[Congressional Record (Bound Edition), Volume 150 (2004), Part 3]
[Senate]
[Pages 3128-3208]
[From the U.S. Government Publishing Office, www.gpo.gov]




               JUMPSTART OUR BUSINESS STRENGTH (JOBS) ACT

  The PRESIDING OFFICER. Under the previous order, the hour of 10:30 
a.m. having arrived, the Senate will proceed to the consideration of S. 
1637, which the clerk will report.
  The assistant legislative clerk read as follows:

       A bill (S. 1637) to amend the Internal Revenue Code of 1986 
     to comply with the World Trade Organization rulings on the 
     FSC/ETI benefit in a manner that preserves jobs and 
     production activities in the United States, to reform and 
     simplify the international taxation rules of the United 
     States, and for other purposes.

  The Senate proceeded to consider the bill, which had been reported 
from the Committee on Finance, with an amendment to strike all after 
the enacting clause and inserting in lieu thereof the following:
  (Strike the part shown in black brackets and insert the part shown in 
italic.)

                                S. 1637

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

     [SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF 
                   CONTENTS.

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

[Sec. 1. Short title; amendment of 1986 Code; table of contents.

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

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

                [TITLE II--INTERNATIONAL TAX PROVISIONS

                 [Subtitle A--International Tax Reform

[Sec. 201. 20-year foreign tax credit carryforward.
[Sec. 202. Look-thru rules to apply to dividends from noncontrolled 
              section 902 corporations.
[Sec. 203. Foreign tax credit under alternative minimum tax.
[Sec. 204. Recharacterization of overall domestic loss.
[Sec. 205. Interest expense allocation rules.
[Sec. 206. Determination of foreign personal holding company income 
              with respect to transactions in commodities.

             [Subtitle B--International Tax Simplification

[Sec. 211. Repeal of foreign personal holding company rules and foreign 
              investment company rules.
[Sec. 212. Expansion of de minimis rule under subpart F.
[Sec. 213. Attribution of stock ownership through partnerships to apply 
              in determining section 902 and 960 credits.
[Sec. 214. Application of uniform capitalization rules to foreign 
              persons.
[Sec. 215. Repeal of withholding tax on dividends from certain foreign 
              corporations.
[Sec. 216. Repeal of special capital gains tax on aliens present in the 
              United States for 183 days or more.

     [TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR EXTRA
                           TERRITORIAL INCOME

     [SEC. 101. REPEAL OF EXCLUSION FOR EXTRA
                   TERRITORIAL INCOME.

       [(a) In General.--Section 114 is hereby repealed.
       [(b) Conforming Amendments.--
       [(1)(A) Subpart E of part III of subchapter N of chapter 1 
     (relating to qualifying foreign trade income) is hereby 
     repealed.
       [(B) The table of subparts for such part III is amended by 
     striking the item relating to subpart E.
       [(2) The table of sections for part III of subchapter B of 
     chapter 1 is amended by striking the item relating to section 
     114.
       [(3) The second sentence of section 56(g)(4)(B)(i) is 
     amended by striking ``or under section 114''.
       [(4) 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.
       [(5) 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).
       [(6) Section 903 is amended by striking ``114, 164(a),'' 
     and inserting ``164(a)''.
       [(7) Section 999(c)(1) is amended by striking 
     ``941(a)(5),''.
       [(c) Effective Date.--
       [(1) In general.--The amendments made by this section shall 
     apply to transactions occurring after the date of the 
     enactment of this Act.
       [(2) 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--
       [(A) 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
       [(B) which is in effect on September 17, 2003, and at all 
     times thereafter.
       [(d) Revocation of Section 943(e) Elections.--
       [(1) In general.--In the case of a corporation that elected 
     to be treated as a domestic corporation under section 943(e) 
     of the Internal Revenue Code of 1986 (as in effect on the day 
     before the date of the enactment of this Act)--
       [(A) the corporation may, during the 1-year period 
     beginning on the date of the enactment of this Act, revoke 
     such election, effective as of such date of enactment, and
       [(B) if the corporation does revoke such election--
       [(i) such corporation shall be treated as a domestic 
     corporation transferring (as of such

[[Page 3129]]

     date of enactment) all of its property to a foreign 
     corporation in connection with an exchange described in 
     section 354 of such Code, and
       [(ii) no gain or loss shall be recognized on such transfer.
       [(2) Exception.--Subparagraph (B)(ii) of paragraph (1) 
     shall not apply to gain on any asset held by the revoking 
     corporation if--
       [(A) the basis of such asset is determined in whole or in 
     part by reference to the basis of such asset in the hands of 
     the person from whom the revoking corporation acquired such 
     asset,
       [(B) the asset was acquired by transfer (not as a result of 
     the election under section 943(e) of such Code) occurring on 
     or after the 1st day on which its election under section 
     943(e) of such Code was effective, and
       [(C) a principal purpose of the acquisition was the 
     reduction or avoidance of tax (other than a reduction in tax 
     under section 114 of such Code, as in effect on the day 
     before the date of the enactment of this Act).
       [(e) General Transition.--
       [(1) In general.--In the case of a taxable year ending 
     after the date of the enactment of this Act and beginning 
     before January 1, 2007, for purposes of chapter 1 of such 
     Code, a current FSC/ETI beneficiary shall be allowed a 
     deduction equal to the transition amount determined under 
     this subsection with respect to such beneficiary for such 
     year.
       [(2) Current fsc/eti beneficiary.--The term ``current FSC/
     ETI beneficiary'' means any corporation which entered into 
     one or more transactions during its taxable year beginning in 
     calendar year 2002 with respect to which FSC/ETI benefits 
     were allowable.
       [(3) Transition amount.--For purposes of this subsection--
       [(A) In general.--The transition amount applicable to any 
     current FSC/ETI beneficiary for any taxable year is the 
     phaseout percentage of the base period amount.
       [(B) Phaseout percentage.--
       [(i) In general.--In the case of a taxpayer using the 
     calendar year as its taxable year, the phaseout percentage 
     shall be determined under the following table:


  The phaseout
  percentage is:
   80 .................................................................
   80 .................................................................
   60..................................................................

       [(ii) Special rule for 2003.--The phaseout percentage for 
     2003 shall be the amount that bears the same ratio to 100 
     percent as the number of days after the date of the enactment 
     of this Act bears to 365.
       [(iii) Special rule for fiscal year taxpayers.--In the case 
     of a taxpayer not using the calendar year as its taxable 
     year, the phaseout percentage is the weighted average of the 
     phaseout percentages determined under the preceding 
     provisions of this paragraph with respect to calendar years 
     any portion of which is included in the taxpayer's taxable 
     year. The weighted average shall be determined on the basis 
     of the respective portions of the taxable year in each 
     calendar year.
       [(4) Base period amount.--For purposes of this subsection, 
     the base period amount is the aggregate FSC/ETI benefits for 
     the taxpayer's taxable year beginning in calendar year 2002.
       [(5) FSC/ETI benefit.--For purposes of this subsection, the 
     term ``FSC/ETI benefit'' means--
       [(A) amounts excludable from gross income under section 114 
     of such Code, and
       [(B) the exempt foreign trade income of related foreign 
     sales corporations from property acquired from the taxpayer 
     (determined without regard to section 923(a)(5) of such Code 
     (relating to special rule for military property), as in 
     effect on the day before the date of the enactment of the FSC 
     Repeal and Extraterritorial Income Exclusion Act of 2000).

     In determining the FSC/ETI benefit there shall be excluded 
     any amount attributable to a transaction with respect to 
     which the taxpayer is the lessor unless the leased property 
     was manufactured or produced in whole or in part by the 
     taxpayer.
       [(6) Special rule for farm cooperatives.--Determinations 
     under this subsection with respect to an organization 
     described in section 943(g)(1) of such Code, as in effect on 
     the day before the date of the enactment of this Act, shall 
     be made at the cooperative level and the purposes of this 
     subsection shall be carried out in a manner similar to 
     section 250(h) of such Code, as added by this Act. Such 
     determinations shall be in accordance with such requirements 
     and procedures as the Secretary may prescribe.
       [(7) Certain rules to apply.--Rules similar to the rules of 
     section 41(f) of such Code shall apply for purposes of this 
     subsection.
       [(8) Coordination with binding contract rule.--The 
     deduction determined under paragraph (1) for any taxable year 
     shall be reduced by the phaseout percentage of any FSC/ETI 
     benefit realized for the taxable year by reason of subsection 
     (c)(2), except that for purposes of this paragraph the 
     phaseout percentage for 2003 shall be treated as being equal 
     to 100 percent.
       [(9) Special rule for taxable year which includes date of 
     enactment.--In the case of a taxable year which includes the 
     date of the enactment of this Act, the deduction allowed 
     under this subsection to any current FSC/ETI beneficiary 
     shall in no event exceed--
       [(A) 100 percent of such beneficiary's base period amount 
     for calendar year 2003, reduced by
       [(B) the aggregate FSC/ETI benefits of such beneficiary 
     with respect to transactions occurring during the portion of 
     the taxable year ending on the date of the enactment of this 
     Act.

     [SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO 
                   UNITED STATES PRODUCTION ACTIVITIES.

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

     [``SEC. 250. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION 
                   ACTIVITIES.

       [``(a) In General.--In the case of a corporation, there 
     shall be allowed as a deduction an amount equal to 9 percent 
     of the qualified production activities income of the 
     corporation for the taxable year.
       [``(b) Phasein.--In the case of taxable years beginning in 
     2004, 2005, 2006, 2007, or 2008, subsection (a) shall be 
     applied by substituting for the percentage contained therein 
     the transition percentage determined under the following 
     table:

  The transition
  percentage is:

  1 4..................................................................
  2 5..................................................................
  3 6..................................................................
  6.7 or 2008..........................................................

       [``(c) Qualified Production Activities Income.--For 
     purposes of this section--
       [``(1) In general.--The term `qualified production 
     activities income' means an amount equal to the applicable 
     percentage of the portion of the modified taxable income of 
     the taxpayer which is attributable to domestic production 
     activities.
       [``(2) Applicable percentage.--For purposes of this 
     subsection, the term `applicable percentage' means--
       [``(A) in the case of taxable years beginning before 2012, 
     a percentage equal to the domestic/worldwide fraction,
       [``(B) in the case of taxable years beginning in 2012, a 
     percentage (not greater than 100 percent) equal to twice the 
     domestic/worldwide fraction, and
       [``(C) in the case of taxable years beginning after 2012, 
     100 percent.
       [``(d) Determination of Income Attributable to Domestic 
     Production Activities.--For purposes of this section--
       [``(1) In general.--The portion of the modified taxable 
     income which is attributable to domestic production 
     activities is so much of the modified taxable income for the 
     taxable year as does not exceed--
       [``(A) the taxpayer's domestic production gross receipts 
     for such taxable year, reduced by
       [``(B) the sum of--
       [``(i) the costs of goods sold that are allocable to such 
     receipts,
       [``(ii) other deductions, expenses, or losses directly 
     allocable to such receipts, and
       [``(iii) a proper share of other deductions, expenses, and 
     losses that are not directly allocable to such receipts or 
     another class of income.
       [``(2) Allocation method.--The Secretary shall prescribe 
     rules for the proper allocation of items of income, 
     deduction, expense, and loss for purposes of determining 
     income attributable to domestic production activities.
       [``(3) Special rules for determining costs.--
       [``(A) In general.--For purposes of determining costs under 
     clause (i) of paragraph (1)(B), any item or service brought 
     into the United States without a transfer price meeting the 
     requirements of section 482 shall be treated as acquired by 
     purchase, and its cost shall be treated as not less than its 
     value when it entered the United States. A similar rule shall 
     apply in determining the adjusted basis of leased or rented 
     property where the lease or rental gives rise to domestic 
     production gross receipts.
       [``(B) Exports for further manufacture.--In the case of any 
     property described in subparagraph (A) that had been exported 
     by the taxpayer for further manufacture, the increase in cost 
     or adjusted basis under subparagraph (A) shall not exceed the 
     difference between the value of the property when exported 
     and the value of the property when brought back into the 
     United States after the further manufacture.
       [``(4) Modified taxable income.--The term `modified taxable 
     income' means taxable income computed without regard to the 
     deduction allowable under this section.
       [``(e) Domestic Production Gross Receipts.--For purposes of 
     this section, the term `domestic production gross receipts' 
     means the gross receipts of the taxpayer which are derived 
     from--
       [``(1) any sale, exchange, or other disposition of, or
       [``(2) any lease, rental, or license of,
     qualifying production property which was manufactured, 
     produced, grown, or extracted in whole or in significant part 
     by the taxpayer within the United States.
       [``(f) Qualifying Production Property.--For purposes of 
     this section--

[[Page 3130]]

       [``(1) In general.--Except as otherwise provided in this 
     paragraph, the term `qualifying production property' means--
       [``(A) any tangible personal property,
       [``(B) any computer software, and
       [``(C) any property described in section 168(f) (3) or (4).
       [``(2) Exclusions from qualifying production property.--The 
     term `qualifying production property' shall not include--
       [``(A) consumable property that is sold, leased, or 
     licensed by the taxpayer as an integral part of the provision 
     of services,
       [``(B) oil or gas (or any primary product thereof),
       [``(C) electricity,
       [``(D) water supplied by pipeline to the consumer,
       [``(E) any unprocessed timber which is softwood,
       [``(F) utility services, or
       [``(G) any property (not described in paragraph (1)(B)) 
     which is a film, tape, recording, book, magazine, newspaper, 
     or similar property the market for which is primarily topical 
     or otherwise essentially transitory in nature.

     For purposes of subparagraph (E), the term `unprocessed 
     timber' means any log, cant, or similar form of timber.
       [``(g) Domestic/Worldwide Fraction.--For purposes of this 
     section--
       [``(1) In general.--The term `domestic/worldwide fraction' 
     means a fraction--
       [``(A) the numerator of which is the value of the domestic 
     production of the taxpayer, and
       [``(B) the denominator of which is the value of the 
     worldwide production of the taxpayer.
       [``(2) Value of domestic production.--The value of domestic 
     production is the excess of--
       [``(A) the domestic production gross receipts, over
       [``(B) the cost of purchased inputs allocable to such 
     receipts that are deductible under this chapter for the 
     taxable year.
       [``(3) Purchased inputs.--
       [``(A) In general.--Purchased inputs are any of the 
     following items acquired by purchase:
       [``(i) Services (other than services of employees) used in 
     manufacture, production, growth, or extraction activities.
       [``(ii) Items consumed in connection with such activities.
       [``(iii) Items incorporated as part of the property being 
     manufactured, produced, grown, or extracted.
       [``(B) Special rule.--Rules similar to the rules of 
     subsection (d)(3) shall apply for purposes of this 
     subsection.
       [``(4) Value of worldwide production.--
       [``(A) In general.--The value of worldwide production shall 
     be determined under the principles of paragraph (2), except 
     that--
       [``(i) worldwide production gross receipts shall be taken 
     into account, and
       [``(ii) paragraph (3)(B) shall not apply.
       [``(B) Worldwide production gross receipts.--The worldwide 
     production gross receipts is the amount that would be 
     determined under subsection (e) if such subsection were 
     applied without any reference to the United States.
       [``(5) Special rule for affiliated groups.--
       [``(A) In general.--In the case of a taxpayer that is a 
     member of an expanded affiliated group, the domestic/
     worldwide fraction shall be the amount determined under the 
     preceding provisions of this subsection by treating all 
     members of such group as a single corporation.
       [``(B) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group as defined in 
     section 1504(a), determined--
       [``(i) by substituting `50 percent' for `80 percent' each 
     place it appears, and
       [``(ii) without regard to paragraphs (2), (3), (4), and (8) 
     of section 1504(b).
       [``(h) Definitions and Special Rules.--
       [``(1) Exclusion for patrons of agricultural and 
     horticultural cooperatives.--
       [``(A) In general.--If any amount described in paragraph 
     (1) or (3) of section 1385 (a)--
       [``(i) is received by a person from an organization to 
     which part I of subchapter T applies which is engaged in the 
     marketing of agricultural or horticultural products, and
       [``(ii) is allocable to the portion of the qualified 
     production activities income of the organization which is 
     deductible under subsection (a) (determined as if the 
     organization were a corporation if it is not) and designated 
     as such by the organization in a written notice mailed to its 
     patrons during the payment period described in section 
     1382(a),

     then such person shall be allowed an exclusion from gross 
     income with respect to such amount. The taxable income of the 
     organization shall not be reduced under section 1382 by the 
     portion of any such amount with respect to which an exclusion 
     is allowable to a person by reason of this paragraph.
       [``(B) Special rules.--For purposes of applying 
     subparagraph (A), in determining the qualified production 
     activities income of the organization under this section--
       [``(i) there shall not be taken into account in computing 
     the organization's modified taxable income any deduction 
     allowable under subsection (b) or (c) of section 1382 
     (relating to patronage dividends, per-unit retain 
     allocations, and nonpatronage distributions), and
       [``(ii) the organization shall be treated as having 
     manufactured, produced, grown, or extracted in whole or 
     significant part any qualifying production property marketed 
     by the organization which its patrons have so manufactured, 
     produced, grown, or extracted.
       [``(2) Special rule for partnerships.--For purposes of this 
     section, a corporation's distributive share of any 
     partnership item shall be taken into account as if directly 
     realized by the corporation.
       [``(3) Coordination with minimum tax.--The deduction under 
     this section shall be allowed for purposes of the tax imposed 
     by section 55; except that for purposes of section 55, 
     alternative minimum taxable income shall be taken into 
     account in determining the deduction under this section.
       [``(4) Ordering rule.--The amount of any other deduction 
     allowable under this chapter shall be determined as if this 
     section had not been enacted.
       [``(5) Coordination with transition rules.--For purposes of 
     this section--
       [``(A) domestic production gross receipts shall not include 
     gross receipts from any transaction if the binding contract 
     transition relief of section 101(c)(2) of the Jumpstart Our 
     Business Strength (JOBS) Act applies to such transaction, and
       [``(B) any deduction allowed under section 101(e) of such 
     Act shall be disregarded in determining the portion of the 
     taxable income which is attributable to domestic production 
     gross receipts.''.
       [(b) Deduction Allowed to Shareholders of S Corporations.--
       [(1) In general.--Section 1363(b) (relating to computation 
     of S corporation's taxable income) is amended by striking 
     ``and'' at the end of paragraph (3), by striking the period 
     at the end of paragraph (4) and inserting ``, and'', and by 
     adding at the end the following new paragraph:
       [``(5) the deduction under section 250 shall be allowed to 
     the S corporation.''
       [(2) Increase in basis.--Section 1367(a)(1) (relating to 
     increases in basis) is amended by striking ``and'' at the end 
     of subparagraph (B), by striking the period at the end of 
     subparagraph (C) and inserting ``, and'', and by adding at 
     the end the following new subparagraph:
       [``(D) any deduction allowed under section 250.''
       [(c) Minimum Tax.--Section 56(g)(4)(C) (relating to 
     disallowance of items not deductible in computing earnings 
     and profits) is amended by adding at the end the following 
     new clause:
       [``(v) Deduction for domestic production.--Clause (i) shall 
     not apply to any amount allowable as a deduction under 
     section 250.''
       [(d) Clerical Amendment.--The table of sections for part 
     VIII of subchapter B of chapter 1 is amended by adding at the 
     end the following new item:

[``Sec. 250. Income attributable to domestic production activities.''

       [(e) Effective Date.--
       [(1) In general.--The amendments made by this section shall 
     apply to taxable years ending after the date of the enactment 
     of this Act.
       [(2) Application of section 15.--Section 15 of the Internal 
     Revenue Code of 1986 shall apply to the amendments made by 
     this section as if they were changes in a rate of tax.

                [TITLE II--INTERNATIONAL TAX PROVISIONS

                 [Subtitle A--International Tax Reform

     [SEC. 201. 20-YEAR FOREIGN TAX CREDIT CARRYFORWARD.

       [(a) General Rule.--Section 904(c) (relating to carryback 
     and carryover of excess tax paid) is amended by striking ``in 
     the first, second, third, fourth, or fifth'' and inserting 
     ``in any of the first 20''.
       [(b) Excess Extraction Taxes.--Paragraph (1) of section 
     907(f) is amended by striking ``in the first, second, third, 
     fourth, or fifth'' and inserting ``in any of the first 20''.
       [(c) Effective Date.--The amendments made by this section 
     shall apply to excess foreign taxes which (without regard to 
     the amendments made by this section) may be carried to any 
     taxable year beginning after December 31, 2004.

     [SEC. 202. 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

[[Page 3131]]

       [``(ii) the total amount of earnings and profits.
       [``(B) 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) Look-thru with respect to carryforwards 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.
       [``(iv) Coordination with high-taxed income provisions.--
     Rules similar to the rules of paragraph (3)(F) shall apply 
     for purposes of this paragraph.''.
       [(b) Conforming Amendments.--
       [(1) 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).
       [(2) Clause (i) of section 864(d)(5)(A) is amended to read 
     as follows:
       [``(i) Subclause (I) of section 904(d)(2)(B)(iii).''
       [(c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     [SEC. 203. 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) of such Code 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. 204. 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. 205. 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 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),
       [``(ii) a financial holding company (within the meaning of 
     section 2(p) of the Bank Holding Company Act of 1956), and
       [``(iii) any subsidiary of a financial institution 
     described in section 581 or 591, or of any

[[Page 3132]]

     such bank or financial holding company, if such subsidiary is 
     predominantly engaged (directly or indirectly) in the active 
     conduct of a banking, financing, or similar business,

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

     shall be treated as described in paragraph (4)(B) for 
     purposes of applying paragraph (4)(A). This subsection (other 
     than this paragraph) shall apply to any such group in the 
     same manner as this subsection (other than this paragraph) 
     applies to the pre-election worldwide affiliated group of 
     which such group is a part.
       [``(B) Financial corporation.--For purposes of this 
     paragraph, the term `financial corporation' means any 
     corporation if at least 80 percent of its gross income is 
     income described in section 904(d)(2)(D)(ii) and the 
     regulations thereunder which is derived from transactions 
     with persons who are not related (within the meaning of 
     section 267(b) or 707(b)(1)) to the corporation. For purposes 
     of the preceding sentence, there shall be disregarded any 
     item of income or gain from a transaction or series of 
     transactions a principal purpose of which is the 
     qualification of any corporation as a financial corporation.
       [``(C) 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, 2009, 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, 2009, in 
     which a worldwide affiliated group exists which includes such 
     affiliated group and at least one 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, 
     2009.

     [SEC. 206. 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 (6)(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 (5) the 
     following new paragraph:
       [``(6) 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) 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) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after December 31, 
     2004.

             [Subtitle B--International Tax Simplification

     [SEC. 211. 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

[[Page 3133]]

     is owned, directly or indirectly, by or for the individual 
     who has performed, is to perform, or may be designated (by 
     name or by description) as the one to perform, such 
     services.''
       [(c) Conforming Amendments.--
       [(1) Section 1(h) is amended--
       [(A) in paragraph (10), by inserting ``and'' at the end of 
     subparagraph (F), by striking subparagraph (G), and by 
     redesignating subparagraph (H) as subparagraph (G), and
       [(B) by striking ``a foreign personal holding company (as 
     defined in section 552), a foreign investment company (as 
     defined in section 1246(b)), or'' in paragraph (11)(C)(iii).
       [(2) Paragraph (2) of section 171(c) is amended--
       [(A) by striking ``, or by a foreign personal holding 
     company, as defined in section 552'', and
       [(B) by striking ``, or foreign personal holding company''.
       [(3) Paragraph (2) of section 245(a) is amended by striking 
     ``foreign personal holding company or''.
       [(4) Section 312 is amended by striking subsection (j).
       [(5) Subsection (m) of section 312 is amended by striking 
     ``, a foreign investment company (within the meaning of 
     section 1246(b)), or a foreign personal holding company 
     (within the meaning of section 552)''.
       [(6) Subsection (e) of section 443 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       [(7) Subparagraph (B) of section 465(c)(7) is amended by 
     adding ``or'' at the end of clause (i), by striking clause 
     (ii), and by redesignating clause (iii) as clause (ii).
       [(8) Paragraph (1) of section 543(b) is amended by 
     inserting ``and'' at the end of subparagraph (A), by striking 
     ``, and'' at the end of subparagraph (B) and inserting a 
     period, and by striking subparagraph (C).
       [(9) Paragraph (1) of section 562(b) is amended by striking 
     ``or a foreign personal holding company described in section 
     552''.
       [(10) Section 563 is amended--
       [(A) by striking subsection (c),
       [(B) by redesignating subsection (d) as subsection (c), and
       [(C) by striking ``subsection (a), (b), or (c)'' in 
     subsection (c) (as so redesignated) and inserting 
     ``subsection (a) or (b)''.
       [(11) Subsection (d) of section 751 is amended by adding 
     ``and'' at the end of paragraph (2), by striking paragraph 
     (3), by redesignating paragraph (4) as paragraph (3), and by 
     striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as 
     so redesignated) and inserting ``paragraph (1) or (2)''.
       [(12) Paragraph (2) of section 864(d) is amended by 
     striking subparagraph (A) and by redesignating subparagraphs 
     (B) and (C) as subparagraphs (A) and (B), respectively.
       [(13)(A) Subparagraph (A) of section 898(b)(1) is amended 
     to read as follows:
       [``(A) which is treated as a controlled foreign corporation 
     for any purpose under subpart F of part III of this 
     subchapter, and''.
       [(B) Subparagraph (B) of section 898(b)(2) is amended by 
     striking ``and sections 551(f) and 554, whichever are 
     applicable,''.
       [(C) Paragraph (3) of section 898(b) is amended to read as 
     follows:
       [``(3) United states shareholder.--The term `United States 
     shareholder' has the meaning given to such term by section 
     951(b), except that, in the case of a foreign corporation 
     having related person insurance income (as defined in section 
     953(c)(2)), the Secretary may treat any person as a United 
     States shareholder for purposes of this section if such 
     person is treated as a United States shareholder under 
     section 953(c)(1).''
       [(D) Subsection (c) of section 898 is amended to read as 
     follows:
       [``(c) Determination of Required Year.--
       [``(1) In general.--The required year is--
       [``(A) the majority U.S. shareholder year, or
       [``(B) if there is no majority U.S. shareholder year, the 
     taxable year prescribed under regulations.
       [``(2) 1-month deferral allowed.--A specified foreign 
     corporation may elect, in lieu of the taxable year under 
     paragraph (1)(A), a taxable year beginning 1 month earlier 
     than the majority U.S. shareholder year.
       [``(3) Majority u.s. shareholder year.--
       [``(A) In general.--For purposes of this subsection, the 
     term `majority U.S. shareholder year' means the taxable year 
     (if any) which, on each testing day, constituted the taxable 
     year of--
       [``(i) each United States shareholder described in 
     subsection (b)(2)(A), and
       [``(ii) each United States shareholder not described in 
     clause (i) whose stock was treated as owned under subsection 
     (b)(2)(B) by any shareholder described in such clause.
       [``(B) Testing day.--The testing days shall be--
       [``(i) the first day of the corporation's taxable year 
     (determined without regard to this section), or
       [``(ii) the days during such representative period as the 
     Secretary may prescribe.''
       [(14) Clause (ii) of section 904(d)(2)(A) is amended to 
     read as follows:
       [``(ii) Certain amounts included.--Except as provided in 
     clause (iii), the term `passive income' includes, except as 
     provided in subparagraph (E)(iii) or paragraph (3)(I), any 
     amount includible in gross income under section 1293 
     (relating to certain passive foreign investment companies).''
       [(15)(A) Subparagraph (A) of section 904(g)(1), as 
     redesignated by section 204, 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(g), as so redesignated, is amended by striking ``foreign 
     personal holding or''.
       [(16) Section 951 is amended by striking subsections (c) 
     and (d) and by redesignating subsections (e) and (f) as 
     subsections (c) and (d), respectively.
       [(17) Paragraph (3) of section 989(b) is amended by 
     striking ``, 551(a),''.
       [(18) Paragraph (5) of section 1014(b) is amended by 
     inserting ``and before January 1, 2005,'' after ``August 26, 
     1937,''.
       [(19) Subsection (a) of section 1016 is amended by striking 
     paragraph (13).
       [(20)(A) Paragraph (3) of section 1212(a) is amended to 
     read as follows:
       [``(3) Special rules on carrybacks.--A net capital loss of 
     a corporation shall not be carried back under paragraph 
     (1)(A) to a taxable year--
       [``(A) for which it is a regulated investment company (as 
     defined in section 851), or
       [``(B) for which it is a real estate investment trust (as 
     defined in section 856).''
       [(B) The amendment made by subparagraph (A) shall apply to 
     taxable years beginning after December 31, 2004.
       [(21) Section 1223 is amended by striking paragraph (10) 
     and by redesignating the following paragraphs accordingly.
       [(22) Subsection (d) of section 1248 is amended by striking 
     paragraph (5) and by redesignating paragraphs (6) and (7) as 
     paragraphs (5) and (6), respectively.
       [(23) Paragraph (2) of section 1260(c) is amended by 
     striking subparagraphs (H) and (I) and by redesignating 
     subparagraph (J) as subparagraph (H).
       [(24)(A) Subparagraph (F) of section 1291(b)(3) is amended 
     by striking ``551(d), 959(a),'' and inserting ``959(a)''.
       [(B) Subsection (e) of section 1291 is amended by inserting 
     ``(as in effect on the day before the date of the enactment 
     of the Jumpstart Our Business Strength (JOBS) Act)'' after 
     ``section 1246''.
       [(25) Paragraph (2) of section 1294(a) is amended to read 
     as follows:
       [``(2) Election not permitted where amounts otherwise 
     includible under section 951.--The taxpayer may not make an 
     election under paragraph (1) with respect to the 
     undistributed PFIC earnings tax liability attributable to a 
     qualified electing fund for the taxable year if any amount is 
     includible in the gross income of the taxpayer under section 
     951 with respect to such fund for such taxable year.''
       [(26) Section 6035 is hereby repealed.
       [(27) Subparagraph (D) of section 6103(e)(1) is amended by 
     striking clause (iv) and redesignating clauses (v) and (vi) 
     as clauses (iv) and (v), respectively.
       [(28) Subparagraph (B) of section 6501(e)(1) is amended to 
     read as follows:
       [``(B) Constructive dividends.--If the taxpayer omits from 
     gross income an amount properly includible therein under 
     section 951(a), the tax may be assessed, or a proceeding in 
     court for the collection of such tax may be done without 
     assessing, at any time within 6 years after the return was 
     filed.''
       [(29) Subsection (a) of section 6679 is amended--
       [(A) by striking ``6035, 6046, and 6046A'' in paragraph (1) 
     and inserting ``6046 and 6046A'', and
       [(B) by striking paragraph (3).
       [(30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
     are each amended by striking ``556(b)(2),'' each place it 
     appears.
       [(31) The table of parts for subchapter G of chapter 1 is 
     amended by striking the item relating to part III.
       [(32) The table of sections for part IV of subchapter P of 
     chapter 1 is amended by striking the items relating to 
     sections 1246 and 1247.
       [(33) The table of sections for subpart A of part III of 
     subchapter A of chapter 61 is amended by striking the item 
     relating to section 6035.
       [(d) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and taxable years of 
     United States shareholders of such corporations ending with 
     or within such taxable years of such corporations.

     [SEC. 212. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

       [(a) In General.--Clause (ii) of section 954(b)(3)(A) 
     (relating to de minimis, etc., rules) is amended by striking 
     ``$1,000,000'' and inserting ``$5,000,000''.
       [(b) Technical Amendments.--
       [(1) Clause (ii) of section 864(d)(5)(A) is amended by 
     striking ``$1,000,000'' and inserting ``$5,000,000''.
       [(2) Clause (i) of section 881(c)(5)(A) is amended by 
     striking ``$1,000,000'' and inserting ``$5,000,000''.
       [(c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and taxable years of 
     United States shareholders of such corporations ending with 
     or within such taxable years of such corporations.

[[Page 3134]]



     [SEC. 213. 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. 214. APPLICATION OF UNIFORM CAPITALIZATION RULES TO 
                   FOREIGN PERSONS.

       [(a) In General.--Section 263A(c) (relating to exceptions) 
     is amended by adding at the end the following new paragraph:
       [``(7) Foreign persons.--Except for purposes of applying 
     sections 871(b)(1) and 882(a)(1), this section shall not 
     apply to any taxpayer who is not a United States person if 
     such taxpayer capitalizes costs of produced property or 
     property acquired for resale by applying the method used to 
     ascertain the income, profit, or loss for purposes of reports 
     or statements to shareholders, partners, other proprietors, 
     or beneficiaries, or for credit purposes.''
       [(b) Effective Date.--
       [(1) In general.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2004.
       [(2) Change in method of accounting.--In the case of any 
     taxpayer required by the amendment made by this section to 
     change its method of accounting for its first taxable year 
     beginning after December 31, 2004--
       [(A) such change shall be treated as initiated by the 
     taxpayer,
       [(B) such change shall be treated as made with the consent 
     of the Secretary of the Treasury, and
       [(C) the net amount of the adjustments required to be taken 
     into account by the taxpayer under section 481 of the 
     Internal Revenue Code of 1986 shall be taken into account in 
     such first year.

     [SEC. 215. 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. 216. REPEAL OF SPECIAL CAPITAL GAINS TAX ON ALIENS 
                   PRESENT IN THE UNITED STATES FOR 183 DAYS OR 
                   MORE.

       [(a) In General.--Subsection (a) of section 871 is amended 
     by striking paragraph (2) and by redesignating paragraph (3) 
     as paragraph (2).
       [(b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.]

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF 
                   CONTENTS.

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

Sec. 1. Short title; amendment of 1986 Code; table of contents.

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

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

                 TITLE II--INTERNATIONAL TAX PROVISIONS

                  Subtitle A--International Tax Reform

Sec. 201. 20-year foreign tax credit carryover; 1-year foreign tax 
              credit carryback.
Sec. 202. Look-thru rules to apply to dividends from noncontrolled 
              section 902 corporations.
Sec. 203. Foreign tax credit under alternative minimum tax.
Sec. 204. Recharacterization of overall domestic loss.
Sec. 205. Interest expense allocation rules.
Sec. 206. Determination of foreign personal holding company income with 
              respect to transactions in commodities.

              Subtitle B--International Tax Simplification

Sec. 211. Repeal of foreign personal holding company rules and foreign 
              investment company rules.
Sec. 212. Expansion of de minimis rule under subpart F.
Sec. 213. Attribution of stock ownership through partnerships to apply 
              in determining section 902 and 960 credits.
Sec. 214. Application of uniform capitalization rules to foreign 
              persons.
Sec. 215. Repeal of withholding tax on dividends from certain foreign 
              corporations.
Sec. 216. Repeal of special capital gains tax on aliens present in the 
              United States for 183 days or more.

          Subtitle C--Additional International Tax Provisions

Sec. 221. Active leasing income from aircraft and vessels.
Sec. 222. Look-thru treatment of payments between related controlled 
              foreign corporations under foreign personal holding 
              company income rules.
Sec. 223. Look-thru treatment for sales of partnership interests.
Sec. 224. Election not to use average exchange rate for foreign tax 
              paid other than in functional currency.
Sec. 225. Treatment of income tax base differences.
Sec. 226. Modification of exceptions under subpart F for active 
              financing.
Sec. 227. United States property not to include certain assets of 
              controlled foreign corporation.
Sec. 228. Provide equal treatment for interest paid by foreign 
              partnerships and foreign corporations.
Sec. 229. Clarification of treatment of certain transfers of intangible 
              property.
Sec. 230. Modification of the treatment of certain REIT distributions 
              attributable to gain from sales or exchanges of United 
              States real property interests.
Sec. 231. Toll tax on excess qualified foreign distribution amount.
Sec. 232. Exclusion of income derived from certain wagers on horse 
              races and dog races from gross income of nonresident 
              alien individuals.
Sec. 233. Limitation of withholding tax for Puerto Rico corporations.
Sec. 234. Report on WTO dispute settlement panels and the appellate 
              body.
Sec. 235. Study of impact of international tax laws on taxpayers other 
              than large corporations.
Sec. 236. Consultative role for Senate Committee on Finance in 
              connection with the review of proposed tax treaties.

       TITLE III--DOMESTIC MANUFACTURING AND BUSINESS PROVISIONS

                     Subtitle A--General Provisions

Sec. 301. Expansion of qualified small-issue bond program.
Sec. 302. Expensing of broadband Internet access expenditures.
Sec. 303. Exemption of natural aging process in determination of 
              production period for distilled spirits under section 
              263A.
Sec. 304. Modification of active business definition under section 355.
Sec. 305. Exclusion of certain indebtedness of small business 
              investment companies from acquisition indebtedness.
Sec. 306. Modified taxation of imported archery products.
Sec. 307. Modification to cooperative marketing rules to include value 
              added processing involving animals.
Sec. 308. Extension of declaratory judgment procedures to farmers' 
              cooperative organizations.
Sec. 309. Temporary suspension of personal holding company tax.
Sec. 310. Increase in section 179 expensing.
Sec. 311. Three-year carryback of net operating losses.

              Subtitle B--Manufacturing Relating to Films

Sec. 321. Special rules for certain film and television productions.
Sec. 322. Modification of application of income forecast method of 
              depreciation.

              Subtitle C--Manufacturing Relating to Timber

Sec. 331. Expensing of certain reforestation expenditures.
Sec. 332. Election to treat cutting of timber as a sale or exchange.
Sec. 333. Capital gain treatment under section 631(b) to apply to 
              outright sales by landowners.
Sec. 334. Modification of safe harbor rules for timber REITS.

                    TITLE IV--ADDITIONAL PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

Sec. 401. Clarification of economic substance doctrine.

[[Page 3135]]

Sec. 402. Penalty for failing to disclose reportable transaction.
Sec. 403. Accuracy-related penalty for listed transactions and other 
              reportable transactions having a significant tax 
              avoidance purpose.
Sec. 404. Penalty for understatements attributable to transactions 
              lacking economic substance, etc.
Sec. 405. Modifications of substantial understatement penalty for 
              nonreportable transactions.
Sec. 406. Tax shelter exception to confidentiality privileges relating 
              to taxpayer communications.
Sec. 407. Disclosure of reportable transactions.
Sec. 408. Modifications to penalty for failure to register tax 
              shelters.
Sec. 409. Modification of penalty for failure to maintain lists of 
              investors.
Sec. 410. Modification of actions to enjoin certain conduct related to 
              tax shelters and reportable transactions.
Sec. 411. Understatement of taxpayer's liability by income tax return 
              preparer.
Sec. 412. Penalty on failure to report interests in foreign financial 
              accounts.
Sec. 413. Frivolous tax submissions.
Sec. 414. Regulation of individuals practicing before the Department of 
              Treasury.
Sec. 415. Penalty on promoters of tax shelters.
Sec. 416. Statute of limitations for taxable years for which required 
              listed transactions not reported.
Sec. 417. Denial of deduction for interest on underpayments 
              attributable to nondisclosed reportable and noneconomic 
              substance transactions.
Sec. 418. Authorization of appropriations for tax law enforcement.

           Subtitle B--Other Corporate Governance Provisions

Sec. 421. Affirmation of consolidated return regulation authority.
Sec. 422. Signing of corporate tax returns by chief executive officer.
Sec. 423. Denial of deduction for certain fines, penalties, and other 
              amounts.
Sec. 424. Disallowance of deduction for punitive damages.
Sec. 425. Increase in criminal monetary penalty limitation for the 
              underpayment or overpayment of tax due to fraud.

            Subtitle C--Enron-Related Tax Shelter Provisions

Sec. 431. Limitation on transfer or importation of built-in losses.
Sec. 432. No reduction of basis under section 734 in stock held by 
              partnership in corporate partner.
Sec. 433. Repeal of special rules for FASITs.
Sec. 434. Expanded disallowance of deduction for interest on 
              convertible debt.
Sec. 435. Expanded authority to disallow tax benefits under section 
              269.
Sec. 436. Modification of interaction between subpart F and passive 
              foreign investment company rules.

           Subtitle D--Provisions To Discourage Expatriation

Sec. 441. Tax treatment of inverted corporate entities.
Sec. 442. Imposition of mark-to-market tax on individuals who 
              expatriate.
Sec. 443. Excise tax on stock compensation of insiders of inverted 
              corporations.
Sec. 444. Reinsurance of United States risks in foreign jurisdictions.
Sec. 445. Reporting of taxable mergers and acquisitions.

                     Subtitle E--International Tax

Sec. 451. Clarification of banking business for purposes of determining 
              investment of earnings in United States property.
Sec. 452. Prohibition on nonrecognition of gain through complete 
              liquidation of holding company.
Sec. 453. Prevention of mismatching of interest and original issue 
              discount deductions and income inclusions in transactions 
              with related foreign persons.
Sec. 454. Effectively connected income to include certain foreign 
              source income.
Sec. 455. Recapture of overall foreign losses on sale of controlled 
              foreign corporation.
Sec. 456. Minimum holding period for foreign tax credit on withholding 
              taxes on income other than dividends.

                  Subtitle F--Other Revenue Provisions

                     Part I--Financial Instruments

Sec. 461. Treatment of stripped interests in bond and preferred stock 
              funds, etc.
Sec. 462. Application of earnings stripping rules to partnerships and S 
              corporations.
Sec. 463. Recognition of cancellation of indebtedness income realized 
              on satisfaction of debt with partnership interest.
Sec. 464. Modification of straddle rules.
Sec. 465. Denial of installment sale treatment for all readily 
              tradeable debt.

                 Part II--Corporations and Partnerships

Sec. 466. Modification of treatment of transfers to creditors in 
              divisive reorganizations.
Sec. 467. Clarification of definition of nonqualified preferred stock.
Sec. 468. Modification of definition of controlled group of 
              corporations.
Sec. 469. Mandatory basis adjustments in connection with partnership 
              distributions and transfers of partnership interests.

                Part III--Depreciation and Amortization

Sec. 471. Extension of amortization of intangibles to sports 
              franchises.
Sec. 472. Services contracts treated in the same manner as leases for 
              rules relating to tax-exempt use of property.
Sec. 473. Class lives for utility grading costs.
Sec. 474. Expansion of limitation on depreciation of certain passenger 
              automobiles.
Sec. 475. Consistent amortization of periods for intangibles.
Sec. 476. Limitation on deductions allocable to property used by 
              governments or other tax-exempt entities.

                   Part IV--Administrative Provisions

Sec. 481. Clarification of rules for payment of estimated tax for 
              certain deemed asset sales.
Sec. 482. Extension of IRS user fees.
Sec. 483. Doubling of certain penalties, fines, and interest on 
              underpayments related to certain offshore financial 
              arrangement.
Sec. 484. Partial payment of tax liability in installment agreements.
Sec. 485. Extension of customs user fees.
Sec. 486. Deposits made to suspend running of interest on potential 
              underpayments.
Sec. 487. Qualified tax collection contracts.

                    Part V--Miscellaneous Provisions

Sec. 491. Addition of vaccines against hepatitis A to list of taxable 
              vaccines.
Sec. 492. Recognition of gain from the sale of a principal residence 
              acquired in a like-kind exchange within 5 years of sale.
Sec. 493. Clarification of exemption from tax for small property and 
              casualty insurance companies.
Sec. 494. Definition of insurance company for section 831.
Sec. 495. Limitations on deduction for charitable contributions of 
              patents and similar property.
Sec. 496. Repeal of 10-percent rehabilitation tax credit.
Sec. 497. Increase in age of minor children whose unearned income is 
              taxed as if parent's income.

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

     SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

       (a) In General.--Section 114 is hereby repealed.
       (b) Conforming Amendments.--
       (1)(A) Subpart E of part III of subchapter N of chapter 1 
     (relating to qualifying foreign trade income) is hereby 
     repealed.
       (B) The table of subparts for such part III is amended by 
     striking the item relating to subpart E.
       (2) The table of sections for part III of subchapter B of 
     chapter 1 is amended by striking the item relating to section 
     114.
       (3) The second sentence of section 56(g)(4)(B)(i) is 
     amended by striking ``or under section 114''.
       (4) 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.
       (5) 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).
       (6) Section 903 is amended by striking ``114, 164(a),'' and 
     inserting ``164(a)''.
       (7) Section 999(c)(1) is amended by striking 
     ``941(a)(5),''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to transactions occurring after the date of the 
     enactment of this Act.
       (2) 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--
       (A) 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
       (B) which is in effect on September 17, 2003, and at all 
     times thereafter.
       (d) Revocation of Section 943(e) Elections.--
       (1) In general.--In the case of a corporation that elected 
     to be treated as a domestic corporation under section 943(e) 
     of the Internal Revenue Code of 1986 (as in effect on the day 
     before the date of the enactment of this Act)--
       (A) the corporation may, during the 1-year period beginning 
     on the date of the enactment of this Act, revoke such 
     election, effective as of such date of enactment, and

[[Page 3136]]

       (B) if the corporation does revoke such election--
       (i) such corporation shall be treated as a domestic 
     corporation transferring (as of such date of enactment) all 
     of its property to a foreign corporation in connection with 
     an exchange described in section 354 of such Code, and
       (ii) no gain or loss shall be recognized on such transfer.
       (2) Exception.--Subparagraph (B)(ii) of paragraph (1) shall 
     not apply to gain on any asset held by the revoking 
     corporation if--
       (A) the basis of such asset is determined in whole or in 
     part by reference to the basis of such asset in the hands of 
     the person from whom the revoking corporation acquired such 
     asset,
       (B) the asset was acquired by transfer (not as a result of 
     the election under section 943(e) of such Code) occurring on 
     or after the 1st day on which its election under section 
     943(e) of such Code was effective, and
       (C) a principal purpose of the acquisition was the 
     reduction or avoidance of tax (other than a reduction in tax 
     under section 114 of such Code, as in effect on the day 
     before the date of the enactment of this Act).
       (e) General Transition.--
       (1) In general.--In the case of a taxable year ending after 
     the date of the enactment of this Act and beginning before 
     January 1, 2007, for purposes of chapter 1 of such Code, a 
     current FSC/ETI beneficiary shall be allowed a deduction 
     equal to the transition amount determined under this 
     subsection with respect to such beneficiary for such year.
       (2) Current fsc/eti beneficiary.--The term ``current FSC/
     ETI beneficiary'' means any corporation which entered into 
     one or more transactions during its taxable year beginning in 
     calendar year 2002 with respect to which FSC/ETI benefits 
     were allowable.
       (3) Transition amount.--For purposes of this subsection--
       (A) In general.--The transition amount applicable to any 
     current FSC/ETI beneficiary for any taxable year is the 
     phaseout percentage of the base period amount.
       (B) Phaseout percentage.--
       (i) In general.--In the case of a taxpayer using the 
     calendar year as its taxable year, the phaseout percentage 
     shall be determined under the following table:

Years:                                      The phaseout percentage is:
  2004.............................................................. 80
  2005.............................................................. 80
  2006..............................................................60.

       (ii) Special rule for 2003.--The phaseout percentage for 
     2003 shall be the amount that bears the same ratio to 100 
     percent as the number of days after the date of the enactment 
     of this Act bears to 365.
       (iii) Special rule for fiscal year taxpayers.--In the case 
     of a taxpayer not using the calendar year as its taxable 
     year, the phaseout percentage is the weighted average of the 
     phaseout percentages determined under the preceding 
     provisions of this paragraph with respect to calendar years 
     any portion of which is included in the taxpayer's taxable 
     year. The weighted average shall be determined on the basis 
     of the respective portions of the taxable year in each 
     calendar year.
       (C) Short taxable year.--The Secretary shall prescribe 
     guidance for the computation of the transition amount in the 
     case of a short taxable year.
       (4) Base period amount.--For purposes of this subsection, 
     the base period amount is the FSC/ETI benefit for the 
     taxpayer's taxable year beginning in calendar year 2002.
       (5) FSC/ETI benefit.--For purposes of this subsection, the 
     term ``FSC/ETI benefit'' means--
       (A) amounts excludable from gross income under section 114 
     of such Code, and
       (B) the exempt foreign trade income of related foreign 
     sales corporations from property acquired from the taxpayer 
     (determined without regard to section 923(a)(5) of such Code 
     (relating to special rule for military property), as in 
     effect on the day before the date of the enactment of the FSC 
     Repeal and Extraterritorial Income Exclusion Act of 2000).

     In determining the FSC/ETI benefit there shall be excluded 
     any amount attributable to a transaction with respect to 
     which the taxpayer is the lessor unless the leased property 
     was manufactured or produced in whole or in significant part 
     by the taxpayer.
       (6) Special rule for agricultural and horticultural 
     cooperatives.--Determinations under this subsection with 
     respect to an organization described in section 943(g)(1) of 
     such Code, as in effect on the day before the date of the 
     enactment of this Act, shall be made at the cooperative level 
     and the purposes of this subsection shall be carried out in a 
     manner similar to section 199(h)(2) of such Code, as added by 
     this Act. Such determinations shall be in accordance with 
     such requirements and procedures as the Secretary may 
     prescribe.
       (7) Certain rules to apply.--Rules similar to the rules of 
     section 41(f) of such Code shall apply for purposes of this 
     subsection.
       (8) Coordination with binding contract rule.--The deduction 
     determined under paragraph (1) for any taxable year shall be 
     reduced by the phaseout percentage of any FSC/ETI benefit 
     realized for the taxable year by reason of subsection (c)(2) 
     or section 5(c)(1)(B) of the FSC Repeal and Extraterritorial 
     Income Exclusion Act of 2000, except that for purposes of 
     this paragraph the phaseout percentage for 2003 shall be 
     treated as being equal to 100 percent.
       (9) Special rule for taxable year which includes date of 
     enactment.--In the case of a taxable year which includes the 
     date of the enactment of this Act, the deduction allowed 
     under this subsection to any current FSC/ETI beneficiary 
     shall in no event exceed--
       (A) 100 percent of such beneficiary's base period amount 
     for calendar year 2003, reduced by
       (B) the FSC/ETI benefit of such beneficiary with respect to 
     transactions occurring during the portion of the taxable year 
     ending on the date of the enactment of this Act.

     SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO UNITED 
                   STATES PRODUCTION ACTIVITIES.

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

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

       ``(a) Allowance of Deduction.--
       ``(1) In general.--There shall be allowed as a deduction an 
     amount equal to 9 percent of the qualified production 
     activities income of the taxpayer for the taxable year.
       ``(2) Phasein.--In the case of taxable years beginning in 
     2003, 2004, 2005, 2006, 2007, or 2008, paragraph (1) shall be 
     applied by substituting for the percentage contained therein 
     the transition percentage determined under the following 
     table:

``Taxable years beginning in:             The transition percentage is:
2003 or 2004........................................................  1
2005................................................................  2
2006................................................................  3
2007 or 2008........................................................ 6.

       ``(b) Deduction Limited to Wages Paid.--
       ``(1) In general.--The amount of the deduction allowable 
     under subsection (a) for any taxable year shall not exceed 50 
     percent of the W-2 wages of the employer for the taxable 
     year.
       ``(2) W-2 wages.--For purposes of paragraph (1), the term 
     `W-2 wages' means the sum of the aggregate amounts the 
     taxpayer is required to include on statements under 
     paragraphs (3) and (8) of section 6051(a) with respect to 
     employment of employees of the taxpayer during the taxpayer's 
     taxable year.
       ``(3) Special rules.--
       ``(A) Pass-thru entities.--In the case of an S corporation, 
     partnership, estate or trust, or other pass-thru entity, the 
     limitation under this subsection shall apply at the entity 
     level.
       ``(B) Acquisitions and dispositions.--The Secretary shall 
     provide for the application of this subsection in cases where 
     the taxpayer acquires, or disposes of, the major portion of a 
     trade or business or the major portion of a separate unit of 
     a trade or business during the taxable year.
       ``(c) Qualified Production Activities Income.--For purposes 
     of this section--
       ``(1) In general.--The term `qualified production 
     activities income' means an amount equal to the portion of 
     the modified taxable income of the taxpayer which is 
     attributable to domestic production activities.
       ``(2) Reduction for taxable years beginning before 2013.--
     The amount otherwise determined under paragraph (1) (the 
     `unreduced amount') shall not exceed--
       ``(A) in the case of taxable years beginning before 2010, 
     the product of the unreduced amount and the domestic/
     worldwide fraction, and
       ``(B) in the case of taxable years beginning in 2010, 2011, 
     or 2012, an amount equal to the sum of--
       ``(i) the product of the unreduced amount and the domestic/
     worldwide fraction, plus
       ``(ii) the applicable percentage of an amount equal to the 
     unreduced amount minus the amount determined under clause 
     (i).

     For purposes of subparagraph (B)(ii), the applicable 
     percentage is 25 percent for 2010, 50 percent for 2011, and 
     75 percent for 2012.
       ``(d) Determination of Income Attributable to Domestic 
     Production Activities.--For purposes of this section--
       ``(1) In general.--The portion of the modified taxable 
     income which is attributable to domestic production 
     activities is so much of the modified taxable income for the 
     taxable year as does not exceed--
       ``(A) the taxpayer's domestic production gross receipts for 
     such taxable year, reduced by
       ``(B) the sum of--
       ``(i) the costs of goods sold that are allocable to such 
     receipts,
       ``(ii) other deductions, expenses, or losses directly 
     allocable to such receipts, and
       ``(iii) a proper share of other deductions, expenses, and 
     losses that are not directly allocable to such receipts or 
     another class of income.
       ``(2) Allocation method.--The Secretary shall prescribe 
     rules for the proper allocation of items of income, 
     deduction, expense, and loss for purposes of determining 
     income attributable to domestic production activities.
       ``(3) Special rules for determining costs.--
       ``(A) In general.--For purposes of determining costs under 
     clause (i) of paragraph (1)(B), any item or service brought 
     into the United States shall be treated as acquired by 
     purchase, and its cost shall be treated as not less than its 
     fair market value immediately after it entered the United 
     States. A similar rule shall apply in determining the 
     adjusted basis of leased or rented property where the lease 
     or rental gives rise to domestic production gross receipts.
       ``(B) Exports for further manufacture.--In the case of any 
     property described in subparagraph (A) that had been exported 
     by the taxpayer for further manufacture, the increase in cost 
     or adjusted basis under subparagraph

[[Page 3137]]

     (A) shall not exceed the difference between the value of the 
     property when exported and the value of the property when 
     brought back into the United States after the further 
     manufacture.
       ``(4) Modified taxable income.--The term `modified taxable 
     income' means taxable income computed without regard to the 
     deduction allowable under this section.
       ``(e) Domestic Production Gross Receipts.--For purposes of 
     this section--
       ``(1) In general.--The term `domestic production gross 
     receipts' means the gross receipts of the taxpayer which are 
     derived from--
       ``(A) any sale, exchange, or other disposition of, or
       ``(B) any lease, rental, or license of,
     qualifying production property which was manufactured, 
     produced, grown, or extracted in whole or in significant part 
     by the taxpayer within the United States.
       ``(2) Special rules for certain property.--In the case of 
     any qualifying production property described in subsection 
     (f)(1)(C)--
       ``(A) such property shall be treated for purposes of 
     paragraph (1) as produced in significant part by the taxpayer 
     within the United States if more than 50 percent of the 
     aggregate development and production costs are incurred by 
     the taxpayer within the United States, and
       ``(B) if a taxpayer acquires such property before such 
     property begins to generate substantial gross receipts, any 
     development or production costs incurred before the 
     acquisition shall be treated as incurred by the taxpayer for 
     purposes of subparagraph (A) and paragraph (1).
       ``(f) Qualifying Production Property.--For purposes of this 
     section--
       ``(1) In general.--Except as otherwise provided in this 
     paragraph, the term `qualifying production property' means--
       ``(A) any tangible personal property,
       ``(B) any computer software, and
       ``(C) any property described in section 168(f) (3) or (4), 
     including any underlying copyright or trademark.
       ``(2) Exclusions from qualifying production property.--The 
     term `qualifying production property' shall not include--
       ``(A) consumable property that is sold, leased, or licensed 
     by the taxpayer as an integral part of the provision of 
     services,
       ``(B) oil or gas,
       ``(C) electricity,
       ``(D) water supplied by pipeline to the consumer,
       ``(E) utility services, or
       ``(F) any film, tape, recording, book, magazine, newspaper, 
     or similar property the market for which is primarily topical 
     or otherwise essentially transitory in nature.
       ``(g) Domestic/Worldwide Fraction.--For purposes of this 
     section--
       ``(1) In general.--The term `domestic/worldwide fraction' 
     means a fraction (not greater than 1)--
       ``(A) the numerator of which is the value of the domestic 
     production of the taxpayer, and
       ``(B) the denominator of which is the value of the 
     worldwide production of the taxpayer.
       ``(2) Value of domestic production.--The value of domestic 
     production is the excess (if any) of--
       ``(A) the domestic production gross receipts, over
       ``(B) the cost of purchased inputs allocable to such 
     receipts that are deductible under this chapter for the 
     taxable year.
       ``(3) Purchased inputs.--
       ``(A) In general.--Purchased inputs are any of the 
     following items acquired by purchase:
       ``(i) Services (other than services of employees) used in 
     manufacture, production, growth, or extraction activities.
       ``(ii) Items consumed in connection with such activities.
       ``(iii) Items incorporated as part of the property being 
     manufactured, produced, grown, or extracted.
       ``(B) Special rule.--Rules similar to the rules of 
     subsection (d)(3) shall apply for purposes of this 
     subsection.
       ``(4) Value of worldwide production.--
       ``(A) In general.--The value of worldwide production shall 
     be determined under the principles of paragraph (2), except 
     that--
       ``(i) worldwide production gross receipts shall be taken 
     into account, and
       ``(ii) paragraph (3)(B) shall not apply.
       ``(B) Worldwide production gross receipts.--The worldwide 
     production gross receipts is the amount that would be 
     determined under subsection (e) if such subsection were 
     applied without any reference to the United States.
       ``(h) Definitions and Special Rules.--
       ``(1) Application of section to pass-thru entities.--In the 
     case of an S corporation, partnership, estate or trust, or 
     other pass-thru entity--
       ``(A) subject to the provisions of paragraph (2) and 
     subsection (b)(3)(A), this section shall be applied at the 
     shareholder, partner, or similar level, and
       ``(B) the Secretary shall prescribe rules for the 
     application of this section, including rules relating to--
       ``(i) restrictions on the allocation of the deduction to 
     taxpayers at the partner or similar level, and
       ``(ii) additional reporting requirements.
       ``(2) Exclusion for patrons of agricultural and 
     horticultural cooperatives.--
       ``(A) In general.--If any amount described in paragraph (1) 
     or (3) of section 1385 (a)--
       ``(i) is received by a person from an organization to which 
     part I of subchapter T applies which is engaged in the 
     marketing of agricultural or horticultural products, and
       ``(ii) is allocable to the portion of the qualified 
     production activities income of the organization which is 
     deductible under subsection (a) and designated as such by the 
     organization in a written notice mailed to its patrons during 
     the payment period described in section 1382(d),

     then such person shall be allowed an exclusion from gross 
     income with respect to such amount. The taxable income of the 
     organization shall not be reduced under section 1382 by the 
     portion of any such amount with respect to which an exclusion 
     is allowable to a person by reason of this paragraph.
       ``(B) Special rules.--For purposes of applying subparagraph 
     (A), in determining the qualified production activities 
     income of the organization under this section--
       ``(i) there shall not be taken into account in computing 
     the organization's modified taxable income any deduction 
     allowable under subsection (b) or (c) of section 1382 
     (relating to patronage dividends, per-unit retain 
     allocations, and nonpatronage distributions), and
       ``(ii) the organization shall be treated as having 
     manufactured, produced, grown, or extracted in whole or 
     significant part any qualifying production property marketed 
     by the organization which its patrons have so manufactured, 
     produced, grown, or extracted.
       ``(3) Special rule for affiliated groups.--
       ``(A) In general.--All members of an expanded affiliated 
     group shall be treated as a single corporation for purposes 
     of this section.
       ``(B) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group as defined in 
     section 1504(a), determined--
       ``(i) by substituting `50 percent' for `80 percent' each 
     place it appears, and
       ``(ii) without regard to paragraphs (2) and (4) of section 
     1504(b).

     For purposes of determining the domestic/worldwide fraction 
     under subsection (g), clause (ii) shall be applied by also 
     disregarding paragraphs (3) and (8) of section 1504(b).
       ``(4) Coordination with minimum tax.--The deduction under 
     this section shall be allowed for purposes of the tax imposed 
     by section 55; except that for purposes of section 55, 
     alternative minimum taxable income shall be taken into 
     account in determining the deduction under this section.
       ``(5) Ordering rule.--The amount of any other deduction 
     allowable under this chapter shall be determined as if this 
     section had not been enacted.
       ``(6) Trade or business requirement.--This section shall be 
     applied by only taking into account items which are 
     attributable to the actual conduct of a trade or business.
       ``(7) Possessions, etc.--
       ``(A) In general.--For purposes of subsections (d) and (e), 
     the term `United States' includes the Commonwealth of Puerto 
     Rico, Guam, American Samoa, the Commonwealth of the Northern 
     Mariana Islands, and the Virgin Islands of the United States.
       ``(B) Special rules for applying wage limitation.--For 
     purposes of applying the limitation under subsection (b) for 
     any taxable year--
       ``(i) the determination of W-2 wages of a taxpayer shall be 
     made without regard to any exclusion under section 3401(a)(8) 
     for remuneration paid for services performed in a 
     jurisdiction described in subparagraph (A), and
       ``(ii) in determining the amount of any credit allowable 
     under section 30A or 936 for the taxable year, there shall 
     not be taken into account any wages which are taken into 
     account in applying such limitation.
       ``(8) Coordination with transition rules.--For purposes of 
     this section--
       ``(A) domestic production gross receipts shall not include 
     gross receipts from any transaction if the binding contract 
     transition relief of section 101(c)(2) of the Jumpstart Our 
     Business Strength (JOBS) Act applies to such transaction, and
       ``(B) any deduction allowed under section 101(e) of such 
     Act shall be disregarded in determining the portion of the 
     taxable income which is attributable to domestic production 
     gross receipts.''.
       (b) Minimum Tax.--Section 56(g)(4)(C) (relating to 
     disallowance of items not deductible in computing earnings 
     and profits) is amended by adding at the end the following 
     new clause:
       ``(v) Deduction for domestic production.--Clause (i) shall 
     not apply to any amount allowable as a deduction under 
     section 199.''.
       (c) Clerical Amendment.--The table of sections for part VI 
     of subchapter B of chapter 1 is amended by adding at the end 
     the following new item:

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

       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years ending after the date of the enactment 
     of this Act.
       (2) Application of section 15.--Section 15 of the Internal 
     Revenue Code of 1986 shall apply to the amendments made by 
     this section as if they were changes in a rate of tax.

                 TITLE II--INTERNATIONAL TAX PROVISIONS

                  Subtitle A--International Tax Reform

     SEC. 201. 20-YEAR FOREIGN TAX CREDIT CARRYOVER; 1-YEAR 
                   FOREIGN TAX CREDIT CARRYBACK.

       (a) General Rule.--Section 904(c) (relating to carryback 
     and carryover of excess tax paid) is amended--
       (1) by striking ``in the second preceding taxable year,'', 
     and

[[Page 3138]]

       (2) by striking ``, and in the first, second, third, 
     fourth, or fifth'' and inserting ``and in any of the first 
     20''.
       (b) Excess Extraction Taxes.--Paragraph (1) of section 
     907(f) is amended--
       (1) by striking ``in the second preceding taxable year,'',
       (2) by striking ``, and in the first, second, third, 
     fourth, or fifth'' and inserting ``and in any of the first 
     20'', and
       (3) by striking the last sentence.
       (c) Effective Date.--
       (1) Carryback.--The amendments made by subsections (a)(1) 
     and (b)(1) shall apply to excess foreign taxes arising in 
     taxable years beginning after the date of the enactment of 
     this Act.
       (2) Carryover.--The amendments made by subsections (a)(2) 
     and (b)(2) shall apply to excess foreign taxes which (without 
     regard to the amendments made by this section) may be carried 
     to any taxable year ending after the date of the enactment of 
     this Act.

     SEC. 202. 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. 203. 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. 204. 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. 205. 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

[[Page 3139]]

     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. 206. 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.

              Subtitle B--International Tax Simplification

     SEC. 211. 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).

[[Page 3140]]

       (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 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 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(g)(1), as 
     redesignated by section 204, 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(g), 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 Jumpstart Our Business Strength (JOBS) Act)'' 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

[[Page 3141]]

     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 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. 212. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

       (a) In General.--Clause (ii) of section 954(b)(3)(A) 
     (relating to de minimis, etc., rules) is amended by striking 
     ``$1,000,000'' and inserting ``$5,000,000''.
       (b) Technical Amendments.--
       (1) Clause (ii) of section 864(d)(5)(A) is amended by 
     striking ``$1,000,000'' and inserting ``$5,000,000''.
       (2) Clause (i) of section 881(c)(5)(A) is amended by 
     striking ``$1,000,000'' and inserting ``$5,000,000''.
       (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. 213. 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. 214. APPLICATION OF UNIFORM CAPITALIZATION RULES TO 
                   FOREIGN PERSONS.

       (a) In General.--Section 263A(c) (relating to exceptions) 
     is amended by adding at the end the following new paragraph:
       ``(7) Foreign persons.--Except for purposes of applying 
     sections 871(b)(1) and 882(a)(1), this section shall not 
     apply to any taxpayer who is not a United States person if 
     such taxpayer capitalizes costs of produced property or 
     property acquired for resale by applying the method used to 
     ascertain the income, profit, or loss for purposes of reports 
     or statements to shareholders, partners, other proprietors, 
     or beneficiaries, or for credit purposes.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by subsection (a) shall 
     apply to taxable years beginning after December 31, 2004.
       (2) Change in method of accounting.--In the case of any 
     taxpayer required by the amendment made by this section to 
     change its method of accounting for its first taxable year 
     beginning after December 31, 2004--
       (A) such change shall be treated as initiated by the 
     taxpayer,
       (B) such change shall be treated as made with the consent 
     of the Secretary of the Treasury, and
       (C) the net amount of the adjustments required to be taken 
     into account by the taxpayer under section 481 of the 
     Internal Revenue Code of 1986 shall be taken into account in 
     such first year.

     SEC. 215. 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. 216. REPEAL OF SPECIAL CAPITAL GAINS TAX ON ALIENS 
                   PRESENT IN THE UNITED STATES FOR 183 DAYS OR 
                   MORE.

       (a) In General.--Subsection (a) of section 871 is amended 
     by striking paragraph (2) and by redesignating paragraph (3) 
     as paragraph (2).
       (b) Conforming Amendment.--Section 1441(g) is amended is 
     amended by striking ``section 871(a)(3)'' and inserting 
     ``section 871(a)(2)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

          Subtitle C--Additional International Tax Provisions

     SEC. 221. ACTIVE LEASING INCOME FROM AIRCRAFT AND VESSELS.

       (a) In General.--Section 954(c)(2) is amended by adding at 
     the end the following new subparagraph:
       ``(D) Certain rents, etc.--
       ``(i) In general.--Foreign personal holding company income 
     shall not include qualified leasing income derived from or in 
     connection with the leasing or rental of any aircraft or 
     vessel.
       ``(ii) Qualified leasing income.--For purposes of this 
     subparagraph, the term `qualified leasing income' means rents 
     and gains derived in the active conduct of a trade or 
     business of leasing with respect to which the controlled 
     foreign corporation conducts substantial activity, but only 
     if--

       ``(I) the leased property is used by the lessee or other 
     end-user in foreign commerce and predominantly outside the 
     United States, and
       ``(II) the lessee or other end-user is not a related person 
     (as defined in subsection (d)(3)).

     Any amount not treated as foreign personal holding income 
     under this subparagraph shall not be treated as foreign base 
     company shipping income.''.
       (b) Conforming Amendment.--Section 954(c)(1)(B) is amended 
     by inserting ``or (2)(D)'' after ``paragraph (2)(A)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2006, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 222. 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). 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. 223. 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. 224. 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:

[[Page 3142]]

       ``(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. 225. TREATMENT OF INCOME TAX BASE DIFFERENCES.

       (a) In General.--Paragraph (2) of section 904(d) is amended 
     by redesignating subparagraphs (H) and (I) as subparagraphs 
     (I) and (J), respectively, and by inserting after 
     subparagraph (G) the following new subparagraph:
       ``(H) Treatment of income tax base differences.--
       ``(i) In general.--A taxpayer may elect to treat tax 
     imposed under the law of a foreign country or possession of 
     the United States on an amount which does not constitute 
     income under United States tax principles as tax imposed on 
     income described in subparagraph (C) or (I) of paragraph (1).
       ``(ii) Election irrevocable.--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 ending after the date of the 
     enactment of this Act.

     SEC. 226. 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.

     SEC. 227. 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. 228. 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 in which United 
     States persons do not hold directly or indirectly 20 percent 
     or more of either the capital or profits interests, 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. 229. 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. 230. MODIFICATION OF THE TREATMENT OF CERTAIN REIT 
                   DISTRIBUTIONS ATTRIBUTABLE TO GAIN FROM SALES 
                   OR EXCHANGES OF UNITED STATES REAL PROPERTY 
                   INTERESTS.

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

     SEC. 231. TOLL TAX ON EXCESS QUALIFIED FOREIGN DISTRIBUTION 
                   AMOUNT.

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

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

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

     Such tax shall be imposed in lieu of the tax imposed under 
     section 11 or 55 on the amounts described in paragraphs (1) 
     and (2) for such taxable year.
       ``(b) Excess Qualified Foreign Distribution Amount.--For 
     purposes of this section--
       ``(1) In general.--The term `excess qualified foreign 
     distribution amount' means the excess (if any) of--
       ``(A) the aggregate dividends received by the taxpayer 
     during the taxable year which are--
       ``(i) from 1 or more corporations which are controlled 
     foreign corporations in which the taxpayer is a United States 
     shareholder on the date such dividends are paid, and
       ``(ii) described in a domestic reinvestment plan which--

       ``(I) is approved by the taxpayer's president, chief 
     executive officer, or comparable official before the payment 
     of such dividends and subsequently approved by the taxpayer's 
     board of directors, management committee, executive 
     committee, or similar body, and
       ``(II) provides for the reinvestment of such dividends in 
     the United States (other than as payment for executive 
     compensation), including as a source for the funding of 
     worker hiring and training, infrastructure, research and 
     development, capital investments, or the financial 
     stabilization of the corporation for the purposes of job 
     retention or creation, over

       ``(B) the base dividend amount.
       ``(2) Base dividend amount.--The term `base dividend 
     amount' means an amount designated under subsection (c)(7), 
     but not less than the average amount of dividends received 
     during the fixed base period from 1 or more corporations 
     which are controlled foreign corporations in which the 
     taxpayer is a United States shareholder on the date such 
     dividends are paid.
       ``(3) Fixed base period.--
       ``(A) In general.--The term `fixed base period' means each 
     of 3 taxable years which are

[[Page 3143]]

     among the 5 most recent taxable years of the taxpayer ending 
     on or before December 31, 2002, determined by disregarding--
       ``(i) the 1 taxable year for which the taxpayer had the 
     highest amount of dividends from 1 or more corporations which 
     are controlled foreign corporations relative to the other 4 
     taxable years, and
       ``(ii) the 1 taxable year for which the taxpayer had the 
     lowest amount of dividends from such corporations relative to 
     the other 4 taxable years.
       ``(B) Shorter period.--If the taxpayer has fewer than 5 
     taxable years ending on or before December 31, 2002, then in 
     lieu of applying subparagraph (A), the fixed base period 
     shall include all the taxable years of the taxpayer ending on 
     or before December 31, 2002.
       ``(c) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Dividends.--The term `dividend' has the meaning given 
     such term by section 316, except that the term shall include 
     amounts described in section 951(a)(1)(B), but shall not 
     include amounts described in sections 78 and 959.
       ``(2) Controlled foreign corporations and united states 
     shareholders.--The term `controlled foreign corporation' has 
     the meaning given such term by section 957(a) and the term 
     `United States shareholder' has the meaning given such term 
     by section 951(b).
       ``(3) Foreign tax credits.--The amount of any income, war, 
     profits, or excess profit taxes paid (or deemed paid under 
     sections 902 and 960) or accrued by the taxpayer with respect 
     to the excess qualified foreign distribution amount for which 
     a credit would be allowable under section 901 in the absence 
     of this section, shall be reduced by 85 percent. No deduction 
     shall be allowed under this chapter for the portion of any 
     tax for which credit is not allowable by reason of the 
     preceding sentence.
       ``(4) Foreign tax credit limitation.--For purposes of 
     section 904, there shall be disregarded 85 percent of--
       ``(A) the excess qualified foreign distribution amount,
       ``(B) the amount determined under section 78 which is 
     attributable to such excess qualified foreign distribution 
     amount, and
       ``(C) the amounts (including assets, gross income, and 
     other relevant bases of apportionment) which are attributable 
     to the excess qualified foreign distribution amount which 
     would, determined without regard to this section, be used to 
     apportion the expenses, losses, and deductions of the 
     taxpayer under section 861 and 864 in determining its taxable 
     income from sources without the United States.

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

``Sec. 965. Toll tax imposed on excess qualified foreign distribution 
              amount.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply only to the first taxable year of the electing 
     taxpayer ending 120 days or more after the date of the 
     enactment of this Act.

     SEC. 232. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON 
                   HORSE RACES AND DOG RACES FROM GROSS INCOME OF 
                   NONRESIDENT ALIEN INDIVIDUALS.

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

     SEC. 233. LIMITATION OF WITHHOLDING TAX FOR PUERTO RICO 
                   CORPORATIONS.

       (a) In General.--Subsection (b) of section 881 is amended 
     by redesignating paragraph (2) as paragraph (3) and by 
     inserting after paragraph (1) the following new paragraph:
       ``(2) Commonwealth of puerto rico.--If dividends are 
     received during a taxable year by a corporation--
       ``(A) created or organized in, or under the law of, the 
     Commonwealth of Puerto Rico, and
       ``(B) with respect to which the requirements of 
     subparagraphs (A), (B), and (C) of paragraph (1) are met for 
     the taxable year,

     subsection (a) shall be applied for such taxable year by 
     substituting `10 percent' for `30 percent'.''.
       (b) Withholding.--Subsection (c) of section 1442 (relating 
     to withholding of tax on foreign corporations) is amended--
       (1) by striking ``For purposes'' and inserting the 
     following:
       ``(1) Guam, american samoa, the northern mariana islands, 
     and the virgin islands.--For purposes'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Commonwealth of puerto rico.--If dividends are 
     received during a taxable year by a corporation--
       ``(A) created or organized in, or under the law of, the 
     Commonwealth of Puerto Rico, and
       ``(B) with respect to which the requirements of 
     subparagraphs (A), (B), and (C) of section 881(b)(1) are met 
     for the taxable year,
     subsection (a) shall be applied for such taxable year by 
     substituting `10 percent' for `30 percent'.''.
       (b) Conforming Amendments.--
       (1) Subsection (b) of section 881 is amended by striking 
     ``Guam and Virgin Islands Corporations'' in the heading and 
     inserting ``Possessions''.
       (2) Paragraph (1) of section 881(b) is amended by striking 
     ``In general'' in the heading and inserting ``Guam, american 
     samoa, the northern mariana islands, and the virgin 
     islands''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to dividends paid after the date of the enactment 
     of this Act.

     SEC. 234. REPORT ON WTO DISPUTE SETTLEMENT PANELS AND THE 
                   APPELLATE BODY.

       Not later than March 31, 2004, the Secretary of Commerce, 
     in consultation with the United States Trade Representative, 
     shall transmit a report to the Committee on Finance of the 
     Senate and the Committee on Ways and Means of the House of 
     Representatives, regarding whether dispute settlement panels 
     and the Appellate Body of the World Trade Organization have--
       (1) added to or diminished the rights of the United States 
     by imposing obligations or restrictions on the use of 
     antidumping, countervailing, and safeguard measures not 
     agreed to under the Agreement on Implementation of Article VI 
     of the General Agreement on Tariffs and Trade of 1994, the 
     Agreement on Subsidies and Countervailing Measures, and the 
     Agreement on Safeguards;
       (2) appropriately applied the standard of review contained 
     in Article 17.6 of the Agreement on Implementation of Article 
     VI of the General Agreement on Tariffs and Trade of 1994; or
       (3) exceeded their authority or terms of reference under 
     the Agreements referred to in paragraph (1).

     SEC. 235. STUDY OF IMPACT OF INTERNATIONAL TAX LAWS ON 
                   TAXPAYERS OTHER THAN LARGE CORPORATIONS.

       (a) Study.--The Secretary of the Treasury or the 
     Secretary's delegate shall conduct a study of the impact of 
     Federal international tax rules on taxpayers other than large 
     corporations, including the burdens placed on such taxpayers 
     in complying with such rules.
       (b) Report.--Not later than 180 days after the date of the 
     enactment of this Act, the Secretary shall report to the 
     Committee on Finance of the Senate and the Committee on Ways 
     and Means of the House of Representatives the results of the 
     study conducted under subsection (a), including any 
     recommendations for legislative or administrative changes to 
     reduce the compliance burden on taxpayers other than large 
     corporations and for such other purposes as the Secretary 
     determines appropriate.

[[Page 3144]]



     SEC. 236. CONSULTATIVE ROLE FOR SENATE COMMITTEE ON FINANCE 
                   IN CONNECTION WITH THE REVIEW OF PROPOSED TAX 
                   TREATIES.

       Paragraph 1(j) of Rule XXV of the Standing Rules of the 
     Senate is amended by adding at the end the following:
       ``(3)(A) Notwithstanding any other rule of the Senate, the 
     Committee on Foreign Relations shall consult with the 
     Committee on Finance with respect to any proposed treaty on 
     taxation prior to reporting such treaty to the Senate.
       ``(B) The Committee on Foreign Relations shall request in 
     writing the views of the Committee on Finance with respect to 
     any proposed treaty on taxation which is referred to the 
     Committee on Foreign Relations. Not less than 120 days after 
     the date on which such request is made, the Committee on 
     Finance shall respond to such request in writing. If the 
     Committee on Finance does not provide such written response 
     during such 120 day period, the Committee on Finance shall be 
     deemed to have waived the opportunity to submit such views.
       ``(C) The Committee on Foreign Relations shall consider the 
     views submitted by the Committee on Finance and shall include 
     such views in any report of the treaty to the Senate.''.

       TITLE III--DOMESTIC MANUFACTURING AND BUSINESS PROVISIONS

                     Subtitle A--General Provisions

     SEC. 301. EXPANSION OF QUALIFIED SMALL-ISSUE BOND PROGRAM.

       (a) In General.--Subparagraph (F) of section 144(a)(4) 
     (relating to $10,000,000 limit in certain cases) is amended 
     to read as follows:
       ``(F) Additional capital expenditures not taken into 
     account.--With respect to any issue, in addition to any 
     capital expenditure described in subparagraph (C), capital 
     expenditures of not to exceed $10,000,000 shall not be taken 
     into account for purposes of applying subparagraph 
     (A)(ii).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to bonds issued after the date of the enactment 
     of this Act.

     SEC. 302. EXPENSING OF BROADBAND INTERNET ACCESS 
                   EXPENDITURES.

       (a) In General.--Part VI of subchapter B of chapter 1 
     (relating to itemized deductions for individuals and 
     corporations) is amended by inserting after section 190 the 
     following new section:

     ``SEC. 191. BROADBAND EXPENDITURES.

       ``(a) Treatment of Expenditures.--
       ``(1) In general.--A taxpayer may elect to treat any 
     qualified broadband expenditure which is paid or incurred by 
     the taxpayer as an expense which is not chargeable to capital 
     account. Any expenditure which is so treated shall be allowed 
     as a deduction.
       ``(2) Election.--An election under paragraph (1) shall be 
     made at such time and in such manner as the Secretary may 
     prescribe by regulation.
       ``(b) Qualified Broadband Expenditures.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified broadband 
     expenditure' means, with respect to any taxable year, any 
     direct or indirect costs incurred during 2004 and properly 
     taken into account for such taxable year with respect to--
       ``(A) the purchase or installation of qualified equipment 
     (including any upgrades thereto), and
       ``(B) the connection of such qualified equipment to any 
     qualified subscriber.
       ``(2) Certain satellite expenditures excluded.--Such term 
     shall not include any costs incurred with respect to the 
     launching of any satellite equipment.
       ``(3) Leased equipment.--Such term shall include so much of 
     the purchase price paid by the lessor of qualified equipment 
     subject to a lease described in subsection (c)(2)(B) as is 
     attributable to expenditures incurred by the lessee which 
     would otherwise be described in paragraph (1).
       ``(c) When Expenditures Taken Into Account.--For purposes 
     of this section--
       ``(1) In general.--Qualified broadband expenditures with 
     respect to qualified equipment shall be taken into account 
     with respect to the first taxable year in which--
       ``(A) current generation broadband services are provided 
     through such equipment to qualified subscribers, or
       ``(B) next generation broadband services are provided 
     through such equipment to qualified subscribers.
       ``(2) Limitation.--
       ``(A) In general.--Qualified expenditures shall be taken 
     into account under paragraph (1) only with respect to 
     qualified equipment--
       ``(i) the original use of which commences with the 
     taxpayer, and
       ``(ii) which is placed in service, after December 31, 2003.
       ``(B) Sale-leasebacks.--For purposes of subparagraph (A), 
     if property--
       ``(i) is originally placed in service after December 31, 
     2003, by any person, and
       ``(ii) sold and leased back by such person within 3 months 
     after the date such property was originally placed in 
     service,

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

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

     providing current generation broadband services or next 
     generation broadband services to subscribers through such 
     qualified equipment.
       ``(12) Provision of services.--A provider shall be treated 
     as providing services to 1 or more subscribers if--
       ``(A) such a subscriber has been passed by the provider's 
     equipment and can be connected to such equipment for a 
     standard connection fee,
       ``(B) the provider is physically able to deliver current 
     generation broadband services or next generation broadband 
     services, as applicable, to such a subscriber without making 
     more than an insignificant investment with respect to such 
     subscriber,
       ``(C) the provider has made reasonable efforts to make such 
     subscribers aware of the availability of such services,
       ``(D) such services have been purchased by 1 or more such 
     subscribers, and
       ``(E) such services are made available to such subscribers 
     at average prices comparable to those at which the provider 
     makes available similar services in any areas in which the 
     provider makes available such services.
       ``(13) Qualified equipment.--
       ``(A) In general.--The term `qualified equipment' means 
     equipment which provides current generation broadband 
     services or next generation broadband services--

[[Page 3145]]

       ``(i) at least a majority of the time during periods of 
     maximum demand to each subscriber who is utilizing such 
     services, and
       ``(ii) in a manner substantially the same as such services 
     are provided by the provider to subscribers through equipment 
     with respect to which no deduction is allowed under 
     subsection (a)(1).
       ``(B) Only certain investment taken into account.--Except 
     as provided in subparagraph (C) or (D), equipment shall be 
     taken into account under subparagraph (A) only to the extent 
     it--
       ``(i) extends from the last point of switching to the 
     outside of the unit, building, dwelling, or office owned or 
     leased by a subscriber in the case of a telecommunications 
     carrier,
       ``(ii) extends from the customer side of the mobile 
     telephone switching office to a transmission/receive antenna 
     (including such antenna) owned or leased by a subscriber in 
     the case of a commercial mobile service carrier,
       ``(iii) extends from the customer side of the headend to 
     the outside of the unit, building, dwelling, or office owned 
     or leased by a subscriber in the case of a cable operator or 
     open video system operator, or
       ``(iv) extends from a transmission/receive antenna 
     (including such antenna) which transmits and receives signals 
     to or from multiple subscribers, to a transmission/receive 
     antenna (including such antenna) on the outside of the unit, 
     building, dwelling, or office owned or leased by a subscriber 
     in the case of a satellite carrier or other wireless carrier, 
     unless such other wireless carrier is also a 
     telecommunications carrier.
       ``(C) Packet switching equipment.--Packet switching 
     equipment, regardless of location, shall be taken into 
     account under subparagraph (A) only if it is deployed in 
     connection with equipment described in subparagraph (B) and 
     is uniquely designed to perform the function of packet 
     switching for current generation broadband services or next 
     generation broadband services, but only if such packet 
     switching is the last in a series of such functions performed 
     in the transmission of a signal to a subscriber or the first 
     in a series of such functions performed in the transmission 
     of a signal from a subscriber.
       ``(D) Multiplexing and demultiplexing equipment.--
     Multiplexing and demultiplexing equipment shall be taken into 
     account under subparagraph (A) only to the extent it is 
     deployed in connection with equipment described in 
     subparagraph (B) and is uniquely designed to perform the 
     function of multiplexing and demultiplexing packets or cells 
     of data and making associated application adaptions, but only 
     if such multiplexing or demultiplexing equipment is located 
     between packet switching equipment described in subparagraph 
     (C) and the subscriber's premises.
       ``(14) Qualified subscriber.--The term `qualified 
     subscriber' means--
       ``(A) with respect to the provision of current generation 
     broadband services--
       ``(i) any nonresidential subscriber maintaining a permanent 
     place of business in a rural area or underserved area, or
       ``(ii) any residential subscriber residing in a dwelling 
     located in a rural area or underserved area which is not a 
     saturated market, and
       ``(B) with respect to the provision of next generation 
     broadband services--
       ``(i) any nonresidential subscriber maintaining a permanent 
     place of business in a rural area or underserved area, or
       ``(ii) any residential subscriber.
       ``(15) Residential subscriber.--The term `residential 
     subscriber' means any individual who purchases broadband 
     services which are delivered to such individual's dwelling.
       ``(16) Rural area.--The term `rural area' means any census 
     tract which--
       ``(A) is not within 10 miles of any incorporated or census 
     designated place containing more than 25,000 people, and
       ``(B) is not within a county or county equivalent which has 
     an overall population density of more than 500 people per 
     square mile of land.
       ``(17) Rural subscriber.--The term `rural subscriber' means 
     any residential subscriber residing in a dwelling located in 
     a rural area or nonresidential subscriber maintaining a 
     permanent place of business located in a rural area.
       ``(18) Satellite carrier.--The term `satellite carrier' 
     means any person using the facilities of a satellite or 
     satellite service licensed by the Federal Communications 
     Commission and operating in the Fixed-Satellite Service under 
     part 25 of title 47 of the Code of Federal Regulations or the 
     Direct Broadcast Satellite Service under part 100 of title 47 
     of such Code to establish and operate a channel of 
     communications for distribution of signals, and owning or 
     leasing a capacity or service on a satellite in order to 
     provide such point-to-multipoint distribution.
       ``(19) Saturated market.--The term `saturated market' means 
     any census tract in which, as of the date of the enactment of 
     this section--
       ``(A) current generation broadband services have been 
     provided by a single provider to 85 percent or more of the 
     total number of potential residential subscribers residing in 
     dwellings located within such census tract, and
       ``(B) such services can be utilized--
       ``(i) at least a majority of the time during periods of 
     maximum demand by each such subscriber who is utilizing such 
     services, and
       ``(ii) in a manner substantially the same as such services 
     are provided by the provider to subscribers through equipment 
     with respect to which no deduction is allowed under 
     subsection (a)(1).
       ``(20) Subscriber.--The term `subscriber' means any person 
     who purchases current generation broadband services or next 
     generation broadband services.
       ``(21) Telecommunications carrier.--The term 
     `telecommunications carrier' has the meaning given such term 
     by section 3(44) of the Communications Act of 1934 (47 U.S.C. 
     153(44)), but--
       ``(A) includes all members of an affiliated group of which 
     a telecommunications carrier is a member, and
       ``(B) does not include a commercial mobile service carrier.
       ``(22) Total potential subscriber population.--The term 
     `total potential subscriber population' means, with respect 
     to any area and based on the most recent census data, the 
     total number of potential residential subscribers residing in 
     dwellings located in such area and potential nonresidential 
     subscribers maintaining permanent places of business located 
     in such area.
       ``(23) Underserved area.--The term `underserved area' 
     means--
       ``(A) any census tract which is located in--
       ``(i) an empowerment zone or enterprise community 
     designated under section 1391, or
       ``(ii) the District of Columbia Enterprise Zone established 
     under section 1400, or
       ``(B) any census tract--
       ``(i) the poverty level of which is at least 30 percent 
     (based on the most recent census data), and
       ``(ii) the median family income of which does not exceed--

       ``(I) in the case of a census tract located in a 
     metropolitan statistical area, 70 percent of the greater of 
     the metropolitan area median family income or the statewide 
     median family income, and
       ``(II) in the case of a census tract located in a 
     nonmetropolitan statistical area, 70 percent of the 
     nonmetropolitan statewide median family income.

       ``(24) Underserved subscriber.--The term `underserved 
     subscriber' means any residential subscriber residing in a 
     dwelling located in an underserved area or nonresidential 
     subscriber maintaining a permanent place of business located 
     in an underserved area.
       ``(f) Special Rules.--
       ``(1) Property used outside the united states, etc., not 
     qualified.--No expenditures shall be taken into account under 
     subsection (a)(1) with respect to the portion of the cost of 
     any property referred to in section 50(b) or with respect to 
     the portion of the cost of any property specified in an 
     election under section 179.
       ``(2) Basis reduction.--
       ``(A) In general.--For purposes of this title, the basis of 
     any property shall be reduced by the portion of the cost of 
     such property taken into account under subsection (a)(1).
       ``(B) Ordinary income recapture.--For purposes of section 
     1245, the amount of the deduction allowable under subsection 
     (a)(1) with respect to any property which is of a character 
     subject to the allowance for depreciation shall be treated as 
     a deduction allowed for depreciation under section 167.
       ``(3) Coordination with section 38.--No credit shall be 
     allowed under section 38 with respect to any amount for which 
     a deduction is allowed under subsection (a)(1).''.
       (b) Special Rule for Mutual or Cooperative Telephone 
     Companies.--Section 501(c)(12)(B) (relating to list of exempt 
     organizations) is amended by striking ``or'' at the end of 
     clause (iii), by striking the period at the end of clause 
     (iv) and inserting ``, or'', and by adding at the end the 
     following:
       ``(v) from the sale of property subject to a lease 
     described in section 191(c)(2)(B), but only to the extent 
     such income does not in any year exceed an amount equal to 
     the qualified broadband expenditures which would be taken 
     into account under section 191 for such year if the mutual or 
     cooperative telephone company was not exempt from taxation 
     and was treated as the owner of the property subject to such 
     lease.''.
       (c) Conforming Amendments.--
       (1) Section 263(a)(1) (relating to capital expenditures) is 
     amended by striking ``or'' at the end of subparagraph (G), by 
     striking the period at the end of subparagraph (H) and 
     inserting ``, or'', and by adding at the end the following 
     new subparagraph:
       ``(I) expenditures for which a deduction is allowed under 
     section 191.''.
       (2) Section 1016(a) of such Code is amended by striking 
     ``and'' at the end of paragraph (27), by striking the period 
     at the end of paragraph (28) and inserting ``, and'', and by 
     adding at the end the following new paragraph:
       ``(29) to the extent provided in section 191(f)(2).''.
       (3) The table of sections for part VI of subchapter A of 
     chapter 1 of such Code is amended by inserting after the item 
     relating to section 190 the following new item:
``Sec. 191. Broadband expenditures.''.

       (d) Designation of Census Tracts.--
       (1) In general.--The Secretary of the Treasury shall, not 
     later than 90 days after the date of the enactment of this 
     Act, designate and publish those census tracts meeting the 
     criteria described in paragraphs (16), (22), and (23) of 
     section 191(e) of the Internal Revenue Code of 1986 (as added 
     by this section). In making such designations, the Secretary 
     of the Treasury shall consult with such other departments and 
     agencies as the Secretary determines appropriate.
       (2) Saturated market.--
       (A) In general.--For purposes of designating and publishing 
     those census tracts meeting the

[[Page 3146]]

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

     SEC. 303. EXEMPTION OF NATURAL AGING PROCESS IN DETERMINATION 
                   OF PRODUCTION PERIOD FOR DISTILLED SPIRITS 
                   UNDER SECTION 263A.

       (a) In General.--Section 263A(f) of the Internal Revenue 
     Code of 1986 (relating to general exceptions) is amended by 
     adding at the end the following new paragraph:
       ``(5) Exemption of natural aging process in determination 
     of production period for distilled spirits.--For purposes of 
     this subsection, the production period for distilled spirits 
     shall be determined without regard to any period allocated to 
     the natural aging process.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to production periods beginning after the date of 
     the enactment of this Act.

     SEC. 304. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER 
                   SECTION 355.

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

     SEC. 305. EXCLUSION OF CERTAIN INDEBTEDNESS OF SMALL BUSINESS 
                   INVESTMENT COMPANIES FROM ACQUISITION 
                   INDEBTEDNESS.

       (a) In General.--Section 514(c) (relating to acquisition 
     indebtedness) is amended by adding at the end the following 
     new paragraph:
       ``(10) Certain indebtedness of small business investment 
     companies.--For purposes of this section, the term 
     `acquisition indebtedness' does not include any indebtedness 
     incurred by a small business investment company licensed 
     under the Small Business Investment Act of 1958 which is 
     evidenced by a debenture--
       ``(A) issued by such company under section 303(a) of such 
     Act, and
       ``(B) held or guaranteed by the Small Business 
     Administration.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to any indebtedness incurred after December 31, 
     2003, by a small business investment company described in 
     section 514(c)(10) of the Internal Revenue Code of 1986 (as 
     added by this section) with respect to property acquired by 
     such company after such date.

     SEC. 306. MODIFIED TAXATION OF IMPORTED ARCHERY PRODUCTS.

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

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

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

       ``(C) Arrow.--For purposes of this paragraph, the term 
     `arrow' means any shaft described in paragraph (2) to which 
     additional components are attached.''.
       (c) Conforming Amendments.--Section 4161(b)(2) is amended--
       (1) by inserting ``(other than broadheads)'' after 
     ``point'', and
       (2) by striking ``Arrows.--'' in the heading and inserting 
     ``Arrow components.--''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to articles sold by the manufacturer, producer, 
     or importer after December 31, 2003.

     SEC. 307. MODIFICATION TO COOPERATIVE MARKETING RULES TO 
                   INCLUDE VALUE ADDED PROCESSING INVOLVING 
                   ANIMALS.

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

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

     SEC. 308. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO 
                   FARMERS' COOPERATIVE ORGANIZATIONS.

       (a) In General.--Section 7428(a)(1) (relating to 
     declaratory judgments of tax exempt organizations) is amended 
     by striking ``or'' at the end of subparagraph (B) and by 
     adding at the end the following new subparagraph:

[[Page 3147]]

       ``(D) with respect to the initial classification or 
     continuing classification of a cooperative as an organization 
     described in section 521(b) which is exempt from tax under 
     section 521(a), or''.
       (b) Effective Date.--The amendments made by this section 
     shall apply with respect to pleadings filed after the date of 
     the enactment of this Act.

     SEC. 309. TEMPORARY SUSPENSION OF PERSONAL HOLDING COMPANY 
                   TAX.

       (a) In General.--Section 541 (relating to imposition of 
     personal holding company tax) is amended by adding at the end 
     the following new sentence: ``The preceding sentence shall 
     not apply with respect to any taxable year to which section 
     1(h)(11) (as in effect on the date of the enactment of this 
     sentence) applies.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 310. INCREASE IN SECTION 179 EXPENSING.

       (a) In General.--Section 179(b)(2) (relating to reduction 
     in limitation) is amended by inserting ``50 percent of'' 
     before ``the amount''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 311. THREE-YEAR CARRYBACK OF NET OPERATING LOSSES.

       (a) In General.--Paragraph (1) of section 172(b) (relating 
     to years to which loss may be carried) is amended by adding 
     at the end the following new subparagraph:
       ``(I) Special rule for 2003.--In the case of a net 
     operating loss for any taxable year ending during 2003, 
     subparagraph (A)(i) shall be applied by substituting `3' for 
     `2'.''.
       (b) Election To Disregard 3-Year Carryback.--Section 172 
     (relating to net operating loss deduction) is amended by 
     redesignating subsection (k) as subsection (l) and by 
     inserting after subsection (j) the following new subsection:
       ``(k) Election To Disregard 3-Year Carryback for Certain 
     Net Operating Losses.--Any taxpayer entitled to a 3-year 
     carryback under subsection (b)(1)(I) from any loss year may 
     elect to have the carryback period with respect to such loss 
     year determined without regard to subsection (b)(1)(I). Such 
     election shall be made in such manner as may be prescribed by 
     the Secretary and shall be made by the due date (including 
     extensions of time) for filing the taxpayer's return for the 
     taxable year of the net operating loss. Such election, once 
     made for any taxable year, shall be irrevocable for such 
     taxable year.''.
       (c) Temporary Suspension of 90 Percent Limit on Certain NOL 
     Carryovers.--
       (1) In general.--Section 56(d)(1)(A)(ii)(I) (relating to 
     general rule defining alternative tax net operating loss 
     deduction) is amended--
       (A) by striking ``or 2002'' and inserting ``, 2002, or 
     2003'', and
       (B) by striking ``and 2002'' and inserting ``, 2002, and 
     2003''.
       (d) Technical Corrections.--
       (1) Subparagraph (H) of section 172(b)(1) is amended by 
     striking ``a taxpayer which has''.
       (2) Section 102(c)(2) of the Job Creation and Worker 
     Assistance Act of 2002 (Public Law 107-147) is amended by 
     striking ``before January 1, 2003'' and inserting ``after 
     December 31, 1990''.
       (3)(A) Subclause (I) of section 56(d)(1)(A)(i) is amended 
     by striking ``attributable to carryovers''.
       (B) Subclause (I) of section 56(d)(1)(A)(ii) is amended--
       (i) by striking ``for taxable years'' and inserting ``from 
     taxable years'', and
       (ii) by striking ``carryforwards'' and inserting 
     ``carryovers''.
       (e) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to net operating 
     losses for taxable years ending after December 31, 2002.
       (2) Technical corrections.--The amendments made by 
     subsection (d) shall take effect as if included in the 
     amendments made by section 102 of the Job Creation and Worker 
     Assistance Act of 2002.
       (3) Election.--In the case of a net operating loss for a 
     taxable year ending during 2003--
       (A) any election made under section 172(b)(3) of such Code 
     may (notwithstanding such section) be revoked before April 
     15, 2004, and
       (B) any election made under section 172(k) (as added by 
     this section) of such Code shall (notwithstanding such 
     section) be treated as timely made if made before April 15, 
     2004.

              Subtitle B--Manufacturing Relating to Films

     SEC. 321. SPECIAL RULES FOR CERTAIN FILM AND TELEVISION 
                   PRODUCTIONS.

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

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

       ``(a) Election To Treat Certain Costs of Qualified Film and 
     Television Productions as Expenses.--
       ``(1) In general.--A taxpayer may elect to treat the cost 
     of any qualified film or television production as an expense 
     which is not chargeable to capital account. Any cost so 
     treated shall be allowed as a deduction.
       ``(2) Dollar limitation.--
       ``(A) In general.--The aggregate cost which may be taken 
     into account under paragraph (1) with respect to each 
     qualified film or television production shall not exceed 
     $15,000,000.
       ``(B) Higher dollar limitation for productions in certain 
     areas.--In the case of any qualified film or television 
     production the aggregate cost of which is significantly 
     incurred in an area eligible for designation as--
       ``(i) a low-income community under section 45D, or
       ``(ii) a distressed county or isolated area of distress by 
     the Delta Regional Authority established under section 
     2009aa-1 of title 7, United States Code,

     subparagraph (A) shall be applied by substituting 
     `$20,000,000' for `$15,000,000'.
       ``(b) Amortization of Remaining Costs.--
       ``(1) In general.--If an election is made under subsection 
     (a) with respect to any qualified film or television 
     production, that portion of the basis of such production in 
     excess of the amount taken into account under subsection (a) 
     shall be allowed as a deduction ratably over the 36-month 
     period beginning with the month in which such production is 
     placed in service.
       ``(2) No other deduction or amortization deduction 
     allowable.--With respect to the basis of any qualified film 
     or television production described in paragraph (1), no other 
     depreciation or amortization deduction shall be allowable.
       ``(c) Election.--
       ``(1) In general.--An election under subsection (a) with 
     respect to any qualified film or television production shall 
     be made in such manner as prescribed by the Secretary and by 
     the due date (including extensions) for filing the taxpayer's 
     return of tax under this chapter for the taxable year in 
     which costs of the production are first incurred.
       ``(2) Revocation of election.--Any election made under 
     subsection (a) may not be revoked without the consent of the 
     Secretary.
       ``(d) Qualified Film or Television Production.--For 
     purposes of this section--
       ``(1) In general.--The term `qualified film or television 
     production' means any production described in paragraph (2) 
     if 75 percent of the total compensation of the production is 
     qualified compensation.
       ``(2) Production.--
       ``(A) In general.--A production is described in this 
     paragraph if such production is property described in section 
     168(f)(3). For purposes of a television series, only the 
     first 44 episodes of such series may be taken into account.
       ``(B) Exception.--A production is not described in this 
     paragraph if records are required under section 2257 of title 
     18, United States Code, to be maintained with respect to any 
     performer in such production.
       ``(3) Qualified compensation.--For purposes of paragraph 
     (1)--
       ``(A) In general.--The term `qualified compensation' means 
     compensation for services performed in the United States by 
     actors, directors, producers, and other relevant production 
     personnel.
       ``(B) Participations and residuals excluded.--The term 
     `compensation' does not include participations and residuals 
     (as defined in section 167(g)(7)(B)).
       ``(e) Application of Certain Other Rules.--For purposes of 
     this section, rules similar to the rules of subsections 
     (b)(2) and (c)(4) of section 194 shall apply.
       ``(f) Termination.--This section shall not apply to 
     qualified film and television productions commencing after 
     December 31, 2008.''.
       (b) Conforming Amendment.--The table of sections for part 
     VI of subchapter B of chapter 1 is amended by inserting after 
     the item relating to section 180 the following new item:
``Sec. 181. Treatment of qualified film and television productions.''.

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

     SEC. 322. MODIFICATION OF APPLICATION OF INCOME FORECAST 
                   METHOD OF DEPRECIATION.

       (a) In General.--Section 167(g) (relating to depreciation 
     under income forecast method) is amended by adding at the end 
     the following new paragraph:
       ``(7) Treatment of participations and residuals.--
       ``(A) In general.--For purposes of determining the 
     depreciation deduction allowable with respect to a property 
     under this subsection, the taxpayer may include 
     participations and residuals with respect to such property in 
     the adjusted basis of such property for the taxable year in 
     which the property is placed in service, but only to the 
     extent that such participations and residuals relate to 
     income estimated (for purposes of this subsection) to be 
     earned in connection with the property before the close of 
     the 10th taxable year referred to in paragraph (1)(A).
       ``(B) Participations and residuals.--For purposes of this 
     paragraph, the term `participations and residuals' means, 
     with respect to any property, costs the amount of which by 
     contract varies with the amount of income earned in 
     connection with such property.
       ``(C) Special rules relating to recomputation years.--If 
     the adjusted basis of any property is determined under this 
     paragraph, paragraph (4) shall be applied by substituting 
     `for each taxable year in such period' for `for such period'.
       ``(D) Other special rules.--
       ``(i) Participations and residuals.--Notwithstanding 
     subparagraph (A), the taxpayer may exclude participations and 
     residuals from the adjusted basis of such property and deduct 
     such participations and residuals in the taxable year that 
     such participations and residuals are paid.

[[Page 3148]]

       ``(ii) Coordination with other rules.--Deductions computed 
     in accordance with this paragraph shall be allowable 
     notwithstanding paragraph (1)(B) or sections 263, 263A, 404, 
     419, or 461(h).
       ``(E) Authority to make adjustments.--The Secretary shall 
     prescribe appropriate adjustments to the basis of property 
     and to the look-back method for the additional amounts 
     allowable as a deduction solely by reason of this 
     paragraph.''.
       (b) Determination of Income.--Section 167(g)(5) (relating 
     to special rules) is amended by redesignating subparagraphs 
     (E) and (F) as subparagraphs (F) and (G), respectively, and 
     inserting after subparagraph (D) the following new 
     subparagraph:
       ``(E) Treatment of distribution costs.--For purposes of 
     this subsection, the income with respect to any property 
     shall be the taxpayer's gross income from such property.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.

              Subtitle C--Manufacturing Relating to Timber

     SEC. 331. EXPENSING OF CERTAIN REFORESTATION EXPENDITURES.

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

     SEC. 332. ELECTION TO TREAT CUTTING OF TIMBER AS A SALE OR 
                   EXCHANGE.

       Any election under section 631(a) of the Internal Revenue 
     Code of 1986 made for a taxable year ending on or before the 
     date of the enactment of this Act may be revoked by the 
     taxpayer for any taxable year ending after such date. For 
     purposes of determining whether the taxpayer may make a 
     further election under such section, such election (and any 
     revocation under this section) shall not be taken into 
     account.

     SEC. 333. 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 the date of the enactment of this 
     Act.

     SEC. 334. MODIFICATION OF SAFE HARBOR RULES FOR TIMBER REITS.

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

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

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

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

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

                    TITLE IV--ADDITIONAL PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

     SEC. 401. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

       (a) In General.--Section 7701 is amended by redesignating 
     subsection (n) as subsection (o) and by inserting after 
     subsection (m) the following new subsection:
       ``(n) Clarification of Economic Substance Doctrine; Etc.--
       ``(1) General rules.--
       ``(A) In general.--In any case in which a court determines 
     that the economic substance doctrine is relevant for purposes 
     of this title to a transaction (or series of transactions), 
     such transaction (or series of transactions) shall have 
     economic substance only if the requirements of this paragraph 
     are met.
       ``(B) Definition of economic substance.--For purposes of 
     subparagraph (A)--
       ``(i) In general.--A transaction has economic substance 
     only if--

       ``(I) the transaction changes in a meaningful way (apart 
     from Federal tax effects) the taxpayer's economic position, 
     and

[[Page 3149]]

       ``(II) the taxpayer has a substantial nontax purpose for 
     entering into such transaction and the transaction is a 
     reasonable means of accomplishing such purpose.

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

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

       ``(C) Treatment of fees and foreign taxes.--Fees and other 
     transaction expenses and foreign taxes shall be taken into 
     account as expenses in determining pre-tax profit under 
     subparagraph (B)(ii).
       ``(2) Special rules for transactions with tax-indifferent 
     parties.--
       ``(A) Special rules for financing transactions.--The form 
     of a transaction which is in substance the borrowing of money 
     or the acquisition of financial capital directly or 
     indirectly from a tax-indifferent party shall not be 
     respected if the present value of the deductions to be 
     claimed with respect to the transaction is substantially in 
     excess of the present value of the anticipated economic 
     returns of the person lending the money or providing the 
     financial capital. A public offering shall be treated as a 
     borrowing, or an acquisition of financial capital, from a 
     tax-indifferent party if it is reasonably expected that at 
     least 50 percent of the offering will be placed with tax-
     indifferent parties.
       ``(B) Artificial income shifting and basis adjustments.--
     The form of a transaction with a tax-indifferent party shall 
     not be respected if--
       ``(i) it results in an allocation of income or gain to the 
     tax-indifferent party in excess of such party's economic 
     income or gain, or
       ``(ii) it results in a basis adjustment or shifting of 
     basis on account of overstating the income or gain of the 
     tax-indifferent party.
       ``(3) Definitions and special rules.--For purposes of this 
     subsection--
       ``(A) Economic substance doctrine.--The term `economic 
     substance doctrine' means the common law doctrine under which 
     tax benefits under subtitle A with respect to a transaction 
     are not allowable if the transaction does not have economic 
     substance or lacks a business purpose.
       ``(B) Tax-indifferent party.--The term `tax-indifferent 
     party' means any person or entity not subject to tax imposed 
     by subtitle A. A person shall be treated as a tax-indifferent 
     party with respect to a transaction if the items taken into 
     account with respect to the transaction have no substantial 
     impact on such person's liability under subtitle A.
       ``(C) Exception for personal transactions of individuals.--
     In the case of an individual, this subsection shall apply 
     only to transactions entered into in connection with a trade 
     or business or an activity engaged in for the production of 
     income.
       ``(D) Treatment of lessors.--In applying paragraph 
     (1)(B)(ii) to the lessor of tangible property subject to a 
     lease--
       ``(i) the expected net tax benefits with respect to the 
     leased property shall not include the benefits of--

       ``(I) depreciation,
       ``(II) any tax credit, or
       ``(III) any other deduction as provided in guidance by the 
     Secretary, and

       ``(ii) subclause (II) of paragraph (1)(B)(ii) shall be 
     disregarded in determining whether any of such benefits are 
     allowable.
       ``(4) Other common law doctrines not affected.--Except as 
     specifically provided in this subsection, the provisions of 
     this subsection shall not be construed as altering or 
     supplanting any other rule of law, and the requirements of 
     this subsection shall be construed as being in addition to 
     any such other rule of law.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection. Such regulations may include 
     exemptions from the application of this subsection.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after the date of 
     the enactment of this Act.

     SEC. 402. PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
                   TRANSACTION.

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

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

       ``(a) Imposition of Penalty.--Any person who fails to 
     include on any return or statement any information with 
     respect to a reportable transaction which is required under 
     section 6011 to be included with such return or statement 
     shall pay a penalty in the amount determined under subsection 
     (b).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraphs (2) and 
     (3), the amount of the penalty under subsection (a) shall be 
     $50,000.
       ``(2) Listed transaction.--The amount of the penalty under 
     subsection (a) with respect to a listed transaction shall be 
     $100,000.
       ``(3) Increase in penalty for large entities and high net 
     worth individuals.--
       ``(A) In general.--In the case of a failure under 
     subsection (a) by--
       ``(i) a large entity, or
       ``(ii) a high net worth individual,

     the penalty under paragraph (1) or (2) shall be twice the 
     amount determined without regard to this paragraph.
       ``(B) Large entity.--For purposes of subparagraph (A), the 
     term `large entity' means, with respect to any taxable year, 
     a person (other than a natural person) with gross receipts in 
     excess of $10,000,000 for the taxable year in which the 
     reportable transaction occurs or the preceding taxable year. 
     Rules similar to the rules of paragraph (2) and subparagraphs 
     (B), (C), and (D) of paragraph (3) of section 448(c) shall 
     apply for purposes of this subparagraph.
       ``(C) High net worth individual.--For purposes of 
     subparagraph (A), the term `high net worth individual' means, 
     with respect to a reportable transaction, a natural person 
     whose net worth exceeds $2,000,000 immediately before the 
     transaction.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Reportable transaction.--The term `reportable 
     transaction' means any transaction with respect to which 
     information is required to be included with a return or 
     statement because, as determined under regulations prescribed 
     under section 6011, such transaction is of a type which the 
     Secretary determines as having a potential for tax avoidance 
     or evasion.
       ``(2) Listed transaction.--Except as provided in 
     regulations, the term `listed transaction' means a reportable 
     transaction which is the same as, or substantially similar 
     to, a transaction specifically identified by the Secretary as 
     a tax avoidance transaction for purposes of section 6011.
       ``(d) Authority To Rescind Penalty.--
       ``(1) In general.--The Commissioner of Internal Revenue may 
     rescind all or any portion of any penalty imposed by this 
     section with respect to any violation if--
       ``(A) the violation is with respect to a reportable 
     transaction other than a listed transaction,
       ``(B) the person on whom the penalty is imposed has a 
     history of complying with the requirements of this title,
       ``(C) it is shown that the violation is due to an 
     unintentional mistake of fact;
       ``(D) imposing the penalty would be against equity and good 
     conscience, and
       ``(E) rescinding the penalty would promote compliance with 
     the requirements of this title and effective tax 
     administration.
       ``(2) Discretion.--The exercise of authority under 
     paragraph (1) shall be at the sole discretion of the 
     Commissioner and may be delegated only to the head of the 
     Office of Tax Shelter Analysis. The Commissioner, in the 
     Commissioner's sole discretion, may establish a procedure to 
     determine if a penalty should be referred to the Commissioner 
     or the head of such Office for a determination under 
     paragraph (1).
       ``(3) No appeal.--Notwithstanding any other provision of 
     law, any determination under this subsection may not be 
     reviewed in any administrative or judicial proceeding.
       ``(4) Records.--If a penalty is rescinded under paragraph 
     (1), the Commissioner shall place in the file in the Office 
     of the Commissioner the opinion of the Commissioner or the 
     head of the Office of Tax Shelter Analysis with respect to 
     the determination, including--
       ``(A) the facts and circumstances of the transaction,
       ``(B) the reasons for the rescission, and
       ``(C) the amount of the penalty rescinded.
       ``(5) Report.--The Commissioner shall each year report to 
     the Committee on Ways and Means of the House of 
     Representatives and the Committee on Finance of the Senate--
       ``(A) a summary of the total number and aggregate amount of 
     penalties imposed, and rescinded, under this section, and
       ``(B) a description of each penalty rescinded under this 
     subsection and the reasons therefor.
       ``(e) Penalty Reported to SEC.--In the case of a person--
       ``(1) which is required to file periodic reports under 
     section 13 or 15(d) of the Securities Exchange Act of 1934 or 
     is required to be consolidated with another person for 
     purposes of such reports, and
       ``(2) which--
       ``(A) is required to pay a penalty under this section with 
     respect to a listed transaction,
       ``(B) is required to pay a penalty under section 6662A with 
     respect to any reportable transaction at a rate prescribed 
     under section 6662A(c), or
       ``(C) is required to pay a penalty under section 6662B with 
     respect to any noneconomic substance transaction,

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

[[Page 3150]]

     is amended by inserting after the item relating to section 
     6707 the following:

``Sec. 6707A. Penalty for failure to include reportable transaction 
              information with return or statement.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to returns and statements the due date for which 
     is after the date of the enactment of this Act.

     SEC. 403. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS 
                   AND OTHER REPORTABLE TRANSACTIONS HAVING A 
                   SIGNIFICANT TAX AVOIDANCE PURPOSE.

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

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

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

     For purposes of subparagraph (A), any reduction of the excess 
     of deductions allowed for the taxable year over gross income 
     for such year, and any reduction in the amount of capital 
     losses which would (without regard to section 1211) be 
     allowed for such year, shall be treated as an increase in 
     taxable income.
       ``(2) Items to which section applies.--This section shall 
     apply to any item which is attributable to--
       ``(A) any listed transaction, and
       ``(B) any reportable transaction (other than a listed 
     transaction) if a significant purpose of such transaction is 
     the avoidance or evasion of Federal income tax.
       ``(c) Higher Penalty for Nondisclosed Listed and Other 
     Avoidance Transactions.--
       ``(1) In general.--Subsection (a) shall be applied by 
     substituting `30 percent' for `20 percent' with respect to 
     the portion of any reportable transaction understatement with 
     respect to which the requirement of section 6664(d)(2)(A) is 
     not met.
       ``(2) Rules applicable to assertion and compromise of 
     penalty.--
       ``(A) In general.--Only upon the approval by the Chief 
     Counsel for the Internal Revenue Service or the Chief 
     Counsel's delegate at the national office of the Internal 
     Revenue Service may a penalty to which paragraph (1) applies 
     be included in a 1st letter of proposed deficiency which 
     allows the taxpayer an opportunity for administrative review 
     in the Internal Revenue Service Office of Appeals. If such a 
     letter is provided to the taxpayer, only the Commissioner of 
     Internal Revenue may compromise all or any portion of such 
     penalty.
       ``(B) Applicable rules.--The rules of paragraphs (2), (3), 
     (4), and (5) of section 6707A(d) shall apply for purposes of 
     subparagraph (A).
       ``(d) Definitions of Reportable and Listed Transactions.--
     For purposes of this section, the terms `reportable 
     transaction' and `listed transaction' have the respective 
     meanings given to such terms by section 6707A(c).
       ``(e) Special Rules.--
       ``(1) Coordination with penalties, etc., on other 
     understatements.--In the case of an understatement (as 
     defined in section 6662(d)(2))--
       ``(A) the amount of such understatement (determined without 
     regard to this paragraph) shall be increased by the aggregate 
     amount of reportable transaction understatements and 
     noneconomic substance transaction understatements for 
     purposes of determining whether such understatement is a 
     substantial understatement under section 6662(d)(1), and
       ``(B) the addition to tax under section 6662(a) shall apply 
     only to the excess of the amount of the substantial 
     understatement (if any) after the application of subparagraph 
     (A) over the aggregate amount of reportable transaction 
     understatements and noneconomic substance transaction 
     understatements.
       ``(2) Coordination with other penalties.--
       ``(A) Application of fraud penalty.--References to an 
     underpayment in section 6663 shall be treated as including 
     references to a reportable transaction understatement and a 
     noneconomic substance transaction understatement.
       ``(B) No double penalty.--This section shall not apply to 
     any portion of an understatement on which a penalty is 
     imposed under section 6662B or 6663.
       ``(3) Special rule for amended returns.--Except as provided 
     in regulations, in no event shall any tax treatment included 
     with an amendment or supplement to a return of tax be taken 
     into account in determining the amount of any reportable 
     transaction understatement or noneconomic substance 
     transaction understatement if the amendment or supplement is 
     filed after the earlier of the date the taxpayer is first 
     contacted by the Secretary regarding the examination of the 
     return or such other date as is specified by the Secretary.
       ``(4) Noneconomic substance transaction understatement.--
     For purposes of this subsection, the term `noneconomic 
     substance transaction understatement' has the meaning given 
     such term by section 6662B(c).
       ``(5) Cross reference.--

  ``For reporting of section 6662A(c) penalty to the Securities and 
Exchange Commission, see section 6707A(e).''.

       (b) Determination of Other Understatements.--Subparagraph 
     (A) of section 6662(d)(2) is amended by adding at the end the 
     following flush sentence:

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

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

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

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

       ``(I) is a material advisor (within the meaning of section 
     6111(b)(1)) who participates in the organization, management, 
     promotion, or sale of the transaction or who is related 
     (within the meaning of section 267(b) or 707(b)(1)) to any 
     person who so participates,
       ``(II) is compensated directly or indirectly by a material 
     advisor with respect to the transaction,
       ``(III) has a fee arrangement with respect to the 
     transaction which is contingent on all or part of the 
     intended tax benefits from the transaction being sustained, 
     or
       ``(IV) as determined under regulations prescribed by the 
     Secretary, has a 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 amendment.--The heading for subsection (c) 
     of section 6664 is amended by inserting ``for Underpayments'' 
     after ``Exception''.
       (d) Conforming Amendments.--
       (1) Subparagraph (C) of section 461(i)(3) is amended by 
     striking ``section 6662(d)(2)(C)(iii)'' and inserting 
     ``section 1274(b)(3)(C)''.
       (2) Paragraph (3) of section 1274(b) is amended--
       (A) by striking ``(as defined in section 
     6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
       (B) by adding at the end the following new subparagraph:
       ``(C) Tax shelter.--For purposes of subparagraph (B), the 
     term `tax shelter' means--
       ``(i) a partnership or other entity,
       ``(ii) any investment plan or arrangement, or

[[Page 3151]]

       ``(iii) any other plan or arrangement,

     if a significant purpose of such partnership, entity, plan, 
     or arrangement is the avoidance or evasion of Federal income 
     tax.''.
       (3) Section 6662(d)(2) is amended by striking subparagraphs 
     (C) and (D).
       (4) Section 6664(c)(1) is amended by striking ``this part'' 
     and inserting ``section 6662 or 6663''.
       (5) Subsection (b) of section 7525 is amended by striking 
     ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
     1274(b)(3)(C)''.
       (6)(A) The heading for section 6662 is amended to read as 
     follows:

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

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

``Sec. 6662. Imposition of accuracy-related penalty on underpayments.
``Sec. 6662A. Imposition of accuracy-related penalty on understatements 
              with respect to reportable transactions.''.

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

     SEC. 404. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO 
                   TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

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

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

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

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

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

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

       (c) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after the date of 
     the enactment of this Act.

     SEC. 405. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY 
                   FOR NONREPORTABLE TRANSACTIONS.

       (a) Substantial Understatement of Corporations.--Section 
     6662(d)(1)(B) (relating to special rule for corporations) is 
     amended to read as follows:
       ``(B) Special rule for corporations.--In the case of a 
     corporation other than an S corporation or a personal holding 
     company (as defined in section 542), there is a substantial 
     understatement of income tax for any taxable year if the 
     amount of the understatement for the taxable year exceeds the 
     lesser of--
       ``(i) 10 percent of the tax required to be shown on the 
     return for the taxable year (or, if greater, $10,000), or
       ``(ii) $10,000,000.''.
       (b) Reduction for Understatement of Taxpayer Due to 
     Position of Taxpayer or Disclosed Item.--
       (1) In general.--Section 6662(d)(2)(B)(i) (relating to 
     substantial authority) is amended to read as follows:
       ``(i) the tax treatment of any item by the taxpayer if the 
     taxpayer had reasonable belief that the tax treatment was 
     more likely than not the proper treatment, or''.
       (2) Conforming amendment.--Section 6662(d) is amended by 
     adding at the end the following new paragraph:
       ``(3) Secretarial list.--For purposes of this subsection, 
     section 6664(d)(2), and section 6694(a)(1), the Secretary may 
     prescribe a list of positions for which the Secretary 
     believes there is not substantial authority or there is no 
     reasonable belief that the tax treatment is more likely than 
     not the proper tax treatment. Such list (and any revisions 
     thereof) shall be published in the Federal Register or the 
     Internal Revenue Bulletin.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 406. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES 
                   RELATING TO TAXPAYER COMMUNICATIONS.

       (a) In General.--Section 7525(b) (relating to section not 
     to apply to communications regarding corporate tax shelters) 
     is amended to read as follows:
       ``(b) Section Not To Apply to Communications Regarding Tax 
     Shelters.--The privilege under subsection (a) shall not apply 
     to any written communication which is--
       ``(1) between a federally authorized tax practitioner and--
       ``(A) any person,
       ``(B) any director, officer, employee, agent, or 
     representative of the person, or
       ``(C) any other person holding a capital or profits 
     interest in the person, and
       ``(2) in connection with the promotion of the direct or 
     indirect participation of the person in any tax shelter (as 
     defined in section 1274(b)(3)(C)).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to communications made on or after the date of 
     the enactment of this Act.

     SEC. 407. 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 for such aid, assistance, or 
     advice.
       ``(B) Threshold amount.--For purposes of subparagraph (A), 
     the threshold amount is--
       ``(i) $50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons, and
       ``(ii) $250,000 in any other case.
       ``(2) Reportable transaction.--The term `reportable 
     transaction' has the meaning given to such term by section 
     6707A(c).
       ``(c) Regulations.--The Secretary may prescribe regulations 
     which provide--
       ``(1) that only 1 person shall be required to meet the 
     requirements of subsection (a) in cases in which 2 or more 
     persons would otherwise be required to meet such 
     requirements,
       ``(2) exemptions from the requirements of this section, and
       ``(3) such rules as may be necessary or appropriate to 
     carry out the purposes of this section.''.
       (b) Conforming Amendments.--
       (1) The item relating to section 6111 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

``Sec. 6111. Disclosure of reportable transactions.''.

       (2)(A) So much of section 6112 as precedes subsection (c) 
     thereof is amended to read as follows:

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

       ``(a) In General.--Each material advisor (as defined in 
     section 6111) with respect to any reportable transaction (as 
     defined in section 6707A(c)) shall maintain, in such manner 
     as the Secretary may by regulations prescribe, a list--
       ``(1) identifying each person with respect to whom such 
     advisor acted as such a material advisor with respect to such 
     transaction, and
       ``(2) containing such other information as the Secretary 
     may by regulations require.


[[Page 3152]]


     This section shall apply without regard to whether a material 
     advisor is required to file a return under section 6111 with 
     respect to such transaction.''.
       (B) Section 6112 is amended by redesignating subsection (c) 
     as subsection (b).
       (C) Section 6112(b), as redesignated by subparagraph (B), 
     is amended--
       (i) by inserting ``written'' before ``request'' in 
     paragraph (1)(A), and
       (ii) by striking ``shall prescribe'' in paragraph (2) and 
     inserting ``may prescribe''.
       (D) The item relating to section 6112 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

``Sec. 6112. Material advisors of reportable transactions must keep 
              lists of advisees.''.

       (3)(A) The heading for section 6708 is amended to read as 
     follows:

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

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

``Sec. 6708. Failure to maintain lists of advisees with respect to 
              reportable transactions.''.

       (c) Required Disclosure Not Subject to Claim of 
     Confidentiality.--Subparagraph (A) of section 6112(b)(1), as 
     redesignated by subsection (b)(2)(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. 408. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER 
                   TAX SHELTERS.

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

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

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

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

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

     SEC. 409. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN 
                   LISTS OF INVESTORS.

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

     SEC. 410. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT 
                   RELATED TO TAX SHELTERS AND REPORTABLE 
                   TRANSACTIONS.

       (a) In General.--Section 7408 (relating to action to enjoin 
     promoters of abusive tax shelters, etc.) is amended by 
     redesignating subsection (c) as subsection (d) and by 
     striking subsections (a) and (b) and inserting the following 
     new subsections:
       ``(a) Authority To Seek Injunction.--A civil action in the 
     name of the United States to enjoin any person from further 
     engaging in specified conduct may be commenced at the request 
     of the Secretary. Any action under this section shall be 
     brought in the district court of the United States for the 
     district in which such person resides, has his principal 
     place of business, or has engaged in specified conduct. The 
     court may exercise its jurisdiction over such action (as 
     provided in section 7402(a)) separate and apart from any 
     other action brought by the United States against such 
     person.
       ``(b) Adjudication and Decree.--In any action under 
     subsection (a), if the court finds--
       ``(1) that the person has engaged in any specified conduct, 
     and
       ``(2) that injunctive relief is appropriate to prevent 
     recurrence of such conduct,

     the court may enjoin such person from engaging in such 
     conduct or in any other activity subject to penalty under 
     this title.
       ``(c) Specified Conduct.--For purposes of this section, the 
     term `specified conduct' means any action, or failure to take 
     action, subject to penalty under section 6700, 6701, 6707, or 
     6708.''.
       (b) Conforming Amendments.--
       (1) The heading for section 7408 is amended to read as 
     follows:

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

       (2) The table of sections for subchapter A of chapter 67 is 
     amended by striking the item relating to section 7408 and 
     inserting the following new item:

``Sec. 7408. Actions to enjoin specified conduct related to tax 
              shelters and reportable transactions.''.

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

     SEC. 411. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME 
                   TAX RETURN PREPARER.

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

     SEC. 412. 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.

[[Page 3153]]



     SEC. 413. FRIVOLOUS TAX SUBMISSIONS.

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

     ``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

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

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

       ``(ii) an application under--

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

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

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

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

     SEC. 414. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE 
                   DEPARTMENT OF TREASURY.

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

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

     SEC. 415. 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. 416. 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. 417. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                   ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND 
                   NONECONOMIC SUBSTANCE TRANSACTIONS.

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

[[Page 3154]]

     taxable years beginning after the date of the enactment of 
     this Act.

     SEC. 418. AUTHORIZATION OF APPROPRIATIONS FOR TAX LAW 
                   ENFORCEMENT.

       There is authorized to be appropriated $300,000,000 for 
     each fiscal year beginning after September 30, 2003, for the 
     purpose of carrying out tax law enforcement to combat tax 
     avoidance transactions and other tax shelters, including the 
     use of offshore financial accounts to conceal taxable income.

           Subtitle B--Other Corporate Governance Provisions

     SEC. 421. AFFIRMATION OF CONSOLIDATED RETURN REGULATION 
                   AUTHORITY.

       (a) In General.--Section 1502 (relating to consolidated 
     return regulations) is amended by adding at the end the 
     following new sentence: ``In prescribing such regulations, 
     the Secretary may prescribe rules applicable to corporations 
     filing consolidated returns under section 1501 that are 
     different from other provisions of this title that would 
     apply if such corporations filed separate returns.''.
       (b) Result Not Overturned.--Notwithstanding subsection (a), 
     the Internal Revenue Code of 1986 shall be construed by 
     treating Treasury regulation Sec. 1.1502-20(c)(1)(iii) (as in 
     effect on January 1, 2001) as being inapplicable to the type 
     of factual situation in 255 F.3d 1357 (Fed. Cir. 2001).
       (c) Effective Date.--The provisions of this section shall 
     apply to taxable years beginning before, on, or after the 
     date of the enactment of this Act.

     SEC. 422. SIGNING OF CORPORATE TAX RETURNS BY CHIEF EXECUTIVE 
                   OFFICER.

       (a) In General.--Section 6062 (relating to signing of 
     corporation returns) is amended by inserting after the first 
     sentence the following new sentences: ``The return of a 
     corporation with respect to income shall also include a 
     declaration signed by the chief executive officer of such 
     corporation (or other such officer of the corporation as the 
     Secretary may designate if the corporation does not have a 
     chief executive officer), under penalties of perjury, that 
     the chief executive officer ensures that such return complies 
     with this title and that the chief executive officer was 
     provided reasonable assurance of the accuracy of all material 
     aspects of such return. The preceding sentence shall not 
     apply to any return of a regulated investment company (within 
     the meaning of section 851).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to returns filed after the date of the enactment 
     of this Act.

     SEC. 423. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, 
                   AND OTHER AMOUNTS.

       (a) In General.--Subsection (f) of section 162 (relating to 
     trade or business expenses) is amended to read as follows:
       ``(f) Fines, Penalties, and Other Amounts.--
       ``(1) In general.--Except as provided in paragraph (2), no 
     deduction otherwise allowable shall be allowed under this 
     chapter for any amount paid or incurred (whether by suit, 
     agreement, or otherwise) to, or at the direction of, a 
     government or entity described in paragraph (4) in relation 
     to the violation of any law or the investigation or inquiry 
     by such government or entity into the potential violation of 
     any law.
       ``(2) Exception for amounts constituting restitution.--
     Paragraph (1) shall not apply to any amount which the 
     taxpayer establishes constitutes restitution for damage or 
     harm caused by the violation of any law or the potential 
     violation of any law. This paragraph shall not apply to any 
     amount paid or incurred as reimbursement to the government or 
     entity for the costs of any investigation or litigation.
       ``(3) Exception for amounts paid or incurred as the result 
     of certain court orders.--Paragraph (1) shall not apply to 
     any amount paid or incurred by order of a court in a suit in 
     which no government or entity described in paragraph (4) is a 
     party.
       ``(4) Certain nongovernmental regulatory entities.--An 
     entity is described in this paragraph if it is--
       ``(A) a nongovernmental entity which exercises self-
     regulatory powers (including imposing sanctions) in 
     connection with a qualified board or exchange (as defined in 
     section 1256(g)(7)), or
       ``(B) to the extent provided in regulations, a 
     nongovernmental entity which exercises self-regulatory powers 
     (including imposing sanctions) as part of performing an 
     essential governmental function.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid or incurred after April 27, 2003, 
     except that such amendment shall not apply to amounts paid or 
     incurred under any binding order or agreement entered into on 
     or before April 27, 2003. Such exception shall not apply to 
     an order or agreement requiring court approval unless the 
     approval was obtained on or before April 27, 2003.

     SEC. 424. DISALLOWANCE OF DEDUCTION FOR PUNITIVE DAMAGES.

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

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

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

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

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

     SEC. 425. INCREASE IN CRIMINAL MONETARY PENALTY LIMITATION 
                   FOR THE UNDERPAYMENT OR OVERPAYMENT OF TAX DUE 
                   TO FRAUD.

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

            Subtitle C--Enron-Related Tax Shelter Provisions

     SEC. 431. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN 
                   LOSSES.

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

     In any case in which the transferor is a partnership, the 
     preceding sentence shall be applied by

[[Page 3155]]

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

     then, notwithstanding subsection (a), the transferee's 
     aggregate adjusted bases of the property so transferred shall 
     not exceed the fair market value of such property immediately 
     after such transaction.
       ``(B) Allocation of basis reduction.--The aggregate 
     reduction in basis by reason of subparagraph (A) shall be 
     allocated among the property so transferred in proportion to 
     their respective built-in losses immediately before the 
     transaction.
       ``(C) Exception for transfers within affiliated group.--
     Subparagraph (A) shall not apply to any transaction if the 
     transferor owns stock in the transferee meeting the 
     requirements of section 1504(a)(2). In the case of property 
     to which subparagraph (A) does not apply by reason of the 
     preceding sentence, the transferor's basis in the stock 
     received for such property shall not exceed its fair market 
     value immediately after the transfer.''.
       (b) Comparable Treatment Where Liquidation.--Paragraph (1) 
     of section 334(b) (relating to liquidation of subsidiary) is 
     amended to read as follows:
       ``(1) In general.--If property is received by a corporate 
     distributee in a distribution in a complete liquidation to 
     which section 332 applies (or in a transfer described in 
     section 337(b)(1)), the basis of such property in the hands 
     of such distributee shall be the same as it would be in the 
     hands of the transferor; except that the basis of such 
     property in the hands of such distributee shall be the fair 
     market value of the property at the time of the 
     distribution--
       ``(A) in any case in which gain or loss is recognized by 
     the liquidating corporation with respect to such property, or
       ``(B) in any case in which the liquidating corporation is a 
     foreign corporation, the corporate distributee is a domestic 
     corporation, and the corporate distributee's aggregate 
     adjusted bases of property described in section 362(e)(1)(B) 
     which is distributed in such liquidation would (but for this 
     subparagraph) exceed the fair market value of such property 
     immediately after such liquidation.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to transactions after February 13, 2003.

     SEC. 432. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK 
                   HELD BY PARTNERSHIP IN CORPORATE PARTNER.

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

     Gain shall be recognized to the partnership to the extent 
     that the amount required to be allocated under paragraph (2) 
     to other partnership property exceeds the aggregate adjusted 
     basis of such other property immediately before the 
     allocation required by paragraph (2).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions after February 13, 2003.

     SEC. 433. 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 paragraph 
     (3)(A).''.
       (9) Subparagraph (C) of section 1202(e)(4) is amended by 
     striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
       (10) Section 1272(a)(6)(B) is amended by adding at the end 
     the following new flush sentence:

     ``For purposes of clause (iii), the Secretary shall prescribe 
     regulations permitting the use of a current prepayment 
     assumption, determined as of the close of the accrual period 
     (or such other time as the Secretary may prescribe during the 
     taxable year in which the accrual period ends).''.
       (11) Subparagraph (C) of section 7701(a)(19) is amended by 
     adding ``and'' at the end of clause (ix), by striking ``, 
     and'' at the end of clause (x) and inserting a period, and by 
     striking clause (xi).
       (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 February 
     14, 2003.
       (2) Exception for existing fasits.--
       (A) In general.--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.
       (B) Transfer of additional assets not permitted.--Except as 
     provided in regulations prescribed by the Secretary of the 
     Treasury or the Secretary's delegate, subparagraph (A) shall 
     cease to apply as of the earliest date after the date of the 
     enactment of this Act that any property is transferred to the 
     FASIT.

     SEC. 434. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON 
                   CONVERTIBLE DEBT.

       (a) In General.--Paragraph (2) of section 163(l) is amended 
     by striking ``or a related party'' and inserting ``or equity 
     held by the issuer (or any related party) in any other 
     person''.
       (b) Capitalization Allowed With Respect to Equity of 
     Persons Other Than Issuer and Related Parties.--Section 
     163(l) is amended by redesignating paragraphs (4) and (5) as 
     paragraphs (5) and (6) and by inserting after paragraph (3) 
     the following new paragraph:
       ``(4) Capitalization allowed with respect to equity of 
     persons other than issuer and

[[Page 3156]]

     related parties.--If the disqualified debt instrument of a 
     corporation is payable in equity held by the issuer (or any 
     related party) in any other person (other than a related 
     party), the basis of such equity shall be increased by the 
     amount not allowed as a deduction by reason of paragraph (1) 
     with respect to the instrument.''.
       (c) Exception for Certain Instruments Issued by Dealers in 
     Securities.--Section 163(l), as amended by subsection (b), is 
     amended by redesignating paragraphs (5) and (6) as paragraphs 
     (6) and (7) and by inserting after paragraph (4) the 
     following new paragraph:
       ``(5) Exception for certain instruments issued by dealers 
     in securities.--For purposes of this subsection, the term 
     `disqualified debt instrument' does not include indebtedness 
     issued by a dealer in securities (or a related party) which 
     is payable in, or by reference to, equity (other than equity 
     of the issuer or a related party) held by such dealer in its 
     capacity as a dealer in securities. For purposes of this 
     paragraph, the term `dealer in securities' has the meaning 
     given such term by section 475.''.
       (c) Conforming Amendments.--Paragraph (3) of section 163(l) 
     is amended--
       (1) by striking ``or a related party'' in the material 
     preceding subparagraph (A) and inserting ``or any other 
     person'', and
       (2) by striking ``or interest'' each place it appears.
       (d) Effective Date.--The amendments made by this section 
     shall apply to debt instruments issued after February 13, 
     2003.

     SEC. 435. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER 
                   SECTION 269.

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

     then the Secretary may disallow such deduction, credit, or 
     other allowance. For purposes of paragraph (1)(A), control 
     means the ownership of stock possessing at least 50 percent 
     of the total combined voting power of all classes of stock 
     entitled to vote or at least 50 percent of the total value of 
     all shares of all classes of stock of the corporation.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to stock and property acquired after February 13, 
     2003.

     SEC. 436. MODIFICATION OF INTERACTION BETWEEN SUBPART F AND 
                   PASSIVE FOREIGN INVESTMENT COMPANY RULES.

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

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

           Subtitle D--Provisions to Discourage Expatriation

     SEC. 441. TAX TREATMENT OF INVERTED CORPORATE ENTITIES

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

     ``SEC. 7874. RULES RELATING TO INVERTED CORPORATE ENTITIES

       ``(a) Inverted Corporations Treated as Domestic 
     Corporations.--
       ``(1) In general.--If a foreign incorporated entity is 
     treated as an inverted domestic corporation, then, 
     notwithstanding section 7701(a)(4), such entity shall be 
     treated for purposes of this title as a domestic corporation.
       ``(2) Inverted domestic corporation.--For purposes of this 
     section, a foreign incorporated entity shall be treated as an 
     inverted domestic corporation if, pursuant to a plan (or a 
     series of related transactions)--
       ``(A) the entity completes after March 20, 2002, the direct 
     or indirect acquisition of substantially all of the 
     properties held directly or indirectly by a domestic 
     corporation or substantially all of the properties 
     constituting a trade or business of a domestic partnership,
       ``(B) after the acquisition at least 80 percent of the 
     stock (by vote or value) of the entity is held--
       ``(i) in the case of an acquisition with respect to a 
     domestic corporation, by former shareholders of the domestic 
     corporation by reason of holding stock in the domestic 
     corporation, or
       ``(ii) in the case of an acquisition with respect to a 
     domestic partnership, by former partners of the domestic 
     partnership by reason of holding a capital or profits 
     interest in the domestic partnership, and
       ``(C) the expanded affiliated group which after the 
     acquisition includes the entity does not have substantial 
     business activities in the foreign country in which or under 
     the law of which the entity is created or organized when 
     compared to the total business activities of such expanded 
     affiliated group.

     Except as provided in regulations, an acquisition of 
     properties of a domestic corporation shall not be treated as 
     described in subparagraph (A) if none of the corporation's 
     stock was readily tradeable on an established securities 
     market at any time during the 4-year period ending on the 
     date of the acquisition.
       ``(b) Preservation of Domestic Tax Base in Certain 
     Inversion Transactions to Which Subsection (a) Does Not 
     Apply.--
       ``(1) In general.--If a foreign incorporated entity would 
     be treated as an inverted domestic corporation with respect 
     to an acquired entity if either--
       ``(A) subsection (a)(2)(A) were applied by substituting 
     `after December 31, 1996, and on or before March 20, 2002' 
     for `after March 20, 2002' and subsection (a)(2)(B) were 
     applied by substituting `more than 50 percent' for `at least 
     80 percent', or
       ``(B) subsection (a)(2)(B) were applied by substituting 
     `more than 50 percent' for `at least 80 percent',

     then the rules of subsection (c) shall apply to any inversion 
     gain of the acquired entity during the applicable period and 
     the rules of subsection (d) shall apply to any related party 
     transaction of the acquired entity during the applicable 
     period. This subsection shall not apply for any taxable year 
     if subsection (a) applies to such foreign incorporated entity 
     for such taxable year.
       ``(2) Acquired entity.--For purposes of this section--
       ``(A) In general.--The term `acquired entity' means the 
     domestic corporation or partnership substantially all of the 
     properties of which are directly or indirectly acquired in an 
     acquisition described in subsection (a)(2)(A) to which this 
     subsection applies.
       ``(B) Aggregation rules.--Any domestic person bearing a 
     relationship described in section 267(b) or 707(b) to an 
     acquired entity shall be treated as an acquired entity with 
     respect to the acquisition described in subparagraph (A).
       ``(3) Applicable period.--For purposes of this section--
       ``(A) In general.--The term `applicable period' means the 
     period--
       ``(i) beginning on the first date properties are acquired 
     as part of the acquisition described in subsection (a)(2)(A) 
     to which this subsection applies, and
       ``(ii) ending on the date which is 10 years after the last 
     date properties are acquired as part of such acquisition.
       ``(B) Special rule for inversions occurring before march 
     21, 2002.--In the case of any acquired entity to which 
     paragraph (1)(A) applies, the applicable period shall be the 
     10-year period beginning on January 1, 2003.
       ``(c) Tax on Inversion Gains May Not Be Offset.--If 
     subsection (b) applies--
       ``(1) In general.--The taxable income of an acquired entity 
     (or any expanded affiliated group which includes such entity) 
     for any taxable year which includes any portion of the 
     applicable period shall in no event be less than the 
     inversion gain of the entity for the taxable year.
       ``(2) Credits not allowed against tax on inversion gain.--
     Credits shall be allowed against the tax imposed by this 
     chapter on an acquired entity for any taxable year described 
     in paragraph (1) only to the extent such tax exceeds the 
     product of--
       ``(A) the amount of the inversion gain for the taxable 
     year, and
       ``(B) the highest rate of tax specified in section 
     11(b)(1).

     For purposes of determining the credit allowed by section 901 
     inversion gain shall be treated as from sources within the 
     United States.
       ``(3) Special rules for partnerships.--In the case of an 
     acquired entity which is a partnership--
       ``(A) the limitations of this subsection shall apply at the 
     partner rather than the partnership level,
       ``(B) the inversion gain of any partner for any taxable 
     year shall be equal to the sum of--
       ``(i) the partner's distributive share of inversion gain of 
     the partnership for such taxable year, plus
       ``(ii) income or gain required to be recognized for the 
     taxable year by the partner under section 367(a), 741, or 
     1001, or under any other provision of chapter 1, by reason of 
     the transfer during the applicable period of any partnership 
     interest of the partner in such partnership to the foreign 
     incorporated entity, and
       ``(C) the highest rate of tax specified in the rate 
     schedule applicable to the partner under chapter 1 shall be 
     substituted for the rate of tax under paragraph (2)(B).
       ``(4) Inversion gain.--For purposes of this section, the 
     term `inversion gain' means any income or gain required to be 
     recognized under section 304, 311(b), 367, 1001, or 1248, or 
     under any other provision of chapter 1, by reason of the 
     transfer during the applicable period of stock or other 
     properties by an acquired entity--
       ``(A) as part of the acquisition described in subsection 
     (a)(2)(A) to which subsection (b) applies, or
       ``(B) after such acquisition to a foreign related person.

     The Secretary may provide that income or gain from the sale 
     of inventories or other transactions in the ordinary course 
     of a trade or business shall not be treated as inversion gain 
     under subparagraph (B) to the extent the Secretary determines 
     such treatment would not be inconsistent with the purposes of 
     this section.

[[Page 3157]]

       ``(5) Coordination with section 172 and minimum tax.--Rules 
     similar to the rules of paragraphs (3) and (4) of section 
     860E(a) shall apply for purposes of this section.
       ``(6) Statute of limitations.--
       ``(A) In general.--The statutory period for the assessment 
     of any deficiency attributable to the inversion gain of any 
     taxpayer for any pre-inversion year shall not expire before 
     the expiration of 3 years from the date the Secretary is 
     notified by the taxpayer (in such manner as the Secretary may 
     prescribe) of the acquisition described in subsection 
     (a)(2)(A) to which such gain relates and such deficiency may 
     be assessed before the expiration of such 3-year period 
     notwithstanding the provisions of any other law or rule of 
     law which would otherwise prevent such assessment.
       ``(B) Pre-inversion year.--For purposes of subparagraph 
     (A), the term `pre-inversion year' means any taxable year 
     if--
       ``(i) any portion of the applicable period is included in 
     such taxable year, and
       ``(ii) such year ends before the taxable year in which the 
     acquisition described in subsection (a)(2)(A) is completed.
       ``(d) Special Rules Applicable to Acquired Entities to 
     Which Subsection (b) Applies.--
       ``(1) Increases in accuracy-related penalties.--In the case 
     of any underpayment of tax of an acquired entity to which 
     subsection (b) applies--
       ``(A) section 6662(a) shall be applied with respect to such 
     underpayment by substituting `30 percent' for `20 percent', 
     and
       ``(B) if such underpayment is attributable to one or more 
     gross valuation understatements, the increase in the rate of 
     penalty under section 6662(h) shall be to 50 percent rather 
     than 40 percent.
       ``(2) Modifications of limitation on interest deduction.--
     In the case of an acquired entity to which subsection (b) 
     applies, section 163(j) shall be applied--
       ``(A) without regard to paragraph (2)(A)(ii) thereof, and
       ``(B) by substituting `25 percent' for `50 percent' each 
     place it appears in paragraph (2)(B) thereof.
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Rules for application of subsection (a)(2).--In 
     applying subsection (a)(2) for purposes of subsections (a) 
     and (b), the following rules shall apply:
       ``(A) Certain stock disregarded.--There shall not be taken 
     into account in determining ownership for purposes of 
     subsection (a)(2)(B)--
       ``(i) stock held by members of the expanded affiliated 
     group which includes the foreign incorporated entity, or
       ``(ii) stock of such entity which is sold in a public 
     offering or private placement related to the acquisition 
     described in subsection (a)(2)(A).
       ``(B) Plan deemed in certain cases.--If a foreign 
     incorporated entity acquires directly or indirectly 
     substantially all of the properties of a domestic corporation 
     or partnership during the 4-year period beginning on the date 
     which is 2 years before the ownership requirements of 
     subsection (a)(2)(B) are met with respect to such domestic 
     corporation or partnership, such actions shall be treated as 
     pursuant to a plan.
       ``(C) Certain transfers disregarded.--The transfer of 
     properties or liabilities (including by contribution or 
     distribution) shall be disregarded if such transfers are part 
     of a plan a principal purpose of which is to avoid the 
     purposes of this section.
       ``(D) Special rule for related partnerships.--For purposes 
     of applying subsection (a)(2) to the acquisition of a 
     domestic partnership, except as provided in regulations, all 
     partnerships which are under common control (within the 
     meaning of section 482) shall be treated as 1 partnership.
       ``(E) Treatment of certain rights.--The Secretary shall 
     prescribe such regulations as may be necessary--
       ``(i) to treat warrants, options, contracts to acquire 
     stock, convertible debt instruments, and other similar 
     interests as stock, and
       ``(ii) to treat stock as not stock.
       ``(2) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group as defined in 
     section 1504(a) but without regard to section 1504(b)(3), 
     except that section 1504(a) shall be applied by substituting 
     `more than 50 percent' for `at least 80 percent' each place 
     it appears.
       ``(3) Foreign incorporated entity.--The term `foreign 
     incorporated entity' means any entity which is, or but for 
     subsection (a)(1) would be, treated as a foreign corporation 
     for purposes of this title.
       ``(4) Foreign related person.--The term `foreign related 
     person' means, with respect to any acquired entity, a foreign 
     person which--
       ``(A) bears a relationship to such entity described in 
     section 267(b) or 707(b), or
       ``(B) is under the same common control (within the meaning 
     of section 482) as such entity.
       ``(5) Subsequent acquisitions by unrelated domestic 
     corporations.--
       ``(A) In general.--Subject to such conditions, limitations, 
     and exceptions as the Secretary may prescribe, if, after an 
     acquisition described in subsection (a)(2)(A) to which 
     subsection (b) applies, a domestic corporation stock of which 
     is traded on an established securities market acquires 
     directly or indirectly any properties of one or more acquired 
     entities in a transaction with respect to which the 
     requirements of subparagraph (B) are met, this section shall 
     cease to apply to any such acquired entity with respect to 
     which such requirements are met.
       ``(B) Requirements.--The requirements of the subparagraph 
     are met with respect to a transaction involving any 
     acquisition described in subparagraph (A) if--
       ``(i) before such transaction the domestic corporation did 
     not have a relationship described in section 267(b) or 
     707(b), and was not under common control (within the meaning 
     of section 482), with the acquired entity, or any member of 
     an expanded affiliated group including such entity, and
       ``(ii) after such transaction, such acquired entity--

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

       ``(f) Regulations.--The Secretary shall provide such 
     regulations as are necessary to carry out this section, 
     including regulations providing for such adjustments to the 
     application of this section as are necessary to prevent the 
     avoidance of the purposes of this section, including the 
     avoidance of such purposes through--
       ``(1) the use of related persons, pass-thru 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) Information Reporting.--The Secretary of the Treasury 
     shall exercise the Secretary's authority under the Internal 
     Revenue Code of 1986 to require entities involved in 
     transactions to which section 7874 of such Code (as added by 
     subsection (a)) applies to report to the Secretary, 
     shareholders, partners, and such other persons as the 
     Secretary may prescribe such information as is necessary to 
     ensure the proper tax treatment of such transactions.
       (c) Conforming Amendment.--The table of sections for 
     subchapter C of chapter 80 is amended by adding at the end 
     the following new item:

``Sec. 7874. Rules relating to inverted corporate entities.''.

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

     SEC. 442. IMPOSITION OF MARK-TO-MARKET TAX ON INDIVIDUALS WHO 
                   EXPATRIATE.

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

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

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

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

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

       ``(ii) Rounding rules.--If any amount after adjustment 
     under clause (i) is not a multiple of $1,000, such amount 
     shall be rounded to the next lower multiple of $1,000.
       ``(4) Election to continue to be taxed as united states 
     citizen.--
       ``(A) In general.--If a covered expatriate elects the 
     application of this paragraph--
       ``(i) this section (other than this paragraph and 
     subsection (i)) shall not apply to the expatriate, but

[[Page 3158]]

       ``(ii) in the case of property to which this section would 
     apply but for such election, the expatriate shall be subject 
     to tax under this title in the same manner as if the 
     individual were a United States citizen.
       ``(B) Requirements.--Subparagraph (A) shall not apply to an 
     individual unless the individual--
       ``(i) provides security for payment of tax in such form and 
     manner, and in such amount, as the Secretary may require,
       ``(ii) consents to the waiver of any right of the 
     individual under any treaty of the United States which would 
     preclude assessment or collection of any tax which may be 
     imposed by reason of this paragraph, and
       ``(iii) complies with such other requirements as the 
     Secretary may prescribe.
       ``(C) Election.--An election under subparagraph (A) shall 
     apply to all property to which this section would apply but 
     for the election and, once made, shall be irrevocable. Such 
     election shall also apply to property the basis of which is 
     determined in whole or in part by reference to the property 
     with respect to which the election was made.
       ``(b) Election To Defer Tax.--
       ``(1) In general.--If the taxpayer elects the application 
     of this subsection with respect to any property treated as 
     sold by reason of subsection (a), the payment of the 
     additional tax attributable to such property shall be 
     postponed until the due date of the return for the taxable 
     year in which such property is disposed of (or, in the case 
     of property disposed of in a transaction in which gain is not 
     recognized in whole or in part, until such other date as the 
     Secretary may prescribe).
       ``(2) Determination of tax with respect to property.--For 
     purposes of paragraph (1), the additional tax attributable to 
     any property is an amount which bears the same ratio to the 
     additional tax imposed by this chapter for the taxable year 
     solely by reason of subsection (a) as the gain taken into 
     account under subsection (a) with respect to such property 
     bears to the total gain taken into account under subsection 
     (a) with respect to all property to which subsection (a) 
     applies.
       ``(3) Termination of postponement.--No tax may be postponed 
     under this subsection later than the due date for the return 
     of tax imposed by this chapter for the taxable year which 
     includes the date of death of the expatriate (or, if earlier, 
     the time that the security provided with respect to the 
     property fails to meet the requirements of paragraph (4), 
     unless the taxpayer corrects such failure within the time 
     specified by the Secretary).
       ``(4) Security.--
       ``(A) In general.--No election may be made under paragraph 
     (1) with respect to any property unless adequate security is 
     provided to the Secretary with respect to such property.
       ``(B) Adequate security.--For purposes of subparagraph (A), 
     security with respect to any property shall be treated as 
     adequate security if--
       ``(i) it is a bond in an amount equal to the deferred tax 
     amount under paragraph (2) for the property, or
       ``(ii) the taxpayer otherwise establishes to the 
     satisfaction of the Secretary that the security is adequate.
       ``(5) Waiver of certain rights.--No election may be made 
     under paragraph (1) unless the taxpayer consents to the 
     waiver of any right under any treaty of the United States 
     which would preclude assessment or collection of any tax 
     imposed by reason of this section.
       ``(6) Elections.--An election under paragraph (1) shall 
     only apply to property described in the election and, once 
     made, is irrevocable. An election may be made under paragraph 
     (1) with respect to an interest in a trust with respect to 
     which gain is required to be recognized under subsection 
     (f)(1).
       ``(7) Interest.--For purposes of section 6601--
       ``(A) the last date for the payment of tax shall be 
     determined without regard to the election under this 
     subsection, and
       ``(B) section 6621(a)(2) shall be applied by substituting 
     `5 percentage points' for `3 percentage points' in 
     subparagraph (B) thereof.
       ``(c) Covered Expatriate.--For purposes of this section--
       ``(1) In general.--Except as provided in paragraph (2), the 
     term `covered expatriate' means an expatriate.
       ``(2) Exceptions.--An individual shall not be treated as a 
     covered expatriate if--
       ``(A) the individual--
       ``(i) became at birth a citizen of the United States and a 
     citizen of another country and, as of the expatriation date, 
     continues to be a citizen of, and is taxed as a resident of, 
     such other country, and
       ``(ii) has not been a resident of the United States (as 
     defined in section 7701(b)(1)(A)(ii)) during the 5 taxable 
     years ending with the taxable year during which the 
     expatriation date occurs, or
       ``(B)(i) the individual's relinquishment of United States 
     citizenship occurs before such individual attains age 18\1/
     2\, and
       ``(ii) the individual has been a resident of the United 
     States (as so defined) for not more than 5 taxable years 
     before the date of relinquishment.
       ``(d) Exempt Property; Special Rules for Pension Plans.--
       ``(1) Exempt property.--This section shall not apply to the 
     following:
       ``(A) United states real property interests.--Any United 
     States real property interest (as defined in section 
     897(c)(1)), other than stock of a United States real property 
     holding corporation which does not, on the day before the 
     expatriation date, meet the requirements of section 
     897(c)(2).
       ``(B) Specified property.--Any property or interest in 
     property not described in subparagraph (A) which the 
     Secretary specifies in regulations.
       ``(2) Special rules for certain retirement plans.--
       ``(A) In general.--If a covered expatriate holds on the day 
     before the expatriation date any interest in a retirement 
     plan to which this paragraph applies--
       ``(i) such interest shall not be treated as sold for 
     purposes of subsection (a)(1), but
       ``(ii) an amount equal to the present value of the 
     expatriate's nonforfeitable accrued benefit shall be treated 
     as having been received by such individual on such date as a 
     distribution under the plan.
       ``(B) Treatment of subsequent distributions.--In the case 
     of any distribution on or after the expatriation date to or 
     on behalf of the covered expatriate from a plan from which 
     the expatriate was treated as receiving a distribution under 
     subparagraph (A), the amount otherwise includible in gross 
     income by reason of the subsequent distribution shall be 
     reduced by the excess of the amount includible in gross 
     income under subparagraph (A) over any portion of such amount 
     to which this subparagraph previously applied.
       ``(C) Treatment of subsequent distributions by plan.--For 
     purposes of this title, a retirement plan to which this 
     paragraph applies, and any person acting on the plan's 
     behalf, shall treat any subsequent distribution described in 
     subparagraph (B) in the same manner as such distribution 
     would be treated without regard to this paragraph.
       ``(D) Applicable plans.--This paragraph shall apply to--
       ``(i) any qualified retirement plan (as defined in section 
     4974(c)),
       ``(ii) an eligible deferred compensation plan (as defined 
     in section 457(b)) of an eligible employer described in 
     section 457(e)(1)(A), and
       ``(iii) to the extent provided in regulations, any foreign 
     pension plan or similar retirement arrangements or programs.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Expatriate.--The term `expatriate' means--
       ``(A) any United States citizen who relinquishes 
     citizenship, and
       ``(B) any long-term resident of the United States who--
       ``(i) ceases to be a lawful permanent resident of the 
     United States (within the meaning of section 7701(b)(6)), or
       ``(ii) commences to be treated as a resident of a foreign 
     country under the provisions of a tax treaty between the 
     United States and the foreign country and who does not waive 
     the benefits of such treaty applicable to residents of the 
     foreign country.
       ``(2) Expatriation date.--The term `expatriation date' 
     means--
       ``(A) the date an individual relinquishes United States 
     citizenship, or
       ``(B) in the case of a long-term resident of the United 
     States, the date of the event described in clause (i) or (ii) 
     of paragraph (1)(B).
       ``(3) Relinquishment of citizenship.--A citizen shall be 
     treated as relinquishing United States citizenship on the 
     earliest of--
       ``(A) the date the individual renounces such individual's 
     United States nationality before a diplomatic or consular 
     officer of the United States pursuant to paragraph (5) of 
     section 349(a) of the Immigration and Nationality Act (8 
     U.S.C. 1481(a)(5)),
       ``(B) the date the individual furnishes to the United 
     States Department of State a signed statement of voluntary 
     relinquishment of United States nationality confirming the 
     performance of an act of expatriation specified in paragraph 
     (1), (2), (3), or (4) of section 349(a) of the Immigration 
     and Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
       ``(C) the date the United States Department of State issues 
     to the individual a certificate of loss of nationality, or
       ``(D) the date a court of the United States cancels a 
     naturalized citizen's certificate of naturalization.

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


[[Page 3159]]


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

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

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

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

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

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

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

       ``(g) Termination of Deferrals, etc.--In the case of any 
     covered expatriate, notwithstanding any other provision of 
     this title--
       ``(1) any period during which recognition of income or gain 
     is deferred shall terminate on the day before the 
     expatriation date, and
       ``(2) any extension of time for payment of tax shall cease 
     to apply on the day before the expatriation date and the 
     unpaid portion of such tax shall be due and payable at the 
     time and in the manner prescribed by the Secretary.
       ``(h) Imposition of Tentative Tax.--
       ``(1) In general.--If an individual is required to include 
     any amount in gross income under subsection (a) for any 
     taxable year, there is hereby imposed, immediately before the 
     expatriation date, a tax in an amount equal to the amount of 
     tax which would be imposed if the taxable year were a short 
     taxable year ending on the expatriation date.
       ``(2) Due date.--The due date for any tax imposed by 
     paragraph (1) shall be the 90th day after the expatriation 
     date.
       ``(3) Treatment of tax.--Any tax paid under paragraph (1) 
     shall be treated as a payment of the tax imposed by this 
     chapter for the taxable year to which subsection (a) applies.
       ``(4) Deferral of tax.--The provisions of subsection (b) 
     shall apply to the tax imposed by this subsection to the 
     extent attributable to gain includible in gross income by 
     reason of this section.
       ``(i) Special Liens for Deferred Tax Amounts.--
       ``(1) Imposition of lien.--
       ``(A) In general.--If a covered expatriate makes an 
     election under subsection (a)(4) or (b) which results in the 
     deferral of any tax imposed by reason of subsection (a), the 
     deferred amount (including any interest, additional amount, 
     addition to tax, assessable penalty, and costs attributable 
     to the deferred amount) shall be a lien in favor of the 
     United States on all property of the expatriate located in 
     the United States (without regard to whether this section 
     applies to the property).
       ``(B) Deferred amount.--For purposes of this subsection, 
     the deferred amount is the amount of the increase in the 
     covered expatriate's income tax which, but for the election 
     under subsection (a)(4) or (b), would have occurred by reason 
     of this section for the taxable year including the 
     expatriation date.
       ``(2) Period of lien.--The lien imposed by this subsection 
     shall arise on the expatriation date and continue until--
       ``(A) the liability for tax by reason of this section is 
     satisfied or has become unenforceable by reason of lapse of 
     time, or
       ``(B) it is established to the satisfaction of the 
     Secretary that no further tax liability may arise by reason 
     of this section.
       ``(3) Certain rules apply.--The rules set forth in 
     paragraphs (1), (3), and (4) of section 6324A(d) shall apply 
     with respect to the lien imposed by this subsection as if it 
     were a lien imposed by section 6324A.
       ``(j) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Inclusion in Income of Gifts and Bequests Received by 
     United States Citizens and Residents From Expatriates.--
     Section 102 (relating to gifts, etc. not included in gross 
     income) is amended by adding at the end the following new 
     subsection:
       ``(d) Gifts and Inheritances From Covered Expatriates.--
       ``(1) In general.--Subsection (a) shall not exclude from 
     gross income the value of any property acquired by gift, 
     bequest, devise, or inheritance from a covered expatriate 
     after the expatriation date. For purposes of this subsection, 
     any term used in this subsection which is also used in 
     section 877A shall have the same meaning as when used in 
     section 877A.
       ``(2) Exceptions for transfers otherwise subject to estate 
     or gift tax.--Paragraph (1) shall not apply to any property 
     if either--
       ``(A) the gift, bequest, devise, or inheritance is--

[[Page 3160]]

       ``(i) shown on a timely filed return of tax imposed by 
     chapter 12 as a taxable gift by the covered expatriate, or
       ``(ii) included in the gross estate of the covered 
     expatriate for purposes of chapter 11 and shown on a timely 
     filed return of tax imposed by chapter 11 of the estate of 
     the covered expatriate, or
       ``(B) no such return was timely filed but no such return 
     would have been required to be filed even if the covered 
     expatriate were a citizen or long-term resident of the United 
     States.''.
       (c) Definition of Termination of United States 
     Citizenship.--Section 7701(a) is amended by adding at the end 
     the following new paragraph:
       ``(48) Termination of united states citizenship.--
       ``(A) In general.--An individual shall not cease to be 
     treated as a United States citizen before the date on which 
     the individual's citizenship is treated as relinquished under 
     section 877A(e)(3).
       ``(B) Dual citizens.--Under regulations prescribed by the 
     Secretary, subparagraph (A) shall not apply to an individual 
     who became at birth a citizen of the United States and a 
     citizen of another country.''.
       (d) Ineligibility for Visa or Admission to United States.--
       (1) In general.--Section 212(a)(10)(E) of the Immigration 
     and Nationality Act (8 U.S.C. 1182(a)(10)(E)) is amended to 
     read as follows:
       ``(E) Former citizens not in compliance with expatriation 
     revenue provisions.--Any alien who is a former citizen of the 
     United States who relinquishes United States citizenship 
     (within the meaning of section 877A(e)(3) of the Internal 
     Revenue Code of 1986) and who is not in compliance with 
     section 877A of such Code (relating to expatriation).''.
       (2) Availability of information.--
       (A) In general.--Section 6103(l) (relating to disclosure of 
     returns and return information for purposes other than tax 
     administration) is amended by adding at the end the following 
     new paragraph:
       ``(19) Disclosure to deny visa or admission to certain 
     expatriates.--Upon written request of the Attorney General or 
     the Attorney General's delegate, the Secretary shall disclose 
     whether an individual is in compliance with section 877A (and 
     if not in compliance, any items of noncompliance) to officers 
     and employees of the Federal agency responsible for 
     administering section 212(a)(10)(E) of the Immigration and 
     Nationality Act solely for the purpose of, and to the extent 
     necessary in, administering such section 212(a)(10)(E).''.
       (B) Safeguards.--
       (i) Technical amendments.--Paragraph (4) of section 6103(p) 
     of the Internal Revenue Code of 1986, as amended by section 
     202(b)(2)(B) of the Trade Act of 2002 (Public Law 107-210; 
     116 Stat. 961), is amended by striking ``or (17)'' after 
     ``any other person described in subsection (l)(16)'' each 
     place it appears and inserting ``or (18)''.
       (ii) Conforming amendments.--Section 6103(p)(4) (relating 
     to safeguards), as amended by clause (i), is amended by 
     striking ``or (18)'' after ``any other person described in 
     subsection (l)(16)'' each place it appears and inserting 
     ``(18), or (19)''.
       (3) Effective dates.--
       (A) In general.--Except as provided in subparagraph (B), 
     the amendments made by this subsection shall apply to 
     individuals who relinquish United States citizenship on or 
     after the date of the enactment of this Act.
       (B) Technical amendments.--The amendments made by paragraph 
     (2)(B)(i) shall take effect as if included in the amendments 
     made by section 202(b)(2)(B) of the Trade Act of 2002 (Public 
     Law 107-210; 116 Stat. 961).
       (e) Conforming Amendments.--
       (1) Section 877 is amended by adding at the end the 
     following new subsection:
       ``(g) Application.--This section shall not apply to an 
     expatriate (as defined in section 877A(e)) whose expatriation 
     date (as so defined) occurs on or after February 5, 2003.''.
       (2) Section 2107 is amended by adding at the end the 
     following new subsection:
       ``(f) Application.--This section shall not apply to any 
     expatriate subject to section 877A.''.
       (3) Section 2501(a)(3) is amended by adding at the end the 
     following new subparagraph:
       ``(F) Application.--This paragraph shall not apply to any 
     expatriate subject to section 877A.''.
       (4)(A) Paragraph (1) of section 6039G(d) is amended by 
     inserting ``or 877A'' after ``section 877''.
       (B) The second sentence of section 6039G(e) is amended by 
     inserting ``or who relinquishes United States citizenship 
     (within the meaning of section 877A(e)(3))'' after 
     ``877(a))''.
       (C) Section 6039G(f) is amended by inserting ``or 
     877A(e)(2)(B)'' after ``877(e)(1)''.
       (f) Clerical Amendment.--The table of sections for subpart 
     A of part II of subchapter N of chapter 1 is amended by 
     inserting after the item relating to section 877 the 
     following new item:

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

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

     SEC. 443. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN 
                   INVERTED CORPORATIONS.

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

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

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

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

       ``(a) Imposition of Tax.--In the case of an individual who 
     is a disqualified individual with respect to any inverted 
     corporation, there is hereby imposed on such person a tax 
     equal to 20 percent of the value (determined under subsection 
     (b)) of the specified stock compensation held (directly or 
     indirectly) by or for the benefit of such individual or a 
     member of such individual's family (as defined in section 
     267) at any time during the 12-month period beginning on the 
     date which is 6 months before the inversion date.
       ``(b) Value.--For purposes of subsection (a)--
       ``(1) In general.--The value of specified stock 
     compensation shall be--
       ``(A) in the case of a stock option (or other similar 
     right) or any stock appreciation right, the fair value of 
     such option or right, and
       ``(B) in any other case, the fair market value of such 
     compensation.
       ``(2) Date for determining value.--The determination of 
     value shall be made--
       ``(A) in the case of specified stock compensation held on 
     the inversion date, on such date,
       ``(B) in the case of such compensation which is canceled 
     during the 6 months before the inversion date, on the day 
     before such cancellation, and
       ``(C) in the case of such compensation which is granted 
     after the inversion date, on the date such compensation is 
     granted.
       ``(c) Tax To Apply Only if Shareholder Gain Recognized.--
     Subsection (a) shall apply to any disqualified individual 
     with respect to an inverted corporation only if gain (if any) 
     on any stock in such corporation is recognized in whole or 
     part by any shareholder by reason of the acquisition referred 
     to in section 7874(a)(2)(A) (determined by substituting `July 
     10, 2002' for `March 20, 2002') with respect to such 
     corporation.
       ``(d) Exception Where Gain Recognized on Compensation.--
     Subsection (a) shall not apply to--
       ``(1) any stock option which is exercised on the inversion 
     date or during the 6-month period before such date and to the 
     stock acquired in such exercise, if income is recognized 
     under section 83 on or before the inversion date with respect 
     to the stock acquired pursuant to such exercise, and
       ``(2) any specified stock compensation which is exercised, 
     sold, exchanged, distributed, cashed out, or otherwise paid 
     during such period in a transaction in which gain or loss is 
     recognized in full.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Disqualified individual.--The term `disqualified 
     individual' means, with respect to a corporation, any 
     individual who, at any time during the 12-month period 
     beginning on the date which is 6 months before the inversion 
     date--
       ``(A) is subject to the requirements of section 16(a) of 
     the Securities Exchange Act of 1934 with respect to such 
     corporation, or
       ``(B) would be subject to such requirements if such 
     corporation were an issuer of equity securities referred to 
     in such section.
       ``(2) Inverted corporation; inversion date.--
       ``(A) Inverted corporation.--The term `inverted 
     corporation' means any corporation to which subsection (a) or 
     (b) of section 7874 applies determined--
       ``(i) by substituting `July 10, 2002' for `March 20, 2002' 
     in section 7874(a)(2)(A), and
       ``(ii) without regard to subsection (b)(1)(A).

     Such term includes any predecessor or successor of such a 
     corporation.
       ``(B) Inversion date.--The term `inversion date' means, 
     with respect to a corporation, the date on which the 
     corporation first becomes an inverted corporation.
       ``(3) Specified stock compensation.--
       ``(A) In general.--The term `specified stock compensation' 
     means payment (or right to payment) granted by the inverted 
     corporation (or by any member of the expanded affiliated 
     group which includes such corporation) to any person in 
     connection with the performance of services by a disqualified 
     individual for such corporation or member if the value of 
     such payment or right is based on (or determined by reference 
     to) the value (or change in value) of stock in such 
     corporation (or any such member).
       ``(B) Exceptions.--Such term shall not include--
       ``(i) any option to which part II of subchapter D of 
     chapter 1 applies, or
       ``(ii) any payment or right to payment from a plan referred 
     to in section 280G(b)(6).
       ``(4) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated

[[Page 3161]]

     group (as defined in section 1504(a) without regard to 
     section 1504(b)(3)); except that section 1504(a) shall be 
     applied by substituting `more than 50 percent' for `at least 
     80 percent' each place it appears.
       ``(f) Special Rules.--For purposes of this section--
       ``(1) Cancellation of restriction.--The cancellation of a 
     restriction which by its terms will never lapse shall be 
     treated as a grant.
       ``(2) Payment or reimbursement of tax by corporation 
     treated as specified stock compensation.--Any payment of the 
     tax imposed by this section directly or indirectly by the 
     inverted corporation or by any member of the expanded 
     affiliated group which includes such corporation--
       ``(A) shall be treated as specified stock compensation, and
       ``(B) shall not be allowed as a deduction under any 
     provision of chapter 1.
       ``(3) Certain restrictions ignored.--Whether there is 
     specified stock compensation, and the value thereof, shall be 
     determined without regard to any restriction other than a 
     restriction which by its terms will never lapse.
       ``(4) Property transfers.--Any transfer of property shall 
     be treated as a payment and any right to a transfer of 
     property shall be treated as a right to a payment.
       ``(5) Other administrative provisions.--For purposes of 
     subtitle F, any tax imposed by this section shall be treated 
     as a tax imposed by subtitle A.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Denial of Deduction.--
       (1) In general.--Paragraph (6) of section 275(a) is amended 
     by inserting ``48,'' after ``46,''.
       (2) $1,000,000 limit on deductible compensation reduced by 
     payment of excise tax on specified stock compensation.--
     Paragraph (4) of section 162(m) is amended by adding at the 
     end the following new subparagraph:
       ``(G) Coordination with excise tax on specified stock 
     compensation.--The dollar limitation contained in paragraph 
     (1) with respect to any covered employee shall be reduced 
     (but not below zero) by the amount of any payment (with 
     respect to such employee) of the tax imposed by section 5000A 
     directly or indirectly by the inverted corporation (as 
     defined in such section) or by any member of the expanded 
     affiliated group (as defined in such section) which includes 
     such corporation.''.
       (c) Conforming Amendments.--
       (1) The last sentence of section 3121(v)(2)(A) is amended 
     by inserting before the period ``or to any specified stock 
     compensation (as defined in section 5000A) on which tax is 
     imposed by section 5000A''.
       (2) The table of chapters for subtitle D is amended by 
     adding at the end the following new item:

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

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

     SEC. 444. REINSURANCE OF UNITED STATES RISKS IN FOREIGN 
                   JURISDICTIONS.

       (a) In General.--Section 845(a) (relating to allocation in 
     case of reinsurance agreement involving tax avoidance or 
     evasion) is amended by striking ``source and character'' and 
     inserting ``amount, source, or character''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to any risk reinsured after April 11, 2002.

     SEC. 445. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

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

     ``SEC. 6043A. TAXABLE MERGERS AND ACQUISITIONS.

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

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

     The written statement required under the preceding sentence 
     shall be furnished to the shareholder on or before January 31 
     of the year following the calendar year during which the 
     taxable acquisition occurred.''.
       (b) Assessable Penalties.--
       (1) Subparagraph (B) of section 6724(d)(1) (relating to 
     definitions) is amended by redesignating clauses (ii) through 
     (xvii) as clauses (iii) through (xviii), respectively, and by 
     inserting after clause (i) the following new clause:
       ``(ii) section 6043A(a) (relating to returns relating to 
     taxable mergers and acquisitions),''.
       (2) Paragraph (2) of section 6724(d) is amended by 
     redesignating subparagraphs (F) through (AA) as subparagraphs 
     (G) through (BB), respectively, and by inserting after 
     subparagraph (E) the following new subparagraph:
       ``(F) subsections (b) and (d) of section 6043A (relating to 
     returns relating to taxable mergers and acquisitions).''.
       (c) Clerical Amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61 is amended by 
     inserting after the item relating to section 6043 the 
     following new item:

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

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

                     Subtitle E--International Tax

     SEC. 451. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF 
                   DETERMINING INVESTMENT OF EARNINGS IN UNITED 
                   STATES PROPERTY.

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

     SEC. 452. PROHIBITION ON NONRECOGNITION OF GAIN THROUGH 
                   COMPLETE LIQUIDATION OF HOLDING COMPANY.

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

     SEC. 453. 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

[[Page 3162]]

     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 is 
     included 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 amount payable to a foreign personal holding 
     company (as defined in section 552), a controlled foreign 
     corporation (as defined in section 957), or a passive foreign 
     investment company (as defined in section 1297), a deduction 
     shall be allowable to the payor with respect to such amount 
     for any taxable year before the taxable year in which paid 
     only to the extent such amount is included 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. 454. EFFECTIVELY CONNECTED INCOME TO INCLUDE CERTAIN 
                   FOREIGN SOURCE INCOME.

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

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

     SEC. 455. RECAPTURE OF OVERALL FOREIGN LOSSES ON SALE OF 
                   CONTROLLED FOREIGN CORPORATION.

       (a) In General.--Section 904(f)(3) (relating to 
     dispositions) is amending by adding at the end the following 
     new subparagraph:
       ``(D) Application to dispositions of stock in controlled 
     foreign corporations.--In the case of any disposition by a 
     taxpayer of any share of stock in a controlled foreign 
     corporation (as defined in section 957), this paragraph shall 
     apply to such disposition in the same manner as if it were a 
     disposition of property described in subparagraph (A), except 
     that the exception contained in subparagraph (C)(i) shall not 
     apply.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to dispositions after the date of the enactment 
     of this Act.

     SEC. 456. 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.

                  Subtitle F--Other Revenue Provisions

                     PART I--FINANCIAL INSTRUMENTS

     SEC. 461. 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. 462. APPLICATION OF EARNINGS STRIPPING RULES TO 
                   PARTNERSHIPS AND S CORPORATIONS.

       (a) In General.--Section 168(j) (relating to limitation on 
     deduction for interest on certain indebtedness) is amended by 
     redesignating paragraph (8) as paragraph (9) and by inserting 
     after paragraph (7) the following new paragraph:
       ``(8) Application to partnerships and s corporations.--
       ``(A) In general.--This subsection shall apply to 
     partnerships and S corporations in the same manner as it 
     applies to C corporations.
       ``(B) Allocations to certain corporate partners.--If a C 
     corporation is a partner in a partnership--
       ``(i) the corporation's allocable share of indebtedness and 
     interest income of the partnership shall be taken into 
     account in applying this subsection to the corporation, and
       ``(ii) if a deduction is not disallowed under this 
     subsection with respect to any interest expense of the 
     partnership, this subsection shall be applied separately in 
     determining whether a deduction is allowable to the 
     corporation with respect to the corporation's allocable share 
     of such interest expense.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 463. RECOGNITION OF CANCELLATION OF INDEBTEDNESS INCOME 
                   REALIZED ON SATISFACTION OF DEBT WITH 
                   PARTNERSHIP INTEREST.

       (a) In General.--Paragraph (8) of section 108(e) (relating 
     to general rules for discharge of indebtedness (including 
     discharges not in title 11 cases or insolvency)) is amended 
     to read as follows:

[[Page 3163]]

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

     SEC. 464. 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.--Section 1092(d)(3) is repealed.
       (2) Conforming amendment.--Section 1258(d)(1) is amended by 
     striking ``; except that the term `personal property' shall 
     include stock''.
       (d) Repeal of Qualified Covered Call Exception.--Section 
     1092(c)(4) is amended by adding at the end the following new 
     subparagraph:
       ``(I) Termination.--This paragraph shall not apply to any 
     position established on or after the date of the enactment of 
     this subparagraph.''.
       (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. 465. DENIAL OF INSTALLMENT SALE TREATMENT FOR ALL 
                   READILY TRADEABLE DEBT.

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

                 PART II--CORPORATIONS AND PARTNERSHIPS

     SEC. 466. MODIFICATION OF TREATMENT OF TRANSFERS TO CREDITORS 
                   IN DIVISIVE REORGANIZATIONS.

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

     SEC. 467. CLARIFICATION OF DEFINITION OF NONQUALIFIED 
                   PREFERRED STOCK.

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

     SEC. 468. MODIFICATION OF DEFINITION OF CONTROLLED GROUP OF 
                   CORPORATIONS.

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

     SEC. 469. MANDATORY BASIS ADJUSTMENTS IN CONNECTION WITH 
                   PARTNERSHIP DISTRIBUTIONS AND TRANSFERS OF 
                   PARTNERSHIP INTERESTS.

       (a) In General.--Section 754 is repealed.
       (b) Adjustment to Basis of Undistributed Partnership 
     Property.--Section 734 is amended--
       (1) by striking ``, with respect to which the election 
     provided in section 754 is in effect,'' in the matter 
     preceding paragraph (1) of subsection (b),
       (2) by striking ``(as adjusted by section 732(d))'' both 
     places it appears in subsection (b),
       (3) by striking the last sentence of subsection (b),
       (4) by striking subsection (a) and by redesignating 
     subsections (b) and (c) as subsections (a) and (b), 
     respectively, and
       (5) by striking ``optional'' in the heading.
       (c) Adjustment to Basis of Partnership Property.--Section 
     743 is amended--
       (1) by striking ``with respect to which the election 
     provided in section 754 is in effect'' in the matter 
     preceding paragraph (1) of subsection (b),
       (2) by striking subsection (a) and by redesignating 
     subsections (b) and (c) as subsections (a) and (b), 
     respectively,
       (3) by adding at the end the following new subsection:
       ``(c) Election To Adjust Basis for Transfers Upon Death of 
     Partner.--Subsection (a) shall not apply and no adjustments 
     shall be made in the case of any transfer of an interest in a 
     partnership upon the death of a partner unless an election to 
     do so is made by the partnership. Such an election shall 
     apply with respect to all such transfers of interests in the

[[Page 3164]]

     partnership. Any election under section 754 in effect on the 
     date of the enactment of this subsection shall constitute an 
     election made under this subsection. Such election may be 
     revoked by the partnership, subject to such limitations as 
     may be provided by regulations prescribed by the 
     Secretary.'', and
       (4) by striking ``optional'' in the heading.
       (d) Conforming Amendments.--
       (1) Subsection (d) of section 732 is repealed.
       (2) Section 755(a) is amended--
       (A) by striking ``section 734(b) (relating to the optional 
     adjustment'' and inserting ``section 734(a) (relating to the 
     adjustment'', and
       (B) by striking ``section 743(b) (relating to the optional 
     adjustment'' and inserting ``section 743(a) (relating to the 
     adjustment''.
       (3) Section 761(e)(2) is amended by striking ``optional''.
       (4) Section 774(a) is amended by striking ``743(b)'' both 
     places it appears and inserting ``743(a)''.
       (5) The item relating to section 734 in the table of 
     sections for subpart B of part II of subchapter K of chapter 
     1 is amended by striking ``Optional''.
       (6) The item relating to section 743 in the table of 
     sections for subpart C of part II of subchapter K of chapter 
     1 is amended by striking ``Optional''.
       (e) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to transfers and 
     distributions made after the date of the enactment of this 
     Act.
       (2) Repeal of section 732(d).--The amendments made by 
     subsections (b)(2) and (d)(1) shall apply to--
       (A) except as provided in subparagraph (B), transfers made 
     after the date of the enactment of this Act, and
       (B) in the case of any transfer made on or before such date 
     to which section 732(d) applies, distributions made after the 
     date which is 2 years after such date of enactment.

                PART III--DEPRECIATION AND AMORTIZATION

     SEC. 471. 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. 472. SERVICE CONTRACTS TREATED IN SAME MANNER AS LEASES 
                   FOR RULES RELATING TO TAX-EXEMPT USE PROPERTY.

       (a) In General.--Section 168(h)(7) (defining lease) is 
     amended by adding at the end the following: ``Such term shall 
     also include any service contract or other similar 
     arrangement.''.
       (b) Lease Term.--Section 168(i)(3) (relating to lease term) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Special rule for service contracts.--In the case of 
     any service contract or other similar arrangement treated as 
     a lease under subsection (h)(7), the lease term shall be 
     determined in the same manner as a lease.''.
       (c) Conforming Amendments.--Section 168(g)(3)(A) is 
     amended--
       (1) by inserting ``(as defined in subsection (h)(7)'' after 
     ``lease'' the first place it appears, and
       (2) by inserting ``(as determined under subsection 
     (i)(3))'' after ``term''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to leases and service contracts or other similar 
     arrangements entered into after the date of the enactment of 
     this Act.

     SEC. 473. CLASS LIVES FOR UTILITY GRADING COSTS.

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

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

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

     SEC. 474. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN 
                   PASSENGER AUTOMOBILES.

       (a) In General.--Section 179(b) (relating to limitations) 
     is amended by adding at the end the following new paragraph:
       ``(6) Limitation on cost taken into account for certain 
     passenger vehicles.--
       ``(A) In general.--The cost of any sport utility vehicle 
     for any taxable year which may be taken into account under 
     this section shall not exceed $25,000.
       ``(B) Sport utility vehicle.--For purposes of subparagraph 
     (A)--
       ``(i) In general.--The term `sport utility vehicle' means 
     any 4-wheeled vehicle which--

       ``(I) is manufactured primarily for use on public streets, 
     roads, and highways,

       ``(II) is not subject to section 280F, and
       ``(III) is rated at not more than 14,000 pounds gross 
     vehicle weight.

       ``(ii) Certain vehicles excluded.--Such term does not 
     include any vehicle which--

       ``(I) does not have the primary load carrying device or 
     container attached,
       ``(II) has a seating capacity of more than 12 individuals,
       ``(III) is designed for more than 9 individuals in seating 
     rearward of the driver's seat,
       ``(IV) is equipped with an open cargo area, or a covered 
     box not readily accessible from the passenger compartment, of 
     at least 72.0 inches in interior length, or
       ``(V) has an integral enclosure, fully enclosing the driver 
     compartment and load carrying device, does not have seating 
     rearward of the driver's seat, and has no body section 
     protruding more than 30 inches ahead of the leading edge of 
     the windshield.''.

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

     SEC. 475. CONSISTENT AMORTIZATION OF PERIODS FOR INTANGIBLES.

       (a) Start-Up Expenditures.--
       (1) Allowance of deduction.--Paragraph (1) of section 
     195(b) (relating to start-up expenditures) is amended to read 
     as follows:
       ``(1) Allowance of deduction.--If a taxpayer elects the 
     application of this subsection with respect to any start-up 
     expenditures--
       ``(A) the taxpayer shall be allowed a deduction for the 
     taxable year in which the active trade or business begins in 
     an amount equal to the lesser of--
       ``(i) the amount of start-up expenditures with respect to 
     the active trade or business, or
       ``(ii) $5,000, reduced (but not below zero) by the amount 
     by which such start-up expenditures exceed $50,000, and
       ``(B) the remainder of such start-up expenditures shall be 
     allowed as a deduction ratably over the 180-month period 
     beginning with the month in which the active trade or 
     business begins.''.
       (2) Conforming amendment.--Subsection (b) of section 195 is 
     amended by striking ``Amortize'' and inserting ``Deduct'' in 
     the heading.
       (b) Organizational Expenditures.--Subsection (a) of section 
     248 (relating to organizational expenditures) is amended to 
     read as follows:
       ``(a) Election to Deduct.--If a corporation elects the 
     application of this subsection (in accordance with 
     regulations prescribed by the Secretary) with respect to any 
     organizational expenditures--
       ``(1) the corporation shall be allowed a deduction for the 
     taxable year in which the corporation begins business in an 
     amount equal to the lesser of--
       ``(A) the amount of organizational expenditures with 
     respect to the taxpayer, or
       ``(B) $5,000, reduced (but not below zero) by the amount by 
     which such organizational expenditures exceed $50,000, and
       ``(2) the remainder of such organizational expenditures 
     shall be allowed as a deduction ratably over the 180-month 
     period beginning with the month in which the corporation 
     begins business.''.
       (c) Treatment of Organizational and Syndication Fees or 
     Partnerships.--
       (1) In general.--Section 709(b) (relating to amortization 
     of organization fees) is amended by redesignating paragraph 
     (2) as paragraph (3) and by amending paragraph (1) to read as 
     follows:
       ``(1) Allowance of deduction.--If a taxpayer elects the 
     application of this subsection (in accordance with 
     regulations prescribed by the Secretary) with respect to any 
     organizational expenses--
       ``(A) the taxpayer shall be allowed a deduction for the 
     taxable year in which the partnership begins business in an 
     amount equal to the lesser of--
       ``(i) the amount of organizational expenses with respect to 
     the partnership, or
       ``(ii) $5,000, reduced (but not below zero) by the amount 
     by which such organizational expenses exceed $50,000, and
       ``(B) the remainder of such organizational expenses shall 
     be allowed as a deduction ratably over the 180-month period 
     beginning with the month in which the partnership begins 
     business.
       ``(2) Dispositions before close of amortization period.--In 
     any case in which a partnership is liquidated before the end 
     of the period

[[Page 3165]]

     to which paragraph (1)(B) applies, any deferred expenses 
     attributable to the partnership which were not allowed as a 
     deduction by reason of this section may be deducted to the 
     extent allowable under section 165.''.
       (2) Conforming amendment.--Subsection (b) of section 709 is 
     amended by striking ``Amortization'' and inserting 
     ``Deduction'' in the heading.
       (d) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act.

     SEC. 476. 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. DEDUCTIONS ALLOCABLE TO PROPERTY USED BY 
                   GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

       ``(a) General Rule.--The aggregate amount of deductions 
     otherwise allowable to the taxpayer with respect to tax-
     exempt use property for any taxable year shall not exceed the 
     aggregate amount of income includible in gross income of the 
     taxpayer for the taxable year with respect to such property.
       ``(b) Disallowed Deduction Carried to Next Year.--Except as 
     otherwise provided in this section, any deduction with 
     respect to any tax-exempt use property which is disallowed 
     under subsection (a) shall, subject to the limitation under 
     subsection (a), be treated as a deduction with respect to 
     such property in the next taxable year.
       ``(c) Tax-Exempt Use Property.--For purposes of this 
     section--
       ``(1) In general.--The term `tax-exempt use property' has 
     the meaning given such term by section 168(h), except that 
     such section shall be applied without regard to paragraphs 
     (2)(C)(ii) and (3).
       ``(2) Special rules for service contracts and similar 
     arrangements.--If tangible property is subject to a service 
     contract or other similar arrangement between a taxpayer (or 
     any related person) and any tax-exempt entity, such contract 
     or arrangement shall be treated in the same manner as if it 
     were a lease for purposes of determining whether such 
     property is tax-exempt use property under paragraph (1).
       ``(d) Special Rules.--
       ``(1) Allocable deductions.--Subsection (a) shall apply 
     to--
       ``(A) any deduction directly allocable to any tax-exempt 
     use property, and
       ``(B) a proper share of other deductions that are not 
     directly allocable to such property.
       ``(2) Property ceasing to be tax-exempt use property.--If 
     property of a taxpayer ceases to be tax-exempt use property 
     in the hands of the taxpayer--
       ``(A) any unused deduction allocable to such property under 
     subsection (b) shall only be allowable as a deduction for any 
     taxable year to the extent of any net income of the taxpayer 
     allocable to such property, and
       ``(B) any portion of such unused deduction remaining after 
     application of subparagraph (A) shall, subject to the 
     limitation of subparagraph (A), be treated as a deduction 
     allocable to such property in the next taxable year.
       ``(3) 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, rules similar to 
     the rules of section 469(g) shall apply for purposes of this 
     section.
       ``(e) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the provisions 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. Deductions allocable to property used by governments or 
              other tax-exempt entities.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to leases and service contracts or similar 
     arrangements entered into after the date of the enactment of 
     this Act.

                   PART IV--ADMINISTRATIVE PROVISIONS

     SEC. 481. 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. 482. 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, 2013''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to requests after the date of the enactment of 
     this Act.

     SEC. 483. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST 
                   ON UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE 
                   FINANCIAL ARRANGEMENT.

       (a) General Rule.--If--
       (1) a taxpayer eligible to participate in--
       (A) the Department of the Treasury's Offshore Voluntary 
     Compliance Initiative, or
       (B) the Department of the Treasury's voluntary disclosure 
     initiative which applies to the taxpayer by reason of the 
     taxpayer's underreporting of United States income tax 
     liability through financial arrangements which rely on the 
     use of offshore arrangements which were the subject of the 
     initiative described in subparagraph (A), and
       (2) any interest or applicable penalty is imposed with 
     respect to any arrangement to which any initiative described 
     in paragraph (1) applied or to any underpayment of Federal 
     income tax attributable to items arising in connection with 
     any arrangement described in paragraph (1),
     then, notwithstanding any other provision of law, the amount 
     of such interest or penalty shall be equal to twice that 
     determined without regard to this section.
       (b) Definitions and Rules.--For purposes of this section--
       (1) Applicable penalty.--The term ``applicable penalty'' 
     means any penalty, addition to tax, or fine imposed under 
     chapter 68 of the Internal Revenue Code of 1986.
       (2) Voluntary offshore compliance initiative.--The term 
     ``Voluntary Offshore Compliance Initiative'' means the 
     program established by the Department of the Treasury in 
     January of 2003 under which any taxpayer was eligible to 
     voluntarily disclose previously undisclosed income on assets 
     placed in offshore accounts and accessed through credit card 
     and other financial arrangements.
       (3) Participation.--A taxpayer shall be treated as having 
     participated in the Voluntary Offshore Compliance Initiative 
     if the taxpayer submitted the request in a timely manner and 
     all information requested by the Secretary of the Treasury or 
     his delegate within a reasonable period of time following the 
     request.
       (c) Effective Date.--The provisions of this section shall 
     apply to interest, penalties, additions to tax, and fines 
     with respect to any taxable year if as of the date of the 
     enactment of this Act, the assessment of any tax, penalty, or 
     interest with respect to such taxable year is not prevented 
     by the operation of any law or rule of law.

     SEC. 484. 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, as amended by this Act, is amended 
     by redesignating subsections (d), (e), and (f) as subsections 
     (e), (f), and (g), 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. 485. EXTENSION OF CUSTOMS USER FEES.

       Section 13031(j)(3) of the Consolidated Omnibus Budget 
     Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended 
     by striking ``March 31, 2004'' and inserting ``September 30, 
     2013''.

     SEC. 486. 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

[[Page 3166]]

     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. 487. 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 3 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.

                    PART V--MISCELLANEOUS PROVISIONS

     SEC. 491. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF 
                   TAXABLE VACCINES.

       (a) In General.--Section 4132(a)(1) (defining taxable 
     vaccine) is amended by redesignating subparagraphs (I), (J), 
     (K), and (L) as subparagraphs (J), (K), (L), and (M), 
     respectively, and by inserting after subparagraph (H) the 
     following new subparagraph:
       ``(I) Any vaccine against hepatitis A.''.
       (b) Conforming Amendment.--Section 9510(c)(1)(A) is amended 
     by striking ``October 18, 2000'' and inserting ``May 8, 
     2003''.
       (c) Effective Date.--
       (1) Sales, etc.--The amendments made by this section shall 
     apply to sales and uses on or after the first day of the 
     first month which begins more than 4 weeks after the date of 
     the enactment of this Act.
       (2) Deliveries.--For purposes of paragraph (1) and section 
     4131 of the Internal Revenue Code of 1986, in the case of 
     sales on or before the effective date described in such 
     paragraph for which delivery is made after such date, the 
     delivery date shall be considered the sale date.

     SEC. 492. 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

[[Page 3167]]

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

       (a) In General.--Section 501(c)(15)(A) is amended to read 
     as follows:
       ``(A) Insurance companies (as defined in section 816(a)) 
     other than life (including interinsurers and reciprocal 
     underwriters) if--
       ``(i) the gross receipts for the taxable year do not exceed 
     $600,000, and
       ``(ii) more than 50 percent of such gross receipts consist 
     of premiums.''.
       (b) Controlled Group Rule.--Section 501(c)(15)(C) is 
     amended by inserting ``, except that in applying section 1563 
     for purposes of section 831(b)(2)(B)(ii), subparagraphs (B) 
     and (C) of section 1563(b)(2) shall be disregarded'' before 
     the period at the end.
       (c) Conforming Amendment.--Clause (i) of section 
     831(b)(2)(A) is amended by striking ``exceed $350,000 but''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 494. DEFINITION OF INSURANCE COMPANY FOR SECTION 831.

       (a) In General.--Section 831 is amended by redesignating 
     subsection (c) as subsection (d) and by inserting after 
     subsection (b) the following new subsection:
       ``(c) Insurance Company Defined.--For purposes of this 
     section, the term `insurance company' has the meaning given 
     to such term by section 816(a)).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 495. LIMITATIONS ON DEDUCTION FOR CHARITABLE 
                   CONTRIBUTIONS OF PATENTS AND SIMILAR PROPERTY.

       (a) Deduction Allowed Only to the Extent of Basis.--Section 
     170(e)(1)(B) (relating to certain contributions of ordinary 
     income and capital gain property) is amended by striking 
     ``or'' at the end of clause (i), by adding ``or'' at the end 
     of clause (ii), and by inserting after clause (ii) the 
     following new clause:
       ``(iii) of any patent, copyright, trademark, trade name, 
     trade secret, know-how, software, or similar property, or 
     applications or registrations of such property,''.
       (b) Treatment of Contributions Where Donor Receives 
     Interest.--Section 170(e) is amended by adding at the end the 
     following new paragraph:
       ``(7) Special rules for contributions of patents and 
     similar property where donor receives interest.--
       ``(A) Disallowance of deduction.--No deduction shall be 
     allowed under this section with respect to a contribution of 
     property described in paragraph (1)(B)(iii) if the taxpayer 
     after the contribution has any interest in the property other 
     than a qualified interest.
       ``(B) Contributions with qualified interest.--If a taxpayer 
     after a contribution of property described in paragraph 
     (1)(B)(iii) has a qualified interest in the property--
       ``(i) any payment pursuant to the qualified interest shall 
     be treated as ordinary income and shall be includible in 
     gross income of the taxpayer for the taxable year in which 
     the payment is received by the taxpayer, and
       ``(ii) subsection (f)(3) and section 1011(b) shall not 
     apply to the transfer of the property from the taxpayer to 
     the donee.
       ``(C) Qualified interest.--For purposes of this paragraph--
       ``(i) In general.--The term `qualified interest' means, 
     with respect to any taxpayer, a right to receive from the 
     donee a percentage (not greater than 50 percent) of any 
     royalty payment received by the donee with respect to 
     property described in paragraph (1)(B)(iii) (other than 
     copyrights which are described in section 1221(a)(3) or 
     1231(b)(1)(C)) contributed by the taxpayer to the donee.
       ``(ii) Secretarial authority.--

       ``(I) In general.--Except as provided in subclause (II), 
     the Secretary may by regulation or other administrative 
     guidance treat as a qualified interest the right to receive 
     other payments from the donee, but only if the donee does not 
     possess a right to receive any payment (whether royalties or 
     otherwise) from a third party with respect to the contributed 
     property.
       ``(II) Exceptions.--The Secretary may not treat as a 
     qualified interest the right to receive any payment which 
     provides a benefit to the donor which is greater than the 
     benefit retained by the donee or the right to receive any 
     portion of the proceeds from the sale of the property 
     contributed.

       ``(iii) Limitation.--An interest shall be treated as a 
     qualified interest under this subparagraph only if the 
     taxpayer has no right to receive any payment described in 
     clause (i) or (ii)(I) after the earlier of the date on which 
     the legal life of the contributed property expires or the 
     date which is 20 years after the date of the contribution.''.
       (c) Reporting Requirements.--
       (1) In general.--Section 6050L(a) (relating to returns 
     regarding certain dispositions of donated property) is 
     amended--
       (A) by striking ``If'' and inserting:
       ``(1) Dispositions of donated property.--If'',
       (B) by redesignating paragraphs (1) through (5) as 
     subparagraphs (A) through (E), respectively, and
       (C) by adding at the end the following new paragraph:
       ``(2) Payments of qualified interests.--Each donee of 
     property described in section 170(e)(1)(B)(iii) which makes a 
     payment to a donor pursuant to a qualified interest (as 
     defined in section 170(e)(7)) during any calendar year shall 
     make a return (in accordance with forms and regulations 
     prescribed by the Secretary) showing--
       ``(A) the name, address, and TIN of the payor and the payee 
     with respect to such a payment,
       ``(B) a description, and date of contribution, of the 
     property to which the qualified interest relates,
       ``(C) the dates and amounts of any royalty payments 
     received by the donee with respect to such property,
       ``(D) the date and the amount of the payment pursuant to 
     the qualified interest, and
       ``(E) a description of the terms of the qualified 
     interest.''.
       (2) Conforming amendments.--
       (A) The heading for section 6050L is amended by striking 
     ``certain dispositions of''.
       (B) The item relating to section 6050L in the table of 
     sections for subpart B of part III of subchapter A of chapter 
     61 is amended by striking ``certain dispositions of''.
       (d) Anti-Abuse Rules.--The Secretary of the Treasury may 
     prescribe such regulations or other administrative guidance 
     as may be necessary or appropriate to prevent the avoidance 
     of the purposes of section 170(e)(1)(B)(iii) of the Internal 
     Revenue Code of 1986 (as added by subsection (a)), including 
     preventing--
       (1) the circumvention of the reduction of the charitable 
     deduction by embedding or bundling the patent or similar 
     property as part of a charitable contribution of property 
     that includes the patent or similar property,
       (2) the manipulation of the basis of the property to 
     increase the amount of the charitable deduction through the 
     use of related persons, pass-thru entities, or other 
     intermediaries, or through the use of any provision of law or 
     regulation (including the consolidated return regulations), 
     and
       (3) a donor from changing the form of the patent or similar 
     property to property of a form for which different deduction 
     rules would apply.
       (e) Effective Date.--The amendments made by this section 
     shall apply to contributions made after October 1, 2003.

     SEC. 496. REPEAL OF 10-PERCENT REHABILITATION TAX CREDIT.

       Section 47 is amended by adding at the end the following 
     new subsection:
       ``(e) Termination.--This section shall not apply to 
     expenditures described in subsection (a)(1) incurred in 
     taxable years beginning after December 31, 2003.''.

     SEC. 497. INCREASE IN AGE OF MINOR CHILDREN WHOSE UNEARNED 
                   INCOME IS TAXED AS IF PARENT'S INCOME.

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

  The PRESIDING OFFICER. The Senator from Iowa.
  Mr. GRASSLEY. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. GRASSLEY. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. GRASSLEY. Mr. President, I am happy to be, once again, on the 
floor with a very important piece of legislation. With the cooperation 
of the Democratic leadership of the Senate Finance Committee, Senator 
Baucus, we bring to the floor a bill that was voted out of committee 19 
to 2. Senator Baucus and I always work together as much as we can--that 
is, most of the time--to bring to the Senate a bill that can get 
through the Chamber because as so many people who watch the Senate 
regularly know, the Senate, unlike the House of Representatives, can't 
function if it does not function in a bipartisan way.
  So we proceed, then, with this bipartisan bill: the Jumpstart Our 
Business Strength Act. If I refer to the acronym JOBS, it is jumpstart 
our business strength.
  Since March 2000, long before President Bush took office, the 
manufacturing sector has been under significant economic pressure. 
Obviously, that has affected manufacturing workers. A recent CBO study 
estimates that going way back to March 2000, an estimated 3 million 
workers have lost their manufacturing jobs.
  The Congressional Budget Office attributes this job decline to the 
recession that began in November 2000 and

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the weak economy in demand that followed, part of it a result of 
September 11 and recovery not coming as normal as recoveries do.
  But we always tend to look at bad news. Bad news tends to make the 
front pages of the newspaper. Good news tends to make the back pages, 
if there is good news printed at all.
  There is good news on the horizon. That is, that new manufacturing 
orders, just this past December, surged to their highest levels in 50 
years. They haven't been that high since July of 1950. And January was 
the sixth consecutive month that manufacturing activity expanded. In 
December, the manufacturing employment index grew for the second 
consecutive month, but the overall economy during that month added 
1,000 jobs only. That was, of course, disappointing. But it wasn't 
disappointing from the standpoint of the manufacturing employment index 
growing because it seems that is the lagging sector of this recovery.
  I believe we are on the right path for a strong recovery. In fact, 
there has been a recovery underway since economists ruled that the last 
recession ended October 1, 2001. But when a recovery ends, it is not 
always visible. Of course, it is visible in most segments of the 
economy by very strong indices that are there to prove that. But one 
area that is not is manufacturing employment. We do now have those 2 
consecutive months of increased employment.
  I believe we are on the right path to strong recovery, but we must do 
more to ensure manufacturing stays on the path of recovery. 
Manufacturing is so vital to the overall health of our economy, 
including follow-on sectors that benefit: the service and financial 
sectors.
  As government policymakers, which we are, we have to act to 
revitalize the manufacturing sector. Today we have some good news on 
manufacturing, and that is, the legislation we bring to the Senate, 
because it is going to help enhance employment in the manufacturing 
sector.
  As I have said previously, but I cannot emphasize too much, by a vote 
of 19 to 2 this bill was voted out of the Senate Finance Committee. Our 
bill is a bipartisan balance of domestic tax relief and international 
tax reforms, all meant to strengthen American business. Not as an end 
in itself, but as business strengthens, jobs are created. We are 
talking about jobs for Americans.
  Most importantly, this bill is revenue neutral. That is important, 
when we read in the newspapers about facing a budget deficit. This bill 
then will not add one dime to the Federal deficit. The JOBS bill will 
repeal the current FSC/ETI regime and use all the money from repeal to 
provide a 3-point tax rate cut on income from U.S.-based manufacturing. 
I emphasize U.S.-based manufacturing. We start those cuts phasing in 
next year. This 3-point rate cut is only for manufacturing and only for 
manufacturing in the United States. This bill will not help American 
manufacturers that want to manufacture offshore.
  I point out how our bill would approach this effort to help create 
jobs in American manufacturing and do it on American soil as opposed to 
the way that the Ways and Means Committee of the other body, and even 
other bills that will be offered in the upcoming debate, would face 
these issues. Our bill reducing taxes applies to all that manufacture 
in America.
  I wish to make clear to our colleagues this is a bill to help 
manufacturing in the United States. American companies that manufacture 
overseas will not get the benefit of the corporate rate reduction. 
Foreign corporations that want to come over here to America and build 
plants and employ people in this country would get the benefit. But 
this bill is about helping American manufacturing that takes place in 
the United States of America.
  I wish to differentiate the approach we use from the approach the 
Ways and Means Committee uses.
  Unlike the pending Ways and Means bill, and other bills that will be 
offered during the upcoming debate, these cuts apply to all who 
manufacture in America, regardless of size. So this is going to include 
sole proprietors, partnerships, farmers, individuals, family 
businesses, multinational corporations, and foreign companies that set 
up manufacturing plants in the United States. All of these enterprises 
will benefit as long as they manufacture.
  So the objectives of this bill are pretty simple. Three: Jobs, jobs, 
jobs, meaning jobs that pay money because of manufacturing in America.
  Manufacturing is important to all States, and I want to point out 
some benefits. For my State of Iowa--the figures I have are for 2001--
Iowa's gross State product was $91 billion. Of that, $19 billion or 21 
percent of the State's wealth was created by manufacturing. From 2001 
to 2002, Iowa's exports grew by nearly 15 percent. We shipped nearly $5 
billion of goods out of Iowa, and that was during the year 2002.
  In Iowa, we have 222,000 jobs in manufacturing. So that shows how 
important it is for the United States to be competitive in 
manufacturing both home and abroad because of 222,000 jobs just in my 
State. Those kinds of export numbers translate into very good and 
lasting jobs at home. Many of our country's manufacturing jobs are 
dependent upon the current FSC/ETI international taxing regime.
  I have a map behind me that makes this very clear. It shows by State 
the jobs that are existing today because of the current FSC/ETI 
provision: South Carolina, 47,000 jobs; my State of Iowa, 35,000 jobs; 
California, 429,000 jobs; Texas, 262,000; New York, 215,000; Illinois, 
156,000; Washington State, 107,000 jobs generated by FSC/ETI.
  As my colleagues probably know, FSC/ETI stands for Foreign Sales 
Corporation, extraterritorial income. This is what was determined to be 
contrary to our international trade agreements, and that is why we have 
this legislation before us because if we do not do something about this 
issue, these numbers of jobs that are dependent upon this legislation 
are in jeopardy because our manufacturing will not be competitive with 
our foreign competition.
  Of course, what this is all about is passing legislation that will be 
in agreement with our trade agreements and, consequently, still protect 
American manufacturing as the FSC/ETI has done over the last 25 to 30 
years.
  FSC/ETI reduces the income tax on goods manufactured in the U.S. and 
sold overseas. FSC/ETI is critical to the manufacturing sector. It can 
reduce taxes on exports by as much as 3 to 8 tax rate percentage 
points.
  The nonpartisan Joint Committee on Taxation says that 89 percent of 
the Foreign Sales Corporation benefits go to manufacturing companies. 
Many of those companies are the largest manufacturing employers in the 
Nation. This reduced rate of tax on exports of U.S.-manufactured goods 
keeps our companies competitive in the international marketplace. It 
allows our companies to compete with the European Union countries, 
which happen to have a taxing system where they get a rebate on their 
value-added tax on exports.
  If we did not have the Foreign Sales Corporation, we would be 
exporting more of our taxes, making us uncompetitive with the European 
Community that has a different taxing system, value-added tax, that 
they do not export.
  Several years ago, the European Union filed a claim with the World 
Trade Organization challenging FSC/ETI as an illegal export subsidy. 
Hence, we are here repealing such an important provision because under 
trading rules, according to the decision, we cannot have a subsidy if 
it is contingent upon the act of exporting. The World Trade 
Organization ruled that the FSC/ETI is an illegal export subsidy and 
has authorized the European Union to impose up to $4 billion a year of 
sanctions against U.S. exports.
  The European Union has already started this because March 1, this 
year, was the date to do it. The sanctions start at 5 percent of the $4 
billion, and they are going to increase 1 percent for each month if we 
do not repeal the FSC/ETI provisions. They are going to cap out at 17 
percent. So by November, these sanctions will be 12 percent. How are we 
going to compete when the tax

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benefits that were supposed to level the playing field are not only 
used, but the European Union, in a legal way under our trade 
agreements, is levying sanctions. Just as the United States when the 
European Union lost a case on our beef--they did not take our beef--we 
leveled sanctions against European products that are coming into this 
country, all in a legal way but not necessarily in the best way to 
conduct international trade.
  So eventually, these sanctions are going to get up to 17 percent, and 
at that point the European Union will review the effectiveness of the 
sanctions, and further increases are possible.
  The European Union has been consistent in its message, that the FSC/
ETI must be repealed; the same way that we were insistent upon Europe 
and we won a case in the World Trade Organization that they take our 
beef.
  This is a serious threat against American manufacturing, and Europe 
knows where to hit us. One of those is agricultural products, plus 
paper products, and also a number of important manufacturing 
industries, and they are hitting us right now in our soft underbelly.
  These sanctions are going to undermine the economic recovery that is 
underway, as I indicated before--underway with 2 months in a row of a 
positive upturn in the manufacturing index. So I believe it is 
important for the United States to fulfill its obligations under our 
trading rules.
  Now, it so happens that we win a lot more cases than we lose, and it 
also is true that the United States has been a leader--in fact, the 
entire world recognizes us as a leader, and they wait for us 
sometimes--in reducing trade barriers around the world. We have shown 
leadership for the last 60 or 70 years in this area going back to the 
reciprocity agreements of the 1930s of reducing trade barriers.
  As we expect Europe to import our beef when we win a case, it seems 
to me that we must show leadership in complying with these rules. What 
the World Trade Organization is all about is to bring the rule of law 
to what would otherwise be a jungle of international trade. That is 
because we get more business activity when there is predictability and 
understanding of how we are going to do business. Just as that is true 
in our domestic policy for business expansion, it is true in 
international trade; if there is predictability, we will get more 
business expansion around the world.
  Domestic law has made that possible within the United States. We need 
to support a regime that does the same thing in international trade 
because we have seen under that regime of rule of law in international 
trade for the last 50 or 60 years the expansion of the world economic 
pie.
  We are not talking about something that is just good for the United 
States. It is good for the United States. But we are talking about 
something that is good for the entire world.
  We have a growing world population. If you don't have a growing world 
economic pie, there will be less for more people and less for more 
people means political, economic, and social instability, and chaos.
  So we have seen under this regime of rule of law in international 
trade that the world economic pie has grown tremendously, and to a 
great extent because of international trade.
  The United States has led the way. We need to continue leading the 
way. There are some lobbyists who are suggesting this is no big deal, 
this doesn't have to be done now, it can be done tomorrow, it can be 
done next year, and somehow these sanctions don't mean anything. They 
do mean something because they are going to make our products 
uncompetitive and then we can't sell. If these were put on John Deere 
tractors in Waterloo, IA, one-fourth of the jobs could go.
  One-fourth of the jobs at John Deere Tractor in my home State are 
related to trade. But we do have to abide by the rule of law in 
international trade unless we want chaos, unless we want the jungle.
  These lobbyists say sanctions don't matter. They argue: After all, 
sanctions only start at 5 percent. They would say: There has been a 
decline in the dollar. That is going to take care of that problem. With 
a decline in the dollar, add on 5 percent, no difference.
  But I will bet these lobbyists who are spreading this word that 
Congress doesn't have to act don't represent anybody--any workers or 
any firms--on this retaliation list. But for those industries that I 
have already talked about, and there are a lot more, sanctions do 
matter because they will not be able to export if they can't compete. 
Five percent right now, and for sure 17 percent a year from now, is 
going to make a big difference.
  In regard to the lower value of the dollar against the euro, that 
somehow merely restores the status quo of the 1990s for a lot of 
American companies so they can export more. The recent decline in the 
dollar helped these companies regain lost market share in Europe, and 
we have lobbyists saying they ought to be back in that position that 
they were in just a year ago, not being able to sell because of the 
high cost of the dollar?
  Why would Congress want to deprive these companies and their 
employees, where these are good American jobs, of the opportunity to 
export? That is beyond me. These are good jobs, because statistics show 
conclusively that jobs connected with exports pay 15 percent above the 
national average.
  Besides, there is no guarantee that the value of the dollar will not 
go up tomorrow because our official policy is a strong dollar policy. 
Our official policy is also to let the marketplace decide the value of 
the dollar. But if it does go up, it is going to leave American 
exporters in even a worse situation than they are today with that 5 
percent and next month 6 percent.
  It is plain wrong for us in Congress, when we can do something about 
it--and this bill does something about it--to gamble the future of 
these American working men and women on the volatile international 
currency market.
  There is another fancy suggestion from these high-paid lobbyists, 
that all we have to do is cut a Government check to these U.S. 
exporters that are hurt by the sanctions.
  That suggestion is just as stupid as the previous one. First, it is 
likely that the World Trade Organization would find such a scheme to be 
a prohibited export subsidy anyway, just as they originally did. That 
would continue the cycle of noncompliance and retaliation.
  These birds don't believe in the rule of law on international trade. 
They like the jungle of international trade. In fact, most lobbyists 
like a jungle because they are the ones who think they are smart enough 
to sort it out. We are not going to allow that jungle to grow just so 
lobbyists can prosper.
  But this scheme, as the original suggestions, is unworkable. It would 
probably require a new government bureaucracy to administer. You know 
what. This JOBS bill is about creating manufacturing jobs, not jobs in 
a government bureaucracy.
  It has also been suggested that the U.S. Government could simply pay 
compensation to some foreign government rather than comply with our 
international trade obligations. I suppose, in the era of foreign aid, 
you might say that suggestion is theoretically possible. But it is not 
very realistic.
  Under the World Trade Organization dispute settlement system, there 
is only one way, just one way, a nation can bring itself into 
compliance with an adverse ruling, conforming with the WTO-inconsistent 
measure, and that is with a report adopted by the dispute settlement 
body. That would dictate that as long as FSC/ETI is not repealed, the 
United States remains in violation of these international trade 
commitments. So paying compensation to some government, in my reading 
of the obligations under the trade commitments, is not going to bring 
the United States into compliance.
  Furthermore, it has to be remembered that compensation in lieu of 
retaliation is only a viable option if the prevailing parties agree.
  I think that is something the European Union is not inclined to do.
  Even if it were possible, I am not going to suggest on the Senate 
floor that the United States taxpayers ought

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to be writing a check to the country of France. I, for one, don't think 
Congress is going to buy these arguments that we don't have to deal 
with this now and there are other ways around. These proposals are 
shell games expounded by Washington lobbyists trying to confuse 
Congress, confuse the public, and thus avoiding a real permanent 
solution to a longstanding FSC/ETI dispute with the European Union. 
This is not realistic. They will not stop the imposition of European 
sanctions.
  People suggesting these alternatives ought to face facts. Gambling 
America's exports on the volatile currency market won't work. Cutting 
government checks to U.S. exporters won't work. Transferring taxpayers' 
money to foreign governments such as France won't work. These are shell 
games. There is only one real solution for American workers. This is 
something that has been worked out in a bipartisan way for the Senate 
to consider by the Senator from Montana and this Senator. This is the 
JOBS Act that is before us, and the best solution is to pass the JOBS 
Act now. I hope my Senate colleagues and our counterparts in the House 
of Representatives will act on the Finance Committee's FSC/ETI 
legislation. It is all of our responsibility--Democrat and Republican 
alike--to pass this bipartisan legislation.
  If we, as a body, fail to act, American workers will suffer with 
fewer jobs, and the United States will lose an opportunity to 
rejuvenate and remain globally competitive in the mainstay of its 
economy--the manufacturing sector of our economy.
  Our majority leader, Senator Frist, should be commended for bringing 
this bill to the floor so that the Senate can act now to end sanctions 
before they seriously damage the economy and before they damage our 
transatlantic relations. The bill needs to be passed so we can end the 
sanctions as soon as possible.
  Repealing FSC/ETI raises around $55 billion over 10 years. Eighty-
nine percent of it comes from jobs in the manufacturing industry. If 
that money is not sent back to help the manufacturing sector to be 
competitive with Europe, FSC/ETI repeal will be a $50 billion tax 
increase on manufacturing. The old rule of economics is if you tax 
something more, you get less of it. So there is going to be less jobs 
in manufacturing.
  I think we can all agree that a $50 billion tax increase on 
manufacturing will not stimulate job growth in that sector. That is why 
the JOBS bill passed by the Finance Committee uses every penny from the 
FSC/ETI bill repeal. To give this 3-percentage tax rate cut on all 
income derived from manufacturing--that is done in the United States--
there is no benefit to American companies manufacturing overseas. There 
would be a benefit to international companies that come here to create 
jobs in America in manufacturing. Our 3-point rate reduction is not 
export contingent under the World Trade Organization rules. Unlike the 
FSC/ETI regime, this 3-point rate reduction applies to goods 
manufactured in the United States and which are sold domestically in 
the United States, or if they are exported for sale outside the United 
States. If you make it here, we cut your taxes regardless of whether 
you are a U.S. or foreign corporation--bringing those manufacturing 
jobs, then, to the United States of America. The JOBS bill starts 
phasing in the 3-point percentage tax rate reduction immediately in 
2004.
  If you look at this next chart behind me, you see on average, 
European Union manufacturing income is taxed at 21 percent but U.S. 
manufacturing income is taxed at 24 percent. As you can see, the 3-
point rate cut on manufacturing income in the JOBS bill keeps us even 
with the European Union on manufacturing tax burdens.
  We included in the JOBS bill several international tax reforms that 
are aimed specifically to help manufacturing. The whole JOBS bill is 
slanted towards manufacturing. Flaws in our international tax rules 
seriously undermine America's ability to compete in the global 
marketplace. International tax reform, like doing something with FSC/
ETI, is long overdue.
  Our current system is built upon a framework dating back to President 
Kennedy in the early 1960s. We clean up problems that cause foreign 
earnings to be double taxed by the United States and the foreign 
countries where those profits are earned. We reform subpart (f) to 
ensure that active foreign businesses are taxed when the money is 
brought home and not when the United States companies are locked in 
battle with foreign companies that do not pay taxes.
  You will hear a lot of noise in the upcoming debate about these 
international provisions. But let me tell you right now that the 
international provisions in our bipartisan JOBS bill are targeted to 
benefit U.S. manufacturing companies. Members may be surprised to learn 
our international provisions can actually harm a company's expansion in 
the United States of America where we want companies to expand so that 
jobs are created here and so that those jobs are not exported. It is a 
simple thing to do. Just fix our tax laws so that jobs are created in 
America as opposed to overseas.
  We will have plenty of opportunity to talk about that issue in the 
upcoming debate.
  In an era of expanding global markets, in an era of falling trade 
barriers, and in an era of technological innovations that melt away 
traditional notions of national borders, it is critical that our 
international tax laws keep pace with these new business realities.
  We also include a provision for manufacturing that is not making 
money right now. We allow a 3-year net operating loss carryback. This 
will allow companies to reclaim prior taxes paid. This will give them 
cash liquidity to weather the current storm.
  I understand there may be some effort to expand this 3-year carryback 
to a 5-year carryback.
  The JOBS bill also includes the Homeland Reinvestment Act sponsored 
by Senator Smith of Oregon, Senator Ensign of Nevada, and Senator Boxer 
of California. That is a bipartisan group to which anybody ought to be 
drawn.
  This subpart of our JOBS bill, which is sponsored by Senators Smith, 
Ensign, and Boxer, is intended to encourage companies to bring their 
foreign earnings back to the United States by temporarily providing the 
reduced rate of tax. This bill will tax foreign earnings at 5\1/4\ 
percentage points instead of the 35 percent that would normally apply.
  Advocates of this Homeland Investment Act claim that those moneys 
will be invested overseas instead of the United States, if we don't tax 
them at a lower rate than the 35 percent.
  These colleagues view this measure as I do, very much stimulative to 
the economy and helping with our unemployment problem.
  One last point I will make is that our bipartisan manufacturing tax 
bill is revenue neutral. I don't think it does harm to emphasize, 
sometimes we pass a tax bill and less money comes into the Federal 
Treasury and we might have a bigger deficit. This bill does not do 
that. Not one dime is added to the current deficit.
  Thank God, the President has been in the forefront of this, asking 
for a bill that would be revenue neutral. We have delivered for our 
colleagues who believe in revenue neutrality of tax bills. We have 
delivered for the President.
  The JOBS bill provides over $112 billion in business tax relief which 
is paid for by shutting down tax shelters and by closing abusive 
loopholes. Let me emphasize that because people are reading about this 
every day in the newspaper, companies setting up shell corporations 
overseas, with nothing but a cabinet and maybe an address, a post 
office box, for the sole purpose of avoiding taxation. They dash and 
stash the cash, whereas we have all these other patriotic companies 
staying in America.
  There are other schemes I will not go into, but we deal with those 
schemes in this legislation, bringing in additional revenue that can be 
used, then, to make our international taxing regime more fair and do it 
in a way that creates jobs in the United States of America, not 
overseas.

[[Page 3171]]

  It is a fact of life with most bills that come to the Senate, there 
is never complete agreement on an approach. There is always 20 percent 
on the right and 20 percent on the left that might disagree with 
something that comes to this Senate. What this Senate is all about is 
moving things to the center, to get a consensus to get something 
passed. In the process, there is never complete agreement.
  For instance, some Members did not favor including this Homeland 
Reinvestment Act which Senators Smith, Ensign, and Boxer have written. 
We have included it in this bill. So we may have votes on that.
  Our bill contains a temporary haircut on the rate reduction some 
Members would like to remove and others would like to retain. We will 
probably have that divisive issue before the Senate. Some Members 
prefer a reduction in the top corporate rate in place of all these 
international tax reforms and manufacturing rate cut deductions. Now, 
that is a more simple approach than we have, but this approach misses a 
couple of factors.
  First, the top level rate cut would only go to the biggest 
corporations of America. It would not go to the local family-held S 
corporation or partnership as our finance bill does. We think we ought 
to help small business in the process.
  Second, FSC/ETI repeal will not create a large tax increase on the 
service industry. That repeal will be a $50 billion tax increase on 
manufacturing. If we redirect the FSC/ETI repeal money to an across-
the-board corporate cut, as a couple of my colleagues will offer an 
amendment to do, then the manufacturing sector will be the revenue 
offset for the services sector of tax cuts. It is a fact that we have a 
struggling manufacturing sector and I don't think a sector of our 
economy that is slowly recovering ought to be hit with this sort of a 
revenue offset for the benefit of the service industry. We have to face 
what is the current crisis in manufacturing.
  Working families are living in financial fear. We owe a secure future 
to these hard-working men and women. For them, we have a secure future. 
Their employers must be able to compete and thrive both at home and 
abroad. Then their future is secure. Their employers cannot thrive if 
these companies are burdened with excessive tax rates at home and 
international tax barriers abroad.
  Our bipartisan JOBS bill presents the best opportunity to end that 
burden and to make a downpayment on putting Americans back to work. 
Let's hope the Senate gets to work, puts American manufacturing back in 
the game. That is why I am here, urging my colleagues to support a 
bipartisan JOBS Act and cooperate to get this bill on the President's 
desk.
  In closing, I have one message for the 39 Democrats who are not on 
the Finance Committee and may not see this, other than just a piece of 
legislation voted out of the Senate Finance Committee. I say to the 39 
Democrats who are not on the committee, they have an opportunity to 
help us very quickly move a bill to the other body, very quickly help 
us pass a bill to help manufacturing, help us pass a bill to create 
jobs for American men and women in manufacturing, which is slow to 
recover. They have an opportunity to help with bipartisanship in the 
other body because there are bills in the other body, but they are 
short of the number of votes they need. Part of the reason is maybe the 
other body does not see the need to pass a bipartisan bill as we do in 
the Senate. There are Republicans and Democrats in the other body who 
are working on a way to do this, a way that is not far removed from our 
legislation.
  If we have a real strong vote over here and we get this done quickly, 
we might be able to help the House of Representatives pass some 
legislation and to do it in a bipartisan way. Helping to pass 
legislation in a bipartisan way is not a bad goal for Senators, since 
we practice that.
  Also, those 39 Democrats will have an opportunity to help the Senate 
Finance Committee do something we want to do because we can get it done 
in this bipartisan way and it is not exactly the way the White House 
wants us to get it done. Here again, we share governing 
responsibilities with the President and with the House of 
Representatives, and so Democrats working with Senator Baucus and 
myself, Democrats who are not on the committee, can help get a bill to 
the President, help the President to see maybe the aspects about this 
bill they do not like, they ought to take a second look at to see the 
good work, and help get a bipartisan bill through the House of 
Representatives.
  I don't say that in a defensive way because I don't know of any 
reason the other 39 Democrats do not want to help us accomplish what we 
want to accomplish. What I have just said is not for that purpose, but 
only said for the purpose of those Democrats who are not on this 
committee, there is a larger aspect than just the language of the 
legislation that is before the Senate. It benefits them for a lot of 
goals they want to accomplish that sometimes cannot be accomplished as 
a minority part of this body.
  The PRESIDING OFFICER. The Senator from Montana.
  Mr. BAUCUS. Mr. President, I would like to make a few remarks about 
the JOBS bill before the Senate. With this bill, we join in the work of 
improving the economic well-being of Americans.
  This bill is about creating good jobs in America. This bill is about 
improving the standard of living of all Americans.
  Let me begin with the economic context for this bill. In a series of 
statements over the coming week, I will address particular aspects of 
the legislation. We begin with the dignity and importance of work. Our 
jobs often define who we are. They are where we spend much of our 
waking hours. As the preacher teaches in the book Ecclesiastes, ``A man 
can do nothing better than to . . . find satisfaction in his work. This 
. . . I see, is from the hand of God. . . .''
  Job creation is fundamental to our ability to live a good life. It is 
through the creation of good jobs that Americans have come to enjoy 
remarkable advancements in income and comforts. The American job 
creation machine makes our shores the shores to which immigrants swarm. 
We don't see people heading for the door. Rather, people from around 
the world want to live in America.
  Ours is a dynamic economy. This economic growth is the key to our 
Nation's success.
  I point out this chart. I will raise it up so people can see it. This 
chart shows the picture I have just basically described. In 1900, in 
the wake of the industrial revolution, America already stood at the 
pinnacle of the world economy. Already in 1900, believe it or not, we 
had the highest per capita income in the world, slightly more than 
Britain or Australia, and almost double that of France or Germany.
  But even adjusted for inflation in today's dollars, not 1900 dollars, 
America's per capita GDP--a rough measure of our average income--was 
only about $5,000 a year in today's dollars. Measured by today's 
standards, we lived in poverty: Walking and horseback was how one got 
around; electricity lit only 3 percent of homes in 1900; only one-third 
of Americans had running water; only 15 percent had flush toilets; life 
expectancy was 47 years.
  In 1900, America had one of the best educated populations in the 
world. But 1 in 10 were illiterate. The typical adult had left school 
after the eighth grade. There were only 382 Ph.Ds awarded in the entire 
country in 1900.
  Even though in 1900 our economy was at the top of the world, 
Americans had an average income then that the average person in Mexico 
has today.
  If our economy had not grown, our standard of living would be 
unacceptable by today's measures. Economic growth made a huge 
difference.
  Because of economic growth, inflation-adjusted, our per capita income 
today is roughly seven times now what it was 104 years ago.
  With economic growth, electricity became available across the 
country, and automobiles made us a mobile nation and made much more of 
the Nation within reach of work.
  It is incredible to see how much we have grown in real per capita GDP

[[Page 3172]]

since 1900. You can see a dip on the chart in 1929. But we have grown 
at a rapid rate.
  The next chart is very interesting as well. This is private sector 
employment. American economic growth created 108 million new jobs, net, 
since 1900. In 1900, the American economy employed 27 million people in 
its civilian labor force. By January 2004, 104 years later, the 
American economy employed almost 140 million Americans.
  Two-thirds of Americans participate in the labor force--substantially 
higher rates than in Europe. That is up from 55.5 percent in 1900. 
Americans are hard-working people. We work.
  The American economy has, on average, created more than a million net 
new jobs every year since 1900. Since 1935, we have done better; 
America has created 1.5 million jobs every year. That is a net figure.
  America's economic growth springs from our people, our freedom, our 
unity. The American people are smart and as hard working as any in the 
world. Our free market has given this great people the freedom to 
achieve their best potential. Our unity has protected its huge internal 
market from robbers, foreign and domestic.
  We are lucky to be Americans, very lucky. Our Nation is still a 
magnet for immigrants. This country is still a beacon to countries 
around the world.
  We can pride ourselves in our independent judiciary, which helped 
make this country strong. We can be proud of our system of government--
this long-lived democracy. We have a dynamic, mobile society.
  In a number of ways, America has it right. More times than not, 
Americans have struck about the right balance between government 
protections and private freedoms, to contribute to economic growth.
  Our society provides an environment for success. Bill Gates, for 
example, might be a pauper in Sri Lanka. But America provides the 
environment and infrastructure and, of course, the political system and 
markets where a Bill Gates can succeed. We should not take this lesson 
for granted. This is not true in all countries. Our society, economy 
and, yes, the Government contributed to the successes of people such as 
Bill Gates.
  Government does have a role to play, for good or evil, either to 
foster or to impede this economic growth.
  Government can impede growth. By running large continuing budget 
deficits, the Government can suck vital capital out of the economy, 
robbing individuals and businesses of funds that can be used for 
investment.
  Thus, the record budget deficits that the Government is now running 
pose a threat to our Nation's economic growth. We have to recognize 
that. These deficits decrease national savings, decrease private sector 
investment, and raise interest rates. The resulting slower economic 
growth and increased cost of borrowing harm businesses, large and 
small.
  Foreign governments can impede our growth when they deny Americans 
access to their markets, when they don't let us sell products in their 
country, when they artificially depress the value of their currency, 
flooding our lands with their imports and denying our exports a fair 
opportunity to compete.
  Our Government can foster growth by investing in education, by 
opening markets at home and abroad, and by removing barriers to our 
economic greatness. We can foster growth in America.
  That is what this bill is about--removing barriers to economic growth 
and creating jobs.
  It is no secret that in the past few years the engine of American job 
creation has ground to low gear; manufacturing has been particularly 
hard hit.
  This next chart shows the story of private sector job creation in the 
American economy over the last decade. Beginning in March of 1993, here 
at the lower left, the American economy steadily created new jobs 
throughout the rest of the decade. The economy grew. People had jobs 
and families had more money in their pockets. In fact, from January of 
1993 to January 2001, about 20 million--net jobs--were created in 
America.
  Private sector employment peaked at 111.6 million jobs in December of 
2000. The Bureau of Labor Statistics reports that since the end of the 
year 2000, the private sector of the American economy lost 3 million 
jobs. You can see that on the chart. Our peak was here in 2000 and we 
have lost jobs--3 million. Three million jobs were lost in the American 
economy since that peak in December of 2000. In January of this year--
the month for which we have the latest statistics--the American economy 
employed 108 million private sector workers, which means 1 out of every 
40 private sector jobs have disappeared since the end of 2000.
  The manufacturing sector has disproportionately borne the brunt of 
these job losses.
  This next chart shows the story. This is manufacturing jobs from 1993 
to 2004. We can see the dramatic decline in roughly 2001, since July of 
2000.
  Since July of 2000, the American economy has lost 3 million 
manufacturing jobs. That is a net loss. The Bureau of Labor Statistics 
reports that in January, America employed 14.3 million workers in 
manufacturing, and that is down from the 42nd straight month from the 
high of 17.3 million in July of 2000. That is a drop of 17.5 percent in 
manufacturing employment. More than one in every six American 
manufacturing jobs has disappeared since July of 2000. Again, one in 
every six manufacturing jobs in America has disappeared since July of 
2000.
  Manufacturing jobs have disappeared in all 21 industries that 
constitute the manufacturing sector. It is in all sectors. We lost jobs 
in computer and electronics products. We lost jobs in transportation 
equipment. We lost jobs in machinery. We lost jobs in fabricated 
metals. We lost jobs across the board.
  My home State of Montana has suffered more than most. It has had a 
19-percent reduction in manufacturing jobs since January of 2000.
  This next chart also shows job losses happening all across the 
country; not just across all manufacturing sectors but all across 
America. Every State in the Nation but one has lost manufacturing jobs 
since July 2000. The darker the shade, the greater the job loss; the 
lighter the shade--orange and yellow--there is less job loss. But every 
State in the Nation has lost jobs, except one.
  The manufacturing jobs we are losing are good jobs. This next chart 
shows manufacturing jobs pay more than service jobs on the average. We 
all know we are moving from a manufacturing society to a service job 
society. Regrettably, those new jobs, service jobs, pay quite a bit 
less than manufacturing jobs, and that has been true from 1994 all the 
way up through the current date.
  This next chart shows manufacturing employment is now at its lowest 
absolute level since July of 1950. Fewer Americans are employed in 
manufacturing today than at any time in more than half a century. We 
can see from the line from 1950 to today there is essentially the same 
number of jobs. Clearly, we are not doing very well.
  Why do I mention all this? First, it is fact. Second, we have to deal 
with it. We have to do something about it, and that brings us to the 
bill before us, the JOBS bill. We have targeted the provisions of this 
bill directly at manufacturing employment. Why? Because that has been 
the greatest problem.
  This bill will not be a complete solution. By no stretch of the 
imagination will this bill be a complete solution to job loss in 
America. To help create and keep manufacturing jobs, we also need to do 
many other things in addition to passing this bill. We need to open 
foreign markets to American goods much more aggressively than we have 
done in the last couple of years. We need to improve education, to 
preserve the comparative advantage of American workers. Clearly, we 
have to be the smartest--hopefully at least try to be the smartest--in 
the world. To do that, we have to educate our kids and keep education 
at all levels, and to retrain workers.
  We also need to make health care more affordable. Health care costs 
in the United States are too high. They place a big burden on 
employment, on businesses. The cost of health insurance and the cost of 
health care is way

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too high and should be lowered. We also need to provide assistance to 
displaced workers. They need to be retrained.
  This bill will do two things that will make an important contribution 
to creating and keeping manufacturing jobs in America. This bill will 
contribute to economic growth and increased demand. This bill will help 
reduce manufacturers' tax burdens. It will reduce the tax rate for 
domestic manufacturers by 3 percentage points. Basically, it is a 9-
percent reduction for domestic manufacturing income, which translates 
to about a 3-percentage point break for corporations. The JOBS Act will 
thus help all manufacturers who produce goods in the United States.
  Cutting taxes for domestic manufacturers will help prevent layoffs. 
It will help. It will not solve the entire problem, but it is going to 
certainly help. It will help preserve jobs, and this bill is paid for. 
It will not contribute to the deficit. It thus will not raise interest 
rates. It thus will not levy that hidden tax of higher borrowing costs 
for business.
  This is an important bill. It comes none too soon. American 
manufacturing is calling out for help. This bill is part of the answer.
  To ensure continued prosperity and well-being, the American economy 
needs to start growing again, and this bill is part of that solution.
  This bill is an important first step to address the economic 
circumstances in which we find our country. Over the days to come, I 
look forward to working with my colleagues on this bill. I particularly 
thank the chairman of the committee, Chairman Grassley, who has done a 
terrific job in putting this bill together in a way that focuses 
directly on the problem.
  We know we are here in large respect because of the WTO ruling which 
says we must repeal the so-called FSC/ETI regime because it is WTO 
illegal and replace it with a system that helps our domestic 
manufacturers in a way that is legal under WTO. There are various ways 
to fashion a replacement bill, and the other body has a replacement 
bill which gives the break to American corporations, C corporations, 
big corporations. We have a different bill. Our bill says if you are a 
C corporation, if you are an S corporation, sole proprietorship, 
partnership--whatever--if you manufacture products domestically in the 
United States of America, whether you export is irrelevant. You get the 
same reduction in your tax rate. That is to help small business as well 
as big business. So business together across the board is helped, not 
just big business.
  We all know that is important because most new jobs are created by 
small businesses. There are many more small business people in this 
country than there are big business. Small business tends to be more 
creative in creating new jobs and expanding rather than big 
corporations.
  I will stop here. There is much more to say about this bill.
  One final point. I mentioned it is paid for. It is paid for by 
measures which in themselves should be good public policy and we should 
pass, anyway. What are they? They are corporate tax loophole closures. 
They are shelters legislation. They are post-Enron provisions that have 
not yet been enacted into law. There is something else called silos, to 
shut down another abusive international transaction.
  Not only is this bill paid for, it is paid for in ways that will help 
restore consumer and investment confidence in American business which, 
in and of itself, will help create and keep jobs in America.
  I yield the floor.
  Mr. GRASSLEY. I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant bill clerk proceeded to call the roll.
  Mr. BAUCUS. Madam President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. BAUCUS. Madam President, I have a few more comments I would like 
to make about this bill. I hope, though, we can get an agreement put 
together, a list of several amendments that would then be in order. I 
know various Senators and leadership are now discussing that. It would 
be my hope we could reach that agreement fairly soon so we can get on 
with this bill.
  Let me just discuss for a few minutes what this JOBS bill is really 
all about. It is a bill which the Finance Committee reported last 
November. It is something we simply must pass due to the WTO decision. 
I hope we can get it enacted into law as soon as possible.
  I think this bill is important for three reasons. First of all, it 
will cut taxes for domestic manufacturers. That is important. The bill 
will also simplify taxes for American companies operating overseas. 
That, too, is important. And it will bring us into compliance with an 
unfavorable ruling of the World Trade Organization--no small matter. 
The JOBS bill, the bill before us, reduces the tax rate for domestic 
manufacturers by 3 percentage points. So if you are in the top bracket, 
it is 3 percentage points. If you are a company or corporation in a 
lower bracket, it is still about the same. Actually, it is a 9-percent 
deduction for the cost of producing or manufacturing products in the 
United States, which translates to about a 3-point reduction. Cutting 
taxes for domestic manufacturers will help prevent layoffs. It will 
help preserve jobs. As we all know, this country has lost 3 million--
think of that, 3 million--manufacturing jobs since July of 2000. That 
is net loss. We have lost a lot more and gained some, but the net loss 
is 3 million manufacturing jobs lost since July of 2000.
  When I talk to manufacturers in my home State, as I know the 
Presiding Officer does in her own State, they say the rising cost of 
doing business is one of the biggest impediments to business. It is a 
big problem business has. By cutting the cost of doing business, this 
bill will help alleviate the job loss.
  This bill will help companies do their job. This bill helps small 
businesses as well as larger businesses. The Tax Code treats different 
kinds of businesses differently, as we all know. C corporations, as you 
well know, are companies that exist as a separate entity from their 
owners, thus limiting the owners' liability. The corporations can be 
liable for various actions, but the stockholders themselves, the 
owners, are not. That is the reason why companies organize themselves, 
very often, in that manner.
  This chart shows about 26 percent of companies in the United States 
are organized as C corporations; that is, they limit their owners' 
liability, the shareholders themselves. The owners are not liable.
  Sole proprietorships and partnerships are businesses where the owners 
of the business are fully liable for its debts. S corporations are 
smaller businesses that are incorporated for liability purposes but 
taxed as a partnership. The S corporations, partnerships, and sole 
proprietorships are collectively known as passthrough entities. These 
are generally smaller businesses, while C corporations are larger 
concerns.
  Why do I mention all of that? I mention all that because, as I 
earlier stated, about a quarter of companies are organized as C 
corporations, but about three-quarters of American companies are 
organized differently, either as sole proprietorships, as partnerships, 
or as S corporations. We want to make sure that not just standard, 
garden-variety C corporations get the benefit of this bill but that all 
companies that manufacture domestically get the benefit of this bill, 
so we have changed the underlying bill.
  Currently, today, under the FSC/ETI regime, which has been declared 
illegal by the WTO, the C corporations are the ones that get the 
benefit of the tax break. It helps them export products overseas. But 
in the Finance Committee, we felt, not just big companies but all 
companies should get the benefit of reduced taxes.
  Nearly three-fourths of the manufacturers in this country are S 
corporations, partnerships, and sole proprietorships. About three-
quarters of all new jobs that are created are by these small 
businesses. This chart shows that. About one-half of all employees

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in this country are employed not by big C corporations, they are 
employed by the other passthrough entities I mentioned. About three-
quarters of all the jobs created and held in the United States are not 
by the big companies but by all the other smaller companies.
  That is why we have extended this bill to include so-called 
passthrough entities. Our smaller businesses are the backbone of my 
State's economy and certainly the backbone of the economy of the 
Presiding Officer's State. I think they deserve tax relief just as much 
as larger businesses do.
  In addition, by including partnerships and sole proprietorships, more 
of our agricultural producers will become eligible for this tax relief.
  The JOBS bill that is before us also includes long overdue 
international tax reform. We are not just talking about the domestic 
manufacturing reduction rate; we are also talking about international 
tax simplification. That is for bigger American companies that do 
operate overseas. We want to make sure our American companies are 
competing on equal ground with rivals from other countries. One way to 
do that is to limit double taxation. When our companies are taxed 
twice, that makes them less competitive. We have included international 
tax simplification and reform provisions that will help American 
companies compete with foreign companies overseas.
  A number of provisions will help companies better utilize their 
foreign tax credits. Foreign tax credits prevent income from being 
taxed twice. There is a repatriation provision that encourages 
companies to bring back overseas profits for investments in the United 
States. There is also a provision that will ease the tax compliance 
burden for small businesses looking to gain access to overseas markets. 
These are worthwhile, and they are measures that will help restore 
fairness and integrity to our American tax system.
  As I mentioned, the bill repeals the current FSC/ETI laws. Why? To 
bring us into compliance with WTO obligations. Our bill replaces a tax 
incentive that was dependent on exports with a tax incentive that is 
not dependent on exports. A company can utilize this tax benefit in 
this bill whether the product it manufacturers is exported. So long as 
it is manufactured in the United States, that company qualifies. We 
will partially offset the loss of tax benefits to U.S. exporting 
companies, therefore, by the repeal of the current law, which I said is 
inconsistent with WTO, and will also provide benefits to all American 
manufacturers, providing a needed boost to our economy.
  Another point: This legislation is completely paid for. Repealing the 
old FSC/ETI regime will cover most of the cost for the new tax 
incentive. By repealing the current law, that almost pays for what we 
are doing here.
  The international provisions are paid for; that is, the additional 
provisions of the bill are paid for with offsets that curb abusive tax 
shelters. We have offsets in this bill. They will not just create 
revenue, but they are also good provisions, good tax policy in and of 
themselves--clamping down on shelters, the inversions provisions, post-
Enron reforms, something else called SILOs, which is a gimmick, 
frankly, that international American companies are using to shelter 
their income. All that is shut down, and that pays for the rest of the 
bill. Again, these shelter provisions are absolutely critical to be 
enacted.
  Let me mention in a little bit more detail the three reasons for 
supporting this bill. I mentioned it is fully offset and the revenue 
goes to manufacturing. I think that is a principle we should maintain. 
We should not put incentives in this bill or change this bill in a way 
that deviates from that. We should also not change this bill in any way 
that reduces or diminishes stopping the abuses of tax shelters. That is 
a principle we should absolutely maintain.
  I might say something about our budget deficit. Our current budget 
deficit is projected at about $521 billion this year. We all know that 
is basically an understatement. It is going to be much worse. Why? 
Because the administration's budget, as well as the budget resolution 
pending in the Senate Budget Committee, does not include several 
factors which more accurately reflect the true deficit our country is 
facing. What are those? First, both the budgets of the administration 
and the Budget Committee, which will be coming before the floor on 
Monday, will not include the cost of the war in Iraq. It will not 
include war costs. In fact, defense spending is going to be cut a 
little bit. One might wonder why, when costs are going up. My guess is 
the administration will come back with a supplemental next year with a 
big increase in Iraq costs and war costs. This budget does not include 
that and it should. That would be more honest.
  Second, the budget does not include the cost of making expiring tax 
cuts permanent. That is the view of the administration, that they 
should be permanent. The budget does not include that.
  It doesn't include providing alternative minimum tax relief. We all 
know this Congress is going to have to enact alternative minimum tax 
relief soon, and it is very expensive. That also is not included, to 
say nothing of the cost of paying for the baby boomers when they start 
to retire in the not too distant future.
  Deficits are going to be a lot larger than contemplated in either the 
administration budget or the budget resolution that will come to the 
floor.
  I say that because it is all the more reason why this bill must be 
budget neutral. I say that also because there are other Members of 
Congress who have a different view about that. They would not like this 
to be budget neutral. They would like there to be further tax cuts but 
not paid for. I think that is not wise. Frankly, psychologically, as 
well as actually, the American people will appreciate us having a 
budget-neutral bill and trying to work toward a balanced budget. That 
means people around the country are saying those guys and gals in 
Washington maybe have their heads screwed on straight. Maybe they are 
doing something right back there. Maybe they are not frittering away 
taxpayer money.
  The more we do what is right, by keeping this budget neutral, not 
succumbing to the siren song of lowering taxes but not paying for them, 
the better off we will be in so many respects.
  Another point: We have a heck of a job ahead of us, a huge challenge. 
What is it? It is how to create more jobs in America, how to keep jobs 
in America, and how to help those who have lost jobs--no easy task. It 
is extremely difficult. We all know the statistics. Three million 
manufacturing jobs lost in the last several years. We have to do 
something about that. The real question is, what do we do? What is the 
right thing to do? Some say it is OK. That is the way things are. That 
is international competition. That is globalization. It just happens. 
In the long run we are all better off. Some say that.
  Essentially that was a statement of Mr. Mankiw the other day that has 
been bandied about so much. He said that is the way it is. There will 
be new technologies. Companies will be able to compete better. They 
have to lower their costs, and they can lower their costs if they can 
compete any place in the world. If that means jobs overseas, lowering 
costs, that makes American companies more competitive.
  I have a different view. I think we have to face up to the challenge 
of creating more jobs and retraining Americans so they can have jobs, 
and keeping those jobs in America. That is, we cannot be passive. We 
have two choices: try or do nothing.
  I say we try to create more jobs in America; we try to keep more jobs 
in America; we try to retrain people and help people who have lost 
jobs. We have to do something about it.
  The administration thus far has been passive. It has gone AWOL. It 
does not seem to really care. I do not see any affirmative programs to 
create jobs in America. We need them. It is a hugely complex problem in 
both the short term and long term. In the long term, it is education--
science, math, engineering. Did you know we don't graduate nearly as 
many engineers as does Japan, Europe? And China graduates about three 
times the number of engineers we do. Did you know that? How

[[Page 3175]]

long can we continue that? In the long term, we cannot. It is 
unsustainable.
  I must also say the amount of financial aid or the amount of support 
in basic research has dropped tremendously in America. The number of 
engineers who graduate in America is now about 30 percent less than it 
was not too many years ago. The figure is worse than that. We are not 
going to be able to compete in the long run if we continue that. It 
can't be done. There are lots of other long-term measures we have to 
undertake.
  There are also in the midterm things we could be doing and we are 
not. What are they? No. 1, we are not opening foreign markets. Look at 
India, look at other countries in the world that are closed to America, 
particularly the country of India. We hear about all the call centers 
going to India. We don't hear about goods being exported to India for a 
very good reason: India is by and large closed. They are closed to 
intellectual property rights, closed to so many markets, so many 
products. India is closed. What are we doing about that? Not much.
  The same can be said for other countries--China. Remember the WTO? 
They are a member of the WTO. We gave them PNTR. China has a lot more 
to do.
  What are we doing in trade? Basically looking to countries--with no 
disrespect--such as Bahrain and Morocco. These smaller countries don't 
have huge commercial benefit to the United States. It is easier to 
reach trade agreements with those countries. It is much more difficult 
to go after where the real problem is. As I mentioned, this country is 
not doing that, and it should do that. It should start working more 
aggressively to open markets so we can sell products overseas. When we 
start selling products overseas, that means more jobs in America. It is 
pretty doggone simple, but it is not being done.
  I might also add that there are other things we could be doing that 
we are not doing. I mentioned education. We are cutting education in 
this country. We are not fully financing No Child Left Behind. How are 
we going to compete in the world if we don't give full due to 
education? We have all gone overseas and visited high schools in 
countries worldwide. I have. The graduates in Pusan, Korea, are bright 
as the dickens, and they are hungry.
  We have great schools and great teachers. But there is so much more 
we can do. In my State--and this may be true in other States--teachers 
are leaving because their salaries are so low. They cannot teach. A lot 
of schools in the country are cutting back on gifted children programs. 
They don't have any money. Why are we cutting back on gifted kids? That 
certainly helps all kids, including the underprivileged.
  Madam President, I will yield the floor because I see our Democratic 
leader in the Chamber. He has a lot to tell us. Certainly, it will add 
immensely to this discussion. I urge us to think critically about the 
real problem. We cannot close our borders and put our heads in the 
sand. We have to meet this challenge head on. This is part of that 
effort.
  I yield the floor.
  The PRESIDING OFFICER. The Democratic leader is recognized.
  Mr. DASCHLE. Madam President, I compliment the Senator from Montana 
for his words. I have not heard all of his remarks this morning, but I 
could not agree more that this is a problem that has to be addressed 
head on. As he noted, this legislation gives us an opportunity to do 
so. It may not be the ultimate solution, but it is a critical building 
block in our effort to restore the economy and create new jobs.
  I hope that very shortly we can get on with the debate. We had an 
agreement not to offer amendments, of course, until people have had a 
chance to make opening statements. I intend to make a short one. I hope 
in the not too distant future we can begin the real debate. We don't 
have a lot of time. We have 3 days. Senator Frist is right that we have 
a lot to do in a short period of time. If we are going to maximize the 
use of these 3 days, it is time to get on with amendments. I know 
Senator Hatch is prepared to offer the first one. We hope that 
certainly before the end of this noon hour, we will have offered the 
first amendment.
   Mr. President, these are very difficult times for millions of 
American families.
   Nine million Americans can't find jobs. We have the highest long-
term unemployment rate in 20 years. And in the last 3\1/2\ years, our 
economy has lost 2.9 million jobs; 2.8 million of those jobs were 
manufacturing jobs.
   These aren't abstract numbers. They have real world, dramatic 
impacts in South Dakota and across our country. And the millions of 
affected families are looking to us for answers. They don't want hand-
outs; they want jobs.
   Unfortunately, American has lost manufacturing jobs every month 
since this administration took office--every single month. This is 
unprecedented. It's also dangerous for our economy.
   Manufacturing is more productive, it pays higher wages, and provides 
more benefits than other sectors of the economy. Manufacturing jobs are 
the kind of jobs you can raise a family on. They're the kind of jobs 
that make it possible for middle-class families to put their kids 
through college, and put something away for retirement.
   We have clear choices in facing this problem. We can let jobs move 
overseas--or we can fight to keep them here. We can try to create jobs 
here, or we can do nothing in the face of globalization.
   We can provide help for workers who are losing their jobs, or we can 
look the other way. And we can strengthen worker protections, or we can 
strip away overtime and other benefits that have been a hallmark of the 
American workplace.
   A couple of weeks ago, President Bush and his economic advisors 
weighted in on this issue and told Americans it was a good idea to ship 
jobs overseas and we ought not worry about it. I don't see it that way, 
and I know people in South Dakota don't see it that way. And we need to 
do something about it.
  Today's legislation is the second step in this process. The first 
step was the creation and the passage of a very important highway bill, 
which will create hundreds of thousands, if not millions, of new jobs 
over the course of the next 6 years. This is the second step.
  The foreign sales corporation regime was created to counterbalance 
provisions in the Tax Code that create incentives to move operations 
overseas. It provided tax advantages for American companies that keep 
their jobs in America and ship their products overseas.
  But the World Trade Organization has decided that these advantages 
were an unfair subsidy and needed to be eliminated. And if they weren't 
eliminated, international sanctions would follow. Those sanctions 
kicked in beginning March 1.
  The question before us is what to replace the old export tax regime 
with?
  The Bush administration is completely focused on overseas activities 
and has proposed nothing to encourage manufacturing job creation at 
home.
  But thanks to Chairman Grassley and Senator Baucus, we have another 
solution before us.
  The centerpiece of their legislation is creating tax incentives for 
manufacturers that will keep and create good jobs in America. Their 
proposal is one of the most important opportunities we will have this 
year to begin addressing America's manufacturing crisis.
  Just as importantly, this bill gives us an overdue opportunity to do 
more.
  We need to accelerate and increase domestic manufacturing tax 
incentives, and establish a strong job creation tax credit.
  We need to prohibit tax deductions for outsourcing expenses, and 
require notice to employees about outsourcing plans. Every community 
has a right to know how many employees are losing their jobs, why then 
are losing their jobs, and where those jobs are being sent.
  We need to restrict outsourcing of government contracts.
  We need to help workers who are hurt by outsourcing, and make sure 
they have access to training and health care while they get back on 
their feet.
  And we need to reverse some of the Bush administration's worst 
policies--

[[Page 3176]]

like eliminating overtime for 8 million workers, including veterans who 
have been given training in the military and are now ineligible for 
overtime pay as a result of this regulation. We need to do that. 
American workers have the same rights they have always had. That fact 
needs to be reemphasized with the legislation we will offer on this 
bill.
  We can't wait until next year to make these improvements. Millions of 
American families need them today. And I have seen firsthand, in South 
Dakota, why this is so important.
  I recently toured a manufacturing plant in Sioux Falls. Graco 
Incorporated is the world's leading manufacturer of fluid-handling 
systems and equipment. They've been in business for 78 years. They 
employ about 165 people.
  The plant manager showed me two, nearly identical parts. The first 
was made in Sioux Falls. The other--made overseas--wasn't quite as 
high-quality, but it cost a little less because the people who made it 
were paid less, with no benefits.
  The manager showed me those two parts. Then he introduced me to the 
workers who would lose their jobs if Graco took the easy, offshoring 
route. He said, ``I don't want to be the one to have to tell them they 
don't have jobs anymore.''
  The people at Graco are resisting the temptation to export their 
workers' jobs. They're doing everything they can think of to be good, 
responsible corporate citizens of my State. The last thing the Federal 
Government should do is make that job any harder.
  Our responsibility is to make it easier for Graco and thousands of 
other companies to keep and create jobs here at home.
  As I said, this bill is one step in a long process. By itself, it 
will not completely reverse the unpredecented decline in American 
manufacturing that has occurred since 2001. That will require a 
comprehensive plan and sustained bipartisan cooperation over a period 
of time.
  In the short term, we have to work together to restore fiscal sanity 
to the budget.
  The Federal deficit this year will be half a trillion dollars--with 
no end in sight to the red ink. This debt could cripple our economy and 
destroy our children's future.
  In the longer term, our Government should assist people with 
education and training so they can seize the opportunities that rapid 
change creates. We need to help people who are displaced by change, and 
we need to make sure America remains on the cutting edge of innovation.
  The administration is not facing either of these challenges. We have 
the largest budget deficits in all of American history, and the 
administration is drastically underfunding training and education.
  The President's budget recommends $9.3 billion less for the 
President's own educational reform plan than the new law calls for.
  By choosing tax cuts for those at the top over assistance for States, 
the President has forced drastic increases in tuition at public 
colleges and universities.
  The administration has fought Democratic efforts to help dislocated 
workers upgrade their skills at community colleges.
  At a time when other countries are feverishly trying to challenge 
America's preeminence in critical technology, the administration, 
through neglect and politicization has weakened America's science and 
technology infrastructure and undercut America's scientific edge.
  The decline in American manufacturing isn't just happening on 
President Bush's watch. It is happening in part because of President 
Bush's policies.
  Our choices are clear. We can follow the administration's path and 
make it easier and cheaper for companies to ship American jobs 
overseas, or we can fight to keep good jobs in America. We can turn our 
back on millions of workers and families who cannot find jobs, or we 
can help them get back on their feet and get back to work.
  It is our hope that, in a bipartisan way, we can find ways to ensure 
that these goals can be achieved, not only with this legislation but 
certainly beginning with the amendments we will offer throughout the 
debate on this bill and hopefully with final passage accorded this 
legislation someday soon.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Nevada.
  Mr. REID. Madam President, before the distinguished Democratic leader 
leaves the floor, I would like, through you, to pose this to him: We 
have been here now for approximately 2 hours on this very important 
legislation. The Democratic leader has talked about how important it 
is, the distinguished chairman of the committee has talked about how 
important it is, our ranking member has talked about how important it 
is, and we are doing nothing. We have a gentleman's agreement that this 
would be for debate only, but I think the Democratic leader would agree 
with me, and I think everybody should be put on notice that this cannot 
go on all day long, that this is ridiculous; would the Senator agree to 
that?
  Mr. DASCHLE. Madam President, I respond to the Senator from Nevada, 
the distinguished assistant Democratic leader, that the schedule is 
clear. We have this afternoon, we have tomorrow, and, let's face it, 
honestly, we only have Friday morning, and we will be under great 
pressure, I am sure, not to have any amendments offered beyond 
midmorning on Friday.
  So for all intents and purposes, we have a little bit more than a day 
to debate this critical legislation prior to the time the majority 
leader has already indicated we are going to be moving to the budget, 
setting aside this legislation.
  We are going to be assessed $4 billion in tariffs beginning this week 
if we do not correct the current situation. So this legislation is 
urgent. It needs to be addressed.
  I think we have some very critical amendments that ought to be 
offered in this very narrow window to accommodate concerns on both 
sides of the aisle. I hope we can do so. Frankly, as the Senator 
suggests with his question, we need to do it soon.
  The PRESIDING OFFICER. The Senator from Nevada.
  Mr. REID. Madam President, it is true also, is it not, that we have 
made--and I would like to hear the Democratic leader respond to this--a 
fair response? The majority has an amendment they want to offer, 
sponsored by Senator Hatch, dealing with extension of some tax credits. 
We then said we would like to offer an amendment to stop what--it is 
not a crime but it is close to it in our country today with all the 
outsourcing of all these contracts, and we want to make sure the U.S. 
Government contracts are not outsourced unless there are certain 
limitations placed upon them.
  Then they would come back with another amendment sponsored by Senator 
Bunning. Then we would come back with another amendment sponsored by 
Senator Harkin dealing with overtime, and this is no secret; this is an 
issue about which we have great concern as to what the administration 
is doing with American workers with overtime.
  Is there anything in this agreement the Democratic leader sees that 
should prevent us from moving forward on this critical legislation? We 
have even agreed to time limits; is that not true?
  Mr. DASCHLE. The Senator from Nevada is correct. We have agreed with 
our Republican colleagues to limit the amount of time devoted to each 
of these amendments.
  I see the distinguished chair of the Finance Committee, and it looks 
as if he may be about to propound a unanimous consent request. Perhaps 
we can yield the floor to accommodate his interests in doing so. I 
think we all hope to achieve the same goal. Let's move this bill 
forward. Let's have a good debate about amendments, up or down, and 
let's see if we can complete our work on this legislation in a timely 
way.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Iowa.

[[Page 3177]]


  Mr. GRASSLEY. Madam President, I ask the following unanimous consent 
request. We have perfecting amendments that have been cleared on both 
sides. Therefore, I ask unanimous consent that the first-degree and 
second-degree perfecting amendments that are at the desk be considered 
and agreed to en bloc and that the motions to reconsider be laid upon 
the table; provided further that the committee substitute be agreed to 
and considered as original text for the purpose of further amendment. I 
further ask unanimous consent that the next first-degree amendments in 
order be the following: a Senator Hatch and Senator Murray amendment on 
R&D, with a Bingaman second-degree amendment which is relevant to the 
first degree; then Senator Dodd dealing with outsourcing; then Senator 
Bunning and Senator Stabenow dealing with accelerating manufacturers' 
tax cut; and then the fourth amendment will be Senator Daschle or his 
designee.
  The PRESIDING OFFICER. Is there objection? The Senator from Nevada.
  Mr. REID. Madam President, reserving the right object, I wish to 
express my appreciation to the chairman of the committee. He, in the 
statement he has made so far, along with the ranking member, 
underscored the importance of moving this legislation, and this is 
movement in that direction.
  As we indicated in the dialog between Senator Daschle and this 
Senator, we will agree on time limits anytime the Senator wants to work 
something out in that regard. We will be happy to do that. This is a 
very good first step, and we do not object.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment (No. 2646) was agreed to.
  (The amendment is printed in today's Record under ``Text of 
Amendments.'')
  The amendment (No. 2645), as amended, was agreed to.
  (The amendment is printed in today's Record under ``Text of 
Amendments.'')
  The committee amendment in the nature of a substitute, as amended, 
was agreed to.
  Mr. REID. Madam President, we now have an amendment that will be 
offered as soon as Senator Hatch arrives. Senator Byrd saw we were not 
doing a lot on the floor, and he asks, through me, that he be able to 
speak for up to 20 minutes at this time.
  Mr. GRASSLEY. Madam President, I feel as if I owe that to the Senator 
from West Virginia because I already made arrangements for him to speak 
before we completed this agreement.
  Mr. REID. Madam President, I propound that in the form of a unanimous 
consent request, with the understanding that the first amendment be 
offered as soon as he finishes. That will be good.
  The PRESIDING OFFICER. Without objection, it is so ordered. The 
Senator from West Virginia.
  Mr. BYRD. Madam President, I thank the distinguished Democratic whip 
and I thank the distinguished chairman of the committee for his 
courtesy.


          Independent Commissions on National Security Issues

  Most of us are familiar with the Aesop's fables, having read some of 
them at one or more times during our lives. Aesop once told the story 
of a jaybird that ventured into a yard where peacocks used to walk. 
There the jay found a number of feathers fallen from the majestic birds 
when they had last molted. He tied them all to his tail and strutted 
toward the peacocks. His cheat was quickly discovered, and the peacocks 
harassed the imposter until all his borrowed plumes had fallen away. 
When the jay could do no more than return to his own kind, having 
watched him from afar, they were equally affronted by the jay's 
actions.
  The moral of the story, said Aesop, is that it takes more than just 
fine feathers to make fine birds.
  It is an age-old lesson that the Congress should hold in its mind as 
we consider how best to investigate the distorted and misleading 
intelligence that the administration used to build its case for war in 
Iraq.
  On February 6, the President announced the creation of his own 
commission to investigate our intelligence agencies to find out, in the 
words of Dr. David Kay, why we were almost all wrong about the 
administration's prewar claims of huge Iraqi stockpiles of weapons of 
mass destruction. If Congress is serious about getting to the bottom of 
this apparent intelligence failure and the administration's rush to 
war, we must realize that once stripped of its dazzling plumage, the 
White House proposal for its own so-called independent commission is a 
real, honest to goodness turkey. It is not only fine feathers that make 
fine birds.
  The President has described the panel that he created as being an 
independent commission. Well, nothing could be further from the truth. 
This commission is 100 percent under the thumb of the White House. Who 
created the panel's charter? The President. Who chooses the panel 
members? The President. To whom does the panel report? The President. 
Whom shall the panel advise and assist? The President. Who is in charge 
of determining what classified reports the panel may see? The 
President. Who gets to decide whether the Congress may see the panel's 
report? The President.
  To describe this commission as independent is to turn that word's 
definition on its head. In fact, the deeper one delves into the text of 
the Executive order that creates the President's so-called independent 
commission, the more one finds that the commission is ill-equipped to 
discover just what went wrong with the prewar intelligence on Iraq.
  At first glance, the charter of the President's commission appears 
very broad. It is to assess whether the intelligence community of the 
United States is sufficiently authorized, organized, equipped, trained, 
and resourced to tackle the threats of terrorism and weapons of mass 
destruction. As part of that goal, the commission is to compare prewar 
intelligence on Iraq with what has so far been discovered.
  That mission sounds like a mouthful, but it really misses the point 
of why the American people are calling for a commission to investigate 
in this matter.
  The public has a right to know why our intelligence on Iraq was so 
wrong, how the administration may have misrepresented its intelligence, 
who is going to be held accountable for misleading our country into 
war, and what will be done to fix the problems with our intelligence. 
Those are exactly the questions an independent intelligence panel 
should be investigating, and yet the President's commission only skirts 
those key issues.
  What is more, even though the President promised that his commission 
will investigate current intelligence on North Korea, Iran, and 
Pakistan, his Executive order, in fact, does not bother to direct the 
commission to review intelligence on those countries. Instead, the 
President's Executive order directs the commission to focus its 
energies on Libya and Afghanistan. Libya and Afghanistan are not 
countries that the President has labeled as part of his axis of evil. A 
real independent intelligence commission would shine new light on how 
we assess the threats of North Korea and Iran, not be distracted by 
sideshows that will keep the commission busy until March 31, 2005.
  The President has carefully drafted this Executive order to allow 
himself to serve as the gatekeeper on what information the so-called 
independent commission might have access to. While the President 
directs Federal agencies to cooperate with this commission, he also has 
created a giant loophole that would prevent the most important 
intelligence products from being read by his commission.
  The Executive order reads as follows: The President may at any time 
modify the security rules or procedures of the commission to provide 
the necessary protection to classified information.
  I was born at night but not last night. All of America knows that the 
White House is in a dispute with the September 11 Commission over 
intelligence reports that were read by the President. The commission 
wants them. The White House will not give them. The Executive order 
drafted by the President to create an intelligence commission makes 
sure that his own commission will never see documents

[[Page 3178]]

that the President does not want them to see.
  At least the 9/11 Commission has the power to issue subpoenas for 
critical information. The President's intelligence commission does not 
even have that power. The deck is being stacked against a full and open 
inquiry on the prewar intelligence on Iraq. Congress is not even 
assured of having access to the commission's report.
  The President has required that the commission send its report to him 
in March 2005 and then within 90 days the President will consult with 
the Congress concerning the commission's report and recommendations.
  Why can the Congress not simply read the commission's report? Why 
should the White House be given the opportunity to reword, reshape, 
redact, or even flat out censor the so-called independent commission's 
report before Congress can get their hands on it?
  It is quite possible that if this so-called independent commission is 
allowed to proceed as the President has directed, Congress will never 
have the chance to review the commission's work.
  Tucked away in the President's Executive order is a provision that 
intends to exempt this commission from judicial review. Let us not 
forget that the Office of the Vice President fought tooth and nail in 
Federal courts, and is still doing so, to keep the General Accounting 
Office, an arm of the Congress, from learning about the meetings of the 
Vice President's energy task force.
  Could this provision be an attempt to hide the work of the 
President's intelligence commission from Congress? I would not put such 
a scheme beyond the White House, which has already demonstrated its 
zeal for secrecy.
  The administration's case for war in Iraq appears to have been built 
upon cherry-picked intelligence, produced and massaged to hype the 
American people into going along with a war of choice. The President's 
so-called independent commission would allow the White House to do the 
exact same number on the commission's report as it did on prewar 
intelligence and analysis; namely, pick out only the parts that it 
wants the public to see and bury the rest.
  It is bitter irony that a report on whether the administration 
covered up evidence that contradicted a rush to war might itself be 
covered up under the terms of the President's Executive order.
  So what is next? An independent commission to investigate the 
President's own commission? Is that so? I wonder. Let us not make the 
mistake of ignoring the shortcomings of the White House's version of an 
intelligence commission on Iraq, only to be haunted by those problems 
later.
  The revelation by Dr. Kay that he does not believe any stockpiles of 
weapons of mass destruction existed in Iraq has dealt a blow to the 
President's case for war. It has shaken the American people's faith in 
their Government. We owe it to the American people to get to the bottom 
of what went wrong with our intelligence agencies and whether the 
administration misused the intelligence that it was provided.
  The President has simultaneously promised a commission to investigate 
these matters and stacked the deck against the independence of his very 
own panel. That is not the right way to gain the confidence of the 
American people in their Government. It is yet another in a string of 
attempts by this White House to mislead the American people on issues 
of national security.
  Congress must step in and correct the grievous error that the 
President has made in creating a commission that is not equipped 
properly to do its job. Congress should use the independent 9/11 
Commission, a commission that has shown itself to be fair, independent, 
and bipartisan, as a starting point for how to create an independent 
panel to investigate the Iraq intelligence failures. If the 
administration is serious about getting to the bottom of this debacle, 
this new commission might even be created in just a matter of days.
  The American people deserve answers on why the administration relied 
on faulty intelligence to take this country to war without presence of 
an imminent threat. A commission that is designed to keep the inquiry 
under the thumb of the same White House that misled Congress and the 
public about the nature of the threat from Saddam Hussein will never be 
able to operate independently. So Congress should not allow the 
President to get away with posting a fox at the door to the hen house.
  The structure of the 9/11 Commission is a solid foundation upon which 
to conduct an inquiry into the administration's prewar intelligence 
claims. The 9/11 Commission has been doing yeoman's work in digging 
into all of the events that led up to those catastrophic attacks on New 
York and Washington. In fact, the only real problem that the 9/11 
Commission has faced is the lack of cooperation from the White House.
  After refusing to meet with the full membership of the 9/11 
Commission, the President and Vice President have reluctantly proposed 
to meet only with the chairman and vice chairman of the panel. And for 
how long? Just 1 hour.
  The National Security Adviser has flatly refused to participate in 
any public discussions with the Commission. The White House position on 
dealing with the 9/11 Commission is so unreasonable that the 
administration is drawing criticism from both sides of that panel. 
There is even talk that former Senator Bob Kerrey, who once served as 
Chairman of the Senate Intelligence Committee, could resign because of 
the administration's refusal to let the Commission do its work. What 
could possibly be the reason for this stonewalling by the White House?
  It is as if a whole swath of the Washington establishment has 
completely forgotten the horror of the terrorist attacks that killed 
3,000 innocent people. But the American people have not forgotten. The 
American people have their priorities straight. They place getting at 
the truth of how that tragedy was carried out above election year 
politics.
  Enough with the stonewalling. Enough with the foot dragging. Enough 
with the election year politics. The Senate acted correctly a few days 
ago to extend the life of the 9/11 Commission so that it can get its 
work done, and the House should promptly follow suit. Now Congress 
should act quickly to create an independent Iraq intelligence 
commission. The confidence of the American people in their Government, 
the people's government, hangs in the balance.
  Madam President, I yield the floor and I suggest the absence of a 
quorum.
  The PRESIDING OFFICER (Mr. Hagel). The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. HATCH. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.


                           Amendment No. 2647

  Mr. HATCH. Mr. President, I send an amendment to the desk.
  The PRESIDING OFFICER. The clerk will report.
  The assistant journal clerk read as follows:

       The Senator from Utah [Mr. Hatch], for himself, Mrs. 
     Murray, Mr. Baucus, Ms. Cantwell, Mr. Smith, Mr. Bunning, and 
     Mr. Grassley, proposes an amendment numbered 2647.

  Mr. HATCH. Mr. President, I ask unanimous consent that reading of the 
amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

          (Purpose: To extend and modify the research credit)

       At the end of subtitle A of title III add the following:

     SEC. __. EXTENSION AND MODIFICATION 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) Increase in Rates of Alternative Incremental Credit.--
     Subparagraph (A) of section 41(c)(4) (relating to election of 
     alternative incremental credit) is amended--

[[Page 3179]]

       (1) by striking ``2.65 percent'' and inserting ``3 
     percent'',
       (2) by striking ``3.2 percent'' and inserting ``4 
     percent'', and
       (3) by striking ``3.75 percent'' and inserting ``5 
     percent''.
       (c) Alternative Simplified Credit for Qualified Research 
     Expenses.--
       (1) In general.--Subsection (c) of section 41 (relating to 
     base amount) is amended by redesignating paragraphs (5) and 
     (6) as paragraphs (6) and (7), respectively, and by inserting 
     after paragraph (4) the following new paragraph:
       ``(5) Election of alternative simplified credit.--
       ``(A) In general.--At the election of the taxpayer, the 
     credit determined under subsection (a)(1) shall be equal to 
     12 percent of so much of the qualified research expenses for 
     the taxable year as exceeds 50 percent of the average 
     qualified research expenses for the 3 taxable years preceding 
     the taxable year for which the credit is being determined.
       ``(B) Special rule in case of no qualified research 
     expenses in any of 3 preceding taxable years.--
       ``(i) Taxpayers to which subparagraph applies.--The credit 
     under this paragraph shall be determined under this 
     subparagraph if the taxpayer has no qualified research 
     expenses in any 1 of the 3 taxable years preceding the 
     taxable year for which the credit is being determined.
       ``(ii) Credit rate.--The credit determined under this 
     subparagraph shall be equal to 6 percent of the qualified 
     research expenses for the taxable year.
       ``(C) Election.--An election under this paragraph shall 
     apply to the taxable year for which made and all succeeding 
     taxable years unless revoked with the consent of the 
     Secretary. An election under this paragraph may not be made 
     for any taxable year to which an election under paragraph (4) 
     applies.''
       (2) Coordination with election of alternative incremental 
     credit.--
       (A) In general.--Section 41(c)(4)(B) (relating to election) 
     is amended by adding at the end the following: ``An election 
     under this paragraph may not be made for any taxable year to 
     which an election under paragraph (5) applies.''
       (B) Transition rule.--In the case of an election under 
     section 41(c)(4) of the Internal Revenue Code of 1986 which 
     applies to the taxable year which includes the date of the 
     enactment of this Act, such election shall be treated as 
     revoked with the consent of the Secretary of the Treasury if 
     the taxpayer makes an election under section 41(c)(5) of such 
     Code (as added by paragraph (1)) for such year.
       (f) Effective Dates.--
       (1) Subsection (a).--The amendments made by subsection (a) 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act.
       (2) Subsections (b) and (c).--The amendments made by 
     subsections (b) and (c) shall apply to taxable years 
     beginning after December 31, 2004.

   Mr. HATCH. Mr. President, the amendment I am offering today is an 
important and appropriate one for any bill that has the word ``jobs'' 
in its title. It is a bill to extend and expand a tax provision that is 
central to creating and retaining U.S. jobs--the research credit. I am 
joined in this effort by Senators Murray, Baucus, Cantwell, Smith, 
Bunning, and Grassley.
   This bipartisan amendment will help to ensure that businesses 
continue to increase research activities--and to create new jobs--in 
the United States. As many of our colleagues are aware, the current 
research credit expires in just a few weeks, on June 30, 2004.
   I believe that if we fail to act to extend this credit, we surely 
will see the negative effects manifest in lower economic growth, fewer 
jobs, fewer innovative products, and opportunities lost as research is 
taken from this country to other nations that offer more attractive 
incentives.
   Our colleagues many times have expressed their resounding support 
for the research credit and I hope they will again. This amendment not 
only would extend the credit for 18 months, until December 31, 2005, 
but also would allow businesses to choose a new way to calculate the 
credit so that more research-intensive companies can lower their costs 
of U.S.-based research activities.
  The American taxpayer relies on us to make the right policy choices 
for the long-term health of our economy. We have faced and are still 
facing major challenges both to our national security and to our 
economic security. Time and again we have looked to the industries on 
the cutting edge of new and improved technologies to help us meet those 
challenges.
   My home State of Utah is a good example of how State economies 
benefit from the research tax credit. Utah is home to a large number of 
firms that invest a high percentage of their revenue on research and 
development.
   In Utah, 5 percent of the workers--51,000 people--work in the 
research-intensive high technology sector. That includes over 10,000 
people working just to design computer systems, and over 6,000 
producing medical equipment. And there is a lot of R&D taking place 
outside of Utah's high-tech sector.
  Just to give one example, more than 7,000 people work in Utah's 
chemical industry, and workers in that industry benefit from research 
and development taking place in Utah and throughout the country. 
Aerospace and the pharmaceutical industries are two more examples of 
big Utah employer groups that reap the benefits of R&D.
  I want Utah companies to be able to buy better manufacturing 
equipment, more reliable electronics, and have access to more efficient 
quality control techniques. The workers who use new inventions will get 
just as many benefits as workers who create those new inventions. And 
the evidence clearly shows, that the research credit will increase 
innovation.
  In short, there are tens of thousands of employees working in Utah's 
thousands of technology based companies, with tens of thousands more 
working in other sectors that engage in R&D. Beyond that, practically 
all of Utah's hundreds of thousands of workers benefit from higher 
productivity coming from the innovations that researchers both inside 
and outside of Utah produce. Research and development is clearly the 
lifeblood of our economy throughout the Nation.
  Since 1981, when the research credit was first enacted, the Federal 
Government has joined in partnership with businesses, large and small, 
in those industries to ensure that the research dollars were expended 
in the United States so that the jobs were created here. We as a nation 
have reaped the benefits of that research.
  It seems clear to me that if we want to keep our Nation and our 
economy strong and growing, it is vital that we maintain and even 
enhance our position as the world leader in technological advances. Our 
Nation simply must continue to invest in research and development, 
especially in the private sector. And, the Federal Government must 
affirm its role as a partner in those private-sector endeavors.
  I believe the best way to ensure that private-sector investment in 
R&D continues at the health rate needed to fuel further productivity 
gains is to extend the current-law research credit and make that credit 
more widely available. Ideally, the credit should be made permanent.
  I have long advocated a permanent credit and this body is 
overwhelmingly on record for a permanent research credit. During the 
Senate's debate on the 2001 tax cut bill, I offered an amendment to 
provide for such a permanent credit that the Senate adopted. 
Unfortunately, that provision was dropped in conference and we lost a 
great opportunity.
  Given our budget deficit situation, I do not believe it is possible 
politically to make the research credit permanent on this bill. 
Ironically, though, a permanent credit costs no more than one that is 
regularly extended. Because of the urgency and importance of this 
matter, however, this amendment seeks only a temporary extension.
  Let me point out a few key points for our colleagues so they can 
understand the importance of the research credit. These are according 
to the staff of the Joint Committee on Taxation.
  The primary category of expenditures that qualify for the research 
credit are wages paid to employees performing research in the Unites 
States. In 2001, more than 15,000 taxpayers claimed the research tax 
credit--42 percent of these businesses were engaged in manufacturing.
  However, of the total $6.5 billion in research credits claimed in 
2001, 66 percent of those dollars were claimed by manufacturers. When 
you look at the size of the companies claiming the credit in 2001, you 
see that 68 percent of

[[Page 3180]]

the firms claiming it had assets of $10 million or less.
  The research credit translates into real jobs in the United States 
and, as the statistics show, it is our small- and medium-size domestic 
manufacturers that most benefit from the research credit.
  A great deal of the reason our economy grew so rapidly in the second 
half of the last decade was because of a strong surge in our 
productivity rate. This surge is continuing into the present and has 
been a marvel to most economists.
  This increase in productivity has allowed the economy to continue to 
grow at a rapid pace without the increase in inflation that usually 
accompanies such growth. Moreover, increases in productivity growth are 
the key to future economic security, particularly in light of the huge 
entitlement challenges we face in the coming years. A very large factor 
in that productivity growth is innovation, which of course, requires 
R&D.
  As I mentioned, this amendment would extend the current credit until 
December 31, 2005, giving businesses that utilize this important 
incentive some certainty in the short-term so that they can hire the 
needed personnel to take research activities off the drawing board now.
  Over the years, the research credit has proven to be a powerful 
incentive for companies to increase their research and development 
activities. Unfortunately, it does not work perfectly. Part of the 
reason is that this is an incremental credit, designed to reward extra 
research efforts, not just what a company might do anyway. From a good 
tax policy point of view, I believe this is the best way to provide an 
incentive tax credit.
  However, it is difficult to craft an incremental credit that works as 
it should in every case. While the regular credit works very well for 
many companies, it does not help some other firms that still incur 
significant research expenditures. This is because the credit's base 
period of 1984 through 1988 is growing more distant and some firms' 
business models have changed.
  There is no good policy reason why research should be more expensive 
for some industries than it is for others. To partially solve this 
problem Congress enacted the alternative incremental research credit, 
AIRC, in 1996, and now we propose a way to address the rest of that 
problem.
  In addition to increasing the AIRC rates, this amendment allows 
taxpayers to elect, in lieu of the regular credit or the AIRC, an 
alternative simplified credit that is based on a rolling average of the 
prior 3 years' qualified research expenses. This provides companies 
that are increasing their R&D with another way to take advantage of the 
credit when the 20-year-old base period proves to be irrelevant.
  This is an important amendment. It is important to our economy, both 
now and in the future. It is important to good, high paying jobs in the 
United States.
  We need to continue to be the world's leader in innovation. We cannot 
afford to allow other countries to lure away the research that has 
always been done in the United States. We cannot afford to have the 
lapses in the research pipeline that would result if we do not take 
care of extending this credit before it expires on June 30. I urge all 
of my colleagues to support this amendment. It is the right thing to 
do. We have done it before. We certainly should do it now. I wish it 
were permanent. But under the circumstances, this is the best we can 
do. I have every confidence my fellow Members of the Senate will vote 
for this amendment.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Washington.
  Mrs. MURRAY. I rise today to join with Senator Hatch to strengthen 
and extend the research and development tax credit. We are all 
concerned about our slow economy. Every day we learn of more American 
jobs that are being shipped overseas. We worry about American companies 
losing out in the global marketplace and the impact that has on our 
workers and on our economy.
  Today, we are offering a way to fight back and help our workers and 
companies continue to lead the world in innovation. Today, I am proud 
to offer an amendment that will support high-wage jobs for American 
workers at home and make our products more competitive around the 
world.
  Anyone who wants to support good-paying American jobs, and anyone who 
wants to help American companies compete and win in the global 
marketplace should vote for the Hatch-Murray amendment. We all know 
research and development is a critical part of any business's success, 
but investing in R&D is not cheap. Our foreign trade competitors offer 
substantial tax and financial incentives to encourage American 
companies to make their research investments elsewhere. But we need 
those jobs in the United States and this amendment gives us a chance to 
support American workers in the face of foreign competition.
  That is why the R&D tax credit is so important. It provides a real 
incentive for companies to increase their investment in U.S.-based 
research and development. The credit helps stimulate innovation, wages, 
and exports which all contribute to a stronger economy and a higher 
standard of living for American workers.
  This is about investing in America. Because this tax credit is only 
available for R&D performed in the United States, it provides a 
discount on qualifying expenditures, and it is a proven incentive for 
U.S. companies to increase their R&D investment in the United States.
  Unfortunately, the existing research and development tax credit will 
expire this June. Unless we take action, in just a few months we will 
be throwing away one of the best incentives for spurring investments at 
home. I have always supported making the R&D tax credit permanent, but 
because of budget constraints, we are not in a position to do that 
today. But we can do the next best thing and extend and strengthen this 
incentive.
  The Hatch-Murray amendment does three things: First, it extends the 
traditional credit for 18 months through December 31, 2005; second, it 
increases the alternative incremental credit rate starting in January 
of 2005; and finally, again starting in January of 2005, it provides an 
alternative simplified credit to encourage even more research-intensive 
businesses to spend more on research in the United States.
  The R&D tax credit is a great example of how we make the Tax Code 
work for American workers and American families right here at home.
  I have a letter from the R&D Tax Credit Coalition, and I ask 
unanimous consent to have it printed in the Record after my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit No. 1)
  Mrs. MURRAY. Mr. President, this letter is actually signed by over 
500 companies and associations and urges Congress to permanently extend 
the R&D tax credit and make the modifications contained in S. 664.
  I share with my colleagues a portion of the letter:

       The technological innovations made possible by the R&D 
     Credit enable companies to bring more products and services 
     to market, increase employment, and raise the standard of 
     living for all Americans.
       R&D helps manufacturers and services companies with U.S. 
     operations maintain a competitive edge over lower-cost 
     foreign competitors.
       It allows a small, medium or large company to reduce its 
     financial risk in expensive, labor-intensive R&D investments.
       Since the credit was created in 1981, investments in 
     technology and innovation have spurred economic growth and 
     contributed greatly to our country's high standard of living. 
     Continued R&D spending is a necessary element in our 
     country's ability to invest for our future.

  This is not some abstract economic principle. It is a real incentive 
that creates jobs and helps workers in America. I have seen it 
firsthand at companies throughout Washington State. This year, 
Microsoft plans to invest $6.8 billion on R&D. Because this tax credit 
is targeted almost exclusively at wages, the credit will translate into 
additional jobs in Washington State and in the United States. That will 
mean jobs not just at Microsoft but at many other local companies.

[[Page 3181]]

  In fact, according to a February 25, 2003, article in the Seattle 
Times, one study found that every job at Microsoft supports 3.4 other 
jobs in the economy. It also found that from 1990 to 2001 Microsoft was 
responsible for more than a fourth, 28.3 percent, of King County's 
growth. That is an example of how one company's investment in R&D is 
supporting good family wage jobs throughout the region.
  That is just one company. There are many other companies engaged in 
R&D in Washington State and in the United States. Their investment in 
R&D will help our workers and help our economy.
  I want to share some other figures that show the importance of R&D 
investment, especially in Washington State.
  In the year 2000, companies performed almost $200 billion in R&D 
$9.8 billion of that research was performed in Washington State.
  Let me shed some light on types of employers that are doing that 
work. Thirty-three percent of the research done in Washington State was 
performed by manufacturers. We have seen a terrible loss of 
manufacturing jobs over the years, and this credit is one way to help 
them stem the tide. Mr. President, 11.4 percent of the research done in 
Washington State was done in the professional, scientific, and 
technical service industries.
  This is about moving our economy forward. Technological innovations 
have accounted for more than one-third of our Nation's economic growth 
during the last decade. We know innovation is critical to sustained 
growth in the future.
  Extending and improving the R&D tax credit is one of the most 
important steps we can take right now to foster investment at home and 
job creation throughout the country.
  I urge my colleagues to give American workers a fair shot in the 
global marketplace by voting for the Hatch-Murray amendment.
  Mr. President, I yield the floor.

                               Exhibit 1


                                         R&D Credit Coalition,

                                 Washington, DC, February 9, 2004.
     Hon. Bill Thomas,
     Chairman, Committee on Ways and Means, House of 
         Representatives, Washington, DC.
     Hon. Charles Grassley,
     Chairman, Committee on Finance, U.S. Senate, Washington, DC.
     Hon. Charles Rangel,
     Ranking Member, Committee on Ways and Means, House of 
         Representatives, Washington, DC.
     Hon. Max Baucus,
     Ranking Member, Committee on Finance, U.S. Senate, 
         Washington, DC.
        Dear Chairmen Thomas and Grassley, and Ranking Members 
     Rangel and Baucus: We urge you to make the enactment of a 
     permanent research tax credit (R&D Credit) with the 
     modifications contained in companion bills H.R. 463/S. 664 an 
     early legislative priority in 2004.
        As you know, the technological innovations made possible 
     by the R&D Credit enable companies to bring more products and 
     services to market, increase employment, and raise the 
     standard of living for all Americans. R&D helps manufacturers 
     and services companies with U.S. operations maintain a 
     competitive edge over lower-cost foreign competitors. It 
     allows a small, medium or large company to reduce its 
     financial risk in expensive, labor-intensive R&D investments.
        Since the credit was created in 1981, investments in 
     technology and innovation have spurred economic growth and 
     contributed greatly to our country's high standard of living. 
     Continued R&D spending is a necessary element in our 
     country's ability to invest for our future.
        The growth of our economy is inextricably tied to the 
     ability to companies to make a sustained commitment to long-
     term research. Congress has consistently demonstrated support 
     for the R&D credit. This year, in order to provide stability 
     and to ensure that all companies performing intensive 
     research in the United States are able to benefit from the 
     credit, Congress should make the credit permanent, increase 
     the Alternative Incremental Credit (AIRC) rates, and provide 
     an alternative simplified credit calculation.

  Mr. HATCH. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant journal clerk proceeded to call the roll.
  Mr. HARKIN. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. HARKIN. Mr. President, just a parliamentary inquiry: I understand 
we are on the FSC bill, and we are on an amendment that has been laid 
down; is that correct?
  The PRESIDING OFFICER. The Senator is correct.
  Mr. HARKIN. I thank the Chair.
  America is stuck in a jobless recovery and this jobless recovery is 
not an accident. It is in large measure the result of failed economic 
policies, policies that the administration stubbornly clings to despite 
the loss of nearly 3 million private sector jobs over the last 3 years.
  This administration has embraced outsourcing. It is against extending 
unemployment insurance for the long-term unemployed. It is adamant 
against raising the minimum wage. And it is determined--any day now--to 
eliminate time-and-a-half overtime pay for millions of American 
workers.
  It is time for Congress to step in and chart a new course. It is time 
for Washington to listen to ordinary working Americans. They are 
telling us loudly and clearly that their No. 1 issue is economic 
security. They are telling us that they fear losing their jobs, health 
care, and retirement.
  Now they also fear losing their right, which has been their right 
since 1938, to time-and-a-half compensation for work over 40 hours a 
week. They fear, with good reason, that under the Department of Labor's 
new rules, they will be obligated to work a 50-, 55-, 60-hour week with 
zero additional compensation. For millions of working Americans and 
their families, this is unacceptable. It is, indeed, the last straw.
  Accordingly, at the appropriate time, I will offer an amendment to 
this bill that will stop the administration from implementing its 
proposed new rules to eliminate overtime pay protection for millions of 
American workers.
  This amendment will be very familiar to my colleagues. Late last year 
a similar amendment I offered passed the Senate by a vote of 54 to 45. 
It was endorsed in the House by a vote of 226 to 203. It also won the 
overwhelming support of the American public. Yet despite this clear 
expression of the will of Congress and of the public, my overtime 
amendment was stripped from the omnibus appropriations bill in 
conference.
  Today this overtime amendment is back by popular demand. It amazes me 
that wherever I travel, anywhere in the country, people come up to me 
to talk about this overtime issue. They know now what the 
administration is trying to do. They are upset. Working families are 
angry and they want action. They want us to take action to stop the 
implementation of these new rules that will take away their protection 
so that they can get time and a half when they work overtime.
  Frankly, at this point the administration has zero credibility on 
this issue. The Department of Labor claims that it simply wants to give 
employers clear guidance as to who is eligible for overtime pay. But 
ordinary Americans are not buying this happy talk. They know that the 
administration is proposing a radical rewrite of the Nation's overtime 
rules. They know these new rules will strip millions of workers of 
their right to fair compensation.
  The people are right. They are correct. Plain and simply, the new 
overtime rules are a frontal attack on the 40-hour workweek, pushed 
aggressively by the administration without a single public hearing. 
Yes, that is correct. Last year these proposed rules came out, 
drastically changing our overtime pay protections, the rules that had 
been implemented since 1938, without one public hearing anywhere in the 
United States.
  These new proposed rules could effectively end overtime pay in dozens 
of occupations, including nursing, police officers, firefighters, 
clerical workers, air traffic controllers, social workers, journalists. 
Indeed, the new criteria for excluding employees from overtime are 
deliberately vague and elastic so as to stretch across vast swaths of 
the workforce.
  Listen to Mary Schlichte, a nurse in Cedar Rapids, IA:


[[Page 3182]]

       Many nurses just like me work long hours in a field with 
     very stressful working conditions and little compensation. . 
     . . Our patients rely on us. Our families depend on us. We 
     need overtime pay so we can stay in the profession we love 
     and still make our ends meet.

  Ms. Schlichte told me about her Cedar Rapids nurse colleagues who 
also rely on overtime pay. One nurse is married to a struggling farmer. 
She relies on her overtime pay to cover their insurance premiums. They 
already fear losing their farm, and now they fear losing their health 
care coverage also.
  Dixie Harms is a longtime trainer of nurses in Des Moines. Ms. Harms 
told me:

       If overtime is changed for hospital nurses, we will see a 
     mass exodus of registered nurses from the hospital setting 
     because they will get fed up and refuse to volunteer so many 
     hours to what they really love doing.

  Two and a half years ago, after the terrible September 11 attacks, 
many in this body spoke eloquently about the heroism of our 
firefighters, police officers, public safety workers. Ever since, 
America's first responders have worked long hours to protect us from 
terrorists threats. But now the administration apparently wants to deny 
them time- and-a-half compensation for those longer hours. Simply put, 
this is wrong.
  Since passage of the Fair Labor Standards Act in 1938, overtime 
rights and the 40-hour workweek have been sacrosanct, respected by 
Presidents of both parties. But nothing, it seems, is sacred to this 
administration when it comes to workers' rights.
  For 65 years, the 40-hour workweek has allowed workers to spend time 
with their families instead of toiling past dark and on weekends. At a 
time when the family dinner is becoming an oxymoron, this standard is 
more important than ever.
  These radical revisions are anti-
worker and antifamily. Given the fact we are stuck in a jobless 
recovery, the timing of this attack on overtime could not be worse. It 
is yet another instance of this administration's economic malpractice.
  Bear in mind that time-and-a-half pay accounts for some 25 percent of 
the total income of Americans who work overtime. With average U.S. 
incomes declining, the proposed changes would slash the paychecks of 
millions of American workers.
  Moreover, the proposed new rules are all but guaranteed to hurt job 
creation in the United States. This is basic logic. If employers can 
more easily deny overtime pay, they will push their current employees 
to work longer hours without compensation.
  With 9 million Americans currently out of work, these proposed 
regulations will give employers yet another disincentive to hire new 
workers. Why hire a new worker if you can get your present workers to 
work overtime and not have to pay them time and a half? That would be 
cheaper than hiring a new worker.
  It is bad enough to deny 8 million workers their overtime rights, but 
what is really striking about these proposed rules is the mean-
spiritedness of the language included in these proposed rules from the 
Department of Labor.
  For example, the department is offering employers what amounts to 
kind of a cheat sheet--helpful hints on how to avoid paying overtime to 
the lowest paid workers, the same workers who are supposedly helped by 
the new rules.
  Let me be clear about this. There is a part of the proposed changes 
that we all support, and that is raising the minimum pay level by which 
a worker would not be exempt from any overtime rules. For example, 
right now, if you make below about $7,000 a year, no matter what your 
job is, you cannot be exempted from overtime, from overtime rules--even 
if you are a professional or if you fall into one of the exempt 
categories. If you make below about $6,900 or $7,000 a year, you have 
to be paid time and a half overtime, no matter what your job is. The 
administration is proposing to raise that to about $21,900, close to 
$22,000 a year. It has not been raised for a long time, so that is all 
well and good. But, in so doing, the administration has put out 
technical advice to employers on how they can get around paying the 
lowest paid workers time and a half.
  For example, the department suggested in writing that an employer 
might cut a worker's hourly wage so that any new overtime payments will 
not result in a net gain to the employee. It also recommends if the 
worker's salary is close to the threshold, you might want to raise 
their salary slightly to meet that threshold and then their protection 
for time and a half would end, and then they could be exempt.
  This is kind of disgraceful. This would be like the IRS putting out 
advice to would-be scofflaws, or people or entities that might want to 
get around paying their fair share of taxes, telling them how to avoid 
paying their taxes, saying here is how you can effectively cheat. What 
would we say if the IRS started putting out advice to employers, saying 
here is how to get around paying your fair share of taxes?
  That is what they are doing on overtime. They are putting out advice 
to employers, saying here is how you get around it. It is disgraceful. 
There is one part of this new proposed rule that I find probably more 
disgraceful than just about anything. I know that when I say this, 
people are going to say: Harkin, this cannot be right, this cannot 
happen.
  The more I dig into the nuts and bolts and fine print of this 
proposed rule for changing overtime, the more astounded I am at what we 
are finding, in terms of who is now being exempted, or trying to be 
exempted from overtime pay.
  Would you believe it if I told you that the administration, for the 
first time since 1938, is changing the rules to make it harder for 
veterans to get overtime pay than their counterparts who did not serve 
in the military? Let me repeat that. Mr. President, generally, people 
would not believe me if I told them this administration, in their 
proposed rules, is making it harder for a veteran to qualify for 
overtime than someone who didn't serve in the military. People say: 
Harkin, that cannot be right.
  Read the proposed regulation. I have the old one. Here is the old 
rule that covers overtime pay. There is a section called ``Learned 
Professions,'' and it is talking about who basically would be not 
barred from exemption. It talks about members of the professions, such 
as graduates of law school and different things like that. It says here 
the word ``customarily'' implies that in the vast majority of cases a 
specific academic training is a prerequisite for entrance into the 
profession. It makes the exemption available to the lawyer, the 
chemist, and things like that. But it does not in any way mention 
veterans in the old rule. There is no mention of veterans.
  Here is the new rule. I have it blown up on the chart. It says:

       However, the word ``customarily'' means that the exemption 
     is also available to employees in such professions who have 
     substantially the same knowledge level as the degreed 
     employees, but who attained such knowledge through a 
     combination of work experience, training in the Armed Forces, 
     attending a technical school.

  Et cetera, et cetera. These words, ``training in the Armed Forces'' 
have never been in the rules before. In other words, since 1938, we 
have gone through World War II, the Korean war, cold war, Vietnam war, 
the gulf war, Dominican Republic war, Grenada, and a whole bunch of 
other things. And our veterans--people who have served in the military, 
who went in there, who the Army asks to ``be all that you can be in the 
U.S. Army.'' How many ads do we see enticing young people to come into 
the military because they can get training which will increase their 
ability to earn more money later on in life, after they get out of the 
military--specialized training that will make them more desirable in 
the workforce?
  Well, guess what. They are running those same ads to be all you can 
be, learn a specialized training, and be more valuable in the 
workforce, and at the same time the administration is promulgating a 
rule saying: Wait a minute, if you get training in the Armed Forces, 
guess what. You are now covered under this new rule that

[[Page 3183]]

says you can be exempted from the overtime pay protection because now 
you fall into the same kind of category as lawyers and architects and 
people who went to school for a long time to receive specialized 
training.
  Again, don't take my word for it. Read it. ``Training in the Armed 
Forces''--those five words have never been in the rules before, never. 
We said before if you get training in the Armed Forces, you can now be 
exempt from overtime pay. That is what is coming down the pike. That is 
what is in these rules. That is why so many of us feel so strongly that 
this proposed overtime rule should not be adopted.
  According to the proposed rules, employers can consider specialized 
training and knowledge gained in the military as equivalent to what is 
learned in professional schools. This will allow employers to 
reclassify veterans as ineligible for overtime. I started looking at 
some of the comments made regarding this. I wondered where it is coming 
from. Here are comments on behalf of the Boeing company:

       Boeing observes that many of its most skilled technical 
     workers received a significant portion of their knowledge and 
     training outside the university classroom, typically in a 
     branch of the military service, where through a combination 
     of classroom training and field experience they become 
     ``learned experts'' on very sophisticated aerospace products 
     or services. Oftentimes, such experts are actually more 
     knowledgeable than colleagues with advanced degrees--


      Master's degrees and Ph.D.s.and are viewed by the customers 
     as the company's experts on the product. Boeing thus supports 
     the Department's--

  That is the Department of Labor--

     focus on the knowledge used by the employee in performing her 
     job, rather than the source of the knowledge or skill.

  What Boeing is saying is we have a lot of people who work for us who 
got their training in the military. They have become skilled in their 
profession. But because they did not go to graduate school, because 
they got their training in the military, we still have to pay these 
people overtime. We have to pay them time and a half, and we do not 
want to pay them time and a half. We want to treat them just like 
Ph.D.s and all those other people. So, therefore, they support the 
proposed rule change that would allow them, Boeing, to reclassify these 
former veterans as being exempt from overtime pay protections.
  This is a letter from Thomas Corey, the national president of the 
Vietnam Veterans of America:

       Therefore, we would like to make you aware that the 
     proposed modification of the rules would give employers the 
     ability to prohibit veterans from receiving overtime pay 
     based on the training they received in the military. . . . 
     The proposed rule changes will make these veterans and their 
     families unfairly economically vulnerable in comparison with 
     their non-veteran peers.

  Let me repeat that:

       The proposed rule changes will make these veterans and 
     their families unfairly economically vulnerable in comparison 
     with their non-veteran peers. We hope you will agree that the 
     men and women who have served our Nation so well in military 
     service should not be penalized for having served.

  That is Thomas Corey, national president, Vietnam Veterans of 
America. I think that is the crux of it. You could have two people, 
both skilled in a certain area, let's say aerospace or whatever it 
might be. One got his training in the military and one got his training 
in some other way outside the military. So the person outside the 
military would be covered under overtime. The person who served in the 
military would not be covered by overtime.
  I wish someone would make some sense out of that. It is just a slap 
in the face to the men and women who served in the military and were 
told: Be all you can be, get specialized training in the military, but 
what they are not telling them is once you do that, they are going to 
take away your right to overtime pay once you get out of the military.
  This is outrageous--outrageous not just to our veterans but to most 
Americans. Veterans organizations are deeply disturbed by this, not 
just the Vietnam veterans but all veterans organizations.
  Picture this: The Commander in Chief has mobilized thousand of 
reservists and National Guard troops from Iowa and from across America. 
They left their regular jobs as police officers, firefighters, nurses, 
clerical workers, on and on, and are deployed in Iraq for a year or 
more. But if the administration has its way, when these troops come 
back home from Iraq or wherever to resume their civilian jobs, they are 
going to find that if they received specialized training in the 
military, they have been stripped of their right to time-and-a-half 
overtime pay.
  It is punishing veterans precisely because they were dedicated 
soldiers who pursued specialized instruction and training while in the 
military. The Department of Labor is preparing quite a welcome home 
present for many of the guardsmen and reservists returning from Iraq. 
It might read this way:

       Dear Returning Veteran: While you were away we reclassified 
     your job so that you no longer qualify for time-and-a-half 
     overtime pay. Thank you for serving our country.

  There is another group I talked about last year--and it is still true 
this year--who are disproportionately harmed by the proposed new 
overtime rules--women.
  The fact is, women tend to dominate in retail services and sales 
positions which would be particularly affected by the new rules. 
Married women in America increased their working hours by nearly 40 
percent from 1979 to 2000. As women have increased their time in the 
paid labor market, their contribution to family income has also risen. 
These contributions are especially important to lower and middle-income 
families--important for housing, health care, heating bills and, of 
course, for sending kids to school.
  Yet now the administration's new rules would take away overtime 
protections from millions of American women. Women in the paid 
workforce would be forced to work longer hours for less pay and, of 
course, this means more time away from families, more childcare 
expenses with no additional compensation. Not surprising, prominent 
women's groups are adamantly opposed to the new overtime rules.
  The American Association of University Women, the National 
Organization of Women, the National Partnership for Women and Families, 
the YWCA, and Nine to Five, and the National Association of Working 
Women are all strongly supporting my amendment to stop the 
administration from implementing these new overtime rules.
  There is a broader context to this discussion of overtime. There is a 
bigger picture. As I said, the No. 1 issue for Americans today is 
economic security, and with good reason, because it is abundantly clear 
that America is stuck in a jobless recovery.
  Since this administration took office, nearly 3 million private 
sector jobs have been lost, including one in every seven jobs in 
manufacturing. George W. Bush has presided over the largest job loss of 
any President since Herbert Hoover. Yet the President remains wedded to 
policies that are making the problem worse. He remains wedded to 
policies that are destroying jobs, driving down wages, and threatening 
the economic security of the American people.
  A couple of weeks ago, the White House issued its annual economic 
report signed by the President explaining why we should welcome the 
``offshoring'' of U.S. jobs. The President's top economic adviser 
assured us that the outsourcing of high-end, white-collar jobs to Asia 
is ``a plus for the economy in the long run.''
  The President's economic report praises the virtues of a ``level 
playing field for goods and services,'' arguing that when a good or 
service is produced more cheaply abroad, it makes more sense to import 
it than to make or provide it domestically. That is from the 
President's report.
  We have a very serious question to ask ourselves: Do we really want 
American workers competing on a ``level playing field,'' head to head 
with factory workers in China working for 20 cents an hour, with 
software engineers in India working for $10,000 a year, going head to 
head with countries that employ abusive child labor to make products?
  In reality, is this not a race to the bottom, with nations competing 
to

[[Page 3184]]

slash salaries and benefits in order to win more jobs? Outsourcing is 
not the only thing hurting job creation and suppressing wages. These 
new overtime rules will have the same effect. Eight million workers 
will be stripped of their right and their protection to overtime pay.
  Of course, the employers can deny overtime pay. As I said, they 
simply push their current employees to work longer hours without 
compensation. This is a powerful disincentive to hire new workers. So 
as with outsourcing, the idea of sending so many of these jobs 
overseas, where they are paying 20 cents an hour, no health benefits, 
no retirement benefits, no Social Security, no environmental 
protections, killing overtime pay is the same thing. Just keep in mind 
if an employer can work an employee more than 40 hours and not pay time 
and a half, we can see that an employer would then say, well, why 
should I hire new workers? I will just work my present workers longer. 
If I can get 4 or 5 more hours a week out of each employee and not pay 
time and a half overtime, that is better than hiring somebody else.
  That is exactly what this proposed overtime rule is all about. It is 
terrible for job creation. I do not know why this administration does 
not see that. Yet in the face of facts, in the face of all of the 
reports we have gotten, in the face of what Americans are saying, which 
is that they want their overtime protected, the administration is 
surging ahead. They are going to strip people in this country of their 
right to overtime pay.
  Since we have had no public hearings on it, we are not certain why 
the administration is doing this. Why are they moving ahead with the 
most profound change in our overtime laws since 1938? Now, I use my 
words carefully. I said the ``most profound change.'' There have been 
changes in overtime rules and laws since 1938, since the Fair Labor 
Standards Act was passed, of course. Many occupations that existed then 
no longer exist, and they were taken off. I understand.
  New occupations came in like computer software writers, computer 
engineers, which were not around in the late 1930s, 1940s, 1950s, or 
1960s. So there have been changes.
  Every time we have made a change in the overtime rules, we have done 
it through open hearings, through open collaboration between the 
administration and Congress and labor, all working together to do what 
is right for our people and our country.
  So, yes, we have made a number of changes since 1938, but as far as 
my research shows, this is the first time since 1938 that an 
administration has made this profound a change, and it is the first 
time since 1938 that the administration has proposed these changes 
without having one public hearing. It is the first time since 1938 that 
any administration, Republican or Democrat, has proposed changes such 
as this in the overtime rules without consultation and working closely 
with Congress to develop a consensus as to what has to be done.
  I am left with, perhaps, some conclusions: The administration really 
does not want to create a lot of new jobs; that by driving down labor 
costs, perhaps we can increase corporate profitability. It allows 
corporations to export cheap labor overseas with outsourcing. The 
administration puts pressure on U.S. workers to accept lower wages, 
less generous benefits, longer working hours. This is true of 
outsourcing, and it is true of eliminating overtime.
  Right now, American workers work longer than any workers in any 
industrialized country in the world. We now work longer than workers in 
Japan, Germany, Great Britain, and our neighbor to the north, Canada. 
Guess what we are being told. Guess what our workers are being told by 
this administration. That they are going to work even longer, and they 
will not have any right to overtime pay.
  There is more. The President refuses to extend benefits for the long-
time unemployed, and opposes any increase in the minimum wage. It has 
been frozen at $5.15 an hour for years. This is not a living wage; it 
is a poverty wage. It keeps downward pressure on wages all across the 
spectrum.
  All this means, again, is fewer jobs for U.S. citizens. It means 
downward pressure on wages for all of our workers.
  Something is missing. What is missing is ordinary, hard-working 
Americans are not participating in this so-called economic recovery. 
More and more Americans live in fear of losing their jobs, their health 
benefits, and losing their retirement. The truth is, we cannot build a 
sustainable recovery by exporting jobs, by driving down wages, and by 
making Americans work longer hours without compensation.
  Moreover, such a recovery, if it even could take place, is not 
desirable. As one individual said, my time with my family in the 
evenings and on the weekends is premium time. Yes, I work during the 
week to make a living, but the time with my family is premium time. If 
I am going to be asked to give up my premium time with my family, do I 
not deserve to have premium pay, time and a half, something out of the 
ordinary?
  As this person said to me, I get my wages, which are ordinary, for my 
ordinary working hours that I have agreed to work, but I should not get 
ordinary pay for my premium time, which is the time I spend with my 
family. That is why I say a recovery that means that our American 
workers are going to work longer, spend more time away from their 
families, and not get paid any more for it is not a desirable recovery.
  A true recovery must include all working Americans. It can only be 
built on a foundation of good jobs with good wages in America, not 
overseas. It can only be built on a foundation that includes a minimum 
wage that is a living wage, not a poverty wage. It can only be built on 
a foundation that preserves American workers' rights to time and a half 
overtime pay.
  Shortly, I will be offering this amendment. Obviously, this FSC bill 
is touted as a JOBS bill. That is all well and good. Let us have an 
open and good discussion about that. We have some amendments to offer 
that a number of us believe will help increase jobs in this country. 
The one I will be offering will be protecting the overtime rights of 
American workers. So I am hopeful we can move on to that.
  On this issue, the administration ignores the pleas of the public. It 
has brushed aside the clear wishes of both Houses of Congress. Last 
year, we passed the amendment in the Senate to disallow the Bush 
regulations on taking away overtime pay protections. The House 
emphatically approved of that. Yet it was stripped out in conference. 
Again, this is not acceptable. I hope we can have a strong bipartisan 
vote in support of my amendment that would disallow taking away 
overtime pay protection for American workers. We can save the 
administration from making a terrible mistake. We can protect American 
workers' time-honored right to overtime compensation, and we can 
support an economic recovery that includes all Americans, a recovery 
that respects and preserves the American way.
  I yield the floor.
  The PRESIDING OFFICER (Mr. Sununu). The Senator from New Mexico.


                Amendment No. 2651 to Amendment No. 2647

  Mr. BINGAMAN. Mr. President, I send an amendment to the desk and ask 
for its immediate consideration.
  The PRESIDING OFFICER. The clerk will report.
  The assistant legislative clerk read as follows:

       The Senator from New Mexico [Mr. Bingaman] proposes an 
     amendment numbered 2651 to amendment No. 2647.

  Mr. BINGAMAN. I ask unanimous consent the reading of the amendment be 
dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

                (Purpose: To expand the research credit)

       At the end of the amendment add the following:

     SEC. __. EXPANSION OF RESEARCH CREDIT.

       (a) Credit for Expenses Attributable to Certain 
     Collaborative Research Consortia.--
       (1) In general.--Section 41(a) (relating to credit for 
     increasing research activities) is

[[Page 3185]]

     amended by striking ``and'' at the end of paragraph (1), by 
     striking the period at the end of paragraph (2) and inserting 
     ``, and'', and by adding at the end the following new 
     paragraph:
       ``(3) 20 percent of the amounts paid or incurred by the 
     taxpayer in carrying on any trade or business of the taxpayer 
     during the taxable year (including as contributions) to a 
     research consortium.''.
       (2) Research consortium defined.--Section 41(f) (relating 
     to special rules) is amended by adding at the end the 
     following new paragraph:
       ``(6) Research consortium.--
       ``(A) In general.--The term `research consortium' means any 
     organization--
       ``(i) which is--

       ``(I) described in section 501(c)(3) and is exempt from tax 
     under section 501(a) and is organized and operated primarily 
     to conduct energy research, or
       ``(II) organized and operated primarily to conduct research 
     in the public interest (within the meaning of section 
     501(c)(3)),

       ``(ii) which is not a private foundation,
       ``(iii) to which at least 5 unrelated persons paid or 
     incurred during the calendar year in which the taxable year 
     of the organization begins amounts (including as 
     contributions) to such organization for research, and
       ``(iv) to which no single person paid or incurred 
     (including as contributions) during such calendar year an 
     amount equal to more than 50 percent of the total amounts 
     received by such organization during such calendar year for 
     research.
       ``(B) Treatment of persons.--All persons treated as a 
     single employer under subsection (a) or (b) of section 52 
     shall be treated as related persons for purposes of 
     subparagraph (A)(iii) and as a single person for purposes of 
     subparagraph (A)(iv).''.
       (3) Conforming amendment.--Section 41(b)(3)(C) is amended 
     by inserting ``(other than a research consortium)'' after 
     ``organization''.
       (b) Repeal of Limitation on Contract Research Expenses Paid 
     to Small Businesses, Universities, and Federal 
     Laboratories.--Section 41(b)(3) (relating to contract 
     research expenses) is amended by adding at the end the 
     following new subparagraph:
       ``(D) Amounts paid to eligible small businesses, 
     universities, and federal laboratories.--
       ``(i) In general.--In the case of amounts paid by the 
     taxpayer to--

       ``(I) an eligible small business,
       ``(II) an institution of higher education (as defined in 
     section 3304(f)), or
       ``(III) an organization which is a Federal laboratory,

     for qualified research which is energy research, subparagraph 
     (A) shall be applied by substituting `100 percent' for `65 
     percent'.
       ``(ii) Eligible small business.--For purposes of this 
     subparagraph, the term `eligible small business' means a 
     small business with respect to which the taxpayer does not 
     own (within the meaning of section 318) 50 percent or more 
     of--

       ``(I) in the case of a corporation, the outstanding stock 
     of the corporation (either by vote or value), and
       ``(II) in the case of a small business which is not a 
     corporation, the capital and profits interests of the small 
     business.

       ``(iii) Small business.--For purposes of this 
     subparagraph--

       ``(I) In general.--The term `small business' means, with 
     respect to any calendar year, any person if the annual 
     average number of employees employed by such person during 
     either of the 2 preceding calendar years was 500 or fewer. 
     For purposes of the preceding sentence, a preceding calendar 
     year may be taken into account only if the person was in 
     existence throughout the year.
       ``(II) Startups, controlled groups, and predecessors.--
     Rules similar to the rules of subparagraphs (B) and (D) of 
     section 220(c)(4) shall apply for purposes of this clause.

       ``(iv) Federal laboratory.--For purposes of this 
     subparagraph, the term `Federal laboratory' has the meaning 
     given such term by section 4(6) of the Stevenson-Wydler 
     Technology Innovation Act of 1980 (15 U.S.C. 3703(6)), as in 
     effect on the date of the enactment of the Energy Tax 
     Incentives Act of 2003.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after December 31, 
     2004.

  Mr. BINGAMAN. Mr. President, I thank my colleagues, Senator Hatch and 
Senator Murray, for their leadership on extending and strengthening the 
research and development, R&D tax credit. The ability of our Nation to 
remain a world leader in technology and innovation is directly related 
to the investment we make in research and development. The R&D tax 
credit is an important component of this strategy as it creates an 
incentive for private companies to invest in research they might not 
otherwise have invested in but for that tax credit. This is an 
efficient way to accomplish a goal in our society that is increasing 
funding for research.
  Senator Domenici and I have been working here for the last several 
years to make some changes in the R&D tax credit law. The amendment I 
have sent to the desk incorporates those changes we have worked on. The 
amendment is based on legislation we filed in each of the last several 
Congresses, most recently S. 515 in the 107th Congress. This amendment 
addresses two weaknesses in the current R&D tax credit.
  The first part of the amendment provides participants in a research 
consortium with a flat 20-percent research credit. A consortium is 
defined as a group of five or more unrelated companies which are 
working together on a specific type of mutually beneficial research. 
Under current law, these companies are unable to take advantage of the 
full R&D tax credit. That does not make good sense. We should be 
encouraging companies to work together to share the costs of research 
instead of requiring that each of them bear the full capital 
expenditure to which they would be entitled in order to get the 
research tax credit. The amendment I have sent to the desk which 
Senator Domenici and I have been working on would correct this and 
would encourage this type of private research teaming.
  The second part of the amendment would be to get rid of a restriction 
that allows companies to only consider 65 percent of their research 
expenses for purposes of calculating their tax credit when the funds 
are paid to an outside party such as a Federal laboratory or university 
or a small business.
  Again, as with consortiums, this provision makes no sense as it 
exists in current law. In many if not most cases it is far more 
efficient and economical for a company to have their research done at a 
facility that is already equipped to do this type of experimentation 
and development. We ought to be encouraging businesses to utilize these 
resources instead of discouraging that use. For this reason, the 
amendment would allow a company to consider 100 percent of all of their 
expenses when contracting with a lab or university or small business to 
handle their research projects.
  The amendment would come into effect at the end of the year. It would 
continue for as long as the R&D provisions are in effect which, under 
the Hatch-Murray amendment which is what this proposal would amend, is 
the end of 2005.
  I look forward to working with my colleagues, Senators Hatch and 
Murray, on their R&D amendment. I very much appreciate their support 
for these small changes Senator Domenici and I would like to see made 
in this bill.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Nevada.
  Mr. REID. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. ALEXANDER. Mr. President, I ask unanimous consent the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Is there objection?
  Mr. REID. I object.
  The PRESIDING OFFICER. Objection is heard.
  Mr. ENSIGN. Mr. President, I ask unanimous consent the order for the 
quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. ENSIGN. I ask unanimous consent the time until 3:30 be equally 
divided in the usual form and that if the Bingaman amendment has not 
been previously disposed of, the Senate would then vote in relation to 
the Bingaman second-degree, to be followed immediately by a vote in 
relation to the Hatch first-degree, as amended if amended, provided 
further no additional second degrees be in order prior to the vote.
  The PRESIDING OFFICER. Is there objection?
  Mr. REID. No objection.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. ENSIGN. Mr. President, I understand the Senator from Tennessee is

[[Page 3186]]

going to seek recognition. I ask unanimous consent that following the 
Senator from Tennessee, I be recognized to speak on the R&D amendment.
  Mr. REID. Reserving the right to object, we have no problem with that 
except we now have an hour and 10 minutes. We don't want those two 
Senators to use the entire 70 minutes so we should have some idea how 
long they are going to speak.
  Mr. ENSIGN. For myself, I would only need 5 minutes.
  Senator Alexander?
  Mr. REID. I think it would be appropriate if my friends agree the 
time be equally divided between now and 3:30 between the proponents and 
opponents of the measure.
  The PRESIDING OFFICER. Under the order, the time is equally divided.
  Mr. ENSIGN. I ask to be recognized after Senator Alexander.
  The PRESIDING OFFICER. Without objection, it is so ordered. Who 
yields time?
  Mr. ENSIGN. I yield to Senator Alexander.
  Mr. ALEXANDER. Mr. President, my intention was to ask unanimous 
consent to speak as in morning business for 7 or 8 minutes, which may 
not be appropriate at this moment.
  The PRESIDING OFFICER. Under controlled time that is the Senator's 
right. The Senator is recognized.
  Mr. ALEXANDER. I ask unanimous consent to speak as in morning 
business for up to 7 minutes.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (The remarks of Mr. Alexander are printed in today's Record under 
``Morning Business.'')
  Mr. ALEXANDER. I thank the Chair. I yield the floor.
  The PRESIDING OFFICER. The Senator from Nevada is recognized.
  Mr. ENSIGN. Mr. President, I want to speak on the R&D tax credit that 
is in this bill--the proposal to extend that tax credit which is 
scheduled to expire. I want to talk about some of the benefits.
  This is a tax credit that has been supported by both sides of the 
aisle and by both bodies. There are many benefits to keeping this R&D 
tax credit as part of our Tax Code; first of all, the industries that 
benefit from this tax credit. I am the chairman of the Republican High-
Tech Task Force in the Senate, and I hear about this issue all the time 
from very important parts of our economy and how important it is to the 
creation of jobs.
  The industries that benefit from this include--it is not limited to 
the aerospace industry--the agriculture industry, biotechnology, 
chemical industry, electronic, energy, information technology, 
manufacturing, medical technology, pharmaceuticals, software and 
telecommunications, as well as others.
  It is not just big business that benefits from this R&D tax credit; 
it is also many small businesses. The companies that perform 
significant amounts of R&D perform that research and development in the 
United States. They pay very good wages to the people who do the 
research and development.
  This tax credit should be made permanent in the long run. That is my 
goal--to someday make this tax credit permanent. We keep extending it. 
I think it has been extended 10 different times over the years. It was 
allowed to actually lapse once, but it has never been made permanent. I 
believe it should be made permanent. Unfortunately, we can't do that in 
the context of what we are doing today. But we should at least make 
sure that R&D tax credit is extended for the 18 months the bill calls 
for.
  Why is it important? New vaccines, faster Internet, and other 
communications capabilities, safer transportation, enhanced energy-
efficient appliances, higher quality entertainment, better homes, 
improved national security. The list of societal benefits as a result 
of R&D is endless.
  R&D is the lifeblood of the U.S. economy. We really should encourage 
not only adoption of the extension but also eventually making permanent 
this tax credit.
  The revenue analysis, according to the economic benefit of the R&D 
tax credit prepared by Coopers & Lybrand in 1998 says:

       In the long run, $1.75 of additional tax revenue would be 
     generated for each dollar the Federal Government spends on 
     the credit, creating a win-win situation for both the 
     taxpayers and the government.

  I will conclude with this: We should do the right thing for the 
economy and allow companies some level of predictability. We keep 
telling them we are going to extend it, we are going to extend it. But, 
frankly, it is hard when research and development is usually planned 
long term. It is hard to do that when we keep coming up to the deadline 
and then finally extending the tax credit.
  I encourage us to do what we are doing today--extending it for 18 
months but also be looking for ways to make this R&D tax credit 
permanent.
  I yield the floor.
  Mr. BAUCUS. Mr. President, I yield myself about 10 minutes.
  The PRESIDING OFFICER. The Senator is recognized for 10 minutes.
  Mr. BAUCUS. Mr. President, I ask my friend from Wyoming how much time 
he has. It is my understanding that there was an agreement before I 
came to the floor.
  The PRESIDING OFFICER. Under the previous order, the time until 3:30 
is equally divided between the majority and minority leader.
  Mr. BAUCUS. Mr. President, I will be very brief.
  I am very happy to be supporting the pending amendment. This is an 
amendment that the author of the amendment, Senator Hatch, and I have 
introduced many times over many years. I have been a cosponsor of this 
amendment for years. Senator Hatch has been a cosponsor of this 
amendment for years. It is critically important that we finally get a 
major research and development tax stimulus enacted into law. This 
provision has been in law for various years, but it has always been 
extended--on and off again. It has been a yo-yo tax provision--a yo-yo 
incentive. Sometimes companies get it, sometimes they don't. Sometimes 
we enact it--all the way back to the expiration previous times--
sometimes we don't. It is very irresponsible, in my judgment, for this 
Congress not to give permanent research and development tax credit to 
American companies. Other countries do. The Government of Canada, for 
example, has a R&D tax credit which is much more generous than the one 
we give to American companies.
  There are other countries that also have stimulus incentives to 
research and development--more generous than we have in our country.
  I urge adoption of this amendment.
  I also agree with my good friend from Nevada. This provision should 
be permanently extended. It makes no sense not to be permanently 
extended. It should be a permanent fixture in the law.
  I say that because the stakes are getting so high. We are losing jobs 
to overseas companies in lots of ways.
  One way to create jobs in America is to have a very aggressive 
research and development tax credit for research and development in 
America. It is clear that jobs tend to be where the research is. The 
more research we have in America, the more likely it is we will have 
more jobs in America. It will also help to maintain jobs.
  We do not want jobs to go overseas. This will help us maintain jobs 
in America. We should not erect barriers to our companies going 
overseas. We should not stick our heads in the sand. That does not 
work. We are facing an immense challenge, and one good way is to pass 
this amendment.
  In addition to passing the underlying bill, this JOBS bill before the 
Senate is not going to be the silver bullet many would like but it will 
help significantly.
  With respect to the R&D credit, 62 percent of total industry research 
and development is performed in manufacturing industries. That includes 
computer and electronic products, transportation, equipment, and 
chemicals. It is disproportionately helpful to manufacturing jobs. We 
clearly want more manufacturing jobs in this country. Manufacturing 
jobs are important to the entire economy.
  The multiplier effect in manufacturing jobs is extremely high. For

[[Page 3187]]

every 16 million manufacturing jobs in this country, another 9 million 
are created in retail, wholesale, finance, and other sectors. That is 
not as true in other sectors. Most of the R&D effect is manufacturing, 
and manufacturing has a very high multiplier effect, which is all the 
more reason to get this passed.
  Workers employed in manufacturing plants with more technologies also 
earn 63 percent more than workers in plants using lower level 
technologies. It is a question not only of the number of jobs but the 
wages the jobs pay, the amount of income those workers will receive.
  I can go on at great length as to why this is so important. I am not 
going to expand anymore on it because I think Senators realize how 
important it is. I expect this to pass by a very large margin, and well 
it should.
  Once we pass this amendment, it is incumbent upon us to start looking 
for other ways we can help give stimulus and help American companies 
keep jobs in America. I am certainly going to be a part of this. It is 
something we desperately have to do.
  What is the remaining time?
  The PRESIDING OFFICER. The majority has 27 minutes remaining and the 
minority has 30 minutes remaining.
  Mr. BAUCUS. I yield the floor.
  The PRESIDING OFFICER. The Senator from Wyoming.
  Mr. ENZI. I will talk about an amendment that has not been laid down. 
There were comments about overtime a while ago, and I want people to 
know the rest of the story.
  The bill we are on has the catchy name of FSC/ETI. What we are trying 
to do is comply with some World Trade Organization requirements that 
allow penalties to be put on our exports overseas and agricultural 
products are a big one. They always get targeted when this sort of 
thing happens. We need to correct our law so we are not being 
penalized, so we do not eliminate business that the United States can 
have.
  Penalties went into effect on March 1 and go up 1 percent per month 
on U.S. businesses if we do not change the law. We are trying to change 
the law. It needs to be done quickly. It should be done pretty cleanly. 
It obviously is not going to be.
  We keep talking about jobs, but our actions do not match our words. I 
point out one very important jobs program we have that affects 
Americans who want to improve their skills and get a better job. We 
have the Workforce Investment Act, and that has the potential each and 
every year to retrain 900,000 people so they have the skills and 
talents to handle the jobs available, the well-paying jobs available in 
this country that we are having to fill from overseas.
  Do you know what has happened to that bill? Let me give Members a 
brief history. We passed it out of the Health, Education, Labor, and 
Pensions Committee unanimously. How often do you think that happens in 
that committee? It can be a very contentious committee. It passed out 
of the committee unanimously. What happened in the Senate? We passed it 
in the Senate by unanimous consent. That means not one person in the 
Senate wanted to amend the bill; not one person in the Senate wanted to 
vote against the bill. It was unanimous. That is as bipartisan as we 
can possibly get.
  Where is that bill now? We cannot appoint a conference committee. 
That is the committee made up of Republicans and Democrats who would 
meet with Republicans and Democrats from the House to work out 
differences between what they passed and what we passed. We cannot have 
a conference committee to do that.
  That is 900,000 jobs in this country that are being stalled out; 
900,000 opportunities we are not going to give to Americans. Instead, 
we are going to talk about a whole bunch of amendments to this bill 
that are going to slow down this bill and increase penalties on 
American businesses trying to ship goods overseas. In fact, all 
American businesses.
  Keep that in mind. If we want to take care of jobs in this country 
and make sure jobs stay in this country, we would get a conference 
committee appointed on the Workforce Investment Act and get that thing 
resolved and get people trained and to work.
  One of the examples of what will happen on this is the overtime 
amendment that we have been promised. I could wait until it actually 
came up, but there were some comments made and there is a need to 
respond on the 40 minutes we have already heard about the overtime 
amendment.
  It is time to strip the rhetoric from the reality and consider who is 
really helped and hurt by this amendment which prohibits the Department 
of Labor from updating the rules exempting white-collar employees from 
overtime pay. It is not all that simple.
  When I am back in Wyoming, I like to hold town meetings to find out 
what is on the minds of my constituents. At each town meeting, there is 
usually someone in attendance who is quite concerned about government 
regulations. I am often told to rein big government in, keep the rules 
and regulations simple, keep them current and responsive, and make sure 
they make sense in today's ever changing workplace.
  Most of the people I talk to are small businessmen, but that is most 
of business in this country. They are being killed by the rules and 
regulations, and, in some cases, by trial attorneys.
  Today we are reviewing an amendment that takes the opposite approach. 
Instead of keeping it simple and current, it will prohibit the 
Secretary of Labor from updating the rules exempting white-collar 
employees from the Fair Labor Standards Act and overtime requirement in 
some cases, an attempt to reject the new, turn back the clock, and look 
to yesterday for the answer to tomorrow's problems. It is an approach 
that is doomed to failure before it is even applied. I am opposed to 
the amendment.
  There is no question that the workplace has dramatically changed 
during the last half century. The regulations governing white-collar 
exemptions remain substantially the same as they were 50 years ago. The 
existing rules take us back to the time when workers held titles such 
as straw boss, keypunch operator, legman, and other occupations that no 
longer exist today.
  Our economy has evolved. New occupations have emerged that were not 
even contemplated when the regulations were written. A 1999 study by 
the General Accounting Office recommended that the Department of Labor: 
Comprehensively review current regulations and restructure white-collar 
exemptions to better accommodate today's workplace and to anticipate 
future workplace trends. That is precisely what the Department of 
Labor's proposal to update and clarify the white-collar regulations 
will do.
  While the Department's proposal will update and clarify, this 
amendment will do neither. Instead, it will set the clock back to 1954 
and try to force the square peg of the 21st century jobs into the round 
hole of the workplace of 50 years ago.
  I am a former shoe salesman and I know how to tell when something 
will not fit. This just will not fit. It is like trying to force a size 
10 foot into a size 6 shoe. It will not fit no matter how hard you try.
  Through the course of the debate on overtime over the next several 
days, we will hear a lot of numbers. Some of them are statistics and we 
know how statistics work. I am an accountant so I will try to give some 
good numbers and hope you will put up with me with the numbers, but 
there are numbers you need to know.
  Let us be clear about what this amendment will do. The amendment will 
undermine the Department of Labor's efforts to extend overtime 
protection to 1.3 million low-wage workers. Under the current rules, 
only those rare workers earning less than $8,060 a year are protected 
for overtime pay. That is how old this rule is. You are protected if 
you are making less than $8,060 a year. Now the administration's 
proposed rule will raise that threshold to $22,100 a year.
  Doesn't that sound more common sense in today's market? Doesn't that 
sound like a number that covers more people? If the old rule covered 
those making less than $8,060, a new rule, covering those making less 
than $22,100, would cover more people.

[[Page 3188]]

  As a result, 20 percent of the lowest paid workers would be 
guaranteed overtime pay. The overtime provisions of the Fair Labor 
Standards Act were originally intended to protect lower income workers. 
The proposed rules will provide lower income workers with the 
protection they deserve.
  That also makes it easier for businesses to know when they are 
complying with the law. And that is important, particularly for small 
businesses. They need to know. They should not have a bunch of 
different criteria that they need a special accountant or attorney to 
interpret for them so they can tell whether they are violating the law.
  This rule, the one proposed--proposed; it is not finalized yet--by 
the Department of Labor will make it easier for businesses to know when 
they are complying.
  By undermining the administration's efforts to better protect lower 
income workers, who will this amendment protect? The supporters of the 
amendment--the amendment that is going to be laid down, I guess--claim 
that an estimated 8 million workers will become ineligible for overtime 
under the proposed rules. However, this estimate is based on a study by 
the Economic Policy Institute, and it is riddled with errors. For 
example, the study includes in its calculations at least 18 percent of 
the workforce who work 35 hours or less a week. These part-time workers 
do not work more than 40 hours a week and, therefore, they do not 
receive overtime in the first place.
  The study also claims the proposed rule will deny overtime pay to 
white-collar employees earning more than $65,000 a year. However, not 
all the employees earning over $65,000 are exempt under the proposed 
rules--only those performing office or nonmanual work and one or more 
exempt duties. This means workers, such as police officers, 
firefighters, plumbers, Teamsters, carpenters, and electricians will 
not--will not--lose their overtime pay. The Department of Labor 
acknowledges the possibility that 644,000 highly educated workers 
making over $65,000 a year might lose their overtime. Mr. President, 
1.3 million get picked up on the bottom end; 644,000 drop out on the 
top.
  Supporters of this amendment claim that the proposed rules will strip 
overtime pay for first responders and nurses. If we look behind the 
rhetoric, we find there will be virtually no change in status for first 
responders and nurses under the Department of Labor proposal. Under 
both the current and proposed regulations, only registered nurses are 
exempt from overtime pay.
  Supporters of this amendment claim that military personnel and 
veterans will lose their overtime pay under the proposed rules. 
However, military personnel and veterans are not affected by the 
proposed rules by virtue of their military status or training. Nothing 
in the current or proposed regulation makes any mention of veteran 
status.
  Who will this amendment protect, if not low-income workers, first 
responders, nurses, veterans, or millions of other working Americans? 
The antiquated and confusing white-collar exemptions have created a 
windfall--a windfall--for trial lawyers. Ambiguities and outdated terms 
have generated significant confusion regarding which employees are 
exempt from the overtime requirements. The confusion has generated 
significant litigation and overtime pay awards for highly paid, white-
collar employees. Wage and hour cases now exceed discrimination suits 
as the leading type of employment law class action. Let me repeat that 
again. Wage and hour cases now exceed discrimination suits as the 
leading type of employment law class action.
  This amendment--the amendment that Senator Harkin is going to put 
in--will not preserve overtime for millions of working Americans. The 
amendment will not help employers and employees clearly and fairly 
determine who is entitled to overtime. The only clear winners from this 
amendment will be the trial lawyers who will continue to benefit from 
the current state of confusion. We are spending taxpayers' dollars 
sorting through what could be solved with clarity.
  I stress that these are proposed rules--proposed rules. The 
Department of Labor has received, and is currently reviewing, around 
80,000 comments to their proposed regulations. We should allow the 
regulatory process to continue and give the Department a chance to 
complete its review of the proposed rules. Once the review is 
completed, the Department will align the white-collar regulations with 
the realities of the 21st century workplace, the intent of the Fair 
Labor Standards Act, and--this is most important--what they have 
learned from the comments.
  They have 80,000 comments. I expect them to read those. I expect them 
to react to those, and make sure that it becomes a part of the rule.
  Now, supporters of this amendment are, in effect, denying the public 
a voice in the regulatory process. This amendment will deny the 
Department of Labor an opportunity to respond to public comments. I 
happen to believe that public comments play a critical role in the 
regulatory process.
  I will tell you, I go back to Wyoming most weekends. I go out on 
Friday, travel to a different part of the State, and come back on 
Sunday. It is the most valuable thing I do around here, and that is 
because I get to talk to the person who has the problem firsthand. Do 
you know what? They are working on that all day, every day. And the 
advantage is they have usually thought of some kind of a solution. Now, 
when I bring it back, quite often, the comment is: It is too simple. It 
will never work. Where did you come up with a crazy idea like that? And 
I have to explain: From the guy with the problem who works on this 
every day and knows the commonsense approach to solving that problem.
  Those are the people writing in with comments. Those are the people 
who are saying: This is where it is right. This is where it is wrong. 
Fix it where it is wrong. Leave it in the new context where it is 
right. That is how the process is supposed to work.
  We want the Department of Labor to look at those comments and 
respond--respond by changing the rule, or respond by letting the people 
know how that will not work or how it is covered a different way. We 
have to have that process work.
  Now, I hope if there are substantial changes it gets put out one more 
time for comments. There is not anything around that says they cannot 
reissue them for comment. The public comments are what help us get it 
right. We do not do these jobs, so we do not know all the right 
answers. But the people out there working on them do. The answers can 
be made right.
  Now, if the final rule has gone astray, after all of this process, we 
can use the Congressional Review Act to reverse it. And we have done 
that before. That is where we say: You did not pay attention to the 
process. You did not pay attention to the comments. We are going to 
jerk you back to reality. But now is not the time or the vehicle for 
making that determination.
  I hope my colleague will not put down the amendment, but if he does, 
I hope my other colleagues will support me in allowing the Department 
to move forward with the review and response that they need to be 
doing. They do need to be paying attention to all of this debate. But 
we do need to bring that rule into the current century and make sure 
people are working at jobs and the rules are understandable, 
particularly with small businesses that are trying to provide a 
service, not figure out Government regulations.
  I yield the floor and reserve the remainder of my time.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, I ask unanimous consent to yield myself such 
time as I may consume from the time under the control of the Democratic 
side.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DODD. Let me say to those who may be listening in the offices of 
Members who want to come over and wish to be heard on this matter, I 
will be prepared to yield some time. I am here to discuss an amendment 
that will

[[Page 3189]]

come up after 3:30. I thought I would move things along while we have 
this dead time, while we are waiting for this vote to occur, to discuss 
upcoming amendments and encourage those who may want to participate in 
some of those debates to come to the floor and share some of their 
thoughts.
  I will be offering at the appropriate time, sometime after 3:30, an 
amendment that deals with the outsourcing of jobs. I note the presence 
of the Presiding Officer who comes from the same region of the country 
I do. We have all been feeling it in our States, not just in the 
Northeast, but across the country, the tremendous pinch that is 
occurring as a result of job loss and the growing number of jobs that 
are being outsourced. I am told by those who cover these issues that 
the coalition opposed to any legislative efforts to stop outsourcing is 
coming up with some new language. They don't like the word, 
``outsourcing,'' so they are calling it worldwide sourcing, to take 
some of the sting out of the language. They may succeed in taking the 
sting out of the language by changing the vocabulary, but you cannot 
take the sting out of finding out that your job has been lost and that 
others offshore are taking those jobs because it enhances the bottom 
line in a quarterly report someplace. We need to address that.
  I fully understand that outsourcing to some degree is going to go on. 
I expect that to be the case. But I don't think the Federal Government 
ought to be subsidizing that effort. I am one who has believed in and 
supported free and fair trade agreements over the years. I take great 
pride in that. In a global economy, you have to do that. But I also 
understand if we don't have the services or provide the manufactured 
goods with which to trade globally because we have given up a 
significant part of our manufacturing base or given up a critical area 
of technology in the service areas, for instance, we are necessarily 
going to be great competitors in a global marketplace in the 21st 
century.
  You may say we are nowhere near that yet. The rest of the world 
doesn't even come close to producing the quality and high value goods 
we do in the United States. They can't come close to providing the high 
technology we do.
  I think we have all learned over the last number of years that 
technology and productivity is highly portable, and it is moving at 
warp speed. What was true a year ago, 5 years ago, certainly 10 years 
ago, is no longer the case. I suspect this rate of speed of change is 
going to continue to grow.
  At this particular juncture, I think it is important that we speak to 
this issue and that we try to find some balance on how we maintain our 
global leadership role, continue to provide opportunities for American 
workers, while simultaneously not allowing the exportation of jobs 
overseas.
  I was terribly disheartened to read a report, the Economic Report of 
the President, February 2004, just last month, this publication that 
comes out. It is designed to give an overall economic report of the 
Nation, with various suggestions and ideas. I am not making up these 
quotes from some news article or some demagogue or pundit out there 
when talking about these issues. These are actual conclusions reached 
by the top economic advisers to the President of the United States when 
it comes to the issue of manufacturing and outsourcing.
  First on outsourcing, chapter 12, on page 229 of this economic report 
of President Bush and his economic team, it says:

       When a good or a service is produced more cheaply abroad, 
     it makes more sense to import it than to make or provide it 
     domestically.

  I would suggest that is a conclusion with which some economists may 
agree. Some have drawn the conclusion that that is inherently a far 
better idea, just thinking in terms of quarters or yearly reports, I 
suppose, and the bottom line. That may be OK. But if you are worried 
about generational change, if you are worried about trying to establish 
a bedrock of job opportunities, stability, and security in the 21st 
century, then it absolutely makes no sense to export that job rather 
than to provide it domestically.
  I note in this morning's Wall Street Journal--so you don't think 
these ideas are merely being spouted by a Democrat in disagreement with 
the President's economic report--a March 3, 2004, article, ``Lesson in 
India.'' I ask unanimous consent to print the full article in the 
Record.
   There being no objection, the material was ordered to be printed in 
the Record, as follows:

              [From the Wall Street Journal, Mar. 3, 2004]

           Lesson in India: Not Every Job Translates Overseas

                            (By Scott Thurm)

        When sales of their security software slowed in 2001, 
     executives at ValiCert Inc. began laying off engineers in 
     Silicon Valley to hire replacements in India for $7,000 a 
     year.
        ValiCert expected to save millions annually while cranking 
     out new software for banks, insurers and government agencies. 
     Senior Vice President David Jevans recalls optimistic 
     predictions that the company would ``cut the budget by half 
     here and hire twice as many people there.'' Colleagues would 
     swap work across the globe every 12 hours, helping ValiCert 
     ``put more people on it and get it done sooner,'' he says.
       The reality was different. The Indian engineers, who knew 
     little about ValiCert's software or how it was used, omitted 
     features Americans considered intuitive. U.S. programmers, 
     accustomed to quick chats over cubicle walls, spent months 
     writing detailed instructions for overseas assignments, 
     delaying new products. Fear and distrust thrived as 
     ValiCert's finances deteriorated, and co-workers, 14 time 
     zones apart, traded curt e-mails. In the fall of 2002, 
     executives brought back to the U.S. a key project that had 
     been assigned to India, irritating some Indian employees.
        ``At times, we were thinking, `What have we done here?''' 
     recalls John Vigouroux, who joined ValiCert in July 2002 and 
     became chief executive three months later.
        Shifting work to India eventually did help cut ValiCert's 
     engineering costs by two-thirds, keeping the company and its 
     major products alive--and saving 65 positions which remained 
     in the U.S. But not before ValiCert experienced a harrowing 
     period of instability and doubt, and only after its 
     executives significantly refined the company's global 
     division of labor.
       The successful formula that emerged was to assign the India 
     team bigger projects, rather than tasks requiring continual 
     interaction with U.S. counterparts. The crucial jobs of 
     crafting new products and features stayed in Silicon Valley. 
     In the end, exporting some jobs ultimately led to adding a 
     small but important number of new, higher-level positions in 
     the U.S.
       In F2003, ValiCert agreed to be acquired by Tumbleweed 
     Communications Corp., a maker of antispam software with its 
     own offshore operation in Bulgaria. Today, the combined 
     Tumbleweed is growing, and again hiring software architects 
     in Silicon Valley with six-figure salaries, as well as 
     engineers overseas. Without India, Mr. Vigouroux says, ``I 
     don't know if we'd be around today.''
       ValiCert's experience offers important insights into the 
     debate over the movement of service jobs to lower-cost 
     countries, such as India. Such shifts can save companies 
     money and hurt U.S. workers. But the process is difficult, 
     and the savings typically aren't as great as a simple wage 
     comparison suggests. Some jobs cannot easily or profitable be 
     exported, and trying to do so can risk a customer backlash: 
     In recent months, Dell Inc. and Lehman Brothers Holdings 
     Inc., for example, moved several dozen call-center and help-
     desk jobs back to the U.S., after employee and customer 
     complaints.
       Founded in 1996, ValiCert specializes in software to 
     securely exchange information over the Internet. Banks use 
     ValiCert's software to safeguard electronic funds transfers, 
     health insurers to protect patient medical records. Although 
     still unprofitable, ValiCert conducted an initial public 
     offering in July 2000, in the dying embers of the dot-com 
     boom. In two months, the stock doubled to $25.25.
       In 2001, however, sales growth slowed, as corporate 
     customers reduced technology purchases. ValiCert had 
     projected that it would break even with quarterly revenue of 
     $18 million, according to Srinivasan ``Chini'' Krishnan, 
     founder and then-chairman. Quarterly expenses had grown to 
     $14 million, but revenue was stalled at less than half that 
     figure. Executives began considering shifting work to India. 
     The ``motivation was pure survival,'' says Mr. Krishnan, who 
     left the company after the Tumbleweed merger.
       India was a natural choice because of its large pool of 
     software engineers. Moreover, both Mr. Krishnan and 
     ValiCert's then-head of engineering grew up in India and were 
     familiar with large tech-outsourcing firms.
       Some, including Mr. Jevans, harbored doubts. The Apple 
     Computer Inc. veteran says he preferred ``small teams of 
     awesome people'' working closely together. Nonetheless, that 
     summer, ValiCert hired Infosys

[[Page 3190]]

     Technologies Ltd., an Indian specialist in contract software-
     programming, to supply about 15 people in India to review 
     software for bugs, and to update two older products.
       With no manager in India, ValiCert employees in the U.S. 
     managed the Infosys workers directly, often late at night or 
     early in the morning because of the time difference. ValiCert 
     also frequently changed the tasks assigned to Infosys, 
     prompting Infosys to shuffle the employees and frustrating 
     ValiCert's efforts to build a team there.
       Within a few months, ValiCert abandoned Infosys and created 
     its own Indian subsidiary, with as many as 60 employees. Most 
     employees would be paid less than $10,000 a year. Even after 
     accounting for benefits, office operating costs and 
     communications links back to the U.S., ValiCert estimated the 
     annual cost of an Indian worker at roughly $30,000. That's 
     about half what ValiCert was paying Infosys per worker, and 
     less than one-sixth of the $200,000 comparable annual cost in 
     Silicon Valley.
       To run the new office in India, ValiCert hired Sridhar 
     Vutukuri, an outspoken 38-year-old engineer who had headed a 
     similar operation for another Silicon Valley start-up. He set 
     up shop in January 2002 in a ground-floor office in bustling 
     Bangalore, the tech hub of southern India. The office looked 
     much like ValiCert's California home, except for the smaller 
     cubicles and Indian designs on the partitions. There were no 
     savings on the rent. At $1 a square foot, it matched what 
     ValiCert paid for its Mountain View, Calif., home offices, 
     amid a Silicon Valley office glut.
       Misunderstandings started right away. U.S. executives 
     wanted programmers with eight to 10 years of experience, 
     typical of ValiCert's U.S. employees. But such ``career 
     programmers'' are rare in India, where the average age of 
     engineers is 26. Most seek management jobs after four or five 
     years. Expertise in security technology, key to ValiCert's 
     products, was even rarer.
       By contrast, Mr. Vutukuri quickly assembled a group to test 
     ValiCert's software for bugs, tapping a large pool of Indian 
     engineers that had long performed this mundane work.
       But the Indian manager heading that group ran into 
     resistance. It was ValiCert's first use of code-checkers who 
     didn't report to the same managers who wrote the programs. 
     Those U.S. managers fumed when the team in India recommended 
     in June 2002 delaying a new product's release because it had 
     too many bugs.
       By midsummer, when Mr. Vutukuri had enough programmers for 
     ValiCert to begin sending bigger assignments to India, U.S. 
     managers quickly overwhelmed the India team by sending a 
     half-dozen projects at once.
       Accustomed to working closely with veteran engineers 
     familiar with ValiCert's products, the U.S. managers offered 
     only vague outlines for each assignment. The less-experienced 
     Indian engineers didn't include elements in the programs that 
     were considered standard among U.S. customers. U.S. 
     programmers rewrote the software, delaying its release by 
     months.
       In India, engineer grew frustrated with long silences, 
     punctuated by rejection. Suresh Marur, the head of one 
     programming team, worked on five projects during 2002. All 
     were either cancelled for delayed. Programmers who had worked 
     around the clock for days on one project quit for new jobs in 
     Bangalore's vibrant market. Of nine people on Mr. Marur's 
     team in mid-2002, only three still work for ValiCert. ``The 
     first time people understand,'' he says. ``The second time 
     people understand. The third time it gets to be more of a 
     problem.''
       In the U.S., executives lurched from crisis to crisis, as 
     ValiCert's revenue dipped further. Each quarter brought more 
     layoffs. By year end, the California office, which once 
     employed 75 engineers, was reduced to 17; the India office, 
     meanwhile, swelled to 45. Engineers ``felt the sword of 
     Damocles was swinging above their cube,'' recalls John 
     Thielens, a product manager.
       Executives knew they could save more money by exporting 
     more jobs. But they were developing a keener sense of how 
     critical it was to keep core managers in the U.S. who knew 
     ValiCert, its products, and how they were used by customers. 
     ``Even if you could find someone'' with the right skills in 
     India, says Mr. Krishnan, the ValiCert founder, ``it wouldn't 
     make business sense to move the job.''
       Frustrations came to a head in September 2002, when a 
     prospective customer discovered problems with the log-on 
     feature of a ValiCert program. The anticipated purchase was 
     delayed, causing ValiCert to miss third-quarter financial 
     targets. The India team had recently modified the program, 
     and the glitch prompted U.S. managers to question ValiCert's 
     entire offshore strategy.
       Relations had long been strained between the U.S. and 
     Indian product teams. John Hines, the Netscape Communications 
     Corp. veteran who headed the tight-knit U.S. product team, 
     thrives on quick responses to customer requests. As his team 
     shrank to six engineers from 20, Mr. Hines was assigned three 
     engineers in India. But he viewed the Indians' inexperience 
     and the communication delays, as more a hindrance than a 
     help. ``Things we could do in two days would take a week,'' 
     he says.
       Mr. Vigouroux, who became CEO in October 2002, admits to a 
     touch of ``panic'' at this point. ValiCert's cash was running 
     low. ``We didn't have a lot of time,'' he says. He conferred 
     with Mr. Hines, who said he wanted to be rid of India, even 
     if it meant a smaller team. Mr. Vigouroux agreed to hire one 
     engineer in California. When he learned of the decision, Mr. 
     Vutukuri says he felt as if he had failed.
       By contrast, Matt Lourie, who heads ValiCert's other big 
     programming group, welcomed additional help in India. He was 
     struggling to keep pace with customer demands for new 
     features on his product and new versions for different types 
     of computers.
       At the same time, ValiCert executives were streamlining 
     operations and changing how they divided work between 
     California and India. They gave the India team entire 
     projects--such as creating a PC version of a program 
     initially built for bigger workstations--rather than small 
     pieces of larger projects. U.S. managers began writing more 
     detailed specifications for each assignment to India.
       ValiCert also killed its three smallest-selling products to 
     focus resources on the remaining two. To improve morale in 
     the U.S., Mr. Vigouroux crowded the remaining employees into 
     one corner of the half-vacant office and installed a ship's 
     bell that he rang each time ValiCert recorded $10,000 in 
     revenue. He made sure the India employees received company-
     wide e-mails, and conducted multiple sessions of monthly 
     employee meetings so the India group could listen at a 
     convenient hour. Engineering-team leaders began conferring 
     twice a week by telephone, shifting the time of the calls 
     every six months so that it's early morning in one office and 
     early evening in the other.
       Toward the end of 2002, Mr. Vigouroux began to ring the 
     bell daily, as customers such as Washington Mutual Inc. and 
     MasterCard International Inc. purchased ValiCert's software.
       By early the next year, ValiCert executives believed the 
     company had stabilized. Revenue increased to $3 million in 
     the fourth quarter of 2002, up 27% from the previous quarter. 
     Expenses declined, and the company neared profitability. 
     Investors detected a pulse, and the stock rose to 46 cents on 
     the Nasdaq Stock Market at the end of January, from a low of 
     20 cents in August 2002.
       But with just $3 million in cash, ValiCert remained 
     precarious. Mr. Vigouroux started meeting with potential new 
     investors and began talks with Tumbleweed CEO Jeffrey C. 
     Smith.
       Tumbleweed also had been through significant layoffs and 
     retrenchment, and in February 2003, the companies agreed to 
     merge. The combined Redwood City, Calif., company's 150 
     engineers today are almost evenly divided among California, 
     the Tumbleweed operation in Bulgaria, and the India office 
     started by ValiCert. In Bulgaria, engineers write and test 
     software, and scan millions of e-mails daily for traces of 
     spam. In India, engineers test software, fix bugs and create 
     new versions of one product. Last September, Tumbleweed 
     released its first product developed entirely in India, a 
     program that lets two computers communicate automatically and 
     securely. Mr. Marur's team had worked on it for over 18 
     months.
       Core development for new products remains in California, 
     where engineers are closer to marketing teams and 
     Tumbleweed's customers. Since July, Mr. Lourie's U.S. team 
     has grown to nine engineers, from six.
       Tumbleweed's fourth-quarter revenue grew 69% from a year 
     earlier, as its net loss shrank to $700,000, and cash 
     increased by $2.4 million. Shares have risen five-fold in the 
     past year.
       Brent Haines, 36, is a new hire. He joined in October as a 
     $120,000-a-year software architect, charged largely with 
     coordinating the work of the U.S. and India teams. That often 
     means exchanging e-mail from home with engineers in India 
     between 11 p.m. and 3 a.m. California time, as Mr. Haines 
     reviews programming code and suggests changes. Such 
     collaboration requires extensive planning, he says, 
     ``something very unnatural to people in software.''
       ``Nine months ago, people would have said [moving offshore] 
     was the biggest . . . disaster,'' says Mr. Thielens, the 
     product manager. ``Now we're starting to understand how we 
     can benefit.''

  Mr. DODD. This is a story written by Scott Thurm. It is about a 
company, ValiCert, that learned key roles must remain in the U.S. for 
outsourcing to work. And the thrust of the article is this company 
rushed, like everybody else. Forty percent of the top 1,000 companies 
in America are now outsourcing their jobs, sort of like chasing into 
Mexico back in the 1980s when the financial service sector thought that 
was the place to be, without much thought. Once these trends begin, 
they are sort of like sheep following one after another without much 
thought involved.

[[Page 3191]]

  This company ValiCert went racing off to outsource its jobs, reduced 
its employment, saved a lot of money, according to the article, 
expected to save millions annually while cranking out new software for 
banks.
  I am quoting from the article now:

       When sales of their securities software slowed in 2001, 
     executives at ValiCert began laying off engineers in Silicon 
     Valley to hire replacements in India for $7,000 a year.
       ValiCert expected to save millions while cranking out new 
     software for banks and insurers and government agencies. 
     Senior Vice President David Jevans recalls optimistic 
     predictions that the company would ``cut the budget by half 
     here and hire twice as many people there [in India].'' 
     Colleagues would swap work across the globe every 12 hours, 
     helping ValiCert ``put more people on it and get it done 
     sooner,'' he says.
       The reality was different. The Indian engineers, who knew 
     little about ValiCert's software or how it was used, omitted 
     features Americans considered intuitive. U.S. programmers, 
     accustomed to quick chats over cubicle walls, spent months 
     writing detailed instructions for overseas assignments, 
     delaying new products. Fear and distrust thrived, and 
     ValiCert's finances deteriorated and co-workers, 14 time 
     zones apart, traded curt e-mails. In the fall of 2002, 
     executives brought back to the U.S. a key project that had 
     been assigned to India, irritating some Indian employees.
       ``At times we were thinking, what have we done here?'' . . 
     .

  The article goes on; I won't read all of it; the point being sort of 
buyer beware. This notion that you might be hiring people for a 
fraction of what it would cost to hire someone in the Silicon Valley 
and it is going to allow you to make millions because of laid-off 
American workers and you hire someone 8 or 10 time zones away, has 
been, certainly in the case of this particular company, proven to be 
untrue.
  So to the point that when a good or service is produced more cheaply 
abroad, it makes more sense to import it than to provide it 
domestically, I would suggest that the people who wrote the economic 
report for the President may want to talk to the people at ValiCert. I 
don't suspect that is one company. I suspect that is true of many 
companies. So it is not Biblical.
  I agree that in certain cases you will make a lot more money by 
firing people in the United States and getting rid of them. Why should 
you worry about that? Your job is to provide a bottom line. That is 
your job.
  My job is a little different than your job. My job, as a Senator, is 
to not only watch out for you and your company, to make sure you live 
in an environment where you can make a profit, I have an obligation to 
those people who work for you as well. I didn't get elected to the 
Senate just to guarantee you a bottom line. My job is setting public 
policy, not quarter by quarter, not just bottom line and yearly report 
to yearly report, but longer than that. That is what we are supposed to 
do in a Chamber such as this, to think a little longer, to worry about 
this country, those who are the children of the 21st century and what 
kind of a Nation are they going to inherit after you and I have left. 
They are going to ask us about what we did at the beginning of the 21st 
century when we saw the trend lines reaching out to cause literally 
millions of people to lose their jobs.
  One report indicates that in the next 10 years or so we may lose as 
many as 4 million jobs, a loss of $140 billion in wages, just by 
outsourcing alone.
  That number may be low, according to those who have done this. I will 
get to the charts in a minute and identify the source of that. I will 
get to the amendment at an appropriate time and talk about the 
specifics of it. I know I am going to hear that your amendment goes too 
far, it is too heavyhanded, because I am going to suggest that maybe 
the use of Federal tax dollars--we ought to have second thoughts about 
subsidizing this rushing to go overseas to outsource. I cannot stop a 
private company with its own dollars deciding to do that. You can make 
it less of an attractive thing through the Tax Code or more attractive 
for people to stay here, but I certainly cannot stop you from doing it.
  But I ought to be able to say something about how American taxpayer 
money is being used. If their money is being used to cause somebody to 
lose their job and to hire someone for the attraction of the salary 
someplace else, maybe taxpayers have a right to be heard on this issue. 
This amendment says Federal tax, for the purpose of outsourcing--with 
the exceptions of national security and other provisional waivers, 
which I will explain--ought not to be something we are supporting. If 
you want to do it as a private company, that is your business. I don't 
think you ought to necessarily have a right to Uncle Sam's taxpayer 
money to do that at the expense of critical jobs that are important for 
this Nation's future.
  I will go on in this economic report because I may not have time, 
when we get to the amendment, to talk about it. I cited chapter 12, 
page 229, where you have this emphatic statement that it automatically, 
in every case, as I read this, makes more sense to import. They don't 
talk about outsourcing. They act as if it were a good or a service. I 
know economists like to suggest that is all it is. But I think people 
in Ohio, Connecticut, or Pennsylvania are more than a good or a 
service. They may have a family, a home mortgage they are trying to 
pay, and they may have other obligations; and they worry about their 
future retirement and health care. So to have the cold eye of an 
economist saying a person out there who has a job in America may find 
it gone because the quarterly report would look a lot better if we can 
hire that person for $7,000 a year rather than paying you $40,000, 
$50,000, $60,000, or $70,000 a year, and you are really nothing more 
than a good or a service--I think many of us here believe otherwise.
  These are not just goods or services; these are human beings who help 
to strengthen this country, provide us the kinds of liberties and 
opportunities we enjoy as Americans. I think it is about time we stood 
up for them and what their interests may be--not at the expense of 
others, but to merely strike a balance. This is not about being against 
trade, being an isolationist at all. It is merely saying strike some 
balance before this sort of giddy trend, where company after company is 
sort of playing follow the leader and runs amuck as they send these 
jobs willy-nilly offshore; we ought to say let's look at what we are 
doing and at what ultimate price we may pay.
  The second point I want to make out of this economic report is a 
reference with regard to what is manufacturing. I don't have the page 
number, unfortunately, on this, but I will get it before I finish my 
remarks. It is a highlighted box, and the title of the box that is 
framed out here is ``What Is Manufacturing?'' This economic report says 
the definition of a manufactured product, however, is not 
straightforward. When a fast food restaurant sells a hamburger, for 
example, is it providing a service or manufacturing a product? You may 
say that is only a question. You know, if this is your question and the 
example you would cite in your question, what are you thinking of? Do 
you think it is a debatable item as to whether or not producing a 
hamburger or a hot dog involves manufacturing? This is not some op-ed 
piece; this is the official economic report of this administration's 
economic policy. In bold print in this economic report they suggest 
there is a legitimate question over whether or not working at 
McDonald's or Burger King flipping hamburgers ought to be classified as 
a manufacturing job. If you don't think we are in trouble on these 
issues, just read that.
  That is an example of the kind of terribly naive at best, at worst 
rather callous, thinking when it comes to talking about the importance 
of manufacturing. I don't belittle a job somebody holds down working in 
a fast food restaurant. For many people out there, that is the only job 
they can get to provide for themselves and their families. They would 
be the first to tell you that they hardly think of themselves as being 
in the manufacturing business. Yet, in the administration's official 
report, it raises the question of whether or not it is a manufacturing 
job. At least this Member gets a sense they are lost on this issue, 
when they raise questions as foolish as that.
  Let me go to some of these charts, if I may. Let me just give you a 
suggestion of what is happening on the issue

[[Page 3192]]

of manufacturing. The first chart I raise here points to the fact that 
in the last 36 months, we have now lost in the United States of America 
2.8 million manufacturing jobs--since January 2001, up until now, the 
winter of 2004. That is 2.8 million manufacturing jobs that have gone 
in this country. I believe that is the single largest loss of 
manufacturing jobs that has occurred since the Great Depression. I 
understand transitions in the economy. Things happen and move in 
different directions. But I don't think you can wash your hands of this 
and say I am sorry, but that is the trend line and that is the way life 
is--sort of a laissez-faire approach.
  We ought to analyze why things are happening, where are the jobs 
going, and what are the implications for our country. I understand 
where the CEO of a company is coming from, and the board of directors 
or the administration of a company. Their concern is the bottom line 
and whether you have a profit to show the next quarter. I think Members 
of Congress ought to have a different set of questions from whether the 
quarterly report is all right--whether this trend line is going to 
continue, and what it means to our country. If this trend line 
continues and we end up losing a manufacturing sector, we will deeply 
regret it.
  I come from a State where I have 5,400 small manufacturers--or I 
did--in Connecticut. Most of them are small operators, with 5, 10, 15 
people, third and fourth generation, producing not just flowers or some 
other item but, rather, significant products, many of which are used in 
the aircraft engine industry of my State, the manufacture of the 
sophisticated submarines we produce in Connecticut, or other high value 
products. These manufacturers employ highly skilled people, producing 
very valuable pieces of equipment used in some of our most 
sophisticated defense and nondefense products. So when I see these jobs 
and these businesses going, I have to be reminded that we are not going 
to create this overnight. You don't reconstitute the manufacturing base 
overnight. Again, I accept we have to make changes and you cannot say 
we are going to stop this altogether. But I think we have an obligation 
to express our concerns and worries about where we are headed, if we 
don't speak up and begin to address what this may mean for our country.
  I am very worried about where these trend lines are going and what it 
may mean. If we end up continuing to lose jobs and manufacturers, I am 
concerned about what it may mean for our country if we end up having to 
import not only the jobs but the products themselves. That is another 
subject matter we can discuss later. We ought to worry about it as a 
country. If we don't do something soon in this area, that is going to 
be a continuing problem.
  Let me point out further, to give some idea of where this is all 
happening, because it is not, as I mentioned, just my State of 
Connecticut. I mentioned my friend and colleague, the Presiding 
Officer, comes from New Hampshire up in our area. Just to highlight, 
his small New England State as well had some 22,300 jobs in the 
manufacturing sector lost in New Hampshire. In my State of Connecticut, 
it is about 32,800, about 10,000 more. That is in the last 36 months.
  The trend lines are: Pennsylvania, 132,000; Ohio, 153,000 jobs have 
been lost; California, 272,000 manufacturing jobs lost; the State of 
Washington, 59,000; Oregon, 21,000; Texas, 149,000; Florida, 52,000; 
Georgia, 67,000; 142,000 jobs lost in the small State of North 
Carolina. This is all in the last 36 months.
  I won't go through State after State, but you get some sense of this. 
It is not isolated to our corner in Connecticut, our small State, or 
the area of New England: New York State, 115,000 jobs; Michigan, 
121,000; Wisconsin, 168,000; Illinois, 115,000 jobs. It is a worrisome 
trend. It is going on all across the country.
  Again, we cannot say this is transitional, I am sorry, America, you 
are going to have to live with this. We ought to respond in a way that 
acknowledges this trend and tries to offer some ideas on how we might 
turn this trend around.
  I will be glad to share with my colleagues, if they are curious about 
their States--I will not go through all 50 States, but there is not a 
State in the country that has not lost manufacturing jobs. Some have 
lost very few. The State of Wyoming lost 700 jobs; North Dakota, 500. 
That may be the lowest. Arizona, 34,000; New Mexico, 5,000; Colorado, 
37,000; Kansas, 19,000; Arkansas, 29,000; Missouri, 38,000. These job 
losses have been very painful.
  We talk about these jobs, and I think the tendency is to talk about 
them in and of themselves, the job loss in any manufacturing sector in 
any given State. Each manufacturing job supports three other U.S. jobs. 
When we end up losing these jobs in the manufacturing sector, there is 
a ripple effect.
  I won't dwell on this, but I think most of my colleagues are aware of 
this already. When someone loses their source of income in the area of 
manufacturing, the effects are felt in retail trade, personal/business 
services, and other manufacturing sectors with the inability of people 
to purchase goods. It is not as if these jobs exist or, when they are 
lost, the only people paying that price are the people who lost the 
job. In effect, it is being felt across the economy as well.
  Mr. President, 14 million additional jobs are in danger.
  Now we get into the question of jobs going offshore. I want to give 
some indication of what is happening. Let's get back to the outsourcing 
question. I mentioned manufacturing because a lot of these jobs are 
moving in that area.
  We are told--and this is from Time magazine in their February 22 
issue--that by the year 2015, more than 3 million American jobs are 
projected to be shipped overseas. We begin to see these trend lines. In 
2005, it moves up to 588,000 which will be outsourced overseas. A few 
years later that number of jobs goes to 1.6 million, and projections 
are, with no effort being made to change this direction, the number 
gets up to 3 million. We are worried that if we do not speak up now and 
do something about this trend, we are going to find a continued erosion 
and continued loss of these jobs overseas.
  Let me point out where they are coming from because this may be 
helpful as well to those interested in this subject matter. There are 
14 million additional jobs in danger of being shipped overseas, as I 
mentioned. Where are they coming from? Office support areas, some 8 
million jobs; business and financial support, 2 million; in the area of 
computer and math professionals, close to 3 million; in the area of 
paralegal, legal assistance, diagnostic support, medical transcriptions 
and the like, the numbers are in the thousands, to give some idea where 
we are going with all of this.
  It isn't just these low-wage jobs that are going. They are also going 
in the more sophisticated areas as well. I mentioned earlier the story 
in the Wall Street Journal talking about ValiCert. They were talking 
about jobs in Silicon Valley. I guarantee you we are not talking about 
low-wage jobs at all. Those are jobs that are fairly well paid, and 
they are being lost. The trend lines are not good in just raw numbers, 
but also in sectors of the economy where these jobs are being lost.
  At the appropriate time, I will offer a very specific amendment to 
address the issue. Very briefly, the amendment would do the following: 
It will restrict anyone from using Federal tax dollars to ship jobs 
offshore in three different ways. First, the Federal Government may not 
use Federal taxpayer dollars to procure goods or services to fulfill 
contracts that use overseas workers at the expense of American jobs.
  Second, we tell State and local governments that any Federal dollars 
they receive in the form of a grant or in the form of an appropriation 
by formula or in any other way are not to be used to promote the loss 
of American jobs.
  I point out that today 40 States outsource jobs. I am told that in 
the State of Minnesota, if you lose your job and you call up the 
unemployment office, you are going to talk to someone in India about 
what your rights and benefits are. I do not need to tell you the 
reaction of those people in that

[[Page 3193]]

State who lost their job and they are talking to someone offshore to 
tell them what their benefits are.
  The third way is, any agency seeking to privatize a government 
contract being paid with U.S. taxpayer dollars may not enter that 
contract if it again displaces American workers in favor of offshore 
workers.
  In all these cases, we have exceptions on the grounds of national 
security and we allow the Governor or a Federal agency head to, in 
effect, waive these provisions if there is bona fide lack of goods and 
services in the United States. There is an escape clause here.
  The obvious question arises, one, on national security, or, two, if 
no one is producing these goods and services here, what are we supposed 
to do? Rather than have the President have to waive the provision, we 
allow a Governor or head of an agency who would be in charge of this 
particular area to do so.
  Let me take a few minutes to explain why this is a timely amendment 
and why it is deserving of our support. A gentleman by the name of John 
Bowman dedicated 25 years of his life to becoming an information 
technology professional, and he was very good at it, I might add. He, 
like hundreds of thousands of Americans, lost his job because of 
outsourcing. John looked around and realized what happened to him was 
not an isolated incident. It was part of a massive trend, and he 
decided to do something about it.
  John will tell you he would be the last person in the world leading a 
grassroots organization that has practically become a grassroots 
movement in this country, not just in my State but all across the 
Nation. These are white-collar professional people, highly trained, who 
are watching their jobs lost day after day, flying offshore, being 
outsourced.
  Fortunately, John is now being joined in this fight from people of 
all walks of life--labor unions, small business owners, Republicans and 
Democrats alike. I had a meeting in my State a few days ago on this 
issue. I had people in the same room that I could not put in the same 
town in Connecticut a year ago--people from the manufacturing sector, 
from labor unions, and the private sector coming together. They differ 
on a lot of issues, but on this one they are joined in common cause. 
They recognize what we are experiencing is different from what we 
experienced before.
  Today, advances in technology and fewer trade restrictions have made 
it far easier to move goods, information, and jobs around the globe. 
Foreign countries are aggressively enticing American businesses with 
promises of lower wages, lax worker protections, and weak environmental 
laws. Countries such as India and China have figured out if you want to 
compete in the global marketplace in the best jobs, you need to invest 
in the best education and training of your workers. Rather than trying 
to find a meaningful way to address these new circumstances, this 
administration would rather pretend the world is still functioning as 
it always did and actually that our economy is on a path to recovery. 
As a matter of fact, our country is hemorrhaging jobs at an alarming 
rate. As I mentioned already, according to one estimate, by the year 
2015, 3.3 million, close to 4 million jobs and $136 billion in annual 
wages will have moved offshore if we do not do something about it. Four 
hundred of the largest 1,000 companies are already sending jobs 
offshore, with more planning to do so every single day.
  In a short time I will get a chance to go into this in more detail as 
to why I think this is an important amendment and why I hope my 
colleagues will support it.
  I realize it is a loud shout at this moment, and I know others will 
argue that maybe it is louder than it need be, but I do not know any 
other way to express my deep concern about what is happening in my 
State and all across this country if we do not begin to say that at 
least with taxpayer money you are going to have to act differently. You 
may decide to do it on your own dime, but you are not going to do it on 
the dimes of my taxpayers, to send jobs overseas when they are not 
necessary. You do not need to do that in order to survive.
  I see my colleague from Montana in the Chamber. I yield the floor and 
at an appropriate time I will come back to this discussion.
  The PRESIDING OFFICER. Under the previous order, the time for the 
minority has expired. The majority controls an additional 9 minutes 20 
seconds.
  Who yields time?
  Mr. GRASSLEY. I suggest the absence of a quorum and that it come off 
of our time.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant journal clerk proceeded to call the roll.
  Mr. HATCH. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.


                           Amendment No. 2647

  Mr. HATCH. Mr. President, there are several aspects of U.S. job 
creation and retention on which many of us may disagree. I do not 
believe, however, that the need for an effective research credit is one 
of them. It will do more for workers, more for jobs, more for high 
technology, more for opportunities, and more for the economy than most 
anything else we could pass. In this jobs bill it seems very 
appropriate for us to add this particular amendment to it.
  This amendment has strong support from both sides of the aisle. It 
has the unified support of the whole business community. It is the 
right thing to do for U.S. workers, for the U.S. economy, and for our 
children and our grandchildren. This amendment will open a door for 
small businesses, where most of the jobs are created anyway, to create 
more jobs, more opportunities, more good products, more high 
technology, more ways of keeping the United States at the forefront, 
economically, in this world than almost anything else we could do.
  This jobs bill, which itself is an excellent bill that will do a lot 
for jobs, will be much better for having this amendment added to it. I 
hope my colleagues will all vote for it. It is a worthwhile thing to 
do. It is something that every one of us ought to vote for.
  I thank those who have cosponsored this with me, those who have 
amended it with their excellent suggestions and the members of the 
Senate Finance Committee who have been champions of this for many 
years. I believe over the long run this type of amendment is going to 
pay off in great dividends.
  I yield the floor, and I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant journal clerk proceeded to call the roll.
  Mr. REID. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.


                       Vote on Amendment No. 2651

  The PRESIDING OFFICER. Under the previous order, the hour of 3:30 
having arrived, the question is on agreeing to amendment No. 2651.
  The amendment (No. 2651) was agreed to.


                       Vote on Amendment No. 2647

  The PRESIDING OFFICER. The question is on agreeing to amendment No. 
2647, as amended.
  Mr. BAUCUS. I ask for the yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second?
  There appears to be a sufficient second.
  The clerk will call the roll.
  The assistant journal clerk called the roll.
  Mr. REID. I announce that the Senator from Louisiana (Mr. Breaux), 
the Senator from North Carolina (Mr. Edwards), the Senator from Florida 
(Mr. Graham), the Senator from South Dakota (Mr. Johnson), the Senator 
from Massachusetts (Mr. Kerry), and the Senator from Florida (Mr. 
Nelson) are necessarily absent.
  I further announce that the Senator from Delaware (Mr. Biden) is 
absent on official business.
  I further announce that, if present and voting, the Senator from 
South

[[Page 3194]]

Dakota (Mr. Johnson) and the Senator from Massachusetts (Mr. Kerry) 
would each vote ``yea.''
  The PRESIDING OFFICER (Mr. Cornyn). Are there any other Senators in 
the Chamber desiring to vote?
  The result was announced--yeas 93, nays 0, as follows:

                      [Rollcall Vote No. 31 Leg.]

                                YEAS--93

     Akaka
     Alexander
     Allard
     Allen
     Baucus
     Bayh
     Bennett
     Bingaman
     Bond
     Boxer
     Brownback
     Bunning
     Burns
     Byrd
     Campbell
     Cantwell
     Carper
     Chafee
     Chambliss
     Clinton
     Cochran
     Coleman
     Collins
     Conrad
     Cornyn
     Corzine
     Craig
     Crapo
     Daschle
     Dayton
     DeWine
     Dodd
     Dole
     Domenici
     Dorgan
     Durbin
     Ensign
     Enzi
     Feingold
     Feinstein
     Fitzgerald
     Frist
     Graham (SC)
     Grassley
     Gregg
     Hagel
     Harkin
     Hatch
     Hollings
     Hutchison
     Inhofe
     Inouye
     Jeffords
     Kennedy
     Kohl
     Kyl
     Landrieu
     Lautenberg
     Leahy
     Levin
     Lieberman
     Lincoln
     Lott
     Lugar
     McCain
     McConnell
     Mikulski
     Miller
     Murkowski
     Murray
     Nelson (NE)
     Nickles
     Pryor
     Reed
     Reid
     Roberts
     Rockefeller
     Santorum
     Sarbanes
     Schumer
     Sessions
     Shelby
     Smith
     Snowe
     Specter
     Stabenow
     Stevens
     Sununu
     Talent
     Thomas
     Voinovich
     Warner
     Wyden

                             NOT VOTING--7

     Biden
     Breaux
     Edwards
     Graham (FL)
     Johnson
     Kerry
     Nelson (FL)
  The amendment (No. 2647) was agreed to.
  Mr. GRASSLEY. I move to reconsider the vote.
  Mr. BAUCUS. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, may I inquire what is the business before 
the Senate?
  The PRESIDING OFFICER. The bill, as amended, is currently pending.


                           Amendment No. 2660

  Mr. DODD. I send an amendment to the desk and ask for its immediate 
consideration.
  The PRESIDING OFFICER. The clerk will report.
  The assistant legislative clerk read as follows:

       The Senator from Connecticut [Mr. Dodd] proposes an 
     amendment numbered 2660.

  Mr. DODD. Mr. President, I ask unanimous consent that the reading of 
the amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:
  (Data not supplied.)
  Mr. DODD. Mr. President, I offer this amendment on behalf of myself, 
Senator Coleman of Minnesota, Senator Kennedy, Senator Corzine, Senator 
Mikulski, and others.
  Let me say to the floor managers, if I may, I know they are 
interested in the time. I am prepared to agree to a 1-hour time 
agreement. I do not necessarily expect to take the hour. I know there 
are others who may want to be heard. I know you want to move things 
along, so I am prepared to have a time agreement and move on my 
amendment, give my remarks, and then others can speak, and then vote on 
it, if you would like.
  The PRESIDING OFFICER. The Senator from Montana.
  Mr. BAUCUS. Mr. President, with this amendment, we are moving along 
on this bill. I very much appreciate the Senator's generosity in 
suggesting a time agreement. At this point, apparently, that is not 
advisable. But I thank the Senator for making his generous offer and 
for proceeding nevertheless.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, I will move forward. If, at any moment you 
would like to have a time agreement, let me know and I will try to 
accommodate you so you can move on to other matters.
  I have already spoken about the amendment during the time between 
2:30 and around 3:30, describing, in a sense, what the amendment would 
do and the rationale for the amendment. I will be glad to go back over 
this amendment again for my colleagues and then engage in any debate or 
discussion about it.
  In a sense, I am preaching to the choir when I talk about this issue 
to my colleagues on both sides of the aisle because we all painfully 
know what has happened in the last 36 months in our country. We have 
lost around 2.8 million manufacturing jobs in the United States. I have 
laid out on this chart I have in the Chamber how that breaks down State 
by State across the country.
  In my home State of Connecticut, we have lost some 32,000 jobs in the 
manufacturing sector; California, 272,000; Ohio has lost around 153,000 
jobs; in Illinois, 115,000; Texas--the Presiding Officer's State--
150,000 jobs.
  So certainly we all appreciate the fact there has been a tremendous 
erosion in a very critical area in our economy.
  We also know there is another phenomena occurring, and at an 
accelerated pace; that is, the outsourcing of many jobs, including some 
manufacturing jobs, around the globe, and it is accelerating at warp 
speed.
  We now know there are literally 400 of the top 1,000 companies in the 
United States outsourcing their jobs to India or China or other nations 
around the globe. Mr. President, 40 of the 50 States now outsource 
jobs.
  My amendment simply says--and there are waivers in here and the like. 
I understand, although I do not like it, if a company decides on its 
own dime it is going to outsource a job. I disagree with that. I think 
they are wrong to do it, but it certainly is their right to do it. We 
can offer tax incentives to encourage people to stay here, tax 
disincentives so they do not go offshore, but ultimately a company can 
decide for itself.
  It is another matter with taxpayer money, with the money that 
American taxpayers send to Washington. The idea that we would use their 
dollars to outsource an American job is something on which I think we 
ought to speak loudly and clearly. We ought to say: Look, we disagree 
with that. We don't think you ought to be able to do that.
  So this amendment, in three different areas, very simply says: First, 
the Federal Government may not use Federal taxpayer money to procure 
goods and services to fulfill contracts that use overseas workers at 
the expense of American jobs. Second, we tell State and local 
governments that any Federal dollars they receive in the form of a 
grant, in the form of an appropriation, or any other way, that they are 
not to use those Federal dollars to promote the loss of American jobs 
for the creation of offshore jobs. And, third, we say any agency 
seeking to privatize a Government contract being paid with U.S. 
taxpayer dollars may not enter into that contract if it, again, 
displaces American workers in favor of offshore workers.
  Now, very quickly, in anticipation of some of the arguments we may 
hear, we provide waivers and exceptions on grounds of national 
security, and we also allow Governors or Federal agency heads to waive 
these provisions if there is a bona fide lack of comparable goods or 
services in the United States.
  In this legislation, we also, of course, make it clear that the 
Government procurement agreements between the United States and some 27 
other nations, that are predominantly Western Europe countries, are not 
affected by the prohibitions contained in this bill. Those 27 nations 
do not include, I would point out, India or the People's Republic of 
China.
  So the major sources of outsourcing are not affected by those 
provisions. Thus, we are in complete compliance with the WTO and every 
other formal agreement we have. We are not in violation of any of those 
agreements as a result of this amendment.
  Now, I had a meeting in my State--and I assume my colleagues may have 
had similar kinds of gatherings--where people came together who you 
could not have put in the same county a year ago on this issue. I am 
talking about my chambers of commerce, my manufacturing associations, 
and my labor unions--all coming together saying:

[[Page 3195]]

When is Washington going to say something about this outsourcing that 
is going on?
  If we continue to allow these jobs to flow out of our country, then I 
think we run the risk, at critical junctures, of having the human 
talent necessary for us to provide those services and to produce those 
goods which will allow us to compete effectively in the 21st century. 
Once you lose jobs, particularly in the manufacturing sector, or some 
of the high-skilled areas, it is very difficult to go back and re-
create those jobs, to re-create those manufacturing centers.
  Let me point out an article that appeared in the Wall Street Journal 
this morning. In fact, I have already included it in the Record. But 
the ValiCert company--and I think this is a front-page story or nearly 
a front-page story in the Wall Street Journal--discovered that 
outsourcing was no great success for them. They did it and discovered 
that the value they were getting for the jobs and products being 
produced did not equal that produced here in the United States. They 
have reversed that decision.
  So when you read in this economic report, prepared for the President 
of the United States, last month, in February-- and I will quote the 
report for my colleagues where they state, in absolute terms, on page 
229 of this report:

       When a good or service is produced more cheaply abroad, it 
     makes more sense to import it than to make or provide it 
     domestically.

  Well, tell that to the ValiCert company. They did not discover that. 
Certainly, while that may be true of a bottom line of a company, if you 
are trying to preserve jobs in this country, which is a responsibility 
we bear in this body, and not just to those companies but to the people 
who work for them--an American job is not just a good or a service. An 
American job has implications that go beyond just the dollar amount 
lost of income in wages or salaries. It means also that a family may 
not pay their home mortgage and may not be able to provide the goods 
and services that allow our economy to grow and expand. It means 
families are under more strain and stress because they have lost the 
source of income to provide for themselves.
  So this ought not be a partisan issue. This ought to be something on 
which we stand united. This is not being an isolationist. I am a free 
trader. I have been so in the years I have been here. I have supported 
many, many free trade agreements, and I opposed some as well, but I 
honestly believe if you are going to be an effective trader, a free and 
fair trader in the 21st century, then you ought not squander and give 
up the very jobs that make it possible for you to compete in this 
global economy.
  So I am deeply concerned that if we do not say something, 
particularly with U.S. taxpayer money that is being used to subsidize 
this outsourcing of jobs, then we are failing to understand what is 
going on across this country. In State after State after State, the 
trend lines are there in manufacturing. It is also occurring in other 
sectors in the economy.
  Let me share with my colleagues, as shown on this chart, indication 
of where the outsourcing of these jobs is occurring. Presently, it is 
occurring in areas such as office support. The estimate is 14 million 
additional jobs, by the way, will be lost and shipped overseas over the 
next several years. The estimates are about 8 million will occur in 
office support areas; in computer and math professionals, close to 3 
million jobs lost in that area; business and financial services, over 2 
million jobs; paralegals, diagnostic support services, medical 
transcriptions, over 94,000.
  So it is not just low-wage, low-salary jobs that are going but very 
sophisticated, high-technology jobs that could be leaving our country 
as well. That makes us weaker. It is not in the national security 
interests of the United States to be losing these critical jobs at a 
time when we need them most in order to provide for the economic growth 
of our own Nation.
  So while I understand, from a business perspective, your job is to 
look at quarterly reports, to try to improve the bottom line, our job 
in the Senate and the Congress of the United States goes beyond looking 
at quarterly reports.
  We should look generationally. I don't want my generation to be the 
first generation of Americans which leaves the coming generation less 
well off than every other succeeding generation has left their children 
and their grandchildren. We are at risk of doing that if we don't step 
up at this juncture and say we need to stop or at least discourage this 
outsourcing of jobs that is occurring at a rapid pace every single day.
  It is hard not to pick up a U.S. newspaper in any city and read where 
one corporation, one business after another, is making the decision to 
outsource more jobs. I think we ought to say, let's slow down. Let's 
have some balance. Let's not use taxpayer money to allow these jobs to 
be lost. That is the thrust of the amendment.
  I hope we will have overwhelming support for this idea. This bill is 
an appropriate place to be debating it. It is something that could make 
a huge difference for those who are worrying whether we are paying 
attention at all. We have just debated over the last 5 weeks medical 
malpractice, providing immunization for gun manufacturers. We have had 
a bill on pensions. But we have not spent 5 minutes debating the issue 
of what is happening to America's jobs. That is the big issue.
  Look at any survey right now. Ask the American people what they worry 
about the most. It is the loss of jobs. They are outraged we have 
nothing to say when it comes to outsourcing of jobs to other nations, 
and we are not standing up and defending our own workforce.
  In this same economic report I cited earlier, to give you some idea 
of why people get discouraged, I mentioned earlier the quote suggesting 
it was an automatic thing that outsourcing of jobs was good or, as they 
call it, importing of jobs. That is the way they describe it. I 
mentioned already a company identified in a Wall Street Journal article 
this morning, ``Lesson in India, Not Every Job Translates Overseas.'' I 
encourage my colleagues to look at that article as one example of a 
company that discovered outsourcing was bad for business, not good.
  In this same economic report prepared by the President's top economic 
advisors, they raised the following question:

       The definition of a manufactured product, however, is not 
     straightforward. When a fast food restaurant sells a 
     hamburger, for example, is it providing a service or inputs 
     for manufacturing a product?

  If this was some sort of cartoon in the paper, I might have laughed 
at it, but it is part of an official document, an economic report 
prepared by the President's top economic advisers which suggests 
through the question that flipping a hamburger or cooking a hot dog is 
a manufacturing job. You get some idea and sense of where the outrage 
of the American public is coming on why we are unable to speak to this 
issue.
  Again, I don't care if you are a Democrat or Republican, what your 
politics or ideology is. We have to stand up and defend our country in 
a moment like this. I worry about losing these jobs.
  I mentioned earlier I had some 5,400 manufacturers in my State 
employing well over 240,000 people. We have lost about 35,000 jobs in 
the last 36 months. My manufacturers produce critical components for 
some of the most sophisticated defense technologies in the Nation. If 
you lose that manufacturing base, it is not just the loss of a 
manufacturing job or the loss of a good little company, it is also a 
critical issue when it comes to national security needs. Many of these 
small manufacturers produce critical components and parts for some of 
the most sophisticated defense technologies in our Nation.
  I mentioned earlier my friend and colleague from Texas. The number of 
jobs there, 150,000. I know this Senator has many of these small 
companies that are producing those parts for defense companies, defense 
technologies. There is a ripple effect. We know as well, beyond the 
implications for our national security, for every one of

[[Page 3196]]

these jobs that are lost in the manufacturing sector, there are jobs 
lost in other sectors. It is not just that job that is lost or that 
family that is affected. Each manufacturing job supports three other 
U.S. jobs. So when we lose these jobs, we also feel it in the retail 
trade, in the professional services, and in manufacturing as well.
  I apologize if I get heated about this subject, but it is painful to 
read some of this cold-eyed analysis that suggests somehow you just 
have to stomach this or weather this, that this is just one of these 
cyclical or structural occurrences in the national economy, and these 
statistics, as troublesome as they are, are nothing more than that, 
statistics.
  Behind every one of those statistics, behind every one of those 
numbers I cite, is usually a head of household or people trying to keep 
their families together. They are not just statistics. These are 
American citizens. These are human beings who are doing everything they 
can to live by the rules and provide for their families. They want to 
know whether their Congress--they don't identify themselves when they 
get up in the morning as a Democrat or Republican; they get up in the 
morning and worry about their families and their future--gets it, if we 
understand it, and whether we are willing to do anything about it.
  This is an attempt by myself and my colleague from Minnesota and 
others to say at least when it comes to your tax dollar, we are going 
to say to the States, localities, and other businesses with waiver 
provisions here, you are not going to use those dollars to outsource an 
American job, not on our watch. You may decide to do it with your own 
money, but you will not do it with American taxpayer money. That is why 
we offer this amendment.
  I yield the floor to my colleague from Minnesota for any comments he 
would like to make.
  The PRESIDING OFFICER. The Senator from Minnesota.
  Mr. COLEMAN. Mr. President, I rise in support of the amendment 
offered by my colleague from Connecticut. I am proud of working with 
the President to grow jobs. I firmly believe, from my days as a mayor, 
when you cut taxes, you shape an environment in which folks invest. And 
when they invest, mom and dad have a job. The best welfare program is a 
job. The best housing program is a job. Access to health care comes 
with a job, most often. So we have to do what is necessary to grow 
jobs. We are moving in that direction. Clearly, more needs to be done.
  Changing the economy at times reminds me of turning around one of 
those oar boats in Lake Superior: You have to get it moving in the 
right direction. I believe we are moving in the right direction, but 
more has to be done.
  We have an opportunity with the Dodd amendment to do more, to make 
sure we use taxpayer dollars wisely, in a way that prevents the 
outsourcing of American jobs and grows jobs here.
  The underlying bill we are dealing with, the Jumpstart JOBS Act, is 
moving us in that direction. We have to do more. We are doing it right 
here.
  I am one who has supported and supports expanding markets. I 
understand the importance of trade in terms of growing jobs. This 
initiative is not designed to step in the way of our efforts to expand 
and broaden our capacity to find new markets for our products. On the 
contrary, what it does is ensures those firms which have exemplary 
goods and services to sell have a fair shake at contracts involving 
Federal dollars.
  This issue has come up in Minnesota. From conversations with my 
Governor, it is clear--and I understood this when I was a former 
mayor--we have an obligation to get the best possible value for 
taxpayers. We have to look at the bottom line. But at the same time we 
have to be concerned about the impact on our State and national economy 
of foreign offshoring when other options are available, when the work 
can be done here.
  I call this commonsense legislation. Again, I support trade as a way 
to create wealth and jobs. But for a government at any level to 
contract out with foreign entities for delivery of federally funded 
U.S. programs is tantamount to Detroit, MI buying a fleet of foreign-
made squad cars. It doesn't make any sense. It flies in the face of 
common sense.
  Recent news reports noted that under a $16.8 million contract with an 
Arizona firm, calls to a Minnesota toll-free number for help with lost 
and stolen food stamp cards are being routed to Bombay, India. Under a 
$13.3 million contract, software programs in India are helping build a 
Web-based system to automate eligibility for Medicaid and other health 
care benefits to low-income Minnesotans.
  The administration of U.S. Government programs ought to be done here 
at home in the U.S. Even if some of the work is outsourced to private 
vendors, the thought of our Medicaid or food stamp programs being run 
out of someplace in India would offend most Minnesotans' sensibilities, 
and it offends mine.
  We have an opportunity to talk about what we do with taxpayer 
dollars. Would you use those taxpayer dollars in a way that fosters the 
growth and development of American jobs or do we send them overseas? I 
think common sense says we use them here.
  My colleague and I may disagree at times on tax policy or on a range 
of issues. But this is an issue that should cut across partisan lines. 
We have an interest in growing jobs in this country and this is a way 
to make commonsense use of taxpayer dollars. I am proud to stand in 
support of my colleague's amendment to this bill.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from New Jersey is recognized.
  Mr. CORZINE. Mr. President, I also rise to support the amendment of 
the Senator from Connecticut. It is very hard for people in my State 
and across this country to read the President's economic report and 
hear economic theory that is pronounced in economics 101, that somehow 
or another 19th century comparative advantage is the basis on which we 
ought to be working jobs in this country.
  Folks are very concerned when they don't have work. That is a very 
simple principle of economics. We are seeing so many of our 
manufacturing jobs go, and now 40 out of 50 of our States are taking 
jobs that are government jobs and shipping them overseas and 
undermining our economy here. That is not highfalutin economics. That 
is taking money out of the pockets of people who drive our economy and 
make a difference in our communities. It has all those multiplier 
effects other economists might talk about. Then you don't collect tax 
revenues, you don't have people spending money back into the economy 
and driving it. A Senator talked about manufacturing jobs, but there is 
a leverage or multiplier effect on government jobs as well.
  This is really out of touch with the American people, when we believe 
our policy ought to be to encourage outsourcing. Here, with taxpayer 
dollars, in the Federal Government, we have an opportunity to say, no, 
this is not the direction we ought to take. We should not be moving 
jobs overseas that would be very properly done here at home. We see it 
in the manufacturing sector. I am not sure I totally agree we ought to 
let everybody look at their quarterly bottom line and move. I think we 
need to understand there are national security interests at stake on 
jobs we have right here at home. We need to make sure we have a 
manufacturing sector that can actually produce steel, manufacture the 
weapons that protect our men and women when they go to war. We need to 
have that strength and it needs to be substantial.
  We need to work to make sure our technology is under our control, the 
privacy of the information that flows in. I think we ought to push back 
against all this outsourcing for a lot of reasons that don't just deal 
with economics. But it is absolutely unfathomable that we would take 
State and local folks, Federal Government people, and ship their jobs 
overseas at the cost of not being able to have the overall economic 
impact of this. I think, particularly with the waivers the Senator from 
Connecticut

[[Page 3197]]

has built into these programs, we have a program that will make a 
difference.
  It is not enough to talk about translating hamburger-flipping jobs 
into reclassifying manufacturing as a means to solve an outsourcing 
problem. It is incredible, absolutely incredible, the illogic we see 
running through this economic report.
  I think the Senator from Connecticut has put together a response that 
makes sense. We are going to use U.S. taxpayer dollars to make sure 
when we have Government jobs, they stay here. I am proud to be a 
cosponsor. I think it is absolutely essential the American people know 
we are fighting for their best interests at home on the floor of the 
Senate. This is the most direct, clear method of pushing back against 
what is a very wrongheaded approach to creating jobs in America.
  Again, I am pleased to be a cosponsor.
  Mr. DODD. If my colleague will yield, I thank my colleague from New 
Jersey for his support, and my colleague from Minnesota as well.
  My colleague from New Jersey is no stranger to these issues. I made 
note before of what is happening in Minnesota and other States. In 
Connecticut, we have lost 32,000 manufacturing jobs. New Jersey has 
lost over 55,000 manufacturing jobs.
  Mr. CORZINE. If the Senator will yield for a quick statement, on 
Friday, we closed the last Ford production facility in New Jersey, and 
we are on track to have complete closure of the auto industry in New 
Jersey, which used to be one of the heartlands of auto production, 
outside of Michigan. It is very much reflected in the kinds of numbers 
the Senator is talking about.
  We were supposed to be replacing those jobs with technology, 
information systems and telecommunications equipment, and now we see 
those jobs moving offshore just as much, and some are reflected in 
those numbers. That is why it is so important to stanch some of that 
movement by the kind of action that would be taken in reflection of the 
amendment of the Senator.
  Mr. DODD. I mentioned earlier there was an article in this morning's 
Wall Street Journal entitled ``Lesson in India: Not Every Job 
Translates Overseas.'' I want to ask my colleague a question. Because 
of his background in business, he understands those issues better than 
most of us. This reads:

       When sales of their security software slowed in 2001, 
     executives at ValiCert Inc. began laying off engineers in 
     Silicon Valley to hire replacements in India for $7,000 a 
     year.

  It says:

       The reality was different. The Indian engineers, who knew 
     little about ValiCert's software or how it was used, omitted 
     features Americans considered intuitive. U.S. programmers, 
     accustomed to quick chats over cubicle walls, spent months 
     writing detailed instructions for overseas assignments, 
     delaying new products. Fear and distrust thrived as 
     ValiCert's finances deteriorated, and co-workers, 14 time 
     zones apart, traded curt e-mails. In the fall 2002, 
     executives brought back to the U.S. a key project that had 
     been assigned to India, irritating many Indian employees.
       ``At times, we are thinking, `What have we done here?''' 
     recalls John Vigouroux, who joined ValiCert in July 2002 and 
     became chief executive three months later.

  Tell me a bit about this. I think the assumption is made 
automatically, and certainly in this economic report prepared for the 
President by his administration, it makes a categorical statement that 
outsourcing of jobs is always a good thing because it improves the 
bottom line. Here is an example of a company which had a very different 
example. Aside from the obvious reduction in payroll by hiring people 
in another country to do the job, and firing Americans, are there also 
examples where this kind of activity has actually been bad for business 
and not necessarily automatically good for business, as suggested by 
this report?
  Mr. CORZINE. Well, the Senator from Connecticut raises a good point 
because I think when business decides it wants to outsource 14 time 
zones away or 12 time zones away, there are enormous synergies in 
business that are lost--the ability for people to work in similar 
space, to get the economies of the consolidation of ideas, working with 
people. It doesn't work nearly as well. As a matter of fact, a lot of 
businesses are consolidating so they can make a lot of their operations 
much more sympathetic with each other. These are business principles a 
lot of folks follow.
  I don't think it is as obvious as is commented in the economic report 
of the President, but I guarantee sometimes the short-term benefits 
that somebody might see on a quarterly report, because they have 
lowered their loss, are grossly offset by long-term costs because they 
lose the technological innovation of having people work together. They 
lose the economies of scale, and the potential long-term costs, aside 
from the social costs the Senators from Connecticut, Minnesota, and New 
Jersey have been talking about, are huge.
  Mr. DODD. I thank my colleague for those comments. They are very 
enlightening. It is further indication that these trend lines are 
moving forward.
  There has been a report in Time magazine that indicates we are 
looking at, some indicate over the coming years as many as 14 million, 
15 million jobs to be outsourced if we do not begin to do something 
about it. In the near term, I think the number is between 3 and 4 
million with a loss, by the way, just looking at revenue loss, of wages 
lost--forget everything else, forget what happens when a person loses 
their job and the ripple effects that occur--just in lost wages it is 
about $140 billion.
  We know what kind of budget deficit we are in already. I don't think 
this figure has been projected onto those numbers at all. We look at 
revenues coming in, and we look at what expenditures for which we have 
to account, and a loss of $136 billion to $140 billion in wages, lost 
because of outsourcing over the next decade or less, ought to be a 
matter of deep concern, even if you are not affected or moved by what 
happens to families or heads of households who are trying to provide 
for the needs of their families.
  The fact that we lose that much salary and wages going out ought to 
be of great concern. I mention that as an additional implication of 
what is caused by outsourcing.
  Again, I said earlier, we can offer incentives for people to stay, we 
can offer disincentives in the Tax Code for them not to go, but I don't 
know, for the life of me, why we ought to be taking American taxpayers' 
money--we insult the taxpayer to say, I am going to use your money to 
fire someone in this company and hire someone someplace else to do the 
job at a fraction of the cost because it is going to improve your 
bottom line.
  I don't know how the Senator feels, but the societal implications are 
profound. Our job is not only to make sure there is wealth creation in 
the country, but also we bear a responsibility beyond quarterly reports 
to see to it, from a generational standpoint, that we are going to 
leave this country at least as in good a shape as we inherited from our 
parents.
  Mr. CORZINE. Will the Senator yield?
  Mr. DODD. I will be happy to yield.
  Mr. CORZINE. The $140 billion the Senator from Connecticut spoke 
about with regard to salaries on the chart the Senator previously 
showed, there is a multiplier effect. It is almost three times that 
value to the economy. The Senator had the chart which showed the full 
implications. It is remarkable what is given up when our Nation loses 
these jobs overseas. It is not just those salaries. When you take the 
full implication, because you also have to look at the tax revenues 
that come back into the coffers of State, local, and Federal 
governments, these numbers could be even larger. This is just showing 
the impact of what the multiplier effect is for the economy.
  These numbers are huge. So the undermining of the well-being of our 
economy by this outsourcing element is just way more profound than I 
think is being discussed and is an extraordinary misrepresentation and 
a mistake for the administration to believe that this is something we 
ought to be embracing and encouraging.
  There is another element that needs to be thought about. Every time 
those outsourcing jobs cost an American job, then that individual has 
to compete for

[[Page 3198]]

another job. Right now, for all but the top 20 percent of our economy, 
we are seeing declining real wages.
  The fact is, people are competing for lesser quality jobs that pay 
less than the jobs that are leaving. I think we have seen estimates 
that it is about 20 percent less that an individual makes in the next 
job they take after they have been laid off. It is profoundly wrong for 
the administration to embrace such a dangerous idea both for the 
economic power and also the real hurt that I think it brings to the 
individual loss.
  Mr. DODD. I thank my colleague. It is worthwhile to make the point 
that actually watching the buying power, the wealth of individuals 
being reduced, overall our country suffers from that--obviously the 
families do--but when you reduce that buying power, that wealth, 
implications are being felt throughout our economy.
  These happen from a structural standpoint. But when you allow it to 
go on with Federal money being used--again, as I say, I would not be 
party, as much as I may object, to companies that want to do this. I 
think they are wrong to do it. They are making a mistake. It is harmful 
to our country. On their dime, I guess they have a right to do it. But 
on our dime, they ought not have the right to do it, and this is the 
American taxpayers' dime.
  I don't think we ought to be saying to them, You can take your 
Federal taxpayer money and pay somebody offshore to do it, losing an 
American job that could be done here. I don't think that is right, and 
that is the purpose of this amendment. I thank my colleague.
  Mr. BAUCUS. My good friend from New Jersey has to leave the floor. I 
compliment the Senator for what he is trying to do. This clearly is the 
issue, the problem that faces our country as it will certainly for the 
rest of the year and probably for the indefinite future.
  I am wondering, in addition to the approach suggested today--and 
there probably are additional proposals, too. This is a complex problem 
and requires a complex solution. It reminds me of a quote I am fond of 
making. H.L. Mencken once said: For every complicated problem there is 
a simple solution, and it is usually wrong.
  In my judgment, this administration not only is sort of laissez-faire 
but kind of going AWOL on this issue. I don't see a plan. I don't see a 
way to deal with job loss that passes the smell test. In addition, 
wouldn't it help to be much more aggressive in enforcing our trade 
laws?
  One thing that bothers me, frankly, is that we are going about 
getting trade agreements with minuscule economies. The big bang for the 
buck is enforcing our trade laws, say, with respect to India or China 
or maybe the European Union. There are lots of examples.
  We hear about all the call centers in India. We don't hear much about 
many products by American companies being sold in India, and the 
Indians are very much violating the intellectual property agreements. 
Billions of dollars are being lost to American companies that could be 
spent in America because other countries are not living up to their 
international obligations.
  I was wondering if the Senators agree that is one of the additional 
ways we can take to keep more jobs in America? Let's open up markets in 
other countries so we can export more.
  Mr. CORZINE. The Senator from Montana is exactly right, some of the 
regulatory restrictions or ability to actually penetrate some of these 
markets, while they may meet the letter of the law with regard to trade 
agreements, are virtually impossible, particularly in the services 
where we supposedly have the comparative advantage.
  I think unless we are prepared to deal on all fronts--enforcing our 
trade agreements, particularly with large economies--we are not going 
to see even the theoretical benefits coming back of open trade markets. 
The situation is very true in the old industry that I worked in, 
financial services. It is very hard to penetrate these large economies 
about which the Senator has talked.
  So we give up the jobs in outsourcing, but we are not getting the 
ability to actually provide the services that would make up for some of 
those jobs back here at home.
  It goes back to a miscast presentation of a concept that is fine in 
Economics 101 books on comparative advantage but makes no sense in the 
everyday lives of working men and women in America.
  Mr. BAUCUS. The point I am trying to make is, we Americans pride 
ourselves on being fair and open, but I don't know that other countries 
are as fair and open when it comes to trade.
  We are not pure. We do not wear a white hat. Other countries are not 
necessarily Darth Vaders and wear black hats. But I think it is also 
true the shade of gray of our hat is a lot lighter shade of gray than 
the shade of gray of their hats. They do not agree to fair trade in the 
main. I am talking about the bigger countries. India is the best 
example, the most blatant example.
  Mr. DODD. I thank my colleague from Montana, as well, for his 
comments. I think they are poignant. While we do not specifically 
address those issues, he is absolutely correct. It is another piece of 
this puzzle on which we need to do a far better job. I have had some 
recent discussions with ambassadors from some of the Latin American 
countries and have suggested to them they ought to start talking to us 
about having labor standards and environmental standards from their 
perspective.
  Mr. BAUCUS. Absolutely.
  Mr. DODD. If free and fair trade is to work well, it ought to be 
raising the quality of life and the level of wealth accumulation by 
people in these countries with whom we are about to enter into trading 
agreements. That is good for us, and it is good for them. Instead of us 
having to fight for it here, they ought to be fighting for it and 
insisting upon it on behalf of their own constituents.
  Mr. BAUCUS. Let me ask the Senator a question on that same point. 
Would the Senator agree that in the main, most of the countries we are 
talking about--we are talking about environmental standards and labor 
standards in these countries--generally do not most of those countries 
want to sign free trade agreements with the United States because it 
adds to their prestige; it helps them market their products and helps 
them gain standing in the world? Would the Senator agree with that?
  Mr. DODD. I say to my friend from Montana, it is as obvious as 
anything. These are the shelves--this is the marketplace you want to 
be. If you are any other country in the world, you want to be able to 
access the greatest consumer market in the history of mankind, which is 
the United States of America. This is the most inviolable place to 
which you can sale your services and your goods.
  Mr. BAUCUS. Would the Senator also agree that it is the case that 
most of these countries probably want to enjoy the status or the 
prestige of having a free trade agreement with the United States? 
Certainly we are not going to negotiate an agreement that gives away 
the store. This is a bargain for an exchange. Is it not also true that 
it therefore is a mistake for the United States to in effect be 
negotiating against itself; that is, for some in the administration to 
say, no, we do not want those labor standards, we do not want those 
environmental standards, whereas in truth those countries, frankly, are 
the ones we should be talking with because they themselves want these 
agreements and would be much more willing to agree to them?
  Mr. DODD. Absolutely. The whole point of these trading agreements, 
because we are a high value country, obviously, and we do not want to 
dumb down our system, we want to see improving quality products, you 
need to sell them to somebody. If the countries with whom you are 
entering trading agreements do not have a population that can afford to 
buy your higher value goods and services, then the trading arrangement 
is going to be all one way and not the other. So it is very much in our 
own interest, from a larger perspective, to be able to have it.
  Too often it is U.S. interests that are insisting that labor and 
environmental agreements not be included because

[[Page 3199]]

they want to be able to enter those markets and hire people at those 
depressed wages and be able to operate plants that do not face 
environmental regulations. So they see it as advantageous for them. 
They then turn around and sell those goods back here.
  They are not thinking about an American corporation that wants to 
sell its quality product there. It is very shortsighted and, of course, 
it only leads to further encourage the outsourcing of jobs, which is 
exactly what is going on.
  Mr. BAUCUS. The point being that the other countries themselves are 
much less concerned about this.
  Mr. DODD. And they should be more concerned about it.
  Mr. BAUCUS. Exactly.
  Mr. DODD. My colleague would be interested to know, in my 
conversations, very informally at this point, but I am finding a great 
deal of receptivity to the point the Senator from Montana is making; 
that, in fact, they should be insisting upon these points. The politics 
of their own countries are changing and they are insisting if you are 
going to enter these agreements, that this be a part of it as well.
  Mr. BAUCUS. Absolutely.
  Mr. DODD. We may be looking at a new era where it is not going to be 
just people in this Chamber calling for these kinds of things, but, in 
fact, people in these other countries are going to be insisting upon it 
as well.
  Mr. BAUCUS. I do not know how much time the Senator has, but I might 
ask, if the Senator does not mind, to address another subject with 
respect to jobs. Would the Senator agree, as we try to find a solution 
to this problem, that one of the issues we have to face and have to 
focus on is high health care costs that American companies pay and 
face? It is a very complex problem, clearly, but a lot of companies 
unfortunately are lowering their employee health benefits or their 
retiree health benefits because they say it is necessary in order to do 
business; the world is just so competitive.
  The first casualty is those who lose their health benefits. They are 
scared to death, frankly, about lowered health benefits or no health 
benefits. On top of that, it is partly, it seems to me, because we do 
have high health care costs in America.
  In fact, the last study I saw is that we pay twice as much per capita 
on health than does the next highest country. I do not know if we are 
twice as healthy as people in other countries, but we pay a lot, and 
that has to be the cost of doing business.
  What I am getting at, is part of the solution of this some way to 
address efficiencies in health care and quality of health care, 
recognizing that employees of companies in other countries have their 
health covered by the government, where that is not true in our 
country; that that, too, is a part of the problem here? If we are 
honest with ourselves, we are going to have to figure out some way to 
get our hand on that one, too.
  Mr. DODD. I appreciate the comments of my colleague from Montana. He 
is absolutely correct. I did not even get into the issue of what 
happens here. Obviously, when you fire someone, lay someone off, you 
hire someone offshore to do the job, there is absolutely no requirement 
that the fired or laid-off worker is necessarily going to be able to 
get any kind of health care coverage from the former employer. Even 
when you have retired with full benefits there is no guarantee, as we 
learned through the discussion of the Medicare bill that was before us 
only a few months ago.
  So in addition to the lost jobs and wages--that is all I have been 
talking about today--there are benefits that are incredible, and when 
people lose those benefits it adds to the roles of the 44 million 
people in this country who have no health insurance.
  They get health care. It might be showing up in an emergency room, 
which increases the costs of everyone else who has health care, as we 
all know. Fortunately, in this country if people get sick they can show 
up someplace and get some kind of coverage.
  Mr. BAUCUS. Usually that is true.
  Mr. DODD. It is not free, and it adds tremendously to the cost of 
others as well. So the implications, in addition to laying someone 
off--as we see now the thousands of jobs that have gone--the Senator 
from Montana is very accurate in pointing this out when looking at this 
issue.
  Here we are taking Federal taxpayer money. That is what my amendment 
addresses. It says: With Federal taxpayer money you can lay someone off 
and hire someone else and pay them basically with Federal dollars. So 
we are, in a sense, not only causing that person to lose their job in 
this country but also their health care benefits and other benefits 
they may have, not to mention what it does to a family.
  Talk about keeping families together, the single largest reason why 
families break up is economics. Every study in the world that has been 
done on that institution says it is economics.
  As a matter of Federal policy, in effect we are saying we are going 
to outsource these jobs, causing a great disruption in America and 
families' lives. The Senator from Montana is so right to point out that 
the health care implications, because we have not yet sorted this out, 
are huge.
  Again, I come back to the point, I do not accept it, I do not like 
it, but if someone on their dime wants to lay someone off and hire 
someone else, I do not like it and I wish I could do something about it 
and I certainly want to support measures that I know of the Senator 
from Montana and the Senator from California, such as giving tax 
incentives to encourage people to stay here, but when someone does it 
with Uncle Sam's nickel, with the taxpayers' money, then I say, no. I 
have some control over that.
  I am offering an amendment today that says when it comes to U.S. 
taxpayer money, you are not going to lay somebody off and hire somebody 
else 12 time zones away to do the job. You may do it on your dime but 
not on their dime.
  I will mention one other subject matter that I know my colleague from 
Montana and my colleague from California care about, and that is 
privacy. That is one of the things we have not talked about at all on 
this issue.
  I pointed out earlier--I apologize to my colleague from California 
because she cannot see this chart, but I was talking earlier about 
where these jobs are going, from what sectors of our economy they are 
coming from, the 14 million additional jobs in danger of being shipped 
overseas. One of the areas we are talking about is in the area of 
medical, diagnostic and medical services. This covers a little more 
than almost 300,000 jobs in that area.
  We all know what is happening. Today, with information technology, x-
rays can be transmitted at the speed of light or faster.
  Mr. BAUCUS. We are going to give you a Nobel Prize for that.
  Mr. DODD. All sorts of medical information.
  We have provisions of law in this country that say you cannot share 
certain private medical information with insurance companies or 
employers without consent. Medical information is now being processed 
by someone who has been hired 12 time zones away--all of a sudden that 
information is no longer well-protected. So as we see the increase in 
these diagnostic support services and medical transcriptions going 
offshore, then the very protections we ought to have as Americans are 
also being lost. I don't cover that in my amendment here, but we may 
offer some language on this bill at some point that would say you have 
to give people at least the opportunity to say I don't want my medical 
records being processed or handled by someone offshore. I want it kept 
in the United States because I don't want someone to be able to go in 
and find out highly sensitive information about me and my family that 
could be used against me.
  Today the laws of the United States do not adequately protect you 
when this information is being processed and handled offshore. That is 
one of the major areas we are seeing these jobs moving.
  Mrs. BOXER. Will my colleague yield for a question?
  Mr. DODD. I am happy to yield.

[[Page 3200]]


  Mrs. BOXER. First let me say how happy I am to hear you and our 
ranking member have this conversation. This is so important. In a way 
it is kind of a problem that snuck up on us. I took a look at the loss 
of manufacturing jobs in California and my heart sank.
  Mr. DODD. There were 272,000 jobs lost.
  Mrs. BOXER. Think about it, 272,000 jobs.
  There is one area covered in your amendment. Since no one has 
mentioned it, I want to read into the record a letter and then answer 
the comment, and then I am done with my role here today other than to 
say thank you again for your leadership.
  This is an interesting issue. It is covered. Your amendment is not 
reflected on the charts because it deals with agriculture, something in 
your State you don't have as much of as I have.
  I want to read a letter I just wrote to Ann Veneman. I believe this 
will get you a lot of votes from agriculture country.

       Dear Madam Secretary: I was shocked to learn that the U.S. 
     Department of Agriculture purchased 70,000 metric tons of 
     rice for the Iraqi people from abroad rather than purchasing 
     this product from U.S. sources. At a time when U.S. farmers 
     are facing increased economic pressures and food surpluses, 
     our taxpayer money should be spent on U.S. commodities, not 
     the commodities of other nations.
       California, like many other States across our nation, is 
     experiencing a surplus of commodities such as rice that could 
     provide valuable nutrition to the Iraqi people while 
     alleviating potential crop losses for our nation's farmers.

  Then I talk about California's high quality of rice.

       As we work to alleviate food shortages experienced by the 
     Iraqi people, we have a unique opportunity to assist our own 
     farmers. I request USDA reconsider this decision and instead 
     purchase the needed quantity of rice from U.S. farmers. In 
     the future, USDA should use taxpayer dollars to purchase U.S. 
     rice before it spends taxpayer dollars on foreign 
     commodities.

  I wrote this letter on February 24. I am so pleased. I discussed this 
with your staff. Your amendment would cover this.
  Here we have the sons and daughters of America's working people, 
including people on the farms for sure, going off to Iraq and putting 
their lives on the line. Now their families either see their jobs going 
abroad or in this case they are ready and willing to feed the Iraqi 
people. They are excited about it, they have great products, they have 
surpluses, and our administration, the Bush administration, goes 
outside.
  I wanted to first of all ask if you were aware of this issue, and, 
second, say to you whether you were or you were not, I thank you on 
behalf of the people who make a living from agriculture, because we 
have our serious problems. We have the best products in the world and 
we have farmers who are ready to feed the hungry.
  Mr. DODD. Let me say to my colleague I was not aware of it. I 
apologize for not being aware of it.
  I know agriculture is a huge industry in the State of California, 
particularly in the area of rice. It is significant. So I am pleased to 
know we are covering this kind of activity as well.
  Again, this is not being isolationist.
  Mrs. BOXER. No.
  Mr. DODD. Every time you try to stand up for an American job you are 
called an isolationist. There is a new coalition. They want to change 
the language, by the way. There was an article this morning that says, 
``Business coalition rewrites lexicon for jobs outsourcing.'' They 
point out, they say the coalition is now rallying around ``worldwide 
sourcing'' as a less provocative term.
  I apologize for sounding provocative, but we didn't make this up. 
What ought to be provocative is the fact that people like my colleague 
from California have constituents who are losing their jobs because we 
are not doing enough to protect these jobs--not from a protectionist 
standpoint, but protect them when in fact there is no loss to be 
incurred as a result of standing up and saying we ought to be doing 
what we can to protect these positions in our country. I commend her 
for it.
  I thank you for raising it. It is an important point and I am glad 
our amendment covers it.
  Mrs. BOXER. I will talk to those from agriculture states because they 
may not be aware this administration is taking the dollars this body 
voted on--I had problems with voting on it, but most people voted for 
it--they are taking that taxpayer money and taking it right out of this 
country. It is outrageous.
  I thank you again for your leadership.
  Mr. DODD. My staff gave me some other information. I have mentioned 
others. Tax experts now say Indian-chartered accountants, the 
subcontinent version of certified professional accountants, will 
prepare somewhere between 150,000 and 200,000 tax returns this year. 
That is up from 20,000 last year.
  I am not making up these numbers. The trend lines are moving at a 
very rapid pace. In this case here I am not suggesting these are 
necessarily being paid for with Federal tax dollars. I don't know that. 
If it is not, obviously we are not covering the situation and these 
firms that want to continue doing it unfortunately will be able to 
continue. But if they were doing it with Federal tax money, I say no, 
just as my colleague from California says no.
  If someone with their own dime wants to decide they are going to ship 
rice or whatever products and use someone else offshore, that is one 
thing. But when they are using taxpayer money to do that, that is when 
we have an obligation to stand up and say no.
  Mrs. BOXER. Thank you.
  Mr. DODD. I appreciate her very much for raising that issue.
  Let me say I see my colleague from Iowa on the floor, and others. 
This Senator is prepared to vote. I talked about this. I have had 
colleagues come over and share some thoughts on it. I know there are 
other matters. I know Senators want to move on. I am certainly not 
engaged in any filibuster. I am prepared to ask for the yeas and nays 
and vote on this amendment and move on to other questions. Is there 
some opportunity? I don't want to go into a quorum call if other 
Members want to come over and discuss other matters, but if we want to 
vote on it, I would like to do it. What chance do we have, I ask my 
friend from Iowa?
  Mr. GRASSLEY. I will be glad to respond to that. Some Members on our 
side have not studied the amendment as much as they felt they should 
and have some questions about it. I would say there are two things. One 
is understanding completely the impact of your amendment, which 
obviously is a legitimate concern. The other is that kind of makes a 
determination whether some Members on our side would want to take some 
action, maybe with an amendment to the amendment. That decision has not 
been made. My guess is that decision is not going to be made today. 
That decision will be made tomorrow.
  Mr. DODD. I appreciate that.
  Mr. GRASSLEY. Maybe I am being more candid than a Republican ought to 
be, but that is the way it looks to me. You have always been 
transparent with me. I think I ought to be transparent with you.
  Mr. DODD. I thank my colleague and the manager of this bill for his 
candor on the subject matter. He will certainly understand if I share 
with him--I know these were not his views, he is expressing the views 
of others who didn't understand the impact of this amendment. Let me 
say to him, my good friend--and he is a good friend. We have been in 
Congress together for many years--the impact of not doing something 
here is huge, on workers losing their jobs. I know my colleague knows 
that and shares my concern about it as well.
  It is not terribly complicated what I am suggesting here. It is 
straightforward. It says when it comes to taxpayer money, it can't be 
used to subsidize someone offshore at the cost of an American job.
  I know the coalition of the Chamber of Commerce and the National 
Association of Manufacturers and some other groups out there don't 
particularly like this amendment because 400 of the top

[[Page 3201]]

1,000 corporations are now outsourcing jobs, and I am sorry if they are 
disappointed by this amendment, but there are an awful lot of people 
losing their jobs.
  That is the only reason I raise it. I have to wait until tomorrow. We 
will have to wait, obviously. I am disappointed because I thought it 
was pretty straight forward. Nonetheless, I appreciate my friend's 
candor.
  I see my colleague from California.
  Mrs. BOXER. Mr. President, I wanted to ask a question of my friend. I 
would be happy to defer.
  Mr. GRASSLEY. Mr. President, I think maybe I answered too casually 
when I answered the Senator's question--that maybe I have a feeling 
there were not legitimate concerns by people on my side. There are a 
couple legitimate concerns. No. 1, the Senator's amendment does have 
some mandate on States. That creates a lot of concern--I will bet not 
only on my side but on his side as well. That is a very philosophical 
point of view of the impact which we make in the Senate on 50 States, 
and how many subdivisions I don't know. The other one is the extent to 
which this might lead to legitimate legal retaliation as a result of 
the Senator's amendment. That seems to me to be a reasonable, free, and 
fair trade consideration in any action this body takes.
  I want to make clear that it is not strictly political. There are 
some concerns about his amendment. I enunciated at least two.
  Mr. DODD. Mr. President, I yield to my colleague from California.
  Mrs. BOXER. I have a question of my friend, Senator Grassley.
  While the Senator was out, I was telling the Senate that I had 
written to Ann Veneman because with taxpayer dollars the USDA went out 
and bought rice from a foreign country instead of from my rice farmers. 
I think that is wrong.
  I ask this question of my friend: If there are legitimate concerns, I 
am sure my friend will sit down and work them out with somebody because 
you have been here a long time. There is no one who is more patient and 
more willing to sit down and figure things out. But I have a feeling it 
is deeper than that. I have a feeling you have touched a nerve today 
which is a very important nerve to be touched. I think it is being 
touched in the Presidential campaign. I think it is being touched in 
the campaigns across our country, and it is being touched here today.
  If we don't stand up and do something about this, as my friend 
pointed out in his very chilling chart--and say there is some 
complication, there is a message being sent, it may be too late.
  I say to my friend, if he is willing and if there is some concerns 
around the edges which can be worked out, I just hope he won't back off 
this amendment in a substantial way. If there is a difference between 
the parties, bring it on, I say. This is what people care about in my 
State, and I know also in my friend's State. Can he give me a sense of 
the thinking on how he is going to proceed since the majority will not 
allow a vote today?
  Mr. DODD. I will make two points.
  I appreciate my friend from Iowa telling me what the substantive 
concerns are about the amendment, one which I think we have addressed.
  On the second question he raised, we included language which very 
specifically makes clear that the government procurement agreements 
between the United States and 27 other predominantly western European 
countries would not be affected by this legislation. India and China 
are not part of that problem. The major culprit in all of this is 
outsourcing of jobs. But my colleague from Montana raised the question 
that we could be found in violation of World Trade Organization 
policies, if we didn't include this language. So I think we addressed 
the concerns about whether or not we are going to run afoul of some 
international agreements to which we are a signatory.
  The second part about mandating States, if you are going to use 
Federal money to lay off workers in your State and hire someone 12 time 
zones away to do the job, I don't consider that a mandate. That is 
Federal money. If you want to do it with State money, I can't keep you 
from doing that. That is your choice. If you are going to do it with 
Federal money that comes from grants and so forth, I think the American 
taxpayer would like to know that Federal dollars are being used to lay 
off one person in your State and hire someone 12 time zones away. You 
can call that a mandate, but I call it common sense at this particular 
juncture.
  I think we have gone as far as we can go on this issue. We have 
covered the ground.
  I thank my colleague from Wisconsin, Senator Kohl, for joining me in 
a bipartisan fashion on this amendment.
  Today, 40 States outsource jobs. That is pretty alarming.
  If you are unemployed in a State and you call up your unemployment 
office to find out about your rights, and you are talking to someone 14 
time zones away to find out your rights, that is offensive to people in 
this country. They want to know what we are going to do about it. Do we 
understand what they are going through?
  This is the first opportunity we have had since we have been back 
over the last 5 or 6 weeks to raise the one issue here. Night after 
night, Lou Dobbs on CNN, to his great credit, is talking about this 
issue. He is not talking about it and speaking to an audience that is 
not interested. The audience across this country is deeply interested 
in this subject matter. They want to know whether or not anybody is 
doing anything about it. I can't stop a private company from 
outsourcing with their own money. But I can stop you from using Federal 
taxpayer money to fire somebody here and hire somebody 14 time zones 
away. That I can try. I may not win, but I can try to do it. And that 
is what we are trying to do.
  Mrs. BOXER. I am really relieved to hear my friend's response to the 
Senator from Iowa. As I understand his amendment, he has already gone a 
very long way in answering the concerns that were raised. I hope we 
will stick with it. I think the people in this country are watching. 
They are not only watching CNN, but they want to know what we are 
doing. It is an amendment that I have been looking forward to for a 
long time. We have to make a stand, and I think what my friend is doing 
is not overreaching.
  I rise to say thank you to the Senator for sticking with it, and I 
will do all I can to help him get it passed.
  The PRESIDING OFFICER (Ms. Collins). The Senator from Iowa.
  Mr. GRASSLEY. Madam President, first of all, the Senator from 
Connecticut has been right in the sense that we have raised some 
concerns, and we are working with him. He has made some modifications. 
We are still hearing about some more concerns. I have expressed two of 
those already. I would like to express another concern that I have 
heard.
  Yes, it preserves jobs in America if there is not outsourcing of 
service jobs that are involved. But this is a legitimate concern on our 
side: The extent to which there might be retaliation by countries that 
outsource some things to the United States. That goes on as well. We 
want to make sure if we are losing jobs, we don't have a greater loss 
of jobs in retaliation for Americans who are already employed by a 
company outside the United States which is using the services of 
American people in America.
  These are concerns that need to be addressed. These are things that 
will be brought out in debate, and it may be possible to work on 
continuing modifications of the Dodd amendment so that hopefully we can 
get it passed without a great deal of opposition.
  At this point, we are not prepared to vote.
  Mr. DODD. Madam President, I don't believe I yielded the floor.
  The PRESIDING OFFICER. The Senator from Connecticut has the floor.
  Mr. DODD. My colleague from Nevada is in the Chamber. I didn't know 
if he wanted to speak.
  Mr. REID. If I could make a brief statement without the Senator 
losing the floor----
  The PRESIDING OFFICER. Is there objection? Without objection, it is 
so ordered.

[[Page 3202]]


  Mr. REID. For the minority, the majority leader has indicated there 
will be no votes tonight. Everyone should know that.
  Mr. GRASSLEY. That is what my Blackberry said 5 minutes ago.
  Mr. DODD. For the purposes of those who don't know what a Blackberry 
is, we will explain that.
  I do not know whether my colleague from Texas has a question of me or 
not. I know he would like to speak on the issue. Does he have a 
question for this Senator on the subject matter?
  Mr. CORNYN. If the Senator will yield, I will have a brief response 
but not so much a question at this time.
  Mr. DODD. I will wrap up myself. I would like to come back, if I 
could.
  Again, maybe I am wrong. But every survey I have seen over the last 
number of weeks has indicated that people--even people who have jobs--
are worried about this issue.
  To give you some indication of the disconnect that occurs when it 
comes to this issue, I quote from the Los Angeles Times story, which 
appeared elsewhere, but talking about this question, it says:

       ``The movement of American factory jobs and other white 
     collar work to other countries is part of a positive 
     transformation that will enrich the United States economy 
     over time even if it causes short term pain and 
     dislocation,'' the Bush administration said the other day.

  It goes down and says from the economic report:

       ``Outsourcing is just a new way of doing international 
     trade,'' said Gregory Mankiw, Chairman of the President's 
     Council of Economic Advisers.

  They prepared the report.

       More things are tradable than were tradable in the past, 
     and that is a good thing.

  The article goes on.
  I remember the statement being made; Mr. Mankiw apologizing. He said 
it was a bad choice of words, and we certainly accept his apology. The 
problem is, it was not the words. It is not a bad choice of words; it 
is a bad idea.
  The idea of saying I am sorry I said only indicated to me they were 
sorry they said it out loud. They did not change their mind about the 
subject matter but merely said we got caught at something we should not 
have said because it was bad politics to say it. I misspoke politically 
but not substantively, and there is a fundamental disagreement on this 
point that outsourcing is a good thing.
  These are not just goods and services to be tradable in the open 
marketplace. These are critical jobs which mean a huge difference to 
the families affected. We bear no greater responsibility in this 
Chamber than to do what we can to protect American families. When they 
are being threatened by unnecessarily shipping their job overseas, it 
is our obligation to speak out and try to do something about it that is 
responsible.
  I made the point over and over again, and I will make it again, I 
have supported far more free trade agreements over my course of service 
here than not because I believe that is where you have to be in the 
21st century. But they have to be fair agreements. We have to negotiate 
them far better.
  The Senator from Montana and I have talked about how we might achieve 
those desired results. I don't subscribe to the notion that it is 
isolationist or protectionist to stand in the Senate and say I think it 
is wrong to use Federal taxpayer money to cause someone in this country 
to lose their job and hire someone 14 time zones away. I don't think 
that is a good idea. Others may say that is their right, but we will 
have a vote on whether you think it is right.
  Examine it until you are blue in the face and try every cockamamie 
idea to undermine what we are doing, but it is a bad idea to federally 
subsidize the exportation of jobs that ought to be kept here, not for 
protectionist reasons but if we provide services and jobs in the global 
marketplace in the 21st century, you better have the people here who 
can do it.
  If we give up that kind of human capital that is so critical to our 
long-term success of people, we are putting our Nation in jeopardy. It 
is not a great quarterly answer. For that company which wants to make 
more money next quarter, this is a dreadful idea. But if you are 
thinking more than quarters, if you are thinking down the road about 
what kind of a Nation we will be leaving the next generation who will 
inhabit these seats we hold today as Members--we have an obligation to 
them, as well. We owe an obligation, just as others who sat in these 
seats bore an obligation to us and left us a pretty decent country--not 
a perfect one, but a good one. We should see to it that coming 
generations have the equal opportunity to bear the fruits we have 
provided for two centuries.
  We do not do it by remaining silent or giving phony reasons about why 
jobs are being outsourced unnecessarily around the globe. That is why I 
bring it up and that is why I hope we can have a vote and move on it. 
It is not that difficult to understand.
  I yield the floor, as I know my friend from Texas wants to be heard.
  The PRESIDING OFFICER. The Senator from Texas.
  Mr. CORNYN. Madam President, the distinguished Senator from 
Connecticut has spoken passionately and eloquently about our concern 
about job loss in this country and certainly it is something we are all 
concerned and want to do something about. But I am sure none of us 
would want to endorse a cure which is worse than the disease or cause 
other problems that perhaps we have not thought through or that are not 
intended.
  I do detect a whiff of politics. I notice the chart says 
manufacturing jobs lost under President Bush. Perhaps since the time 
when we had primarily an agrarian economy, we have seen tremendous 
shifts in our economy because of the efficiency of a flow market system 
that is far more efficient than the command-and-control economy that is 
used in other parts of the world that is inefficient and stifles 
competition and innovation and the productivity that we have in this 
country.
  I certainly would not want to see us do anything that would harm the 
good things we had going on in the economy in the effort to address a 
real problem but perhaps with the wrong solution.
  I appreciate the Senator from Wyoming mentioning this is something I 
and no doubt other Members would like to study a little further to see 
exactly what the details may be before we were asked to vote on it.
  I am not an economist. I do understand why companies outsource, to 
find a cheaper way of producing their product. Even though the 
distinguished Senator from Connecticut says it is a bad idea, I am not 
sure what you can do or what we could do, short of erecting a wall 
around this country and saying we are no longer interested in 
international trade. I don't know what we can do to avoid companies who 
are seeking to produce a cheaper product in a more competitive 
environment from outsourcing some of those jobs. I do think there is an 
answer, but I am not sure the answer is what the distinguished Senator 
from Connecticut is proposing.
  In fact, by prohibiting the outsourcing of jobs we are basically 
saying the American taxpayer has to pay a higher price than they would 
otherwise have to pay. Certainly, that is something we need to explore, 
whether the higher price is worth the proposed cure.
  Also, the Senator from Iowa mentioned we are a country that has a 
policy of free and fair trade. Of course, there is a question of 
retaliation. But the truth is, we have seen a loss of manufacturing 
jobs in this country for a lot of reasons other than outsourcing or 
competition with China, India--now with the movement of white-collar 
jobs particularly in the service sector to that country--and that is 
simply because we have increased productivity. Technology has made it 
possible to do the same or, indeed, more work using less people. That 
is just a fact of life. I don't think anyone would want to go back to 
the last century and say we are not going to seek further improvements 
in technology or innovation because we do not want to put people out of 
work.
  The truth is, the solution is, we need to make sure we continue to 
educate

[[Page 3203]]

our workforce and not for minimum-wage jobs but for good high-paying 
jobs. Members may recall the President addressed this issue in his 
State of the Union speech and talked about the importance of Americans 
competing in a global economy by educating and perhaps retraining our 
workforce for new and better-paying jobs.
  He mentioned his initiative, working with community colleges. I took 
the President's words to heart because I am concerned--as no doubt all 
100 Members of this body are--about job loss in this country. I went to 
the community colleges in my State. I said, Tell me what you are doing 
to train the American worker or perhaps to retrain the American worker 
for good, high-paying jobs. I went to Amarillo in the Panhandle where I 
found that Bell Helicopter and the Amarillo College helped create a 
curriculum to train people to work on the V-22 Osprey which is produced 
in that plant.
  I remember a young woman, a single mom, Hispanic woman, with two 
children, formerly working as a prison guard making about $9 an hour. 
As a result of this program with Amarillo College and Bell Helicopter--
this is just one example--she is now working on a production line, 
contributing to the transformation of our military and also improving 
her standard of living, making about $16 an hour in a good job.
  I have done the same thing in Austin where I went to the Austin 
Community College and learned about partnerships they had entered into 
to train nurses, surgical techs, dental hygienists. At the San Jacinto 
Community College near Houston they have partnerships with Boeing and 
NASA and others to train people for good, high-paying jobs.
  Now, I realize we are in the political season, and I understand that 
perhaps nothing said in this body or anywhere else in Washington is 
perhaps totally devoid of politics, but the truth is, Americans can and 
will always be willing to compete and win in the global competition in 
this new economy.
  Now is not the time for us to wring our hands and say: Oh, woe is us. 
We just can't quite do it. We have to erect protectionist walls. We 
have to come up with solutions which, perhaps maybe actually increase 
prices to the American consumer while not actually solving the problem 
that we are all concerned about; that is, job loss.
  So I say as part of this debate--and, again, I know the Senator from 
Connecticut has the best of intentions, and we share the same concern--
now is not the time for the American worker or for the Members of the 
Congress to lose faith in free markets and the capitalist economy which 
has made this Nation the envy of the world.
  We are talking now again, thankfully, about addressing our 
immigration issues in this country. I will note that there are not 
people trying to get out of the United States of America because things 
are so bad. To the contrary, people are risking life itself to come 
here because we are still a beacon in terms of the opportunities 
provided, in terms of the freedom, in terms of the ability of people, 
working hard in this country, to have a good standard of living and a 
better quality of life.
  I hope the election year does not consume us so much that we look at 
the glass always as half empty rather than half full, or look at 
something as a lemon rather than an opportunity to make lemonade.
  I think the President is exactly on the right track. I think if we 
commit resources to train the American worker to be part of the 
innovation that has always characterized and been the hallmark of the 
American economy and the business providers in this country, to make 
sure those workers are trained in this constantly evolving economy, 
which is very efficient, and sometimes brutal, but to make sure we are 
there and are working with local and State and Federal governments to 
do everything we can to assist business partners and the education 
community to train the American worker for good, high-paying jobs, I 
think we have nothing to fear.
  Finally, where I was raised we were taught that we would get our 
formal education and then we would go to work and maybe even stay in 
the same job for the rest of our adult life. But the truth is, today 
that is just not possible. We need to change our frame of mind so that 
we teach our younger people, look, learning is a lifetime endeavor, and 
it may be that you will change jobs at different times during your 
adult life because you want to improve your circumstances, you want to 
get a better paying job to better provide for your family, and you can 
do it in a free country where there is an opportunity to retrain, to 
get an education throughout the course of your life.
  I firmly believe now is not the time for the American people to lose 
faith in the good thing we have going in this country, and that, as I 
said a moment ago, is the envy of the entire world. I believe our focus 
ought to be on that education, lifetime job training, and not on 
erecting barriers around this country or perhaps other solutions, 
although well intended, which will have a detrimental impact.
  With that, Madam President, I yield the floor.
  Mr. DODD. I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant journal clerk proceeded to call the roll.
  Mr. REID. Madam President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. REID. Madam President, I think the American people need to look 
at what has transpired in recent weeks with this administration. 
Senator Dodd has brought to the Senate's attention one issue; that is, 
a high-ranking member of this administration has said that outsourcing 
jobs--what does it mean? Shipping jobs overseas--is good for our 
economy. That is what he said. Well, if that were the end of it, you 
could well say, maybe that was just somebody who made a mistake.
  Then we have today Tommy Thompson who says: We should not have 
Americans be concerned about all the money we are giving to Iraq to 
establish a health care system because we really have, in the United 
States, a universal health care system because those people who have no 
insurance get taken care of. That is what a Cabinet officer of this 
President said.
  Now, should we stop there? Let's go on and talk about what another 
Cabinet officer said 2 weeks ago, the Secretary of Education. The 
Secretary of Education said, to a group of assembled Governors, that 
the National Education Association were terrorists. He did not say it 
once to the Governors but twice. I have talked to Governors who were 
there: The National Education Association are terrorists; the largest 
teacher organization in the world, based in the United States, are 
terrorists.
  I think that is something I cannot comprehend: How the Secretary of 
Education can say this about teachers.
  Someone I went to high school with--we played baseball together; we 
were on the first State championship baseball team in the history of 
the State of Nevada; He was a pitcher; I was a catcher--Reynaldo 
Martinez and I have been friends for these many years. He was my chief 
of staff in the Senate. He retired a few years ago. He was a longtime 
organizer for the National Education Association. To call Rey Martinez 
a terrorist because he was a member of that organization is difficult 
for me to comprehend.
  For me personally, what is transpiring in Congress, because of the 
position the administration has taken regarding highway 
transportation--the former chairman of the Environment and Public Works 
Committee, the former chairman of the Finance Committee, now the 
ranking member of the Finance Committee, has worked, as I have worked, 
on a number of highway bills. There is no bill we do in the Senate, in 
the Congress, that is more important than a highway bill. It creates 
millions of jobs over a 6-year bill. We produced a bill based on the 
budget we passed a year ago. We have there, in the bill that we were 
able to report out of committee, in keeping with the budget, and as 
passed the Senate of the United States, a bill that is a very good 
bill, that does not raise one penny of

[[Page 3204]]

taxes, that takes care of transit and highways. The President says he 
is going to veto the bill.
  Outsourcing is good; 44 million Americans, don't worry, you have 
universal coverage because if you get sick, you can go to an emergency 
room, if you are lucky, if there is one there; the National Education 
Association personnel are terrorists; and he is going to veto the 
transportation bill. Is there somebody in the bowels of the White House 
trying to destroy the President? I cannot imagine the President would 
come up with these ideas himself. I certainly hope not.
  I commend and applaud my friend from Connecticut, the senior Senator 
from Connecticut. He has brought to the attention of the Senate the 
importance of focusing on the disastrous loss of manufacturing jobs. 
Since this President has been in office, our Nation has lost a total of 
2.8 million jobs. Every single month, with no exception, manufacturing 
jobs are lost.
  I guess I should be leading the cheers here because out of the 50 
States, the great State of Nevada is the only one in white on this 
chart. We hold the record. We created 200 new jobs in the last 3\1/2\ 
years. That is certainly better than losing 200, and it is certainly 
better than the State of Texas, which has lost 150,000 jobs, or the 
State of New York, 115,000 jobs. Even a small State such as Wyoming 
lost 700 jobs. California has lost 273,000 jobs. So 200 may not look 
like much, but for us in Nevada, we will take it.
  Two hundred manufacturing jobs in 3\1/2\ years were created in the 
State of Nevada--not much, until you compare it to the rest of the 
country. Then we are doing pretty well. We are the only State in the 
Union that had a net gain of manufacturing jobs during this Presidency.
  Where have these jobs gone? Some are gone forever, but lots of them 
have gone overseas. Our country cannot remain strong if we can't 
manufacture steel, automobiles, airplanes, and appliances. I am very 
happy that we do wonderfully well with our service industry. No place 
represents that better than the State of Nevada, especially Las Vegas. 
But we cannot remain the superpower of the world by flipping 
hamburgers, which is something I forgot to mention.
  Somebody in the administration suggested 2 weeks ago that we should 
create a new manufacturing category; that is, people who work in fast 
food restaurants. I am not making that up. They want to turn people who 
work in McDonald's preparing meat patties, putting the sandwiches 
together, into manufacturers.
  Mr. DODD. If my colleague will yield, in chapter 2, page 73 of the 
Economic Report of the President--this was prepared by the President's 
economic advisors--they raise the issue here as if it were a legitimate 
question. They say: The definition of a manufactured product, however, 
is not straightforward. When a fast food restaurant sells a hamburger, 
for example, is it providing a service or is it manufacturing a 
product? They think that is a legitimate question, that manufacturing a 
hamburger might actually be a manufacturing job. My colleague from 
Nevada is absolutely right to raise this point.
  Mr. REID. Mr. President, I have only talked about what has happened 
in the last few weeks: Outsourcing is good, teachers are terrorists, 
veto the transportation bill. We have universal coverage in America 
because if you are one of the 44 million, you get taken care of some 
day somewhere. That is universal coverage. That was the Secretary of 
Health and Human Services who said that. And now they are trying to 
develop a new category of manufacturing.
  This reminds me of my friend Greg Maddux. In Las Vegas we are so 
proud of him. He has won the Cy Young Award 4 years. He is slightly 
built and my size. He is one of the greatest pitchers of all size. His 
hands are smaller than mine. He is now going to Chicago. He needs to 
win 11 more games to become a 300-game winner, which is a big deal in 
baseball. Just a handful of people have done that. So he needs 11 more 
games. Based on the President's assumption of how we can create 
manufacturing jobs, maybe we can get him to 11 more quickly. What I 
suggest is having four strikes instead of three. With four strikes--he 
has great control--I guarantee you, even though he will be 37 years old 
next month, I think he could win his 11 games much more quickly.
  That is what is going on with this administration. If you don't like 
what goes on, change the rules.
  I have said before, I have two brothers older than I. One of them was 
working in a Standard station in a place called Ashfork, AZ. He wanted 
to take his little brother away from Searchlight. So we went to what I 
thought was the big town of Ashfork, AZ. Frankly, it was not a lot of 
fun for me because my brother had a girlfriend, and he didn't spend a 
lot of time with me. So I was pushed off on his girlfriend's brother. I 
could not beat him at anything. It didn't matter what it was. I never 
beat him at anything because he always changed the rules in the middle 
of the game. That is what is going on here with the administration. We 
are going to change the definition of manufacturing.
  The loss of jobs in our country is very bad. If it were only 
manufacturing jobs that were going overseas, I would not like it, I 
would complain about it. But this has been compounded because the loss 
of manufacturing jobs is not the only problem. The Senator from 
Connecticut and I were looking earlier today at a chart. I am sure he 
has shown it. This chart talked about some of the diagnostic procedures 
that were going overseas. Look at some of these things: 14 million jobs 
in danger of being shipped overseas.
  Mr. DODD. These charts belong to Senator Kennedy. He feels very 
strongly about these charts. I wanted to make sure the record reflects 
we are borrowing Senator Kennedy's charts. They are very good charts.
  Mr. REID. As I was saying, Senator Dodd and I were looking at this 
earlier today. We don't need to go through all of this, about the 14 
million jobs, some of which have already been shipped overseas and some 
going overseas. Diagnostic support services, we already know what these 
are. They are actually shipping medical records to other countries and 
having them catalogued. But they are also having some of these medical 
records reviewed. Take, for example, a CAT scan. Ship it overseas. They 
can have somebody there review it very quickly. Take, for example, an 
X-ray, a simple X-ray, ship it overseas. They can do it quickly. You 
will get the results back soon. I don't feel very good about that. I go 
to my doctor in Las Vegas or Reno, Boulder City, Elko in Nevada. They 
are shipping the X-rays they take of my body to India or some foreign 
country to have somebody over there call my doctor or the hospital 
staff and tell them what is wrong with me? I don't think so.
  The additional problem with that, just from a basic fairness 
standpoint, I won't disclose the Senator's name, but a Senator told me 
she had two complaints from constituents in that State that privacy was 
being violated, people had information that came from overseas about 
her health condition. I hope the people making these decisions for our 
President were not trained during the Reagan years.
  Reagan, for whom I have the highest respect, didn't continue this. He 
learned early on it was not a good idea when someone in his 
administration said, let's have ketchup considered a vegetable for the 
school lunch programs. Maybe that person is still around here someplace 
and giving these great recommendations to this administration. I hope 
not. Or if it is true that that person is around, maybe they should put 
a stop to it. We do not want people who are being X-rayed, medical 
records, lawyers who research cases and write briefs, technological 
specialists to keep virtually every company running--all these jobs are 
fleeing America in a mad global case for cheap labor.
  Every time a job goes overseas, it hurts an American family.
  It used to be that if you lost a job, you would find one pretty 
quickly. Now the average time for getting a new job after losing a job 
in America is almost 1 year. Losing the job is bad enough because you 
lose self-esteem, you lose a

[[Page 3205]]

sense of pride, you believe you have not been appreciated, even though 
you were doing the best job you could, but also that family probably 
loses their health insurance because they cannot pay for the COBRA; 
they don't have money to do so.
  My son left to go to Vegas, and he needed coverage of insurance for 2 
weeks. It cost him $2,200. He is married, has two little girls, his 
wife was pregnant. He had no choice. He had the money to pay for it. If 
he had not had it, I would have helped him. That is not the way it is 
with everybody. Many people are not able to buy insurance for periods 
of time when they don't have it. Maybe they are buying a home or were 
going to buy one and they lose the sense of a dream of owning a home.
  What about college? College is so expensive. It used to be that when 
I was growing up, I could work in the summers and during the school 
year to pay for my education. My parents were not in a position to help 
me, and I basically educated myself with a few little scholarships I 
had. You cannot do that anymore. You cannot work during the off-
season--unless you rob banks--to pay for a college education. It is too 
expensive. So that is another thing a family would lose--the ability to 
prepare for their children to attend college. That is why the loss of 
American jobs is a crisis in our country. We need a real plan to 
address that issue. We cannot afford to wait until the next business 
cycle because the flight of jobs overseas is a result of powerful 
economic forces.
  American workers are not afraid of fair competition. I am not against 
that, but I am against the mentality of chasing cheap labor around the 
globe with no regard to long-term implications. When American companies 
choose cheap labor, they are saying our environment doesn't matter. 
They are saying conditions for their own workers do not matter, and 
they are forgetting the great lesson learned from Henry Ford. Henry 
Ford was not a person I liked everything he did or said, but he was a 
good businessman. He realized in order for his company to sell cars, 
the people who build them should be able to also buy those cars. In 
other words, workers are also customers. A worker who earns a decent 
living can afford to buy the products and services American companies 
are selling. So every time a so-called American company chases cheap 
labor by moving jobs overseas, we are all diminished. The market for 
goods and services in our country is damaged.
  As I have said, the President's top economic advisers said the 
outsourcing of jobs is a good thing. Every day someone in the 
administration says the economy is getting better. It might be looking 
up to those who have the Wall Street Journal and the Financial Times 
delivered to their homes but not to middle class Americans. They feel 
that inside something is happening that goes beyond the normal business 
cycle.
  Middle class Americans are deeper in debt than ever. Consumer debt is 
at an all-time high. Middle class Americans are afraid the Social 
Security benefits will be swallowed in the sink hole of a half-
trillion-dollar deficit. And they are right. The debt would be much 
bigger for the 3 years that this President has been in office but for 
the fact that the debt is being disguised by the Social Security 
surplus. Middle class Americans are worried their jobs might be 
outsourced. They are being hit hard by the skyrocketing cost of health 
care. Their deductibles and copayments keep going up, and they wonder 
whether they are going to lose coverage entirely.
  There are 77,000 people on strike in California who work in grocery 
stores. They are not on strike because of working conditions, not 
because of wages or hours; they are striking for one simple reason, 
health benefits. They could not make ends meet by having to pay what 
they were going to be told by their employer they had to pay for health 
costs, so they went on strike--one of the longest strikes in modern 
history.
  All these problems are deeper than the business cycle. They all 
demand a real economic plan, and part of that plan is the amendment 
offered by the Senator from Connecticut. It is not everything. If we 
had the opportunity, we could come up with a better plan. This is a 
step in the right direction. What we have to do in Congress today is 
understand that we are not going to completely rewrite Superfund, 
endangered species, clean air and clean water, or the economic 
situation this country faces. But we have the ability to do things to 
improve Superfund and endangered species. We can do a little here and a 
little there to help the economic situation in this country.
  The amendment by the Senator from Connecticut is a good amendment. It 
is a step in the right direction. That is why we chose this as our 
first amendment. It sends a message to the American people that we want 
to do something to stop the outflow of these jobs. Focusing on Federal 
Government outsourcing is one of the things at which we need to take a 
closer look.
  We can start trying to improve our economy now, today, by cutting off 
Government contracts to companies that plan to outsource their work. 
Two years ago, the State of Florida ordered a $280 million contract to 
a company that outsources its work to India. If Florida wants to do 
that, it is their business. But when the American taxpayers hire 
somebody to do a job, it should be done by an American worker who is 
also a taxpayer.
  For the fourth time in the last few minutes, I commend Senator Dodd 
for this amendment and urge all of my colleagues to support it. I also 
say this to the majority: If tomorrow, when we come back in session, 
there is an effort made to prevent the Senator from Connecticut from 
having a vote on this, we are going to keep offering it and offering it 
until we get a vote on it. If we don't get it done on this bill, we 
will get it done on the next bill. If we don't get it done on the next 
bill, it will be offered on the next bill. This is our No. 1 amendment, 
and we are going to continue pushing it.
  The PRESIDING OFFICER. The Senator from Connecticut is recognized.
  Mr. DODD. Madam President, I thank my colleague from Nevada for his 
comments. He is absolutely right about changing the rules. I have 
worried about that, when all of a sudden--and I have seen it happen in 
the past--you don't like the numbers you have, so you come up with a 
whole new definition and expand the numbers. That is what it looks like 
when you start talking about what clearly are fast food service jobs, 
manufacturing jobs, and we have seen those efforts being made.
  This wasn't the first administration trying games like that. We have 
had others in the past doing that. I appreciate his comments, and I 
thank him for his support as well.
  I have just a couple of other points. My friend and colleague from 
Texas cited earlier some of the efforts in the area of job training, 
vocational education. I wanted to respond by saying I don't disagree. I 
think that is an important element. But the problem is that one of the 
frustrations is the outsourcing of jobs that is occurring at a rather 
remarkable rate now, and it seems to be accelerating and very little is 
being offered to try to do something about this.
  In fact, even in the area of protecting manufacturing jobs and doing 
something about retraining, let me share with my colleagues what is 
going on. In the manufacturing extension partnership, which is a very 
important issue for the manufacturing firms of this country, this is 
going to mean less help to an estimated 11,000 small businesses; 28,000 
workers will either lose their jobs or not be hired as a result of 
these cuts.
  So there is cutting back in this area. Outsourcing is going to have a 
huge impact on the manufacturing sector.
  The Small Business Administration is being cut by $79 million, 
hurting hundreds of thousands of small businesses struggling to create 
jobs for Americans. There is a cut of $316 million for vocational 
education. This is in addition to the more than $1.5 million in 
proposed cuts to job training and vocational education made over the 
last 3 years. We are also cutting $448 million for the Workforce 
Investment Act programs.
  My point is, as we watch these outsourcing of jobs and the loss of 
2.8

[[Page 3206]]

million manufacturing jobs, I would be heartened if I thought we were 
making an effort at least to commit additional resources to help 
provide training for people who find themselves under normal cyclical 
circumstances losing a job, but here we are in an abnormal situation 
where there is an extraordinary loss of manufacturing jobs occurring 
across the country in the last 36 months and we have an extraordinary 
acceleration of outsourcing of jobs occurring over the same period of 
time--I pointed out that now 400 of the top 1,000 businesses in America 
are outsourcing, 40 of the 50 States, all for a very obvious reason. 
You can save a lot of money right off the top by doing it. When you can 
hire somebody in India at $7 a day as opposed to paying someone a 
salary in Silicon Valley, you do not have to have a Ph.D. in 
mathematics to know the outcome.
  I understand the motivation behind it. The question I have is, are we 
going to sit back and allow this to continue at the expense of losing 
the kind of human investments that we ought to be making to guarantee 
that we have a workforce capable of doing jobs and providing the 
services that America ought to be providing in the coming years?
  In addition to that, even if we were not doing an amendment or were 
not going to support language that would say that Federal taxpayer 
money ought not be used for this purpose, I would like to think that in 
the area of vocational education, small business assistance, 
manufacture extension partnerships, and certainly Workforce Investment 
Act--all of these areas--that the administration would say: Look, this 
is our answer to this. We don't agree with you, Senator, about not 
using Federal funds.
  Madam President, I ask unanimous consent that an article from the Los 
Angeles Times be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                    [From the Nation; Feb. 10, 2004]

                  Bush Supports Shift of Jobs Overseas

                    (By Warren Vieth and Edwin Chen)

       Washington.--The movement of American factory jobs and 
     white-collar work to other countries is part of a positive 
     transformation that will enrich the U.S. economy over time, 
     even if it causes short-term pain and dislocation, the Bush 
     administration said Monday.
       The embrace of foreign outsourcing, an accelerating trend 
     that has contributed to U.S. job losses in recent years and 
     has become an issue in the 2004 elections, is contained in 
     the president's annual report to Congress on the health of 
     the economy.
       ``Outsourcing is just a new way of doing international 
     trade,'' said N. Gregory Mankiw, chairman of Bush's Council 
     of Economic Advisers, which prepared the report. ``More 
     things are tradable than were tradable in the past. An that's 
     a good thing.''
       The report, which predicts that the nation will reverse a 
     three-year employment slide by creating 2.6 million jobs in 
     2004, is part of a weeklong effort by the administration to 
     highlight signs that the recovery is picking up speed. Bush's 
     economic stewardship has become a central issue in the 
     presidential campaign, and the White House is eager to 
     demonstrate that his policies are producing results.
       In his message to Congress on Monday, Bush said the economy 
     ``is strong and getting stronger,'' thanks in part to his tax 
     cuts and other economic programs. He said the nation had 
     survived a stock market melt-down, recession, terrorist 
     attacks, corporate scandals and war in Afghanistan and Iraq, 
     and was finally beginning to enjoy ``a mounting prosperity 
     that will reach every corner of America.''
       The president repeated that message during an afternoon 
     discussion about the economy at SRC Automotive, an engine-
     rebuilding plant in Springfield, Mo., where he lashed out at 
     lawmakers who oppose making his tax cuts permanent.
       ``When they say, `We're going to repeal Bush's tax cuts,' 
     that means they're going to raise your taxes, and that's 
     wrong. And that's bad economics,'' he said.
       Democrats who want Bush's job were quick to challenge his 
     claims.
       Sen. John F. Kerry of Massachusetts, the front-runner for 
     the Democratic presidential nomination, supports a rollback 
     of Bush's tax cuts for the wealthiest Americans and backs the 
     creation of tax incentives for companies that keep jobs in 
     the United States--although he supported the North American 
     Free Trade Agreement, which many union members say is 
     responsible for the migration of U.S. jobs, particularly in 
     the auto industry, to Mexico.
       Campaigning Monday in Roanoke, Va., Kerry questioned the 
     credibility of the administration's job-creation forecast.
       ``I've got a feeling this report was prepared by the same 
     people who brought us the intelligence on Iraq,'' Kerry said. 
     ``I don't think we need a new report about jobs in America. I 
     think we need a new president who's going to create jobs in 
     America and put Americans back to work.''
       In an evening appearance at George Mason University in 
     Fairfax, Va., Sen. John Edwards of North Carolina mocked the 
     Bush administration's economic report.
       Edwards, who also supports repealing tax cuts for the 
     richest Americans and offering incentives to corporations 
     that create new jobs in the United States, said it would come 
     as a ``news bulletin'' to the American people that the 
     economy was improving and that the outsourcing of jobs was 
     good for America.
       ``These people,'' he said of the Bush administration, 
     ``what planet do they live on? They are so out of touch.''
       The president's 411-page report contains a detailed 
     diagnosis of the forces the White House says are contributing 
     to America's economic slowdown and a wide-ranging defense of 
     the policies Bush has pursued to combat it.
       It asserts that the last recession actually began in late 
     2000, before the president took office, instead of March 
     2001, as certified by the official recession-dating panel of 
     the National Bureau of Economic Research.
       Much of the report repeats the administration's previous 
     economic prescriptions.
       For instance, it says the Bush tax cuts must be made 
     permanent to have their full effect on the economy.
       Social Security also must be restructured to let workers 
     put part of their retirement funds in private accounts, the 
     report argues. Doing so could add nearly $5 trillion to the 
     national debt by 2036, the president's advisors note, but the 
     additional borrowing would be repaid 20 years later and the 
     program's long-term health would be more secure.
       The report devotes an entire chapter to an issue that has 
     become increasingly troublesome for the administration: the 
     loss of 2.8 million manufacturing jobs since Bush took 
     office, and critics' claims that his trade policies are 
     partly to blame.
       His advisors acknowledge that international trade and 
     foreign outsourcing have contributed to the job slump. But 
     the report argues that technological progress and rising 
     productivity--the ability to produce more goods with fewer 
     workers--have played a bigger role than the flight of 
     production to China and other low-wage countries.
       Although trade expansion inevitably hurts some domestic 
     workers, the benefits eventually will outweigh the costs as 
     Americans are able to buy cheaper goods and services and as 
     new jobs are created in growing sectors of the economy, the 
     report said.
       The president's report endorses the relatively new 
     phenomenon of outsourcing high-end, white-collar work to 
     India and other countries, a trend that has stirred concern 
     within such affected occupations as computer programming and 
     medical diagnostics.
       ``Maybe we will outsource a few radiologists,'' Mankiw told 
     reporters. ``What does that mean? Well, maybe the next 
     generation of doctors will train fewer radiologists and will 
     train more general practitioners or surgeons. . . . Maybe 
     we've learned that we don't have a comparative advantage in 
     radiologists.''
       Government should try to salve the short-term disruption by 
     helping displaced workers obtain the training they need to 
     enter new fields, such as health-care, Mankiw said, not by 
     erecting protectionist barriers on behalf of vulnerable 
     industries or professions. ``The market is the best 
     determination of where the jobs should be,'' he said.
       Bush's quick visit to Missouri--his 15th to a state 
     considered a critical election battleground--was the first of 
     several events this week intended to underscore recent 
     economic gains. Although U.S. job creation remains relatively 
     sluggish, the nation's unemployment rate fell from 6.4% in 
     June to 5.6% in January, and the economy grew at the fastest 
     pace in 20 years during the last half of 2003.
       The format of his visit to SRC Automotive--one that he 
     particularly likes--involved several employees and local 
     business owners sharing the stage with the president to 
     discuss their perspectives on the economy, with Bush 
     elaborating on their stories to emphasize particular aspects 
     of his economic program.
       Today, Bush is scheduled to meet with economic leaders at 
     the White House. On Thursday, he goes to Pennsylvania's 
     capital, Harrisburg--in another swing state that he has 
     already visited more than two dozen times since becoming 
     president.

  Mr. DODD. The headline in the Los Angeles Times--it is a viewpoint--
says: ``Bush Supports Shift of Jobs Overseas.'' It goes on to talk 
about the report that I talked about all afternoon, this economic 
report prepared by the Council of Economic Advisers, where they 
conclude that the outsourcing of jobs is a good thing. The author of 
that

[[Page 3207]]

language apologized for his use of those words, but he has not 
apologized, and I understand why, because he believes it is good 
economic policy to be outsourcing.
  There are some of us--I do not know if it is a majority--who disagree 
with that conclusion, that outsourcing is necessarily good.
  I cited already from the Wall Street Journal companies that painfully 
discovered when they outsourced, while they thought they were going to 
save money, it actually cost them dearly. It is not only not good, but 
it fails to take into account--watching somebody's job be lost because 
there is a cheaper labor pool that you don't have to pay health care 
benefits to, despite the fact the person here is going to lose them--if 
it is really good for America.
  I am suggesting while this rush is occurring that we ought to put on 
the brakes and stop, look, and listen so we will not necessarily be 
caught up in a situation where a year or two or five from now we will 
look back and say: Why didn't somebody say something or do something 
when we knew this was happening, when we could sit, watch, and read on 
a daily basis the pouring of jobs out of this country to 14 time zones 
away, depriving people of benefits and income they needed for their 
families; what did you do on your watch? What did you do?
  If the answer is we thought it was a good thing for the American 
economy, then I think we will be suffering an indictment historically.
  I see my colleague from Kentucky who wants to move on to matters of 
the day. I yield the floor, with the right to be recognized at the 
conclusion of his remarks.
  Mr. McCONNELL. I say to my friend from Connecticut, he will hardly 
have to hold his breath and he will be back up waxing eloquent to all 
of our colleagues who I am sure, back in their offices, are watching 
his speech and listening carefully to every word.


                 eliminating the ``haircut'' provision

  Mr. SMITH. Madam President, I rise today in support of S. 1637, the 
JOBS Act, which will halt European Union trade sanctions against 
American industries and provide immediate tax relief for domestic 
manufacturers.
  U.S. manufacturing has experienced a crisis over the last three years 
due to the global economic downturn, sharply diminished capital 
spending, global overcapacity, and steady price declines for 
manufactured goods. S. 1637 provides a strong incentive for companies 
to keep and create jobs in the U.S.
  However, I believe we can improve S. 1637 by eliminating the 
``haircut'' provision that increases the taxes on U.S. manufacturers 
for their U.S. companies merely because these companies also 
manufacture products abroad. This concept is totally at odds with the 
purpose of this legislation--to cut taxes on manufacturers that employ 
American workers. U.S. companies with global operations employ more 
than 23 million Americans--9 million of which are manufacturing jobs. 
Foreign-owned companies with U.S. operations employ more than 2 million 
manufacturing workers in the U.S.
  The haircut is structured so that the more a company manufacturers 
abroad, the less of a manufacturing rate cut it gets. The ``haircut'' 
makes the U.S. a less competitive location for current and future 
investment. Thus, it is less likely that multinational manufacturing 
companies will site new plants and new high-paying jobs in the U.S.
  Furthermore, I am concerned that the ``haircut'' invites mirror 
legislation in other countries. In this time of crisis for the U.S. 
manufacturing industry, we cannot afford to let any more manufacturing 
jobs slip away, particularly due to bad tax policy.
  With my colleague, Senator Breaux, I am offering an amendment to the 
JOBS Act which will eliminate the ``haircut'' and provide an equal tax 
benefit for all manufacturers that employ American workers. Congress 
should be in the business of rewarding all well-paid manufacturing jobs 
that are created in the U.S.--not just those created by certain 
domestic manufacturers.
  Mr. KENNEDY. Madam President, we call this bill the ``Jumpstart Our 
Business Strength Act''--the JOBS Act, because that is exactly what we 
are debating this week--the critical issue facing so many millions of 
Americans, the lack of jobs.
  To hear President Bush, you would never know there was a problem with 
jobs. According to the Bush administration, everything is sunshine and 
roses.
  Over and over again, the President says things that show he is out of 
touch with the lives of ordinary Americans and can't understand the 
economic hardships they are facing. Happy talk about economic recovery 
doesn't jibe with the daily lives of the people on Main Street.
  In his State of the Union Address in January, the President said ``. 
. . this economy is strong, and growing stronger . . . Productivity is 
high, and jobs are on the rise.''
  A week later he said: ``The economy is growing, people are finding 
work. There's an excitement in our economy . . . You can tell I'm 
upbeat, and I've got reason to be. Not only the numbers say things are 
looking pretty good, the American people are telling me they feel 
pretty good.''
  Then came his annual economic report and its ringing endorsement of 
sending jobs overseas.
  At the National Governors Association meeting last Monday, he said he 
thinks the 5.6 percent unemployment rate is ``a good national number.''
  Yesterday, Vice President Cheney said, ``The economy's in very good 
shape, and going forward there's every reason to be optimistic that we 
will have the kind of growth that we need to create jobs out there.''
  In fact, he went on to say that if ``Democratic policies had been 
pursued over the last two or three years.  . . . we would not have had 
the kind of job growth that we've had.''
  Job growth? Someone should tell the Vice President that we have lost 
over two million jobs in the Bush economy.
  The reality of the Bush economic record is very different from the 
rhetoric.
  Just a few weeks ago, the President said in his economic report that 
the economy will create 2.6 million new jobs this year. The reality is 
that no one in the White House or the Cabinet will endorse the 2.6 
million number.
  President Bush said his first tax cuts in 2001 would create 800,000 
additional jobs by the end of 2002. The reality is, we lost 1.9 million 
jobs instead.
  His 2002 economic report predicted 3 million jobs would be created in 
2003. Instead, more than 300,000 were lost.
  He said the tax breaks enacted last year would create 510,000 
additional jobs by the end of the year, but we lost 53,000 jobs last 
year.
  Even the few jobs being created are not as good as the jobs we have 
lost. The new jobs pay on average $8,000 less than jobs lost in the 
Bush economy. In 48 of the 50 States, jobs being created pay 21 percent 
less than had been paid by industries losing jobs.
  Employees have smaller paychecks, and are even less able to keep up 
with the rising costs of education, let alone pay the bill for food, 
rent and health care.
  A big part of the job problem is the worsening crisis in 
manufacturing. We have lost nearly 3 million manufacturing jobs since 
the Bush administration took office. It is a nationwide problem, 
affecting almost every State in the Union. Forty-nine of the 50 States 
have lost manufacturing jobs under this President.
  That is only part of the story. Fourteen million other jobs are newly 
at risk of being sent overseas as well. Every day, we hear more stories 
about how white collar jobs and service sector jobs in health care, 
financial services, and information technology are going to other 
countries.
  What is the President's response? More empty rhetoric and broken 
promises. Last year on Labor Day, the President met with workers and 
promised to appoint a manufacturing czar to deal with the loss of 
manufacturing jobs. How typical of the President to make a promise like 
that on Labor Day and then forget all about it.
  Six months later, there is still no manufacturing czar. 
Administration officials say they're working on it, but

[[Page 3208]]

the economy is still hemorrhaging manufacturing jobs.
  American workers deserve better than this. They deserve better than 
to have their jobs exported with the President, as cheerleader in 
chief, waving good bye.
  We need to do more, to encourage good-paying manufacturing jobs to 
stay here, and discourage corporations from sending jobs and new 
investment overseas.
  This bill contains provisions to encourage manufacturing in the 
United States, and I commend Senator Grassley and Senator Baucus for 
their bi-partisan work on this bill. But we can do more and we must do 
more.
  We need to provide incentives now for companies to keep and create 
manufacturing jobs in the United States. A key weakness in this bill is 
that the tax benefits for domestic manufacturing are phased in too 
slowly. These companies and their workers need help now.
  We need to stop rewarding multinational corporations that send jobs 
to other countries.
  This bill not only fails to do that, it creates $35 billion in new or 
larger tax breaks for companies doing business abroad. Why on earth do 
we want to make exporting of American jobs more attractive to 
corporations? These international provisions should be removed from the 
bill, and the tax dollars should be used to make the tax benefits for 
domestic manufacturing more robust.
  In many respects, the tax code already gives a greater subsidy to 
profits from foreign operations over domestic plants. We ought to 
change that too, instead of kowtowing to the clout of multinational 
corporations. Our corporate tax laws should be rewritten to increase 
the cost of exporting jobs and decrease the cost of maintaining jobs in 
America.
  And what about the urgent needs of Americans who have already lost 
their jobs and their long-term unemployment benefits too?
  Solid majorities in the Senate and the House have already sent a 
message loud and clear to the White House and the Republican leadership 
in Congress that we want to reinstate those benefits, which expired on 
December 31st. Ninety thousand workers a week have lost their benefits 
and still can't get a job. They're moving in with friends or family, 
giving up health care, and struggling to pay every bill. Yet our 
Republican colleagues say, in their best imitation of Marie Antoinette, 
``let them eat cake.''
  They tell the unemployed to look harder for work. They treat them as 
slackers, and say they won't subsidize their idleness any longer. That 
attitude is wrong. The unemployment insurance extension we enacted when 
the economy began to decline has expired, and I urge my colleagues to 
fix it, before these hard-working employees who have lost their jobs 
through no fault of their own suffer any longer.
  I also urge my colleagues to join me in strengthening this 
legislation. We must improve incentives in the manufacturing industries 
and give working Americans a chance for the jobs and the better future 
they deserve.
  Mr. SMITH. Madam President, I will offer an amendment which would 
allow commercial fishermen to use income tax averaging to help mitigate 
the negative effects of their fluctuating incomes.
  Progressive tax systems, like the Federal income tax, often penalize 
farmers and others whose incomes vary greatly from year to year. 
Recognizing this fact, Congress, in 1997, gave farmers the option to 
calculate their taxes by averaging their income over a 3-year period. 
This was an important change in the Tax Code and has helped many in our 
agriculture communities weather the up-and-downs of a sometimes erratic 
farm economy.
  Like farmers, our fishermen are often subject to dramatic swings in 
income. Whether it's changing ocean conditions, harvest restrictions, 
or bad weather that keeps them in port, the change in income can be 
severe and beyond their control. For example, fishermen in Coos Bay, OR 
have struggled with regulatory restrictions and reduced stocks over the 
last several years. Unfortunately, our Tax Code doesn't allow for 
flexibility, and fishermen, who experience both good and bad years, are 
forced to pay more taxes than if they had steady income levels.
  My amendment would resolve some of this inequality by extending to 
commercial fishermen the same income averaging benefit given to 
farmers. It would also fix a technical error in the original provision 
that has led to some farmers being caught under alternative minimum 
tax.
  I thank the chairman for his leadership on this issue in the past and 
including this important provision in his bill, the Tax Empowerment and 
Relief for Farmers and Fishermen, TERFF, Act. I am pleased to see that 
portions of the TERFF Act were incorporated into the bill now before 
us, and I am hopeful that we will be able to address the issue of 
income averaging for fishermen also at this time.
  Our farmers and fishermen represent an important sector of our 
economy. Unfortunately, they and their families often have to deal with 
more than their fair share of challenges. Making the Tax Code more 
consistent and more reflective of the variable nature of resource 
industries will also make it more fair and provide some measure of 
stability for these hard working individuals.
  I encourage the Senate to consider and pass this important amendment.
  The PRESIDING OFFICER (Mr. Alexander). The Senator from Kentucky.

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