[Congressional Record (Bound Edition), Volume 150 (2004), Part 10]
[House]
[Pages 12760-12846]
[From the U.S. Government Publishing Office, www.gpo.gov]




                   AMERICAN JOBS CREATION ACT OF 2004

  Mr. THOMAS. Mr. Speaker, pursuant to House Resolution 681, I call up 
the bill (H.R. 4520) to amend the Internal Revenue Code of 1986 to 
remove impediments in such Code and make our manufacturing, service, 
and high-technology businesses and workers more competitive and 
productive both at home and abroad, and ask for its immediate 
consideration.
  The Clerk read the title of the bill.
  The SPEAKER pro tempore. Pursuant to House Resolution 681, the bill 
is considered read for amendment.
  The text of H.R. 4520 is as follows:

                               H.R. 4520

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

     SECTION 1. SHORT TITLE; ETC.

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

Sec. 1. Short title; etc.

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS

Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Reduced corporate income tax rate for domestic production 
              activities income.
Sec. 103. Reduced corporate income tax rate for small corporations.

    TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL 
                        BUSINESSES, AND FARMERS

                  Subtitle A--Small Business Expensing

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

                        Subtitle B--Depreciation

Sec. 211. Recovery period for depreciation of certain leasehold 
              improvements and restaurant property.
Sec. 212. Modification of depreciation allowance for aircraft.
Sec. 213. Modification of placed in service rule for bonus depreciation 
              property.

          Subtitle C--S Corporation Reform and Simplification

Sec. 221. Members of family treated as 1 shareholder.
Sec. 222. Increase in number of eligible shareholders to 100.
Sec. 223. Expansion of bank S corporation eligible shareholders to 
              include IRAs.
Sec. 224. Disregard of unexercised powers of appointment in determining 
              potential current beneficiaries of ESBT.
Sec. 225. Transfer of suspended losses incident to divorce, etc.
Sec. 226. Use of passive activity loss and at-risk amounts by qualified 
              subchapter S trust income beneficiaries.
Sec. 227. Exclusion of investment securities income from passive income 
              test for bank S corporations.
Sec. 228. Treatment of bank director shares.
Sec. 229. Relief from inadvertently invalid qualified subchapter S 
              subsidiary elections and terminations.
Sec. 230. Information returns for qualified subchapter S subsidiaries.
Sec. 231. Repayment of loans for qualifying employer securities.

               Subtitle D--Alternative Minimum Tax Relief

Sec. 241. Foreign tax credit under alternative minimum tax.
Sec. 242. Expansion of exemption from alternative minimum tax for small 
              corporations.
Sec. 243. Income averaging for farmers not to increase alternative 
              minimum tax.

    Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.

Sec. 251. Reduced rates of tax on gasohol replaced with excise tax 
              credit; repeal of other alcohol-based fuel incentives; 
              etc.
Sec. 252. Alcohol fuel subsidies borne by general fund.

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

Sec. 261. Exclusion of incentive stock options and employee stock 
              purchase plan stock options from wages.

  Subtitle G--Incentives to Reinvest Foreign Earnings in United States

Sec. 271. Incentives to reinvest foreign earnings in United States.

                 Subtitle H--Other Incentive Provisions

Sec. 281. Special rules for livestock sold on account of weather-
              related conditions.
Sec. 282. Payment of dividends on stock of cooperatives without 
              reducing patronage dividends.
Sec. 283. Capital gain treatment under section 631(b) to apply to 
              outright sales by landowners.
Sec. 284. Distributions from publicly traded partnerships treated as 
              qualifying income of regulated investment companies.
Sec. 285. Improvements related to real estate investment trusts.
Sec. 286. Treatment of certain dividends of regulated investment 
              companies.
Sec. 287. Taxation of certain settlement funds.
Sec. 288. Expansion of human clinical trials qualifying for orphan drug 
              credit.
Sec. 289. Simplification of excise tax imposed on bows and arrows.
Sec. 290. Repeal of excise tax on fishing tackle boxes.
Sec. 291. Sonar devices suitable for finding fish.
Sec. 292. Income tax credit to distilled spirits wholesalers for cost 
              of carrying Federal excise taxes on bottled distilled 
              spirits.
Sec. 293. Suspension of occupational taxes relating to distilled 
              spirits, wine, and beer.

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

Sec. 301. Interest expense allocation rules.
Sec. 302. Recharacterization of overall domestic loss.
Sec. 303. Reduction to 2 foreign tax credit baskets.
Sec. 304. Look-thru rules to apply to dividends from noncontrolled 
              section 902 corporations.
Sec. 305. Attribution of stock ownership through partnerships to apply 
              in determining section 902 and 960 credits.
Sec. 306. Clarification of treatment of certain transfers of intangible 
              property.
Sec. 307. United States property not to include certain assets of 
              controlled foreign corporation.
Sec. 308. Election not to use average exchange rate for foreign tax 
              paid other than in functional currency.

[[Page 12761]]

Sec. 309. Repeal of withholding tax on dividends from certain foreign 
              corporations.
Sec. 310. Provide equal treatment for interest paid by foreign 
              partnerships and foreign corporations.
Sec. 311. Look-thru treatment of payments between related controlled 
              foreign corporations under foreign personal holding 
              company income rules.
Sec. 312. Look-thru treatment for sales of partnership interests.
Sec. 313. Repeal of foreign personal holding company rules and foreign 
              investment company rules.
Sec. 314. Determination of foreign personal holding company income with 
              respect to transactions in commodities.
Sec. 315. Modifications to treatment of aircraft leasing and shipping 
              income.
Sec. 316. Modification of exceptions under subpart F for active 
              financing.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

Sec. 401. Allowance of nonrefundable personal credits against regular 
              and minimum tax liability.
Sec. 402. Extension of research credit.
Sec. 403. Extension of credit for electricity produced from certain 
              renewable resources.
Sec. 404. Indian employment tax credit.
Sec. 405. Work opportunity credit.
Sec. 406. Welfare-to-work credit.
Sec. 407. Certain expenses of elementary and secondary school teachers.
Sec. 408. Extension of accelerated depreciation benefit for property on 
              Indian reservations.
Sec. 409. Charitable contributions of computer technology and equipment 
              used for educational purposes.
Sec. 410. Expensing of environmental remediation costs.
Sec. 411. Availability of medical savings accounts.
Sec. 412. Taxable income limit on percentage depletion for oil and 
              natural gas produced from marginal properties.
Sec. 413. Qualified zone academy bonds.
Sec. 414. District of Columbia.
Sec. 415. Extension of certain New York Liberty Zone bond financing.
Sec. 416. Disclosures relating to terrorist activities.
Sec. 417. Disclosure of return information relating to student loans.
Sec. 418. Cover over of tax on distilled spirits.
Sec. 419. Joint review of strategic plans and budget for the Internal 
              Revenue Service.
Sec. 420. Parity in the application of certain limits to mental health 
              benefits.
Sec. 421. Combined employment tax reporting project.
Sec. 422. Clean-fuel vehicles.

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

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

                      TITLE VI--REVENUE PROVISIONS

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

Sec. 601. Tax treatment of expatriated entities and their foreign 
              parents.
Sec. 602. Excise tax on stock compensation of insiders in expatriated 
              corporations.
Sec. 603. Reinsurance of United States risks in foreign jurisdictions.
Sec. 604. Revision of tax rules on expatriation of individuals.
Sec. 605. Reporting of taxable mergers and acquisitions.
Sec. 606. Studies.

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

Sec. 611. Penalty for failing to disclose reportable transactions.
Sec. 612. Accuracy-related penalty for listed transactions, other 
              reportable transactions having a significant tax 
              avoidance purpose, etc.
Sec. 613. Tax shelter exception to confidentiality privileges relating 
              to taxpayer communications.
Sec. 614. Statute of limitations for taxable years for which required 
              listed transactions not reported.
Sec. 615. Disclosure of reportable transactions.
Sec. 616. Failure to furnish information regarding reportable 
              transactions.
Sec. 617. Modification of penalty for failure to maintain lists of 
              investors.
Sec. 618. Penalty on promoters of tax shelters.
Sec. 619. Modifications of substantial understatement penalty for 
              nonreportable transactions.
Sec. 620. Modification of actions to enjoin certain conduct related to 
              tax shelters and reportable transactions.
Sec. 621. Penalty on failure to report interests in foreign financial 
              accounts.
Sec. 622. Regulation of individuals practicing before the Department of 
              the Treasury.

                       Part II--Other Provisions

Sec. 631. Treatment of stripped interests in bond and preferred stock 
              funds, etc.
Sec. 632. Minimum holding period for foreign tax credit on withholding 
              taxes on income other than dividends.
Sec. 633. Disallowance of certain partnership loss transfers.
Sec. 634. No reduction of basis under section 734 in stock held by 
              partnership in corporate partner.
Sec. 635. Repeal of special rules for FASITs.
Sec. 636. Limitation on transfer of built-in losses on REMIC residuals.
Sec. 637. Clarification of banking business for purposes of determining 
              investment of earnings in United States property.
Sec. 638. Alternative tax for certain small insurance companies.
Sec. 639. Denial of deduction for interest on underpayments 
              attributable to nondisclosed reportable transactions.
Sec. 640. Clarification of rules for payment of estimated tax for 
              certain deemed asset sales.
Sec. 641. Recognition of gain from the sale of a principal residence 
              acquired in a like-kind exchange within 5 years of sale.
Sec. 642. Prevention of mismatching of interest and original issue 
              discount deductions and income inclusions in transactions 
              with related foreign persons.
Sec. 643. Exclusion from gross income for interest on overpayments of 
              income tax by individuals.
Sec. 644. Deposits made to suspend running of interest on potential 
              underpayments.
Sec. 645. Partial payment of tax liability in installment agreements.
Sec. 646. Affirmation of consolidated return regulation authority.

                           Part III--Leasing

Sec. 647. Reform of tax treatment of certain leasing arrangements.
Sec. 648. Limitation on deductions allocable to property used by 
              governments or other tax-exempt entities.
Sec. 649. Effective date.

               Subtitle C--Reduction of Fuel Tax Evasion

Sec. 651. Exemption from certain excise taxes for mobile machinery.
Sec. 652. Taxation of aviation-grade kerosene.
Sec. 653. Dye injection equipment.
Sec. 654. Authority to inspect on-site records.
Sec. 655. Registration of pipeline or vessel operators required for 
              exemption of bulk transfers to registered terminals or 
              refineries.
Sec. 656. Display of registration.
Sec. 657. Penalties for failure to register and failure to report.
Sec. 658. Collection from customs bond where importer not registered.
Sec. 659. Modifications of tax on use of certain vehicles.
Sec. 660. Modification of ultimate vendor refund claims with respect to 
              farming.
Sec. 661. Dedication of revenues from certain penalties to the Highway 
              Trust Fund.
Sec. 662. Taxable fuel refunds for certain ultimate vendors.
Sec. 663. Two-party exchanges.
Sec. 664. Simplification of tax on tires.

          Subtitle D--Nonqualified Deferred Compensation Plans

Sec. 671. Treatment of nonqualified deferred compensation plans.

                  Subtitle E--Other Revenue Provisions

Sec. 681. Qualified tax collection contracts.
Sec. 682. Treatment of charitable contributions of patents and similar 
              property.
Sec. 683. Increased reporting for noncash charitable contributions.
Sec. 684. Donations of motor vehicles, boats, and aircraft.
Sec. 685. Extension of amortization of intangibles to sports 
              franchises.
Sec. 686. Modification of continuing levy on payments to Federal 
              venders.
Sec. 687. Modification of straddle rules.
Sec. 688. Addition of vaccines against hepatitis A to list of taxable 
              vaccines.
Sec. 689. Addition of vaccines against influenza to list of taxable 
              vaccines.
Sec. 690. Extension of IRS user fees.
Sec. 691. COBRA fees.
Sec. 692. Safe harbor for churches.

              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

Sec. 701. Short title.
Sec. 702. Effective date.

[[Page 12762]]

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

Sec. 711. Termination of tobacco quota program and related provisions.
Sec. 712. Termination of tobacco price support program and related 
              provisions.
Sec. 713. Liability.

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

Sec. 721. Definitions of active tobacco producer and quota holder.
Sec. 722. Payments to tobacco quota holders.
Sec. 723. Transition payments for active producers of quota tobacco.
Sec. 724. Resolution of disputes.
Sec. 725. Source of funds for payments.

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS

     SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

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

     The Secretary of the Treasury (or such Secretary's delegate) 
     may prescribe such regulations as may be necessary to prevent 
     the abuse of the purposes of this subsection.
       (f) Binding Contracts.--The amendments made by this section 
     shall not apply to any transaction in the ordinary course of 
     a trade or business which occurs pursuant to a binding 
     contract--
       (1) which is between the taxpayer and a person who is not a 
     related person (as defined in section 943(b)(3) of such Code, 
     as in effect on the day before the date of the enactment of 
     this Act), and
       (2) which is in effect on January 14, 2002, and at all 
     times thereafter.

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

     SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR DOMESTIC 
                   PRODUCTION ACTIVITIES INCOME.

       (a) Limitation on Tax on Qualified Production Activities 
     Income.--Section 11 is amended by redesignating subsections 
     (c) and (d) as subsections (d) and (e), respectively, and by 
     inserting after subsection (b) the following new subsection:
       ``(c) Limitation on Tax on Qualified Production Activities 
     Income.--
       ``(1) In general.--If a corporation has qualified 
     production activities income for any taxable year, the tax 
     imposed by this section shall not exceed the sum of--
       ``(A) a tax computed at the rates and in the manner as if 
     this subsection had not been enacted on the taxable income 
     reduced by the amount of qualified production activities 
     income, plus
       ``(B) a tax equal to 32 percent (34 percent in the case of 
     taxable years beginning before January 1, 2007) of the 
     qualified production activities income (or, if less, taxable 
     income).
       ``(2) Qualified production activities income.--
       ``(A) In general.--The term `qualified production 
     activities income' for any taxable year means an amount equal 
     to the excess (if any) of--
       ``(i) the taxpayer's domestic production gross receipts for 
     such taxable year, over
       ``(ii) the sum of--

       ``(I) the cost of goods sold that are allocable to such 
     receipts,
       ``(II) other deductions, expenses, or losses directly 
     allocable to such receipts, and
       ``(III) a ratable portion of other deductions, expenses, 
     and losses that are not directly allocable to such receipts 
     or another class of income.

       ``(B) Allocation method.--The Secretary shall prescribe 
     rules for the proper allocation of items of income, 
     deduction, expense, and loss for purposes of determining 
     income attributable to domestic production activities.
       ``(3) Domestic production gross receipts.--For purposes of 
     this subsection, the term `domestic production gross 
     receipts' means the gross receipts of the taxpayer which are 
     derived from--
       ``(A) any lease, rental, license, sale, exchange, or other 
     disposition of--
       ``(i) qualifying production property which was 
     manufactured, produced, grown, or extracted in whole or in 
     significant part by the taxpayer within the United States, or
       ``(ii) any qualified film produced by the taxpayer, or
       ``(B) construction, engineering, or architectural services 
     performed in the United States for construction projects in 
     the United States.
       ``(4) Qualifying production property.--For purposes of this 
     subsection, the term `qualifying production property' means--
       ``(A) tangible personal property,
       ``(B) any computer software, and
       ``(C) any property described in section 168(f)(4).
       ``(5) Qualified film.--For purposes of this subsection--
       ``(A) In general.--The term `qualified film' means any 
     property described in section 168(f)(3) if not less than 50 
     percent of the total compensation relating to the production 
     of such property is compensation for services performed in 
     the United States by actors, production personnel, directors, 
     and producers.
       ``(B) Exception.--Such term does not include property with 
     respect to which records are required to be maintained under 
     section 2257 of title 18, United States Code.
       ``(6) Related persons.--For purposes of this subsection--
       ``(A) In general.--The term `domestic production gross 
     receipts' shall not include any gross receipts of the 
     taxpayer derived from property leased, licensed, or rented by 
     the taxpayer for use by any related person.
       ``(B) Related person.--For purposes of subparagraph (A), a 
     person shall be treated as related to another person if such 
     persons are treated as a single employer under subsection (a) 
     or (b) of section 52 or subsection (m) or (o) of section 414, 
     except that determinations under subsections (a) and (b) of 
     section 52 shall be made without regard to section 
     1563(b).''.
       (b) Special Rule Relating to Election To Treat Cutting of 
     Timber as a Sale or Exchange.--In the case of a corporation, 
     any election under section 631(a) of the Internal Revenue 
     Code of 1986 made for a taxable year ending on or before the 
     date of the enactment of this Act may be revoked by the 
     taxpayer for any taxable year ending after such date. For 
     purposes of determining whether such taxpayer may make a 
     further election under such section, such election (and any 
     revocation under this section) shall not be taken into 
     account.
       (c) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR SMALL 
                   CORPORATIONS.

       (a) In General.--Subsection (b) of section 11 (relating to 
     tax imposed on corporations) is amended by redesignating 
     paragraph (2) as paragraph (6) and by striking paragraph (1) 
     and inserting the following new paragraphs:
       ``(1) For taxable years beginning after 2012.--In the case 
     of taxable years beginning after 2012, the amount of the tax 
     imposed by subsection (a) shall be determined in accordance 
     with the following table:
The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 32% of the excess over $75,000...........................

[[Page 12763]]

$6,389,750, plus 35% of the excess over $20,000,000....................
       ``(2) For taxable years beginning in 2011 or 2012.--In the 
     case of taxable years beginning in 2011 or 2012, the amount 
     of the tax imposed by subsection (a) shall be determined in 
     accordance with the following table:
The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 32% of the excess over $75,000...........................
$1,589,750, plus 34% of the excess over $5,000,000.....................
$3,289,750, plus 35% of the excess over $10,000,000....................

       ``(3) For taxable years beginning in 2008, 2009, or 2010.--
     In the case of taxable years beginning in 2008, 2009, or 
     2010, the amount of the tax imposed by subsection (a) shall 
     be determined in accordance with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 32% of the excess over $75,000...........................
$309,750, plus 34% of the excess over $1,000,000.......................
$3,369,750, plus 35% of the excess over $10,000,000....................

       ``(4) For taxable years beginning in 2005, 2006, or 2007.--
     In the case of taxable years beginning in 2005, 2006, or 
     2007, the amount of the tax imposed by subsection (a) shall 
     be determined in accordance with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 33% of the excess over $75,000...........................
$319,000, plus 34% of the excess over $1,000,000.......................
$3,379,000, plus 35% of the excess over $10,000,000....................

       ``(5) Phaseout of lower rates for certain taxpayers.--
       ``(A) General rule for years before 2013.--
       ``(i) In general.--In the case of taxable years beginning 
     before 2013 with respect to a corporation which has taxable 
     income in excess of the applicable amount for any taxable 
     year, the amount of tax determined under paragraph (1), (2), 
     (3) or (4) for such taxable year shall be increased by the 
     lesser of (I) 5 percent of such excess, or (II) the maximum 
     increase amount.
       ``(ii) Maximum increase amount.--For purposes of clause 
     (i)--

 
                                                          The maximum
   ``In the case of any taxable     The applicable      increase amount
    year   beginning during:          amount is:              is:
 
2005, 2006, or 2007............       $1,000,000            $21,000
2008, 2009, or 2010............       $1,000,000            $30,250
2011 or 2012...................       $5,000,000           $110,250.
 


       ``(B) Higher income corporations.--In the case of a 
     corporation which has taxable income in excess of $20,000,000 
     ($15,000,000 in the case of taxable years beginning before 
     2013), the amount of the tax determined under the foregoing 
     provisions of this subsection shall be increased by an 
     additional amount equal to the lesser of (i) 3 percent of 
     such excess, or (ii) $610,250 ($100,000 in the case of 
     taxable years beginning before 2013).''.
       (b) Conforming Amendments.--
       (1) Section 904(b)(3)(D)(ii) is amended to read as follows:
       ``(ii) in the case of a corporation, section 1201(a) 
     applies to such taxable year.''.
       (2) Section 1201(a) is amended by striking ``the last 2 
     sentences of section 11(b)(1)'' and inserting ``section 
     11(b)(5)''.
       (3) Section 1561(a) is amended--
       (A) by striking ``the last 2 sentences of section 
     11(b)(1)'' and inserting ``section 11(b)(5)'', and
       (B) by striking ``such last 2 sentences'' and inserting 
     ``section 11(b)(5)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

    TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL 
                        BUSINESSES, AND FARMERS

                  Subtitle A--Small Business Expensing

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

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

                        Subtitle B--Depreciation

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

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

    ``(E)(iv).....................................................39   
    ``(E)(v)....................................................39''.  

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

     SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE FOR 
                   AIRCRAFT.

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

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

       ``(iv) which has--

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

       (2) Placed in service date.--Clause (iv) of section 
     168(k)(2)(A) is amended by striking ``subparagraph (B)'' and 
     inserting ``subparagraphs (B) and (C)''.
       (b) Conforming Amendments.--
       (1) Section 168(k)(2)(B) is amended by adding at the end 
     the following new clause:
       ``(iv) Application of subparagraph.--This subparagraph 
     shall not apply to any property which is described in 
     subparagraph (C).''.
       (2) Section 168(k)(4)(A)(ii) is amended by striking 
     ``paragraph (2)(C)'' and inserting ``paragraph (2)(D)''.

[[Page 12764]]

       (3) Section 168(k)(4)(B)(iii) is amended by inserting ``and 
     paragraph (2)(C)'' after ``of this paragraph)''.
       (4) Section 168(k)(4)(C) is amended by striking 
     ``subparagraphs (B) and (D)'' and inserting ``subparagraphs 
     (B), (C), and (E)''.
       (5) Section 168(k)(4)(D) is amended by striking ``Paragraph 
     (2)(E)'' and inserting ``Paragraph (2)(F)''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 101 of the Job Creation and Worker Assistance Act of 
     2002.

     SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE FOR BONUS 
                   DEPRECIATION PROPERTY.

       (a) In General.--Section 168(k)(2)(D) (relating to special 
     rules) is amended by adding at the end the following new 
     clause:
       ``(iii) Syndication.--For purposes of subparagraph (A)(ii), 
     if--

       ``(I) property is originally placed in service after 
     September 10, 2001, by the lessor of such property,
       ``(II) such property is sold by such lessor or any 
     subsequent purchaser within 3 months after the date so placed 
     in service (or, in the case of multiple units of property 
     subject to the same lease, within 3 months after the date the 
     final unit is placed in service, so long as the period 
     between the time the first unit is placed in service and the 
     time the last unit is placed in service does not exceed 12 
     months), and
       ``(III) the user of such property after the last sale 
     during such 3-month period remains the same as when such 
     property was originally placed in service,

     such property shall be treated as originally placed in 
     service not earlier than the date of such last sale, so long 
     as no previous owner of such property elects the application 
     of this subsection with respect to such property.''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 101 of the Job Creation and Worker Assistance Act of 
     2002; except that the parenthetical material in section 
     168(k)(2)(D)(iii)(II) of the Internal Revenue Code of 1986, 
     as added by this section, shall apply to property sold after 
     June 4, 2004.

          Subtitle C--S Corporation Reform and Simplification

     SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

       (a) In General.--Paragraph (1) of section 1361(c) (relating 
     to special rules for applying subsection (b)) is amended to 
     read as follows:
       ``(1) Members of family treated as 1 shareholder.--
       ``(A) In general.--For purpose of subsection (b)(1)(A)--
       ``(i) except as provided in clause (ii), a husband and wife 
     (and their estates) shall be treated as 1 shareholder, and
       ``(ii) in the case of a family with respect to which an 
     election is in effect under subparagraph (D), all members of 
     the family shall be treated as 1 shareholder.
       ``(B) Members of the family.--For purpose of subparagraph 
     (A)(ii)--
       ``(i) In general.--The term `members of the family' means 
     the common ancestor, lineal descendants of the common 
     ancestor, and the spouses (or former spouses) of such lineal 
     descendants or common ancestor.
       ``(ii) Common Ancestor.--For purposes of this paragraph, an 
     individual shall not be considered a common ancestor if, as 
     of the later of the effective date of this paragraph or the 
     time the election under section 1362(a) is made, the 
     individual is more than 3 generations removed from the 
     youngest generation of shareholders who would (but for this 
     clause) be members of the family. For purposes of the 
     preceding sentence, a spouse (or former spouse) shall be 
     treated as being of the same generation as the individual to 
     which such spouse is (or was) married.
       ``(C) Effect of adoption, etc.--In determining whether any 
     relationship specified in subparagraph (B) exists, the rules 
     of section 152(b)(2) shall apply.
       ``(D) Election.--An election under subparagraph (A)(ii)--
       ``(i) may, except as otherwise provided in regulations 
     prescribed by the Secretary, be made by any member of the 
     family, and
       ``(ii) shall remain in effect until terminated as provided 
     in regulations prescribed by the Secretary.''.
       (b) Relief From Inadvertent Invalid Election or 
     Termination.--Section 1362(f) (relating to inadvertent 
     invalid elections or terminations), as amended by section 
     229, is amended--
       (1) by inserting ``or section 1361(c)(1)(A)(ii)'' after 
     ``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
       (2) by inserting ``or section 1361(c)(1)(D)(iii)'' after 
     ``section 1361(b)(3)(C),'' in paragraph (1)(B).
       (c) Effective Dates.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2004.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to elections and terminations made after December 
     31, 2004.

     SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

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

     SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE 
                   SHAREHOLDERS TO INCLUDE IRAS.

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

     SEC. 224. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN 
                   DETERMINING POTENTIAL CURRENT BENEFICIARIES OF 
                   ESBT.

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

     SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE, 
                   ETC.

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

     SEC. 226. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY 
                   QUALIFIED SUBCHAPTER S TRUST INCOME 
                   BENEFICIARIES.

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

[[Page 12765]]



     SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM 
                   PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

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

     SEC. 228. TREATMENT OF BANK DIRECTOR SHARES.

       (a) In General.--Section 1361 (defining S corporation) is 
     amended by adding at the end the following new subsection:
       ``(f) Restricted Bank Director Stock.--
       ``(1) In general.--Restricted bank director stock shall not 
     be taken into account as outstanding stock of the S 
     corporation in applying this subchapter (other than section 
     1368(f)).
       ``(2) Restricted bank director stock.--For purposes of this 
     subsection, the term `restricted bank director stock' means 
     stock in a bank (as defined in section 581), a bank holding 
     company (within the meaning of section 2(a) of the Bank 
     Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a 
     financial holding company (within the meaning of section 2(p) 
     of such Act), registered with the Federal Reserve System if 
     such stock--
       ``(A) is required to be held by an individual under 
     applicable Federal or State law in order to permit such 
     individual to serve as a director, and
       ``(B) is subject to an agreement with such bank or company 
     (or a corporation which controls (within the meaning of 
     section 368(c)) such bank or company) pursuant to which the 
     holder is required to sell back such stock (at the same price 
     as the individual acquired such stock) upon ceasing to hold 
     the office of director.
       ``(3) Cross reference.--

  ``For treatment of certain distributions with respect to restricted 
bank director stock, see section 1368(f).''.

       (b) Distributions.--Section 1368 (relating to 
     distributions) is amended by adding at the end the following 
     new subsection:
       ``(f) Restricted Bank Director Stock.--If a director 
     receives a distribution (not in part or full payment in 
     exchange for stock) from an S corporation with respect to any 
     restricted bank director stock (as defined in section 
     1361(f)), the amount of such distribution--
       ``(1) shall be includible in gross income of the director, 
     and
       ``(2) shall be deductible by the corporation for the 
     taxable year of such corporation in which or with which ends 
     the taxable year in which such amount in included in the 
     gross income of the director.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALIFIED 
                   SUBCHAPTER S SUBSIDIARY ELECTIONS AND 
                   TERMINATIONS.

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

     SEC. 230. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S 
                   SUBSIDIARIES.

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

     SEC. 231. REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER 
                   SECURITIES.

       (a) In General.--Subsection (f) of section 4975 (relating 
     to other definitions and special rules) is amended by adding 
     at the end the following new paragraph:
       ``(7) S corporation repayment of loans for qualifying 
     employer securities.--A plan shall not be treated as 
     violating the requirements of section 401 or 409 or 
     subsection (e)(7), or as engaging in a prohibited transaction 
     for purposes of subsection (d)(3), merely by reason of any 
     distribution (as described in section 1368(a)) with respect 
     to S corporation stock that constitutes qualifying employer 
     securities, which in accordance with the plan provisions is 
     used to make payments on a loan described in subsection 
     (d)(3) the proceeds of which were used to acquire such 
     qualifying employer securities (whether or not allocated to 
     participants). The preceding sentence shall not apply in the 
     case of a distribution which is paid with respect to any 
     employer security which is allocated to a participant unless 
     the plan provides that employer securities with a fair market 
     value of not less than the amount of such distribution are 
     allocated to such participant for the year which (but for the 
     preceding sentence) such distribution would have been 
     allocated to such participant.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions with respect to S corporation 
     stock made after December 31, 2004.

               Subtitle D--Alternative Minimum Tax Relief

     SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

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

     SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE MINIMUM TAX 
                   FOR SMALL CORPORATIONS.

       (a) In General.--Subparagraphs (A) and (B) of section 
     55(e)(1) are each amended by striking ``$7,500,000'' each 
     place it appears and inserting ``$20,000,000''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO INCREASE 
                   ALTERNATIVE MINIMUM TAX.

       (a) In General.--Subsection (c) of section 55 (defining 
     regular tax) is amended by redesignating paragraph (2) as 
     paragraph (3) and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Coordination with income averaging for farmers.--
     Solely for purposes of this section, section 1301 (relating 
     to averaging of farm income) shall not apply in computing the 
     regular tax liability.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

    Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.

     SEC. 251. REDUCED RATES OF TAX ON GASOHOL REPLACED WITH 
                   EXCISE TAX CREDIT; REPEAL OF OTHER ALCOHOL-
                   BASED FUEL INCENTIVES; ETC.

       (a) Excise Tax Credit for Alcohol Fuel Mixtures.--
       (1) In general.--Subsection (f) of section 6427 is amended 
     to read as follows:
       ``(f) Alcohol Fuel Mixtures.--
       ``(1) In general.--The amount of credit which would (but 
     for section 40(c)) be determined under section 40(a)(1) for 
     any period--
       ``(A) shall, with respect to taxable events occurring 
     during such period, be treated--
       ``(i) as a payment of the taxpayer's liability for tax 
     imposed by section 4081, and
       ``(ii) as received at the time of the taxable event, and
       ``(B) to the extent such amount of credit exceeds such 
     liability for such period, shall (except as provided in 
     subsection (k)) be paid subject to subsection (i)(3) by the 
     Secretary without interest.
       ``(2) Special rules.--
       ``(A) Only certain alcohol taken into account.--For 
     purposes of paragraph (1), section 40 shall be applied--
       ``(i) by not taking into account alcohol with a proof of 
     less than 190, and
       ``(ii) by treating as alcohol the alcohol gallon equivalent 
     of ethyl tertiary butyl ether or other ethers produced from 
     such alcohol.
       ``(B) Treatment of refiners.--For purposes of paragraph 
     (1), in the case of a mixture--
       ``(i) the alcohol in which is described in subparagraph 
     (A)(ii), and
       ``(ii) which is produced by any person at a refinery prior 
     to any taxable event,

     section 40 shall be applied by treating such person as having 
     sold such mixture at the

[[Page 12766]]

     time of its removal from the refinery (and only at such time) 
     to another person for use as a fuel.
       ``(3) Mixtures not used as fuel.--Rules similar to the 
     rules of subparagraphs (A) and (D) of section 40(d)(3) shall 
     apply for purposes of this subsection.
       ``(4) Termination.--This section shall apply only to 
     periods to which section 40 applies, determined by 
     substituting in section 40(e)--
       ``(A) `December 31, 2010' for `December 31, 2007', and
       ``(B) `January 1, 2011' for `January 1, 2008'.''
       (2) Revision of rules for payment of credit.--Paragraph (3) 
     of section 6427(i) is amended to read as follows:
       ``(3) Special rule for alcohol mixture credit.--
       ``(A) In general.--A claim may be filed under subsection 
     (f)(1)(B) by any person for any period--
       ``(i) for which $200 or more is payable under such 
     subsection (f)(1)(B), and
       ``(ii) which is not less than 1 week.

     In the case of an electronic claim, this subparagraph shall 
     be applied without regard to clause (i).
       ``(B) Payment of claim.--Notwithstanding subsection 
     (f)(1)(B), if the Secretary has not paid pursuant to a claim 
     filed under this section within 45 days of the date of the 
     filing of such claim (20 days in the case of an electronic 
     claim), the claim shall be paid with interest from such date 
     determined by using the overpayment rate and method under 
     section 6621.
       ``(C) Time for filing claim.--No claim filed under this 
     paragraph shall be allowed unless filed on or before the last 
     day of the first quarter following the earliest quarter 
     included in the claim.''
       (b) Repeal of Other Incentives for Fuel Mixtures.--
       (1) Subsection (b) of section 4041 is amended to read as 
     follows:
       ``(b) Exemption for Off-Highway Business Use.--
       ``(1) In general.--No tax shall be imposed by subsection 
     (a) or (d)(1) on liquids sold for use or used in an off-
     highway business use.
       ``(2) Tax where other use.--If a liquid on which no tax was 
     imposed by reason of paragraph (1) is used otherwise than in 
     an off-highway business use, a tax shall be imposed by 
     paragraph (1)(B), (2)(B), or (3)(A)(ii) of subsection (a) 
     (whichever is appropriate) and by the corresponding provision 
     of subsection (d)(1) (if any).
       ``(3) Off-highway business use defined.--For purposes of 
     this subsection, the term `off-highway business use' has the 
     meaning given to such term by section 6421(e)(2); except that 
     such term shall not, for purposes of subsection (a)(1), 
     include use in a diesel-powered train.''
       (2) Section 4041(k) is hereby repealed.
       (3) Section 4081(c) is hereby repealed.
       (4) Section 4091(c) is hereby repealed.
       (c) Transfers to Highway Trust Fund.--Paragraph (4) of 
     section 9503(b) is amended by adding ``or'' at the end of 
     subparagraph (B), by striking the comma at the end of 
     subparagraph (C) and inserting a period, and by striking 
     subparagraphs (D), (E), and (F).
       (d) Conforming Amendments.--
       (1) Subsection (c) of section 40 is amended to read as 
     follows:
       ``(c) Coordination With Excise Tax Benefits.--The amount of 
     the credit determined under this section with respect to any 
     alcohol shall, under regulations prescribed by the Secretary, 
     be properly reduced to take into account the benefit provided 
     with respect to such alcohol under section 6427(f).''
       (2) Subparagraph (B) of section 40(d)(4) is amended by 
     striking ``under section 4041(k) or 4081(c)'' and inserting 
     ``under section 6427(f)''.
       (e) Effective Dates.--
       (1) In general.--Except as provided by paragraph (2), the 
     amendments made by this section shall apply to fuel sold or 
     used after September 30, 2004.
       (2) Subsection (c).--The amendments made by subsection (c) 
     shall apply to taxes imposed after September 30, 2003.

     SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL FUND.

       (a) Transfers to Fund.--Section 9503(b)(1) is amended by 
     adding at the end the following new flush sentence:

     ``For purposes of this paragraph, the amount of taxes 
     received under section 4081 shall include any amount treated 
     as a payment under section 6427(f)(1)(A) and shall not be 
     reduced by the amount paid under section 6427(f)(1)(B).''.
       (b) Transfers From Fund.--Subparagraph (A) of section 
     9503(c)(2) is amended by adding at the end the following new 
     sentence: ``Clauses (i)(III) and (ii) shall not apply to 
     claims under section 6427(f)(1)(B).''
       (c) Effective Date.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to taxes received after September 30, 2004.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall apply to amounts paid after September 30, 2004, and (to 
     the extent related to section 34 of the Internal Revenue Code 
     of 1986) to fuel used after such date.

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

     SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE 
                   STOCK PURCHASE PLAN STOCK OPTIONS FROM WAGES.

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

  Subtitle G--Incentives To Reinvest Foreign Earnings in United States

     SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN UNITED 
                   STATES.

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

     ``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.

       ``(a) Deduction.--
       ``(1) In general.--In the case of a corporation which is a 
     United States shareholder, there shall be allowed as a 
     deduction an amount equal to 85 percent of the dividends 
     which are received by such shareholder from controlled 
     foreign corporations during the election period.
       ``(2) Dividends paid indirectly from controlled foreign 
     corporations.--If, within the election period, a United 
     States shareholder receives a distribution from a controlled 
     foreign corporation which is excluded from gross income under 
     section 959(a), such distribution shall be treated for 
     purposes of this section as a dividend to the extent of any 
     amount included in income by such United States shareholder 
     under section 951(a)(1)(A) as a result of any dividend paid 
     during the election period to--
       ``(A) such controlled foreign corporation from another 
     controlled foreign corporation that is in a chain of 
     ownership described in section 958(a), or
       ``(B) any other controlled foreign corporation in such 
     chain of ownership, but only to the extent of distributions 
     described in section 959(b) which are made during the 
     election period to the controlled foreign corporation from 
     which such United States shareholder received such 
     distribution.
       ``(b) Limitations.--

[[Page 12767]]

       ``(1) In general.--The amount of dividends taken into 
     account under subsection (a) shall not exceed the greater 
     of--
       ``(A) $500,000,000,
       ``(B) the amount shown on the applicable financial 
     statement as earnings permanently reinvested outside the 
     United States, or
       ``(C) in the case of an applicable financial statement 
     which fails to show a specific amount of earnings permanently 
     reinvested outside the United States and which shows a 
     specific amount of tax liability attributable to such 
     earnings, the amount of such earnings determined in such 
     manner as the Secretary may prescribe.

     Except as provided in subparagraph (C), if there is no 
     statement or such statement fails to show a specific amount 
     of such earnings or liability, such amount shall be treated 
     as being zero for purposes of this paragraph.
       ``(2) Dividends must be extraordinary.--The amount of 
     dividends taken into account under subsection (a) shall not 
     exceed the excess (if any) of--
       ``(A) the dividends received during the taxable year by 
     such shareholder from controlled foreign corporations, over
       ``(B) the annual average for the base period years of--
       ``(i) the dividends received during each base period year 
     by such shareholder from such corporations,
       ``(ii) the amounts includible in such shareholder's gross 
     income for each base period year under section 951(a)(1)(B) 
     with respect to such corporations, and
       ``(iii) the amounts that would have been included for each 
     base period year but for section 959(a) with respect to such 
     corporations.

     The amount taken into account under clause (iii) for any base 
     period year shall not include any amount which is not 
     includible in gross income by reason of an amount described 
     in clause (ii) with respect to a prior taxable year.
       ``(3) Requirement to invest in united states.--Subsection 
     (a) shall not apply to any dividend received by a United 
     States shareholder unless the amount of the dividend is 
     invested in the United States pursuant to a plan describing 
     the expenditures to be made with such amount--
       ``(A) which, before the dividend is received, is approved 
     by the president or chief executive officer of such 
     shareholder, and
       ``(B) which is approved by the Board of Directors (or 
     management committee) of such shareholder no later than its 
     first meeting on or after the date the dividend is received.
       ``(c) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Election period.--The term `election period' means--
       ``(A) if this section applies to the taxpayer's last 
     taxable year beginning before the date of the enactment of 
     this section, any 6-month or shorter period during such year 
     which is after the date of the enactment of this section and 
     which is selected by the taxpayer, and
       ``(B) if this section applies to the taxpayer's first 
     taxable year beginning on or after such date, the 1st 6 
     months of such taxable year.
       ``(2) Applicable financial statement.--The term `applicable 
     financial statement' means the most recently audited 
     financial statement (including notes and other documents 
     which accompany such statement)--
       ``(A) which is certified on or before March 31, 2003, as 
     being prepared in accordance with generally accepted 
     accounting principles, and
       ``(B) which is used for the purposes of a statement or 
     report--
       ``(i) to creditors,
       ``(ii) to shareholders, or
       ``(iii) for any other substantial nontax purpose.

     In the case of a corporation required to file a financial 
     statement with the Securities and Exchange Commission, such 
     term means the most recent such statement filed on or before 
     March 31, 2003.
       ``(3) Base period years.--The base period years are the 3 
     taxable years--
       ``(A) which are among the 5 most recent taxable years 
     ending on or before March 31, 2003, and
       ``(B) which are determined by disregarding--
       ``(i) 1 taxable year for which the sum of the amounts 
     described in clauses (i), (ii), and (iii) of subsection 
     (b)(2)(B) is the largest, and
       ``(ii) 1 taxable year for which such sum is the smallest.

     Rules similar to the rules of subparagraphs (A) and (B) of 
     section 41(f)(3) shall apply for purposes of this paragraph.
       ``(4) Coordination with dividends received deduction.--No 
     deduction shall be allowed under section 243 or 245 for any 
     dividend for which a deduction is allowed under this section.
       ``(d) Denial of Foreign Tax Credit.--
       ``(1) In general.--No credit shall be allowed under section 
     901 for any taxes paid or accrued (or treated as paid or 
     accrued) with respect to the deductible portion of any 
     dividend or of any amount described in subsection (a)(2). No 
     deduction shall be allowed under this chapter for any tax for 
     which credit is not allowable by reason of the preceding 
     sentence.
       ``(2) Deductible portion.--For purposes of paragraph (1), 
     unless the taxpayer otherwise specifies, the deductible 
     portion of any dividend is the amount which bears the same 
     ratio to the amount of such dividend as the amount allowed as 
     a deduction under subsection (a) for the taxable year bears 
     to the amount described in subsection (b)(2)(A) for such 
     year.
       ``(e) Increase in Tax on Included Amounts Not Reduced by 
     Credits, Etc.--
       ``(1) In general.--Any tax under this chapter by reason of 
     nondeductible CFC dividends shall not be treated as tax 
     imposed by this chapter for purposes of determining--
       ``(A) the amount of any credit allowable under this 
     chapter, or
       ``(B) the amount of the tax imposed by section 55.

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

``Sec. 965. Temporary dividends received deduction.''.

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

                 Subtitle H--Other Incentive Provisions

     SEC. 281. 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.--Subsection (e) of section 451 
     (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 (without regard to extensions) for the return is after 
     December 31, 2002.

     SEC. 282. 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

[[Page 12768]]

     earnings shall not be reduced by amounts paid during the year 
     as dividends on capital stock or other proprietary capital 
     interests of the organization to the extent that the articles 
     of incorporation or bylaws of such organization or other 
     contract with patrons provide that such dividends are in 
     addition to amounts otherwise payable to patrons which are 
     derived from business done with or for patrons during the 
     taxable year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions in taxable years beginning after 
     the date of the enactment of this Act.

     SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO 
                   APPLY TO OUTRIGHT SALES BY LANDOWNERS.

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

     SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS 
                   TREATED AS QUALIFYING INCOME OF REGULATED 
                   INVESTMENT COMPANIES.

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

     SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE INVESTMENT 
                   TRUSTS.

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

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

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

[[Page 12769]]

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

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

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

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

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

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

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

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

       ``(iii) Period.--For purposes of clause (ii)(II), the 
     period described in this clause is the period beginning on 
     the first date that the failure to satisfy the requirements 
     of such paragraph (4) occurs as a result of the ownership of 
     such assets and ending on the earlier of the date on which 
     the trust disposes of such assets or the end of the first 
     quarter when there is no longer a failure to satisfy such 
     paragraph (4).
       ``(iv) Administrative provisions.--For purposes of subtitle 
     F, the taxes imposed by this subparagraph shall be treated as 
     excise taxes with respect to which the deficiency procedures 
     of such subtitle apply.''.
       (2) Modification of rules of application for failure to 
     satisfy sections 856(c)(2) or 856(c)(3).--Paragraph (6) of 
     section 856(c) (relating to definition of real estate 
     investment trust) is amended by striking subparagraphs (A) 
     and (B), by redesignating subparagraph (C) as subparagraph 
     (B), and by inserting before subparagraph (B) (as so 
     redesignated) the following new subparagraph:
       ``(A) following the corporation, trust, or association's 
     identification of the failure to meet the requirements of 
     paragraph (2) or (3), or of both such paragraphs, for any 
     taxable year, a description of each item of its

[[Page 12770]]

     gross income described in such paragraphs is set forth in a 
     schedule for such taxable year filed in accordance with 
     regulations prescribed by the Secretary, and''.
       (3) Reasonable cause exception to loss of reit status if 
     failure to satisfy requirements.--Subsection (g) of section 
     856 (relating to termination of election) is amended--
       (A) in paragraph (1) by inserting before the period at the 
     end of the first sentence the following: ``unless paragraph 
     (5) applies'', and
       (B) by adding at the end the following new paragraph:
       ``(5) Entities to which paragraph applies.--This paragraph 
     applies to a corporation, trust, or association--
       ``(A) which is not a real estate investment trust to which 
     the provisions of this part apply for the taxable year due to 
     one or more failures to comply with one or more of the 
     provisions of this part (other than subsection (c)(6) or 
     (c)(7) of section 856),
       ``(B) such failures are due to reasonable cause and not due 
     to willful neglect, and
       ``(C) if such corporation, trust, or association pays (as 
     prescribed by the Secretary in regulations and in the same 
     manner as tax) a penalty of $50,000 for each failure to 
     satisfy a provision of this part due to reasonable cause and 
     not willful neglect.''.
       (4) Deduction of tax paid from amount required to be 
     distributed.--Subparagraph (E) of section 857(b)(2) is 
     amended by striking ``(7)'' and inserting ``(7) of this 
     subsection, section 856(c)(7)(B)(iii), and section 
     856(g)(1).''.
       (5) Expansion of deficiency dividend procedure.--Subsection 
     (e) of section 860 is amended by striking ``or'' at the end 
     of paragraph (2), by striking the period at the end of 
     paragraph (3) and inserting ``; or'', and by adding at the 
     end the following new paragraph:
       ``(4) a statement by the taxpayer attached to its amendment 
     or supplement to a return of tax for the relevant tax 
     year.''.
       (g) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2000.
       (2) Subparagraphs (c) through  (f).--The amendments made by 
     subsections (c), (d), (e), and (f) shall apply to taxable 
     years beginning after the date of the enactment of this Act.

     SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED 
                   INVESTMENT COMPANIES.

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

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

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

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

     To the extent provided in regulations, clause (ii) shall 
     apply also for purposes of computing the taxable income of 
     the regulated investment company.''
       (2) Foreign corporations.--Section 881 (relating to tax on 
     income of foreign corporations not connected with United 
     States business) is amended by redesignating subsection (e) 
     as subsection (f) and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Tax Not To Apply to Certain Dividends of Regulated 
     Investment Companies.--
       ``(1) Interest-related dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1) of subsection (a) 
     on any interest-related dividend (as defined in section 
     871(k)(1)) received from a regulated investment company.

[[Page 12771]]

       ``(B) Exception.--Subparagraph (A) shall not apply--
       ``(i) to any dividend referred to in section 871(k)(1)(B), 
     and
       ``(ii) to any interest-related dividend received by a 
     controlled foreign corporation (within the meaning of section 
     957(a)) to the extent such dividend is attributable to 
     interest received by the regulated investment company from a 
     person who is a related person (within the meaning of section 
     864(d)(4)) with respect to such controlled foreign 
     corporation.
       ``(C) Treatment of dividends received by controlled foreign 
     corporations.--The rules of subsection (c)(5)(A) shall apply 
     to any interest-related dividend received by a controlled 
     foreign corporation (within the meaning of section 957(a)) to 
     the extent such dividend is attributable to interest received 
     by the regulated investment company which is described in 
     clause (ii) of section 871(k)(1)(E) (and not described in 
     clause (i) or (iii) of such section).
       ``(2) Short-term capital gain dividends.--No tax shall be 
     imposed under paragraph (1) of subsection (a) on any short-
     term capital gain dividend (as defined in section 871(k)(2)) 
     received from a regulated investment company.''.
       (3) Withholding taxes.--
       (A) Section 1441(c) (relating to exceptions) is amended by 
     adding at the end the following new paragraph:
       ``(12) Certain dividends received from regulated investment 
     companies.--
       ``(A) In general.--No tax shall be required to be deducted 
     and withheld under subsection (a) from any amount exempt from 
     the tax imposed by section 871(a)(1)(A) by reason of section 
     871(k).
       ``(B) Special rule.--For purposes of subparagraph (A), 
     clause (i) of section 871(k)(1)(B) shall not apply to any 
     dividend unless the regulated investment company knows that 
     such dividend is a dividend referred to in such clause. A 
     similar rule shall apply with respect to the exception 
     contained in section 871(k)(2)(B).''.
       (B) Section 1442(a) (relating to withholding of tax on 
     foreign corporations) is amended--
       (i) by striking ``and the reference in section 
     1441(c)(10)'' and inserting ``the reference in section 
     1441(c)(10)'', and
       (ii) by inserting before the period at the end the 
     following: ``, and the references in section 1441(c)(12) to 
     sections 871(a) and 871(k) shall be treated as referring to 
     sections 881(a) and 881(e) (except that for purposes of 
     applying subparagraph (A) of section 1441(c)(12), as so 
     modified, clause (ii) of section 881(e)(1)(B) shall not apply 
     to any dividend unless the regulated investment company knows 
     that such dividend is a dividend referred to in such 
     clause)''.
       (b) Estate Tax Treatment of Interest in Certain Regulated 
     Investment Companies.--Section 2105 (relating to property 
     without the United States for estate tax purposes) is amended 
     by adding at the end the following new subsection:
       ``(d) Stock in a RIC.--
       ``(1) In general.--For purposes of this subchapter, stock 
     in a regulated investment company (as defined in section 851) 
     owned by a nonresident not a citizen of the United States 
     shall not be deemed property within the United States in the 
     proportion that, at the end of the quarter of such investment 
     company's taxable year immediately preceding a decedent's 
     date of death (or at such other time as the Secretary may 
     designate in regulations), the assets of the investment 
     company that were qualifying assets with respect to the 
     decedent bore to the total assets of the investment company.
       ``(2) Qualifying assets.--For purposes of this subsection, 
     qualifying assets with respect to a decedent are assets that, 
     if owned directly by the decedent, would have been--
       ``(A) amounts, deposits, or debt obligations described in 
     subsection (b) of this section,
       ``(B) debt obligations described in the last sentence of 
     section 2104(c), or
       ``(C) other property not within the United States.''
       (c) Treatment of Regulated Investment Companies Under 
     Section 897.--
       (1) Paragraph (1) of section 897(h) is amended by striking 
     ``REIT'' each place it appears and inserting ``qualified 
     investment entity''.
       (2) Paragraphs (2) and (3) of section 897(h) are amended to 
     read as follows:
       ``(2) Sale of stock in domestically controlled entity not 
     taxed.--The term `United States real property interest' does 
     not include any interest in a domestically controlled 
     qualified investment entity.
       ``(3) Distributions by domestically controlled qualified 
     investment entities.--In the case of a domestically 
     controlled qualified investment entity, rules similar to the 
     rules of subsection (d) shall apply to the foreign ownership 
     percentage of any gain.''
       (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
     amended to read as follows:
       ``(A) Qualified investment entity.--The term `qualified 
     investment entity' means any real estate investment trust and 
     any regulated investment company.
       ``(B) Domestically controlled.--The term `domestically 
     controlled qualified investment entity' means any qualified 
     investment entity in which at all times during the testing 
     period less than 50 percent in value of the stock was held 
     directly or indirectly by foreign persons.''
       (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
     amended by striking ``REIT'' and inserting ``qualified 
     investment entity''.
       (5) The subsection heading for subsection (h) of section 
     897 is amended by striking ``REITS'' and inserting ``Certain 
     Investment Entities''.
       (d) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to dividends with respect to taxable years of regulated 
     investment companies beginning after December 31, 2004.
       (2) Estate tax treatment.--The amendment made by subsection 
     (b) shall apply to estates of decedents dying after December 
     31, 2004.
       (3) Certain other provisions.--The amendments made by 
     subsection (c) (other than paragraph (1) thereof) shall take 
     effect after December 31, 2004.

     SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS.

       (a) In General.--Subsection (g) of section 468B (relating 
     to clarification of taxation of certain funds) is amended to 
     read as follows:
       ``(g) Clarification of Taxation of Certain Funds.--
       ``(1) In general.--Except as provided in paragraph (2), 
     nothing in any provision of law shall be construed as 
     providing that an escrow account, settlement fund, or similar 
     fund is not subject to current income tax. The Secretary 
     shall prescribe regulations providing for the taxation of any 
     such account or fund whether as a grantor trust or otherwise.
       ``(2) Exemption from tax for certain settlement funds.--An 
     escrow account, settlement fund, or similar fund shall be 
     treated as beneficially owned by the United States and shall 
     be exempt from taxation under this subtitle if--
       ``(A) it is established pursuant to a consent decree 
     entered by a judge of a United States District Court,
       ``(B) it is created for the receipt of settlement payments 
     as directed by a government entity for the sole purpose of 
     resolving or satisfying one or more claims asserting 
     liability under the Comprehensive Environmental Response, 
     Compensation, and Liability Act of 1980,
       ``(C) the authority and control over the expenditure of 
     funds therein (including the expenditure of contributions 
     thereto and any net earnings thereon) is with such government 
     entity, and
       ``(D) upon termination, any remaining funds will be 
     disbursed upon instructions by such government entity in 
     accordance with applicable law.

     For purposes of this paragraph, the term `government entity' 
     means the United States, any State or political subdivision 
     thereof, the District of Columbia, any possession of the 
     United States, and any agency or instrumentality of any of 
     the foregoing.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR 
                   ORPHAN DRUG CREDIT.

       (a) In General.--Paragraph (2) of section 45C(b) (relating 
     to qualified clinical testing expenses) is amended by adding 
     at the end the following new subparagraph:
       ``(C) Treatment of certain expenses incurred before 
     designation.--For purposes of subparagraph (A)(ii)(I), if a 
     drug is designated under section 526 of the Federal Food, 
     Drug, and Cosmetic Act not later than the due date (including 
     extensions) for filing the return of tax under this subtitle 
     for the taxable year in which the application for such 
     designation of such drug was filed, such drug shall be 
     treated as having been designated on the date that such 
     application was filed.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to expenses incurred after the date of the 
     enactment of this Act.

     SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND 
                   ARROWS.

       (a) Bows.--Paragraph (1) of section 4161(b) (relating to 
     bows) is amended to read as follows:
       ``(1) Bows.--
       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any bow which has 
     a peak draw weight of 30 pounds or more, a tax equal to 11 
     percent of the price for which so sold.
       ``(B) Archery equipment.--There is hereby imposed on the 
     sale by the manufacturer, producer, or importer--
       ``(i) of any part or accessory suitable for inclusion in or 
     attachment to a bow described in subparagraph (A), and
       ``(ii) of any quiver or broadhead suitable for use with an 
     arrow described in paragraph (2),
     a tax equal to 11 percent of the price for which so sold.''.
       (b) Arrows.--Subsection (b) of section 4161 (relating to 
     bows and arrows, etc.) is amended by redesignating paragraph 
     (3) as paragraph (4) and inserting after paragraph (2) the 
     following:
       ``(3) Arrows.--

[[Page 12772]]

       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any arrow, a tax 
     equal to 12 percent of the price for which so sold.
       ``(B) Exception.--In the case of any arrow of which the 
     shaft or any other component has been previously taxed under 
     paragraph (1) or (2)--
       ``(i) section 6416(b)(3) shall not apply, and
       ``(ii) the tax imposed by subparagraph (A) shall be an 
     amount equal to the excess (if any) of--

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

       ``(C) Arrow.--For purposes of this paragraph, the term 
     `arrow' means any shaft described in paragraph (2) to which 
     additional components are attached.''.
       (c) Conforming Amendments.--Section 4161(b)(2) is amended--
       (1) by inserting ``(other than broadheads)'' after 
     ``point'', and
       (2) by striking ``Arrows.--'' in the heading and inserting 
     ``Arrow components.--''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to articles sold by the manufacturer, producer, 
     or importer after December 31, 2004.

     SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.

       (a) Repeal.--Paragraph (6) of section 4162(a) (defining 
     sport fishing equipment) is amended by striking subparagraph 
     (C) and by redesignating subparagraphs (D) through (J) as 
     subparagraphs (C) through (I), respectively.
       (b) Effective Date.--The amendments made this section shall 
     apply to articles sold by the manufacturer, producer, or 
     importer after December 31, 2004.

     SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH.

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

     SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS WHOLESALERS 
                   FOR COST 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 WHOLESALER'S AVERAGE COST 
                   OF CARRYING EXCISE TAX.

       ``(a) In General.--For purposes of section 38, in the case 
     of an eligible wholesaler, the amount of the distilled 
     spirits wholesalers credit for any taxable year is the amount 
     equal to the product of--
       ``(1) the number of cases of bottled distilled spirits--
       ``(A) which were bottled in the United States, and
       ``(B) which are purchased by such wholesaler during the 
     taxable year directly from the bottler of such spirits, 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 who holds a 
     permit under the Federal Alcohol Administration Act as a 
     wholesaler of distilled spirits.
       ``(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 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 based on case.--For 
     purposes of paragraph (1), the deemed Federal excise tax per 
     case of 12 80-proof 750ml bottles is $22.83.
       ``(4) Number of cases in lot.--For purposes of this 
     section, 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) in the case of an eligible wholesaler (as defined in 
     section 5011(b)), the distilled spirits wholesalers 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, 2005.--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, 2005.''.
       (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 wholesaler's average cost of 
              carrying excise tax.''.

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

     SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELATING TO 
                   DISTILLED SPIRITS, WINE, AND BEER.

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

     ``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.

       ``(a) In General.--Notwithstanding sections 5081, 5091, 
     5111, 5121, and 5131, the rate of tax imposed under such 
     sections for the suspension period shall be zero. During such 
     period, persons engaged in or carrying on a trade or business 
     covered by such sections shall register under section 5141 
     and shall comply with the recordkeeping requirements under 
     this part.
       ``(b) Suspension Period.--For purposes of subsection (a), 
     the suspension period is the period beginning on July 1, 
     2004, and ending on June 30, 2007.''.
       (b) Conforming Amendment.--Section 5117 is amended by 
     adding at the end the following new subsection:
       ``(d) Special Rule During Suspension Period.--Except as 
     provided by the Secretary, during the suspension period (as 
     defined in section 5148) it shall be unlawful for any dealer 
     to purchase distilled spirits for resale from any person 
     other than a wholesale dealer in liquors who is required to 
     keep records under section 5114.''.
       (c) Clerical Amendment.--The table of sections for subpart 
     G of part II of subchapter A of chapter 51 is amended by 
     striking the last item and inserting the following new items:

``Sec. 5148. Suspension of occupational tax.
``Sec. 5149. Cross references.''.

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

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

     SEC. 301. INTEREST EXPENSE ALLOCATION RULES.

       (a) Election To Allocate on Worldwide Basis.--Section 864 
     is amended by redesignating subsection (f) as subsection (g) 
     and by inserting after subsection (e) the following new 
     subsection:
       ``(f) Election To Allocate Interest, etc. on Worldwide 
     Basis.--For purposes of this subchapter, at the election of 
     the worldwide affiliated group--
       ``(1) Allocation and apportionment of interest expense.--
       ``(A) In general.--The taxable income of each domestic 
     corporation which is a member of a worldwide affiliated group 
     shall be determined by allocating and apportioning interest 
     expense of each member as if all members of such group were a 
     single corporation.
       ``(B) Treatment of worldwide affiliated group.--The taxable 
     income of the domestic members of a worldwide affiliated 
     group from sources outside the United States shall be 
     determined by allocating and apportioning the interest 
     expense of such domestic members to such income in an amount 
     equal to the excess (if any) of--
       ``(i) the total interest expense of the worldwide 
     affiliated group multiplied by the ratio which the foreign 
     assets of the worldwide affiliated group bears to all the 
     assets of the worldwide affiliated group, over
       ``(ii) the interest expense of all foreign corporations 
     which are members of the worldwide affiliated group to the 
     extent such interest expense of such foreign corporations 
     would have been allocated and apportioned to foreign source 
     income if this subsection were applied to a group consisting 
     of all the foreign corporations in such worldwide affiliated 
     group.
       ``(C) Worldwide affiliated group.--For purposes of this 
     paragraph, the term `worldwide affiliated group' means a 
     group consisting of--
       ``(i) the includible members of an affiliated group (as 
     defined in section 1504(a), determined without regard to 
     paragraphs (2) and (4) of section 1504(b)), and
       ``(ii) all controlled foreign corporations in which such 
     members in the aggregate meet the ownership requirements of 
     section 1504(a)(2) either directly or indirectly through 
     applying paragraph (2) of section 958(a) or through applying 
     rules similar to the rules of such paragraph to stock owned 
     directly or indirectly by domestic partnerships, trusts, or 
     estates.

[[Page 12773]]

       ``(2) Allocation and apportionment of other expenses.--
     Expenses other than interest which are not directly allocable 
     or apportioned to any specific income producing activity 
     shall be allocated and apportioned as if all members of the 
     affiliated group were a single corporation. For purposes of 
     the preceding sentence, the term `affiliated group' has the 
     meaning given such term by section 1504 (determined without 
     regard to paragraph (4) of section 1504(b)).
       ``(3) Treatment of tax-exempt assets; basis of stock in 
     nonaffiliated 10-percent owned corporations.--The rules of 
     paragraphs (3) and (4) of subsection (e) shall apply for 
     purposes of this subsection, except that paragraph (4) shall 
     be applied on a worldwide affiliated group basis.
       ``(4) Treatment of certain financial institutions.--
       ``(A) In general.--For purposes of paragraph (1), any 
     corporation described in subparagraph (B) shall be treated as 
     an includible corporation for purposes of section 1504 only 
     for purposes of applying this subsection separately to 
     corporations so described.
       ``(B) Description.--A corporation is described in this 
     subparagraph if--
       ``(i) such corporation is a financial institution described 
     in section 581 or 591,
       ``(ii) the business of such financial institution is 
     predominantly with persons other than related persons (within 
     the meaning of subsection (d)(4)) or their customers, and
       ``(iii) such financial institution is required by State or 
     Federal law to be operated separately from any other entity 
     which is not such an institution.
       ``(C) Treatment of bank and financial holding companies.--
     To the extent provided in regulations--
       ``(i) a bank holding company (within the meaning of section 
     2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 
     1841(a)),
       ``(ii) a financial holding company (within the meaning of 
     section 2(p) of the Bank Holding Company Act of 1956 (12 
     U.S.C. 1841(p)), and
       ``(iii) any subsidiary of a financial institution described 
     in section 581 or 591, or of any such bank or financial 
     holding company, if such subsidiary is predominantly engaged 
     (directly or indirectly) in the active conduct of a banking, 
     financing, or similar business,
     shall be treated as a corporation described in subparagraph 
     (B).
       ``(5) Election to expand financial institution group of 
     worldwide group.--
       ``(A) In general.--If a worldwide affiliated group elects 
     the application of this subsection, all financial 
     corporations which--
       ``(i) are members of such worldwide affiliated group, but
       ``(ii) are not corporations described in paragraph (4)(B),
     shall be treated as described in paragraph (4)(B) for 
     purposes of applying paragraph (4)(A). This subsection (other 
     than this paragraph) shall apply to any such group in the 
     same manner as this subsection (other than this paragraph) 
     applies to the pre-election worldwide affiliated group of 
     which such group is a part.
       ``(B) Financial corporation.--For purposes of this 
     paragraph, the term `financial corporation' means any 
     corporation if at least 80 percent of its gross income is 
     income described in section 904(d)(2)(C)(ii) and the 
     regulations thereunder which is derived from transactions 
     with persons who are not related (within the meaning of 
     section 267(b) or 707(b)(1)) to the corporation. For purposes 
     of the preceding sentence, there shall be disregarded any 
     item of income or gain from a transaction or series of 
     transactions a principal purpose of which is the 
     qualification of any corporation as a financial corporation.
       ``(C) Antiabuse rules.--In the case of a corporation which 
     is a member of an electing financial institution group, to 
     the extent that such corporation--
       ``(i) distributes dividends or makes other distributions 
     with respect to its stock after the date of the enactment of 
     this paragraph to any member of the pre-election worldwide 
     affiliated group (other than to a member of the electing 
     financial institution group) in excess of the greater of--

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

       ``(ii) deals with any person in any manner not clearly 
     reflecting the income of the corporation (as determined under 
     principles similar to the principles of section 482),
     an amount of indebtedness of the electing financial 
     institution group equal to the excess distribution or the 
     understatement or overstatement of income, as the case may 
     be, shall be recharacterized (for the taxable year and 
     subsequent taxable years) for purposes of this paragraph as 
     indebtedness of the worldwide affiliated group (excluding the 
     electing financial institution group). If a corporation has 
     not been in existence for 5 taxable years, this subparagraph 
     shall be applied with respect to the period it was in 
     existence.
       ``(D) Election.--An election under this paragraph with 
     respect to any financial institution group may be made only 
     by the common parent of the pre-election worldwide affiliated 
     group and may be made only for the first taxable year 
     beginning after December 31, 2008, in which such affiliated 
     group includes 1 or more financial corporations. Such an 
     election, once made, shall apply to all financial 
     corporations which are members of the electing financial 
     institution group for such taxable year and all subsequent 
     years unless revoked with the consent of the Secretary.
       ``(E) Definitions relating to groups.--For purposes of this 
     paragraph--
       ``(i) Pre-election worldwide affiliated group.--The term 
     `pre-election worldwide affiliated group' means, with respect 
     to a corporation, the worldwide affiliated group of which 
     such corporation would (but for an election under this 
     paragraph) be a member for purposes of applying paragraph 
     (1).
       ``(ii) Electing financial institution group.--The term 
     `electing financial institution group' means the group of 
     corporations to which this subsection applies separately by 
     reason of the application of paragraph (4)(A) and which 
     includes financial corporations by reason of an election 
     under subparagraph (A).
       ``(F) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this 
     subsection, including regulations--
       ``(i) providing for the direct allocation of interest 
     expense in other circumstances where such allocation would be 
     appropriate to carry out the purposes of this subsection,
       ``(ii) preventing assets or interest expense from being 
     taken into account more than once, and
       ``(iii) dealing with changes in members of any group 
     (through acquisitions or otherwise) treated under this 
     paragraph as an affiliated group for purposes of this 
     subsection.
       ``(6) Election.--An election to have this subsection apply 
     with respect to any worldwide affiliated group may be made 
     only by the common parent of the domestic affiliated group 
     referred to in paragraph (1)(C) and may be made only for the 
     first taxable year beginning after December 31, 2008, in 
     which a worldwide affiliated group exists which includes such 
     affiliated group and at least 1 foreign corporation. Such an 
     election, once made, shall apply to such common parent and 
     all other corporations which are members of such worldwide 
     affiliated group for such taxable year and all subsequent 
     years unless revoked with the consent of the Secretary.''.
       (b) Expansion of Regulatory Authority.--Paragraph (7) of 
     section 864(e) is amended--
       (1) by inserting before the comma at the end of 
     subparagraph (B) ``and in other circumstances where such 
     allocation would be appropriate to carry out the purposes of 
     this subsection'', and
       (2) by striking ``and'' at the end of subparagraph (E), by 
     redesignating subparagraph (F) as subparagraph (G), and by 
     inserting after subparagraph (E) the following new 
     subparagraph:
       ``(F) preventing assets or interest expense from being 
     taken into account more than once, and''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2008.

     SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

       (a) General Rule.--Section 904 is amended by redesignating 
     subsections (g), (h), (i), (j), and (k) as subsections (h), 
     (i), (j), (k), and (l) respectively, and by inserting after 
     subsection (f) the following new subsection:
       ``(g) Recharacterization of Overall Domestic Loss.--
       ``(1) General rule.--For purposes of this subpart and 
     section 936, in the case of any taxpayer who sustains an 
     overall domestic loss for any taxable year beginning after 
     December 31, 2006, that portion of the taxpayer's taxable 
     income from sources within the United States for each 
     succeeding taxable year which is equal to the lesser of--
       ``(A) the amount of such loss (to the extent not used under 
     this paragraph in prior taxable years), or
       ``(B) 50 percent of the taxpayer's taxable income from 
     sources within the United States for such succeeding taxable 
     year,
     shall be treated as income from sources without the United 
     States (and not as income from sources within the United 
     States).
       ``(2) Overall domestic loss defined.--For purposes of this 
     subsection--
       ``(A) In general.--The term `overall domestic loss' means 
     any domestic loss to the extent such loss offsets taxable 
     income from sources without the United States for the taxable 
     year or for any preceding taxable year by reason of a 
     carryback. For purposes of the preceding sentence, the term 
     `domestic loss' means the amount by which the gross income 
     for the taxable year from sources within the United States is 
     exceeded by the sum of the deductions properly apportioned or 
     allocated thereto (determined without regard to any carryback 
     from a subsequent taxable year).
       ``(B) Taxpayer must have elected foreign tax credit for 
     year of loss.--The term `overall domestic loss' shall not 
     include any loss for any taxable year unless the taxpayer 
     chose the benefits of this subpart for such taxable year.

[[Page 12774]]

       ``(3) Characterization of subsequent income.--
       ``(A) In general.--Any income from sources within the 
     United States that is treated as income from sources without 
     the United States under paragraph (1) shall be allocated 
     among and increase the income categories in proportion to the 
     loss from sources within the United States previously 
     allocated to those income categories.
       ``(B) Income category.--For purposes of this paragraph, the 
     term `income category' has the meaning given such term by 
     subsection (f)(5)(E)(i).
       ``(4) Coordination with subsection (f).--The Secretary 
     shall prescribe such regulations as may be necessary to 
     coordinate the provisions of this subsection with the 
     provisions of subsection (f).''.
       (b) Conforming Amendments.--
       (1) Section 535(d)(2) is amended by striking ``section 
     904(g)(6)'' and inserting ``section 904(h)(6)''.
       (2) Subparagraph (A) of section 936(a)(2) is amended by 
     striking ``section 904(f)'' and inserting ``subsections (f) 
     and (g) of section 904''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to losses for taxable years beginning after 
     December 31, 2006.

     SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.

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

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

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

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

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

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

       ``(iii) Pass-thru entities.--The Secretary shall by 
     regulation specify for purposes of this subparagraph the 
     treatment of financial services income received or accrued by 
     partnerships and by other pass-thru entities which are not 
     members of a financial services group.''
       (e) Conforming Amendments.--
       (1) Clause (iii) of section 904(d)(2)(B) (relating to 
     exceptions from passive income), as so redesignated, is 
     amended by striking subclause (I) and by redesignating 
     subclauses (II) and (III) as subclauses (I) and (II), 
     respectively.
       (2) Clause (i) of section 904(d)(2)(D) (defining financial 
     services income), as so redesignated, is amended by adding 
     ``or'' at the end of subclause (I) and by striking subclauses 
     (II) and (III) and inserting the following new subclause:

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

       (3) Section 904(d)(2)(D) (defining financial services 
     income), as so redesignated, is amended by striking clause 
     (iii).
       (4) Paragraph (3) of section 904(d) is amended to read as 
     follows:
       ``(3) Look-thru in case of controlled foreign 
     corporations.--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, dividends, interest, rents, and royalties received 
     or accrued by the taxpayer from a controlled foreign 
     corporation in which the taxpayer is a United States 
     shareholder shall not be treated as passive category income.
       ``(B) Subpart f inclusions.--Any amount included in gross 
     income under section 951(a)(1)(A) shall be treated as passive 
     category income to the extent the amount so included is 
     attributable to passive category income.
       ``(C) Interest, rents, and royalties.--Any interest, rent, 
     or royalty which is received or accrued from a controlled 
     foreign corporation in which the taxpayer is a United States 
     shareholder shall be treated as passive category income to 
     the extent it is properly allocable (under regulations 
     prescribed by the Secretary) to passive category income of 
     the controlled foreign corporation.
       ``(D) Dividends.--Any dividend paid out of the earnings and 
     profits of any controlled foreign corporation in which the 
     taxpayer is a United States shareholder shall be treated as 
     passive category income in proportion to the ratio of--
       ``(i) the portion of the earnings and profits attributable 
     to passive category income, to
       ``(ii) the total amount of earnings and profits.
       ``(E) Look-thru applies only where subpart f applies.--If a 
     controlled foreign corporation meets the requirements of 
     section 954(b)(3)(A) (relating to de minimis rule) for any 
     taxable year, for purposes of this paragraph, none of its 
     foreign base company income (as defined in section 954(a) 
     without regard to section 954(b)(5)) and none of its gross 
     insurance income (as defined in section 954(b)(3)(C)) for 
     such taxable year shall be treated as passive category 
     income, except that this sentence shall not apply to any 
     income which (without regard to this sentence) would be 
     treated as financial services income. Solely for purposes of 
     applying subparagraph (D), passive income of a controlled 
     foreign corporation shall not be treated as passive category 
     income if the requirements of section 954(b)(4) are met with 
     respect to such income.
       ``(F) Coordination with high-taxed income provisions.--
       ``(i) In determining whether any income of a controlled 
     foreign corporation is passive category income, subclause 
     (II) of paragraph (2)(B)(iii) shall not apply.
       ``(ii) Any income of the taxpayer which is treated as 
     passive category income under this paragraph shall be so 
     treated notwithstanding any provision of paragraph (2); 
     except that the determination of whether any amount is high-
     taxed income shall be made after the application of this 
     paragraph.
       ``(G) Dividend.--For purposes of this paragraph, the term 
     `dividend' includes any amount included in gross income in 
     section 951(a)(1)(B). Any amount included in gross income 
     under section 78 to the extent attributable to amounts 
     included in gross income in section 951(a)(1)(A) shall not be 
     treated as a dividend but shall be treated as included in 
     gross income under section 951(a)(1)(A).
       ``(H) Look-thru applies to passive foreign investment 
     company inclusion.--If--
       ``(i) a passive foreign investment company is a controlled 
     foreign corporation, and
       ``(ii) the taxpayer is a United States shareholder in such 
     controlled foreign corporation,
     any amount included in gross income under section 1293 shall 
     be treated as income in a separate category to the extent 
     such amount is attributable to income in such category.''
       (5) Treatment of income tax base differences.--Paragraph 
     (2) of section 904(d) is amended by redesignating 
     subparagraphs (H) and (I) as subparagraphs (I) and (J), 
     respectively, and by inserting after subparagraph (G) the 
     following new subparagraph:
       ``(H) Treatment of income tax base differences.--Tax 
     imposed under the law of a foreign country or possession of 
     the United States on an amount which does not constitute 
     income under United States tax principles shall be treated as 
     imposed on income described in paragraph (1)(B).''
       (6) Paragraph (2) of section 904(d) is amended by adding at 
     the end the following new subparagraph:
       ``(K) Transitional rules for 2007 changes.--For purposes of 
     paragraph (1)--
       ``(i) taxes carried from any taxable year beginning before 
     January 1, 2007, to any taxable year beginning on or after 
     such date, with respect to any item of income, shall be 
     treated as described in the subparagraph of paragraph (1) in 
     which such income would be described were such taxes paid or 
     accrued in a taxable year beginning on or after such date, 
     and

[[Page 12775]]

       ``(ii) the Secretary may by regulations provide for the 
     allocation of any carryback of taxes with respect to income 
     to such a taxable year for purposes of allocating such income 
     among the separate categories in effect for such taxable 
     year.''.
       (7) Section 904(j)(3)(A)(i) is amended by striking 
     ``subsection (d)(2)(A)'' and inserting ``subsection 
     (d)(2)(B)''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.

     SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM 
                   NONCONTROLLED SECTION 902 CORPORATIONS.

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

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

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

     SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS 
                   TO APPLY IN DETERMINING SECTION 902 AND 960 
                   CREDITS.

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

     SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF 
                   INTANGIBLE PROPERTY.

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

     SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN 
                   ASSETS OF CONTROLLED FOREIGN CORPORATION.

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

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

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

     SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR 
                   FOREIGN TAX PAID OTHER THAN IN FUNCTIONAL 
                   CURRENCY.

       (a) In General.--Paragraph (1) of section 986(a) (relating 
     to determination of foreign taxes and foreign corporation's 
     earnings and profits) is amended by redesignating 
     subparagraph (D) as subparagraph (E) and by inserting after 
     subparagraph (C) the following new subparagraph:
       ``(D) Elective exception for taxes paid other than in 
     functional currency.--
       ``(i) In general.--At the election of the taxpayer, 
     subparagraph (A) shall not apply to any foreign income taxes 
     the liability for which is denominated in any currency other 
     than in the taxpayer's functional currency.
       ``(ii) Application to qualified business units.--An 
     election under this subparagraph may apply to foreign income 
     taxes attributable to a qualified business unit in accordance 
     with regulations prescribed by the Secretary.
       ``(iii) Election.--Any such election shall apply to the 
     taxable year for which made and all subsequent taxable years 
     unless revoked with the consent of the Secretary.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN 
                   FOREIGN CORPORATIONS.

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

     SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY 
                   FOREIGN PARTNERSHIPS AND FOREIGN CORPORATIONS.

       (a) In General.--Paragraph (1) of section 861(a) is amended 
     by striking ``and'' at the end of subparagraph (A), by 
     striking the period at the end of subparagraph (B) and 
     inserting ``, and'', and by adding at the end the following 
     new subparagraph:
       ``(C) in the case of a foreign partnership, which is 
     predominantly engaged in the active conduct of a trade or 
     business outside

[[Page 12776]]

     the United States, any interest not paid by a trade or 
     business engaged in by the partnership in the United States 
     and not allocable to income which is effectively connected 
     (or treated as effectively connected) with the conduct of a 
     trade or business in the United States.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED 
                   CONTROLLED FOREIGN CORPORATIONS UNDER FOREIGN 
                   PERSONAL HOLDING COMPANY INCOME RULES.

       (a) In General.--Subsection (c) of section 954, as amended 
     by this Act, is amended by adding after paragraph (4) the 
     following new paragraph:
       ``(5) Look-thru in the case of related controlled foreign 
     corporations.--For purposes of this subsection, dividends, 
     interest, rents, and royalties received or accrued from a 
     controlled foreign corporation which is a related person (as 
     defined in subsection (b)(9)) shall not be treated as foreign 
     personal holding company income to the extent attributable or 
     properly allocable (determined under rules similar to the 
     rules of subparagraphs (C) and (D) of section 904(d)(3)) to 
     income of the related person which is not subpart F income 
     (as defined in section 952). For purposes of this paragraph, 
     interest shall include factoring income which is treated as 
     income equivalent to interest for purposes of paragraph 
     (1)(E). The Secretary shall prescribe such regulations as may 
     be appropriate to prevent the abuse of the purposes of this 
     paragraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP 
                   INTERESTS.

       (a) In General.--Section 954(c) (defining foreign personal 
     holding company income), as amended by this Act, is amended 
     by adding after paragraph (5) the following new paragraph:
       ``(6) Look-thru rule for certain partnership sales.--
       ``(A) In general.--In the case of any sale by a controlled 
     foreign corporation of an interest in a partnership with 
     respect to which such corporation is a 25-percent owner, such 
     corporation shall be treated for purposes of this subsection 
     as selling the proportionate share of the assets of the 
     partnership attributable to such interest. The Secretary 
     shall prescribe such regulations as may be appropriate to 
     prevent abuse of the purposes of this paragraph, including 
     regulations providing for coordination of this paragraph with 
     the provisions of subchapter K.
       ``(B) 25-percent owner.--For purposes of this paragraph, 
     the term `25-percent owner' means a controlled foreign 
     corporation which owns directly 25 percent or more of the 
     capital or profits interest in a partnership. For purposes of 
     the preceding sentence, if a controlled foreign corporation 
     is a shareholder or partner of a corporation or partnership, 
     the controlled foreign corporation shall be treated as owning 
     directly its proportionate share of any such capital or 
     profits interest held directly or indirectly by such 
     corporation or partnership''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES 
                   AND FOREIGN INVESTMENT COMPANY RULES.

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

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

       ``(ii) amounts received from the sale or other disposition 
     of such a contract.
     This subparagraph shall apply with respect to amounts 
     received for services under a particular contract only if at 
     some time during the taxable year 25 percent or more in value 
     of the outstanding stock of the corporation is owned, 
     directly or indirectly, by or for the individual who has 
     performed, is to perform, or may be designated (by name or by 
     description) as the one to perform, such services.''.
       (c) Conforming Amendments.--
       (1) Section 1(h) is amended--
       (A) in paragraph (10), by inserting ``and'' at the end of 
     subparagraph (F), by striking subparagraph (G), and by 
     redesignating subparagraph (H) as subparagraph (G), and
       (B) by striking ``a foreign personal holding company (as 
     defined in section 552), a foreign investment company (as 
     defined in section 1246(b)), or'' in paragraph (11)(C)(iii).
       (2) Section 163(e)(3)(B), as amended by section 642(a) of 
     this Act, is amended by striking ``which is a foreign 
     personal holding company (as defined in section 552), a 
     controlled foreign corporation (as defined in section 957), 
     or'' and inserting ``which is a controlled foreign 
     corporation (as defined in section 957) or''.
       (3) Paragraph (2) of section 171(c) is amended--
       (A) by striking ``, or by a foreign personal holding 
     company, as defined in section 552'', and
       (B) by striking ``, or foreign personal holding company''.
       (4) Paragraph (2) of section 245(a) is amended by striking 
     ``foreign personal holding company or''.
       (5) Section 267(a)(3)(B), as amended by section 642(b) of 
     this Act, is amended by striking ``to a foreign personal 
     holding company (as defined in section 552), a controlled 
     foreign corporation (as defined in section 957), or'' and 
     inserting ``to a controlled foreign corporation (as defined 
     in section 957) or''.
       (6) Section 312 is amended by striking subsection (j).
       (7) Subsection (m) of section 312 is amended by striking 
     ``, a foreign investment company (within the meaning of 
     section 1246(b)), or a foreign personal holding company 
     (within the meaning of section 552)''.
       (8) Subsection (e) of section 443 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       (9) Subparagraph (B) of section 465(c)(7) is amended by 
     adding ``or'' at the end of clause (i), by striking clause 
     (ii), and by redesignating clause (iii) as clause (ii).
       (10) Paragraph (1) of section 543(b) is amended by 
     inserting ``and'' at the end of subparagraph (A), by striking 
     ``, and'' at the end of subparagraph (B) and inserting a 
     period, and by striking subparagraph (C).
       (11) Paragraph (1) of section 562(b) is amended by striking 
     ``or a foreign personal holding company described in section 
     552''.
       (12) Section 563 is amended--
       (A) by striking subsection (c),
       (B) by redesignating subsection (d) as subsection (c), and
       (C) by striking ``subsection (a), (b), or (c)'' in 
     subsection (c) (as so redesignated) and inserting 
     ``subsection (a) or (b)''.
       (13) Subsection (d) of section 751 is amended by adding 
     ``and'' at the end of paragraph (2), by striking paragraph 
     (3), by redesignating paragraph (4) as paragraph (3), and by 
     striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as 
     so redesignated) and inserting ``paragraph (1) or (2)''.
       (14) Paragraph (2) of section 864(d) is amended by striking 
     subparagraph (A) and by redesignating subparagraphs (B) and 
     (C) as subparagraphs (A) and (B), respectively.
       (15)(A) Subparagraph (A) of section 898(b)(1) is amended to 
     read as follows:
       ``(A) which is treated as a controlled foreign corporation 
     for any purpose under subpart F of part III of this 
     subchapter, and''.
       (B) Subparagraph (B) of section 898(b)(2) is amended by 
     striking ``and sections 551(f) and 554, whichever are 
     applicable,''.
       (C) Paragraph (3) of section 898(b) is amended to read as 
     follows:
       ``(3) United states shareholder.--The term `United States 
     shareholder' has the meaning given to such term by section 
     951(b), except that, in the case of a foreign corporation 
     having related person insurance income (as defined in section 
     953(c)(2)), the Secretary may treat any person as a United 
     States shareholder for purposes of this section if such 
     person is treated as a United States shareholder under 
     section 953(c)(1).''.
       (D) Subsection (c) of section 898 is amended to read as 
     follows:
       ``(c) Determination of Required Year.--
       ``(1) In general.--The required year is--
       ``(A) the majority U.S. shareholder year, or
       ``(B) if there is no majority U.S. shareholder year, the 
     taxable year prescribed under regulations.
       ``(2) 1-month deferral allowed.--A specified foreign 
     corporation may elect, in lieu of the taxable year under 
     paragraph (1)(A), a taxable year beginning 1 month earlier 
     than the majority U.S. shareholder year.
       ``(3) Majority u.s. shareholder year.--
       ``(A) In general.--For purposes of this subsection, the 
     term `majority U.S. shareholder

[[Page 12777]]

     year' means the taxable year (if any) which, on each testing 
     day, constituted the taxable year of--
       ``(i) each United States shareholder described in 
     subsection (b)(2)(A), and
       ``(ii) each United States shareholder not described in 
     clause (i) whose stock was treated as owned under subsection 
     (b)(2)(B) by any shareholder described in such clause.
       ``(B) Testing day.--The testing days shall be--
       ``(i) the first day of the corporation's taxable year 
     (determined without regard to this section), or
       ``(ii) the days during such representative period as the 
     Secretary may prescribe.''.
       (16) Clause (ii) of section 904(d)(2)(A) is amended to read 
     as follows:
       ``(ii) Certain amounts included.--Except as provided in 
     clause (iii), the term `passive income' includes, except as 
     provided in subparagraph (E)(iii) or paragraph (3)(I), any 
     amount includible in gross income under section 1293 
     (relating to certain passive foreign investment 
     companies).''.
       (17)(A) Subparagraph (A) of section 904(h)(1), as 
     redesignated by section 302, is amended by adding ``or'' at 
     the end of clause (i), by striking clause (ii), and by 
     redesignating clause (iii) as clause (ii).
       (B) The paragraph heading of paragraph (2) of section 
     904(h), as so redesignated, is amended by striking ``foreign 
     personal holding or''.
       (18) Section 951 is amended by striking subsections (c) and 
     (d) and by redesignating subsections (e) and (f) as 
     subsections (c) and (d), respectively.
       (19) Paragraph (3) of section 989(b) is amended by striking 
     ``, 551(a),''.
       (20) Paragraph (5) of section 1014(b) is amended by 
     inserting ``and before January 1, 2005,'' after ``August 26, 
     1937,''.
       (21) Subsection (a) of section 1016 is amended by striking 
     paragraph (13).
       (22)(A) Paragraph (3) of section 1212(a) is amended to read 
     as follows:
       ``(3) Special rules on carrybacks.--A net capital loss of a 
     corporation shall not be carried back under paragraph (1)(A) 
     to a taxable year--
       ``(A) for which it is a regulated investment company (as 
     defined in section 851), or
       ``(B) for which it is a real estate investment trust (as 
     defined in section 856).''.
       (B) The amendment made by subparagraph (A) shall apply to 
     taxable years beginning after December 31, 2004.
       (23) Section 1223 is amended by striking paragraph (10) and 
     by redesignating the following paragraphs accordingly.
       (24) Subsection (d) of section 1248 is amended by striking 
     paragraph (5) and by redesignating paragraphs (6) and (7) as 
     paragraphs (5) and (6), respectively.
       (25) Paragraph (2) of section 1260(c) is amended by 
     striking subparagraphs (H) and (I) and by redesignating 
     subparagraph (J) as subparagraph (H).
       (26)(A) Subparagraph (F) of section 1291(b)(3) is amended 
     by striking ``551(d), 959(a),'' and inserting ``959(a)''.
       (B) Subsection (e) of section 1291 is amended by inserting 
     ``(as in effect on the day before the date of the enactment 
     of the American Jobs Creation Act of 2004)'' after ``section 
     1246''.
       (27) Paragraph (2) of section 1294(a) is amended to read as 
     follows:
       ``(2) Election not permitted where amounts otherwise 
     includible under section 951.--The taxpayer may not make an 
     election under paragraph (1) with respect to the 
     undistributed PFIC earnings tax liability attributable to a 
     qualified electing fund for the taxable year if any amount is 
     includible in the gross income of the taxpayer under section 
     951 with respect to such fund for such taxable year.''.
       (28) Section 6035 is hereby repealed.
       (29) Subparagraph (D) of section 6103(e)(1) is amended by 
     striking clause (iv) and redesignating clauses (v) and (vi) 
     as clauses (iv) and (v), respectively.
       (30) Subparagraph (B) of section 6501(e)(1) is amended to 
     read as follows:
       ``(B) Constructive dividends.--If the taxpayer omits from 
     gross income an amount properly includible therein under 
     section 951(a), the tax may be assessed, or a proceeding in 
     court for the collection of such tax may be done without 
     assessing, at any time within 6 years after the return was 
     filed.''.
       (31) Subsection (a) of section 6679 is amended--
       (A) by striking ``6035, 6046, and 6046A'' in paragraph (1) 
     and inserting ``6046 and 6046A'', and
       (B) by striking paragraph (3).
       (32) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
     are each amended by striking ``556(b)(2),'' each place it 
     appears.
       (33) The table of parts for subchapter G of chapter 1 is 
     amended by striking the item relating to part III.
       (34) The table of sections for part IV of subchapter P of 
     chapter 1 is amended by striking the items relating to 
     sections 1246 and 1247.
       (35) The table of sections for subpart A of part III of 
     subchapter A of chapter 61 is amended by striking the item 
     relating to section 6035.
       (d) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     of foreign corporations beginning after December 31, 2004, 
     and to taxable years of United States shareholders with or 
     within which such taxable years of foreign corporations end.
       (2) Subsection (c)(29).--The amendments made by subsection 
     (c)(29) shall apply to disclosures of return or return 
     information with respect to taxable years beginning after 
     December 31, 2004.

     SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY 
                   INCOME WITH RESPECT TO TRANSACTIONS IN 
                   COMMODITIES.

       (a) In General.--Clauses (i) and (ii) of section 
     954(c)(1)(C) (relating to commodity transactions) are amended 
     to read as follows:
       ``(i) arise out of commodity hedging transactions (as 
     defined in paragraph (4)(A)),
       ``(ii) are active business gains or losses from the sale of 
     commodities, but only if substantially all of the controlled 
     foreign corporation's commodities are property described in 
     paragraph (1), (2), or (8) of section 1221(a), or''.
       (b) Definition and Special Rules.--Subsection (c) of 
     section 954 is amended by adding after paragraph (3) the 
     following new paragraph:
       ``(4) Definition and special rules relating to commodity 
     transactions.--
       ``(A) Commodity hedging transactions.--For purposes of 
     paragraph (1)(C)(i), the term `commodity hedging transaction' 
     means any transaction with respect to a commodity if such 
     transaction--
       ``(i) is a hedging transaction as defined in section 
     1221(b)(2), determined--

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

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

     SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT LEASING AND 
                   SHIPPING INCOME.

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

     SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR 
                   ACTIVE FINANCING.

       (a) In General.--Section 954(h)(3) is amended by adding at 
     the end the following:
       ``(E) Direct conduct of activities.--For purposes of 
     subparagraph (A)(ii)(II), an activity shall be treated as 
     conducted directly by an eligible controlled foreign 
     corporation or qualified business unit in its home country if 
     the activity is performed by employees of a related person 
     and--

[[Page 12778]]

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

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

     SEC. 401. 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 taxable years 2000 through 2005.--
     '', and
       (2) by striking ``or 2003,'' and inserting ``2003, 2004, or 
     2005,''.
       (b) Conforming Provisions.--
       (1) Section 904(h) is amended by striking ``or 2003'' and 
     inserting ``2003, 2004, or 2005''.
       (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 or 2005.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 402. EXTENSION OF RESEARCH CREDIT.

       (a) Extension.--
       (1) In general.--Section 41(h)(1)(B) (relating to 
     termination) is amended by striking ``June 30, 2004'' and 
     inserting ``December 31, 2005''.
       (2) Conforming amendment.--Section 45C(b)(1)(D) is amended 
     by striking ``June 30, 2004'' and inserting ``December 31, 
     2005''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act.

     SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM 
                   CERTAIN RENEWABLE RESOURCES.

       (a) In General.--Subparagraphs (A) and (B) of section 
     45(c)(3) (defining qualified facility) are both amended by 
     striking ``2004'' and inserting ``2006''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to electricity produced and sold after December 
     31, 2003.

     SEC. 404. INDIAN EMPLOYMENT TAX CREDIT.

       Section 45A(f) (relating to termination) is amended by 
     striking ``December 31, 2004'' and inserting ``December 31, 
     2005''.

     SEC. 405. WORK OPPORTUNITY CREDIT.

       (a) In General.--Subparagraph (B) of section 51(c)(4) is 
     amended by striking ``December 31, 2003'' and inserting 
     ``December 31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to individuals who begin work for the employer 
     after December 31, 2003.

     SEC. 406. WELFARE-TO-WORK CREDIT.

       (a) In General.--Subsection (f) of section 51A is amended 
     by striking ``December 31, 2003'' and inserting ``December 
     31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to individuals who begin work for the employer 
     after December 31, 2003.

     SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL 
                   TEACHERS.

       (a) In General.--Subparagraph (D) of section 62(a)(2) 
     (relating to certain trade and business deductions of 
     employees) is amended by striking ``or 2003'' and inserting 
     ``, 2003, 2004, or 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION BENEFIT FOR 
                   PROPERTY ON INDIAN RESERVATIONS.

       Paragraph (8) of section 168(j) (relating to termination) 
     is amended by striking ``December 31, 2004'' and inserting 
     ``December 31, 2005''.

     SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND 
                   EQUIPMENT USED FOR EDUCATIONAL PURPOSES.

       (a) In General.--Subparagraph (G) of section 170(e)(6) 
     (relating to special rule for contributions of computer 
     technology and equipment for educational purposes) is amended 
     by striking ``December 31, 2003'' and inserting ``December 
     31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

       (a) In General.--Subsection (h) of section 198 (relating to 
     termination) is amended by striking ``December 31, 2003'' and 
     inserting ``December 31, 2005''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to expenditures paid or incurred after December 
     31, 2003.

     SEC. 411. 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 in the text and headings and 
     inserting ``2004''.
       (b) Conforming Amendments.--
       (1) Subparagraph (A) of section 220(j)(4) is amended by 
     striking ``and 2002'' and inserting ``2002, and 2004''.
       (2) Subparagraph (C) of section 220(j)(2) is amended to 
     read as follows:
       ``(C) No limitation for 2000 or 2003.--The numerical 
     limitation shall not apply for 2000 or 2003.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2004.
       (d) Time for Filing Reports.--The report required by 
     section 220(j)(4) of the Internal Revenue Code of 1986 to be 
     made on August 1, 2004, shall be treated as timely if made 
     before the close of the 90-day period beginning on the date 
     of the enactment of this Act.

     SEC. 412. 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 ``January 1, 2004'' and inserting 
     ``January 1, 2006''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 413. QUALIFIED ZONE ACADEMY BONDS.

       (a) In General.--Paragraph (1) of section 1397E(e) is 
     amended by striking ``and 2003'' and inserting ``2003, 2004, 
     and 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to obligations issued after the date of the 
     enactment of this Act.

     SEC. 414. DISTRICT OF COLUMBIA.

       (a) District of Columbia Enterprise Zone.--Subsection (f) 
     of section 1400 is amended by striking ``December 31, 2003'' 
     both places it appears and inserting ``December 31, 2005''.
       (b)  Tax-Exempt Economic Development Bonds.--Subsection (b) 
     of section 1400A is amended by striking ``December 31, 2003'' 
     and inserting ``December 31, 2005''.
       (c) Zero Percent Capital Gains Rate.--
       (1) Section 1400B is amended by striking ``January 1, 
     2004'' each place it appears and inserting ``January 1, 
     2006''.
       (2) Subsections (e)(2) and (g)(2) of section 1400B are each 
     amended by striking ``2008'' each place it appears in the 
     headings and text and inserting ``2010''.
       (3) Subsection (d) of section 1400F is amended by striking 
     ``December 31, 2008'' and inserting ``December 31, 2010''.
       (d) First-Time Homebuyer Credit.--Subsection (i) of section 
     1400C is amended by striking ``January 1, 2004'' and 
     inserting ``January 1, 2006''.
       (e) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall take 
     effect on the date of the enactment of this Act.
       (2) Tax-exempt economic development bonds.--The amendment 
     made by subsection (b) shall apply to obligations issued 
     after December 31, 2003.

     SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY ZONE BOND 
                   FINANCING.

       Subparagraph (D) of section 1400L(d)(2) is amended by 
     striking ``2005'' and inserting ``2009''.

     SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVITIES.

       (a) In General.--Clause (iv) of section 6103(i)(3)(C) and 
     subparagraph (E) of section 6103(i)(7) are both amended by 
     striking ``December 31, 2003'' and inserting ``December 31, 
     2005''.
       (b) Disclosure of taxpayer identity to law enforcement 
     agencies investigating terrorism.--Subparagraph (A) of 
     section 6103(i)(7) is amended by adding at the end the 
     following new clause:
       ``(v) Taxpayer identity.--For purposes of this 
     subparagraph, a taxpayer's identity shall not be treated as 
     taxpayer return information.''.
       (c) Effective Dates.--
       (1) In general.--The amendments made by subsection (a) 
     shall apply to disclosures on or after the date of the 
     enactment of this Act.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall take effect as if included in section 201 of the 
     Victims of Terrorism Tax Relief Act of 2001.

     SEC. 417. DISCLOSURE OF RETURN INFORMATION RELATING TO 
                   STUDENT LOANS.

       Section 6103(l)(13)(D) (relating to termination) is amended 
     by striking ``December 31, 2004'' and inserting ``December 
     31, 2005''.

     SEC. 418. 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, 2006''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to articles brought into the United States after 
     December 31, 2003.

[[Page 12779]]



     SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDGET FOR THE 
                   INTERNAL REVENUE SERVICE.

       (a) In General.--Paragraph (2) of section 8021(f) (relating 
     to joint reviews) is amended by striking ``2004'' and 
     inserting ``2005''.
       (b) Report.--Subparagraph (C) of section 8022(3) (regarding 
     reports) is amended--
       (1) by striking ``2004'' and inserting ``2005'', and
       (2) by striking ``with respect to--'' and all that follows 
     and inserting ``with respect to the matters addressed in the 
     joint review referred to in section 8021(f)(2).''.
       (c) Time for Joint Review.--The joint review required by 
     section 8021(f)(2) of the Internal Revenue Code of 1986 to be 
     made before June 1, 2004, shall be treated as timely if made 
     before June 1, 2005.

     SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO 
                   MENTAL HEALTH BENEFITS.

       (a) In General.--Subsection (f) of section 9812 is amended 
     by striking ``and'' at the end of paragraph (1), by striking 
     paragraph (2), and by inserting after paragraph (1) the 
     following new paragraphs:
       ``(2) on or after January 1, 2004, and before the date of 
     the enactment of American Jobs Creation Act of 2004, and
       ``(3) after December 31, 2005.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to benefits for services furnished on or after 
     December 31, 2003.

     SEC. 421. COMBINED EMPLOYMENT TAX REPORTING PROJECT.

       (a) In General.--Paragraph (1) of section 976(b) of the 
     Taxpayer Relief Act of 1997 (111 Stat. 898) is amended by 
     striking ``for a period ending with the date which is 5 years 
     after the date of the enactment of this Act'' and inserting 
     ``during the period ending on December 31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to disclosures on or after the date of the 
     enactment of this Act.

     SEC. 422. CLEAN-FUEL VEHICLES.

       (a) Credit for Qualified Electric Vehicles.--Paragraph (2) 
     of section 30(b) (relating to phaseout) is amended to read as 
     follows:
       ``(2) Phaseout.--In the case of any qualified electric 
     vehicle placed in service after December 31, 2005, the credit 
     otherwise allowable under subsection (a) (determined after 
     the application of paragraph (1)) shall be reduced by 75 
     percent.''.
       (b) Deduction for Qualified Clean-fuel Vehicle Property.--
     Subparagraph (B) of section 179A(b)(1) (relating to phaseout) 
     is amended to read as follows:
       ``(B) Phaseout.--In the case of any qualified clean-fuel 
     vehicle property placed in service after December 31, 2005, 
     the limit otherwise applicable under subparagraph (A) shall 
     be reduced by 75 percent.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2003.

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

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

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

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

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

       ``(I) shall reflect the provisions of this paragraph,
       ``(II) shall be based on the average consumption by 
     taxpayers on a State-by-State basis, as determined by the 
     Secretary, taking into account filing status, number of 
     dependents, adjusted gross income, and rates of State and 
     local general sales taxation, and
       ``(III) need only be determined with respect to adjusted 
     gross incomes up to the applicable amount (as determined 
     under section 68(b)).

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

                      TITLE VI--REVENUE PROVISIONS

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

     SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND THEIR 
                   FOREIGN PARENTS.

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

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

       ``(a) Tax on Inversion Gain of Expatriated Entities.--
       ``(1) In general.--The taxable income of an expatriated 
     entity for any taxable year which includes any portion of the 
     applicable period shall in no event be less than the 
     inversion gain of the entity for the taxable year.
       ``(2) Expatriated entity.--For purposes of this 
     subsection--
       ``(A) In general.--The term `expatriated entity' means--
       ``(i) the domestic corporation or partnership referred to 
     in subparagraph (B)(i) with respect to which a foreign 
     corporation is a surrogate foreign corporation, and
       ``(ii) any United States person who is related (within the 
     meaning of section 267(b) or 707(b)(1)) to a domestic 
     corporation or partnership described in clause (i).
       ``(B) Surrogate foreign corporation.--A foreign corporation 
     shall be treated as a surrogate foreign corporation if, 
     pursuant to a plan (or a series of related transactions)--
       ``(i) the entity completes after March 4, 2003, the direct 
     or indirect acquisition of substantially all of the 
     properties held directly or indirectly by a domestic 
     corporation or substantially all of the properties 
     constituting a trade or business of a domestic partnership,
       ``(ii) after the acquisition at least 60 percent of the 
     stock (by vote or value) of the entity is held--

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

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

     An entity otherwise described in clause (i) with respect to 
     any domestic corporation or partnership trade or business 
     shall be treated as not so described if, on or before March 
     4, 2003, such entity acquired directly or indirectly more 
     than half of the properties held directly or indirectly by 
     such corporation or more than half of the properties 
     constituting such partnership trade or business, as the case 
     may be.
       ``(b) Definitions and Special Rules.--
       ``(1) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group as defined in 
     section 1504(a) but without regard to section 1504(b)(3), 
     except that section 1504(a) shall be applied by substituting 
     `more than 50 percent' for `at least 80 percent' each place 
     it appears.

[[Page 12780]]

       ``(2) Certain stock disregarded.--There shall not be taken 
     into account in determining ownership under subsection 
     (a)(2)(B)(ii)--
       ``(A) stock held by members of the expanded affiliated 
     group which includes the foreign corporation, or
       ``(B) stock of such foreign corporation which is sold in a 
     public offering related to the acquisition described in 
     subsection (a)(2)(B)(i).
       ``(3) Plan deemed in certain cases.--If a foreign 
     corporation acquires directly or indirectly substantially all 
     of the properties of a domestic corporation or partnership 
     during the 4-year period beginning on the date which is 2 
     years before the ownership requirements of subsection 
     (a)(2)(B)(ii) are met, such actions shall be treated as 
     pursuant to a plan.
       ``(4) Certain transfers disregarded.--The transfer of 
     properties or liabilities (including by contribution or 
     distribution) shall be disregarded if such transfers are part 
     of a plan a principal purpose of which is to avoid the 
     purposes of this section.
       ``(5) Special rule for related partnerships.--For purposes 
     of applying subsection (a)(2)(B)(ii) to the acquisition of a 
     trade or business of a domestic partnership, except as 
     provided in regulations, all partnerships which are under 
     common control (within the meaning of section 482) shall be 
     treated as 1 partnership.
       ``(6) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to determine whether a 
     corporation is a surrogate foreign corporation, including 
     regulations--
       ``(A) to treat warrants, options, contracts to acquire 
     stock, convertible debt interests, and other similar 
     interests as stock, and
       ``(B) to treat stock as not stock.
       ``(c) Other Definitions.--For purposes of this section--
       ``(1) Applicable period.--The term `applicable period' 
     means the period--
       ``(A) beginning on the first date properties are acquired 
     as part of the acquisition described in subsection 
     (a)(2)(B)(i), and
       ``(B) ending on the date which is 10 years after the last 
     date properties are acquired as part of such acquisition.
       ``(2) Inversion gain.--The term `inversion gain' means the 
     income or gain recognized by reason of the transfer during 
     the applicable period of stock or other properties by an 
     expatriated entity, and any income received or accrued during 
     the applicable period by reason of a license of any property 
     by an expatriated entity--
       ``(A) as part of the acquisition described in subsection 
     (a)(2)(B)(i), or
       ``(B) after such acquisition if the transfer or license is 
     to a foreign related person.
     Subparagraph (B) shall not apply to property described in 
     section 1221(a)(1) in the hands of the expatriated entity.
       ``(3) Foreign related person.--The term `foreign related 
     person' means, with respect to any expatriated entity, a 
     foreign person which--
       ``(A) is related (within the meaning of section 267(b) or 
     707(b)(1)) to such entity, or
       ``(B) is under the same common control (within the meaning 
     of section 482) as such entity.
       ``(d) Special Rules.--
       ``(1) Credits not allowed against tax on inversion gain.--
     Credits (other than the credit allowed by section 901) shall 
     be allowed against the tax imposed by this chapter on an 
     expatriated entity for any taxable year described in 
     subsection (a) only to the extent such tax exceeds the 
     product of--
       ``(A) the amount of the inversion gain for the taxable 
     year, and
       ``(B) the highest rate of tax specified in section 
     11(b)(1).

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

``Sec. 7874. Rules relating to expatriated entities and their foreign 
              parents.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after March 4, 2003.

     SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN 
                   EXPATRIATED CORPORATIONS.

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

       ``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES

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

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

       ``(a) Imposition of Tax.--In the case of an individual who 
     is a disqualified individual with respect to any expatriated 
     corporation, there is hereby imposed on such person a tax 
     equal to 15 percent of the value (determined under subsection 
     (b)) of the specified stock compensation held (directly or 
     indirectly) by or for the benefit of such individual or a 
     member of such individual's family (as defined in section 
     267) at any time during the 12-month period beginning on the 
     date which is 6 months before the expatriation date.
       ``(b) Value.--For purposes of subsection (a)--
       ``(1) In general.--The value of specified stock 
     compensation shall be--
       ``(A) in the case of a stock option (or other similar 
     right) or a stock appreciation right, the fair value of such 
     option or right, and
       ``(B) in any other case, the fair market value of such 
     compensation.
       ``(2) Date for determining value.--The determination of 
     value shall be made--
       ``(A) in the case of specified stock compensation held on 
     the expatriation date, on such date,
       ``(B) in the case of such compensation which is canceled 
     during the 6 months before the expatriation date, on the day 
     before such cancellation, and
       ``(C) in the case of such compensation which is granted 
     after the expatriation date, on the date such compensation is 
     granted.
       ``(c) Tax To Apply Only if Shareholder Gain Recognized.--
     Subsection (a) shall apply to any disqualified individual 
     with respect to an expatriated corporation only if gain (if 
     any) on any stock in such corporation is recognized in whole 
     or part by any shareholder by reason of the acquisition 
     referred to in section 7874(a)(2)(B)(i) with respect to such 
     corporation.
       ``(d) Exception Where Gain Recognized on Compensation.--
     Subsection (a) shall not apply to--
       ``(1) any stock option which is exercised on the 
     expatriation date or during the 6-month period before such 
     date and to the stock acquired in such exercise, if income is 
     recognized under section 83 on or before the expatriation 
     date with respect to the stock acquired pursuant to such 
     exercise, and
       ``(2) any other specified stock compensation which is 
     exercised, sold, exchanged, distributed, cashed-out, or 
     otherwise paid during such period in a transaction in which 
     income, gain, or loss is recognized in full.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Disqualified individual.--The term `disqualified 
     individual' means, with respect to a corporation, any 
     individual who, at any time during the 12-month period 
     beginning on the date which is 6 months before the 
     expatriation date--
       ``(A) is subject to the requirements of section 16(a) of 
     the Securities Exchange Act of 1934 with respect to such 
     corporation or any member of the expanded affiliated group 
     which includes such corporation, or

[[Page 12781]]

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

``Chapter 45. Provisions relating to expatriated entities.''
       (d) Effective Date.--The amendments made by this section 
     shall take effect on March 4, 2003; except that periods 
     before such date shall not be taken into account in applying 
     the periods in subsections (a) and (e)(1) of section 4985 of 
     the Internal Revenue Code of 1986, as added by this section.

     SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOREIGN 
                   JURISDICTIONS.

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

     SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF 
                   INDIVIDUALS.

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

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

[[Page 12782]]

       ``(2) provides a statement in accordance with section 
     6039G.''.
       (c) Physical Presence in the United States for More Than 30 
     Days.--Section 877 (relating to expatriation to avoid tax) is 
     amended by adding at the end the following new subsection:
       ``(g) Physical Presence.--
       ``(1) In general.--This section shall not apply to any 
     individual to whom this section would otherwise apply for any 
     taxable year during the 10-year period referred to in 
     subsection (a) in which such individual is physically present 
     in the United States at any time on more than 30 days in the 
     calendar year ending in such taxable year, and such 
     individual shall be treated for purposes of this title as a 
     citizen or resident of the United States, as the case may be, 
     for such taxable year.
       ``(2) Exception.--
       ``(A) In general.--In the case of an individual described 
     in any of the following subparagraphs of this paragraph, a 
     day of physical presence in the United States shall be 
     disregarded if the individual is performing services in the 
     United States on such day for an employer. The preceding 
     sentence shall not apply if--
       ``(i) such employer is related (within the meaning of 
     section 267 and 707) to such individual, or
       ``(ii) such employer fails to meet such requirements as the 
     Secretary may prescribe by regulations to prevent the 
     avoidance of the purposes of this paragraph.

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

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

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

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

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

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

     SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

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

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

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

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

     The written statement required under the preceding sentence 
     shall be furnished to the shareholder on or before January 31 
     of the year following the calendar year during which the 
     taxable acquisition occurred.''

[[Page 12783]]

       (b) Assessable Penalties.--
       (1) Subparagraph (B) of section 6724(d)(1) (relating to 
     definitions) is amended by redesignating clauses (ii) through 
     (xviii) as clauses (iii) through (xix), respectively, and by 
     inserting after clause (i) the following new clause:
       ``(ii) section 6043A(a) (relating to returns relating to 
     taxable mergers and acquisitions),''.
       (2) Paragraph (2) of section 6724(d) is amended by 
     redesignating subparagraphs (F) through (BB) as subparagraphs 
     (G) through (CC), respectively, and by inserting after 
     subparagraph (E) the following new subparagraph:
       ``(F) subsections (b) and (d) of section 6043A (relating to 
     returns relating to taxable mergers and acquisitions).''.
       (c) Clerical Amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61 is amended by 
     inserting after the item relating to section 6043 the 
     following new item:

``Sec. 6043A. Returns relating to taxable mergers and acquisitions.''.

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

     SEC. 606. STUDIES.

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

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

     SEC. 611. PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
                   TRANSACTIONS.

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

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

       ``(a) Imposition of Penalty.--Any person who fails to 
     include on any return or statement any information with 
     respect to a reportable transaction which is required under 
     section 6011 to be included with such return or statement 
     shall pay a penalty in the amount determined under subsection 
     (b).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     amount of the penalty under subsection (a) shall be--
       ``(A) $10,000 in the case of a natural person, and
       ``(B) $50,000 in any other case.
       ``(2) Listed transaction.--The amount of the penalty under 
     subsection (a) with respect to a listed transaction shall 
     be--
       ``(A) $100,000 in the case of a natural person, and
       ``(B) $200,000 in any other case.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Reportable transaction.--The term `reportable 
     transaction' means any transaction with respect to which 
     information is required to be included with a return or 
     statement because, as determined under regulations prescribed 
     under section 6011, such transaction is of a type which the 
     Secretary determines as having a potential for tax avoidance 
     or evasion.
       ``(2) Listed transaction.--The term `listed transaction' 
     means a reportable transaction which is the same as, or 
     substantially similar to, a transaction specifically 
     identified by the Secretary as a tax avoidance transaction 
     for purposes of section 6011.
       ``(d) Authority To Rescind Penalty.--
       ``(1) In general.--The Commissioner of Internal Revenue may 
     rescind all or any portion of any penalty imposed by this 
     section with respect to any violation if--
       ``(A) the violation is with respect to a reportable 
     transaction other than a listed transaction, and
       ``(B) rescinding the penalty would promote compliance with 
     the requirements of this title and effective tax 
     administration.
       ``(2) No judicial appeal.--Notwithstanding any other 
     provision of law, any determination under this subsection may 
     not be reviewed in any judicial proceeding.
       ``(3) Records.--If a penalty is rescinded under paragraph 
     (1), the Commissioner shall place in the file in the Office 
     of the Commissioner the opinion of the Commissioner or the 
     head of the Office of Tax Shelter Analysis with respect to 
     the determination, including--
       ``(A) a statement of the facts and circumstances relating 
     to the violation,
       ``(B) the reasons for the rescission, and
       ``(C) the amount of the penalty rescinded.
       ``(e) Coordination With Other Penalties.--The penalty 
     imposed by this section shall be in addition to any other 
     penalty imposed by this title.''
       (b) Conforming Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6707 the following:

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

     SEC. 612. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, 
                   OTHER REPORTABLE TRANSACTIONS HAVING A 
                   SIGNIFICANT TAX AVOIDANCE PURPOSE, ETC.

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

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

       ``(a) Imposition of Penalty.--If a taxpayer has a 
     reportable transaction understatement for any taxable year, 
     there shall be added to the tax an amount equal to 20 percent 
     of the amount of such understatement.
       ``(b) Reportable Transaction Understatement.--For purposes 
     of this section--
       ``(1) In general.--The term `reportable transaction 
     understatement' means the sum of--
       ``(A) the product of--
       ``(i) the amount of the increase (if any) in taxable income 
     which results from a difference between the proper tax 
     treatment of an item to which this section applies and the 
     taxpayer's treatment of such item (as shown on the taxpayer's 
     return of tax), and
       ``(ii) the highest rate of tax imposed by section 1 
     (section 11 in the case of a taxpayer which is a 
     corporation), and
       ``(B) the amount of the decrease (if any) in the aggregate 
     amount of credits determined under subtitle A which results 
     from a difference between the taxpayer's treatment of an item 
     to which this section applies (as shown on the taxpayer's 
     return of tax) and the proper tax treatment of such item.

     For purposes of subparagraph (A), any reduction of the excess 
     of deductions allowed for the taxable year over gross income 
     for such year, and any reduction in the amount of capital 
     losses which would (without regard to section 1211) be 
     allowed for such year, shall be treated as an increase in 
     taxable income.
       ``(2) Items to which section applies.--This section shall 
     apply to any item which is attributable to--
       ``(A) any listed transaction, and
       ``(B) any reportable transaction (other than a listed 
     transaction) if a significant purpose of such transaction is 
     the avoidance or evasion of Federal income tax.
       ``(c) Higher Penalty for Nondisclosed Transactions.--
     Subsection (a) shall be applied by substituting `30 percent' 
     for `20 percent' with respect to the portion of any 
     reportable transaction understatement with respect to which 
     the requirement of section 6664(d)(2)(A) is not met.
       ``(d) Definitions of Reportable and Listed Transactions.--
     For purposes of this section, the terms `reportable 
     transaction' and

[[Page 12784]]

     `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 for purposes 
     of determining whether such understatement is a substantial 
     understatement under section 6662(d)(1), and
       ``(B) the addition to tax under section 6662(a) shall apply 
     only to the excess of the amount of the substantial 
     understatement (if any) after the application of subparagraph 
     (A) over the aggregate amount of reportable transaction 
     understatements.
       ``(2) Coordination with other penalties.--
       ``(A) Application of fraud penalty.--References to an 
     underpayment in section 6663 shall be treated as including 
     references to a reportable transaction understatement.
       ``(B) No double penalty.--This section shall not apply to 
     any portion of an understatement on which a penalty is 
     imposed under section 6663.
       ``(3) Special rule for amended returns.--Except as provided 
     in regulations, in no event shall any tax treatment included 
     with an amendment or supplement to a return of tax be taken 
     into account in determining the amount of any reportable 
     transaction understatement if the amendment or supplement is 
     filed after the earlier of the date the taxpayer is first 
     contacted by the Secretary regarding the examination of the 
     return or such other date as is specified by the Secretary.''
       (b) Determination of Other Understatements.--Subparagraph 
     (A) of section 6662(d)(2) is amended by adding at the end the 
     following flush sentence:

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

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

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

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

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

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

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

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

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

     if a significant purpose of such partnership, entity, plan, 
     or arrangement is the avoidance or evasion of Federal income 
     tax.''
       (e) Conforming Amendments.--
       (1) Sections 461(i)(3)(C), 1274(b)(3), and 7525(b) are each 
     amended by striking ``section 6662(d)(2)(C)(iii)'' and 
     inserting ``section 6662(d)(2)(C)(ii)''.
       (2) The heading for section 6662 is amended to read as 
     follows:

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

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

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

     SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES 
                   RELATING TO TAXPAYER COMMUNICATIONS.

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

     SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH 
                   REQUIRED LISTED TRANSACTIONS NOT REPORTED.

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

     SEC. 615. 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

[[Page 12785]]

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

     Such return shall be filed not later than the date specified 
     by the Secretary.
       ``(b) Definitions.--For purposes of this section--
       ``(1) Material advisor.--
       ``(A) In general.--The term `material advisor' means any 
     person--
       ``(i) who provides any material aid, assistance, or advice 
     with respect to organizing, managing, promoting, selling, 
     implementing, or carrying out any reportable transaction, and
       ``(ii) who directly or indirectly derives gross income in 
     excess of the threshold amount (or such other amount as may 
     be prescribed by the Secretary) for such advice or 
     assistance.
       ``(B) Threshold amount.--For purposes of subparagraph (A), 
     the threshold amount is--
       ``(i) $50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons, and
       ``(ii) $250,000 in any other case.
       ``(2) Reportable transaction.--The term `reportable 
     transaction' has the meaning given to such term by section 
     6707A(c).
       ``(c) Regulations.--The Secretary may prescribe regulations 
     which provide--
       ``(1) that only 1 person shall be required to meet the 
     requirements of subsection (a) in cases in which 2 or more 
     persons would otherwise be required to meet such 
     requirements,
       ``(2) exemptions from the requirements of this section, and
       ``(3) such rules as may be necessary or appropriate to 
     carry out the purposes of this section.''
       (b) Conforming Amendments.--
       (1) The item relating to section 6111 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

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

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

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

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

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

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

``Sec. 6708. Failure to maintain lists of advisees with respect to 
              reportable transactions.''
       (c) Required Disclosure Not Subject to Claim of 
     Confidentiality.--Paragraph (1) of section 6112(b), as 
     redesignated by subsection (b), is amended by adding at the 
     end the following new flush sentence:

     ``For purposes of this section, the identity of any person on 
     such list shall not be privileged.''.
       (d) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), 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.
       (2) No claim of confidentiality against disclosure.--The 
     amendment made by subsection (c) shall take effect as if 
     included in the amendments made by section 142 of the Deficit 
     Reduction Act of 1984.

     SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
                   TRANSACTIONS.

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

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

       ``(a) In General.--If a person who is required to file a 
     return under section 6111(a) with respect to any reportable 
     transaction--
       ``(1) fails to file such return on or before the date 
     prescribed therefor, or
       ``(2) files false or incomplete information with the 
     Secretary with respect to such transaction,

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

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

     SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN 
                   LISTS OF INVESTORS.

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

     SEC. 618. 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. 619. 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) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 620. 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:

[[Page 12786]]

       ``(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 76 is 
     amended by striking the item relating to section 7408 and 
     inserting the following new item:

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

     SEC. 621. 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. 622. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE 
                   DEPARTMENT OF THE TREASURY.

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

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

                       Part II--Other Provisions

     SEC. 631. 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. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON 
                   WITHHOLDING TAXES ON INCOME OTHER THAN 
                   DIVIDENDS.

       (a) In General.--Section 901 is amended by redesignating 
     subsection (l) as subsection (m) and by inserting after 
     subsection (k) the following new subsection:
       ``(l) Minimum Holding Period for Withholding Taxes on Gain 
     and Income Other Than Dividends etc.--
       ``(1) In general.--In no event shall a credit be allowed 
     under subsection (a) for any withholding tax (as defined in 
     subsection (k)) on any item of income or gain with respect to 
     any property if--
       ``(A) such property is held by the recipient of the item 
     for 15 days or less during the 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.

[[Page 12787]]



     SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

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

     For purposes of subparagraph (C), the term `built-in loss' 
     means the excess of the adjusted basis of the property 
     (determined without regard to subparagraph (C)(ii)) over its 
     fair market value at the time of contribution.''
       (b) Special Rules for Transfers of Partnership Interest if 
     There Is Substantial Built-In Loss.--
       (1) Adjustment of partnership basis required.--Subsection 
     (a) of section 743 (relating to optional adjustment to basis 
     of partnership property) is amended by inserting before the 
     period ``or unless the partnership has a substantial built-in 
     loss immediately after such transfer''.
       (2) Adjustment.--Subsection (b) of section 743 is amended 
     by inserting ``or 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 partnership's 
     adjusted basis in the partnership property exceeds by more 
     than $250,000 the fair market value of such property.
       ``(2) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of paragraph (1) and section 734(d), including regulations 
     aggregating related partnerships and disregarding property 
     acquired by the partnership in an attempt to avoid such 
     purposes.''
       (4) Alternative rules for electing investment 
     partnerships.--
       (A) In general.--Section 743 is amended by adding at the 
     end the following new subsection:
       ``(e) Alternative rules for electing investment 
     partnerships.--
       ``(1) No adjustment of partnership basis.--For purposes of 
     this section, an electing investment partnership shall not be 
     treated as having a substantial built-in loss with respect to 
     any transfer occurring while the election under paragraph 
     (6)(A) is in effect.
       ``(2) Loss deferral for transferee partner.--In the case of 
     a transfer of an interest in an electing investment 
     partnership, the transferee partner's distributive share of 
     losses (without regard to gains) from the sale or exchange of 
     partnership property shall not be allowed except to the 
     extent that it is established that such losses exceed the 
     loss (if any) recognized by the transferor (or any prior 
     transferor to the extent not fully offset by a prior 
     disallowance under this paragraph) on the transfer of the 
     partnership interest.
       ``(3) No reduction in partnership basis.--Losses disallowed 
     under paragraph (2) shall not decrease the transferee 
     partner's basis in the partnership interest.
       ``(4) Effect of termination of partnership.--This 
     subsection shall be applied without regard to any termination 
     of a partnership under section 708(b)(1)(B).
       ``(5) Certain basis reductions treated as losses.--In the 
     case of a transferee partner whose basis in property 
     distributed by the partnership is reduced under section 
     732(a)(2), the amount of the loss recognized by the 
     transferor on the transfer of the partnership interest which 
     is taken into account under paragraph (2) shall be reduced by 
     the amount of such basis reduction.
       ``(6) Electing investment partnership.--For purposes of 
     this subsection, the term `electing investment partnership' 
     means any partnership if--
       ``(A) the partnership makes an election to have this 
     subsection apply,
       ``(B) the partnership would be an investment company under 
     section 3(a)(1)(A) of the Investment Company Act of 1940 but 
     for an exemption under paragraph (1) or (7) of section 3(c) 
     of such Act,
       ``(C) such partnership has never been engaged in a trade or 
     business,
       ``(D) substantially all of the assets of such partnership 
     are held for investment,
       ``(E) at least 95 percent of the assets contributed to such 
     partnership consist of money,
       ``(F) no assets contributed to such partnership had an 
     adjusted basis in excess of fair market value at the time of 
     contribution,
       ``(G) all partnership interests of such partnership are 
     issued by such partnership pursuant to a private offering and 
     during the 24-month period beginning on the date of the first 
     capital contribution to such partnership,
       ``(H) the partnership agreement of such partnership has 
     substantive restrictions on each partner's ability to cause a 
     redemption of the partner's interest, and
       ``(I) the partnership agreement of such partnership 
     provides for a term that is not in excess of 15 years.

     The election described in subparagraph (A), once made, shall 
     be irrevocable except with the consent of the Secretary.
       ``(7) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of this subsection, including regulations for applying this 
     subsection to tiered partnerships.''.
       (B) Information reporting.--Section 6031 is amended by 
     adding at the end the following new subsection:
       ``(f) Electing Investment Partnerships.--In the case of any 
     electing investment partnership (as defined in section 
     743(e)(6)), the information required under subsection (b) to 
     be furnished to any partner to whom section 743(e)(2) applies 
     shall include such information as is necessary to enable the 
     partner to compute the amount of losses disallowed under 
     section 743(e).''.
       (5) Clerical amendments.--
       (A) The section heading for section 743 is amended to read 
     as follows:

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

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

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

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

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

       (4) Clerical amendments.--
       (A) The section heading for section 734 is amended to read 
     as follows:

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

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

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

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

     SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK 
                   HELD BY PARTNERSHIP IN CORPORATE PARTNER.

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

[[Page 12788]]

     under subsection (a) to other partnership property.

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

     SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS.

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

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

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

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

     SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES ON REMIC 
                   RESIDUALS.

       (a) In General.--Section 362 (relating to basis to 
     corporations) is amended by adding at the end the following 
     new subsection:
       ``(e) Limitation on Transfer of Built-in Losses on REMIC 
     Residuals in Section 351 Transactions.--If--
       ``(1) a residual interest (as defined in section 
     860G(a)(2)) in a REMIC is transferred in any transaction 
     which is described in subsection (a), and
       ``(2) the transferee's adjusted basis in such residual 
     interest would (but for this paragraph) exceed its fair 
     market value immediately after such transaction,

     then, notwithstanding subsection (a), the transferee's 
     adjusted basis in such residual interest shall not exceed its 
     fair market value (whether or not greater than zero) 
     immediately after such transaction.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to transactions after the date of the enactment 
     of this Act.

     SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF 
                   DETERMINING INVESTMENT OF EARNINGS IN UNITED 
                   STATES PROPERTY.

       (a) In General.--Subparagraph (A) of section 956(c)(2) is 
     amended to read as follows:
       ``(A) obligations of the United States, money, or deposits 
     with persons described in paragraph (4);''.
       (b) Eligible Persons.--Section 956(c) (relating to 
     exceptions to definition of United States property) is 
     amended by adding at the end the following new paragraph:
       ``(4) Financial services providers.--
       ``(A) In general.--For purposes of paragraph (2)(A), a 
     person is described in this paragraph if at least 80 percent 
     of the person's income is from the active conduct of a 
     banking business which is derived from persons who are not 
     related persons.
       ``(B) Special rules.--For purposes of subparagraph (A) all 
     related persons shall be treated as 1 person in applying the 
     80-percent test.
       ``(C) Related person.--For purposes of this paragraph, a 
     person is a related person to another person if--
       ``(i) the related person bears a relationship to such 
     person specified in section 267(b) or 707(b)(1), or
       ``(ii) such persons are members of the same controlled 
     group of corporations (as defined in section 1563(a), except 
     that `more than 50 percent' shall be substituted for `at 
     least 80 percent' each place it appears therein).''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE 
                   COMPANIES.

       (a) In General.--Clause (i) of section 831(b)(2)(A) is 
     amended by striking ``$1,200,000'' and inserting 
     ``$1,890,000''.
       (b) Inflation Adjustment.--Paragraph (2) of section 831(b) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2004, the $1,890,000 
     amount in subparagraph (A) shall be increased by an amount 
     equal to--
       ``(i) $1,890,000, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting 
     `calendar year 2003' for `calendar year 1992' in subparagraph 
     (B) thereof.

     If the amount as adjusted under the preceding sentence is not 
     a multiple of $1,000, such amount shall be rounded to the 
     next lowest multiple of $1,000.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                   ATTRIBUTABLE TO NONDISCLOSED REPORTABLE 
                   TRANSACTIONS.

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

     SEC. 640. 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

[[Page 12789]]

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

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

     SEC. 642. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL 
                   ISSUE DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS 
                   IN TRANSACTIONS WITH RELATED FOREIGN PERSONS.

       (a) Original Issue Discount.--Section 163(e)(3) (relating 
     to special rule for original issue discount on obligation 
     held by related foreign person) is amended by redesignating 
     subparagraph (B) as subparagraph (C) and by inserting after 
     subparagraph (A) the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--In the case of any debt instrument 
     having original issue discount which is held by a related 
     foreign person which is a 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 before the taxable year in 
     which paid only to the extent such original issue discount 
     (reduced by properly allowable deductions and qualified 
     deficits under section 952(c)(1)(B)) is includible during 
     such prior taxable year in the gross income of a United 
     States person who owns (within the meaning of section 958(a)) 
     stock in such corporation.
       ``(ii) Secretarial authority.--The Secretary may by 
     regulation exempt transactions from the application of clause 
     (i), including any transaction which is entered into by a 
     payor in the ordinary course of a trade or business in which 
     the payor is predominantly engaged.''.
       (b) Interest and Other Deductible Amounts.--Section 
     267(a)(3) is amended--
       (1) by striking ``The Secretary'' and inserting:
       ``(A) In general.--The Secretary'', and
       (2) by adding at the end the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--Notwithstanding subparagraph (A), in the 
     case of any item payable to a 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 before the taxable year in which paid 
     only to the extent that an amount attributable to such item 
     (reduced by properly allowable deductions and qualified 
     deficits under section 952(c)(1)(B)) is includible during 
     such prior taxable year in the gross income of a United 
     States person who owns (within the meaning of section 958(a)) 
     stock in such corporation.
       ``(ii) Secretarial authority.--The Secretary may by 
     regulation exempt transactions from the application of clause 
     (i), including any transaction which is entered into by a 
     payor in the ordinary course of a trade or business in which 
     the payor is predominantly engaged and in which the payment 
     of the accrued amounts occurs within 8\1/2\ months after 
     accrual or within such other period as the Secretary may 
     prescribe.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments accrued on or after the date of the 
     enactment of this Act.

     SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST ON 
                   OVERPAYMENTS OF INCOME TAX BY INDIVIDUALS.

       (a) In General.--Part III of subchapter B of chapter 1 
     (relating to items specifically excluded from gross income) 
     is amended by inserting after section 139A the following new 
     section:

     ``SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTEREST ON 
                   OVERPAYMENTS OF INCOME TAX BY INDIVIDUALS.

       ``(a) In General.--In the case of an individual, gross 
     income shall not include interest paid under section 6611 on 
     any overpayment of tax imposed by this subtitle.
       ``(b) Exception.--Subsection (a) shall not apply in the 
     case of a failure to claim items resulting in the overpayment 
     on the original return if the Secretary determines that the 
     principal purpose of such failure is to take advantage of 
     subsection (a).
       ``(c) Special Rule for Determining Modified Adjusted Gross 
     Income.--For purposes of this title, interest not included in 
     gross income under subsection (a) shall not be treated as 
     interest which is exempt from tax for purposes of sections 
     32(i)(2)(B) and 6012(d) or any computation in which interest 
     exempt from tax under this title is added to adjusted gross 
     income.''.
       (b) Clerical Amendment.--The table of sections for part III 
     of subchapter B of chapter 1 is amended by inserting after 
     the item relating to section 139A the following new item:

``Sec. 139B. Exclusion from gross income for interest on overpayments 
              of income tax by individuals.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to interest received in calendar years beginning 
     after the date of the enactment of this Act.

     SEC. 644. 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

[[Page 12790]]

     treated as the date such amount is deposited for purposes of 
     such section 6603.

     SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT 
                   AGREEMENTS.

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

     SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGULATION 
                   AUTHORITY.

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

                           Part III--Leasing

     SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEASING 
                   ARRANGEMENTS.

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

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

       (d) Expansion of Short-Term Lease Exemption for Qualified 
     Technological Equipment.--Subparagraph (A) of section 
     168(h)(3) is amended by adding at the end the following new 
     sentence: ``Notwithstanding subsection (i)(3)(A)(i), in 
     determining a lease term for purposes of the preceding 
     sentence, there shall not be taken into account any option of 
     the lessee to renew at the fair market value rent determined 
     at the time of renewal; except that the aggregate period not 
     taken into account by reason of this sentence shall not 
     exceed 24 months.''

     SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED 
                   BY GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

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

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

       ``(a) Limitation on Losses.--Except as otherwise provided 
     in this section, a tax-exempt use loss for any taxable year 
     shall not be allowed.
       ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt 
     use loss with respect to any tax-exempt use property which is 
     disallowed under subsection (a) for any taxable year shall be 
     treated as a deduction with respect to such property in the 
     next taxable year.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Tax-exempt use loss.--The term `tax-exempt use loss' 
     means, with respect to any taxable year, the amount (if any) 
     by which--
       ``(A) the sum of--
       ``(i) the aggregate deductions (other than interest) 
     directly allocable to a tax-exempt use property, plus
       ``(ii) the aggregate deductions for interest properly 
     allocable to such property, exceed
       ``(B) the aggregate income from such property.
       ``(2) Tax-exempt use property.--The term `tax-exempt use 
     property' has the meaning given to such term by section 
     168(h) (without regard to paragraphs (1)(C) and (3) thereof 
     and determined as if property described in section 
     167(f)(1)(B) were tangible property). Such term shall not 
     include property which would (but for this sentence) be tax-
     exempt use property solely by reason of section 168(h)(6) if 
     any credit is allowable under section 42 or 47 with respect 
     to such property.
       ``(d) Exception for Certain Leases.--This section shall not 
     apply to any lease of property which meets the requirements 
     of all of the following paragraphs:
       ``(1) Availability of funds.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if (at all times during the 
     lease term) not more than an allowable amount of funds are--
       ``(i) subject to any arrangement referred to in 
     subparagraph (B), or
       ``(ii) set aside or expected to be set aside,
     to or for the benefit of the lessor or any lender, or to or 
     for the benefit of the lessee to satisfy the lessee's 
     obligations or options under the lease. For purposes of 
     clause (ii), funds shall be treated as set aside or expected 
     to be set aside only if a reasonable person would conclude, 
     based on the facts and circumstances, that such funds are set 
     aside or expected to be set aside.
       ``(B) Arrangements.--The arrangements referred to in this 
     subparagraph include a defeasance arrangement, a loan by the 
     lessee to the lessor or any lender, a deposit arrangement, a 
     letter of credit collateralized with cash or cash 
     equivalents, a payment undertaking agreement, prepaid rent 
     (within the meaning of the regulations under section 467), a 
     sinking fund arrangement, a guaranteed investment contract, 
     financial guaranty insurance, and any similar arrangement 
     (whether or not such arrangement provides credit support).
       ``(C) Allowable amount.--
       ``(i) In general.--Except as otherwise provided in this 
     subparagraph, the term `allowable amount' means an amount 
     equal to 20 percent of the lessor's adjusted basis in the 
     property at the time the lease is entered into.
       ``(ii) Higher amount permitted in certain cases.--To the 
     extent provided in regulations, a higher percentage shall be 
     permitted under clause (i) where necessary because of the 
     credit-worthiness of the lessee. In no event may such 
     regulations permit a percentage of more than 50 percent.
       ``(iii) Option to purchase other than at fair market 
     value.--If under the lease the lessee has the option to 
     purchase the property for a fixed price or for other than the 
     fair market value of the property (determined at the time of 
     exercise), the allowable amount at the time such option may 
     be exercised may not exceed 50 percent of the price at which 
     such option may be exercised.
       ``(iv) No allowable amount for certain arrangements.--The 
     allowable amount shall be zero with respect to any 
     arrangement which involves--

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

     For purposes of subclause (I), the term `loan' shall not 
     include any amount treated as a loan under section 467 with 
     respect to a section 467 rental agreement.
       ``(2) Lessor must make substantial equity investment.--A 
     lease of property meets the requirements of this paragraph 
     if--
       ``(A) the lessor--
       ``(i) has at the time the lease is entered into an 
     unconditional at-risk equity investment (as determined by the 
     Secretary) in the property of at least 20 percent of the 
     lessor's adjusted basis in the property as of that time, and
       ``(ii) maintains such investment throughout the term of the 
     lease, and
       ``(B) the fair market value of the property at the end of 
     the lease term is reasonably expected to be equal to at least 
     20 percent of such basis.

     Subparagraphs (A)(ii) and (B) shall not apply to any lease 
     with a lease term of 5 years or less. For purposes of 
     subparagraph (B), the fair market value at the end of the 
     lease

[[Page 12791]]

     term shall be reduced to the extent that a person other than 
     the lessor bears a risk of loss in the value of the property.
       ``(3) Lessee may not bear more than minimal risk of loss.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if there is no arrangement 
     under which the lessee bears--
       ``(i) any portion of the loss that would occur if the fair 
     market value of the leased property were 25 percent less than 
     its reasonably expected fair market value at the time the 
     lease is terminated, or
       ``(ii) more than 50 percent of the loss that would occur if 
     the fair market value of the leased property at the time the 
     lease is terminated were zero.
       ``(B) Exception.--The Secretary may by regulations provide 
     that the requirements of this paragraph are not met where the 
     lessee bears more than a minimal risk of loss.
       ``(C) Paragraph not to apply to short-term leases.--This 
     paragraph shall not apply to any lease with a lease term of 5 
     years or less.
       ``(e) Special Rules.--
       ``(1) Treatment of former tax-exempt use property.--
       ``(A) In general.--In the case of any former tax-exempt use 
     property--
       ``(i) any deduction allowable under subsection (b) with 
     respect to such property for any taxable year shall be 
     allowed only to the extent of any net income (without regard 
     to such deduction) from such property for such taxable year, 
     and
       ``(ii) any portion of such unused deduction remaining after 
     application of clause (i) shall be treated as a deduction 
     allowable under subsection (b) with respect to such property 
     in the next taxable year.
       ``(B) Former tax-exempt use property.--For purposes of this 
     subsection, the term `former tax-exempt use property' means 
     any property which--
       ``(i) is not tax-exempt use property for the taxable year, 
     but
       ``(ii) was tax-exempt use property for any prior taxable 
     year.
       ``(2) Disposition of entire interest in property.--If 
     during the taxable year a taxpayer disposes of the taxpayer's 
     entire interest in tax-exempt use property (or former tax-
     exempt use property), rules similar to the rules of section 
     469(g) shall apply for purposes of this section.
       ``(3) Coordination with section 469.--This section shall be 
     applied before the application of section 469.
       ``(4) Coordination with sections 1031 and 1033.--
       ``(A) In general.--Sections 1031(a) and 1033(a) shall not 
     apply if--
       ``(i) the exchanged or converted property is tax-exempt use 
     property subject to a lease which was entered into before 
     March 13, 2004, and which would not have met the requirements 
     of subsection (d) had such requirements been in effect when 
     the lease was entered into, or
       ``(ii) the replacement property is tax-exempt use property 
     subject to a lease which does not meet the requirements of 
     subsection (d).
       ``(B) Adjusted basis.--In the case of property acquired by 
     the lessor in a transaction to which section 1031 or 1033 
     applies, the adjusted basis of such property for purposes of 
     this section shall not exceed the lesser of--
       ``(i) the fair market value of the property as of the 
     beginning of the lease term, or
       ``(ii) the amount which would be the lessor's adjusted 
     basis if such sections did not apply to such transaction.
       ``(f) Other Definitions.--For purposes of this section--
       ``(1) Related parties.--The terms `lessor', `lessee', and 
     `lender' each include any related party (within the meaning 
     of section 197(f)(9)(C)(i)).
       ``(2) Lease term.--The term `lease term' has the meaning 
     given to such term by section 168(i)(3).
       ``(3) Lender.--The term `lender' means, with respect to any 
     lease, a person that makes a loan to the lessor which is 
     secured (or economically similar to being secured) by the 
     lease or the leased property.
       ``(4) Loan.--The term `loan' includes any similar 
     arrangement.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the provisions of this section, including regulations which--
       ``(1) allow in appropriate cases the aggregation of 
     property subject to the same lease, and
       ``(2) provide for the determination of the allocation of 
     interest expense for purposes of this section.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart C of part II of subchapter E of chapter 1 is amended 
     by adding at the end the following new item:

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

     SEC. 649. EFFECTIVE DATE.

       (a) In General.--Except as provided in this section, the 
     amendments made by this part shall apply to leases entered 
     into after March 12, 2004.
       (b) Exception.--
       (1) In general.--The amendments made by this part shall not 
     apply to qualified transportation property.
       (2) Qualified transportation property.--For purposes of 
     paragraph (1), the term ``qualified transportation property'' 
     means domestic property subject to a lease with respect to 
     which a formal application--
       (A) was submitted for approval to the Federal Transit 
     Administration (an agency of the Department of 
     Transportation) after June 30, 2003, and before March 13, 
     2004,
       (B) is approved by the Federal Transit Administration 
     before January 1, 2005, and
       (C) includes a description of such property and the value 
     of such property.
       (3) Exchanges and conversion of tax-exempt use property.--
     Section 470(e)(4) of the Internal Revenue Code of 1986, as 
     added by this section, shall apply to property exchanged or 
     converted after the date of the enactment of this Act.

               Subtitle C--Reduction of Fuel Tax Evasion

     SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR MOBILE 
                   MACHINERY.

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

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

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

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

       ``(iv) Use-based test.--For purposes of clause (ii)(II), 
     the use-based test is met if the

[[Page 12792]]

     use of the vehicle on public highways was less than 7,500 
     miles during the taxpayer's taxable year.''.
       (2) No tax-free sales.--Subsection (b) of section 4082, as 
     amended by section 652, is amended by inserting before the 
     period at the end ``and such term shall not include any use 
     described in section 6421(e)(2)(C)''.
       (3) Annual refund of tax paid.--Section 6427(i)(2) 
     (relating to exceptions) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Nonapplication of paragraph.--This paragraph shall 
     not apply to any fuel used solely in any off-highway business 
     use described in section 6421(e)(2)(C).''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE.

       (a) Rate of Tax.--
       (1) In general.--Subparagraph (A) of section 4081(a)(2) is 
     amended by striking ``and'' at the end of clause (ii), by 
     striking the period at the end of clause (iii) and inserting 
     ``, and'', and by adding at the end the following new clause:
       ``(iv) in the case of aviation-grade kerosene, 21.8 cents 
     per gallon.''.
       (2) Commercial aviation.--Paragraph (2) of section 4081(a) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Taxes imposed on fuel used in commercial aviation.--
     In the case of aviation-grade kerosene which is removed from 
     any refinery or terminal directly into the fuel tank of an 
     aircraft for use in commercial aviation, the rate of tax 
     under subparagraph (A)(iv) shall be 4.3 cents per gallon.''.
       (3) Certain refueler trucks, tankers, and tank wagons 
     treated as terminal.--Subsection (a) of section 4081 is 
     amended by adding at the end the following new paragraph:
       ``(3) Certain refueler trucks, tankers, and tank wagons 
     treated as terminal.--
       ``(A) In general.--In the case of aviation-grade kerosene 
     which is removed from any terminal directly into the fuel 
     tank of an aircraft (determined without regard to any 
     refueler truck, tanker, or tank wagon which meets the 
     requirements of subparagraph (B)), a refueler truck, tanker, 
     or tank wagon shall be treated as part of such terminal if--
       ``(i) such truck, tanker, or wagon meets the requirements 
     of subparagraph (B) with respect to an airport, and
       ``(ii) except in the case of exigent circumstances 
     identified by the Secretary in regulations, no vehicle 
     registered for highway use is loaded with aviation-grade 
     kerosene at such terminal.
       ``(B) Requirements.--A refueler truck, tanker, or tank 
     wagon meets the requirements of this subparagraph with 
     respect to an airport if such truck, tanker, or wagon--
       ``(i) is loaded with aviation-grade kerosene at such 
     terminal located within such airport and delivers such 
     kerosene only into aircraft at such airport,
       ``(ii) has storage tanks, hose, and coupling equipment 
     designed and used for the purposes of fueling aircraft,
       ``(iii) is not registered for highway use, and
       ``(iv) is operated by--

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

       ``(C) Reporting.--The Secretary shall require under section 
     4101(d) reporting by such terminal operator of--
       ``(i) any information obtained under subparagraph 
     (B)(iv)(II), and
       ``(ii) any similar information maintained by such terminal 
     operator with respect to deliveries of fuel made by trucks, 
     tankers, or wagons operated by such terminal operator.''.
       (4) Liability for tax on aviation-grade kerosene used in 
     commercial aviation.--Subsection (a) of section 4081 is 
     amended by adding at the end the following new paragraph:
       ``(4) Liability for tax on aviation-grade kerosene used in 
     commercial aviation.--For purposes of paragraph (2)(C), the 
     person who uses the fuel for commercial aviation shall pay 
     the tax imposed under such paragraph. For purposes of the 
     preceding sentence, fuel shall be treated as used when such 
     fuel is removed into the fuel tank.''.
       (5) Nontaxable uses.--
       (A) In general.--Section 4082 is amended by redesignating 
     subsections (e) and (f) as subsections (f) and (g), 
     respectively, and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Aviation-Grade Kerosene.--In the case of aviation-
     grade kerosene which is exempt from the tax imposed by 
     section 4041(c) (other than by reason of a prior imposition 
     of tax) and which is removed from any refinery or terminal 
     directly into the fuel tank of an aircraft, the rate of tax 
     under section 4081(a)(2)(A)(iv) shall be zero.''.
       (B) Conforming amendments.--
       (i) Subsection (b) of section 4082 is amended by adding at 
     the end the following new flush sentence:

     ``The term `nontaxable use' does not include the use of 
     aviation-grade kerosene in an aircraft.''.
       (ii) Section 4082(d) is amended by striking paragraph (1) 
     and by redesignating paragraphs (2) and (3) as paragraphs (1) 
     and (2), respectively.
       (6) Nonaircraft use of aviation-grade kerosene.--
       (A) In general.--Subparagraph (B) of section 4041(a)(1) is 
     amended by adding at the end the following new sentence: 
     ``This subparagraph shall not apply to aviation-grade 
     kerosene.''.
       (B) Conforming amendment.--The heading for paragraph (1) of 
     section 4041(a) is amended by inserting ``and kerosene'' 
     after ``diesel fuel''.
       (b) Commercial Aviation.--Section 4083 is amended by 
     redesignating subsections (b) and (c) as subsections (c) and 
     (d), respectively, and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Commercial Aviation.--For purposes of this subpart, 
     the term `commercial aviation' means any use of an aircraft 
     in a business of transporting persons or property for 
     compensation or hire by air, unless properly allocable to any 
     transportation exempt from the taxes imposed by sections 4261 
     and 4271 by reason of section 4281 or 4282 or by reason of 
     section 4261(h).''.
       (c) Refunds.--
       (1) In general.--Paragraph (4) of section 6427(l) is 
     amended to read as follows:
       ``(4) Refunds for aviation-grade kerosene.--
       ``(A) No refund of certain taxes on fuel used in commercial 
     aviation.--In the case of aviation-grade kerosene used in 
     commercial aviation (as defined in section 4083(b)) (other 
     than supplies for vessels or aircraft within the meaning of 
     section 4221(d)(3)), paragraph (1) shall not apply to so much 
     of the tax imposed by section 4081 as is attributable to--
       ``(i) the Leaking Underground Storage Tank Trust Fund 
     financing rate imposed by such section, and
       ``(ii) so much of the rate of tax specified in section 
     4081(a)(2)(A)(iv) as does not exceed 4.3 cents per gallon.
       ``(B) Payment to ultimate, registered vendor.--With respect 
     to aviation-grade kerosene, if the ultimate purchaser of such 
     kerosene waives (at such time and in such form and manner as 
     the Secretary shall prescribe) the right to payment under 
     paragraph (1) and assigns such right to the ultimate vendor, 
     then the Secretary shall pay the amount which would be paid 
     under paragraph (1) to such ultimate vendor, but only if such 
     ultimate vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (2) Time for filing claims.--Subparagraph (A) of section 
     6427(i)(4) is amended--
       (A) by striking ``subsection (l)(5)'' both places it 
     appears and inserting ``paragraph (4)(B) or (5) of subsection 
     (l)'', and
       (B) by striking ``the preceding sentence'' and inserting 
     ``subsection (l)(5)''.
       (3) Conforming amendment.--Subparagraph (B) of section 
     6427(l)(2) is amended to read as follows:
       ``(B) in the case of aviation-grade kerosene--
       ``(i) any use which is exempt from the tax imposed by 
     section 4041(c) other than by reason of a prior imposition of 
     tax, or
       ``(ii) any use in commercial aviation (within the meaning 
     of section 4083(b)).''.
       (d) Repeal of Prior Taxation of Aviation Fuel.--
       (1) In general.--Part III of subchapter A of chapter 32 is 
     amended by striking subpart B and by redesignating subpart C 
     as subpart B.
       (2) Conforming amendments.--
       (A) Section 4041(c) is amended to read as follows:
       ``(c) Aviation-Grade Kerosene.--
       ``(1) In general.--There is hereby imposed a tax upon 
     aviation-grade kerosene--
       ``(A) sold by any person to an owner, lessee, or other 
     operator of an aircraft for use in such aircraft, or
       ``(B) used by any person in an aircraft unless there was a 
     taxable sale of such fuel under subparagraph (A).
       ``(2) Exemption for previously taxed fuel.--No tax shall be 
     imposed by this subsection on the sale or use of any 
     aviation-grade kerosene if tax was imposed on such liquid 
     under section 4081 and the tax thereon was not credited or 
     refunded.
       ``(3) Rate of tax.--The rate of tax imposed by this 
     subsection shall be the rate of tax specified in section 
     4081(a)(2)(A)(iv) which is in effect at the time of such sale 
     or use.''.
       (B) Section 4041(d)(2) is amended by striking ``section 
     4091'' and inserting ``section 4081''.
       (C) Section 4041 is amended by striking subsection (e).
       (D) Section 4041 is amended by striking subsection (i).
       (E) Sections 4101(a), 4103, 4221(a), and 6206 are each 
     amended by striking ``, 4081, or 4091'' and inserting ``or 
     4081''.
       (F) Section 6416(b)(2) is amended by striking ``4091 or''.
       (G) Section 6416(b)(3) is amended by striking ``or 4091'' 
     each place it appears.
       (H) Section 6416(d) is amended by striking ``or to the tax 
     imposed by section 4091 in the case of refunds described in 
     section 4091(d)''.
       (I) Section 6427(j)(1) is amended by striking ``, 4081, and 
     4091'' and inserting ``and 4081''.

[[Page 12793]]

       (J)(i) Section 6427(l)(1) is amended to read as follows:
       ``(1) In general.--Except as otherwise provided in this 
     subsection and in subsection (k), if any diesel fuel or 
     kerosene on which tax has been imposed by section 4041 or 
     4081 is used by any person in a nontaxable use, the Secretary 
     shall pay (without interest) to the ultimate purchaser of 
     such fuel an amount equal to the aggregate amount of tax 
     imposed on such fuel under section 4041 or 4081, as the case 
     may be, reduced by any payment made to the ultimate vendor 
     under paragraph (4)(B).''.
       (ii) Paragraph (5)(B) of section 6427(l) is amended by 
     striking ``Paragraph (1)(A) shall not apply to kerosene'' and 
     inserting ``Paragraph (1) shall not apply to kerosene (other 
     than aviation-grade kerosene)''.
       (K) Subparagraph (B) of section 6724(d)(1) is amended by 
     striking clause (xv) and by redesignating the succeeding 
     clauses accordingly.
       (L) Paragraph (2) of section 6724(d) is amended by striking 
     subparagraph (W) and by redesignating the succeeding 
     subparagraphs accordingly.
       (M) Paragraph (1) of section 9502(b) is amended by adding 
     ``and'' at the end of subparagraph (B) and by striking 
     subparagraphs (C) and (D) and inserting the following new 
     subparagraph:
       ``(C) section 4081 with respect to aviation gasoline and 
     aviation-grade kerosene, and''.
       (N) The last sentence of section 9502(b) is amended to read 
     as follows:

     ``There shall not be taken into account under paragraph (1) 
     so much of the taxes imposed by section 4081 as are 
     determined at the rate specified in section 4081(a)(2)(B).''.
       (O) Subsection (b) of section 9508 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       (P) Section 9508(c)(2)(A) is amended by striking ``sections 
     4081 and 4091'' and inserting ``section 4081''.
       (Q) The table of subparts for part III of subchapter A of 
     chapter 32 is amended to read as follows:

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

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

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

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

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

       (e) Effective Date.--The amendments made by this section 
     shall apply to aviation-grade kerosene removed, entered, or 
     sold after September 30, 2004.
       (f) Floor Stocks Tax.--
       (1) In general.--There is hereby imposed on aviation-grade 
     kerosene held on October 1, 2004, by any person a tax equal 
     to--
       (A) the tax which would have been imposed before such date 
     on such kerosene had the amendments made by this section been 
     in effect at all times before such date, reduced by
       (B) the tax imposed before such date under section 4091 of 
     the Internal Revenue Code of 1986, as in effect on the day 
     before the date of the enactment of this Act.
       (2) Liability for tax and method of payment.--
       (A) Liability for tax.--The person holding the kerosene on 
     October 1, 2004, to which the tax imposed by paragraph (1) 
     applies shall be liable for such tax.
       (B) Method and time for payment.--The tax imposed by 
     paragraph (1) shall be paid at such time and in such manner 
     as the Secretary of the Treasury (or the Secretary's 
     delegate) shall prescribe, including the nonapplication of 
     such tax on de minimis amounts of kerosene.
       (3) Transfer of floor stock tax revenues to trust funds.--
     For purposes of determining the amount transferred to any 
     trust fund, the tax imposed by this subsection shall be 
     treated as imposed by section 4081 of the Internal Revenue 
     Code of 1986--
       (A) at the Leaking Underground Storage Tank Trust Fund 
     financing rate under such section to the extent of 0.1 cents 
     per gallon, and
       (B) at the rate under section 4081(a)(2)(A)(iv) to the 
     extent of the remainder.
       (4) Held by a person.--For purposes of this section, 
     kerosene shall be considered as held by a person if title 
     thereto has passed to such person (whether or not delivery to 
     the person has been made).
       (5) Other laws applicable.--All provisions of law, 
     including penalties, applicable with respect to the tax 
     imposed by section 4081 of such Code shall, insofar as 
     applicable and not inconsistent with the provisions of this 
     subsection, apply with respect to the floor stock tax imposed 
     by paragraph (1) to the same extent as if such tax were 
     imposed by such section.

     SEC. 653. DYE INJECTION EQUIPMENT.

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

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

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

``Sec. 6715A. Tampering with or failing to maintain security 
              requirements for mechanical dye injection systems.''.

       (d) Effective Date.--The amendments made by subsections (a) 
     and (c) shall take effect on the 180th day after the date on 
     which the Secretary issues the regulations described in 
     subsection (b).

     SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS.

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

     SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERATORS 
                   REQUIRED FOR EXEMPTION OF BULK TRANSFERS TO 
                   REGISTERED TERMINALS OR REFINERIES.

       (a) In General.--Section 4081(a)(1)(B) (relating to 
     exemption for bulk transfers to registered terminals or 
     refineries) is amended--
       (1) by inserting ``by pipeline or vessel'' after 
     ``transferred in bulk'', and
       (2) by inserting ``, the operator of such pipeline or 
     vessel,'' after ``the taxable fuel''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.
       (c) Publication of Registered Persons.--Beginning on July 
     1, 2004, the Secretary of the Treasury (or the Secretary's 
     delegate) shall periodically publish a current list of 
     persons registered under section 4101 of the Internal Revenue 
     Code of 1986 who are required to register under such section.

     SEC. 656. DISPLAY OF REGISTRATION.

       (a) In General.--Subsection (a) of section 4101 (relating 
     to registration) is amended--
       (1) by striking ``Every'' and inserting the following:
       ``(1) In general.--Every'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Display of registration.--Every operator of a vessel 
     required by the Secretary to register under this section 
     shall display proof of registration through an electronic 
     identification device prescribed by the Secretary on each 
     vessel used by such operator to transport any taxable 
     fuel.''.

[[Page 12794]]

       (b) Civil Penalty for Failure To Display Registration.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by inserting 
     after section 6716 the following new section:

     ``SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON VESSELS.

       ``(a) Failure To Display Registration.--Every operator of a 
     vessel who fails to display proof of registration pursuant to 
     section 4101(a)(2) shall pay a penalty of $500 for each such 
     failure. With respect to any vessel, only one penalty shall 
     be imposed by this section during any calendar month.
       ``(b) Multiple Violations.--In determining the penalty 
     under subsection (a) on any person, subsection (a) shall be 
     applied by increasing the amount in subsection (a) by the 
     product of such amount and the aggregate number of penalties 
     (if any) imposed with respect to prior months by this section 
     on such person (or a related person or any predecessor of 
     such person or related person).
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6716 the following new item:

``Sec. 6717. Failure to display tax registration on vessels.''.

       (c) Effective Dates.--
       (1) Subsection (a).--The amendments made by subsection (a) 
     shall take effect on October 1, 2004.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to penalties imposed after September 30, 2004.

     SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND FAILURE TO 
                   REPORT.

       (a) Increased Penalty.--Subsection (a) of section 7272 
     (relating to penalty for failure to register) is amended by 
     inserting ``($10,000 in the case of a failure to register 
     under section 4101)'' after ``$50''.
       (b) Increased Criminal Penalty.--Section 7232 (relating to 
     failure to register under section 4101, false representations 
     of registration status, etc.) is amended by striking 
     ``$5,000'' and inserting ``$10,000''.
       (c) Assessable Penalty for Failure To Register.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by inserting 
     after section 6717 the following new section:

     ``SEC. 6718. FAILURE TO REGISTER.

       ``(a) Failure To Register.--Every person who is required to 
     register under section 4101 and fails to do so shall pay a 
     penalty in addition to the tax (if any).
       ``(b) Amount of Penalty.--The amount of the penalty under 
     subsection (a) shall be--
       ``(1) $10,000 for each initial failure to register, and
       ``(2) $1,000 for each day thereafter such person fails to 
     register.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6717 the following new item:

``Sec. 6718. Failure to register.''.

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

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

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

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

       (e) Effective Date.--The amendments made by this section 
     shall apply to penalties imposed after September 30, 2004.

     SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT 
                   REGISTERED.

       (a) Tax at Point of Entry Where Importer Not Registered.--
     Subpart B of part III of subchapter A of chapter 32, as 
     redesignated by section 652(d), is amended by adding after 
     section 4103 the following new section:

     ``SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT 
                   REGISTERED.

       ``(a) In General.--The importer of record shall be jointly 
     and severally liable for the tax imposed by section 
     4081(a)(1)(A)(iii) if, under regulations prescribed by the 
     Secretary, any other person that is not a person who is 
     registered under section 4101 is liable for such tax.
       ``(b) Collection From Customs Bond.--If any tax for which 
     any importer of record is liable under subsection (a), or for 
     which any importer of record that is not a person registered 
     under section 4101 is otherwise liable, is not paid on or 
     before the last date prescribed for payment, the Secretary 
     may collect such tax from the Customs bond posted with 
     respect to the importation of the taxable fuel to which the 
     tax relates. For purposes of determining the jurisdiction of 
     any court of the United States or any agency of the United 
     States, any action by the Secretary described in the 
     preceding sentence shall be treated as an action to collect 
     the tax from a bond described in section 4101(b)(1) and not 
     as an action to collect from a bond relating to the 
     importation of merchandise.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart B of part III of subchapter A of chapter 32, as 
     redesignated by section 652(d), is amended by adding after 
     the item related to section 4103 the following new item:

``Sec. 4104. Collection from Customs bond where importer not 
              registered.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to fuel entered after September 30, 
     2004.

     SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VEHICLES.

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

     SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND CLAIMS WITH 
                   RESPECT TO FARMING.

       (a) In General.--
       (1) Refunds.--Section 6427(l) is amended by adding at the 
     end the following new paragraph:
       ``(6) Registered vendors permitted to administer certain 
     claims for refund of diesel fuel and kerosene sold to 
     farmers.--
       ``(A) In general.--In the case of diesel fuel or kerosene 
     used on a farm for farming purposes (within the meaning of 
     section 6420(c)), paragraph (1) shall not apply to the 
     aggregate amount of such diesel fuel or kerosene if such 
     amount does not exceed 250 gallons (as determined under 
     subsection (i)(5)(A)(iii)).
       ``(B) Payment to ultimate vendor.--The amount which would 
     (but for subparagraph (A)) have been paid under paragraph (1) 
     with respect to any fuel shall be paid to the ultimate vendor 
     of such fuel, if such vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (2) Filing of claims.--Section 6427(i) is amended by 
     inserting at the end the following new paragraph:
       ``(5) Special rule for vendor refunds with respect to 
     farmers.--
       ``(A) In general.--A claim may be filed under subsection 
     (l)(6) by any person with respect to fuel sold by such person 
     for any period--
       ``(i) for which $200 or more ($100 or more in the case of 
     kerosene) is payable under subsection (l)(6),
       ``(ii) which is not less than 1 week, and
       ``(iii) which is for not more than 250 gallons for each 
     farmer for which there is a claim.

     Notwithstanding subsection (l)(1), paragraph (3)(B) shall 
     apply to claims filed under the preceding sentence.
       ``(B) Time for filing claim.--No claim filed under this 
     paragraph shall be allowed unless filed on or before the last 
     day of the first quarter following the earliest quarter 
     included in the claim.''.
       (3) Conforming amendments.--
       (A) Section 6427(l)(5)(A) is amended to read as follows:

[[Page 12795]]

       ``(A) In general.--Paragraph (1) shall not apply to diesel 
     fuel or kerosene used by a State or local government.''.
       (B) The heading for section 6427(l)(5) is amended by 
     striking ``farmers and''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to fuels sold for nontaxable use after the date 
     of the enactment of this Act.

     SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PENALTIES TO 
                   THE HIGHWAY TRUST FUND.

       (a) In General.--Subsection (b) of section 9503 (relating 
     to transfer to Highway Trust Fund of amounts equivalent to 
     certain taxes) is amended by redesignating paragraph (5) as 
     paragraph (6) and inserting after paragraph (4) the following 
     new paragraph:
       ``(5) Certain penalties.--There are hereby appropriated to 
     the Highway Trust Fund amounts equivalent to the penalties 
     paid under sections 6715, 6715A, 6717, 6718, 6725, 7232, and 
     7272 (but only with regard to penalties under such section 
     related to failure to register under section 4101).''.
       (b) Conforming Amendments.--
       (1) The heading of subsection (b) of section 9503 is 
     amended by inserting ``and Penalties'' after ``Taxes''.
       (2) The heading of paragraph (1) of section 9503(b) is 
     amended by striking ``In general'' and inserting ``Certain 
     taxes''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to penalties assessed after October 1, 2004.

     SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE VENDORS.

       (a) In General.--Paragraph (4) of section 6416(a) (relating 
     to abatements, credits, and refunds) is amended to read as 
     follows:
       ``(4) Registered ultimate vendor to administer credits and 
     refunds of gasoline tax.--
       ``(A) In general.--For purposes of this subsection, if an 
     ultimate vendor purchases any gasoline on which tax imposed 
     by section 4081 has been paid and sells such gasoline to an 
     ultimate purchaser described in subparagraph (C) or (D) of 
     subsection (b)(2) (and such gasoline is for a use described 
     in such subparagraph), such ultimate vendor shall be treated 
     as the person (and the only person) who paid such tax, but 
     only if such ultimate vendor is registered under section 
     4101. For purposes of this subparagraph, if the sale of 
     gasoline is made by means of a credit card, the person 
     extending the credit to the ultimate purchaser shall be 
     deemed to be the ultimate vendor.
       ``(B) Timing of claims.--The procedure and timing of any 
     claim under subparagraph (A) shall be the same as for claims 
     under section 6427(i)(4), except that the rules of section 
     6427(i)(3)(B) regarding electronic claims shall not apply 
     unless the ultimate vendor has certified to the Secretary for 
     the most recent quarter of the taxable year that all ultimate 
     purchasers of the vendor covered by such claim are certified 
     and entitled to a refund under subparagraph (C) or (D) of 
     subsection (b)(2).''.
       (b) Credit Card Purchases of Diesel Fuel or Kerosene by 
     State and Local Governments.--Section 6427(l)(5)(C) (relating 
     to nontaxable uses of diesel fuel, kerosene, and aviation 
     fuel) is amended by adding at the end the following new flush 
     sentence:

     ``For purposes of this subparagraph, if the sale of diesel 
     fuel or kerosene is made by means of a credit card, the 
     person extending the credit to the ultimate purchaser shall 
     be deemed to be the ultimate vendor.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

     SEC. 663. TWO-PARTY EXCHANGES.

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

     ``SEC. 4105. TWO-PARTY EXCHANGES.

       ``(a) In General.--In a two-party exchange, the delivering 
     person shall not be liable for the tax imposed under section 
     4081(a)(1)(A)(ii).
       ``(b) Two-Party Exchange.--The term `two-party exchange' 
     means a transaction, other than a sale, in which taxable fuel 
     is transferred from a delivering person registered under 
     section 4101 as a taxable fuel registrant fuel to a receiving 
     person who is so registered where all of the following occur:
       ``(1) The transaction includes a transfer from the 
     delivering person, who holds the inventory position for 
     taxable fuel in the terminal as reflected in the records of 
     the terminal operator.
       ``(2) The exchange transaction occurs before or 
     contemporaneous with completion of removal across the rack 
     from the terminal by the receiving person.
       ``(3) The terminal operator in its books and records treats 
     the receiving person as the person that removes the taxable 
     fuel across the terminal rack for purposes of reporting the 
     transaction to the Secretary.
       ``(4) The transaction is the subject of a written 
     contract.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart B of part III of subchapter A of chapter 32, as 
     amended by this Act, is amended by adding after the item 
     relating to section 4104 the following new item:

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

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

     SEC. 664. SIMPLIFICATION OF TAX ON TIRES.

       (a) In General.--Subsection (a) of section 4071 is amended 
     to read as follows:
       ``(a) Imposition and Rate of Tax.--There is hereby imposed 
     on taxable tires sold by the manufacturer, producer, or 
     importer thereof a tax at the rate of 9.4 cents (4.7 cents in 
     the case of a biasply tire) for each 10 pounds so much of the 
     maximum rated load capacity thereof as exceeds 3,500 
     pounds.''
       (b) Taxable Tire.--Section 4072 is amended by redesignating 
     subsections (a) and (b) as subsections (b) and (c), 
     respectively, and by inserting before subsection (b) (as so 
     redesignated) the following new subsection:
       ``(a) Taxable Tire.--For purposes of this chapter, the term 
     `taxable tire' means any tire of the type used on highway 
     vehicles if wholly or in part made of rubber and if marked 
     pursuant to Federal regulations for highway use.''
       (c) Exemption for Tires Sold to Department of Defense.--
     Section 4073 is amended to read as follows:

     ``SEC. 4073. EXEMPTIONS.

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

``Sec. 4073. Exemptions.''.

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

          Subtitle D--Nonqualified Deferred Compensation Plans

     SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION 
                   PLANS.

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

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

       ``(a) Rules Relating to Constructive Receipt.--
       ``(1) In general.--
       ``(A) Gross income inclusion.--In the case of a 
     nonqualified deferred compensation plan, all compensation 
     deferred under the plan for all taxable years (to the extent 
     not subject to a substantial risk of forfeiture and not 
     previously included in gross income) shall be includible in 
     gross income for the taxable year unless at all times during 
     the taxable year the plan meets the requirements of 
     paragraphs (2), (3), and (4) and is operated in accordance 
     with such requirements.
       ``(B) Interest on tax liability payable with respect to 
     previously deferred compensation.--
       ``(i) In general.--If compensation is required to be 
     included in gross income under subparagraph (A) for a taxable 
     year, the tax imposed by this chapter for such taxable year 
     shall be increased by the amount of interest determined under 
     clause (ii).
       ``(ii) Interest.--For purposes of clause (i), the interest 
     determined under this clause for any taxable year is the 
     amount of interest at the underpayment rate plus 1 percentage 
     point on the underpayments that would have occurred had the 
     deferred compensation been includible in gross income for the 
     taxable year in which first deferred or, if later, the first 
     taxable year in which such deferred compensation is not 
     subject to a substantial risk of forfeiture.
       ``(2) Distributions.--
       ``(A) In general.--The requirements of this paragraph are 
     met if the plan provides that compensation deferred under the 
     plan may not be distributed earlier than--
       ``(i) separation from service as determined by the 
     Secretary (except as provided in subparagraph (B)(i)),
       ``(ii) the date the participant becomes disabled (within 
     the meaning of subparagraph (C)),
       ``(iii) death,
       ``(iv) a specified time (or pursuant to a fixed schedule) 
     specified under the plan at the date of the deferral of such 
     compensation,
       ``(v) to the extent provided by the Secretary, a change in 
     the ownership or effective control of the corporation, or in 
     the ownership of a substantial portion of the assets of the 
     corporation, or
       ``(vi) the occurrence of an unforeseeable emergency.
       ``(B) Special rules.--
       ``(i) Specified employees.--In the case of specified 
     employees, the requirement of subparagraph (A)(i) is met only 
     if distributions may not be made earlier than 6 months after 
     the date of separation from service. For purposes of the 
     preceding sentence, a specified employee is a key employee 
     (as defined in section 416(i)) of a corporation the stock in 
     which is publicly traded on an established securities market 
     or otherwise.
       ``(ii) Unforeseeable emergency.--For purposes of 
     subparagraph (A)(vi)--

[[Page 12796]]

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

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


[[Page 12797]]


``Sec. 409A. Inclusion in gross income of deferred compensation under 
              nonqualified deferred compensation plans.''.

       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to amounts deferred after June 3, 2004.
       (2) Certain amounts deferred in 2004 under certain 
     irrevocable elections and binding arrangements.--The 
     amendments made by this section shall not apply to amounts 
     deferred after June 3, 2004, and before January 1, 2005, 
     pursuant to an irrevocable election or binding arrangement 
     made before June 4, 2004.
       (3) Earnings attributable to amount previously deferred.--
     The amendments made by this section shall apply to earnings 
     on deferred compensation only to the extent that such 
     amendments apply to such compensation.
       (e) Guidance Relating to Change of Ownership or Control.--
     Not later than 90 days after the date of the enactment of 
     this Act, the Secretary of the Treasury shall issue guidance 
     on what constitutes a change in ownership or effective 
     control for purposes of section 409A of the Internal Revenue 
     Code of 1986, as added by this section.
       (f) Guidance Relating to Termination of Certain Existing 
     Arrangements.--Not later than 90 days after the date of the 
     enactment of this Act, the Secretary of the Treasury shall 
     issue guidance providing a limited period during which an 
     individual participating in a nonqualified deferred 
     compensation plan adopted before June 4, 2004, may, without 
     violating the requirements of paragraphs (2), (3), and (4) of 
     section 409A(a)(2) of the Internal Revenue Code of 1986 (as 
     added by this section), terminate participation or cancel an 
     outstanding deferral election with regard to amounts earned 
     after June 3, 2004, if such amounts are includible in income 
     as earned.

                  Subtitle E--Other Revenue Provisions

     SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS.

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

     ``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

       ``(a) In General.--Nothing in any provision of law shall be 
     construed to prevent the Secretary from entering into a 
     qualified tax collection contract.
       ``(b) Qualified Tax Collection Contract.--For purposes of 
     this section, the term `qualified tax collection contract' 
     means any contract which--
       ``(1) is for the services of any person (other than an 
     officer or employee of the Treasury Department)--
       ``(A) to locate and contact any taxpayer specified by the 
     Secretary,
       ``(B) to request full payment from such taxpayer of an 
     amount of Federal tax specified by the Secretary and, if such 
     request cannot be met by the taxpayer, to offer the taxpayer 
     an installment agreement providing for full payment of such 
     amount during a period not to exceed 5 years, and
       ``(C) to obtain financial information specified by the 
     Secretary with respect to such taxpayer,
       ``(2) prohibits each person providing such services under 
     such contract from committing any act or omission which 
     employees of the Internal Revenue Service are prohibited from 
     committing in the performance of similar services,
       ``(3) prohibits subcontractors from--
       ``(A) having contacts with taxpayers,
       ``(B) providing quality assurance services, and
       ``(C) composing debt collection notices, and
       ``(4) permits subcontractors to perform other services only 
     with the approval of the Secretary.
       ``(c) Fees.--The Secretary may retain and use 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 
     section 6304, section 7602(c), or by any other provision of 
     this title.
       ``(f) Cross References.--
       ``(1) For damages for certain unauthorized collection 
     actions by persons performing services under a qualified tax 
     collection contract, see section 7433A.
       ``(2) For application of Taxpayer Assistance Orders to 
     persons performing services under a qualified tax collection 
     contract, see section 7811(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), (d)(1), and (e) of section 7433 
     shall not apply.''.
       (2) Clerical amendment.--The table of sections for 
     subchapter B of chapter 76 is amended by inserting after the 
     item relating to section 7433 the following new item:

``Sec. 7433A. Civil damages for certain unauthorized collection actions 
              by persons performing services under 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. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF PATENTS 
                   AND SIMILAR PROPERTY.

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

[[Page 12798]]

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

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

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

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

       ``(a) Dispositions of Donated Property.--
       ``(1) In general.--If the donee of any charitable deduction 
     property sells, exchanges, or otherwise disposes of such 
     property within 2 years after its receipt, the donee shall 
     make a return (in accordance with forms and regulations 
     prescribed by the Secretary) showing--
       ``(A) the name, address, and TIN of the donor,
       ``(B) a description of the property,
       ``(C) the date of the contribution,
       ``(D) the amount received on the disposition, and
       ``(E) the date of such disposition.
       ``(2) Definitions.--For purposes of this subsection--
       ``(A) Charitable deduction property.--The term `charitable 
     deduction property' means any property (other than publicly 
     traded securities) contributed in a contribution for which a 
     deduction was claimed under section 170 if the claimed value 
     of such property (plus the claimed value of all similar items 
     of property donated by the donor to 1 or more donees) exceeds 
     $5,000.
       ``(B) Publicly traded securities.--The term `publicly 
     traded securities' means securities for which (as of the date 
     of the contribution) market quotations are readily available 
     on an established securities market.
       ``(b) Qualified Intellectual Property Contributions.--
       ``(1) In general.--Each donee with respect to a qualified 
     intellectual property contribution shall make a return (at 
     such time and in such form and manner as the Secretary may by 
     regulations prescribe) with respect to each specified taxable 
     year of the donee showing--
       ``(A) the name, address, and TIN of the donor,
       ``(B) a description of the qualified intellectual property 
     contributed,
       ``(C) the date of the contribution, and
       ``(D) the amount of net income of the donee for the taxable 
     year which is properly allocable to the qualified 
     intellectual property (determined without regard to paragraph 
     (10)(B) of section 170(m) and with the modifications 
     described in paragraphs (5) and (6) of such section).
       ``(2) Definitions.--For purposes of this subsection--
       ``(A) In general.--Terms used in this subsection which are 
     also used in section 170(m) have the respective meanings 
     given such terms in such section.
       ``(B) Specified taxable year.--The term `specified taxable 
     year' means, with respect to any qualified intellectual 
     property contribution, any taxable year of the donee any 
     portion of which is part of the 10-year period beginning on 
     the date of such contribution.
       ``(c) Statement To Be Furnished to Donors.--Every person 
     making a return under subsection (a) or (b) shall furnish a 
     copy of such return to the donor at such time and in such 
     manner as the Secretary may by regulations prescribe.''.
       (d) Coordination With Appraisal Requirements.--Subclause 
     (I) of section 170(f)(11)(A)(ii), as added by section 683, is 
     amended by inserting ``subsection (e)(1)(B)(iii) or'' before 
     ``section 1221(a)(1)''.
       (e) Anti-Abuse Rules.--The Secretary of the Treasury may 
     prescribe such regulations or other guidance as may be 
     necessary or appropriate to prevent the avoidance of the 
     purposes of section 170(e)(1)(B)(iii) of the Internal Revenue 
     Code of 1986 (as added by subsection (a)), including 
     preventing--
       (1) the circumvention of the reduction of the charitable 
     deduction by embedding or bundling the patent or similar 
     property as part of a charitable contribution of property 
     that includes the patent or similar property,
       (2) the manipulation of the basis of the property to 
     increase the amount of the charitable deduction through the 
     use of related persons, pass-thru entities, or other 
     intermediaries, or through the use of any provision of law or 
     regulation (including the consolidated return regulations), 
     and
       (3) a donor from changing the form of the patent or similar 
     property to property of a form for which different deduction 
     rules would apply.
       (f) Effective Date.--The amendments made by this section 
     shall apply to contributions made after June 3, 2004.

     SEC. 683. INCREASED REPORTING FOR NONCASH CHARITABLE 
                   CONTRIBUTIONS.

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

       ``(I) Readily valued property.--Subparagraphs (C) and (D) 
     shall not apply to cash, property described in section 
     1221(a)(1), and

[[Page 12799]]

     publicly traded securities (as defined in section 
     6050L(a)(2)(B)).
       ``(II) Reasonable cause.--Clause (i) shall not apply if it 
     is shown that the failure to meet such requirements is due to 
     reasonable cause and not to willful neglect.

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

     SEC. 684. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRCRAFT.

       (a) In General.--Subsection (f) of section 170 (relating to 
     disallowance of deduction in certain cases and special rules) 
     is amended by adding after paragraph (11) the following new 
     paragraph:
       ``(12) Contributions of motor vehicles, boats, and 
     aircraft.--
       ``(A) In general.--Except as provided in regulations or 
     other guidance, in the case of a contribution of a specified 
     vehicle to which paragraph (8) applies, no deduction shall be 
     allowed under subsection (a) for such contribution unless the 
     taxpayer obtains a qualified appraisal of the specified 
     vehicle on or before the date of such contribution.
       ``(B) Exception for inventory property.--Subparagraph (A) 
     shall not apply to property which is described in section 
     1221(a)(1).
       ``(C) Specified vehicle.--For purposes of this paragraph, 
     the term `specified vehicle' means any--
       ``(i) motor vehicle manufactured primarily for use on 
     public streets, roads, and highways,
       ``(ii) boat, or
       ``(iii) aircraft.
       ``(D) Qualified appraisal.--For purposes of this paragraph, 
     the term `qualified appraisal' means any appraisal which is 
     treated for purposes of this paragraph as a qualified 
     appraisal under regulations or other guidance prescribed by 
     the Secretary.
       ``(E) Regulations or other guidance.--The Secretary shall 
     prescribe such regulations or other guidance as may be 
     necessary to carry out the purposes of this paragraph.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to contributions made after June 3, 2004.

     SEC. 685. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS 
                   FRANCHISES.

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

     SEC. 686. MODIFICATION OF CONTINUING LEVY ON PAYMENTS TO 
                   FEDERAL VENDERS.

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

     SEC. 687. MODIFICATION OF STRADDLE RULES.

       (a) Rules Relating to Identified Straddles.--
       (1) In general.--Subparagraph (A) of section 1092(a)(2) 
     (relating to special rule for identified straddles) is 
     amended to read as follows:
       ``(A) In general.--In the case of any straddle which is an 
     identified straddle--
       ``(i) paragraph (1) shall not apply with respect to 
     identified positions comprising the identified straddle,
       ``(ii) if there is any loss with respect to any identified 
     position of the identified straddle, the basis of each of the 
     identified offsetting positions in the identified straddle 
     shall be increased by an amount which bears the same ratio to 
     the loss as the unrecognized gain with respect to such 
     offsetting position bears to the aggregate unrecognized gain 
     with respect to all such offsetting positions, and
       ``(iii) any loss described in clause (ii) shall not 
     otherwise be taken into account for purposes of this 
     title.''.
       (2) Identified straddle.--Section 1092(a)(2)(B) (defining 
     identified straddle) is amended--
       (A) by striking clause (ii) and inserting the following:
       ``(ii) to the extent provided by regulations, the value of 
     each position of which (in the hands of the taxpayer 
     immediately before the creation of the straddle) is not less 
     than the basis of such position in the hands of the taxpayer 
     at the time the straddle is created, and'', and
       (B) by adding at the end the following new flush sentence:

     ``The Secretary shall prescribe regulations which specify the 
     proper methods for clearly identifying a straddle as an 
     identified straddle (and the positions comprising such 
     straddle), which specify the rules for the application of 
     this section for a taxpayer which fails to properly identify 
     the positions of an identified straddle, and which specify 
     the ordering rules in cases where a taxpayer disposes of less 
     than an entire position which is part of an identified 
     straddle.''.
       (3) Unrecognized gain.--Section 1092(a)(3) (defining 
     unrecognized gain) is amended by redesignating subparagraph 
     (B) as subparagraph (C) and by inserting after subparagraph 
     (A) the following new subparagraph:
       ``(B) Special rule for identified straddles.--For purposes 
     of paragraph (2)(A)(ii), the unrecognized gain with respect 
     to any identified offsetting position shall be the excess of 
     the fair market value of the position at the time of the 
     determination over the fair market value of the position at 
     the time the taxpayer identified the position as a position 
     in an identified straddle.''.
       (4) Conforming amendment.--Section 1092(c)(2) is amended by 
     striking subparagraph (B) and by redesignating subparagraph 
     (C) as subparagraph (B).
       (b) Physically Settled Positions.--Section 1092(d) 
     (relating to definitions and special rules) is amended by 
     adding at the end the following new paragraph:
       ``(8) Special rules for physically settled positions.--For 
     purposes of subsection (a), if a taxpayer settles a position 
     which is part of a straddle by delivering property to which 
     the position relates (and such position, if terminated, would 
     result in a realization of a loss), then such taxpayer shall 
     be treated as if such taxpayer--
       ``(A) terminated the position for its fair market value 
     immediately before the settlement, and
       ``(B) sold the property so delivered by the taxpayer at its 
     fair market value.''.
       (c) Repeal of Stock Exception.--
       (1) In general.--Paragraph (3) of section 1092(d) (relating 
     to definitions and special rules) is amended to read as 
     follows:
       ``(3) Special rules for stock.--For purposes of paragraph 
     (1)--
       ``(A) In general.--The term `personal property' includes--

[[Page 12800]]

       ``(i) any stock which is a part of a straddle at least 1 of 
     the offsetting positions of which is a position with respect 
     to such stock or substantially similar or related property, 
     or
       ``(ii) any stock of a corporation formed or availed of to 
     take positions in personal property which offset positions 
     taken by any shareholder.
       ``(B) Rule for application.--For purposes of determining 
     whether subsection (e) applies to any transaction with 
     respect to stock described in subparagraph (A)(ii), all 
     includible corporations of an affiliated group (within the 
     meaning of section 1504(a)) shall be treated as 1 
     taxpayer.''.
       (2) Conforming amendment.--Section 1258(d)(1) is amended by 
     striking ``; except that the term `personal property' shall 
     include stock''.
       (d) Holding period for dividend exclusion.--The last 
     sentence of section 246(c) is amended by inserting: ``, other 
     than a qualified covered call option to which section 1092(f) 
     applies'' before the period at the end.
       (e) Effective Date.--The amendments made by this section 
     shall apply to positions established on or after the date of 
     the enactment of this Act.

     SEC. 688. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF 
                   TAXABLE VACCINES.

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

     SEC. 689. ADDITION OF VACCINES AGAINST INFLUENZA TO LIST OF 
                   TAXABLE VACCINES.

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

     SEC. 690. EXTENSION OF IRS USER FEES.

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

     SEC. 691. COBRA FEES.

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

     SEC. 692. SAFE HARBOR FOR CHURCHES.

       (a) In General.--Section 501 is amended by redesignating 
     subsection (q) as subsection (r) and by inserting after 
     subsection (p) the following new subsection:
       ``(q) Safe Harbor for Churches.--
       ``(1) Statements by religious leaders as private 
     citizens.--An organization described in section 508(c)(1)(A) 
     (relating to churches) shall not fail to be treated as 
     organized and operated exclusively for a religious purpose, 
     or be treated as having participated in, or intervened in any 
     political campaign on behalf of (or in opposition to) any 
     candidate for public office, for purposes of subsection 
     (c)(3), or section 170(c)(2) (relating to charitable 
     contributions), 4955, or 4956 solely by reason of a statement 
     by a religious leader of such organization which is clearly 
     identified as a statement made as a private citizen and not 
     made on behalf of or in representation of such organization. 
     A statement shall not be treated as clearly identified for 
     purposes of this paragraph if such statement is made in an 
     official publication of such organization, at an official 
     function

[[Page 12801]]

     of such organization, or if such statement is paid for in 
     whole or part by such organization.
       ``(2) Unintentional violations.--An organization described 
     in section 508(c)(1)(A) (relating to churches) shall not fail 
     to be treated as organized and operated exclusively for a 
     religious purpose, or be treated as having participated in, 
     or intervened in any political campaign on behalf of (or in 
     opposition to) any candidate for public office, for purposes 
     of subsection (c)(3), or section 170(c)(2) (relating to 
     charitable contributions) unless such organization or any of 
     its religious leaders so participates or intervenes on more 
     than 3 separate occasions during any calendar year. This 
     paragraph shall not apply with respect to any such 
     participation or intervention which constitutes an 
     intentional disregard by such organization or any of its 
     religious leaders of the prohibition of such activity under 
     subsection (c)(3) or section 170(c)(2).
       ``(3) Cross reference.--

  ``For tax imposed on churches for impermissible activities, see 
section 4956.''.
       (b) Imposition of Tax on Impermissible Activities.--
       (1) In general.--Subchapter C of chapter 42 is amended by 
     inserting after section 4955 the following new section:

     ``SEC. 4956. TAX ON IMPERMISSIBLE ACTIVITIES BY CHURCHES.

       ``(a) Imposition of Tax.--There is hereby imposed on each 
     organization described in section 508(c)(1)(A) which is an 
     organization exempt from tax under section 501(a) by reason 
     of section 501(q)(2), a tax equal to--
       ``(1) the highest rate of tax specified by section 11(b), 
     multiplied by
       ``(2) the gross income of such organization for such 
     calendar year.
     The tax imposed by this subsection shall be paid by the 
     organization.
       ``(b) Reduction for Less Than 3 Violations.--In the case of 
     an organization described in subsection (a) which committed 
     not more than 2 acts of participation in, or intervention in 
     a political campaign on behalf of (or in opposition to) any 
     candidate for public office during such calendar year, the 
     amount taken into account under subsection (a)(2) shall be 
     the amount which would have been taken into account under 
     subsection (a)(2) (but for this subsection) divided by--
       ``(1) 52 in the case of one such act during such calendar 
     year, or
       ``(2) 2 in the case of 2 such acts during such calendar 
     year.
       ``(c) Coordination With Section 4955.--The tax imposed 
     under this section with respect to any act shall be reduced 
     by the amount of any tax imposed under section 4955 with 
     respect to such act.''.
       (2) Clerical amendments.--
       (A) The table of section for subchapter C of chapter 42 is 
     amended by adding at the end the following new item:

``Sec. 4956. Tax on impermissible activities by churches.''.

       (B) The heading for subchapter C of chapter 42 is amended 
     by striking ``Expenditures'' and inserting ``Activities''.
       (c) Reporting.--
       (1) Requirement.--Subsection (a) of section 6012 is amended 
     by adding at the end the following new paragraph:
       ``(10) Every organization described in section 508(c)(1)(A) 
     with respect to which tax is imposed under section 4956.''.
       (2) Form and manner.--Section 6033 is amended by 
     redesignating subsection (h) as subsection (i) and by 
     inserting after subsection (g) the following new subsection:
       ``(h) Returns Required by Churches Participating in Certain 
     Activities.--Any organization on which tax is imposed under 
     section 4956 shall file a return at such time, in such 
     manner, and including such information as the Secretary may 
     prescribe.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to acts occurring after the date of the enactment 
     of this Act.

              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

     SEC. 701. SHORT TITLE.

       This title may be cited as the ``Fair and Equitable Tobacco 
     Reform Act of 2004''.

     SEC. 702. EFFECTIVE DATE.

       This title and the amendments made by this title shall 
     apply beginning with the 2005 marketing year of each kind of 
     tobacco.

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

     SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM AND RELATED 
                   PROVISIONS.

       (a) Marketing Quotas.--Part I of subtitle B of title III of 
     the Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et 
     seq.) is repealed.
       (b) Processing.--Section 9(b) of the Agricultural 
     Adjustment Act (7 U.S.C. 609(b)), reenacted with amendments 
     by the Agricultural Marketing Agreement Act of 1937, is 
     amended--
       (1) in paragraph (2), by striking ``tobacco,''; and
       (2) in paragraph (6)(B)(i), by striking ``, or, in the case 
     of tobacco, is less than the fair exchange value by not more 
     than 10 per centum,''.
       (c) Declaration of Policy.--Section 2 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1282) is amended by striking 
     ``tobacco,''.
       (d) Definitions.--Section 301(b) of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1301(b)) is amended--
       (1) in paragraph (3)--
       (A) by striking subparagraph (C); and
       (B) by redesignating subparagraph (D) as subparagraph (C);
       (2) in paragraph (6)(A), by striking ``tobacco,'';
       (3) in paragraph (10)--
       (A) by striking subparagraph (B); and
       (B) by redesignating subparagraph (C) as subparagraph (B);
       (4) in paragraph (11)(B), by striking ``and tobacco'';
       (5) in paragraph (12), by striking ``tobacco,'';
       (6) in paragraph (14)--
       (A) in subparagraph (A), by striking ``(A)''; and
       (B) by striking subparagraphs (B), (C), and (D);
       (7) by striking paragraph (15);
       (8) in paragraph (16)--
       (A) by striking subparagraph (B); and
       (B) by redesignating subparagraph (C) as subparagraph (B);
       (9) by striking paragraph (17); and
       (10) by redesignating paragraph (16) as paragraph (15).
       (e) Parity Payments.--Section 303 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1303) is amended in the 
     first sentence by striking ``rice, or tobacco,'' and 
     inserting ``or rice,''.
       (f) Administrative Provisions.--Section 361 of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) is 
     amended by striking ``tobacco,''.
       (g) Adjustment of Quotas.--Section 371 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1371) is amended--
       (1) in the first sentence of subsection (a), by striking 
     ``rice, or tobacco'' and inserting ``or rice''; and
       (2) in the first sentence of subsection (b), by striking 
     ``rice, or tobacco'' and inserting ``or rice''.
       (h) Regulations.--Section 375 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1375) is amended--
       (1) in subsection (a), by striking ``peanuts, or tobacco'' 
     and inserting ``or peanuts''; and
       (2) by striking subsection (c).
       (i) Eminent Domain.--Section 378 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1378) is amended--
       (1) in the first sentence of subsection (c), by striking 
     ``cotton, and tobacco'' and inserting ``and cotton''; and
       (2) by striking subsections (d), (e), and (f).
       (j) Burley Tobacco Farm Reconstitution.--Section 379 of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is 
     amended--
       (1) in subsection (a)--
       (A) by striking ``(a)''; and
       (B) in paragraph (6), by striking ``, but this clause (6) 
     shall not be applicable in the case of burley tobacco''; and
       (2) by striking subsections (b) and (c).
       (k) Acreage-Poundage Quotas.--Section 4 of the Act of April 
     16, 1955 (Public Law 89-12; 7 U.S.C. 1314c note), is 
     repealed.
       (l) Burley Tobacco Acreage Allotments.--The Act of July 12, 
     1952 (7 U.S.C. 1315), is repealed.
       (m) Transfer of Allotments.--Section 703 of the Food and 
     Agriculture Act of 1965 (7 U.S.C. 1316) is repealed.
       (n) Advance Recourse Loans.--Section 13(a)(2)(B) of the 
     Food Security Improvements Act of 1986 (7 U.S.C. 1433c-
     1(a)(2)(B)) is amended by striking ``tobacco and''.
       (o) Tobacco Field Measurement.--Section 1112 of the Omnibus 
     Budget Reconciliation Act of 1987 (Public Law 100-203) is 
     amended by striking subsection (c).

     SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT PROGRAM AND 
                   RELATED PROVISIONS.

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

     SEC. 713. LIABILITY.

       The amendments made by this subtitle shall not affect the 
     liability of any person

[[Page 12802]]

     under any provision of law so amended with respect to any 
     crop of tobacco planted before the effective date of this 
     Act.

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

     SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER AND QUOTA 
                   HOLDER.

       In this subtitle:
       (1) Active tobacco producer.--The term ``active tobacco 
     producer'' means an owner, operator, landlord, tenant, or 
     sharecropper who--
       (A) shared in the risk of producing tobacco on a farm where 
     tobacco was produced or considered planted pursuant to a 
     tobacco farm marketing quota or farm acreage allotment 
     established under part I of subtitle B of title III of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et seq.) 
     for the 2004 marketing year; and
       (B) was actively engaged on that farm.
       (2) Considered planted.--The term ``considered planted'' 
     means tobacco that was planted, but failed to be produced as 
     a result of a natural disaster, as determined by the 
     Secretary.
       (3) Tobacco quota holder.--The term ``tobacco quota 
     holder'' means a person that was an owner of a farm, as of 
     July 1, 2004, for which a basic tobacco farm marketing quota 
     or farm acreage allotment for quota tobacco was established 
     for the 2004 tobacco marketing year.
       (4) Secretary.--The term ``Secretary'' means the Secretary 
     of Agriculture.

     SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS.

       (a) Payment Required.--The Secretary shall make payments to 
     each eligible tobacco quota holder for the termination of 
     tobacco marketing quotas and related price support under 
     subtitle A, which shall constitute full and fair compensation 
     for any losses relating to such termination.
       (b) Eligibility.--To be eligible to receive a payment under 
     this section, a person shall submit to the Secretary an 
     application containing such information as the Secretary may 
     require to demonstrate to the satisfaction of the Secretary 
     that the person satisfies the definition of tobacco quota 
     holder. The application shall be submitted within such time, 
     in such form, and in such manner as the Secretary may 
     require.
       (c) Individual Base Quota Level.--
       (1) In general.--The Secretary shall establish a base quota 
     level applicable to each eligible tobacco quota holder 
     identified under subsection (b).
       (2) Poundage quotas.--Subject to adjustment under 
     subsection (d), for each kind of tobacco for which the 
     marketing quota is expressed in pounds, the base quota level 
     for each tobacco quota holder shall be equal to the basic 
     tobacco marketing quota under the Agriculture Adjustment Act 
     of 1938 for the marketing year in effect on the date of the 
     enactment of this Act for quota tobacco on the farm owned by 
     the tobacco quota holder.
       (3) Marketing quotas other than poundage quotas.--Subject 
     to adjustment under subsection (d), for each kind of tobacco 
     for which there is marketing quota or allotment on an acreage 
     basis, the base quota level for each tobacco quota holder 
     shall be the amount equal to the product obtained by 
     multiplying--
       (A) the basic tobacco farm marketing quota or allotment for 
     the marketing year in effect on the date of the enactment of 
     this Act, as established by the Secretary for quota tobacco 
     on the farm owned by the tobacco quota holder; by
       (B) the average county production yield per acre for the 
     county in which the farm is located for the kind of tobacco 
     for that marketing year.
       (d) Treatment of Certain Contracts and Agreements.--
       (1) Effect of purchase contract.--If there was an agreement 
     for the purchase of all or part of a farm described in 
     subsection (c) as of the date of the enactment of this Act, 
     and the parties to the sale are unable to agree to the 
     disposition of eligibility for payments under this section, 
     the Secretary, taking into account any transfer of quota that 
     has been agreed to, shall provide for the equitable division 
     of the payments among the parties by adjusting the 
     determination of who is the tobacco quota holder with respect 
     to particular pounds of the quota.
       (2) Effect of agreement for permanent quota transfer.--If 
     the Secretary determines that there was in existence, as of 
     the day before the date of the enactment of this Act, an 
     agreement for the permanent transfer of quota, but that the 
     transfer was not completed by that date, the Secretary shall 
     consider the tobacco quota holder to be the party to the 
     agreement that, as of that date, was the owner of the farm to 
     which the quota was to be transferred.
       (e) Total Payment Amounts Based on 2002 Marketing Year.--
       (1) Calculation of annual payment amount.--During fiscal 
     years 2005 through 2009, the Secretary shall make payments to 
     all eligible tobacco quota holders identified under 
     subsection (b) in an annual amount equal to the product 
     obtained by multiplying, for each kind of tobacco--
       (A) $1.40 per pound; by
       (B) the total national basic marketing quota established 
     under the Agriculture Adjustment Act of 1938 for the 2002 
     marketing year for that kind of tobacco.
       (2) Marketing quotas other than poundage quotas.--For each 
     kind of tobacco for which there is a marketing quota or 
     allotment on an acreage basis, the Secretary shall convert 
     the tobacco farm marketing quotas or allotments established 
     under the Agriculture Adjustment Act of 1938 for the 2002 
     marketing year for that kind of tobacco as the Secretary 
     considers appropriate.
       (f) Individual Payment Amounts.--The annual payment amount 
     for each eligible tobacco quota holder with respect to a kind 
     of tobacco under this section shall bear the same ratio to 
     the amount determined by the Secretary under subsection (e) 
     with respect to that kind of tobacco as the individual base 
     quota level of that eligible tobacco quota holder under 
     subsection (c) with respect to that kind of tobacco bears to 
     the total base quota levels of all eligible tobacco quota 
     holders with respect to that kind of tobacco.
       (g) Death of Tobacco Quota Holder.--If a tobacco quota 
     holder who is entitled to payments under this section dies 
     and is survived by a spouse or one or more dependents, the 
     right to receive the payments shall transfer to the surviving 
     spouse or, if there is no surviving spouse, to the estate of 
     the tobacco quota holder.

     SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS OF QUOTA 
                   TOBACCO.

       (a) Transition Payments Required.--The Secretary shall make 
     transition payments under this section to eligible active 
     producers of quota tobacco.
       (b) Eligibility.--To be eligible to receive a transition 
     payment under this section, a person shall submit to the 
     Secretary an application containing such information as the 
     Secretary may require to demonstrate to the satisfaction of 
     the Secretary that the person satisfies the definition of 
     active producer of quota tobacco. The application shall be 
     submitted within such time, in such form, and in such manner 
     as the Secretary may require.
       (c) Current Production Base.--The Secretary shall establish 
     a production base applicable to each eligible active producer 
     of quota tobacco identified under subsection (b). A 
     producer's production base shall be equal to the quantity, in 
     pounds, of quota tobacco subject to the basic marketing quota 
     marketed or considered planted by the producer under the 
     Agriculture Adjustment Act of 1938 for the marketing year in 
     effect on the date of the enactment of this Act.
       (d) Total Payment Amounts Based on 2002 Marketing Year.--
       (1) Calculation of annual payment amount.--During fiscal 
     years 2005 through 2009, the Secretary shall make payments to 
     all eligible active producers of quota tobacco identified 
     under subsection (b) in an annual amount equal to the product 
     obtained by multiplying, for each kind of tobacco--
       (A) $0.60 per pound; by
       (B) the total national effective marketing quota 
     established under the Agriculture Adjustment Act of 1938 for 
     the 2002 marketing year for that kind of tobacco.
       (2) Marketing quotas other than poundage quotas.--For each 
     kind of tobacco for which there is a marketing quota or 
     allotment on an acreage basis, the Secretary shall convert 
     the tobacco farm marketing quotas or allotments established 
     under the Agriculture Adjustment Act of 1938 for the 2002 
     marketing year for that kind of tobacco to a poundage basis 
     before executing the mathematical equation specified in 
     paragraph (1).
       (e) Individual Payment Amounts.--The annual payment amount 
     for each eligible active producer of quota tobacco identified 
     under subsection (b) with respect to a kind of tobacco under 
     this section shall bear the same ratio to the amount 
     determined by the Secretary under subsection (d) with respect 
     to that kind of tobacco as the individual production base of 
     that eligible active producer under subsection (c) with 
     respect to that kind of tobacco bears to the total production 
     bases determined under that subsection for all eligible 
     active producers of that kind of tobacco.
       (f) Death of Tobacco Producer.--If a tobacco producer who 
     is entitled to payments under this section dies and is 
     survived by a spouse or one or more dependents, the right to 
     receive the payments shall transfer to the surviving spouse 
     or, if there is no surviving spouse, to the estate of the 
     tobacco producer.

     SEC. 724. RESOLUTION OF DISPUTES.

       Any dispute regarding the eligibility of a person to 
     receive a payment under this subtitle, or the amount of the 
     payment, shall be resolved by the county committee 
     established under section 8 of the Soil Conservation and 
     Domestic Allotment Act (16 U.S.C. 590h) for the county or 
     other area in which the farming operation of the person is 
     located.

     SEC. 725. SOURCE OF FUNDS FOR PAYMENTS.

       There is hereby appropriated to the Secretary, from amounts 
     in the general fund of the Treasury, such amounts as the 
     Secretary needs in order to make the payments required by 
     sections 722 and 723, except that such amounts shall not 
     exceed the lesser of--
       (1) amounts received in the Treasury under chapter 52 of 
     the Internal Revenue Code of 1986 (relating to tobacco 
     products and cigarette papers and tubes), or

[[Page 12803]]

       (2) $9,600,000,000.

  The SPEAKER pro tempore. The amendment in the nature of a substitute 
printed in the bill, modified by the amendment printed in House report 
108-549, is adopted.
  The text of the amendment in the nature of a substitute, as modified, 
is as follows:

                               H.R. 4520

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

     SECTION 1. SHORT TITLE; ETC.

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

Sec. 1. Short title; etc.

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS

Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Reduced corporate income tax rate for domestic production 
              activities income.
Sec. 103. Reduced corporate income tax rate for small corporations.

    TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL 
                        BUSINESSES, AND FARMERS

                  Subtitle A--Small Business Expensing

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

                        Subtitle B--Depreciation

Sec. 211. Recovery period for depreciation of certain leasehold 
              improvements and restaurant property.
Sec. 212. Modification of depreciation allowance for aircraft.
Sec. 213. Modification of placed in service rule for bonus depreciation 
              property.

          Subtitle C--S Corporation Reform and Simplification

Sec. 221. Members of family treated as 1 shareholder.
Sec. 222. Increase in number of eligible shareholders to 100.
Sec. 223. Expansion of bank S corporation eligible shareholders to 
              include IRAs.
Sec. 224. Disregard of unexercised powers of appointment in determining 
              potential current beneficiaries of ESBT.
Sec. 225. Transfer of suspended losses incident to divorce, etc.
Sec. 226. Use of passive activity loss and at-risk amounts by qualified 
              subchapter S trust income beneficiaries.
Sec. 227. Exclusion of investment securities income from passive income 
              test for bank S corporations.
Sec. 228. Treatment of bank director shares.
Sec. 229. Relief from inadvertently invalid qualified subchapter S 
              subsidiary elections and terminations.
Sec. 230. Information returns for qualified subchapter S subsidiaries.
Sec. 231. Repayment of loans for qualifying employer securities.

               Subtitle D--Alternative Minimum Tax Relief

Sec. 241. Foreign tax credit under alternative minimum tax.
Sec. 242. Expansion of exemption from alternative minimum tax for small 
              corporations.
Sec. 243. Income averaging for farmers not to increase alternative 
              minimum tax.

    Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.

Sec. 251. Reduced rates of tax on gasohol replaced with excise tax 
              credit; repeal of other alcohol-based fuel incentives; 
              etc.
Sec. 252. Alcohol fuel subsidies borne by general fund.

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

Sec. 261. Exclusion of incentive stock options and employee stock 
              purchase plan stock options from wages.

  Subtitle G--Incentives to Reinvest Foreign Earnings in United States

Sec. 271. Incentives to reinvest foreign earnings in United States.

                 Subtitle H--Other Incentive Provisions

Sec. 281. Special rules for livestock sold on account of weather-
              related conditions.
Sec. 282. Payment of dividends on stock of cooperatives without 
              reducing patronage dividends.
Sec. 283. Capital gain treatment under section 631(b) to apply to 
              outright sales by landowners.
Sec. 284. Distributions from publicly traded partnerships treated as 
              qualifying income of regulated investment companies.
Sec. 285. Improvements related to real estate investment trusts.
Sec. 286. Treatment of certain dividends of regulated investment 
              companies.
Sec. 287. Taxation of certain settlement funds.
Sec. 288. Expansion of human clinical trials qualifying for orphan drug 
              credit.
Sec. 289. Simplification of excise tax imposed on bows and arrows.
Sec. 290. Repeal of excise tax on fishing tackle boxes.
Sec. 291. Sonar devices suitable for finding fish.
Sec. 292. Income tax credit to distilled spirits wholesalers for cost 
              of carrying Federal excise taxes on bottled distilled 
              spirits.
Sec. 293. Suspension of occupational taxes relating to distilled 
              spirits, wine, and beer.
Sec. 294. Modification of unrelated business income limitation on 
              investment in certain small business investment 
              companies.
Sec. 295. Election to determine taxable income from certain 
              international shipping activities using per ton rate.
Sec. 296. Charitable contribution deduction for certain expenses 
              incurred in support of Native Alaskan subsistence 
              whaling.

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

Sec. 301. Interest expense allocation rules.
Sec. 302. Recharacterization of overall domestic loss.
Sec. 303. Reduction to 2 foreign tax credit baskets.
Sec. 304. Look-thru rules to apply to dividends from noncontrolled 
              section 902 corporations.
Sec. 305. Attribution of stock ownership through partnerships to apply 
              in determining section 902 and 960 credits.
Sec. 306. Clarification of treatment of certain transfers of intangible 
              property.
Sec. 307. United States property not to include certain assets of 
              controlled foreign corporation.
Sec. 308. Election not to use average exchange rate for foreign tax 
              paid other than in functional currency.
Sec. 309. Repeal of withholding tax on dividends from certain foreign 
              corporations.
Sec. 310. Provide equal treatment for interest paid by foreign 
              partnerships and foreign corporations.
Sec. 311. Look-thru treatment of payments between related controlled 
              foreign corporations under foreign personal holding 
              company income rules.
Sec. 312. Look-thru treatment for sales of partnership interests.
Sec. 313. Repeal of foreign personal holding company rules and foreign 
              investment company rules.
Sec. 314. Determination of foreign personal holding company income with 
              respect to transactions in commodities.
Sec. 315. Modifications to treatment of aircraft leasing and shipping 
              income.
Sec. 316. Modification of exceptions under subpart F for active 
              financing.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

Sec. 401. Allowance of nonrefundable personal credits against regular 
              and minimum tax liability.
Sec. 402. Extension of research credit.
Sec. 403. Extension of credit for electricity produced from certain 
              renewable resources.
Sec. 404. Indian employment tax credit.
Sec. 405. Work opportunity credit.
Sec. 406. Welfare-to-work credit.
Sec. 407. Certain expenses of elementary and secondary school teachers.
Sec. 408. Extension of accelerated depreciation benefit for property on 
              Indian reservations.
Sec. 409. Charitable contributions of computer technology and equipment 
              used for educational purposes.
Sec. 410. Expensing of environmental remediation costs.
Sec. 411. Availability of medical savings accounts.
Sec. 412. Taxable income limit on percentage depletion for oil and 
              natural gas produced from marginal properties.
Sec. 413. Qualified zone academy bonds.
Sec. 414. District of Columbia.
Sec. 415. Extension of certain New York Liberty Zone bond financing.
Sec. 416. Disclosures relating to terrorist activities.
Sec. 417. Disclosure of return information relating to student loans.
Sec. 418. Cover over of tax on distilled spirits.
Sec. 419. Joint review of strategic plans and budget for the Internal 
              Revenue Service.
Sec. 420. Parity in the application of certain limits to mental health 
              benefits.
Sec. 421. Combined employment tax reporting project.
Sec. 422. Clean-fuel vehicles.

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

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

                      TITLE VI--REVENUE PROVISIONS

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

Sec. 601. Tax treatment of expatriated entities and their foreign 
              parents.

[[Page 12804]]

Sec. 602. Excise tax on stock compensation of insiders in expatriated 
              corporations.
Sec. 603. Reinsurance of United States risks in foreign jurisdictions.
Sec. 604. Revision of tax rules on expatriation of individuals.
Sec. 605. Reporting of taxable mergers and acquisitions.
Sec. 606. Studies.

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

Sec. 611. Penalty for failing to disclose reportable transactions.
Sec. 612. Accuracy-related penalty for listed transactions, other 
              reportable transactions having a significant tax 
              avoidance purpose, etc.
Sec. 613. Tax shelter exception to confidentiality privileges relating 
              to taxpayer communications.
Sec. 614. Statute of limitations for taxable years for which required 
              listed transactions not reported.
Sec. 615. Disclosure of reportable transactions.
Sec. 616. Failure to furnish information regarding reportable 
              transactions.
Sec. 617. Modification of penalty for failure to maintain lists of 
              investors.
Sec. 618. Penalty on promoters of tax shelters.
Sec. 619. Modifications of substantial understatement penalty for 
              nonreportable transactions.
Sec. 620. Modification of actions to enjoin certain conduct related to 
              tax shelters and reportable transactions.
Sec. 621. Penalty on failure to report interests in foreign financial 
              accounts.
Sec. 622. Regulation of individuals practicing before the Department of 
              the Treasury.

                       Part II--Other Provisions

Sec. 631. Treatment of stripped interests in bond and preferred stock 
              funds, etc.
Sec. 632. Minimum holding period for foreign tax credit on withholding 
              taxes on income other than dividends.
Sec. 633. Disallowance of certain partnership loss transfers.
Sec. 634. No reduction of basis under section 734 in stock held by 
              partnership in corporate partner.
Sec. 635. Repeal of special rules for FASITs.
Sec. 636. Limitation on transfer of built-in losses on REMIC residuals.
Sec. 637. Clarification of banking business for purposes of determining 
              investment of earnings in United States property.
Sec. 638. Alternative tax for certain small insurance companies.
Sec. 639. Denial of deduction for interest on underpayments 
              attributable to nondisclosed reportable transactions.
Sec. 640. Clarification of rules for payment of estimated tax for 
              certain deemed asset sales.
Sec. 641. Recognition of gain from the sale of a principal residence 
              acquired in a like-kind exchange within 5 years of sale.
Sec. 642. Prevention of mismatching of interest and original issue 
              discount deductions and income inclusions in transactions 
              with related foreign persons.
Sec. 643. Exclusion from gross income for interest on overpayments of 
              income tax by individuals.
Sec. 644. Deposits made to suspend running of interest on potential 
              underpayments.
Sec. 645. Partial payment of tax liability in installment agreements.
Sec. 646. Affirmation of consolidated return regulation authority.

                           Part III--Leasing

Sec. 647. Reform of tax treatment of certain leasing arrangements.
Sec. 648. Limitation on deductions allocable to property used by 
              governments or other tax-exempt entities.
Sec. 649. Effective date.

               Subtitle C--Reduction of Fuel Tax Evasion

Sec. 651. Exemption from certain excise taxes for mobile machinery.
Sec. 652. Taxation of aviation-grade kerosene.
Sec. 653. Dye injection equipment.
Sec. 654. Authority to inspect on-site records.
Sec. 655. Registration of pipeline or vessel operators required for 
              exemption of bulk transfers to registered terminals or 
              refineries.
Sec. 656. Display of registration.
Sec. 657. Penalties for failure to register and failure to report.
Sec. 658. Collection from customs bond where importer not registered.
Sec. 659. Modifications of tax on use of certain vehicles.
Sec. 660. Modification of ultimate vendor refund claims with respect to 
              farming.
Sec. 661. Dedication of revenues from certain penalties to the Highway 
              Trust Fund.
Sec. 662. Taxable fuel refunds for certain ultimate vendors.
Sec. 663. Two-party exchanges.
Sec. 664. Simplification of tax on tires.

          Subtitle D--Nonqualified Deferred Compensation Plans

Sec. 671. Treatment of nonqualified deferred compensation plans.

                  Subtitle E--Other Revenue Provisions

Sec. 681. Qualified tax collection contracts.
Sec. 682. Treatment of charitable contributions of patents and similar 
              property.
Sec. 683. Increased reporting for noncash charitable contributions.
Sec. 684. Donations of motor vehicles, boats, and aircraft.
Sec. 685. Extension of amortization of intangibles to sports 
              franchises.
Sec. 686. Modification of continuing levy on payments to Federal 
              venders.
Sec. 687. Modification of straddle rules.
Sec. 688. Addition of vaccines against hepatitis A to list of taxable 
              vaccines.
Sec. 689. Addition of vaccines against influenza to list of taxable 
              vaccines.
Sec. 690. Extension of IRS user fees.
Sec. 691. COBRA fees.

              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

Sec. 701. Short title.
Sec. 702. Effective date.

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

Sec. 711. Termination of tobacco quota program and related provisions.
Sec. 712. Termination of tobacco price support program and related 
              provisions.
Sec. 713. Continuation of Liability and No Net Loss Assessments to 
              Prevent Losses on Price Support Loans.

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

Sec. 721. Definitions of active tobacco producer and quota holder.
Sec. 722. Payments to tobacco quota holders.
Sec. 723. Transition payments for active producers of quota tobacco.
Sec. 724. Resolution of disputes.
Sec. 725. Source of funds for payments.

                      TITLE VIII--TRADE PROVISIONS

Sec. 801. Ceiling fans.
Sec. 802. Certain steam generators, and certain reactor vessel heads, 
              used in nuclear facilities.

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS

     SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

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

[[Page 12805]]

     transaction in the ordinary course of a trade or business 
     which occurs pursuant to a binding contract--
       (1) which is between the taxpayer and a person who is not a 
     related person (as defined in section 943(b)(3) of such Code, 
     as in effect on the day before the date of the enactment of 
     this Act), and
       (2) which is in effect on January 14, 2002, and at all 
     times thereafter.
     For purposes of this subsection, a binding contract shall 
     include a purchase option, renewal option, or replacement 
     option which is included in such contract and which is 
     enforceable against the seller or lessor.

     SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR DOMESTIC 
                   PRODUCTION ACTIVITIES INCOME.

       (a) Limitation on Tax on Qualified Production Activities 
     Income.--Section 11 is amended by redesignating subsections 
     (c) and (d) as subsections (d) and (e), respectively, and by 
     inserting after subsection (b) the following new subsection:
       ``(c) Limitation on Tax on Qualified Production Activities 
     Income.--
       ``(1) In general.--If a corporation has qualified 
     production activities income for any taxable year, the tax 
     imposed by this section shall not exceed the sum of--
       ``(A) a tax computed at the rates and in the manner as if 
     this subsection had not been enacted on the taxable income 
     reduced by the amount of qualified production activities 
     income, plus
       ``(B) a tax equal to 32 percent (34 percent in the case of 
     taxable years beginning before January 1, 2007) of the 
     qualified production activities income (or, if less, taxable 
     income).
       ``(2) Qualified production activities income.--
       ``(A) In general.--The term `qualified production 
     activities income' for any taxable year means an amount equal 
     to the excess (if any) of--
       ``(i) the taxpayer's domestic production gross receipts for 
     such taxable year, over
       ``(ii) the sum of--

       ``(I) the cost of goods sold that are allocable to such 
     receipts,
       ``(II) other deductions, expenses, or losses directly 
     allocable to such receipts, and
       ``(III) a ratable portion of other deductions, expenses, 
     and losses that are not directly allocable to such receipts 
     or another class of income.

       ``(B) Allocation method.--The Secretary shall prescribe 
     rules for the proper allocation of items of income, 
     deduction, expense, and loss for purposes of determining 
     income attributable to domestic production activities.
       ``(3) Domestic production gross receipts.--For purposes of 
     this subsection, the term `domestic production gross 
     receipts' means the gross receipts of the taxpayer which are 
     derived from--
       ``(A) any lease, rental, license, sale, exchange, or other 
     disposition of--
       ``(i) qualifying production property which was 
     manufactured, produced, grown, or extracted in whole or in 
     significant part by the taxpayer within the United States, or
       ``(ii) any qualified film produced by the taxpayer, or
       ``(B) construction, engineering, or architectural services 
     performed in the United States for construction projects in 
     the United States.
       ``(4) Qualifying production property.--For purposes of this 
     subsection, the term `qualifying production property' means--
       ``(A) tangible personal property,
       ``(B) any computer software, and
       ``(C) any property described in section 168(f)(4).
       ``(5) Qualified film.--For purposes of this subsection--
       ``(A) In general.--The term `qualified film' means any 
     property described in section 168(f)(3) if not less than 50 
     percent of the total compensation relating to the production 
     of such property is compensation for services performed in 
     the United States by actors, production personnel, directors, 
     and producers.
       ``(B) Exception.--Such term does not include property with 
     respect to which records are required to be maintained under 
     section 2257 of title 18, United States Code.
       ``(6) Related persons.--For purposes of this subsection--
       ``(A) In general.--The term `domestic production gross 
     receipts' shall not include any gross receipts of the 
     taxpayer derived from property leased, licensed, or rented by 
     the taxpayer for use by any related person.
       ``(B) Related person.--For purposes of subparagraph (A), a 
     person shall be treated as related to another person if such 
     persons are treated as a single employer under subsection (a) 
     or (b) of section 52 or subsection (m) or (o) of section 414, 
     except that determinations under subsections (a) and (b) of 
     section 52 shall be made without regard to section 
     1563(b).''.
       (b) Special Rule Relating to Election To Treat Cutting of 
     Timber as a Sale or Exchange.--In the case of a corporation, 
     any election under section 631(a) of the Internal Revenue 
     Code of 1986 made for a taxable year ending on or before the 
     date of the enactment of this Act may be revoked by the 
     taxpayer for any taxable year ending after such date. For 
     purposes of determining whether such taxpayer may make a 
     further election under such section, such election (and any 
     revocation under this section) shall not be taken into 
     account.
       (c) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR SMALL 
                   CORPORATIONS.

       (a) In General.--Subsection (b) of section 11 (relating to 
     tax imposed on corporations) is amended by redesignating 
     paragraph (2) as paragraph (6) and by striking paragraph (1) 
     and inserting the following new paragraphs:
       ``(1) For taxable years beginning after 2012.--In the case 
     of taxable years beginning after 2012, the amount of the tax 
     imposed by subsection (a) shall be determined in accordance 
     with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 32% of the excess over $75,000...........................
$6,389,750, plus 35% of the excess over $20,000,000....................
       ``(2) For taxable years beginning in 2011 or 2012.--In the 
     case of taxable years beginning in 2011 or 2012, the amount 
     of the tax imposed by subsection (a) shall be determined in 
     accordance with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 32% of the excess over $75,000...........................
$1,589,750, plus 34% of the excess over $5,000,000.....................
$3,289,750, plus 35% of the excess over $10,000,000....................
       ``(3) For taxable years beginning in 2008, 2009, or 2010.--
     In the case of taxable years beginning in 2008, 2009, or 
     2010, the amount of the tax imposed by subsection (a) shall 
     be determined in accordance with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 32% of the excess over $75,000...........................
$309,750, plus 34% of the excess over $1,000,000.......................
$3,369,750, plus 35% of the excess over $10,000,000....................
       ``(4) For taxable years beginning in 2005, 2006, or 2007.--
     In the case of taxable years beginning in 2005, 2006, or 
     2007, the amount of the tax imposed by subsection (a) shall 
     be determined in accordance with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 33% of the excess over $75,000...........................
$319,000, plus 34% of the excess over $1,000,000.......................
$3,379,000, plus 35% of the excess over $10,000,000....................
       ``(5) Phaseout of lower rates for certain taxpayers.--
       ``(A) General rule for years before 2013.--
       ``(i) In general.--In the case of taxable years beginning 
     before 2013 with respect to a corporation which has taxable 
     income in excess of the applicable amount for any taxable 
     year, the amount of tax determined under paragraph (1), (2), 
     (3) or (4) for such taxable year shall be increased by the 
     lesser of (I) 5 percent of such excess, or (II) the maximum 
     increase amount.
       ``(ii) Maximum increase amount.--For purposes of clause 
     (i)--

------------------------------------------------------------------------
                                                           The maximum
   ``In the case of any taxable year     The applicable  increase amount
           beginning during:               amount is:          is:
------------------------------------------------------------------------
2005, 2006, or 2007...................     $1,000,000        $21,000
2008, 2009, or 2010...................     $1,000,000        $30,250
2011 or 2012..........................     $5,000,000       $110,250.
------------------------------------------------------------------------

       ``(B) Higher income corporations.--In the case of a 
     corporation which has taxable income in excess of $20,000,000 
     ($15,000,000 in the case of taxable years beginning before 
     2013), the amount of the tax determined under the foregoing 
     provisions of this subsection shall be increased by an 
     additional amount equal to the lesser of (i) 3 percent of 
     such excess, or (ii) $610,250 ($100,000 in the case of 
     taxable years beginning before 2013).''.
       (b) Conforming Amendments.--
       (1) Section 904(b)(3)(D)(ii) is amended to read as follows:
       ``(ii) in the case of a corporation, section 1201(a) 
     applies to such taxable year.''.
       (2) Section 1201(a) is amended by striking ``the last 2 
     sentences of section 11(b)(1)'' and inserting ``section 
     11(b)(5)''.
       (3) Section 1561(a) is amended--
       (A) by striking ``the last 2 sentences of section 
     11(b)(1)'' and inserting ``section 11(b)(5)'', and
       (B) by striking ``such last 2 sentences'' and inserting 
     ``section 11(b)(5)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

    TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL 
                        BUSINESSES, AND FARMERS

                  Subtitle A--Small Business Expensing

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

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

                        Subtitle B--Depreciation

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

       (a) 15-Year Recovery Period.--Subparagraph (E) of section 
     168(e)(3) (relating to classification of certain property) is 
     amended by

[[Page 12806]]

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

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

     SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE FOR 
                   AIRCRAFT.

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

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

       ``(iv) which has--

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

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

     SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE FOR BONUS 
                   DEPRECIATION PROPERTY.

       (a) In General.--Section 168(k)(2)(D) (relating to special 
     rules) is amended by adding at the end the following new 
     clause:
       ``(iii) Syndication.--For purposes of subparagraph (A)(ii), 
     if--

       ``(I) property is originally placed in service after 
     September 10, 2001, by the lessor of such property,
       ``(II) such property is sold by such lessor or any 
     subsequent purchaser within 3 months after the date so placed 
     in service (or, in the case of multiple units of property 
     subject to the same lease, within 3 months after the date the 
     final unit is placed in service, so long as the period 
     between the time the first unit is placed in service and the 
     time the last unit is placed in service does not exceed 12 
     months), and
       ``(III) the user of such property after the last sale 
     during such 3-month period remains the same as when such 
     property was originally placed in service,

     such property shall be treated as originally placed in 
     service not earlier than the date of such last sale, so long 
     as no previous owner of such property elects the application 
     of this subsection with respect to such property.''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 101 of the Job Creation and Worker Assistance Act of 
     2002; except that the parenthetical material in section 
     168(k)(2)(D)(iii)(II) of the Internal Revenue Code of 1986, 
     as added by this section, shall apply to property sold after 
     June 4, 2004.

          Subtitle C--S Corporation Reform and Simplification

     SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

       (a) In General.--Paragraph (1) of section 1361(c) (relating 
     to special rules for applying subsection (b)) is amended to 
     read as follows:
       ``(1) Members of family treated as 1 shareholder.--
       ``(A) In general.--For purpose of subsection (b)(1)(A)--
       ``(i) except as provided in clause (ii), a husband and wife 
     (and their estates) shall be treated as 1 shareholder, and
       ``(ii) in the case of a family with respect to which an 
     election is in effect under subparagraph (D), all members of 
     the family shall be treated as 1 shareholder.
       ``(B) Members of the family.--For purpose of subparagraph 
     (A)(ii)--
       ``(i) In general.--The term `members of the family' means 
     the common ancestor, lineal descendants of the common 
     ancestor, and the spouses (or former spouses) of such lineal 
     descendants or common ancestor.
       ``(ii) Common Ancestor.--For purposes of this paragraph, an 
     individual shall not be considered a common ancestor if, as 
     of the later of the effective date of this paragraph or the 
     time the election under section 1362(a) is made, the 
     individual is more than 3 generations removed from the 
     youngest generation of shareholders who would (but for this 
     clause) be members of the family. For purposes of the 
     preceding sentence, a spouse (or former spouse) shall be 
     treated as being of the same generation as the individual to 
     which such spouse is (or was) married.
       ``(C) Effect of adoption, etc.--In determining whether any 
     relationship specified in subparagraph (B) exists, the rules 
     of section 152(b)(2) shall apply.
       ``(D) Election.--An election under subparagraph (A)(ii)--
       ``(i) may, except as otherwise provided in regulations 
     prescribed by the Secretary, be made by any member of the 
     family, and
       ``(ii) shall remain in effect until terminated as provided 
     in regulations prescribed by the Secretary.''.
       (b) Relief From Inadvertent Invalid Election or 
     Termination.--Section 1362(f) (relating to inadvertent 
     invalid elections or terminations), as amended by section 
     229, is amended--
       (1) by inserting ``or section 1361(c)(1)(A)(ii)'' after 
     ``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
       (2) by inserting ``or section 1361(c)(1)(D)(iii)'' after 
     ``section 1361(b)(3)(C),'' in paragraph (1)(B).
       (c) Effective Dates.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2004.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to elections and terminations made after December 
     31, 2004.

     SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

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

[[Page 12807]]



     SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE 
                   SHAREHOLDERS TO INCLUDE IRAS.

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

     SEC. 224. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN 
                   DETERMINING POTENTIAL CURRENT BENEFICIARIES OF 
                   ESBT.

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

     SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE, 
                   ETC.

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

     SEC. 226. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY 
                   QUALIFIED SUBCHAPTER S TRUST INCOME 
                   BENEFICIARIES.

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

     SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM 
                   PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

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

     SEC. 228. TREATMENT OF BANK DIRECTOR SHARES.

       (a) In General.--Section 1361 (defining S corporation) is 
     amended by adding at the end the following new subsection:
       ``(f) Restricted Bank Director Stock.--
       ``(1) In general.--Restricted bank director stock shall not 
     be taken into account as outstanding stock of the S 
     corporation in applying this subchapter (other than section 
     1368(f)).
       ``(2) Restricted bank director stock.--For purposes of this 
     subsection, the term `restricted bank director stock' means 
     stock in a bank (as defined in section 581), a bank holding 
     company (within the meaning of section 2(a) of the Bank 
     Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a 
     financial holding company (within the meaning of section 2(p) 
     of such Act), registered with the Federal Reserve System, if 
     such stock--
       ``(A) is required to be held by an individual under 
     applicable Federal or State law in order to permit such 
     individual to serve as a director, and
       ``(B) is subject to an agreement with such bank or company 
     (or a corporation which controls (within the meaning of 
     section 368(c)) such bank or company) pursuant to which the 
     holder is required to sell back such stock (at the same price 
     as the individual acquired such stock) upon ceasing to hold 
     the office of director.
       ``(3) Cross reference.--

  ``For treatment of certain distributions with respect to restricted 
bank director stock, see section 1368(f).''.
       (b) Distributions.--Section 1368 (relating to 
     distributions) is amended by adding at the end the following 
     new subsection:
       ``(f) Restricted Bank Director Stock.--If a director 
     receives a distribution (not in part or full payment in 
     exchange for stock) from an S corporation with respect to any 
     restricted bank director stock (as defined in section 
     1361(f)), the amount of such distribution--
       ``(1) shall be includible in gross income of the director, 
     and
       ``(2) shall be deductible by the corporation for the 
     taxable year of such corporation in which or with which ends 
     the taxable year in which such amount is included in the 
     gross income of the director.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALIFIED 
                   SUBCHAPTER S SUBSIDIARY ELECTIONS AND 
                   TERMINATIONS.

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

     SEC. 230. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S 
                   SUBSIDIARIES.

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

     SEC. 231. REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER 
                   SECURITIES.

       (a) In General.--Subsection (f) of section 4975 (relating 
     to other definitions and special rules) is amended by adding 
     at the end the following new paragraph:

[[Page 12808]]

       ``(7) S corporation repayment of loans for qualifying 
     employer securities.--A plan shall not be treated as 
     violating the requirements of section 401 or 409 or 
     subsection (e)(7), or as engaging in a prohibited transaction 
     for purposes of subsection (d)(3), merely by reason of any 
     distribution (as described in section 1368(a)) with respect 
     to S corporation stock that constitutes qualifying employer 
     securities, which in accordance with the plan provisions is 
     used to make payments on a loan described in subsection 
     (d)(3) the proceeds of which were used to acquire such 
     qualifying employer securities (whether or not allocated to 
     participants). The preceding sentence shall not apply in the 
     case of a distribution which is paid with respect to any 
     employer security which is allocated to a participant unless 
     the plan provides that employer securities with a fair market 
     value of not less than the amount of such distribution are 
     allocated to such participant for the year which (but for the 
     preceding sentence) such distribution would have been 
     allocated to such participant.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions with respect to S corporation 
     stock made after December 31, 2004.

               Subtitle D--Alternative Minimum Tax Relief

     SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

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

     SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE MINIMUM TAX 
                   FOR SMALL CORPORATIONS.

       (a) In General.--Subparagraphs (A) and (B) of section 
     55(e)(1) are each amended by striking ``$7,500,000'' each 
     place it appears and inserting ``$20,000,000''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO INCREASE 
                   ALTERNATIVE MINIMUM TAX.

       (a) In General.--Subsection (c) of section 55 (defining 
     regular tax) is amended by redesignating paragraph (2) as 
     paragraph (3) and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Coordination with income averaging for farmers.--
     Solely for purposes of this section, section 1301 (relating 
     to averaging of farm income) shall not apply in computing the 
     regular tax liability.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

    Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.

     SEC. 251. REDUCED RATES OF TAX ON GASOHOL REPLACED WITH 
                   EXCISE TAX CREDIT; REPEAL OF OTHER ALCOHOL-
                   BASED FUEL INCENTIVES; ETC.

       (a) Excise Tax Credit for Alcohol Fuel Mixtures.--
       (1) In general.--Subsection (f) of section 6427 is amended 
     to read as follows:
       ``(f) Alcohol Fuel Mixtures.--
       ``(1) In general.--The amount of credit which would (but 
     for section 40(c)) be determined under section 40(a)(1) for 
     any period--
       ``(A) shall, with respect to taxable events occurring 
     during such period, be treated--
       ``(i) as a payment of the taxpayer's liability for tax 
     imposed by section 4081, and
       ``(ii) as received at the time of the taxable event, and
       ``(B) to the extent such amount of credit exceeds such 
     liability for such period, shall (except as provided in 
     subsection (k)) be paid subject to subsection (i)(3) by the 
     Secretary without interest.
       ``(2) Special rules.--
       ``(A) Only certain alcohol taken into account.--For 
     purposes of paragraph (1), section 40 shall be applied--
       ``(i) by not taking into account alcohol with a proof of 
     less than 190, and
       ``(ii) by treating as alcohol the alcohol gallon equivalent 
     of ethyl tertiary butyl ether or other ethers produced from 
     such alcohol.
       ``(B) Treatment of refiners.--For purposes of paragraph 
     (1), in the case of a mixture--
       ``(i) the alcohol in which is described in subparagraph 
     (A)(ii), and
       ``(ii) which is produced by any person at a refinery prior 
     to any taxable event,
     section 40 shall be applied by treating such person as having 
     sold such mixture at the time of its removal from the 
     refinery (and only at such time) to another person for use as 
     a fuel.
       ``(3) Mixtures not used as fuel.--Rules similar to the 
     rules of subparagraphs (A) and (D) of section 40(d)(3) shall 
     apply for purposes of this subsection.
       ``(4) Termination.--This section shall apply only to 
     periods to which section 40 applies, determined by 
     substituting in section 40(e)--
       ``(A) `December 31, 2010' for `December 31, 2007', and
       ``(B) `January 1, 2011' for `January 1, 2008'.''
       (2) Revision of rules for payment of credit.--Paragraph (3) 
     of section 6427(i) is amended to read as follows:
       ``(3) Special rule for alcohol mixture credit.--
       ``(A) In general.--A claim may be filed under subsection 
     (f)(1)(B) by any person for any period--
       ``(i) for which $200 or more is payable under such 
     subsection (f)(1)(B), and
       ``(ii) which is not less than 1 week.
     In the case of an electronic claim, this subparagraph shall 
     be applied without regard to clause (i).
       ``(B) Payment of claim.--Notwithstanding subsection 
     (f)(1)(B), if the Secretary has not paid pursuant to a claim 
     filed under this section within 45 days of the date of the 
     filing of such claim (20 days in the case of an electronic 
     claim), the claim shall be paid with interest from such date 
     determined by using the overpayment rate and method under 
     section 6621.
       ``(C) Time for filing claim.--No claim filed under this 
     paragraph shall be allowed unless filed on or before the last 
     day of the first quarter following the earliest quarter 
     included in the claim.''
       (b) Repeal of Other Incentives for Fuel Mixtures.--
       (1) Subsection (b) of section 4041 is amended to read as 
     follows:
       ``(b) Exemption for Off-Highway Business Use.--
       ``(1) In general.--No tax shall be imposed by subsection 
     (a) or (d)(1) on liquids sold for use or used in an off-
     highway business use.
       ``(2) Tax where other use.--If a liquid on which no tax was 
     imposed by reason of paragraph (1) is used otherwise than in 
     an off-highway business use, a tax shall be imposed by 
     paragraph (1)(B), (2)(B), or (3)(A)(ii) of subsection (a) 
     (whichever is appropriate) and by the corresponding provision 
     of subsection (d)(1) (if any).
       ``(3) Off-highway business use defined.--For purposes of 
     this subsection, the term `off-highway business use' has the 
     meaning given to such term by section 6421(e)(2); except that 
     such term shall not, for purposes of subsection (a)(1), 
     include use in a diesel-powered train.''
       (2) Section 4041(k) is hereby repealed.
       (3) Section 4081(c) is hereby repealed.
       (4) Section 4091(c) is hereby repealed.
       (c) Transfers to Highway Trust Fund.--(1) Paragraph (4) of 
     section 9503(b) is amended by adding ``or'' at the end of 
     subparagraph (C), by striking the comma at the end of 
     subparagraph (D) and inserting a period, and by striking 
     subparagraphs (E) and (F).
       (2) Subsection (c).--
       (A) The amendments made by subsection (c)(1) shall apply to 
     taxes imposed after September 30, 2003.
       (B) The amendments made by subsection (c)(2) shall apply to 
     taxes imposed after September 30, 2006.
       (d) Conforming Amendments.--
       (1) Subsection (c) of section 40 is amended to read as 
     follows:
       ``(c) Coordination With Excise Tax Benefits.--The amount of 
     the credit determined under this section with respect to any 
     alcohol shall, under regulations prescribed by the Secretary, 
     be properly reduced to take into account the benefit provided 
     with respect to such alcohol under section 6427(f).''
       (2) Subparagraph (B) of section 40(d)(4) is amended by 
     striking ``under section 4041(k) or 4081(c)'' and inserting 
     ``under section 6427(f)''.
       (e) Effective Dates.--
       (1) In general.--Except as provided by paragraph (2), the 
     amendments made by this section shall apply to fuel sold or 
     used after September 30, 2004.
       (2) Paragraph (4) of section 9503(b), as amended by 
     paragraph (1), is further amended by adding ``or'' at the end 
     of subparagraph (B), by striking the comma at the end of 
     subparagraph (C) and inserting a period, and by striking 
     subparagraph (D).

     SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL FUND.

       (a) Transfers to Fund.--Section 9503(b)(1) is amended by 
     adding at the end the following new flush sentence:
     ``For purposes of this paragraph, the amount of taxes 
     received under section 4081 shall include any amount treated 
     as a payment under section 6427(f)(1)(A) and shall not be 
     reduced by the amount paid under section 6427(f)(1)(B).''.
       (b) Transfers From Fund.--Subparagraph (A) of section 
     9503(c)(2) is amended by adding at the end the following new 
     sentence: ``Clauses (i)(III) and (ii) shall not apply to 
     claims under section 6427(f)(1)(B).''
       (c) Effective Date.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to taxes received after September 30, 2004.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall apply to amounts paid after September 30, 2004, and (to 
     the extent related to section 34 of the Internal Revenue Code 
     of 1986) to fuel used after such date.

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

     SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE 
                   STOCK PURCHASE PLAN STOCK OPTIONS FROM WAGES.

       (a) Exclusion From Employment Taxes.--
       (1) Social security taxes.--
       (A) Section 3121(a) (relating to definition of wages) is 
     amended by striking ``or'' at the end of paragraph (20), by 
     striking the period at the end of paragraph (21) and 
     inserting ``; or'', and by inserting after paragraph (21) the 
     following new paragraph:
       ``(22) remuneration on account of--
       ``(A) a transfer of a share of stock to any individual 
     pursuant to an exercise of an incentive stock option (as 
     defined in section 422(b)) or

[[Page 12809]]

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

  Subtitle G--Incentives to Reinvest Foreign Earnings in United States

     SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN UNITED 
                   STATES.

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

     ``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.

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

     Except as provided in subparagraph (C), if there is no 
     statement or such statement fails to show a specific amount 
     of such earnings or liability, such amount shall be treated 
     as being zero for purposes of this paragraph.
       ``(2) Dividends must be extraordinary.--The amount of 
     dividends taken into account under subsection (a) shall not 
     exceed the excess (if any) of--
       ``(A) the dividends received during the taxable year by 
     such shareholder from controlled foreign corporations, over
       ``(B) the annual average for the base period years of--
       ``(i) the dividends received during each base period year 
     by such shareholder from such corporations,
       ``(ii) the amounts includible in such shareholder's gross 
     income for each base period year under section 951(a)(1)(B) 
     with respect to such corporations, and
       ``(iii) the amounts that would have been included for each 
     base period year but for section 959(a) with respect to such 
     corporations.

     The amount taken into account under clause (iii) for any base 
     period year shall not include any amount which is not 
     includible in gross income by reason of an amount described 
     in clause (ii) with respect to a prior taxable year.
       ``(3) Requirement to invest in united states.--Subsection 
     (a) shall not apply to any dividend received by a United 
     States shareholder unless the amount of the dividend is 
     invested in the United States pursuant to a plan describing 
     the expenditures to be made with such amount--
       ``(A) which, before the dividend is received, is approved 
     by the president or chief executive officer of such 
     shareholder, and
       ``(B) which is approved by the Board of Directors (or 
     management committee) of such shareholder no later than its 
     first meeting on or after the date the dividend is received.
       ``(c) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Election period.--The term `election period' means--
       ``(A) if this section applies to the taxpayer's last 
     taxable year beginning before the date of the enactment of 
     this section, any 6-month or shorter period during such year 
     which is after the date of the enactment of this section and 
     which is selected by the taxpayer, and
       ``(B) if this section applies to the taxpayer's first 
     taxable year beginning on or after such date, the 1st 6 
     months of such taxable year.
       ``(2) Applicable financial statement.--The term `applicable 
     financial statement' means the most recently audited 
     financial statement (including notes and other documents 
     which accompany such statement)--
       ``(A) which is certified on or before March 31, 2003, as 
     being prepared in accordance with generally accepted 
     accounting principles, and
       ``(B) which is used for the purposes of a statement or 
     report--
       ``(i) to creditors,
       ``(ii) to shareholders, or
       ``(iii) for any other substantial nontax purpose.

     In the case of a corporation required to file a financial 
     statement with the Securities and Exchange Commission, such 
     term means the most recent such statement filed on or before 
     March 31, 2003.
       ``(3) Base period years.--The base period years are the 3 
     taxable years--
       ``(A) which are among the 5 most recent taxable years 
     ending on or before March 31, 2003, and
       ``(B) which are determined by disregarding--
       ``(i) 1 taxable year for which the sum of the amounts 
     described in clauses (i), (ii), and (iii) of subsection 
     (b)(2)(B) is the largest, and
       ``(ii) 1 taxable year for which such sum is the smallest.

     Rules similar to the rules of subparagraphs (A) and (B) of 
     section 41(f)(3) shall apply for purposes of this paragraph.
       ``(4) Coordination with dividends received deduction.--No 
     deduction shall be allowed under section 243 or 245 for any 
     dividend for which a deduction is allowed under this section.
       ``(d) Denial of Foreign Tax Credit.--
       ``(1) In general.--No credit shall be allowed under section 
     901 for any taxes paid or accrued (or treated as paid or 
     accrued) with respect to the deductible portion of any 
     dividend or of any amount described in subsection (a)(2). No 
     deduction shall be allowed under this chapter for any tax for 
     which credit is not allowable by reason of the preceding 
     sentence.
       ``(2) Deductible portion.--For purposes of paragraph (1), 
     unless the taxpayer otherwise specifies, the deductible 
     portion of any dividend is the amount which bears the same 
     ratio to the amount of such dividend as the amount allowed as 
     a deduction under subsection (a) for the taxable year bears 
     to the amount described in subsection (b)(2)(A) for such 
     year.
       ``(e) Increase in Tax on Included Amounts Not Reduced by 
     Credits, Etc.--
       ``(1) In general.--Any tax under this chapter by reason of 
     nondeductible CFC dividends shall not be treated as tax 
     imposed by this chapter for purposes of determining--
       ``(A) the amount of any credit allowable under this 
     chapter, or
       ``(B) the amount of the tax imposed by section 55.

     Subparagraph (A) shall not apply to the credit under section 
     53 or to the credit under section 27(a) with respect to taxes 
     attributable to such dividends.
       ``(2) Inclusions may not be offset by net operating 
     losses.--
       ``(A) In general.--The taxable income of any United States 
     shareholder for any taxable year

[[Page 12810]]

     shall in no event be less than the amount of nondeductible 
     CFC dividends received during such year.
       ``(B) Coordination with section 172.--The nondeductible CFC 
     dividends for any taxable year shall not be taken into 
     account--
       ``(i) in determining under section 172 the amount of any 
     net operating loss for such taxable year, and
       ``(ii) in determining taxable income for such taxable year 
     for purposes of the 2nd sentence of section 172(b)(2).
       ``(3) Nondeductible cfc dividends.--For purposes of this 
     subsection, the term `nondeductible CFC dividends' means the 
     excess of the amount of dividends taken into account under 
     subsection (a) over the deduction allowed under subsection 
     (a) for such dividends.
       ``(f) Election.--This section shall apply for the 
     taxpayer's first taxable year beginning on or after the date 
     of the enactment of this section if the taxpayer elects its 
     application for such taxable year. The taxpayer may elect to 
     apply this section to the taxpayer's last taxable year 
     beginning before the date of the enactment of this section in 
     lieu of such first taxable year.''
       (b) Alternative Minimum Tax.--Subparagraph (C) of section 
     56(g)(4) is amended by adding at the end the following new 
     clause:
       ``(v) Special rule for certain distributions from 
     controlled foreign corporations.--Clause (i) shall not apply 
     to any deduction allowable under section 965.''.
       (c) Clerical Amendment.--The table of sections for subpart 
     F of part III of subchapter N of chapter 1 is amended by 
     adding at the end the following new item:

``Sec. 965. Temporary dividends received deduction.''.

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

                 Subtitle H--Other Incentive Provisions

     SEC. 281. 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.--Subsection (e) of section 451 
     (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 (without regard to extensions) for the return is after 
     December 31, 2002.

     SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES 
                   WITHOUT REDUCING PATRONAGE DIVIDENDS.

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

     SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO 
                   APPLY TO OUTRIGHT SALES BY LANDOWNERS.

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

     SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS 
                   TREATED AS QUALIFYING INCOME OF REGULATED 
                   INVESTMENT COMPANIES.

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

     SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE INVESTMENT 
                   TRUSTS.

       (a) Expansion of Straight Debt Safe Harbor.--Section 856 
     (defining real estate investment trust) is amended--
       (1) in subsection (c) by striking paragraph (7), and
       (2) by adding at the end the following new subsection:
       ``(m) Safe Harbor in Applying Subsection (c)(4).--
       ``(1) In general.--In applying subclause (III) of 
     subsection (c)(4)(B)(iii), except as otherwise determined by 
     the Secretary in regulations, the following shall not be 
     considered securities held by the trust:
       ``(A) Straight debt securities of an issuer which meet the 
     requirements of paragraph (2).
       ``(B) Any loan to an individual or an estate.
       ``(C) Any section 467 rental agreement (as defined in 
     section 467(d)), other than with a person described in 
     subsection (d)(2)(B).
       ``(D) Any obligation to pay rents from real property (as 
     defined in subsection (d)(1)).
       ``(E) Any security issued by a State or any political 
     subdivision thereof, the District of Columbia, a foreign 
     government or any political subdivision thereof, or the 
     Commonwealth of Puerto Rico, but only if the determination of 
     any payment received or accrued under such security does not 
     depend in whole or in part on the profits of any entity not 
     described in this subparagraph or payments on any obligation 
     issued by such an entity,

[[Page 12811]]

       ``(F) Any security issued by a real estate investment 
     trust.
       ``(G) Any other arrangement as determined by the Secretary.
       ``(2) Special rules relating to straight debt securities.--
       ``(A) In general.--For purposes of paragraph (1)(A), 
     securities meet the requirements of this paragraph if such 
     securities are straight debt, as defined in section 
     1361(c)(5) (without regard to subparagraph (B)(iii) thereof).
       ``(B) Special rules relating to certain contingencies.--For 
     purposes of subparagraph (A), any interest or principal shall 
     not be treated as failing to satisfy section 1361(c)(5)(B)(i) 
     solely by reason of the fact that--
       ``(i) the time of payment of such interest or principal is 
     subject to a contingency, but only if--

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

       ``(II) neither the aggregate issue price nor the aggregate 
     face amount of the issuer's debt instruments held by the 
     trust exceeds $1,000,000 and not more than 12 months of 
     unaccrued interest can be required to be prepaid thereunder, 
     or
       ``(ii) the time or amount of payment is subject to a 
     contingency upon a default or the exercise of a prepayment 
     right by the issuer of the debt, but only if such contingency 
     is consistent with customary commercial practice.
       ``(C) Special rules relating to corporate or partnership 
     issuers.--In the case of an issuer which is a corporation or 
     a partnership, securities that otherwise would be described 
     in paragraph (1)(A) shall be considered not to be so 
     described if the trust holding such securities and any of its 
     controlled taxable REIT subsidiaries (as defined in 
     subsection (d)(8)(A)(iv)) hold any securities of the issuer 
     which--
       ``(i) are not described in paragraph (1) (prior to the 
     application of this subparagraph), and
       ``(ii) have an aggregate value greater than 1 percent of 
     the issuer's outstanding securities determined without regard 
     to paragraph (3)(A)(i).
       ``(3) Look-through rule for partnership securities.--
       ``(A) In general.--For purposes of applying subclause (III) 
     of subsection (c)(4)(B)(iii)--
       ``(i) a trust's interest as a partner in a partnership (as 
     defined in section 7701(a)(2)) shall not be considered a 
     security, and
       ``(ii) the trust shall be deemed to own its proportionate 
     share of each of the assets of the partnership.
       ``(B) Determination of trust's interest in partnership 
     assets.--For purposes of subparagraph (A), with respect to 
     any taxable year beginning after the date of the enactment of 
     this subparagraph--
       ``(i) the trust's interest in the partnership assets shall 
     be the trust's proportionate interest in any securities 
     issued by the partnership (determined without regard to 
     subparagraph (A)(i) and paragraph (4), but not including 
     securities described in paragraph (1)), and
       ``(ii) the value of any debt instrument shall be the 
     adjusted issue price thereof, as defined in section 
     1272(a)(4).
       ``(4) Certain partnership debt instruments not treated as a 
     security.--For purposes of applying subclause (III) of 
     subsection (c)(4)(B)(iii)--
       ``(A) any debt instrument issued by a partnership and not 
     described in paragraph (1) shall not be considered a security 
     to the extent of the trust's interest as a partner in the 
     partnership, and
       ``(B) any debt instrument issued by a partnership and not 
     described in paragraph (1) shall not be considered a security 
     if at least 75 percent of the partnership's gross income 
     (excluding gross income from prohibited transactions) is 
     derived from sources referred to in subsection (c)(3).
       ``(5) Secretarial guidance.--The Secretary is authorized to 
     provide guidance (including through the issuance of a written 
     determination, as defined in section 6110(b)) that an 
     arrangement shall not be considered a security held by the 
     trust for purposes of applying subclause (III) of subsection 
     (c)(4)(B)(iii) notwithstanding that such arrangement 
     otherwise could be considered a security under subparagraph 
     (F) of subsection (c)(5).''.
       (b) Clarification of Application of Limited Rental 
     Exception.--Subparagraph (A) of section 856(d)(8) (relating 
     to special rules for taxable REIT subsidiaries) is amended to 
     read as follows:
       ``(A) Limited rental exception.--
       ``(i) In general.--The requirements of this subparagraph 
     are met with respect to any property if at least 90 percent 
     of the leased space of the property is rented to persons 
     other than taxable REIT subsidiaries of such trust and other 
     than persons described in paragraph (2)(B).
       ``(ii) Rents must be substantially comparable.--Clause (i) 
     shall apply only to the extent that the amounts paid to the 
     trust as rents from real property (as defined in paragraph 
     (1) without regard to paragraph (2)(B)) from such property 
     are substantially comparable to such rents paid by the other 
     tenants of the trust's property for comparable space.
       ``(iii) Times for testing rent comparability.--The 
     substantial comparability requirement of clause (ii) shall be 
     treated as met with respect to a lease to a taxable REIT 
     subsidiary of the trust if such requirement is met under the 
     terms of the lease--

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

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

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

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

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

       ``(ii)(I) the corporation, trust, or association, following 
     the identification of such failure, disposes of assets in 
     order to meet the requirements of such paragraph within 6 
     months after the last day of the quarter in which the 
     corporation, trust or association's identification of the 
     failure to satisfy the requirements of such paragraph 
     occurred or such other time period prescribed by the 
     Secretary and in the manner prescribed by the Secretary, or
       ``(II) the requirements of such paragraph are otherwise met 
     within the time period specified in subclause (I).
       ``(B) Failures exceeding de minimis amount.--A corporation, 
     trust, or association that fails to meet the requirements of 
     paragraph (4) for a particular quarter shall nevertheless be 
     considered to have satisfied the requirements of such 
     paragraph for such quarter if--
       ``(i) such failure involves the ownership of assets the 
     total value of which exceeds the de minimis standard 
     described in subparagraph (A)(i) at the end of the quarter 
     for which such measurement is done,
       ``(ii) following the corporation, trust, or association's 
     identification of the failure to satisfy the requirements of 
     such paragraph for a particular quarter, a description of 
     each asset that causes the corporation, trust, or association 
     to fail to satisfy the requirements of such paragraph at the 
     close of such quarter of any taxable year is set forth in a 
     schedule for such quarter filed in accordance with 
     regulations prescribed by the Secretary,
       ``(iii) the failure to meet the requirements of such 
     paragraph for a particular quarter is due

[[Page 12812]]

     to reasonable cause and not due to willful neglect,
       ``(iv) the corporation, trust, or association pays a tax 
     computed under subparagraph (C), and
       ``(v)(I) the corporation, trust, or association disposes of 
     the assets set forth on the schedule specified in clause (ii) 
     within 6 months after the last day of the quarter in which 
     the corporation, trust or association's identification of the 
     failure to satisfy the requirements of such paragraph 
     occurred or such other time period prescribed by the 
     Secretary and in the manner prescribed by the Secretary, or
       ``(II) the requirements of such paragraph are otherwise met 
     within the time period specified in subclause (I).
       ``(C) Tax.--For purposes of subparagraph (B)(iv)--
       ``(i) Tax imposed.--If a corporation, trust, or association 
     elects the application of this subparagraph, there is hereby 
     imposed a tax on the failure described in subparagraph (B) of 
     such corporation, trust, or association. Such tax shall be 
     paid by the corporation, trust, or association.
       ``(ii) Tax computed.--The amount of the tax imposed by 
     clause (i) shall be the greater of--

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

       ``(iii) Period.--For purposes of clause (ii)(II), the 
     period described in this clause is the period beginning on 
     the first date that the failure to satisfy the requirements 
     of such paragraph (4) occurs as a result of the ownership of 
     such assets and ending on the earlier of the date on which 
     the trust disposes of such assets or the end of the first 
     quarter when there is no longer a failure to satisfy such 
     paragraph (4).
       ``(iv) Administrative provisions.--For purposes of subtitle 
     F, the taxes imposed by this subparagraph shall be treated as 
     excise taxes with respect to which the deficiency procedures 
     of such subtitle apply.''.
       (2) Modification of rules of application for failure to 
     satisfy sections 856(c)(2) or 856(c)(3).--Paragraph (6) of 
     section 856(c) (relating to definition of real estate 
     investment trust) is amended by striking subparagraphs (A) 
     and (B), by redesignating subparagraph (C) as subparagraph 
     (B), and by inserting before subparagraph (B) (as so 
     redesignated) the following new subparagraph:
       ``(A) following the corporation, trust, or association's 
     identification of the failure to meet the requirements of 
     paragraph (2) or (3), or of both such paragraphs, for any 
     taxable year, a description of each item of its gross income 
     described in such paragraphs is set forth in a schedule for 
     such taxable year filed in accordance with regulations 
     prescribed by the Secretary, and''.
       (3) Reasonable cause exception to loss of reit status if 
     failure to satisfy requirements.--Subsection (g) of section 
     856 (relating to termination of election) is amended--
       (A) in paragraph (1) by inserting before the period at the 
     end of the first sentence the following: ``unless paragraph 
     (5) applies'', and
       (B) by adding at the end the following new paragraph:
       ``(5) Entities to which paragraph applies.--This paragraph 
     applies to a corporation, trust, or association--
       ``(A) which is not a real estate investment trust to which 
     the provisions of this part apply for the taxable year due to 
     one or more failures to comply with one or more of the 
     provisions of this part (other than subsection (c)(6) or 
     (c)(7) of section 856),
       ``(B) such failures are due to reasonable cause and not due 
     to willful neglect, and
       ``(C) if such corporation, trust, or association pays (as 
     prescribed by the Secretary in regulations and in the same 
     manner as tax) a penalty of $50,000 for each failure to 
     satisfy a provision of this part due to reasonable cause and 
     not willful neglect.''.
       (4) Deduction of tax paid from amount required to be 
     distributed.--Subparagraph (E) of section 857(b)(2) is 
     amended by striking ``(7)'' and inserting ``(7) of this 
     subsection, section 856(c)(7)(B)(iii), and section 
     856(g)(1).''.
       (5) Expansion of deficiency dividend procedure.--Subsection 
     (e) of section 860 is amended by striking ``or'' at the end 
     of paragraph (2), by striking the period at the end of 
     paragraph (3) and inserting ``; or'', and by adding at the 
     end the following new paragraph:
       ``(4) a statement by the taxpayer attached to its amendment 
     or supplement to a return of tax for the relevant tax 
     year.''.
       (g) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2000.
       (2) Subsections (c) through  (f).--The amendments made by 
     subsections (c), (d), (e), and (f) shall apply to taxable 
     years beginning after the date of the enactment of this Act.

     SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED 
                   INVESTMENT COMPANIES.

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

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

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

       ``(iii) Any interest referred to in subsection (i)(2)(A) 
     (without regard to the trade or business of the regulated 
     investment company).
       ``(iv) Any interest-related dividend includable in gross 
     income with respect to stock of another regulated investment 
     company.
       ``(F) 10-percent shareholder.--For purposes of this 
     paragraph, the term `10-percent shareholder' has the meaning 
     given such term by subsection (h)(3)(B).
       ``(2) Short-term capital gain dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1)(A) of subsection 
     (a) on any short-term capital gain dividend received from a 
     regulated investment company.
       ``(B) Exception for aliens taxable under subsection 
     (a)(2).--Subparagraph (A) shall not apply in the case of any 
     nonresident alien individual subject to tax under subsection 
     (a)(2).
       ``(C) Short-term capital gain dividend.--For purposes of 
     this paragraph, a short-term capital gain dividend is any 
     dividend (or part thereof) which is designated by the 
     regulated investment company as a short-term capital gain 
     dividend in a written notice mailed to its shareholders not 
     later than 60 days after the close of its taxable year. If 
     the aggregate amount so designated with respect to a taxable 
     year of the company (including amounts so designated with 
     respect to dividends paid after the close of the taxable year 
     described in section 855) is greater than the qualified 
     short-term gain of the company for such taxable year, the 
     portion of each distribution which shall be a short-term 
     capital gain dividend shall be only that portion of the 
     amounts so designated which such qualified short-term gain 
     bears to the aggregate amount so designated.
       ``(D) Qualified short-term gain.--For purposes of 
     subparagraph (C), the term `qualified

[[Page 12813]]

     short-term gain' means the excess of the net short-term 
     capital gain of the regulated investment company for the 
     taxable year over the net long-term capital loss (if any) of 
     such company for such taxable year. For purposes of this 
     subparagraph--
       ``(i) the net short-term capital gain of the regulated 
     investment company shall be computed by treating any short-
     term capital gain dividend includible in gross income with 
     respect to stock of another regulated investment company as a 
     short-term capital gain, and
       ``(ii) the excess of the net short-term capital gain for a 
     taxable year over the net long-term capital loss for a 
     taxable year (to which an election under section 4982(e)(4) 
     does not apply) shall be determined without regard to any net 
     capital loss or net short-term capital loss attributable to 
     transactions after October 31 of such year, and any such net 
     capital loss or net short-term capital loss shall be treated 
     as arising on the 1st day of the next taxable year.

     To the extent provided in regulations, clause (ii) shall 
     apply also for purposes of computing the taxable income of 
     the regulated investment company.''
       (2) Foreign corporations.--Section 881 (relating to tax on 
     income of foreign corporations not connected with United 
     States business) is amended by redesignating subsection (e) 
     as subsection (f) and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Tax Not To Apply to Certain Dividends of Regulated 
     Investment Companies.--
       ``(1) Interest-related dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1) of subsection (a) 
     on any interest-related dividend (as defined in section 
     871(k)(1)) received from a regulated investment company.
       ``(B) Exception.--Subparagraph (A) shall not apply--
       ``(i) to any dividend referred to in section 871(k)(1)(B), 
     and
       ``(ii) to any interest-related dividend received by a 
     controlled foreign corporation (within the meaning of section 
     957(a)) to the extent such dividend is attributable to 
     interest received by the regulated investment company from a 
     person who is a related person (within the meaning of section 
     864(d)(4)) with respect to such controlled foreign 
     corporation.
       ``(C) Treatment of dividends received by controlled foreign 
     corporations.--The rules of subsection (c)(5)(A) shall apply 
     to any interest-related dividend received by a controlled 
     foreign corporation (within the meaning of section 957(a)) to 
     the extent such dividend is attributable to interest received 
     by the regulated investment company which is described in 
     clause (ii) of section 871(k)(1)(E) (and not described in 
     clause (i) or (iii) of such section).
       ``(2) Short-term capital gain dividends.--No tax shall be 
     imposed under paragraph (1) of subsection (a) on any short-
     term capital gain dividend (as defined in section 871(k)(2)) 
     received from a regulated investment company.''.
       (3) Withholding taxes.--
       (A) Section 1441(c) (relating to exceptions) is amended by 
     adding at the end the following new paragraph:
       ``(12) Certain dividends received from regulated investment 
     companies.--
       ``(A) In general.--No tax shall be required to be deducted 
     and withheld under subsection (a) from any amount exempt from 
     the tax imposed by section 871(a)(1)(A) by reason of section 
     871(k).
       ``(B) Special rule.--For purposes of subparagraph (A), 
     clause (i) of section 871(k)(1)(B) shall not apply to any 
     dividend unless the regulated investment company knows that 
     such dividend is a dividend referred to in such clause. A 
     similar rule shall apply with respect to the exception 
     contained in section 871(k)(2)(B).''.
       (B) Section 1442(a) (relating to withholding of tax on 
     foreign corporations) is amended--
       (i) by striking ``and the reference in section 
     1441(c)(10)'' and inserting ``the reference in section 
     1441(c)(10)'', and
       (ii) by inserting before the period at the end the 
     following: ``, and the references in section 1441(c)(12) to 
     sections 871(a) and 871(k) shall be treated as referring to 
     sections 881(a) and 881(e) (except that for purposes of 
     applying subparagraph (A) of section 1441(c)(12), as so 
     modified, clause (ii) of section 881(e)(1)(B) shall not apply 
     to any dividend unless the regulated investment company knows 
     that such dividend is a dividend referred to in such 
     clause)''.
       (b) Estate Tax Treatment of Interest in Certain Regulated 
     Investment Companies.--Section 2105 (relating to property 
     without the United States for estate tax purposes) is amended 
     by adding at the end the following new subsection:
       ``(d) Stock in a RIC.--
       ``(1) In general.--For purposes of this subchapter, stock 
     in a regulated investment company (as defined in section 851) 
     owned by a nonresident not a citizen of the United States 
     shall not be deemed property within the United States in the 
     proportion that, at the end of the quarter of such investment 
     company's taxable year immediately preceding a decedent's 
     date of death (or at such other time as the Secretary may 
     designate in regulations), the assets of the investment 
     company that were qualifying assets with respect to the 
     decedent bore to the total assets of the investment company.
       ``(2) Qualifying assets.--For purposes of this subsection, 
     qualifying assets with respect to a decedent are assets that, 
     if owned directly by the decedent, would have been--
       ``(A) amounts, deposits, or debt obligations described in 
     subsection (b) of this section,
       ``(B) debt obligations described in the last sentence of 
     section 2104(c), or
       ``(C) other property not within the United States.''
       (c) Treatment of Regulated Investment Companies Under 
     Section 897.--
       (1) Paragraph (1) of section 897(h) is amended by striking 
     ``REIT'' each place it appears and inserting ``qualified 
     investment entity''.
       (2) Paragraphs (2) and (3) of section 897(h) are amended to 
     read as follows:
       ``(2) Sale of stock in domestically controlled entity not 
     taxed.--The term `United States real property interest' does 
     not include any interest in a domestically controlled 
     qualified investment entity.
       ``(3) Distributions by domestically controlled qualified 
     investment entities.--In the case of a domestically 
     controlled qualified investment entity, rules similar to the 
     rules of subsection (d) shall apply to the foreign ownership 
     percentage of any gain.''
       (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
     amended to read as follows:
       ``(A) Qualified investment entity.--The term `qualified 
     investment entity' means any real estate investment trust and 
     any regulated investment company.
       ``(B) Domestically controlled.--The term `domestically 
     controlled qualified investment entity' means any qualified 
     investment entity in which at all times during the testing 
     period less than 50 percent in value of the stock was held 
     directly or indirectly by foreign persons.''
       (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
     amended by striking ``REIT'' and inserting ``qualified 
     investment entity''.
       (5) The subsection heading for subsection (h) of section 
     897 is amended by striking ``REITS'' and inserting ``Certain 
     Investment Entities''.
       (d) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to dividends with respect to taxable years of regulated 
     investment companies beginning after December 31, 2004.
       (2) Estate tax treatment.--The amendment made by subsection 
     (b) shall apply to estates of decedents dying after December 
     31, 2004.
       (3) Certain other provisions.--The amendments made by 
     subsection (c) (other than paragraph (1) thereof) shall take 
     effect after December 31, 2004.

     SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS.

       (a) In General.--Subsection (g) of section 468B (relating 
     to clarification of taxation of certain funds) is amended to 
     read as follows:
       ``(g) Clarification of Taxation of Certain Funds.--
       ``(1) In general.--Except as provided in paragraph (2), 
     nothing in any provision of law shall be construed as 
     providing that an escrow account, settlement fund, or similar 
     fund is not subject to current income tax. The Secretary 
     shall prescribe regulations providing for the taxation of any 
     such account or fund whether as a grantor trust or otherwise.
       ``(2) Exemption from tax for certain settlement funds.--An 
     escrow account, settlement fund, or similar fund shall be 
     treated as beneficially owned by the United States and shall 
     be exempt from taxation under this subtitle if--
       ``(A) it is established pursuant to a consent decree 
     entered by a judge of a United States District Court,
       ``(B) it is created for the receipt of settlement payments 
     as directed by a government entity for the sole purpose of 
     resolving or satisfying one or more claims asserting 
     liability under the Comprehensive Environmental Response, 
     Compensation, and Liability Act of 1980,
       ``(C) the authority and control over the expenditure of 
     funds therein (including the expenditure of contributions 
     thereto and any net earnings thereon) is with such government 
     entity, and
       ``(D) upon termination, any remaining funds will be 
     disbursed to such government entity for use in accordance 
     with applicable law.

     For purposes of this paragraph, the term `government entity' 
     means the United States, any State or political subdivision 
     thereof, the District of Columbia, any possession of the 
     United States, and any agency or instrumentality of any of 
     the foregoing.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR 
                   ORPHAN DRUG CREDIT.

       (a) In General.--Paragraph (2) of section 45C(b) (relating 
     to qualified clinical testing expenses) is amended by adding 
     at the end the following new subparagraph:
       ``(C) Treatment of certain expenses incurred before 
     designation.--For purposes of subparagraph (A)(ii)(I), if a 
     drug is designated under section 526 of the Federal Food, 
     Drug, and Cosmetic Act not later than the due date (including 
     extensions) for filing the return of tax under this subtitle 
     for the taxable year in which the application for such 
     designation of such drug was filed, such drug shall be 
     treated as having been designated on the date that such 
     application was filed.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to expenses incurred after the date of the 
     enactment of this Act.

     SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND 
                   ARROWS.

       (a) Bows.--Paragraph (1) of section 4161(b) (relating to 
     bows) is amended to read as follows:

[[Page 12814]]

       ``(1) Bows.--
       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any bow which has 
     a peak draw weight of 30 pounds or more, a tax equal to 11 
     percent of the price for which so sold.
       ``(B) Archery equipment.--There is hereby imposed on the 
     sale by the manufacturer, producer, or importer--
       ``(i) of any part or accessory suitable for inclusion in or 
     attachment to a bow described in subparagraph (A), and
       ``(ii) of any quiver or broadhead suitable for use with an 
     arrow described in paragraph (2),

     a tax equal to 11 percent of the price for which so sold.''.
       (b) Arrows.--Subsection (b) of section 4161 (relating to 
     bows and arrows, etc.) is amended by redesignating paragraph 
     (3) as paragraph (4) and inserting after paragraph (2) the 
     following:
       ``(3) Arrows.--
       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any arrow, a tax 
     equal to 12 percent of the price for which so sold.
       ``(B) Exception.--In the case of any arrow of which the 
     shaft or any other component has been previously taxed under 
     paragraph (1) or (2)--
       ``(i) section 6416(b)(3) shall not apply, and
       ``(ii) the tax imposed by subparagraph (A) shall be an 
     amount equal to the excess (if any) of--

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

       ``(C) Arrow.--For purposes of this paragraph, the term 
     `arrow' means any shaft described in paragraph (2) to which 
     additional components are attached.''.
       (c) Conforming Amendments.--Section 4161(b)(2) is amended--
       (1) by inserting ``(other than broadheads)'' after 
     ``point'', and
       (2) by striking ``Arrows.--'' in the heading and inserting 
     ``Arrow components.--''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to articles sold by the manufacturer, producer, 
     or importer after December 31, 2004.

     SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.

       (a) Repeal.--Paragraph (6) of section 4162(a) (defining 
     sport fishing equipment) is amended by striking subparagraph 
     (C) and by redesignating subparagraphs (D) through (J) as 
     subparagraphs (C) through (I), respectively.
       (b) Effective Date.--The amendments made this section shall 
     apply to articles sold by the manufacturer, producer, or 
     importer after December 31, 2004.

     SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH.

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

     SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS WHOLESALERS 
                   FOR COST 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 WHOLESALER'S AVERAGE COST 
                   OF CARRYING EXCISE TAX.

       ``(a) In General.--For purposes of section 38, in the case 
     of an eligible wholesaler, the amount of the distilled 
     spirits wholesalers credit for any taxable year is the amount 
     equal to the product of--
       ``(1) the number of cases of bottled distilled spirits--
       ``(A) which were bottled in the United States, and
       ``(B) which are purchased by such wholesaler during the 
     taxable year directly from the bottler of such spirits, 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 who holds a 
     permit under the Federal Alcohol Administration Act as a 
     wholesaler of distilled spirits.
       ``(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 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 based on case.--For 
     purposes of paragraph (1), the deemed Federal excise tax per 
     case of 12 80-proof 750ml bottles is $22.83.
       ``(4) Number of cases in lot.--For purposes of this 
     section, 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) in the case of an eligible wholesaler (as defined in 
     section 5011(b)), the distilled spirits wholesalers 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, 2005.--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, 2005.''.
       (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 wholesaler's average cost of 
              carrying excise tax.''.

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

     SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELATING TO 
                   DISTILLED SPIRITS, WINE, AND BEER.

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

     ``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.

       ``(a) In General.--Notwithstanding sections 5081, 5091, 
     5111, 5121, and 5131, the rate of tax imposed under such 
     sections for the suspension period shall be zero. During such 
     period, persons engaged in or carrying on a trade or business 
     covered by such sections shall register under section 5141 
     and shall comply with the recordkeeping requirements under 
     this part.
       ``(b) Suspension Period.--For purposes of subsection (a), 
     the suspension period is the period beginning on July 1, 
     2004, and ending on June 30, 2007.''.
       (b) Conforming Amendment.--Section 5117 is amended by 
     adding at the end the following new subsection:
       ``(d) Special Rule During Suspension Period.--Except as 
     provided in subsection (b) or by the Secretary, during the 
     suspension period (as defined in section 5148) it shall be 
     unlawful for any dealer to purchase distilled spirits for 
     resale from any person other than a wholesale dealer in 
     liquors who is required to keep records under section 
     5114.''.
       (c) Clerical Amendment.--The table of sections for subpart 
     G of part II of subchapter A of chapter 51 is amended by 
     striking the last item and inserting the following new items:

``Sec. 5148. Suspension of occupational tax.
``Sec. 5149. Cross references.''.

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

     SEC. 294. MODIFICATION OF UNRELATED BUSINESS INCOME 
                   LIMITATION ON INVESTMENT IN CERTAIN SMALL 
                   BUSINESS INVESTMENT COMPANIES.

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

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

       ``(B) Limitation.--Subparagraph (A)(ii) shall not apply 
     with respect to any small business investment company during 
     any period that--
       ``(i) any organization which is exempt from tax under this 
     title (other than a governmental unit) owns more than 25 
     percent of the capital or profits interest in such company, 
     or
       ``(ii) organizations which are exempt from tax under this 
     title (including governmental units other than any agency or 
     instrumentality of the United States) own, in the aggregate, 
     50 percent or more of the capital or profits interest in such 
     company.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to indebtedness incurred by small business 
     investment companies formed after the date of the enactment 
     of the American Jobs Creation Act of 2004.

     SEC. 295. ELECTION TO DETERMINE TAXABLE INCOME FROM CERTAIN 
                   INTERNATIONAL SHIPPING ACTIVITIES USING PER TON 
                   RATE.

       (a) In General.--Chapter 1 of the Internal Revenue Code of 
     1986 is amended by inserting after subchapter Q the following 
     new subchapter:

[[Page 12815]]



   ``Subchapter R--Election To Determine Taxable Income From Certain 
          International Shipping Activities Using per Ton Rate

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

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

       ``(a) In General.--The taxable income of an electing 
     corporation from qualifying shipping activities shall be the 
     amount determined under this subchapter, and the corporate 
     percentages of the items of income, gain, loss, deduction, or 
     credit of an electing corporation and of other members of the 
     electing group of such corporation which would otherwise be 
     taken into account by reason of its qualifying shipping 
     activities shall be taken into account to the extent provided 
     in section 1357.
       ``(b) Alternative Tax.--The taxable income of an electing 
     corporation from qualifying shipping activities, if otherwise 
     taxable under section 11, 55, 882, 887, or 1201(a) shall be 
     subject to tax only under this section at the maximum rate 
     specified in section 11(b). The income of a foreign 
     corporation shall not be subject to tax under this subchapter 
     to the extent its income is excludible from gross income 
     under section 883(a)(1).

     ``SEC. 1353. TAXABLE INCOME FROM QUALIFYING SHIPPING 
                   ACTIVITIES.

       ``(a) In General.--For purposes of this subchapter, the 
     taxable income of an electing corporation from qualifying 
     shipping activities shall be its corporate income percentage 
     of the sum of the amounts determined under subsection (b) for 
     each qualifying vessel operated by such electing corporation 
     or other electing entity.
       ``(b) Amounts.--For purposes of subsection (a), the amount 
     of taxable income of an electing entity for each qualifying 
     vessel shall equal the product of--
       ``(1) the daily notional taxable income from the operation 
     of the qualifying vessel in United States foreign trade, and
       ``(2) the number of days during the taxable year that the 
     electing entity operated such vessel as a qualifying vessel 
     in United States foreign trade.
       ``(c) Daily Notional Taxable Income.--For purposes of 
     subsection (b), the daily notional taxable income from the 
     operation of a qualifying vessel is 40 cents for each 100 
     tons of the net tonnage of the vessel, up to 25,000 net tons, 
     and 20 cents for each 100 tons of the net tonnage of the 
     vessel, in excess of 25,000 net tons.
       ``(d) Multiple Operators of Vessel.--If 2 or more persons 
     have a joint interest in a qualifying vessel and are treated 
     as operators of that vessel, the taxable income from the 
     operation of such vessel for that time (as determined under 
     this section) shall be allocated among such persons on the 
     basis of their ownership and charter interests in such vessel 
     or on such other basis as the Secretary may prescribe by 
     regulations.
       ``(e) Noncorporate Percentage.--Notwithstanding any 
     contrary provision of this subchapter, the noncorporate 
     percentage of any item of income, gain, loss, deduction, or 
     credit of any member of an electing group shall be taken into 
     account for all purposes of this subtitle as if this 
     subchapter were not in effect.

     ``SEC. 1354. QUALIFYING SHIPPING TAX ELECTION; REVOCATION; 
                   TERMINATION.

       ``(a) In General.--Except as provided in subsections (b) 
     and (f), a qualifying shipping tax election may be made in 
     respect of any qualifying entity.
       ``(b) Condition of Election.--An election may be made by a 
     member of a controlled group under this subsection for any 
     taxable year only if all qualifying entities that are members 
     of the controlled group join in the election.
       ``(c) When Made.--An election under subsection (a) may be 
     made by a qualifying entity in such form as prescribed by the 
     Secretary. Such election shall be filed with the qualifying 
     entity's return for the first taxable year to which the 
     election shall apply, by the due date for such return 
     (including any applicable extensions).
       ``(d) Years for Which Effective.--An election under 
     subsection (a) shall be effective for the taxable year of the 
     qualifying entity for which it is made and for all succeeding 
     taxable years of the entity, until such election is 
     terminated under subsection (e).
       ``(e) Termination.--
       ``(1) By revocation.--
       ``(A) In general.--An election under subsection (a) may be 
     terminated by revocation.
       ``(B) When effective.--Except as provided in subparagraph 
     (C)--
       ``(i) a revocation made during the taxable year and on or 
     before the 15th day of the 3rd month thereof shall be 
     effective on the 1st day of such taxable year, and
       ``(ii) a revocation made during the taxable year but after 
     such 15th day shall be effective on the 1st day of the 
     following taxable year.
       ``(C) Revocation may specify prospective date.--If the 
     revocation specifies a date for revocation which is on or 
     after the day on which the revocation is made, the revocation 
     shall be effective on and after the date so specified.
       ``(2) By entity ceasing to be qualifying entity.--
       ``(A) In general.--An election under subsection (a) shall 
     be terminated whenever (at any time on or after the 1st day 
     of the 1st taxable year for which the entity is an electing 
     entity) such entity ceases to be a qualifying entity.
       ``(B) When effective.--Any termination under this paragraph 
     shall be effective on and after the date of cessation.
       ``(f) Election After Termination.--If a qualifying entity 
     has made an election under subsection (a) and if such 
     election has been terminated under subsection (e), such 
     entity (and any successor entity) shall not be eligible to 
     make an election under subsection (a) for any taxable year 
     before its 5th taxable year which begins after the 1st 
     taxable year for which such termination is effective, unless 
     the Secretary consents to such election.

     ``SEC. 1355. DEFINITIONS AND SPECIAL RULES.

       ``(a) Definitions.--For purposes of this subchapter:
       ``(1) The term `controlled group' means any group of trusts 
     and business entities whose members would be treated as a 
     single employer under the rules of section 52(a) (without 
     regard to paragraphs (1) and (2) thereof) and section 
     52(b)(1).
       ``(2) The term `corporate income percentage' means the 
     least aggregate share, expressed as a percentage, of any item 
     of income or gain of an electing corporation or electing 
     group of which such corporation is a member from qualifying 
     shipping activities that would, but for an election in effect 
     under this subchapter, be required to be reported on the 
     Federal income tax return of an electing corporation during 
     any taxable period. In the case of an electing group which 
     includes two or more electing corporations, the corporate 
     income percentage of each such corporation shall be 
     determined on the basis of such corporations' direct and 
     indirect ownership and charter interests in qualifying 
     vessels of the electing group or on such other basis as the 
     Secretary may prescribe by regulations.
       ``(3) The term `corporate loss percentage' means the 
     greatest aggregate share, expressed as a percentage, of any 
     item of loss, deduction or credit of an electing corporation 
     or electing group of which such corporation is a member from 
     qualifying shipping activities that would, but for an 
     election in effect under this subchapter, be required to be 
     reported on the Federal income tax return of an electing 
     corporation during any taxable period.
       ``(4) The term `corporate percentages' means the corporate 
     income percentage and the corporate loss percentage.
       ``(5) The term `electing corporation' means any C 
     corporation that is an electing entity or that would, but for 
     an election in effect under this subchapter, be required to 
     report any item of income, gain, loss, deduction, or credit 
     of an electing entity on its Federal income tax return.
       ``(6) The term `electing entity' means any qualifying 
     entity for which an election is in effect under this 
     subchapter.
       ``(7) The term `electing group' means a controlled group of 
     which one or more members is an electing entity.
       ``(8) The term `noncorporate percentage' means the 
     difference between one hundred percent and the corporate 
     income percentage or corporate loss percentage, as 
     applicable.
       ``(9) The term `qualifying entity' means a trust or 
     business entity that--
       ``(A) operates one or more qualifying vessels, and
       ``(B) meets the shipping activity requirement in subsection 
     (c).
       ``(10) The term `qualifying shipping assets' means any 
     qualifying vessel and other assets which are used in core 
     qualifying activities as described in section 1356(b).
       ``(11) The term `qualifying vessel' means a self-propelled 
     (or a combination self-propelled and non-self-propelled) 
     United States flag vessel of not less than 10,000 deadweight 
     tons used in the United States foreign trade.
       ``(12) The term `United States domestic trade' means the 
     transportation of goods or passengers between places in the 
     United States.
       ``(13) The term `United States flag vessel' means any 
     vessel documented under the laws of the United States.
       ``(14) The term `United States foreign trade' means the 
     transportation of goods or passengers between a place in the 
     United States and a foreign place or between foreign places.
       ``(b) Operating a Vessel.--For purposes of this subchapter:
       ``(1) Except as provided in paragraph (2), an entity is 
     treated as operating any vessel owned by, or chartered 
     (including a time charter) to, the entity.
       ``(2) An entity is treated as operating a vessel that it 
     has chartered out on bareboat charter terms only if--
       ``(A) the vessel is temporarily surplus to the entity's 
     requirements and the term of the charter does not exceed 
     three years; or
       ``(B) the vessel is bareboat chartered to a member of a 
     controlled group which includes such entity or to an 
     unrelated third party that sub-bareboats or time charters the 
     vessel to a member of such controlled group (including the 
     owner).
       ``(c) Shipping Activity Requirement.--For purposes of this 
     section, the shipping activity requirement is met for a 
     taxable year only by an entity described in paragraph (1), 
     (2), or (3).

[[Page 12816]]

       ``(1) An entity in the first taxable year of its qualifying 
     shipping tax election if, for the preceding taxable year, the 
     test in paragraph (4) is met.
       ``(2) An entity in the second or any subsequent taxable 
     year of its qualifying shipping tax election if, for each of 
     the two preceding taxable years, the test in paragraph (4) is 
     met.
       ``(3) An entity that would be described in paragraph (1) or 
     (2) if the test in paragraph (4) were applied on an aggregate 
     basis to the controlled group of which such entity is a 
     member, and vessel charters between members of the controlled 
     group were disregarded.
       ``(4) The test in this paragraph is met if on average at 
     least 25 percent of the aggregate tonnage of qualifying 
     vessels operated by the entity were owned by the entity or 
     chartered to the entity on bareboat charter terms. For 
     purposes of the preceding sentence, vessels chartered 
     (including time chartered) to an entity by a member of a 
     controlled group which includes the entity, or by a third 
     party that bareboat charters the vessels from the entity or a 
     member of the entity's controlled group, shall be treated as 
     chartered to the entity on bareboat charter terms.
       ``(d) Effect of Temporarily Ceasing To Operate a Qualifying 
     Vessel.--
       ``(1) A temporary cessation by an electing entity in 
     operation of a qualifying vessel shall be disregarded for 
     purposes of subsections (b) and (c) if the electing entity 
     gives timely notice to the Secretary stating--
       ``(A) that it has temporarily ceased to operate the 
     qualifying vessel, and
       ``(B) its intention to resume operating the qualifying 
     vessel.
       ``(2) Notice shall be deemed timely if given not later than 
     the due date (including extensions) for the electing entity's 
     tax return (as set forth in section 6072(b)) for the taxable 
     year in which the temporary cessation begins.
       ``(3) The treatment provided by paragraph (1) shall 
     continue until the earlier of--
       ``(A) the electing entity abandoning its intention to 
     resume operation of the qualifying vessel, or
       ``(B) the electing entity resuming operation of the 
     qualifying vessel.
       ``(e) Effect of Temporarily Operating a Qualifying Vessel 
     in the United States Domestic Trade.--
       ``(1) The temporary operation in the United States domestic 
     trade of any qualifying vessel which had been used in the 
     United States foreign trade shall be disregarded for purposes 
     of this subchapter if the electing entity gives timely notice 
     to the Secretary stating--
       ``(A) that it temporarily operates or has operated in the 
     United States domestic trade a qualifying vessel which had 
     been used in the United States foreign trade, and
       ``(B) its intention to resume operation of the vessel in 
     the United States foreign trade.
       ``(2) Notice shall be deemed timely if given not later than 
     the due date (including extensions) for the electing entity's 
     tax return (as set forth in section 6072(b)) for the taxable 
     year in which the temporary cessation begins.
       ``(3) The treatment provided by paragraph (1) shall 
     continue until the earlier of--
       ``(A) the electing entity abandoning its intention to 
     resume operations of the vessel in the United States foreign 
     trade, or
       ``(B) the electing entity resuming operation of the vessel 
     in the United States foreign trade.
       ``(f) Effect of Change in Use.--
       ``(1) Except as provided in subsection (e), a vessel that 
     is used other than for operations in the United States 
     foreign trade on other than a temporary basis ceases to be a 
     qualifying vessel when such use begins.
       ``(2) For purposes of this subsection, a change in use of a 
     vessel, other than a commencement of operation in the United 
     States domestic trade, is taken to be permanent unless there 
     are circumstances indicating that it is temporary.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.

     ``SEC. 1356. QUALIFYING SHIPPING ACTIVITIES.

       ``(a) Qualifying Shipping Activities.--For purposes of this 
     subchapter the `qualifying shipping activities' of an 
     electing entity consist of--
       ``(1) core qualifying activities,
       ``(2) qualifying secondary activities, and
       ``(3) qualifying incidental activities.
       ``(b) Core Qualifying Activities.--
       ``(1) The `core qualifying activities' of an electing 
     entity are--
       ``(A) its activities in operating qualifying vessels in 
     United States foreign trade, and
       ``(B) other activities of the electing entity and other 
     members of its electing group that are an integral part of 
     its business of operating qualifying vessels in United States 
     foreign trade, including ownership or operation of barges, 
     containers, chassis, and other equipment that are the 
     complement of, or used in connection with, a qualifying 
     vessel in United States foreign trade, the inland haulage of 
     cargo shipped, or to be shipped, on qualifying vessels in 
     United States foreign trade, and the provision of terminal, 
     maintenance, repair, logistical, or other vessel, container, 
     or cargo-related services that are an integral part of 
     operating qualifying vessels in United States foreign trade.
       ``(2) `Core qualifying activities' do not include the 
     provision by an entity of facilities or services to any 
     person, other than--
       ``(A) another member of such entity's electing group,
       ``(B) a consignor, consignee, or other customer of such 
     entity's business of operating qualifying vessels in United 
     States foreign trade, or
       ``(C) a member of an alliance, joint venture, pool, 
     partnership or similar undertaking involving the operation of 
     qualifying vessels in United States foreign trade of which 
     such entity is a member.
       ``(c) Qualifying Secondary Activities.--For purposes of 
     this subsection--
       ``(1) the term `secondary activities' means activities that 
     are not core qualifying activities, and--
       ``(A) are the active management or operation of vessels in 
     the United States foreign trade,
       ``(B) the provision of vessel, container, or cargo-related 
     facilities or services to any person, or
       ``(C) such other activities as may be prescribed by the 
     Secretary pursuant to regulations, and
       ``(2) the `qualified secondary activities' of an electing 
     entity are its secondary activities and the secondary 
     activities of other members of its electing group, but only 
     to the extent that, without regard to this subchapter, the 
     aggregate gross income derived by the electing entity and the 
     other members of its electing group from such activities does 
     not exceed 20 percent of the aggregate gross income derived 
     by the electing entity and the other members of its electing 
     group from their core qualifying activities.
       ``(d) Qualifying Incidental Activities.--Shipping-related 
     activities carried on by an electing entity or another member 
     of its electing group are qualified incidental activities of 
     the electing entity if--
       ``(1) incidental to its core qualifying activities,
       ``(2) not qualifying secondary activities, and
       ``(3) without regard to this subchapter, the aggregate 
     gross income derived by the electing entity and other members 
     of its electing group from such activities does not exceed 
     0.1 percent of such entities' aggregate gross income from 
     their core qualifying activities.

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

       ``(a) Exclusion From Gross Income.--Gross income of an 
     electing entity shall not include the corporate income 
     percentage of--
       ``(1) income from qualifying shipping activities in the 
     United States foreign trade,
       ``(2) income from money, bank deposits and other temporary 
     investments which are reasonably necessary to meet the 
     working capital requirements of qualifying shipping 
     activities, and
       ``(3) income from money or other intangible assets 
     accumulated pursuant to a plan to purchase qualifying 
     shipping assets.
       ``(b) Electing Group Member.--Gross income of a member of 
     an electing group that is not an electing entity shall not 
     include the corporate income percentage of its income from 
     qualifying shipping activities that are taken into account 
     under this subchapter as qualifying shipping activities of an 
     electing entity.
       ``(c) Denial of Losses, Deductions, and Credits.--
       ``(1) General rule.--Subject to paragraph (2), the 
     corporate loss percentage of each item of loss, deduction 
     (other than for interest expense), or credit of any taxpayer 
     with respect to any activity the income from which is 
     excluded from gross income under this section shall be 
     disallowed.
       ``(2) Depreciation.--Notwithstanding paragraph (1), the 
     deduction for depreciation of a qualifying shipping asset 
     shall be allowed in determining the adjusted basis of such 
     asset for purposes of determining gain from its disposition.
       ``(A) Except as provided in subparagraph (B), the straight 
     line method of depreciation shall apply to the corporate 
     income percentage of qualifying shipping assets the income 
     from operation of which is excluded from gross income under 
     this section.
       ``(B) Subparagraph (A) shall not apply to any qualifying 
     shipping asset which is subject to a charter entered into 
     prior to the effective date of this subchapter.
       ``(3) Interest.--The corporate loss percentage of an 
     electing entity's interest expense shall be disallowed in the 
     ratio that the fair market value of its qualifying vessel 
     assets bears to the fair market value of its total assets.
       ``(d) Section Inapplicable to Unrelated Persons.--This 
     section shall not apply to a taxpayer that is not a member of 
     an electing group.

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

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

[[Page 12817]]



     ``SEC. 1359. DISPOSITION OF QUALIFYING SHIPPING ASSETS.

       ``(a) In General.--If an electing entity sells or disposes 
     of qualifying shipping assets (as defined in subsection (c)) 
     in an otherwise taxable transaction, at the election of the 
     entity no gain shall be recognized if replacement qualifying 
     shipping assets are acquired during the period specified in 
     subsection (b), except to the extent that the amount realized 
     upon such sale or disposition exceeds the cost of the 
     replacement qualifying shipping assets.
       ``(b) Period Within Which Property Must Be Replaced.--The 
     period referred to in subsection (a) shall be the period 
     beginning one year prior to the disposition of the qualifying 
     shipping assets and ending--
       ``(1) 3 years after the close of the first taxable year in 
     which the gain is realized, or
       ``(2) subject to such terms and conditions as may be 
     specified by the Secretary, on such later date as the 
     Secretary may designate on application by the taxpayer. Such 
     application shall be made at such time and in such manner as 
     the Secretary may by regulations prescribe.
       ``(c) Time for Assessment of Deficiency Attributable to 
     Gain.--If an electing entity has made the election provided 
     in subsection (a), then--
       ``(1) the statutory period for the assessment of any 
     deficiency, for any taxable year in which any part of the 
     gain is realized, attributable to such gain shall not expire 
     prior to the expiration of 3 years from the date the 
     Secretary is notified by the entity (in such manner as the 
     Secretary may by regulations prescribe) of the replacement 
     tonnage tax property or of an intention not to replace, and
       ``(2) such deficiency may be assessed before the expiration 
     of such 3-year period notwithstanding the provisions of 
     section 6212(c) or the provisions of any other law or rule of 
     law which would otherwise prevent such assessment.
       ``(d) Basis of Replacement Qualifying Shipping Assets.--In 
     the case of replacement qualifying shipping assets purchased 
     by an electing entity which resulted in the nonrecognition of 
     any part of the gain realized as the result of a sale or 
     other disposition of qualifying shipping assets, the basis 
     shall be the cost of such property decreased in the amount of 
     the gain not so recognized; and if the property purchased 
     consists of more than one piece of property, the basis 
     determined under this sentence shall be allocated to the 
     purchased properties in proportion to their respective costs.
       ``(e) Replacement Qualifying Shipping Assets Must Be 
     Acquired From Unrelated Person in Certain Cases.--
       ``(1) In general.--Subsection (a) shall not apply if the 
     replacement qualifying shipping assets are acquired from a 
     related person except to the extent that the related person 
     acquired the replacement qualifying shipping assets from an 
     unrelated person during the period applicable under 
     subsection (b).
       ``(2) Related person.--For purposes of this subsection, a 
     person is related to another person if the person bears a 
     relationship to the other person described in section 267(b) 
     or 707(b)(1).''
       (b) Technical and Conforming Amendment.--The second 
     sentence of section 56(g)(4)(B)(i), as amended by this Act, 
     is further amended by inserting ``or 1357'' after ``section 
     139A''.
       (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. 296. CHARITABLE CONTRIBUTION DEDUCTION FOR CERTAIN 
                   EXPENSES INCURRED IN SUPPORT OF NATIVE ALASKAN 
                   SUBSISTENCE WHALING.

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

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

     SEC. 301. INTEREST EXPENSE ALLOCATION RULES.

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

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

     shall be treated as described in paragraph (4)(B) for 
     purposes of applying paragraph (4)(A). This subsection (other 
     than this paragraph) shall apply to any such group in the 
     same manner as

[[Page 12818]]

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

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

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

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

     SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

       (a) General Rule.--Section 904 is amended by redesignating 
     subsections (g), (h), (i), (j), and (k) as subsections (h), 
     (i), (j), (k), and (l) respectively, and by inserting after 
     subsection (f) the following new subsection:
       ``(g) Recharacterization of Overall Domestic Loss.--
       ``(1) General rule.--For purposes of this subpart and 
     section 936, in the case of any taxpayer who sustains an 
     overall domestic loss for any taxable year beginning after 
     December 31, 2006, that portion of the taxpayer's taxable 
     income from sources within the United States for each 
     succeeding taxable year which is equal to the lesser of--
       ``(A) the amount of such loss (to the extent not used under 
     this paragraph in prior taxable years), or
       ``(B) 50 percent of the taxpayer's taxable income from 
     sources within the United States for such succeeding taxable 
     year,
     shall be treated as income from sources without the United 
     States (and not as income from sources within the United 
     States).
       ``(2) Overall domestic loss defined.--For purposes of this 
     subsection--
       ``(A) In general.--The term `overall domestic loss' means 
     any domestic loss to the extent such loss offsets taxable 
     income from sources without the United States for the taxable 
     year or for any preceding taxable year by reason of a 
     carryback. For purposes of the preceding sentence, the term 
     `domestic loss' means the amount by which the gross income 
     for the taxable year from sources within the United States is 
     exceeded by the sum of the deductions properly apportioned or 
     allocated thereto (determined without regard to any carryback 
     from a subsequent taxable year).
       ``(B) Taxpayer must have elected foreign tax credit for 
     year of loss.--The term `overall domestic loss' shall not 
     include any loss for any taxable year unless the taxpayer 
     chose the benefits of this subpart for such taxable year.
       ``(3) Characterization of subsequent income.--
       ``(A) In general.--Any income from sources within the 
     United States that is treated as income from sources without 
     the United States under paragraph (1) shall be allocated 
     among and increase the income categories in proportion to the 
     loss from sources within the United States previously 
     allocated to those income categories.
       ``(B) Income category.--For purposes of this paragraph, the 
     term `income category' has the meaning given such term by 
     subsection (f)(5)(E)(i).
       ``(4) Coordination with subsection (f).--The Secretary 
     shall prescribe such regulations as may be necessary to 
     coordinate the provisions of this subsection with the 
     provisions of subsection (f).''.
       (b) Conforming Amendments.--
       (1) Section 535(d)(2) is amended by striking ``section 
     904(g)(6)'' and inserting ``section 904(h)(6)''.
       (2) Subparagraph (A) of section 936(a)(2) is amended by 
     striking ``section 904(f)'' and inserting ``subsections (f) 
     and (g) of section 904''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to losses for taxable years beginning after 
     December 31, 2006.

     SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.

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

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

       (d) Treatment of Financial Services.--Paragraph (2) of 
     section 904(d) is amended by striking subparagraph (D), by 
     redesignating subparagraph (C) as subparagraph (D), and by 
     inserting before subparagraph (D) (as so redesignated) the 
     following new subparagraph:
       ``(C) Treatment of financial services income and 
     companies.--

[[Page 12819]]

       ``(i) In general.--Financial services income shall be 
     treated as general category income in the case of--

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

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

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

       ``(iii) Pass-thru entities.--The Secretary shall by 
     regulation specify for purposes of this subparagraph the 
     treatment of financial services income received or accrued by 
     partnerships and by other pass-thru entities which are not 
     members of a financial services group.''
       (e) Conforming Amendments.--
       (1) Clause (iii) of section 904(d)(2)(B) (relating to 
     exceptions from passive income), as so redesignated, is 
     amended by striking subclause (I) and by redesignating 
     subclauses (II) and (III) as subclauses (I) and (II), 
     respectively.
       (2) Clause (i) of section 904(d)(2)(D) (defining financial 
     services income), as so redesignated, is amended by adding 
     ``or'' at the end of subclause (I) and by striking subclauses 
     (II) and (III) and inserting the following new subclause:

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

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

     any amount included in gross income under section 1293 shall 
     be treated as income in a separate category to the extent 
     such amount is attributable to income in such category.''
       (5) Treatment of income tax base differences.--Paragraph 
     (2) of section 904(d) is amended by redesignating 
     subparagraphs (H) and (I) as subparagraphs (I) and (J), 
     respectively, and by inserting after subparagraph (G) the 
     following new subparagraph:
       ``(H) Treatment of income tax base differences.--Tax 
     imposed under the law of a foreign country or possession of 
     the United States on an amount which does not constitute 
     income under United States tax principles shall be treated as 
     imposed on income described in paragraph (1)(B).''
       (6) Paragraph (2) of section 904(d) is amended by adding at 
     the end the following new subparagraph:
       ``(K) Transitional rules for 2007 changes.--For purposes of 
     paragraph (1)--
       ``(i) taxes carried from any taxable year beginning before 
     January 1, 2007, to any taxable year beginning on or after 
     such date, with respect to any item of income, shall be 
     treated as described in the subparagraph of paragraph (1) in 
     which such income would be described were such taxes paid or 
     accrued in a taxable year beginning on or after such date, 
     and
       ``(ii) the Secretary may by regulations provide for the 
     allocation of any carryback of taxes with respect to income 
     to such a taxable year for purposes of allocating such income 
     among the separate categories in effect for such taxable 
     year.''.
       (7) Section 904(j)(3)(A)(i) is amended by striking 
     ``subsection (d)(2)(A)'' and inserting ``subsection 
     (d)(2)(B)''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.

     SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM 
                   NONCONTROLLED SECTION 902 CORPORATIONS.

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

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

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

[[Page 12820]]



     SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS 
                   TO APPLY IN DETERMINING SECTION 902 AND 960 
                   CREDITS.

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

     SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF 
                   INTANGIBLE PROPERTY.

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

     SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN 
                   ASSETS OF CONTROLLED FOREIGN CORPORATION.

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

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

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

     SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR 
                   FOREIGN TAX PAID OTHER THAN IN FUNCTIONAL 
                   CURRENCY.

       (a) In General.--Paragraph (1) of section 986(a) (relating 
     to determination of foreign taxes and foreign corporation's 
     earnings and profits) is amended by redesignating 
     subparagraph (D) as subparagraph (E) and by inserting after 
     subparagraph (C) the following new subparagraph:
       ``(D) Elective exception for taxes paid other than in 
     functional currency.--
       ``(i) In general.--At the election of the taxpayer, 
     subparagraph (A) shall not apply to any foreign income taxes 
     the liability for which is denominated in any currency other 
     than in the taxpayer's functional currency.
       ``(ii) Application to qualified business units.--An 
     election under this subparagraph may apply to foreign income 
     taxes attributable to a qualified business unit in accordance 
     with regulations prescribed by the Secretary.
       ``(iii) Election.--Any such election shall apply to the 
     taxable year for which made and all subsequent taxable years 
     unless revoked with the consent of the Secretary.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN 
                   FOREIGN CORPORATIONS.

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

     SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY 
                   FOREIGN PARTNERSHIPS AND FOREIGN CORPORATIONS.

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

     SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED 
                   CONTROLLED FOREIGN CORPORATIONS UNDER FOREIGN 
                   PERSONAL HOLDING COMPANY INCOME RULES.

       (a) In General.--Subsection (c) of section 954, as amended 
     by this Act, is amended by adding after paragraph (4) the 
     following new paragraph:
       ``(5) Look-thru in the case of related controlled foreign 
     corporations.--For purposes of this subsection, dividends, 
     interest, rents, and royalties received or accrued from a 
     controlled foreign corporation which is a related person (as 
     defined in subsection (b)(9)) shall not be treated as foreign 
     personal holding company income to the extent attributable or 
     properly allocable (determined under rules similar to the 
     rules of subparagraphs (C) and (D) of section 904(d)(3)) to 
     income of the related person which is not subpart F income 
     (as defined in section 952). For purposes of this paragraph, 
     interest shall include factoring income which is treated as 
     income equivalent to interest for purposes of paragraph 
     (1)(E). The Secretary shall prescribe such regulations as may 
     be appropriate to prevent the abuse of the purposes of this 
     paragraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP 
                   INTERESTS.

       (a) In General.--Section 954(c) (defining foreign personal 
     holding company income), as amended by this Act, is amended 
     by adding after paragraph (5) the following new paragraph:
       ``(6) Look-thru rule for certain partnership sales.--
       ``(A) In general.--In the case of any sale by a controlled 
     foreign corporation of an interest in a partnership with 
     respect to which such corporation is a 25-percent owner, such 
     corporation shall be treated for purposes of this subsection 
     as selling the proportionate share of the assets of the 
     partnership attributable to such interest. The Secretary 
     shall prescribe such regulations as may be appropriate to 
     prevent abuse of the purposes of this paragraph, including 
     regulations providing for coordination of this paragraph with 
     the provisions of subchapter K.
       ``(B) 25-percent owner.--For purposes of this paragraph, 
     the term `25-percent owner' means a controlled foreign 
     corporation which owns directly 25 percent or more of the 
     capital or profits interest in a partnership. For purposes of 
     the preceding sentence, if a controlled foreign corporation 
     is a shareholder or partner of a corporation or partnership, 
     the controlled foreign corporation shall be treated as owning 
     directly its proportionate share of any such capital or 
     profits interest held directly or indirectly by such 
     corporation or partnership.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES 
                   AND FOREIGN INVESTMENT COMPANY RULES.

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

[[Page 12821]]

     954(c) is amended by adding at the end the following new 
     subparagraph:
       ``(I) Personal service contracts.--
       ``(i) Amounts received under a contract under which the 
     corporation is to furnish personal services if--

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

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

     This subparagraph shall apply with respect to amounts 
     received for services under a particular contract only if at 
     some time during the taxable year 25 percent or more in value 
     of the outstanding stock of the corporation is owned, 
     directly or indirectly, by or for the individual who has 
     performed, is to perform, or may be designated (by name or by 
     description) as the one to perform, such services.''.
       (c) Conforming Amendments.--
       (1) Section 1(h) is amended--
       (A) in paragraph (10), by inserting ``and'' at the end of 
     subparagraph (F), by striking subparagraph (G), and by 
     redesignating subparagraph (H) as subparagraph (G), and
       (B) by striking ``a foreign personal holding company (as 
     defined in section 552), a foreign investment company (as 
     defined in section 1246(b)), or'' in paragraph (11)(C)(iii).
       (2) Section 163(e)(3)(B), as amended by section 642(a) of 
     this Act, is amended by striking ``which is a foreign 
     personal holding company (as defined in section 552), a 
     controlled foreign corporation (as defined in section 957), 
     or'' and inserting ``which is a controlled foreign 
     corporation (as defined in section 957) or''.
       (3) Paragraph (2) of section 171(c) is amended--
       (A) by striking ``, or by a foreign personal holding 
     company, as defined in section 552'', and
       (B) by striking ``, or foreign personal holding company''.
       (4) Paragraph (2) of section 245(a) is amended by striking 
     ``foreign personal holding company or''.
       (5) Section 267(a)(3)(B), as amended by section 642(b) of 
     this Act, is amended by striking ``to a foreign personal 
     holding company (as defined in section 552), a controlled 
     foreign corporation (as defined in section 957), or'' and 
     inserting ``to a controlled foreign corporation (as defined 
     in section 957) or''.
       (6) Section 312 is amended by striking subsection (j).
       (7) Subsection (m) of section 312 is amended by striking 
     ``, a foreign investment company (within the meaning of 
     section 1246(b)), or a foreign personal holding company 
     (within the meaning of section 552)''.
       (8) Subsection (e) of section 443 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       (9) Subparagraph (B) of section 465(c)(7) is amended by 
     adding ``or'' at the end of clause (i), by striking clause 
     (ii), and by redesignating clause (iii) as clause (ii).
       (10) Paragraph (1) of section 543(b) is amended by 
     inserting ``and'' at the end of subparagraph (A), by striking 
     ``, and'' at the end of subparagraph (B) and inserting a 
     period, and by striking subparagraph (C).
       (11) Paragraph (1) of section 562(b) is amended by striking 
     ``or a foreign personal holding company described in section 
     552''.
       (12) Section 563 is amended--
       (A) by striking subsection (c),
       (B) by redesignating subsection (d) as subsection (c), and
       (C) by striking ``subsection (a), (b), or (c)'' in 
     subsection (c) (as so redesignated) and inserting 
     ``subsection (a) or (b)''.
       (13) Subsection (d) of section 751 is amended by adding 
     ``and'' at the end of paragraph (2), by striking paragraph 
     (3), by redesignating paragraph (4) as paragraph (3), and by 
     striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as 
     so redesignated) and inserting ``paragraph (1) or (2)''.
       (14) Paragraph (2) of section 864(d) is amended by striking 
     subparagraph (A) and by redesignating subparagraphs (B) and 
     (C) as subparagraphs (A) and (B), respectively.
       (15)(A) Subparagraph (A) of section 898(b)(1) is amended to 
     read as follows:
       ``(A) which is treated as a controlled foreign corporation 
     for any purpose under subpart F of part III of this 
     subchapter, and''.
       (B) Subparagraph (B) of section 898(b)(2) is amended by 
     striking ``and sections 551(f) and 554, whichever are 
     applicable,''.
       (C) Paragraph (3) of section 898(b) is amended to read as 
     follows:
       ``(3) United states shareholder.--The term `United States 
     shareholder' has the meaning given to such term by section 
     951(b), except that, in the case of a foreign corporation 
     having related person insurance income (as defined in section 
     953(c)(2)), the Secretary may treat any person as a United 
     States shareholder for purposes of this section if such 
     person is treated as a United States shareholder under 
     section 953(c)(1).''.
       (D) Subsection (c) of section 898 is amended to read as 
     follows:
       ``(c) Determination of Required Year.--
       ``(1) In general.--The required year is--
       ``(A) the majority U.S. shareholder year, or
       ``(B) if there is no majority U.S. shareholder year, the 
     taxable year prescribed under regulations.
       ``(2) 1-month deferral allowed.--A specified foreign 
     corporation may elect, in lieu of the taxable year under 
     paragraph (1)(A), a taxable year beginning 1 month earlier 
     than the majority U.S. shareholder year.
       ``(3) Majority u.s. shareholder year.--
       ``(A) In general.--For purposes of this subsection, the 
     term `majority U.S. shareholder year' means the taxable year 
     (if any) which, on each testing day, constituted the taxable 
     year of--
       ``(i) each United States shareholder described in 
     subsection (b)(2)(A), and
       ``(ii) each United States shareholder not described in 
     clause (i) whose stock was treated as owned under subsection 
     (b)(2)(B) by any shareholder described in such clause.
       ``(B) Testing day.--The testing days shall be--
       ``(i) the first day of the corporation's taxable year 
     (determined without regard to this section), or
       ``(ii) the days during such representative period as the 
     Secretary may prescribe.''.
       (16) Clause (ii) of section 904(d)(2)(A) is amended to read 
     as follows:
       ``(ii) Certain amounts included.--Except as provided in 
     clause (iii), the term `passive income' includes, except as 
     provided in subparagraph (E)(iii) or paragraph (3)(I), any 
     amount includible in gross income under section 1293 
     (relating to certain passive foreign investment 
     companies).''.
       (17)(A) Subparagraph (A) of section 904(h)(1), as 
     redesignated by section 302, is amended by adding ``or'' at 
     the end of clause (i), by striking clause (ii), and by 
     redesignating clause (iii) as clause (ii).
       (B) The paragraph heading of paragraph (2) of section 
     904(h), as so redesignated, is amended by striking ``foreign 
     personal holding or''.
       (18) Section 951 is amended by striking subsections (c) and 
     (d) and by redesignating subsections (e) and (f) as 
     subsections (c) and (d), respectively.
       (19) Paragraph (3) of section 989(b) is amended by striking 
     ``, 551(a),''.
       (20) Paragraph (5) of section 1014(b) is amended by 
     inserting ``and before January 1, 2005,'' after ``August 26, 
     1937,''.
       (21) Subsection (a) of section 1016 is amended by striking 
     paragraph (13).
       (22)(A) Paragraph (3) of section 1212(a) is amended to read 
     as follows:
       ``(3) Special rules on carrybacks.--A net capital loss of a 
     corporation shall not be carried back under paragraph (1)(A) 
     to a taxable year--
       ``(A) for which it is a regulated investment company (as 
     defined in section 851), or
       ``(B) for which it is a real estate investment trust (as 
     defined in section 856).''.
       (B) The amendment made by subparagraph (A) shall apply to 
     taxable years beginning after December 31, 2004.
       (23) Section 1223 is amended by striking paragraph (10) and 
     by redesignating the following paragraphs accordingly.
       (24) Subsection (d) of section 1248 is amended by striking 
     paragraph (5) and by redesignating paragraphs (6) and (7) as 
     paragraphs (5) and (6), respectively.
       (25) Paragraph (2) of section 1260(c) is amended by 
     striking subparagraphs (H) and (I) and by redesignating 
     subparagraph (J) as subparagraph (H).
       (26)(A) Subparagraph (F) of section 1291(b)(3) is amended 
     by striking ``551(d), 959(a),'' and inserting ``959(a)''.
       (B) Subsection (e) of section 1291 is amended by inserting 
     ``(as in effect on the day before the date of the enactment 
     of the American Jobs Creation Act of 2004)'' after ``section 
     1246''.
       (27) Paragraph (2) of section 1294(a) is amended to read as 
     follows:
       ``(2) Election not permitted where amounts otherwise 
     includible under section 951.--The taxpayer may not make an 
     election under paragraph (1) with respect to the 
     undistributed PFIC earnings tax liability attributable to a 
     qualified electing fund for the taxable year if any amount is 
     includible in the gross income of the taxpayer under section 
     951 with respect to such fund for such taxable year.''.
       (28) Section 6035 is hereby repealed.
       (29) Subparagraph (D) of section 6103(e)(1) is amended by 
     striking clause (iv) and redesignating clauses (v) and (vi) 
     as clauses (iv) and (v), respectively.
       (30) Subparagraph (B) of section 6501(e)(1) is amended to 
     read as follows:
       ``(B) Constructive dividends.--If the taxpayer omits from 
     gross income an amount properly includible therein under 
     section 951(a), the tax may be assessed, or a proceeding in 
     court for the collection of such tax may be done without 
     assessing, at any time within 6 years after the return was 
     filed.''.
       (31) Subsection (a) of section 6679 is amended--
       (A) by striking ``6035, 6046, and 6046A'' in paragraph (1) 
     and inserting ``6046 and 6046A'', and
       (B) by striking paragraph (3).
       (32) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
     are each amended by striking ``556(b)(2),'' each place it 
     appears.
       (33) The table of parts for subchapter G of chapter 1 is 
     amended by striking the item relating to part III.
       (34) The table of sections for part IV of subchapter P of 
     chapter 1 is amended by striking the items relating to 
     sections 1246 and 1247.
       (35) The table of sections for subpart A of part III of 
     subchapter A of chapter 61 is amended by striking the item 
     relating to section 6035.
       (d) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section

[[Page 12822]]

     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.
       (2) Subsection (c)(29).--The amendments made by subsection 
     (c)(29) shall apply to disclosures of return or return 
     information with respect to taxable years beginning after 
     December 31, 2004.

     SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY 
                   INCOME WITH RESPECT TO TRANSACTIONS IN 
                   COMMODITIES.

       (a) In General.--Clauses (i) and (ii) of section 
     954(c)(1)(C) (relating to commodity transactions) are amended 
     to read as follows:
       ``(i) arise out of commodity hedging transactions (as 
     defined in paragraph (4)(A)),
       ``(ii) are active business gains or losses from the sale of 
     commodities, but only if substantially all of the controlled 
     foreign corporation's commodities are property described in 
     paragraph (1), (2), or (8) of section 1221(a), or''.
       (b) Definition and Special Rules.--Subsection (c) of 
     section 954 is amended by adding after paragraph (3) the 
     following new paragraph:
       ``(4) Definition and special rules relating to commodity 
     transactions.--
       ``(A) Commodity hedging transactions.--For purposes of 
     paragraph (1)(C)(i), the term `commodity hedging transaction' 
     means any transaction with respect to a commodity if such 
     transaction--
       ``(i) is a hedging transaction as defined in section 
     1221(b)(2), determined--

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

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

     SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT LEASING AND 
                   SHIPPING INCOME.

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

     SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR 
                   ACTIVE FINANCING.

       (a) In General.--Section 954(h)(3) is amended by adding at 
     the end the following:
       ``(E) Direct conduct of activities.--For purposes of 
     subparagraph (A)(ii)(II), an activity shall be treated as 
     conducted directly by an eligible controlled foreign 
     corporation or qualified business unit in its home country if 
     the activity is performed by employees of a related person 
     and--
       ``(i) the related person is an eligible controlled foreign 
     corporation the home country of which is the same as the home 
     country of the corporation or unit to which subparagraph 
     (A)(ii)(II) is being applied,
       ``(ii) the activity is performed in the home country of the 
     related person, and
       ``(iii) the related person is compensated on an arm's-
     length basis for the performance of the activity by its 
     employees and such compensation is treated as earned by such 
     person in its home country for purposes of the home country's 
     tax laws.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of such foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of such foreign corporations end.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

     SEC. 401. 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 taxable years 2000 through 2005.--
     '', and
       (2) by striking ``or 2003,'' and inserting ``2003, 2004, or 
     2005,''.
       (b) Conforming Provisions.--
       (1) Section 904(h) is amended by striking ``or 2003'' and 
     inserting ``2003, 2004, or 2005''.
       (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 or 2005.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 402. EXTENSION OF RESEARCH CREDIT.

       (a) Extension.--
       (1) In general.--Section 41(h)(1)(B) (relating to 
     termination) is amended by striking ``June 30, 2004'' and 
     inserting ``December 31, 2005''.
       (2) Conforming amendment.--Section 45C(b)(1)(D) is amended 
     by striking ``June 30, 2004'' and inserting ``December 31, 
     2005''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to amounts paid or incurred after June 30, 2004.

     SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM 
                   CERTAIN RENEWABLE RESOURCES.

       (a) In General.--Subparagraphs (A) and (B) of section 
     45(c)(3) (defining qualified facility) are both amended by 
     striking ``2004'' and inserting ``2006''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to facilities placed in service after December 
     31, 2003.

     SEC. 404. INDIAN EMPLOYMENT TAX CREDIT.

       Section 45A(f) (relating to termination) is amended by 
     striking ``December 31, 2004'' and inserting ``December 31, 
     2005''.

     SEC. 405. WORK OPPORTUNITY CREDIT.

       (a) In General.--Subparagraph (B) of section 51(c)(4) is 
     amended by striking ``December 31, 2003'' and inserting 
     ``December 31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to individuals who begin work for the employer 
     after December 31, 2003.

     SEC. 406. WELFARE-TO-WORK CREDIT.

       (a) In General.--Subsection (f) of section 51A is amended 
     by striking ``December 31, 2003'' and inserting ``December 
     31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to individuals who begin work for the employer 
     after December 31, 2003.

     SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL 
                   TEACHERS.

       (a) In General.--Subparagraph (D) of section 62(a)(2) 
     (relating to certain trade and business deductions of 
     employees) is amended by striking ``or 2003'' and inserting 
     ``, 2003, 2004, or 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION BENEFIT FOR 
                   PROPERTY ON INDIAN RESERVATIONS.

       Paragraph (8) of section 168(j) (relating to termination) 
     is amended by striking ``December 31, 2004'' and inserting 
     ``December 31, 2005''.

     SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND 
                   EQUIPMENT USED FOR EDUCATIONAL PURPOSES.

       (a) In General.--Subparagraph (G) of section 170(e)(6) 
     (relating to special rule for contributions of computer 
     technology and equipment for educational purposes) is amended 
     by striking ``December 31, 2003'' and inserting ``December 
     31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

       (a) In General.--Subsection (h) of section 198 (relating to 
     termination) is amended by striking ``December 31, 2003'' and 
     inserting ``December 31, 2005''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to expenditures paid or incurred after December 
     31, 2003.

     SEC. 411. 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 in the text and headings and 
     inserting ``2005''.
       (b) Conforming Amendments.--
       (1) Paragraph (2) of section 220(j) is amended--
       (A) in the text by striking ``or 2002'' each place it 
     appears and inserting ``2002, or 2004'', and
       (B) in the heading by striking ``or 2002'' and inserting 
     ``2002, or 2004''.
       (2) Subparagraph (A) of section 220(j)(4) is amended by 
     striking ``and 2002'' and inserting ``2002, and 2004''.

[[Page 12823]]

       (3) Subparagraph (C) of section 220(j)(2) is amended to 
     read as follows:
       ``(C) No limitation for 2000 or 2003.--The numerical 
     limitation shall not apply for 2000 or 2003.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2004.
       (d) Time for Filing Reports, Etc.--
       (1) The report required by section 220(j)(4) of the 
     Internal Revenue Code of 1986 to be made on August 1, 2004, 
     shall be treated as timely if made before the close of the 
     90-day period beginning on the date of the enactment of this 
     Act.
       (2) The determination and publication required by section 
     220(j)(5) of such Code with respect to calendar year 2004 
     shall be treated as timely if made before the close of the 
     120-day period beginning on the date of the enactment of this 
     Act. If the determination under the preceding sentence is 
     that 2004 is a cut-off year under section 220(i) of such 
     Code, the cut-off date under such section 220(i) shall be the 
     last day of such 120-day period.

     SEC. 412. 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 ``January 1, 2004'' and inserting 
     ``January 1, 2006''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 413. QUALIFIED ZONE ACADEMY BONDS.

       (a) In General.--Paragraph (1) of section 1397E(e) is 
     amended by striking ``and 2003'' and inserting ``2003, 2004, 
     and 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to obligations issued after the date of the 
     enactment of this Act.

     SEC. 414. DISTRICT OF COLUMBIA.

       (a) District of Columbia Enterprise Zone.--Subsection (f) 
     of section 1400 is amended by striking ``December 31, 2003'' 
     both places it appears and inserting ``December 31, 2005''.
       (b)  Tax-Exempt Economic Development Bonds.--Subsection (b) 
     of section 1400A is amended by striking ``December 31, 2003'' 
     and inserting ``December 31, 2005''.
       (c) Zero Percent Capital Gains Rate.--
       (1) Section 1400B is amended by striking ``January 1, 
     2004'' each place it appears and inserting ``January 1, 
     2006''.
       (2) Subsections (e)(2) and (g)(2) of section 1400B are each 
     amended by striking ``2008'' each place it appears in the 
     headings and text and inserting ``2010''.
       (3) Subsection (d) of section 1400F is amended by striking 
     ``December 31, 2008'' and inserting ``December 31, 2010''.
       (d) First-Time Homebuyer Credit.--Subsection (i) of section 
     1400C is amended by striking ``January 1, 2004'' and 
     inserting ``January 1, 2006''.
       (e) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall take 
     effect on the date of the enactment of this Act.
       (2) Tax-exempt economic development bonds.--The amendment 
     made by subsection (b) shall apply to obligations issued 
     after December 31, 2003.

     SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY ZONE BOND 
                   FINANCING.

       Subparagraph (D) of section 1400L(d)(2) is amended by 
     striking ``2005'' and inserting ``2010''.

     SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVITIES.

       (a) In General.--Clause (iv) of section 6103(i)(3)(C) and 
     subparagraph (E) of section 6103(i)(7) are both amended by 
     striking ``December 31, 2003'' and inserting ``December 31, 
     2005''.
       (b) Disclosure of taxpayer identity to law enforcement 
     agencies investigating terrorism.--Subparagraph (A) of 
     section 6103(i)(7) is amended by adding at the end the 
     following new clause:
       ``(v) Taxpayer identity.--For purposes of this 
     subparagraph, a taxpayer's identity shall not be treated as 
     taxpayer return information.''.
       (c) Effective Dates.--
       (1) In general.--The amendments made by subsection (a) 
     shall apply to disclosures on or after the date of the 
     enactment of this Act.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall take effect as if included in section 201 of the 
     Victims of Terrorism Tax Relief Act of 2001.

     SEC. 417. DISCLOSURE OF RETURN INFORMATION RELATING TO 
                   STUDENT LOANS.

       Section 6103(l)(13)(D) (relating to termination) is amended 
     by striking ``December 31, 2004'' and inserting ``December 
     31, 2005''.

     SEC. 418. 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, 2006''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to articles brought into the United States after 
     December 31, 2003.

     SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDGET FOR THE 
                   INTERNAL REVENUE SERVICE.

       (a) In General.--Paragraph (2) of section 8021(f) (relating 
     to joint reviews) is amended by striking ``2004'' and 
     inserting ``2005''.
       (b) Report.--Subparagraph (C) of section 8022(3) (regarding 
     reports) is amended--
       (1) by striking ``2004'' and inserting ``2005'', and
       (2) by striking ``with respect to--'' and all that follows 
     and inserting ``with respect to the matters addressed in the 
     joint review referred to in section 8021(f)(2).''.
       (c) Time for Joint Review.--The joint review required by 
     section 8021(f)(2) of the Internal Revenue Code of 1986 to be 
     made before June 1, 2004, shall be treated as timely if made 
     before June 1, 2005.

     SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO 
                   MENTAL HEALTH BENEFITS.

       (a) In General.--Subsection (f) of section 9812 is amended 
     by striking ``and'' at the end of paragraph (1), by striking 
     paragraph (2), and by inserting after paragraph (1) the 
     following new paragraphs:
       ``(2) on or after January 1, 2004, and before the date of 
     the enactment of American Jobs Creation Act of 2004, and
       ``(3) after December 31, 2005.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to benefits for services furnished on or after 
     December 31, 2003.

     SEC. 421. COMBINED EMPLOYMENT TAX REPORTING PROJECT.

       (a) In General.--Paragraph (1) of section 976(b) of the 
     Taxpayer Relief Act of 1997 (111 Stat. 898) is amended by 
     striking ``for a period ending with the date which is 5 years 
     after the date of the enactment of this Act'' and inserting 
     ``during the period ending on December 31, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to disclosures on or after the date of the 
     enactment of this Act.

     SEC. 422. CLEAN-FUEL VEHICLES.

       (a) Credit for Qualified Electric Vehicles.--Paragraph (2) 
     of section 30(b) (relating to phaseout) is amended to read as 
     follows:
       ``(2) Phaseout.--In the case of any qualified electric 
     vehicle placed in service after December 31, 2005, the credit 
     otherwise allowable under subsection (a) (determined after 
     the application of paragraph (1)) shall be reduced by 75 
     percent.''.
       (b) Deduction for Qualified Clean-fuel Vehicle Property.--
     Subparagraph (B) of section 179A(b)(1) (relating to phaseout) 
     is amended to read as follows:
       ``(B) Phaseout.--In the case of any qualified clean-fuel 
     vehicle property placed in service after December 31, 2005, 
     the limit otherwise applicable under subparagraph (A) shall 
     be reduced by 75 percent.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2003.

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

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

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

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

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

[[Page 12824]]

       ``(H) Amount of deduction to be determined under tables.--
       ``(i) In general.--The amount of the deduction allowed 
     under this paragraph shall be determined under tables 
     prescribed by the Secretary.
       ``(ii) Requirements for tables.--The tables prescribed 
     under clause (i)--

       ``(I) shall reflect the provisions of this paragraph,
       ``(II) shall be based on the average consumption by 
     taxpayers on a State-by-State basis, as determined by the 
     Secretary, taking into account filing status, number of 
     dependents, adjusted gross income, and rates of State and 
     local general sales taxation, and
       ``(III) need only be determined with respect to adjusted 
     gross incomes up to the applicable amount (as determined 
     under section 68(b)).

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

                      TITLE VI--REVENUE PROVISIONS

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

     SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND THEIR 
                   FOREIGN PARENTS.

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

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

       ``(a) Tax on Inversion Gain of Expatriated Entities.--
       ``(1) In general.--The taxable income of an expatriated 
     entity for any taxable year which includes any portion of the 
     applicable period shall in no event be less than the 
     inversion gain of the entity for the taxable year.
       ``(2) Expatriated entity.--For purposes of this 
     subsection--
       ``(A) In general.--The term `expatriated entity' means--
       ``(i) the domestic corporation or partnership referred to 
     in subparagraph (B)(i) with respect to which a foreign 
     corporation is a surrogate foreign corporation, and
       ``(ii) any United States person who is related (within the 
     meaning of section 267(b) or 707(b)(1)) to a domestic 
     corporation or partnership described in clause (i).
       ``(B) Surrogate foreign corporation.--A foreign corporation 
     shall be treated as a surrogate foreign corporation if, 
     pursuant to a plan (or a series of related transactions)--
       ``(i) the entity completes after March 4, 2003, the direct 
     or indirect acquisition of substantially all of the 
     properties held directly or indirectly by a domestic 
     corporation or substantially all of the properties 
     constituting a trade or business of a domestic partnership,
       ``(ii) after the acquisition at least 60 percent of the 
     stock (by vote or value) of the entity is held--

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

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

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

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

     For purposes of determining the credit allowed by section 
     901, inversion gain shall be treated as from sources within 
     the United States.
       ``(2) Special rules for partnerships.--In the case of an 
     expatriated entity which is a partnership--
       ``(A) subsection (a)(1) shall apply at the partner rather 
     than the partnership level,
       ``(B) the inversion gain of any partner for any taxable 
     year shall be equal to the sum of--
       ``(i) the partner's distributive share of inversion gain of 
     the partnership for such taxable year, plus
       ``(ii) gain recognized for the taxable year by the partner 
     by reason of the transfer during the applicable period of any 
     partnership interest of the partner in such partnership to 
     the surrogate foreign corporation, and
       ``(C) the highest rate of tax specified in the rate 
     schedule applicable to the partner under this chapter shall 
     be substituted for the rate of tax referred to in paragraph 
     (1).
       ``(3) Coordination with section 172 and minimum tax.--Rules 
     similar to the rules of paragraphs (3) and (4) of section 
     860E(a) shall apply for purposes of subsection (a).
       ``(4) Statute of limitations.--
       ``(A) In general.--The statutory period for the assessment 
     of any deficiency attributable to the inversion gain of any 
     taxpayer for any pre-inversion year shall not expire before 
     the expiration of 3 years from the date the Secretary is 
     notified by the taxpayer (in such manner as the Secretary may 
     prescribe) of the acquisition described in subsection 
     (a)(2)(B)(i) to which such gain relates and such deficiency 
     may be assessed before the expiration of such 3-year period 
     notwithstanding the provisions of any other law or rule of 
     law which would otherwise prevent such assessment.
       ``(B) Pre-inversion year.--For purposes of subparagraph 
     (A), the term `pre-inversion year' means any taxable year 
     if--
       ``(i) any portion of the applicable period is included in 
     such taxable year, and
       ``(ii) such year ends before the taxable year in which the 
     acquisition described in subsection (a)(2)(B)(i) is 
     completed.
       ``(e) Special Rule for Treaties.--Nothing in section 894 or 
     7852(d) or in any other provision of law shall be construed 
     as permitting an exemption, by reason of any treaty 
     obligation of the United States heretofore or hereafter 
     entered into, from the provisions of this section.
       ``(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.''.

[[Page 12825]]

       (b) Conforming Amendment.--The table of sections for 
     subchapter C of chapter 80 is amended by adding at the end 
     the following new item:

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

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

     SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN 
                   EXPATRIATED CORPORATIONS.

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

       ``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES

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

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

       ``(a) Imposition of Tax.--In the case of an individual who 
     is a disqualified individual with respect to any expatriated 
     corporation, there is hereby imposed on such person a tax 
     equal to 15 percent of the value (determined under subsection 
     (b)) of the specified stock compensation held (directly or 
     indirectly) by or for the benefit of such individual or a 
     member of such individual's family (as defined in section 
     267) at any time during the 12-month period beginning on the 
     date which is 6 months before the expatriation date.
       ``(b) Value.--For purposes of subsection (a)--
       ``(1) In general.--The value of specified stock 
     compensation shall be--
       ``(A) in the case of a stock option (or other similar 
     right) or a stock appreciation right, the fair value of such 
     option or right, and
       ``(B) in any other case, the fair market value of such 
     compensation.
       ``(2) Date for determining value.--The determination of 
     value shall be made--
       ``(A) in the case of specified stock compensation held on 
     the expatriation date, on such date,
       ``(B) in the case of such compensation which is canceled 
     during the 6 months before the expatriation date, on the day 
     before such cancellation, and
       ``(C) in the case of such compensation which is granted 
     after the expatriation date, on the date such compensation is 
     granted.
       ``(c) Tax To Apply Only if Shareholder Gain Recognized.--
     Subsection (a) shall apply to any disqualified individual 
     with respect to an expatriated corporation only if gain (if 
     any) on any stock in such corporation is recognized in whole 
     or part by any shareholder by reason of the acquisition 
     referred to in section 7874(a)(2)(B)(i) with respect to such 
     corporation.
       ``(d) Exception Where Gain Recognized on Compensation.--
     Subsection (a) shall not apply to--
       ``(1) any stock option which is exercised on the 
     expatriation date or during the 6-month period before such 
     date and to the stock acquired in such exercise, if income is 
     recognized under section 83 on or before the expatriation 
     date with respect to the stock acquired pursuant to such 
     exercise, and
       ``(2) any other specified stock compensation which is 
     exercised, sold, exchanged, distributed, cashed-out, or 
     otherwise paid during such period in a transaction in which 
     income, gain, or loss is recognized in full.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Disqualified individual.--The term `disqualified 
     individual' means, with respect to a corporation, any 
     individual who, at any time during the 12-month period 
     beginning on the date which is 6 months before the 
     expatriation date--
       ``(A) is subject to the requirements of section 16(a) of 
     the Securities Exchange Act of 1934 with respect to such 
     corporation or any member of the expanded affiliated group 
     which includes such corporation, or
       ``(B) would be subject to such requirements if such 
     corporation or member were an issuer of equity securities 
     referred to in such section.
       ``(2) Expatriated corporation; expatriation date.--
       ``(A) Expatriated corporation.--The term `expatriated 
     corporation' means any corporation which is an expatriated 
     entity (as defined in section 7874(a)(2)). Such term includes 
     any predecessor or successor of such a corporation.
       ``(B) Expatriation date.--The term `expatriation date' 
     means, with respect to a corporation, the date on which the 
     corporation first becomes an expatriated corporation.
       ``(3) Specified stock compensation.--
       ``(A) In general.--The term `specified stock compensation' 
     means payment (or right to payment) granted by the 
     expatriated corporation (or by any member of the expanded 
     affiliated group which includes such corporation) to any 
     person in connection with the performance of services by a 
     disqualified individual for such corporation or member if the 
     value of such payment or right is based on (or determined by 
     reference to) the value (or change in value) of stock in such 
     corporation (or any such member).
       ``(B) Exceptions.--Such term shall not include--
       ``(i) any option to which part II of subchapter D of 
     chapter 1 applies, or
       ``(ii) any payment or right to payment from a plan referred 
     to in section 280G(b)(6).
       ``(4) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group (as defined in 
     section 1504(a) without regard to section 1504(b)(3)); except 
     that section 1504(a) shall be applied by substituting `more 
     than 50 percent' for `at least 80 percent' each place it 
     appears.
       ``(f) Special Rules.--For purposes of this section--
       ``(1) Cancellation of restriction.--The cancellation of a 
     restriction which by its terms will never lapse shall be 
     treated as a grant.
       ``(2) Payment or reimbursement of tax by corporation 
     treated as specified stock compensation.--Any payment of the 
     tax imposed by this section directly or indirectly by the 
     expatriated corporation or by any member of the expanded 
     affiliated group which includes such corporation--
       ``(A) shall be treated as specified stock compensation, and
       ``(B) shall not be allowed as a deduction under any 
     provision of chapter 1.
       ``(3) Certain restrictions ignored.--Whether there is 
     specified stock compensation, and the value thereof, shall be 
     determined without regard to any restriction other than a 
     restriction which by its terms will never lapse.
       ``(4) Property transfers.--Any transfer of property shall 
     be treated as a payment and any right to a transfer of 
     property shall be treated as a right to a payment.
       ``(5) Other administrative provisions.--For purposes of 
     subtitle F, any tax imposed by this section shall be treated 
     as a tax imposed by subtitle A.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''
       (b) Denial of Deduction.--
       (1) In general.--Paragraph (6) of section 275(a) is amended 
     by inserting ``45,'' before ``46,''.
       (2) $1,000,000 limit on deductible compensation reduced by 
     payment of excise tax on specified stock compensation.--
     Paragraph (4) of section 162(m) is amended by adding at the 
     end the following new subparagraph:
       ``(G) Coordination with excise tax on specified stock 
     compensation.--The dollar limitation contained in paragraph 
     (1) with respect to any covered employee shall be reduced 
     (but not below zero) by the amount of any payment (with 
     respect to such employee) of the tax imposed by section 4985 
     directly or indirectly by the expatriated corporation (as 
     defined in such section) or by any member of the expanded 
     affiliated group (as defined in such section) which includes 
     such corporation.''
       (c) Conforming Amendments.--
       (1) The last sentence of section 3121(v)(2)(A) is amended 
     by inserting before the period ``or to any specified stock 
     compensation (as defined in section 4985) on which tax is 
     imposed by section 4985''.
       (2) The table of chapters for subtitle D is amended by 
     inserting after the item relating to chapter 44 the following 
     new item:

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

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

     SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOREIGN 
                   JURISDICTIONS.

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

     SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF 
                   INDIVIDUALS.

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

     In the case of the loss of United States citizenship in any 
     calendar year after 2004, such $124,000 amount shall be 
     increased by an amount equal to such dollar amount multiplied 
     by the cost-of-living adjustment determined under section 
     1(f)(3) for such calendar year by substituting `2003' for 
     `1992' in subparagraph (B) thereof. Any increase under the 
     preceding sentence shall be rounded to the nearest multiple 
     of $1,000.''.

[[Page 12826]]

       (2) Revision of exceptions from alternative tax.--
     Subsection (c) of section 877 (relating to tax avoidance not 
     presumed in certain cases) is amended to read as follows:
       ``(c) Exceptions.--
       ``(1) In general.--Subparagraphs (A) and (B) of subsection 
     (a)(2) shall not apply to an individual described in 
     paragraph (2) or (3).
       ``(2) Dual citizens.--
       ``(A) In general.--An individual is described in this 
     paragraph if--
       ``(i) the individual became at birth a citizen of the 
     United States and a citizen of another country and continues 
     to be a citizen of such other country, and
       ``(ii) the individual has had no substantial contacts with 
     the United States.
       ``(B) Substantial contacts.--An individual shall be treated 
     as having no substantial contacts with the United States only 
     if the individual--
       ``(i) was never a resident of the United States (as defined 
     in section 7701(b)),
       ``(ii) has never held a United States passport, and
       ``(iii) was not present in the United States for more than 
     30 days during any calendar year which is 1 of the 10 
     calendar years preceding the individual's loss of United 
     States citizenship.
       ``(3) Certain minors.--An individual is described in this 
     paragraph if--
       ``(A) the individual became at birth a citizen of the 
     United States,
       ``(B) neither parent of such individual was a citizen of 
     the United States at the time of such birth,
       ``(C) the individual's loss of United States citizenship 
     occurs before such individual attains age 18\1/2\, and
       ``(D) the individual was not present in the United States 
     for more than 30 days during any calendar year which is 1 of 
     the 10 calendar years preceding the individual's loss of 
     United States citizenship.''.
       (3) Conforming amendment.--Section 2107(a) is amended to 
     read as follows:
       ``(a) Treatment of Expatriates.--A tax computed in 
     accordance with the table contained in section 2001 is hereby 
     imposed on the transfer of the taxable estate, determined as 
     provided in section 2106, of every decedent nonresident not a 
     citizen of the United States if the date of death occurs 
     during a taxable year with respect to which the decedent is 
     subject to tax under section 877(b).''.
       (b) Special Rules for Determining When an Individual Is No 
     Longer a United States Citizen or Long-Term Resident.--
     Section 7701 (relating to definitions) is amended by 
     redesignating subsection (n) as subsection (o) and by 
     inserting after subsection (m) the following new subsection:
       ``(n) Special Rules for Determining When an Individual Is 
     No Longer a United States Citizen or Long-Term Resident.--An 
     individual who would (but for this subsection) cease to be 
     treated as a citizen or resident of the United States shall 
     continue to be treated as a citizen or resident of the United 
     States, as the case may be, until such individual--
       ``(1) gives notice of an expatriating act or termination of 
     residency (with the requisite intent to relinquish 
     citizenship or terminate residency) to the Secretary of State 
     or the Secretary of Homeland Security, and
       ``(2) provides a statement in accordance with section 
     6039G.''.
       (c) Physical Presence in the United States for More Than 30 
     Days.--Section 877 (relating to expatriation to avoid tax) is 
     amended by adding at the end the following new subsection:
       ``(g) Physical Presence.--
       ``(1) In general.--This section shall not apply to any 
     individual to whom this section would otherwise apply for any 
     taxable year during the 10-year period referred to in 
     subsection (a) in which such individual is physically present 
     in the United States at any time on more than 30 days in the 
     calendar year ending in such taxable year, and such 
     individual shall be treated for purposes of this title as a 
     citizen or resident of the United States, as the case may be, 
     for such taxable year.
       ``(2) Exception.--
       ``(A) In general.--In the case of an individual described 
     in any of the following subparagraphs of this paragraph, a 
     day of physical presence in the United States shall be 
     disregarded if the individual is performing services in the 
     United States on such day for an employer. The preceding 
     sentence shall not apply if--
       ``(i) such employer is related (within the meaning of 
     section 267 and 707) to such individual, or
       ``(ii) such employer fails to meet such requirements as the 
     Secretary may prescribe by regulations to prevent the 
     avoidance of the purposes of this paragraph.

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

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

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

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

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

     such individual shall pay a penalty of $10,000 unless it is 
     shown that such failure is due to reasonable cause and not to 
     willful neglect.''.
       (4) Conforming amendment.--Section 6039G is amended by 
     striking subsections (c), (f), and (g) and by redesignating 
     subsections (d) and (e) as subsection (c) and (d), 
     respectively.

       (f) Effective Date.--The amendments made by this section 
     shall apply to individuals who expatriate after June 3, 2004.

[[Page 12827]]



     SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

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

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

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

     To the extent provided by the Secretary, the requirements of 
     this section applicable to the acquiring corporation shall be 
     applicable to the acquired corporation and not to the 
     acquiring corporation.
       ``(b) Nominees.--According to the forms or regulations 
     prescribed by the Secretary--
       ``(1) Reporting.--Any person who holds stock as a nominee 
     for another person shall furnish in the manner prescribed by 
     the Secretary to such other person the information provided 
     by the corporation under subsection (d).
       ``(2) Reporting to nominees.--In the case of stock held by 
     any person as a nominee, references in this section (other 
     than in subsection (c)) to a shareholder shall be treated as 
     a reference to the nominee.
       ``(c) Taxable Acquisition.--For purposes of this section, 
     the term `taxable acquisition' means any acquisition by a 
     corporation of stock in or property of another corporation if 
     any shareholder of the acquired corporation is required to 
     recognize gain (if any) as a result of such acquisition.
       ``(d) Statements To Be Furnished to Shareholders.--
     According to the forms or regulations prescribed by the 
     Secretary, every person required to make a return under 
     subsection (a) shall furnish to each shareholder whose name 
     is required to be set forth in such return a written 
     statement showing--
       ``(1) the name, address, and phone number of the 
     information contact of the person required to make such 
     return,
       ``(2) the information required to be shown on such return 
     with respect to such shareholder, and
       ``(3) such other information as the Secretary may 
     prescribe.
     The written statement required under the preceding sentence 
     shall be furnished to the shareholder on or before January 31 
     of the year following the calendar year during which the 
     taxable acquisition occurred.''
       (b) Assessable Penalties.--
       (1) Subparagraph (B) of section 6724(d)(1) (relating to 
     definitions) is amended by redesignating clauses (ii) through 
     (xviii) as clauses (iii) through (xix), respectively, and by 
     inserting after clause (i) the following new clause:
       ``(ii) section 6043A(a) (relating to returns relating to 
     taxable mergers and acquisitions),''.
       (2) Paragraph (2) of section 6724(d) is amended by 
     redesignating subparagraphs (F) through (BB) as subparagraphs 
     (G) through (CC), respectively, and by inserting after 
     subparagraph (E) the following new subparagraph:
       ``(F) subsections (b) and (d) of section 6043A (relating to 
     returns relating to taxable mergers and acquisitions).''.
       (c) Clerical Amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61 is amended by 
     inserting after the item relating to section 6043 the 
     following new item:

``Sec. 6043A. Returns relating to taxable mergers and acquisitions.''.

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

     SEC. 606. STUDIES.

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

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

     SEC. 611. PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
                   TRANSACTIONS.

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

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

       ``(a) Imposition of Penalty.--Any person who fails to 
     include on any return or statement any information with 
     respect to a reportable transaction which is required under 
     section 6011 to be included with such return or statement 
     shall pay a penalty in the amount determined under subsection 
     (b).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     amount of the penalty under subsection (a) shall be--
       ``(A) $10,000 in the case of a natural person, and
       ``(B) $50,000 in any other case.
       ``(2) Listed transaction.--The amount of the penalty under 
     subsection (a) with respect to a listed transaction shall 
     be--
       ``(A) $100,000 in the case of a natural person, and
       ``(B) $200,000 in any other case.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Reportable transaction.--The term `reportable 
     transaction' means any transaction with respect to which 
     information is required to be included with a return or 
     statement because, as determined under regulations prescribed 
     under section 6011, such transaction is of a type which the 
     Secretary determines as having a potential for tax avoidance 
     or evasion.
       ``(2) Listed transaction.--The term `listed transaction' 
     means a reportable transaction which is the same as, or 
     substantially similar to, a transaction specifically 
     identified by the Secretary as a tax avoidance transaction 
     for purposes of section 6011.
       ``(d) Authority To Rescind Penalty.--
       ``(1) In general.--The Commissioner of Internal Revenue may 
     rescind all or any portion of any penalty imposed by this 
     section with respect to any violation if--
       ``(A) the violation is with respect to a reportable 
     transaction other than a listed transaction, and
       ``(B) rescinding the penalty would promote compliance with 
     the requirements of this title and effective tax 
     administration.
       ``(2) No judicial appeal.--Notwithstanding any other 
     provision of law, any determination under this subsection may 
     not be reviewed in any judicial proceeding.
       ``(3) Records.--If a penalty is rescinded under paragraph 
     (1), the Commissioner shall place in the file in the Office 
     of the Commissioner the opinion of the Commissioner or the 
     head of the Office of Tax Shelter Analysis with respect to 
     the determination, including--
       ``(A) a statement of the facts and circumstances relating 
     to the violation,
       ``(B) the reasons for the rescission, and
       ``(C) the amount of the penalty rescinded.
       ``(e) Coordination With Other Penalties.--The penalty 
     imposed by this section shall be in addition to any other 
     penalty imposed by this title.''
       (b) Conforming Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6707 the following:

``Sec. 6707A. Penalty for failure to include reportable transaction 
              information with return.''.

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

     SEC. 612. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, 
                   OTHER REPORTABLE TRANSACTIONS HAVING A 
                   SIGNIFICANT TAX AVOIDANCE PURPOSE, ETC.

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

[[Page 12828]]



     ``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 Transactions.--
     Subsection (a) shall be applied by substituting `30 percent' 
     for `20 percent' with respect to the portion of any 
     reportable transaction understatement with respect to which 
     the requirement of section 6664(d)(2)(A) is not met.
       ``(d) Definitions of Reportable and Listed Transactions.--
     For purposes of this section, the terms `reportable 
     transaction' and `listed transaction' have the respective 
     meanings given to such terms by section 6707A(c).
       ``(e) Special Rules.--
       ``(1) Coordination with penalties, etc., on other 
     understatements.--In the case of an understatement (as 
     defined in section 6662(d)(2))--
       ``(A) the amount of such understatement (determined without 
     regard to this paragraph) shall be increased by the aggregate 
     amount of reportable transaction understatements for purposes 
     of determining whether such understatement is a substantial 
     understatement under section 6662(d)(1), and
       ``(B) the addition to tax under section 6662(a) shall apply 
     only to the excess of the amount of the substantial 
     understatement (if any) after the application of subparagraph 
     (A) over the aggregate amount of reportable transaction 
     understatements.
       ``(2) Coordination with other penalties.--
       ``(A) Application of fraud penalty.--References to an 
     underpayment in section 6663 shall be treated as including 
     references to a reportable transaction understatement.
       ``(B) No double penalty.--This section shall not apply to 
     any portion of an understatement on which a penalty is 
     imposed under section 6663.
       ``(3) Special rule for amended returns.--Except as provided 
     in regulations, in no event shall any tax treatment included 
     with an amendment or supplement to a return of tax be taken 
     into account in determining the amount of any reportable 
     transaction understatement if the amendment or supplement is 
     filed after the earlier of the date the taxpayer is first 
     contacted by the Secretary regarding the examination of the 
     return or such other date as is specified by the Secretary.''
       (b) Determination of Other Understatements.--Subparagraph 
     (A) of section 6662(d)(2) is amended by adding at the end the 
     following flush sentence:

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

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

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

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

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

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

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

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

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

     if a significant purpose of such partnership, entity, plan, 
     or arrangement is the avoidance or evasion of Federal income 
     tax.''
       (e) Conforming Amendments.--
       (1) Sections 461(i)(3)(C), 1274(b)(3), and 7525(b) are each 
     amended by striking ``section 6662(d)(2)(C)(iii)'' and 
     inserting ``section 6662(d)(2)(C)(ii)''.
       (2) The heading for section 6662 is amended to read as 
     follows:

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

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

``Sec. 6662. Imposition of accuracy-related penalty on underpayments.
``Sec. 6662A. Imposition of accuracy-related penalty on understatements 
              with respect to reportable transactions.''

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

     SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES 
                   RELATING TO TAXPAYER COMMUNICATIONS.

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

[[Page 12829]]

     made on or after the date of the enactment of this Act.

     SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH 
                   REQUIRED LISTED TRANSACTIONS NOT REPORTED.

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

     SEC. 615. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

     ``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

     Such return shall be filed not later than the date specified 
     by the Secretary.
       ``(b) Definitions.--For purposes of this section--
       ``(1) Material advisor.--
       ``(A) In general.--The term `material advisor' means any 
     person--
       ``(i) who provides any material aid, assistance, or advice 
     with respect to organizing, managing, promoting, selling, 
     implementing, or carrying out any reportable transaction, and
       ``(ii) who directly or indirectly derives gross income in 
     excess of the threshold amount (or such other amount as may 
     be prescribed by the Secretary) for such advice or 
     assistance.
       ``(B) Threshold amount.--For purposes of subparagraph (A), 
     the threshold amount is--
       ``(i) $50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons, and
       ``(ii) $250,000 in any other case.
       ``(2) Reportable transaction.--The term `reportable 
     transaction' has the meaning given to such term by section 
     6707A(c).
       ``(c) Regulations.--The Secretary may prescribe regulations 
     which provide--
       ``(1) that only 1 person shall be required to meet the 
     requirements of subsection (a) in cases in which 2 or more 
     persons would otherwise be required to meet such 
     requirements,
       ``(2) exemptions from the requirements of this section, and
       ``(3) such rules as may be necessary or appropriate to 
     carry out the purposes of this section.''
       (b) Conforming Amendments.--
       (1) The item relating to section 6111 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

``Sec. 6111. Disclosure of reportable transactions.''

       (2) So much of section 6112 as precedes subsection (c) 
     thereof is amended to read as follows:

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

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

``Sec. 6112. Material advisors of reportable transactions must keep 
              lists of advisees, etc.''

       (5)(A) The heading for section 6708 is amended to read as 
     follows:

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

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

``Sec. 6708. Failure to maintain lists of advisees with respect to 
              reportable transactions.''

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

     SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
                   TRANSACTIONS.

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

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

       ``(a) In General.--If a person who is required to file a 
     return under section 6111(a) with respect to any reportable 
     transaction--
       ``(1) fails to file such return on or before the date 
     prescribed therefor, or
       ``(2) files false or incomplete information with the 
     Secretary with respect to such transaction,

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

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

     SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN 
                   LISTS OF INVESTORS.

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

     SEC. 618. 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. 619. 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) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

[[Page 12830]]



     SEC. 620. 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 76 is 
     amended by striking the item relating to section 7408 and 
     inserting the following new item:

``Sec. 7408. Actions to enjoin specified conduct related to tax 
              shelters and reportable transactions.''

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

     SEC. 621. 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. 622. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE 
                   DEPARTMENT OF THE TREASURY.

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

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

                       Part II--Other Provisions

     SEC. 631. 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. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON 
                   WITHHOLDING TAXES ON INCOME OTHER THAN 
                   DIVIDENDS.

       (a) In General.--Section 901 is amended by redesignating 
     subsection (l) as subsection (m) and by inserting after 
     subsection (k) the following new subsection:
       ``(l) Minimum Holding Period for Withholding Taxes on Gain 
     and Income Other Than Dividends etc.--
       ``(1) In general.--In no event shall a credit be allowed 
     under subsection (a) for any withholding tax (as defined in 
     subsection (k)) on any item of income or gain with respect to 
     any property if--
       ``(A) such property is held by the recipient of the item 
     for 15 days or less during the 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.

[[Page 12831]]



     SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

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

     For purposes of subparagraph (C), the term `built-in loss' 
     means the excess of the adjusted basis of the property 
     (determined without regard to subparagraph (C)(ii)) over its 
     fair market value at the time of contribution.''
       (b) Special Rules for Transfers of Partnership Interest if 
     There Is Substantial Built-In Loss.--
       (1) Adjustment of partnership basis required.--Subsection 
     (a) of section 743 (relating to optional adjustment to basis 
     of partnership property) is amended by inserting before the 
     period ``or unless the partnership has a substantial built-in 
     loss immediately after such transfer''.
       (2) Adjustment.--Subsection (b) of section 743 is amended 
     by inserting ``or which has a substantial built-in loss 
     immediately after such transfer'' after ``section 754 is in 
     effect''.
       (3) Substantial built-in loss.--Section 743 is amended by 
     adding at the end the following new subsection:
       ``(d) Substantial Built-In Loss.--
       ``(1) In general.--For purposes of this section, a 
     partnership has a substantial built-in loss with respect to a 
     transfer of an interest in a partnership if the partnership's 
     adjusted basis in the partnership property exceeds by more 
     than $250,000 the fair market value of such property.
       ``(2) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of paragraph (1) and section 734(d), including regulations 
     aggregating related partnerships and disregarding property 
     acquired by the partnership in an attempt to avoid such 
     purposes.''
       (4) Alternative rules for electing investment 
     partnerships.--
       (A) In general.--Section 743 is amended by adding at the 
     end the following new subsection:
       ``(e) Alternative rules for electing investment 
     partnerships.--
       ``(1) No adjustment of partnership basis.--For purposes of 
     this section, an electing investment partnership shall not be 
     treated as having a substantial built-in loss with respect to 
     any transfer occurring while the election under paragraph 
     (6)(A) is in effect.
       ``(2) Loss deferral for transferee partner.--In the case of 
     a transfer of an interest in an electing investment 
     partnership, the transferee partner's distributive share of 
     losses (without regard to gains) from the sale or exchange of 
     partnership property shall not be allowed except to the 
     extent that it is established that such losses exceed the 
     loss (if any) recognized by the transferor (or any prior 
     transferor to the extent not fully offset by a prior 
     disallowance under this paragraph) on the transfer of the 
     partnership interest.
       ``(3) No reduction in partnership basis.--Losses disallowed 
     under paragraph (2) shall not decrease the transferee 
     partner's basis in the partnership interest.
       ``(4) Effect of termination of partnership.--This 
     subsection shall be applied without regard to any termination 
     of a partnership under section 708(b)(1)(B).
       ``(5) Certain basis reductions treated as losses.--In the 
     case of a transferee partner whose basis in property 
     distributed by the partnership is reduced under section 
     732(a)(2), the amount of the loss recognized by the 
     transferor on the transfer of the partnership interest which 
     is taken into account under paragraph (2) shall be reduced by 
     the amount of such basis reduction.
       ``(6) Electing investment partnership.--For purposes of 
     this subsection, the term `electing investment partnership' 
     means any partnership if--
       ``(A) the partnership makes an election to have this 
     subsection apply,
       ``(B) the partnership would be an investment company under 
     section 3(a)(1)(A) of the Investment Company Act of 1940 but 
     for an exemption under paragraph (1) or (7) of section 3(c) 
     of such Act,
       ``(C) such partnership has never been engaged in a trade or 
     business,
       ``(D) substantially all of the assets of such partnership 
     are held for investment,
       ``(E) at least 95 percent of the assets contributed to such 
     partnership consist of money,
       ``(F) no assets contributed to such partnership had an 
     adjusted basis in excess of fair market value at the time of 
     contribution,
       ``(G) all partnership interests of such partnership are 
     issued by such partnership pursuant to a private offering and 
     during the 24-month period beginning on the date of the first 
     capital contribution to such partnership,
       ``(H) the partnership agreement of such partnership has 
     substantive restrictions on each partner's ability to cause a 
     redemption of the partner's interest, and
       ``(I) the partnership agreement of such partnership 
     provides for a term that is not in excess of 15 years.

     The election described in subparagraph (A), once made, shall 
     be irrevocable except with the consent of the Secretary.
       ``(7) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of this subsection, including regulations for applying this 
     subsection to tiered partnerships.''.
       (B) Information reporting.--Section 6031 is amended by 
     adding at the end the following new subsection:
       ``(f) Electing Investment Partnerships.--In the case of any 
     electing investment partnership (as defined in section 
     743(e)(6)), the information required under subsection (b) to 
     be furnished to any partner to whom section 743(e)(2) applies 
     shall include such information as is necessary to enable the 
     partner to compute the amount of losses disallowed under 
     section 743(e).''.
       (5) Clerical amendments.--
       (A) The section heading for section 743 is amended to read 
     as follows:

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

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

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

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

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

       (4) Clerical amendments.--
       (A) The section heading for section 734 is amended to read 
     as follows:

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

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

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

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

     SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK 
                   HELD BY PARTNERSHIP IN CORPORATE PARTNER.

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

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

     SEC. 635. 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.

[[Page 12832]]

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

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

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

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

     SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES ON REMIC 
                   RESIDUALS.

       (a) In General.--Section 362 (relating to basis to 
     corporations) is amended by adding at the end the following 
     new subsection:
       ``(e) Limitation on Transfer of Built-in Losses on REMIC 
     Residuals in Section 351 Transactions.--If--
       ``(1) a residual interest (as defined in section 
     860G(a)(2)) in a REMIC is transferred in any transaction 
     which is described in subsection (a), and
       ``(2) the transferee's adjusted basis in such residual 
     interest would (but for this paragraph) exceed its fair 
     market value immediately after such transaction,

     then, notwithstanding subsection (a), the transferee's 
     adjusted basis in such residual interest shall not exceed its 
     fair market value (whether or not greater than zero) 
     immediately after such transaction.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to transactions after the date of the enactment 
     of this Act.

     SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF 
                   DETERMINING INVESTMENT OF EARNINGS IN UNITED 
                   STATES PROPERTY.

       (a) In General.--Subparagraph (A) of section 956(c)(2) is 
     amended to read as follows:
       ``(A) obligations of the United States, money, or deposits 
     with persons described in paragraph (4);''.
       (b) Eligible Persons.--Section 956(c) (relating to 
     exceptions to definition of United States property) is 
     amended by adding at the end the following new paragraph:
       ``(4) Financial services providers.--
       ``(A) In general.--For purposes of paragraph (2)(A), a 
     person is described in this paragraph if at least 80 percent 
     of the person's income is from the active conduct of a 
     banking business which is derived from persons who are not 
     related persons.
       ``(B) Special rules.--For purposes of subparagraph (A) all 
     related persons shall be treated as 1 person in applying the 
     80-percent test.
       ``(C) Related person.--For purposes of this paragraph, a 
     person is a related person to another person if--
       ``(i) the related person bears a relationship to such 
     person specified in section 267(b) or 707(b)(1), or
       ``(ii) such persons are members of the same controlled 
     group of corporations (as defined in section 1563(a), except 
     that `more than 50 percent' shall be substituted for `at 
     least 80 percent' each place it appears therein).''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE 
                   COMPANIES.

       (a) In General.--Clause (i) of section 831(b)(2)(A) is 
     amended by striking ``$1,200,000'' and inserting 
     ``$1,890,000''.
       (b) Inflation Adjustment.--Paragraph (2) of section 831(b) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2004, the $1,890,000 
     amount in subparagraph (A) shall be increased by an amount 
     equal to--
       ``(i) $1,890,000, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting 
     `calendar year 2003' for `calendar year 1992' in subparagraph 
     (B) thereof.

     If the amount as adjusted under the preceding sentence is not 
     a multiple of $1,000, such amount shall be rounded to the 
     next lowest multiple of $1,000.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                   ATTRIBUTABLE TO NONDISCLOSED REPORTABLE 
                   TRANSACTIONS.

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

     SEC. 640. 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. 641. RECOGNITION OF GAIN FROM THE SALE OF A PRINCIPAL 
                   RESIDENCE ACQUIRED IN A LIKE-KIND EXCHANGE 
                   WITHIN 5 YEARS OF SALE.

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

[[Page 12833]]

       (b) Effective Date.--The amendment made by this section 
     shall apply to sales or exchanges after the date of the 
     enactment of this Act.

     SEC. 642. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL 
                   ISSUE DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS 
                   IN TRANSACTIONS WITH RELATED FOREIGN PERSONS.

       (a) Original Issue Discount.--Section 163(e)(3) (relating 
     to special rule for original issue discount on obligation 
     held by related foreign person) is amended by redesignating 
     subparagraph (B) as subparagraph (C) and by inserting after 
     subparagraph (A) the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--In the case of any debt instrument 
     having original issue discount which is held by a related 
     foreign person which is a 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 before the taxable year in 
     which paid only to the extent such original issue discount 
     (reduced by properly allowable deductions and qualified 
     deficits under section 952(c)(1)(B)) is includible during 
     such prior taxable year in the gross income of a United 
     States person who owns (within the meaning of section 958(a)) 
     stock in such corporation.
       ``(ii) Secretarial authority.--The Secretary may by 
     regulation exempt transactions from the application of clause 
     (i), including any transaction which is entered into by a 
     payor in the ordinary course of a trade or business in which 
     the payor is predominantly engaged.''.
       (b) Interest and Other Deductible Amounts.--Section 
     267(a)(3) is amended--
       (1) by striking ``The Secretary'' and inserting:
       ``(A) In general.--The Secretary'', and
       (2) by adding at the end the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--Notwithstanding subparagraph (A), in the 
     case of any item payable to a 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 before the taxable year in which paid 
     only to the extent that an amount attributable to such item 
     (reduced by properly allowable deductions and qualified 
     deficits under section 952(c)(1)(B)) is includible during 
     such prior taxable year in the gross income of a United 
     States person who owns (within the meaning of section 958(a)) 
     stock in such corporation.
       ``(ii) Secretarial authority.--The Secretary may by 
     regulation exempt transactions from the application of clause 
     (i), including any transaction which is entered into by a 
     payor in the ordinary course of a trade or business in which 
     the payor is predominantly engaged and in which the payment 
     of the accrued amounts occurs within 8\1/2\ months after 
     accrual or within such other period as the Secretary may 
     prescribe.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments accrued on or after the date of the 
     enactment of this Act.

     SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST ON 
                   OVERPAYMENTS OF INCOME TAX BY INDIVIDUALS.

       (a) In General.--Part III of subchapter B of chapter 1 
     (relating to items specifically excluded from gross income) 
     is amended by inserting after section 139A the following new 
     section:

     ``SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTEREST ON 
                   OVERPAYMENTS OF INCOME TAX BY INDIVIDUALS.

       ``(a) In General.--In the case of an individual, gross 
     income shall not include interest paid under section 6611 on 
     any overpayment of tax imposed by this subtitle.
       ``(b) Exception.--Subsection (a) shall not apply in the 
     case of a failure to claim items resulting in the overpayment 
     on the original return if the Secretary determines that the 
     principal purpose of such failure is to take advantage of 
     subsection (a).
       ``(c) Special Rule for Determining Modified Adjusted Gross 
     Income.--For purposes of this title, interest not included in 
     gross income under subsection (a) shall not be treated as 
     interest which is exempt from tax for purposes of sections 
     32(i)(2)(B) and 6012(d) or any computation in which interest 
     exempt from tax under this title is added to adjusted gross 
     income.''.
       (b) Clerical Amendment.--The table of sections for part III 
     of subchapter B of chapter 1 is amended by inserting after 
     the item relating to section 139A the following new item:

``Sec. 139B. Exclusion from gross income for interest on overpayments 
              of income tax by individuals.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to interest received in calendar years beginning 
     after the date of the enactment of this Act.

     SEC. 644. 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. 645. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT 
                   AGREEMENTS.

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

     SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGULATION 
                   AUTHORITY.

       (a) In General.--Section 1502 is amended by adding at the 
     end the following new sentence: ``In carrying out the 
     preceding sentence, the

[[Page 12834]]

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

                           Part III--Leasing

     SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEASING 
                   ARRANGEMENTS.

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

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

       (d) Expansion of Short-Term Lease Exemption for Qualified 
     Technological Equipment.--Subparagraph (A) of section 
     168(h)(3) is amended by adding at the end the following new 
     sentence: ``Notwithstanding subsection (i)(3)(A)(i), in 
     determining a lease term for purposes of the preceding 
     sentence, there shall not be taken into account any option of 
     the lessee to renew at the fair market value rent determined 
     at the time of renewal; except that the aggregate period not 
     taken into account by reason of this sentence shall not 
     exceed 24 months.''

     SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED 
                   BY GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

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

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

       ``(a) Limitation on Losses.--Except as otherwise provided 
     in this section, a tax-exempt use loss for any taxable year 
     shall not be allowed.
       ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt 
     use loss with respect to any tax-exempt use property which is 
     disallowed under subsection (a) for any taxable year shall be 
     treated as a deduction with respect to such property in the 
     next taxable year.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Tax-exempt use loss.--The term `tax-exempt use loss' 
     means, with respect to any taxable year, the amount (if any) 
     by which--
       ``(A) the sum of--
       ``(i) the aggregate deductions (other than interest) 
     directly allocable to a tax-exempt use property, plus
       ``(ii) the aggregate deductions for interest properly 
     allocable to such property, exceed
       ``(B) the aggregate income from such property.
       ``(2) Tax-exempt use property.--The term `tax-exempt use 
     property' has the meaning given to such term by section 
     168(h) (without regard to paragraphs (1)(C) and (3) thereof 
     and determined as if property described in section 
     167(f)(1)(B) were tangible property). Such term shall not 
     include property which would (but for this sentence) be tax-
     exempt use property solely by reason of section 168(h)(6) if 
     any credit is allowable under section 42 or 47 with respect 
     to such property.
       ``(d) Exception for Certain Leases.--This section shall not 
     apply to any lease of property which meets the requirements 
     of all of the following paragraphs:
       ``(1) Availability of funds.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if (at any time during the 
     lease term) not more than an allowable amount of funds are--
       ``(i) subject to any arrangement referred to in 
     subparagraph (B), or
       ``(ii) set aside or expected to be set aside,

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

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

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

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

       ``(ii) the fair market value of the property at the end of 
     the lease term is reasonably expected to be equal to at least 
     20 percent of such basis.
       ``(B) Risk of loss.--For purposes of clause (ii), the fair 
     market value at the end of the lease term shall be reduced to 
     the extent that a person other than the lessor bears a risk 
     of loss in the value of the property.
       ``(C) Paragraph not to apply to short-term leases.--This 
     paragraph shall not apply to any lease with a lease term of 5 
     years or less.
       ``(3) Lessee may not bear more than minimal risk of loss.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if there is no arrangement 
     under which the lessee bears--
       ``(i) any portion of the loss that would occur if the fair 
     market value of the leased property were 25 percent less than 
     its reasonably expected fair market value at the time the 
     lease is terminated, or
       ``(ii) more than 50 percent of the loss that would occur if 
     the fair market value of the leased property at the time the 
     lease is terminated were zero.
       ``(B) Exception.--The Secretary may by regulations provide 
     that the requirements of this paragraph are not met where the 
     lessee bears more than a minimal risk of loss.
       ``(C) Paragraph not to apply to short-term leases.--This 
     paragraph shall not apply to any lease with a lease term of 5 
     years or less.
       ``(e) Special Rules.--
       ``(1) Treatment of former tax-exempt use property.--
       ``(A) In general.--In the case of any former tax-exempt use 
     property--
       ``(i) any deduction allowable under subsection (b) with 
     respect to such property for any taxable year shall be 
     allowed only to the extent of any net income (without regard 
     to such deduction) from such property for such taxable year, 
     and
       ``(ii) any portion of such unused deduction remaining after 
     application of clause (i) shall be treated as a deduction 
     allowable under subsection (b) with respect to such property 
     in the next taxable year.
       ``(B) Former tax-exempt use property.--For purposes of this 
     subsection, the term `former tax-exempt use property' means 
     any property which--
       ``(i) is not tax-exempt use property for the taxable year, 
     but
       ``(ii) was tax-exempt use property for any prior taxable 
     year.
       ``(2) Disposition of entire interest in property.--If 
     during the taxable year a taxpayer disposes of the taxpayer's 
     entire interest in tax-

[[Page 12835]]

     exempt use property (or former tax-exempt use property), 
     rules similar to the rules of section 469(g) shall apply for 
     purposes of this section.
       ``(3) Coordination with section 469.--This section shall be 
     applied before the application of section 469.
       ``(4) Coordination with sections 1031 and 1033.--
       ``(A) In general.--Sections 1031(a) and 1033(a) shall not 
     apply if--
       ``(i) the exchanged or converted property is tax-exempt use 
     property subject to a lease which was entered into before 
     March 13, 2004, and which would not have met the requirements 
     of subsection (d) had such requirements been in effect when 
     the lease was entered into, or
       ``(ii) the replacement property is tax-exempt use property 
     subject to a lease which does not meet the requirements of 
     subsection (d).
       ``(B) Adjusted basis.--In the case of property acquired by 
     the lessor in a transaction to which section 1031 or 1033 
     applies, the adjusted basis of such property for purposes of 
     this section shall be equal to the lesser of--
       ``(i) the fair market value of the property as of the 
     beginning of the lease term, or
       ``(ii) the amount which would be the lessor's adjusted 
     basis if such sections did not apply to such transaction.
       ``(f) Other Definitions.--For purposes of this section--
       ``(1) Related parties.--The terms `lessor', `lessee', and 
     `lender' each include any related party (within the meaning 
     of section 197(f)(9)(C)(i)).
       ``(2) Lease term.--The term `lease term' has the meaning 
     given to such term by section 168(i)(3).
       ``(3) Lender.--The term `lender' means, with respect to any 
     lease, a person that makes a loan to the lessor which is 
     secured (or economically similar to being secured) by the 
     lease or the leased property.
       ``(4) Loan.--The term `loan' includes any similar 
     arrangement.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the provisions of this section, including regulations which--
       ``(1) allow in appropriate cases the aggregation of 
     property subject to the same lease, and
       ``(2) provide for the determination of the allocation of 
     interest expense for purposes of this section.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart C of part II of subchapter E of chapter 1 is amended 
     by adding at the end the following new item:

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

     SEC. 649. EFFECTIVE DATE.

       (a) In General.--Except as provided in this section, the 
     amendments made by this part shall apply to leases entered 
     into after March 12, 2004.
       (b) Exception.--
       (1) In general.--The amendments made by this part shall not 
     apply to qualified transportation property.
       (2) Qualified transportation property.--For purposes of 
     paragraph (1), the term ``qualified transportation property'' 
     means domestic property subject to a lease with respect to 
     which a formal application--
       (A) was submitted for approval to the Federal Transit 
     Administration (an agency of the Department of 
     Transportation) after June 30, 2003, and before March 13, 
     2004,
       (B) is approved by the Federal Transit Administration 
     before January 1, 2005, and
       (C) includes a description of such property and the value 
     of such property.
       (3) Exchanges and conversion of tax-exempt use property.--
     Section 470(e)(4) of the Internal Revenue Code of 1986, as 
     added by this section, shall apply to property exchanged or 
     converted after the date of the enactment of this Act.

               Subtitle C--Reduction of Fuel Tax Evasion

     SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR MOBILE 
                   MACHINERY.

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

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

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

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

       ``(iv) Use-based test.--For purposes of clause (ii)(II), 
     the use-based test is met if the use of the vehicle on public 
     highways was less than 7,500 miles during the taxpayer's 
     taxable year.''.
       (2) No tax-free sales.--Subsection (b) of section 4082, as 
     amended by section 652, is amended by inserting before the 
     period at the end ``and such term shall not include any use 
     described in section 6421(e)(2)(C)''.
       (3) Annual refund of tax paid.--Section 6427(i)(2) 
     (relating to exceptions) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Nonapplication of paragraph.--This paragraph shall 
     not apply to any fuel used solely in any off-highway business 
     use described in section 6421(e)(2)(C).''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE.

       (a) Rate of Tax.--
       (1) In general.--Subparagraph (A) of section 4081(a)(2) is 
     amended by striking ``and'' at the end of clause (ii), by 
     striking the period at the end of clause (iii) and inserting 
     ``, and'', and by adding at the end the following new clause:
       ``(iv) in the case of aviation-grade kerosene, 21.8 cents 
     per gallon.''.
       (2) Commercial aviation.--Paragraph (2) of section 4081(a) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Taxes imposed on fuel used in commercial aviation.--
     In the case of aviation-grade kerosene which is removed from 
     any refinery or terminal directly into the fuel tank of an 
     aircraft for use in commercial aviation, the rate of tax 
     under subparagraph (A)(iv) shall be 4.3 cents per gallon.''.
       (3) Certain refueler trucks, tankers, and tank wagons 
     treated as terminal.--Subsection (a) of section 4081 is 
     amended by adding at the end the following new paragraph:
       ``(3) Certain refueler trucks, tankers, and tank wagons 
     treated as terminal.--
       ``(A) In general.--In the case of aviation-grade kerosene 
     which is removed from any terminal directly into the fuel 
     tank of an aircraft (determined without regard to any 
     refueler truck, tanker, or tank wagon which meets the 
     requirements of subparagraph (B)), a refueler truck, tanker, 
     or tank wagon shall be treated as part of such terminal if--
       ``(i) such truck, tanker, or wagon meets the requirements 
     of subparagraph (B) with respect to an airport, and
       ``(ii) except in the case of exigent circumstances 
     identified by the Secretary in regulations, no vehicle 
     registered for highway use is loaded with aviation-grade 
     kerosene at such terminal.
       ``(B) Requirements.--A refueler truck, tanker, or tank 
     wagon meets the requirements of this subparagraph with 
     respect to an airport if such truck, tanker, or wagon--
       ``(i) is loaded with aviation-grade kerosene at such 
     terminal located within such airport and delivers such 
     kerosene only into aircraft at such airport,

[[Page 12836]]

       ``(ii) has storage tanks, hose, and coupling equipment 
     designed and used for the purposes of fueling aircraft,
       ``(iii) is not registered for highway use, and
       ``(iv) is operated by--

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

       ``(C) Reporting.--The Secretary shall require under section 
     4101(d) reporting by such terminal operator of--
       ``(i) any information obtained under subparagraph 
     (B)(iv)(II), and
       ``(ii) any similar information maintained by such terminal 
     operator with respect to deliveries of fuel made by trucks, 
     tankers, or wagons operated by such terminal operator.''.
       (4) Liability for tax on aviation-grade kerosene used in 
     commercial aviation.--Subsection (a) of section 4081 is 
     amended by adding at the end the following new paragraph:
       ``(4) Liability for tax on aviation-grade kerosene used in 
     commercial aviation.--For purposes of paragraph (2)(C), the 
     person who uses the fuel for commercial aviation shall pay 
     the tax imposed under such paragraph. For purposes of the 
     preceding sentence, fuel shall be treated as used when such 
     fuel is removed into the fuel tank.''.
       (5) Nontaxable uses.--
       (A) In general.--Section 4082 is amended by redesignating 
     subsections (e) and (f) as subsections (f) and (g), 
     respectively, and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Aviation-Grade Kerosene.--In the case of aviation-
     grade kerosene which is exempt from the tax imposed by 
     section 4041(c) (other than by reason of a prior imposition 
     of tax) and which is removed from any refinery or terminal 
     directly into the fuel tank of an aircraft, the rate of tax 
     under section 4081(a)(2)(A)(iv) shall be zero.''.
       (B) Conforming amendments.--
       (i) Subsection (b) of section 4082 is amended by adding at 
     the end the following new flush sentence:

     ``The term `nontaxable use' does not include the use of 
     aviation-grade kerosene in an aircraft.''.
       (ii) Section 4082(d) is amended by striking paragraph (1) 
     and by redesignating paragraphs (2) and (3) as paragraphs (1) 
     and (2), respectively.
       (6) Nonaircraft use of aviation-grade kerosene.--
       (A) In general.--Subparagraph (B) of section 4041(a)(1) is 
     amended by adding at the end the following new sentence: 
     ``This subparagraph shall not apply to aviation-grade 
     kerosene.''.
       (B) Conforming amendment.--The heading for paragraph (1) of 
     section 4041(a) is amended by inserting ``and kerosene'' 
     after ``diesel fuel''.
       (b) Commercial Aviation.--Section 4083 is amended by 
     redesignating subsections (b) and (c) as subsections (c) and 
     (d), respectively, and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Commercial Aviation.--For purposes of this subpart, 
     the term `commercial aviation' means any use of an aircraft 
     in a business of transporting persons or property for 
     compensation or hire by air, unless properly allocable to any 
     transportation exempt from the taxes imposed by sections 4261 
     and 4271 by reason of section 4281 or 4282 or by reason of 
     section 4261(h).''.
       (c) Refunds.--
       (1) In general.--Paragraph (4) of section 6427(l) is 
     amended to read as follows:
       ``(4) Refunds for aviation-grade kerosene.--
       ``(A) No refund of certain taxes on fuel used in commercial 
     aviation.--In the case of aviation-grade kerosene used in 
     commercial aviation (as defined in section 4083(b)) (other 
     than supplies for vessels or aircraft within the meaning of 
     section 4221(d)(3)), paragraph (1) shall not apply to so much 
     of the tax imposed by section 4081 as is attributable to--
       ``(i) the Leaking Underground Storage Tank Trust Fund 
     financing rate imposed by such section, and
       ``(ii) so much of the rate of tax specified in section 
     4081(a)(2)(A)(iv) as does not exceed 4.3 cents per gallon.
       ``(B) Payment to ultimate, registered vendor.--With respect 
     to aviation-grade kerosene, if the ultimate purchaser of such 
     kerosene waives (at such time and in such form and manner as 
     the Secretary shall prescribe) the right to payment under 
     paragraph (1) and assigns such right to the ultimate vendor, 
     then the Secretary shall pay the amount which would be paid 
     under paragraph (1) to such ultimate vendor, but only if such 
     ultimate vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (2) Time for filing claims.--Subparagraph (A) of section 
     6427(i)(4) is amended--
       (A) by striking ``subsection (l)(5)'' both places it 
     appears and inserting ``paragraph (4)(B) or (5) of subsection 
     (l)'', and
       (B) by striking ``the preceding sentence'' and inserting 
     ``subsection (l)(5)''.
       (3) Conforming amendment.--Subparagraph (B) of section 
     6427(l)(2) is amended to read as follows:
       ``(B) in the case of aviation-grade kerosene--
       ``(i) any use which is exempt from the tax imposed by 
     section 4041(c) other than by reason of a prior imposition of 
     tax, or
       ``(ii) any use in commercial aviation (within the meaning 
     of section 4083(b)).''.
       (d) Repeal of Prior Taxation of Aviation Fuel.--
       (1) In general.--Part III of subchapter A of chapter 32 is 
     amended by striking subpart B and by redesignating subpart C 
     as subpart B.
       (2) Conforming amendments.--
       (A) Section 4041(c) is amended to read as follows:
       ``(c) Aviation-Grade Kerosene.--
       ``(1) In general.--There is hereby imposed a tax upon 
     aviation-grade kerosene--
       ``(A) sold by any person to an owner, lessee, or other 
     operator of an aircraft for use in such aircraft, or
       ``(B) used by any person in an aircraft unless there was a 
     taxable sale of such fuel under subparagraph (A).
       ``(2) Exemption for previously taxed fuel.--No tax shall be 
     imposed by this subsection on the sale or use of any 
     aviation-grade kerosene if tax was imposed on such liquid 
     under section 4081 and the tax thereon was not credited or 
     refunded.
       ``(3) Rate of tax.--The rate of tax imposed by this 
     subsection shall be the rate of tax specified in section 
     4081(a)(2)(A)(iv) which is in effect at the time of such sale 
     or use.''.
       (B) Section 4041(d)(2) is amended by striking ``section 
     4091'' and inserting ``section 4081''.
       (C) Section 4041 is amended by striking subsection (e).
       (D) Section 4041 is amended by striking subsection (i).
       (E) Sections 4101(a), 4103, 4221(a), and 6206 are each 
     amended by striking ``, 4081, or 4091'' and inserting ``or 
     4081''.
       (F) Section 6416(b)(2) is amended by striking ``4091 or''.
       (G) Section 6416(b)(3) is amended by striking ``or 4091'' 
     each place it appears.
       (H) Section 6416(d) is amended by striking ``or to the tax 
     imposed by section 4091 in the case of refunds described in 
     section 4091(d)''.
       (I) Section 6427(j)(1) is amended by striking ``, 4081, and 
     4091'' and inserting ``and 4081''.
       (J)(i) Section 6427(l)(1) is amended to read as follows:
       ``(1) In general.--Except as otherwise provided in this 
     subsection and in subsection (k), if any diesel fuel or 
     kerosene on which tax has been imposed by section 4041 or 
     4081 is used by any person in a nontaxable use, the Secretary 
     shall pay (without interest) to the ultimate purchaser of 
     such fuel an amount equal to the aggregate amount of tax 
     imposed on such fuel under section 4041 or 4081, as the case 
     may be, reduced by any payment made to the ultimate vendor 
     under paragraph (4)(B).''.
       (ii) Paragraph (5)(B) of section 6427(l) is amended by 
     striking ``Paragraph (1)(A) shall not apply to kerosene'' and 
     inserting ``Paragraph (1) shall not apply to kerosene (other 
     than aviation-grade kerosene)''.
       (K) Subparagraph (B) of section 6724(d)(1) is amended by 
     striking clause (xv) and by redesignating the succeeding 
     clauses accordingly.
       (L) Paragraph (2) of section 6724(d) is amended by striking 
     subparagraph (W) and by redesignating the succeeding 
     subparagraphs accordingly.
       (M) Paragraph (1) of section 9502(b) is amended by adding 
     ``and'' at the end of subparagraph (B) and by striking 
     subparagraphs (C) and (D) and inserting the following new 
     subparagraph:
       ``(C) section 4081 with respect to aviation gasoline and 
     aviation-grade kerosene, and''.
       (N) The last sentence of section 9502(b) is amended to read 
     as follows:

     ``There shall not be taken into account under paragraph (1) 
     so much of the taxes imposed by section 4081 as are 
     determined at the rate specified in section 4081(a)(2)(B).''.
       (O) Subsection (b) of section 9508 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       (P) Section 9508(c)(2)(A) is amended by striking ``sections 
     4081 and 4091'' and inserting ``section 4081''.
       (Q) The table of subparts for part III of subchapter A of 
     chapter 32 is amended to read as follows:

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

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

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

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

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

       (e) Effective Date.--The amendments made by this section 
     shall apply to aviation-grade kerosene removed, entered, or 
     sold after September 30, 2004.
       (f) Floor Stocks Tax.--
       (1) In general.--There is hereby imposed on aviation-grade 
     kerosene held on October 1, 2004, by any person a tax equal 
     to--
       (A) the tax which would have been imposed before such date 
     on such kerosene had the amendments made by this section been 
     in effect at all times before such date, reduced by
       (B) the tax imposed before such date under section 4091 of 
     the Internal Revenue Code of 1986, as in effect on the day 
     before the date of the enactment of this Act.
       (2) Liability for tax and method of payment.--
       (A) Liability for tax.--The person holding the kerosene on 
     October 1, 2004, to which the tax imposed by paragraph (1) 
     applies shall be liable for such tax.

[[Page 12837]]

       (B) Method and time for payment.--The tax imposed by 
     paragraph (1) shall be paid at such time and in such manner 
     as the Secretary of the Treasury (or the Secretary's 
     delegate) shall prescribe, including the nonapplication of 
     such tax on de minimis amounts of kerosene.
       (3) Transfer of floor stock tax revenues to trust funds.--
     For purposes of determining the amount transferred to any 
     trust fund, the tax imposed by this subsection shall be 
     treated as imposed by section 4081 of the Internal Revenue 
     Code of 1986--
       (A) at the Leaking Underground Storage Tank Trust Fund 
     financing rate under such section to the extent of 0.1 cents 
     per gallon, and
       (B) at the rate under section 4081(a)(2)(A)(iv) to the 
     extent of the remainder.
       (4) Held by a person.--For purposes of this section, 
     kerosene shall be considered as held by a person if title 
     thereto has passed to such person (whether or not delivery to 
     the person has been made).
       (5) Other laws applicable.--All provisions of law, 
     including penalties, applicable with respect to the tax 
     imposed by section 4081 of such Code shall, insofar as 
     applicable and not inconsistent with the provisions of this 
     subsection, apply with respect to the floor stock tax imposed 
     by paragraph (1) to the same extent as if such tax were 
     imposed by such section.

     SEC. 653. DYE INJECTION EQUIPMENT.

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

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

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

``Sec. 6715A. Tampering with or failing to maintain security 
              requirements for mechanical dye injection systems.''.

       (d) Effective Date.--The amendments made by subsections (a) 
     and (c) shall take effect on the 180th day after the date on 
     which the Secretary issues the regulations described in 
     subsection (b).

     SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS.

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

     SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERATORS 
                   REQUIRED FOR EXEMPTION OF BULK TRANSFERS TO 
                   REGISTERED TERMINALS OR REFINERIES.

       (a) In General.--Section 4081(a)(1)(B) (relating to 
     exemption for bulk transfers to registered terminals or 
     refineries) is amended--
       (1) by inserting ``by pipeline or vessel'' after 
     ``transferred in bulk'', and
       (2) by inserting ``, the operator of such pipeline or 
     vessel,'' after ``the taxable fuel''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.
       (c) Publication of Registered Persons.--Beginning on July 
     1, 2004, the Secretary of the Treasury (or the Secretary's 
     delegate) shall periodically publish a current list of 
     persons registered under section 4101 of the Internal Revenue 
     Code of 1986 who are required to register under such section.

     SEC. 656. DISPLAY OF REGISTRATION.

       (a) In General.--Subsection (a) of section 4101 (relating 
     to registration) is amended--
       (1) by striking ``Every'' and inserting the following:
       ``(1) In general.--Every'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Display of registration.--Every operator of a vessel 
     required by the Secretary to register under this section 
     shall display proof of registration through an electronic 
     identification device prescribed by the Secretary on each 
     vessel used by such operator to transport any taxable 
     fuel.''.
       (b) Civil Penalty for Failure To Display Registration.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by inserting 
     after section 6716 the following new section:

     ``SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON VESSELS.

       ``(a) Failure To Display Registration.--Every operator of a 
     vessel who fails to display proof of registration pursuant to 
     section 4101(a)(2) shall pay a penalty of $500 for each such 
     failure. With respect to any vessel, only one penalty shall 
     be imposed by this section during any calendar month.
       ``(b) Multiple Violations.--In determining the penalty 
     under subsection (a) on any person, subsection (a) shall be 
     applied by increasing the amount in subsection (a) by the 
     product of such amount and the aggregate number of penalties 
     (if any) imposed with respect to prior months by this section 
     on such person (or a related person or any predecessor of 
     such person or related person).
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6716 the following new item:

``Sec. 6717. Failure to display tax registration on vessels.''.

       (c) Effective Dates.--
       (1) Subsection (a).--The amendments made by subsection (a) 
     shall take effect on October 1, 2004.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to penalties imposed after September 30, 2004.

     SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND FAILURE TO 
                   REPORT.

       (a) Increased Penalty.--Subsection (a) of section 7272 
     (relating to penalty for failure to register) is amended by 
     inserting ``($10,000 in the case of a failure to register 
     under section 4101)'' after ``$50''.
       (b) Increased Criminal Penalty.--Section 7232 (relating to 
     failure to register under section 4101, false representations 
     of registration status, etc.) is amended by striking 
     ``$5,000'' and inserting ``$10,000''.
       (c) Assessable Penalty for Failure To Register.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by inserting 
     after section 6717 the following new section:

     ``SEC. 6718. FAILURE TO REGISTER.

       ``(a) Failure To Register.--Every person who is required to 
     register under section 4101 and fails to do so shall pay a 
     penalty in addition to the tax (if any).
       ``(b) Amount of Penalty.--The amount of the penalty under 
     subsection (a) shall be--
       ``(1) $10,000 for each initial failure to register, and
       ``(2) $1,000 for each day thereafter such person fails to 
     register.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6717 the following new item:

``Sec. 6718. Failure to register.''.

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

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

       ``(a) In General.--In the case of each failure described in 
     subsection (b) by any person with respect to a vessel or 
     facility, such person shall pay a penalty of $10,000 in 
     addition to the tax (if any).

[[Page 12838]]

       ``(b) Failures Subject to Penalty.--For purposes of 
     subsection (a), the failures described in this subsection 
     are--
       ``(1) any failure to make a report under section 4101(d) on 
     or before the date prescribed therefor, and
       ``(2) any failure to include all of the information 
     required to be shown on such report or the inclusion of 
     incorrect information.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part II 
     of subchapter B of chapter 68 is amended by adding at the end 
     the following new item:

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

       (e) Effective Date.--The amendments made by this section 
     shall apply to penalties imposed after September 30, 2004.

     SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT 
                   REGISTERED.

       (a) Tax at Point of Entry Where Importer Not Registered.--
     Subpart B of part III of subchapter A of chapter 32, as 
     redesignated by section 652(d), is amended by adding after 
     section 4103 the following new section:

     ``SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT 
                   REGISTERED.

       ``(a) In General.--The importer of record shall be jointly 
     and severally liable for the tax imposed by section 
     4081(a)(1)(A)(iii) if, under regulations prescribed by the 
     Secretary, any other person that is not a person who is 
     registered under section 4101 is liable for such tax.
       ``(b) Collection From Customs Bond.--If any tax for which 
     any importer of record is liable under subsection (a), or for 
     which any importer of record that is not a person registered 
     under section 4101 is otherwise liable, is not paid on or 
     before the last date prescribed for payment, the Secretary 
     may collect such tax from the Customs bond posted with 
     respect to the importation of the taxable fuel to which the 
     tax relates. For purposes of determining the jurisdiction of 
     any court of the United States or any agency of the United 
     States, any action by the Secretary described in the 
     preceding sentence shall be treated as an action to collect 
     the tax from a bond described in section 4101(b)(1) and not 
     as an action to collect from a bond relating to the 
     importation of merchandise.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart B of part III of subchapter A of chapter 32, as 
     redesignated by section 652(d), is amended by adding after 
     the item related to section 4103 the following new item:

``Sec. 4104. Collection from Customs bond where importer not 
              registered.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to fuel entered after September 30, 
     2004.

     SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VEHICLES.

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

     SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND CLAIMS WITH 
                   RESPECT TO FARMING.

       (a) In General.--
       (1) Refunds.--Section 6427(l) is amended by adding at the 
     end the following new paragraph:
       ``(6) Registered vendors permitted to administer certain 
     claims for refund of diesel fuel and kerosene sold to 
     farmers.--
       ``(A) In general.--In the case of diesel fuel or kerosene 
     used on a farm for farming purposes (within the meaning of 
     section 6420(c)), paragraph (1) shall not apply to the 
     aggregate amount of such diesel fuel or kerosene if such 
     amount does not exceed 250 gallons (as determined under 
     subsection (i)(5)(A)(iii)).
       ``(B) Payment to ultimate vendor.--The amount which would 
     (but for subparagraph (A)) have been paid under paragraph (1) 
     with respect to any fuel shall be paid to the ultimate vendor 
     of such fuel, if such vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (2) Filing of claims.--Section 6427(i) is amended by 
     inserting at the end the following new paragraph:
       ``(5) Special rule for vendor refunds with respect to 
     farmers.--
       ``(A) In general.--A claim may be filed under subsection 
     (l)(6) by any person with respect to fuel sold by such person 
     for any period--
       ``(i) for which $200 or more ($100 or more in the case of 
     kerosene) is payable under subsection (l)(6),
       ``(ii) which is not less than 1 week, and
       ``(iii) which is for not more than 250 gallons for each 
     farmer for which there is a claim.
     Notwithstanding subsection (l)(1), paragraph (3)(B) shall 
     apply to claims filed under the preceding sentence.
       ``(B) Time for filing claim.--No claim filed under this 
     paragraph shall be allowed unless filed on or before the last 
     day of the first quarter following the earliest quarter 
     included in the claim.''.
       (3) Conforming amendments.--
       (A) Section 6427(l)(5)(A) is amended to read as follows:
       ``(A) In general.--Paragraph (1) shall not apply to diesel 
     fuel or kerosene used by a State or local government.''.
       (B) The heading for section 6427(l)(5) is amended by 
     striking ``farmers and''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to fuels sold for nontaxable use after the date 
     of the enactment of this Act.

     SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PENALTIES TO 
                   THE HIGHWAY TRUST FUND.

       (a) In General.--Subsection (b) of section 9503 (relating 
     to transfer to Highway Trust Fund of amounts equivalent to 
     certain taxes) is amended by redesignating paragraph (5) as 
     paragraph (6) and inserting after paragraph (4) the following 
     new paragraph:
       ``(5) Certain penalties.--There are hereby appropriated to 
     the Highway Trust Fund amounts equivalent to the penalties 
     paid under sections 6715, 6715A, 6717, 6718, 6725, 7232, and 
     7272 (but only with regard to penalties under such section 
     related to failure to register under section 4101).''.
       (b) Conforming Amendments.--
       (1) The heading of subsection (b) of section 9503 is 
     amended by inserting ``and Penalties'' after ``Taxes''.
       (2) The heading of paragraph (1) of section 9503(b) is 
     amended by striking ``In general'' and inserting ``Certain 
     taxes''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to penalties assessed after October 1, 2004.

     SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE VENDORS.

       (a) In General.--Paragraph (4) of section 6416(a) (relating 
     to abatements, credits, and refunds) is amended to read as 
     follows:
       ``(4) Registered ultimate vendor to administer credits and 
     refunds of gasoline tax.--
       ``(A) In general.--For purposes of this subsection, if an 
     ultimate vendor purchases any gasoline on which tax imposed 
     by section 4081 has been paid and sells such gasoline to an 
     ultimate purchaser described in subparagraph (C) or (D) of 
     subsection (b)(2) (and such gasoline is for a use described 
     in such subparagraph), such ultimate vendor shall be treated 
     as the person (and the only person) who paid such tax, but 
     only if such ultimate vendor is registered under section 
     4101. For purposes of this subparagraph, if the sale of 
     gasoline is made by means of a credit card, the person 
     extending the credit to the ultimate purchaser shall be 
     deemed to be the ultimate vendor.
       ``(B) Timing of claims.--The procedure and timing of any 
     claim under subparagraph (A) shall be the same as for claims 
     under section 6427(i)(4), except that the rules of section 
     6427(i)(3)(B) regarding electronic claims shall not apply 
     unless the ultimate vendor has certified to the Secretary for 
     the most recent quarter of the taxable year that all ultimate 
     purchasers of the vendor covered by such claim are certified 
     and entitled to a refund under subparagraph (C) or (D) of 
     subsection (b)(2).''.
       (b) Credit Card Purchases of Diesel Fuel or Kerosene by 
     State and Local Governments.--Section 6427(l)(5)(C) (relating 
     to nontaxable uses of diesel fuel, kerosene, and aviation 
     fuel) is amended by adding at the end the following new flush 
     sentence: ``For purposes of this subparagraph, if the sale of 
     diesel fuel or kerosene is made by means of a credit card, 
     the person extending the credit to the ultimate purchaser 
     shall be deemed to be the ultimate vendor.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

     SEC. 663. TWO-PARTY EXCHANGES.

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

     ``SEC. 4105. TWO-PARTY EXCHANGES.

       ``(a) In General.--In a two-party exchange, the delivering 
     person shall not be liable for the tax imposed under section 
     4081(a)(1)(A)(ii).
       ``(b) Two-Party Exchange.--The term `two-party exchange' 
     means a transaction, other than a sale, in which taxable fuel 
     is transferred from a delivering person registered under 
     section 4101 as a taxable fuel registrant fuel to a receiving 
     person who is so registered where all of the following occur:
       ``(1) The transaction includes a transfer from the 
     delivering person, who holds the inventory position for 
     taxable fuel in the terminal as reflected in the records of 
     the terminal operator.

[[Page 12839]]

       ``(2) The exchange transaction occurs before or 
     contemporaneous with completion of removal across the rack 
     from the terminal by the receiving person.
       ``(3) The terminal operator in its books and records treats 
     the receiving person as the person that removes the taxable 
     fuel across the terminal rack for purposes of reporting the 
     transaction to the Secretary.
       ``(4) The transaction is the subject of a written 
     contract.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart B of part III of subchapter A of chapter 32, as 
     amended by this Act, is amended by adding after the item 
     relating to section 4104 the following new item:

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

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

     SEC. 664. SIMPLIFICATION OF TAX ON TIRES.

       (a) In General.--Subsection (a) of section 4071 is amended 
     to read as follows:
       ``(a) Imposition and Rate of Tax.--There is hereby imposed 
     on taxable tires sold by the manufacturer, producer, or 
     importer thereof a tax at the rate of 9.4 cents (4.7 cents in 
     the case of a biasply tire) for each 10 pounds so much of the 
     maximum rated load capacity thereof as exceeds 3,500 
     pounds.''
       (b) Taxable Tire.--Section 4072 is amended by redesignating 
     subsections (a) and (b) as subsections (b) and (c), 
     respectively, and by inserting before subsection (b) (as so 
     redesignated) the following new subsection:
       ``(a) Taxable Tire.--For purposes of this chapter, the term 
     `taxable tire' means any tire of the type used on highway 
     vehicles if wholly or in part made of rubber and if marked 
     pursuant to Federal regulations for highway use.''
       (c) Exemption for Tires Sold to Department of Defense.--
     Section 4073 is amended to read as follows:

     ``SEC. 4073. EXEMPTIONS.

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

``Sec. 4073. Exemptions.''

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

          Subtitle D--Nonqualified Deferred Compensation Plans

     SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION 
                   PLANS.

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

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

       ``(a) Rules Relating to Constructive Receipt.--
       ``(1) In general.--
       ``(A) Gross income inclusion.--In the case of a 
     nonqualified deferred compensation plan, all compensation 
     deferred under the plan for all taxable years (to the extent 
     not subject to a substantial risk of forfeiture and not 
     previously included in gross income) shall be includible in 
     gross income for the taxable year unless at all times during 
     the taxable year the plan meets the requirements of 
     paragraphs (2), (3), and (4) and is operated in accordance 
     with such requirements.
       ``(B) Interest on tax liability payable with respect to 
     previously deferred compensation.--
       ``(i) In general.--If compensation is required to be 
     included in gross income under subparagraph (A) for a taxable 
     year, the tax imposed by this chapter for such taxable year 
     shall be increased by the amount of interest determined under 
     clause (ii).
       ``(ii) Interest.--For purposes of clause (i), the interest 
     determined under this clause for any taxable year is the 
     amount of interest at the underpayment rate plus 1 percentage 
     point on the underpayments that would have occurred had the 
     deferred compensation been includible in gross income for the 
     taxable year in which first deferred or, if later, the first 
     taxable year in which such deferred compensation is not 
     subject to a substantial risk of forfeiture.
       ``(2) Distributions.--
       ``(A) In general.--The requirements of this paragraph are 
     met if the plan provides that compensation deferred under the 
     plan may not be distributed earlier than--
       ``(i) separation from service as determined by the 
     Secretary (except as provided in subparagraph (B)(i)),
       ``(ii) the date the participant becomes disabled (within 
     the meaning of subparagraph (C)),
       ``(iii) death,
       ``(iv) a specified time (or pursuant to a fixed schedule) 
     specified under the plan at the date of the deferral of such 
     compensation,
       ``(v) to the extent provided by the Secretary, a change in 
     the ownership or effective control of the corporation, or in 
     the ownership of a substantial portion of the assets of the 
     corporation, or
       ``(vi) the occurrence of an unforeseeable emergency.
       ``(B) Special rules.--
       ``(i) Specified employees.--In the case of specified 
     employees, the requirement of subparagraph (A)(i) is met only 
     if distributions may not be made earlier than 6 months after 
     the date of separation from service. For purposes of the 
     preceding sentence, a specified employee is a key employee 
     (as defined in section 416(i)) of a corporation the stock in 
     which is publicly traded on an established securities market 
     or otherwise.
       ``(ii) Unforeseeable emergency.--For purposes of 
     subparagraph (A)(vi)--

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

       ``(C) Disabled.--For purposes of subparagraph (A)(ii), a 
     participant shall be considered disabled if the participant--
       ``(i) is unable to engage in any substantial gainful 
     activity by reason of any medically determinable physical or 
     mental impairment which can be expected to result in death or 
     can be expected to last for a continuous period of not less 
     than 12 months, or
       ``(ii) is, by reason of any medically determinable physical 
     or mental impairment which can be expected to result in death 
     or can be expected to last for a continuous period of not 
     less than 12 months, receiving income replacement benefits 
     for a period of not less than 3 months under an accident and 
     health plan covering employees of the participant's employer.
       ``(3) Acceleration of benefits.--The requirements of this 
     paragraph are met if the plan does not permit the 
     acceleration of the time or schedule of any payment under the 
     plan, except as provided in regulations by the Secretary.
       ``(4) Elections.--
       ``(A) In general.--The requirements of this paragraph are 
     met if the requirements of subparagraphs (B) and (C) are met.
       ``(B) Initial deferral decision.--The requirements of this 
     subparagraph are met if the plan provides that compensation 
     for services performed during a taxable year may be deferred 
     at the participant's election only if the election to defer 
     such compensation is made not later than the close of the 
     preceding taxable year or at such other time as provided in 
     regulations. In the case of the first year in which a 
     participant becomes eligible to participate in the plan, such 
     election may be made with respect to services to be performed 
     subsequent to the election within 30 days after the date the 
     participant becomes eligible to participate in such plan.
       ``(C) Changes in time and form of distribution.--The 
     requirements of this subparagraph are met if, in the case of 
     a plan which permits under a subsequent election a delay in a 
     payment or a change in the form of payment--
       ``(i) the plan requires that such election may not take 
     effect until at least 12 months after the date on which the 
     election is made,
       ``(ii) in the case an election related to a payment not 
     described in clause (ii), (iii), or (vi) of paragraph (2)(A), 
     the plan requires that the first payment with respect to 
     which such election is made be deferred for a period of not 
     less than 5 years from the date such payment would otherwise 
     have been made, and
       ``(iii) the plan requires that any election related to a 
     payment described in paragraph (2)(A)(iv) may not be made 
     less than 12 months prior to the date of the first scheduled 
     payment under such paragraph.
       ``(b) Rules Relating to Funding.--
       ``(1) Offshore property in a trust.--In the case of assets 
     set aside (directly or indirectly) in a trust (or other 
     arrangement determined by the Secretary) for purposes of 
     paying deferred compensation under a nonqualified deferred 
     compensation plan, for purposes of section 83 such assets 
     shall be treated as property transferred in connection with 
     the performance of services whether or not such assets are 
     available to satisfy claims of general creditors--
       ``(A) at the time set aside if such assets are located 
     outside of the United States, or
       ``(B) at the time transferred if such assets are 
     subsequently transferred outside of the United States.
       ``(2) Employer's financial health.--In the case of 
     compensation deferred under a nonqualified deferred 
     compensation plan, there is a transfer of property within the 
     meaning of section 83 with respect to such compensation as of 
     the earlier of--
       ``(A) the date on which the plan first provides that assets 
     will become restricted to the provision of benefits under the 
     plan in connection with a change in the employer's financial 
     health, or
       ``(B) the date on which assets are so restricted.

[[Page 12840]]

       ``(3) Income inclusion for offshore trusts and employer's 
     financial health.--For each taxable year that assets treated 
     as transferred under this subsection remain set aside in a 
     trust or other arrangement subject to paragraph (1) or (2), 
     any increase in value in, or earnings with respect to, such 
     assets shall be treated as an additional transfer of property 
     under this subsection (to the extent not previously included 
     in income).
       ``(4) Interest on tax liability payable with respect to 
     transferred property.--
       ``(A) In general.--If amounts are required to be included 
     in gross income by reason of paragraph (1) or (2) for a 
     taxable year, the tax imposed by this chapter for such 
     taxable year shall be increased by the amount of interest 
     determined under subparagraph (B).
       ``(B) Interest.--The interest determined under this 
     subparagraph for any taxable year is the amount of interest 
     at the underpayment rate plus 1 percentage point on the 
     underpayments that would have occurred had the amounts so 
     required to be included in gross income by paragraph (1) or 
     (2) been includible in gross income for the taxable year in 
     which first deferred or, if later, the first taxable year in 
     which such deferred compensation is not subject to a 
     substantial risk of forfeiture.
       ``(c) No Inference on Earlier Income Inclusion or 
     Requirement of Later Inclusion.--Nothing in this section 
     shall be construed to prevent the inclusion of amounts in 
     gross income under any other provision of this chapter or any 
     other rule of law earlier than the time provided in this 
     section. Any amount included in gross income under this 
     section shall not be required to be included in gross income 
     under any other provision of this chapter or any other rule 
     of law later than the time provided in this section.
       ``(d) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Nonqualified deferred compensation plan.--The term 
     `nonqualified deferred compensation plan' means any plan that 
     provides for the deferral of compensation, other than--
       ``(A) a qualified employer plan, and
       ``(B) any bona fide vacation leave, sick leave, 
     compensatory time, disability pay, or death benefit plan.
       ``(2) Qualified employer plan.--The term `qualified 
     employer plan' means--
       ``(A) any plan, contract, pension, account, or trust 
     described in subparagraph (A) or (B) of section 219(g)(5), 
     and
       ``(B) any eligible deferred compensation plan (within the 
     meaning of section 457(b)) of an employer described in 
     section 457(e)(1)(A).
       ``(3) Plan includes arrangements, etc.--The term `plan' 
     includes any agreement or arrangement, including an agreement 
     or arrangement that includes one person.
       ``(4) Substantial risk of forfeiture.--The rights of a 
     person to compensation are subject to a substantial risk of 
     forfeiture if such person's rights to such compensation are 
     conditioned upon the future performance of substantial 
     services by any individual.
       ``(5) Treatment of earnings.--References to deferred 
     compensation shall be treated as including references to 
     income (whether actual or notional) attributable to such 
     compensation or such income.
       ``(e) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including regulations--
       ``(1) providing for the determination of amounts of 
     deferral in the case of a nonqualified deferred compensation 
     plan which is a defined benefit plan,
       ``(2) relating to changes in the ownership and control of a 
     corporation or assets of a corporation for purposes of 
     subsection (a)(2)(A)(v),
       ``(3) exempting arrangements from the application of 
     subsection (b) if such arrangements will not result in an 
     improper deferral of United States tax and will not result in 
     assets being effectively beyond the reach of creditors,
       ``(4) defining financial health for purposes of subsection 
     (b)(2), and
       ``(5) disregarding a substantial risk of forfeiture in 
     cases where necessary to carry out the purposes of this 
     section.''.
       (b) W-2 Forms.--
       (1) In general.--Subsection (a) of section 6051 (relating 
     to receipts for employees) is amended by striking ``and'' at 
     the end of paragraph (11), by striking the period at the end 
     of paragraph (12) and inserting ``, and'', and by inserting 
     after paragraph (12) the following new paragraph:
       ``(13) the total amount of deferrals under a nonqualified 
     deferred compensation plan (within the meaning of section 
     409A(d)).''.
       (2) Threshold.--Subsection (a) of section 6051 is amended 
     by adding at the end the following: ``In the case of the 
     amounts required to be shown by paragraph (13), the Secretary 
     (by regulation) may establish a minimum amount of deferrals 
     below which paragraph (13) does not apply and may provide 
     that paragraph (13) does not apply with respect to amounts of 
     deferrals which are not reasonably ascertainable.''.
       (c) Conforming and Clerical Amendments.--
       (1) Section 414(b) is amended by inserting ``409A,'' after 
     ``408(p),''.
       (2) Section 414(c) is amended by inserting ``409A,'' after 
     ``408(p),''.
       (3) The table of sections for such subpart A of part I of 
     subchapter D of chapter 1 is amended by adding at the end the 
     following new item:

``Sec. 409A. Inclusion in gross income of deferred compensation under 
              nonqualified deferred compensation plans.''.

       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to amounts deferred after June 3, 2004.
       (2) Certain amounts deferred in 2004 under certain 
     irrevocable elections and binding arrangements.--The 
     amendments made by this section shall not apply to amounts 
     deferred after June 3, 2004, and before January 1, 2005, 
     pursuant to an irrevocable election or binding arrangement 
     made before June 4, 2004.
       (3) Earnings attributable to amount previously deferred.--
     The amendments made by this section shall apply to earnings 
     on deferred compensation only to the extent that such 
     amendments apply to such compensation.
       (e) Guidance Relating to Change of Ownership or Control.--
     Not later than 90 days after the date of the enactment of 
     this Act, the Secretary of the Treasury shall issue guidance 
     on what constitutes a change in ownership or effective 
     control for purposes of section 409A of the Internal Revenue 
     Code of 1986, as added by this section.
       (f) Guidance Relating to Termination of Certain Existing 
     Arrangements.--Not later than 90 days after the date of the 
     enactment of this Act, the Secretary of the Treasury shall 
     issue guidance providing a limited period during which an 
     individual participating in a nonqualified deferred 
     compensation plan adopted before June 4, 2004, may, without 
     violating the requirements of paragraphs (2), (3), and (4) of 
     section 409A(a)(2) of the Internal Revenue Code of 1986 (as 
     added by this section), terminate participation or cancel an 
     outstanding deferral election with regard to amounts earned 
     after June 3, 2004, if such amounts are includible in income 
     as earned.

                  Subtitle E--Other Revenue Provisions

     SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS.

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

     ``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

       ``(a) In General.--Nothing in any provision of law shall be 
     construed to prevent the Secretary from entering into a 
     qualified tax collection contract.
       ``(b) Qualified Tax Collection Contract.--For purposes of 
     this section, the term `qualified tax collection contract' 
     means any contract which--
       ``(1) is for the services of any person (other than an 
     officer or employee of the Treasury Department)--
       ``(A) to locate and contact any taxpayer specified by the 
     Secretary,
       ``(B) to request full payment from such taxpayer of an 
     amount of Federal tax specified by the Secretary and, if such 
     request cannot be met by the taxpayer, to offer the taxpayer 
     an installment agreement providing for full payment of such 
     amount during a period not to exceed 5 years, and
       ``(C) to obtain financial information specified by the 
     Secretary with respect to such taxpayer,
       ``(2) prohibits each person providing such services under 
     such contract from committing any act or omission which 
     employees of the Internal Revenue Service are prohibited from 
     committing in the performance of similar services,
       ``(3) prohibits subcontractors from--
       ``(A) having contacts with taxpayers,
       ``(B) providing quality assurance services, and
       ``(C) composing debt collection notices, and
       ``(4) permits subcontractors to perform other services only 
     with the approval of the Secretary.
       ``(c) Fees.--The Secretary may retain and use 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 
     section 6304, section 7602(c), or by any other provision of 
     this title.
       ``(f) Cross References.--

  ``(1) For damages for certain unauthorized collection actions by 
persons performing services under a qualified tax collection contract, 
see section 7433A.
  ``(2) For application of Taxpayer Assistance Orders to persons 
performing services under a qualified tax collection contract, see 
section 7811(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:

[[Page 12841]]



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

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

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

       (c) Application of Taxpayer Assistance Orders to Persons 
     Performing Services Under a Qualified Tax Collection 
     Contract.--Section 7811 (relating to taxpayer assistance 
     orders) is amended by adding at the end the following new 
     subsection:
       ``(g) Application to Persons Performing Services Under a 
     Qualified Tax Collection Contract.--Any order issued or 
     action taken by the National Taxpayer Advocate pursuant to 
     this section shall apply to persons performing services under 
     a qualified tax collection contract (as defined in section 
     6306(b)) to the same extent and in the same manner as such 
     order or action applies to the Secretary.''.
       (d) Ineligibility of Individuals Who Commit Misconduct to 
     Perform Under Contract.--Section 1203 of the Internal Revenue 
     Service Restructuring Act of 1998 (relating to termination of 
     employment for misconduct) is amended by adding at the end 
     the following new subsection:
       ``(e) Individuals Performing Services Under a Qualified Tax 
     Collection Contract.--An individual shall cease to be 
     permitted to perform any services under any qualified tax 
     collection contract (as defined in section 6306(b) of the 
     Internal Revenue Code of 1986) if there is a final 
     determination by the Secretary of the Treasury under such 
     contract that such individual committed any act or omission 
     described under subsection (b) in connection with the 
     performance of such services.''.
       (e) Effective Date.--The amendments made to this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF PATENTS 
                   AND SIMILAR PROPERTY.

       (a) In General.--Subparagraph (B) of section 170(e)(1) is 
     amended by striking ``or'' at the end of clause (i), by 
     adding ``or'' at the end of clause (ii), and by inserting 
     after clause (ii) the following new clause:
       ``(iii) of any patent, copyright (other than a copyright 
     described in section 1221(a)(3) or 1231(b)(1)(C)), trademark, 
     trade name, trade secret, know-how, software (other than 
     software described in section 197(e)(3)(A)(i)), or similar 
     property, or applications or registrations of such 
     property,''.
       (b) Certain Donee Income From Intellectual Property Treated 
     as an Additional Charitable Contribution.--Section 170 is 
     amended by redesignating subsection (m) as subsection (n) and 
     by inserting after subsection (l) the following new 
     subsection:
       ``(m) Certain Donee Income From Intellectual Property 
     Treated as an Additional Charitable Contribution.--
       ``(1) Treatment as additional contribution.--In the case of 
     a taxpayer who makes a qualified intellectual property 
     contribution, the deduction allowed under subsection (a) for 
     each taxable year of the taxpayer ending on or after the date 
     of such contribution shall be increased (subject to the 
     limitations under subsection (b)) by the applicable 
     percentage of qualified donee income with respect to such 
     contribution which is properly allocable to such year under 
     this subsection.
       ``(2) Reduction in additional deductions to extent of 
     initial deduction.--With respect to any qualified 
     intellectual property contribution, the deduction allowed 
     under subsection (a) shall be increased under paragraph (1) 
     only to the extent that the aggregate amount of such 
     increases with respect to such contribution exceed the amount 
     allowed as a deduction under subsection (a) with respect to 
     such contribution determined without regard to this 
     subsection.
       ``(3) Qualified donee income.--For purposes of this 
     subsection, the term `qualified donee income' means any net 
     income received by or accrued to the donee which is properly 
     allocable to the qualified intellectual property.
       ``(4) Allocation of qualified donee income to taxable years 
     of donor.--For purposes of this subsection, qualified donee 
     income shall be treated as properly allocable to a taxable 
     year of the donor if such income is received by or accrued to 
     the donee for the taxable year of the donee which ends within 
     or with such taxable year of the donor.
       ``(5) 10-year limitation.--Income shall not be treated as 
     properly allocable to qualified intellectual property for 
     purposes of this subsection if such income is received by or 
     accrued to the donee after the 10-year period beginning on 
     the date of the contribution of such property.
       ``(6) Benefit limited to life of intellectual property.--
     Income shall not be treated as properly allocable to 
     qualified intellectual property for purposes of this 
     subsection if such income is received by or accrued to the 
     donee after the expiration of the legal life of such 
     property.
       ``(7) Applicable percentage.--For purposes of this 
     subsection, the term `applicable percentage' means the 
     percentage determined under the following table which 
     corresponds to a taxable year of the donor ending on or after 
     the date of the qualified intellectual property contribution:

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

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

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

       ``(a) Dispositions of Donated Property.--
       ``(1) In general.--If the donee of any charitable deduction 
     property sells, exchanges, or otherwise disposes of such 
     property within 2 years after its receipt, the donee shall 
     make a return (in accordance with forms and regulations 
     prescribed by the Secretary) showing--
       ``(A) the name, address, and TIN of the donor,
       ``(B) a description of the property,
       ``(C) the date of the contribution,
       ``(D) the amount received on the disposition, and
       ``(E) the date of such disposition.
       ``(2) Definitions.--For purposes of this subsection--
       ``(A) Charitable deduction property.--The term `charitable 
     deduction property' means any property (other than publicly 
     traded securities) contributed in a contribution for which a 
     deduction was claimed under section 170 if the claimed value 
     of such property (plus the claimed value of all similar items 
     of property donated by the donor to 1 or more donees) exceeds 
     $5,000.

[[Page 12842]]

       ``(B) Publicly traded securities.--The term `publicly 
     traded securities' means securities for which (as of the date 
     of the contribution) market quotations are readily available 
     on an established securities market.
       ``(b) Qualified Intellectual Property Contributions.--
       ``(1) In general.--Each donee with respect to a qualified 
     intellectual property contribution shall make a return (at 
     such time and in such form and manner as the Secretary may by 
     regulations prescribe) with respect to each specified taxable 
     year of the donee showing--
       ``(A) the name, address, and TIN of the donor,
       ``(B) a description of the qualified intellectual property 
     contributed,
       ``(C) the date of the contribution, and
       ``(D) the amount of net income of the donee for the taxable 
     year which is properly allocable to the qualified 
     intellectual property (determined without regard to paragraph 
     (10)(B) of section 170(m) and with the modifications 
     described in paragraphs (5) and (6) of such section).
       ``(2) Definitions.--For purposes of this subsection--
       ``(A) In general.--Terms used in this subsection which are 
     also used in section 170(m) have the respective meanings 
     given such terms in such section.
       ``(B) Specified taxable year.--The term `specified taxable 
     year' means, with respect to any qualified intellectual 
     property contribution, any taxable year of the donee any 
     portion of which is part of the 10-year period beginning on 
     the date of such contribution.
       ``(c) Statement To Be Furnished to Donors.--Every person 
     making a return under subsection (a) or (b) shall furnish a 
     copy of such return to the donor at such time and in such 
     manner as the Secretary may by regulations prescribe.''.
       (2) Clerical amendment.--The table of sections for subpart 
     A of part II of subchapter A of chapter 61 is amended by 
     striking the item relating to section 6050L and inserting the 
     following new item:

``Sec. 6050L. Returns relating to certain donated property.''.

       (d) Coordination With Appraisal Requirements.--Subclause 
     (I) of section 170(f)(11)(A)(ii), as added by section 683, is 
     amended by inserting ``subsection (e)(1)(B)(iii) or'' before 
     ``section 1221(a)(1)''.
       (e) Anti-Abuse Rules.--The Secretary of the Treasury may 
     prescribe such regulations or other guidance as may be 
     necessary or appropriate to prevent the avoidance of the 
     purposes of section 170(e)(1)(B)(iii) of the Internal Revenue 
     Code of 1986 (as added by subsection (a)), including 
     preventing--
       (1) the circumvention of the reduction of the charitable 
     deduction by embedding or bundling the patent or similar 
     property as part of a charitable contribution of property 
     that includes the patent or similar property,
       (2) the manipulation of the basis of the property to 
     increase the amount of the charitable deduction through the 
     use of related persons, pass-thru entities, or other 
     intermediaries, or through the use of any provision of law or 
     regulation (including the consolidated return regulations), 
     and
       (3) a donor from changing the form of the patent or similar 
     property to property of a form for which different deduction 
     rules would apply.
       (f) Effective Date.--The amendments made by this section 
     shall apply to contributions made after June 3, 2004.

     SEC. 683. INCREASED REPORTING FOR NONCASH CHARITABLE 
                   CONTRIBUTIONS.

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

       ``(I) Readily valued property.--Subparagraphs (C) and (D) 
     shall not apply to cash, property described in section 
     1221(a)(1), and publicly traded securities (as defined in 
     section 6050L(a)(2)(B)).
       ``(II) Reasonable cause.--Clause (i) shall not apply if it 
     is shown that the failure to meet such requirements is due to 
     reasonable cause and not to willful neglect.

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

     SEC. 684. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRCRAFT.

       (a) In General.--Subsection (f) of section 170 (relating to 
     disallowance of deduction in certain cases and special rules) 
     is amended by adding after paragraph (11) the following new 
     paragraph:
       ``(12) Contributions of motor vehicles, boats, and 
     aircraft.--
       ``(A) In general.--Except as provided in regulations or 
     other guidance, in the case of a contribution of a specified 
     vehicle to which paragraph (8) applies, no deduction shall be 
     allowed under subsection (a) for such contribution unless the 
     taxpayer obtains a qualified appraisal of the specified 
     vehicle on or before the date of such contribution.
       ``(B) Exception for inventory property.--Subparagraph (A) 
     shall not apply to property which is described in section 
     1221(a)(1).
       ``(C) Specified vehicle.--For purposes of this paragraph, 
     the term `specified vehicle' means any--
       ``(i) motor vehicle manufactured primarily for use on 
     public streets, roads, and highways,
       ``(ii) boat, or
       ``(iii) aircraft.
       ``(D) Qualified appraisal.--For purposes of this paragraph, 
     the term `qualified appraisal' means any appraisal which is 
     treated for purposes of this paragraph as a qualified 
     appraisal under regulations or other guidance prescribed by 
     the Secretary.
       ``(E) Regulations or other guidance.--The Secretary shall 
     prescribe such regulations or other guidance as may be 
     necessary to carry out the purposes of this paragraph.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to contributions made after June 3, 2004.

     SEC. 685. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS 
                   FRANCHISES.

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

     SEC. 686. MODIFICATION OF CONTINUING LEVY ON PAYMENTS TO 
                   FEDERAL VENDERS.

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

     SEC. 687. MODIFICATION OF STRADDLE RULES.

       (a) Rules Relating to Identified Straddles.--

[[Page 12843]]

       (1) In general.--Subparagraph (A) of section 1092(a)(2) 
     (relating to special rule for identified straddles) is 
     amended to read as follows:
       ``(A) In general.--In the case of any straddle which is an 
     identified straddle--
       ``(i) paragraph (1) shall not apply with respect to 
     identified positions comprising the identified straddle,
       ``(ii) if there is any loss with respect to any identified 
     position of the identified straddle, the basis of each of the 
     identified offsetting positions in the identified straddle 
     shall be increased by an amount which bears the same ratio to 
     the loss as the unrecognized gain with respect to such 
     offsetting position bears to the aggregate unrecognized gain 
     with respect to all such offsetting positions, and
       ``(iii) any loss described in clause (ii) shall not 
     otherwise be taken into account for purposes of this 
     title.''.
       (2) Identified straddle.--Section 1092(a)(2)(B) (defining 
     identified straddle) is amended--
       (A) by striking clause (ii) and inserting the following:
       ``(ii) to the extent provided by regulations, the value of 
     each position of which (in the hands of the taxpayer 
     immediately before the creation of the straddle) is not less 
     than the basis of such position in the hands of the taxpayer 
     at the time the straddle is created, and'', and
       (B) by adding at the end the following new flush sentence:

     ``The Secretary shall prescribe regulations which specify the 
     proper methods for clearly identifying a straddle as an 
     identified straddle (and the positions comprising such 
     straddle), which specify the rules for the application of 
     this section for a taxpayer which fails to properly identify 
     the positions of an identified straddle, and which specify 
     the ordering rules in cases where a taxpayer disposes of less 
     than an entire position which is part of an identified 
     straddle.''.
       (3) Unrecognized gain.--Section 1092(a)(3) (defining 
     unrecognized gain) is amended by redesignating subparagraph 
     (B) as subparagraph (C) and by inserting after subparagraph 
     (A) the following new subparagraph:
       ``(B) Special rule for identified straddles.--For purposes 
     of paragraph (2)(A)(ii), the unrecognized gain with respect 
     to any identified offsetting position shall be the excess of 
     the fair market value of the position at the time of the 
     determination over the fair market value of the position at 
     the time the taxpayer identified the position as a position 
     in an identified straddle.''.
       (4) Conforming amendment.--Section 1092(c)(2) is amended by 
     striking subparagraph (B) and by redesignating subparagraph 
     (C) as subparagraph (B).
       (b) Physically Settled Positions.--Section 1092(d) 
     (relating to definitions and special rules) is amended by 
     adding at the end the following new paragraph:
       ``(8) Special rules for physically settled positions.--For 
     purposes of subsection (a), if a taxpayer settles a position 
     which is part of a straddle by delivering property to which 
     the position relates (and such position, if terminated, would 
     result in a realization of a loss), then such taxpayer shall 
     be treated as if such taxpayer--
       ``(A) terminated the position for its fair market value 
     immediately before the settlement, and
       ``(B) sold the property so delivered by the taxpayer at its 
     fair market value.''.
       (c) Repeal of Stock Exception.--
       (1) In general.--Paragraph (3) of section 1092(d) (relating 
     to definitions and special rules) is amended to read as 
     follows:
       ``(3) Special rules for stock.--For purposes of paragraph 
     (1)--
       ``(A) In general.--The term `personal property' includes--
       ``(i) any stock which is a part of a straddle at least 1 of 
     the offsetting positions of which is a position with respect 
     to such stock or substantially similar or related property, 
     or
       ``(ii) any stock of a corporation formed or availed of to 
     take positions in personal property which offset positions 
     taken by any shareholder.
       ``(B) Rule for application.--For purposes of determining 
     whether subsection (e) applies to any transaction with 
     respect to stock described in subparagraph (A)(ii), all 
     includible corporations of an affiliated group (within the 
     meaning of section 1504(a)) shall be treated as 1 
     taxpayer.''.
       (2) Conforming amendment.--Section 1258(d)(1) is amended by 
     striking ``; except that the term `personal property' shall 
     include stock''.
       (d) Holding period for dividend exclusion.--The last 
     sentence of section 246(c) is amended by inserting: ``, other 
     than a qualified covered call option to which section 1092(f) 
     applies'' before the period at the end.
       (e) Effective Date.--The amendments made by this section 
     shall apply to positions established on or after the date of 
     the enactment of this Act.

     SEC. 688. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF 
                   TAXABLE VACCINES.

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

     SEC. 689. ADDITION OF VACCINES AGAINST INFLUENZA TO LIST OF 
                   TAXABLE VACCINES.

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

     SEC. 690. EXTENSION OF IRS USER FEES.

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

     SEC. 691. COBRA FEES.

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

[[Page 12844]]

       ``(II) the amount of fees collected under such paragraphs 
     may not exceed, in the aggregate, the amounts paid in that 
     fiscal year for the costs described in subsection (f)(3)(A) 
     incurred in providing customs services in connection with the 
     activity or item for which the fees are charged under such 
     paragraphs;
       ``(III) a fee may not be collected under any such paragraph 
     except to the extent such fee will be expended to pay the 
     costs described in subsection (f)(3)(A) incurred in providing 
     customs services in connection with the activity or item for 
     which the fee is charged under such paragraph; and
       ``(IV) any fee collected under any such paragraph shall be 
     available for expenditure only to pay the costs described in 
     subsection (f)(3)(A) incurred in providing customs services 
     in connection with the activity or item for which the fee is 
     charged under such paragraph.''.
       (d) Clerical Amendments.--Section 13031 of the Consolidated 
     Omnibus Budget Reconciliation Act of 1985 is amended--
       (1) in subsection (a)(5)(B), by striking ``$1.75'' and 
     inserting ``$1.75.'';
       (2) in subsection (b)--
       (A) in paragraph (1)(A), by aligning clause (iii) with 
     clause (ii);
       (B) in paragraph (7), by striking ``paragraphs'' and 
     inserting ``paragraph''; and
       (C) in paragraph (9), by aligning subparagraph (B) with 
     subparagraph (A); and
       (3) in subsection (e)(2), by aligning subparagraph (B) with 
     subparagraph (A).
       (e) Study of All Fees Collected by Department of Homeland 
     Security.--The Secretary of the Treasury shall conduct a 
     study of all the fees collected by the Department of Homeland 
     Security, and shall submit to the Congress, not later than 
     September 30, 2005, a report containing the recommendations 
     of the Secretary on--
       (1) what fees should be eliminated;
       (2) what the rate of fees retained should be; and
       (3) any other recommendations with respect to the fees that 
     the Secretary considers appropriate.

              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

     SEC. 701. SHORT TITLE.

       This title may be cited as the ``Fair and Equitable Tobacco 
     Reform Act of 2004''.

     SEC. 702. EFFECTIVE DATE.

       This title and the amendments made by this title shall 
     apply beginning with the 2005 marketing year of each kind of 
     tobacco.

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

     SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM AND RELATED 
                   PROVISIONS.

       (a) Marketing Quotas.--Part I of subtitle B of title III of 
     the Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et 
     seq.) is repealed.
       (b) Processing.--Section 9(b) of the Agricultural 
     Adjustment Act (7 U.S.C. 609(b)), reenacted with amendments 
     by the Agricultural Marketing Agreement Act of 1937, is 
     amended--
       (1) in paragraph (2), by striking ``tobacco,''; and
       (2) in paragraph (6)(B)(i), by striking ``, or, in the case 
     of tobacco, is less than the fair exchange value by not more 
     than 10 per centum,''.
       (c) Declaration of Policy.--Section 2 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1282) is amended by striking 
     ``tobacco,''.
       (d) Definitions.--Section 301(b) of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1301(b)) is amended--
       (1) in paragraph (3)--
       (A) by striking subparagraph (C); and
       (B) by redesignating subparagraph (D) as subparagraph (C);
       (2) in paragraph (6)(A), by striking ``tobacco,'';
       (3) in paragraph (10)--
       (A) by striking subparagraph (B); and
       (B) by redesignating subparagraph (C) as subparagraph (B);
       (4) in paragraph (11)(B), by striking ``and tobacco'';
       (5) in paragraph (12), by striking ``tobacco,'';
       (6) in paragraph (14)--
       (A) in subparagraph (A), by striking ``(A)''; and
       (B) by striking subparagraphs (B), (C), and (D);
       (7) by striking paragraph (15);
       (8) in paragraph (16)--
       (A) by striking subparagraph (B); and
       (B) by redesignating subparagraph (C) as subparagraph (B);
       (9) by striking paragraph (17); and
       (10) by redesignating paragraph (16) as paragraph (15).
       (e) Parity Payments.--Section 303 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1303) is amended in the 
     first sentence by striking ``rice, or tobacco,'' and 
     inserting ``or rice,''.
       (f) Administrative Provisions.--Section 361 of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) is 
     amended by striking ``tobacco,''.
       (g) Adjustment of Quotas.--Section 371 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1371) is amended--
       (1) in the first sentence of subsection (a), by striking 
     ``rice, or tobacco'' and inserting ``or rice''; and
       (2) in the first sentence of subsection (b), by striking 
     ``rice, or tobacco'' and inserting ``or rice''.
       (h) Regulations.--Section 375 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1375) is amended--
       (1) in subsection (a), by striking ``peanuts, or tobacco'' 
     and inserting ``or peanuts''; and
       (2) by striking subsection (c).
       (i) Eminent Domain.--Section 378 of the Agricultural 
     Adjustment Act of 1938 (7 U.S.C. 1378) is amended--
       (1) in the first sentence of subsection (c), by striking 
     ``cotton, and tobacco'' and inserting ``and cotton''; and
       (2) by striking subsections (d), (e), and (f).
       (j) Burley Tobacco Farm Reconstitution.--Section 379 of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is 
     amended--
       (1) in subsection (a)--
       (A) by striking ``(a)''; and
       (B) in paragraph (6), by striking ``, but this clause (6) 
     shall not be applicable in the case of burley tobacco''; and
       (2) by striking subsections (b) and (c).
       (k) Acreage-Poundage Quotas.--Section 4 of the Act of April 
     16, 1955 (Public Law 89-12; 7 U.S.C. 1314c note), is 
     repealed.
       (l) Burley Tobacco Acreage Allotments.--The Act of July 12, 
     1952 (7 U.S.C. 1315), is repealed.
       (m) Transfer of Allotments.--Section 703 of the Food and 
     Agriculture Act of 1965 (7 U.S.C. 1316) is repealed.
       (n) Advance Recourse Loans.--Section 13(a)(2)(B) of the 
     Food Security Improvements Act of 1986 (7 U.S.C. 1433c-
     1(a)(2)(B)) is amended by striking ``tobacco and''.
       (o) Tobacco Field Measurement.--Section 1112 of the Omnibus 
     Budget Reconciliation Act of 1987 (Public Law 100-203) is 
     amended by striking subsection (c).

     SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT PROGRAM AND 
                   RELATED PROVISIONS.

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

     SEC. 713. CONTINUATION OF LIABILITY AND NO NET LOSS 
                   ASSESSMENTS TO PREVENT LOSSES ON PRICE SUPPORT 
                   LOANS.

       (a) Liability.--The amendments made by this subtitle shall 
     not affect the liability of any person under any provision of 
     law so amended with respect to any crop of tobacco planted 
     before the effective date applicable to that kind of tobacco 
     under section 702.
       (b) Assessment Authority.--
       (1) Assessments to cover outstanding loan costs.--The 
     Commodity Credit Corporation shall impose and collect an 
     assessment on the sale of 2005 and subsequent crops of each 
     kind of tobacco and on the importation of tobacco in such 
     amounts as may be necessary to obtain funds sufficient to 
     cover any losses incurred by the Corporation with respect to 
     price support loans that--
       (A) were made for that kind of tobacco under section 106 of 
     the Agricultural Act of 1949 (7 U.S.C. 1445), before the 
     repeal of such section by section 712 of this Act; and
       (B) remain outstanding on or after the date of the 
     enactment of this Act.
       (2) Administration.--Assessments under paragraph (1) shall 
     be administered in the manner provided for in section 106B of 
     the Agricultural Act of 1949 (7 U.S.C. 1445-2), as in effect 
     the day before the date of the enactment of this Act. To 
     cover the costs of administering such assessments, the 
     Commodity Credit Corporation shall use funds remaining in the 
     No Net Cost Tobacco Funds and No Net Cost Tobacco Accounts 
     established pursuant to sections 106A and 106B of the 
     Agricultural Act of 1949 (7 U.S.C. 1445-1, 1445-2).

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

     SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER AND QUOTA 
                   HOLDER.

       In this subtitle:
       (1) Active tobacco producer.--The term ``active tobacco 
     producer'' means an owner, operator, landlord, tenant, or 
     sharecropper who--
       (A) shared in the risk of producing tobacco on a farm where 
     tobacco was produced or considered planted pursuant to a 
     tobacco farm marketing quota or farm acreage allotment 
     established under part I of subtitle B of title III of the 
     Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et seq.) 
     for the 2004 marketing year; and
       (B) was actively engaged on that farm.
       (2) Considered planted.--The term ``considered planted'' 
     means tobacco that was planted, but failed to be produced as 
     a result of a natural disaster, as determined by the 
     Secretary.

[[Page 12845]]

       (3) Tobacco quota holder.--The term ``tobacco quota 
     holder'' means a person that was an owner of a farm, as of 
     July 1, 2004, for which a basic tobacco farm marketing quota 
     or farm acreage allotment for quota tobacco was established 
     for the 2004 tobacco marketing year.
       (4) Secretary.--The term ``Secretary'' means the Secretary 
     of Agriculture.

     SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS.

       (a) Payment Required.--The Secretary shall make payments to 
     each eligible tobacco quota holder for the termination of 
     tobacco marketing quotas and related price support under 
     subtitle A, which shall constitute full and fair compensation 
     for any losses relating to such termination.
       (b) Eligibility.--To be eligible to receive a payment under 
     this section, a person shall submit to the Secretary an 
     application containing such information as the Secretary may 
     require to demonstrate to the satisfaction of the Secretary 
     that the person satisfies the definition of tobacco quota 
     holder. The application shall be submitted within such time, 
     in such form, and in such manner as the Secretary may 
     require.
       (c) Individual Base Quota Level.--
       (1) In general.--The Secretary shall establish a base quota 
     level applicable to each eligible tobacco quota holder 
     identified under subsection (b).
       (2) Poundage quotas.--Subject to adjustment under 
     subsection (d), for each kind of tobacco for which the 
     marketing quota is expressed in pounds, the base quota level 
     for each tobacco quota holder shall be equal to the basic 
     tobacco marketing quota under the Agriculture Adjustment Act 
     of 1938 for the marketing year in effect on the date of the 
     enactment of this Act for quota tobacco on the farm owned by 
     the tobacco quota holder.
       (3) Marketing quotas other than poundage quotas.--Subject 
     to adjustment under subsection (d), for each kind of tobacco 
     for which there is marketing quota or allotment on an acreage 
     basis, the base quota level for each tobacco quota holder 
     shall be the amount equal to the product obtained by 
     multiplying--
       (A) the basic tobacco farm marketing quota or allotment for 
     the marketing year in effect on the date of the enactment of 
     this Act, as established by the Secretary for quota tobacco 
     on the farm owned by the tobacco quota holder; by
       (B) the average county production yield per acre for the 
     county in which the farm is located for the kind of tobacco 
     for that marketing year.
       (d) Treatment of Certain Contracts and Agreements.--
       (1) Effect of purchase contract.--If there was an agreement 
     for the purchase of all or part of a farm described in 
     subsection (c) as of the date of the enactment of this Act, 
     and the parties to the sale are unable to agree to the 
     disposition of eligibility for payments under this section, 
     the Secretary, taking into account any transfer of quota that 
     has been agreed to, shall provide for the equitable division 
     of the payments among the parties by adjusting the 
     determination of who is the tobacco quota holder with respect 
     to particular pounds of the quota.
       (2) Effect of agreement for permanent quota transfer.--If 
     the Secretary determines that there was in existence, as of 
     the day before the date of the enactment of this Act, an 
     agreement for the permanent transfer of quota, but that the 
     transfer was not completed by that date, the Secretary shall 
     consider the tobacco quota holder to be the party to the 
     agreement that, as of that date, was the owner of the farm to 
     which the quota was to be transferred.
       (e) Total Payment Amounts Based on 2002 Marketing Year.--
       (1) Calculation of annual payment amount.--During fiscal 
     years 2005 through 2009, the Secretary shall make payments to 
     all eligible tobacco quota holders identified under 
     subsection (b) in an annual amount equal to the product 
     obtained by multiplying, for each kind of tobacco--
       (A) $1.40 per pound; by
       (B) the total national basic marketing quota established 
     under the Agriculture Adjustment Act of 1938 for the 2002 
     marketing year for that kind of tobacco.
       (2) Marketing quotas other than poundage quotas.--For each 
     kind of tobacco for which there is a marketing quota or 
     allotment on an acreage basis, the Secretary shall convert 
     the tobacco farm marketing quotas or allotments established 
     under the Agriculture Adjustment Act of 1938 for the 2002 
     marketing year for that kind of tobacco as the Secretary 
     considers appropriate.
       (f) Individual Payment Amounts.--The annual payment amount 
     for each eligible tobacco quota holder with respect to a kind 
     of tobacco under this section shall bear the same ratio to 
     the amount determined by the Secretary under subsection (e) 
     with respect to that kind of tobacco as the individual base 
     quota level of that eligible tobacco quota holder under 
     subsection (c) with respect to that kind of tobacco bears to 
     the total base quota levels of all eligible tobacco quota 
     holders with respect to that kind of tobacco.
       (g) Death of Tobacco Quota Holder.--If a tobacco quota 
     holder who is entitled to payments under this section dies 
     and is survived by a spouse or one or more dependents, the 
     right to receive the payments shall transfer to the surviving 
     spouse or, if there is no surviving spouse, to the estate of 
     the tobacco quota holder.

     SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS OF QUOTA 
                   TOBACCO.

       (a) Transition Payments Required.--The Secretary shall make 
     transition payments under this section to eligible active 
     producers of quota tobacco.
       (b) Eligibility.--To be eligible to receive a transition 
     payment under this section, a person shall submit to the 
     Secretary an application containing such information as the 
     Secretary may require to demonstrate to the satisfaction of 
     the Secretary that the person satisfies the definition of 
     active producer of quota tobacco. The application shall be 
     submitted within such time, in such form, and in such manner 
     as the Secretary may require.
       (c) Current Production Base.--The Secretary shall establish 
     a production base applicable to each eligible active producer 
     of quota tobacco identified under subsection (b). A 
     producer's production base shall be equal to the quantity, in 
     pounds, of quota tobacco subject to the basic marketing quota 
     marketed or considered planted by the producer under the 
     Agriculture Adjustment Act of 1938 for the marketing year in 
     effect on the date of the enactment of this Act.
       (d) Total Payment Amounts Based on 2002 Marketing Year.--
       (1) Calculation of annual payment amount.--During fiscal 
     years 2005 through 2009, the Secretary shall make payments to 
     all eligible active producers of quota tobacco identified 
     under subsection (b) in an annual amount equal to the product 
     obtained by multiplying, for each kind of tobacco--
       (A) $0.60 per pound; by
       (B) the total national effective marketing quota 
     established under the Agriculture Adjustment Act of 1938 for 
     the 2002 marketing year for that kind of tobacco.
       (2) Marketing quotas other than poundage quotas.--For each 
     kind of tobacco for which there is a marketing quota or 
     allotment on an acreage basis, the Secretary shall convert 
     the tobacco farm marketing quotas or allotments established 
     under the Agriculture Adjustment Act of 1938 for the 2002 
     marketing year for that kind of tobacco to a poundage basis 
     before executing the mathematical equation specified in 
     paragraph (1).
       (e) Individual Payment Amounts.--The annual payment amount 
     for each eligible active producer of quota tobacco identified 
     under subsection (b) with respect to a kind of tobacco under 
     this section shall bear the same ratio to the amount 
     determined by the Secretary under subsection (d) with respect 
     to that kind of tobacco as the individual production base of 
     that eligible active producer under subsection (c) with 
     respect to that kind of tobacco bears to the total production 
     bases determined under that subsection for all eligible 
     active producers of that kind of tobacco.
       (f) Death of Tobacco Producer.--If a tobacco producer who 
     is entitled to payments under this section dies and is 
     survived by a spouse or one or more dependents, the right to 
     receive the payments shall transfer to the surviving spouse 
     or, if there is no surviving spouse, to the estate of the 
     tobacco producer.

     SEC. 724. RESOLUTION OF DISPUTES.

       Any dispute regarding the eligibility of a person to 
     receive a payment under this subtitle, or the amount of the 
     payment, shall be resolved by the county committee 
     established under section 8 of the Soil Conservation and 
     Domestic Allotment Act (16 U.S.C. 590h) for the county or 
     other area in which the farming operation of the person is 
     located.

     SEC. 725. SOURCE OF FUNDS FOR PAYMENTS.

       There is hereby appropriated to the Secretary, from amounts 
     in the general fund of the Treasury, such amounts as the 
     Secretary needs in order to make the payments required by 
     sections 722 and 723, except that such amounts shall not 
     exceed the lesser of--
       (1) amounts received in the Treasury under chapter 52 of 
     the Internal Revenue Code of 1986 (relating to tobacco 
     products and cigarette papers and tubes) during the period 
     beginning on October 1, 2004, and ending on September 30, 
     2009, or
       (2) $9,600,000,000.

                      TITLE VIII--TRADE PROVISIONS

     SEC. 801. CEILING FANS.

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

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

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

     SEC. 802. CERTAIN STEAM GENERATORS, AND CERTAIN REACTOR 
                   VESSEL HEADS, USED IN NUCLEAR FACILITIES.

       (a) Certain Steam Generators.--Heading 9902.84.02 of the 
     Harmonized Tariff Schedule of the United States is amended by 
     striking ``12/31/2006'' and inserting ``12/31/2008''.

[[Page 12846]]

       (b) Certain Reactor Vessel Heads.--Subchapter II of chapter 
     99 of the Harmonized Tariff Schedule of the United States is 
     amended by inserting in numerical sequence the following new 
     heading:

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

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

     

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