby imposed on each distribution with respect to 
     such interest a tax in the amount determined under 
     subparagraph (B).
       ``(B) Amount of tax.--The amount of tax under subparagraph 
     (A)(ii) shall be equal to the lesser of--
       ``(i) the highest rate of tax imposed by section 1(e) for 
     the taxable year which includes the day before the 
     expatriation date, multiplied by the amount of the 
     distribution, or
       ``(ii) the balance in the deferred tax account immediately 
     before the distribution determined without regard to any 
     increases under subparagraph (C)(ii) after the 30th day 
     preceding the distribution.
       ``(C) Deferred tax account.--For purposes of subparagraph 
     (B)(ii)--
       ``(i) Opening balance.--The opening balance in a deferred 
     tax account with respect to any trust interest is an amount 
     equal to the tax which would have been imposed on the 
     allocable expatriation gain with respect to the trust 
     interest if such gain had been included in gross income under 
     subsection (a).
       ``(ii) Increase for interest.--The balance in the deferred 
     tax account shall be increased by the amount of interest 
     determined (on the balance in the account at the time the 
     interest accrues), for periods after the 90th day after the 
     expatriation date, by using the rates and method applicable 
     under section 6621 for underpayments of tax for such periods, 
     except that section 6621(a)(2) shall be applied by 
     substituting `5 percentage points' for `3 percentage points' 
     in subparagraph (B) thereof.
       ``(iii) Decrease for taxes previously paid.--The balance in 
     the tax deferred account shall be reduced--

       ``(I) by the amount of taxes imposed by subparagraph (A) on 
     any distribution to the person holding the trust interest, 
     and
       ``(II) in the case of a person holding a nonvested 
     interest, to the extent provided in regulations, by the 
     amount of taxes imposed by subparagraph (A) on distributions 
     from the trust with respect to nonvested interests not held 
     by such person.

       ``(D) Allocable expatriation gain.--For purposes of this 
     paragraph, the allocable expatriation gain with respect to 
     any beneficiary's interest in a trust is the amount of gain 
     which would be allocable to such beneficiary's vested and 
     nonvested interests in the trust if the beneficiary held 
     directly all assets allocable to such interests.
       ``(E) Tax deducted and withheld.--
       ``(i) In general.--The tax imposed by subparagraph (A)(ii) 
     shall be deducted and withheld by the trustees from the 
     distribution to which it relates.
       ``(ii) Exception where failure to waive treaty rights.--If 
     an amount may not be deducted and withheld under clause (i) 
     by reason of the distributee failing to waive any treaty 
     right with respect to such distribution--

       ``(I) the tax imposed by subparagraph (A)(ii) shall be 
     imposed on the trust and each trustee shall be personally 
     liable for the amount of such tax, and
       ``(II) any other beneficiary of the trust shall be entitled 
     to recover from the distributee the amount of such tax 
     imposed on the other beneficiary.

       ``(F) Disposition.--If a trust ceases to be a qualified 
     trust at any time, a covered expatriate disposes of an 
     interest in a qualified trust, or a covered expatriate 
     holding an interest in a qualified trust dies, then, in lieu 
     of the tax imposed by subparagraph (A)(ii), there is hereby 
     imposed a tax equal to the lesser of--
       ``(i) the tax determined under paragraph (1) as if the day 
     before the expatriation date were the date of such cessation, 
     disposition, or death, whichever is applicable, or
       ``(ii) the balance in the tax deferred account immediately 
     before such date.

     Such tax shall be imposed on the trust and each trustee shall 
     be personally liable for the amount

[[Page 12400]]

     of such tax and any other beneficiary of the trust shall be 
     entitled to recover from the covered expatriate or the estate 
     the amount of such tax imposed on the other beneficiary.
       ``(G) Definitions and special rules.--For purposes of this 
     paragraph--
       ``(i) Qualified trust.--The term `qualified trust' means a 
     trust which is described in section 7701(a)(30)(E).
       ``(ii) Vested interest.--The term `vested interest' means 
     any interest which, as of the day before the expatriation 
     date, is vested in the beneficiary.
       ``(iii) Nonvested interest.--The term `nonvested interest' 
     means, with respect to any beneficiary, any interest in a 
     trust which is not a vested interest. Such interest shall be 
     determined by assuming the maximum exercise of discretion in 
     favor of the beneficiary and the occurrence of all 
     contingencies in favor of the beneficiary.
       ``(iv) Adjustments.--The Secretary may provide for such 
     adjustments to the bases of assets in a trust or a deferred 
     tax account, and the timing of such adjustments, in order to 
     ensure that gain is taxed only once.
       ``(v) Coordination with retirement plan rules.--This 
     subsection shall not apply to an interest in a trust which is 
     part of a retirement plan to which subsection (d)(2) applies.
       ``(3) Determination of beneficiaries' interest in trust.--
       ``(A) Determinations under paragraph (1).--For purposes of 
     paragraph (1), a beneficiary's interest in a trust shall be 
     based upon all relevant facts and circumstances, including 
     the terms of the trust instrument and any letter of wishes or 
     similar document, historical patterns of trust distributions, 
     and the existence of and functions performed by a trust 
     protector or any similar adviser.
       ``(B) Other determinations.--For purposes of this section--
       ``(i) Constructive ownership.--If a beneficiary of a trust 
     is a corporation, partnership, trust, or estate, the 
     shareholders, partners, or beneficiaries shall be deemed to 
     be the trust beneficiaries for purposes of this section.
       ``(ii) Taxpayer return position.--A taxpayer shall clearly 
     indicate on its income tax return--

       ``(I) the methodology used to determine that taxpayer's 
     trust interest under this section, and
       ``(II) if the taxpayer knows (or has reason to know) that 
     any other beneficiary of such trust is using a different 
     methodology to determine such beneficiary's trust interest 
     under this section.

       ``(g) Termination of Deferrals, etc.--In the case of any 
     covered expatriate, notwithstanding any other provision of 
     this title--
       ``(1) any period during which recognition of income or gain 
     is deferred shall terminate on the day before the 
     expatriation date, and
       ``(2) any extension of time for payment of tax shall cease 
     to apply on the day before the expatriation date and the 
     unpaid portion of such tax shall be due and payable at the 
     time and in the manner prescribed by the Secretary.
       ``(h) Imposition of Tentative Tax.--
       ``(1) In general.--If an individual is required to include 
     any amount in gross income under subsection (a) for any 
     taxable year, there is hereby imposed, immediately before the 
     expatriation date, a tax in an amount equal to the amount of 
     tax which would be imposed if the taxable year were a short 
     taxable year ending on the expatriation date.
       ``(2) Due date.--The due date for any tax imposed by 
     paragraph (1) shall be the 90th day after the expatriation 
     date.
       ``(3) Treatment of tax.--Any tax paid under paragraph (1) 
     shall be treated as a payment of the tax imposed by this 
     chapter for the taxable year to which subsection (a) applies.
       ``(4) Deferral of tax.--The provisions of subsection (b) 
     shall apply to the tax imposed by this subsection to the 
     extent attributable to gain includible in gross income by 
     reason of this section.
       ``(i) Special Liens for Deferred Tax Amounts.--
       ``(1) Imposition of lien.--
       ``(A) In general.--If a covered expatriate makes an 
     election under subsection (a)(4) or (b) which results in the 
     deferral of any tax imposed by reason of subsection (a), the 
     deferred amount (including any interest, additional amount, 
     addition to tax, assessable penalty, and costs attributable 
     to the deferred amount) shall be a lien in favor of the 
     United States on all property of the expatriate located in 
     the United States (without regard to whether this section 
     applies to the property).
       ``(B) Deferred amount.--For purposes of this subsection, 
     the deferred amount is the amount of the increase in the 
     covered expatriate's income tax which, but for the election 
     under subsection (a)(4) or (b), would have occurred by reason 
     of this section for the taxable year including the 
     expatriation date.
       ``(2) Period of lien.--The lien imposed by this subsection 
     shall arise on the expatriation date and continue until--
       ``(A) the liability for tax by reason of this section is 
     satisfied or has become unenforceable by reason of lapse of 
     time, or
       ``(B) it is established to the satisfaction of the 
     Secretary that no further tax liability may arise by reason 
     of this section.
       ``(3) Certain rules apply.--The rules set forth in 
     paragraphs (1), (3), and (4) of section 6324A(d) shall apply 
     with respect to the lien imposed by this subsection as if it 
     were a lien imposed by section 6324A.
       ``(j) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Inclusion in Income of Gifts and Bequests Received by 
     United States Citizens and Residents From Expatriates.--
     Section 102 (relating to gifts, etc. not included in gross 
     income) is amended by adding at the end the following new 
     subsection:
       ``(d) Gifts and Inheritances From Covered Expatriates.--
       ``(1) In general.--Subsection (a) shall not exclude from 
     gross income the value of any property acquired by gift, 
     bequest, devise, or inheritance from a covered expatriate 
     after the expatriation date. For purposes of this subsection, 
     any term used in this subsection which is also used in 
     section 877A shall have the same meaning as when used in 
     section 877A.
       ``(2) Exceptions for transfers otherwise subject to estate 
     or gift tax.--Paragraph (1) shall not apply to any property 
     if either--
       ``(A) the gift, bequest, devise, or inheritance is--
       ``(i) shown on a timely filed return of tax imposed by 
     chapter 12 as a taxable gift by the covered expatriate, or
       ``(ii) included in the gross estate of the covered 
     expatriate for purposes of chapter 11 and shown on a timely 
     filed return of tax imposed by chapter 11 of the estate of 
     the covered expatriate, or
       ``(B) no such return was timely filed but no such return 
     would have been required to be filed even if the covered 
     expatriate were a citizen or long-term resident of the United 
     States.''.
       (c) Definition of Termination of United States 
     Citizenship.--Section 7701(a) is amended by adding at the end 
     the following new paragraph:
       ``(48) Termination of united states citizenship.--
       ``(A) In general.--An individual shall not cease to be 
     treated as a United States citizen before the date on which 
     the individual's citizenship is treated as relinquished under 
     section 877A(e)(3).
       ``(B) Dual citizens.--Under regulations prescribed by the 
     Secretary, subparagraph (A) shall not apply to an individual 
     who became at birth a citizen of the United States and a 
     citizen of another country.''.
       (d) Ineligibility for Visa or Admission to United States.--
       (1) In general.--Section 212(a)(10)(E) of the Immigration 
     and Nationality Act (8 U.S.C. 1182(a)(10)(E)) is amended to 
     read as follows:
       ``(E) Former citizens not in compliance with expatriation 
     revenue provisions.--Any alien who is a former citizen of the 
     United States who relinquishes United States citizenship 
     (within the meaning of section 877A(e)(3) of the Internal 
     Revenue Code of 1986) and who is not in compliance with 
     section 877A of such Code (relating to expatriation).''.
       (2) Availability of information.--
       (A) In general.--Section 6103(l) (relating to disclosure of 
     returns and return information for purposes other than tax 
     administration) is amended by adding at the end the following 
     new paragraph:
       ``(19) Disclosure to deny visa or admission to certain 
     expatriates.--Upon written request of the Attorney General or 
     the Attorney General's delegate, the Secretary shall disclose 
     whether an individual is in compliance with section 877A (and 
     if not in compliance, any items of noncompliance) to officers 
     and employees of the Federal agency responsible for 
     administering section 212(a)(10)(E) of the Immigration and 
     Nationality Act solely for the purpose of, and to the extent 
     necessary in, administering such section 212(a)(10)(E).''.
       (B) Safeguards.--
       (i) Technical amendments.--Paragraph (4) of section 6103(p) 
     of the Internal Revenue Code of 1986, as amended by section 
     202(b)(2)(B) of the Trade Act of 2002 (Public Law 107-210; 
     116 Stat. 961), is amended by striking ``or (17)'' after 
     ``any other person described in subsection (l)(16)'' each 
     place it appears and inserting ``or (18)''.
       (ii) Conforming amendments.--Section 6103(p)(4) (relating 
     to safeguards), as amended by clause (i), is amended by 
     striking ``or (18)'' after ``any other person described in 
     subsection (l)(16)'' each place it appears and inserting 
     ``(18), or (19)''.
       (3) Effective dates.--
       (A) In general.--Except as provided in subparagraph (B), 
     the amendments made by this subsection shall apply to 
     individuals who relinquish United States citizenship on or 
     after the date of the enactment of this Act.
       (B) Technical amendments.--The amendments made by paragraph 
     (2)(B)(i) shall take effect as if included in the amendments 
     made by section 202(b)(2)(B) of the Trade Act of 2002 (Public 
     Law 107-210; 116 Stat. 961).
       (e) Conforming Amendments.--
       (1) Section 877 is amended by adding at the end the 
     following new subsection:
       ``(g) Application.--This section shall not apply to an 
     expatriate (as defined in section 877A(e)) whose expatriation 
     date (as so defined) occurs on or after February 5, 2003.''.
       (2) Section 2107 is amended by adding at the end the 
     following new subsection:
       ``(f) Application.--This section shall not apply to any 
     expatriate subject to section 877A.''.
       (3) Section 2501(a)(3) is amended by adding at the end the 
     following new subparagraph:
       ``(F) Application.--This paragraph shall not apply to any 
     expatriate subject to section 877A.''.
       (4)(A) Paragraph (1) of section 6039G(d) is amended by 
     inserting ``or 877A'' after ``section 877''.

[[Page 12401]]

       (B) The second sentence of section 6039G(e) is amended by 
     inserting ``or who relinquishes United States citizenship 
     (within the meaning of section 877A(e)(3))'' after 
     ``877(a))''.
       (C) Section 6039G(f) is amended by inserting ``or 
     877A(e)(2)(B)'' after ``877(e)(1)''.
       (f) Clerical Amendment.--The table of sections for subpart 
     A of part II of subchapter N of chapter 1 is amended by 
     inserting after the item relating to section 877 the 
     following new item:

``Sec. 877A. Tax responsibilities of expatriation.''.

       (g) Effective Date.--
       (1) In general.--Except as provided in this subsection, the 
     amendments made by this section shall apply to expatriates 
     (within the meaning of section 877A(e) of the Internal 
     Revenue Code of 1986, as added by this section) whose 
     expatriation date (as so defined) occurs on or after February 
     5, 2003.
       (2) Gifts and bequests.--Section 102(d) of the Internal 
     Revenue Code of 1986 (as added by subsection (b)) shall apply 
     to gifts and bequests received on or after February 5, 2003, 
     from an individual or the estate of an individual whose 
     expatriation date (as so defined) occurs after such date.
       (3) Due date for tentative tax.--The due date under section 
     877A(h)(2) of the Internal Revenue Code of 1986, as added by 
     this section, shall in no event occur before the 90th day 
     after the date of the enactment of this Act.

     SEC. 341. TAX TREATMENT OF INVERTED CORPORATE ENTITIES.

       (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 INVERTED CORPORATE ENTITIES.

       ``(a) Inverted Corporations Treated as Domestic 
     Corporations.--
       ``(1) In general.--If a foreign incorporated entity is 
     treated as an inverted domestic corporation, then, 
     notwithstanding section 7701(a)(4), such entity shall be 
     treated for purposes of this title as a domestic corporation.
       ``(2) Inverted domestic corporation.--For purposes of this 
     section, a foreign incorporated entity shall be treated as an 
     inverted domestic corporation if, pursuant to a plan (or a 
     series of related transactions)--
       ``(A) the entity completes after March 20, 2002, 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,
       ``(B) after the acquisition at least 80 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
       ``(C) the expanded affiliated group which after the 
     acquisition 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.

     Except as provided in regulations, an acquisition of 
     properties of a domestic corporation shall not be treated as 
     described in subparagraph (A) if none of the corporation's 
     stock was readily tradeable on an established securities 
     market at any time during the 4-year period ending on the 
     date of the acquisition.
       ``(b) Preservation of Domestic Tax Base In Certain 
     Inversion Transactions To Which Subsection (a) Does Not 
     Apply.--
       ``(1) In general.--If a foreign incorporated entity would 
     be treated as an inverted domestic corporation with respect 
     to an acquired entity if either--
       ``(A) subsection (a)(2)(A) were applied by substituting 
     `after December 31, 1996, and on or before March 20, 2002' 
     for `after March 20, 2002' and subsection (a)(2)(B) were 
     applied by substituting `more than 50 percent' for `at least 
     80 percent', or
       ``(B) subsection (a)(2)(B) were applied by substituting 
     `more than 50 percent' for `at least 80 percent',
     then the rules of subsection (c) shall apply to any inversion 
     gain of the acquired entity during the applicable period and 
     the rules of subsection (d) shall apply to any related party 
     transaction of the acquired entity during the applicable 
     period. This subsection shall not apply for any taxable year 
     if subsection (a) applies to such foreign incorporated entity 
     for such taxable year.
       ``(2) Acquired entity.--For purposes of this section--
       ``(A) In general.--The term `acquired entity' means the 
     domestic corporation or partnership substantially all of the 
     properties of which are directly or indirectly acquired in an 
     acquisition described in subsection (a)(2)(A) to which this 
     subsection applies.
       ``(B) Aggregation rules.--Any domestic person bearing a 
     relationship described in section 267(b) or 707(b) to an 
     acquired entity shall be treated as an acquired entity with 
     respect to the acquisition described in subparagraph (A).
       ``(3) Applicable period.--For purposes of this section--
       ``(A) In general.--The term `applicable period' means the 
     period--
       ``(i) beginning on the first date properties are acquired 
     as part of the acquisition described in subsection (a)(2)(A) 
     to which this subsection applies, and
       ``(ii) ending on the date which is 10 years after the last 
     date properties are acquired as part of such acquisition.
       ``(B) Special rule for inversions occurring before march 
     21, 2002.--In the case of any acquired entity to which 
     paragraph (1)(A) applies, the applicable period shall be the 
     10-year period beginning on January 1, 2003.
       ``(c) Tax on Inversion Gains May Not Be Offset.--If 
     subsection (b) applies--
       ``(1) In general.--The taxable income of an acquired entity 
     (or any expanded affiliated group which includes such 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) Credits not allowed against tax on inversion gain.--
     Credits shall be allowed against the tax imposed by this 
     chapter on an acquired entity for any taxable year described 
     in paragraph (1) 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.
       ``(3) Special rules for partnerships.--In the case of an 
     acquired entity which is a partnership--
       ``(A) the limitations of this subsection 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) income or gain required to be recognized for the 
     taxable year by the partner under section 367(a), 741, or 
     1001, or under any other provision of chapter 1, by reason of 
     the transfer during the applicable period of any partnership 
     interest of the partner in such partnership to the foreign 
     incorporated entity, and
       ``(C) the highest rate of tax specified in the rate 
     schedule applicable to the partner under chapter 1 shall be 
     substituted for the rate of tax under paragraph (2)(B).
       ``(4) Inversion gain.--For purposes of this section, the 
     term `inversion gain' means any income or gain required to be 
     recognized under section 304, 311(b), 367, 1001, or 1248, or 
     under any other provision of chapter 1, by reason of the 
     transfer during the applicable period of stock or other 
     properties by an acquired entity--
       ``(A) as part of the acquisition described in subsection 
     (a)(2)(A) to which subsection (b) applies, or
       ``(B) after such acquisition to a foreign related person.

     The Secretary may provide that income or gain from the sale 
     of inventories or other transactions in the ordinary course 
     of a trade or business shall not be treated as inversion gain 
     under subparagraph (B) to the extent the Secretary determines 
     such treatment would not be inconsistent with the purposes of 
     this section.
       ``(5) 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 this section.
       ``(6) 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)(A) 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)(A) is completed.
       ``(d) Special Rules Applicable to Related Party 
     Transactions.--
       ``(1) Annual application for agreements on return 
     positions.--
       ``(A) In general.--Each acquired entity to which subsection 
     (b) applies shall file with the Secretary an application for 
     an approval agreement under subparagraph (D) for each taxable 
     year which includes a portion of the applicable period. Such 
     application shall be filed at such time and manner, and shall 
     contain such information, as the Secretary may prescribe.
       ``(B) Secretarial action.--Within 90 days of receipt of an 
     application under subparagraph (A) (or such longer period as 
     the Secretary and entity may agree upon), the Secretary 
     shall--
       ``(i) enter into an agreement described in subparagraph (D) 
     for the taxable year covered by the application,
       ``(ii) notify the entity that the Secretary has determined 
     that the application was filed in good faith and 
     substantially complies with the requirements for the 
     application under subparagraph (A), or
       ``(iii) notify the entity that the Secretary has determined 
     that the application was not filed in good faith or does not 
     substantially comply with such requirements.


[[Page 12402]]


     If the Secretary fails to act within the time prescribed 
     under the preceding sentence, the entity shall be treated for 
     purposes of this paragraph as having received notice under 
     clause (ii).
       ``(C) Failures to comply.--If an acquired entity fails to 
     file an application under subparagraph (A), or the acquired 
     entity receives a notice under subparagraph (B)(iii), for any 
     taxable year, then for such taxable year--
       ``(i) there shall not be allowed any deduction, or addition 
     to basis or cost of goods sold, for amounts paid or incurred, 
     or losses incurred, by reason of a transaction between the 
     acquired entity and a foreign related person,
       ``(ii) any transfer or license of intangible property (as 
     defined in section 936(h)(3)(B)) between the acquired entity 
     and a foreign related person shall be disregarded, and
       ``(iii) any cost-sharing arrangement between the acquired 
     entity and a foreign related person shall be disregarded.
       ``(D) Approval agreement.--For purposes of subparagraph 
     (A), the term `approval agreement' means a prefiling, advance 
     pricing, or other agreement specified by the Secretary which 
     contains such provisions as the Secretary determines 
     necessary to ensure that the requirements of sections 163(j), 
     267(a)(3), 482, and 845, and any other provision of this 
     title applicable to transactions between related persons and 
     specified by the Secretary, are met.
       ``(E) Tax court review.--
       ``(i) In general.--The Tax Court shall have jurisdiction 
     over any action brought by an acquired entity receiving a 
     notice under subparagraph (B)(iii) to determine whether the 
     issuance of the notice was an abuse of discretion, but only 
     if the action is brought within 30 days after the date of the 
     mailing (determined under rules similar to section 6213) of 
     the notice.
       ``(ii) Court action.--The Tax Court shall issue its 
     decision within 30 days after the filing of the action under 
     clause (i) and may order the Secretary to issue a notice 
     described in subparagraph (B)(ii).
       ``(iii) Review.--An order of the Tax Court under this 
     subparagraph shall be reviewable in the same manner as any 
     other decision of the Tax Court.
       ``(2) Modifications of limitation on interest deduction.--
     In the case of an acquired entity to which subsection (b) 
     applies, section 163(j) shall be applied--
       ``(A) without regard to paragraph (2)(A)(ii) thereof, and
       ``(B) by substituting `25 percent' for `50 percent' each 
     place it appears in paragraph (2)(B) thereof.
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Rules for application of subsection (a)(2).--In 
     applying subsection (a)(2) for purposes of subsections (a) 
     and (b), the following rules shall apply:
       ``(A) Certain stock disregarded.--There shall not be taken 
     into account in determining ownership for purposes of 
     subsection (a)(2)(B)--
       ``(i) stock held by members of the expanded affiliated 
     group which includes the foreign incorporated entity, or
       ``(ii) stock of such entity which is sold in a public 
     offering or private placement related to the acquisition 
     described in subsection (a)(2)(A).
       ``(B) Plan deemed in certain cases.--If a foreign 
     incorporated entity 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) are met with respect to such domestic 
     corporation or partnership, such actions shall be treated as 
     pursuant to a plan.
       ``(C) 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.
       ``(D) Special rule for related partnerships.--For purposes 
     of applying subsection (a)(2) to the acquisition 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.
       ``(E) Treatment of certain rights.--The Secretary shall 
     prescribe such regulations as may be necessary--
       ``(i) to treat warrants, options, contracts to acquire 
     stock, convertible debt instruments, and other similar 
     interests as stock, and
       ``(ii) to treat stock as not stock.
       ``(2) 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.
       ``(3) Foreign incorporated entity.--The term `foreign 
     incorporated entity' means any entity which is, or but for 
     subsection (a)(1) would be, treated as a foreign corporation 
     for purposes of this title.
       ``(4) Foreign related person.--The term `foreign related 
     person' means, with respect to any acquired entity, a foreign 
     person which--
       ``(A) bears a relationship to such entity described in 
     section 267(b) or 707(b), or
       ``(B) is under the same common control (within the meaning 
     of section 482) as such entity.
       ``(5) Subsequent acquisitions by unrelated domestic 
     corporations.--
       ``(A) In general.--Subject to such conditions, limitations, 
     and exceptions as the Secretary may prescribe, if, after an 
     acquisition described in subsection (a)(2)(A) to which 
     subsection (b) applies, a domestic corporation stock of which 
     is traded on an established securities market acquires 
     directly or indirectly any properties of one or more acquired 
     entities in a transaction with respect to which the 
     requirements of subparagraph (B) are met, this section shall 
     cease to apply to any such acquired entity with respect to 
     which such requirements are met.
       ``(B) Requirements.--The requirements of the subparagraph 
     are met with respect to a transaction involving any 
     acquisition described in subparagraph (A) if--
       ``(i) before such transaction the domestic corporation did 
     not have a relationship described in section 267(b) or 
     707(b), and was not under common control (within the meaning 
     of section 482), with the acquired entity, or any member of 
     an expanded affiliated group including such entity, and
       ``(ii) after such transaction, such acquired entity--

       ``(I) is a member of the same expanded affiliated group 
     which includes the domestic corporation or has such a 
     relationship or is under such common control with any member 
     of such group, and
       ``(II) is not a member of, and does not have such a 
     relationship and is not under such common control with any 
     member of, the expanded affiliated group which before such 
     acquisition included such entity.

       ``(f) 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) Treatment of Agreements.--
       (1) Confidentiality.--
       (A) Treatment as return information.--Section 6103(b)(2) 
     (relating to return information) is amended by striking 
     ``and'' at the end of subparagraph (C), by inserting ``and'' 
     at the end of subparagraph (D), and by inserting after 
     subparagraph (D) the following new subparagraph:
       ``(E) any approval agreement under section 7874(d)(1) to 
     which any preceding subparagraph does not apply and any 
     background information related to the agreement or any 
     application for the agreement,''.
       (B) Exception from public inspection as written 
     determination.--Section 6110(b)(1)(B) is amended by striking 
     ``or (D)'' and inserting ``, (D), or (E)''.
       (2) Reporting.--The Secretary of the Treasury shall include 
     with any report on advance pricing agreements required to be 
     submitted after the date of the enactment of this Act under 
     section 521(b) of the Ticket to Work and Work Incentives 
     Improvement Act of 1999 (Public Law 106-170) a report 
     regarding approval agreements under section 7874(d)(1) of the 
     Internal Revenue Code of 1986. Such report shall include 
     information similar to the information required with respect 
     to advance pricing agreements and shall be treated for 
     confidentiality purposes in the same manner as the reports on 
     advance pricing agreements are treated under section 
     521(b)(3) of such Act.
       (c) Information Reporting.--The Secretary of the Treasury 
     shall exercise the Secretary's authority under the Internal 
     Revenue Code of 1986 to require entities involved in 
     transactions to which section 7874 of such Code (as added by 
     subsection (a)) applies to report to the Secretary, 
     shareholders, partners, and such other persons as the 
     Secretary may prescribe such information as is necessary to 
     ensure the proper tax treatment of such transactions.
       (d) 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 inverted corporate entities.''.

       (e) Transition Rule for Certain Regulated Investment 
     Companies and Unit Investment Trusts.--Notwithstanding 
     section 7874 of the Internal Revenue Code of 1986 (as added 
     by subsection (a)), a regulated investment company, or other 
     pooled fund or trust specified by the Secretary of the 
     Treasury, may elect to recognize gain by reason of section 
     367(a) of such Code with respect to a transaction under which 
     a foreign incorporated entity is treated as an inverted 
     domestic corporation under section 7874(a) of such Code by 
     reason of an acquisition completed after March 20, 2002, and 
     before January 1, 2004.

     SEC. 342. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN 
                   INVERTED CORPORATIONS.

       (a) In General.--Subtitle D is amended by adding at the end 
     the following new chapter:

 ``CHAPTER 48--STOCK COMPENSATION OF INSIDERS IN INVERTED CORPORATIONS

``Sec. 5000A. Stock compensation of insiders in inverted corporations 
              entities.

     ``SEC. 5000A. STOCK COMPENSATION OF INSIDERS IN INVERTED 
                   CORPORATIONS.

       ``(a) Imposition of Tax.--In the case of an individual who 
     is a disqualified individual with respect to any inverted 
     corporation, there is hereby imposed on such person a tax 
     equal to 20 percent of the value (determined under subsection 
     (b)) of the specified stock compensation

[[Page 12403]]

     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 
     inversion 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 any 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--
       ``(A) in the case of specified stock compensation held on 
     the inversion date, on such date,
       ``(B) in the case of such compensation which is canceled 
     during the 6 months before the inversion date, on the day 
     before such cancellation, and
       ``(C) in the case of such compensation which is granted 
     after the inversion 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 inverted 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)(A) (determined by substituting `July 
     10, 2002' for `March 20, 2002') 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 inversion 
     date or during the 6-month period before such date and to the 
     stock acquired in such exercise, and
       ``(2) any specified stock compensation which is sold, 
     exchanged, or distributed during such period in a transaction 
     in which 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 inversion 
     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) Inverted corporation; inversion date.--
       ``(A) Inverted corporation.--The term `inverted 
     corporation' means any corporation to which subsection (a) or 
     (b) of section 7874 applies determined--
       ``(i) by substituting `July 10, 2002' for `March 20, 2002' 
     in section 7874(a)(2)(A), and
       ``(ii) without regard to subsection (b)(1)(A).
     Such term includes any predecessor or successor of such a 
     corporation.
       ``(B) Inversion date.--The term `inversion date' means, 
     with respect to a corporation, the date on which the 
     corporation first becomes an inverted corporation.
       ``(3) Specified stock compensation.--
       ``(A) In general.--The term `specified stock compensation' 
     means payment (or right to payment) granted by the inverted 
     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 
     inverted 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 ``48,'' after ``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 5000A 
     directly or indirectly by the inverted 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 5000A) on which tax is 
     imposed by section 5000A''.
       (2) The table of chapters for subtitle D is amended by 
     adding at the end the following new item:

``Chapter 48. Stock compensation of insiders in inverted 
              corporations.''.

       (d) Effective Date.--The amendments made by this section 
     shall take effect on July 11, 2002; except that periods 
     before such date shall not be taken into account in applying 
     the periods in subsections (a) and (e)(1) of section 5000A of 
     the Internal Revenue Code of 1986, as added by this section.

     SEC. 343. 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 April 11, 2002.

                       PART II--OTHER PROVISIONS

     SEC. 344. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST 
                   ON UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE 
                   FINANCIAL ARRANGEMENT.

       (a) General Rule.--If--
       (1) a taxpayer eligible to participate in--
       (A) the Department of the Treasury's Offshore Voluntary 
     Compliance Initiative, or
       (B) the Department of the Treasury's voluntary disclosure 
     initiative which applies to the taxpayer by reason of the 
     taxpayer's underreporting of United States income tax 
     liability through financial arrangements which rely on the 
     use of offshore arrangements which were the subject of the 
     initiative described in subparagraph (A), and
       (2) any interest or applicable penalty is imposed with 
     respect to any arrangement to which any initiative described 
     in paragraph (1) applied or to any underpayment of Federal 
     income tax attributable to items arising in connection with 
     any arrangement described in paragraph (1),

     then, notwithstanding any other provision of law, the amount 
     of such interest or penalty shall be equal to twice that 
     determined without regard to this section.
       (b) Definitions and Rules.--For purposes of this section--
       (1) Applicable penalty.--The term ``applicable penalty'' 
     means any penalty, addition to tax, or fine imposed under 
     chapter 68 of the Internal Revenue Code of 1986.
       (2) Voluntary offshore compliance initiative.--The term 
     ``Voluntary Offshore Compliance Initiative'' means the 
     program established by the Department of the Treasury in 
     January of 2003 under which any taxpayer was eligible to 
     voluntarily disclose previously undisclosed income on assets 
     placed in offshore accounts and accessed through credit card 
     and other financial arrangements.
       (3) Participation.--A taxpayer shall be treated as having 
     participated in the Voluntary Offshore Compliance Initiative 
     if the taxpayer submitted the request in a timely manner and 
     all information requested by the Secretary of the Treasury or 
     his delegate within a reasonable period of time following the 
     request.
       (c) Effective Date.--The provisions of this section shall 
     apply to interest penalties, additions to tax, and fines with 
     respect to any taxable year if as of May 8, 2003, the 
     assessment of any tax, penalty, or interest with respect to 
     such taxable year is not prevented by the operation of any 
     law or rule of law.

     SEC. 345. 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.''.

[[Page 12404]]

       (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. 346. DETERMINATION OF BASIS OF AMOUNTS PAID FROM FOREIGN 
                   PENSION PLANS.

       (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) 
     by inserting subsection (v) the following new subsection:
       ``(w) Determination of Basis of Foreign Pension Plans.--
     Notwithstanding any other provision of this section, for 
     purposes of determining the portion of any distribution from 
     a foreign pension plan which is includible in gross income of 
     the distributee, the investment in the contract with respect 
     to the plan shall not include employer or employee 
     contributions to the plan (or any earnings on such 
     contributions) unless such contributions or earnings were 
     subject to taxation by the United States or any foreign 
     government.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to distributions on or after the date of the 
     enactment of this Act.

     SEC. 347. 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:
       ``(D) Application to dispositions of stock in controlled 
     foreign corporations.--In the case of any disposition by a 
     taxpayer of any share of stock in a controlled foreign 
     corporation (as defined in section 957), this paragraph shall 
     apply to such 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.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to dispositions after the date of the enactment 
     of this Act.

     SEC. 348. 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.--
     Notwithstanding subparagraph (A) (and any regulations 
     thereunder), in the case of any debt instrument having 
     original issue discount which is held by a related foreign 
     person which is a foreign personal holding company (as 
     defined in section 552), 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 only to the extent such 
     original issue discount is included during such taxable year 
     in the gross income of a United States person who owns 
     (within the meaning of section 958(a)) stock in such 
     corporation. For purposes of this subparagraph, the 
     determination as to the proper allocation of the original 
     issue discount to shareholders shall be made in such manner 
     as the Secretary may prescribe.''.
       (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.--
     Notwithstanding any regulations issued under subparagraph 
     (A), in the case of any amount payable to a foreign personal 
     holding company (as defined in section 552), 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 only to the extent such 
     amount is included during such taxable year in the gross 
     income of a United States person who owns (within the meaning 
     of section 958(a)) stock in such corporation. For purposes of 
     this subparagraph, the determination as to the proper 
     allocation of such amount to shareholders shall be made in 
     such manner as the Secretary may prescribe.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments accrued on or after May 8, 2003.

     SEC. 349. SALE OF GASOLINE AND DIESEL FUEL AT DUTY-FREE SALES 
                   ENTERPRISES.

       (a) Prohibition.--Section 555(b) of the Tariff Act of 1930 
     (19 U.S.C. 1555(b)) is amended--
       (1) by redesignating paragraphs (6) through (8) as 
     paragraphs (7) through (9), respectively; and
       (2) by inserting after paragraph (5) the following:
       ``(6) Any gasoline or diesel fuel sold at a duty-free sales 
     enterprise shall be considered to be entered for consumption 
     into the customs territory of the United States.''.
       (b) Construction.--The amendments made by this section 
     shall not be construed to create any inference with respect 
     to the interpretation of any provision of law as such 
     provision was in effect on the day before the date of 
     enactment of this Act.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of enactment of this Act.

     SEC. 350. REPEAL OF EARNED INCOME EXCLUSION OF CITIZENS OR 
                   RESIDENTS LIVING ABROAD.

       (a) Repeal.--Section 911 (relating to citizens or residents 
     living abroad) is amended by adding at the end the following 
     new subsection:
       ``(g) Termination.--This section shall not apply to any 
     taxable year beginning after December 31, 2003.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

                  Subtitle E--Other Revenue Provisions

     SEC. 351. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.

       (a) In General.--Chapter 77 (relating to miscellaneous 
     provisions) is amended by adding at the end the following new 
     section:

     ``SEC. 7528. INTERNAL REVENUE SERVICE USER FEES.

       ``(a) General Rule.--The Secretary shall establish a 
     program requiring the payment of user fees for--
       ``(1) requests to the Internal Revenue Service for ruling 
     letters, opinion letters, and determination letters, and
       ``(2) other similar requests.
       ``(b) Program Criteria.--
       ``(1) In general.--The fees charged under the program 
     required by subsection (a)--
       ``(A) shall vary according to categories (or subcategories) 
     established by the Secretary,
       ``(B) shall be determined after taking into account the 
     average time for (and difficulty of) complying with requests 
     in each category (and subcategory), and
       ``(C) shall be payable in advance.
       ``(2) Exemptions, etc.--
       ``(A) In general.--The Secretary shall provide for such 
     exemptions (and reduced fees) under such program as the 
     Secretary determines to be appropriate.
       ``(B) Exemption for certain requests regarding pension 
     plans.--The Secretary shall not require payment of user fees 
     under such program for requests for determination letters 
     with respect to the qualified status of a pension benefit 
     plan maintained solely by 1 or more eligible employers or any 
     trust which is part of the plan. The preceding sentence shall 
     not apply to any request--
       ``(i) made after the later of--

       ``(I) the fifth plan year the pension benefit plan is in 
     existence, or
       ``(II) the end of any remedial amendment period with 
     respect to the plan beginning within the first 5 plan years, 
     or

       ``(ii) made by the sponsor of any prototype or similar plan 
     which the sponsor intends to market to participating 
     employers.
       ``(C) Definitions and special rules.--For purposes of 
     subparagraph (B)--
       ``(i) Pension benefit plan.--The term `pension benefit 
     plan' means a pension, profit-sharing, stock bonus, annuity, 
     or employee stock ownership plan.
       ``(ii) Eligible employer.--The term `eligible employer' 
     means an eligible employer (as defined in section 
     408(p)(2)(C)(i)(I)) which has at least 1 employee who is not 
     a highly compensated employee (as defined in section 414(q)) 
     and is participating in the plan. The determination of 
     whether an employer is an eligible employer under 
     subparagraph (B) shall be made as of the date of the request 
     described in such subparagraph.
       ``(iii) Determination of average fees charged.--For 
     purposes of any determination of average fees charged, any 
     request to which subparagraph (B) applies shall not be taken 
     into account.
       ``(3) Average fee requirement.--The average fee charged 
     under the program required by subsection (a) shall not be 
     less than the amount determined under the following table:

                                                                Average
``Category                                                          Fee
  Employee plan ruling and opinion............................$250 ....

  Exempt organization ruling..................................$350 ....

  Employee plan determination.................................$300 ....

  Exempt organization determination...........................$275 ....

  Chief counsel ruling........................................$200.....

       ``(c) Termination.--No fee shall be imposed under this 
     section with respect to requests made after September 30, 
     2013.''.
       (b) Conforming Amendments.--
       (1) The table of sections for chapter 77 is amended by 
     adding at the end the following new item:

``Sec. 7528. Internal Revenue Service user fees.''.

       (2) Section 10511 of the Revenue Act of 1987 is repealed.
       (3) Section 620 of the Economic Growth and Tax Relief 
     Reconciliation Act of 2001 is repealed.
       (c) Limitations.--Notwithstanding any other provision of 
     law, any fees collected pursuant to section 7528 of the 
     Internal Revenue Code of 1986, as added by subsection (a), 
     shall not be expended by the Internal Revenue Service unless 
     provided by an appropriations Act.
       (d) Effective Date.--The amendments made by this section 
     shall apply to requests made after the date of the enactment 
     of this Act.

     SEC. 352. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF 
                   TAXABLE VACCINES.

       (a) In General.--Section 4132(a)(1) (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) Conforming Amendment.--Section 9510(c)(1)(A) is amended 
     by striking ``October 18, 2000'' and inserting ``May 8, 
     2003''.

[[Page 12405]]

       (c) Effective Date.--
       (1) Sales, etc.--The amendments made by this section 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. 353. 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 
     immediately after the 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 immediately after the contribution.''.
       (b) Adjustment to Basis of Partnership Property on Transfer 
     of Partnership Interest if There Is Substantial Built-In 
     Loss.--
       (1) Adjustment 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 with respect to which there is 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 transferee 
     partner's proportionate share of the adjusted basis of the 
     partnership property exceeds by more than $250,000 the basis 
     of such partner's interest in the partnership.
       ``(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) Clerical amendments.--
       (A) The section heading for section 743 is amended to read 
     as follows:

     ``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY 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. Adjustment to basis of partnership property 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) 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).--The amendments made by subsection (b) 
     shall apply to transfers after the date of the enactment of 
     this Act.
       (3) Subsection (c).--The amendments made by subsection (c) 
     shall apply to distributions after the date of the enactment 
     of this Act.

     SEC. 354. 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. 355. 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. TAXABLE MERGERS AND ACQUISITIONS.

       ``(a) In General.--The acquiring corporation in any taxable 
     acquisition shall make a return (according to the forms or 
     regulations prescribed by the Secretary) 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) Nominee 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).
       ``(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.--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 
     (xvii) as clauses (iii) through (xviii), respectively, and by 
     inserting after clause (i) the following new clause:
       ``(ii) section 6043A(a) (relating to returns relating to 
     taxable mergers and acquisitions),''.
       (2) Paragraph (2) of section 6724(d) is amended by 
     redesignating subparagraphs (F) through (AA) as subparagraphs 
     (G) through (BB), 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. 356. 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)

[[Page 12406]]

     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 30-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. 357. 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) to locate and 
     contact any taxpayer specified by the Secretary, to request 
     payment from such taxpayer of an amount of Federal tax 
     specified by the Secretary, and to obtain financial 
     information specified by the Secretary with respect to such 
     taxpayer, and
       ``(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.
       ``(c) Fees.--The Secretary may retain and use 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. 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 any 
     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(a)(4).''.
       (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) and (d)(1) 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 a qualified tax 
              collection contract.''.

       (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) Effective Date.--The amendments made to this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 358. EXTENSION OF CUSTOMS USER FEES.

       Section 13031(j)(3) of the Consolidated Omnibus Budget 
     Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended 
     by striking ``September 30, 2003'' and inserting ``September 
     30, 2013''.

     SEC. 359. CLARIFICATION OF EXEMPTION FROM TAX FOR SMALL 
                   PROPERTY AND CASUALTY INSURANCE COMPANIES.

       (a) In General.--Section 501(c)(15)(A) is amended to read 
     as follows:
       ``(A) Insurance companies or associations other than life 
     (including interinsurers and reciprocal underwriters) if--
       ``(i) the gross receipts for the taxable year do not exceed 
     $600,000, and
       ``(ii) more than 50 percent of such gross receipts consist 
     of premiums.''.
       (b) Controlled Group Rule.--Section 501(c)(15)(C) is 
     amended by inserting ``, except that in applying section 1563 
     for purposes of section 831(b)(2)(B)(ii), subparagraphs (B) 
     and (C) of section 1563(b)(2) shall be disregarded'' before 
     the period at the end.
       (c) Conforming Amendment.--Clause (i) of section 
     831(b)(2)(A) is amended by striking ``exceed $350,000 but''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 360. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT 
                   AGREEMENTS.

       (a) In General.--

[[Page 12407]]

       (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. 361. 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 1253 (relating to transfers of franchises, 
     trademarks, and trade names) is amended by striking 
     subsection (e).
       (c) Effective Date.--The amendments made by this section 
     shall apply to property acquired after the date of the 
     enactment of this Act.

     SEC. 362. 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), 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 allowable 
     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. 363. 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. 364. LIMITATION OF DEDUCTION FOR CHARITABLE 
                   CONTRIBUTIONS OF PATENTS AND SIMILAR PROPERTY.

       (a) In General.--Section 170(e)(1)(B) (relating to certain 
     contributions of ordinary income and capital gain property) 
     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, trademark, trade name, 
     trade secret, know-how, software, or similar property, or 
     applications or registrations of such property,''.
       (b) Anti-Abuse Rules.--The Secretary of the Treasury may 
     prescribe such regulations or other administrative 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.
       (c) Effective Date.--The amendments made by this section 
     shall apply to contributions made after May 7, 2003.

     SEC. 365. EXTENSION OF TRANSFERS OF EXCESS PENSION ASSETS TO 
                   RETIREE HEALTH ACCOUNTS.

       (a) Amendment of Internal Revenue Code of 1986.--Paragraph 
     (5) of section 420(b) (relating to expiration) is amended by 
     striking ``December 31, 2005'' and inserting ``December 31, 
     2013''.
       (b) 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 ``Tax Relief Extension Act of 1999'' and inserting 
     ``Jobs and Growth Tax Relief Reconciliation Act of 2003''.
       (2) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is 
     amended by striking ``Tax Relief Extension Act of 1999'' and 
     inserting ``Jobs and Growth Tax Relief Reconciliation Act of 
     2003''.
       (3) Paragraph (13) of section 408(b) of such Act (29 U.S.C. 
     1108(b)(3)) is amended--
       (A) by striking ``January 1, 2006'' and inserting ``January 
     1, 2014'', and
       (B) by striking ``Tax Relief Extension Act of 1999'' and 
     inserting ``Jobs and Growth Tax Relief Reconciliation Act of 
     2003''.

     SEC. 366. PRORATION RULES FOR LIFE INSURANCE BUSINESS OF 
                   PROPERTY AND CASUALTY INSURANCE COMPANIES.

       (a) In General.--Section 832(b)(4) (defining premiums 
     earned) is amended--
       (1) by inserting ``, except that any deduction attributable 
     to such reserves shall be reduced in the same manner as the 
     deductions provided by sections 243, 244, and 245 for a life 
     insurance company are reduced under section 805(a)(4)'' 
     before the period at the end of the first sentence following 
     subparagraph (C), and
       (2) by adding at the end the following new sentence: ``In 
     applying section 812(d) for purposes of the reduction under 
     the third preceding sentence, only gross investment income 
     attributable to the reserves described in such sentence shall 
     be taken into account.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 367. 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

[[Page 12408]]

     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 money or 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. 368. INCREASE IN AGE OF MINOR CHILDREN WHOSE UNEARNED 
                   INCOME IS TAXED AS IF PARENT'S INCOME.

       (a) In General.--Section 1(g)(2)(A) (relating to child to 
     whom subsection applies) is amended by striking ``age 14'' 
     and inserting ``age 18''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 369. 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
       ``(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. 370. 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. 371. CLASS LIVES FOR UTILITY GRADING COSTS.

       (a) Gas Utility Property.--Section 168(e)(3)(E) (defining 
     15-year property) 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) 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 Amendments.--The table contained in section 
     168(g)(3)(B) is amended--
       (1) by inserting ``or (E)(iv)'' after ``(E)(iii)'', and
       (2) by adding at the end the following new item:

  ``(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. 372. 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.--Subsection (a) and section 331 shall not 
     apply to any distribution in complete liquidation of an 
     applicable holding company to the extent of the earnings and 
     profits of such company.
       ``(2) Applicable holding company.--For purposes of this 
     subsection--
       ``(A) In general.--The term `applicable holding company' 
     means any corporation--
       ``(i) which is a member of a chain of includible 
     corporations with a common parent which is a foreign 
     corporation,
       ``(ii) the stock of which is directly owned by such common 
     parent or another foreign corporation,
       ``(iii) substantially all of the assets of which consist of 
     stock in other members of such chain of corporations, and
       ``(iv) which has not been in existence at least 5 years as 
     of the date of the liquidation.
       ``(B) Includible corporation.--The term `includible 
     corporation' has the meaning given such term under section 
     1504(b) (without regard to paragraph (3) thereof).''
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions in complete liquidation 
     occurring after the date of the enactment of this Act.

     SEC. 373. LEASE TERM TO INCLUDE CERTAIN SERVICE CONTRACTS.

       (a) In General.--Section 168(i)(3) (relating to lease term) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Special rule for service contracts.--In determining a 
     lease term, there shall be taken into account any optional 
     service contract or other similar arrangement.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to leases entered into after the date of the 
     enactment of this Act.

     SEC. 374. 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 exchange to which section 1031 
     applied.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales or exchanges after the date of the 
     enactment of this Act.

                      Subtitle F--Other Provisions

     SEC. 381. TEMPORARY STATE AND LOCAL FISCAL RELIEF.

       (a) $10,000,000,000 for a Temporary Increase of the 
     Medicaid FMAP.--
       (1) Permitting maintenance of fiscal year 2002 fmap for 
     last 2 calendar quarters of fiscal year 2003.--Subject to 
     paragraph (5), if the FMAP determined without regard to this 
     subsection for a State for fiscal year 2003 is less than the 
     FMAP as so determined for fiscal year 2002, the FMAP for the 
     State for fiscal year 2002 shall be substituted for the 
     State's FMAP for the third and fourth calendar quarters of 
     fiscal year 2003, before the application of this subsection.
       (2) Permitting maintenance of fiscal year 2003 fmap for 
     first 3 quarters of fiscal year 2004.--Subject to paragraph 
     (5), if the FMAP determined without regard to this subsection 
     for a State for fiscal year 2004 is less than the FMAP as so 
     determined for fiscal year 2003, the FMAP for the State for 
     fiscal year 2003 shall be substituted for the State's FMAP 
     for the first, second, and third calendar quarters of fiscal 
     year 2004, before the application of this subsection.
       (3) General 2.95 percentage points increase for last 2 
     calendar quarters of fiscal year

[[Page 12409]]

     2003 and first 3 calendar quarters of fiscal year 2004.--
     Subject to paragraphs (5), (6), and (7), for each State for 
     the third and fourth calendar quarters of fiscal year 2003 
     and for the first, second, and third calendar quarters of 
     fiscal year 2004, the FMAP (taking into account the 
     application of paragraphs (1) and (2)) shall be increased by 
     2.95 percentage points.
       (4) Increase in cap on medicaid payments to territories.--
     Subject to paragraphs (6) and (7), with respect to the third 
     and fourth calendar quarters of fiscal year 2003 and the 
     first, second, and third calendar quarters of fiscal year 
     2004, the amounts otherwise determined for Puerto Rico, the 
     Virgin Islands, Guam, the Northern Mariana Islands, and 
     American Samoa under subsections (f) and (g) of section 1108 
     of the Social Security Act (42 U.S.C. 1308) shall each be 
     increased by an amount equal to 5.90 percent of such amounts.
       (5) Scope of application.--The increases in the FMAP for a 
     State under this subsection shall apply only for purposes of 
     title XIX of the Social Security Act and shall not apply with 
     respect to--
       (A) disproportionate share hospital payments described in 
     section 1923 of such Act (42 U.S.C. 1396r-4);
       (B) payments under title IV or XXI of such Act (42 U.S.C. 
     601 et seq. and 1397aa et seq.); or
       (C) any payments under XIX of such Act that are based on 
     the enhanced FMAP described in section 2105(b) of such Act 
     (42 U.S.C. 1397ee(b)).
       (6) State eligibility.--
       (A) In general.--Subject to subparagraph (B), a State is 
     eligible for an increase in its FMAP under paragraph (3) or 
     an increase in a cap amount under paragraph (4) only if the 
     eligibility under its State plan under title XIX of the 
     Social Security Act (including any waiver under such title or 
     under section 1115 of such Act (42 U.S.C. 1315)) is no more 
     restrictive than the eligibility under such plan (or waiver) 
     as in effect on September 2, 2003.
       (B) State reinstatement of eligibility permitted.--A State 
     that has restricted eligibility under its State plan under 
     title XIX of the Social Security Act (including any waiver 
     under such title or under section 1115 of such Act (42 U.S.C. 
     1315)) after September 2, 2003, is eligible for an increase 
     in its FMAP under paragraph (3) or an increase in a cap 
     amount under paragraph (4) in the first calendar quarter (and 
     subsequent calendar quarters) in which the State has 
     reinstated eligibility that is no more restrictive than the 
     eligibility under such plan (or waiver) as in effect on 
     September 2, 2003.
       (C) Rule of construction.--Nothing in subparagraph (A) or 
     (B) shall be construed as affecting a State's flexibility 
     with respect to benefits offered under the State medicaid 
     program under title XIX of the Social Security Act (42 U.S.C. 
     1396 et seq.) (including any waiver under such title or under 
     section 1115 of such Act (42 U.S.C. 1315)).
       (7) Requirement for certain states.--In the case of a State 
     that requires political subdivisions within the State to 
     contribute toward the non-Federal share of expenditures under 
     the State medicaid plan required under section 1902(a)(2) of 
     the Social Security Act (42 U.S.C. 1396a(a)(2)), the State 
     shall not require that such political subdivisions pay a 
     greater percentage of the non-Federal share of such 
     expenditures for the third and fourth calendar quarters of 
     fiscal year 2003 and the first, second and third calendar 
     quarters of fiscal year 2004, than the percentage that was 
     required by the State under such plan on April 1, 2003, prior 
     to application of this subsection.
       (8) Definitions.--In this subsection:
       (A) FMAP.--The term ``FMAP'' means the Federal medical 
     assistance percentage, as defined in section 1905(b) of the 
     Social Security Act (42 U.S.C. 1396d(b)).
       (B) State.--The term ``State'' has the meaning given such 
     term for purposes of title XIX of the Social Security Act (42 
     U.S.C. 1396 et seq.).
       (9) Repeal.--Effective as of October 1, 2004, this 
     subsection is repealed.
       (b) $10,000,000,000 for Assistance in Providing Government 
     Services.--
       (1) Establishment.--
       (A) In general.--Not later than 45 days after the date of 
     enactment of this Act, the Secretary shall establish a 
     program under which the Secretary shall make a payment to 
     each State in accordance with paragraph (2) and each unit of 
     general local government which qualifies for a payment under 
     paragraph (3).
       (B) Requirement.--In making payments under this subsection, 
     the Secretary shall ensure that not more than 72.70 percent 
     of the amount appropriated under subparagraph (C) is paid in 
     fiscal year 2003.
       (C) Appropriation.--There is authorized to be appropriated 
     and is appropriated for making payments under this 
     subsection, $10,000,000,000. Amounts appropriated under this 
     subparagraph shall remain available for expenditure through 
     September 30, 2004.
       (2) $6,000,000,000 paid to states.--
       (A) Amount of payment.--
       (i) Based on population.--Subject to clause (ii), 
     $6,000,000,000 of the amount appropriated under paragraph 
     (1)(C) shall be used to pay each State an amount equal to the 
     relative population proportion amount described in clause 
     (iii).
       (ii) Minimum payment.--

       (I) In general.--No State shall receive a payment under 
     this paragraph that is less than--

       (aa) in the case of any of the several States or the 
     District of Columbia, $30,000,000; and
       (bb) in the case of the Commonwealth of Puerto Rico, the 
     United States Virgin Islands, Guam, the Commonwealth of the 
     Northern Mariana Islands, or American Samoa, $6,000,000.

       (II) Pro rata adjustments.--The Secretary shall adjust on a 
     pro rata basis the amount of the payments to States 
     determined under this subparagraph to the extent necessary to 
     comply with the requirements of subclause (I).

       (iii) Relative population proportion amount.--The relative 
     population proportion amount described in this clause is the 
     product of--

       (I) $6,000,000,000; and
       (II) the relative State population proportion (defined in 
     clause (iv)).

       (iv) Relative state population proportion defined.--For 
     purposes of clause (iii)(II), the term ``relative State 
     population proportion'' means, with respect to a State, the 
     amount equal to the quotient of--

       (I) the population of the State (as reported in the most 
     recent decennial census); and
       (II) the total population of all States (as reported in the 
     most recent decennial census).

       (B) Use of payment.--
       (i) In general.--Subject to clause (ii), a State shall use 
     the funds provided under a payment made under this paragraph 
     to fund 1 or more of the following activities:

       (I) Education or job training.
       (II) Health care or other social services.
       (III) Transportation or other infrastructure.
       (IV) Law enforcement or public safety.
       (V) Essential government services.

       (ii) Limitation.--A State may only use funds provided under 
     a payment made under this paragraph for types of expenditures 
     permitted under the most recently approved budget for the 
     State.
       (C) Certification.--In order to receive a payment under 
     this paragraph for a fiscal year, the State shall provide the 
     Secretary with a certification that the State's proposed uses 
     of the funds are consistent with subparagraph (B).
       (3) $4,000,000,000 paid to units of general local 
     government.--
       (A) Eligibility.--The Secretary shall, by regulation, 
     establish procedures under which units of general local 
     government may qualify for the payments provided under this 
     paragraph. Such procedures shall include a requirement that 
     no unit of general local government shall be eligible for a 
     payment under this paragraph unless the unit provides the 
     Secretary with a certification that the unit's proposed uses 
     of the funds are consistent with subparagraph (C).
       (B) Amount of payment.--
       (i) In general.--Subject to clause (ii), the Secretary 
     shall pay each unit of general local government that 
     qualifies for a payment under the regulation required under 
     subparagraph (A), an amount equal to the same ratio to 
     $4,000,000,000 as the population of such unit of general 
     local government (as reported in the most recent decennial 
     census) bears to the total population of all such units that 
     qualify for a payment under this paragraph (as so reported).
       (ii) Adjustments.--The Secretary may adjust the amount of 
     the payment otherwise determined for a unit of general local 
     government under this subparagraph to the extent the 
     Secretary determines necessary to ensure that all such units 
     that would qualify for a payment under this paragraph receive 
     a payment.
       (C) Use of payment.--
       (i) In general.--Subject to clause (ii), a unit of general 
     local government shall use the funds provided under a payment 
     made under this paragraph to fund 1 or more of the following 
     activities:

       (I) Education or job training.
       (II) Health care or other social services.
       (III) Transportation or other infrastructure.
       (IV) Law enforcement or public safety.
       (V) Essential government services.

       (ii) Limitation.--A unit of general local government may 
     only use funds provided under a payment made under this 
     paragraph for types of expenditures permitted under the most 
     recently approved budget for the unit.
       (4) Definitions.--In this subsection:
       (A) Secretary.--The term ``Secretary'' means the Secretary 
     of the Treasury.
       (B) State.--The term ``State'' means the 50 States, the 
     District of Columbia, the Commonwealth of Puerto Rico, the 
     United States Virgin Islands, Guam, the Commonwealth of the 
     Northern Mariana Islands, and American Samoa.
       (C) Unit of general local government.--
       (i) In general.--The term ``unit of general local 
     government'' means--

       (I) a county, parish, township, city, or political 
     subdivision of a county, parish, township, or city, that is a 
     unit of general local government as determined by the 
     Secretary of Commerce for general statistical purposes; and
       (II) the recognized governing body of an Indian tribe or 
     Alaskan native village that carries out substantial 
     governmental duties and powers.

       (ii) Treatment of subsumed areas.--For purposes of 
     determining a unit of general local government under this 
     subsection, the rules under section 6720(c) of title 31, 
     United States Code, shall apply.
       (5) Repeal.--Effective as of October 1, 2004, this 
     subsection is repealed.

     SEC. 382. REVIEW OF STATE AGENCY BLINDNESS AND DISABILITY 
                   DETERMINATIONS.

       Section 1633 of the Social Security Act (42 U.S.C. 1383b) 
     is amended by adding at the end the following:
       ``(e)(1) The Commissioner of Social Security shall review 
     determinations, made by State agencies pursuant to subsection 
     (a) in connection with applications for benefits under this 
     title on the basis of blindness or disability, that 
     individuals who have attained 18 years of age are blind or 
     disabled as of a specified onset date.

[[Page 12410]]

     The Commissioner of Social Security shall review such a 
     determination before any action is taken to implement the 
     determination.
       ``(2)(A) In carrying out paragraph (1), the Commissioner of 
     Social Security shall review--
       ``(i) at least 25 percent of all determinations referred to 
     in paragraph (1) that are made in fiscal year 2004; and
       ``(ii) at least 50 percent of all such determinations that 
     are made in fiscal year 2005 or thereafter.
       ``(B) In carrying out subparagraph (A), the Commissioner of 
     Social Security shall, to the extent feasible, select for 
     review the determinations which the Commissioner of Social 
     Security identifies as being the most likely to be 
     incorrect.''.

     SEC. 383. PROHIBITION ON USE OF SCHIP FUNDS TO PROVIDE 
                   COVERAGE FOR CHILDLESS ADULTS.

       (a) General Limitations on Payments.--Section 2105(c)(1) of 
     the Social Security Act (42 U.S.C. 1397ee(c)(1)) is amended 
     by inserting before the period the following: ``and may not 
     include coverage of a childless adult unless the childless 
     adult is a pregnant woman. For purposes of the preceding 
     sentence, a caretaker relative (as such term is defined for 
     purposes of carrying out section 1931) shall not be 
     considered a childless adult.''.
       (b) Limitation on Waiver Authority.--Section 2107 of the 
     Social Security Act (42 U.S.C. 1397gg) is amended by adding 
     at the end the following:
       ``(f) Limitation of Waiver Authority.--Notwithstanding 
     subsection (e)(2)(A) and section 1115(a), the Secretary may 
     not approve a waiver, experimental, pilot, or demonstration 
     project, or an amendment to such a project that has been 
     approved as of the date of enactment of this subsection, that 
     would allow funds made available under this title to be used 
     to provide child health assistance or other health benefits 
     coverage to a childless adult, other than a childless adult 
     who is a pregnant woman. For purposes of the preceding 
     sentence, a caretaker relative (as such term is defined for 
     purposes of carrying out section 1931) shall not be 
     considered a childless adult.''.
       (c) Effective Date.--The amendments made by this section 
     take effect on the date of enactment of this Act and apply to 
     proposals to conduct a waiver, experimental, pilot, or 
     demonstration project affecting the State children's health 
     insurance program under title XXI of such Act, and to any 
     proposals to amend such a project, that are approved or 
     extended on or after such date of enactment.
       (d) Rule of Construction.--Nothing in this section or the 
     amendments made by this section shall be construed to--
       (1) authorize the waiver of any provision of title XXI of 
     the Social Security Act (42 U.S.C. 1397aa et seq.) that is 
     not otherwise authorized to be waived under such title or 
     under title XI of such Act (42 U.S.C. 1301 et seq.) as of the 
     date of enactment of this Act; or
       (2) imply congressional approval of any waiver, 
     experimental, pilot, or demonstration project affecting the 
     State children's health insurance program under title XXI of 
     such Act that has been approved as of such date of enactment.

     SEC. 384. MEDICAID DSH ALLOTMENTS.

       (a) Temporary Increase in Floor for Treatment as an 
     Extremely Low DSH State under the Medicaid Program.--
       (1) In general.--Section 1923(f)(5) of the Social Security 
     Act (42 U.S.C. 1396r-4(f)(5)) is amended--
       (A) by striking ``In the case of'' and inserting the 
     following:
       ``(A) In general.--In the case of''; and
       (B) by adding at the end the following:
       ``(B) Temporary increase in floor for fiscal year 2004.--
     During the period that begins on October 1, 2003, and ends on 
     September 30, 2004, subparagraph (A) shall be applied--
       ``(i) by substituting `fiscal year 2002' for `fiscal year 
     1999';
       ``(iii) by substituting `Centers for Medicare & Medicaid 
     Services' for `Health Care Financing Administration';
       ``(ii) by substituting `August 31, 2003' for `August 31, 
     2000';
       ``(iv) by substituting `3 percent' for `1 percent' each 
     place it appears;
       ``(v) by substituting `fiscal year 2004' for `fiscal year 
     2001'; and
       ``(vi) without regard to the second sentence.''.
       (2) Effective date.--The amendments made by paragraph (1) 
     take effect on October 1, 2003, and apply to DSH allotments 
     under title XIX of the Social Security Act only with respect 
     to fiscal year 2004.
       (b) Allotment Adjustment for Certain States.--
       (1) In general.--Section 1923(f) of the Social Security Act 
     (42 U.S.C. 1396r-4(f)) is amended--
       (A) by redesignating paragraph (6) as paragraph (7); and
       (B) by inserting after paragraph (5) the following:
       ``(6) Allotment adjustment for certain states.--
       ``(A) Tennessee.--Only with respect to fiscal year 2004, if 
     the statewide waiver approved under section 1115 for the 
     State of Tennessee with respect to the requirements of this 
     title (as in effect on the date of enactment of this 
     paragraph) is revoked or terminated, the Secretary shall--
       ``(i) permit the State of Tennessee to submit an amendment 
     to its State plan that would describe the methodology to be 
     used by the State (after the effective date of such 
     revocation or termination) to identify and make payments to 
     disproportionate share hospitals, including children's 
     hospitals and institutions for mental diseases or other 
     mental health facilities (other than State-owned institutions 
     or facilities), on the basis of the proportion of patients 
     served by such hospitals that are low-income patients with 
     special needs; and
       ``(ii) provide for purposes of this subsection for 
     computation of an appropriate DSH allotment for the State for 
     fiscal year 2004 that provides for the maximum amount 
     (permitted consistent with paragraph (3)(B)(ii)) that does 
     not result in greater expenditures under this title than 
     would have been made if such waiver had not been revoked or 
     terminated.
       ``(B) Hawaii.--The Secretary shall compute a DSH allotment 
     for the State of Hawaii for fiscal year 2004 in the same 
     manner as DSH allotments are determined with respect to those 
     States to which paragraph (5) applies (but without regard to 
     the requirement under such paragraph that total expenditures 
     under the State plan for disproportionate share hospital 
     adjustments for any fiscal year exceeds 0).''.
       (2) Treatment of institutions for mental diseases.--Section 
     1923(h)(1) of the Social Security Act (42 U.S.C. 1396r-
     4(h)(1)) is amended--
       (A) in paragraph (1), in the matter preceding subparagraph 
     (A), by striking ``Payment'' and inserting ``Subject to 
     paragraph (3), payment''; and
       (B) by adding at the end the following:
       ``(3) Special rule.--The limitation of paragraph (1) shall 
     not apply in the case of Tennessee with respect to fiscal 
     year 2004 in the case of a revocation or termination of its 
     statewide waiver described in subsection (f)(6)(A).''.
       (3) Effective date.--The amendments made by this subsection 
     shall take effect as if enacted on October 1, 2002.

          TITLE IV--SMALL BUSINESS AND AGRICULTURAL PROVISIONS

                 Subtitle A--Small Business Provisions

     SEC. 401. EXCLUSION OF CERTAIN INDEBTEDNESS OF SMALL BUSINESS 
                   INVESTMENT COMPANIES FROM ACQUISITION 
                   INDEBTEDNESS.

       (a) In General.--Section 514(c) (relating to acquisition 
     indebtedness) is amended by adding at the end the following 
     new paragraph:
       ``(10) Certain indebtedness of small business investment 
     companies.--For purposes of this section, the term 
     `acquisition indebtedness' does not include any indebtedness 
     incurred by a small business investment company licensed 
     under the Small Business Investment Act of 1958 which is 
     evidenced by a debenture--
       ``(A) issued by such company under section 303(a) of such 
     Act, or
       ``(B) held or guaranteed by the Small Business 
     Administration.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to any indebtedness incurred after December 31, 
     2002, by a small business investment company described in 
     section 514(c)(10) of the Internal Revenue Code of 1986 (as 
     added by this section) with respect to property acquired by 
     such company after such date.

     SEC. 402. REPEAL OF OCCUPATIONAL TAXES RELATING TO DISTILLED 
                   SPIRITS, WINE, AND BEER.

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

                  ``PART II--MISCELLANEOUS PROVISIONS

``Subpart A. Manufacturers of stills.
``Subpart B. Nonbeverage domestic drawback claimants.
``Subpart C. Recordkeeping by dealers.
``Subpart D. Other provisions.''.

       (B) The table of parts for such subchapter A is amended by 
     striking the item relating to part II and inserting the 
     following new item:

``Part II. Miscellaneous provisions.''.

       (2) Subpart C of part II of such subchapter (relating to 
     manufacturers of stills) is redesignated as subpart A.
       (3)(A) Subpart F of such part II (relating to nonbeverage 
     domestic drawback claimants) is redesignated as subpart B and 
     sections 5131 through 5134 are redesignated as sections 5111 
     through 5114, respectively.
       (B) The table of sections for such subpart B, as so 
     redesignated, is amended--
       (i) by redesignating the items relating to sections 5131 
     through 5134 as relating to sections 5111 through 5114, 
     respectively, and
       (ii) by striking ``and rate of tax'' in the item relating 
     to section 5111, as so redesignated.
       (C) Section 5111, as redesignated by subparagraph (A), is 
     amended--
       (i) by striking ``and rate of tax'' in the section heading,

[[Page 12411]]

       (ii) by striking the subsection heading for subsection (a), 
     and
       (iii) by striking subsection (b).
       (4) Part II of subchapter A of chapter 51 is amended by 
     adding after subpart B, as redesignated by paragraph (3), the 
     following new subpart:

                 ``Subpart C--Recordkeeping by Dealers

``Sec. 5121. Recordkeeping by wholesale dealers.
``Sec. 5122. Recordkeeping by retail dealers.
``Sec. 5123. Preservation and inspection of records, and entry of 
              premises for inspection.''.

       (5)(A) Section 5114 (relating to records) is moved to 
     subpart C of such part II and inserted after the table of 
     sections for such subpart.
       (B) Section 5114 is amended--
       (i) by striking the section heading and inserting the 
     following new heading:

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

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

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

       (ii) by striking ``section 5146'' in subsection (c) and 
     inserting ``section 5123'', and
       (iii) by redesignating subsection (c) as subsection (d) and 
     inserting after subsection (b) the following new subsection:
       ``(c) Retail Dealers.--For purposes of this section--
       ``(1) Retail dealer in liquors.--The term `retail dealer in 
     liquors' means any dealer (other than a retail dealer in 
     beer) who sells, or offers for sale, distilled spirits, 
     wines, or beer, to any person other than a dealer.
       ``(2) Retail dealer in beer.--The term `retail dealer in 
     beer' means any dealer who sells, or offers for sale, beer, 
     but not distilled spirits or wines, to any person other than 
     a dealer.
       ``(3) Dealer.--The term `dealer' has the meaning given such 
     term by section 5121(c)(3).''.
       (7) Section 5146 is moved to subpart C of part II of 
     subchapter A of chapter 51, inserted after section 5122, and 
     redesignated as section 5123.
       (8) Part II of subchapter A of chapter 51 is amended by 
     inserting after subpart C the following new subpart:

                     ``Subpart D--Other Provisions

``Sec. 5131. Packaging distilled spirits for industrial uses.
``Sec. 5132. Prohibited purchases by dealers.''.

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

     ``SEC. 5132. PROHIBITED PURCHASES BY DEALERS.

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

  ``For penalty and forfeiture provisions applicable to violations of 
subsection (a), see sections 5687 and 7302.''.

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

``Sec. 5732. Payment of tax.
``Sec. 5733. Provisions relating to liability for occupational taxes.
``Sec. 5734. Application of State laws.''.

       (E) Section 5731 is amended by striking subsection (c) and 
     by redesignating subsection (d) as subsection (c).
       (19) Subsection (c) of section 6071 is amended by striking 
     ``section 5142'' and inserting ``section 5732''.
       (20) Paragraph (1) of section 7652(g) is amended--
       (A) by striking ``subpart F'' and inserting ``subpart B'', 
     and
       (B) by striking ``section 5131(a)'' and inserting ``section 
     5111''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on July 1, 2003, but shall not apply to 
     taxes imposed for periods before such date.

     SEC. 403. CUSTOM GUNSMITHS.

       (a) Small Manufacturers Exempt From Firearms Excise Tax.--
     Section 4182 (relating to exemptions) is amended by 
     redesignating subsection (c) as subsection (d) and by 
     inserting after subsection (b) the following new subsection:
       ``(c) Small Manufacturers, Etc.--
       ``(1) In general.--The tax imposed by section 4181 shall 
     not apply to any article described in such section if 
     manufactured, produced, or imported by a person who 
     manufactures, produces, and imports less than 50 of such 
     articles during the calendar year.
       ``(2) Controlled groups.--All persons treated as a single 
     employer for purposes of subsection (a) or (b) of section 52 
     shall be treated as one person for purposes of paragraph 
     (1).''.
       (b) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to articles sold by the manufacturer, producer, or 
     importer on or after the date which is the first day of the 
     month beginning at least 2 weeks after the date of the 
     enactment of this Act.
       (2) No inference.--Nothing in the amendments made by this 
     section shall be construed to create any inference with 
     respect to the proper tax treatment of any sales before the 
     effective date of such amendments.

     SEC. 404. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND 
                   ARROWS.

       (a) Bows.--Section 4161(b)(1) (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 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 (3),
     a tax equal to 11 percent of the price for which so sold.''.
       (b) Arrows.--Section 4161(b) (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.--The tax imposed by subparagraph (A) on an 
     arrow shall not apply if the arrow contains an arrow shaft 
     subject to the tax imposed by paragraph (2).
       ``(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 Amendment.--The heading of section 
     4161(b)(2) (relating to arrows) is

[[Page 12412]]

     amended by striking ``Arrows.--'' 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 of the enactment of this Act.

                  Subtitle B--Agricultural Provisions

     SEC. 411. 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 Amendment.--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''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales after the date of the enactment of this 
     Act.

     SEC. 412. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF 
                   WEATHER-RELATED CONDITIONS.

       (a) Rules for Replacement 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.''.
       (b) 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.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to any taxable year with respect to which the due 
     date of the return is after December 31, 2002.

     SEC. 413. EXCLUSION FOR LOAN PAYMENTS UNDER NATIONAL HEALTH 
                   SERVICE CORPS LOAN REPAYMENT PROGRAM.

       (a) In General.--Section 108(f) (relating to student loans) 
     is amended by adding at the end the following new paragraph:
       ``(4) Loan payments under national health service corps 
     loan repayment program.--In the case of an individual, gross 
     income shall not include any amount received under section 
     338B(g) of the Public Health Service Act.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to amounts received by an individual in taxable 
     years beginning after December 31, 2002.

     SEC. 414. 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 ending after 
     the date of the enactment of this Act.

              TITLE V--SIMPLIFICATION AND OTHER PROVISIONS

                Subtitle A--Uniform Definition of Child

     SEC. 501. UNIFORM DEFINITION OF CHILD, ETC.

       Section 152 is amended to read as follows:

     ``SEC. 152. DEPENDENT DEFINED.

       ``(a) In General.--For purposes of this subtitle, the term 
     `dependent' means--
       ``(1) a qualifying child, or
       ``(2) a qualifying relative.
       ``(b) Exceptions.--For purposes of this section--
       ``(1) Dependents ineligible.--If an individual is a 
     dependent of a taxpayer for any taxable year of such taxpayer 
     beginning in a calendar year, such individual shall be 
     treated as having no dependents for any taxable year of such 
     individual beginning in such calendar year.
       ``(2) Married dependents.--An individual shall not be 
     treated as a dependent of a taxpayer under subsection (a) if 
     such individual has made a joint return with the individual's 
     spouse under section 6013 for the taxable year beginning in 
     the calendar year in which the taxable year of the taxpayer 
     begins.
       ``(3) Citizens or nationals of other countries.--
       ``(A) In general.--The term `dependent' does not include an 
     individual who is not a citizen or national of the United 
     States unless such individual is a resident of the United 
     States or a country contiguous to the United States.
       ``(B) Exception for adopted child.--Subparagraph (A) shall 
     not exclude any child of a taxpayer (within the meaning of 
     subsection (f)(1)(B)) from the definition of `dependent' if--
       ``(i) for the taxable year of the taxpayer, the child's 
     principal place of abode is the home of the taxpayer, and
       ``(ii) the taxpayer is a citizen or national of the United 
     States.
       ``(c) Qualifying Child.--For purposes of this section--
       ``(1) In general.--The term `qualifying child' means, with 
     respect to any taxpayer for any taxable year, an individual--
       ``(A) who bears a relationship to the taxpayer described in 
     paragraph (2),
       ``(B) who has the same principal place of abode as the 
     taxpayer for more than one-half of such taxable year,
       ``(C) who meets the age requirements of paragraph (3), and
       ``(D) who has not provided over one-half of such 
     individual's own support for the calendar year in which the 
     taxable year of the taxpayer begins.
       ``(2) Relationship test.--For purposes of paragraph (1)(A), 
     an individual bears a relationship to the taxpayer described 
     in this paragraph if such individual is--
       ``(A) a child of the taxpayer or a descendant of such a 
     child, or
       ``(B) a brother, sister, stepbrother, or stepsister of the 
     taxpayer or a descendant of any such relative.
       ``(3) Age requirements.--
       ``(A) In general.--For purposes of paragraph (1)(C), an 
     individual meets the requirements of this paragraph if such 
     individual--
       ``(i) has not attained the age of 19 as of the close of the 
     calendar year in which the taxable year of the taxpayer 
     begins, or
       ``(ii) is a student who has not attained the age of 24 as 
     of the close of such calendar year.
       ``(B) Special rule for disabled.--In the case of an 
     individual who is permanently and totally disabled (as 
     defined in section 22(e)(3)) at any time during such calendar 
     year, the requirements of subparagraph (A) shall be treated 
     as met with respect to such individual.
       ``(4) Special rule relating to 2 or more claiming 
     qualifying child.--
       ``(A) In general.--Except as provided in subparagraph (B) 
     and subsection (e), if (but for this paragraph) an individual 
     may be and is claimed as a qualifying child by 2 or more 
     taxpayers for a taxable year beginning in the same calendar 
     year, such individual shall be treated as the qualifying 
     child of the taxpayer who is--
       ``(i) a parent of the individual, or
       ``(ii) if clause (i) does not apply, the taxpayer with the 
     highest adjusted gross income for such taxable year.
       ``(B) More than 1 parent claiming qualifying child.--If the 
     parents claiming any qualifying child do not file a joint 
     return together, such child shall be treated as the 
     qualifying child of--
       ``(i) the parent with whom the child resided for the 
     longest period of time during the taxable year, or
       ``(ii) if the child resides with both parents for the same 
     amount of time during such taxable year, the parent with the 
     highest adjusted gross income.
       ``(d) Qualifying Relative.--For purposes of this section--
       ``(1) In general.--The term `qualifying relative' means, 
     with respect to any taxpayer for any taxable year, an 
     individual--
       ``(A) who bears a relationship to the taxpayer described in 
     paragraph (2),
       ``(B) whose gross income for the calendar year in which 
     such taxable year begins is less than the exemption amount 
     (as defined in section 151(d)),
       ``(C) with respect to whom the taxpayer provides over one-
     half of the individual's support for the calendar year in 
     which such taxable year begins, and
       ``(D) who is not a qualifying child of such taxpayer or of 
     any other taxpayer for any taxable year beginning in the 
     calendar year in which such taxable year begins.
       ``(2) Relationship.--For purposes of paragraph (1)(A), an 
     individual bears a relationship to the taxpayer described in 
     this paragraph if the individual is any of the following with 
     respect to the taxpayer:
       ``(A) A child or a descendant of a child.
       ``(B) A brother, sister, stepbrother, or stepsister.
       ``(C) The father or mother, or an ancestor of either.
       ``(D) A stepfather or stepmother.
       ``(E) A son or daughter of a brother or sister of the 
     taxpayer.
       ``(F) A brother or sister of the father or mother of the 
     taxpayer.
       ``(G) A son-in-law, daughter-in-law, father-in-law, mother-
     in-law, brother-in-law, or sister-in-law.
       ``(H) An individual (other than an individual who at any 
     time during the taxable year was the spouse, determined 
     without regard to section 7703, of the taxpayer) who, for the 
     taxable year

[[Page 12413]]

     of the taxpayer, has as such individual's principal place of 
     abode the home of the taxpayer and is a member of the 
     taxpayer's household.
       ``(3) Special rule relating to multiple support 
     agreements.--For purposes of paragraph (1)(C), over one-half 
     of the support of an individual for a calendar year shall be 
     treated as received from the taxpayer if--
       ``(A) no one person contributed over one-half of such 
     support,
       ``(B) over one-half of such support was received from 2 or 
     more persons each of whom, but for the fact that any such 
     person alone did not contribute over one-half of such 
     support, would have been entitled to claim such individual as 
     a dependent for a taxable year beginning in such calendar 
     year,
       ``(C) the taxpayer contributed over 10 percent of such 
     support, and
       ``(D) each person described in subparagraph (B) (other than 
     the taxpayer) who contributed over 10 percent of such support 
     files a written declaration (in such manner and form as the 
     Secretary may by regulations prescribe) that such person will 
     not claim such individual as a dependent for any taxable year 
     beginning in such calendar year.
       ``(4) Special rule relating to income of handicapped 
     dependents.--
       ``(A) In general.--For purposes of paragraph (1)(B), the 
     gross income of an individual who is permanently and totally 
     disabled (as defined in section 22(e)(3)) at any time during 
     the taxable year shall not include income attributable to 
     services performed by the individual at a sheltered workshop 
     if--
       ``(i) the availability of medical care at such workshop is 
     the principal reason for the individual's presence there, and
       ``(ii) the income arises solely from activities at such 
     workshop which are incident to such medical care.
       ``(B) Sheltered workshop defined.--For purposes of 
     subparagraph (A), the term `sheltered workshop' means a 
     school--
       ``(i) which provides special instruction or training 
     designed to alleviate the disability of the individual, and
       ``(ii) which is operated by an organization described in 
     section 501(c)(3) and exempt from tax under section 501(a), 
     or by a State, a possession of the United States, any 
     political subdivision of any of the foregoing, the United 
     States, or the District of Columbia.
       ``(5) Special support test in case of students.--For 
     purposes of paragraph (1)(C), in the case of an individual 
     who is--
       ``(A) a child of the taxpayer, and
       ``(B) a student,

     amounts received as scholarships for study at an educational 
     organization described in section 170(b)(1)(A)(ii) shall not 
     be taken into account in determining whether such individual 
     received more than one-half of such individual's support from 
     the taxpayer.
       ``(6) Special rules for support.--For purposes of this 
     subsection--
       ``(A) payments to a spouse which are includible in the 
     gross income of such spouse under section 71 or 682 shall not 
     be treated as a payment by the payor spouse for the support 
     of any dependent,
       ``(B) amounts expended for the support of a child or 
     children shall be treated as received from the noncustodial 
     parent (as defined in subsection (e)(3)(B)) to the extent 
     that such parent provided amounts for such support, and
       ``(C) in the case of the remarriage of a parent, support of 
     a child received from the parent's spouse shall be treated as 
     received from the parent.
       ``(e) Special Rule for Divorced Parents.--
       ``(1) In general.--Notwithstanding subsection (c)(4) or 
     (d)(1)(C), if--
       ``(A) a child receives over one-half of the child's support 
     during the calendar year from the child's parents--
       ``(i) who are divorced or legally separated under a decree 
     of divorce or separate maintenance,
       ``(ii) who are separated under a written separation 
     agreement, or
       ``(iii) who live apart at all times during the last 6 
     months of the calendar year, and
       ``(B) such child is in the custody of 1 or both of the 
     child's parents for more than \1/2\ of the calendar year,

     such child shall be treated as being the qualifying child or 
     qualifying relative of the noncustodial parent for a calendar 
     year if the requirements described in paragraph (2) are met.
       ``(2) Requirements.--For purposes of paragraph (1), the 
     requirements described in this paragraph are met if--
       ``(A) a decree of divorce or separate maintenance or 
     written agreement between the parents applicable to the 
     taxable year beginning in such calendar year provides that--
       ``(i) the noncustodial parent shall be entitled to any 
     deduction allowable under section 151 for such child, or
       ``(ii) the custodial parent will sign a written declaration 
     that such parent will not claim such child as a dependent for 
     such taxable year, and
       ``(B) in the case of such an agreement executed before 
     January 1, 1985, the noncustodial parent provides at least 
     $600 for the support of such child during such calendar year.
       ``(3) Custodial parent and noncustodial parent.--For 
     purposes of this subsection--
       ``(A) Custodial parent.--The term `custodial parent' means 
     the parent with whom a child shared the same principal place 
     of abode for the greater portion of the calendar year.
       ``(B) Noncustodial parent.--The term `noncustodial parent' 
     means the parent who is not the custodial parent.
       ``(4) Exception for multiple-support agreements.--This 
     subsection shall not apply in any case where over one-half of 
     the support of the child is treated as having been received 
     from a taxpayer under the provision of subsection (d)(3).
       ``(f) Other Definitions and Rules.--For purposes of this 
     section--
       ``(1) Child defined.--
       ``(A) In general.--The term `child' means an individual who 
     is--
       ``(i) a son, daughter, stepson, or stepdaughter of the 
     taxpayer, or
       ``(ii) an eligible foster child of the taxpayer.
       ``(B) Adopted child.--In determining whether any of the 
     relationships specified in subparagraph (A)(i) or paragraph 
     (4) exists, a legally adopted individual of the taxpayer, or 
     an individual who is placed with the taxpayer by an 
     authorized placement agency for adoption by the taxpayer, 
     shall be treated as a child of such individual by blood.
       ``(C) Eligible foster child.--For purposes of subparagraph 
     (A)(ii), the term `eligible foster child' means an individual 
     who is placed with the taxpayer by an authorized placement 
     agency or by judgment, decree, or other order of any court of 
     competent jurisdiction.
       ``(2) Student defined.--The term `student' means an 
     individual who during each of 5 calendar months during the 
     calendar year in which the taxable year of the taxpayer 
     begins--
       ``(A) is a full-time student at an educational organization 
     described in section 170(b)(1)(A)(ii), or
       ``(B) is pursuing a full-time course of institutional on-
     farm training under the supervision of an accredited agent of 
     an educational organization described in section 
     170(b)(1)(A)(ii) or of a State or political subdivision of a 
     State.
       ``(3) Place of abode.--An individual shall not be treated 
     as having the same principal place of abode of the taxpayer 
     if at any time during the taxable year of the taxpayer the 
     relationship between the individual and the taxpayer is in 
     violation of local law.
       ``(4) Brother and sister.--The terms `brother' and `sister' 
     include a brother or sister by the half blood.
       ``(5) Treatment of missing children.--
       ``(A) In general.--Solely for the purposes referred to in 
     subparagraph (B), a child of the taxpayer--
       ``(i) who is presumed by law enforcement authorities to 
     have been kidnapped by someone who is not a member of the 
     family of such child or the taxpayer, and
       ``(ii) who had, for the taxable year in which the 
     kidnapping occurred, the same principal place of abode as the 
     taxpayer for more than one-half of the portion of such year 
     before the date of the kidnapping,

     shall be treated as meeting the requirement of subsection 
     (c)(1)(B) with respect to a taxpayer for all taxable years 
     ending during the period that the individual is kidnapped.
       ``(B) Purposes.--Subparagraph (A) shall apply solely for 
     purposes of determining--
       ``(i) the deduction under section 151(c),
       ``(ii) the credit under section 24 (relating to child tax 
     credit),
       ``(iii) whether an individual is a surviving spouse or a 
     head of a household (as such terms are defined in section 2), 
     and
       ``(iv) the earned income credit under section 32.
       ``(C) Comparable treatment of certain qualifying 
     relatives.--For purposes of this section, a child of the 
     taxpayer--
       ``(i) who is presumed by law enforcement authorities to 
     have been kidnapped by someone who is not a member of the 
     family of such child or the taxpayer, and
       ``(ii) who was (without regard to this paragraph) a 
     qualifying relative of the taxpayer for the portion of the 
     taxable year before the date of the kidnapping,

     shall be treated as a qualifying relative of the taxpayer for 
     all taxable years ending during the period that the child is 
     kidnapped.
       ``(D) Termination of treatment.--Subparagraphs (A) and (C) 
     shall cease to apply as of the first taxable year of the 
     taxpayer beginning after the calendar year in which there is 
     a determination that the child is dead (or, if earlier, in 
     which the child would have attained age 18).
       ``(6) Cross references.--

``For provision treating child as dependent of both parents for 
purposes of certain provisions, see sections 105(b), 132(h)(2)(B), and 
213(d)(5).''.

     SEC. 502. MODIFICATIONS OF DEFINITION OF HEAD OF HOUSEHOLD.

       (a) Head of Household.--Clause (i) of section 2(b)(1)(A) is 
     amended to read as follows:
       ``(i) a qualifying child of the individual (as defined in 
     section 152(c), determined without regard to section 152(e)), 
     but not if such child--

       ``(I) is married at the close of the taxpayer's taxable 
     year, and
       ``(II) is not a dependent of such individual by reason of 
     section 152(b)(2) or 152(b)3), or both, or''.

       (b) Conforming Amendments.--
       (1) Section 2(b)(2) is amended by striking subparagraph (A) 
     and by redesignating subparagraphs (B), (C), and (D) as 
     subparagraphs (A), (B), and (C), respectively.
       (2) Clauses (i) and (ii) of section 2(b)(3)(B) are amended 
     to read as follows:
       ``(i) subparagraph (H) of section 152(d)(2), or
       ``(ii) paragraph (3) of section 152(d).''.

     SEC. 503. MODIFICATIONS OF DEPENDENT CARE CREDIT.

       (a) In General.--Section 21(a)(1) is amended by striking 
     ``In the case of an individual who

[[Page 12414]]

     maintains a household which includes as a member one or more 
     qualifying individuals (as defined in subsection (b)(1))'' 
     and inserting ``In the case of an individual for which there 
     are 1 or more qualifying individuals (as defined in 
     subsection (b)(1)) with respect to such individual''.
       (b) Qualifying Individual.--Paragraph (1) of section 21(b) 
     is amended to read as follows:
       ``(1) Qualifying individual.--The term `qualifying 
     individual' means--
       ``(A) a dependent of the taxpayer (as defined in section 
     152(a)(1)) who has not attained age 13,
       ``(B) a dependent of the taxpayer who is physically or 
     mentally incapable of caring for himself or herself and who 
     has the same principal place of abode as the taxpayer for 
     more than one-half of such taxable year, or
       ``(C) the spouse of the taxpayer, if the spouse is 
     physically or mentally incapable of caring for himself or 
     herself and who has the same principal place of abode as the 
     taxpayer for more than one-half of such taxable year.''.
       (c) Conforming Amendment.--Paragraph (1) of section 21(e) 
     is amended to read as follows:
       ``(1) Place of abode.--An individual shall not be treated 
     as having the same principal place of abode of the taxpayer 
     if at any time during the taxable year of the taxpayer the 
     relationship between the individual and the taxpayer is in 
     violation of local law.''.

     SEC. 504. MODIFICATIONS OF CHILD TAX CREDIT.

       (a) In General.--Paragraph (1) of section 24(c) is amended 
     to read as follows:
       ``(1) In general.--The term `qualifying child' means a 
     qualifying child of the taxpayer (as defined in section 
     152(c)) who has not attained age 17.''.
       (b) Conforming Amendment.--Section 24(c)(2) is amended by 
     striking ``the first sentence of section 152(b)(3)'' and 
     inserting ``subparagraph (A) of section 152(b)(3)''.

     SEC. 505. MODIFICATIONS OF EARNED INCOME CREDIT.

       (a) Qualifying Child.--Paragraph (3) of section 32(c) is 
     amended to read as follows:
       ``(3) Qualifying child.--
       ``(A) In general.--The term `qualifying child' means a 
     qualifying child of the taxpayer (as defined in section 
     152(c), determined without regard to paragraph (1)(D) thereof 
     and section 152(e)).
       ``(B) Married individual.--The term `qualifying child' 
     shall not include an individual who is married as of the 
     close of the taxpayer's taxable year unless the taxpayer is 
     entitled to a deduction under section 151 for such taxable 
     year with respect to such individual (or would be so entitled 
     but for section 152(e)).
       ``(C) Place of abode.--For purposes of subparagraph (A), 
     the requirements of section 152(c)(1)(B) shall be met only if 
     the principal place of abode is in the United States.
       ``(D) Identification requirements.--
       ``(i) In general.--A qualifying child shall not be taken 
     into account under subsection (b) unless the taxpayer 
     includes the name, age, and TIN of the qualifying child on 
     the return of tax for the taxable year.
       ``(ii) Other methods.--The Secretary may prescribe other 
     methods for providing the information described in clause 
     (i).''.
       (b) Conforming Amendments.--
       (1) Section 32(c)(1) is amended by striking subparagraph 
     (C) and by redesignating subparagraphs (D), (E), (F), and (G) 
     as subparagraphs (C), (D), (E), and (F), respectively.
       (2) Section 32(c)(4) is amended by striking ``(3)(E)'' and 
     inserting ``(3)(C)''.
       (3) Section 32(m) is amended by striking ``subsections 
     (c)(1)(F)'' and inserting ``subsections (c)(1)(E)''.

     SEC. 506. MODIFICATIONS OF DEDUCTION FOR PERSONAL EXEMPTION 
                   FOR DEPENDENTS.

       Subsection (c) of section 151 is amended to read as 
     follows:
       ``(c) Additional Exemption for Dependents.--An exemption of 
     the exemption amount for each individual who is a dependent 
     (as defined in section 152) of the taxpayer for the taxable 
     year.''.

     SEC. 507. TECHNICAL AND CONFORMING AMENDMENTS.

       (1) Section 21(e)(5) is amended--
       (A) by striking ``paragraph (2) or (4) of'' in subparagraph 
     (A), and
       (B) by striking ``within the meaning of section 152(e)(1)'' 
     and inserting ``as defined in section 152(e)(3)(A)''.
       (2) Section 21(e)(6)(B) is amended by striking ``section 
     151(c)(3)'' and inserting ``section 152(f)(1)''.
       (3) Section 25B(c)(2)(B) is amended by striking 
     ``151(c)(4)'' and inserting ``152(f)(2)''.
       (4)(A) Subparagraphs (A) and (B) of section 51(i)(1) are 
     each amended by striking ``paragraphs (1) through (8) of 
     section 152(a)'' both places it appears and inserting 
     ``subparagraphs (A) through (G) of section 152(d)(2)''.
       (B) Section 51(i)(1)(C) is amended by striking 
     ``152(a)(9)'' and inserting ``152(d)(2)(H)''.
       (5) Section 72(t)(7)(A)(iii) is amended by striking 
     ``151(c)(3)'' and inserting ``152(f)(1)''.
       (6) Section 129(c)(2) is amended by striking ``151(c)(3)'' 
     and inserting ``152(f)(1)''.
       (7) The first sentence of section 132(h)(2)(B) is amended 
     by striking ``151(c)(3)'' and inserting ``152(f)(1)''.
       (8) Section 153 is amended by striking paragraph (1) and by 
     redesignating paragraphs (2), (3), and (4) as paragraphs (1), 
     (2), and (3), respectively.
       (9) Section 170(g)(3) is amended by striking ``paragraphs 
     (1) through (8) of section 152(a)'' and inserting 
     ``subparagraphs (A) through (G) of section 152(d)(2)''.
       (10) The second sentence of section 213(d)(11) is amended 
     by striking ``paragraphs (1) through (8) of section 152(a)'' 
     and inserting ``subparagraphs (A) through (G) of section 
     152(d)(2)''.
       (11) Section 529(e)(2)(B) is amended by striking 
     ``paragraphs (1) through (8) of section 152(a)'' and 
     inserting ``subparagraphs (A) through (G) of section 
     152(d)(2)''.
       (12) Section 2032A(c)(7)(D) is amended by striking 
     ``section 151(c)(4)'' and inserting ``section 152(f)(2)''.
       (13) Section 7701(a)(17) is amended by striking 
     ``152(b)(4), 682,'' and inserting ``682''.
       (14) Section 7702B(f)(2)(C)(iii) is amended by striking 
     ``paragraphs (1) through (8) of section 152(a)'' and 
     inserting ``subparagraphs (A) through (G) of section 
     152(d)(2)''.
       (15) Section 7703(b)(1) is amended--
       (A) by striking ``151(c)(3)'' and inserting ``152(f)(1)'', 
     and
       (B) by striking ``paragraph (2) or (4) of''.

     SEC. 508. EFFECTIVE DATE.

       The amendments made by this subtitle shall apply to taxable 
     years beginning after December 31, 2003.

                       Subtitle B--Simplification

     SEC. 511. CONSOLIDATION OF LIFE AND NON-LIFE COMPANY RETURNS.

       (a) In General.--Section 1504 (relating to definition of 
     affiliated group) is amended by striking subsection (c) and 
     by redesignating subsections (d), (e), and (f) as subsections 
     (c), (d), and (e), respectively.
       (b) Conforming Amendments.--
       (1) Section 243(b)(2)(A) is amended by striking ``, 
     1504(b)(4), and 1504(c)'' and inserting ``and 1504(b)(4)''.
       (2) Section 818(e)(1) is amended by striking ``If an 
     election under section 1504(c)(2) is effect with respect to 
     an affiliated group for the taxable year'' and inserting ``If 
     an affiliated group includes members which are, and which are 
     not, life insurance companies for any taxable year''.
       (3) Section 1503(c)(1) is amended by striking ``an election 
     under section 1504(c)(2) is in effect for the taxable year''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2009.
       (d) Waiver of 5-Year Waiting Period.--Under regulations 
     prescribed by the Secretary of the Treasury or his delegate, 
     an automatic waiver from the 5-year waiting period for 
     reconsolidation provided in section 1504(a)(3) of the 
     Internal Revenue Code of 1986 shall be granted to any 
     corporation which was previously an includible corporation 
     but was subsequently deemed a nonincludible corporation as a 
     result of becoming a subsidiary of a corporation which was 
     not an includible corporation solely by operation of section 
     1504(c)(2) of such Code (as in effect on the day before the 
     date of the enactment of this Act).
       (e) Nontermination of Group.--No affiliated group shall 
     terminate solely as a result of the amendments made by this 
     section.

     SEC. 512. SPECIAL RULES FOR TAXATION OF LIFE INSURANCE 
                   COMPANIES.

       (a) Reduction in Mutual Life Insurance Company Deductions 
     Not To Apply.--
       (1) In general.--Section 809 (relating to reduction in 
     certain deductions of material life insurance companies) is 
     amended by adding at the end the following:
       ``(j) Differential Earnings Rate Treated as Zero.--
     Notwithstanding subsection (c) or (f), the differential 
     earnings rate shall be treated as zero for purposes of 
     computing both the differential earnings amount and the 
     recomputed differential earnings amount for any taxable year 
     of a mutual life insurance company beginning after December 
     31, 2003, and before January 1, 2009.''.
       (2) Effective date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.
       (b) Distributions To Shareholders From Pre-1984 
     Policyholders Surplus Account.--
       (1) In general.--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 2004 Through 2008.--
     In the case of any taxable year of a stock life insurance 
     company beginning after December 31, 2003, and before January 
     1, 2009--
       ``(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.''.
       (2) Effective date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 513. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER 
                   SECTION 355.

       (a) In General.--Section 355(b) (defining active conduct of 
     a trade or business) is amended by adding at the end the 
     following new paragraph:
       ``(3) Special rules relating to active business 
     requirement.--
       ``(A) In general.--For purposes of determining whether a 
     corporation meets the requirement of paragraph (2)(A), all 
     members of such corporation's separate affiliated group shall 
     be treated as one corporation. For purposes of the

[[Page 12415]]

     preceding sentence, a corporation's separate affiliated group 
     is the affiliated group which would be determined under 
     section 1504(a) if such corporation were the common parent 
     and section 1504(b) did not apply.
       ``(B) Control.--For purposes of paragraph (2)(D), all 
     distributee corporations which are members of the same 
     affiliated group (as defined in section 1504(a) without 
     regard to section 1504(b)) shall be treated as one 
     distributee corporation.''.
       (b) Conforming Amendments.--
       (1) Subparagraph (A) of section 355(b)(2) is amended to 
     read as follows:
       ``(A) it is engaged in the active conduct of a trade or 
     business,''.
       (2) Section 355(b)(2) is amended by striking the last 
     sentence.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply--
       (A) to distributions after the date of the enactment of 
     this Act, and
       (B) for purposes of determining the continued qualification 
     under section 355(b)(2)(A) of the Internal Revenue Code of 
     1986 (as amended by subsection (b)(1)) of distributions made 
     before such date, as a result of an acquisition, disposition, 
     or other restructuring after such date.
       (2) Transition rule.--The amendments made by this section 
     shall not apply to any distribution pursuant to a transaction 
     which is--
       (A) made pursuant to an agreement which was binding on such 
     date of enactment and at all times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission.
       (3) Election to have amendments apply.--Paragraph (2) shall 
     not apply if the distributing corporation elects not to have 
     such paragraph apply to distributions of such corporation. 
     Any such election, once made, shall be irrevocable.

                      Subtitle C--Other Provisions

     SEC. 521. 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. 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 (29 
     U.S.C. 1681 et seq.).
       ``(9) The Employee Polygraph Protection Act of 1988 (29 
     U.S.C. 201 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 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 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. 522. INCREASE IN SECTION 382 LIMITATION FOR COMPANIES 
                   EMERGING FROM BANKRUPTCY.

       (a) In General.--Section 382(b) (relating to section 382 
     limitation) is amended by adding at the end the following new 
     paragraph:
       ``(4) Increase in section 382 limitation for companies 
     emerging from bankruptcy.--In the case of any new loss 
     corporation which immediately before any ownership change was 
     an old loss corporation under the jurisdiction of the court 
     in a title 11 or similar case (as defined in subsection 
     (l)(5)(G)), the section 382 limitation for any post-change 
     year beginning in 2004 or 2005 shall be an amount equal to 
     200 percent of the amount otherwise determined under 
     paragraph (1) for such year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to ownership changes after December 31, 2002.

     SEC. 523. INCREASE IN HISTORIC REHABILITATION CREDIT FOR 
                   CERTAIN LOW-INCOME HOUSING FOR THE ELDERLY.

       (a) In General.--Section 47 (relating to rehabilitation 
     credit) is amended by adding at the end the following new 
     subsection:
       ``(e) Special Rule Regarding Certain Historic Structures.--
     In the case of any qualified rehabilitation expenditure with 
     respect to any certified historic structure--
       ``(1) which is placed in service after the date of the 
     enactment of this subsection,
       ``(2) which is part of a qualified low-income building with 
     respect to which a credit under section 42 is allowed, and
       ``(3) substantially all of the residential rental units of 
     which are used for tenants who have attained the age of 65,
     subsection (a)(2) shall be applied by substituting `25 
     percent' for `20 percent'.''.
       (b) Application of MACRS.--The Internal Revenue Code of 
     1986 shall be applied and administered as if paragraph (4)(X) 
     of section 251(d) of the Tax Reform Act of 1986 as applied to 
     the amendments made by section 201 of such Act had not been 
     enacted with respect to any property described in such 
     paragraph and placed in service after the date of the 
     enactment of this Act.
       (c) Effective Date.--The amendment made by subsection (a) 
     shall apply to property placed in service after the date of 
     the enactment of this Act.

     SEC. 524. 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) Coordination with other rules.--
       ``(i) 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) 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

[[Page 12416]]

     service after the date of the enactment of this Act.

     SEC. 525. ADDITIONAL ADVANCE REFUNDINGS OF CERTAIN 
                   GOVERNMENTAL BONDS.

       (a) In General.--Section 149(d)(3)(A)(i) (relating to 
     advance refundings of other bonds) is amended--
       (1) by striking ``or'' at the end of subclause (I),
       (2) by adding ``or'' at the end of subclause (II), and
       (3) by inserting after subclause (II) the following:

       ``(III) the 2nd advance refunding of the original bond if 
     the original bond was issued after 1985 or the 3rd advance 
     refunding of the original bond if the original bond was 
     issued before 1986, if, in either case, the refunding bond is 
     issued before the date which is 2 years after the date of the 
     enactment of this subclause and the original bond was issued 
     as part of an issue 90 percent or more of the net proceeds of 
     which were used to finance a public elementary or secondary 
     school in any State in which the State's highest court ruled 
     by opinion issued on November 21, 2002, that the State school 
     funding system violated the State constitution and was 
     constitutionally inadequate,''.

       (b) Effective Date.--The amendments made by this section 
     shall apply to refunding bonds issued on or after the date of 
     the enactment of this Act.

     SEC. 526. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON 
                   HORSE 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 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 proceeds from wagering transactions after 
     September 30, 2003.

     SEC. 527. FEDERAL REIMBURSEMENT OF EMERGENCY HEALTH SERVICES 
                   FURNISHED TO UNDOCUMENTED ALIENS.

       (a) Total Amount Available for Allotment.--There is 
     appropriated, out of any funds in the Treasury not otherwise 
     appropriated, $48,000,000 for fiscal year 2004, for the 
     purpose of making allotments under this section to States 
     described in paragraph (1) or (2) of subsection (b). Funds 
     appropriated under the preceding sentence shall remain 
     available until expended.
       (b) State Allotments.--
       (1) Based on percentage of undocumented aliens.--
       (A) In general.--Out of the amount appropriated under 
     subsection (a) for fiscal year 2004, the Secretary shall use 
     $32,000,000 of such amount to make allotments for such fiscal 
     year in accordance with subparagraph (B).
       (B) Formula.--The amount of the allotment for each State 
     for fiscal year 2004 shall be equal to the product of--
       (i) the total amount available for allotments under this 
     paragraph for the fiscal year; and
       (ii) the percentage of undocumented aliens residing in the 
     State with respect to the total number of such aliens 
     residing in all States, as determined by the Statistics 
     Division of the Immigration and Naturalization Service, as of 
     January 2003, based on the 2000 decennial census.
       (2) Based on number of undocumented alien apprehension 
     states.--
       (A) In general.--Out of the amount appropriated under 
     subsection (a) for fiscal year 2004, the Secretary shall use 
     $16,000,000 of such amount to make allotments for such fiscal 
     year for each of the 6 States with the highest number of 
     undocumented alien apprehensions for such fiscal year.
       (B) Determination of allotments.--The amount of the 
     allotment for each State described in subparagraph (A) for 
     fiscal year 2004 shall bear the same ratio to the total 
     amount available for allotments under this paragraph for the 
     fiscal year as the ratio of the number of undocumented alien 
     apprehensions in the State in that fiscal year bears to the 
     total of such numbers for all such States for such fiscal 
     year.
       (C) Data.--For purposes of this paragraph, the highest 
     number of undocumented alien apprehensions for fiscal year 
     2004 shall be based on the 4 most recent quarterly 
     apprehension rates for undocumented aliens in such States, as 
     reported by the Immigration and Naturalization Service.
       (3) Rule of construction.--Nothing in this section shall be 
     construed as prohibiting a State that is described in both of 
     paragraphs (1) and (2) from receiving an allotment under both 
     paragraphs for fiscal year 2004.
       (c) Use of Funds.--
       (1) Authority to make payments.--From the allotments made 
     for a State under subsection (b) for fiscal year 2004, the 
     Secretary shall pay directly to local governments, hospitals, 
     or other providers located in the State (including providers 
     of services received through an Indian Health Service 
     facility whether operated by the Indian Health Service or by 
     an Indian tribe or tribal organization) that provide 
     uncompensated emergency health services furnished to 
     undocumented aliens during that fiscal year, and to the 
     State, such amounts (subject to the total amount available 
     from such allotments) as the local governments, hospitals, 
     providers, or State demonstrate were incurred for the 
     provision of such services during that fiscal year.
       (2) Limitation on state use of funds.--Funds paid to a 
     State from allotments made under subsection (b) for fiscal 
     year 2004 may only be used for making payments to local 
     governments, hospitals, or other providers for costs incurred 
     in providing emergency health services to undocumented aliens 
     or for State costs incurred with respect to the provision of 
     emergency health services to such aliens.
       (3) Inclusion of costs incurred with respect to certain 
     aliens.--Uncompensated emergency health services furnished to 
     aliens who have been allowed to enter the United States for 
     the sole purpose of receiving emergency health services may 
     be included in the determination of costs incurred by a 
     State, local government, hospital, or other provider with 
     respect to the provision of such services.
       (d) Applications; Advance Payments.--
       (1) Deadline for establishment of application process.--
       (A) In general.--Not later than September 1, 2003, the 
     Secretary shall establish a process under which States, local 
     governments, hospitals, or other providers located in the 
     State may apply for payments from allotments made under 
     subsection (b) for fiscal year 2004 for uncompensated 
     emergency health services furnished to undocumented aliens 
     during that fiscal year.
       (B) Inclusion of measures to combat fraud.--The Secretary 
     shall include in the process established under subparagraph 
     (A) measures to ensure that fraudulent payments are not made 
     from the allotments determined under subsection (b).
       (2) Advance payment; Retrospective adjustment.--The process 
     established under paragraph (1) shall allow for making 
     payments under this section for each quarter of fiscal year 
     2004 on the basis of advance estimates of expenditures 
     submitted by applicants for such payments and such other 
     investigation as the Secretary may find necessary, and for 
     making reductions or increases in the payments as necessary 
     to adjust for any overpayment or underpayment for prior 
     quarters of such fiscal year.
       (e) Definitions.--In this section:
       (1) Hospital.--The term ``hospital'' has the meaning given 
     such term in section 1861(e) of the Social Security Act (42 
     U.S.C. 1395x(e)).
       (2) Indian tribe; tribal organization.--The terms ``Indian 
     tribe'' and ``tribal organization'' have the meanings given 
     such terms in section 4 of the Indian Health Care Improvement 
     Act (25 U.S.C. 1603).
       (3) Provider.--The term ``provider'' includes a physician, 
     any other health care professional licensed under State law, 
     and any other entity that furnishes emergency health 
     services, including ambulance services.
       (4) Secretary.--The term ``Secretary'' means the Secretary 
     of Health and Human Services.
       (5) State.--The term ``State'' means the 50 States and the 
     District of Columbia.
       (f) Entitlement.--This section constitutes budget authority 
     in advance of appropriations Acts and represents the 
     obligation of the Federal Government to provide for the 
     payment of amounts provided under this section.

     SEC. 528. PREMIUMS FOR MORTGAGE INSURANCE.

       (a) Mortgage Insurance Premiums Treated as Interest.--
       (1) In general.--Paragraph (3) of section 163(h) (relating 
     to qualified residence interest) is amended by adding after 
     subparagraph (D) the following new subparagraph:
       ``(E) Mortgage insurance premiums treated as interest.--
       ``(i) In general.--Premiums paid or accrued for qualified 
     mortgage insurance by a taxpayer during the taxable year in 
     connection with acquisition indebtedness with respect to a 
     qualified residence of the taxpayer shall be treated for 
     purposes of this subsection as qualified residence interest.
       ``(ii) Phaseout.--The amount otherwise allowable as a 
     deduction under clause (i) shall be reduced (but not below 
     zero) by 10 percent of such amount for each $1,000 ($500 in 
     the case of a married individual filing a separate return) 
     (or fraction thereof) that the taxpayer's adjusted gross 
     income for the taxable year exceeds $100,000 ($50,000 in the 
     case of a married individual filing a separate return).''.
       (2) Definition and special rules.--Paragraph (4) of section 
     163(h) (relating to other definitions and special rules) is 
     amended by adding at the end the following new subparagraphs:
       ``(E) Qualified mortgage insurance.--The term `qualified 
     mortgage insurance' means--
       ``(i) mortgage insurance provided by the Veterans 
     Administration, the Federal Housing Administration, or the 
     Rural Housing Administration, and
       ``(ii) private mortgage insurance (as defined by section 2 
     of the Homeowners Protection Act of 1998 (12 U.S.C. 4901), as 
     in effect on the date of the enactment of this subparagraph).
       ``(F) Special rules for prepaid qualified mortgage 
     insurance.--Any amount paid by the taxpayer for qualified 
     mortgage insurance that is properly allocable to any mortgage 
     the payment of which extends to periods that are after the 
     close of the taxable year in which such amount is paid shall 
     be chargeable to capital account and shall be treated as paid 
     in such periods to which so allocated. No deduction shall be 
     allowed for the unamortized balance of such account if such 
     mortgage is satisfied before the

[[Page 12417]]

     end of its term. The preceding sentences shall not apply to 
     amounts paid for qualified mortgage insurance provided by the 
     Veterans Administration or the Rural Housing 
     Administration.''.
       (b) Information Returns Relating to Mortgage Insurance.--
     Section 6050H (relating to returns relating to mortgage 
     interest received in trade or business from individuals) is 
     amended by adding at the end the following new subsection:
       ``(h) Returns Relating to Mortgage Insurance Premiums.--
       ``(1) In general.--The Secretary may prescribe, by 
     regulations, that any person who, in the course of a trade or 
     business, receives from any individual premiums for mortgage 
     insurance aggregating $600 or more for any calendar year, 
     shall make a return with respect to each such individual. 
     Such return shall be in such form, shall be made at such 
     time, and shall contain such information as the Secretary may 
     prescribe.
       ``(2) Statement to be furnished to individuals with respect 
     to whom information is required.--Every person required to 
     make a return under paragraph (1) shall furnish to each 
     individual with respect to whom a return is made a written 
     statement showing such information as the Secretary may 
     prescribe. Such written statement shall be furnished on or 
     before January 31 of the year following the calendar year for 
     which the return under paragraph (1) was required to be made.
       ``(3) Special rules.--For purposes of this subsection--
       ``(A) rules similar to the rules of subsection (c) shall 
     apply, and
       ``(B) the term `mortgage insurance' means--
       ``(i) mortgage insurance provided by the Veterans 
     Administration, the Federal Housing Administration, or the 
     Rural Housing Administration, and
       ``(ii) private mortgage insurance (as defined by section 2 
     of the Homeowners Protection Act of 1998 (12 U.S.C. 4901), as 
     in effect on the date of the enactment of this 
     subparagraph).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or accrued after the date of 
     enactment of this section in taxable years ending after such 
     date.

     SEC. 529. SENSE OF THE SENATE ON REPEALING THE 1993 TAX HIKE 
                   ON SOCIAL SECURITY BENEFITS SECTION.

       (a) Findings.--(1) The 1993 tax on social security benefits 
     was imposed as part of President Clinton's agenda to raise 
     taxes.
       (2) The original 1993 tax hike on social security benefits 
     was to raise income taxes on social security retirees with as 
     little as $25,000 of income.
       (3) Repeated efforts to repeal the 1993 tax hike on social 
     security benefits have failed.
       (4) Seniors rely on social security benefits as well as 
     dividend income to fund their retirement and they should have 
     taxes reduced on both sources of income.
       (b) Sense of the Senate.--It is the sense of the Senate 
     that the Senate Finance Committee should report out the 
     Social Security Benefits Tax Relief Act of 2003, S. 514, to 
     repeal the tax on seniors not later than July 31, 2003, and 
     the Senate shall consider such bill not later than September 
     30, 2003, in a manner consistent with the preservation of the 
     Medicare Trust Fund.

     SEC. 530. FLAT TAX.

       (a) Findings.--The Senate finds the following:
       (1) The current Internal Revenue Code, with its myriad 
     deductions, credits and schedules, and over 17,000 pages of 
     rules and regulations, is long overdue for an overhaul.
       (2) The current Internal Revenue Code has over 
     6,900,000,000 words compared to the bible at 1,773,000 words, 
     the Declaration of Independence at 1,300 words, The 
     Gettysburg Address at 267 words, and the Pledge of Allegiance 
     at only 31 words.
       (3) It is an unacceptable waste of our Nation's precious 
     resources when Americans spend more than 5,800,000,000 hours 
     every year compiling information and filling out Internal 
     Revenue Code tax forms. In addition, taxpayers spend 
     $194,000,000,000 each year in tax code compliance. America's 
     resources could be dedicated to far more productive pursuits.
       (4) The primary goal of any tax reform is to promote growth 
     and remove the inefficiencies of the current tax code. The 
     flat tax will expand the economy by an estimated 
     $2,000,000,000,000 over seven years.
       (5) Another important goal of the flat tax is to achieve 
     fairness, with a single low flat tax rate for all individuals 
     and businesses.
       (6) Simplicity is another critically important goal of the 
     flat tax, and it is in the public interest to have a ten-
     lined tax form that fits on a postcard and takes 10 minutes 
     to fill out.
       (7) A comprehensive analyses of our tax structure has 
     concluded that a flat tax of 19 percent could be imposed upon 
     individuals and be revenue neutral.
       (8) If the decision is made to include deductibility on 
     items such as interest on home mortgages and charitable 
     contributions, the flat tax would be raised from a 19 percent 
     to a 20 percent rate to accommodate the deductions and remain 
     revenue neutral.
       (9) The flat tax would tax business at a 20 percent rate on 
     net profits and be revenue neutral and lead to investment 
     decisions being made on the basis of productivity rather than 
     for tax avoidance.
       (10) The flat tax would lead to the elimination of the 
     capital gains tax. This would become a powerful incentive for 
     savings and investment--which translates into economic growth 
     and expansion, more and better jobs, and raising the standard 
     of living for all Americans.
       (11) The flat tax would lower the cost of capital by 
     allowing businesses to write off the cost of capital purchase 
     in the same year the purchase was made as opposed to 
     complying with complicated depreciation schedules.
       (12) By eliminating the double tax on dividends, the flat 
     tax eliminates the distortions in the tax code favoring debt 
     over equity financing by businesses.
       (13) The flat tax would eliminate the estate and gift tax. 
     With the elimination of the estate and gift tax, family-held 
     businesses will be much more stable under the flat tax 
     system.
       (14) As tax loopholes are eliminated and the tax code is 
     simplified, there will be far less opportunity for tax 
     avoidance and fraud, which now amounts to over 
     $120,000,000,000 in uncollected revenue annually.
       (b) Sense of the Senate.--It is the sense of the Senate 
     that the Senate Finance Committee and the Joint Economic 
     Committee should undertake a comprehensive analysis of 
     simplification including flat tax proposals, including 
     appropriate hearings and consider legislation providing for a 
     flat tax.

     SEC. 531. TOLL TAX ON EXCESS QUALIFIED FOREIGN DISTRIBUTION 
                   AMOUNT.

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

     ``SEC. 965. TOLL TAX IMPOSED ON EXCESS QUALIFIED FOREIGN 
                   DISTRIBUTION AMOUNT.

       ``(a) Toll Tax Imposed on Excess Qualified Foreign 
     Distribution Amount.--If a corporation elects the application 
     of this section, a tax shall be imposed on the taxpayer in an 
     amount equal to 5.25 percent of--
       ``(1) the taxpayer's excess qualified foreign distribution 
     amount, and
       ``(2) the amount determined under section 78 which is 
     attributable to such excess qualified foreign distribution 
     amount.

     Such tax shall be imposed in lieu of the tax imposed under 
     section 11 or 55 on the amounts described in paragraphs (1) 
     and (2) for such taxable year.
       ``(b) Excess Qualified Foreign Distribution Amount.--For 
     purposes of this section--
       ``(1) In general.--The term `excess qualified foreign 
     distribution amount' means the excess (if any) of--
       ``(A) dividends received by the taxpayer during the taxable 
     year which are--
       ``(i) from 1 or more corporations which are controlled 
     foreign corporations in which the taxpayer is a United States 
     shareholder on the date such dividends are paid, and
       ``(ii) described in a domestic reinvestment plan approved 
     by the taxpayer's president, chief executive officer, or 
     comparable official before the payment of such dividends and 
     subsequently approved by the taxpayer's board of directors, 
     management committee, executive committee, or similar body, 
     which plan shall provide for the reinvestment of such 
     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, over
       ``(B) the base dividend amount.
       ``(2) Base dividend amount.--The term `base dividend 
     amount' means an amount designated under subsection (c)(7), 
     but not less than the average amount of dividends received 
     during the fixed base period from 1 or more corporations 
     which are controlled foreign corporations in which the 
     taxpayer is a United States shareholder on the date such 
     dividends are paid.
       ``(3) Fixed base period.--
       ``(A) In general.--The term `fixed base period' means each 
     of 3 taxable years which are among the 5 most recent taxable 
     years of the taxpayer ending on or before December 31, 2002, 
     determined by disregarding--
       ``(i) the 1 taxable year for which the taxpayer had the 
     highest amount of dividends from 1 or more corporations which 
     are controlled foreign corporations relative to the other 4 
     taxable years, and
       ``(ii) the 1 taxable year for which the taxpayer had the 
     lowest amount of dividends from such corporations relative to 
     the other 4 taxable years.
       ``(B) Shorter period.--If the taxpayer has fewer than 5 
     taxable years ending on or before December 31, 2002, then in 
     lieu of applying subparagraph (A), the fixed base period 
     shall mean such shorter period representing all of the 
     taxable years of the taxpayer ending on or before December 
     31, 2002.
       ``(c) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Dividends.--The term `dividend' means a dividend as 
     defined in section 316, except that the term shall also 
     include amounts described in section 951(a)(1)(B), and shall 
     exclude amounts described in sections 78 and 959.
       ``(2) Controlled foreign corporations and united states 
     shareholders.--The term `controlled foreign corporation' 
     shall have the same meaning as under section 957(a) and the 
     term `United States shareholder' shall have the same meaning 
     as under section 951(b).
       ``(3) Foreign tax credits.--The amount of any income, war, 
     profits, or excess profit taxes paid (or deemed paid under 
     sections 902 and 960) or accrued by the taxpayer with respect 
     to the excess qualified foreign distribution amount for which 
     a credit would be allowable under section 901 in the absence 
     of this section, shall be reduced by 85 percent.
       ``(4) Foreign tax credit limitation.--For all purposes of 
     section 904, there shall be disregarded 85 percent of--

[[Page 12418]]

       ``(A) the excess qualified foreign distribution amount,
       ``(B) the amount determined under section 78 which is 
     attributable to such excess qualified foreign distribution 
     amount, and
       ``(C) the amounts (including assets, gross income, and 
     other relevant bases of apportionment) which are attributable 
     to the excess qualified foreign distribution amount which 
     would, determined without regard to this section, be used to 
     apportion the expenses, losses, and deductions of the 
     taxpayer under section 861 and 864 in determining its taxable 
     income from sources without the United States.

     For purposes of applying subparagraph (C), the principles of 
     section 864(e)(3)(A) shall apply.
       ``(5) Treatment of acquisitions and dispositions.--Rules 
     similar to the rules of section 41(f)(3) shall apply in the 
     case of acquisitions or dispositions of controlled foreign 
     corporations occurring on or after the first day of the 
     earliest taxable year taken into account in determining the 
     fixed base period.
       ``(6) Treatment of consolidated groups.--Members of an 
     affiliated group of corporations filing a consolidated return 
     under section 1501 shall be treated as a single taxpayer in 
     applying the rules of this section.
       ``(7) Designation of dividends.--Subject to subsection 
     (b)(2), the taxpayer shall designate the particular dividends 
     received during the taxable year from 1 or more corporations 
     which are controlled foreign corporations in which it is a 
     United States shareholder which are dividends excluded from 
     the excess qualified foreign distribution amount. The total 
     amount of such designated dividends shall equal the base 
     dividend amount.
       ``(8) Treatment of expenses, losses, and deductions.--Any 
     expenses, losses, or deductions of the taxpayer allowable 
     under subchapter B--
       ``(A) shall not be applied to reduce the amounts described 
     in subsection (a)(1), and
       ``(B) shall be applied to reduce other income of the 
     taxpayer (determined without regard to the amounts described 
     in subsection (a)(1)).
       ``(d) Election.--
       ``(1) In general.--An election under this section shall be 
     made on the taxpayer's timely filed income tax return for the 
     taxable year (determined by taking extensions into account) 
     ending 120 days or more after the date of the enactment of 
     this section, and, once made, may be revoked only with the 
     consent of the Secretary.
       ``(2) All controlled foreign corporations.--The election 
     shall apply to all corporations which are controlled foreign 
     corporations in which the taxpayer is a United States 
     shareholder during the taxable year.
       ``(3) Consolidated groups.--If a taxpayer is a member of an 
     affiliated group of corporations filing a consolidated return 
     under section 1501 for the taxable year, an election under 
     this section shall be made by the common parent of the 
     affiliated group which includes the taxpayer, and shall apply 
     to all members of the affiliated group.
       ``(e) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary and appropriate to carry out 
     the purposes of this section, including regulations under 
     section 55 and regulations addressing corporations which, 
     during the fixed base period or thereafter, join or leave an 
     affiliated group of corporations filing a consolidated 
     return.''.
       (b) Conforming 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. Toll tax imposed on excess qualified foreign distribution 
              amount.''.

       (c) Effective Date.--Except as otherwise provided, the 
     amendments made by this section, other than the amendment 
     made by subsection (d), shall apply only to the first taxable 
     year of the electing taxpayer ending 120 days or more after 
     the date of the enactment of this Act.
       (d) Termination of Rehabilitation Credit for Buildings 
     Other Than Certified Historic Structures.--Section 47 
     (relating to rehabilitation credit) is amended by adding at 
     the end the following new subsection:
       ``(e) Termination of Credit for Buildings Other Than 
     Certified Historic Structures.--No credit shall be allowed 
     under subsection (a)(1) with respect to expenditures incurred 
     after December 31, 2003.''.

     SEC. 532. CHILD SUPPORT ENFORCEMENT.

       (a) Inclusion in Income of Amount of Unpaid Child 
     Support.--Section 108 (relating to discharge of indebtedness 
     income) is amended by adding at the end the following new 
     subsection:
       ``(h) Unpaid Child Support.--
       ``(1) In general.--For purposes of this chapter, any unpaid 
     child support of a delinquent debtor for any taxable year 
     shall be treated as amounts includible in gross income of the 
     delinquent debtor for the taxable year.
       ``(2) Definitions.--For the purposes of this subsection--
       ``(A) Child support.--The term `child support' means--
       ``(i) any periodic payment of a fixed amount, or
       ``(ii) any payment of a medical expense, education expense, 
     insurance premium, or other similar item,

     which is required to be paid to a custodial parent by an 
     individual under a support instrument for the support of any 
     qualifying child of such individual. `Child support' does not 
     include any amount which is described in section 408(a)(3) of 
     the Social Security Act and which has been assigned to a 
     State.
       ``(B) Custodial parent.--The term `custodial parent' means 
     an individual who is entitled to receive child support and 
     who has registered with the appropriate State office of child 
     support enforcement charged with implementing section 454 of 
     the Social Security Act.
       ``(C) Delinquent debtor.--The term `delinquent debtor' 
     means a taxpayer who owes unpaid child support to a custodial 
     parent.
       ``(D) Qualifying child.--The term `qualifying child' means 
     a child of a custodial parent with respect to whom a 
     dependent deduction is allowable under section 151 for the 
     taxable year (or would be so allowable but for paragraph (2) 
     or (4) of section 152(e)).
       ``(E) Support instrument.--The term `support instrument' 
     means--
       ``(i) a decree of divorce or separate maintenance or a 
     written instrument incident to such a decree,
       ``(ii) a written separation agreement, or
       ``(iii) a decree (not described in clause (i)) of a court 
     or administrative agency requiring a parent to make payments 
     for the support or maintenance of 1 or more children of such 
     parent.
       ``(F) Unpaid child support.--The term `unpaid child 
     support' means child support that is payable for months 
     during a custodial parent's taxable year and unpaid as of the 
     last day of such taxable year, provided that such unpaid 
     amount as of such day equals or exceeds one-half of the total 
     amount of child support due to the custodial parent for such 
     year.
       ``(3) Coordination with other laws.--Amounts treated as 
     income by paragraph (1) shall not be treated as income by 
     reason of paragraph (1) for the purposes of any provision of 
     law which is not an internal revenue law.''.
       (b) Effective Date; Implementation.--The amendments made by 
     is section shall apply to taxable years beginning after 
     December 31, 2002. The Secretary of the Treasury shall 
     publish Form 1099-CS (or such other form that may be 
     prescribed to comply with the amendment made by subsection 
     (b)(1)) and regulations, if any, that may be deemed necessary 
     to carry out the purposes of this Act, not later than 90 days 
     after the date of enactment of this Act.

     SEC. 533. LOW-INCOME HOUSING TAX CREDIT.

       (a) Findings.--The Senate finds the following:
       (1) The low-income housing tax credit is the Nation's 
     primary program for producing affordable rental housing.
       (2) Each year, the low-income housing tax credit produces 
     over 115,000 affordable apartments.
       (3) Since Congress created the low-income housing tax 
     credit in 1986, the credit has created 1,500,000 units of 
     affordable housing for about 3,500,000 Americans.
       (4) Analyses have found that certain approaches to reducing 
     or eliminating the taxation of dividends have the potential 
     to reduce the value of the low-income housing tax credit and 
     so reduce the amount of affordable housing available.
       (5) As of 2001, over 7,000,000 American renter families (1 
     in 5) suffer severe housing affordability problems, meaning 
     that the family spends more than half of its income on rent 
     or lives in substandard housing.
       (6) More than 150,000 apartments in the low-cost rental 
     housing inventory are lost each year due to rent increases, 
     abandonment, and deterioration.
       (b) Sense of the Senate.--It is the sense of the Senate 
     that any reduction or elimination of the taxation on 
     dividends should include provisions to preserve the success 
     of the low-income housing tax credit.

     SEC. 534. EXPENSING OF BROADBAND INTERNET ACCESS 
                   EXPENDITURES.

       (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 190 the 
     following new section:

     ``SEC. 191. BROADBAND EXPENDITURES.

       ``(a) Treatment of Expenditures.--
       ``(1) In general.--A taxpayer may elect to treat any 
     qualified broadband expenditure which is paid or incurred by 
     the taxpayer as an expense which is not chargeable to capital 
     account. Any expenditure which is so treated shall be allowed 
     as a deduction.
       ``(2) Election.--An election under paragraph (1) shall be 
     made at such time and in such manner as the Secretary may 
     prescribe by regulation.
       ``(b) Qualified Broadband Expenditures.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified broadband 
     expenditure' means, with respect to any taxable year, any 
     direct or indirect costs incurred and properly taken into 
     account with respect to the purchase or installation of 
     qualified equipment (including any upgrades thereto), 
     together with any direct or indirect costs incurred and 
     properly taken into account with respect to the connection of 
     such qualified equipment to any qualified subscriber, but 
     only if such costs are incurred after December 31, 2003, and 
     before January 1, 2005.
       ``(2) Certain satellite expenditures excluded.--Such term 
     shall not include any costs incurred with respect to the 
     launching of any satellite equipment.
       ``(3) Leased equipment.--Such term shall include so much of 
     the purchase price paid by the lessor of equipment subject to 
     a lease described in subsection (c)(2)(B) as is attributable 
     to expenditures incurred by the lessee which would otherwise 
     be described in paragraph (1).
       ``(4) Limitation with regard to current generation 
     broadband services.--Only 50 percent of the amounts taken 
     into account

[[Page 12419]]

     under paragraph (1) with respect to qualified equipment 
     through which current generation broadband services are 
     provided shall be treated as qualified broadband 
     expenditures.
       ``(c) When Expenditures Taken Into Account.--For purposes 
     of this section--
       ``(1) In general.--Qualified broadband expenditures with 
     respect to qualified equipment shall be taken into account 
     with respect to the first taxable year in which--
       ``(A) current generation broadband services are provided 
     through such equipment to qualified subscribers, or
       ``(B) next generation broadband services are provided 
     through such equipment to qualified subscribers.
       ``(2) Limitation.--
       ``(A) In general.--Qualified expenditures shall be taken 
     into account under paragraph (1) only with respect to 
     qualified equipment--
       ``(i) the original use of which commences with the 
     taxpayer, and
       ``(ii) which is placed in service,
     after December 31, 2003.
       ``(B) Sale-leasebacks.--For purposes of subparagraph (A), 
     if property--
       ``(i) is originally placed in service after December 31, 
     2003, by any person, and
       ``(ii) sold and leased back by such person within 3 months 
     after the date such property was originally placed in 
     service,

     such property shall be treated as originally placed in 
     service not earlier than the date on which such property is 
     used under the leaseback referred to in clause (ii).
       ``(d) Special Allocation Rules.--
       ``(1) Current generation broadband services.--For purposes 
     of determining the amount of qualified broadband expenditures 
     under subsection (a)(1) with respect to qualified equipment 
     through which current generation broadband services are 
     provided, if the qualified equipment is capable of serving 
     both qualified subscribers and other subscribers, the 
     qualified broadband expenditures shall be multiplied by a 
     fraction--
       ``(A) the numerator of which is the sum of the number of 
     potential qualified subscribers within the rural areas and 
     the underserved areas which the equipment is capable of 
     serving with current generation broadband services, and
       ``(B) the denominator of which is the total potential 
     subscriber population of the area which the equipment is 
     capable of serving with current generation broadband 
     services.
       ``(2) Next generation broadband services.--For purposes of 
     determining the amount of qualified broadband expenditures 
     under subsection (a)(1) with respect to qualified equipment 
     through which next generation broadband services are 
     provided, if the qualified equipment is capable of serving 
     both qualified subscribers and other subscribers, the 
     qualified expenditures shall be multiplied by a fraction--
       ``(A) the numerator of which is the sum of--
       ``(i) the number of potential qualified subscribers within 
     the rural areas and underserved areas, plus
       ``(ii) the number of potential qualified subscribers within 
     the area consisting only of residential subscribers not 
     described in clause (i),

     which the equipment is capable of serving with next 
     generation broadband services, and
       ``(B) the denominator of which is the total potential 
     subscriber population of the area which the equipment is 
     capable of serving with next generation broadband services.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Antenna.--The term `antenna' means any device used to 
     transmit or receive signals through the electromagnetic 
     spectrum, including satellite equipment.
       ``(2) Cable operator.--The term `cable operator' has the 
     meaning given such term by section 602(5) of the 
     Communications Act of 1934 (47 U.S.C. 522(5)).
       ``(3) Commercial mobile service carrier.--The term 
     `commercial mobile service carrier' means any person 
     authorized to provide commercial mobile radio service as 
     defined in section 20.3 of title 47, Code of Federal 
     Regulations.
       ``(4) Current generation broadband service.--The term 
     `current generation broadband service' means the transmission 
     of signals at a rate of at least 1,000,000 bits per second to 
     the subscriber and at least 128,000 bits per second from the 
     subscriber.
       ``(5) Multiplexing or demultiplexing.--The term 
     `multiplexing' means the transmission of 2 or more signals 
     over a single channel, and the term `demultiplexing' means 
     the separation of 2 or more signals previously combined by 
     compatible multiplexing equipment.
       ``(6) Next generation broadband service.--The term `next 
     generation broadband service' means the transmission of 
     signals at a rate of at least 22,000,000 bits per second to 
     the subscriber and at least 5,000,000 bits per second from 
     the subscriber.
       ``(7) Nonresidential subscriber.--The term `nonresidential 
     subscriber' means any person who purchases broadband services 
     which are delivered to the permanent place of business of 
     such person.
       ``(8) Open video system operator.--The term `open video 
     system operator' means any person authorized to provide 
     service under section 653 of the Communications Act of 1934 
     (47 U.S.C. 573).
       ``(9) Other wireless carrier.--The term `other wireless 
     carrier' means any person (other than a telecommunications 
     carrier, commercial mobile service carrier, cable operator, 
     open video system operator, or satellite carrier) providing 
     current generation broadband services or next generation 
     broadband service to subscribers through the radio 
     transmission of energy.
       ``(10) Packet switching.--The term `packet switching' means 
     controlling or routing the path of any digitized transmission 
     signal which is assembled into packets or cells.
       ``(11) Provider.--The term `provider' means, with respect 
     to any qualified equipment--
       ``(A) a cable operator,
       ``(B) a commercial mobile service carrier,
       ``(C) an open video system operator,
       ``(D) a satellite carrier,
       ``(E) a telecommunications carrier, or
       ``(F) any other wireless carrier,

     providing current generation broadband services or next 
     generation broadband services to subscribers through such 
     qualified equipment.
       ``(12) Provision of services.--A provider shall be treated 
     as providing services to 1 or more subscribers if--
       ``(A) such a subscriber has been passed by the provider's 
     equipment and can be connected to such equipment for a 
     standard connection fee,
       ``(B) the provider is physically able to deliver current 
     generation broadband services or next generation broadband 
     services, as applicable, to such a subscriber without making 
     more than an insignificant investment with respect to such 
     subscriber,
       ``(C) the provider has made reasonable efforts to make such 
     subscribers aware of the availability of such services,
       ``(D) such services have been purchased by 1 or more such 
     subscribers, and
       ``(E) such services are made available to such subscribers 
     at average prices comparable to those at which the provider 
     makes available similar services in any areas in which the 
     provider makes available such services.
       ``(13) Qualified equipment.--
       ``(A) In general.--The term `qualified equipment' means 
     equipment which provides current generation broadband 
     services or next generation broadband services--
       ``(i) at least a majority of the time during periods of 
     maximum demand to each subscriber who is utilizing such 
     services, and
       ``(ii) in a manner substantially the same as such services 
     are provided by the provider to subscribers through equipment 
     with respect to which no deduction is allowed under 
     subsection (a)(1).
       ``(B) Only certain investment taken into account.--Except 
     as provided in subparagraph (C) or (D), equipment shall be 
     taken into account under subparagraph (A) only to the extent 
     it--
       ``(i) extends from the last point of switching to the 
     outside of the unit, building, dwelling, or office owned or 
     leased by a subscriber in the case of a telecommunications 
     carrier,
       ``(ii) extends from the customer side of the mobile 
     telephone switching office to a transmission/receive antenna 
     (including such antenna) owned or leased by a subscriber in 
     the case of a commercial mobile service carrier,
       ``(iii) extends from the customer side of the headend to 
     the outside of the unit, building, dwelling, or office owned 
     or leased by a subscriber in the case of a cable operator or 
     open video system operator, or
       ``(iv) extends from a transmission/receive antenna 
     (including such antenna) which transmits and receives signals 
     to or from multiple subscribers, to a transmission/receive 
     antenna (including such antenna) on the outside of the unit, 
     building, dwelling, or office owned or leased by a subscriber 
     in the case of a satellite carrier or other wireless carrier, 
     unless such other wireless carrier is also a 
     telecommunications carrier.
       ``(C) Packet switching equipment.--Packet switching 
     equipment, regardless of location, shall be taken into 
     account under subparagraph (A) only if it is deployed in 
     connection with equipment described in subparagraph (B) and 
     is uniquely designed to perform the function of packet 
     switching for current generation broadband services or next 
     generation broadband services, but only if such packet 
     switching is the last in a series of such functions performed 
     in the transmission of a signal to a subscriber or the first 
     in a series of such functions performed in the transmission 
     of a signal from a subscriber.
       ``(D) Multiplexing and demultiplexing equipment.--
     Multiplexing and demultiplexing equipment shall be taken into 
     account under subparagraph (A) only to the extent it is 
     deployed in connection with equipment described in 
     subparagraph (B) and is uniquely designed to perform the 
     function of multiplexing and demultiplexing packets or cells 
     of data and making associated application adaptions, but only 
     if such multiplexing or demultiplexing equipment is located 
     between packet switching equipment described in subparagraph 
     (C) and the subscriber's premises.
       ``(14) Qualified subscriber.--The term `qualified 
     subscriber' means--
       ``(A) with respect to the provision of current generation 
     broadband services--
       ``(i) any nonresidential subscriber maintaining a permanent 
     place of business in a rural area or underserved area, or
       ``(ii) any residential subscriber residing in a dwelling 
     located in a rural area or underserved area which is not a 
     saturated market, and
       ``(B) with respect to the provision of next generation 
     broadband services--
       ``(i) any nonresidential subscriber maintaining a permanent 
     place of business in a rural area or underserved area, or
       ``(ii) any residential subscriber.
       ``(15) Residential subscriber.--The term `residential 
     subscriber' means any individual who purchases broadband 
     services which are delivered to such individual's dwelling.

[[Page 12420]]

       ``(16) Rural area.--The term `rural area' means any census 
     tract which--
       ``(A) is not within 10 miles of any incorporated or census 
     designated place containing more than 25,000 people, and
       ``(B) is not within a county or county equivalent which has 
     an overall population density of more than 500 people per 
     square mile of land.
       ``(17) Rural subscriber.--The term `rural subscriber' means 
     any residential subscriber residing in a dwelling located in 
     a rural area or nonresidential subscriber maintaining a 
     permanent place of business located in a rural area.
       ``(18) Satellite carrier.--The term `satellite carrier' 
     means any person using the facilities of a satellite or 
     satellite service licensed by the Federal Communications 
     Commission and operating in the Fixed-Satellite Service under 
     part 25 of title 47 of the Code of Federal Regulations or the 
     Direct Broadcast Satellite Service under part 100 of title 47 
     of such Code to establish and operate a channel of 
     communications for distribution of signals, and owning or 
     leasing a capacity or service on a satellite in order to 
     provide such point-to-multipoint distribution.
       ``(19) Saturated market.--The term `saturated market' means 
     any census tract in which, as of the date of the enactment of 
     this section--
       ``(A) 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 in 
     dwellings located within such census tract, and
       ``(B) such services can be utilized--
       ``(i) at least a majority of the time during periods of 
     maximum demand by each such subscriber who is utilizing such 
     services, and
       ``(ii) in a manner substantially the same as such services 
     are provided by the provider to subscribers through equipment 
     with respect to which no deduction is allowed under 
     subsection (a)(1).
       ``(20) Subscriber.--The term `subscriber' means any person 
     who purchases current generation broadband services or next 
     generation broadband services.
       ``(21) Telecommunications carrier.--The term 
     `telecommunications carrier' has the meaning given such term 
     by section 3(44) of the Communications Act of 1934 (47 U.S.C. 
     153(44)), but--
       ``(A) includes all members of an affiliated group of which 
     a telecommunications carrier is a member, and
       ``(B) does not include a commercial mobile service carrier.
       ``(22) Total potential subscriber population.--The term 
     `total potential subscriber population' means, with respect 
     to any area and based on the most recent census data, the 
     total number of potential residential subscribers residing in 
     dwellings located in such area and potential nonresidential 
     subscribers maintaining permanent places of business located 
     in such area.
       ``(23) Underserved area.--The term `underserved area' means 
     any census tract which is located in--
       ``(A) an empowerment zone or enterprise community 
     designated under section 1391,
       ``(B) the District of Columbia Enterprise Zone established 
     under section 1400,
       ``(C) a renewal community designated under section 1400E, 
     or
       ``(D) a low-income community designated under section 45D.
       ``(24) Underserved subscriber.--The term `underserved 
     subscriber' means any residential subscriber residing in a 
     dwelling located in an underserved area or nonresidential 
     subscriber maintaining a permanent place of business located 
     in an underserved area.
       ``(f) Special Rules.--
       ``(1) Property used outside the united states, etc., not 
     qualified.--No expenditures shall be taken into account under 
     subsection (a)(1) with respect to the portion of the cost of 
     any property referred to in section 50(b) or with respect to 
     the portion of the cost of any property taken into account 
     under section 179.
       ``(2) Basis reduction.--
       ``(A) 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)(1).
       ``(B) Ordinary income recapture.--For purposes of section 
     1245, the amount of the deduction allowable under subsection 
     (a)(1) 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.
       ``(3) Coordination with section 38.--No credit shall be 
     allowed under section 38 with respect to any amount for which 
     a deduction is allowed under subsection (a)(1).''.
       (b) Special Rule for Mutual or Cooperative Telephone 
     Companies.--Section 501(c)(12)(B) (relating to list of exempt 
     organizations) is amended by striking ``or'' at the end of 
     clause (iii), by striking the period at the end of clause 
     (iv) and inserting ``, or'', and by adding at the end the 
     following:
       ``(v) from the sale of property subject to a lease 
     described in section 191(c)(2)(B), but only to the extent 
     such income does not in any year exceed an amount equal to 
     the qualified broadband expenditures which would be taken 
     into account under section 191 for such year if the mutual or 
     cooperative telephone company was not exempt from taxation 
     and was treated as the owner of the property subject to such 
     lease.''.
       (c) Conforming Amendments.--
       (1) Section 263(a)(1) (relating to capital expenditures) 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 191.''.
       (2) Section 1016(a) of such Code 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 
     adding at the end the following new paragraph:
       ``(29) to the extent provided in section 191(f)(2).''.
       (3) The table of sections for part VI of subchapter A of 
     chapter 1 of such Code is amended by inserting after the item 
     relating to section 190 the following new item:
``Sec. 191. Broadband expenditures.''.

       (d) Designation of Census Tracts.--
       (1) In general.--The Secretary of the Treasury shall, not 
     later than 90 days after the date of the enactment of this 
     Act, designate and publish those census tracts meeting the 
     criteria described in paragraphs (16), (22), and (23) of 
     section 191(e) of the Internal Revenue Code of 1986 (as added 
     by this section). In making such designations, the Secretary 
     of the Treasury shall consult with such other departments and 
     agencies as the Secretary determines appropriate.
       (2) Saturated market.--
       (A) In general.--For purposes of designating and publishing 
     those census tracts meeting the criteria described in 
     subsection (e)(19) of such section 191--
       (i) the Secretary of the Treasury shall prescribe not later 
     than 30 days after the date of the enactment of this Act the 
     form upon which any provider which takes the position that it 
     meets such criteria with respect to any census tract shall 
     submit a list of such census tracts (and any other 
     information required by the Secretary) not later than 60 days 
     after the date of the publication of such form, and
       (ii) the Secretary of the Treasury shall publish an 
     aggregate list of such census tracts and the applicable 
     providers not later than 30 days after the last date such 
     submissions are allowed under clause (i).
       (B) No subsequent lists required.--The Secretary of the 
     Treasury shall not be required to publish any list of census 
     tracts meeting such criteria subsequent to the list described 
     in subparagraph (A)(ii).
       (C) Authority to disregard false submissions.--In addition 
     to imposing any other applicable penalties, the Secretary of 
     the Treasury shall have the discretion to disregard any form 
     described in subparagraph (A)(i) on which a provider 
     knowingly submitted false information.
       (e) Other Regulatory Matters.--
       (1) Prohibition.--No Federal or State agency or 
     instrumentality shall adopt regulations or ratemaking 
     procedures that would have the effect of confiscating any 
     deduction or portion thereof allowed under section 191 of the 
     Internal Revenue Code of 1986 (as added by this section) or 
     otherwise subverting the purpose of this section.
       (2) Treasury regulatory authority.--It is the intent of 
     Congress in providing the election to deduct qualified 
     broadband expenditures under section 191 of the Internal 
     Revenue Code of 1986 (as added by this section) to provide 
     incentives for the purchase, installation, and connection of 
     equipment and facilities offering expanded broadband access 
     to the Internet for users in certain low income and rural 
     areas of the United States, as well as to residential users 
     nationwide, in a manner that maintains competitive neutrality 
     among the various classes of providers of broadband services. 
     Accordingly, the Secretary of the Treasury shall prescribe 
     such regulations as may be necessary or appropriate to carry 
     out the purposes of section 191 of such Code, including--
       (A) regulations to determine how and when a taxpayer that 
     incurs qualified broadband expenditures satisfies the 
     requirements of section 191 of such Code to provide broadband 
     services, and
       (B) regulations describing the information, records, and 
     data taxpayers are required to provide the Secretary to 
     substantiate compliance with the requirements of section 191 
     of such Code.
       (f) Effective Date.--The amendments made by this section 
     shall apply to expenditures incurred after December 31, 2003.

     SEC. 535. INCOME TAX CREDIT FOR DISTILLED SPIRITS WHOLESALERS 
                   AND FOR DISTILLED SPIRITS IN CONTROL STATE 
                   BAILMENT WAREHOUSES FOR COSTS OF CARRYING 
                   FEDERAL EXCISE TAXES ON BOTTLED DISTILLED 
                   SPIRITS.

       (a) In General.--Subpart A of part I of subchapter A of 
     chapter 51 (relating to gallonage and occupational taxes) is 
     amended by adding at the end the following new section:

     ``SEC. 5011. INCOME TAX CREDIT FOR AVERAGE COST OF CARRYING 
                   EXCISE TAX.

       ``(a) In General.--For purposes of section 38, the amount 
     of the distilled spirits credit for any taxable year is the 
     amount equal to the product of--
       ``(1) in the case of--
       ``(A) any eligible wholesaler--
       ``(i) the number of cases of bottled distilled spirits--

       ``(I) which were bottled in the United States, and
       ``(II) which are purchased by such wholesaler during the 
     taxable year directly from the bottler of such spirits, or

       ``(B) any person which is subject to section 5005 and which 
     is not an eligible wholesaler, the number of cases of bottled 
     distilled spirits which

[[Page 12421]]

     are stored in a warehouse operated by, or on behalf of, a 
     State, or agency or political subdivision thereof, on which 
     title has not passed on an unconditional sale basis, and
       ``(2) the average tax-financing cost per case for the most 
     recent calendar year ending before the beginning of such 
     taxable year.
       ``(b) Eligible Wholesaler.--For purposes of this section, 
     the term `eligible wholesaler' means any person which holds a 
     permit under the Federal Alcohol Administration Act as a 
     wholesaler of distilled spirits which is not a State, or 
     agency or political subdivision thereof.
       ``(c) Average Tax-Financing Cost.--
       ``(1) In general.--For purposes of this section, the 
     average tax-financing cost per case for any calendar year is 
     the amount of interest which would accrue at the deemed 
     financing rate during a 60-day period on an amount equal to 
     the deemed Federal excise tax per case.
       ``(2) Deemed financing rate.--For purposes of paragraph 
     (1), the deemed financing rate for any calendar year is the 
     average of the corporate overpayment rates under paragraph 
     (1) of section 6621(a) (determined without regard to the last 
     sentence of such paragraph) for calendar quarters of such 
     year.
       ``(3) Deemed federal excise tax per case.--For purposes of 
     paragraph (1), the deemed Federal excise tax per case is 
     $25.68.
       ``(d) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Case.--The term `case' means 12 80-proof 750 
     milliliter bottles.
       ``(2) Number of cases in lot.--The number of cases in any 
     lot of distilled spirits shall be determined by dividing the 
     number of liters in such lot by 9.''.
       (b) Conforming Amendments.--
       (1) Subsection (b) of section 38 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 distilled spirits credit determined under 
     section 5011(a).''.
       (2) Subsection (d) of section 39 (relating to carryback and 
     carryforward of unused credits) is amended by adding at the 
     end the following new paragraph:
       ``(11) No carryback of section 5011 credit before january 
     1, 2003.--No portion of the unused business credit for any 
     taxable year which is attributable to the credit determined 
     under section 5011(a) may be carried back to a taxable year 
     beginning before January 1, 2003.''.
       (3) The table of sections for subpart A of part I of 
     subchapter A of chapter 51 is amended by adding at the end 
     the following new item:
``Sec. 5011. Income tax credit for average cost of carrying excise 
              tax.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 536. CLARIFICATION OF CONTRIBUTION IN AID OF 
                   CONSTRUCTION FOR WATER AND SEWERAGE DISPOSAL 
                   UTILITIES.

       (a) In General.--Subparagraph (A) of section 118(c)(3) 
     (relating to definitions) is amended to read as follows:
       ``(A) Contribution in aid of construction.--The term 
     `contribution in aid of construction' shall be defined by 
     regulations prescribed by the Secretary, except that such 
     term--
       ``(i) shall include amounts paid as customer connection 
     fees (including amounts paid to connect the customer's water 
     service line or sewer lateral line to the utility's 
     distribution or collection system or extend a main water or 
     sewer line to provide service to a customer), and
       ``(ii) shall not include amounts paid as service charges 
     for starting or stopping services.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to contributions made after the date of the 
     enactment of this Act.

     SEC. 537. RESTORATION OF DEDUCTION FOR TRAVEL EXPENSES OF 
                   SPOUSE, ETC. ACCOMPANYING TAXPAYER ON BUSINESS 
                   TRAVEL.

       (a) In General.--Subsection (m) of section 274 (relating to 
     additional limitations on travel expenses) is amended by 
     striking paragraph (3)(A).
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act, and on or before December 31, 2004.

     SEC. 538. CERTAIN SIGHTSEEING FLIGHTS EXEMPT FROM TAXES ON 
                   AIR TRANSPORTATION.

       (a) In General.--Section 4281 (relating to small aircraft 
     on nonestablished lines) is amended by adding at the end the 
     following new sentence: ``For purposes of this section, an 
     aircraft shall not be considered as operated on an 
     established line if such aircraft is operated on a flight the 
     sole purpose of which is sightseeing.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply with respect to transportation beginning on or 
     after the date of the enactment of this Act, but shall not 
     apply to any amount paid before such date.

     SEC. 539. CONFORMING THE INTERNAL REVENUE CODE OF 1986 TO 
                   REQUIREMENTS IMPOSED BY THE WOMEN'S HEALTH AND 
                   CANCER RIGHTS ACT OF 1998.

       (a) In General.--Subchapter B of chapter 100 (relating to 
     other requirements) is amended by inserting after section 
     9812 the following new section:

     ``SEC. 9813. REQUIRED COVERAGE FOR RECONSTRUCTIVE SURGERY 
                   FOLLOWING MASTECTOMIES.

       ``(a) In General.--A group health plan that provides 
     medical and surgical benefits with respect to a mastectomy 
     shall provide, in a case of a participant or beneficiary who 
     is receiving benefits in connection with a mastectomy and who 
     elects breast reconstruction in connection with such 
     mastectomy, coverage for--
       ``(1) all stages of reconstruction of the breast on which 
     the mastectomy has been performed,
       ``(2) surgery and reconstruction of the other breast to 
     produce a symmetrical appearance, and
       ``(3) prostheses and physical complications of mastectomy, 
     including lymphedemas,

     in a manner determined in consultation with the attending 
     physician and the patient. Such coverage may be subject to 
     annual deductibles and coinsurance provisions as may be 
     deemed appropriate and as are consistent with those 
     established for other benefits under the plan. Written notice 
     of the availability of such coverage shall be delivered to 
     the participant upon enrollment and annually thereafter.
       ``(b) Prohibitions.--A group health plan may not--
       ``(1) deny to a patient eligibility, or continued 
     eligibility, to enroll or to renew coverage under the terms 
     of the plan, solely for the purpose of avoiding the 
     requirements of this section, and
       ``(2) penalize or otherwise reduce or limit the 
     reimbursement of an attending provider, or provide incentives 
     (monetary or otherwise) to an attending provider, to induce 
     such provider to provide care to an individual participant or 
     beneficiary in a manner inconsistent with this section.
       ``(c) Rule of Construction.--Nothing in this section shall 
     be construed to prevent a group health plan from negotiating 
     the level and type of reimbursement with a provider for care 
     provided in accordance with this section.''
       (b) Clerical Amendment.--The table of sections for chapter 
     100 of such Code is amended by inserting after the item 
     relating to section 9812 the following new item:
``Sec. 9813. Required coverage for reconstructive surgery following 
              mastectomies.''

       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply with respect to plan years beginning on or after the 
     date of enactment of this Act.
       (2) Special rule for collective bargaining agreements.--In 
     the case of a group health plan maintained pursuant to 1 or 
     more collective bargaining agreements between employee 
     representatives and 1 or more employers, any plan amendment 
     made pursuant to a collective bargaining agreement relating 
     to the plan which amends the plan solely to conform to any 
     requirement added by this section shall not be treated as a 
     termination of such collective bargaining agreement.

     SEC. 540. EXPANSION OF DESIGNATED RENEWAL COMMUNITY AREA 
                   BASED ON 2000 CENSUS DATA.

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

     SEC. 541. RENEWAL COMMUNITY EMPLOYERS MAY QUALIFY FOR 
                   EMPLOYMENT CREDIT BY EMPLOYING RESIDENTS OF 
                   CERTAIN OTHER RENEWAL COMMUNITIES.

       (a) In General.--Section 1400H(b)(2) (relating to 
     modification) is amended by striking ``and'' at the end of 
     paragraph (1), by striking the period at the end of paragraph 
     (2) and inserting ``, and'', and by adding at the end the 
     following new paragraph:
       ``(3) subsection (d)(1)(B) thereof shall be applied by 
     substituting `such renewal community, an adjacent renewal 
     community within the same

[[Page 12422]]

     State as such renewal community, or a renewal community 
     within such State which is within 5 miles of any border of 
     such renewal community' for `such empowerment zone'.''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall take effect as if included in the amendment made by 
     section 101(a) of the Community Renewal Tax Relief Act of 
     2000.

     SEC. 542. EXPANSION OF INCOME TAX EXCLUSION FOR COMBAT ZONE 
                   SERVICE.

       (a) Combat Zone Service To Include Transit to Zone.--
     Section 112(c)(3) of the Internal Revenue Code of 1986 
     (relating to definitions) is amended by adding at the end the 
     following new sentence: ``Such service shall include any 
     period (not to exceed 14 days) of direct transit to the 
     combat zone.''.
       (b) Removal of Limitation on Exclusion for Commissioned 
     Officers.--
       (1) In general.--Subsection (b) of section 112 of the 
     Internal Revenue Code of 1986 (relating to certain combat 
     zone compensation of members of the Armed Forces) is 
     repealed.
       (2) Conforming amendments.--
       (A) Section 112(a) of such Code is amended--
       (i) by striking ``below the grade of commissioned 
     officer'', and
       (ii) by striking ``Enlisted Personnel'' in the heading and 
     inserting ``In General''.
       (B) Section 112(c) of such Code is amended by striking 
     paragraphs (1) and (5) and by redesignating paragraphs (2), 
     (3), and (4) as paragraphs (1), (2), and (3), respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to months beginning after December 31, 2002.

     SEC. 543. AVAILABILITY OF CERTAIN TAX BENEFITS FOR MEMBERS OF 
                   THE ARMED FORCES PERFORMING SERVICES AT 
                   GUANTANAMO BAY NAVAL STATION, CUBA, AND ON THE 
                   ISLAND OF DIEGO GARCIA.

       (a) General Rule.--In the case of a member of the Armed 
     Forces of the United States who is entitled to special pay 
     under section 305 of title 37, United States Code (relating 
     to special pay: hardship duty pay), for services performed as 
     a member of the Joint Task Force Guantanamo at Guantanamo Bay 
     Naval Station, Cuba, or for services performed on the Island 
     of Diego Garcia as part of Operation Iraqi Freedom, such 
     member shall be treated in the same manner as if such 
     services were in a combat zone (as determined under section 
     112 of the Internal Revenue Code of 1986) for purposes of the 
     following provisions of such Code:
       (1) Section 2(a)(3) (relating to special rule where 
     deceased spouse was in missing status).
       (2) Section 112 (relating to the exclusion of certain 
     combat pay of members of the Armed Forces).
       (3) Section 692 (relating to income taxes of members of 
     Armed Forces on death).
       (4) Section 2201 (relating to members of the Armed Forces 
     dying in combat zone or by reason of combat-zone-incurred 
     wounds, etc.).
       (5) Section 3401(a)(1) (defining wages relating to combat 
     pay for members of the Armed Forces).
       (6) Section 4253(d) (relating to the taxation of phone 
     service originating from a combat zone from members of the 
     Armed Forces).
       (7) Section 6013(f)(1) (relating to joint return where 
     individual is in missing status).
       (8) Section 7508 (relating to time for performing certain 
     acts postponed by reason of service in combat zone).
       (b) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), this 
     section shall take effect on January 1, 2003.
       (2) Withholding.--Subsection (a)(5) shall apply to 
     remuneration paid after December 31, 2002.

     SEC. 544. CITRUS CANKER TREE RELIEF.

       (a) Ratable Inclusion.--
       (1) In general.--Part I of subchapter Q of chapter 1 
     (relating to income averaging) is amended by inserting after 
     section 1301 the following new section:

     ``SEC. 1302. RATABLE INCOME INCLUSION FOR CITRUS CANKER TREE 
                   PAYMENTS.

       ``(a) In General.--At the election of the taxpayer, any 
     amount taken into account as income or gain by reason of 
     receiving a citrus canker tree payment shall be included in 
     the income of the taxpayer ratably over the 10-year period 
     beginning with the taxable year in which the payment is 
     received or accrued by the taxpayer. Such election shall be 
     made on the return of tax for such taxable year in such 
     manner as the Secretary prescribes, and, once made shall be 
     irrevocable.
       ``(b) Citrus Canker Tree Payment.--For purposes of 
     subsection (a), the term `citrus canker tree payment' means a 
     payment made to an owner of a commercial citrus grove to 
     recover income that was lost as a result of the removal of 
     commercial citrus trees to control canker under the 
     amendments to the citrus canker regulations (7 C.F.R. 301) 
     made by the final rule published in the Federal Register by 
     the Secretary of Agriculture on June 18, 2001 (66 Fed. Reg. 
     32713, Docket No. 00-37-4).''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter Q of chapter 1 is amended by inserting after 
     the item relating to section 1301 the following new item:
Sec. 1302. Ratable income inclusion for citrus canker tree payments.''.

       (b) Expansion of Period Within Which Converted Citrus Tree 
     Property Must Be Replaced.--Section 1033 (relating to period 
     within which property must be replaced) is amended by 
     redesignating subsection (k) as subsection (l) and by 
     inserting after subsection (j) the following new subsection:
       ``(k) Commercial Trees Destroyed Because of Citrus Tree 
     Canker.--In the case of commercial citrus trees which are 
     compulsorily or involuntarily converted under a public order 
     as a result of the citrus tree canker, clause (i) of 
     subsection (a)(2)(B) shall be applied as if such clause 
     reads: `4 years after the close of the first taxable year in 
     which any part of the gain upon conversion is realized, or 
     such additional period after the close of such taxable year 
     as determined appropriate by the Secretary on a regional 
     basis if a State or Federal plant health authority determines 
     with respect to such region that the land on which such trees 
     grew is not free from the bacteria that causes citrus tree 
     canker'.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning before, on, or after 
     the date of the enactment of this Act.

     SEC. 545. EXCLUSION OF CERTAIN PUNITIVE DAMAGE AWARDS.

       (a) In General.--Section 104 (relating to compensation for 
     injuries or sickness) is amended by redesignating subsection 
     (d) as subsection (e), and by inserting after subsection (c) 
     the following new subsection:
       ``(d) Exclusion of Punitive Damages Paid to a State Under a 
     Split-Award Statute.--
       ``(1) In general.--The phrase `(other than punitive 
     damages)' in subsection (a) shall not apply to--
       ``(A) any portion of an award of punitive damages in a 
     civil action which is paid to a State under a split-award 
     statute, or
       ``(B) any attorneys' fees or other costs incurred by the 
     taxpayer in connection with obtaining an award of punitive 
     damages to which subparagraph (A) is applicable.
       ``(2) Split-Award Statute.--For purposes of this 
     subsection, the term `split-award statute' means a State law 
     that requires a fixed portion of an award of punitive damages 
     in a civil action to be paid to the State.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to awards made in taxable years ending after the 
     date of the enactment of this Act.

     SEC. 546. TREATMENT OF CERTAIN IMPORTED RECYCLED HALONS.

       (a) In General.--Section 1803(c) of the Small Business Job 
     Protection Act of 1986 (Public Law 104-188) is amended by 
     striking ``1997'' and ``1998'' and inserting ``1994''.
       (b) Waiver of Limitations.--If refund or credit of any 
     overpayment of tax resulting from the amendment made by this 
     section is prevented at any time before the close of the 1-
     year period beginning on the date of the enactment of this 
     Act by the operation of any law or rule of law (including res 
     judicata), such refund or credit may nevertheless be made or 
     allowed if claim therefor is filed before the close of such 
     period.

     SEC. 547. MODIFICATION OF INVOLUNTARY CONVERSION RULES FOR 
                   BUSINESSES AFFECTED BY THE SEPTEMBER 11TH 
                   TERRORIST ATTACKS.

       (a) In General.--Subsection (g) of section 1400L is amended 
     to read as follows:
       ``(g) Modification of Rules Applicable to Nonrecognition of 
     Gain.--In the case of property which is compulsorily or 
     involuntarily converted as a result of the terrorist attacks 
     on September 11, 2001, in the New York Liberty Zone--
       ``(1) which was held by a corporation which is a member of 
     an affiliated group filing a consolidated return, such 
     corporation shall be treated as satisfying the purchase 
     requirement of section 1033(a)(2) with respect to such 
     property to the extent such requirement is satisfied by 
     another member of the group, and
       ``(2) notwithstanding subsections (g) and (h) of section 
     1033, clause (i) of section 1033(a)(2)(B) shall be applied by 
     substituting `5 years' for `2 years' with respect to property 
     which is compulsorily or involuntarily converted as a result 
     of the terrorist attacks on September 11, 2001, in the New 
     York Liberty Zone but only if substantially all of the use of 
     the replacement property is in the City of New York, New 
     York.''.
       (b) Effective Date.--The amendments made by this Act shall 
     apply to involuntary conversions occurring on or after 
     September 11, 2001.

                    Subtitle D--Medicare Provisions

     SEC. 561. EQUALIZING URBAN AND RURAL STANDARDIZED PAYMENT 
                   AMOUNTS UNDER THE MEDICARE INPATIENT HOSPITAL 
                   PROSPECTIVE PAYMENT SYSTEM.

       (a) In General.--Section 1886(d)(3)(A)(iv) of the Social 
     Security Act (42 U.S.C. 1395ww(d)(3)(A)(iv)) is amended--
       (1) by striking ``(iv) For discharges'' and inserting 
     ``(iv)(I) Subject to subclause (II), for discharges''; and
       (2) by adding at the end the following new subclause:
       ``(II) For discharges occurring in a fiscal year beginning 
     with fiscal year 2004, the Secretary shall compute a 
     standardized amount for hospitals located in any area within 
     the United States and within each region equal to the 
     standardized amount computed for the previous fiscal year 
     under this subparagraph for hospitals located in a large 
     urban area (or, beginning with fiscal year 2005, for 
     hospitals located in any area) increased by the applicable 
     percentage increase under subsection (b)(3)(B)(i) for the 
     fiscal year involved.''.
       (b) Conforming Amendments.--
       (1) Computing drg-specific rates.--Section 1886(d)(3)(D) of 
     the Social Security Act (42 U.S.C. 1395ww(d)(3)(D)) is 
     amended--
       (A) in the heading, by striking ``in different areas'';
       (B) in the matter preceding clause (i), by striking ``, 
     each of'';

[[Page 12423]]

       (C) in clause (i)--
       (i) in the matter preceding subclause (I), by inserting 
     ``for fiscal years before fiscal year 2004,'' before ``for 
     hospitals''; and
       (ii) in subclause (II), by striking ``and'' after the 
     semicolon at the end;
       (D) in clause (ii)--
       (i) in the matter preceding subclause (I), by inserting 
     ``for fiscal years before fiscal year 2004,'' before ``for 
     hospitals''; and
       (ii) in subclause (II), by striking the period at the end 
     and inserting ``; and''; and
       (E) by adding at the end the following new clause:
       ``(iii) for a fiscal year beginning after fiscal year 2003, 
     for hospitals located in all areas, to the product of--
       ``(I) the applicable standardized amount (computed under 
     subparagraph (A)), reduced under subparagraph (B), and 
     adjusted or reduced under subparagraph (C) for the fiscal 
     year; and
       ``(II) the weighting factor (determined under paragraph 
     (4)(B)) for that diagnosis-related group.''.
       (2) Technical conforming sunset.--Section 1886(d)(3) of the 
     Social Security Act (42 U.S.C. 1395ww(d)(3)) is amended--
       (A) in the matter preceding subparagraph (A), by inserting 
     ``, for fiscal years before fiscal year 1997,'' before ``a 
     regional adjusted DRG prospective payment rate''; and
       (B) in subparagraph (D), in the matter preceding clause 
     (i), by inserting ``, for fiscal years before fiscal year 
     1997,'' before ``a regional DRG prospective payment rate for 
     each region,''.

     SEC. 562. FAIRNESS IN THE MEDICARE DISPROPORTIONATE SHARE 
                   HOSPITAL (DSH) ADJUSTMENT FOR RURAL HOSPITALS.

       (a) Equalizing DSH Payment Amounts.--
       (1) In general.--Section 1886(d)(5)(F)(vii) of the Social 
     Security Act (42 U.S.C. 1395ww(d)(5)(F)(vii)) is amended by 
     inserting ``, and, after October 1, 2003, for any other 
     hospital described in clause (iv),'' after ``clause (iv)(I)'' 
     in the matter preceding subclause (I).
       (2) Conforming amendments.--Section 1886(d)(5)(F) of the 
     Social Security Act (42 U.S.C. 1395ww(d)(5)(F)) is amended--
       (A) in clause (iv)--
       (i) in subclause (II)--

       (I) by inserting ``and before October 1, 2003,'' after 
     ``April 1, 2001,''; and
       (II) by inserting ``or, for discharges occurring on or 
     after October 1, 2003, is equal to the percent determined in 
     accordance with the applicable formula described in clause 
     (vii)'' after ``clause (xiii)'';

       (ii) in subclause (III)--

       (I) by inserting ``and before October 1, 2003,'' after 
     ``April 1, 2001,''; and
       (II) by inserting ``or, for discharges occurring on or 
     after October 1, 2003, is equal to the percent determined in 
     accordance with the applicable formula described in clause 
     (vii)'' after ``clause (xii)'';

       (iii) in subclause (IV)--

       (I) by inserting ``and before October 1, 2003,'' after 
     ``April 1, 2001,''; and
       (II) by inserting ``or, for discharges occurring on or 
     after October 1, 2003, is equal to the percent determined in 
     accordance with the applicable formula described in clause 
     (vii)'' after ``clause (x) or (xi)'';

       (iv) in subclause (V)--

       (I) by inserting ``and before October 1, 2003,'' after 
     ``April 1, 2001,''; and
       (II) by inserting ``or, for discharges occurring on or 
     after October 1, 2003, is equal to the percent determined in 
     accordance with the applicable formula described in clause 
     (vii)'' after ``clause (xi)''; and

       (v) in subclause (VI)--

       (I) by inserting ``and before October 1, 2003,'' after 
     ``April 1, 2001,''; and
       (II) by inserting ``or, for discharges occurring on or 
     after October 1, 2003, is equal to the percent determined in 
     accordance with the applicable formula described in clause 
     (vii)'' after ``clause (x)'';

       (B) in clause (viii), by striking ``The formula'' and 
     inserting ``For discharges occurring before October 1, 2003, 
     the formula''; and
       (C) in each of clauses (x), (xi), (xii), and (xiii), by 
     striking ``For purposes'' and inserting ``With respect to 
     discharges occurring before October 1, 2003, for purposes''.
       (b) Effective Date.--The amendments made by this section 
     shall apply with respect to discharges occurring on or after 
     October 1, 2003.

     SEC. 563. MEDICARE INPATIENT HOSPITAL PAYMENT ADJUSTMENT FOR 
                   LOW-VOLUME HOSPITALS.

       Section 1886(d) of the Social Security Act (42 U.S.C. 
     1395ww(d)) is amended by adding at the end the following new 
     paragraph:
       ``(12) Payment adjustment for low-volume hospitals.--
       ``(A) Payment adjustment.--
       ``(i) In general.--Notwithstanding any other provision of 
     this section, for each cost reporting period (beginning with 
     the cost reporting period that begins in fiscal year 2005), 
     the Secretary shall provide for an additional payment amount 
     to each low-volume hospital (as defined in clause (iii)) for 
     discharges occurring during that cost reporting period to 
     increase the amount paid to such hospital under this section 
     for such discharges by the applicable percentage increase 
     determined under clause (ii).
       ``(ii) Applicable percentage increase.--The Secretary shall 
     determine a percentage increase applicable under this 
     paragraph that ensures that--

       ``(I) no percentage increase in payments under this 
     paragraph exceeds 25 percent of the amount of payment that 
     would otherwise be made to a low-volume hospital under this 
     section for each discharge (but for this paragraph);
       ``(II) low-volume hospitals that have the lowest number of 
     discharges during a cost reporting period receive the highest 
     percentage increase in payments due to the application of 
     this paragraph; and
       ``(III) the percentage increase in payments due to the 
     application of this paragraph is reduced as the number of 
     discharges per cost reporting period increases.

       ``(iii) Low-volume hospital defined.--For purposes of this 
     paragraph, the term `low-volume hospital' means, for a cost 
     reporting period, a subsection (d) hospital (as defined in 
     paragraph (1)(B)) other than a critical access hospital (as 
     defined in section 1861(mm)(1)) that--

       ``(I) the Secretary determines had an average of less than 
     2,000 discharges (determined with respect to all patients and 
     not just individuals receiving benefits under this title) 
     during the 3 most recent cost reporting periods for which 
     data are available that precede the cost reporting period to 
     which this paragraph applies; and
       ``(II) is located at least 15 miles from a similar hospital 
     (or is deemed by the Secretary to be so located by reason of 
     such factors as the Secretary determines appropriate, 
     including the time required for an individual to travel to 
     the nearest alternative source of appropriate inpatient care 
     (taking into account the location of such alternative source 
     of inpatient care and any weather or travel conditions that 
     may affect such travel time)).

       ``(B) Prohibiting certain reductions.--Notwithstanding 
     subsection (e), the Secretary shall not reduce the payment 
     amounts under this section to offset the increase in payments 
     resulting from the application of subparagraph (A).''.

     SEC. 564. ADJUSTMENT TO THE MEDICARE INPATIENT HOSPITAL PPS 
                   WAGE INDEX TO REVISE THE LABOR-RELATED SHARE OF 
                   SUCH INDEX.

       (a) In General.--Section 1886(d)(3)(E) of the Social 
     Security Act (42 U.S.C. 1395ww(d)(3)(E)) is amended--
       (1) by striking ``wage levels.--The Secretary'' and 
     inserting ``wage levels.--
       ``(i) In general.--Except as provided in clause (ii), the 
     Secretary''; and
       (2) by adding at the end the following new clause:
       ``(ii) Alternative proportion to be adjusted beginning in 
     fiscal year 2004.--
       ``(I) In general.--Except as provided in subclause (II), 
     for discharges occurring on or after October 1, 2003, the 
     Secretary shall substitute `62 percent' for the proportion 
     described in the first sentence of clause (i).
       ``(II) Hold harmless for certain hospitals.--If the 
     application of subclause (I) would result in lower payments 
     to a hospital than would otherwise be made, then this 
     subparagraph shall be applied as if this clause had not been 
     enacted.''.
       (b) Waiving Budget Neutrality.--Section 1886(d)(3)(E) of 
     the Social Security Act (42 U.S.C. 1395ww(d)(3)(E)), as 
     amended by subsection (a), is amended by adding at the end of 
     clause (i) the following new sentence: ``The Secretary shall 
     apply the previous sentence for any period as if the 
     amendments made by section 564(a) of the Jobs and Growth Tax 
     Relief Reconciliation Act of 2003 had not been enacted.''.

     SEC. 565. ONE-YEAR EXTENSION OF HOLD HARMLESS PROVISIONS FOR 
                   SMALL RURAL HOSPITALS AND TEMPORARY TREATMENT 
                   OF CERTAIN SOLE COMMUNITY HOSPITALS TO LIMIT 
                   DECLINE IN PAYMENT UNDER THE OPD PPS.

       (a) Hold Harmless Provisions.--Section 1833(t)(7)(D)(i) of 
     the Social Security Act (42 U.S.C. 1395l(t)(7)(D)(i)) is 
     amended--
       (1) in the heading, by striking ``small'' and inserting 
     ``certain'';
       (2) by inserting ``or a sole community hospital (as defined 
     in section 1886(d)(5)(D)(iii)) located in a rural area'' 
     after ``100 beds''; and
       (3) by striking ``2004'' and inserting ``2005''.
       (b) Effective Date.--The amendment made by subsection 
     (a)(2) shall apply with respect to payment for OPD services 
     furnished on and after January 1, 2004.

     SEC. 566. CRITICAL ACCESS HOSPITAL (CAH) IMPROVEMENTS.

       (a) Permitting Hospitals To Allocate Swing Beds and Acute 
     Care Inpatient Beds Subject to a Total Limit of 25 Beds.--
       (1) In general.--Section 1820(c)(2)(B)(iii) of the Social 
     Security Act (42 U.S.C. 1395i-4(c)(2)(B)(iii)) is amended to 
     read as follows:
       ``(iii) provides not more than a total of 25 extended care 
     service beds (pursuant to an agreement under subsection (f)) 
     or acute care inpatient beds (meeting such standards as the 
     Secretary may establish) for providing inpatient care for a 
     period that does not exceed, as determined on an annual, 
     average basis, 96 hours per patient;''.
       (2) Conforming amendment.--Section 1820(f) of the Social 
     Security Act (42 U.S.C. 1395i-4(f)) is amended by striking 
     ``and the number of beds used at any time for acute care 
     inpatient services does not exceed 15 beds''.
       (b) Elimination of the Isolation Test for Cost-Based CAH 
     Ambulance Services.--
       (1) In general.--Section 1834(l)(8) of the Social Security 
     Act (42 U.S.C. 1395m(l)(8)), as added by section 205(a) of 
     the Medicare, Medicaid, and SCHIP Benefits Improvement and 
     Protection Act of 2000 (114 Stat. 2763A-482), as enacted into 
     law by section 1(a)(6) of Public Law 106-554 (114 Stat. 
     2763), is amended by

[[Page 12424]]

     striking the comma at the end of subparagraph (B) and all 
     that follows and inserting a period.
       (2) Technical correction.--Section 1834(l) of the Social 
     Security Act (42 U.S.C. 1395m(l)) is amended by redesignating 
     paragraph (8), as added by section 221(a) of the Medicare, 
     Medicaid, and SCHIP Benefits Improvement and Protection Act 
     of 2000 (114 Stat. 2763A-486), as enacted into law by section 
     1(a)(6) of Public Law 106-554 (114 Stat. 2763), as paragraph 
     (9).
       (c) Coverage of Costs for Certain Emergency Room On-Call 
     Providers.--
       (1) In general.--Section 1834(g)(5) of the Social Security 
     Act (42 U.S.C. 1395m(g)(5)) is amended--
       (A) in the heading--
       (i) by inserting ``certain'' before ``emergency''; and
       (ii) by striking ``physicians'' and inserting 
     ``providers'';
       (B) by striking ``emergency room physicians who are on-call 
     (as defined by the Secretary)'' and inserting ``physicians, 
     physician assistants, nurse practitioners, and clinical nurse 
     specialists who are on-call (as defined by the Secretary) to 
     provide emergency services''; and
       (C) by striking ``physicians' services'' and inserting 
     ``services covered under this title''.
       (2) Effective date.--The amendments made by paragraph (1) 
     shall apply with respect to costs incurred for services 
     provided on or after January 1, 2004.
       (d) Authorization of Periodic Interim Payment (PIP).--
       (1) In general.--Section 1815(e)(2) of the Social Security 
     Act (42 U.S.C. 1395g(e)(2)) is amended--
       (A) in subparagraph (C), by striking ``and'' after the 
     semicolon at the end;
       (B) in subparagraph (D), by adding ``and'' after the 
     semicolon at the end; and
       (C) by inserting after subparagraph (D) the following new 
     subparagraph:
       ``(E) inpatient critical access hospital services,''.
       (2) Effective date.--The amendments made by paragraph (1) 
     shall apply with respect to payments for inpatient critical 
     access hospital services furnished on or after January 1, 
     2004.
       (e) Exclusion of New CAHs From PPS Hospital Wage Index 
     Calculation.--Section 1886(d)(3)(E)(i) of the Social Security 
     Act (42 U.S.C. 1395ww(d)(3)(E)(i)), as amended by section 
     564, is amended by inserting after the first sentence the 
     following new sentence: ``In calculating the hospital wage 
     levels under the preceding sentence applicable with respect 
     to cost reporting periods beginning on or after January 1, 
     2004, the Secretary shall exclude the wage levels of any 
     hospital that became a critical access hospital prior to the 
     cost reporting period for which such hospital wage levels are 
     calculated.''.

     SEC. 567. TEMPORARY INCREASE FOR HOME HEALTH SERVICES 
                   FURNISHED IN A RURAL AREA.

       (a) In General.--In the case of home health services 
     furnished in a rural area (as defined in section 
     1886(d)(2)(D) of the Social Security Act (42 U.S.C. 
     1395ww(d)(2)(D))) on or after October 1, 2003, and before 
     October 1, 2005, the Secretary of Health and Human Services 
     shall increase the payment amount otherwise made under 
     section 1895 of such Act (42 U.S.C. 1395fff) for such 
     services by 10 percent.
       (b) Waiving Budget Neutrality.--The Secretary of Health and 
     Human Services shall not reduce the standard prospective 
     payment amount (or amounts) under section 1895 of the Social 
     Security Act (42 U.S.C. 1395fff) applicable to home health 
     services furnished during a period to offset the increase in 
     payments resulting from the application of subsection (a).
       (c) No Effect on Subsequent Periods.--The payment increase 
     provided under subsection (a) for a period under such 
     subsection, shall not apply to episodes and visits ending 
     after such period, and shall not be taken into account in 
     calculating the payment amounts applicable for episodes and 
     visits occurring after such period.

     SEC. 568. TEMPORARY INCREASE IN PAYMENTS FOR CERTAIN SERVICES 
                   FURNISHED BY SMALL RURAL HOSPITALS UNDER 
                   MEDICARE PROSPECTIVE PAYMENT SYSTEM FOR 
                   HOSPITAL OUTPATIENT DEPARTMENT SERVICES.

       (a) Increase.--
       (1) In general.--In the case of an applicable covered OPD 
     service (as defined in paragraph (2)) that is furnished by a 
     hospital described in paragraph (7)(D)(i) of section 1833(t) 
     of the Social Security Act (42 U.S.C. 1395l(t)) on or after 
     January 1, 2004, and before January 1, 2007, the Secretary of 
     Health and Human Services (in this section referred to as the 
     ``Secretary'') shall increase the medicare OPD fee schedule 
     amount (as determined under paragraph (4)(A) of such section) 
     that is applicable for such service in that year (determined 
     without regard to any increase under this section in a 
     previous year) by 5 percent.
       (2) Applicable covered opd services defined.--For purposes 
     of this section, the term ``applicable covered OPD service'' 
     means a covered clinic or emergency room visit that is 
     classified within the groups of covered OPD services (as 
     defined in paragraph (1)(B) of section 1833(t) of the Social 
     Security Act (42 U.S.C. 1395l(t))) established under 
     paragraph (2)(B) of such section.
       (b) No Effect on Copayment Amount.--The Secretary shall 
     compute the copayment amount for applicable covered OPD 
     services under section 1833(t)(8)(A) of the Social Security 
     Act (42 U.S.C. 1395l(t)(8)(A)) as if this section had not 
     been enacted.
       (c) No Effect on Increase Under Hold Harmless or Outlier 
     Provisions.--The Secretary shall apply the temporary hold 
     harmless provision under paragraph (7)(D)(i) of section 
     1833(t) of the Social Security Act (42 U.S.C. 1395l(t)) and 
     the outlier provision under paragraph (5) of such section as 
     if this section had not been enacted.
       (d) Waiving Budget Neutrality and No Revision or 
     Adjustments.--The Secretary shall not make any revision or 
     adjustment under subparagraph (A), (B), or (C) of section 
     1833(t)(9) of the Social Security Act (42 U.S.C. 1395l(t)(9)) 
     because of the application of subsection (a)(1).
       (e) No Effect on Payments After Increase Period Ends.--The 
     Secretary shall not take into account any payment increase 
     provided under subsection (a)(1) in determining payments for 
     covered OPD services (as defined in paragraph (1)(B) of 
     section 1833(t) of the Social Security Act (42 U.S.C. 
     1395l(t))) under such section that are furnished after 
     January 1, 2007.
       (f) Findings.--The Senate finds the following:
       (1) The medicare program has a responsibility to pay enough 
     for beneficial new technologies in order to ensure that 
     medicare beneficiaries have access to care; however, such 
     program must also be a prudent purchaser of health care items 
     and services.
       (2) The 2003 Medicare Hospital Outpatient Prospective 
     Payment System Regulation may have resulted in limiting 
     beneficiary access to care.
       (3) A methodology should be developed under the medicare 
     outpatient prospective payment system under section 1833(t) 
     of the Social Security Act (42 U.S.C. 1395l(t)) with 
     appropriate resources and such methodology should be 
     implemented January 1, 2004. This will ensure that all 
     hospitals are appropriately reimbursed for the drugs and 
     biologics that are used in the outpatient setting which in 
     turn will ensure patient access to new technologies.
       (g) Technical Amendment.--Section 1833(t)(2)(B) (42 U.S.C. 
     1395l(t)(2)(B)) is amended by inserting ``(and periodically 
     revise such groups pursuant to paragraph (9)(A))'' after 
     ``establish groups''.

     SEC. 569 TEMPORARY INCREASE FOR GROUND AMBULANCE SERVICES 
                   FURNISHED IN A RURAL AREA.

       Section 1834(l) of the Social Security Act (42 U.S.C. 
     1395m(l)), as amended by section 566(b)(2), is amended by 
     adding at the end the following new paragraph:
       ``(10) Temporary increase for ground ambulance services 
     furnished in a rural area.--
       ``(A) In general.--Notwithstanding any other provision of 
     this subsection, in the case of ground ambulance services 
     furnished on or after January 1, 2004, and before January 1, 
     2007, for which the transportation originates in a rural area 
     described in paragraph (9) or in a rural census tract 
     described in such paragraph, the fee schedule established 
     under this section shall provide that the rate for the 
     service otherwise established, after application of any 
     increase under such paragraph, shall be increased by 5 
     percent.
       ``(B) Application of increased payments after 2006.--The 
     increased payments under subparagraph (A) shall not be taken 
     into account in calculating payments for services furnished 
     on or after the period specified in such subparagraph.''.

     SEC. 570. EXCLUSION OF CERTAIN RURAL HEALTH CLINIC AND 
                   FEDERALLY QUALIFIED HEALTH CENTER SERVICES FROM 
                   THE MEDICARE PPS FOR SKILLED NURSING 
                   FACILITIES.

       (a) In General.--Section 1888(e) of the Social Security Act 
     (42 U.S.C. 1395yy(e)) is amended--
       (1) in paragraph (2)(A)(i)(II), by striking ``clauses (ii) 
     and (iii)'' and inserting ``clauses (ii), (iii), and (iv)''; 
     and
       (2) by adding at the end of paragraph (2)(A) the following 
     new clause:
       ``(iv) Exclusion of certain rural health clinic and 
     federally qualified health center services.--Services 
     described in this clause are--

       ``(I) rural health clinic services (as defined in paragraph 
     (1) of section 1861(aa)); and
       ``(II) Federally qualified health center services (as 
     defined in paragraph (3) of such section);

     that would be described in clause (ii) if such services were 
     furnished by a physician or practitioner not affiliated with 
     a rural health clinic or a Federally qualified health 
     center.''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to services furnished on or after January 1, 
     2004.

     SEC. 571. MEDICARE INCENTIVE PAYMENT PROGRAM IMPROVEMENTS.

       (a) Procedures for Secretary, and Not Physicians, To 
     Determine When Bonus Payments Under Medicare Incentive 
     Payment Program Should Be Made.--Section 1833(m) of the 
     Social Security Act (42 U.S.C. 1395l(m)) is amended--
       (1) by inserting ``(1)'' after ``(m)''; and
       (2) by adding at the end the following new paragraph:
       ``(2) The Secretary shall establish procedures under which 
     the Secretary, and not the physician furnishing the service, 
     is responsible for determining when a payment is required to 
     be made under paragraph (1).''.
       (b) Educational Program Regarding the Medicare Incentive 
     Payment Program.--The Secretary shall establish and implement 
     an ongoing educational program to provide education to 
     physicians under the medicare program on the medicare 
     incentive payment program under section 1833(m) of the Social 
     Security Act (42 U.S.C. 1395l(m)).
       (c) Ongoing Study and Annual Report on the Medicare 
     Incentive Payment Program.--
       (1) Ongoing study.--The Secretary shall conduct an ongoing 
     study on the medicare incentive payment program under section 
     1833(m) of

[[Page 12425]]

     the Social Security Act (42 U.S.C. 1395l(m)). Such study 
     shall focus on whether such program increases the access of 
     medicare beneficiaries who reside in an area that is 
     designated (under section 332(a)(1)(A) of the Public Health 
     Service Act (42 U.S.C. 254e(a)(1)(A))) as a health 
     professional shortage area to physicians' services under the 
     medicare program.
       (2) Annual reports.--Not later than 1 year after the date 
     of enactment of this Act, and annually thereafter, the 
     Secretary shall submit to Congress a report on the study 
     conducted under paragraph (1), together with recommendations 
     for such legislation and administrative action as the 
     Secretary considers appropriate.

     SEC. 572. TWO-YEAR TREATMENT OF CERTAIN CLINICAL DIAGNOSTIC 
                   LABORATORY TESTS FURNISHED BY A SOLE COMMUNITY 
                   HOSPITAL.

       Notwithstanding subsections (a)(1)(D) and (h) of section 
     1833 of the Social Security Act (42 U.S.C. 1395l) and section 
     1834(d)(1) of such Act (42 U.S.C. 1395m(d)(1)), in the case 
     of a clinical diagnostic laboratory test covered under part B 
     of title XVIII of such Act that is furnished in 2004 or 2005 
     by a sole community hospital (as defined in section 
     1886(d)(5)(D)(iii) of such Act (42 U.S.C. 
     1395ww(d)(5)(D)(iii))) as part of services provided to 
     patients of the hospital, the following rules shall apply:
       (1) Payment based on reasonable costs.--The amount of 
     payment for such test shall be 100 percent of the reasonable 
     costs of the hospital in furnishing such test.
       (2) No beneficiary cost-sharing.--No coinsurance, 
     deductible, copayment, or other cost-sharing otherwise 
     applicable under such part B shall apply with respect to such 
     test.

     SEC. 573. ESTABLISHMENT OF FLOOR ON GEOGRAPHIC ADJUSTMENTS OF 
                   PAYMENTS FOR PHYSICIANS' SERVICES.

       Section 1848(e)(1) of the Social Security Act (42 U.S.C. 
     1395w-4(e)(1)) is amended--
       (1) in subparagraph (A), by striking ``subparagraphs (B) 
     and (C)'' and inserting ``subparagraphs (B), (C), and (E)''; 
     and
       (2) by adding at the end the following new subparagraph:
       ``(E) Floor for practice expense, malpractice, and work 
     geographic indices.--For purposes of payment for services 
     furnished on or after January 1, 2004, after calculating the 
     practice expense, malpractice, and work geographic indices in 
     clauses (i), (ii), and (iii) of subparagraph (A) and in 
     subparagraph (B), the Secretary shall increase any such index 
     to 1.00 for any locality for which such index is less than 
     1.00.''.

     SEC. 574. FREEZE IN PAYMENTS FOR ITEMS OF DURABLE MEDICAL 
                   EQUIPMENT AND ORTHOTICS AND PROSTHETICS.

       (a) DME.--Section 1834(a)(14) of the Social Security Act 
     (42 U.S.C. 1395m(a)(14)) is amended--
       (1) in subparagraph (E), by striking ``and'' at the end;
       (2) in subparagraph (F)--
       (A) by striking ``a subsequent year'' and inserting 
     ``2003''; and
       (B) by striking ``the previous year.'' and inserting 
     ``2002;''; and
       (3) by adding at the end the following new subparagraphs:
       ``(G) for each of the years 2004 through 2013, 0 percentage 
     points; and
       ``(H) for a subsequent year, the percentage increase in the 
     consumer price index for all urban consumers (U.S. urban 
     average) for the 12-month period ending with June of the 
     previous year.''.
       (b) Orthotics and Prosthetics.--Section 1834(h)(4)(A) of 
     the Social Security Act (42 U.S.C. 1395m(h)(4)(A)) is 
     amended--
       (1) in clause (vii), by striking ``and'' at the end;
       (2) in clause (viii)--
       (A) by striking ``a subsequent year'' and inserting 
     ``2003''; and
       (B) by striking ``the previous year'' and inserting 
     ``2002''; and
       (3) by adding at the end the following new clauses:
       ``(ix) for each of the years 2004 through 2013, 0 percent; 
     and
       ``(x) for a subsequent year, the percentage increase in the 
     consumer price index for all urban consumers (U.S. urban 
     average) for the 12-month period ending with June of the 
     previous year;''.

     SEC. 575. APPLICATION OF COINSURANCE AND DEDUCTIBLE FOR 
                   CLINICAL DIAGNOSTIC LABORATORY TESTS.

       (a) Coinsurance.--
       (1) In general.--Section 1833(a) of the Social Security Act 
     (42 U.S.C. 1395l(a)) is amended--
       (A) in paragraph (1)(D)--
       (i) in clause (i), by striking ``(or 100 percent, in the 
     case of such tests for which payment is made on an 
     assignment-related basis)''; and
       (ii) in clause (ii), by striking ``100 percent'' and 
     inserting ``80 percent''; and
       (B) in paragraph (2)(D)--
       (i) in clause (i), by striking ``(or 100 percent, in the 
     case of such tests for which payment is made on an 
     assignment-related basis or to a provider having an agreement 
     under section 1866)''; and
       (ii) in clause (ii), by striking ``100 percent'' and 
     inserting ``80 percent''.
       (2) Conforming amendment.--The third sentence of section 
     1866(a)(2)(A) of the Social Security Act (42 U.S.C. 
     1395cc(a)(2)(A) is amended by striking ``and with respect to 
     clinical diagnostic laboratory tests for which payment is 
     made under part B''.
       (b) Deductible.--Section 1833(b) of the Social Security Act 
     (42 U.S.C. 1395l(b)) is amended--
       (1) by striking paragraph (3); and
       (2) by redesignating paragraphs (4), (5), and (6) as 
     paragraphs (3), (4), and (5), respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to tests furnished on or after January 1, 2004.

     SEC. 576. REVISION IN PAYMENTS FOR COVERED OUTPATIENT DRUGS.

       Section 1842(o)(1) of the Social Security Act (42 U.S.C. 
     1395u(o)(1)) is amended by striking ``equal to 95 percent of 
     the average wholesale price.'' and inserting ``equal to--
       ``(A) in the case of drugs furnished prior to January 1, 
     2004, 95 percent of the average wholesale price; and
       ``(B) in the case of drugs furnished on or after January 1, 
     2004, the lesser of--
       ``(i) 85 percent of the average wholesale price; or
       ``(ii) the amount payable for the drug or biological during 
     the last quarter of the previous year (as determined under 
     this subparagraph, or, in the case of 2004, under 
     subparagraph (A) using the second quarter of 2003) increased 
     by the percentage increase in the consumer price index for 
     all urban consumers (U.S. urban average) for the 12-month 
     period ending with June of the previous year.''.

     SEC. 577. INAPPLICABILITY OF SUNSET.

       The provisions of section 1001(a) of this Act shall not 
     apply to the provisions of, and amendments made by, this 
     subtitle.

      Subtitle E--Provisions Relating To S Corporation Reform and 
                             Simplification

       PART I--MAXIMUM NUMBER OF SHAREHOLDERS OF AN S CORPORATION

     SEC. 581. 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 (E), all members of 
     the family shall be treated as 1 shareholder.
       ``(B) Members of the family.--For purpose of subparagraph 
     (A)(ii), the term `members of the family' means the common 
     ancestor, lineal descendants of the common ancestor and the 
     spouses of such lineal descendants or common ancestor.
       ``(C) 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.
       ``(D) Effect of adoption, etc.--In determining whether any 
     relationship specified in subparagraph (B) or (C) exists, the 
     rules of section 152(b)(2) shall apply.
       ``(E) Election.--An election under subparagraph (A)(ii)--
       ``(i) must be made with the consent of all persons who are 
     shareholders (including those that are family members) in the 
     corporation on the day the election is made,
       ``(ii) in the case of--

       ``(I) an electing small business trust, shall be made by 
     the trustee of the trust, and
       ``(II) a qualified subchapter S trust, shall be made by the 
     beneficiary of the trust,

       ``(iii) under regulations, shall remain in effect until 
     terminated, and
       ``(iv) shall apply only with respect to 1 family in any 
     corporation.''.
       (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 under section 1361(c)(1)(A)(ii)'' 
     after ``section 1361(b)(3)(B)(ii)'' in paragraph (1), and
       (2) by inserting ``or under section 1361(c)(1)(E)(iii)'' 
     after ``section 1361(b)(3)(C)'' in paragraph (1)(B).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 582. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

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

     SEC. 583. NONRESIDENT ALIENS ALLOWED AS BENEFICIARIES OF AN 
                   ELECTING SMALL BUSINESS TRUST.

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

 PART II--TERMINATION OF ELECTION AND ADDITIONS TO TAX DUE TO PASSIVE 
                           INVESTMENT INCOME

     SEC. 584. MODIFICATIONS TO PASSIVE INCOME RULES.

       (a) Increased Percentage Limit.--

[[Page 12426]]

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

           PART III--TREATMENT OF S CORPORATION SHAREHOLDERS

     SEC. 585. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE.

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

     SEC. 586. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY 
                   QUALIFIED SUBCHAPTER S TRUST INCOME 
                   BENEFICIARIES.

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

     SEC. 587. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN 
                   DETERMINING POTENTIAL CURRENT BENEFICIARIES OF 
                   ESBT.

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

     SEC. 588. CLARIFICATION OF ELECTING SMALL BUSINESS TRUST 
                   DISTRIBUTION RULES.

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

                 PART IV--PROVISIONS RELATING TO BANKS

     SEC. 589. SALE OF STOCK IN IRA RELATING TO S CORPORATION 
                   ELECTION EXEMPT FROM PROHIBITED TRANSACTION 
                   RULES.

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

     SEC. 590. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM 
                   PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

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

     SEC. 591. TREATMENT OF QUALIFYING DIRECTOR SHARES.

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

              PART V--QUALIFIED SUBCHAPTER S SUBSIDIARIES

     SEC. 592. RELIEF FROM INADVERTENTLY INVALID QUALIFIED 
                   SUBCHAPTER S SUBSIDIARY ELECTIONS AND 
                   TERMINATIONS.

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

     SEC. 593. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S 
                   SUBSIDIARIES.

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

[[Page 12427]]



                     PART VI--ADDITIONAL PROVISIONS

     SEC. 594. ELIMINATION OF ALL EARNINGS AND PROFITS 
                   ATTRIBUTABLE TO PRE-1983 YEARS.

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

      TITLE VI--BLUE RIBBON COMMISSION ON COMPREHENSIVE TAX REFORM

     SEC. 601. SHORT TITLE.

       This Act may be cited as the ``Fundamental Tax Reform 
     Commission Act of 2003''.

     SEC. 602. ESTABLISHMENT OF COMMISSION.

       (a) Establishment.--There is established the ``Blue Ribbon 
     Commission on Comprehensive Tax Reform'' (in this Act 
     referred to as the ``Commission'').
       (b) Membership.--
       (1) Composition.--The Commission shall be composed of 12 
     members of whom--
       (A) 1 shall be the Chairman of the Board of Governors of 
     the Federal Reserve System;
       (B) 2 shall be appointed by the majority leader of the 
     Senate;
       (C) 2 shall be appointed by the minority leader of the 
     Senate;
       (D) 2 shall be appointed by the Speaker of the House of 
     Representatives;
       (E) 2 shall be appointed by the minority leader of the 
     House of Representatives; and
       (F) 3 shall be appointed by the President, of which no more 
     than 2 shall be of the same party as the President.
       (2) Federal employees.--The members of the Commission may 
     be employees or former employees of the Federal Government.
       (3) Date.--The appointments of the members of the 
     Commission shall be made not later than July 30, 2003.
       (c) Period of Appointment; Vacancies.--Members shall be 
     appointed for the life of the Commission. Any vacancy in the 
     Commission shall not affect its powers, but shall be filled 
     in the same manner as the original appointment.
       (d) Initial Meeting.--Not later than 30 days after the date 
     on which all members of the Commission have been appointed, 
     the Commission shall hold its first meeting.
       (e) Meetings.--The Commission shall meet at the call of the 
     Chairman.
       (f) Quorum.--A majority of the members of the Commission 
     shall constitute a quorum, but a lesser number of members may 
     hold hearings.
       (g) Chairman and Vice Chairman.--The President shall select 
     a Chairman and Vice Chairman from among its members.

     SEC. 603. DUTIES OF THE COMMISSION.

       (a) Study.--The Commission shall conduct a thorough study 
     of all matters relating to a comprehensive reform of the 
     Federal tax system, including the reform of the Internal 
     Revenue Code of 1986 and the implementation (if appropriate) 
     of other types of tax systems.
       (b) Recommendations.--The Commission shall develop 
     recommendations on how to comprehensively reform the Federal 
     tax system in a manner that generates appropriate revenue for 
     the Federal Government.
       (c) Report.--Not later than 18 months after the date on 
     which all initial members of the commission have been 
     appointed pursuant to section 602(b), the Commission shall 
     submit a report to the President and Congress which shall 
     contain a detailed statement of the findings and conclusions 
     of the Commission, together with its recommendations for such 
     legislation and administrative actions as it considers 
     appropriate.

     SEC. 604. POWERS OF THE COMMISSION.

       (a) Hearings.--The Commission may hold such hearings, sit 
     and act at such times and places, take such testimony, and 
     receive such evidence as the Commission considers advisable 
     to carry out this Act.
       (b) Information From Federal Agencies.--The Commission may 
     secure directly from any Federal department or agency such 
     information as the Commission considers necessary to carry 
     out this Act. Upon request of the Chairman of the Commission, 
     the head of such department or agency shall furnish such 
     information to the Commission.
       (c) Postal Services.--The Commission may use the United 
     States mails in the same manner and under the same conditions 
     as other departments and agencies of the Federal Government.
       (d) Gifts.--The Commission may accept, use, and dispose of 
     gifts or donations of services or property.

     SEC. 605. COMMISSION PERSONNEL MATTERS.

       (a) Compensation of Members.--Each member of the Commission 
     who is not an officer or employee of the Federal Government 
     shall be compensated at a rate equal to the daily equivalent 
     of the annual rate of basic pay prescribed for level IV of 
     the Executive Schedule under section 5315 of title 5, United 
     States Code, for each day (including travel time) during 
     which such member is engaged in the performance of the duties 
     of the Commission. All members of the Commission who are 
     officers or employees of the United States shall serve 
     without compensation in addition to that received for their 
     services as officers or employees of the United States.
       (b) Travel Expenses.--The members of the Commission shall 
     be allowed travel expenses, including per diem in lieu of 
     subsistence, at rates authorized for employees of agencies 
     under subchapter I of chapter 57 of title 5, United States 
     Code, while away from their homes or regular places of 
     business in the performance of services for the Commission.
       (c) Staff.--
       (1) In general.--The Chairman of the Commission may, 
     without regard to the civil service laws and regulations, 
     appoint and terminate an executive director and such other 
     additional personnel as may be necessary to enable the 
     Commission to perform its duties. The employment of an 
     executive director shall be subject to confirmation by the 
     Commission.
       (2) Compensation.--The Chairman of the Commission may fix 
     the compensation of the executive director and other 
     personnel without regard to chapter 51 and subchapter III of 
     chapter 53 of title 5, United States Code, relating to 
     classification of positions and General Schedule pay rates, 
     except that the rate of pay for the executive director and 
     other personnel may not exceed the rate payable for level V 
     of the Executive Schedule under section 5316 of such title.
       (d) Detail of Government Employees.--Any Federal Government 
     employee may be detailed to the Commission without 
     reimbursement, and such detail shall be without interruption 
     or loss of civil service status or privilege.
       (e) Procurement of Temporary and Intermittent Services.--
     The Chairman of the Commission may procure temporary and 
     intermittent services under section 3109(b) of title 5, 
     United States Code, at rates for individuals which do not 
     exceed the daily equivalent of the annual rate of basic pay 
     prescribed for level V of the Executive Schedule under 
     section 5316 of such title.

     SEC. 606. TERMINATION OF THE COMMISSION.

       The Commission shall terminate 90 days after the date on 
     which the Commission submits its report under section 603.

     SEC. 607. AUTHORIZATION OF APPROPRIATIONS.

       There are authorized to be appropriated such sums as are 
     necessary to the Commission to carry out this Act.

                TITLE VII--REAL ESTATE INVESTMENT TRUSTS

                      Subtitle A--REIT Corrections

     SEC. 701. REVISIONS TO REIT ASSET TEST.

       (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 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 either--

       ``(I) does not exceed the greater of \1/4\ of 1 percent or 
     5 percent of the annual yield to maturity, or
       ``(II) results solely from a default or the exercise of a 
     prepayment right by the issuer of the debt, 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.

[[Page 12428]]

       ``(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 paragraph (1)(C)), and
       ``(ii) have an aggregate value greater than 1 percent of 
     the issuer's outstanding securities.
       ``(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 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).''.

     SEC. 702. 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.''.

     SEC. 703. 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.

     SEC. 704. CONFORMITY WITH GENERAL HEDGING DEFINITION.

       (a) 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.''.

     SEC. 705. 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''.

     SEC. 706. PROHIBITED TRANSACTIONS PROVISIONS.

       (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 to 
     its taxable REIT subsidiary is not based in whole or in part 
     on the income or profits of the subsidiary or the income or 
     profits that the subsidiary derives from the sale or 
     operation of such property.''.

     SEC. 707. EFFECTIVE DATES.

       (a) In General.--Except as provided in subsection (b), the 
     amendments made by this title shall apply to taxable years 
     beginning after December 31, 2000.
       (b) Sections 703 Through 706.--The amendments made by 
     sections 703, 704, 705 and 706 shall apply to taxable years 
     beginning after the date of the enactment of this Act.

                  Subtitle B--REIT Savings Provisions

     SEC. 711. REVISIONS TO REIT PROVISIONS.

       (a) Rules of Application for Failure To Satisfy Section 
     856(c)(4).--Section 856(c) (relating to definition of real 
     estate investment trust), as amended by section 701, 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--

[[Page 12429]]

       ``(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.''.
       (b) 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''.
       (c) 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--
       (1) in paragraph (1) by inserting before the period at the 
     end of the first sentence the following: ``unless paragraph 
     (5) applies'', and
       (2) 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.''.
       (d) 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).''.
       (e) 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:
       ``(4) a statement by the taxpayer attached to its amendment 
     or supplement to a return of tax for the relevant tax 
     year.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after date of 
     enactment.

         TITLE VIII--EXTENSIONS OF CERTAIN EXPIRING PROVISIONS

             Subtitle A--Extensions of Expiring Provisions

     SEC. 801. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO 
                   MENTAL HEALTH BENEFITS.

       (a) In General.--Subsection (f) of section 9812 is amended 
     by striking ``2003'' and inserting ``2004''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to plan years beginning after December 31, 2002.

     SEC. 802. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST 
                   REGULAR AND MINIMUM TAX LIABILITY.

       (a) In General.--Paragraph (2) of section 26(a) is 
     amended--
       (1) by striking ``rule for 2000, 2001, 2002, and 2003.--'' 
     and inserting ``rule for 2000, 2001, 2002, 2003, and 2004.--
     '', and
       (2) by striking ``during 2000, 2001, 2002, or 2003,'' and 
     inserting ``during 2000, 2001, 2002, 2003, or 2004''.
       (b) Conforming Amendments.--
       (1) Section 904(h) is amended by striking ``during 2000, 
     2001, 2002, or 2003'' and inserting ``during 2000, 2001, 
     2002, 2003, or 2004''.
       (2) The amendments made by sections 201(b), 202(f), and 
     618(b) of the Economic Growth and Tax Relief Reconciliation 
     Act of 2001 shall not apply to taxable years beginning during 
     2004.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 803. CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN 
                   RENEWABLE RESOURCES.

       (a) In General.--Subparagraphs (A), (B), and (C) of section 
     45(c)(3) are each amended by striking ``2004'' and inserting 
     ``2005''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to facilities placed in service after December 
     31, 2002.

     SEC. 804. WORK OPPORTUNITY CREDIT.

       (a) In General.--Subparagraph (B) of section 51(c)(4) is 
     amended by striking ``2003'' and inserting ``2004''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to individuals who begin work for the employer 
     after December 31, 2002.

     SEC. 805. WELFARE-TO-WORK CREDIT.

       (a) In General.--Subsection (f) of section 51A is amended 
     by striking ``2003'' and inserting ``2004''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to individuals who begin work for the employer 
     after December 31, 2002.

     SEC. 806. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR 
                   OIL AND NATURAL GAS PRODUCED FROM MARGINAL 
                   PROPERTIES.

       (a) In General.--Subparagraph (H) of section 613A(c)(6) is 
     amended by striking ``2004'' and inserting ``2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 807. QUALIFIED ZONE ACADEMY BONDS.

       (a) In General.--Paragraph (1) of section 1397E(e) is 
     amended by striking ``2000, 2001, 2002, and 2003'' and 
     inserting ``2000, 2001, 2002, 2003, and 2004''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to obligations issued after the date of the 
     enactment of this Act.

     SEC. 808. COVER OVER OF TAX ON DISTILLED SPIRITS.

       (a) In General.--Paragraph (1) of section 7652(f) is 
     amended by striking ``January 1, 2004'' and inserting 
     ``January 1, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to articles brought into the United States after 
     December 31, 2002.

     SEC. 809. DEDUCTION FOR CORPORATE DONATIONS OF COMPUTER 
                   TECHNOLOGY.

       (a) Extension of Deduction.--Section 170(e)(6)(G) (relating 
     to termination) is amended by striking ``December 31, 2003'' 
     and inserting ``December 31, 2004''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to contributions made after December 31, 2002.

     SEC. 810. CREDIT FOR QUALIFIED ELECTRIC VEHICLES.

       (a) In General.--Section 30 is amended--
       (1) in subsection (b)(2)--
       (A) by striking ``December 31, 2003,'' and inserting 
     ``December 31, 2004,'', and
       (B) in subparagraphs (A), (B), and (C), by striking 
     ``2004'', ``2005'', and ``2006'', respectively, and inserting 
     ``2005'', ``2006'', and ``2007'', respectively.

[[Page 12430]]

       (2) in subsection (e), by striking ``December 31, 2006'' 
     and inserting ``December 31, 2007''.
       (b) Conforming Amendments.--Clause (iii) of section 
     280F(a)(1)(C) is amended by striking ``2007'' and inserting 
     ``2008''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2002.

     SEC. 811. DEDUCTION FOR CLEAN-FUEL VEHICLES AND CERTAIN 
                   REFUELING PROPERTY.

       (a) In General.--Section 179A is amended--
       (1) in subsection (b)(1)(B)--
       (A) by striking ``December 31, 2003,'' and inserting 
     ``December 31, 2004,'', and
       (B) in clauses (i), (ii), and (iii), by striking ``2004'', 
     ``2005'', and ``2006'', respectively, and inserting ``2005'', 
     ``2006'', and ``2007'', respectively, and
       (2) in subsection (f), by striking ``December 31, 2006'' 
     and inserting ``December 31, 2007''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to property placed in service after December 31, 
     2002.

     SEC. 812. DEDUCTION FOR CERTAIN EXPENSES OF SCHOOL TEACHERS.

       (a) In General.--Subparagraph (D) of section 62(a)(2) is 
     amended by striking ``during 2002 or 2003'' and inserting 
     ``during 2002, 2003, or 2004''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 813. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS.

       (a) In General.--Paragraphs (2) and (3)(B) of section 
     220(i) (defining cut-off year) are each amended by striking 
     ``2003'' each place it appears and inserting ``2004''.
       (b) Conforming Amendments.--
       (1) Paragraph (2) of section 220(j) is amended by striking 
     ``1998, 1999, 2001, or 2002'' each place it appears and 
     inserting ``1998, 1999, 2001, 2002, or 2003''.
       (2) Subparagraph (A) of section 220(j)(4) is amended by 
     striking ``and 2002'' and inserting ``2002, and 2003''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2003.

     SEC. 814. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

       (a) Extension of Termination Date.--Subsection (h) of 
     section 198 is amended by striking ``2003'' and inserting 
     ``2004''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to expenditures paid or incurred after December 
     31, 2002.

         TITLE IX--IMPROVING TAX EQUITY FOR MILITARY PERSONNEL

     SEC. 900. SHORT TITLE.

       This title may be cited as the ``Armed Forces Tax Fairness 
     Act of 2003''.

     SEC. 901. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL 
                   RESIDENCE BY A MEMBER OF THE UNIFORMED SERVICES 
                   OR THE FOREIGN SERVICE.

       (a) In General.--Subsection (d) of section 121 (relating to 
     exclusion of gain from sale of principal residence) is 
     amended by redesignating paragraph (9) as paragraph (10) and 
     by inserting after paragraph (8) the following new paragraph:
       ``(9) Members of uniformed services and foreign service.--
       ``(A) In general.--At the election of an individual with 
     respect to a property, the running of the 5-year period 
     described in subsections (a) and (c)(1)(B) and paragraph (7) 
     of this subsection with respect to such property shall be 
     suspended during any period that such individual or such 
     individual's spouse is serving on qualified official extended 
     duty as a member of the uniformed services or of the Foreign 
     Service of the United States.
       ``(B) Maximum period of suspension.--The 5-year period 
     described in subsection (a) shall not be extended more than 
     10 years by reason of subparagraph (A).
       ``(C) Qualified official extended duty.--For purposes of 
     this paragraph--
       ``(i) In general.--The term `qualified official extended 
     duty' means any extended duty while serving at a duty station 
     which is at least 50 miles from such property or while 
     residing under Government orders in Government quarters.
       ``(ii) Uniformed services.--The term `uniformed services' 
     has the meaning given such term by section 101(a)(5) of title 
     10, United States Code, as in effect on the date of the 
     enactment of this paragraph.
       ``(iii) Foreign service of the united states.--The term 
     `member of the Foreign Service of the United States' has the 
     meaning given the term `member of the Service' by paragraph 
     (1), (2), (3), (4), or (5) of section 103 of the Foreign 
     Service Act of 1980, as in effect on the date of the 
     enactment of this paragraph.
       ``(iv) Extended duty.--The term `extended duty' means any 
     period of active duty pursuant to a call or order to such 
     duty for a period in excess of 90 days or for an indefinite 
     period.
       ``(D) Special rules relating to election.--
       ``(i) Election limited to 1 property at a time.--An 
     election under subparagraph (A) with respect to any property 
     may not be made if such an election is in effect with respect 
     to any other property.
       ``(ii) Revocation of election.--An election under 
     subparagraph (A) may be revoked at any time.''.
       (b) Effective Date; Special Rule.--
       (1) Effective date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 312 of the Taxpayer Relief Act of 1997.
       (2) Waiver of limitations.--If refund or credit of any 
     overpayment of tax resulting from the amendments made by this 
     section is prevented at any time before the close of the 1-
     year period beginning on the date of the enactment of this 
     Act by the operation of any law or rule of law (including res 
     judicata), such refund or credit may nevertheless be made or 
     allowed if claim therefor is filed before the close of such 
     period.

     SEC. 902. EXCLUSION FROM GROSS INCOME OF CERTAIN DEATH 
                   GRATUITY PAYMENTS.

       (a) In General.--Subsection (b)(3) of section 134 (relating 
     to certain military benefits) is amended by adding at the end 
     the following new subparagraph:
       ``(C) Exception for death gratuity adjustments made by 
     law.--Subparagraph (A) shall not apply to any adjustment to 
     the amount of death gratuity payable under chapter 75 of 
     title 10, United States Code, which is pursuant to a 
     provision of law enacted after September 9, 1986.''.
       (b) Conforming Amendment.--Subparagraph (A) of section 
     134(b)(3) is amended by striking ``subparagraph (B)'' and 
     inserting ``subparagraphs (B) and (C)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to deaths occurring after September 
     10, 2001.

     SEC. 903. EXCLUSION FOR AMOUNTS RECEIVED UNDER DEPARTMENT OF 
                   DEFENSE HOMEOWNERS ASSISTANCE PROGRAM.

       (a) In General.--Section 132(a) (relating to the exclusion 
     from gross income of certain fringe benefits) is amended by 
     striking ``or'' at the end of paragraph (6), by striking the 
     period at the end of paragraph (7) and inserting ``, or'', 
     and by adding at the end the following new paragraph:
       ``(8) qualified military base realignment and closure 
     fringe.''.
       (b) Qualified Military Base Realignment and Closure 
     Fringe.--Section 132 is amended by redesignating subsection 
     (n) as subsection (o) and by inserting after subsection (m) 
     the following new subsection:
       ``(n) Qualified Military Base Realignment and Closure 
     Fringe.--For purposes of this section--
       ``(1) In general.--The term `qualified military base 
     realignment and closure fringe' means 1 or more payments 
     under the authority of section 1013 of the Demonstration 
     Cities and Metropolitan Development Act of 1966 (42 U.S.C. 
     3374) (as in effect on the date of the enactment of this 
     subsection) to offset the adverse effects on housing values 
     as a result of a military base realignment or closure.
       ``(2) Limitation.--With respect to any property, such term 
     shall not include any payment referred to in paragraph (1) to 
     the extent that the sum of all of such payments related to 
     such property exceeds the maximum amount described in clause 
     (1) of subsection (c) of such section (as in effect on such 
     date).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments made after the date of the enactment 
     of this Act.

     SEC. 904. EXPANSION OF COMBAT ZONE FILING RULES TO 
                   CONTINGENCY OPERATIONS.

       (a) In General.--Section 7508(a) (relating to time for 
     performing certain acts postponed by reason of service in 
     combat zone) is amended--
       (1) by inserting ``, or when deployed outside the United 
     States away from the individual's permanent duty station 
     while participating in an operation designated by the 
     Secretary of Defense as a contingency operation (as defined 
     in section 101(a)(13) of title 10, United States Code) or 
     which became such a contingency operation by operation of 
     law'' after ``section 112'',
       (2) by inserting in the first sentence ``or at any time 
     during the period of such contingency operation'' after ``for 
     purposes of such section'',
       (3) by inserting ``or operation'' after ``such an area'', 
     and
       (4) by inserting ``or operation'' after ``such area''.
       (b) Conforming Amendments.--
       (1) Section 7508(d) is amended by inserting ``or 
     contingency operation'' after ``area''.
       (2) The heading for section 7508 is amended by inserting 
     ``OR CONTINGENCY OPERATION'' after ``COMBAT ZONE''.
       (3) The item relating to section 7508 in the table of 
     sections for chapter 77 is amended by inserting ``OR 
     CONTINGENCY OPERATION'' after ``COMBAT ZONE''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to any period for performing an act which has not 
     expired before the date of the enactment of this Act.

     SEC. 905. MODIFICATION OF MEMBERSHIP REQUIREMENT FOR 
                   EXEMPTION FROM TAX FOR CERTAIN VETERANS' 
                   ORGANIZATIONS.

       (a) In General.--Subparagraph (B) of section 501(c)(19) 
     (relating to list of exempt organizations) is amended by 
     striking ``or widowers'' and inserting ``, widowers, 
     ancestors, or lineal descendants''.
       (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. 906. CLARIFICATION OF THE TREATMENT OF CERTAIN DEPENDENT 
                   CARE ASSISTANCE PROGRAMS.

       (a) In General.--Section 134(b) (defining qualified 
     military benefit) is amended by adding at the end the 
     following new paragraph:
       ``(4) Clarification of certain benefits.--For purposes of 
     paragraph (1), such term includes any dependent care 
     assistance program (as in effect on the date of the enactment 
     of this

[[Page 12431]]

     paragraph) for any individual described in paragraph 
     (1)(A).''.
       (b) Conforming Amendments.--
       (1) Section 134(b)(3)(A), as amended by section 102, is 
     amended by inserting ``and paragraph (4)'' after 
     ``subparagraphs (B) and (C)''.
       (2) Section 3121(a)(18) is amended by striking ``or 129'' 
     and inserting ``, 129, or 134(b)(4)''.
       (3) Section 3306(b)(13) is amended by striking ``or 129'' 
     and inserting ``, 129, or 134(b)(4)''.
       (4) Section 3401(a)(18) is amended by striking ``or 129'' 
     and inserting ``, 129, or 134(b)(4)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.
       (d) No Inference.--No inference may be drawn from the 
     amendments made by this section with respect to the tax 
     treatment of any amounts under the program described in 
     section 134(b)(4) of the Internal Revenue Code of 1986 (as 
     added by this section) for any taxable year beginning before 
     January 1, 2003.

     SEC. 907. CLARIFICATION RELATING TO EXCEPTION FROM ADDITIONAL 
                   TAX ON CERTAIN DISTRIBUTIONS FROM QUALIFIED 
                   TUITION PROGRAMS, ETC. ON ACCOUNT OF ATTENDANCE 
                   AT MILITARY ACADEMY.

       (a) In General.--Subparagraph (B) of section 530(d)(4) 
     (relating to exceptions from additional tax for distributions 
     not used for educational purposes) is amended by striking 
     ``or'' at the end of clause (iii), by redesignating clause 
     (iv) as clause (v), and by inserting after clause (iii) the 
     following new clause:
       ``(iv) made on account of the attendance of the designated 
     beneficiary at the United States Military Academy, the United 
     States Naval Academy, the United States Air Force Academy, 
     the United States Coast Guard Academy, or the United States 
     Merchant Marine Academy, to the extent that the amount of the 
     payment or distribution does not exceed the costs of advanced 
     education (as defined by section 2005(e)(3) of title 10, 
     United States Code, as in effect on the date of the enactment 
     of this section) attributable to such attendance, or''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 908. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST 
                   ORGANIZATIONS.

       (a) In General.--Section 501 (relating to exemption from 
     tax on corporations, certain trusts, etc.) is amended by 
     redesignating subsection (p) as subsection (q) and by 
     inserting after subsection (o) the following new subsection:
       ``(p) Suspension of Tax-Exempt Status of Terrorist 
     Organizations.--
       ``(1) In general.--The exemption from tax under subsection 
     (a) with respect to any organization described in paragraph 
     (2), and the eligibility of any organization described in 
     paragraph (2) to apply for recognition of exemption under 
     subsection (a), shall be suspended during the period 
     described in paragraph (3).
       ``(2) Terrorist organizations.--An organization is 
     described in this paragraph if such organization is 
     designated or otherwise individually identified--
       ``(A) under section 212(a)(3)(B)(vi)(II) or 219 of the 
     Immigration and Nationality Act as a terrorist organization 
     or foreign terrorist organization,
       ``(B) in or pursuant to an Executive order which is related 
     to terrorism and issued under the authority of the 
     International Emergency Economic Powers Act or section 5 of 
     the United Nations Participation Act of 1945 for the purpose 
     of imposing on such organization an economic or other 
     sanction, or
       ``(C) in or pursuant to an Executive order issued under the 
     authority of any Federal law if--
       ``(i) the organization is designated or otherwise 
     individually identified in or pursuant to such Executive 
     order as supporting or engaging in terrorist activity (as 
     defined in section 212(a)(3)(B) of the Immigration and 
     Nationality Act) or supporting terrorism (as defined in 
     section 140(d)(2) of the Foreign Relations Authorization Act, 
     Fiscal Years 1988 and 1989); and
       ``(ii) such Executive order refers to this subsection.
       ``(3) Period of suspension.--With respect to any 
     organization described in paragraph (2), the period of 
     suspension--
       ``(A) begins on the later of--
       ``(i) the date of the first publication of a designation or 
     identification described in paragraph (2) with respect to 
     such organization, or
       ``(ii) the date of the enactment of this subsection, and
       ``(B) ends on the first date that all designations and 
     identifications described in paragraph (2) with respect to 
     such organization are rescinded pursuant to the law or 
     Executive order under which such designation or 
     identification was made.
       ``(4) Denial of deduction.--No deduction shall be allowed 
     under any provision of this title, including sections 170, 
     545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), and 2522, 
     with respect to any contribution to an organization described 
     in paragraph (2) during the period described in paragraph 
     (3).
       ``(5) Denial of administrative or judicial challenge of 
     suspension or denial of deduction.--Notwithstanding section 
     7428 or any other provision of law, no organization or other 
     person may challenge a suspension under paragraph (1), a 
     designation or identification described in paragraph (2), the 
     period of suspension described in paragraph (3), or a denial 
     of a deduction under paragraph (4) in any administrative or 
     judicial proceeding relating to the Federal tax liability of 
     such organization or other person.
       ``(6) Erroneous designation.--
       ``(A) In general.--If--
       ``(i) the tax exemption of any organization described in 
     paragraph (2) is suspended under paragraph (1),
       ``(ii) each designation and identification described in 
     paragraph (2) which has been made with respect to such 
     organization is determined to be erroneous pursuant to the 
     law or Executive order under which such designation or 
     identification was made, and
       ``(iii) the erroneous designations and identifications 
     result in an overpayment of income tax for any taxable year 
     by such organization,
     credit or refund (with interest) with respect to such 
     overpayment shall be made.
       ``(B) Waiver of limitations.--If the credit or refund of 
     any overpayment of tax described in subparagraph (A)(iii) is 
     prevented at any time by the operation of any law or rule of 
     law (including res judicata), such credit or refund may 
     nevertheless be allowed or made if the claim therefor is 
     filed before the close of the 1-year period beginning on the 
     date of the last determination described in subparagraph 
     (A)(ii).
       ``(7) Notice of Suspensions.--If the tax exemption of any 
     organization is suspended under this subsection, the Internal 
     Revenue Service shall update the listings of tax-exempt 
     organizations and shall publish appropriate notice to 
     taxpayers of such suspension and of the fact that 
     contributions to such organization are not deductible during 
     the period of such suspension.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to designations made before, on, or after the 
     date of the enactment of this Act.

     SEC. 909. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT TRAVEL 
                   EXPENSES OF NATIONAL GUARD AND RESERVE MEMBERS.

       (a) Deduction Allowed.--Section 162 (relating to certain 
     trade or business expenses) is amended by redesignating 
     subsection (p) as subsection (q) and inserting after 
     subsection (o) the following new subsection:
       ``(p) Treatment of Expenses of Members of Reserve Component 
     of Armed Forces of the United States.--For purposes of 
     subsection (a)(2), in the case of an individual who performs 
     services as a member of a reserve component of the Armed 
     Forces of the United States at any time during the taxable 
     year, such individual shall be deemed to be away from home in 
     the pursuit of a trade or business for any period during 
     which such individual is away from home in connection with 
     such service.''.
       (b) Deduction Allowed Whether or Not Taxpayer Elects To 
     Itemize.--Section 62(a)(2) (relating to certain trade and 
     business deductions of employees) is amended by adding at the 
     end the following new subparagraph:
       ``(E) Certain expenses of members of reserve components of 
     the armed forces of the united states.--The deductions 
     allowed by section 162 which consist of expenses, determined 
     at a rate not in excess of the rates for travel expenses 
     (including per diem in lieu of subsistence) authorized for 
     employees of agencies under subchapter I of chapter 57 of 
     title 5, United States Code, paid or incurred by the taxpayer 
     in connection with the performance of services by such 
     taxpayer as a member of a reserve component of the Armed 
     Forces of the United States for any period during which such 
     individual is more than 100 miles away from home in 
     connection with such services.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred in taxable years 
     beginning after December 31, 2002.

     SEC. 910. TAX RELIEF AND ASSISTANCE FOR FAMILIES OF SPACE 
                   SHUTTLE COLUMBIA HEROES.

       (a) Income Tax Relief.--
       (1) In general.--Subsection (d) of section 692 (relating to 
     income taxes of members of Armed Forces and victims of 
     certain terrorist attacks on death) is amended by adding at 
     the end the following new paragraph:
       ``(5) Relief with respect to astronauts.--The provisions of 
     this subsection shall apply to any astronaut whose death 
     occurs in the line of duty, except that paragraph (3)(B) 
     shall be applied by using the date of the death of the 
     astronaut rather than September 11, 2001.''.
       (2) Conforming amendments.--
       (A) Section 5(b)(1) is amended by inserting ``, 
     astronauts,'' after ``Forces''.
       (B) Section 6013(f)(2)(B) is amended by inserting ``, 
     astronauts,'' after ``Forces''.
       (3) Clerical amendments.--
       (A) The heading of section 692 is amended by inserting ``, 
     ASTRONAUTS,'' after ``FORCES''.
       (B) The item relating to section 692 in the table of 
     sections for part II of subchapter J of chapter 1 is amended 
     by inserting ``, ASTRONAUTS,'' after ``FORCES''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply with respect to any astronaut whose death occurs 
     after December 31, 2002.
       (b) Death Benefit Relief.--
       (1) In general.--Subsection (i) of section 101 (relating to 
     certain death benefits) is amended by adding at the end the 
     following new paragraph:
       ``(4) Relief with respect to astronauts.--The provisions of 
     this subsection shall apply to any astronaut whose death 
     occurs in the line of duty.''.
       (2) Clerical amendment.--The heading for subsection (i) of 
     section 101 is amended by inserting ``or Astronauts'' after 
     ``Victims''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to amounts paid after December 31, 2002, with 
     respect to deaths occurring after such date.

[[Page 12432]]

       (c) Estate Tax Relief.--
       (1) In general.--Section 2201(b) (defining qualified 
     decedent) is amended by striking ``and'' at the end of 
     paragraph (1)(B), by striking the period at the end of 
     paragraph (2) and inserting ``, and'', and by adding at the 
     end the following new paragraph:
       ``(3) any astronaut whose death occurs in the line of 
     duty.''.
       (2) Clerical amendments.--
       (A) The heading of section 2201 is amended by inserting ``, 
     DEATHS OF ASTRONAUTS,'' after ``FORCES''.
       (B) The item relating to section 2201 in the table of 
     sections for subchapter C of chapter 11 is amended by 
     inserting ``, DEATHS OF ASTRONAUTS,'' after ``FORCES''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to estates of decedents dying after December 31, 
     2002.

                            TITLE X--SUNSET

     SEC. 1001. SUNSET.

       (a) In General.--Except as otherwise provided, the 
     provisions of, and amendments made, by this Act shall not 
     apply to taxable years beginning after December 31, 2012, and 
     the Internal Revenue Code of 1986 shall be applied and 
     administered to such years as if such amendments had never 
     been enacted.
       (b) Exceptions.--Subsection (a) shall not apply to the 
     following provisions of, and amendments made by, this Act:
       (1) Title I (other than section 107).
       (2) Title III (other than section 362).

                          ____________________