[Congressional Record (Bound Edition), Volume 150 (2004), Part 5]
[Senate]
[Pages 6476-6576]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           TEXT OF AMENDMENTS

                                 ______
                                 
  SA 3011. Mr. FRIST proposed an amendment intended to the 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; as follows:

       Strike all after the enacting clause and insert the 
     following:

     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. Delay in effective date of final regulations governing 
              exclusion of income from international operation of ships 
              or aircraft.

       TITLE III--DOMESTIC MANUFACTURING AND BUSINESS PROVISIONS

                     Subtitle A--General Provisions

Sec. 301. Expansion of qualified small-issue bond program.

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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. Modified taxation of imported archery products.
Sec. 306. Modification to cooperative marketing rules to include value 
              added processing involving animals.
Sec. 307. Extension of declaratory judgment procedures to farmers' 
              cooperative organizations.
Sec. 308. Temporary suspension of personal holding company tax.
Sec. 309. Increase in section 179 expensing.
Sec. 310. Five-year carryback of net operating losses.
Sec. 311. Extension and modification of research credit.
Sec. 312. Expansion of research credit.

              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.
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.
Sec. 419. Increases in penalties for aiding and abetting 
              understatements.
Sec. 420. Study on information sharing among law enforcement agencies.

           Subtitle B--Other Corporate Governance Provisions

Sec. 421. Affirmation of consolidated return regulation authority.
Sec. 422. Declaration by chief executive officer relating to Federal 
              annual income tax return of a corporation.
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 partners which are 
              C 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. Class lives for utility grading costs.
Sec. 473. Expansion of limitation on depreciation of certain passenger 
              automobiles.
Sec. 474. Consistent amortization of periods for intangibles.
Sec. 475. Reform of tax treatment of leasing operations.
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.
Sec. 488. Whistleblower reforms.

                    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. Limitations on deduction for charitable contributions of 
              patents and similar property.
Sec. 495. Repeal of 10-percent rehabilitation tax credit.
Sec. 496. Increase in age of minor children whose unearned income is 
              taxed as if parent's income.
Sec. 497. Holding period for preferred stock.

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   TITLE V--PROTECTION OF UNITED STATES WORKERS FROM COMPETITION OF 
                           FOREIGN WORKFORCES

Sec. 501. Limitations on off-shore performance of contracts.
Sec. 502. Repeal of superseded law.
Sec. 503. Effective date and applicability.

                       TITLE VI--OTHER PROVISIONS

               Subtitle A--Provisions Relating to Housing

Sec. 601. Treatment of qualified mortgage bonds.
Sec. 602. Premiums for mortgage insurance.
Sec. 603. Increase in historic rehabilitation credit for certain low-
              income housing for the elderly.

                Subtitle B--Provisions Relating to Bonds

Sec. 611. Expansion of New York Liberty Zone tax benefits.
Sec. 612. Modifications of treatment of qualified zone academy bonds.
Sec. 613. Modifications of authority of Indian tribal governments to 
              issue tax-exempt bonds.
Sec. 614. Definition of manufacturing facility for small issue bonds.
Sec. 615. Conservation bonds.
Sec. 616. Indian school construction.

            Subtitle C--Provisions Relating to Depreciation

Sec. 621. Special placed in service rule for bonus depreciation 
              property.
Sec. 622. Modification of depreciation allowance for aircraft.
Sec. 623. Modification of class life for certain track facilities.
Sec. 624. Minimum tax relief for certain taxpayers.

                Subtitle D--Expansion of Business Credit

Sec. 631. New markets tax credit for Native American reservations.
Sec. 632. Ready Reserve-National Guard employee credit added to general 
              business credit.
Sec. 633. Rural investment tax credit.
Sec. 634. Qualified rural small business investment credit.
Sec. 635. Credit for maintenance of railroad track.
Sec. 636. Railroad revitalization and security investment credit.
Sec. 637. Modification of targeted areas designated for new markets tax 
              credit.
Sec. 638. Modification of income requirement for census tracts within 
              high migration rural counties.

                  Subtitle E--Miscellaneous Provisions

Sec. 641. Exclusion of gain or loss on sale or exchange of certain 
              brownfield sites from unrelated business taxable income.
Sec. 642. Modification of unrelated business income limitation on 
              investment in certain debt-financed properties.
Sec. 643. Civil rights tax relief.
Sec. 644. Exclusion for payments to individuals under National Health 
              Service Corps loan repayment program and certain State 
              loan repayment programs.
Sec. 645. Certain expenses of rural letter carriers.
Sec. 646. Method of accounting for naval shipbuilders.
Sec. 647. Suspension of policyholders surplus account provisions.
Sec. 648. Payment of dividends on stock of cooperatives without 
              reducing patronage dividends.
Sec. 649. Special rules for livestock sold on account of weather-
              related conditions.
Sec. 650. Motor vehicle dealer transitional assistance.
Sec. 651. Expansion of designated renewal community area based on 2000 
              census data.
Sec. 652. Reduction of holding period to 12 months for purposes of 
              determining whether horses are section 1231 assets.
Sec. 653. Blue Ribbon Commission on Comprehensive Tax Reform.
Sec. 654. Treatment of distributions by ESOPs with respect to S 
              corporation stock.
Sec. 655. Clarification of working capital for reasonably anticipated 
              needs of a business for purposes of accumulated earnings 
              tax.
Sec. 656. Tax treatment of State ownership of railroad real estate 
              investment trust.
Sec. 657. Clarification of contribution in aid of construction for 
              water and sewerage disposal utilities.
Sec. 658. Credit for purchase and installation of agricultural water 
              conservation systems.
Sec. 659. Modification of involuntary conversion rules for businesses 
              affected by the September 11th terrorist attacks.

                     Subtitle F--Revenue Provisions

                   Part I--General Revenue Provisions

Sec. 661. Treasury regulations on foreign tax credit.
Sec. 662. Nonattribution of certain manufacturing by persons other than 
              controlled foreign corporation.
Sec. 663. Freeze of provisions regarding suspension of interest where 
              Secretary fails to contact taxpayer.

               Part II--Pension and Deferred Compensation

Sec. 671. Treatment of nonqualified deferred compensation plans.
Sec. 672. Prohibition on deferral of gain from the exercise of stock 
              options and restricted stock gains through deferred 
              compensation arrangements.
Sec. 673. Increase in withholding from supplemental wage payments in 
              excess of $1,000,000.
Sec. 674. Treatment of sale of stock acquired pursuant to exercise of 
              stock options to comply with conflict-of-interest 
              requirements.
Sec. 675. Determination of basis of amounts paid from foreign pension 
              plans.

          TITLE VII--EXTENSIONS OF CERTAIN EXPIRING PROVISIONS

                         Subtitle A--Extensions

Sec. 701. Parity in the application of certain limits to mental health 
              benefits.
Sec. 702. Modifications to work opportunity credit and welfare-to-work 
              credit.
Sec. 703. Consolidation of work opportunity credit with welfare-to-work 
              credit.
Sec. 704. Qualified zone academy bonds.
Sec. 705. Cover over of tax on distilled spirits.
Sec. 706. Deduction for corporate donations of scientific property and 
              computer technology.
Sec. 707. Deduction for certain expenses of school teachers.
Sec. 708. Expensing of environmental remediation costs.
Sec. 709. Expansion of certain New York Liberty Zone benefits.
Sec. 710. Repeal of reduction of deductions for mutual life insurance 
              companies.
Sec. 711. Tax incentives for investment in the District of Columbia.
Sec. 712. Combined employment tax reporting program.
Sec. 713. Allowance of nonrefundable personal credits against regular 
              and minimum tax liability.
Sec. 714. Credit for electricity produced from certain renewable 
              resources.
Sec. 715. Taxable income limit on percentage depletion for oil and 
              natural gas produced from marginal properties.
Sec. 716. Indian employment tax credit.
Sec. 717. Accelerated depreciation for business property on Indian 
              reservation.
Sec. 718. Disclosure of return information relating to student loans.
Sec. 719. Extension of transfers of excess pension assets to retiree 
              health accounts.
Sec. 720. Elimination of phaseout of credit for qualified electric 
              vehicles.
Sec. 721. Elimination of phaseout for deduction for clean-fuel vehicle 
              property.

                     Subtitle B--Revenue Provisions

Sec. 731. Donations of motor vehicles, boats, and airplanes. 
Sec. 732. Addition of vaccines against influenza to list of taxable 
              vaccines.
Sec. 733. Treatment of contingent payment convertible debt instruments.
Sec. 734. Modification of continuing levy on payments to Federal 
              venders.

                   TITLE VIII--ENERGY TAX INCENTIVES

Sec. 800. Short title.

        Subtitle A--Renewable Electricity Production Tax Credit

Sec. 801. Extension and expansion of credit for electricity produced 
              from certain renewable resources.

      Subtitle B--Alternative Motor Vehicles and Fuels Incentives

Sec. 811. Alternative motor vehicle credit.
Sec. 812. Modification of credit for qualified electric vehicles.
Sec. 813. Credit for installation of alternative fueling stations.
Sec. 814. Credit for retail sale of alternative fuels as motor vehicle 
              fuel.
Sec. 815. Small ethanol producer credit.

       Subtitle C--Conservation and Energy Efficiency Provisions

Sec. 821. Credit for construction of new energy efficient home.
Sec. 822. Credit for energy efficient appliances.
Sec. 823. Credit for residential energy efficient property.
Sec. 824. Credit for business installation of qualified fuel cells and 
              stationary microturbine power plants.
Sec. 825. Energy efficient commercial buildings deduction.
Sec. 826. Three-year applicable recovery period for depreciation of 
              qualified energy management devices.
Sec. 827. Three-year applicable recovery period for depreciation of 
              qualified water submetering devices.
Sec. 828. Energy credit for combined heat and power system property.

[[Page 6479]]

Sec. 829. Credit for energy efficiency improvements to existing homes.

                   Subtitle D--Clean Coal Incentives

 Part I--Credit for Emission Reductions and Efficiency Improvements in 
         Existing Coal-Based Electricity Generation Facilities

Sec. 831. Credit for production from a qualifying clean coal technology 
              unit.

Part II--Incentives for Early Commercial Applications of Advanced Clean 
                           Coal Technologies

Sec. 832. Credit for investment in qualifying advanced clean coal 
              technology.
Sec. 833. Credit for production from a qualifying advanced clean coal 
              technology unit.

      Part III--Treatment of Persons Not Able To Use Entire Credit

Sec. 834. Treatment of persons not able to use entire credit.

                   Subtitle E--Oil and Gas Provisions

Sec. 841. Oil and gas from marginal wells.
Sec. 842. Natural gas gathering lines treated as 7-year property.
Sec. 843. Expensing of capital costs incurred in complying with 
              Environmental Protection Agency sulfur regulations.
Sec. 844. Credit for production of low sulfur diesel fuel.
Sec. 845. Determination of small refiner exception to oil depletion 
              deduction.
Sec. 846. Marginal production income limit extension.
Sec. 847. Amortization of delay rental payments.
Sec. 848. Amortization of geological and geophysical expenditures.
Sec. 849. Extension and modification of credit for producing fuel from 
              a nonconventional source.
Sec. 850. Natural gas distribution lines treated as 15-year property.
Sec. 851. Credit for Alaska natural gas.
Sec. 852. Certain Alaska natural gas pipeline property treated as 7-
              year property.
Sec. 853. Extension of enhanced oil recovery credit to certain Alaska 
              facilities.
Sec. 854. Arbitrage rules not to apply to prepayments for natural gas.

         Subtitle F--Electric Utility Restructuring Provisions

Sec. 855. Modifications to special rules for nuclear decommissioning 
              costs.
Sec. 856. Treatment of certain income of cooperatives.
Sec. 857. Sales or dispositions to implement Federal Energy Regulatory 
              Commission or State electric restructuring policy.

            Subtitle G--Volumetric Ethanol Excise Tax Credit

Sec. 860. Short title.
Sec. 861. Alcohol and biodiesel excise tax credit and extension of 
              alcohol fuels income tax credit.
Sec. 862. Biodiesel income tax credit.

                   Subtitle H--Fuel Fraud Prevention

Sec. 870. Short title.

                       Part I--Aviation Jet Fuel

Sec. 871. Taxation of aviation-grade kerosene.
Sec. 872. Transfer of certain amounts from the Airport and Airway Trust 
              Fund to the Highway Trust Fund to reflect highway use of 
              jet fuel.

                           Part II--Dyed Fuel

Sec. 873. Dye injection equipment.
Sec. 874. Elimination of administrative review for taxable use of dyed 
              fuel. 
Sec. 875. Penalty on untaxed chemically altered dyed fuel mixtures.
Sec. 876. Termination of dyed diesel use by intercity buses.

       Part III--Modification of Inspection of Records Provisions

Sec. 877. Authority to inspect on-site records.
Sec. 878. Assessable penalty for refusal of entry.

            Part IV--Registration and Reporting Requirements

Sec. 879. Registration of pipeline or vessel operators required for 
              exemption of bulk transfers to registered terminals or 
              refineries.
Sec. 880. Display of registration.
Sec. 881. Registration of persons within foreign trade zones.
Sec. 882. Penalties for failure to register and failure to report.
Sec. 883. Information reporting for persons claiming certain tax 
              benefits.

                            Part V--Imports

Sec. 884. Tax at point of entry where importer not registered.
Sec. 885. Reconciliation of on-loaded cargo to entered cargo.

                   Part VI--Miscellaneous Provisions

Sec. 886. Tax on sale of diesel fuel whether suitable for use or not in 
              a diesel-powered vehicle or train.
Sec. 887. Modification of ultimate vendor refund claims with respect to 
              farming.
Sec. 888. Taxable fuel refunds for certain ultimate vendors.
Sec. 889. Two-party exchanges.
Sec. 890. Modifications of tax on use of certain vehicles.
Sec. 891. Dedication of revenues from certain penalties to the Highway 
              Trust Fund.
Sec. 892. Nonapplication of export exemption to delivery of fuel to 
              motor vehicles removed from United States.

                     Part VII--Total Accountability

Sec. 893. Total accountability.
Sec. 894. Excise tax reporting.
Sec. 895. Information reporting.

                      Subtitle I--Mobile Machinery

Sec. 896. Treatment of mobile machinery.

                   Subtitle J--Additional Provisions

Sec. 897. Study of effectiveness of certain provisions by GAO.
Sec. 898. Repeal of 4.3-cent motor fuel excise taxes on railroads and 
              inland waterway transportation which remain in general 
              fund.
Sec. 899. Distributions from publicly traded partnerships treated as 
              qualifying income of regulated investment companies.
Sec. 899A. Certain business related credits allowed against regular and 
              minimum tax.

        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 ``114 or''.
       (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 the 
     Internal Revenue Code of 1986, 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 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

[[Page 6480]]

       (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:
    2005.....................................................   80 ....

    2006.....................................................   60.....

       (ii) Special rule for 2004.--The phaseout percentage for 
     2004 shall be the amount that bears the same ratio to 80 
     percent as the number of days after the date of the enactment 
     of this Act bears to 366.
       (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 average FSC/ETI benefit for the 
     taxpayer's taxable years beginning in calendar years 2000, 
     2001, and 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 2004 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 2004, 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 
     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:
    2004, 2005, or 2006........................................  5 ....

    2007.......................................................  6 ....

    2008.......................................................  7.....

       ``(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. The preceding sentence shall not apply to any entity 
     all of the ownership interests of which are held directly or 
     indirectly by members of the same expanded affiliated group.
       ``(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 (A) shall not exceed the 
     difference between the value of the property when exported 
     and the value of the property when

[[Page 6481]]

     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) Patrons of agricultural and horticultural 
     cooperatives.--
       ``(A) In general.--If any amount described in paragraph (1) 
     or (3) of section 1385 (a)--
       ``(i) is received by a person from an organization to which 
     part I of subchapter T applies which is engaged--

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

       ``(ii) is allocable to the portion of the qualified 
     production activities income of the organization which, but 
     for this paragraph, would be deductible under subsection (a) 
     by the organization and is designated as such by the 
     organization in a written notice mailed to its patrons during 
     the payment period described in section 1382(d),
     then such person shall be allowed a deduction under 
     subsection (a) with respect to such amount. The taxable 
     income of the organization shall not be reduced under section 
     1382 by reason of any amount to which the preceding sentence 
     applies.
       ``(B) Special rules.--For purposes of applying subparagraph 
     (A), in determining the qualified production activities 
     income 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) in the case of an organization described in 
     subparagraph (A)(i)(II), the organization shall be treated as 
     having manufactured, produced, grown, or extracted in whole 
     or significant part any qualifying production property 
     marketed by the organization which its patrons have so 
     manufactured, produced, grown, or extracted.
       ``(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.
       ``(9) Separate application to films and videotape.--In the 
     case of qualifying production property described in section 
     168(f)(3), this section shall be applied separately to 
     qualified production activities income of the taxpayer 
     allocable to each of the following markets with respect to 
     such property:
       ``(A) Theatrical.
       ``(B) Broadcast television (including cable, foreign, pay-
     per-view, and syndication).
       ``(C) Home video.''.
       (b) Minimum Tax.--Section 56(g)(4)(C) (relating to 
     disallowance of items not deductible in computing earnings 
     and profits) is

[[Page 6482]]

      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
       (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.--

[[Page 6483]]

       ``(A) In general.--The taxable income of each domestic 
     corporation which is a member of a worldwide affiliated group 
     shall be determined by allocating and apportioning interest 
     expense of each member as if all members of such group were a 
     single corporation.
       ``(B) Treatment of worldwide affiliated group.--The taxable 
     income of the domestic members of a worldwide affiliated 
     group from sources outside the United States shall be 
     determined by allocating and apportioning the interest 
     expense of such domestic members to such income in an amount 
     equal to the excess (if any) of--
       ``(i) the total interest expense of the worldwide 
     affiliated group multiplied by the ratio which the foreign 
     assets of the worldwide affiliated group bears to all the 
     assets of the worldwide affiliated group, over
       ``(ii) the interest expense of all foreign corporations 
     which are members of the worldwide affiliated group to the 
     extent such interest expense of such foreign corporations 
     would have been allocated and apportioned to foreign source 
     income if this subsection were applied to a group consisting 
     of all the foreign corporations in such worldwide affiliated 
     group.
       ``(C) Worldwide affiliated group.--For purposes of this 
     paragraph, the term `worldwide affiliated group' means a 
     group consisting of--
       ``(i) the includible members of an affiliated group (as 
     defined in section 1504(a), determined without regard to 
     paragraphs (2) and (4) of section 1504(b)), and
       ``(ii) all controlled foreign corporations in which such 
     members in the aggregate meet the ownership requirements of 
     section 1504(a)(2) either directly or indirectly through 
     applying paragraph (2) of section 958(a) or through applying 
     rules similar to the rules of such paragraph to stock owned 
     directly or indirectly by domestic partnerships, trusts, or 
     estates.
       ``(2) Allocation and apportionment of other expenses.--
     Expenses other than interest which are not directly allocable 
     or apportioned to any specific income producing activity 
     shall be allocated and apportioned as if all members of the 
     affiliated group were a single corporation. For purposes of 
     the preceding sentence, the term `affiliated group' has the 
     meaning given such term by section 1504 (determined without 
     regard to paragraph (4) of section 1504(b)).
       ``(3) Treatment of tax-exempt assets; basis of stock in 
     nonaffiliated 10-percent owned corporations.--The rules of 
     paragraphs (3) and (4) of subsection (e) shall apply for 
     purposes of this subsection, except that paragraph (4) shall 
     be applied on a worldwide affiliated group basis.
       ``(4) Treatment of certain financial institutions.--
       ``(A) In general.--For purposes of paragraph (1), any 
     corporation described in subparagraph (B) shall be treated as 
     an includible corporation for purposes of section 1504 only 
     for purposes of applying this subsection separately to 
     corporations so described.
       ``(B) Description.--A corporation is described in this 
     subparagraph if--
       ``(i) such corporation is a financial institution described 
     in section 581 or 591,
       ``(ii) the business of such financial institution is 
     predominantly with persons other than related persons (within 
     the meaning of subsection (d)(4)) or their customers, and
       ``(iii) such financial institution is required by State or 
     Federal law to be operated separately from any other entity 
     which is not such an institution.
       ``(C) Treatment of bank and financial holding companies.--
     To the extent provided in regulations--
       ``(i) a bank holding company (within the meaning of section 
     2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 
     1841(a)),
       ``(ii) a financial holding company (within the meaning of 
     section 2(p) of the Bank Holding Company Act of 1956 (12 
     U.S.C. 1841(p)), and
       ``(iii) any subsidiary of a financial institution described 
     in section 581 or 591, or of any such bank or financial 
     holding company, if such subsidiary is predominantly engaged 
     (directly or indirectly) in the active conduct of a banking, 
     financing, or similar business,
     shall be treated as a corporation described in subparagraph 
     (B).
       ``(5) Election to expand financial institution group of 
     worldwide group.--
       ``(A) In general.--If a worldwide affiliated group elects 
     the application of this subsection, all financial 
     corporations which--
       ``(i) are members of such worldwide affiliated group, but
       ``(ii) are not corporations described in paragraph (4)(B),
     shall be treated as described in paragraph (4)(B) for 
     purposes of applying paragraph (4)(A). This subsection (other 
     than this paragraph) shall apply to any such group in the 
     same manner as this subsection (other than this paragraph) 
     applies to the pre-election worldwide affiliated group of 
     which such group is a part.
       ``(B) Financial corporation.--For purposes of this 
     paragraph, the term `financial corporation' means any 
     corporation if at least 80 percent of its gross income is 
     income described in section 904(d)(2)(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.

[[Page 6484]]



     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).
       (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).''.

[[Page 6485]]

       (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 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

[[Page 6486]]

     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, 2005, 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). For purposes of this paragraph, 
     interest shall include factoring income which is treated as 
     income equivalent to interest for purposes of paragraph 
     (1)(E). The Secretary shall prescribe such regulations as may 
     be appropriate to prevent the abuse of the purposes of this 
     paragraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2004, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

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

     SEC. 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

[[Page 6487]]

     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 the 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 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

[[Page 6488]]

     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.

     SEC. 236. DELAY IN EFFECTIVE DATE OF FINAL REGULATIONS 
                   GOVERNING EXCLUSION OF INCOME FROM 
                   INTERNATIONAL OPERATION OF SHIPS OR AIRCRAFT.

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

       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 and properly taken into 
     account 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 the date of the 
     enactment of this Act.
       ``(B) Sale-leasebacks.--For purposes of subparagraph (A), 
     if property--
       ``(i) is originally placed in service after the date of the 
     enactment of this Act 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

[[Page 6489]]

     both qualified subscribers and other subscribers, the 
     qualified broadband expenditures shall be multiplied by a 
     fraction--
       ``(A) the numerator of which is the sum of the number of 
     potential qualified subscribers within the rural areas and 
     the underserved areas which the equipment is capable of 
     serving with current generation broadband services, and
       ``(B) the denominator of which is the total potential 
     subscriber population of the area which the equipment is 
     capable of serving with current generation broadband 
     services.
       ``(2) Next generation broadband services.--For purposes of 
     determining the amount of qualified broadband expenditures 
     under subsection (a)(1) with respect to qualified equipment 
     through which next generation broadband services are 
     provided, if the qualified equipment is capable of serving 
     both qualified subscribers and other subscribers, the 
     qualified expenditures shall be multiplied by a fraction--
       ``(A) the numerator of which is the sum of--
       ``(i) the number of potential qualified subscribers within 
     the rural areas and underserved areas, plus
       ``(ii) the number of potential qualified subscribers within 
     the area consisting only of residential subscribers not 
     described in clause (i),

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

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

[[Page 6490]]

     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 512(b) (relating to modifications) is 
     amended by adding at the end the following new paragraph:
       ``(18) Special rule for mutual or cooperative telephone 
     companies.--A mutual or cooperative telephone company which 
     for the taxable year satisfies the requirements of section 
     501(c)(12)(A) may elect to reduce its unrelated business 
     taxable income for such year, if any, by an amount that does 
     not exceed the qualified broadband expenditures which would 
     be taken into account under section 191 for such year by such 
     company if such company was not exempt from taxation. Any 
     amount which is allowed as a deduction under this paragraph 
     shall not be allowed as a deduction under section 191 and the 
     basis of any property to which this paragraph applies shall 
     be reduced under section 1016(a)(29).''.
       (c) Conforming Amendments.--
       (1) Section 263(a)(1) (relating to capital expenditures) is 
     amended by striking ``or'' at the end of subparagraph (G), by 
     striking the period at the end of subparagraph (H) and 
     inserting ``, or'', and by adding at the end the following 
     new subparagraph:
       ``(I) expenditures for which a deduction is allowed under 
     section 191.''.
       (2) Section 1016(a) of such Code is amended by striking 
     ``and'' at the end of paragraph (27), by striking the period 
     at the end of paragraph (28) and inserting ``, and'', and by 
     adding at the end the following new paragraph:
       ``(29) to the extent provided in section 191(f)(2).''.
       (3) The table of sections for part VI of subchapter A of 
     chapter 1 of such Code is amended by inserting after the item 
     relating to section 190 the following new item:

``Sec. 191. Broadband expenditures.''.
       (d) Designation of Census Tracts.--
       (1) In general.--The Secretary of the Treasury shall, not 
     later than 90 days after the date of the enactment of this 
     Act, designate and publish those census tracts meeting the 
     criteria described in paragraphs (16), (22), and (23) of 
     section 191(e) of the Internal Revenue Code of 1986 (as added 
     by this section). In making such designations, the Secretary 
     of the Treasury shall consult with such other departments and 
     agencies as the Secretary determines appropriate.
       (2) Saturated market.--
       (A) In general.--For purposes of designating and publishing 
     those census tracts meeting the criteria described in 
     subsection (e)(19) of such section 191--
       (i) the Secretary of the Treasury shall prescribe not later 
     than 30 days after the date of the enactment of this Act the 
     form upon which any provider which takes the position that it 
     meets such criteria with respect to any census tract shall 
     submit a list of such census tracts (and any other 
     information required by the Secretary) not later than 60 days 
     after the date of the publication of such form, and
       (ii) the Secretary of the Treasury shall publish an 
     aggregate list of such census tracts and the applicable 
     providers not later than 30 days after the last date such 
     submissions are allowed under clause (i).
       (B) No subsequent lists required.--The Secretary of the 
     Treasury shall not be required to publish any list of census 
     tracts meeting such criteria subsequent to the list described 
     in subparagraph (A)(ii).
       (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 the date of the 
     enactment of this Act and before the date which is 12 months 
     after the date of the enactment of this Act.

     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.--

[[Page 6491]]

       ``(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. 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. 306. 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. 307. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO 
                   FARMERS' COOPERATIVE ORGANIZATIONS.

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

     SEC. 308. 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) Coordination With Accumulated Earnings Tax.--Section 
     532(b) is amended by adding at the end the following flush 
     sentence:

     ``Paragraph (1) shall not apply to any taxable year to which 
     section 541 does not apply.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 309. 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. 310. FIVE-YEAR CARRYBACK OF NET OPERATING LOSSES.

       (a) In General.--Subparagraph (H) of section 172(b)(1) is 
     amended--
       (1) by inserting ``5-year carryback of certain losses.--'' 
     after ``(H)'', and
       (2) by striking ``or 2002'' and inserting ``, 2002, or 
     2003''.
       (b) Rules Relating to Certain Extended Net Operating 
     Losses.--Section 172 is amended by redesignating subsection 
     (k) as subsection (l) and by inserting after subsection (j) 
     the following new subsection:
       ``(k) Rules Relating to Certain Extended Net Operating 
     Losses.--In the case of a taxpayer which has a net operating 
     loss for any taxable year ending during 2003 and does not 
     make an election under subsection (j), such taxpayer shall be 
     treated as having made an election under paragraphs (4)(E) 
     and (2)(C)(iii) of section 168(k) with respect to all classes 
     of property for such taxable year.
       (c) Temporary Suspension of 90 Percent Limit on Certain NOL 
     Carryovers.--Section 56(d)(1)(A)(ii)(I) (relating to general 
     rule defining alternative tax net operating loss deduction) 
     is amended--
       (1) by striking ``or 2002'' and inserting ``, 2002, or 
     2003'', and
       (2) 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 November 
     15, 2004, and

[[Page 6492]]

       (B) any election made under section 172(j) of such Code 
     shall (notwithstanding such section) be treated as timely 
     made if made before November 15, 2004.
       (4) Special rule for taxpayers with taxable years ending 
     during january.--Any taxpayer which has a taxable year ending 
     during January may elect under this paragraph to apply 
     section 172(b)(1)(H) of the Internal Revenue Code of 1986 (as 
     amended by this section) to its taxable year ending in 2004 
     rather than its taxable year ending in 2003. If such election 
     is made, then section 172(k) of such Code (as added by this 
     section) shall be applied to the taxpayer's taxable year 
     ending in 2004. Such election shall be made in such manner 
     and at such time as may be prescribed by the Secretary of the 
     Treasury. Such election, once made, shall be irrevocable.

     SEC. 311. 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--
       (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.

     SEC. 312. 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 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.

              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

[[Page 6493]]

       ``(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.
       ``(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''.

[[Page 6494]]

       (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
       ``(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.

[[Page 6495]]



     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) Disclosure by Secretary.--
       (1) In general.--Section 6103 is amended by redesignating 
     subsection (q) as subsection (r) and by inserting after 
     subsection (p) the following new subsection:
       ``(q) Disclosure Relating to Payments of Certain 
     Penalties.--Notwithstanding any other provision of this 
     section, the Secretary shall make public the name of any 
     person required to pay a penalty described in section 
     6707A(e)(2) and the amount of the penalty.''.
       (2) Records.--Section 6103(p)(3)(A) is amended by striking 
     ``or (n)'' and inserting ``(n), or (q)''.
       (c) Conforming Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by inserting after 
     the item relating to section 6707 the following:

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

       (d) 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

[[Page 6496]]

     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,
       ``(IV) has an arrangement with respect to the transaction 
     which provides that contractual disputes between the taxpayer 
     and the advisor are to be settled by arbitration or which 
     limits damages by reference to fees paid to the advisor for 
     such transaction, or
       ``(V) 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,
       ``(IV) is not signed by all individuals who are principal 
     authors of the opinion, or
       ``(V) 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
       ``(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--

[[Page 6497]]

       ``(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.

     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

[[Page 6498]]

     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, which is--
       ``(1) subject to penalty under section 6700, 6701, 6707, or 
     6708, or
       ``(2) in violation of any requirement under regulations 
     issued under section 320 of title 31, United States Code.''.
       (b) Conforming Amendments.--
       (1) The heading for section 7408 is amended to read as 
     follows:

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

       (2) The table of sections for subchapter A of chapter 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 $10,000.
       ``(ii) Reasonable cause exception.--No penalty shall be 
     imposed under subparagraph (A) with respect to any violation 
     if--

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

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

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

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

     SEC. 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

[[Page 6499]]

     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 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.

[[Page 6500]]



     SEC. 419. INCREASES IN PENALTIES FOR AIDING AND ABETTING 
                   UNDERSTATEMENTS.

       (a) In General.--Section 6701(b) is amended to read as 
     follows:
       ``(b) Amount of Penalty.--
       ``(1) In general.--The amount of the penalty imposed by 
     subsection (a) shall be the greater of--
       ``(A) $2,000, or
       ``(B) 50 percent of the gross income derived (or to be 
     derived) from the activity giving rise to the penalty.
       ``(2) Corporations.--If the return, affidavit, claim, or 
     other document relates to the tax liability of a corporation, 
     paragraph (1)(A) shall be applied by substituting `$20,000' 
     for `$2,000'.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to activities after the date of the enactment of 
     this Act.

     SEC. 420. STUDY ON INFORMATION SHARING AMONG LAW ENFORCEMENT 
                   AGENCIES.

       (a) Study.--The Secretary of the Treasury shall, jointly 
     with the Attorney General, the Securities and Exchange 
     Commission, and the Commissioner of Internal Revenue, study 
     the effectiveness of, and ways to improve, the sharing of 
     information related to the promotion of prohibited tax 
     shelters or tax avoidance schemes and other potential 
     violations of Federal laws.
       (b) Report.--The Secretary shall, not later than 1 year 
     after the date of the enactment of this Act, report to the 
     appropriate committees of the Congress the results of the 
     study under subsection (a), including any recommendations for 
     legislation.

           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. DECLARATION BY CHIEF EXECUTIVE OFFICER RELATING TO 
                   FEDERAL ANNUAL INCOME TAX RETURN OF A 
                   CORPORATION.

       (a) In General.--The Federal annual tax 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 of the Treasury may designate if the corporation 
     does not have a chief executive officer), under penalties of 
     perjury, that the corporation has in place processes and 
     procedures to ensure that such return complies with the 
     Internal Revenue Code of 1986 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 of such Code).
       (b) Effective Date.--This section shall apply to the 
     Federal annual tax return of a corporation with respect to 
     income for taxable years ending 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 (including 
     remediation of property) for damage or harm caused by or 
     which may be 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.
       ``(5) Exception for taxes due.--Paragraph (1) shall not 
     apply to any amount paid or incurred as taxes due.''.
       (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--

[[Page 6501]]

       (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 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 Dates.--
       (1) In general.--The amendment made by subsection (a) shall 
     apply to transactions after December 31, 2003.
       (2) Liquidations.--The amendment made by subsection (b) 
     shall apply to liquidations after December 31, 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

[[Page 6502]]

     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) Clause (xi) of section 7701(a)(19)(C) is amended--
       (A) by striking ``and any regular interest in a FASIT,'', 
     and
       (B) by striking ``or FASIT'' each place it appears.
       (11) Subparagraph (A) of section 7701(i)(2) is amended by 
     striking ``or a FASIT''.
       (12) The table of parts for subchapter M of chapter 1 is 
     amended by striking the item relating to part V.
       (c) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall take effect on February 
     14, 2003.
       (2) Exception for existing fasits.--Paragraph (1) shall not 
     apply to any FASIT in existence on the date of the enactment 
     of this Act to the extent that regular interests issued by 
     the FASIT before such date continue to remain outstanding in 
     accordance with the original terms of issuance.

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

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

[[Page 6503]]

       ``(c) Tax on Inversion Gains May Not Be Offset.--If 
     subsection (b) applies--
       ``(1) In general.--The taxable income of an acquired entity 
     (or any expanded affiliated group which includes such entity) 
     for any taxable year which includes any portion of the 
     applicable period shall in no event be less than the 
     inversion gain of the entity for the taxable year.
       ``(2) Credits not allowed against tax on inversion gain.--
     Credits shall be allowed against the tax imposed by this 
     chapter on an acquired entity for any taxable year described 
     in paragraph (1) only to the extent such tax exceeds the 
     product of--
       ``(A) the amount of the inversion gain for the taxable 
     year, and
       ``(B) the highest rate of tax specified in section 
     11(b)(1).

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

     The Secretary may provide that income or gain from the sale 
     of inventories or other transactions in the ordinary course 
     of a trade or business shall not be treated as inversion gain 
     under subparagraph (B) to the extent the Secretary determines 
     such treatment would not be inconsistent with the purposes of 
     this section.
       ``(5) Coordination with section 172 and minimum tax.--Rules 
     similar to the rules of paragraphs (3) and (4) of section 
     860E(a) shall apply for purposes of this section.
       ``(6) Statute of limitations.--
       ``(A) In general.--The statutory period for the assessment 
     of any deficiency attributable to the inversion gain of any 
     taxpayer for any pre-inversion year shall not expire before 
     the expiration of 3 years from the date the Secretary is 
     notified by the taxpayer (in such manner as the Secretary may 
     prescribe) of the acquisition described in subsection 
     (a)(2)(A) to which such gain relates and such deficiency may 
     be assessed before the expiration of such 3-year period 
     notwithstanding the provisions of any other law or rule of 
     law which would otherwise prevent such assessment.
       ``(B) Pre-inversion year.--For purposes of subparagraph 
     (A), the term `pre-inversion year' means any taxable year 
     if--
       ``(i) any portion of the applicable period is included in 
     such taxable year, and
       ``(ii) such year ends before the taxable year in which the 
     acquisition described in subsection (a)(2)(A) is completed.
       ``(d) Special Rules Applicable to 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

[[Page 6504]]

     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.
       (e) Disclosure of Corporate Expatriation Transactions.--
       (1) In general.--Section 14 of the Securities Exchange Act 
     of 1934 (15 U.S.C. 78n) is amended by adding at the end the 
     following new subsection:
       ``(i) Proxy Solicitations in Connection With Corporate 
     Expatriation Transactions.--
       ``(1) Disclosure to shareholders of effects of corporate 
     expatriation transaction.--The Commission shall, by rule, 
     require that each domestic issuer shall prominently disclose, 
     not later than 5 business days before any shareholder vote 
     relating to a corporate expatriation transaction, as a 
     separate and distinct document accompanying each proxy 
     statement relating to the transaction--
       ``(A) the number of employees of the domestic issuer that 
     would be located in the new foreign jurisdiction of 
     incorporation or organization of that issuer upon completion 
     of the corporate expatriation transaction;
       ``(B) how the rights of holders of the securities of the 
     domestic issuer would be impacted by a completed corporate 
     expatriation transaction, and any differences in such rights 
     before and after a completed corporate expatriation 
     transaction; and
       ``(C) that, as a result of a completed corporate 
     expatriation transaction, any taxable holder of the 
     securities of the domestic issuer shall be subject to the 
     taxation of any capital gains realized with respect to such 
     securities, and the amount of any such capital gains tax that 
     would apply as a result of the transaction.
       ``(2) Definitions.--In this subsection, the following 
     definitions shall apply:
       ``(A) Corporate expatriation transaction.--The term 
     `corporate expatriation transaction' means any transaction, 
     or series of related transactions, described in subsection 
     (a) or (b) of section 7874 of the Internal Revenue Code of 
     1986.
       ``(A) Domestic issuer.--The term `domestic issuer' means an 
     issuer created or organized in the United States or under the 
     law of the United States or of any State.''
       (2) Effective date.--Section 14(i) of the Securities 
     Exchange Act of 1934 (as added by this subsection) shall 
     apply with respect to corporate expatriation transactions (as 
     defined in that section 14(i)) proposed on and after the date 
     of enactment of this Act.

     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 2004, 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 2003' for `calendar year 1992' in 
     subparagraph (B) thereof.

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

[[Page 6505]]

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

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

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

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

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

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

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

[[Page 6506]]

       ``(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--
       ``(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

[[Page 6507]]

     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 January 1, 2004.''.
       (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 January 
     1, 2004.
       (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 January 1, 2004, 
     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 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

[[Page 6508]]

     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) 
     0f 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 issue discount on obligation 
     held by related foreign person) is amended by redesignating 
     subparagraph (B) as subparagraph (C) and by inserting after 
     subparagraph (A) the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--In the case of any debt instrument 
     having original issue discount which is held by a related 
     foreign person which is a foreign personal holding company 
     (as defined in section 552), a controlled foreign corporation 
     (as defined in section 957), or a passive foreign investment 
     company (as defined in section 1297), a deduction shall be 
     allowable to the issuer with respect to such original issue 
     discount for any taxable year before the taxable year in 
     which paid only to the extent such original issue discount 
     (reduced by properly allowable deductions and qualified 
     deficits under section 952(c)(1)(B)) is includible during 
     such prior taxable year in the gross income of a United 
     States person who owns (within the meaning of section 958(a)) 
     stock in such corporation.
       ``(ii) Secretarial authority.--The Secretary may by 
     regulation exempt transactions from the application of clause 
     (i), including any transaction which is entered into by a 
     payor in the ordinary course of a trade or business in which 
     the payor is predominantly engaged.''.
       (b) Interest and Other Deductible Amounts.--Section 
     267(a)(3) is amended--
       (1) by striking ``The Secretary'' and inserting:
       ``(A) In general.--The Secretary'', and
       (2) by adding at the end the following new subparagraph:
       ``(B) Special rule for certain foreign entities.--
       ``(i) In general.--Notwithstanding subparagraph (A), in the 
     case of any item payable to a foreign personal holding 
     company (as defined in section 552), a controlled foreign 
     corporation (as defined in section 957), or a passive foreign 
     investment company (as defined in section 1297), a deduction 
     shall be allowable to the payor with respect to such amount 
     for any taxable year before the taxable year in which paid 
     only to the extent that an amount attributable to such item 
     (reduced by properly allowable deductions and qualified 
     deficits under section 952(c)(1)(B)) is includible during 
     such prior taxable year in the gross income of a United 
     States person who owns (within the meaning of section 958(a)) 
     stock in such corporation.

[[Page 6509]]

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

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

     Clause (i) shall apply to any gain recognized on any 
     disposition to which this clause applies.
       ``(iv) Controlled foreign corporation.--For purposes of 
     this subparagraph, the term `controlled foreign corporation' 
     has the meaning given such term by section 957.
       ``(v) Stock ownership.--For purposes of this subparagraph, 
     ownership of stock shall be determined under the rules of 
     subsections (a) and (b) of section 958.
       (b) Effective Date.--The amendment made by this section 
     shall apply to dispositions after the date of the enactment 
     of this Act.

     SEC. 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 PARTNERS 
                   WHICH ARE C 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) Allocations to certain corporate partners.--If a C 
     corporation is a partner in a partnership--
       ``(A) 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
       ``(B) 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:
       ``(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

[[Page 6510]]

       ``(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.--Paragraph (3) of section 1092(d) (relating 
     to definitions and special rules) is amended to read as 
     follows:
       ``(3) Special rules for stock.--For purposes of paragraph 
     (1)--
       ``(A) In general.--The term `personal property' includes--
       ``(i) any stock which is a part of a straddle at least 1 of 
     the offsetting positions of which is a position with respect 
     to such stock or substantially similar or related property, 
     or
       ``(ii) any stock of a corporation formed or availed of to 
     take positions in personal property which offset positions 
     taken by any shareholder.
       ``(B) Rule for application.--For purposes of determining 
     whether subsection (e) applies to any transaction with 
     respect to stock described in subparagraph (A)(ii), all 
     includible corporations of an affiliated group (within the 
     meaning of section 1504(a)) shall be treated as 1 
     taxpayer.''.
       (2) Conforming amendment.--Section 1258(d)(1) is amended by 
     striking ``; except that the term `personal property' shall 
     include stock''.
       (d) Modifications of Qualified Covered Call Exception.--
       (1) Markets on which options may be traded.--
       (A) In general.--Section 1092(c)(4)(B)(i) is amended by 
     striking ``or other market which the Secretary determines has 
     rules adequate to carry out the purposes of this paragraph''.
       (B) Regulations.--Section 1092(c)(4)(H) is amended by 
     adding at the end the following new sentence: ``Such 
     regulations shall not add any exchange or market not 
     described in subparagraph (B)(i) to the exchanges or markets 
     on which qualified covered call options may be traded.''
       (2) Holding period for dividend exclusion.--The last 
     sentence of section 246(c) is amended by inserting: ``, other 
     than a qualified covered call option to which section 1092(f) 
     applies'' before the period at the end.
       (e) Effective Date.--The amendments made by this section 
     shall apply to positions established on or after the date of 
     the enactment of this Act.

     SEC. 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

[[Page 6511]]

     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 
     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 755(c), as added by this Act, is amended by 
     striking ``section 734(b)'' and inserting ``section 734(a)''.
       (4) Section 761(e)(2) is amended by striking ``optional''.
       (5) Section 774(a) is amended by striking ``743(b)'' both 
     places it appears and inserting ``743(a)''.
       (6) 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''.
       (7) 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. 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. 473. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN 
                   PASSENGER AUTOMOBILES.

       (a) In General.--Section 179(b) of the Internal Revenue 
     Code of 1986 (relating to limitations) is amended by adding 
     at the end the following new paragraph:
       ``(6) Limitation on cost taken into account for certain 
     passenger vehicles.--
       ``(A) In general.--The cost of any sport utility vehicle 
     for any taxable year which may be taken into account under 
     this section shall not exceed $25,000.
       ``(B) Sport utility vehicle.--For purposes of subparagraph 
     (A)--
       ``(i) In general.--The term `sport utility vehicle' means 
     any 4-wheeled vehicle--

       ``(I) which is primarily designed or which can be used to 
     carry passengers over public streets, roads, or highways 
     (except any vehicle operated exclusively on a rail or rails),
       ``(II) which is not subject to section 280F, and
       ``(III) which is rated at not more than 14,000 pounds gross 
     vehicle weight.

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

       ``(I) is designed to have a seating capacity of more than 9 
     persons behind the driver's seat,
       ``(II) is equipped with a cargo area of at least 6 feet in 
     interior length which is an open area or is designed for use 
     as an open area but is enclosed by a cap and is not readily 
     accessible directly from the passenger compartment, or
       ``(III) has an integral enclosure, fully enclosing the 
     driver compartment and load carrying device, does not have 
     seating rearward of the driver's seat, and has no body 
     section protruding more than 30 inches ahead of the leading 
     edge of the windshield.''.

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

     SEC. 474. 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--

[[Page 6512]]

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

     SEC. 475. REFORM OF TAX TREATMENT OF LEASING OPERATIONS.

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

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

       (d) Effective Date.--The amendments made by this section 
     shall apply to leases entered into after December 31, 2003.

     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. LIMITATIONS ON LOSSES FROM TAX-EXEMPT USE 
                   PROPERTY.

       ``(a) Limitation on Losses.--Except as otherwise provided 
     in this section, a tax-exempt use loss for any taxable year 
     shall not be allowed.
       ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt 
     use loss with respect to any tax-exempt use property which is 
     disallowed under subsection (a) for any taxable year shall be 
     treated as a deduction with respect to such property in the 
     next taxable year.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Tax-exempt use loss.--The term `tax-exempt use loss' 
     means, with respect to any taxable year, the amount (if any) 
     by which--
       ``(A) the sum of--
       ``(i) the aggregate deductions (other than interest) 
     directly allocable to a tax-exempt use property, plus
       ``(ii) the aggregate deductions for interest properly 
     allocable to such property, exceed
       ``(B) the aggregate income from such property.
       ``(2) Tax-exempt use property.--The term `tax-exempt use 
     property' has the meaning given to such term by section 
     168(h) (without regard to paragraph (1)(C) or (3) thereof and 
     determined as if property described in section 167(f)(1)(B) 
     were tangible property). Such term shall not include property 
     with respect to which the credit under section 42 is allowed 
     and which, but for this sentence, would be tax-exempt 
     property solely by reason of section 168(h)(6).
       ``(d) Exception for Certain Leases.--This section shall not 
     apply to any lease of property which meets the requirements 
     of all of the following paragraphs:
       ``(1) Property not financed with tax-exempt bonds or 
     federal funds.--A lease of property meets the requirements of 
     this paragraph if no part of the property was financed 
     (directly or indirectly) from--
       ``(A) the proceeds of an obligation the interest on which 
     is exempt from tax under section 103(a) and which (or any 
     refunding bond of which) is outstanding when the lease is 
     entered into, or
       ``(B) Federal funds.

     The Secretary may by regulations provide for a de minimis 
     exception from this paragraph.
       ``(2) Availability of funds.--
       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if (at any time during the 
     lease term) not more than an allowable amount of funds are--
       ``(i) subject to any arrangement referred to in 
     subparagraph (B), or
       ``(ii) set aside or expected to be set aside,

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

       ``(I) a loan from the lessee to the lessor or a lender,
       ``(II) any deposit, letter of credit, or payment 
     undertaking agreement involving a lender, or
       ``(III) any credit support made available to the lessor in 
     which a lender (if any) does not have a claim which is senior 
     to the lessor.

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

     Subparagraphs (A)(ii) and (B) shall not apply if the lease 
     term is described in section 168(h)(1)(C)(ii), or in the case 
     of qualified technological equipment, is described in section 
     168(h)(3). For purposes of subparagraph (B), the fair market 
     value at the end of the lease term shall be reduced to the 
     extent that a person other than the lessor bears a risk of 
     loss in the value of the property.
       ``(4) Lessee may not bear more than minimal risk of loss.--

[[Page 6513]]

       ``(A) In general.--A lease of property meets the 
     requirements of this paragraph if there is no arrangement 
     under which more than a minimal risk of loss (as determined 
     under regulations) in the value of the property is borne by 
     the lessee.
       ``(B) Certain arrangements fail requirement.--In no event 
     will the requirements of this paragraph be met if there is 
     any arrangement under which the lessee bears--
       ``(i) any portion of the loss that would occur if the fair 
     market value of the leased property were 25 percent less than 
     its reasonably expected fair market value at the time the 
     lease is terminated, or
       ``(ii) more than 50 percent of the loss that would occur if 
     the fair market value of the leased property at the time the 
     lease is terminated were zero.
       ``(5) Property with more than 7-year class life.--In the 
     case of a lease--
       ``(A) of property with a class life (as defined in section 
     168(i)(1)) of more than 7 years, and
       ``(B) under which the lessee has the option to purchase the 
     property,

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

``Sec. 470. Limitations on losses from tax-exempt use property.''

       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to leases entered into after November 18, 2003.
       (2) Leases to foreign entities.--In the case of tax-exempt 
     use property leased to a tax-exempt entity which is a foreign 
     person or entity, the amendments made by this section shall 
     apply to taxable years beginning after December 31, 2004, 
     with respect to leases entered into on or before November 18, 
     2003.

                   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) Determination of Penalty.--
       (1) In general.--Notwithstanding any other provision of 
     law, in the case of an applicable taxpayer--
       (A) the determination as to whether any interest or 
     applicable penalty is to be imposed with respect to any 
     arrangement to which any initiative described in paragraph 
     (2) applied, or to any underpayment of Federal income tax 
     attributable to items arising in connection with any 
     arrangement described in paragraph (2), shall be made without 
     regard to section 6664 of the Internal Revenue Code of 1986, 
     and
       (B) if any such interest or applicable penalty is imposed, 
     the amount of such interest or penalty shall be equal to 
     twice that determined without regard to this section.
       (2) Applicable taxpayer.--For purposes of this subsection, 
     the term ``applicable taxpayer'' means 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).
       (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 1, 2005'' 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

[[Page 6514]]

     amended by adding at the end the following new section:

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

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

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

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

     SEC. 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:

[[Page 6515]]

       ``(e) Individuals Performing Services Under a Qualified Tax 
     Collection Contract.--An individual shall cease to be 
     permitted to perform any services under any qualified tax 
     collection contract (as defined in section 6306(b) of the 
     Internal Revenue Code of 1986) if there is a final 
     determination by the Secretary of the Treasury under such 
     contract that such individual committed any act or omission 
     described under subsection (b) in connection with the 
     performance of such services.''.
       (e) Effective Date.--The amendments made to this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 488. WHISTLEBLOWER REFORMS.

       (a) In General.--Section 7623 (relating to expenses of 
     detection of underpayments and fraud, etc.) is amended--
       (1) by striking ``The Secretary'' and inserting ``(a) In 
     General.--The Secretary'',
       (2) by striking ``and'' at the end of paragraph (1) and 
     inserting ``or'',
       (3) by striking ``(other than interest)'', and
       (4) by adding at the end the following new subsections:
       ``(b) Awards to Whistleblowers.--
       ``(1) In general.--If the Secretary proceeds with any 
     administrative or judicial action described in subsection (a) 
     based on information brought to the Secretary's attention by 
     an individual, such individual shall, subject to paragraph 
     (2), receive as an award at least 15 percent but not more 
     than 30 percent of the proceeds (including penalties and 
     interest) resulting from the action (including any related 
     actions) or from any settlement in response to such action. 
     The determination of the amount of such award by the 
     Whistleblower Office shall depend upon the extent to which 
     the individual substantially contributed to such action.
       ``(2) Award in case of less substantial contribution.--In 
     the event the action described in paragraph (1) is one which 
     the Whistleblower Office determines to be based primarily on 
     disclosures of specific information (other than information 
     provided by the individual described in paragraph (1)) 
     resulting from a judicial or administrative hearing, from a 
     governmental report, hearing, audit, or investigation, or 
     from the news media, the Whistleblower Office may award such 
     sums as it considers appropriate, but in no case more than 10 
     percent of the proceeds (including penalties and interest) 
     resulting from the action (including any related actions) or 
     from any settlement in response to such action, taking into 
     account the significance of the individual's information and 
     the role of such individual in contributing to such action. 
     This paragraph shall not apply if the information resulting 
     in the initiation of such action was originally provided by 
     such individual.
       ``(3) Appeal of award determination.--Any determination 
     regarding an award under paragraph (1) or (2) shall be 
     subject to the filing by the individual described in such 
     paragraph of a petition for review with the Tax Court under 
     rules similar to the rules under section 7463 (without regard 
     to the amount in dispute) and such review shall be subject to 
     the rules under section 7461(b)(1).
       ``(4) Application of this subsection.--This subsection 
     shall apply with respect to any action--
       ``(A) against any taxpayer, but in the case of any 
     individual, only if such individual's gross income exceeds 
     $200,000 for the taxable year subject to such action, and
       ``(B) if the tax (including penalties and interest) in 
     dispute exceeds $20,000.
       ``(5) Additional rules.--
       ``(A) No contract necessary.--No contract with the Internal 
     Revenue Service is necessary for any individual to receive an 
     award under this subsection.
       ``(B) Representation.--Any individual described in 
     paragraph (1) or (2) may be represented by counsel.
       ``(C) Award not subject to individual alternative minimum 
     tax.--No award received under this subsection shall be 
     included in gross income for purposes of determining 
     alternative minimum taxable income.
       ``(c) Whistleblower Office.--
       ``(1) In general.--There is established in the Internal 
     Revenue Service an office to be known as the `Whistleblower 
     Office' which--
       ``(A) shall analyze information received from any 
     individual described in subsection (b) and either investigate 
     the matter itself or assign it to the appropriate Internal 
     Revenue Service office,
       ``(B) shall monitor any action taken with respect to such 
     matter,
       ``(C) shall inform such individual that it has accepted the 
     individual's information for further review, may ask for 
     additional assistance from such individual, and may require 
     such individual to not disclose any information so provided,
       ``(D) shall determine the amount to be awarded to such 
     individual under subsection (b).
       ``(2) Funding for office.--From the amounts available for 
     expenditure under subsection (a), the budget of the 
     Whistleblower Office shall be credited with an amount equal 
     to 20 percent of the awards made under subsection (b). These 
     funds shall be used to maintain the Whistleblower Office and 
     also to reimburse other Internal Revenue Service offices for 
     related costs, such as costs of investigation and collection. 
     Such funds may also be used to contract with or reimburse the 
     legal representatives of any such individual to provide 
     assistance in pursuing the actions described in subsection 
     (a).
       (b) Effective Date.--The amendments made by this section 
     shall apply to information provided on or after 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 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)(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, or
       ``(ii) in the case of a mutual insurance company--
       ``(I) the gross receipts of which for the taxable year do 
     not exceed $150,000, and
       ``(II) more than 35 percent of such gross receipts consist 
     of premiums.

     Clause (ii) shall not apply to a company if any employee of 
     the company, or a member of the employee's family (as defined 
     in section 2032A(e)(2)), is an employee of another company 
     exempt from taxation by reason of this paragraph (or would be 
     so exempt but for this sentence).''.
       (b) Controlled Group Rule.--Section 501(c)(15)(C) is 
     amended by inserting ``, except that in applying section 
     831(b)(2)(B)(ii) for purposes of this subparagraph, 
     subparagraphs (B) and (C) of section 1563(b)(2) shall be 
     disregarded'' before the period at the end.
       (c) Definition of Insurance Company for Section 831.--
     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)).''.
       (d) Conforming Amendment.--Clause (i) of section 
     831(b)(2)(A) is amended by striking ``exceed $350,000 but''.
       (e) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2003.
       (2) Transition rule for companies in receivership or 
     liquidation.--In the case of a company or association which--
       (A) for the taxable year which includes April 1, 2004, 
     meets the requirements of section 501(c)(15)(A) of the 
     Internal Revenue Code of 1986, as in effect for the taxable 
     year beginning before January 1, 2004, and
       (B) on April 1, 2004, is in a receivership, liquidation, or 
     similar proceeding under the supervision of a State court,

     the amendments made by this section shall apply to taxable 
     years beginning after the earlier of the date such proceeding 
     ends or December 31, 2007.

     SEC. 494. 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:

[[Page 6516]]

       ``(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. 495. 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. 496. INCREASE IN AGE OF MINOR CHILDREN WHOSE UNEARNED 
                   INCOME IS TAXED AS IF PARENT'S INCOME.

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

     SEC. 497. HOLDING PERIOD FOR PREFERRED STOCK.

       (a) In General.--Section 1(h)(11)(B)(iii)(I) is amended to 
     read as follows:

       ``(I) with respect to which the holding period requirements 
     of section 246(c) are not met, determined by substituting `60 
     days' for `45' days each place it appears, by substituting 
     `120-day' for `90-day' each place it appears, and by 
     substituting `120 days' for `90 days' and `240-day' for `180-
     day' in paragraph (2).''

       (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 V--PROTECTION OF UNITED STATES WORKERS FROM COMPETITION OF 
                           FOREIGN WORKFORCES

     SEC. 501. LIMITATIONS ON OFF-SHORE PERFORMANCE OF CONTRACTS.

       (a) Limitations.--
       (1) In general.--The Office of Federal Procurement Policy 
     Act (41 U.S.C. 403 et seq.) is amended by adding at the end 
     the following new section:

     ``SEC. 42. LIMITATIONS ON OFF-SHORE PERFORMANCE OF CONTRACTS.

       ``(a) Conversions to Contractor Performance of Federal 
     Activities.--An activity or function of an executive agency 
     that is converted to contractor performance under Office of 
     Management and Budget Circular A-76 may not be performed by 
     the contractor or any subcontractor at a location outside the 
     United States except to the extent that such activity or 
     function was previously performed by Federal Government 
     employees outside the United States.
       ``(b) Other Federal Contracts.--(1) A contract that is 
     entered into by the head of an executive agency may not be 
     performed outside the United States except to meet a 
     requirement of the executive agency for the contract to be 
     performed specifically at a location outside the United 
     States.
       ``(2) The prohibition in paragraph (1) does not apply in 
     the case of a contract of an executive agency if--
       ``(A) the President determines in writing that it is 
     necessary in the national security interests of the United 
     States for the contract to be performed outside the United 
     States; or
       ``(B) the head of such executive agency makes a 
     determination and reports such determination on a timely 
     basis to the Director of the Office of Management and Budget 
     that--
       ``(i) the property or services needed by the executive 
     agency are available only by means of performance of the 
     contract outside the United States; and
       ``(ii) no property or services available by means of 
     performance of the contract inside the United States would 
     satisfy the executive agency's need.
       ``(3) Paragraph (1) does not apply to the performance of a 
     contract outside the United States under the exception 
     provided in subsection (a).
       ``(c) State Contracts.--(1) Except as provided in paragraph 
     (2), funds appropriated for financial assistance for a State 
     may not be disbursed to or for such State during a fiscal 
     year unless the chief executive of that State has transmitted 
     to the Administrator for Federal Procurement Policy, not 
     later than April 1 of the preceding fiscal year, a written 
     certification that none of such funds will be expended for 
     the performance outside the United States of contracts 
     entered into by such State.
       ``(2) The prohibition on disbursement of funds to or for a 
     State under paragraph (1) does not apply with respect to the 
     performance of a State contract outside the United States 
     if--
       ``(A) the chief executive of such State--
       ``(i) determines that the property or services needed by 
     the State are available only by means of performance of the 
     contract outside the United States and no property or 
     services available by means of performance of the contract 
     inside the United States would satisfy the State's need; and
       ``(ii) transmits a notification of such determination to 
     the head of the executive agency of the United States that 
     administers the authority under which such funds are 
     disbursed to or for the State; and

[[Page 6517]]

       ``(B) the head of the executive agency receiving the 
     notification of such determination--
       ``(i) confirms that the facts warrant the determination;
       ``(ii) approves the determination; and
       ``(iii) transmits a notification of the approval of the 
     determination to the Director of the Office of Management and 
     Budget.
       ``(3) In this subsection, the term `State' means each of 
     the several States of the United States, the District of 
     Columbia, the Commonwealth of Puerto Rico, the Commonwealth 
     of the Northern Mariana Islands, the Virgin Islands, Guam, 
     American Samoa, and the Trust Territory of the Pacific 
     Islands.
       ``(d) Subsections (b) and (c) shall not apply to 
     procurement covered by the World Trade Organization 
     Government Procurement Agreement.
       ``(e) National Security Exemption.--Subsection (b) shall 
     not apply to any procurement for national security purposes 
     entered into by--
       ``(1) the Department of Defense or any agency or entity 
     thereof;
       ``(2) the Department of the Army, the Department of the 
     Navy, the Department of the Air Force, or any agency or 
     entity of any of the military departments;
       ``(3) the Department of Homeland Security;
       ``(4) the Department of Energy or any agency or entity 
     thereof, with respect to the national security programs of 
     that Department; or
       ``(5) any element of the intelligence community.
       ``(f) Responsibilities of OMB.--The Director of the Office 
     of Management and Budget shall--
       ``(1) maintain--
       ``(A) the waivers granted under subsection (b)(2), together 
     with the determinations and certifications on which such 
     waivers were based; and
       ``(B) the notifications received under subsection 
     (c)(2)(B)(iii); and
       ``(2) submit to Congress promptly after the end of each 
     quarter of each fiscal year a report that sets forth--
       ``(A) the waivers that were granted under subsection (b)(2) 
     during such quarter; and
       ``(B) the notifications that were received under subsection 
     (c)(2)(B)(iii) during such quarter.
       ``(g) Annual GAO Review.--The Comptroller General shall--
       ``(1) review, each fiscal year, the waivers granted during 
     such fiscal year under subsection (b)(2) and the 
     disbursements of funds authorized pursuant to the exceptions 
     in subsections (c)(2) and (e); and
       ``(2) promptly after the end of such fiscal year, transmit 
     to Congress a report containing a list of the contracts 
     covered by such waivers and exception together with a brief 
     description of the performance of each such contract to the 
     maximum extent feasible outside the United States.''.
       (2) Clerical amendment.--The table of sections in section 
     1(b) of such Act is amended by adding at the end the 
     following new item:

``Sec. 42. Limitations on off-shore performance of contracts.''.

       (b) Inapplicability to States During First Two Fiscal 
     Years.--Section 42(c) of the Office of Federal Procurement 
     Policy Act (as added by subsection (a)) shall not apply to 
     disbursements of funds to a State during the fiscal year in 
     which this Act is enacted and the next fiscal year.

     SEC. 502. REPEAL OF SUPERSEDED LAW.

       Section 647 of the Transportation, Treasury, and 
     Independent Agencies Appropriations Act, 2004 (division F of 
     Public Law 108-199) is amended by striking subsection (e).

     SEC. 503. EFFECTIVE DATE AND APPLICABILITY.

       (a) In General.--This title and the amendments made by this 
     title shall take effect 30 days after the Secretary of 
     Commerce certifies that the amendments made by this title 
     will not result in the loss of more jobs than it will protect 
     and will not cause harm to the United States economy. The 
     initial certification shall be made by the Secretary of 
     Commerce no later than 90 days after the enactment of this 
     Act. Such certification must be renewed on or before January 
     1 of each year in order for the amendments made by this title 
     to be in effect for that year.
       (b) Consistency With International Agreements.--The 
     provisions of this title shall not apply to the extent that 
     they may be inconsistent with obligations under international 
     agreements. Within 90 days of this legislation, the Office of 
     Management and Budget, in consultation with the Office of the 
     United States Trade Representative, shall develop guidelines 
     for the implementation of this provision.

                       TITLE VI--OTHER PROVISIONS

               Subtitle A--Provisions Relating to Housing

     SEC. 601. TREATMENT OF QUALIFIED MORTGAGE BONDS.

       (a) Year Holiday.--Section 143(a)(2)(A)(iv) of the Internal 
     Revenue Code of 1986 shall not apply to amounts received 
     during the 1-year period beginning on the date of the 
     enactment of this Act with respect to any bond outstanding on 
     such date.
       (b) Repeal of Required Use of Certain Principal Repayments 
     on Mortgage Subsidy Bond Financings To Redeem Bonds.--
       (1) In general.--Subparagraph (A) of section 143(a)(2) 
     (defining qualified mortgage issue) is amended by adding 
     ``and'' at the end of clause (ii), by striking ``, and'' at 
     the end of clause (iii) and inserting a period, and by 
     striking clause (iv) and the last sentence.
       (2) Conforming amendment.--Clause (ii) of section 
     143(a)(2)(D) is amended by striking ``(and clause (iv) of 
     subparagraph (A))''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to bonds originally issued after the date of the 
     enactment of this Act.

     SEC. 602. PREMIUMS FOR MORTGAGE INSURANCE.

       (a) In General.--Paragraph (3) of section 163(h) (relating 
     to qualified residence interest) is amended by adding after 
     subparagraph (D) the following new subparagraph:
       ``(E) Mortgage insurance premiums treated as interest.--
       ``(i) In general.--Premiums paid or accrued for qualified 
     mortgage insurance by a taxpayer during the taxable year in 
     connection with acquisition indebtedness with respect to a 
     qualified residence of the taxpayer shall be treated for 
     purposes of this subsection as qualified residence interest.
       ``(ii) Phaseout.--The amount otherwise allowable as a 
     deduction under clause (i) shall be reduced (but not below 
     zero) by 10 percent of such amount for each $1,000 ($500 in 
     the case of a married individual filing a separate return) 
     (or fraction thereof) that the taxpayer's adjusted gross 
     income for the taxable year exceeds $100,000 ($50,000 in the 
     case of a married individual filing a separate return).''.
       (b) Definition and Special Rules.--Paragraph (4) of section 
     163(h) (relating to other definitions and special rules) is 
     amended by adding at the end the following new subparagraphs:
       ``(E) Qualified mortgage insurance.--The term `qualified 
     mortgage insurance' means--
       ``(i) the Home Loan Guaranty Program of the Department of 
     Veterans Affairs, and mortgage insurance provided by the 
     Federal Housing Administration or the Rural Housing 
     Administration, and
       ``(ii) private mortgage insurance (as defined by section 2 
     of the Homeowners Protection Act of 1998 (12 U.S.C. 4901), as 
     in effect on the date of the enactment of this subparagraph).
       ``(F) Special rules for prepaid qualified mortgage 
     insurance.--Any amount paid by the taxpayer for qualified 
     mortgage insurance that is properly allocable to any mortgage 
     the payment of which extends to periods that are after the 
     close of the taxable year in which such amount is paid shall 
     be chargeable to capital account and shall be treated as paid 
     in such periods to which so allocated. No deduction shall be 
     allowed for the unamortized balance of such account if such 
     mortgage is satisfied before the end of its term. The 
     preceding sentences shall not apply to amounts paid for 
     qualified mortgage insurance provided by the Department of 
     Veterans Affairs or the Rural Housing Administration.''.
       (c) Information Returns Relating to Mortgage Insurance.--
     Section 6050H (relating to returns relating to mortgage 
     interest received in trade or business from individuals) is 
     amended by adding at the end the following new subsection:
       ``(h) Returns Relating to Mortgage Insurance Premiums.--
       ``(1) In general.--The Secretary may prescribe, by 
     regulations, that any person who, in the course of a trade or 
     business, receives from any individual premiums for mortgage 
     insurance aggregating $600 or more for any calendar year, 
     shall make a return with respect to each such individual. 
     Such return shall be in such form, shall be made at such 
     time, and shall contain such information as the Secretary may 
     prescribe.
       ``(2) Statement to be furnished to individuals with respect 
     to whom information is required.--Every person required to 
     make a return under paragraph (1) shall furnish to each 
     individual with respect to whom a return is made a written 
     statement showing such information as the Secretary may 
     prescribe. Such written statement shall be furnished on or 
     before January 31 of the year following the calendar year for 
     which the return under paragraph (1) was required to be made.
       ``(3) Special rules.--For purposes of this subsection--
       ``(A) rules similar to the rules of subsection (c) shall 
     apply, and
       ``(B) the term `mortgage insurance' means--
       ``(i) the Home Loan Guaranty Program of the Department of 
     Veterans Affairs, and mortgage insurance provided by the 
     Federal Housing Administration or the Rural Housing 
     Administration, and
       ``(ii) private mortgage insurance (as defined by section 2 
     of the Homeowners Protection Act of 1998 (12 U.S.C. 4901), as 
     in effect on the date of the enactment of this 
     subparagraph).''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or accrued in taxable years 
     beginning after December 31, 2004, and ending before January 
     1, 2006.

[[Page 6518]]



     SEC. 603. INCREASE IN HISTORIC REHABILITATION CREDIT FOR 
                   CERTAIN LOW-INCOME HOUSING FOR THE ELDERLY.

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

                Subtitle B--Provisions Relating to Bonds

     SEC. 611. EXPANSION OF NEW YORK LIBERTY ZONE TAX BENEFITS.

       (a) Additional Extension of Tax-Exempt Bond Financing.--
     Section 1400L(d)(2)(D), as amended by this Act, is amended by 
     striking ``2006'' and inserting ``2010''.
       (b) Extension of Advance Refundings.--Section 1400L(e)(1) 
     is amended by striking ``2005'' and inserting ``2006''.

     SEC. 612. MODIFICATIONS OF TREATMENT OF QUALIFIED ZONE 
                   ACADEMY BONDS.

       (a) Proceeds of Bonds May Be Used for Construction and Land 
     Acquisition.--Paragraph (5) of section 1397E(d) (defining 
     qualified purpose) is amended--
       (1) by striking ``rehabilitating or repairing'' in 
     subparagraph (A) and inserting ``constructing, 
     rehabilitating, or repairing'', and
       (2) by redesignating subparagraphs (B), (C), and (D) as 
     subparagraphs (C), (D), and (E), respectively, and by 
     inserting after subparagraph (A) the following:
       ``(B) acquiring the land on which the facility is to be 
     constructed,''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to obligations issued after December 31, 2003.

     SEC. 613. MODIFICATIONS OF AUTHORITY OF INDIAN TRIBAL 
                   GOVERNMENTS TO ISSUE TAX-EXEMPT BONDS.

       (a) In General.--Paragraph (1) of section 7871(c) (relating 
     to Indian tribal governments treated as States for certain 
     purposes) is amended to read as follows:
       ``(1) In general.--Subsection (a) of section 103 shall 
     apply to any obligation issued by an Indian tribal government 
     (or subdivision thereof) only if--
       ``(A) such obligation--
       ``(i) is part of an issue 95 percent or more of the net 
     proceeds of which are to be used to finance any facility 
     located on an Indian reservation, and
       ``(ii) is issued before January 1, 2006, or
       ``(B) such obligation is part of an issue substantially all 
     of the proceeds of which are to be used in the exercise of 
     any essential governmental function.''.
       (b) Special Rules and Definitions.--Subsection (c) of 
     section 7871 is amended by inserting at the end the following 
     new paragraph:
       ``(4) Special rules and definitions.--
       ``(A) Exclusion of gaming.--An obligation described in 
     subparagraph (A) or (B) of paragraph (1) may not be used to 
     finance any portion of a building in which class II or III 
     gaming (as defined in section 4 of the Indian Gaming 
     Regulatory Act (25 U.S.C. 2702)) is conducted or housed.
       ``(B) Indian reservation.--For purposes of paragraph (1), 
     the term `Indian reservation' means--
       ``(i) a reservation, as defined in section 4(10) of the 
     Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)), and
       ``(ii) lands held under the provisions of the Alaska Native 
     Claims Settlement Act (43 U.S.C. 1601 et seq.) by a Native 
     corporation as defined in section 3(m) of such Act (43 U.S.C. 
     1602(m)).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to obligations issued after the date of the 
     enactment of this Act.

     SEC. 614. DEFINITION OF MANUFACTURING FACILITY FOR SMALL 
                   ISSUE BONDS.

       (a) In General.--Section 144(a)(12) (relating to 
     termination dates) is amended by striking subparagraph (C) 
     and inserting the following new subparagraphs:
       ``(C) Manufacturing facility.--For purposes of this 
     paragraph, the term `manufacturing facility' means any 
     facility which is used in--
       ``(i) the manufacture of tangible personal property 
     (including processing which results in a change in the 
     condition of such property),
       ``(ii) the manufacture or development of any software 
     product or process if--

       ``(I) it takes more than 6 months to manufacture or develop 
     such product,
       ``(II) the manufacture or development could not with due 
     diligence be reasonably expected to occur in less than 6 
     months, and
       ``(III) the software product or process comprises programs, 
     routines, and attendant documentation developed and 
     maintained for use in computer and telecommunications 
     technology, or

       ``(iii) the manufacture or development of any biobased 
     product or bioenergy if--

       ``(I) it takes more than 6 months to manufacture or 
     develop, and
       ``(II) the manufacture or development could not with due 
     diligence be reasonably expected to occur in less than 6 
     months.

       ``(D) Related facilities.--For purposes of subparagraph 
     (C), the term `manufacturing facility' includes a facility 
     which is directly and functionally related to a manufacturing 
     facility (determined without regard to subparagraph (C)) if--
       ``(i) such facility, including an office facility and a 
     research and development facility, is located on the same 
     site as the manufacturing facility, and
       ``(ii) not more than 40 percent of the net proceeds of the 
     issue are used to provide such facility.
       ``(E) Other definitions.--For purposes of subparagraph 
     (C)(iii)--
       ``(i) Biobased product.--The term `biobased product' means 
     a commercial or industrial product (other than food or feed) 
     which utilizes biological products or renewable domestic 
     agricultural (plant, animal, and marine) or forestry 
     materials.
       ``(ii) Bioenergy.--The term `bioenergy' means biomass used 
     in the production of energy, including liquid, solid, or 
     gaseous fuels, electricity, and heat.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to obligations issued after the date of the 
     enactment of this Act.

     SEC. 615. CONSERVATION BONDS.

       (a) Tax-Exempt Bond Financing.--
       (1) In general.--For purposes of the Internal Revenue Code 
     of 1986, any qualified forest conservation bond shall be 
     treated as an exempt facility bond under section 142 of such 
     Code.
       (2) Qualified forest conservation bond.--For purposes of 
     this section, the term ``qualified forest conservation bond'' 
     means any bond issued as part of an issue if--
       (A) 95 percent or more of the net proceeds (as defined in 
     section 150(a)(3) of such Code) of such issue are to be used 
     for qualified project costs,
       (B) such bond is issued for a qualified organization, and
       (C) such bond is issued before December 31, 2006.
       (3) Limitation on aggregate amount issued.--
       (A) In general.--The maximum aggregate face amount of bonds 
     which may be issued under this subsection shall not exceed 
     $1,500,000,000 for all projects (excluding refunding bonds).
       (B) Allocation of limitation.--The limitation described in 
     subparagraph (A) shall be allocated by the Secretary of the 
     Treasury among qualified organizations based on criteria 
     established by the Secretary not later than 180 days after 
     the date of the enactment of this section, after consultation 
     with the Chief of the Forest Service.
       (4) Qualified project costs.--For purposes of this 
     subsection, the term ``qualified project costs'' means the 
     sum of--
       (A) the cost of acquisition by the qualified organization 
     from an unrelated person of forests and forest land which at 
     the time of acquisition or immediately thereafter are subject 
     to a conservation restriction described in subsection (c)(2),
       (B) capitalized interest on the qualified forest 
     conservation bonds for the 3-year period beginning on the 
     date of issuance of such bonds, and
       (C) credit enhancement fees which constitute qualified 
     guarantee fees (within the meaning of section 148 of such 
     Code).
       (5) Special rules.--In applying the Internal Revenue Code 
     of 1986 to any qualified forest conservation bond, the 
     following modifications shall apply:
       (A) Section 146 of such Code (relating to volume cap) shall 
     not apply.
       (B) For purposes of section 147(b) of such Code (relating 
     to maturity may not exceed 120 percent of economic life), the 
     land and standing timber acquired with proceeds of qualified 
     forest conservation bonds shall have an economic life of 35 
     years.
       (C) Subsections (c) and (d) of section 147 of such Code 
     (relating to limitations on acquisition of land and existing 
     property) shall not apply.
       (D) Section 57(a)(5) of such Code (relating to tax-exempt 
     interest) shall not apply to interest on qualified forest 
     conservation bonds.
       (6) Treatment of current refunding bonds.--Paragraphs 
     (2)(C) and (3) shall not apply to any bond (or series of 
     bonds) issued to refund a qualified forest conservation bond 
     issued before December 31, 2006, if--
       (A) the average maturity date of the issue of which the 
     refunding bond is a part is not later than the average 
     maturity date of the bonds to be refunded by such issue,
       (B) the amount of the refunding bond does not exceed the 
     outstanding amount of the refunded bond, and

[[Page 6519]]

       (C) the net proceeds of the refunding bond are used to 
     redeem the refunded bond not later than 90 days after the 
     date of the issuance of the refunding bond.

     For purposes of subparagraph (A), average maturity shall be 
     determined in accordance with section 147(b)(2)(A) of such 
     Code.
       (7) Effective date.--This subsection shall apply to 
     obligations issued on or after the date which is 180 days 
     after the enactment of this Act.
       (b) Items From Qualified Harvesting Activities Not Subject 
     to Tax or Taken Into Account.--
       (1) In general.--Income, gains, deductions, losses, or 
     credits from a qualified harvesting activity conducted by a 
     qualified organization shall not be subject to tax or taken 
     into account under subtitle A of the Internal Revenue Code of 
     1986.
       (2) Limitation.--The amount of income excluded from gross 
     income under paragraph (1) for any taxable year shall not 
     exceed the amount used by the qualified organization to make 
     debt service payments during such taxable year for qualified 
     forest conservation bonds.
       (3) Qualified harvesting activity.--For purposes of 
     paragraph (1)--
       (A) In general.--The term ``qualified harvesting activity'' 
     means the sale, lease, or harvesting, of standing timber--
       (i) on land owned by a qualified organization which was 
     acquired with proceeds of qualified forest conservation 
     bonds,
       (ii) with respect to which a written acknowledgement has 
     been obtained by the qualified organization from the State or 
     local governments with jurisdiction over such land that the 
     acquisition lessens the burdens of such government with 
     respect to such land, and
       (iii) pursuant to a qualified conservation plan adopted by 
     the qualified organization.
       (B) Exceptions.--
       (i) Cessation as qualified organization.--The term 
     ``qualified harvesting activity'' shall not include any sale, 
     lease, or harvesting for any period during which the 
     organization ceases to qualify as a qualified organization.
       (ii) Exceeding limits on harvesting.--The term ``qualified 
     harvesting activity'' shall not include any sale, lease, or 
     harvesting of standing timber on land acquired with proceeds 
     of qualified forest conservation bonds to the extent that--

       (I) the average annual area of timber harvested from such 
     land exceeds 2.5 percent of the total area of such land or,
       (II) the quantity of timber removed from such land exceeds 
     the quantity which can be removed from such land annually in 
     perpetuity on a sustained-yield basis with respect to such 
     land.

     The limitations under subclauses (I) and (II) shall not apply 
     to post-fire restoration and rehabilitation or sanitation 
     harvesting of timber stands which are substantially damaged 
     by fire, windthrow, or other catastrophes, or which are in 
     imminent danger from insect or disease attack.
       (4) Termination.--This subsection shall not apply to any 
     qualified harvesting activity of a qualified organization 
     occurring after the date on which there is no outstanding 
     qualified forest conservation bond with respect to such 
     qualified organization or any such bond ceases to be a tax-
     exempt bond.
       (5) Partial recapture of benefits if harvesting limit 
     exceeded.--If, as of the date that this subsection ceases to 
     apply under paragraph (3), the average annual area of timber 
     harvested from the land exceeds the requirement of paragraph 
     (3)(B)(ii)(I), the tax imposed by chapter 1 of the Internal 
     Revenue Code of 1986 shall be increased, under rules 
     prescribed by the Secretary of the Treasury, by the sum of 
     the tax benefits attributable to such excess and interest at 
     the underpayment rate under section 6621 of such Code for the 
     period of the underpayment.
       (c) Definitions.--For purposes of this section--
       (1) Qualified conservation plan.--The term ``qualified 
     conservation plan'' means a multiple land use program or plan 
     which--
       (A) is designed and administered primarily for the purposes 
     of protecting and enhancing wildlife and fish, timber, scenic 
     attributes, recreation, and soil and water quality of the 
     forest and forest land,
       (B) mandates that conservation of forest and forest land is 
     the single-most significant use of the forest and forest 
     land, and
       (C) requires that timber harvesting be consistent with--
       (i) restoring and maintaining reference conditions for the 
     region's ecotype,
       (ii) restoring and maintaining a representative sample of 
     young, mid, and late successional forest age classes,
       (iii) maintaining or restoring the resources' ecological 
     health for purposes of preventing damage from fire, insect, 
     or disease,
       (iv) maintaining or enhancing wildlife or fish habitat, or
       (v) enhancing research opportunities in sustainable 
     renewable resource uses.
       (2) Conservation restriction.--The conservation restriction 
     described in this paragraph is a restriction which--
       (A) is granted in perpetuity to an unrelated person which 
     is described in section 170(h)(3) of such Code and which, in 
     the case of a nongovernmental unit, is organized and operated 
     for conservation purposes,
       (B) meets the requirements of clause (ii) or (iii)(II) of 
     section 170(h)(4)(A) of such Code,
       (C) obligates the qualified organization to pay the costs 
     incurred by the holder of the conservation restriction in 
     monitoring compliance with such restriction, and
       (D) requires an increasing level of conservation benefits 
     to be provided whenever circumstances allow it.
       (3) Qualified organization.--The term ``qualified 
     organization'' means an organization--
       (A) which is a nonprofit organization substantially all the 
     activities of which are charitable, scientific, or 
     educational, including acquiring, protecting, restoring, 
     managing, and developing forest lands and other renewable 
     resources for the long-term charitable, educational, 
     scientific and public benefit,
       (B) more than half of the value of the property of which 
     consists of forests and forest land acquired with the 
     proceeds from qualified forest conservation bonds,
       (C) which periodically conducts educational programs 
     designed to inform the public of environmentally sensitive 
     forestry management and conservation techniques,
       (D) which has at all times a board of directors--
       (i) at least 20 percent of the members of which represent 
     the holders of the conservation restriction described in 
     paragraph (2),
       (ii) at least 20 percent of the members of which are public 
     officials, and
       (iii) not more than one-third of the members of which are 
     individuals who are or were at any time within 5 years before 
     the beginning of a term of membership on the board, an 
     employee of, independent contractor with respect to, officer 
     of, director of, or held a material financial interest in, a 
     commercial forest products enterprise with which the 
     qualified organization has a contractual or other financial 
     arrangement,
       (E) the bylaws of which require at least two-thirds of the 
     members of the board of directors to vote affirmatively to 
     approve the qualified conservation plan and any change 
     thereto, and
       (F) upon dissolution, is required to dedicate its assets 
     to--
       (i) an organization described in section 501(c)(3) of such 
     Code which is organized and operated for conservation 
     purposes, or
       (ii) a governmental unit described in section 170(c)(1) of 
     such Code.
       (4) Unrelated person.--The term ``unrelated person'' means 
     a person who is not a related person.
       (5) Related person.--A person shall be treated as related 
     to another person if--
       (A) such person bears a relationship to such other person 
     described in section 267(b) (determined without regard to 
     paragraph (9) thereof), or 707(b)(1), of such Code, 
     determined by substituting ``25 percent'' for ``50 percent'' 
     each place it appears therein, and
       (B) in the case such other person is a non-profit 
     organization, if such person controls directly or indirectly 
     more than 25 percent of the governing body of such 
     organization.

     SEC. 616. INDIAN SCHOOL CONSTRUCTION.

       (a) Definitions.--In this section:
       (1) Bureau.--The term ``Bureau'' means the Bureau of Indian 
     Affairs of the Department.
       (2) Department.--The term ``Department'' means the 
     Department of the Interior.
       (3) Escrow account.--The term ``escrow account'' means the 
     tribal school modernization escrow account established under 
     subsection (b)(6)(B)(i).
       (4) Indian.--The term ``Indian'' means any individual who 
     is a member of an Indian tribe.
       (5) Indian tribe.--
       (A) In general.--The term ``Indian tribe'' has the meaning 
     given the term ``Indian tribal government'' by section 
     7701(a)(40) of the Internal Revenue Code of 1986 (including 
     the application of section 7871(d) of that Code).
       (B) Inclusion.--The term ``Indian tribe'' includes a 
     consortium of Indian tribes approved by the Secretary.
       (6) Secretary.--The term ``Secretary'' means the Secretary 
     of the Interior.
       (7) Tribal school.--The term ``tribal school'' means an 
     elementary school, secondary school, or dormitory that--
       (A) is operated by a tribal organization or the Bureau for 
     the education of Indian children; and
       (B) under a contract, a grant, or an agreement, or for a 
     Bureau-operated school, receives financial assistance to pay 
     the costs of operation from funds made available under--
       (i) section 102, 103(a), or 208 of the Indian Self-
     Determination and Education Assistance Act (25 U.S.C. 450f, 
     450h(a), 458d); or
       (ii) the Tribally Controlled Schools Act of 1988 (25 U.S.C. 
     2501 et seq.).
       (b) Issuance of Bonds.--
       (1) In general.--The Secretary shall establish a pilot 
     program under which eligible Indian tribes may issue 
     qualified tribal school modernization bonds to provide 
     funding for the construction, rehabilitation, or repair of 
     tribal schools (including the advance planning and design of 
     tribal schools).
       (2) Eligibility.--

[[Page 6520]]

       (A) In general.--To be eligible to issue any qualified 
     tribal school modernization bond under the program under 
     paragraph (1), an Indian tribe shall--
       (i) prepare and submit to the Secretary a plan of 
     construction that meets the requirements of subparagraph (B);
       (ii) provide for quarterly and final inspection of the 
     project by the Bureau; and
       (iii) pledge that the facilities financed by the bond will 
     be used primarily for elementary and secondary educational 
     purposes for not less than the period during which the bond 
     remains outstanding.
       (B) Plan of construction.--A plan of construction referred 
     to in subparagraph (A)(i) meets the requirements of this 
     subparagraph if the plan--
       (i) contains a description of the construction to be 
     carried out with funding provided under a qualified tribal 
     school modernization bond;
       (ii) demonstrates that a comprehensive survey has been 
     completed to determine the construction needs of the tribal 
     school involved;
       (iii) contains assurances that funding under the bond will 
     be used only for the activities described in the plan;
       (iv) contains a response to the evaluation criteria 
     contained in Instructions and Application for Replacement 
     School Construction, Revision 6, dated February 6, 1999; and
       (v) contains any other reasonable and related information 
     determined to be appropriate by the Secretary.
       (C) Priority.--In determining whether an Indian tribe is 
     eligible to participate in the program under this subsection, 
     the Secretary shall give priority to an Indian tribe that, as 
     demonstrated by the relevant plans of construction, will fund 
     projects--
       (i) described in the Education Facilities Replacement 
     Construction Priorities List, as of fiscal year 2000, of the 
     Bureau (65 Fed. Reg. 4623);
       (ii) described in any subsequent priorities list published 
     in the Federal Register; or
       (iii) that meet the criteria for ranking schools as 
     described in Instructions and Application for Replacement 
     School Construction, Revision 6, dated February 6, 1999.
       (D) Advance planning and design funding.--
       (i) In general.--An Indian tribe may propose in the plan of 
     construction of the Indian tribe to receive advance planning 
     and design funding from the escrow account.
       (ii) Conditions on allocation of funds.--As a condition to 
     the allocation to an Indian tribe of advance planning and 
     design funds from the escrow account under clause (i), the 
     Indian tribe shall agree--

       (I) to issue qualified tribal school modernization bonds 
     after the date of receipt of the funds; and
       (II) as a condition of each bond issuance, that the Indian 
     tribe will deposit into the escrow account, or a fund managed 
     by the trustee as described in paragraph (4)(C), an amount 
     equal to the amount of funds received from the escrow 
     account.

       (3) Permissible activities.--In addition to the use of 
     funds permitted under paragraph (1), an Indian tribe may use 
     amounts received through the issuance of a qualified tribal 
     school modernization bond--
       (A) to enter into and make payments under contracts with 
     licensed and bonded architects, engineers, and construction 
     firms--
       (i) to determine the needs of the tribal school; and
       (ii) for the design and engineering of the tribal school;
       (B) enter into and make payments under contracts with 
     financial advisers, underwriters, attorneys, trustees, and 
     other professionals who would be able to provide assistance 
     to the Indian tribe in issuing bonds; and
       (C) carry out other activities determined to be appropriate 
     by the Secretary.
       (4) Bond trustee.--
       (A) In general.--Notwithstanding any other provision of 
     law, any qualified tribal school modernization bond issued by 
     an Indian tribe under this subsection shall be subject to a 
     trust agreement between the Indian tribe and a trustee.
       (B) Trustee.--Any bank or trust company that meets 
     requirements established by the Secretary may be designated 
     as a trustee under subparagraph (A).
       (C) Content of trust agreement.--A trust agreement entered 
     into by an Indian tribe under this paragraph shall specify 
     that the trustee, with respect to any bond issued under this 
     subsection, shall--
       (i) act as a repository for the proceeds of the bond;
       (ii) make payments to bondholders;
       (iii) receive, as a condition to the issuance of the bond, 
     a transfer of funds from the escrow account, or from other 
     funds furnished by or on behalf of the Indian tribe, in an 
     amount that (including interest earnings from the investment 
     of the funds in obligations of, or fully guaranteed by, the 
     United States, or from other investments authorized by 
     paragraph (10)) will produce funds sufficient to timely pay 
     in full the entire principal amount of the bond on the stated 
     maturity date of the bond;
       (iv) invest the funds transferred under clause (iii) in an 
     investment described in that clause; and
       (v)(I) hold and invest the funds transferred under clause 
     (iii) in a segregated fund or account under the agreement; 
     and
       (II) use the fund or account solely for payment of the 
     costs of items described in paragraph (3).
       (D) Requirements for making direct payments.--
       (i) Payments.--

       (I) In general.--Notwithstanding any other provision of 
     law, the trustee shall make any payment referred to in 
     subparagraph (C)(v) in accordance with such requirements as 
     the Indian tribe shall prescribe in the trust agreement 
     entered into under subparagraph (C).
       (II) Inspection.--Before making a payment for a project to 
     a contractor under subparagraph (C)(v), to ensure completion 
     of the project, the trustee shall require an inspection of 
     the project by--

       (aa) a local financial institution; or
       (bb) an independent inspecting architect or engineer.
       (ii) Contracts.--Each contract referred to in paragraph (3) 
     shall specify, or be renegotiated to specify, that payments 
     under the contract shall be made in accordance with this 
     paragraph.
       (5) Payments of principal and interest.--
       (A) Principal.--
       (i) In general.--No principal payment on any qualified 
     tribal school modernization bond shall be required under this 
     subsection until the final, stated date on which the bond 
     reaches maturity.
       (ii) Maturity; outstanding principal.--With respect to a 
     qualified tribal school modernization bond issued under this 
     subsection--

       (I) the bond shall reach maturity not later than 15 years 
     after the date of issuance of the bond; and

       (II) on the date on which the bond reaches maturity, the 
     entire outstanding principal under the bond shall become due 
     and payable.

       (B) Interest.--There shall be awarded a tax credit under 
     section 1400M of the Internal Revenue Code of 1986 in lieu of 
     interest on a qualified tribal school modernization bond 
     issued under this subsection.
       (6) Bond guarantees.--
       (A) In general.--Payment of the principal portion of a 
     qualified tribal school modernization bond issued under this 
     subsection shall be guaranteed solely by amounts deposited 
     with each respective bond trustee as described in paragraph 
     (4)(C)(iii).
       (B) Establishment of account.--
       (i) In general.--Notwithstanding any other provision of 
     law, the Secretary may--

       (I) establish a tribal school modernization escrow account; 
     and
       (II) beginning in fiscal year 2005, from amounts made 
     available for school replacement under the construction 
     account of the Bureau, deposit not more than $30,000,000 for 
     each fiscal year into the escrow account.

       (ii) Transfers of excess proceeds.--Excess proceeds held 
     under any trust agreement that are not needed for any of the 
     purposes described in clauses (iii) and (v) of paragraph 
     (4)(C) shall be transferred, from time to time, by the 
     trustee for deposit into the escrow account.
       (iii) Payments.--The Secretary shall use any amounts 
     deposited in the escrow account under clauses (i) and (ii)--

       (I) to make payments to trustees appointed and acting in 
     accordance with paragraph (4); or
       (II) to make payments described in paragraph (2)(D).

       (7) Limitations.--
       (A) Obligation to repay.--
       (i) In general.--Notwithstanding any other provision of 
     law, the principal amount on any qualified tribal school 
     modernization bond issued under this subsection shall be 
     repaid only to the extent of any escrowed funds provided 
     under paragraph (4)(C)(iii).
       (ii) No guarantee.--No qualified tribal school 
     modernization bond issued by an Indian tribe under this 
     subsection shall be an obligation of, and no payment of the 
     principal of such a bond shall be guaranteed by--

       (I) the United States;
       (II) the Indian tribe; or
       (III) the tribal school for which the bond was issued.

       (B) Land and facilities.--No land or facility purchased or 
     improved with amounts derived from a qualified tribal school 
     modernization bond issued under this subsection shall be 
     mortgaged or used as collateral for the bond.
       (8) Sale of bonds.--A qualified tribal school modernization 
     bond may be sold at a purchase price equal to, in excess of, 
     or at a discount from, the par amount of the bond.
       (9) Treatment of trust agreement earnings.--No amount 
     earned through the investment of funds under the control of a 
     trustee under any trust agreement described in paragraph (4) 
     shall be subject to Federal income taxation.
       (10) Investment of sinking funds.--A sinking fund 
     established for the purpose of the payment of principal on a 
     qualified tribal school modernization bond issued under this 
     subsection shall be invested in--
       (A) obligations issued by or guaranteed by the United 
     States; or
       (B) such other assets as the Secretary of the Treasury may 
     by regulation allow.

[[Page 6521]]

       (c) Expansion of Incentives for Tribal Schools.--Chapter 1 
     is amended by adding at the end the following new subchapter:

         ``Subchapter Z--Tribal School Modernization Provisions

``Sec. 1400M. Credit to holders of qualified tribal school 
              modernization bonds.

     ``SEC. 1400M. CREDIT TO HOLDERS OF QUALIFIED TRIBAL SCHOOL 
                   MODERNIZATION BONDS.

       ``(a) Allowance of Credit.--In the case of a taxpayer who 
     holds a qualified tribal school modernization bond on a 
     credit allowance date of such bond which occurs during the 
     taxable year, there shall be allowed as a credit against the 
     tax imposed by this chapter for such taxable year an amount 
     equal to the sum of the credits determined under subsection 
     (b) with respect to credit allowance dates during such year 
     on which the taxpayer holds such bond.
       ``(b) Amount of Credit.--
       ``(1) In general.--The amount of the credit determined 
     under this subsection with respect to any credit allowance 
     date for a qualified tribal school modernization bond is 25 
     percent of the annual credit determined with respect to such 
     bond.
       ``(2) Annual credit.--The annual credit determined with 
     respect to any qualified tribal school modernization bond is 
     the product of--
       ``(A) the applicable credit rate, multiplied by
       ``(B) the outstanding face amount of the bond.
       ``(3) Applicable credit rate.--For purposes of paragraph 
     (1), the applicable credit rate with respect to an issue is 
     the rate equal to an average market yield (as of the date of 
     sale of the issue) on outstanding long-term corporate 
     obligations (as determined by the Secretary).
       ``(4) Special rule for issuance and redemption.--In the 
     case of a bond which is issued during the 3-month period 
     ending on a credit allowance date, the amount of the credit 
     determined under this subsection with respect to such credit 
     allowance date shall be a ratable portion of the credit 
     otherwise determined based on the portion of the 3-month 
     period during which the bond is outstanding. A similar rule 
     shall apply when the bond is redeemed.
       ``(c) Limitation Based on Amount of Tax.--
       ``(1) In general.--The credit allowed under subsection (a) 
     for any taxable year shall not exceed the excess of--
       ``(A) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(B) the sum of the credits allowable under part IV of 
     subchapter A (other than subpart C thereof, relating to 
     refundable credits).
       ``(2) Carryover of unused credit.--If the credit allowable 
     under subsection (a) exceeds the limitation imposed by 
     paragraph (1) for such taxable year, such excess shall be 
     carried to the succeeding taxable year and added to the 
     credit allowable under subsection (a) for such taxable year.
       ``(d) Qualified Tribal School Modernization Bond; Other 
     Definitions.--For purposes of this section--
       ``(1) Qualified tribal school modernization bond.--
       ``(A) In general.--The term `qualified tribal school 
     modernization bond' means, subject to subparagraph (B), any 
     bond issued as part of an issue under section 616(b) of the 
     Jumpstart Our Business Strength (JOBS) Act, as in effect on 
     the date of the enactment of this section, if--
       ``(i) 95 percent or more of the proceeds of such issue are 
     to be used for the construction, rehabilitation, or repair of 
     a school facility funded by the Bureau of Indian Affairs of 
     the Department of the Interior or for the acquisition of land 
     on which such a facility is to be constructed with part of 
     the proceeds of such issue,
       ``(ii) the bond is issued by an Indian tribe,
       ``(iii) the issuer designates such bond for purposes of 
     this section, and
       ``(iv) the term of each bond which is part of such issue 
     does not exceed 15 years.
       ``(B) National limitation on amount of bonds designated.--
       ``(i) National limitation.--There is a national qualified 
     tribal school modernization bond limitation for each calendar 
     year. Such limitation is--

       ``(I) $200,000,000 for 2005,
       ``(II) $200,000,000 for 2006, and
       ``(III) zero after 2006.

       ``(ii) Allocation of limitation.--The national qualified 
     tribal school modernization bond limitation shall be 
     allocated to Indian tribes by the Secretary of the Interior 
     subject to the provisions of section 616 of the Jumpstart Our 
     Business Strength (JOBS) Act, as in effect on the date of the 
     enactment of this section.
       ``(iii) Designation subject to limitation amount.--The 
     maximum aggregate face amount of bonds issued during any 
     calendar year which may be designated under subsection (d)(1) 
     with respect to any Indian tribe shall not exceed the 
     limitation amount allocated to such government under clause 
     (ii) for such calendar year.
       ``(iv) Carryover of unused limitation.--If for any calendar 
     year--

       ``(I) the limitation amount under this subparagraph, 
     exceeds
       ``(II) the amount of qualified tribal school modernization 
     bonds issued during such year,

     the limitation amount under this subparagraph for the 
     following calendar year shall be increased by the amount of 
     such excess. The preceding sentence shall not apply if such 
     following calendar year is after 2012.
       ``(2) Credit allowance date.--The term `credit allowance 
     date' means--
       ``(A) March 15,
       ``(B) June 15,
       ``(C) September 15, and
       ``(D) December 15.
     Such term includes the last day on which the bond is 
     outstanding.
       ``(3) Bond.--The term `bond' includes any obligation.
       ``(4) Tribe.--The term `tribe' has the meaning given the 
     term `Indian tribal government' by section 7701(a)(40), 
     including the application of section 7871(d). Such term 
     includes any consortium of tribes approved by the Secretary 
     of the Interior.
       ``(e) Credit Included in Gross Income.--Gross income 
     includes the amount of the credit allowed to the taxpayer 
     under this section (determined without regard to subsection 
     (c)) and the amount so included shall be treated as interest 
     income.
       ``(f) Bonds Held by Regulated Investment Companies.--If any 
     qualified tribal school modernization bond is held by a 
     regulated investment company, the credit determined under 
     subsection (a) shall be allowed to shareholders of such 
     company under procedures prescribed by the Secretary.
       ``(g) Treatment for Estimated Tax Purposes.--Solely for 
     purposes of sections 6654 and 6655, the credit allowed by 
     this section to a taxpayer by reason of holding a qualified 
     tribal school modernization bonds on a credit allowance date 
     shall be treated as if it were a payment of estimated tax 
     made by the taxpayer on such date.
       ``(h) Credit Treated as Allowed Under Part IV of Subchapter 
     A.--For purposes of subtitle F, the credit allowed by this 
     section shall be treated as a credit allowable under part IV 
     of subchapter A of this chapter.
       ``(i) Reporting.--Issuers of qualified tribal school 
     modernization bonds shall submit reports similar to the 
     reports required under section 149(e).''.
       (d) Conforming Amendment.--The table of subchapters for 
     chapter 1 is amended by adding at the end the following new 
     item:

``Subchapter Z. Tribal school modernization provisions.''.
       (e) Additional Provisions.--
       (1) Sovereign immunity.--This section and the amendments 
     made by this section shall not be construed to impact, limit, 
     or affect the sovereign immunity of the Federal Government or 
     any State or tribal government.
       (2) Application.--This section and the amendments made by 
     this section shall take effect on the date of the enactment 
     of this Act with respect to bonds issued after December 31, 
     2004, regardless of the status of regulations promulgated 
     thereunder.

            Subtitle C--Provisions Relating to Depreciation

     SEC. 621. SPECIAL PLACED IN SERVICE RULE FOR BONUS 
                   DEPRECIATION PROPERTY.

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

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

     such property shall be treated as originally placed in 
     service not earlier than the date of such last sale, so long 
     as no previous owner of such property elects the application 
     of this subsection with respect to such property.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales after the date of the enactment of this 
     Act.

     SEC. 622. MODIFICATION OF DEPRECIATION ALLOWANCE FOR 
                   AIRCRAFT.

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

[[Page 6522]]

       ``(iii) which is purchased and on which such purchaser, at 
     the time of the contract for purchase, has made a 
     nonrefundable deposit of the lesser of--

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

       ``(iv) which has--

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

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

     SEC. 623. MODIFICATION OF CLASS LIFE FOR CERTAIN TRACK 
                   FACILITIES.

       (a) 7-Year Property.--Subparagraph (C) of section 168(e)(3) 
     (relating to classification of certain property) is amended 
     by redesignating clause (ii) as clause (iii) and by inserting 
     after clause (i) the following new clause:
       ``(ii) any motorsports entertainment complex, and''.
       (b) Definition.--Section 168(i) (relating to definitions 
     and special rules) is amended by adding at the end the 
     following new paragraph:
       ``(15) Motorsports entertainment complex.--
       ``(A) In general.--The term `motorsports entertainment 
     complex' means a racing track facility that is permanently 
     situated on land and which during the applicable period is 
     scheduled to host one or more racing events for automobiles 
     (of any type), trucks, or motorcycles that are open to the 
     public for the price of admission.
       ``(B) Ancillary and support facilities.--Such term shall 
     include, if owned by the complex and provided for the benefit 
     of patrons of the complex--
       ``(i) ancillary grounds and facilities and land 
     improvements in support of the complex's activities 
     (including parking lots, sidewalks, waterways, bridges, 
     fences, and landscaping),
       ``(ii) support facilities (including food and beverage 
     retailing, souvenir vending, and other nonlodging 
     accommodations), and
       ``(iii) appurtenances associated with such facilities and 
     related attractions and amusements (including ticket booths, 
     race track surfaces, suites and hospitality facilities, 
     grandstands and viewing structures, props, walls, facilities 
     that support the delivery of entertainment services, other 
     special purpose structures, facades, shop interiors, and 
     buildings).
       ``(C) Exception.--Such term shall not include any 
     transportation equipment, administrative services assets, 
     warehouses, administrative buildings, hotels, or motels.
       ``(D) Applicable period.--For purposes of subparagraph (A), 
     the term `applicable period' means the period ending the 
     later of the last day of--
       ``(i) the 36 month period following the first day of the 
     month in which the asset is or was placed in service, or
       ``(ii) the 36 month period ending December 31, 2003, to the 
     extent that the asset remains in service during such 
     period.''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to any property placed in service after the date of the 
     enactment of this Act.
       (2) No inference.--Nothing in the amendments made by this 
     section shall be construed to affect the treatment of 
     expenses incurred on or before the date of the enactment of 
     this Act.

     SEC. 624. MINIMUM TAX RELIEF FOR CERTAIN TAXPAYERS.

       (a) Election to Increase Minimum Tax Credit Limitation in 
     Lieu of Bonus Depreciation.--
       (1) In general.--Section 53 (relating to credit for prior 
     year minimum tax liability) is amended by adding at the end 
     the following new subsection:
       ``(e) Additional Credit in Lieu of Bonus Depreciation.--
       ``(1) In general.--In the case of a corporation making an 
     election under this subsection for a taxable year, the 
     limitation under subsection (c) shall be increased by an 
     amount equal to 50 percent of the bonus depreciation amount.
       ``(2) Bonus depreciation amount.--For purposes of paragraph 
     (1), the bonus depreciation amount for any taxable year is an 
     amount (not in excess of $10,000,000) equal to the product 
     of--
       ``(A) 30 percent, and
       ``(B) the excess (if any) of--
       ``(i) the aggregate amount of depreciation which would be 
     determined under section 168 for property placed in service 
     during such taxable year if no election under this subsection 
     were made, over
       ``(ii) the aggregate allowance for depreciation allowable 
     with respect to such property placed in service for such 
     taxable year.
       ``(3) Aggregation rule.--All members of the same controlled 
     group of corporations shall be treated as 1 corporation for 
     purposes of this subsection.
       ``(4) Election.--Sections 168(k) (other than paragraph 
     (2)(F) thereof) shall not apply to any property placed in 
     service during a taxable year by a corporation making an 
     election under this subsection for such taxable year. An 
     election under this subsection may only be revoked with the 
     consent of the Secretary.
       ``(5) Credit refundable.--The aggregate increase in the 
     credit allowed by this section for any taxable year by reason 
     of this subsection shall for purposes of this title (other 
     than subsection (b)(2) of this section) be treated as a 
     credit allowed to the taxpayer under subpart C.''.
       (2) Conforming amendments.--Subsection (k) of section 168 
     is amended by adding at the end the following new paragraph:
       ``(5) Cross reference.--For an election to claim certain 
     minimum tax credits in lieu of the allowance determined under 
     this subsection, see section 53(e).''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to taxable years ending after December 31, 2003.
       (b) Use of General Business Credits Against Alternative 
     Minimum Tax.--
       (1) In general.--Section 38(c) (relating to limitations 
     based on amount of tax) is amended by redesignating paragraph 
     (4) as paragraph (5) and by inserting after paragraph (3) the 
     following new paragraph:
       ``(4) Special rule for 2004.--Notwithstanding the preceding 
     provisions of this paragraph, in the case of any taxable year 
     beginning in 2004, the credit allowed under subsection (a) 
     shall not exceed the greater of--
       ``(A) the amount determined under this subsection without 
     regard to this paragraph, or
       ``(B) 50 percent of the lesser of--
       ``(i) the amount which would be determined under this 
     subsection if the tentative minimum tax were treated as being 
     zero in applying paragraph (1) to such credit, or
       ``(ii) the amount of the current year business credit.''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning in 2004.

                Subtitle D--Expansion of Business Credit

     SEC. 631. NEW MARKETS TAX CREDIT FOR NATIVE AMERICAN 
                   RESERVATIONS.

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

     ``SEC. 45D. NEW MARKETS TAX CREDIT FOR NATIVE AMERICAN 
                   RESERVATIONS.

       ``(a) Allowance of Credit.--
       ``(1) In general.--For purposes of section 38, in the case 
     of a taxpayer who holds a qualified equity investment on a 
     credit allowance date of such investment which occurs during 
     the taxable year, the Native American new markets tax credit 
     determined under this section for such taxable year is an 
     amount equal to the applicable percentage of the amount paid 
     to the reservation development entity for such investment at 
     its original issue.
       ``(2) Applicable percentage.--For purposes of paragraph 
     (1), the applicable percentage is--
       ``(A) 5 percent with respect to the first 3 credit 
     allowance dates, and
       ``(B) 6 percent with respect to the remainder of the credit 
     allowance dates.
       ``(3) Credit allowance date.--For purposes of paragraph 
     (1), the term `credit allowance date' means, with respect to 
     any qualified equity investment--
       ``(A) the date on which such investment is initially made, 
     and
       ``(B) each of the 6 anniversary dates of such date 
     thereafter.
       ``(b) Qualified Equity Investment.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified equity investment' 
     means any equity investment in a reservation development 
     entity if--
       ``(A) such investment is acquired by the taxpayer at its 
     original issue (directly or through an underwriter) solely in 
     exchange for cash,
       ``(B) substantially all of such cash is used by the 
     reservation development entity to make qualified low-income 
     reservation investments, and
       ``(C) such investment is designated for purposes of this 
     section by the reservation development entity.

     Such term shall not include any equity investment issued by a 
     reservation development entity more than 5 years after the 
     date that such entity receives an allocation under

[[Page 6523]]

     subsection (f). Any allocation not used within such 5-year 
     period may be reallocated by the Secretary under subsection 
     (f).
       ``(2) Limitation.--The maximum amount of equity investments 
     issued by a reservation development entity which may be 
     designated under paragraph (1)(C) by such entity shall not 
     exceed the portion of the limitation amount allocated under 
     subsection (f) to such entity.
       ``(3) Safe harbor for determining use of cash.--The 
     requirement of paragraph (1)(B) shall be treated as met if at 
     least 85 percent of the aggregate gross assets of the 
     reservation development entity are invested in qualified low-
     income reservation investments.
       ``(4) Treatment of subsequent purchasers.--The term 
     `qualified equity investment' includes any equity investment 
     which would (but for paragraph (1)(A)) be a qualified equity 
     investment in the hands of the taxpayer if such investment 
     was a qualified equity investment in the hands of a prior 
     holder.
       ``(5) Redemptions.--A rule similar to the rule of section 
     1202(c)(3) shall apply for purposes of this subsection.
       ``(6) Equity investment.--The term `equity investment' 
     means--
       ``(A) any stock (other than nonqualified preferred stock as 
     defined in section 351(g)(2)) in an entity which is a 
     corporation, and
       ``(B) any capital interest in an entity which is a 
     partnership.
       ``(c) Reservation Development Entity.--For purposes of this 
     section--
       ``(1) In general.--The term `reservation development 
     entity' means any domestic corporation or partnership if--
       ``(A) the primary mission of the entity is serving, or 
     providing investment capital for, low-income reservations,
       ``(B) the entity maintains accountability to residents of 
     low-income reservations through their representation on any 
     governing board of the entity or on any advisory board to the 
     entity, and
       ``(C) the entity is certified by the Secretary for purposes 
     of this section as being a reservation development entity.
       ``(2) Exception.--For purposes of subparagraph (C) of 
     paragraph (1), the Secretary shall not certify an entity as a 
     reservation development entity if such entity is also 
     certified as a qualified community development entity under 
     section 45D(c).
       ``(d) Qualified Low-Income Reservation Investments.--For 
     purposes of this section--
       ``(1) In general.--The term `qualified low-income 
     reservation investment' means--
       ``(A) any capital or equity investment in, or loan to, any 
     qualified active low-income reservation business,
       ``(B) the purchase from another reservation development 
     entity of any loan made by such entity which is a qualified 
     low-income reservation investment,
       ``(C) financial counseling and other services specified in 
     regulations prescribed by the Secretary to businesses located 
     in, and residents of, low-income reservations, and
       ``(D) any equity investment in, or loan to, any reservation 
     development entity.
       ``(2) Qualified active low-income reservation business.--
       ``(A) In general.--For purposes of paragraph (1), the term 
     `qualified active low-income reservation business' means, 
     with respect to any taxable year, any corporation (including 
     a nonprofit corporation) or partnership if for such year--
       ``(i) at least 50 percent of the total gross income of such 
     entity is derived from the active conduct of a qualified 
     business within any low-income reservation,
       ``(ii) a substantial portion of the use of the tangible 
     property of such entity (whether owned or leased) is within 
     any low-income reservation,
       ``(iii) a substantial portion of the services performed for 
     such entity by its employees are performed in any low-income 
     reservation,
       ``(iv) less than 5 percent of the average of the aggregate 
     unadjusted bases of the property of such entity is 
     attributable to collectibles (as defined in section 
     408(m)(2)) other than collectibles that are held primarily 
     for sale to customers in the ordinary course of such 
     business, and
       ``(v) less than 5 percent of the average of the aggregate 
     unadjusted bases of the property of such entity is 
     attributable to nonqualified financial property (as defined 
     in section 1397C(e)).
       ``(B) Proprietorship.--Such term shall include any business 
     carried on by an individual as a proprietor if such business 
     would meet the requirements of subparagraph (A) were it 
     incorporated.
       ``(C) Portions of business may be qualified active low-
     income reservation business.--The term `qualified active low-
     income reservation business' includes any trades or 
     businesses which would qualify as a qualified active low-
     income reservation business if such trades or businesses were 
     separately incorporated.
       ``(3) Qualified business.--For purposes of this subsection, 
     the term `qualified business' has the meaning given to such 
     term by section 45D(d)(3).
       ``(e) Low-Income Reservation.--For purposes of this 
     section, the term `low-income reservation' means any Indian 
     reservation (as defined in section 168(j)(6)) which has a 
     poverty rate of at least 40 percent.
       ``(f) National Limitation on Amount of Investments 
     Designated.--
       ``(1) In general.--There is a Native American new markets 
     tax credit limitation of $50,000,000 for each of calendar 
     years 2004 through 2007.
       ``(2) Allocation of limitation.--The limitation under 
     paragraph (1) shall be allocated by the Secretary among 
     reservation development entities selected by the Secretary. 
     In making allocations under the preceding sentence, the 
     Secretary shall give priority to any entity--
       ``(A) with a record of having successfully provided capital 
     or technical assistance to disadvantaged businesses or 
     communities, or
       ``(B) which intends to satisfy the requirement under 
     subsection (b)(1)(B) by making qualified low-income 
     reservation investments in 1 or more businesses in which 
     persons unrelated to such entity (within the meaning of 
     section 267(b) or 707(b)(1)) hold the majority equity 
     interest.
       ``(3) Carryover of unused limitation.--If the Native 
     American new markets tax credit limitation for any calendar 
     year exceeds the aggregate amount allocated under paragraph 
     (2) for such year, such limitation for the succeeding 
     calendar year shall be increased by the amount of such 
     excess. No amount may be carried under the preceding sentence 
     to any calendar year after 2014.
       ``(g) Recapture of Credit in Certain Cases.--
       ``(1) In general.--If, at any time during the 7-year period 
     beginning on the date of the original issue of a qualified 
     equity investment in a reservation development entity, there 
     is a recapture event with respect to such investment, then 
     the tax imposed by this chapter for the taxable year in which 
     such event occurs shall be increased by the credit recapture 
     amount.
       ``(2) Credit recapture amount.--For purposes of paragraph 
     (1), the credit recapture amount is an amount equal to the 
     sum of--
       ``(A) the aggregate decrease in the credits allowed to the 
     taxpayer under section 38 for all prior taxable years which 
     would have resulted if no credit had been determined under 
     this section with respect to such investment, plus
       ``(B) interest at the underpayment rate established under 
     section 6621 on the amount determined under subparagraph (A) 
     for each prior taxable year for the period beginning on the 
     due date for filing the return for the prior taxable year 
     involved.

     No deduction shall be allowed under this chapter for interest 
     described in subparagraph (B).
       ``(3) Recapture event.--For purposes of paragraph (1), 
     there is a recapture event with respect to an equity 
     investment in a reservation development entity if--
       ``(A) such entity ceases to be a reservation development 
     entity,
       ``(B) the proceeds of the investment cease to be used as 
     required of subsection (b)(1)(B), or
       ``(C) such investment is redeemed by such entity.
       ``(4) Special rules.--
       ``(A) Tax benefit rule.--The tax for the taxable year shall 
     be increased under paragraph (1) only with respect to credits 
     allowed by reason of this section which were used to reduce 
     tax liability. In the case of credits not so used to reduce 
     tax liability, the carryforwards and carrybacks under section 
     39 shall be appropriately adjusted.
       ``(B) No credits against tax.--Any increase in tax under 
     this subsection shall not be treated as a tax imposed by this 
     chapter for purposes of determining the amount of any credit 
     under this chapter or for purposes of section 55.
       ``(h) Basis Reduction.--The basis of any qualified equity 
     investment shall be reduced by the amount of any credit 
     determined under this section with respect to such 
     investment. This subsection shall not apply for purposes of 
     sections 1202, 1400B, and 1400F.
       ``(i) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this section, 
     including regulations--
       ``(1) which limit the credit for investments which are 
     directly or indirectly subsidized by other Federal tax 
     benefits (including the credit under section 42 and the 
     exclusion from gross income under section 103),
       ``(2) which prevent the abuse of the purposes of this 
     section,
       ``(3) which provide rules for determining whether the 
     requirement of subsection (b)(1)(B) is treated as met,
       ``(4) which impose appropriate reporting requirements, and
       ``(5) which apply the provisions of this section to newly 
     formed entities.''.
       (b) Credit Made Part of General Business Credit.--
       (1) In general.--Subsection (b) of section 38 is amended by 
     redesignating paragraphs (14) and (15) as paragraphs (15) and 
     (16), respectively, and by inserting after paragraph (13) the 
     following new paragraph:
       ``(14) the Native American new markets tax credit 
     determined under section 45E(a),''.
       (2) Limitation on carryback.--Subsection (d) of section 39 
     is amended by redesignating paragraph (10) as paragraph (11) 
     and by inserting after paragraph (9) the following new 
     paragraph:

[[Page 6524]]

       ``(10) No carryback of native american new markets tax 
     credit before january 1, 2004.--No portion of the unused 
     business credit for any taxable year which is attributable to 
     the credit under section 45E may be carried back to a taxable 
     year ending before January 1, 2004.''.
       (c) Deduction for Unused Credit.--Subsection (c) of section 
     196 is amended by redesignating paragraph (10) as paragraph 
     (11), by striking ``and'' at the end of paragraph (9), and by 
     inserting after paragraph (9) the following new paragraph:
       ``(10) the Native American new markets tax credit 
     determined under section 45E(a), and''.
       (d) Conforming Amendments.--
       (1) Section 38(b)(15), as redesignated by subsection 
     (b)(1), is amended--
       (A) by striking ``45E(c)'' and inserting ``45F(c)'', and
       (B) by striking ``45E(a)'' and inserting ``45F(a)''.
       (2) Section 38(b)(16), as redesignated by subsection 
     (b)(1), is amended by striking ``45F(a)'' and inserting 
     ``45G(a)''.
       (3) Section 39(d)(11), as redesignated by subsection 
     (b)(2), is amended by striking ``section 45E'' and inserting 
     ``section 45F''.
       (4) Section 196(c)(11), as redesignated by subsection (c), 
     is amended by striking ``45E(a)'' and inserting ``45F(a)''.
       (5) Section 1016(a)(28) is amended--
       (A) by striking ``under section 45F'' and inserting ``under 
     section 45G'', and
       (B) by striking ``section 45F(f)(1)'' and inserting 
     ``section 45G(f)(1)''.
       (e) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1 is amended by 
     striking the items relating to sections 45E and 45F and 
     inserting the following:

``Sec. 45E. Native American new markets tax credit.
``Sec. 45F. Small employer pension plan startup costs.
``Sec. 45G. Employer-provided child care credit.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to investments made after December 31, 2003.
       (f) Guidance on Allocation of National Limitation.--Not 
     later than 120 days after the date of the enactment of this 
     Act, the Secretary of the Treasury or the Secretary's 
     delegate shall issue guidance which specifies--
       (1) how entities shall apply for an allocation under 
     section 45E(f)(2) of the Internal Revenue Code of 1986, as 
     added by this section;
       (2) the competitive procedure through which such 
     allocations are made; and
       (3) the actions that such Secretary or delegate shall take 
     to ensure that such allocations are properly made to 
     appropriate entities.
       (g) Audit and Report.--Not later than January 31 of 2007 
     and 2010, the Comptroller General of the United States shall, 
     pursuant to an audit of the Native American new markets tax 
     credit program established under section 45E of the Internal 
     Revenue Code of 1986 (as added by subsection (a)), report to 
     Congress on such program, including all reservation 
     development entities that receive an allocation under the 
     Native American new markets credit under such section.
       (f) Grants in Coordination With Credit.--
       (1) In general.--The Secretary of the Treasury is 
     authorized to award a grant of not more than $1,000,000 to 
     the First Nations Oweesta Corporation.
       (2) Use of funds.--The grant awarded under paragraph (1) 
     may be used--
       (A) to enhance the capacity of people living on low-income 
     reservations (within the meaning of section 45E(e) of the 
     Internal Revenue Code of 1986, as added by this section) to 
     access, apply, control, create, leverage, utilize, and retain 
     the financial benefits to such low-income reservations which 
     are attributable to qualified low-income reservation 
     investments (within the meaning of section 45E(d) of such 
     Code), and
       (B) to provide access to appropriate financial capital for 
     the development of such low-income reservations.
       (3) Authorization of appropriations.--There are authorized 
     to be appropriated $1,000,000 for fiscal years 2004 through 
     2014 to carry out the provisions of this subsection.

     SEC. 632. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT ADDED 
                   TO GENERAL BUSINESS CREDIT.

       (a) Ready Reserve-National Guard Credit.--Subpart D of part 
     IV of subchapter A of chapter 1 (relating to business-related 
     credits), as amended by this Act, is amended by adding at the 
     end the following:

     ``SEC. 45H. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT.

       ``(a) General Rule.--For purposes of section 38, the Ready 
     Reserve-National Guard employee credit determined under this 
     section for any taxable year with respect to each Ready 
     Reserve-National Guard employee of an employer is an amount 
     equal to 50 percent of the lesser of--
       ``(1) the actual compensation amount with respect to such 
     employee for such taxable year, or
       ``(2) $15,000.
       ``(b) Definition of Actual Compensation Amount.--For 
     purposes of this section, the term `actual compensation 
     amount' means the amount of compensation paid or incurred by 
     an employer with respect to a Ready Reserve-National Guard 
     employee on any day when the employee was absent from 
     employment for the purpose of performing qualified active 
     duty.
       ``(c) Limitations.--
       ``(1) Maximum period for credit per employee.--The maximum 
     period with respect to which the credit may be allowed with 
     respect to any Ready Reserve-National Guard employee shall 
     not exceed the 12-month period beginning on the first day 
     such credit is so allowed with respect to such employee.
       ``(2) Days other than work days.--No credit shall be 
     allowed with respect to any day that a Ready Reserve-National 
     Guard employee who performs qualified active duty was not 
     scheduled to work (for reason other than to participate in 
     qualified active duty).
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Qualified active duty.--The term `qualified active 
     duty' means--
       ``(A) active duty, other than the training duty specified 
     in section 10147 of title 10, United States Code (relating to 
     training requirements for the Ready Reserve), or section 
     502(a) of title 32, United States Code (relating to required 
     drills and field exercises for the National Guard), in 
     connection with which an employee is entitled to reemployment 
     rights and other benefits or to a leave of absence from 
     employment under chapter 43 of title 38, United States Code, 
     and
       ``(B) hospitalization incident to such duty.
       ``(2) Compensation.--The term `compensation' means any 
     remuneration for employment, whether in cash or in kind, 
     which is paid or incurred by a taxpayer and which is 
     deductible from the taxpayer's gross income under section 
     162(a)(1).
       ``(3) Ready reserve-national guard employee.--The term 
     `Ready Reserve-National Guard employee' means an employee who 
     is a member of the Ready Reserve of a reserve component of an 
     Armed Force of the United States as described in sections 
     10142 and 10101 of title 10, United States Code.
       ``(4) Certain rules to apply.--Rules similar to the rules 
     of section 52 shall apply.
       ``(e) Portion of Credit Refundable.--
       ``(1) In general.--In the case of an employer of a 
     qualified first responder, the aggregate credits allowed to a 
     taxpayer under subpart C shall be increased by the lesser 
     of--
       ``(A) the credit which would be allowed under this section 
     without regard to this subsection and the limitation under 
     section 38(c), or
       ``(B) the amount by which the aggregate amount of credits 
     allowed by this subpart (determined without regard to this 
     subsection) would increase if the limitation imposed by 
     section 38(c) for any taxable year were increased by the 
     amount of employer payroll taxes imposed on the taxpayer 
     during the calendar year in which the taxable year begins.

     The amount of the credit allowed under this subsection shall 
     not be treated as a credit allowed under this subpart and 
     shall reduce the amount of the credit otherwise allowable 
     under subsection (a) without regard to section 38(c).
       ``(2) Employer payroll taxes.--For purposes of this 
     subsection--
       ``(A) In general.--The term `employer payroll taxes' means 
     the taxes imposed by--
       ``(i) section 3111(b), and
       ``(ii) sections 3211(a) and 3221(a) (determined at a rate 
     equal to the rate under section 3111(b)).
       ``(B) Special rule.--A rule similar to the rule of section 
     24(d)(2)(C) shall apply for purposes of subparagraph (A).
       ``(3) Qualified first responder.--For purposes of this 
     subsection, the term `qualified first responder' means any 
     person who is--
       ``(A) employed as a law enforcement official, a 
     firefighter, or a paramedic, and
       ``(B) a Ready Reserve-National Guard employee.''.
       (b) Credit To Be Part of General Business Credit.--
     Subsection (b) of section 38 (relating to general business 
     credit), as amended by this Act, is amended by striking 
     ``plus'' at the end of paragraph (15), by striking the period 
     at the end of paragraph (16) and inserting ``, plus'', and by 
     adding at the end the following:
       ``(17) the Ready Reserve-National Guard employee credit 
     determined under section 45H(a).''.
       (c) Denial of Double Benefit.--Section 280C(a) (relating to 
     rule for employment credits) is amended by inserting 
     ``45H(a),'' after ``45A(a),''.
       (d) Conforming Amendment.--The table of sections for 
     subpart D of part IV of subchapter A of chapter 1, as amended 
     by this Act, is amended by inserting after the item relating 
     to section 45G the following:

``Sec. 45H. Ready Reserve-National Guard employee credit.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act, in taxable years ending after such 
     date.

     SEC. 633. RURAL INVESTMENT TAX CREDIT.

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

[[Page 6525]]



     ``SEC. 42A. RURAL INVESTMENT CREDIT.

       ``(a) In General.--For purposes of section 38, the amount 
     of the rural investment credit determined under this section 
     for any taxable year in the credit period shall be an amount 
     equal to the applicable percentage of the eligible basis of 
     each qualified rural investment building.
       ``(b) Applicable Percentage: 70 Percent Present Value 
     Credit for New Buildings; 30 Percent Present Value Credit for 
     Existing Buildings.--For purposes of this section--
       ``(1) In general.--The term `applicable percentage' means 
     the appropriate percentage prescribed by the Secretary for 
     the earlier of--
       ``(A) the first month of the credit period with respect to 
     a rural investment building, or
       ``(B) at the election of the taxpayer, the month in which 
     the taxpayer and the rural investment credit agency enter 
     into an agreement with respect to such building (which is 
     binding on such agency, the taxpayer, and all successors in 
     interest) as to the rural investment credit dollar amount to 
     be allocated to such building.

     A month may be elected under subparagraph (B) only if the 
     election is made not later than the 5th day after the close 
     of such month. Such an election, once made, shall be 
     irrevocable.
       ``(2) Method of prescribing percentages.--The percentages 
     prescribed by the Secretary for any month shall be 
     percentages which will yield over a 10-year period amounts of 
     credit under subsection (a) which have a present value equal 
     to--
       ``(A) 70 percent of the eligible basis of a new building, 
     and
       ``(B) 30 percent of the eligible basis of an existing 
     building.
       ``(3) Method of discounting.--The present value under 
     paragraph (2) shall be determined--
       ``(A) as of the last day of the 1st year of the 10-year 
     period referred to in paragraph (2),
       ``(B) by using a discount rate equal to 72 percent of the 
     average of the annual Federal mid-term rate and the annual 
     Federal long-term rate applicable under section 1274(d)(1) to 
     the month applicable under subparagraph (A) or (B) of 
     paragraph (1) and compounded annually, and
       ``(C) by assuming that the credit allowable under this 
     section for any year is received on the last day of such 
     year.
       ``(c) Eligible Basis; Qualified Rural Investment 
     Building.--For purposes of this section--
       ``(1) Eligible basis.--
       ``(A) In general.--The eligible basis of any qualified 
     rural investment building for any taxable year shall be 
     determined under rules similar to the rules under section 
     42(d), except that--
       ``(i) the determination of the adjusted basis of any 
     building shall be made as of the beginning of the credit 
     period, and
       ``(ii) such basis shall include development costs properly 
     attributable to such building.
       ``(B) Development costs.--For purposes of subparagraph 
     (A)(ii), the term `development costs' includes--
       ``(i) site preparation costs,
       ``(ii) State and local impact fees,
       ``(iii) reasonable development costs,
       ``(iv) professional fees related to basis items,
       ``(v) construction financing costs related to basis items 
     other than land, and
       ``(vi) on-site and adjacent improvements required by State 
     and local governments.
       ``(2) Qualified rural investment building.--The term 
     `qualified rural investment building' means any building 
     which is part of a qualified rural investment project at all 
     times during the period--
       ``(A) beginning on the 1st day in the compliance period on 
     which such building is part of such an investment project, 
     and
       ``(B) ending on the last day of the compliance period with 
     respect to such building.
       ``(d) Rehabilitation Expenditures Treated as Separate New 
     Building.--Rehabilitation expenditures paid or incurred by 
     the taxpayer with respect to any building shall be treated 
     for purposes of this section as a separate new building under 
     the rules of section 42(e).
       ``(e) Definition and Special Rules Relating to Credit 
     Period.--
       ``(1) Credit period defined.--For purposes of this section, 
     the term `credit period' means, with respect to any building, 
     the period of 10 taxable years beginning with the taxable 
     year in which the building is first placed in service.
       ``(2) Special rule for 1st year of credit period.--
       ``(A) In general.--The credit allowable under subsection 
     (a) with respect to any building for the 1st taxable year of 
     the credit period shall be determined by multiplying such 
     credit by the fraction--
       ``(i) the numerator of which is the number of full months 
     of such year during which such building was in service, and
       ``(ii) the denominator of which is 12.
       ``(B) Disallowed 1st year credit allowed in 11th year.--Any 
     reduction by reason of subparagraph (A) in the credit 
     allowable (without regard to subparagraph (A)) for the 1st 
     taxable year of the credit period shall be allowable under 
     subsection (a) for the 1st taxable year following the credit 
     period.
       ``(3) Credit period for existing buildings not to begin 
     before rehabilitation credit allowed.--The credit period for 
     an existing building shall not begin before the 1st taxable 
     year of the credit period for rehabilitation expenditures 
     with respect to the building.
       ``(f) Qualified Rural Investment Project; Qualifying 
     County.--For purposes of this section--
       ``(1) Qualified rural investment project.--The term 
     `qualified rural investment project' means any investment 
     project of 1 or more qualified rural investment buildings 
     located in a qualifying county (and, if necessary to the 
     project, any contiguous county) and selected by the State 
     according to its qualified rural investment plan.
       ``(2) Qualifying county.--The term `qualifying county' 
     means any county which--
       ``(A) is outside a metropolitan statistical area (defined 
     as such by the Office of Management and Budget), and
       ``(B) during the 20-year period ending with the year in 
     which the most recent census was conducted, has a net out-
     migration of inhabitants from the county of at least 10 
     percent of the population of the county at the beginning of 
     such period.
       ``(g) Limitation on Aggregate Credit Allowable With Respect 
     to Investment Projects Located in a State.--
       ``(1) Credit may not exceed credit amount allocated to 
     building.--The amount of the credit determined under this 
     section for any taxable year with respect to any building 
     shall not exceed the rural investment credit dollar amount 
     allocated to such building under rules similar to the rules 
     of section 42(h)(1).
       ``(2) Allocated credit amount to apply to all taxable years 
     ending during or after credit allocation year.--Any rural 
     investment credit dollar amount allocated to any building for 
     any calendar year--
       ``(A) shall apply to such building for all taxable years in 
     the credit period ending during or after such calendar year, 
     and
       ``(B) shall reduce the aggregate rural investment credit 
     dollar amount of the allocating agency only for such calendar 
     year.
       ``(3) Rural investment credit dollar amount for agencies.--
       ``(A) In general.--The aggregate rural investment credit 
     dollar amount which a rural investment credit agency may 
     allocate for any calendar year is the portion of the State 
     rural investment credit ceiling allocated under this 
     paragraph for such calendar year to such agency.
       ``(B) State ceiling initially allocated to state rural 
     investment credit agencies.--Except as provided in 
     subparagraphs (D) and (E), the State rural investment credit 
     ceiling for each calendar year shall be allocated to the 
     rural investment credit agency of such State. If there is 
     more than 1 rural investment credit agency of a State, all 
     such agencies shall be treated as a single agency.
       ``(C) State rural investment credit ceiling.--The State 
     rural investment credit ceiling applicable to any State and 
     any calendar year shall be an amount equal to the sum of--
       ``(i) the unused State rural investment credit ceiling (if 
     any) of such State for the preceding calendar year,
       ``(ii) $185,000 for each qualifying county in the State,
       ``(iii) the amount of State rural investment credit ceiling 
     returned in the calendar year, plus
       ``(iv) the amount (if any) allocated under subparagraph (D) 
     to such State by the Secretary.

     For purposes of clause (i), the unused State rural investment 
     credit ceiling for any calendar year is the excess (if any) 
     of the sum of the amounts described in clauses (ii) through 
     (iv) over the aggregate rural investment credit dollar amount 
     allocated for such year. For purposes of clause (iii), the 
     amount of State rural investment credit ceiling returned in 
     the calendar year equals the rural investment credit dollar 
     amount previously allocated within the State to any 
     investment project which fails to meet the 10 percent test 
     under section 42(h)(1)(E)(ii) on a date after the close of 
     the calendar year in which the allocation was made or which 
     does not become a qualified rural investment project within 
     the period required by this section or the terms of the 
     allocation or to any investment project with respect to which 
     an allocation is canceled by mutual consent of the rural 
     investment credit agency and the allocation recipient.
       ``(D) Unused rural investment credit carryovers allocated 
     among certain states.--
       ``(i) In general.--The unused rural investment credit 
     carryover of a State for any calendar year shall be assigned 
     to the Secretary for allocation among qualified States for 
     the succeeding calendar year.
       ``(ii) Unused rural investment credit carryover.--For 
     purposes of this subparagraph, the unused rural investment 
     credit carryover of a State for any calendar year is the 
     excess (if any) of the unused State rural investment credit 
     ceiling for such year (as defined in subparagraph (C)(i)) 
     over the excess (if any) of--

[[Page 6526]]

       ``(I) the unused State rural investment credit ceiling for 
     the year preceding such year, over
       ``(II) the aggregate rural investment credit dollar amount 
     allocated for such year.

       ``(iii) Formula for allocation of unused rural investment 
     credit carryovers among qualified states.--The amount 
     allocated under this subparagraph to a qualified State for 
     any calendar year shall be the amount determined by the 
     Secretary to bear the same ratio to the aggregate unused 
     rural investment credit carryovers of all States for the 
     preceding calendar year as such State's population for the 
     calendar year bears to the population of all qualified States 
     for the calendar year. For purposes of the preceding 
     sentence, population shall be determined in accordance with 
     section 146(j).
       ``(iv) Qualified state.--For purposes of this subparagraph, 
     the term `qualified State' means, with respect to a calendar 
     year, any State--

       ``(I) which allocated its entire State rural investment 
     credit ceiling for the preceding calendar year, and
       ``(II) for which a request is made (not later than May 1 of 
     the calendar year) to receive an allocation under clause 
     (iii).

       ``(E) State may provide for different allocation.--Rules 
     similar to the rules of section 146(e) (other than paragraph 
     (2)(B) thereof) shall apply for purposes of this paragraph.
       ``(F) Population.--For purposes of this paragraph, 
     population shall be determined in accordance with section 
     146(j).
       ``(G) Cost-of-living adjustment.--
       ``(i) In general.--In the case of a calendar year after 
     2005, the $185,000 amount in subparagraph (C) 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 by substituting 
     `calendar year 2004' for `calendar year 1992' in subparagraph 
     (B) thereof.

       ``(ii) Rounding.--Any increase under clause (i) which is 
     not a multiple of $5,000 shall be rounded to the next lowest 
     multiple of $5,000.
       ``(4) Portion of state ceiling set-aside for certain 
     investment projects involving qualified nonprofit 
     organizations.--
       ``(A) In general.--At least 10 percent of the State rural 
     investment credit ceiling for any State for any calendar year 
     shall be allocated to qualified rural investment projects 
     described in subparagraph (B).
       ``(B) Investment projects involving qualified nonprofit 
     organizations.--For purposes of subparagraph (A), a qualified 
     rural investment project is described in this subparagraph if 
     a qualified nonprofit organization is to materially 
     participate (within the meaning of section 469(h)) in the 
     development and operation of the investment project 
     throughout the compliance period.
       ``(C) Qualified nonprofit organization.--For purposes of 
     this paragraph, the term `qualified nonprofit organization' 
     means any organization if--
       ``(i) such organization is described in any paragraph of 
     section 501(c) and is exempt from tax under section 501(a),
       ``(ii) such organization is determined by the State rural 
     investment credit agency not to be affiliated with or 
     controlled by a for-profit organization; and
       ``(iii) 1 of the exempt purposes of such organization 
     includes the fostering of rural investment.
       ``(D) Treatment of certain subsidiaries.--
       ``(i) In general.--For purposes of this paragraph, a 
     qualified nonprofit organization shall be treated as 
     satisfying the ownership and material participation test of 
     subparagraph (B) if any qualified corporation in which such 
     organization holds stock satisfies such test.
       ``(ii) Qualified corporation.--For purposes of clause (i), 
     the term `qualified corporation' means any corporation if 100 
     percent of the stock of such corporation is held by 1 or more 
     qualified nonprofit organizations at all times during the 
     period such corporation is in existence.
       ``(E) State may not override set-aside.--Nothing in 
     subparagraph (F) of paragraph (3) shall be construed to 
     permit a State not to comply with subparagraph (A) of this 
     paragraph.
       ``(F) Credits for qualified nonprofit organizations.--
       ``(i) Allowance of credit.--Any credit which would be 
     allowable under subsection (a) with respect to a qualified 
     rural investment building of a qualified nonprofit 
     organization if such organization were not exempt from tax 
     under this chapter shall be treated as a credit allowable 
     under subpart C to such organization.
       ``(ii) Use of credit.--A qualified nonprofit organization 
     may assign, trade, sell, or otherwise transfer any credit 
     allowable to such organization under subparagraph (A) to any 
     taxpayer.
       ``(iii) Credit not income.--A transfer under subparagraph 
     (B) of any credit allowable under subparagraph (A) shall not 
     result in income for purposes of section 511.
       ``(5) Special rules.--
       ``(A) Building must be located within jurisdiction of 
     credit agency.--A rural investment credit agency may allocate 
     its aggregate rural investment credit dollar amount only to 
     buildings located in the jurisdiction of the governmental 
     unit of which such agency is a part.
       ``(B) Agency allocations in excess of limit.--If the 
     aggregate rural investment credit dollar amounts allocated by 
     a rural investment credit agency for any calendar year exceed 
     the portion of the State rural investment credit ceiling 
     allocated to such agency for such calendar year, the rural 
     investment credit dollar amounts so allocated shall be 
     reduced (to the extent of such excess) for buildings in the 
     reverse of the order in which the allocations of such amounts 
     were made.
       ``(C) Credit reduced if allocated credit dollar amount is 
     less than credit which would be allowable without regard to 
     sales convention, etc.--
       ``(i) In general.--The amount of the credit determined 
     under this section with respect to any building shall not 
     exceed the clause (ii) percentage of the amount of the credit 
     which would (but for this subparagraph) be determined under 
     this section with respect to such building.
       ``(ii) Determination of percentage.--For purposes of clause 
     (i), the clause (ii) percentage with respect to any building 
     is the percentage which--

       ``(I) the rural investment credit dollar amount allocated 
     to such building bears to
       ``(II) the credit amount determined in accordance with 
     clause (iii).

       ``(iii) Determination of credit amount.--The credit amount 
     determined in accordance with this clause is the amount of 
     the credit which would (but for this subparagraph) be 
     determined under this section with respect to the building if 
     this section were applied without regard to paragraph (2)(A) 
     of subsection (e).
       ``(D) Rural investment credit agency to specify applicable 
     percentage and maximum eligible basis.--In allocating a rural 
     investment credit dollar amount to any building, the rural 
     investment credit agency shall specify the applicable 
     percentage and the maximum eligible basis which may be taken 
     into account under this section with respect to such 
     building. The applicable percentage and maximum eligible 
     basis so specified shall not exceed the applicable percentage 
     and eligible basis determined under this section without 
     regard to this subsection.
       ``(6) Other definitions.--For purposes of this subsection--
       ``(A) Rural investment credit agency.--The term `rural 
     investment credit agency' means any agency authorized to 
     carry out this subsection.
       ``(B) Possessions treated as States.--The term `State' 
     includes a possession of the United States.
       ``(7) Portion of state ceiling set-aside for qualified 
     rural small business investment credits.--Not more than 10 
     percent of the State rural investment credit ceiling for any 
     State for any calendar year may be allocated to qualified 
     rural small business investment credits under section 42B.
       ``(h) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Compliance period.--The term `compliance period' 
     means, with respect to any building, the period of 10 taxable 
     years beginning with the 1st taxable year of the credit 
     period with respect thereto.
       ``(2) New building.--The term `new building' means a 
     building the original use of which begins with the taxpayer.
       ``(3) Existing building.--The term `existing building' 
     means any building which is not a new building.
       ``(4) Application to estates and trusts.--In the case of an 
     estate or trust, the amount of the credit determined under 
     subsection (a) and any increase in tax under subsection (i) 
     shall be apportioned between the estate or trust and the 
     beneficiaries on the basis of the income of the estate or 
     trust allocable to each.
       ``(i) Recapture of Credit.--If--
       ``(1) as of the close of any taxable year in the compliance 
     period, the amount of the eligible basis of any building with 
     respect to the taxpayer is less than
       ``(2) the amount of such basis as of the close of the 
     preceding taxable year,
     then the taxpayer's tax under this chapter for the taxable 
     year shall be increased by the credit recapture amount 
     determined under rules similar to the rules of section 42(j).
       ``(j) Certifications and Other Reports to Secretary.--
       ``(1) Certification with respect to 1st year of credit 
     period.--Following the close of the 1st taxable year in the 
     credit period with respect to any qualified rural investment 
     building, the taxpayer shall certify to the Secretary (at 
     such time and in such form and in such manner as the 
     Secretary prescribes)--
       ``(A) the taxable year, and calendar year, in which such 
     building was first placed in service,
       ``(B) the eligible basis of such building as of the 
     beginning of the credit period,
       ``(C) the maximum applicable percentage and eligible basis 
     permitted to be taken into account by the appropriate rural 
     investment credit agency under subsection (g),
       ``(D) the election made under subsection (f) with respect 
     to the qualified rural investment project of which such 
     building is a part, and

[[Page 6527]]

       ``(E) such other information as the Secretary may require.

     In the case of a failure to make the certification required 
     by the preceding sentence on the date prescribed therefor, 
     unless it is shown that such failure is due to reasonable 
     cause and not to willful neglect, no credit shall be 
     allowable by reason of subsection (a) with respect to such 
     building for any taxable year ending before such 
     certification is made.
       ``(2) Annual reports to the secretary.--The Secretary may 
     require taxpayers to submit an information return (at such 
     time and in such form and manner as the Secretary prescribes) 
     for each taxable year setting forth--
       ``(A) the eligible basis for the taxable year of each 
     qualified rural investment building of the taxpayer,
       ``(B) the information described in paragraph (1)(C) for the 
     taxable year, and
       ``(C) such other information as the Secretary may require.

     The penalty under section 6652(j) shall apply to any failure 
     to submit the return required by the Secretary under the 
     preceding sentence on the date prescribed therefor.
       ``(3) Annual reports from rural investment credit 
     agencies.--Each agency which allocates any rural investment 
     credit amount to any building for any calendar year shall 
     submit to the Secretary (at such time and in such manner as 
     the Secretary shall prescribe) an annual report specifying--
       ``(A) the amount of rural investment credit amount 
     allocated to each building for such year,
       ``(B) sufficient information to identify each such building 
     and the taxpayer with respect thereto, and
       ``(C) such other information as the Secretary may require.

     The penalty under section 6652(j) shall apply to any failure 
     to submit the report required by the preceding sentence on 
     the date prescribed therefor.
       ``(k) Responsibilities of Rural Investment Credit 
     Agencies.--
       ``(1) Plans for allocation of credit among investment 
     projects.--
       ``(A) In general.--Notwithstanding any other provision of 
     this section, the rural investment credit dollar amount with 
     respect to any building shall be zero unless--
       ``(i) such amount was allocated pursuant to a qualified 
     rural investment plan of the agency which is approved by the 
     governmental unit (in accordance with rules similar to the 
     rules of section 147(f)(2) (other than subparagraph (B)(ii) 
     thereof)) of which such agency is a part,
       ``(ii) such agency notifies the chief executive officer (or 
     the equivalent) of the local jurisdiction within which the 
     building is located of such investment project and provides 
     such individual a reasonable opportunity to comment on the 
     investment project,
       ``(iii) a comprehensive market study of the development 
     needs of individuals in the qualifying county to be served by 
     the investment project is conducted before the credit 
     allocation is made and at the developer's expense by a 
     disinterested party who is approved by such agency, and
       ``(iv) a written explanation is available to the general 
     public for any allocation of a rural investment credit dollar 
     amount which is not made in accordance with established 
     priorities and selection criteria of the rural investment 
     credit agency.
       ``(B) Qualified rural investment plan.--For purposes of 
     this section, the term `qualified rural investment plan' 
     means any plan--
       ``(i) which sets forth selection criteria to be used to 
     determine priorities of the rural investment credit agency 
     which are appropriate to qualifying counties,
       ``(ii) which also gives preference in allocating rural 
     investment credit dollar amounts among selected investment 
     projects to--

       ``(I) investment projects that target those small rural 
     counties with consistently high rates of net out-migration,
       ``(II) investment projects that link the economic 
     development and job creation efforts of 2 or more small rural 
     counties with high rates of net out-migration, and
       ``(III) investment projects that link the economic 
     development and job creation efforts of 1 or more small rural 
     counties in the State with high rates of net out-migration to 
     related efforts in regions of such State experiencing 
     economic growth, and

       ``(iii) which provides a procedure that the agency (or an 
     agent or other private contractor of such agency) will follow 
     in monitoring for noncompliance with the provisions of this 
     section and in notifying the Internal Revenue Service of such 
     noncompliance which such agency becomes aware of and in 
     monitoring for noncompliance through regular site visits.
       ``(C) Certain selection criteria must be used.--The 
     selection criteria set forth in a qualified rural investment 
     plan must include--
       ``(i) investment project location,
       ``(ii) technology and transportation infrastructure needs, 
     and
       ``(iii) private development trends.
       ``(2) Credit allocated to building not to exceed amount 
     necessary to assure investment project feasibility.--
       ``(A) In general.--The rural investment credit dollar 
     amount allocated to an investment project shall not exceed 
     the amount the rural investment credit agency determines is 
     necessary for the financial feasibility of the investment 
     project and its viability as a qualified rural investment 
     project throughout the compliance period.
       ``(B) Agency evaluation.--In making the determination under 
     subparagraph (A), the rural investment credit agency shall 
     consider--
       ``(i) the sources and uses of funds and the total financing 
     planned for the investment project,
       ``(ii) any proceeds or receipts expected to be generated by 
     reason of tax benefits,
       ``(iii) the percentage of the rural investment credit 
     dollar amount used for investment project costs other than 
     the cost of intermediaries, and
       ``(iv) the reasonableness of the developmental and 
     operational costs of the investment project.

     Clause (iii) shall not be applied so as to impede the 
     development of investment projects in hard-to-develop areas.
       ``(C) Determination made when credit amount applied for and 
     when building placed in service.--
       ``(i) In general.--A determination under subparagraph (A) 
     shall be made as of each of the following times:

       ``(I) The application for the rural investment credit 
     dollar amount.
       ``(II) The allocation of the rural investment credit dollar 
     amount.
       ``(III) The date the building is first placed in service.

       ``(ii) Certification as to amount of other subsidies.--
     Prior to each determination under clause (i), the taxpayer 
     shall certify to the rural investment credit agency the full 
     extent of all Federal, State, and local subsidies which apply 
     (or which the taxpayer expects to apply) with respect to the 
     building.
       ``(l) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including regulations--
       ``(1) dealing with--
       ``(A) investment projects which include more than 1 
     building or only a portion of a building,
       ``(B) buildings which are sold in portions,
       ``(2) providing for the application of this section to 
     short taxable years,
       ``(3) preventing the avoidance of the rules of this 
     section, and
       ``(4) providing the opportunity for rural investment credit 
     agencies to correct administrative errors and omissions with 
     respect to allocations and record keeping within a reasonable 
     period after their discovery, taking into account the 
     availability of regulations and other administrative guidance 
     from the Secretary.''.
       (b) Current Year Business Credit Calculation.--Section 
     38(b) (relating to current year business credit), as amended 
     by this Act, is amended by striking ``plus'' at the end of 
     paragraph (16), by striking the period at the end of 
     paragraph (17) and inserting ``, plus'', and by adding at the 
     end the following:
       ``(18) the rural investment credit determined under section 
     42A(a).''.
       (c) Limitation on Carryback.--Subsection (d) of section 39 
     (relating to carryback and carryforward of unused credits), 
     as amended by this Act, is amended by adding at the end the 
     following:
       ``(12) No carryback of rural investment credit before 
     effective date.--No portion of the unused business credit for 
     any taxable year which is attributable to the rural 
     investment credit determined under section 42A may be carried 
     back to a taxable year beginning before the date of the 
     enactment of the Jumpstart Our Business Strength (JOBS) 
     Act.''.
       (d) Conforming Amendments.--
       (1) Section 55(c)(1) is amended by inserting ``or 
     subsection (i) or (j) of section 42A'' after ``section 42''.
       (2) Subsections (i)(c)(3), (i)(c)(6)(B)(i), and (k)(1) of 
     section 469 are each amended by inserting ``or 42A'' after 
     ``section 42''.
       (3) Section 772(a) is amended by striking ``and'' at the 
     end of paragraph (10), by redesignating paragraph (11) as 
     paragraph (12), and by inserting after paragraph (10) the 
     following:
       ``(11) the rural investment credit determined under section 
     42A, and''.
       (4) Section 774(b)(4) is amended by inserting ``, 42A(i),'' 
     after ``section 42(j)''.
       (e) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1 is amended by 
     inserting after the item relating to section 42 the 
     following:

``Sec. 42A. Rural investment credit.''.

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

     SEC. 634. QUALIFIED RURAL SMALL BUSINESS INVESTMENT CREDIT.

       (a) In General.--Subpart D of part IV of subchapter A of 
     chapter 1 (relating to business related credits), as amended 
     by this Act,

[[Page 6528]]

     is amended by adding at the end the following:

     ``SEC. 42B. QUALIFIED RURAL SMALL BUSINESS INVESTMENT CREDIT.

       ``(a) In General.--For purposes of section 38, in the case 
     of a qualified rural small business, the amount of the 
     qualified rural small business investment credit determined 
     under this section for any taxable year is equal to 30 
     percent of the qualified expenditures for the taxable year of 
     such business.
       ``(b) Dollar Limitation.--
       ``(1) In general.--The credit allowable under subsection 
     (a) for any taxable year shall not exceed the lesser of--
       ``(A) $5,000, or
       ``(B) the amount when added to the aggregate credits 
     allowable to the taxpayer under subsection (a) for all 
     preceding taxable years does not exceed $25,000.
       ``(2) No double credit allowed.--In the case of any 
     qualified rural small business which places in service a 
     qualified rural investment building with respect to which a 
     rural investment credit is allowed under section 42A for any 
     taxable year, paragraph (1)(A) shall be applied with respect 
     to such taxable year by substituting `zero' for `$5,000'.
       ``(c) Qualified Rural Small Business.--For purposes of this 
     section, the term `qualified rural small business' means any 
     person if such person--
       ``(1) employed not more than 5 full-time employees during 
     the taxable year,
       ``(2) materially and substantially participates in 
     management,
       ``(3) is located in a qualifying county, and
       ``(4) submitted a qualified business plan with respect to 
     which the rural investment credit agency with jurisdiction 
     over such qualifying county has allocated a portion of the 
     State rural investment ceiling for such taxable year under 
     section 42A(g)(7).

     For purposes of paragraph (1), an employee shall be 
     considered full-time if such employee is employed at least 30 
     hours per week for 20 or more calendar weeks in the taxable 
     year.
       ``(d) Qualified Expenditures.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified expenditures' means 
     expenditures normally associated with starting or expanding a 
     business and included in a qualified business plan, including 
     costs for capital, plant and equipment, inventory expenses, 
     and wages, but not including interest costs.
       ``(2) Only certain expenditures included for existing 
     businesses.--In the case of a qualified rural small business 
     with respect to which a credit under subsection (a) was 
     allowed for a preceding taxable year, such term shall include 
     only so much of the expenditures described in paragraph (1) 
     for the taxable year as exceed the aggregate of such 
     expenditures for the preceding taxable year.
       ``(e) Qualified Business Plan.--For purposes of this 
     section, the term `qualified business plan' means a business 
     plan which--
       ``(1) has been approved by the rural investment credit 
     agency with jurisdiction over the qualifying county in which 
     the qualified rural small business is located pursuant to 
     such agency's rural investment plan, and
       ``(2) meets such requirements as the agency may specify.
       ``(f) Denial of Double Benefit.--In the case of the amount 
     of the credit determined under this section--
       ``(1) no deduction or credit shall be allowed for such 
     amount under any other provision of this chapter, and
       ``(2) no increase in the adjusted basis of any property 
     shall result from such amount.
       ``(g) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) any term which is used in this section which is used 
     in section 42A shall have the meaning given such term by 
     section 42A, and
       ``(2) rules similar to the rules under subsections (j)(2), 
     (j)(3), and (k) of section 42A shall apply.''.
       (b) Current Year Business Credit Calculation.--Section 
     38(b) (relating to current year business credit), as amended 
     by this Act, is amended by striking ``plus'' at the end of 
     paragraph (17), by striking the period at the end of 
     paragraph (18) and inserting ``, plus'', and by adding at the 
     end the following:
       ``(19) the qualified rural small business investment credit 
     determined under section 42B(a).''.
       (c) Limitation on Carryback.--Subsection (d) of section 39 
     (relating to carryback and carryforward of unused credits), 
     as amended by this Act, is amended by adding at the end the 
     following:
       ``(13) No carryback of qualified rural small business 
     investment credit before effective date.--No portion of the 
     unused business credit for any taxable year which is 
     attributable to the qualified rural small business investment 
     credit determined under section 42B may be carried back to a 
     taxable year beginning before the date of the enactment of 
     the Jumpstart Our Business Strength (JOBS) Act.''.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by inserting after the item relating to 
     section 42A the following:

``Sec. 42B. Qualified rural small business investment credit.''.

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

     SEC. 635. CREDIT FOR MAINTENANCE OF RAILROAD TRACK.

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

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

       ``(a) General Rule.--For purposes of section 38, the 
     railroad track maintenance credit determined under this 
     section for the taxable year is an amount equal to 30 percent 
     of the qualified railroad track maintenance expenditures paid 
     or incurred by an eligible taxpayer during the taxable year.
       ``(b) Limitation.--The credit allowed under subsection (a) 
     for any taxable year shall not exceed the product of--
       ``(1) $3,500, and
       ``(2) the number of miles of railroad track owned or leased 
     by the eligible taxpayer as of the close of the taxable year.
       ``(c) Eligible taxpayer.--For purposes of this section, the 
     term `eligible taxpayer' means--
       ``(1) any Class II or Class III railroad, and
       ``(2) any person who transports property using the rail 
     facilities of a person described in paragraph (1) or who 
     furnishes railroad-related property or services to such a 
     person.
       ``(d) Qualified Railroad Track Maintenance Expenditures.--
     For purposes of this section, the term `qualified railroad 
     track maintenance expenditures' means expenditures (whether 
     or not otherwise chargeable to capital account) for 
     maintaining railroad track (including roadbed, bridges, and 
     related track structures) owned or leased as of January 1, 
     2005, by a Class II or Class III railroad.
       ``(e) Other Definitions and Special Rules.--
       ``(1) Class ii or Class iii railroad.--For purposes of this 
     section, the terms `Class II railroad' and `Class III 
     railroad' have the meanings given such terms by the Surface 
     Transportation Board.
       ``(2) Controlled groups.--Rules similar to the rules of 
     paragraph (1) of section 41(f) shall apply for purposes of 
     this section.
       ``(3) Basis adjustment.--For purposes of this subtitle, if 
     a credit is allowed under this section with respect to any 
     railroad track, the basis of such track shall be reduced by 
     the amount of the credit so allowed.
       ``(f) Application of Section.--This section shall apply to 
     qualified railroad track maintenance expenditures paid or 
     incurred during taxable years beginning after December 31, 
     2004, and before January 1, 2008.''.
       (b) Limitation on Carryback.--Section 39(d) (relating to 
     transition rules), as amended by this Act, is amended by 
     adding at the end the following new paragraph:
       ``(14) No carryback of railroad track maintenance credit 
     before effective date.--No portion of the unused business 
     credit for any taxable year which is attributable to the 
     railroad track maintenance credit determined under section 
     45I may be carried to a taxable year beginning before January 
     1, 2005.''.
       (c) Conforming Amendments.--
       (1) Section 38(b) (relating to general business credit), as 
     amended by this Act, is amended by striking ``plus'' at the 
     end of paragraph (18), by striking the period at the end of 
     paragraph (19) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(20) the railroad track maintenance credit determined 
     under section 45I(a).''.
       (2) Subsection (a) of section 1016, as amended by this Act, 
     is amended by striking ``and'' at the end of paragraph (28), 
     by striking the period at the end of paragraph (29) and 
     inserting ``, and'', and by adding at the end the following 
     new paragraph:
       ``(30) in the case of railroad track with respect to which 
     a credit was allowed under section 45I, to the extent 
     provided in section 45I(e)(3).''.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by inserting after the item relating to 
     section 45F the following new item:

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

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

     SEC. 636. RAILROAD REVITALIZATION AND SECURITY INVESTMENT 
                   CREDIT.

       (a) Railroad Revitalization and Security Investment 
     Credit.--
       (1) In general.--Subpart D of part IV of subchapter A of 
     chapter 1 (relating to business-related credits), as amended 
     by this Act, is amended by adding at the end the following 
     new section:

     ``SEC. 45J. RAILROAD REVITALIZATION AND SECURITY INVESTMENT 
                   CREDIT.

       ``(a) General Rule.--For purposes of section 38, the 
     railroad revitalization and security investment credit 
     determined under this section for the taxable year is the 
     amount equal to 50 percent of the qualified project 
     expenditures paid or incurred by the taxpayer during the 
     taxable year.

[[Page 6529]]

       ``(b) Qualified Project Expenditures.--
       ``(1) In general.--For purposes of this section, the term 
     `qualified project expenditures' means, with respect to any 
     project for intercity passenger rail transportation (as 
     defined under section 24102 of title 49, United States Code) 
     which is included in a State rail plan, expenditures (whether 
     or not otherwise chargeable to capital account) for--
       ``(A) planning,
       ``(B) environmental review and environmental impact 
     mitigation,
       ``(C) track and track structure rehabilitation, relocation, 
     improvement, and development,
       ``(D) railroad safety and security improvements,
       ``(E) communications and signaling improvements,
       ``(F) intercity passenger rail equipment acquisition, and
       ``(G) rail station and intermodal facilities development.
       ``(2) Exceptions.--An expenditure shall not be treated as a 
     qualified project expenditure unless all persons which 
     conduct rail operations over the infrastructure with respect 
     to which such an expenditure is made--
       ``(A) are employers for purposes of the Railroad Retirement 
     Act of 1974 and are carriers for purposes of the Railway 
     Labor Act (unless such a person is an operator with respect 
     to commuter rail passenger transportation (as defined in 
     section 24102(4) of title 49, United States Code) of a State 
     or local government authority (as such terms are defined in 
     section 5302 of such title) eligible to receive financial 
     assistance under section 5307 of such title, a contractor 
     performing services in connection with the operations with 
     respect to commuter rail passenger transportation (as so 
     defined), or the Alaska Railroad or its contractors),
       ``(B) provide assurances to the State that any collective 
     bargaining agreements with such a person's employees 
     (including terms regulating the contracting of work) will 
     remain in full force and effect according to the terms of the 
     agreements for work performed for such a person on the 
     railroad transportation corridor, and
       ``(C) comply with the protective agreements established 
     under section 504 of the Railroad Revitalization and 
     Regulatory Reform Act of 1976 with respect to employees 
     affected by actions taken in connection with the project.
       ``(c) Limitation.--
       ``(1) In general.--The amount of the credit allowed under 
     subsection (a) for any taxable year with respect to any 
     project for which qualified project expenditures are made 
     shall not exceed the limitation allocated to such project 
     under this subsection for the calendar year in which the 
     taxable year begins.
       ``(2) State limitation.--
       ``(A) In general.--There is a State railroad revitalization 
     and security investment credit limitation for each calendar 
     year. Such limitation is the amount which bears the same 
     ratio to $165,000,000 as the allocation number for such State 
     bears to the allocation number for all States.
       ``(B) Allocation number.--For purposes of subparagraph (A), 
     the allocation number is, with respect to any State, the sum 
     of the following:
       ``(i) The number of railroad and public road grade 
     crossings on intercity passenger rail routes within the 
     State.
       ``(ii) The number of intercity passenger rail miles within 
     the State.
       ``(iii) The number of intercity embarkations and 
     disembarkations for each passenger within the State.
       ``(3) Unused credit carryovers allocated among certain 
     states.--
       ``(A) In general.--The unused credit carryover for all 
     States for any calendar year shall be reallocated to each 
     qualified State in an amount which bears the same ratio to 
     the unused credit carryover for all States for the calendar 
     as the allocation number for such qualified State bears to 
     the allocation number for all qualified States.
       ``(B) Unused credit carryover.--For purposes of this 
     paragraph, the term `unused credit carryover' means, with 
     respect to any State, the excess of the State limitation 
     (determined under paragraph (2)) for the calendar year over 
     the amount allocated by the State under paragraph (4) for 
     such calendar year.
       ``(C) Qualified states.--For purposes of this paragraph, 
     the term `qualified State' means any State--
       ``(i) which allocated its entire State limitation amount 
     under paragraph (4) for the calendar year, and
       ``(ii) for which a request is made to receive an allocation 
     under this paragraph.
       ``(4) Allocation within states.--Each State shall allocate 
     the limitation amount allocated to such State under 
     paragraphs (2) and (3) to projects for intercity passenger 
     rail transportation which are included in the State rail plan 
     of such State.
       ``(5) New york city rail projects.--
       ``(A) In general.--In addition to the amounts allocated 
     under paragraph (2), the Secretary shall allocate a 
     limitation of $200,000,000 to New York City, New York, for 
     qualified project expenditures within the New York Liberty 
     Zone (as defined in section 1400L(h)) for the period 
     described in subsection (h).
       ``(B) Allocation among projects.--Of the limitation 
     allocated under subparagraph (A)--
       ``(i) $100,000,000 shall be allocated to projects 
     designated by the Mayor of New York City, New York, and
       ``(ii) $100,000,000 shall be allocated to projects 
     designated by the Governor of New York.
       ``(C) Special rule regarding qualified project 
     expenditures.--For purposes of this paragraph, a qualified 
     project expenditure shall include any expenditure for 
     improvements to subway systems, for commuter rail systems, 
     for rail links to airports, and for public infrastructure 
     improvements in the vicinity of rail or subway stations.
       ``(d) State rail plan.--For purposes of this section, the 
     term `State rail plan' means a plan prepared and maintained 
     in accordance with chapter 225 of title 49, United States 
     Code.
       ``(e) Basis Adjustment.--For purposes of this subtitle, if 
     a credit is allowed under this section with respect to any 
     property, the basis of such property shall be reduced by the 
     amount of the credit so allowed.
       ``(f) No Double Benefit.--No credit shall be allowed under 
     this section with respect to any expenditures for which a 
     credit is allowed under section 45I.
       ``(g) Credit Transferability.--Any credit allowable under 
     this section may be transferred (but not more than once) if--
       ``(1) the credit exceeds the tax liability of the taxpayer 
     for the taxable year, or
       ``(2) the taxpayer is not subject to any tax imposed by 
     this chapter by reason of having a tax-exempt status.
       ``(h) Application of Section.--This section shall apply to 
     qualified project expenditures paid or incurred during 
     taxable years beginning after December 31, 2004, and before 
     January 1, 2008.''.
       (2) Limitation on carryback.--Section 39(d) (relating to 
     transition rules), as amended by this Act, is amended by 
     adding at the end the following new paragraph:
       ``(15) No carryback of section 45j credit before effective 
     date.--No portion of the unused business credit for any 
     taxable year which is attributable to the credit determined 
     under section 45J(a) may be carried back to any taxable year 
     beginning before January 1, 2005.''.
       (3) Conforming Amendments.--
       (A) Section 38(b) (relating to general business credit), as 
     amended by this Act, is amended by striking ``plus'' at the 
     end of paragraph (19), by striking the period at the end of 
     paragraph (20) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(21) the railroad revitalization and security investment 
     credit determined under section 45J(a).''.
       (B) Subsection (a) of section 1016, as amended by this Act, 
     is amended by striking ``and'' at the end of paragraph (29), 
     by striking the period at the end of paragraph (30) and 
     inserting ``, and'', and by adding at the end the following 
     new paragraph:
       ``(31) in the case of property with respect to which a 
     credit was allowed under section 45J, to the extent provided 
     in section 45J(e).''.
       (4) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by inserting after the item relating to 
     section 45I the following new item:

``Sec. 45J. Railroad revitalization and security investment credit.''.

       (5) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.
       (b) State rail plans.--
       (1) In general.--Part B of subtitle V of title 49, United 
     States Code, is amended by adding at the end the following:

                    ``CHAPTER 225--STATE RAIL PLANS

``Sec.
``22501. Authority.
``22502. Purposes.
``22503. Transparency; coordination.
``22504. Content.
``22505. Approval.
``22506. Definitions.

     ``Sec. 22501. Authority

       ``(a) In General.--Each State may prepare and maintain a 
     State rail plan in accordance with the provisions of this 
     chapter.
       ``(b) Requirements.--For the preparation and periodic 
     revision of a State rail plan, a State shall--
       ``(1) establish or designate a State rail transportation 
     authority to prepare, maintain, coordinate, and administer 
     the plan;
       ``(2) establish or designate a State rail plan approval 
     authority to approve the plan;
       ``(3) make the State's approved plan available to the 
     public and transmit a copy to the Secretary of 
     Transportation; and
       ``(4) revise the plan no less frequently than once every 5 
     years.

     ``Sec. 22502. Purposes

       ``(a) Purposes.--The purposes of a State rail plan are as 
     follows:
       ``(1) To set forth State policy involving freight and 
     passenger rail transportation, including commuter rail 
     operations, in the State.
       ``(2) To present priorities and strategies to enhance rail 
     service in the State that benefits the public.

[[Page 6530]]

       ``(3) To serve as the basis for Federal and State rail 
     investments within the State.
       ``(b) Content.--The State rail plan shall establish the 
     period covered by such plan.
       ``(c) Consistency With State Transportation Efforts.--A 
     State rail plan shall be consistent with the State 
     transportation planning goals and programs and shall set 
     forth rail transportation's role within the State 
     transportation system.

     ``Sec. 22503. Transparency; coordination

       ``(a) Preparation.--A State shall provide adequate and 
     reasonable notice and opportunity for comment and other input 
     on a proposed State rail plan under this chapter to the 
     following:
       ``(1) The public.
       ``(2) Rail carriers.
       ``(3) Commuter and transit authorities operating in, or 
     affected by rail operations within, the State.
       ``(4) Units of local government.
       ``(5) Other parties interested in the preparation and 
     review of the State rail plan.
       ``(b) Intergovernmental Coordination.--A State shall review 
     the freight and passenger rail service activities and 
     initiatives of regional planning agencies, regional 
     transportation authorities, and municipalities within the 
     State, or in the region in which the State is located, while 
     preparing the plan, and shall include any recommendations 
     made by such agencies, authorities, and municipalities as 
     deemed appropriate by the State.

     ``Sec. 22504. Content

       ``(a) In General.--Each State rail plan shall contain the 
     following:
       ``(1) An inventory of the existing overall rail 
     transportation system and rail services and facilities within 
     the State and an analysis of the role of rail transportation 
     within the State's surface transportation system.
       ``(2) A comprehensive review of all rail lines within the 
     State, including proposed high speed rail corridors and 
     significant rail line segments not currently in service.
       ``(3) A statement of the State's passenger rail service 
     objectives, including minimum service levels, for intercity 
     passenger rail transportation routes in the State.
       ``(4) A general analysis of rail's transportation, 
     economic, and environmental impacts in the State, including 
     congestion mitigation, trade and economic development, air 
     quality, land-use, energy-use, and community impacts.
       ``(5) A long-range rail investment program for current and 
     future freight and passenger infrastructure in the State that 
     meets the requirements of subsection (b).
       ``(6) A statement of public financing issues for rail 
     projects and service in the State, including a list of 
     current and prospective public capital and operating funding 
     resources, public subsidies, State taxation, and other 
     financial policies relating to rail infrastructure 
     development.
       ``(7) An identification of rail infrastructure issues 
     within the State that reflects consultation with all relevant 
     stake holders.
       ``(8) A review of major passenger and freight intermodal 
     rail connections and facilities within the State, including 
     seaports, and prioritized options to maximize service 
     integration and efficiency between rail and other modes of 
     transportation within the State.
       ``(9) A review of publicly funded projects within the State 
     to improve rail transportation safety and security, including 
     all major projects funded under section 130 of title 23.
       ``(10) A performance evaluation of passenger rail services 
     operating in the State, including possible improvements in 
     those services, and a description of strategies to achieve 
     those improvements.
       ``(11) A compilation of studies and reports on high-speed 
     rail corridor development within the State not included in a 
     previous plan under this chapter, and a plan for funding any 
     recommended development of such corridors in the State.
       ``(12) A statement that the State satisfies the conditions 
     set forth in section 22102.
       ``(b) Long-Range Service and Investment Program.--
       ``(1) Program content.--A long-range rail investment 
     program included in a State rail plan under subsection (a)(5) 
     shall include the following matters:
       ``(A) Two lists for rail capital projects, 1 list for 
     freight rail capital projects and 1 list for intercity 
     passenger rail capital projects.
       ``(B) A detailed funding plan for the projects.
       ``(2) Project list content.--The lists of freight and 
     intercity passenger rail capital projects shall contain--
       ``(A) a description of the anticipated public and private 
     benefits of each such project; and
       ``(B) a statement of the correlation between--
       ``(i) public funding contributions for the projects; and
       ``(ii) the public benefits.
       ``(3) Considerations for project list.--In preparing the 
     list of freight and intercity passenger rail capital 
     projects, a State rail transportation authority shall take 
     into consideration the following matters:
       ``(A) Contributions made by non-Federal and non-State 
     sources through user fees, matching funds, or other private 
     capital involvement.
       ``(B) Rail capacity and congestion effects.
       ``(C) Effects to highway, aviation, and maritime capacity, 
     congestion, or safety.
       ``(D) Regional balance.
       ``(E) Environmental impact.
       ``(F) Economic and employment impacts.
       ``(G) Projected ridership and other service measures for 
     passenger rail projects.

     ``Sec. 22505. Approval

       ``The State rail plan approval authority established or 
     designated under section 22501(b)(2) may approve a State rail 
     plan for the purposes of this chapter if--
       ``(1) the plan meets all of the requirements applicable to 
     State plans under this chapter;
       ``(2) for each ready-to-commence project listed on the 
     ranked list of freight and intercity passenger rail capital 
     improvement projects under the plan--
       ``(A) the project meets all safety and environmental 
     requirements, including those prescribed under the National 
     Environmental Policy Act of 1969 (42 U.S.C. 4331 et seq.) 
     that are applicable to the project under law; and
       ``(B) the State has entered into an agreement with any 
     owner of rail infrastructure or right-of-way directly 
     affected by the project that provides for the State to 
     proceed with the project and includes assurances regarding 
     capacity and compensation for use of such infrastructure or 
     right-of-way, if applicable; and
       ``(3) the content of the plan is coordinated with State 
     transportation plans developed pursuant to section 135 of 
     title 23.

     ``Sec. 22506. Definitions

       ``In this chapter:
       ``(1) Private benefit.--The term `private benefit'--
       ``(A) means a benefit accrued to a person or private 
     entity, other than the National Railroad Passenger 
     Corporation, that directly improves the economic and 
     competitive condition of that person or entity through 
     improved assets, cost reductions, service improvements, or 
     other means; and
       ``(B) shall be determined on a project-by-project basis, 
     based upon an agreement between the State and the affected 
     persons or private entities.
       ``(2) Public benefit.--The term `public benefit'--
       ``(A) means a benefit accrued to the public in the form of 
     enhanced mobility of people or goods, environmental 
     protection or enhancement, congestion mitigation, enhanced 
     trade and economic development, improved air quality or land 
     use, more efficient energy use, enhanced public safety or 
     security, reduction of public expenditures due to improved 
     transportation efficiency or infrastructure preservation, and 
     other positive community effects; and
       ``(B) shall be determined on a project-by-project basis, 
     based upon an agreement between the State and the persons or 
     private entities involved in the project.
       ``(3) State.--The term `State' means any of the 50 States 
     and the District of Columbia.
       ``(4) State rail transportation authority.--The term `State 
     rail transportation authority' means the State agency or 
     official responsible under the direction of the Chief 
     Executive of the State or a State law for preparation, 
     maintenance, coordination, and administration of the State 
     rail plan under this chapter.''.
       (2) Clerical amendment.--The table of chapters at the 
     beginning of subtitle V of title 49, United States Code, is 
     amended by inserting after the item relating to chapter 223 
     the following:

``225. STATE RAIL PLANS.......................................22501.''.

     SEC. 637. MODIFICATION OF TARGETED AREAS DESIGNATED FOR NEW 
                   MARKETS TAX CREDIT.

       (a) In General.--Paragraph (2) of section 45D(e) is amended 
     to read as follows:
       ``(2) Targeted populations.--The Secretary shall prescribe 
     regulations under which 1 or more targeted populations 
     (within the meaning of section 3(20) of the Riegle Community 
     Development and Regulatory Improvement Act of 1974 (12 U.S.C. 
     4702(20))) may be treated as low-income communities. Such 
     regulations shall include procedures for determining which 
     entities are qualified active low-income community businesses 
     with respect to such populations.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to designations made by the Secretary of the 
     Treasury after the date of the enactment of this Act.

     SEC. 638. MODIFICATION OF INCOME REQUIREMENT FOR CENSUS 
                   TRACTS WITHIN HIGH MIGRATION RURAL COUNTIES.

       (a) In general.--Section 45D(e) (relating to low-income 
     community) is amended by adding at the end the following new 
     paragraph:
       ``(4) Modification of income requirement for census tracts 
     within high migration rural counties.--
       ``(A) In general.--In the case of a population census tract 
     located within a high migration rural county, paragraph 
     (1)(B)(i) shall be applied by substituting `85 percent' for 
     `80 percent'.
       ``(B) High migration rural county.--For purposes of this 
     paragraph, the term `high migration rural county' means any 
     county which, during the 20-year period ending with the year 
     in which the most recent census was

[[Page 6531]]

     conducted, has a net out-migration of inhabitants from the 
     county of at least 10 percent of the population of the county 
     at the beginning of such period.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the amendment made by 
     section 121(a) of the Community Renewal Tax Relief Act of 
     2000.

                  Subtitle E--Miscellaneous Provisions

     SEC. 641. EXCLUSION OF GAIN OR LOSS ON SALE OR EXCHANGE OF 
                   CERTAIN BROWNFIELD SITES FROM UNRELATED 
                   BUSINESS TAXABLE INCOME.

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

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

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

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

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

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

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

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

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

       ``(I) to manage, remove, control, contain, abate, or 
     otherwise remediate a hazardous substance, pollutant, or 
     contaminant on the property,
       ``(II) to obtain a Phase II environmental site assessment 
     of the property, including any expenditure to monitor, 
     sample, study, assess, or otherwise evaluate the release, 
     threat of release, or presence of a hazardous substance, 
     pollutant, or contaminant on the property,
       ``(III) to obtain environmental regulatory certifications 
     and approvals required to manage the remediation and 
     monitoring of the hazardous substance, pollutant, or 
     contaminant on the property, and
       ``(IV) regardless of whether it is necessary to obtain a 
     certification described in subparagraph (D)(i)(II), to obtain 
     remediation cost-cap or stop-loss coverage, re-opener or 
     regulatory action coverage, or similar coverage under 
     environmental insurance policies, or financial guarantees 
     required to manage such remediation and monitoring.

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

       ``(I) any portion of the purchase price paid or incurred by 
     the eligible taxpayer to acquire the qualifying brownfield 
     property,
       ``(II) environmental insurance costs paid or incurred to 
     obtain legal defense coverage, owner/operator liability 
     coverage, lender liability coverage, professional liability 
     coverage, or similar types of coverage,
       ``(III) any amount paid or incurred to the extent such 
     amount is reimbursed, funded, or otherwise subsidized by 
     grants provided by the United States, a State, or a political 
     subdivision of a State for use in connection with

[[Page 6532]]

     the property, proceeds of an issue of State or local 
     government obligations used to provide financing for the 
     property the interest of which is exempt from tax under 
     section 103, or subsidized financing provided (directly or 
     indirectly) under a Federal, State, or local program provided 
     in connection with the property, or
       ``(IV) any expenditure paid or incurred before the date of 
     the enactment of this paragraph.

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

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

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

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

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

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

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

     SEC. 642. MODIFICATION OF UNRELATED BUSINESS INCOME 
                   LIMITATION ON INVESTMENT IN CERTAIN DEBT-
                   FINANCED PROPERTIES.

       (a) In General.--Section 514(c)(6) (relating to acquisition 
     indebtedness) is amended--
       (1) by striking ``include an obligation'' and inserting 
     ``include--
       ``(A) an obligation'',
       (2) by striking the period at the end and inserting ``, 
     or'', and
       (3) by adding at the end the following:
       ``(B) indebtedness incurred by a small business investment 
     company licensed under the Small Business Investment Act of 
     1958 which is evidenced by a debenture--
       ``(i) issued by such company under section 303(a) of such 
     Act, and
       ``(ii) held or guaranteed by the Small Business 
     Administration.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to acquisitions made on or after the date of the 
     enactment of this Act.

     SEC. 643. CIVIL RIGHTS TAX RELIEF.

       (a) Deduction Allowed Whether or Not Taxpayer Itemizes 
     Other Deductions.--Subsection (a) of section 62 (defining 
     adjusted gross income) is amended by inserting after 
     paragraph (18) the following new item:
       ``(19) Costs involving discrimination suits, etc.--Any 
     deduction allowable under this chapter for attorney fees and 
     court costs paid by, or on behalf of, the taxpayer in 
     connection with any action involving a claim of unlawful 
     discrimination (as defined in subsection (e)) or a claim of a 
     violation of subchapter III of chapter 37 of title 31, United 
     States Code. The preceding sentence shall not apply to any 
     deduction in excess of the amount includible in the 
     taxpayer's gross income for the taxable year on account of a 
     judgment or settlement (whether by suit or agreement and 
     whether as lump sum or periodic payments) resulting from such 
     claim.''.
       (b) Unlawful Discrimination Defined.--Section 62 is amended 
     by adding at the end the following new subsection:
       ``(e) Unlawful discrimination defined.--For purposes of 
     subsection (a)(19), the term `unlawful discrimination' means 
     an act that is unlawful under any of the following:
       ``(1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 
     1202).
       ``(2) Section 201, 202, 203, 204, 205, 206, or 207 of the 
     Congressional Accountability Act of 1995 (2 U.S.C. 1311, 
     1312, 1313, 1314, 1315, 1316, or 1317).

[[Page 6533]]

       ``(3) The National Labor Relations Act (29 U.S.C. 151 et 
     seq.).
       ``(4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 
     et seq.).
       ``(5) Section 4 or 15 of the Age Discrimination in 
     Employment Act of 1967 (29 U.S.C. 623 or 633a).
       ``(6) Section 501 or 504 of the Rehabilitation Act of 1973 
     (29 U.S.C. 791 or 794).
       ``(7) Section 510 of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1140).
       ``(8) Title IX of the Education Amendments of 1972 (29 
     U.S.C. 1681 et seq.).
       ``(9) The Employee Polygraph Protection Act of 1988 (29 
     U.S.C. 201 et seq.).
       ``(10) The Worker Adjustment and Retraining Notification 
     Act (29 U.S.C. 2102 et seq.).
       ``(11) Section 105 of the Family and Medical Leave Act of 
     1993 (29 U.S.C. 2615).
       ``(12) Chapter 43 of title 38, United States Code (relating 
     to employment and reemployment rights of members of the 
     uniformed services).
       ``(13) Section 1977, 1979, or 1980 of the Revised Statutes 
     (42 U.S.C. 1981, 1983, or 1985).
       ``(14) Section 703, 704, or 717 of the Civil Rights Act of 
     1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
       ``(15) Section 804, 805, 806, 808, or 818 of the Fair 
     Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).
       ``(16) Section 102, 202, 302, or 503 of the Americans with 
     Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 
     12203).
       ``(17) Any provision of Federal law (popularly known as 
     whistleblower protection provisions) prohibiting the 
     discharge of an employee, the discrimination against an 
     employee, or any other form of retaliation or reprisal 
     against an employee for asserting rights or taking other 
     actions permitted under Federal law.
       ``(18) Any provision of Fderal, State, or local law, or 
     common law claims permitted under Federal, State, or local 
     law--
       ``(i) providing for the enforcement of civil rights, or
       ``(ii) regulating any aspect of the employment 
     relationship, including claims for wages, compensation, or 
     benefits, or prohibiting the discharge of an employee, the 
     discrimination against an employee, or any other form of 
     retaliation or reprisal against an employee for asserting 
     rights or taking other actions permitted by law.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to fees and costs paid after December 31, 2002, 
     with respect to any judgment or settlement occurring after 
     such date.

     SEC. 644. EXCLUSION FOR PAYMENTS TO INDIVIDUALS UNDER 
                   NATIONAL HEALTH SERVICE CORPS LOAN REPAYMENT 
                   PROGRAM AND CERTAIN STATE LOAN REPAYMENT 
                   PROGRAMS.

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

     SEC. 645. CERTAIN EXPENSES OF RURAL LETTER CARRIERS.

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

     SEC. 646. METHOD OF ACCOUNTING FOR NAVAL SHIPBUILDERS.

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

     SEC. 647. SUSPENSION OF POLICYHOLDERS SURPLUS ACCOUNT 
                   PROVISIONS.

       (a) Distributions To Shareholders From Pre-1984 
     Policyholders Surplus Account.--Section 815 (relating to 
     distributions to shareholders from pre-1984 policyholders 
     surplus account) is amended by adding at the end the 
     following:
       ``(g) Special Rules Applicable During 2004 and 2005.--In 
     the case of any taxable year of a stock life insurance 
     company beginning after December 31, 2003, and before January 
     1, 2006--
       ``(1) the amount under subsection (a)(2) for such taxable 
     year shall be treated as zero, and
       ``(2) notwithstanding subsection (b), in determining any 
     subtractions from an account under subsections (c)(3) and 
     (d)(3), any distribution to shareholders during such taxable 
     year shall be treated as made first out of the policyholders 
     surplus account, then out of the shareholders surplus 
     account, and finally out of other accounts.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 648. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES 
                   WITHOUT REDUCING PATRONAGE DIVIDENDS.

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

     SEC. 649. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF 
                   WEATHER-RELATED CONDITIONS.

       (a) Replacement of Livestock With Other Farm Property.--
     Subsection (f) of section 1033 (relating to involuntary 
     conversions) is amended--
       (1) by inserting ``drought, flood, or other weather-related 
     conditions, or'' after ``because of'',
       (2) by inserting ``in the case of soil contamination or 
     other environmental contamination'' after ``including real 
     property'', and
       (3) by striking ``Where There Has Been Environmental 
     Contamination'' in the heading and inserting ``in Certain 
     Cases''.
       (b) Extension of Replacement Period of Involuntarily 
     Converted Livestock.--Subsection (e) of section 1033 
     (relating to involuntary conversions) is amended--
       (1) by striking ``Conditions.--For purposes'' and inserting 
     ``Conditions.--
       ``(1) In general.--For purposes'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Extension of replacement period.--
       ``(A) In general.--In the case of drought, flood, or other 
     weather-related conditions described in paragraph (1) which 
     result in the area being designated as eligible for 
     assistance by the Federal Government, subsection (a)(2)(B) 
     shall be applied with respect to any converted property by 
     substituting `4 years' for `2 years'.
       ``(B) Further extension by secretary.--The Secretary may 
     extend on a regional basis the period for replacement under 
     this section (after the application of subparagraph (A)) for 
     such additional time as the Secretary determines appropriate 
     if the weather-related conditions which resulted in

[[Page 6534]]

     such application continue for more than 3 years.''.
       (c) Income Inclusion Rules.--Section 451(e) (relating to 
     special rule for proceeds from livestock sold on account of 
     drought, flood, or other weather-related conditions) is 
     amended by adding at the end the following new paragraph:
       ``(3) Special election rules.--If section 1033(e)(2) 
     applies to a sale or exchange of livestock described in 
     paragraph (1), the election under paragraph (1) shall be 
     deemed valid if made during the replacement period described 
     in such section.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 650. MOTOR VEHICLE DEALER TRANSITIONAL ASSISTANCE.

       (a) In General.--For purposes of subtitle A of the Internal 
     Revenue Code of 1986, in the case of a taxpayer who elects 
     the application of this section and who was a party to a 
     motor vehicle sales and service agreement with a motor 
     vehicle manufacturer who announced in December 2000 that it 
     would phase-out the motor vehicle brand to which such 
     agreement relates--
       (1) amounts received by such taxpayer from such 
     manufacturer on account of the termination of such agreement 
     (hereafter in this section referred to as ``termination 
     payment'') are considered to be received for property used in 
     the trade or business of a motor vehicle retail sales and 
     service dealership, and
       (2) to the extent such termination payment is reinvested in 
     property used in a motor vehicle retail sales and service 
     dealership located within the United States, such property 
     shall qualify as like-kind replacement property to which 
     section 1031 of the Internal Revenue Code of 1986 shall apply 
     with the following modifications:
       (A) Such section shall be applied without regard to 
     subparagraphs (A) and (B)(ii) of subsection (a)(3).
       (B) The period described in section 1031(a)(3)(B) of such 
     Code shall be applied by substituting ``2 years'' for ``180 
     days''.
       (b) Rules for Election.--
       (1) Form of election.--The taxpayer shall make an election 
     under this section in such form and manner as the Secretary 
     of the Treasury may prescribe and shall include in such 
     election the amount of the termination payment received, the 
     identification of the replacement property purchased, and 
     such other information as the Secretary may prescribe.
       (2) Election on amended return.--The Secretary of the 
     Treasury shall permit an election under this section on an 
     amended tax return for taxable years beginning before the 
     date of the enactment of this Act.
       (c) Statute of Limitations.--Notwithstanding the provisions 
     of any other law or rule of law, the statutory period for the 
     assessment for any deficiency attributable to any termination 
     payment gain shall be extended until 3 years after the date 
     the Secretary of the Treasury is notified by the taxpayer of 
     the like-kind replacement property or an intention not to 
     replace.
       (d) Effective Date.--This section shall apply to amounts 
     received after December 12, 2000, in taxable years ending 
     after such date.

     SEC. 651. EXPANSION OF DESIGNATED RENEWAL COMMUNITY AREA 
                   BASED ON 2000 CENSUS DATA.

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

     SEC. 652. REDUCTION OF HOLDING PERIOD TO 12 MONTHS FOR 
                   PURPOSES OF DETERMINING WHETHER HORSES ARE 
                   SECTION 1231 ASSETS.

       (a) In General.--Subparagraph (A) of section 1231(b)(3) 
     (relating to definition of property used in the trade or 
     business) is amended by striking ``and horses''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 653. BLUE RIBBON COMMISSION ON COMPREHENSIVE TAX REFORM.

       (a) Establishment.--
       (1) In general.--There is established the ``Blue Ribbon 
     Commission on Comprehensive Tax Reform'' (in this section 
     referred to as the ``Commission'').
       (2) Membership.--
       (A) Composition.--The Commission shall be composed of 17 
     members of whom--
       (i) 3 shall be appointed by the majority leader of the 
     Senate;
       (ii) 3 shall be appointed by the minority leader of the 
     Senate;
       (iii) 3 shall be appointed by the Speaker of the House of 
     Representatives;
       (iv) 3 shall be appointed by the minority leader of the 
     House of Representatives; and
       (v) 5 shall be appointed by the President, of which no more 
     than 3 shall be of the same party as the President.
       (B) Federal employees.--The members of the Commission may 
     be employees or former employees of the Federal Government.
       (C) Date.--The appointments of the members of the 
     Commission shall be made not later than October 30, 2004.
       (3) Period of appointment; vacancies.--Members shall be 
     appointed for the life of the Commission. Any vacancy in the 
     Commission shall not affect its powers, but shall be filled 
     in the same manner as the original appointment.
       (4) Initial meeting.--Not later than 30 days after the date 
     on which all members of the Commission have been appointed, 
     the Commission shall hold its first meeting.
       (5) Meetings.--The Commission shall meet at the call of the 
     Chairman.
       (6) Quorum.--A majority of the members of the Commission 
     shall constitute a quorum, but a lesser number of members may 
     hold hearings.
       (7) Chairman and vice chairman.--The President shall select 
     a Chairman and Vice Chairman from among its members.
       (b) Duties of the Commission.--
       (1) Study.--The Commission shall conduct a thorough study 
     of all matters relating to a comprehensive reform of the 
     Federal tax system, including the reform of the Internal 
     Revenue Code of 1986 and the implementation (if appropriate) 
     of other types of tax systems.
       (2) Recommendations.--The Commission shall develop 
     recommendations on how to comprehensively reform the Federal 
     tax system in a manner that generates appropriate revenue for 
     the Federal Government.
       (3) Report.--Not later than 18 months after the date on 
     which all initial members of the commission have been 
     appointed pursuant to subsection (a)(2), the Commission shall 
     submit a report to the President and Congress which shall 
     contain a detailed statement of the findings and conclusions 
     of the Commission, together with its recommendations for such 
     legislation and administrative actions as it considers 
     appropriate.
       (c) Powers of the Commission.--
       (1) Hearings.--The Commission may hold such hearings, sit 
     and act at such times and places, take such testimony, and 
     receive such evidence as the Commission considers advisable 
     to carry out this Act.
       (2) Information from federal agencies.--The Commission may 
     secure directly from any Federal department or agency such 
     information as the Commission considers necessary to carry 
     out this Act. Upon request of the Chairman of the Commission, 
     the head of such department or agency shall furnish such 
     information to the Commission.
       (3) Postal services.--The Commission may use the United 
     States mails in the same manner and under the same conditions 
     as other departments and agencies of the Federal Government.
       (4) Gifts.--The Commission may accept, use, and dispose of 
     gifts or donations of services or property.
       (d) Commission Personnel Matters.--
       (1) Compensation of members.--Each member of the Commission 
     who is not an officer or employee of the Federal Government 
     shall be compensated at a rate equal to the daily equivalent 
     of the annual rate of basic pay prescribed for level IV of 
     the Executive Schedule under section 5315 of title 5, United 
     States Code, for each day (including travel time) during 
     which such member is engaged in the performance of the duties 
     of the Commission. All members of the Commission who are 
     officers or employees of the United States shall serve 
     without compensation in addition to that received for their 
     services as officers or employees of the United States.
       (2) Travel expenses.--The members of the Commission shall 
     be allowed travel expenses, including per diem in lieu of 
     subsistence, at rates authorized for employees of agencies 
     under subchapter I of chapter 57 of title 5,

[[Page 6535]]

     United States Code, while away from their homes or regular 
     places of business in the performance of services for the 
     Commission.
       (3) Staff.--
       (A) In general.--The Chairman of the Commission may, 
     without regard to the civil service laws and regulations, 
     appoint and terminate an executive director and such other 
     additional personnel as may be necessary to enable the 
     Commission to perform its duties. The employment of an 
     executive director shall be subject to confirmation by the 
     Commission.
       (B) Compensation.--The Chairman of the Commission may fix 
     the compensation of the executive director and other 
     personnel without regard to chapter 51 and subchapter III of 
     chapter 53 of title 5, United States Code, relating to 
     classification of positions and General Schedule pay rates, 
     except that the rate of pay for the executive director and 
     other personnel may not exceed the rate payable for level V 
     of the Executive Schedule under section 5316 of such title.
       (4) Detail of government employees.--Any Federal Government 
     employee may be detailed to the Commission without 
     reimbursement, and such detail shall be without interruption 
     or loss of civil service status or privilege.
       (5) Procurement of temporary and intermittent services.--
     The Chairman of the Commission may procure temporary and 
     intermittent services under section 3109(b) of title 5, 
     United States Code, at rates for individuals which do not 
     exceed the daily equivalent of the annual rate of basic pay 
     prescribed for level V of the Executive Schedule under 
     section 5316 of such title.
       (e) Termination of the Commission.--The Commission shall 
     terminate 90 days after the date on which the Commission 
     submits its report under subsection (b).
       (f) Authorization of Appropriations.--There are authorized 
     to be appropriated such sums as are necessary to the 
     Commission to carry out this section.

     SEC. 654. TREATMENT OF DISTRIBUTIONS BY ESOPS WITH RESPECT TO 
                   S CORPORATION STOCK.

       (a) In General.--Section 4975(d) of the Internal Revenue 
     Code of 1986 is amended by adding at the end the following 
     new flush sentences:

     ``A plan shall not be treated as violating the requirements 
     of section 401, 409, or subsection (e)(7), or as engaging in 
     a prohibited transaction for purposes of paragraph (3), 
     merely by reason of any distribution described in section 
     1368(a) with respect to S corporation stock which constitutes 
     qualifying employer securities if the distribution is, in 
     accordance with the plan provisions, used to make payments on 
     a loan described in paragraph (3) the proceeds of which were 
     used to acquire the qualifying employer securities (whether 
     or not allocated to participants). The preceding sentence 
     shall not apply in the case of a distribution which is paid 
     with respect to any employer security which is allocated to a 
     participant unless the plan provides that employer securities 
     with a fair market value of not less than the amount of such 
     distribution are allocated to such participant for the year 
     which (but for the preceding sentence) such distribution 
     would have been allocated to such participant.''
       (b) Effective Date.--The amendment made by this section 
     shall take effect on January 1, 1998.

     SEC. 655. CLARIFICATION OF WORKING CAPITAL FOR REASONABLY 
                   ANTICIPATED NEEDS OF A BUSINESS FOR PURPOSES OF 
                   ACCUMULATED EARNINGS TAX.

       (a) In General.--Section 537(b) (relating to special rules) 
     is amended by adding at the end the following new paragraph:
       ``(6) Working capital.--The reasonably anticipated needs of 
     a business for any taxable year shall include working capital 
     for the business in an amount which is not less than the sum 
     of the cost of goods, operating expenses, taxes, and interest 
     expense which the business incurred during the preceding 
     taxable year. Any amounts incurred as part of a plan a 
     principal purpose of which is to increase the limitation 
     under this subsection shall not be taken into account.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003, and before January 1, 2009.

     SEC. 656. TAX TREATMENT OF STATE OWNERSHIP OF RAILROAD REAL 
                   ESTATE INVESTMENT TRUST.

       (a) In General.--If a State owns all of the outstanding 
     stock of a corporation which is a real estate investment 
     trust, which is a non-operating class III railroad, and 
     substantially all of the activities of which consist of the 
     ownership, leasing, and operation by such corporation of 
     facilities, equipment, and other property used by the 
     corporation or other persons in railroad transportation, 
     then, for purposes of section 115 of the Internal Revenue 
     Code of 1986--
       (1) income derived from such activities by the corporation 
     shall be treated as accruing to the State, and
       (2) such activities shall be treated as the exercise of an 
     essential governmental function of the State to the extent 
     such activities are of a type which are an essential 
     government function (within the meaning of section 115 of 
     such Code).
       (b) Gain or Loss Not Recognized on Conversion.--
     Notwithstanding section 337(d) of the Internal Revenue Code 
     of 1986--
       (1) no gain or loss shall be recognized under section 336 
     or 337 of such Code, and
       (2) no change in basis of the property of such corporation 
     shall occur,
     because of any change of status of the corporation to a tax-
     exempt entity by reason of the application of subsection (a).
       (c) Tax-Exempt Financing.--Any obligation issued by an 
     entity described in subsection (a) shall be treated as an 
     obligation of the State for purposes of applying section 103 
     and part IV of subchapter B of chapter 1 of the Internal 
     Revenue Code of 1986.
       (d) Definitions.--For purposes of this section--
       (1) Real estate investment trust.--The term ``real estate 
     investment trust'' has the meaning given such term by section 
     856(a) of the Internal Revenue Code of 1986.
       (2) Non-operating class iii railroad.--The term ``non-
     operating class III railroad'' has the meaning given such 
     term by part A of subtitle IV of title 49, United States Code 
     (49 U.S.C. 10101 et seq.) and the regulations thereunder.
       (3) State.--The term ``State'' includes--
       (A) the District of Columbia and any possession of the 
     United States, and
       (B) any authority, agency, or public corporation of a 
     State.
       (e) Applicability.--
       (1) In general.--Except as provided in paragraph (2), this 
     section shall apply on and after the date on which a State 
     becomes the owner of all of the outstanding stock of a 
     corporation described in subsection (a).
       (2) Exception.--This section shall not apply to any State 
     which--
       (A) becomes the owner of all of the voting stock of a 
     corporation described in subsection (a) after December 31, 
     2003, or
       (B) becomes the owner of all of the outstanding stock of a 
     corporation described in subsection (a) after December 31, 
     2005.

     SEC. 657. CLARIFICATION OF CONTRIBUTION IN AID OF 
                   CONSTRUCTION FOR WATER AND SEWERAGE DISPOSAL 
                   UTILITIES.

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

     SEC. 658. CREDIT FOR PURCHASE AND INSTALLATION OF 
                   AGRICULTURAL WATER CONSERVATION SYSTEMS.

       (a) In General.--Subpart B of part IV of subchapter A of 
     chapter 1 (relating to foreign tax credit, etc.) is amended 
     by adding at the end the following new section:

     ``SEC. 30B. PURCHASE AND INSTALLATION OF AGRICULTURAL WATER 
                   CONSERVATION SYSTEMS.

       ``(a) Allowance of Credit.--In the case of an eligible 
     taxpayer, there shall be allowed as a credit against the tax 
     imposed by this chapter for the taxable year an amount equal 
     to 30 percent of the water conservation system expenses paid 
     or incurred by the taxpayer during such year.
       ``(b) Limitations.--The credit allowed by subsection (a) 
     with respect to any acre of land which is served by a water 
     conservation system shall not exceed the excess of--
       ``(1) $500, over
       ``(2) the amount of credit allowed under this section with 
     respect to such acre for all prior taxable years.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Eligible taxpayer.--The term `eligible taxpayer' 
     means any taxpayer if--
       ``(A) at least 50 percent of such taxpayer's gross income 
     is normally derived from farm land, and
       ``(B) such taxpayer complies with all Federal, State, and 
     local water rights and environmental laws.
       ``(2) Water conservation system expenses.--
       ``(A) In general.--The term `water conservation system 
     expenses' means expenses for the purchase and installation of 
     a water conservation system but only if--
       ``(i) the land served by the water conservation system is 
     entirely in a county or county-equivalent area which has 
     received, in the taxable year the expenses were paid or 
     incurred or in any of the 3 preceding taxable years, a 
     primary-county designation due to drought by the Secretary of 
     Agriculture, and
       ``(ii) such system is certified as saving at least 5 
     percent more irrigation water than the irrigation system 
     which was used on

[[Page 6536]]

     such land immediately prior to the installation of such water 
     conservation system.

     For purposes of clause (ii), irrigation water savings shall 
     be determined and certified under regulations prescribed 
     jointly by the Natural Resources Conservation Service of the 
     Department of Agriculture and the Bureau of Reclamation of 
     the Department of the Interior. Such regulations shall 
     include a list of individuals or organizations qualified to 
     make such certification.
       ``(B) Water conservation system.--The term `water 
     conservation system' means, with respect to farm land--
       ``(i) new or replacement irrigation equipment and 
     machinery, including sprinklers, pipes, siphons, nozzles, 
     pumps, motors, and engines, and
       ``(ii) computer systems for irrigation and water 
     management.
       ``(C) Farm land.--The term `farm land' means land used in a 
     trade or business by the taxpayer or a tenant of the taxpayer 
     for--
       ``(i) the production of crops, fruits, or other 
     agricultural products,
       ``(ii) the raising, harvesting, or growing of trees, or
       ``(iii) the sustenance of livestock.
       ``(d) Year Expenditure Made.--For purposes of this section, 
     an expenditure with respect to a water conservation system 
     shall be treated as made when the original installation of 
     the system is completed.
       ``(e) Limitation Based on Amount of Tax.--
       ``(1) Liability for tax.--The credit allowable under 
     subsection (a) for any taxable year shall not exceed the 
     excess (if any) of--
       ``(A) the regular tax for the taxable year, reduced by the 
     sum of the credits allowable under subpart A and the 
     preceding sections of this subpart, over
       ``(B) the tentative minimum tax for the taxable year.
       ``(2) Carryforward of unused credit.--If the amount of the 
     credit allowable under subsection (a) for any taxable year 
     exceeds the limitation under paragraph (1) for the taxable 
     year, the excess shall be carried to the succeeding taxable 
     year and added to the amount allowable as a credit under 
     subsection (a) for such succeeding taxable year.
       ``(f) Denial of Double Benefit.--No deduction shall be 
     allowed under this chapter with respect to any expense which 
     is taken into account in determining the credit under this 
     section, and any increase in the basis of any property which 
     would (but for this subsection) result from such expense 
     shall be reduced by the amount of credit allowed under this 
     section for such expense.
       ``(g) Termination.--This section shall not apply to amounts 
     paid or incurred with respect any water conservation system 
     the installation of which is completed after December 31, 
     2006.''.
       (b) Technical Amendment.--Subsection (a) of section 1016, 
     as amended by this Act, is amended by striking ``and'' at the 
     end of paragraph (30), by striking the period at the end of 
     paragraph (31) and inserting ``; and'', and by adding at the 
     end the following new paragraph:
       ``(32) to the extent provided in section 30B(f), in the 
     case of amounts with respect to which a credit has been 
     allowed under section 30B.''.
       (c) Clerical Amendment.--The table of sections for subpart 
     B of part IV of subchapter A of chapter 1 is amended by 
     adding at the end the following new item:

``Sec. 30B. Purchase and installation of agricultural water 
              conservation systems.''.
       (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 with respect any water conservation 
     system the installation of which is completed after December 
     31, 2004.

     SEC. 659. MODIFICATION OF INVOLUNTARY CONVERSION RULES FOR 
                   BUSINESSES AFFECTED BY THE SEPTEMBER 11TH 
                   TERRORIST ATTACKS.

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

                     Subtitle F--Revenue Provisions

                   PART I--GENERAL REVENUE PROVISIONS

     SEC. 661. TREASURY REGULATIONS ON FOREIGN TAX CREDIT.

       Section 901, as amended by this Act, is amended by 
     redesignating subsection (m) as subsection (n) and by 
     inserting after subsection (l) the following new subsection:
       ``(m) Regulations.--The Secretary may prescribe regulations 
     disallowing a credit under subsection (a) for all or a 
     portion of any foreign tax, or allocating a foreign tax among 
     2 or more persons, in cases where the foreign tax is imposed 
     on any person in respect of income of another person or in 
     other cases involving the inappropriate separation of the 
     foreign tax from the related foreign income.''.

     SEC. 662. NONATTRIBUTION OF CERTAIN MANUFACTURING BY PERSONS 
                   OTHER THAN CONTROLLED FOREIGN CORPORATION.

       (a) In General.--Section 954(d) (defining foreign base 
     company sales income) is amended by adding at the end the 
     following new paragraph:
       ``(5) Nonattribution of certain manufacturing activities.--
     For purposes of this subsection, in determining whether 
     income of a controlled foreign corporation is foreign base 
     company sales income, any manufacturing, production, or 
     construction by a person other than an individual who is an 
     employee of the corporation shall not be attributed to the 
     corporation or taken into account in determining whether the 
     property sold by such corporation has been sufficiently 
     transformed as to constitute property different from the 
     property purchased by such corporation.''
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to taxable years of controlled foreign corporations 
     beginning on or after the date of the enactment of this Act, 
     and to taxable years of United States shareholders with or 
     within which such taxable years of foreign corporations end.
       (2) No inference.--Nothing in the amendment made by this 
     section shall be construed to infer the proper treatment of 
     manufacturing, production, or construction for taxable years 
     beginning before the date of the enactment of this Act.

     SEC. 663. FREEZE OF PROVISIONS REGARDING SUSPENSION OF 
                   INTEREST WHERE SECRETARY FAILS TO CONTACT 
                   TAXPAYER.

       (a) In General.--Section 6404(g) (relating to suspension of 
     interest and certain penalties where secretary fails to 
     contact taxpayer) is amended by striking ``1-year period (18-
     month period in the case of taxable years beginning before 
     January 1, 2004)'' both places it appears and inserting ``18-
     month period''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

               PART II--PENSION AND DEFERRED COMPENSATION

     SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION 
                   PLANS.

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

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

       ``(a) Rules Relating to Constructive Receipt.--
       ``(1) In general.--
       ``(A) Gross income inclusion.--If at any time during a 
     taxable year a nonqualified deferred compensation plan--
       ``(i) fails to meet the requirements of paragraphs (2), 
     (3), (4), and (5), or
       ``(ii) is not operated in accordance with such 
     requirements,

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

       ``(I) the amount of interest determined under clause (ii), 
     and
       ``(II) an amount equal to 10 percent of the compensation 
     which is required to be included in gross income.

       ``(ii) Interest.--For purposes of clause (i), the interest 
     determined under this clause for any taxable year is the 
     amount of interest at the underpayment rate on the 
     underpayments that would have occurred had the deferred 
     compensation been includible in gross income for the taxable 
     year in which first deferred or, if later, the first taxable 
     in which such deferred compensation is not subject to a 
     substantial risk of forfeiture.
       ``(2) Distributions.--
       ``(A) In general.--The requirements of this paragraph are 
     met if the plan provides that compensation deferred under the 
     plan may not be distributed earlier than--
       ``(i) except as provided in subparagraph (B)(i), separation 
     from service (as determined by the Secretary),

[[Page 6537]]

       ``(ii) the date the participant becomes disabled (within 
     the meaning of subparagraph (C)),
       ``(iii) death,
       ``(iv) a specified time (or pursuant to a fixed schedule) 
     specified under the plan as of the date of the deferral of 
     such compensation,
       ``(v) to the extent provided by the Secretary, a change in 
     the ownership or effective control of the corporation, or in 
     the ownership of a substantial portion of the assets of the 
     corporation, or
       ``(vi) the occurrence of an unforeseeable emergency.
       ``(B) Special rules.--
       ``(i) Separation from service of specified employees.--In 
     the case of specified employees, the requirement of 
     subparagraph (A)(i) is met only if distributions may not be 
     made earlier than 6 months after the date of separation from 
     service. For purposes of the preceding sentence, a specified 
     employee is a key employee (as defined in section 416(i)) of 
     a corporation the stock in which is publicly traded on an 
     established securities market or otherwise.
       ``(ii) Changes in ownership or control.--In the case of a 
     participant who is subject to the requirements of section 
     16(a) of the Securities Exchange Act of 1934, the requirement 
     of subparagraph (A)(v) is met only if distributions may not 
     be made earlier than 1 year after the date of the change in 
     ownership or effective control.
       ``(iii) Unforeseeable emergency.--For purposes of 
     subparagraph (A)(vi)--

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

       ``(C) Disabled.--For purposes of subparagraph (A)(ii), a 
     participant shall be considered disabled if the participant--
       ``(i) is unable to engage in any substantial gainful 
     activity by reason of any medically determinable physical or 
     mental impairment which can be expected to result in death or 
     can be expected to last for a continuous period of not less 
     than 12 months, or
       ``(ii) is, by reason of any medically determinable physical 
     or mental impairment which can be expected to result in death 
     or can be expected to last for a continuous period of not 
     less than 12 months, receiving income replacement benefits 
     for a period of not less than 3 months under an accident and 
     health plan covering employees of the participant's employer 
     .
       ``(3) Investment options.--The requirements of this 
     paragraph are met if the plan provides that the investment 
     options a participant may elect under the plan--
       ``(A) are comparable to the investment options which a 
     participant may elect under the qualified employer plan of 
     the employer which has the fewest investment options, or
       ``(B) if there is no such qualified employer plan, meet 
     such requirements as the Secretary may prescribe (including 
     requirements limiting such options to permissible investment 
     options specified by the Secretary).
       ``(4) Acceleration of benefits.--The requirements of this 
     paragraph are met if the plan does not permit the 
     acceleration of the time or schedule of any payment under the 
     plan, except as provided by the Secretary.
       ``(5) Elections.--
       ``(A) In general.--The requirements of this paragraph are 
     met if the requirements of subparagraphs (B) and (C) are met.
       ``(B) Initial deferral decision.--The requirements of this 
     subparagraph are met if the plan provides that compensation 
     earned during a taxable year may be deferred at the 
     participant's election only if the election to defer such 
     compensation is made during the preceding taxable year or at 
     such other time as provided in regulations. In the case of 
     the first year in which a participant becomes eligible to 
     participate in the plan, such election may be made with 
     respect to services to be performed subsequent to the 
     election within 30 days after the date the participant 
     becomes eligible to participate in such plan.
       ``(C) Changes in time and form of distribution.--The 
     requirements of this subparagraph are met if, in the case of 
     a plan which permits under a subsequent election a delay in a 
     payment or a change in the form of payment--
       ``(i) the plan requires that such election may not take 
     effect until at least 12 months after the date on which the 
     election is made,
       ``(ii) in the case an election related to a payment not 
     described in clause (ii), (iii), or (vi) of paragraph (2)(A), 
     the plan requires that the first payment with respect to 
     which such election is made be deferred for a period of not 
     less than 5 years from the date such payment would otherwise 
     have been made, and
       ``(iii) the plan requires that any election related to a 
     payment described in paragraph (2)(A)(iv) may not be made 
     less than 12 months prior to the date of the first scheduled 
     payment under such paragraph.

     A plan shall be treated as failing to meet the requirements 
     of this subparagraph if the plan permits more than 1 
     subsequent election to delay any payment.
       ``(b) Rules Relating to Funding.--
       ``(1) Offshore property in a trust.--In the case of assets 
     set aside (directly or indirectly) in a trust (or other 
     arrangement determined by the Secretary) for purposes of 
     paying deferred compensation under a nonqualified deferred 
     compensation plan, such assets shall be treated for purposes 
     of section 83 as property transferred in connection with the 
     performance of services whether or not such assets are 
     available to satisfy claims of general creditors--
       ``(A) at the time set aside if such assets are located 
     outside of the United States, or
       ``(B) at the time transferred if such assets are 
     subsequently transferred outside of the United States.

     This paragraph shall not apply to assets located in a foreign 
     jurisdiction if substantially all of the services to which 
     the nonqualified deferred compensation relates are performed 
     in such jurisdiction.
       ``(2) Employer's financial health.--In the case of a 
     nonqualified deferred compensation plan, there is a transfer 
     of property within the meaning of section 83 as of the 
     earlier of--
       ``(A) the date on which the plan first provides that assets 
     will become restricted to the provision of benefits under the 
     plan in connection with a change in the employer's financial 
     health, or
       ``(B) the date on which assets are so restricted.
       ``(3) Income inclusion for offshore trusts and employer's 
     financial health.--For each taxable year that assets treated 
     as transferred under this subsection remain set aside in a 
     trust or other arrangement subject to paragraph (1) or (2), 
     any increase in value in, or earnings with respect to, such 
     assets shall be treated as an additional transfer of property 
     under this subsection (to the extent not previously included 
     in income).
       ``(4) Interest on tax liability payable with respect to 
     transferred property.--
       ``(A) In general.--If amounts are required to be included 
     in gross income by reason of paragraph (1) or (2) for a 
     taxable year, the tax imposed by this chapter for such 
     taxable year shall be increased by the sum of--
       ``(i) the amount of interest determined under subparagraph 
     (B), and
       ``(ii) an amount equal to 10 percent of the amounts 
     required to be included in gross income.
       ``(B) Interest.--For purposes of subparagraph (A), the 
     interest determined under this subparagraph for any taxable 
     year is the amount of interest at the underpayment rate on 
     the underpayments that would have occurred had the amounts 
     been includible in gross income for the taxable year in which 
     first deferred or, if later, the first taxable in which such 
     amounts is not subject to a substantial risk of forfeiture.
       ``(c) No Inference on Earlier Income Inclusion.--Nothing in 
     this section shall be construed to prevent the inclusion of 
     amounts in gross income under any other provision of this 
     chapter or any other rule of law earlier than the time 
     provided in this section. Any amount included in gross income 
     under this section shall not be required to be included in 
     gross income under any other provision of this chapter or any 
     other rule of law later than the time provided in this 
     section.
       ``(d) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Nonqualified deferred compensation plan.--The term 
     `nonqualified deferred compensation plan' means any plan that 
     provides for the deferral of compensation, other than--
       ``(A) a qualified employer plan, and
       ``(B) any bona fide vacation leave, sick leave, 
     compensatory time, disability pay, or death benefit plan.
       ``(2) Qualified employer plan.--The term `qualified 
     employer plan' means--
       ``(A) any plan, contract, pension, account, or trust 
     described in subparagraph (A) or (B) of section 219(g)(5), 
     and
       ``(B) any eligible deferred compensation plan (within the 
     meaning of section 457(b)) of an employer described in 
     section 457(e)(1)(A).
       ``(3) Plan includes arrangements, etc.--The term `plan' 
     includes any agreement or arrangement, including an agreement 
     or arrangement that includes one person.
       ``(4) Substantial risk of forfeiture.--The rights of a 
     person to compensation are subject to a substantial risk of 
     forfeiture if

[[Page 6538]]

     such person's rights to such compensation are conditioned 
     upon the future performance of substantial services by any 
     individual.
       ``(5) Treatment of earnings.--References to deferred 
     compensation shall be treated as including references to 
     income (whether actual or notional) attributable to such 
     compensation or such income.
       ``(e) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including regulations--
       ``(1) providing for the determination of amounts of 
     deferral in the case of a nonqualified deferred compensation 
     plan which is a defined benefit plan,
       ``(2) relating to changes in the ownership and control of a 
     corporation or assets of a corporation for purposes of 
     subsection (a)(2)(A)(v),
       ``(3) exempting arrangements from the application of 
     subsection (b) if such arrangements will not result in an 
     improper deferral of United States tax and will not result in 
     assets being effectively beyond the reach of creditors,
       ``(4) defining financial health for purposes of subsection 
     (b)(2), and
       ``(5) disregarding a substantial risk of forfeiture in 
     cases where necessary to carry out the purposes of this 
     section.''
       (b) Application of Golden Parachute Payment Provisions.--
     Section 280G(b) of such Code (defining excess parachute 
     payment) is amended by adding at the end the following new 
     paragraph:
       ``(7) Special rules for certain payments from nonqualified 
     deferred compensation plans.--
       ``(A) In general.--In the case of any applicable payment--
       ``(i) such payment shall be treated as a parachute payment 
     without regard to any exception otherwise applicable under 
     this subsection, and
       ``(ii) notwithstanding paragraph (1), the entire amount of 
     the payment shall be treated as an excess parachute payment.
       ``(B) Coordination with other payments.--An applicable 
     payment shall be taken into account in determining whether 
     any payment other than an applicable payment is a parachute 
     payment under paragraph (2) or an excess parachute payment 
     under paragraph (1).
       ``(C) Applicable payment.--For purposes of this paragraph, 
     the term `applicable payment' means any distribution 
     (including any distribution treated as a parachute payment 
     without regard to this paragraph) from a nonqualified 
     deferred compensation plan (as defined in section 409A(d)) 
     which is made--
       ``(i) to a participant who is subject to the requirements 
     of section 16(a) of the Securities Exchange Act of 1934, and
       ``(ii) during the 1-year period following a change in the 
     ownership or effective control of the corporation or in the 
     ownership of a substantial portion of the assets of the 
     corporation.
       ``(D) No double counting.--Under regulations, proper 
     adjustments shall be made in the application of this 
     paragraph to prevent a deduction from being disallowed more 
     than once.''
       (c) W-2 Forms.--
       (1) In general.--Subsection (a) of section 6051 (relating 
     to receipts for employees) is amended by striking ``and'', by 
     striking the period at the end of paragraph (12) and 
     inserting ``, and'', and by inserting after paragraph (12) 
     the following new paragraph:
       ``(13) the total amount of deferrals under a nonqualified 
     deferred compensation plan (within the meaning of section 
     409A(d)).''
       (2) Threshold.--Subsection (a) of section 6051 is amended 
     by adding at the end the following: ``In the case of the 
     amounts required to be shown by paragraph (13), the Secretary 
     may (by regulation) establish a minimum amount of deferrals 
     below which paragraph (13) does not apply.''
       (d) Conforming and Clerical Amendments.--
       (1) Section 414(b) is amended by inserting ``409A,'' after 
     ``408(p),''.
       (2) Section 414(c) is amended by inserting ``409A,'' after 
     ``408(p),''.
       (3) The table of sections for such subpart A is amended by 
     adding at the end the following new item:

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

       (e) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to amounts deferred in taxable years beginning after 
     December 31, 2004.
       (2) Earnings attributable to amount previously deferred.--
     The amendments made by this section shall apply to earnings 
     on deferred compensation only to the extent that such 
     amendments apply to such compensation.
       (f) Guidance Relating to Change of Ownership or Control.--
     Not later than 90 days after the date of the enactment of 
     this Act, the Secretary of the Treasury shall issue guidance 
     on what constitutes a change in ownership or effective 
     control for purposes of section 409A of the Internal Revenue 
     Code of 1986, as added by this section.
       (g) Guidance Relating to Termination of Certain Existing 
     Arrangements.--Not later than 90 days after the date of the 
     enactment of this Act, the Secretary of the Treasury shall 
     issue guidance providing a limited period during which an 
     individual participating in a nonqualified deferred 
     compensation plan adopted on or before December 31, 2004, 
     may, without violating the requirements of paragraphs (2), 
     (3), (4), and (5) of section 409A(a)(2) of the Internal 
     Revenue Code of 1986 (as added by this section), terminate 
     participation or cancel an outstanding deferral election with 
     regard to amounts earned after December 31, 2004, if such 
     amounts are includible in income as earned.

     SEC. 672. PROHIBITION ON DEFERRAL OF GAIN FROM THE EXERCISE 
                   OF STOCK OPTIONS AND RESTRICTED STOCK GAINS 
                   THROUGH DEFERRED COMPENSATION ARRANGEMENTS.

       (a) In General.--Section 83 (relating to property 
     transferred in connection with performance of services) is 
     amending by adding at the end the following new subsection:
       ``(i) Prohibition on Additional Deferral Through Deferred 
     Compensation Arrangements.--If a taxpayer elects to exchange 
     an option to purchase employer securities--
       ``(1) to which subsection (a) applies, or
       ``(2) which is described in subsection (e)(3),

     or any other property based on employer securities 
     transferred to the taxpayer, for a right to receive future 
     payments, then, notwithstanding any other provision of this 
     title, there shall be included in gross income for the 
     taxable year of the exchange an amount equal to the present 
     value of such right (or such other amount as the Secretary 
     may by regulations specify). For purposes of this subsection, 
     the term `employer securities' includes any security issued 
     by the employer.''
       (b) Controlled Group Rules.--Section 414(t)(2) is amended 
     by inserting ``83(i),'' after ``79,''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to any exchange after December 31, 2004.

     SEC. 673. INCREASE IN WITHHOLDING FROM SUPPLEMENTAL WAGE 
                   PAYMENTS IN EXCESS OF $1,000,000.

       (a) In General.--If an employer elects under Treasury 
     Regulation 31.3402(g)-1 to determine the amount to be 
     deducted and withheld from any supplemental wage payment by 
     using a flat percentage rate, the rate to be used in 
     determining the amount to be so deducted and withheld shall 
     not be less than 28 percent (or the corresponding rate in 
     effect under section 1(i)(2) of the Internal Revenue Code of 
     1986 for taxable years beginning in the calendar year in 
     which the payment is made).
       (b) Special Rule for Large Payments.--
       (1) In general.--Notwithstanding subsection (a), if the 
     supplemental wage payment, when added to all such payments 
     previously made by the employer to the employee during the 
     calendar year, exceeds $1,000,000, the rate used with respect 
     to such excess shall be equal to the maximum rate of tax in 
     effect under section 1 of such Code for taxable years 
     beginning in such calendar year.
       (2) Aggregation.--All persons treated as a single employer 
     under subsection (a) or (b) of section 52 of the Internal 
     Revenue Code of 1986 shall be treated as a single employer 
     for purposes of this subsection.
       (c) Conforming Amendment.--Section 13273 of the Revenue 
     Reconciliation Act of 1993 (Public Law 103-66) is repealed.
       (d) Effective Date.--The provisions of, and the amendment 
     made by, this section shall apply to payments made after 
     December 31, 2003.

     SEC. 674. TREATMENT OF SALE OF STOCK ACQUIRED PURSUANT TO 
                   EXERCISE OF STOCK OPTIONS TO COMPLY WITH 
                   CONFLICT-OF-INTEREST REQUIREMENTS.

       (a) In General.--Section 421 of the Internal Revenue Code 
     of 1986 (relating to general rules for certain stock options) 
     is amended by adding at the end the following new subsection:
       ``(d) Certain Sales To Comply With Conflict-of-Interest 
     Requirements.--If--
       ``(1) a share of stock is transferred to an eligible person 
     (as defined in section 1043(b)(1)) pursuant to such person's 
     exercise of an option to which this part applies, and
       ``(2) such share is disposed of by such person pursuant to 
     a certificate of divestiture (as defined in section 
     1043(b)(2)),

     such disposition shall be treated as meeting the requirements 
     of section 422(a)(1) or 423(a)(1), whichever is applicable.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales after the date of the enactment of this 
     Act.

     SEC. 675. DETERMINATION OF BASIS OF AMOUNTS PAID FROM FOREIGN 
                   PENSION PLANS.

       (a) In General.--Section 72 of the Internal Revenue Code of 
     1986 (relating to annuities and certain proceeds of endowment 
     and life insurance contracts) is amended by redesignating 
     subsection (w) as subsection (x) by inserting subsection (v) 
     the following new subsection:
       ``(w) Determination of Basis of Foreign Pension Plans.--
     Notwithstanding any other provision of this section, for 
     purposes of determining the portion of any distribution from 
     a foreign pension plan which is includible in gross income of 
     the distributee, the investment in the contract with respect 
     to the plan shall not include employer or employee 
     contributions to the plan (or any

[[Page 6539]]

     earnings on such contributions) unless such contributions or 
     earnings were subject to taxation by the United States or any 
     foreign government.''
       (b) Effective Date.--The amendments made by this section 
     shall apply to distributions on or after the date of the 
     enactment of this Act.

          TITLE VII--EXTENSIONS OF CERTAIN EXPIRING PROVISIONS

                         Subtitle A--Extensions

     SEC. 701. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO 
                   MENTAL HEALTH BENEFITS.

       (a) In General.--Section 9812(f) is amended--
       (1) by striking ``and'' at the end of paragraph (1), and
       (2) by striking paragraph (2) and inserting the following 
     new paragraphs:
       ``(2) on or after January 1, 2004, and before the date of 
     the enactment of the Jumpstart Our Business Strength (JOBS) 
     Act, and
       ``(3) after December 31, 2005.''.
       (b) ERISA.--Section 712(f) of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1185a(f)) is amended 
     by striking ``on or after December 31, 2004'' and inserting 
     ``after December 31, 2005''.
       (c) PHSA.--Section 2705(f) of the Public Health Service Act 
     (42 U.S.C. 300gg-5(f)) is amended by striking ``on or after 
     December 31, 2004'' and inserting ``after December 31, 
     2005''.
       (d) Effective Dates.--
       (1) Subsection (a).--The amendments made by subsection (a) 
     shall apply to benefits for services furnished on or after 
     December 31, 2003.
       (2) Subsections (b) and (c).--The amendments made by 
     subsections (b) and (c) shall apply to benefits for services 
     furnished on or after December 31, 2004.

     SEC. 702. MODIFICATIONS TO WORK OPPORTUNITY CREDIT AND 
                   WELFARE-TO-WORK CREDIT.

       (a) Permanent Extension of Credit.--
       (1) In general.--Section 51(c) is amended by striking 
     paragraph (4).
       (2) Long-term family assistance recipients.--
       (A) In general.--Section 51A is amended by striking 
     subsection (f).
       (B) Conforming amendments.--
       (i) The heading for section 51A is amended by striking 
     ``temporary''.
       (ii) The item relating to section 51A in the table of 
     sections for subpart F of part IV of subchapter A of chapter 
     1 is amended by striking ``Temporary incentives'' and 
     inserting ``Incentives''.
       (b) Eligibility of Ex-Felons Determined Without Regard to 
     Family Income.--Paragraph (4) of section 51(d) is amended by 
     adding ``and'' at the end of subparagraph (A), by striking 
     ``, and'' at the end of subparagraph (B) and inserting a 
     period, and by striking all that follows subparagraph (B).
       (c) Increase in Maximum Age for Eligibility of Food Stamp 
     Recipients.--Clause (i) of section 51(d)(8)(A) is amended by 
     striking ``25'' and inserting ``40''.
       (d) Increase in Maximum Age for Designated Community 
     residents.--
       (1) In general.--Paragraph (5) of section 51(d) is amended 
     to read as follows:
       ``(5) Designated community residents.--
       ``(A) In general.--The term `designated community resident' 
     means any individual who is certified by the designated local 
     agency--
       ``(i) as having attained age 18 but not age 40 on the 
     hiring date, and
       ``(ii) as having his principal place of abode within an 
     empowerment zone, enterprise community, or renewal community.
       ``(B) Individual must continue to reside in zone or 
     community.--In the case of a designated community resident, 
     the term `qualified wages' shall not include wages paid or 
     incurred for services performed while the individual's 
     principal place of abode is outside an empowerment zone, 
     enterprise community, or renewal community.''
       (2) Conforming amendment.--Subparagraph (D) of section 
     51(d)(1) is amended to read as follows:
       ``(D) a designated community resident,''.
       (e) Effective Dates.--
       (1) Extension of credits.--The amendments made by 
     subsection (a) shall apply to individuals who begin work for 
     the employer after December 31, 2003.
       (2) Modifications.--The amendments made by subsections (b), 
     (c), and (d) shall apply to individuals who begin work for 
     the employer after December 31, 2004.

     SEC. 703. CONSOLIDATION OF WORK OPPORTUNITY CREDIT WITH 
                   WELFARE-TO-WORK CREDIT.

       (a) In General.--Paragraph (1) of section 51(d) 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) a long-term family assistance recipient.''
       (b) Long-Term Family Assistance Recipient.--Subsection (d) 
     of section 51 is amended by redesignating paragraphs (10) 
     through (12) as paragraphs (11) through (13), respectively, 
     and by inserting after paragraph (9) the following new 
     paragraph:
       ``(10) Long-term family assistance recipient.--The term 
     `long-term family assistance recipient' means any individual 
     who is certified by the designated local agency--
       ``(A) as being a member of a family receiving assistance 
     under a IV-A program (as defined in paragraph (2)(B)) for at 
     least the 18-month period ending on the hiring date,
       ``(B)(i) as being a member of a family receiving such 
     assistance for 18 months beginning after August 5, 1997, and
       ``(ii) as having a hiring date which is not more than 2 
     years after the end of the earliest such 18-month period, or
       ``(C)(i) as being a member of a family which ceased to be 
     eligible for such assistance by reason of any limitation 
     imposed by Federal or State law on the maximum period such 
     assistance is payable to a family, and
       ``(ii) as having a hiring date which is not more than 2 
     years after the date of such cessation.''
       (c) Increased Credit for Employment of Long-Term Family 
     Assistance Recipients.--Section 51 is amended by inserting 
     after subsection (d) the following new subsection:
       ``(e) Credit for Employment of Long-Term Family Assistance 
     Recipients.--
       ``(1) In general.--With respect to the employment of a 
     long-term family assistance recipient--
       ``(A) the amount of the work opportunity credit determined 
     under this section for the taxable year shall include 50 
     percent of the qualified second-year wages for such year, and
       ``(B) in lieu of applying subsection (b)(3), the amount of 
     the qualified first-year wages, and the amount of qualified 
     second-year wages, which may be taken into account with 
     respect to such a recipient shall not exceed $10,000 per 
     year.
       ``(2) Qualified second-year wages.--For purposes of this 
     subsection, the term `qualified second-year wages' means 
     qualified wages--
       ``(A) which are paid to a long-term family assistance 
     recipient, and
       ``(B) which are attributable to service rendered during the 
     1-year period beginning on the day after the last day of the 
     1-year period with respect to such recipient determined under 
     subsection (b)(2).
       ``(3) Special rules for agricultural and railway labor.--If 
     such recipient is an employee to whom subparagraph (A) or (B) 
     of subsection (h)(1) applies, rules similar to the rules of 
     such subparagraphs shall apply except that--
       ``(A) such subparagraph (A) shall be applied by 
     substituting `$10,000' for `$6,000', and
       ``(B) such subparagraph (B) shall be applied by 
     substituting `$833.33' for `$500'.''
       (d) Repeal of Separate Welfare-to-Work Credit.--
       (1) In general.--Section 51A is hereby repealed.
       (2) Clerical amendment.--The table of sections for subpart 
     F of part IV of subchapter A of chapter 1 is amended by 
     striking the item relating to section 51A.
       (e) Effective Date.--The amendments made by this section 
     shall apply to individuals who begin work for the employer 
     after December 31, 2004.

     SEC. 704. QUALIFIED ZONE ACADEMY BONDS.

       (a) In General.--Paragraph (1) of section 1397E(e) is 
     amended by striking ``and 2003'' and inserting ``2003, 2004, 
     and 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to obligations issued after December 31, 2003.

     SEC. 705. COVER OVER OF TAX ON DISTILLED SPIRITS.

       (a) In General.--Paragraph (1) of section 7652(f) is 
     amended by striking ``January 1, 2004'' and inserting 
     ``January 1, 2006''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to articles brought into the United States after 
     December 31, 2003.

     SEC. 706. DEDUCTION FOR CORPORATE DONATIONS OF SCIENTIFIC 
                   PROPERTY AND COMPUTER TECHNOLOGY.

       (a) Scientific Property Used for Research.--
       (1) In general.--Clause (ii) of section 170(e)(4)(B) 
     (defining qualified research contributions) is amended by 
     inserting ``or assembled'' after ``constructed''.
       (2) Conforming amendment.--Clause (iii) of section 
     170(e)(4)(B) is amended by inserting ``or assembling'' after 
     ``construction''.
       (b) Computer Technology and Equipment for Educational 
     Purposes.--
       (1) In general.--Clause (ii) of section 170(e)(6)(B) is 
     amended by inserting ``or assembled'' after ``constructed'' 
     and ``or assembling'' after ``construction''.
       (2) Special rule extended.--Section 170(e)(6)(G) is amended 
     by striking ``2003'' and inserting ``2005''.
       (3) Conforming amendments.--Subparagraph (D) of section 
     170(e)(6) is amended by inserting ``or assembled'' after 
     ``constructed'' and ``or assembling'' after ``construction''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to contributions made in taxable years beginning 
     after December 31, 2003.

     SEC. 707. DEDUCTION FOR CERTAIN EXPENSES OF SCHOOL TEACHERS.

       (a) In General.--Subparagraph (D) of section 62(a)(2) is 
     amended by striking ``or 2003'' and inserting ``, 2003, 2004, 
     or 2005''.

[[Page 6540]]

       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to expenses paid or incurred in taxable years 
     beginning after December 31, 2003.

     SEC. 708. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

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

     SEC. 709. EXPANSION OF CERTAIN NEW YORK LIBERTY ZONE 
                   BENEFITS.

       (a) Extension of Tax-Exempt Bond Financing.--Subparagraph 
     (D) of section 1400L(d)(2) is amended by striking ``2005'' 
     and inserting ``2006''.
       (b) Clarification of Bonds Eligible for Advance 
     Refunding.--Section 1400L(e)(2)(B) (relating to bonds 
     described) is amended by striking ``, or'' and inserting ``or 
     the Municipal Assistance Corporation, or''.
       (c) Election Out Technical Amendment.--Subsection (c) of 
     section 1400L is amended by adding at the end the following 
     new paragraph:
       ``(5) Election out.--For purposes of this subsection, rules 
     similar to the rules of section 168(k)(2)(C)(iii) shall 
     apply.''.
       (d) Effective date.--The amendments made by subsections (b) 
     and (c) shall take effect as if included in the amendments 
     made by section 301 of the Job Creation and Worker Assistance 
     Act of 2002.

     SEC. 710. REPEAL OF REDUCTION OF DEDUCTIONS FOR MUTUAL LIFE 
                   INSURANCE COMPANIES.

       (a) In General.--Section 809 of the Internal Revenue Code 
     of 1986 (relating to reductions in certain deduction of 
     mutual life insurance companies) is hereby repealed.
       (b) Conforming Amendments.--
       (1) Subsections (a)(2)(B) and (b)(1)(B) of section 807 of 
     such Code are each amended by striking ``the sum of (i)'' and 
     by striking ``plus (ii) any excess described in section 
     809(a)(2) for the taxable year,''.
       (2)(A) The last sentence of section 807(d)(1) of such Code 
     is amended by striking ``section 809(b)(4)(B)'' and inserting 
     ``paragraph (6)''.
       (B) Subsection (d) of section 807 of such Code is amended 
     by adding at the end the following new paragraph:
       ``(6) Statutory reserves.--The term `statutory reserves' 
     means the aggregate amount set forth in the annual statement 
     with respect to items described in section 807(c). Such term 
     shall not include any reserve attributable to a deferred and 
     uncollected premium if the establishment of such reserve is 
     not permitted under section 811(c).''
       (3) Subsection (c) of section 808 of such Code is amended 
     to read as follows:
       ``(c) Amount of Deduction.--The deduction for policyholder 
     dividends for any taxable year shall be an amount equal to 
     the policyholder dividends paid or accrued during the taxable 
     year.''
       (4) Subparagraph (A) of section 812(b)(3) of such Code is 
     amended by striking ``sections 808 and 809'' and inserting 
     ``section 808''.
       (5) Subsection (c) of section 817 of such Code is amended 
     by striking ``(other than section 809)''.
       (6) Subsection (c) of section 842 of such Code is amended 
     by striking paragraph (3) and by redesignating paragraph (4) 
     as paragraph (3).
       (7) The table of sections for subpart C of part I of 
     subchapter L of chapter 1 of such Code is amended by striking 
     the item relating to section 809.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 711. TAX INCENTIVES FOR INVESTMENT IN THE DISTRICT OF 
                   COLUMBIA.

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

     SEC. 712. DISCLOSURE OF TAX INFORMATION TO FACILITATE 
                   COMBINED EMPLOYMENT TAX REPORTING.

       (a) In General.--Paragraph (5) of section 6103(d) (relating 
     to disclosure to State tax officials and State and local law 
     enforcement agencies) is amended to read as follows:
       ``(5) Disclosure for combined employment tax reporting.--
     The Secretary may disclose taxpayer identity information and 
     signatures to any agency, body, or commission of any State 
     for the purpose of carrying out with such agency, body, or 
     commission a combined Federal and State employment tax 
     reporting program approved by the Secretary. Subsections 
     (a)(2) and (p)(4) and sections 7213 and 7213A shall not apply 
     with respect to disclosures or inspections made pursuant to 
     this paragraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 713. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST 
                   REGULAR AND MINIMUM TAX LIABILITY.

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

     SEC. 714. CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN 
                   RENEWABLE RESOURCES.

       (a) In General.--Subparagraphs (A), (B), and (C) of section 
     45(c)(3) are each amended by striking ``January 1, 2004'' and 
     inserting ``January 1, 2005''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to facilities placed in service after December 
     31, 2003.

     SEC. 715. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR 
                   OIL AND NATURAL GAS PRODUCED FROM MARGINAL 
                   PROPERTIES.

       (a) In General.--Subparagraph (H) of section 613A(c)(6) is 
     amended by striking ``January 1, 2004'' and inserting 
     ``January 1, 2005''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2003.

     SEC. 716. INDIAN EMPLOYMENT TAX CREDIT.

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

     SEC. 717. ACCELERATED DEPRECIATION FOR BUSINESS PROPERTY ON 
                   INDIAN RESERVATION.

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

     SEC. 718. DISCLOSURE OF RETURN INFORMATION RELATING TO 
                   STUDENT LOANS.

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

     SEC. 719. EXTENSION OF TRANSFERS OF EXCESS PENSION ASSETS TO 
                   RETIREE HEALTH ACCOUNTS.

       (a) Amendment of Internal Revenue Code of 1986.--Paragraph 
     (5) of section 420(b) (relating to expiration) is amended by 
     striking ``December 31, 2005'' and inserting ``December 31, 
     2013''.
       (b) Amendments of ERISA.--
       (1) Section 101(e)(3) of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1021(e)(3)) is amended by 
     striking ``Tax Relief Extension Act of 1999'' and inserting 
     ``Jumpstart Our Business Strength (JOBS) Act''.
       (2) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is 
     amended by striking ``Tax Relief Extension Act of 1999'' and 
     inserting ``Jumpstart Our Business Strength (JOBS) Act''.
       (3) Paragraph (13) of section 408(b) of such Act (29 U.S.C. 
     1108(b)(3)) is amended--
       (A) by striking ``January 1, 2006'' and inserting ``January 
     1, 2014'', and
       (B) by striking ``Tax Relief Extension Act of 1999'' and 
     inserting ``Jumpstart Our Business Strength (JOBS) Act''.
       (c) Minimum Cost Requirements.--
       (1) In general.--Section 420(c)(3)(E) is amended by adding 
     at the end the following new clause:
       ``(ii) Insignificant cost reductions permitted.--

       ``(I) In general.--An eligible employer shall not be 
     treated as failing to meet the requirements of this paragraph 
     for any taxable year if, in lieu of any reduction of retiree 
     health coverage permitted under the regulations prescribed 
     under clause (i), the employer reduces applicable employer 
     cost by an amount not in excess of the reduction in costs 
     which would have occurred if the employer had made the 
     maximum permissible reduction in retiree health coverage 
     under such regulations. In applying such regulations to any 
     subsequent taxable year, any reduction in applicable employer 
     cost under this clause shall be treated as if it were an 
     equivalent reduction in retiree health coverage.

[[Page 6541]]

       ``(II) Eligible employer.--For purposes of subclause (I), 
     an employer shall be treated as an eligible employer for any 
     taxable year if, for the preceding taxable year, the 
     qualified current retiree health liabilities of the employer 
     were at least 5 percent of the gross receipts of the 
     employer. For purposes of this subclause, the rules of 
     paragraphs (2), (3)(B), and (3)(C) of section 448(c) shall 
     apply in determining the amount of an employer's gross 
     receipts.''

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

     SEC. 720. ELIMINATION OF PHASEOUT OF CREDIT FOR QUALIFIED 
                   ELECTRIC VEHICLES.

       (a) In General.--Section 30(b) is amended by striking 
     paragraph (2) and by redesignating paragraph (3) as paragraph 
     (2).
       (b) Conforming Amendments.--
       (1) Section 53(d)(1)(B)(iii) is amended by striking 
     ``section 30(b)(3)(B)'' and inserting ``section 
     30(b)(2)(B)''.
       (2) Section 55(c)(2) is amended by striking ``30(b)(3)'' 
     and inserting ``30(b)(2)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2003.

     SEC. 721. ELIMINATION OF PHASEOUT FOR DEDUCTION FOR CLEAN-
                   FUEL VEHICLE PROPERTY.

       (a) In General.--Paragraph (1) of section 179A(b) is 
     amended to read as follows:
       ``(1) Qualified clean-fuel vehicle property.--The cost 
     which may be taken into account under subsection (a)(1)(A) 
     with respect to any motor vehicle shall not exceed--
       ``(A) in the case of a motor vehicle not described in 
     subparagraph (B) or (C), $2,000,
       ``(B) in the case of any truck or van with a gross vehicle 
     weight rating greater than 10,000 pounds but not greater than 
     26,000 pounds, $5,000, or
       ``(C) $50,000 in the case of--
       ``(i) a truck or van with a gross vehicle weight rating 
     greater than 26,000 pounds, or
       ``(ii) any bus which has a seating capacity of at least 20 
     adults (not including the driver).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to property placed in service after December 31, 
     2003.

                     Subtitle B--Revenue Provisions

     SEC. 731. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRPLANES.

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

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

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

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

       ``(C) Contemporaneous.--For purposes of subparagraph (A), 
     an acknowledgement shall be considered to be contemporaneous 
     if the donee organization provides it within 30 days of--
       ``(i) the sale of the qualified vehicle, or
       ``(ii) in the case of an acknowledgement including a 
     certification described in subparagraph (B)(iv), the 
     contribution of the qualified vehicle.
       ``(D) Information to secretary.--A donee organization 
     required to provide an acknowledgement under this paragraph 
     shall provide to the Secretary the information contained in 
     the acknowledgement. Such information shall be provided at 
     such time and in such manner as the Secretary may prescribe.
       ``(E) Qualified vehicle.--For purposes of this paragraph, 
     the term `qualified vehicle' means any--
       ``(i) self-propelled vehicle manufactured primarily for use 
     on public streets, roads, and highways,
       ``(ii) boat, or
       ``(iii) airplane.

     Such term shall not include any property which is described 
     in section 1221(a)(1).
       ``(F) Regulations or other guidance.--The Secretary shall 
     prescribe such regulations or other guidance as may be 
     necessary to carry out the purposes of this paragraph.''.
       (b) Penalty for Fraudulent Acknowledgments.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended adding at the 
     end the following new section:

     ``SEC. 6717. FRAUDULENT ACKNOWLEDGMENTS WITH RESPECT TO 
                   DONATIONS OF MOTOR VEHICLES, BOATS, AND 
                   AIRPLANES.

       ``Any donee organization required under section 
     170(f)(11)(A) to furnish a contemporaneous written 
     acknowledgment to a donor which knowingly furnishes a false 
     or fraudulent acknowledgment, or which knowingly fails to 
     furnish such acknowledgment in the manner, at the time, and 
     showing the information required under section 170(f)(11), or 
     regulations prescribed thereunder, shall for each such act, 
     or for each such failure, be subject to a penalty equal to--
       ``(1) in the case of an acknowledgment with respect to a 
     qualified vehicle to which section 170(f)(11)(A)(ii) applies, 
     the greater of the value of the tax benefit to the donor or 
     the gross proceeds from the sale of such vehicle, and
       ``(2) in the case of an acknowledgment with respect to any 
     other qualified vehicle to which section 170(f)(11) applies, 
     the greater of the value of the tax benefit to the donor or 
     $5,000.''.
       (2) Conforming amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by adding at the end 
     the following new item:

``Sec. 6717. Fraudulent acknowledgments with respect to donations of 
              motor vehicles, boats, and airplanes.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to contributions after June 30, 2004.

     SEC. 732. ADDITION OF VACCINES AGAINST INFLUENZA TO LIST OF 
                   TAXABLE VACCINES.

       (a) In General.--Section 4132(a)(1) (defining taxable 
     vaccine) is amended adding at the end the following new 
     subparagraph:
       ``(M) Any trivalent vaccine against influenza.''.
       (b) Conforming Amendment.--Section 9510(c)(1)(A) is amended 
     by striking ``October 18, 2000'' and inserting ``the date of 
     the enactment of the Jumpstart Our Business Strength (JOBS) 
     Act''.
       (b) Effective Date.--
       (1) Sales, etc.--The amendment made by this section shall 
     apply to sales and uses on or after the later of--
       (A) the first day of the first month which begins more than 
     4 weeks after the date of the enactment of this Act, or
       (B) the date on which the Secretary of Health and Human 
     Services lists any vaccine against influenza for purposes of 
     compensation for any vaccine-related injury or death through 
     the Vaccine Injury Compensation Trust Fund.
       (2) Deliveries.--For purposes of paragraph (1) and section 
     4131 of the Internal Revenue Code of 1986, in the case of 
     sales on or before the effective date described in such 
     paragraph for which delivery is made after such date, the 
     delivery date shall be considered the sale date.

     SEC. 733. TREATMENT OF CONTINGENT PAYMENT CONVERTIBLE DEBT 
                   INSTRUMENTS.

       (a) In General.--Section 1275(d) (relating to regulation 
     authority) is amended--
       (1) by striking ``The Secretary'' and inserting the 
     following:
       ``(1) In general.--The Secretary'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Treatment of contingent payment convertible debt.--
       ``(A) In general.--In the case of a debt instrument which--
       ``(i) is convertible into stock of the issuing corporation, 
     into stock or debt of a related party (within the meaning of 
     section 267(b) or 707(b)(1)), or into cash or other property 
     in an amount equal to the approximate value of such stock or 
     debt, and
       ``(ii) provides for contingent payments,

     any regulations which require original issue discount to be 
     determined by reference to the comparable yield of a 
     noncontingent fixed rate debt instrument shall be applied as 
     requiring that such comparable yield be determined by 
     reference to a noncontingent fixed rate debt instrument which 
     is convertible into stock.
       ``(B) Special rule.--For purposes of subparagraph (A), the 
     comparable yield shall be

[[Page 6542]]

     determined without taking into account the yield resulting 
     from the conversion of a debt instrument into stock.''.
       (b) Cross Reference.--Section 163(e)(6) (relating to cross 
     references) is amended by adding at the end the following:
       ``For the treatment of contingent payment convertible debt, 
     see section 1275(d)(2).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to debt instruments issued after the date of the 
     enactment of this Act.

     SEC. 734. MODIFICATION OF CONTINUING LEVY ON PAYMENTS TO 
                   FEDERAL VENDERS.

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

                   TITLE VIII--ENERGY TAX INCENTIVES

     SEC. 800. SHORT TITLE.

       This title may be cited as the ``Energy Tax Incentives 
     Act''.

        Subtitle A--Renewable Electricity Production Tax Credit

     SEC. 801. EXTENSION AND EXPANSION OF CREDIT FOR ELECTRICITY 
                   PRODUCED FROM CERTAIN RENEWABLE RESOURCES.

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

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

       ``(B) Agricultural livestock waste nutrients.--
       ``(i) In general.--The term `agricultural livestock waste 
     nutrients' means agricultural livestock manure and litter, 
     including wood shavings, straw, rice hulls, and other bedding 
     material for the disposition of manure.
       ``(ii) Agricultural livestock.--The term `agricultural 
     livestock' includes bovine, swine, poultry, and sheep.
       ``(C) Exceptions.--The term `open-loop biomass' does not 
     include--
       ``(i) closed-loop biomass, or
       ``(ii) biomass burned in conjunction with fossil fuel 
     (cofiring) beyond such fossil fuel required for startup and 
     flame stabilization.
       ``(4) Geothermal energy.--The term `geothermal energy' 
     means energy derived from a geothermal deposit (within the 
     meaning of section 613(e)(2)).
       ``(5) Small irrigation power.--The term `small irrigation 
     power' means power--
       ``(A) generated without any dam or impoundment of water 
     through an irrigation system canal or ditch, and
       ``(B) the installed capacity of which is less than 5 
     megawatts.
       ``(6) Biosolids and sludge.--The term `biosolids and 
     sludge' means the residue or solids removed in the treatment 
     of commercial, industrial, or municipal wastewater.
       ``(7) Municipal solid waste.--The term `municipal solid 
     waste' has the meaning given the term `solid waste' under 
     section 2(27) of the Solid Waste Disposal Act (42 U.S.C. 
     6903).''.
       (b) Extension and Expansion of Qualified Facilities.--
       (1) In general.--Section 45 is amended by redesignating 
     subsection (d) as subsection (e) and by inserting after 
     subsection (c) the following new subsection:
       ``(d) Qualified Facilities.--For purposes of this section--
       ``(1) Wind facility.--In the case of a facility using wind 
     to produce electricity, the term `qualified facility' means 
     any facility owned by the taxpayer which is originally placed 
     in service after December 31, 1993, and before January 1, 
     2007.
       ``(2) Closed-loop biomass facility.--
       ``(A) In general.--In the case of a facility using closed-
     loop biomass to produce electricity, the term `qualified 
     facility' means any facility--
       ``(i) owned by the taxpayer which is originally placed in 
     service after December 31, 1992, and before January 1, 2007, 
     or
       ``(ii) owned by the taxpayer which before January 1, 2007, 
     is originally placed in service and modified to use closed-
     loop biomass to co-fire with coal, with other biomass, or 
     with both, but only if the modification is approved under the 
     Biomass Power for Rural Development Programs or is part of a 
     pilot project of the Commodity Credit Corporation as 
     described in 65 Fed. Reg. 63052.
       ``(B) Special rules.--In the case of a qualified facility 
     described in subparagraph (A)(ii)--
       ``(i) the 10-year period referred to in subsection (a) 
     shall be treated as beginning no earlier than January 1, 
     2005,
       ``(ii) the amount of the credit determined under subsection 
     (a) with respect to the facility shall be an amount equal to 
     the amount determined without regard to this clause 
     multiplied by the ratio of the thermal content of the closed-
     loop biomass used in such facility to the thermal content of 
     all fuels used in such facility, and
       ``(iii) if the owner of such facility is not the producer 
     of the electricity, the person eligible for the credit 
     allowable under subsection (a) shall be the lessee or the 
     operator of such facility.
       ``(3) Open-loop biomass facility.--
       ``(A) In general.--In the case of a facility using open-
     loop biomass to produce electricity for grid sale in excess 
     of its internal requirements, the term `qualified facility' 
     means any facility owned by the taxpayer which--
       ``(i) in the case of a facility using agricultural 
     livestock waste nutrients, is originally placed in service 
     after December 31, 2004, and before January 1, 2007, and
       ``(ii) in the case of any other facility, is originally 
     placed in service before January 1, 2005.
       ``(B) Special rules for preeffective date facilities.--In 
     the case of any facility described in subparagraph (A)(ii) 
     which is placed in service before January 1, 2005--
       ``(i) subsection (a)(1) shall be applied by substituting 
     `1.2 cents' for `1.5 cents', and
       ``(ii) the 5-year period beginning on January 1, 2005, 
     shall be substituted for the 10-year period in subsection 
     (a)(2)(A)(ii).
       ``(C) Credit eligibility.--In the case of any facility 
     described in subparagraph (A), if the owner of such facility 
     is not the producer of the electricity, the person eligible 
     for the credit allowable under subsection (a) shall be the 
     lessee or the operator of such facility.
       ``(4) Geothermal or solar energy facility.--In the case of 
     a facility using geothermal or solar energy to produce 
     electricity, the term `qualified facility' means any facility 
     owned by the taxpayer which is originally placed in service 
     after December 31, 2004, and before January 1, 2007. Such 
     term shall not include any property described in section 
     48(a)(3) the basis of which is taken into account by the 
     taxpayer for purposes of determining the energy credit under 
     section 48.
       ``(5) Small irrigation power facility.--In the case of a 
     facility using small irrigation power to produce electricity, 
     the term `qualified facility' means any facility owned by the 
     taxpayer which is originally placed in service after December 
     31, 2004, and before January 1, 2007.
       ``(6) Biosolids and sludge facility.--In the case of a 
     facility using waste heat from the incineration of biosolids 
     and sludge to produce electricity, the term `qualified 
     facility' means any facility owned by the taxpayer which is 
     originally placed in service after December 31, 2004, and 
     before January 1, 2007. Such term shall not include any 
     property described in section 48(a)(3) the basis of which is 
     taken into account for purposes of the energy credit under 
     section 46.
       ``(7) Municipal solid waste facility.--
       ``(A) In general.--In the case of a facility or unit 
     incinerating municipal solid waste to produce electricity, 
     the term `qualified facility' means any facility or unit 
     owned by the taxpayer which is originally placed in service 
     after December 31, 2004, and before January 1, 2007.
       ``(B) Special rule.--In the case of any facility or unit 
     described in subparagraph (A), the 5-year period beginning on 
     the date the facility or unit was originally placed in 
     service shall be substituted for the 10-year period in 
     subsection (a)(2)(A)(ii).
       ``(C) Credit eligibility.--In the case of any qualified 
     facility described in subparagraph (A), if the owner of such 
     facility is not the producer of the electricity, the person 
     eligible for the credit allowable under subsection (a) shall 
     be the lessee or the operator of such facility.''.

[[Page 6543]]

       (2) No credit for certain production.--Section 45(e) 
     (relating to definitions and special rules), as redesignated 
     by paragraph (1), is amended by striking paragraph (6) and 
     inserting the following new paragraph:
       ``(6) Operations inconsistent with solid waste disposal 
     act.--In the case of a qualified facility described in 
     subsection (d)(6)(A), subsection (a) shall not apply to 
     electricity produced at such facility during any taxable year 
     if, during a portion of such year, there is a certification 
     in effect by the Administrator of the Environmental 
     Protection Agency that such facility was permitted to operate 
     in a manner inconsistent with section 4003(d) of the Solid 
     Waste Disposal Act (42 U.S.C. 6943(d)).''.
       (3) Conforming amendment.--Section 45(e), as so 
     redesignated, is amended by striking ``subsection (c)(3)(A)'' 
     in paragraph (7)(A)(i) and inserting ``subsection (d)(1)''.
       (c) Credit Rate for Electricity Produced From New 
     Facilities.--
       (1) In general.--Section 45(a) is amended by adding at the 
     end the following new flush sentence:

     ``In the case of electricity produced after December 31, 
     2004, at any qualified facility originally placed in service 
     after such date, paragraph (1) shall be applied by 
     substituting `1.8 cents' for `1.5 cents'.''.
       (2) New rate not subject to inflation adjustment.--Section 
     45(b)(2) (relating to credit and phaseout adjustment based on 
     inflation) is amended by adding at the end the following new 
     sentence: ``This paragraph shall not apply to any amount 
     which is substituted for the 1.5 cent amount in subsection 
     (a) by reason of any provision of this section.''.
       (d) Elimination of Certain Credit Reductions.--Section 
     45(b)(3)(A) (relating to credit reduced for grants, tax-
     exempt bonds, subsidized energy financing, and other credits) 
     is amended--
       (1) by striking clause (ii),
       (2) by redesignating clauses (iii) and (iv) as clauses (ii) 
     and (iii),
       (3) by inserting ``(other than proceeds of an issue of 
     State or local government obligations the interest on which 
     is exempt from tax under section 103, or any loan, debt, or 
     other obligation incurred under subchapter I of chapter 31 of 
     title 7 of the Rural Electrification Act of 1936 (7 U.S.C. 
     901 et seq.), as in effect on the date of the enactment of 
     the Energy Tax Incentives Act)'' after ``project'' in clause 
     (ii) (as so redesignated),
       (4) by adding at the end the following new sentence: ``This 
     paragraph shall not apply with respect to any facility 
     described in subsection (d)(2)(A)(ii).'', and
       (5) by striking ``tax-exempt bonds,'' in the heading and 
     inserting ``certain''.
       (e) Treatment of Persons Not Able To Use Entire Credit.--
     Section 45(e) (relating to definitions and special rules), as 
     redesignated by subsection (b)(1), is amended by adding at 
     the end the following new paragraph:
       ``(8) Treatment of persons not able to use entire credit.--
       ``(A) Allowance of credit.--
       ``(i) In general.--Except as otherwise provided in this 
     subsection--

       ``(I) any credit allowable under subsection (a) with 
     respect to a qualified facility owned by a person described 
     in clause (ii) may be transferred or used as provided in this 
     paragraph, and
       ``(II) the determination as to whether the credit is 
     allowable shall be made without regard to the tax-exempt 
     status of the person.

       ``(ii) Persons described.--A person is described in this 
     clause if the person is--

       ``(I) an organization described in section 501(c)(12)(C) 
     and exempt from tax under section 501(a),
       ``(II) an organization described in section 1381(a)(2)(C),
       ``(III) a public utility (as defined in section 
     136(c)(2)(B)), which is exempt from income tax under this 
     subtitle,
       ``(IV) any State or political subdivision thereof, the 
     District of Columbia, any possession of the United States, or 
     any agency or instrumentality of any of the foregoing, or

       ``(V) any Indian tribal government (within the meaning of 
     section 7871) or any agency or instrumentality thereof.

       ``(B) Transfer of credit.--
       ``(i) In general.--A person described in subparagraph 
     (A)(ii) may transfer any credit to which subparagraph (A)(i) 
     applies through an assignment to any other person not 
     described in subparagraph (A)(ii). Such transfer may be 
     revoked only with the consent of the Secretary.
       ``(ii) Regulations.--The Secretary shall prescribe such 
     regulations as necessary to ensure that any credit described 
     in clause (i) is assigned once and not reassigned by such 
     other person.
       ``(iii) Transfer proceeds treated as arising from essential 
     government function.--Any proceeds derived by a person 
     described in subclause (III), (IV), or (V) of subparagraph 
     (A)(ii) from the transfer of any credit under clause (i) 
     shall be treated as arising from the exercise of an essential 
     government function.
       ``(C) Use of credit as an offset.--Notwithstanding any 
     other provision of law, in the case of a person described in 
     subclause (I), (II), or (V) of subparagraph (A)(ii), any 
     credit to which subparagraph (A)(i) applies may be applied by 
     such person, to the extent provided by the Secretary of 
     Agriculture, as a prepayment of any loan, debt, or other 
     obligation the entity has incurred under subchapter I of 
     chapter 31 of title 7 of the Rural Electrification Act of 
     1936 (7 U.S.C. 901 et seq.), as in effect on the date of the 
     enactment of the Energy Tax Incentives Act.
       ``(D) Credit not income.--Any transfer under subparagraph 
     (B) or use under subparagraph (C) of any credit to which 
     subparagraph (A)(i) applies shall not be treated as income 
     for purposes of section 501(c)(12).
       ``(E) Treatment of unrelated persons.--For purposes of 
     subsection (a)(2)(B), sales of electricity among and between 
     persons described in subparagraph (A)(ii) shall be treated as 
     sales between unrelated parties.''.
       (g) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to electricity produced and sold after December 31, 2004, in 
     taxable years ending after such date.
       (2) Certain biomass facilities.--With respect to any 
     facility described in section 45(d)(3)(A)(ii) of the Internal 
     Revenue Code of 1986, as added by subsection (b)(1), which is 
     placed in service before the date of the enactment of this 
     Act, the amendments made by this section shall apply to 
     electricity produced and sold after December 31, 2004, in 
     taxable years ending after such date.
       (3) Credit rate for new facilities.--The amendments made by 
     subsection (c) shall apply to electricity produced and sold 
     after December 31, 2004, in taxable years ending after such 
     date.
       (4) Nonapplication of amendments to preeffective date 
     poultry waste facilities.--The amendments made by this 
     section shall not apply with respect to any poultry waste 
     facility (within the meaning of section 45(c)(3)(C), as in 
     effect on December 31, 2004) placed in service on or before 
     such date.

      Subtitle B--Alternative Motor Vehicles and Fuels Incentives

     SEC. 811. ALTERNATIVE MOTOR VEHICLE CREDIT.

       (a) In General.--Subpart B of part IV of subchapter A of 
     chapter 1 (relating to foreign tax credit, etc.) is amended 
     by adding at the end the following new section:

     ``SEC. 30B. ALTERNATIVE MOTOR VEHICLE CREDIT.

       ``(a) Allowance of Credit.--There shall be allowed as a 
     credit against the tax imposed by this chapter for the 
     taxable year an amount equal to the sum of--
       ``(1) the new qualified fuel cell motor vehicle credit 
     determined under subsection (b),
       ``(2) the new qualified hybrid motor vehicle credit 
     determined under subsection (c), and
       ``(3) the new qualified alternative fuel motor vehicle 
     credit determined under subsection (d).
       ``(b) New Qualified Fuel Cell Motor Vehicle Credit.--
       ``(1) In general.--For purposes of subsection (a), the new 
     qualified fuel cell motor vehicle credit determined under 
     this subsection with respect to a new qualified fuel cell 
     motor vehicle placed in service by the taxpayer during the 
     taxable year is--
       ``(A) $4,000, if such vehicle has a gross vehicle weight 
     rating of not more than 8,500 pounds,
       ``(B) $10,000, if such vehicle has a gross vehicle weight 
     rating of more than 8,500 pounds but not more than 14,000 
     pounds,
       ``(C) $20,000, if such vehicle has a gross vehicle weight 
     rating of more than 14,000 pounds but not more than 26,000 
     pounds, and
       ``(D) $40,000, if such vehicle has a gross vehicle weight 
     rating of more than 26,000 pounds.
       ``(2) Increase for fuel efficiency.--
       ``(A) In general.--The amount determined under paragraph 
     (1)(A) with respect to a new qualified fuel cell motor 
     vehicle which is a passenger automobile or light truck shall 
     be increased by--
       ``(i) $1,000, if such vehicle achieves at least 150 percent 
     but less than 175 percent of the 2002 model year city fuel 
     economy,
       ``(ii) $1,500, if such vehicle achieves at least 175 
     percent but less than 200 percent of the 2002 model year city 
     fuel economy,
       ``(iii) $2,000, if such vehicle achieves at least 200 
     percent but less than 225 percent of the 2002 model year city 
     fuel economy,
       ``(iv) $2,500, if such vehicle achieves at least 225 
     percent but less than 250 percent of the 2002 model year city 
     fuel economy,
       ``(v) $3,000, if such vehicle achieves at least 250 percent 
     but less than 275 percent of the 2002 model year city fuel 
     economy,
       ``(vi) $3,500, if such vehicle achieves at least 275 
     percent but less than 300 percent of the 2002 model year city 
     fuel economy, and
       ``(vii) $4,000, if such vehicle achieves at least 300 
     percent of the 2002 model year city fuel economy.
       ``(B) 2002 model year city fuel economy.--For purposes of 
     subparagraph (A), the 2002 model year city fuel economy with 
     respect to a vehicle shall be determined in accordance with 
     the following tables:
       ``(i) In the case of a passenger automobile:

``If vehicle inertia weight clThe 2002 model year city fuel economy is:
1,500 or 1,750 lbs.............................................45.2 mpg
2,000 lbs......................................................39.6 mpg
2,250 lbs......................................................35.2 mpg
2,500 lbs......................................................31.7 mpg

[[Page 6544]]

2,750 lbs......................................................28.8 mpg
3,000 lbs......................................................26.4 mpg
3,500 lbs......................................................22.6 mpg
4,000 lbs......................................................19.8 mpg
4,500 lbs......................................................17.6 mpg
5,000 lbs......................................................15.9 mpg
5,500 lbs......................................................14.4 mpg
6,000 lbs......................................................13.2 mpg
6,500 lbs......................................................12.2 mpg
7,000 to 8,500 lbs............................................11.3 mpg.

       ``(ii) In the case of a light truck:

``If vehicle inertia weight clThe 2002 model year city fuel economy is:
1,500 or 1,750 lbs.............................................39.4 mpg
2,000 lbs......................................................35.2 mpg
2,250 lbs......................................................31.8 mpg
2,500 lbs......................................................29.0 mpg
2,750 lbs......................................................26.8 mpg
3,000 lbs......................................................24.9 mpg
3,500 lbs......................................................21.8 mpg
4,000 lbs......................................................19.4 mpg
4,500 lbs......................................................17.6 mpg
5,000 lbs......................................................16.1 mpg
5,500 lbs......................................................14.8 mpg
6,000 lbs......................................................13.7 mpg
6,500 lbs......................................................12.8 mpg
7,000 to 8,500 lbs............................................12.1 mpg.

       ``(C) Vehicle inertia weight class.--For purposes of 
     subparagraph (B), the term `vehicle inertia weight class' has 
     the same meaning as when defined in regulations prescribed by 
     the Administrator of the Environmental Protection Agency for 
     purposes of the administration of title II of the Clean Air 
     Act (42 U.S.C. 7521 et seq.).
       ``(3) New qualified fuel cell motor vehicle.--For purposes 
     of this subsection, the term `new qualified fuel cell motor 
     vehicle' means a motor vehicle--
       ``(A) which is propelled by power derived from 1 or more 
     cells which convert chemical energy directly into electricity 
     by combining oxygen with hydrogen fuel which is stored on 
     board the vehicle in any form and may or may not require 
     reformation prior to use,
       ``(B) which, in the case of a passenger automobile or light 
     truck--
       ``(i) for 2002 and later model vehicles, has received a 
     certificate of conformity under the Clean Air Act and meets 
     or exceeds the equivalent qualifying California low emission 
     vehicle standard under section 243(e)(2) of the Clean Air Act 
     for that make and model year, and
       ``(ii) for 2004 and later model vehicles, has received a 
     certificate that such vehicle meets or exceeds the Bin 5 Tier 
     II emission level established in regulations prescribed by 
     the Administrator of the Environmental Protection Agency 
     under section 202(i) of the Clean Air Act for that make and 
     model year vehicle,
       ``(C) the original use of which commences with the 
     taxpayer,
       ``(D) which is acquired for use or lease by the taxpayer 
     and not for resale, and
       ``(E) which is made by a manufacturer.
       ``(c) New Qualified Hybrid Motor Vehicle Credit.--
       ``(1) In general.--For purposes of subsection (a), the new 
     qualified hybrid motor vehicle credit determined under this 
     subsection with respect to a new qualified hybrid motor 
     vehicle placed in service by the taxpayer during the taxable 
     year is the credit amount determined under paragraph (2).
       ``(2) Credit amount.--
       ``(A) In general.--The credit amount determined under this 
     paragraph shall be determined in accordance with the 
     following tables:
       ``(i) In the case of a new qualified hybrid motor vehicle 
     which is a passenger automobile, medium duty passenger 
     vehicle, or light truck and which provides the following 
     percentage of the maximum available power:

``If percentage of the maximum available power is:The credit amount is:
At least 4 percent but less than 10 percent........................$250
At least 10 percent but less than 20 percent.......................$500
At least 20 percent but less than 30 percent.......................$750
At least 30 percent.............................................$1,000.

       ``(ii) In the case of a new qualified hybrid motor vehicle 
     which is a heavy duty hybrid motor vehicle and which provides 
     the following percentage of the maximum available power:

       ``(I) If such vehicle has a gross vehicle weight rating of 
     not more than 14,000 pounds:

``If percentage of the maximum available power is:The credit amount is:
At least 20 percent but less than 30 percent.....................$1,000
At least 30 percent but less than 40 percent.....................$1,750
At least 40 percent but less than 50 percent.....................$2,000
At least 50 percent but less than 60 percent.....................$2,250
At least 60 percent.............................................$2,500.

       ``(II) If such vehicle has a gross vehicle weight rating of 
     more than 14,000 but not more than 26,000 pounds:

``If percentage of the maximum available power is:The credit amount is:
At least 20 percent but less than 30 percent.....................$4,000
At least 30 percent but less than 40 percent.....................$4,500
At least 40 percent but less than 50 percent.....................$5,000
At least 50 percent but less than 60 percent.....................$5,500
At least 60 percent.............................................$6,000.

       ``(III) If such vehicle has a gross vehicle weight rating 
     of more than 26,000 pounds:

``If percentage of the maximum available power is:The credit amount is:
At least 20 percent but less than 30 percent.....................$6,000
At least 30 percent but less than 40 percent.....................$7,000
At least 40 percent but less than 50 percent.....................$8,000
At least 50 percent but less than 60 percent.....................$9,000
At least 60 percent............................................$10,000.

       ``(B) Increase for fuel efficiency.--
       ``(i) Amount.--The amount determined under subparagraph 
     (A)(i) with respect to a new qualified hybrid motor vehicle 
     which is a passenger automobile or light truck shall be 
     increased by--

       ``(I) $500, if such vehicle achieves at least 125 percent 
     but less than 150 percent of the 2002 model year city fuel 
     economy,
       ``(II) $1,000, if such vehicle achieves at least 150 
     percent but less than 175 percent of the 2002 model year city 
     fuel economy,
       ``(III) $1,500, if such vehicle achieves at least 175 
     percent but less than 200 percent of the 2002 model year city 
     fuel economy,
       ``(IV) $2,000, if such vehicle achieves at least 200 
     percent but less than 225 percent of the 2002 model year city 
     fuel economy,
       ``(V) $2,500, if such vehicle achieves at least 225 percent 
     but less than 250 percent of the 2002 model year city fuel 
     economy, and
       ``(VI) $3,000, if such vehicle achieves at least 250 
     percent of the 2002 model year city fuel economy.

       ``(ii) 2002 model year city fuel economy.--For purposes of 
     clause (i), the 2002 model year city fuel economy with 
     respect to a vehicle shall be determined on a gasoline gallon 
     equivalent basis as determined by the Administrator of the 
     Environmental Protection Agency using the tables provided in 
     subsection (b)(2)(B) with respect to such vehicle.
       ``(C) Increase for accelerated emissions performance.--The 
     amount determined under subparagraph (A)(ii) with respect to 
     an applicable heavy duty hybrid motor vehicle shall be 
     increased by the increased credit amount determined in 
     accordance with the following tables:
       ``(i) In the case of a vehicle which has a gross vehicle 
     weight rating of not more than 14,000 pounds:

``If the model year is:                 The increased credit amount is:
2004.............................................................$2,500
2005.............................................................$2,000
2006............................................................$1,500.

       ``(ii) In the case of a vehicle which has a gross vehicle 
     weight rating of more than 14,000 pounds but not more than 
     26,000 pounds:

``If the model year is:                 The increased credit amount is:
2004.............................................................$6,500
2005.............................................................$5,250
2006............................................................$4,000.

       ``(iii) In the case of a vehicle which has a gross vehicle 
     weight rating of more than 26,000 pounds:

``If the model year is:                 The increased credit amount is:
2004............................................................$10,000
2005.............................................................$8,000
2006............................................................$6,000.

       ``(D) Definitions relating to credit amount.--
       ``(i) Applicable heavy duty hybrid motor vehicle.--For 
     purposes of subparagraph (C), the term `applicable heavy duty 
     hybrid motor vehicle' means a heavy duty hybrid motor vehicle 
     which is powered by an internal combustion or heat engine 
     which is certified as meeting the emission standards set in 
     the regulations prescribed by the Administrator of the 
     Environmental Protection Agency for 2007 and later model year 
     diesel heavy duty engines, or for 2008 and later model year 
     ottocycle heavy duty engines, as applicable.
       ``(ii) Maximum available power.--

       ``(I) Passenger automobile, medium duty passenger vehicle, 
     or light truck.--For purposes of subparagraph (A)(i), the 
     term `maximum available power' means the maximum power 
     available from the rechargeable energy storage system, during 
     a standard 10 second pulse power or equivalent test, divided 
     by such maximum power and the SAE net power of the heat 
     engine.
       ``(II) Heavy duty hybrid motor vehicle.--For purposes of 
     subparagraph (A)(ii), the term `maximum available power' 
     means the maximum power available from the rechargeable 
     energy storage system, during a standard 10 second pulse 
     power or equivalent test, divided by the vehicle's total 
     traction power. The term `total traction power' means the sum 
     of the peak power from the rechargeable energy storage system 
     and the heat engine peak power of the vehicle, except that if 
     such storage system is the sole

[[Page 6545]]

     means by which the vehicle can be driven, the total traction 
     power is the peak power of such storage system.

       ``(3) New qualified hybrid motor vehicle.--For purposes of 
     this subsection--
       ``(A) In general.--The term `new qualified hybrid motor 
     vehicle' means a motor vehicle--
       ``(i) which draws propulsion energy from onboard sources of 
     stored energy which are both--

       ``(I) an internal combustion or heat engine using 
     consumable fuel, and
       ``(II) a rechargeable energy storage system,

       ``(ii) which, in the case of a passenger automobile, medium 
     duty passenger vehicle, or light truck--

       ``(I) for 2002 and later model vehicles, has received a 
     certificate of conformity under the Clean Air Act and meets 
     or exceeds the equivalent qualifying California low emission 
     vehicle standard under section 243(e)(2) of the Clean Air Act 
     for that make and model year, and
       ``(II) for 2004 and later model vehicles, has received a 
     certificate that such vehicle meets or exceeds the Bin 5 Tier 
     II emission level established in regulations prescribed by 
     the Administrator of the Environmental Protection Agency 
     under section 202(i) of the Clean Air Act for that make and 
     model year vehicle,

       ``(iii) which, in the case of a heavy duty hybrid motor 
     vehicle, has an internal combustion or heat engine which has 
     received a certificate of conformity under the Clean Air Act 
     as meeting the emission standards set in the regulations 
     prescribed by the Administrator of the Environmental 
     Protection Agency for 2004 through 2007 model year diesel 
     heavy duty engines or ottocycle heavy duty engines, as 
     applicable,
       ``(iv) the original use of which commences with the 
     taxpayer,
       ``(v) which is acquired for use or lease by the taxpayer 
     and not for resale, and
       ``(vi) which is made by a manufacturer.
       ``(B) Consumable fuel.--For purposes of subparagraph 
     (A)(i)(I), the term `consumable fuel' means any solid, 
     liquid, or gaseous matter which releases energy when consumed 
     by an auxiliary power unit.
       ``(4) Heavy duty hybrid motor vehicle.--For purposes of 
     this subsection, the term `heavy duty hybrid motor vehicle' 
     means a new qualified hybrid motor vehicle which has a gross 
     vehicle weight rating of more than 8,500 pounds. Such term 
     does not include a medium duty passenger vehicle.
       ``(d) New Qualified Alternative Fuel Motor Vehicle 
     Credit.--
       ``(1) Allowance of credit.--Except as provided in paragraph 
     (5), the new qualified alternative fuel motor vehicle credit 
     determined under this subsection is an amount equal to the 
     applicable percentage of the incremental cost of any new 
     qualified alternative fuel motor vehicle placed in service by 
     the taxpayer during the taxable year.
       ``(2) Applicable percentage.--For purposes of paragraph 
     (1), the applicable percentage with respect to any new 
     qualified alternative fuel motor vehicle is--
       ``(A) 40 percent, plus
       ``(B) 30 percent, if such vehicle--
       ``(i) has received a certificate of conformity under the 
     Clean Air Act and meets or exceeds the most stringent 
     standard available for certification under the Clean Air Act 
     for that make and model year vehicle (other than a zero 
     emission standard), or
       ``(ii) has received an order certifying the vehicle as 
     meeting the same requirements as vehicles which may be sold 
     or leased in California and meets or exceeds the most 
     stringent standard available for certification under the 
     State laws of California (enacted in accordance with a waiver 
     granted under section 209(b) of the Clean Air Act) for that 
     make and model year vehicle (other than a zero emission 
     standard).
     For purposes of the preceding sentence, in the case of any 
     new qualified alternative fuel motor vehicle which weighs 
     more than 14,000 pounds gross vehicle weight rating, the most 
     stringent standard available shall be such standard available 
     for certification on the date of the enactment of the Energy 
     Tax Incentives Act.
       ``(3) Incremental cost.--For purposes of this subsection, 
     the incremental cost of any new qualified alternative fuel 
     motor vehicle is equal to the amount of the excess of the 
     manufacturer's suggested retail price for such vehicle over 
     such price for a gasoline or diesel fuel motor vehicle of the 
     same model, to the extent such amount does not exceed--
       ``(A) $5,000, if such vehicle has a gross vehicle weight 
     rating of not more than 8,500 pounds,
       ``(B) $10,000, if such vehicle has a gross vehicle weight 
     rating of more than 8,500 pounds but not more than 14,000 
     pounds,
       ``(C) $25,000, if such vehicle has a gross vehicle weight 
     rating of more than 14,000 pounds but not more than 26,000 
     pounds, and
       ``(D) $40,000, if such vehicle has a gross vehicle weight 
     rating of more than 26,000 pounds.
       ``(4) New qualified alternative fuel motor vehicle.--For 
     purposes of this subsection--
       ``(A) In general.--The term `new qualified alternative fuel 
     motor vehicle' means any motor vehicle--
       ``(i) which is only capable of operating on an alternative 
     fuel,
       ``(ii) the original use of which commences with the 
     taxpayer,
       ``(iii) which is acquired by the taxpayer for use or lease, 
     but not for resale, and
       ``(iv) which is made by a manufacturer.
       ``(B) Alternative fuel.--The term `alternative fuel' means 
     compressed natural gas, liquefied natural gas, liquefied 
     petroleum gas, hydrogen, and any liquid at least 85 percent 
     of the volume of which consists of methanol.
       ``(5) Credit for mixed-fuel vehicles.--
       ``(A) In general.--In the case of a mixed-fuel vehicle 
     placed in service by the taxpayer during the taxable year, 
     the credit determined under this subsection is an amount 
     equal to--
       ``(i) in the case of a 75/25 mixed-fuel vehicle, 70 percent 
     of the credit which would have been allowed under this 
     subsection if such vehicle was a qualified alternative fuel 
     motor vehicle, and
       ``(ii) in the case of a 90/10 mixed-fuel vehicle, 90 
     percent of the credit which would have been allowed under 
     this subsection if such vehicle was a qualified alternative 
     fuel motor vehicle.
       ``(B) Mixed-fuel vehicle.--For purposes of this subsection, 
     the term `mixed-fuel vehicle' means any motor vehicle 
     described in subparagraph (C) or (D) of paragraph (3), 
     which--
       ``(i) is certified by the manufacturer as being able to 
     perform efficiently in normal operation on a combination of 
     an alternative fuel and a petroleum-based fuel,
       ``(ii) either--

       ``(I) has received a certificate of conformity under the 
     Clean Air Act, or
       ``(II) has received an order certifying the vehicle as 
     meeting the same requirements as vehicles which may be sold 
     or leased in California and meets or exceeds the low emission 
     vehicle standard under section 88.105-94 of title 40, Code of 
     Federal Regulations, for that make and model year vehicle,

       ``(iii) the original use of which commences with the 
     taxpayer,
       ``(iv) which is acquired by the taxpayer for use or lease, 
     but not for resale, and
       ``(v) which is made by a manufacturer.
       ``(C) 75/25 mixed-fuel vehicle.--For purposes of this 
     subsection, the term `75/25 mixed-fuel vehicle' means a 
     mixed-fuel vehicle which operates using at least 75 percent 
     alternative fuel and not more than 25 percent petroleum-based 
     fuel.
       ``(D) 90/10 mixed-fuel vehicle.--For purposes of this 
     subsection, the term `90/10 mixed-fuel vehicle' means a 
     mixed-fuel vehicle which operates using at least 90 percent 
     alternative fuel and not more than 10 percent petroleum-based 
     fuel.
       ``(e) Application With Other Credits.--The credit allowed 
     under subsection (a) for any taxable year shall not exceed 
     the excess (if any) of--
       ``(1) the regular tax for the taxable year reduced by the 
     sum of the credits allowable under subpart A and sections 27, 
     29, and 30, over
       ``(2) the tentative minimum tax for the taxable year.
       ``(f) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Motor vehicle.--The term `motor vehicle' has the 
     meaning given such term by section 30(c)(2).
       ``(2) City fuel economy.--The city fuel economy with 
     respect to any vehicle shall be measured in a manner which is 
     substantially similar to the manner city fuel economy is 
     measured in accordance with procedures under part 600 of 
     subchapter Q of chapter I of title 40, Code of Federal 
     Regulations, as in effect on the date of the enactment of 
     this section.
       ``(3) Other terms.--The terms `automobile', `passenger 
     automobile', `medium duty passenger vehicle', `light truck', 
     and `manufacturer' have the meanings given such terms in 
     regulations prescribed by the Administrator of the 
     Environmental Protection Agency for purposes of the 
     administration of title II of the Clean Air Act (42 U.S.C. 
     7521 et seq.).
       ``(4)  Reduction in basis.--For purposes of this subtitle, 
     the basis of any property for which a credit is allowable 
     under subsection (a) shall be reduced by the amount of such 
     credit so allowed (determined without regard to subsection 
     (e)).
       ``(5) No double benefit.--The amount of any deduction or 
     other credit allowable under this chapter--
       ``(A) for any incremental cost taken into account in 
     computing the amount of the credit determined under 
     subsection (d) shall be reduced by the amount of such credit 
     attributable to such cost, and
       ``(B) with respect to a vehicle described under subsection 
     (b) or (c), shall be reduced by the amount of credit allowed 
     under subsection (a) for such vehicle for the taxable year.
       ``(6) Property used by tax-exempt entities.--In the case of 
     a credit amount which is allowable with respect to a motor 
     vehicle which is acquired by an entity exempt from tax under 
     this chapter, the person which sells or leases such vehicle 
     to the entity shall be treated as the taxpayer with respect 
     to the vehicle for purposes of this section and the credit 
     shall be allowed to such person, but only if the person 
     clearly discloses

[[Page 6546]]

     to the entity at the time of any sale or lease the specific 
     amount of any credit otherwise allowable to the entity under 
     this section.
       ``(7) Recapture.--The Secretary shall, by regulations, 
     provide for recapturing the benefit of any credit allowable 
     under subsection (a) with respect to any property which 
     ceases to be property eligible for such credit (including 
     recapture in the case of a lease period of less than the 
     economic life of a vehicle).
       ``(8) Property used outside united states, etc., not 
     qualified.--No credit shall be allowed under subsection (a) 
     with respect to any property referred to in section 50(b) or 
     with respect to the portion of the cost of any property taken 
     into account under section 179.
       ``(9) Election to not take credit.--No credit shall be 
     allowed under subsection (a) for any vehicle if the taxpayer 
     elects to not have this section apply to such vehicle.
       ``(10) Carryback and carryforward allowed.--
       ``(A) In general.--If the credit allowable under subsection 
     (a) for a taxable year exceeds the amount of the limitation 
     under subsection (e) for such taxable year (in this paragraph 
     referred to as the `unused credit year'), such excess shall 
     be a credit carryback to each of the 3 taxable years 
     preceding the unused credit year and a credit carryforward to 
     each of the 20 taxable years following the unused credit 
     year, except that no excess may be carried to a taxable year 
     beginning before January 1, 2005.
       ``(B) Rules.--Rules similar to the rules of section 39 
     shall apply with respect to the credit carryback and credit 
     carryforward under subparagraph (A).
       ``(11) Interaction with air quality and motor vehicle 
     safety standards.--Unless otherwise provided in this section, 
     a motor vehicle shall not be considered eligible for a credit 
     under this section unless such vehicle is in compliance 
     with--
       ``(A) the applicable provisions of the Clean Air Act for 
     the applicable make and model year of the vehicle (or 
     applicable air quality provisions of State law in the case of 
     a State which has adopted such provision under a waiver under 
     section 209(b) of the Clean Air Act), and
       ``(B) the motor vehicle safety provisions of sections 30101 
     through 30169 of title 49, United States Code.
       ``(g) Regulations.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     Secretary shall promulgate such regulations as necessary to 
     carry out the provisions of this section.
       ``(2) Coordination in prescription of certain 
     regulations.--The Secretary of the Treasury, in coordination 
     with the Secretary of Transportation and the Administrator of 
     the Environmental Protection Agency, shall prescribe such 
     regulations as necessary to determine whether a motor vehicle 
     meets the requirements to be eligible for a credit under this 
     section.
       ``(h) Termination.--This section shall not apply to any 
     property purchased after--
       ``(1) in the case of a new qualified fuel cell motor 
     vehicle (as described in subsection (b)), December 31, 2011, 
     and
       ``(2) in the case of any other property, December 31, 
     2006.''.
       (b) Conforming Amendments.--
       (1) Section 1016(a) 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 30B(f)(4).''.
       (2) Section 55(c)(2) is amended by inserting ``30B(e),'' 
     after ``30(b)(3),''.
       (3) Section 6501(m) is amended by inserting ``30B(f)(9),'' 
     after ``30(d)(4),''.
       (4) The table of sections for subpart B of part IV of 
     subchapter A of chapter 1 is amended by inserting after the 
     item relating to section 30A the following new item:

``Sec. 30B. Alternative motor vehicle credit.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004, in taxable years ending after such date.

     SEC. 812. MODIFICATION OF CREDIT FOR QUALIFIED ELECTRIC 
                   VEHICLES.

       (a) Amount of Credit.--
       (1) In general.--Section 30(a) (relating to allowance of 
     credit) is amended by striking ``10 percent of''.
       (2) Limitation of credit according to type of vehicle.--
     Paragraph (1) of section 30(b) (relating to limitations) is 
     amended to read as follows:
       ``(1) Limitation according to type of vehicle.--The amount 
     of the credit allowed under subsection (a) for any vehicle 
     shall not exceed the greatest of the following amounts 
     applicable to such vehicle:
       ``(A) In the case of a vehicle with a gross vehicle weight 
     rating not exceeding 8,500 pounds--
       ``(i) except as provided in clause (ii) or (iii), $3,500,
       ``(ii) $6,000, if such vehicle is--

       ``(I) capable of a driving range of at least 100 miles on a 
     single charge of the vehicle's rechargeable batteries as 
     measured pursuant to the urban dynamometer schedules under 
     appendix I to part 86 of title 40, Code of Federal 
     Regulations, or
       ``(II) capable of a payload capacity of at least 1,000 
     pounds, and

       ``(iii) if such vehicle is a low-speed vehicle which 
     conforms to Standard 500 prescribed by the Secretary of 
     Transportation (49 C.F.R. 571.500), as in effect on the date 
     of the enactment of the Energy Tax Incentives Act, the lesser 
     of--

       ``(I) 10 percent of the manufacturer's suggested retail 
     price of the vehicle, or
       ``(II) $1,500.

       ``(B) In the case of a vehicle with a gross vehicle weight 
     rating exceeding 8,500 but not exceeding 14,000 pounds, 
     $10,000.
       ``(C) In the case of a vehicle with a gross vehicle weight 
     rating exceeding 14,000 but not exceeding 26,000 pounds, 
     $20,000.
       ``(D) In the case of a vehicle with a gross vehicle weight 
     rating exceeding 26,000 pounds, $40,000.''.
       (b) Qualified Battery Electric Vehicle.--
       (1) In general.--Section 30(c)(1)(A) (defining qualified 
     electric vehicle) is amended to read as follows:
       ``(A) which is--
       ``(i) operated solely by use of a battery or battery pack, 
     or
       ``(ii) powered primarily through the use of an electric 
     battery or battery pack using a flywheel or capacitor which 
     stores energy produced by an electric motor through 
     regenerative braking to assist in vehicle operation,''.
       (2) Leased vehicles.--Section 30(c)(1)(C) is amended by 
     inserting ``or lease'' after ``use''.
       (3) Conforming amendments.--
       (A) Subsections (a), (b)(2), and (c) of section 30 are each 
     amended by inserting ``battery'' after ``qualified'' each 
     place it appears.
       (B) The heading of subsection (c) of section 30 is amended 
     by inserting ``Battery'' after ``Qualified''.
       (C) The heading of section 30 is amended by inserting 
     ``BATTERY'' after ``QUALIFIED''.
       (D) The item relating to section 30 in the table of 
     sections for subpart B of part IV of subchapter A of chapter 
     1 is amended by inserting ``battery'' after ``qualified''.
       (E) Section 179A(c)(3) is amended by inserting ``battery'' 
     before ``electric''.
       (F) The heading of paragraph (3) of section 179A(c) is 
     amended by inserting ``battery'' before ``electric''.
       (c) Additional Special Rules.--Section 30(d) (relating to 
     special rules) is amended by adding at the end the following 
     new paragraphs:
       ``(5) No double benefit.--The amount of any deduction or 
     other credit allowable under this chapter for any cost taken 
     into account in computing the amount of the credit determined 
     under subsection (a) shall be reduced by the amount of such 
     credit attributable to such cost.
       ``(6) Property used by tax-exempt entities.--In the case of 
     a credit amount which is allowable with respect to a vehicle 
     which is acquired by an entity exempt from tax under this 
     chapter, the person which sells or leases such vehicle to the 
     entity shall be treated as the taxpayer with respect to the 
     vehicle for purposes of this section and the credit shall be 
     allowed to such person, but only if the person clearly 
     discloses to the entity at the time of any sale or lease the 
     specific amount of any credit otherwise allowable to the 
     entity under this section.
       ``(7) Carryback and carryforward allowed.--
       ``(A) In general.--If the credit allowable under subsection 
     (a) for a taxable year exceeds the amount of the limitation 
     under subsection (b)(2) for such taxable year (in this 
     paragraph referred to as the `unused credit year'), such 
     excess shall be a credit carryback to each of the 3 taxable 
     years preceding the unused credit year and a credit 
     carryforward to each of the 20 taxable years following the 
     unused credit year, except that no excess may be carried to a 
     taxable year beginning before January 1, 2005.
       ``(B) Rules.--Rules similar to the rules of section 39 
     shall apply with respect to the credit carryback and credit 
     carryforward under subparagraph (A).''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004, in taxable years ending after such date.

     SEC. 813. CREDIT FOR INSTALLATION OF ALTERNATIVE FUELING 
                   STATIONS.

       (a) In General.--Subpart B of part IV of subchapter A of 
     chapter 1 (relating to foreign tax credit, etc.), as amended 
     by this Act, is amended by adding at the end the following 
     new section:

     ``SEC. 30C. CLEAN-FUEL VEHICLE REFUELING PROPERTY CREDIT.

       ``(a) Credit Allowed.--There shall be allowed as a credit 
     against the tax imposed by this chapter for the taxable year 
     an amount equal to 50 percent of the amount paid or incurred 
     by the taxpayer during the taxable year for the installation 
     of qualified clean-fuel vehicle refueling property.
       ``(b) Limitation.--The credit allowed under subsection 
     (a)--
       ``(1) with respect to any retail clean-fuel vehicle 
     refueling property, shall not exceed $30,000, and
       ``(2) with respect to any residential clean-fuel vehicle 
     refueling property, shall not exceed $1,000.
       ``(c) Year Credit Allowed.--Notwithstanding subsection (a), 
     no credit shall be allowed under subsection (a) with respect 
     to

[[Page 6547]]

     any qualified clean-fuel vehicle refueling property before 
     the taxable year in which the property is placed in service 
     by the taxpayer.
       ``(d) Definitions.--For purposes of this section--
       ``(1) Qualified clean-fuel vehicle refueling property.--The 
     term `qualified clean-fuel vehicle refueling property' has 
     the same meaning given such term by section 179A(d).
       ``(2) Residential clean-fuel vehicle refueling property.--
     The term `residential clean-fuel vehicle refueling property' 
     means qualified clean-fuel vehicle refueling property which 
     is installed on property which is used as the principal 
     residence (within the meaning of section 121) of the 
     taxpayer.
       ``(3) Retail clean-fuel vehicle refueling property.--The 
     term `retail clean-fuel vehicle refueling property' means 
     qualified clean-fuel vehicle refueling property which is 
     installed on property (other than property described in 
     paragraph (2)) used in a trade or business of the taxpayer.
       ``(e) Application With Other Credits.--The credit allowed 
     under subsection (a) for any taxable year shall not exceed 
     the excess (if any) of--
       ``(1) the regular tax for the taxable year reduced by the 
     sum of the credits allowable under subpart A and sections 27, 
     29, 30, and 30B, over
       ``(2) the tentative minimum tax for the taxable year.
       ``(f) Basis Reduction.--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).
       ``(g) No Double Benefit.--
       ``(1) Coordination with other deductions and credits.--
     Except as provided in paragraph (2), the amount of any 
     deduction or other credit allowable under this chapter for 
     any cost taken into account in computing the amount of the 
     credit determined under subsection (a) shall be reduced by 
     the amount of such credit attributable to such cost.
       ``(2) No deduction allowed under section 179a.--No 
     deduction shall be allowed under section 179A with respect to 
     any property with respect to which a credit is allowed under 
     subsection (a).
       ``(h) Refueling Property Installed for Tax-Exempt 
     Entities.--In the case of qualified clean-fuel vehicle 
     refueling property installed on property owned or used by an 
     entity exempt from tax under this chapter, the person which 
     installs such refueling property for the entity shall be 
     treated as the taxpayer with respect to the refueling 
     property for purposes of this section (and such refueling 
     property shall be treated as retail clean-fuel vehicle 
     refueling property) and the credit shall be allowed to such 
     person, but only if the person clearly discloses to the 
     entity in any installation contract the specific amount of 
     the credit allowable under this section.
       ``(i) Carryforward Allowed.--
       ``(1) In general.--If the credit allowable under subsection 
     (a) for a taxable year exceeds the amount of the limitation 
     under subsection (e) for such taxable year, such excess shall 
     be a credit carryforward to each of the 20 taxable years 
     following such taxable year.
       ``(2) Rules.--Rules similar to the rules of section 39 
     shall apply with respect to the credit carryforward under 
     paragraph (1).
       ``(j) Special Rules.--Rules similar to the rules of 
     paragraphs (4) and (5) of section 179A(e) shall apply.
       ``(k) Regulations.--The Secretary shall prescribe such 
     regulations as necessary to carry out the provisions of this 
     section.
       ``(l) Termination.--This section shall not apply to any 
     property placed in service--
       ``(1) in the case of property relating to hydrogen, after 
     December 31, 2011, and
       ``(2) in the case of any other property, after December 31, 
     2007.''.
       (b) Modifications to Extension of Deduction for Certain 
     Refueling Property.--Subsection (f) of section 179A is 
     amended to read as follows:
       ``(f) Termination.--This section shall not apply to any 
     property placed in service--
       ``(1) in the case of property relating to hydrogen, after 
     December 31, 2011, and
       ``(2) in the case of any other property, after December 31, 
     2007.''.
       (c) Incentive for Production of Hydrogen at Qualified 
     Clean-Fuel Vehicle Refueling Property.--Section 179A(d) 
     (defining qualified clean-fuel vehicle refueling property) is 
     amended by adding at the end the following new flush 
     sentence:

     ``In the case of clean-burning fuel which is hydrogen 
     produced from another clean-burning fuel, paragraph (3)(A) 
     shall be applied by substituting `production, storage, or 
     dispensing' for `storage or dispensing' both places it 
     appears.''.
       (d) Conforming Amendments.--
       (1) Section 1016(a), as amended by this Act, is amended by 
     striking ``and'' at the end of paragraph (28), by striking 
     the period at the end of paragraph (29) and inserting ``, 
     and'', and by adding at the end the following new paragraph:
       ``(30) to the extent provided in section 30C(f).''.
       (2) Section 55(c)(2), as amended by this Act, is amended by 
     inserting ``30C(e),'' after ``30B(e),''.
       (3) The table of sections for subpart B of part IV of 
     subchapter A of chapter 1, as amended by this Act, is amended 
     by inserting after the item relating to section 30B the 
     following new item:

``Sec. 30C. Clean-fuel vehicle refueling property credit.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004, in taxable years ending after such date.

     SEC. 814. CREDIT FOR RETAIL SALE OF ALTERNATIVE FUELS AS 
                   MOTOR VEHICLE FUEL.

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

     ``SEC. 40A. CREDIT FOR RETAIL SALE OF ALTERNATIVE FUELS AS 
                   MOTOR VEHICLE FUEL.

       ``(a) General Rule.--For purposes of section 38, the 
     alternative fuel retail sales credit for any taxable year is 
     the applicable amount for each gasoline gallon equivalent of 
     alternative fuel sold at retail by the taxpayer during such 
     year as a fuel to propel any qualified motor vehicle.
       ``(b) Definitions.--For purposes of this section--
       ``(1) Applicable amount.--The term `applicable amount' 
     means the amount determined in accordance with the following 
     table:

``In the case of any taxable year ending in--The applicable amount is--
2005 and 2006.................................................50 cents.

       ``(2) Alternative fuel.--The term `alternative fuel' means 
     compressed natural gas, liquefied natural gas, liquefied 
     petroleum gas, hydrogen, or any liquid at least 85 percent of 
     the volume of which consists of methanol or ethanol.
       ``(3) Gasoline gallon equivalent.--The term `gasoline 
     gallon equivalent' means, with respect to any alternative 
     fuel, the amount (determined by the Secretary) of such fuel 
     having a Btu content of 114,000.
       ``(4) Qualified motor vehicle.--The term `qualified motor 
     vehicle' means any motor vehicle (as defined in section 
     30(c)(2)) which meets any applicable Federal or State 
     emissions standards with respect to each fuel by which such 
     vehicle is designed to be propelled.
       ``(5) Sold at retail.--
       ``(A) In general.--The term `sold at retail' means the 
     sale, for a purpose other than resale, after manufacture, 
     production, or importation.
       ``(B) Use treated as sale.--If any person uses alternative 
     fuel (including any use after importation) as a fuel to 
     propel any new qualified alternative fuel motor vehicle (as 
     defined in section 30B(d)(4)) before such fuel is sold at 
     retail, then such use shall be treated in the same manner as 
     if such fuel were sold at retail as a fuel to propel such a 
     vehicle by such person.
       ``(c) No Double Benefit.--The amount of any deduction or 
     other credit allowable under this chapter for any fuel taken 
     into account in computing the amount of the credit determined 
     under subsection (a) shall be reduced by the amount of such 
     credit attributable to such fuel.
       ``(d) Pass-Thru in the Case of Estates and Trusts.--Under 
     regulations prescribed by the Secretary, rules similar to the 
     rules of subsection (d) of section 52 shall apply.
       ``(e) Termination.--This section shall not apply to any 
     fuel sold at retail after December 31, 2006.''.
       (b) Credit Treated as Business Credit.--Section 38(b) 
     (relating to current year business credit) is amended by 
     striking ``plus'' at the end of paragraph (20), by striking 
     the period at the end of paragraph (21) and inserting ``, 
     plus'', and by adding at the end the following new paragraph:
       ``(22) the alternative fuel retail sales credit determined 
     under section 40A(a).''.
       (c) Limitation on Carryback.--
       (1) In general.--Subsection (d) of section 39, as amended 
     by this Act, is amended to read as follows:
       ``(d) Transitional Rule.--No portion of the unused business 
     credit for any taxable year which is attributable to a credit 
     specified in section 38(b) may be carried back to any taxable 
     year before the first taxable year for which such specified 
     credit is allowable.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply with respect to taxable years beginning after 
     December 31, 2003.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1 is amended by 
     inserting after the item relating to section 40 the following 
     new item:

``Sec. 40A. Credit for retail sale of alternative fuels as motor 
              vehicle fuel.''.

       (e) Effective Date.--Except as otherwise provided, the 
     amendments made by this section shall apply to fuel sold at 
     retail after December 31, 2004, in taxable years ending after 
     such date.

     SEC. 815. SMALL ETHANOL PRODUCER CREDIT.

       (a) Allocation of Alcohol Fuels Credit to Patrons of a 
     Cooperative.--Section 40(g) (relating to definitions and 
     special

[[Page 6548]]

     rules for eligible small ethanol producer credit) is amended 
     by adding at the end the following new paragraph:
       ``(6) Allocation of small ethanol producer credit to 
     patrons of cooperative.--
       ``(A) Election to allocate.--
       ``(i) In general.--In the case of a cooperative 
     organization described in section 1381(a), any portion of the 
     credit determined under subsection (a)(3) for the taxable 
     year may, at the election of the organization, be apportioned 
     pro rata among patrons of the organization on the basis of 
     the quantity or value of business done with or for such 
     patrons for the taxable year.
       ``(ii) Form and effect of election.--An election under 
     clause (i) for any taxable year shall be made on a timely 
     filed return for such year. Such election, once made, shall 
     be irrevocable for such taxable year.
       ``(B) Treatment of organizations and patrons.--The amount 
     of the credit apportioned to patrons under subparagraph (A)--
       ``(i) shall not be included in the amount determined under 
     subsection (a) with respect to the organization for the 
     taxable year, and
       ``(ii) shall be included in the amount determined under 
     subsection (a) for the taxable year of each patron for which 
     the patronage dividends for the taxable year described in 
     subparagraph (A) are included in gross income.
       ``(C) Special rules for decrease in credits for taxable 
     year.--If the amount of the credit of a cooperative 
     organization determined under subsection (a)(3) for a taxable 
     year is less than the amount of such credit shown on the 
     return of the cooperative organization for such year, an 
     amount equal to the excess of--
       ``(i) such reduction, over
       ``(ii) the amount not apportioned to such patrons under 
     subparagraph (A) for the taxable year,

     shall be treated as an increase in tax imposed by this 
     chapter on the organization. Such increase shall not be 
     treated as tax imposed by this chapter for purposes of 
     determining the amount of any credit under this chapter or 
     for purposes of section 55.''.
       (b) Improvements to Small Ethanol Producer Credit.--
       (1) Definition of small ethanol producer.--Section 40(g) 
     (relating to definitions and special rules for eligible small 
     ethanol producer credit) is amended by striking 
     ``30,000,000'' each place it appears and inserting 
     ``60,000,000''.
       (2) Small ethanol producer credit not a passive activity 
     credit.--Clause (i) of section 469(d)(2)(A) is amended by 
     striking ``subpart D'' and inserting ``subpart D, other than 
     section 40(a)(3),''.
       (3) Small ethanol producer credit not added back to income 
     under section 87.--Section 87 (relating to income inclusion 
     of alcohol fuel credit) is amended to read as follows:

     ``SEC. 87. ALCOHOL FUEL CREDIT.

       ``Gross income includes an amount equal to the sum of--
       ``(1) the amount of the alcohol mixture credit determined 
     with respect to the taxpayer for the taxable year under 
     section 40(a)(1), and
       ``(2) the alcohol credit determined with respect to the 
     taxpayer for the taxable year under section 40(a)(2).''.
       (c) Conforming Amendment.--Section 1388 (relating to 
     definitions and special rules for cooperative organizations) 
     is amended by adding at the end the following new subsection:
       ``(k) Cross Reference.--For provisions relating to the 
     apportionment of the alcohol fuels credit between cooperative 
     organizations and their patrons, see section 40(g)(6).''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

       Subtitle C--Conservation and Energy Efficiency Provisions

     SEC. 821. CREDIT FOR CONSTRUCTION OF NEW ENERGY EFFICIENT 
                   HOME.

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

     ``SEC. 45K. NEW ENERGY EFFICIENT HOME CREDIT.

       ``(a) In General.--For purposes of section 38, in the case 
     of an eligible contractor, the credit determined under this 
     section for the taxable year is an amount equal to the 
     aggregate adjusted bases of all energy efficient property 
     installed in a qualifying new home during construction of 
     such home.
       ``(b) Limitations.--
       ``(1) Maximum credit.--
       ``(A) In general.--The credit allowed by this section with 
     respect to a qualifying new home shall not exceed--
       ``(i) in the case of a 30-percent home, $1,000, and
       ``(ii) in the case of a 50-percent home, $2,000.
       ``(B) 30- or 50-percent home.--For purposes of subparagraph 
     (A)--
       ``(i) 30-percent home.--The term `30-percent home' means--

       ``(I) a qualifying new home which is certified to have a 
     projected level of annual heating and cooling energy 
     consumption, measured in terms of average annual energy cost 
     to the homeowner, which is at least 30 percent less than the 
     annual level of heating and cooling energy consumption of a 
     qualifying new home constructed in accordance with the latest 
     standards of chapter 4 of the International Energy 
     Conservation Code approved by the Department of Energy before 
     the construction of such qualifying new home and any 
     applicable Federal minimum efficiency standards for 
     equipment, or
       ``(II) in the case of a qualifying new home which is a 
     manufactured home, a home which meets the applicable 
     standards required by the Administrator of the Environmental 
     Protection Agency under the Energy Star Labeled Homes 
     program.

       ``(ii) 50-percent home.--The term `50-percent home' means a 
     qualifying new home which would be described in clause (i)(I) 
     if 50 percent were substituted for 30 percent.
       ``(C) Prior credit amounts on same home taken into 
     account.--The amount of the credit otherwise allowable for 
     the taxable year with respect to a qualifying new home under 
     clause (i) or (ii) of subparagraph (A) shall be reduced by 
     the sum of the credits allowed under subsection (a) to any 
     taxpayer with respect to the home for all preceding taxable 
     years.
       ``(2) Coordination with certain credits.--For purposes of 
     this section--
       ``(A) the basis of any property referred to in subsection 
     (a) shall be reduced by that portion of the basis of any 
     property which is attributable to the rehabilitation credit 
     (as determined under section 47(a)) or to the energy credit 
     (as determined under section 48(a)), and
       ``(B) expenditures taken into account under section 25D, 
     47, or 48(a) shall not be taken into account under this 
     section.
       ``(3) Provider limitation.--Any eligible contractor who 
     directly or indirectly provides the guarantee of energy 
     savings under a guarantee-based method of certification 
     described in subsection (d)(1)(D) shall not be eligible to 
     receive the credit allowed by this section.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Eligible contractor.--The term `eligible contractor' 
     means--
       ``(A) the person who constructed the qualifying new home, 
     or
       ``(B) in the case of a qualifying new home which is a 
     manufactured home, the manufactured home producer of such 
     home.

     If more than 1 person is described in subparagraph (A) or (B) 
     with respect to any qualifying new home, such term means the 
     person designated as such by the owner of such home.
       ``(2) Energy efficient property.--The term `energy 
     efficient property' means any energy efficient building 
     envelope component, and any energy efficient heating or 
     cooling equipment or system which can, individually or in 
     combination with other components, meet the requirements of 
     this section.
       ``(3) Qualifying new home.--
       ``(A) In general.--The term `qualifying new home' means a 
     dwelling--
       ``(i) located in the United States,
       ``(ii) the construction of which is substantially completed 
     after December 31, 2004, and
       ``(iii) the first use of which after construction is as a 
     principal residence (within the meaning of section 121).
       ``(B) Manufactured home included.--The term `qualifying new 
     home' includes a manufactured home conforming to Federal 
     Manufactured Home Construction and Safety Standards (24 
     C.F.R. 3280).
       ``(4) Construction.--The term `construction' includes 
     reconstruction and rehabilitation.
       ``(5) Building envelope component.--The term `building 
     envelope component' means--
       ``(A) any insulation material or system which is 
     specifically and primarily designed to reduce the heat loss 
     or gain of a qualifying new home when installed in or on such 
     home,
       ``(B) exterior windows (including skylights), and
       ``(C) exterior doors.
       ``(d) Certification.--
       ``(1) Method of certification.--
       ``(A) In general.--A certification described in subsection 
     (b)(1)(B) shall be determined either by a component-based 
     method, a performance-based method, or a guarantee-based 
     method, or, in the case of a qualifying new home which is a 
     manufactured home, by a method prescribed by the 
     Administrator of the Environmental Protection Agency under 
     the Energy Star Labeled Homes program.
       ``(B) Component-based method.--A component-based method is 
     a method which uses the applicable technical energy 
     efficiency specifications or ratings (including product 
     labeling requirements) for the energy efficient building 
     envelope component or energy efficient heating or cooling 
     equipment. The Secretary shall, in consultation with the 
     Administrator of the Environmental Protection Agency, develop 
     prescriptive component-based packages which are equivalent in 
     energy performance to properties which qualify under 
     subparagraph (C).
       ``(C) Performance-based method.--
       ``(i) In general.--A performance-based method is a method 
     which calculates projected energy usage and cost reductions 
     in the qualifying new home in relation to a new home--

[[Page 6549]]

       ``(I) heated by the same fuel type, and
       ``(II) constructed in accordance with the latest standards 
     of chapter 4 of the International Energy Conservation Code 
     approved by the Department of Energy before the construction 
     of such qualifying new home and any applicable Federal 
     minimum efficiency standards for equipment.

       ``(ii) Computer software.--Computer software shall be used 
     in support of a performance-based method certification under 
     clause (i). Such software shall meet procedures and methods 
     for calculating energy and cost savings in regulations 
     promulgated by the Secretary of Energy.
       ``(D) Guarantee-based method.--
       ``(i) In general.--A guarantee-based method is a method 
     which guarantees in writing to the homeowner energy savings 
     of either 30 percent or 50 percent over the 2000 
     International Energy Conservation Code for heating and 
     cooling costs. The guarantee shall be provided for a minimum 
     of 2 years and shall fully reimburse the homeowner any 
     heating and cooling costs in excess of the guaranteed amount.
       ``(ii) Computer software.--Computer software shall be 
     selected by the provider to support the guarantee-based 
     method certification under clause (i). Such software shall 
     meet procedures and methods for calculating energy and cost 
     savings in regulations promulgated by the Secretary of 
     Energy.
       ``(2) Provider.--A certification described in subsection 
     (b)(1)(B) shall be provided by--
       ``(A) in the case of a component-based method, a local 
     building regulatory authority, a utility, or a home energy 
     rating organization,
       ``(B) in the case of a performance-based method or a 
     guarantee-based method, an individual recognized by an 
     organization designated by the Secretary for such purposes, 
     or
       ``(C) in the case of a qualifying new home which is a 
     manufactured home, a manufactured home primary inspection 
     agency.
       ``(3) Form.--
       ``(A) In general.--A certification described in subsection 
     (b)(1)(B) shall be made in writing in a manner which 
     specifies in readily verifiable fashion the energy efficient 
     building envelope components and energy efficient heating or 
     cooling equipment installed and their respective rated energy 
     efficiency performance, and
       ``(i) in the case of a performance-based method, 
     accompanied by a written analysis documenting the proper 
     application of a permissible energy performance calculation 
     method to the specific circumstances of such qualifying new 
     home, and
       ``(ii) in the case of a qualifying new home which is a 
     manufactured home, accompanied by such documentation as 
     required by the Administrator of the Environmental Protection 
     Agency under the Energy Star Labeled Homes program.
       ``(B) Form provided to buyer.--A form documenting the 
     energy efficient building envelope components and energy 
     efficient heating or cooling equipment installed and their 
     rated energy efficiency performance shall be provided to the 
     buyer of the qualifying new home. The form shall include 
     labeled R-value for insulation products, NFRC-labeled U-
     factor and solar heat gain coefficient for windows, 
     skylights, and doors, labeled annual fuel utilization 
     efficiency (AFUE) ratings for furnaces and boilers, labeled 
     heating seasonal performance factor (HSPF) ratings for 
     electric heat pumps, and labeled seasonal energy efficiency 
     ratio (SEER) ratings for air conditioners.
       ``(C) Ratings label affixed in dwelling.--A permanent label 
     documenting the ratings in subparagraph (B) shall be affixed 
     to the front of the electrical distribution panel of the 
     qualifying new home, or shall be otherwise permanently 
     displayed in a readily inspectable location in such home.
       ``(4) Regulations.--
       ``(A) In general.--In prescribing regulations under this 
     subsection for performance-based and guarantee-based 
     certification methods, the Secretary shall prescribe 
     procedures for calculating annual energy usage and cost 
     reductions for heating and cooling and for the reporting of 
     the results. Such regulations shall--
       ``(i) provide that any calculation procedures be fuel 
     neutral such that the same energy efficiency measures allow a 
     qualifying new home to be eligible for the credit under this 
     section regardless of whether such home uses a gas or oil 
     furnace or boiler or an electric heat pump, and
       ``(ii) require that any computer software allow for the 
     printing of the Federal tax forms necessary for the credit 
     under this section and for the printing of forms for 
     disclosure to the homebuyer.
       ``(B) Providers.--For purposes of paragraph (2)(B), the 
     Secretary shall establish requirements for the designation of 
     individuals based on the requirements for energy consultants 
     and home energy raters specified by the Mortgage Industry 
     National Home Energy Rating Standards.
       ``(e) Application.--Subsection (a) shall apply to 
     qualifying new homes the construction of which is 
     substantially completed after December 31, 2004, and 
     purchased during the period beginning on such date and ending 
     on--
       ``(1) in the case of any 30-percent home, December 31, 
     2005, and
       ``(2) in the case of any 50-percent home, December 31, 
     2007.''.
       (b) Credit Made Part of General Business Credit.--Section 
     38(b) (relating to current year business credit), as amended 
     by this Act, is amended by striking ``plus'' at the end of 
     paragraph (21), by striking the period at the end of 
     paragraph (22) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(23) the new energy efficient home credit determined 
     under section 45K(a).''.
       (c) Denial of Double Benefit.--Section 280C (relating to 
     certain expenses for which credits are allowable) is amended 
     by adding at the end the following new subsection:
       ``(d) New Energy Efficient Home Expenses.--No deduction 
     shall be allowed for that portion of expenses for a 
     qualifying new home otherwise allowable as a deduction for 
     the taxable year which is equal to the amount of the credit 
     determined for such taxable year under section 45K(a).''.
       (d) Deduction for Certain Unused Business Credits.--Section 
     196(c) (defining qualified business credits), as amended by 
     this Act, is amended by striking ``and'' at the end of 
     paragraph (10), by striking the period at the end of 
     paragraph (11) and inserting ``, and'', and by adding after 
     paragraph (11) the following new paragraph:
       ``(12) the new energy efficient home credit determined 
     under section 45K(a).''.
       (e) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by adding at the end the following new item:

``Sec. 45K. New energy efficient home credit.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to homes the construction of which is 
     substantially completed after December 31, 2004.

     SEC. 822. CREDIT FOR ENERGY EFFICIENT APPLIANCES.

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

     ``SEC. 45L. ENERGY EFFICIENT APPLIANCE CREDIT.

       ``(a) Allowance of Credit.--
       ``(1) In general.--For purposes of section 38, the energy 
     efficient appliance credit determined under this section for 
     the taxable year is an amount equal to the sum of the amounts 
     determined under paragraph (2) for qualified energy efficient 
     appliances produced by the taxpayer during the calendar year 
     ending with or within the taxable year.
       ``(2) Amount.--The amount determined under this paragraph 
     for any category described in subsection (b)(2)(B) shall be 
     the product of the applicable amount for appliances in the 
     category and the eligible production for the category.
       ``(b) Applicable Amount; Eligible Production.--For purposes 
     of subsection (a)--
       ``(1) Applicable amount.--The applicable amount is--
       ``(A) $50, in the case of--
       ``(i) a clothes washer which is manufactured with at least 
     a 1.42 MEF, or
       ``(ii) a refrigerator which consumes at least 10 percent 
     less kilowatt hours per year than the energy conservation 
     standards for refrigerators promulgated by the Department of 
     Energy and effective on July 1, 2001,
       ``(B) $100, in the case of--
       ``(i) a clothes washer which is manufactured with at least 
     a 1.50 MEF, or
       ``(ii) a refrigerator which consumes at least 15 percent 
     (20 percent in the case of a refrigerator manufactured after 
     2006) less kilowatt hours per year than such energy 
     conservation standards, and
       ``(C) $150, in the case of a refrigerator manufactured 
     before 2007 which consumes at least 20 percent less kilowatt 
     hours per year than such energy conservation standards.
       ``(2) Eligible production.--
       ``(A) In general.--The eligible production of each category 
     of qualified energy efficient appliances is the excess of--
       ``(i) the number of appliances in such category which are 
     produced by the taxpayer during such calendar year, over
       ``(ii) the average number of appliances in such category 
     which were produced by the taxpayer during calendar years 
     2001, 2002, and 2003.
       ``(B) Categories.--For purposes of subparagraph (A), the 
     categories are--
       ``(i) clothes washers described in paragraph (1)(A)(i),
       ``(ii) clothes washers described in paragraph (1)(B)(i),
       ``(iii) refrigerators described in paragraph (1)(A)(ii),
       ``(iv) refrigerators described in paragraph (1)(B)(ii), and
       ``(v) refrigerators described in paragraph (1)(C).
       ``(c) Limitation on Maximum Credit.--
       ``(1) In general.--The amount of credit allowed under 
     subsection (a) with respect to a taxpayer for all taxable 
     years shall not exceed $60,000,000, of which not more than 
     $30,000,000 may be allowed with respect to the credit 
     determined by using the applicable amount under subsection 
     (b)(1)(A).
       ``(2) Limitation based on gross receipts.--The credit 
     allowed under subsection (a) with respect to a taxpayer for 
     the taxable

[[Page 6550]]

     year shall not exceed an amount equal to 2 percent of the 
     average annual gross receipts of the taxpayer for the 3 
     taxable years preceding the taxable year in which the credit 
     is determined.
       ``(3) Gross receipts.--For purposes of this subsection, the 
     rules of paragraphs (2) and (3) of section 448(c) shall 
     apply.
       ``(d) Definitions.--For purposes of this section--
       ``(1) Qualified energy efficient appliance.--The term 
     `qualified energy efficient appliance' means--
       ``(A) a clothes washer described in subparagraph (A)(i) or 
     (B)(i) of subsection (b)(1), or
       ``(B) a refrigerator described in subparagraph (A)(ii), 
     (B)(ii), or (C) of subsection (b)(1).
       ``(2) Clothes washer.--The term `clothes washer' means a 
     residential clothes washer, including a residential style 
     coin operated washer.
       ``(3) Refrigerator.--The term `refrigerator' means an 
     automatic defrost refrigerator-freezer which has an internal 
     volume of at least 16.5 cubic feet.
       ``(4) MEF.--The term `MEF' means Modified Energy Factor (as 
     determined by the Secretary of Energy).
       ``(e) Special Rules.--
       ``(1) In general.--Rules similar to the rules of 
     subsections (c), (d), and (e) of section 52 shall apply for 
     purposes of this section.
       ``(2) Aggregation rules.--All persons treated as a single 
     employer under subsection (a) or (b) of section 52 or 
     subsection (m) or (o) of section 414 shall be treated as 1 
     person for purposes of subsection (a).
       ``(f) Verification.--The taxpayer shall submit such 
     information or certification as the Secretary, in 
     consultation with the Secretary of Energy, determines 
     necessary to claim the credit amount under subsection (a).
       ``(g) Termination.--This section shall not apply--
       ``(1) with respect to refrigerators described in subsection 
     (b)(1)(A)(ii) produced after December 31, 2005, and
       ``(2) with respect to all other qualified energy efficient 
     appliances produced after December 31, 2007.''.
       (b) Credit Made Part of General Business Credit.--Section 
     38(b) (relating to current year business credit), as amended 
     by this Act, is amended by striking ``plus'' at the end of 
     paragraph (22), by striking the period at the end of 
     paragraph (23) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(24) the energy efficient appliance credit determined 
     under section 45L(a).''.
       (c) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by adding at the end the following new item:

``Sec. 45L. Energy efficient appliance credit.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to appliances produced after December 31, 2004, 
     in taxable years ending after such date.

     SEC. 823. CREDIT FOR RESIDENTIAL ENERGY EFFICIENT PROPERTY.

       (a) In General.--Subpart A of part IV of subchapter A of 
     chapter 1 (relating to nonrefundable personal credits) is 
     amended by inserting after section 25B the following new 
     section:

     ``SEC. 25C. RESIDENTIAL ENERGY EFFICIENT PROPERTY.

       ``(a) Allowance of Credit.--In the case of an individual, 
     there shall be allowed as a credit against the tax imposed by 
     this chapter for the taxable year an amount equal to the sum 
     of--
       ``(1) 15 percent of the qualified photovoltaic property 
     expenditures made by the taxpayer during such year,
       ``(2) 15 percent of the qualified solar water heating 
     property expenditures made by the taxpayer during such year,
       ``(3) 30 percent of the qualified fuel cell property 
     expenditures made by the taxpayer during such year,
       ``(4) 30 percent of the qualified wind energy property 
     expenditures made by the taxpayer during such year, and
       ``(5) the sum of the qualified Tier 2 energy efficient 
     building property expenditures made by the taxpayer during 
     such year.
       ``(b) Limitations.--
       ``(1) Maximum credit.--The credit allowed under subsection 
     (a) shall not exceed--
       ``(A) $2,000 for property described in paragraph (1), (2), 
     or (5) of subsection (d),
       ``(B) $500 for each 0.5 kilowatt of capacity of property 
     described in subsection (d)(4), and
       ``(C) for property described in subsection (d)(6)--
       ``(i) $150 for each electric heat pump water heater,
       ``(ii) $125 for each advanced natural gas, oil, propane 
     furnace, or hot water boiler,
       ``(iii) $150 for each advanced natural gas, oil, or propane 
     water heater,
       ``(iv) $50 for each natural gas, oil, or propane water 
     heater,
       ``(v) $50 for an advanced main air circulating fan,
       ``(vi) $150 for each advanced combination space and water 
     heating system,
       ``(vii) $50 for each combination space and water heating 
     system, and
       ``(viii) $250 for each geothermal heat pump.
       ``(2) Safety certifications.--No credit shall be allowed 
     under this section for an item of property unless--
       ``(A) in the case of solar water heating property, such 
     property is certified for performance and safety by the non-
     profit Solar Rating Certification Corporation or a comparable 
     entity endorsed by the government of the State in which such 
     property is installed,
       ``(B) in the case of a photovoltaic property, a fuel cell 
     property, or a wind energy property, such property meets 
     appropriate fire and electric code requirements, and
       ``(C) in the case of property described in subsection 
     (d)(6), such property meets the performance and quality 
     standards, and the certification requirements (if any), 
     which--
       ``(i) have been prescribed by the Secretary by regulations 
     (after consultation with the Secretary of Energy or the 
     Administrator of the Environmental Protection Agency, as 
     appropriate),
       ``(ii) in the case of the energy efficiency ratio (EER) for 
     property described in subsection (d)(6)(B)(viii)--

       ``(I) require measurements to be based on published data 
     which is tested by manufacturers at 95 degrees Fahrenheit, 
     and
       ``(II) do not require ratings to be based on certified data 
     of the Air Conditioning and Refrigeration Institute, and

       ``(iii) are in effect at the time of the acquisition of the 
     property.
       ``(c) Carryforward of Unused Credit.--If the credit 
     allowable under subsection (a) exceeds the limitation imposed 
     by section 26(a) for such taxable year reduced by the sum of 
     the credits allowable under this subpart (other than this 
     section and section 25D), such excess shall be carried to the 
     succeeding taxable year and added to the credit allowable 
     under subsection (a) for such succeeding taxable year.
       ``(d) Definitions.--For purposes of this section--
       ``(1) Qualified solar water heating property expenditure.--
     The term `qualified solar water heating property expenditure' 
     means an expenditure for property to heat water for use in a 
     dwelling unit located in the United States and used as a 
     residence by the taxpayer if at least half of the energy used 
     by such property for such purpose is derived from the sun.
       ``(2) Qualified photovoltaic property expenditure.--The 
     term `qualified photovoltaic property expenditure' means an 
     expenditure for property which uses solar energy to generate 
     electricity for use in a dwelling unit located in the United 
     States and used as a residence by the taxpayer.
       ``(3) Solar panels.--No expenditure relating to a solar 
     panel or other property installed as a roof (or portion 
     thereof) shall fail to be treated as property described in 
     paragraph (1) or (2) solely because it constitutes a 
     structural component of the structure on which it is 
     installed.
       ``(4) Qualified fuel cell property expenditure.--The term 
     `qualified fuel cell property expenditure' means an 
     expenditure for qualified fuel cell property (as defined in 
     section 48(a)(4)) installed on or in connection with a 
     dwelling unit located in the United States and used as a 
     principal residence (within the meaning of section 121) by 
     the taxpayer.
       ``(5) Qualified wind energy property expenditure.--The term 
     `qualified wind energy property expenditure' means an 
     expenditure for property which uses wind energy to generate 
     electricity for use in a dwelling unit located in the United 
     States and used as a residence by the taxpayer.
       ``(6) Qualified tier 2 energy efficient building property 
     expenditure.--
       ``(A) In general.--The term `qualified Tier 2 energy 
     efficient building property expenditure' means an expenditure 
     for any Tier 2 energy efficient building property.
       ``(B) Tier 2 energy efficient building property.--The term 
     `Tier 2 energy efficient building property' means--
       ``(i) an electric heat pump water heater which yields an 
     energy factor of at least 1.7 in the standard Department of 
     Energy test procedure,
       ``(ii) an advanced natural gas, oil, propane furnace, or 
     hot water boiler which achieves at least 95 percent annual 
     fuel utilization efficiency (AFUE),
       ``(iii) an advanced natural gas, oil, or propane water 
     heater which has an energy factor of at least 0.80 in the 
     standard Department of Energy test procedure,
       ``(iv) a natural gas, oil, or propane water heater which 
     has an energy factor of at least 0.65 but less than 0.80 in 
     the standard Department of Energy test procedure,
       ``(v) an advanced main air circulating fan used in a new 
     natural gas, propane, or oil-fired furnace, including main 
     air circulating fans that use a brushless permanent magnet 
     motor or another type of motor which achieves similar or 
     higher efficiency at half and full speed, as determined by 
     the Secretary,
       ``(vi) an advanced combination space and water heating 
     system which has a combined energy factor of at least 0.80 
     and a combined annual fuel utilization efficiency (AFUE) of 
     at least 78 percent in the standard Department of Energy test 
     procedure,

[[Page 6551]]

       ``(vii) a combination space and water heating system which 
     has a combined energy factor of at least 0.65 but less than 
     0.80 and a combined annual fuel utilization efficiency (AFUE) 
     of at least 78 percent in the standard Department of Energy 
     test procedure, and
       ``(viii) a geothermal heat pump which has an energy 
     efficiency ratio (EER) of at least 21.
       ``(7) Labor costs.--Expenditures for labor costs properly 
     allocable to the onsite preparation, assembly, or original 
     installation of the property described in paragraph (1), (2), 
     (4), (5), or (6) and for piping or wiring to interconnect 
     such property to the dwelling unit shall be taken into 
     account for purposes of this section.
       ``(8) Swimming pools, etc., used as storage medium.--
     Expenditures which are properly allocable to a swimming pool, 
     hot tub, or any other energy storage medium which has a 
     function other than the function of such storage shall not be 
     taken into account for purposes of this section.
       ``(e) Special Rules.--For purposes of this section--
       ``(1) Dollar amounts in case of joint occupancy.--In the 
     case of any dwelling unit which is jointly occupied and used 
     during any calendar year as a residence by 2 or more 
     individuals the following rules shall apply:
       ``(A) The amount of the credit allowable, under subsection 
     (a) by reason of expenditures (as the case may be) made 
     during such calendar year by any of such individuals with 
     respect to such dwelling unit shall be determined by treating 
     all of such individuals as 1 taxpayer whose taxable year is 
     such calendar year.
       ``(B) There shall be allowable, with respect to such 
     expenditures to each of such individuals, a credit under 
     subsection (a) for the taxable year in which such calendar 
     year ends in an amount which bears the same ratio to the 
     amount determined under subparagraph (A) as the amount of 
     such expenditures made by such individual during such 
     calendar year bears to the aggregate of such expenditures 
     made by all of such individuals during such calendar year.
       ``(2) Tenant-stockholder in cooperative housing 
     corporation.--In the case of an individual who is a tenant-
     stockholder (as defined in section 216) in a cooperative 
     housing corporation (as defined in such section), such 
     individual shall be treated as having made his tenant-
     stockholder's proportionate share (as defined in section 
     216(b)(3)) of any expenditures of such corporation.
       ``(3) Condominiums.--
       ``(A) In general.--In the case of an individual who is a 
     member of a condominium management association with respect 
     to a condominium which the individual owns, such individual 
     shall be treated as having made the individual's 
     proportionate share of any expenditures of such association.
       ``(B) Condominium management association.--For purposes of 
     this paragraph, the term `condominium management association' 
     means an organization which meets the requirements of 
     paragraph (1) of section 528(c) (other than subparagraph (E) 
     thereof) with respect to a condominium project substantially 
     all of the units of which are used as residences.
       ``(4) Allocation in certain cases.--Except in the case of 
     qualified wind energy property expenditures, if less than 80 
     percent of the use of an item is for nonbusiness purposes, 
     only that portion of the expenditures for such item which is 
     properly allocable to use for nonbusiness purposes shall be 
     taken into account.
       ``(5) When expenditure made; amount of expenditure.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     an expenditure with respect to an item shall be treated as 
     made when the original installation of the item is completed.
       ``(B) Expenditures part of building construction.--In the 
     case of an expenditure in connection with the construction or 
     reconstruction of a structure, such expenditure shall be 
     treated as made when the original use of the constructed or 
     reconstructed structure by the taxpayer begins.
       ``(C) Amount.--The amount of any expenditure shall be the 
     cost thereof.
       ``(6) Property financed by subsidized energy financing.--
     For purposes of determining the amount of expenditures made 
     by any individual with respect to any dwelling unit, there 
     shall not be taken into account expenditures which are made 
     from subsidized energy financing (as defined in section 
     48(a)(5)(C)).
       ``(f) Basis Adjustments.--For purposes of this subtitle, if 
     a credit is allowed under this section for any expenditure 
     with respect to any property, the increase in the basis of 
     such property which would (but for this subsection) result 
     from such expenditure shall be reduced by the amount of the 
     credit so allowed.
       ``(g) Termination.--The credit allowed under this section 
     shall not apply to expenditures after December 31, 2007.''.
       (b) Credit Allowed Against Regular Tax and Alternative 
     Minimum Tax.--
       (1) In general.--Section 25C(b), as added by subsection 
     (a), is amended by adding at the end the following new 
     paragraph:
       ``(3) Limitation based on amount of tax.--The credit 
     allowed under subsection (a) for the taxable year shall not 
     exceed the excess of--
       ``(A) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(B) the sum of the credits allowable under this subpart 
     (other than this section and section 25D) and section 27 for 
     the taxable year.''.
       (2) Conforming amendments.--
       (A) Section 25C(c), as added by subsection (a), is amended 
     by striking ``section 26(a) for such taxable year reduced by 
     the sum of the credits allowable under this subpart (other 
     than this section and section 25D)'' and inserting 
     ``subsection (b)(3)''.
       (B) Section 23(b)(4)(B) is amended by inserting ``and 
     section 25C'' after ``this section''.
       (C) Section 24(b)(3)(B) is amended by striking ``23 and 
     25B'' and inserting ``23, 25B, and 25C''.
       (D) Section 25(e)(1)(C) is amended by inserting ``25C,'' 
     after ``25B,''.
       (E) Section 25B(g)(2) is amended by striking ``section 23'' 
     and inserting ``sections 23 and 25C''.
       (F) Section 26(a)(1) is amended by striking ``and 25B'' and 
     inserting ``25B, and 25C''.
       (G) Section 904(h) is amended by striking ``and 25B'' and 
     inserting ``25B, and 25C''.
       (H) Section 1400C(d) is amended by striking ``and 25B'' and 
     inserting ``25B, and 25C''.
       (c) Additional Conforming Amendments.--
       (1) Section 1016(a), as amended by this Act, is amended by 
     striking ``and'' at the end of paragraph (29), by striking 
     the period at the end of paragraph (30) and inserting ``, 
     and'', and by adding at the end the following new paragraph:
       ``(31) to the extent provided in section 25C(f), in the 
     case of amounts with respect to which a credit has been 
     allowed under section 25C.''.
       (2) The table of sections for subpart A of part IV of 
     subchapter A of chapter 1 is amended by inserting after the 
     item relating to section 25B the following new item:

``Sec. 25C. Residential energy efficient property.''.
       (d) Effective Dates.--
       (1) In general.--Except as provided by paragraph (2), the 
     amendments made by this section shall apply to expenditures 
     after December 31, 2004, in taxable years ending after such 
     date.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 824. CREDIT FOR BUSINESS INSTALLATION OF QUALIFIED FUEL 
                   CELLS AND STATIONARY MICROTURBINE POWER PLANTS.

       (a) In General.--Section 48(a)(3)(A) (defining energy 
     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) qualified fuel cell property or qualified 
     microturbine property,''.
       (b) Qualified Fuel Cell Property; Qualified Microturbine 
     Property.--Section 48(a) (relating to energy credit) is 
     amended by redesignating paragraphs (4) and (5) as paragraphs 
     (5) and (6), respectively, and by inserting after paragraph 
     (3) the following new paragraph:
       ``(4) Qualified fuel cell property; qualified microturbine 
     property.--For purposes of this subsection--
       ``(A) Qualified fuel cell property.--
       ``(i) In general.--The term `qualified fuel cell property' 
     means a fuel cell power plant which--

       ``(I) generates at least 0.5 kilowatt of electricity using 
     an electrochemical process, and
       ``(II) has an electricity-only generation efficiency 
     greater than 30 percent.

       ``(ii) Limitation.--In the case of qualified fuel cell 
     property placed in service during the taxable year, the 
     credit otherwise determined under paragraph (1) for such year 
     with respect to such property shall not exceed an amount 
     equal to $500 for each 0.5 kilowatt of capacity of such 
     property.
       ``(iii) Fuel cell power plant.--The term `fuel cell power 
     plant' means an integrated system comprised of a fuel cell 
     stack assembly and associated balance of plant components 
     which converts a fuel into electricity using electrochemical 
     means.
       ``(iv) Termination.--The term `qualified fuel cell 
     property' shall not include any property placed in service 
     after December 31, 2007.
       ``(B) Qualified microturbine property.--
       ``(i) In general.--The term `qualified microturbine 
     property' means a stationary microturbine power plant which--

       ``(I) has a capacity of less than 2,000 kilowatts, and
       ``(II) has an electricity-only generation efficiency of not 
     less than 26 percent at International Standard Organization 
     conditions.

       ``(ii) Limitation.--In the case of qualified microturbine 
     property placed in service during the taxable year, the 
     credit otherwise determined under paragraph (1) for such year 
     with respect to such property shall not exceed an amount 
     equal $200 for each kilowatt of capacity of such property.
       ``(iii) Stationary microturbine power plant.--The term 
     `stationary microturbine power plant' means an integrated 
     system comprised of a gas turbine engine, a combustor, a 
     recuperator or regenerator, a generator or alternator, and 
     associated balance

[[Page 6552]]

     of plant components which converts a fuel into electricity 
     and thermal energy. Such term also includes all secondary 
     components located between the existing infrastructure for 
     fuel delivery and the existing infrastructure for power 
     distribution, including equipment and controls for meeting 
     relevant power standards, such as voltage, frequency, and 
     power factors.
       ``(iv) Termination.--The term `qualified microturbine 
     property' shall not include any property placed in service 
     after December 31, 2006.''.
       (c) Energy Percentage.--Section 48(a)(2)(A) (relating to 
     energy percentage) is amended to read as follows:
       ``(A) In general.--The energy percentage is--
       ``(i) in the case of qualified fuel cell property, 30 
     percent, and
       ``(ii) in the case of any other energy property, 10 
     percent.''.
       (d) Conforming Amendments.--
       (A) Section 29(b)(3)(A)(i)(III) is amended by striking 
     ``section 48(a)(4)(C)'' and inserting ``section 
     48(a)(5)(C)''.
       (B) Section 48(a)(1) is amended by inserting ``except as 
     provided in subparagraph (A)(ii) or (B)(ii) of paragraph 
     (4),'' before ``the energy''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004, in taxable years ending after such date, under rules 
     similar to the rules of section 48(m) of the Internal Revenue 
     Code of 1986 (as in effect on the day before the date of the 
     enactment of the Revenue Reconciliation Act of 1990).

     SEC. 825. ENERGY EFFICIENT COMMERCIAL BUILDINGS DEDUCTION.

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

     ``SEC. 179B. ENERGY EFFICIENT COMMERCIAL BUILDINGS DEDUCTION.

       ``(a) In General.--There shall be allowed as a deduction 
     for the taxable year in which a building is placed in service 
     by a taxpayer, an amount equal to the energy efficient 
     commercial building property expenditures made by such 
     taxpayer with respect to the construction or reconstruction 
     of such building for the taxable year or any preceding 
     taxable year.
       ``(b) Maximum Amount of Deduction.--The amount of energy 
     efficient commercial building property expenditures taken 
     into account under subsection (a) shall not exceed an amount 
     equal to the product of--
       ``(1) $2.25, and
       ``(2) the square footage of the building with respect to 
     which the expenditures are made.
       ``(c) Energy Efficient Commercial Building Property 
     Expenditures.--For purposes of this section--
       ``(1) In general.--The term `energy efficient commercial 
     building property expenditures' means amounts paid or 
     incurred for energy efficient property installed on or in 
     connection with the construction or reconstruction of a 
     building--
       ``(A) for which depreciation is allowable under section 
     167,
       ``(B) which is located in the United States, and
       ``(C) which is the type of structure to which the Standard 
     90.1-2001 of the American Society of Heating, Refrigerating, 
     and Air Conditioning Engineers and the Illuminating 
     Engineering Society of North America is applicable.

     Such term includes expenditures for labor costs properly 
     allocable to the onsite preparation, assembly, or original 
     installation of the property.
       ``(2) Energy efficient property.--For purposes of paragraph 
     (1)--
       ``(A) In general.--The term `energy efficient property' 
     means any property which reduces total annual energy and 
     power costs with respect to the lighting, heating, cooling, 
     ventilation, and hot water supply systems of the building by 
     50 percent or more in comparison to a building which meets 
     the minimum requirements of Standard 90.1-2001 of the 
     American Society of Heating, Refrigerating, and Air 
     Conditioning Engineers and the Illuminating Engineering 
     Society of North America, using methods of calculation 
     described in subparagraph (B) and certified by qualified 
     individuals as provided under paragraph (5).
       ``(B) Methods of calculation.--The Secretary, in 
     consultation with the Secretary of Energy, shall promulgate 
     regulations which describe in detail methods for calculating 
     and verifying energy and power costs.
       ``(C) Computer software.--
       ``(i) In general.--Any calculation described in 
     subparagraph (B) shall be prepared by qualified computer 
     software.
       ``(ii) Qualified computer software.--For purposes of this 
     subparagraph, the term `qualified computer software' means 
     software--

       ``(I) for which the software designer has certified that 
     the software meets all procedures and detailed methods for 
     calculating energy and power costs as required by the 
     Secretary,
       ``(II) which provides such forms as required to be filed by 
     the Secretary in connection with energy efficiency of 
     property and the deduction allowed under this section, and
       ``(III) which provides a notice form which summarizes the 
     energy efficiency features of the building and its projected 
     annual energy costs.

       ``(3) Allocation of deduction for public property.--In the 
     case of energy efficient commercial building property 
     expenditures made by a public entity with respect to the 
     construction or reconstruction of a public building, the 
     Secretary shall promulgate regulations under which the value 
     of the deduction with respect to such expenditures which 
     would be allowable to the public entity under this section 
     (determined without regard to the tax-exempt status of such 
     entity) may be allocated to the person primarily responsible 
     for designing the energy efficient property. Such person 
     shall be treated as the taxpayer for purposes of this 
     section.
       ``(4) Notice to owner.--Any qualified individual providing 
     a certification under paragraph (5) shall provide an 
     explanation to the owner of the building regarding the energy 
     efficiency features of the building and its projected annual 
     energy costs as provided in the notice under paragraph 
     (2)(C)(ii)(III).
       ``(5) Certification.--
       ``(A) In general.--The Secretary shall prescribe procedures 
     for the inspection and testing for compliance of buildings by 
     qualified individuals described in subparagraph (B). Such 
     procedures shall be--
       ``(i) comparable, given the difference between commercial 
     and residential buildings, to the requirements in the 
     Mortgage Industry National Home Energy Rating Standards, and
       ``(ii) fuel neutral such that the same energy efficiency 
     measures allow a building to be eligible for the credit under 
     this section regardless of whether such building uses a gas 
     or oil furnace or boiler or an electric heat pump.
       ``(B) Qualified individuals.--Individuals qualified to 
     determine compliance shall be only those individuals who are 
     recognized by an organization certified by the Secretary for 
     such purposes. The Secretary may qualify a home energy 
     ratings organization, a local building regulatory authority, 
     a State or local energy office, a utility, or any other 
     organization which meets the requirements prescribed under 
     this paragraph.
       ``(C) Proficiency of qualified individuals.--The Secretary 
     shall consult with nonprofit organizations and State agencies 
     with expertise in energy efficiency calculations and 
     inspections to develop proficiency tests and training 
     programs to qualify individuals to determine compliance.
       ``(d) Basis Reduction.--For purposes of this subtitle, if a 
     deduction is allowed under this section with respect to any 
     energy efficient property, the basis of such property shall 
     be reduced by the amount of the deduction so allowed.
       ``(e) Interim Rules for Lighting Systems.--Until such time 
     as the Secretary issues final regulations under subsection 
     (c)(2)(B) with respect to property which is part of a 
     lighting system--
       ``(1) In general.--The lighting system target under 
     subsection (d)(1)(A)(ii) shall be a reduction in lighting 
     power density of 25 percent (50 percent in the case of a 
     warehouse) of the minimum requirements in Table 9.3.1.1 or 
     Table 9.3.1.2 (not including additional interior lighting 
     power allowances) of Standard 90.1-2001.
       ``(2) Reduction in credit if reduction less than 40 
     percent.--
       ``(A) In general.--If, with respect to the lighting system 
     of any building other than a warehouse, the reduction of 
     lighting power density of the lighting system is not at least 
     40 percent, only the applicable percentage of the amount of 
     credit otherwise allowable under this section with respect to 
     such property shall be allowed.
       ``(B) Applicable percentage.--For purposes of subparagraph 
     (A), the applicable percentage is the number of percentage 
     points (not greater than 100) equal to the sum of--
       ``(i) 50, and
       ``(ii) the amount which bears the same ratio to 50 as the 
     excess of the reduction of lighting power density of the 
     lighting system over 25 percentage points bears to 15.
       ``(C) Exceptions.--This subsection shall not apply to any 
     system--
       ``(i) the controls and circuiting of which do not comply 
     fully with the mandatory and prescriptive requirements of 
     Standard 90.1-2001 and which do not include provision for 
     bilevel switching in all occupancies except hotel and motel 
     guest rooms, store rooms, restrooms, and public lobbies, or
       ``(ii) which does not meet the minimum requirements for 
     calculated lighting levels as set forth in the Illuminating 
     Engineering Society of North America Lighting Handbook, 
     Performance and Application, Ninth Edition, 2000.
       ``(f) Regulations.--The Secretary shall promulgate such 
     regulations as necessary to take into account new 
     technologies regarding energy efficiency and renewable energy 
     for purposes of determining energy efficiency and savings 
     under this section.
       ``(g) Termination.--This section shall not apply with 
     respect to any energy efficient commercial building property 
     expenditures in connection with a building the construction 
     of which is not completed on or before December 31, 2009.''.

[[Page 6553]]

       (b) Conforming Amendments.--
       (1) Section 1016(a), as amended by this Act, is amended by 
     striking ``and'' at the end of paragraph (30), by striking 
     the period at the end of paragraph (31) and inserting ``, 
     and'', and by adding at the end the following new paragraph:
       ``(32) to the extent provided in section 179B(d).''.
       (2) Section 1245(a) is amended by inserting ``179B,'' after 
     ``179A,'' both places it appears in paragraphs (2)(C) and 
     (3)(C).
       (3) Section 1250(b)(3) is amended by inserting before the 
     period at the end of the first sentence ``or by section 
     179B''.
       (4) Section 263(a)(1) 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 inserting 
     after subparagraph (H) the following new subparagraph:
       ``(I) expenditures for which a deduction is allowed under 
     section 179B.''.
       (5) Section 312(k)(3)(B) is amended by striking ``or 179A'' 
     each place it appears in the heading and text and inserting 
     ``, 179A, or 179B''.
       (c) Clerical Amendment.--The table of sections for part VI 
     of subchapter B of chapter 1 is amended by inserting after 
     section 179A the following new item:

``Sec. 179B. Energy efficient commercial buildings deduction.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 826. THREE-YEAR APPLICABLE RECOVERY PERIOD FOR 
                   DEPRECIATION OF QUALIFIED ENERGY MANAGEMENT 
                   DEVICES.

       (a) In General.--Section 168(e)(3)(A) (defining 3-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) any qualified energy management device.''.
       (b) Definition of Qualified Energy Management Device.--
     Section 168(i) (relating to definitions and special rules) is 
     amended by inserting at the end the following new paragraph:
       ``(15) Qualified energy management device.--
       ``(A) In general.--The term `qualified energy management 
     device' means any energy management device which is placed in 
     service before January 1, 2008, by a taxpayer who is a 
     supplier of electric energy or a provider of electric energy 
     services.
       ``(B) Energy management device.--For purposes of 
     subparagraph (A), the term `energy management device' means 
     any meter or metering device which is used by the taxpayer--
       ``(i) to measure and record electricity usage data on a 
     time-differentiated basis in at least 4 separate time 
     segments per day, and
       ``(ii) to provide such data on at least a monthly basis to 
     both consumers and the taxpayer.''.
       (c) Alternative System.--The table contained in section 
     168(g)(3)(B) is amended by inserting after the item relating 
     to subparagraph (A)(iii) the following:

``(A)(iv).........................................................20''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004, in taxable years ending after such date.

     SEC. 827. THREE-YEAR APPLICABLE RECOVERY PERIOD FOR 
                   DEPRECIATION OF QUALIFIED WATER SUBMETERING 
                   DEVICES.

       (a) In General.--Section 168(e)(3)(A) (defining 3-year 
     property), as amended by this Act, is amended by striking 
     ``and'' at the end of clause (iii), by striking the period at 
     the end of clause (iv) and inserting ``, and'', and by adding 
     at the end the following new clause:
       ``(v) any qualified water submetering device.''.
       (b) Definition of Qualified Water Submetering Device.--
     Section 168(i) (relating to definitions and special rules), 
     as amended by this Act, is amended by inserting at the end 
     the following new paragraph:
       ``(16) Qualified water submetering device.--
       ``(A) In general.--The term `qualified water submetering 
     device' means any water submetering device which is placed in 
     service before January 1, 2008, by a taxpayer who is an 
     eligible resupplier with respect to the unit for which the 
     device is placed in service.
       ``(B) Water submetering device.--For purposes of this 
     paragraph, the term `water submetering device' means any 
     submetering device which is used by the taxpayer--
       ``(i) to measure and record water usage data, and
       ``(ii) to provide such data on at least a monthly basis to 
     both consumers and the taxpayer.
       ``(C) Eligible resupplier.--For purposes of subparagraph 
     (A), the term `eligible resupplier' means any taxpayer who 
     purchases and installs qualified water submetering devices in 
     every unit in any multi-unit property.''.
       (c) Alternative System.--The table contained in section 
     168(g)(3)(B), as amended by this Act, is amended by inserting 
     after the item relating to subparagraph (A)(iv) the 
     following:

``(A)(v)..........................................................20''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004, in taxable years ending after such date.

     SEC. 828. ENERGY CREDIT FOR COMBINED HEAT AND POWER SYSTEM 
                   PROPERTY.

       (a) In General.--Section 48(a)(3)(A) (defining energy 
     property), as amended by this Act, is amended by striking 
     ``or'' at the end of clause (ii), by adding ``or'' at the end 
     of clause (iii), and by inserting after clause (iii) the 
     following new clause:
       ``(iv) combined heat and power system property,''.
       (b) Combined Heat and Power System Property.--Section 48 
     (relating to energy credit; reforestation credit), as amended 
     by this Act, is amended by adding at the end the following 
     new subsection:
       ``(d) Combined Heat and Power System Property.--For 
     purposes of subsection (a)(3)(A)(iv)--
       ``(1) Combined heat and power system property.--The term 
     `combined heat and power system property' means property 
     comprising a system--
       ``(A) which uses the same energy source for the 
     simultaneous or sequential generation of electrical power, 
     mechanical shaft power, or both, in combination with the 
     generation of steam or other forms of useful thermal energy 
     (including heating and cooling applications),
       ``(B) which has an electrical capacity of not more than 15 
     megawatts or a mechanical energy capacity of not more than 
     2,000 horsepower or an equivalent combination of electrical 
     and mechanical energy capacities,
       ``(C) which produces--
       ``(i) at least 20 percent of its total useful energy in the 
     form of thermal energy which is not used to produce 
     electrical or mechanical power (or combination thereof), and
       ``(ii) at least 20 percent of its total useful energy in 
     the form of electrical or mechanical power (or combination 
     thereof),
       ``(D) the energy efficiency percentage of which exceeds 60 
     percent, and
       ``(E) which is placed in service before January 1, 2007.
       ``(2) Special rules.--
       ``(A) Energy efficiency percentage.--For purposes of this 
     subsection, the energy efficiency percentage of a system is 
     the fraction--
       ``(i) the numerator of which is the total useful 
     electrical, thermal, and mechanical power produced by the 
     system at normal operating rates, and expected to be consumed 
     in its normal application, and
       ``(ii) the denominator of which is the lower heating value 
     of the fuel sources for the system.
       ``(B) Determinations made on btu basis.--The energy 
     efficiency percentage and the percentages under paragraph 
     (1)(C) shall be determined on a Btu basis.
       ``(C) Input and output property not included.--The term 
     `combined heat and power system property' does not include 
     property used to transport the energy source to the facility 
     or to distribute energy produced by the facility.
       ``(D) Public utility property.--
       ``(i) Accounting rule for public utility property.--If the 
     combined heat and power system property is public utility 
     property (as defined in section 168(i)(10)), the taxpayer may 
     only claim the credit under subsection (a) if, with respect 
     to such property, the taxpayer uses a normalization method of 
     accounting.
       ``(ii) Certain exception not to apply.--The matter in 
     subsection (a)(3) which follows subparagraph (D) thereof 
     shall not apply to combined heat and power system property.
       ``(3) Systems using bagasse.--If a system is designed to 
     use bagasse for at least 90 percent of the energy source--
       ``(A) paragraph (1)(D) shall not apply, but
       ``(B) the amount of credit determined under subsection (a) 
     with respect to such system shall not exceed the amount which 
     bears the same ratio to such amount of credit (determined 
     without regard to this paragraph) as the energy efficiency 
     percentage of such system bears to 60 percent.''.
       (c) Effective Date.--The amendments made by this subsection 
     shall apply to periods after December 31, 2004, in taxable 
     years ending after such date, under rules similar to the 
     rules of section 48(m) of the Internal Revenue Code of 1986 
     (as in effect on the day before the date of the enactment of 
     the Revenue Reconciliation Act of 1990).

     SEC. 829. CREDIT FOR ENERGY EFFICIENCY IMPROVEMENTS TO 
                   EXISTING HOMES.

       (a) In General.--Subpart A of part IV of subchapter A of 
     chapter 1 (relating to nonrefundable personal credits), as 
     amended by this Act, is amended by inserting after section 
     25C the following new section:

     ``SEC. 25D. ENERGY EFFICIENCY IMPROVEMENTS TO EXISTING HOMES.

       ``(a) Allowance of Credit.--In the case of an individual, 
     there shall be allowed as a credit against the tax imposed by 
     this chapter for the taxable year an amount equal to 10 
     percent of the amount paid or incurred by the taxpayer for 
     qualified energy efficiency improvements installed during 
     such taxable year.

[[Page 6554]]

       ``(b) Limitation.--The credit allowed by this section with 
     respect to a dwelling for any taxable year shall not exceed 
     $300, reduced (but not below zero) by the sum of the credits 
     allowed under subsection (a) to the taxpayer with respect to 
     the dwelling for all preceding taxable years.
       ``(c) Carryforward of Unused Credit.--If the credit 
     allowable under subsection (a) exceeds the limitation imposed 
     by section 26(a) for such taxable year reduced by the sum of 
     the credits allowable under this subpart (other than this 
     section) for such taxable year, such excess shall be carried 
     to the succeeding taxable year and added to the credit 
     allowable under subsection (a) for such succeeding taxable 
     year.
       ``(d) Qualified Energy Efficiency Improvements.--For 
     purposes of this section, the term `qualified energy 
     efficiency improvements' means any energy efficient building 
     envelope component which is certified to meet or exceed the 
     latest prescriptive criteria for such component in the 
     International Energy Conservation Code approved by the 
     Department of Energy before the installation of such 
     component, or any combination of energy efficiency measures 
     which are certified as achieving at least a 30 percent 
     reduction in heating and cooling energy usage for the 
     dwelling (as measured in terms of energy cost to the 
     taxpayer), if--
       ``(1) such component or combination of measures is 
     installed in or on a dwelling which--
       ``(A) is located in the United States,
       ``(B) has not been treated as a qualifying new home for 
     purposes of any credit allowed under section 45K, and
       ``(C) is owned and used by the taxpayer as the taxpayer's 
     principal residence (within the meaning of section 121),
       ``(2) the original use of such component or combination of 
     measures commences with the taxpayer, and
       ``(3) such component or combination of measures reasonably 
     can be expected to remain in use for at least 5 years.
       ``(e) Certification.--
       ``(1) Methods of certification.--
       ``(A) Component-based method.--The certification described 
     in subsection (d) for any component described in such 
     subsection shall be determined on the basis of applicable 
     energy efficiency ratings (including product labeling 
     requirements) for affected building envelope components.
       ``(B) Performance-based method.--
       ``(i) In general.--The certification described in 
     subsection (d) for any combination of measures described in 
     such subsection shall be--

       ``(I) determined by comparing the projected heating and 
     cooling energy usage for the dwelling to such usage for such 
     dwelling in its original condition, and
       ``(II) accompanied by a written analysis documenting the 
     proper application of a permissible energy performance 
     calculation method to the specific circumstances of such 
     dwelling.

       ``(ii) Computer software.--Computer software shall be used 
     in support of a performance-based method certification under 
     clause (i). Such software shall meet procedures and methods 
     for calculating energy and cost savings in regulations 
     promulgated by the Secretary of Energy.
       ``(2) Provider.--A certification described in subsection 
     (d) shall be provided by--
       ``(A) in the case of the method described in paragraph 
     (1)(A), a third party, such as a local building regulatory 
     authority, a utility, a manufactured home primary inspection 
     agency, or a home energy rating organization, or
       ``(B) in the case of the method described in paragraph 
     (1)(B), an individual recognized by an organization 
     designated by the Secretary for such purposes.
       ``(3) Form.--A certification described in subsection (d) 
     shall be made in writing on forms which specify in readily 
     inspectable fashion the energy efficient components and other 
     measures and their respective efficiency ratings, and which 
     include a permanent label affixed to the electrical 
     distribution panel of the dwelling.
       ``(4) Regulations.--
       ``(A) In general.--In prescribing regulations under this 
     subsection for certification methods described in paragraph 
     (1)(B), the Secretary, after examining the requirements for 
     energy consultants and home energy ratings providers 
     specified by the Mortgage Industry National Home Energy 
     Rating Standards, shall prescribe procedures for calculating 
     annual energy usage and cost reductions for heating and 
     cooling and for the reporting of the results. Such 
     regulations shall--
       ``(i) provide that any calculation procedures be fuel 
     neutral such that the same energy efficiency measures allow a 
     dwelling to be eligible for the credit under this section 
     regardless of whether such dwelling uses a gas or oil furnace 
     or boiler or an electric heat pump, and
       ``(ii) require that any computer software allow for the 
     printing of the Federal tax forms necessary for the credit 
     under this section and for the printing of forms for 
     disclosure to the owner of the dwelling.
       ``(B) Providers.--For purposes of paragraph (2)(B), the 
     Secretary shall establish requirements for the designation of 
     individuals based on the requirements for energy consultants 
     and home energy raters specified by the Mortgage Industry 
     National Home Energy Rating Standards.
       ``(f) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Dollar amounts in case of joint occupancy.--In the 
     case of any dwelling unit which is jointly occupied and used 
     during any calendar year as a residence by 2 or more 
     individuals the following rules shall apply:
       ``(A) The amount of the credit allowable under subsection 
     (a) by reason of expenditures for the qualified energy 
     efficiency improvements made during such calendar year by any 
     of such individuals with respect to such dwelling unit shall 
     be determined by treating all of such individuals as 1 
     taxpayer whose taxable year is such calendar year.
       ``(B) There shall be allowable, with respect to such 
     expenditures to each of such individuals, a credit under 
     subsection (a) for the taxable year in which such calendar 
     year ends in an amount which bears the same ratio to the 
     amount determined under subparagraph (A) as the amount of 
     such expenditures made by such individual during such 
     calendar year bears to the aggregate of such expenditures 
     made by all of such individuals during such calendar year.
       ``(2) Tenant-stockholder in cooperative housing 
     corporation.--In the case of an individual who is a tenant-
     stockholder (as defined in section 216) in a cooperative 
     housing corporation (as defined in such section), such 
     individual shall be treated as having paid his tenant-
     stockholder's proportionate share (as defined in section 
     216(b)(3)) of the cost of qualified energy efficiency 
     improvements made by such corporation.
       ``(3) Condominiums.--
       ``(A) In general.--In the case of an individual who is a 
     member of a condominium management association with respect 
     to a condominium which the individual owns, such individual 
     shall be treated as having paid the individual's 
     proportionate share of the cost of qualified energy 
     efficiency improvements made by such association.
       ``(B) Condominium management association.--For purposes of 
     this paragraph, the term `condominium management association' 
     means an organization which meets the requirements of 
     paragraph (1) of section 528(c) (other than subparagraph (E) 
     thereof) with respect to a condominium project substantially 
     all of the units of which are used as residences.
       ``(4) Building envelope component.--The term `building 
     envelope component' means--
       ``(A) any insulation material or system which is 
     specifically and primarily designed to reduce the heat loss 
     or gain or a dwelling when installed in or on such dwelling,
       ``(B) exterior windows (including skylights), and
       ``(C) exterior doors.
       ``(5) Manufactured homes included.--For purposes of this 
     section, the term `dwelling' includes a manufactured home 
     which conforms to Federal Manufactured Home Construction and 
     Safety Standards (24 C.F.R. 3280).
       ``(g) Basis Adjustment.--For purposes of this subtitle, if 
     a credit is allowed under this section for any expenditure 
     with respect to any property, the increase in the basis of 
     such property which would (but for this subsection) result 
     from such expenditure shall be reduced by the amount of the 
     credit so allowed.
       ``(h) Termination.--Subsection (a) shall not apply to 
     qualified energy efficiency improvements installed after 
     December 31, 2006.''.
       (b) Credit Allowed Against Regular Tax and Alternative 
     Minimum Tax.--
       (1) In general.--Section 25D(b), as added by subsection 
     (a), is amended--
       (A) by striking ``The credit'' and inserting the following:
       ``(1) Dollar amount.--The credit'', and
       (B) by adding at the end the following new paragraph:
       ``(2) Limitation based on amount of tax.--The credit 
     allowed under subsection (a) for the taxable year shall not 
     exceed the excess of--
       ``(A) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(B) the sum of the credits allowable under this subpart 
     (other than this section) and section 27 for the taxable 
     year.''.
       (2) Conforming amendments.--
       (A) Section 25D(c), as added by subsection (a), is amended 
     by striking ``section 26(a) for such taxable year reduced by 
     the sum of the credits allowable under this subpart (other 
     than this section)'' and inserting ``subsection (b)(2)''.
       (B) Section 23(b)(4)(B), as amended by this Act, is amended 
     by striking ``section 25C'' and inserting ``sections 25C and 
     25D''.
       (C) Section 24(b)(3)(B), as amended by this Act, is amended 
     by striking ``and 25C'' and inserting ``25C, and 25D''.
       (D) Section 25(e)(1)(C), as amended by this Act, is amended 
     by inserting ``25D,'' after ``25C,''.
       (E) Section 25B(g)(2), as amended by this Act, is amended 
     by striking ``23 and 25C'' and inserting ``23, 25C, and 
     25D''.
       (F) Section 26(a)(1), as amended by this Act, is amended by 
     striking ``and 25C'' and inserting ``25C, and 25D''.

[[Page 6555]]

       (G) Section 904(h), as amended by this Act, is amended by 
     striking ``and 25C'' and inserting ``25C, and 25D''.
       (H) Section 1400C(d), as amended by this Act, is amended by 
     striking ``and 25C'' and inserting ``25C, and 25D''.
       (c) Additional Conforming Amendments.--
       (1) Section 1016(a), as amended by this Act, is amended by 
     striking ``and'' at the end of paragraph (31), by striking 
     the period at the end of paragraph (32) and inserting ``; 
     and'', and by adding at the end the following new paragraph:
       ``(33) to the extent provided in section 25D(g), in the 
     case of amounts with respect to which a credit has been 
     allowed under section 25D.''.
       (2) The table of sections for subpart A of part IV of 
     subchapter A of chapter 1, as amended by this Act, is amended 
     by inserting after the item relating to section 25C the 
     following new item:

``Sec. 25D. Energy efficiency improvements to existing homes.''.
       (d) Effective Dates.--
       (1) In general.--Except as provided by paragraph (2), the 
     amendments made by this section shall apply to property 
     installed after December 31, 2004, in taxable years ending 
     after such date.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to taxable years beginning after December 31, 
     2004.

                   Subtitle D--Clean Coal Incentives

 PART I--CREDIT FOR EMISSION REDUCTIONS AND EFFICIENCY IMPROVEMENTS IN 
         EXISTING COAL-BASED ELECTRICITY GENERATION FACILITIES

     SEC. 831. CREDIT FOR PRODUCTION FROM A QUALIFYING CLEAN COAL 
                   TECHNOLOGY UNIT.

       (a) Credit for Production From a Qualifying Clean Coal 
     Technology Unit.--Subpart D of part IV of subchapter A of 
     chapter 1 (relating to business related credits), as amended 
     by this Act, is amended by adding at the end the following 
     new section:

     ``SEC. 45M. CREDIT FOR PRODUCTION FROM A QUALIFYING CLEAN 
                   COAL TECHNOLOGY UNIT.

       ``(a) General Rule.--For purposes of section 38, the 
     qualifying clean coal technology production credit of any 
     taxpayer for any taxable year is equal to--
       ``(1) the applicable amount of clean coal technology 
     production credit, multiplied by
       ``(2) the applicable percentage of the sum of--
       ``(A) the kilowatt hours of electricity, plus
       ``(B) each 3,413 Btu of fuels or chemicals,

     produced by the taxpayer during such taxable year at a 
     qualifying clean coal technology unit, but only if such 
     production occurs during the 10-year period beginning on the 
     date the unit was returned to service after becoming a 
     qualifying clean coal technology unit.
       ``(b) Applicable Amount.--
       ``(1) In general.--For purposes of this section, the 
     applicable amount of clean coal technology production credit 
     is equal to $0.0034.
       ``(2) Inflation adjustment.--For calendar years after 2005, 
     the applicable amount of clean coal technology production 
     credit shall be adjusted by multiplying such amount by the 
     inflation adjustment factor for the calendar year in which 
     the amount is applied. If any amount as increased under the 
     preceding sentence is not a multiple of 0.01 cent, such 
     amount shall be rounded to the nearest multiple of 0.01 cent.
       ``(c) Applicable Percentage.--For purposes of this section, 
     with respect to any qualifying clean coal technology unit, 
     the applicable percentage is the percentage equal to the 
     ratio which the portion of the national megawatt capacity 
     limitation allocated to the taxpayer with respect to such 
     unit under subsection (e) bears to the total megawatt 
     capacity of such unit.
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Qualifying clean coal technology unit.--The term 
     `qualifying clean coal technology unit' means a clean coal 
     technology unit of the taxpayer which--
       ``(A) on January 1, 2005--
       ``(i) was a coal-based electricity generating steam 
     generator-turbine unit which was not a clean coal technology 
     unit, and
       ``(ii) had a nameplate capacity rating of not more than 300 
     megawatts,
       ``(B) becomes a clean coal technology unit as the result of 
     the retrofitting, repowering, or replacement of the unit with 
     clean coal technology during the 10-year period beginning on 
     January 1, 2005,
       ``(C) is not receiving nor is scheduled to receive funding 
     under the Clean Coal Technology Program, the Power Plant 
     Improvement Initiative, or the Clean Coal Power Initiative 
     administered by the Secretary of Energy, and
       ``(D) receives an allocation of a portion of the national 
     megawatt capacity limitation under subsection (e).
       ``(2) Clean coal technology unit.--The term `clean coal 
     technology unit' means a unit which--
       ``(A) uses clean coal technology, including advanced 
     pulverized coal or atmospheric fluidized bed combustion, 
     pressurized fluidized bed combustion, integrated gasification 
     combined cycle, or any other technology, for the production 
     of electricity,
       ``(B) uses an input of at least 75 percent coal to produce 
     at least 50 percent of its thermal output as electricity,
       ``(C) has a design net heat rate of at least 500 less than 
     that of such unit as described in paragraph (1)(A),
       ``(D) has a maximum design net heat rate of not more than 
     9,500, and
       ``(E) meets the pollution control requirements of paragraph 
     (3).
       ``(3) Pollution control requirements.--
       ``(A) In general.--A unit meets the requirements of this 
     paragraph if--
       ``(i) its emissions of sulfur dioxide, nitrogen oxide, or 
     particulates meet the lower of the emission levels for each 
     such emission specified in--

       ``(I) subparagraph (B), or
       ``(II) the new source performance standards of the Clean 
     Air Act (42 U.S.C. 7411) which are in effect for the category 
     of source at the time of the retrofitting, repowering, or 
     replacement of the unit, and

       ``(ii) its emissions do not exceed any relevant emission 
     level specified by regulation pursuant to the hazardous air 
     pollutant requirements of the Clean Air Act (42 U.S.C. 7412) 
     in effect at the time of the retrofitting, repowering, or 
     replacement.
       ``(B) Specific levels.--The levels specified in this 
     subparagraph are--
       ``(i) in the case of sulfur dioxide emissions, 50 percent 
     of the sulfur dioxide emission levels specified in the new 
     source performance standards of the Clean Air Act (42 U.S.C. 
     7411) in effect on the date of the enactment of this section 
     for the category of source,
       ``(ii) in the case of nitrogen oxide emissions--

       ``(I) 0.1 pound per million Btu of heat input if the unit 
     is not a cyclone-fired boiler, and
       ``(II) if the unit is a cyclone-fired boiler, 15 percent of 
     the uncontrolled nitrogen oxide emissions from such boilers, 
     and

       ``(iii) in the case of particulate emissions, 0.02 pound 
     per million Btu of heat input.
       ``(4) Design net heat rate.--The design net heat rate with 
     respect to any unit, measured in Btu per kilowatt hour 
     (HHV)--
       ``(A) shall be based on the design annual heat input to and 
     the design annual net electrical power, fuels, and chemicals 
     output from such unit (determined without regard to such 
     unit's co-generation of steam),
       ``(B) shall be adjusted for the heat content of the design 
     coal to be used by the unit if it is less than 12,000 Btu per 
     pound according to the following formula:

     Design net heat rate = Unit net heat rate [l- {((12,000-
     design coal heat content, Btu per pound)/1,000) 0.013}],
       ``(C) shall be corrected for the site reference conditions 
     of--
       ``(i) elevation above sea level of 500 feet,
       ``(ii) air pressure of 14.4 pounds per square inch absolute 
     (psia),
       ``(iii) temperature, dry bulb of 63 deg.F,
       ``(iv) temperature, wet bulb of 54 deg.F, and
       ``(v) relative humidity of 55 percent, and
       ``(D) if carbon capture controls have been installed with 
     respect to any qualifying unit and such controls remove at 
     least 50 percent of the unit's carbon dioxide emissions, 
     shall be adjusted up to the design heat rate level which 
     would have resulted without the installation of such 
     controls.
       ``(5) HHV.--The term `HHV' means higher heating value.
       ``(6) Application of certain rules.--The rules of 
     paragraphs (3), (4), and (5) of section 45(e) shall apply.
       ``(7) Inflation adjustment factor.--
       ``(A) In general.--The term `inflation adjustment factor' 
     means, with respect to a calendar year, a fraction the 
     numerator of which is the GDP implicit price deflator for the 
     preceding calendar year and the denominator of which is the 
     GDP implicit price deflator for the calendar year 2003.
       ``(B) GDP implicit price deflator.--The term `GDP implicit 
     price deflator' means, for any calendar year, the most recent 
     revision of the implicit price deflator for the gross 
     domestic product as of June 30 of such calendar year as 
     computed by the Department of Commerce before October 1 of 
     such calendar year.
       ``(8) Noncompliance with pollution laws.--For purposes of 
     this section, a unit which is not in compliance with the 
     applicable State and Federal pollution prevention, control, 
     and permit requirements for any period of time shall not be 
     considered to be a qualifying clean coal technology unit 
     during such period.
       ``(e) National Limitation on the Aggregate Capacity of 
     Qualifying Clean Coal Technology Units.--
       ``(1) In general.--For purposes of this section, the 
     national megawatt capacity limitation for qualifying clean 
     coal technology units is 4,000 megawatts.
       ``(2) Allocation of limitation.--The Secretary shall 
     allocate the national megawatt capacity limitation for 
     qualifying clean coal technology units in such manner as the 
     Secretary may prescribe under the regulations under paragraph 
     (3).
       ``(3) Regulations.--Not later than 6 months after the date 
     of the enactment of this section, the Secretary shall 
     prescribe such regulations as may be necessary or 
     appropriate--
       ``(A) to carry out the purposes of this subsection,

[[Page 6556]]

       ``(B) to limit the capacity of any qualifying clean coal 
     technology unit to which this section applies so that the 
     megawatt capacity allocated to any unit under this subsection 
     does not exceed 300 megawatts and the combined megawatt 
     capacity allocated to all such units when all such units are 
     placed in service during the 10-year period described in 
     subsection (d)(1)(B), does not exceed 4,000 megawatts,
       ``(C) to provide a certification process under which the 
     Secretary, in consultation with the Secretary of Energy, 
     shall approve and allocate the national megawatt capacity 
     limitation--
       ``(i) to encourage that units with the highest thermal 
     efficiencies, when adjusted for the heat content of the 
     design coal and site reference conditions described in 
     subsection (d)(4)(C), and environmental performance, be 
     placed in service as soon as possible, and
       ``(ii) to allocate capacity to taxpayers which have a 
     definite and credible plan for placing into commercial 
     operation a qualifying clean coal technology unit, 
     including--

       ``(I) a site,
       ``(II) contractual commitments for procurement and 
     construction or, in the case of regulated utilities, the 
     agreement of the State utility commission,
       ``(III) filings for all necessary preconstruction 
     approvals,
       ``(IV) a demonstrated record of having successfully 
     completed comparable projects on a timely basis, and

       ``(V) such other factors that the Secretary determines are 
     appropriate,

       ``(D) to allocate the national megawatt capacity limitation 
     to a portion of the capacity of a qualifying clean coal 
     technology unit if the Secretary determines that such an 
     allocation would maximize the amount of efficient production 
     encouraged with the available tax credits,
       ``(E) to set progress requirements and conditional 
     approvals so that capacity allocations for clean coal 
     technology units which become unlikely to meet the necessary 
     conditions for qualifying can be reallocated by the Secretary 
     to other clean coal technology units, and
       ``(F) to provide taxpayers with opportunities to correct 
     administrative errors and omissions with respect to 
     allocations and record keeping within a reasonable period 
     after discovery, taking into account the availability of 
     regulations and other administrative guidance from the 
     Secretary.''.
       (b) Credit Treated as Business Credit.--Section 38(b) 
     (relating to current year business credit), as amended by 
     this Act, is amended by striking ``plus'' at the end of 
     paragraph (23), by striking the period at the end of 
     paragraph (24) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(25) the qualifying clean coal technology production 
     credit determined under section 45M(a).''.
       (c) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by adding at the end the following new item:

``Sec. 45M. Credit for production from a qualifying clean coal 
              technology unit.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to production after December 31, 2004, in taxable 
     years ending after such date.

PART II--INCENTIVES FOR EARLY COMMERCIAL APPLICATIONS OF ADVANCED CLEAN 
                           COAL TECHNOLOGIES

     SEC. 832. CREDIT FOR INVESTMENT IN QUALIFYING ADVANCED CLEAN 
                   COAL TECHNOLOGY.

       (a) Allowance of Qualifying Advanced Clean Coal Technology 
     Unit Credit.--Section 46 (relating to amount of credit) is 
     amended by striking ``and'' at the end of paragraph (2), by 
     striking the period at the end of paragraph (3) and inserting 
     ``, and'', and by adding at the end the following new 
     paragraph:
       ``(4) the qualifying advanced clean coal technology unit 
     credit.''.
       (b) Amount of Qualifying Advanced Clean Coal Technology 
     Unit Credit.--Subpart E of part IV of subchapter A of chapter 
     1 (relating to rules for computing investment credit) is 
     amended by inserting after section 48 the following new 
     section:

     ``SEC. 48A. QUALIFYING ADVANCED CLEAN COAL TECHNOLOGY UNIT 
                   CREDIT.

       ``(a) In General.--For purposes of section 46, the 
     qualifying advanced clean coal technology unit credit for any 
     taxable year is an amount equal to 10 percent of the 
     applicable percentage of the qualified investment in a 
     qualifying advanced clean coal technology unit for such 
     taxable year.
       ``(b) Qualifying Advanced Clean Coal Technology Unit.--
       ``(1) In general.--For purposes of subsection (a), the term 
     `qualifying advanced clean coal technology unit' means an 
     advanced clean coal technology unit of the taxpayer--
       ``(A)(i) in the case of a unit first placed in service 
     after December 31, 2004, the original use of which commences 
     with the taxpayer, or
       ``(ii) in the case of the retrofitting or repowering of a 
     unit first placed in service before January 1, 2005, the 
     retrofitting or repowering of which is completed by the 
     taxpayer after such date, or
       ``(B) which is depreciable under section 167,
       ``(C) which has a useful life of not less than 4 years,
       ``(D) which is located in the United States,
       ``(E) which is not receiving nor is scheduled to receive 
     funding under the Clean Coal Technology Program, the Power 
     Plant Improvement Initiative, or the Clean Coal Power 
     Initiative administered by the Secretary of Energy,
       ``(F) which is not a qualifying clean coal technology unit, 
     and
       ``(G) which receives an allocation of a portion of the 
     national megawatt capacity limitation under subsection (f).
       ``(2) Special rule for sale-leasebacks.--For purposes of 
     subparagraph (A) of paragraph (1), in the case of a unit 
     which--
       ``(A) is originally placed in service by a person, and
       ``(B) is sold and leased back by such person, or is leased 
     to such person, within 3 months after the date such unit was 
     originally placed in service, for a period of not less than 
     12 years,

     such unit shall be treated as originally placed in service 
     not earlier than the date on which such unit is used under 
     the leaseback (or lease) referred to in subparagraph (B). The 
     preceding sentence shall not apply to any property if the 
     lessee and lessor of such property make an election under 
     this sentence. Such an election, once made, may be revoked 
     only with the consent of the Secretary.
       ``(3) Noncompliance with pollution laws.--For purposes of 
     this subsection, a unit which is not in compliance with the 
     applicable State and Federal pollution prevention, control, 
     and permit requirements for any period of time shall not be 
     considered to be a qualifying advanced clean coal technology 
     unit during such period.
       ``(c) Applicable Percentage.--For purposes of this section, 
     with respect to any qualifying advanced clean coal technology 
     unit, the applicable percentage is the percentage equal to 
     the ratio which the portion of the national megawatt capacity 
     limitation allocated to the taxpayer with respect to such 
     unit under subsection (f) bears to the total megawatt 
     capacity of such unit.
       ``(d) Advanced Clean Coal Technology Unit.--For purposes of 
     this section--
       ``(1) In general.--The term `advanced clean coal technology 
     unit' means a new, retrofit, or repowering unit of the 
     taxpayer which--
       ``(A) is--
       ``(i) an eligible advanced pulverized coal or atmospheric 
     fluidized bed combustion technology unit,
       ``(ii) an eligible pressurized fluidized bed combustion 
     technology unit,
       ``(iii) an eligible integrated gasification combined cycle 
     technology unit, or
       ``(iv) an eligible other technology unit, and
       ``(B) meets the carbon emission rate requirements of 
     paragraph (6).
       ``(2) Eligible advanced pulverized coal or atmospheric 
     fluidized bed combustion technology unit.--The term `eligible 
     advanced pulverized coal or atmospheric fluidized bed 
     combustion technology unit' means a clean coal technology 
     unit using advanced pulverized coal or atmospheric fluidized 
     bed combustion technology which--
       ``(A) is placed in service after December 31, 2004, and 
     before January 1, 2013, and
       ``(B) has a design net heat rate of not more than 8,500 
     (8,900 in the case of units placed in service before 2009).
       ``(3) Eligible pressurized fluidized bed combustion 
     technology unit.--The term `eligible pressurized fluidized 
     bed combustion technology unit' means a clean coal technology 
     unit using pressurized fluidized bed combustion technology 
     which--
       ``(A) is placed in service after December 31, 2004, and 
     before January 1, 2017, and
       ``(B) has a design net heat rate of not more than 7,720 
     (8,900 in the case of units placed in service before 2009, 
     and 8,500 in the case of units placed in service after 2008 
     and before 2013).
       ``(4) Eligible integrated gasification combined cycle 
     technology unit.--The term `eligible integrated gasification 
     combined cycle technology unit' means a clean coal technology 
     unit using integrated gasification combined cycle technology, 
     with or without fuel or chemical co-production, which--
       ``(A) is placed in service after December 31, 2004, and 
     before January 1, 2017,
       ``(B) has a design net heat rate of not more than 7,720 
     (8,900 in the case of units placed in service before 2009, 
     and 8,500 in the case of units placed in service after 2008 
     and before 2013), and
       ``(C) has a net thermal efficiency (HHV) using coal with 
     fuel or chemical co-production of not less than 44.2 percent 
     (38.4 percent in the case of units placed in service before 
     2009, and 40.2 percent in the case of units placed in service 
     after 2008 and before 2013).
       ``(5) Eligible other technology unit.--The term `eligible 
     other technology unit' means a clean coal technology unit 
     using any other technology for the production of electricity 
     which is placed in service after December 31, 2004, and 
     before January 1, 2017.

[[Page 6557]]

       ``(6) Carbon emission rate requirements.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     a unit meets the requirements of this paragraph if--
       ``(i) in the case of a unit using design coal with a heat 
     content of not more than 9,000 Btu per pound, the carbon 
     emission rate is less than 0.60 pound of carbon per kilowatt 
     hour, and
       ``(ii) in the case of a unit using design coal with a heat 
     content of more than 9,000 Btu per pound, the carbon emission 
     rate is less than 0.54 pound of carbon per kilowatt hour.
       ``(B) Eligible other technology unit.--In the case of an 
     eligible other technology unit, subparagraph (A) shall be 
     applied by substituting `0.51' and `0.459' for `0.60' and 
     `0.54', respectively.
       ``(e) General Definitions.--Any term used in this section 
     which is also used in section 45M shall have the meaning 
     given such term in section 45M.
       ``(f) National Limitation on the Aggregate Capacity of 
     Advanced Clean Coal Technology Units.--
       ``(1) In general.--For purposes of subsection (b)(1)(G), 
     the national megawatt capacity limitation is--
       ``(A) for qualifying advanced clean coal technology units 
     using advanced pulverized coal or atmospheric fluidized bed 
     combustion technology, not more than 1,000 megawatts (not 
     more than 500 megawatts in the case of units placed in 
     service before 2009),
       ``(B) for such units using pressurized fluidized bed 
     combustion technology, not more than 500 megawatts (not more 
     than 250 megawatts in the case of units placed in service 
     before 2009),
       ``(C) for such units using integrated gasification combined 
     cycle technology, with or without fuel or chemical co-
     production, not more than 2,000 megawatts (not more than 
     1,000 megawatts in the case of units placed in service before 
     2009), and
       ``(D) for such units using other technology for the 
     production of electricity, not more than 500 megawatts (not 
     more than 250 megawatts in the case of units placed in 
     service before 2009).
       ``(2) Allocation of limitation.--The Secretary shall 
     allocate the national megawatt capacity limitation for 
     qualifying advanced clean coal technology units in such 
     manner as the Secretary may prescribe under the regulations 
     under paragraph (3).
       ``(3) Regulations.--Not later than 6 months after the date 
     of the enactment of this section, the Secretary shall 
     prescribe such regulations as may be necessary or 
     appropriate--
       ``(A) to carry out the purposes of this subsection and 
     section 45N,
       ``(B) to limit the capacity of any qualifying advanced 
     clean coal technology unit to which this section applies so 
     that the combined megawatt capacity of all such units to 
     which this section applies does not exceed 4,000 megawatts,
       ``(C) to provide a certification process described in 
     section 45M(e)(3)(C),
       ``(D) to carry out the purposes described in subparagraphs 
     (D), (E), and (F) of section 45M(e)(3), and
       ``(E) to reallocate capacity which is not allocated to any 
     technology described in subparagraphs (A) through (D) of 
     paragraph (1) because an insufficient number of qualifying 
     units request an allocation for such technology, to another 
     technology described in such subparagraphs in order to 
     maximize the amount of energy efficient production encouraged 
     with the available tax credits.
       ``(4) Selection criteria.--For purposes of this subsection, 
     the selection criteria for allocating the national megawatt 
     capacity limitation to qualifying advanced clean coal 
     technology units--
       ``(A) shall be established by the Secretary of Energy as 
     part of a competitive solicitation,
       ``(B) shall include primary criteria of minimum design net 
     heat rate, maximum design thermal efficiency, environmental 
     performance, and lowest cost to the Government, and
       ``(C) shall include supplemental criteria as determined 
     appropriate by the Secretary of Energy.
       ``(g) Qualified Investment.--For purposes of subsection 
     (a), the term `qualified investment' means, with respect to 
     any taxable year, the basis of a qualifying advanced clean 
     coal technology unit placed in service by the taxpayer during 
     such taxable year (in the case of a unit described in 
     subsection (b)(1)(A)(ii), only that portion of the basis of 
     such unit which is properly attributable to the retrofitting 
     or repowering of such unit).
       ``(h) Qualified Progress Expenditures.--
       ``(1) Increase in qualified investment.--In the case of a 
     taxpayer who has made an election under paragraph (5), the 
     amount of the qualified investment of such taxpayer for the 
     taxable year (determined under subsection (g) without regard 
     to this subsection) shall be increased by an amount equal to 
     the aggregate of each qualified progress expenditure for the 
     taxable year with respect to progress expenditure property.
       ``(2) Progress expenditure property defined.--For purposes 
     of this subsection, the term `progress expenditure property' 
     means any property being constructed by or for the taxpayer 
     and which it is reasonable to believe will qualify as a 
     qualifying advanced clean coal technology unit which is being 
     constructed by or for the taxpayer when it is placed in 
     service.
       ``(3) Qualified progress expenditures defined.--For 
     purposes of this subsection--
       ``(A) Self-constructed property.--In the case of any self-
     constructed property, the term `qualified progress 
     expenditures' means the amount which, for purposes of this 
     subpart, is properly chargeable (during such taxable year) to 
     capital account with respect to such property.
       ``(B) Nonself-constructed property.--In the case of 
     nonself-constructed property, the term `qualified progress 
     expenditures' means the amount paid during the taxable year 
     to another person for the construction of such property.
       ``(4) Other definitions.--For purposes of this subsection--
       ``(A) Self-constructed property.--The term `self-
     constructed property' means property for which it is 
     reasonable to believe that more than half of the construction 
     expenditures will be made directly by the taxpayer.
       ``(B) Nonself-constructed property.--The term `nonself-
     constructed property' means property which is not self-
     constructed property.
       ``(C) Construction, etc.--The term `construction' includes 
     reconstruction and erection, and the term `constructed' 
     includes reconstructed and erected.
       ``(D) Only construction of qualifying advanced clean coal 
     technology unit to be taken into account.--Construction shall 
     be taken into account only if, for purposes of this subpart, 
     expenditures therefor are properly chargeable to capital 
     account with respect to the property.
       ``(5) Election.--An election under this subsection may be 
     made at such time and in such manner as the Secretary may by 
     regulations prescribe. Such an election shall apply to the 
     taxable year for which made and to all subsequent taxable 
     years. Such an election, once made, may not be revoked except 
     with the consent of the Secretary.
       ``(i) Coordination With Other Credits.--This section shall 
     not apply to any property with respect to which the 
     rehabilitation credit under section 47 or the energy credit 
     under section 48 is allowed unless the taxpayer elects to 
     waive the application of such credit to such property.''.
       (c) Recapture.--Section 50(a) (relating to other special 
     rules) is amended by adding at the end the following new 
     paragraph:
       ``(6) Special rules relating to qualifying advanced clean 
     coal technology unit.--For purposes of applying this 
     subsection in the case of any credit allowable by reason of 
     section 48A, the following rules shall apply:
       ``(A) General rule.--In lieu of the amount of the increase 
     in tax under paragraph (1), the increase in tax shall be an 
     amount equal to the investment tax credit allowed under 
     section 38 for all prior taxable years with respect to a 
     qualifying advanced clean coal technology unit (as defined by 
     section 48A(b)(1)) multiplied by a fraction the numerator of 
     which is the number of years remaining to fully depreciate 
     under this title the qualifying advanced clean coal 
     technology unit disposed of, and the denominator of which is 
     the total number of years over which such unit would 
     otherwise have been subject to depreciation. For purposes of 
     the preceding sentence, the year of disposition of the 
     qualifying advanced clean coal technology unit shall be 
     treated as a year of remaining depreciation.
       ``(B) Property ceases to qualify for progress 
     expenditures.--Rules similar to the rules of paragraph (2) 
     shall apply in the case of qualified progress expenditures 
     for a qualifying advanced clean coal technology unit under 
     section 48A, except that the amount of the increase in tax 
     under subparagraph (A) of this paragraph shall be substituted 
     for the amount described in such paragraph (2).
       ``(C) Application of paragraph.--This paragraph shall be 
     applied separately with respect to the credit allowed under 
     section 38 regarding a qualifying advanced clean coal 
     technology unit.''.
       (d) Technical Amendments.--
       (1) Section 49(a)(1)(C) 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) the portion of the basis of any qualifying advanced 
     clean coal technology unit attributable to any qualified 
     investment (as defined by section 48A(g)).''.
       (2) Section 50(a)(4) is amended by striking ``and (2)'' and 
     inserting ``, (2), and (6)''.
       (3) Section 50(c) is amended by adding at the end the 
     following new paragraph:
       ``(6) Nonapplication.--Paragraphs (1) and (2) shall not 
     apply to any qualifying advanced clean coal technology unit 
     credit under section 48A.''.
       (4) The table of sections for subpart E of part IV of 
     subchapter A of chapter 1 is amended by inserting after the 
     item relating to section 48 the following new item:

``Sec. 48A. Qualifying advanced clean coal technology unit credit.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to periods

[[Page 6558]]

     after December 31, 2004, under rules similar to the rules of 
     section 48(m) of the Internal Revenue Code of 1986 (as in 
     effect on the day before the date of the enactment of the 
     Revenue Reconciliation Act of 1990).

     SEC. 833. CREDIT FOR PRODUCTION FROM A QUALIFYING ADVANCED 
                   CLEAN COAL TECHNOLOGY UNIT.

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

     ``SEC. 45N. CREDIT FOR PRODUCTION FROM A QUALIFYING ADVANCED 
                   CLEAN COAL TECHNOLOGY UNIT.

       ``(a) General Rule.--For purposes of section 38, the 
     qualifying advanced clean coal technology production credit 
     of any taxpayer for any taxable year is equal to--
       ``(1) the applicable amount of advanced clean coal 
     technology production credit, multiplied by
       ``(2) the applicable percentage (as determined under 
     section 48A(c)) of the sum of--
       ``(A) the kilowatt hours of electricity, plus
       ``(B) each 3,413 Btu of fuels or chemicals,

     produced by the taxpayer during such taxable year at a 
     qualifying advanced clean coal technology unit, but only if 
     such production occurs during the 10-year period beginning on 
     the date the unit was originally placed in service (or 
     returned to service after becoming a qualifying advanced 
     clean coal technology unit).
       ``(b) Applicable Amount.--For purposes of this section--
       ``(1) In general.--Except as provided in paragraph (2), the 
     applicable amount of advanced clean coal technology 
     production credit with respect to production from a 
     qualifying advanced clean coal technology unit shall be 
     determined as follows:
       ``(A) If the qualifying advanced clean coal technology unit 
     is producing electricity only:
       ``(i) In the case of a unit originally placed in service 
     before 2009, if--
       

------------------------------------------------------------------------
                                            The applicable amount is:
                                       ---------------------------------
    ``The design net heat rate is:      For 1st 5 years   For 2d 5 years
                                        of such service  of such service
------------------------------------------------------------------------
Not more than 8,500...................          $.0060           $.0038
More than 8,500 but not more than               $.0025           $.0010
 8,750................................
More than 8,750 but less than 8,900...          $.0010          $.0010.
------------------------------------------------------------------------

       ``(ii) In the case of a unit originally placed in service 
     after 2008 and before 2013, if--
       

------------------------------------------------------------------------
                                            The applicable amount is:
                                       ---------------------------------
    ``The design net heat rate is:      For 1st 5 years   For 2d 5 years
                                        of such service  of such service
------------------------------------------------------------------------
Not more than 7,770...................          $.0105           $.0090
More than 7,770 but not more than               $.0085           $.0068
 8,125................................
More than 8,125 but less than 8,500...          $.0075          $.0055.
------------------------------------------------------------------------

       ``(iii) In the case of a unit originally placed in service 
     after 2012 and before 2017, if--
       

------------------------------------------------------------------------
                                            The applicable amount is:
                                       ---------------------------------
    ``The design net heat rate is:      For 1st 5 years   For 2d 5 years
                                        of such service  of such service
------------------------------------------------------------------------
Not more than 7,380...................          $.0140           $.0115
More than 7,380 but not more than               $.0120          $.0090.
 7,720................................
------------------------------------------------------------------------

       ``(B) If the qualifying advanced clean coal technology unit 
     is producing fuel or chemicals:
       ``(i) In the case of a unit originally placed in service 
     before 2009, if--
       

------------------------------------------------------------------------
                                            The applicable amount is:
     ``The unit design net thermal     ---------------------------------
         efficiency (HHV) is:           For 1st 5 years   For 2d 5 years
                                        of such service  of such service
------------------------------------------------------------------------
Not less than 40.2 percent............          $.0060           $.0038
Less than 40.2 but not less than 39             $.0025           $.0010
 percent..............................
Less than 39 but not less than 38.4             $.0010          $.0010.
 percent..............................
------------------------------------------------------------------------

       ``(ii) In the case of a unit originally placed in service 
     after 2008 and before 2013, if--
       

------------------------------------------------------------------------
                                            The applicable amount is:
     ``The unit design net thermal     ---------------------------------
         efficiency (HHV) is:           For 1st 5 years   For 2d 5 years
                                        of such service  of such service
------------------------------------------------------------------------
Not less than 43.9 percent............          $.0105           $.0090
Less than 43.9 but not less than 42             $.0085           $.0068
 percent..............................
Less than 42 but not less than 40.2             $.0075          $.0055.
 percent..............................
------------------------------------------------------------------------

       ``(iii) In the case of a unit originally placed in service 
     after 2012 and before 2017, if--
       

------------------------------------------------------------------------
                                            The applicable amount is:
     ``The unit design net thermal     ---------------------------------
         efficiency (HHV) is:           For 1st 5 years   For 2d 5 years
                                        of such service  of such service
------------------------------------------------------------------------
 
Not less than 46.3 percent............          $.0140           $.0115
Less than 46.3 but not less than 44.2           $.0120          $.0090.
 percent..............................
------------------------------------------------------------------------


[[Page 6559]]

       ``(2) Special rule for units qualifying for greater 
     applicable amount when placed in service.--If, at the time a 
     qualifying advanced clean coal technology unit is placed in 
     service, production from the unit would be entitled to a 
     greater applicable amount if such unit had been placed in 
     service at a later date, the applicable amount for such unit 
     shall be such greater amount.
       ``(c) Inflation Adjustment.--For calendar years after 2005, 
     each dollar amount in subsection (b)(1) shall be adjusted by 
     multiplying such amount by the inflation adjustment factor 
     for the calendar year in which the amount is applied. If any 
     amount as increased under the preceding sentence is not a 
     multiple of 0.01 cent, such amount shall be rounded to the 
     nearest multiple of 0.01 cent.
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) In general.--Any term used in this section which is 
     also used in section 45M or 48A shall have the meaning given 
     such term in such section.
       ``(2) Applicable rules.--The rules of paragraphs (3), (4), 
     and (5) of section 45(e) shall apply.''.
       (b) Credit Treated as Business Credit.--Section 38(b) 
     (relating to current year business credit), as amended by 
     this Act, is amended by striking ``plus'' at the end of 
     paragraph (24), by striking the period at the end of 
     paragraph (25) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(26) the qualifying advanced clean coal technology 
     production credit determined under section 45N(a).''.
       (c) Denial of Double Benefit.--Section 29(d) (relating to 
     other definitions and special rules) is amended by adding at 
     the end the following new paragraph:
       ``(9) Denial of double benefit.--This section shall not 
     apply with respect to any qualified fuel the production of 
     which may be taken into account for purposes of determining 
     the credit under section 45N.''.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by adding at the end the following new item:

``Sec. 45N. Credit for production from a qualifying advanced clean coal 
              technology unit.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to production after December 31, 2004, in taxable 
     years ending after such date.

      PART III--TREATMENT OF PERSONS NOT ABLE TO USE ENTIRE CREDIT

     SEC. 834. TREATMENT OF PERSONS NOT ABLE TO USE ENTIRE CREDIT.

       (a) In General.--Section 45M, as added by this Act, is 
     amended by adding at the end the following new subsection:
       ``(f) Treatment of Person Not Able To Use Entire Credit.--
       ``(1) Allowance of credits.--
       ``(A) In general.--Any credit allowable under this section, 
     section 45N, or section 48A with respect to a facility owned 
     by a person described in subparagraph (B) may be transferred 
     or used as provided in this subsection, and the determination 
     as to whether the credit is allowable shall be made without 
     regard to the tax-exempt status of the person.
       ``(B) Persons described.--A person is described in this 
     subparagraph if the person is--
       ``(i) an organization described in section 501(c)(12)(C) 
     and exempt from tax under section 501(a),
       ``(ii) an organization described in section 1381(a)(2)(C),
       ``(iii) a public utility (as defined in section 
     136(c)(2)(B)),
       ``(iv) any State or political subdivision thereof, the 
     District of Columbia, or any agency or instrumentality of any 
     of the foregoing,
       ``(v) any Indian tribal government (within the meaning of 
     section 7871) or any agency or instrumentality thereof, or
       ``(vi) the Tennessee Valley Authority.
       ``(2) Transfer of credit.--
       ``(A) In general.--A person described in clause (i), (ii), 
     (iii), (iv), or (v) of paragraph (1)(B) may transfer any 
     credit to which paragraph (1)(A) applies through an 
     assignment to any other person not described in paragraph 
     (1)(B). Such transfer may be revoked only with the consent of 
     the Secretary.
       ``(B) Regulations.--The Secretary shall prescribe such 
     regulations as necessary to ensure that any credit described 
     in subparagraph (A) is claimed once and not reassigned by 
     such other person.
       ``(C) Transfer proceeds treated as arising from essential 
     government function.--Any proceeds derived by a person 
     described in clause (iii), (iv), or (v) of paragraph (1)(B) 
     from the transfer of any credit under subparagraph (A) shall 
     be treated as arising from the exercise of an essential 
     government function.
       ``(3) Use of credit as an offset.--Notwithstanding any 
     other provision of law, in the case of a person described in 
     clause (i), (ii), or (v) of paragraph (1)(B), any credit to 
     which paragraph (1)(A) applies may be applied by such person, 
     to the extent provided by the Secretary of Agriculture, as a 
     prepayment of any loan, debt, or other obligation the entity 
     has incurred under subchapter I of chapter 31 of title 7 of 
     the Rural Electrification Act of 1936 (7 U.S.C. 901 et seq.), 
     as in effect on the date of the enactment of this section.
       ``(4) Use by tva.--
       ``(A) In general.--Notwithstanding any other provision of 
     law, in the case of a person described in paragraph 
     (1)(B)(vi), any credit to which paragraph (1)(A) applies may 
     be applied as a credit against the payments required to be 
     made in any fiscal year under section 15d(e) of the Tennessee 
     Valley Authority Act of 1933 (16 U.S.C. 831n-4(e)) as an 
     annual return on the appropriations investment and an annual 
     repayment sum.
       ``(B) Treatment of credits.--The aggregate amount of 
     credits described in paragraph (1)(A) with respect to such 
     person shall be treated in the same manner and to the same 
     extent as if such credits were a payment in cash and shall be 
     applied first against the annual return on the appropriations 
     investment.
       ``(C) Credit carryover.--With respect to any fiscal year, 
     if the aggregate amount of credits described paragraph (1)(A) 
     with respect to such person exceeds the aggregate amount of 
     payment obligations described in subparagraph (A), the excess 
     amount shall remain available for application as credits 
     against the amounts of such payment obligations in succeeding 
     fiscal years in the same manner as described in this 
     paragraph.
       ``(5) Credit not income.--Any transfer under paragraph (2) 
     or use under paragraph (3) of any credit to which paragraph 
     (1)(A) applies shall not be treated as income for purposes of 
     section 501(c)(12).
       ``(6) Treatment of unrelated persons.--For purposes of this 
     subsection, transfers among and between persons described in 
     clauses (i), (ii), (iii), (iv), and (v) of paragraph (1)(B) 
     shall be treated as transfers between unrelated parties.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to production after December 31, 2004, in taxable 
     years ending after such date.

                   Subtitle E--Oil and Gas Provisions

     SEC. 841. OIL AND GAS FROM MARGINAL WELLS.

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

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

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

     The applicable reference price for a taxable year is the 
     reference price of the calendar year preceding the calendar 
     year in which the taxable year begins.
       ``(B) Inflation adjustment.--
       ``(i) In general.--In the case of any taxable year 
     beginning in a calendar year after 2005, each of the dollar 
     amounts contained in subparagraph (A) shall be increased to 
     an amount equal to such dollar amount multiplied by the 
     inflation adjustment factor for such calendar year.
       ``(ii) Inflation adjustment factor.--For purposes of clause 
     (i)--

       ``(I) In general.--The term `inflation adjustment factor' 
     means, with respect to a calendar year, a fraction the 
     numerator of which is the GDP implicit price deflator for the 
     preceding calendar year and the denominator of which is the 
     GDP implicit price deflator for the calendar year 2004.
       ``(II) GDP implicit price deflator.--The term `GDP implicit 
     price deflator' means, for any calendar year, the most recent 
     revision of the implicit price deflator for the gross 
     domestic product as of June 30 of such calendar year as 
     computed by the Department of Commerce before October 1 of 
     such calendar year.

       ``(C) Reference price.--For purposes of this paragraph, the 
     term `reference price' means, with respect to any calendar 
     year--
       ``(i) in the case of qualified crude oil production, the 
     reference price determined under section 29(d)(2)(C), and
       ``(ii) in the case of qualified natural gas production, the 
     Secretary's estimate of the annual average wellhead price per 
     1,000 cubic feet for all domestic natural gas.

[[Page 6560]]

       ``(c) Qualified Crude Oil and Natural Gas Production.--For 
     purposes of this section--
       ``(1) In general.--The terms `qualified crude oil 
     production' and `qualified natural gas production' mean 
     domestic crude oil or domestic natural gas which is produced 
     from a qualified marginal well.
       ``(2) Limitation on amount of production which may 
     qualify.--
       ``(A) In general.--Crude oil or natural gas produced during 
     any taxable year from any well shall not be treated as 
     qualified crude oil production or qualified natural gas 
     production to the extent production from the well during the 
     taxable year exceeds 1,095 barrels or barrel equivalents.
       ``(B) Proportionate reductions.--
       ``(i) Short taxable years.--In the case of a short taxable 
     year, the limitations under this paragraph shall be 
     proportionately reduced to reflect the ratio which the number 
     of days in such taxable year bears to 365.
       ``(ii) Wells not in production entire year.--In the case of 
     a well which is not capable of production during each day of 
     a taxable year, the limitations under this paragraph 
     applicable to the well shall be proportionately reduced to 
     reflect the ratio which the number of days of production 
     bears to the total number of days in the taxable year.
       ``(3) Noncompliance with pollution laws.--Production from 
     any well during any period in which such well is not in 
     compliance with applicable Federal pollution prevention, 
     control, and permit requirements shall not be treated as 
     qualified crude oil production or qualified natural gas 
     production.
       ``(4) Definitions.--
       ``(A) Qualified marginal well.--The term `qualified 
     marginal well' means a domestic well--
       ``(i) the production from which during the taxable year is 
     treated as marginal production under section 613A(c)(6), or
       ``(ii) which, during the taxable year--

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

       ``(B) Crude oil, etc.--The terms `crude oil', `natural 
     gas', `domestic', and `barrel' have the meanings given such 
     terms by section 613A(e).
       ``(C) Barrel equivalent.--The term `barrel equivalent' 
     means, with respect to natural gas, a conversation ratio of 
     6,000 cubic feet of natural gas to 1 barrel of crude oil.
       ``(D) Domestic natural gas.--The term `domestic natural 
     gas' does not include Alaska natural gas (as defined in 
     section 45Q(c)(1)).
       ``(d) Other Rules.--
       ``(1) Production attributable to the taxpayer.--In the case 
     of a qualified marginal well in which there is more than 1 
     owner of operating interests in the well and the crude oil or 
     natural gas production exceeds the limitation under 
     subsection (c)(2), qualifying crude oil production or 
     qualifying natural gas production attributable to the 
     taxpayer shall be determined on the basis of the ratio which 
     taxpayer's revenue interest in the production bears to the 
     aggregate of the revenue interests of all operating interest 
     owners in the production.
       ``(2) Operating interest required.--Any credit under this 
     section may be claimed only on production which is 
     attributable to the holder of an operating interest.
       ``(3) Production from nonconventional sources excluded.--In 
     the case of production from a qualified marginal well which 
     is eligible for the credit allowed under section 29 for the 
     taxable year, no credit shall be allowable under this section 
     unless the taxpayer elects not to claim the credit under 
     section 29 with respect to the well.''.
       (b) Credit Treated as Business Credit.--Section 38(b) 
     (relating to current year business credit), as amended by 
     this Act, is amended by striking ``plus'' at the end of 
     paragraph (25), by striking the period at the end of 
     paragraph (26) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(27) the marginal oil and gas well production credit 
     determined under section 45O(a).''.
       (c) Coordination With Section 29.--Section 29(a) (relating 
     to allowance of credit) is amended by striking ``There'' and 
     inserting ``At the election of the taxpayer, there''.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by adding at the end the following new item:

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

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

     SEC. 842. NATURAL GAS GATHERING LINES TREATED AS 7-YEAR 
                   PROPERTY.

       (a) In General.--Section 168(e)(3)(C) (defining 7-year 
     property) is amended by striking ``and'' at the end of clause 
     (i), by redesignating clause (ii) as clause (iii), and by 
     inserting after clause (i) the following new clause:
       ``(ii) any natural gas gathering line, and''.
       (b) Natural Gas Gathering Line.--Section 168(i) (relating 
     to definitions and special rules), as amended by this Act, is 
     amended by adding at the end the following new paragraph:
       ``(17) Natural gas gathering line.--The term `natural gas 
     gathering line' means--
       ``(A) the pipe, equipment, and appurtenances used to 
     deliver natural gas from the wellhead or a commonpoint to the 
     point at which such gas first reaches--
       ``(i) a gas processing plant,
       ``(ii) an interconnection with a transmission pipeline 
     certificated by the Federal Energy Regulatory Commission as 
     an interstate transmission pipeline,
       ``(iii) an interconnection with an intrastate transmission 
     pipeline, or
       ``(iv) a direct interconnection with a local distribution 
     company, a gas storage facility, or an industrial consumer, 
     or
       ``(B) any other pipe, equipment, or appurtenances 
     determined to be a gathering line by the Federal Energy 
     Regulatory Commission.
       (c) Alternative System.--The table contained in section 
     168(g)(3)(B) (relating to special rule for certain property 
     assigned to classes) is amended by inserting after the item 
     relating to subparagraph (C)(i) the following new item:

``(C)(ii).........................................................14''.

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

     SEC. 843. EXPENSING OF CAPITAL COSTS INCURRED IN COMPLYING 
                   WITH ENVIRONMENTAL PROTECTION AGENCY SULFUR 
                   REGULATIONS.

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

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

       ``(a) Treatment as Expenses.--A small business refiner (as 
     defined in section 45I(c)(1)) may elect to treat 75 percent 
     of qualified capital costs (as defined in section 45I(c)(2)) 
     which are paid or incurred by the taxpayer during the taxable 
     year as expenses which are not chargeable to capital account. 
     Any cost so treated shall be allowed as a deduction for the 
     taxable year in which paid or incurred.
       ``(b) Reduced Percentage.--In the case of a small business 
     refiner with average daily domestic refinery runs for the 1-
     year period ending on December 31, 2002, in excess of 155,000 
     barrels, the number of percentage points described in 
     subsection (a) shall be reduced (not below zero) by the 
     product of such number (before the application of this 
     subsection) and the ratio of such excess to 50,000 barrels. 
     For purposes of calculating such average daily domestic 
     refinery runs, only refineries of the refiner or a related 
     person (within the meaning of section 613A(d)(3)) on April 1, 
     2003, shall be taken into account.
       ``(c) Basis Reduction.--
       ``(1) In general.--For purposes of this title, the basis of 
     any property shall be reduced by the portion of the cost of 
     such property taken into account under subsection (a).
       ``(2) Ordinary income recapture.--For purposes of section 
     1245, the amount of the deduction allowable under subsection 
     (a) with respect to any property which is of a character 
     subject to the allowance for depreciation shall be treated as 
     a deduction allowed for depreciation under section 167.''.
       ``(d) Coordination With Other Provisions.--Section 280B 
     shall not apply to amounts which are treated as expenses 
     under this section.''.
       (b) Conforming Amendments.--
       (1) Section 263(a)(1), as amended by this Act, is amended 
     by striking ``or'' at the end of subparagraph (H), by 
     striking the period at the end of subparagraph (I) and 
     inserting ``; or'', and by adding at the end the following 
     new subparagraph:
       ``(J) expenditures for which a deduction is allowed under 
     section 179C.''.
       (2) Section 263A(c)(3) is amended by inserting ``179C,'' 
     after ``section''.
       (3) Section 312(k)(3)(B), as amended by this Act, is 
     amended by striking ``or 179B'' each place it appears in the 
     heading and text and inserting ``179B, or 179C''.
       (4) Section 1016(a), as amended by this Act, is amended by 
     striking ``and'' at the end of paragraph (32), by striking 
     the period at the end of paragraph (33) and inserting ``, 
     and'', and by adding at the end the following new paragraph:
       ``(34) to the extent provided in section 179C(c).''
       (5) Paragraphs (2)(C) and (3)(C) of section 1245(a), as 
     amended by this Act, are each amended by inserting ``179C,'' 
     after ``179B,''.
       (5) The table of sections for part VI of subchapter B of 
     chapter 1, as amended by this Act, is amended by inserting 
     after the item relating to section 179B the following new 
     item:

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

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

[[Page 6561]]



     SEC. 844. CREDIT FOR PRODUCTION OF LOW SULFUR DIESEL FUEL.

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

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

       ``(a) In General.--For purposes of section 38, the amount 
     of the low sulfur diesel fuel production credit determined 
     under this section with respect to any facility of a small 
     business refiner is an amount equal to 5 cents for each 
     gallon of low sulfur diesel fuel produced during the taxable 
     year by such small business refiner at such facility.
       ``(b) Maximum Credit.--
       ``(1) In general.--The aggregate credit determined under 
     subsection (a) for any taxable year with respect to any 
     facility shall not exceed--
       ``(A) 25 percent of the qualified capital costs incurred by 
     the small business refiner with respect to such facility, 
     reduced by
       ``(B) the aggregate credits determined under this section 
     for all prior taxable years with respect to such facility.
       ``(2) Reduced percentage.--In the case of a small business 
     refiner with average daily domestic refinery runs for the 1-
     year period ending on December 31, 2002, in excess of 155,000 
     barrels, the number of percentage points described in 
     paragraph (1) shall be reduced (not below zero) by the 
     product of such number (before the application of this 
     paragraph) and the ratio of such excess to 50,000 barrels. 
     For purposes of calculating such average daily domestic 
     refinery runs, only refineries of the refiner or a related 
     person (within the meaning of section 613A(d)(3)) on April 1, 
     2003, shall be taken into account.
       ``(c) Definitions and Special Rule.--For purposes of this 
     section--
       ``(1) Small business refiner.--The term `small business 
     refiner' means, with respect to any taxable year, a refiner 
     of crude oil--
       ``(A) with respect to which not more than 1,500 individuals 
     are engaged in the refinery operations of the business on any 
     day during such taxable year, and
       ``(B) the average daily domestic refinery run or average 
     retained production of which for all facilities of the 
     taxpayer for the 1-year period ending on December 31, 2002, 
     did not exceed 205,000 barrels.

     For purposes of calculating such average daily domestic 
     refinery run or retained production, only refineries of the 
     refiner or a related person (within the meaning of section 
     613A(d)(3)) on April 1, 2003, shall be taken into account.
       ``(2) Qualified capital costs.--The term `qualified capital 
     costs' means, with respect to any facility, those costs paid 
     or incurred during the applicable period for compliance with 
     the applicable EPA regulations with respect to such facility, 
     including expenditures for the construction of new process 
     operation units or the dismantling and reconstruction of 
     existing process units to be used in the production of low 
     sulfur diesel fuel, associated adjacent or offsite equipment 
     (including tankage, catalyst, and power supply), engineering, 
     construction period interest, and sitework.
       ``(3) Applicable epa regulations.--The term `applicable EPA 
     regulations' means the Highway Diesel Fuel Sulfur Control 
     Requirements of the Environmental Protection Agency.
       ``(4) Applicable period.--The term `applicable period' 
     means, with respect to any facility, the period beginning on 
     January 1, 2003, and ending on the earlier of the date which 
     is 1 year after the date on which the taxpayer must comply 
     with the applicable EPA regulations with respect to such 
     facility or December 31, 2009.
       ``(5) Low sulfur diesel fuel.--The term `low sulfur diesel 
     fuel' means diesel fuel with a sulfur content of 15 parts per 
     million or less.
       ``(6) Special rule for determination of refinery runs.--
     Refinery runs shall be determined under rules similar to the 
     rules under section 613A(d)(4).
       ``(d) Reduction in Basis.--For purposes of this subtitle, 
     if a credit is determined under this section for any 
     expenditure with respect to any property, the increase in 
     basis of such property which would (but for this subsection) 
     result from such expenditure shall be reduced by the amount 
     of the credit so determined.
       ``(e) Certification.--
       ``(1) Required.--No credit shall be allowed unless, not 
     later than the date which is 30 months after the first day of 
     the first taxable year in which the low sulfur diesel fuel 
     production credit is allowed with respect to a facility, the 
     small business refiner obtains certification from the 
     Secretary, after consultation with the Administrator of the 
     Environmental Protection Agency, that the taxpayer's 
     qualified capital costs with respect to such facility will 
     result in compliance with the applicable EPA regulations.
       ``(2) Contents of application.--An application for 
     certification shall include relevant information regarding 
     unit capacities and operating characteristics sufficient for 
     the Secretary, after consultation with the Administrator of 
     the Environmental Protection Agency, to determine that such 
     qualified capital costs are necessary for compliance with the 
     applicable EPA regulations.
       ``(3) Review period.--Any application shall be reviewed and 
     notice of certification, if applicable, shall be made within 
     60 days of receipt of such application. In the event the 
     Secretary does not notify the taxpayer of the results of such 
     certification within such period, the taxpayer may presume 
     the certification to be issued until so notified.
       ``(4) Statute of limitations.--With respect to the credit 
     allowed under this section--
       ``(A) the statutory period for the assessment of any 
     deficiency attributable to such credit shall not expire 
     before the end of the 3-year period ending on the date that 
     the review period described in paragraph (3) ends with 
     respect to the taxpayer, and
       ``(B) such deficiency may be assessed before the expiration 
     of such 3-year period notwithstanding the provisions of any 
     other law or rule of law which would otherwise prevent such 
     assessment.
       ``(f) Cooperative Organizations.--
       ``(1) Apportionment of credit.--
       ``(A) In general.--In the case of a cooperative 
     organization described in section 1381(a), any portion of the 
     credit determined under subsection (a) for the taxable year 
     may, at the election of the organization, be apportioned 
     among patrons eligible to share in patronage dividends on the 
     basis of the quantity or value of business done with or for 
     such patrons for the taxable year.
       ``(B) Form and effect of election.--An election under 
     subparagraph (A) for any taxable year shall be made on a 
     timely filed return for such year. Such election, once made, 
     shall be irrevocable for such taxable year.
       ``(2) Treatment of organizations and patrons.--
       ``(A) Organizations.--The amount of the credit not 
     apportioned to patrons pursuant to paragraph (1) shall be 
     included in the amount determined under subsection (a) for 
     the taxable year of the organization.
       ``(B) Patrons.--The amount of the credit apportioned to 
     patrons pursuant to paragraph (1) shall be included in the 
     amount determined under subsection (a) for the first taxable 
     year of each patron ending on or after the last day of the 
     payment period (as defined in section 1382(d)) for the 
     taxable year of the organization or, if earlier, for the 
     taxable year of each patron ending on or after the date on 
     which the patron receives notice from the cooperative of the 
     apportionment.
       ``(3) Special rule.--If for any reason the tax imposed with 
     respect to any patron of a cooperative organization would, 
     but for this paragraph, be increased by any amount by reason 
     of a credit apportioned to such patron under this 
     subsection--
       ``(A) the amount of such increase in tax shall not be 
     imposed on such patron, and
       ``(B) the tax imposed by this chapter on such organization 
     shall be increased by such amount.

     The increase under subparagraph (B) shall not be treated as 
     tax imposed by this chapter for purposes of determining the 
     amount of any credit under this chapter or for purposes of 
     section 55.''.
       (b) Credit Made Part of General Business Credit.--
     Subsection (b) of section 38 (relating to general business 
     credit), as amended by this Act, is amended by striking 
     ``plus'' at the end of paragraph (26), by striking the period 
     at the end of paragraph (27) and inserting ``, plus'', and by 
     adding at the end the following new paragraph:
       ``(28) in the case of a small business refiner, the low 
     sulfur diesel fuel production credit determined under section 
     45P(a).''.
       (c) Denial of Double Benefit.--Section 280C (relating to 
     certain expenses for which credits are allowable) is amended 
     by adding after subsection (d) the following new subsection:
       ``(e) Low Sulfur Diesel Fuel Production Credit.--No 
     deduction shall be allowed for that portion of the expenses 
     otherwise allowable as a deduction for the taxable year which 
     is equal to the amount of the credit determined for the 
     taxable year under section 45P(a).''.
       (d) Basis Adjustment.--Section 1016(a) (relating to 
     adjustments to basis), as amended by this Act, is amended by 
     striking ``and'' at the end of paragraph (33), by striking 
     the period at the end of paragraph (34) and inserting ``, 
     and'', and by adding at the end the following new paragraph:
       ``(35) in the case of a facility with respect to which a 
     credit was allowed under section 45P, to the extent provided 
     in section 45P(d).''.
       (e) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by adding at the end the following new item:

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

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

     SEC. 845. DETERMINATION OF SMALL REFINER EXCEPTION TO OIL 
                   DEPLETION DEDUCTION.

       (a) In General.--Paragraph (4) of section 613A(d) (relating 
     to limitations on application of subsection (c)) is amended 
     to read as follows:

[[Page 6562]]

       ``(4) Certain refiners excluded.--If the taxpayer or 1 or 
     more related persons engages in the refining of crude oil, 
     subsection (c) shall not apply to the taxpayer for a taxable 
     year if the average daily refinery runs of the taxpayer and 
     such persons for the taxable year exceed 60,000 barrels. For 
     purposes of this paragraph, the average daily refinery runs 
     for any taxable year shall be determined by dividing the 
     aggregate refinery runs for the taxable year by the number of 
     days in the taxable year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after December 31, 2004.

     SEC. 846. MARGINAL PRODUCTION INCOME LIMIT EXTENSION.

       Section 613A(c)(6)(H) (relating to temporary suspension of 
     taxable income limit with respect to marginal production) is 
     amended by striking ``2005'' and inserting ``2007''.

     SEC. 847. AMORTIZATION OF DELAY RENTAL PAYMENTS.

       (a) In General.--Section 167 (relating to depreciation) is 
     amended by redesignating subsection (h) as subsection (i) and 
     by inserting after subsection (g) the following new 
     subsection:
       ``(h) Amortization of Delay Rental Payments for Domestic 
     Oil and Gas Wells.--
       ``(1) In general.--Any delay rental payment paid or 
     incurred in connection with the development of oil or gas 
     wells within the United States (as defined in section 638) 
     shall be allowed as a deduction ratably over the 24-month 
     period beginning on the date that such payment was paid or 
     incurred.
       ``(2) Half-year convention.--For purposes of paragraph (1), 
     any payment paid or incurred during the taxable year shall be 
     treated as paid or incurred on the mid-point of such taxable 
     year.
       ``(3) Exclusive method.--Except as provided in this 
     subsection, no depreciation or amortization deduction shall 
     be allowed with respect to such payments.
       ``(4) Treatment upon abandonment.--If any property to which 
     a delay rental payment relates is retired or abandoned during 
     the 24-month period described in paragraph (1), no deduction 
     shall be allowed on account of such retirement or abandonment 
     and the amortization deduction under this subsection shall 
     continue with respect to such payment.
       ``(5) Delay rental payments.--For purposes of this 
     subsection, the term `delay rental payment' means an amount 
     paid for the privilege of deferring development of an oil or 
     gas well under an oil or gas lease.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred in taxable years 
     beginning after December 31, 2004.

     SEC. 848. AMORTIZATION OF GEOLOGICAL AND GEOPHYSICAL 
                   EXPENDITURES.

       (a) In General.--Section 167 (relating to depreciation), as 
     amended by this Act, is amended by redesignating subsection 
     (i) as subsection (j) and by inserting after subsection (h) 
     the following new subsection:
       ``(i) Amortization of Geological and Geophysical 
     Expenditures.--
       ``(1) In general.--Any geological and geophysical expenses 
     paid or incurred in connection with the exploration for, or 
     development of, oil or gas within the United States (as 
     defined in section 638) shall be allowed as a deduction 
     ratably over the 24-month period beginning on the date that 
     such expense was paid or incurred.
       ``(2) Special rules.--For purposes of this subsection, 
     rules similar to the rules of paragraphs (2), (3), and (4) of 
     subsection (h) shall apply.''.
       (b) Conforming Amendment.--Section 263A(c)(3) is amended by 
     inserting ``167(h), 167(i),'' after ``under section''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to costs paid or incurred in taxable years 
     beginning after December 31, 2004.

     SEC. 849. EXTENSION AND MODIFICATION OF CREDIT FOR PRODUCING 
                   FUEL FROM A NONCONVENTIONAL SOURCE.

       (a) In General.--Section 29 (relating to credit for 
     producing fuel from a nonconventional source) is amended by 
     adding at the end the following new subsection:
       ``(h) Extension for Other Facilities.--
       ``(1) Oil and gas.--In the case of a well or facility for 
     producing qualified fuels described in subparagraph (A) or 
     (B) of subsection (c)(1) which was drilled or placed in 
     service after December 31, 2004, and before January 1, 2007, 
     notwithstanding subsection (f), this section shall apply with 
     respect to such fuels produced at such well or facility 
     before the close of the 3-year period beginning on the date 
     that such well is drilled or such facility is placed in 
     service.
       ``(2) Facilities producing fuels from agricultural and 
     animal waste.--
       ``(A) In general.--In the case of a facility for producing 
     liquid, gaseous, or solid fuels from qualified agricultural 
     and animal wastes, including such fuels when used as 
     feedstocks, which was placed in service after December 31, 
     2004, and before January 1, 2007, this section shall apply 
     with respect to fuel produced at such facility before the 
     close of the 3-year period beginning on the date such 
     facility is placed in service.
       ``(B) Qualified agricultural and animal waste.--For 
     purposes of this paragraph, the term `qualified agricultural 
     and animal waste' means agriculture and animal waste, 
     including by-products, packaging, and any materials 
     associated with the processing, feeding, selling, 
     transporting, or disposal of agricultural or animal products 
     or wastes.
       ``(3) Wells producing viscous oil.--
       ``(A) In general.--In the case of a well for producing 
     viscous oil which was placed in service after December 31, 
     2004, and before January 1, 2007, this section shall apply 
     with respect to fuel produced at such well before the close 
     of the 3-year period beginning on the date such well is 
     placed in service.
       ``(B) Viscous oil.--The term `viscous oil' means heavy oil, 
     as defined in section 613A(c)(6), except that--
       ``(i) `22 degrees' shall be substituted for `20 degrees' in 
     applying subparagraph (F) thereof, and
       ``(ii) in all cases, the oil gravity shall be measured from 
     the initial well-head samples, drill cuttings, or down hole 
     samples.
       ``(C) Waiver of unrelated person requirement.--In the case 
     of viscous oil, the requirement under subsection (a)(2)(A) of 
     a sale to an unrelated person shall not apply to any sale to 
     the extent that the viscous oil is not consumed in the 
     immediate vicinity of the wellhead.
       ``(4) Facilities producing refined coal.--
       ``(A) In general.--In the case of a facility described in 
     subparagraph (C) for producing refined coal which was placed 
     in service after December 31, 2004, and before January 1, 
     2007, this section shall apply with respect to fuel produced 
     at such facility before the close of the 5-year period 
     beginning on the date such facility is placed in service.
       ``(B) Refined coal.--For purposes of this paragraph, the 
     term `refined coal' means a fuel which is a liquid, gaseous, 
     or solid synthetic fuel produced from coal (including 
     lignite) or high carbon fly ash, including such fuel used as 
     a feedstock.
       ``(C) Covered facilities.--
       ``(i) In general.--A facility is described in this 
     subparagraph if such facility produces refined coal using a 
     technology which results in--

       ``(I) a qualified emission reduction, and
       ``(II) a qualified enhanced value.

       ``(ii) Qualified emission reduction.--For purposes of this 
     subparagraph, the term `qualified emission reduction' means a 
     reduction of at least 20 percent of the emissions of nitrogen 
     oxide and either sulfur dioxide or mercury released when 
     burning the refined coal (excluding any dilution caused by 
     materials combined or added during the production process), 
     as compared to the emissions released when burning the 
     feedstock coal or comparable coal predominantly available in 
     the marketplace as of January 1, 2004.
       ``(iii) Qualified enhanced value.--For purposes of this 
     subparagraph, the term `qualified enhanced value' means an 
     increase of at least 50 percent in the market value of the 
     refined coal (excluding any increase caused by materials 
     combined or added during the production process), as compared 
     to the value of the feedstock coal.
       ``(iv) Qualifying advanced clean coal technology units 
     excluded.--A facility described in this subparagraph shall 
     not include a qualifying advanced clean coal technology unit 
     (as defined in section 48A(b)).
       ``(5) Coalmine gas.--
       ``(A) In general.--This section shall apply to coalmine 
     gas--
       ``(i) captured or extracted by the taxpayer during the 
     period beginning after December 31, 2004, and ending before 
     January 1, 2007, and
       ``(ii) utilized as a fuel source or sold by or on behalf of 
     the taxpayer to an unrelated person during such period.
       ``(B) Coalmine gas.--For purposes of this paragraph, the 
     term `coalmine gas' means any methane gas which is--
       ``(i) liberated during or as a result of coal mining 
     operations, or
       ``(ii) extracted up to 10 years in advance of coal mining 
     operations as part of a specific plan to mine a coal deposit.
       ``(C) Special rule for advanced extraction.--In the case of 
     coalmine gas which is captured in advance of coal mining 
     operations, the credit under subsection (a) shall be allowed 
     only after the date the coal extraction occurs in the 
     immediate area where the coalmine gas was removed.
       ``(D) Noncompliance with pollution laws.--This paragraph 
     shall not apply to the capture or extraction of coalmine gas 
     from coal mining operations with respect to any period in 
     which such coal mining operations are not in compliance with 
     applicable State and Federal pollution prevention, control, 
     and permit requirements.
       ``(6) Special rules.--In determining the amount of credit 
     allowable under this section solely by reason of this 
     subsection--
       ``(A) Fuels treated as qualified fuels.--Any fuel described 
     in paragraph (2), (3), (4), or (5) shall be treated as a 
     qualified fuel for purposes of this section.
       ``(B) Daily limit.--The amount of qualified fuels described 
     in subparagraph (A) or (B)(i) of subsection (c)(1) sold 
     during any taxable year which may be taken into account by 
     reason of this subsection with respect to any project shall 
     not exceed an average barrel-of-oil equivalent of 200,000 
     cubic feet of natural gas per day. Days before the date the 
     project is placed in service shall not be taken into account 
     in determining such average.

[[Page 6563]]

       ``(C) Extension period to commence with unadjusted credit 
     amount and new phaseout adjustment.--For purposes of applying 
     subsection (b)(2), in the case of fuels sold after 2003--
       ``(i) paragraphs (1)(A) and (2) of subsection (b) shall be 
     applied by subtituting `$35.00' for `$23.50', and
       ``(ii) subparagraph (B) of subsection (d)(2) shall be 
     applied by substituting `2002' for `1979' in determining such 
     dollar amounts.''.
       (b) Extension for certain fuel produced at existing 
     facilities.--
       (1) Extension.--Section 29(f)(2) (relating to application 
     of section) is amended by inserting ``(January 1, 2006, in 
     the case of any coke, coke gas, or natural gas and byproducts 
     produced by coal gasification from lignite in a facility 
     described in paragraph (1)(B))'' after ``January 1, 2003''.
       (2) Use of credit as an offset.--Section 29, as amended by 
     subsection (a), is amended by adding the end the following 
     new subsection;
       ``(i) Use of Credit as an Offset.--
       ``(1) In general.--Any credit allowable under subsection 
     (a) with respect to any natural gas and byproducts produced 
     by coal gasification from lignite in a facility described in 
     paragraph (1)(B) owned by a person described in section 
     1381(a)(2)(C) or subsidiaries of such person may be used as 
     provided in paragraph (2).''.
       ``(2) Use of credit as an offset.--Notwithstanding any 
     other provision of law, in the case of a person described in 
     paragraph (1), any credit to which paragraph (1) applies may 
     be applied by such person--
       ``(A) to the extent provided by the Secretary of 
     Agriculture, as a prepayment of any loan, debt, or other 
     obligation the entity has incurred under subchapter I of 
     chapter 31 of title 7 of the Rural Electrification Act of 
     1936 (7 U.S.C. 901 et seq.), as in effect on the date of the 
     enactment of the Energy Tax Incentives Act of 2003, and
       ``(B) to the extent provided by the Secretary of Energy, as 
     a prepayment not to exceed 50 percent of any obligation the 
     person has incurred pursuant to an asset purchase agreement 
     entered into with the Secretary and dated October 7, 1988.
       ``(3) Credit not income.--Any use under paragraph (2) of 
     any credit to which paragraph (1) applies shall not be 
     treated as income for purposes of this title.
       ``(4) Treatment of unrelated persons.--For purposes of 
     subsection (a)(2)(A), sales of qualified fuels among and 
     between persons described in paragraph (1) shall be treated 
     as sales between unrelated parties.''.
       (c) Treatment as Business Credit.--
       (1) Credit moved to subpart relating to business related 
     credits.--The Internal Revenue Code of 1986, as amended by 
     this Act, is amended by redesignating section 29, as amended 
     by this Act, as section 45R and by moving section 45R (as so 
     redesignated) from subpart B of part IV of subchapter A of 
     chapter 1 to the end of subpart D of part IV of subchapter A 
     of chapter 1.
       (2) Credit Treated as Business Credit.--Section 38(b) is 
     amended by striking ``plus'' at the end of paragraph (29), by 
     striking the period at the end of paragraph (30) and 
     inserting ``, plus'', and by adding at the end the following:
       ``(31) the nonconventional source production credit 
     determined under section 45R(a).''.
       (3) Conforming Amendments.--
       (A) Section 30(b)(2)(A), as redesignated by this Act, is 
     amended by striking ``sections 27 and 29'' and inserting 
     ``section 27''.
       (B) Sections 43(b)(2) and 613A(c)(6)(C) are each amended by 
     striking ``section 29(d)(2)(C)'' and inserting ``section 
     45R(d)(2)(C)''.
       (C) Section 45R(a), as redesignated by paragraph (1), is 
     amended by striking ``At the election of the taxpayer, there 
     shall be allowed as a credit against the tax imposed by this 
     chapter for the taxable year'' and inserting ``For purposes 
     of section 38, if the taxpayer elects to have this section 
     apply, the nonconventional source production credit 
     determined under this section for the taxable year is''.
       (D) Section 45R(b), as so redesignated, is amended by 
     striking paragraph (6).
       (E) Section 53(d)(1)(B)(iii) is amended by striking ``under 
     section 29'' and all that follows through ``or not allowed''.
       (F) Section 55(c)(2) is amended by striking ``29(b)(6),''.
       (G) Subsection (a) of section 772 is amended by inserting 
     ``and'' at the end of paragraph (9), by striking paragraph 
     (10), and by redesignating paragraph (11) as paragraph (10).
       (H) Paragraph (5) of section 772(d) is amended by striking 
     ``the foreign tax credit, and the credit allowable under 
     section 29'' and inserting ``and the foreign tax credit''.
       (I) The table of sections for subpart B of part IV of 
     subchapter A of chapter 1 is amended by striking the item 
     relating to section 29.
       (J) The table of sections for subpart D of part IV of 
     subchapter A of chapter 1, as amended by this Act, is amended 
     by inserting after the item relating to section 45Q the 
     following new item:

``Sec. 45R. Credit for producing fuel from a nonconventional source.''.

       (d) Study of Coalbed Methane.--
       (1) In general.--The Secretary of the Treasury shall 
     conduct a study regarding the effect of section 45R of the 
     Internal Revenue Code of 1986 on the production of coalbed 
     methane.
       (2) Contents of study.--The study under paragraph (1) shall 
     estimate the total amount of credits under section 45R of the 
     Internal Revenue Code of 1986 claimed annually and in the 
     aggregate which are related to the production of coalbed 
     methane since the date of the enactment of such section 45R. 
     Such study shall report the annual value of such credits 
     allowable for coalbed methane compared to the average annual 
     wellhead price of natural gas (per thousand cubic feet of 
     natural gas). Such study shall also estimate the incremental 
     increase in production of coalbed methane which has resulted 
     from the enactment of such section 45R, and the cost to the 
     Federal Government, in terms of the net tax benefits claimed, 
     per thousand cubic feet of incremental coalbed methane 
     produced annually and in the aggregate since such enactment.
       (e) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to fuel sold 
     after December 31, 2004, in taxable years ending after such 
     date.
       (2) Existing facilities.--The amendments made by subsection 
     (b) shall apply to fuel sold after December 31, 2002, in 
     taxable years ending after such date.
       (3) Treatment as business credit.--The amendments made by 
     subsection (c) shall apply to taxable years ending after 
     December 31, 2003.

     SEC. 850. NATURAL GAS DISTRIBUTION LINES TREATED AS 15-YEAR 
                   PROPERTY.

       (a) In General.--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 
     by inserting ``, and'', and by adding at the end the 
     following new clause:
       ``(iv) any natural gas distribution line.''.
       (b) Alternative System.--The table contained in section 
     168(g)(3)(B) (relating to special rule for certain property 
     assigned to classes), as amended by this Act, is amended by 
     adding after the item relating to subparagraph (E)(iii) the 
     following new item:

``(E)(iv).........................................................35''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2004, in taxable years ending after such date.

     SEC. 851. CREDIT FOR ALASKA NATURAL GAS.

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

     ``SEC. 45Q. ALASKA NATURAL GAS.

       ``(a) In General.--For purposes of section 38, the Alaska 
     natural gas credit for any taxable year is an amount equal to 
     the product of--
       ``(1) the credit amount, and
       ``(2) Alaska natural gas the production of which is 
     attributable to the taxpayer.
       ``(b) Credit Amount.--For purposes of this section--
       ``(1) In general.--The credit amount is $0.52 per 1,000,000 
     Btu of Alaska natural gas.
       ``(2) Reduction as gas prices increase.--
       ``(A) In general.--The dollar amount under paragraph (1) 
     shall be reduced (but not below zero) by an amount which 
     bears the same ratio to such amount (determined without 
     regard to this paragraph) as--
       ``(i) the excess (if any) of the applicable reference price 
     over $0.83, bears to
       ``(ii) $0.52.
       ``(B) Applicable reference price.--For purposes of this 
     paragraph--
       ``(i) In general.--The applicable reference price for any 
     calendar month in a taxable year is the reference price for 
     the calendar month in which production occurs.
       ``(ii) Reference price.--The term `reference price' means, 
     with respect to any calendar month, a published market price 
     for natural gas in United States dollars per 1,000,000 Btu 
     (reduced by any gas transportation costs and gas processing 
     costs as determined by the appropriate national regulatory 
     body for natural gas transportation) as determined under 
     regulations by the Secretary.
       ``(C) Inflation adjustment.--
       ``(i) In general.--In the case of any taxable year 
     beginning in a calendar year after 2005, each of the dollar 
     amounts contained in paragraph (1) and subparagraph (A) of 
     this paragraph shall be increased to an amount equal to such 
     dollar amount multiplied by the inflation adjustment factor 
     for such calendar year.
       ``(ii) Inflation adjustment factor.--For purposes of clause 
     (i)--

       ``(I) In general.--The term `inflation adjustment factor' 
     means, with respect to a calendar year, a fraction the 
     numerator of which is the GDP implicit price deflator for the 
     preceding calendar year and the denominator of which is the 
     GDP implicit price deflator for the calendar year 2004.
       ``(II) GDP implicit price deflator.--The term `GDP implicit 
     price deflator' means, for any calendar year, the most recent 
     revision of the implicit price deflator for the gross 
     domestic product as of June 30 of such calendar year as 
     computed by the Department

[[Page 6564]]

     of Commerce before October 1 of such calendar year.

       ``(c) Alaska Natural Gas.--For purposes of this section--
       ``(1) In general.--The term `Alaska natural gas' means 
     natural gas entering the Alaska natural gas pipeline (as 
     defined in section 168(i)(18) (determined without regard to 
     subparagraph (B) thereof)) which is produced from a well--
       ``(A) located in the area of the State of Alaska lying 
     north of 64 degrees North latitude, determined by excluding 
     the area of the Alaska National Wildlife Refuge (including 
     the continental shelf thereof within the meaning of section 
     638(1)), and
       ``(B) pursuant to the applicable State and Federal 
     pollution prevention, control, and permit requirements from 
     such area (including the continental shelf thereof within the 
     meaning of section 638(1)).
       ``(2) Natural gas.--The term `natural gas' has the meaning 
     given such term by section 613A(e)(2).
       ``(d) Special Rules.--For purposes of this section--
       ``(1) Production attributable to the taxpayer.--
       ``(A) In general.--In the case of a well in which there is 
     more than 1 person or entity--
       ``(i) entitled to production of Alaska natural gas, or
       ``(ii) at the election of such person or entity, entitled 
     to the value of production as either an operating interest 
     owner or a royalty interest owner,

     the portion of such production attributable to such person or 
     entity shall be determined on the basis of the ratio which 
     the person's or entity's interest in the production or the 
     value of production bears to the aggregate of the interests 
     of all such persons or entities. Production otherwise 
     attributable to a United States tax-exempt person or entity 
     by reason of a royalty interest shall be attributable to such 
     person or entity with respect to whom royalty-in-value 
     production remains or to whom royalty-in-kind production is 
     sold.
       ``(B) Partnership properties.--In the case of a 
     partnership, for purposes of applying subparagraph (A), 
     production shall be attributable to its partners based on 
     each partner's distributive share of Alaska natural gas which 
     is produced from partnership properties and attributable to 
     the partnership or its partners under subparagraph (A).
       ``(2) Pass-Thru in the Case of Estates and Trusts.--Under 
     regulations prescribed by the Secretary, rules similar to the 
     rules of subsection (d) of section 52 shall apply.
       ``(e) Application of Section.--This section shall apply to 
     Alaska natural gas during the period--
       ``(1) beginning with the later of--
       ``(A) January 1, 2010, or
       ``(B) the initial date for the interstate transportation of 
     such Alaska natural gas, and
       ``(2) ending with the date which is 25 years after the date 
     described in paragraph (1).''.
       (b) Credit Treated as Business Credit.--Section 38(b) 
     (relating to current year business credit), as amended by 
     this Act, is amended by striking ``plus'' at the end of 
     paragraph (27), by striking the period at the end of 
     paragraph (28) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(29) The Alaska natural gas credit determined under 
     section 45Q(a).''.
       (c) Allowing Credit Against Entire Regular Tax and Minimum 
     Tax.--
       (1) In general.--Section 38(c) (relating to limitation 
     based on amount of tax), as amended by this Act, is amended 
     by redesignating paragraph (5) as paragraph (6) and by 
     inserting after paragraph (4) the following new paragraph:
       ``(5) Special rules for alaska natural gas credit.--
       ``(A) In general.--In the case of the Alaska natural gas 
     credit--
       ``(i) this section and section 39 shall be applied 
     separately with respect to the credit, and
       ``(ii) in applying paragraph (1) to the credit--

       ``(I) the amounts in subparagraphs (A) and (B) thereof 
     shall be treated as being zero, and
       ``(II) the limitation under paragraph (1) (as modified by 
     subclause (I)) shall be reduced by the credit allowed under 
     subsection (a) for the taxable year (other than the Alaska 
     natural gas credit).

       ``(B) Alaska Natural Gas Credit.--For purposes of this 
     subsection, the term `Alaska natural gas credit' means the 
     credit allowable under subsection (a) by reason of section 
     45Q(a).''.
       (2) Conforming amendments.--Subclause (II) of section 
     38(c)(2)(A)(ii), as amended by this Act, subclause (II) of 
     section 38(c)(3)(A)(ii), as amended by this Act, and 
     subclause (II) of section 38(c)(4)(A)(ii), as added by this 
     Act, are each amended by inserting ``or the Alaska natural 
     gas credit'' after ``specified credits''.
       (d) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1, as amended by this 
     Act, is amended by adding at the end the following new item:

``Sec. 45Q. Alaska natural gas.''.

     SEC. 852. CERTAIN ALASKA NATURAL GAS PIPELINE PROPERTY 
                   TREATED AS 7-YEAR PROPERTY.

       (a) In General.--Section 168(e)(3)(C) (defining 7-year 
     property), as amended by this Act, is amended by striking 
     ``and'' at the end of clause (ii), by redesignating clause 
     (iii) as clause (iv), and by inserting after clause (ii) the 
     following new clause:
       ``(iii) any Alaska natural gas pipeline, and''.
       (b) Alaska Natural Gas Pipeline.--Section 168(i) (relating 
     to definitions and special rules), as amended by this Act, is 
     amended by adding at the end the following new paragraph:
       ``(18) Alaska natural gas pipeline.--The term `Alaska 
     natural gas pipeline' means the natural gas pipeline system 
     located in the State of Alaska which--
       ``(A) has a capacity of more than 500,000,000,000 Btu of 
     natural gas per day, and
       ``(B) is--
       ``(i) placed in service after December 31, 2012, or
       ``(ii) treated as placed in service on January 1, 2013, if 
     the taxpayer who places such system in service before January 
     1, 2013, elects such treatment.

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

``(C)(iii)........................................................22''.

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

     SEC. 853. EXTENSION OF ENHANCED OIL RECOVERY CREDIT TO 
                   CERTAIN ALASKA FACILITIES.

       (a) In General.--Section 43(c)(1) (defining qualified 
     enhanced oil recovery costs) is amended by adding at the end 
     the following new subparagraph:
       ``(D) Any amount which is paid or incurred during the 
     taxable year to construct a gas treatment plant which--
       ``(i) is located in the area of the United States (within 
     the meaning of section 638(1)) lying north of 64 degrees 
     North latitude,
       ``(ii) prepares Alaska natural gas (as defined in section 
     45Q(c)(1)) for transportation through a pipeline with a 
     capacity of at least 2,000,000,000,000 Btu of natural gas per 
     day, and
       ``(iii) produces carbon dioxide which is injected into 
     hydrocarbon-bearing geological formations.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to costs paid or incurred in taxable years 
     beginning after December 31, 2004.

     SEC. 854. ARBITRAGE RULES NOT TO APPLY TO PREPAYMENTS FOR 
                   NATURAL GAS.

       (a) In General.--Section 148(b) (relating to higher 
     yielding investments) is amended by adding at the end the 
     following new paragraph:
       ``(4) Safe harbor for prepaid natural gas.--
       ``(A) In general.--The term `investment-type property' does 
     not include a prepayment under a qualified natural gas supply 
     contract.
       ``(B) Qualified natural gas supply contract.--For purposes 
     of this paragraph, the term `qualified natural gas supply 
     contract' means any contract to acquire natural gas for 
     resale by or for a utility owned by a governmental unit if 
     the amount of gas permitted to be acquired under the contract 
     for the utility during any year does not exceed the sum of--
       ``(i) the annual average amount during the testing period 
     of natural gas purchased (other than for resale) by customers 
     of such utility who are located within the service area of 
     such utility, and
       ``(ii) the amount of natural gas to be used to transport 
     the prepaid natural gas to the utility during such year.
       ``(C) Natural gas used to generate electricity.--Natural 
     gas used to generate electricity shall be taken into account 
     in determining the average under subparagraph (B)(i)--
       ``(i) only if the electricity is generated by a utility 
     owned by a governmental unit, and
       ``(ii) only to the extent that the electricity is sold 
     (other than for resale) to customers of such utility who are 
     located within the service area of such utility.
       ``(D) Adjustments for changes in customer base.--
       ``(i) New business customers.--If--

       ``(I) after the close of the testing period and before the 
     date of issuance of the issue, the utility owned by a 
     governmental unit enters into a contract to supply natural 
     gas (other than for resale) for use by a business at a 
     property within the service area of such utility, and
       ``(II) the utility did not supply natural gas to such 
     property during the testing period or the ratable amount of 
     natural gas to be supplied under the contract is 
     significantly greater than the ratable amount of gas supplied 
     to such property during the testing period,

     then a contract shall not fail to be treated as a qualified 
     natural gas supply contract by

[[Page 6565]]

     reason of supplying the additional natural gas under the 
     contract referred to in subclause (I).
       ``(ii) Overall limitation.--The average under subparagraph 
     (B)(i) shall not exceed the annual amount of natural gas 
     reasonably expected to be purchased (other than for resale) 
     by persons who are located within the service area of such 
     utility and who, as of the date of issuance of the issue, are 
     customers of such utility.
       ``(E) Ruling requests.--The Secretary may increase the 
     average under subparagraph (B)(i) for any period if the 
     utility owned by the governmental unit establishes to the 
     satisfaction of the Secretary that, based on objective 
     evidence of growth in natural gas consumption or population, 
     such average would otherwise be insufficient for such period.
       ``(F) Adjustment for natural gas otherwise on hand.--
       ``(i) In general.--The amount otherwise permitted to be 
     acquired under the contract for any period shall be reduced 
     by--

       ``(I) the applicable share of natural gas held by the 
     utility on the date of issuance of the issue, and
       ``(II) the natural gas (not taken into account under 
     subclause (I)) which the utility has a right to acquire 
     during such period (determined as of the date of issuance of 
     the issue).

       ``(ii) Applicable share.--For purposes of clause (i), the 
     term `applicable share' means, with respect to any period, 
     the natural gas allocable to such period if the gas were 
     allocated ratably over the period to which the prepayment 
     relates.
       ``(G) Intentional acts.--Subparagraph (A) shall cease to 
     apply to any issue if the utility owned by the governmental 
     unit engages in any intentional act to render the volume of 
     natural gas acquired by such prepayment to be in excess of 
     the sum of--
       ``(i) the amount of natural gas needed (other than for 
     resale) by customers of such utility who are located within 
     the service area of such utility, and
       ``(ii) the amount of natural gas used to transport such 
     natural gas to the utility.
       ``(H) Testing period.--For purposes of this paragraph, the 
     term `testing period' means, with respect to an issue, the 
     most recent 5 calendar years ending before the date of 
     issuance of the issue.
       ``(I) Service area.--For purposes of this paragraph, the 
     service area of a utility owned by a governmental unit shall 
     be comprised of--
       ``(i) any area throughout which such utility provided at 
     all times during the testing period--

       ``(I) in the case of a natural gas utility, natural gas 
     transmission or distribution services, and
       ``(II) in the case of an electric utility, electricity 
     distribution services,

       ``(ii) any area within a county contiguous to the area 
     described in clause (i) in which retail customers of such 
     utility are located if such area is not also served by 
     another utility providing natural gas or electricity 
     services, as the case may be, and
       ``(iii) any area recognized as the service area of such 
     utility under State or Federal law.''.
       (b) Private Loan Financing Test Not To Apply to Prepayments 
     for Natural Gas.--Section 141(c)(2) (providing exceptions to 
     the private loan financing test) is amended by striking 
     ``or'' at the end of subparagraph (A), by striking the period 
     at the end of subparagraph (B) and inserting ``, or'', and by 
     adding at the end the following new subparagraph:
       ``(C) is a qualified natural gas supply contract (as 
     defined in section 148(b)(4)).''.
       (c) Conforming Amendment.--Section 141(d) is amended by 
     adding at the end the following new paragraph:
       ``(7) Exception for qualified electric and natural gas 
     supply contracts.--The term `nongovernmental output property' 
     shall not include any contract for the prepayment of 
     electricity or natural gas which is not investment property 
     under section 148(b)(2).''.
       (d) Effective Date.--The amendment made by this section 
     shall apply to obligations issued after December 31, 2004.

         Subtitle F--Electric Utility Restructuring Provisions

     SEC. 855. MODIFICATIONS TO SPECIAL RULES FOR NUCLEAR 
                   DECOMMISSIONING COSTS.

       (a) Repeal of Limitation on Deposits Into Fund Based on 
     Cost of Service; Contributions After Funding Period.--
     Subsection (b) of section 468A (relating to special rules for 
     nuclear decommissioning costs) is amended to read as follows:
       ``(b) Limitation on Amounts Paid Into Fund.--The amount 
     which a taxpayer may pay into the Fund for any taxable year 
     shall not exceed the ruling amount applicable to such taxable 
     year.''.
       (b) Clarification of Treatment of Fund Transfers.--Section 
     468A(e) (relating to Nuclear Decommissioning Reserve Fund) is 
     amended by adding at the end the following new paragraph:
       ``(8) Treatment of fund transfers.--If, in connection with 
     the transfer of the taxpayer's interest in a nuclear power 
     plant, the taxpayer transfers the Fund with respect to such 
     power plant to the transferee of such interest and the 
     transferee elects to continue the application of this section 
     to such Fund--
       ``(A) the transfer of such Fund shall not cause such Fund 
     to be disqualified from the application of this section, and
       ``(B) no amount shall be treated as distributed from such 
     Fund, or be includable in gross income, by reason of such 
     transfer.''.
       (c) Treatment of Certain Decommissioning Costs.--
       (1) In general.--Section 468A is amended by redesignating 
     subsections (f) and (g) as subsections (g) and (h), 
     respectively, and by inserting after subsection (e) the 
     following new subsection:
       ``(f) Transfers Into Qualified Funds.--
       ``(1) In general.--Notwithstanding subsection (b), any 
     taxpayer maintaining a Fund to which this section applies 
     with respect to a nuclear power plant may transfer into such 
     Fund not more than an amount equal to the present value of 
     the excess of the total nuclear decommissioning costs with 
     respect to such nuclear power plant over the portion of such 
     costs taken into account in determining the ruling amount in 
     effect immediately before the transfer.
       ``(2) Deduction for amounts transferred.--
       ``(A) In general.--Except as provided in subparagraph (C), 
     the deduction allowed by subsection (a) for any transfer 
     permitted by this subsection shall be allowed ratably over 
     the remaining estimated useful life (within the meaning of 
     subsection (d)(2)(A)) of the nuclear power plant beginning 
     with the taxable year during which the transfer is made.
       ``(B) Denial of deduction for previously deducted 
     amounts.--No deduction shall be allowed for any transfer 
     under this subsection of an amount for which a deduction was 
     previously allowed or a corresponding amount was not included 
     in gross income. For purposes of the preceding sentence, a 
     ratable portion of each transfer shall be treated as being 
     from previously deducted or excluded amounts to the extent 
     thereof.
       ``(C) Transfers of qualified funds.--If--
       ``(i) any transfer permitted by this subsection is made to 
     any Fund to which this section applies, and
       ``(ii) such Fund is transferred thereafter,

     any deduction under this subsection for taxable years ending 
     after the date that such Fund is transferred shall be allowed 
     to the transferee and not the transferor. The preceding 
     sentence shall not apply if the transferor is an entity 
     exempt from tax under this chapter.
       ``(D) Special rules.--
       ``(i) Gain or loss not recognized.--No gain or loss shall 
     be recognized on any transfer permitted by this subsection.
       ``(ii) Transfers of appreciated property.--If appreciated 
     property is transferred in a transfer permitted by this 
     subsection, the amount of the deduction shall not exceed the 
     adjusted basis of such property.
       ``(3) New ruling amount required.--Paragraph (1) shall not 
     apply to any transfer unless the taxpayer requests from the 
     Secretary a new schedule of ruling amounts in connection with 
     such transfer.
       ``(4) No basis in qualified funds.--Notwithstanding any 
     other provision of law, the taxpayer's basis in any Fund to 
     which this section applies shall not be increased by reason 
     of any transfer permitted by this subsection.''.
       (2) New ruling amount to take into account total costs.--
     Subparagraph (A) of section 468A(d)(2) (defining ruling 
     amount) is amended to read as follows:
       ``(A) fund the total nuclear decommissioning costs with 
     respect to such power plant over the estimated useful life of 
     such power plant, and''.
       (d) Technical Amendment.--Section 468A(e)(2) (relating to 
     taxation of Fund) is amended--
       (1) by striking ``rate set forth in subparagraph (B)'' in 
     subparagraph (A) and inserting ``rate of 20 percent'',
       (2) by striking subparagraph (B), and
       (3) by redesignating subparagraphs (C) and (D) as 
     subparagraphs (B) and (C), respectively.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 856. TREATMENT OF CERTAIN INCOME OF COOPERATIVES.

       (a) Income From Open Access and Nuclear Decommissioning 
     Transactions.--
       (1) In general.--Section 501(c)(12)(C) (relating to list of 
     exempt organizations) is amended by striking ``or'' at the 
     end of clause (i), by striking clause (ii), and by adding at 
     the end the following new clauses:
       ``(ii) from any open access transaction (other than income 
     received or accrued directly or indirectly from a member),
       ``(iii) from any nuclear decommissioning transaction,
       ``(iv) from any asset exchange or conversion transaction, 
     or
       ``(v) from the prepayment of any loan, debt, or obligation 
     made, insured, or guaranteed under the Rural Electrification 
     Act of 1936.''.
       (2) Definitions and special rules.--Section 501(c)(12) is 
     amended by adding at the end the following new subparagraphs:
       ``(E) For purposes of subparagraph (C)(ii)--
       ``(i) The term `open access transaction' means any 
     transaction meeting the open access requirements of any of 
     the following

[[Page 6566]]

     subclauses with respect to a mutual or cooperative electric 
     company:

       ``(I) The provision or sale of electric transmission 
     service or ancillary services meets the open access 
     requirements of this subclause only if such services are 
     provided on a nondiscriminatory open access basis pursuant to 
     an open access transmission tariff filed with and approved by 
     FERC, including an acceptable reciprocity tariff, or under a 
     regional transmission organization agreement approved by 
     FERC.
       ``(II) The provision or sale of electric energy 
     distribution services or ancillary services meets the open 
     access requirements of this subclause only if such services 
     are provided on a nondiscriminatory open access basis to end-
     users served by distribution facilities owned by the mutual 
     or cooperative electric company (or its members).
       ``(III) The delivery or sale of electric energy generated 
     by a generation facility meets the open access requirements 
     of this subclause only if such facility is directly connected 
     to distribution facilities owned by the mutual or cooperative 
     electric company (or its members) which owns the generation 
     facility, and such distribution facilities meet the open 
     access requirements of subclause (II).

       ``(ii) Clause (i)(I) shall apply in the case of a 
     voluntarily filed tariff only if the mutual or cooperative 
     electric company files a report with FERC within 90 days 
     after the date of the enactment of this subparagraph relating 
     to whether or not such company will join a regional 
     transmission organization.
       ``(iii) A mutual or cooperative electric company shall be 
     treated as meeting the open access requirements of clause 
     (i)(I) if a regional transmission organization controls the 
     transmission facilities.
       ``(iv) References to FERC in this subparagraph shall be 
     treated as including references to the Public Utility 
     Commission of Texas with respect to any ERCOT utility (as 
     defined in section 212(k)(2)(B) of the Federal Power Act (16 
     U.S.C. 824k(k)(2)(B))) or references to the Rural Utilities 
     Service with respect to any other facility not subject to 
     FERC jurisdiction.
       ``(v) For purposes of this subparagraph--

       ``(I) The term `transmission facility' means an electric 
     output facility (other than a generation facility) which 
     operates at an electric voltage of 69 kilovolts or greater. 
     To the extent provided in regulations, such term includes any 
     output facility which FERC determines is a transmission 
     facility under standards applied by FERC under the Federal 
     Power Act (as in effect on the date of the enactment of the 
     Energy Tax Incentives Act).
       ``(II) The term `regional transmission organization' 
     includes an independent system operator.
       ``(III) The term `FERC' means the Federal Energy Regulatory 
     Commission.

       ``(F) The term `nuclear decommissioning transaction' 
     means--
       ``(i) any transfer into a trust, fund, or instrument 
     established to pay any nuclear decommissioning costs if the 
     transfer is in connection with the transfer of the mutual or 
     cooperative electric company's interest in a nuclear power 
     plant or nuclear power plant unit,
       ``(ii) any distribution from any trust, fund, or instrument 
     established to pay any nuclear decommissioning costs, or
       ``(iii) any earnings from any trust, fund, or instrument 
     established to pay any nuclear decommissioning costs.
       ``(G) The term `asset exchange or conversion transaction' 
     means any voluntary exchange or involuntary conversion of any 
     property related to generating, transmitting, distributing, 
     or selling electric energy by a mutual or cooperative 
     electric company, the gain from which qualifies for deferred 
     recognition under section 1031 or 1033, but only if the 
     replacement property acquired by such company pursuant to 
     such section constitutes property which is used, or to be 
     used, for--
       ``(i) generating, transmitting, distributing, or selling 
     electric energy, or
       ``(ii) producing, transmitting, distributing, or selling 
     natural gas.''.
       (b) Treatment of Income From Load Loss Transactions.--
     Section 501(c)(12), as amended by subsection (a)(2), is 
     amended by adding after subparagraph (G) the following new 
     subparagraph:
       ``(H)(i) In the case of a mutual or cooperative electric 
     company described in this paragraph or an organization 
     described in section 1381(a)(2)(C), income received or 
     accrued from a load loss transaction shall be treated as an 
     amount collected from members for the sole purpose of meeting 
     losses and expenses.
       ``(ii) For purposes of clause (i), the term `load loss 
     transaction' means any wholesale or retail sale of electric 
     energy (other than to members) to the extent that the 
     aggregate sales during the recovery period do not exceed the 
     load loss mitigation sales limit for such period.
       ``(iii) For purposes of clause (ii), the load loss 
     mitigation sales limit for the recovery period is the sum of 
     the annual load losses for each year of such period.
       ``(iv) For purposes of clause (iii), a mutual or 
     cooperative electric company's annual load loss for each year 
     of the recovery period is the amount (if any) by which--
       ``(I) the megawatt hours of electric energy sold during 
     such year to members of such electric company are less than
       ``(II) the megawatt hours of electric energy sold during 
     the base year to such members.
       ``(v) For purposes of clause (iv)(II), the term `base year' 
     means--
       ``(I) the calendar year preceding the start-up year, or
       ``(II) at the election of the electric company, the second 
     or third calendar years preceding the start-up year.
       ``(vi) For purposes of this subparagraph, the recovery 
     period is the 7-year period beginning with the start-up year.
       ``(vii) For purposes of this subparagraph, the start-up 
     year is the calendar year which includes January 1, 2005, or, 
     if later, at the election of the mutual or cooperative 
     electric company--
       ``(I) the first year that such electric company offers 
     nondiscriminatory open access, or
       ``(II) the first year in which at least 10 percent of such 
     electric company's sales are not to members of such electric 
     company.
       ``(viii) A company shall not fail to be treated as a mutual 
     or cooperative company for purposes of this paragraph or as a 
     corporation operating on a cooperative basis for purposes of 
     section 1381(a)(2)(C) by reason of the treatment under clause 
     (i).
       ``(ix) In the case of a mutual or cooperative electric 
     company, income from any open access transaction received, or 
     accrued, indirectly from a member shall be treated as an 
     amount collected from members for the sole purpose of meeting 
     losses and expenses.''.
       (c) Exception From Unrelated Business Taxable Income.--
     Section 512(b) (relating to modifications) is amended by 
     adding at the end the following new paragraph:
       ``(18) Treatment of mutual or cooperative electric 
     companies.--In the case of a mutual or cooperative electric 
     company described in section 501(c)(12), there shall be 
     excluded income which is treated as member income under 
     subparagraph (H) thereof.''.
       (d) Cross Reference.--Section 1381 is amended by adding at 
     the end the following new subsection:
       ``(c) Cross Reference.--

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

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

     SEC. 857. SALES OR DISPOSITIONS TO IMPLEMENT FEDERAL ENERGY 
                   REGULATORY COMMISSION OR STATE ELECTRIC 
                   RESTRUCTURING POLICY.

       (a) In General.--Section 451 (relating to general rule for 
     taxable year of inclusion) is amended by adding at the end 
     the following new subsection:
       ``(i) Special Rule for Sales or Dispositions To Implement 
     Federal Energy Regulatory Commission or State Electric 
     Restructuring Policy.--
       ``(1) In general.--For purposes of this subtitle, if a 
     taxpayer elects the application of this subsection to a 
     qualifying electric transmission transaction in any taxable 
     year--
       ``(A) any ordinary income derived from such transaction 
     which would be required to be recognized under section 1245 
     or 1250 for such taxable year (determined without regard to 
     this subsection), and
       ``(B) any income derived from such transaction in excess of 
     such ordinary income which is required to be included in 
     gross income for such taxable year (determined without regard 
     to this subsection),

     shall be so recognized and included ratably over the 8-
     taxable year period beginning with such taxable year.
       ``(2) Qualifying electric transmission transaction.--For 
     purposes of this subsection, the term `qualifying electric 
     transmission transaction' means any sale or other disposition 
     before January 1, 2008, of--
       ``(A) property used by the taxpayer in the trade or 
     business of providing electric transmission services, or
       ``(B) any stock or partnership interest in a corporation or 
     partnership, as the case may be, whose principal trade or 
     business consists of providing electric transmission 
     services,

     but only if such sale or disposition is to an independent 
     transmission company.
       ``(3) Independent transmission company.--For purposes of 
     this subsection, the term `independent transmission company' 
     means--
       ``(A) a regional transmission organization approved by the 
     Federal Energy Regulatory Commission,
       ``(B) a person--
       ``(i) who the Federal Energy Regulatory Commission 
     determines in its authorization of the transaction under 
     section 203 of the Federal Power Act (16 U.S.C. 824b) is not 
     a market participant within the meaning of such Commission's 
     rules applicable to regional transmission organizations, and
       ``(ii) whose transmission facilities to which the election 
     under this subsection applies are under the operational 
     control of a Federal Energy Regulatory Commission-approved 
     regional transmission organization before the close of the 
     period specified in such authorization, but not later than 
     January 1, 2008, or
       ``(C) in the case of facilities subject to the exclusive 
     jurisdiction of the Public Utility

[[Page 6567]]

     Commission of Texas, a person which is approved by that 
     Commission as consistent with Texas State law regarding an 
     independent transmission organization.
       ``(4) Election.--An election under paragraph (1), once 
     made, shall be irrevocable.
       ``(5) Nonapplication of installment sales treatment.--
     Section 453 shall not apply to any qualifying electric 
     transmission transaction with respect to which an election to 
     apply this subsection is made.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to transactions occurring after December 31, 
     2004.

            Subtitle G--Volumetric Ethanol Excise Tax Credit

     SEC. 860. SHORT TITLE.

       This subtitle may be cited as the ``Volumetric Ethanol 
     Excise Tax Credit (VEETC) Act of 2004''.

     SEC. 861. ALCOHOL AND BIODIESEL EXCISE TAX CREDIT AND 
                   EXTENSION OF ALCOHOL FUELS INCOME TAX CREDIT.

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

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

       ``(a) Allowance of Credits.--There shall be allowed as a 
     credit against the tax imposed by section 4081 an amount 
     equal to the sum of--
       ``(1) the alcohol fuel mixture credit, plus
       ``(2) the biodiesel mixture credit.
       ``(b) Alcohol Fuel Mixture Credit.--
       ``(1) In general.--For purposes of this section, the 
     alcohol fuel mixture credit is the product of the applicable 
     amount and the number of gallons of alcohol used by the 
     taxpayer in producing any alcohol fuel mixture for sale or 
     use in a trade or business of the taxpayer.
       ``(2) Applicable amount.--For purposes of this subsection--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the applicable amount is 52 cents (51 cents in the case of 
     any sale or use after 2004).
       ``(B) Mixtures not containing ethanol.--In the case of an 
     alcohol fuel mixture in which none of the alcohol consists of 
     ethanol, the applicable amount is 60 cents.
       ``(3) Alcohol fuel mixture.--For purposes of this 
     subsection, the term `alcohol fuel mixture' means a mixture 
     of alcohol and a taxable fuel which--
       ``(A) is sold by the taxpayer producing such mixture to any 
     person for use as a fuel,
       ``(B) is used as a fuel by the taxpayer producing such 
     mixture, or
       ``(C) is removed from the refinery by a person producing 
     such mixture.
       ``(4) Other definitions.--For purposes of this subsection--
       ``(A) Alcohol.--The term `alcohol' includes methanol and 
     ethanol but does not include--
       ``(i) alcohol produced from petroleum, natural gas, or coal 
     (including peat), or
       ``(ii) alcohol with a proof of less than 190 (determined 
     without regard to any added denaturants).
     Such term also includes an alcohol gallon equivalent of ethyl 
     tertiary butyl ether or other ethers produced from such 
     alcohol.
       ``(B) Taxable fuel.--The term `taxable fuel' has the 
     meaning given such term by section 4083(a)(1).
       ``(5) Termination.--This subsection shall not apply to any 
     sale, use, or removal for any period after December 31, 2010.
       ``(c) Biodiesel Mixture Credit.--
       ``(1) In general.--For purposes of this section, the 
     biodiesel mixture credit is the product of the applicable 
     amount and the number of gallons of biodiesel used by the 
     taxpayer in producing any biodiesel mixture for sale or use 
     in a trade or business of the taxpayer.
       ``(2) Applicable amount.--For purposes of this subsection--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the applicable amount is 50 cents.
       ``(B) Amount for agri-biodiesel.--In the case of any 
     biodiesel which is agri-biodiesel, the applicable amount is 
     $1.00.
       ``(3) Biodiesel mixture.--For purposes of this section, the 
     term `biodiesel mixture' means a mixture of biodiesel and 
     diesel fuel (as defined in section 4083(a)(3)), determined 
     without regard to any use of kerosene, which--
       ``(A) is sold by the taxpayer producing such mixture to any 
     person for use as a fuel,
       ``(B) is used as a fuel by the taxpayer producing such 
     mixture, or
       ``(C) is removed from the refinery by a person producing 
     such mixture.
       ``(4) Certification for biodiesel.--No credit shall be 
     allowed under this section unless the taxpayer obtains a 
     certification (in such form and manner as prescribed by the 
     Secretary) from the producer of the biodiesel which 
     identifies the product produced and the percentage of 
     biodiesel and agri-biodiesel in the product.
       ``(5) Other definitions.--Any term used in this subsection 
     which is also used in section 40A shall have the meaning 
     given such term by section 40A.
       ``(6) Termination.--This subsection shall not apply to any 
     sale, use, or removal for any period after December 31, 2006.
       ``(d) Mixture not used as a fuel, etc.--
       ``(1) Imposition of tax.--If--
       ``(A) any credit was determined under this section with 
     respect to alcohol or biodiesel used in the production of any 
     alcohol fuel mixture or biodiesel mixture, respectively, and
       ``(B) any person--
       ``(i) separates the alcohol or biodiesel from the mixture, 
     or
       ``(ii) without separation, uses the mixture other than as a 
     fuel,
     then there is hereby imposed on such person a tax equal to 
     the product of the applicable amount and the number of 
     gallons of such alcohol or biodiesel.
       ``(2) Applicable laws.--All provisions of law, including 
     penalties, shall, insofar as applicable and not inconsistent 
     with this section, apply in respect of any tax imposed under 
     paragraph (1) as if such tax were imposed by section 4081 and 
     not by this section.
       ``(e) Coordination With Exemption From Excise Tax.--Rules 
     similar to the rules under section 40(c) shall apply for 
     purposes of this section.''.
       (b) Registration Requirement.--Section 4101(a)(1) (relating 
     to registration), as amended by sections 5211 and 5242 of 
     this Act, is amended by inserting ``and every person 
     producing or importing biodiesel (as defined in section 
     40A(d)(1)) or alcohol (as defined in section 6426(b)(4)(A))'' 
     after ``4081''.
       (c) Additional Amendments.--
       (1) Section 40(c) is amended by striking ``subsection 
     (b)(2), (k), or (m) of section 4041, section 4081(c), or 
     section 4091(c)'' and inserting ``section 4041(b)(2), section 
     6426, or section 6427(e)''.
       (2) Paragraph (4) of section 40(d) is amended to read as 
     follows:
       ``(4) Volume of alcohol.--For purposes of determining under 
     subsection (a) the number of gallons of alcohol with respect 
     to which a credit is allowable under subsection (a), the 
     volume of alcohol shall include the volume of any denaturant 
     (including gasoline) which is added under any formulas 
     approved by the Secretary to the extent that such denaturants 
     do not exceed 5 percent of the volume of such alcohol 
     (including denaturants).''.
       (3) Section 40(e)(1) is amended--
       (A) by striking ``2007'' in subparagraph (A) and inserting 
     ``2010'', and
       (B) by striking ``2008'' in subparagraph (B) and inserting 
     ``2011''.
       (4) Section 40(h) is amended--
       (A) by striking ``2007'' in paragraph (1) and inserting 
     ``2010'', and
       (B) by striking ``, 2006, or 2007'' in the table contained 
     in paragraph (2) and inserting ``through 2010''.
       (5) Section 4041(b)(2)(B) is amended by striking ``a 
     substance other than petroleum or natural gas'' and inserting 
     ``coal (including peat)''.
       (6) Section 4041 is amended by striking subsection (k).
       (7) Section 4081 is amended by striking subsection (c).
       (8) Paragraph (2) of section 4083(a) is amended to read as 
     follows:
       ``(2) Gasoline.--The term `gasoline'--
       ``(A) includes any gasoline blend, other than qualified 
     methanol or ethanol fuel (as defined in section 
     4041(b)(2)(B)), partially exempt methanol or ethanol fuel (as 
     defined in section 4041(m)(2)), or a denatured alcohol, and
       ``(B) includes, to the extent prescribed in regulations--
       ``(i) any gasoline blend stock, and
       ``(ii) any product commonly used as an additive in gasoline 
     (other than alcohol).
     For purposes of subparagraph (B)(i), the term `gasoline blend 
     stock' means any petroleum product component of gasoline.''.
       (9) Section 6427 is amended by inserting after subsection 
     (d) the following new subsection:
       ``(e) Alcohol or Biodiesel Used To Produce Alcohol Fuel and 
     Biodiesel Mixtures or Used as Fuels.--Except as provided in 
     subsection (k)--
       ``(1) Used to produce a mixture.--If any person produces a 
     mixture described in section 6426 in such person's trade or 
     business, the Secretary shall pay (without interest) to such 
     person an amount equal to the alcohol fuel mixture credit or 
     the biodiesel mixture credit with respect to such mixture.
       ``(2) Used as fuel.--If alcohol (as defined in section 
     40(d)(1)) or biodiesel (as defined in section 40A(d)(1)) or 
     agri-biodiesel (as defined in section 40A(d)(2)) which is not 
     in a mixture described in section 6426--
       ``(A) is used by any person as a fuel in a trade or 
     business, or
       ``(B) is sold by any person at retail to another person and 
     placed in the fuel tank of such person's vehicle,
     the Secretary shall pay (without interest) to such person an 
     amount equal to the alcohol credit (as determined under 
     section 40(b)(2)) or the biodiesel credit (as determined 
     under section 40A(b)(2)) with respect to such fuel.
       ``(3) Coordination with other repayment provisions.--No 
     amount shall be payable under paragraph (1) with respect to 
     any mixture with respect to which an amount is allowed as a 
     credit under section 6426.
       ``(4) Termination.--This subsection shall not apply with 
     respect to--
       ``(A) any alcohol fuel mixture (as defined in section 
     6426(b)(3)) or alcohol (as so defined) sold or used after 
     December 31, 2010, and
       ``(B) any biodiesel mixture (as defined in section 
     6426(c)(3)) or biodiesel (as so defined)

[[Page 6568]]

     or agri-biodiesel (as so defined) sold or used after December 
     31, 2006.''.
       (10) Section 6427(i)(3) is amended--
       (A) by striking ``subsection (f)'' both places it appears 
     in subparagraph (A) and inserting ``subsection (e)(1)'',
       (B) by striking ``gasoline, diesel fuel, or kerosene used 
     to produce a qualified alcohol mixture (as defined in section 
     4081(c)(3))'' in subparagraph (A) and inserting ``a mixture 
     described in section 6426'',
       (C) by adding at the end of subparagraph (A) the following 
     new flush sentence:
     ``In the case of an electronic claim, this subparagraph shall 
     be applied without regard to clause (i).'',
       (D) by striking ``subsection (f)(1)'' in subparagraph (B) 
     and inserting ``subsection (e)(1)'',
       (E) by striking ``20 days of the date of the filing of such 
     claim'' in subparagraph (B) and inserting ``45 days of the 
     date of the filing of such claim (20 days in the case of an 
     electronic claim)'', and
       (F) by striking ``alcohol mixture'' in the heading and 
     inserting ``alcohol fuel and biodiesel mixture''.
       (11) Section 9503(b)(1) is amended by adding at the end the 
     following new flush sentence:
     ``For purposes of this paragraph, taxes received under 
     sections 4041 and 4081 shall be determined without reduction 
     for credits under section 6426.''.
       (12) Section 9503(b)(4), as amended by section 5101 of this 
     Act, is amended--
       (A) by adding ``or'' at the end of subparagraph (C),
       (B) by striking the comma at the end of subparagraph 
     (D)(iii) and inserting a period, and
       (C) by striking subparagraphs (E) and (F).
       (13) The table of sections for subchapter B of chapter 65 
     is amended by inserting after the item relating to section 
     6425 the following new item:

``Sec. 6426. Credit for alcohol fuel and biodiesel mixtures.''.
       (14) Tariff schedule.--Headings 9901.00.50 and 9901.00.52 
     of the Harmonized Tariff Schedule of the United States (19 
     U.S.C. 3007) are each amended in the effective period column 
     by striking ``10/1/2007'' each place it appears and inserting 
     ``1/1/2011''.
       (d) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to fuel sold or used after September 30, 2004.
       (2) Registration requirement.--The amendment made by 
     subsection (b) shall take effect on April 1, 2005.
       (3) Extension of alcohol fuels credit.--The amendments made 
     by paragraphs (3), (4), and (14) of subsection (c) shall take 
     effect on the date of the enactment of this Act.
       (4) Repeal of general fund retention of certain alcohol 
     fuels taxes.--The amendments made by subsection (c)(12) shall 
     apply to fuel sold or used after September 30, 2003.
       (e) Format for Filing.--The Secretary of the Treasury shall 
     describe the electronic format for filing claims described in 
     section 6427(i)(3)(B) of the Internal Revenue Code of 1986 
     (as amended by subsection (c)(10)(C)) not later than 
     September 30, 2004.

     SEC. 862. BIODIESEL INCOME TAX CREDIT.

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

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

       ``(a) General Rule.--For purposes of section 38, the 
     biodiesel fuels credit determined under this section for the 
     taxable year is an amount equal to the sum of--
       ``(1) the biodiesel mixture credit, plus
       ``(2) the biodiesel credit.
       ``(b) Definition of Biodiesel Mixture Credit and Biodiesel 
     Credit.--For purposes of this section--
       ``(1) Biodiesel mixture credit.--
       ``(A) In general.--The biodiesel mixture credit of any 
     taxpayer for any taxable year is 50 cents for each gallon of 
     biodiesel used by the taxpayer in the production of a 
     qualified biodiesel mixture.
       ``(B) Qualified biodiesel mixture.--The term `qualified 
     biodiesel mixture' means a mixture of biodiesel and diesel 
     fuel (as defined in section 4083(a)(3)), determined without 
     regard to any use of kerosene, which--
       ``(i) is sold by the taxpayer producing such mixture to any 
     person for use as a fuel, or
       ``(ii) is used as a fuel by the taxpayer producing such 
     mixture.
       ``(C) Sale or use must be in trade or business, etc.--
     Biodiesel used in the production of a qualified biodiesel 
     mixture shall be taken into account--
       ``(i) only if the sale or use described in subparagraph (B) 
     is in a trade or business of the taxpayer, and
       ``(ii) for the taxable year in which such sale or use 
     occurs.
       ``(D) Casual off-farm production not eligible.--No credit 
     shall be allowed under this section with respect to any 
     casual off-farm production of a qualified biodiesel mixture.
       ``(2) Biodiesel credit.--
       ``(A) In general.--The biodiesel credit of any taxpayer for 
     any taxable year is 50 cents for each gallon of biodiesel 
     which is not in a mixture with diesel fuel and which during 
     the taxable year--
       ``(i) is used by the taxpayer as a fuel in a trade or 
     business, or
       ``(ii) is sold by the taxpayer at retail to a person and 
     placed in the fuel tank of such person's vehicle.
       ``(B) User credit not to apply to biodiesel sold at 
     retail.--No credit shall be allowed under subparagraph (A)(i) 
     with respect to any biodiesel which was sold in a retail sale 
     described in subparagraph (A)(ii).
       ``(3) Credit for agri-biodiesel.--In the case of any 
     biodiesel which is agri-biodiesel, paragraphs (1)(A) and 
     (2)(A) shall be applied by substituting `$1.00' for `50 
     cents'.
       ``(4) Certification for biodiesel.--No credit shall be 
     allowed under this section unless the taxpayer obtains a 
     certification (in such form and manner as prescribed by the 
     Secretary) from the producer or importer of the biodiesel 
     which identifies the product produced and the percentage of 
     biodiesel and agri-biodiesel in the product.
       ``(c) Coordination With Credit Against Excise Tax.--The 
     amount of the credit determined under this section with 
     respect to any biodiesel shall be properly reduced to take 
     into account any benefit provided with respect to such 
     biodiesel solely by reason of the application of section 6426 
     or 6427(e).
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Biodiesel.--The term `biodiesel' means the monoalkyl 
     esters of long chain fatty acids derived from plant or animal 
     matter which meet--
       ``(A) the registration requirements for fuels and fuel 
     additives established by the Environmental Protection Agency 
     under section 211 of the Clean Air Act (42 U.S.C. 7545), and
       ``(B) the requirements of the American Society of Testing 
     and Materials D6751.
       ``(2) Agri-biodiesel.--The term `agri-biodiesel' means 
     biodiesel derived solely from virgin oils, including esters 
     derived from virgin vegetable oils from corn, soybeans, 
     sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
     safflowers, flaxseeds, rice bran, and mustard seeds, and from 
     animal fats.
       ``(3) Mixture or biodiesel not used as a fuel, etc.--
       ``(A) Mixtures.--If--
       ``(i) any credit was determined under this section with 
     respect to biodiesel used in the production of any qualified 
     biodiesel mixture, and
       ``(ii) any person--

       ``(I) separates the biodiesel from the mixture, or

       ``(II) without separation, uses the mixture other than as a 
     fuel,

     then there is hereby imposed on such person a tax equal to 
     the product of the rate applicable under subsection (b)(1)(A) 
     and the number of gallons of such biodiesel in such mixture.
       ``(B) Biodiesel.--If--
       ``(i) any credit was determined under this section with 
     respect to the retail sale of any biodiesel, and
       ``(ii) any person mixes such biodiesel or uses such 
     biodiesel other than as a fuel,
     then there is hereby imposed on such person a tax equal to 
     the product of the rate applicable under subsection (b)(2)(A) 
     and the number of gallons of such biodiesel.
       ``(C) Applicable laws.--All provisions of law, including 
     penalties, shall, insofar as applicable and not inconsistent 
     with this section, apply in respect of any tax imposed under 
     subparagraph (A) or (B) as if such tax were imposed by 
     section 4081 and not by this chapter.
       ``(4) Pass-thru in the case of estates and trusts.--Under 
     regulations prescribed by the Secretary, rules similar to the 
     rules of subsection (d) of section 52 shall apply.
       ``(e) Termination.--This section shall not apply to any 
     sale or use after December 31, 2006.''.
       (b) Credit Treated as Part of General Business Credit.--
     Section 38(b) (relating to current year business credit) is 
     amended by striking ``plus'' at the end of paragraph (28), by 
     striking the period at the end of paragraph (29) and 
     inserting ``, plus'', and by adding at the end the following 
     new paragraph:
       ``(30) the biodiesel fuels credit determined under section 
     40B(a).''.
       (c) Conforming Amendments.--
       (1)(A) Section 87 is amended to read as follows:

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

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

``Sec. 40B. Biodiesel used as fuel.''.

[[Page 6569]]

       (d) Effective Date.--The amendments made by this section 
     shall apply to fuel produced, and sold or used, after 
     September 30, 2004, in taxable years ending after such date.

                   Subtitle H--Fuel Fraud Prevention

     SEC. 870. SHORT TITLE.

       This subtitle may be cited as the ``Fuel Fraud Prevention 
     Act of 2004''.

                       PART I--AVIATION JET FUEL

     SEC. 871. TAXATION OF AVIATION-GRADE KEROSENE.

       (a) Rate of Tax.--
       (1) In general.--Subparagraph (A) of section 4081(a)(2) is 
     amended by striking ``and'' at the end of clause (ii), by 
     striking the period at the end of clause (iii) and inserting 
     ``, and'', and by adding at the end the following new clause:
       ``(iv) in the case of aviation-grade kerosene, 21.8 cents 
     per gallon.''.
       (2) Commercial aviation.--Paragraph (2) of section 4081(a) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Taxes imposed on fuel used in commercial aviation.--
     In the case of aviation-grade kerosene which is removed from 
     any refinery or terminal directly into the fuel tank of an 
     aircraft for use in commercial aviation, the rate of tax 
     under subparagraph (A)(iv) shall be 4.3 cents per gallon.''.
       (3) Nontaxable uses.--
       (A) In general.--Section 4082 is amended by redesignating 
     subsections (e) and (f) as subsections (f) and (g), 
     respectively, and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Aviation-Grade Kerosene.--In the case of aviation-
     grade kerosene which is exempt from the tax imposed by 
     section 4041(c) (other than by reason of a prior imposition 
     of tax) and which is removed from any refinery or terminal 
     directly into the fuel tank of an aircraft, the rate of tax 
     under section 4081(a)(2)(A)(iv) shall be zero.''.
       (B) Conforming amendments.--
       (i) Subsection (b) of section 4082 is amended by adding at 
     the end the following new flush sentence: ``The term 
     `nontaxable use' does not include the use of aviation-grade 
     kerosene in an aircraft.''.
       (ii) Section 4082(d) is amended by striking paragraph (1) 
     and by redesignating paragraphs (2) and (3) as paragraphs (1) 
     and (2), respectively.
       (4) Nonaircraft use of aviation-grade kerosene.--
       (A) In general.--Subparagraph (B) of section 4041(a)(1) is 
     amended by adding at the end the following new sentence: 
     ``This subparagraph shall not apply to aviation-grade 
     kerosene.''.
       (B) Conforming amendment.--The heading for paragraph (1) of 
     section 4041(a) is amended by inserting ``and kerosene'' 
     after ``diesel fuel''.
       (b) Commercial Aviation.--Section 4083 is amended 
     redesignating subsections (b) and (c) as subsections (c) and 
     (d), respectively, and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Commercial Aviation.--For purposes of this subpart, 
     the term `commercial aviation' means any use of an aircraft 
     in a business of transporting persons or property for 
     compensation or hire by air, unless properly allocable to any 
     transportation exempt from the taxes imposed by section 4261 
     and 4271 by reason of section 4281 or 4282 or by reason of 
     section 4261(h).''.
       (c) Refunds.--
       (1) In general.--Paragraph (4) of section 6427(l) is 
     amended to read as follows:
       ``(4) Refunds for aviation-grade kerosene.--
       ``(A) No refund of certain taxes on fuel used in commercial 
     aviation.--In the case of aviation-grade kerosene used in 
     commercial aviation (as defined in section 4083(b)) (other 
     than supplies for vessels or aircraft within the meaning of 
     section 4221(d)(3)), paragraph (1) shall not apply to so much 
     of the tax imposed by section 4081 as is attributable to--
       ``(i) the Leaking Underground Storage Tank Trust Fund 
     financing rate imposed by such section, and
       ``(ii) so much of the rate of tax specified in section 
     4081(a)(2)(A)(iv) as does not exceed 4.3 cents per gallon.
       ``(B) Payment to ultimate, registered vendor.--With respect 
     to aviation-grade kerosene, if the ultimate purchaser of such 
     kerosene waives (at such time and in such form and manner as 
     the Secretary shall prescribe) the right to payment under 
     paragraph (1) and assigns such right to the ultimate vendor, 
     then the Secretary shall pay the amount which would be paid 
     under paragraph (1) to such ultimate vendor, but only if such 
     ultimate vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (2) Time for filing claims.--Subparagraph (A) of section 
     6427(i)(4) is amended--
       (A) by striking ``subsection (l)(5)'' both places it 
     appears and inserting ``paragraph (4)(B) or (5) of subsection 
     (l)'', and
       (B) by striking ``the preceding sentence'' and inserting 
     ``subsection (l)(5)''.
       (3) Conforming amendment.--Subparagraph (B) of section 
     6427(l)(2) is amended to read as follows:
       ``(B) in the case of aviation-grade kerosene--
       ``(i) any use which is exempt from the tax imposed by 
     section 4041(c) other than by reason of a prior imposition of 
     tax, or
       ``(ii) any use in commercial aviation (within the meaning 
     of section 4083(b)).''.
       (d) Repeal of Prior Taxation of Aviation Fuel.--
       (1) In general.--Part III of subchapter A of chapter 32 is 
     amended by striking subpart B and by redesignating subpart C 
     as subpart B.
       (2) Conforming amendments.--
       (A) Section 4041(c) is amended to read as follows:
       ``(c) Aviation-Grade Kerosene.--
       ``(1) In general.--There is hereby imposed a tax upon 
     aviation-grade kerosene--
       ``(A) sold by any person to an owner, lessee, or other 
     operator of an aircraft for use in such aircraft, or
       ``(B) used by any person in an aircraft unless there was a 
     taxable sale of such fuel under subparagraph (A).
       ``(2) Exemption for previously taxed fuel.--No tax shall be 
     imposed by this subsection on the sale or use of any 
     aviation-grade kerosene if tax was imposed on such liquid 
     under section 4081 and the tax thereon was not credited or 
     refunded.
       ``(3) Rate of tax.--The rate of tax imposed by this 
     subsection shall be the rate of tax specified in section 
     4081(a)(2)(A)(iv) which is in effect at the time of such sale 
     or use.''.
       (B) Section 4041(d)(2) is amended by striking ``section 
     4091'' and inserting ``section 4081''.
       (C) Section 4041 is amended by striking subsection (e).
       (D) Section 4041 is amended by striking subsection (i).
       (E) Section 4041(m)(1) is amended to read as follows:
       ``(1) In general.--In the case of the sale or use of any 
     partially exempt methanol or ethanol fuel, the rate of the 
     tax imposed by subsection (a)(2) shall be--
       ``(A) after September 30, 1997, and before September 30, 
     2009--
       ``(i) in the case of fuel none of the alcohol in which 
     consists of ethanol, 9.15 cents per gallon, and
       ``(ii) in any other case, 11.3 cents per gallon, and
       ``(B) after September 30, 2009--
       ``(i) in the case of fuel none of the alcohol in which 
     consists of ethanol, 2.15 cents per gallon, and
       ``(ii) in any other case, 4.3 cents per gallon.''.
       (F) Sections 4101(a), 4103, 4221(a), and 6206 are each 
     amended by striking ``, 4081, or 4091'' and inserting ``or 
     4081''.
       (G) Section 6416(b)(2) is amended by striking ``4091 or''.
       (H) Section 6416(b)(3) is amended by striking ``or 4091'' 
     each place it appears.
       (I) Section 6416(d) is amended by striking ``or to the tax 
     imposed by section 4091 in the case of refunds described in 
     section 4091(d)''.
       (J) Section 6427 is amended by striking subsection (f).
       (K) Section 6427(j)(1) is amended by striking ``, 4081, and 
     4091'' and inserting ``and 4081''.
       (L)(i) Section 6427(l)(1) is amended to read as follows:
       ``(1) In general.--Except as otherwise provided in this 
     subsection and in subsection (k), if any diesel fuel or 
     kerosene on which tax has been imposed by section 4041 or 
     4081 is used by any person in a nontaxable use, the Secretary 
     shall pay (without interest) to the ultimate purchaser of 
     such fuel an amount equal to the aggregate amount of tax 
     imposed on such fuel under section 4041 or 4081, as the case 
     may be, reduced by any refund paid to the ultimate vendor 
     under paragraph (4)(B).''.
       (ii) Paragraph (5)(B) of section 6427(l) is amended by 
     striking ``Paragraph (1)(A) shall not apply to kerosene'' and 
     inserting ``Paragraph (1) shall not apply to kerosene (other 
     than aviation-grade kerosene)''.
       (M) Subparagraph (B) of section 6724(d)(1) is amended by 
     striking clause (xv) and by redesignating the succeeding 
     clauses accordingly.
       (N) Paragraph (2) of section 6724(d) is amended by striking 
     subparagraph (W) and by redesignating the succeeding 
     subparagraphs accordingly.
       (O) Paragraph (1) of section 9502(b) is amended by adding 
     ``and'' at the end of subparagraph (B) and by striking 
     subparagraphs (C) and (D) and inserting the following new 
     subparagraph:
       ``(C) section 4081 with respect to aviation gasoline and 
     aviation-grade kerosene, and''.
       (P) The last sentence of section 9502(b) is amended to read 
     as follows:
     ``There shall not be taken into account under paragraph (1) 
     so much of the taxes imposed by section 4081 as are 
     determined at the rate specified in section 4081(a)(2)(B).''.
       (Q) Subsection (b) of section 9508 is amended by striking 
     paragraph (3) and by redesignating paragraphs (4) and (5) as 
     paragraphs (3) and (4), respectively.
       (R) Section 9508(c)(2)(A) is amended by striking ``sections 
     4081 and 4091'' and inserting ``section 4081''.
       (S) The table of subparts for part III of subchapter A of 
     chapter 32 is amended to read as follows:

``Subpart A. Motor and aviation fuels.
``Subpart B. Special provisions applicable to fuels tax.''.
       (T) The heading for subpart A of part III of subchapter A 
     of chapter 32 is amended to read as follows:

[[Page 6570]]



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

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

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

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

     SEC. 872. TRANSFER OF CERTAIN AMOUNTS FROM THE AIRPORT AND 
                   AIRWAY TRUST FUND TO THE HIGHWAY TRUST FUND TO 
                   REFLECT HIGHWAY USE OF JET FUEL.

       (a) In General.--Section 9502(d) is amended by adding at 
     the end the following new paragraph:
       ``(7) Transfers from the trust fund to the highway trust 
     fund.--
       ``(A) In general.--The Secretary shall pay annually from 
     the Airport and Airway Trust Fund into the Highway Trust Fund 
     an amount (as determined by him) equivalent to amounts 
     received in the Airport and Airway Trust Fund which are 
     attributable to fuel that is used primarily for highway 
     transportation purposes.
       ``(B) Amounts transferred to mass transit account.--The 
     Secretary shall transfer 11 percent of the amounts paid into 
     the Highway Trust Fund under subparagraph (A) to the Mass 
     Transit Account established under section 9503(e).''.
       (b) Conforming Amendments.--
       (1) Subsection (a) of section 9503 is amended--
       (A) by striking ``appropriated or credited'' and inserting 
     ``paid, appropriated, or credited'', and
       (B) by striking ``or section 9602(b)'' and inserting ``, 
     section 9502(d)(7), or section 9602(b)''.
       (2) Subsection (e)(1) of section 9503 is amended by 
     striking ``or section 9602(b)'' and inserting ``, section 
     9502(d)(7), or section 9602(b)''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

                           PART II--DYED FUEL

     SEC. 873. DYE INJECTION EQUIPMENT.

       (a) In General.--Section 4082(a)(2) (relating to exemptions 
     for diesel fuel and kerosene) is amended by inserting ``by 
     mechanical injection'' after ``indelibly dyed''.
       (b) Dye Injector Security.--Not later than June 30, 2004, 
     the Secretary of the Treasury shall issue regulations 
     regarding mechanical dye injection systems described in the 
     amendment made by subsection (a), and such regulations shall 
     include standards for making such systems tamper resistant.
       (c) Penalty for Tampering With or Failing To Maintain 
     Security Requirements for Mechanical Dye Injection Systems.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by adding after 
     section 6715 the following new section:

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

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

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

     SEC. 874. ELIMINATION OF ADMINISTRATIVE REVIEW FOR TAXABLE 
                   USE OF DYED FUEL.

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

     SEC. 875. PENALTY ON UNTAXED CHEMICALLY ALTERED DYED FUEL 
                   MIXTURES.

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

     SEC. 876. TERMINATION OF DYED DIESEL USE BY INTERCITY BUSES.

       (a) In General.--Paragraph (3) of section 4082(b) (relating 
     to nontaxable use) is amended to read as follows:
       ``(3) any use described in section 
     4041(a)(1)(C)(iii)(II).''.
       (b) Ultimate Vendor Refund.--Subsection (b) of section 6427 
     is amended by adding at the end the following new paragraph:
       ``(4) Refunds for use of diesel fuel in certain intercity 
     buses.--
       ``(A) In general.--With respect to any fuel to which 
     paragraph (2)(A) applies, if the ultimate purchaser of such 
     fuel waives (at such time and in such form and manner as the 
     Secretary shall prescribe) the right to payment under 
     paragraph (1) and assigns such right to the ultimate vendor, 
     then the Secretary shall pay the amount which would be paid 
     under paragraph (1) to such ultimate vendor, but only if such 
     ultimate vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).

[[Page 6571]]

       ``(B) Credit cards.--For purposes of this paragraph, if the 
     sale of such fuel is made by means of a credit card, the 
     person extending credit to the ultimate purchaser shall be 
     deemed to be the ultimate vendor.''.
       (c) Payment of Refunds.--Subparagraph (A) of section 
     6427(i)(4), as amended by section 5211 of this Act, is 
     amended by inserting ``subsections (b)(4) and'' after ``filed 
     under''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to fuel sold after September 30, 2004.

       PART III--MODIFICATION OF INSPECTION OF RECORDS PROVISIONS

     SEC. 877. AUTHORITY TO INSPECT ON-SITE RECORDS.

       (a) In General.--Section 4083(d)(1)(A) (relating to 
     administrative authority), as amended by section 5211 of this 
     Act, is amended by striking ``and'' at the end of clause (i) 
     and by inserting after clause (ii) the following new clause:
       ``(iii) inspecting any books and records and any shipping 
     papers pertaining to such fuel, and''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 878. ASSESSABLE PENALTY FOR REFUSAL OF ENTRY.

       (a) In General.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by section 
     5221 of this Act, is amended by adding at the end the 
     following new section:

     ``SEC. 6717. REFUSAL OF ENTRY.

       ``(a) In General.--In addition to any other penalty 
     provided by law, any person who refuses to admit entry or 
     refuses to permit any other action by the Secretary 
     authorized by section 4083(d)(1) shall pay a penalty of 
     $1,000 for such refusal.
       ``(b) Joint and Several Liability.--
       ``(1) In general.--If a penalty is imposed under this 
     section on any business entity, each officer, employee, or 
     agent of such entity or other contracting party who willfully 
     participated in any act giving rise to such penalty shall be 
     jointly and severally liable with such entity for such 
     penalty.
       ``(2) Affiliated groups.--If a business entity described in 
     paragraph (1) is part of an affiliated group (as defined in 
     section 1504(a)), the parent corporation of such entity shall 
     be jointly and severally liable with such entity for the 
     penalty imposed under this section.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (b) Conforming Amendments.--
       (1) Section 4083(d)(3), as amended by section 5211 of this 
     Act, is amended--
       (A) by striking ``entry.--The penalty'' and inserting: 
     ``entry.--
       ``(A) Forfeiture.--The penalty'', and
       (B) by adding at the end the following new subparagraph:
       ``(B) Assessable penalty.--For additional assessable 
     penalty for the refusal to admit entry or other refusal to 
     permit an action by the Secretary authorized by paragraph 
     (1), see section 6717.''.
       (2) The table of sections for part I of subchapter B of 
     chapter 68, as amended by section 5221 of this Act, is 
     amended by adding at the end the following new item:

``Sec. 6717. Refusal of entry.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

            PART IV--REGISTRATION AND REPORTING REQUIREMENTS

     SEC. 879. REGISTRATION OF PIPELINE OR VESSEL OPERATORS 
                   REQUIRED FOR EXEMPTION OF BULK TRANSFERS TO 
                   REGISTERED TERMINALS OR REFINERIES.

       (a) In General.--Section 4081(a)(1)(B) (relating to 
     exemption for bulk transfers to registered terminals or 
     refineries) is amended--
       (1) by inserting ``by pipeline or vessel'' after 
     ``transferred in bulk'', and
       (2) by inserting ``, the operator of such pipeline or 
     vessel,'' after ``the taxable fuel''.
       (b) Civil Penalty for Carrying Taxable Fuels by 
     Nonregistered Pipelines or Vessels.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by section 
     5232 of this Act, is amended by adding at the end the 
     following new section:

     ``SEC. 6718. CARRYING TAXABLE FUELS BY NONREGISTERED 
                   PIPELINES OR VESSELS.

       ``(a) Imposition of Penalty.--If any person knowingly 
     transfers any taxable fuel (as defined in section 4083(a)(1)) 
     in bulk pursuant to section 4081(a)(1)(B) to an unregistered, 
     such person shall pay a penalty in addition to the tax (if 
     any).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     amount of the penalty under subsection (a) on each act shall 
     be an amount equal to the greater of--
       ``(A) $10,000, or
       ``(B) $1 per gallon.
       ``(2) Multiple violations.--In determining the penalty 
     under subsection (a) on any person, paragraph (1) shall be 
     applied by increasing the amount in paragraph (1) by the 
     product of such amount and the number of prior penalties (if 
     any) imposed by this section on such person (or a related 
     person or any predecessor of such person or related person).
       ``(c) Joint and Several Liability.--
       ``(1) In general.--If a penalty is imposed under this 
     section on any business entity, each officer, employee, or 
     agent of such entity or other contracting party who willfully 
     participated in any act giving rise to such penalty shall be 
     jointly and severally liable with such entity for such 
     penalty.
       ``(2) Affiliated groups.--If a business entity described in 
     paragraph (1) is part of an affiliated group (as defined in 
     section 1504(a)), the parent corporation of such entity shall 
     be jointly and severally liable with such entity for the 
     penalty imposed under this section.
       ``(d) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68, as amended by section 5232 of 
     this Act, is amended by adding at the end the following new 
     item:

``Sec. 6718. Carrying taxable fuels by nonregistered pipelines or 
              vessels.''.

       (c) Publication of Registered Persons.--Not later than June 
     30, 2004, the Secretary of the Treasury shall publish a list 
     of persons required to be registered under section 4101 of 
     the Internal Revenue Code of 1986.
       (d) Effective Date.--The amendments made by subsections (a) 
     and (b) shall take effect on October 1, 2004.

     SEC. 880. DISPLAY OF REGISTRATION.

       (a) In General.--Subsection (a) of section 4101 (relating 
     to registration) is amended--
       (1) by striking ``Every'' and inserting the following:
       ``(1) In general.--Every'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Display of registration.--Every operator of a vessel 
     required by the Secretary to register under this section 
     shall display proof of registration through an electronic 
     identification device prescribed by the Secretary on each 
     vessel used by such operator to transport any taxable 
     fuel.''.
       (b) Civil Penalty for Failure to Display Registration.--
       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by section 
     5241 of this Act, is amended by adding at the end the 
     following new section:

     ``SEC. 6719. FAILURE TO DISPLAY REGISTRATION OF VESSEL.

       ``(a) Failure to Display Registration.--Every operator of a 
     vessel who fails to display proof of registration pursuant to 
     section 4101(a)(2) shall pay a penalty of $500 for each such 
     failure. With respect to any vessel, only one penalty shall 
     be imposed by this section during any calendar month.
       ``(b) Multiple Violations.--In determining the penalty 
     under subsection (a) on any person, subsection (a) shall be 
     applied by increasing the amount in subsection (a) by the 
     product of such amount and the number of prior penalties (if 
     any) imposed by this section on such person (or a related 
     person or any predecessor of such person or related person).
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68, as amended by section 5241 of 
     this Act, is amended by adding at the end the following new 
     item:

``Sec. 6719. Failure to display registration of vessel.''.

       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

     SEC. 881. REGISTRATION OF PERSONS WITHIN FOREIGN TRADE ZONES, 
                   ETC..

       (a) In General.--Section 4101(a), as amended by section 
     5242 of this Act, is amended by redesignating paragraph (2) 
     as paragraph (3), and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Registration of persons within foreign trade zones, 
     etc..--The Secretary shall require registration by any person 
     which--
       ``(A) operates a terminal or refinery within a foreign 
     trade zone or within a customs bonded storage facility, or
       ``(B) holds an inventory position with respect to a taxable 
     fuel in such a terminal.''.
       (b) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

     SEC. 882. PENALTIES FOR FAILURE TO REGISTER AND FAILURE TO 
                   REPORT.

       (a) Increased Penalty.--Subsection (a) of section 7272 
     (relating to penalty for failure to register) is amended by 
     inserting ``($10,000 in the case of a failure to register 
     under section 4101)'' after ``$50''.
       (b) Increased Criminal Penalty.--Section 7232 (relating to 
     failure to register under section 4101, false representations 
     of registration status, etc.) is amended by striking 
     ``$5,000'' and inserting ``$10,000''.
       (c) Assessable Penalty for Failure to Register.--

[[Page 6572]]

       (1) In general.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties), as amended by section 
     5242 of this Act, is amended by adding at the end the 
     following new section:

     ``SEC. 6720. FAILURE TO REGISTER.

       ``(a) Failure to Register.--Every person who is required to 
     register under section 4101 and fails to do so shall pay a 
     penalty in addition to the tax (if any).
       ``(b) Amount of Penalty.--The amount of the penalty under 
     subsection (a) shall be--
       ``(1) $10,000 for each initial failure to register, and
       ``(2) $1,000 for each day thereafter such person fails to 
     register.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under this section with respect to any failure if it 
     is shown that such failure is due to reasonable cause.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter B of chapter 68, as amended by section 5242 of 
     this Act, is amended by adding at the end the following new 
     item:

``Sec. 6720. Failure to register.''.

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

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

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

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

       (e) Effective Date.--The amendments made by this section 
     shall apply to failures pending or occurring after September 
     30, 2004.

     SEC. 883. INFORMATION REPORTING FOR PERSONS CLAIMING CERTAIN 
                   TAX BENEFITS.

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

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

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

``Sec. 4104. Information reporting for persons claiming certain tax 
              benefits.''.

       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

                            PART V--IMPORTS

     SEC. 884. TAX AT POINT OF ENTRY WHERE IMPORTER NOT 
                   REGISTERED.

       (a) Tax at Point of Entry Where Importer Not Registered.--
       (1) In general.--Subpart C of part III of subchapter A of 
     chapter 31, as amended by section 5245 of this Act, is 
     amended by adding at the end the following new section:

     ``SEC. 4105. TAX AT ENTRY WHERE IMPORTER NOT REGISTERED.

       ``(a) In General.--Any tax imposed under this part on any 
     person not registered under section 4101 for the entry of a 
     fuel into the United States shall be imposed at the time and 
     point of entry.
       ``(b) Enforcement of Assessment.--If any person liable for 
     any tax described under subsection (a) has not paid the tax 
     or posted a bond, the Secretary may--
       ``(1) seize the fuel on which the tax is due, or
       ``(2) detain any vehicle transporting such fuel,

     until such tax is paid or such bond is filed.
       ``(c) Levy of Fuel.--If no tax has been paid or no bond has 
     been filed within 5 days from the date the Secretary seized 
     fuel pursuant to subsection (b), the Secretary may sell such 
     fuel as provided under section 6336.''.
       (2) Conforming amendment.--The table of sections for 
     subpart C of part III of subchapter A of chapter 31 of the 
     Internal Revenue Code of 1986, as amended by section 5245 of 
     this Act, is amended by adding after the last item the 
     following new item:

``Sec. 4105. Tax at entry where importer not registered.''.

       (b) Denial of Entry Where Tax Not Paid.--The Secretary of 
     Homeland Security is authorized to deny entry into the United 
     States of any shipment of a fuel which is taxable under 
     section 4081 of the Internal Revenue Code of 1986 if the 
     person entering such shipment fails to pay the tax imposed 
     under such section or post a bond in accordance with the 
     provisions of section 4105 of such Code.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 885. RECONCILIATION OF ON-LOADED CARGO TO ENTERED CARGO.

       (a) In General.--Subsection (a) of section 343 of the Trade 
     Act of 2002 is amended by inserting at the end the following 
     new paragraph:
       ``(4) In General.--Subject to paragraphs (2) and (3), not 
     later than 1 year after the enactment of this paragraph, the 
     Secretary of Homeland Security, together with the Secretary 
     of the Treasury, shall promulgate regulations providing for 
     the transmission to the Internal Revenue Service, through an 
     electronic data interchange system, of information pertaining 
     to cargo of taxable fuels (as defined in section 4083 of the 
     Internal Revenue Code of 1986) destined for importation into 
     the United States prior to such importation.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

                   PART VI--MISCELLANEOUS PROVISIONS

     SEC. 886. TAX ON SALE OF DIESEL FUEL WHETHER SUITABLE FOR USE 
                   OR NOT IN A DIESEL-POWERED VEHICLE OR TRAIN.

       (a) In General.--Section 4083(a)(3) is amended--
       (1) by striking ``The term'' and inserting the following:
       ``(A) In general.--The term'', and
       (2) by inserting at the end the following new subparagraph:
       ``(B) Liquid sold as diesel fuel.--The term `diesel fuel' 
     includes any liquid which is sold as or offered for sale as a 
     fuel in a diesel-powered highway vehicle or a diesel-powered 
     train.''.
       (b) Conforming Amendments.--
       (1) Section 40B(b)(1)(B), as added by this Act, is amended 
     by striking ``4083(a)(3)'' and inserting ``4083(a)(3)(A)''.
       (2) Section 6426(c)(3), as added by section 5102 of this 
     Act, is amended by striking ``4083(a)(3)'' and inserting 
     ``4083(a)(3)(A)''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 887. MODIFICATION OF ULTIMATE VENDOR REFUND CLAIMS WITH 
                   RESPECT TO FARMING.

       (a) In General.--
       (1) Refunds.--Section 6427(l) is amended by adding at the 
     end the following new paragraph:
       ``(6) Registered vendors permitted to administer certain 
     claims for refund of diesel fuel and kerosene sold to 
     farmers.--
       ``(A) In general.--In the case of diesel fuel or kerosene 
     used on a farm for farming purposes (within the meaning of 
     section 6420(c)), paragraph (1) shall not apply to the 
     aggregate amount of such diesel fuel or kerosene if such 
     amount does not exceed 500 gallons (as determined under 
     subsection (i)(5)(A)(iii)).
       ``(B) Payment to ultimate vendor.--The amount which would 
     (but for subparagraph (A)) have been paid under paragraph (1) 
     with respect to any fuel shall be paid to the ultimate vendor 
     of such fuel, if such vendor--
       ``(i) is registered under section 4101, and
       ``(ii) meets the requirements of subparagraph (A), (B), or 
     (D) of section 6416(a)(1).''.
       (2) Filing of claims.--Section 6427(i) is amended by 
     inserting at the end the following new paragraph:
       ``(5) Special rule for vendor refunds with respect to 
     farmers.--
       ``(A) In general.--A claim may be filed under subsection 
     (l)(6) by any person with respect to fuel sold by such person 
     for any period--
       ``(i) for which $200 or more ($100 or more in the case of 
     kerosene) is payable under subsection (l)(6),
       ``(ii) which is not less than 1 week, and
       ``(iii) which is for not more than 500 gallons for each 
     farmer for which there is a claim.

     Notwithstanding subsection (l)(1), paragraph (3)(B) shall 
     apply to claims filed under the preceding sentence.
       ``(B) Time for filing claim.--No claim filed under this 
     paragraph shall be allowed

[[Page 6573]]

     unless filed on or before the last day of the first quarter 
     following the earliest quarter included in the claim.''.
       (3) Conforming amendments.--
       (A) Section 6427(l)(5)(A) is amended to read as follows:
       ``(A) In general.--Paragraph (1) shall not apply to diesel 
     fuel or kerosene used by a State or local government.''.
       (B) The heading for section 6427(l)(5) is amended by 
     striking ``farmers and''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to fuels sold for nontaxable use after the date 
     of the enactment of this Act.

     SEC. 888. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE VENDORS.

       (a) In General.--Paragraph (4) of section 6416(a) (relating 
     to abatements, credits, and refunds) is amended to read as 
     follows:
       ``(4) Registered ultimate vendor to administer credits and 
     refunds of gasoline tax.--
       ``(A) In general.--For purposes of this subsection, if an 
     ultimate vendor purchases any gasoline on which tax imposed 
     by section 4081 has been paid and sells such gasoline to an 
     ultimate purchaser described in subparagraph (C) or (D) of 
     subsection (b)(2) (and such gasoline is for a use described 
     in such subparagraph), such ultimate vendor shall be treated 
     as the person (and the only person) who paid such tax, but 
     only if such ultimate vendor is registered under section 
     4101. For purposes of this subparagraph, if the sale of 
     gasoline is made by means of a credit card, the person 
     extending the credit to the ultimate purchaser shall be 
     deemed to be the ultimate vendor.
       ``(B) Timing of claims.--The procedure and timing of any 
     claim under subparagraph (A) shall be the same as for claims 
     under section 6427(i)(4), except that the rules of section 
     6427(i)(3)(B) regarding electronic claims shall not apply 
     unless the ultimate vendor has certified to the Secretary for 
     the most recent quarter of the taxable year that all ultimate 
     purchasers of the vendor are certified and entitled to a 
     refund under subparagraph (C) or (D) of subsection (b)(2).''.
       (b) Credit Card Purchases of Diesel Fuel or Kerosene by 
     State and Local Governments.--Section 6427(l)(5)(C) (relating 
     to nontaxable uses of diesel fuel, kerosene, and aviation 
     fuel), as amended by section 5252 of this Act, is amended by 
     adding at the end the following new sentence: ``For purposes 
     of this subparagraph, if the sale of diesel fuel or kerosene 
     is made by means of a credit card, the person extending the 
     credit to the ultimate purchaser shall be deemed to be the 
     ultimate vendor.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

     SEC. 889. TWO-PARTY EXCHANGES.

       (a) In General.--Subpart C of part III of subchapter A of 
     chapter 32, as amended by section 5251 of this Act, is 
     amended by adding at the end the following new section:

     ``SEC. 4106. TWO-PARTY EXCHANGES.

       ``(a) In General.--In a two-party exchange, the delivering 
     person shall not be liable for the tax imposed under of 
     section 4081(a)(1)(A)(ii).
       ``(b) Two-Party Exchange.--The term `two-party exchange' 
     means a transaction, other than a sale, in which taxable fuel 
     is transferred from a delivering person registered under 
     section 4101 as a taxable fuel registrant to a receiving 
     person who is so registered where all of the following occur:
       ``(1) The transaction includes a transfer from the 
     delivering person, who holds the inventory position for 
     taxable fuel in the terminal as reflected in the records of 
     the terminal operator.
       ``(2) The exchange transaction occurs before or 
     contemporaneous with completion of removal across the rack 
     from the terminal by the receiving person.
       ``(3) The terminal operator in its books and records treats 
     the receiving person as the person that removes the product 
     across the terminal rack for purposes of reporting the 
     transaction to the Secretary.
       ``(4) The transaction is the subject of a written 
     contract.''.
       (b) Conforming Amendment.--The table of sections for 
     subpart C of part III of subchapter A of chapter 32, as 
     amended by section 5251 of this Act, is amended by adding 
     after the last item the following new item:

``Sec. 4106. Two-party exchanges.''.

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

     SEC. 890. MODIFICATIONS OF TAX ON USE OF CERTAIN VEHICLES.

       (a) No Proration of Tax Unless Vehicle Is Destroyed or 
     Stolen.--
       (1) In general.--Section 4481(c) (relating to proration of 
     tax) is amended to read as follows:
       ``(c) Proration of Tax Where Vehicle Sold, Destroyed, or 
     Stolen.--
       ``(1) In general.--If in any taxable period a highway motor 
     vehicle is sold, destroyed, or stolen before the first day of 
     the last month in such period and not subsequently used 
     during such taxable period, the tax shall be reckoned 
     proportionately from the first day of the month in such 
     period in which the first use of such highway motor vehicle 
     occurs to and including the last day of the month in which 
     such highway motor vehicle was sold, destroyed, or stolen.
       ``(2) Destroyed.--For purposes of paragraph (1), a highway 
     motor vehicle is destroyed if such vehicle is damaged by 
     reason of an accident or other casualty to such an extent 
     that it is not economic to rebuild.''.
       (2) Conforming amendments.--
       (A) Section 6156 (relating to installment payment of tax on 
     use of highway motor vehicles) is repealed.
       (B) The table of sections for subchapter A of chapter 62 is 
     amended by striking the item relating to section 6156.
       (b) Display of Tax Certificate.--Paragraph (2) of section 
     4481(d) (relating to one tax liability for period) is amended 
     to read as follows:
       ``(2) Display of tax certificate.--Under regulations by the 
     Secretary, every taxpayer which pays the tax imposed under 
     this section with respect to a highway motor vehicle shall, 
     not later than 1 month after the due date of the return of 
     tax with respect to each taxable period, receive and display 
     on such vehicle an electronic identification device 
     prescribed by the Secretary.''.
       (c) Electronic filing.--Section 4481, as amended by section 
     5001 of this Act, is amended by redesignating subsection (e) 
     as subsection (f) and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Electronic filing.--Any taxpayer who files a return 
     under this section with respect to 25 or more vehicles for 
     any taxable period shall file such return electronically.''.
       (d) Repeal of reduction in tax for certain trucks.--Section 
     4483 of the Internal Revenue Code of 1986 is amended by 
     striking subsection (f).
       (e) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable 
     periods beginning after the date of the enactment of this 
     Act.
       (2) Regulations regarding display of tax certificate.--The 
     Secretary of the Treasury shall issue regulations required 
     under section 4481(d)(2) of the Internal Revenue Code of 1986 
     (as added by subsection (b)) not later than October 1, 2005.

     SEC. 891. DEDICATION OF REVENUES FROM CERTAIN PENALTIES TO 
                   THE HIGHWAY TRUST FUND.

       (a) In General.--Subsection (b) of section 9503 (relating 
     to transfer to Highway Trust Fund of amounts equivalent to 
     certain taxes), as amended by section 5001 of this Act, is 
     amended by redesignating paragraph (5) as paragraph (6) and 
     inserting after paragraph (4) the following new paragraph:
       ``(5) Certain penalties.--There are hereby appropriated to 
     the Highway Trust Fund amounts equivalent to the penalties 
     assessed under sections 6715, 6715A, 6717, 6718, 6719, 6720, 
     6725, 7232, and 7272 (but only with regard to penalties under 
     such section related to failure to register under section 
     4101).''.
       (b) Conforming Amendments.--
       (1) The heading of subsection (b) of section 9503 is 
     amended by inserting ``and Penalties'' after ``Taxes''.
       (2) The heading of paragraph (1) of section 9503(b) is 
     amended by striking ``In general'' and inserting ``Certain 
     taxes''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to penalties assessed after October 1, 2004.

     SEC. 892. NONAPPLICATION OF EXPORT EXEMPTION TO DELIVERY OF 
                   FUEL TO MOTOR VEHICLES REMOVED FROM UNITED 
                   STATES.

       (a) In General.--Section 4221(d)(2) (defining export) is 
     amended by adding at the end the following new sentence: 
     ``Such term does not include the delivery of a taxable fuel 
     (as defined in section 4083(a)(1)) into a fuel tank of a 
     motor vehicle which is shipped or driven out of the United 
     States.''.
       (b) Conforming Amendments.--
       (1) Section 4041(g) (relating to other exemptions) is 
     amended by adding at the end the following new sentence: 
     ``Paragraph (3) shall not apply to the sale for delivery of a 
     liquid into a fuel tank of a motor vehicle which is shipped 
     or driven out of the United States.''.
       (2) Clause (iv) of section 4081(a)(1)(A) (relating to tax 
     on removal, entry, or sale) is amended by inserting ``or at a 
     duty-free sales enterprise (as defined in section 555(b)(8) 
     of the Tariff Act of 1930)'' after ``section 4101''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales or deliveries made after the date of the 
     enactment of this Act.

                     PART VII--TOTAL ACCOUNTABILITY

     SEC. 893. TOTAL ACCOUNTABILITY.

       (a) Taxation of Reportable Liquids.--
       (1) In general.--Section 4081(a), as amended by this Act, 
     is amended--
       (A) by inserting ``or reportable liquid'' after ``taxable 
     fuel'' each place it appears, and
       (B) by inserting ``such liquid'' after ``such fuel'' in 
     paragraph (1)(A)(iv).
       (2) Rate of tax.--Subparagraph (A) of section 4081(a)(2), 
     as amended by section 5211 of this Act, is amended by 
     striking ``and'' at the end of clause (iii), by striking the 
     period at the end of clause (iv) and inserting ``, and'', and 
     by adding at the end the following new clause:
       ``(v) in the case of reportable liquids, the rate 
     determined under section 4083(c)(2).''.

[[Page 6574]]

       (3) Exemption.--Section 4081(a)(1) is amended by adding at 
     the end the following new subparagraph:
       ``(C) Exemption for registered transfers of reportable 
     liquids.--The tax imposed by this paragraph shall not apply 
     to any removal, entry, or sale of a reportable liquid if--
       ``(i) such removal, entry, or sale is to a registered 
     person who certifies that such liquid will not be used as a 
     fuel or in the production of a fuel, or
       ``(ii) the sale is to the ultimate purchaser of such 
     liquid.''.
       (4) Reportable liquids.--Section 4083, as amended by this 
     Act, is amended by redesignating subsections (c) and (d) (as 
     redesignated by section 5211 of this Act) as subsections (d) 
     and (e), respectively, and by inserting after subsection (b) 
     the following new section:
       ``(c) Reportable liquid.--For purposes of this subpart--
       ``(1) In general.--The term `reportable liquid' means any 
     petroleum-based liquid other than a taxable fuel.
       ``(2) Taxation.--
       ``(A) Gasoline blend stocks and additives.--Gasoline blend 
     stocks and additives which are reportable liquids (as defined 
     in paragraph (1)) shall be subject to the rate of tax under 
     clause (i) of section 4081(a)(2)(A).
       ``(B) Other reportable liquids.--Any reportable liquid (as 
     defined in paragraph (1)) not described in subparagraph (A) 
     shall be subject to the rate of tax under clause (iii) of 
     section 4081(a)(2)(A).''.
       (5) Conforming amendments.--
       (A) Section 4081(e) is amended by inserting ``or reportable 
     liquid'' after ``taxable fuel''.
       (B) Section 4083(d) (relating to certain use defined as 
     removal), as redesignated by paragraph (4), is amended by 
     inserting ``or reportable liquid'' after ``taxable fuel''.
       (C) Section 4083(e)(1) (relating to administrative 
     authority), as redesignated by paragraph (4), is amended--
       (i) in subparagraph (A)--

       (I) by inserting ``or reportable liquid'' after ``taxable 
     fuel'', and
       (II) by inserting ``or such liquid'' after ``such fuel'' 
     each place it appears, and

       (ii) in subparagraph (B), by inserting ``or any reportable 
     liquid'' after ``any taxable fuel''.
       (D) Section 4101(a)(2), as added by section 5243 of this 
     Act, is amended by inserting ``or a reportable liquid'' after 
     ``taxable fuel''.
       (E) Section 4101(a)(3), as added by section 5242 of this 
     Act and redesignated by section 5243 of this Act, is amended 
     by inserting ``or any reportable liquid'' before the period 
     at the end.
       (F) Section 4102 is amended by inserting ``or any 
     reportable liquid'' before the period at the end.
       (G)(i) Section 6718, as added by section 5241 of this Act, 
     is amended--
       (I) in subsection (a), by inserting ``or any reportable 
     liquid (as defined in section 4083(c)(1))'' after `` section 
     4083(a)(1))'', and
       (II) in the heading, by inserting ``or reportable liquids'' 
     after ``taxable fuel''.
       (ii) The item relating to section 6718 in table of sections 
     for part I of subchapter B of chapter 68, as added by section 
     5241 of this Act, is amended by inserting ``or reportable 
     liquids'' after ``taxable fuels''.
       (H) Section 6427(h) is amended to read as follows:
       ``(h) Gasoline Blend Stocks or Additives and Reportable 
     Liquids.--Except as provided in subsection (k)--
       ``(1) if any gasoline blend stock or additive (within the 
     meaning of section 4083(a)(2)) is not used by any person to 
     produce gasoline and such person establishes that the 
     ultimate use of such gasoline blend stock or additive is not 
     to produce gasoline, or
       ``(2) if any reportable liquid (within the meaning of 
     section 4083(c)(1)) is not used by any person to produce a 
     taxable fuel and such person establishes that the ultimate 
     use of such reportable liquid is not to produce a taxable 
     fuel,

     then the Secretary shall pay (without interest) to such 
     person an amount equal to the aggregate amount of the tax 
     imposed on such person with respect to such gasoline blend 
     stock or additive or such reportable liquid.''.
       (I) Section 7232, as amended by this Act, is amended by 
     inserting ``or reportable liquid (within the meaning of 
     section 4083(c)(1))'' after ``section 4083)''.
       (J) Section 343 of the Trade Act of 2002, as amended by 
     section 5252 of this Act, is amended by inserting ``and 
     reportable liquids (as defined in section 4083(c)(1) of such 
     Code)'' after ``Internal Revenue Code of 1986)''.
       (b) Dyed Diesel.--Section 4082(a) is amended by striking 
     ``and'' at the end of paragraph (2), by striking the period 
     at the end of paragraph (3) and inserting ``and'', and by 
     inserting after paragraph (3) the following new paragraph:
       ``(4) which is removed, entered, or sold by a person 
     registered under section 4101.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to reportable liquids (as defined in section 
     4083(c) of the Internal Revenue Code) and fuel sold or used 
     after September 30, 2004.

     SEC. 894. EXCISE TAX REPORTING.

       (a) In General.--Part II of subchapter A of chapter 61 is 
     amended by adding at the end the following new subpart:


                   ``Subpart E--Excise Tax Reporting

     ``SEC. 6025. RETURNS RELATING TO FUEL TAXES.

       ``(a) In General.--The Secretary shall require any person 
     liable for the tax imposed under Part III of subchapter A of 
     chapter 32 to file a return of such tax on a monthly basis. 
     Not earlier than January 1, 2005, such filings shall be in 
     electronic form as prescribed by the Secretary.
       ``(b) Information Included with Return.--The Secretary 
     shall require any person filing a return under subsection (a) 
     to provide information regarding any refined product (whether 
     or not such product is taxable under this title) removed from 
     a terminal during the period for which such return 
     applies.''.
       (b) Conforming Amendment.--The table of parts for 
     subchapter A of chapter 61 is amended by adding at the end 
     the following new item:

``Subpart E--Excise Tax Reporting''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to fuel sold or used after September 30, 2004.

     SEC. 895. INFORMATION REPORTING.

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

     ``The Secretary shall require reporting under the previous 
     sentence with respect to taxable fuels removed, entered, or 
     transferred from any refinery, pipeline, or vessel which is 
     registered under this section. Any person who is required to 
     report under this subsection and who has 25 or more 
     reportable transactions in a month shall file such report in 
     electronic format.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply on October 1, 2004.

                      Subtitle I--Mobile Machinery

     SEC. 896. TREATMENT OF MOBILE MACHINERY.

       (a) Treatment of Mobile Machinery as Highway Vehicle.--
       (1) In general.--Section 7701(a) (relating to definitions) 
     is amended by adding at the end the following new paragraph:
       ``(48) Treatment of mobile machinery as highway vehicle.--
       ``(A) In general.--A vehicle described in subparagraph (B) 
     shall be treated as a highway vehicle.
       ``(B) Mobile machinery.--A vehicle is described in this 
     subparagraph if such vehicle consists of a chassis--
       ``(i) to which there has been permanently mounted (by 
     welding, bolting, riveting, or other means) machinery or 
     equipment to perform a construction, manufacturing, 
     processing, farming, mining, drilling, timbering, or similar 
     operation if the operation of the machinery or equipment is 
     unrelated to transportation on or off the public highways,
       ``(ii) which has been specially designed to serve only as a 
     mobile carriage and mount (and a power source, where 
     applicable) for the particular machinery or equipment 
     involved, whether or not such machinery or equipment is in 
     operation, and
       ``(iii) which, by reason of such special design, could not, 
     without substantial structural modification, be used as a 
     component of a vehicle designed to perform a function of 
     transporting any load other than that particular machinery or 
     equipment or similar machinery or equipment requiring such a 
     specially designed chassis.''.
       (2) Effective date.--The amendment made by this subsection 
     shall take effect on the day after the date of the enactment 
     of this Act.
       (b) Eligibility for Refund in Case of Limited Use of 
     Vehicle on Highways.--
       (1) Retail sales and tire taxes.--
       (A) In general.--Section 6416(b) (relating to special cases 
     in which tax payments considered overpayments) is amended by 
     adding at the end the following new paragraph:
       ``(7) Mobile machinery.--
       ``(A) In general.--If the tax imposed by section 4051 or 
     4071 has been paid with respect to any vehicle described in 
     section 7701(a)(48)(B) which meets the use-based test for 
     each of the first 2 12-month periods after such payment, 50 
     percent of such tax shall be considered an overpayment for 
     each such period.
       ``(B) Use-based test.--For purposes of subparagraph (A), 
     the use-based test is met if the use of the vehicle on public 
     highways was less than 5,000 miles during any 12-month 
     period.
       ``(iii) Special rule for use by certain tax-exempt 
     organizations.--For purposes of clause (i), the use-based 
     test shall be determined without regard to any use in a 
     vehicle by an organization which is described in section 
     501(c) and exempt from tax under section 501(a).''.
       (B) Effective date.--The amendment made by this paragraph 
     shall take effect on the day after the date of the enactment 
     of this Act.
       (2) Fuel Taxes.--
       (A) In general.--Section 6421(e)(2) (defining off-highway 
     business use) is amended by adding at the end the following 
     new subparagraph:
       ``(C) Uses in mobile machinery.--
       ``(i) In general.--The term `off-highway business use' 
     shall include any use in a vehicle described in section 
     7701(a)(48)(B) which meets the use-based test.

[[Page 6575]]

       ``(ii) Use-based test.--For purposes of clause (i), the 
     use-based test is met if the use of the vehicle on public 
     highways was less than 5,000 miles during the taxpayer's 
     taxable year.
       ``(iii) Special rule for use by certain tax-exempt 
     organizations.--For purposes of clause (i), the use-based 
     test shall be determined without regard to any use in a 
     vehicle by an organization which is described in section 
     501(c) and exempt from tax under section 501(a).''.
       (B) Annual refund of tax paid.--Section 6427(i)(2) 
     (relating to exceptions) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Nonapplication of paragraph.--This paragraph shall 
     not apply to any fuel used in any off-highway business use 
     described in section 6421(e)(2)(C).''.
       (C) Effective date.--The amendments made by this paragraph 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.
       (3) Conforming amendment for tax-exempt users with respect 
     to use tax.--
       (A) In general.--Section 4483(d)(1) (relating to suspension 
     of tax) is amended by adding at the end the following new 
     subparagraph:
       ``(C) Special rule for use by certain tax-exempt 
     organizations.--Subparagraph (A) shall be determined without 
     regard to any use in a vehicle by an organization which is 
     described in section 501(c) and exempt from tax under section 
     501(a).''.
       (B) Effective date.--The amendment made by this paragraph 
     shall take effect on the day after the date of the enactment 
     of this Act.

                   Subtitle J--Additional Provisions

     SEC. 897. STUDY OF EFFECTIVENESS OF CERTAIN PROVISIONS BY 
                   GAO.

       (a) Study.--The Comptroller General of the United States 
     shall undertake an ongoing analysis of--
       (1) the effectiveness of the alternative motor vehicles and 
     fuel incentives provisions under subtitle B and the 
     conservation and energy efficiency provisions under subtitle 
     C, and
       (2) the recipients of the tax benefits contained in such 
     provisions, including an identification of such recipients by 
     income and other appropriate measurements.

     Such analysis shall quantify the effectiveness of such 
     provisions by examining and comparing the Federal 
     Government's forgone revenue to the aggregate amount of 
     energy actually conserved and tangible environmental benefits 
     gained as a result of such provisions.
       (b) Reports.--The Comptroller General of the United States 
     shall report the analysis required under subsection (a) to 
     Congress not later than December 31, 2004, and annually 
     thereafter.

     SEC. 898. REPEAL OF 4.3-CENT MOTOR FUEL EXCISE TAXES ON 
                   RAILROADS AND INLAND WATERWAY TRANSPORTATION 
                   WHICH REMAIN IN GENERAL FUND.

       (a) Taxes on Trains.--
       (1) In general.--Subparagraph (A) of section 4041(a)(1) is 
     amended by striking ``or a diesel-powered train'' each place 
     it appears and by striking ``or train''.
       (2) Conforming amendments.--
       (A) Subparagraph (C) of section 4041(a)(1) is amended by 
     striking clause (ii) and by redesignating clause (iii) as 
     clause (ii).
       (B) Subparagraph (C) of section 4041(b)(1) is amended by 
     striking all that follows ``section 6421(e)(2)'' and 
     inserting a period.
       (C) Subsection (d) of section 4041 is amended by 
     redesignating paragraph (3) as paragraph (4) and by inserting 
     after paragraph (2) the following new paragraph:
       ``(3) Diesel fuel used in trains.--There is hereby imposed 
     a tax of 0.1 cent per gallon on any liquid other than 
     gasoline (as defined in section 4083)--
       ``(A) sold by any person to an owner, lessee, or other 
     operator of a diesel-powered train for use as a fuel in such 
     train, or
       ``(B) used by any person as a fuel in a diesel-powered 
     train unless there was a taxable sale of such fuel under 
     subparagraph (A).
     No tax shall be imposed by this paragraph on the sale or use 
     of any liquid if tax was imposed on such liquid under section 
     4081.''
       (D) Subsection (f) of section 4082 is amended by striking 
     ``section 4041(a)(1)'' and inserting ``subsections (d)(3) and 
     (a)(1) of section 4041, respectively''.
       (E) Paragraph (3) of section 4083(a) is amended by striking 
     ``or a diesel-powered train''.
       (F) Paragraph (3) of section 6421(f) is amended to read as 
     follows:
       ``(3) Gasoline used in trains.--In the case of gasoline 
     used as a fuel in a train, this section shall not apply with 
     respect to the Leaking Underground Storage Tank Trust Fund 
     financing rate under section 4081.''
       (G) Paragraph (3) of section 6427(l) is amended to read as 
     follows:
       ``(3) Refund of certain taxes on fuel used in diesel-
     powered trains.--For purposes of this subsection, the term 
     `nontaxable use' includes fuel used in a diesel-powered 
     train. The preceding sentence shall not apply to the tax 
     imposed by section 4041(d) and the Leaking Underground 
     Storage Tank Trust Fund financing rate under section 4081 
     except with respect to fuel sold for exclusive use by a State 
     or any political subdivision thereof.''
       (b) Fuel Used on Inland Waterways.--
       (1) In general.--Paragraph (1) of section 4042(b) is 
     amended by adding ``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).
       (2) Conforming amendment.--Paragraph (2) of section 4042(b) 
     is amended by striking subparagraph (C).
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 2004.

     SEC. 899. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS 
                   TREATED AS QUALIFYING INCOME OF REGULATED 
                   INVESTMENT COMPANIES.

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

     SEC. 899A. CERTAIN BUSINESS RELATED CREDITS ALLOWED AGAINST 
                   REGULAR AND MINIMUM TAX.

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

       ``(I) the tentative minimum tax shall be treated as being 
     zero, and

[[Page 6576]]

       ``(II) the limitation under paragraph (1) (as modified by 
     subclause (I)) shall be reduced by the credit allowed under 
     subsection (a) for the taxable year (other than the specified 
     credits).

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

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

       (b) Conforming Amendments.--Paragraph (2)(A)(ii)(II) and 
     (3)(A)(ii)(II) of section 38(c) are each amended by inserting 
     ``or the specified credits'' after ``employee credit''.
       (c) Effective Date.--Except as otherwise provided, the 
     amendments made by this section shall apply to taxable years 
     ending after the date of the enactment of this Act.
                                 ______
                                 
  SA 3012. Mr. FRIST proposed an amendment to the 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; as follows:

       At the end of the instructions, insert the following:


    Sec.   . This act shall become effective 1 day after enactment.

                                 ______
                                 
  SA 3013. Mr. FRIST proposed an amendment to amend SA 3012 proposed by 
Mr. Frist to the 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; as follows:

       In the amendment strike ``1 day'' and insert ``2 days''.
                                 ______
                                 
  SA 3014. Ms. MURKOWSKI submitted an amendment intended to be proposed 
by her to the bill S. 1637, to amend the Internal Revenue Code of 1986 
to comply with the World Trade Organizations 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; which was ordered 
to lie on the table; as follows:

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

       Notwithstanding the provisions of Treasury regulation 
     Sec. 1.883-5, the final regulations issued by the Secretary 
     of the Treasury relating to income derived by foreign 
     corporations from the international operation of ships or 
     aircraft (Treasury regulations Sec. 1.883-1 through 
     Sec. 1.883-5) shall apply to taxable years of a foreign 
     corporation seeking qualified foreign corporation status 
     beginning after September 24, 2004.
                                 ______
                                 
  SA 3015. Mr. NICKLES submitted an amendment intended to be proposed 
by him to the 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; which was ordered 
to lie on the table; as follows:

       On page 71, line 13, strike ``December 31, 2006'' and 
     insert ``December 31, 2004''.

                          ____________________