[House Report 108-755]
[From the U.S. Government Publishing Office]




108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     108-755
_______________________________________________________________________

                                     


                   AMERICAN JOBS CREATION ACT OF 2004

                               ----------                              

                           CONFERENCE REPORT

                              to accompany

                               H.R. 4520





                October 7, 2004.--Ordered to be printed


                   AMERICAN JOBS CREATION ACT OF 2004


108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     108-755
_______________________________________________________________________

                                     


                   AMERICAN JOBS CREATION ACT OF 2004

                               __________

                           CONFERENCE REPORT

                              to accompany

                               H.R. 4520





                October 7, 2004.--Ordered to be printed
108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     108-755

======================================================================



 
                   AMERICAN JOBS CREATION ACT OF 2004

                                _______
                                

                October 7, 2004.--Ordered to be printed

                                _______
                                

 Mr. Thomas, from the committee of conference, submitted the following

                           CONFERENCE REPORT

                        [To accompany H.R. 4520]

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

SECTION 1. SHORT TITLE; ETC.

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

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

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

                    TITLE II--BUSINESS TAX INCENTIVES

                  Subtitle A--Small Business Expensing

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

                        Subtitle B--Depreciation

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

                  Subtitle C--Community Revitalization

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

           Subtitle D--S Corporation Reform and Simplification

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

                  Subtitle E--Other Business Incentives

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

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

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

      TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS

            Subtitle A--Volumetric Ethanol Excise Tax Credit

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

                   Subtitle B--Agricultural Incentives

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

             Subtitle C--Incentives for Small Manufacturers

Sec. 331. Net income from publicly traded partnerships treated as 
          qualifying income of regulated investment companies.
Sec. 332. Simplification of excise tax imposed on bows and arrows.
Sec. 333. Reduction of excise tax on fishing tackle boxes.
Sec. 334. Sonar devices suitable for finding fish.
Sec. 335. Charitable contribution deduction for certain expenses 
          incurred in support of Native Alaskan subsistence whaling.
Sec. 336. Modification of depreciation allowance for aircraft.
Sec. 337. Modification of placed in service rule for bonus depreciation 
          property.
Sec. 338. Expensing of capital costs incurred in complying with 
          Environmental Protection Agency sulfur regulations.
Sec. 339. Credit for production of low sulfur diesel fuel.
Sec. 340. Expansion of qualified small-issue bond program.
Sec. 341. Oil and gas from marginal wells.

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

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

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

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

               TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM

Sec. 601. Short title.

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

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

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

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

                Subtitle C--Implementation and Transition

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

                   TITLE VII--MISCELLANEOUS PROVISIONS

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

                     TITLE VIII--REVENUE PROVISIONS

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

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

             Subtitle B--Provisions Relating to Tax Shelters

                   Part I--Taxpayer-Related Provisions

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

                        Part II--Other Provisions

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

                            Part III--Leasing

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

                Subtitle C--Reduction of Fuel Tax Evasion

Sec. 851. Exemption from certain excise taxes for mobile machinery.
Sec. 852. Modification of definition of off-highway vehicle.
Sec. 853. Taxation of aviation-grade kerosene.
Sec. 854. Dye injection equipment.
Sec. 855. Elimination of administrative review for taxable use of dyed 
          fuel. 
Sec. 856. Penalty on untaxed chemically altered dyed fuel mixtures.
Sec. 857. Termination of dyed diesel use by intercity buses.
Sec. 858. Authority to inspect on-site records.
Sec. 859. Assessable penalty for refusal of entry.
Sec. 860. Registration of pipeline or vessel operators required for 
          exemption of bulk transfers to registered terminals or 
          refineries.
Sec. 861. Display of registration.
Sec. 862. Registration of persons within foreign trade zones, etc.
Sec. 863. Penalties for failure to register and failure to report.
Sec. 864. Electronic filing of required information reports.
Sec. 865. Taxable fuel refunds for certain ultimate vendors.
Sec. 866. Two-party exchanges.
Sec. 867. Modifications of tax on use of certain vehicles.
Sec. 868. Dedication of revenues from certain penalties to the Highway 
          Trust Fund.
Sec. 869. Simplification of tax on tires.
Sec. 870. Transmix and diesel fuel blend stocks treated as taxable fuel.
Sec. 871. Study regarding fuel tax compliance.

                  Subtitle D--Other Revenue Provisions

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

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

SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

    (a) In General.--Section 114 is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subpart E of part III of subchapter N of 
        chapter 1 (relating to qualifying foreign trade income) 
        is hereby repealed.
            (2) The table of subparts for such part III is 
        amended by striking the item relating to subpart E.
            (3) The table of sections for part III of 
        subchapter B of chapter 1 is amended by striking the 
        item relating to section 114.
            (4) The second sentence of section 56(g)(4)(B)(i) 
        is amended by striking ``114 or''.
            (5) Section 275(a) is amended--
                    (A) by inserting ``or'' at the end of 
                paragraph (4)(A), by striking ``or'' at the end 
                of paragraph (4)(B) and inserting a period, and 
                by striking subparagraph (C), and
                    (B) by striking the last sentence.
            (6) Paragraph (3) of section 864(e) is amended--
                    (A) by striking:
            ``(3) Tax-exempt assets not taken into account.--
                    ``(A) In general.--For purposes of''; and 
                inserting:
            ``(3) Tax-exempt assets not taken into account.--
        For purposes of'', and
                    (B) by striking subparagraph (B).
            (7) Section 903 is amended by striking ``114, 
        164(a),'' and inserting ``164(a)''.
            (8) Section 999(c)(1) is amended by striking 
        ``941(a)(5),''.
    (c) Effective Date.--The amendments made by this section 
shall apply to transactions after December 31, 2004.
    (d) Transitional Rule for 2005 and 2006.--
            (1) In general.--In the case of transactions during 
        2005 or 2006, the amount includible in gross income by 
        reason of the amendments made by this section shall not 
        exceed the applicable percentage of the amount which 
        would have been so included but for this subsection.
            (2) Applicable percentage.--For purposes of 
        paragraph (1), the applicable percentage shall be as 
        follows:
                    (A) For 2005, the applicable percentage 
                shall be 20 percent.
                    (B) For 2006, the applicable percentage 
                shall be 40 percent.
    (e) Revocation of Election To Be Treated as Domestic 
Corporation.--If, during the 1-year period beginning on the 
date of the enactment of this Act, a corporation for which an 
election is in effect under section 943(e) of the Internal 
Revenue Code of 1986 revokes such election, no gain or loss 
shall be recognized with respect to property treated as 
transferred under clause (ii) of section 943(e)(4)(B) of such 
Code to the extent such property--
            (1) was treated as transferred under clause (i) 
        thereof, or
            (2) was acquired during a taxable year to which 
        such election applies and before May 1, 2003, in the 
        ordinary course of its trade or business.
The Secretary of the Treasury (or such Secretary's delegate) 
may prescribe such regulations as may be necessary to prevent 
the abuse of the purposes of this subsection.
    (f) Binding Contracts.--The amendments made by this section 
shall not apply to any transaction in the ordinary course of a 
trade or business which occurs pursuant to a binding contract--
            (1) which is between the taxpayer and a person who 
        is not a related person (as defined in section 
        943(b)(3) of such Code, as in effect on the day before 
        the date of the enactment of this Act), and
            (2) which is in effect on September 17, 2003, and 
        at all times thereafter.
For purposes of this subsection, a binding contract shall 
include a purchase option, renewal option, or replacement 
option which is included in such contract and which is 
enforceable against the seller or lessor.

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

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

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

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

``For taxable years                                       The transition
beginning in:                                             percentage is:
    2005 or 2006..............................................        3 
    2007, 2008, or 2009.......................................        6.

    ``(b) Deduction Limited to Wages Paid.--
            ``(1) In general.--The amount of the deduction 
        allowable under subsection (a) for any taxable year 
        shall not exceed 50 percent of the W-2 wages of the 
        employer for the taxable year.
            ``(2) W-2 wages.--For purposes of paragraph (1), 
        the term `W-2 wages' means the sum of the aggregate 
        amounts the taxpayer is required to include on 
        statements under paragraphs (3) and (8) of section 
        6051(a) with respect to employment of employees of the 
        taxpayer during the calendar year ending during the 
        taxpayer's taxable year.
            ``(3) Acquisitions and dispositions.--The Secretary 
        shall provide for the application of this subsection in 
        cases where the taxpayer acquires, or disposes of, the 
        major portion of a trade or business or the major 
        portion of a separate unit of a trade or business 
        during the taxable year.
    ``(c) Qualified Production Activities Income.--For purposes 
of this section--
            ``(1) In general.--The term `qualified production 
        activities income' for any taxable year means an amount 
        equal to the excess (if any) of--
                    ``(A) the taxpayer's domestic production 
                gross receipts for such taxable year, over
                    ``(B) the sum of--
                            ``(i) the cost of goods sold that 
                        are allocable to such receipts,
                            ``(ii) other deductions, expenses, 
                        or losses directly allocable to such 
                        receipts, and
                            ``(iii) a ratable portion of other 
                        deductions, expenses, and losses that 
                        are not directly allocable to such 
                        receipts or another class of income.
            ``(2) Allocation method.--The Secretary shall 
        prescribe rules for the proper allocation of items of 
        income, deduction, expense, and loss for purposes of 
        determining income attributable to domestic production 
        activities.
            ``(3) Special rules for determining costs.--
                    ``(A) In general.--For purposes of 
                determining costs under clause (i) of paragraph 
                (1)(B), any item or service brought into the 
                United States shall be treated as acquired by 
                purchase, and its cost shall be treated as not 
                less than its value immediately after it 
                entered the United States. A similar rule shall 
                apply in determining the adjusted basis of 
                leased or rented property where the lease or 
                rental gives rise to domestic production gross 
                receipts.
                    ``(B) Exports for further manufacture.--In 
                the case of any property described in 
                subparagraph (A) that had been exported by the 
                taxpayer for further manufacture, the increase 
                in cost or adjusted basis under subparagraph 
                (A) shall not exceed the difference between the 
                value of the property when exported and the 
                value of the property when brought back into 
                the United States after the further 
                manufacture.
            ``(4) Domestic production gross receipts.--
                    ``(A) In general.--The term `domestic 
                production gross receipts' means the gross 
                receipts of the taxpayer which are derived 
                from--
                            ``(i) any lease, rental, license, 
                        sale, exchange, or other disposition 
                        of--
                                    ``(I) qualifying production 
                                property which was 
                                manufactured, produced, grown, 
                                or extracted by the taxpayer in 
                                whole or in significant part 
                                within the United States,
                                    ``(II) any qualified film 
                                produced by the taxpayer, or
                                    ``(III) electricity, 
                                natural gas, or potable water 
                                produced by the taxpayer in the 
                                United States,
                            ``(ii) construction performed in 
                        the United States, or
                            ``(iii) engineering or 
                        architectural services performed in the 
                        United States for construction projects 
                        in the United States.
                    ``(B) Exceptions.--Such term shall not 
                include gross receipts of the taxpayer which 
                are derived from--
                            ``(i) the sale of food and 
                        beverages prepared by the taxpayer at a 
                        retail establishment, and
                            ``(ii) the transmission or 
                        distribution of electricity, natural 
                        gas, or potable water.
            ``(5) Qualifying production property.--The term 
        `qualifying production property' means--
                    ``(A) tangible personal property,
                    ``(B) any computer software, and
                    ``(C) any property described in section 
                168(f)(4).
            ``(6) Qualified film.--The term `qualified film' 
        means any property described in section 168(f)(3) if 
        not less than 50 percent of the total compensation 
        relating to the production of such property is 
        compensation for services performed in the United 
        States by actors, production personnel, directors, and 
        producers. Such term does not include property with 
        respect to which records are required to be maintained 
        under section 2257 of title 18, United States Code.
            ``(7) Related persons.--
                    ``(A) In general.--The term `domestic 
                production gross receipts' shall not include 
                any gross receipts of the taxpayer derived from 
                property leased, licensed, or rented by the 
                taxpayer for use by any related person.
                    ``(B) Related person.--For purposes of 
                subparagraph (A), a person shall be treated as 
                related to another person if such persons are 
                treated as a single employer under subsection 
                (a) or (b) of section 52 or subsection (m) or 
                (o) of section 414, except that determinations 
                under subsections (a) and (b) of section 52 
                shall be made without regard to section 
                1563(b).
    ``(d) Definitions and Special Rules.--
            ``(1) Application of section to pass-thru 
        entities.--
                    ``(A) In general.--In the case of an S 
                corporation, partnership, estate or trust, or 
                other pass-thru entity--
                            ``(i) subject to the provisions of 
                        paragraphs (2) and (3), this section 
                        shall be applied at the shareholder, 
                        partner, or similar level, and
                            ``(ii) the Secretary shall 
                        prescribe rules for the application of 
                        this section, including rules relating 
                        to--
                                    ``(I) restrictions on the 
                                allocation of the deduction to 
                                taxpayers at the partner or 
                                similar level, and
                                    ``(II) additional reporting 
                                requirements.
                    ``(B) Application of wage limitation.--
                Notwithstanding subparagraph (A)(i), for 
                purposes of applying subsection (b), a 
                shareholder, partner, or similar person which 
                is allocated qualified production activities 
                income from an S corporation, partnership, 
                estate, trust, or other pass-thru entity shall 
                also be treated as having been allocated W-2 
                wages from such entity in an amount equal to 
                the lesser of--
                            ``(i) such person's allocable share 
                        of such wages (without regard to this 
                        subparagraph), as determined under 
                        regulations prescribed by the 
                        Secretary, or
                            ``(ii) 2 times 9 percent of the 
                        qualified production activities income 
                        allocated to such person for the 
                        taxable year.
            ``(2) Application to individuals.--In the case of 
        an individual, subsection (a)(1)(B) shall be applied by 
        substituting `adjusted gross income' for `taxable 
        income'. For purposes of the preceding sentence, 
        adjusted gross income shall be determined--
                    ``(A) after application of sections 86, 
                135, 137, 219, 221, 222, and 469, and
                    ``(B) without regard to this section.
            ``(3) Patrons of agricultural and horticultural 
        cooperatives.--
                    ``(A) In general.--If any amount described 
                in paragraph (1) or (3) of section 1385(a)--
                            ``(i) is received by a person from 
                        an organization to which part I of 
                        subchapter T applies which is engaged--
                                    ``(I) in the manufacturing, 
                                production, growth, or 
                                extraction in whole or 
                                significant part of any 
                                agricultural or horticultural 
                                product, or
                                    ``(II) in the marketing of 
                                agricultural or horticultural 
                                products, and
                            ``(ii) is allocable to the portion 
                        of the qualified production activities 
                        income of the organization which, but 
                        for this paragraph, would be deductible 
                        under subsection (a) by the 
                        organization and is designated as such 
                        by the organization in a written notice 
                        mailed to its patrons during the 
                        payment period described in section 
                        1382(d),
                then such person shall be allowed a deduction 
                under subsection (a) with respect to such 
                amount. The taxable income of the organization 
                shall not be reduced under section 1382 by 
                reason of any amount to which the preceding 
                sentence applies.
                    ``(B) Special rules.--For purposes of 
                applying subparagraph (A), in determining the 
                qualified production activities income which 
                would be deductible by the organization under 
                subsection (a)--
                            ``(i) there shall not be taken into 
                        account in computing the organization's 
                        taxable income any deduction allowable 
                        under subsection (b) or (c) of section 
                        1382 (relating to patronage dividends, 
                        per-unit retain allocations, and 
                        nonpatronage distributions), and
                            ``(ii) in the case of an 
                        organization described in subparagraph 
                        (A)(i)(II), the organization shall be 
                        treated as having manufactured, 
                        produced, grown, or extracted in whole 
                        or significant part any qualifying 
                        production property marketed by the 
                        organization which its patrons have so 
                        manufactured, produced, grown, or 
                        extracted.
            ``(4) Special rule for affiliated groups.--
                    ``(A) In general.--All members of an 
                expanded affiliated group shall be treated as a 
                single corporation for purposes of this 
                section.
                    ``(B) Expanded affiliated group.--For 
                purposes of this section, the term `expanded 
                affiliated group' means an affiliated group as 
                defined in section 1504(a), determined--
                            ``(i) by substituting `50 percent' 
                        for `80 percent' each place it appears, 
                        and
                            ``(ii) without regard to paragraphs 
                        (2) and (4) of section 1504(b).
                    ``(C) Allocation of deduction.--Except as 
                provided in regulations, the deduction under 
                subsection (a) shall be allocated among the 
                members of the expanded affiliated group in 
                proportion to each member's respective amount 
                (if any) of qualified production activities 
                income.
            ``(5) Trade or business requirement.--This section 
        shall be applied by only taking into account items 
        which are attributable to the actual conduct of a trade 
        or business.
            ``(6) Coordination with minimum tax.--The deduction 
        under this section shall be allowed for purposes of the 
        tax imposed by section 55; except that for purposes of 
        section 55, the deduction under subsection (a) shall be 
        9 percent of the lesser of--
                    ``(A) qualified production activities 
                income (determined without regard to part IV of 
                subchapter A), or
                    ``(B) alternative minimum taxable income 
                (determined without regard to this section) for 
                the taxable year.
        In the case of an individual, subparagraph (B) shall be 
        applied by substituting `adjusted gross income' for 
        `alternative minimum taxable income'. For purposes of 
        the preceding sentence, adjusted gross income shall be 
        determined in the same manner as provided in paragraph 
        (2).
            ``(7) Regulations.--The Secretary shall prescribe 
        such regulations as are necessary to carry out the 
        purposes of this section.''.
    (b) Minimum Tax.--Section 56(g)(4)(C) (relating to 
disallowance of items not deductible in computing earnings and 
profits) is amended by adding at the end the following new 
clause:
                            ``(v) Deduction for domestic 
                        production.--Clause (i) shall not apply 
                        to any amount allowable as a deduction 
                        under section 199.''.
    (c) Special Rule Relating to Election To Treat Cutting of 
Timber as a Sale or Exchange.--Any election under section 
631(a) of the Internal Revenue Code of 1986 made for a taxable 
year ending on or before the date of the enactment of this Act 
may be revoked by the taxpayer for any taxable year ending 
after such date. For purposes of determining whether such 
taxpayer may make a further election under such section, such 
election (and any revocation under this section) shall not be 
taken into account.
    (d) Technical Amendments.--
            (1) Sections 86(b)(2)(A), 135(c)(4)(A), 
        137(b)(3)(A), and 219(g)(3)(A)(ii) are each amended by 
        inserting ``199,'' before ``221''.
            (2) Clause (i) of section 221(b)(2)(C) is amended 
        by inserting ``199,'' before ``222''.
            (3) Clause (i) of section 222(b)(2)(C) is amended 
        by inserting ``199,'' before ``911''.
            (4) Paragraph (1) of section 246(b) is amended by 
        inserting ``199,'' after ``172,''.
            (5) Clause (iii) of section 469(i)(3)(F) is amended 
        by inserting ``199,'' before ``219,''.
            (6) Subsection (a) of section 613 is amended by 
        inserting ``and without the deduction under section 
        199'' after ``without allowances for depletion''.
            (7) Subsection (a) of section 1402 is amended by 
        striking ``and'' at the end of paragraph (14), by 
        striking the period at the end of paragraph (15) and 
        inserting ``, and'', and by inserting after paragraph 
        (15) the following new paragraph:
            ``(16) the deduction provided by section 199 shall 
        not be allowed.''.
            (8) The table of sections for part VI of subchapter 
        B of chapter 1 is amended by adding at the end the 
        following new item:

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

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

                   TITLE II--BUSINESS TAX INCENTIVES

                  Subtitle A--Small Business Expensing

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

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

                        Subtitle B--Depreciation

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

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

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

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

                  Subtitle C--Community Revitalization

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

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

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

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

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

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

          Subtitle D--S Corporation Reform and Simplification

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

    (a) In General.--Paragraph (1) of section 1361(c) (relating 
to special rules for applying subsection (b)) is amended to 
read as follows:
            ``(1) Members of family treated as 1 shareholder.--
                    ``(A) In general.--For purpose of 
                subsection (b)(1)(A)--
                            ``(i) except as provided in clause 
                        (ii), a husband and wife (and their 
                        estates) shall be treated as 1 
                        shareholder, and
                            ``(ii) in the case of a family with 
                        respect to which an election is in 
                        effect under subparagraph (D), all 
                        members of the family shall be treated 
                        as 1 shareholder.
                    ``(B) Members of the family.--For purpose 
                of subparagraph (A)(ii)--
                            ``(i) In general.--The term 
                        `members of the family' means the 
                        common ancestor, lineal descendants of 
                        the common ancestor, and the spouses 
                        (or former spouses) of such lineal 
                        descendants or common ancestor.
                            ``(ii) Common Ancestor--For 
                        purposes of this paragraph, an 
                        individual shall not be considered a 
                        common ancestor if, as of the later of 
                        the effective date of this paragraph or 
                        the time the election under section 
                        1362(a) is made, the individual is more 
                        than 6 generations removed from the 
                        youngest generation of shareholders who 
                        would (but for this clause) be members 
                        of the family. For purposes of the 
                        preceding sentence, a spouse (or former 
                        spouse) shall be treated as being of 
                        the same generation as the individual 
                        to which such spouse is (or was) 
                        married.
                    ``(C) Effect of adoption, etc.--In 
                determining whether any relationship specified 
                in subparagraph (B) exists, the rules of 
                section 152(b)(2) shall apply.
                    ``(D) Election.--An election under 
                subparagraph (A)(ii)--
                            ``(i) may, except as otherwise 
                        provided in regulations prescribed by 
                        the Secretary, be made by any member of 
                        the family, and
                            ``(ii) shall remain in effect until 
                        terminated as provided in regulations 
                        prescribed by the Secretary.''.
    (b) Relief From Inadvertent Invalid Election or 
Termination.--Section 1362(f) (relating to inadvertent invalid 
elections or terminations), as amended by this Act, is 
amended--
            (1) by inserting ``or section 1361(c)(1)(A)(ii)'' 
        after ``section 1361(b)(3)(B)(ii),'' in paragraph (1), 
        and
            (2) by inserting ``or section 1361(c)(1)(D)(iii)'' 
        after ``section 1361(b)(3)(C),'' in paragraph (1)(B).
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by 
        subsection (a) shall apply to taxable years beginning 
        after December 31, 2004.
            (2) Subsection (b).--The amendments made by 
        subsection (b) shall apply to elections and 
        terminations made after December 31, 2004.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    (a) In General.--Subsection (f) of section 4975 (relating 
to other definitions and special rules) is amended by adding at 
the end the following new paragraph:
            ``(7) S corporation repayment of loans for 
        qualifying employer securities.--A plan shall not be 
        treated as violating the requirements of section 401 or 
        409 or subsection (e)(7), or as engaging in a 
        prohibited transaction for purposes of subsection 
        (d)(3), merely by reason of any distribution (as 
        described in section 1368(a)) with respect to S 
        corporation stock that constitutes qualifying employer 
        securities, which in accordance with the plan 
        provisions is used to make payments on a loan described 
        in subsection (d)(3) the proceeds of which were used to 
        acquire such qualifying employer securities (whether or 
        not allocated to participants). The preceding sentence 
        shall not apply in the case of a distribution which is 
        paid with respect to any employer security which is 
        allocated to a participant unless the plan provides 
        that employer securities with a fair market value of 
        not less than the amount of such distribution are 
        allocated to such participant for the year which (but 
        for the preceding sentence) such distribution would 
        have been allocated to such participant.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to distributions with respect to S corporation 
stock made after December 31, 1997.

                 Subtitle E--Other Business Incentives

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

    (a) Taxes on Trains.--
            (1) In general.--Clause (ii) of section 
        4041(a)(1)(C) is amended by striking subclauses (I), 
        (II), and (III) and inserting the following new 
        subclauses:
                                    ``(I) 3.3 cents per gallon 
                                after December 31, 2004, and 
                                before July 1, 2005,
                                    ``(II) 2.3 cents per gallon 
                                after June 30, 2005, and before 
                                January 1, 2007, and
                                    ``(III) 0 after December 
                                31, 2006.''.
            (2) Conforming amendments.--
                    (A) Subsection (d) of section 4041 is 
                amended by redesignating paragraph (3) as 
                paragraph (4) and by inserting after paragraph 
                (2) the following new paragraph:
            ``(3) Diesel fuel used in trains.--In the case of 
        any sale for use or use after December 31, 2006, there 
        is hereby imposed a tax of 0.1 cent per gallon on any 
        liquid other than gasoline (as defined in section 
        4083)--
                    ``(A) sold by any person to an owner, 
                lessee, or other operator of a diesel-powered 
                train for use as a fuel in such train, or
                    ``(B) used by any person as a fuel in a 
                diesel-powered train unless there was a taxable 
                sale of such fuel under subparagraph (A).
        No tax shall be imposed by this paragraph on the sale 
        or use of any liquid if tax was imposed on such liquid 
        under section 4081.''.
                    (B) Subsection (f) of section 4082 is 
                amended by striking ``section 4041(a)(1)'' and 
                inserting ``subsections (a)(1) and (d)(3) of 
                section 4041''.
                    (C) Subparagraph (B) of section 6421(f)(3) 
                is amended to read as follows:
                    ``(B) so much of the rate specified in 
                section 4081(a)(2)(A) as does not exceed the 
                rate applicable under section 
                4041(a)(1)(C)(ii).''.
                    (D) Subparagraph (B) of section 6427(l)(3) 
                is amended to read as follows:
                    ``(B) so much of the rate specified in 
                section 4081(a)(2)(A) as does not exceed the 
                rate applicable under section 
                4041(a)(1)(C)(ii).''.
    (b) Fuel Used on Inland Waterways.--Subparagraph (C) of 
section 4042(b)(2) is amended to read as follows:
                    ``(C) The deficit reduction rate is--
                            ``(i) 3.3 cents per gallon after 
                        December 31, 2004, and before July 1, 
                        2005,
                            ``(ii) 2.3 cents per gallon after 
                        June 30, 2005, and before January 1, 
                        2007, and
                            ``(iii) 0 after December 31, 
                        2006.''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 2005.

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

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

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

    (a) Expansion of Straight Debt Safe Harbor.--Section 856 
(defining real estate investment trust) is amended--
            (1) in subsection (c) by striking paragraph (7), 
        and
            (2) by adding at the end the following new 
        subsection:
    ``(m) Safe Harbor in Applying Subsection (c)(4).--
            ``(1) In general.--In applying subclause (III) of 
        subsection (c)(4)(B)(iii), except as otherwise 
        determined by the Secretary in regulations, the 
        following shall not be considered securities held by 
        the trust:
                    ``(A) Straight debt securities of an issuer 
                which meet the requirements of paragraph (2).
                    ``(B) Any loan to an individual or an 
                estate.
                    ``(C) Any section 467 rental agreement (as 
                defined in section 467(d)), other than with a 
                person described in subsection (d)(2)(B).
                    ``(D) Any obligation to pay rents from real 
                property (as defined in subsection (d)(1)).
                    ``(E) Any security issued by a State or any 
                political subdivision thereof, the District of 
                Columbia, a foreign government or any political 
                subdivision thereof, or the Commonwealth of 
                Puerto Rico, but only if the determination of 
                any payment received or accrued under such 
                security does not depend in whole or in part on 
                the profits of any entity not described in this 
                subparagraph or payments on any obligation 
                issued by such an entity,
                    ``(F) Any security issued by a real estate 
                investment trust.
                    ``(G) Any other arrangement as determined 
                by the Secretary.
            ``(2) Special rules relating to straight debt 
        securities.--
                    ``(A) In general.--For purposes of 
                paragraph (1)(A), securities meet the 
                requirements of this paragraph if such 
                securities are straight debt, as defined in 
                section 1361(c)(5) (without regard to 
                subparagraph (B)(iii) thereof).
                    ``(B) Special rules relating to certain 
                contingencies.--For purposes of subparagraph 
                (A), any interest or principal shall not be 
                treated as failing to satisfy section 
                1361(c)(5)(B)(i) solely by reason of the fact 
                that--
                            ``(i) the time of payment of such 
                        interest or principal is subject to a 
                        contingency, but only if--
                                    ``(I) any such contingency 
                                does not have the effect of 
                                changing the effective yield to 
                                maturity, as determined under 
                                section 1272, other than a 
                                change in the annual yield to 
                                maturity which does not exceed 
                                the greater of \1/4\ of 1 
                                percent or 5 percent of the 
                                annual yield to maturity, or
                            ``(II) neither the aggregate issue 
                        price nor the aggregate face amount of 
                        the issuer's debt instruments held by 
                        the trust exceeds $1,000,000 and not 
                        more than 12 months of unaccrued 
                        interest can be required to be prepaid 
                        thereunder, or
                            ``(ii) the time or amount of 
                        payment is subject to a contingency 
                        upon a default or the exercise of a 
                        prepayment right by the issuer of the 
                        debt, but only if such contingency is 
                        consistent with customary commercial 
                        practice.
                    ``(C) Special rules relating to corporate 
                or partnership issuers.--In the case of an 
                issuer which is a corporation or a partnership, 
                securities that otherwise would be described in 
                paragraph (1)(A) shall be considered not to be 
                so described if the trust holding such 
                securities and any of its controlled taxable 
                REIT subsidiaries (as defined in subsection 
                (d)(8)(A)(iv)) hold any securities of the 
                issuer which--
                            ``(i) are not described in 
                        paragraph (1) (prior to the application 
                        of this subparagraph), and
                            ``(ii) have an aggregate value 
                        greater than 1 percent of the issuer's 
                        outstanding securities determined 
                        without regard to paragraph (3)(A)(i).
            ``(3) Look-through rule for partnership 
        securities.--
                    ``(A) In general.--For purposes of applying 
                subclause (III) of subsection (c)(4)(B)(iii)--
                            ``(i) a trust's interest as a 
                        partner in a partnership (as defined in 
                        section 7701(a)(2)) shall not be 
                        considered a security, and
                            ``(ii) the trust shall be deemed to 
                        own its proportionate share of each of 
                        the assets of the partnership.
                    ``(B) Determination of trust's interest in 
                partnership assets.--For purposes of 
                subparagraph (A), with respect to any taxable 
                year beginning after the date of the enactment 
                of this subparagraph--
                            ``(i) the trust's interest in the 
                        partnership assets shall be the trust's 
                        proportionate interest in any 
                        securities issued by the partnership 
                        (determined without regard to 
                        subparagraph (A)(i) and paragraph (4), 
                        but not including securities described 
                        in paragraph (1)), and
                            ``(ii) the value of any debt 
                        instrument shall be the adjusted issue 
                        price thereof, as defined in section 
                        1272(a)(4).
            ``(4) Certain partnership debt instruments not 
        treated as a security.--For purposes of applying 
        subclause (III) of subsection (c)(4)(B)(iii)--
                    ``(A) any debt instrument issued by a 
                partnership and not described in paragraph (1) 
                shall not be considered a security to the 
                extent of the trust's interest as a partner in 
                the partnership, and
                    ``(B) any debt instrument issued by a 
                partnership and not described in paragraph (1) 
                shall not be considered a security if at least 
                75 percent of the partnership's gross income 
                (excluding gross income from prohibited 
                transactions) is derived from sources referred 
                to in subsection (c)(3).
            ``(5) Secretarial guidance.--The Secretary is 
        authorized to provide guidance (including through the 
        issuance of a written determination, as defined in 
        section 6110(b)) that an arrangement shall not be 
        considered a security held by the trust for purposes of 
        applying subclause (III) of subsection (c)(4)(B)(iii) 
        notwithstanding that such arrangement otherwise could 
        be considered a security under subparagraph (F) of 
        subsection (c)(5).''.
    (b) Clarification of Application of Limited Rental 
Exception.--Subparagraph (A) of section 856(d)(8) (relating to 
special rules for taxable REIT subsidiaries) is amended to read 
as follows:
                    ``(A) Limited rental exception.--
                            ``(i) In general.--The requirements 
                        of this subparagraph are met with 
                        respect to any property if at least 90 
                        percent of the leased space of the 
                        property is rented to persons other 
                        than taxable REIT subsidiaries of such 
                        trust and other than persons described 
                        in paragraph (2)(B).
                            ``(ii) Rents must be substantially 
                        comparable.--Clause (i) shall apply 
                        only to the extent that the amounts 
                        paid to the trust as rents from real 
                        property (as defined in paragraph (1) 
                        without regard to paragraph (2)(B)) 
                        from such property are substantially 
                        comparable to such rents paid by the 
                        other tenants of the trust's property 
                        for comparable space.
                            ``(iii) Times for testing rent 
                        comparability.--The substantial 
                        comparability requirement of clause 
                        (ii) shall be treated as met with 
                        respect to a lease to a taxable REIT 
                        subsidiary of the trust if such 
                        requirement is met under the terms of 
                        the lease--
                                    ``(I) at the time such 
                                lease is entered into,
                                    ``(II) at the time of each 
                                extension of the lease, 
                                including a failure to exercise 
                                a right to terminate, and
                                    ``(III) at the time of any 
                                modification of the lease 
                                between the trust and the 
                                taxable REIT subsidiary if the 
                                rent under such lease is 
                                effectively increased pursuant 
                                to such modification.
                        With respect to subclause (III), if the 
                        taxable REIT subsidiary of the trust is 
                        a controlled taxable REIT subsidiary of 
                        the trust, the term `rents from real 
                        property' shall not in any event 
                        include rent under such lease to the 
                        extent of the increase in such rent on 
                        account of such modification.
                            ``(iv) Controlled taxable reit 
                        subsidiary.--For purposes of clause 
                        (iii), the term `controlled taxable 
                        REIT subsidiary' means, with respect to 
                        any real estate investment trust, any 
                        taxable REIT subsidiary of such trust 
                        if such trust owns directly or 
                        indirectly--
                                    ``(I) stock possessing more 
                                than 50 percent of the total 
                                voting power of the outstanding 
                                stock of such subsidiary, or
                                    ``(II) stock having a value 
                                of more than 50 percent of the 
                                total value of the outstanding 
                                stock of such subsidiary.
                            ``(v) Continuing qualification 
                        based on third party actions.--If the 
                        requirements of clause (i) are met at a 
                        time referred to in clause (iii), such 
                        requirements shall continue to be 
                        treated as met so long as there is no 
                        increase in the space leased to any 
                        taxable REIT subsidiary of such trust 
                        or to any person described in paragraph 
                        (2)(B).
                            ``(vi) Correction period.--If there 
                        is an increase referred to in clause 
                        (v) during any calendar quarter with 
                        respect to any property, the 
                        requirements of clause (iii) shall be 
                        treated as met during the quarter and 
                        the succeeding quarter if such 
                        requirements are met at the close of 
                        such succeeding quarter.''.
    (c) Deletion of Customary Services Exception.--Subparagraph 
(B) of section 857(b)(7) (relating to redetermined rents) is 
amended by striking clause (ii) and by redesignating clauses 
(iii), (iv), (v), (vi), and (vii) as clauses (ii), (iii), (iv), 
(v), and (vi), respectively.
    (d) Conformity With General Hedging Definition.--
Subparagraph (G) of section 856(c)(5) (relating to treatment of 
certain hedging instruments) is amended to read as follows:
                    ``(G) Treatment of certain hedging 
                instruments.--Except to the extent provided by 
                regulations, any income of a real estate 
                investment trust from a hedging transaction (as 
                defined in clause (ii) or (iii) of section 
                1221(b)(2)(A)) which is clearly identified 
                pursuant to section 1221(a)(7), including gain 
                from the sale or disposition of such a 
                transaction, shall not constitute gross income 
                under paragraph (2) to the extent that the 
                transaction hedges any indebtedness incurred or 
                to be incurred by the trust to acquire or carry 
                real estate assets.''.
    (e) Conformity With Regulated Investment Company Rules.--
Clause (i) of section 857(b)(5)(A) (relating to imposition of 
tax in case of failure to meet certain requirements) is amended 
by striking ``90 percent'' and inserting ``95 percent''.
    (f) Savings Provisions.--
            (1) Rules of application for failure to satisfy 
        section 856(c)(4).--Section 856(c) (relating to 
        definition of real estate investment trust) is amended 
        by inserting after paragraph (6) the following new 
        paragraph:
            ``(7) Rules of application for failure to satisfy 
        paragraph (4).--
                    ``(A) De minimis failure.--A corporation, 
                trust, or association that fails to meet the 
                requirements of paragraph (4)(B)(iii) for a 
                particular quarter shall nevertheless be 
                considered to have satisfied the requirements 
                of such paragraph for such quarter if--
                            ``(i) such failure is due to the 
                        ownership of assets the total value of 
                        which does not exceed the lesser of--
                                    ``(I) 1 percent of the 
                                total value of the trust's 
                                assets at the end of the 
                                quarter for which such 
                                measurement is done, and
                                    ``(II) $10,000,000, and
                            ``(ii)(I) the corporation, trust, 
                        or association, following the 
                        identification of such failure, 
                        disposes of assets in order to meet the 
                        requirements of such paragraph within 6 
                        months after the last day of the 
                        quarter in which the corporation, trust 
                        or association's identification of the 
                        failure to satisfy the requirements of 
                        such paragraph occurred or such other 
                        time period prescribed by the Secretary 
                        and in the manner prescribed by the 
                        Secretary, or
                            ``(II) the requirements of such 
                        paragraph are otherwise met within the 
                        time period specified in subclause (I).
                    ``(B) Failures exceeding de minimis 
                amount.--A corporation, trust, or association 
                that fails to meet the requirements of 
                paragraph (4) for a particular quarter shall 
                nevertheless be considered to have satisfied 
                the requirements of such paragraph for such 
                quarter if--
                            ``(i) such failure involves the 
                        ownership of assets the total value of 
                        which exceeds the de minimis standard 
                        described in subparagraph (A)(i) at the 
                        end of the quarter for which such 
                        measurement is done,
                            ``(ii) following the corporation, 
                        trust, or association's identification 
                        of the failure to satisfy the 
                        requirements of such paragraph for a 
                        particular quarter, a description of 
                        each asset that causes the corporation, 
                        trust, or association to fail to 
                        satisfy the requirements of such 
                        paragraph at the close of such quarter 
                        of any taxable year is set forth in a 
                        schedule for such quarter filed in 
                        accordance with regulations prescribed 
                        by the Secretary,
                            ``(iii) the failure to meet the 
                        requirements of such paragraph for a 
                        particular quarter is due to reasonable 
                        cause and not due to willful neglect,
                            ``(iv) the corporation, trust, or 
                        association pays a tax computed under 
                        subparagraph (C), and
                            ``(v)(I) the corporation, trust, or 
                        association disposes of the assets set 
                        forth on the schedule specified in 
                        clause (ii) within 6 months after the 
                        last day of the quarter in which the 
                        corporation, trust or association's 
                        identification of the failure to 
                        satisfy the requirements of such 
                        paragraph occurred or such other time 
                        period prescribed by the Secretary and 
                        in the manner prescribed by the 
                        Secretary, or
                            ``(II) the requirements of such 
                        paragraph are otherwise met within the 
                        time period specified in subclause (I).
                    ``(C) Tax.--For purposes of subparagraph 
                (B)(iv)--
                            ``(i) Tax imposed.--If a 
                        corporation, trust, or association 
                        elects the application of this 
                        subparagraph, there is hereby imposed a 
                        tax on the failure described in 
                        subparagraph (B) of such corporation, 
                        trust, or association. Such tax shall 
                        be paid by the corporation, trust, or 
                        association.
                            ``(ii) Tax computed.--The amount of 
                        the tax imposed by clause (i) shall be 
                        the greater of--
                                    ``(I) $50,000, or
                                    ``(II) the amount 
                                determined (pursuant to 
                                regulations promulgated by the 
                                Secretary) by multiplying the 
                                net income generated by the 
                                assets described in the 
                                schedule specified in 
                                subparagraph (B)(ii) for the 
                                period specified in clause 
                                (iii) by the highest rate of 
                                tax specified in section 11.
                            ``(iii) Period.--For purposes of 
                        clause (ii)(II), the period described 
                        in this clause is the period beginning 
                        on the first date that the failure to 
                        satisfy the requirements of such 
                        paragraph (4) occurs as a result of the 
                        ownership of such assets and ending on 
                        the earlier of the date on which the 
                        trust disposes of such assets or the 
                        end of the first quarter when there is 
                        no longer a failure to satisfy such 
                        paragraph (4).
                            ``(iv) Administrative provisions.--
                        For purposes of subtitle F, the taxes 
                        imposed by this subparagraph shall be 
                        treated as excise taxes with respect to 
                        which the deficiency procedures of such 
                        subtitle apply.''.
            (2) Modification of rules of application for 
        failure to satisfy sections 856(c)(2) or 856(c)(3).--
        Paragraph (6) of section 856(c) (relating to definition 
        of real estate investment trust) is amended by striking 
        subparagraphs (A) and (B), by redesignating 
        subparagraph (C) as subparagraph (B), and by inserting 
        before subparagraph (B) (as so redesignated) the 
        following new subparagraph:
                    ``(A) following the corporation, trust, or 
                association's identification of the failure to 
                meet the requirements of paragraph (2) or (3), 
                or of both such paragraphs, for any taxable 
                year, a description of each item of its gross 
                income described in such paragraphs is set 
                forth in a schedule for such taxable year filed 
                in accordance with regulations prescribed by 
                the Secretary, and''.
            (3) Reasonable cause exception to loss of reit 
        status if failure to satisfy requirements.--Subsection 
        (g) of section 856 (relating to termination of 
        election) is amended--
                    (A) in paragraph (1) by inserting before 
                the period at the end of the first sentence the 
                following: ``unless paragraph (5) applies'', 
                and
                    (B) by adding at the end the following new 
                paragraph:
            ``(5) Entities to which paragraph applies.--This 
        paragraph applies to a corporation, trust, or 
        association--
                    ``(A) which is not a real estate investment 
                trust to which the provisions of this part 
                apply for the taxable year due to one or more 
                failures to comply with one or more of the 
                provisions of this part (other than subsection 
                (c)(6) or (c)(7) of section 856),
                    ``(B) such failures are due to reasonable 
                cause and not due to willful neglect, and
                    ``(C) if such corporation, trust, or 
                association pays (as prescribed by the 
                Secretary in regulations and in the same manner 
                as tax) a penalty of $50,000 for each failure 
                to satisfy a provision of this part due to 
                reasonable cause and not willful neglect.''.
            (4) Deduction of tax paid from amount required to 
        be distributed.--Subparagraph (E) of section 857(b)(2) 
        is amended by striking ``(7)'' and inserting ``(7) of 
        this subsection, section 856(c)(7)(B)(iii), and section 
        856(g)(1).''.
            (5) Expansion of deficiency dividend procedure.--
        Subsection (e) of section 860 is amended by striking 
        ``or'' at the end of paragraph (2), by striking the 
        period at the end of paragraph (3) and inserting ``; 
        or'', and by adding at the end the following new 
        paragraph:
            ``(4) a statement by the taxpayer attached to its 
        amendment or supplement to a return of tax for the 
        relevant tax year.''.
    (g) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2000.
            (2) Subsections (c) through  (f).--The amendments 
        made by subsections (c), (d), (e), and (f) shall apply 
        to taxable years beginning after the date of the 
        enactment of this Act.

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

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

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

    ``(a) Election To Treat Costs as Expenses.--
            ``(1) In general.--A taxpayer may elect to treat 
        the cost of any qualified film or television production 
        as an expense which is not chargeable to capital 
        account. Any cost so treated shall be allowed as a 
        deduction.
            ``(2) Dollar limitation.--
                    ``(A) In general.--Paragraph (1) shall not 
                apply to any qualified film or television 
                production the aggregate cost of which exceeds 
                $15,000,000.
                    ``(B) Higher dollar limitation for 
                productions in certain areas.--In the case of 
                any qualified film or television production the 
                aggregate cost of which is significantly 
                incurred in an area eligible for designation 
                as--
                            ``(i) a low-income community under 
                        section 45D, or
                            ``(ii) a distressed county or 
                        isolated area of distress by the Delta 
                        Regional Authority established under 
                        section 2009aa-1 of title 7, United 
                        States Code,
                subparagraph (A) shall be applied by 
                substituting `$20,000,000' for `$15,000,000'.
    ``(b) No Other Deduction or Amortization Deduction 
Allowable.--With respect to the basis of any qualified film or 
television production to which an election is made under 
subsection (a), no other depreciation or amortization deduction 
shall be allowable.
    ``(c) Election.--
            ``(1) In general.--An election under this section 
        with respect to any qualified film or television 
        production shall be made in such manner as prescribed 
        by the Secretary and by the due date (including 
        extensions) for filing the taxpayer's return of tax 
        under this chapter for the taxable year in which costs 
        of the production are first incurred.
            ``(2) Revocation of election.--Any election made 
        under this section may not be revoked without the 
        consent of the Secretary.
    ``(d) Qualified Film or Television Production.--For 
purposes of this section--
            ``(1) In general.--The term `qualified film or 
        television production' means any production described 
        in paragraph (2) if 75 percent of the total 
        compensation of the production is qualified 
        compensation.
            ``(2) Production.--
                    ``(A) In general.--A production is 
                described in this paragraph if such production 
                is property described in section 168(f)(3). For 
                purposes of a television series, only the first 
                44 episodes of such series may be taken into 
                account.
                    ``(B) Exception.--A production is not 
                described in this paragraph if records are 
                required under section 2257 of title 18, United 
                States Code, to be maintained with respect to 
                any performer in such production.
            ``(3) Qualified compensation.--For purposes of 
        paragraph (1)--
                    ``(A) In general.--The term `qualified 
                compensation' means compensation for services 
                performed in the United States by actors, 
                directors, producers, and other relevant 
                production personnel.
                    ``(B) Participations and residuals 
                excluded.--The term `compensation' does not 
                include participations and residuals (as 
                defined in section 167(g)(7)(B)).
    ``(e) Application of Certain Other Rules.--For purposes of 
this section, rules similar to the rules of subsections (b)(2) 
and (c)(4) of section 194 shall apply.
    ``(f) Termination.--This section shall not apply to 
qualified film and television productions commencing after 
December 31, 2008.''.
    (b) Conforming Amendment.--The table of sections for part 
VI of subchapter B of chapter 1 is amended by inserting after 
the item relating to section 180 the following new item:

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

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

SEC. 245. CREDIT FOR MAINTENANCE OF RAILROAD TRACK.

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

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

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

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

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

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

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

``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.

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

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

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

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

    (a) In General.--Paragraph (6) of section 514(c) (relating 
to acquisition indebtedness) is amended to read as follows:
            ``(6) Certain federal financing.--
                    ``(A) In general.--For purposes of this 
                section, the term `acquisition indebtedness' 
                does not include--
                            ``(i) an obligation, to the extent 
                        that it is insured by the Federal 
                        Housing Administration, to finance the 
                        purchase, rehabilitation, or 
                        construction of housing for low and 
                        moderate income persons, or
                            ``(ii) indebtedness incurred by a 
                        small business investment company 
                        licensed after the date of the 
                        enactment of the American Jobs Creation 
                        Act of 2004 under the Small Business 
                        Investment Act of 1958 if such 
                        indebtedness is evidenced by a 
                        debenture--
                                    ``(I) issued by such 
                                company under section 303(a) of 
                                such Act, and
                                    ``(II) held or guaranteed 
                                by the Small Business 
                                Administration.
                    ``(B) Limitation.--Subparagraph (A)(ii) 
                shall not apply with respect to any small 
                business investment company during any period 
                that--
                            ``(i) any organization which is 
                        exempt from tax under this title (other 
                        than a governmental unit) owns more 
                        than 25 percent of the capital or 
                        profits interest in such company, or
                            ``(ii) organizations which are 
                        exempt from tax under this title 
                        (including governmental units other 
                        than any agency or instrumentality of 
                        the United States) own, in the 
                        aggregate, 50 percent or more of the 
                        capital or profits interest in such 
                        company.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to indebtedness incurred after the date of the 
enactment of this Act by a small business investment company 
licensed after the date of the enactment of this Act.

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

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

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

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

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

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

``SEC. 1353. NOTIONAL SHIPPING INCOME.

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

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

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

``SEC. 1355. DEFINITIONS AND SPECIAL RULES.

    ``(a) Definitions.--For purposes of this subchapter--
            ``(1) Electing corporation.--The term `electing 
        corporation' means any corporation for which an 
        election is in effect under this subchapter.
            ``(2) Electing group; controlled group.--
                    ``(A) Electing group.--The term `electing 
                group' means a controlled group of which one or 
                more members is an electing corporation.
                    ``(B) Controlled group.--The term 
                `controlled group' means any group which would 
                be treated as a single employer under 
                subsection (a) or (b) of section 52 if 
                paragraphs (1) and (2) of section 52(a) did not 
                apply.
            ``(3) Qualifying vessel operator.--The term 
        `qualifying vessel operator' means any corporation--
                    ``(A) who operates one or more qualifying 
                vessels, and
                    ``(B) who meets the shipping activity 
                requirement in subsection (c).
            ``(4) Qualifying vessel.--The term `qualifying 
        vessel' means a self-propelled (or a combination self-
        propelled and non-self-propelled) United States flag 
        vessel of not less than 10,000 deadweight tons used 
        exclusively in the United States foreign trade during 
        the period that the election under this subchapter is 
        in effect.
            ``(5) United states flag vessel.--The term `United 
        States flag vessel' means any vessel documented under 
        the laws of the United States.
            ``(6) United states domestic trade.--The term 
        `United States domestic trade' means the transportation 
        of goods or passengers between places in the United 
        States.
            ``(7) United states foreign trade.--The term 
        `United States foreign trade' means the transportation 
        of goods or passengers between a place in the United 
        States and a foreign place or between foreign places.
            ``(8) Charter.--The term `charter' includes an 
        operating agreement.
    ``(b) Operating a Vessel.--For purposes of this 
subchapter--
            ``(1) In general.--Except as provided in paragraph 
        (2), a person is treated as operating any vessel during 
        any period if such vessel is--
                    ``(A) owned by, or chartered (including a 
                time charter) to, the person, and
                    ``(B) is in use as a qualifying vessel 
                during such period.
            ``(2) Bareboat charters.--A person is treated as 
        operating and using a vessel that it has chartered out 
        on bareboat charter terms only if--
                    ``(A)(i) the vessel is temporarily surplus 
                to the person's requirements and the term of 
                the charter does not exceed 3 years, or
                    ``(ii) the vessel is bareboat chartered to 
                a member of a controlled group which includes 
                such person or to an unrelated person who sub-
                bareboats or time charters the vessel to such a 
                member (including the owner of the vessel), and
                    ``(B) the vessel is used as a qualifying 
                vessel by the person to whom ultimately 
                chartered.
    ``(c) Shipping Activity Requirement.--For purposes of this 
section--
            ``(1) In general.--Except as otherwise provided in 
        this subsection, a corporation meets the shipping 
        activity requirement of this subsection for any taxable 
        year only if the requirement of paragraph (4) is met 
        for each of the 2 preceding taxable years.
            ``(2) Special rule for 1st year of election.--A 
        corporation meets the shipping activity requirement of 
        this subsection for the first taxable year for which 
        the election under section 1354(a) is in effect only if 
        the requirement of paragraph (4) is met for the 
        preceding taxable year.
            ``(3) Controlled groups.--A corporation who is a 
        member of a controlled group meets the shipping 
        activity requirement of this subsection only if such 
        requirement is met determined--
                    ``(A) by treating all members of such group 
                as 1 person, and
                    ``(B) by disregarding vessel charters 
                between members of such group.
            ``(4) Requirement.--The requirement of this 
        paragraph is met for any taxable year if, on average 
        during such year, at least 25 percent of the aggregate 
        tonnage of qualifying vessels used by the corporation 
        were owned by such corporation or chartered to such 
        corporation on bareboat charter terms.
    ``(d) Activities Carried on Partnerships, Etc.--In applying 
this subchapter to a partner in a partnership--
            ``(1) each partner shall be treated as operating 
        vessels operated by the partnership,
            ``(2) each partner shall be treated as conducting 
        the activities conducted by the partnership, and
            ``(3) the extent of a partner's ownership or 
        charter interest in any vessel owned by or chartered to 
        the partnership shall be determined on the basis of the 
        partner's interest in the partnership.
A similar rule shall apply with respect to other pass-thru 
entities.
    ``(e) Effect of Temporarily Ceasing To Operate a Qualifying 
Vessel.--
            ``(1) In general.--For purposes of subsections (b) 
        and (c), an electing corporation shall be treated as 
        continuing to use a qualifying vessel during any period 
        of temporary cessation if the electing corporation 
        gives timely notice to the Secretary stating--
                    ``(A) that it has temporarily ceased to 
                operate the qualifying vessel, and
                    ``(B) its intention to resume operating the 
                qualifying vessel.
            ``(2) Notice.--Notice shall be deemed timely if 
        given not later than the due date (including 
        extensions) for the corporation's tax return for the 
        taxable year in which the temporary cessation begins.
            ``(3) Period disregard in effect.--The period of 
        temporary cessation under paragraph (1) shall continue 
        until the earlier of the date on which--
                    ``(A) the electing corporation abandons its 
                intention to resume operation of the qualifying 
                vessel, or
                    ``(B) the electing corporation resumes 
                operation of the qualifying vessel.
    ``(f) Effect of Temporarily Operating a Qualifying Vessel 
in the United States Domestic Trade.--
            ``(1) In general.--For purposes of this subchapter, 
        an electing corporation shall be treated as continuing 
        to use a qualifying vessel in the United States foreign 
        trade during any period of temporary use in the United 
        States domestic trade if the electing corporation gives 
        timely notice to the Secretary stating--
                    ``(A) that it temporarily operates or has 
                operated in the United States domestic trade a 
                qualifying vessel which had been used in the 
                United States foreign trade, and
                    ``(B) its intention to resume operation of 
                the vessel in the United States foreign trade.
            ``(2) Notice.--Notice shall be deemed timely if 
        given not later than the due date (including 
        extensions) for the corporation's tax return for the 
        taxable year in which the temporary cessation begins.
            ``(3) Period disregard in effect.--The period of 
        temporary use under paragraph (1) continues until the 
        earlier of the date of which--
                    ``(A) the electing corporation abandons its 
                intention to resume operations of the vessel in 
                the United States foreign trade, or
                    ``(B) the electing corporation resumes 
                operation of the vessel in the United States 
                foreign trade.
            ``(4) No disregard if domestic trade use exceeds 30 
        days.--Paragraph (1) shall not apply to any qualifying 
        vessel which is operated in the United States domestic 
        trade for more than 30 days during the taxable year.
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.

``SEC. 1356. QUALIFYING SHIPPING ACTIVITIES.

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

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

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

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

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

``SEC. 1359. DISPOSITION OF QUALIFYING VESSELS.

    ``(a) In General.--If any qualifying vessel operator sells 
or disposes of any qualifying vessel in an otherwise taxable 
transaction, at the election of such operator, no gain shall be 
recognized if any replacement qualifying vessel is acquired 
during the period specified in subsection (b), except to the 
extent that the amount realized upon such sale or disposition 
exceeds the cost of the replacement qualifying vessel.
    ``(b) Period Within Which Property Must Be Replaced.--The 
period referred to in subsection (a) shall be the period 
beginning one year prior to the disposition of the qualifying 
vessel and ending--
            ``(1) 3 years after the close of the first taxable 
        year in which the gain is realized, or
            ``(2) subject to such terms and conditions as may 
        be specified by the Secretary, on such later date as 
        the Secretary may designate on application by the 
        taxpayer.
Such application shall be made at such time and in such manner 
as the Secretary may by regulations prescribe.
    ``(c) Application of Section to Noncorporate Operators.--
For purposes of this section, the term `qualifying vessel 
operator' includes any person who would be a qualifying vessel 
operator were such person a corporation.
    ``(d) Time for Assessment of Deficiency Attributable to 
Gain.--If a qualifying vessel operator has made the election 
provided in subsection (a), then--
            ``(1) the statutory period for the assessment of 
        any deficiency, for any taxable year in which any part 
        of the gain is realized, attributable to such gain 
        shall not expire prior to the expiration of 3 years 
        from the date the Secretary is notified by such 
        operator (in such manner as the Secretary may by 
        regulations prescribe) of the replacement qualifying 
        vessel or of an intention not to replace, and
            ``(2) such deficiency may be assessed before the 
        expiration of such 3-year period notwithstanding the 
        provisions of section 6212(c) or the provisions of any 
        other law or rule of law which would otherwise prevent 
        such assessment.
    ``(e) Basis of Replacement Qualifying Vessel.--In the case 
of any replacement qualifying vessel purchased by the 
qualifying vessel operator which resulted in the nonrecognition 
of any part of the gain realized as the result of a sale or 
other disposition of a qualifying vessel, the basis shall be 
the cost of the replacement qualifying vessel decreased in the 
amount of the gain not so recognized; and if the property 
purchased consists of more than one piece of property, the 
basis determined under this sentence shall be allocated to the 
purchased properties in proportion to their respective costs.''
    (b) Technical Amendments.--
            (1) The second sentence of section 56(g)(4)(B)(i), 
        as amended by this Act, is further amended by inserting 
        ``or 1357'' after ``section 139A''.
            (2) The table of subchapters for chapter 1 is 
        amended by inserting after the item relating to 
        subchapter S the following new item:

        ``Subchapter R. Election to determine corporate tax on certain 
                  international shipping activities using per ton 
                  rate.''

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

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

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

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

     TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS

            Subtitle A--Volumetric Ethanol Excise Tax Credit

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

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

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

    ``(a) Allowance of Credits.--There shall be allowed as a 
credit against the tax imposed by section 4081 an amount equal 
to the sum of--
            ``(1) the alcohol fuel mixture credit, plus
            ``(2) the biodiesel mixture credit.
    ``(b) Alcohol Fuel Mixture Credit.--
            ``(1) In general.--For purposes of this section, 
        the alcohol fuel mixture credit is the product of the 
        applicable amount and the number of gallons of alcohol 
        used by the taxpayer in producing any alcohol fuel 
        mixture for sale or use in a trade or business of the 
        taxpayer.
            ``(2) Applicable amount.--For purposes of this 
        subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the applicable amount is 51 
                cents.
                    ``(B) Mixtures not containing ethanol.--In 
                the case of an alcohol fuel mixture in which 
                none of the alcohol consists of ethanol, the 
                applicable amount is 60 cents.
            ``(3) Alcohol fuel mixture.--For purposes of this 
        subsection, the term `alcohol fuel mixture' means a 
        mixture of alcohol and a taxable fuel which--
                    ``(A) is sold by the taxpayer producing 
                such mixture to any person for use as a fuel, 
                or
                    ``(B) is used as a fuel by the taxpayer 
                producing such mixture.
        For purposes of subparagraph (A), a mixture produced by 
        any person at a refinery prior to a taxable event which 
        includes ethyl tertiary butyl ether or other ethers 
        produced from alcohol shall be treated as sold at the 
        time of its removal from the refinery (and only at such 
        time) to another person for use as a fuel.
            ``(4) Other definitions.--For purposes of this 
        subsection--
                    ``(A) Alcohol.--The term `alcohol' includes 
                methanol and ethanol but does not include--
                            ``(i) alcohol produced from 
                        petroleum, natural gas, or coal 
                        (including peat), or
                            ``(ii) alcohol with a proof of less 
                        than 190 (determined without regard to 
                        any added denaturants).
                Such term also includes an alcohol gallon 
                equivalent of ethyl tertiary butyl ether or 
                other ethers produced from such alcohol.
                    ``(B) Taxable fuel.--The term `taxable 
                fuel' has the meaning given such term by 
                section 4083(a)(1).
            ``(5) Termination.--This subsection shall not apply 
        to any sale, use, or removal for any period after 
        December 31, 2010.
    ``(c) Biodiesel Mixture Credit.--
            ``(1) In general.--For purposes of this section, 
        the biodiesel mixture credit is the product of the 
        applicable amount and the number of gallons of 
        biodiesel used by the taxpayer in producing any 
        biodiesel mixture for sale or use in a trade or 
        business of the taxpayer.
            ``(2) Applicable amount.--For purposes of this 
        subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the applicable amount is 50 
                cents.
                    ``(B) Amount for agri-biodiesel.--In the 
                case of any biodiesel which is agri-biodiesel, 
                the applicable amount is $1.00.
            ``(3) Biodiesel mixture.--For purposes of this 
        section, the term `biodiesel mixture' means a mixture 
        of biodiesel and diesel fuel (as defined in section 
        4083(a)(3)), determined without regard to any use of 
        kerosene, which--
                    ``(A) is sold by the taxpayer producing 
                such mixture to any person for use as a fuel, 
                or
                    ``(B) is used as a fuel by the taxpayer 
                producing such mixture.
            ``(4) Certification for biodiesel.--No credit shall 
        be allowed under this subsection unless the taxpayer 
        obtains a certification (in such form and manner as 
        prescribed by the Secretary) from the producer of the 
        biodiesel which identifies the product produced and the 
        percentage of biodiesel and agri-biodiesel in the 
        product.
            ``(5) Other definitions.--Any term used in this 
        subsection which is also used in section 40A shall have 
        the meaning given such term by section 40A.
            ``(6) Termination.--This subsection shall not apply 
        to any sale, use, or removal for any period after 
        December 31, 2006.
    ``(d) Mixture Not Used As a Fuel, Etc.--
            ``(1) Imposition of tax.--If--
                    ``(A) any credit was determined under this 
                section with respect to alcohol or biodiesel 
                used in the production of any alcohol fuel 
                mixture or biodiesel mixture, respectively, and
                    ``(B) any person--
                            ``(i) separates the alcohol or 
                        biodiesel from the mixture, or
                            ``(ii) without separation, uses the 
                        mixture other than as a fuel,
                then there is hereby imposed on such person a 
                tax equal to the product of the applicable 
                amount and the number of gallons of such 
                alcohol or biodiesel.
            ``(2) Applicable laws.--All provisions of law, 
        including penalties, shall, insofar as applicable and 
        not inconsistent with this section, apply in respect of 
        any tax imposed under paragraph (1) as if such tax were 
        imposed by section 4081 and not by this section.
    ``(e) Coordination With Exemption From Excise Tax.--Rules 
similar to the rules under section 40(c) shall apply for 
purposes of this section.''.
    (b) Registration Requirement.--Section 4101(a)(1) (relating 
to registration), as amended by section 861, is amended by 
inserting ``and every person producing or importing biodiesel 
(as defined in section 40A(d)(1)) or alcohol (as defined in 
section 6426(b)(4)(A))'' before ``shall register with the 
Secretary''.
    (c) Additional Amendments.--
            (1) Section 40(c) is amended by striking 
        ``subsection (b)(2), (k), or (m) of section 4041, 
        section 4081(c), or section 4091(c)'' and inserting 
        ``section 4041(b)(2), section 6426, or section 
        6427(e)''.
            (2) Paragraph (4) of section 40(d) is amended to 
        read as follows:
            ``(4) Volume of alcohol.--For purposes of 
        determining under subsection (a) the number of gallons 
        of alcohol with respect to which a credit is allowable 
        under subsection (a), the volume of alcohol shall 
        include the volume of any denaturant (including 
        gasoline) which is added under any formulas approved by 
        the Secretary to the extent that such denaturants do 
        not exceed 5 percent of the volume of such alcohol 
        (including denaturants).''.
            (3) Section 40(e)(1) is amended--
                    (A) by striking ``2007'' in subparagraph 
                (A) and inserting ``2010'', and
                    (B) by striking ``2008'' in subparagraph 
                (B) and inserting ``2011''.
            (4) Section 40(h) is amended--
                    (A) by striking ``2007'' in paragraph (1) 
                and inserting ``2010'', and
                    (B) by striking ``, 2006, or 2007'' in the 
                table contained in paragraph (2) and inserting 
                ``through 2010''.
            (5) Section 4041(b)(2)(B) is amended by striking 
        ``a substance other than petroleum or natural gas'' and 
        inserting ``coal (including peat)''.
            (6) Section 4041 is amended by striking subsection 
        (k).
            (7) Section 4081 is amended by striking subsection 
        (c).
            (8) Paragraph (2) of section 4083(a) is amended to 
        read as follows:
            ``(2) Gasoline.--The term `gasoline'--
                    ``(A) includes any gasoline blend, other 
                than qualified methanol or ethanol fuel (as 
                defined in section 4041(b)(2)(B)), partially 
                exempt methanol or ethanol fuel (as defined in 
                section 4041(m)(2)), or a denatured alcohol, 
                and
                    ``(B) includes, to the extent prescribed in 
                regulations--
                            ``(i) any gasoline blend stock, and
                            ``(ii) any product commonly used as 
                        an additive in gasoline (other than 
                        alcohol).
        For purposes of subparagraph (B)(i), the term `gasoline 
        blend stock' means any petroleum product component of 
        gasoline.''.
            (9) Section 6427 is amended by inserting after 
        subsection (d) the following new subsection:
    ``(e) Alcohol or Biodiesel Used To Produce Alcohol Fuel and 
Biodiesel Mixtures.--Except as provided in subsection (k)--
            ``(1) Used to produce a mixture.--If any person 
        produces a mixture described in section 6426 in such 
        person's trade or business, the Secretary shall pay 
        (without interest) to such person an amount equal to 
        the alcohol fuel mixture credit or the biodiesel 
        mixture credit with respect to such mixture.
            ``(2) Coordination with other repayment 
        provisions.--No amount shall be payable under paragraph 
        (1) with respect to any mixture with respect to which 
        an amount is allowed as a credit under section 6426.
            ``(3) Termination.--This subsection shall not apply 
        with respect to--
                    ``(A) any alcohol fuel mixture (as defined 
                in section 6426(b)(3)) sold or used after 
                December 31, 2010, and
                    ``(B) any biodiesel mixture (as defined in 
                section 6426(c)(3)) sold or used after December 
                31, 2006.''.
            (10) Section 6427(i)(3) is amended--
                    (A) by striking ``subsection (f)'' both 
                places it appears in subparagraph (A) and 
                inserting ``subsection (e)(1)'',
                    (B) by striking ``gasoline, diesel fuel, or 
                kerosene used to produce a qualified alcohol 
                mixture (as defined in section 4081(c)(3))'' in 
                subparagraph (A) and inserting ``a mixture 
                described in section 6426'',
                    (C) by adding at the end of subparagraph 
                (A) the following new flush sentence:
                ``In the case of an electronic claim, this 
                subparagraph shall be applied without regard to 
                clause (i).'',
                    (D) by striking ``subsection (f)(1)'' in 
                subparagraph (B) and inserting ``subsection 
                (e)(1)'',
                    (E) by striking ``20 days of the date of 
                the filing of such claim'' in subparagraph (B) 
                and inserting ``45 days of the date of the 
                filing of such claim (20 days in the case of an 
                electronic claim)'', and
                    (F) by striking ``alcohol mixture'' in the 
                heading and inserting ``alcohol fuel and 
                biodiesel mixture''.
            (11) Section 9503(b)(1) is amended by adding at the 
        end the following new flush sentence:
        ``For purposes of this paragraph, taxes received under 
        sections 4041 and 4081 shall be determined without 
        reduction for credits under section 6426.''.
            (12) Section 9503(b)(4) is amended--
                    (A) by adding ``or'' at the end of 
                subparagraph (C),
                    (B) by striking the comma at the end of 
                subparagraph (D)(iii) and inserting a period, 
                and
                    (C) by striking subparagraphs (E) and (F).
            (13) Section 9503(c)(2)(A) is amended by adding at 
        the end the following: ``Clauses (i)(III) and (ii) 
        shall not apply to claims under section 6427(e).''.
            (14) The table of sections for subchapter B of 
        chapter 65 is amended by inserting after the item 
        relating to section 6425 the following new item:

    ``Sec. 6426. Credit for alcohol fuel and biodiesel mixtures.''.

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

SEC. 302. BIODIESEL INCOME TAX CREDIT.

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

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

    ``(a) General Rule.--For purposes of section 38, the 
biodiesel fuels credit determined under this section for the 
taxable year is an amount equal to the sum of--
            ``(1) the biodiesel mixture credit, plus
            ``(2) the biodiesel credit.
    ``(b) Definition of Biodiesel Mixture Credit and Biodiesel 
Credit.--For purposes of this section--
            ``(1) Biodiesel mixture credit.--
                    ``(A) In general.--The biodiesel mixture 
                credit of any taxpayer for any taxable year is 
                50 cents for each gallon of biodiesel used by 
                the taxpayer in the production of a qualified 
                biodiesel mixture.
                    ``(B) Qualified biodiesel mixture.--The 
                term `qualified biodiesel mixture' means a 
                mixture of biodiesel and diesel fuel (as 
                defined in section 4083(a)(3)), determined 
                without regard to any use of kerosene, which--
                            ``(i) is sold by the taxpayer 
                        producing such mixture to any person 
                        for use as a fuel, or
                            ``(ii) is used as a fuel by the 
                        taxpayer producing such mixture.
                    ``(C) Sale or use must be in trade or 
                business, etc.--Biodiesel used in the 
                production of a qualified biodiesel mixture 
                shall be taken into account--
                            ``(i) only if the sale or use 
                        described in subparagraph (B) is in a 
                        trade or business of the taxpayer, and
                            ``(ii) for the taxable year in 
                        which such sale or use occurs.
                    ``(D) Casual off-farm production not 
                eligible.--No credit shall be allowed under 
                this section with respect to any casual off-
                farm production of a qualified biodiesel 
                mixture.
            ``(2) Biodiesel credit.--
                    ``(A) In general.--The biodiesel credit of 
                any taxpayer for any taxable year is 50 cents 
                for each gallon of biodiesel which is not in a 
                mixture with diesel fuel and which during the 
                taxable year--
                            ``(i) is used by the taxpayer as a 
                        fuel in a trade or business, or
                            ``(ii) is sold by the taxpayer at 
                        retail to a person and placed in the 
                        fuel tank of such person's vehicle.
                    ``(B) User credit not to apply to biodiesel 
                sold at retail.--No credit shall be allowed 
                under subparagraph (A)(i) with respect to any 
                biodiesel which was sold in a retail sale 
                described in subparagraph (A)(ii).
            ``(3) Credit for agri-biodiesel.--In the case of 
        any biodiesel which is agri-biodiesel, paragraphs 
        (1)(A) and (2)(A) shall be applied by substituting 
        `$1.00' for `50 cents'.
            ``(4) Certification for biodiesel.--No credit shall 
        be allowed under this section unless the taxpayer 
        obtains a certification (in such form and manner as 
        prescribed by the Secretary) from the producer or 
        importer of the biodiesel which identifies the product 
        produced and the percentage of biodiesel and agri-
        biodiesel in the product.
    ``(c) Coordination With Credit Against Excise Tax.--The 
amount of the credit determined under this section with respect 
to any biodiesel shall be properly reduced to take into account 
any benefit provided with respect to such biodiesel solely by 
reason of the application of section 6426 or 6427(e).
    ``(d) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Biodiesel.--The term `biodiesel' means the 
        monoalkyl esters of long chain fatty acids derived from 
        plant or animal matter which meet--
                    ``(A) the registration requirements for 
                fuels and fuel additives established by the 
                Environmental Protection Agency under section 
                211 of the Clean Air Act (42 U.S.C. 7545), and
                    ``(B) the requirements of the American 
                Society of Testing and Materials D6751.
            ``(2) Agri-biodiesel.--The term `agri-biodiesel' 
        means biodiesel derived solely from virgin oils, 
        including esters derived from virgin vegetable oils 
        from corn, soybeans, sunflower seeds, cottonseeds, 
        canola, crambe, rapeseeds, safflowers, flaxseeds, rice 
        bran, and mustard seeds, and from animal fats.
            ``(3) Mixture or biodiesel not used as a fuel, 
        etc.--
                    ``(A) Mixtures.--If--
                            ``(i) any credit was determined 
                        under this section with respect to 
                        biodiesel used in the production of any 
                        qualified biodiesel mixture, and
                            ``(ii) any person--
                                    ``(I) separates the 
                                biodiesel from the mixture, or
                                    ``(II) without separation, 
                                uses the mixture other than as 
                                a fuel,
                then there is hereby imposed on such person a 
                tax equal to the product of the rate applicable 
                under subsection (b)(1)(A) and the number of 
                gallons of such biodiesel in such mixture.
                    ``(B) Biodiesel.--If--
                            ``(i) any credit was determined 
                        under this section with respect to the 
                        retail sale of any biodiesel, and
                            ``(ii) any person mixes such 
                        biodiesel or uses such biodiesel other 
                        than as a fuel,
                then there is hereby imposed on such person a 
                tax equal to the product of the rate applicable 
                under subsection (b)(2)(A) and the number of 
                gallons of such biodiesel.
                    ``(C) Applicable laws.--All provisions of 
                law, including penalties, shall, insofar as 
                applicable and not inconsistent with this 
                section, apply in respect of any tax imposed 
                under subparagraph (A) or (B) as if such tax 
                were imposed by section 4081 and not by this 
                chapter.
            ``(4) Pass-thru in the case of estates and 
        trusts.--Under regulations prescribed by the Secretary, 
        rules similar to the rules of subsection (d) of section 
        52 shall apply.
    ``(e) Termination.--This section shall not apply to any 
sale or use after December 31, 2006.''.
    (b) Credit Treated as Part of General Business Credit.--
Section 38(b) (relating to current year business credit), as 
amended by this Act, is amended by striking ``plus'' at the end 
of paragraph (15), by striking the period at the end of 
paragraph (16) and inserting ``, plus'', and by inserting after 
paragraph (16) the following new paragraph:
            ``(17) the biodiesel fuels credit determined under 
        section 40A(a).''.
    (c) Conforming Amendments.--
            (1)(A) Section 87 is amended to read as follows:

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

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

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

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

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

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

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

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

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

    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 2005.

                  Subtitle B--Agricultural Incentives

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

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

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

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

SEC. 313. APPORTIONMENT OF SMALL ETHANOL PRODUCER CREDIT.

    (a) Allocation of Alcohol Fuels Credit to Patrons of a 
Cooperative.--Section 40(g) (relating to definitions and 
special rules for eligible small ethanol producer credit) is 
amended by adding at the end the following new paragraph:
            ``(6) Allocation of small ethanol producer credit 
        to patrons of cooperative.--
                    ``(A) Election to allocate.--
                            ``(i) In general.--In the case of a 
                        cooperative organization described in 
                        section 1381(a), any portion of the 
                        credit determined under subsection 
                        (a)(3) for the taxable year may, at the 
                        election of the organization, be 
                        apportioned pro rata among patrons of 
                        the organization on the basis of the 
                        quantity or value of business done with 
                        or for such patrons for the taxable 
                        year.
                            ``(ii) Form and effect of 
                        election.--An election under clause (i) 
                        for any taxable year shall be made on a 
                        timely filed return for such year. Such 
                        election, once made, shall be 
                        irrevocable for such taxable year.
                    ``(B) Treatment of organizations and 
                patrons.--
                            ``(i) Organizations.--The amount of 
                        the credit not apportioned to patrons 
                        pursuant to subparagraph (A) shall be 
                        included in the amount determined under 
                        subsection (a)(3) for the taxable year 
                        of the organization.
                            ``(ii) Patrons.--The amount of the 
                        credit apportioned to patrons pursuant 
                        to subparagraph (A) shall be included 
                        in the amount determined under such 
                        subsection for the first taxable year 
                        of each patron ending on or after the 
                        last day of the payment period (as 
                        defined in section 1382(d)) for the 
                        taxable year of the organization or, if 
                        earlier, for the taxable year of each 
                        patron ending on or after the date on 
                        which the patron receives notice from 
                        the cooperative of the apportionment.
                            ``(iii) Special rules for decrease 
                        in credits for taxable year.--If the 
                        amount of the credit of the 
                        organization determined under such 
                        subsection for a taxable year is less 
                        than the amount of such credit shown on 
                        the return of the organization for such 
                        year, an amount equal to the excess 
                        of--
                                    ``(I) such reduction, over
                                    ``(ii) the amount not 
                                apportioned to such patrons 
                                under subparagraph (A) for the 
                                taxable year,
                        shall be treated as an increase in tax 
                        imposed by this chapter on the 
                        organization. Such increase shall not 
                        be treated as tax imposed by this 
                        chapter for purposes of determining the 
                        amount of any credit under this chapter 
                        or for purposes of section 55.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years ending after the date of the 
enactment of this Act.

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

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

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

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

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

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

          ``For treatment of value-added processing involving animals, 
        see section 1388(k).''.

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

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

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

SEC. 318. CERTAIN EXPENSES OF RURAL LETTER CARRIERS.

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

SEC. 319. TREATMENT OF CERTAIN INCOME OF COOPERATIVES.

    (a) Income From Open Access and Nuclear Decommissioning 
Transactions.--
            (1) In general.--Subparagraph (C) of section 
        501(c)(12) is amended by striking clause (ii) and 
        adding at the end the following:
                            ``(ii) from any provision or sale 
                        of electric energy transmission 
                        services or ancillary services if such 
                        services are provided on a 
                        nondiscriminatory open access basis 
                        under an open access transmission 
                        tariff approved or accepted by FERC or 
                        under an independent transmission 
                        provider agreement approved or accepted 
                        by FERC (other than income received or 
                        accrued directly or indirectly from a 
                        member),
                            ``(iii) from the provision or sale 
                        of electric energy distribution 
                        services or ancillary services if such 
                        services are provided on a 
                        nondiscriminatory open access basis to 
                        distribute electric energy not owned by 
                        the mutual or electric cooperative 
                        company--
                                    ``(I) to end-users who are 
                                served by distribution 
                                facilities not owned by such 
                                company or any of its members 
                                (other than income received or 
                                accrued directly or indirectly 
                                from a member), or
                                    ``(II) generated by a 
                                generation facility not owned 
                                or leased by such company or 
                                any of its members and which is 
                                directly connected to 
                                distribution facilities owned 
                                by such company or any of its 
                                members (other than income 
                                received or accrued directly or 
                                indirectly from a member),
                            ``(iv) from any nuclear 
                        decommissioning transaction, or
                            ``(v) from any asset exchange or 
                        conversion transaction.
                Clauses (ii) through (v) shall not apply to 
                taxable years beginning after December 31, 
                2006.''.
            (2) Definitions and special rules.--Paragraph (12) 
        of section 501(c) is amended by adding at the end the 
        following new subparagraphs:
                    ``(E) For purposes of subparagraph (C)(ii), 
                the term `FERC' means the Federal Energy 
                Regulatory Commission and references to such 
                term shall be treated as including the Public 
                Utility Commission of Texas with respect to any 
                ERCOT utility (as defined in section 
                212(k)(2)(B) of the Federal Power Act (16 
                U.S.C. 824k(k)(2)(B))).
                    ``(F) For purposes of subparagraph 
                (C)(iii), the term `nuclear decommissioning 
                transaction' means--
                            ``(i) any transfer into a trust, 
                        fund, or instrument established to pay 
                        any nuclear decommissioning costs if 
                        the transfer is in connection with the 
                        transfer of the mutual or cooperative 
                        electric company's interest in a 
                        nuclear power plant or nuclear power 
                        plant unit,
                            ``(ii) any distribution from any 
                        trust, fund, or instrument established 
                        to pay any nuclear decommissioning 
                        costs, or
                            ``(iii) any earnings from any 
                        trust, fund, or instrument established 
                        to pay any nuclear decommissioning 
                        costs.
                    ``(G) For purposes of subparagraph (C)(iv), 
                the term `asset exchange or conversion 
                transaction' means any voluntary exchange or 
                involuntary conversion of any property related 
                to generating, transmitting, distributing, or 
                selling electric energy by a mutual or 
                cooperative electric company, the gain from 
                which qualifies for deferred recognition under 
                section 1031 or 1033, but only if the 
                replacement property acquired by such company 
                pursuant to such section constitutes property 
                which is used, or to be used, for--
                            ``(i) generating, transmitting, 
                        distributing, or selling electric 
                        energy, or
                            ``(ii) producing, transmitting, 
                        distributing, or selling natural 
                        gas.''.
    (b) Treatment of Income From Load Loss Transactions, Etc.--
Paragraph (12) of section 501(c), as amended by subsection 
(a)(2), is amended by adding after subparagraph (G) the 
following new subparagraph:
                    ``(H)(i) In the case of a mutual or 
                cooperative electric company described in this 
                paragraph or an organization described in 
                section 1381(a)(2)(C), income received or 
                accrued from a load loss transaction shall be 
                treated as an amount collected from members for 
                the sole purpose of meeting losses and 
                expenses.
                    ``(ii) For purposes of clause (i), the term 
                `load loss transaction' means any wholesale or 
                retail sale of electric energy (other than to 
                members) to the extent that the aggregate sales 
                during the recovery period do not exceed the 
                load loss mitigation sales limit for such 
                period.
                    ``(iii) For purposes of clause (ii), the 
                load loss mitigation sales limit for the 
                recovery period is the sum of the annual load 
                losses for each year of such period.
                    ``(iv) For purposes of clause (iii), a 
                mutual or cooperative electric company's annual 
                load loss for each year of the recovery period 
                is the amount (if any) by which--
                            ``(I) the megawatt hours of 
                        electric energy sold during such year 
                        to members of such electric company are 
                        less than
                            ``(II) the megawatt hours of 
                        electric energy sold during the base 
                        year to such members.
                    ``(v) For purposes of clause (iv)(II), the 
                term `base year' means--
                            ``(I) the calendar year preceding 
                        the start-up year, or
                            ``(II) at the election of the 
                        mutual or cooperative electric company, 
                        the second or third calendar years 
                        preceding the start-up year.
                    ``(vi) For purposes of this subparagraph, 
                the recovery period is the 7-year period 
                beginning with the start-up year.
                    ``(vii) For purposes of this subparagraph, 
                the start-up year is the first year that the 
                mutual or cooperative electric company offers 
                nondiscriminatory open access or the calendar 
                year which includes the date of the enactment 
                of this subparagraph, if later, at the election 
                of such company.
                    ``(viii) A company shall not fail to be 
                treated as a mutual or cooperative electric 
                company for purposes of this paragraph or as a 
                corporation operating on a cooperative basis 
                for purposes of section 1381(a)(2)(C) by reason 
                of the treatment under clause (i).
                    ``(ix) For purposes of subparagraph (A), in 
                the case of a mutual or cooperative electric 
                company, income received, or accrued, 
                indirectly from a member shall be treated as an 
                amount collected from members for the sole 
                purpose of meeting losses and expenses.
                    ``(x) This subparagraph shall not apply to 
                taxable years beginning after December 31, 
                2006.''.
    (c) Exception From Unrelated Business Taxable Income.--
Subsection (b) of section 512 (relating to modifications) is 
amended by adding at the end the following new paragraph:
            ``(18) Treatment of mutual or cooperative electric 
        companies.--In the case of a mutual or cooperative 
        electric company described in section 501(c)(12), there 
        shall be excluded income which is treated as member 
        income under subparagraph (H) thereof.''.
    (d) Cross Reference.--Section 1381 is amended by adding at 
the end the following new subsection:
    ``(c) Cross Reference.--

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

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

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

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

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

    (a) Expansion of Prohibited Transaction Safe Harbor.--
Section 857(b)(6) (relating to income from prohibited 
transactions) is amended by redesignating subparagraphs (D) and 
(E) as subparagraphs (E) and (F), respectively, and by 
inserting after subparagraph (C) the following new 
subparagraph:
                    ``(D) Certain sales not to constitute 
                prohibited transactions.--For purposes of this 
                part, the term `prohibited transaction' does 
                not include a sale of property which is a real 
                estate asset (as defined in section 
                856(c)(5)(B)) if--
                            ``(i) the trust held the property 
                        for not less than 4 years in connection 
                        with the trade or business of producing 
                        timber,
                            ``(ii) the aggregate expenditures 
                        made by the trust, or a partner of the 
                        trust, during the 4-year period 
                        preceding the date of sale which--
                                    ``(I) are includible in the 
                                basis of the property (other 
                                than timberland acquisition 
                                expenditures), and
                                    ``(II) are directly related 
                                to operation of the property 
                                for the production of timber or 
                                for the preservation of the 
                                property for use as timberland,
                        do not exceed 30 percent of the net 
                        selling price of the property,
                            ``(iii) the aggregate expenditures 
                        made by the trust, or a partner of the 
                        trust, during the 4-year period 
                        preceding the date of sale which--
                                    ``(I) are includible in the 
                                basis of the property (other 
                                than timberland acquisition 
                                expenditures), and
                                    ``(II) are not directly 
                                related to operation of the 
                                property for the production of 
                                timber, or for the preservation 
                                of the property for use as 
                                timberland,
                        do not exceed 5 percent of the net 
                        selling price of the property,
                            ``(iv)(I) during the taxable year 
                        the trust does not make more than 7 
                        sales of property (other than sales of 
                        foreclosure property or sales to which 
                        section 1033 applies), or
                            ``(II) the aggregate adjusted bases 
                        (as determined for purposes of 
                        computing earnings and profits) of 
                        property (other than sales of 
                        foreclosure property or sales to which 
                        section 1033 applies) sold during the 
                        taxable year does not exceed 10 percent 
                        of the aggregate bases (as so 
                        determined) of all of the assets of the 
                        trust as of the beginning of the 
                        taxable year,
                            ``(v) in the case that the 
                        requirement of clause (iv)(I) is not 
                        satisfied, substantially all of the 
                        marketing expenditures with respect to 
                        the property were made through an 
                        independent contractor (as defined in 
                        section 856(d)(3)) from whom the trust 
                        itself does not derive or receive any 
                        income, and
                            ``(vi) the sales price of the 
                        property sold by the trust is not based 
                        in whole or in part on income or 
                        profits, including income or profits 
                        derived from the sale or operation of 
                        such property.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 322. EXPENSING OF CERTAIN REFORESTATION EXPENDITURES.

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

             Subtitle C--Incentives for Small Manufacturers

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

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

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

    (a) Bows.--Paragraph (1) of section 4161(b) (relating to 
bows) is amended to read as follows:
            ``(1) Bows.--
                    ``(A) In general.--There is hereby imposed 
                on the sale by the manufacturer, producer, or 
                importer of any bow which has a peak draw 
                weight of 30 pounds or more, a tax equal to 11 
                percent of the price for which so sold.
                    ``(B) Archery equipment.--There is hereby 
                imposed on the sale by the manufacturer, 
                producer, or importer--
                            ``(i) of any part or accessory 
                        suitable for inclusion in or attachment 
                        to a bow described in subparagraph (A), 
                        and
                            ``(ii) of any quiver or broadhead 
                        suitable for use with an arrow 
                        described in paragraph (2),
                a tax equal to 11 percent of the price for 
                which so sold.''.
    (b) Arrows.--Subsection (b) of section 4161 (relating to 
bows and arrows, etc.) is amended by redesignating paragraph 
(3) as paragraph (4) and inserting after paragraph (2) the 
following:
            ``(3) Arrows.--
                    ``(A) In general.--There is hereby imposed 
                on the sale by the manufacturer, producer, or 
                importer of any arrow, a tax equal to 12 
                percent of the price for which so sold.
                    ``(B) Exception.--In the case of any arrow 
                of which the shaft or any other component has 
                been previously taxed under paragraph (1) or 
                (2)--
                            ``(i) section 6416(b)(3) shall not 
                        apply, and
                            ``(ii) the tax imposed by 
                        subparagraph (A) shall be an amount 
                        equal to the excess (if any) of--
                                    ``(I) the amount of tax 
                                imposed by this paragraph 
                                (determined without regard to 
                                this subparagraph), over
                                    ``(II) the amount of tax 
                                paid with respect to the tax 
                                imposed under paragraph (1) or 
                                (2) on such shaft or component.
                    ``(C) Arrow.--For purposes of this 
                paragraph, the term `arrow' means any shaft 
                described in paragraph (2) to which additional 
                components are attached.''.
    (c) Conforming Amendments.--Section 4161(b)(2) is amended--
            (1) by inserting ``(other than broadheads)'' after 
        ``point'', and
            (2) by striking ``Arrows.--'' in the heading and 
        inserting ``Arrow components.--''.
    (d) Effective Date.--The amendments made by this section 
shall apply to articles sold by the manufacturer, producer, or 
importer after the date which is 30 days after the date of the 
enactment of this Act.

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

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

SEC. 334. SONAR DEVICES SUITABLE FOR FINDING FISH.

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

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

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

SEC. 336. MODIFICATION OF DEPRECIATION ALLOWANCE FOR AIRCRAFT.

    (a) Aircraft Treated as Qualified Property.--
            (1) In general.--Paragraph (2) of section 168(k) is 
        amended by redesignating subparagraphs (C) through (F) 
        as subparagraphs (D) through (G), respectively, and by 
        inserting after subparagraph (B) the following new 
        subparagraph:
                    ``(C) Certain aircraft.--The term 
                `qualified property' includes property--
                            ``(i) which meets the requirements 
                        of clauses (ii) and (iii) of 
                        subparagraph (A),
                            ``(ii) which is an aircraft which 
                        is not a transportation property (as 
                        defined in subparagraph (B)(iii)) other 
                        than for agricultural or firefighting 
                        purposes,
                            ``(iii) which is purchased and on 
                        which such purchaser, at the time of 
                        the contract for purchase, has made a 
                        nonrefundable deposit of the lesser 
                        of--
                                    ``(I) 10 percent of the 
                                cost, or
                                    ``(II) $100,000, and
                            ``(iv) which has--
                                    ``(I) an estimated 
                                production period exceeding 4 
                                months, and
                                    ``(II) a cost exceeding 
                                $200,000.''.
            (2) Placed in service date.--Clause (iv) of section 
        168(k)(2)(A) is amended by striking ``subparagraph 
        (B)'' and inserting ``subparagraphs (B) and (C)''.
    (b) Conforming Amendments.--
            (1) Section 168(k)(2)(B) is amended by adding at 
        the end the following new clause:
                            ``(iv) Application of 
                        subparagraph.--This subparagraph shall 
                        not apply to any property which is 
                        described in subparagraph (C).''.
            (2) Section 168(k)(4)(A)(ii) is amended by striking 
        ``paragraph (2)(C)'' and inserting ``paragraph 
        (2)(D)''.
            (3) Section 168(k)(4)(B)(iii) is amended by 
        inserting ``and paragraph (2)(C)'' after ``of this 
        paragraph)''.
            (4) Section 168(k)(4)(C) is amended by striking 
        ``subparagraphs (B) and (D)'' and inserting 
        ``subparagraphs (B), (C), and (E)''.
            (5) Section 168(k)(4)(D) is amended by striking 
        ``Paragraph (2)(E)'' and inserting ``Paragraph 
        (2)(F)''.
    (c) Effective Date.--The amendments made by this section 
shall take effect as if included in the amendments made by 
section 101 of the Job Creation and Worker Assistance Act of 
2002.

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

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

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

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

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

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

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

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

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

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

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

    ``(a) In General.--For purposes of section 38, the amount 
of the low sulfur diesel fuel production credit determined 
under this section with respect to any facility of a small 
business refiner is an amount equal to 5 cents for each gallon 
of low sulfur diesel fuel produced during the taxable year by 
such small business refiner at such facility.
    ``(b) Maximum Credit.--
            ``(1) In general.--The aggregate credit determined 
        under subsection (a) for any taxable year with respect 
        to any facility shall not exceed--
                    ``(A) 25 percent of the qualified capital 
                costs incurred by the small business refiner 
                with respect to such facility, reduced by
                    ``(B) the aggregate credits determined 
                under this section for all prior taxable years 
                with respect to such facility.
            ``(2) Reduced percentage.--In the case of a small 
        business refiner with average daily domestic refinery 
        runs for the 1-year period ending on December 31, 2002, 
        in excess of 155,000 barrels, the number of percentage 
        points described in paragraph (1) shall be reduced (not 
        below zero) by the product of such number (before the 
        application of this paragraph) and the ratio of such 
        excess to 50,000 barrels.
    ``(c) Definitions and Special Rule.--For purposes of this 
section--
            ``(1) Small business refiner.--The term `small 
        business refiner' means, with respect to any taxable 
        year, a refiner of crude oil--
                    ``(A) with respect to which not more than 
                1,500 individuals are engaged in the refinery 
                operations of the business on any day during 
                such taxable year, and
                    ``(B) the average daily domestic refinery 
                run or average retained production of which for 
                all facilities of the taxpayer for the 1-year 
                period ending on December 31, 2002, did not 
                exceed 205,000 barrels.
            ``(2) Qualified capital costs.--The term `qualified 
        capital costs' means, with respect to any facility, 
        those costs paid or incurred during the applicable 
        period for compliance with the applicable EPA 
        regulations with respect to such facility, including 
        expenditures for the construction of new process 
        operation units or the dismantling and reconstruction 
        of existing process units to be used in the production 
        of low sulfur diesel fuel, associated adjacent or 
        offsite equipment (including tankage, catalyst, and 
        power supply), engineering, construction period 
        interest, and sitework.
            ``(3) Applicable epa regulations.--The term 
        `applicable EPA regulations' means the Highway Diesel 
        Fuel Sulfur Control Requirements of the Environmental 
        Protection Agency.
            ``(4) Applicable period.--The term `applicable 
        period' means, with respect to any facility, the period 
        beginning on January 1, 2003, and ending on the earlier 
        of the date which is 1 year after the date on which the 
        taxpayer must comply with the applicable EPA 
        regulations with respect to such facility or December 
        31, 2009.
            ``(5) Low sulfur diesel fuel.--The term `low sulfur 
        diesel fuel' means diesel fuel with a sulfur content of 
        15 parts per million or less.
    ``(d) Reduction in Basis.--For purposes of this subtitle, 
if a credit is determined under this section for any 
expenditure with respect to any property, the increase in basis 
of such property which would (but for this subsection) result 
from such expenditure shall be reduced by the amount of the 
credit so determined.
    ``(e) Special Rule for Determination of Refinery Runs.--For 
purposes this section and section 179B(b), in the calculation 
of average daily domestic refinery run or retained production, 
only refineries which on April 1, 2003, were refineries of the 
refiner or a related person (within the meaning of section 
613A(d)(3)), shall be taken into account.
    ``(f) Certification.--
            ``(1) Required.--No credit shall be allowed unless, 
        not later than the date which is 30 months after the 
        first day of the first taxable year in which the low 
        sulfur diesel fuel production credit is determined with 
        respect to a facility, the small business refiner 
        obtains certification from the Secretary, after 
        consultation with the Administrator of the 
        Environmental Protection Agency, that the taxpayer's 
        qualified capital costs with respect to such facility 
        will result in compliance with the applicable EPA 
        regulations.
            ``(2) Contents of application.--An application for 
        certification shall include relevant information 
        regarding unit capacities and operating characteristics 
        sufficient for the Secretary, after consultation with 
        the Administrator of the Environmental Protection 
        Agency, to determine that such qualified capital costs 
        are necessary for compliance with the applicable EPA 
        regulations.
            ``(3) Review period.--Any application shall be 
        reviewed and notice of certification, if applicable, 
        shall be made within 60 days of receipt of such 
        application. In the event the Secretary does not notify 
        the taxpayer of the results of such certification 
        within such period, the taxpayer may presume the 
        certification to be issued until so notified.
            ``(4) Statute of limitations.--With respect to the 
        credit allowed under this section--
                    ``(A) the statutory period for the 
                assessment of any deficiency attributable to 
                such credit shall not expire before the end of 
                the 3-year period ending on the date that the 
                review period described in paragraph (3) ends 
                with respect to the taxpayer, and
                    ``(B) such deficiency may be assessed 
                before the expiration of such 3-year period 
                notwithstanding the provisions of any other law 
                or rule of law which would otherwise prevent 
                such assessment.
    ``(g) Cooperative Organizations.--
            ``(1) Apportionment of credit.--
                    ``(A) In general.--In the case of a 
                cooperative organization described in section 
                1381(a), any portion of the credit determined 
                under subsection (a) for the taxable year may, 
                at the election of the organization, be 
                apportioned among patrons eligible to share in 
                patronage dividends on the basis of the 
                quantity or value of business done with or for 
                such patrons for the taxable year.
                    ``(B) Form and effect of election.--An 
                election under subparagraph (A) for any taxable 
                year shall be made on a timely filed return for 
                such year. Such election, once made, shall be 
                irrevocable for such taxable year.
            ``(2) Treatment of organizations and patrons.--
                    ``(A) Organizations.--The amount of the 
                credit not apportioned to patrons pursuant to 
                paragraph (1) shall be included in the amount 
                determined under subsection (a) for the taxable 
                year of the organization.
                    ``(B) Patrons.--The amount of the credit 
                apportioned to patrons pursuant to paragraph 
                (1) shall be included in the amount determined 
                under subsection (a) for the first taxable year 
                of each patron ending on or after the last day 
                of the payment period (as defined in section 
                1382(d)) for the taxable year of the 
                organization or, if earlier, for the taxable 
                year of each patron ending on or after the date 
                on which the patron receives notice from the 
                cooperative of the apportionment.
            ``(3) Special rule.--If the amount of a credit 
        which has been apportioned to any patron under this 
        subsection is decreased for any reason--
                    ``(A) such amount shall not increase the 
                tax imposed on such patron, and
                    ``(B) the tax imposed by this chapter on 
                such organization shall be increased by such 
                amount.
        The increase under subparagraph (B) shall not be 
        treated as tax imposed by this chapter for purposes of 
        determining the amount of any credit under this chapter 
        or for purposes of section 55.''.
    (b) Credit Made Part of General Business Credit.--
Subsection (b) of section 38 (relating to general business 
credit), as amended by this Act, is amended by striking 
``plus'' at the end of paragraph (16), by striking the period 
at the end of paragraph (17) and inserting ``, plus'', and by 
inserting after paragraph (17) the following new paragraph:
            ``(18) the low sulfur diesel fuel production credit 
        determined under section 45H(a).''.
    (c) Denial of Double Benefit.--Section 280C (relating to 
certain expenses for which credits are allowable) is amended by 
adding at the end the following new subsection:
    ``(d) Low Sulfur Diesel Fuel Production Credit.--No 
deduction shall be allowed for that portion of the expenses 
otherwise allowable as a deduction for the taxable year which 
is equal to the amount of the credit determined for the taxable 
year under section 45H(a).''.
    (d) Basis Adjustment.--Section 1016(a) (relating to 
adjustments to basis), as amended by this Act, is amended by 
striking ``and'' at the end of paragraph (29), by striking the 
period at the end of paragraph (30) and inserting ``, and'', 
and by inserting after paragraph (30) the following new 
paragraph:
            ``(31) in the case of a facility with respect to 
        which a credit was allowed under section 45H, to the 
        extent provided in section 45H(d).''.
    (e) Deduction for Certain Unused Business Credits.--Section 
196(c) (defining qualified business credits), as amended by 
this Act, is amended by striking ``and'' at the end of 
paragraph (10), by striking the period at the end of paragraph 
(11) and inserting ``, and'', and by adding after paragraph 
(11) the following new paragraph:
            ``(12) the low sulfur diesel fuel production credit 
        determined under section 45H(a).''.
    (e) Clerical Amendment.--The table of sections for subpart 
D of part IV of subchapter A of chapter 1, as amended by this 
Act, is amended by inserting after the item relating to section 
45G the following new item:

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

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

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

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

SEC. 341. OIL AND GAS FROM MARGINAL WELLS.

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

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

    ``(a) General Rule.--For purposes of section 38, the 
marginal well production credit for any taxable year is an 
amount equal to the product of--
            ``(1) the credit amount, and
            ``(2) the qualified credit oil production and the 
        qualified natural gas production which is attributable 
        to the taxpayer.
    ``(b) Credit Amount.--For purposes of this section--
            ``(1) In general.--The credit amount is--
                    ``(A) $3 per barrel of qualified crude oil 
                production, and
                    ``(B) 50 cents per 1,000 cubic feet of 
                qualified natural gas production.
            ``(2) Reduction as oil and gas prices increase.--
                    ``(A) In general.--The $3 and 50 cents 
                amounts under paragraph (1) shall each be 
                reduced (but not below zero) by an amount which 
                bears the same ratio to such amount (determined 
                without regard to this paragraph) as--
                            ``(i) the excess (if any) of the 
                        applicable reference price over $15 
                        ($1.67 for qualified natural gas 
                        production), bears to
                            ``(ii) $3 ($0.33 for qualified 
                        natural gas production).
                The applicable reference price for a taxable 
                year is the reference price of the calendar 
                year preceding the calendar year in which the 
                taxable year begins.
                    ``(B) Inflation adjustment.--In the case of 
                any taxable year beginning in a calendar year 
                after 2005, each of the dollar amounts 
                contained in subparagraph (A) shall be 
                increased to an amount equal to such dollar 
                amount multiplied by the inflation adjustment 
                factor for such calendar year (determined under 
                section 43(b)(3)(B) by substituting `2004' for 
                `1990').
                    ``(C) Reference price.--For purposes of 
                this paragraph, the term `reference price' 
                means, with respect to any calendar year--
                            ``(i) in the case of qualified 
                        crude oil production, the reference 
                        price determined under section 
                        29(d)(2)(C), and
                            ``(ii) in the case of qualified 
                        natural gas production, the Secretary's 
                        estimate of the annual average wellhead 
                        price per 1,000 cubic feet for all 
                        domestic natural gas.
    ``(c) Qualified Crude Oil and Natural Gas Production.--For 
purposes of this section--
            ``(1) In general.--The terms `qualified crude oil 
        production' and `qualified natural gas production' mean 
        domestic crude oil or natural gas which is produced 
        from a qualified marginal well.
            ``(2) Limitation on amount of production which may 
        qualify.--
                    ``(A) In general.--Crude oil or natural gas 
                produced during any taxable year from any well 
                shall not be treated as qualified crude oil 
                production or qualified natural gas production 
                to the extent production from the well during 
                the taxable year exceeds 1,095 barrels or 
                barrel-of-oil equivalents (as defined in 
                section 29(d)(5)).
                    ``(B) Proportionate reductions.--
                            ``(i) Short taxable years.--In the 
                        case of a short taxable year, the 
                        limitations under this paragraph shall 
                        be proportionately reduced to reflect 
                        the ratio which the number of days in 
                        such taxable year bears to 365.
                            ``(ii) Wells not in production 
                        entire year.--In the case of a well 
                        which is not capable of production 
                        during each day of a taxable year, the 
                        limitations under this paragraph 
                        applicable to the well shall be 
                        proportionately reduced to reflect the 
                        ratio which the number of days of 
                        production bears to the total number of 
                        days in the taxable year.
            ``(3) Definitions.--
                    ``(A) Qualified marginal well.--The term 
                `qualified marginal well' means a domestic 
                well--
                            ``(i) the production from which 
                        during the taxable year is treated as 
                        marginal production under section 
                        613A(c)(6), or
                            ``(ii) which, during the taxable 
                        year--
                                    ``(I) has average daily 
                                production of not more than 25 
                                barrel-of-oil equivalents (as 
                                so defined), and
                                    ``(II) produces water at a 
                                rate not less than 95 percent 
                                of total well effluent.
                    ``(B) Crude oil, etc.--The terms `crude 
                oil', `natural gas', `domestic', and `barrel' 
                have the meanings given such terms by section 
                613A(e).
    ``(d) Other Rules.--
            ``(1) Production attributable to the taxpayer.--In 
        the case of a qualified marginal well in which there is 
        more than one owner of operating interests in the well 
        and the crude oil or natural gas production exceeds the 
        limitation under subsection (c)(2), qualifying crude 
        oil production or qualifying natural gas production 
        attributable to the taxpayer shall be determined on the 
        basis of the ratio which taxpayer's revenue interest in 
        the production bears to the aggregate of the revenue 
        interests of all operating interest owners in the 
        production.
            ``(2) Operating interest required.--Any credit 
        under this section may be claimed only on production 
        which is attributable to the holder of an operating 
        interest.
            ``(3) Production from nonconventional sources 
        excluded.--In the case of production from a qualified 
        marginal well which is eligible for the credit allowed 
        under section 29 for the taxable year, no credit shall 
        be allowable under this section unless the taxpayer 
        elects not to claim the credit under section 29 with 
        respect to the well.''.
    (b) Credit Treated as Business Credit.--Section 38(b), as 
amended by this Act, is amended by striking ``plus'' at the end 
of paragraph (17), by striking the period at the end of 
paragraph (18) and inserting ``, plus'', and by inserting after 
paragraph (18) the following:
            ``(19) the marginal oil and gas well production 
        credit determined under section 45I(a).''.
    (c) Carryback.--Subsection (a) of section 39 (relating to 
carryback and carryforward of unused credits generally) is 
amended by adding at the end the following:
            ``(3) 5-year carryback for marginal oil and gas 
        well production credit.--Notwithstanding subsection 
        (d), in the case of the marginal oil and gas well 
        production credit--
                    ``(A) this section shall be applied 
                separately from the business credit (other than 
                the marginal oil and gas well production 
                credit),
                    ``(B) paragraph (1) shall be applied by 
                substituting `5 taxable years' for `1 taxable 
                years' in subparagraph (A) thereof, and
                    ``(C) paragraph (2) shall be applied--
                            ``(i) by substituting `25 taxable 
                        years' for `21 taxable years' in 
                        subparagraph (A) thereof, and
                            ``(ii) by substituting `24 taxable 
                        years' for `20 taxable years' in 
                        subparagraph (B) thereof.''.
    (d) Clerical Amendment.--The table of sections for subpart 
D of part IV of subchapter A of chapter 1, as amended by this 
Act, is amended by inserting after section 45H the following:

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

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

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

SEC. 401. INTEREST EXPENSE ALLOCATION RULES.

    (a) Election To Allocate on Worldwide Basis.--Section 864 
is amended by redesignating subsection (f) as subsection (g) 
and by inserting after subsection (e) the following new 
subsection:
    ``(f) Election To Allocate Interest, etc. on Worldwide 
Basis.--For purposes of this subchapter, at the election of the 
worldwide affiliated group--
            ``(1) Allocation and apportionment of interest 
        expense.--
                    ``(A) In general.--The taxable income of 
                each domestic corporation which is a member of 
                a worldwide affiliated group shall be 
                determined by allocating and apportioning 
                interest expense of each member as if all 
                members of such group were a single 
                corporation.
                    ``(B) Treatment of worldwide affiliated 
                group.--The taxable income of the domestic 
                members of a worldwide affiliated group from 
                sources outside the United States shall be 
                determined by allocating and apportioning the 
                interest expense of such domestic members to 
                such income in an amount equal to the excess 
                (if any) of--
                            ``(i) the total interest expense of 
                        the worldwide affiliated group 
                        multiplied by the ratio which the 
                        foreign assets of the worldwide 
                        affiliated group bears to all the 
                        assets of the worldwide affiliated 
                        group, over
                            ``(ii) the interest expense of all 
                        foreign corporations which are members 
                        of the worldwide affiliated group to 
                        the extent such interest expense of 
                        such foreign corporations would have 
                        been allocated and apportioned to 
                        foreign source income if this 
                        subsection were applied to a group 
                        consisting of all the foreign 
                        corporations in such worldwide 
                        affiliated group.
                    ``(C) Worldwide affiliated group.--For 
                purposes of this paragraph, the term `worldwide 
                affiliated group' means a group consisting of--
                            ``(i) the includible members of an 
                        affiliated group (as defined in section 
                        1504(a), determined without regard to 
                        paragraphs (2) and (4) of section 
                        1504(b)), and
                            ``(ii) all controlled foreign 
                        corporations in which such members in 
                        the aggregate meet the ownership 
                        requirements of section 1504(a)(2) 
                        either directly or indirectly through 
                        applying paragraph (2) of section 
                        958(a) or through applying rules 
                        similar to the rules of such paragraph 
                        to stock owned directly or indirectly 
                        by domestic partnerships, trusts, or 
                        estates.
            ``(2) Allocation and apportionment of other 
        expenses.--Expenses other than interest which are not 
        directly allocable or apportioned to any specific 
        income producing activity shall be allocated and 
        apportioned as if all members of the affiliated group 
        were a single corporation. For purposes of the 
        preceding sentence, the term `affiliated group' has the 
        meaning given such term by section 1504 (determined 
        without regard to paragraph (4) of section 1504(b)).
            ``(3) Treatment of tax-exempt assets; basis of 
        stock in nonaffiliated 10-percent owned corporations.--
        The rules of paragraphs (3) and (4) of subsection (e) 
        shall apply for purposes of this subsection, except 
        that paragraph (4) shall be applied on a worldwide 
        affiliated group basis.
            ``(4) Treatment of certain financial 
        institutions.--
                    ``(A) In general.--For purposes of 
                paragraph (1), any corporation described in 
                subparagraph (B) shall be treated as an 
                includible corporation for purposes of section 
                1504 only for purposes of applying this 
                subsection separately to corporations so 
                described.
                    ``(B) Description.--A corporation is 
                described in this subparagraph if--
                            ``(i) such corporation is a 
                        financial institution described in 
                        section 581 or 591,
                            ``(ii) the business of such 
                        financial institution is predominantly 
                        with persons other than related persons 
                        (within the meaning of subsection 
                        (d)(4)) or their customers, and
                            ``(iii) such financial institution 
                        is required by State or Federal law to 
                        be operated separately from any other 
                        entity which is not such an 
                        institution.
                    ``(C) Treatment of bank and financial 
                holding companies.--To the extent provided in 
                regulations--
                            ``(i) a bank holding company 
                        (within the meaning of section 2(a) of 
                        the Bank Holding Company Act of 1956 
                        (12 U.S.C. 1841(a)),
                            ``(ii) a financial holding company 
                        (within the meaning of section 2(p) of 
                        the Bank Holding Company Act of 1956 
                        (12 U.S.C. 1841(p)), and
                            ``(iii) any subsidiary of a 
                        financial institution described in 
                        section 581 or 591, or of any such bank 
                        or financial holding company, if such 
                        subsidiary is predominantly engaged 
                        (directly or indirectly) in the active 
                        conduct of a banking, financing, or 
                        similar business,
                shall be treated as a corporation described in 
                subparagraph (B).
            ``(5) Election to expand financial institution 
        group of worldwide group.--
                    ``(A) In general.--If a worldwide 
                affiliated group elects the application of this 
                subsection, all financial corporations which--
                            ``(i) are members of such worldwide 
                        affiliated group, but
                            ``(ii) are not corporations 
                        described in paragraph (4)(B),
                shall be treated as described in paragraph 
                (4)(B) for purposes of applying paragraph 
                (4)(A). This subsection (other than this 
                paragraph) shall apply to any such group in the 
                same manner as this subsection (other than this 
                paragraph) applies to the pre-election 
                worldwide affiliated group of which such group 
                is a part.
                    ``(B) Financial corporation.--For purposes 
                of this paragraph, the term `financial 
                corporation' means any corporation if at least 
                80 percent of its gross income is income 
                described in section 904(d)(2)(D)(ii) and the 
                regulations thereunder which is derived from 
                transactions with persons who are not related 
                (within the meaning of section 267(b) or 
                707(b)(1)) to the corporation. For purposes of 
                the preceding sentence, there shall be 
                disregarded any item of income or gain from a 
                transaction or series of transactions a 
                principal purpose of which is the qualification 
                of any corporation as a financial corporation.
                    ``(C) Anti-abuse rules.--In the case of a 
                corporation which is a member of an electing 
                financial institution group, to the extent that 
                such corporation--
                            ``(i) distributes dividends or 
                        makes other distributions with respect 
                        to its stock after the date of the 
                        enactment of this paragraph to any 
                        member of the pre-election worldwide 
                        affiliated group (other than to a 
                        member of the electing financial 
                        institution group) in excess of the 
                        greater of--
                                    ``(I) its average annual 
                                dividend (expressed as a 
                                percentage of current earnings 
                                and profits) during the 5-
                                taxable-year period ending with 
                                the taxable year preceding the 
                                taxable year, or
                                    ``(II) 25 percent of its 
                                average annual earnings and 
                                profits for such 5-taxable-year 
                                period, or
                            ``(ii) deals with any person in any 
                        manner not clearly reflecting the 
                        income of the corporation (as 
                        determined under principles similar to 
                        the principles of section 482),
                an amount of indebtedness of the electing 
                financial institution group equal to the excess 
                distribution or the understatement or 
                overstatement of income, as the case may be, 
                shall be recharacterized (for the taxable year 
                and subsequent taxable years) for purposes of 
                this paragraph as indebtedness of the worldwide 
                affiliated group (excluding the electing 
                financial institution group). If a corporation 
                has not been in existence for 5 taxable years, 
                this subparagraph shall be applied with respect 
                to the period it was in existence.
                    ``(D) Election.--An election under this 
                paragraph with respect to any financial 
                institution group may be made only by the 
                common parent of the pre-election worldwide 
                affiliated group and may be made only for the 
                first taxable year beginning after December 31, 
                2008, in which such affiliated group includes 1 
                or more financial corporations. Such an 
                election, once made, shall apply to all 
                financial corporations which are members of the 
                electing financial institution group for such 
                taxable year and all subsequent years unless 
                revoked with the consent of the Secretary.
                    ``(E) Definitions relating to groups.--For 
                purposes of this paragraph--
                            ``(i) Pre-election worldwide 
                        affiliated group.--The term `pre-
                        election worldwide affiliated group' 
                        means, with respect to a corporation, 
                        the worldwide affiliated group of which 
                        such corporation would (but for an 
                        election under this paragraph) be a 
                        member for purposes of applying 
                        paragraph (1).
                            ``(ii) Electing financial 
                        institution group.--The term `electing 
                        financial institution group' means the 
                        group of corporations to which this 
                        subsection applies separately by reason 
                        of the application of paragraph (4)(A) 
                        and which includes financial 
                        corporations by reason of an election 
                        under subparagraph (A).
                    ``(F) Regulations.--The Secretary shall 
                prescribe such regulations as may be 
                appropriate to carry out this subsection, 
                including regulations--
                            ``(i) providing for the direct 
                        allocation of interest expense in other 
                        circumstances where such allocation 
                        would be appropriate to carry out the 
                        purposes of this subsection,
                            ``(ii) preventing assets or 
                        interest expense from being taken into 
                        account more than once, and
                            ``(iii) dealing with changes in 
                        members of any group (through 
                        acquisitions or otherwise) treated 
                        under this paragraph as an affiliated 
                        group for purposes of this subsection.
            ``(6) Election.--An election to have this 
        subsection apply with respect to any worldwide 
        affiliated group may be made only by the common parent 
        of the domestic affiliated group referred to in 
        paragraph (1)(C) and may be made only for the first 
        taxable year beginning after December 31, 2008, in 
        which a worldwide affiliated group exists which 
        includes such affiliated group and at least 1 foreign 
        corporation. Such an election, once made, shall apply 
        to such common parent and all other corporations which 
        are members of such worldwide affiliated group for such 
        taxable year and all subsequent years unless revoked 
        with the consent of the Secretary.''.
    (b) Expansion of Regulatory Authority.--Paragraph (7) of 
section 864(e) is amended--
            (1) by inserting before the comma at the end of 
        subparagraph (B) ``and in other circumstances where 
        such allocation would be appropriate to carry out the 
        purposes of this subsection'', and
            (2) by striking ``and'' at the end of subparagraph 
        (E), by redesignating subparagraph (F) as subparagraph 
        (G), and by inserting after subparagraph (E) the 
        following new subparagraph:
                    ``(F) preventing assets or interest expense 
                from being taken into account more than once, 
                and''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2008.

SEC. 402. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

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

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

    (a) In General.--Section 904(d)(4) (relating to look-thru 
rules apply to dividends from noncontrolled section 902 
corporations) is amended to read as follows:
            ``(4) Look-thru applies to dividends from 
        noncontrolled section 902 corporations.--
                    ``(A) In general.--For purposes of this 
                subsection, any dividend from a noncontrolled 
                section 902 corporation with respect to the 
                taxpayer shall be treated as income described 
                in a subparagraph of paragraph (1) in 
                proportion to the ratio of--
                            ``(i) the portion of earnings and 
                        profits attributable to income 
                        described in such subparagraph, to
                            ``(ii) the total amount of earnings 
                        and profits.
                    ``(B) Earnings and profits of controlled 
                foreign corporations.--In the case of any 
                distribution from a controlled foreign 
                corporation to a United States shareholder, 
                rules similar to the rules of subparagraph (A) 
                shall apply in determining the extent to which 
                earnings and profits of the controlled foreign 
                corporation which are attributable to dividends 
                received from a noncontrolled section 902 
                corporation may be treated as income in a 
                separate category.
                    ``(C) Special rules.--For purposes of this 
                paragraph--
                            ``(i) Earnings and profits.--
                                    ``(I) In general.--The 
                                rules of section 316 shall 
                                apply.
                                    ``(II) Regulations.--The 
                                Secretary may prescribe 
                                regulations regarding the 
                                treatment of distributions out 
                                of earnings and profits for 
                                periods before the taxpayer's 
                                acquisition of the stock to 
                                which the distributions relate.
                            ``(ii) Inadequate substantiation.--
                        If the Secretary determines that the 
                        proper subparagraph of paragraph (1) in 
                        which a dividend is described has not 
                        been substantiated, such dividend shall 
                        be treated as income described in 
                        paragraph (1)(A).
                            ``(iii) Coordination with high-
                        taxed income provisions.--Rules similar 
                        to the rules of paragraph (3)(F) shall 
                        apply for purposes of this paragraph.
                            ``(iv) Look-thru with respect to 
                        carryover of credit.--Rules similar to 
                        subparagraph (A) also shall apply to 
                        any carryforward under subsection (c) 
                        from a taxable year beginning before 
                        January 1, 2003, of tax allocable to a 
                        dividend from a noncontrolled section 
                        902 corporation with respect to the 
                        taxpayer. The Secretary may by 
                        regulations provide for the allocation 
                        of any carryback of tax allocable to a 
                        dividend from a noncontrolled section 
                        902 corporation from a taxable year 
                        beginning on or after January 1, 2003, 
                        to a taxable year beginning before such 
                        date for purposes of allocating such 
                        dividend among the separate categories 
                        in effect for the taxable year to which 
                        carried.''.
    (b) Conforming Amendments.--
            (1) Subparagraph (E) of section 904(d)(1) is hereby 
        repealed.
            (2) Section 904(d)(2)(C)(iii) is amended by adding 
        ``and'' at the end of subclause (I), by striking 
        subclause (II), and by redesignating subclause (III) as 
        subclause (II).
            (3) The last sentence of section 904(d)(2)(D) is 
        amended to read as follows: ``Such term does not 
        include any financial services income.''.
            (4) Section 904(d)(2)(E) is amended--
                    (A) by inserting ``or (4)'' after 
                ``paragraph (3)'' in clause (i), and
                    (B) by striking clauses (ii) and (iv) and 
                by redesignating clause (iii) as clause (ii).
            (5) Section 904(d)(3)(F) is amended by striking 
        ``(D), or (E)'' and inserting ``or (D)''.
            (6) Section 864(d)(5)(A)(i) is amended by striking 
        ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002.

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

    (a) In General.--Paragraph (1) of section 904(d) (relating 
to separate application of section with respect to certain 
categories of income) is amended to read as follows:
            ``(1) In general.--The provisions of subsections 
        (a), (b), and (c) and sections 902, 907, and 960 shall 
        be applied separately with respect to--
                    ``(A) passive category income, and
                    ``(B) general category income.''
    (b) Categories.--Paragraph (2) of section 904(d) is amended 
by striking subparagraph (B), by redesignating subparagraph (A) 
as subparagraph (B), and by inserting before subparagraph (B) 
(as so redesignated) the following new subparagraph:
                    ``(A) Categories.--
                            ``(i) Passive category income.--The 
                        term `passive category income' means 
                        passive income and specified passive 
                        category income.
                            ``(ii) General category income.--
                        The term `general category income' 
                        means income other than passive 
                        category income.''.
    (c) Specified Passive Category Income.--Subparagraph (B) of 
section 904(d)(2), as so redesignated, is amended by adding at 
the end the following new clause:
                            ``(v) Specified passive category 
                        income.--The term `specified passive 
                        category income' means--
                                    ``(I) dividends from a DISC 
                                or former DISC (as defined in 
                                section 992(a)) to the extent 
                                such dividends are treated as 
                                income from sources without the 
                                United States,
                                    ``(II) taxable income 
                                attributable to foreign trade 
                                income (within the meaning of 
                                section 923(b)), and
                                    ``(III) distributions from 
                                a FSC (or a former FSC) out of 
                                earnings and profits 
                                attributable to foreign trade 
                                income (within the meaning of 
                                section 923(b)) or interest or 
                                carrying charges (as defined in 
                                section 927(d)(1)) derived from 
                                a transaction which results in 
                                foreign trade income (as 
                                defined in section 923(b)).''.
    (d) Treatment of Financial Services.--Paragraph (2) of 
section 904(d), as amended by section 403(b)(3), is amended by 
striking subparagraph (D), by redesignating subparagraph (C) as 
subparagraph (D), and by inserting before subparagraph (D) (as 
so redesignated) the following new subparagraph:
                    ``(C) Treatment of financial services 
                income and companies.--
                            ``(i) In general.--Financial 
                        services income shall be treated as 
                        general category income in the case 
                        of--
                                    ``(I) a member of a 
                                financial services group, and
                                    ``(II) any other person if 
                                such person is predominantly 
                                engaged in the active conduct 
                                of a banking, insurance, 
                                financing, or similar business.
                            ``(ii) Financial services group.--
                        The term `financial services group' 
                        means any affiliated group (as defined 
                        in section 1504(a) without regard to 
                        paragraphs (2) and (3) of section 
                        1504(b)) which is predominantly engaged 
                        in the active conduct of a banking, 
                        insurance, financing, or similar 
                        business. In determining whether such a 
                        group is so engaged, there shall be 
                        taken into account only the income of 
                        members of the group that are--
                                    ``(I) United States 
                                corporations, or
                                    ``(II) controlled foreign 
                                corporations in which such 
                                United States corporations own, 
                                directly or indirectly, at 
                                least 80 percent of the total 
                                voting power and value of the 
                                stock.
                            ``(iii) Pass-thru entities.--The 
                        Secretary shall by regulation specify 
                        for purposes of this subparagraph the 
                        treatment of financial services income 
                        received or accrued by partnerships and 
                        by other pass-thru entities which are 
                        not members of a financial services 
                        group.''.
    (e) Treatment of Income Tax Base Differences.--Paragraph 
(2) of section 904(d) is amended by redesignating subparagraphs 
(H) and (I) as subparagraphs (I) and (J), respectively, and by 
inserting after subparagraph (G) the following new 
subparagraph:
                    ``(H) Treatment of income tax base 
                differences.--
                            ``(i) In general.--In the case of 
                        taxable years beginning after December 
                        31, 2006, tax imposed under the law of 
                        a foreign country or possession of the 
                        United States on an amount which does 
                        not constitute income under United 
                        States tax principles shall be treated 
                        as imposed on income described in 
                        paragraph (1)(B).
                            ``(ii) Special rule for years 
                        before 2007.--
                                    ``(I) In general.--In the 
                                case of taxes paid or accrued 
                                in taxable years beginning 
                                after December 31, 2004, and 
                                before January 1, 2007, a 
                                taxpayer may elect to treat tax 
                                imposed under the law of a 
                                foreign country or possession 
                                of the United States on an 
                                amount which does not 
                                constitute income under United 
                                States tax principles as tax 
                                imposed on income described in 
                                subparagraph (C) or (I) of 
                                paragraph (1).
                                    ``(II) Election 
                                irrevocable.--Any such election 
                                shall apply to the taxable year 
                                for which made and all 
                                subsequent taxable years 
                                described in subclause (I) 
                                unless revoked with the consent 
                                of the Secretary.''.
    (f) Conforming Amendments.--
            (1) Clause (iii) of section 904(d)(2)(B) (relating 
        to exceptions from passive income), as so redesignated, 
        is amended by striking subclause (I) and by 
        redesignating subclauses (II) and (III) as subclauses 
        (I) and (II), respectively.
            (2) Clause (i) of section 904(d)(2)(D) (defining 
        financial services income), as so redesignated, is 
        amended by adding ``or'' at the end of subclause (I) 
        and by striking subclauses (II) and (III) and inserting 
        the following new subclause:
                                    ``(II) passive income 
                                (determined without regard to 
                                subparagraph (B)(iii)(II)).''
            (3) Section 904(d)(2)(D) (defining financial 
        services income), as so redesignated and amended by 
        section 404(b)(3), is amended by striking clause (iii).
            (4) Paragraph (3) of section 904(d) is amended to 
        read as follows:
            ``(3) Look-thru in case of controlled foreign 
        corporations.--
                    ``(A) In general.--Except as otherwise 
                provided in this paragraph, dividends, 
                interest, rents, and royalties received or 
                accrued by the taxpayer from a controlled 
                foreign corporation in which the taxpayer is a 
                United States shareholder shall not be treated 
                as passive category income.
                    ``(B) Subpart f inclusions.--Any amount 
                included in gross income under section 
                951(a)(1)(A) shall be treated as passive 
                category income to the extent the amount so 
                included is attributable to passive category 
                income.
                    ``(C) Interest, rents, and royalties.--Any 
                interest, rent, or royalty which is received or 
                accrued from a controlled foreign corporation 
                in which the taxpayer is a United States 
                shareholder shall be treated as passive 
                category income to the extent it is properly 
                allocable (under regulations prescribed by the 
                Secretary) to passive category income of the 
                controlled foreign corporation.
                    ``(D) Dividends.--Any dividend paid out of 
                the earnings and profits of any controlled 
                foreign corporation in which the taxpayer is a 
                United States shareholder shall be treated as 
                passive category income in proportion to the 
                ratio of--
                            ``(i) the portion of the earnings 
                        and profits attributable to passive 
                        category income, to
                            ``(ii) the total amount of earnings 
                        and profits.
                    ``(E) Look-thru applies only where subpart 
                f applies.--If a controlled foreign corporation 
                meets the requirements of section 954(b)(3)(A) 
                (relating to de minimis rule) for any taxable 
                year, for purposes of this paragraph, none of 
                its foreign base company income (as defined in 
                section 954(a) without regard to section 
                954(b)(5)) and none of its gross insurance 
                income (as defined in section 954(b)(3)(C)) for 
                such taxable year shall be treated as passive 
                category income, except that this sentence 
                shall not apply to any income which (without 
                regard to this sentence) would be treated as 
                financial services income. Solely for purposes 
                of applying subparagraph (D), passive income of 
                a controlled foreign corporation shall not be 
                treated as passive category income if the 
                requirements of section 954(b)(4) are met with 
                respect to such income.
                    ``(F) Coordination with high-taxed income 
                provisions.--
                            ``(i) In determining whether any 
                        income of a controlled foreign 
                        corporation is passive category income, 
                        subclause (II) of paragraph (2)(B)(iii) 
                        shall not apply.
                            ``(ii) Any income of the taxpayer 
                        which is treated as passive category 
                        income under this paragraph shall be so 
                        treated notwithstanding any provision 
                        of paragraph (2); except that the 
                        determination of whether any amount is 
                        high-taxed income shall be made after 
                        the application of this paragraph.
                    ``(G) Dividend.--For purposes of this 
                paragraph, the term `dividend' includes any 
                amount included in gross income in section 
                951(a)(1)(B). Any amount included in gross 
                income under section 78 to the extent 
                attributable to amounts included in gross 
                income in section 951(a)(1)(A) shall not be 
                treated as a dividend but shall be treated as 
                included in gross income under section 
                951(a)(1)(A).
                    ``(H) Look-thru applies to passive foreign 
                investment company inclusion.--If--
                            ``(i) a passive foreign investment 
                        company is a controlled foreign 
                        corporation, and
                            ``(ii) the taxpayer is a United 
                        States shareholder in such controlled 
                        foreign corporation,
                any amount included in gross income under 
                section 1293 shall be treated as income in a 
                separate category to the extent such amount is 
                attributable to income in such category.''.
            (5) Paragraph (2) of section 904(d) is amended by 
        adding at the end the following new subparagraph:
                    ``(K) Transitional rules for 2007 
                changes.--For purposes of paragraph (1)--
                            ``(i) taxes carried from any 
                        taxable year beginning before January 
                        1, 2007, to any taxable year beginning 
                        on or after such date, with respect to 
                        any item of income, shall be treated as 
                        described in the subparagraph of 
                        paragraph (1) in which such income 
                        would be described were such taxes paid 
                        or accrued in a taxable year beginning 
                        on or after such date, and
                            ``(ii) the Secretary may by 
                        regulations provide for the allocation 
                        of any carryback of taxes with respect 
                        to income from a taxable year beginning 
                        on or after January 1, 2007, to a 
                        taxable year beginning before such date 
                        for purposes of allocating such income 
                        among the separate categories in effect 
                        for the taxable year to which 
                        carried.''.
            (6) Section 904(j)(3)(A)(i) is amended by striking 
        ``subsection (d)(2)(A)'' and inserting ``subsection 
        (d)(2)(B)''.
    (g) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to taxable years beginning after 
        December 31, 2006.
            (2) Transitional rule relating to income tax base 
        difference.--Section 904(d)(2)(H)(ii) of the Internal 
        Revenue Code of 1986, as added by subsection (e), shall 
        apply to taxable years beginning after December 31, 
        2004.

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

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

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

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

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

    (a) In General.--Section 956(c)(2) (relating to exceptions 
from property treated as United States property) is amended by 
striking ``and'' at the end of subparagraph (J), by striking 
the period at the end of subparagraph (K) and inserting a 
semicolon, and by adding at the end the following new 
subparagraphs:
                    ``(L) securities acquired and held by a 
                controlled foreign corporation in the ordinary 
                course of its business as a dealer in 
                securities if--
                            ``(i) the dealer accounts for the 
                        securities as securities held primarily 
                        for sale to customers in the ordinary 
                        course of business, and
                            ``(ii) the dealer disposes of the 
                        securities (or such securities mature 
                        while held by the dealer) within a 
                        period consistent with the holding of 
                        securities for sale to customers in the 
                        ordinary course of business; and
                    ``(M) an obligation of a United States 
                person which--
                            ``(i) is not a domestic 
                        corporation, and
                            ``(ii) is not--
                                    ``(I) a United States 
                                shareholder (as defined in 
                                section 951(b)) of the 
                                controlled foreign corporation, 
                                or
                                    ``(II) a partnership, 
                                estate, or trust in which the 
                                controlled foreign corporation, 
                                or any related person (as 
                                defined in section 954(d)(3)), 
                                is a partner, beneficiary, or 
                                trustee immediately after the 
                                acquisition of any obligation 
                                of such partnership, estate, or 
                                trust by the controlled foreign 
                                corporation.''.
    (b) Conforming Amendment.--Section 956(c)(2) is amended by 
striking ``and (K)'' in the last sentence and inserting ``, 
(K), and (L)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 2004, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

SEC. 408. TRANSLATION OF FOREIGN TAXES.

    (a) Elective Exception for Taxes Paid Other Than in 
Functional Currency.--Paragraph (1) of section 986(a) (relating 
to determination of foreign taxes and foreign corporation's 
earnings and profits) is amended by redesignating subparagraph 
(D) as subparagraph (E) and by inserting after subparagraph (C) 
the following new subparagraph:
                    ``(D) Elective exception for taxes paid 
                other than in functional currency.--
                            ``(i) In general.--At the election 
                        of the taxpayer, subparagraph (A) shall 
                        not apply to any foreign income taxes 
                        the liability for which is denominated 
                        in any currency other than in the 
                        taxpayer's functional currency.
                            ``(ii) Application to qualified 
                        business units.--An election under this 
                        subparagraph may apply to foreign 
                        income taxes attributable to a 
                        qualified business unit in accordance 
                        with regulations prescribed by the 
                        Secretary.
                            ``(iii) Election.--Any such 
                        election shall apply to the taxable 
                        year for which made and all subsequent 
                        taxable years unless revoked with the 
                        consent of the Secretary.''.
    (b) Special Rule for Regulated Investment Companies.--
            (1) In general.--Section 986(a)(1), as amended by 
        subsection (a), is amended by redesignating 
        subparagraph (E) as subparagraph (F) and by inserting 
        after subparagraph (D) the following:
                    ``(E) Special rule for regulated investment 
                companies.--In the case of a regulated 
                investment company which takes into account 
                income on an accrual basis, subparagraphs (A) 
                through (D) shall not apply and foreign income 
                taxes paid or accrued with respect to such 
                income shall be translated into dollars using 
                the exchange rate as of the date the income 
                accrues.''.
            (2) Conforming amendment.--Section 986(a)(2) is 
        amended by inserting ``or (E)'' after ``subparagraph 
        (A)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2004.

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

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

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

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

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

    (a) Treatment of Certain Dividends.--
            (1) Nonresident alien individuals.--Section 871 
        (relating to tax on nonresident alien individuals) is 
        amended by redesignating subsection (k) as subsection 
        (l) and by inserting after subsection (j) the following 
        new subsection:
    ``(k) Exemption for Certain Dividends of Regulated 
Investment Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any 
                interest-related dividend received from a 
                regulated investment company.
                    ``(B) Exceptions.--Subparagraph (A) shall 
                not apply--
                            ``(i) to any interest-related 
                        dividend received from a regulated 
                        investment company by a person to the 
                        extent such dividend is attributable to 
                        interest (other than interest described 
                        in subparagraph (E) (i) or (iii)) 
                        received by such company on 
                        indebtedness issued by such person or 
                        by any corporation or partnership with 
                        respect to which such person is a 10-
                        percent shareholder,
                            ``(ii) to any interest-related 
                        dividend with respect to stock of a 
                        regulated investment company unless the 
                        person who would otherwise be required 
                        to deduct and withhold tax from such 
                        dividend under chapter 3 receives a 
                        statement (which meets requirements 
                        similar to the requirements of 
                        subsection (h)(5)) that the beneficial 
                        owner of such stock is not a United 
                        States person, and
                            ``(iii) to any interest-related 
                        dividend paid to any person within a 
                        foreign country (or any interest-
                        related dividend payment addressed to, 
                        or for the account of, persons within 
                        such foreign country) during any period 
                        described in subsection (h)(6) with 
                        respect to such country.
                Clause (iii) shall not apply to any dividend 
                with respect to any stock which was acquired on 
                or before the date of the publication of the 
                Secretary's determination under subsection 
                (h)(6).
                    ``(C) Interest-related dividend.--For 
                purposes of this paragraph, the term `interest-
                related dividend' means any dividend (or part 
                thereof) which is designated by the regulated 
                investment company as an interest-related 
                dividend in a written notice mailed to its 
                shareholders not later than 60 days after the 
                close of its taxable year. If the aggregate 
                amount so designated with respect to a taxable 
                year of the company (including amounts so 
                designated with respect to dividends paid after 
                the close of the taxable year described in 
                section 855) is greater than the qualified net 
                interest income of the company for such taxable 
                year, the portion of each distribution which 
                shall be an interest-related dividend shall be 
                only that portion of the amounts so designated 
                which such qualified net interest income bears 
                to the aggregate amount so designated. Such 
                term shall not include any dividend with 
                respect to any taxable year of the company 
                beginning after December 31, 2007.
                    ``(D) Qualified net interest income.--For 
                purposes of subparagraph (C), the term 
                `qualified net interest income' means the 
                qualified interest income of the regulated 
                investment company reduced by the deductions 
                properly allocable to such income.
                    ``(E) Qualified interest income.--For 
                purposes of subparagraph (D), the term 
                `qualified interest income' means the sum of 
                the following amounts derived by the regulated 
                investment company from sources within the 
                United States:
                            ``(i) Any amount includible in 
                        gross income as original issue discount 
                        (within the meaning of section 1273) on 
                        an obligation payable 183 days or less 
                        from the date of original issue 
                        (without regard to the period held by 
                        the company).
                            ``(ii) Any interest includible in 
                        gross income (including amounts 
                        recognized as ordinary income in 
                        respect of original issue discount or 
                        market discount or acquisition discount 
                        under part V of subchapter P and such 
                        other amounts as regulations may 
                        provide) on an obligation which is in 
                        registered form; except that this 
                        clause shall not apply to--
                                    ``(I) any interest on an 
                                obligation issued by a 
                                corporation or partnership if 
                                the regulated investment 
                                company is a 10-percent 
                                shareholder in such corporation 
                                or partnership, and
                                    ``(II) any interest which 
                                is treated as not being 
                                portfolio interest under the 
                                rules of subsection (h)(4).
                            ``(iii) Any interest referred to in 
                        subsection (i)(2)(A) (without regard to 
                        the trade or business of the regulated 
                        investment company).
                            ``(iv) Any interest-related 
                        dividend includable in gross income 
                        with respect to stock of another 
                        regulated investment company.
                    ``(F) 10-percent shareholder.--For purposes 
                of this paragraph, the term `10-percent 
                shareholder' has the meaning given such term by 
                subsection (h)(3)(B).
            ``(2) Short-term capital gain dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any 
                short-term capital gain dividend received from 
                a regulated investment company.
                    ``(B) Exception for aliens taxable under 
                subsection (a)(2).--Subparagraph (A) shall not 
                apply in the case of any nonresident alien 
                individual subject to tax under subsection 
                (a)(2).
                    ``(C) Short-term capital gain dividend.--
                For purposes of this paragraph, the term 
                `short-term capital gain dividend' means any 
                dividend (or part thereof) which is designated 
                by the regulated investment company as a short-
                term capital gain dividend in a written notice 
                mailed to its shareholders not later than 60 
                days after the close of its taxable year. If 
                the aggregate amount so designated with respect 
                to a taxable year of the company (including 
                amounts so designated with respect to dividends 
                paid after the close of the taxable year 
                described in section 855) is greater than the 
                qualified short-term gain of the company for 
                such taxable year, the portion of each 
                distribution which shall be a short-term 
                capital gain dividend shall be only that 
                portion of the amounts so designated which such 
                qualified short-term gain bears to the 
                aggregate amount so designated. Such term shall 
                not include any dividend with respect to any 
                taxable year of the company beginning after 
                December 31, 2007.
                    ``(D) Qualified short-term gain.--For 
                purposes of subparagraph (C), the term 
                `qualified short-term gain' means the excess of 
                the net short-term capital gain of the 
                regulated investment company for the taxable 
                year over the net long-term capital loss (if 
                any) of such company for such taxable year. For 
                purposes of this subparagraph--
                            ``(i) the net short-term capital 
                        gain of the regulated investment 
                        company shall be computed by treating 
                        any short-term capital gain dividend 
                        includible in gross income with respect 
                        to stock of another regulated 
                        investment company as a short-term 
                        capital gain, and
                            ``(ii) the excess of the net short-
                        term capital gain for a taxable year 
                        over the net long-term capital loss for 
                        a taxable year (to which an election 
                        under section 4982(e)(4) does not 
                        apply) shall be determined without 
                        regard to any net capital loss or net 
                        short-term capital loss attributable to 
                        transactions after October 31 of such 
                        year, and any such net capital loss or 
                        net short-term capital loss shall be 
                        treated as arising on the 1st day of 
                        the next taxable year.
                To the extent provided in regulations, clause 
                (ii) shall apply also for purposes of computing 
                the taxable income of the regulated investment 
                company.''
            (2) Foreign corporations.--Section 881 (relating to 
        tax on income of foreign corporations not connected 
        with United States business) is amended by 
        redesignating subsection (e) as subsection (f) and by 
        inserting after subsection (d) the following new 
        subsection:
    ``(e) Tax Not To Apply to Certain Dividends of Regulated 
Investment Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1) of subsection (a) on any 
                interest-related dividend (as defined in 
                section 871(k)(1)) received from a regulated 
                investment company.
                    ``(B) Exception.--Subparagraph (A) shall 
                not apply--
                            ``(i) to any dividend referred to 
                        in section 871(k)(1)(B), and
                            ``(ii) to any interest-related 
                        dividend received by a controlled 
                        foreign corporation (within the meaning 
                        of section 957(a)) to the extent such 
                        dividend is attributable to interest 
                        received by the regulated investment 
                        company from a person who is a related 
                        person (within the meaning of section 
                        864(d)(4)) with respect to such 
                        controlled foreign corporation.
                    ``(C) Treatment of dividends received by 
                controlled foreign corporations.--The rules of 
                subsection (c)(5)(A) shall apply to any (within 
                the meaning of section 957(a)) to the extent 
                such dividend is attributable to interest 
                received by the regulated investment company 
                which is described in clause (ii) of section 
                871(k)(1)(E) (and not described in clause (i) 
                or (iii) of such section).
            ``(2) Short-term capital gain dividends.--No tax 
        shall be imposed under paragraph (1) of subsection (a) 
        on any short-term capital gain dividend (as defined in 
        section 871(k)(2)) received from a regulated investment 
        company.''.
            (3) Withholding taxes.--
                    (A) Section 1441(c) (relating to 
                exceptions) is amended by adding at the end the 
                following new paragraph:
            ``(12) Certain dividends received from regulated 
        investment companies.--
                    ``(A) In general.--No tax shall be required 
                to be deducted and withheld under subsection 
                (a) from any amount exempt from the tax imposed 
                by section 871(a)(1)(A) by reason of section 
                871(k).
                    ``(B) Special rule.--For purposes of 
                subparagraph (A), clause (i) of section 
                871(k)(1)(B) shall not apply to any dividend 
                unless the regulated investment company knows 
                that such dividend is a dividend referred to in 
                such clause. A similar rule shall apply with 
                respect to the exception contained in section 
                871(k)(2)(B).''.
                    (B) Section 1442(a) (relating to 
                withholding of tax on foreign corporations) is 
                amended--
                            (i) by striking ``and the reference 
                        in section 1441(c)(10)'' and inserting 
                        ``the reference in section 
                        1441(c)(10)'', and
                            (ii) by inserting before the period 
                        at the end the following: ``, and the 
                        references in section 1441(c)(12) to 
                        sections 871(a) and 871(k) shall be 
                        treated as referring to sections 881(a) 
                        and 881(e) (except that for purposes of 
                        applying subparagraph (A) of section 
                        1441(c)(12), as so modified, clause 
                        (ii) of section 881(e)(1)(B) shall not 
                        apply to any dividend unless the 
                        regulated investment company knows that 
                        such dividend is a dividend referred to 
                        in such clause)''.
    (b) Estate Tax Treatment of Interest in Certain Regulated 
Investment Companies.--Section 2105 (relating to property 
without the United States for estate tax purposes) is amended 
by adding at the end the following new subsection:
    ``(d) Stock in a RIC.--
            ``(1) In general.--For purposes of this subchapter, 
        stock in a regulated investment company (as defined in 
        section 851) owned by a nonresident not a citizen of 
        the United States shall not be deemed property within 
        the United States in the proportion that, at the end of 
        the quarter of such investment company's taxable year 
        immediately preceding a decedent's date of death (or at 
        such other time as the Secretary may designate in 
        regulations), the assets of the investment company that 
        were qualifying assets with respect to the decedent 
        bore to the total assets of the investment company.
            ``(2) Qualifying assets.--For purposes of this 
        subsection, qualifying assets with respect to a 
        decedent are assets that, if owned directly by the 
        decedent, would have been--
                    ``(A) amounts, deposits, or debt 
                obligations described in subsection (b) of this 
                section,
                    ``(B) debt obligations described in the 
                last sentence of section 2104(c), or
                    ``(C) other property not within the United 
                States.
            ``(3) Termination.--This subsection shall not apply 
        to estates of decedents dying after December 31, 
        2007.''
    (c) Treatment of Regulated Investment Companies Under 
Section 897.--
            (1) Paragraph (1) of section 897(h) is amended by 
        striking ``REIT'' each place it appears and inserting 
        ``qualified investment entity''.
            (2) Paragraphs (2) and (3) of section 897(h) are 
        amended to read as follows:
            ``(2) Sale of stock in domestically controlled 
        entity not taxed.--The term `United States real 
        property interest' does not include any interest in a 
        domestically controlled qualified investment entity.
            ``(3) Distributions by domestically controlled 
        qualified investment entities.--In the case of a 
        domestically controlled qualified investment entity, 
        rules similar to the rules of subsection (d) shall 
        apply to the foreign ownership percentage of any 
        gain.''
            (3) Subparagraphs (A) and (B) of section 897(h)(4) 
        are amended to read as follows:
                    ``(A) Qualified investment entity.--
                            ``(i) In general.--The term 
                        `qualified investment entity' means--
                                    ``(I) any real estate 
                                investment trust, and
                                    ``(II) any regulated 
                                investment company.
                            ``(ii) Termination.--Clause (i)(II) 
                        shall not apply after December 31, 
                        2007.
                    ``(B) Domestically controlled.--The term 
                `domestically controlled qualified investment 
                entity' means any qualified investment entity 
                in which at all times during the testing period 
                less than 50 percent in value of the stock was 
                held directly or indirectly by foreign 
                persons.''
            (4) Subparagraphs (C) and (D) of section 897(h)(4) 
        are each amended by striking ``REIT'' and inserting 
        ``qualified investment entity''.
            (5) The subsection heading for subsection (h) of 
        section 897 is amended by striking ``REITS'' and 
        inserting ``Certain Investment Entities''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in 
        this subsection, the amendments made by this section 
        shall apply to dividends with respect to taxable years 
        of regulated investment companies beginning after 
        December 31, 2004.
            (2) Estate tax treatment.--The amendment made by 
        subsection (b) shall apply to estates of decedents 
        dying after December 31, 2004.
            (3) Certain other provisions.--The amendments made 
        by subsection (c) (other than paragraph (1) thereof) 
        shall take effect after December 31, 2004.

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

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

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

    (a) General Rule.--The following provisions are hereby 
repealed:
            (1) Part III of subchapter G of chapter 1 (relating 
        to foreign personal holding companies).
            (2) Section 1246 (relating to gain on foreign 
        investment company stock).
            (3) Section 1247 (relating to election by foreign 
        investment companies to distribute income currently).
    (b) Exemption of Foreign Corporations From Personal Holding 
Company Rules.--
            (1) In general.--Subsection (c) of section 542 
        (relating to exceptions) is amended--
                    (A) by striking paragraph (5) and inserting 
                the following:
            ``(5) a foreign corporation,'',
                    (B) by striking paragraphs (7) and (10) and 
                by redesignating paragraphs (8) and (9) as 
                paragraphs (7) and (8), respectively,
                    (C) by inserting ``and'' at the end of 
                paragraph (7) (as so redesignated), and
                    (D) by striking ``; and'' at the end of 
                paragraph (8) (as so redesignated) and 
                inserting a period.
            (2) Treatment of income from personal service 
        contracts.--Paragraph (1) of section 954(c) is amended 
        by adding at the end the following new subparagraph:
                    ``(I) Personal service contracts.--
                            ``(i) Amounts received under a 
                        contract under which the corporation is 
                        to furnish personal services if--
                                    ``(I) some person other 
                                than the corporation has the 
                                right to designate (by name or 
                                by description) the individual 
                                who is to perform the services, 
                                or
                                    ``(II) the individual who 
                                is to perform the services is 
                                designated (by name or by 
                                description) in the contract, 
                                and
                            ``(ii) amounts received from the 
                        sale or other disposition of such a 
                        contract.
                This subparagraph shall apply with respect to 
                amounts received for services under a 
                particular contract only if at some time during 
                the taxable year 25 percent or more in value of 
                the outstanding stock of the corporation is 
                owned, directly or indirectly, by or for the 
                individual who has performed, is to perform, or 
                may be designated (by name or by description) 
                as the one to perform, such services.''.
    (c) Conforming Amendments.--
            (1) Section 1(h) is amended--
                    (A) in paragraph (10), by inserting ``and'' 
                at the end of subparagraph (F), by striking 
                subparagraph (G), and by redesignating 
                subparagraph (H) as subparagraph (G), and
                    (B) by striking ``a foreign personal 
                holding company (as defined in section 552), a 
                foreign investment company (as defined in 
                section 1246(b)), or'' in paragraph 
                (11)(C)(iii).
            (2) Paragraph (2) of section 171(c) is amended--
                    (A) by striking ``, or by a foreign 
                personal holding company, as defined in section 
                552'', and
                    (B) by striking ``, or foreign personal 
                holding company''.
            (3) Paragraph (2) of section 245(a) is amended by 
        striking ``foreign personal holding company or''.
            (4) Section 312 is amended by striking subsection 
        (j).
            (5) Subsection (m) of section 312 is amended by 
        striking ``, a foreign investment company (within the 
        meaning of section 1246(b)), or a foreign personal 
        holding company (within the meaning of section 552)''.
            (6) Subsection (e) of section 443 is amended by 
        striking paragraph (3) and by redesignating paragraphs 
        (4) and (5) as paragraphs (3) and (4), respectively.
            (7) Subparagraph (B) of section 465(c)(7) is 
        amended by adding ``or'' at the end of clause (i), by 
        striking clause (ii), and by redesignating clause (iii) 
        as clause (ii).
            (8) Paragraph (1) of section 543(b) is amended by 
        inserting ``and'' at the end of subparagraph (A), by 
        striking ``, and'' at the end of subparagraph (B) and 
        inserting a period, and by striking subparagraph (C).
            (9) Paragraph (1) of section 562(b) is amended by 
        striking ``or a foreign personal holding company 
        described in section 552''.
            (10) Section 563 is amended--
                    (A) by striking subsection (c),
                    (B) by redesignating subsection (d) as 
                subsection (c), and
                    (C) by striking ``subsection (a), (b), or 
                (c)'' in subsection (c) (as so redesignated) 
                and inserting ``subsection (a) or (b)''.
            (11) Subsection (d) of section 751 is amended by 
        adding ``and'' at the end of paragraph (2), by striking 
        paragraph (3), by redesignating paragraph (4) as 
        paragraph (3), and by striking ``paragraph (1), (2), or 
        (3)'' in paragraph (3) (as so redesignated) and 
        inserting ``paragraph (1) or (2)''.
            (12) Paragraph (2) of section 864(d) is amended by 
        striking subparagraph (A) and by redesignating 
        subparagraphs (B) and (C) as subparagraphs (A) and (B), 
        respectively.
            (13)(A) Subparagraph (A) of section 898(b)(1) is 
        amended to read as follows:
                    ``(A) which is treated as a controlled 
                foreign corporation for any purpose under 
                subpart F of part III of this subchapter, 
                and''.
            (B) Subparagraph (B) of section 898(b)(2) is 
        amended by striking ``and sections 551(f) and 554, 
        whichever are applicable,''.
            (C) Paragraph (3) of section 898(b) is amended to 
        read as follows:
            ``(3) United states shareholder.--The term `United 
        States shareholder' has the meaning given to such term 
        by section 951(b), except that, in the case of a 
        foreign corporation having related person insurance 
        income (as defined in section 953(c)(2)), the Secretary 
        may treat any person as a United States shareholder for 
        purposes of this section if such person is treated as a 
        United States shareholder under section 953(c)(1).''.
            (D) Subsection (c) of section 898 is amended to 
        read as follows:
    ``(c) Determination of Required Year.--
            ``(1) In general.--The required year is--
                    ``(A) the majority U.S. shareholder year, 
                or
                    ``(B) if there is no majority U.S. 
                shareholder year, the taxable year prescribed 
                under regulations.
            ``(2) 1-month deferral allowed.--A specified 
        foreign corporation may elect, in lieu of the taxable 
        year under paragraph (1)(A), a taxable year beginning 1 
        month earlier than the majority U.S. shareholder year.
            ``(3) Majority u.s. shareholder year.--
                    ``(A) In general.--For purposes of this 
                subsection, the term `majority U.S. shareholder 
                year' means the taxable year (if any) which, on 
                each testing day, constituted the taxable year 
                of--
                            ``(i) each United States 
                        shareholder described in subsection 
                        (b)(2)(A), and
                            ``(ii) each United States 
                        shareholder not described in clause (i) 
                        whose stock was treated as owned under 
                        subsection (b)(2)(B) by any shareholder 
                        described in such clause.
                    ``(B) Testing day.--The testing days shall 
                be--
                            ``(i) the first day of the 
                        corporation's taxable year (determined 
                        without regard to this section), or
                            ``(ii) the days during such 
                        representative period as the Secretary 
                        may prescribe.''.
            (14) Clause (ii) of section 904(d)(2)(A) is amended 
        to read as follows:
                            ``(ii) Certain amounts included.--
                        Except as provided in clause (iii), the 
                        term `passive income' includes, except 
                        as provided in subparagraph (E)(iii) or 
                        paragraph (3)(I), any amount includible 
                        in gross income under section 1293 
                        (relating to certain passive foreign 
                        investment companies).''.
            (15)(A) Subparagraph (A) of section 904(h)(1), as 
        redesignated by this Act, is amended by adding ``or'' 
        at the end of clause (i), by striking clause (ii), and 
        by redesignating clause (iii) as clause (ii).
            (B) The paragraph heading of paragraph (2) of 
        section 904(h), as so redesignated, is amended by 
        striking ``foreign personal holding or''.
            (16) Section 951 is amended by striking subsections 
        (c) and (d) and by redesignating subsections (e) and 
        (f) as subsections (c) and (d), respectively.
            (17) Paragraph (3) of section 989(b) is amended by 
        striking ``, 551(a),''.
            (18) Paragraph (5) of section 1014(b) is amended by 
        inserting ``and before January 1, 2005,'' after 
        ``August 26, 1937,''.
            (19) Subsection (a) of section 1016 is amended by 
        striking paragraph (13).
            (20)(A) Paragraph (3) of section 1212(a) is amended 
        to read as follows:
            ``(3) Special rules on carrybacks.--A net capital 
        loss of a corporation shall not be carried back under 
        paragraph (1)(A) to a taxable year--
                    ``(A) for which it is a regulated 
                investment company (as defined in section 851), 
                or
                    ``(B) for which it is a real estate 
                investment trust (as defined in section 
                856).''.
            (B) The amendment made by subparagraph (A) shall 
        apply to taxable years beginning after December 31, 
        2004.
            (21) Section 1223 is amended by striking paragraph 
        (10) and by redesignating the following paragraphs 
        accordingly.
            (22) Subsection (d) of section 1248 is amended by 
        striking paragraph (5) and by redesignating paragraphs 
        (6) and (7) as paragraphs (5) and (6), respectively.
            (23) Paragraph (2) of section 1260(c) is amended by 
        striking subparagraphs (H) and (I) and by redesignating 
        subparagraph (J) as subparagraph (H).
            (24)(A) Subparagraph (F) of section 1291(b)(3) is 
        amended by striking ``551(d), 959(a),'' and inserting 
        ``959(a)''.
            (B) Subsection (e) of section 1291 is amended by 
        inserting ``(as in effect on the day before the date of 
        the enactment of the American Jobs Creation Act of 
        2004)'' after ``section 1246''.
            (25) Paragraph (2) of section 1294(a) is amended to 
        read as follows:
            ``(2) Election not permitted where amounts 
        otherwise includible under section 951.--The taxpayer 
        may not make an election under paragraph (1) with 
        respect to the undistributed PFIC earnings tax 
        liability attributable to a qualified electing fund for 
        the taxable year if any amount is includible in the 
        gross income of the taxpayer under section 951 with 
        respect to such fund for such taxable year.''.
            (26) Section 6035 is hereby repealed.
            (27) Subparagraph (D) of section 6103(e)(1) is 
        amended by striking clause (iv) and redesignating 
        clauses (v) and (vi) as clauses (iv) and (v), 
        respectively.
            (28) Subparagraph (B) of section 6501(e)(1) is 
        amended to read as follows:
                    ``(B) Constructive dividends.--If the 
                taxpayer omits from gross income an amount 
                properly includible therein under section 
                951(a), the tax may be assessed, or a 
                proceeding in court for the collection of such 
                tax may be done without assessing, at any time 
                within 6 years after the return was filed.''.
            (29) Subsection (a) of section 6679 is amended--
                    (A) by striking ``6035, 6046, and 6046A'' 
                in paragraph (1) and inserting ``6046 and 
                6046A'', and
                    (B) by striking paragraph (3).
            (30) Sections 170(f)(10)(A), 508(d), 4947, and 
        4948(c)(4) are each amended by striking ``556(b)(2),'' 
        each place it appears.
            (31) The table of parts for subchapter G of chapter 
        1 is amended by striking the item relating to part III.
            (32) The table of sections for part IV of 
        subchapter P of chapter 1 is amended by striking the 
        items relating to sections 1246 and 1247.
            (33) The table of sections for subpart A of part 
        III of subchapter A of chapter 61 is amended by 
        striking the item relating to section 6035.
    (d) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years of foreign corporations beginning after 
        December 31, 2004, and to taxable years of United 
        States shareholders with or within which such taxable 
        years of foreign corporations end.
            (2) Subsection (c)(27).--The amendments made by 
        subsection (c)(27) shall apply to disclosures of return 
        or return information with respect to taxable years 
        beginning after December 31, 2004.

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

    (a) In General.--Clauses (i) and (ii) of section 
954(c)(1)(C) (relating to commodity transactions) are amended 
to read as follows:
                            ``(i) arise out of commodity 
                        hedging transactions (as defined in 
                        paragraph (4)(A)),
                            ``(ii) are active business gains or 
                        losses from the sale of commodities, 
                        but only if substantially all of the 
                        controlled foreign corporation's 
                        commodities are property described in 
                        paragraph (1), (2), or (8) of section 
                        1221(a), or''.
    (b) Definition and Special Rules.--Subsection (c) of 
section 954, as amended by this Act, is amended by adding after 
paragraph (4) the following new paragraph:
            ``(5) Definition and special rules relating to 
        commodity transactions.--
                    ``(A) Commodity hedging transactions.--For 
                purposes of paragraph (1)(C)(i), the term 
                `commodity hedging transaction' means any 
                transaction with respect to a commodity if such 
                transaction--
                            ``(i) is a hedging transaction as 
                        defined in section 1221(b)(2), 
                        determined--
                                    ``(I) without regard to 
                                subparagraph (A)(ii) thereof,
                                    ``(II) by applying 
                                subparagraph (A)(i) thereof by 
                                substituting `ordinary property 
                                or property described in 
                                section 1231(b)' for `ordinary 
                                property', and
                                    ``(III) by substituting 
                                `controlled foreign 
                                corporation' for `taxpayer' 
                                each place it appears, and
                            ``(ii) is clearly identified as 
                        such in accordance with section 
                        1221(a)(7).
                    ``(B) Treatment of dealer activities under 
                paragraph (1)(C).--Commodities with respect to 
                which gains and losses are not taken into 
                account under paragraph (2)(C) in computing a 
                controlled foreign corporation's foreign 
                personal holding company income shall not be 
                taken into account in applying the 
                substantially all test under paragraph 
                (1)(C)(ii) to such corporation.
                    ``(C) Regulations.--The Secretary shall 
                prescribe such regulations as are appropriate 
                to carry out the purposes of paragraph (1)(C) 
                in the case of transactions involving related 
                parties.''.
    (c) Modification of Exception for Dealers.--Clause (i) of 
section 954(c)(2)(C) is amended by inserting ``and transactions 
involving physical settlement'' after ``(including hedging 
transactions''.
    (d) Effective Date.--The amendments made by this section 
shall apply to transactions entered into after December 31, 
2004.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.

    ``(a) Deduction.--
            ``(1) In general.--In the case of a corporation 
        which is a United States shareholder and for which the 
        election under this section is in effect for the 
        taxable year, there shall be allowed as a deduction an 
        amount equal to 85 percent of the cash dividends which 
        are received during such taxable year by such 
        shareholder from controlled foreign corporations.
            ``(2) Dividends paid indirectly from controlled 
        foreign corporations.--If, within the taxable year for 
        which the election under this section is in effect, a 
        United States shareholder receives a cash distribution 
        from a controlled foreign corporation which is excluded 
        from gross income under section 959(a), such 
        distribution shall be treated for purposes of this 
        section as a cash dividend to the extent of any amount 
        included in income by such United States shareholder 
        under section 951(a)(1)(A) as a result of any cash 
        dividend during such taxable year to--
                    ``(A) such controlled foreign corporation 
                from another controlled foreign corporation 
                that is in a chain of ownership described in 
                section 958(a), or
                    ``(B) any other controlled foreign 
                corporation in such chain of ownership, but 
                only to the extent of cash distributions 
                described in section 959(b) which are made 
                during such taxable year to the controlled 
                foreign corporation from which such United 
                States shareholder received such distribution.
    ``(b) Limitations.--
            ``(1) In general.--The amount of dividends taken 
        into account under subsection (a) shall not exceed the 
        greater of--
                    ``(A) $500,000,000,
                    ``(B) the amount shown on the applicable 
                financial statement as earnings permanently 
                reinvested outside the United States, or
                    ``(C) in the case of an applicable 
                financial statement which fails to show a 
                specific amount of earnings permanently 
                reinvested outside the United States and which 
                shows a specific amount of tax liability 
                attributable to such earnings, the amount equal 
                to the amount of such liability divided by 
                0.35.
        The amounts described in subparagraphs (B) and (C) 
        shall be treated as being zero if there is no such 
        statement or such statement fails to show a specific 
        amount of such earnings or liability, as the case may 
        be.
            ``(2) Dividends must be extraordinary.--The amount 
        of dividends taken into account under subsection (a) 
        shall not exceed the excess (if any) of--
                    ``(A) the dividends received during the 
                taxable year by such shareholder from 
                controlled foreign corporations, over
                    ``(B) the annual average for the base 
                period years of--
                            ``(i) the dividends received during 
                        each base period year by such 
                        shareholder from controlled foreign 
                        corporations,
                            ``(ii) the amounts includible in 
                        such shareholder's gross income for 
                        each base period year under section 
                        951(a)(1)(B) with respect to controlled 
                        foreign corporations, and
                            ``(iii) the amounts that would have 
                        been included for each base period year 
                        but for section 959(a) with respect to 
                        controlled foreign corporations.
                The amount taken into account under clause 
                (iii) for any base period year shall not 
                include any amount which is not includible in 
                gross income by reason of an amount described 
                in clause (ii) with respect to a prior taxable 
                year. Amounts described in subparagraph (B) for 
                any base period year shall be such amounts as 
                shown on the most recent return filed for such 
                year; except that amended returns filed after 
                June 30, 2003, shall not be taken into account.
            ``(3) Reduction of benefit if increase in related 
        party indebtedness.--The amount of dividends which 
        would (but for this paragraph) be taken into account 
        under subsection (a) shall be reduced by the excess (if 
        any) of--
                    ``(A) the amount of indebtedness of the 
                controlled foreign corporation to any related 
                person (as defined in section 954(d)(3)) as of 
                the close of the taxable year for which the 
                election under this section is in effect, over
                    ``(B) the amount of indebtedness of the 
                controlled foreign corporation to any related 
                person (as so defined) as of the close of 
                October 3, 2004.
        All controlled foreign corporations with respect to 
        which the taxpayer is a United States shareholder shall 
        be treated as 1 controlled foreign corporation for 
        purposes of this paragraph.
            ``(4) Requirement to invest in united states.--
        Subsection (a) shall not apply to any dividend received 
        by a United States shareholder unless the amount of the 
        dividend is invested in the United States pursuant to a 
        domestic reinvestment plan which--
                    ``(A) is approved by the taxpayer's 
                president, chief executive officer, or 
                comparable official before the payment of such 
                dividend and subsequently approved by the 
                taxpayer's board of directors, management 
                committee, executive committee, or similar 
                body, and
                    ``(B) provides for the reinvestment of such 
                dividend in the United States (other than as 
                payment for executive compensation), including 
                as a source for the funding of worker hiring 
                and training, infrastructure, research and 
                development, capital investments, or the 
                financial stabilization of the corporation for 
                the purposes of job retention or creation.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Applicable financial statement.--The term 
        `applicable financial statement' means, with respect to 
        a United States shareholder, the most recently audited 
        financial statement (including notes and other 
        documents which accompany such statement) which 
        includes such shareholder--
                    ``(A) which is certified on or before June 
                30, 2003, as being prepared in accordance with 
                generally accepted accounting principles, and
                    ``(B) which is used for the purposes of a 
                statement or report--
                            ``(i) to creditors,
                            ``(ii) to shareholders, or
                            ``(iii) for any other substantial 
                        nontax purpose.
        In the case of a corporation required to file a 
        financial statement with the Securities and Exchange 
        Commission, such term means the most recent such 
        statement filed on or before June 30, 2003.
            ``(2) Base period years.--
                    ``(A) In general.--The base period years 
                are the 3 taxable years--
                            ``(i) which are among the 5 most 
                        recent taxable years ending on or 
                        before June 30, 2003, and
                            ``(ii) which are determined by 
                        disregarding--
                                    ``(I) 1 taxable year for 
                                which the sum of the amounts 
                                described in clauses (i), (ii), 
                                and (iii) of subsection 
                                (b)(2)(B) is the largest, and
                                    ``(II) 1 taxable year for 
                                which such sum is the smallest.
                    ``(B) Shorter period.--If the taxpayer has 
                fewer than 5 taxable years ending on or before 
                June 30, 2003, then in lieu of applying 
                subparagraph (A), the base period years shall 
                include all the taxable years of the taxpayer 
                ending on or before June 30, 2003.
                    ``(C) Mergers, acquisitions, etc.--
                            ``(i) In general.--Rules similar to 
                        the rules of subparagraphs (A) and (B) 
                        of section 41(f)(3) shall apply for 
                        purposes of this paragraph.
                            ``(ii) Spin-offs, etc.--If there is 
                        a distribution to which section 355 (or 
                        so much of section 356 as relates to 
                        section 355) applies during the 5-year 
                        period referred to in subparagraph 
                        (A)(i) and the controlled corporation 
                        (within the meaning of section 355) is 
                        a United States shareholder--
                                    ``(I) the controlled 
                                corporation shall be treated as 
                                being in existence during the 
                                period that the distributing 
                                corporation (within the meaning 
                                of section 355) is in 
                                existence, and
                                    ``(II) for purposes of 
                                applying subsection (b)(2) to 
                                the controlled corporation and 
                                the distributing corporation, 
                                amounts described in subsection 
                                (b)(2)(B) which are received or 
                                includible by the distributing 
                                corporation or controlled 
                                corporation (as the case may 
                                be) before the distribution 
                                referred to in subclause (I) 
                                from a controlled foreign 
                                corporation shall be allocated 
                                between such corporations in 
                                proportion to their respective 
                                interests as United States 
                                shareholders of such controlled 
                                foreign corporation immediately 
                                after such distribution.
                        Subclause (II) shall not apply if 
                        neither the controlled corporation nor 
                        the distributing corporation is a 
                        United States shareholder of such 
                        controlled foreign corporation 
                        immediately after such distribution.
            ``(3) Dividend.--The term `dividend' shall not 
        include amounts includible in gross income as a 
        dividend under section 78, 367, or 1248. In the case of 
        a liquidation under section 332 to which section 367(b) 
        applies, the preceding sentence shall not apply to the 
        extent the United States shareholder actually receives 
        cash as part of the liquidation.
            ``(4) Coordination with dividends received 
        deduction.--No deduction shall be allowed under section 
        243 or 245 for any dividend for which a deduction is 
        allowed under this section.
            ``(5) Controlled groups.--
                    ``(A) In general.--All United States 
                shareholders which are members of an affiliated 
                group filing a consolidated return under 
                section 1501 shall be treated as one United 
                States shareholder.
                    ``(B) Application of $500,000,000 limit.--
                All corporations which are treated as a single 
                employer under section 52(a) shall be limited 
                to one $500,000,000 amount in subsection 
                (b)(1)(A), and such amount shall be divided 
                among such corporations under regulations 
                prescribed by the Secretary.
                    ``(C) Permanently reinvested earnings.--If 
                a financial statement is an applicable 
                financial statement for more than 1 United 
                States shareholder, the amount applicable under 
                subparagraph (B) or (C) of subsection (b)(1) 
                shall be divided among such shareholders under 
                regulations prescribed by the Secretary.
    ``(d) Denial of Foreign Tax Credit; Denial of Certain 
Expenses.--
            ``(1) Foreign tax credit.--No credit shall be 
        allowed under section 901 for any taxes paid or accrued 
        (or treated as paid or accrued) with respect to the 
        deductible portion of--
                    ``(A) any dividend, or
                    ``(B) any amount described in subsection 
                (a)(2) which is included in income under 
                section 951(a)(1)(A).
        No deduction shall be allowed under this chapter for 
        any tax for which credit is not allowable by reason of 
        the preceding sentence.
            ``(2) Expenses.--No deduction shall be allowed for 
        expenses properly allocated and apportioned to the 
        deductible portion described in paragraph (1).
            ``(3) Deductible portion.--For purposes of 
        paragraph (1), unless the taxpayer otherwise specifies, 
        the deductible portion of any dividend or other amount 
        is the amount which bears the same ratio to the amount 
        of such dividend or other amount as the amount allowed 
        as a deduction under subsection (a) for the taxable 
        year bears to the amount described in subsection 
        (b)(2)(A) for such year.
    ``(e) Increase in Tax on Included Amounts Not Reduced by 
Credits, Etc.--
            ``(1) In general.--Any tax under this chapter by 
        reason of nondeductible CFC dividends shall not be 
        treated as tax imposed by this chapter for purposes of 
        determining--
                    ``(A) the amount of any credit allowable 
                under this chapter, or
                    ``(B) the amount of the tax imposed by 
                section 55.
        Subparagraph (A) shall not apply to the credit under 
        section 53 or to the credit under section 27(a) with 
        respect to taxes attributable to such dividends.
            ``(2) Limitation on reduction in taxable income, 
        etc.--
                    ``(A) In general.--The taxable income of 
                any United States shareholder for any taxable 
                year shall in no event be less than the amount 
                of nondeductible CFC dividends received during 
                such year.
                    ``(B) Coordination with section 172.--The 
                nondeductible CFC dividends for any taxable 
                year shall not be taken into account--
                            ``(i) in determining under section 
                        172 the amount of any net operating 
                        loss for such taxable year, and
                            ``(ii) in determining taxable 
                        income for such taxable year for 
                        purposes of the 2nd sentence of section 
                        172(b)(2).
            ``(3) Nondeductible cfc dividends.--For purposes of 
        this subsection, the term `nondeductible CFC dividends' 
        means the excess of the amount of dividends taken into 
        account under subsection (a) over the deduction allowed 
        under subsection (a) for such dividends.
    ``(f) Election.--The taxpayer may elect to apply this 
section to--
            ``(1) the taxpayer's last taxable year which begins 
        before the date of the enactment of this section, or
            ``(2) the taxpayer's first taxable year which 
        begins during the 1-year period beginning on such date.
Such election may be made for a taxable year only if made 
before the due date (including extensions) for filing the 
return of tax for such taxable year.''
    (b) Alternative Minimum Tax.--Subparagraph (C) of section 
56(g)(4) is amended by inserting after clause (v) the following 
new clause:
                            ``(vi) Special rule for certain 
                        distributions from controlled foreign 
                        corporations.--Clause (i) shall not 
                        apply to any deduction allowable under 
                        section 965.''.
    (c) Clerical Amendment.--The table of sections for subpart 
F of part III of subchapter N of chapter 1 is amended by adding 
at the end the following new item:

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

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

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

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

SEC. 424. STUDY OF EARNINGS STRIPPING PROVISIONS.

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

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

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

    (a) In General.--Subsection (b) of section 164 (relating to 
definitions and special rules) is amended by adding at the end 
the following:
            ``(5) General sales taxes.--For purposes of 
        subsection (a)--
                    ``(A) Election to deduct state and local 
                sales taxes in lieu of state and local income 
                taxes.--
                            ``(i) In general.--At the election 
                        of the taxpayer for the taxable year, 
                        subsection (a) shall be applied--
                                    ``(I) without regard to the 
                                reference to State and local 
                                income taxes, and
                                    ``(II) as if State and 
                                local general sales taxes were 
                                referred to in a paragraph 
                                thereof.
                    ``(B) Definition of general sales tax.--The 
                term `general sales tax' means a tax imposed at 
                one rate with respect to the sale at retail of 
                a broad range of classes of items.
                    ``(C) Special rules for food, etc.--In the 
                case of items of food, clothing, medical 
                supplies, and motor vehicles--
                            ``(i) the fact that the tax does 
                        not apply with respect to some or all 
                        of such items shall not be taken into 
                        account in determining whether the tax 
                        applies with respect to a broad range 
                        of classes of items, and
                            ``(ii) the fact that the rate of 
                        tax applicable with respect to some or 
                        all of such items is lower than the 
                        general rate of tax shall not be taken 
                        into account in determining whether the 
                        tax is imposed at one rate.
                    ``(D) Items taxed at different rates.--
                Except in the case of a lower rate of tax 
                applicable with respect to an item described in 
                subparagraph (C), no deduction shall be allowed 
                under this paragraph for any general sales tax 
                imposed with respect to an item at a rate other 
                than the general rate of tax.
                    ``(E) Compensating use taxes.--A 
                compensating use tax with respect to an item 
                shall be treated as a general sales tax. For 
                purposes of the preceding sentence, the term 
                `compensating use tax' means, with respect to 
                any item, a tax which--
                            ``(i) is imposed on the use, 
                        storage, or consumption of such item, 
                        and
                            ``(ii) is complementary to a 
                        general sales tax, but only if a 
                        deduction is allowable under this 
                        paragraph with respect to items sold at 
                        retail in the taxing jurisdiction which 
                        are similar to such item.
                    ``(F) Special rule for motor vehicles.--In 
                the case of motor vehicles, if the rate of tax 
                exceeds the general rate, such excess shall be 
                disregarded and the general rate shall be 
                treated as the rate of tax.
                    ``(G) Separately stated general sales 
                taxes.--If the amount of any general sales tax 
                is separately stated, then, to the extent that 
                the amount so stated is paid by the consumer 
                (other than in connection with the consumer's 
                trade or business) to the seller, such amount 
                shall be treated as a tax imposed on, and paid 
                by, such consumer.
                    ``(H) Amount of deduction may be determined 
                under tables.--
                            ``(i) In general.--At the election 
                        of the taxpayer for the taxable year, 
                        the amount of the deduction allowed 
                        under this paragraph for such year 
                        shall be--
                                    ``(I) the amount determined 
                                under this paragraph (without 
                                regard to this subparagraph) 
                                with respect to motor vehicles, 
                                boats, and other items 
                                specified by the Secretary, and
                                    ``(II) the amount 
                                determined under tables 
                                prescribed by the Secretary 
                                with respect to items to which 
                                subclause (I) does not apply.
                            ``(ii) Requirements for tables.--
                        The tables prescribed under clause 
                        (i)--
                                    ``(I) shall reflect the 
                                provisions of this paragraph,
                                    ``(II) shall be based on 
                                the average consumption by 
                                taxpayers on a State-by-State 
                                basis (as determined by the 
                                Secretary) of items to which 
                                clause (i)(I) does not apply, 
                                taking into account filing 
                                status, number of dependents, 
                                adjusted gross income, and 
                                rates of State and local 
                                general sales taxation, and
                                    ``(III) need only be 
                                determined with respect to 
                                adjusted gross incomes up to 
                                the applicable amount (as 
                                determined under section 
                                68(b)).
                    ``(I) Application of paragraph.--This 
                paragraph shall apply to taxable years 
                beginning after December 31, 2003, and before 
                January 1, 2006.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2003.

              TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM

SEC. 601. SHORT TITLE.

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

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

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

    (a) Marketing Quotas.--Part I of subtitle B of title III of 
the Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et seq.) 
is repealed.
    (b) Tobacco Inspections.--Section 213 of the Tobacco 
Adjustment Act of 1983 (7 U.S.C. 511r) is repealed.
    (c) Tobacco Control.--The Act of April 25, 1936 (commonly 
known as the Tobacco Control Act; 7 U.S.C. 515 et seq.), is 
repealed.
    (d) Processing Tax.--Section 9(b) of the Agricultural 
Adjustment Act (7 U.S.C. 609(b)), reenacted with amendments by 
the Agricultural Marketing Agreement Act of 1937, is amended--
            (1) in paragraph (2), by striking ``tobacco,''; and
            (2) in paragraph (6)(B)(i), by striking ``, or, in 
        the case of tobacco, is less than the fair exchange 
        value by not more than 10 per centum,''.
    (e) Declaration of Policy.--Section 2 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1282) is amended by striking 
``tobacco,''.
    (f) Definitions.--Section 301(b) of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1301(b)) is amended--
            (1) in paragraph (3)--
                    (A) by striking subparagraph (C); and
                    (B) by redesignating subparagraph (D) as 
                subparagraph (C);
            (2) in paragraph (6)(A), by striking ``tobacco,'';
            (3) in paragraph (10)--
                    (A) by striking subparagraph (B); and
                    (B) by redesignating subparagraph (C) as 
                subparagraph (B);
            (4) in paragraph (11)(B), by striking ``and 
        tobacco'';
            (5) in paragraph (12), by striking ``tobacco,'';
            (6) in paragraph (14)--
                    (A) in subparagraph (A), by striking 
                ``(A)''; and
                    (B) by striking subparagraphs (B), (C), and 
                (D);
            (7) by striking paragraph (15);
            (8) in paragraph (16)--
                    (A) by striking subparagraph (B); and
                    (B) by redesignating subparagraph (C) as 
                subparagraph (B);
            (9) by striking paragraph (17); and
            (10) by redesignating paragraph (16) as paragraph 
        (15).
    (g) Parity Payments.--Section 303 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1303) is amended in the first 
sentence by striking ``rice, or tobacco,'' and inserting ``or 
rice,''.
    (h) Administrative Provisions.--Section 361 of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) is amended 
by striking ``tobacco,''.
    (i) Adjustment of Quotas.--Section 371 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1371) is amended--
            (1) in the first sentence of subsection (a), by 
        striking ``rice, or tobacco'' and inserting ``or 
        rice''; and
            (2) in the first sentence of subsection (b), by 
        striking ``rice, or tobacco'' and inserting ``or 
        rice''.
    (j) Reports and Records.--Section 373 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1373) is amended--
            (1) by striking ``rice, or tobacco'' each place it 
        appears in subsections (a) and (b) and inserting ``or 
        rice''; and
            (2) in subsection (a)--
                    (A) in the first sentence, by striking 
                ``all persons engaged in the business of 
                redrying, prizing, or stemming tobacco for 
                producers,''; and
                    (B) in the last sentence, by striking 
                ``$500;'' and all that follows through the 
                period at the end of the sentence and inserting 
                ``$500.''.
    (k) Regulations.--Section 375 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1375) is amended--
            (1) in subsection (a), by striking ``peanuts, or 
        tobacco'' and inserting ``or peanuts''; and
            (2) by striking subsection (c).
    (l) Eminent Domain.--Section 378 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1378) is amended--
            (1) in the first sentence of subsection (c), by 
        striking ``cotton, and tobacco'' and inserting ``and 
        cotton''; and
            (2) by striking subsections (d), (e), and (f).
    (m) Burley Tobacco Farm Reconstitution.--Section 379 of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is 
amended--
            (1) in subsection (a)--
                    (A) by striking ``(a)''; and
                    (B) in paragraph (6), by striking ``, but 
                this clause (6) shall not be applicable in the 
                case of burley tobacco''; and
            (2) by striking subsections (b) and (c).
    (n) Acreage-Poundage Quotas.--Section 4 of the Act of April 
16, 1955 (Public Law 89-12; 7 U.S.C. 1314c note), is repealed.
    (o) Burley Tobacco Acreage Allotments.--The Act of July 12, 
1952 (7 U.S.C. 1315), is repealed.
    (p) Transfer of Allotments.--Section 703 of the Food and 
Agriculture Act of 1965 (7 U.S.C. 1316) is repealed.
    (q) Advance Recourse Loans.--Section 13(a)(2)(B) of the 
Food Security Improvements Act of 1986 (7 U.S.C. 1433c-
1(a)(2)(B)) is amended by striking ``tobacco and''.
    (r) Tobacco Field Measurement.--Section 1112 of the Omnibus 
Budget Reconciliation Act of 1987 (Public Law 100-203; 101 
Stat. 1330-8) is amended by striking subsection (c).
    (s) Burley Tobacco Import Review.--Section 3 of Public Law 
98-59 (7 U.S.C. 625) is repealed.

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

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

SEC. 613. CONFORMING AMENDMENTS.

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

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

    The amendments made by this subtitle shall not affect the 
liability of any person under any provision of law so amended 
with respect to the 2004 or an earlier crop of each kind of 
tobacco.

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

SEC. 621. DEFINITIONS.

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

SEC. 622. CONTRACT PAYMENTS TO TOBACCO QUOTA HOLDERS.

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

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

    (a) Contract Offered.--The Secretary shall offer to enter 
into a contract with each producer of quota tobacco under which 
the producer of quota tobacco shall be entitled to receive 
payments under this section in exchange for the termination of 
tobacco marketing quotas and related price support under the 
amendments made by sections 611 and 612. The contract payments 
shall constitute full and fair consideration for the 
termination of such tobacco marketing quotas and related price 
support.
    (b) Eligibility.--
            (1) Application and determination.--To be eligible 
        to enter into a contract to receive a contract payment 
        under this section, a person shall submit to the 
        Secretary an application containing such information as 
        the Secretary may require to demonstrate to the 
        satisfaction of the Secretary that the person is a 
        producer of quota tobacco. The application shall be 
        submitted within such time, in such form, and in such 
        manner as the Secretary may require.
            (2) Effect of Multiple Producers for Same Quota 
        Tobacco.--If, on the basis of the applications 
        submitted under paragraph (1) or other information, the 
        Secretary determines that two or more persons are a 
        producer of the same quota tobacco, the Secretary shall 
        provide for an equitable distribution among the persons 
        of the contract payments made under this section with 
        respect to that quota tobacco, based on relative share 
        of such persons in the risk of producing the quota 
        tobacco and such other factors as the Secretary 
        considers appropriate.
    (c) Base Quota Level.--
            (1) Establishment.--The Secretary shall establish a 
        base quota level applicable to each producer of quota 
        tobacco, as determined under this subsection.
            (2) Flue-cured and burley tobacco.--In the case of 
        Flue-cured tobacco (types 11, 12, 13, and 14) and 
        Burley tobacco (type 31), the base quota level for each 
        producer of quota tobacco shall be equal to the 
        effective tobacco marketing quota (irrespective of 
        disaster lease and transfers) under part I of subtitle 
        B of title III of the Agriculture Adjustment Act of 
        1938 for the 2002 marketing year for quota tobacco 
        produced on the farm.
            (3) Other kinds of tobacco.--In the case of each 
        kind of tobacco (other than tobacco covered by 
        paragraph (2)), for the purpose of calculating a 
        contract payment to a producer of quota tobacco, the 
        base quota level for the producer of quota tobacco 
        shall be the quantity obtained by multiplying--
                    (A) the basic tobacco farm acreage 
                allotment for the 2002 marketing year 
                established by the Secretary for quota tobacco 
                produced on the farm; by
                    (B) the average annual yield, per acre, of 
                quota tobacco produced on the farm for the 
                period covering the 2001, 2002, and 2003 crop 
                years.
    (d) Contract Payments.--
            (1) Calculation of total payment amount.--Subject 
        to subsection (b)(2), the total amount of contract 
        payments to which an eligible producer of quota tobacco 
        is entitled under this section, with respect to a kind 
        of tobacco, shall be equal to the product obtained by 
        multiplying--
                    (A) subject to paragraph (2), $3.00 per 
                pound; by
                    (B) the base quota level of the producer of 
                quota tobacco determined under subsection (c) 
                with respect to that kind of tobacco.
            (2) Annual payment.--During each of fiscal years 
        2005 through 2014, the Secretary shall make a contract 
        payment under this section to each eligible producer of 
        tobacco, with respect to a kind of tobacco, in an 
        amount equal to \1/10\ of the amount determined under 
        paragraph (1) for the producer for that kind of 
        tobacco.
            (3) Variable payment rates.--The rate for payments 
        to a producer of quota tobacco under paragraph (1)(A) 
        shall be equal to--
                    (A) in the case of a producer of quota 
                tobacco that produced quota tobacco marketed, 
                or considered planted, under a marketing quota 
                in all three of the 2002, 2003, or 2004 tobacco 
                marketing years, the rate prescribed under 
                paragraph (1)(A);
                    (B) in the case of a producer of quota 
                tobacco that produced quota tobacco marketed, 
                or considered planted, under a marketing quota 
                in only two of those tobacco marketing years, 
                \2/3\ of the rate prescribed under paragraph 
                (1)(A); and
                    (C) in the case of a producer of quota 
                tobacco that produced quota tobacco marketed, 
                or considered planted, under a marketing quota 
                in only one of those tobacco marketing years, 
                \1/3\ of the rate prescribed under paragraph 
                (1)(A).
    (e) Death of Tobacco Producer.--If a producer of quota 
tobacco who is entitled to contract payments under this section 
dies and is survived by a spouse or one or more dependents, the 
right to receive the contract payments shall transfer to the 
surviving spouse or, if there is no surviving spouse, to the 
estate of the producer.

SEC. 624. ADMINISTRATION.

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

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

    (a) Definitions.--In this section:
            (1) Base period.--The term ``base period'' means 
        the one-year period ending the June 30 before the 
        beginning of a fiscal year.
            (2) Gross domestic volume.--The term ``gross 
        domestic volume'' means the volume of tobacco 
        products--
                    (A) removed (as defined by section 5702 of 
                the Internal Revenue Code of 1986); and
                    (B) not exempt from tax under chapter 52 of 
                the Internal Revenue Code of 1986 at the time 
                of their removal under that chapter or the 
                Harmonized Tariff Schedule of the United States 
                (19 U.S.C. 1202).
            (3) Market share.--The term ``market share'' means 
        the share of each manufacturer or importer of a class 
        of tobacco product (expressed as a decimal to the 
        fourth place) of the total volume of domestic sales of 
        the class of tobacco product during the base period for 
        a fiscal year for an assessment under this section.
    (b) Quarterly Assessments.--
            (1) Imposition of assessment.--The Secretary, 
        acting through the Commodity Credit Corporation, shall 
        impose quarterly assessments during each of fiscal 
        years 2005 through 2014, calculated in accordance with 
        this section, on each tobacco product manufacturer and 
        tobacco product importer that sells tobacco products in 
        domestic commerce in the United States during that 
        fiscal year.
            (2) Amounts.--Beginning with the calendar quarter 
        ending on December 31 of each of fiscal years 2005 
        through 2014, the assessment payments over each four-
        calendar quarter period shall be sufficient to cover--
                    (A) the contract payments made under 
                sections 622 and 623 during that period; and
                    (B) other expenditures from the Tobacco 
                Trust Fund made during the base quarter periods 
                corresponding to the four calendar quarters of 
                that period.
            (3) Deposit.--Assessments collected under this 
        section shall be deposited in the Tobacco Trust Fund.
    (c) Assessments for Classes of Tobacco Products.--
            (1) Initial allocation.--The percentage of the 
        total amount required by subsection (b) to be assessed 
        against, and paid by, the manufacturers and importers 
        of each class of tobacco product in fiscal year 2005 
        shall be as follows:
                    (A) For cigarette manufacturers and 
                importers, 96.331 percent.
                    (B) For cigar manufacturers and importers, 
                2.783 percent.
                    (C) For snuff manufacturers and importers, 
                0.539 percent.
                    (D) For roll-your-own tobacco manufacturers 
                and importers, 0.171 percent.
                    (E) For chewing tobacco manufacturers and 
                importers, 0.111 percent.
                    (F) For pipe tobacco manufacturers and 
                importers, 0.066 percent.
            (2) Subsequent allocations.--For subsequent fiscal 
        years, the Secretary shall periodically adjust the 
        percentage of the total amount required under 
        subsection (b) to be assessed against, and paid by, the 
        manufacturers and importers of each class of tobacco 
        product specified in paragraph (1) to reflect changes 
        in the share of gross domestic volume held by that 
        class of tobacco product.
            (3) Effect of insufficient amounts.--If the 
        Secretary determines that the assessment imposed under 
        subsection (b) will result in insufficient amounts to 
        carry out this subtitle during a fiscal year, the 
        Secretary shall assess such additional amounts as the 
        Secretary determines to be necessary to carry out this 
        subtitle during that fiscal year. The additional amount 
        shall be allocated to manufacturers and importers of 
        each class of tobacco product specified in paragraph 
        (1) in the same manner and based on the same 
        percentages applicable under paragraph (1) or (2) for 
        that fiscal year.
    (d) Notification and Timing of Assessments.--
            (1) Notification of assessments.--The Secretary 
        shall provide each manufacturer or importer subject to 
        an assessment under subsection (b) with written notice 
        setting forth the amount to be assessed against the 
        manufacturer or importer for each quarterly payment 
        period. The notice for a quarterly period shall be 
        provided not later than 30 days before the date payment 
        is due under paragraph (3).
            (2) Content.--The notice shall include the 
        following information with respect to the quarterly 
        period used by the Secretary in calculating the amount:
                    (A) The total combined assessment for all 
                manufacturers and importers of tobacco 
                products.
                    (B) The total assessment with respect to 
                the class of tobacco products manufactured or 
                imported by the manufacturer or importer.
                    (C) Any adjustments to the percentage 
                allocations among the classes of tobacco 
                products made pursuant to paragraph (2) or (3) 
                of subsection (c).
                    (D) The volume of gross sales of the 
                applicable class of tobacco product treated as 
                made by the manufacturer or importer for 
                purposes of calculating the manufacturer's or 
                importer's market share under subsection (f).
                    (E) The total volume of gross sales of the 
                applicable class of tobacco product that the 
                Secretary treated as made by all manufacturers 
                and importers for purposes of calculating the 
                manufacturer's or importer's market share under 
                subsection (f).
                    (F) The manufacturer's or importer's market 
                share of the applicable class of tobacco 
                product, as determined by the Secretary under 
                subsection (f).
                    (G) The market share, as determined by the 
                Secretary under subsection (f), of each other 
                manufacturer and importer, for each applicable 
                class of tobacco product.
            (3) Timing of assessment payments.--
                    (A) Collection date.--Assessments shall be 
                collected at the end of each calendar year 
                quarter, except that the Secretary shall ensure 
                that the final assessment due under this 
                section is collected not later than September 
                30, 2014.
                    (B) Base period quarter.--The assessment 
                for a calendar year quarter shall correspond to 
                the base period quarter that ended at the end 
                of the preceding calendar year quarter.
    (e) Allocation of Assessment Within Each Class of Tobacco 
Product.--
            (1) Pro rata basis.--The assessment for each class 
        of tobacco product specified in subsection (c)(1) shall 
        be allocated on a pro rata basis among manufacturers 
        and importers based on each manufacturer's or 
        importer's share of gross domestic volume.
            (2) Limitation.--No manufacturer or importer shall 
        be required to pay an assessment that is based on a 
        share that is in excess of the manufacturer's or 
        importer's share of domestic volume.
    (f) Allocation of Total Assessments by Market Share.--The 
amount of the assessment for each class of tobacco product 
specified in subsection (c)(1) to be paid by each manufacturer 
or importer of that class of tobacco product shall be 
determined for each quarterly payment period by multiplying--
            (1) the market share of the manufacturer or 
        importer, as calculated with respect to that payment 
        period, of the class of tobacco product; by
            (2) the total amount of the assessment for that 
        quarterly payment period under subsection (c), for the 
        class of tobacco product.
    (g) Determination of Volume of Domestic Sales.--
            (1) In general.--The calculation of the volume of 
        domestic sales of a class of tobacco product by a 
        manufacturer or importer, and by all manufacturers and 
        importers as a group, shall be made by the Secretary 
        based on information provided by the manufacturers and 
        importers pursuant to subsection (h), as well as any 
        other relevant information provided to or obtained by 
        the Secretary.
            (2) Gross domestic volume.--The volume of domestic 
        sales shall be calculated based on gross domestic 
        volume.
            (3) Measurement.--For purposes of the calculations 
        under this subsection and the certifications under 
        subsection (h) by the Secretary, the volumes of 
        domestic sales shall be measured by--
                    (A) in the case of cigarettes and cigars, 
                the number of cigarettes and cigars; and
                    (B) in the case of the other classes of 
                tobacco products specified in subsection 
                (c)(1), in terms of number of pounds, or 
                fraction thereof, of those products.
    (h) Measurement of Volume of Domestic Sales.--
            (1) Submission of information.--Each manufacturer 
        and importer of tobacco products shall submit to the 
        Secretary a certified copy of each of the returns or 
        forms described by paragraph (2) that are required to 
        be filed with a Federal agency on the same date that 
        those returns or forms are filed, or required to be 
        filed, with the agency.
            (2) Returns and forms.--The returns and forms 
        described by this paragraph are those returns and forms 
        that relate to--
                    (A) the removal of tobacco products into 
                domestic commerce (as defined by section 5702 
                of the Internal Revenue Code of 1986); and
                    (B) the payment of the taxes imposed under 
                charter 52 of the Internal Revenue Code of 
                1986, including AFT Form 5000.24 and United 
                States Customs Form 7501 under currently 
                applicable regulations.
            (3) Effect of failure to provide required 
        information.--Any person that knowingly fails to 
        provide information required under this subsection or 
        that provides false information under this subsection 
        shall be subject to the penalties described in section 
        1003 of title 18, United States Code. The Secretary may 
        also assess against the person a civil penalty in an 
        amount not to exceed two percent of the value of the 
        kind of tobacco products manufactured or imported by 
        the person during the fiscal year in which the 
        violation occurred, as determined by the Secretary.
    (i) Challenge to Assessment.--
            (1) Appeal to secretary.--A manufacturer or 
        importer subject to this section may contest an 
        assessment imposed on the manufacturer or importer 
        under this section by notifying the Secretary, not 
        later than 30 business days after receiving the 
        assessment notification required by subsection (d), 
        that the manufacturer or importer intends to contest 
        the assessment.
            (2) Information.--Not later than 180 days after the 
        date of the enactment of this title, the Secretary 
        shall establish by regulation a procedure under which a 
        manufacturer or importer contesting an assessment under 
        this subsection may present information to the 
        Secretary to demonstrate that the assessment applicable 
        to the manufacturer or importer is incorrect. In 
        challenging the assessment, the manufacturer or 
        importer may use any information that is available, 
        including third party data on industry or individual 
        company sales volumes.
            (3) Revision.--If a manufacturer or importer 
        establishes that the initial determination of the 
        amount of an assessment is incorrect, the Secretary 
        shall revise the amount of the assessment so that the 
        manufacturer or importer is required to pay only the 
        amount correctly determined.
            (4) Time for review.--Not later than 30 days after 
        receiving notice from a manufacturer or importer under 
        paragraph (1), the Secretary shall--
                    (A) decide whether the information provided 
                to the Secretary under paragraph (2), and any 
                other information that the Secretary determines 
                is appropriate, is sufficient to establish that 
                the original assessment was incorrect; and
                    (B) make any revisions necessary to ensure 
                that each manufacturer and importer pays only 
                its correct pro rata share of total gross 
                domestic volume from all sources.
            (5) Immediate payment of undisputed amounts.--The 
        regulations promulgated by the Secretary under 
        paragraph (2) shall provide for the immediate payment 
        by a manufacturer or importer challenging an assessment 
        of that portion of the assessment that is not in 
        dispute. The manufacturer and importer may place into 
        escrow, in accordance with such regulations, only the 
        portion of the assessment being challenged in good 
        faith pending final determination of the claim.
    (j) Judicial Review.--
            (1) In general.--Any manufacturer or importer 
        aggrieved by a determination of the Secretary with 
        respect to the amount of any assessment may seek review 
        of the determination in the United States District 
        Court for the District of Columbia or for the district 
        in which the manufacturer or importer resides or has 
        its principal place of business at any time following 
        exhaustion of the administrative remedies available 
        under subsection (i).
            (2) Time limits.--Administrative remedies shall be 
        deemed exhausted if no decision by the Secretary is 
        made within the time limits established under 
        subsection (i)(4).
            (3) Excessive assessments.--The court shall 
        restrain collection of the excessive portion of any 
        assessment or order a refund of excessive assessments 
        already paid, along with interest calculated at the 
        rate prescribed in section 3717 of title 31, United 
        States Code, if it finds that the Secretary's 
        determination is not supported by a preponderance of 
        the information available to the Secretary.
    (k) Termination Date.--The authority provided by this 
section to impose assessments terminates on September 30, 2014.

SEC. 626. TOBACCO TRUST FUND.

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

SEC. 627. LIMITATION ON TOTAL EXPENDITURES.

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

               Subtitle C--Implementation and Transition

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

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

SEC. 642. REGULATIONS.

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

SEC. 643. EFFECTIVE DATE.

    This title and the amendments made by this title shall 
apply to the 2005 and subsequent crops of each kind of tobacco.

                  TITLE VII--MISCELLANEOUS PROVISIONS

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

    (a) Treatment as Exempt Facility Bond.--Subsection (a) of 
section 142 (relating to the definition of exempt facility 
bond) is amended by striking ``or'' at the end of paragraph 
(12), by striking the period at the end of paragraph (13) and 
inserting ``, or'', and by inserting at the end the following 
new paragraph:
            ``(14) qualified green building and sustainable 
        design projects.''.
    (b) Qualified Green Building and Sustainable Design 
Projects.--Section 142 (relating to exempt facility bonds) is 
amended by adding at the end thereof the following new 
subsection:
    ``(l) Qualified Green Building and Sustainable Design 
Projects.--
            ``(1) In general.--For purposes of subsection 
        (a)(14), the term `qualified green building and 
        sustainable design project' means any project which is 
        designated by the Secretary, after consultation with 
        the Administrator of the Environmental Protection 
        Agency, as a qualified green building and sustainable 
        design project and which meets the requirements of 
        clauses (i), (ii), (iii), and (iv) of paragraph (4)(A).
            ``(2) Designations.--
                    ``(A) In general.--Within 60 days after the 
                end of the application period described in 
                paragraph (3)(A), the Secretary, after 
                consultation with the Administrator of the 
                Environmental Protection Agency, shall 
                designate qualified green building and 
                sustainable design projects. At least one of 
                the projects designated shall be located in, or 
                within a 10-mile radius of, an empowerment zone 
                as designated pursuant to section 1391, and at 
                least one of the projects designated shall be 
                located in a rural State. No more than one 
                project shall be designated in a State. A 
                project shall not be designated if such project 
                includes a stadium or arena for professional 
                sports exhibitions or games.
                    ``(B) Minimum conservation and technology 
                innovation objectives.--The Secretary, after 
                consultation with the Administrator of the 
                Environmental Protection Agency, shall ensure 
                that, in the aggregate, the projects designated 
                shall--
                            ``(i) reduce electric consumption 
                        by more than 150 megawatts annually as 
                        compared to conventional generation,
                            ``(ii) reduce daily sulfur dioxide 
                        emissions by at least 10 tons compared 
                        to coal generation power,
                            ``(iii) expand by 75 percent the 
                        domestic solar photovoltaic market in 
                        the United States (measured in 
                        megawatts) as compared to the expansion 
                        of that market from 2001 to 2002, and
                            ``(iv) use at least 25 megawatts of 
                        fuel cell energy generation.
            ``(3) Limited designations.--A project may not be 
        designated under this subsection unless--
                    ``(A) the project is nominated by a State 
                or local government within 180 days of the 
                enactment of this subsection, and
                    ``(B) such State or local government 
                provides written assurances that the project 
                will satisfy the eligibility criteria described 
                in paragraph (4).
            ``(4) Application.--
                    ``(A) In general.--A project may not be 
                designated under this subsection unless the 
                application for such designation includes a 
                project proposal which describes the energy 
                efficiency, renewable energy, and sustainable 
                design features of the project and demonstrates 
                that the project satisfies the following 
                eligibility criteria:
                            ``(i) Green building and 
                        sustainable design.--At least 75 
                        percent of the square footage of 
                        commercial buildings which are part of 
                        the project is registered for United 
                        States Green Building Council's LEED 
                        certification and is reasonably 
                        expected (at the time of the 
                        designation) to receive such 
                        certification. For purposes of 
                        determining LEED certification as 
                        required under this clause, points 
                        shall be credited by using the 
                        following:
                                    ``(I) For wood products, 
                                certification under the 
                                Sustainable Forestry Initiative 
                                Program and the American Tree 
                                Farm System.
                                    ``(II) For renewable wood 
                                products, as credited for 
                                recycled content otherwise 
                                provided under LEED 
                                certification.
                                    ``(III) For composite wood 
                                products, certification under 
                                standards established by the 
                                American National Standards 
                                Institute, or such other 
                                voluntary standards as 
                                published in the Federal 
                                Register by the Administrator 
                                of the Environmental Protection 
                                Agency.
                            ``(ii) Brownfield redevelopment.--
                        The project includes a brownfield site 
                        as defined by section 101(39) of the 
                        Comprehensive Environmental Response, 
                        Compensation, and Liability Act of 1980 
                        (42 U.S.C. 9601), including a site 
                        described in subparagraph 
                        (D)(ii)(II)(aa) thereof.
                            ``(iii) State and local support.--
                        The project receives specific State or 
                        local government resources which will 
                        support the project in an amount equal 
                        to at least $5,000,000. For purposes of 
                        the preceding sentence, the term 
                        `resources' includes tax abatement 
                        benefits and contributions in kind.
                            ``(iv) Size.--The project includes 
                        at least one of the following:
                                    ``(I) At least 1,000,000 
                                square feet of building.
                                    ``(II) At least 20 acres.
                            ``(v) Use of tax benefit.--The 
                        project proposal includes a description 
                        of the net benefit of the tax-exempt 
                        financing provided under this 
                        subsection which will be allocated for 
                        financing of one or more of the 
                        following:
                                    ``(I) The purchase, 
                                construction, integration, or 
                                other use of energy efficiency, 
                                renewable energy, and 
                                sustainable design features of 
                                the project.
                                    ``(II) Compliance with 
                                certification standards cited 
                                under clause (i).
                                    ``(III) The purchase, 
                                remediation, and foundation 
                                construction and preparation of 
                                the brownfields site.
                            ``(vi) Prohibited facilities.--An 
                        issue shall not be treated as an issue 
                        described in subsection (a)(14) if any 
                        proceeds of such issue are used to 
                        provide any facility the principal 
                        business of which is the sale of food 
                        or alcoholic beverages for consumption 
                        on the premises.
                            ``(vii) Employment.--The project is 
                        projected to provide permanent 
                        employment of at least 1,500 full time 
                        equivalents (150 full time equivalents 
                        in rural States) when completed and 
                        construction employment of at least 
                        1,000 full time equivalents (100 full 
                        time equivalents in rural States).
                The application shall include an independent 
                analysis which describes the project's economic 
                impact, including the amount of projected 
                employment.
                    ``(B) Project description.--Each 
                application described in subparagraph (A) shall 
                contain for each project a description of--
                            ``(i) the amount of electric 
                        consumption reduced as compared to 
                        conventional construction,
                            ``(ii) the amount of sulfur dioxide 
                        daily emissions reduced compared to 
                        coal generation,
                            ``(iii) the amount of the gross 
                        installed capacity of the project's 
                        solar photovoltaic capacity measured in 
                        megawatts, and
                            ``(iv) the amount, in megawatts, of 
                        the project's fuel cell energy 
                        generation.
            ``(5) Certification of use of tax benefit.--No 
        later than 30 days after the completion of the project, 
        each project must certify to the Secretary that the net 
        benefit of the tax-exempt financing was used for the 
        purposes described in paragraph (4).
            ``(6) Definitions.--For purposes of this 
        subsection--
                    ``(A) Rural state.--The term `rural State' 
                means any State which has--
                            ``(i) a population of less than 
                        4,500,000 according to the 2000 census,
                            ``(ii) a population density of less 
                        than 150 people per square mile 
                        according to the 2000 census, and
                            ``(iii) increased in population by 
                        less than half the rate of the national 
                        increase between the 1990 and 2000 
                        censuses.
                    ``(B) Local government.--The term `local 
                government' has the meaning given such term by 
                section 1393(a)(5).
                    ``(C) Net benefit of tax-exempt 
                financing.--The term `net benefit of tax-exempt 
                financing' means the present value of the 
                interest savings (determined by a calculation 
                established by the Secretary) which result from 
                the tax-exempt status of the bonds.
            ``(7) Aggregate face amount of tax-exempt 
        financing.--
                    ``(A) In general.--An issue shall not be 
                treated as an issue described in subsection 
                (a)(14) if the aggregate face amount of bonds 
                issued by the State or local government 
                pursuant thereto for a project (when added to 
                the aggregate face amount of bonds previously 
                so issued for such project) exceeds an amount 
                designated by the Secretary as part of the 
                designation.
                    ``(B) Limitation on amount of bonds.--The 
                Secretary may not allocate authority to issue 
                qualified green building and sustainable design 
                project bonds in an aggregate face amount 
                exceeding $2,000,000,000.
            ``(8) Termination.--Subsection (a)(14) shall not 
        apply with respect to any bond issued after September 
        30, 2009.
            ``(9) Treatment of current refunding bonds.--
        Paragraphs (7)(B) and (8) shall not apply to any bond 
        (or series of bonds) issued to refund a bond issued 
        under subsection (a)(14) before October 1, 2009, if--
                    ``(A) the average maturity date of the 
                issue of which the refunding bond is a part is 
                not later than the average maturity date of the 
                bonds to be refunded by such issue,
                    ``(B) the amount of the refunding bond does 
                not exceed the outstanding amount of the 
                refunded bond, and
                    ``(C) the net proceeds of the refunding 
                bond are used to redeem the refunded bond not 
                later than 90 days after the date of the 
                issuance of the refunding bond.
        For purposes of subparagraph (A), average maturity 
        shall be determined in accordance with section 
        147(b)(2)(A).''.
    (c) Exemption From General State Volume Caps.--Paragraph 
(3) of section 146(g) (relating to exception for certain bonds) 
is amended--
            (1) by striking ``or (13)'' and inserting ``(13), 
        or (14)'', and
            (2) by striking ``and qualified public educational 
        facilities'' and inserting ``qualified public 
        educational facilities, and qualified green building 
        and sustainable design projects''.
    (d) Accountability.--Each issuer shall maintain, on behalf 
of each project, an interest bearing reserve account equal to 1 
percent of the net proceeds of any bond issued under this 
section for such project. Not later than 5 years after the date 
of issuance, the Secretary of the Treasury, after consultation 
with the Administrator of the Environmental Protection Agency, 
shall determine whether the project financed with such bonds 
has substantially complied with the terms and conditions 
described in section 142(l)(4) of the Internal Revenue Code of 
1986 (as added by this section). If the Secretary, after such 
consultation, certifies that the project has substantially 
complied with such terms and conditions and meets the 
commitments set forth in the application for such project 
described in section 142(l)(4) of such Code, amounts in the 
reserve account, including all interest, shall be released to 
the project. If the Secretary determines that the project has 
not substantially complied with such terms and conditions, 
amounts in the reserve account, including all interest, shall 
be paid to the United States Treasury.
    (e) Effective Date.--The amendments made by this section 
shall apply to bonds issued after December 31, 2004.

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

    (a) In General.--Subsection (b) of section 512 (relating to 
unrelated business taxable income) is amended by adding at the 
end the following new paragraph:
            ``(18) Treatment of gain or loss on sale or 
        exchange of certain brownfield sites.--
                    ``(A) In general.--Notwithstanding 
                paragraph (5)(B), there shall be excluded any 
                gain or loss from the qualified sale, exchange, 
                or other disposition of any qualifying 
                brownfield property by an eligible taxpayer.
                    ``(B) Eligible taxpayer.--For purposes of 
                this paragraph--
                            ``(i) In general.--The term 
                        `eligible taxpayer' means, with respect 
                        to a property, any organization exempt 
                        from tax under section 501(a) which--
                                    ``(I) acquires from an 
                                unrelated person a qualifying 
                                brownfield property, and
                                    ``(II) pays or incurs 
                                eligible remediation 
                                expenditures with respect to 
                                such property in an amount 
                                which exceeds the greater of 
                                $550,000 or 12 percent of the 
                                fair market value of the 
                                property at the time such 
                                property was acquired by the 
                                eligible taxpayer, determined 
                                as if there was not a presence 
                                of a hazardous substance, 
                                pollutant, or contaminant on 
                                the property which is 
                                complicating the expansion, 
                                redevelopment, or reuse of the 
                                property.
                            ``(ii) Exception.--Such term shall 
                        not include any organization which is--
                                    ``(I) potentially liable 
                                under section 107 of the 
                                Comprehensive Environmental 
                                Response, Compensation, and 
                                Liability Act of 1980 with 
                                respect to the qualifying 
                                brownfield property,
                                    ``(II) affiliated with any 
                                other person which is so 
                                potentially liable through any 
                                direct or indirect familial 
                                relationship or any 
                                contractual, corporate, or 
                                financial relationship (other 
                                than a contractual, corporate, 
                                or financial relationship which 
                                is created by the instruments 
                                by which title to any 
                                qualifying brownfield property 
                                is conveyed or financed or by a 
                                contract of sale of goods or 
                                services), or
                                    ``(III) the result of a 
                                reorganization of a business 
                                entity which was so potentially 
                                liable.
                    ``(C) Qualifying brownfield property.--For 
                purposes of this paragraph--
                            ``(i) In general.--The term 
                        `qualifying brownfield property' means 
                        any real property which is certified, 
                        before the taxpayer incurs any eligible 
                        remediation expenditures (other than to 
                        obtain a Phase I environmental site 
                        assessment), by an appropriate State 
                        agency (within the meaning of section 
                        198(c)(4)) in the State in which such 
                        property is located as a brownfield 
                        site within the meaning of section 
                        101(39) of the Comprehensive 
                        Environmental Response, Compensation, 
                        and Liability Act of 1980 (as in effect 
                        on the date of the enactment of this 
                        paragraph).
                            ``(ii) Request for certification.--
                        Any request by an eligible taxpayer for 
                        a certification described in clause (i) 
                        shall include a sworn statement by the 
                        eligible taxpayer and supporting 
                        documentation of the presence of a 
                        hazardous substance, pollutant, or 
                        contaminant on the property which is 
                        complicating the expansion, 
                        redevelopment, or reuse of the property 
                        given the property's reasonably 
                        anticipated future land uses or 
                        capacity for uses of the property 
                        (including a Phase I environmental site 
                        assessment and, if applicable, evidence 
                        of the property's presence on a local, 
                        State, or Federal list of brownfields 
                        or contaminated property) and other 
                        environmental assessments prepared or 
                        obtained by the taxpayer.
                    ``(D) Qualified sale, exchange, or other 
                disposition.--For purposes of this paragraph--
                            ``(i) In general.--A sale, 
                        exchange, or other disposition of 
                        property shall be considered as 
                        qualified if--
                                    ``(I) such property is 
                                transferred by the eligible 
                                taxpayer to an unrelated 
                                person, and
                                    ``(II) within 1 year of 
                                such transfer the eligible 
                                taxpayer has received a 
                                certification from the 
                                Environmental Protection Agency 
                                or an appropriate State agency 
                                (within the meaning of section 
                                198(c)(4)) in the State in 
                                which such property is located 
                                that, as a result of the 
                                eligible taxpayer's remediation 
                                actions, such property would 
                                not be treated as a qualifying 
                                brownfield property in the 
                                hands of the transferee.
                        For purposes of subclause (II), before 
                        issuing such certification, the 
                        Environmental Protection Agency or 
                        appropriate State agency shall respond 
                        to comments received pursuant to clause 
                        (ii)(V) in the same form and manner as 
                        required under section 117(b) of the 
                        Comprehensive Environmental Response, 
                        Compensation, and Liability Act of 1980 
                        (as in effect on the date of the 
                        enactment of this paragraph).
                            ``(ii) Request for certification.--
                        Any request by an eligible taxpayer for 
                        a certification described in clause (i) 
                        shall be made not later than the date 
                        of the transfer and shall include a 
                        sworn statement by the eligible 
                        taxpayer certifying the following:
                                    ``(I) Remedial actions 
                                which comply with all 
                                applicable or relevant and 
                                appropriate requirements 
                                (consistent with section 121(d) 
                                of the Comprehensive 
                                Environmental Response, 
                                Compensation, and Liability Act 
                                of 1980) have been 
                                substantially completed, such 
                                that there are no hazardous 
                                substances, pollutants, or 
                                contaminants which complicate 
                                the expansion, redevelopment, 
                                or reuse of the property given 
                                the property's reasonably 
                                anticipated future land uses or 
                                capacity for uses of the 
                                property.
                                    ``(II) The reasonably 
                                anticipated future land uses or 
                                capacity for uses of the 
                                property are more economically 
                                productive or environmentally 
                                beneficial than the uses of the 
                                property in existence on the 
                                date of the certification 
                                described in subparagraph 
                                (C)(i). For purposes of the 
                                preceding sentence, use of 
                                property as a landfill or other 
                                hazardous waste facility shall 
                                not be considered more 
                                economically productive or 
                                environmentally beneficial.
                                    ``(III) A remediation plan 
                                has been implemented to bring 
                                the property into compliance 
                                with all applicable local, 
                                State, and Federal 
                                environmental laws, 
                                regulations, and standards and 
                                to ensure that the remediation 
                                protects human health and the 
                                environment.
                                    ``(IV) The remediation plan 
                                described in subclause (III), 
                                including any physical 
                                improvements required to 
                                remediate the property, is 
                                either complete or 
                                substantially complete, and, if 
                                substantially complete, 
                                sufficient monitoring, funding, 
                                institutional controls, and 
                                financial assurances have been 
                                put in place to ensure the 
                                complete remediation of the 
                                property in accordance with the 
                                remediation plan as soon as is 
                                reasonably practicable after 
                                the sale, exchange, or other 
                                disposition of such property.
                                    ``(V) Public notice and the 
                                opportunity for comment on the 
                                request for certification was 
                                completed before the date of 
                                such request. Such notice and 
                                opportunity for comment shall 
                                be in the same form and manner 
                                as required for public 
                                participation required under 
                                section 117(a) of the 
                                Comprehensive Environmental 
                                Response, Compensation, and 
                                Liability Act of 1980 (as in 
                                effect on the date of the 
                                enactment of this paragraph). 
                                For purposes of this subclause, 
                                public notice shall include, at 
                                a minimum, publication in a 
                                major local newspaper of 
                                general circulation.
                            ``(iii) Attachment to tax 
                        returns.--A copy of each of the 
                        requests for certification described in 
                        clause (ii) of subparagraph (C) and 
                        this subparagraph shall be included in 
                        the tax return of the eligible taxpayer 
                        (and, where applicable, of the 
                        qualifying partnership) for the taxable 
                        year during which the transfer occurs.
                            ``(iv) Substantial completion.--For 
                        purposes of this subparagraph, a 
                        remedial action is substantially 
                        complete when any necessary physical 
                        construction is complete, all immediate 
                        threats have been eliminated, and all 
                        long-term threats are under control.
                    ``(E) Eligible remediation expenditures.--
                For purposes of this paragraph--
                            ``(i) In general.--The term 
                        `eligible remediation expenditures' 
                        means, with respect to any qualifying 
                        brownfield property, any amount paid or 
                        incurred by the eligible taxpayer to an 
                        unrelated third person to obtain a 
                        Phase I environmental site assessment 
                        of the property, and any amount so paid 
                        or incurred after the date of the 
                        certification described in subparagraph 
                        (C)(i) for goods and services necessary 
                        to obtain a certification described in 
                        subparagraph (D)(i) with respect to 
                        such property, including expenditures--
                                    ``(I) to manage, remove, 
                                control, contain, abate, or 
                                otherwise remediate a hazardous 
                                substance, pollutant, or 
                                contaminant on the property,
                                    ``(II) to obtain a Phase II 
                                environmental site assessment 
                                of the property, including any 
                                expenditure to monitor, sample, 
                                study, assess, or otherwise 
                                evaluate the release, threat of 
                                release, or presence of a 
                                hazardous substance, pollutant, 
                                or contaminant on the property,
                                    ``(III) to obtain 
                                environmental regulatory 
                                certifications and approvals 
                                required to manage the 
                                remediation and monitoring of 
                                the hazardous substance, 
                                pollutant, or contaminant on 
                                the property, and
                                    ``(IV) regardless of 
                                whether it is necessary to 
                                obtain a certification 
                                described in subparagraph 
                                (D)(i)(II), to obtain 
                                remediation cost-cap or stop-
                                loss coverage, re-opener or 
                                regulatory action coverage, or 
                                similar coverage under 
                                environmental insurance 
                                policies, or financial 
                                guarantees required to manage 
                                such remediation and 
                                monitoring.
                            ``(ii) Exceptions.--Such term shall 
                        not include--
                                    ``(I) any portion of the 
                                purchase price paid or incurred 
                                by the eligible taxpayer to 
                                acquire the qualifying 
                                brownfield property,
                                    ``(II) environmental 
                                insurance costs paid or 
                                incurred to obtain legal 
                                defense coverage, owner/
                                operator liability coverage, 
                                lender liability coverage, 
                                professional liability 
                                coverage, or similar types of 
                                coverage,
                                    ``(III) any amount paid or 
                                incurred to the extent such 
                                amount is reimbursed, funded, 
                                or otherwise subsidized by 
                                grants provided by the United 
                                States, a State, or a political 
                                subdivision of a State for use 
                                in connection with the 
                                property, proceeds of an issue 
                                of State or local government 
                                obligations used to provide 
                                financing for the property the 
                                interest of which is exempt 
                                from tax under section 103, or 
                                subsidized financing provided 
                                (directly or indirectly) under 
                                a Federal, State, or local 
                                program provided in connection 
                                with the property, or
                                    ``(IV) any expenditure paid 
                                or incurred before the date of 
                                the enactment of this 
                                paragraph.
                        For purposes of subclause (III), the 
                        Secretary may issue guidance regarding 
                        the treatment of government-provided 
                        funds for purposes of determining 
                        eligible remediation expenditures.
                    ``(F) Determination of gain or loss.--For 
                purposes of this paragraph, the determination 
                of gain or loss shall not include an amount 
                treated as gain which is ordinary income with 
                respect to section 1245 or section 1250 
                property, including amounts deducted as section 
                198 expenses which are subject to the recapture 
                rules of section 198(e), if the taxpayer had 
                deducted such amounts in the computation of its 
                unrelated business taxable income.
                    ``(G) Special rules for partnerships.--
                            ``(i) In general.--In the case of 
                        an eligible taxpayer which is a partner 
                        of a qualifying partnership which 
                        acquires, remediates, and sells, 
                        exchanges, or otherwise disposes of a 
                        qualifying brownfield property, this 
                        paragraph shall apply to the eligible 
                        taxpayer's distributive share of the 
                        qualifying partnership's gain or loss 
                        from the sale, exchange, or other 
                        disposition of such property.
                            ``(ii) Qualifying partnership.--The 
                        term `qualifying partnership' means a 
                        partnership which--
                                    ``(I) has a partnership 
                                agreement which satisfies the 
                                requirements of section 
                                514(c)(9)(B)(vi) at all times 
                                beginning on the date of the 
                                first certification received by 
                                the partnership under 
                                subparagraph (C)(i),
                                    ``(II) satisfies the 
                                requirements of subparagraphs 
                                (B)(i), (C), (D), and (E), if 
                                `qualified partnership' is 
                                substituted for `eligible 
                                taxpayer' each place it appears 
                                therein (except subparagraph 
                                (D)(iii)), and
                                    ``(III) is not an 
                                organization which would be 
                                prevented from constituting an 
                                eligible taxpayer by reason of 
                                subparagraph (B)(ii).
                            ``(iii) Requirement that tax-exempt 
                        partner be a partner since first 
                        certification.--This paragraph shall 
                        apply with respect to any eligible 
                        taxpayer which is a partner of a 
                        partnership which acquires, remediates, 
                        and sells, exchanges, or otherwise 
                        disposes of a qualifying brownfield 
                        property only if such eligible taxpayer 
                        was a partner of the qualifying 
                        partnership at all times beginning on 
                        the date of the first certification 
                        received by the partnership under 
                        subparagraph (C)(i) and ending on the 
                        date of the sale, exchange, or other 
                        disposition of the property by the 
                        partnership.
                            ``(iv) Regulations.--The Secretary 
                        shall prescribe such regulations as are 
                        necessary to prevent abuse of the 
                        requirements of this subparagraph, 
                        including abuse through--
                                    ``(I) the use of special 
                                allocations of gains or losses, 
                                or
                                    ``(II) changes in ownership 
                                of partnership interests held 
                                by eligible taxpayers.
                    ``(H) Special rules for multiple 
                properties.--
                            ``(i) In general.--An eligible 
                        taxpayer or a qualifying partnership of 
                        which the eligible taxpayer is a 
                        partner may make a 1-time election to 
                        apply this paragraph to more than 1 
                        qualifying brownfield property by 
                        averaging the eligible remediation 
                        expenditures for all such properties 
                        acquired during the election period. If 
                        the eligible taxpayer or qualifying 
                        partnership makes such an election, the 
                        election shall apply to all qualified 
                        sales, exchanges, or other dispositions 
                        of qualifying brownfield properties the 
                        acquisition and transfer of which occur 
                        during the period for which the 
                        election remains in effect.
                            ``(ii) Election.--An election under 
                        clause (i) shall be made with the 
                        eligible taxpayer's or qualifying 
                        partnership's timely filed tax return 
                        (including extensions) for the first 
                        taxable year for which the taxpayer or 
                        qualifying partnership intends to have 
                        the election apply. An election under 
                        clause (i) is effective for the 
                        period--
                                    ``(I) beginning on the date 
                                which is the first day of the 
                                taxable year of the return in 
                                which the election is included 
                                or a later day in such taxable 
                                year selected by the eligible 
                                taxpayer or qualifying 
                                partnership, and
                                    ``(II) ending on the date 
                                which is the earliest of a date 
                                of revocation selected by the 
                                eligible taxpayer or qualifying 
                                partnership, the date which is 
                                8 years after the date 
                                described in subclause (I), or, 
                                in the case of an election by a 
                                qualifying partnership of which 
                                the eligible taxpayer is a 
                                partner, the date of the 
                                termination of the qualifying 
                                partnership.
                            ``(iii) Revocation.--An eligible 
                        taxpayer or qualifying partnership may 
                        revoke an election under clause (i)(II) 
                        by filing a statement of revocation 
                        with a timely filed tax return 
                        (including extensions). A revocation is 
                        effective as of the first day of the 
                        taxable year of the return in which the 
                        revocation is included or a later day 
                        in such taxable year selected by the 
                        eligible taxpayer or qualifying 
                        partnership. Once an eligible taxpayer 
                        or qualifying partnership revokes the 
                        election, the eligible taxpayer or 
                        qualifying partnership is ineligible to 
                        make another election under clause (i) 
                        with respect to any qualifying 
                        brownfield property subject to the 
                        revoked election.
                    ``(I) Recapture.--If an eligible taxpayer 
                excludes gain or loss from a sale, exchange, or 
                other disposition of property to which an 
                election under subparagraph (H) applies, and 
                such property fails to satisfy the requirements 
                of this paragraph, the unrelated business 
                taxable income of the eligible taxpayer for the 
                taxable year in which such failure occurs shall 
                be determined by including any previously 
                excluded gain or loss from such sale, exchange, 
                or other disposition allocable to such 
                taxpayer, and interest shall be determined at 
                the overpayment rate established under section 
                6621 on any resulting tax for the period 
                beginning with the due date of the return for 
                the taxable year during which such sale, 
                exchange, or other disposition occurred, and 
                ending on the date of payment of the tax.
                    ``(J) Related persons.--For purposes of 
                this paragraph, a person shall be treated as 
                related to another person if--
                            ``(i) such person bears a 
                        relationship to such other person 
                        described in section 267(b) (determined 
                        without regard to paragraph (9) 
                        thereof), or section 707(b)(1), 
                        determined by substituting `25 percent' 
                        for `50 percent' each place it appears 
                        therein, and
                            ``(ii) in the case such other 
                        person is a nonprofit organization, if 
                        such person controls directly or 
                        indirectly more than 25 percent of the 
                        governing body of such organization.
                    ``(K) Termination.--Except for purposes of 
                determining the average eligible remediation 
                expenditures for properties acquired during the 
                election period under subparagraph (H), this 
                paragraph shall not apply to any property 
                acquired by the eligible taxpayer or qualifying 
                partnership after December 31, 2009.''.
    (b) Exclusion From Definition of Debt-Financed Property.--
Section 514(b)(1) (defining debt-financed property) is amended 
by striking ``or'' at the end of subparagraph (C), by striking 
the period at the end of subparagraph (D) and inserting ``; 
or'', and by inserting after subparagraph (D) the following new 
subparagraph:
                    ``(E) any property the gain or loss from 
                the sale, exchange, or other disposition of 
                which would be excluded by reason of the 
                provisions of section 512(b)(18) in computing 
                the gross income of any unrelated trade or 
                business.''.
    (c) Savings Clause.--Nothing in the amendments made by this 
section shall affect any duty, liability, or other requirement 
imposed under any other Federal or State law. Notwithstanding 
section 128(b) of the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980, a certification 
provided by the Environmental Protection Agency or an 
appropriate State agency (within the meaning of section 
198(c)(4) of the Internal Revenue Code of 1986) shall not 
affect the liability of any person under section 107(a) of such 
Act.
    (d) Effective Date.--The amendments made by this section 
shall apply to any gain or loss on the sale, exchange, or other 
disposition of any property acquired by the taxpayer after 
December 31, 2004.

SEC. 703. CIVIL RIGHTS TAX RELIEF.

    (a) Deduction Allowed Whether or Not Taxpayer Itemizes 
Other Deductions.--Subsection (a) of section 62 (defining 
adjusted gross income) is amended by inserting after paragraph 
(18) the following new item:
            ``(19) Costs involving discrimination suits, etc.--
        Any deduction allowable under this chapter for attorney 
        fees and court costs paid by, or on behalf of, the 
        taxpayer in connection with any action involving a 
        claim of unlawful discrimination (as defined in 
        subsection (e)) or a claim of a violation of subchapter 
        III of chapter 37 of title 31, United States Code or a 
        claim made under section 1862(b)(3)(A) of the Social 
        Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding 
        sentence shall not apply to any deduction in excess of 
        the amount includible in the taxpayer's gross income 
        for the taxable year on account of a judgment or 
        settlement (whether by suit or agreement and whether as 
        lump sum or periodic payments) resulting from such 
        claim.''.
    (b) Unlawful Discrimination Defined.--Section 62 is amended 
by adding at the end the following new subsection:
    ``(e) Unlawful Discrimination Defined.--For purposes of 
subsection (a)(19), the term `unlawful discrimination' means an 
act that is unlawful under any of the following:
            ``(1) Section 302 of the Civil Rights Act of 1991 
        (2 U.S.C. 1202).
            ``(2) Section 201, 202, 203, 204, 205, 206, or 207 
        of the Congressional Accountability Act of 1995 (2 
        U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).
            ``(3) The National Labor Relations Act (29 U.S.C. 
        151 et seq.).
            ``(4) The Fair Labor Standards Act of 1938 (29 
        U.S.C. 201 et seq.).
            ``(5) Section 4 or 15 of the Age Discrimination in 
        Employment Act of 1967 (29 U.S.C. 623 or 633a).
            ``(6) Section 501 or 504 of the Rehabilitation Act 
        of 1973 (29 U.S.C. 791 or 794).
            ``(7) Section 510 of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1140).
            ``(8) Title IX of the Education Amendments of 1972 
        (20 U.S.C. 1681 et seq.).
            ``(9) The Employee Polygraph Protection Act of 1988 
        (29 U.S.C. 2001 et seq.).
            ``(10) The Worker Adjustment and Retraining 
        Notification Act (29 U.S.C. 2102 et seq.).
            ``(11) Section 105 of the Family and Medical Leave 
        Act of 1993 (29 U.S.C. 2615).
            ``(12) Chapter 43 of title 38, United States Code 
        (relating to employment and reemployment rights of 
        members of the uniformed services).
            ``(13) Section 1977, 1979, or 1980 of the Revised 
        Statutes (42 U.S.C. 1981, 1983, or 1985).
            ``(14) Section 703, 704, or 717 of the Civil Rights 
        Act of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
            ``(15) Section 804, 805, 806, 808, or 818 of the 
        Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 
        3617).
            ``(16) Section 102, 202, 302, or 503 of the 
        Americans with Disabilities Act of 1990 (42 U.S.C. 
        12112, 12132, 12182, or 12203).
            ``(17) Any provision of Federal law (popularly 
        known as whistleblower protection provisions) 
        prohibiting the discharge of an employee, the 
        discrimination against an employee, or any other form 
        of retaliation or reprisal against an employee for 
        asserting rights or taking other actions permitted 
        under Federal law.
            ``(18) Any provision of Federal, State, or local 
        law, or common law claims permitted under Federal, 
        State, or local law--
                            ``(i) providing for the enforcement 
                        of civil rights, or
                            ``(ii) regulating any aspect of the 
                        employment relationship, including 
                        claims for wages, compensation, or 
                        benefits, or prohibiting the discharge 
                        of an employee, the discrimination 
                        against an employee, or any other form 
                        of retaliation or reprisal against an 
                        employee for asserting rights or taking 
                        other actions permitted by law.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to fees and costs paid after the date of the 
enactment of this Act with respect to any judgment or 
settlement occurring after such date.

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

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

SEC. 705. SUSPENSION OF POLICYHOLDERS SURPLUS ACCOUNT PROVISIONS.

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

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

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

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

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

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

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

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

SEC. 708. METHOD OF ACCOUNTING FOR NAVAL SHIPBUILDERS.

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

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

    (a) Amendments of ERISA.--
            (1) Section 101(e)(3) of the Employee Retirement 
        Income Security Act of 1974 (29 U.S.C. 1021(e)(3)) is 
        amended by striking ``Pension Funding Equity Act of 
        2004'' and inserting ``American Jobs Creation Act of 
        2004''.
            (2) Section 403(c)(1) of such Act (29 U.S.C. 
        1103(c)(1)) is amended by striking ``Pension Funding 
        Equity Act of 2004'' and inserting ``American Jobs 
        Creation Act of 2004''.
            (3) Paragraph (13) of section 408(b) of such Act 
        (29 U.S.C. 1108(b)(3)) is amended by striking ``Pension 
        Funding Equity Act of 2004'' and inserting ``American 
        Jobs Creation Act of 2004''.
    (b) Minimum Cost Requirements.--
            (1) In general.--Section 420(c)(3)(E) is amended by 
        adding at the end the following new clause:
                            ``(ii) Insignificant cost 
                        reductions permitted.--
                                    ``(I) In general.--An 
                                eligible employer shall not be 
                                treated as failing to meet the 
                                requirements of this paragraph 
                                for any taxable year if, in 
                                lieu of any reduction of 
                                retiree health coverage 
                                permitted under the regulations 
                                prescribed under clause (i), 
                                the employer reduces applicable 
                                employer cost by an amount not 
                                in excess of the reduction in 
                                costs which would have occurred 
                                if the employer had made the 
                                maximum permissible reduction 
                                in retiree health coverage 
                                under such regulations. In 
                                applying such regulations to 
                                any subsequent taxable year, 
                                any reduction in applicable 
                                employer cost under this clause 
                                shall be treated as if it were 
                                an equivalent reduction in 
                                retiree health coverage.
                                    ``(II) Eligible employer.--
                                For purposes of subclause (I), 
                                an employer shall be treated as 
                                an eligible employer for any 
                                taxable year if, for the 
                                preceding taxable year, the 
                                qualified current retiree 
                                health liabilities of the 
                                employer were at least 5 
                                percent of the gross receipts 
                                of the employer. For purposes 
                                of this subclause, the rules of 
                                paragraphs (2), (3)(B), and 
                                (3)(C) of section 448(c) shall 
                                apply in determining the amount 
                                of an employer's gross 
                                receipts.''.
            (2) Conforming amendment.--Section 420(c)(3)(E) is 
        amended by striking ``The Secretary'' and inserting:
                            ``(i) In general.--The Secretary''.
            (3) Effective date.--The amendments made by this 
        subsection shall apply to taxable years ending after 
        the date of the enactment of this Act.

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

    (a) Expansion of Qualified Energy Resources.--Subsection 
(c) of section 45 (relating to electricity produced from 
certain renewable resources) is amended to read as follows:
    ``(c) Qualified Energy Resources and Refined Coal.--For 
purposes of this section--
            ``(1) In general.--The term `qualified energy 
        resources' means--
                    ``(A) wind,
                    ``(B) closed-loop biomass,
                    ``(C) open-loop biomass,
                    ``(D) geothermal energy,
                    ``(E) solar energy,
                    ``(F) small irrigation power, and
                    ``(G) municipal solid waste.
            ``(2) Closed-loop biomass.--The term `closed-loop 
        biomass' means any organic material from a plant which 
        is planted exclusively for purposes of being used at a 
        qualified facility to produce electricity.
            ``(3) Open-loop biomass.--
                    ``(A) In general.--The term `open-loop 
                biomass' means--
                            ``(i) any agricultural livestock 
                        waste nutrients, or
                            ``(ii) any solid, nonhazardous, 
                        cellulosic waste material which is 
                        segregated from other waste materials 
                        and which is derived from--
                                    ``(I) any of the following 
                                forest-related resources: mill 
                                and harvesting residues, 
                                precommercial thinnings, slash, 
                                and brush,
                                    ``(II) solid wood waste 
                                materials, including waste 
                                pallets, crates, dunnage, 
                                manufacturing and construction 
                                wood wastes (other than 
                                pressure-treated, chemically-
                                treated, or painted wood 
                                wastes), and landscape or 
                                right-of-way tree trimmings, 
                                but not including municipal 
                                solid waste, gas derived from 
                                the biodegradation of solid 
                                waste, or paper which is 
                                commonly recycled, or
                                    ``(III) agriculture 
                                sources, including orchard tree 
                                crops, vineyard, grain, 
                                legumes, sugar, and other crop 
                                by-products or residues.
                Such term shall not include closed-loop biomass 
                or biomass burned in conjunction with fossil 
                fuel (cofiring) beyond such fossil fuel 
                required for startup and flame stabilization.
                    ``(B) Agricultural livestock waste 
                nutrients.--
                            ``(i) In general.--The term 
                        `agricultural livestock waste 
                        nutrients' means agricultural livestock 
                        manure and litter, including wood 
                        shavings, straw, rice hulls, and other 
                        bedding material for the disposition of 
                        manure.
                            ``(ii) Agricultural livestock.--The 
                        term `agricultural livestock' includes 
                        bovine, swine, poultry, and sheep.
            ``(4) Geothermal energy.--The term `geothermal 
        energy' means energy derived from a geothermal deposit 
        (within the meaning of section 613(e)(2)).
            ``(5) Small irrigation power.--The term `small 
        irrigation power' means power--
                    ``(A) generated without any dam or 
                impoundment of water through an irrigation 
                system canal or ditch, and
                    ``(B) the nameplate capacity rating of 
                which is not less than 150 kilowatts but is 
                less than 5 megawatts.
            ``(6) Municipal solid waste.--The term `municipal 
        solid waste' has the meaning given the term `solid 
        waste' under section 2(27) of the Solid Waste Disposal 
        Act (42 U.S.C. 6903).
            ``(7) Refined coal.--
                    ``(A) In general.--The term `refined coal' 
                means a fuel which--
                            ``(i) is a liquid, gaseous, or 
                        solid synthetic fuel produced from coal 
                        (including lignite) or high carbon fly 
                        ash, including such fuel used as a 
                        feedstock,
                            ``(ii) is sold by the taxpayer with 
                        the reasonable expectation that it will 
                        be used for purpose of producing steam,
                            ``(iii) is certified by the 
                        taxpayer as resulting (when used in the 
                        production of steam) in a qualified 
                        emission reduction, and
                            ``(iv) is produced in such a manner 
                        as to result in an increase of at least 
                        50 percent in the market value of the 
                        refined coal (excluding any increase 
                        caused by materials combined or added 
                        during the production process), as 
                        compared to the value of the feedstock 
                        coal.
                    ``(B) Qualified emission reduction.--The 
                term `qualified emission reduction' means a 
                reduction of at least 20 percent of the 
                emissions of nitrogen oxide and either sulfur 
                dioxide or mercury released when burning the 
                refined coal (excluding any dilution caused by 
                materials combined or added during the 
                production process), as compared to the 
                emissions released when burning the feedstock 
                coal or comparable coal predominantly available 
                in the marketplace as of January 1, 2003.''.
    (b) Expansion of Qualified Facilities.--
            (1) In general.--Section 45 is amended by 
        redesignating subsection (d) as subsection (e) and by 
        inserting after subsection (c) the following new 
        subsection:
    ``(d) Qualified Facilities.--For purposes of this section--
            ``(1) Wind facility.--In the case of a facility 
        using wind to produce electricity, the term `qualified 
        facility' means any facility owned by the taxpayer 
        which is originally placed in service after December 
        31, 1993, and before January 1, 2006.
            ``(2) Closed-loop biomass facility.--
                    ``(A) In general.--In the case of a 
                facility using closed-loop biomass to produce 
                electricity, the term `qualified facility' 
                means any facility--
                            ``(i) owned by the taxpayer which 
                        is originally placed in service after 
                        December 31, 1992, and before January 
                        1, 2006, or
                            ``(ii) owned by the taxpayer which 
                        before January 1, 2006, is originally 
                        placed in service and modified to use 
                        closed-loop biomass to co-fire with 
                        coal, with other biomass, or with both, 
                        but only if the modification is 
                        approved under the Biomass Power for 
                        Rural Development Programs or is part 
                        of a pilot project of the Commodity 
                        Credit Corporation as described in 65 
                        Fed. Reg. 63052.
                    ``(B) Special rules.--In the case of a 
                qualified facility described in subparagraph 
                (A)(ii)--
                            ``(i) the 10-year period referred 
                        to in subsection (a) shall be treated 
                        as beginning no earlier than the date 
                        of the enactment of this clause,
                            ``(ii) the amount of the credit 
                        determined under subsection (a) with 
                        respect to the facility shall be an 
                        amount equal to the amount determined 
                        without regard to this clause 
                        multiplied by the ratio of the thermal 
                        content of the closed-loop biomass used 
                        in such facility to the thermal content 
                        of all fuels used in such facility, and
                            ``(iii) if the owner of such 
                        facility is not the producer of the 
                        electricity, the person eligible for 
                        the credit allowable under subsection 
                        (a) shall be the lessee or the operator 
                        of such facility.
            ``(3) Open-loop biomass facilities.--
                    ``(A) In general.--In the case of a 
                facility using open-loop biomass to produce 
                electricity, the term `qualified facility' 
                means any facility owned by the taxpayer 
                which--
                            ``(i) in the case of a facility 
                        using agricultural livestock waste 
                        nutrients--
                                    ``(I) is originally placed 
                                in service after the date of 
                                the enactment of this subclause 
                                and before January 1, 2006, and
                                    ``(II) the nameplate 
                                capacity rating of which is not 
                                less than 150 kilowatts, and
                            ``(ii) in the case of any other 
                        facility, is originally placed in 
                        service before January 1, 2006.
                    ``(B) Credit eligibility.--In the case of 
                any facility described in subparagraph (A), if 
                the owner of such facility is not the producer 
                of the electricity, the person eligible for the 
                credit allowable under subsection (a) shall be 
                the lessee or the operator of such facility.
            ``(4) Geothermal or solar energy facility.--In the 
        case of a facility using geothermal or solar energy to 
        produce electricity, the term `qualified facility' 
        means any facility owned by the taxpayer which is 
        originally placed in service after the date of the 
        enactment of this paragraph and before January 1, 2006. 
        Such term shall not include any property described in 
        section 48(a)(3) the basis of which is taken into 
        account by the taxpayer for purposes of determining the 
        energy credit under section 48.
            ``(5) Small irrigation power facility.--In the case 
        of a facility using small irrigation power to produce 
        electricity, the term `qualified facility' means any 
        facility owned by the taxpayer which is originally 
        placed in service after the date of the enactment of 
        this paragraph and before January 1, 2006.
            ``(6) Landfill gas facilities.--In the case of a 
        facility producing electricity from gas derived from 
        the biodegradation of municipal solid waste, the term 
        `qualified facility' means any facility owned by the 
        taxpayer which is originally placed in service after 
        the date of the enactment of this paragraph and before 
        January 1, 2006.
            ``(7) Trash combustion facilities.--In the case of 
        a facility which burns municipal solid waste to produce 
        electricity, the term `qualified facility' means any 
        facility owned by the taxpayer which is originally 
        placed in service after the date of the enactment of 
        this paragraph and before January 1, 2006.
            ``(8) Refined coal production facility.--The term 
        `refined coal production facility' means a facility 
        which is placed in service after the date of the 
        enactment of this paragraph and before January 1, 
        2009.''.
            (2) Rules for refined coal production facilities.--
        Subsection (e) of section 45, as so redesignated, is 
        amended by adding at the end the following new 
        paragraph:
            ``(8) Refined coal production facilities.--
                    ``(A) Determination of credit amount.--In 
                the case of a producer of refined coal, the 
                credit determined under this section (without 
                regard to this paragraph) for any taxable year 
                shall be increased by an amount equal to $4.375 
                per ton of qualified refined coal--
                            ``(i) produced by the taxpayer at a 
                        refined coal production facility during 
                        the 10-year period beginning on the 
                        date the facility was originally placed 
                        in service, and
                            ``(ii) sold by the taxpayer--
                                    ``(I) to an unrelated 
                                person, and
                                    ``(II) during such 10-year 
                                period and such taxable year.
                    ``(B) Phaseout of credit.--The amount of 
                the increase determined under subparagraph (A) 
                shall be reduced by an amount which bears the 
                same ratio to the amount of the increase 
                (determined without regard to this 
                subparagraph) as--
                            ``(i) the amount by which the 
                        reference price of fuel used as a 
                        feedstock (within the meaning of 
                        subsection (c)(7)(A)) for the calendar 
                        year in which the sale occurs exceeds 
                        an amount equal to 1.7 multiplied by 
                        the reference price for such fuel in 
                        2002, bears to
                            ``(ii) $8.75.
                    ``(C) Application of rules.--Rules similar 
                to the rules of the subsection (b)(3) and 
                paragraphs (1) through (5) and (9) of this 
                subsection shall apply for purposes of 
                determining the amount of any increase under 
                this paragraph.''.
            (3) Conforming amendments.--
                    (A) Section 45(e), as so redesignated, is 
                amended by striking ``subsection (c)(3)(A)'' in 
                paragraph (7)(A)(i) and inserting ``subsection 
                (d)(1)''.
                    (B) The heading of section 45 and the item 
                relating to such section in the table of 
                sections for subpart D of part IV of subchapter 
                A of chapter 1 are each amended by inserting 
                before the period at the end ``, etc''.
                    (C) Paragraph (2) of section 45(b) is 
                amended by striking ``The 1.5 cent amount'' and 
                all that follows through ``paragraph (1)'' and 
                inserting ``The 1.5 cent amount in subsection 
                (a), the 8 cent amount in paragraph (1), the 
                $4.375 amount in subsection (e)(8)(A), and in 
                subsection (e)(8)(B)(i) the reference price of 
                fuel used as a feedstock (within the meaning of 
                subsection (c)(7)(A)) in 2002''.
    (c) Special Credit Rate and Period for Electricity Produced 
and Sold After Enactment Date.--Section 45(b) is amended by 
adding at the end the following new paragraph:
            ``(4) Credit rate and period for electricity 
        produced and sold from certain facilities.--
                    ``(A) Credit rate.--In the case of 
                electricity produced and sold in any calendar 
                year after 2003 at any qualified facility 
                described in paragraph (3), (5), (6), or (7) of 
                subsection (d), the amount in effect under 
                subsection (a)(1) for such calendar year 
                (determined before the application of the last 
                sentence of paragraph (2) of this subsection) 
                shall be reduced by one-half.
                    ``(B) Credit period.--
                            ``(i) In general.--Except as 
                        provided in clause (ii), in the case of 
                        any facility described in paragraph 
                        (3), (4), (5), (6), or (7) of 
                        subsection (d), the 5-year period 
                        beginning on the date the facility was 
                        originally placed in service shall be 
                        substituted for the 10-year period in 
                        subsection (a)(2)(A)(ii).
                            ``(ii) Certain open-loop biomass 
                        facilities.--In the case of any 
                        facility described in subsection 
                        (d)(3)(A)(ii) placed in service before 
                        the date of the enactment of this 
                        paragraph, the 5-year period beginning 
                        on the date of the enactment of this 
                        Act shall be substituted for the 10-
                        year period in subsection 
                        (a)(2)(A)(ii).''.
    (d) Coordination With Other Credits.--Section 45(e), as 
redesignated and amended by this section, is amended by 
inserting after paragraph (8) the following new paragraph:
            ``(9) Coordination with credit for producing fuel 
        from a nonconventional source.--The term `qualified 
        facility' shall not include any facility the production 
        from which is allowed as a credit under section 29 for 
        the taxable year or any prior taxable year.''.
    (e) Coordination With Section 48.--Section 48(a)(3) 
(defining energy property) is amended by adding at the end the 
following new sentence: ``Such term shall not include any 
property which is part of a facility the production from which 
is allowed as a credit under section 45 for the taxable year or 
any prior taxable year.''.
    (f) Elimination of Certain Credit Reductions.--Section 
45(b)(3) (relating to credit reduced for grants, tax-exempt 
bonds, subsidized energy financing, and other credits) is 
amended--
            (1) by inserting ``the lesser of \1/2\ or'' before 
        ``a fraction'' in the matter preceding subparagraph 
        (A), and
            (2) by adding at the end the following new 
        sentence: ``This paragraph shall not apply with respect 
        to any facility described in subsection 
        (d)(2)(A)(ii).''.
    (g) Effective Dates.--
            (1) In general.--Except as otherwise provided in 
        this subsection, the amendments made by this section 
        shall apply to electricity produced and sold after the 
        date of the enactment of this Act, in taxable years 
        ending after such date.
            (2) Certain biomass facilities.--With respect to 
        any facility described in section 45(d)(3)(A)(ii) of 
        the Internal Revenue Code of 1986, as added by 
        subsection (b)(1), which is placed in service before 
        the date of the enactment of this Act, the amendments 
        made by this section shall apply to electricity 
        produced and sold after December 31, 2004, in taxable 
        years ending after such date.
            (3) Credit rate and period for new facilities.--The 
        amendments made by subsection (c) shall apply to 
        electricity produced and sold after December 31, 2004, 
        in taxable years ending after such date.
            (4) Nonapplication of amendments to preeffective 
        date poultry waste facilities.--The amendments made by 
        this section shall not apply with respect to any 
        poultry waste facility (within the meaning of section 
        45(c)(3)(C), as in effect on the day before the date of 
        the enactment of this Act) placed in service before 
        January 1, 2004.
            (5) Refined coal production facilities.--Section 
        45(e)(8) of the Internal Revenue Code of 1986, as added 
        by this section, shall apply to refined coal produced 
        and sold after the date of the enactment of this Act.

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

    (a) In General.--Subsection (c) of section 38 (relating to 
limitation based on amount of tax) is amended by redesignating 
paragraph (4) as paragraph (5) and by inserting after paragraph 
(3) the following new paragraph:
            ``(4) Special rules for specified credits.--
                    ``(A) In general.--In the case of specified 
                credits--
                            ``(i) this section and section 39 
                        shall be applied separately with 
                        respect to such credits, and
                            ``(ii) in applying paragraph (1) to 
                        such credits--
                                    ``(I) the tentative minimum 
                                tax shall be treated as being 
                                zero, and
                                    ``(II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the specified 
                                credits).
                    ``(B) Specified credits.--For purposes of 
                this subsection, the term `specified credits' 
                includes--
                            ``(i) for taxable years beginning 
                        after December 31, 2004, the credit 
                        determined under section 40,
                            ``(ii) the credit determined under 
                        section 45 to the extent that such 
                        credit is attributable to electricity 
                        or refined coal produced--
                                    ``(I) at a facility which 
                                is originally placed in service 
                                after the date of the enactment 
                                of this paragraph, and
                                    ``(II) during the 4-year 
                                period beginning on the date 
                                that such facility was 
                                originally placed in service''.
    (b) Conforming Amendments.--Paragraph (2)(A)(ii)(II) and 
(3)(A)(ii)(II) of section 38(c) are each amended by inserting 
``or the specified credits'' after ``employee credit''.
    (c) Effective Date.--Except as otherwise provided, the 
amendments made by this section shall apply to taxable years 
ending after the date of the enactment of this Act.

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

    (a) Optional Medical Assistance.--
            (1) In general.--Section 1905 of the Social 
        Security Act (42 U.S.C. 1396d) is amended--
                    (A) in subsection (a)--
                            (i) by striking ``and'' at the end 
                        of paragraph (26);
                            (ii) by redesignating paragraph 
                        (27) as paragraph (28); and
                            (iii) by inserting after paragraph 
                        (26), the following:
            ``(27) subject to subsection (x), primary and 
        secondary medical strategies and treatment and services 
        for individuals who have Sickle Cell Disease; and''; 
        and
                    (B) by adding at the end the following:
    ``(x) For purposes of subsection (a)(27), the strategies, 
treatment, and services described in that subsection include 
the following:
            ``(1) Chronic blood transfusion (with deferoxamine 
        chelation) to prevent stroke in individuals with Sickle 
        Cell Disease who have been identified as being at high 
        risk for stroke.
            ``(2) Genetic counseling and testing for 
        individuals with Sickle Cell Disease or the sickle cell 
        trait to allow health care professionals to treat such 
        individuals and to prevent symptoms of Sickle Cell 
        Disease.
            ``(3) Other treatment and services to prevent 
        individuals who have Sickle Cell Disease and who have 
        had a stroke from having another stroke.''.
            (2) Rule of Construction.--Nothing in subsections 
        (a)(27) or (x) of section 1905 of the Social Security 
        Act (42 U.S.C. 1396d), as added by paragraph (1), shall 
        be construed as implying that a State medicaid program 
        under title XIX of such Act could not have treated, 
        prior to the date of enactment of this Act, any of the 
        primary and secondary medical strategies and treatment 
        and services described in such subsections as medical 
        assistance under such program, including as early and 
        periodic screening, diagnostic, and treatment services 
        under section 1905(r) of such Act.
    (b) Federal Reimbursement for Education and Other Services 
Related to the Prevention and Treatment of Sickle Cell 
Disease.--Section 1903(a)(3) of the Social Security Act (42 
U.S.C. 1396b(a)(3)) is amended--
            (1) in subparagraph (D), by striking ``plus'' at 
        the end and inserting ``and''; and
            (2) by adding at the end the following:
                    ``(E) 50 percent of the sums expended with 
                respect to costs incurred during such quarter 
                as are attributable to providing--
                            ``(i) services to identify and 
                        educate individuals who are likely to 
                        be eligible for medical assistance 
                        under this title and who have Sickle 
                        Cell Disease or who are carriers of the 
                        sickle cell gene, including education 
                        regarding how to identify such 
                        individuals; or
                            ``(ii) education regarding the 
                        risks of stroke and other 
                        complications, as well as the 
                        prevention of stroke and other 
                        complications, in individuals who are 
                        likely to be eligible for medical 
                        assistance under this title and who 
                        have Sickle Cell Disease; plus''.
    (c) Demonstration Program for the Development and 
Establishment of Systemic Mechanisms for the Prevention and 
Treatment of Sickle Cell Disease.--
            (1) Authority to conduct demonstration program.--
                    (A) In general.--The Administrator, through 
                the Bureau of Primary Health Care and the 
                Maternal and Child Health Bureau, shall conduct 
                a demonstration program by making grants to up 
                to 40 eligible entities for each fiscal year in 
                which the program is conducted under this 
                section for the purpose of developing and 
                establishing systemic mechanisms to improve the 
                prevention and treatment of Sickle Cell 
                Disease, including through--
                            (i) the coordination of service 
                        delivery for individuals with Sickle 
                        Cell Disease;
                            (ii) genetic counseling and 
                        testing;
                            (iii) bundling of technical 
                        services related to the prevention and 
                        treatment of Sickle Cell Disease;
                            (iv) training of health 
                        professionals; and
                            (v) identifying and establishing 
                        other efforts related to the expansion 
                        and coordination of education, 
                        treatment, and continuity of care 
                        programs for individuals with Sickle 
                        Cell Disease.
                    (B) Grant award requirements.--
                            (i) Geographic diversity.--The 
                        Administrator shall, to the extent 
                        practicable, award grants under this 
                        section to eligible entities located in 
                        different regions of the United States.
                            (ii) Priority.--In awarding grants 
                        under this subsection, the 
                        Administrator shall give priority to 
                        awarding grants to eligible entities 
                        that are--
                                    (I) Federally-qualified 
                                health centers that have a 
                                partnership or other 
                                arrangement with a 
                                comprehensive Sickle Cell 
                                Disease treatment center that 
                                does not receive funds from the 
                                National Institutes of Health; 
                                or
                                    (II) Federally-qualified 
                                health centers that intend to 
                                develop a partnership or other 
                                arrangement with a 
                                comprehensive Sickle Cell 
                                Disease treatment center that 
                                does not receive funds from the 
                                National Institutes of Health.
            (2) Additional requirements.--An eligible entity 
        awarded a grant under this subsection shall use funds 
        made available under the grant to carry out, in 
        addition to the activities described in paragraph 
        (1)(A), the following activities:
                    (A) To facilitate and coordinate the 
                delivery of education, treatment, and 
                continuity of care for individuals with Sickle 
                Cell Disease under--
                            (i) the entity's collaborative 
                        agreement with a community-based Sickle 
                        Cell Disease organization or a 
                        nonprofit entity that works with 
                        individuals who have Sickle Cell 
                        Disease;
                            (ii) the Sickle Cell Disease 
                        newborn screening program for the State 
                        in which the entity is located; and
                            (iii) the maternal and child health 
                        program under title V of the Social 
                        Security Act (42 U.S.C. 701 et seq.) 
                        for the State in which the entity is 
                        located.
                    (B) To train nursing and other health staff 
                who provide care for individuals with Sickle 
                Cell Disease.
                    (C) To enter into a partnership with adult 
                or pediatric hematologists in the region and 
                other regional experts in Sickle Cell Disease 
                at tertiary and academic health centers and 
                State and county health offices.
                    (D) To identify and secure resources for 
                ensuring reimbursement under the medicaid 
                program, State children's health insurance 
                program, and other health programs for the 
                prevention and treatment of Sickle Cell 
                Disease.
            (3) National coordinating center.--
                    (A) Establishment.--The Administrator shall 
                enter into a contract with an entity to serve 
                as the National Coordinating Center for the 
                demonstration program conducted under this 
                subsection.
                    (B) Activities described.--The National 
                Coordinating Center shall--
                            (i) collect, coordinate, monitor, 
                        and distribute data, best practices, 
                        and findings regarding the activities 
                        funded under grants made to eligible 
                        entities under the demonstration 
                        program;
                            (ii) develop a model protocol for 
                        eligible entities with respect to the 
                        prevention and treatment of Sickle Cell 
                        Disease;
                            (iii) develop educational materials 
                        regarding the prevention and treatment 
                        of Sickle Cell Disease; and
                            (iv) prepare and submit to Congress 
                        a final report that includes 
                        recommendations regarding the 
                        effectiveness of the demonstration 
                        program conducted under this subsection 
                        and such direct outcome measures as--
                                    (I) the number and type of 
                                health care resources utilized 
                                (such as emergency room visits, 
                                hospital visits, length of 
                                stay, and physician visits for 
                                individuals with Sickle Cell 
                                Disease); and
                                    (II) the number of 
                                individuals that were tested 
                                and subsequently received 
                                genetic counseling for the 
                                sickle cell trait.
            (4) Application.--An eligible entity desiring a 
        grant under this subsection shall submit an application 
        to the Administrator at such time, in such manner, and 
        containing such information as the Administrator may 
        require.
            (5) Definitions.--In this subsection:
                    (A) Administrator.--The term 
                ``Administrator'' means the Administrator of 
                the Health Resources and Services 
                Administration.
                    (B) Eligible entity.--The term ``eligible 
                entity'' means a Federally-qualified health 
                center, a nonprofit hospital or clinic, or a 
                university health center that provides primary 
                health care, that--
                            (i) has a collaborative agreement 
                        with a community-based SickleCell 
                        Disease organization or a nonprofit 
                        entity with experience in working with 
                        individuals who have Sickle Cell 
                        Disease; and
                            (ii) demonstrates to the 
                        Administrator that either the 
                        Federally-qualified health center, the 
                        nonprofit hospital or clinic, the 
                        university health center, the 
                        organization or entity described in 
                        clause (i), or the experts described in 
                        paragraph (2)(C), has at least 5 years 
                        of experience in working with 
                        individuals who have Sickle Cell 
                        Disease.
                    (C) Federally-qualified health center.--The 
                term ``Federally-qualified health center'' has 
                the meaning given that term in section 
                1905(l)(2)(B) of the Social Security Act (42 
                U.S.C. 1396d(l)(2)(B)).
            (6) Authorization of appropriations.--There is 
        authorized to be appropriated to carry out this 
        subsection, $10,000,000 for each of fiscal years 2005 
        through 2009.
    (d) Effective Date.--The amendments made by subsections (a) 
and (b) take effect on the date of enactment of this Act and 
apply to medical assistance and services provided under title 
XIX of the Social Security Act (42 U.S.C. 1396 et seq.) on or 
after that date.

SEC. 713. CEILING FANS.

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

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

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

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

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

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

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

                     TITLE VIII--REVENUE PROVISIONS

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

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

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

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

    ``(a) Tax on Inversion Gain of Expatriated Entities.--
            ``(1) In general.--The taxable income of an 
        expatriated entity for any taxable year which includes 
        any portion of the applicable period shall in no event 
        be less than the inversion gain of the entity for the 
        taxable year.
            ``(2) Expatriated entity.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `expatriated 
                entity' means--
                            ``(i) the domestic corporation or 
                        partnership referred to in subparagraph 
                        (B)(i) with respect to which a foreign 
                        corporation is a surrogate foreign 
                        corporation, and
                            ``(ii) any United States person who 
                        is related (within the meaning of 
                        section 267(b) or 707(b)(1)) to a 
                        domestic corporation or partnership 
                        described in clause (i).
                    ``(B) Surrogate foreign corporation.--A 
                foreign corporation shall be treated as a 
                surrogate foreign corporation if, pursuant to a 
                plan (or a series of related transactions)--
                            ``(i) the entity completes after 
                        March 4, 2003, the direct or indirect 
                        acquisition of substantially all of the 
                        properties held directly or indirectly 
                        by a domestic corporation or 
                        substantially all of the properties 
                        constituting a trade or business of a 
                        domestic partnership,
                            ``(ii) after the acquisition at 
                        least 60 percent of the stock (by vote 
                        or value) of the entity is held--
                                    ``(I) in the case of an 
                                acquisition with respect to a 
                                domestic corporation, by former 
                                shareholders of the domestic 
                                corporation by reason of 
                                holding stock in the domestic 
                                corporation, or
                                    ``(II) in the case of an 
                                acquisition with respect to a 
                                domestic partnership, by former 
                                partners of the domestic 
                                partnership by reason of 
                                holding a capital or profits 
                                interest in the domestic 
                                partnership, and
                            ``(iii) after the acquisition the 
                        expanded affiliated group which 
                        includes the entity does not have 
                        substantial business activities in the 
                        foreign country in which, or under the 
                        law of which, the entity is created or 
                        organized, when compared to the total 
                        business activities of such expanded 
                        affiliated group.
                An entity otherwise described in clause (i) 
                with respect to any domestic corporation or 
                partnership trade or business shall be treated 
                as not so described if, on or before March 4, 
                2003, such entity acquired directly or 
                indirectly more than half of the properties 
                held directly or indirectly by such corporation 
                or more than half of the properties 
                constituting such partnership trade or 
                business, as the case may be.
            ``(3) Coordination with subsection (b).--Paragraph 
        (1) shall not apply to any entity which is treated as a 
        domestic corporation under subsection (b).
    ``(b) Inverted Corporations Treated as Domestic 
Corporations.--Notwithstanding section 7701(a)(4), a foreign 
corporation shall be treated for purposes of this title as a 
domestic corporation if such corporation would be a surrogate 
foreign corporation if subsection (a)(2) were applied by 
substituting `80 percent' for `60 percent'.
    ``(c) Definitions and Special Rules.--
            ``(1) Expanded affiliated group.--The term 
        `expanded affiliated group' means an affiliated group 
        as defined in section 1504(a) but without regard to 
        section 1504(b)(3), except that section 1504(a) shall 
        be applied by substituting `more than 50 percent' for 
        `at least 80 percent' each place it appears.
            ``(2) Certain stock disregarded.--There shall not 
        be taken into account in determining ownership under 
        subsection (a)(2)(B)(ii)--
                    ``(A) stock held by members of the expanded 
                affiliated group which includes the foreign 
                corporation, or
                    ``(B) stock of such foreign corporation 
                which is sold in a public offering related to 
                the acquisition described in subsection 
                (a)(2)(B)(i).
            ``(3) Plan deemed in certain cases.--If a foreign 
        corporation acquires directly or indirectly 
        substantially all of the properties of a domestic 
        corporation or partnership during the 4-year period 
        beginning on the date which is 2 years before the 
        ownership requirements of subsection (a)(2)(B)(ii) are 
        met, such actions shall be treated as pursuant to a 
        plan.
            ``(4) Certain transfers disregarded.--The transfer 
        of properties or liabilities (including by contribution 
        or distribution) shall be disregarded if such transfers 
        are part of a plan a principal purpose of which is to 
        avoid the purposes of this section.
            ``(5) Special rule for related partnerships.--For 
        purposes of applying subsection (a)(2)(B)(ii) to the 
        acquisition of a trade or business of a domestic 
        partnership, except as provided in regulations, all 
        partnerships which are under common control (within the 
        meaning of section 482) shall be treated as 1 
        partnership.
            ``(6) Regulations.--The Secretary shall prescribe 
        such regulations as may be appropriate to determine 
        whether a corporation is a surrogate foreign 
        corporation, including regulations--
                    ``(A) to treat warrants, options, contracts 
                to acquire stock, convertible debt interests, 
                and other similar interests as stock, and
                    ``(B) to treat stock as not stock.
    ``(d) Other Definitions.--For purposes of this section--
            ``(1) Applicable period.--The term `applicable 
        period' means the period--
                    ``(A) beginning on the first date 
                properties are acquired as part of the 
                acquisition described in subsection 
                (a)(2)(B)(i), and
                    ``(B) ending on the date which is 10 years 
                after the last date properties are acquired as 
                part of such acquisition.
            ``(2) Inversion gain.--The term `inversion gain' 
        means the income or gain recognized by reason of the 
        transfer during the applicable period of stock or other 
        properties by an expatriated entity, and any income 
        received or accrued during the applicable period by 
        reason of a license of any property by an expatriated 
        entity--
                    ``(A) as part of the acquisition described 
                in subsection (a)(2)(B)(i), or
                    ``(B) after such acquisition if the 
                transfer or license is to a foreign related 
                person.
        Subparagraph (B) shall not apply to property described 
        in section 1221(a)(1) in the hands of the expatriated 
        entity.
            ``(3) Foreign related person.--The term `foreign 
        related person' means, with respect to any expatriated 
        entity, a foreign person which--
                    ``(A) is related (within the meaning of 
                section 267(b) or 707(b)(1)) to such entity, or
                    ``(B) is under the same common control 
                (within the meaning of section 482) as such 
                entity.
    ``(e) Special Rules.--
            ``(1) Credits not allowed against tax on inversion 
        gain.--Credits (other than the credit allowed by 
        section 901) shall be allowed against the tax imposed 
        by this chapter on an expatriated entity for any 
        taxable year described in subsection (a) only to the 
        extent such tax exceeds the product of--
                    ``(A) the amount of the inversion gain for 
                the taxable year, and
                    ``(B) the highest rate of tax specified in 
                section 11(b)(1).
        For purposes of determining the credit allowed by 
        section 901, inversion gain shall be treated as from 
        sources within the United States.
            ``(2) Special rules for partnerships.--In the case 
        of an expatriated entity which is a partnership--
                    ``(A) subsection (a)(1) shall apply at the 
                partner rather than the partnership level,
                    ``(B) the inversion gain of any partner for 
                any taxable year shall be equal to the sum of--
                            ``(i) the partner's distributive 
                        share of inversion gain of the 
                        partnership for such taxable year, plus
                            ``(ii) gain recognized for the 
                        taxable year by the partner by reason 
                        of the transfer during the applicable 
                        period of any partnership interest of 
                        the partner in such partnership to the 
                        surrogate foreign corporation, and
                    ``(C) the highest rate of tax specified in 
                the rate schedule applicable to the partner 
                under this chapter shall be substituted for the 
                rate of tax referred to in paragraph (1).
            ``(3) Coordination with section 172 and minimum 
        tax.--Rules similar to the rules of paragraphs (3) and 
        (4) of section 860E(a) shall apply for purposes of 
        subsection (a).
            ``(4) Statute of limitations.--
                    ``(A) In general.--The statutory period for 
                the assessment of any deficiency attributable 
                to the inversion gain of any taxpayer for any 
                pre-inversion year shall not expire before the 
                expiration of 3 years from the date the 
                Secretary is notified by the taxpayer (in such 
                manner as the Secretary may prescribe) of the 
                acquisition described in subsection 
                (a)(2)(B)(i) to which such gain relates and 
                such deficiency may be assessed before the 
                expiration of such 3-year period 
                notwithstanding the provisions of any other law 
                or rule of law which would otherwise prevent 
                such assessment.
                    ``(B) Pre-inversion year.--For purposes of 
                subparagraph (A), the term `pre-inversion year' 
                means any taxable year if--
                            ``(i) any portion of the applicable 
                        period is included in such taxable 
                        year, and
                            ``(ii) such year ends before the 
                        taxable year in which the acquisition 
                        described in subsection (a)(2)(B)(i) is 
                        completed.
    ``(f) Special Rule for Treaties.--Nothing in section 894 or 
7852(d) or in any other provision of law shall be construed as 
permitting an exemption, by reason of any treaty obligation of 
the United States heretofore or hereafter entered into, from 
the provisions of this section.
    ``(g) Regulations.--The Secretary shall provide such 
regulations as are necessary to carry out this section, 
including regulations providing for such adjustments to the 
application of this section as are necessary to prevent the 
avoidance of the purposes of this section, including the 
avoidance of such purposes through--
            ``(1) the use of related persons, pass-through or 
        other noncorporate entities, or other intermediaries, 
        or
            ``(2) transactions designed to have persons cease 
        to be (or not become) members of expanded affiliated 
        groups or related persons.''.
    (b) Conforming Amendment.--The table of sections for 
subchapter C of chapter 80 is amended by adding at the end the 
following new item:

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

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

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

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

       ``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES

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

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

    ``(a) Imposition of Tax.--In the case of an individual who 
is a disqualified individual with respect to any expatriated 
corporation, there is hereby imposed on such person a tax equal 
to--
            ``(1) the rate of tax specified in section 
        1(h)(1)(C), multiplied by
            ``(2) the value (determined under subsection (b)) 
        of the specified stock compensation held (directly or 
        indirectly) by or for the benefit of such individual or 
        a member of such individual's family (as defined in 
        section 267) at any time during the 12-month period 
        beginning on the date which is 6 months before the 
        expatriation date.
    ``(b) Value.--For purposes of subsection (a)--
            ``(1) In general.--The value of specified stock 
        compensation shall be--
                    ``(A) in the case of a stock option (or 
                other similar right) or a stock appreciation 
                right, the fair value of such option or right, 
                and
                    ``(B) in any other case, the fair market 
                value of such compensation.
            ``(2) Date for determining value.--The 
        determination of value shall be made--
                    ``(A) in the case of specified stock 
                compensation held on the expatriation date, on 
                such date,
                    ``(B) in the case of such compensation 
                which is canceled during the 6 months before 
                the expatriation date, on the day before such 
                cancellation, and
                    ``(C) in the case of such compensation 
                which is granted after the expatriation date, 
                on the date such compensation is granted.
    ``(c) Tax To Apply Only if Shareholder Gain Recognized.--
Subsection (a) shall apply to any disqualified individual with 
respect to an expatriated corporation only if gain (if any) on 
any stock in such corporation is recognized in whole or part by 
any shareholder by reason of the acquisition referred to in 
section 7874(a)(2)(B)(i) with respect to such corporation.
    ``(d) Exception Where Gain Recognized on Compensation.--
Subsection (a) shall not apply to--
            ``(1) any stock option which is exercised on the 
        expatriation date or during the 6-month period before 
        such date and to the stock acquired in such exercise, 
        if income is recognized under section 83 on or before 
        the expatriation date with respect to the stock 
        acquired pursuant to such exercise, and
            ``(2) any other specified stock compensation which 
        is exercised, sold, exchanged, distributed, cashed-out, 
        or otherwise paid during such period in a transaction 
        in which income, gain, or loss is recognized in full.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Disqualified individual.--The term 
        `disqualified individual' means, with respect to a 
        corporation, any individual who, at any time during the 
        12-month period beginning on the date which is 6 months 
        before the expatriation date--
                    ``(A) is subject to the requirements of 
                section 16(a) of the Securities Exchange Act of 
                1934 with respect to such corporation or any 
                member of the expanded affiliated group which 
                includes such corporation, or
                    ``(B) would be subject to such requirements 
                if such corporation or member were an issuer of 
                equity securities referred to in such section.
            ``(2) Expatriated corporation; expatriation date.--
                    ``(A) Expatriated corporation.--The term 
                `expatriated corporation' means any corporation 
                which is an expatriated entity (as defined in 
                section 7874(a)(2)). Such term includes any 
                predecessor or successor of such a corporation.
                    ``(B) Expatriation date.--The term 
                `expatriation date' means, with respect to a 
                corporation, the date on which the corporation 
                first becomes an expatriated corporation.
            ``(3) Specified stock compensation.--
                    ``(A) In general.--The term `specified 
                stock compensation' means payment (or right to 
                payment) granted by the expatriated corporation 
                (or by any member of the expanded affiliated 
                group which includes such corporation) to any 
                person in connection with the performance of 
                services by a disqualified individual for such 
                corporation or member if the value of such 
                payment or right is based on (or determined by 
                reference to) the value (or change in value) of 
                stock in such corporation (or any such member).
                    ``(B) Exceptions.--Such term shall not 
                include--
                            ``(i) any option to which part II 
                        of subchapter D of chapter 1 applies, 
                        or
                            ``(ii) any payment or right to 
                        payment from a plan referred to in 
                        section 280G(b)(6).
            ``(4) Expanded affiliated group.--The term 
        `expanded affiliated group' means an affiliated group 
        (as defined in section 1504(a) without regard to 
        section 1504(b)(3)); except that section 1504(a) shall 
        be applied by substituting `more than 50 percent' for 
        `at least 80 percent' each place it appears.
    ``(f) Special Rules.--For purposes of this section--
            ``(1) Cancellation of restriction.--The 
        cancellation of a restriction which by its terms will 
        never lapse shall be treated as a grant.
            ``(2) Payment or reimbursement of tax by 
        corporation treated as specified stock compensation.--
        Any payment of the tax imposed by this section directly 
        or indirectly by the expatriated corporation or by any 
        member of the expanded affiliated group which includes 
        such corporation--
                    ``(A) shall be treated as specified stock 
                compensation, and
                    ``(B) shall not be allowed as a deduction 
                under any provision of chapter 1.
            ``(3) Certain restrictions ignored.--Whether there 
        is specified stock compensation, and the value thereof, 
        shall be determined without regard to any restriction 
        other than a restriction which by its terms will never 
        lapse.
            ``(4) Property transfers.--Any transfer of property 
        shall be treated as a payment and any right to a 
        transfer of property shall be treated as a right to a 
        payment.
            ``(5) Other administrative provisions.--For 
        purposes of subtitle F, any tax imposed by this section 
        shall be treated as a tax imposed by subtitle A.
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.''.
    (b) Denial of Deduction.--
            (1) In general.--Paragraph (6) of section 275(a) is 
        amended by inserting ``45,'' before ``46,''.
            (2) $1,000,000 limit on deductible compensation 
        reduced by payment of excise tax on specified stock 
        compensation.--Paragraph (4) of section 162(m) is 
        amended by adding at the end the following new 
        subparagraph:
                    ``(G) Coordination with excise tax on 
                specified stock compensation.--The dollar 
                limitation contained in paragraph (1) with 
                respect to any covered employee shall be 
                reduced (but not below zero) by the amount of 
                any payment (with respect to such employee) of 
                the tax imposed by section 4985 directly or 
                indirectly by the expatriated corporation (as 
                defined in such section) or by any member of 
                the expanded affiliated group (as defined in 
                such section) which includes such 
                corporation.''.
    (c) Conforming Amendments.--
            (1) The last sentence of section 3121(v)(2)(A) is 
        amended by inserting before the period ``or to any 
        specified stock compensation (as defined in section 
        4985) on which tax is imposed by section 4985''.
            (2) The table of chapters for subtitle D is amended 
        by inserting after the item relating to chapter 44 the 
        following new item:

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

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

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

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

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

    (a) Expatriation To Avoid Tax.--
            (1) In general.--Subsection (a) of section 877 
        (relating to treatment of expatriates) is amended to 
        read as follows:
    ``(a) Treatment of Expatriates.--
            ``(1) In general.--Every nonresident alien 
        individual to whom this section applies and who, within 
        the 10-year period immediately preceding the close of 
        the taxable year, lost United States citizenship shall 
        be taxable for such taxable year in the manner provided 
        in subsection (b) if the tax imposed pursuant to such 
        subsection (after any reduction in such tax under the 
        last sentence of such subsection) exceeds the tax 
        which, without regard to this section, is imposed 
        pursuant to section 871.
            ``(2) Individuals subject to this section.--This 
        section shall apply to any individual if--
                    ``(A) the average annual net income tax (as 
                defined in section 38(c)(1)) of such individual 
                for the period of 5 taxable years ending before 
                the date of the loss of United States 
                citizenship is greater than $124,000,
                    ``(B) the net worth of the individual as of 
                such date is $2,000,000 or more, or
                    ``(C) such individual fails to certify 
                under penalty of perjury that he has met the 
                requirements of this title for the 5 preceding 
                taxable years or fails to submit such evidence 
                of such compliance as the Secretary may 
                require.
        In the case of the loss of United States citizenship in 
        any calendar year after 2004, such $124,000 amount 
        shall be increased by an amount equal to such dollar 
        amount multiplied by the cost-of-living adjustment 
        determined under section 1(f)(3) for such calendar year 
        by substituting `2003' for `1992' in subparagraph (B) 
        thereof. Any increase under the preceding sentence 
        shall be rounded to the nearest multiple of $1,000.''.
            (2) Revision of exceptions from alternative tax.--
        Subsection (c) of section 877 (relating to tax 
        avoidance not presumed in certain cases) is amended to 
        read as follows:
    ``(c) Exceptions.--
            ``(1) In general.--Subparagraphs (A) and (B) of 
        subsection (a)(2) shall not apply to an individual 
        described in paragraph (2) or (3).
            ``(2) Dual citizens.--
                    ``(A) In general.--An individual is 
                described in this paragraph if--
                            ``(i) the individual became at 
                        birth a citizen of the United States 
                        and a citizen of another country and 
                        continues to be a citizen of such other 
                        country, and
                            ``(ii) the individual has had no 
                        substantial contacts with the United 
                        States.
                    ``(B) Substantial contacts.--An individual 
                shall be treated as having no substantial 
                contacts with the United States only if the 
                individual--
                            ``(i) was never a resident of the 
                        United States (as defined in section 
                        7701(b)),
                            ``(ii) has never held a United 
                        States passport, and
                            ``(iii) was not present in the 
                        United States for more than 30 days 
                        during any calendar year which is 1 of 
                        the 10 calendar years preceding the 
                        individual's loss of United States 
                        citizenship.
            ``(3) Certain minors.--An individual is described 
        in this paragraph if--
                    ``(A) the individual became at birth a 
                citizen of the United States,
                    ``(B) neither parent of such individual was 
                a citizen of the United States at the time of 
                such birth,
                    ``(C) the individual's loss of United 
                States citizenship occurs before such 
                individual attains age 18\1/2\, and
                    ``(D) the individual was not present in the 
                United States for more than 30 days during any 
                calendar year which is 1 of the 10 calendar 
                years preceding the individual's loss of United 
                States citizenship.''.
            (3) Conforming amendment.--Section 2107(a) is 
        amended to read as follows:
    ``(a) Treatment of Expatriates.--A tax computed in 
accordance with the table contained in section 2001 is hereby 
imposed on the transfer of the taxable estate, determined as 
provided in section 2106, of every decedent nonresident not a 
citizen of the United States if the date of death occurs during 
a taxable year with respect to which the decedent is subject to 
tax under section 877(b).''.
    (b) Special Rules for Determining When an Individual Is No 
Longer a United States Citizen or Long-Term Resident.--Section 
7701 (relating to definitions) is amended by redesignating 
subsection (n) as subsection (o) and by inserting after 
subsection (m) the following new subsection:
    ``(n) Special Rules for Determining When an Individual Is 
No Longer a United States Citizen or Long-Term Resident.--An 
individual who would (but for this subsection) cease to be 
treated as a citizen or resident of the United States shall 
continue to be treated as a citizen or resident of the United 
States, as the case may be, until such individual--
            ``(1) gives notice of an expatriating act or 
        termination of residency (with the requisite intent to 
        relinquish citizenship or terminate residency) to the 
        Secretary of State or the Secretary of Homeland 
        Security, and
            ``(2) provides a statement in accordance with 
        section 6039G.''.
    (c) Physical Presence in the United States for More Than 30 
Days.--Section 877 (relating to expatriation to avoid tax) is 
amended by adding at the end the following new subsection:
    ``(g) Physical Presence.--
            ``(1) In general.--This section shall not apply to 
        any individual to whom this section would otherwise 
        apply for any taxable year during the 10-year period 
        referred to in subsection (a) in which such individual 
        is physically present in the United States at any time 
        on more than 30 days in the calendar year ending in 
        such taxable year, and such individual shall be treated 
        for purposes of this title as a citizen or resident of 
        the United States, as the case may be, for such taxable 
        year.
            ``(2) Exception.--
                    ``(A) In general.--In the case of an 
                individual described in any of the following 
                subparagraphs of this paragraph, a day of 
                physical presence in the United States shall be 
                disregarded if the individual is performing 
                services in the United States on such day for 
                an employer. The preceding sentence shall not 
                apply if--
                            ``(i) such employer is related 
                        (within the meaning of section 267 and 
                        707) to such individual, or
                            ``(ii) such employer fails to meet 
                        such requirements as the Secretary may 
                        prescribe by regulations to prevent the 
                        avoidance of the purposes of this 
                        paragraph.
                Not more than 30 days during any calendar year 
                may be disregarded under this subparagraph.
                    ``(B) Individuals with ties to other 
                countries.--An individual is described in this 
                subparagraph if--
                            ``(i) the individual becomes (not 
                        later than the close of a reasonable 
                        period after loss of United States 
                        citizenship or termination of 
                        residency) a citizen or resident of the 
                        country in which--
                                    ``(I) such individual was 
                                born,
                                    ``(II) if such individual 
                                is married, such individual's 
                                spouse was born, or
                                    ``(III) either of such 
                                individual's parents were born, 
                                and
                            ``(ii) the individual becomes fully 
                        liable for income tax in such country.
                    ``(C) Minimal prior physical presence in 
                the united states.--An individual is described 
                in this subparagraph if, for each year in the 
                10-year period ending on the date of loss of 
                United States citizenship or termination of 
                residency, the individual was physically 
                present in the United States for 30 days or 
                less. The rule of section 7701(b)(3)(D)(ii) 
                shall apply for purposes of this 
                subparagraph.''.
    (d) Transfers Subject to Gift Tax.--
            (1) In general.--Subsection (a) of section 2501 
        (relating to taxable transfers) is amended by striking 
        paragraph (4), by redesignating paragraph (5) as 
        paragraph (4), and by striking paragraph (3) and 
        inserting the following new paragraph:
            ``(3) Exception.--
                    ``(A) Certain individuals.--Paragraph (2) 
                shall not apply in the case of a donor to whom 
                section 877(b) applies for the taxable year 
                which includes the date of the transfer.
                    ``(B) Credit for foreign gift taxes.--The 
                tax imposed by this section solely by reason of 
                this paragraph shall be credited with the 
                amount of any gift tax actually paid to any 
                foreign country in respect of any gift which is 
                taxable under this section solely by reason of 
                this paragraph.''.
            (2) Transfers of certain stock.--Subsection (a) of 
        section 2501 is amended by adding at the end the 
        following new paragraph:
            ``(5) Transfers of certain stock.--
                    ``(A) In general.--In the case of a 
                transfer of stock in a foreign corporation 
                described in subparagraph (B) by a donor to 
                whom section 877(b) applies for the taxable 
                year which includes the date of the transfer--
                            ``(i) section 2511(a) shall be 
                        applied without regard to whether such 
                        stock is situated within the United 
                        States, and
                            ``(ii) the value of such stock for 
                        purposes of this chapter shall be its 
                        U.S.-asset value determined under 
                        subparagraph (C).
                    ``(B) Foreign corporation described.--A 
                foreign corporation is described in this 
                subparagraph with respect to a donor if--
                            ``(i) the donor owned (within the 
                        meaning of section 958(a)) at the time 
                        of such transfer 10 percent or more of 
                        the total combined voting power of all 
                        classes of stock entitled to vote of 
                        the foreign corporation, and
                            ``(ii) such donor owned (within the 
                        meaning of section 958(a)), or is 
                        considered to have owned (by applying 
                        the ownership rules of section 958(b)), 
                        at the time of such transfer, more than 
                        50 percent of--
                                    ``(I) the total combined 
                                voting power of all classes of 
                                stock entitled to vote of such 
                                corporation, or
                                    ``(II) the total value of 
                                the stock of such corporation.
                    ``(C) U.S.-asset value.--For purposes of 
                subparagraph (A), the U.S.-asset value of stock 
                shall be the amount which bears the same ratio 
                to the fair market value of such stock at the 
                time of transfer as--
                            ``(i) the fair market value (at 
                        such time) of the assets owned by such 
                        foreign corporation and situated in the 
                        United States, bears to
                            ``(ii) the total fair market value 
                        (at such time) of all assets owned by 
                        such foreign corporation.''.
    (e) Enhanced Information Reporting From Individuals Losing 
United States Citizenship.--
            (1) In general.--Subsection (a) of section 6039G is 
        amended to read as follows:
    ``(a) In General.--Notwithstanding any other provision of 
law, any individual to whom section 877(b) applies for any 
taxable year shall provide a statement for such taxable year 
which includes the information described in subsection (b).''.
            (2) Information to be provided.--Subsection (b) of 
        section 6039G is amended to read as follows:
    ``(b) Information To Be Provided.--Information required 
under subsection (a) shall include--
            ``(1) the taxpayer's TIN,
            ``(2) the mailing address of such individual's 
        principal foreign residence,
            ``(3) the foreign country in which such individual 
        is residing,
            ``(4) the foreign country of which such individual 
        is a citizen,
            ``(5) information detailing the income, assets, and 
        liabilities of such individual,
            ``(6) the number of days during any portion of 
        which that the individual was physically present in the 
        United States during the taxable year, and
            ``(7) such other information as the Secretary may 
        prescribe.''.
            (3) Increase in penalty.--Subsection (d) of section 
        6039G is amended to read as follows:
    ``(d) Penalty.--If--
            ``(1) an individual is required to file a statement 
        under subsection (a) for any taxable year, and
            ``(2) fails to file such a statement with the 
        Secretary on or before the date such statement is 
        required to be filed or fails to include all the 
        information required to be shown on the statement or 
        includes incorrect information,
such individual shall pay a penalty of $10,000 unless it is 
shown that such failure is due to reasonable cause and not to 
willful neglect.''.
            (4) Conforming amendment.--Section 6039G is amended 
        by striking subsections (c), (f), and (g) and by 
        redesignating subsections (d) and (e) as subsection (c) 
        and (d), respectively.
    (f) Effective Date.--The amendments made by this section 
shall apply to individuals who expatriate after June 3, 2004.

SEC. 805. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

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

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

    ``(a) In General.--According to the forms or regulations 
prescribed by the Secretary, the acquiring corporation in any 
taxable acquisition shall make a return setting forth--
            ``(1) a description of the acquisition,
            ``(2) the name and address of each shareholder of 
        the acquired corporation who is required to recognize 
        gain (if any) as a result of the acquisition,
            ``(3) the amount of money and the fair market value 
        of other property transferred to each such shareholder 
        as part of such acquisition, and
            ``(4) such other information as the Secretary may 
        prescribe.
To the extent provided by the Secretary, the requirements of 
this section applicable to the acquiring corporation shall be 
applicable to the acquired corporation and not to the acquiring 
corporation.
    ``(b) Nominees.--According to the forms or regulations 
prescribed by the Secretary--
            ``(1) Reporting.--Any person who holds stock as a 
        nominee for another person shall furnish in the manner 
        prescribed by the Secretary to such other person the 
        information provided by the corporation under 
        subsection (d).
            ``(2) Reporting to nominees.--In the case of stock 
        held by any person as a nominee, references in this 
        section (other than in subsection (c)) to a shareholder 
        shall be treated as a reference to the nominee.
    ``(c) Taxable Acquisition.--For purposes of this section, 
the term `taxable acquisition' means any acquisition by a 
corporation of stock in or property of another corporation if 
any shareholder of the acquired corporation is required to 
recognize gain (if any) as a result of such acquisition.
    ``(d) Statements To Be Furnished to Shareholders.--
According to the forms or regulations prescribed by the 
Secretary, every person required to make a return under 
subsection (a) shall furnish to each shareholder whose name is 
required to be set forth in such return a written statement 
showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such 
        return,
            ``(2) the information required to be shown on such 
        return with respect to such shareholder, and
            ``(3) such other information as the Secretary may 
        prescribe.
The written statement required under the preceding sentence 
shall be furnished to the shareholder on or before January 31 
of the year following the calendar year during which the 
taxable acquisition occurred.''.
    (b) Assessable Penalties.--
            (1) Subparagraph (B) of section 6724(d)(1) 
        (relating to definitions) is amended by redesignating 
        clauses (ii) through (xviii) as clauses (iii) through 
        (xix), respectively, and by inserting after clause (i) 
        the following new clause:
                            ``(ii) section 6043A(a) (relating 
                        to returns relating to taxable mergers 
                        and acquisitions),''.
            (2) Paragraph (2) of section 6724(d) is amended by 
        redesignating subparagraphs (F) through (BB) as 
        subparagraphs (G) through (CC), respectively, and by 
        inserting after subparagraph (E) the following new 
        subparagraph:
                    ``(F) subsections (b) and (d) of section 
                6043A (relating to returns relating to taxable 
                mergers and acquisitions).''.
    (c) Clerical Amendment.--The table of sections for subpart 
B of part III of subchapter A of chapter 61 is amended by 
inserting after the item relating to section 6043 the following 
new item:

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

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

SEC. 806. STUDIES.

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

            Subtitle B--Provisions Relating to Tax Shelters

                  PART I--TAXPAYER-RELATED PROVISIONS

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

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

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

    ``(a) Imposition of Penalty.--Any person who fails to 
include on any return or statement any information with respect 
to a reportable transaction which is required under section 
6011 to be included with such return or statement shall pay a 
penalty in the amount determined under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph 
        (2), the amount of the penalty under subsection (a) 
        shall be--
                    ``(A) $10,000 in the case of a natural 
                person, and
                    ``(B) $50,000 in any other case.
            ``(2) Listed transaction.--The amount of the 
        penalty under subsection (a) with respect to a listed 
        transaction shall be--
                    ``(A) $100,000 in the case of a natural 
                person, and
                    ``(B) $200,000 in any other case.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to 
        which information is required to be included with a 
        return or statement because, as determined under 
        regulations prescribed under section 6011, such 
        transaction is of a type which the Secretary determines 
        as having a potential for tax avoidance or evasion.
            ``(2) Listed transaction.--The term `listed 
        transaction' means a reportable transaction which is 
        the same as, or substantially similar to, a transaction 
        specifically identified by the Secretary as a tax 
        avoidance transaction for purposes of section 6011.
    ``(d) Authority To Rescind Penalty.--
            ``(1) In general.--The Commissioner of Internal 
        Revenue may rescind all or any portion of any penalty 
        imposed by this section with respect to any violation 
        if--
                    ``(A) the violation is with respect to a 
                reportable transaction other than a listed 
                transaction, and
                    ``(B) rescinding the penalty would promote 
                compliance with the requirements of this title 
                and effective tax administration.
            ``(2) No judicial appeal.--Notwithstanding any 
        other provision of law, any determination under this 
        subsection may not be reviewed in any judicial 
        proceeding.
            ``(3) Records.--If a penalty is rescinded under 
        paragraph (1), the Commissioner shall place in the file 
        in the Office of the Commissioner the opinion of the 
        Commissioner with respect to the determination, 
        including--
                    ``(A) a statement of the facts and 
                circumstances relating to the violation,
                    ``(B) the reasons for the rescission, and
                    ``(C) the amount of the penalty rescinded.
    ``(e) Penalty Reported to SEC.--In the case of a person--
            ``(1) which is required to file periodic reports 
        under section 13 or 15(d) of the Securities Exchange 
        Act of 1934 or is required to be consolidated with 
        another person for purposes of such reports, and
            ``(2) which--
                    ``(A) is required to pay a penalty under 
                this section with respect to a listed 
                transaction,
                    ``(B) is required to pay a penalty under 
                section 6662A with respect to any reportable 
                transaction at a rate prescribed under section 
                6662A(c), or
                    ``(C) is required to pay a penalty under 
                section 6662(h) with respect to any reportable 
                transaction and would (but for section 
                6662A(e)(2)(C)) have been subject to penalty 
                under section 6662A at a rate prescribed under 
                section 6662A(c),
the requirement to pay such penalty shall be disclosed in such 
reports filed by such person for such periods as the Secretary 
shall specify. Failure to make a disclosure in accordance with 
the preceding sentence shall be treated as a failure to which 
the penalty under subsection (b)(2) applies.
    ``(f) Coordination With Other Penalties.--The penalty 
imposed by this section shall be in addition to any other 
penalty imposed by this title.''
    (b) Conforming Amendment.--The table of sections for part I 
of subchapter B of chapter 68 is amended by inserting after the 
item relating to section 6707 the following:

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

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

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

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

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

    ``(a) Imposition of Penalty.--If a taxpayer has a 
reportable transaction understatement for any taxable year, 
there shall be added to the tax an amount equal to 20 percent 
of the amount of such understatement.
    ``(b) Reportable Transaction Understatement.--For purposes 
of this section--
            ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                    ``(A) the product of--
                            ``(i) the amount of the increase 
                        (if any) in taxable income which 
                        results from a difference between the 
                        proper tax treatment of an item to 
                        which this section applies and the 
                        taxpayer's treatment of such item (as 
                        shown on the taxpayer's return of tax), 
                        and
                            ``(ii) the highest rate of tax 
                        imposed by section 1 (section 11 in the 
                        case of a taxpayer which is a 
                        corporation), and
                    ``(B) the amount of the decrease (if any) 
                in the aggregate amount of credits determined 
                under subtitle A which results from a 
                difference between the taxpayer's treatment of 
                an item to which this section applies (as shown 
                on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of the 
        excess of deductions allowed for the taxable year over 
        gross income for such year, and any reduction in the 
        amount of capital losses which would (without regard to 
        section 1211) be allowed for such year, shall be 
        treated as an increase in taxable income.
            ``(2) Items to which section applies.--This section 
        shall apply to any item which is attributable to--
                    ``(A) any listed transaction, and
                    ``(B) any reportable transaction (other 
                than a listed transaction) if a significant 
                purpose of such transaction is the avoidance or 
                evasion of Federal income tax.
    ``(c) Higher Penalty for Nondisclosed Listed and Other 
Avoidance Transactions.--Subsection (a) shall be applied by 
substituting `30 percent' for `20 percent' with respect to the 
portion of any reportable transaction understatement with 
respect to which the requirement of section 6664(d)(2)(A) is 
not met.
    ``(d) Definitions of Reportable and Listed Transactions.--
For purposes of this section, the terms `reportable 
transaction' and `listed transaction' have the respective 
meanings given to such terms by section 6707A(c).
    ``(e) Special Rules.--
            ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as 
        defined in section 6662(d)(2))--
                    ``(A) the amount of such understatement 
                (determined without regard to this paragraph) 
                shall be increased by the aggregate amount of 
                reportable transaction understatements for 
                purposes of determining whether such 
                understatement is a substantial understatement 
                under section 6662(d)(1), and
                    ``(B) the addition to tax under section 
                6662(a) shall apply only to the excess of the 
                amount of the substantial understatement (if 
                any) after the application of subparagraph (A) 
                over the aggregate amount of reportable 
                transaction understatements.
            ``(2) Coordination with other penalties.--
                    ``(A) Application of fraud penalty.--
                References to an underpayment in section 6663 
                shall be treated as including references to a 
                reportable transaction understatement.
                    ``(B) No double penalty.--This section 
                shall not apply to any portion of an 
                understatement on which a penalty is imposed 
                under section 6663.
                    ``(C) Coordination with valuation 
                penalties.--
                            ``(i) Section 6662(e).--Section 
                        6662(e) shall not apply to any portion 
                        of an understatement on which a penalty 
                        is imposed under this section.
                            ``(ii) Section 6662(h).--This 
                        section shall not apply to any portion 
                        of an understatement on which a penalty 
                        is imposed under section 6662(h).
            ``(3) Special rule for amended returns.--Except as 
        provided in regulations, in no event shall any tax 
        treatment included with an amendment or supplement to a 
        return of tax be taken into account in determining the 
        amount of any reportable transaction understatement if 
        the amendment or supplement is filed after the earlier 
        of the date the taxpayer is first contacted by the 
        Secretary regarding the examination of the return or 
        such other date as is specified by the Secretary.''.
    (b) Determination of Other Understatements.--Subparagraph 
(A) of section 6662(d)(2) is amended by adding at the end the 
following flush sentence:
                ``The excess under the preceding sentence shall 
                be determined without regard to items to which 
                section 6662A applies.''.
    (c) Reasonable Cause Exception.--
            (1) In general.--Section 6664 is amended by adding 
        at the end the following new subsection:
    ``(d) Reasonable Cause Exception for Reportable Transaction 
Understatements.--
            ``(1) In general.--No penalty shall be imposed 
        under section 6662A with respect to any portion of a 
        reportable transaction understatement if it is shown 
        that there was a reasonable cause for such portion and 
        that the taxpayer acted in good faith with respect to 
        such portion.
            ``(2) Special rules.--Paragraph (1) shall not apply 
        to any reportable transaction understatement unless--
                    ``(A) the relevant facts affecting the tax 
                treatment of the item are adequately disclosed 
                in accordance with the regulations prescribed 
                under section 6011,
                    ``(B) there is or was substantial authority 
                for such treatment, and
                    ``(C) the taxpayer reasonably believed that 
                such treatment was more likely than not the 
                proper treatment.
        A taxpayer failing to adequately disclose in accordance 
        with section 6011 shall be treated as meeting the 
        requirements of subparagraph (A) if the penalty for 
        such failure was rescinded under section 6707A(d).
            ``(3) Rules relating to reasonable belief.--For 
        purposes of paragraph (2)(C)--
                    ``(A) In general.--A taxpayer shall be 
                treated as having a reasonable belief with 
                respect to the tax treatment of an item only if 
                such belief--
                            ``(i) is based on the facts and law 
                        that exist at the time the return of 
                        tax which includes such tax treatment 
                        is filed, and
                            ``(ii) relates solely to the 
                        taxpayer's chances of success on the 
                        merits of such treatment and does not 
                        take into account the possibility that 
                        a return will not be audited, such 
                        treatment will not be raised on audit, 
                        or such treatment will be resolved 
                        through settlement if it is raised.
                    ``(B) Certain opinions may not be relied 
                upon.--
                            ``(i) In general.--An opinion of a 
                        tax advisor may not be relied upon to 
                        establish the reasonable belief of a 
                        taxpayer if--
                                    ``(I) the tax advisor is 
                                described in clause (ii), or
                                    ``(II) the opinion is 
                                described in clause (iii).
                            ``(ii) Disqualified tax advisors.--
                        A tax advisor is described in this 
                        clause if the tax advisor--
                                    ``(I) is a material advisor 
                                (within the meaning of section 
                                6111(b)(1)) and participates in 
                                the organization, management, 
                                promotion, or sale of the 
                                transaction or is related 
                                (within the meaning of section 
                                267(b) or 707(b)(1)) to any 
                                person who so participates,
                                    ``(II) is compensated 
                                directly or indirectly by a 
                                material advisor with respect 
                                to the transaction,
                                    ``(III) has a fee 
                                arrangement with respect to the 
                                transaction which is contingent 
                                on all or part of the intended 
                                tax benefits from the 
                                transaction being sustained, or
                                    ``(IV) as determined under 
                                regulations prescribed by the 
                                Secretary, has a disqualifying 
                                financial interest with respect 
                                to the transaction.
                            ``(iii) Disqualified opinions.--For 
                        purposes of clause (i), an opinion is 
                        disqualified if the opinion--
                                    ``(I) is based on 
                                unreasonable factual or legal 
                                assumptions (including 
                                assumptions as to future 
                                events),
                                    ``(II) unreasonably relies 
                                on representations, statements, 
                                findings, or agreements of the 
                                taxpayer or any other person,
                                    ``(III) does not identify 
                                and consider all relevant 
                                facts, or
                                    ``(IV) fails to meet any 
                                other requirement as the 
                                Secretary may prescribe.''.
            (2) Conforming amendments.--
                    (A) Paragraph (1) of section 6664(c) is 
                amended by striking ``this part'' and inserting 
                ``section 6662 or 6663''.
                    (B) The heading for subsection (c) of 
                section 6664 is amended by inserting ``for 
                Underpayments'' after ``Exception''.
    (d) Reduction in Penalty for Substantial Understatement of 
Income Tax Not To Apply to Tax Shelters.--Subparagraph (C) of 
section 6662(d)(2) (relating to substantial understatement of 
income tax) is amended to read as follows:
                    ``(C) Reduction not to apply to tax 
                shelters.--
                            ``(i) In general.--Subparagraph (B) 
                        shall not apply to any item 
                        attributable to a tax shelter.
                            ``(ii) Tax shelter.--For purposes 
                        of clause (i), the term `tax shelter' 
                        means--
                                    ``(I) a partnership or 
                                other entity,
                                    ``(II) any investment plan 
                                or arrangement, or
                                    ``(III) any other plan or 
                                arrangement,
                        if a significant purpose of such 
                        partnership, entity, plan, or 
                        arrangement is the avoidance or evasion 
                        of Federal income tax.''.
    (e) Clerical Amendments.--
            (1) The heading for section 6662 is amended to read 
        as follows:

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

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

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

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

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

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

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

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

SEC. 815. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    ``(a) In General.--If a person who is required to file a 
return under section 6111(a) with respect to any reportable 
transaction--
            ``(1) fails to file such return on or before the 
        date prescribed therefor, or
            ``(2) files false or incomplete information with 
        the Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in 
the amount determined under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph 
        (2), the penalty imposed under subsection (a) with 
        respect to any failure shall be $50,000.
            ``(2) Listed transactions.--The penalty imposed 
        under subsection (a) with respect to any listed 
        transaction shall be an amount equal to the greater 
        of--
                    ``(A) $200,000, or
                    ``(B) 50 percent of the gross income 
                derived by such person with respect to aid, 
                assistance, or advice which is provided with 
                respect to the listed transaction before the 
                date the return is filed under section 6111.
        Subparagraph (B) shall be applied by substituting `75 
        percent' for `50 percent' in the case of an intentional 
        failure or act described in subsection (a).
    ``(c) Rescission Authority.--The provisions of section 
6707A(d) (relating to authority of Commissioner to rescind 
penalty) shall apply to any penalty imposed under this section.
    ``(d) Reportable and Listed Transactions.--For purposes of 
this section, the terms `reportable transaction' and `listed 
transaction' have the respective meanings given to such terms 
by section 6707A(c).''.
    (b) Clerical Amendment.--The item relating to section 6707 
in the table of sections for part I of subchapter B of chapter 
68 is amended by striking ``tax shelters'' and inserting 
``reportable transactions''.
    (c) Effective Date.--The amendments made by this section 
shall apply to returns the due date for which is after the date 
of the enactment of this Act.

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

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

SEC. 818. PENALTY ON PROMOTERS OF TAX SHELTERS.

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

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

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

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

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

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

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

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

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

    (a) In General.--Section 5321(a)(5) of title 31, United 
States Code, is amended to read as follows:
            ``(5) Foreign financial agency transaction 
        violation.--
                    ``(A) Penalty authorized.--The Secretary of 
                the Treasury may impose a civil money penalty 
                on any person who violates, or causes any 
                violation of, any provision of section 5314.
                    ``(B) Amount of penalty.--
                            ``(i) In general.--Except as 
                        provided in subparagraph (C), the 
                        amount of any civil penalty imposed 
                        under subparagraph (A) shall not exceed 
                        $10,000.
                            ``(ii) Reasonable cause 
                        exception.--No penalty shall be imposed 
                        under subparagraph (A) with respect to 
                        any violation if--
                                    ``(I) such violation was 
                                due to reasonable cause, and
                                    ``(II) the amount of the 
                                transaction or the balance in 
                                the account at the time of the 
                                transaction was properly 
                                reported.
                    ``(C) Willful violations.--In the case of 
                any person willfully violating, or willfully 
                causing any violation of, any provision of 
                section 5314--
                            ``(i) the maximum penalty under 
                        subparagraph (B)(i) shall be increased 
                        to the greater of--
                                    ``(I) $100,000, or
                                    ``(II) 50 percent of the 
                                amount determined under 
                                subparagraph (D), and
                            ``(ii) subparagraph (B)(ii) shall 
                        not apply.
                    ``(D) Amount.--The amount determined under 
                this subparagraph is--
                            ``(i) in the case of a violation 
                        involving a transaction, the amount of 
                        the transaction, or
                            ``(ii) in the case of a violation 
                        involving a failure to report the 
                        existence of an account or any 
                        identifying information required to be 
                        provided with respect to an account, 
                        the balance in the account at the time 
                        of the violation.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to violations occurring after the date of the 
enactment of this Act.

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

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

                       PART II--OTHER PROVISIONS

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

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

          ``For treatment of stripped interests in certain accounts or 
        entities holding preferred stock, see section 1286(f).''.

    (c) Effective Date.--The amendments made by this section 
shall apply to purchases and dispositions after the date of the 
enactment of this Act.

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

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

SEC. 833. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

    (a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) is amended by striking ``and'' 
at the end of subparagraph (A), by striking the period at the 
end of subparagraph (B) and inserting ``, and'', and by adding 
at the end the following:
                    ``(C) if any property so contributed has a 
                built-in loss--
                            ``(i) such built-in loss shall be 
                        taken into account only in determining 
                        the amount of items allocated to the 
                        contributing partner, and
                            ``(ii) except as provided in 
                        regulations, in determining the amount 
                        of items allocated to other partners, 
                        the basis of the contributed property 
                        in the hands of the partnership shall 
                        be treated as being equal to its fair 
                        market value at the time of 
                        contribution.
        For purposes of subparagraph (C), the term `built-in 
        loss' means the excess of the adjusted basis of the 
        property (determined without regard to subparagraph 
        (C)(ii)) over its fair market value at the time of 
        contribution.''.
    (b) Special Rules for Transfers of Partnership Interest if 
There Is Substantial Built-In Loss.--
            (1) Adjustment of partnership basis required.--
        Subsection (a) of section 743 (relating to optional 
        adjustment to basis of partnership property) is amended 
        by inserting before the period ``or unless the 
        partnership has a substantial built-in loss immediately 
        after such transfer''.
            (2) Adjustment.--Subsection (b) of section 743 is 
        amended by inserting ``or which has a substantial 
        built-in loss immediately after such transfer'' after 
        ``section 754 is in effect''.
            (3) Substantial built-in loss.--Section 743 is 
        amended by adding at the end the following new 
        subsection:
    ``(d) Substantial Built-In Loss.--
            ``(1) In general.--For purposes of this section, a 
        partnership has a substantial built-in loss with 
        respect to a transfer of an interest in a partnership 
        if the partnership's adjusted basis in the partnership 
        property exceeds by more than $250,000 the fair market 
        value of such property.
            ``(2) Regulations.--The Secretary shall prescribe 
        such regulations as may be appropriate to carry out the 
        purposes of paragraph (1) and section 734(d), including 
        regulations aggregating related partnerships and 
        disregarding property acquired by the partnership in an 
        attempt to avoid such purposes.''.
            (4) Alternative rules for electing investment 
        partnerships.--
                    (A) In general.--Section 743 is amended by 
                adding after subsection (d) the following new 
                subsection:
    ``(e) Alternative rules for electing investment 
partnerships.--
            ``(1) No adjustment of partnership basis.--For 
        purposes of this section, an electing investment 
        partnership shall not be treated as having a 
        substantial built-in loss with respect to any transfer 
        occurring while the election under paragraph (6)(A) is 
        in effect.
            ``(2) Loss deferral for transferee partner.--In the 
        case of a transfer of an interest in an electing 
        investment partnership, the transferee partner's 
        distributive share of losses (without regard to gains) 
        from the sale or exchange of partnership property shall 
        not be allowed except to the extent that it is 
        established that such losses exceed the loss (if any) 
        recognized by the transferor (or any prior transferor 
        to the extent not fully offset by a prior disallowance 
        under this paragraph) on the transfer of the 
        partnership interest.
            ``(3) No reduction in partnership basis.--Losses 
        disallowed under paragraph (2) shall not decrease the 
        transferee partner's basis in the partnership interest.
            ``(4) Effect of termination of partnership.--This 
        subsection shall be applied without regard to any 
        termination of a partnership under section 
        708(b)(1)(B).
            ``(5) Certain basis reductions treated as losses.--
        In the case of a transferee partner whose basis in 
        property distributed by the partnership is reduced 
        under section 732(a)(2), the amount of the loss 
        recognized by the transferor on the transfer of the 
        partnership interest which is taken into account under 
        paragraph (2) shall be reduced by the amount of such 
        basis reduction.
            ``(6) Electing investment partnership.--For 
        purposes of this subsection, the term `electing 
        investment partnership' means any partnership if--
                    ``(A) the partnership makes an election to 
                have this subsection apply,
                    ``(B) the partnership would be an 
                investment company under section 3(a)(1)(A) of 
                the Investment Company Act of 1940 but for an 
                exemption under paragraph (1) or (7) of section 
                3(c) of such Act,
                    ``(C) such partnership has never been 
                engaged in a trade or business,
                    ``(D) substantially all of the assets of 
                such partnership are held for investment,
                    ``(E) at least 95 percent of the assets 
                contributed to such partnership consist of 
                money,
                    ``(F) no assets contributed to such 
                partnership had an adjusted basis in excess of 
                fair market value at the time of contribution,
                    ``(G) all partnership interests of such 
                partnership are issued by such partnership 
                pursuant to a private offering before the date 
                which is 24 months after the date of the first 
                capital contribution to such partnership,
                    ``(H) the partnership agreement of such 
                partnership has substantive restrictions on 
                each partner's ability to cause a redemption of 
                the partner's interest, and
                    ``(I) the partnership agreement of such 
                partnership provides for a term that is not in 
                excess of 15 years.
        The election described in subparagraph (A), once made, 
        shall be irrevocable except with the consent of the 
        Secretary.
            ``(7) Regulations.--The Secretary shall prescribe 
        such regulations as may be appropriate to carry out the 
        purposes of this subsection, including regulations for 
        applying this subsection to tiered partnerships.''.
                    (B) Information reporting.--Section 6031 is 
                amended by adding at the end the following new 
                subsection:
    ``(f) Electing Investment Partnerships.--In the case of any 
electing investment partnership (as defined in section 
743(e)(6)), the information required under subsection (b) to be 
furnished to any partner to whom section 743(e)(2) applies 
shall include such information as is necessary to enable the 
partner to compute the amount of losses disallowed under 
section 743(e).''.
            (5) Special rule for securitization partnerships.--
        Section 743 is amended by adding after subsection (e) 
        the following new subsection:
    ``(f) Exception for Securitization Partnerships.--
            ``(1) No adjustment of partnership basis.--For 
        purposes of this section, a securitization partnership 
        shall not be treated as having a substantial built-in 
        loss with respect to any transfer.
            ``(2) Securitization partnership.--For purposes of 
        paragraph (1), the term `securitization partnership' 
        means any partnership the sole business activity of 
        which is to issue securities which provide for a fixed 
        principal (or similar) amount and which are primarily 
        serviced by the cash flows of a discrete pool (either 
        fixed or revolving) of receivables or other financial 
        assets that by their terms convert into cash in a 
        finite period, but only if the sponsor of the pool 
        reasonably believes that the receivables and other 
        financial assets comprising the pool are not acquired 
        so as to be disposed of.''
            (6) Clerical amendments.--
                    (A) The section heading for section 743 is 
                amended to read as follows:

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

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

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

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

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

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

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

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

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

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

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

    (a) In General.--Section 755 is amended by adding at the 
end the following new subsection:
    ``(c) No Allocation of Basis Decrease to Stock of Corporate 
Partner.--In making an allocation under subsection (a) of any 
decrease in the adjusted basis of partnership property under 
section 734(b)--
            ``(1) no allocation may be made to stock in a 
        corporation (or any person related (within the meaning 
        of sections 267(b) and 707(b)(1)) to such corporation) 
        which is a partner in the partnership, and
            ``(2) any amount not allocable to stock by reason 
        of paragraph (1) shall be allocated under subsection 
        (a) to other partnership property.
Gain shall be recognized to the partnership to the extent that 
the amount required to be allocated under paragraph (2) to 
other partnership property exceeds the aggregate adjusted basis 
of such other property immediately before the allocation 
required by paragraph (2).''.
    (b) Effective Date.--The amendment made by this section 
shall apply to distributions after the date of the enactment of 
this Act.

SEC. 835. REPEAL OF SPECIAL RULES FOR FASITS.

    (a) In General.--Part V of subchapter M of chapter 1 
(relating to financial asset securitization investment trusts) 
is hereby repealed.
    (b) Conforming Amendments.--
            (1) Paragraph (6) of section 56(g) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or 
        REMIC''.
            (2) Clause (ii) of section 382(l)(4)(B) is amended 
        by striking ``a REMIC to which part IV of subchapter M 
        applies, or a FASIT to which part V of subchapter M 
        applies,'' and inserting ``or a REMIC to which part IV 
        of subchapter M applies,''.
            (3) Paragraph (1) of section 582(c) is amended by 
        striking ``, and any regular interest in a FASIT,''.
            (4) Subparagraph (E) of section 856(c)(5) is 
        amended by striking the last sentence.
            (5)(A) Section 860G(a)(1) is amended by adding at 
        the end the following new sentence: ``An interest shall 
        not fail to qualify as a regular interest solely 
        because the specified principal amount of the regular 
        interest (or the amount of interest accrued on the 
        regular interest) can be reduced as a result of the 
        nonoccurrence of 1 or more contingent payments with 
        respect to any reverse mortgage loan held by the REMIC 
        if, on the startup day for the REMIC, the sponsor 
        reasonably believes that all principal and interest due 
        under the regular interest will be paid at or prior to 
        the liquidation of the REMIC.''.
            (B) The last sentence of section 860G(a)(3) is 
        amended by inserting ``, and any reverse mortgage loan 
        (and each balance increase on such loan meeting the 
        requirements of subparagraph (A)(iii)) shall be treated 
        as an obligation secured by an interest in real 
        property'' before the period at the end.
            (6) Paragraph (3) of section 860G(a) is amended by 
        adding ``and'' at the end of subparagraph (B), by 
        striking ``, and'' at the end of subparagraph (C) and 
        inserting a period, and by striking subparagraph (D).
            (7) Section 860G(a)(3), as amended by paragraph 
        (6), is amended by adding at the end the following new 
        sentence: ``For purposes of subparagraph (A), if more 
        than 50 percent of the obligations transferred to, or 
        purchased by, the REMIC are originated by the United 
        States or any State (or any political subdivision, 
        agency, or instrumentality of the United States or any 
        State) and are principally secured by an interest in 
        real property, then each obligation transferred to, or 
        purchased by, the REMIC shall be treated as secured by 
        an interest in real property.''.
            (8)(A) Section 860G(a)(3)(A) is amended by striking 
        ``or'' at the end of clause (i), by inserting ``or'' at 
        the end of clause (ii), and by inserting after clause 
        (ii) the following new clause:
                            ``(iii) represents an increase in 
                        the principal amount under the original 
                        terms of an obligation described in 
                        clause (i) or (ii) if such increase--
                                    ``(I) is attributable to an 
                                advance made to the obligor 
                                pursuant to the original terms 
                                of the obligation,
                                    ``(II) occurs after the 
                                startup day, and
                                    ``(III) is purchased by the 
                                REMIC pursuant to a fixed price 
                                contract in effect on the 
                                startup day.''.
            (B) Section 860G(a)(7)(B) is amended to read as 
        follows:
                    ``(B) Qualified reserve fund.--For purposes 
                of subparagraph (A), the term `qualified 
                reserve fund' means any reasonably required 
                reserve to--
                            ``(i) provide for full payment of 
                        expenses of the REMIC or amounts due on 
                        regular interests in the event of 
                        defaults on qualified mortgages or 
                        lower than expected returns on cash 
                        flow investments, or
                            ``(ii) provide a source of funds 
                        for the purchase of obligations 
                        described in clause (ii) or (iii) of 
                        paragraph (3)(A).
                The aggregate fair market value of the assets 
                held in any such reserve shall not exceed 50 
                percent of the aggregate fair market value of 
                all of the assets of the REMIC on the startup 
                day, and the amount of any such reserve shall 
                be promptly and appropriately reduced to the 
                extent the amount held in such reserve is no 
                longer reasonably required for purposes 
                specified in clause (i) or (ii) of this 
                subparagraph.''.
            (9) Subparagraph (C) of section 1202(e)(4) is 
        amended by striking ``REMIC, or FASIT'' and inserting 
        ``or REMIC''.
            (10) Clause (xi) of section 7701(a)(19)(C) is 
        amended--
                    (A) by striking ``and any regular interest 
                in a FASIT,'', and
                    (B) by striking ``or FASIT'' each place it 
                appears.
            (11) Subparagraph (A) of section 7701(i)(2) is 
        amended by striking ``or a FASIT''.
            (12) The table of parts for subchapter M of chapter 
        1 is amended by striking the item relating to part V.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall take 
        effect on January 1, 2005.
            (2) Exception for existing fasits.--Paragraph (1) 
        shall not apply to any FASIT in existence on the date 
        of the enactment of this Act to the extent that regular 
        interests issued by the FASIT before such date continue 
        to remain outstanding in accordance with the original 
        terms of issuance.

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

    (a) In General.--Section 362 (relating to basis to 
corporations) is amended by adding at the end the following new 
subsection:
    ``(e) Limitations on Built-In Losses.--
            ``(1) Limitation on importation of built-in 
        losses.--
                    ``(A) In general.--If in any transaction 
                described in subsection (a) or (b) there would 
                (but for this subsection) be an importation of 
                a net built-in loss, the basis of each property 
                described in subparagraph (B) which is acquired 
                in such transaction shall (notwithstanding 
                subsections (a) and (b)) be its fair market 
                value immediately after such transaction.
                    ``(B) Property described.--For purposes of 
                subparagraph (A), property is described in this 
                subparagraph if--
                            ``(i) gain or loss with respect to 
                        such property is not subject to tax 
                        under this subtitle in the hands of the 
                        transferor immediately before the 
                        transfer, and
                            ``(ii) gain or loss with respect to 
                        such property is subject to such tax in 
                        the hands of the transferee immediately 
                        after such transfer.
                In any case in which the transferor is a 
                partnership, the preceding sentence shall be 
                applied by treating each partner in such 
                partnership as holding such partner's 
                proportionate share of the property of such 
                partnership.
                    ``(C) Importation of net built-in loss.--
                For purposes of subparagraph (A), there is an 
                importation of a net built-in loss in a 
                transaction if the transferee's aggregate 
                adjusted bases of property described in 
                subparagraph (B) which is transferred in such 
                transaction would (but for this paragraph) 
                exceed the fair market value of such property 
                immediately after such transaction.
            ``(2) Limitation on transfer of built-in losses in 
        section 351 transactions.--
                    ``(A) In general.--If--
                            ``(i) property is transferred by a 
                        transferor in any transaction which is 
                        described in subsection (a) and which 
                        is not described in paragraph (1) of 
                        this subsection, and
                            ``(ii) the transferee's aggregate 
                        adjusted bases of such property so 
                        transferred would (but for this 
                        paragraph) exceed the fair market value 
                        of such property immediately after such 
                        transaction,
                then, notwithstanding subsection (a), the 
                transferee's aggregate adjusted bases of the 
                property so transferred shall not exceed the 
                fair market value of such property immediately 
                after such transaction.
                    ``(B) Allocation of basis reduction.--The 
                aggregate reduction in basis by reason of 
                subparagraph (A) shall be allocated among the 
                property so transferred in proportion to their 
                respective built-in losses immediately before 
                the transaction.
                    ``(C) Election to apply limitation to 
                transferor's stock basis.--
                            ``(i) In general.--If the 
                        transferor and transferee of a 
                        transaction described in subparagraph 
                        (A) both elect the application of this 
                        subparagraph--
                                    ``(I) subparagraph (A) 
                                shall not apply, and
                                    ``(II) the transferor's 
                                basis in the stock received for 
                                property to which subparagraph 
                                (A) does not apply by reason of 
                                the election shall not exceed 
                                its fair market value 
                                immediately after the transfer.
                            ``(ii) Election.--An election under 
                        clause (i) shall be included with the 
                        return of tax for the taxable year in 
                        which the transaction occurred, shall 
                        be in such form and manner as the 
                        Secretary may prescribe, and, once 
                        made, shall be irrevocable.''.
    (b) Comparable Treatment Where Liquidation.--Paragraph (1) 
of section 334(b) (relating to liquidation of subsidiary) is 
amended to read as follows:
            ``(1) In general.--If property is received by a 
        corporate distributee in a distribution in a complete 
        liquidation to which section 332 applies (or in a 
        transfer described in section 337(b)(1)), the basis of 
        such property in the hands of such distributee shall be 
        the same as it would be in the hands of the transferor; 
        except that the basis of such property in the hands of 
        such distributee shall be the fair market value of the 
        property at the time of the distribution--
                    ``(A) in any case in which gain or loss is 
                recognized by the liquidating corporation with 
                respect to such property, or
                    ``(B) in any case in which the liquidating 
                corporation is a foreign corporation, the 
                corporate distributee is a domestic 
                corporation, and the corporate distributee's 
                aggregate adjusted bases of property described 
                in section 362(e)(1)(B) which is distributed in 
                such liquidation would (but for this 
                subparagraph) exceed the fair market value of 
                such property immediately after such 
                liquidation.''.
    (c) Effective Dates.--
            (1) In general.--The amendment made by subsection 
        (a) shall apply to transactions after the date of the 
        enactment of this Act.
            (2) Liquidations.--The amendment made by subsection 
        (b) shall apply to liquidations after the date of the 
        enactment of this Act.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SEC. 844. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

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

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

    (a) In General.--Paragraph (2) of section 163(l) is amended 
by inserting ``or equity held by the issuer (or any related 
party) in any other person'' after ``or a related party''.
    (b) Capitalization Allowed With Respect to Equity of 
Persons Other Than Issuer and Related Parties.--Section 163(l) 
is amended by redesignating paragraphs (4) and (5) as 
paragraphs (5) and (6) and by inserting after paragraph (3) the 
following new paragraph:
            ``(4) Capitalization allowed with respect to equity 
        of persons other than issuer and related parties.--If 
        the disqualified debt instrument of a corporation is 
        payable in equity held by the issuer (or any related 
        party) in any other person (other than a related 
        party), the basis of such equity shall be increased by 
        the amount not allowed as a deduction by reason of 
        paragraph (1) with respect to the instrument.''.
    (c) Exception for Certain Instruments Issued by Dealers in 
Securities.--Section 163(l), as amended by subsection (b), is 
amended by redesignating paragraphs (5) and (6) as paragraphs 
(6) and (7) and by inserting after paragraph (4) the following 
new paragraph:
            ``(5) Exception for certain instruments issued by 
        dealers in securities.--For purposes of this 
        subsection, the term `disqualified debt instrument' 
        does not include indebtedness issued by a dealer in 
        securities (or a related party) which is payable in, or 
        by reference to, equity (other than equity of the 
        issuer or a related party) held by such dealer in its 
        capacity as a dealer in securities. For purposes of 
        this paragraph, the term `dealer in securities' has the 
        meaning given such term by section 475.''.
    (d) Conforming Amendment.--Paragraph (3) of section 163(l) 
is amended by striking ``or a related party'' in the material 
preceding subparagraph (A) and inserting ``or any other 
person''.
    (e) Effective Date.--The amendments made by this section 
shall apply to debt instruments issued after October 3, 2004.

                           PART III--LEASING

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

    (a) Clarification of Recovery Period for Tax-Exempt Use 
Property Subject to Lease.--Subparagraph (A) of section 
168(g)(3) (relating to special rules for determining class 
life) is amended by inserting ``(notwithstanding any other 
subparagraph of this paragraph)'' after ``shall''.
    (b) Limitation on Depreciation and Amortization Periods for 
Intangibles Leased to Tax-Exempt Entity.--
            (1) Computer software.--Paragraph (1) of section 
        167(f) is amended by adding at the end the following 
        new subparagraph:
                    ``(C) Tax-exempt use property subject to 
                lease.--In the case of computer software which 
                would be tax-exempt use property as defined in 
                subsection (h) of section 168 if such section 
                applied to computer software, the useful life 
                under subparagraph (A) shall not be less than 
                125 percent of the lease term (within the 
                meaning of section 168(i)(3)).''.
            (2) Certain interests or rights acquired 
        separately.--Paragraph (2) of section 167(f) is amended 
        by adding at the end the following new sentence: ``If 
        such property would be tax-exempt use property as 
        defined in subsection (h) of section 168 if such 
        section applied to such property, the useful life under 
        such regulations shall not be less than 125 percent of 
        the lease term (within the meaning of section 
        168(i)(3)).''.
            (3) Section 197 intangibles.--Section 197(f) 
        (relating to special rules) is amended by adding at the 
        end the following new paragraph:
            ``(10) Tax-exempt use property subject to lease.--
        In the case of any section 197 intangible which would 
        be tax-exempt use property as defined in subsection (h) 
        of section 168 if such section applied to such 
        intangible, the amortization period under this section 
        shall not be less than 125 percent of the lease term 
        (within the meaning of section 168(i)(3)).''.
    (c) Lease Term To Include Related Service Contracts.--
Subparagraph (A) of section 168(i)(3) (relating to lease term) 
is amended by striking ``and'' at the end of clause (i), by 
redesignating clause (ii) as clause (iii), and by inserting 
after clause (i) the following new clause:
                            ``(ii) the term of a lease shall 
                        include the term of any service 
                        contract or similar arrangement 
                        (whether or not treated as a lease 
                        under section 7701(e))--
                                    ``(I) which is part of the 
                                same transaction (or series of 
                                related transactions) which 
                                includes the lease, and
                                    ``(II) which is with 
                                respect to the property subject 
                                to the lease or substantially 
                                similar property, and''.
    (d) Expansion of Short-Term Lease Exemption for Qualified 
Technological Equipment.--Subparagraph (A) of section 168(h)(3) 
is amended by adding at the end the following new sentence: 
``Notwithstanding subsection (i)(3)(A)(i), in determining a 
lease term for purposes of the preceding sentence, there shall 
not be taken into account any option of the lessee to renew at 
the fair market value rent determined at the time of renewal; 
except that the aggregate period not taken into account by 
reason of this sentence shall not exceed 24 months.''.
    (e) Treatment of Certain Indian Tribal Governments As Tax-
Exempt Entities.--Section 168(h)(2)(A) is amended by striking 
``and'' at the end of clause (ii), by striking the period at 
the end of clause (iii) and inserting ``, and'', and by 
inserting at the end the following:
                            ``(iv) any Indian tribal government 
                        described in section 7701(a)(40).
                For purposes of applying this subsection, any 
                Indian tribal government referred to in clause 
                (iv) shall be treated in the same manner as a 
                State.''

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

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

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

    ``(a) Limitation on Losses.--Except as otherwise provided 
in this section, a tax-exempt use loss for any taxable year 
shall not be allowed.
    ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt 
use loss with respect to any tax-exempt use property which is 
disallowed under subsection (a) for any taxable year shall be 
treated as a deduction with respect to such property in the 
next taxable year.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Tax-exempt use loss.--The term `tax-exempt 
        use loss' means, with respect to any taxable year, the 
        amount (if any) by which--
                    ``(A) the sum of--
                            ``(i) the aggregate deductions 
                        (other than interest) directly 
                        allocable to a tax-exempt use property, 
                        plus
                            ``(ii) the aggregate deductions for 
                        interest properly allocable to such 
                        property, exceed
                    ``(B) the aggregate income from such 
                property.
            ``(2) Tax-exempt use property.--The term `tax-
        exempt use property' has the meaning given to such term 
        by section 168(h), except that such section shall be 
        applied--
                    ``(A) without regard to paragraphs (1)(C) 
                and (3) thereof, and
                    ``(B) as if property described in--
                            ``(i) section 167(f)(1)(B),
                            ``(ii) section 167(f)(2), and
                            ``(iii) section 197 intangible,
                were tangible property.
        Such term shall not include property which would (but 
        for this sentence) be tax-exempt use property solely by 
        reason of section 168(h)(6) if any credit is allowable 
        under section 42 or 47 with respect to such property.
    ``(d) Exception for Certain Leases.--This section shall not 
apply to any lease of property which meets the requirements of 
all of the following paragraphs:
            ``(1) Availability of funds.--
                    ``(A) In general.--A lease of property 
                meets the requirements of this paragraph if (at 
                any time during the lease term) not more than 
                an allowable amount of funds are--
                            ``(i) subject to any arrangement 
                        referred to in subparagraph (B), or
                            ``(ii) set aside or expected to be 
                        set aside,
                to or for the benefit of the lessor or any 
                lender, or to or for the benefit of the lessee 
                to satisfy the lessee's obligations or options 
                under the lease. For purposes of clause (ii), 
                funds shall be treated as set aside or expected 
                to be set aside only if a reasonable person 
                would conclude, based on the facts and 
                circumstances, that such funds are set aside or 
                expected to be set aside.
                    ``(B) Arrangements.--The arrangements 
                referred to in this subparagraph include a 
                defeasance arrangement, a loan by the lessee to 
                the lessor or any lender, a deposit 
                arrangement, a letter of credit collateralized 
                with cash or cash equivalents, a payment 
                undertaking agreement, prepaid rent (within the 
                meaning of the regulations under section 467), 
                a sinking fund arrangement, a guaranteed 
                investment contract, financial guaranty 
                insurance, and any similar arrangement (whether 
                or not such arrangement provides credit 
                support).
                    ``(C) Allowable amount.--
                            ``(i) In general.--Except as 
                        otherwise provided in this 
                        subparagraph, the term `allowable 
                        amount' means an amount equal to 20 
                        percent of the lessor's adjusted basis 
                        in the property at the time the lease 
                        is entered into.
                            ``(ii) Higher amount permitted in 
                        certain cases.--To the extent provided 
                        in regulations, a higher percentage 
                        shall be permitted under clause (i) 
                        where necessary because of the credit-
                        worthiness of the lessee. In no event 
                        may such regulations permit a 
                        percentage of more than 50 percent.
                            ``(iii) Option to purchase.--If 
                        under the lease the lessee has the 
                        option to purchase the property for a 
                        fixed price or for other than the fair 
                        market value of the property 
                        (determined at the time of exercise), 
                        the allowable amount at the time such 
                        option may be exercised may not exceed 
                        50 percent of the price at which such 
                        option may be exercised.
                            ``(iv) No allowable amount for 
                        certain arrangements.--The allowable 
                        amount shall be zero with respect to 
                        any arrangement which involves--
                                    ``(I) a loan from the 
                                lessee to the lessor or a 
                                lender,
                                    ``(II) any deposit 
                                received, letter of credit 
                                issued, or payment undertaking 
                                agreement entered into by a 
                                lender otherwise involved in 
                                the transaction, or
                                    ``(III) in the case of a 
                                transaction which involves a 
                                lender, any credit support made 
                                available to the lessor in 
                                which any such lender does not 
                                have a claim that is senior to 
                                the lessor.

                        For purposes of subclause (I), the term 
                        `loan' shall not include any amount 
                        treated as a loan under section 467 
                        with respect to a section 467 rental 
                        agreement.
            ``(2) Lessor must make substantial equity 
        investment.--
                    ``(A) In general.--A lease of property 
                meets the requirements of this paragraph if--
                            ``(i) the lessor--
                                    ``(I) has at the time the 
                                lease is entered into an 
                                unconditional at-risk equity 
                                investment (as determined by 
                                the Secretary) in the property 
                                of at least 20 percent of the 
                                lessor's adjusted basis in the 
                                property as of that time, and
                                    ``(II) maintains such 
                                investment throughout the term 
                                of the lease, and
                            ``(ii) the fair market value of the 
                        property at the end of the lease term 
                        is reasonably expected to be equal to 
                        at least 20 percent of such basis.
                    ``(B) Risk of loss.--For purposes of clause 
                (ii), the fair market value at the end of the 
                lease term shall be reduced to the extent that 
                a person other than the lessor bears a risk of 
                loss in the value of the property.
                    ``(C) Paragraph not to apply to short-term 
                leases.--This paragraph shall not apply to any 
                lease with a lease term of 5 years or less.
            ``(3) Lessee may not bear more than minimal risk of 
        loss.--
                    ``(A) In general.--A lease of property 
                meets the requirements of this paragraph if 
                there is no arrangement under which the lessee 
                bears--
                            ``(i) any portion of the loss that 
                        would occur if the fair market value of 
                        the leased property were 25 percent 
                        less than its reasonably expected fair 
                        market value at the time the lease is 
                        terminated, or
                            ``(ii) more than 50 percent of the 
                        loss that would occur if the fair 
                        market value of the leased property at 
                        the time the lease is terminated were 
                        zero.
                    ``(B) Exception.--The Secretary may by 
                regulations provide that the requirements of 
                this paragraph are not met where the lessee 
                bears more than a minimal risk of loss.
                    ``(C) Paragraph not to apply to short-term 
                leases.--This paragraph shall not apply to any 
                lease with a lease term of 5 years or less.
            ``(4) Property with more than 7-year class life.--
        In the case of a lease--
                    ``(A) of property with a class life (as 
                defined in section 168(i)(1)) of more than 7 
                years, other than fixed-wing aircraft and 
                vessels, and
                    ``(B) under which the lessee has the option 
                to purchase the property,
        the lease meets the requirements of this paragraph only 
        if the purchase price under the option equals the fair 
        market value of the property (determined at the time of 
        exercise).
    ``(e) Special Rules.--
            ``(1) Treatment of former tax-exempt use 
        property.--
                    ``(A) In general.--In the case of any 
                former tax-exempt use property--
                            ``(i) any deduction allowable under 
                        subsection (b) with respect to such 
                        property for any taxable year shall be 
                        allowed only to the extent of any net 
                        income (without regard to such 
                        deduction) from such property for such 
                        taxable year, and
                            ``(ii) any portion of such unused 
                        deduction remaining after application 
                        of clause (i) shall be treated as a 
                        deduction allowable under subsection 
                        (b) with respect to such property in 
                        the next taxable year.
                    ``(B) Former tax-exempt use property.--For 
                purposes of this subsection, the term `former 
                tax-exempt use property' means any property 
                which--
                            ``(i) is not tax-exempt use 
                        property for the taxable year, but
                            ``(ii) was tax-exempt use property 
                        for any prior taxable year.
            ``(2) Disposition of entire interest in property.--
        If during the taxable year a taxpayer disposes of the 
        taxpayer's entire interest in tax-exempt use property 
        (or former tax-exempt use property), rules similar to 
        the rules of section 469(g) shall apply for purposes of 
        this section.
            ``(3) Coordination with section 469.--This section 
        shall be applied before the application of section 469.
            ``(4) Coordination with sections 1031 and 1033.--
                    ``(A) In general.--Sections 1031(a) and 
                1033(a) shall not apply if--
                            ``(i) the exchanged or converted 
                        property is tax-exempt use property 
                        subject to a lease which was entered 
                        into before March 13, 2004, and which 
                        would not have met the requirements of 
                        subsection (d) had such requirements 
                        been in effect when the lease was 
                        entered into, or
                            ``(ii) the replacement property is 
                        tax-exempt use property subject to a 
                        lease which does not meet the 
                        requirements of subsection (d).
                    ``(B) Adjusted basis.--In the case of 
                property acquired by the lessor in a 
                transaction to which section 1031 or 1033 
                applies, the adjusted basis of such property 
                for purposes of this section shall be equal to 
                the lesser of--
                            ``(i) the fair market value of the 
                        property as of the beginning of the 
                        lease term, or
                            ``(ii) the amount which would be 
                        the lessor's adjusted basis if such 
                        sections did not apply to such 
                        transaction.
    ``(f) Other Definitions.--For purposes of this section--
            ``(1) Related parties.--The terms `lessor', 
        `lessee', and `lender' each include any related party 
        (within the meaning of section 197(f)(9)(C)(i)).
            ``(2) Lease term.--The term `lease term' has the 
        meaning given to such term by section 168(i)(3).
            ``(3) Lender.--The term `lender' means, with 
        respect to any lease, a person that makes a loan to the 
        lessor which is secured (or economically similar to 
        being secured) by the lease or the leased property.
            ``(4) Loan.--The term `loan' includes any similar 
        arrangement.
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations which--
            ``(1) allow in appropriate cases the aggregation of 
        property subject to the same lease, and
            ``(2) provide for the determination of the 
        allocation of interest expense for purposes of this 
        section.''.
    (b) Conforming Amendment.--The table of sections for 
subpart C of part II of subchapter E of chapter 1 is amended by 
adding at the end the following new item:

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

SEC. 849. EFFECTIVE DATE.

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

               Subtitle C--Reduction of Fuel Tax Evasion

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

    (a) Exemption From Tax on Heavy Trucks and Trailers Sold at 
Retail.--
            (1) In general.--Section 4053 (relating to 
        exemptions) is amended by adding at the end the 
        following new paragraph:
            ``(8) Mobile machinery.--Any vehicle which consists 
        of a chassis--
                    ``(A) to which there has been permanently 
                mounted (by welding, bolting, riveting, or 
                other means) machinery or equipment to perform 
                a construction, manufacturing, processing, 
                farming, mining, drilling, timbering, or 
                similar operation if the operation of the 
                machinery or equipment is unrelated to 
                transportation on or off the public highways,
                    ``(B) which has been specially designed to 
                serve only as a mobile carriage and mount (and 
                a power source, where applicable) for the 
                particular machinery or equipment involved, 
                whether or not such machinery or equipment is 
                in operation, and
                    ``(C) which, by reason of such special 
                design, could not, without substantial 
                structural modification, be used as a component 
                of a vehicle designed to perform a function of 
                transporting any load other than that 
                particular machinery or equipment or similar 
                machinery or equipment requiring such a 
                specially designed chassis.''.
            (2) Effective date.--The amendment made by this 
        subsection shall take effect on the day after the date 
        of the enactment of this Act.
    (b) Exemption From Tax on Use of Certain Vehicles.--
            (1) In general.--Section 4483 (relating to 
        exemptions) is amended by redesignating subsection (g) 
        as subsection (h) and by inserting after subsection (f) 
        the following new subsection:
    ``(g) Exemption for Mobile Machinery.--No tax shall be 
imposed by section 4481 on the use of any vehicle described in 
section 4053(8).''.
            (2) Effective date.--The amendments made by this 
        subsection shall take effect on the day after the date 
        of the enactment of this Act.
    (c) Exemption From Tax on Tires.--
            (1) In General.--Section 4072(b)(2) is amended by 
        adding at the end the following flush sentence: ``Such 
        term shall not include tires of a type used exclusively 
        on vehicles described in section 4053(8).''.
            (2) Effective date.--The amendment made by this 
        subsection shall take effect on the day after the date 
        of the enactment of this Act.
    (d) Refund of Fuel Taxes.--
            (1) In general.--Section 6421(e)(2) (defining off-
        highway business use) is amended by adding at the end 
        the following new subparagraph:
                    ``(C) Uses in mobile machinery.--
                            ``(i) In general.--The term `off-
                        highway business use' shall include any 
                        use in a vehicle which meets the 
                        requirements described in clause (ii).
                            ``(ii) Requirements for mobile 
                        machinery.--The requirements described 
                        in this clause are--
                                    ``(I) the design-based 
                                test, and
                                    ``(II) the use-based test.
                            ``(iii) Design-based test.--For 
                        purposes of clause (ii)(I), the design-
                        based test is met if the vehicle 
                        consists of a chassis--
                                    ``(I) to which there has 
                                been permanently mounted (by 
                                welding, bolting, riveting, or 
                                other means) machinery or 
                                equipment to perform a 
                                construction, manufacturing, 
                                processing, farming, mining, 
                                drilling, timbering, or similar 
                                operation if the operation of 
                                the machinery or equipment is 
                                unrelated to transportation on 
                                or off the public highways,
                                    ``(II) which has been 
                                specially designed to serve 
                                only as a mobile carriage and 
                                mount (and a power source, 
                                where applicable) for the 
                                particular machinery or 
                                equipment involved, whether or 
                                not such machinery or equipment 
                                is in operation, and
                                    ``(III) which, by reason of 
                                such special design, could not, 
                                without substantial structural 
                                modification, be used as a 
                                component of a vehicle designed 
                                to perform a function of 
                                transporting any load other 
                                than that particular machinery 
                                or equipment or similar 
                                machinery or equipment 
                                requiring such a specially 
                                designed chassis.
                            ``(iv) Use-based test.--For 
                        purposes of clause (ii)(II), the use-
                        based test is met if the use of the 
                        vehicle on public highways was less 
                        than 7,500 miles during the taxpayer's 
                        taxable year. This clause shall be 
                        applied without regard to use of the 
                        vehicle by any organization which is 
                        described in section 501(c) and exempt 
                        from tax under section 501(a).''.
            (2) No tax-free sales.--Subsection (b) of section 
        4082 is amended by inserting before the period at the 
        end ``and such term shall not include any use described 
        in section 6421(e)(2)(C)''.
            (3) Annual refund of tax paid.--Section 6427(i)(2) 
        (relating to exceptions) is amended by adding at the 
        end the following new subparagraph:
                    ``(C) Nonapplication of paragraph.--This 
                paragraph shall not apply to any fuel used 
                solely in any off-highway business use 
                described in section 6421(e)(2)(C).''.
            (4) Effective date.--The amendments made by this 
        subsection shall apply to taxable years beginning after 
        the date of the enactment of this Act.

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

    (a) In General.--Section 7701(a) (relating to definitions) 
is amended by adding at the end the following new paragraph:
            ``(48) Off-highway vehicles.--
                    ``(A) Off-highway transportation 
                vehicles.--
                            ``(i) In general.--A vehicle shall 
                        not be treated as a highway vehicle if 
                        such vehicle is specially designed for 
                        the primary function of transporting a 
                        particular type of load other than over 
                        the public highway and because of this 
                        special design such vehicle's 
                        capability to transport a load over the 
                        public highway is substantially limited 
                        or impaired.
                            ``(ii) Determination of vehicle's 
                        design.--For purposes of clause (i), a 
                        vehicle's design is determined solely 
                        on the basis of its physical 
                        characteristics.
                            ``(iii) Determination of 
                        substantial limitation or impairment.--
                        For purposes of clause (i), in 
                        determining whether substantial 
                        limitation or impairment exists, 
                        account may be taken of factors such as 
                        the size of the vehicle, whether such 
                        vehicle is subject to the licensing, 
                        safety, and other requirements 
                        applicable to highway vehicles, and 
                        whether such vehicle can transport a 
                        load at a sustained speed of at least 
                        25 miles per hour. It is immaterial 
                        that a vehicle can transport a greater 
                        load off the public highway than such 
                        vehicle is permitted to transport over 
                        the public highway.
                    ``(B) Nontransportation trailers and 
                semitrailers.--A trailer or semitrailer shall 
                not be treated as a highway vehicle if it is 
                specially designed to function only as an 
                enclosed stationary shelter for the carrying on 
                of an off-highway function at an off-highway 
                site.''.
    (c) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendment made by this section shall take 
        effect on the date of the enactment of this Act.
            (2) Fuel taxes.--With respect to taxes imposed 
        under subchapter B of chapter 31 and part III of 
        subchapter A of chapter 32, the amendment made by this 
        section shall apply to taxable periods beginning after 
        the date of the enactment of this Act.

SEC. 853. TAXATION OF AVIATION-GRADE KEROSENE.

    (a) Rate of Tax.--
            (1) In general.--Subparagraph (A) of section 
        4081(a)(2) is amended by striking ``and'' at the end of 
        clause (ii), by striking the period at the end of 
        clause (iii) and inserting ``, and'', and by adding at 
        the end the following new clause:
                            ``(iv) in the case of aviation-
                        grade kerosene, 21.8 cents per 
                        gallon.''.
            (2) Commercial aviation.--Paragraph (2) of section 
        4081(a) is amended by adding at the end the following 
        new subparagraph:
                    ``(C) Taxes imposed on fuel used in 
                commercial aviation.--In the case of aviation-
                grade kerosene which is removed from any 
                refinery or terminal directly into the fuel 
                tank of an aircraft for use in commercial 
                aviation, the rate of tax under subparagraph 
                (A)(iv) shall be 4.3 cents per gallon.''.
            (3) Certain refueler trucks, tankers, and tank 
        wagons treated as terminal.--
                    (A) In general.--Subsection (a) of section 
                4081 is amended by adding at the end the 
                following new paragraph:
            ``(3) Certain refueler trucks, tankers, and tank 
        wagons treated as terminal.--
                    ``(A) In general.--For purposes of 
                paragraph (2)(C), a refueler truck, tanker, or 
                tank wagon shall be treated as part of a 
                terminal if--
                            ``(i) such terminal is located 
                        within a secured area of an airport,
                            ``(ii) any aviation-grade kerosene 
                        which is loaded in such truck, tanker, 
                        or wagon at such terminal is for 
                        delivery only into aircraft at the 
                        airport in which such terminal is 
                        located,
                            ``(iii) such truck, tanker, or 
                        wagon meets the requirements of 
                        subparagraph (B) with respect to such 
                        terminal, and
                            ``(iv) except in the case of 
                        exigent circumstances identified by the 
                        Secretary in regulations, no vehicle 
                        registered for highway use is loaded 
                        with aviation-grade kerosene at such 
                        terminal.
                    ``(B) Requirements.--A refueler truck, 
                tanker, or tank wagon meets the requirements of 
                this subparagraph with respect to a terminal if 
                such truck, tanker, or wagon--
                            ``(i) has storage tanks, hose, and 
                        coupling equipment designed and used 
                        for the purposes of fueling aircraft,
                            ``(ii) is not registered for 
                        highway use, and
                            ``(iii) is operated by--
                                    ``(I) the terminal operator 
                                of such terminal, or
                                    ``(II) a person that makes 
                                a daily accounting to such 
                                terminal operator of each 
                                delivery of fuel from such 
                                truck, tanker, or wagon.
                    ``(C) Reporting.--The Secretary shall 
                require under section 4101(d) reporting by such 
                terminal operator of--
                            ``(i) any information obtained 
                        under subparagraph (B)(iii)(II), and
                            ``(ii) any similar information 
                        maintained by such terminal operator 
                        with respect to deliveries of fuel made 
                        by trucks, tankers, or wagons operated 
                        by such terminal operator.''.
                    (B) List of airports with secured 
                terminals.--Not later than December 15, 2004, 
                the Secretary of the Treasury shall publish and 
                maintain a list of airports which include a 
                secured area in which a terminal is located 
                (within the meaning of section 4081(a)(3)(A)(i) 
                of the Internal Revenue Code of 1986, as added 
                by this paragraph).
            (4) Liability for tax on aviation-grade kerosene 
        used in commercial aviation.--Subsection (a) of section 
        4081 is amended by adding at the end the following new 
        paragraph:
            ``(4) Liability for tax on aviation-grade kerosene 
        used in commercial aviation.--For purposes of paragraph 
        (2)(C), the person who uses the fuel for commercial 
        aviation shall pay the tax imposed under such 
        paragraph. For purposes of the preceding sentence, fuel 
        shall be treated as used when such fuel is removed into 
        the fuel tank.''.
            (5) Nontaxable uses.--
                    (A) In general.--Section 4082 is amended by 
                redesignating subsections (e) and (f) as 
                subsections (f) and (g), respectively, and by 
                inserting after subsection (d) the following 
                new subsection:
    ``(e) Aviation-Grade Kerosene.--In the case of aviation-
grade kerosene which is exempt from the tax imposed by section 
4041(c) (other than by reason of a prior imposition of tax) and 
which is removed from any refinery or terminal directly into 
the fuel tank of an aircraft, the rate of tax under section 
4081(a)(2)(A)(iv) shall be zero.''.
                    (B) Conforming amendments.--
                            (i) Subsection (b) of section 4082 
                        is amended by adding at the end the 
                        following new flush sentence:
``The term `nontaxable use' does not include the use of 
aviation-grade kerosene in an aircraft.''.
                            (ii) Section 4082(d) is amended by 
                        striking paragraph (1) and by 
                        redesignating paragraphs (2) and (3) as 
                        paragraphs (1) and (2), respectively.
            (6) Nonaircraft use of aviation-grade kerosene.--
                    (A) In general.--Subparagraph (B) of 
                section 4041(a)(1) is amended by adding at the 
                end the following new sentence: ``This 
                subparagraph shall not apply to aviation-grade 
                kerosene.''.
                    (B) Conforming amendment.--The heading for 
                paragraph (1) of section 4041(a) is amended by 
                inserting ``and kerosene'' after ``diesel 
                fuel''.
    (b) Commercial Aviation.--Section 4083 is amended by 
redesignating subsections (b) and (c) as subsections (c) and 
(d), respectively, and by inserting after subsection (a) the 
following new subsection:
    ``(b) Commercial Aviation.--For purposes of this subpart, 
the term `commercial aviation' means any use of an aircraft in 
a business of transporting persons or property for compensation 
or hire by air, unless properly allocable to any transportation 
exempt from the taxes imposed by sections 4261 and 4271 by 
reason of section 4281 or 4282 or by reason of section 
4261(h).''.
    (c) Refunds.--
            (1) In general.--Paragraph (4) of section 6427(l) 
        is amended to read as follows:
            ``(4) Refunds for aviation-grade kerosene.--
                    ``(A) No refund of certain taxes on fuel 
                used in commercial aviation.--In the case of 
                aviation-grade kerosene used in commercial 
                aviation (as defined in section 4083(b)) (other 
                than supplies for vessels or aircraft within 
                the meaning of section 4221(d)(3)), paragraph 
                (1) shall not apply to so much of the tax 
                imposed by section 4081 as is attributable to--
                            ``(i) the Leaking Underground 
                        Storage Tank Trust Fund financing rate 
                        imposed by such section, and
                            ``(ii) so much of the rate of tax 
                        specified in section 4081(a)(2)(A)(iv) 
                        as does not exceed 4.3 cents per 
                        gallon.
                    ``(B) Payment to ultimate, registered 
                vendor.--With respect to aviation-grade 
                kerosene, if the ultimate purchaser of such 
                kerosene waives (at such time and in such form 
                and manner as the Secretary shall prescribe) 
                the right to payment under paragraph (1) and 
                assigns such right to the ultimate vendor, then 
                the Secretary shall pay the amount which would 
                be paid under paragraph (1) to such ultimate 
                vendor, but only if such ultimate vendor--
                            ``(i) is registered under section 
                        4101, and
                            ``(ii) meets the requirements of 
                        subparagraph (A), (B), or (D) of 
                        section 6416(a)(1).''.
            (2) Time for filing claims.--Subparagraph (A) of 
        section 6427(i)(4) is amended--
                    (A) by striking ``subsection (l)(5)'' both 
                places it appears and inserting ``paragraph 
                (4)(B) or (5) of subsection (l)'', and
                    (B) by striking ``the preceding sentence'' 
                and inserting ``subsection (l)(5)''.
            (3) Conforming amendment.--Subparagraph (B) of 
        section 6427(l)(2) is amended to read as follows:
                    ``(B) in the case of aviation-grade 
                kerosene--
                            ``(i) any use which is exempt from 
                        the tax imposed by section 4041(c) 
                        other than by reason of a prior 
                        imposition of tax, or
                            ``(ii) any use in commercial 
                        aviation (within the meaning of section 
                        4083(b)).''.
    (d) Repeal of Prior Taxation of Aviation Fuel.--
            (1) In general.--Part III of subchapter A of 
        chapter 32 is amended by striking subpart B and by 
        redesignating subpart C as subpart B.
            (2) Conforming amendments.--
                    (A) Section 4041(c) is amended to read as 
                follows:
    ``(c) Aviation-Grade Kerosene.--
            ``(1) In general.--There is hereby imposed a tax 
        upon aviation-grade kerosene--
                    ``(A) sold by any person to an owner, 
                lessee, or other operator of an aircraft for 
                use in such aircraft, or
                    ``(B) used by any person in an aircraft 
                unless there was a taxable sale of such fuel 
                under subparagraph (A).
            ``(2) Exemption for previously taxed fuel.--No tax 
        shall be imposed by this subsection on the sale or use 
        of any aviation-grade kerosene if tax was imposed on 
        such liquid under section 4081 and the tax thereon was 
        not credited or refunded.
            ``(3) Rate of tax.--The rate of tax imposed by this 
        subsection shall be the rate of tax applicable under 
        section 4081(a)(2)(A)(iv) which is in effect at the 
        time of such sale or use.''.
                    (B) Section 4041(d)(2) is amended by 
                striking ``section 4091'' and inserting 
                ``section 4081''.
                    (C) Section 4041 is amended by striking 
                subsection (e).
                    (D) Section 4041 is amended by striking 
                subsection (i).
                    (E) Section 4041(m)(1) is amended to read 
                as follows:
            ``(1) In general.--In the case of the sale or use 
        of any partially exempt methanol or ethanol fuel the 
        rate of the tax imposed by subsection (a)(2) shall be--
                    ``(A) after September 30, 1997, and before 
                October 1, 2005--
                            ``(i) in the case of fuel none of 
                        the alcohol in which consists of 
                        ethanol, 9.15 cents per gallon, and
                            ``(ii) in any other case, 11.3 
                        cents per gallon, and
                    ``(B) after September 30, 2005--
                            ``(i) in the case of fuel none of 
                        the alcohol in which consists of 
                        ethanol, 2.15 cents per gallon, and
                            ``(ii) in any other case, 4.3 cents 
                        per gallon.''.
                    (F) Sections 4101(a), 4103, 4221(a), and 
                6206 are each amended by striking ``, 4081, or 
                4091'' and inserting ``or 4081''.
                    (G) Section 6416(b)(2) is amended by 
                striking ``4091 or''.
                    (H) Section 6416(b)(3) is amended by 
                striking ``or 4091'' each place it appears.
                    (I) Section 6416(d) is amended by striking 
                ``or to the tax imposed by section 4091 in the 
                case of refunds described in section 4091(d)''.
                    (J) Section 6427(j)(1) is amended by 
                striking ``, 4081, and 4091'' and inserting 
                ``and 4081''.
                    (K)(i) Section 6427(l)(1) is amended to 
                read as follows:
            ``(1) In general.--Except as otherwise provided in 
        this subsection and in subsection (k), if any diesel 
        fuel or kerosene on which tax has been imposed by 
        section 4041 or 4081 is used by any person in a 
        nontaxable use, the Secretary shall pay (without 
        interest) to the ultimate purchaser of such fuel an 
        amount equal to the aggregate amount of tax imposed on 
        such fuel under section 4041 or 4081, as the case may 
        be, reduced by any payment made to the ultimate vendor 
        under paragraph (4)(B).''.
                    (ii) Paragraph (5)(B) of section 6427(l) is 
                amended by striking ``Paragraph (1)(A) shall 
                not apply to kerosene'' and inserting 
                ``Paragraph (1) shall not apply to kerosene 
                (other than aviation-grade kerosene)''.
                    (L) Subparagraph (B) of section 6724(d)(1), 
                as amended by section 805, is amended by 
                striking clause (xvi) and by redesignating the 
                succeeding clauses accordingly.
                    (M) Paragraph (2) of section 6724(d), as 
                amended by section 805, is amended by striking 
                subparagraph (X) and by redesignating the 
                succeeding subparagraphs accordingly.
                    (N) Paragraph (1) of section 9502(b) is 
                amended by adding ``and'' at the end of 
                subparagraph (B) and by striking subparagraphs 
                (C) and (D) and inserting the following new 
                subparagraph:
                    ``(C) section 4081 with respect to aviation 
                gasoline and aviation-grade kerosene, and''.
                    (O) The last sentence of section 9502(b) is 
                amended to read as follows:
``There shall not be taken into account under paragraph (1) so 
much of the taxes imposed by section 4081 as are determined at 
the rate specified in section 4081(a)(2)(B).''.
                    (P) Subsection (b) of section 9508 is 
                amended by striking paragraph (3) and by 
                redesignating paragraphs (4) and (5) as 
                paragraphs (3) and (4), respectively.
                    (Q) Section 9508(c)(2)(A) is amended by 
                striking ``sections 4081 and 4091'' and 
                inserting ``section 4081''.
                    (R) The table of subparts for part III of 
                subchapter A of chapter 32 is amended to read 
                as follows:

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

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

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

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

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

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

SEC. 854. DYE INJECTION EQUIPMENT.

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

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

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

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

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

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

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

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

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

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

    (a) In General.--Paragraph (3) of section 4082(b) (relating 
to nontaxable use) is amended to read as follows:
            ``(3) any use described in section 
        4041(a)(1)(C)(iii)(II).''.
    (b) Ultimate Vendor Refund.--Subsection (b) of section 6427 
is amended by adding at the end the following new paragraph:
            ``(4) Refunds for use of diesel fuel in certain 
        intercity buses.--With respect to any fuel to which 
        paragraph (2)(A) applies, if the ultimate purchaser of 
        such fuel waives (at such time and in such form and 
        manner as the Secretary shall prescribe) the right to 
        payment under paragraph (1) and assigns such right to 
        the ultimate vendor, then the Secretary shall pay the 
        amount which would be paid under paragraph (1) to such 
        ultimate vendor, but only if such ultimate vendor--
                    ``(A) is registered under section 4101, and
                    ``(B) meets the requirements of 
                subparagraph (A), (B), or (D) of section 
                6416(a)(1).''.
    (c) Payment of Refunds.--Subparagraph (A) of section 
6427(i)(4), as amended by this Act, is amended by inserting 
``subsections (b)(4) and'' after ``filed under''.
    (d) Effective Date.--The amendments made by this section 
shall apply to fuel sold after December 31, 2004.

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

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

SEC. 859. ASSESSABLE PENALTY FOR REFUSAL OF ENTRY.

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

``SEC. 6717. REFUSAL OF ENTRY.

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

        ``Sec. 6717. Refusal of entry.''.

    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 2005.

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

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

SEC. 861. DISPLAY OF REGISTRATION.

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

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

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

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

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

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

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

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

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

``SEC. 6719. FAILURE TO REGISTER.

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

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

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

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

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

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

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

SEC. 864. ELECTRONIC FILING OF REQUIRED INFORMATION REPORTS.

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

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

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

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

SEC. 866. TWO-PARTY EXCHANGES.

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

``SEC. 4105. TWO-PARTY EXCHANGES.

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

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

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

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

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

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

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

SEC. 869. SIMPLIFICATION OF TAX ON TIRES.

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

``SEC. 4073. EXEMPTIONS.

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

        ``Sec. 4073. Exemptions.''.

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

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

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

SEC. 871. STUDY REGARDING FUEL TAX COMPLIANCE.

    (a) In General.--Not later than January 31, 2005, the 
Secretary of the Treasury shall submit to the Committee on 
Finance of the Senate and the Committee on Ways and Means of 
the House of Representatives a report regarding compliance with 
the tax imposed under subchapter B of chapter 31 and part III 
of subchapter A of chapter 32 of the Internal Revenue Code of 
1986. Such report shall include the information, analysis, and 
recommendations specified in subsections (b), (c), and (d).
    (b) Taxable Fuel Blendstocks.--The Secretary shall identify 
chemical products to be added to the list of blendstocks from 
lab analysis of fuel samples collected by the Internal Revenue 
Service which have been blended with taxable fuel but are not 
treated as blendstocks. The Secretary shall include statistics 
regarding the frequency in which a chemical product has been 
collected, and whether the sample contained an above normal 
concentration of the chemical product.
    (c) Waste Products Added to Taxable Fuels.--The report 
shall include a discussion of Internal Revenue Service findings 
regarding the addition of waste products to taxable fuel and 
any recommendations to address the taxation of such products.
    (d) Erroneous Claims of Fuel Tax Exemptions.--The report 
shall include a discussion of Internal Revenue Service findings 
regarding sales of taxable fuel to entities claiming exempt 
status as a State or local government and the frequency of 
erroneous certifications of tax exempt status. The Secretary, 
in consultation with representatives of State and local 
governments, shall provide recommendations to address such 
erroneous claims, including recommendations on the feasibility 
of a State maintained list of exempt governmental entities 
within the State.

                  Subtitle D--Other Revenue Provisions

SEC. 881. QUALIFIED TAX COLLECTION CONTRACTS.

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

``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

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

          ``(1) For damages for certain unauthorized collection actions 
        by persons performing services under a qualified tax collection 
        contract, see section 7433A.
          ``(2) For application of Taxpayer Assistance Orders to persons 
        performing services under a qualified tax collection contract, 
        see section 7811(g).''.

            (2) Conforming amendments.--
                    (A) Section 7809(a) is amended by inserting 
                ``6306,'' before ``7651''.
                    (B) The table of sections for subchapter A 
                of chapter 64 is amended by adding at the end 
                the following new item:

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

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

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

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

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

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

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

    (a) In General.--Subparagraph (B) of section 170(e)(1) is 
amended by striking ``or'' at the end of clause (i), by adding 
``or'' at the end of clause (ii), and by inserting after clause 
(ii) the following new clause:
                            ``(iii) of any patent, copyright 
                        (other than a copyright described in 
                        section 1221(a)(3) or 1231(b)(1)(C)), 
                        trademark, trade name, trade secret, 
                        know-how, software (other than software 
                        described in section 197(e)(3)(A)(i)), 
                        or similar property, or applications or 
                        registrations of such property,''.
    (b) Certain Donee Income From Intellectual Property Treated 
as an Additional Charitable Contribution.--Section 170 is 
amended by redesignating subsection (m) as subsection (n) and 
by inserting after subsection (l) the following new subsection:
    ``(m) Certain Donee Income From Intellectual Property 
Treated as an Additional Charitable Contribution.--
            ``(1) Treatment as additional contribution.--In the 
        case of a taxpayer who makes a qualified intellectual 
        property contribution, the deduction allowed under 
        subsection (a) for each taxable year of the taxpayer 
        ending on or after the date of such contribution shall 
        be increased (subject to the limitations under 
        subsection (b)) by the applicable percentage of 
        qualified donee income with respect to such 
        contribution which is properly allocable to such year 
        under this subsection.
            ``(2) Reduction in additional deductions to extent 
        of initial deduction.--With respect to any qualified 
        intellectual property contribution, the deduction 
        allowed under subsection (a) shall be increased under 
        paragraph (1) only to the extent that the aggregate 
        amount of such increases with respect to such 
        contribution exceed the amount allowed as a deduction 
        under subsection (a) with respect to such contribution 
        determined without regard to this subsection.
            ``(3) Qualified donee income.--For purposes of this 
        subsection, the term `qualified donee income' means any 
        net income received by or accrued to the donee which is 
        properly allocable to the qualified intellectual 
        property.
            ``(4) Allocation of qualified donee income to 
        taxable years of donor.--For purposes of this 
        subsection, qualified donee income shall be treated as 
        properly allocable to a taxable year of the donor if 
        such income is received by or accrued to the donee for 
        the taxable year of the donee which ends within or with 
        such taxable year of the donor.
            ``(5) 10-year limitation.--Income shall not be 
        treated as properly allocable to qualified intellectual 
        property for purposes of this subsection if such income 
        is received by or accrued to the donee after the 10-
        year period beginning on the date of the contribution 
        of such property.
            ``(6) Benefit limited to life of intellectual 
        property.--Income shall not be treated as properly 
        allocable to qualified intellectual property for 
        purposes of this subsection if such income is received 
        by or accrued to the donee after the expiration of the 
        legal life of such property.
            ``(7) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means the 
        percentage determined under the following table which 
        corresponds to a taxable year of the donor ending on or 
        after the date of the qualified intellectual property 
        contribution:

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

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

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

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

        ``Sec. 6050L. Returns relating to certain donated property.''.

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

SEC. 883. INCREASED REPORTING FOR NONCASH CHARITABLE CONTRIBUTIONS.

    (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules) 
is amended by adding after paragraph (10) the following new 
paragraph:
            ``(11) Qualified appraisal and other documentation 
        for certain contributions.--
                    ``(A) In general.--
                            ``(i) Denial of deduction.--In the 
                        case of an individual, partnership, or 
                        corporation, no deduction shall be 
                        allowed under subsection (a) for any 
                        contribution of property for which a 
                        deduction of more than $500 is claimed 
                        unless such person meets the 
                        requirements of subparagraphs (B), (C), 
                        and (D), as the case may be, with 
                        respect to such contribution.
                            ``(ii) Exceptions.--
                                    ``(I) Readily valued 
                                property.--Subparagraphs (C) 
                                and (D) shall not apply to 
                                cash, property described in 
                                section 1221(a)(1), publicly 
                                traded securities (as defined 
                                in section 6050L(a)(2)(B)), and 
                                any qualified vehicle described 
                                in paragraph (12)(A)(ii) for 
                                which an acknowledgement under 
                                paragraph (12)(B)(iii) is 
                                provided.
                                    ``(II) Reasonable cause.--
                                Clause (i) shall not apply if 
                                it is shown that the failure to 
                                meet such requirements is due 
                                to reasonable cause and not to 
                                willful neglect.
                    ``(B) Property description for 
                contributions of more than $500.--In the case 
                of contributions of property for which a 
                deduction of more than $500 is claimed, the 
                requirements of this subparagraph are met if 
                the individual, partnership or corporation 
                includes with the return for the taxable year 
                in which the contribution is made a description 
                of such property and such other information as 
                the Secretary may require. The requirements of 
                this subparagraph shall not apply to a C 
                corporation which is not a personal service 
                corporation or a closely held C corporation.
                    ``(C) Qualified appraisal for contributions 
                of more than $5,000.--In the case of 
                contributions of property for which a deduction 
                of more than $5,000 is claimed, the 
                requirements of this subparagraph are met if 
                the individual, partnership, or corporation 
                obtains a qualified appraisal of such property 
                and attaches to the return for the taxable year 
                in which such contribution is made such 
                information regarding such property and such 
                appraisal as the Secretary may require.
                    ``(D) Substantiation for contributions of 
                more than $500,000.--In the case of 
                contributions of property for which a deduction 
                of more than $500,000 is claimed, the 
                requirements of this subparagraph are met if 
                the individual, partnership, or corporation 
                attaches to the return for the taxable year a 
                qualified appraisal of such property.
                    ``(E) Qualified appraisal.--For purposes of 
                this paragraph, the term `qualified appraisal' 
                means, with respect to any property, an 
                appraisal of such property which is treated for 
                purposes of this paragraph as a qualified 
                appraisal under regulations or other guidance 
                prescribed by the Secretary.
                    ``(F) Aggregation of similar items of 
                property.--For purposes of determining 
                thresholds under this paragraph, property and 
                all similar items of property donated to 1 or 
                more donees shall be treated as 1 property.
                    ``(G) Special rule for pass-thru 
                entities.--In the case of a partnership or S 
                corporation, this paragraph shall be applied at 
                the entity level, except that the deduction 
                shall be denied at the partner or shareholder 
                level.
                    ``(H) Regulations.--The Secretary may 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph, including regulations that may 
                provide that some or all of the requirements of 
                this paragraph do not apply in appropriate 
                cases.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to contributions made after June 3, 2004.

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

    (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules), 
as amended by this Act, is amended by inserting after paragraph 
(11) the following new paragraph:
            ``(12) Contributions of used motor vehicles, boats, 
        and airplanes.--
                    ``(A) In general.--In the case of a 
                contribution of a qualified vehicle the claimed 
                value of which exceeds $500--
                            ``(i) paragraph (8) shall not apply 
                        and no deduction shall be allowed under 
                        subsection (a) for such contribution 
                        unless the taxpayer substantiates the 
                        contribution by a contemporaneous 
                        written acknowledgement of the 
                        contribution by the donee organization 
                        that meets the requirements of 
                        subparagraph (B) and includes the 
                        acknowledgement with the taxpayer's 
                        return of tax which includes the 
                        deduction, and
                            ``(ii) if the organization sells 
                        the vehicle without any significant 
                        intervening use or material improvement 
                        of such vehicle by the organization, 
                        the amount of the deduction allowed 
                        under subsection (a) shall not exceed 
                        the gross proceeds received from such 
                        sale.
                    ``(B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following 
                information:
                            ``(i) The name and taxpayer 
                        identification number of the donor.
                            ``(ii) The vehicle identification 
                        number or similar number.
                            ``(iii) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        applies--
                                    ``(I) a certification that 
                                the vehicle was sold in an 
                                arm's length transaction 
                                between unrelated parties,
                                    ``(II) the gross proceeds 
                                from the sale, and
                                    ``(III) a statement that 
                                the deductible amount may not 
                                exceed the amount of such gross 
                                proceeds.
                            ``(iv) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        does not apply--
                                    ``(I) a certification of 
                                the intended use or material 
                                improvement of the vehicle and 
                                the intended duration of such 
                                use, and
                                    ``(II) a certification that 
                                the vehicle would not be 
                                transferred in exchange for 
                                money, other property, or 
                                services before completion of 
                                such use or improvement.
                    ``(C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgement shall be 
                considered to be contemporaneous if the donee 
                organization provides it within 30 days of--
                            ``(i) the sale of the qualified 
                        vehicle, or
                            ``(ii) in the case of an 
                        acknowledgement including a 
                        certification described in subparagraph 
                        (B)(iv), the contribution of the 
                        qualified vehicle.
                    ``(D) Information to secretary.--A donee 
                organization required to provide an 
                acknowledgement under this paragraph shall 
                provide to the Secretary the information 
                contained in the acknowledgement. Such 
                information shall be provided at such time and 
                in such manner as the Secretary may prescribe.
                    ``(E) Qualified vehicle.--For purposes of 
                this paragraph, the term `qualified vehicle' 
                means any--
                            ``(i) motor vehicle manufactured 
                        primarily for use on public streets, 
                        roads, and highways,
                            ``(ii) boat, or
                            ``(iii) airplane.
                Such term shall not include any property which 
                is described in section 1221(a)(1).
                    ``(F) Regulations or other guidance.--The 
                Secretary shall prescribe such regulations or 
                other guidance as may be necessary to carry out 
                the purposes of this paragraph. The Secretary 
                may prescribe regulations or other guidance 
                which exempts sales by the donee organization 
                which are in direct furtherance of such 
                organization's charitable purpose from the 
                requirements of subparagraphs (A)(ii) and 
                (B)(iv)(II).''.
    (b) Penalty for Fraudulent Acknowledgments.--
            (1) In general.--Part I of subchapter B of chapter 
        68 (relating to assessable penalties), as amended by 
        this Act, is amended by inserting after section 6719 
        the following new section:

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

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

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

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

SEC. 885. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.

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

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

    ``(a) Rules Relating to Constructive Receipt.--
            ``(1) Plan failures.--
                    ``(A) Gross income inclusion.--
                            ``(i) In general.--If at any time 
                        during a taxable year a nonqualified 
                        deferred compensation plan--
                                    ``(I) fails to meet the 
                                requirements of paragraphs (2), 
                                (3), and (4), or
                                    ``(II) is not operated in 
                                accordance with such 
                                requirements,
                        all compensation deferred under the 
                        plan for the taxable year and all 
                        preceding taxable years shall be 
                        includible in gross income for the 
                        taxable year to the extent not subject 
                        to a substantial risk of forfeiture and 
                        not previously included in gross 
                        income.
                            ``(ii) Application only to affected 
                        participants.--Clause (i) shall only 
                        apply with respect to all compensation 
                        deferred under the plan for 
                        participants with respect to whom the 
                        failure relates.
                    ``(B) Interest and additional tax payable 
                with respect to previously deferred 
                compensation.--
                            ``(i) In general.--If compensation 
                        is required to be included in gross 
                        income under subparagraph (A) for a 
                        taxable year, the tax imposed by this 
                        chapter for the taxable year shall be 
                        increased by the sum of--
                                    ``(I) the amount of 
                                interest determined under 
                                clause (ii), and
                                    ``(II) an amount equal to 
                                20 percent of the compensation 
                                which is required to be 
                                included in gross income.
                            ``(ii) Interest.--For purposes of 
                        clause (i), the interest determined 
                        under this clause for any taxable year 
                        is the amount of interest at the 
                        underpayment rate plus 1 percentage 
                        point on the underpayments that would 
                        have occurred had the deferred 
                        compensation been includible in gross 
                        income for the taxable year in which 
                        first deferred or, if later, the first 
                        taxable year in which such deferred 
                        compensation is not subject to a 
                        substantial risk of forfeiture.
            ``(2) Distributions.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the plan provides that 
                compensation deferred under the plan may not be 
                distributed earlier than--
                            ``(i) separation from service as 
                        determined by the Secretary (except as 
                        provided in subparagraph (B)(i)),
                            ``(ii) the date the participant 
                        becomes disabled (within the meaning of 
                        subparagraph (C)),
                            ``(iii) death,
                            ``(iv) a specified time (or 
                        pursuant to a fixed schedule) specified 
                        under the plan at the date of the 
                        deferral of such compensation,
                            ``(v) to the extent provided by the 
                        Secretary, a change in the ownership or 
                        effective control of the corporation, 
                        or in the ownership of a substantial 
                        portion of the assets of the 
                        corporation, or
                            ``(vi) the occurrence of an 
                        unforeseeable emergency.
                    ``(B) Special rules.--
                            ``(i) Specified employees.--In the 
                        case of any specified employee, the 
                        requirement of subparagraph (A)(i) is 
                        met only if distributions may not be 
                        made before the date which is 6 months 
                        after the date of separation from 
                        service (or, if earlier, the date of 
                        death of the employee). For purposes of 
                        the preceding sentence, a specified 
                        employee is a key employee (as defined 
                        in section 416(i) without regard to 
                        paragraph (5) thereof) of a corporation 
                        any stock in which is publicly traded 
                        on an established securities market or 
                        otherwise.
                            ``(ii) Unforeseeable emergency.--
                        For purposes of subparagraph (A)(vi)--
                                    ``(I) In general.--The term 
                                `unforeseeable emergency' means 
                                a severe financial hardship to 
                                the participant resulting from 
                                an illness or accident of the 
                                participant, the participant's 
                                spouse, or a dependent (as 
                                defined in section 152(a)) of 
                                the participant, loss of the 
                                participant's property due to 
                                casualty, or other similar 
                                extraordinary and unforeseeable 
                                circumstances arising as a 
                                result of events beyond the 
                                control of the participant.
                                    ``(II) Limitation on 
                                distributions.--The requirement 
                                of subparagraph (A)(vi) is met 
                                only if, as determined under 
                                regulations of the Secretary, 
                                the amounts distributed with 
                                respect to an emergency do not 
                                exceed the amounts necessary to 
                                satisfy such emergency plus 
                                amounts necessary to pay taxes 
                                reasonably anticipated as a 
                                result of the distribution, 
                                after taking into account the 
                                extent to which such hardship 
                                is or may be relieved through 
                                reimbursement or compensation 
                                by insurance or otherwise or by 
                                liquidation of the 
                                participant's assets (to the 
                                extent the liquidation of such 
                                assets would not itself cause 
                                severe financial hardship).
                    ``(C) Disabled.--For purposes of 
                subparagraph (A)(ii), a participant shall be 
                considered disabled if the participant--
                            ``(i) is unable to engage in any 
                        substantial gainful activity by reason 
                        of any medically determinable physical 
                        or mental impairment which can be 
                        expected to result in death or can be 
                        expected to last for a continuous 
                        period of not less than 12 months, or
                            ``(ii) is, by reason of any 
                        medically determinable physical or 
                        mental impairment which can be expected 
                        to result in death or can be expected 
                        to last for a continuous period of not 
                        less than 12 months, receiving income 
                        replacement benefits for a period of 
                        not less than 3 months under an 
                        accident and health plan covering 
                        employees of the participant's 
                        employer.
            ``(3) Acceleration of benefits.--The requirements 
        of this paragraph are met if the plan does not permit 
        the acceleration of the time or schedule of any payment 
        under the plan, except as provided in regulations by 
        the Secretary.
            ``(4) Elections.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the requirements of 
                subparagraphs (B) and (C) are met.
                    ``(B) Initial deferral decision.--
                            ``(i) In general.--The requirements 
                        of this subparagraph are met if the 
                        plan provides that compensation for 
                        services performed during a taxable 
                        year may be deferred at the 
                        participant's election only if the 
                        election to defer such compensation is 
                        made not later than the close of the 
                        preceding taxable year or at such other 
                        time as provided in regulations.
                            ``(ii) First year of eligibility.--
                        In the case of the first year in which 
                        a participant becomes eligible to 
                        participate in the plan, such election 
                        may be made with respect to services to 
                        be performed subsequent to the election 
                        within 30 days after the date the 
                        participant becomes eligible to 
                        participate in such plan.
                            ``(iii) Performance-based 
                        compensation.--In the case of any 
                        performance-based compensation based on 
                        services performed over a period of at 
                        least 12 months, such election may be 
                        made no later than 6 months before the 
                        end of the period.
                    ``(C) Changes in time and form of 
                distribution.--The requirements of this 
                subparagraph are met if, in the case of a plan 
                which permits under a subsequent election a 
                delay in a payment or a change in the form of 
                payment--
                            ``(i) the plan requires that such 
                        election may not take effect until at 
                        least 12 months after the date on which 
                        the election is made,
                            ``(ii) in the case of an election 
                        related to a payment not described in 
                        clause (ii), (iii), or (vi) of 
                        paragraph (2)(A), the plan requires 
                        that the first payment with respect to 
                        which such election is made be deferred 
                        for a period of not less than 5 years 
                        from the date such payment would 
                        otherwise have been made, and
                            ``(iii) the plan requires that any 
                        election related to a payment described 
                        in paragraph (2)(A)(iv) may not be made 
                        less than 12 months prior to the date 
                        of the first scheduled payment under 
                        such paragraph.
    ``(b) Rules Relating to Funding.--
            ``(1) Offshore property in a trust.--In the case of 
        assets set aside (directly or indirectly) in a trust 
        (or other arrangement determined by the Secretary) for 
        purposes of paying deferred compensation under a 
        nonqualified deferred compensation plan, for purposes 
        of section 83 such assets shall be treated as property 
        transferred in connection with the performance of 
        services whether or not such assets are available to 
        satisfy claims of general creditors--
                    ``(A) at the time set aside if such assets 
                (or such trust or other arrangement) are 
                located outside of the United States, or
                    ``(B) at the time transferred if such 
                assets (or such trust or other arrangement) are 
                subsequently transferred outside of the United 
                States.
        This paragraph shall not apply to assets located in a 
        foreign jurisdiction if substantially all of the 
        services to which the nonqualified deferred 
        compensation relates are performed in such 
        jurisdiction.
            ``(2) Employer's financial health.--In the case of 
        compensation deferred under a nonqualified deferred 
        compensation plan, there is a transfer of property 
        within the meaning of section 83 with respect to such 
        compensation as of the earlier of--
                    ``(A) the date on which the plan first 
                provides that assets will become restricted to 
                the provision of benefits under the plan in 
                connection with a change in the employer's 
                financial health, or
                    ``(B) the date on which assets are so 
                restricted,
        whether or not such assets are available to satisfy 
        claims of general creditors.
            ``(3) Income inclusion for offshore trusts and 
        employer's financial health.--For each taxable year 
        that assets treated as transferred under this 
        subsection remain set aside in a trust or other 
        arrangement subject to paragraph (1) or (2), any 
        increase in value in, or earnings with respect to, such 
        assets shall be treated as an additional transfer of 
        property under this subsection (to the extent not 
        previously included in income).
            ``(4) Interest on tax liability payable with 
        respect to transferred property.--
                    ``(A) In general.--If amounts are required 
                to be included in gross income by reason of 
                paragraph (1) or (2) for a taxable year, the 
                tax imposed by this chapter for such taxable 
                year shall be increased by the sum of--
                            ``(i) the amount of interest 
                        determined under subparagraph (B), and
                            ``(ii) an amount equal to 20 
                        percent of the amounts required to be 
                        included in gross income.
                    ``(B) Interest.--For purposes of 
                subparagraph (A), the interest determined under 
                this subparagraph for any taxable year is the 
                amount of interest at the underpayment rate 
                plus 1 percentage point on the underpayments 
                that would have occurred had the amounts so 
                required to be included in gross income by 
                paragraph (1) or (2) been includible in gross 
                income for the taxable year in which first 
                deferred or, if later, the first taxable year 
                in which such amounts are not subject to a 
                substantial risk of forfeiture.
    ``(c) No Inference on Earlier Income Inclusion or 
Requirement of Later Inclusion.--Nothing in this section shall 
be construed to prevent the inclusion of amounts in gross 
income under any other provision of this chapter or any other 
rule of law earlier than the time provided in this section. Any 
amount included in gross income under this section shall not be 
required to be included in gross income under any other 
provision of this chapter or any other rule of law later than 
the time provided in this section.
    ``(d) Other Definitions and Special Rules.--For purposes of 
this section--
            ``(1) Nonqualified deferred compensation plan.--The 
        term `nonqualified deferred compensation plan' means 
        any plan that provides for the deferral of 
        compensation, other than--
                    ``(A) a qualified employer plan, and
                    ``(B) any bona fide vacation leave, sick 
                leave, compensatory time, disability pay, or 
                death benefit plan.
            ``(2) Qualified employer plan.--The term `qualified 
        employer plan' means--
                    ``(A) any plan, contract, pension, account, 
                or trust described in subparagraph (A) or (B) 
                of section 219(g)(5) (without regard to 
                subparagraph (A)(iii)),
                    ``(B) any eligible deferred compensation 
                plan (within the meaning of section 457(b)), 
                and
                    ``(C) any plan described in section 415(m).
            ``(3) Plan includes arrangements, etc.--The term 
        `plan' includes any agreement or arrangement, including 
        an agreement or arrangement that includes one person.
            ``(4) Substantial risk of forfeiture.--The rights 
        of a person to compensation are subject to a 
        substantial risk of forfeiture if such person's rights 
        to such compensation are conditioned upon the future 
        performance of substantial services by any individual.
            ``(5) Treatment of earnings.--References to 
        deferred compensation shall be treated as including 
        references to income (whether actual or notional) 
        attributable to such compensation or such income.
            ``(6) Aggregation rules.--Except as provided by the 
        Secretary, rules similar to the rules of subsections 
        (b) and (c) of section 414 shall apply.
    ``(e) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations--
            ``(1) providing for the determination of amounts of 
        deferral in the case of a nonqualified deferred 
        compensation plan which is a defined benefit plan,
            ``(2) relating to changes in the ownership and 
        control of a corporation or assets of a corporation for 
        purposes of subsection (a)(2)(A)(v),
            ``(3) exempting arrangements from the application 
        of subsection (b) if such arrangements will not result 
        in an improper deferral of United States tax and will 
        not result in assets being effectively beyond the reach 
        of creditors,
            ``(4) defining financial health for purposes of 
        subsection (b)(2), and
            ``(5) disregarding a substantial risk of forfeiture 
        in cases where necessary to carry out the purposes of 
        this section.''.
    (b) Treatment of Deferred Amounts.--
            (1) W-2 forms.--
                    (A) In general.--Subsection (a) of section 
                6051 (relating to receipts for employees) is 
                amended by striking ``and'' at the end of 
                paragraph (11), by striking the period at the 
                end of paragraph (12) and inserting ``, and'', 
                and by inserting after paragraph (12) the 
                following new paragraph:
            ``(13) the total amount of deferrals for the year 
        under a nonqualified deferred compensation plan (within 
        the meaning of section 409A(d)).''.
                    (B) Threshold.--Subsection (a) of section 
                6051 is amended by adding at the end the 
                following: ``In the case of the amounts 
                required to be shown by paragraph (13), the 
                Secretary may (by regulation) establish a 
                minimum amount of deferrals below which 
                paragraph (13) does not apply.''.
            (2) Wage withholding.--Section 3401(a) (defining 
        wages) is amended by adding at the end the following 
        flush sentence: ``The term `wages' includes any amount 
        includible in gross income of an employee under section 
        409A and payment of such amount shall be treated as 
        having been made in the taxable year in which the 
        amount is so includible.''.
            (3) Other reporting.--Section 6041 (relating to 
        information at source) is amended by adding at the end 
        the following new subsection:
    ``(g) Nonqualified Deferred Compensation.--Subsection (a) 
shall apply to--
            ``(1) any deferrals for the year under a 
        nonqualified deferred compensation plan (within the 
        meaning of section 409A(d)), whether or not paid, 
        except that this paragraph shall not apply to deferrals 
        which are required to be reported under section 
        6051(a)(13) (without regard to any de minimis 
        exception), and
            ``(2) any amount includible under section 409A and 
        which is not treated as wages under section 3401(a).''.
    (c) Clerical Amendment.--The table of sections for such 
subpart A of part I of subchapter D of chapter 1 is amended by 
adding at the end the following new item:

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

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

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

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

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

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

SEC. 888. MODIFICATION OF STRADDLE RULES.

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

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

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

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

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

SEC. 891. EXTENSION OF IRS USER FEES.

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

SEC. 892. COBRA FEES.

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

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

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

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

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

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

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

    (a) In General.--Section 904(f)(3) (relating to 
dispositions) is amending by adding at the end the following 
new subparagraph:
                    ``(D) Application to certain dispositions 
                of stock in controlled foreign corporation.--
                            ``(i) In general.--This paragraph 
                        shall apply to an applicable 
                        disposition in the same manner as if it 
                        were a disposition of property 
                        described in subparagraph (A), except 
                        that the exception contained in 
                        subparagraph (C)(i) shall not apply.
                            ``(ii) Applicable disposition.--For 
                        purposes of clause (i), the term 
                        `applicable disposition' means any 
                        disposition of any share of stock in a 
                        controlled foreign corporation in a 
                        transaction or series of transactions 
                        if, immediately before such transaction 
                        or series of transactions, the taxpayer 
                        owned more than 50 percent (by vote or 
                        value) of the stock of the controlled 
                        foreign corporation. Such term shall 
                        not include a disposition described in 
                        clause (iii) or (iv), except that 
                        clause (i) shall apply to any gain 
                        recognized on any such disposition.
                            ``(iii) Exception for certain 
                        exchanges where ownership percentage 
                        retained.--A disposition shall not be 
                        treated as an applicable disposition 
                        under clause (ii) if it is part of a 
                        transaction or series of transactions--
                                    ``(I) to which section 351 
                                or 721 applies, or under which 
                                the transferor receives stock 
                                in a foreign corporation in 
                                exchange for the stock in the 
                                controlled foreign corporation 
                                and the stock received is 
                                exchanged basis property (as 
                                defined in section 
                                7701(a)(44)), and
                                    ``(II) immediately after 
                                which, the transferor owns (by 
                                vote or value) at least the 
                                same percentage of stock in the 
                                controlled foreign corporation 
                                (or, if the controlled foreign 
                                corporation is not in existence 
                                after such transaction or 
                                series of transactions, in 
                                another foreign corporation 
                                stock in which was received by 
                                the transferor in exchange for 
                                stock in the controlled foreign 
                                corporation) as the percentage 
                                of stock in the controlled 
                                foreign corporation which the 
                                taxpayer owned immediately 
                                before such transaction or 
                                series of transactions.
                            ``(iv) Exception for certain asset 
                        acquisitions.--A disposition shall not 
                        be treated as an applicable disposition 
                        under clause (ii) if it is part of a 
                        transaction or series of transactions 
                        in which the taxpayer (or any member of 
                        a controlled group of corporations 
                        filing a consolidated return under 
                        section 1501 which includes the 
                        taxpayer) acquires the assets of a 
                        controlled foreign corporation in 
                        exchange for the shares of the 
                        controlled foreign corporation in a 
                        liquidation described in section 332 or 
                        a reorganization described in section 
                        368(a)(1).
                            ``(v) Controlled foreign 
                        corporation.--For purposes of this 
                        subparagraph, the term `controlled 
                        foreign corporation' has the meaning 
                        given such term by section 957.
                            ``(vi) Stock ownership.--For 
                        purposes of this subparagraph, 
                        ownership of stock shall be determined 
                        under the rules of subsections (a) and 
                        (b) of section 958.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to dispositions after the date of the enactment of 
this Act.

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

    (a) In General.--Paragraph (8) of section 108(e) (relating 
to general rules for discharge of indebtedness (including 
discharges not in title 11 cases or insolvency) is amended to 
read as follows:
            ``(8) Indebtedness satisfied by corporate stock or 
        partnership interest.--For purposes of determining 
        income of a debtor from discharge of indebtedness, if--
                    ``(A) a debtor corporation transfers stock, 
                or
                    ``(B) a debtor partnership transfers a 
                capital or profits interest in such 
                partnership,
        to a creditor in satisfaction of its recourse or 
        nonrecourse indebtedness, such corporation or 
        partnership shall be treated as having satisfied the 
        indebtedness with an amount of money equal to the fair 
        market value of the stock or interest. In the case of 
        any partnership, any discharge of indebtedness income 
        recognized under this paragraph shall be included in 
        the distributive shares of taxpayers which were the 
        partners in the partnership immediately before such 
        discharge.''.
    (b) Effective Date.--The amendment made by this section 
shall apply with respect to cancellations of indebtedness 
occurring on or after the date of the enactment of this Act.

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

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

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

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

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

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

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

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

SEC. 901. CLASS LIVES FOR UTILITY GRADING COSTS.

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

    ``(E)(vi).................................................     20''.
    ``(F).....................................................     25''.

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

SEC. 902. CONSISTENT AMORTIZATION OF PERIODS FOR INTANGIBLES.

    (a) Start-Up Expenditures.--
            (1) Allowance of deduction.--Paragraph (1) of 
        section 195(b) (relating to start-up expenditures) is 
        amended to read as follows:
            ``(1) Allowance of deduction.--If a taxpayer elects 
        the application of this subsection with respect to any 
        start-up expenditures--
                    ``(A) the taxpayer shall be allowed a 
                deduction for the taxable year in which the 
                active trade or business begins in an amount 
                equal to the lesser of--
                            ``(i) the amount of start-up 
                        expenditures with respect to the active 
                        trade or business, or
                            ``(ii) $5,000, reduced (but not 
                        below zero) by the amount by which such 
                        start-up expenditures exceed $50,000, 
                        and
                    ``(B) the remainder of such start-up 
                expenditures shall be allowed as a deduction 
                ratably over the 180-month period beginning 
                with the month in which the active trade or 
                business begins.''.
            (2) Conforming amendment.--Subsection (b) of 
        section 195 is amended by striking ``Amortize'' and 
        inserting ``Deduct'' in the heading.
    (b) Organizational Expenditures.--Subsection (a) of section 
248 (relating to organizational expenditures) is amended to 
read as follows:
    ``(a) Election to Deduct.--If a corporation elects the 
application of this subsection (in accordance with regulations 
prescribed by the Secretary) with respect to any organizational 
expenditures--
            ``(1) the corporation shall be allowed a deduction 
        for the taxable year in which the corporation begins 
        business in an amount equal to the lesser of--
                    ``(A) the amount of organizational 
                expenditures with respect to the taxpayer, or
                    ``(B) $5,000, reduced (but not below zero) 
                by the amount by which such organizational 
                expenditures exceed $50,000, and
            ``(2) the remainder of such organizational 
        expenditures shall be allowed as a deduction ratably 
        over the 180-month period beginning with the month in 
        which the corporation begins business.''.
    (c) Treatment of Organizational and Syndication Fees or 
Partnerships.--
            (1) In general.--Section 709(b) (relating to 
        amortization of organization fees) is amended by 
        redesignating paragraph (2) as paragraph (3) and by 
        amending paragraph (1) to read as follows:
            ``(1) Allowance of deduction.--If a taxpayer elects 
        the application of this subsection (in accordance with 
        regulations prescribed by the Secretary) with respect 
        to any organizational expenses--
                    ``(A) the taxpayer shall be allowed a 
                deduction for the taxable year in which the 
                partnership begins business in an amount equal 
                to the lesser of--
                            ``(i) the amount of organizational 
                        expenses with respect to the 
                        partnership, or
                            ``(ii) $5,000, reduced (but not 
                        below zero) by the amount by which such 
                        organizational expenses exceed $50,000, 
                        and
                    ``(B) the remainder of such organizational 
                expenses shall be allowed as a deduction 
                ratably over the 180-month period beginning 
                with the month in which the partnership begins 
                business.
            ``(2) Dispositions before close of amortization 
        period.--In any case in which a partnership is 
        liquidated before the end of the period to which 
        paragraph (1)(B) applies, any deferred expenses 
        attributable to the partnership which were not allowed 
        as a deduction by reason of this section may be 
        deducted to the extent allowable under section 165.''.
            (2) Conforming amendment.--Subsection (b) of 
        section 709 is amended by striking ``Amortization'' and 
        inserting ``Deduction'' in the heading.
    (d) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred after the date of the 
enactment of this Act.

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

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

SEC. 904. INCREASE IN WITHHOLDING FROM SUPPLEMENTAL WAGE PAYMENTS IN 
                    EXCESS OF $1,000,000.

    (a) In General.--If an employer elects under Treasury 
Regulation 31.3402(g)-1 to determine the amount to be deducted 
and withheld from any supplemental wage payment by using a flat 
percentage rate, the rate to be used in determining the amount 
to be so deducted and withheld shall not be less than 28 
percent (or the corresponding rate in effect under section 
1(i)(2) of the Internal Revenue Code of 1986 for taxable years 
beginning in the calendar year in which the payment is made).
    (b) Special Rule for Large Payments.--
            (1) In general.--Notwithstanding subsection (a), if 
        the supplemental wage payment, when added to all such 
        payments previously made by the employer to the 
        employee during the calendar year, exceeds $1,000,000, 
        the rate used with respect to such excess shall be 
        equal to the maximum rate of tax in effect under 
        section 1 of such Code for taxable years beginning in 
        such calendar year.
            (2) Aggregation.--All persons treated as a single 
        employer under subsection (a) or (b) of section 52 of 
        the Internal Revenue Code of 1986 shall be treated as a 
        single employer for purposes of this subsection.
    (c) Conforming Amendment.--Section 13273 of the Revenue 
Reconciliation Act of 1993 (Public Law 103-66) is repealed.
    (d) Effective Date.--The provisions of, and the amendment 
made by, this section shall apply to payments made after 
December 31, 2004.

SEC. 905. TREATMENT OF SALE OF STOCK ACQUIRED PURSUANT TO EXERCISE OF 
                    STOCK OPTIONS TO COMPLY WITH CONFLICT-OF-INTEREST 
                    REQUIREMENTS.

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

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

SEC. 906. APPLICATION OF BASIS RULES TO NONRESIDENT ALIENS.

    (a) In General.--Section 72 (relating to annuities and 
certain proceeds of endowment and life insurance contracts) is 
amended by redesignating subsection (w) as subsection (x) and 
by inserting after subsection (v) the following new subsection:
    ``(w) Application of Basis Rules to Nonresident Aliens.--
            ``(1) In general.--Notwithstanding any other 
        provision of this section, for purposes of determining 
        the portion of any distribution which is includible in 
        gross income of a distributee who is a citizen or 
        resident of the United States, the investment in the 
        contract shall not include any applicable nontaxable 
        contributions or applicable nontaxable earnings.
            ``(2) Applicable nontaxable contribution.--For 
        purposes of this subsection, the term `applicable 
        nontaxable contribution' means any employer or employee 
        contribution--
                    ``(A) which was made with respect to 
                compensation--
                            ``(i) for labor or personal 
                        services performed by an employee who, 
                        at the time the labor or services were 
                        performed, was a nonresident alien for 
                        purposes of the laws of the United 
                        States in effect at such time, and
                            ``(ii) which is treated as from 
                        sources without the United States, and
                    ``(B) which was not subject to income tax 
                (and would have been subject to income tax if 
                paid as cash compensation when the services 
                were rendered) under the laws of the United 
                States or any foreign country.
            ``(3) Applicable nontaxable earnings.--For purposes 
        of this subsection, the term `applicable nontaxable 
        earnings' means earnings--
                    ``(A) which are paid or accrued with 
                respect to any employer or employee 
                contribution which was made with respect to 
                compensation for labor or personal services 
                performed by an employee,
                    ``(B) with respect to which the employee 
                was at the time the earnings were paid or 
                accrued a nonresident alien for purposes of the 
                laws of the United States, and
                    ``(C) which were not subject to income tax 
                under the laws of the United States or any 
                foreign country.
            ``(4) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary to carry out the 
        provisions of this subsection, including regulations 
        treating contributions and earnings as not subject to 
        tax under the laws of any foreign country where 
        appropriate to carry out the purposes of this 
        subsection.''
    (b) Basis.--Section 83 (relating to property transferred in 
connection with the performance of services is amended by 
adding after paragraph (3) of subsection (c) the following new 
paragraph:
            ``(4) For purposes of determining an individual's 
        basis in property transferred in connection with the 
        performance of services, rules similar to the rules of 
        section 72(w) shall apply.''
    (c) Effective Date.--The amendments made by this section 
shall apply to distributions on or after the date of the 
enactment of this Act.

SEC. 907. LIMITATION OF EMPLOYER DEDUCTION FOR CERTAIN ENTERTAINMENT 
                    EXPENSES.

    (a) In General.--Paragraph (2) of section 274(e) (relating 
to expenses treated as compensation) is amended to read as 
follows:
            ``(2) Expenses treated as compensation.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), expenses for goods, services, 
                and facilities, to the extent that the expenses 
                are treated by the taxpayer, with respect to 
                the recipient of the entertainment, amusement, 
                or recreation, as compensation to an employee 
                on the taxpayer's return of tax under this 
                chapter and as wages to such employee for 
                purposes of chapter 24 (relating to withholding 
                of income tax at source on wages).
                    ``(B) Specified individuals.--
                            ``(i) In general.--In the case of a 
                        recipient who is a specified 
                        individual, subparagraph (A) and 
                        paragraph (9) shall each be applied by 
                        substituting `to the extent that the 
                        expenses do not exceed the amount of 
                        the expenses which' for `to the extent 
                        that the expenses'.
                            ``(ii) Specified individual.--For 
                        purposes of clause (i), the term 
                        `specified individual' means any 
                        individual who--
                                    ``(I) is subject to the 
                                requirements of section 16(a) 
                                of the Securities Exchange Act 
                                of 1934 with respect to the 
                                taxpayer, or
                                    ``(II) would be subject to 
                                such requirements if the 
                                taxpayer were an issuer of 
                                equity securities referred to 
                                in such section.''
    (b) Effective Date.--The amendment made by this section 
shall apply to expenses incurred after the date of the 
enactment of this Act.

SEC. 908. RESIDENCE AND SOURCE RULES RELATING TO UNITED STATES 
                    POSSESSIONS.

    (a) Residence and Source Rules.--Subpart D of part III of 
subchapter N of chapter 1 (relating to possessions of the 
United States) is amended by adding at the end the following 
new section:

``SEC. 937. RESIDENCE AND SOURCE RULES INVOLVING POSSESSIONS.

    ``(a) Bona Fide Resident.--For purposes of this subpart, 
section 865(g)(3), section 876, section 881(b), paragraphs (2) 
and (3) of section 901(b), section 957(c), section 
3401(a)(8)(C), and section 7654(a), except as provided in 
regulations, the term `bona fide resident' means a person--
            ``(1) who is present for at least 183 days during 
        the taxable year in Guam, American Samoa, the Northern 
        Mariana Islands, Puerto Rico, or the Virgin Islands, as 
        the case may be, and
            ``(2) who does not have a tax home (determined 
        under the principles of section 911(d)(3) without 
        regard to the second sentence thereof) outside such 
        specified possession during the taxable year and does 
        not have a closer connection (determined under the 
        principles of section 7701(b)(3)(B)(ii)) to the United 
        States or a foreign country than to such specified 
        possession.
For purposes of paragraph (1), the determination as to whether 
a person is present for any day shall be made under the 
principles of section 7701(b).
    ``(b) Source Rules.--Except as provided in regulations, for 
purposes of this title--
            ``(1) except as provided in paragraph (2), rules 
        similar to the rules for determining whether income is 
        income from sources within the United States or is 
        effectively connected with the conduct of a trade or 
        business within the United States shall apply for 
        purposes of determining whether income is from sources 
        within a possession specified in subsection (a)(1) or 
        effectively connected with the conduct of a trade or 
        business within any such possession, and
            ``(2) any income treated as income from sources 
        within the United States or as effectively connected 
        with the conduct of a trade or business within the 
        United States shall not be treated as income from 
        sources within any such possession or as effectively 
        connected with the conduct of a trade or business 
        within any such possession.
    ``(c) Reporting Requirement.--
            ``(1) In general.--If, for any taxable year, an 
        individual takes the position for United States income 
        tax reporting purposes that the individual became, or 
        ceases to be, a bona fide resident of a possession 
        specified in subsection (a)(1), such individual shall 
        file with the Secretary, at such time and in such 
        manner as the Secretary may prescribe, notice of such 
        position.
            ``(2) Transition rule.--If, for any of an 
        individual's 3 taxable years ending before the 
        individual's first taxable year ending after the date 
        of the enactment of this subsection, the individual 
        took a position described in paragraph (1), the 
        individual shall file with the Secretary, at such time 
        and in such manner as the Secretary may prescribe, 
        notice of such position.''.
    (b) Penalty.--Section 6688 is amended--
            (1) by inserting ``under section 937(c) or'' before 
        ``by regulations'', and
            (2) by striking ``$100'' and inserting ``$1,000''.
    (c) Conforming and Clerical Amendments.--
            (1) Section 931(d) is amended to read as follows:
    ``(d) Employees of the United States.--Amounts paid for 
services performed as an employee of the United States (or any 
agency thereof) shall be treated as not described in paragraph 
(1) or (2) of subsection (a).''
            (2) Section 932 is amended by striking ``at the 
        close of the taxable year'' and inserting ``during the 
        entire taxable year'' each place it appears.
            (3) Section 934(b)(4) is amended by striking ``the 
        Virgin Islands or'' each place it appears.
            (4) Section 935, as in effect before the effective 
        date of its repeal, is amended--
                    (A) by striking ``for the taxable year 
                who'' in subsection (a) and inserting ``who, 
                during the entire taxable year'',
                    (B) by inserting ``bona fide'' before 
                ``resident'' in subsection (a)(1),
                    (C) in subsection (b)(1)--
                            (i) by inserting ``(other a bona 
                        fide resident of Guam during the entire 
                        taxable year)'' after ``United States'' 
                        in subparagraph (A), and
                            (ii) by inserting ``bona fide'' 
                        before ``resident'' in subparagraph 
                        (B), and
                    (D) in subsection (b)(2) by striking 
                ``residence and''.
            (5) Section 957(c) is amended--
                    (A) in paragraph (2)(B) by striking 
                ``conduct of an active'' and inserting ``active 
                conduct of a'', and
                    (B) in the last sentence by striking 
                ``derived from sources within a possession, was 
                effectively connected with the conduct of a 
                trade or business within a possession, or''.
            (6) The table of sections of subpart D of part III 
        of subchapter N of chapter 1 is amended by adding at 
        the end the following new item:

        ``Sec. 937. Residence and source rules involving possessions.''.

    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in 
        this subsection, the amendments made by this section 
        shall apply to taxable years ending after the date of 
        the enactment of this Act.
            (2) 183-day rule.--Section 937(a)(1) of the 
        Internal Revenue Code of 1986 (as added by this 
        section) shall apply to taxable years beginning after 
        the date of the enactment of this Act.
            (3) Sourcing.--Section 937(b)(2) of such Code (as 
        so added) shall apply to income earned after the date 
        of the enactment of this Act.

SEC. 909. SALES OR DISPOSITIONS TO IMPLEMENT FEDERAL ENERGY REGULATORY 
                    COMMISSION OR STATE ELECTRIC RESTRUCTURING POLICY.

    (a) In General.--Section 451 (relating to general rule for 
taxable year of inclusion) is amended by adding at the end the 
following new subsection:
    ``(i) Special Rule for Sales or Dispositions To Implement 
Federal Energy Regulatory Commission or State Electric 
Restructuring Policy.--
            ``(1) In general.--In the case of any qualifying 
        electric transmission transaction for which the 
        taxpayer elects the application of this section, 
        qualified gain from such transaction shall be 
        recognized--
                    ``(A) in the taxable year which includes 
                the date of such transaction to the extent the 
                amount realized from such transaction exceeds--
                            ``(i) the cost of exempt utility 
                        property which is purchased by the 
                        taxpayer during the 4-year period 
                        beginning on such date, reduced (but 
                        not below zero) by
                            ``(ii) any portion of such cost 
                        previously taken into account under 
                        this subsection, and
                    ``(B) ratably over the 8-taxable year 
                period beginning with the taxable year which 
                includes the date of such transaction, in the 
                case of any such gain not recognized under 
                subparagraph (A).
            ``(2) Qualified gain.--For purposes of this 
        subsection, the term `qualified gain' means, with 
        respect to any qualifying electric transmission 
        transaction in any taxable year--
                    ``(A) any ordinary income derived from such 
                transaction which would be required to be 
                recognized under section 1245 or 1250 for such 
                taxable year (determined without regard to this 
                subsection), and
                    ``(B) any income derived from such 
                transaction in excess of the amount described 
                in subparagraph (A) which is required to be 
                included in gross income for such taxable year 
                (determined without regard to this subsection).
            ``(3) Qualifying electric transmission 
        transaction.--For purposes of this subsection, the term 
        `qualifying electric transmission transaction' means 
        any sale or other disposition before January 1, 2007, 
        of--
                    ``(A) property used in the trade or 
                business of providing electric transmission 
                services, or
                    ``(B) any stock or partnership interest in 
                a corporation or partnership, as the case may 
                be, whose principal trade or business consists 
                of providing electric transmission services,
        but only if such sale or disposition is to an 
        independent transmission company.
            ``(4) Independent transmission company.--For 
        purposes of this subsection, the term `independent 
        transmission company' means--
                    ``(A) an independent transmission provider 
                approved by the Federal Energy Regulatory 
                Commission,
                    ``(B) a person--
                            ``(i) who the Federal Energy 
                        Regulatory Commission determines in its 
                        authorization of the transaction under 
                        section 203 of the Federal Power Act 
                        (16 U.S.C. 824b) or by declaratory 
                        order is not a market participant 
                        within the meaning of such Commission's 
                        rules applicable to independent 
                        transmission providers, and
                            ``(ii) whose transmission 
                        facilities to which the election under 
                        this subsection applies are under the 
                        operational control of a Federal Energy 
                        Regulatory Commission-approved 
                        independent transmission provider 
                        before the close of the period 
                        specified in such authorization, but 
                        not later than the close of the period 
                        applicable under subsection (a)(2)(B) 
                        as extended under paragraph (2), or
                    ``(C) in the case of facilities subject to 
                the jurisdiction of the Public Utility 
                Commission of Texas--
                            ``(i) a person which is approved by 
                        that Commission as consistent with 
                        Texas State law regarding an 
                        independent transmission provider, or
                            ``(ii) a political subdivision or 
                        affiliate thereof whose transmission 
                        facilities are under the operational 
                        control of a person described in clause 
                        (i).
            ``(5) Exempt utility property.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `exempt utility 
                property' means property used in the trade or 
                business of--
                            ``(i) generating, transmitting, 
                        distributing, or selling electricity, 
                        or
                            ``(ii) producing, transmitting, 
                        distributing, or selling natural gas.
                    ``(B) Nonrecognition of gain by reason of 
                acquisition of stock.--Acquisition of control 
                of a corporation shall be taken into account 
                under this subsection with respect to a 
                qualifying electric transmission transaction 
                only if the principal trade or business of such 
                corporation is a trade or business referred to 
                in subparagraph (A).
            ``(6) Special rule for consolidated groups.--In the 
        case of a corporation which is a member of an 
        affiliated group filing a consolidated return, any 
        exempt utility property purchased by another member of 
        such group shall be treated as purchased by such 
        corporation for purposes of applying paragraph (1)(A).
            ``(7) Time for assessment of deficiencies.--If the 
        taxpayer has made the election under paragraph (1) and 
        any gain is recognized by such taxpayer as provided in 
        paragraph (1)(B), then--
                    ``(A) the statutory period for the 
                assessment of any deficiency, for any taxable 
                year in which any part of the gain on the 
                transaction is realized, attributable to such 
                gain shall not expire prior to the expiration 
                of 3 years from the date the Secretary is 
                notified by the taxpayer (in such manner as the 
                Secretary may by regulations prescribe) of the 
                purchase of exempt utility property or of an 
                intention not to purchase such property, and
                    ``(B) such deficiency may be assessed 
                before the expiration of such 3-year period 
                notwithstanding any law or rule of law which 
                would otherwise prevent such assessment.
            ``(8) Purchase.--For purposes of this subsection, 
        the taxpayer shall be considered to have purchased any 
        property if the unadjusted basis of such property is 
        its cost within the meaning of section 1012.
            ``(9) Election.--An election under paragraph (1) 
        shall be made at such time and in such manner as the 
        Secretary may require and, once made, shall be 
        irrevocable.
            ``(10) Nonapplication of installment sales 
        treatment.--Section 453 shall not apply to any 
        qualifying electric transmission transaction with 
        respect to which an election to apply this subsection 
        is made.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to transactions occurring after the date of the 
enactment of this Act, in taxable years ending after such date.

SEC. 910. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN PASSENGER 
                    AUTOMOBILES.

    (a) In General.--Section 179(b) (relating to limitations) 
is amended by adding at the end the following new paragraph:
            ``(6) Limitation on cost taken into account for 
        certain passenger vehicles.--
                    ``(A) In general.--The cost of any sport 
                utility vehicle for any taxable year which may 
                be taken into account under this section shall 
                not exceed $25,000.
                    ``(B) Sport utility vehicle.--For purposes 
                of subparagraph (A)--
                            ``(i) In general.--The term `sport 
                        utility vehicle' means any 4-wheeled 
                        vehicle--
                                    ``(I) which is primarily 
                                designed or which can be used 
                                to carry passengers over public 
                                streets, roads, or highways 
                                (except any vehicle operated 
                                exclusively on a rail or 
                                rails),
                                    ``(II) which is not subject 
                                to section 280F, and
                                    ``(III) which is rated at 
                                not more than 14,000 pounds 
                                gross vehicle weight.
                            ``(ii) Certain vehicles excluded.--
                        Such term does not include any vehicle 
                        which--
                                    ``(I) is designed to have a 
                                seating capacity of more than 9 
                                persons behind the driver's 
                                seat,
                                    ``(II) is equipped with a 
                                cargo area of at least 6 feet 
                                in interior length which is an 
                                open area or is designed for 
                                use as an open area but is 
                                enclosed by a cap and is not 
                                readily accessible directly 
                                from the passenger compartment, 
                                or
                                    ``(III) has an integral 
                                enclosure, fully enclosing the 
                                driver compartment and load 
                                carrying device, does not have 
                                seating rearward of the 
                                driver's seat, and has no body 
                                section protruding more than 30 
                                inches ahead of the leading 
                                edge of the windshield.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to property placed in service after the date of the 
enactment of this Act.
    And the Senate agree to the same.

                From the Committee on Ways and Means, for 
                consideration of the House bill and the Senate 
                amendment, and modifications committed to 
                conference:
                                   William M. Thomas,
                                   Phil Crane,
                                   Jim McCrery,
                From the Committee on Agriculture, for 
                consideration of Title VII of the House bill, 
                and subtitle B of Title XI of the Senate 
                amendment, and modifications committed to 
                conference:
                                   Bob Goodlatte,
                                   John Boehner,
                                   Charlie Stenholm,
                From the Committee on Education and the 
                Workforce, for consideration of sections 489, 
                489, 616, 701, and 719 of the Senate amendment, 
                and modifications committed to conference:
                                   John Boehner,
                                   Sam Johnson,
                From the Committee on Energy and Commerce, for 
                consideration of sections 662 and subtitle A of 
                Title XI of the Senate amendment, and 
                modifications committed to conference:
                                   Joe Barton,
                                   Richard Burr,
                From the Committee on the Judiciary, for 
                consideration of sections 422, 442, 1111, 1151, 
                and 1161 of the Senate amendment, and 
                modifications committed to conference:
                                   Lamar Smith,
                For consideration of the House bill and the 
                Senate amendment, and modifications committed 
                to conference:
                                   Tom DeLay,
                                 Managers on the Part of the House.

                                   Chuck Grassley,
                                   Orrin Hatch,
                                   Don Nickles,
                                   Trent Lott,
                                   Olympia Snowe,
                                   Jon Kyl,
                                   Craig Thomas,
                                   Rick Santorum,
                                   Gordon Smith,
                                   Jim Bunning,
                                   Mitch McConnell,
                                   Max Baucus,
                                   Tom Daschle,
                                   John Breaux,
                                   Kent Conrad,
                                   Jeff Bingaman,
                                   Blanche L. Lincoln,
                                Managers on the Part of the Senate.
       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

      The managers on the part of the House and the Senate at 
the conference on the disagreeing votes of the two Houses on 
the amendment of the Senate to the bill (H.R. 4520), to amend 
the Internal Revenue Code of 1986 to remove impediments in such 
Code and make our manufacturing, service, and high-technology 
businesses and workers more competitive and productive both at 
home and abroad, submit the following joint statement to the 
House and the Senate in explantion of the effect of the action 
agreed upon by the managers and recommended in the accompanying 
conference report:
      The Senate amendment struck all of the House bill after 
the enacting clause and inserted a substitute text.
      The House recedes from its disagreement to the amendment 
of the Senate with an amendment that is a substitute for the 
House bill and the Senate amendment. The differences between 
the House bill, the Senate amendment, and the substitute agreed 
to in conference are noted below, except for clerical 
corrections, conforming changes made necessary by agreements 
reached by the conferees, and minor drafting and clarifying 
changes.

                                CONTENTS

                                                                   Page
Title I--Provisions Relating to Repeal of Exclusion for 
  Extraterritorial Income........................................   262
    A. Repeal of Extraterritorial Income Regime (sec. 101 of the 
      House bill, sec. 101 of the Senate amendment, and secs. 114 
      and 941 through 943 of the Code)...........................   262
    B. Deduction Relating to Income Attributable to United States 
      Production Activities (sec. 102 of the House bill, secs. 
      102 and 103 of the Senate amendment, and sec. 11 of the 
      Code)......................................................   265
    C. Reduced Corporate Income Tax Rate for Small Corporations 
      (sec. 103 of the House bill and sec. 11 of the Code).......   275
Title II--Provisions Relating to Job Creation Tax Incentives for 
  Manufacturers, Small Businesses, and Farmers...................   277
    A. Section 179 Expensing (sec. 201 of the House bill, sec. 
      309 of the Senate amendment and sec. 179 of the Code)......   277
    B. Depreciation..............................................   279
        1. Recovery period for depreciation of certain leasehold 
          improvements (sec. 211 of the House bill and sec. 168 
          of the Code)...........................................   279
        2. Recovery period for depreciation of certain restaurant 
          improvements (sec. 211 of the House bill and sec. 168 
          of the Code)...........................................   281
        3. Extended placed in service date for bonus depreciation 
          for certain aircraft (excluding aircraft used in the 
          transportation industry) (sec. 212 of the House bill, 
          sec. 622 of the Senate amendment, and sec. 168 of the 
          Code)..................................................   282
        4. Special placed in service rule for bonus depreciation 
          for certain property subject to syndication (sec. 213 
          of the House bill, sec. 621 of the Senate amendment, 
          and sec. 168 of the Code)..............................   285
    C. S Corporation Reform and Simplification (sec. 221-231 of 
      the House bill, sec. 654 of the Senate amendment and secs. 
      1361-1379 and 4975 of the Code)............................   286
        1. Members of family treated as one shareholder..........   287
        2. Increase in number of eligible shareholders to 100....   288
        3. Expansion of bank S corporation eligible shareholders 
          to include IRAs........................................   289
        4. Disregard of unexercised powers of appointment in 
          determining potential current beneficiaries of ESBT....   290
        5. Transfers of suspended losses incident to divorce, etc   290
        6. Use of passive activity loss and at-risk amounts by 
          qualified subchapter S trust income beneficiaries......   291
        7. Exclusion of investment securities income from passive 
          investment income test for bank S corporations.........   291
        8. Treatment of bank director shares.....................   292
        9. Relief from inadvertently invalid qualified subchapter 
          S subsidiary elections and terminations................   294
        10. Information returns for qualified subchapter S 
          subsidiaries...........................................   294
        11. Repayment of loans for qualifying employer securities   294
    D. Alternative Minimum Tax Relief............................   297
        1. Repeal limitation on use of foreign tax credit (sec. 
          241 of the House bill, sec. 203 of the Senate 
          amendment, and sec. 59 of the Code)....................   297
        2. Expansion of exemption from alternative minimum tax 
          for small corporations (sec. 242 of the House bill and 
          sec. 55 of the Code)...................................   298
        3. Coordinate farmer and fisherman income averaging and 
          the alternative minimum tax (sec. 243 of the House bill 
          and secs. 55 and 1301 of the Code).....................   298
    E. Restructuring of Incentives for Alcohol Fuels, Etc........   299
        1. Incentives for alcohol and biodiesel fuels (secs. 251 
          and 252 of the House bill, sec. 861 of the Senate 
          amendment, and secs. 4041, 4081, 4091, 6427, 9503 and 
          new section 6426 of the Code)..........................   299
        2. Biodiesel income tax credit (sec. 862 of the bill and 
          new sec. 40A of the Code)..............................   309
    F. Exclusion of Incentive Stock Options and Employee Stock 
      Purchase Plan Stock Options From Wages (sec. 261 of the 
      House bill and secs. 421(b), 423(c), 3121(a), 3231, and 
      3306(b) of the Code).......................................   310
    G. Incentives To Reinvest Foreign Earnings in the United 
      States (sec. 271 of the House bill, sec. 231 of the Senate 
      amendment, and new sec. 965 of the Code)...................   312
    H. Other Incentive Provisions................................   317
        1. Special rules for livestock sold on account of 
          weather-related conditions (sec. 281 of the House bill, 
          sec. 649 of the Senate amendment, and secs. 1033 and 
          451 of the Code).......................................   317
        2. Payment of dividends on stock of cooperatives without 
          reducing patronage dividends (sec. 282 of the House 
          bill, sec. 648 of the Senate amendment, and sec. 1388 
          of the Code)...........................................   318
        3. Manufacturing relating to timber......................   319
            a. Capital gains treatment to apply to outright sales 
              of timber by landowner (sec. 283 of the House bill, 
              sec. 333 of the Senate amendment, and sec. 631(b) 
              of the Code).......................................   319
            b. Expensing of reforestation expenditures (sec. 331 
              of the Senate amendment and secs. 48 and 194 of the 
              Code)..............................................   320
            c. Election to treat cutting of timber as a sale or 
              exchange (sec. 102(b) of the House bill, sec. 332 
              of the Senate amendment, and sec. 631(a) of the 
              Code)..............................................   321
            d. Modified safe harbor rules for timber REITs (sec. 
              334 of the Senate amendment and sec. 857 of the 
              Code)..............................................   321
        4. Net income from publicly traded partnerships treated 
          as qualifying income of regulated investment company 
          (sec. 284 of the House bill, sec. 899 of the Senate 
          amendment, and secs. 851(b), 469(k), 7704(d) and new 
          sec. 851(h) of the Code)...............................   325
        5. Improvements related to real estate investment trusts 
          (sec. 285 of the House bill and secs. 856, 857 and 860 
          of the Code)...........................................   327
        6. Treatment of certain dividends of regulated investment 
          companies (sec. 286 of the House bill and secs. 871 and 
          881 of the Code).......................................   336
        7. Taxation of certain settlement funds (sec. 287 of the 
          House bill and sec. 468B of the Code)..................   341
        8. Expand human clinical trials expenses qualifying for 
          the orphan drug tax credit (sec. 288 of the House bill 
          and sec. 45C of the Code)..............................   342
        9. Simplification of excise tax imposed on bows and 
          arrows (sec. 289 of the House bill, sec. 305 of the 
          Senate amendment, and sec. 4161 of the Code)...........   343
        10. Reduce rate of excise tax on fishing tackle boxes to 
          three percent (sec. 290 of the House bill and sec. 4162 
          of the Code)...........................................   344
        11. Repeal of excise tax on sonar devices suitable for 
          finding fish (sec. 291 of the House bill and secs. 4161 
          and 4162 of the Code)..................................   345
        12. Income tax credit for cost of carrying tax-paid 
          distilled spirits in wholesale inventories (sec. 292 of 
          the House bill)........................................   345
        13. Suspension of occupational taxes relating to 
          distilled spirits, wine, and beer (sec. 293 of the 
          House bill and new sec. 5148 of the Code)..............   346
        14. Modification of unrelated business income limitation 
          on investment in certain small business investment 
          companies (sec. 294 of the House bill, sec. 642 of the 
          Senate amendment, and sec. 514 of the Code)............   348
        15. Election to determine taxable income from certain 
          international shipping activities using per ton rate 
          (sec. 295 of the House bill and new secs. 1352-1359 of 
          the Code)..............................................   349
        16. Charitable contribution deduction for certain 
          expenses in support of Native Alaskan subsistence 
          whaling (sec. 296 of the House bill and sec. 170 of the 
          Code)..................................................   355
    I. General Provisions........................................   357
        1. Modification to qualified small issue bonds (sec. 301 
          of the Senate amendment and sec. 144 of the Code)......   357
        2. Expensing of investment in broadband equipment (sec. 
          302 of the Senate amendment and new sec. 191 of the 
          Code)..................................................   358
        3. Exemption for natural aging process from interest 
          capitalization (sec. 303 of the Senate amendment and 
          sec. 263A of the Code).................................   359
        4. Section 355 ``active business test'' applied to chains 
          of affiliated corporations (sec. 304 of the Senate 
          amendment and sec. 355 of the Code)....................   360
        5. Modification to cooperative marketing rules to include 
          value-added processing involving animals (sec. 306 of 
          the Senate amendment and sec. 1388 of the Code)........   362
        6. Extension of declaratory judgment procedures to 
          farmers' cooperative organizations (sec. 307 of the 
          Senate amendment and sec. 7428 of the Code)............   363
        7. Temporary suspension of personal holding company tax 
          (sec. 308 of the Senate amendment and sec. 541 of the 
          Code)..................................................   364
        8. 5-year NOL carryback for 2003 NOLs if taxpayer elects 
          out of bonus depreciation as modified; extend temporary 
          suspension of 90-percent limit on minimum tax NOLs 
          (sec. 310 of the Senate amendment and sec. 172 of the 
          Code)..................................................   366
        9. Manufacturer's jobs credit (sec. 313 of the Senate 
          amendment).............................................   367
        10. Brownfields demonstration program for qualified green 
          building and sustainable design projects (sec. 314 of 
          the Senate amendment and secs. 142 and 146 of the Code)   368
    J. Manufacturing Relating to Films...........................   371
        1. Special rules for certain film and television 
          production (sec. 321 of the Senate amendment and new 
          sec. 181 of the Code)..................................   371
        2. Modification of application of income forecast method 
          of depreciation (sec. 322 of the Senate amendment and 
          sec. 167 of the Code)..................................   373
Title III--Provisions Relating to Tax Reform and Simplification 
  for United States Businesses...................................   375
        1. Interest expense allocation rules (sec. 301 of the 
          House bill, sec. 205 of the Senate amendment, and sec. 
          864 of the Code).......................................   375
        2. Recharacterize overall domestic loss (sec. 302 of the 
          House bill, sec. 204 of the Senate amendment, and sec. 
          904 of the Code).......................................   379
        3. Foreign tax credit baskets and ``base differences'' 
          (sec. 303 of the House bill, sec. 225 of the Senate 
          amendment, and sec. 904 of the Code)...................   381
        4. Apply look-through rules for dividends from 
          noncontrolled section 902 corporations (sec. 304 of the 
          House bill, sec. 202 of the Senate amendment, and sec. 
          904 of the Code).......................................   385
        5. Attribution of stock ownership through partnerships in 
          determining section 902 and 960 credits (sec. 305 of 
          the House bill, sec. 213 of the Senate amendment, and 
          sec. 902 of the Code)..................................   386
        6. Foreign tax credit treatment of deemed payments under 
          section 367(d) of the Code (sec. 306 of the House bill, 
          sec. 229 of the Senate amendment, and sec. 367(d) of 
          the Code)..............................................   388
        7. United States property not to include certain assets 
          of controlled foreign corporations (sec. 307 of the 
          House bill, sec. 227 of the Senate amendment, and sec. 
          956 of the Code).......................................   389
        8. Election not to use average exchange rate for foreign 
          tax paid other than in functional currency (sec. 308 of 
          the House bill, sec. 224 of the Senate amendment, and 
          sec. 986 of the Code)..................................   391
        9. Eliminate secondary withholding tax with respect to 
          dividends paid by certain foreign corporations (sec. 
          309 of the House bill, sec. 215 of the Senate 
          amendment, and sec. 871 of the Code)...................   392
        10. Equal treatment for interest paid by foreign 
          partnerships and foreign corporations (sec. 310 of the 
          House bill, sec. 228 of the Senate amendment, and sec. 
          861 of the Code).......................................   394
        11. Look-through treatment of payments between related 
          controlled foreign corporations (sec. 311 of the House 
          bill, sec. 222 of the Senate amendment, and sec. 954 of 
          the Code)..............................................   395
        12. Look-through treatment under subpart F for sales of 
          partnership interests (sec. 312 of the House bill, sec. 
          223 of the Senate amendment, and sec. 954 of the Code).   396
        13. Repeal of foreign personal holding company rules and 
          foreign investment company rules (sec. 313 of the House 
          bill, sec. 211 of the Senate amendment, and secs. 542, 
          551-558, 954, 1246, and 1247 of the Code)..............   397
        14. Determination of foreign personal holding company 
          income with respect to transactions in commodities 
          (sec. 314 of the House bill, sec. 206 of the Senate 
          amendment, and sec. 954 of the Code)...................   398
        15. Modification to treatment of aircraft leasing and 
          shipping income (sec. 315 of the House bill, sec. 221 
          of the Senate amendment, and sec. 954 of the Code).....   400
        16. Modification of exceptions under subpart F for active 
          financing (sec. 316 of the House bill, sec. 226 of the 
          Senate amendment, and sec. 954 of the Code)............   404
        17. Ten-year foreign tax credit carryover; one-year 
          foreign tax credit carryback (sec. 201 of the Senate 
          amendment and sec. 904 of the Code)....................   406
        18. Expand the subpart F de minimis rule to the lesser of 
          five percent of gross income or $5 million (sec. 212 of 
          the Senate amendment and sec. 954 of the Code).........   407
        19. Limit application of uniform capitalization rules in 
          the case of foreign persons (sec. 214 of the Senate 
          amendment and sec. 263A of the Code)...................   408
        20. Eliminate the 30-percent tax on certain U.S.-source 
          capital gains of nonresident individuals (sec. 216 of 
          the Senate amendment and sec. 871 of the Code).........   410
        21. Modify FIRPTA rules for real estate investment trusts 
          (sec. 230 of the Senate amendment and sec. 857 and 897 
          of the Code)...........................................   412
        22. Exclusion of certain horse-racing and dog-racing 
          gambling winnings from the income of nonresident alien 
          individuals (sec. 232 of the Senate amendment and sec. 
          872 of the Code).......................................   413
        23. Limitation of withholding on U.S.-source dividends 
          paid to Puerto Rico corporation (sec. 233 of the Senate 
          amendment and sec. 881 and 1442 of the Code)...........   415
        24. Require Commerce Department report on adverse 
          decisions of the World Trade Organization (sec. 234 of 
          the Senate amendment)..................................   416
        25. Study of impact of international tax law on taxpayers 
          other than large corporations (sec. 235 of the Senate 
          amendment).............................................   417
        26. Delay in effective date of final regulations 
          governing exclusion of income from international 
          operations of ships and aircraft (sec. 236 of the 
          Senate amendment and sec. 883 of the Code).............   418
        27. Interest payments deductible where taxpayer could 
          have borrowed without a guarantee (sec. 237 of the 
          Senate amendment and sec. 163(j) of the Code)..........   419
Title IV--Extension of Certain Expiring Provisions...............   419
        28. Nonrefundable personal credits allowed against the 
          alternative minimum tax (``AMT'') (sec. 401 of the 
          House bill, sec. 713 of the Senate amendment, and sec. 
          26 of the Code)........................................   419
        29. Extension and modification of the research credit 
          (sec. 402 of the House bill, secs. 311 and 312 of the 
          Senate amendment, and sec. 41 of the Code).............   420
        30. Extension of credit for electricity produced from 
          certain renewable resources (sec. 403 of the House 
          bill, secs. 714 and 8801 of the Senate amendment, and 
          sec. 45 of the Code)...................................   421
        31. Indian employment tax credit (sec. 404 of the House 
          bill, sec. 716 of the Senate amendment, and sec. 45A of 
          the Code)..............................................   422
        32. Extension of the work opportunity tax credit (sec. 
          405 of the House bill, sec. 702 of the Senate 
          amendment, and sec. 51 of the Code)....................   423
        33. Extension of the welfare-to-work tax credit (sec. 406 
          of the House bill, sec. 702 of the Senate amendment, 
          and sec. 51A of the Code)..............................   425
        34. Combination and modification of the work opportunity 
          tax credit and the welfare-to-work tax credit (sec. 703 
          of the Senate amendment and sec. 51 of the Code).......   427
        35. Certain expenses of elementary and secondary school 
          teachers (sec. 407 of the House bill, sec. 707 of the 
          Senate amendment, and sec. 62 of the Code).............   428
        36. Accelerated depreciation for business property on 
          Indian reservations (sec. 408 of the House bill, sec. 
          717 of the Senate amendment, and sec. 168 of the Code).   429
        37. Charitable contributions of computer technology and 
          equipment used for educational purposes and of 
          scientific property used for research (sec. 409 of the 
          House bill, sec. 706 of the Senate amendment, and sec. 
          170 of the Code).......................................   430
        38. Expensing of environmental remediation costs (sec. 
          410 of the House bill, sec. 708 of the Senate 
          amendment, and sec. 198 of the Code)...................   431
        39. Availability of Archer medical savings accounts (sec. 
          411 of the House bill and sec. 220 of the Code)........   431
        40. Suspension of 100-percent-of-net-income limitation on 
          percentage depletion for oil and gas from marginal 
          wells (sec. 412 of the House bill, secs. 715 and 846 of 
          the Senate amendment, and sec. 613A of the Code).......   433
        41. Qualified zone academy bonds (sec. 413 of the House 
          bill, secs. 612 and 704 of the Senate amendment, and 
          sec. 1397E of the Code)................................   435
        42. Tax Incentives for Investment in the District of 
          Columbia (sec. 414 of the House bill, sec. 711 of the 
          Senate amendment, and secs. 1400, 1400A, and 1400C of 
          the Code)..............................................   436
        43. Modifications to New York Liberty Zone bond 
          provisions (sec. 415 of the House bill, secs. 611 and 
          709 of the Senate amendment, and sec. 1400L of the 
          Code)..................................................   436
        44. Qualified New York Liberty Zone leasehold improvement 
          election out (sec. 709(c) of the Senate amendment).....   437
        45. Disclosures relating to terrorist activities (sec. 
          416 of the House bill and sec. 6103 of the Code).......   438
        46. Disclosure of return information relating to student 
          loans (sec. 417 of the House bill, sec. 718 of the 
          Senate amendment, and sec. 6103(l) of the Code)........   440
        47. Extension of cover over of excise tax on distilled 
          spirits to Puerto Rico and Virgin Islands (sec. 418 of 
          the House bill, sec. 705 of the Senate amendment, and 
          sec. 7652 of the Code).................................   441
        48. Joint review of strategic plans and budget for the 
          IRS (sec. 419 of the House bill and secs. 8021 and 8022 
          of the Code)...........................................   442
        49. Extension of parity in the application of certain 
          limits to mental health benefits (sec. 420 of the House 
          bill, sec. 701 of the Senate amendment, and sec. 9812 
          of the Code, sec. 712 of ERISA, and section 2705 of the 
          PHSA)..................................................   442
        50. Combined employment tax reporting (sec. 421 of the 
          House bill and sec. 712 of the Senate amendment).......   444
        51. Deduction for qualified clean-fuel vehicle property 
          (sec. 422 of the House bill, sec. 721 of the Senate 
          amendment, and sec. 179 of the Code)...................   445
        52. Credit for qualified electric vehicles (sec. 422 of 
          the House bill, sec. 720 of the Senate amendment, and 
          sec. 30 of the Code)...................................   445
        53. Repeal of reduction of deductions for mutual life 
          insurance companies (sec. 710 of the Senate amendment 
          and sec. 809 of the Code)..............................   446
        54. Study of earnings stripping provisions (sec. 163(j) 
          of the Code)...........................................   447
Title V--Deduction of State and Local General Sales Taxes........   448
    A. Deduction of State and Local General Sales Taxes (sec. 501 
      of the House bill and sec. 164 of the Code)................   448
Title VI--Fair and Equitable Tobacco Reform......................   450
    A. Tobacco Reform (secs. 701-725 of the House bill and title 
      XI of the Senate amendment)................................   450
Title VII--Protection of United States Workers From Competition 
  of Foreign Workforces..........................................   452
Title VIII--Other Provisions.....................................   452
    A. Provisions Relating to Housing............................   452
        1. Treatment of qualified mortgage revenue bonds (sec. 
          601 of the Senate amendment and sec. 143 of the Code)..   452
        2. Premiums for mortgage insurance (sec. 602 of the 
          Senate amendment and secs. 163(h) and 6050H of the 
          Code)..................................................   453
        3. Increase in historic rehabilitation credit for 
          residential housing for the elderly (sec. 603 of the 
          Senate amendment and secs. 42 and 47 of the Code)......   455
    B. Provisions Relating to Bonds..............................   456
        1. Modification of the authority of Indian tribal 
          governments to issue tax-exempt bonds (sec. 613 of the 
          Senate amendment and sec. 7871 of the Code)............   456
        2. Definition of manufacturing facility for qualified 
          small issue bonds (sec. 614 of the Senate amendment and 
          sec. 144 of the Code)..................................   457
        3. Qualified forest conservation bonds (sec. 615 of the 
          Senate amendment and sec. 142 of the Code).............   458
        4. Qualified tribal school modernization bonds (sec. 616 
          of the Senate amendment)...............................   460
    C. Provisions Relating to Depreciation.......................   461
        1. 7-year recovery period for certain track facilities 
          (sec. 623 of the Senate amendment and sec. 168 of the 
          Code)..................................................   461
        2. Alternative minimum tax and credits (sec. 624 of the 
          Senate amendment and secs. 38 and 53 of the Code)......   462
    D. Expansion of Business Credit..............................   463
        1. New markets tax credit for Native American 
          reservations (sec. 631 of the Senate amendment)........   463
        2. Ready Reserve-National Guard employee credit and Ready 
          Reserve-National Guard replacement employee credit 
          (sec. 632 of the Senate amendment).....................   465
        3. Rural investment tax credit (sec. 633 of the Senate 
          amendment and new sec. 42A of the Code)................   466
        4. Qualified small business rural investment tax credit 
          (sec. 634 of the Senate amendment and new sec. 42B of 
          the Code)..............................................   468
        5. Provide a tax credit or maintenance of railroad track 
          (sec. 635 of the Senate amendment and new sec. 45I of 
          the Code)..............................................   469
        6. Railroad revitalization and security investment credit 
          (sec. 636 of the Senate amendment).....................   470
        7. Special allocation of the railroad revitalization and 
          security investment credit for New York city rail 
          projects (sec. 636 of the Senate amendment)............   471
        8. Modification of targeted areas and low-income 
          communities designated for new markets tax credit (sec. 
          637 of the Senate amendment and sec. 45D of the Code)..   471
        9. Modification of income requirement for census tracts 
          within high migration rural counties for new markets 
          tax credit (sec. 638 of the Senate amendment and sec. 
          45D of the Code).......................................   473
        10. Provide a tax credit for expenditures on closed 
          captioning technology in movies (sec. 639 of the Senate 
          amendment and new sec. 45T of the Code)................   475
    E. Miscellaneous Provisions..................................   476
        1. Exclusion of gain or loss on sale or exchange of 
          certain brownfield sites from unrelated business 
          taxable income (sec. 641 of the Senate amendment and 
          secs. 512 and 514 of the Code).........................   476
        2. Civil rights tax relief (sec. 643 of the Senate 
          amendment and sec. 62 of the Code).....................   483
        3. Exclusion from gross income for amounts paid under 
          National Health Service Corps loan repayment program 
          (sec. 644 of the Senate amendment and sec. 108 of the 
          Code)..................................................   485
        4. Certain expenses of rural letter carriers (sec. 645 of 
          the Senate amendment and sec. 162(o) of the Code)......   486
        5. Method of accounting for naval shipbuilders (sec. 646 
          of the Senate amendment)...............................   486
        6. Distributions to shareholders from policyholders 
          surplus account of life insurance companies (sec. 647 
          of the Senate amendment and sec. 815 of the Code)......   487
        7. Motor vehicle dealer transitional assistance (sec. 650 
          of the Senate amendment)...............................   489
        8. Expansion of designated renewal community area based 
          on 2000 census data (sec. 651 of the Senate amendment 
          and sec. 1400E of the Code)............................   490
        9. Reduction of holding period to 12 months for purposes 
          of determining whether horses are section 1231 assets 
          (sec. 652 of the Senate amendment and sec. 1231 of the 
          Code)..................................................   491
        10. Blue ribbon commission on comprehensive tax reform 
          (sec. 653 of the Senate amendment).....................   492
        11. Temporary accumulated earnings tax safe harbor (sec. 
          655 of the Senate amendment and sec. 537 of the Code)..   492
        12. Tax Treatment of State Ownership of Railroad REIT 
          (sec. 656 of the Senate amendment and secs. 103, 115, 
          336 and 337 of the Code)...............................   494
        13. Contribution in aid of construction (sec. 657 of the 
          Senate amendment and sec. 118 of the Code).............   495
        14. Credit for purchase and installation of agricultural 
          water conservation systems (sec. 658 of the Senate 
          amendment).............................................   496
        15. Modification of involuntary conversion rules for 
          businesses affected by the September 11th terrorist 
          attacks (sec. 659 of the Senate amendment and sec. 
          1400L of the Code).....................................   497
        16. Repeal of application of below-market loan rules to 
          amounts paid to certain continuing care facilities 
          (sec. 660 of the Senate amendment and sec. 7872 of the 
          Code)..................................................   498
        17. Maximum capital gain rates of individuals for gold, 
          silver, platinum, and palladium (sec. 661 of the Senate 
          amendment and sec. 1(h) of the Code)...................   499
        18. Inclusion of primary and secondary medical strategies 
          for children and adults with sickle cell disease as 
          medical assistance under the medicaid program (sec. 662 
          of the Senate amendment)...............................   500
        19. Mortgage payment assistance (secs. 901 and 902 of the 
          Senate amendment)......................................   502
        20. Protection of overtime pay (secs. 489-490 of the 
          Senate amendment and sec. 13 of the Fair Labor 
          Standards Act of 1938).................................   503
        21. Report on acquisitions of goods from foreign sources 
          (sec. 1001 of the Senate amendment and sec. 43 of the 
          Office of Federal Procurement Policy Act)..............   504
        22. Minimum cost requirement for excess asset transfers 
          (sec. 719 of the Senate amendment and sec. 420 of the 
          Code)..................................................   505
Title IX--Energy Tax Incentives..................................   507
    A. Credit for Electricity Produced from Certain Sources (sec. 
      801 of the Senate amendment and sec. 45 of the Code).......   507
    B. Alternative Motor Vehicles and Fuels Incentives...........   513
        1. Alternative motor vehicle credit (sec. 811 of the 
          Senate amendment)......................................   513
        2. Modification of credit for electric vehicles (sec. 812 
          of Senate amendment and sec. 30 of the Code)...........   515
        3. Modifications of deduction for refueling property 
          (sec. 813 of Senate amendment and sec. 179A of the 
          Code)..................................................   516
        4. Credit for retail sale of alternative motor vehicle 
          fuels (sec. 814 of Senate amendment)...................   516
        5. Small ethanol producer credit (sec. 815 of the Senate 
          amendment and sec. 40 of the Code).....................   517
    C. Conservation and Energy Efficiency Provisions.............   519
        1. Energy efficient new homes (sec. 821 of the Senate 
          amendment).............................................   519
        2. Energy efficient appliances (sec. 822 of the Senate 
          amendment).............................................   521
        3. Residential solar hot water, photovoltaics and other 
          energy efficient property (sec. 823 of the Senate 
          amendment).............................................   523
        4. Credit for business installation of qualified fuel 
          cells and stationary microturbine power plants (sec. 
          824 of the Senate amendment and sec. 48 of the Code)...   525
        5. Energy efficient commercial building deduction (sec. 
          825 of the Senate amendment)...........................   526
        6. Three-year applicable recovery period for depreciation 
          of qualified energy management devices and qualified 
          water submetering devices (secs. 826 and 827 of the 
          Senate amendment and sec. 168 of the Code).............   528
        7. Energy credit for combined heat and power system 
          property (sec. 828 of the Senate amendment and sec. 48 
          of the Code)...........................................   528
        8. Energy efficient improvements to existing homes (sec. 
          829 of the Senate amendment)...........................   530
    D. Clean Coal Incentives.....................................   531
        1. Credit for production from a clean coal technology 
          unit (secs. 831 and 834 of the Senate amendment).......   531
        2. Investment credit for clean coal technology units 
          (secs. 832 and 834 of the Senate amendment)............   532
        3. Credit for production from advanced clean coal 
          technology (secs. 833 and 834 of the Senate amendment).   534
    E. Oil and Gas Provisions....................................   535
        1. Oil and gas production from marginal wells (sec. 841 
          of the Senate amendment and new sec. 451 of the Code)..   535
        2. Natural gas gathering lines treated as seven-year 
          property (sec. 842 of the Senate amendment and sec. 168 
          of the Code)...........................................   536
        3. Expensing of capital costs incurred for production in 
          complying with environmental protection agency sulfur 
          regulations for small refiners (sec. 843 of the Senate 
          amendment and new sec. 179B of the Code)...............   537
        4. Credit for small refiners for production of diesel 
          fuel in compliance with Environmental Protection Agency 
          sulfur regulations for small refiners (sec. 844 of the 
          Senate amendment and new sec. 45H of the Code).........   538
        5. Determination of small refiner exception to oil 
          depletion deduction (sec. 845 of the Senate amendment 
          and sec. 613A of the Code).............................   539
        6. Suspension of 100-percent-of-net-income limitation on 
          percentage depletion for oil and gas from marginal 
          wells (sec. 412 of the House bill, sec. 846 of the 
          Senate amendment, and sec. 613A of the Code)...........   540
        7. Delay rental payments (sec. 847 of the Senate 
          amendment and sec. 167 of the Code)....................   541
        8. Geological and geophysical costs (sec. 848 of the 
          Senate amendment and sec. 167 of the Code).............   542
        9. Extension and modification of credit for producing 
          fuel from a non-coneventional source (sec. 849 of the 
          Senate amendment and sec. 29 of the Code)..............   543
        10. Natural gas distribution lines treated as 15-year 
          property (sec. 850 of the Senate amendment and sec. 168 
          of the Code)...........................................   546
        11. Credit for production of Alaska natural gas (sec. 851 
          of the Senate amendment)...............................   547
        12. Treat certain Alaska pipeline property as seven-year 
          property (sec. 852 of the Senate amendment and sec. 168 
          of the Code)...........................................   548
        13. Enhanced oil recovery credit for certain gas 
          processing facilities (sec. 853 of the Senate amendment 
          and sec. 43 of the Code)...............................   549
        14. Exempt certain prepayments for natural gas from tax-
          exempt bond arbitrage rules (sec. 854 of the Senate 
          amendment and secs. 141 and 148 of the Code)...........   549
    F. Electric Utility Restructuring and Reliability Provisions.   553
        1. Modification to special rules for nuclear 
          decommissioning costs (sec. 855 of the Senate amendment 
          and sec. 468A of the Code).............................   553
        2. Treatment of certain income of electric cooperatives 
          (sec. 856 of the Senate amendment and sec. 501 of the 
          Code)..................................................   556
        3. Dispositions of transmission property to implement 
          Federal Energy Regulatory Commission restructuring 
          policy (no reinvestment obligation) (sec. 857 of the 
          Senate amendment and sec. 451 of the Code).............   561
    G. Additional Provisions.....................................   563
        1. GAO Study (sec. 897 of the Senate amendment)..........   563
        2. Repeal certain excise taxes on rail diesel fuel and 
          inland waterway barge fuels (sec. 898 of the Senate 
          amendment and secs. 4041, 4042, 6421, and 6427 of the 
          Code)..................................................   564
        3. Increase tax limitation on use of business energy 
          credits (secs. 851(c) and 899A of the Senate amendment, 
          and sec. 38 of the Code)...............................   564
        4. Transmission property treated as fifteen-year property 
          (sec. 899C of the Senate amendment and sec. 168 of the 
          Code)..................................................   565
        5. Qualifying pollution control equipment credit (sec. 
          899B of the Senate amendment)..........................   566
Title X--Revenue Provisions......................................   567
    A. Provisions to Reduce Tax Avoidance Through Individual and 
      Corporate Expatriation.....................................   567
        1. Tax treatment of expatriated entities and their 
          foreign parents (sec. 601 of the House bill, sec. 441 
          of the Senate amendment, and new sec. 7874 of the Code)   567
        2. Excise tax on stock compensation of insiders in 
          expatriated corporations (sec. 602 of the House bill, 
          sec. 443 of the Senate amendment, and secs. 162(m), 
          275(a), and new sec. 4985 of the Code).................   575
        3. Reinsurance of U.S. risks in foreign jurisdictions 
          (sec. 603 of the House bill, sec. 444 of the Senate 
          amendment, and sec. 845(a) of the Code)................   580
        4. Revision of tax rules on expatriation of individuals 
          (sec. 604 of the House bill, sec. 442 of the Senate 
          amendment, and secs. 877, 2107, 2501 and 6039G of the 
          Code)..................................................   581
        5. Reporting of taxable mergers and acquisitions (sec. 
          605 of the House bill, sec. 445 of the Senate 
          amendment, and new sec. 6043A of the Code..............   593
        6. Studies (sec. 606 of the House bill)..................   594
    B. Provisions Relating to Tax Shelters.......................   595
        1. Penalty for failure to disclose reportable 
          transactions (sec. 611 of the House bill, sec. 402 of 
          the Senate amendment, and new sec. 6707A of the Code)..   595
        2. Modifications to the accuracy-related penalties for 
          listed transactions and reportable transactions having 
          a significant tax avoidance purpose (sec. 612 of the 
          House bill, sec. 403 of the Senate amendment, and new 
          sec. 6662A of the Code)................................   599
        3. Tax shelter exception to confidentiality privileges 
          relating to taxpayer communications (sec. 613 of the 
          House bill, sec. 406 of the Senate amendment, and sec. 
          7525 of the Code)......................................   604
        4. Statute of limitations for unreported listed 
          transactions (sec. 614 of the House bill, sec. 416 of 
          the Senate amendment, and sec. 6501 of the Code).......   605
        5. Disclosure of reportable transactions by material 
          advisors (secs. 615 and 616 of the House bill, secs. 
          407 and 408 of the Senate amendment, and secs. 6111 and 
          6707 of the Code)......................................   606
        6. Investor lists and modification of penalty for failure 
          to maintain investor lists (secs. 615 and 617 of the 
          House bill, secs. 407 and 409 of the Senate amendment, 
          and secs. 6112 and 6708 of the Code)...................   609
        7. Penalty on promoters of tax shelters (sec. 618 of the 
          House bill, sec. 415 of the Senate amendment, and sec. 
          6700 of the Code)......................................   611
        8. Penalty for aiding and abetting the understatement of 
          tax liability (sec. 419 of the Senate amendment and 
          sec. 6701 of the Code).................................   612
        9. Modifications of substantial understatement penalty 
          for nonreportable transactions (sec. 619 of the House 
          bill, sec. 405 of the Senate amendment, and sec. 6662 
          of the Code)...........................................   613
        10. Modification of actions to enjoin certain conduct 
          related to tax shelters and reportable transactions 
          (sec. 620 of the House bill, sec. 410 of the Senate 
          amendment, and sec. 7408 of the Code)..................   614
        11. Penalty on failure to report interests in foreign 
          financial accounts (sec. 621 of the House bill, sec. 
          412 of the Senate amendment, and sec. 5321 of Title 31, 
          United States Code)....................................   614
        12. Regulation of individuals practicing before the 
          Department of the Treasury (sec. 622 of the House bill, 
          sec. 414 of the Senate amendment, and sec. 330 of Title 
          31, Untied States Code)................................   616
        13. Treatment of stripped bonds to apply to stripped 
          interests in bond and preferred stock funds (sec. 631 
          of the House bill, sec. 461 of the Senate amendment, 
          and secs. 305 and 1286 of the Code)....................   617
        14. Minimum holding period for foreign tax credit with 
          respect to withholding taxes on income other than 
          dividends (sec. 632 of the House bill, sec. 456 of the 
          Senate amendment, and sec. 901 of the Code)............   620
        15. Treatment of partnership loss transfers and 
          partnership basis adjustments (sec. 633 of the House 
          bill, sec. 469 of the Senate amendment, and secs. 704, 
          734, 743, and 754 of the Code).........................   621
        16. No reduction of basis under section 734 in stock held 
          by partnership in corporate partner (sec. 634 of the 
          House bill, sec. 432 of the Senate amendment, and sec. 
          755 of the Code).......................................   628
        17. Repeal of special rules for FASITs (sec. 635 of the 
          House bill, sec. 433 of the Senate amendment, and secs. 
          860H through 860L of the Code).........................   629
        18. Limitation on transfer and importation of built-in 
          losses (sec. 636 of the House bill, sec. 431 of the 
          Senate amendment, and secs. 362 and 334 of the Code)...   634
        19. Clarification of banking business for purposes of 
          determining investment of earnings in U.S. property 
          (sec. 637 of the House bill, sec. 451 of the Senate 
          amendment, and sec. 956 of the Code)...................   636
        20. Alternative tax for small insurance companies and 
          modification of exemption from tax for small property 
          and casualty insurance companies (sec. 638 of the House 
          bill, sec. 493 of the Senate amendment, and secs. 
          501(c)(15) and 831(b) of the Code).....................   638
        21. Denial of deduction for interest on underpayments 
          attributable to nondisclosed reportable transactions 
          (sec. 639 of the House bill, sec. 417 of the Senate 
          amendment, and sec. 163 of the Code)...................   639
        22. Clarification of rules for payment of estimated tax 
          for certain deemed asset sales (sec. 640 of the House 
          bill, sec. 481 of the Senate amendment, and sec. 338 of 
          the Code)..............................................   640
        23. Exclusion of like-kind exchange property from 
          nonrecognition treatment on the sale or exchange of a 
          principal resident (sec. 641 of the House bill and sec. 
          492 of the Senate amendment)...........................   641
        24. Prevention of mismatching of interest and original 
          issue discount deductions and income inclusions in 
          transactions with related foreign persons (sec. 642 of 
          the House bill, sec. 453 of the Senate amendment, and 
          secs. 163 and 267 of the Code).........................   642
        25. Exclusion from gross income for interest on 
          overpayments of income tax by individuals (sec. 643 of 
          the House bill)........................................   644
        26. Deposits made to suspend the running of interest on 
          potential underpayments (sec. 644 of the House bill, 
          sec. 486 of the Senate amendment, and new sec. 6603 of 
          the Code)..............................................   646
        27. Authorize IRS to enter into installment agreements 
          that provide for partial payment (sec. 645 of the House 
          bill, sec. 484 of the Senate amendment, and sec. 6159 
          of the Code)...........................................   649
        28. Affirmation of consolidated return regulation 
          authority (sec. 646 of the House bill, sec. 421 of the 
          Senate amendment, and sec. 1502 of the Code)...........   650
        29. Reform of tax treatment of certain leasing 
          arrangements and limitation on deductions allocable to 
          property used by governments or other tax-exempt 
          entities (secs. 647 through 649 of the bill, secs. 475 
          and 476 of the Senate amendment, secs. 167 and 168 of 
          the Code, and new sec. 470 of the Code)................   654
        30. Clarification of the economic substance doctrine 
          (sec. 401 of the Senate amendment and sec. 7701 of the 
          Code)..................................................   663
        31. Penalty for understatements attributable to 
          transactions lacking economic substance, etc. (sec. 404 
          of the Senate amendment and sec. 6662B of the Code)....   669
        32. Understatement of taxpayer's liability by income tax 
          return preparer (sec. 411 of the Senate amendment).....   671
        33. Frivolous tax submissions (sec. 413 of the Senate 
          amendment and sec. 6702 of the Code)...................   672
        34. Authorization of appropriations for tax law 
          enforcement (sec. 418 of the Senate amendment).........   673
        35. Declaration by chief executive officer relating to 
          Federal annual corporate income tax return (sec. 422 of 
          the Senate amendment)..................................   673
        36. Denial of deduction for certain fines, penalties, and 
          other amounts (sec. 423 of the Senate amendment and 
          sec. 162 of the Code)..................................   675
        37. Denial of deduction for punitive damages (sec. 424 of 
          the Senate amendment and sec. 162 of the Code).........   677
        38. Increase in criminal monetary penalty limitation for 
          the underpayment or overpayment of tax due to fraud 
          (sec. 425 of the Senate amendment).....................   678
        39. Expanded disallowance of deduction for interest on 
          convertible debt (sec. 434 of the Senate amendment and 
          sec. 163 of the Code)..................................   679
        40. Expand authority to disallow tax benefits under 
          section 269 (sec. 435 of the Senate amendment and sec. 
          269 of the Code).......................................   680
        41. Modification of coordination rules for controlled 
          foreign corporation and passive foreign investment 
          company regimes (sec. 436 of the Senate amendment and 
          sec. 1297 of the Code).................................   681
    C. Reduction of Fuel Tax Evasion.............................   684
        1. Exemption from certain excise taxes for mobile 
          machinery vehicles and modification of definition of 
          offhighway vehicle (sec. 651 of the House bill, sec. 
          896 of the Senate amendment, and secs. 4053, 4072, 
          4082, 4483, 6421, and 7701 of the Code)................   684
        2. Taxation of aviation-grade kerosene (sec. 652 of the 
          House bill, sec. 871 of the Senate amendment, and secs. 
          4041, 4081, 4082, 4083, 4091, 4092, 4093, 4101, and 
          6427 of the Code)......................................   687
        3. Provide for transfer from Airport and Airway Trust 
          Fund to Highway Trust Fund to adjust for continued 
          highway use of aviation fuel (sec. 872 of the Senate 
          amendment and secs. 9502 and 9503 of the Code).........   693
        4. Mechanical dye injection and related penalties (sec. 
          653 of the House bill, secs. 873, 874 and 875 of the 
          Senate amendment and secs. 4082 and 6715 and new sec. 
          6715A of the Code).....................................   694
        5. Terminate dyed diesel use by intercity buses (sec. 876 
          of the Senate amendment and secs. 4082 and 6427 of the 
          Code)..................................................   697
        6. Authority to inspect on-site records (sec. 654 of the 
          House bill, sec. 877 of the Senate amendment, and sec. 
          4083 of the Code)......................................   698
        7. Assessable penalty for refusal of entry (sec. 878 of 
          the Senate amendment and new sec. 6717 of the Code)....   698
        8. Registration of pipeline or vessel operators required 
          for exemption of bulk transfers to registered terminals 
          or refineries (sec. 655 of the House bill, sec. 879 of 
          the Senate amendment, and sec. 4081 of the Code).......   700
        9. Display of registration and penalties for failure to 
          display registration and to register (secs. 656 and 657 
          of the House bill, secs. 880 and 882 of the Senate 
          amendment, and secs. 4101, 7232, 7272 and new secs. 
          6718 and 6719 of the Code).............................   701
        10. Registration of persons within foreign trade zones 
          (sec. 881 of the Senate amendment and sec. 4101 of the 
          Code)..................................................   702
        11. Penalties for failure to report (sec. 657 of the 
          House bill, sec. 882 of the Senate amendment, and new 
          sec. 6725 of the Code).................................   702
        12. Electronic filing of required information reports 
          (sec. 895 of the Senate amendment and sec. 4010 of the 
          Code)..................................................   703
        13. Information reporting for persons claiming certain 
          tax benefits (sec. 883 of the Senate amendment and new 
          sec. 4104 of the Code).................................   704
        14. Collection from Customs bond where importer not 
          registered (sec. 658 of the House bill and sec. 884 of 
          Senate amendment)......................................   705
        15. Reconciliation of on-loaded cargo to entered cargo 
          (sec. 885 of the Senate amendment).....................   706
        16. Modification of the use tax on heavy highway vehicles 
          (sec. 659 of the House bill, sec. 890 of the Senate 
          amendment, and secs. 4481, 4483 and 6165 of the Code)..   707
        17. Modification of ultimate vendor refund claims with 
          respect to farming (sec. 660 of the House bill, sec. 
          887 of the Senate amendment, and sec. 6427 of the Code)   708
        18. Dedication of revenue from certain penalties to the 
          Highway Trust Fund (sec. 661 of the House bill, sec. 
          891 of the Senate amendment, and sec. 9503 of the Code)   709
        19. Taxable fuel refunds for certain ultimate vendors 
          (sec. 662 of the House bill, sec. 888 of the Senate 
          amendment, and secs. 6416 and 6427 of the Code)........   710
        20. Two party exchanges (sec. 663 of the bill and new 
          sec. 4105 of the Code).................................   711
        21. Simplification of tax on tires (sec. 664 of the House 
          bill and sec. 4071 of the Code)........................   712
        22. Tax on sale of diesel fuel whether suitable for use 
          or not in a diesel-powered vehicle or train (sec. 886 
          of the Senate amendment)...............................   713
        23. Nonapplication of export exemption to delivery of 
          fuel to motor vehicles removed from United States (sec. 
          892 of the Senate amendment)...........................   714
        24. Taxation of transmix and diesel fuel blend stocks and 
          Treasury study on fuel tax compliance (secs. 893, 894 
          and 895 of the Senate amendment and sec. 4083 of the 
          Code)..................................................   716
    D. Nonqualified Deferred Compensation Plans..................   720
        1. Treatment of nonqualified deferred compensation plans 
          (sec. 671 of the House bill, section 671 of the Senate 
          amendment, and new sec. 490A and secs. 6040 and 6051 of 
          the Code)..............................................   720
        2. Denial of deferral of certain stock option and 
          restricted stock gains (sec. 672 of the Senate 
          amendment and sec. 83 of the Code).....................   738
    E. Other Revenue Provisions..................................   739
        1. Permit private sector debt collection companies to 
          collect tax debts (sec. 681 of the House bill, sec. 487 
          of the Senate amendment, and new sec. 6306 of the Code)   739
        2. Modify charitable contribution rules for donations of 
          patents and other intellectual property (sec. 682 of 
          the House bill, sec. 494 of the Senate amendment, and 
          secs. 170 and 6050L of the Code).......................   742
        3. Require increased reporting for noncash charitable 
          contributions (sec. 683 of the House bill and sec. 170 
          of the Code)...........................................   745
        4. Limit deduction for charitable contributions of 
          vehicles (sec. 684 of the House bill, sec. 731 of the 
          Senate amendment, and new sec. 6720 and sec. 170 of the 
          Code)..................................................   747
        5. Extend the present-law intangible amortization 
          provisions to acquisitions of sports franchises (sec. 
          685 of the House bill, sec. 471 of the Senate 
          amendment, and sec. 197 of the Code)...................   752
        6. Increase continuous levy for certain federal payments 
          (sec. 686 of the House bill, sec. 734 of the Senate 
          amendment, and sec. 6331(h) of the Code)...............   753
        7. Modification of straddle rules (sec. 687 of the House 
          bill, sec. 64 of the Senate amendment, and sec. 1092 of 
          the Code)..............................................   754
        8. Add vaccines against Hepatitis A to the list of 
          taxable vaccines (sec. 688 of the House bill, sec. 491 
          of the Senate amendment, and sec. 4132 of the Code)....   758
        9. Add vaccines against influenza to the list of taxable 
          vaccines (sec. 689 of the House bill, sec. 732 of the 
          Senate amendment, and sec. 4132 of the Code)...........   759
        10. Extension of IRS user fees (sec. 690 of the House 
          bill, sec. 482 of the Senate amendment, and sec. 7528 
          of the Code)...........................................   759
        11. Extension of Customs user fees (Sec. 691 of the House 
          bill and sec. 485 of the Senate amendment).............   760
        12. Prohibition on nonrecognition of gain through 
          complete liquidation of holding company (sec. 452 of 
          the Senate amendment and sec. 332 of the Code).........   761
        13. Effectively connected income to include certain 
          foreign source income (sec. 454 of the Senate amendment 
          and sec. 864 of the Code)..............................   762
        14. Recapture of overall foreign losses on sale of 
          controlled foreign corporation stock (sec. 455 of the 
          Senate amendment and sec. 904 of the Code).............   764
        15. Application of earnings-stripping rules to 
          partnerships and S corporations (sec. 462 of the Senate 
          amendment and sec. 163 of the Code)....................   766
        16. Recognition of cancellation of indebtedness income 
          realized on satisfaction of debt with partnership 
          interest (sec. 463 of the Senate amendment and sec. 108 
          of the Code)...........................................   767
        17. Denial of installment sale treatment for all readily 
          tradable debt (sec. 465 of the Senate amendment and 
          sec. 453 of the Code)..................................   769
        18. Modify treatment of transfers to creditors in 
          divisive reorganizations (sec. 466 of the Senate 
          amendment and secs. 357 and 361 of the Code)...........   770
        19. Clarify definition of nonqualified preferred stock 
          (sec. 467 of the Senate amendment and sec. 351(g) of 
          the Code)..............................................   771
        20. Modify definition of controlled group of corporations 
          (sec. 468 of the Senate amendment and sec. 1563 of the 
          Code)..................................................   772
        21. Establish specific class lives for utility grading 
          costs (sec. 472 of the Senate amendment and sec. 168 of 
          the Code)..............................................   773
        22. Expansion of limitation on expensing of certain 
          passenger automobiles (sec. 473 of the Senate amendment 
          and sec. 179 of the Code)..............................   774
        23. Provide consistent amortization period for 
          intangibles (sec. 474 of the Senate amendment and secs. 
          195, 248, and 709 of the Code).........................   776
        24. Doubling of certain penalties, fines, and interest on 
          underpayments related to certain offshore financial 
          arrangements (sec. 483 of the Senate amendment)........   777
        25. Whistleblower reforms (sec. 488 of the Senate 
          amendment).............................................   778
        26. Increase in age of minor children whose unearned 
          income is taxed as if parent's income (sec. 495 of the 
          Senate amendment and sec. 1 of the Code)...............   779
        27. Modify holding period requirement for qualification 
          for reduced tax rate on dividends on preferred stock 
          (sec. 496 of the Senate amendment and sec. 1 of the 
          Code)..................................................   782
        28. Grant Treasury regulatory authority to address 
          foreign tax credit transactions involving inappropriate 
          separation of foreign taxes from related foreign income 
          (sec. 661A of Senate amendment and sec. 901 of the 
          Code)..................................................   783
        29. Freeze of provision regarding suspension of interest 
          where Secretary fails to contact taxpayer (sec. 662B of 
          the Senate amendment and sec. 6404(g) of the Code).....   784
        30. Increase in withholding from supplemental wage 
          payments in excess of $1 million (sec. 673 of the 
          Senate amendment and sec. 13273 of the Revenue 
          Reconciliation Act of 1993)............................   785
        31. Capital gain treatment on sale of stock acquired from 
          exercise of statutory stock options to comply with 
          conflict of interest requirements (sec 674 of the 
          Senate amendment and sec. 421 of the Code).............   786
        32. Application of basis rules to nonresident aliens (sec 
          675 of the Senate amendment and new sec. 72(w) and sec. 
          83 of the Code)........................................   787
        33. Residence and source rules related to a United States 
          possession (sec. 497 of the Senate amendment and new 
          sec. 937 of the Code)..................................   791
        34. Include employer provided housing under foreign 
          earned income exclusion cap (sec. 632 of the Senate 
          amendment and sec. 911 of the Code)....................   795
        35. Deduction for personal use of company aircraft and 
          other entertainment expenses (sec. 103(b) of the Senate 
          amendment and sec. 274(e) of the Code).................   797
        36. Treatment of contingent payment convertible debt 
          instruments (sec. 733 of the Senate Amendment and sec. 
          1275 of the Code)......................................   799
Title XI--Trade Provisions.......................................   801
    A. Suspension of Duties on Ceiling Fans (sec. 801 of the 
      House bill and Chapter 99, II of the harmonized Tariff 
      Schedule of the United States).............................   801
    B. Temporary Suspension of Certain Customs Duties............   801
        1. Suspension of duties on nuclear steam generators (sec. 
          802(a) of the House bill and Chapter 99, II of the 
          harmonized Tariff Schedule of the United States).......   801
        2. Suspension of Duties on Nuclear Reactor Vessel Heads 
          (sec. 802(b) of the House bill and Chapter 99, II of 
          the Harmonized Tariff Schedule of the United States....   802
Title XII--Tax Complexity Analysis...............................   802
        1. Deduction relating to income attributable to United 
          States production activities (sec. 102 of the House 
          bill, secs. 102 and 103 of the Senate amendment, and 
          sec. 11 of the Code)...................................   803

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


              A. Repeal of Extraterritorial Income Regime


(Sec. 101 of the House bill, sec. 101 of the Senate amendment, and 
        secs. 114 and 941 through 943 of the Code)

                              PRESENT LAW

      Like many other countries, the United States has long 
provided export-related benefits under its tax law. In the 
United States, for most of the last two decades, these benefits 
were provided under the foreign sales corporation (``FSC'') 
regime. In 2000, the European Union succeeded in having the FSC 
regime declared a prohibited export subsidy by the World Trade 
Organization (``WTO''). In response to this WTO finding, the 
United States repealed the FSC rules and enacted a new regime, 
under the FSC Repeal and Extraterritorial Income Exclusion Act 
of 2000.\1\ The European Union immediately challenged the 
extraterritorial income (``ETI'') regime in the WTO, and in 
January of 2002 the WTO Appellate Body held that the ETI regime 
also constituted a prohibited export subsidy under the relevant 
trade agreements.
---------------------------------------------------------------------------
    \1\ Transition rules delayed the repeal of the FSC rules and the 
effective date of ETI for transactions before January 1, 2002. An 
election was provided, however, under which taxpayers could adopt ETI 
at an earlier date for transactions after September 30, 2000. This 
election allowed the ETI rules to apply to transactions after September 
30, 2000, including transactions occurring pursuant to pre-existing 
binding contracts.
---------------------------------------------------------------------------
      Under the ETI regime, an exclusion from gross income 
applies with respect to ``extraterritorial income,'' which is a 
taxpayer's gross income attributable to ``foreign trading gross 
receipts.'' This income is eligible for the exclusion to the 
extent that it is ``qualifying foreign trade income.'' 
Qualifying foreign trade income is the amount of gross income 
that, if excluded, would result in a reduction of taxable 
income by the greatest of: (1) 1.2 percent of the foreign 
trading gross receipts derived by the taxpayer from the 
transaction; (2) 15 percent of the ``foreign trade income'' 
derived by the taxpayer from the transaction; \2\ or (3) 30 
percent of the ``foreign sale and leasing income'' derived by 
the taxpayer from the transaction.\3\
---------------------------------------------------------------------------
    \2\ ``Foreign trade income'' is the taxable income of the taxpayer 
(determined without regard to the exclusion of qualifying foreign trade 
income) attributable to foreign trading gross receipts.
    \3\ ``Foreign sale and leasing income'' is the amount of the 
taxpayer's foreign trade income (with respect to a transaction) that is 
properly allocable to activities that constitute foreign economic 
processes. Foreign sale and leasing income also includes foreign trade 
income derived by the taxpayer in connection with the lease or rental 
of qualifying foreign trade property for use by the lessee outside the 
United States.
---------------------------------------------------------------------------
      Foreign trading gross receipts are gross receipts derived 
from certain activities in connection with ``qualifying foreign 
trade property'' with respect to which certain economic 
processes take place outside of the United States. 
Specifically, the gross receipts must be: (1) from the sale, 
exchange, or other disposition of qualifying foreign trade 
property; (2) from the lease or rental of qualifying foreign 
trade property for use by the lessee outside the United States; 
(3) for services which are related and subsidiary to the sale, 
exchange, disposition, lease, or rental of qualifying foreign 
trade property (as described above); (4) for engineering or 
architectural services for construction projects located 
outside the United States; or (5) for the performance of 
certain managerial services for unrelated persons. A taxpayer 
may elect to treat gross receipts from a transaction as not 
foreign trading gross receipts. As a result of such an 
election, a taxpayer may use any related foreign tax credits in 
lieu of the exclusion.
      Qualifying foreign trade property generally is property 
manufactured, produced, grown, or extracted within or outside 
the United States that is held primarily for sale, lease, or 
rental in the ordinary course of a trade or business for direct 
use, consumption, or disposition outside the United States. No 
more than 50 percent of the fair market value of such property 
can be attributable to the sum of: (1) the fair market value of 
articles manufactured outside the United States; and (2) the 
direct costs of labor performed outside the United States. With 
respect to property that is manufactured outside the United 
States, certain rules are provided to ensure consistent U.S. 
tax treatment with respect to manufacturers.

                               HOUSE BILL

      The provision repeals the ETI exclusion. For transactions 
prior to 2005, taxpayers retain 100 percent of their ETI 
benefits. For transactions after 2004, the provision provides 
taxpayers with 80 percent of their otherwise-applicable ETI 
benefits for transactions during 2005 and 60 percent of their 
otherwise-applicable ETI benefits for transactions during 2006. 
However, the provision provides that the ETI exclusion 
provisions remain in effect for transactions in the ordinary 
course of a trade or business if such transactions are pursuant 
to a binding contract \4\ between the taxpayer and an unrelated 
person and such contract is in effect on January 14, 2002, and 
at all times thereafter.
---------------------------------------------------------------------------
    \4\ This rule also applies to a purchase option, renewal option, or 
replacement option that is included in such contract. For this purpose, 
a replacement option will be considered enforceable against a lessor 
notwithstanding the fact that a lessor retained approval of the 
replacement lessee.
---------------------------------------------------------------------------
      In addition, foreign corporations that elected to be 
treated for all Federal tax purposes as domestic corporations 
in order to facilitate the claiming of ETI benefits are allowed 
to revoke such elections within one year of the date of 
enactment of the provision without recognition of gain or loss, 
subject to anti-abuse rules.
      Effective date.--The provision is effective for 
transactions after December 31, 2004.

                            SENATE AMENDMENT

      The provision repeals the exclusion for extraterritorial 
income. However, the provision provides that the 
extraterritorial income exclusion provisions remain in effect 
for transactions in the ordinary course of a trade or business 
if such transactions are pursuant to a binding contract between 
the taxpayer and an unrelated person and such contract is in 
effect on September 17, 2003, and at all times thereafter.
      The provision permits foreign corporations that have 
elected to be treated as U.S. corporations pursuant to the 
extraterritorial income exclusion provisions to revoke their 
elections. Such revocations are effective on the date of 
enactment of this provision. A corporation revoking its 
election is treated as a U.S. corporation that transfers all of 
its property to a foreign corporation in connection with an 
exchange described in section 354 of the Code. In general, the 
corporation shall not recognize any gain or loss on such deemed 
transfer. However, a revoking corporation shall recognize any 
gain on any asset held by the corporation if: (1) the basis of 
such asset is determined (in whole or in part) by reference to 
the basis of such asset in the hands of the person from whom 
the corporation acquired such asset; (2) the asset was acquired 
by an actual transfer (rather than as a result of the U.S. 
corporation election by the corporation) occurring on or after 
the first day on which the U.S. corporation election by the 
corporation was effective; and (3) a principal purpose of the 
acquisition was the reduction or avoidance of tax.
      The provision also provides a deduction for taxable years 
of certain corporations ending after the date of enactment of 
the provision and beginning before January 1, 2007.\5\ The 
amount of the deduction for each such taxable year is equal to 
a specified percentage of the amount that, for the taxable year 
of a corporation beginning in 2002, was excludable from the 
gross income of the corporation under the extraterritorial 
income exclusion provisions or was treated by the corporation 
as exempt foreign trade income of related FSCs from property 
acquired by the FSCs from the corporation.\6\ However, this 
aggregate amount does not include any amount attributable to a 
transaction involving a lease by the corporation unless the 
corporation manufactured or produced (in whole or in part) the 
leased property.
---------------------------------------------------------------------------
    \5\ The deduction also is available to cooperatives engaged in the 
marketing of agricultural or horticultural products.
    \6\ In the case of a short taxable year that ends after the date of 
enactment and begins before January 1, 2007, the Treasury Secretary 
shall prescribe guidance for determining the amount of the deduction, 
including guidance that limits the amount of the deduction for a short 
taxable year based upon the proportion that the number of days in the 
short taxable year bears to 365.
---------------------------------------------------------------------------
      The specified percentage to be used in determining the 
deduction is: 80 percent for calendar years 2004 and 2005; 60 
percent for calendar year 2006; and 0 percent for calendar 
years 2007 and thereafter. For calendar year 2003, the 
specified percentage is the amount that bears the same ratio to 
100 percent as the number of days after the date of enactment 
of this provision bears to 365. In the case of a corporation 
with a taxable year that is not the calendar year (i.e., a 
fiscal year corporation), a special rule is provided for 
determining a weighted average specified percentage based upon 
the calendar years that are included in the taxable year.
      The deduction for a taxable year generally is reduced by 
the specified percentage of exempted FSC income and excluded 
extraterritorial income of the corporation for the taxable year 
from transactions pursuant to a binding contract.
      Effective date.--The provision is effective for 
transactions occurring after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, except 
that under the conference agreement the ETI exclusion 
provisions remain in effect for transactions in the ordinary 
course of a trade or business if such transactions are pursuant 
to a binding contract \7\ between the taxpayer and an unrelated 
person and such contract is in effect on September 17, 2003, 
and at all times thereafter.
---------------------------------------------------------------------------
    \7\ This rule also applies to a purchase option, renewal option, or 
replacement option that is included in such contract. For this purpose, 
a replacement option will be considered enforceable against a lessor 
notwithstanding the fact that a lessor retained approval of the 
replacement lessee.
---------------------------------------------------------------------------
      Effective date.--The effective date is the same as the 
House bill.

     B. Deduction Relating to Income Attributable to United States 
                         Production Activities

(Sec. 102 of the House bill, secs. 102 and 103 of the Senate amendment, 
        and sec. 11 of the Code)

                              PRESENT LAW

      A corporation's regular income tax liability is 
determined by applying the following tax rate schedule to its 
taxable income.

     TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$10,000,000.......................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

      The benefit of the first two graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $100,000 and $335,000. 
Also, the benefit of the 34-percent rate is phased out by a 
three-percent surcharge for corporations with taxable income 
between $15 million and $18,333,333; a corporation with taxable 
income of $18,333,333 or more effectively is subject to a flat 
rate of 35 percent.
      Under present law, there is no provision that reduces the 
corporate income tax for taxable income attributable to 
domestic production activities.

                               HOUSE BILL

In general
      The House bill provides that the corporate tax rate 
applicable to qualified production activities income may not 
exceed 32 percent (34 percent for taxable years beginning 
before 2007) of the qualified production activities income.
            Qualified production activities income
      ``Qualified production activities income'' is the income 
attributable to domestic production gross receipts, reduced by 
the sum of: (1) the costs of goods sold that are allocable to 
such receipts; (2) other deductions, expenses, or losses that 
are directly allocable to such receipts; and (3) a proper share 
of other deductions, expenses, and losses that are not directly 
allocable to such receipts or another class of income.\8\
---------------------------------------------------------------------------
    \8\ The House bill provides that Secretary shall prescribe rules 
for the proper allocation of items of income, deduction, expense, and 
loss for purposes of determining income attributable to domestic 
production activities. Where appropriate, such rules shall be similar 
to and consistent with relevant present-law rules (e.g., secs. 263A and 
861).
---------------------------------------------------------------------------

                   DOMESTIC PRODUCTION GROSS RECEIPTS

      Under the House bill, ``domestic production gross 
receipts'' generally are gross receipts of a corporation that 
are derived from: (1) any sale, exchange or other disposition, 
or any lease, rental or license, of qualifying production 
property that was manufactured, produced, grown or extracted 
(in whole or in significant part) by the corporation within the 
United States; \9\ (2) any sale, exchange or other disposition, 
or any lease, rental or license, of qualified film produced by 
the taxpayer; or (3) construction, engineering or architectural 
services performed in the United States for construction 
projects located in the United States. However, domestic 
production gross receipts do not include any gross receipts of 
the taxpayer derived from property that is leased, licensed or 
rented by the taxpayer for use by any related person.\10\
---------------------------------------------------------------------------
    \9\ Domestic production gross receipts under the House bill include 
gross receipts of a taxpayer derived from any sale, exchange or other 
disposition of agricultural products with respect to which the taxpayer 
performs storage, handling or other processing activities (other than 
transportation activities) within the United States, provided such 
products are consumed in connection with, or incorporated into, the 
manufacturing, production, growth or extraction of qualifying 
production property (whether or not by the taxpayer). Domestic 
production gross receipts also include gross receipts of a taxpayer 
derived from any sale, exchange or other disposition of food products 
with respect to which the taxpayer performs processing activities (in 
whole or in significant part) within the United States.
    \10\ It is intended under the House bill that principles similar to 
those under the present-law extraterritorial income regime apply for 
this purpose. See Temp. Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For 
example, this exclusion generally does not apply to property leased by 
the taxpayer to a related person if the property is held for sublease, 
or is subleased, by the related person to an unrelated person for the 
ultimate use of such unrelated person. Similarly, the license of 
computer software to a related person for reproduction and sale, 
exchange, lease, rental or sublicense to an unrelated person for the 
ultimate use of such unrelated person is not treated as excluded 
property by reason of the license to the related person.
---------------------------------------------------------------------------
      ``Qualifying production property'' under the House bill 
generally is any tangible personal property, computer software, 
or property described in section 168(f)(4) of the Code. 
``Qualified film'' is any property described in section 
168(f)(3) of the Code (other than certain sexually explicit 
productions) if 50 percent or more of the total compensation 
relating to the production of such film (other than 
compensation in the form of residuals and participations) 
constitutes compensation for services performed in the United 
States by actors, production personnel, directors, and 
producers.
      Under the House bill, an election under section 631(a) 
made by a corporate taxpayer for a taxable year ending on or 
before the date of enactment to treat the cutting of timber as 
a sale or exchange, may be revoked by the taxpayer without the 
consent of the IRS for any taxable year ending after that date. 
The prior election (and revocation) is disregarded for purposes 
of making a subsequent election.
      Effective date.--The House bill provision is effective 
for taxable years beginning after December 31, 2004.

                            SENATE AMENDMENT

In general
      The Senate amendment provides a deduction equal to a 
portion of the taxpayer's qualified production activities 
income. For taxable years beginning after 2008, the Senate 
amendment deduction is nine percent of such income. For taxable 
years beginning in 2004, 2005, 2006, 2007 and 2008, the 
deduction is five, five, five, six, and seven percent of 
income, respectively. However, the deduction for a taxable year 
is limited to 50 percent of the wages paid by the taxpayer 
during such taxable year.\11\ In the case of corporate 
taxpayers that are members of certain affiliated groups, the 
deduction is determined by treating all members of such groups 
as a single taxpayer.
---------------------------------------------------------------------------
    \11\ For purposes of the Senate amendment, ``wages'' include the 
sum of the aggregate amounts of wages (as defined in section 3401(a) 
without regard to exclusions for remuneration paid for services 
performed in possessions of the United States) and elective deferrals 
that the taxpayer is required to include on statements with respect to 
the employment of employees of the taxpayer during the taxpayer's 
taxable year. Elective deferrals include elective deferrals as defined 
in section 402(g)(3), amounts deferred under section 457, and, for 
taxable years beginning after December 31, 2005, designated Roth 
contributions (as defined in section 402A). Any wages taken into 
account for purposes of determining the wage limitation under the 
Senate amendment cannot also be taken into account for purposes of 
determining any credit allowable under sections 30A or 936.
---------------------------------------------------------------------------
Qualified production activities income
      In general, ``qualified production activities income'' 
under the Senate amendment is the modified taxable income \12\ 
of a taxpayer that is attributable to domestic production 
activities. Income attributable to domestic production 
activities generally is equal to domestic production gross 
receipts, reduced by the sum of: (1) the costs of goods sold 
that are allocable to such receipts; \13\ (2) other deductions, 
expenses, or losses that are directly allocable to such 
receipts; and (3) a proper share of other deductions, expenses, 
and losses that are not directly allocable to such receipts or 
another class of income.\14\
---------------------------------------------------------------------------
    \12\ ``Modified taxable income'' under the Senate amendment is 
taxable income of the taxpayer computed without regard to the deduction 
provided by the Senate amendment. Qualified production activities 
income is limited to the modified taxable income of the taxpayer.
    \13\ For purposes of determining such costs under the Senate 
amendment, any item or service that is imported into the United States 
without an arm's length transfer price shall be treated as acquired by 
purchase, and its cost shall be treated as not less than its fair 
market value when it entered the United States. A similar rule shall 
apply in determining the adjusted basis of leased or rented property 
where the lease or rental gives rise to domestic production gross 
receipts. With regard to property previously exported by the taxpayer 
for further manufacture, the increase in cost or adjusted basis shall 
not exceed the difference between the fair market value of the property 
when exported and the fair market value of the property when re-
imported into the United States after further manufacture.
    \14\ The Senate amendment provides that the Secretary shall 
prescribe rules for the proper allocation of items of income, 
deduction, expense, and loss for purposes of determining income 
attributable to domestic production activities. Where appropriate, such 
rules shall be similar to and consistent with relevant present-law 
rules (e.g., secs. 263A and 861).
---------------------------------------------------------------------------
      For taxable years beginning before 2013, the Senate 
amendment provides that qualified production activities income 
is reduced by virtue of a fraction (not to exceed one), the 
numerator of which is the value of the domestic production of 
the taxpayer and the denominator of which is the value of the 
worldwide production of the taxpayer (the ``domestic/worldwide 
fraction'').\15\ For taxable years beginning in 2010, 2011, and 
2012, the reduction in qualified production activities income 
by virtue of this fraction is reduced by 25, 50, and 75 
percent, respectively. For taxable years beginning after 2012, 
there is no reduction in qualified production activities income 
by virtue of this fraction.
---------------------------------------------------------------------------
    \15\ For purposes of the domestic/worldwide fraction under the 
Senate amendment, the value of domestic production is the excess of 
domestic production gross receipts (as defined below) over the cost of 
deductible purchased inputs that are allocable to such receipts. 
Similarly, the value of worldwide production is the excess of worldwide 
production gross receipts over the cost of deductible purchased inputs 
that are allocable to such receipts. For purposes of determining the 
domestic/worldwide fraction, purchased inputs include: purchased 
services (other than employees) used in manufacture, production, 
growth, or extraction activities; purchased items consumed in 
connection with such activities; and purchased items incorporated as 
part of the property being manufactured, produced, grown, or extracted. 
In the case of corporate taxpayers that are members of certain 
affiliated groups, the domestic/worldwide fraction is determined by 
treating all members of such groups as a single taxpayer.
---------------------------------------------------------------------------
Domestic production gross receipts
      Under the Senate amendment, ``domestic production gross 
receipts'' are gross receipts of a taxpayer that are derived in 
the actual conduct of a trade or business from any sale, 
exchange or other disposition, or any lease, rental or license, 
of qualifying production property that was manufactured, 
produced, grown or extracted (in whole or in significant part) 
by the taxpayer within the United States or any possession of 
the United States.\16\ Such term also includes a percentage of 
gross receipts derived from engineering or architectural 
services performed in the United States for construction 
projects in the United States.\17\ Finally, such term includes 
gross receipts derived by the taxpayer from the use of film and 
videotape property produced in whole or in significant part by 
the taxpayer within the United States. ``Qualifying production 
property'' generally is any tangible personal property, 
computer software, or property described in section 168(f)(3) 
or (4) of the Code.\18\ However, qualifying production property 
does not include: (1) consumable property that is sold, leased 
or licensed as an integral part of the provision of services; 
(2) oil or gas (other than certain primary products thereof); 
\19\ (3) electricity; (4) water supplied by pipeline to the 
consumer; (5) utility services; and (6) any film, tape, 
recording, book, magazine, newspaper or similar property the 
market for which is primarily topical or otherwise essentially 
transitory in nature.\20\
---------------------------------------------------------------------------
    \16\ Under the Senate amendment, domestic production gross receipts 
include gross receipts of a taxpayer derived from any sale, exchange or 
other disposition of agricultural products with respect to which the 
taxpayer performs storage, handling or other processing activities (but 
not transportation activities) within the United States, provided such 
products are consumed in connection with, or incorporated into, the 
manufacturing, production, growth or extraction of qualifying 
production property (whether or not by the taxpayer).
    \17\ For taxable years beginning in 2004 through 2008, the 
applicable percentage is 25%. For taxable years beginning in 2009 
through 2012, the applicable percentage is 50%. For taxable years 
beginning after 2012, the applicable percentage is 100%.
    \18\ For purposes of the definition of qualified production 
property under the Senate amendment, property described in section 
168(f)(3) or (4) of the Code includes underlying copyrights and 
trademarks. In addition, gross receipts from the sale, exchange, lease, 
rental, license or other disposition of property described in section 
168(f)(3) or (4) are treated as domestic production gross receipts if 
more than 50 percent of the aggregate development and production costs 
of such property are incurred by the taxpayer within the United States. 
For this purpose, property that is acquired by the taxpayer after 
development or production has commenced, but before such property 
generates substantial gross receipts, shall be treated as developed or 
produced by the taxpayer.
    \19\ Under the Senate amendment, qualifying production property 
does not include extracted but unrefined oil or gas, but generally 
includes primary products of oil and gas that are produced by the 
taxpayer. Examples of primary products for this purpose include motor 
fuels, chemical feedstocks and fertilizer. However, primary products do 
not include the output of a natural gas processing plant. Natural gas 
processing plants generally are located at or near the producing gas 
field that supplies the facility, and the facility serves to separate 
impurities from the natural gas liquids recovered from the field for 
the purpose of selling the liquids for future production and 
preparation of the natural gas for pipeline transportation.
    \20\ The topical and transitory exclusion does not apply to the 
extent of the gross receipts from the use of film and videotape 
property produced in whole or in significant part by the taxpayer 
within the United States.
---------------------------------------------------------------------------
Other rules
            Qualified production activities income of passthrough 
                    entities (other than cooperatives)
      With respect to domestic production activities of an S 
corporation, partnership, estate, trust or other passthrough 
entity (other than an agricultural or horticultural 
cooperative), the deduction under the Senate amendment 
generally is determined at the shareholder, partner or similar 
level by taking into account at such level the proportionate 
share of qualified production activities income of the 
entity.\21\ The Senate amendment directs the Secretary to 
prescribe rules for the application of the deduction to 
passthrough entities, including reporting requirements and 
rules relating to restrictions on the allocation of the 
deduction to taxpayers at the partner or similar level.
---------------------------------------------------------------------------
    \21\ However, the wage limitation described above is determined at 
the entity level in computing the deduction with respect to qualified 
production activities income of a passthrough entity.
---------------------------------------------------------------------------
            Qualified production activities income of agricultural and 
                    horticultural cooperatives
      With regard to member-owned agricultural and 
horticultural cooperatives formed under Subchapter T of the 
Code, the Senate amendment provides the same treatment of 
qualified production activities income derived from products 
marketed through cooperatives as it provides for qualified 
production activities income of other taxpayers (i.e., the 
cooperative may claim a deduction from qualified production 
activities income). In addition, the Senate amendment provides 
that the amount of any patronage dividends or per-unit retain 
allocations paid to a member of an agricultural or 
horticultural cooperative (to which Part I of Subchapter T 
applies), which is allocable to the portion of qualified 
production activities income of the cooperative that is 
deductible under the Senate amendment, is excludible from the 
gross income of the member. In order to qualify, such amount 
must be designated by the organization as allocable to the 
deductible portion of qualified production activities income in 
a written notice mailed to its patrons not later than the 
payment period described in section 1382(d). The cooperative 
cannot reduce its income under section 1382 (e.g., cannot claim 
a dividends-paid deduction) for such amounts.
            Separate application to films and videotape
      Under the Senate amendment, the deduction provided by 
this provision with respect to films and videotape is 
determined separately with respect to qualified production 
activities income of the taxpayer allocable to each of three 
markets: theatrical, broadcast television, and home video. The 
Senate amendment provides rules for making a separate 
determination of qualified production activities allocable to 
each market.
            Alternative minimum tax
      The deduction provided by the Senate amendment is allowed 
for purposes of the alternative minimum tax (including adjusted 
current earnings). The deduction is determined by reference to 
modified alternative minimum taxable income.
            Coordination with ETI repeal
      For purposes of the Senate amendment, domestic production 
gross receipts does not include gross receipts from any 
transaction that produces excluded extraterritorial income 
pursuant to the binding contract exception to the ETI repeal 
provisions of the Senate amendment.
      Qualified production activities income is determined 
without regard to any deduction provided by the ETI repeal 
provisions of the Senate amendment.
      Effective date.--The Senate amendment provision is 
effective for taxable years ending after the date of enactment.

                          CONFERENCE AGREEMENT

In general
      The conference agreement provides a deduction from 
taxable income (or, in the case of an individual, adjusted 
gross income) that is equal to a portion of the taxpayer's 
qualified production activities income. For taxable years 
beginning after 2009, the deduction is equal to nine percent of 
the lesser of (1) the qualified production activities income of 
the taxpayer for the taxable year, or (2) taxable income 
(determined without regard to this provision) for the taxable 
year. For taxable years beginning in 2005 and 2006, the 
deduction is three percent of income and, for taxable years 
beginning in 2007, 2008 and 2009, the deduction is six percent 
of income. However, the deduction for a taxable year is limited 
to 50 percent of the wages paid by the taxpayer during the 
calendar year that ends in such taxable year.\22\ In the case 
of corporate taxpayers that are members of certain affiliated 
groups, the deduction is determined by treating all members of 
such groups as a single taxpayer and the deduction is allocated 
among such members in proportion to each member's respective 
amount (if any) of qualified production activities income.
---------------------------------------------------------------------------
    \22\ For purposes of the conference agreement, ``wages'' include 
the sum of the aggregate amounts of wages and elective deferrals that 
the taxpayer is required to include on statements with respect to the 
employment of employees of the taxpayer during the taxpayer's taxable 
year. Elective deferrals include elective deferrals as defined in 
section 402(g)(3), amounts deferred under section 457, and, for taxable 
years beginning after December 31, 2005, designated Roth contributions 
(as defined in section 402A).
---------------------------------------------------------------------------
Qualified production activities income
      In general, ``qualified production activities income'' is 
equal to domestic production gross receipts, reduced by the sum 
of: (1) the costs of goods sold that are allocable to such 
receipts; \23\ (2) other deductions, expenses, or losses that 
are directly allocable to such receipts; and (3) a proper share 
of other deductions, expenses, and losses that are not directly 
allocable to such receipts or another class of income.\24\
---------------------------------------------------------------------------
    \23\ For purposes of determining such costs, any item or service 
that is imported into the United States without an arm's length 
transfer price shall be treated as acquired by purchase, and its cost 
shall be treated as not less than its value when it entered the United 
States. A similar rule shall apply in determining the adjusted basis of 
leased or rented property where the lease or rental gives rise to 
domestic production gross receipts. With regard to property previously 
exported by the taxpayer for further manufacture, the increase in cost 
or adjusted basis shall not exceed the difference between the value of 
the property when exported and the value of the property when re-
imported into the United States after further manufacture. Except as 
provided by the Secretary, the value of property for this purpose shall 
be its customs value (as defined in section 1059A(b)(1)).
    \24\ The Secretary shall prescribe rules for the proper allocation 
of items of income, deduction, expense, and loss for purposes of 
determining income attributable to domestic production activities. 
Where appropriate, such rules shall be similar to and consistent with 
relevant present-law rules (e.g., sec. 263A, in determining the cost of 
goods sold, and sec. 861, in determining the source of such items). 
Other deductions, expenses or losses that are directly allocable to 
such receipts include, for example, selling and marketing expenses. A 
proper share of other deductions, expenses, and losses that are not 
directly allocable to such receipts or another class of income include, 
for example, general and administrative expenses allocable to selling 
and marketing expenses.
---------------------------------------------------------------------------
Domestic production gross receipts
      ``Domestic production gross receipts'' generally are 
gross receipts of a taxpayer that are derived from: (1) any 
sale, exchange or other disposition, or any lease, rental or 
license, of qualifying production property that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States; \25\ (2) 
any sale, exchange or other disposition, or any lease, rental 
or license, of qualified film produced by the taxpayer; (3) any 
sale, exchange or other disposition electricity, natural gas, 
or potable water produced by the taxpayer in the United States; 
(4) construction activities performed in the United States; 
\26\ or (5) engineering or architectural services performed in 
the United States for construction projects located in the 
United States.
---------------------------------------------------------------------------
    \25\ Domestic production gross receipts include gross receipts of a 
taxpayer derived from any sale, exchange or other disposition of 
agricultural products with respect to which the taxpayer performs 
storage, handling or other processing activities (other than 
transportation activities) within the United States, provided such 
products are consumed in connection with, or incorporated into, the 
manufacturing, production, growth or extraction of qualifying 
production property (whether or not by the taxpayer).
    \26\ For this purpose, construction activities include activities 
that are directly related to the erection or substantial renovation of 
residential and commercial buildings and infrastructure. Substantial 
renovation would include structural improvements, but not mere cosmetic 
changes, such as painting.
---------------------------------------------------------------------------
      However, domestic production gross receipts do not 
include any gross receipts of the taxpayer that are derived 
from (1) the sale of food or beverages prepared by the taxpayer 
at a retail establishment,\27\ or (2) the transmission or 
distribution of electricity, natural gas, or potable water.\28\ 
In addition, domestic production gross receipts do not include 
any gross receipts of the taxpayer derived from property that 
is leased, licensed or rented by the taxpayer for use by any 
related person.\29\
---------------------------------------------------------------------------
    \27\ The conferees intend that food processing, which generally is 
a qualified production activity under the conference agreement, does 
not include activities carried out at retail establishment. Thus, under 
the conference agreement while the gross receipts of a meat packing 
establishment are qualified domestic production gross receipts, the 
activities of a master chef who creates a venison sausage for his or 
her restaurant menu cannot be construed as a qualified production 
activity.
    The conferees recognize that some taxpayers may own facilities at 
which the predominant activity is domestic production as defined in the 
conference agreement and other facilities at which they engage in the 
retail sale of the taxpayer's produced goods and also sell food and 
beverages. For example, assume that the taxpayer buys coffee beans and 
roasts those beans at a facility, the primary activity of which is the 
roasting and packaging of roasted coffee. The taxpayer sells the 
roasted coffee through a variety of unrelated third-party vendors and 
also sells roasted coffee at the taxpayer's own retail establishments. 
In addition, at the taxpayer's retail establishments, the taxpayer 
prepares brewed coffee and other foods. The conferees intend that to 
the extent that the gross receipts of the taxpayer's retail 
establishment represent receipts from the sale of its roasted coffee 
beans to customers, the receipts are qualified domestic production 
gross receipts, but to the extent that the gross receipts of the 
taxpayer's retail establishment represent receipts from the sale of 
brewed coffee or food prepared at the retail establishment, the 
receipts are not qualified domestic production gross receipts. However, 
the conferees intend that, in this case, the taxpayer may allocate part 
of the receipts from the sale of the brewed coffee as qualified 
domestic production gross receipts to the extent of the value of the 
roasted coffee beans used to brew the coffee. The conferees intend that 
the Secretary provide guidance drawing on the principles of section 482 
by which such a taxpayer can allocate gross receipts between qualified 
and nonqualified gross receipts. The conferees observe that in this 
example, the taxpayer's sales of roasted coffee beans to unrelated 
third parties would provide a value for the beans used in brewing a cup 
of coffee for retail sale.
    The conferees intend that the disqualification of gross receipts 
derived from the sale of food and beverage prepared by the taxpayer at 
a retail establishment not be construed narrowly to apply only to 
establishments at which customers dine on premises. The receipts of a 
facility that prepares food and beverage solely for take out service 
would not be qualified production gross receipts. Likewise, the 
conferees intend that the disqualification of gross receipts derived 
from the sale of food and beverages prepared by the taxpayer need not 
be limited to retail establishments primarily engaged in the dining 
trade. For example, if a taxpayer operates a supermarket and as part of 
the supermarket the taxpayer operates an in-store bakery, the same 
allocation described above would apply to determine the extent to which 
the taxpayer's gross receipts represent qualified domestic production 
gross receipts.
    \28\ The conference agreement provides that domestic production 
gross receipts include the gross receipts from the production in the 
United States of electricity, gas, and potable water, but excludes the 
gross receipts from the transmission or distribution of electricity, 
gas, and potable water. Thus, in the case of a taxpayer who owns a 
facility for the production of electricity, whether the taxpayer's 
facility is part of a regulated utility or an independent power 
facility, the taxpayer's gross receipts from the production of 
electricity at that facility are qualified domestic production gross 
receipts. However, to the extent that the taxpayer is an integrated 
producer that generates electricity and delivers electricity to end 
users, any gross receipts properly attributable to the transmission of 
electricity from the generating facility to a point of local 
distribution and any gross receipts properly attributable to the 
distribution of electricity to final customers are not qualified 
domestic production gross receipts. For example, assume taxpayer A owns 
a wind turbine that generates electricity and taxpayer B owns a high-
voltage transmission line that passes near taxpayer A's wind turbine 
and ends near the system of local distribution lines of taxpayer C. 
Taxpayer A sells the electricity produced at the wind turbine to 
taxpayer C and contracts with taxpayer B to transmit the electricity 
produced at the wind turbine to taxpayer C who sells the electricity to 
his or her customers using taxpayer C's distribution network. The gross 
receipts received by taxpayer A for the sale of electricity produced at 
the wind turbine constitute qualifying domestic production gross 
receipts. The gross receipts of taxpayer B from transporting taxpayer 
A's electricity to taxpayer C are not qualifying domestic production 
gross receipts. Likewise the gross receipts of taxpayer C from 
distributing the electricity are not qualifying domestic production 
gross receipts. Also, if taxpayer A made direct sales of electricity to 
customers in taxpayer C's service area and taxpayer C receives 
remuneration for the distribution of electricity, the gross receipts of 
taxpayer C are not qualifying domestic production gross receipts. If 
taxpayers A, B, and C are all related taxpayer, then taxpayers A, B, 
and C must allocate gross receipts to production activities, 
transmission activities, and distribution activities in a manner 
consistent with the preceding example.
    The conference agreement provides that the same principles apply in 
the case of the natural gas and water supply industries. In the case of 
natural gas, production activities generally are all activities 
involved in extracting natural gas from the ground and processing the 
gas into pipeline quality gas. Such activities would produce qualifying 
domestic production gross receipts. However gross receipts of a 
taxpayer attributable to transmission of pipeline quality gas from a 
natural gas field (or from a natural gas processing plant) to a local 
distribution company's citygate (or to another customer) are not 
qualified domestic production gross receipts. Likewise gas purchased by 
a local gas distribution company and distributed from the citygate to 
the local customers does not give rise to domestic production gross 
receipts.
    In the case of the production of potable water the conferees intend 
that activities involved in the production of potable water include the 
acquisition, collection, and storage of raw water (untreated water). It 
also includes the transportation of raw water to a water treatment 
facility and treatment of raw water at such a facility. However, any 
gross receipts from the storage of potable water after the water 
treatment facility or delivery of potable water to customers does not 
give rise to qualifying domestic production gross receipts. The 
conferees intend that a taxpayer that both produces potable water and 
distributes potable water will properly allocate gross receipts across 
qualifying and non-qualifying activities.
    \29\ It is intended that principles similar to those under the 
present-law extraterritorial income regime apply for this purpose. See 
Temp. Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For example, this 
exclusion generally does not apply to property leased by the taxpayer 
to a related person if the property is held for sublease, or is 
subleased, by the related person to an unrelated person for the 
ultimate use of such unrelated person. Similarly, the license of 
computer software to a related person for reproduction and sale, 
exchange, lease, rental or sublicense to an unrelated person for the 
ultimate use of such unrelated person is not treated as excluded 
property by reason of the license to the related person.
---------------------------------------------------------------------------
      ``Qualifying production property'' generally includes any 
tangible personal property, computer software, or sound 
recordings. ``Qualified film'' includes any motion picture film 
or videotape \30\ (including live or delayed television 
programming, but not including certain sexually explicit 
productions) if 50 percent or more of the total compensation 
relating to the production of such film (including compensation 
in the form of residuals and participations \31\) constitutes 
compensation for services performed in the United States by 
actors, production personnel, directors, and producers.\32\
---------------------------------------------------------------------------
    \30\ The conferees intend that the nature of the material on which 
properties described in section 168(f)(3) are embodied and the methods 
and means of distribution of such properties shall not affect their 
qualification under this provision.
    \31\ To the extent that a taxpayer has included an estimate of 
participations and/or residuals in its income forecast calculation 
under section 167(g), such taxpayer must use the same estimate of 
participations and/or residuals for purposes of determining total 
compensation.
    \32\ It is intended that the Secretary will provide appropriate 
rules governing the determination of total compensation for services 
performed in the United States.
---------------------------------------------------------------------------
Other rules
            Qualified production activities income of passthrough 
                    entities (other than cooperatives)
      With respect to domestic production activities of an S 
corporation, partnership, estate, trust or other passthrough 
entity (other than an agricultural or horticultural 
cooperative), although the wage limitation is applied first at 
the entity level, the deduction under the conference agreement 
generally is determined at the shareholder, partner or similar 
level by taking into account at such level the proportionate 
share of qualified production activities income of the entity. 
The Secretary is directed to prescribe rules for the 
application of the conference agreement to passthrough 
entities, including reporting requirements and rules relating 
to restrictions on the allocation of the deduction to taxpayers 
at the partner or similar level.
      For purposes of applying the wage limitation at the level 
of a shareholder, partner, or similar person, each person who 
is allocated qualified production activities income from a 
passthrough entity also is treated as having been allocated 
wages from such entity in an amount that is equal to the lesser 
of: (1) such person's allocable share of wages, as determined 
under regulations prescribed by the Secretary; or (2) twice the 
appropriate deductible percentage of qualified production 
activities income that actually is allocated to such person for 
the taxable year.
            Qualified production activities income of agricultural and 
                    horticultural cooperatives
      With regard to member-owned agricultural and 
horticultural cooperatives formed under Subchapter T of the 
Code, the conference agreement provides the same treatment of 
qualified production activities income derived from 
agricultural or horticultural products that are manufactured, 
produced, grown, or extracted by cooperatives,\33\ or that are 
marketed through cooperatives, as it provides for qualified 
production activities income of other taxpayers (i.e., the 
cooperative may claim a deduction from qualified production 
activities income).
---------------------------------------------------------------------------
    \33\ For this purpose, agricultural or horticultural products also 
include fertilizer, diesel fuel and other supplies used in agricultural 
or horticultural production that are manufactured, produced, grown, or 
extracted by the cooperative.
---------------------------------------------------------------------------
      In addition, the conference agreement provides that the 
amount of any patronage dividends or per-unit retain 
allocations paid to a member of an agricultural or 
horticultural cooperative (to which Part I of Subchapter T 
applies), which is allocable to the portion of qualified 
production activities income of the cooperative that is 
deductible under the conference agreement, is deductible from 
the gross income of the member. In order to qualify, such 
amount must be designated by the organization as allocable to 
the deductible portion of qualified production activities 
income in a written notice mailed to its patrons not later than 
the payment period described in section 1382(d). The 
cooperative cannot reduce its income under section 1382 (e.g., 
cannot claim a dividends-paid deduction) for such amounts.
            Alternative minimum tax
      The deduction provided by the conference agreement is 
allowed for purposes of computing alternative minimum taxable 
income (including adjusted current earnings). The deduction in 
computing alternative minimum taxable income is determined by 
reference to the lesser of the qualified production activities 
income (as determined for the regular tax) or the alternative 
minimum taxable income (in the case of an individual, adjusted 
gross income as determined for the regular tax) without regard 
to this deduction.
            Timber cutting
      Under the conference agreement, an election made for a 
taxable year ending on or before the date of enactment, to 
treat the cutting of timber as a sale or exchange, may be 
revoked by the taxpayer without the consent of the IRS for any 
taxable year ending after that date. The prior election (and 
revocation) is disregarded for purposes of making a subsequent 
election.
Exploration of fundamental tax reform
      The conferees acknowledge that Congress has not reduced 
the statutory corporate income tax rate since 1986. According 
to the Organisation of Economic Cooperation and Development 
(``OECD''), the combined corporate income tax rate, as defined 
by the OECD, in most instances is lower than the U.S. corporate 
income tax rate.\34\ Higher corporate tax rates factor into the 
United States' ability to attract and retain economically 
vibrant industries, which create good jobs and contribute to 
overall economic growth.
---------------------------------------------------------------------------
    \34\ Organisation of Economic Cooperation and Development, Table 
1.5, Tax Data Base Statistics, Tax Policy and Administration, Summary 
Tables (2003).
---------------------------------------------------------------------------
      This legislation was crafted to repeal an export tax 
benefit that was deemed inconsistent with obligations of the 
United States under the Agreement on Subsidies and 
Countervailing Measures and other international trade 
agreements. This legislation replaces the benefit with tax 
relief specifically designed to be economically equivalent to a 
3-percentage point reduction in U.S.-based manufacturing.
      The conferees recognize that manufacturers are a segment 
of the economy that has faced significant challenges during the 
nation's recent economic slowdown. The conferees recognize that 
trading partners of the United States retain subsidies for 
domestic manufacturers and exports through their indirect tax 
systems. The conferees are concerned about the adverse 
competitive impact of these subsidies on U.S. manufacturers.
      These concerns should be considered in the context of the 
benefits of a unified top tax rate for all corporate taxpayers, 
including manufacturing, in terms of efficiency and fairness. 
The conferees also expect that the tax-writing committees will 
explore a unified top corporate tax rate in the context of 
fundamental tax reform.
      Effective date.--The conference agreement is effective 
for taxable years beginning after December 31, 2004.

      C. Reduced Corporate Income Tax Rate for Small Corporations

(Sec. 103 of the House bill and sec. 11 of the Code)

                              PRESENT LAW

      A corporation's regular income tax liability is 
determined by applying the following tax rate schedule to its 
taxable income.

     TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$10,000,000.......................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

      The benefit of the first two graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $100,000 and $335,000. 
Also, the benefit of the 34-percent rate is phased out by a 
three-percent surcharge for corporations with taxable income 
between $15 million and $18,333,333; a corporation with taxable 
income of $18,333,333 or more effectively is subject to a flat 
rate of 35 percent.

                               HOUSE BILL

      Under the House bill, a corporation's regular income tax 
liability is determined by applying the following tax rate 
schedules to its taxable income.

   TABLE 2.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2013 AND
                               THEREAFTER
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$20,000,000.......................  32 percent of taxable
                                             income.
Over $20,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

      The benefit of the graduated rates described above is 
phased out by a three-percent surcharge for corporations with 
taxable income between $20 million and $40,341,667; a 
corporation with taxable income of $40,341,667 or more 
effectively is subject to a flat rate of 35 percent.

   TABLE 3.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2011-2012
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$5,000,000........................  32 percent of taxable
                                             income.
$5,000,001-$10,000,000....................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

      The benefit of the first three graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $5,000,000 and 
$7,205,000. Also, the benefit of the 34-percent rate is phased 
out by a three-percent surcharge for corporations with taxable 
income between $15 million and $18,333,333; a corporation with 
taxable income of $18,333,333 or more effectively is subject to 
a flat rate of 35 percent.

   TABLE 4.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2008-2010
------------------------------------------------------------------------
              Taxable income:                     Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$1,000,000........................  32 percent of taxable
                                             income.
$1,000,001-$10,000,000....................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable income
------------------------------------------------------------------------

      The benefit of the first three graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $1,000,000 and 
$1,605,000. Also, the benefit of the 34-percent rate is phased 
out by a three-percent surcharge for corporations with taxable 
income between $15 million and $18,333,333; a corporation with 
taxable income of $18,333,333 or more effectively is subject to 
a flat rate of 35 percent.

                       TABLE 5.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2005-2007
----------------------------------------------------------------------------------------------------------------
                         Taxable income:                                          Income tax rate:
----------------------------------------------------------------------------------------------------------------
$0-$50,000.......................................................                  15 percent of taxable income.
$50,001-$75,000..................................................                  25 percent of taxable income.
$75,001-$1,000,000...............................................                  33 percent of taxable income.
$1,000,001-$10,000,000...........................................                  34 percent of taxable income.
Over $10,000,000.................................................                  35 percent of taxable income.
----------------------------------------------------------------------------------------------------------------

      The benefit of the first three graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $1,000,000 and 
$1,420,000. Also, the benefit of the 34-percent rate is phased 
out by a three-percent surcharge for corporations with taxable 
income between $15 million and $18,333,333; a corporation with 
taxable income of $18,333,333 or more effectively is subject to 
a flat rate of 35 percent.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

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

                        A. Section 179 Expensing

(Sec. 201 of the House bill, sec. 309 of the Senate amendment and sec. 
        179 of the Code)

                              PRESENT LAW

      Present law provides that, in lieu of depreciation, a 
taxpayer with a sufficiently small amount of annual investment 
may elect to deduct such costs. The Jobs and Growth Tax Relief 
Reconciliation Act (JGTRRA) of 2003 \35\ increased the amount a 
taxpayer may deduct, for taxable years beginning in 2003 
through 2005, to $100,000 of the cost of qualifying property 
placed in service for the taxable year.\36\ In general, 
qualifying property is defined as depreciable tangible personal 
property (and certain computer software) that is purchased for 
use in the active conduct of a trade or business. The $100,000 
amount is reduced (but not below zero) by the amount by which 
the cost of qualifying property placed in service during the 
taxable year exceeds $400,000. The $100,000 and $400,000 
amounts are indexed for inflation.
---------------------------------------------------------------------------
    \35\ Pub. L. No. 108-27, sec. 202 (2003).
    \36\ Additional section 179 incentives are provided with respect to 
a qualified property used by a business in the New York Liberty Zone 
(sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal 
community (sec. 1400J).
---------------------------------------------------------------------------
      Prior to the enactment of JGTRRA (and for taxable years 
beginning in 2006 and thereafter) a taxpayer with a 
sufficiently small amount of annual investment could elect to 
deduct up to $25,000 of the cost of qualifying property placed 
in service for the taxable year. The $25,000 amount was reduced 
(but not below zero) by the amount by which the cost of 
qualifying property placed in service during the taxable year 
exceeds $200,000. In general, qualifying property is defined as 
depreciable tangible personal property that is purchased for 
use in the active conduct of a trade or business.
      The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179.
      Under present law, an expensing election is made under 
rules prescribed by the Secretary.\37\ Applicable Treasury 
regulations provide that an expensing election generally is 
made on the taxpayer's original return for the taxable year to 
which the election relates.\38\
---------------------------------------------------------------------------
    \37\ Sec. 179(c)(1).
    \38\ Under Treas. Reg. sec. 1.179-5, applicable to property placed 
in service in taxable years ending after Jan. 25, 1993 (but not 
including property placed in service in taxable years beginning after 
2002 and before 2006), a taxpayer may make the election on the original 
return (whether or not the return is timely), or on an amended return 
filed by the due date (including extensions) for filing the return for 
the tax year the property was placed in service. If the taxpayer timely 
filed an original return without making the election, the taxpayer may 
still make the election by filing an amended return within six months 
of the due date of the return (excluding extensions).
---------------------------------------------------------------------------
      Prior to the enactment of JGTRRA (and for taxable years 
beginning in 2006 and thereafter), an expensing election may be 
revoked only with consent of the Commissioner.\39\ JGTRRA 
permits taxpayers to revoke expensing elections on amended 
returns without the consent of the Commissioner with respect to 
a taxable year beginning after 2002 and before 2006.\40\
---------------------------------------------------------------------------
    \39\ Sec. 179(c)(2).
    \40\ Id. Under Prop. and Temp. Treas. Reg. sec. 179-5T, applicable 
to property placed in service in taxable years beginning after 2002 and 
before 2006, a taxpayer is permitted to make or revoke an election 
under section 179 without the consent of the Commissioner on an amended 
Federal tax return for that taxable year. This amended return must be 
filed within the time prescribed by law for filing an amended return 
for the taxable year. T.D. 9146, Aug. 3, 2004.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision extends the increased amount that a 
taxpayer may deduct, and other changes that were made by 
JGTRRA, for an additional two years. Thus, the provision 
provides that the maximum dollar amount that may be deducted 
under section 179 is $100,000 for property placed in service in 
taxable years beginning before 2008 ($25,000 for taxable years 
beginning in 2008 and thereafter). In addition, the $400,000 
amount applies for property placed in service in taxable years 
beginning before 2008 ($200,000 for taxable years beginning in 
2008 and thereafter). The provision extends, through 2007 (from 
2005), the indexing for inflation of both the maximum dollar 
amount that may be deducted and the $400,000 amount. The 
provision also includes off-the-shelf computer software placed 
in service in taxable years beginning before 2008 as qualifying 
property. The provision permits taxpayers to revoke expensing 
elections on amended returns without the consent of the 
Commissioner with respect to a taxable year beginning before 
2008. The Committee expects that the Secretary will prescribe 
regulations to permit a taxpayer to make an expensing election 
on an amended return without the consent of the Commissioner.
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      The provision provides that the $100,000 amount ($25,000 
for taxable years beginning in 2006 and thereafter) is reduced 
(but not below zero) by only one half of the amount by which 
the cost of qualifying property placed in service during the 
taxable year exceeds $400,000 ($200,000 for taxable years 
beginning 2006 and thereafter).\41\
---------------------------------------------------------------------------
    \41\ As a result of the reduced phase-out percentage, the 
deductible amount in the New York Liberty Zone, an enterprise zone or a 
renewal community is correspondingly increased. See sec. 1400L(f), sec. 
1397A and sec. 1400J.
---------------------------------------------------------------------------
      For example, under the provision, if in 2004 an eligible 
taxpayer places in service qualifying property costing 
$500,000, the $100,000 amount is reduced by $50,000 (i.e., one 
half the amount by which the $500,000 cost of qualifying 
property placed in service during the taxable year exceeds 
$400,000). Thus, the maximum amount eligible for section 179 
expensing by this taxpayer for 2004 is $50,000.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2002.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.

                            B. Depreciation

1. Recovery period for depreciation of certain leasehold improvements 
        (sec. 211 of the House bill and sec. 168 of the Code)

                              PRESENT LAW

In general
      A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168). The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month.
Depreciation of leasehold improvements
      Depreciation allowances for improvements made on leased 
property are determined under MACRS, even if the MACRS recovery 
period assigned to the property is longer than the term of the 
lease.\42\ This rule applies regardless of whether the lessor 
or the lessee places the leasehold improvements in service.\43\ 
If a leasehold improvement constitutes an addition or 
improvement to nonresidential real property already placed in 
service, the improvement is depreciated using the straight-line 
method over a 39-year recovery period, beginning in the month 
the addition or improvement was placed in service.\44\
---------------------------------------------------------------------------
    \42\ Sec. 168(i)(8). The Tax Reform Act of 1986 modified the 
Accelerated Cost Recovery System (``ACRS'') to institute MACRS. Prior 
to the adoption of ACRS by the Economic Recovery Tax Act of 1981, 
taxpayers were allowed to depreciate the various components of a 
building as separate assets with separate useful lives. The use of 
component depreciation was repealed upon the adoption of ACRS. The Tax 
Reform Act of 1986 also denied the use of component depreciation under 
MACRS.
    \43\ Former sections 168(f)(6) and 178 provided that, in certain 
circumstances, a lessee could recover the cost of leasehold 
improvements made over the remaining term of the lease. The Tax Reform 
Act of 1986 repealed these provisions.
    \44\ Secs. 168(b)(3), (c), (d)(2), and (i)(6). If the improvement 
is characterized as tangible personal property, ACRS or MACRS 
depreciation is calculated using the shorter recovery periods, 
accelerated methods, and conventions applicable to such property. The 
determination of whether improvements are characterized as tangible 
personal property or as nonresidential real property often depends on 
whether or not the improvements constitute a ``structural component'' 
of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)). See, e.g., 
Metro National Corp v. Commissioner, 52 TCM (CCH) 1440 (1987); King 
Radio Corp Inc. v. U.S., 486 F.2d 1091 (10th Cir. 1973); Mallinckrodt, 
Inc. v. Commissioner, 778 F.2d 402 (8th Cir. 1985) (with respect to 
various leasehold improvements).
---------------------------------------------------------------------------
Qualified leasehold improvement property
      The Job Creation and Worker Assistance Act of 2002 \45\ 
(``JCWAA''), as amended by JGTRRA, generally provides an 
additional first-year depreciation deduction equal to either 30 
percent or 50 percent of the adjusted basis of qualified 
property placed in service before January 1, 2005. Qualified 
property includes qualified leasehold improvement property. For 
this purpose, qualified leasehold improvement property is any 
improvement to an interior portion of a building that is 
nonresidential real property, provided certain requirements are 
met. The improvement must be made under or pursuant to a lease 
either by the lessee (or sublessee), or by the lessor, of that 
portion of the building to be occupied exclusively by the 
lessee (or sublessee). The improvement must be placed in 
service more than three years after the date the building was 
first placed in service. Qualified leasehold improvement 
property does not include any improvement for which the 
expenditure is attributable to the enlargement of the building, 
any elevator or escalator, any structural component benefiting 
a common area, or the internal structural framework of the 
building.
---------------------------------------------------------------------------
    \45\ Pub. L. No. 107-147, sec. 101 (2002), as amended by Pub. L. 
No. 108-27, sec. 201 (2003).
---------------------------------------------------------------------------
Treatment of dispositions of leasehold improvements
      A lessor of leased property that disposes of a leasehold 
improvement that was made by the lessor for the lessee of the 
property may take the adjusted basis of the improvement into 
account for purposes of determining gain or loss if the 
improvement is irrevocably disposed of or abandoned by the 
lessor at the termination of the lease. This rule conforms the 
treatment of lessors and lessees with respect to leasehold 
improvements disposed of at the end of a term of lease.

                               HOUSE BILL

      The House bill provides a statutory 15-year recovery 
period for qualified leasehold improvement property placed in 
service before January 1, 2006.\46\ The provision requires that 
qualified leasehold improvement property be recovered using the 
straight-line method.
---------------------------------------------------------------------------
    \46\ Qualified leasehold improvement property continues to be 
eligible for the additional first-year depreciation deduction under 
sec. 168(k).
---------------------------------------------------------------------------
      Qualified leasehold improvement property is defined as 
under present law for purposes of the additional first-year 
depreciation deduction,\47\ with the following modification. If 
a lessor makes an improvement that qualifies as qualified 
leasehold improvement property, such improvement does not 
qualify as qualified leasehold improvement property to any 
subsequent owner of such improvement. An exception to the rule 
applies in the case of death and certain transfers of property 
that qualify for non-recognition treatment.
---------------------------------------------------------------------------
    \47\ Sec. 168(k).
---------------------------------------------------------------------------
      Effective date.--The House bill provision is effective 
for property placed in service after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
2. Recovery period for depreciation of certain restaurant improvements 
        (sec. 211 of the House bill and sec. 168 of the Code)

                              PRESENT LAW

      A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168). The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month.

                               HOUSE BILL

      The House bill provides a statutory 15-year recovery 
period for qualified restaurant property placed in service 
before January 1, 2006.\48\ For purposes of the provision, 
qualified restaurant property means any improvement to a 
building if such improvement is placed in service more than 
three years after the date such building was first placed in 
service and more than 50 percent of the building's square 
footage is devoted to the preparation of, and seating for, on-
premises consumption of prepared meals. The provision requires 
that qualified restaurant property be recovered using the 
straight-line method.
---------------------------------------------------------------------------
    \48\ Qualified restaurant property would become eligible for the 
additional first-year depreciation deduction under sec. 168(k) by 
virtue of the assigned 15-year recovery period.
---------------------------------------------------------------------------
      Effective date.--The House bill provision is effective 
for property placed in service after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
3. Extended placed in service date for bonus depreciation for certain 
        aircraft (excluding aircraft used in the transportation 
        industry) (sec. 212 of the House bill, sec. 622 of the Senate 
        amendment, and sec. 168 of the Code)

                              PRESENT LAW

In general
      A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property range from three 
to 25 years. The depreciation methods generally applicable to 
tangible personal property are the 200-percent and 150-percent 
declining balance methods, switching to the straight-line 
method for the taxable year in which the depreciation deduction 
would be maximized.
Thirty-percent additional first year depreciation deduction
      JCWAA allows an additional first-year depreciation 
deduction equal to 30 percent of the adjusted basis of 
qualified property.\49\ The amount of the additional first-year 
depreciation deduction is not affected by a short taxable year. 
The additional first-year depreciation deduction is allowed for 
both regular tax and alternative minimum tax purposes for the 
taxable year in which the property is placed in service.\50\ 
The basis of the property and the depreciation allowances in 
the placed-in-service year and later years are appropriately 
adjusted to reflect the additional first-year depreciation 
deduction. In addition, there are generally no adjustments to 
the allowable amount of depreciation for purposes of computing 
a taxpayer's alternative minimum taxable income with respect to 
property to which the provision applies. A taxpayer is allowed 
to elect out of the additional first-year depreciation for any 
class of property for any taxable year.\51\
---------------------------------------------------------------------------
    \49\ The additional first-year depreciation deduction is subject to 
the general rules regarding whether an item is deductible under section 
162 or subject to capitalization under section 263 or section 263A.
    \50\ However, the additional first-year depreciation deduction is 
not allowed for purposes of computing earnings and profits.
    \51\ A taxpayer may elect out of the 50-percent additional first-
year depreciation (discussed below) for any class of property and still 
be eligible for the 30-percent additional first-year depreciation.
---------------------------------------------------------------------------
      In order for property to qualify for the additional 
first-year depreciation deduction, it must meet all of the 
following requirements. First, the property must be (1) 
property to which MACRS applies with an applicable recovery 
period of 20 years or less, (2) water utility property (as 
defined in section 168(e)(5)), (3) computer software other than 
computer software covered by section 197, or (4) qualified 
leasehold improvement property (as defined in section 
168(k)(3)).\52\ Second, the original use \53\ of the property 
must commence with the taxpayer on or after September 11, 2001. 
Third, the taxpayer must acquire the property within the 
applicable time period. Finally, the property must be placed in 
service before January 1, 2005.
---------------------------------------------------------------------------
    \52\ A special rule precludes the additional first-year 
depreciation deduction for any property that is required to be 
depreciated under the alternative depreciation system of MACRS.
    \53\ The term ``original use'' means the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer.
    If, in the normal course of its business, a taxpayer sells 
fractional interests in property to unrelated third parties, then the 
original use of such property begins with the first user of each 
fractional interest (i.e., each fractional owner is considered the 
original user of its proportionate share of the property).
---------------------------------------------------------------------------
      An extension of the placed-in-service date of one year 
(i.e., January 1, 2006) is provided for certain property with a 
recovery period of ten years or longer and certain 
transportation property.\54\ Transportation property is defined 
as tangible personal property used in the trade or business of 
transporting persons or property.
---------------------------------------------------------------------------
    \54\ In order for property to qualify for the extended placed-in-
service date, the property must be subject to section 263A and have an 
estimated production period exceeding two years or an estimated 
production period exceeding one year and a cost exceeding $1 million.
---------------------------------------------------------------------------
      The applicable time period for acquired property is (1) 
after September 10, 2001 and before January 1, 2005, but only 
if no binding written contract for the acquisition is in effect 
before September 11, 2001, or (2) pursuant to a binding written 
contract which was entered into after September 10, 2001, and 
before January 1, 2005.\55\ With respect to property that is 
manufactured, constructed, or produced by the taxpayer for use 
by the taxpayer, the taxpayer must begin the manufacture, 
construction, or production of the property after September 10, 
2001. For property eligible for the extended placed-in-service 
date, a special rule limits the amount of costs eligible for 
the additional first year depreciation. With respect to such 
property, only the portion of the basis that is properly 
attributable to the costs incurred before January 1, 2005 
(``progress expenditures'') is eligible for the additional 
first-year depreciation.\56\
---------------------------------------------------------------------------
    \55\ Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire 
a component of the property is in effect prior to September 11, 2001.
    \56\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to sec. 46(d)(3) as in 
effect prior to the Tax Reform Act of 1986 shall apply.
---------------------------------------------------------------------------
Fifty-percent additional first year depreciation
      JGTRRA provides an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified property. Qualified property is defined in the same 
manner as for purposes of the 30-percent additional first-year 
depreciation deduction provided by the JCWAA except that the 
applicable time period for acquisition (or self construction) 
of the property is modified. Property eligible for the 50-
percent additional first-year depreciation deduction is not 
eligible for the 30-percent additional first-year depreciation 
deduction.
      In order to qualify, the property must be acquired after 
May 5, 2003 and before January 1, 2005, and no binding written 
contract for the acquisition can be in effect before May 6, 
2003.\57\ With respect to property that is manufactured, 
constructed, or produced by the taxpayer for use by the 
taxpayer, the taxpayer must begin the manufacture, 
construction, or production of the property after May 5, 2003. 
For property eligible for the extended placed-in-service date 
(i.e., certain property with a recovery period of ten years or 
longer and certain transportation property), a special rule 
limits the amount of costs eligible for the additional first-
year depreciation. With respect to such property, only progress 
expenditures properly attributable to the costs incurred before 
January 1, 2005 are eligible for the additional first-year 
depreciation.\58\
---------------------------------------------------------------------------
    \57\ Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire 
a component of the property is in effect prior to May 6, 2003. However, 
no 50-percent additional first-year depreciation is permitted on any 
such component. No inference is intended as to the proper treatment of 
components placed in service under the 30-percent additional first-year 
depreciation provided by the JCWAA.
    \58\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to sec. 46(d)(3) as in 
effect prior to the Tax Reform Act of 1986 shall apply.
---------------------------------------------------------------------------

                               HOUSE BILL

      Due to the extended production period, the House bill 
provides criteria under which certain non-commercial aircraft 
can qualify for the extended placed-in-service date. Qualifying 
aircraft are eligible for the additional first-year 
depreciation deduction if placed in service before January 1, 
2006. In order to qualify, the aircraft must:
            (1) Be acquired by the taxpayer during the 
        applicable time period as under present law;
            (2) Meet the appropriate placed-in-service date 
        requirements;
            (3) Not be tangible personal property used in the 
        trade or business of transporting persons or property 
        (except for agricultural or firefighting purposes);
            (4) Be purchased \59\ by a purchaser who, at the 
        time of the contract for purchase, has made a 
        nonrefundable deposit of the lesser of ten percent of 
        the cost or $100,000; and
---------------------------------------------------------------------------
    \59\ For this purpose, it is intended that the term ``purchase'' be 
interpreted as it is defined in sec. 179(d)(2).
---------------------------------------------------------------------------
            (5) Have an estimated production period exceeding 
        four months and a cost exceeding $200,000.
      Effective date.--The House bill provision is effective as 
if included in the amendments made by section 101 of JCWAA, 
which applies to property placed in service after September 10, 
2001. However, because the property described by the provision 
qualifies for the additional first-year depreciation deduction 
under present law if placed in service prior to January 1, 
2005, the provision will modify the treatment only of property 
placed in service during calendar year 2005.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except for the effective date.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
4. Special placed in service rule for bonus depreciation for certain 
        property subject to syndication (sec. 213 of the House bill, 
        sec. 621 of the Senate amendment, and sec. 168 of the Code)

                              PRESENT LAW

      Section 101 of JCWAA provides generally for 30-percent 
additional first-year depreciation, and provides a binding 
contract rule in determining property that qualifies for it. 
The requirements that must be satisfied in order for property 
to qualify include that (1) the original use of the property 
must commence with the taxpayer on or after September 11, 2001, 
and (2) the taxpayer must acquire the property (i) after 
September 10, 2001 and before January 1, 2005, but only if no 
binding written contract for the acquisition is in effect 
before September 11, 2001, or (ii) pursuant to a binding 
contract which was entered into after September 10, 2001, and 
before January 1, 2005. In addition, JCWAA provides a special 
rule in the case of certain leased property. In the case of any 
property that is originally placed in service by a person and 
that is sold to the taxpayer and leased back to such person by 
the taxpayer within three months after the date that the 
property was placed in service, the property is treated as 
originally placed in service by the taxpayer not earlier than 
the date that the property is used under the leaseback. JCWAA 
did not specifically address the syndication of a lease by the 
lessor.
      The Working Families Tax Relief Act of 2004 (``H.R. 
1308'') included a technical correction regarding the 
syndication of a lease by the lessor. The technical correction 
provides that if property is originally placed in service by a 
lessor (including by operation of the special rule for self-
constructed property), such property is sold within three 
months after the date that the property was placed in service, 
and the user of such property does not change, then the 
property is treated as originally placed in service by the 
taxpayer not earlier than the date of such sale.
      JGTRRA provides an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified property. Qualified property is defined in the same 
manner as for purposes of the 30-percent additional first-year 
depreciation deduction provided by the JCWAA except that the 
applicable time period for acquisition (or self construction) 
of the property is modified. Property with respect to which the 
50-percent additional first-year depreciation deduction is 
claimed is not also eligible for the 30-percent additional 
first-year depreciation deduction. In order to qualify, the 
property must be acquired after May 5, 2003 and before January 
1, 2005, and no binding written contract for the acquisition 
can be in effect before May 6, 2003. With respect to property 
that is manufactured, constructed, or produced by the taxpayer 
for use by the taxpayer, the taxpayer must begin the 
manufacture, construction, or production of the property after 
May 5, 2003.

                            HOUSE BILL \60\
---------------------------------------------------------------------------

    \60\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of technical corrections.
---------------------------------------------------------------------------
      The House bill provides that if property is originally 
placed in service by a lessor (including by operation of the 
special rule for self-constructed property), such property is 
sold within three months after the date that the property was 
placed in service, and the user of such property does not 
change, then the property is treated as originally placed in 
service by the taxpayer not earlier than the date of such sale. 
The provision also provides a special rule in the case of 
multiple units of property subject to the same lease. In such 
cases, property will qualify as placed in service on the date 
of sale if it is sold within three months after the final unit 
is placed in service, so long as the period between the time 
the first and last units are placed in service does not exceed 
12 months.
      Effective date.--The House bill provision is generally 
effective as if included in the amendments made by section 101 
of JCWAA (i.e., generally for property placed in service after 
September 10, 2001, in taxable years ending after that date). 
However, the special rule in the case of multiple units of 
property subject to the same lease applies to property sold 
after June 4, 2004.

                         SENATE AMENDMENT \61\
---------------------------------------------------------------------------

    \61\ The Senate amendment predated the enactment of H.R. 1308, Pub. 
L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of technical corrections.
---------------------------------------------------------------------------
      The Senate amendment is the same as the House bill, 
except for the effective date.
      Effective date.--The Senate amendment is effective for 
sales occurring after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with the 
following modification. The clauses that were duplicative of 
the provisions enacted as part of H.R. 1308 were removed. Thus, 
the conference agreement provision provides only for the 
special rule in the case of multiple units of property subject 
to the same lease.

               C. S Corporation Reform and Simplification

(Secs. 221-231 of the House bill, sec. 654 of the Senate amendment and 
        secs. 1361-1379 and 4975 of the Code)
      In general, an S corporation is not subject to corporate-
level income tax on its items of income and loss. Instead, an S 
corporation passes through its items of income and loss to its 
shareholders. The shareholders take into account separately 
their shares of these items on their individual income tax 
returns. To prevent double taxation of these items when the 
stock is later disposed of, each shareholder's basis in the 
stock of the S corporation is increased by the amount included 
in income (including tax-exempt income) and is decreased by the 
amount of any losses (including nondeductible losses) taken 
into account. A shareholder's loss may be deducted only to the 
extent of his or her basis in the stock or debt of the S 
corporation. To the extent a loss is not allowed due to this 
limitation, the loss generally is carried forward with respect 
to the shareholder.
1. Members of family treated as one shareholder

                              PRESENT LAW

      A small business corporation may elect to be an S 
corporation with the consent of all its shareholders, and may 
terminate its election with the consent of shareholders holding 
more than 50 percent of the stock. A ``small business 
corporation'' is defined as a domestic corporation which is not 
an ineligible corporation and which has (1) no more than 75 
shareholders, all of whom are individuals (and certain trusts, 
estates, charities, and qualified retirement plans) \62\ who 
are citizens or residents of the United States, and (2) only 
one class of stock. For purposes of the 75-shareholder 
limitation, a husband and wife are treated as one shareholder. 
An ``ineligible corporation'' means a corporation that is a 
financial institution using the reserve method of accounting 
for bad debts, an insurance company, a corporation electing the 
benefits of the Puerto Rico and possessions tax credit, or a 
Domestic International Sales Corporation (``DISC'') or former 
DISC.
---------------------------------------------------------------------------
    \62\ If a qualified retirement plan (other than an employee stock 
ownership plan) or a charity holds stock in an S corporation, the 
interest held is treated as an interest in an unrelated trade or 
business, and the plan or charity's share of the S corporation's items 
of income, loss, or deduction, and gain or loss on the disposition of 
the S corporation stock, are taken into account in computing unrelated 
business taxable income.
---------------------------------------------------------------------------

                               HOUSE BILL

      The bill provides an election to allow all members of a 
family be treated as one shareholder in determining the number 
of shareholders in the corporation (for purposes of section 
1361(b)(1)(A)).
      A family is defined as the common ancestor and all lineal 
descendants of the common ancestor, as well as the spouses, or 
former spouses, of these individuals. An individual shall not 
be a common ancestor if, as of the later of the time of the 
election or the effective date of this provision, the 
individual is more than three generations removed from the 
youngest generation of shareholders who would (but for this 
rule) be members of the family. For purposes of this rule, a 
spouse or former spouse is treated as in the same generation as 
the person to whom the individual is (or was) married.
      Except as provided by Treasury regulations, the election 
for a family may be made by any family member and remains in 
effect until terminated.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill, except that the number of generations is increased 
from three to six.
      The conferees wish to clarify that members of a family 
may be treated as one shareholder, for the purpose of 
determining the number of shareholders, whether a family member 
holds stock directly or is treated as a shareholder (under 
section 1361(c)(2)(B)) by reason being a beneficiary of an 
electing small business trust or qualified subchapter S trust.
2. Increase in number of eligible shareholders to 100

                              PRESENT LAW

      A small business corporation may elect to be an S 
corporation with the consent of all its shareholders, and may 
terminate its election with the consent of shareholders holding 
more than 50 percent of the stock. A ``small business 
corporation'' is defined as a domestic corporation which is not 
an ineligible corporation and which has (1) no more than 75 
shareholders, all of whom are individuals (and certain trusts, 
estates, charities, and qualified retirement plans) \63\ who 
are citizens or residents of the United States, and (2) only 
one class of stock. For purposes of the 75-shareholder 
limitation, a husband and wife are treated as one shareholder. 
An ``ineligible corporation'' means a corporation that is a 
financial institution using the reserve method of accounting 
for bad debts, an insurance company, a corporation electing the 
benefits of the Puerto Rico and possessions tax credit, or a 
Domestic International Sales Corporation (``DISC'') or former 
DISC.
---------------------------------------------------------------------------
    \63\ If a qualified retirement plan (other than an employee stock 
ownership plan) or a charity holds stock in an S corporation, the 
interest held is treated as an interest in an unrelated trade or 
business, and the plan or charity's share of the S corporation's items 
of income, loss, or deduction, and gain or loss on the disposition of 
the S corporation stock, are taken into account in computing unrelated 
business taxable income.
---------------------------------------------------------------------------

                               HOUSE BILL

      The bill increases the maximum number of eligible 
shareholders from 75 to 100.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.
3. Expansion of bank S corporation eligible shareholders to include 
        IRAs

                              PRESENT LAW

      An individual retirement account (``IRA'') is a trust or 
account established for the exclusive benefit of an individual 
and his or her beneficiaries. There are two general types of 
IRAs: traditional IRAs, to which both deductible and 
nondeductible contributions may be made, and Roth IRAs, 
contributions to which are not deductible. Amounts held in a 
traditional IRA are includible in income when withdrawn (except 
to the extent the withdrawal is a return of nondeductible 
contributions). Amounts held in a Roth IRA that are withdrawn 
as a qualified distribution are not includible in income; 
distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings. A qualified distribution is a 
distribution that (1) is made after the five-taxable year 
period beginning with the first taxable year for which the 
individual made a contribution to a Roth IRA, and (2) is made 
after attainment of age 59\1/2\, on account of death or 
disability, or is made for first-time homebuyer expenses of up 
to $10,000.
      Under present law, an IRA cannot be a shareholder of an S 
corporation.
      Certain transactions are prohibited between an IRA and 
the individual for whose benefit the IRA is established, 
including a sale of property by the IRA to the individual. If a 
prohibited transaction occurs between an IRA and the IRA 
beneficiary, the account ceases to be an IRA, and an amount 
equal to the fair market value of the assets held in the IRA is 
deemed distributed to the beneficiary.

                               HOUSE BILL

      The bill allows an IRA (including a Roth IRA) to be a 
shareholder of a bank that is an S corporation, but only to the 
extent of bank stock held by the IRA on the date of enactment 
of the provision.\64\
---------------------------------------------------------------------------
    \64\ Under the bill, the present-law rules treating S corporation 
stock held by a qualified retirement plan (other than an employee stock 
ownership plan) or a charity as an interest in an unrelated trade or 
business apply to an IRA holding S corporation stock of a bank.
---------------------------------------------------------------------------
      The bill also provides an exemption from prohibited 
transaction treatment for the sale by an IRA to the IRA 
beneficiary of bank stock held by the IRA on the date of 
enactment of the provision. Under the bill, a sale is not a 
prohibited transaction if: (1) the sale is pursuant to an S 
corporation election by the bank; (2) the sale is for fair 
market value (as established by an independent appraiser) and 
is on terms at least as favorable to the IRA as the terms would 
be on a sale to an unrelated party; (3) the IRA incurs no 
commissions, costs, or other expenses in connection with the 
sale; and (4) the stock is sold in a single transaction for 
cash not later than 120 days after the S corporation election 
is made.
      Effective date.--The provision takes effect on date of 
enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.
4. Disregard of unexercised powers of appointment in determining 
        potential current beneficiaries of ESBT

                              PRESENT LAW

      An electing small business trust (``ESBT'') holding stock 
in an S corporation is taxed at the maximum individual tax rate 
on its ratable share of items of income, deduction, gain, or 
loss passing through from the S corporation. An ESBT generally 
is an electing trust all of whose beneficiaries are eligible S 
corporation shareholders. For purposes of determining the 
maximum number of shareholders, each person who is entitled to 
receive a distribution from the trust (``potential current 
beneficiary'') is treated as a shareholder during the period 
the person may receive a distribution from the trust.
      An ESBT has 60 days to dispose of the S corporation stock 
after an ineligible shareholder becomes a potential current 
beneficiary to avoid disqualification.

                               HOUSE BILL

      Under the bill, powers of appointment to the extent not 
exercised are disregarded in determining the potential current 
beneficiaries of an electing small business trust.
      The bill increases the period during which an ESBT can 
dispose of S corporation stock, after an ineligible shareholder 
becomes a potential current beneficiary, from 60 days to one 
year.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.
5. Transfers of suspended losses incident to divorce, etc.

                              PRESENT LAW

      Under present law, any loss or deduction that is not 
allowed to a shareholder of an S corporation, because the loss 
exceeds the shareholder's basis in stock and debt of the 
corporation, is treated as incurred by the S corporation with 
respect to that shareholder in the subsequent taxable year.

                               HOUSE BILL

      Under the bill, if a shareholder's stock in an S 
corporation is transferred to a spouse, or to a former spouse 
incident to a divorce, any suspended loss or deduction with 
respect to that stock is treated as incurred by the corporation 
with respect to the transferee in the subsequent taxable year.
      Effective date.--The provision applies to transfers after 
December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.
6. Use of passive activity loss and at-risk amounts by qualified 
        subchapter S trust income beneficiaries

                              PRESENT LAW

      Under present law, the share of income of an S 
corporation whose stock is held by a qualified subchapter S 
trust (``QSST''), with respect to which the beneficiary makes 
an election, is taxed to the beneficiary. However, the trust, 
and not the beneficiary, is treated as the owner of the S 
corporation stock for purposes of determining the tax 
consequences of the disposition of the S corporation stock by 
the trust. A QSST generally is a trust with one individual 
income beneficiary for the life of the beneficiary.

                               HOUSE BILL

      Under the bill, the beneficiary of a qualified subchapter 
S trust is generally allowed to deduct suspended losses under 
the at-risk rules and the passive loss rules when the trust 
disposes of the S corporation stock.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.
7. Exclusion of investment securities income from passive investment 
        income test for bank S corporations

                              PRESENT LAW

      An S corporation is subject to corporate-level tax, at 
the highest corporate tax rate, on its excess net passive 
income if the corporation has (1) accumulated earnings and 
profits at the close of the taxable year and (2) gross receipts 
more than 25 percent of which are passive investment income.
      Excess net passive income is the net passive income for a 
taxable year multiplied by a fraction, the numerator of which 
is the amount of passive investment income in excess of 25 
percent of gross receipts and the denominator of which is the 
passive investment income for the year. Net passive income is 
defined as passive investment income reduced by the allowable 
deductions that are directly connected with the production of 
that income. Passive investment income generally means gross 
receipts derived from royalties, rents, dividends, interest, 
annuities, and sales or exchanges of stock or securities (to 
the extent of gains). Passive investment income generally does 
not include interest on accounts receivable, gross receipts 
that are derived directly from the active and regular conduct 
of a lending or finance business, gross receipts from certain 
liquidations, or gain or loss from any section 1256 contract 
(or related property) of an options or commodities dealer.\65\
---------------------------------------------------------------------------
    \65\ Notice 97-5, 1997-1 C.B. 352, sets forth guidance relating to 
passive investment income on banking assets.
---------------------------------------------------------------------------
      In addition, an S corporation election is terminated 
whenever the S corporation has accumulated earnings and profits 
at the close of each of three consecutive taxable years and has 
gross receipts for each of those years more than 25 percent of 
which are passive investment income.

                               HOUSE BILL

      The bill provides that, in the case of a bank (as defined 
in section 581), a bank holding company (as defined in section 
2(a) of the Bank Holding Company Act of 1956), or a financial 
holding company (as defined in section 2(p) of that Act), 
interest income and dividends on assets required to be held by 
the bank or holding company are not treated as passive 
investment income for purposes of the S corporation passive 
investment income rules.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.
8. Treatment of bank director shares

                              PRESENT LAW

      An S corporation may have no more than 75 shareholders 
and may have only one outstanding class of stock.\66\
---------------------------------------------------------------------------
    \66\ Another provision of the bill increases the maximum number of 
shareholders to 100.
---------------------------------------------------------------------------
      An S corporation has one class of stock if all 
outstanding shares of stock confer identical rights to 
distribution and liquidation proceeds. Differences in voting 
rights are disregarded.\67\
---------------------------------------------------------------------------
    \67\ Sec. 1361(c)(4). Treasury regulations provide that buy-sell 
and redemption agreements are disregarded in determining whether a 
corporation's outstanding shares confer identical distribution and 
liquidation rights unless (1) a principal purpose of the agreement is 
to circumvent the one class of stock requirement and (2) the agreement 
establishes a purchase price that, at the time the agreement is entered 
into, is significantly in excess of, or below, the fair market value of 
the stock. Treas. Reg. sec. 1.1361-1(l).
---------------------------------------------------------------------------
      National banking law requires that a director of a 
national bank own stock in the bank and that a bank have at 
least five directors.\68\ A number of States have similar 
requirements for State-chartered banks. Apparently, it is 
common practice for a bank director to enter into an agreement 
under which the bank (or a holding company) will reacquire the 
stock upon the director's ceasing to hold the office of 
director, at the price paid by the director for the stock.\69\
---------------------------------------------------------------------------
    \68\ 12 U.S.C. secs. 71-72.
    \69\ See Private Letter Ruling 200217048 (January 24, 2002) 
describing such an agreement and holding that it creates a second class 
of stock. Nonetheless, the ruling concluded that the election to be an 
S corporation was inadvertently invalid and that an amended agreement 
did not create a second class of stock so that the corporation's 
election was validated.
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the bill, restricted bank director stock is not 
taken into account as outstanding stock in applying the 
provisions of subchapter S. Thus, the stock is not treated as a 
second class of stock; a director is not treated as a 
shareholder of the S corporation by reason of the stock; the 
stock is disregarded in allocating items of income, loss, etc. 
among the shareholders; and the stock is not treated as 
outstanding for purposes of determining whether an S 
corporation holds 100 percent of the stock of a qualified 
subchapter S subsidiary.
      Restricted bank director stock is stock in a bank (as 
defined in section 581), a bank holding company (within the 
meaning of section 2(a) of the Bank Holding Company Act of 
1956), or a financial holding company (as defined in section 
2(p) of that Act), registered with the Federal Reserve System, 
if the stock is required to be held by an individual under 
applicable Federal or State law in order to permit the 
individual to serve as a director of the bank or holding 
company and which is subject to an agreement with the bank or 
holding company (or corporation in control of the bank or 
company) pursuant to which the holder is required to sell the 
stock back upon ceasing to be a director at the same price the 
individual acquired the stock.
      A distribution (other than a payment in exchange for the 
stock) with respect to the restricted stock is includible in 
the gross income of the director and is deductible by the S 
corporation for the taxable year that includes the last day of 
the director's taxable year in which the distribution is 
included in income.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the provision 
in the House bill.
9. Relief from inadvertently invalid qualified subchapter S subsidiary 
        elections and terminations

                              PRESENT LAW

      Under present law, inadvertent invalid subchapter S 
elections and terminations may be waived.

                               HOUSE BILL

      The bill allows inadvertent invalid qualified subchapter 
S subsidiary elections and terminations to be waived by the 
IRS.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill, effective for elections and terminations after 
December 31, 2004.
10. Information returns for qualified subchapter S subsidiaries

                              PRESENT LAW

      Under present law, a corporation all of whose stock is 
held by an S corporation is treated as a qualified subchapter S 
subsidiary if the S corporation so elects. The assets, 
liabilities, and items of income, deduction, and credit of the 
subsidiary are treated as assets, liabilities, and items of the 
parent S corporation.

                               HOUSE BILL

      The bill provides authority to the Secretary to provide 
guidance regarding information returns of qualified subchapter 
S subsidiaries.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.
11. Repayment of loans for qualifying employer securities

                              PRESENT LAW

      An employee stock ownership plan (an ``ESOP'') is a 
defined contribution plan that is designated as an ESOP and is 
designed to invest primarily in qualifying employer securities. 
For purposes of ESOP investments, a ``qualifying employer 
security'' is defined as: (1) publicly traded common stock of 
the employer or a member of the same controlled group; (2) if 
there is no such publicly traded common stock, common stock of 
the employer (or member of the same controlled group) that has 
both voting power and dividend rights at least as great as any 
other class of common stock; or (3) noncallable preferred stock 
that is convertible into common stock described in (1) or (2) 
and that meets certain requirements. In some cases, an employer 
may design a class of preferred stock that meets these 
requirements and that is held only by the ESOP. Special rules 
apply to ESOPs that do not apply to other types of qualified 
retirement plans, including a special exemption from the 
prohibited transaction rules.
      Certain transactions between an employee benefit plan and 
a disqualified person, including the employer maintaining the 
plan, are prohibited transactions that result in the imposition 
of an excise tax.\70\ Prohibited transactions include, among 
other transactions, (1) the sale, exchange or leasing of 
property between a plan and a disqualified person, (2) the 
lending of money or other extension of credit between a plan 
and a disqualified person, and (3) the transfer to, or use by 
or for the benefit of, a disqualified person of the income or 
assets of the plan. However, certain transactions are exempt 
from prohibited transaction treatment, including certain loans 
to enable an ESOP to purchase qualifying employer 
securities.\71\ In such a case, the employer securities 
purchased with the loan proceeds are generally pledged as 
security for the loan. Contributions to the ESOP and dividends 
paid on employer securities held by the ESOP are used to repay 
the loan. The employer securities are held in a suspense 
account and released for allocation to participants' accounts 
as the loan is repaid.
---------------------------------------------------------------------------
    \70\ Sec. 4975.
    \71\ Sec. 4975(d)(3). An ESOP that borrows money to purchase 
employer stock is referred to as a ``leveraged'' ESOP.
---------------------------------------------------------------------------
      A loan to an ESOP is exempt from prohibited transaction 
treatment if the loan is primarily for the benefit of the 
participants and their beneficiaries, the loan is at a 
reasonable rate of interest, and the collateral given to a 
disqualified person consists of only qualifying employer 
securities. No person entitled to payments under the loan can 
have the right to any assets of the ESOP other than (1) 
collateral given for the loan, (2) contributions made to the 
ESOP to meet its obligations on the loan, and (3) earnings 
attributable to the collateral and the investment of 
contributions described in (2).\72\ In addition, the payments 
made on the loan by the ESOP during a plan year cannot exceed 
the sum of those contributions and earnings during the current 
and prior years, less loan payments made in prior years.
---------------------------------------------------------------------------
    \72\ Treas. Reg. sec. 54.4975-7(b)(5).
---------------------------------------------------------------------------
      An ESOP of a C corporation is not treated as violating 
the qualification requirements of the Code or as engaging in a 
prohibited transaction merely because, in accordance with plan 
provisions, a dividend paid with respect to qualifying employer 
securities held by the ESOP is used to make payments on a loan 
(including payments of interest as well as principal) that was 
used to acquire the employer securities (whether or not 
allocated to participants).\73\ In the case of a dividend paid 
with respect to any employer security that is allocated to a 
participant, this relief does not apply unless the plan 
provides that employer securities with a fair market value of 
not less than the amount of the dividend is allocated to the 
participant for the year which the dividend would have been 
allocated to the participant.\74\
---------------------------------------------------------------------------
    \73\ Sec. 404(k)(5)(B).
    \74\ Sec. 404(k)(2)(B).
---------------------------------------------------------------------------
      Effective for taxable years beginning after December 31, 
1997, a qualified retirement plan (including an ESOP) may be a 
shareholder of an S corporation.\75\ As a result, an S 
corporation may maintain an ESOP.
---------------------------------------------------------------------------
    \75\ Sec. 1361(c)(6).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, an ESOP maintained by an S 
corporation is not treated as violating the qualification 
requirements of the Code or as engaging in a prohibited 
transaction merely because, in accordance with plan provisions, 
a distribution made with respect to S corporation stock that 
constitutes qualifying employer securities held by the ESOP is 
used to make payments on a loan that was used to acquire the 
securities (whether or not allocated to participants). This 
relief does not apply in the case of a distribution with 
respect to S corporation stock that is allocated to a 
participant unless the plan provides that stock with a fair 
market value of not less than the amount of such distribution 
is allocated to the participant for the year which the 
distribution would have been allocated to the participant.
      Effective date.--The provision is effective for 
distributions made with respect to S corporation stock after 
December 31, 2004.

                            SENATE AMENDMENT

      The Senate amendment is the same as House bill (other 
than the effective date).
      Effective date.--The provision is effective on January 1, 
1998.

                          CONFERENCE AGREEMENT

      The conference agreement contains the provision in the 
House bill and Senate amendment, with a modification of the 
effective date. Thus, an ESOP maintained by an S corporation is 
not treated as violating the qualification requirements of the 
Code or as engaging in a prohibited transaction merely because, 
in accordance with plan provisions, a distribution made with 
respect to S corporation stock that constitutes qualifying 
employer securities held by the ESOP is used to make payments 
on a loan (including payments of interest as well as principal) 
that was used to acquire the securities (whether or not 
allocated to participants). This relief does not apply in the 
case of a distribution with respect to S corporation stock that 
is allocated to a participant unless the plan provides that 
stock with a fair market value of not less than the amount of 
such distribution is allocated to the participant for the year 
which the distribution would have been allocated to the 
participant.
      Effective date.--The provision is effective for 
distributions made with respect to S corporation stock after 
December 31, 1997.

                   D. Alternative Minimum Tax Relief

1. Repeal limitation on use of foreign tax credit (sec. 241 of the 
        House bill, sec. 203 of the Senate amendment, and sec. 59 of 
        the Code)

                              PRESENT LAW

In general
      Under present law, taxpayers are subject to an 
alternative minimum tax (``AMT''), which is payable, in 
addition to all other tax liabilities, to the extent that it 
exceeds the taxpayer's regular income tax liability. The tax is 
imposed at a flat rate of 20 percent, in the case of corporate 
taxpayers, on alternative minimum taxable income (``AMTI'') in 
excess of an exemption amount that phases out. AMTI is the 
taxpayer's taxable income increased for certain tax preferences 
and adjusted by determining the tax treatment of certain items 
in a manner that limits the tax benefits resulting from the 
regular tax treatment of such items.
Foreign tax credit
      Taxpayers are permitted to reduce their AMT liability by 
an AMT foreign tax credit. The AMT foreign tax credit for a 
taxable year is determined under principles similar to those 
used in computing the regular tax foreign tax credit, except 
that (1) the numerator of the AMT foreign tax credit limitation 
fraction is foreign source AMTI and (2) the denominator of that 
fraction is total AMTI. Taxpayers may elect to use as their AMT 
foreign tax credit limitation fraction the ratio of foreign 
source regular taxable income to total AMTI.
      The AMT foreign tax credit for any taxable year generally 
may not offset a taxpayer's entire pre-credit AMT. Rather, the 
AMT foreign tax credit is limited to 90 percent of AMT computed 
without any AMT net operating loss deduction and the AMT 
foreign tax credit. For example, assume that a corporation has 
$10 million of AMTI, has no AMT net operating loss deduction, 
and has no regular tax liability. In the absence of the AMT 
foreign tax credit, the corporation's tax liability would be $2 
million. Accordingly, the AMT foreign tax credit cannot be 
applied to reduce the taxpayer's tax liability below $200,000. 
Any unused AMT foreign tax credit may be carried back two years 
and carried forward five years for use against AMT in those 
years under the principles of the foreign tax credit carryback 
and carryover rules set forth in section 904(c).

                               HOUSE BILL

      The House bill repeals the 90-percent limitation on the 
utilization of the AMT foreign tax credit.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                            SENATE AMENDMENT

      Same as House bill.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill and Senate amendment.
2. Expansion of exemption from alternative minimum tax for small 
        corporations (sec. 242 of the House bill and sec. 55 of the 
        Code)

                              PRESENT LAW

      Corporations with average gross receipts of less than 
$7.5 million for the prior three taxable years are exempt from 
the corporate AMT. The $7.5 million threshold is reduced to $5 
million for the corporation's first 3-taxable year period.

                               HOUSE BILL

      The House bill increases the amount of average gross 
receipts that an exempt corporation may receive from $7.5 
million to $20 million.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2005.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the provision 
in the House bill.
3. Coordinate farmer and fisherman income averaging and the alternative 
        minimum tax (sec. 243 of the House bill and secs. 55 and 1301 
        of the Code)

                              PRESENT LAW

      An individual taxpayer engaged in a farming business (as 
defined by section 263A(e)(4)) may elect to compute his or her 
current year regular tax liability by averaging, over the prior 
three-year period, all or portion of his or her taxable income 
from the trade or business of farming. Because farmer income 
averaging reduces the regular tax liability, the AMT may be 
increased. Thus, the benefits of farmer income averaging may be 
reduced or eliminated for farmers subject to the AMT.

                               HOUSE BILL

      The House bill provides that, in computing AMT, a 
farmer's regular tax liability is determined without regard to 
farmer income averaging. Thus, a farmer receives the full 
benefit of income averaging because averaging reduces the 
regular tax while the AMT (if any) remains unchanged.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2003.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement extends the benefits of income 
averaging to fishermen. The provision also includes the 
provision in the House bill relating to the AMT, applicable to 
both farmers and fishermen.
      Effective date.--Taxable years beginning after December 
31, 2003.

         E. Restructuring of Incentives for Alcohol Fuels, Etc.

1. Incentives for alcohol and biodiesel fuels (secs. 251 and 252 of the 
        House bill, sec. 861 of the Senate amendment, and secs. 4041, 
        4081, 4091, 6427, 9503 and new section 6426 of the Code)

                              PRESENT LAW

Alcohol fuels income tax credit
      The alcohol fuels credit is the sum of three credits: the 
alcohol mixture credit, the alcohol credit, and the small 
ethanol producer credit. Generally, the alcohol fuels credit 
expires after December 31, 2007.\76\
---------------------------------------------------------------------------
    \76\ The alcohol fuels credit is unavailable when, for any period 
before January 1, 2008, the tax rates for gasoline and diesel fuels 
drop to 4.3 cents per gallon.
---------------------------------------------------------------------------
      A taxpayer (generally a petroleum refiner, distributor, 
or marketer) who mixes ethanol with gasoline (or a special fuel 
\77\) is an ``ethanol blender.'' Ethanol blenders are eligible 
for an income tax credit of 52 cents per gallon of ethanol used 
in the production of a qualified mixture (the ``alcohol mixture 
credit''). A qualified mixture means a mixture of alcohol and 
gasoline (or of alcohol and a special fuel) sold by the blender 
as fuel or used as fuel by the blender in producing the 
mixture. The term alcohol includes methanol and ethanol but 
does not include (1) alcohol produced from petroleum, natural 
gas, or coal (including peat), or (2) alcohol with a proof of 
less than 150. Businesses also may reduce their income taxes by 
52 cents for each gallon of ethanol (not mixed with gasoline or 
other special fuel) that they sell at the retail level as 
vehicle fuel or use themselves as a fuel in their trade or 
business (``the alcohol credit''). The 52-cents-per-gallon 
income tax credit rate is scheduled to decline to 51 cents per 
gallon during the period 2005 through 2007. For blenders using 
an alcohol other than ethanol, the rate is 60 cents per 
gallon.\78\
---------------------------------------------------------------------------
    \77\ A special fuel includes any liquid (other than gasoline) that 
is suitable for use in an internal combustion engine.
    \78\ In the case of any alcohol (other than ethanol) with a proof 
that is at least 150 but less than 190, the credit is 45 cents per 
gallon (the ``low-proof blender amount''). For ethanol with a proof 
that is at least 150 but less than 190, the low-proof blender amount is 
38.52 cents for sales or uses during calendar year 2004, and 37.78 
cents for calendar years 2005, 2006, and 2007.
---------------------------------------------------------------------------
      A separate income tax credit is available for small 
ethanol producers (the ``small ethanol producer credit''). A 
small ethanol producer is defined as a person whose ethanol 
production capacity does not exceed 30 million gallons per 
year. The small ethanol producer credit is 10 cents per gallon 
of ethanol produced during the taxable year for up to a maximum 
of 15 million gallons.
      The credits that comprise the alcohol fuels tax credit 
are includible in income. The credit may not be used to offset 
alternative minimum tax liability. The credit is treated as a 
general business credit, subject to the ordering rules and 
carryforward/carryback rules that apply to business credits 
generally.
Excise tax reductions for alcohol mixture fuels
            In general
      Generally, motor fuels tax rates are as follows: \79\
---------------------------------------------------------------------------
    \79\ These fuels are also subject to an additional 0.1 cent-per-
gallon excise tax to fund the Leaking Underground Storage Tank Trust 
Fund. See secs. 4041(d) and 4081(a)(2)(B). In addition, the basic fuel 
tax rate will drop to 4.3 cents per gallon beginning on October 1, 
2005.

------------------------------------------------------------------------

------------------------------------------------------------------------
Gasoline..................................        18.3 cents per gallon.
Diesel fuel and kerosene..................        24.3 cents per gallon.
Special motor fuels.......................         18.3 cents per gallon
                                                              generally.
------------------------------------------------------------------------

      Alcohol-blended fuels are subject to a reduced rate of 
tax. The benefits provided by the alcohol fuels income tax 
credit and the excise tax reduction are integrated such that 
the alcohol fuels credit is reduced to take into account the 
benefit of any excise tax reduction.
            Gasohol
      Registered ethanol blenders may forgo the full income tax 
credit and instead pay reduced rates of excise tax on gasoline 
that they purchase for blending with ethanol. Most of the 
benefit of the alcohol fuels credit is claimed through the 
excise tax system.
      The reduced excise tax rates apply to gasohol upon its 
removal or entry. Gasohol is defined as a gasoline/ethanol 
blend that contains 5.7 percent ethanol, 7.7 percent ethanol, 
or 10 percent ethanol. For the calendar year 2004, the 
following reduced rates apply to gasohol: \80\
---------------------------------------------------------------------------
    \80\ These rates include the additional 0.1 cent-per-gallon excise 
tax to fund the Leaking Underground Storage Tank Trust Fund. These 
special rates will terminate after September 30, 2007 (sec. 
4081(c)(8)).

------------------------------------------------------------------------

------------------------------------------------------------------------
5.7 percent ethanol.......................      15.436 cents per gallon.
7.7 percent ethanol.......................      14.396 cents per gallon.
10.0 percent ethanol......................      13.200 cents per gallon.
------------------------------------------------------------------------

      Reduced excise tax rates also apply when gasoline is 
purchased for the production of ``gasohol.'' When gasoline is 
purchased for blending into gasohol, the rates above are 
multiplied by a fraction (e.g., 10/9 for 10-percent gasohol) so 
that the increased volume of motor fuel will be subject to tax. 
The reduced tax rates apply if the person liable for the tax is 
registered with the IRS and (1) produces gasohol with gasoline 
within 24 hours of removing or entering the gasoline or (2) 
gasoline is sold upon its removal or entry and such person has 
an unexpired certificate from the buyer and has no reason to 
believe the certificate is false.\81\
---------------------------------------------------------------------------
    \81\ Treas. Reg. sec. 48.4081-6(c). A certificate from the buyer 
assures that the gasoline will be used to produce gasohol within 24 
hours after purchase. A copy of the registrant's letter of registration 
cannot be used as a gasohol blender's certificate.
---------------------------------------------------------------------------
            Qualified methanol and ethanol fuels
      Qualified methanol or ethanol fuel is any liquid that 
contains at least 85 percent methanol or ethanol or other 
alcohol produced from a substance other than petroleum or 
natural gas. These fuels are taxed at reduced rates.\82\ The 
rate of tax on qualified methanol is 12.35 cents per gallon. 
The rate on qualified ethanol in 2004 is 13.15 cents. From 
January 1, 2005, through September 30, 2007, the rate of tax on 
qualified ethanol is 13.25 cents.
---------------------------------------------------------------------------
    \82\ These reduced rates terminate after September 30, 2007. 
Included in these rates is the 0.05-cent-per-gallon Leaking Underground 
Storage Tank Trust Fund tax imposed on such fuel. (sec. 4041(b)(2)).
---------------------------------------------------------------------------
            Alcohol produced from natural gas
      A mixture of methanol, ethanol, or other alcohol produced 
from natural gas that consists of at least 85 percent alcohol 
is also taxed at reduced rates.\83\ For mixtures not containing 
ethanol, the applicable rate of tax is 9.25 cents per gallon 
before October 1, 2005. In all other cases, the rate is 11.4 
cents per gallon. After September 30, 2005, the rate is reduced 
to 2.15 cents per gallon when the mixture does not contain 
ethanol and 4.3 cents per gallon in all other cases.
---------------------------------------------------------------------------
    \83\ These rates include the additional 0.1 cent-per-gallon excise 
tax to fund the Leaking Underground Storage Tank Trust Fund (sec. 
4041(d)(1)).
---------------------------------------------------------------------------
            Blends of alcohol and diesel fuel or special motor fuels
      A reduced rate of tax applies to diesel fuel or kerosene 
that is combined with alcohol as long as at least 10 percent of 
the finished mixture is alcohol. If none of the alcohol in the 
mixture is ethanol, the rate of tax is 18.4 cents per gallon. 
For alcohol mixtures containing ethanol, the rate of tax in 
2004 is 19.2 cents per gallon and 19.3 cents per gallon for 
2005 through September 30, 2007. Fuel removed or entered for 
use in producing a 10 percent diesel-alcohol fuel mixture 
(without ethanol), is subject to a tax of 20.44 cents per 
gallon. The rate of tax for fuel removed or entered for use to 
produce a 10 percent diesel-ethanol fuel mixture is 21.333 
cents per gallon for 2004 and 21.444 cents per gallon for the 
period January 1, 2005, through September 30, 2007.\84\
---------------------------------------------------------------------------
    \84\ These rates include the additional 0.1 cent-per-gallon excise 
tax to fund the Leaking Underground Storage Tank Trust Fund.
---------------------------------------------------------------------------
      Special motor fuel (nongasoline) mixtures with alcohol 
also are taxed at reduced rates.
            Aviation fuel
      Noncommercial aviation fuel is subject to a tax of 21.9 
cents per gallon.\85\ Fuel mixtures containing at least 10 
percent alcohol are taxed at lower rates.\86\ In the case of 10 
percent ethanol mixtures, for any sale or use during 2004, the 
21.9 cents is reduced by 13.2 cents (for a tax of 8.7 cents per 
gallon), for 2005, 2006, and 2007 the reduction is 13.1 cents 
(for a tax of 8.8 cents per gallon) and is reduced by 13.4 
cents in the case of any sale during 2008 or thereafter. For 
mixtures not containing ethanol, the 21.9 cents is reduced by 
14 cents for a tax of 7.9 cents. These reduced rates expire 
after September 30, 2007.\87\
---------------------------------------------------------------------------
    \85\ This rate includes the additional 0.1 cent-per-gallon tax for 
the Leaking Underground Storage Tank Trust fund.
    \86\ Secs. 4041(k)(1) and 4091(c).
    \87\ Sec. 4091(c)(1).
---------------------------------------------------------------------------
      When aviation fuel is purchased for blending with 
alcohol, the rates above are multiplied by a fraction (10/9) so 
that the increased volume of aviation fuel will be subject to 
tax.
Refunds and payments
      If fully taxed gasoline (or other taxable fuel) is used 
to produce a qualified alcohol mixture, the Code permits the 
blender to file a claim for a quick excise tax refund. The 
refund is equal to the difference between the gasoline (or 
other taxable fuel) excise tax that was paid and the tax that 
would have been paid by a registered blender on the alcohol 
fuel mixture being produced. Generally, the IRS pays these 
quick refunds within 20 days. Interest accrues if the refund is 
paid more than 20 days after filing. A claim may be filed by 
any person with respect to gasoline, diesel fuel, or kerosene 
used to produce a qualified alcohol fuel mixture for any period 
for which $200 or more is payable and which is not less than 
one week.
Ethyl tertiary butyl ether (ETBE)
      Ethyl tertiary butyl ether (``ETBE'') is an ether that is 
manufactured using ethanol. Unlike ethanol, ETBE can be blended 
with gasoline before the gasoline enters a pipeline because 
ETBE does not result in contamination of fuel with water while 
in transport. Treasury regulations provide that gasohol 
blenders may claim the income tax credit and excise tax rate 
reductions for ethanol used in the production of ETBE. The 
regulations also provide a special election allowing refiners 
to claim the benefit of the excise tax rate reduction even 
though the fuel being removed from terminals does not contain 
the requisite percentages of ethanol for claiming the excise 
tax rate reduction.
Highway Trust Fund
      With certain exceptions, the taxes imposed by section 
4041 (relating to retail taxes on diesel fuels and special 
motor fuels) and section 4081 (relating to tax on gasoline, 
diesel fuel and kerosene) are credited to the Highway Trust 
Fund. In the case of alcohol fuels, 2.5 cents per gallon of the 
tax imposed is retained in the General Fund.\88\ In the case of 
a taxable fuel taxed at a reduced rate upon removal or entry 
prior to mixing with alcohol, 2.8 cents of the reduced rate is 
retained in the General Fund.\89\
---------------------------------------------------------------------------
    \88\ Sec. 9503(b)(4)(E).
    \89\ Sec. 9503(b)(4)(F).
---------------------------------------------------------------------------
Biodiesel
      If biodiesel is used in the production of blended taxable 
fuel, the Code imposes tax on the removal or sale of the 
blended taxable fuel.\90\ In addition, the Code imposes tax on 
any liquid other than gasoline sold for use or used as a fuel 
in a diesel-powered highway vehicle or diesel-powered train 
unless tax was previously imposed and not refunded or 
credited.\91\ If biodiesel that was not previously taxed or 
exempt is sold for use or used as a fuel in a diesel-powered 
highway vehicle or a diesel-powered train, tax is imposed.\92\ 
There are no reduced excise tax rates for biodiesel.
---------------------------------------------------------------------------
    \90\ Sec. 4081(b); Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002). 
``Taxable fuels'' are gasoline, diesel and kerosene (sec. 4083). 
Biodiesel, although suitable for use as a fuel in a diesel-powered 
highway vehicle or diesel-powered train, contains less than four 
percent normal paraffins and, therefore, is not treated as diesel fuel 
under the applicable Treasury regulations. Treas. Reg. secs. 48.4081-
1(c)(2)(i) and (ii), and 48.4081-1(b); Rev. Rul. 2002-76, 2002-46 
I.R.B. 841 (2002). As a result, biodiesel alone is not a taxable fuel 
for purposes of section 4081. As noted above, however, tax is imposed 
upon the removal or entry of blended taxable fuel made with biodiesel.
    \91\ Sec. 4041. The tax imposed under section 4041 also will not 
apply if an exemption from tax applies.
    \92\ Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002).
---------------------------------------------------------------------------
Taxes from gasoline and special motor fuels used in motorboats and 
        gasoline used in the nonbusiness use of small-engine outdoor 
        power equipment
      The Aquatic Resources Trust Fund is funded by a portion 
of the receipts from the excise tax imposed on motorboat 
gasoline and special motor fuels, as well as small-engine fuel 
taxes, that are first deposited into the Highway Trust Fund. As 
a result, transfers to the Aquatic Resources Trust Fund are 
governed in part by Highway Trust Fund provisions.\93\
---------------------------------------------------------------------------
    \93\ Sec. 9503(c)(4) and 9503(c)(5).
---------------------------------------------------------------------------
      A total tax rate of 18.4 cents per gallon is imposed on 
gasoline and special motor fuels used in motorboats. Of this 
rate, 0.1 cent per gallon is dedicated to the Leaking 
Underground Storage Tank Trust Fund. Of the remaining 18.3 
cents per gallon, the Code currently transfers 13.5 cents per 
gallon from the Highway Trust Fund to the Aquatics Resources 
Trust Fund and Land and Water Conservation Fund. The remainder, 
4.8 cents per gallon, is retained in the General Fund. In 
addition, the Sport Fish Restoration Account of the Aquatics 
Resources Trust Fund receives 13.5 cents per gallon of the 
revenues from the tax imposed on gasoline used as a fuel in the 
nonbusiness use of small-engine outdoor power equipment. The 
balance of 4.8 cents per gallon is retained in the General 
Fund.\94\
---------------------------------------------------------------------------
    \94\ The Sport Fish Restoration Account also is funded with 
receipts from an ad valorem manufacturers excise tax on sport fishing 
equipment.
---------------------------------------------------------------------------

                               HOUSE BILL

Overview
      The provision eliminates reduced rates of excise tax for 
alcohol-blended fuels and imposes the full rate of excise tax 
on alcohol-blended fuels (18.4 cents per gallon on gasoline 
blends and 24.4 cents per gallon of diesel blended fuel). In 
place of reduced rates, the provision permits the section 40 
alcohol mixture credit, with certain modifications, to be 
applied against excise tax liability. The credit may be taken 
against the tax imposed on taxable fuels (by section 4081). To 
the extent a person does not have section 4081 liability, the 
provision allows taxpayers to file a claim for payment equal to 
the amount of the credit for the alcohol used to produce an 
eligible mixture. Under certain circumstances, a tax is imposed 
if an alcohol fuel mixture credit is claimed with respect to 
alcohol used in the production of any alcohol mixture, which is 
subsequently used for a purpose for which the credit is not 
allowed or changed into a substance that does not qualify for 
the credit. The provision eliminates the General Fund retention 
of certain taxes on alcohol fuels, and credits these taxes to 
the Highway Trust Fund.
Alcohol fuel mixture excise tax credit and payment provisions
            Alcohol fuel mixture excise tax credit
      The provision eliminates the reduced rates of excise tax 
for alcohol-blended fuels and taxable fuels used to produce an 
alcohol fuel mixture. Under the provision, the full rate of tax 
for taxable fuels is imposed on both alcohol fuel mixtures and 
the taxable fuel used to produce an alcohol fuel mixture.
      In lieu of the reduced excise tax rates, the provision 
provides that the alcohol mixture credit provided under section 
40 may be applied against section 4081 excise tax liability 
(hereinafter referred to as ``the alcohol fuel mixture 
credit''). The credit is treated as a payment of the taxpayer's 
tax liability received at the time of the taxable event. The 
alcohol fuel mixture credit is 52 cents for each gallon of 
alcohol used by a person in producing an alcohol fuel mixture 
for sale or use in a trade or business of the taxpayer. The 
credit declines to 51 cents per gallon after calendar year 
2004. For mixtures not containing ethanol (renewable source 
methanol), the credit is 60 cents per gallon. As discussed 
further below, the excise tax credit is refundable in order to 
provide a benefit equivalent to the reduced tax rates, which 
are being repealed under the provision.
      For purposes of the alcohol fuel mixture credit, an 
``alcohol fuel mixture'' is a mixture of alcohol and gasoline 
or alcohol and a special fuel which is sold for use or used as 
a fuel by the taxpayer producing the mixture. Alcohol for this 
purpose includes methanol, ethanol, and alcohol gallon 
equivalents of ETBE or other ethers produced from such alcohol. 
It does not include alcohol produced from petroleum, natural 
gas, or coal (including peat), or alcohol with a proof of less 
than 190 (determined without regard to any added denaturants). 
Special fuel is any liquid fuel (other than gasoline) which is 
suitable for use in an internal combustion engine. The benefit 
obtained from the excise tax credit is coordinated with the 
alcohol fuels income tax credit. For refiners making an alcohol 
fuel mixture with ETBE, the mixture is treated as sold to 
another person for use as a fuel only upon removal from the 
refinery. The excise tax credit is available through December 
31, 2010.
            Payments with respect to qualified alcohol fuel mixtures
      To the extent the alcohol fuel mixture credit exceeds any 
section 4081 liability of a person, the Secretary is to pay 
such person an amount equal to the alcohol fuel mixture credit 
with respect to such mixture. These payments are intended to 
provide an equivalent benefit to replace the partial exemption 
for fuels to be blended with alcohol and alcohol fuels being 
repealed by the provision. If claims for payment are not paid 
within 45 days, the claim is to be paid with interest. The 
provision also provides that in the case of an electronic 
claim, if such claim is not paid within 20 days, the claim is 
to be paid with interest. If claims are filed electronically, 
the claimant may make a claim for less than $200.
      The provision does not apply with respect to alcohol fuel 
mixtures sold after December 31, 2010.
Alcohol fuel subsidies borne by General Fund
      The provision eliminates the requirement that 2.5 and 2.8 
cents per gallon of excise taxes be retained in the General 
Fund with the result that the full amount of tax on alcohol 
fuels is credited to the Highway Trust Fund. The provision also 
authorizes the full amount of fuel taxes to be appropriated to 
the Highway Trust Fund without reduction for amounts equivalent 
to the excise tax credits allowed for alcohol fuel mixtures, 
and the Trust Fund is not required to reimburse any payments 
with respect to qualified alcohol fuel mixtures.
Motorboat and small engine fuel taxes
      The provision eliminates the General Fund retention of 
the 4.8 cents per gallon of the taxes imposed on gasoline and 
special motor fuels used in motorboats and gasoline used as a 
fuel in the nonbusiness use of small-engine outdoor power 
equipment.
Effective dates
      The provisions generally are effective for fuel sold or 
used after September 30, 2004. The repeal of the General Fund 
retention of the 2.5/2.8 cents per gallon of tax regarding 
alcohol fuels is effective for taxes imposed after September 
30, 2003. The repeal of the 4.8 cents per gallon General Fund 
retention of the taxes imposed on fuels used in motorboats and 
small engine equipment is effective for taxes imposed after 
September 30, 2006. The provision regarding the crediting of 
the full amount of tax to the Highway Trust Fund without regard 
to credits and payments is effective for taxes received after 
September 30, 2004, and payments made after September 30, 2004.

                            SENATE AMENDMENT

Alcohol fuels
      The Senate amendment is similar to the House bill with 
respect to alcohol fuels, except that it also provides that 
outlay payments are available for neat alcohol used as fuel. In 
addition, the Senate amendment also extends the alcohol fuels 
income tax credit (sec. 40) through December 31, 2010. The 
Senate amendment requires importers and producers of alcohol to 
be registered with the Secretary. Finally, the provision 
extends the temporary additional duty on ethanol through 
January 1, 2011.
Biodiesel fuels
      The Senate amendment creates a refundable excise tax 
credit for biodiesel fuel mixtures similar to that created for 
alcohol fuel mixtures. The excise tax credit for biodiesel 
mixtures is 50 cents for each gallon of biodiesel used by the 
taxpayer in producing a qualified biodiesel mixture for sale or 
use in a trade or business of the taxpayer. A qualified 
biodiesel mixture is a mixture of biodiesel and diesel fuel 
(determined without regard to any use of kerosene) that is (1) 
sold for use or used by the taxpayer producing such mixture as 
a fuel, or (2) removed from the refinery by a person producing 
the mixture. In the case of agri-biodiesel, the credit is $1.00 
per gallon. No credit is allowed unless the taxpayer obtains a 
certification (in such form and manner as prescribed by the 
Secretary) from the producer of the biodiesel that identifies 
the product produced and the percentage of biodiesel and agri-
biodiesel in the product. The Senate amendment also provides 
for outlay payments for biodiesel, not in a mixture, used as a 
fuel.
      The credit is not available for any sale or use for any 
period after December 31, 2006. Credits and outlay payments are 
paid out of the General Fund, rather than the Highway Trust 
Fund. The excise tax credit is coordinated with the income tax 
credit for biodiesel such that credit for the same biodiesel 
cannot be claimed for both income and excise tax purposes.
      The Senate amendment requires importers and producers of 
biodiesel to be registered with the Secretary.
Motorboat and small engine fuel taxes
      The Senate amendment does not change the General Fund's 
retention of the 4.8 cents per gallon imposed on motorboat and 
small engine fuel.
Effective date
      The provisions generally are effective for fuel sold or 
used after September 30, 2004. The repeal of the General Fund 
retention of the 2.5/2.8 cents per gallon regarding alcohol 
fuels is effective for fuel sold or used after September 30, 
2003. The Secretary is to provide electronic filing 
instructions by September 30, 2004. The extension of the 
section 40 alcohol fuels credit is effective on the date of 
enactment. The requirement that producers and importers of 
alcohol and biodiesel be registered is effective April 1, 2005.

                          CONFERENCE AGREEMENT

Overview
      The conference agreement generally follows the Senate 
amendment. The conference agreement does not include outlay 
payments for neat alcohol and 100 percent biodiesel fuels. The 
conference agreement does not change the temporary duty on 
ethanol. In addition, the conference agreement does not change 
the General Fund's retention of the 4.8 cents per gallon 
imposed on motorboat and small engine fuel.
      The conference agreement eliminates reduced rates of 
excise tax for most alcohol-blended fuels and imposes the full 
rate of excise tax on most alcohol-blended fuels (18.3 cents 
per gallon on gasoline blends and 24.3 cents per gallon of 
diesel blended fuel). In place of reduced rates, the conference 
agreement creates two new excise tax credits: the alcohol fuel 
mixture credit and the biodiesel mixture credit. The sum of 
these credits may be taken against the tax imposed on taxable 
fuels (by section 4081). The conference agreement allows 
taxpayers to file a claim for payment equal to the amount of 
these credits for biodiesel or alcohol used to produce an 
eligible mixture.
      Under certain circumstances, a tax is imposed if an 
alcohol fuel mixture credit or biodiesel fuel mixture credit is 
claimed with respect to alcohol or biodiesel used in the 
production of any alcohol or biodiesel mixture, which is 
subsequently used for a purpose for which the credit is not 
allowed or changed into a substance that does not qualify for 
the credit.
      The conference agreement eliminates the General Fund 
retention of certain taxes on alcohol fuels, and credits these 
taxes to the Highway Trust Fund. The Highway Trust Fund is 
credited with the full amount of tax imposed on alcohol and 
biodiesel fuel mixtures.
      The conference agreement also extends the present-law 
alcohol fuels income tax credit through December 31, 2010.
Alcohol fuel mixture excise tax credit
      The provision eliminates the reduced rates of excise tax 
for most alcohol-blended fuels.\95\ Under the provision, the 
full rate of tax for taxable fuels is imposed on both alcohol 
fuel mixtures and the taxable fuel used to produce an alcohol 
fuel mixture.
---------------------------------------------------------------------------
    \95\ The provision does not change the present-law treatment of 
fuels blended with alcohol derived from natural gas (under sec. 
4041(m)), or alcohol derived from coal or peat (under sec. 4041(b)(2)). 
The provision does not change the taxes imposed to fund the Leaking 
Underground Storage Tank Trust Fund.
---------------------------------------------------------------------------
      In lieu of the reduced excise tax rates, the provision 
provides for an excise tax credit, the alcohol fuel mixture 
credit. The alcohol fuel mixture credit is 51 cents for each 
gallon of alcohol used by a person in producing an alcohol fuel 
mixture for sale or use in a trade or business of the taxpayer. 
For mixtures not containing ethanol (renewable source 
methanol), the credit is 60 cents per gallon.
      For purposes of the alcohol fuel mixture credit, an 
``alcohol fuel mixture'' is a mixture of alcohol and a taxable 
fuel that (1) is sold by the taxpayer producing such mixture to 
any person for use as a fuel or (2) is used as a fuel by the 
taxpayer producing the mixture. Alcohol for this purpose 
includes methanol, ethanol, and alcohol gallon equivalents of 
ETBE or other ethers produced from such alcohol. It does not 
include alcohol produced from petroleum, natural gas, or coal 
(including peat), or alcohol with a proof of less than 190 
(determined without regard to any added denaturants). Taxable 
fuel is gasoline, diesel, and kerosene.\96\ A mixture that 
includes ETBE or other ethers produced from alcohol produced by 
any person at a refinery prior to a taxable event is treated as 
sold at the time of its removal from the refinery (and only at 
such time) to another person for use as a fuel.
---------------------------------------------------------------------------
    \96\ Sec. 4083(a)(1). Under present law, dyed fuels are taxable 
fuels that have been exempted from tax.
---------------------------------------------------------------------------
      The excise tax credit is coordinated with the alcohol 
fuels income tax credit and is available through December 31, 
2010.
Biodiesel mixture excise tax credit
      The provision provides an excise tax credit for biodiesel 
mixtures.\97\ The credit is 50 cents for each gallon of 
biodiesel used by the taxpayer in producing a qualified 
biodiesel mixture for sale or use in a trade or business of the 
taxpayer. A qualified biodiesel mixture is a mixture of 
biodiesel and diesel fuel that (1) is sold by the taxpayer 
producing such mixture to any person for use as a fuel, or (2) 
is used as a fuel by the taxpayer producing such mixture. In 
the case of agri-biodiesel, the credit is $1.00 per gallon. No 
credit is allowed unless the taxpayer obtains a certification 
(in such form and manner as prescribed by the Secretary) from 
the producer of the biodiesel that identifies the product 
produced and the percentage of biodiesel and agri-biodiesel in 
the product.
---------------------------------------------------------------------------
    \97\ The excise tax credit uses the same definitions as the 
biodiesel fuels income tax credit.
---------------------------------------------------------------------------
      The credit is not available for any sale or use for any 
period after December 31, 2006. This excise tax credit is 
coordinated with the income tax credit for biodiesel such that 
credit for the same biodiesel cannot be claimed for both income 
and excise tax purposes.
Payments with respect to qualified alcohol and biodiesel fuel mixtures
      To the extent the alcohol fuel mixture credit exceeds any 
section 4081 liability of a person, the Secretary is to pay 
such person an amount equal to the alcohol fuel mixture credit 
with respect to such mixture. Thus, if the person has no 
section 4081 liability, the credit is totally refundable. These 
payments are intended to provide an equivalent benefit to 
replace the partial exemption for fuels to be blended with 
alcohol and alcohol fuels being repealed by the provision. 
Similar rules apply to the biodiesel fuel mixture credit.
      If claims for payment are not paid within 45 days, the 
claim is to be paid with interest. The provision also provides 
that in the case of an electronic claim, if such claim is not 
paid within 20 days, the claim is to be paid with interest. If 
claims are filed electronically, the claimant may make a claim 
for less than $200. The Secretary is to describe the electronic 
format for filing claims by December 31, 2004.
      The payment provision does not apply with respect to 
alcohol fuel mixtures sold after December 31, 2010, and 
biodiesel fuel mixtures sold after December 31, 2006.
Alcohol and biodiesel fuel subsidies borne by General Fund
      The provision eliminates the requirement that 2.5 and 2.8 
cents per gallon of excise taxes be retained in the General 
Fund with the result that the full amount of tax on alcohol 
fuels is credited to the Highway Trust Fund. The provision also 
authorizes the full amount of fuel taxes to be appropriated to 
the Highway Trust Fund without reduction for amounts equivalent 
to the excise tax credits allowed for alcohol or biodiesel fuel 
mixtures and the Highway Trust Fund is not required to 
reimburse the General Fund for any credits or payments taken or 
made with respect to qualified alcohol fuel mixtures or 
biodiesel fuel mixtures.
Registration requirement
      Every person producing or importing biodiesel or alcohol 
is required to register with the Secretary.
Alcohol fuels income tax credit
      The provision extends the alcohol fuels credit (sec. 40) 
through December 31, 2010.
Effective dates
      The provisions generally are effective for fuel sold or 
used after December 31, 2004. The repeal of the General Fund 
retention of the 2.5/2.8 cents per gallon regarding alcohol 
fuels is effective for fuel sold or used after September 30, 
2004. The Secretary is to provide electronic filing 
instructions by December 31, 2004. The registration requirement 
is effective April 1, 2005.
2. Biodiesel income tax credit (sec. 862 of the bill and new sec. 40A 
        of the Code)

                              PRESENT LAW

      No income tax credit or excise tax rate reduction is 
provided for biodiesel fuels under present law. However, a 52-
cents-per-gallon income tax credit (the ``alcohol fuels 
credit'') is allowed for ethanol and methanol (derived from 
renewable sources) when the alcohol is used as a highway motor 
fuel. Registered blenders may forgo the full income tax credit 
and instead pay reduced rates of excise tax on gasoline that 
they purchase for blending with alcohol. These present law 
provisions are scheduled to expire in 2007.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The Senate amendment provides a new income tax credit for 
biodiesel and qualified biodiesel mixtures, the biodiesel fuels 
credit. The biodiesel fuels credit is the sum of the biodiesel 
mixture credit plus the biodiesel credit and is treated as a 
general business credit. The amount of the biodiesel fuels 
credit is includable in gross income. The biodiesel fuels 
credit is coordinated to take into account benefits from the 
biodiesel excise tax credit and payment provisions discussed 
above. The credit may not be carried back to a taxable year 
ending before or on September 30, 2004. The provision does not 
apply to fuel sold or used after December 31, 2006.
      Biodiesel is monoalkyl esters of long chain fatty acids 
derived from plant or animal matter that meet (1) the 
registration requirements established by the Environmental 
Protection Agency under section 211 of the Clean Air Act and 
(2) the requirements of the American Society of Testing and 
Materials D6751. Agri-biodiesel is biodiesel derived solely 
from virgin oils including oils from corn, soybeans, sunflower 
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, 
flaxseeds, rice bran, mustard seeds, or animal fats.
      Biodiesel may be taken into account for purposes of the 
credit only if the taxpayer obtains a certification (in such 
form and manner as prescribed by the Secretary) from the 
producer or importer of the biodiesel which identifies the 
product produced and the percentage of the biodiesel and agri-
biodiesel in the product.
Biodiesel mixture credit
      The biodiesel mixture credit is 50 cents for each gallon 
of biodiesel used by the taxpayer in the production of a 
qualified biodiesel mixture. For agri-biodiesel, the credit is 
$1.00 per gallon. A qualified biodiesel mixture is a mixture of 
biodiesel and diesel fuel that is (1) sold by the taxpayer 
producing such mixture to any person for use as a fuel, or (2) 
is used as a fuel by the taxpayer producing such mixture. The 
sale or use must be in the trade or business of the taxpayer 
and is to be taken into account for the taxable year in which 
such sale or use occurs. No credit is allowed with respect to 
any casual off-farm production of a qualified biodiesel 
mixture.
Biodiesel credit
      The biodiesel credit is 50 cents for each gallon of 100 
percent biodiesel which is not in a mixture with diesel fuel 
and which during the taxable year is (1) used by the taxpayer 
as a fuel in a trade or business or (2) sold by the taxpayer at 
retail to a person and placed in the fuel tank of such person's 
vehicle. For agri-biodiesel, the credit is $1.00 per gallon.
Later separation or failure to use as fuel
      In a manner similar to the treatment of alcohol fuels, a 
tax is imposed if a biodiesel fuels credit is claimed with 
respect to biodiesel that is subsequently used for a purpose 
for which the credit is not allowed or that is changed into a 
substance that does not qualify for the credit.
Effective date
      The biodiesel fuel income tax credit provision is 
effective for fuel produced, and sold or used after September 
30, 2004, in taxable years ending after such date.

                          CONFERENCE AGREEMENT

      The conference agreement generally follows the Senate 
amendment, except for the effective date.
      Effective date.--The provision is effective for fuel 
produced, and sold or used after December 31, 2004, in taxable 
years ending after such date.

  F. Exclusion of Incentive Stock Options and Employee Stock Purchase 
                     Plan Stock Options From Wages

(Sec. 261 of the House bill and secs. 421(b), 423(c), 3121(a), 3231, 
        and 3306(b) of the Code)

                              PRESENT LAW

      Generally, when an employee exercises a compensatory 
option on employer stock, the difference between the option 
price and the fair market value of the stock (i.e., the 
``spread'') is includible in income as compensation. In the 
case of an incentive stock option or an option to purchase 
stock under an employee stock purchase plan (collectively 
referred to as ``statutory stock options''), the spread is not 
included in income at the time of exercise.\98\
---------------------------------------------------------------------------
    \98\ Sec. 421. For purposes of the individual alternative minimum 
tax, the transfer of stock pursuant to an incentive stock option is 
generally treated as the transfer of stock pursuant to a nonstatutory 
option. Sec. 56(b)(3).
---------------------------------------------------------------------------
      If the statutory holding period requirements are 
satisfied with respect to stock acquired through the exercise 
of a statutory stock option, the spread, and any additional 
appreciation, will be taxed as capital gain upon disposition of 
such stock. Compensation income is recognized, however, if 
there is a disqualifying disposition (i.e., if the statutory 
holding period is not satisfied) of stock acquired pursuant to 
the exercise of a statutory stock option.
      Federal Insurance Contribution Act (``FICA'') and Federal 
Unemployment Tax Act (``FUTA'') taxes (collectively referred to 
as ``employment taxes'') are generally imposed in an amount 
equal to a percentage of wages paid by the employer with 
respect to employment.\99\ The applicable Code provisions\100\ 
do not provide an exception from FICA and FUTA taxes for wages 
paid to an employee arising from the exercise of a statutory 
stock option.
---------------------------------------------------------------------------
    \99\ Secs. 3101, 3111 and 3301.
    \100\ Secs. 3121 and 3306.
---------------------------------------------------------------------------
      There has been uncertainty in the past as to employer 
withholding obligations upon the exercise of statutory stock 
options. On June 25, 2002, the IRS announced that until further 
guidance is issued, it would not assess FICA or FUTA taxes, or 
impose Federal income tax withholding obligations, upon either 
the exercise of a statutory stock option or the disposition of 
stock acquired pursuant to the exercise of a statutory stock 
option.\101\
---------------------------------------------------------------------------
    \101\ Notice 2002-47, 2002-28 I.R.B. 97.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill provides specific exclusions from FICA and 
FUTA wages for remuneration on account of the transfer of stock 
pursuant to the exercise of an incentive stock option or under 
an employee stock purchase plan, or any disposition of such 
stock. Thus, under the House bill, FICA and FUTA taxes do not 
apply upon the exercise of a statutory stock option.\102\ The 
House bill also provides that such remuneration is not taken 
into account for purposes of determining Social Security 
benefits.
---------------------------------------------------------------------------
    \102\ The provision also provides a similar exclusion under the 
Railroad Retirement Tax Act.
---------------------------------------------------------------------------
      Additionally, the House bill provides that Federal income 
tax withholding is not required on a disqualifying disposition, 
nor when compensation is recognized in connection with an 
employee stock purchase plan discount. Present law reporting 
requirements continue to apply.
      Effective date.--The House bill is effective for stock 
acquired pursuant to options exercised after the date of 
enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.

    G. Incentives to Reinvest Foreign Earnings in the United States

(Sec. 271 of the House bill, sec. 231 of the Senate amendment, and new 
        sec. 965 of the Code)

                              PRESENT LAW

      The United States employs a ``worldwide'' tax system, 
under which domestic corporations generally are taxed on all 
income, whether derived in the United States or abroad. Income 
earned by a domestic parent corporation from foreign operations 
conducted by foreign corporate subsidiaries generally is 
subject to U.S. tax when the income is distributed as a 
dividend to the domestic corporation. Until such repatriation, 
the U.S. tax on such income generally is deferred, and U.S. tax 
is imposed on such income when repatriated. However, under 
anti-deferral rules, the domestic parent corporation may be 
taxed on a current basis in the United States with respect to 
certain categories of passive or highly mobile income earned by 
its foreign subsidiaries, regardless of whether the income has 
been distributed as a dividend to the domestic parent 
corporation. The main anti-deferral provisions in this context 
are the controlled foreign corporation rules of subpart F \103\ 
and the passive foreign investment company rules.\104\ A 
foreign tax credit generally is available to offset, in whole 
or in part, the U.S. tax owed on foreign-source income, whether 
earned directly by the domestic corporation, repatriated as a 
dividend from a foreign subsidiary, or included in income under 
the anti-deferral rules.\105\
---------------------------------------------------------------------------
    \103\ Secs. 951-964.
    \104\ Secs. 1291-1298.
    \105\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, certain dividends received by a U.S. 
corporation from a controlled foreign corporation are eligible 
for an 85-percent dividends-received deduction. At the 
taxpayer's election, this deduction is available for dividends 
received either: (1) during the first six months of the 
taxpayer's first taxable year beginning on or after the date of 
enactment of the bill; or (2) during any six-month or shorter 
period after the date of enactment of the bill, during the 
taxpayer's last taxable year beginning before such date. 
Dividends received after the election period will be taxed in 
the normal manner under present law.
      The deduction applies only to dividends and other amounts 
included in gross income as dividends (e.g., amounts described 
in section 1248(a)). The deduction does not apply to items that 
are not included in gross income as dividends, such as subpart 
F inclusions or deemed repatriations under section 956. 
Similarly, the deduction does not apply to distributions of 
earnings previously taxed under subpart F, except to the extent 
that the subpart F inclusions result from the payment of a 
dividend by one controlled foreign corporation to another 
controlled foreign corporation within a certain chain of 
ownership during the election period. This exception enables 
multinational corporate groups to qualify for the deduction in 
connection with the repatriation of earnings from lower-tier 
controlled foreign corporations.
      The deduction is subject to a number of limitations. 
First, it applies only to repatriations in excess of the 
taxpayer's average repatriation level over three of the five 
most recent taxable years ending on or before March 31, 2003, 
determined by disregarding the highest-repatriation year and 
the lowest-repatriation year among such five years (the ``base-
period average''). In addition to actual dividends, deemed 
repatriations under section 956 and distributions of earnings 
previously taxed under subpart F are included in the base-
period average.
      Second, the amount of dividends eligible for the 
deduction is limited to the greatest of: (1) $500 million; (2) 
the amount of earnings shown as permanently invested outside 
the United States on the taxpayer's most recent audited 
financial statement which is certified on or before March 31, 
2003; or (3) in the case of an applicable financial statement 
that fails to show a specific amount of such earnings, but that 
does show a specific amount of tax liability attributable to 
such earnings, the amount of such earnings determined in such 
manner as the Treasury Secretary may prescribe.
      Third, dividends qualifying for the deduction must be 
invested in the United States pursuant to a plan approved by 
the senior management and board of directors of the corporation 
claiming the deduction.
      No foreign tax credit (or deduction) is allowed for 
foreign taxes attributable to the deductible portion of any 
dividend received during the taxable year for which an election 
under the provision is in effect. For this purpose, the 
taxpayer may specifically identify which dividends are treated 
as carrying the deduction and which are not; in the absence of 
such identification, a pro rata amount of foreign tax credits 
will be disallowed with respect to every dividend received 
during the taxable year.
      In addition, the income attributable to the nondeductible 
portion of a qualifying dividend may not be offset by net 
operating losses, and the tax attributable to such income 
generally may not be offset by credits (other than foreign tax 
credits and AMT credits) and may not reduce the alternative 
minimum tax otherwise owed by the taxpayer. No deduction under 
sections 243 or 245 is allowed for any dividend for which a 
deduction is allowed under the provision.
      Effective date.--The House bill provision is effective 
for a taxpayer's first taxable year beginning on or after the 
date of enactment of the bill, or the taxpayer's last taxable 
year beginning before such date, at the taxpayer's election.

                            SENATE AMENDMENT

      Under the provision, certain actual and deemed dividends 
received by a U.S. corporation from a controlled foreign 
corporation are subject to tax at a reduced rate of 5.25 
percent. For corporations taxed at the top corporate income tax 
rate of 35 percent, this rate reduction is equivalent to an 85-
percent dividends-received deduction. This rate reduction is 
available only for the first taxable year of an electing 
taxpayer ending 120 days or more after the date of enactment of 
the provision.
      The reduced rate applies only to repatriations in excess 
of the taxpayer's average repatriation level over 3 of the 5 
most recent taxable years ending on or before December 31, 
2002, determined by disregarding the highest-repatriation year 
and the lowest-repatriation year among such 5 years.\106\ The 
taxpayer may designate which of its dividends are treated as 
meeting the base-period average level and which of its 
dividends are treated as comprising the excess.
---------------------------------------------------------------------------
    \106\ If the taxpayer has fewer than 5 taxable years ending on or 
before December 31, 2002, then the base period consists of all such 
taxable years, with none disregarded.
---------------------------------------------------------------------------
      In order to qualify for the reduced rate, dividends must 
be described in a ``domestic reinvestment plan'' approved by 
the taxpayer's senior management and board of directors. This 
plan must provide for the reinvestment of the repatriated 
dividends in the United States, ``including as a source for the 
funding of worker hiring and training; infrastructure; research 
and development; capital investments; or the financial 
stabilization of the corporation for the purposes of job 
retention or creation.''
      The provision disallows 85 percent of the foreign tax 
credits attributable to dividends subject to the reduced rate 
and removes 85 percent of the underlying income from the 
taxpayer's foreign tax credit limitation fraction under section 
904. In addition, any expenses, losses, or deductions of the 
taxpayer may not be used to reduce the tax on dividends 
qualifying for the benefits of the provision.
      In the case of an affiliated group, an election under the 
provision is made by the common parent on a group-wide basis, 
and all members of the group are treated as a single taxpayer. 
The election applies to all controlled foreign corporations 
with respect to which an electing taxpayer is a United States 
shareholder.
      Effective date.--The Senate amendment provision is 
effective for the first taxable year of an electing taxpayer 
ending 120 days or more after the provision's date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, with 
modifications.
      Under the conference agreement, certain dividends 
received by a U.S. corporation from controlled foreign 
corporations are eligible for an 85-percent dividends-received 
deduction. At the taxpayer's election, this deduction is 
available for dividends received either during the taxpayer's 
first taxable year beginning on or after the date of enactment 
of the bill, or during the taxpayer's last taxable year 
beginning before such date.\107\ Dividends received after the 
election period will be taxed in the normal manner under 
present law. The conferees emphasize that this is a temporary 
economic stimulus measure, and that there is no intent to make 
this measure permanent, or to ``extend'' or enact it again in 
the future.
---------------------------------------------------------------------------
    \107\ The election is to be made on a timely filed return 
(including extensions) for the taxable year with respect to which the 
deduction is claimed.
---------------------------------------------------------------------------
      The deduction applies only to cash dividends and other 
cash amounts included in gross income as dividends, such as 
cash amounts treated as dividends under sections 302 or 304 
(but not to amounts treated as dividends under Code sections 
78, 367, or 1248).\108\ The deduction does not apply to items 
that are not included in gross income as dividends, such as 
subpart F inclusions or deemed repatriations under section 956. 
Similarly, the deduction does not apply to distributions of 
earnings previously taxed under subpart F, except to the extent 
that the subpart F inclusions result from the payment of a 
dividend by one controlled foreign corporation to another 
controlled foreign corporation within a certain chain of 
ownership during the election period, with the result that cash 
travels through a chain of controlled foreign corporations to 
the taxpayer within the election period. The amount of 
dividends eligible for the deduction is reduced by any increase 
in related-party indebtedness on the part of a controlled 
foreign corporation between October 3, 2004 and the close of 
the taxable year for which the deduction is being claimed, 
determined by treating all controlled foreign corporations with 
respect to which the taxpayer is a U.S. shareholder as one 
controlled foreign corporation.\109\ This rule is intended to 
prevent a deduction from being claimed in cases in which the 
U.S. shareholder directly or indirectly (e.g., through a 
related party) finances the payment of a dividend from a 
controlled foreign corporation. In such a case, there may be no 
net repatriation of funds, and thus it would be inappropriate 
to provide the deduction.
---------------------------------------------------------------------------
    \108\ However, to the extent that the taxpayer actually receives 
cash in an inbound liquidation that is described in Code section 332 
and treated as a dividend under Code section 367(b), such amount is 
treated as a dividend for these purposes. The conferees note that a 
deemed liquidation effectuated by means of a ``check the box'' election 
under the entity classification regulations will not involve an actual 
receipt of cash that is reinvested in the United States as required for 
purposes of this provision.
    \109\ Thus, indebtedness between such controlled foreign 
corporations is disregarded for purposes of this determination.
---------------------------------------------------------------------------
      The deduction is subject to a number of general 
limitations. First, it applies only to repatriations in excess 
of the taxpayer's average repatriation level over three of the 
five most recent taxable years ending on or before June 30, 
2003, determined by disregarding the highest-repatriation year 
and the lowest-repatriation year among such five years (the 
``base-period average''). If the taxpayer has fewer than five 
such years, then all taxable years ending on or before June 30, 
2003 are included in the base period.\110\ Repatriation levels 
are determined by reference to base-period tax returns as 
filed, including any amended returns that were filed on or 
before June 30, 2003. U.S. shareholders that file a 
consolidated tax return are treated as one U.S. shareholder for 
all purposes of this dividends-received deduction provision. 
Thus, all such shareholders are aggregated in determining the 
base-period average (as are all controlled foreign 
corporations). In addition to cash dividends, dividends of 
property, deemed repatriations under section 956, and 
distributions of earnings previously taxed under subpart F are 
included in the base-period average.
---------------------------------------------------------------------------
    \110\ A corporation that was spun off from another corporation 
during the five-year period is treated for this purpose as having been 
in existence for the same period that such other corporation has been 
in existence. The pre-spin-off dividend history of the two corporations 
is generally allocated between them on the basis of their interests in 
the dividend-paying controlled foreign corporations immediately after 
the spin-off. In other cases involving companies entering and exiting 
corporate groups, the principles of Code section 41(f)(3)(A) and (B) 
apply.
---------------------------------------------------------------------------
      Second, the amount of dividends eligible for the 
deduction is limited to the greatest of: (1) $500 million; (2) 
the amount of earnings shown as permanently invested outside 
the United States on the taxpayer's most recent audited 
financial statement which is certified on or before June 30, 
2003; \111\ or (3) in the case of an applicable financial 
statement that does not show a specific amount of such 
earnings, but that does show a specific amount of tax liability 
attributable to such earnings, the amount of such earnings 
determined by grossing up the tax liability at a 35-percent 
rate. If there is no applicable financial statement, or if such 
statement does not show a specific earnings or tax liability 
amount, then the $500 million limit applies. This $500 million 
amount is divided among corporations that are members of a 
controlled group, using a 50-percent standard of common 
control. The two financial statement amounts described above 
are divided among the U.S. shareholders that are included on 
such statements.
---------------------------------------------------------------------------
    \111\ This rule refers to elements of Accounting Principles Board 
Opinion 23 (``APB 23''), which provides an exception to the general 
rule of comprehensive recognition of deferred taxes for temporary book-
tax differences. The exception is for temporary differences related to 
undistributed earnings of foreign subsidiaries and foreign corporate 
joint ventures that meet the indefinite reversal criterion in APB 23.
---------------------------------------------------------------------------
      Third, in order to qualify for the deduction, dividends 
must be described in a domestic reinvestment plan approved by 
the taxpayer's senior management and board of directors. This 
plan must provide for the reinvestment of the repatriated 
dividends in the United States, including as a source for the 
funding of worker hiring and training, infrastructure, research 
and development, capital investments, and the financial 
stabilization of the corporation for the purposes of job 
retention or creation. The conferees note that this list of 
permitted uses is not exclusive. The reinvestment plan cannot, 
however, designate repatriated funds for use as payment for 
executive compensation. Dividends with respect to which the 
deduction is not being claimed are not required to be included 
in any domestic reinvestment plan.
      No foreign tax credit (or deduction) is allowed for 
foreign taxes attributable to the deductible portion of any 
dividend. For this purpose, the taxpayer may specifically 
identify which dividends are treated as carrying the deduction 
and which dividends are not.\112\ In other words, the taxpayer 
is allowed to choose which of its dividends are treated as 
meeting the base-period repatriation level (and thus carry 
foreign tax credits, to the extent otherwise allowable), and 
which of its dividends are treated as comprising the excess 
eligible for the deduction (and thus entail proportional 
disallowance of any associated foreign tax credits). The 
deduction itself will have the effect of appropriately reducing 
the taxpayer's foreign tax credit limitation.
---------------------------------------------------------------------------
    \112\ In the absence of such a specification, a pro rata amount of 
foreign tax credits will be disallowed with respect to every dividend 
repatriated during the taxable year.
---------------------------------------------------------------------------
      Deductions are disallowed for expenses that are properly 
allocated and apportioned to the deductible portion of any 
dividend.
      The income attributable to the nondeductible portion of a 
qualifying dividend may not be offset by expenses, losses, or 
deductions, and the tax attributable to such income generally 
may not be offset by credits (other than foreign tax credits 
and AMT credits).\113\ The tax on this amount also cannot 
reduce the alternative minimum tax that otherwise would be owed 
by the taxpayer. However, the deduction available under this 
provision is not treated as a preference item for purposes of 
computing the AMT. Thus, the deduction is allowed in computing 
alternative minimum taxable income notwithstanding the fact 
that it may not be deductible in computing earnings and 
profits. No deduction under sections 243 or 245 is allowed for 
any dividend for which a deduction is allowed under the 
provision.
---------------------------------------------------------------------------
    \113\ These expenses, losses, and deductions may, however, have the 
effect of reducing other income of the taxpayer.
---------------------------------------------------------------------------
      Effective date.--The provision is effective only for a 
taxpayer's first taxable year beginning on or after the date of 
enactment of the bill, or the taxpayer's last taxable year 
beginning before such date, at the taxpayer's election. The 
deduction available under the provision is not allowed for 
dividends received in any taxable year beginning one year or 
more after the date of enactment.

                     H. Other Incentive Provisions

1. Special rules for livestock sold on account of weather-related 
        conditions (sec. 281 of the House bill, sec. 649 of the Senate 
        amendment, and secs. 1033 and 451 of the Code)

                              PRESENT LAW

      Generally, a taxpayer realizes gain to the extent the 
sales price (and any other consideration received) exceeds the 
taxpayer's basis in the property. The realized gain is subject 
to current income tax unless the gain is deferred or not 
recognized under a special tax provision.
      Under section 1033, gain realized by a taxpayer from an 
involuntary conversion of property is deferred to the extent 
the taxpayer purchases property similar or related in service 
or use to the converted property within the applicable period. 
The taxpayer's basis in the replacement property generally is 
the cost of such property reduced by the amount of gain not 
recognized.
      The applicable period for the taxpayer to replace the 
converted property begins with the date of the disposition of 
the converted property (or if earlier, the earliest date of the 
threat or imminence of requisition or condemnation of the 
converted property) and ends two years after the close of the 
first taxable year in which any part of the gain upon 
conversion is realized (the ``replacement period''). Special 
rules extend the replacement period for certain real property 
and principal residences damaged by a Presidentially declared 
disaster to three years and four years, respectively, after the 
close of the first taxable year in which gain is realized.
      Section 1033(e) provides that the sale of livestock 
(other than poultry) that is held for draft, breeding, or dairy 
purposes in excess of the number of livestock that would have 
been sold but for drought, flood, or other weather-related 
conditions is treated as an involuntary conversion. 
Consequently, gain from the sale of such livestock could be 
deferred by reinvesting the proceeds of the sale in similar 
property within a two-year period.
      In general, cash-method taxpayers report income in the 
year it is actually or constructively received. However, 
section 451(e) provides that a cash-method taxpayer whose 
principal trade or business is farming who is forced to sell 
livestock due to drought, flood, or other weather-related 
conditions may elect to include income from the sale of the 
livestock in the taxable year following the taxable year of the 
sale. This elective deferral of income is available only if the 
taxpayer establishes that, under the taxpayer's usual business 
practices, the sale would not have occurred but for drought, 
flood, or weather-related conditions that resulted in the area 
being designated as eligible for Federal assistance. This 
exception is generally intended to put taxpayers who receive an 
unusually high amount of income in one year in the position 
they would have been in absent the weather-related condition.

                               HOUSE BILL

      The House bill extends the applicable period for a 
taxpayer to replace livestock sold on account of drought, 
flood, or other weather-related conditions from two years to 
four years after the close of the first taxable year in which 
any part of the gain on conversion is realized. The extension 
is only available if the taxpayer establishes that, under the 
taxpayer's usual business practices, the sale would not have 
occurred but for drought, flood, or weather-related conditions 
that resulted in the area being designated as eligible for 
Federal assistance. In addition, the Secretary of the Treasury 
is granted authority to further extend the replacement period 
on a regional basis should the weather-related conditions 
continue longer than three years. Also, for property eligible 
for the provision's extended replacement period, the provision 
provides that the taxpayer can make an election under section 
451(e) until the period for reinvestment of such property under 
section 1033 expires.
      Effective date.--The House bill provision is effective 
for any taxable year with respect to which the due date 
(without regard to extensions) for the return is after December 
31, 2002.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except that it also permits the taxpayer to replace 
compulsorily or involuntarily converted livestock with other 
farm property if, due to drought, flood, or other weather-
related conditions, it is not feasible for the taxpayer to 
reinvest the proceeds in property similar or related in use to 
the livestock so converted.
      Effective date.--The Senate amendment provision is 
effective for taxable years beginning after December 31, 2001.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except for the effective date.
      Effective date.--The conference agreement provision is 
effective for any taxable year with respect to which the due 
date (without regard to extensions) for the return is after 
December 31, 2002.
2. Payment of dividends on stock of cooperatives without reducing 
        patronage dividends (sec. 282 of the House bill, sec. 648 of 
        the Senate amendment, and sec. 1388 of the Code)

                              PRESENT LAW

      Under present law, cooperatives generally are entitled to 
deduct or exclude amounts distributed as patronage dividends in 
accordance with Subchapter T of the Code. In general, patronage 
dividends are comprised of amounts that are paid to patrons (1) 
on the basis of the quantity or value of business done with or 
for patrons, (2) under a valid and enforceable obligation to 
pay such amounts that was in existence before the cooperative 
received the amounts paid, and (3) which are determined by 
reference to the net earnings of the cooperative from business 
done with or for patrons.
      Treasury Regulations provide that net earnings are 
reduced by dividends paid on capital stock or other proprietary 
capital interests (referred to as the ``dividend allocation 
rule'').\114\ The dividend allocation rule has been interpreted 
to require that such dividends be allocated between a 
cooperative's patronage and nonpatronage operations, with the 
amount allocated to the patronage operations reducing the net 
earnings available for the payment of patronage dividends.
---------------------------------------------------------------------------
    \114\ Treas. Reg. sec. 1.1388-1(a)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill provides a special rule for dividends on 
capital stock of a cooperative. To the extent provided in 
organizational documents of the cooperative, dividends on 
capital stock do not reduce patronage income and do not prevent 
the cooperative from being treated as operating on a 
cooperative basis.
      Effective date.--The House bill provision is effective 
for distributions made in taxable years ending after the date 
of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The Senate amendment provision is 
effective for distributions made in taxable years ending after 
the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
3. Manufacturing relating to timber
            a. Capital gains treatment to apply to outright sales of 
                    timber by landowner (sec. 283 of the House bill, 
                    sec. 333 of the Senate amendment, and sec. 631(b) 
                    of the Code)

                              PRESENT LAW

      Under present law, a taxpayer disposing of timber held 
for more than one year is eligible for capital gains treatment 
in three situations. First, if the taxpayer sells or exchanges 
timber that is a capital asset (sec. 1221) or property used in 
the trade or business (sec. 1231), the gain generally is long-
term capital gain; however, if the timber is held for sale to 
customers in the taxpayer's business, the gain will be ordinary 
income. Second, if the taxpayer disposes of the timber with a 
retained economic interest, the gain is eligible for capital 
gain treatment (sec. 631(b)). Third, if the taxpayer cuts 
standing timber, the taxpayer may elect to treat the cutting as 
a sale or exchange eligible for capital gains treatment (sec. 
631(a)).

                               HOUSE BILL

      Under the House bill, in the case of a sale of timber by 
the owner of the land from which the timber is cut, the 
requirement that a taxpayer retain an economic interest in the 
timber in order to treat gains as capital gain under section 
631(b) does not apply. Outright sales of timber by the 
landowner will qualify for capital gains treatment in the same 
manner as sales with a retained economic interest qualify under 
present law, except that the usual tax rules relating to the 
timing of the income from the sale of the timber will apply 
(rather than the special rule of section 631(b) treating the 
disposal as occurring on the date the timber is cut).
      Effective date.--The provision is effective for sales of 
timber after December 31, 2004.

                            SENATE AMENDMENT

      The provision in the Senate amendment is the same as 
House bill.
      Effective date.--The provision is effective for sales of 
timber after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill and Senate amendment.
      Effective date.--The provision is effective for sales of 
timber after December 31, 2004.
            b. Expensing of reforestation expenditures (sec. 331 of the 
                    Senate amendment and secs. 48 and 194 of the Code)

                              PRESENT LAW

      Section 194 provides for an 84-month amortization period 
for up to $10,000 of qualified reforestation expenditures. 
Section 48(b) provides a 10-percent credit on up to $10,000 of 
qualified amortizable basis in timber property. The amount 
amortized under section 194 is reduced by one half of the 
amount of credit claimed under section 48(b).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment permits up to $10,000 of qualified 
reforestation expenditures to be deducted in the year paid or 
incurred (i.e., expensed). The Senate amendment permits 
qualified reforestation expenditures above $10,000 to be 
amortized over 84 months. The Senate amendment also repeals the 
reforestation tax credit.
      Effective date.--Expenditures paid or incurred after the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
provision.
            c. Election to treat cutting of timber as a sale or 
                    exchange (sec. 102(b) of the House bill, sec. 332 
                    of the Senate amendment, and sec. 631(a) of the 
                    Code)

                              PRESENT LAW

      Under present law, a taxpayer may elect to treat the 
cutting of timber as a sale or exchange of the timber. If an 
election is made, the gain or loss is recognized in an amount 
equal to the difference between the fair market value of the 
timber and the basis of the timber. An election, once made, is 
effective for the taxable year and all subsequent taxable 
years, unless the IRS, upon a showing of undue hardship by the 
taxpayer, permits the revocation of the election. If an 
election is revoked, a new election may be made only with the 
consent of the IRS.

                               HOUSE BILL

      Under the House bill, an election made by a corporation 
for a taxable year ending on or before the date of enactment, 
to treat the cutting of timber as a sale or exchange, may be 
revoked by the taxpayer without the consent of the IRS for any 
taxable year ending after that date. The prior election (and 
revocation) is disregarded for purposes of making a subsequent 
election.
      Effective date.--The provision applies to taxable years 
ending after the date of enactment.

                            SENATE AMENDMENT

      The provision is the same as the House bill, except the 
provision applies to all taxpayers.
      Effective date.--The provision applies to taxable years 
ending after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
Senate amendment.
            d. Modified safe harbor rules for timber REITs (sec. 334 of 
                    the Senate amendment and sec. 857 of the Code)

                              PRESENT LAW

In general
      Under present law, real estate investment trusts 
(``REITs'') are subject to a special taxation regime. Under 
this regime, a REIT is allowed a deduction for dividends paid 
to its shareholders. As a result, REITs generally do not pay 
tax on distributed income. REITs are generally restricted to 
earning certain types of passive income, primarily rents from 
real property and interests on mortgages secured by real 
property.
      To qualify as a REIT, a corporation must satisfy a number 
of requirements, among which are four tests: organizational 
structure, source of income, nature of assets, and distribution 
of income.
Income or loss from prohibited transactions
      A 100-percent tax is imposed on the net income of a REIT 
from ``prohibited transactions''. A prohibited transaction is 
the sale or other disposition of property held for sale in the 
ordinary course of a trade or business,\115\ other than 
foreclosure property.\116\ A safe harbor is provided for 
certain sales of rent-producing real property. To qualify for 
the safe harbor, three criteria generally must be met. First, 
the REIT must have held the property for at least four years 
for rental purposes. Second, the aggregate expenditures made by 
the REIT during the four-year period prior to the date of the 
sale must not exceed 30 percent of the net selling price of the 
property. Third, either (i) the REIT must make seven or fewer 
sales of property during the taxable year or (ii) the aggregate 
adjusted basis of the property sold must not exceed 10 percent 
of the aggregate bases of all the REIT's assets at the 
beginning of the REIT's taxable year. In the latter case, 
substantially all of the marketing and development expenditures 
with respect to the property must be made through an 
independent contractor.
---------------------------------------------------------------------------
    \115\ Sec. 1221(a)(l).
    \116\ Thus, the 100-percent tax on prohibited transactions helps to 
ensure that the REIT is a passive entity and may not engage in ordinary 
retailing activities such as sales to customers of condominium units or 
subdivided lots in a development project.
---------------------------------------------------------------------------
Certain timber income
      Some REITs have been formed to hold land on which trees 
are grown. Upon maturity of the trees, the standing trees are 
sold by the REIT. The Internal Revenue Service has issued 
private letter rulings in particular instances stating that the 
income from the sale of the trees can qualify as REIT real 
property income because the uncut timber and the timberland on 
which the timber grew is considered real property and the sale 
of uncut trees can qualify as capital gain derived from the 
sale of real property.\117\
---------------------------------------------------------------------------
    \117\ See, e.g., PLR 200052021, PLR 199945055, PLR 19927021, PLR 
8838016. A private letter ruling may be relied upon only by the 
taxpayer to which the ruling is issued. However, such rulings provide 
an indication of administrative practice.
---------------------------------------------------------------------------
Limitation on investment in other entities
      A REIT is limited in the amount that it can own in other 
corporations. Specifically, a REIT cannot own securities (other 
than Government securities and certain real estate assets) in 
an amount greater than 25 percent of the value of REIT assets. 
In addition, it cannot own such securities of any one issuer 
representing more than five percent of the total value of REIT 
assets or more than 10 percent of the voting securities or 10 
percent of the value of the outstanding securities of any one 
issuer. Securities for purposes of these rules are defined by 
reference to the Investment Company Act of 1940.\118\
---------------------------------------------------------------------------
    \118\ Certain securities that are within a safe-harbor definition 
of ``straight debt'' are not taken into account for purposes of the 
limitation to no more than 10 percent of the value of an issuer's 
outstanding securities.
---------------------------------------------------------------------------
            Special rules for taxable REIT subsidiaries
      Under an exception to the general rule limiting REIT 
securities ownership of other entities, a REIT can own stock of 
a taxable REIT subsidiary (``TRS''), generally, a corporation 
other than a REIT \119\ with which the REIT makes a joint 
election to be subject to special rules. A TRS can engage in 
active business operations that would produce income that would 
not be qualified income for purposes of the 95-percent or 75-
percent income tests for a REIT, and that income is not 
attributed to the REIT. Transactions between a TRS and a REIT 
are subject to a number of specified rules that are intended to 
prevent the TRS (taxable as a separate corporate entity) from 
shifting taxable income from its activities to the pass-through 
entity REIT or from absorbing more than its share of expenses. 
Under one rule, a 100-percent excise tax is imposed on rents, 
deductions, or interest paid by the TRS to the REIT to the 
extent such items would exceed an arm's length amount as 
determined under section 482.\120\
---------------------------------------------------------------------------
    \119\ Certain corporations are not eligible to be a TRS, such as a 
corporation which directly or indirectly operates or manages a lodging 
facility or a health care facility or directly or indirectly provides 
to any other person rights to a brand name under which any lodging 
facility or health care facility is operated. Sec. 856(l)(3).
    \120\ If the excise tax applies, the item is not also reallocated 
back to the TRS under section 482.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, a sale of a real estate asset by a 
REIT will not be a prohibited transaction if the following six 
requirements are met:
            (1) The asset must have been held for at least four 
        years in the trade or business of producing timber;
            (2) The aggregate expenditures made by the REIT (or 
        a partner of the REIT) during the four-year period 
        preceding the date of sale that are includible in the 
        basis of the property (other than timberland 
        acquisition expenditures \121\) and that are directly 
        related to the operation of the property for the 
        production of timber or for the preservation of the 
        property for use as timberland must not exceed 30 
        percent of the net selling price of the property;
---------------------------------------------------------------------------
    \121\ The timberland acquisition expenditures that are excluded for 
this purpose are those expenditures that are related to timberland 
other than the specific timberland that is being sold under the safe 
harbor, but costs of which may be combined with costs of such property 
in the same ``management block'' under Treas. Reg. sec. 1.611-3(d). Any 
specific timberland being sold must meet the requirement that it has 
been held for at least four years by the REIT in order to qualify for 
the safe harbor.
---------------------------------------------------------------------------
            (3) The aggregate expenditures made by the REIT (or 
        a partner of the REIT) during the four-year period 
        preceding the date of sale that are includible in the 
        basis of the property and that are not directly related 
        to the operation of the property for the production of 
        timber or the preservation of the property for use as 
        timberland must not exceed five percent of the net 
        selling price of the property;
            (4) The REIT either (a) does not make more than 
        seven sales of property (other than sales of 
        foreclosure property or sales to which 1033 applies) or 
        (b) the aggregate adjusted bases (as determined for 
        purposes of computing earnings and profits) of property 
        sold during the year (other than sales of foreclosure 
        property or sales to which 1033 applies) does not 
        exceed 10 percent of the aggregate bases (as determined 
        for purposes of computing earnings and profits) of 
        property of all assets of the REIT as of the beginning 
        of the year;
            (5) Substantially all of the marketing expenditures 
        with respect to the property are made by persons who 
        are independent contractors (as defined by section 
        856(d)(3)) with respect to the REIT and from whom the 
        REIT does not derive any income; and
            (6) The sales price on the sale of the property 
        cannot be based in whole or in part on income or 
        profits of any person, including income or profits 
        derived from the sale of such properties.
      Capital expenditures counted towards the 30-percent limit 
are those expenditures that are includible in the basis of the 
property (other than timberland acquisition expenditures), and 
that are directly related to operation of the property for the 
production of timber, or for the preservation of the property 
for use as timberland. These capital expenditures are those 
incurred directly in the operation of raising timber (i.e., 
silviculture), as opposed to capital expenditures incurred in 
the ownership of undeveloped land. In general, these capital 
expenditures incurred directly in the operation of raising 
timber include capital expenditures incurred by the REIT to 
create an established stand of growing trees. A stand of trees 
is considered established when a target stand exhibits the 
expected growing rate and is free of non-target competition 
(e.g., hardwoods, grasses, brush, etc.) that may significantly 
inhibit or threaten the target stand survival. The costs 
commonly incurred during stand establishment are: (1) site 
preparation including manual or mechanical scarification, 
manual or mechanical cutting, disking, bedding, shearing, 
raking, piling, broadcast and windrow/pile burning (including 
slash disposal costs as required for stand establishment); (2) 
site regeneration including manual or mechanical hardwood 
coppice; (3) chemical application via aerial or ground to 
eliminate or reduce vegetation; (4) nursery operating costs 
including personnel salaries and benefits, facilities costs, 
cone collection and seed extraction, and other costs directly 
attributable to the nursery operations (to the extent such 
costs are allocable to seedlings used by the REIT); (5) 
seedlings including storage, transportation and handling 
equipment; (6) direct planting of seedlings; and (7) initial 
stand fertilization, up through stand establishment. Other 
examples of capital expenditures incurred directly in the 
operation of raising timber include construction cost of road 
to be used for managing the timber land (including for removal 
of logs or fire protection), environmental costs (i.e., habitat 
conservation plans), and any other post stand establishment 
capital costs (e.g., ``mid-term fertilization costs).''
      Capital expenditures counted towards the five-percent 
limit are those capital expenditures incurred in the ownership 
of undeveloped land that are not incurred in the direct 
operation of raising timber (i.e., silviculture). This category 
of capital expenditures includes: (1) expenditures to separate 
the REIT's holdings of land into separate parcels; (2) costs of 
granting leases or easements to cable, cellular or similar 
companies; (3) costs in determining the presence or quality of 
minerals located on the land; (4) costs incurred to defend 
changes in law that would limit future use of the land by the 
REIT or a purchaser from the REIT; (5) costs incurred to 
determine alternative uses of the land (e.g., recreational 
use); and (6) development costs of the property incurred by the 
REIT (e.g., engineering, surveying, legal, permit, consulting, 
road construction, utilities, and other development costs for 
use other than to grow timber).
      Costs that are not includible in the basis of the 
property are not counted towards either the 30-percent or five-
percent requirements.
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
4. Net income from publicly traded partnerships treated as qualifying 
        income of regulated investment company (sec. 284 of the House 
        bill, sec. 899 of the Senate amendment, and secs. 851(b), 
        469(k), 7704(d) and new sec. 851(h) of the Code)

                              PRESENT LAW

Treatment of RICs
      A regulated investment company (``RIC'') generally is 
treated as a conduit for Federal income tax purposes. In 
computing its taxable income, a RIC deducts dividends paid to 
its shareholders to achieve conduit treatment.\122\ In order to 
qualify for conduit treatment, a RIC must be a domestic 
corporation that, at all times during the taxable year, is 
registered under the Investment Company Act of 1940 as a 
management company or as a unit investment trust, or has 
elected to be treated as a business development company under 
that Act.\123\ In addition, the corporation must elect RIC 
status, and must satisfy certain other requirements.\124\
---------------------------------------------------------------------------
    \122\ Sec. 852(b).
    \123\ Sec. 851(a).
    \124\ Sec. 851(b).
---------------------------------------------------------------------------
      One of the RIC qualification requirements is that at 
least 90 percent of the RIC's gross income is derived from 
dividends, interest, payments with respect to securities loans, 
and gains from the sale or other disposition of stock or 
securities or foreign currencies, or other income (including 
but not limited to gains from options, futures, or forward 
contracts) derived with respect to its business of investing in 
such stock, securities, or currencies.\125\ Income derived from 
a partnership is treated as meeting this requirement only to 
the extent such income is attributable to items of income of 
the partnership that would meet the requirement if realized by 
the RIC in the same manner as realized by the partnership (the 
``look-through'' rule for partnership income).\126\ Under 
present law, no distinction is made under this rule between a 
publicly traded partnership and any other partnership.
---------------------------------------------------------------------------
    \125\ Sec. 851(b)(2).
    \126\ Sec. 851(b).
---------------------------------------------------------------------------
      The RIC qualification rules include limitations on the 
ownership of assets and on the composition of the RIC's 
assets.\127\ Under the ownership limitation, at least 50 
percent of the value of the RIC's total assets must be 
represented by cash, government securities and securities of 
other RICs, and other securities; however, in the case of such 
other securities, the RIC may invest no more than five percent 
of the value of the total assets of the RIC in the securities 
of any one issuer, and may hold no more than 10 percent of the 
outstanding voting securities of any one issuer. Under the 
limitation on the composition of the RIC's assets, no more than 
25 percent of the value of the RIC's total assets may be 
invested in the securities of any one issuer (other than 
Government securities), or in securities of two or more 
controlled issuers in the same or similar trades or businesses. 
These limitations generally are applied at the end of each 
quarter.\128\
---------------------------------------------------------------------------
    \127\ Sec. 851(b)(3).
    \128\ Sec. 851(d).
---------------------------------------------------------------------------
Treatment of publicly traded partnerships
      Present law provides that a publicly traded partnership 
means a partnership, interests in which are traded on an 
established securities market, or are readily tradable on a 
secondary market (or the substantial equivalent thereof). In 
general, a publicly traded partnership is treated as a 
corporation, but an exception to corporate treatment is 
provided if 90 percent or more of its gross income is interest, 
dividends, real property rents, or certain other types of 
qualifying income.\129\
---------------------------------------------------------------------------
    \129\ Sec. 7704(a), (c), and (d).
---------------------------------------------------------------------------
      A special rule for publicly traded partnerships applies 
under the passive loss rules. The passive loss rules limit 
deductions and credits from passive trade or business 
activities.\130\ Deductions attributable to passive activities, 
to the extent they exceed income from passive activities, 
generally may not be deducted against other income. Deductions 
and credits that are suspended under these rules are carried 
forward and treated as deductions and credits from passive 
activities in the next year. The suspended losses from a 
passive activity are allowed in full when a taxpayer disposes 
of his entire interest in the passive activity to an unrelated 
person. The special rule for publicly traded partnerships 
provides that the passive loss rules are applied separately 
with respect to items attributable to each publicly traded 
partnership.\131\ Thus, income or loss from the publicly traded 
partnership is treated as separate from income or loss from 
other passive activities.
---------------------------------------------------------------------------
    \130\ Sec. 469.
    \131\ Sec. 469(k).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill modifies the 90-percent test with respect 
to income of a RIC to include net income derived from an 
interest in a publicly traded partnership. The House bill also 
modifies the look-through rule for partnership income of a RIC 
so that it applies only to income from a partnership other than 
a publicly traded partnership.
      The House bill provides that the limitation on ownership 
and the limitation on composition of assets that apply to other 
investments of a RIC also apply to RIC investments in publicly 
traded partnership interests.
      The House bill provides that the special rule for 
publicly traded partnerships under the passive loss rules 
(requiring separate treatment) applies to a RIC holding an 
interest in a publicly traded partnership, with respect to 
items attributable to the interest in the publicly traded 
partnership.
      Effective date.--The House bill provision is effective 
for taxable years beginning after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and 
Senate amendment. In addition, the conference agreement 
provides that net income from an interest in a publicly traded 
partnership is used for purposes of both the numerator and 
denominator of the 90-percent test. As under present law, the 
conference agreement also provides that gains from the sale or 
other disposition of interests in publicly traded partnerships 
constitute qualifying income of regulated investment companies.
5. Improvements related to real estate investment trusts (sec. 285 of 
        the House bill and secs. 856, 857 and 860 of the Code)

                              PRESENT LAW

In general
      Real estate investment trusts (``REITs'') are treated, in 
substance, as pass-through entities under present law. Pass-
through status is achieved by allowing the REIT a deduction for 
dividends paid to its shareholders. REITs are generally 
restricted to investing in passive investments primarily in 
real estate and securities.
      A REIT must satisfy four tests on a year-by-year basis: 
organizational structure, source of income, nature of assets, 
and distribution of income. Whether the REIT meets the asset 
tests is generally measured each quarter.
Organizational structure requirements
      To qualify as a REIT, an entity must be for its entire 
taxable year a corporation or an unincorporated trust or 
association that would be taxable as a domestic corporation but 
for the REIT provisions, and must be managed by one or more 
trustees. The beneficial ownership of the entity must be 
evidenced by transferable shares or certificates of ownership. 
Except for the first taxable year for which an entity elects to 
be a REIT, the beneficial ownership of the entity must be held 
by 100 or more persons, and the entity may not be so closely 
held by individuals that it would be treated as a personal 
holding company if all its adjusted gross income constituted 
personal holding company income. A REIT is required to comply 
with regulations to ascertain the actual ownership of the 
REIT's outstanding shares.
Income requirements
      In order for an entity to qualify as a REIT, at least 95 
percent of its gross income generally must be derived from 
certain passive sources (the ``95-percent income test''). In 
addition, at least 75 percent of its income generally must be 
from certain real estate sources (the ``75-percent income 
test''), including rents from real property (as defined) and 
gain from the sale or other disposition of real property, and 
income and gain derived from foreclosure property.
            Qualified rental income
      Amounts received as impermissible ``tenant services 
income'' are not treated as rents from real property.\132\ In 
general, such amounts are for services rendered to tenants that 
are not ``customarily furnished'' in connection with the rental 
of real property.\133\
---------------------------------------------------------------------------
    \132\ A REIT is not treated as providing services that produce 
impermissible tenant services income if such services are provided by 
an independent contractor from whom the REIT does not derive or receive 
any income. An independent contractor is defined as a person who does 
not own, directly or indirectly, more than 35 percent of the shares of 
the REIT. Also, no more than 35 percent of the total shares of stock of 
an independent contractor (or of the interests in net assets or net 
profits, if not a corporation) can be owned directly or indirectly by 
persons owning 35 percent or more of the interests in the REIT.
    \133\ Rents for certain personal property leased in connection with 
the rental of real property are treated as rents from real property if 
the fair market value of the personal property does not exceed 15 
percent of the aggregate fair market values of the real and personal 
property.
---------------------------------------------------------------------------
      Rents from real property, for purposes of the 95-percent 
and 75-percent income tests, generally do not include any 
amount received or accrued from any person in which the REIT 
owns, directly or indirectly, 10 percent or more of the vote or 
value.\134\ An exception applies to rents received from a 
taxable REIT subsidiary (``TRS'') (described further below) if 
at least 90 percent of the leased space of the property is 
rented to persons other than a TRS or certain related persons, 
and if the rents from the TRS are substantially comparable to 
unrelated party rents.\135\
---------------------------------------------------------------------------
    \134\ Sec. 856(d)(2)(B).
    \135\ Sec. 856(d)(8).
---------------------------------------------------------------------------
            Certain hedging instruments
      Except as provided in regulations, a payment to a REIT 
under an interest rate swap or cap agreement, option, futures 
contract, forward rate agreement, or any similar financial 
instrument, entered into by the trust in a transaction to 
reduce the interest rate risks with respect to any indebtedness 
incurred or to be incurred by the REIT to acquire or carry real 
estate assets, and any gain from the sale or disposition of any 
such investment, is treated as income qualifying for the 95-
percent income test.
            Tax if qualified income tests not met
      If a REIT fails to meet the 95-percent or 75-percent 
income tests but has set out the income it did receive in a 
schedule and any error in the schedule is not due to fraud with 
intent to evade tax, then the REIT does not lose its REIT 
status provided that the failure to meet the 95-percent or 75-
percent test is due to reasonable cause and not due to willful 
neglect. If the REIT qualifies for this relief, the REIT must 
pay a tax measured by the greater of the amount by which 90 
percent\136\ of the REIT's gross income exceeds the amount of 
items subject to the 95-percent test, or the amount by which 75 
percent of the REIT's gross income exceeds the amount of items 
subject to the 75-percent test.\137\
---------------------------------------------------------------------------
    \136\ Prior to 1999, the rule had applied to the amount by which 95 
percent of the income exceeded the items subject to the 95 percent 
test.
    \137\ The ratio of the REIT's net to gross income is applied to the 
excess amount, to determine the amount of tax (disregarding certain 
items otherwise subject to a 100-percent tax). In effect, the formula 
seeks to require that all of the REIT net income attributable to the 
failure of the income tests will be paid as tax. Sec. 857(b)(5).
---------------------------------------------------------------------------
Asset requirements
            75-percent asset test
      To satisfy the asset requirements to qualify for 
treatment as a REIT, at the close of each quarter of its 
taxable year, an entity must have at least 75 percent of the 
value of its assets invested in real estate assets, cash and 
cash items, and government securities (the ``75-percent asset 
test''). The term real estate asset is defined to mean real 
property (including interests in real property and mortgages on 
real property) and interests in REITs.
            Limitation on investment in other entities
      A REIT is limited in the amount that it can own in other 
corporations. Specifically, a REIT cannot own securities (other 
than Government securities and certain real estate assets) in 
an amount greater than 25 percent of the value of REIT assets. 
In addition, it cannot own such securities of any one issuer 
representing more than 5 percent of the total value of REIT 
assets or more than 10 percent of the voting securities or 10 
percent of the value of the outstanding securities of any one 
issuer. Securities for purposes of these rules are defined by 
reference to the Investment Company Act of 1940.
            ``Straight debt'' exception
      Securities of an issuer that are within a safe-harbor 
definition of ``straight debt'' (as defined for purposes of 
subchapter S)\138\ are not taken into account in applying the 
limitation that a REIT may not hold more than 10 percent of the 
value of outstanding securities of a single issuer, if: (1) the 
issuer is an individual; (2) the only securities of such issuer 
held by the REIT or a taxable REIT subsidiary of the REIT are 
straight debt; or (3) the issuer is a partnership and the trust 
holds at least a 20 percent profits interest in the 
partnership.
---------------------------------------------------------------------------
    \138\ Sec. 1361(c)(5), without regard to paragraph (B)(iii) 
thereof.
---------------------------------------------------------------------------
      Straight debt for purposes of the REIT provision\139\ is 
defined as a written or unconditional promise to pay on demand 
or on a specified date a sum certain in money if (i) the 
interest rate (and interest payment dates) are not contingent 
on profits, the borrower's discretion, or similar factors, and 
(ii) there is no convertibility (directly or indirectly) into 
stock.
---------------------------------------------------------------------------
    \139\ Sec. 856(c)(7).
---------------------------------------------------------------------------
            Certain subsidiary ownership permitted with income treated 
                    as income of the REIT
      Under one exception to the rule limiting a REIT's 
securities holdings to no more than 10 percent of the vote or 
value of a single issuer, a REIT can own 100 percent of the 
stock of a corporation, but in that case the income and assets 
of such corporation are treated as income and assets of the 
REIT.
            Special rules for taxable REIT subsidiaries
      Under another exception to the general rule limiting REIT 
securities ownership of other entities, a REIT can own stock of 
a taxable REIT subsidiary (``TRS''), generally, a corporation 
other than a real estate investment trust\140\ with which the 
REIT makes a joint election to be subject to special rules. A 
TRS can engage in active business operations that would produce 
income that would not be qualified income for purposes of the 
95-percent or 75-percent income tests for a REIT, and that 
income is not attributed to the REIT. For example, a TRS could 
provide noncustomary services to REIT tenants, or it could 
engage directly in the active operation and management of real 
estate (without use of an independent contractor); and the 
income the TRS derived from these nonqualified activities would 
not be treated as disqualified REIT income. Transactions 
between a TRS and a REIT are subject to a number of specified 
rules that are intended to prevent the TRS (taxable as a 
separate corporate entity) from shifting taxable income from 
its activities to the pass-through entity REIT or from 
absorbing more than its share of expenses. Under one rule, a 
100-percent excise tax is imposed on rents to the extent that 
the amount of the rents would be reduced on distribution, 
apportionment, or allocation under section 482 to clearly 
reflect income as a result of services furnished by a TRS of 
the REIT to a tenant of the REIT.\141\
---------------------------------------------------------------------------
    \140\ Certain corporations are not eligible to be a TRS, such as a 
corporation which directly or indirectly operates or manages a lodging 
facility or a health care facility, or directly or indirectly provides 
to any other person rights to a brand name under which any lodging 
facility or health care facility is operated. Sec. 856(l)(3).
    \141\ If the excise tax applies, then the item is not reallocated 
back to the TRS under section 482.
---------------------------------------------------------------------------
      The 100 percent excise tax does not apply to amounts 
received directly or indirectly by a REIT from a TRS that would 
be excluded from unrelated taxable income if received by an 
organization described in section 511(a)(2). Such amounts are 
defined in section 512(b)(3).
      Rents paid by a TRS to a REIT generally are treated as 
rents from real property if at least 90 percent of the leased 
space of the property is rented to persons other than the 
REIT's TRSs and other than persons related to the REIT. In such 
a case, the rent paid by the TRS to the REIT is treated as rent 
from real property only to the extent that it is substantially 
comparable to rents from other tenants of the REIT's property 
for comparable space.
Income distribution requirements
      A REIT is generally required to distribute 90 percent of 
its income before the end of its taxable year, as deductible 
dividends paid to shareholders. This rule is similar to a rule 
for regulated investment companies (``RICs'') that requires 
distribution of 90 percent of income. If a REIT declares 
certain dividends after the end of its taxable year but before 
the time prescribed for filing its return for that year and 
distributes those amounts to shareholders within the 12 months 
following the close of that taxable year, such distributions 
are treated as made during such taxable year for this purpose. 
As described further below, a REIT can also make certain 
``deficiency dividends'' after the close of the taxable year 
after a determination that it has not distributed the correct 
amount for qualification as a REIT.
Consequences of failure to meet requirements
      A REIT loses its status as a REIT, and becomes subject to 
tax as a C corporation, if it fails to meet specified tests 
regarding the sources of its income, the nature and amount of 
its assets, its structure, and the amount of its income 
distributed to shareholders.
      If a REIT fails to meet the source of income 
requirements, but has set out the income it did receive in a 
schedule and any error in the schedule is not due to fraud with 
intent to evade tax, then the REIT does not lose its REIT 
status, provided that the failure to meet the 95-percent or 75-
percent test is due to reasonable cause and not to willful 
neglect. If the REIT qualifies for this relief, the REIT must 
pay the disallowed income as a tax to the Treasury.\142\
---------------------------------------------------------------------------
    \142\ Secs. 856(c)(6) and 857(b)(5).
---------------------------------------------------------------------------
      Failure to satisfy the asset test is excused if the REIT 
eliminates the discrepancy within 30 days. Failure to meet 
distribution requirements may also be excused if the REIT was 
unable to meet such requirement by reason of distributions 
previously made to meet the requirements of section 4981.
      There are no similar provisions that allow a REIT to pay 
a penalty and avoid disqualification in the case of other 
qualification failures.
      A REIT may make a deficiency dividend after a 
determination is made that it has not distributed the correct 
amount of its income, and avoid disqualification. The Code 
provides only for determinations involving a controversy with 
the IRS and does not provide for a REIT to make such a 
distribution on its own initiative. Deficiency dividends may be 
declared on or after the date of ``determination''. A 
determination is defined to include only (i) a final decision 
by the Tax Court or other court of competent jurisdiction, (ii) 
a closing agreement under section 7121, or (iii) under Treasury 
regulations, an agreement signed by the Secretary and the REIT.

                               HOUSE BILL

      The provision makes a number of modifications to the REIT 
rules.
Straight debt modification
      The provision modifies the definition of ``straight 
debt'' for purposes of the limitation that a REIT may not hold 
more than 10 percent of the value of the outstanding securities 
of a single issuer, to provide more flexibility than the 
present law rule. In addition, except as provided in 
regulations, neither such straight debt nor certain other types 
of securities are considered ``securities'' for purposes of 
this rule.
            Straight debt securities
      As under present law, ``straight-debt'' is still defined 
by reference to section 1361(c)(5), without regard to 
subparagraph (B)(iii) thereof (limiting the nature of the 
creditor).
      Special rules are provided permitting certain 
contingencies for purposes of the REIT provision. Any interest 
or principal shall not be treated as failing to satisfy section 
1361(c)(5)(B)(i) solely by reason of the fact that the time of 
payment of such interest or principal is subject to a 
contingency, but only if one of several factors applies. The 
first type of contingency that is permitted is one that does 
not have the effect of changing the effective yield to 
maturity, as determined under section 1272, other than a change 
in the annual yield to maturity, but only if (i) any such 
contingency does not exceed the greater of \1/4\ of one percent 
or five percent of the annual yield to maturity, or (ii) 
neither the aggregate issue price nor the aggregate face amount 
of the debt instruments held by the REIT exceeds $1,000,000 and 
not more than 12 months of unaccrued interest can be required 
to be prepaid thereunder.
      Also, the time or amount of any payment is permitted to 
be subject to a contingency upon a default or the exercise of a 
prepayment right by the issuer of the debt, provided that such 
contingency is consistent with customary commercial 
practice.\143\
---------------------------------------------------------------------------
    \143\ The present law rules that limit qualified interest income to 
amounts the determination of which do not depend, in whole or in part, 
on the income or profits of any person, continue to apply to such 
contingent interest. See, e.g., secs. 856(c)(2)(G), 856(c)(3)(G) and 
856(f).
---------------------------------------------------------------------------
      The provision eliminates the present law rule requiring a 
REIT to own a 20 percent equity interest in a partnership in 
order for debt to qualify as ``straight debt''. The bill 
instead provides new ``look-through'' rules determining a REIT 
partner's share of partnership securities, generally treating 
debt to the REIT as part of the REIT's partnership interest for 
this purpose, except in the case of otherwise qualifying debt 
of the partnership.
      Certain corporate or partnership issues that otherwise 
would be permitted to be held without limitation under the 
special straight debt rules described above will not be so 
permitted if the REIT holding such securities, and any of its 
taxable REIT subsidiaries, holds any securities of the issuer 
which are not permitted securities (prior to the application of 
this rule) and have an aggregate value greater than one percent 
of the issuer's outstanding securities.
            Other securities
      Except as provided in regulations, the following also are 
not considered ``securities'' for purposes of the rule that a 
REIT cannot own more than 10 percent of the value of the 
outstanding securities of a single issuer: (i) any loan to an 
individual or an estate, (ii) any section 467 rental agreement, 
(as defined in section 467(d)), other than with a person 
described in section 856(d)(2)(B), (iii) any obligation to pay 
rents from real property, (iv) any security issued by a State 
or any political subdivision thereof, the District of Columbia, 
a foreign government, or any political subdivision thereof, or 
the Commonwealth of Puerto Rico, but only if the determination 
of any payment received or accrued under such security does not 
depend in whole or in part on the profits of any entity not 
described in this category, or payments on any obligation 
issued by such an entity, (v) any security issued by a real 
estate investment trust; and (vi) any other arrangement that, 
as determined by the Secretary, is excepted from the definition 
of a security.
Safe harbor testing date for certain rents
      The provision provides specific safe-harbor rules 
regarding the dates for testing whether 90 percent of a REIT 
property is rented to unrelated persons and whether the rents 
paid by related persons are substantially comparable to 
unrelated party rents. These testing rules are provided solely 
for purposes of the special provision permitting rents received 
from a TRS to be treated as qualified rental income for 
purposes of the income tests.\144\
---------------------------------------------------------------------------
    \144\ The provision does not modify any of the standards of section 
482 as they apply to REITs and to TRSs.
---------------------------------------------------------------------------
Customary services exception
      The provision prospectively eliminates the safe harbor 
allowing rents received by a REIT to be exempt from the 100 
percent excise tax if the rents are for customary services 
performed by the TRS \145\ or are from a TRS and are described 
in section 512(b)(3). Instead, such payments are free of the 
excise tax if they satisfy the present law safe-harbor that 
applies if the REIT pays the TRS at least 150 percent of the 
cost to the TRS of providing any services.
---------------------------------------------------------------------------
    \145\ Although a REIT could itself provide such service and receive 
the income without receiving any disqualified income, in that case the 
REIT itself would be bearing the cost of providing the service. Under 
the present law exception for a TRS providing such service, there is no 
explicit requirement that the TRS be reimbursed for the full cost of 
the service.
---------------------------------------------------------------------------
Hedging rules
      The rules governing the tax treatment of arrangements 
engaged in by a REIT to reduce certain interest rate risks are 
prospectively generally conformed to the rules included in 
section 1221. Also, the defined income of a REIT from such a 
hedging transaction is excluded from gross income for purposes 
of the 95-percent of gross income requirement.
95-percent of gross income requirement
      The provision prospectively amends the tax liability owed 
by the REIT when it fails to meet the 95-percent of gross 
income test by applying a taxable fraction based on 95 percent, 
rather than 90 percent, of the REIT's gross income.
Consequences of failure to meet REIT requirements
      Under the provision, a REIT may avoid disqualification in 
the event of certain failures of the requirements for REIT 
status, provided that (1) the failure was due to reasonable 
cause and not willful neglect, (2) the failure is corrected, 
and (3) except for certain failures not exceeding a specified 
de minimis amount, a penalty amount is paid.
            Certain de minimis asset failures of 5-percent or 10-
                    percent tests
      One requirement of present law is that, with certain 
exceptions, (i) not more than 5 percent of the value of total 
REIT assets may be represented by securities of one issuer, and 
(ii) a REIT may not hold securities possessing more than 10 
percent of the total voting power or 10 percent of the total 
value of the outstanding securities of any one issuer.\146\ The 
requirements must be satisfied each quarter.
---------------------------------------------------------------------------
     \146\ Sec. 856(c)(4)(B)(iii). These rules do not apply to 
securities of a TRS, or to securities that qualify for the 75 percent 
asset test of section 856(c)(4)(A), such as real estate assets, cash 
items (including receivables), or Government securities.
---------------------------------------------------------------------------
      The provision provides that a REIT will not lose its REIT 
status for failing to satisfy these requirements in a quarter 
if the failure is due to the ownership of assets the total 
value of which does not exceed the lesser of (i) one percent of 
the total value of the REIT's assets at the end of the quarter 
for which such measurement is done or (ii) 10 million dollars; 
provided in either case that the REIT either disposes of the 
assets within six months after the last day of the quarter in 
which the REIT identifies the failure (or such other time 
period prescribed by the Treasury), or otherwise meets the 
requirements of those rules by the end of such time 
period.\147\
---------------------------------------------------------------------------
    \147\ A REIT might satisfy the requirements without a disposition, 
for example, by increasing its other assets in the case of the 5 
percent rule; or by the issuer modifying the amount or value of its 
total securities outstanding in the case of the 10 percent rule.
---------------------------------------------------------------------------
            Larger asset test failures (whether of 5-percent or 10-
                    percent tests, or of 75-percent or other asset 
                    tests)
      Under the provision, if a REIT fails to meet any of the 
asset test requirements for a particular quarter and the 
failure exceeds the de minimis threshold described above, then 
the REIT still will be deemed to have satisfied the 
requirements if: (i) following the REIT's identification of the 
failure, the REIT files a schedule with a description of each 
asset that caused the failure, in accordance with regulations 
prescribed by the Treasury; (ii) the failure was due to 
reasonable cause and not to willful neglect, (iii) the REIT 
disposes of the assets within 6 months after the last day of 
the quarter in which the identification occurred or such other 
time period as is prescribed by the Treasury (or the 
requirements of the rules are otherwise met within such 
period), and (iv) the REIT pays a tax on the failure.
      The tax that the REIT must pay on the failure is the 
greater of (i) $50,000, or (ii) an amount determined (pursuant 
to regulations) by multiplying the highest rate of tax for 
corporations under section 11, by the net income generated by 
the assets for the period beginning on the first date of the 
failure and ending on the date the REIT has disposed of the 
assets (or otherwise satisfies the requirements).
      Such taxes are treated as excise taxes, for which the 
deficiency provisions of the excise tax subtitle of the Code 
(subtitle F) apply.
            Conforming reasonable cause and reporting standard for 
                    failures of income tests
      The provision conforms the reporting and reasonable cause 
standards for failure to meet the income tests to the new asset 
test standards. However, the provision does not change the rule 
under section 857(b)(5) that for income test failures, all of 
the net income attributed to the disqualified gross income is 
paid as tax.
            Other failures
      The bill adds a provision under which, if a REIT fails to 
satisfy one or more requirements for REIT qualification, other 
than the 95-percent and 75-percent gross income tests and other 
than the new rules provided for failures of the asset tests, 
the REIT may retain its REIT qualification if the failures are 
due to reasonable cause and not willful neglect, and if the 
REIT pays a penalty of $50,000 for each such failure.
            Taxes and penalties paid deducted from amount required to 
                    be distributed
      Any taxes or penalties paid under the provision are 
deducted from the net income of the REIT in determining the 
amount the REIT must distribute under the 90-percent 
distribution requirement.
            Expansion of deficiency dividend procedure
      The provision expands the circumstances in which a REIT 
may declare a deficiency dividend, by allowing such a 
declaration to occur after the REIT unilaterally has identified 
a failure to pay the relevant amount. Thus, the declaration 
need not await a decision of the Tax Court, a closing 
agreement, or an agreement signed by the Secretary of the 
Treasury.
Effective date
      The provision is generally effective for taxable years 
beginning after December 31, 2000.
      However, some of the provisions are effective for taxable 
years beginning after the date of enactment. These are: the new 
``look through'' rules determining a REIT partner's share of 
partnership securities for purposes of the ``straight debt'' 
rules; the provision changing the 90-percent of gross income 
reference to 95 percent, for purposes of the tax liability if a 
REIT fails to meet the 95-percent of gross income test; the new 
hedging definition; the rule modifying the treatment of rents 
with respect to customary services; and the new rules for 
correction of certain failures to satisfy the REIT 
requirements.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
6. Treatment of certain dividends of regulated investment companies 
        (sec. 286 of the House bill and secs. 871 and 881 of the Code)

                              PRESENT LAW

Regulated investment companies
      A regulated investment company (``RIC'') is a domestic 
corporation that, at all times during the taxable year, is 
registered under the Investment Company Act of 1940 as a 
management company or as a unit investment trust, or has 
elected to be treated as a business development company under 
that Act (sec. 851(a)).
      In addition, to qualify as a RIC, a corporation must 
elect such status and must satisfy certain tests (sec. 851(b)). 
These tests include a requirement that the corporation derive 
at least 90 percent of its gross income from dividends, 
interest, payments with respect to certain securities loans, 
and gains on the sale or other disposition of stock or 
securities or foreign currencies, or other income derived with 
respect to its business of investment in such stock, 
securities, or currencies.
      Generally, a RIC pays no income tax because it is 
permitted to deduct dividends paid to its shareholders in 
computing its taxable income. The amount of any distribution 
generally is not considered as a dividend for purposes of 
computing the dividends paid deduction unless the distribution 
is pro rata, with no preference to any share of stock as 
compared with other shares of the same class (sec. 562(c)). For 
distributions by RICs to shareholders who made initial 
investments of at least $10,000,000, however, the distribution 
is not treated as non-pro rata or preferential solely by reason 
of an increase in the distribution due to reductions in 
administrative expenses of the company.
      A RIC generally may pass through to its shareholders the 
character of its long-term capital gains. It does this by 
designating a dividend it pays as a capital gain dividend to 
the extent that the RIC has net capital gain (i.e., net long-
term capital gain over net short-term capital loss). These 
capital gain dividends are treated as long-term capital gain by 
the shareholders. A RIC generally also can pass through to its 
shareholders the character of tax-exempt interest from State 
and local bonds, but only if, at the close of each quarter of 
its taxable year, at least 50 percent of the value of the total 
assets of the RIC consists of these obligations. In this case, 
the RIC generally may designate a dividend it pays as an 
exempt-interest dividend to the extent that the RIC has tax-
exempt interest income. These exempt-interest dividends are 
treated as interest excludable from gross income by the 
shareholders.
U.S. source investment income of foreign persons
            In general
      The United States generally imposes a flat 30-cent tax, 
collected by withholding, on the gross amount of U.S.-source 
investment income payments, such as interest, dividends, rents, 
royalties or similar types of income, to nonresident alien 
individuals and foreign corporations (``foreign persons'') 
(secs. 871(a), 881, 1441, and 1442). Under treaties, the United 
States may reduce or eliminate such taxes. Even taking into 
account U.S. treaties, however, the tax on a dividend generally 
is not entirely eliminated. Instead, U.S.-source portfolio 
investment dividends received by foreign persons generally are 
subject to U.S. withholding tax at a rate of at least 15 
percent.
            Interest
      Although payments of U.S.-source interest that is not 
effectively connected with a U.S. trade or business generally 
are subject to the 30-cent withholding tax, there are 
exceptions to that rule. For example, interest from certain 
deposits with banks and other financial institutions is exempt 
from tax (secs. 871(i)(2)(A) and 881(d)). Original issue 
discount on obligations maturing in 183 days or less from the 
date of original issue (without regard to the period held by 
the taxpayer) is also exempt from tax (sec. 871(g)). An 
additional exception is provided for certain interest paid on 
portfolio obligations (secs. 871(h) and 881(c)). ``Portfolio 
interest'' generally is defined as any U.S.-source interest 
(including original issue discount), not effectively connected 
with the conduct of a U.S. trade or business, (i) on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto (i.e., the obligation is ``foreign 
targeted''), and (ii) that is not received by a 10-cent 
shareholder (secs. 871(h)(3) and 881(c)(3)). With respect to a 
registered obligation, a statement that the beneficial owner is 
not a U.S. person is required (secs. 871(h)(2), (5) and 
881(c)(2)). This exception is not available for any interest 
received either by a bank on a loan extended in the ordinary 
course of its business (except in the case of interest paid on 
an obligation of the United States), or by a controlled foreign 
corporation from a related person (sec. 881(c)(3)). Moreover, 
this exception is not available for certain contingent interest 
payments (secs. 871(h)(4) and 881(c)(4)).
            Capital gains
      Foreign persons generally are not subject to U.S. tax on 
gain realized on the disposition of stock or securities issued 
by a U.S. person (other than a ``U.S. real property holding 
corporation,'' as described below), unless the gain is 
effectively connected with the conduct of a trade or business 
in the United States. This exemption does not apply, however, 
if the foreign person is a nonresident alien individual present 
in the United States for a period or periods aggregating 183 
days or more during the taxable year (sec. 871(a)(2)). A RIC 
may elect not to withhold on a distribution to a foreign person 
representing a capital gain dividend. (Treas. Reg. sec. 1.1441-
3(c)(2)(D)).
      Gain or loss of a foreign person from the disposition of 
a U.S. real property interest is subject to net basis tax as if 
the taxpayer were engaged in a trade or business within the 
United States and the gain or loss were effectively connected 
with such trade or business (sec. 897). In addition to an 
interest in real property located in the United States or the 
Virgin Islands, U.S. real property interests include (among 
other things) any interest in a domestic corporation unless the 
taxpayer establishes that the corporation was not, during a 5-
year period ending on the date of the disposition of the 
interest, a U.S. real property holding corporation (which is 
defined generally to mean a corporation the fair market value 
of whose U.S. real property interests equals or exceeds 50 
percent of the sum of the fair market values of its real 
property interests and any other of its assets used or held for 
use in a trade or business).
            Estate taxation
      Decedents who were citizens or residents of the United 
States are generally subject to Federal estate tax on all 
property, wherever situated.\148\ Nonresidents who are not U.S. 
citizens, however, are subject to estate tax only on their 
property which is within the United States. Property within the 
United States generally includes debt obligations of U.S. 
persons, including the Federal government and State and local 
governments (sec. 2104(c)), but does not include either bank 
deposits or portfolio obligations, the interest on which would 
be exempt from U.S. income tax under section 871 (sec. 
2105(b)). Stock owned and held by a nonresident who is not a 
U.S. citizen is treated as property within the United States 
only if the stock was issued by a domestic corporation (sec. 
2104(a); Treas. Reg. sec. 20.2104-1(a)(5)).
---------------------------------------------------------------------------
    \148\ The Economic Growth and Tax Relief Reconciliation Act of 2001 
(``EGTRRA'') repealed the estate tax for estates of decedents dying 
after December 31, 2009. However, EGTRRA included a ``sunset'' 
provision, pursuant to which EGTRRA's provisions (including estate tax 
repeal) do not apply to estates of decedents dying after December 31, 
2010.
---------------------------------------------------------------------------
      Treaties may reduce U.S. taxation on transfers by estates 
of nonresident decedents who are not U.S. citizens. Under 
recent treaties, for example, U.S. tax may generally be 
eliminated except insofar as the property transferred includes 
U.S. real property or business property of a U.S. permanent 
establishment.

                               HOUSE BILL

In general
      Under the House bill, a RIC that earns certain interest 
income that would not be subject to U.S. tax if earned by a 
foreign person directly may, to the extent of such income, 
designate a dividend it pays as derived from such interest 
income. A foreign person who is a shareholder in the RIC 
generally would treat such a dividend as exempt from gross-
basis U.S. tax, as if the foreign person had earned the 
interest directly. Similarly, a RIC that earns an excess of net 
short-term capital gains over net long-term capital losses, 
which excess would not be subject to U.S. tax if earned by a 
foreign person, generally may, to the extent of such excess, 
designate a dividend it pays as derived from such excess. A 
foreign person who is a shareholder in the RIC generally would 
treat such a dividend as exempt from gross-basis U.S. tax, as 
if the foreign person had realized the excess directly. The 
House bill also provides that the estate of a foreign decedent 
is exempt from U.S. estate tax on a transfer of stock in the 
RIC in the proportion that the assets held by the RIC are debt 
obligations, deposits, or other property that would generally 
be treated as situated outside the United States if held 
directly by the estate.
Interest-related dividends
      Under the House bill, a RIC may, under certain 
circumstances, designate all or a portion of a dividend as an 
``interest-related dividend,'' by written notice mailed to its 
shareholders not later than 60 days after the close of its 
taxable year. In addition, an interest-related dividend 
received by a foreign person generally is exempt from U.S. 
gross-basis tax under sections 871(a), 881, 1441 and 1442.
      However, this exemption does not apply to a dividend on 
shares of RIC stock if the withholding agent does not receive a 
statement, similar to that required under the portfolio 
interest rules, that the beneficial owner of the shares is not 
a U.S. person. The exemption does not apply to a dividend paid 
to any person within a foreign country (or dividends addressed 
to, or for the account of, persons within such foreign country) 
with respect to which the Treasury Secretary has determined, 
under the portfolio interest rules, that exchange of 
information is inadequate to prevent evasion of U.S. income tax 
by U.S. persons.
      In addition, the exemption generally does not apply to 
dividends paid to a controlled foreign corporation to the 
extent such dividends are attributable to income received by 
the RIC on a debt obligation of a person with respect to which 
the recipient of the dividend (i.e., the controlled foreign 
corporation) is a related person. Nor does the exemption 
generally apply to dividends to the extent such dividends are 
attributable to income (other than short-term original issue 
discount or bank deposit interest) received by the RIC on 
indebtedness issued by the RIC-dividend recipient or by any 
corporation or partnership with respect to which the recipient 
of the RIC dividend is a 10-percent shareholder. However, in 
these two circumstances the RIC remains exempt from its 
withholding obligation unless the RIC knows that the dividend 
recipient is such a controlled foreign corporation or 10-
percent shareholder. To the extent that an interest-related 
dividend received by a controlled foreign corporation is 
attributable to interest income of the RIC that would be 
portfolio interest if received by a foreign corporation, the 
dividend is treated as portfolio interest for purposes of the 
de minimis rules, the high-tax exception, and the same country 
exceptions of subpart F (see sec. 881(c)(5)(A)).
      The aggregate amount designated as interest-related 
dividends for the RIC's taxable year (including dividends so 
designated that are paid after the close of the taxable year 
but treated as paid during that year as described in section 
855) generally is limited to the qualified net interest income 
of the RIC for the taxable year. The qualified net interest 
income of the RIC equals the excess of: (1) the amount of 
qualified interest income of the RIC; over (2) the amount of 
expenses of the RIC properly allocable to such interest income.
      Qualified interest income of the RIC is equal to the sum 
of its U.S.-source income with respect to: (1) bank deposit 
interest; (2) short term original issue discount that is 
currently exempt from the gross-basis tax under section 871; 
(3) any interest (including amounts recognized as ordinary 
income in respect of original issue discount, market discount, 
or acquisition discount under the provisions of sections 1271-
1288, and such other amounts as regulations may provide) on an 
obligation which is in registered form, unless it is earned on 
an obligation issued by a corporation or partnership in which 
the RIC is a 10-percent shareholder or is contingent interest 
not treated as portfolio interest under section 871(h)(4); and 
(4) any interest-related dividend from another RIC.
      If the amount designated as an interest-related dividend 
is greater than the qualified net interest income described 
above, the portion of the distribution so designated which 
constitutes an interest-related dividend will be only that 
proportion of the amount so designated as the amount of the 
qualified net interest income bears to the amount so 
designated.
Short-term capital gain dividends
      Under the House bill, a RIC also may, under certain 
circumstances, designate all or a portion of a dividend as a 
``short-term capital gain dividend,'' by written notice mailed 
to its shareholders not later than 60 days after the close of 
its taxable year. For purposes of the U.S. gross-basis tax, a 
short-term capital gain dividend received by a foreign person 
generally is exempt from U.S. gross-basis tax under sections 
871(a), 881, 1441 and 1442. This exemption does not apply to 
the extent that the foreign person is a nonresident alien 
individual present in the United States for a period or periods 
aggregating 183 days or more during the taxable year. However, 
in this circumstance the RIC remains exempt from its 
withholding obligation unless the RIC knows that the dividend 
recipient has been present in the United States for such 
period.
      The aggregate amount qualified to be designated as short-
term capital gain dividends for the RIC's taxable year 
(including dividends so designated that are paid after the 
close of the taxable year but treated as paid during that year 
as described in sec. 855) is equal to the excess of the RIC's 
net short-term capital gains over net long-term capital losses. 
The short-term capital gain includes short-term capital gain 
dividends from another RIC. As provided under present law for 
purposes of computing the amount of a capital gain dividend, 
the amount is determined (except in the case where an election 
under sec. 4982(e)(4) applies) without regard to any net 
capital loss or net short-term capital loss attributable to 
transactions after October 31 of the year. Instead, that loss 
is treated as arising on the first day of the next taxable 
year. To the extent provided in regulations, this rule also 
applies for purposes of computing the taxable income of the 
RIC.
      In computing the amount of short-term capital gain 
dividends for the year, no reduction is made for the amount of 
expenses of the RIC allocable to such net gains. In addition, 
if the amount designated as short-term capital gain dividends 
is greater than the amount of qualified short-term capital 
gain, the portion of the distribution so designated which 
constitutes a short-term capital gain dividend is only that 
proportion of the amount so designated as the amount of the 
excess bears to the amount so designated.
      As under present law for distributions from REITs, the 
House bill provides that any distribution by a RIC to a foreign 
person shall, to the extent attributable to gains from sales or 
exchanges by the RIC of an asset that is considered a U.S. real 
property interest, be treated as gain recognized by the foreign 
person from the sale or exchange of a U.S. real property 
interest. The House bill also extends the special rules for 
domestically-controlled REITs to domestically-controlled RICs.
Estate tax treatment
      Under the House bill, a portion of the stock in a RIC 
held by the estate of a nonresident decedent who is not a U.S. 
citizen is treated as property without the United States. The 
portion so treated is based upon the proportion of the assets 
held by the RIC at the end of the quarter immediately preceding 
the decedent's death (or such other time as the Secretary may 
designate in regulations) that are ``qualifying assets''. 
Qualifying assets for this purpose are bank deposits of the 
type that are exempt from gross-basis income tax, portfolio 
debt obligations, certain original issue discount obligations, 
debt obligations of a domestic corporation that are treated as 
giving rise to foreign source income, and other property not 
within the United States.
Effective date
      The House bill provision generally applies to dividends 
with respect to taxable years of RICs beginning after December 
31, 2004. With respect to the treatment of a RIC for estate tax 
purposes, the House bill provision applies to estates of 
decedents dying after December 31, 2004. With respect to the 
treatment of RICs under section 897 (relating to U.S. real 
property interests), the House bill provision is effective 
after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, except 
the conference agreement only applies: (1) to dividends with 
respect to taxable years of RICs beginning after December 31, 
2004 and before January 1, 2008; (2) with respect to the 
treatment of a RIC for estate tax purposes, to estates of 
decedents dying after December 31, 2004 and before January 1, 
2008; and (3) with respect to the treatment of RICs under 
section 897 (relating to U.S. real property interests), after 
December 31, 2004 and before January 1, 2008.
7. Taxation of certain settlement funds (sec. 287 of the House bill and 
        sec. 468B of the Code)

                              PRESENT LAW

      In general, section 468B provides that a payment to a 
designated settlement fund that extinguishes a tort liability 
of the taxpayer will result in a deduction to the taxpayer. A 
designated settlement fund means a fund which is established 
pursuant to a court order, extinguishes the taxpayer's tort 
liability, is managed and controlled by persons unrelated to 
the taxpayer, and in which the taxpayer does not have a 
beneficial interest in the trust.
      Generally, a designated or qualified settlement fund is 
taxed as a separate entity at the maximum trust rate on its 
modified income. Modified income is generally gross income less 
deductions for administrative costs and other incidental 
expenses incurred in connection with the operation of the 
settlement fund.
      The cleanup of hazardous waste sites is sometimes funded 
by environmental ``settlement funds'' or escrow accounts. These 
escrow accounts are established in consent decrees between the 
Environmental Protection Agency (``EPA'') and the settling 
parties under the jurisdiction of a Federal district court. The 
EPA uses these accounts to resolve claims against private 
parties under Comprehensive Environmental Response, 
Compensation and Liability Act of 1980 (``CERCLA'').
      Present law provides that nothing in any provision of law 
is to be construed as providing that an escrow account, 
settlement fund, or similar fund is not subject to current 
income tax.

                               HOUSE BILL

      The House bill provides that certain settlement funds 
established in consent decrees for the sole purpose of 
resolving claims under CERCLA are to be treated as beneficially 
owned by the United States government and therefore not subject 
to Federal income tax.
      To qualify the settlement fund must be: (1) established 
pursuant to a consent decree entered by a judge of a United 
States District Court; (2) created for the receipt of 
settlement payments for the sole purpose of resolving claims 
under CERCLA; (3) controlled (in terms of expenditures of 
contributions and earnings thereon) by the government or an 
agency or instrumentality thereof; and (4) upon termination, 
any remaining funds will be disbursed to such government entity 
and used in accordance with applicable law. For purposes of the 
provision, a government entity means the United States, any 
State of political subdivision thereof, the District of 
Columbia, any possession of the United States, and any agency 
or instrumentality of the foregoing.
      Effective date.--The House bill provision is effective 
for taxable years beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
8. Expand human clinical trials expenses qualifying for the orphan drug 
        tax credit (sec. 288 of the House bill and sec. 45C of the 
        Code)

                              PRESENT LAW

      Taxpayers may claim a 50-percent credit for expenses 
related to human clinical testing of drugs for the treatment of 
certain rare diseases and conditions, generally those that 
afflict less than 200,000 persons in the United States. 
Qualifying expenses are those paid or incurred by the taxpayer 
after the date on which the drug is designated as a potential 
treatment for a rare disease or disorder by the Food and Drug 
Administration (``FDA'') in accordance with section 526 of the 
Federal Food, Drug, and Cosmetic Act.

                               HOUSE BILL

      The House bill expands qualifying expenses to include 
those expenses related to human clinical testing paid or 
incurred after the date on which the taxpayer files an 
application with the FDA for designation of the drug under 
section 526 of the Federal Food, Drug, and Cosmetic Act as a 
potential treatment for a rare disease or disorder, if certain 
conditions are met. Under the provision, qualifying expenses 
include those expenses paid or incurred after the date on which 
the taxpayer files an application with the FDA for designation 
as a potential treatment for a rare disease or disorder, if the 
drug receives FDA designation before the due date (including 
extensions) for filing the tax return for the taxable year in 
which the application was filed with the FDA. As under present 
law, the credit may only be claimed for such expenses related 
to drugs designated as a potential treatment for a rare disease 
or disorder by the FDA in accordance with section 526 of such 
Act.
      Effective date.--The provision is effective for 
expenditures paid or incurred after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
9. Simplification of excise tax imposed on bows and arrows (sec. 289 of 
        the House bill, sec. 305 of the Senate amendment, and sec. 4161 
        of the Code)

                              PRESENT LAW

      The Code imposes an excise tax of 11 percent on the sale 
by a manufacturer, producer or importer of any bow with a draw 
weight of 10 pounds or more.\149\ An excise tax of 12.4 percent 
is imposed on the sale by a manufacturer or importer of any 
shaft, point, nock, or vane designed for use as part of an 
arrow which after its assembly (1) is over 18 inches long, or 
(2) is designed for use with a taxable bow (if shorter than 18 
inches).\150\ No tax is imposed on finished arrows. An 11-
percent excise tax also is imposed on any part of an accessory 
for taxable bows and on quivers for use with arrows (1) over 18 
inches long or (2) designed for use with a taxable bow (if 
shorter than 18 inches).\151\
---------------------------------------------------------------------------
    \149\ Sec. 4161(b)(1)(A).
    \150\ Sec. 4161(b)(2).
    \151\ Sec. 4161(b)(1)(B).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision increases the draw weight for a taxable bow 
from 10 pounds or more to a peak draw weight of 30 pounds or 
more.\152\ The provision also imposes an excise tax of 12 
percent on arrows generally. An arrow for this purpose is 
defined as a taxable arrow shaft to which additional components 
are attached. The present law 12.4-percent excise tax on 
certain arrow components is unchanged by the bill. In the case 
of any arrow comprised of a shaft or any other component upon 
which tax has been imposed, the amount of the arrow tax is 
equal to the excess of (1) the arrow tax that would have been 
imposed but for this exception, over (2) the amount of tax paid 
with respect to such components.\153\ Finally, the provision 
subjects certain broadheads (a type of arrow point) to an 
excise tax equal to 11 percent of the sales price instead of 
12.4 percent.
---------------------------------------------------------------------------
    \152\ Draw weight is the maximum force required to bring the 
bowstring to a full-draw position not less than 26\1/4\ inches, 
measured from the pressure point of the hand grip to the nocking 
position on the bowstring.
    \153\ A credit or refund may be obtained when an item was taxed and 
it is used in the manufacture or production of another taxable item. 
Sec. 6416(b)(3). As arrow components and finished arrows are both 
taxable, in lieu of a refund of the tax paid on components, the 
provision suspends the application of sec. 6416(b)(3) and permits the 
taxpayer to reduce the tax due on the finished arrow by the amount of 
the previous tax paid on the components used in the manufacture of such 
arrow.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for articles 
sold by the manufacturer, producer or importer after December 
31, 2004.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The provision is effective for articles 
sold by the manufacturer, producer or importer 30 days after 
the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and 
Senate amendment with the effective date of the Senate 
amendment.
      Effective date.--The conference agreement follows the 
Senate amendment.
10. Reduce rate of excise tax on fishing tackle boxes to three percent 
        (sec. 290 of the House bill and sec. 4162 of the Code)

                              PRESENT LAW

      A 10-percent manufacturer's excise tax is imposed on 
specified sport fishing equipment. Examples of taxable 
equipment include fishing rods and poles, fishing reels, 
artificial bait, fishing lures, line and hooks, and fishing 
tackle boxes. Revenues from the excise tax on sport fishing 
equipment are deposited in the Sport Fishing Account of the 
Aquatic Resources Trust Fund. Monies in the fund are spent, 
subject to an existing permanent appropriation, to support 
Federal-State sport fish enhancement and safety programs.

                               HOUSE BILL

      The provision repeals the excise tax on fishing tackle 
boxes.
      Effective date.--The provision is effective for articles 
sold by the manufacturer, producer, or importer after December 
31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with 
modifications. Under the provision as modified, the rate of 
excise tax imposed on fishing tackle boxes is reduced to three 
percent.
11. Repeal of excise tax on sonar devices suitable for finding fish 
        (sec. 291 of the House bill and secs. 4161 and 4162 of the 
        Code)

                              PRESENT LAW

      In general, the Code imposes a 10-percent tax on the sale 
by the manufacturer, producer, or importer of specified sport 
fishing equipment.\154\ A three percent rate, however, applies 
to the sale of electric outboard motors and sonar devices 
suitable for finding fish.\155\ Further, the tax imposed on the 
sale of sonar devices suitable for finding fish is limited to 
$30. A sonar device suitable for finding fish does not include 
any device that is a graph recorder, a digital type, a meter 
readout, a combination graph recorder or combination meter 
readout.\156\
---------------------------------------------------------------------------
    \154\ Sec. 4161(a)(1).
    \155\ Sec. 4161(a)(2).
    \156\ Sec. 4162(b).
---------------------------------------------------------------------------
      Revenues from the excise tax on sport fishing equipment 
are deposited in the Sport Fishing Account of the Aquatic 
Resources Trust Fund. Monies in the fund are spent, subject to 
an existing permanent appropriation, to support Federal-State 
sport fish enhancement and safety programs.

                               HOUSE BILL

      The provision repeals the excise tax on all sonar devices 
suitable for finding fish.
      Effective date.--The provision is effective for articles 
sold by the manufacturer, producer, or importer after December 
31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
12. Income tax credit for cost of carrying tax-paid distilled spirits 
        in wholesale inventories (sec. 292 of the House bill)

                              PRESENT LAW

      As is true of most major Federal excise taxes, the excise 
tax on distilled spirits is imposed at a point in the chain of 
distribution before the product reaches the retail (consumer) 
level. Tax on domestically produced and/or bottled distilled 
spirits arises upon production (receipt) in a bonded distillery 
and is collected based on removals from the distillery during 
each semi-monthly period. Distilled spirits that are bottled 
before importation into the United States are taxed on removal 
from the first U.S. warehouse where they are landed (including 
a warehouse located in a foreign trade zone).
      No tax credits are allowed under present law for business 
costs associated with having tax-paid products in inventory. 
Rather, excise tax that is included in the purchase price of a 
product is treated the same as the other components of the 
product cost, i.e., deductible as a cost of goods sold.

                               HOUSE BILL

      The provision creates a new income tax credit for 
eligible wholesale distributors of distilled spirits. An 
eligible wholesaler is any person who holds a permit under the 
Federal Alcohol Administration Act as a wholesaler of distilled 
spirits.
      The credit is calculated by multiplying the number of 
cases of bottled distilled spirits by the average tax-financing 
cost per case for the most recent calendar year ending before 
the beginning of such taxable year. A case is 12 80-proof 750-
milliliter bottles. The average tax-financing cost per case is 
the amount of interest that would accrue at corporate 
overpayment rates during an assumed 60-day holding period on an 
assumed tax rate of $22.83 per case of 12 750-milliliter 
bottles.
      The credit only applies to domestically bottled distilled 
spirits \157\ purchased directly from the bottler of such 
spirits. The credit is in addition to present-law rules 
allowing tax included in inventory costs to be deducted as a 
cost of goods sold.
---------------------------------------------------------------------------
    \157\ Distilled spirits that are imported in bulk and then bottled 
domestically qualify as domestically bottled distilled spirits.
---------------------------------------------------------------------------
      The credit cannot be carried back to a taxable year 
beginning before January 1, 2005.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
13. Suspension of occupational taxes relating to distilled spirits, 
        wine, and beer (sec. 293 of the House bill and new sec. 5148 of 
        the Code)

                              PRESENT LAW

      Under present law, special occupational taxes are imposed 
on producers and others engaged in the marketing of distilled 
spirits, wine, and beer. These excise taxes are imposed as part 
of a broader Federal tax and regulatory engine governing the 
production and marketing of alcoholic beverages. The special 
occupational taxes are payable annually, on July 1 of each 
year. The present tax rates are as follows:




  Producers: \158\
    Distilled spirits and wines (sec.       $1,000 per year, per
     5081).                                  premise.
    Brewers (sec. 5091)...................  $1,000 per year, per
                                             premise.
Wholesale dealers (sec. 5111): Liquors,     $500 per year.
 wines, or beer.
Retail dealers (sec. 5121): Liquors,        $250 per year.
 wines, or beer.
Nonbeverage use of distilled spirits (sec.  $500 per year.
 5131).
Industrial use of distilled spirits (sec.   $250 per year.
 5276).


      The Code requires every wholesale or retail dealer in 
liquors, wine or beer to keep records of their 
transactions.\159\ A delegate of the Secretary of the Treasury 
is authorized to inspect the records of any dealer during 
business hours.\160\ There are penalties for failing to comply 
with the recordkeeping requirements.\161\
---------------------------------------------------------------------------
    \158\ A reduced rate of tax in the amount of $500 is imposed on 
small proprietors. Secs. 5081(b), 5091(b).
    \159\ Secs. 5114, 5124.
    \160\ Sec. 5146.
    \161\ Sec. 5603.
---------------------------------------------------------------------------
      The Code limits the persons from whom dealers may 
purchase their liquor stock intended for resale. Under the 
Code, a dealer may only purchase from:
      (1) A wholesale dealer in liquors who has paid the 
special occupational tax as such dealer to cover the place 
where such purchase is made; or
      (2) A wholesale dealer in liquors who is exempt, at the 
place where such purchase is made, from payment of such tax 
under any provision chapter 51 of the Code; or
      (3) A person who is not required to pay special 
occupational tax as a wholesale dealer in liquors.\162\
---------------------------------------------------------------------------
    \162\ Sec. 5117. For example, purchases from a proprietor of a 
distilled spirits plant at his principal business office would be 
covered under item (2) since such a proprietor is not subject to the 
special occupational tax on account of sales at his principal business 
office. Sec. 5113(a). Purchases from a State-operated liquor store 
would be covered under item (3). Sec. 5113(b).
---------------------------------------------------------------------------
      In addition, a limited retail dealer (such as a 
charitable organization selling liquor at a picnic) may 
lawfully purchase distilled spirits for resale from a retail 
dealer in liquors.\163\
---------------------------------------------------------------------------
    \163\ Sec. 5117(b).
---------------------------------------------------------------------------
      Violation of this restriction is punishable by $1,000 
fine, imprisonment of one year, or both.\164\ A violation also 
makes the alcohol subject to seizure and forfeiture.\165\
---------------------------------------------------------------------------
    \164\ Sec. 5687.
    \165\ Sec. 7302.
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, the special occupational taxes on 
producers and marketers of alcoholic beverages are suspended 
for a three-year period, July 1, 2004 through June 30, 2007. 
Present law recordkeeping and registration requirements 
continue to apply, notwithstanding the suspension of the 
special occupation taxes. In addition, during the suspension 
period, it shall be unlawful for any dealer to purchase 
distilled spirits for resale from any person other than a 
wholesale dealer in liquors who is subject to the recordkeeping 
requirements, except that a limited retail dealer may purchase 
distilled spirits for resale from a retail dealer in liquors, 
as permitted under present law.
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill except as 
follows. Under the provision as modified, the three-year 
suspension period is July 1, 2005 through June 30, 2008.
14. Modification of unrelated business income limitation on investment 
        in certain small business investment companies (sec. 294 of the 
        House bill, sec. 642 of the Senate amendment, and sec. 514 of 
        the Code)

                              PRESENT LAW

      In general, an organization that is otherwise exempt from 
Federal income tax is taxed on income from a trade or business 
regularly carried on that is not substantially related to the 
organization's exempt purposes. Certain types of income, such 
as rents, royalties, dividends, and interest, generally are 
excluded from unrelated business taxable income except when 
such income is derived from ``debt-financed property.'' Debt-
financed property generally means any property that is held to 
produce income and with respect to which there is acquisition 
indebtedness at any time during the taxable year.
      In general, income of a tax-exempt organization that is 
produced by debt-financed property is treated as unrelated 
business income in proportion to the acquisition indebtedness 
on the income-producing property. Acquisition indebtedness 
generally means the amount of unpaid indebtedness incurred by 
an organization to acquire or improve the property and 
indebtedness that would not have been incurred but for the 
acquisition or improvement of the property. Acquisition 
indebtedness does not include, however, (1) certain 
indebtedness incurred in the performance or exercise of a 
purpose or function constituting the basis of the 
organization's exemption, (2) obligations to pay certain types 
of annuities, (3) an obligation, to the extent it is insured by 
the Federal Housing Administration, to finance the purchase, 
rehabilitation, or construction of housing for low and moderate 
income persons, or (4) indebtedness incurred by certain 
qualified organizations to acquire or improve real property.
      Special rules apply in the case of an exempt organization 
that owns a partnership interest in a partnership that holds 
debt-financed income-producing property. An exempt 
organization's share of partnership income that is derived from 
such debt-financed property generally is taxed as debt-financed 
income unless an exception provides otherwise.

                               HOUSE BILL

      The House bill modifies the debt-financed property 
provisions by excluding from the definition of acquisition 
indebtedness any indebtedness incurred by a small business 
investment company licensed under the Small Business Investment 
Act of 1958 that is evidenced by a debenture (1) issued by such 
company under section 303(a) of said Act, and (2) held or 
guaranteed by the Small Business Administration. The exclusion 
shall not apply during any period that any exempt organization 
(other than a governmental unit) owns more than 25 percent of 
the capital or profits interest in the small business 
investment company, or exempt organizations (including 
governmental units other than any agency or instrumentality of 
the United States) own, in the aggregate, 50 percent or more of 
the capital or profits interest in such company.
      Effective date.--The provision is effective for small 
business investment companies formed after the date of 
enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill except 
that the Senate amendment does not contain any individual or 
aggregate ownership percentage limitations with respect to 
exempt organizations or government units.
      Effective date.--The provision is effective for 
acquisitions made on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, modified 
to apply to small business investment companies licensed after 
(rather than formed after) the date of enactment.
      Effective date.--The conference agreement provision is 
effective for debt incurred after the date of enactment by 
small business investment companies licensed after the date of 
enactment.
15. Election to determine taxable income from certain international 
        shipping activities using per ton rate (sec. 295 of the House 
        bill and new secs. 1352-1359 of the Code)

                              PRESENT LAW

      The United States employs a ``worldwide'' tax system, 
under which domestic corporations generally are taxed on all 
income, including income from shipping operations, whether 
derived in the United States or abroad. In order to mitigate 
double taxation, a foreign tax credit for income taxes paid to 
foreign countries is provided to reduce or eliminate the U.S. 
tax owed on such income, subject to certain limitations.
      Generally, the United States taxes foreign corporations 
only on income that has a sufficient nexus to the United 
States. Thus, a foreign corporation is generally subject to 
U.S. tax only on income, including income from shipping 
operations, which is ``effectively connected'' with the conduct 
of a trade or business in the United States (sec. 882). Such 
``effectively connected income'' generally is taxed in the same 
manner and at the same rates as the income of a U.S. 
corporation.
      The United States imposes a four percent tax on the 
amount of a foreign corporation's U.S. gross transportation 
income (sec. 887). Transportation income includes income from 
the use (or hiring or leasing for use) of a vessel and income 
from services directly related to the use of a vessel. Fifty 
percent of the transportation income attributable to 
transportation that either begins or ends (but not both) in the 
United States is treated as U.S. source gross transportation 
income. The tax does not apply, however, to U.S. gross 
transportation income that is treated as income effectively 
connected with the conduct of a U.S. trade or business. U.S. 
gross transportation income is not treated as effectively 
connected income unless (1) the taxpayer has a fixed place of 
business in the United States involved in earning the income, 
and (2) substantially all the income is attributable to 
regularly scheduled transportation.
      The taxes imposed by section 882 and 887 on income from 
shipping operations may be limited by an applicable U.S. income 
tax treaty or by an exemption of a foreign corporation's 
international shipping operations income in instances where a 
foreign country grants an equivalent exemption (sec. 883).
      Under present law, there is no provision that provides an 
alternative to the corporate income tax for taxable income 
attributable to international shipping activities.

                               HOUSE BILL

In general
      The provision generally allows corporations to elect a 
``tonnage tax'' on their taxable income from certain shipping 
activities in lieu of the U.S. corporate income tax. 
Accordingly, a corporation's income from qualifying shipping 
activities is no longer taxable under sections 11, 55, 882, 887 
or 1201(a) under the regime, and electing entities are only 
subject to tax at the maximum corporate income tax rate on a 
notional amount based on the net tonnage of a corporation's 
qualifying vessels. However, a foreign corporation is not 
subject to tax under the tonnage tax regime to the extent its 
income from qualifying shipping activities is subject to an 
exclusion for certain shipping operations by foreign 
corporations pursuant to section 883(a)(1) or pursuant to a 
treaty obligation of the United States.
Taxable income from qualifying shipping activities
      Generally, the taxable income of an electing corporation 
from qualifying shipping activities is the corporate income 
percentage \166\ of the sum of the taxable income from each of 
its qualifying vessels. The taxable income from each qualifying 
vessel is the product of (1) the daily notional taxable income 
\167\ from the operation of the qualifying vessel in United 
States foreign trade,\168\ and (2) the number of days during 
the taxable year that the electing entity operated such vessel 
as a qualifying vessel in U.S. foreign trade.\169\ A 
``qualifying vessel'' is described as a self-propelled U.S.-
flag vessel of not less than 10,000 deadweight tons used in 
U.S. foreign trade.
---------------------------------------------------------------------------
    \166\ The ``corporate income percentage'' is the least aggregate 
share, expressed as a percentage, of any item of income or gain of an 
electing corporation, or an electing group (i.e., a controlled group of 
which one or more members is an electing entity) of which such 
corporation is a member from qualifying shipping activities that would 
otherwise be required to be reported on the U.S. Federal income tax 
return of an electing corporation during any taxable period. A 
``controlled group'' is any group of trusts and business entities whose 
members would be treated as a single employer under the rules of 
section 52(a) (without regard to paragraphs (1) and (2)) and section 
52(b)(1)).
    \167\ The ``daily notional taxable income'' from the operation of a 
qualifying vessel is 40 cents for each 100 tons of the net tonnage of 
the vessel (up to 25,000 net tons), and 20 cents for each 100 tons of 
the net tonnage of the vessel, in excess of 25,000 net tons.
    \168\ ``U.S. foreign trade'' means the transportation of goods or 
passengers between a place in the United States and a foreign place or 
between foreign places. As a general rule, the temporary operation in 
the U.S. domestic trade (i.e., the transportation of goods or 
passengers between places in the United States) of any qualifying 
vessel is disregarded. However, a vessel that is no longer used for 
operations in U.S. foreign trade (unless such non-use is on a temporary 
basis) ceases to be a qualifying vessel when such non-use begins.
    \169\ If there are multiple operators of a vessel, the taxable 
income of such vessel must be allocated among such persons on the basis 
of their ownership and charter interests or another basis that Treasury 
may prescribe in regulations.
---------------------------------------------------------------------------
      An entity's qualifying shipping activities consist of its 
(1) core qualifying activities, (2) qualifying secondary 
activities, and (3) qualifying incidental activities. 
Generally, core qualifying activities are activities from 
operating vessels in U.S. foreign trade and other activities of 
an electing entity and an electing group that are an integral 
part of the business of operating qualifying vessels in U.S. 
foreign trade. Qualifying secondary activities generally 
consist of the active management or operation of vessels in 
U.S. foreign trade and provisions for vessel, container and 
cargo-related facilities or such other activities as may be 
prescribed by the Secretary (which are not core activities), 
and may not exceed 20 percent of the aggregate gross income 
derived from electing entities and other members of its 
electing group from their core qualifying activities. 
Qualifying incidental activities are activities that are 
incidental to core qualifying activities and are not qualifying 
secondary activities. The aggregate gross income from 
qualifying incidental activities cannot exceed one-tenth of one 
percent of the aggregate gross income from the core qualifying 
activities of the electing entities and other members of its 
electing group.
Items not subject to corporate income tax
      Generally, gross income from an electing entity does not 
include the corporate income percentage of an entity's (1) 
income from qualifying shipping activities in U.S. foreign 
trade, (2) income from money, bank deposits and other temporary 
investments which are reasonably necessary to meet the working 
capital requirements of its qualifying shipping activities, and 
(3) income from money or other intangible assets accumulated 
pursuant to a plan to purchase qualifying shipping assets.\170\ 
Generally, the corporate loss percentage \171\ of each item of 
loss, deduction, or credit is disallowed with respect to any 
activity the income from which is excluded from gross income 
under the provision. The corporate loss percentage of an 
electing entity's interest expense is disallowed in the ratio 
that the fair market value of its qualifying shipping assets 
bears to the fair market value of its total assets.
---------------------------------------------------------------------------
    \170\ ``Qualifying shipping assets'' means any qualifying vessel 
and other assets which are used in core qualifying activities.
    \171\ ``Corporate loss percentage'' means the greatest aggregate 
share, expressed as a percentage, of any item of loss, deduction or 
credit of an electing corporation or electing group of which such 
corporation is a member from qualifying shipping activities that would 
otherwise be required to be reported on the U.S. Federal income tax 
return of an electing corporation during any taxable period.
---------------------------------------------------------------------------
Allocation of credits, income, and deductions
      No deductions are allowed against the taxable income of 
an electing corporation from qualifying shipping activities, 
and no credit is allowed against the tax imposed under the 
tonnage tax regime. No deduction is allowed for any net 
operating loss attributable to the qualifying shipping 
activities of a corporation to the extent that such loss is 
carried forward by the corporation from a taxable year 
preceding the first taxable year for which such corporation was 
an electing corporation. For purposes of the provision, section 
482 applies to a transaction or series of transactions between 
an electing entity and another person or between an entity's 
qualifying shipping activities and other activities carried on 
by it. The qualifying shipping activities of an electing entity 
shall be treated as a separate trade or business activity from 
all other activities conducted by the entity.
Qualifying shipping assets
      If an electing entity sells or disposes of qualifying 
shipping assets in an otherwise taxable transaction, at the 
election of the entity no gain is recognized if replacement 
qualifying shipping assets are acquired during a limited 
replacement period except to the extent that the amount 
realized upon such sale or disposition exceeds the cost of the 
replacement qualifying shipping assets. In the case of 
replacement qualifying shipping assets purchased by an electing 
entity which results in the nonrecognition of any part of the 
gain realized as the result of a sale or other disposition of 
qualifying shipping assets, the basis is the cost of such 
replacement property decreased in the amount of gain not 
recognized. If the property purchased consists of more than one 
piece of property, the basis is allocated to the purchased 
properties in proportion to their respective costs.
      The election not to recognize gain on the disposition and 
replacement of qualifying shipping assets is not available if 
the replacement qualifying shipping assets are acquired from a 
related person except to the extent that the related person (as 
defined under section 267(b) or 707(b)(1)) acquired the 
replacement qualifying shipping assets from an unrelated person 
during a limited replacement period.
Election
      Generally, any qualifying entity may elect into the 
tonnage tax regime by filing an election with the qualifying 
entity's income tax return for the first taxable year to which 
the election applies. However, a qualifying entity, which is a 
member of a controlled group, may only make an election into 
the tonnage tax regime if all qualifying entities that are 
members of the controlled group make such an election. Once 
made, an election is effective for the taxable year in which it 
was made and for all succeeding taxable years of the entity 
until the election is terminated. An election may be terminated 
if the entity ceases to be a qualifying entity or if the 
election is revoked. In the event that a qualifying entity 
elects into the tonnage tax regime and subsequently revokes the 
election, such entity is barred from electing back into the 
regime until the fifth taxable year after the termination is 
effective, unless the Secretary of the Treasury consents to the 
election.
      A qualifying entity means a trust or business entity that 
(1) operates one or more qualifying vessels and (2) meets the 
``shipping activity requirement.'' \172\ The shipping activity 
requirement is met for a taxable year only by an entity that 
meets one of the following requirements: (1) in the first 
taxable year of its election into the tonnage tax regime, for 
the preceding taxable year on average at least 25 percent of 
the aggregate tonnage of the qualifying vessels which were 
operated by the entity were owned by the entity or bareboat 
chartered to the entity; (2) in the second or any subsequent 
taxable year of its election into the tonnage tax regime, in 
each of the two preceding taxable years on average at least 25 
percent of the aggregate tonnage of the qualifying vessels 
which were operated by the entity were owned by the entity or 
bareboat chartered to the entity; or (3) requirements (1) or 
(2) above would be met if the 25 percent average tonnage 
requirement was applied on an aggregate basis to the controlled 
group of which such entity is a member, and vessel charters 
between members of the controlled group were disregarded.
---------------------------------------------------------------------------
    \172\ An entity is generally treated as operating any vessel owned 
by or chartered to the entity. However, an entity is treated as 
operating a vessel that it has chartered out on bareboat basis only if: 
(1) the vessel is temporarily surplus to the entity's requirements and 
the term of the charter does not exceed three years or (2) the vessel 
is bareboat chartered to a member of a controlled group which includes 
such entity or to an unrelated third party that sub-bareboats or time 
charters the vessel to a member of such controlled group (including the 
owner). Special rules apply in an instance in which an electing entity 
temporarily ceases to operate a qualifying vessel.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with 
modifications.
In general
      The proposal generally allows corporations to elect a 
``tonnage tax'' in lieu of the corporate income tax on taxable 
income from certain shipping activities. Accordingly, an 
electing corporation's gross income does not include its income 
from qualifying shipping activities, and electing corporations 
are only subject to tax on these activities at the maximum 
corporate income tax rate on their notional shipping income, 
which is based on the net tonnage of the corporation's 
qualifying vessels. An electing corporation is treated as a 
separate trade or business activity distinct from all other 
activities conducted by such corporation.
Notional shipping income
      An electing corporation's notional shipping income for 
the taxable year is the sum of the following amounts for each 
of the qualifying vessels it operates: (1) the daily notional 
shipping income \173\ from the operation of the qualifying 
vessel in United States foreign trade,\174\ and (2) the number 
of days during the taxable year that the electing corporation 
operated such vessel as a qualifying vessel in United States 
foreign trade.\175\ However, in the case of a qualifying vessel 
any of the income of which is not included in gross income, the 
amount of notional shipping income from such vessel is equal to 
the notional shipping income from such vessel (determined 
without regard to this provision) that bears the same ratio as 
the gross income from the operation of such vessel in the 
United States foreign trade bears to the sum of such gross 
income and the income so excluded. Generally, a ``qualifying 
vessel'' is described as a self-propelled U.S.-flag vessel of 
not less than 10,000 deadweight tons used exclusively in U.S. 
foreign trade.
---------------------------------------------------------------------------
    \173\ The daily notional shipping income from the operation of a 
qualifying vessel is 40 cents for each 100 tons of the net tonnage of 
the vessel (up to 25,000 net tons), and 20 cents for each 100 tons of 
the net tonnage of the vessel, in excess of 25,000 net tons.
    \174\ ``United States foreign trade'' means the transportation of 
goods or passengers between a place in the United States and a foreign 
place or between foreign places. The temporary use in the United States 
domestic trade (i.e., the transportation of goods or passengers between 
places in the United States) of any qualifying vessel is deemed to be 
the use in the United States foreign trade of such vessel, if such use 
does not exceed 30 days in a taxable year.
    \175\ Special rules apply in the case of multiple operators of a 
vessel.
---------------------------------------------------------------------------
Items not subject to corporate income tax
      Generally, a corporate member of an electing group \176\ 
does not include in gross income its income from qualifying 
shipping activities. Qualifying shipping activities consist of 
(1) core qualifying activities, (2) qualifying secondary 
activities, and (3) qualifying incidental activities. All of an 
electing entity's core qualifying activities are excluded from 
gross income. However, only a portion of an electing 
corporation's secondary and incidental activities are treated 
as qualifying income and thus, are excluded from gross income.
---------------------------------------------------------------------------
    \176\ An electing group means any group that would be treated as a 
single employer under subsection (a) or (b) of section 52 if paragraphs 
(1) and (2) of section 52(a) did not apply.
---------------------------------------------------------------------------
      Core qualifying activities consist of the operation of 
qualifying vessels.\177\ Secondary activities generally consist 
of (1) the active management or operation of vessels in U.S. 
foreign trade; (2) the provision of vessels, barge, container 
or cargo-related facilities or services; and (3) other 
activities of the electing corporation and other members of its 
electing group that are an integral part of its business of 
operating qualifying vessels in United States foreign trade. 
Secondary activities do not include any core qualifying 
activities. In addition, any activities that would otherwise 
constitute core qualifying activities of a corporation, who is 
a member of an electing group but is not an electing 
corporation, are treated as qualifying secondary activities. 
Incidental activities are activities that are incidental to 
core qualifying activities and are not qualifying secondary 
activities.
---------------------------------------------------------------------------
    \177\ It is intended that the operation of a lighter-aboard-ship be 
treated as the operation of a vessel and not the operation of a barge.
---------------------------------------------------------------------------
Denial of credits, income and deductions
      Each item of loss, deduction, or credit of any taxpayer 
is disallowed with respect to the income that is excluded from 
gross income under the proposal. An electing corporation's 
interest expense is disallowed in the ratio that the fair 
market value of its qualifying vessels bears to the fair market 
value of its total assets; special rules apply for disallowing 
interest expense in the context of an electing group.
      No deductions are allowed against the notional shipping 
income of an electing corporation, and no credit is allowed 
against the notional tax imposed under the tonnage tax regime. 
No deduction is allowed for any net operating loss attributable 
to the qualifying shipping activities of a corporation to the 
extent that such loss is carried forward by the corporation 
from a taxable year preceding the first taxable year for which 
such corporation was an electing corporation.
Dispositions of qualifying vessels
      Generally, if an qualifying vessel operator sells or 
disposes of a qualifying vessel in an otherwise taxable 
transaction, at the election of the operator no gain is 
recognized if a replacement qualifying vessel is acquired 
during a limited replacement period except to the extent that 
the amount realized upon such sale or disposition exceeds the 
cost of the replacement qualifying vessels. Generally, in the 
case of the replacement of a qualifying vessel that results in 
the nonrecognition of any part of the gain under the rule 
above, the basis of the replacement vessel is the cost of such 
replacement property decreased in the amount of gain not 
recognized.
      Generally, a qualifying vessel operator is a corporation 
that (1) operates one or more qualifying vessels and (2) meets 
certain requirements with respect to its shipping 
activities.\178\ Special rules apply in determining whether 
corporate partners in pass-through entities are treated as 
qualifying vessel operators.
---------------------------------------------------------------------------
    \178\ A person is generally treated as operating and using any 
vessel owned by or chartered to it and that is used as a qualifying 
vessel during such period. Special rules apply in the case of pass-
through entities, and special rules apply in an instance in which an 
electing entity temporarily ceases to operate a qualifying vessel due 
to dry-docking, surveying, inspection, repairs and the like.
---------------------------------------------------------------------------
Election
      Generally, any qualifying vessel operator may elect into 
the tonnage tax regime and such election is made in the form 
prescribed by Treasury. An election is only effective if made 
before the due date (including extensions) for filing the 
corporation's return for such taxable year. However, a 
qualifying vessel operator, which is a member of a controlled 
group, may only make an election into the tonnage tax regime if 
all qualifying vessel operators that are members of the 
controlled group make such an election. Once made, an election 
is effective for the taxable year in which it was made and for 
all succeeding taxable years of the entity until the election 
is terminated.
Effective date
      The provision is effective for taxable years beginning 
after the date of enactment.
16. Charitable contribution deduction for certain expenses in support 
        of Native Alaskan subsistence whaling (sec. 296 of the House 
        bill and sec. 170 of the Code)

                              PRESENT LAW

      In computing taxable income, individuals who do not elect 
the standard deduction may claim itemized deductions, including 
a deduction (subject to certain limitations) for charitable 
contributions or gifts made during the taxable year to a 
qualified charitable organization or governmental entity. 
Individuals who elect the standard deduction may not claim a 
deduction for charitable contributions made during the taxable 
year.
      No charitable contribution deduction is allowed for a 
contribution of services. However, unreimbursed expenditures 
made incident to the rendition of services to an organization, 
contributions to which are deductible, may constitute a 
deductible contribution.\179\ Specifically, section 170(j) 
provides that no charitable contribution deduction is allowed 
for traveling expenses (including amounts expended for meals 
and lodging) while away from home, whether paid directly or by 
reimbursement, unless there is no significant element of 
personal pleasure, recreation, or vacation in such travel.
---------------------------------------------------------------------------
    \179\ Treas. Reg. sec. 1.170A-1(g).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill allows individuals to claim a deduction 
under section 170 not exceeding $10,000 per taxable year for 
certain expenses incurred in carrying out sanctioned whaling 
activities. The deduction is available only to an individual 
who is recognized by the Alaska Eskimo Whaling Commission as a 
whaling captain charged with the responsibility of maintaining 
and carrying out sanctioned whaling activities. The deduction 
is available for reasonable and necessary expenses paid by the 
taxpayer during the taxable year for: (1) the acquisition and 
maintenance of whaling boats, weapons, and gear used in 
sanctioned whaling activities; (2) the supplying of food for 
the crew and other provisions for carrying out such activities; 
and (3) the storage and distribution of the catch from such 
activities. It is intended that the Secretary shall require 
that the taxpayer substantiate deductible expenses by 
maintaining appropriate written records that show, for example, 
the time, place, date, amount, and nature of the expense, as 
well as the taxpayer's eligibility for the deduction, and that 
such substantiation be provided as part of the taxpayer's 
income tax return, to the extent provided by the Secretary.
      For purposes of the provision, the term ``sanctioned 
whaling activities'' means subsistence bowhead whale hunting 
activities conducted pursuant to the management plan of the 
Alaska Eskimo Whaling Commission.
      Effective date.--The provision is effective for 
contributions made after December 31, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision, modified to provide that the Secretary shall issue 
guidance regarding substantiation of amounts claimed as 
deductible whaling expenses.

                         I. General Provisions

1. Modification to qualified small issue bonds (sec. 301 of the Senate 
        amendment and sec. 144 of the Code)

                              PRESENT LAW

      Qualified small-issue bonds are tax-exempt State and 
local government bonds used to finance private business 
manufacturing facilities (including certain directly related 
and ancillary facilities) or the acquisition of land and 
equipment by certain farmers. In both instances, these bonds 
are subject to limits on the amount of financing that may be 
provided, both for a single borrowing and in the aggregate. In 
general, no more than $1 million of small-issue bond financing 
may be outstanding at any time for property of a business 
(including related parties) located in the same municipality or 
county. Generally, this $1 million limit may be increased to 
$10 million if all other capital expenditures of the business 
in the same municipality or county are counted toward the limit 
over a six-year period that begins three years before the issue 
date of the bonds and ends three years after such date. 
Outstanding aggregate borrowing is limited to $40 million per 
borrower (including related parties) regardless of where the 
property is located.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment increases the maximum allowable 
amount of total capital expenditures by an eligible business or 
a related party in the same municipality or county during the 
six-year measurement period from $10 million to $20 million. As 
under present law, no more than $10 million of bond financing 
may be outstanding at any time for property of an eligible 
business (including related parties) located in the same 
municipality or county. Other present-law limits (e.g., the $40 
million per borrower limit) continue to apply.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except with respect to the effective date. The conference 
agreement increases the maximum allowable amount of total 
capital expenditures by an eligible business (or related party) 
in the same municipality or county from $10 million to $20 
million for bonds issued after September 30, 2009.
      Effective date.--The provision is effective for bonds 
issued after September 30, 2009.
2. Expensing of investment in broadband equipment (sec. 302 of the 
        Senate amendment and new sec. 191 of the Code)

                              PRESENT LAW

      Under present law, a taxpayer generally must capitalize 
the cost of property used in a trade or business and recover 
such cost over time through annual deductions for depreciation 
or amortization. Tangible property generally is depreciated 
under the Modified Accelerated Cost Recovery System (MACRS) of 
section 168, which determines depreciation by applying specific 
recovery periods, placed-in-service conventions, and 
depreciation methods to the cost of various types of 
depreciable property.
      Personal property is classified under MACRS based on the 
property's ``class life'' unless a different classification is 
specifically provided in section 168. The class life applicable 
for personal property is the asset guideline period (midpoint 
class life as of January 1, 1986). Based on the property's 
classification, a recovery period is prescribed under MACRS. In 
general, there are six classes of recovery periods to which 
personal property can be assigned. For example, personal 
property that has a class life of four years or less has a 
recovery period of three years, whereas personal property with 
a class life greater than four years but less than 10 years has 
a recovery period of five years. The class lives and recovery 
periods for most property are contained in Revenue Procedure 
87-56.\180\
---------------------------------------------------------------------------
    \180\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that the taxpayer may elect 
to treat qualified broadband expenditures paid or incurred 
during the one-year period beginning after the date of 
enactment as a deduction in the taxable year in which the 
equipment is placed in service.
      Qualified expenditures are expenditures incurred with 
respect to equipment with which the taxpayer offers current 
generation broadband services to qualified subscribers. In 
addition, qualified expenditures include qualified expenditures 
incurred by the taxpayer with respect to qualified equipment 
with which the taxpayer offers next generation broadband 
services to qualified subscribers. Current generation broadband 
services are defined as the transmission of signals at a rate 
of at least 1 million bits per second to the subscriber and at 
a rate of at least 128,000 bits per second from the subscriber. 
Next generation broadband services are defined as the 
transmission of signals at a rate of at least 22 million bits 
per second to the subscriber and at a rate of at least 5 
million bits per second from the subscriber.
      Qualified subscribers for the purposes of the current 
generation broadband deduction include nonresidential 
subscribers in rural or underserved areas that are not in a 
saturated market. A saturated market is defined as a census 
tract in which current generation broadband services have been 
provided by a single provider to 85 percent or more of the 
total number of potential residential subscribers residing 
within such census tracts. For the purposes of the next 
generation broadband deduction, qualified subscribers include 
nonresidential subscribers in rural or underserved areas or any 
residential subscriber. In the case of a taxpayer who incurs 
expenditures for equipment capable of serving both subscribers 
in qualifying areas and other areas, qualifying expenditures 
are determined by multiplying otherwise qualifying expenditures 
by the ratio of the number of potential qualifying subscribers 
to all potential subscribers the qualifying equipment would be 
capable of serving.
      Qualifying equipment must be capable of providing 
broadband services a majority of the time during periods of 
maximum demand. Qualifying equipment is equipment that extends 
from (1) the last point of switching to the outside of the 
building in which the subscriber is located, (2) the customer 
side of a mobile telephone switching office to a transmission/
reception antenna (including the antenna) of the subscriber, 
(3) the customer side of the headend to the outside of the 
building in which the subscriber is located, or (4) a 
transmission/reception antenna to a transmission/reception 
antenna on the outside of the building used by the subscriber. 
Any packet switching equipment deployed in connection with 
other qualifying equipment is qualifying equipment, regardless 
of location, provided that it is the last such equipment in a 
series as part of transmission of a signal to a subscriber or 
the first in a series in the transmission of a signal from a 
subscriber. Also, multiplexing and demultiplexing equipment are 
qualified equipment.
      A rural area is any census tract which is not within 10 
miles of any incorporated or census designated place with a 
population of more than 25,000 and which is not within a county 
with a population density of more than 500 people per square 
mile. An underserved area is any census tract located in an 
empowerment zone or enterprise community or any census tract in 
which the poverty level is greater than or equal to 30 percent 
and in which the median family income is less than 70 percent 
of the greater of metropolitan area median family income or 
Statewide median family income. A residential subscriber is any 
individual who purchases broadband service to be delivered to 
his or her dwelling.
      Effective date.--The provision is effective for 
expenditures incurred after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Exemption for natural aging process from interest capitalization 
        (sec. 303 of the Senate amendment and sec. 263A of the Code)

                              PRESENT LAW

      Section 263A provides uniform rules for capitalization of 
certain costs. In general, section 263A requires the 
capitalization of the direct costs and an allocable portion of 
the indirect costs of real or tangible personal property 
produced by a taxpayer or real or personal property that is 
acquired by a taxpayer for resale. Costs attributable to 
producing or acquiring property generally must be capitalized 
by charging such costs to basis or, in the case of property 
which is inventory in the hands of the taxpayer, by including 
such costs in inventory.
      Special rules apply for the allocation of interest 
expense to property produced by the taxpayer.\181\ In general, 
interest paid or incurred during the production period of 
certain types of property that is allocable to the production 
of the property must be capitalized. Property subject to the 
interest capitalization requirement includes property produced 
by the taxpayer for use in its trade or business or in an 
activity for profit, but only if it (1) is real property, (2) 
has an estimated production period exceeding two years (one 
year if the cost of the property exceeds $1 million), or (3) 
has a class life of 20 years or more (as defined under section 
168). The production period of property for this purpose begins 
when construction or production is commenced and ends when the 
property is ready to be placed in service or is ready to be 
held for sale. For example, in the case of property such as 
tobacco, wine, or whiskey that is aged before it is sold, the 
production period includes the aging period. Activities such as 
planning or design generally do not cause the production period 
to begin.
---------------------------------------------------------------------------
    \181\ Sec. 263A(f).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that for purposes of 
determining the production period for purposes of 
capitalization of interest expense under section 263A(f) that 
the production period for distilled spirits shall be determined 
without regard to any period allocated to the natural aging 
process.\182\
---------------------------------------------------------------------------
    \182\ It is intended that, for purposes of the provision, the 
natural aging process begin when the distilled spirits are placed in 
charred barrels to lie for an extended period of time to allow such 
product to obtain its color, much of its distinctive flavor, and to 
mellow. The natural aging process concludes when the distilled spirits 
are removed from the barrel.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment applies to 
production periods beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Section 355 ``active business test'' applied to chains of affiliated 
        corporations (sec. 304 of the Senate amendment and sec. 355 of 
        the Code)

                              PRESENT LAW

      A corporation generally is required to recognize gain on 
the distribution of property (including stock of a subsidiary) 
to its shareholders as if such property had been sold for its 
fair market value. An exception to this rule applies if the 
distribution of the stock of a controlled corporation satisfies 
the requirements of section 355 of the Code. To qualify for 
tax-free treatment under section 355, both the distributing 
corporation and the controlled corporation must be engaged 
immediately after the distribution in the active conduct of a 
trade or business that has been conducted for at least five 
years and was not acquired in a taxable transaction during that 
period.\183\ For this purpose, a corporation is engaged in the 
active conduct of a trade or business only if (1) the 
corporation is directly engaged in the active conduct of a 
trade or business, or (2) the corporation is not directly 
engaged in an active business, but substantially all of its 
assets consist of stock and securities of a corporation it 
controls that is engaged in the active conduct of a trade or 
business.\184\
---------------------------------------------------------------------------
    \183\ Section 355(b).
    \184\ Section 355(b)(2)(A).
---------------------------------------------------------------------------
      In determining whether a corporation satisfies the active 
trade or business requirement, the IRS position for advance 
ruling purposes is that the value of the gross assets of the 
trade or business being relied on must ordinarily constitute at 
least 5 percent of the total fair market value of the gross 
assets of the corporation directly conducting the trade or 
business.\185\ However, if the corporation is not directly 
engaged in an active trade or business, then the IRS takes the 
position that the ``substantially all'' test requires that at 
least 90 percent of the fair market value of the corporation's 
gross assets consist of stock and securities of a controlled 
corporation that is engaged in the active conduct of a trade or 
business.\186\
---------------------------------------------------------------------------
    \185\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
    \186\ Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. Proc. 
77-37, sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the bill, the active business test is determined by 
reference to the relevant affiliated group. For the 
distributing corporation, the relevant affiliated group 
consists of the distributing corporation as the common parent 
and all corporations affiliated with the distributing 
corporation through stock ownership described in section 
1504(a)(1)(B) (regardless of whether the corporations are 
includible corporations under section 1504(b)), immediately 
after the distribution. The relevant affiliated group for a 
controlled corporation is determined in a similar manner (with 
the controlled corporation as the common parent).
      Effective date.--The bill applies to distributions after 
the date of enactment, with three exceptions. The bill does not 
apply to distributions (1) made pursuant to an agreement which 
is binding on the date of enactment and at all times 
thereafter, (2) described in a ruling request submitted to the 
IRS on or before the date of enactment, or (3) described on or 
before the date of enactment in a public announcement or in a 
filing with the Securities and Exchange Commission. The 
distributing corporation may irrevocably elect not to have the 
exceptions described above apply.
      The bill also applies to any distribution prior to the 
date of enactment, but solely for the purpose of determining 
whether, after the date of enactment, the taxpayer continues to 
satisfy the requirements of section 355(b)(2)(A).\187\
---------------------------------------------------------------------------
    \187\ For example, a holding company taxpayer that had distributed 
a controlled corporation in a spin-off prior to the date of enactment, 
in which spin-off the taxpayer satisfied the ``substantially all'' 
active business stock test of present law section 355(b)(2)(A) 
immediately after the distribution, would not be deemed to have failed 
to satisfy any requirement that it continue that same qualified 
structure for any period of time after the distribution, solely because 
of a restructuring that occurs after the date of enactment and that 
would satisfy the requirements of new section 355(b)(2)(A).
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Modification to cooperative marketing rules to include value-added 
        processing involving animals (sec. 306 of the Senate amendment 
        and sec. 1388 of the Code)

                              PRESENT LAW

      Under present law, cooperatives generally are treated 
similarly to pass-through entities in that the cooperative is 
not subject to corporate income tax to the extent the 
cooperative timely pays patronage dividends. Farmers' 
cooperatives are tax-exempt and include cooperatives of 
farmers, fruit growers, and like organizations that are 
organized and operated on a cooperative basis for the purpose 
of marketing the products of members or other producers and 
remitting the proceeds of sales, less necessary marketing 
expenses, on the basis of either the quantity or the value of 
products furnished by them (sec. 521). Farmers' cooperatives 
may claim a limited amount of additional deductions for 
dividends on capital stock and patronage-based distributions of 
nonpatronage income.
      In determining whether a cooperative qualifies as a tax-
exempt farmers' cooperative, the IRS has apparently taken the 
position that a cooperative is not marketing certain products 
of members or other producers if the cooperative adds value 
through the use of animals (e.g., farmers sell corn to a 
cooperative which is fed to chickens that produce eggs sold by 
the cooperative).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that marketing products of 
members or other producers includes feeding products of members 
or other producers to cattle, hogs, fish, chickens, or other 
animals and selling the resulting animals or animal products.
      Effective date.--The Senate amendment provision is 
effective for taxable years beginning after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
6. Extension of declaratory judgment procedures to farmers' cooperative 
        organizations (sec. 307 of the Senate amendment and sec. 7428 
        of the Code)

                              PRESENT LAW

      In limited circumstances, the Code provides declaratory 
judgment procedures, which generally permit a taxpayer to seek 
judicial review of an IRS determination prior to the issuance 
of a notice of deficiency and prior to payment of tax. Examples 
of declaratory judgment procedures that are available include 
disputes involving the initial or continuing classification of 
a tax-exempt organization described in section 501(c)(3), a 
private foundation described in section 509(a), or a private 
operating foundation described in section 4942(j)(3), the 
qualification of retirement plans, the value of gifts, the 
status of certain governmental obligations, or eligibility of 
an estate to pay tax in installments under section 6166.\188\ 
In such cases, taxpayers may challenge adverse determinations 
by commencing a declaratory judgment action. For example, where 
the IRS denies an organization's application for recognition of 
exemption under section 501(c)(3) or fails to act on such 
application, or where the IRS informs a section 501(c)(3) 
organization that it is considering revoking or adversely 
modifying its tax-exempt status, present law authorizes the 
organization to seek a declaratory judgment regarding its tax 
exempt status.
---------------------------------------------------------------------------
    \188\ For disputes involving the initial or continuing 
qualification of an organization described in sections 501(c)(3), 
509(a), or 4942(j)(3), declaratory judgment actions may be brought in 
the U.S. Tax Court, a U.S. district court, or the U.S. Court of Federal 
Claims. For all other Federal tax declaratory judgment actions, 
proceedings may be brought only in the U.S. Tax Court.
---------------------------------------------------------------------------
      Declaratory judgment procedures are not available under 
present law to a cooperative with respect to an IRS 
determination regarding its status as a farmers' cooperative 
under section 521.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment extends the declaratory judgment 
procedures to cooperatives. Such a case may be commenced in the 
U.S. Tax Court, a U.S. district court, or the U.S. Court of 
Federal Claims, and such court would have jurisdiction to 
determine a cooperative's initial or continuing qualification 
as a farmers' cooperative described in section 521.
      Effective date.--The Senate amendment provision is 
effective for pleadings filed after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
7. Temporary suspension of personal holding company tax (sec. 308 of 
        the Senate amendment and sec. 541 of the Code)

                              PRESENT LAW

      Under present law, a tax is imposed on the taxable income 
of corporations. The rates are as follows:

          TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES
------------------------------------------------------------------------
           If taxable income is:            Then the income tax rate is:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable income
$50,001-$75,000...........................  25 percent of taxable income
$75,001-$10,000,000.......................  34 percent of taxable income
Over $10,000,000..........................  35 percent of taxable income
------------------------------------------------------------------------

      The first two graduated rates described above are phased 
out by a five-percent surcharge for corporations with taxable 
income between $100,000 and $335,000. Also, the application of 
the 34-percent rate is phased out by a three-percent surcharge 
for corporations with taxable income between $15 million and 
$18,333,333.
      When a corporation distributes its after-tax earnings to 
individual shareholders as dividends, a tax is imposed on the 
shareholders at rates up to 15 percent.\189\ If a corporation 
receives a dividend from another corporation, the recipient 
corporation is entitled to a dividends-received deduction that 
excludes a significant part of the dividend from the 
recipient's income. The percentage of a dividend received that 
is deducted varies from 70 percent to 100 percent, depending on 
the level of ownership of the recipient corporation in the 
distributing corporation.\190\ Thus, with a 70 percent 
dividends received deduction, the tax rate imposed on a 
dividend received by a corporation in the 35-percent tax 
bracket is 10.5 percent.\191\ For corporations at lower rate 
brackets, the tax rates on these dividends are lower.
---------------------------------------------------------------------------
    \189\ The 15-percent rate applies to dividends received in taxable 
years beginning before January 1, 2009. Dividends received on or after 
that date are scheduled to be taxed at the rates applicable to ordinary 
income, which range up to 35 percent (39.6 percent for taxable years 
beginning after December 31, 2010).
    \190\ If the recipient corporation owns less than 20 percent of the 
distributing corporation, the dividends-received deduction is 70 
percent. If the recipient corporation owns less than 80 percent but at 
least 20 percent of the distributing corporation, the dividends-
received deduction is 80 percent. If the recipient corporation owns 80 
percent or more of the distributing corporation, the dividends received 
deduction is generally 100 percent.
    \191\ This is the 35 percent tax rate, applied to the 30 percent of 
the dividend that is taxable after a 70 percent dividends-received 
deduction.
---------------------------------------------------------------------------
      In addition to the regular corporate income tax, a 
corporate level penalty tax, the ``personal holding company 
tax'' is currently imposed at 15 percent \192\ on certain 
corporate earnings of personal holding companies that are not 
distributed to shareholders. The personal holding company tax 
was originally enacted to prevent so-called ``incorporated 
pocketbooks'' that could be formed by individuals to hold 
assets that could have been held directly by the individuals, 
such as passive investment assets, and retain the income at 
corporate rates that were then significantly lower than 
individual tax rates.
---------------------------------------------------------------------------
    \192\ This rate is scheduled to return to the highest individual 
tax rate when the lower dividend tax rate expires.
---------------------------------------------------------------------------
      Corporations are personal holding companies only if they 
are closely held and have substantial passive income. A 
corporation is closely held if, at any time during the last 
half of the taxable year, more than 50 percent of the value of 
the stock of the corporation is owned, directly or indirectly, 
by five or fewer individuals (determined with the application 
of specified attribution rules). A corporation has substantial 
passive income if at least 60 percent of the corporation's 
adjusted ordinary gross income (as defined for this purpose) is 
``personal holding company income,'' generally, income from 
interest, dividends, rents, royalties, compensation for use of 
corporate property by certain shareholders, and income under 
contracts giving someone other than the corporation the right 
to designate the individual service provider. Numerous 
adjustments apply in specified situations where there are 
specified indicia that the income is active rather than 
passive.
      A corporation that otherwise would be subject to personal 
holding company tax can distribute, or can agree to be deemed 
to have distributed, its modified taxable income and avoid the 
tax. A corporation may make such an actual dividend 
distribution during its taxable year or, up to a specified 
limited amount, until the 15th day of the third month following 
the close of its taxable year. In addition, if an election is 
filed with its return for the year, its shareholders may agree 
to include a deemed amount in their income as if a dividend had 
been paid (``consent dividend''). A corporation may also make a 
``deficiency dividend'' distribution within 90 days following a 
determination by the IRS or a court that personal holding 
company tax liability is due. That distribution can eliminate 
the personal holding company tax itself, though interest (and 
penalties, if any) with respect to such tax would still be owed 
to the IRS.\193\
---------------------------------------------------------------------------
    \193\ Section 547.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision repeals the personal holding company tax 
until 2009, the period of time the 15 percent rate on dividends 
received by individuals is scheduled to be in effect.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.
      The provision would be treated, for purposes of section 
303 of the Jobs and Growth Tax Relief Reconciliation Act of 
2003 as enacted by Title III of that Act (relating to lower 
rates on capital gains and dividends), so that the provision 
terminates when those provisions terminate (currently scheduled 
to be for taxable years beginning after December 31, 2008).

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. 5-year NOL carryback for 2003 NOLs if taxpayer elects out of bonus 
        depreciation as modified; extend temporary suspension of 90-
        percent limit on minimum tax NOLs (sec. 310 of the Senate 
        amendment and sec. 172 of the Code)

                              PRESENT LAW

      In general, a net operating loss (``NOL'') may be carried 
back two years and carried forward 20 years to offset taxable 
income in such years. The Job Creation and Worker Assistance 
Act of 2002 (``JCWAA'') provides a temporary extension of the 
general NOL carryback period to five years (from two years) for 
NOLs arising in taxable years ending in 2001 and 2002.
      The alternative minimum tax (``AMT'') rules provide that 
a taxpayer's NOL deduction cannot reduce the taxpayer's 
alternative minimum taxable income (``AMTI'') by more than 90 
percent of the AMTI (determined without regard to the NOL 
deduction). JCWAA also provides that an NOL deduction 
attributable to NOL carrybacks arising in taxable years ending 
in 2001 and 2002, as well as NOL carryforwards to these taxable 
years, may offset 100 percent of a taxpayer's AMTI.
      JCWAA provides generally for an elective 30-percent 
additional first-year depreciation deduction. The requirements 
that must be satisfied in order for property to qualify include 
that (1) the original use of the property must commence with 
the taxpayer on or after September 11, 2001, (2) the taxpayer 
must acquire the property after September 10, 2001 and before 
September 11, 2004, and (3) no binding written contract for the 
acquisition of the property is in effect before September 11, 
2001 (or, in the case of self-constructed property, 
manufacture, construction, or production of the property does 
not begin before September 11, 2001).
      The Jobs and Growth Tax Relief Reconciliation Act of 2003 
(``JGTRRA'') provides an elective additional first-year 
depreciation deduction equal to 50 percent of the adjusted 
basis of qualified property. Qualified property is defined in 
the same manner as for purposes of the 30-percent additional 
first-year depreciation deduction provided by the JCWAA except 
that the applicable time period for acquisition (or self 
construction) of the property is modified. Property with 
respect to which the 50-percent additional first-year 
depreciation deduction is claimed is not also eligible for the 
30-percent additional first-year depreciation deduction. In 
order to qualify, the property must be acquired after May 5, 
2003 and before January 1, 2005.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment extends the application of the five-
year carryback period to NOLs arising in taxable years ending 
in 2003, provided that the taxpayer elects not to apply the 
bonus depreciation provisions of section 168(k). Under the 
provision, taxpayers with taxable years ending during January 
are permitted to apply the provision to tax years ending during 
January of 2004 rather than tax years ending during January of 
2003. The provision also allows an NOL deduction attributable 
to NOL carrybacks arising in taxable years ending in 2003, as 
well as NOL carryforwards to these taxable years, to offset 100 
percent of a taxpayer's AMTI.
      Effective date.--The Senate amendment applies to net 
operating losses for taxable years ending after December 31, 
2002.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
9. Manufacturer's jobs credit (sec. 313 of the Senate amendment)

                              PRESENT LAW

      There is no present law credit for a manufacturer's 
employment of eligible Trade Adjustment Act (``TAA'') 
recipients.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a 50-percent tax credit for 
W-2 wages paid by the taxpayer to eligible TAA recipients (as 
defined in sec. 35(c)(2) of the Code). The credit may not 
exceed 50 percent of the lesser of: (1) the excess of the W-2 
wages paid by the taxpayer during the taxable year over the W-2 
wages paid by the taxpayer during the preceding taxable year, 
(2) the W-2 wages paid by the taxpayer during the taxable year 
to any employee who is an eligible TAA recipient for any month 
during such taxable year, or (3) 22.4 percent of the W-2 wages 
paid by the taxpayer during the taxable year. The amount of W-2 
wages taken into account with respect to any employee for any 
taxable year shall not exceed $50,000.
      The otherwise allowable credit is limited if the value of 
the taxpayer's non-domestic production increased from the 
preceding taxable year. In such case, the credit is (1) reduced 
to zero for taxpayers whose value of domestic production does 
not exceed that from the preceding taxable year, or (2) reduced 
by a percentage equal to the non-domestic share of the increase 
in the value of worldwide production from the preceding taxable 
year.
      A taxpayer eligible for the credit is any taxpayer that 
has domestic production gross receipts for the taxable year and 
the preceding taxable year, and is not treated at any time 
during the taxable year as an inverted domestic corporation 
under section 7874 of the Senate amendment.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2003, and before January 1, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
10. Brownfields demonstration program for qualified green building and 
        sustainable design projects (sec. 314 of the Senate amendment 
        and secs. 142 and 146 of the Code)

                              PRESENT LAW

In general
      Interest on debt incurred by States or local governments 
is excluded from income if the proceeds of the borrowing are 
used to carry out governmental functions of those entities or 
the debt is repaid with governmental funds. Interest on bonds 
that nominally are issued by States or local governments, but 
the proceeds of which are used (directly or indirectly) by a 
private person and payment of which is derived from funds of 
such a private person is taxable unless the purpose of the 
borrowing is approved specifically in the Code or in a non-Code 
provision of a revenue Act. These bonds are called ``private 
activity bonds.'' The term ``private person'' includes the 
Federal Government and all other individuals and entities other 
than States or local governments.
Private activities eligible for financing with tax-exempt private 
        activity bonds
      Present law includes several exceptions permitting States 
or local governments to act as conduits providing tax-exempt 
financing for private activities. For example, interest on 
bonds issued to benefit section 501(c)(3) organizations is 
generally tax-exempt (``qualified 501(c)(3) bonds''). Both 
capital expenditures and limited working capital expenditures 
of section 501(c)(3) organizations may be financed with 
qualified 501(c)(3) bonds.
      In addition, States or local governments may issue tax-
exempt ``exempt-facility bonds'' to finance property for 
certain private businesses.\194\ Business facilities eligible 
for this financing include transportation (airports, ports, 
local mass commuting, and high speed intercity rail 
facilities); privately owned and/or privately operated public 
works facilities (sewage, solid waste disposal, local district 
heating or cooling, hazardous waste disposal facilities, and 
public educational facilities); privately owned and/or operated 
low-income rental housing;\195\ and certain private facilities 
for the local furnishing of electricity or gas. A further 
provision allows tax-exempt financing for ``environmental 
enhancements of hydro-electric generating facilities.'' Tax-
exempt financing also is authorized for capital expenditures 
for small manufacturing facilities and land and equipment for 
first-time farmers (``qualified small-issue bonds''), local 
redevelopment activities (``qualified redevelopment bonds''), 
and eligible empowerment zone and enterprise community 
businesses. Tax-exempt private activity bonds also may be 
issued to finance limited non-business purposes: certain 
student loans and mortgage loans for owner-occupied housing 
(``qualified mortgage bonds'' and ``qualified veterans' 
mortgage bonds'').
---------------------------------------------------------------------------
    \194\  Secs. 141(e) and 142(a).
    \195\  Residential rental projects must satisfy low-income tenant 
occupancy requirements for a minimum period of 15 years.
---------------------------------------------------------------------------
      Generally, tax-exempt private activity bonds are subject 
to restrictions that do not apply to other bonds issued by 
State or local governments. For example, most tax-exempt 
private activity bonds are subject to annual volume limits on 
the aggregate face amount of such bonds that may be 
issued.\196\
---------------------------------------------------------------------------
    \196\ Sec. 146.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The Senate amendment creates a new category of exempt-
facility bond, the qualified green building and sustainable 
design project bond (``qualified green bond''). A qualified 
green bond is defined as any bond issued as part of an issue 
that finances a project designated by the Secretary, after 
consultation with the Administrator of the Environmental 
Protection Agency (the ``Administrator'') as a green building 
and sustainable design project that meets the following 
eligibility requirements: (1) at least 75 percent of the square 
footage of the commercial buildings that are part of the 
project is registered for the U.S. Green Building Council's 
LEED \197\ certification and is reasonably expected (at the 
time of designation) to meet such certification; (2) the 
project includes a brownfield site; \198\ (3) the project 
receives at least $5 million dollars in specific State or local 
resources; and (4) the project includes at least one million 
square feet of building or at least 20 acres of land.
---------------------------------------------------------------------------
    \197\ The LEED (``Leadership in Energy and Environmental Design'') 
Green Building Rating System is a voluntary, consensus-based national 
standard for developing high-performance sustainable buildings. 
Registration is the first step toward LEED certification. Actual 
certification requires that the applicant project satisfy a number of 
requirements. Commercial buildings, as defined by standard building 
codes are eligible for certification. Commercial occupancies include, 
but are not limited to, offices, retail and service establishments, 
institutional buildings (e.g. libraries, schools, museums, churches, 
etc.), hotels, and residential buildings of four or more habitable 
stories.
    \198\ For this purpose, a brownfield site is defined by section 
101(39) of the Comprehensive Environmental Response, Compensation, and 
Liability Act of 1980 (42 U.S.C. 9601), including a site described in 
subparagraph (D)(ii)(II)(aa) thereof (relating to a site that is 
contaminated by petroleum or a petroleum product excluded from the 
definition of `hazardous substance' under section 101).
---------------------------------------------------------------------------
      Under the provision, qualified green bonds are not 
subject to the State bond volume limitations. Rather, there is 
a national limitation of $2 billion of qualified green bonds 
that the Secretary may allocate, in the aggregate, to qualified 
green building and sustainable design projects. Qualified green 
bonds may be currently refunded if certain conditions are met, 
but cannot be advance refunded. The authority to issue 
qualified green bonds terminates after September 30, 2009.
Application and designation process
      The provision requires the submission of an application 
that meets certain requirements before a project may be 
designated for financing with qualified green bonds. In 
addition to the eligibility requirements listed above, each 
project application must demonstrate that the net benefit of 
the tax-exempt financing provided will be allocated for (i) the 
purchase, construction, integration or other use of energy 
efficiency, renewable energy and sustainable design features of 
the project, (ii) compliance with LEED certification standards, 
and/or (iii) the purchase, remediation, foundation 
construction, and preparation of the brownfield site. The 
application also must demonstrate that the project is expected, 
based on independent analysis, to provide the equivalent of at 
least 1,500 full-time permanent employees (150 full-time 
employees in rural States) when completed and the equivalent of 
at least 1,000 construction employees (100 full-time employees 
in rural States). In addition, each project application shall 
contain a description of: (1) the amount of electric 
consumption reduced as compared to conventional construction; 
(2) the amount of sulfur dioxide daily emissions reduced 
compared to coal generation; (3) the amount of gross installed 
capacity of the project's solar photovoltaic capacity measured 
in megawatts; and (4) the amount of the project's fuel cell 
energy generation, measured in megawatts.
      Under the Senate Amendment, each project must be 
nominated by a State or local government within 180 days of 
enactment of this Act and such State or local government must 
provide written assurances that the project will satisfy 
certain eligibility requirements. Within 60 days after the end 
of the application period, the Secretary, after consultation 
with the Administrator, will designate the qualified green 
building and sustainable design projects eligible for financing 
with qualified green bonds. At least one of the projects must 
be in or within a ten-mile radius of an empowerment zone (as 
defined under section 1391 of the Code) and at least one 
project must be in a rural State.\199\ No more than one project 
is permitted in a State. A project shall not be designated for 
financing with qualified green bonds if such project includes a 
stadium or arena for professional sports exhibitions or games.
---------------------------------------------------------------------------
    \199\ The term ``rural State'' means any State that has (1) a 
population of less than 4.5 million according to the 2000 census; (2) a 
population density of less than 150 people per square mile according to 
the 2000 census; and (3) increased in population by less than half the 
rate of the national increase between the 1990 and 2000 censuses.
---------------------------------------------------------------------------
      The provision requires the Secretary, after consultation 
with the Administrator, to ensure that the projects designated 
shall, in the aggregate: (1) reduce electric consumption by 
more than 150 megawatts annually as compared to conventional 
construction; (2) reduce daily sulfur dioxide emissions by at 
least 10 tons compared to coal generation power; (3) expand by 
75 percent the domestic solar photovoltaic market in the United 
States (measured in megawatts) as compared to the expansion of 
that market from 2001 to 2002; and (4) use at least 25 
megawatts of fuel cell energy generation.
      Each project must certify to the Secretary, no later than 
30 days after the completion of the project, that the net 
benefit of the tax-exempt financing was used for the purposes 
described in the project application. In addition, no bond 
proceeds can be used to provide any facility the principal 
business of which is the sale of food or alcoholic beverages 
for consumption on the premises.
Special rules
      The provision requires each issuer to maintain, on behalf 
of each project, an interest bearing reserve account equal to 
one percent of the net proceeds of any qualified green bond 
issued for such project. Not later than five years after the 
date of issuance, the Secretary, after consultation with the 
Administrator, shall determine whether the project financed 
with the proceeds of qualified green bonds has substantially 
complied with the requirements and goals described in the 
project application. If the Secretary, after such consultation, 
certifies that the project has substantially complied with the 
requirements and goals, amounts in the reserve account, 
including all interest, shall be released to the project. If 
the Secretary determines that the project has not substantially 
complied with such requirements and goals, amounts in the 
reserve account, including all interest, shall be paid to the 
United States Treasury.
      Effective date.--The provision is effective for bonds 
issued after December 31, 2004, and before October 1, 2009.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                   J. Manufacturing Relating to Films

1. Special rules for certain film and television production (sec. 321 
        of the Senate amendment and new sec. 181 of the Code)

                              PRESENT LAW

      The modified Accelerated Cost Recovery System (``MACRS'') 
does not apply to certain property, including any motion 
picture film, video tape, or sound recording, or to any other 
property if the taxpayer elects to exclude such property from 
MACRS and the taxpayer properly applies a unit-of-production 
method or other method of depreciation not expressed in a term 
of years. Section 197 does not apply to certain intangible 
property, including property produced by the taxpayer or any 
interest in a film, sound recording, video tape, book or 
similar property not acquired in a transaction (or a series of 
related transactions) involving the acquisition of assets 
constituting a trade or business or substantial portion 
thereof. Thus, the recovery of the cost of a film, video tape, 
or similar property that is produced by the taxpayer or is 
acquired on a ``stand-alone'' basis by the taxpayer may not be 
determined under either the MACRS depreciation provisions or 
under the section 197 amortization provisions. The cost 
recovery of such property may be determined under section 167, 
which allows a depreciation deduction for the reasonable 
allowance for the exhaustion, wear and tear, or obsolescence of 
the property. A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. Section 
167(g) provides that the cost of motion picture films, sound 
recordings, copyrights, books, and patents are eligible to be 
recovered using the income forecast method of depreciation.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment permits qualifying film and 
television productions to elect to deduct certain production 
expenditures in the year the expenditure is incurred in lieu of 
capitalizing the cost and recovering it through depreciation 
allowances.\200\
---------------------------------------------------------------------------
    \200\ An election to deduct such costs shall be made in such manner 
as prescribed by the Secretary and by the due date (including 
extensions of time) for filing the taxpayer's return of tax for the 
taxable year in which production costs of such property are first 
incurred. An election may not be revoked without the consent of the 
Secretary. The Committee intends that, in the absence of specific 
guidance by the Secretary, deducting qualifying costs on the 
appropriate tax return shall constitute a valid election.
---------------------------------------------------------------------------
      The provision limits the amount of production 
expenditures that may be expensed to $15 million for each 
qualifying production.\201\ An additional $5 million of 
production expenditures may be deducted (up to $20 million in 
total) if a significant amount of the production expenditures 
are incurred in areas eligible for designation as a low-income 
community or eligible for designation by the Delta Regional 
Authority as a distressed county or isolated area of distress. 
Expenditures in excess of $15 million ($20 million in 
distressed areas) are required to be recovered over a three-
year period using the straight-line method beginning in the 
month such property is placed in service.
---------------------------------------------------------------------------
    \201\ Thus, a qualifying film that is co-produced is limited to $15 
million of deduction. The benefits of this provision shall be allocated 
among the owners of a film in a manner that reasonably reflects each 
owner's proportionate investment in and economic interest in the film.
---------------------------------------------------------------------------
      The provision defines a qualified film or television 
production as any production of a motion picture (whether 
released theatrically or directly to video cassette or any 
other format); miniseries; scripted, dramatic television 
episode; or movie of the week if at least 75 percent of the 
total compensation expended on the production are for services 
performed in the United States.\202\ With respect to property 
which is one or more episodes in a television series, only the 
first 44 episodes qualify under the provision. Qualified 
property does not include sexually explicit productions as 
defined by section 2257 of title 18 of the U.S. Code.
---------------------------------------------------------------------------
    \202\ The term compensation does not include participations and 
residuals.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is effective for 
qualified productions commencing after the date of enactment 
and sunsets for qualifying productions commencing after 
December 31, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except that the provision does not apply to qualified 
productions the aggregate cost of which exceeds the $15 million 
threshold. The threshold is increased to $20 million if a 
significant amount of the production expenditures are incurred 
in areas eligible for designation as a low-income community or 
eligible for designation by the Delta Regional Authority as a 
distressed county or isolated area of distress.
      Effective date.--The provision is effective for qualified 
productions commencing after the date of enactment and before 
January 1, 2009.\203\
---------------------------------------------------------------------------
    \203\ For this purpose, a production is treated as commencing on 
the first date of principal photography.
---------------------------------------------------------------------------
2. Modification of application of income forecast method of 
        depreciation (sec. 322 of the Senate amendment and sec. 167 of 
        the Code)

                              PRESENT LAW

      The modified Accelerated Cost Recovery System (``MACRS'') 
does not apply to certain property, including any motion 
picture film, video tape, or sound recording, or to any other 
property if the taxpayer elects to exclude such property from 
MACRS and the taxpayer properly applies a unit-of-production 
method or other method of depreciation not expressed in a term 
of years. Section 197 does not apply to certain intangible 
property, including property produced by the taxpayer or any 
interest in a film, sound recording, video tape, book or 
similar property not acquired in a transaction (or a series of 
related transactions) involving the acquisition of assets 
constituting a trade or business or substantial portion 
thereof. Thus, the recovery of the cost of a film, video tape, 
or similar property that is produced by the taxpayer or is 
acquired on a ``stand-alone'' basis by the taxpayer may not be 
determined under either the MACRS depreciation provisions or 
under the section 197 amortization provisions. The cost 
recovery of such property may be determined under section 167, 
which allows a depreciation deduction for the reasonable 
allowance for the exhaustion, wear and tear, or obsolescence of 
the property. A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. Section 
167(g) provides that the cost of motion picture films, sound 
recordings, copyrights, books, and patents are eligible to be 
recovered using the income forecast method of depreciation.
Income forecast method of depreciation
      Under the income forecast method, a property's 
depreciation deduction for a taxable year is determined by 
multiplying the adjusted basis of the property by a fraction, 
the numerator of which is the income generated by the property 
during the year and the denominator of which is the total 
forecasted or estimated income expected to be generated prior 
to the close of the tenth taxable year after the year the 
property was placed in service. Any costs that are not 
recovered by the end of the tenth taxable year after the 
property was placed in service may be taken into account as 
depreciation in such year.
      The adjusted basis of property that may be taken into 
account under the income forecast method only includes amounts 
that satisfy the economic performance standard of section 
461(h). In addition, taxpayers that claim depreciation 
deductions under the income forecast method are required to pay 
(or receive) interest based on a recalculation of depreciation 
under a ``look-back'' method.
      The ``look-back'' method is applied in any 
``recomputation year'' by (1) comparing depreciation deductions 
that had been claimed in prior periods to depreciation 
deductions that would have been claimed had the taxpayer used 
actual, rather than estimated, total income from the property; 
(2) determining the hypothetical overpayment or underpayment of 
tax based on this recalculated depreciation; and (3) applying 
the overpayment rate of section 6621 of the Code. Except as 
provided in Treasury regulations, a ``recomputation year'' is 
the third and tenth taxable year after the taxable year the 
property was placed in service, unless the actual income from 
the property for each taxable year ending with or before the 
close of such years was within 10 percent of the estimated 
income from the property for such years.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment clarifies that, solely for purposes 
of computing the allowable deduction for property under the 
income forecast method of depreciation, participations and 
residuals may be included in the adjusted basis of the property 
beginning in the year such property is placed in service, but 
only if such participations and residuals relate to income to 
be derived from the property before the close of the tenth 
taxable year following the year the property is placed in 
service (as defined in section 167(g)(1)(A)). For purposes of 
the provision, participations and residuals are defined as 
costs the amount of which, by contract, varies with the amount 
of income earned in connection with such property. The 
provision also clarifies that the income from the property to 
be taken into account under the income forecast method is the 
gross income from such property.
      The provision also grants authority to the Treasury 
Department to prescribe appropriate adjustments to the basis of 
property (and the look-back method) to reflect the treatment of 
participations and residuals under the provision.
      In addition, the provision clarifies that, in the case of 
property eligible for the income forecast method that the 
holding in the Associated Patentees \204\ decision will 
continue to constitute a valid method. Thus, rather than 
accounting for participations and residuals as a cost of the 
property under the income forecast method of depreciation, the 
taxpayer may deduct those payments as they are paid as under 
the Associated Patentees decision. This may be done on a 
property-by-property basis and shall be applied consistently 
with respect to a given property thereafter. The provision also 
clarifies that distribution costs are not taken into account 
for purposes of determining the taxpayer's current and total 
forecasted income with respect to a property.
---------------------------------------------------------------------------
    \204\ Associated Patentees, Inc. v. Commissioner, 4 T.C. 979 
(1945).
---------------------------------------------------------------------------
      Effective date.--The Senate amendment applies to property 
placed in service after date of enactment. No inference is 
intended as to the appropriate treatment under present law. It 
is intended that the Treasury Department and the IRS expedite 
the resolution of open cases. In resolving these cases in an 
expedited and balanced manner, the Treasury Department and IRS 
are encouraged to take into account the principles of the 
provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

  TITLE III--PROVISIONS RELATING TO TAX REFORM AND SIMPLIFICATION FOR 
                        UNITED STATES BUSINESSES

1. Interest expense allocation rules (sec. 301 of the House bill, sec. 
        205 of the Senate amendment, and sec. 864 of the Code)

                              PRESENT LAW

In general
      In order to compute the foreign tax credit limitation, a 
taxpayer must determine the amount of its taxable income from 
foreign sources. Thus, the taxpayer must allocate and apportion 
deductions between items of U.S.-source gross income, on the 
one hand, and items of foreign-source gross income, on the 
other.
      In the case of interest expense, the rules generally are 
based on the approach that money is fungible and that interest 
expense is properly attributable to all business activities and 
property of a taxpayer, regardless of any specific purpose for 
incurring an obligation on which interest is paid.\205\ For 
interest allocation purposes, the Code provides that all 
members of an affiliated group of corporations generally are 
treated as a single corporation (the so-called ``one-taxpayer 
rule'') and allocation must be made on the basis of assets 
rather than gross income.
---------------------------------------------------------------------------
    \205\ However, exceptions to the fungibility principle are provided 
in particular cases, some of which are described below.
---------------------------------------------------------------------------
Affiliated group
            In general
      The term ``affiliated group'' in this context generally 
is defined by reference to the rules for determining whether 
corporations are eligible to file consolidated returns. 
However, some groups of corporations are eligible to file 
consolidated returns yet are not treated as affiliated for 
interest allocation purposes, and other groups of corporations 
are treated as affiliated for interest allocation purposes even 
though they are not eligible to file consolidated returns. 
Thus, under the one-taxpayer rule, the factors affecting the 
allocation of interest expense of one corporation may affect 
the sourcing of taxable income of another, related corporation 
even if the two corporations do not elect to file, or are 
ineligible to file, consolidated returns.
            Definition of affiliated group--consolidated return rules
      For consolidation purposes, the term ``affiliated group'' 
means one or more chains of includible corporations connected 
through stock ownership with a common parent corporation which 
is an includible corporation, but only if: (1) the common 
parent owns directly stock possessing at least 80 percent of 
the total voting power and at least 80 percent of the total 
value of at least one other includible corporation; and (2) 
stock meeting the same voting power and value standards with 
respect to each includible corporation (excluding the common 
parent) is directly owned by one or more other includible 
corporations.
      Generally, the term ``includible corporation'' means any 
domestic corporation except certain corporations exempt from 
tax under section 501 (for example, corporations organized and 
operated exclusively for charitable or educational purposes), 
certain life insurance companies, corporations electing 
application of the possession tax credit, regulated investment 
companies, real estate investment trusts, and domestic 
international sales corporations. A foreign corporation 
generally is not an includible corporation.
            Definition of affiliated group--special interest allocation 
                    rules
      Subject to exceptions, the consolidated return and 
interest allocation definitions of affiliation generally are 
consistent with each other.\206\ For example, both definitions 
generally exclude all foreign corporations from the affiliated 
group. Thus, while debt generally is considered fungible among 
the assets of a group of domestic affiliated corporations, the 
same rules do not apply as between the domestic and foreign 
members of a group with the same degree of common control as 
the domestic affiliated group.
---------------------------------------------------------------------------
    \206\ One such exception is that the affiliated group for interest 
allocation purposes includes section 936 corporations that are excluded 
from the consolidated group.
---------------------------------------------------------------------------
            Banks, savings institutions, and other financial affiliates
      The affiliated group for interest allocation purposes 
generally excludes what are referred to in the Treasury 
regulations as ``financial corporations'' (Treas. Reg. sec. 
1.861-11T(d)(4)). These include any corporation, otherwise a 
member of the affiliated group for consolidation purposes, that 
is a financial institution (described in section 581 or section 
591), the business of which is predominantly with persons other 
than related persons or their customers, and which is required 
by State or Federal law to be operated separately from any 
other entity which is not a financial institution (sec. 
864(e)(5)(C)). The category of financial corporations also 
includes, to the extent provided in regulations, bank holding 
companies (including financial holding companies), subsidiaries 
of banks and bank holding companies (including financial 
holding companies), and savings institutions predominantly 
engaged in the active conduct of a banking, financing, or 
similar business (sec. 864(e)(5)(D)).
      A financial corporation is not treated as a member of the 
regular affiliated group for purposes of applying the one-
taxpayer rule to other non-financial members of that group. 
Instead, all such financial corporations that would be so 
affiliated are treated as a separate single corporation for 
interest allocation purposes.

                               HOUSE BILL

In general
      The provision modifies the present-law interest expense 
allocation rules (which generally apply for purposes of 
computing the foreign tax credit limitation) by providing a 
one-time election under which the taxable income of the 
domestic members of an affiliated group from sources outside 
the United States generally is determined by allocating and 
apportioning interest expense of the domestic members of a 
worldwide affiliated group on a worldwide-group basis (i.e., as 
if all members of the worldwide group were a single 
corporation). If a group makes this election, the taxable 
income of the domestic members of a worldwide affiliated group 
from sources outside the United States is determined by 
allocating and apportioning the third-party interest expense of 
those domestic members to foreign-source income in an amount 
equal to the excess (if any) of (1) the worldwide affiliated 
group's worldwide third-party interest expense multiplied by 
the ratio which the foreign assets of the worldwide affiliated 
group bears to the total assets of the worldwide affiliated 
group,\207\ over (2) the third-party interest expense incurred 
by foreign members of the group to the extent such interest 
would be allocated to foreign sources if the provision's 
principles were applied separately to the foreign members of 
the group.\208\
---------------------------------------------------------------------------
    \207\ For purposes of determining the assets of the worldwide 
affiliated group, neither stock in corporations within the group nor 
indebtedness (including receivables) between members of the group is 
taken into account. It is anticipated that the Treasury Secretary will 
adopt regulations addressing the allocation and apportionment of 
interest expense on such indebtedness that follow principles analogous 
to those of existing regulations. Income from holding stock or 
indebtedness of another group member is taken into account for all 
purposes under the present-law rules of the Code, including the foreign 
tax credit provisions.
    \208\ Although the interest expense of a foreign subsidiary is 
taken into account for purposes of allocating the interest expense of 
the domestic members of the electing worldwide affiliated group for 
foreign tax credit limitation purposes, the interest expense incurred 
by a foreign subsidiary is not deductible on a U.S. return.
---------------------------------------------------------------------------
      For purposes of the new elective rules based on worldwide 
fungibility, the worldwide affiliated group means all 
corporations in an affiliated group (as that term is defined 
under present law for interest allocation purposes) \209\ as 
well as all controlled foreign corporations that, in the 
aggregate, either directly or indirectly,\210\ would be members 
of such an affiliated group if section 1504(b)(3) did not apply 
(i.e., in which at least 80-percent of the vote and value of 
the stock of such corporations is owned by one or more other 
corporations included in the affiliated group). Thus, if an 
affiliated group makes this election, the taxable income from 
sources outside the United States of domestic group members 
generally is determined by allocating and apportioning interest 
expense of the domestic members of the worldwide affiliated 
group as if all of the interest expense and assets of 80-
percent or greater owned domestic corporations (i.e., 
corporations that are part of the affiliated group under 
present-law section 864(e)(5)(A) as modified to include 
insurance companies) and certain controlled foreign 
corporations were attributable to a single corporation.
---------------------------------------------------------------------------
    \209\ The provision expands the definition of an affiliated group 
for interest expense allocation purposes to include certain insurance 
companies that are generally excluded from an affiliated group under 
section 1504(b)(2) (without regard to whether such companies are 
covered by an election under section 1504(c)(2)).
    \210\ Indirect ownership is determined under the rules of section 
958(a)(2) or through applying rules similar to those of section 
958(a)(2) to stock owned directly or indirectly by domestic 
partnerships, trusts, or estates.
---------------------------------------------------------------------------
      In addition, if an affiliated group elects to apply the 
new elective rules based on worldwide fungibility, the present-
law rules regarding the treatment of tax-exempt assets and the 
basis of stock in nonaffiliated 10-percent owned corporations 
apply on a worldwide affiliated group basis.
      The common parent of the domestic affiliated group must 
make the worldwide affiliated group election. It must be made 
for the first taxable year beginning after December 31, 2008, 
in which a worldwide affiliated group exists that includes at 
least one foreign corporation that meets the requirements for 
inclusion in a worldwide affiliated group. Once made, the 
election applies to the common parent and all other members of 
the worldwide affiliated group for the taxable year for which 
the election was made and all subsequent taxable years, unless 
revoked with the consent of the Secretary of the Treasury.
Financial institution group election
      The provision allows taxpayers to apply the present-law 
bank group rules to exclude certain financial institutions from 
the affiliated group for interest allocation purposes under the 
worldwide fungibility approach. The provision also provides a 
one-time ``financial institution group'' election that expands 
the present-law bank group. Under the provision, at the 
election of the common parent of the pre-election worldwide 
affiliated group, the interest expense allocation rules are 
applied separately to a subgroup of the worldwide affiliated 
group that consists of (1) all corporations that are part of 
the present-law bank group, and (2) all ``financial 
corporations.'' For this purpose, a corporation is a financial 
corporation if at least 80 percent of its gross income is 
financial services income (as described in section 
904(d)(2)(C)(i) and the regulations thereunder) that is derived 
from transactions with unrelated persons.\211\ For these 
purposes, items of income or gain from a transaction or series 
of transactions are disregarded if a principal purpose for the 
transaction or transactions is to qualify any corporation as a 
financial corporation.
---------------------------------------------------------------------------
    \211\ See Treas. Reg. sec. 1.904-4(e)(2).
---------------------------------------------------------------------------
      The common parent of the pre-election worldwide 
affiliated group must make the election for the first taxable 
year beginning after December 31, 2008, in which a worldwide 
affiliated group includes a financial corporation. Once made, 
the election applies to the financial institution group for the 
taxable year and all subsequent taxable years. In addition, the 
provision provides anti-abuse rules under which certain 
transfers from one member of a financial institution group to a 
member of the worldwide affiliated group outside of the 
financial institution group are treated as reducing the amount 
of indebtedness of the separate financial institution group. 
The provision provides regulatory authority with respect to the 
election to provide for the direct allocation of interest 
expense in circumstances in which such allocation is 
appropriate to carry out the purposes of the provision, prevent 
assets or interest expense from being taken into account more 
than once, or address changes in members of any group (through 
acquisitions or otherwise) treated as affiliated under this 
provision.
      Effective date.--The House bill provision is effective 
for taxable years beginning after December 31, 2008.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
2. Recharacterize overall domestic loss (sec. 302 of the House bill, 
        sec. 204 of the Senate amendment, and sec. 904 of the Code)

                              PRESENT LAW

      The United States provides a credit for foreign income 
taxes paid or accrued. The foreign tax credit generally is 
limited to the U.S. tax liability on a taxpayer's foreign-
source income, in order to ensure that the credit serves the 
purpose of mitigating double taxation of foreign-source income 
without offsetting the U.S. tax on U.S.-source income. This 
overall limitation is calculated by prorating a taxpayer's pre-
credit U.S. tax on its worldwide income between its U.S.-source 
and foreign-source taxable income. The ratio (not exceeding 100 
percent) of the taxpayer's foreign-source taxable income to 
worldwide taxable income is multiplied by its pre-credit U.S. 
tax to establish the amount of U.S. tax allocable to the 
taxpayer's foreign-source income and, thus, the upper limit on 
the foreign tax credit for the year.
      In addition, this limitation is calculated separately for 
various categories of income, generally referred to as 
``separate limitation categories.'' The total amount of the 
foreign tax credit used to offset the U.S. tax on income in 
each separate limitation category may not exceed the proportion 
of the taxpayer's U.S. tax which the taxpayer's foreign-source 
taxable income in that category bears to its worldwide taxable 
income.
      If a taxpayer's losses from foreign sources exceed its 
foreign-source income, the excess (``overall foreign loss,'' or 
``OFL'') may offset U.S.-source income. Such an offset reduces 
the effective rate of U.S. tax on U.S.-source income.
      In order to eliminate a double benefit (that is, the 
reduction of U.S. tax previously noted and, later, full 
allowance of a foreign tax credit with respect to foreign-
source income), present law includes an OFL recapture rule. 
Under this rule, a portion of foreign-source taxable income 
earned after an OFL year is recharacterized as U.S.-source 
taxable income for foreign tax credit purposes (and for 
purposes of the possessions tax credit). Unless a taxpayer 
elects a higher percentage, however, generally no more than 50 
percent of the foreign-source taxable income earned in any 
particular taxable year is recharacterized as U.S.-source 
taxable income. The effect of the recapture is to reduce the 
foreign tax credit limitation in one or more years following an 
OFL year and, therefore, the amount of U.S. tax that can be 
offset by foreign tax credits in the later year or years.
      Losses for any taxable year in separate foreign 
limitation categories (to the extent that they do not exceed 
foreign income for the year) are apportioned on a proportionate 
basis among (and operate to reduce) the foreign income 
categories in which the entity earns income in the loss year. A 
separate limitation loss recharacterization rule applies to 
foreign losses apportioned to foreign income pursuant to the 
above rule. If a separate limitation loss was apportioned to 
income subject to another separate limitation category and the 
loss category has income for a subsequent taxable year, then 
that income (to the extent that it does not exceed the 
aggregate separate limitation losses in the loss category not 
previously recharacterized) must be recharacterized as income 
in the separate limitation category that was previously offset 
by the loss. Such recharacterization must be made in proportion 
to the prior loss apportionment not previously taken into 
account.
      A U.S.-source loss reduces pre-credit U.S. tax on 
worldwide income to an amount less than the hypothetical tax 
that would apply to the taxpayer's foreign-source income if 
viewed in isolation. The existence of foreign-source taxable 
income in the year of the U.S.-source loss reduces or 
eliminates any net operating loss carryover that the U.S.-
source loss would otherwise have generated absent the foreign 
income. In addition, as the pre-credit U.S. tax on worldwide 
income is reduced, so is the foreign tax credit limitation. 
Moreover, any U.S.-source loss for any taxable year is 
apportioned among (and operates to reduce) foreign income in 
the separate limitation categories on a proportionate basis. As 
a result, some foreign tax credits in the year of the U.S.-
source loss must be credited, if at all, in a carryover year. 
Tax on U.S.-source taxable income in a subsequent year may be 
offset by a net operating loss carryforward, but not by a 
foreign tax credit carryforward. There is currently no 
mechanism for recharacterizing such subsequent U.S.-source 
income as foreign-source income.
      For example, suppose a taxpayer generates a $100 U.S.-
source loss and earns $100 of foreign-source income in Year 1, 
and pays $30 of foreign tax on the $100 of foreign-source 
income. Because the taxpayer has no net taxable income in Year 
1, no foreign tax credit can be claimed in Year 1 with respect 
to the $30 of foreign taxes. If the taxpayer then earns $100 of 
U.S.-source income and $100 of foreign-source income in Year 2, 
present law does not recharacterize any portion of the $100 of 
U.S.-source income as foreign-source income to reflect the fact 
that the previous year's $100 U.S.-source loss reduced the 
taxpayer's ability to claim foreign tax credits.

                               HOUSE BILL

      The provision applies a re-sourcing rule to U.S.-source 
income in cases in which a taxpayer's foreign tax credit 
limitation has been reduced as a result of an overall domestic 
loss. Under the provision, a portion of the taxpayer's U.S.-
source income for each succeeding taxable year is 
recharacterized as foreign-source income in an amount equal to 
the lesser of: (1) the amount of the unrecharacterized overall 
domestic losses for years prior to such succeeding taxable 
year, and (2) 50 percent of the taxpayer's U.S.-source income 
for such succeeding taxable year.
      The provision defines an overall domestic loss for this 
purpose as any domestic loss to the extent it offsets foreign-
source taxable income for the current taxable year or for any 
preceding taxable year by reason of a loss carryback. For this 
purpose, a domestic loss means the amount by which the U.S.-
source gross income for the taxable year is exceeded by the sum 
of the deductions properly apportioned or allocated thereto, 
determined without regard to any loss carried back from a 
subsequent taxable year. Under the provision, an overall 
domestic loss does not include any loss for any taxable year 
unless the taxpayer elected the use of the foreign tax credit 
for such taxable year.
      Any U.S.-source income recharacterized under the 
provision is allocated among and increases the various foreign 
tax credit separate limitation categories in the same 
proportion that those categories were reduced by the prior 
overall domestic losses, in a manner similar to the 
recharacterization rules for separate limitation losses.
      It is anticipated that situations may arise in which a 
taxpayer generates an overall domestic loss in a year following 
a year in which it had an overall foreign loss, or vice versa. 
In such a case, it would be necessary for ordering and other 
coordination rules to be developed for purposes of computing 
the foreign tax credit limitation in subsequent taxable years. 
The provision grants the Secretary of the Treasury authority to 
prescribe such regulations as may be necessary to coordinate 
the operation of the OFL recapture rules with the operation of 
the overall domestic loss recapture rules added by the 
provision.
      Effective date.--The provision applies to losses incurred 
in taxable years beginning after December 31, 2006.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
3. Foreign tax credit baskets and ``base differences'' (sec. 303 of the 
        House bill, sec. 225 of the Senate amendment, and sec. 904 of 
        the Code)

                              PRESENT LAW

In general
      The United States taxes its citizens and residents on 
their worldwide income. Because the countries in which income 
is earned also may assert their jurisdiction to tax the same 
income on the basis of source, foreign-source income earned by 
U.S. persons may be subject to double taxation. In order to 
mitigate this possibility, the United States provides a credit 
against U.S. tax liability for foreign income taxes paid, 
subject to a number of limitations. The foreign tax credit 
generally is limited to the U.S. tax liability on a taxpayer's 
foreign-source income, in order to ensure that the credit 
serves its purpose of mitigating double taxation of cross-
border income without offsetting the U.S. tax on U.S.-source 
income.
      The foreign tax credit limitation is applied separately 
to the following categories of income: (1) passive income, (2) 
high withholding tax interest, (3) financial services income, 
(4) shipping income, (5) certain dividends received from 
noncontrolled section 902 foreign corporations (``10/50 
companies''),\212\ (6) certain dividends from a domestic 
international sales corporation or former domestic 
international sales corporation, (7) taxable income 
attributable to certain foreign trade income, (8) certain 
distributions from a foreign sales corporation or former 
foreign sales corporation, and (9) any other income not 
described in items (1) through (8) (so-called ``general 
basket'' income). In addition, a number of other provisions of 
the Code and U.S. tax treaties effectively create additional 
separate limitations in certain circumstances.\213\
---------------------------------------------------------------------------
    \212\ Subject to certain exceptions, dividends paid by a 10/50 
company in taxable years beginning after December 31, 2002 are subject 
to either a look-through approach in which the dividend is attributed 
to a particular limitation category based on the underlying earnings 
which gave rise to the dividend (for post-2002 earnings and profits), 
or a single-basket limitation approach for dividends from all 10/50 
companies that are not passive foreign investment companies (for pre-
2003 earnings and profits). Under the conference agreement, these 
dividends are subject to a look-through approach, irrespective of when 
the underlying earnings and profits arose.
    \213\ See, e.g., sec. 56(g)(4)(C)(iii)(IV) (relating to certain 
dividends from corporations eligible for the sec. 936 credit); sec. 
245(a)(10) (relating to certain dividends treated as foreign source 
under treaties); sec. 865(h)(1)(B) (relating to certain gains from 
stock and intangibles treated as foreign source under treaties); sec. 
901(j)(1)(B) (relating to income from certain specified countries); and 
sec. 904(g)(10)(A) (relating to interest, dividends, and certain other 
amounts derived from U.S.-owned foreign corporations and treated as 
foreign source under treaties).
---------------------------------------------------------------------------
Financial services income
      In general, the term ``financial services income'' 
includes income received or accrued by a person predominantly 
engaged in the active conduct of a banking, insurance, 
financing, or similar business, if the income is derived in the 
active conduct of a banking, financing or similar business, or 
is derived from the investment by an insurance company of its 
unearned premiums or reserves ordinary and necessary for the 
proper conduct of its insurance business (sec. 904(d)(2)(C)). 
The Code also provides that financial services income includes 
income, received or accrued by a person predominantly engaged 
in the active conduct of a banking, insurance, financing, or 
similar business, of a kind which would generally be insurance 
income (as defined in section 953(a)), among other items.
      Treasury regulations provide that a person is 
predominantly engaged in the active conduct of a banking, 
insurance, financing, or similar business for any year if for 
that year at least 80 percent of its gross income is ``active 
financing income.'' \214\ The regulations further provide that 
a corporation that is not predominantly engaged in the active 
conduct of a banking, insurance, financing, or similar business 
under the preceding definition can derive financial services 
income if the corporation is a member of an affiliated group 
(as defined in section 1504(a), but expanded to include foreign 
corporations) that, as a whole, meets the regulatory test of 
being ``predominantly engaged.'' \215\ In determining whether 
an affiliated group is ``predominantly engaged,'' only the 
income of members of the group that are U.S. corporations, or 
controlled foreign corporations in which such U.S. corporations 
own (directly or indirectly) at least 80 percent of the total 
voting power and value of the stock, are counted.
---------------------------------------------------------------------------
    \214\ Treas. Reg. sec. 1.904-4(e)(3)(i) and (2)(i).
    \215\ Treas. Reg. sec. 1.904-4(e)(3)(ii).
---------------------------------------------------------------------------
``Base difference'' items
      Under Treasury regulations, foreign taxes are allocated 
and apportioned to the same limitation categories as the income 
to which they relate.\216\ In cases in which foreign law 
imposes tax on an item of income that does not constitute 
income under U.S. tax principles (a ``base difference'' item), 
the tax is treated as imposed on income in the general 
limitation category.\217\
---------------------------------------------------------------------------
    \216\ Treas. Reg. sec. 1.904-6.
    \217\ Treas. Reg. sec. 1.904-6(a)(1)(iv).
---------------------------------------------------------------------------

                               HOUSE BILL

In general
      The provision generally reduces the number of foreign tax 
credit limitation categories to two: passive category income 
and general category income. Other income is included in one of 
the two categories, as appropriate. For example, shipping 
income generally falls into the general limitation category, 
whereas high withholding tax interest generally could fall into 
the passive income or the general limitation category, 
depending on the circumstances. Dividends from a domestic 
international sales corporation or former domestic 
international sales corporation, income attributable to certain 
foreign trade income, and certain distributions from a foreign 
sales corporation or former foreign sales corporation all are 
assigned to the passive income limitation category. The 
provision does not affect the separate computation of foreign 
tax credit limitations under special provisions of the Code 
relating to, for example, treaty-based sourcing rules or 
specified countries under section 901(j).
Financial services income
      In the case of a member of a financial services group or 
any other person predominantly engaged in the active conduct of 
a banking, insurance, financing or similar business, the 
provision treats income meeting the definition of financial 
services income as general category income. Under the 
provision, a financial services group is an affiliated group 
that is predominantly engaged in the active conduct of a 
banking, insurance, financing or similar business. For this 
purpose, the definition of an affiliated group under section 
1504(a) is applied, but expanded to include certain insurance 
companies (without regard to whether such companies are covered 
by an election under section 1504(c)(2)) and foreign 
corporations. In determining whether such a group is 
predominantly engaged in the active conduct of a banking, 
insurance, financing, or similar business, only the income of 
members of the group that are U.S. corporations or controlled 
foreign corporations in which such U.S. corporations own 
(directly or indirectly) at least 80 percent of total voting 
power and value of the stock are taken into account.
      The provision does not alter the present law 
interpretation of what it means to be a ``person predominantly 
engaged in the active conduct of a banking, insurance, 
financing, or similar business.'' \218\ Thus, other provisions 
of the Code that rely on this same concept of a ``person 
predominantly engaged in the active conduct of a banking, 
insurance, financing, or similar business'' are not affected by 
the provision. For example, under the ``accumulated deficit 
rule'' of section 952(c)(1)(B), subpart F income inclusions of 
a U.S. shareholder attributable to a ``qualified activity'' of 
a controlled foreign corporation may be reduced by the amount 
of the U.S. shareholder's pro rata share of certain prior year 
deficits attributable to the same qualified activity. In the 
case of a qualified financial institution, qualified activity 
consists of any activity giving rise to foreign personal 
holding company income, but only if the controlled foreign 
corporation was predominantly engaged in the active conduct of 
a banking, financing, or similar business in both the year in 
which the corporation earned the income and the year in which 
the corporation incurred the deficit. Similarly, in the case of 
a qualified insurance company, qualified activity consists of 
activity giving rise to insurance income or foreign personal 
holding company income, but only if the controlled foreign 
corporation was predominantly engaged in the active conduct of 
an insurance business in both the year in which the corporation 
earned the income and the year in which the corporation 
incurred the deficit. For this purpose, ``predominantly engaged 
in the active conduct of a banking, insurance, financing, or 
similar business'' is defined under present law by reference to 
the use of the term for purposes of the separate foreign tax 
credit limitations.\219\ The present-law meaning of 
``predominantly engaged'' for purposes of section 952(c)(1)(B) 
remains unchanged under the provision.
---------------------------------------------------------------------------
    \218\ See Treas. Reg. sec. 1.904-4(e).
    \219\ See H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-621 (1986); 
Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess., 
General Explanation of the Tax Reform Act of 1986, at 984 (1987).
---------------------------------------------------------------------------
      The provision requires the Treasury Secretary to specify 
the treatment of financial services income received or accrued 
by pass-through entities that are not members of a financial 
services group. The Committee expects these regulations to be 
generally consistent with regulations currently in effect.
``Base difference'' items
      Creditable foreign taxes that are imposed on amounts that 
do not constitute income under U.S. tax principles are treated 
as imposed on general limitation income.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2006. Taxes paid or accrued 
in a taxable year beginning before January 1, 2007, and carried 
to any subsequent taxable year are treated as if this provision 
were in effect on the date such taxes were paid or accrued. 
Thus, such taxes are assigned to one of the two foreign tax 
credit limitation categories, as appropriate. The Treasury 
Secretary is given authority to provide by regulations for the 
allocation of income with respect to taxes carried back to pre-
effective-date years (in which more than two limitation 
categories are in effect).

                            SENATE AMENDMENT

      Under the provision, creditable foreign taxes that are 
imposed on amounts that do not constitute income under U.S. tax 
principles are treated as imposed either on general limitation 
income or on financial services income, at the taxpayer's 
election. Once made, this election applies to all such taxes 
and is revocable only with the consent of the Secretary.
      Effective date.--The provision is effective for taxable 
years ending after date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, with a 
modification relating to base differences. As in the House 
bill, creditable foreign taxes that are imposed on amounts that 
do not constitute income under U.S. tax principles are treated 
as imposed on general limitation income, as of the general 
effective date of the House bill provision. The conference 
agreement adds a provision under which any such taxes arising 
in taxable years beginning after December 31, 2004, but before 
January 1, 2007 (when the number of limitation categories is 
reduced to two), are treated as imposed on either general 
limitation income or financial services income, at the 
taxpayer's election. Once made, this election applies to all 
such taxes for the taxable years described above and is 
revocable only with the consent of the Treasury Secretary.
4. Apply look-through rules for dividends from noncontrolled section 
        902 corporations (sec. 304 of the House bill, sec. 202 of the 
        Senate amendment, and sec. 904 of the Code)

                              PRESENT LAW

      U.S. persons may credit foreign taxes against U.S. tax on 
foreign-source income. In general, the amount of foreign tax 
credits that may be claimed in a year is subject to a 
limitation that prevents taxpayers from using foreign tax 
credits to offset U.S. tax on U.S.-source income. Separate 
limitations are also applied to specific categories of income.
      Special foreign tax credit limitations apply in the case 
of dividends received from a foreign corporation in which the 
taxpayer owns at least 10 percent of the stock by vote and 
which is not a controlled foreign corporation (a so-called 
``10/50 company''). Dividends paid by a 10/50 company that is 
not a passive foreign investment company out of earnings and 
profits accumulated in taxable years beginning before January 
1, 2003 are subject to a single foreign tax credit limitation 
for all 10/50 companies (other than passive foreign investment 
companies).\220\ Dividends paid by a 10/50 company that is a 
passive foreign investment company out of earnings and profits 
accumulated in taxable years beginning before January 1, 2003 
continue to be subject to a separate foreign tax credit 
limitation for each such 10/50 company. Dividends paid by a 10/
50 company out of earnings and profits accumulated in taxable 
years after December 31, 2002 are treated as income in a 
foreign tax credit limitation category in proportion to the 
ratio of the 10/50 company's earnings and profits attributable 
to income in such foreign tax credit limitation category to its 
total earnings and profits (a ``look-through'' approach).
---------------------------------------------------------------------------
    \220\ Dividends paid by a 10/50 company in taxable years beginning 
before January 1, 2003 are subject to a separate foreign tax credit 
limitation for each 10/50 company.
---------------------------------------------------------------------------
      For these purposes, distributions are treated as made 
from the most recently accumulated earnings and profits. 
Regulatory authority is granted to provide rules regarding the 
treatment of distributions out of earnings and profits for 
periods prior to the taxpayer's acquisition of such stock.

                               HOUSE BILL

      The provision generally applies the look-through approach 
to dividends paid by a 10/50 company regardless of the year in 
which the earnings and profits out of which the dividend is 
paid were accumulated.\221\ If the Treasury Secretary 
determines that a taxpayer has inadequately substantiated that 
it assigned a dividend from a 10/50 company to the proper 
foreign tax credit limitation category, the dividend is treated 
as passive category income for foreign tax credit basketing 
purposes.\222\
---------------------------------------------------------------------------
    \221\ This look-through treatment also applies to dividends that a 
controlled foreign corporation receives from a 10/50 company and then 
distributes to a U.S. shareholder.
    \222\ It is anticipated that the Treasury Secretary will reconsider 
the operation of the foreign tax credit regulations to ensure that the 
high-tax income rules apply appropriately to dividends treated as 
passive category income because of inadequate substantiation.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2002. The provision also 
provides transition rules regarding the use of pre-effective-
date foreign tax credits associated with a 10/50-company 
separate limitation category in post-effective-date years. 
Look-through principles similar to those applicable to post-
effective-date dividends from a 10/50 company apply to 
determine the appropriate foreign tax credit limitation 
category or categories with respect to carrying forward foreign 
tax credits into future years. The provision allows the 
Treasury Secretary to issue regulations addressing the 
carryback of foreign tax credits associated with a dividend 
from a 10/50 company to pre-effective-date years.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
5. Attribution of stock ownership through partnerships in determining 
        section 902 and 960 credits (sec. 305 of the House bill, sec. 
        213 of the Senate amendment, and sec. 902 of the Code)

                              PRESENT LAW

      Under section 902, a domestic corporation that receives a 
dividend from a foreign corporation in which it owns 10 percent 
or more of the voting stock is deemed to have paid a portion of 
the foreign taxes paid by such foreign corporation. Thus, such 
a domestic corporation is eligible to claim a foreign tax 
credit with respect to such deemed-paid taxes. The domestic 
corporation that receives a dividend is deemed to have paid a 
portion of the foreign corporation's post-1986 foreign income 
taxes based on the ratio of the amount of the dividend to the 
foreign corporation's post-1986 undistributed earnings and 
profits.
      Foreign income taxes paid or accrued by lower-tier 
foreign corporations also are eligible for the deemed-paid 
credit if the foreign corporation falls within a qualified 
group (sec. 902(b)). A ``qualified group'' includes certain 
foreign corporations within the first six tiers of a chain of 
foreign corporations if, among other things, the product of the 
percentage ownership of voting stock at each level of the chain 
(beginning from the domestic corporation) equals at least five 
percent. In addition, in order to claim indirect credits for 
foreign taxes paid by certain fourth-, fifth-, and sixth-tier 
corporations, such corporations must be controlled foreign 
corporations (within the meaning of sec. 957) and the 
shareholder claiming the indirect credit must be a U.S. 
shareholder (as defined in sec. 951(b)) with respect to the 
controlled foreign corporations. The application of the 
indirect foreign tax credit below the third tier is limited to 
taxes paid in taxable years during which the payor is a 
controlled foreign corporation. Foreign taxes paid below the 
sixth tier of foreign corporations are ineligible for the 
indirect foreign tax credit.
      Section 960 similarly permits a domestic corporation with 
subpart F inclusions from a controlled foreign corporation to 
claim deemed-paid foreign tax credits with respect to foreign 
taxes paid or accrued by the controlled foreign corporation on 
its subpart F income.
      The foreign tax credit provisions in the Code do not 
specifically address whether a domestic corporation owning 10 
percent or more of the voting stock of a foreign corporation 
through a partnership is entitled to a deemed-paid foreign tax 
credit.\223\ In Rev. Rul. 71-141,\224\ the IRS held that a 
foreign corporation's stock held indirectly by two domestic 
corporations through their interests in a domestic general 
partnership is attributed to such domestic corporations for 
purposes of determining the domestic corporations' eligibility 
to claim a deemed-paid foreign tax credit with respect to the 
foreign taxes paid by such foreign corporation. Accordingly, a 
general partner of a domestic general partnership is permitted 
to claim deemed-paid foreign tax credits with respect to a 
dividend distribution from the foreign corporation to the 
partnership.
---------------------------------------------------------------------------
    \223\ Under section 901(b)(5), an individual member of a 
partnership or a beneficiary of an estate or trust generally may claim 
a direct foreign tax credit with respect to the amount of his or her 
proportionate share of the foreign taxes paid or accrued by the 
partnership, estate, or trust. This rule does not specifically apply to 
corporations that are either members of a partnership or beneficiaries 
of an estate or trust. However, section 702(a)(6) provides that each 
partner (including individuals or corporations) of a partnership must 
take into account separately its distributive share of the 
partnership's foreign taxes paid or accrued. In addition, under section 
703(b)(3), the election under section 901 (whether to credit the 
foreign taxes) is made by each partner separately.
    \224\ 1971-1 C.B. 211.
---------------------------------------------------------------------------
      However, in 1997, the Treasury Department issued final 
regulations under section 902, and the preamble to the 
regulations states that ``[t]he final regulations do not 
resolve under what circumstances a domestic corporate partner 
may compute an amount of foreign taxes deemed paid with respect 
to dividends received from a foreign corporation by a 
partnership or other pass-through entity.'' \225\ In 
recognition of the holding in Rev. Rul. 71-141, the preamble to 
the final regulations under section 902 states that a 
``domestic shareholder'' for purposes of section 902 is a 
domestic corporation that ``owns'' the requisite voting stock 
in a foreign corporation rather than one that ``owns directly'' 
the voting stock. At the same time, the preamble states that 
the IRS is still considering under what other circumstances 
Rev. Rul. 71-141 should apply. Consequently, uncertainty 
remains regarding whether a domestic corporation owning 10 
percent or more of the voting stock of a foreign corporation 
through a partnership is entitled to a deemed-paid foreign tax 
credit (other than through a domestic general partnership).
---------------------------------------------------------------------------
    \225\ T.D. 8708, 1997-1 C.B. 137.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision clarifies that a domestic corporation is 
entitled to claim deemed-paid foreign tax credits with respect 
to a foreign corporation that is held indirectly through a 
foreign or domestic partnership, provided that the domestic 
corporation owns (indirectly through the partnership) 10 
percent or more of the foreign corporation's voting stock. No 
inference is intended as to the treatment of such deemed-paid 
foreign tax credits under present law. The provision also 
clarifies that both individual and corporate partners (or 
estate or trust beneficiaries) may claim direct foreign tax 
credits with respect to their proportionate shares of taxes 
paid or accrued by a partnership (or estate or trust).
      Effective date.--The provision applies to taxes of 
foreign corporations for taxable years of such corporations 
beginning after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
6. Foreign tax credit treatment of deemed payments under section 367(d) 
        of the Code (sec. 306 of the House bill, sec. 229 of the Senate 
        amendment, and sec. 367(d) of the Code)

                              PRESENT LAW

      In the case of transfers of intangible property to 
foreign corporations by means of contributions and certain 
other nonrecognition transactions, special rules apply that are 
designed to mitigate the tax avoidance that may arise from 
shifting the income attributable to intangible property 
offshore. Under section 367(d), the outbound transfer of 
intangible property is treated as a sale of the intangible for 
a stream of contingent payments. The amounts of these deemed 
payments must be commensurate with the income attributable to 
the intangible. The deemed payments are included in gross 
income of the U.S. transferor as ordinary income, and the 
earnings and profits of the foreign corporation to which the 
intangible was transferred are reduced by such amounts.
      The Taxpayer Relief Act of 1997 (the ``1997 Act'') 
repealed a rule that treated all such deemed payments as giving 
rise to U.S.-source income. Because the foreign tax credit is 
generally limited to the U.S. tax imposed on foreign-source 
income, the prior-law rule reduced the taxpayer's ability to 
claim foreign tax credits. As a result of the repeal of the 
rule, the source of payments deemed received under section 
367(d) is determined under general sourcing rules. These rules 
treat income from sales of intangible property for contingent 
payments the same as royalties, with the result that the deemed 
payments may give rise to foreign-source income.\226\
---------------------------------------------------------------------------
    \226\ Secs. 865(d), 862(a).
---------------------------------------------------------------------------
      The 1997 Act did not address the characterization of the 
deemed payments for purposes of applying the foreign tax credit 
separate limitation categories.\227\ If the deemed payments are 
treated like proceeds of a sale, then they could fall into the 
passive category; if the deemed payments are treated like 
royalties, then in many cases they could fall into the general 
category (under look-through rules applicable to payments of 
dividends, interest, rents, and royalties received from 
controlled foreign corporations).\228\
---------------------------------------------------------------------------
    \227\ Sec. 904(d).
    \228\ Sec. 904(d)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision specifies that deemed payments under 
section 367(d) are treated as royalties for purposes of 
applying the separate limitation categories of the foreign tax 
credit.
      Effective date.--The provision is effective for amounts 
treated as received on or after August 5, 1997 (the effective 
date of the relevant provision of the 1997 Act).

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
7. United States property not to include certain assets of controlled 
        foreign corporations (sec. 307 of the House bill, sec. 227 of 
        the Senate amendment, and sec. 956 of the Code)

                              PRESENT LAW

      In general, the subpart F rules \229\ require U.S. 
shareholders with a 10-percent or greater interest in a 
controlled foreign corporation (``U.S. 10-percent 
shareholders'') to include in taxable income their pro rata 
shares of certain income of the controlled foreign corporation 
(referred to as ``subpart F income'') when such income is 
earned, whether or not the earnings are distributed currently 
to the shareholders. In addition, the U.S. 10-percent 
shareholders of a controlled foreign corporation are subject to 
U.S. tax on their pro rata shares of the controlled foreign 
corporation's earnings to the extent invested by the controlled 
foreign corporation in certain U.S. property in a taxable 
year.\230\
---------------------------------------------------------------------------
    \229\ Secs. 951-964.
    \230\ Sec. 951(a)(1)(B).
---------------------------------------------------------------------------
      A shareholder's income inclusion with respect to a 
controlled foreign corporation's investment in U.S. property 
for a taxable year is based on the controlled foreign 
corporation's average investment in U.S. property for such 
year. For this purpose, the U.S. property held (directly or 
indirectly) by the controlled foreign corporation must be 
measured as of the close of each quarter in the taxable 
year.\231\ The amount taken into account with respect to any 
property is the property's adjusted basis as determined for 
purposes of reporting the controlled foreign corporation's 
earnings and profits, reduced by any liability to which the 
property is subject. The amount determined for inclusion in 
each taxable year is the shareholder's pro rata share of an 
amount equal to the lesser of: (1) the controlled foreign 
corporation's average investment in U.S. property as of the end 
of each quarter of such taxable year, to the extent that such 
investment exceeds the foreign corporation's earnings and 
profits that were previously taxed on that basis; or (2) the 
controlled foreign corporation's current or accumulated 
earnings and profits (but not including a deficit), reduced by 
distributions during the year and by earnings that have been 
taxed previously as earnings invested in U.S. property.\232\ An 
income inclusion is required only to the extent that the amount 
so calculated exceeds the amount of the controlled foreign 
corporation's earnings that have been previously taxed as 
subpart F income.\233\
---------------------------------------------------------------------------
    \231\ Sec. 956(a).
    \232\ Secs. 956 and 959.
    \233\ Secs. 951(a)(1)(B) and 959.
---------------------------------------------------------------------------
      For purposes of section 956, U.S. property generally is 
defined to include tangible property located in the United 
States, stock of a U.S. corporation, an obligation of a U.S. 
person, and certain intangible assets including a patent or 
copyright, an invention, model or design, a secret formula or 
process or similar property right which is acquired or 
developed by the controlled foreign corporation for use in the 
United States.\234\
---------------------------------------------------------------------------
    \234\ Sec. 956(c)(1).
---------------------------------------------------------------------------
      Specified exceptions from the definition of U.S. property 
are provided for: (1) obligations of the United States, money, 
or deposits with persons carrying on the banking business; (2) 
certain export property; (3) certain trade or business 
obligations; (4) aircraft, railroad rolling stock, vessels, 
motor vehicles or containers used in transportation in foreign 
commerce and used predominantly outside of the United States; 
(5) certain insurance company reserves and unearned premiums 
related to insurance of foreign risks; (6) stock or debt of 
certain unrelated U.S. corporations; (7) moveable property 
(other than a vessel or aircraft) used for the purpose of 
exploring, developing, or certain other activities in 
connection with the ocean waters of the U.S. Continental Shelf; 
(8) an amount of assets equal to the controlled foreign 
corporation's accumulated earnings and profits attributable to 
income effectively connected with a U.S. trade or business; (9) 
property (to the extent provided in regulations) held by a 
foreign sales corporation and related to its export activities; 
(10) certain deposits or receipts of collateral or margin by a 
securities or commodities dealer, if such deposit is made or 
received on commercial terms in the ordinary course of the 
dealer's business as a securities or commodities dealer; and 
(11) certain repurchase and reverse repurchase agreement 
transactions entered into by or with a dealer in securities or 
commodities in the ordinary course of its business as a 
securities or commodities dealer.\235\
---------------------------------------------------------------------------
    \235\ Sec. 956(c)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill adds two new exceptions from the 
definition of U.S. property for determining current income 
inclusion by a U.S. 10-percent shareholder with respect to an 
investment in U.S. property by a controlled foreign 
corporation.
      The first exception generally applies to securities 
acquired and held by a controlled foreign corporation in the 
ordinary course of its trade or business as a dealer in 
securities. The exception applies only if the controlled 
foreign corporation dealer: (1) accounts for the securities as 
securities held primarily for sale to customers in the ordinary 
course of business; and (2) disposes of such securities (or 
such securities mature while being held by the dealer) within a 
period consistent with the holding of securities for sale to 
customers in the ordinary course of business.
      The second exception generally applies to the acquisition 
by a controlled foreign corporation of obligations issued by a 
U.S. person that is not a domestic corporation and that is not 
(1) a U.S. 10-percent shareholder of the controlled foreign 
corporation, or (2) a partnership, estate or trust in which the 
controlled foreign corporation or any related person is a 
partner, beneficiary or trustee immediately after the 
acquisition by the controlled foreign corporation of such 
obligation.
      Effective date.--The House bill provision is effective 
for taxable years of foreign corporations beginning after 
December 31, 2004, and for taxable years of United States 
shareholders with or within which such taxable years of such 
foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
8. Election not to use average exchange rate for foreign tax paid other 
        than in functional currency (sec. 308 of the House bill, sec. 
        224 of the Senate amendment, and sec. 986 of the Code)

                              PRESENT LAW

      For taxpayers that take foreign income taxes into account 
when accrued, present law provides that the amount of the 
foreign tax credit generally is determined by translating the 
amount of foreign taxes paid in foreign currencies into a U.S. 
dollar amount at the average exchange rate for the taxable year 
to which such taxes relate.\236\ This rule applies to foreign 
taxes paid directly by U.S. taxpayers, which taxes are 
creditable in the year paid or accrued, and to foreign taxes 
paid by foreign corporations that are deemed paid by a U.S. 
corporation that is a shareholder of the foreign corporation, 
and hence creditable in the year that the U.S. corporation 
receives a dividend or has an income inclusion from the foreign 
corporation. This rule does not apply to any foreign income 
tax: (1) that is paid after the date that is two years after 
the close of the taxable year to which such taxes relate; (2) 
of an accrual-basis taxpayer that is actually paid in a taxable 
year prior to the year to which the tax relates; or (3) that is 
denominated in an inflationary currency (as defined by 
regulations).
---------------------------------------------------------------------------
    \236\ Sec. 986(a)(1).
---------------------------------------------------------------------------
      Foreign taxes that are not eligible for translation at 
the average exchange rate generally are translated into U.S. 
dollar amounts using the exchange rates as of the time such 
taxes are paid. However, the Secretary is authorized to issue 
regulations that would allow foreign tax payments to be 
translated into U.S. dollar amounts using an average exchange 
rate for a specified period.\237\
---------------------------------------------------------------------------
    \237\ Sec. 986(a)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      For taxpayers that are required under present law to 
translate foreign income tax payments at the average exchange 
rate, the House bill provides an election to translate such 
taxes into U.S. dollar amounts using the exchange rates as of 
the time such taxes are paid, provided the foreign income taxes 
are denominated in a currency other than the taxpayer's 
functional currency.\238\ Any election under the provision 
applies to the taxable year for which the election is made and 
to all subsequent taxable years unless revoked with the consent 
of the Secretary. The House bill authorizes the Secretary to 
issue regulations that apply the election to foreign income 
taxes attributable to a qualified business unit.
---------------------------------------------------------------------------
    \238\ Electing taxpayers translate foreign income tax payments 
pursuant to the same present-law rules that apply to taxpayers that are 
required to translate foreign income taxes using the exchange rates as 
of the time such taxes are paid.
---------------------------------------------------------------------------
      Effective date.--The House bill provision is effective 
with respect to taxable years beginning after December 31, 
2004.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The Senate amendment provision is 
effective with respect to taxable years beginning after 
December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment. In addition, the conference agreement 
provides that the election does not apply to regulated 
investment companies that take into account income on an 
accrual basis. Instead, the conference agreement provides that 
foreign income taxes paid or accrued by a regulated investment 
company with respect to such income are translated into U.S. 
dollar amounts using the exchange rate as of the date the 
income accrues.
9. Eliminate secondary withholding tax with respect to dividends paid 
        by certain foreign corporations (sec. 309 of the House bill, 
        sec. 215 of the Senate amendment, and sec. 871 of the Code)

                              PRESENT LAW

      Nonresident individuals who are not U.S. citizens and 
foreign corporations (collectively, foreign persons) are 
subject to U.S. tax on income that is effectively connected 
with the conduct of a U.S. trade or business; the U.S. tax on 
such income is calculated in the same manner and at the same 
graduated rates as the tax on U.S. persons (secs. 871(b) and 
882). Foreign persons also are subject to a 30-percent gross 
basis tax, collected by withholding, on certain U.S.-source 
passive income (e.g., interest and dividends) that is not 
effectively connected with a U.S. trade or business. This 30-
percent withholding tax may be reduced or eliminated pursuant 
to an applicable tax treaty. Foreign persons generally are not 
subject to U.S. tax on foreign-source income that is not 
effectively connected with a U.S. trade or business.
      In general, dividends paid by a domestic corporation are 
treated as being from U.S. sources and dividends paid by a 
foreign corporation are treated as being from foreign sources. 
Thus, dividends paid by foreign corporations to foreign persons 
generally are not subject to withholding tax because such 
income generally is treated as foreign-source income.
      An exception from this general rule applies in the case 
of dividends paid by certain foreign corporations. If a foreign 
corporation derives 25 percent or more of its gross income as 
income effectively connected with a U.S. trade or business for 
the three-year period ending with the close of the taxable year 
preceding the declaration of a dividend, then a portion of any 
dividend paid by the foreign corporation to its shareholders 
will be treated as U.S.-source income and, in the case of 
dividends paid to foreign shareholders, will be subject to the 
30-percent withholding tax (sec. 861(a)(2)(B)). This rule is 
sometimes referred to as the ``secondary withholding tax.'' The 
portion of the dividend treated as U.S.-source income is equal 
to the ratio of the gross income of the foreign corporation 
that was effectively connected with its U.S. trade or business 
over the total gross income of the foreign corporation during 
the three-year period ending with the close of the preceding 
taxable year. The U.S.-source portion of the dividend paid by 
the foreign corporation to its foreign shareholders is subject 
to the 30-percent withholding tax.
      Under the branch profits tax provisions, the United 
States taxes foreign corporations engaged in a U.S. trade or 
business on amounts of U.S. earnings and profits that are 
shifted out of the U.S. branch of the foreign corporation. The 
branch profits tax is comparable to the second-level taxes 
imposed on dividends paid by a domestic corporation to its 
foreign shareholders. The branch profits tax is 30 percent of 
the foreign corporation's ``dividend equivalent amount,'' which 
generally is the earnings and profits of a U.S. branch of a 
foreign corporation attributable to its income effectively 
connected with a U.S. trade or business (secs. 884(a) and (b)).
      If a foreign corporation is subject to the branch profits 
tax, then no secondary withholding tax is imposed on dividends 
paid by the foreign corporation to its shareholders (sec. 
884(e)(3)(A)). If a foreign corporation is a qualified resident 
of a tax treaty country and claims an exemption from the branch 
profits tax pursuant to the treaty, the secondary withholding 
tax could apply with respect to dividends it pays to its 
shareholders. Several tax treaties (including treaties that 
prevent imposition of the branch profits tax), however, exempt 
dividends paid by the foreign corporation from the secondary 
withholding tax.

                               HOUSE BILL

      The provision eliminates the secondary withholding tax 
with respect to dividends paid by certain foreign corporations.
      Effective date.--The provision is effective for payments 
made after December 31, 2004.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
10. Equal treatment for interest paid by foreign partnerships and 
        foreign corporations (sec. 310 of the House bill, sec. 228 of 
        the Senate amendment, and sec. 861 of the Code)

                              PRESENT LAW

      In general, interest income from bonds, notes or other 
interest-bearing obligations of noncorporate U.S. residents or 
domestic corporations is treated as U.S.-source income.\239\ 
Other interest (e.g., interest on obligations of foreign 
corporations and foreign partnerships) generally is treated as 
foreign-source income. However, Treasury regulations provide 
that a foreign partnership is a U.S. resident for purposes of 
this rule if at any time during its taxable year it is engaged 
in a trade or business in the United States.\240\ Therefore, 
any interest received from such a foreign partnership is U.S.-
source income.
---------------------------------------------------------------------------
    \239\ Sec. 861(a)(1).
    \240\ Treas. Reg. sec. 1.861-2(a)(2).
---------------------------------------------------------------------------
      Notwithstanding the general rule described above, in the 
case of a foreign corporation engaged in a U.S. trade or 
business (or having gross income that is treated as effectively 
connected with the conduct of a U.S. trade or business), 
interest paid by such U.S. trade or business is treated as if 
it were paid by a domestic corporation (i.e., such interest is 
treated as U.S.-source income).\241\
---------------------------------------------------------------------------
    \241\ Sec. 884(f)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill treats interest paid by foreign 
partnerships in a manner similar to the treatment of interest 
paid by foreign corporations. Thus, interest paid by a foreign 
partnership is treated as U.S.-source income only if the 
interest is paid by a U.S. trade or business conducted by the 
partnership or is allocable to income that is treated as 
effectively connected with the conduct of a U.S. trade or 
business. The House bill applies only to foreign partnerships 
that are predominantly engaged in the active conduct of a trade 
or business outside the United States.
      Effective date.--This House bill provision is effective 
for taxable years beginning after December 31, 2003.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
11. Look-through treatment of payments between related controlled 
        foreign corporations (sec. 311 of the House bill, sec. 222 of 
        the Senate amendment, and sec. 954 of the Code)

                              PRESENT LAW

      In general, the rules of subpart F (secs. 951-964) 
require U.S. shareholders with a 10-percent or greater interest 
in a controlled foreign corporation to include certain income 
of the controlled foreign corporation (referred to as ``subpart 
F income'') on a current basis for U.S. tax purposes, 
regardless of whether the income is distributed to the 
shareholders.
      Subpart F income includes foreign base company income. 
One category of foreign base company income is foreign personal 
holding company income. For subpart F purposes, foreign 
personal holding company income generally includes dividends, 
interest, rents and royalties, among other types of income. 
However, foreign personal holding company income does not 
include dividends and interest received by a controlled foreign 
corporation from a related corporation organized and operating 
in the same foreign country in which the controlled foreign 
corporation is organized, or rents and royalties received by a 
controlled foreign corporation from a related corporation for 
the use of property within the country in which the controlled 
foreign corporation is organized. Interest, rent, and royalty 
payments do not qualify for this exclusion to the extent that 
such payments reduce the subpart F income of the payor.

                               HOUSE BILL

      Under the provision, dividends, interest, rents, and 
royalties received by one controlled foreign corporation from a 
related controlled foreign corporation are not treated as 
foreign personal holding company income to the extent 
attributable or properly allocable to non-subpart-F income of 
the payor. For these purposes, a related controlled foreign 
corporation is a controlled foreign corporation that controls 
or is controlled by the other controlled foreign corporation, 
or a controlled foreign corporation that is controlled by the 
same person or persons that control the other controlled 
foreign corporation. Ownership of more than 50 percent of the 
controlled foreign corporation's stock (by vote or value) 
constitutes control for these purposes.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2004, and taxable years of U.S. shareholders with or within 
which such taxable years of such foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or Senate amendment provision.
12. Look-through treatment under subpart F for sales of partnership 
        interests (sec. 312 of the House bill, sec. 223 of the Senate 
        amendment, and sec. 954 of the Code)

                              PRESENT LAW

      In general, the subpart F rules (secs. 951-964) require 
U.S. shareholders with a 10-percent or greater interest in a 
controlled foreign corporation to include in income currently 
for U.S. tax purposes certain types of income of the controlled 
foreign corporation, whether or not such income is actually 
distributed currently to the shareholders (referred to as 
``subpart F income''). Subpart F income includes foreign 
personal holding company income. Foreign personal holding 
company income generally consists of the following: (1) 
dividends, interest, royalties, rents, and annuities; (2) net 
gains from the sale or exchange of (a) property that gives rise 
to the preceding types of income, (b) property that does not 
give rise to income, and (c) interests in trusts, partnerships, 
and real estate mortgages investment conduits (``REMICs''); (3) 
net gains from commodities transactions; (4) net gains from 
foreign currency transactions; (5) income that is equivalent to 
interest; (6) income from notional principal contracts; and (7) 
payments in lieu of dividends. Thus, if a controlled foreign 
corporation sells a partnership interest at a gain, the gain 
generally constitutes foreign personal holding company income 
and is included in the income of 10-percent U.S. shareholders 
of the controlled foreign corporation as subpart F income.

                               HOUSE BILL

      The provision treats the sale by a controlled foreign 
corporation of a partnership interest as a sale of the 
proportionate share of partnership assets attributable to such 
interest for purposes of determining subpart F foreign personal 
holding company income. This rule applies only to partners 
owning directly, indirectly, or constructively at least 25 
percent of a capital or profits interest in the partnership. 
Thus, the sale of a partnership interest by a controlled 
foreign corporation that meets this ownership threshold 
constitutes subpart F income under the provision only to the 
extent that a proportionate sale of the underlying partnership 
assets attributable to the partnership interest would 
constitute subpart F income. The Treasury Secretary is directed 
to prescribe such regulations as may be appropriate to prevent 
the abuse of this provision.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2004, and taxable years of U.S. shareholders with or within 
which such taxable years of such foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
13. Repeal of foreign personal holding company rules and foreign 
        investment company rules (sec. 313 of the House bill, sec. 211 
        of the Senate amendment, and secs. 542, 551-558, 954, 1246, and 
        1247 of the Code)

                              PRESENT LAW

      Income earned by a foreign corporation from its foreign 
operations generally is subject to U.S. tax only when such 
income is distributed to any U.S. persons that hold stock in 
such corporation. Accordingly, a U.S. person that conducts 
foreign operations through a foreign corporation generally is 
subject to U.S. tax on the income from those operations when 
the income is repatriated to the United States through a 
dividend distribution to the U.S. person. The income is 
reported on the U.S. person's tax return for the year the 
distribution is received, and the United States imposes tax on 
such income at that time. The foreign tax credit may reduce the 
U.S. tax imposed on such income.
      Several sets of anti-deferral rules impose current U.S. 
tax on certain income earned by a U.S. person through a foreign 
corporation. Detailed rules for coordination among the anti-
deferral rules are provided to prevent the U.S. person from 
being subject to U.S. tax on the same item of income under 
multiple rules.
      The Code sets forth the following anti-deferral rules: 
the controlled foreign corporation rules of subpart F (secs. 
951-964); the passive foreign investment company rules (secs. 
1291-1298); the foreign personal holding company rules (secs. 
551-558); the personal holding company rules (secs. 541-547); 
the accumulated earnings tax rules (secs. 531-537); and the 
foreign investment company rules (secs. 1246-1247).

                               HOUSE BILL

      The provision: (1) eliminates the rules applicable to 
foreign personal holding companies and foreign investment 
companies; (2) excludes foreign corporations from the 
application of the personal holding company rules; and (3) 
includes as subpart F foreign personal holding company income 
personal services contract income that is subject to the 
present-law foreign personal holding company rules.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2004, and taxable years of U.S. shareholders with or within 
which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment provision is the same as the House 
bill provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
14. Determination of foreign personal holding company income with 
        respect to transactions in commodities (sec. 314 of the House 
        bill, sec. 206 of the Senate amendment, and sec. 954 of the 
        Code)

                              PRESENT LAW

Subpart F foreign personal holding company income
      Under the subpart F rules, U.S. shareholders with a 10-
percent or greater interest in a controlled foreign corporation 
(``U.S. 10-percent shareholders'') are subject to U.S. tax 
currently on certain income earned by the controlled foreign 
corporation, whether or not such income is distributed to the 
shareholders. The income subject to current inclusion under the 
subpart F rules includes, among other things, ``foreign 
personal holding company income.''
      Foreign personal holding company income generally 
consists of the following: dividends, interest, royalties, 
rents and annuities; net gains from sales or exchanges of (1) 
property that gives rise to the foregoing types of income, (2) 
property that does not give rise to income, and (3) interests 
in trusts, partnerships, and real estate mortgage investment 
conduits (``REMICs''); net gains from commodities transactions; 
net gains from foreign currency transactions; income that is 
equivalent to interest; income from notional principal 
contracts; and payments in lieu of dividends.
      With respect to transactions in commodities, foreign 
personal holding company income does not consist of gains or 
losses which arise out of bona fide hedging transactions that 
are reasonably necessary to the conduct of any business by a 
producer, processor, merchant, or handler of a commodity in the 
manner in which such business is customarily and usually 
conducted by others.\242\ In addition, foreign personal holding 
company income does not consist of gains or losses which are 
comprised of active business gains or losses from the sale of 
commodities, but only if substantially all of the controlled 
foreign corporation's business is as an active producer, 
processor, merchant, or handler of commodities.\243\
---------------------------------------------------------------------------
    \242\ For hedging transactions entered into on or after January 31, 
2003, Treasury regulations provide that gains or losses from a 
commodities hedging transaction generally are excluded from the 
definition of foreign personal holding company income if the 
transaction is with respect to the controlled foreign corporation's 
business as a producer, processor, merchant or handler of commodities, 
regardless of whether the transaction is a hedge with respect to a sale 
of commodities in the active conduct of a commodities business by the 
controlled foreign corporation. The regulations also provide that, for 
purposes of satisfying the requirements for exclusion from the 
definition of foreign personal holding company income, a producer, 
processor, merchant or handler of commodities includes a controlled 
foreign corporation that regularly uses commodities in a manufacturing, 
construction, utilities, or transportation business (Treas. Reg. sec. 
1.954-2(f)(2)(v)). However, the regulations provide that a controlled 
foreign corporation is not a producer, processor, merchant or handler 
of commodities (and therefore would not satisfy the requirements for 
exclusion) if its business is primarily financial (Treas. Reg. sec. 
1.954-2(f)(2)(v)).
    \243\ Treasury regulations provide that substantially all of a 
controlled foreign corporation's business is as an active producer, 
processor, merchant or handler of commodities if: (1) the sum of its 
gross receipts from all of its active sales of commodities in such 
capacity and its gross receipts from all of its commodities hedging 
transactions that qualify for exclusion from the definition of foreign 
personal holding company income, equals or exceeds (2) 85 percent of 
its total receipts for the taxable year (computed as though the 
controlled foreign corporation was a domestic corporation) (Treas. Reg. 
sec. 1.954-2(f)(2)(iii)(C)).
---------------------------------------------------------------------------
Hedging transactions
      Under present law, the term ``capital asset'' does not 
include any hedging transaction which is clearly identified as 
such before the close of the day on which it was acquired, 
originated, or entered into (or such other time as the 
Secretary may by regulations prescribe).\244\ The term 
``hedging transaction'' means any transaction entered into by 
the taxpayer in the normal course of the taxpayer's trade or 
business primarily: (1) to manage risk of price changes or 
currency fluctuations with respect to ordinary property which 
is held or to be held by the taxpayer; (2) to manage risk of 
interest rate or price changes or currency fluctuations with 
respect to borrowings made or to be made, or ordinary 
obligations incurred or to be incurred, by the taxpayer; or (3) 
to manage such other risks as the Secretary may prescribe in 
regulations.\245\
---------------------------------------------------------------------------
    \244\ Sec. 1221(a)(7).
    \245\ Sec. 1221(b)(2)(A).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill modifies the requirements that must be 
satisfied for gains or losses from a commodities hedging 
transaction to qualify for exclusion from the definition of 
subpart F foreign personal holding company income. Under the 
House bill, gains or losses from a transaction with respect to 
a commodity are not treated as foreign personal holding company 
income if the transaction satisfies the general definition of a 
hedging transaction under section 1221(b)(2). For purposes of 
the House bill, the general definition of a hedging transaction 
under section 1221(b)(2) is modified to include any transaction 
with respect to a commodity entered into by a controlled 
foreign corporation in the normal course of the controlled 
foreign corporation's trade or business primarily: (1) to 
manage risk of price changes or currency fluctuations with 
respect to ordinary property or property described in section 
1231(b) which is held or to be held by the controlled foreign 
corporation; or (2) to manage such other risks as the Secretary 
may prescribe in regulations. Gains or losses from a 
transaction that satisfies the modified definition of a hedging 
transaction are excluded from the definition of foreign 
personal holding company income only if the transaction is 
clearly identified as a hedging transaction in accordance with 
the hedge identification requirements that apply generally to 
hedging transactions under section 1221(b)(2).\246\
---------------------------------------------------------------------------
    \246\ Sec. 1221(a)(7) and (b)(2)(B).
---------------------------------------------------------------------------
      The House bill also changes the requirements that must be 
satisfied for active business gains or losses from the sale of 
commodities to qualify for exclusion from the definition of 
foreign personal holding company income. Under the House bill, 
such gains or losses are not treated as foreign personal 
holding company income if substantially all of the controlled 
foreign corporation's commodities are comprised of: (1) stock 
in trade of the controlled foreign corporation or other 
property of a kind which would properly be included in the 
inventory of the controlled foreign corporation if on hand at 
the close of the taxable year, or property held by the 
controlled foreign corporation primarily for sale to customers 
in the ordinary course of the controlled foreign corporation's 
trade or business; (2) property that is used in the trade or 
business of the controlled foreign corporation and is of a 
character which is subject to the allowance for depreciation 
under section 167; or (3) supplies of a type regularly used or 
consumed by the controlled foreign corporation in the ordinary 
course of a trade or business of the controlled foreign 
corporation.\247\
---------------------------------------------------------------------------
    \247\ For purposes of determining whether substantially all of the 
controlled foreign corporation's commodities are comprised of such 
property, it is intended that the 85-percent requirement provided in 
the current Treasury regulations (as modified to reflect the changes 
made by the House bill) continue to apply.
---------------------------------------------------------------------------
      For purposes of applying the requirements for active 
business gains or losses from commodities sales to qualify for 
exclusion from the definition of foreign personal holding 
company income, the House bill also provides that commodities 
with respect to which gains or losses are not taken into 
account as foreign personal holding company income by a regular 
dealer in commodities (or financial instruments referenced to 
commodities) are not taken into account in determining whether 
substantially all of the dealer's commodities are comprised of 
the property described above.
      Effective date.--The House bill provision is effective 
with respect to transactions entered into after December 31, 
2004.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
15. Modifications to treatment of aircraft leasing and shipping income 
        (sec. 315 of the House bill, sec. 221 of the Senate amendment, 
        and sec. 954 of the Code)

                              PRESENT LAW

      In general, the subpart F rules (secs. 951-964) require 
U.S. shareholders with a 10-percent or greater interest in a 
controlled foreign corporation (``CFC'') to include currently 
in income for U.S. tax purposes certain income of the CFC 
(referred to as ``subpart F income''), without regard to 
whether the income is distributed to the shareholders (sec. 
951(a)(1)(A)). In effect, the Code treats the U.S. 10-percent 
shareholders of a CFC as having received a current distribution 
of their pro rata shares of the CFC's subpart F income. The 
amounts included in income by the CFC's U.S. 10-percent 
shareholders under these rules are subject to U.S. tax 
currently. The U.S. tax on such amounts may be reduced through 
foreign tax credits.
      Subpart F income includes foreign base company shipping 
income (sec. 954(f)). Foreign base company shipping income 
generally includes income derived from the use of an aircraft 
or vessel in foreign commerce, the performance of services 
directly related to the use of any such aircraft or vessel, the 
sale or other disposition of any such aircraft or vessel, and 
certain space or ocean activities (e.g., leasing of satellites 
for use in space). Foreign commerce generally involves the 
transportation of property or passengers between a port (or 
airport) in the U.S. and a port (or airport) in a foreign 
country, two ports (or airports) within the same foreign 
country, or two ports (or airports) in different foreign 
countries. In addition, foreign base company shipping income 
includes dividends and interest that a CFC receives from 
certain foreign corporations and any gains from the disposition 
of stock in certain foreign corporations, to the extent the 
dividends, interest, or gains are attributable to foreign base 
company shipping income. Foreign base company shipping income 
also includes incidental income derived in the course of active 
foreign base company shipping operations (e.g., income from 
temporary investments in or sales of related shipping assets), 
foreign exchange gain or loss attributable to foreign base 
company shipping operations, and a CFC's distributive share of 
gross income of any partnership and gross income received from 
certain trusts to the extent that the income would have been 
foreign base company shipping income had it been realized 
directly by the corporation.
      Subpart F income also includes foreign personal holding 
company income (sec. 954(c)). For subpart F purposes, foreign 
personal holding company income generally consists of the 
following: (1) dividends, interest, royalties, rents and 
annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and real estate mortgage investment 
conduits (``REMICs''); (3) net gains from commodities 
transactions; (4) net gains from foreign currency transactions; 
(5) income that is equivalent to interest; (6) income from 
notional principal contracts; and (7) payments in lieu of 
dividends.
      Subpart F foreign personal holding company income does 
not include rents and royalties received by a CFC in the active 
conduct of a trade or business from unrelated persons (sec. 
954(c)(2)(A)). The determination of whether rents or royalties 
are derived in the active conduct of a trade or business is 
based on all the facts and circumstances. However, the Treasury 
regulations provide certain types of rents are treated as 
derived in the active conduct of a trade or business. These 
include rents derived from property that is leased as a result 
of the performance of marketing functions by the lessor if the 
lessor (through its own officers or employees located in a 
foreign country) maintains and operates an organization in such 
country that regularly engages in the business of marketing, or 
marketing and servicing, the leased property and that is 
substantial in relation to the amount of rents derived from the 
leasing of such property. An organization in a foreign country 
is substantial in relation to rents if the active leasing 
expenses \248\ equal at least 25 percent of the adjusted 
leasing profit.\249\
---------------------------------------------------------------------------
    \248\ ``Active-leasing expenses'' are section 162 expenses properly 
allocable to rental income other than (1) deductions for compensation 
for personal services rendered by the lessor's shareholders or a 
related person, (2) deductions for rents, (3) section 167 and 168 
expenses, and (4) deductions for payments to independent contractors 
with respect to leased property. Treas. Reg. sec. 1.954-2(c)(2)(iii).
    \249\ Generally, ``adjusted leasing profit'' is rental income less 
the sum of (1) rents paid or incurred by the CFC with respect to such 
rental income; (2) section 167 and 168 expenses with respect to such 
rental income; and (3) payments to independent contractors with respect 
to such rental income. Treas. Reg. sec. 1.954-2(c)(2)(iv).
---------------------------------------------------------------------------
      Also generally excluded from subpart F foreign personal 
holding company income are rents and royalties received by the 
CFC from a related corporation for the use of property within 
the country in which the CFC was organized (sec. 954(c)(3)). 
However, rent and royalty payments do not qualify for this 
exclusion to the extent that such payments reduce subpart F 
income of the payor.

                               HOUSE BILL

      The provision repeals the subpart F rules relating to 
foreign base company shipping income. The bill also amends the 
exception from foreign personal holding company income 
applicable to rents or royalties derived from unrelated persons 
in an active trade or business by providing a safe harbor for 
rents derived from leasing an aircraft or vessel in foreign 
commerce. Such rents are excluded from foreign personal holding 
company income if the active leasing expenses comprise at least 
10 percent of the profit on the lease. This provision is to be 
applied in accordance with existing regulations under section 
954(c)(2)(A) by comparing the lessor's ``active leasing 
expenses'' for its pool of leased assets to its ``adjusted 
leasing profit.''
      The safe harbor will not prevent a lessor from otherwise 
showing that it actively carries on a trade or business. In 
this regard, the requirements of section 954(c)(2)(A) will be 
met if a lessor regularly and directly performs active and 
substantial marketing, remarketing, management and operational 
functions with respect to the leasing of an aircraft or vessel 
(or component engines). This will be the case regardless of 
whether the lessor engages in marketing of the lease as a form 
of financing (versus marketing the property as such) or whether 
the lease is classified as a finance lease or operating lease 
for financial accounting purposes. If a lessor acquires, from 
an unrelated or related party, a ship or aircraft subject to an 
existing FSC or ETI lease, the requirements of section 
954(c)(2)(A) will be satisfied if, following the acquisition, 
the lessor performs active and substantial management, 
operational, and remarketing functions with respect to the 
leased property. If such a lease is transferred to a CFC 
lessor, it will no longer be eligible for FSC or ETI benefits.
      An aircraft or vessel is considered to be leased in 
foreign commerce if it is used for the transportation of 
property or passengers between a port (or airport) in the 
United States and one in a foreign country or between foreign 
ports (or airports), provided the aircraft or vessel is used 
predominantly outside the United States. An aircraft or vessel 
will be considered used predominantly outside the United States 
if more than 50 percent of the miles during the taxable year 
are traversed outside the United States or the aircraft or 
vessel is located outside the United States more than 50 
percent of the time during such taxable year.
      It is expected that the Secretary of the Treasury will 
issue timely guidance to make conforming changes to existing 
regulations, including guidance that aircraft or vessel leasing 
activity that satisfies the requirements of section 
954(c)(2)(A) shall also satisfy the requirements for avoiding 
income inclusion under section 956 and section 367(a).
      It is anticipated that taxpayers now eligible for the 
benefits of the ETI exclusion (or the FSC provisions pursuant 
to the FSC Repeal and Extraterritorial Income Exclusion Act of 
2000), will find it appropriate, as matter of sound business 
judgment, to restructure their business operations to take into 
account the tax law changes brought about by the bill. It is 
noted that courts have recognized the validity of structuring 
operations for the purpose of obtaining the benefit of tax 
regimes expressly intended by Congress. It is intended that 
structuring or restructuring of operations for the purposes of 
adapting to the repeal of the ETI exclusion (or the FSC regime) 
will be considered to serve a valid business purpose and will 
not constitute tax avoidance, where the restructured operations 
conform to the requirements expressly mandated by Congress for 
obtaining tax benefits that remain available. For example, it 
is intended that a restructuring undertaken to transfer 
aircraft subject to existing FSC or ETI leases to a CFC lessor, 
to take advantage of the amendments made by this bill, would 
serve a valid business purpose and would not constitute tax 
avoidance, for purposes of determining whether a particular tax 
treatment (such as nonrecognition of gain) applies to such 
restructuring. It is intended, for example, that if such a 
restructuring meets the other requirements necessary to qualify 
as a ``reorganization'' under section 368, the transaction will 
also be deemed to meet the ``business purpose'' requirements 
under section 368, and thus, qualify as a reorganization under 
that section.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2004, and taxable years of U.S. shareholders with or within 
which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The provision provides that ``qualified leasing income'' 
derived from or in connection with the leasing or rental of any 
aircraft or vessel is not treated as foreign personal holding 
company income or foreign base company shipping income of a 
controlled foreign corporation. The provision defines 
``qualified leasing income'' as rents or gains derived in the 
active conduct of a leasing trade or business with respect to 
which the controlled foreign corporation conducts substantial 
activity, provided that the leased property is used by the 
lessee or other end-user in foreign commerce and predominantly 
outside the United States, and such lessee or other end-user is 
not related to the controlled foreign corporation (within the 
meaning of sec. 954(d)(3)).
      In determining whether an aircraft or vessel is used in 
foreign commerce, it is intended that foreign commerce 
encompass the use of an aircraft or vessel in the 
transportation of property or passengers: (1) between an 
airport or port in the United States (including for this 
purpose any possession of the United States) and an airport or 
port in a foreign country; (2) between an airport or port in a 
foreign country and another in the same country; or (3) between 
an airport or port in a foreign country and another in a 
different foreign country. It is intended that an aircraft or 
vessel be considered as used predominantly outside the United 
States if more than 70 percent of its miles traveled during the 
taxable year are traveled outside the United States, or if the 
aircraft or vessel is located outside the United States for 
more than 70 percent of the time during the taxable year.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2006, and taxable years of U.S. shareholders with or within 
which such taxable years of such foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with the 
following clarifications. First, the terms ``aircraft or 
vessels'' include engines that are leased separately from an 
aircraft or vessel. Second, if a lessor acquires (from a 
related or unrelated party) or aircraft or vessel subject to an 
existing lease, the requirements of section 954(c)(2)(A) are 
satisfied if, following the acquisition, the lessor performs 
active and substantial management, operational, and remarketing 
functions with respect to the leased property. However, if an 
existing FSC or ETI lease is transferred to a CFC lessor, the 
lease will no longer be eligible for FSC or ETI benefits.
16. Modification of exceptions under subpart F for active financing 
        (sec. 316 of the House bill, sec. 226 of the Senate amendment, 
        and sec. 954 of the Code)

                              PRESENT LAW

      Under the subpart F rules, U.S. shareholders with a 10-
percent or greater interest in a controlled foreign corporation 
(``CFC'') are subject to U.S. tax currently on certain income 
earned by the CFC, whether or not such income is distributed to 
the shareholders. The income subject to current inclusion under 
the subpart F rules includes, among other things, foreign 
personal holding company income and insurance income. In 
addition, 10-percent U.S. shareholders of a CFC are subject to 
current inclusion with respect to their shares of the CFC's 
foreign base company services income (i.e., income derived from 
services performed for a related person outside the country in 
which the CFC is organized).
      Foreign personal holding company income generally 
consists of the following: (1) dividends, interest, royalties, 
rents, and annuities; (2) net gains from the sale or exchange 
of (a) property that gives rise to the preceding types of 
income, (b) property that does not give rise to income, and (c) 
interests in trusts, partnerships, and real estate mortgage 
investment conduits (``REMICs''); (3) net gains from 
commodities transactions; (4) net gains from foreign currency 
transactions; (5) income that is equivalent to interest; (6) 
income from notional principal contracts; and (7) payments in 
lieu of dividends.
      Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization, as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other country risks. Investment 
income of a CFC that is allocable to any insurance or annuity 
contract related to risks located outside the CFC's country of 
organization is taxable as subpart F insurance income (Treas. 
Reg. sec. 1.953-1(a)).
      Temporary exceptions from foreign personal holding 
company income, foreign base company services income, and 
insurance income apply for subpart F purposes for certain 
income that is derived in the active conduct of a banking, 
financing, or similar business, or in the conduct of an 
insurance business (so-called ``active financing 
income'').\250\
---------------------------------------------------------------------------
    \250\ Temporary exceptions from the subpart F provisions for 
certain active financing income applied only for taxable years 
beginning in 1998. Those exceptions were modified and extended for one 
year, applicable only for taxable years beginning in 1999. The Tax 
Relief Extension Act of 1999 (Pub. L. No. 106-170) clarified and 
extended the temporary exceptions for two years, applicable only for 
taxable years beginning after 1999 and before 2002. The Job Creation 
and Worker Assistance Act of 2002 (Pub. L. No. 107-147) extended the 
temporary exceptions for five years, applicable only for taxable years 
beginning after 2001 and before 2007, with a modification relating to 
insurance reserves.
---------------------------------------------------------------------------
      With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the exceptions. In addition, certain nexus 
requirements apply, which provide that income derived by a CFC 
or a qualified business unit (``QBU'') of a CFC from 
transactions with customers is eligible for the exceptions if, 
among other things, substantially all of the activities in 
connection with such transactions are conducted directly by the 
CFC or QBU in its home country, and such income is treated as 
earned by the CFC or QBU in its home country for purposes of 
such country's tax laws. Moreover, the exceptions apply to 
income derived from certain cross border transactions, provided 
that certain requirements are met. Additional exceptions from 
foreign personal holding company income apply for certain 
income derived by a securities dealer within the meaning of 
section 475 and for gain from the sale of active financing 
assets.
      In the case of insurance, in addition to temporary 
exceptions from insurance income and from foreign personal 
holding company income for certain income of a qualifying 
insurance company with respect to risks located within the 
CFC's country of creation or organization, temporary exceptions 
from insurance income and from foreign personal holding company 
income apply for certain income of a qualifying branch of a 
qualifying insurance company with respect to risks located 
within the home country of the branch, provided certain 
requirements are met under each of the exceptions. Further, 
additional temporary exceptions from insurance income and from 
foreign personal holding company income apply for certain 
income of certain CFCs or branches with respect to risks 
located in a country other than the United States, provided 
that the requirements for these exceptions are met.

                               HOUSE BILL

      The House bill modifies the present-law temporary 
exceptions from subpart F foreign personal holding company 
income and foreign base company services income for income 
derived in the active conduct of a banking, financing, or 
similar business. For purposes of determining whether a CFC or 
QBU has conducted directly in its home country substantially 
all of the activities in connection with transactions with 
customers, the House bill provides that an activity is treated 
as conducted directly by the CFC or QBU in its home country if 
the activity is performed by employees of a related person and: 
(1) the related person is itself an eligible CFC the home 
country of which is the same as that of the CFC or QBU; (2) the 
activity is performed in the home country of the related 
person; and (3) the related person is compensated on an arm's 
length basis for the performance of the activity by its 
employees and such compensation is treated as earned by such 
person in its home country for purposes of the tax laws of such 
country. For purposes of determining whether a CFC or QBU is 
eligible to earn active financing income, such activity may not 
be taken into account by any CFC or QBU (including the employer 
of the employees performing the activity) other than the CFC or 
QBU for which the activities are performed.
      Effective date.--The House bill provision is effective 
for taxable years of foreign corporations beginning after 
December 31, 2004, and taxable years of U.S. shareholders with 
or within which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
17. Ten-year foreign tax credit carryover; one-year foreign tax credit 
        carryback (sec. 201 of the Senate amendment and sec. 904 of the 
        Code)

                              PRESENT LAW

      U.S. persons may credit foreign taxes against U.S. tax on 
foreign-source income. The amount of foreign tax credits that 
may be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S.-source income. The amount of foreign tax 
credits generally is limited to a portion of the taxpayer's 
U.S. tax which portion is calculated by multiplying the 
taxpayer's total U.S. tax by a fraction, the numerator of which 
is the taxpayer's foreign-source taxable income (i.e., foreign-
source gross income less allocable expenses or deductions) and 
the denominator of which is the taxpayer's worldwide taxable 
income for the year.\251\
---------------------------------------------------------------------------
    \251\ Section 904(a).
---------------------------------------------------------------------------
      In addition, this limitation is calculated separately for 
various categories of income, generally referred to as 
``separate limitation categories.'' The total amount of the 
foreign tax credit used to offset the U.S. tax on income in 
each separate limitation category may not exceed the proportion 
of the taxpayer's U.S. tax which the taxpayer's foreign-source 
taxable income in that category bears to its worldwide taxable 
income.
      The amount of creditable taxes paid or accrued (or deemed 
paid) in any taxable year which exceeds the foreign tax credit 
limitation is permitted to be carried back to the two 
immediately preceding taxable years (to the earliest year 
first) and carried forward five taxable years (in chronological 
order) and credited (not deducted) to the extent that the 
taxpayer otherwise has excess foreign tax credit limitation for 
those years. Excess credits that are carried back or forward 
are usable only to the extent that there is excess foreign tax 
credit limitation in such carryover or carryback year. 
Consequently, foreign tax credits arising in a taxable year are 
utilized before excess credits from another taxable year may be 
carried forward or backward. In addition, excess credits are 
carried forward or carried back on a separate limitation basis. 
Thus, if a taxpayer has excess foreign tax credits in one 
separate limitation category for a taxable year, those excess 
credits may be carried back and forward only as taxes allocable 
to that category, notwithstanding the fact that the taxpayer 
may have excess foreign tax credit limitation in another 
category for that year. If credits cannot be so utilized, they 
are permanently disallowed.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision extends the excess foreign tax credit 
carryforward period to twenty years and limits the carryback 
period to one year.
      Effective date.--The extension of the carryforward period 
is effective for excess foreign tax credits that may be carried 
to any taxable years ending after the date of enactment of the 
provision; the limited carryback period is effective for excess 
foreign tax credits arising in taxable years beginning after 
the date of enactment of the provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
with the modification that the foreign tax credit carryforward 
period is extended to 10 years.
18. Expand the subpart F de minimis rule to the lesser of five percent 
        of gross income or $5 million (sec. 212 of the Senate amendment 
        and sec. 954 of the Code)

                              PRESENT LAW

      Under the rules of subpart F (secs. 951-964), U.S. 10-
percent shareholders of a controlled foreign corporation are 
required to include in income currently for U.S. tax purposes 
certain types of income of the controlled foreign corporation, 
whether or not such income is actually distributed currently to 
the shareholders (referred to as ``subpart F income''). Subpart 
F income includes foreign base company income and certain 
insurance income. Foreign base company income includes five 
categories of income: foreign personal holding company income, 
foreign base company sales income, foreign base company 
services income, foreign base company shipping income, and 
foreign base company oil-related income (sec. 954(a)). Under a 
de minimis rule, if the gross amount of a controlled foreign 
corporation's foreign base company income and insurance income 
for a taxable year is less than the lesser of five percent of 
the controlled foreign corporation's gross income or $1 
million, then no part of the controlled foreign corporation's 
gross income is treated as foreign base company income or 
insurance income (sec. 954(b)(3)(A)).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision expands the subpart F de minimis rule to 
provide that, if the gross amount of a controlled foreign 
corporation's foreign base company income and insurance income 
for a taxable year is less than the lesser of five percent of 
the controlled foreign corporation's gross income or $5 
million, then no part of the controlled foreign corporation's 
gross income is treated as foreign base company income or 
insurance income.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2004, and taxable years of U.S. shareholders with or within 
which such taxable years of such foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
19. Limit application of uniform capitalization rules in the case of 
        foreign persons (sec. 214 of the Senate amendment and sec. 263A 
        of the Code)

                              PRESENT LAW

      Taxpayers generally may not currently deduct the costs 
incurred in producing property or acquiring property for 
resale. In general, the uniform capitalization rules require 
that a portion of the direct and indirect costs of producing 
property or acquiring property for resale be capitalized or 
included in the cost of inventory (sec. 263A). Consequently, 
such costs must be recovered through an offset to the sales 
price if the property is produced for sale, or through 
depreciation or amortization if the property is produced for 
the taxpayer's own use in a business or investment activity. 
The purpose of this requirement is to match the costs of 
producing or acquiring goods with the revenues realized from 
their sale or use in the business or investment activity.
      The uniform capitalization rules apply to foreign 
corporations, whether or not engaged in business in the United 
States. In the case of a foreign corporation carrying on a U.S. 
trade or business, for example, the uniform capitalization 
rules apply for purposes of computing the corporation's U.S. 
effectively connected taxable income, as well as computing its 
effectively connected earnings and profits for purposes of the 
branch profits tax.
      When a foreign corporation is not engaged in a trade or 
business in the United States, its taxable income and earnings 
and profits may nonetheless be relevant under the Code. For 
example, the subpart F income of a controlled foreign 
corporation may be currently includible on the return of a U.S. 
shareholder of the controlled foreign corporation. Regardless 
of whether or not a foreign corporation is U.S.-controlled, its 
accumulated earnings and profits must be computed in order to 
determine the amount of taxable dividends and the indirect 
foreign tax credit carried by distributions from the foreign 
corporation to any domestic corporation that owns at least 10 
percent of its voting stock.
      The earnings and profits surplus or deficit of any 
foreign corporation for any taxable year generally is 
determined according to rules substantially similar to those 
applicable to domestic corporations. However, proposed 
regulations provide that, for purposes of computing a foreign 
corporation's earnings and profits, the amount of expenses that 
must be capitalized into inventory under the uniform 
capitalization rules may not exceed the amount capitalized in 
keeping the taxpayer's books and records.\252\ For this 
purpose, the taxpayer's books and records must be prepared in 
accordance with U.S. generally accepted accounting principles 
for purposes of reflecting in the financial statements of a 
domestic corporation the operations of its foreign affiliates. 
This proposed regulation applies only for purposes of 
determining a foreign corporation's earnings and profits and 
does not apply for purposes of determining subpart F income or 
income effectively connected with a U.S. trade or business of a 
foreign corporation.
---------------------------------------------------------------------------
    \252\ Treas. Prop. Reg. sec. 1.964-1(c)(1)(ii)(B).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides that, in lieu of the uniform 
capitalization rules, costs incurred in producing property or 
acquiring property for resale are capitalized using U.S. 
generally accepted accounting principles (i.e., the method used 
to ascertain income, profit, or loss for purposes of reports or 
statements to shareholders, partners, other proprietors, or 
beneficiaries, or for credit purposes) for purposes of 
determining a U.S.-owned foreign corporation's earnings and 
profits and subpart F income. The uniform capitalization rules 
continue to apply to foreign corporations for purposes of 
determining income effectively connected with a U.S. trade or 
business and the related earnings and profits therefrom. Any 
change in the taxpayer's method of accounting required as a 
result of this provision is treated as a voluntary change 
initiated by the taxpayer and is deemed made with the consent 
of the Secretary of the Treasury (i.e., no application for 
change in method of accounting is required to be filed with the 
Secretary). Any resultant section 481(a) adjustment required to 
be taken into account is to be taken into account in the first 
year.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
20. Eliminate the 30-percent tax on certain U.S.-source capital gains 
        of nonresident individuals (sec. 216 of the Senate amendment 
        and sec. 871 of the Code)

                              PRESENT LAW

      In general, resident aliens are taxed in the same manner 
as U.S. citizens. Nonresident aliens are subject to (1) U.S. 
tax on income from U.S. sources that are effectively connected 
with a U.S. trade or business, and (2) a 30-percent withholding 
tax on the gross amount of certain types of passive income 
derived from U.S. sources, such as interest, dividends, rents, 
and other fixed or determinable annual or periodical income 
(sec. 871(a)(1)). Bilateral income tax treaties may modify 
these tax rules.
      Income derived from the sale of personal property other 
than inventory property generally is sourced based on the 
residence of the seller (sec. 865(a)). Thus, nonresident aliens 
generally are not taxable on capital gains because the gains 
generally are considered to be foreign-source income.\253\
---------------------------------------------------------------------------
    \253\ Nonresident individuals are subject to the 30-percent gross 
withholding tax, for example, with respect to gains from the sale or 
exchange of intangible property if the payments are contingent on the 
productivity, use, or disposition of the property. Secs. 871(a)(1)(D) 
and 881(a)(4).
---------------------------------------------------------------------------
      Special rules apply in the case of sales of personal 
property by certain foreign persons. In this regard, an 
individual who is otherwise treated as a nonresident is treated 
as a U.S. resident for purposes of sourcing income from the 
sale of personal property if the individual has a tax home in 
the United States (sec. 865(g)(1)(A)(i)(II)). An individual's 
U.S. tax home generally is the place where the individual has 
his or her principal place of business. For example, if a 
nonresident individual with a tax home in the United States 
sells stocks or other securities for a gain, the individual 
will be treated as a U.S. resident with respect to the sale 
such that the gain will be treated as U.S.-source income 
potentially subject to U.S. tax.
      Under the special capital gains tax of section 871(a)(2), 
a nonresident individual who is physically present in the 
United States for 183 days or more during a taxable year is 
subject to a 30-percent tax on the excess of U.S.-source 
capital gains over U.S.-source capital losses. This 30-percent 
tax is not a withholding tax. The tax under section 871(a)(2) 
does not apply to gains and losses subject to the gross 30-
percent withholding tax under section 871(a)(1) or to gains 
effectively connected with a U.S. trade or business. Capital 
gains and losses are taken into account only to the extent that 
they would be recognized and taken into account if such gains 
and losses were effectively connected with a U.S. trade or 
business. Capital loss carryovers are not taken into account.
      As a practical matter, the special rule under section 
871(a)(2) applies only in a very limited set of cases. In order 
for the rule to apply, two conditions must be satisfied: (1) 
the individual must spend at least 183 days in the United 
States during a taxable year without being treated as a U.S. 
resident, and (2) the individual's capital gains must be from 
U.S. sources. If these conditions are satisfied, then the 30-
percent tax applies to the excess of U.S.-source capital gains 
over U.S.-source capital losses. However, section 871(a)(2) 
generally is not applicable because if the individual spends 
183 days or more in the United States in most cases he or she 
would be treated as a U.S. resident, or if not treated as a 
U.S. resident, would generally not have U.S.-source capital 
gains.
      An individual who is not a citizen and who spends 183 
days or more in the United States during a calendar year 
generally would be treated as a U.S. resident under the 
substantial presence test of section 7701(b). Thus, in most 
cases, the individual who spends at least 183 days in the 
United States would not be subject to section 871(a)(2).\254\ 
However, under the substantial presence test under section 
7701(b), certain days of physical presence in the United States 
are not counted for purposes of meeting the 183-day rule. This 
includes days spent in the United States in which the 
individual regularly commutes to employment (or self-
employment) in the United States from Canada or Mexico; the 
individual is in transit between two points outside the United 
States and is physically present in the United States for less 
than 24 hours; the individual is temporarily present in the 
United States as a regular member of the crew of a foreign 
vessel engaged in transportation between the United States and 
a foreign country or U.S. possession; and certain exempt 
individuals. These exceptions from counting physical presence 
in the United States do not apply, however, for purposes of the 
special rule under section 871(a)(2). Thus, it is possible in 
certain cases for an individual to be present in the United 
States for at least 183 days without being treated as a U.S. 
resident under the substantial presence test of section 
7701(b).\255\
---------------------------------------------------------------------------
    \254\ See the American Law Institute, Federal Income Tax Project, 
International Aspects of United States Income Taxation, Proposals of 
the American Law Institute on United States Taxation of Foreign Persons 
and of the Foreign Income of United States Persons, at 112-113 (1987) 
(recommending that sec. 871(a)(2) be eliminated and stating ``[u]nder 
Section 7701(b), enacted in 1984, an individual physically present in 
the U.S. for 183 days in a calendar year is considered a resident, 
taxable at net income rates on all of his income; and accordingly the 
justification for Section 871(a)(2) no longer exists.'' [footnotes 
omitted]).
    \255\ It should be noted that there also is a difference with 
respect to the year over which the 183-day rule is measured for 
purposes of the substantial presence test and the rule under sec. 
871(a)(2). The sec. 871(a)(2) tax applies to 183 days or more of 
presence in the United States during the taxable year, while the 
substantial presence test under sec. 7701(b) applies to 183 days or 
more of presence in the United States during the calendar year. In most 
cases, however, a nonresident individual's taxable year is the calendar 
year. Secs. 7701(b)(9) and 871(a)(2).
---------------------------------------------------------------------------
      Even if an individual spends at least 183 days in the 
United States but is not treated as a U.S. resident under 
section 7701(b), the nonresident individual's capital gains 
generally will be treated as foreign-source income and, thus, 
not subject to section 871(a)(2). In this regard, capital gains 
generally are from foreign sources if the individual is a 
nonresident, and from U.S. sources if the individual is a U.S. 
resident. Under a special rule, an individual is treated as a 
U.S. resident for sales of personal property (including sales 
giving rise to capital gains) if the individual has a tax home 
in the United States. This rule applies even if the individual 
is treated as a nonresident for other U.S. tax purposes. An 
individual's capital gains would be treated as U.S.-source 
income and potentially subject to section 871(a)(2) if the 
individual is treated as a U.S. resident under this special 
rule.\256\
---------------------------------------------------------------------------
    \256\ The individual's income also could be treated as U.S.-source 
income under sec. 865(e)(2) if the individual derives income from the 
sale of personal property that is attributable to an office or other 
fixed place of business that the individual maintains in the United 
States. However, sec. 871(a)(2) would not apply if the income is 
effectively connected with a U.S. trade or business, or if the sale 
qualifies for the exception from U.S.-source treatment as a result of a 
material participation in the sale by a foreign office of the taxpayer.
---------------------------------------------------------------------------
      Even in the limited cases in which the special rule under 
section 871(a)(2) could potentially apply, a tax treaty might 
prevent its application.\257\
---------------------------------------------------------------------------
    \257\ Under Article 13(5) of the U.S. model income tax treaty, 
subject to certain exceptions, the capital gains of a nonresident 
individual are exempt from U.S. taxation.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision repeals the special tax on certain capital 
gains of nonresident aliens under section 871(a)(2).
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
21. Modify FIRPTA rules for real estate investment trusts (sec. 230 of 
        the Senate amendment and secs. 857 and 897 of the Code)

                              PRESENT LAW

      A real estate investment trust (``REIT'') is a U.S. 
entity that derives most of its income from passive real 
estate-related investments. A REIT must satisfy a number of 
tests on an annual basis that relate to the entity's 
organizational structure, the source of its income, and the 
nature of its assets. If an electing entity meets the 
requirements for REIT status, the portion of its income that is 
distributed to its investors each year generally is treated as 
a dividend deductible by the REIT, and includible in income by 
its investors. In this manner, the distributed income of the 
REIT is not taxed at the entity level. The distributed income 
is taxed only at the investor level. A REIT generally is 
required to distribute 90 percent of its income to its 
investors before the end of its taxable year.
      Special U.S. tax rules apply to gains of foreign persons 
attributable to dispositions of interests in U.S. real 
property, including certain transactions involving REITs. The 
rules governing the imposition and collection of tax on such 
dispositions are contained in a series of provisions that were 
enacted in 1980 and that are collectively referred to as the 
Foreign Investment in Real Property Tax Act (``FIRPTA'').
      In general, FIRPTA provides that gain or loss of a 
foreign person from the disposition of a U.S. real property 
interest is taken into account for U.S. tax purposes as if such 
gain or loss were effectively connected with a U.S. trade or 
business during the taxable year. Accordingly, foreign persons 
generally are subject to U.S. tax on any gain from a 
disposition of a U.S. real property interest at the same rates 
that apply to similar income received by U.S. persons. For 
these purposes, the receipt of a distribution from a REIT is 
treated as a disposition of a U.S. real property interest by 
the recipient to the extent that it is attributable to a sale 
or exchange of a U.S. real property interest by the REIT. These 
capital gains distributions from REITs generally are subject to 
withholding tax at a rate of 35 percent (or a lower treaty 
rate). In addition, the recipients of these capital gains 
distributions are required to file Federal income tax returns 
in the United States, since the recipients are treated as 
earning income effectively connected with a U.S. trade or 
business.
      In addition, foreign corporations that have effectively 
connected income generally are subject to the branch profits 
tax at a 30-percent rate (or a lower treaty rate).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision removes from treatment as effectively 
connected income for a foreign investor a capital gain 
distribution from a REIT, provided that (1) the distribution is 
received with respect to a class of stock that is regularly 
traded on an established securities market located in the 
United States and (2) the foreign investor does not own more 
than five percent of the class of stock at any time during the 
taxable year within which the distribution is received.
      Thus, a foreign investor is not required to file a U.S. 
Federal income tax return by reason of receiving such a 
distribution. The distribution is to be treated as a REIT 
dividend to that investor, taxed as a REIT dividend that is not 
a capital gain. Also, the branch profits tax no longer applies 
to such a distribution.
      Effective date.--The provision applies to taxable years 
beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
22. Exclusion of certain horse-racing and dog-racing gambling winnings 
        from the income of nonresident alien individuals (sec. 232 of 
        the Senate amendment and sec. 872 of the Code)

                              PRESENT LAW

      Under section 871, certain items of gross income received 
by a nonresident alien from sources within the United States 
are subject to a flat 30-percent withholding tax. Gambling 
winnings received by a nonresident alien from wagers placed in 
the United States are U.S.-source and thus generally are 
subject to this withholding tax, unless exempted by treaty. 
Currently, several U.S. income tax treaties exempt U.S.-source 
gambling winnings of residents of the other treaty country from 
U.S. withholding tax. In addition, no withholding tax is 
imposed under section 871 on the non-business gambling income 
of a nonresident alien from wagers on the following games 
(except to the extent that the Secretary determines that 
collection of the tax would be administratively feasible): 
blackjack, baccarat, craps, roulette, and big-6 wheel. Various 
other (non-gambling-related) items of income of a nonresident 
alien are excluded from gross income under section 872(b) and 
are thereby exempt from the 30-percent withholding tax, without 
any authority for the Secretary to impose the tax by 
regulation. In cases in which a withholding tax on gambling 
winnings applies, section 1441(a) of the Code requires the 
party making the winning payout to withhold the appropriate 
amount and makes that party responsible for amounts not 
withheld.
      With respect to gambling winnings of a nonresident alien 
resulting from a wager initiated outside the United States on a 
pari-mutuel \258\ event taking place within the United States, 
the source of the winnings, and thus the applicability of the 
30-percent U.S. withholding tax, depends on the type of 
wagering pool from which the winnings are paid. If the payout 
is made from a separate foreign pool, maintained completely in 
a foreign jurisdiction (e.g., a pool maintained by a racetrack 
or off-track betting parlor that is showing in a foreign 
country a simulcast of a horse race taking place in the United 
States), then the winnings paid to a nonresident alien 
generally would not be subject to withholding tax, because the 
amounts received generally would not be from sources within the 
United States. However, if the payout is made from a ``merged'' 
or ``commingled'' pool, in which betting pools in the United 
States and the foreign country are combined for a particular 
event, then the portion of the payout attributable to wagers 
placed in the United States could be subject to withholding 
tax. The party making the payment, in this case a racetrack or 
off-track betting parlor in a foreign country, would be 
responsible for withholding the tax.
---------------------------------------------------------------------------
    \258\ In pari-mutuel wagering (common in horse racing), odds and 
payouts are determined by the aggregate bets placed. The money wagered 
is placed into a pool, the party maintaining the pool takes a 
percentage of the total, and the bettors effectively bet against each 
other. Pari-mutuel wagering may be contrasted with fixed-odds wagering 
(common in sports wagering), in which odds (or perhaps a point spread) 
are agreed to by the bettor and the party taking the bet and are not 
affected by the bets placed by other bettors.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides an exclusion from gross income 
under section 872(b) for winnings paid to a nonresident alien 
resulting from a legal wager initiated outside the United 
States in a pari-mutuel pool on a live horse or dog race in the 
United States, regardless of whether the pool is a separate 
foreign pool or a merged U.S.-foreign pool.
      Effective date.--The provision is effective for wagers 
made after the date of enactment of the provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
23. Limitation of withholding on U.S.-source dividends paid to Puerto 
        Rico corporation (sec. 233 of the Senate amendment and secs. 
        881 and 1442 of the Code)

                              PRESENT LAW

      In general, dividends paid by corporations organized in 
the United States \259\ to corporations organized outside of 
the United States and its possessions are subject to U.S. 
income tax withholding at the flat rate of 30 percent. The rate 
may be reduced or eliminated under a tax treaty. Dividends paid 
by U.S. corporations to corporations organized in certain U.S. 
possessions are subject to different rules.\260\ Corporations 
organized in the U.S. possessions of the Virgin Islands, Guam, 
American Samoa or the Northern Mariana Islands are not subject 
to withholding tax on dividends from corporations organized in 
the United States, provided that certain local ownership and 
activity requirements are met. Each of those possessions have 
adopted local internal revenue codes that provide a zero rate 
of withholding tax on dividends paid by corporations organized 
in the possession to corporations organized in the United 
States.
---------------------------------------------------------------------------
    \259\ The term ``United States'' does not include its possessions. 
Sec. 7701(a)(9).
    \260\ The usual method of effecting a mitigation of the flat 30 
percent rate--an income tax treaty providing for a lower rate--is not 
possible in the case of a possession. See S. Rep. No. 1707, 89th Cong., 
2d Sess. 34 (1966).
---------------------------------------------------------------------------
      Under the tax laws of Puerto Rico, which is also a U.S. 
possession, a 10 percent withholding tax is imposed on 
dividends paid by Puerto Rico corporations to non-Puerto Rico 
corporations.\261\ Dividends paid by corporations organized in 
the United States to Puerto Rico corporations are subject to 
U.S. withholding tax at a 30 percent rate. Under Puerto Rico 
law, Puerto Rico corporations may elect to credit their U.S. 
income taxes against their Puerto Rico income taxes. Creditable 
income taxes include the 30 percent dividend withholding tax 
and the underlying U.S. corporate tax attributable to the 
dividends. However, a Puerto Rico corporation's tax credit for 
U.S. income taxes may be limited because the sum of the U.S. 
withholding tax and the underlying U.S. corporate tax generally 
exceeds the amount of Puerto Rico corporate income tax imposed 
on the dividend. Consequently, Puerto Rico corporations with 
subsidiaries organized in the United States may be subject to 
some degree of double taxation on their U.S. subsidiaries' 
earnings.
---------------------------------------------------------------------------
    \261\ The 10 percent withholding rate may be subject to exemption 
or elimination if the dividend is paid out of income that is subject to 
certain tax incentives offered by Puerto Rico. These tax incentives may 
also reduce the rate of underlying Puerto Rico corporate tax to a flat 
rate of between two and seven percent.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision lowers the withholding income tax rate on 
U.S. source dividends paid to a corporation created or 
organized in Puerto Rico from 30 percent to 10 percent, to 
create parity with the generally applicable 10 percent 
withholding tax imposed by Puerto Rico on dividends paid to 
U.S. corporations. The lower rate applies only if the same 
local ownership and activity requirements are met that are 
applicable to corporations organized in other possessions 
receiving dividends from corporations organized in the United 
States.
      Effective date.--The provision is effective for dividends 
paid after date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications. Under the provision as modified, if the 
generally applicable withholding tax rate imposed by Puerto 
Rico on dividends paid to U.S. corporations increases to 
greater than 10 percent, the U.S. withholding rate on dividends 
to Puerto Rico corporations reverts to 30 percent.
24. Require Commerce Department report on adverse decisions of the 
        World Trade Organization (sec. 234 of the Senate amendment)

                              PRESENT LAW

      The Secretary of Commerce does not have an obligation to 
transmit any future report to the Senate Committee on Finance 
and the House of Representatives Committee on Ways and Means, 
in consultation with the United States Trade Representative, 
regarding whether dispute settlement panels or the Appellate 
Body of the World Trade Organization have (1) added to or 
diminished the rights of the United States by imposing 
obligations and restrictions on the use of antidumping, 
countervailing, or safeguard measures not agreed to under the 
World Trade Organization Antidumping Agreement, the Agreement 
on Subsidies and Countervailing Measures, or the Agreement on 
Safeguards; (2) appropriately applied the standard of review 
contained in Article 17.6 of the Antidumping Agreement; or (3) 
exceeded its authority or terms of reference.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision requires that by no later than March 31, 
2004, the Secretary of Commerce, in consultation with the 
United States Trade Representative, shall transmit a report to 
the Senate Committee on Finance and the House of 
Representatives Committee on Ways and Means regarding whether 
dispute settlement panels or the Appellate Body of the World 
Trade Organization have (1) added to or diminished the rights 
of the United States by imposing obligations and restrictions 
on the use of antidumping, countervailing, or safeguard 
measures not agreed to under the World Trade Organization 
Antidumping Agreement, the Agreement on Subsidies and 
Countervailing Measures, or the Agreement on Safeguards; (2) 
appropriately applied the standard of review contained in 
Article 17.6 of the Antidumping Agreement; or (3) exceeded its 
authority or terms of reference.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
25. Study of impact of international tax law on taxpayers other than 
        large corporations (sec. 235 of the Senate amendment)

                              PRESENT LAW

      The United States employs a ``worldwide'' tax system, 
under which U.S. persons (including domestic corporations) 
generally are taxed on all income, whether derived in the 
United States or abroad. In contrast, foreign persons 
(including foreign corporations) are subject to U.S. tax only 
on U.S.-source income and income that has a sufficient nexus to 
the United States. The United States generally provides a 
credit to U.S. persons for foreign income taxes paid or 
accrued.\262\ The foreign tax credit generally is limited to 
the U.S. tax liability on a taxpayer's foreign-source income, 
in order to ensure that the credit serves its purpose of 
mitigating double taxation of foreign-source income without 
offsetting the U.S. tax on U.S.-source income.\263\
---------------------------------------------------------------------------
    \262\ Sec. 901.
    \263\ Secs. 901, 904.
---------------------------------------------------------------------------
      Within this basic framework, there are a variety of rules 
that affect the U.S. taxation of cross-border transactions. 
Detailed rules govern the determination of the source of income 
and the allocation and apportionment of expenses between 
foreign-source and U.S.-source income. Such rules are relevant 
not only for purposes of determining the U.S. taxation of 
foreign persons (because foreign persons are subject to U.S. 
tax only on income that is from U.S. sources or otherwise has 
sufficient U.S. nexus), but also for purposes of determining 
the U.S. taxation of U.S. persons (because the U.S. tax on a 
U.S. person's foreign-source income may be reduced or 
eliminated by foreign tax credits). Authority is provided for 
the reallocation of items of income and deductions between 
related persons in order to ensure the clear reflection of the 
income of each person and to prevent the avoidance of tax. 
Although U.S. tax generally is not imposed on a foreign 
corporation that operates abroad, several anti-deferral regimes 
apply to impose current U.S. tax on certain income from foreign 
operations of certain U.S.-owned foreign corporations.
      A cross-border transaction potentially gives rise to tax 
consequences in two (or more) countries. The tax treatment in 
each country generally is determined under the tax laws of the 
respective country. However, an income tax treaty between the 
two countries may operate to coordinate the two tax regimes and 
mitigate the double taxation of the transaction. In this 
regard, the United States' network of bilateral income tax 
treaties includes provisions affecting both U.S. and foreign 
taxation of both U.S. persons with foreign income and foreign 
persons with U.S. income.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision requires the Secretary of the Treasury or 
the Secretary's delegate to conduct a study of the impact of 
Federal international tax rules on taxpayers other than large 
corporations, including the burdens placed on such taxpayers in 
complying with such rules. In addition, not later than 180 days 
after the date of the enactment of this provision, the 
Secretary shall report to the Committee on Finance of the 
Senate and the Committee on Ways and Means of the House of 
Representatives the results of the study conducted as a result 
of this provision, including any recommendations for 
legislative or administrative changes to reduce the compliance 
burden on taxpayers other than large corporations and for such 
other purposes as the Secretary determines appropriate.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
26. Delay in effective date of final regulations governing exclusion of 
        income from international operations of ships and aircraft 
        (sec. 236 of the Senate amendment and sec. 883 of the Code)

                              PRESENT LAW

      Section 883 generally provides an exemption from gross 
income for earnings of a foreign corporation derived from the 
international operation of ships and aircraft if an equivalent 
exemption from tax is granted by the applicable foreign country 
to corporations organized in the United States.
      Treasury has issued regulations implementing the rules of 
section 883 that are effective for taxable years beginning 30 
days or more after August 26, 2003. The regulations provide, in 
general, that a foreign corporation organized in a qualified 
foreign country and engaged in the international operation of 
ships or aircraft shall exclude qualified income from gross 
income for purposes of United States Federal income taxation, 
provided that the corporation can satisfy certain ownership and 
related documentation requirements. The proposed rules explain 
when a foreign country is a qualified foreign country and what 
income is considered to be qualified income.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision delays the effective date for the Treasury 
regulations so that they apply to taxable years of foreign 
corporations seeking qualified foreign corporation status 
beginning after December 31, 2004.
      Effective date.--The provision is effective after date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except the regulations apply to taxable years of foreign 
corporations seeking qualified foreign corporation status 
beginning after September 24, 2004.
27. Interest payments deductible where taxpayer could have borrowed 
        without a guarantee (sec. 237 of the Senate amendment and sec. 
        163(j) of the Code)

                              PRESENT LAW

      Present law provides rules to limit the ability of U.S. 
corporations to reduce the U.S. tax on their U.S.-source income 
through earnings stripping transactions. These rules limit the 
deductibility of interest paid to certain related parties 
(``disqualified interest''), if the payor's debt-equity ratio 
exceeds 1.5 to 1 and the payor's net interest expense exceeds 
50 percent of its ``adjusted taxable income'' (generally 
taxable income computed without regard to deductions for net 
interest expense, net operating losses, and depreciation, 
amortization, and depletion).
      Disqualified interest for these purposes also may include 
interest paid to unrelated parties in certain cases in which a 
related party guarantees the debt.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, a foreign related-party guarantee 
does not trigger the earnings stripping rules to the extent of 
the amount of debt that the taxpayer establishes (to the 
satisfaction of the Treasury Secretary) that it could have 
borrowed without the guarantee.
      Effective date.--The provision is effective for 
guarantees issued on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

28. Nonrefundable personal credits allowed against the alternative 
        minimum tax (``AMT'') (sec. 401 of the House bill, sec. 713 of 
        the Senate amendment, and sec. 26 of the Code)

                              PRESENT LAW

      Present law provides for certain nonrefundable personal 
tax credits (i.e., the dependent care credit, the credit for 
the elderly and disabled, the adoption credit, the child tax 
credit,\264\ the credit for interest on certain home mortgages, 
the HOPE Scholarship and Lifetime Learning credits, the credit 
for savers, and the D.C. first-time homebuyer credit).
---------------------------------------------------------------------------
    \264\ A portion of the child credit may be refundable.
---------------------------------------------------------------------------
      For taxable years beginning before 2006, all the 
nonrefundable personal credits are allowed to the extent of the 
full amount of the individual's regular tax and alternative 
minimum tax.
      For taxable years beginning after 2005, the credits 
(other than the adoption credit, child credit and credit for 
savers) are allowed only to the extent that the individual's 
regular income tax liability exceeds the individual's tentative 
minimum tax, determined without regard to the minimum tax 
foreign tax credit. The adoption credit, child credit, and IRA 
credit are allowed to the full extent of the individual's 
regular tax and alternative minimum tax.

                            HOUSE BILL \265\

      The House bill allows all nonrefundable personal credits 
against the AMT.
---------------------------------------------------------------------------
    \265\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--Taxable years beginning in 2004 and 
2005.

                         SENATE AMENDMENT \266\

      The Senate amendment allows all nonrefundable personal 
credits against the AMT.
---------------------------------------------------------------------------
    \266\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--Taxable years beginning in 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
29. Extension and modification of the research credit (sec. 402 of the 
        House bill, secs. 311 and 312 of the Senate amendment, and sec. 
        41 of the Code)

                              PRESENT LAW

      Section 41 provides for a research tax credit equal to 20 
percent of the amount by which a taxpayer's qualified research 
expenses for a taxable year exceed its base amount for that 
year. Taxpayers may elect an alternative incremental research 
credit regime in which the taxpayer is assigned a three-tiered 
fixed-base percentage and the credit rate likewise is reduced. 
Under the alternative credit regime, a credit rate of 2.65 
percent applies to the extent that a taxpayer's current-year 
research expenses exceed a base amount computed by using a 
fixed-base percentage of one percent but do not exceed a base 
amount computed by using a fixed-base percentage of 1.5 
percent. A credit rate of 3.2 percent applies to the extent 
that a taxpayer's current-year research expenses exceed a base 
amount computed by using a fixed-base percentage of 1.5 percent 
but do not exceed a base amount computed by using a fixed-base 
percentage of two percent. A credit rate of 3.75 percent 
applies to the extent that a taxpayer's current-year research 
expenses exceed a base amount computed by using a fixed-base 
percentage of two percent.
      The research tax credit generally applies to amounts paid 
or incurred before January 1, 2006.

                            HOUSE BILL \267\

      The House bill extends the present-law research credit to 
qualified amounts paid or incurred before January 1, 2006.
---------------------------------------------------------------------------
    \267\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for amounts 
paid or incurred after June 30, 2004.

                         SENATE AMENDMENT \268\

      The Senate amendment is the same as the House bill with 
respect to extension of the present-law research credit. In 
addition, the Senate amendment makes the following 
modifications:
---------------------------------------------------------------------------
    \268\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
            (4) Increases the credit rates of the alternative 
        incremental credit to three percent, four percent, and 
        five percent.
            (5) Creates a third alternative for taxpayers, the 
        alternative simplified credit. The taxpayer may elect 
        to claim a credit equal to 12 percent of qualified 
        research expenses in excess of 50 percent of the 
        average qualified research expenses for the preceding 
        three taxable years.
            (6) Permits taxpayers to claim a credit equal to 20 
        percent of amounts paid to certain research consortia.
      The provision also permits taxpayers to include 100 
percent of contract research expenses (rather than 65 percent) 
if the contractor is an eligible small business, a college or 
university, or a Federal laboratory.
      Effective date.--With respect to extension of the 
present-law research credit, the provision is effective for 
amounts paid or incurred after the date of enactment.
      With respect to the increase in the alternative 
incremental credit and the alternative simplified credit, the 
provisions are effective for taxable years beginning after 
December 31, 2004.
      With respect to payments to research consortia and 
certain contract research, the provisions are effective for 
amounts paid or incurred after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or Senate amendment provision.
30. Extension of credit for electricity produced from certain renewable 
        resources (sec. 403 of the House bill, secs. 714 and 801 of the 
        Senate amendment, and sec. 45 of the Code)

                              PRESENT LAW

      An income tax credit is allowed for the production of 
electricity from either qualified wind energy, qualified 
``closed-loop'' biomass, or qualified poultry waste facilities. 
The amount of the credit is 1.8 cents per kilowatt hour for 
2004. The credit amount is indexed for inflation.
      The credit applies to electricity produced by a wind 
energy facility placed in service after December 31, 1993, and 
before January 1, 2006, to electricity produced by a closed-
loop biomass facility placed in service after December 31, 
1992, and before January 1, 2006, and to a poultry waste 
facility placed in service after December 31, 1999, and before 
January 1, 2006. The credit is allowable for production during 
the 10-year period after a facility is originally placed in 
service.

                            HOUSE BILL \269\

      Extends the placed-in-service date for wind facilities 
and closed-loop biomass facilities to facilities placed in 
service after December 31, 1993 (December 31, 1992 in the case 
of closed-loop biomass facilities) and before January 1, 2006. 
Does not extend the placed-in-service date for poultry waste 
facilities.
---------------------------------------------------------------------------
    \269\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for 
facilities placed in service after December 31, 2003.

                         SENATE AMENDMENT \270\

      With respect to extension of the present-law credit, the 
Senate amendment extends the placed-in-service date for wind, 
closed-loop biomass, and poultry waste facilities to facilities 
placed in service prior to January 1, 2007.
---------------------------------------------------------------------------
    \270\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      (The Senate amendment would also expand the definition of 
qualified facilities and make certain other modifications to 
the operation of credit. These expansions and modifications are 
described later in this document.)
      Effective date.--With respect to the extension of the 
placed-in-service dates, the provision is generally effective 
for facilities placed in service after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or Senate amendment provision with respect to the extension of 
present law, but it does make modifications to present law that 
are described later in this document.
31. Indian employment tax credit (sec. 404 of the House bill, sec. 716 
        of the Senate amendment, and sec. 45A of the Code)

                              PRESENT LAW

      In general, a credit against income tax liability is 
allowed to employers for the first $20,000 of qualified wages 
and qualified employee health insurance costs paid or incurred 
by the employer with respect to certain employees. The credit 
is equal to 20 percent of the excess of eligible employee 
qualified wages and health insurance costs during the current 
year over the amount of such wages and costs incurred by the 
employer during 1993. The credit is an incremental credit, such 
that an employer's current-year qualified wages and qualified 
employee health insurance costs (up to $20,000 per employee) 
are eligible for the credit only to the extent that the sum of 
such costs exceeds the sum of comparable costs paid during 
1993. No deduction is allowed for the portion of the wages 
equal to the amount of the credit.
      Qualified wages means wages paid or incurred by an 
employer for services performed by a qualified employee. A 
qualified employee means any employee who is an enrolled member 
of an Indian tribe or the spouse of an enrolled member of an 
Indian tribe, who performs substantially all of the services 
within an Indian reservation, and whose principal place of 
abode while performing such services is on or near the 
reservation in which the services are performed. An employee 
will not be treated as a qualified employee for any taxable 
year of the employer if the total amount of wages paid or 
incurred by the employer with respect to such employee during 
the taxable year exceeds an amount determined at an annual rate 
of $30,000 (adjusted for inflation after 1993).
      The wage credit is available for wages paid or incurred 
on or after January 1, 1994, in taxable years that begin before 
January 1, 2006.

                            HOUSE BILL \271\

      The provision extends the Indian employment credit 
incentive for one year (to taxable years beginning before 
January 1, 2006).
---------------------------------------------------------------------------
    \271\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective on the date 
of enactment.

                         SENATE AMENDMENT \272\

      Same as the House bill.
---------------------------------------------------------------------------
    \272\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
32. Extension of the work opportunity tax credit (sec. 405 of the House 
        bill, sec. 702 of the Senate amendment, and sec. 51 of the 
        Code)

                              PRESENT LAW

Work opportunity tax credit
            Targeted groups eligible for the credit
      The work opportunity tax credit is available on an 
elective basis for employers hiring individuals from one or 
more of eight targeted groups. The eight targeted groups are: 
(1) certain families eligible to receive benefits under the 
Temporary Assistance for Needy Families Program; (2) high-risk 
youth; (3) qualified ex-felons; (4) vocational rehabilitation 
referrals; (5) qualified summer youth employees; (6) qualified 
veterans; (7) families receiving food stamps; and (8) persons 
receiving certain Supplemental Security Income (SSI) benefits.
      A qualified ex-felon is an individual certified as: (1) 
having been convicted of a felony under State or Federal law; 
(2) being a member of an economically disadvantaged family; and 
(3) having a hiring date within one year of release from prison 
or conviction.
            Qualified wages
      Generally, qualified wages are defined as cash wages paid 
by the employer to a member of a targeted group. The employer's 
deduction for wages is reduced by the amount of the credit.
            Calculation of the credit
      The credit equals 40 percent (25 percent for employment 
of 400 hours or less) of qualified first-year wages. Generally, 
qualified first-year wages are qualified wages (not in excess 
of $6,000) attributable to service rendered by a member of a 
targeted group during the one-year period beginning with the 
day the individual began work for the employer. Therefore, the 
maximum credit per employee is $2,400 (40 percent of the first 
$6,000 of qualified first-year wages). With respect to 
qualified summer youth employees, the maximum credit is $1,200 
(40 percent of the first $3,000 of qualified first-year wages).
            Minimum employment period
      No credit is allowed for qualified wages paid to 
employees who work less than 120 hours in the first year of 
employment.
Coordination of the work opportunity tax credit and the welfare-to-work 
        tax credit
      An employer cannot claim the work opportunity tax credit 
with respect to wages of any employee on which the employer 
claims the welfare-to-work tax credit.
Other rules
      The work opportunity tax credit is not allowed for wages 
paid to a relative or dependent of the taxpayer. Similarly 
wages paid to replacement workers during a strike or lockout 
are not eligible for the work opportunity tax credit. Wages 
paid to any employee during any period for which the employer 
received on-the-job training program payments with respect to 
that employee are not eligible for the work opportunity tax 
credit. The work opportunity tax credit generally is not 
allowed for wages paid to individuals who had previously been 
employed by the employer. In addition, many other technical 
rules apply.
Expiration
      The credit is effective for wages paid or incurred to a 
qualified individual who begins work for an employer before 
January 1, 2006.

                            HOUSE BILL \273\

      The House bill extends the WOTC for two years (through 
December 31, 2005).
---------------------------------------------------------------------------
    \273\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--Wages paid or incurred for individuals 
beginning work after December 31, 2003.

                         SENATE AMENDMENT \274\

      The Senate amendment permanently extends the WOTC.
---------------------------------------------------------------------------
    \274\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 
2004''),which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment also makes the following 
modifications to the WOTC:
            (1) repeals the requirement that a qualified ex-
        felon be a member of an economically disadvantaged 
        family for purposes of eligibility for the tax credit;
            (2) expands the category of vocational 
        rehabilitation referrals to include certain individuals 
        who have a physical or mental disability that 
        constitutes a substantial handicap to employment and 
        who are receiving vocational services or have completed 
        an individual work plan developed by a private 
        employment network as defined under section 1148(f) of 
        the Social Security Act qualify as members of the 
        vocational rehabilitation referral targeted group.
            (3) increases the age limit for qualified food 
        stamp recipients. Therefore a food stamp recipient is 
        an individual aged 18 but not aged 40 certified as 
        being a member of a family either currently or recently 
        receiving assistance under an eligible food stamp 
        program.
            (4) increases the age limit for high-risk youths. 
        Therefore a high-risk youth is an individual aged 18 
        but not aged 40 having a principal place of abode 
        within an empowerment zone, enterprise community, or 
        renewal community.
      Effective date.--The extension is effective for wages 
paid or incurred for individuals beginning work after December 
31, 2003. The modifications are effective for wages paid or 
incurred for individuals beginning work after December 31, 
2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
33. Extension of the welfare-to-work tax credit (sec. 406 of the House 
        bill, sec. 702 of the Senate amendment, and sec. 51A of the 
        Code)

                              PRESENT LAW

Welfare-to-work tax credit
            Targeted group eligible for the credit
      The welfare-to-work tax credit is available on an 
elective basis to employers of qualified long-term family 
assistance recipients. Qualified long-term family assistance 
recipients are: (1) members of a family that has received 
family assistance for at least 18 consecutive months ending on 
the hiring date; (2) members of a family that has received such 
family assistance for a total of at least 18 months (whether or 
not consecutive) after August 5, 1997 (the date of enactment of 
the welfare-to-work tax credit) if they are hired within 2 
years after the date that the 18-month total is reached; and 
(3) members of a family who are no longer eligible for family 
assistance because of either Federal or State time limits, if 
they are hired within 2 years after the Federal or State time 
limits made the family ineligible for family assistance.
            Qualified wages
      Qualified wages for purposes of the welfare-to-work tax 
credit are defined more broadly than the work opportunity tax 
credit. Unlike the definition of wages for the work opportunity 
tax credit which includes simply cash wages, the definition of 
wages for the welfare-to-work tax credit includes cash wages 
paid to an employee plus amounts paid by the employer for: (1) 
educational assistance excludable under a section 127 program 
(or that would be excludable but for the expiration of sec. 
127); (2) health plan coverage for the employee, but not more 
than the applicable premium defined under section 4980B(f)(4); 
and (3) dependent care assistance excludable under section 129. 
The employer's deduction for wages is reduced by the amount of 
the credit.
            Calculation of the credit
      The welfare-to-work tax credit is available on an 
elective basis to employers of qualified long-term family 
assistance recipients during the first two years of employment. 
The maximum credit is 35 percent of the first $10,000 of 
qualified first-year wages and 50 percent of the first $10,000 
of qualified second-year wages. Qualified first-year wages are 
defined as qualified wages (not in excess of $10,000) 
attributable to service rendered by a member of the targeted 
group during the one-year period beginning with the day the 
individual began work for the employer. Qualified second-year 
wages are defined as qualified wages (not in excess of $10,000) 
attributable to service rendered by a member of the targeted 
group during the one-year period beginning immediately after 
the first year of that individual's employment for the 
employer. The maximum credit is $8,500 per qualified employee.
            Minimum employment period
      No credit is allowed for qualified wages paid to a member 
of the targeted group unless they work at least 400 hours or 
180 days in the first year of employment.
Coordination of the work opportunity tax credit and the welfare-to-work 
        tax credit
      An employer cannot claim the work opportunity tax credit 
with respect to wages of any employee on which the employer 
claims the welfare-to-work tax credit.
Other rules
      The welfare-to-work tax credit incorporates directly or 
by reference many of these other rules contained on the work 
opportunity tax credit.
Expiration
      The welfare to work credit is effective for wages paid or 
incurred to a qualified individual who begins work for an 
employer before January 1, 2006.

                            HOUSE BILL \275\
---------------------------------------------------------------------------

    \275\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The House bill extends the WWTC for two years (through 
December 31, 2005).
      Effective date.--The provision is effective for wages 
paid or incurred for individuals beginning work after December 
31, 2003.

                         SENATE AMENDMENT \276\
---------------------------------------------------------------------------

    \276\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment permanently extends the WWTC.
      Effective date.--Wages paid or incurred for individuals 
beginning work after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
34. Combination and modification of the work opportunity tax credit and 
        the welfare-to-work tax credit (sec. 703 of the Senate 
        amendment and sec. 51 of the Code)

                              PRESENT LAW

      Same as items 5 and 6, above.

                            HOUSE BILL \277\
---------------------------------------------------------------------------

    \277\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      No provision.

                         SENATE AMENDMENT \278\
---------------------------------------------------------------------------

    \278\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment combines and modifies the work 
opportunity and welfare-to-work tax credits with the following 
modifications:
      The combined credit uses the WOTC definition of wages; in 
the case of first-year wages for long-term family assistance 
recipients the maximum credit is increased to $4,000 (40 
percent of the first $10,000 of qualified first-year wages);
      The combined credit uses the WOTC definition for the 
minimum employment period (i.e., the combined credit is not 
allowed for qualified wages paid to employees who work less 
than 120 hours in the first year of employment).
      Effective date.--The provision is effective for wages 
paid or incurred for individuals beginning work after December 
31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
35. Certain expenses of elementary and secondary school teachers (sec. 
        407 of the House bill, sec. 707 of the Senate amendment, and 
        sec. 62 of the Code)

                              PRESENT LAW

      In general, ordinary and necessary business expenses are 
deductible (sec. 162). However, in general, unreimbursed 
employee business expenses are deductible only as an itemized 
deduction and only to the extent that the individual's total 
miscellaneous deductions (including employee business expenses) 
exceed two percent of adjusted gross income. An individual's 
otherwise allowable itemized deductions may be further limited 
by the overall limitation on itemized deductions, which reduces 
itemized deductions for taxpayers with adjusted gross income in 
excess of $142,700 (for 2004). In addition, miscellaneous 
itemized deductions are not allowable under the alternative 
minimum tax.
      Certain expenses of eligible educators are allowed an 
above-the-line deduction. Specifically, for taxable years 
beginning prior to January 1, 2006, an above-the-line deduction 
is allowed for up to $250 annually of expenses paid or incurred 
by an eligible educator for books, supplies (other than 
nonathletic supplies for courses of instruction in health or 
physical education), computer equipment (including related 
software and services) and other equipment, and supplementary 
materials used by the eligible educator in the classroom. To be 
eligible for this deduction, the expenses must be otherwise 
deductible under section 162 as a trade or business expense. A 
deduction is allowed only to the extent the amount of expenses 
exceeds the amount excludable from income under section 135 
(relating to education savings bonds), section 529(c)(1) 
(relating to qualified tuition programs), and section 530(d)(2) 
(relating to Coverdell education savings accounts).
      An eligible educator is a kindergarten through grade 12 
teacher, instructor, counselor, principal, or aide in a school 
for at least 900 hours during a school year. A school means any 
school which provides elementary education or secondary 
education, as determined under State law.
      The above-the-line deduction for eligible educators is 
not allowed for taxable years beginning after December 31, 
2005.

                            HOUSE BILL \279\
---------------------------------------------------------------------------

    \279\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The House bill allows the above-the-line deduction for 
taxable years beginning prior to January 1, 2006.
      Effective date.--The provision is effective for taxable 
years beginning in 2004 and 2005.

                         SENATE AMENDMENT \280\
---------------------------------------------------------------------------

    \280\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
36. Accelerated depreciation for business property on Indian 
        reservations (sec. 408 of the House bill, sec. 717 of the 
        Senate amendment, and sec. 168 of the Code)

                              PRESENT LAW

      With respect to certain property used in connection with 
the conduct of a trade or business within an Indian 
reservation, depreciation deductions under section 168(j) will 
be determined using the following recovery periods:

                                                                   Years
3-year property...................................................     2
5-year property...................................................     3
7-year property...................................................     4
10-year property..................................................     6
15-year property..................................................     9
20-year property..................................................    12
Nonresidential real property......................................    22

      ``Qualified Indian reservation property'' eligible for 
accelerated depreciation includes property which is (1) used by 
the taxpayer predominantly in the active conduct of a trade or 
business within an Indian reservation, (2) not used or located 
outside the reservation on a regular basis, (3) not acquired 
(directly or indirectly) by the taxpayer from a person who is 
related to the taxpayer (within the meaning of section 
465(b)(3)(C)), and (4) described in the recovery-period table 
above. In addition, property is not ``qualified Indian 
reservation property'' if it is placed in service for purposes 
of conducting gaming activities. Certain ``qualified 
infrastructure property'' may be eligible for the accelerated 
depreciation even if located outside an Indian reservation, 
provided that the purpose of such property is to connect with 
qualified infrastructure property located within the 
reservation (e.g., roads, power lines, water systems, railroad 
spurs, and communications facilities).
      The depreciation deduction allowed for regular tax 
purposes is also allowed for purposes of the alternative 
minimum tax. The accelerated depreciation for Indian 
reservations is available with respect to property placed in 
service on or after January 1, 1994, and before January 1, 
2006.

                            HOUSE BILL \281\

      The provision extends eligibility for the special 
depreciation periods to property placed in service before 
January 1, 2006.
---------------------------------------------------------------------------
    \281\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective on the date 
of enactment.

                         SENATE AMENDMENT \282\

      Same as the House bill.
---------------------------------------------------------------------------
    \282\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
37. Charitable contributions of computer technology and equipment used 
        for educational purposes and of scientific property used for 
        research (sec. 409 of the House bill, sec. 706 of the Senate 
        amendment, and sec. 170 of the Code)

                              PRESENT LAW

      A deduction for charitable contributions of computer 
technology and equipment and of scientific property used for 
research generally is limited to the taxpayer's basis in the 
property. However, certain corporations may claim a deduction 
in excess of basis for a qualified computer contribution or a 
qualified research contribution. To be eligible for the 
enhanced deduction, the contributed property must be 
constructed by the taxpayer, among other requirements. The 
enhanced deduction for qualified computer contributions expires 
for contributions made during any taxable year beginning after 
December 31, 2005.

                            HOUSE BILL \283\
---------------------------------------------------------------------------

    \283\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The House bill extends the enhanced deduction for 
qualified computer contributions to contributions made during 
any taxable year beginning before January 1, 2006.
      Effective date.--Taxable years beginning after December 
31, 2003.

                         SENATE AMENDMENT \284\
---------------------------------------------------------------------------

    \284\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment expands the enhanced deduction for 
qualified computer contributions and qualified research 
contributions to apply to property assembled by the taxpayer as 
well as property constructed by the taxpayer.
      The extension of the enhanced deduction for qualified 
computer contributions is the same as the House bill.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
38. Expensing of environmental remediation costs (sec. 410 of the House 
        bill, sec. 708 of the Senate amendment, and sec. 198 of the 
        Code)

                              PRESENT LAW

      Taxpayers can elect to treat certain environmental 
remediation expenditures that would otherwise be chargeable to 
capital account as deductible in the year paid or incurred. The 
deduction applies for both regular and alternative minimum tax 
purposes. The expenditure must be incurred in connection with 
the abatement or control of hazardous substances at a qualified 
contaminated site (so called ``brownfields'').
      Eligible expenditures are those paid or incurred before 
January 1, 2006.

                            HOUSE BILL \285\
---------------------------------------------------------------------------

    \285\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The House bill extends the present law expensing 
provision for two years (through December 31, 2005).
      Effective date.--The provision is effective for expenses 
paid or incurred after December 31, 2003.

                         SENATE AMENDMENT \286\
---------------------------------------------------------------------------

    \286\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or Senate amendment provision.
39. Availability of Archer medical savings accounts (sec. 411 of the 
        House bill and sec. 220 of the Code)

                              PRESENT LAW

In general
      Within limits, contributions to an Archer medical savings 
account (``Archer MSA'') are deductible in determining adjusted 
gross income if made by an eligible individual and are 
excludable from gross income and wages for employment tax 
purposes if made by the employer of an eligible individual. 
Earnings on amounts in an Archer MSA are not currently taxable. 
Distributions from an Archer MSA for medical expenses are not 
includible in gross income. Distributions not used for medical 
expenses are includible in gross income. In addition, 
distributions not used for medical expenses are subject to an 
additional 15-percent tax unless the distribution is made after 
age 65, death, or disability.
Eligible individuals
      Archer MSAs are available to employees covered under an 
employer-sponsored high deductible plan of a small employer and 
self-employed individuals covered under a high deductible 
health plan.\287\ An employer is a small employer if it 
employed, on average, no more than 50 employees on business 
days during either the preceding or the second preceding year. 
An individual is not eligible for an Archer MSA if he or she is 
covered under any other health plan in addition to the high 
deductible plan.
---------------------------------------------------------------------------
    \287\ Self-employed individuals include more than two-percent 
shareholders of S corporations who are treated as partners for purposes 
of fringe benefit rules pursuant to section 1372.
---------------------------------------------------------------------------
Tax treatment of and limits on contributions
      Individual contributions to an Archer MSA are deductible 
(within limits) in determining adjusted gross income (i.e., 
``above-the-line''). In addition, employer contributions are 
excludable from gross income and wages for employment tax 
purposes (within the same limits), except that this exclusion 
does not apply to contributions made through a cafeteria plan. 
In the case of an employee, contributions can be made to an 
Archer MSA either by the individual or by the individual's 
employer.
      The maximum annual contribution that can be made to an 
Archer MSA for a year is 65 percent of the deductible under the 
high deductible plan in the case of individual coverage and 75 
percent of the deductible in the case of family coverage.
Definition of high deductible plan
      A high deductible plan is a health plan with an annual 
deductible of at least $1,700 and no more than $2,600 in the 
case of individual coverage and at least $3,450 and no more 
than $5,150 in the case of family coverage. In addition, the 
maximum out-of-pocket expenses with respect to allowed costs 
(including the deductible) must be no more than $3,450 in the 
case of individual coverage and no more than $6,300 in the case 
of family coverage.\288\ A plan does not fail to qualify as a 
high deductible plan merely because it does not have a 
deductible for preventive care as required by State law. A plan 
does not qualify as a high deductible health plan if 
substantially all of the coverage under the plan is for 
permitted coverage (as described above). In the case of a self-
insured plan, the plan must in fact be insurance (e.g., there 
must be appropriate risk shifting) and not merely a 
reimbursement arrangement.
---------------------------------------------------------------------------
    \288\ These dollar amounts are for 2004. These amounts are indexed 
for inflation, rounded to the nearest $50.
---------------------------------------------------------------------------
Cap on taxpayers utilizing Archer MSAs and expiration of pilot program
      The number of taxpayers benefiting annually from an 
Archer MSA contribution is limited to a threshold level 
(generally 750,000 taxpayers). The number of Archer MSAs 
established has not exceeded the threshold level.
      After 2005, no new contributions may be made to Archer 
MSAs except by or on behalf of individuals who previously made 
(or had made on their behalf) Archer MSA contributions and 
employees who are employed by a participating employer.
      Trustees of Archer MSAs are generally required to make 
reports to the Treasury by August 1 regarding Archer MSAs 
established by July 1 of that year. If any year is a cut-off 
year, the Secretary is required to make and publish such 
determination by October 1 of such year.
      The reports required by MSA trustees for 2004 are treated 
as timely if made within 90 days after October 4, 2004. In 
addition, the determination of whether 2004 is a cut-off year 
and the publication of such determination is to be made within 
120 days of October 4, 2004. If 2004 is a cut-off year, the 
cut-off date will be the last day of such 120-day period.

                            HOUSE BILL \289\

      The House bill extends Archer MSAs through December 31, 
2005.
---------------------------------------------------------------------------
    \289\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for January 
1, 2004.

                         SENATE AMENDMENT \290\

      No provision.
---------------------------------------------------------------------------
    \290\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or Senate amendment provision.
40. Suspension of 100-percent-of-net-income limitation on percentage 
        depletion for oil and gas from marginal wells (sec. 412 of the 
        House bill, secs. 715 and 846 of the Senate amendment, and sec. 
        613A of the Code)

                              PRESENT LAW

Overview of depletion
      Depletion, like depreciation, is a form of capital cost 
recovery. In both cases, the taxpayer is allowed a deduction in 
recognition of the fact that an asset--in the case of depletion 
for oil or gas interests, the mineral reserve itself--is being 
expended in order to produce income. Certain costs incurred 
prior to drilling an oil or gas property are recovered through 
the depletion deduction. These include costs of acquiring the 
lease or other interest in the property and geological and 
geophysical costs (in advance of actual drilling).
      Depletion is available to any person having an economic 
interest in a producing property. An economic interest is 
possessed in every case in which the taxpayer has acquired by 
investment any interest in minerals in place, and secures, by 
any form of legal relationship, income derived from the 
extraction of the mineral, to which it must look for a return 
of its capital.\291\ Thus, for example, both working interests 
and royalty interests in an oil- or gas-producing property 
constitute economic interests, thereby qualifying the interest 
holders for depletion deductions with respect to the property. 
A taxpayer who has no capital investment in the mineral deposit 
does not possess an economic interest merely because it 
possesses an economic or pecuniary advantage derived from 
production through a contractual relation.
---------------------------------------------------------------------------
    \291\ Treas. Reg. sec. 1.611-1(b)(1).
---------------------------------------------------------------------------
Cost depletion
      Two methods of depletion are currently allowable under 
the Code: (1) the cost depletion method, and (2) the percentage 
depletion method.\292\ Under the cost depletion method, the 
taxpayer deducts that portion of the adjusted basis of the 
depletable property which is equal to the ratio of units sold 
from that property during the taxable year to the number of 
units remaining as of the end of the taxable year plus the 
number of units sold during the taxable year. Thus, the amount 
recovered under cost depletion may never exceed the taxpayer's 
basis in the property.
---------------------------------------------------------------------------
    \292\ Secs. 611-613.
---------------------------------------------------------------------------
Percentage depletion and related income limitations
      The Code generally limits the percentage depletion method 
for oil and gas properties to independent producers and royalty 
owners.\293\ Generally, under the percentage depletion method, 
15 percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable 
year.\294\ The amount deducted generally may not exceed 100 
percent of the net income from that property in any year (the 
``net-income limitation'').\295\ The 100-percent net-income 
limitation for marginal wells has been suspended for taxable 
years beginning after December 31, 1997, and before January 1, 
2006.
---------------------------------------------------------------------------
    \293\ Sec. 613A.
    \294\ Sec. 613A(c).
    \295\ Sec. 613(a).
---------------------------------------------------------------------------

                            HOUSE BILL \296\

      The provision extends the suspension of the net-income 
limitation for marginal wells for taxable years beginning 
before January 1, 2006.
---------------------------------------------------------------------------
    \296\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                         SENATE AMENDMENT \297\

      The Senate amendment extends the suspension of the net-
income limitation for marginal wells for taxable years 
beginning before January 1, 2007.
---------------------------------------------------------------------------
    \297\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--Same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the House bill 
or Senate amendment provision.
41. Qualified zone academy bonds (sec. 413 of the House bill, secs. 612 
        and 704 of the Senate amendment, and sec. 1397E of the Code)

                              PRESENT LAW

      Generally, ``qualified zone academy bonds'' are bonds 
issued by a State or local government, provided that at least 
95 percent of the proceeds are used for one or more qualified 
purposes with respect to a ``qualified zone academy'' and 
private entities have promised to contribute to the qualified 
zone academy certain equipment, technical assistance or 
training, employee services, or other property or services with 
a value equal to at least 10 percent of the bond proceeds. 
Qualified purposes with respect to any qualified zone academy 
are: (1) rehabilitating or repairing the public school facility 
in which the academy is established; (2) providing equipment 
for use at such academy; (3) developing course materials for 
education at such academy, and (4) training teachers and other 
school personnel. A total of $400 million of qualified zone 
academy bonds may be issued annually in calendar years 1998 
through 2005.

                            HOUSE BILL \298\

      The House bill authorizes $400 million of qualified zone 
academy bonds to be issued in 2004 and 2005.
---------------------------------------------------------------------------
    \298\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The House bill provision is effective 
for obligations issued after the date of enactment.

                         SENATE AMENDMENT \299\

      The Senate amendment expands the qualified purposes for 
which qualified zone academy bonds may be issued to include 
construction of the public school facility in which the 
qualified zone academy is established, and the acquisition of 
land on which the facility is to be constructed.
---------------------------------------------------------------------------
    \299\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment authorizes $400 million of qualified 
zone academy bonds to be issued in 2004 and 2005.
      Effective date.--The Senate amendment is effective for 
obligations issued after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
42. Tax Incentives for Investment in the District of Columbia (sec. 414 
        of the House bill, sec. 711 of the Senate amendment, and secs. 
        1400, 1400A, and 1400C of the Code)

                              PRESENT LAW

      Certain economically depressed census tracts within the 
District of Columbia are designated as the District of Columbia 
Enterprise Zone (the ``D.C. Zone'') within which businesses and 
individual residents are eligible for special tax incentives. 
The designation expires on December 31, 2005.
      First-time homebuyers of a principal residence in the 
District of Columbia are eligible for a nonrefundable tax 
credit of up to $5,000 of the amount of the purchase price. The 
credit expires for property purchased after December 31, 2005.

                            HOUSE BILL \300\

      The House bill extends the D.C. Zone designation and 
related tax incentives for two years, and extends the first-
time homebuyer credit for two years.
---------------------------------------------------------------------------
    \300\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision takes effect on the date 
of enactment, except that the provision relating to tax-exempt 
financing incentives, which applies to obligations issued after 
December 31, 2003.

                         SENATE AMENDMENT \301\

      Same as the House bill.
---------------------------------------------------------------------------
    \301\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision takes effect on January 1, 
2004, except that the provision relating to tax-exempt 
financing incentives applies to obligations issued after the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
43. Modifications to New York Liberty Zone bond provisions (sec. 415 of 
        the House bill, secs. 611 and 709 of the Senate amendment, and 
        sec. 1400L of the Code)

                              PRESENT LAW

      An aggregate of $8 billion in tax-exempt private activity 
bonds is authorized for the purpose of financing the 
construction and repair of infrastructure in New York City 
(``Liberty Zone bonds''). The bonds must be issued before 
January 1, 2010.
      Certain bonds used to fund facilities located in New York 
City are permitted one additional advance refunding before 
January 1, 2006 (``advance refunding bonds''). In addition to 
satisfying other requirements, the bond refunded must be (1) a 
State or local bond that is a general obligation of New York 
City, (2) a State or local bond issued by the New York 
Municipal Water Finance Authority or Metropolitan 
Transportation Authority of the City of New York, or (3) a 
qualified 501(c)(3) bond which is a qualified hospital bond 
issued by or on behalf of the State of New York or the City of 
New York.\302\ The maximum amount of advance refunding bonds is 
$9 billion.
---------------------------------------------------------------------------
    \302\ On July 8, 2002, the IRS issued Notice 2002-42, which 
provides that bonds issued by the Municipal Assistance Corporation for 
the City of New York are eligible for the advance refunding provisions 
of section 1400L(e) if they otherwise satisfy the requirements of that 
section.
---------------------------------------------------------------------------

                            HOUSE BILL \303\

      The House bill provision extends authority to issue 
Liberty Zone bonds through December 31, 2009.
---------------------------------------------------------------------------
    \303\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for bonds 
issued after the date of enactment and before January 1, 2010.

                         SENATE AMENDMENT \304\

      The Senate amendment extends authority to issue Liberty 
Zone bonds through December 31, 2009, and extends the 
additional advance refunding authority through December 31, 
2005. The Senate amendment provides that bonds issued by the 
Municipal Assistance Corporation are eligible for advance 
refunding.
---------------------------------------------------------------------------
    \304\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provisions extending authority to 
issue Liberty Zone bonds and an additional advance refunding 
are effective on the date of enactment. The provision relating 
to the advance refunding of bonds of the Municipal Assistance 
Corporation is effective as if included in the amendments made 
by section 301 of the Job Creation and Worker Assistance Act of 
2002.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
44. Qualified New York Liberty Zone leasehold improvement election out 
        (sec. 709(c) of the Senate amendment)

                              PRESENT LAW

      Qualified New York Liberty Zone leasehold improvements 
placed in service after September 10, 2001 and before January 
1, 2007 are depreciable over five years (rather than 39 years) 
using the straight line method of depreciation. There is no 
election out of this provision.
      Liberty Zone leasehold improvements that are eligible for 
a five-year recovery period are not also eligible for the 30-
percent first-year bonus depreciation under section 168(k) or 
1400L(b). A taxpayer may elect out of bonus depreciation. The 
election out is made at the property class level. Section 
168(k)(2)(C)(iii) provides that the election applies to all 
property in the class or classes for which the election out is 
made that is placed in service for the tax year of the 
election.

                            HOUSE BILL \305\

      No provision.
---------------------------------------------------------------------------
    \305\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------

                         SENATE AMENDMENT \306\

      The Senate amendment permits a taxpayer to elect out of 
the five-year recovery period for qualified New York Liberty 
Zone leasehold improvement property under rules similar to 
section 168(k)(2)(C)(iii).
---------------------------------------------------------------------------
    \306\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is effective as if 
included in the amendments made by section 301 of the Job 
Creation and Worker Assistance Act of 2002.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
45. Disclosures relating to terrorist activities (sec. 416 of the House 
        bill and sec. 6103 of the Code)

                              PRESENT LAW

      In connection with terrorist activities, the IRS is 
permitted to disclose return information, other than taxpayer 
return information, to officers and employees of Federal law 
enforcement upon a written request. The Code requires the 
request to be made by the head of the Federal law enforcement 
agency (or his delegate) involved in the response to or 
investigation of terrorist incidents, threats, or activities, 
and set forth the specific reason or reasons why such 
disclosure may be relevant to a terrorist incident, threat, or 
activity. Disclosure of the information is permitted to 
officers and employees of the Federal law enforcement agency 
who are personally and directly involved in the response to or 
investigation of terrorist incidents, threats, or activities. 
The information is to be used by such officers and employees 
solely for such response or investigation.\307\ A taxpayer's 
identity is not treated as taxpayer return information for 
purposes of disclosures to law enforcement agencies regarding 
terrorist activities.
---------------------------------------------------------------------------
    \307\ Sec. 6103(i)(7)(A).
---------------------------------------------------------------------------
      The Code permits the head of the Federal law enforcement 
agency to redisclose the information to officers and employees 
of State and local law enforcement personally and directly 
engaged in the response to or investigation of the terrorist 
incident, threat, or activity. The State or local law 
enforcement agency is required to be part of an investigative 
or response team with the Federal law enforcement agency for 
these disclosures to be made.\308\
---------------------------------------------------------------------------
    \308\ Sec. 6103(i)(7)(A)(ii).
---------------------------------------------------------------------------
      The Code also allows the IRS to disclose return 
information (other than taxpayer return information) upon the 
written request of an officer or employee of the Department of 
Justice or Treasury who is appointed by the President with the 
advice and consent of the Senate, or who is the Director of the 
U.S. Secret Service, if such individual is responsible for the 
collection and analysis of intelligence and counterintelligence 
concerning any terrorist incident, threat, or activity.\309\ 
Taxpayer identity information for this purpose is not 
considered taxpayer return information. Such written request is 
required to set forth the specific reason or reasons why such 
disclosure may be relevant to a terrorist incident, threat, or 
activity. Disclosures under this authority are permitted to be 
made to those officers and employees of the Department of 
Justice, Treasury, and Federal intelligence agencies who are 
personally and directly engaged in the collection or analysis 
of intelligence and counterintelligence information or 
investigation concerning any terrorist incident, threat, or 
activity. Such disclosures are permitted solely for the use of 
such officers and employees in such investigation, collection, 
or analysis.
---------------------------------------------------------------------------
    \309\ Sec. 6103(i)(7)(B).
---------------------------------------------------------------------------
      The IRS, on its own initiative, is permitted to disclose 
in writing return information (other than taxpayer return 
information) that may be related to a terrorist incident, 
threat, or activity to the extent necessary to apprise the head 
of the appropriate investigating Federal law enforcement 
agency.\310\ Taxpayer identity information for this purpose is 
not considered taxpayer return information. The head of the 
agency is permitted to redisclose such information to officers 
and employees of such agency to the extent necessary to 
investigate or respond to the terrorist incident, threat, or 
activity.
---------------------------------------------------------------------------
    \310\ Sec. 6103(i)(3)(C).
---------------------------------------------------------------------------
      If taxpayer return information is sought, the disclosure 
is required to be made pursuant to the ex parte order of a 
Federal district court judge or magistrate.
      No disclosures may be made under these provisions after 
December 31, 2005.

                            HOUSE BILL \311\

      The House bill provision extends all disclosure authority 
relating to terrorist activities through December 31, 2005. The 
House bill provision permits the disclosure of taxpayer 
identity upon receiving a proper written request from the head 
of a Federal law enforcement agency.
---------------------------------------------------------------------------
    \311\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The House bill generally applies to 
disclosures made on or after the date of enactment. The 
provision permitting the disclosure of taxpayer identity upon 
receiving a proper written request from the head of a Federal 
law enforcement agency is effective as if included in section 
201 of the Victims of Terrorism Tax Relief Act of 2001.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
46. Disclosure of return information relating to student loans (sec. 
        417 of the House bill, sec. 718 of the Senate amendment, and 
        sec. 6103(l) of the Code)

                              PRESENT LAW

      Present law prohibits the disclosure of returns and 
return information, except to the extent specifically 
authorized by the Code.\312\ An exception is provided for 
disclosure to the Department of Education (but not to 
contractors thereof) of a taxpayer's filing status, adjusted 
gross income and identity information (i.e., name, mailing 
address, taxpayer identifying number) to establish an 
appropriate repayment amount for an applicable student 
loan.\313\ The Department of Education disclosure authority is 
scheduled to expire after December 31, 2005.\314\
---------------------------------------------------------------------------
    \312\ Sec. 6103.
    \313\ Sec. 6103(l)(13).
    \314\ Pub. L. No. 108-311 (2004).
---------------------------------------------------------------------------
      An exception to the general rule prohibiting disclosure 
is also provided for the disclosure of returns and return 
information to a designee of the taxpayer.\315\ Because the 
Department of Education utilizes contractors for the income-
contingent loan verification program, the Department of 
Education obtains taxpayer information by consent under section 
6103(c), rather than under the specific exception.\316\ The 
Department of Treasury has reported that the Internal Revenue 
Service processes approximately 100,000 consents per year for 
this purpose.\317\
---------------------------------------------------------------------------
    \315\ Sec. 6103(c).
    \316\ Department of Treasury, Report to the Congress on Scope and 
Use of Taxpayer Confidentiality and Disclosure Provisions, Volume I: 
Study of General Provisions (October 2000) at 91.
    \317\ Department of Treasury, General Explanations of the 
Administration's Fiscal Year 2004 Revenue Proposals (February 2003) at 
133.
---------------------------------------------------------------------------

                            HOUSE BILL \318\

      The House bill extends the disclosure authority relating 
to the disclosure of return information to carry out income-
contingent repayment of student loans. No disclosures can be 
made after December 31, 2005.
---------------------------------------------------------------------------
    \318\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective on the date 
of enactment.

                         SENATE AMENDMENT \319\

      Same as the House bill.
---------------------------------------------------------------------------
    \319\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
47. Extension of cover over of excise tax on distilled spirits to 
        Puerto Rico and Virgin Islands (sec. 418 of the House bill, 
        sec. 705 of the Senate amendment, and sec. 7652 of the Code)

                              PRESENT LAW

      A $13.50 per proof gallon (a proof gallon is a liquid 
gallon consisting of 50 percent alcohol) excise tax is imposed 
on distilled spirits produced in or imported into the United 
States.
      The Code provides for cover over (payment) to Puerto Rico 
and the Virgin Islands of the excise tax imposed on rum 
imported into the United States, without regard to the country 
of origin. The amount of the cover over is limited under 
section 7652(f) to $10.50 per proof gallon ($13.25 per proof 
gallon during the period July 1, 1999 through December 31, 
2003).
      Thus, tax amounts attributable to rum produced in Puerto 
Rico are covered over to Puerto Rico. Tax amounts attributable 
to rum produced in the Virgin Islands are covered over to the 
Virgin Islands. Tax amounts attributable to rum produced in 
neither Puerto Rico nor the Virgin Islands are divided and 
covered over to the two possessions under a formula. All of the 
amounts covered over are subject to the limitation.
      Section 305 of H.R. 1308, Pub. L. No. 108-311 (the 
``Working Families Tax Relief Act of 2004'') temporarily 
suspended the $10.50 per proof gallon limitation on the amount 
of excise taxes on rum covered over to Puerto Rico and the 
Virgin Islands. That law extended the cover over amount of 
$13.25 per proof gallon for rum brought into the United States 
after December 31, 2003, and before January 1, 2006. After 
December 31, 2005, the cover over amount reverts to $10.50 per 
proof gallon.

                            HOUSE BILL \320\

      The provision temporarily suspends the $10.50 per proof 
gallon limitation on the amount of excise taxes on rum covered 
over to Puerto Rico and the Virgin Islands. Under the 
provision, the cover over amount of $13.25 per proof gallon is 
extended for rum brought into the United States after December 
31, 2003, and before January 1, 2006. After December 31, 2005, 
the cover over amount reverts to $10.50 per proof gallon.
---------------------------------------------------------------------------
    \320\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision applies to articles 
brought into the United States after December 31, 2003.

                         SENATE AMENDMENT \321\

      Same as the House bill.
---------------------------------------------------------------------------
    \321\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
and the Senate amendment provision.
48. Joint review of strategic plans and budget for the IRS (sec. 419 of 
        the House bill and secs. 8021 and 8022 of the Code)

                              PRESENT LAW

      The Joint Committee on Taxation is required to conduct a 
joint review \322\ of the strategic plans and budget of the IRS 
from 1999 through 2004.\323\ The joint review required in 2004 
is considered as timely if conducted before June 1, 2005. The 
Joint Committee was required to provide an annual report \324\ 
from 1999 through 2003 with respect to:
---------------------------------------------------------------------------
    \322\ The joint review is required to include two members of the 
majority and one member of the minority of the Senate Committees on 
Finance, Appropriations, and Governmental Affairs, and of the House 
Committees on Ways and Means, Appropriations, and Government Reform and 
Oversight.
    \323\ Sec. 8021(f).
    \324\ Sec. 8022(3)(C).
---------------------------------------------------------------------------
         Strategic and business plans for the IRS;
         Progress of the IRS in meeting its objectives;
         The budget for the IRS and whether it supports its 
        objectives;
         Progress of the IRS in improving taxpayer service and 
        compliance;
         Progress of the IRS on technology modernization; and
         The annual filing season.
With respect to the annual report for the joint review required 
in 2004, the report must cover the matters addressed in the 
joint review.

                            HOUSE BILL \325\

      The Joint Committee on Taxation is required to conduct a 
joint review before June 1, 2005, and to provide an annual 
report with respect to such joint review. The content of the 
annual report is the matters addressed in the joint review.
---------------------------------------------------------------------------
    \325\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
49. Extension of parity in the application of certain limits to mental 
        health benefits (sec. 420 of the House bill, sec. 701 of the 
        Senate amendment, sec. 9812 of the Code, sec. 712 of ERISA, and 
        section 2705 of the PHSA)

                              PRESENT LAW

      The Mental Health Parity Act of 1996 amended the Employee 
Retirement Income Security Act of 1974 (``ERISA'') and the 
Public Health Service Act (``PHSA'') to provide that group 
health plans that provide both medical and surgical benefits 
and mental health benefits cannot impose aggregate lifetime or 
annual dollar limits on mental health benefits that are not 
imposed on substantially all medical and surgical benefits. The 
provisions of the Mental Health Parity Act were initially 
effective with respect to plan years beginning on or after 
January 1, 1998, for a temporary period. Since enactment, the 
mental health parity requirements in ERISA and the PHSA have 
been extended on more than one occasion and were most recently 
extended to apply with respect to benefits for services 
furnished before January 1, 2006, by the Working Families Tax 
Relief Act of 2004 (``WFTRA'').\326\
---------------------------------------------------------------------------
    \326\ Pub. L. No. 108-311 (2004).
---------------------------------------------------------------------------
      The Taxpayer Relief Act of 1997 added to the Code the 
requirements imposed under the Mental Health Parity Act, and 
imposed an excise tax on group health plans that fail to meet 
the requirements. The excise tax is equal to $100 per day 
during the period of noncompliance and is generally imposed on 
the employer sponsoring the plan if the plan fails to meet the 
requirements. The maximum tax that can be imposed during a 
taxable year cannot exceed the lesser of 10 percent of the 
employer's group health plan expenses for the prior year or 
$500,000. No tax is imposed if the Secretary determines that 
the employer did not know, and exercising reasonable diligence 
would not have known, that the failure existed.
      The mental health parity requirements in the Code were 
initially effective with respect to plan years beginning on or 
after January 1, 1998, for a temporary period. Since enactment, 
the mental health parity requirements in the Code have been 
extended on more than one occasion and were most recently 
extended to apply with respect to benefits for services 
furnished before January 1, 2006, by the WFTRA.

                            HOUSE BILL \327\

      The House bill extends the Code provisions relating to 
mental health parity to benefits for services furnished on or 
after the date of enactment and before January 1, 2006. The 
excise tax on failures to meet the requirements imposed by the 
Code provisions does not apply after December 31, 2003, and 
before the date of enactment.
---------------------------------------------------------------------------
    \327\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for benefits 
for services furnished on or after December 31, 2003.

                         SENATE AMENDMENT \328\

      The Senate amendment extends the ERISA and PHSA 
provisions relating to mental health parity to benefits for 
services furnished before January 1, 2006. The Senate amendment 
also extends the Code provisions relating to mental health 
parity to benefits for services furnished on or after the date 
of enactment and before January 1, 2006. The excise tax on 
failures to meet the requirements imposed by the Code 
provisions does not apply after December 31, 2003, and before 
the date of enactment.
---------------------------------------------------------------------------
    \328\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment provision extending 
the Code provision applies to benefits for services furnished 
on or after December 31, 2003. The ERISA and PHSA provisions 
apply to benefits for services furnished on or after December 
31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
50. Combined employment tax reporting (sec. 421 of the House bill and 
        sec. 712 of the Senate amendment)

                              PRESENT LAW

      Traditionally, Federal tax forms are filed with the 
Federal government and State tax forms are filed with 
individual States. This necessitates duplication of items 
common to both returns.
      The Taxpayer Relief Act of 1997 permits implementation of 
a limited demonstration project to assess the feasibility and 
desirability of expanding combined Federal and State reporting. 
As enacted, it was limited to the sharing of information 
between the State of Montana and the IRS, but any State may 
participate in a combined reporting program under present law. 
However, the project is limited to employment tax reporting. In 
addition, it is limited to disclosure of the name, address, 
TIN, and signature of the taxpayer. The authority for the 
demonstration project expired on the date five years after the 
date of enactment (August 5, 2002).
      The Working Families Tax Relief Act of 2004 expanded to 
all States the authority to participate in a combined Federal 
and State employment tax reporting program. The authority for 
this expanded program expires December 31, 2005.

                            HOUSE BILL \329\

      The House bill provision extends the demonstration 
project through December 31, 2005.
---------------------------------------------------------------------------
    \329\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The House bill provision takes effect on 
the date of enactment.

                         SENATE AMENDMENT \330\

      The Senate amendment provides permanent authority for any 
State to participate in a combined Federal and State employment 
tax reporting program, provided that the program has been 
approved by the Secretary.
---------------------------------------------------------------------------
    \330\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment takes effect on the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
51. Deduction for qualified clean-fuel vehicle property (sec. 422 of 
        the House bill, sec. 721 of the Senate amendment, and sec. 179 
        of the Code)

                              PRESENT LAW

      Certain costs of qualified clean-fuel vehicles may be 
expensed and deducted when such property is placed in service. 
Qualified clean-fuel vehicle property includes motor vehicles 
that use certain clean-burning fuels (natural gas, liquefied 
natural gas, liquefied petroleum gas, hydrogen, electricity and 
any other fuel at least 85 percent of which is methanol, 
ethanol, any other alcohol or ether). The maximum amount of the 
deduction is $50,000 for a truck or van with a gross vehicle 
weight over 26,000 pounds or a bus with seating capacities of 
at least 20 adults; $5,000 in the case of a truck or van with a 
gross vehicle weight between 10,000 and 26,000 pounds; and 
$2,000 in the case of any other motor vehicle. The deduction is 
one quarter of the otherwise allowable amount in 2006, and is 
unavailable for purchases after December 31, 2006.

                            HOUSE BILL \331\

      The House bill repeals the phase down of the allowable 
deduction for clean-fuel vehicles in 2004 and 2005. Thus, a 
taxpayer who purchases a qualifying vehicle may claim 100 
percent of the otherwise allowable deduction for vehicles 
purchased in 2004 and 2005. For vehicles purchased in 2006 the 
deduction remains at 25 percent of the otherwise allowable 
amount as under present law.
---------------------------------------------------------------------------
    \331\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for vehicles 
placed in service after December 31, 2003.

                         SENATE AMENDMENT \332\

      The Senate amendment repeals the phase down for each of 
2004, 2005, and 2006.
---------------------------------------------------------------------------
    \332\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      (Other sections of the Senate amendment create new 
credits for the purchase of certain vehicles that would be 
qualified clean-fuel vehicles under present law. These 
modifications are not described in this document.)
      Effective date.--The provision is effective for vehicles 
placed in service after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
52. Credit for qualified electric vehicles (sec. 422 of the House bill, 
        sec. 720 of the Senate amendment, and sec. 30 of the Code)

                              PRESENT LAW

      A ten-percent tax credit is provided for the cost of a 
qualified electric vehicle, up to a maximum credit of $4,000. A 
qualified electric vehicle generally is a motor vehicle that is 
powered primarily by an electric motor drawing current from 
rechargeable batteries, fuel cells, or other portable sources 
of electrical current. The full amount of the credit is 
available for purchases prior to 2006. The credit is reduced 
for purchases in 2006, and is unavailable for purchases after 
December 31, 2006.

                            HOUSE BILL \333\
---------------------------------------------------------------------------

    \333\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The House bill repeals the phase down of allowable tax 
credit for electric vehicles in 2004 and 2005. Thus, a taxpayer 
who purchases a qualifying vehicle may claim 100 percent of the 
otherwise allowable credit for vehicles purchased in 2004 and 
2005. For vehicles purchased in 2006 the credit remains at 25 
percent of the otherwise allowable amount as under present law.
      Effective date.--The provision is effective for vehicles 
placed in service after December 31, 2003.

                         SENATE AMENDMENT \334\
---------------------------------------------------------------------------

    \334\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      The Senate amendment repeals the phase down for each of 
2004, 2005, and 2006.
      (Other sections of the Senate amendment modify the 
credit. These modifications are not described in this 
document.)
      Effective date.--The provision is effective for vehicles 
placed in service after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
53. Repeal of reduction of deductions for mutual life insurance 
        companies (sec. 710 of the Senate amendment and sec. 809 of the 
        Code)

                              PRESENT LAW

      The Pension Funding Equity Act of 2004 \335\ repealed the 
rule requiring reduction in certain deductions of a mutual life 
insurance company (sec. 809), effective for taxable years 
beginning after 2004.
---------------------------------------------------------------------------
    \335\ Pub. L. No. 108-218.
---------------------------------------------------------------------------
      For taxable years beginning in 2004, under section 809, a 
mutual life insurance company is required to reduce its 
deduction for policyholder dividends by the company's 
differential earnings amount. If the company's differential 
earnings amount exceeds the amount of its deductible 
policyholder dividends, the company is required to reduce its 
deduction for changes in its reserves by the excess of its 
differential earnings amount over the amount of its deductible 
policyholder dividends. The differential earnings amount is the 
product of the differential earnings rate and the average 
equity base of a mutual life insurance company.
      The differential earnings rate is based on the difference 
between the average earnings rate of the 50 largest stock life 
insurance companies and the earnings rate of all mutual life 
insurance companies. The mutual earnings rate applied under the 
provision is the rate for the second calendar year preceding 
the calendar year in which the taxable year begins. Under 
present law, the differential earnings rate cannot be a 
negative number.
      A company's equity base equals the sum of: (1) its 
surplus and capital increased by 50 percent of the amount of 
any provision for policyholder dividends payable in the 
following taxable year; (2) the amount of its nonadmitted 
financial assets; (3) the excess of its statutory reserves over 
its tax reserves; and (4) the amount of any mandatory security 
valuation reserves, deficiency reserves, and voluntary 
reserves. A company's average equity base is the average of the 
company's equity base at the end of the taxable year and its 
equity base at the end of the preceding taxable year.
      A recomputation or ``true-up'' in the succeeding year is 
required if the differential earnings amount for the taxable 
year either exceeds, or is less than, the recomputed 
differential earnings amount. The recomputed differential 
earnings amount is calculated taking into account the average 
mutual earnings rate for the calendar year (rather than the 
second preceding calendar year, as above). The amount of the 
true-up for any taxable year is added to, or deducted from, the 
mutual company's income for the succeeding taxable year.
      For taxable years beginning in 2001, 2002, or 2003, the 
differential earnings amount is treated as zero for purposes of 
computing both the differential earnings amount and the 
recomputed differential earnings amount (true-up).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision repeals the rule requiring reduction in 
certain deductions of a mutual life insurance company (sec. 
809) for taxable years beginning in 2004.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
54. Study of earnings stripping provisions (sec. 163(j) of the Code)

                              PRESENT LAW

      Present law provides rules to limit the ability of U.S. 
corporations to reduce the U.S. tax on their U.S.-source income 
through certain earnings stripping transactions. These rules 
limit the deductibility of interest paid to certain related 
parties (``disqualified interest''), if the payor's debt-equity 
ratio exceeds 1.5 to 1 and the payor's net interest expense 
exceeds 50 percent of its ``adjusted taxable income'' 
(generally taxable income computed without regard to deductions 
for net interest expense, net operating losses, and 
depreciation, amortization, and depletion). Disqualified 
interest for these purposes also may include interest paid to 
unrelated parties in certain cases in which a related party 
guarantees the debt.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement requires the Treasury Department 
to conduct a study of the earnings stripping rules, including a 
study of the effectiveness of these rules in preventing the 
shifting of income outside the United States, whether any 
deficiencies in these rules have the effect of placing U.S.-
based businesses at a competitive disadvantage relative to 
foreign-based businesses, the impact of earnings stripping 
activities on the U.S. tax base, whether laws of foreign 
countries facilitate the stripping of earnings out of the 
United States, and whether changes to the earnings stripping 
rules would affect jobs in the United States. This study is to 
include specific recommendations for improving these rules and 
is to be submitted to the Congress not later than June 30, 
2005.
      Effective date.--The provision is effective on the date 
of enactment.

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

          A. Deduction of State and Local General Sales Taxes

(Sec. 501 of the House bill and sec. 164 of the Code)

                              PRESENT LAW

      An itemized deduction is permitted for certain State and 
local taxes paid, including individual income taxes, real 
property taxes, and personal property taxes. No itemized 
deduction is permitted for State or local general sales taxes.

                               HOUSE BILL

      The provision provides that, at the election of the 
taxpayer, an itemized deduction may be taken for State and 
local general sales taxes in lieu of the itemized deduction 
provided under present law for State and local income taxes. 
The allowable deduction would be determined under tables 
prescribed by the Secretary. The tables would be based on the 
average consumption of taxpayers on a State-by-State basis, and 
would take into account filing status, number of dependents, 
adjusted gross income, and rates of State and local general 
sales taxes.
      The term `general sales tax' means a tax imposed at one 
rate with respect to the sale at retail of a broad range of 
classes of items. However, in the case of items of food, 
clothing, medical supplies, and motor vehicles, the fact that 
the tax does not apply with respect to some or all of such 
items is not taken into account in determining whether the tax 
applies with respect to a broad range of classes of items, and 
the fact that the rate of tax applicable with respect to some 
or all of such items is lower than the general rate of tax is 
not taken into account in determining whether the tax is 
imposed at one rate. Except in the case of a lower rate of tax 
applicable with respect to food, clothing, medical supplies, or 
motor vehicles, no deduction is allowed for any general sales 
tax imposed with respect to an item at a rate other than the 
general rate of tax. However, in the case of motor vehicles, if 
the rate of tax exceeds the general rate, such excess shall be 
disregarded and the general rate is treated as the rate of tax.
      A compensating use tax with respect to an item is treated 
as a general sales tax, provided such tax is complementary to a 
general sales tax and a deduction for sales taxes is allowable 
with respect to items sold at retail in the taxing jurisdiction 
that are similar to such item.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003, and prior to January 
1, 2006.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with the 
following modification.
      Rather than requiring that taxpayers use tables 
prescribed by the Secretary to determine their allowable sales 
tax deduction, taxpayers would instead have two options with 
respect to the determination of the sales tax deduction amount. 
Taxpayers would be able to deduct the total amount of general 
State and local sales taxes paid by accumulating receipts 
showing general sales taxes paid. Alternatively, taxpayers may 
use tables created by the Secretary of the Treasury. The tables 
are to be based on average consumption by taxpayers on a State-
by-State basis, taking into account filing status, number of 
dependents, adjusted gross income and rates of State and local 
general sales taxation. Taxpayers who use the tables created by 
the Secretary may, in addition to the table amounts, deduct 
eligible general sales taxes paid with respect to the purchase 
of motor vehicles, boats and other items specified by the 
Secretary. Sales taxes for items that may be added to the 
tables would not be reflected in the tables themselves.
      The IRS is currently in the process of finalizing tax 
forms for 2004. The Code has not contained an itemized 
deduction for State and local sales taxes for a number of 
years. Developing the tables required by the provision will in 
general require a significant amount of time and effort. The 
conferees anticipate that IRS will do the best they can to 
reasonably and accurately implement this statutory provision in 
order to effectuate the deduction for the 2005 filing season.

              TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM

                           A. Tobacco Reform

(Secs. 701-725 of the House bill and title XI of the Senate amendment)

                              PRESENT LAW

      The current tobacco program has two main components: a 
supply management component and a price support component. In 
addition, in 1982, Congress passed the ``No-Net-Cost Tobacco 
Program Act'' \336\ that assured the tobacco program would run 
at no-net-cost to the Federal government.
---------------------------------------------------------------------------
    \336\ Pub. L. No. 97-218 (1982).
---------------------------------------------------------------------------
Supply management
      The supply management component limits and stabilizes the 
quantity of tobacco marketed by farmers. This is achieved 
through marketing quotas. The Secretary of Agriculture raises 
or lowers the national marketing quota on an annual basis. The 
Secretary establishes the national marketing quota for each 
type of tobacco based upon domestic and export demand, but at a 
price above the government support price. The purpose of 
matching supply with demand is to keep the price of tobacco 
high. There is a secondary market in tobacco quota. Tobacco 
growers who do not have sufficient quota may purchase or rent 
one.
Support price
      Given the numerous variables that affect tobacco supply 
and demand, marketing quotas alone have not always been able to 
guarantee tobacco prices. Therefore, in addition to marketing 
quotas, Federal support prices are established and guaranteed 
through the mechanism of nonrecourse loans available on each 
farmer's marketed crop. The loan price for each type of tobacco 
is announced each year by the Department of Agriculture using 
the formula specified in the law to calculate loan levels. This 
system guarantees minimum prices for the different types of 
tobacco.
      The national loan price on 2004 crop flue-cured tobacco 
is $1.69 per pound; the burley loan price is $1.873 per pound.
No-net-cost assessment
      In 1982, Congress passed the ``No-Net-Cost Tobacco 
Program Act.'' The purpose of this program is to ensure that 
the nonrecourse loan program is run at no-net-cost to the 
Federal government.
      When tobacco is not contracted, it is sold at an auction 
sale barn. At the auction sale barn, each lot of tobacco goes 
to the highest bidder, unless that bid does not exceed the 
government's loan price. When the bid does not exceed this 
price, the farmer may choose to be paid the loan price by a 
cooperative, with money borrowed from the Commodity Credit 
Corporation (``CCC''). In such cases, the tobacco is consigned 
to the cooperative (known as a price stabilization 
cooperative), which redries, packs, and stores the tobacco as 
collateral for the CCC. The cooperative, acting as an agent for 
the CCC, later sells the tobacco, with the proceeds going to 
repay the loan plus interest. If the cooperative does not 
recover the cost of the loan plus interest, the Secretary of 
Agriculture assesses growers, purchasers and importers of 
tobacco in order to repay the difference. All growers, 
purchasers and importers of tobacco participate in paying these 
assessments, regardless of whether or not they participate in 
the loan program.
      The no-net-cost assessment on 2004 crop flue-cured is 
$0.10 per pound; the burley assessment is $0.02 per pound. The 
no-net-cost assessment funds are deposited in an escrow account 
that is held to reimburse the government for any financial 
losses resulting from tobacco loan operations.
      Currently, over 80 percent of growers market their 
tobacco through contracts with tobacco companies, and thus 
these growers do not participate in the loan program. However, 
they must still pay the no-net-cost assessment when the 
Secretary levies it. The remaining 20 percent of growers market 
their tobacco through the auction system, and are eligible for 
participation in the loan program. Of this group, over 60 
percent have consistently participated in the loan program 
during the past several years.

                               HOUSE BILL

      The House bill repeals the Federal tobacco support 
program, including marketing quotas and nonrecourse marketing 
loans. The House bill also provides quota holders $7.00 per 
pound based on their 2002 quota allotment paid in equal 
installments over five years. Additionally, the House bill 
provides producers transition payments of $3.00 per pound based 
on their 2002 quota levels paid in equal installments over five 
years. The House bill caps payments to quota holders and 
growers at $9.6 billion over fiscal years 2005 through 2009. 
The House bill applies to the 2005 and subsequent crops of 
tobacco.
      Effective date.--The House bill is effective on the date 
of enactment.

                            SENATE AMENDMENT

      The Senate amendment ends the current Federal tobacco 
program. The Senate amendment also provides quota holders $8.00 
per pound based on their 2002 quota levels paid over a 10-year 
period. Additionally, the Senate amendment provides tobacco 
growers with $4.00 per pound based on their 2002 quota levels, 
paid over a 10-year period. The payments are funded by 
assessments on tobacco companies. The Senate amendment also 
restricts tobacco production to traditional tobacco producing 
counties and provides poundage and acreage limitations on how 
much tobacco can be produced in the future as determined by 
production boards for each type of tobacco. The Senate 
amendment applies to the 2004 and subsequent crops of tobacco.
      Additionally, the Senate amendment gives the Food and 
Drug Administration regulatory authority over the content and 
marketing of tobacco products.
      Effective date.--The Senate amendment is effective on the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement repeals all aspects of the 
Federal tobacco support program, including marketing quotas and 
nonrecourse marketing loans. The conference agreement provides 
eligible quota holders $7 per pound on their basic quota 
allotment paid in equal installments over 10 years. 
Additionally, the conference agreement provides eligible 
producers transition payments of $3 per pound based on their 
effective quota paid in equal installments over 10 years.
      The Managers intend the payments to producers and quota 
holders to be made as quickly and effectively as possible. The 
Managers expect the Secretary to evaluate and consider the 
utilization of the proven financial and administrative 
expertise of the Phase II settlement system to achieve 
effective and prompt payment. The Managers further expect the 
Secretary to use the facilities of the Farm Service Agency to 
furnish information relating to accelerated payment options 
offered by financial institutions.
      Manufacturers and importers of tobacco products will pay 
a quarterly assessment into a newly formed Tobacco Trust Fund. 
These assessments will be on the following classes of tobacco: 
Cigarettes, Snuff, Chewing Tobacco, Pipe Tobacco, Roll-your-own 
tobacco, and Cigars. Assessment allocations will then be 
divided into manufacturers' and importers' market share. Funds 
from the Tobacco Trust Fund will be used to provide payments to 
quota holders and eligible producers as well as pay for program 
losses incurred by the U.S. Department of Agriculture.
      The conference agreement applies to the 2005 and 
subsequent crops of tobacco.
      Effective date.--The conference agreement is effective on 
the date of enactment.

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

      The Senate amendment contained a provision relating to 
protection of United States workers from competition of foreign 
workforces. The conference agreement does not include the 
Senate amendment provision.

                      TITLE VIII--OTHER PROVISIONS

                   A. Provisions Relating to Housing

1. Treatment of qualified mortgage revenue bonds (sec. 601 of the 
        Senate amendment and sec. 143 of the Code)

                              PRESENT LAW

      Under present law, qualified mortgage bonds are tax-
exempt bonds used to finance owner-occupied residences. Among 
other requirements, these bonds are subject to income and 
purchase price limitations, as well as a requirement that the 
homebuyer not have an ownership interest in the principal 
residence in the preceding three years.
      Generally, in order for a bond to be a qualified mortgage 
bond, the mortgagor's family income cannot exceed 115 percent 
of the applicable median family income. Adjustments are made 
for targeted area residences, for areas that have high housing 
costs in relation to income, and for family size. Further, 95 
percent or more of the net proceeds of qualified mortgage bonds 
must be used to finance residences for first-time homebuyers. 
Exceptions are made for financing of targeted area residences, 
qualified home improvement loans, and qualified rehabilitation 
loans.
      A residence financed with a mortgage funded by qualified 
mortgage bonds may not have a purchase price in excess of 90 
percent of the average area purchase price for that residence. 
Adjustments are made for residences located in certain low-
income or economically distressed areas, and for the number of 
families for which a residence is designed.
      Part or all of the interest subsidy provided by qualified 
mortgage bonds is recaptured if the borrower experiences 
substantial increases in income and disposes of the subsidized 
residence within nine years after purchase. The annual volume 
limitations imposed on most qualified private activity bonds 
limits the aggregate face amount of qualified mortgage bonds 
that may be issued. In addition, repayments of mortgage 
principal received after 10 years from the date of issue must 
be used to retire outstanding bonds (the ``10-year rule'').

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment suspends the 10-year rule for one 
year for outstanding bonds, allowing repayments of principal 
received during this period to be used to finance new mortgage 
loans rather than retiring outstanding bonds. The Senate 
amendment repeals the 10-year rule for bonds originally issued 
after the date of enactment.
      Effective date.--The provision repeals the 10-year rule 
for bonds issued after the date of enactment and suspends the 
10-year rule for outstanding bonds for a one-year period 
beginning on the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Premiums for mortgage insurance (sec. 602 of the Senate amendment 
        and secs. 163(h) and 6050H of the Code)

                              PRESENT LAW

      Present law provides that qualified residence interest is 
deductible notwithstanding the general rule that personal 
interest is nondeductible (sec. 163(h)).
      Qualified residence interest is interest on acquisition 
indebtedness and home equity indebtedness with respect to a 
principal and a second residence of the taxpayer. The maximum 
amount of home equity indebtedness is $100,000. The maximum 
amount of acquisition indebtedness is $1 million. Acquisition 
indebtedness means debt that is incurred in acquiring 
constructing, or substantially improving a qualified residence 
of the taxpayer, and that is secured by the residence. Home 
equity indebtedness is debt (other than acquisition 
indebtedness) that is secured by the taxpayer's principal or 
second residence, to the extent the aggregate amount of such 
debt does not exceed the difference between the total 
acquisition indebtedness with respect to the residence, and the 
fair market value of the residence.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision provides that premiums 
paid or accrued for qualified mortgage insurance by a taxpayer 
during the taxable year in connection with acquisition 
indebtedness on a qualified residence of the taxpayer are 
treated as qualified residence interest and thus deductible. 
The amount allowable as a deduction under the provision is 
phased out ratably by 10 percent for each $1,000 by which the 
taxpayer's adjusted gross income exceeds $100,000 ($500 and 
$50,000, respectively, in the case of a married individual 
filing a separate return). Thus, the deduction is not allowed 
if the taxpayer's adjusted gross income exceeds $110,000 
($55,000 in the case of married individual filing a separate 
return).
      For this purpose, qualified mortgage insurance means the 
Home Loan Guaranty Program of the Department of Veterans 
Affairs, and mortgage insurance provided by the Federal Housing 
Administration, or the Rural Housing Administration, and 
private mortgage insurance (defined in section 2 of the 
Homeowners Protection Act of 1998).
      Amounts paid for qualified mortgage insurance that are 
properly allocable to periods after the close of the taxable 
year are treated as paid in the period to which it is 
allocated. No deduction is allowed for the unamortized balance 
if the mortgage is paid before its term (except in the case of 
qualified mortgage insurance provided by the Department of 
Veterans Affairs or Rural Housing Administration).
      Reporting rules apply under the provision.
      Effective date.--The Senate amendment provision is 
effective for amounts paid or accrued after the date of 
enactment in taxable years beginning after December 31, 2004, 
and ending before January 1, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Increase in historic rehabilitation credit for residential housing 
        for the elderly (sec. 603 of the Senate amendment and secs. 42 
        and 47 of the Code)

                              PRESENT LAW

Rehabilitation credit
      Present law provides a credit for rehabilitation 
expenditures (sec. 47). A 20-percent credit is provided for 
rehabilitation expenditures with respect to a certified 
historic structure. For this purpose, a certified historic 
structure means any building that is listed in the National 
Register, or that is located in a registered historic district 
and is certified by the Secretary of the Interior to the 
Secretary of the Treasury as being of historic significance to 
the district.
      A building is treated as having been substantially 
rehabilitated only if the rehabilitation expenditures during 
the 24-month period selected by the taxpayer and ending within 
the taxable year exceed the greater of the adjusted basis of 
the building (and its structural components), or $5,000. The 
taxpayer's depreciable basis in the property is reduced by any 
rehabilitation credit claimed.
Low-income housing credit
      The low-income housing tax credit (sec. 42) may be 
claimed over a 10-year period for the cost of rental housing 
occupied by tenants having incomes below specified levels. The 
credit percentage for newly constructed or substantially 
rehabilitated housing that is not Federally subsidized is 
adjusted monthly by the Internal Revenue Service so that the 10 
annual installments have a present value of 70 percent of the 
total qualified expenditures. The credit percentage for new 
substantially rehabilitated housing that is Federally 
subsidized and for existing housing that is substantially 
rehabilitated is calculated to have a present value of 30 
percent of qualified expenditures. The aggregate credit 
authority provided annually to each State is $1.75 per 
resident, except in the case of projects that also receive 
financing with proceeds of tax-exempt bonds issued subject to 
the private activity bond volume limit and certain carry-over 
amounts. The $1.75 per resident cap is indexed for inflation.
      Qualified basis with respect to which the credit may be 
computed is generally determined as the portion of the eligible 
basis of the qualified low-income building attributable to the 
low-income rental units. Qualified basis generally is the 
taxpayer's depreciable basis in a qualified low-income 
building. In the case of a taxpayer who claims the 
rehabilitation credit for a qualified low-income building, the 
taxpayer's depreciable basis in the building is reduced by the 
amount of the rehabilitation credit claimed. In addition, 
eligible basis is reduced by any Federal grant received with 
respect to the building. A qualified low-income building is a 
building that meets certain compliance criteria and is 
depreciable under the modified accelerated cost recovery system 
(``MACRS'').

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment increases the present-law 20-percent 
credit for historic rehabilitation expenses to 25 percent in 
the case of rehabilitation expenses incurred with respect to a 
building which is also a low-income housing credit property in 
which substantially all of the tenants, both those tenants in 
rent-restricted units and in other residential units, are age 
65 or greater. The Senate amendment permits the 25-percent 
rehabilitation credit to be claimed with respect to all parts 
of the building, not only those parts on which the taxpayer 
also claims the low-income housing credit.\337\
---------------------------------------------------------------------------
    \337\ The Senate amendment also repeals a transition rule to the 
Tax Reform Act of 1986 permitting the taxpayers who own the property 
described as the Warrior Hotel, Ltd., the first two floors of the 
Martin Hotel, and the 105,000 square foot warehouse constructed in 
1910, all in Sioux City, Iowa, to use ACRS depreciation, in lieu of 
MACRS depreciation. This change enables such property to qualify for 
the provision.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment provision is 
effective for property placed in service after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                    B. Provisions Relating to Bonds

1. Modification of the authority of Indian tribal governments to issue 
        tax-exempt bonds (sec. 613 of the Senate amendment and sec. 
        7871 of the Code)

                              PRESENT LAW

      Under present law, the interest on bonds issued by an 
Indian tribal government is tax-exempt if substantially all of 
the proceeds of are to be used in the exercise of an essential 
government function. The term essential government function 
does not include any function that is not customarily performed 
by State or local governments with general taxing powers. In 
addition, Indian tribal governments are prohibited from issuing 
private activity bonds, with the exception of bonds issued to 
finance certain manufacturing facilities.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment expands the tax-exemption for Indian 
tribal government bonds to include obligations 95 percent or 
more of the proceeds of which are used to finance any facility 
located on an Indian reservation. The tax-exemption does not 
include any obligations used to finance any portion of a 
building in which class II or class III gaming (as defined in 
section 4 of the Indian Gaming Regulatory Act) is conducted or 
housed.
      For purposes of the Senate amendment, an Indian 
reservation means: (1) a reservation as defined in section 
4(10) of the Indian Child Welfare Act of 1978, and (2) lands 
held under the provisions of the Alaska Native Claims 
Settlement Act by a Native corporation as defined in section 
3(m) of that Act.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment and before January 1, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Definition of manufacturing facility for qualified small issue bonds 
        (sec. 614 of the Senate amendment and sec. 144 of the Code)

                              PRESENT LAW

      Qualified small-issue bonds are bonds used to finance 
private business manufacturing facilities or the acquisition of 
land and equipment by certain farmers. Generally, no more than 
$1 million of small-issue bond financing may be outstanding at 
any time for property of a business (including related parties) 
in the same municipality or county. This $1 million limit may 
be increased to $10 million if all other capital expenditures 
of the business (including related parties) in the same 
municipality or county over a six-year period are counted 
toward the limit. In addition, 95 percent or more of the net 
proceeds of qualified small-issue bonds must be used for the 
acquisition, construction, reconstruction, or improvement of 
land or property of a character subject to the allowance for 
depreciation, or to redeem a prior issue that was used for 
those purposes.
      Under present law, a manufacturing facility is defined as 
any facility used in the manufacturing or production of 
tangible personal property. Facilities that are directly 
related and ancillary to a manufacturing facility may be 
financed with small-issue bonds if such facilities are located 
on the same site as the manufacturing facility and no more than 
25 percent of the net proceeds of the bonds are used to finance 
such facilities.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment expands the definition of 
manufacturing facilities eligible for small-issue bond 
financing to include facilities: (1) used in the manufacture or 
development of software products or processes, if it takes more 
than six months to manufacture or develop such products or 
processes, such manufacture or development could not with due 
diligence be reasonably expected to occur in less than six 
months, and the software product or process comprises programs, 
routines, and attendant documentation developed and maintained 
for use in computer and telecommunications technology; and (2) 
used in the manufacture or development of any biobased product 
or bioenergy, if it takes more than six months to manufacture 
or develop and the manufacture or development could not with 
due diligence be reasonably expected to occur in less than six 
months. The term biobased product means a commercial or 
industrial product which utilizes biological products or 
renewable domestic agricultural or forestry materials. The term 
bioenergy means biomass used in the production of energy, 
including liquid, solid, or gaseous fuels, electricity, and 
heat.
      The Senate amendment expands the definition of eligible 
facilities to include directly and functionally related offices 
and research and development facilities located on the same 
site as the manufacturing facilities. Such office and research 
and development facilities may not constitute more than 40 
percent of the net proceeds of the issue used to finance the 
facility.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Qualified forest conservation bonds (sec. 615 of the Senate 
        amendment and sec. 142 of the Code)

                              PRESENT LAW

Tax-exempt bonds
            In general
      Interest on debt incurred by States or local governments 
is excluded from income if the proceeds of the borrowing are 
used to carry out governmental functions of those entities or 
the debt is repaid with governmental funds. Interest on bonds 
that nominally are issued by States or local governments, but 
the proceeds of which are used (directly or indirectly) by a 
private person and payment of which is derived from funds of 
such a private person is taxable unless the purpose of the 
borrowing is approved specifically in the Code or in a non-Code 
provision of a revenue Act. These bonds are called ``private 
activity bonds.'' The term ``private person'' includes the 
Federal Government and all other individuals and entities other 
than States or local governments.
            Private activities eligible for financing with tax-exempt 
                    private activity bonds
      Present law includes several exceptions permitting States 
or local governments to act as conduits providing tax-exempt 
financing for private activities. Generally, interest on bonds 
issued to benefit section 501(c)(3) organizations is tax-exempt 
(``qualified 501(c)(3) bonds''). In addition, States or local 
governments may issue tax-exempt ``exempt-facility bonds'' to 
finance property for certain private businesses. Business 
facilities eligible for this financing include transportation 
(airports, ports, local mass commuting, and high speed 
intercity rail facilities); privately owned and/or privately 
operated public works facilities (sewage, solid waste disposal, 
local district heating or cooling, hazardous waste disposal 
facilities and public educational facilities); privately owned 
and/or operated low-income rental housing; and certain private 
facilities for the local furnishing of electricity or gas.
      Tax-exempt private activity bonds are subject to 
restrictions that generally do not apply to other bonds issued 
by State or local governments. In most cases, the aggregate 
face amount of tax-exempt private activity bonds that may be 
issued is restricted by annual volume limits. Moreover, most 
tax-exempt private activity bonds are subject to a term-to-
maturity rule. Under that rule, the average maturity of most 
tax-exempt private activity bonds cannot exceed 120-percent of 
the economic life of the property being financed.
      Section 501(c)(3) organizations generally may not obtain 
the benefits of exempt facility bonds for debt issued and used 
to acquire forests and forest lands. In addition, qualified 
501(c)(3) bonds may not be issued to acquire forests and forest 
lands to the extent such lands are used to finance a trade or 
business that is unrelated to the exempt purposes of the 
organization. Whether income derived by a section 501(c)(3) 
organization from timber harvesting is unrelated trade or 
business income depends upon a variety of factors.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that qualified forest 
conservation bonds are treated as exempt facility bonds. 
Qualified forest conservation bonds are bonds issued for a 
qualified organization if 95 percent or more of the net 
proceeds of such bonds are used for qualified project costs, 
including acquisition of forests and forest land, capitalized 
interest, and credit enhancement fees that constitute qualified 
guarantee fees (within the meaning of section 148 of the Code). 
The costs of acquiring forests and forest land are qualified 
project costs if such land is acquired by a qualified 
organization from an unrelated party and at the time of 
acquisition or immediately thereafter such land is subject to a 
conservation restriction. Among other requirements, a qualified 
organization must be a nonprofit organization more than half 
the value of which consists of forests and forest land acquired 
with the proceeds of qualified forest conservation bonds.
      The volume limitation on tax-exempt private activity 
bonds does not apply to qualified forest conservation bonds. 
Rather, the maximum aggregate face amount of qualified forest 
conservation bonds that may be issued is $1.5 billion, to be 
allocated by the Secretary of Treasury among qualified 
organizations. For purposes of the term-to-maturity rule, the 
land and timber acquired with qualified forest conservation 
bonds shall have an economic life of 35 years.
      The Senate amendment provides that certain timber 
harvesting income derived by a qualified organization from 
forest lands acquired with proceeds from the qualified forest 
conservation bonds is excludable from income to the extent such 
income is used to pay debt service on the bonds and satisfies 
other conservation restrictions.
      Effective date.--The provision is effective for bonds 
issued on or after the date that is 180 days after the date of 
enactment and before December 31, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
4. Qualified tribal school modernization bonds (sec. 616 of the Senate 
        amendment)

                              PRESENT LAW

      Under present law, the interest on bonds issued by an 
Indian tribal government is tax-exempt if substantially all of 
the proceeds are to be used in the exercise of an essential 
government function. The term essential government function 
does not include any function that is not customarily performed 
by State or local governments with general taxing powers. In 
addition, Indian tribal governments are prohibited from issuing 
private activity bonds, with the exception of bonds issued for 
certain manufacturing facilities.
      There is no present law provision that permits Indian 
tribal governments to issue tax-credit bonds.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment authorizes the Secretary of the 
Interior to establish a program under which eligible Indian 
tribes may issue qualified tribal school modernization bonds 
(``tribal school bonds''). A tribal school bond means any bond 
issued under the program if: (1) 95 percent of the proceeds of 
the issue are used for the construction, rehabilitation, or 
repair of a school facility funded by the Bureau of Indian 
Affairs of the Department of the Interior or for the 
acquisition of land on which such a school facility is to be 
constructed; (2) the bond is issued by an Indian tribe; (3) the 
issuer designates the bond for purposes of the program; and (4) 
the term of each bond that is part of such an issue does not 
exceed 15 years. For purposes of the provision, the term Indian 
tribe has the same meaning as the term Indian tribal government 
under section 7701(a)(40) of the Code (including the 
application of section 7871(d)) and any consortium of tribes 
approved by the Secretary of the Interior.
      Under the provision, the holder of a tribal school bond 
receives a nonrefundable tax credit, in lieu of interest. The 
amount of the credit allowed is included in the holder's gross 
income as interest income. Unused credits may be carried 
forward to the succeeding taxable year.
      The Senate amendment authorizes the Secretary of the 
Interior to establish an escrow fund to secure repayment of 
tribal school bonds. Principal payments on tribal school bonds 
may only be made from amounts in the escrow fund and such bonds 
are not guaranteed by the United States, the issuing Indian 
tribe, or the tribal school for which the bond was issued.
      The Senate amendment establishes a national limitation of 
$200 million on the amount of tribal school bonds that may be 
designated in each of the years 2005 and 2006. The authority to 
issue tribal school bonds shall be allocated to Indian tribes 
by the Secretary of the Interior.
      Effective date.--The provision is effective on the date 
of enactment with respect to bonds issued after December 31, 
2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                 C. Provisions Relating to Depreciation

1. 7-year recovery period for certain track facilities (sec. 623 of the 
        Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

      A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168). The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month. Land improvements (such as roads and 
fences) are recovered over 15 years. An exception exists for 
the theme and amusement park industry, whose assets are 
assigned a recovery period of seven years.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a statutory 7-year recovery 
period for permanent motorsports racetrack complexes. For this 
purpose, motorsports racetrack complexes include land 
improvements and support facilities but do not include 
transportation equipment, warehouses, administrative buildings, 
hotels, or motels.
      Effective date.--The Senate amendment is effective for 
property placed in service after date of enactment and before 
January 1, 2008. No inference is intended with respect to the 
treatment of expenses incurred prior to the effective date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with the following modification to the effective date 
provisions.
      Effective date.--The conference agreement is effective 
for property placed in service after the date of enactment and 
before January 1, 2008. The conference agreement also excludes 
racetrack facilities placed in service after the date of 
enactment from the definition of theme and amusement facilities 
classified under Asset Class 80.0. The conferees do not intend 
for this provision to create any inference as to the treatment 
of property placed in service on or before the date of 
enactment. Accordingly, the conferees do not intend for the 
provision to affect the interpretation of the scope of Asset 
Class 80.0 for assets placed in service prior to the date of 
enactment. The conferees strongly urge the Secretary to resolve 
expeditiously any taxpayer disputes with respect to the scope 
of Class 80.0.
2. Alternative minimum tax and credits (sec. 624 of the Senate 
        amendment and secs. 38 and 53 of the Code)

                              PRESENT LAW

Election to Increase Minimum Tax Credit Limitation in Lieu of Bonus 
        Depreciation
      Under present law, corporations are entitled to a minimum 
tax credit for the minimum tax imposed in prior taxable years. 
The amount of the credit is limited to the excess of the 
taxpayer's regular tax over the tentative minimum tax 
(``minimum tax credit limitation'').
      Under present law, certain property is allowed an 
additional depreciation allowance for the taxable year placed 
in service. This additional allowance is known as ``bonus 
depreciation''. Bonus depreciation is a temporary provision.
Use of General Business Credits Against the Alternative Minimum Tax
      Under present law, the general business credit for any 
taxable year is limited to the excess of the taxpayer's income 
tax over the tentative minimum tax (or, if greater, 25 percent 
of the regular tax liability in excess of $25,000).\338\
---------------------------------------------------------------------------
    \338\  Special rules apply to the empowerment zone employment 
credit and the New York Liberty Zone business credit.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Election to Increase Minimum Tax Credit Limitation in Lieu of Bonus 
        Depreciation
      The Senate amendment provides an election by a 
corporation to increase its minimum tax credit limitation for a 
taxable year by one half of the bonus depreciation amount. If a 
corporation makes an election for any taxable year, no bonus 
depreciation is allowed with respect to any property placed in 
service by the corporation for the taxable year. The bonus 
depreciation amount for a taxable year is an amount (not in 
excess of $25 million) equal to 30 percent of the aggregate 
bonus depreciation that would have been allowable but for the 
election. Any minimum tax credit allowable by reason of the 
election may be refundable to the extent it exceeds the 
corporation's tax liability.
      Effective date.--Taxable years ending after December 31, 
2003.
Use of General Business Credits Against the Alternative Minimum Tax
      The Senate amendment provides that the general business 
credit for any taxable year beginning in 2004 shall not be less 
than 50 percent of the lesser of (1) the amount of credit that 
would be allowed if the tentative minimum tax were zero for the 
taxable year or (2) the current year business credit. In no 
event shall the credit be less than the amount otherwise 
allowable under present law.
      Effective date.--Taxable years beginning in 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the provisions 
in the Senate amendment.

                    D. Expansion of Business Credit

1. New markets tax credit for Native American reservations (sec. 631 of 
        the Senate amendment)

                              PRESENT LAW

      Section 45D provides a new markets tax credit for 
qualified equity investments made to acquire stock in a 
corporation, or a capital interest in a partnership, that is a 
qualified community development entity (``CDE'').\339\ The 
amount of the credit allowed to the investor (either the 
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is 
purchased from the CDE and for each of the following two years, 
and (2) a six-percent credit on each anniversary date 
thereafter for the following four years. The credit is 
determined by applying the applicable percentage (five or six 
percent) to the amount paid to the CDE for the investment at 
its original issue, and is available to the taxpayer who holds 
the qualified equity investment on the date of the initial 
investment or on the respective anniversary dates. The credit 
is recaptured if at any time during the seven-year period that 
begins on the date of the initial issue of the investment the 
entity ceases to be a qualified CDE, the proceeds of the 
investment cease to be used as required, or the interest is 
redeemed.
---------------------------------------------------------------------------
    \339\ Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
      A qualified CDE is any domestic corporation or 
partnership: (1) whose primary mission is serving or providing 
investment capital for low-income communities or low-income 
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing 
board or any advisory board of the CDE; and (3) that is 
certified by the Secretary as being a qualified CDE. A 
qualified equity investment means stock or a similar equity 
interest acquired directly from a CDE for cash. Substantially 
all of the investment proceeds must be used by the CDE to make 
qualified low-income community investments. For this purpose, 
qualified low-income community investments include: (1) capital 
or equity investments in, or loans to, qualified active 
businesses located in low-income communities; (2) certain 
financial counseling and other services to businesses and 
residents in low-income communities; (3) the purchase from 
another CDE of any loan made by such entity that is a qualified 
low-income community investment; or (4) an equity investment 
in, or loan to, another CDE.
      A ``low-income community'' is defined as a census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). The 
Secretary may designate any area within any census tract as a 
low-income community provided that (1) the boundary is 
continuous, (2) the area (if it were a census tract) would 
otherwise satisfy the poverty rate or median income 
requirements, and (3) an inadequate access to investment 
capital exists in the area.
      A qualified active business is defined as a business that 
satisfies, with respect to a taxable year, the following 
requirements: (1) at least 50 percent of the total gross income 
of the business is derived from the active conduct of trade or 
business activities in low-income communities; (2) a 
substantial portion of the tangible property of such business 
is used in a low-income community; (3) a substantial portion of 
the services performed for such business by its employees is 
performed in a low-income community; and (4) less than five 
percent of the average of the aggregate unadjusted bases of the 
property of such business is attributable to certain financial 
property or to certain collectibles.
      The maximum annual amount of qualified equity investments 
is capped at $2.0 billion per year for calendar years 2004 and 
2005, and $3.5 billion per year for calendar years 2006 and 
2007.
      No special rules apply to investments in community 
development entities that serve or provide investment capital 
with respect to low-income Native American reservations.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides special new markets tax 
credit rules for qualified equity investments in a 
``reservation development entity.'' In general, the present-law 
requirements applicable to the new markets tax credit apply for 
purposes of the new credit, with special requirements 
established to define the qualified investment entity (i.e., 
for purposes of this credit, the present-law ``community 
development entity'' is replaced with ``reservation development 
entity''). Under the Senate amendment, a reservation 
development entity is a domestic corporation or partnership if: 
(A) the primary mission of the entity is serving, or providing 
investment capital for, low-income reservations; (B) the entity 
maintains accountability to residents of low-income 
reservations through their representation on any governing 
board or any advisory board of the entity; and (C) the entity 
is certified by the Secretary as being a reservation 
development entity. A low-income reservation means an Indian 
reservation (as defined in section 168(j)(6)) that has a 
poverty rate of at least 40 percent.
      The maximum annual amount of qualified equity investments 
in reservation development entities is $50 million for each of 
calendar years 2004 through 2007. The limitation shall be 
allocated by the Secretary among reservation development 
entities selected by the Secretary, giving priority to any 
entity with a record of having successfully provided capital or 
technical assistance to disadvantaged businesses or 
communities, or that intends to make qualified low-income 
reservation investments in one or more unrelated businesses.
      The Senate amendment provides that not later than January 
31 of 2007 and 2010, the Comptroller General of the United 
States shall, pursuant to an audit, report to Congress on the 
new credit program, including all reservation development 
entities that receive an allocation under the program. In 
addition, the Senate amendment authorizes the Secretary to 
award a grant of not more than one million dollars to the First 
Nations Oweesta Corporation, and authorizes appropriations of 
one million dollars for fiscal years 2004 through 2014.
      Effective date.--The provision is effective for 
investments made after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
2. Ready Reserve-National Guard employee credit and Ready Reserve-
        National Guard replacement employee credit (sec. 632 of the 
        Senate amendment)

                              PRESENT LAW

      There is no employer tax credit for wages paid to Ready 
Reserve and National Guard employees called to active duty, or 
for wages paid to their replacements.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides an employer credit for 
wages paid to Ready Reserve-National Guard employees called to 
active duty. A Ready Reserve-National Guard employee means an 
employee who is a member of the Ready Reserve of a reserve 
component of an Armed Force of the United States as described 
in sections 10142 and 10101 of title 10, United States Code. 
The credit equals 50 percent of the compensation paid while the 
employee is called up to active duty up to a maximum of $30,000 
of compensation. Special rules allowing refundability of the 
credit, up to the amount of employer payroll taxes, apply to 
employers of first responders called up to active duty. 
Qualified first responders are persons employed as a law 
enforcement official, a firefighter, or a paramedic, and who 
are Ready Reserve-National Guard employees.
      In addition, for ``small business employers'' of Ready 
Reserve-National Guard employees called up to active duty, the 
Senate amendment creates a replacement employee credit equal to 
50 percent of the wages paid to any replacement employee up to 
a maximum credit of $6,000. Small business employers are 
employers that employ an average of 50 or fewer employees on 
business days during the taxable year. For small business 
manufacturing employers, the credit rate is increased to 100 
percent and the maximum credit is increased to $20,000.
      Self-employed contract workers called to active duty are 
eligible for the self employed portion of the credit, but 
businesses purchasing the services of contract workers are not 
eligible for the replacement employee credit.
      The credits could be carried back 3 years and carried 
forward 20 years. Rules similar to section 280C apply to deny a 
deduction for the amount of the credits.
      Effective date.--The provision is effective for 
investments made after September 30, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
3. Rural investment tax credit (sec. 633 of the Senate amendment and 
        new sec. 42A of the Code)

                              PRESENT LAW

      There is no present-law provision specifically targeted 
to encourage investment in high-migration rural areas.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The proposal provides a tax credit that may be claimed by 
owners of certain rural residential property (i.e., qualified 
rural investment buildings). The credit is claimed annually, 
generally for a period of ten years. Taxpayers are eligible for 
a maximum present-value tax credit equal to 70 percent of the 
eligible basis of a new building and qualified rehabilitation 
expenses (30 percent in the case of an existing building).
      A qualified rural investment building is defined as any 
building that is part of a qualified rural investment project 
at all times during the credit period. A qualified rural 
investment project is defined as any investment project of one 
or more buildings; (1) located in a qualifying county (and, if 
necessary to the project, a contiguous county); and (2) 
selected by the State in which the county is located, according 
to the State's qualified rural investment plan. Rehabilitation 
expenditures are treated as a separate building for purposes of 
the credit. A qualifying county is defined as a county which: 
(1) is located outside a metropolitan statistical area (as 
defined by the Office of Management and Budget); and (2) during 
the 20-year period ending with the year the most recent census 
was conducted, has experienced a net out-migration of 
inhabitants of the county of at least 10-percent of the 
population of the county. Generally, the credit and compliance 
periods are each ten years and the credit period for an 
existing building may not begin before the credit period for 
the related rehabilitation expenditures.
      For purposes of this credit, the eligible basis of any 
qualified rural investment building shall be determined under 
rules similar to the rules of section 42 (the ``low income 
rental housing credit'') except that: (1) the determination of 
the adjusted basis of any building shall be made at the 
beginning of the credit period; and (2) such basis shall 
include development costs properly attributable to such 
building. Development costs are limited to: (1) site 
preparation costs; (2) State and local impact fees; (3) 
reasonable development fees; (4) professional fees related to 
basis items; (5) construction financing costs related to basis 
items other than land; and (6) on-site and adjacent 
improvements required by State or local governments.
      Generally, any building eligible for the credit must 
receive an allocation of rural investment credit authority from 
the State rural investment credit agency in whose jurisdiction 
the building is located. The aggregate amount of such credits 
allocated within a State is limited by the State's annual rural 
investment credit ceiling. The ceiling for each calendar year 
is the sum of: (1) the unused State rural investment credit 
ceiling (if any) of such State for the preceding calendar year; 
(2) $185,000 for each qualifying county of the State; (3) the 
amount of State rural investment credit ceiling returned in the 
calendar year; and (4) the amount (if any) allocated to the 
State by the Secretary of the Treasury from the pool of 
unallocated rural investment credits unused by other States. 
The allocation is made by a formula provided in the statute. 
The $185,000 amount is indexed for inflation. At least 10 
percent of each State's rural investment credit ceiling is set 
aside for projects in which a qualified non-profit organization 
is to materially participate (within the meaning of section 
469(h) of the Code) in the development and operation of the 
project throughout the compliance period. A qualified non-
profit organization generally means any organization if: (1) 
the organization is described in section 501(c) and exempt from 
tax under 501(a); (2) it is determined by the State rural 
investment credit agency not to be affiliated with or 
controlled by a for-profit organization; and (3) one or more of 
its exempt purposes includes the fostering of rural investment.
      Effective date.--The provision is effective for 
expenditures made in taxable years beginning after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
Amendment.
4. Qualified small business rural investment tax credit (sec. 634 of 
        the Senate amendment and new sec. 42B of the Code)

                              PRESENT LAW

      There is no present-law provision specifically targeted 
to encourage rural small business investment.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a 30-percent tax credit for 
certain qualified expenditures paid or incurred by qualified 
rural small businesses. A qualified taxpayer's maximum credit 
for any taxable year may not exceed the lesser of: (1) $5,000; 
or (2) $25,000 minus the sum of the taxpayer's previous 
qualified rural small business investment credit claimed for 
all prior taxable years. For purposes of this credit, qualified 
expenditures are defined as expenditures normally associated 
with starting or expanding a business and included in a 
qualified business plan, including costs for capital, plant and 
equipment, inventory expenses, and wages but not including 
interest costs. In the case of a qualified rural small business 
with respect to which a small business rural investment credit 
was claimed in any previous years, qualified expenditures for 
each taxable year are limited to qualified small business 
expenditures for the year only to the extent that those total 
expenditures exceed the total expenditures for the immediately 
preceding taxable year. For example, assume Taxpayer A incurs 
qualified expenditures of $3000, in year 1, $0 in year 2, and 
$4,000 in year 3. Taxpayer A will be eligible for a qualified 
rural investment tax credit of $900 in year 1, $0 in year 2, 
and $1,200 in year 3.
      A qualified rural small business is defined as any 
person, if such person; (1) employed not more than five full-
time employees during the taxable year; (2) materially and 
substantially participates in management; (3) is located in a 
qualifying county; and (4) submitted a qualified business plan 
with respect to which an allocation of a rural investment tax 
credit was received. For these purposes, an employee is 
considered full-time if such employee is employed at least 30 
hours per week for 20 or more calendar weeks in the taxable 
year. A qualifying county is defined as a county which: (1) is 
located outside a metropolitan statistical area (as defined by 
the Office of Management and Budget); and (2) during the 20-
year period ending with the year the most recent census was 
conducted, has experienced a net out-migration of inhabitants 
of the county of at least 10-percent of the population of the 
county. A qualified business plan is a business plan which: (1) 
has been approved by the rural investment credit agency with 
jurisdiction over the qualifying county in which the qualified 
rural small business is located pursuant to such agency's rural 
investment plan; and (2) meets such requirements as the agency 
may specify.
      Any otherwise allowable deduction or credit is reduced by 
the amount of this credit.
      Effective date.--The provision is effective for 
expenditures made in taxable years beginning after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
Amendment.
5. Provide a tax credit for maintenance of railroad track (sec. 635 of 
        the Senate amendment and new sec. 45I of the Code)

                              PRESENT LAW

      There is no provision that provides for a railroad track 
maintenance tax credit.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a 30-percent business tax 
credit for qualified railroad track maintenance expenditures 
paid or incurred in a taxable year by eligible taxpayers. The 
credit is limited to the product of $3,500 times the number of 
miles of railroad track owned or leased by an eligible taxpayer 
as of the close of its taxable year. Qualified railroad track 
maintenance expenditures are defined as amounts expended 
(whether or not chargeable to a capital account) for 
maintaining railroad track (including roadbed, bridges, and 
related track structures) owned or leased as of January 1, 
2005, by a Class II or Class III railroad. An eligible taxpayer 
is defined as: (1) any Class II or Class III railroad; and (2) 
any person who transports property using the rail facilities of 
a Class II or Class III railroad or who furnishes railroad-
related property or services to such person. The taxpayer's 
basis in railroad track is reduced by the amount of the credit 
allowed. No portion of the credit may be carried back to any 
taxable year beginning before January 1, 2005. Other rules 
apply.
      This credit applies to qualified railroad track 
maintenance expenditures paid or incurred during taxable years 
beginning after December 31, 2004, and before January 1, 2008.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
provision with the following modification. The conference 
agreement increases the credit percentage from 30-percent to 
50-percent. In addition, the conference agreement clarifies 
that each mile of railroad track may be taken into account only 
once, either by the owner of such mile or by the owner's 
assignee, in computing the per-mile limitation.
6. Railroad revitalization and security investment credit (sec. 636 of 
        the Senate amendment)

                              PRESENT LAW

      There is no provision in present law for railroad 
revitalization.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a 50-percent business tax 
credit for qualified project expenditures paid or incurred in a 
taxable year by eligible taxpayers. Qualified project 
expenditures generally are defined as expenditures (whether or 
not chargeable to a capital account) for: (1) planning; (2) 
environmental review and environmental impact mitigation; (3) 
track and track structure rehabilitation, relocation, 
improvement and development; (4) railroad safety and security 
improvements; (5) communications and signaling improvements; 
(6) intercity passenger rail equipment acquisition; and (7) 
rail station and intermodal facilities development. Such 
expenditures are limited to expenditures for a project with 
respect to intercity passenger rail transportation (as defined 
in 49 U.S.C. 24102) that is included in a State rail plan.
      The railroad revitalization and security investment 
credit is subject to a national cap of $165 million per 
calendar year. The annual national cap is allocated pro rata to 
the States based on each State's share of the national total 
of: (1) railroad and public road grade crossings on intercity 
passenger rail routes; (2) intercity passenger train miles; and 
(3) intercity embarkations and disembarkations for each 
passenger. Any credit allocations unused for a calendar year 
will be carried-over and allocated between those States that 
used their allocation for the calendar year and requested a 
share of the carryover. All projects must have an allocation to 
claim the credit.
      The taxpayer's basis in such property is reduced by the 
amount of the credit allowed. No portion of the credit may be 
carried back to any taxable year beginning before January 1, 
2005. A credit under this section may be transferred (but no 
more than once) if the taxpayer is a tax-exempt entity or if 
the credit exceeds the taxpayer's tax liability for the year. 
Other rules apply.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
7. Special allocation of the railroad revitalization and security 
        investment credit for New York city rail projects (sec. 636 of 
        the Senate amendment)

                              PRESENT LAW

      There is no provision in present law that provides a 
special allocation of the railroad revitalization and security 
investment credit.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides an additional allocation of 
$200 million dollars to New York City for qualified project 
expenditures within the New York Liberty Zone (as defined in 
Code section 1400L(h). This allocation is in addition to the 
allocation allowed under the general railroad revitalization 
and security investment credit, described above. Under a 
special rule, the $200 million will be allocated as follows: 
(1) $100 million to projects designated by the mayor of New 
York City; and (2) $100 million to projects designated by the 
Governor of New York. Qualified project expenditures are 
limited to expenditures for improvements to subway systems, for 
commuter rail systems, for rail links to airports, and for 
public infrastructure improvements in the vicinity of rail or 
subway stations. The taxpayer's basis in such property is 
reduced by the amount of the credit for which this credit is 
allowed. No portion of the credit may be carried back to any 
taxable year beginning before January 1, 2005. A credit under 
this section may be transferred (but no more than once) if the 
taxpayer is a tax-exempt entity or if the credit exceeds the 
taxpayer's tax liability for the year. Other rules apply.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. Modification of targeted areas and low-income communities designated 
        for new markets tax credit (sec. 637 of the Senate amendment 
        and sec. 45D of the Code)

                              PRESENT LAW

      Section 45D provides a new markets tax credit for 
qualified equity investments made to acquire stock in a 
corporation, or a capital interest in a partnership, that is a 
qualified community development entity (``CDE'').\340\ The 
amount of the credit allowable to the investor (either the 
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is 
purchased from the CDE and for each of the following two years, 
and (2) a six-percent credit for each of the following four 
years. The credit is determined by applying the applicable 
percentage (five or six percent) to the amount paid to the CDE 
for the investment at its original issue, and is available for 
a taxable year to the taxpayer who holds the qualified equity 
investment on the date of the initial investment or on the 
respective anniversary date that occurs during the taxable 
year. The credit is recaptured if at any time during the seven-
year period that begins on the date of the original issue of 
the investment the entity ceases to be a qualified CDE, the 
proceeds of the investment cease to be used as required, or the 
equity investment is redeemed.
---------------------------------------------------------------------------
    \340\ Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
      A qualified CDE is any domestic corporation or 
partnership: (1) whose primary mission is serving or providing 
investment capital for low-income communities or low-income 
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing 
board of or any advisory board to the CDE; and (3) that is 
certified by the Secretary as being a qualified CDE. A 
qualified equity investment means stock (other than 
nonqualified preferred stock) in a corporation or a capital 
interest in a partnership that is acquired directly from a CDE 
for cash, and includes an investment of a subsequent purchaser 
if such investment was a qualified equity investment in the 
hands of the prior holder. Substantially all of the investment 
proceeds must be used by the CDE to make qualified low-income 
community investments. For this purpose, qualified low-income 
community investments include: (1) capital or equity 
investments in, or loans to, qualified active low-income 
community businesses; (2) certain financial counseling and 
other services to businesses and residents in low-income 
communities; (3) the purchase from another CDE of any loan made 
by such entity that is a qualified low-income community 
investment; or (4) an equity investment in, or loan to, another 
CDE.
      A ``low-income community'' is defined as a population 
census tract with either (1) a poverty rate of at least 20 
percent or (2) median family income which does not exceed 80 
percent of the greater of metropolitan area median family 
income or statewide median family income (for a non-
metropolitan census tract, does not exceed 80 percent of 
statewide median family income). The Secretary may designate 
any area within any census tract as a low-income community 
provided that (1) the boundary is continuous, (2) the area (if 
it were a census tract) would otherwise satisfy the poverty 
rate or median income requirements, and (3) an inadequate 
access to investment capital exists in the area.
      A qualified active low-income community business is 
defined as a business that satisfies, with respect to a taxable 
year, the following requirements: (1) at least 50 percent of 
the total gross income of the business is derived from the 
active conduct of trade or business activities in any low-
income community; (2) a substantial portion of the tangible 
property of such business is used in a low-income community; 
(3) a substantial portion of the services performed for such 
business by its employees is performed in a low-income 
community; and (4) less than five percent of the average of the 
aggregate unadjusted bases of the property of such business is 
attributable to certain financial property or to certain 
collectibles.
      The maximum annual amount of qualified equity investments 
is capped at $2.0 billion per year for calendar years 2004 and 
2005, and at $3.5 billion per year for calendar years 2006 and 
2007.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the Secretary's authority 
to designate certain areas as low-income communities to provide 
that the Secretary shall prescribe regulations to designate 
``targeted populations'' as low-income communities for purposes 
of the new markets tax credit. For this purpose, a ``targeted 
population'' is defined by reference to section 103(20) of the 
Riegle Community Development and Regulatory Improvement Act of 
1994 (12 U.S.C. 4702(20)) to mean individuals, or an 
identifiable group of individuals, including an Indian tribe, 
who (A) are low-income persons; or (B) otherwise lack adequate 
access to loans or equity investments. Under the Senate 
amendment, ``low-income'' means (1) for a targeted population 
within a metropolitan area, less than 80 percent of the area 
median family income; and (2) for a targeted population within 
a non-metropolitan area, less than the greater of 80 percent of 
the area median family income or 80 percent of the statewide 
non-metropolitan area median family income.\341\ Under the 
Senate amendment, a targeted population is not required to be 
within any census tract.
---------------------------------------------------------------------------
    \341\ 12. U.S.C. 4702(17) (used to define ``low-income'' for 
purposes of 12. U.S.C. 4702(20)).
---------------------------------------------------------------------------
      Effective date.--The provision is effective for 
designations made after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with respect to targeted population designations, modified to 
provide that a population census tract with a population of 
less than 2,000 shall be treated as a low-income community for 
purposes of the credit if such tract is within an empowerment 
zone, the designation of which is in effect under section 1391, 
and is contiguous to one or more low-income communities.
      Effective date.--The targeted population provision is 
effective for designations made after the date of enactment. 
The low-population provision is effective for investments made 
after the date of enactment.
9. Modification of income requirement for census tracts within high 
        migration rural counties for new markets tax credit (sec. 638 
        of the Senate amendment and sec. 45D of the Code)

                              PRESENT LAW

      Section 45D provides a new markets tax credit for 
qualified equity investments made to acquire stock in a 
corporation, or a capital interest in a partnership, that is a 
qualified community development entity (``CDE'').\342\ The 
amount of the credit allowable to the investor (either the 
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is 
purchased from the CDE and for each of the following two years, 
and (2) a six-percent credit for each of the following four 
years. The credit is determined by applying the applicable 
percentage (five or six percent) to the amount paid to the CDE 
for the investment at its original issue, and is available for 
the taxable year to the taxpayer who holds the qualified equity 
investment on the date of the initial investment or on the 
respective anniversary date that occurs during the taxable 
year. The credit is recaptured if at any time during the seven-
year period that begins on the date of the original issue of 
the investment the entity ceases to be a qualified CDE, the 
proceeds of the investment cease to be used as required, or the 
equity investment is redeemed.
---------------------------------------------------------------------------
    \342\ Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
      A qualified CDE is any domestic corporation or 
partnership: (1) whose primary mission is serving or providing 
investment capital for low-income communities or low-income 
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing 
board of or any advisory board to the CDE; and (3) that is 
certified by the Secretary as being a qualified CDE. A 
qualified equity investment means stock (other than 
nonqualified preferred stock) in a corporation or a capital 
interest in a partnership that is acquired directly from a CDE 
for cash, and includes an investment of a subsequent purchaser 
if such investment was a qualified equity investment in the 
hands of the prior holder. Substantially all of the investment 
proceeds must be used by the CDE to make qualified low-income 
community investments. For this purpose, qualified low-income 
community investments include: (1) capital or equity 
investments in, or loans to, qualified active low-income 
community businesses; (2) certain financial counseling and 
other services to businesses and residents in low-income 
communities; (3) the purchase from another CDE of any loan made 
by such entity that is a qualified low-income community 
investment; or (4) an equity investment in, or loan to, another 
CDE.
      A ``low-income community'' is defined as a population 
census tract with either (1) a poverty rate of at least 20 
percent or (2) median family income which does not exceed 80 
percent of the greater of metropolitan area median family 
income or statewide median family income (for a non-
metropolitan census tract, does not exceed 80 percent of 
statewide median family income). The Secretary may designate 
any area within any census tract as a low-income community 
provided that (1) the boundary is continuous, (2) the area (if 
it were a census tract) would otherwise satisfy the poverty 
rate or median income requirements, and (3) an inadequate 
access to investment capital exists in the area.
      A qualified active low-income community business is 
defined as a business that satisfies, with respect to a taxable 
year, the following requirements: (1) at least 50 percent of 
the total gross income of the business is derived from the 
active conduct of trade or business activities in any low-
income community; (2) a substantial portion of the tangible 
property of such business is used in a low-income community; 
(3) a substantial portion of the services performed for such 
business by its employees is performed in a low-income 
community; and (4) less than five percent of the average of the 
aggregate unadjusted bases of the property of such business is 
attributable to certain financial property or to certain 
collectibles.
      The maximum annual amount of qualified equity investments 
is capped at $2.0 billion per year for calendar years 2004 and 
2005, and at $3.5 billion per year for calendar years 2006 and 
2007.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the low-income test for 
high migration rural counties. Under the Senate amendment, in 
the case of a population census tract located within a high 
migration rural county, low income is defined by reference to 
85 percent (rather than 80 percent) of statewide median family 
income. For this purpose, a high migration rural county is any 
county that, during the 20-year period ending with the year in 
which the most recent census was conducted, has a net out-
migration of inhabitants from the county of at least 10 percent 
of the population of the county at the beginning of such 
period.
      Effective date.--The provision is effective as if 
included in the amendment made by section 121(a) of the 
Community Renewal Tax Relief Act of 2000.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
10. Provide a tax credit for expenditures on closed captioning 
        technology in movies (sec. 639 of the Senate amendment and new 
        sec. 45T of the Code)

                              PRESENT LAW

      There is no provision that allows a tax credit for 
expenditures made for closed captioning technology in motion 
pictures.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a 50-percent business tax 
credit (the ``motion picture accessibility credit'') for 
certain qualified expenditures made in a taxable year by an 
eligible taxpayer. Qualified expenditures are defined as 
amounts paid or incurred for making motion pictures accessible 
to deaf or hard-of-hearing individuals through the use of 
captioning technology. An eligible taxpayer is defined as a 
taxpayer who is in the business of showing motion pictures to 
the public in theaters or producing or distributing those 
motion pictures. The taxpayer's basis in property with respect 
to which the credit is allowed is reduced by the amount of the 
credit allowed. No deduction or credit is permitted under any 
other provision of Chapter 1 (Normal Taxes and Surtaxes) of 
Subtitle A (Income Taxes) of the Code for the amount of any 
motion picture accessibility credit allowed. No portion of the 
credit may be carried back to any taxable year beginning before 
January 1, 2004. Other rules apply.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                      E. Miscellaneous Provisions

1. Exclusion of gain or loss on sale or exchange of certain brownfield 
        sites from unrelated business taxable income (sec. 641 of the 
        Senate amendment and secs. 512 and 514 of the Code)

                              PRESENT LAW

      In general, an organization that is otherwise exempt from 
Federal income tax is taxed on income from a trade or business 
regularly carried on that is not substantially related to the 
organization's exempt purposes. Gains or losses from the sale, 
exchange, or other disposition of property, other than stock in 
trade, inventory, or property held primarily for sale to 
customers in the ordinary course of a trade or business, 
generally are excluded from unrelated business taxable income. 
Gains or losses are treated as unrelated business taxable 
income, however, if derived from ``debt-financed property.'' 
Debt-financed property generally means any property that is 
held to produce income and with respect to which there is 
acquisition indebtedness at any time during the taxable year.
      In general, income of a tax-exempt organization that is 
produced by debt-financed property is treated as unrelated 
business income in proportion to the acquisition indebtedness 
on the income-producing property. Acquisition indebtedness 
generally means the amount of unpaid indebtedness incurred by 
an organization to acquire or improve the property and 
indebtedness that would not have been incurred but for the 
acquisition or improvement of the property. Acquisition 
indebtedness does not include: (1) certain indebtedness 
incurred in the performance or exercise of a purpose or 
function constituting the basis of the organization's 
exemption; (2) obligations to pay certain types of annuities; 
(3) an obligation, to the extent it is insured by the Federal 
Housing Administration, to finance the purchase, 
rehabilitation, or construction of housing for low and moderate 
income persons; or (4) indebtedness incurred by certain 
qualified organizations to acquire or improve real property.
      Special rules apply in the case of an exempt organization 
that owns a partnership interest in a partnership that holds 
debt-financed property. An exempt organization's share of 
partnership income that is derived from debt-financed property 
generally is taxed as debt-financed income unless an exception 
provides otherwise.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The Senate amendment provides an exclusion from unrelated 
business taxable income for the gain or loss from the qualified 
sale, exchange, or other disposition of a qualifying brownfield 
property by an eligible taxpayer. The exclusion from unrelated 
business taxable income generally is available to an exempt 
organization that acquires, remediates, and disposes of the 
qualifying brownfield property. In addition, the Senate 
amendment provides an exception from the debt-financed property 
rules for such properties.
      In order to qualify for the exclusions from unrelated 
business income and the debt-financed property rules, the 
eligible taxpayer is required to: (a) acquire from an unrelated 
person real property that constitutes a qualifying brownfield 
property; (b) pay or incur a minimum level of eligible 
remediation expenditures with respect to the property; and (c) 
transfer the remediated site to an unrelated person in a 
transaction that constitutes a sale, exchange, or other 
disposition for purposes of Federal income tax law.\343\
---------------------------------------------------------------------------
    \343\ For purposes of the provision, a person is related to another 
person if (1) such person bears a relationship to such other person 
that is described in section 267(b) (determined without regard to 
paragraph (9)), or section 707(b)(1), determined by substituting 25 
percent for 50 percent each place it appears therein; or (2) if such 
other person is a nonprofit organization, if such person controls 
directly or indirectly more than 25 percent of the governing body of 
such organization.
---------------------------------------------------------------------------
Qualifying brownfield properties
      Under the Senate amendment, the exclusion from unrelated 
business taxable income applies only to real property that 
constitutes a qualifying brownfield property. A qualifying 
brownfield property means real property that is certified, 
before the taxpayer incurs any eligible remediation 
expenditures (other than to obtain a Phase I environmental site 
assessment), by an appropriate State agency (within the meaning 
of section 198(c)(4)) in the State in which the property is 
located as a brownfield site within the meaning of section 
101(39) of the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 (CERCLA) (as in effect 
on the date of enactment of the proposal). The Senate amendment 
provision requires that the taxpayer's request for 
certification include a sworn statement of the taxpayer and 
supporting documentation of the presence of a hazardous 
substance, pollutant, or contaminant on the property that is 
complicating the expansion, redevelopment, or reuse of the 
property given the property's reasonably anticipated future 
land uses or capacity for uses of the property (including a 
Phase I environmental site assessment and, if applicable, 
evidence of the property's presence on a local, State, or 
Federal list of brownfields or contaminated property) and other 
environmental assessments prepared or obtained by the taxpayer.
Eligible taxpayer
      An eligible taxpayer with respect to a qualifying 
brownfield property is an organization exempt from tax under 
section 501(a) that acquired such property from an unrelated 
person and paid or incurred a minimum amount of eligible 
remediation expenditures with respect to such property. The 
exempt organization (or the qualifying partnership of which it 
is a partner) is required to pay or incur eligible remediation 
expenditures with respect to a qualifying brownfield property 
in an amount that exceeds the greater of: (a) $550,000; or (b) 
12 percent of the fair market value of the property at the time 
such property is acquired by the taxpayer, determined as if the 
property were not contaminated.
      An eligible taxpayer does not include an organization 
that is: (1) potentially liable under section 107 of CERCLA 
with respect to the property; (2) affiliated with any other 
person that is potentially liable thereunder through any direct 
or indirect familial relationship or any contractual, 
corporate, or financial relationship (other than a contractual, 
corporate, or financial relationship that is created by the 
instruments by which title to a qualifying brownfield property 
is conveyed or financed by a contract of sale of goods or 
services); or (3) the result of a reorganization of a business 
entity which was so potentially liable.\344\
---------------------------------------------------------------------------
    \344\ In general, a person is potentially liable under section 107 
of CERCLA if: (1) it is the owner and operator of a vessel or a 
facility; (2) at the time of disposal of any hazardous substance it 
owned or operated any facility at which such hazardous substances were 
disposed of; (3) by contract, agreement, or otherwise it arranged for 
disposal or treatment, or arranged with a transporter for transport for 
disposal or treatment, of hazardous substances owned or possessed by 
such person, by any other party or entity, at any facility or 
incineration vessel owned or operated by another party or entity and 
containing such hazardous substances; or (4) it accepts or accepted any 
hazardous substances for transport to disposal or treatment facilities, 
incineration vessels or sites selected by such person, from which there 
is a release, or a threatened release which causes the incurrence of 
response costs, of a hazardous substance. 42 U.S.C. sec. 9607(a) 
(2004).
---------------------------------------------------------------------------
Qualified sale, exchange, or other disposition
      Under the Senate amendment, a sale, exchange, or other 
disposition of a qualifying brownfield property shall be 
considered as qualified if such property is transferred by the 
eligible taxpayer to an unrelated person, and within one year 
of such transfer the taxpayer has received a certification (a 
``remediation certification'') from the Environmental 
Protection Agency or an appropriate State agency (within the 
meaning of section 198(c)(4)) in the State in which the 
property is located that, as a result of the taxpayer's 
remediation actions, such property would not be treated as a 
qualifying brownfield property in the hands of the transferee. 
A taxpayer's request for a remediation certification shall be 
made no later than the date of the transfer and shall include a 
sworn statement by the taxpayer certifying that: (1) remedial 
actions that comply with all applicable or relevant and 
appropriate requirements (consistent with section 121(d) of 
CERCLA) have been substantially completed, such that there are 
no hazardous substances, pollutants or contaminants that 
complicate the expansion, redevelopment, or reuse of the 
property given the property's reasonably anticipated future 
land uses or capacity for uses of the property; (2) the 
reasonably anticipated future land uses or capacity for uses of 
the property are more economically productive or 
environmentally beneficial than the uses of the property in 
existence on the date the property was certified as a 
qualifying brownfield property; \345\ (3) a remediation plan 
has been implemented to bring the property in compliance with 
all applicable local, State, and Federal environmental laws, 
regulations, and standards and to ensure that remediation 
protects human health and the environment; (4) the remediation 
plan, including any physical improvements required to remediate 
the property, is either complete or substantially complete, and 
if substantially complete,\346\ sufficient monitoring, funding, 
institutional controls, and financial assurances have been put 
in place to ensure the complete remediation of the site in 
accordance with the remediation plan as soon as is reasonably 
practicable after the disposition of the property by the 
taxpayer; and (5) public notice and the opportunity for comment 
on the request for certification (in the same form and manner 
as required for public participation required under section 
117(a) of CERCLA (as in effect on the date of enactment of the 
provision)) was completed before the date of such request. 
Public notice shall include, at a minimum, publication in a 
major local newspaper of general circulation.
---------------------------------------------------------------------------
    \345\ For this purpose, use of the property as a landfill or other 
hazardous waste facility shall not be considered more economically 
productive or environmentally beneficial.
    \346\ For these purposes, substantial completion means any 
necessary physical construction is complete, all immediate threats have 
been eliminated, and all long-term threats are under control.
---------------------------------------------------------------------------
      A copy of each of the requests for certification that the 
property was a brownfield site, and that it would no longer be 
a qualifying brownfield property in the hands of the 
transferee, shall be included in the tax return of the eligible 
taxpayer (and, where applicable, of the qualifying partnership) 
for the taxable year during which the transfer occurs.
Eligible remediation expenditures
      Under the Senate amendment, eligible remediation 
expenditures means, with respect to any qualifying brownfield 
property: (1) expenditures that are paid or incurred by the 
taxpayer to an unrelated person to obtain a Phase I 
environmental site assessment of the property; (2) amounts paid 
or incurred by the taxpayer after receipt of the certification 
that the property is a qualifying brownfield property for goods 
and services necessary to obtain the remediation certification; 
and (3) expenditures to obtain remediation cost-cap or stop-
loss coverage, re-opener or regulatory action coverage, or 
similar coverage under environmental insurance policies,\347\ 
or to obtain financial guarantees required to manage the 
remediation and monitoring of the property. Eligible 
remediation expenditures include expenditures to (1) manage, 
remove, control, contain, abate, or otherwise remediate a 
hazardous substance, pollutant, or contaminant on the property; 
(2) obtain a Phase II environmental site assessment of the 
property, including any expenditure to monitor, sample, study, 
assess, or otherwise evaluate the release, threat of release, 
or presence of a hazardous substance, pollutant, or contaminant 
on the property, or (3) obtain environmental regulatory 
certifications and approvals required to manage the remediation 
and monitoring of the hazardous substance, pollutant, or 
contaminant on the property. Eligible remediation expenditures 
do not include (1) any portion of the purchase price paid or 
incurred by the eligible taxpayer to acquire the qualifying 
brownfield property; (2) environmental insurance costs paid or 
incurred to obtain legal defense coverage, owner/operator 
liability coverage, lender liability coverage, professional 
liability coverage, or similar types of coverage; \348\ (3) any 
amount paid or incurred to the extent such amount is 
reimbursed, funded or otherwise subsidized by: (a) grants 
provided by the United States, a State, or a political 
subdivision of a State for use in connection with the property; 
(b) proceeds of an issue of State or local government 
obligations used to provide financing for the property, the 
interest of which is exempt from tax under section 103; or (c) 
subsidized financing provided (directly or indirectly) under a 
Federal, State, or local program in connection with the 
property; or (4) any expenditure paid or incurred before the 
date of enactment of the proposal.\349\
---------------------------------------------------------------------------
    \347\ Cleanup cost-cap or stop-loss coverage is coverage that 
places an upper limit on the costs of cleanup that the insured may have 
to pay. Re-opener or regulatory action coverage is coverage for costs 
associated with any future government actions that require further site 
cleanup, including costs associated with the loss of use of site 
improvements.
    \348\ For this purpose, professional liability insurance is 
coverage for errors and omissions by public and private parties dealing 
with or managing contaminated land issues, and includes coverage under 
policies referred to as owner-controlled insurance. Owner/operator 
liability coverage is coverage for those parties that own the site or 
conduct business or engage in cleanup operations on the site. Legal 
defense coverage is coverage for lawsuits associated with liability 
claims against the insured made by enforcement agencies or third 
parties, including by private parties.
    \349\ The provision authorizes the Secretary of the Treasury to 
issue guidance regarding the treatment of government-provided funds for 
purposes of determining eligible remediation expenditures.
---------------------------------------------------------------------------
Qualified gain or loss
      The Senate amendment generally excludes from unrelated 
business taxable income the exempt organization's gain or loss 
from the sale, exchange, or other disposition of a qualifying 
brownfield property. Income, gain, or loss from other transfers 
does not qualify under the provision.\350\ The amount of gain 
or loss excluded from unrelated business taxable income is not 
limited to or based upon the increase or decrease in value of 
the property that is attributable to the taxpayer's expenditure 
of eligible remediation expenditures. Further, the exclusion 
does not apply to an amount treated as gain that is ordinary 
income with respect to section 1245 or section 1250 property, 
including any amount deducted as a section 198 expense that is 
subject to the recapture rules of section 198(e), if the 
taxpayer had deducted such amount in the computation of its 
unrelated business taxable income.\351\
---------------------------------------------------------------------------
    \350\ For example, rent income from leasing the property does not 
qualify under the proposal.
    \351\ Depreciation or section 198 amounts that the taxpayer had not 
used to determine its unrelated business taxable income are not treated 
as gain that is ordinary income under sections 1245 or 1250 (secs. 
1.1245-2(a)(8) and 1.1250-2(d)(6)), and are not recognized as gain or 
ordinary income upon the sale, exchange, or disposition of the 
property. Thus, an exempt organization would not be entitled to a 
double benefit resulting from a section 198 expense deduction and the 
proposed exclusion from gain with respect to any amounts it deducts 
under section 198.
---------------------------------------------------------------------------
Special rules for qualifying partnerships
            In general
      In the case of a tax-exempt organization that is a 
partner of a qualifying partnership that acquires, remediates, 
and disposes of a qualifying brownfield property, the Senate 
amendment provision applies to the tax-exempt partner's 
distributive share of the qualifying partnership's gain or loss 
from the disposition of the property.\352\ A qualifying 
partnership is a partnership that (1) has a partnership 
agreement that satisfies the requirements of section 
514(c)(9)(B)(vi) at all times beginning on the date of the 
first certification received by the partnership that one of its 
properties is a qualifying brownfield property; (2) satisfies 
the requirements of the proposal if such requirements are 
applied to the partnership (rather than to the eligible 
taxpayer that is a partner of the partnership); and (3) is not 
an organization that would be prevented from constituting an 
eligible taxpayer by reason of it or an affiliate being 
potentially liable under CERCLA with respect to the property.
---------------------------------------------------------------------------
    \352\ The provision's exclusions do not apply to a tax-exempt 
partner's gain or loss from the tax-exempt partner's sale, exchange, or 
other disposition of its partnership interest. Such transactions 
continue to be governed by present-law.
---------------------------------------------------------------------------
      The exclusion is available to a tax-exempt organization 
with respect to a particular property acquired, remediated, and 
disposed of by a qualifying partnership only if the exempt 
organization is a partner of the partnership at all times 
during the period beginning on the date of the first 
certification received by the partnership that one of its 
properties is a qualifying brownfield property, and ending on 
the date of the disposition of the property by the 
partnership.\353\
---------------------------------------------------------------------------
    \353\ The provision subjects a tax-exempt partner to tax on gain 
previously excluded by the partner (plus interest) if a property 
subsequently becomes ineligible for exclusion under the qualifying 
partnership's multiple-property election.
---------------------------------------------------------------------------
      Under the Senate amendment, the Secretary shall prescribe 
such regulations as are necessary to prevent abuse of the 
requirements of the provision, including abuse through the use 
of special allocations of gains or losses, or changes in 
ownership of partnership interests held by eligible taxpayers.
            Certifications and multiple property elections
      If the property is acquired and remediated by a 
qualifying partnership of which the exempt organization is a 
partner, it is intended that the certification as to status as 
a qualified brownfield property and the remediation 
certification will be obtained by the qualifying partnership, 
rather than by the tax-exempt partner, and that both the 
eligible taxpayer and the qualifying partnership will be 
required to make available such copies of the certifications to 
the IRS. Any elections or revocations regarding the application 
of the eligible remediation expenditure rules to multiple 
properties (as described below) acquired, remediated, and 
disposed of by a qualifying partnership must be made by the 
partnership. A tax-exempt partner is bound by an election made 
by the qualifying partnership of which it is a partner.
Special rules for multiple properties
      The eligible remediation expenditure determinations 
generally are made on a property-by-property basis. An exempt 
organization (or a qualifying partnership of which the exempt 
organization is a partner) that acquires, remediates, and 
disposes of multiple qualifying brownfield properties, however, 
may elect to make the eligible remediation expenditure 
determinations on a multiple-property basis. In the case of 
such an election, the taxpayer satisfies the eligible 
remediation expenditures test with respect to all qualifying 
brownfield properties acquired during the election period if 
the average of the eligible remediation expenditures for all 
such properties exceeds the greater of: (a) $550,000; or (b) 12 
percent of the average of the fair market value of the 
properties, determined as of the dates they were acquired by 
the taxpayer and as if they were not contaminated. If the 
eligible taxpayer elects to make the eligible remediation 
expenditure determination on a multiple property basis, then 
the election shall apply to all qualifying sales, exchanges, or 
other dispositions of qualifying brownfield properties the 
acquisition and transfer of which occur during the period for 
which the election remains in effect.\354\
---------------------------------------------------------------------------
    \354\ If the taxpayer fails to satisfy the averaging test for the 
properties subject to the election, then the taxpayer may not apply the 
exclusion on a separate property basis with respect to any of such 
properties.
---------------------------------------------------------------------------
      An acquiring taxpayer makes a multiple-property election 
with its timely filed tax return (including extensions) for the 
first taxable year for which it intends to have the election 
apply. A timely filed election is effective as of the first day 
of the taxable year of the return in which the election is 
included or a later day in such taxable year selected by the 
taxpayer. An election remains effective until the earliest of a 
date selected by the taxpayer, the date which is eight years 
after the effective date of the election, the effective date of 
a revocation of the election, or, in the case of a partnership, 
the date of the termination of the partnership.
      A taxpayer may revoke a multiple-property election by 
filing a statement of revocation with a timely filed tax return 
(including extensions). A revocation is effective as of the 
first day of the taxable year of the return in which the 
revocation is included or a later day in such taxable year 
selected by the eligible taxpayer or qualifying partnership. 
Once a taxpayer revokes the election, the taxpayer is 
ineligible to make another multiple-property election with 
respect to any qualifying brownfield property subject to the 
revoked election.\355\
---------------------------------------------------------------------------
    \355\ The provision subjects a taxpayer to tax on gain previously 
excluded (plus interest) in the event a site subsequently becomes 
ineligible for gain exclusion under the multiple-property election.
---------------------------------------------------------------------------
Debt-financed property
      The Senate amendment provides that debt-financed 
property, as defined by section 514(b), does not include any 
property the gain or loss from the sale, exchange, or other 
disposition of which is excluded by reason of the provisions of 
the proposal that exclude such gain or loss from computing the 
gross income of any unrelated trade or business of the 
taxpayer. Thus, gain or loss from the sale, exchange, or other 
disposition of a qualifying brownfield property that otherwise 
satisfies the requirements of the provision is not taxed as 
unrelated business taxable income merely because the taxpayer 
incurred debt to acquire or improve the site.
      Effective date.--The Senate amendment provision applies 
to gain or loss on the sale, exchange, or other disposition of 
a property acquired by the taxpayer after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
modified to provide a termination date of December 31, 2009. 
The conference agreement provision applies to gain or loss on 
the sale, exchange, or other disposition of property that is 
acquired by the eligible taxpayer or qualifying partnership 
during the period beginning January 1, 2005, and ending 
December 31, 2009. Property acquired during the five-year 
acquisition period need not be disposed of by the termination 
date in order to qualify for the exclusion. For purposes of the 
multiple property election, gain or loss on property acquired 
after December 31, 2009, is not eligible for the exclusion from 
unrelated business taxable income, although properties acquired 
after the termination date (but during the election period) are 
included for purposes of determining average eligible 
remediation expenditures.
      Effective date.--The conference agreement provision 
applies to gain or loss on property that is acquired after 
December 31, 2004.
2. Civil rights tax relief (sec. 643 of the Senate amendment and sec. 
        62 of the Code)

                              PRESENT LAW

      Under present law, gross income generally does not 
include the amount of any damages (other than punitive damages) 
received (whether by suit or agreement and whether as lump sums 
or as periodic payments) by individuals on account of personal 
physical injuries (including death) or physical sickness.\356\ 
Expenses relating to recovering such damages are generally not 
deductible.\357\
---------------------------------------------------------------------------
    \356\ Sec. 104(a)(2).
    \357\ Sec. 265(a)(1).
---------------------------------------------------------------------------
      Other damages are generally included in gross income. The 
related expenses to recover the damages, including attorneys' 
fees, are generally deductible as expenses for the production 
of income,\358\ subject to the two-percent floor on itemized 
deductions.\359\ Thus, such expenses are deductible only to the 
extent the taxpayer's total miscellaneous itemized deductions 
exceed two percent of adjusted gross income. Any amount 
allowable as a deduction is subject to reduction under the 
overall limitation of itemized deductions if the taxpayer's 
adjusted gross income exceeds a threshold amount.\360\ For 
purposes of the alternative minimum tax, no deduction is 
allowed for any miscellaneous itemized deduction.
---------------------------------------------------------------------------
    \358\ Sec. 212.
    \359\ Sec. 67.
    \360\ Sec. 68.
---------------------------------------------------------------------------
      In some cases, claimants will engage an attorney to 
represent them on a contingent fee basis. That is, if the 
claimant recovers damages, a prearranged percentage of the 
damages will be paid to the attorney; if no damages are 
recovered, the attorney is not paid a fee. The proper tax 
treatment of contingent fee arrangements with attorneys has 
been litigated in recent years. Some courts \361\ have held 
that the entire amount of damages is income and that the 
claimant is entitled to a miscellaneous itemized deduction 
subject to both the two-percent floor as an expense for the 
production of income for the portion paid to the attorney and 
to the overall limitation on itemized deductions. Other courts 
have held that the portion of the recovery that is paid 
directly to the attorney is not income to the claimant, holding 
that the claimant has no claim of right to that portion of the 
recovery.\362\
---------------------------------------------------------------------------
    \361\ Kenseth v. Commissioner, 114 T.C. 399 (2000), aff'd 259 F.3d 
881 (7th Cir. 2001); Coady v. Commissioner, 213 F.3d 1187 (9th Cir. 
2000); Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir. 2000); 
Baylin v. United States, 43 F.3d 1451 (Fed. Cir. 1995).
    \362\ Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959); Estate 
of Arthur Clarks v. United States, 202 F.3d 854 (6th Cir. 2000); 
Srivastava v. Commissioner, 220 F.3d 353 (5th Cir. 2000). In some of 
these cases, such as Cotnam, State law has been an important 
consideration in determining that the claimant has no claim of right to 
the recovery.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides an above-the-line deduction 
for attorneys' fees and costs paid by, or on behalf of, the 
taxpayer in connection with any action involving a claim of 
unlawful discrimination, certain claims against the Federal 
Government, or a private cause of action under the Medicare 
Secondary Payer statute. The amount that may be deducted above-
the-line may not exceed the amount includible in the taxpayer's 
gross income for the taxable year on account of a judgment or 
settlement (whether by suit or agreement and whether as lump 
sum or periodic payments) resulting from such claim.
      Under the proposal, ``unlawful discrimination'' means an 
act that is unlawful under certain provisions of any of the 
following: the Civil Rights Act of 1991; the Congressional 
Accountability Act of 1995; the National Labor Relations Act; 
the Fair Labor Standards Act of 1938; the Age Discrimination in 
Employment Act of 1967; the Rehabilitation Act of 1973; the 
Employee Retirement Income Security Act of 1974; the Education 
Amendments of 1972; the Employee Polygraph Protection Act of 
1988; the Worker Adjustment and Retraining Notification Act; 
the Family and Medical Leave Act of 1993; chapter 43 of Title 
38 of the United States Code; the Revised Statutes; the Civil 
Rights Act of 1964; the Fair Housing Act; the Americans with 
Disabilities Act of 1990; any provision of Federal law 
(popularly known as whistleblower protection provisions) 
prohibiting the discharge of an employee, discrimination 
against an employee, or any other form of retaliation or 
reprisal against an employee for asserting rights or taking 
other actions permitted under Federal law; or any provision of 
Federal, State or local law, or common law claims permitted 
under Federal, State, or local law providing for the 
enforcement of civil rights or regulating any aspect of the 
employment relationship, including claims for wages, 
compensation, or benefits, or prohibiting the discharge of an 
employee, discrimination against an employee, or any other form 
of retaliation or reprisal against an employee for asserting 
rights or taking other actions permitted by law.
      Effective date.--The Senate amendment provision applies 
to fees and costs paid after December 31, 2002, with respect to 
any judgment or settlement occurring after such date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
except for the effective date.
      Effective date.--The conference agreement applies to fees 
and costs paid after the date of enactment with respect to any 
judgment or settlement occurring after such date.
3. Exclusion from gross income for amounts paid under National Health 
        Service Corps loan repayment program (sec. 644 of the Senate 
        amendment and sec. 108 of the Code)

                              PRESENT LAW

      The National Health Service Corps Loan Repayment Program 
(the ``NHSC Loan Repayment Program'') provides education loan 
repayments to participants on condition that the participants 
provide certain services. In the case of the NHSC Loan 
Repayment Program, the recipient of the loan repayment is 
obligated to provide medical services in a geographic area 
identified by the Public Health Service as having a shortage of 
health-care professionals. Loan repayments may be as much as 
$35,000 per year of service plus a tax assistance payment of 39 
percent of the repayment amount.
      States may also provide for education loan repayment 
programs for persons who agree to provide primary health 
services in health professional shortage areas. Under the 
Public Health Service Act, such programs may receive Federal 
grants with respect to such repayment programs if certain 
requirements are satisfied.
      Generally, gross income means all income from whatever 
source derived including income for the discharge of 
indebtedness. However, gross income does not include discharge 
of indebtedness income if: (1) the discharge occurs in a Title 
11 case; (2) the discharge occurs when the taxpayer is 
insolvent; (3) the indebtedness discharged is qualified farm 
indebtedness; or (4) except in the case of a C corporation, the 
indebtedness discharged is qualified real property business 
indebtedness.
      Because the loan repayments provided under the NHSC Loan 
Repayment Program or similar State programs under the Public 
Health Service Act are not specifically excluded from gross 
income, they are gross income to the recipient. There is also 
no exception from employment taxes (FICA and FUTA) for such 
loan repayments.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision excludes from gross income and employment 
taxes education loan repayments provided under the NHSC Loan 
Repayment Program and State programs eligible for funds under 
the Public Health Service Act. The provision also provides that 
such repayments are not taken into account as wages in 
determining benefits under the Social Security Act.
      Effective date.--The provision is effective with respect 
to amounts received in taxable years beginning after December 
31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
4. Certain expenses of rural letter carriers (sec. 645 of the Senate 
        amendment and sec. 162(o) of the Code)

                              PRESENT LAW

      The deductible automobile expenses of rural letter 
carriers equal the reimbursements that such carriers receive 
from the U.S. Postal Service. Carriers are not allowed to 
document their actual costs and claim itemized deductions for 
costs in excess of reimbursements,\363\ nor are carriers 
required to include in income reimbursements in excess of their 
actual costs.
---------------------------------------------------------------------------
    \363\ Section 162(o).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, if the reimbursements a rural 
letter carrier receives from the U.S. Postal Service fall short 
of the carrier's actual costs, the costs in excess of 
reimbursements qualify as a miscellaneous itemized deduction 
subject to the two-percent floor. Reimbursements in excess of 
their actual costs continue not to be required to be included 
in gross income.
      Effective date.--The provisions is effective for taxable 
years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
5. Method of accounting for naval shipbuilders (sec. 646 of the Senate 
        amendment)

                              PRESENT LAW

      Generally, taxpayers must use the percentage-of-
completion method to determine taxable income from long-term 
contracts.\364\ Under sec. 10203(b)(2)(B) of the Revenue Act of 
1987,\365\ an exception exists for certain ship construction 
contracts, which may be accounted for using the 40/60 
percentage-of-completion/ capitalized cost method (``PCCM''). 
Under the 40/60 PCCM, 60 percent of a taxpayer's long-term 
contract income is exempt from the requirement to use the 
percentage-of-completion method while 40 percent remains 
subject to the requirement. The exempt 60 percent of long-term 
contract income must be reported by consistently using the 
taxpayer's exempt contract method. Permissible exempt contract 
methods include the percentage of completion method, the 
exempt-contract percentage-of-completion method, and the 
completed contract method.\366\
---------------------------------------------------------------------------
    \364\ Sec. 460(a).
    \365\ Pub. Law No. 100-203 (1987).
    \366\ Treas. Reg. 1.460-4(c)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that qualified naval ship 
contracts may be accounted for using the 40/60 PCCM during the 
first five taxable years of the contract. The cumulative 
reduction in tax resulting from the provision over the five-
year period is recaptured and included in the taxpayer's tax 
liability in the sixth year. Qualified naval ship contracts are 
defined as any contract or portion thereof that is for the 
construction in the United States of one ship or submarine for 
the Federal Government if the taxpayer reasonably expects the 
acceptance date will occur no later than nine years after the 
construction commencement date.
      Effective date.--The Senate amendment is effective for 
contracts with respect to which the construction commencement 
date occurs after date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with the following modification. The provision specifies that 
the construction commencement date is the date on which the 
physical fabrication of any section or component of the ship or 
submarine begins in the taxpayer's shipyard.
      Effective date.--The provision is effective for contracts 
with respect to which the construction commencement date occurs 
after date of enactment.
6. Distributions to shareholders from policyholders surplus account of 
        life insurance companies (sec. 647 of the Senate amendment and 
        sec. 815 of the Code)

                         PRIOR AND PRESENT LAW

      Under the law in effect from 1959 through 1983, a life 
insurance company was subject to a three-phase taxable income 
computation under Federal tax law. Under the three-phase 
system, a company was taxed on the lesser of its gain from 
operations or its taxable investment income (Phase I) and, if 
its gain from operations exceeded its taxable investment 
income, 50 percent of such excess (Phase II). Federal income 
tax on the other 50 percent of the gain from operations was 
deferred, and was accounted for as part of a policyholder's 
surplus account and, subject to certain limitations, taxed only 
when distributed to stockholders or upon corporate dissolution 
(Phase III). To determine whether amounts had been distributed, 
a company maintained a shareholders surplus account, which 
generally included the company's previously taxed income that 
would be available for distribution to shareholders. 
Distributions to shareholders were treated as being first out 
of the shareholders surplus account, then out of the 
policyholders surplus account, and finally out of other 
accounts.
      The Deficit Reduction Act of 1984 included provisions 
that, for 1984 and later years, eliminated further deferral of 
tax on amounts (described above) that previously would have 
been deferred under the three-phase system. Although for 
taxable years after 1983, life insurance companies may not 
enlarge their policyholders surplus account, the companies are 
not taxed on previously deferred amounts unless the amounts are 
treated as distributed to shareholders or subtracted from the 
policyholders surplus account (sec. 815).
      Under present law, any direct or indirect distribution to 
shareholders from an existing policyholders surplus account of 
a stock life insurance company is subject to tax at the 
corporate rate in the taxable year of the distribution. Present 
law (like prior law) provides that any distribution to 
shareholders is treated as made (1) first out of the 
shareholders surplus account, to the extent thereof, (2) then 
out of the policyholders surplus account, to the extent 
thereof, and (3) finally, out of other accounts.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision suspends for a stock life 
insurance company's taxable years beginning after December 31, 
2003, and before January 1, 2006, the application of the rules 
imposing income tax on distributions to shareholders from the 
policyholders surplus account of a life insurance company (sec. 
815). The provision also reverses the order in which 
distributions reduce the various accounts, so that 
distributions would be treated as first made out of the 
policyholders surplus account, to the extent thereof, and then 
out of the shareholders surplus account, and lastly out of 
other accounts.
      Effective date.--The Senate amendment provision is 
effective for taxable years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
with a modification.
      The conference agreement provision suspends for a stock 
life insurance company's taxable years beginning after December 
31, 2004, and before January 1, 2007, the application of the 
rules imposing income tax on distributions to shareholders from 
the policyholders surplus account of a life insurance company 
(sec. 815). The conference agreement includes the Senate 
amendment provision reversing the order in which distributions 
reduce the various accounts, so that distributions would be 
treated as first made out of the policyholders surplus account, 
to the extent thereof, and then out of the shareholders surplus 
account, and lastly out of other accounts.
      Effective date.--The conference agreement provision is 
effective for taxable years beginning after December 31, 2004.
7. Motor vehicle dealer transitional assistance (sec. 650 of the Senate 
        amendment)

                              PRESENT LAW

      Under present law, no gain or loss is recognized on the 
exchange of property used in a trade or business or held for 
investment if the property is exchanged solely for property of 
like kind.\367\ To qualify for nonrecognition treatment, the 
replacement property must be identified within 45 days and the 
exchange must be completed within 180 days after the transfer 
of the exchanged property. The basis of the replacement 
property is determined by reference to the basis of the 
exchanged property.
---------------------------------------------------------------------------
    \367\ Sec. 1031(a)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides an election (on either an 
original or amended return) to defer the gain on termination 
payments received by a taxpayer from a motor vehicle 
manufacturer on account of the termination of a motor vehicle 
sales and service agreement, provided the proceeds are 
reinvested within two years in property used in a domestic 
motor vehicle dealership. Under the provision, a dealership in 
which the proceeds are reinvested within two years is treated 
as like kind replacement property under sec. 1031, without 
regard to the time limitations on identification of and 
acquisition of such replacement property under present law. The 
provision extends the statute of limitations for assessment of 
any deficiency attributable to gain on termination payments 
until three years after the taxpayer notifies the Secretary of 
the like-kind replacement property or an intention not to 
replace.
      The Senate amendment applies only with respect to 
termination payments from a motor vehicle manufacturer who 
announced in December 2000 that it would phase out the motor 
vehicle brand to which the agreement relates.
      Effective date.--The Senate amendment is effective for 
amounts received after December 12, 2000, in taxable years 
ending after that date.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. Expansion of designated renewal community area based on 2000 census 
        data (sec. 651 of the Senate amendment and sec. 1400E of the 
        Code)

                              PRESENT LAW

      Section 1400E provides for the designation of certain 
communities as renewal communities.\368\ An area designated as 
a renewal community is eligible for the following tax 
incentives: (1) a zero-percent rate for capital gain from the 
sale of qualifying assets; (2) a 15-percent wage credit to 
employers for the first $10,000 of qualified wages; (3) a 
``commercial revitalization deduction'' that allows taxpayers 
(to the extent allocated by the appropriate State agency) to 
deduct either (a) 50 percent of qualifying expenditures for the 
taxable year in which a qualified building is placed in 
service, or (b) all of the qualifying expenditures ratably over 
a 10-year period beginning with the month in which such 
building is placed in service; (4) an additional $35,000 of 
section 179 expensing for qualified property; and (5) an 
expansion of the work opportunity tax credit with respect to 
individuals who live in a renewal community.
---------------------------------------------------------------------------
    \368\ Section 1400E was added by section 101(a) of the Community 
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
      To be designated as a renewal community, a nominated area 
was required to meet the following criteria: (1) each census 
tract must have a poverty rate of at least 20 percent; (2) in 
the case of an urban area, at least 70 percent of the 
households have incomes below 80 percent of the median income 
of households within the local government jurisdiction; (3) the 
unemployment rate is at least 1.5 times the national 
unemployment rate; and (4) the area is one of pervasive 
poverty, unemployment, and general distress. There are no 
geographic size limitations placed on renewal communities. 
Instead, the boundary of a renewal community must be 
continuous. In addition, the renewal community must have a 
minimum population of 4,000 if the community is located within 
a metropolitan statistical area (at least 1,000 in all other 
cases), and a maximum population of not more than 200,000. The 
population limitations do not apply to any renewal community 
that is entirely within an Indian reservation.
      The designations of renewal communities were required to 
be made by December 31, 2001, using 1990 census data to 
determine relevant populations and poverty rates.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment permits the Secretary of Housing and 
Urban Development to expand a renewal community to include: (1) 
any census tract that at the time such community was nominated, 
satisfied the requirements for inclusion in such community but 
for the failure of such tract to satisfy one or more of the 
population and poverty rate requirements using 1990 census 
data, and that satisfies all failed population and poverty rate 
requirements using 2000 census data; or (2) an area that is 
adjacent to at least one other area designated as a renewal 
community and that has a population less than the generally 
applicable population requirement, if the area is one of 
pervasive poverty, unemployment, and general distress that is 
within the jurisdiction of one or more local governments and 
the boundary of the area is continuous, or the area contains a 
population of less than 100 people.
      Effective date.--The provision is effective as if 
included in the amendments made by section 101 of the Community 
Renewal Tax Relief Act of 2000.

                          CONFERENCE AGREEMENT

      The conference agreement modifies the Senate amendment to 
authorize the Secretary of Housing and Urban Development, at 
the request of all of the governments that nominated a renewal 
community, to add a contiguous census tract to a renewal 
community in the following circumstances. First, the renewal 
community, including any tract to be added, would have met the 
renewal community eligibility requirements at the time of the 
community's original nomination, and any tract to be added has 
a poverty rate using 2000 census data that exceeds the poverty 
rate of such tract using 1990 census data. Second, a tract may 
be added to a renewal community even if the addition of such 
tract to such community would have caused the community to fail 
one or more eligibility requirements when originally nominated 
using 1990 census data, provided that: (1) the renewal 
community after the inclusion of such tract does not have a 
population that exceeds 200,000 using either 1990 or 2000 
census data; (2) such tract has a poverty rate of at least 20 
percent using 2000 census data; and (3) such tract has a 
poverty rate using 2000 census data that exceeds the poverty 
rate of such tract using 1990 census data. Census tracts that 
did not have a poverty rate determined by the Bureau of the 
Census using 1990 data may be added to an existing renewal 
community without satisfying requirement (3) above. Third, a 
tract may be added to an existing renewal community if such 
tract: (1) has no population using 2000 census data or no 
poverty rate for such tract is determined by the Bureau of the 
Census using 2000 census data; (2) such tract is one of general 
distress; and (3) the renewal community, including such tract, 
is within the jurisdiction of one or more local governments and 
has a continuous boundary.
      Effective date.--The conference agreement provision is 
effective as if included in the amendments made by section 101 
of the Community Renewal Tax Relief Act of 2000.
9. Reduction of holding period to 12 months for purposes of determining 
        whether horses are section 1231 assets (sec. 652 of the Senate 
        amendment and sec. 1231 of the Code)

                              PRESENT LAW

      Under present law, gain from the sale or exchange of 
horses held for draft, breeding, or sporting purposes qualify 
for long-term capital gain if the horse has been held for 24 
months or more.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment reduces the holding period for 
horses to 12 months or more.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the provision 
in the Senate amendment.
10. Blue ribbon commission on comprehensive tax reform (sec. 653 of the 
        Senate amendment)

                              PRESENT LAW

      Under present law, there is no specially-appointed 
commission designated to study and report on comprehensive tax 
reform.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment establishes a commission to study 
and report on comprehensive tax reform. Members of the 
commission are to be appointed by Congressional leadership and 
the President.
      Effective date.--Members must be appointed by October 30, 
2004. The report is due no later than 18 months after all 
members are appointed.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
11. Temporary accumulated earnings tax safe harbor (sec. 655 of the 
        Senate amendment and sec. 537 of the Code)

                              PRESENT LAW

      Present law imposes an accumulated earnings tax on the 
accumulated taxable income of a corporation that is formed or 
availed of for the purpose of avoiding the income tax with 
respect to its shareholders or the shareholders of any other 
corporation, by permitting earnings and profits to accumulate 
instead of being distributed.\369\
---------------------------------------------------------------------------
    \369\ Under present law, corporate income is taxed at graduated 
rates ranging from 15 percent to 35 percent. A corporation is also 
entitled to a dividends-received deduction of at least 70 percent for 
dividends received from other corporations. Thus, the maximum corporate 
rate on dividends received from other corporations is 10.5 percent. 
Individual income is generally taxed at graduated rates up to 35 
percent. However, dividends are taxed at a maximum rate of 15 percent. 
The maximum individual rates are scheduled to return to 39.6 percent on 
dividends as well as on other ordinary income after the year 2009.
---------------------------------------------------------------------------
      The accumulated earnings tax is in addition to the 
regular corporate level tax and is imposed at the maximum rate 
that would be imposed on a dividend to an individual 
shareholder. A corporation is generally permitted to accumulate 
an exempted amount of $250,000 ($150,000 in the case of certain 
service corporations); the tax is then imposed on accumulated 
taxable income above that amount.
      The fact that earnings and profits are permitted to 
accumulate beyond the reasonable needs of the business is 
determinative of the purpose to avoid tax with respect to 
shareholders, unless the corporation by the preponderance of 
the evidence shall prove to the contrary. If a corporation is a 
``mere holding or investment company,'' that fact is prima 
facie evidence of the prohibited purpose.\370\ Treasury 
regulations provide that even in cases of accumulation of 
earnings beyond the reasonable needs of the business or where a 
corporation is a mere holding or investment company, such facts 
are not absolutely conclusive against the taxpayer if the 
taxpayer satisfies the Commissioner that the corporation was 
neither formed not availed of for the purpose of avoiding 
income tax with respect to shareholders.\371\
---------------------------------------------------------------------------
    \370\ Sec. 533.
    \371\ Treas. Reg. sec. 1.533-1(a).
---------------------------------------------------------------------------
      The determination whether earnings and profits have been 
accumulated beyond the reasonable needs of the business is 
based on facts and circumstances. The reasonable needs of the 
business include ``reasonably anticipated'' needs of the 
business.\372\ Some courts have applied a business cycle 
approach in determining the basic working capital needs of a 
business, to which additional reasonably anticipated future 
needs may be added. Disputes have arisen regarding the choice 
of business cycle and the proper addition of future needs.\373\
---------------------------------------------------------------------------
    \372\ Treas. Reg. secs. 1.537-1, 1.537-2 and 1.537-3.
    \373\ See, e.g., Bardahl Manufacturing Corp., 24 TCM 1030 (1965); 
Bardahl International Corp., 25 TCM 935 (1966); Empire Steel Castings, 
Inc., 33 TCM 155 (1974); Alma-Piston Co. v. Commissioner, 579 F.2d 1000 
(6th Cir. 1978); C.E. Hooper, Inc. 76-1 USTC par. 9185 (Ct. Cl. 1976).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The bill provides that the reasonably anticipated needs 
of a business for any taxable year shall include working 
capital for the business in an amount which is not less than 
the sum of the cost of goods, operating expenses, and interest 
expense which the business incurred during the preceding 
taxable year. Any amounts incurred as part of a plan a 
principal purpose of which is to increase the limitation under 
this provision is not taken into account.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2003 and before January 1, 2009.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
12. Tax Treatment of State Ownership of Railroad REIT (sec. 656 of the 
        Senate amendment and secs. 103, 115, 336 and 337 of the Code)

                              PRESENT LAW

      A real estate investment trust (``REIT'') is an electing 
entity that is engaged primarily in passive real estate 
activities (as specifically defined) and that, among other 
requirements, must have at least 100 shareholders. If a 
qualified entity elects REIT status, it can be taxed 
essentially as a pass-through entity, since it can obtain a 
deduction for amounts distributed to its shareholders and it is 
required to distribute at least 90 percent of its income to 
shareholders annually.
      If an entity does not qualify to be treated as a REIT, it 
would generally be treated as a regular C corporation subject 
to tax under subchapter C of the Code and section 11 at the 
corporate entity level, unless it elected to be taxed as a 
partnership or disregarded entity under Treasury regulations. 
Even if it made such an election, the C corporation would be 
treated as if it had liquidated and distributed its assets to 
shareholders, with a resulting corporate tax on the excess of 
fair market value over basis of any corporate assets. A C 
corporation that becomes a tax-exempt entity also must pay 
corporate tax on the excess of the fair market value over the 
basis of its assets.
      A State or local government is not subject to Federal 
income tax on income from an activity that is an essential 
governmental function.\374\
---------------------------------------------------------------------------
    \374\ Sec. 115.
---------------------------------------------------------------------------
      Interest on a State or local bond is excluded from gross 
income, with certain exceptions.\375\ Special rules are also 
provided as requirements for tax exemption for State and local 
bonds.\376\
---------------------------------------------------------------------------
    \375\ Sec. 103.
    \376\ Secs. 141-150.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The bill provides that a qualified railroad corporation 
that is a REIT that meets certain qualified activity 
requirements (described further below) and that becomes 100 
percent owned by a State after December 31, 2003 and before 
December 31, 2005, will not be treated as a taxable C 
corporation, but will be taxed as if its income from the 
qualified activities accrued directly to the State. To the 
extent its described railroad activities qualify under present 
law as essential governmental functions, income from such 
activities shall be tax exempt under section 115 of the Code.
      Under the bill, no gain or loss shall be recognized from 
the deemed conversion of such a REIT to a C corporation which 
is tax-exempt, and no change in the basis of the property of 
the entity shall occur.
      Also, any obligation issued by an entity described above 
is treated as an obligation of a State for purposes of applying 
the tax exempt bond provisions.
      A qualified railroad corporation that is a REIT must be a 
non-operating Class III railroad, and substantially all of its 
activities must consist of the ownership, leasing, and 
operation by such corporation of facilities, equipment, and 
other property used by the corporation or other persons in 
railroad transportation.
      Effective date.--The bill applies on and after the date a 
State becomes the owner of all the outstanding stock of a 
qualified corporation, provided that the State becomes the 
owner of all the voting stock of the corporation on or before 
December 31, 2003 and becomes the owner of all the outstanding 
stock of the corporation on or before December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
13. Contribution in aid of construction (sec. 657 of the Senate 
        amendment and sec. 118 of the Code)

                              PRESENT LAW

      Section 118(a) provides that gross income of a 
corporation does not include a contribution to its capital. In 
general, section 118(b) provides that a contribution to the 
capital of a corporation does not include any contribution in 
aid of construction or any other contribution as a customer or 
potential customer and, as such, is includible in gross income 
of the corporation. However, for any amount of money or 
property received by a regulated public utility that provides 
water or sewerage disposal services, such amount shall be 
considered a contribution to capital (excludible from gross 
income) so long as such amount: (1) is a contribution in aid of 
construction, and (2) is not included in the taxpayer's rate 
base for rate-making purposes. If the contribution is in 
property other than water or sewerage disposal facilities, the 
amount is generally excludible from gross income only if the 
amount is expended to acquire or construct water or sewerage 
disposal facilities within a specified time period. A 
contribution in aid of construction does not include a customer 
connection fee or amounts paid as service charges for starting 
or stopping services.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment clarifies that water and sewer 
service laterals (amounts paid to connect the customer's water 
service line or sewer lateral line to the utility's 
distribution or collection system, or to extend a main water or 
sewer line to provide service to a customer) received by a 
regulated public utility that provides water or sewerage 
disposal services is considered a contribution to capital and 
excludible from gross income of such utility.
      Effective date.--The Senate amendment provision is 
effective for contributions made after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
14. Credit for purchase and installation of agricultural water 
        conservation systems (sec. 658 of the Senate amendment)

                              PRESENT LAW

      There is no provision that provides for a credit for 
agricultural water systems.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a 30-percent credit (not to 
exceed $500 per acre) for water conservation system expenses 
for taxpayers who normally derive at least 50 percent of their 
gross income from land. The term `water conservation system 
expenses' means expenses for the purchase and installation of a 
water conservation system but only if (1) the land served by 
the water conservation system is entirely in a county or 
county-equivalent area which has received, in the taxable year 
the expenses were paid or incurred or in any of the three 
preceding taxable years, a primary-county designation due to 
drought by the Secretary of Agriculture, and (2) such system is 
certified as saving at least 5 percent more irrigation water 
than the irrigation system which was used on such land 
immediately prior to the installation of such water 
conservation system.
      The term `water conservation system' means (1) new or 
replacement irrigation equipment and machinery, including 
sprinklers, pipes, siphons, nozzles, pumps, motors, and 
engines, and (2) computer systems for irrigation and water 
management.
      The irrigation water savings shall be determined and 
certified under regulations prescribed jointly by the Natural 
Resources Conservation Service of the Department of Agriculture 
and the Bureau of Reclamation of the Department of the 
Interior. Such regulations shall include a list of individuals 
or organizations qualified to make such certification.
      No deduction is allowed with respect to any expenses 
taken into account in determining the credit, and any increase 
in the basis of any property which would result from such 
expense shall be reduced by the amount of credit allowed for 
such expense.
      Effective date.--The credit is available for expenses 
incurred after date of enactment with respect to systems 
completed after December 31, 2004 and prior to January 1, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
15. Modification of involuntary conversion rules for businesses 
        affected by the September 11th terrorist attacks (sec. 659 of 
        the Senate amendment and sec. 1400L of the Code)

                              PRESENT LAW

      Generally, a taxpayer realizes gain to the extent the 
sales price (and any other consideration received) exceeds the 
taxpayer's basis in the property. The realized gain is subject 
to current income tax unless the gain is deferred or not 
recognized under a special tax provision.
      Under section 1033, gain realized by a taxpayer from an 
involuntary conversion of property is deferred to the extent 
the taxpayer purchases property similar or related in service 
or use to the converted property within the applicable period. 
The taxpayer's basis in the replacement property generally is 
the same as the taxpayer's basis in the converted property, 
decreased by the amount of any money or loss recognized on the 
conversion, and increased by the amount of any gain recognized 
on the conversion.
      The applicable period for the taxpayer to replace the 
converted property begins with the date of the disposition of 
the converted property (or if earlier, the earliest date of the 
threat or imminence of requisition or condemnation of the 
converted property) and ends two years after the close of the 
first taxable year in which any part of the gain upon 
conversion is realized (the ``replacement period''). Special 
rules extend the replacement period for certain real property 
and principal residences damaged by a Presidentially declared 
disaster to three years and four years, respectively, after the 
close of the first taxable year in which gain is realized.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides special rules for property 
which is compulsorily or involuntarily converted as a result of 
the terrorist attacks on September 11, 2001, in the New York 
Liberty Zone. The special rules provide that a corporation 
which is a member of an affiliated group filing a consolidated 
tax return shall be treated as satisfying the repurchase 
requirement of section 1033 with respect to such property to 
the extent the requirement is satisfied by another member of 
the corporation's affiliated group. In addition, the provision 
extends the replacement period for such property to five years 
after the close of the first taxable year in which gain is 
realized, if substantially all the use of the replacement 
property is in New York City.
      Effective date.--The Senate amendment is effective for 
involuntary conversions occurring on or after September 11, 
2001.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
16. Repeal of application of below-market loan rules to amounts paid to 
        certain continuing care facilities (sec. 660 of the Senate 
        amendment and sec. 7872 of the Code)

                              PRESENT LAW

      Certain loans that bear interest at a below-market 
interest rate are treated as loans bearing interest at the 
market rate accompanied by a payment or payments from the 
lender to the borrower which are characterized in accordance 
with the substance of the particular transaction (e.g., gift, 
compensation, dividend, etc.).\377\ The market rate of interest 
for purposes of the below-market loan rules is assumed to be 
100 percent of the applicable Federal rate (``AFR'') at the 
time the loan is made in the case of a term loan or, in the 
case of a demand loan, 100 percent of the AFR in effect over 
the time that the loan is outstanding.
---------------------------------------------------------------------------
    \377\ Sec. 7872.
---------------------------------------------------------------------------
      In general, the below-market loan rules apply to (1) 
loans where the foregone (i.e., below-market) interest is in 
the nature of a gift, (2) loans between an employee and an 
employer or between an independent contractor and one for whom 
the independent contractor provides services, (3) loans between 
a corporation and a shareholder of the corporation, (4) loans 
of which one of the principal purposes of the interest 
arrangement is the avoidance of Federal tax, (5) to the extent 
provided in Treasury regulations, any other below-market loans 
if the interest arrangement of such loan has a significant 
effect on any Federal tax liability of either the lender or 
borrower, and (6) loans to any qualified continuing care 
facility pursuant to a continuing care contract.
      In the case of loans made to qualified continuing care 
facilities,\378\ an exception from the below-market loan rules 
is provided for any loan as of the calendar year in which the 
lender has attained age 65, provided the loan is made by the 
lender to the qualified continuing care facility pursuant to a 
continuing care contract.\379\ However, the exception applies 
only to the extent that the principal amount of the loan, when 
added to the aggregate outstanding amount of all other previous 
loans between the lender (or the lender's spouse) and any 
qualified continuing care facility, does not exceed $90,000. 
This amount is indexed for inflation, and the amount for 
calendar year 2004 is $154,500.\380\
---------------------------------------------------------------------------
    \378\ A ``qualified continuing care facility'' is defined as one or 
more facilities (1) which are designed to provide services under 
continuing care contracts, and (2) substantially all of the residents 
of which are covered by continuing care contracts. However, a facility 
is not a qualified continuing care facility unless substantially all 
facilities which are used to provide services that are required to be 
provided under a continuing care contract are owned or operated by the 
borrower. In addition, nursing homes do not constitute continuing care 
facilities (sec. 7872(g)(4)).
    \379\ A ``continuing care contract'' is defined as a written 
contract between an individual and a qualified continuing care facility 
under which (1) the individual or individual's spouse may use a 
qualified continuing care facility for their life or lives, (2) the 
individual or individual's spouse (a) will first reside in a separate, 
independent living unit with additional facilities outside such unit 
for the providing of meals and other personal care, and (b) then will 
be provided long-term and skilled nursing care as the health of such 
individual or individual's spouse requires, and (3) no additional 
substantial payment is required if such individual or individual's 
spouse requires increased personal care services or long-term and 
skilled nursing care.
    \380\ Rev. Rul. 2003-118, 2003-47 I.R.B. 1095.
---------------------------------------------------------------------------
      With regard to continuing care facilities that are not 
qualified continuing care facilities, the IRS takes the 
position that loans made to such facilities by residents are 
not subject to the below-market loan rules until and unless 
Treasury regulations are issued that treat such loans as having 
a significant effect on any Federal tax liability of either the 
facility or the resident.\381\
---------------------------------------------------------------------------
    \381\ Tech. Adv. Mem. 9521001 (Dec. 7, 1994).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment repeals the application of the 
below-market loan rules to loans that are made to any qualified 
continuing care facility pursuant to a continuing care 
contract, without regard to the principal amount of the loan 
(including the aggregate outstanding amount of any other 
previous loans between the resident or resident's spouse and 
any qualified continuing care facility). The Senate amendment 
also clarifies that the determination of whether a facility is 
a qualified continuing care facility is to be made on an annual 
basis at the end of each calendar year, rather than only when 
the continuing care contract is entered into. In addition, the 
Senate amendment modifies the definition of a continuing care 
contract to (1) not exclude contracts that require additional 
substantial payment for increased personal care services 
required by the resident or resident's spouse, and (2) provide 
authority for the Treasury to issue guidance that limits such 
definition to contracts that provide to the resident or 
resident's spouse only facilities, care and services that are 
customarily offered by continuing care facilities. The Senate 
amendment also clarifies that the definition of a qualified 
continuing care facility requires substantially all of the 
independent living unit residents of the facility to be covered 
by continuing care contracts.
      The Senate amendment does not affect the present-law 
application of the below-market loan rules to loans made to any 
continuing care facility that is not a qualified continuing 
care facility.
      Effective date.--The Senate amendment provision applies 
to calendar years beginning after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
17. Maximum capital gain rates of individuals for gold, silver, 
        platinum, and palladium (sec. 661 of the Senate amendment and 
        sec. 1(h) of the Code)

                              PRESENT LAW

      Under present law, the net capital gain of an individual 
is generally taxed at a maximum rate of 15 percent (five 
percent for gain otherwise taxed at the 10- or 15-percent 
rate). However, the maximum tax rate for individuals from the 
sale or exchange of a collectible is 28 percent. Gold, silver, 
platinum or palladium bullion is defined as a collectible for 
this purpose.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, gold, silver, platinum and 
palladium bullion is not treated as a ``collectible'' for 
purposes of applying the individual capital gain rates. Thus, 
gain or loss from the sale of the bullion will qualify for the 
lower five- and 15-percent capital gain rates.
      Effective date.--Taxable years beginning after December 
31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the provision 
in the Senate amendment.
18. Inclusion of primary and secondary medical strategies for children 
        and adults with sickle cell disease as medical assistance under 
        the medicaid program (sec. 662 of the Senate amendment)

                              PRESENT LAW

      Medicaid programs are generally operated by the States, 
in part with funds received from the Federal government. Within 
broad Federal guidelines, States can design the scope and 
availability of Medicaid benefits. Medicaid law requires States 
to provide certain services including, for example, hospital 
and physician services. Federal funds are available for 
additional optional services if States choose to include them 
in their Medicaid plans. Within Federal guidelines, States may 
limit the amount, duration of any Medicaid service. Under 
present law, States may have covered some of the primary and 
secondary medical strategies, treatments, and services for 
Sickle Cell Disease, however such services are not specifically 
listed in the Medicaid statute as either mandatory or optional 
services.
      The Federal government shares in States' Medicaid service 
costs by means of a statutory formula designed to provide a 
higher Federal matching rate to States with lower per capita 
incomes. The Federal share is referred to as the Federal 
Medical Assistance Percentage (``FMAP''). For some Medicaid 
services and activities, such as costs associated with program 
administration, the FMAP rate is set in statute. Because 
Medicaid is an individual entitlement, there is no annual 
ceiling on Federal expenditures; however, in order to continue 
receiving Federal payments, States must contribute their share 
of the matching funds.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment amends Title XIX of the Social 
Security Act to add primary and secondary medical strategies, 
treatment and services for individuals who have Sickle Cell 
Disease as a new optional medical assistance category under the 
Medicaid program. Such strategies, treatment, and services 
include: (1) chronic blood transfusion (with deferoxamine 
chelation) to prevent stroke in individuals with Sickle Cell 
Disease who have been identified as being at high risk for 
stroke; (2) genetic counseling, testing, and treatment for 
individuals with Sickle Cell Disease or the Sickle Cell trait; 
and (3) other treatment and services to prevent individuals who 
have Sickle Cell Disease and who have had a stroke having 
another stroke. The amendment sets the FMAP rate at 50 percent 
for costs attributable to providing: (1) services to identify 
and educate likely Medicaid enrollees who have or are carriers 
of Sickle Cell Disease; or (2) education regarding the risks of 
stroke and other complications, as well as the prevention of 
stroke and complications for likely Medicaid enrollees with 
Sickle Cell Disease.
      The Senate amendment also authorizes an appropriation in 
the amount of $10,000,000 for each of fiscal years 2005 through 
2009 for a demonstration program under which the Administrator 
of the Health Resources and Services Administration (through 
the Bureau of Primary Health Care and the Maternal Child Health 
Bureau) would make grants up to 40 eligible entities in each 
such fiscal year for the development and establishment of 
systemic mechanisms for the prevention and treatment of the 
Sickle Cell Disease. Eligible entities include Federally-
qualified health centers as defined in the Medicaid statute; 
nonprofit hospitals or clinics, or university health centers 
that provide primary health care that: (1) have a collaborative 
agreement with a community-based Sickle Cell Disease 
organization or a nonprofit entity with experience in working 
with individuals who have the Sickle Cell Disease; and (2) 
demonstrate that they have at least five years of experience in 
working with individuals who have the Sickle Cell Disease. 
Systematic mechanisms for the prevention and treatment of the 
Sickle Cell Disease include: (1) coordination of service 
delivery for individuals with the disease; (2) genetic 
counseling and testing; (3) bundling of technical services 
related to the prevention and treatment of the disease; (4) 
training health professionals; and (5) identifying and 
establishing efforts related to the expansion and coordination 
of education, treatment, and continuity of care programs for 
individuals with the disease.
      In awarding such grants to eligible entities, the 
Administrator of Health Resources and Services Administration 
is to take into consideration geographic diversity and to give 
priority to: (1) Federally-qualified health centers that have a 
partnership or other arrangement with a comprehensive Sickle 
Cell Disease treatment center and does not receive funds from 
the National Institutes of Health; or (2) Federally-qualified 
health centers that intend to develop a partnership or other 
arrangement with a comprehensive Sickle Cell Disease treatment 
center, and that does not receive funds from the National 
Institutes of Health. Eligible entities that are awarded grants 
are required to use the funds for the following activities: (1) 
to facilitate and coordinate the delivery of education, 
treatment, and continuity of care under: (a) the entity's 
collaborative agreement with a community-based Sickle Cell 
Disease organization or a nonprofit entity that works with 
individuals who have Sickle Cell Disease; (b) the Sickle Cell 
Disease newborn screening program for the State in which the 
entity is located; and (c) the Maternal and Child Health 
program for the State in which the entity is located; (2) to 
train nursing and other health staff who provide care for 
individuals with Sickle Cell Disease; (3) to enter into a 
partnership with adult or pediatric hematologists in the region 
and other regional experts in the Sickle Cell Disease at 
tertiary or academic health centers and State and county health 
offices; and (4) to identify and secure resources for ensuring 
reimbursement under the Medicaid program, State children's 
health insurance program, and other health programs for the 
prevention and treatment of Sickle Cell Disease.
      The Senate amendment also requires the Administrator of 
Health Resources and Services Administration to enter into a 
contract with an entity and to serve as a National Coordinating 
Center for the demonstration program. The center is to: (1) 
collect, coordinate, monitor and distribute data, best 
practices, and findings regarding the activities funded under 
grants made to eligible entities under the demonstration 
program; (2) develop a model protocol for eligible entities 
with respect to prevention and treatment of the disease; (3) 
develop educational materials regarding the prevention and 
treatment of the disease; and (4) submit a written report to 
Congress. The written report to Congress should include 
recommendations on the effectiveness of the demonstration 
program direct outcome measures, such as the number and type of 
health care resources utilized (such as emergency room visits, 
hospital visits, length of stay, and physician visits for 
individuals with Sickle Cell Disease) and the number of 
individuals that were tested and subsequently received genetic 
counseling for the sickle cell trait.
      Effective date.--The Senate amendment is effective on the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
provision.
19. Mortgage payment assistance (secs. 901 and 902 of the Senate 
        amendment)

                              PRESENT LAW

      There is no provision in present law that authorizes the 
Secretary of Housing and Urban Development to award low-
interest loans to individuals adversely affected by 
international economic activity to enable such individuals to 
make mortgage payments with respect to their primary 
residences.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment requires the Secretary of Housing 
and Urban Development (the ``Secretary'') to establish a 
program for awarding low-interest loans to eligible individuals 
to enable such individuals to continue making mortgage payments 
with respect to their primary residences. The provision 
provides that the Secretary shall issue regulations no later 
than six weeks after the date of enactment to implement this 
program.
      An individual eligible to receive a loan under the 
program must be: (1) a worker that is adversely affected by 
international economic activity, as determined by the 
Secretary; (2) a borrower on a loan that requires monthly 
mortgage payments with respect to the primary residence of the 
individual; and (3) enrolled in a training or assistance 
program. The amount of a loan provided under the program cannot 
exceed the aggregate amount of monthly mortgage payments the 
borrower would owe during a 12-month period. In addition, a 
loan provided under the program must have an applicable 
interest rate of four percent and must provide for monthly 
repayments over a five-year period.
      The provision authorizes appropriations of $10 million 
for each of the years 2005 through 2009 to carry out the 
purposes of the provision.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
20. Protection of overtime pay (secs. 489-490 of the Senate amendment 
        and sec. 13 of the Fair Labor Standards Act of 1938)

                              PRESENT LAW

      The Fair Labor Standards Act of 1938 (``FLSA'') 
establishes minimum wage and overtime pay requirements that 
apply to employees, subject to certain exemptions.\382\ On 
April 23, 2004, the Department of Labor issued revised 
regulations implementing exemptions from the FLSA minimum wage 
and overtime pay requirements.\383\ Among other changes, the 
regulations increased the salary threshold for employees to be 
exempt from these requirements.
---------------------------------------------------------------------------
    \382\ See, sections 6, 7, and 13 of the FLSA, 29 U.S.C. sections 
206, 207, and 213 (2004).
    \383\ 69 Fed. Reg. 22,122 (April 23, 2004).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment contains provisions relating to the 
authority of the Secretary of Labor to issue regulations 
implementing the overtime pay requirement and the effect of 
recently issued regulations.
      Under the Senate amendment, the Secretary of Labor may 
not issue any regulation that exempts from the overtime pay 
requirement any employee who earns less than $23,660 per year. 
In addition, the Secretary of Labor may not issue any 
regulation concerning the right to overtime pay that is not as 
protective, or more protective, of the overtime pay rights of 
employees in certain specified occupations or job 
classifications (as listed in the provision) as the protections 
provided for such employees under the regulations in effect on 
March 31, 2003. Any portion of a regulation issued after March 
31, 2003, that modifies the overtime pay requirement in a 
manner that is inconsistent with the provisions of the Senate 
amendment will have no force or effect as it relates to the 
occupation or job classification involved.
      The Senate amendment also provides that, notwithstanding 
the Administrative Procedures Act or any other provision of 
law, any portion of the Labor regulations issued on April 23, 
2004, that exempts from the overtime pay requirement any 
employee who would not otherwise be exempt if the regulations 
in effect on March 31, 2003, remained in effect, will have no 
force or effect. In addition, the portion of the regulations 
(as in effect on March 31, 2003) that would prevent any 
employee from being exempt shall remain in effect. Nonetheless, 
the increased salary requirements provided for in the 
regulations issued on April 23, 2004, will remain in effect.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provisions.
21. Report on acquisitions of goods from foreign sources (sec. 1001 of 
        the Senate amendment and sec. 43 of the Office of Federal 
        Procurement Policy Act)

                              PRESENT LAW

      Public Law 93-400, ``The Office of Federal Procurement 
Policy Act'', as amended, created the Office of Federal 
Procurement Policy (``OFPP'') in 1974 and placed it in the 
Office of Management and Budget (``OMB''). The OFPP was 
created, among other purposes, to provide Government-wide 
procurement policies which are to be followed by Executive 
agencies in procurement activities.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that, not later than 60 
days after the end of each fiscal year, each executive agency 
is to submit to the Congress a report on the acquisitions that 
were made of articles, materials, or supplies by the agency in 
that fiscal year from sources outside the United States. The 
report is to separately include the following information: (1) 
the dollar value of any articles, materials, or supplies that 
were manufactured outside the United States; (2) an itemized 
list of all waivers granted with respect to such articles, 
materials, or supplies under the Buy American Act; and (2) a 
summary of the (a) the total procurement funds expended on 
articles, materials and supplies manufactured outside the 
United States and (b) the total procurement funds expended on 
articles, materials, and supplies manufactured outside the 
Untied States. The agency is to make the report publicly 
available by posting the report on the Internet.
      The reporting requirement does not apply to any 
procurement for national security purposes entered into by: (1) 
the Department of Defense or any agency or entity thereof; (2) 
the Departments of the Army, Navy, and Air Force or any agency 
or entity of any of the military departments; (3) the 
Department of Homeland Security; (4) the Department of Energy 
or any agency or entity thereof, with respect to the national 
security programs of the Department of Energy; or (5) any 
element of the intelligence community.
      The Senate amendment also provides that, not later than 
60 days after the end of each fiscal year ending after the date 
of enactment, the Secretary of Commerce is to submit to 
Congress a report on the acquisitions by foreign governments of 
articles, materials, or supplies that were manufactured or 
extracted in the United States in that fiscal year. The report 
is to indicate the dollar value of such articles, materials, or 
supplies and is to be made publicly available by posting on the 
Internet.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
22. Minimum cost requirement for excess asset transfers (sec. 719 of 
        the Senate amendment and sec. 420 of the Code)

                              PRESENT LAW

      Defined benefit plan assets generally may not revert to 
an employer prior to termination of the plan and satisfaction 
of all plan liabilities. In addition, a reversion may occur 
only if the plan so provides. A reversion prior to plan 
termination may constitute a prohibited transaction and may 
result in plan disqualification. Any assets that revert to the 
employer upon plan termination are includible in the gross 
income of the employer and subject to an excise tax. The excise 
tax rate is 20 percent if the employer maintains a replacement 
plan or makes certain benefit increases in connection with the 
termination; if not, the excise tax rate is 50 percent. Upon 
plan termination, the accrued benefits of all plan participants 
are required to be 100-percent vested.
      A pension plan may provide medical benefits to retired 
employees through a separate account that is part of such plan. 
A qualified transfer of excess assets of a defined benefit plan 
to such a separate account within the plan may be made in order 
to fund retiree health benefits.\384\ A qualified transfer does 
not result in plan disqualification, is not a prohibited 
transaction, and is not treated as a reversion. Thus, 
transferred assets are not includible in the gross income of 
the employer and are not subject to the excise tax on 
reversions. No more than one qualified transfer may be made in 
any taxable year. No qualified transfer may be made after 
December 31, 2013.
---------------------------------------------------------------------------
    \384\ Sec. 420.
---------------------------------------------------------------------------
      Excess assets generally means the excess, if any, of the 
value of the plan's assets\385\ over the greater of (1) the 
accrued liability under the plan (including normal cost) or (2) 
125 percent of the plan's current liability.\386\ In addition, 
excess assets transferred in a qualified transfer may not 
exceed the amount reasonably estimated to be the amount that 
the employer will pay out of such account during the taxable 
year of the transfer for qualified current retiree health 
liabilities. No deduction is allowed to the employer for (1) a 
qualified transfer or (2) the payment of qualified current 
retiree health liabilities out of transferred funds (and any 
income thereon).
---------------------------------------------------------------------------
    \385\ The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
    \386\ In the case of plan years beginning before January 1, 2004, 
excess assets generally means the excess, if any, of the value of the 
plan's assets over the greater of (1) the lesser of (a) the accrued 
liability under the plan (including normal cost) or (b) 170 percent of 
the plan's current liability (for 2003), or (2) 125 percent of the 
plan's current liability. The current liability full funding limit was 
repealed for years beginning after 2003. Under the general sunset 
provision of EGTRRA, the limit is reinstated for years after 2010.
---------------------------------------------------------------------------
      Transferred assets (and any income thereon) must be used 
to pay qualified current retiree health liabilities for the 
taxable year of the transfer. Transferred amounts generally 
must benefit pension plan participants, other than key 
employees, who are entitled upon retirement to receive retiree 
medical benefits through the separate account. Retiree health 
benefits of key employees may not be paid out of transferred 
assets.
      Amounts not used to pay qualified current retiree health 
liabilities for the taxable year of the transfer are to be 
returned to the general assets of the plan. These amounts are 
not includible in the gross income of the employer, but are 
treated as an employer reversion and are subject to a 20-
percent excise tax.
      In order for a transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer (or in the case of a participant who separated in 
the one-year period ending on the date of the transfer, 
immediately before the separation).
      In order for a transfer to be qualified, the transfer 
must meet the minimum cost requirement. To satisfy the minimum 
cost requirement, an employer generally must maintain retiree 
health benefits at the same level for the taxable year of the 
transfer and the following four years (referred to as the cost 
maintance period). The applicable employer cost during the cost 
maintenance period cannot be less than the higher of the 
applicable employer costs for each of the two taxable years 
preceding the taxable year of the transfer. The applicable 
employer cost is generally determined by dividing the current 
retiree health liabilities by the number of individuals 
provided coverage for applicable health benefits during the 
year. The Secretary is directed to prescribe regulations as may 
be necessary to prevent an employer who significantly reduces 
retiree health coverage during the period from being treated as 
satisfying the minimum cost requirement.
      Under Treasury regulations,\387\ the minimum cost 
requirement is not satisfied if the employer significantly 
reduces retiree health coverage during the cost maintenance 
period. Under the regulations, an employer significantly 
reduces retiree health coverage for a year (beginning after 
2001) during the cost maintenance period if either (1) the 
employer-initiated reduction percentage for that taxable year 
exceeds 10 percent, or (2) the sum of the employer-initiated 
reduction percentages for that taxable year and all prior 
taxable years during the cost maintenance period exceeds 20 
percent.\388\ The employer-initiated reduction percentage is 
percentage of the number of individuals receiving coverage for 
applicable health benefits as of the day before the first day 
of the taxable year over the total number of such individuals 
whose coverage for applicable health benefits ended during the 
taxable year by reason of employer action.\389\
---------------------------------------------------------------------------
    \387\ Treas. Reg. sec. 1.420-1(a).
    \388\ Treas. Reg. sec. 1.420-1(b)(1).
    \389\ Treas. Reg. sec. 1.420-1(b)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that an eligible employer 
does not fail the minimum cost requirement if, in lieu of any 
reduction of health coverage permitted by Treasury regulations, 
the employer reduces applicable employer cost by an amount not 
in excess of the reduction in costs which would have occurred 
if the employer had made the maximum permissible reduction in 
retiree health coverage under such regulations. An employer is 
an eligible employer if, for the preceding taxable year, the 
qualified current retiree health liabilities of the employer 
were at least five percent of gross receipts.
      In applying such regulations to any subsequent taxable 
year, any reduction in applicable employer cost under the 
proposal is treated as if it were an equivalent reduction in 
retiree health coverage.
      Effective date.--The provision is effective for taxable 
years ending after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                    TITLE IX--ENERGY TAX INCENTIVES

        A. Credit for Electricity Produced From Certain Sources

(Sec. 801 of the Senate amendment and sec. 45 of the Code)

                              PRESENT LAW

      An income tax credit is allowed for the production of 
electricity from either qualified wind energy, qualified 
``closed-loop'' biomass, or qualified poultry waste facilities 
(sec. 45). The amount of the credit is 1.5 cents per kilowatt-
hour (indexed for inflation) of electricity produced. The 
amount of the credit is 1.8 cents per kilowatt-hour for 2004. 
The credit is reduced for grants, tax-exempt bonds, subsidized 
energy financing, and other credits.
      The credit applies to electricity produced by a wind 
energy facility placed in service after December 31, 1993, and 
before January 1, 2006, to electricity produced by a closed-
loop biomass facility placed in service after December 31, 
1992, and before January 1, 2006, and to a poultry waste 
facility placed in service after December 31, 1999, and before 
January 1, 2006. The credit is allowable for production during 
the 10-year period after a facility is originally placed in 
service. In order to claim the credit, a taxpayer must own the 
facility and sell the electricity produced by the facility to 
an unrelated party. In the case of a poultry waste facility, 
the taxpayer may claim the credit as a lessee/operator of a 
facility owned by a governmental unit.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Extension of placed in service date for existing facilities
      The Senate amendment extends the placed in service date 
for wind facilities, closed-loop biomass facilities, and 
poultry waste facilities to facilities placed in service after 
December 31, 1993 (December 31, 1992, in the case of closed-
loop biomass facilities and December 31, 1999, in the case of 
poultry waste facilities) and before January 1, 2007.
Modification of credit amount
      The Senate amendment modifies the credit rate applicable 
to electricity produced from after December 31, 2004 from 
facilities placed in service after December 31, 2004 to be 1.8 
cents per kilowatt hour and repeals the indexing of the credit 
amount.
Additional qualifying facilities
      The Senate amendment also defines six new qualifying 
energy resources: open-loop biomass including agricultural 
livestock waste nutrients, geothermal energy, solar energy, 
municipal biosolids and sludge, small irrigation, and municipal 
solid waste.
      Open-loop biomass is defined as any solid, nonhazardous, 
cellulosic waste material which is segregated from other waste 
materials and which is derived from any of forest-related 
resources, solid wood waste materials, or agricultural sources. 
Eligible forest-related resources are mill residues, other than 
spent chemicals from pulp manufacturing, precommercial 
thinnings, slash, and brush. Solid wood waste materials include 
waste pallets, crates, dunnage, manufacturing and construction 
wood wastes (other than pressure-treated, chemically-treated, 
or painted wood wastes), and landscape or right-of-way tree 
trimmings. Agricultural sources include orchard tree crops, 
vineyard, grain, legumes, sugar, and other crop by-products or 
residues. However, qualifying open-loop biomass does not 
include municipal solid waste (garbage), gas derived from 
biodegradation of solid waste, or paper that is commonly 
recycled. In addition, open-loop biomass does not include 
closed-loop biomass or any biomass burned in conjunction with 
fossil fuel (cofiring) beyond such fossil fuel required for 
start up and flame stabilization.
      Agricultural livestock waste nutrients are defined as 
agricultural livestock manure and litter, including bedding 
material for the disposition of manure.
      Geothermal energy is energy derived from a geothermal 
deposit which is a geothermal reservoir consisting of natural 
heat which is stored in rocks or in an aqueous liquid or vapor 
(whether or not under pressure).
      Municipal biosolids and sludge are the residue or solids 
removed by a municipal wastewater treatment facility. Sludge is 
the recycled residue byproduct created in the treatment of 
commercial, industrial, municipal, or navigational wastewater, 
but not including residues from incineration.
      A small irrigation power facility is a facility that 
generates electric power through an irrigation system canal or 
ditch without any dam or impoundment of water. The installed 
capacity of a qualified facility is less than five megawatts.
      Qualifying open-loop biomass facilities, other than 
qualifying agricultural livestock waste nutrient facilities are 
facilities using open-loop biomass to produce electricity that 
are placed in service prior to January 1, 2005. Qualifying 
agricultural livestock waste nutrient facilities are facilities 
using agricultural livestock waste nutrients to produce 
electricity that are placed in service after December 31, 2004 
and before January 1, 2007. Qualifying geothermal energy 
facilities are facilities using geothermal deposits to produce 
electricity that are placed in service after December 31, 2004 
and before January 1, 2007. Qualifying solar energy facilities 
are facilities using solar energy to generate electricity that 
are placed in service December 31, 2004 and before January 1, 
2007. Qualifying municipal biosolids and sludge facilities are 
facilities using municipal biosolids or sludge to generate 
electricity that are originally placed in service after 
December 31, 2004, and before January 1, 2007. Qualifying small 
irrigation power facilities are facilities using small 
irrigation power systems to generate electricity that are 
originally placed in service after December 31, 2004 and before 
January 1, 2007. Qualifying municipal solid waste facilities 
are facilities or units incinerating municipal solid waste 
placed in service after December 31, 2004 and before January 1, 
2007.
      In the case of qualifying open-loop biomass facilities 
placed in service prior to January 1, 2005, taxpayers may claim 
a credit of 1.2 cents per kilowatt hour, rather than 1.8 cents 
per kilowatt hour for the five-year period beginning on January 
1, 2005. the otherwise allowable credit for a three-year 
period. For a facility placed in service after the date of 
enactment, the three-year period commences when the facility is 
placed in service.
      In addition, the Senate amendment modifies present law to 
provide that qualifying closed-loop biomass facilities include 
any facility originally placed in service before December 31, 
1992 and modified to use closed-loop biomass to co-fire with 
coal, with other biomass, or both, before January 1, 2007. The 
amount of credit the taxpayer may claim credit is adjusted for 
the thermal value of the qualifying closed-loop biomass 
relative to the thermal value of the closed-loop biomass and 
the coal. The ten-year credit period for such a qualifying 
facility commences no earlier than January 1, 2005.
Credit claimants and treatment of other subsidies
      In the case of qualifying open-loop biomass facilities 
and qualifying closed-loop biomass facilities modified to use 
closed-loop biomass to co-fire with coal, the Senate amendment 
permits a lessee operator to claim the credit in lieu of the 
owner of the facilities.
      The Senate amendment provides that certain persons 
(public utilities, electric cooperatives, rural electric 
cooperatives, and Indian tribes) may sell, trade, or assign to 
any taxpayer any credits that would otherwise be allowable to 
that person, if that person were a taxpayer, for production of 
electricity from a qualified facility owned by such person. 
However, any credit sold, traded, or assigned may only be sold, 
traded, or assigned once. Subsequent trades are not permitted. 
In addition, any credits that would otherwise be allowable to 
such person, to the extent provided by the Administrator of the 
Rural Electrification Administration, may be applied as a 
prepayment to certain loans or obligations undertaken by such 
person under the Rural Electrification Act of 1936.
      The Senate amendment repeals the present-law reduction in 
allowable credit for facilities financed with tax-exempt bonds 
or with certain loans received under the Rural Electrification 
Act of 1936.
      Effective date.--The Senate amendment is generally is 
effective for electricity sold from qualifying facilities after 
December 31, 2004. For electricity produced from qualifying 
open-loop biomass facilities originally placed in service prior 
to the date of enactment, the provision is effective January 1, 
2005.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications.
Extension of placed in service date for existing facilities
      The conference agreement does not include the provisions 
of the Senate amendment with respect to the extension of placed 
in service dates for qualifying wind, closed-loop, and poultry 
waste facilities.
Modification of placed in service date for existing facilities
      The conference agreement includes the Senate amendment 
provision with respect to qualifying closed-loop biomass 
facilities modified to use closed-loop biomass to co-fire with 
coal, to co-fire with other biomass, or to co-fire with coal 
and other biomass, with the modification that the 10-year 
credit period begin no earlier than the date of enactment of 
the provision.
Additional qualifying resource and facilities
      The conference agreement also defines five new qualifying 
resources for the production of electricity: open-loop biomass 
(including agricultural livestock waste nutrients), geothermal 
energy, solar energy, small irrigation power, and municipal 
solid waste. Two different qualifying facilities use municipal 
solid waste as a qualifying resource: landfill gas facilities 
and trash combustion facilities. In addition, the conference 
agreement defines refined coal as a qualifying resource.
      Qualifying open-loop biomass facilities are facilities 
using biomass to produce electricity that are placed in service 
prior to January 1, 2006. Qualifying agricultural livestock 
waste nutrient facilities are facilities using agricultural 
livestock waste nutrients to produce electricity that are 
placed in service after the date of enactment and before 
January 1, 2006. The installed capacity of a qualified 
agricultural livestock waste nutrient facility is not less than 
150 kilowatts.
      Qualifying geothermal energy facilities are facilities 
using geothermal deposits to produce electricity that are 
placed in service after the date of enactment and before 
January 1, 2006. Qualifying solar energy facilities are 
facilities using solar energy to generate electricity that are 
placed in service after the date of enactment and before 
January 1, 2006. A qualifying geothermal energy facility or 
solar energy facility may not have claimed any credit under 
sec. 48 of the Code.\390\
---------------------------------------------------------------------------
    \390\ If a geothermal facility or solar facility claims credit for 
any year under section 45 of the Code, the facility is precluded from 
claiming any investment credit under section 48 of the Code in the 
future.
---------------------------------------------------------------------------
      A qualified small irrigation power facility is a facility 
originally placed in service after the date of enactment and 
before January 1, 2006. A small irrigation power facility is a 
facility that generates electric power through an irrigation 
system canal or ditch without any dam or impoundment of water. 
The installed capacity of a qualified facility is not less than 
150 kilowatts and less than five megawatts.
      Landfill gas is defined as methane gas derived from the 
biodegradation of municipal solid waste. Trash combustion 
facilities are facilities that burn municipal solid waste 
(garbage) to produce steam to drive a turbine for the 
production of electricity. Qualifying landfill gas facilities 
and qualifying trash combustion facilities include facilities 
used to produce electricity placed in service after the date of 
enactment and before January 1, 2006.
      Refined coal is a qualifying liquid, gaseous, or solid 
synthetic fuel produced from coal (including lignite) or high-
carbon fly ash, including such fuel used as a feedstock. A 
qualifying fuel is a fuel that when burned emits 20 percent 
less SO2 and nitrogen oxides than the burning of 
feedstock coal or comparable coal predominantly available in 
the marketplace as of January 1, 2003, and if the fuel sells at 
prices at least 50 percent greater than the prices of the 
feedstock coal or comparable coal. In addition, to be qualified 
refined coal the fuel must be sold by the taxpayer with the 
reasonable expectation that it will be used for the primary 
purpose of producing steam. A qualifying refined coal facility 
is a facility producing refined coal that is placed in service 
after the date of enactment and before January 1, 2009.
Credit period and credit rates
      In general, as under present law, taxpayers may claim the 
credit at a rate of 1.5 cents per kilowatt-hour (indexed for 
inflation and currently 1.8 cents per kilowatt-hour) for 10 
years of production commencing on the date the facility is 
placed in service. In the case of open-loop biomass facilities, 
(including agricultural livestock waste nutrients), geothermal 
energy, solar energy, small irrigation power, landfill gas 
facilities, and trash combustion facilities the 10-year credit 
period is reduced to five years commencing on the date the 
facility is placed in service. In general, for facilities 
placed in service prior to January 1, 2005, the credit period 
commences on January 1, 2005. In the case of a closed-loop 
biomass facilities modified to co-fire with coal, to co-fire 
with other biomass, or to co-fire with coal and other biomass, 
the credit period shall begin no earlier than the date of 
enactment.
      In the case of open-loop biomass facilities (including 
agricultural livestock waste nutrients), small irrigation 
power, landfill gas facilities, and trash combustion 
facilities, the otherwise allowable credit amount is reduced by 
one half.
      An alternative credit applies for the production of 
refined coal. A qualified refined coal facility may claim 
credit at a rate of $4.375 per ton (indexed for inflation after 
1992) of refined coal sold to a unrelated person. As is the 
case for facilities that produce electricity, the credit a 
taxpayer may claim for the production of refined coal is phased 
out as the market price of refined coal exceeds certain 
threshold levels. The threshold is defined by reference to the 
price of feedstock fuel used to produce refined coal. Thus if a 
producer of refined coal uses Powder River Basin coal as a 
feedstock, the threshold price is determined by reference to 
prices of Powder River Basin coal. If the producer uses 
Appalachian coal, the threshold price is determined by 
reference to prices of Appalachian coal.
Credit claimants and treatment of other subsidies
      A lessee or operator may claim the credit in lieu of the 
owner of the qualifying facility in the case of qualifying 
open-loop biomass facilities originally placed in service on or 
before the date of enactment and in the case of a closed-loop 
biomass facilities modified to co-fire with coal, to co-fire 
with other biomass, or to co-fire with coal and other biomass.
      In addition, for all qualifying facilities, other than 
closed-loop biomass facilities modified to co-fire with coal, 
to co-fire with other biomass, or to co-fire with coal and 
other biomass, any reduction in credit by reason of grants, 
tax-exempt bonds, subsidized energy financing, and other 
credits cannot exceed 50 percent. In the case of closed-loop 
biomass facilities modified to co-fire with coal, to co-fire 
with other biomass, or to co-fire with coal and other biomass, 
there is no reduction in credit by reason of grants, tax-exempt 
bonds, subsidized energy financing, and other credits.
      The amendments made by the conference report do not apply 
with respect to any poultry waste facility placed in service 
prior to January 1, 2005. Such facilities placed in service 
after December 31, 2004 generally may qualify for credit as 
animal livestock waste nutrient facilities.
      No facility that previously claimed or currently claims 
credit under section 29 of the Code is a qualifying facility 
for purposes of section 45.
      Effective date.--The provision is effective for 
electricity produced and sold from qualifying facilities after 
the date of enactment in taxable years ending after the date of 
enactment. With respect to open-loop biomass facilities placed 
in service prior to January 1, 2005, the provisions are 
effective for electricity produced and sold after December 31, 
2004.

           B. Alternative Motor Vehicles and Fuels Incentives

1. Alternative motor vehicle credit (sec. 811 of Senate amendment)

                              PRESENT LAW

      Certain costs of qualified clean-fuel vehicle may be 
expensed and deducted when such property is placed in service 
(sec. 179A). Qualified clean-fuel vehicle property includes 
motor vehicles that use certain clean-burning fuels (natural 
gas, liquefied natural gas, liquefied petroleum gas, hydrogen, 
electricity and any other fuel at least 85 percent of which is 
methanol, ethanol, any other alcohol or ether).\391\ The 
maximum amount of the deduction is $50,000 for a truck or van 
with a gross vehicle weight over 26,000 pounds or a bus with 
seating capacities of at least 20 adults; $5,000 in the case of 
a truck or van with a gross vehicle weight between 10,000 and 
26,000 pounds; and $2,000 in the case of any other motor 
vehicle. Qualified electric vehicles do not qualify for the 
clean-fuel vehicle deduction. The deduction allowed is 25 
percent of the otherwise allowable amount in 2006, and is 
unavailable for purchases after December 31, 2006.
---------------------------------------------------------------------------
    \391\ A hybrid-electric vehicle may qualify as a clean-fuel vehicle 
under present law.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Fuel cell motor vehicles
      The Senate amendment provides a credit for the purchase 
of qualified fuel cell motor vehicles. The base credit for the 
purchase of new qualified fuel cell motor vehicles ranges 
between $4,000 and $40,000 depending upon the weight class of 
the vehicle. For automobiles and light trucks, the otherwise 
allowable credit amount ($4,000) is increased by an amount from 
$1,000 to $4,000 if the vehicle meets certain fuel economy 
increases compared to a stated standard. Credit may not be 
claimed for qualified fuel cell motor vehicles purchased after 
December 31, 2011.
Hybrid motor vehicles
      The Senate amendment provides a credit for the purchase 
of qualified hybrid motor vehicles. The base credit for the 
purchase of a new qualified hybrid motor vehicle ranges from 
$250 to $10,000 depending upon the weight of the vehicle and 
the maximum power available from the vehicle's rechargeable 
energy storage system. For automobiles and light trucks, the 
otherwise allowable credit amount ($250 to $1,000) is increased 
by an amount from $500 to $3,000 if the vehicle meets certain 
fuel economy increases. For heavy duty hybrid motor vehicles, 
the otherwise allowable credit ($1,000 to $10,000) is increased 
depending upon the vehicle's weight and provided the vehicle 
meets certain 2007 (and beyond) emissions standards. The amount 
of credit is increased by between $2,500 and $10,000 for 
vehicles placed in service in 2004; is increased by between 
$2,500 and $10,000 for vehicles placed in service in 2004, is 
increased by between $2,000 and $8,000 for vehicles placed in 
service in 2005, and is increased by between $1,500 and $6,000 
for vehicles placed in service in 2006. Credit may not be 
claimed for qualified hybrid motor vehicles purchased after 
December 31, 2006.
Alternative fuel motor vehicles
      The Senate amendment provides a credit for the purchase 
of qualified alternative fuel motor vehicles. The base credit 
for the purchase of a new alternative fuel motor vehicle equals 
40 percent of the incremental cost of such vehicle. The 
otherwise allowable credit for 40 percent of the incremental 
cost is increased by an additional 30 percent of the 
incremental cost of the vehicle if the vehicle meets certain 
emissions standards. For computation of the credit, the 
incremental cost of the vehicle may not exceed between $5,000 
and $40,000 (resulting in a maximum total credit of between 
$3,500 and $28,000) depending upon the weight of the vehicle. 
For this purpose, incremental cost generally is defined as the 
amount of the increase of the manufacturer's suggested retail 
price of such a vehicle compared to the manufacturer's 
suggested retail price of a comparable gasoline or diesel 
model. Qualifying alternative fuel motor vehicles are vehicles 
that operate only on qualifying alternative fuels and are 
incapable of operating on gasoline or diesel (except in the 
extent gasoline or diesel fuel is part of a qualified mixed 
fuel). Qualifying alternative fuels are compressed natural gas, 
liquefied natural gas, liquefied petroleum gas, hydrogen, and 
any liquid mixture consisting of at least 85 percent methanol.
      Taxpayers purchasing certain mixed-fuel vehicles also may 
claim the alternative fuel motor vehicle credit, at a reduced 
rate. A mixed-fuel vehicle is a vehicle with gross weight of 
seven tons or more and is certified by the manufacturer as 
being able to operate on a combination of alternative fuel and 
a petroleum-based fuel. A qualifying mixed-fuel vehicle must 
use at least 75 percent alternative fuel (a ``75/25 mixed-fuel 
vehicle'') or 90 percent alternative fuel (a ``90/10 mixed-fuel 
vehicle'') and be incapable of operating on a mixture 
containing less than 75 percent alternative fuel in the case of 
a 75/25 vehicle (less than 90 percent alternative fuel in the 
case of a 90/10 vehicle). A taxpayer purchasing a 75/25 mixed-
fuel vehicle may claim 70 percent of the otherwise allowable 
credit. A taxpayer purchasing a 90/10 mixed-fuel vehicle may 
claim 90 percent of the otherwise allowable credit.
      Credit may not be claimed for qualified alternative fuel 
motor vehicles purchased after December 31, 2006. The 
taxpayer's basis in the property is reduced by the amount of 
credit claimed.
Provisions of general application
      The Senate amendment provides that unused credits may be 
carried forward for 20 years and three years (but not into 
taxable years beginning before January 1, 2005).
      If a tax-exempt person purchases or leases a qualifying 
vehicle, the seller or lessor may claim the credit.
      Effective date.--The Senate amendment is effective for 
property placed in service after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Modification of credit for electric vehicles (sec. 812 of Senate 
        amendment and sec. 30 of the Code)

                              PRESENT LAW

      A 10-percent tax credit is provided for the cost of a 
qualified electric vehicle, up to a maximum credit of $4,000 
(sec. 30). A qualified electric vehicle is a motor vehicle that 
is powered primarily by an electric motor drawing current from 
rechargeable batteries, fuel cells, or other portable sources 
of electrical current, the original use of which commences with 
the taxpayer, and that is acquired for the use by the taxpayer 
and not for resale. The full amount of the credit is available 
for purchases prior to 2006. The credit allowed is 25 percent 
of the otherwise allowable amount for 2006, and is unavailable 
for purchases after December 31, 2006. There is no carry 
forward or carryback of the credit for electric vehicles.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the present-law credit for 
electric vehicles to provide that the credit for qualifying 
vehicles generally ranges between $3,500 and $40,000 depending 
upon the weight of the vehicle and, for certain vehicles, the 
driving range of the vehicle. In the case of property purchased 
by tax-exempt persons, the seller may claim the credit. The 
taxpayer would be ineligible for the deduction allowable under 
present-law section 179A for a qualified battery electric 
vehicle on which a credit is allowable. The provision would 
repeal the reduce rate of credit for vehicles purchased in 
2006, permitting taxpayer to claim the full amount of credit 
otherwise allowable for 2006. The taxpayer would be able to 
carry forward unused credits for 20 years or carry unused 
credits back for three years (but not carried back to taxable 
years beginning before the January 1, 2005).
      Effective date.--The Senate amendment is effective for 
property placed in service after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Modifications of deduction for refueling property (sec. 813 of 
        Senate amendment and sec. 179A of the Code)

                              PRESENT LAW

      Certain costs of qualified clean-fuel vehicle refueling 
property may be expensed and deducted when such property is 
placed in service (sec. 179A). Up to $100,000 of such property 
at each location owned by the taxpayer may be expensed with 
respect to that location. Natural gas, liquefied natural gas, 
liquefied petroleum gas, hydrogen, electricity and any other 
fuel at least 85 percent of which is methanol, ethanol, or any 
other alcohol or ether comprise clean-burning fuels.
      The deduction is unavailable for property placed in 
service after December 31, 2006.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision permits taxpayers to claim 
a 50-percent credit for the cost of installing clean-fuel 
vehicle refueling property to be used in a trade or business of 
the taxpayer or installed at the principal residence of the 
taxpayer. In the case of retail clean-fuel vehicle refueling 
property the allowable credit may not exceed $30,000. In the 
case of residential clean-fuel vehicle refueling property the 
allowable credit may not exceed $1,000. The taxpayer's basis in 
the property is reduced by the amount of the credit and the 
taxpayer may not claim deductions under section 179A with 
respect to property for which the credit is claimed.
      In the case of refueling property installed on property 
owned or used by a tax-exempt person, the taxpayer that 
installs the property may claim the credit. To be eligible for 
the credit, the property must be placed in service before 
January 1, 2007 (before January 1, 2012 in the hydrogen 
refueling property). The credit allowable in the taxable year 
cannot exceed the difference between the taxpayer's regular tax 
(reduced by certain other credits) and the taxpayer's tentative 
minimum tax. The taxpayer may carry forward unused credits for 
20 years.
      Effective date.--The Senate amendment is effective for 
property placed in service after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Credit for retail sale of alternative motor vehicle fuels (sec. 814 
        of Senate amendment)

                              PRESENT LAW

      There is no retail credit for the sale of alternative 
motor vehicle fuels. However, a 52-cents-per-gallon income tax 
credit is allowed for alcohol fuels for 2003 and 2004 (51 cents 
for 2005-2007). The alcohol fuels credit may be claimed as a 
reduction in excise tax payments. Such tax payments generally 
are made before the retail level. In the case of ethanol, the 
Code provides a separate 10-cents-per-gallon credit for small 
producers.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment permits taxpayers to claim a credit 
equal to the gasoline gallon equivalent of 50 cents per gallon 
of alternative fuel sold in 2005 and 2006. Qualifying 
alternative fuels are compressed natural gas, liquefied natural 
gas, liquefied petroleum gas, hydrogen, any liquid mixture 
consisting of at least 85 percent methanol, and any liquid 
mixture consisting of at least 85 percent ethanol. The credit 
may be claimed for sales prior to January 1, 2007. Under the 
provision, the credit is part of the general business credit.
      Effective date.--The Senate amendment is effective for 
fuel sold at retail after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Small ethanol producer credit (sec. 815 of the Senate amendment and 
        sec. 40 of the Code)

                              PRESENT LAW

Small ethanol producer credit
      Present law provides several tax benefits for ethanol and 
methanol produced from renewable sources (e.g., biomass) that 
are used as a motor fuel or that are blended with other fuels 
(e.g., gasoline) for such a use. In the case of ethanol, a 
separate 10-cents-per-gallon credit is provided for small 
producers, defined generally as persons whose production does 
not exceed 15 million gallons per year and whose production 
capacity does not exceed 30 million gallons per year. The small 
producer credit is part of the alcohol fuels tax credit under 
section 40 of the Code. The alcohol fuels tax credits are 
includible in income. This credit, like tax credits generally, 
may not be used to offset alternative minimum tax liability. 
The credit is treated as a general business credit, subject to 
the ordering rules and carryforward/carryback rules that apply 
to business credits generally. The alcohol fuels tax credit is 
scheduled to expire after December 31, 2007.
Taxation of cooperatives and their patrons
      Under present law, cooperatives in essence are treated as 
pass-through entities in that the cooperative is not subject to 
corporate income tax to the extent the cooperative timely pays 
patronage dividends. Under present law (sec. 38(d)(4)), the 
only excess credits that may be passed through to cooperative 
patrons are the rehabilitation credit (sec. 47), the energy 
property credit (sec. 48(a)), and the reforestation credit 
(sec. 48(b)).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment makes several modifications to the 
rules governing the small producer ethanol credit. First, the 
provision liberalizes the definition of an eligible small 
producer to include persons whose production capacity does not 
exceed 60 million gallons. Second, the provision allows 
cooperatives to elect to pass through the small ethanol 
producer credits to its patrons. The credit is apportioned pro 
rata among patrons of the cooperative on the basis of the 
quantity or value of the business done with or for such patrons 
for the taxable year. An election to pass through the credit is 
made on a timely filed return for the taxable year and is 
irrevocable for such taxable year.
      Third, the provision repeals the rule that includes the 
small producer credit in income of taxpayers claiming it. 
Finally, the provision provides that the small producer ethanol 
credit is not treated as derived from a passive activity under 
the Code rules restricting credits and deductions attributable 
to such activities.
      Effective date.--The provision is effective for taxable 
years ending after date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement allows cooperatives to elect to 
pass the small ethanol producer credit through to their 
patrons. Specifically, the credit is to be apportioned among 
patrons eligible to share in patronage dividends on the basis 
of the quantity or value of business done with or for such 
patrons for the taxable year. The election must be made on a 
timely filed return for the taxable year, and once made, is 
irrevocable for such taxable year.
      The amount of the credit not apportioned to patrons is 
included in the organization's credit for the taxable year of 
the organization. The amount of the credit apportioned to 
patrons is to be included in the patron's credit for the first 
taxable year of each patron ending on or after the last day of 
the payment period for the taxable year of the organization, 
or, if earlier, for the taxable year of each patron ending on 
or after the date on which the patron receives notice from the 
cooperative of the apportionment.
      If the amount of the credit shown on the cooperative's 
return for a taxable year is in excess of the actual amount of 
the credit for that year, an amount equal to the excess of the 
reduction in the credit over the amount not apportioned to 
patrons for the taxable year is treated as an increase in the 
cooperative's tax. The increase is not treated as tax imposed 
for purposes of determining the amount of any tax credit or for 
purposes of the alternative minimum tax.
      The conference agreement does not contain any of the 
other modifications from the Senate amendment.
      Effective date.--The provision is effective for taxable 
years ending after date of enactment.

            C. Conservation and Energy Efficiency Provisions

1. Energy efficient new homes (sec. 821 of the Senate amendment)

                              PRESENT LAW

      A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
      The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
      A taxpayer may exclude from income the value of any 
subsidy provided by a public utility for the purchase or 
installation of an energy conservation measure. An energy 
conservation measure means any installation or modification 
primarily designed to reduce consumption of electricity or 
natural gas or to improve the management of energy demand with 
respect to a dwelling unit (sec. 136).
      There is no present-law credit for the construction of 
new energy-efficient homes.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides a credit to an eligible contractor 
of an amount equal to the aggregate adjusted bases of all 
energy-efficient property installed in a qualified new energy-
efficient home during construction. The credit cannot exceed 
$1,000 ($2,000) in the case of a new home that has a projected 
level of annual heating and cooling costs that is 30 percent 
(50 percent) less than a comparable dwelling constructed in 
accordance with the latest standards of chapter 4 of the 
International Energy Conservation Code approved by the 
Department of Energy before the construction of such qualifying 
new home and any applicable Federal minimum efficiency 
standards for equipment.
      The eligible contractor is the person who constructed the 
home, or in the case of a manufactured home, the producer of 
such home. Energy efficiency property is any energy-efficient 
building envelope component (insulation materials or system 
specifically and primarily designed to reduce heat loss or 
gain, and exterior windows, including skylights, and doors) and 
any energy-efficient heating or cooling equipment or system 
that can, individually or in combination with other components, 
meet the standards for the home.
      To qualify as an energy-efficient new home, the home must 
be: (1) a dwelling located in the United States, (2) the 
principal residence of the person who acquires the dwelling 
from the eligible contractor or manufacturer, and (3) certified 
to have a projected level of annual heating and cooling energy 
consumption that meets the standards for either the 30-percent 
or 50-percent reduction in energy usage. The home may be 
certified according to a component-based method, an energy 
performance based method, a guarantee-based method, or, in the 
case of a qualifying new home which is a manufactured home, by 
a method prescribed by the Administrator of the Environmental 
Protection Agency under the Energy Star Labeled Homes program. 
Manufactured homes certified by a method prescribed by the 
Administrator of the Environmental Protection Agency under the 
Energy Star Labeled Homes program are eligible for the $1,000 
credit provided criteria (1) and (2) are met.
      A component-based method of certification is a method 
which uses the applicable technical energy efficiency 
specifications or ratings (including product labeling 
requirements) for the energy efficient building envelope 
component or energy efficient heating or cooling equipment. The 
Secretary shall, in consultation with the Administrator of the 
Environmental Protection Agency, develop prescriptive 
component-based packages which are equivalent in energy 
performance to properties which qualify under the performance-
based method. The certification under the component-based 
method shall be provided by a local building regulatory 
authority, a utility, or a home energy rating organization.
      A performance-based method of certification is a method 
which calculates projected energy usage and cost reductions in 
the qualifying new home in relation to a new home heated by the 
same fuel type and constructed in accordance with (1) the 
latest standards of chapter 4 of the International Energy 
Conservation Code approved by the Department of Energy before 
the construction of such qualifying new home, and (2) any 
applicable Federal minimum efficiency standards for equipment. 
Computer software shall be used in support of a performance-
based method certification under clause. Such software shall 
meet procedures and methods for calculating energy and cost 
savings in regulations promulgated by the Secretary of Energy. 
The certification under the performance-based method shall be 
provided by an individual recognized by an organization 
recognized by the Secretary for such purposes.
      A guarantee-based method of certification is a method 
that guarantees in writing to the homeowner energy savings of 
either 30 percent or 50 percent over the 2000 International 
Energy Conservation Code for heating and cooling costs. The 
guarantee shall be provided for a minimum of 2 years and shall 
fully reimburse the homeowner any heating and cooling costs in 
excess of the guaranteed amount. Computer software shall be 
selected by the provider of the guarantee to support the 
guarantee-based method certification. Such software shall meet 
procedures and methods for calculating energy and cost savings 
in regulations promulgated by the Secretary of Energy. The 
certification under the guarantee-based method shall be 
provided by an individual recognized by an organization 
recognized by the Secretary for such purposes.
      In prescribing regulations for performance-based and 
guarantee-based certification methods, the Secretary shall 
prescribe procedures for calculating annual energy usage and 
cost reductions for heating and cooling and for the reporting 
of the results. Such regulations shall provide that any 
calculation procedures be fuel neutral such that the same 
energy efficiency measures allow a qualifying new home to be 
eligible for the credit under this section regardless of 
whether such home uses a gas or oil furnace or boiler or an 
electric heat pump, and require that any computer software 
allow for the printing of the Federal tax forms necessary for 
the credit under this section and for the printing of forms for 
disclosure to the homebuyer. Other rules apply relating to the 
form of the certification and the manner in which it is 
provided to the buyer of the home.
      In the case of a qualifying new home which is a 
manufactured home, certification of compliance with energy 
efficiency standards shall be provided by a manufactured home 
primary inspection agency.
      The credit will be part of the general business credit. 
No credits attributable to energy efficient homes may be 
carried back to any taxable year ending on or before the 
effective date of the credit. No deduction shall be allowed for 
that portion of expenses for a qualifying new home otherwise 
allowable as a deduction for the taxable year which is equal to 
the amount of the credit for such taxable year.
      Effective date.--The credit applies to homes whose 
construction is substantially completed after December 31, 
2004, and which are purchased during the period beginning on 
December 31, 2004, and ending on December 31, 2007 (December 
31, 2005 in the case of the $1,000 credit).

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Energy efficient appliances (sec. 822 of the Senate amendment)

                              PRESENT LAW

      A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment: (1) 
that uses solar energy to generate electricity, to heat or cool 
a structure, or to provide solar process heat; or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
      The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of: (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
      A taxpayer may exclude from income the value of any 
subsidy provided by a public utility for the purchase or 
installation of an energy conservation measure. An energy 
conservation measure means any installation or modification 
primarily designed to reduce consumption of electricity or 
natural gas or to improve the management of energy demand with 
respect to a dwelling unit (sec. 136).
      There is no present-law credit for the manufacture of 
energy-efficient appliances.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides a credit for the production of 
certain energy-efficient clothes washers and refrigerators. The 
credit equals $50 per appliance for (1) energy-efficient 
clothes washers produced before December 31, 2007 with a 
modified energy factor (``MEF'') of 1.42 MEF or greater, and 
(2) refrigerators produced before December 31, 2005 that 
consume 10 percent fewer kilowatt-hours per year than the 
energy conservation standards promulgated by the Department of 
Energy that took effect on July 1, 2001. The credit equals $100 
for (1) energy-efficient clothes washers produced before 
December 31, 2007 with a MEF of 1.5 or greater, and (2) 
refrigerators produced before December 31, 2007 that consume at 
least 15 percent fewer kilowatt-hours per year (at least 20 
percent less for production in 2007) than the energy 
conservation standards promulgated by the Department of Energy 
that took effect on July 1, 2001. The credit is $150 for 
refrigerators produced before January 1, 2007 that consume at 
least 20 percent fewer kilowatt-hours per year than the energy 
conservation standards promulgated by the Department of Energy 
that took effect on July 1, 2001. A refrigerator must be an 
automatic defrost refrigerator-freezer with an internal volume 
of at least 16.5 cubic feet to qualify for the credit. A 
clothes washer is any residential clothes washer, including a 
residential style coin operated washer, that satisfies the 
relevant efficiency standard.
      For each category of appliances (e.g., washers that meet 
the $50 standard, washers that meet the $100 standard, 
refrigerators that meet the $50 standard, refrigerators that 
meet the $100 standard, and refrigerators that meet the $150 
standard), only production in excess of average production for 
each such category during calendar years 2001-2003 would be 
eligible for the credit.
      The taxpayer may not claim credits in excess of $60 
million for all taxable years, and may not claim credits in 
excess of $30 million with respect to appliances that only 
qualify for the $50 credit. Additionally, the credit allowed 
for all appliances may not exceed two percent of the average 
annual gross receipts of the taxpayer for the three taxable 
years preceding the taxable year in which the credit is 
determined.
      The credit would be part of the general business credit.

                             EFFECTIVE DATE

      The credit applies to appliances produced after December 
31, 2004, and prior to January 1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Residential solar hot water, photovoltaics and other energy 
        efficient property (sec. 823 of the Senate amendment)

                              PRESENT LAW

      A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
      The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
      A taxpayer may exclude from income the value of any 
subsidy provided by a public utility for the purchase or 
installation of an energy conservation measure. An energy 
conservation measure means any installation or modification 
primarily designed to reduce consumption of electricity or 
natural gas or to improve the management of energy demand with 
respect to a dwelling unit (sec. 136).
      There is no present-law personal tax credit for energy 
efficient residential property.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides a personal tax credit for the 
purchase of qualified wind energy property, qualified 
photovoltaic property, and qualified solar water heating 
property that is used exclusively for purposes other than 
heating swimming pools and hot tubs. The credit is equal to 15 
percent for solar water heating property and photovoltaic 
property, and 30 percent for wind energy property. The maximum 
credit for each of these systems of property is $2,000. The 
provision also provides a 30 percent credit for the purchase of 
qualified fuel cell power plants. The credit for any fuel cell 
may not exceed $500 for each 0.5 kilowatt of capacity.
      Qualifying solar water heating property means an 
expenditure for property to heat water for use in a dwelling 
unit located in the United States and used as a residence if at 
least half of the energy used by such property for such purpose 
is derived from the sun. Qualified photovoltaic property is 
property that uses solar energy to generate electricity for use 
in a dwelling unit. Qualified wind energy property is property 
that uses wind energy to generate electricity for use in a 
dwelling unit located in the United States and used as a 
principal residence by the taxpayer. A qualified fuel cell 
power plant is an integrated system comprised of a fuel cell 
stack assembly and associated balance of plant components that 
converts a fuel into electricity using electrochemical means, 
and which has an electricity-only generation efficiency of 
greater than 30 percent and that generates at least 0.5 
kilowatts of electricity. The qualified fuel cell power plant 
must be installed on or in connection with a dwelling unit 
located in the United States and used by the taxpayer as a 
principal residence.
      The provision also provides a credit for the purchase of 
other qualified energy efficient property, as described below:
      Electric heat pump water heater with an energy factor of 
at least 1.7. The maximum credit is $150 per unit.
      Advanced natural gas, oil, propane furnace, or hot water 
boiler that achieves at least 95 percent annual fuel 
utilization efficiency. The maximum credit is $125 per unit.
      Advanced natural gas, oil, propane water heater that has 
an energy factor of at least 0.80 in the standard Department of 
Energy test procedure. The maximum credit is $150 per unit.
      Natural gas, oil, propane water heater that has an energy 
factor of at least 0.65 but less than 0.80 in the standard 
Department of Energy test procedure. The maximum credit is $50 
per unit.
      Advanced main air circulating fan used in a new natural 
gas, propane, or oil-fired furnace, including main air 
circulating fans that use a brushless permanent magnet motor or 
another type of motor which achieves similar or higher 
efficiency at half and full speed, as determined by the 
Secretary. The maximum credit is $50.
      Advanced combination space and water heating system that 
has a combined energy factor of at least 0.80 and a combined 
annual fuel utilization efficiency (AFUE) of at least 78 
percent in the standard Department of Energy test procedure. 
The maximum credit is $150.
      Combination space and water heating system that has a 
combined energy factor of at least 0.65 but less than 0.80 and 
a combined annual fuel utilization efficiency (AFUE) of at 
least 78 percent in the standard Department of Energy test 
procedure. The maximum credit is $50.
      Geothermal heat pumps that have an EER of at least 21. 
The maximum credit is $250 per unit.
      The credit is nonrefundable, and the depreciable basis of 
the property is reduced by the amount of the credit. 
Expenditures for labor costs allocable to onsite preparation, 
assembly, or original installation of property eligible for the 
credit are eligible expenditures. The credit is allowed against 
the regular and alternative minimum tax.
      Certain equipment safety requirements need to be met to 
qualify for the credit. Special proration rules apply in the 
case of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. With the 
exception of wind energy property, if less than 80 percent of 
the property is used for nonbusiness purposes, only that 
portion of expenditures that is used for nonbusiness purposes 
is taken into account.

                             EFFECTIVE DATE

      The credit applies to expenditures after December 31, 
2004, and prior to January 1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Credit for business installation of qualified fuel cells and 
        stationary microturbine power plants (sec. 824 of the Senate 
        amendment and sec. 48 of the Code)

                              PRESENT LAW

      A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
      The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
      There is no present-law credit for fuel cell or 
microturbine power plant property.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides a 30 percent business energy 
credit for the purchase of qualified fuel cell power plants for 
businesses. A qualified fuel cell power plant is an integrated 
system comprised of a fuel cell stack assembly and associated 
balance of plant components that converts a fuel into 
electricity using electrochemical means, and which has an 
electricity-only generation efficiency of greater than 30 
percent and generates at least 0.5 kilowatts of electricity. 
The credit for any fuel cell may not exceed $500 for each 0.5 
kilowatts of capacity.
      Additionally, the provision provides a 10 percent credit 
for the purchase of qualifying stationary microturbine power 
plants. A qualified stationary microturbine power plant is an 
integrated system comprised of a gas turbine engine, a 
combustor, a recuperator or regenerator, a generator or 
alternator, and associated balance of plant components which 
converts a fuel into electricity and thermal energy. Such 
system also includes all secondary components located between 
the existing infrastructure for fuel delivery and the existing 
infrastructure for power distribution, including equipment and 
controls for meeting relevant power standards, such as voltage, 
frequency and power factors. Such system must have an 
electricity-only generation efficiency of not less that 26 
percent at International Standard Organization conditions and a 
capacity of less than 2,000 kilowatts. The credit is limited to 
the lesser of 10 percent of the basis of the property or $200 
for each kilowatt of capacity.
      The credit is nonrefundable. The taxpayer's basis in the 
property is reduced by the amount of the credit claimed.
      Effective date.--The credit for businesses applies to 
property placed in service after December 31, 2004, and before 
January 1, 2008 (January 1, 2007 in the case of microturbines), 
under rules similar to rules of section 48(m) of the Code (as 
in effect on the day before the date of enactment of the 
Revenue Reconciliation Act of 1990).

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Energy efficient commercial building deduction (sec. 825 of Senate 
        amendment)

                              PRESENT LAW

      No special deduction is currently provided for expenses 
incurred for energy-efficient commercial building property.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides a deduction equal to energy-
efficient commercial building property expenditures made by the 
taxpayer. Energy-efficient commercial building property 
expenditures are defined as amounts paid or incurred for 
energy-efficient property installed in connection with the 
construction or reconstruction of property: (1) which is 
depreciable property; (2) which is located in the United 
States, and (3) which is the type of structure to which the 
Standard 90.1-2001 of the American Society of Heating, 
Refrigerating, and Air Conditioning Engineers and the 
Illuminating Engineering Society of North America (``ASHRAE/
IESNA'') is applicable. The deduction is limited to an amount 
equal to $2.25 per square foot of the property for which such 
expenditures are made. The deduction is allowed in the year in 
which the property is placed in service.
      Energy-efficient commercial building property generally 
means any property that reduces total annual energy and power 
costs with respect to the lighting, heating, cooling, 
ventilation, and hot water supply systems of the building by 50 
percent or more in comparison to a building which minimally 
meets the requirements of Standard 90.1-2001 of ASHRAE/IESNA. 
Because of the requirement that, in order to qualify, a 
building must fall within the scope of the ASHRAE/IESNA 
Standard 90.1-2001, residential rental property that is less 
than four stories does not qualify.
      Certain certification requirements must be met in order 
to qualify for the deduction. The Secretary, in consultation 
with the Secretary of Energy, will promulgate regulations that 
describe methods of calculating and verifying energy and power 
costs using qualified computer software. The methods for 
calculation shall be fuel neutral, such that the same energy 
efficiency features shall qualify a building for the deduction 
under this subsection regardless of whether the heating source 
is a gas or oil furnace or boiler or an electric heat pump.
      The Secretary shall prescribe procedures for the 
inspection and testing for compliance of buildings that are 
comparable, given the difference between commercial and 
residential buildings, to the requirements in the Mortgage 
Industry National Home Energy Rating Standards. Individuals 
qualified to determine compliance shall only be those 
recognized by one or more organizations certified by the 
Secretary for such purposes.
      For energy-efficient commercial building property 
expenditures made by a public entity, such as public schools, 
the Secretary shall promulgate regulations that will allow the 
value of the deduction (determined without regard to the tax-
exempt status of such entity) to be allocated to the person 
primarily responsible for designing the property in lieu of the 
public entity.
      In the case of lighting systems, until such time as the 
Secretary issues final regulations, a partial deduction shall 
be allowed for a reduction in Lighting Power Density of 40 
percent (50 percent in the case of a warehouse) of the minimum 
requirements in Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA 
Standard 90.1-2001. A pro-rated partial deduction is allowed in 
the case of a lighting system that reduces lighting power 
density between 25 percent and 40 percent. Certain lighting 
level and lighting control requirements must also be met in 
order to qualify for the partial lighting deductions.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2004 for expenditures in 
connection with a building whose construction is completed on 
or before December 31, 2009.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
6. Three-year applicable recovery period for depreciation of qualified 
        energy management devices and qualified water submetering 
        devices (secs. 826 and 827 of the Senate amendment and sec. 168 
        of the Code)

                              PRESENT LAW

      No special recovery period is currently provided for 
depreciation of qualified energy management devices or water 
submetering devices.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a three-year recovery 
period for qualified energy management devices placed in 
service by any taxpayer who is a supplier of electric energy or 
is a provider of electric energy services. A qualified energy 
management device is any energy management device that is used 
by the taxpayer to measure and record electricity usage data on 
a time-differentiated basis in at least four separate time 
segments per day, and to provide such data on at least a 
monthly basis to both consumers and the taxpayer.
      Additionally, the Senate amendment provides a three-year 
recovery period for qualified water submetering devices placed 
in service by any taxpayer who is an eligible resupplier. An 
eligible resupplier is any taxpayer who purchases and installs 
qualified water submetering devices in every unit in any multi-
unit property. A qualified water submetering device is any 
water submetering device that is used by the taxpayer to 
measure and record water usage data and to provide such data on 
at least a monthly basis to both consumers and the taxpayer.
      Effective date.--The provision is effective for any 
qualified energy management device or water submetering device 
placed in service after December 31, 2004, and before January 
1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
7. Energy credit for combined heat and power system property (sec. 828 
        of the Senate amendment and sec. 48 of the Code)

                              PRESENT LAW

      A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
      The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
      A taxpayer may exclude from income the value of any 
subsidy provided by a public utility for the purchase or 
installation of an energy conservation measure. An energy 
conservation measure means any installation or modification 
primarily designed to reduce consumption of electricity or 
natural gas or to improve the management of energy demand with 
respect to a dwelling unit (sec. 136).
      There is no present-law credit for combined heat and 
power (``CHP'') property.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a 10-percent credit for the 
purchase of CHP property.
      CHP property is property: (1) that uses the same energy 
source for the simultaneous or sequential generation of 
electrical power, mechanical shaft power, or both, in 
combination with the generation of steam or other forms of 
useful thermal energy (including heating and cooling 
applications); (2) that has an electrical capacity of not more 
than 15 megawatts or a mechanical energy capacity of no more 
than 2000 horsepower or an equivalent combination of electrical 
and mechanical energy capacities; (3) that produces at least 20 
percent of its total useful energy in the form of thermal 
energy that is not used to produce electrical or mechanical 
power, and produces at least 20 percent of its total useful 
energy in the form of electrical or mechanical power (or a 
combination thereof); and (4) the energy efficiency percentage 
of which exceeds 60 percent. CHP property does not include 
property used to transport the energy source to the generating 
facility or to distribute energy produced by the facility.
      Additionally, the Senate amendment provides that systems 
whose fuel source is at least 90 percent bagasse and that would 
qualify for the credit but for the failure to meet the 
efficiency standard are eligible for a credit that is reduced 
in proportion to the degree to which the system fails to meet 
the efficiency standard. For example, a system that would 
otherwise be required to meet the 60-percent efficiency 
standard, but which only achieves 30-percent efficiency, would 
be permitted a credit equal to one-half of the otherwise 
allowable credit (i.e., a 5-percent credit).
      Effective date.--The credit applies to property placed in 
service after December 31, 2004, and before January 1, 2007.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. Energy efficient improvements to existing homes (sec. 829 of the 
        Senate amendment)

                              PRESENT LAW

      A taxpayer may exclude from income the value of any 
subsidy provided by a public utility for the purchase or 
installation of an energy conservation measure. An energy 
conservation measure means any installation or modification 
primarily designed to reduce consumption of electricity or 
natural gas or to improve the management of energy demand with 
respect to a dwelling unit (sec. 136).
      There is no present law credit for energy efficiency 
improvements to existing homes.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision would provide a 10-percent nonrefundable 
credit for the purchase of qualified energy efficiency 
improvements. The maximum credit for a taxpayer with respect to 
the same dwelling for all taxable years is $300. Unused credits 
may be carried forward to succeeding taxable years.
      A qualified energy efficiency improvement would be any 
energy efficiency building envelope component that is certified 
to meet or exceed the latest prescriptive criteria for such 
component in the International Energy Conservation Code 
approved by the Department of Energy before the installation of 
such component, or any combination of energy efficiency 
measures that is certified to achieve at least a 30-percent 
reduction in heating and cooling energy usage for the dwelling 
and that is installed in or on a dwelling that (1) is located 
in the United States; (2) is owned and used by the taxpayer as 
the taxpayer's principal residence; (3) has not been treated as 
a qualifying new home for purposes of the energy-efficient new 
homes credit. Additionally, the original use of such component 
or combination of measures commences with the taxpayer, and 
such component or combination of measures can reasonably be 
expected to remain in use for at least five years.
      Building envelope components are: (1) insulation 
materials or systems which are specifically and primarily 
designed to reduce the heat loss or gain for a dwelling, and 
(2) exterior windows (including skylights) and doors.
      Homes shall be certified according to a component-based 
method or a performance-based method. The component-based 
method shall be based on applicable energy-efficiency ratings, 
including current product labeling requirements. Certification 
by the component method shall be provided by a third party, 
such as a local building regulatory authority, a utility, a 
manufactured home primary inspection agency, or a home energy 
rating organization. The performance-based method shall be 
based on a comparison of the projected energy consumption of 
the dwelling in its original condition and after the completion 
of energy efficiency measures. The performance-based method of 
certification shall be conducted by an individual or 
organization recognized by the Secretary of the Treasury for 
such purposes.
      In prescribing regulations for performance-based 
certification methods, the Secretary shall prescribe procedures 
for calculating annual energy usage and cost reductions for 
heating and cooling and for the reporting of the results. Such 
regulations shall provide that any calculation procedures be 
fuel neutral such that the same energy efficiency measures 
allow a qualifying new home to be eligible for the credit under 
this section regardless of whether such home uses a gas or oil 
furnace or boiler or an electric heat pump, and require that 
any computer software allow for the printing of the Federal tax 
forms necessary for the credit under this section and for the 
printing of forms for disclosure to the owner of the dwelling.
      The taxpayer's basis in the property would be reduced by 
the amount of the credit. Special rules would apply in the case 
of condominiums and tenant-stockholders in cooperative housing 
corporations.
      The credit is allowed against the regular and alternative 
minimum tax.
      Effective date.--The credit is effective for qualified 
energy efficiency improvements installed after December 31, 
2004, and before January 1, 2007.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                        D. Clean Coal Incentives

1. Credit for production from a clean coal technology unit (secs. 831 
        and 834 of Senate amendment)

                              PRESENT LAW

      Present law does not provide a production credit for 
electricity generated at units that use coal as a fuel. 
However, an income tax credit is allowed for the production of 
electricity from either qualified wind energy, qualified 
``closed-loop'' biomass, or qualified poultry waste units 
placed in service prior to January 1, 2006 (sec. 45). The 
credit allowed equals 1.5 cents per kilowatt-hour of 
electricity sold. The 1.5-cent figure is indexed for inflation 
and equals 1.8 cents for 2004. The credit is allowable for 
production during the 10-year period after a unit is originally 
placed in service. The production tax credit is a component of 
the general business credit (sec. 38(b)(1)).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides a production credit for 
electricity produced from certain units that have been 
retrofitted, repowered, or replaced with a clean coal 
technology during the ten-year period beginning on January 1, 
2005. The value of the credit is 0.34 cents per kilowatt-hour 
of electricity produced and is indexed for inflation for 
calendar years after 2005.
      A qualifying clean coal technology unit must meet certain 
capacity standards, thermal efficiency standards, and emissions 
standards for SO2, nitrous oxides, particulate 
emissions, and source emissions standards as provided in the 
Clean Air Act. To be a qualified clean coal technology unit, 
the taxpayer must receive a certificate from the Secretary of 
the Treasury. The Secretary may grant certificates to units 
only to the point that 4,000 megawatts of electricity 
production capacity qualifies for the credit. However, no 
qualifying unit would be eligible if the unit's capacity 
exceeded 300 megawatts.
      Certain persons (public utilities, electric cooperatives, 
Indian tribes, and the Tennessee Valley Authority) are eligible 
to obtain certifications from the Secretary for these credits 
and sell, trade, or assign the credit to any taxpayer. However, 
any credit sold, traded, or assigned may only be sold, traded, 
or assigned once. Subsequent trades are not permitted.
      Effective date.--The Senate amendment is effective for 
production after December 31, 2004, in taxable years ending 
after such date.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Investment credit for clean coal technology units (secs. 832 and 834 
        of Senate amendment)

                              PRESENT LAW

      Present law does not provide an investment credit for 
electricity generating units that use coal as a fuel. However, 
a nonrefundable, 10-percent investment tax credit (``business 
energy credit'') is allowed for the cost of new property that 
is equipment (1) that uses solar energy to generate 
electricity, to heat or cool a structure, or to provide solar 
process heat, or (2) that is used to produce, distribute, or 
use energy derived from a geothermal deposit, but only, in the 
case of electricity generated by geothermal power, up to the 
electric transmission stage (sec. 48). The business energy tax 
credit is a component of the general business credit (sec. 
38(b)(1)).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The Senate amendment provides a 10-percent investment tax 
credit for qualified investments in advanced clean coal 
technology units. Certain persons (public utilities, electric 
cooperatives, Indian tribes, and the Tennessee Valley 
Authority) will be eligible to obtain certifications from the 
Secretary of the Treasury (as described below) for these 
credits and sell, trade, or assign the credit to any taxpayer. 
However, any credit sold, traded, or assigned may only be sold, 
traded, or assigned once. Subsequent trades are not permitted.
Qualifying advanced clean coal technology units
      Qualifying advanced clean coal technology units must 
utilize advanced pulverized coal or atmospheric fluidized bed 
combustion technology, pressurized fluidized bed combustion 
technology, integrated gasification combined cycle technology, 
or some other technology certified by the Secretary of Energy. 
Any qualifying advanced clean coal technology unit must meet 
certain capacity standards, thermal efficiency standards, and 
emissions standards for SO2, nitrous oxides, 
particulate emissions, and source emissions standards as 
provided in the Clean Air Act. In addition, a qualifying 
advanced clean coal technology unit must meet certain carbon 
emissions requirements.
      If the advanced clean coal technology unit is an advanced 
pulverized coal or atmospheric fluidized bed combustion 
technology unit, a pressurized fluidized bed combustion 
technology unit, or an integrated gasification combined cycle 
technology unit and if the unit uses a design coal with a heat 
content of not more than 9,000 Btu per pound, the unit must 
have a carbon emission rate less than 0.60 pound of carbon per 
kilowatt hour of electricity produced. If the advanced clean 
coal technology unit is an advanced pulverized coal or 
atmospheric fluidized bed combustion technology unit, a 
pressurized fluidized bed combustion technology unit, or an 
integrated gasification combined cycle technology unit and if 
the unit uses a design coal with a heat content greater than 
9,000 Btu per pound, the unit must have a carbon emission rate 
less than 0.54 pound of carbon per kilowatt hour of electricity 
produced. In the case of an advanced clean coal technology unit 
that uses another eligible technology and if the unit uses a 
design coal with a heat content of not more than 9,000 Btu per 
pound, the unit must have a carbon emission rate less than 0.51 
pound of carbon per kilowatt hour of electricity produced. In 
the case of an advanced clean coal technology unit that uses 
another eligible technology and if the unit uses a design coal 
with a heat content greater than 9,000 Btu per pound, the unit 
must have a carbon emission rate less than 0.459 pound of 
carbon per kilowatt hour of electricity produced.
Allocation of credits
      To be a qualified investment in advanced clean coal 
technology, the taxpayer must receive a certificate from the 
Secretary of the Treasury. The Secretary may grant certificates 
to investments only to the point that 4,000 megawatts of 
electricity production capacity qualifies for the credit. From 
the potential pool of 4,000 megawatts of capacity, not more 
than 1,000 megawatts in total and not more than 500 megawatts 
in years prior to 2009 shall be allocated to units using 
advanced pulverized coal or atmospheric fluidized bed 
combustion technology. From the potential pool of 4,000 
megawatts of capacity, not more than 500 megawatts in total and 
not more than 250 megawatts in years prior to 2009 shall be 
allocated to units using pressurized fluidized bed combustion 
technology. From the potential pool of 4,000 megawatts of 
capacity, not more than 2,000 megawatts in total and not more 
than 1,000 megawatts in years prior to 2009 and not more than 
1,500 megawatts in year prior to 2013 shall be allocated to 
units using integrated gasification combined cycle technology, 
with or without fuel or chemical co-production. From the 
potential pool of 4,000 megawatts of capacity, not more than 
500 in total and not more than 250 megawatts in years prior to 
2009 shall be allocated to any other technology certified by 
the Secretary of Energy.
      Effective date.--The Senate amendment is effective for 
periods after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Credit for production from advanced clean coal technology (secs. 833 
        and 834 of the Senate amendment)

                              PRESENT LAW

      Present law does not provide a production credit for 
electricity generated at units that use coal as a fuel. 
However, an income tax credit is allowed for the production of 
electricity from either qualified wind energy, qualified 
``closed-loop'' biomass, or qualified poultry waste units 
placed in service prior to January 1, 2006 (sec. 45). The 
credit allowed equals 1.5 cents per kilowatt-hour of 
electricity sold. The 1.5-cent figure is indexed for inflation 
and equals 1.8 cents for 2004. The credit is allowable for 
production during the 10-year period after a unit is originally 
placed in service. The production tax credit is a component of 
the general business credit (sec. 38(b)(1)).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The Senate amendment creates a production credit for 
electricity produced from any qualified advanced clean coal 
technology electricity generation unit that qualifies for the 
investment credit for qualifying clean coal technology units, 
as described above. Certain persons (public utilities, electric 
cooperatives, Indian tribes, and the Tennessee Valley 
Authority) will be eligible to obtain certifications from the 
Secretary of the Treasury (as described below) for each of 
these credits and sell, trade, or assign the credit to any 
taxpayer. However, any credit sold, traded, or assigned may 
only be sold, traded, or assigned once. Subsequent trades are 
not permitted.
Value of production credit for electricity produced from qualifying 
        advanced clean coal technology
      The taxpayer may claim a production credit on the sum of 
each kilowatt-hour of electricity produced and the heat value 
of other fuels or chemicals produced by the taxpayer at the 
unit.\392\ The taxpayer may claim the production credit for the 
10-year period commencing with the date the qualifying unit is 
placed in service (or the date on which a conventional unit was 
retrofitted or repowered). The value of the credit varies 
depending upon the year the unit is placed in service, whether 
the unit produces solely electricity or electricity and fuels 
or chemicals, and the rated thermal efficiency of the unit. In 
addition, the value of the credit is reduced for the second 
five years of eligible production. The maximum value of the 
production credit from any qualifying unit during the first 
five years of production is $0.014 per kilowatt-hour and the 
minimum value is $0.001. During the second five years of 
production from a qualifying unit, the maximum value of the 
production credit is $0.0115 and the minimum value is $0.001. 
The value of the credit is indexed for inflation for calendar 
years after 2005.
---------------------------------------------------------------------------
    \392\ Each 3,413 Btu of heat content of the fuel or chemical is 
treated as equivalent to one kilowatt-hour of electricity.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is effective for 
production after December 31, 2004, in taxable years ending 
after such date.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                       E. Oil and Gas Provisions

1. Oil and gas production from marginal wells (sec. 841 of the Senate 
        amendment and new sec. 45I of the Code)

                              PRESENT LAW

      There is no credit for the production of oil and gas from 
marginal wells. The costs of such production may be recovered 
under the Code's depreciation and depletion rules and in other 
cases as a deduction for ordinary and necessary business 
expenses.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment would create a new, $3-per-barrel 
credit for the production of crude oil and a $0.50 credit per 
1,000 cubic feet of qualified natural gas production. In both 
cases, the credit is available only for production from a 
``qualified marginal well.'' A qualified marginal well is 
defined as domestic well: (1) production from which is treated 
as marginal production for purposes of the Code percentage 
depletion rules; or (2) that during the taxable year had 
average daily production of not more than 25 barrel equivalents 
and produces water at a rate of not less than 95 percent of 
total well effluent. Production from any well during any period 
in which such well is not in compliance with applicable Federal 
pollution prevention, control, and permit requirements is not 
considered a qualified marginal well during such period. The 
maximum amount of production on which credit could be claimed 
is 1,095 barrels or barrel equivalents.
      The credit is not available to production occurring if 
the reference price of oil exceeds $18 ($2.00 for natural gas). 
The credit is reduced proportionately as for reference prices 
between $15 and $18 ($1.67 and $2.00 for natural gas). 
Reference prices are determined on a one-year look-back basis.
      In the case of production from a qualified marginal well 
which is eligible for the credit allowed under section 29 for 
the taxable year, no marginal well credit is allowable unless 
the taxpayer elects not to claim the credit under section 29 
with respect to the well. The credit is treated as a general 
business credit.
      Effective date.--The Senate amendment is effective for 
production in taxable years beginning after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement modifies the Senate amendment. 
The conference agreement does not include the Federal pollution 
prevention, control, and permit requirement provisions of the 
Senate amendment. The conference agreement treats the credit as 
part of the general business credit; however, unused credits 
can be carried back for up to five years rather than the 
generally applicable carryback period of one year. The credit 
is indexed for inflation for taxable years beginning in a 
calendar year after 2005.
      Effective date--The provision is effective for production 
in taxable years beginning after December 31, 2004.
2. Natural gas gathering lines treated as seven-year property (sec. 842 
        of the Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

      The applicable recovery period for assets placed in 
service under the Modified Accelerated Cost Recovery System is 
based on the ``class life of the property.'' The class lives of 
assets placed in service after 1986 are generally set forth in 
Revenue Procedure 87-56.\393\ Revenue Procedure 87-56 includes 
two asset classes that could describe natural gas gathering 
lines owned by nonproducers of natural gas. Asset class 46.0, 
describing pipeline transportation, provides a class life of 22 
years and a recovery period of 15 years. Asset class 13.2, 
describing assets used in the exploration for and production of 
petroleum and natural gas deposits, provides a class life of 14 
years and a depreciation recovery period of seven years. The 
uncertainty regarding the appropriate recovery period of 
natural gas gathering lines has resulted in litigation between 
taxpayers and the IRS. The 10th Circuit Court of Appeals and 
the 6th Circuit Court of Appeals have held that natural gas 
gathering lines owned by nonproducers falls within the scope of 
Asset class 13.2 (i.e., seven-year recovery period).\394\ The 
Tax Court has held that natural gas gathering lines owned by 
nonproducers falls within the scope of Asset class 46.0 (i.e., 
15-year recovery period).\395\
---------------------------------------------------------------------------
    \393\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
    \394\ Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 1999), 
rev'g 109 T.C. 416 (1997). Saginaw Bay Pipeline Co. v. United States, 
2003 FED App. 0259P (6th Cir.) rev'g 124 F. Supp. 2d 465 (E.D. Mich. 
2001). See also True v. United States, 97-2 U.S. Tax Cas. (CCH) par. 
50,946 (D. Wyo. 1997).
    \395\ Clajon Gas Co., L.P. v. Commissioner, 119 T.C. 197 (2002).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment establishes a statutory seven-year 
recovery period and a class life of 14 years for natural gas 
gathering lines. A natural gas gathering line is defined to 
include any pipe, equipment, and appurtenance that is (1) 
determined to be a gathering line by the Federal Energy 
Regulatory Commission, or (2) used to deliver natural gas from 
the wellhead or a common point to the point at which such gas 
first reaches (a) a gas processing plant, (b) an 
interconnection with an interstate transmission line, (c) an 
interconnection with an intrastate transmission line, or (d) a 
direct interconnection with a local distribution company, a gas 
storage facility, or an industrial consumer.
      Effective date.--The Senate amendment is effective for 
property placed in service after December 31, 2004, in taxable 
years ending after that date. No inference is intended as to 
the proper treatment of natural gas gathering lines placed in 
service before the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Expensing of capital costs incurred for production in complying with 
        environmental protection agency sulfur regulations for small 
        refiners (sec. 843 of the Senate amendment and new sec. 179B of 
        the Code)

                              PRESENT LAW

      Taxpayers generally may recover the costs of investments 
in refinery property through annual depreciation deductions.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment permits small business refiners to 
immediately deduct as an expense up to 75 percent of the costs 
paid or incurred for the purpose of complying with the Highway 
Diesel Fuel Sulfur Control Requirements of the Environmental 
Protection Agency (``EPA''). Costs qualifying for the deduction 
are those costs paid or incurred with respect to any facility 
of a small business refiner during the period beginning on 
January 1, 2003 and ending on the earlier of the date that is 
one year after the date on which the taxpayer must comply with 
the applicable EPA regulations or December 31, 2009.
      For these purposes a small business refiner is a taxpayer 
who is in the business of refining petroleum products and 
employs not more than 1,500 employees directly in refining and 
has less than 205,000 barrels per day (average) of total 
refinery capacity. The deduction is reduced, pro rata, for 
taxpayers with capacity in excess of 155,000 barrels per day.
      Effective date.--The Senate amendment is effective for 
expenses paid or incurred after December 31, 2002, in taxable 
years ending after that date.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision. With respect to the definition of a small business 
refiner, the conferees intend that, in any case in which 
refinery through-put or retained production of the refinery 
differs substantially from its average daily output or refined 
product, capacity be measured by reference to the average daily 
output of refined product.
4. Credit for small refiners for production of diesel fuel in 
        compliance with Environmental Protection Agency sulfur 
        regulations for small refiners (sec. 844 of Senate amendment 
        and new sec. 45H of the Code)

                              PRESENT LAW

      Present law does not provide a credit for the production 
of low-sulfur diesel fuel.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that a small business 
refiner may claim credit equal to five cents per gallon for 
each gallon of low sulfur diesel fuel produced during the 
taxable year that is in compliance with the Highway Diesel Fuel 
Sulfur Control Requirements of the Environmental Protection 
Agency (``EPA''). The total production credit claimed by the 
taxpayer is limited to 25 percent of the capital costs incurred 
to come into compliance with the EPA diesel fuel requirements. 
Costs qualifying for the credit are those costs paid or 
incurred with respect to any facility of a small business 
refiner during the period beginning on January 1, 2003 and 
ending on the earlier of the date that is one year after the 
date on which the taxpayer must comply with the applicable EPA 
regulations or December 31, 2009. The taxpayer's basis in 
property with respect to which the credit applies is reduced by 
the amount of production credit claimed.
      In the case of a qualifying small business refiner that 
is owned by a cooperative, the cooperative is allowed to elect 
to pass any production credits to patrons of the organization.
      For these purposes a small business refiner is a taxpayer 
who is in the business of refining petroleum products, employs 
not more than 1,500 employees directly in refining, and has 
less than 205,000 barrels per day (average) of total refinery 
capacity. The credit is reduced, pro rata, for taxpayers with 
capacity in excess of 155,000 barrels per day.
      Effective date.--The Senate amendment is effective for 
expenses paid or incurred after December 31, 2002, in taxable 
years ending after that date.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision with modification as follows. The conference 
agreement makes the low sulfur diesel fuel credit a qualified 
business credit under section 169(c). Therefore, if any portion 
of the credit has not been allowed to the taxpayer as a general 
business credit (sec. 38) for any taxable year, an amount equal 
to that portion may be deducted by the taxpayer in the first 
taxable year following the last taxable year for which such 
portion could have been allowed as a credit under the carryback 
and carryforward rules (sec. 39). With respect to the 
definition of a small business refiner, the conferees intend 
that, in any case where refinery through-put or retained 
production of the refinery differs substantially from its 
average daily output of refined product, capacity be measured 
by reference to the average daily output of refined product.
5. Determination of small refiner exception to oil depletion deduction 
        (sec. 845 of the Senate amendment and sec. 613A of the Code)

                              PRESENT LAW

      Present law classifies oil and gas producers as 
independent producers or integrated companies. The Code 
provides numerous special tax rules for operations by 
independent producers. One such rule allows independent 
producers to claim percentage depletion deductions rather than 
deducting the costs of their asset, a producing well, based on 
actual production from the well (i.e., cost depletion).
      A producer is an independent producer only if its 
refining and retail operations are relatively small. For 
example, an independent producer may not have refining 
operations the runs from which exceed 50,000 barrels on any day 
in the taxable year during which independent producer status is 
claimed.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment increases the current 50,000-barrel-
per-day limitation to 60,000. In addition, the provision 
changes the refinery limitation on claiming independent 
producer status from a limit based on actual daily production 
to a limit based on average daily production for the taxable 
year. Accordingly, the average daily refinery run for the 
taxable year may not exceed 60,000 barrels. For this purpose, 
the taxpayer calculates average daily production by dividing 
total production for the taxable year by the total number of 
days in the taxable year.
      Effective date.--The Senate amendment is effective for 
taxable years ending after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
6. Suspension of 100-percent-of-net-income limitation on percentage 
        depletion for oil and gas from marginal wells (sec. 412 of the 
        House bill, sec. 846 of the Senate amendment, and sec. 613A of 
        the Code)

                              PRESENT LAW

Overview of depletion
      Depletion, like depreciation, is a form of capital cost 
recovery. In both cases, the taxpayer is allowed a deduction in 
recognition of the fact that an asset--in the case of depletion 
for oil or gas interests, the mineral reserve itself--is being 
expended in order to produce income. Certain costs incurred 
prior to drilling an oil or gas property are recovered through 
the depletion deduction. These include costs of acquiring the 
lease or other interest in the property and geological and 
geophysical costs (in advance of actual drilling).
      Depletion is available to any person having an economic 
interest in a producing property. An economic interest is 
possessed in every case in which the taxpayer has acquired by 
investment any interest in minerals in place, and secures, by 
any form of legal relationship, income derived from the 
extraction of the mineral, to which it must look for a return 
of its capital.\396\ Thus, for example, both working interests 
and royalty interests in an oil- or gas-producing property 
constitute economic interests, thereby qualifying the interest 
holders for depletion deductions with respect to the property. 
A taxpayer who has no capital investment in the mineral deposit 
does not possess an economic interest merely because it 
possesses an economic or pecuniary advantage derived from 
production through a contractual relation.
---------------------------------------------------------------------------
    \396\ Treas. Reg. sec. 1.611-1(b)(1).
---------------------------------------------------------------------------
Cost depletion
      Two methods of depletion are currently allowable under 
the Code: (1) the cost depletion method, and (2) the percentage 
depletion method.\397\ Under the cost depletion method, the 
taxpayer deducts that portion of the adjusted basis of the 
depletable property which is equal to the ratio of units sold 
from that property during the taxable year to the number of 
units remaining as of the end of taxable year plus the number 
of units sold during the taxable year. Thus, the amount 
recovered under cost depletion may never exceed the taxpayer's 
basis in the property.
---------------------------------------------------------------------------
    \397\ Secs. 611-613.
---------------------------------------------------------------------------
Percentage depletion and related income limitations
      The Code generally limits the percentage depletion method 
for oil and gas properties to independent producers and royalty 
owners.\398\ Generally, under the percentage depletion method, 
15 percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable 
year.\399\ The amount deducted generally may not exceed 100 
percent of the net income from that property in any year (the 
``net-income limitation'').\400\ The 100-percent net-income 
limitation for marginal wells has been suspended for taxable 
years beginning after December 31, 1997, and before January 1, 
2006.
---------------------------------------------------------------------------
    \398\ Sec. 613A.
    \399\ Sec. 613A(c).
    \400\ Sec. 613(a).
---------------------------------------------------------------------------

                            HOUSE BILL \401\

      The provision extends the suspension of the net-income 
limitation for marginal wells for taxable years beginning 
before January 1, 2006.
---------------------------------------------------------------------------
    \401\ The House bill predated the enactment of H.R. 1308, Pub. L. 
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which 
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                         SENATE AMENDMENT \402\

      The Senate amendment extends the suspension of the net-
income limitation for marginal wells for taxable years 
beginning before January 1, 2007.
---------------------------------------------------------------------------
    \402\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
      Effective date.--Same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the House bill 
or Senate amendment provision.
7. Delay rental payments (sec. 847 of the Senate amendment and sec. 167 
        of the Code)

                              PRESENT LAW

      Present law generally requires costs associated with 
inventory and property held for resale to be capitalized rather 
than currently deducted as they are incurred. (sec. 263). Oil 
and gas producers typically contract for mineral production in 
exchange for royalty payments. If mineral production is 
delayed, these contracts provide for ``delay rental payments'' 
as a condition of their extension. A delay rental is an amount 
paid for the privilege of deferring development of the property 
and which could have been avoided by abandonment of the lease, 
or by commencement of development of operations or by obtaining 
production. The Treasury Department has taken the position that 
the uniform capitalization rules of section 263A require delay 
rental payments to be capitalized.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that delay rental payments 
incurred in connection with the development of oil or gas be 
amortized over two years. In the case of abandoned property, 
remaining basis may no longer be recovered in the year of 
abandonment of a property as all basis is recovered over the 
two-year amortization period.
      Effective date.--The Senate amendment is effective for 
amounts paid or incurred in taxable years beginning after 
December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. Geological and geophysical costs (sec. 848 of the Senate amendment 
        and sec. 167 of the Code)

                              PRESENT LAW

      Under present law, geological and geophysical 
expenditures are costs incurred by a taxpayer for the purpose 
of obtaining and accumulating data that will serve as the basis 
for the acquisition and retention of mineral properties by 
taxpayers exploring for minerals. Capital expenditures are not 
currently deductible as ordinary and necessary expenses, but 
are allocated to the cost of the property (sec. 263). Courts 
have held that geological and geophysical costs are capital, 
and therefore are allocable to the cost of property acquired or 
retained. The costs attributable to such exploration are 
allocable to the cost of the property acquired or retained. In 
the case of abandoned property, exploration expenditures are 
allowable as a loss when such property is abandoned.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that geological and 
geophysical costs incurred in connection with domestic oil and 
gas exploration be amortized over two years. In the case of 
abandoned property, remaining basis may no longer be recovered 
in the year of abandonment of a property as all basis is 
recovered over the two-year amortization period.
      Effective date.--The Senate amendment is effective for 
costs paid or incurred in taxable years beginning after 
December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
9. Extension and modification of credit for producing fuel from a non-
        conventional source (sec. 849 of the Senate amendment and sec. 
        29 of the Code)

                              PRESENT LAW

      An income tax credit is allowed for certain fuels 
produced from ``non-conventional sources'' and sold to 
unrelated parties. The amount of the credit is equal to $3 
(generally adjusted for inflation \403\) per barrel or Btu oil 
barrel equivalent (sec. 29). Qualified fuels must be produced 
within the United States, and include: oil produced from shale 
and tar sands; gas produced from geopressured brine, Devonian 
shale, coal seams, tight formations (``tight sands''), or 
biomass; and liquid, gaseous, or solid synthetic fuels produced 
from coal (including lignite).
---------------------------------------------------------------------------
    \403\ The value of the section 29 credit for production in 2003 was 
$6.40 per barrel of oil equivalent. The $3.00 credit for gas from a 
tight formation is not adjusted for inflation.
---------------------------------------------------------------------------
      The credit applies to fuels produced from wells drilled 
or facilities placed in service after December 31, 1979, and 
before January 1, 1993. An exception extends the January 1, 
1993 expiration date for facilities producing gas from biomass 
and synthetic fuel from coal if the facility producing the fuel 
is placed in service before July 1, 1998, pursuant to a binding 
contract entered into before January 1, 1997.
      The credit applies to qualified fuels produced and sold 
before January 1, 2003 (in the case of non-conventional sources 
subject to the January 1, 1993, expiration date) or January 1, 
2008 (in the case of biomass gas and synthetic fuel facilities 
eligible for the extension period).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Extension of placed in service date for certain new facilities
      For new wells or facilities producing qualifying fuels 
that are oil from shale or tar sands, and gas from geopressured 
brine, Devonian shale, coal seams, a tight formation, or 
biomass, the credit can be claimed for production from such new 
facilities placed in service after December 31, 2004 and before 
January 1, 2007. The credit may be claimed for the three-year 
period beginning on the date such well or facility is placed in 
service. For all qualifying wells and facilities the value of 
the credit is $3.00 per barrel or Btu equivalent for production 
in 2003 and is indexed for inflation commencing with the credit 
amount for 2004.
Extension and modification for ``refined coal''
      The Senate amendment provides a credit for production of 
``refined coal'' from facilities placed in service after 
December 31, 2004, and before January 1, 2007. Credit may be 
claimed for fuel produced during the five-year period beginning 
on the date such facility is placed in service. The amount of 
the credit is $3.00 per barrel or Btu equivalent for production 
in 2003 and is indexed for inflation commencing with the credit 
amount for 2004. Refined coal is a fuel that is a liquid, 
gaseous, or solid synthetic fuel produced from coal (including 
lignite) or high-carbon fly ash, including such fuel used as a 
feedstock. A facility qualifies for the credit only if it 
produces refined coal that: (1) when burned emits 20 percent 
less SO2 and nitrogen oxides than the burning of 
feedstock coal or comparable coal predominantly available in 
the marketplace as of January 1, 2004, and (2) sells at prices 
at least 50 percent greater than the prices of the feedstock 
coal or comparable coal. However, no fuel produced at a 
qualifying advanced clean coal technology unit (as defined 
elsewhere) is a qualifying fuel.
Expansion for ``viscous oil''
      The Senate amendment provides a credit for production of 
certain viscous oil produced at wells placed in service after 
December 31, 2004, and before January 1, 2007. ``Viscous oil'' 
is domestic crude oil produced from any property if the crude 
oil has a weighted average gravity of 22 degrees API or less 
(corrected to 60 degrees Fahrenheit). The credit may be claimed 
for fuel produced during the three-year period beginning on the 
date such well is placed in service. The amount of the credit 
is $3.00 per barrel or Btu equivalent for production in 2003 
and is indexed for inflation commencing with the credit amount 
for 2004. The Senate amendment provides that qualifying sales 
to related parties for consumption not in the immediate 
vicinity of the wellhead qualify for the credit.
Credit for coalmine methane gas
      The Senate amendment provides a credit for production of 
``coalmine methane gas'' captured or extracted from a coalmine 
and sold after December 31, 2004, and before January 1, 2007. 
The amount of the credit is $3.00 (indexed for inflation from 
2002) per barrel or Btu oil for gas utilized, captured or sold 
during the applicable period. Qualifying coalmine gas is any 
methane gas liberated during coal mining operations or 
extracted up to ten years in advance of coal mining operations 
as part of a specific plan to mine a coal deposit. In the case 
of coalmine methane gas that is captured in advance of coal 
mining operations, the credit is allowed only after the date 
the coal extraction occurs in the immediate area where the 
coalmine methane gas was removed. The capture or extraction of 
coalmine gas from coal mining operations is required to be in 
compliance with applicable State and Federal pollution 
prevention, control, and permit requirements in order to 
qualify for the credit.
Expansion for agricultural and animal wastes
      The Senate amendment adds facilities producing liquid, 
gaseous, or solid fuels from agricultural and animal wastes 
(including such fuels when used as feedstocks) placed in 
service after December 31, 2004, and before January 1, 2007, to 
the list of qualified facilities for purposes of the non-
conventional fuel credit. The credit may be claimed for fuel 
produced during the three-year period beginning on the date 
such facility is placed in service. The amount of the credit is 
$3.00 per barrel or Btu equivalent for production in 2003 and 
is indexed for inflation commencing with the credit amount for 
2004. Agricultural and animal waste includes by-products, 
packaging, and any materials associated with processing, 
feeding, selling, transporting, or disposal of agricultural or 
animal products or wastes.
Extension of credit for certain existing facilities
      The Senate amendment extends the present law credit 
($3.00 indexed for inflation from 1979) through December 31, 
2005, for production from existing facilities producing coke, 
coke gas, or natural gas and by-products produced by coal 
gasification from lignite. For persons (or subsidiaries of such 
persons) engaged in furnishing electric energy, or providing 
telephone service, to persons in rural areas, any credit 
claimed for this purpose may be applied as a prepayment of any 
loan, debt, or other obligation to the extent provided by the 
Secretary of Agriculture and to the extent provided by the 
Secretary of Energy, as a prepayment not to exceed 50 percent 
of any obligation incurred pursuant to an asset purchase 
agreement entered into with the Secretary and dated October 7, 
1988. Such credit is not considered income for these purposes.
Daily limit
      Under the Senate amendment, with respect to qualifying 
facilities placed in service under the extended placed in 
service dates, a taxpayer would not be able to claim any credit 
for production in excess of a daily average \404\ of 200,000 
cubic feet of natural gas or barrel of oil equivalent (200,000 
cubic feet is equivalent to approximately 35.4 barrels of oil) 
of such gas with respect to: (1) oil produced from shale and 
tar sands and (2) gas produced from geopressured brine, 
Devonian shale, coal seams, or a tight formation. Days before 
the date the project is placed in service are not taken into 
account in determining such average.
---------------------------------------------------------------------------
    \404\ The daily average is computed as total production divided by 
the total number of days the well or facility was in production during 
the year. Days before the date the project is placed in service are not 
taken into account in determining the daily average.
---------------------------------------------------------------------------
New phaseout adjustment
      In the case of fuels sold after 2003, with the exception 
of fuel produced at existing facilities and for any gas from a 
tight formation: (1) the dollar amount of the credit is $3.00 
indexed for inflation from 2002 (without regard to a phaseout 
adjustment), and (2) the threshold for purposes of the phaseout 
of the credit is increased from $23.50 to $35.00 (indexed for 
inflation from 2002).
General business credit
      The provision adds section 29 to the list of general 
business credits and re-labels present section 29 of the Code 
as new Code section 45R.
Study of coalbed methane gas
      The Senate amendment provides that the Secretary of 
Treasury undertake a study of the effect of section 29 on the 
production of coalbed methane. The study should estimate the 
total amount of credit claimed annually and in aggregate 
related to the production of coalbed methane since the date of 
enactment of section 29. The study should report the annual 
value of the credit allowable for coalbed methane compared to 
the average annual wellhead price of natural gas (per thousand 
cubic feet of natural gas). The study should estimate the 
incremental increase in production of coalbed methane that has 
resulted from the enactment of section 29. The study should 
also estimate the cost to the Federal government, in terms of 
the net tax benefits claimed, per thousand cubic feet of 
incremental coalbed methane produced annually and in aggregate 
since the enactment of section 29.
Effective date
      In general, except as provided below, the provision is 
effective for fuel sold from qualifying facilities after 
December 31, 2004, in taxable years ending after such date.
      For existing facilities, the provision is effective for 
fuel sold after December 31, 2002, in taxable years ending 
after such date.
      For application of the general business credit, the 
provision is effective for taxable years ending after December 
31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
10. Natural gas distribution lines treated as 15-year property (sec. 
        850 of the Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

      The applicable recovery period for assets placed in 
service under the Modified Accelerated Cost Recovery System is 
based on the ``class life of the property.'' The class lives of 
assets placed in service after 1986 are generally set forth in 
Revenue Procedure 87-56.\405\ Natural gas distribution 
pipelines are assigned a 20-year recovery period and a class 
life of 35 years.
---------------------------------------------------------------------------
    \405\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment establishes a statutory 15-year 
recovery period and a class life of 35 years for natural gas 
distribution lines.
      Effective date.--The Senate amendment is effective for 
property placed in service after December 31, 2004, in taxable 
years ending after such date.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
11. Credit for production of Alaska natural gas (sec. 851 of Senate 
        amendment)

                              PRESENT LAW

      Present law does not provide a credit for conventional 
production of natural gas or delivery of fuels to a pipeline. 
However, certain fuels produced from ``non-conventional 
sources'' and sold to unrelated parties are eligible for an 
income tax credit equal to $3 (generally adjusted for 
inflation) per barrel or Btu oil barrel equivalent (sec. 29). 
Qualified fuels must be produced within the United States.
      Qualified fuels include:
            (1) gas produced from geopressured brine, Devonian 
        shale, coal seams, tight formations (``tight sands''), 
        or biomass; and
            (2) liquid, gaseous, or solid synthetic fuels 
        produced from coal (including lignite).
      In general, the credit is available only with respect to 
fuels produced from wells drilled or facilities placed in 
service after December 31, 1979, and before January 1, 1993. An 
exception extends the January 1, 1993 expiration date for 
facilities producing gas from biomass and synthetic fuel from 
coal if the facility producing the fuel is placed in service 
before July 1, 1998, pursuant to a binding contract entered 
into before January 1, 1997.
      The credit may be claimed for qualified fuels produced 
and sold before January 1, 2003 (in the case of non-
conventional sources subject to the January 1, 1993 expiration 
date) or January 1, 2008 (in the case of biomass gas and 
synthetic fuel facilities eligible for the extension period).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides a credit per million British 
thermal units (Btu) of natural gas for Alaska natural gas 
entering a pipeline \406\ during the 25-year period beginning 
the later of January 1, 2010 or the initial date for the 
interstate transportation of Alaska natural gas. Taxpayers may 
claim the credit against both the regular and minimum tax.
---------------------------------------------------------------------------
    \406\ Natural gas entering a gas processing facility is not 
considered to have entered a pipeline. Rather, the credit applies only 
to pipeline quality gas at the time of entry into the pipeline.
---------------------------------------------------------------------------
      The credit amount for any month is a maximum of 52 cents 
per million Btu of natural gas. The credit phases out as the 
reference price of Alaska natural gas rises above 83 cents per 
million Btu, at a rate of one cent of credit lost per each cent 
by which the reference price of Alaska natural gas exceeds 83 
cents per million Btu. The credit is not available if the 
reference price of Alaska natural gas rises above $1.35 per 
million Btu. The 52-cent and 83-cent figures are indexed for 
inflation after 2004, with the first adjustment for calendar 
year 2006.\407\
---------------------------------------------------------------------------
    \407\ In practice, the $1.35-figure also is indexed for inflation, 
as $1.35 is the sum of the 52-cent credit and the 83-cent price. The 
bill provides that the Secretary can compute the inflation adjustment 
factor for a calendar year in the fourth quarter of the preceding year. 
For example, the adjustment for 2006 is calculated as the 2005 GDP 
deflator over the 2004 GDP deflator, where the 2004 GDP deflator is the 
value of the GDP deflator on June 30, 2004 (as determined by the latest 
available revision from the Department of Commerce prior to October 1, 
2004). Likewise, the 2005 deflator is the value of the GDP deflator on 
June 30, 2005.
---------------------------------------------------------------------------
      The bill provides that the Secretary of the Treasury 
calculate the reference price of Alaska natural gas as the 
average price of natural gas delivered in the lower 48 States 
less certain transportation costs and gas processing costs. 
Alaska natural gas is any gas derived from an area of the State 
of Alaska lying north of 64 degrees North latitude, but not 
including the Alaska National Wildlife Refuge.
      The credit is part of the general business credit.
      Effective date.--The proposal is effective on the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
12. Treat certain Alaska pipeline property as seven-year property (sec. 
        852 of the Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

      The applicable recovery period for assets placed in 
service under the Modified Accelerated Cost Recovery System is 
based on the ``class life of the property.'' The class lives of 
assets placed in service after 1986 are generally set forth in 
Revenue Procedure 87-56.\408\ Asset class 46.0, describing 
assets used in the private, commercial, and contract carrying 
of petroleum, gas and other products by means of pipes and 
conveyors, are assigned a class life of 22 years and a recovery 
period of 15 years.
---------------------------------------------------------------------------
    \408\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment establishes a statutory seven-year 
recovery period and a class life of 22 years for any Alaska 
natural gas pipeline. The term ``Alaska natural gas pipeline'' 
is defined as any natural gas pipeline system (including the 
pipe, trunk lines, related equipment, and appurtenances used to 
carry natural gas, but not any gas processing plant) located in 
the State of Alaska that has a capacity of more than 500 
billion Btu of natural gas per day and is placed in service 
after December 31, 2012. A taxpayer who places an otherwise 
qualifying system in service before January 1, 2013 may elect 
to treat the system as placed in service on January 1, 2013, 
thus qualifying for the seven-year recovery period.
      Effective date.--The Senate amendment is effective for 
property placed in service after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with the following modification. In order to qualify for the 
seven-year recovery period, otherwise qualifying property must 
be placed in service after December 31, 2013. A taxpayer who 
places an otherwise qualifying system in service before January 
1, 2014 may elect to treat the system as placed in service on 
January 1, 2014, thus qualifying for the seven-year recovery 
period.
      Effective date.--The provision is effective for property 
placed in service after December 31, 2004.
13. Enhanced oil recovery credit for certain gas processing facilities 
        (sec. 853 of the Senate amendment and sec. 43 of the Code)

                              PRESENT LAW

      The taxpayer may claim a credit equal to 15 percent of 
enhanced oil recovery costs. Qualified enhanced oil recovery 
costs include costs of depreciable tangible property that is 
part of an enhanced oil recovery project, intangible drilling 
and development costs with respect to an enhanced oil recovery 
project, and tertiary injectant expenses incurred with respect 
to an enhanced oil recovery project. The credit is phased out 
when oil prices exceed a threshold amount.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that expenses in connection 
with the construction of any qualifying natural gas processing 
plant capable of processing two trillion British thermal units 
of Alaskan natural gas into a natural gas pipeline system on a 
daily basis are qualified enhanced oil recovery costs eligible 
for the enhanced oil recovery credit. A qualifying natural gas 
processing plant also must produce carbon dioxide for re-
injection into a producing oil or gas field.
      Effective date.--The provision is effective for costs 
paid or incurred in taxable years beginning after December 31, 
2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
14. Exempt certain prepayments for natural gas from tax-exempt bond 
        arbitrage rules (sec. 854 of the Senate amendment and secs. 141 
        and 148 of the Code)

                              PRESENT LAW

      Interest on bonds issued by States or local governments 
to finance activities carried out or paid for by those entities 
generally is exempt from income tax. Restrictions are imposed 
on the ability of States or local governments to invest the 
proceeds of these bonds for profit (the ``arbitrage 
restrictions''). One such restriction limits the use of bond 
proceeds to acquire ``investment-type property.'' The term 
investment-type property includes the acquisition of property 
in a transaction involving a prepayment if a principal purpose 
of the prepayment is to receive an investment return from the 
time the prepayment is made until the time payment otherwise 
would be made. A prepayment can produce prohibited arbitrage 
profits when the discount received for prepaying the costs 
exceeds the yield on the tax-exempt bonds. In general, 
prohibited prepayments include all prepayments that are not 
customary in an industry by both beneficiaries of tax-exempt 
bonds and other persons using taxable financing for the same 
transaction.
      On August 4, 2003, the Treasury Department issued final 
regulations deeming to be customary, and not in violation of 
the arbitrage rules, certain prepayments for natural gas and 
electricity.\409\ Generally, a qualified prepayment under the 
regulations requires that 90 percent of the natural gas or 
electricity purchased with the prepayment be used for a 
qualifying use. Generally, natural gas is used for a qualifying 
use if it is to be (1) furnished to retail gas customers of the 
issuing municipal utility who are located in the natural gas 
service area of the issuing municipal utility, however, gas 
used to produce electricity for sale is not included under this 
provision, (2) used by the issuing municipal utility to produce 
electricity that will be furnished to retail electric service 
area customers of the issuing utility, (3) used by the issuing 
municipal utility to produce electricity that will be sold to a 
utility owned by a governmental person and furnished to the 
service area retail electric customers of the purchaser, (4) 
sold to a utility that is owned by a governmental person if the 
requirements of (1), (2), or (3) are satisfied by the 
purchasing utility (treating the purchaser as the issuing 
utility) or (5) used to fuel the pipeline transportation of the 
prepaid gas supply. Electricity is used for a qualifying use if 
it is to be (1) furnished to retail service area electric 
customers of the issuing municipal utility or (2) sold to a 
municipal utility and furnished to retail electric customers of 
the purchaser who are located in the electricity service area 
of the purchaser. Both governmental gas and electric utilities 
may take advantage of this regulatory provision.
---------------------------------------------------------------------------
    \409\ Treas. Reg. sec. 1.148-1(e)(2)(iii).
---------------------------------------------------------------------------
      State and local bonds may be classified as either 
governmental bonds or private activity bonds. Governmental 
bonds are bonds the proceeds of which are primarily used to 
finance governmental functions or the debt is repaid with 
governmental funds. Private activity bonds are bonds where the 
State or local government serves as a conduit providing 
financing to private businesses or individuals. The exclusion 
from income for State and local bonds does not apply to private 
activity bonds, unless the bonds are issued for certain 
purposes permitted by the Code. Section 141(D) of the Code 
provides that the term ``private activity bond'' includes any 
bond issued as part of an issue if the amount of the proceeds 
of the issue which are to be used (directly or indirectly) for 
the acquisition by a governmental unit of nongovernmental 
output property exceeds the lesser of five percent of such 
proceeds or $5 million. ``Nongovernmental output property'' 
generally means any property (or interest therein) which before 
such acquisition was used (or held for use) by a person other 
than a governmental unit in connection with an output facility 
(other than a facility for the furnishing of water). An 
exception applies to output property which is to be used in 
connection with an output facility 95 percent or more of the 
output of which will be consumed in (1) a qualified service 
area of the governmental unit acquiring the property, or (2) a 
qualified annexed area of such unit.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The provision creates a safe harbor exception to the 
general rule that tax-exempt bond-financed prepayments violate 
the arbitrage restrictions. The term ``investment type 
property'' does not include a prepayment under a qualified 
natural gas supply contract. The provision also provides that 
such prepayments are not treated as private loans for purposes 
of the private business tests.
      Under the provision, a prepayment financed with tax-
exempt bond proceeds for the purpose of obtaining a supply of 
natural gas for service area customers of a governmental 
utility is not treated as the acquisition of investment-type 
property. A contract is a qualified natural gas contract if the 
volume of natural gas secured for any year covered by the 
prepayment does not exceed the sum of (1) the average annual 
natural gas purchased (other than for resale) by customers of 
the utility within the service area of the utility (``retail 
natural gas consumption'') during the testing period, and (2) 
the amount of natural gas that is needed to fuel transportation 
of the natural gas to the governmental utility. The testing 
period is the 5-calendar-year period immediately preceding the 
calendar year in which the bonds are issued. A retail customer 
is one who does not purchase natural gas for resale. Natural 
gas used to generate electricity by a utility owned by a 
governmental unit is counted as retail natural gas consumption 
if the electricity was sold to retail customers within the 
service area of the governmental electric utility.
Adjustments
      The volume of gas permitted by the general rule is 
reduced by natural gas otherwise available on the date of 
issuance. Specifically, the amount of natural gas permitted to 
be acquired under a qualified natural gas contract for any 
period is to be reduced by natural gas held by the utility on 
the date of issuance of the bonds and natural gas that the 
utility has a right to acquire for the prepayment period 
(determined as of the date of issuance). For purposes of the 
preceding sentence, applicable share means, with respect to any 
period, the natural gas allocable to such period if the gas 
were allocated ratably over the period to which the prepayment 
relates.
      For purposes of the safe harbor, if after the close of 
the testing period and before the issue date of the bonds (1) 
the government utility enters into a contract to supply natural 
gas (other than for resale) for a commercial person for use at 
a property within the service area of such utility and (2) the 
gas consumption for such property was not included in the 
testing period or the ratable amount of natural gas to be 
supplied under the contract is significantly greater than the 
ratable amount of gas supplied to such property during the 
testing period, then the amount of gas permitted to be 
purchased may be increased to accommodate the contract.
      The average annual retail natural gas consumption 
calculation for purposes of the safe harbor, however, is not to 
exceed the annual amount of natural gas reasonably expected to 
be purchased (other than for resale) by persons who are located 
within the service area of such utility and who, as of the date 
of issuance of the issue, are customers of such utility.
Intentional acts
      The safe harbor does not apply if the utility engages in 
intentional acts to render (1) the volume of natural gas 
covered by the prepayment to be in excess of that needed for 
retail natural gas consumption, and (2) the amount of natural 
gas that is needed to fuel transportation of the natural gas to 
the governmental utility.
Definition of service area
      Service area is defined as (1) any area throughout which 
the governmental utility provided (at all times during the 
testing period) in the case of a natural gas utility, natural 
gas transmission or distribution service, or in the case of an 
electric utility, electric distribution service; (2) limited 
areas contiguous to such areas; and (3) any area recognized as 
the service area of the governmental utility under State or 
Federal law. Contiguous areas are limited to any area within a 
county contiguous to the area described in (1) in which retail 
customers of the utility are located if such area is not also 
served by another utility providing the same service.
Ruling request for higher prepayment amounts
      Upon written request, the Secretary may allow an issuer 
to prepay for an amount of gas greater than that allowed by the 
safe harbor based on objective evidence of growth in gas 
consumption or population that demonstrates that the amount 
permitted by the exception is insufficient.
Nongovernmental output property restrictions
      A qualified natural gas supply contract as defined in the 
Senate amendment is not nongovernmental output property for 
purposes of subsection (d) of section 141. Subsection (d) of 
section 141 does not apply to prepayment contracts for natural 
gas or electricity that either under the Treasury regulations 
or statutory safe harbor are not investment-type property for 
purposes of the arbitrage rules under section 148. No inference 
is intended regarding the application of subsection 141(d) to 
prepayment contracts not covered by the statutory safe harbor 
or Treasury regulations.
Effective date
      The provision is effective for obligations issued after 
December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

      F. Electric Utility Restructuring and Reliability Provisions

1. Modification to special rules for nuclear decommissioning costs 
        (sec. 855 of the Senate amendment and sec. 468A of the Code)

                              PRESENT LAW

Overview
      Special rules dealing with nuclear decommissioning 
reserve funds were adopted by Congress in the Deficit Reduction 
Act of 1984 (``1984 Act''), when tax issues regarding the time 
value of money were addressed generally. Under general tax 
accounting rules, a deduction for accrual basis taxpayers is 
deferred until there is economic performance for the item for 
which the deduction is claimed. However, the 1984 Act contains 
an exception under which a taxpayer responsible for nuclear 
powerplant decommissioning may elect to deduct contributions 
made to a qualified nuclear decommissioning fund for future 
decommissioning costs. Taxpayers who do not elect this 
provision are subject to general tax accounting rules.
Qualified nuclear decommissioning fund
      A qualified nuclear decommissioning fund (a ``qualified 
fund'') is a segregated fund established by a taxpayer that is 
used exclusively for the payment of decommissioning costs, 
taxes on fund income, management costs of the fund, and for 
making investments. The income of the fund is taxed at a 
reduced rate of 20 percent for taxable years beginning after 
December 31, 1995.\410\
---------------------------------------------------------------------------
    \410\ As originally enacted in 1984, a qualified fund paid tax on 
its earnings at the top corporate rate and, as a result, there was no 
present-value tax benefit of making deductible contributions to a 
qualified fund. Also, as originally enacted, the funds in the trust 
could be invested only in certain low risk investments. Subsequent 
amendments to the provision have reduced the rate of tax on a qualified 
fund to 20 percent and removed the restrictions on the types of 
permitted investments that a qualified fund can make.
---------------------------------------------------------------------------
      Contributions to a qualified fund are deductible in the 
year made to the extent that these amounts were collected as 
part of the cost of service to ratepayers (the ``cost of 
service requirement'').\411\ Funds withdrawn by the taxpayer to 
pay for decommissioning costs are included in the taxpayer's 
income, but the taxpayer also is entitled to a deduction for 
decommissioning costs as economic performance for such costs 
occurs.
---------------------------------------------------------------------------
    \411\ Taxpayers are required to include in gross income customer 
charges for decommissioning costs (sec. 88).
---------------------------------------------------------------------------
      Accumulations in a qualified fund are limited to the 
amount required to fund decommissioning costs of a nuclear 
powerplant for the period during which the qualified fund is in 
existence (generally post-1984 decommissioning costs of a 
nuclear powerplant). For this purpose, decommissioning costs 
are considered to accrue ratably over a nuclear powerplant's 
estimated useful life. In order to prevent accumulations of 
funds over the remaining life of a nuclear powerplant in excess 
of those required to pay future decommissioning costs of such 
nuclear powerplant and to ensure that contributions to a 
qualified fund are not deducted more rapidly than level funding 
(taking into account an appropriate discount rate), taxpayers 
must obtain a ruling from the IRS to establish the maximum 
annual contribution that may be made to a qualified fund (the 
``ruling amount''). In certain instances (e.g., change in 
estimates), a taxpayer is required to obtain a new ruling 
amount to reflect updated information.
      A qualified fund may be transferred in connection with 
the sale, exchange or other transfer of the nuclear powerplant 
to which it relates. If the transferee is a regulated public 
utility and meets certain other requirements, the transfer will 
be treated as a nontaxable transaction. No gain or loss will be 
recognized on the transfer of the qualified fund and the 
transferee will take the transferor's basis in the fund.\412\ 
The transferee is required to obtain a new ruling amount from 
the IRS or accept a discretionary determination by the 
IRS.\413\
---------------------------------------------------------------------------
    \412\ Treas. reg. sec. 1.468A-6.
    \413\ Treas. reg. sec. 1.468A-6(f).
---------------------------------------------------------------------------
Nonqualified nuclear decommissioning funds
      Federal and State regulators may require utilities to set 
aside funds for nuclear decommissioning costs in excess of the 
amount allowed as a deductible contribution to a qualified 
fund. In addition, taxpayers may have set aside funds prior to 
the effective date of the qualified fund rules.\414\ The 
treatment of amounts set aside for decommissioning costs prior 
to 1984 varies. Some taxpayers may have received no tax benefit 
while others may have deducted such amounts or excluded such 
amounts from income. Since 1984, taxpayers have been required 
to include in gross income customer charges for decommissioning 
costs (sec. 88), and a deduction has not been allowed for 
amounts set aside to pay for decommissioning costs except 
through the use of a qualified fund. Income earned in a 
nonqualified fund is taxable to the fund's owner as it is 
earned.
---------------------------------------------------------------------------
    \414\ These funds are generally referred to as ``nonqualified 
funds.''
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Repeal of cost of service requirement
      The Senate amendment repeals the cost of service 
requirement for deductible contributions to a nuclear 
decommissioning fund. Thus, all taxpayers, including 
unregulated taxpayers, would be allowed a deduction for amounts 
contributed to a qualified fund.
Permit contributions to a qualified fund for pre-1984 decommissioning 
        costs
      The Senate amendment also repeals the limitation that a 
qualified fund only accumulate an amount sufficient to pay for 
a nuclear powerplant's decommissioning costs incurred during 
the period that the qualified fund is in existence (generally 
post-1984 decommissioning costs). Thus, any taxpayer is 
permitted to accumulate an amount sufficient to cover the 
present value of 100 percent of a nuclear powerplant's 
estimated decommissioning costs in a qualified fund. The Senate 
amendment does not change the requirement that contributions to 
a qualified fund not be deducted more rapidly than level 
funding.
Exception to ruling amount for certain decommissioning costs
      The Senate amendment permits a taxpayer to make 
contributions to a qualified fund in excess of the ruling 
amount in one circumstance. Specifically, a taxpayer is 
permitted to contribute up to the present value of the amount 
required to fund a nuclear powerplant's decommissioning costs 
which under present law section 468A(d)(2)(A) is not permitted 
to be accumulated in a qualified fund (generally pre-1984 
decommissioning costs).\415\ It is anticipated that an amount 
that is permitted to be contributed under this special rule 
shall be determined using the estimate of total decommissioning 
costs used for purposes of determining the taxpayer's most 
recent ruling amount. Any amount transferred to the qualified 
fund under this special rule that has not previously been 
deducted or excluded from gross income is allowed as a 
deduction over the remaining useful life of the nuclear 
powerplant.\416\ If a qualified fund that has received amounts 
under this rule is transferred to another person, the 
transferor will be permitted a deduction for any remaining 
deductible amounts at the time of transfer.
---------------------------------------------------------------------------
    \415\ The ability to transfer property into a qualified fund under 
this special rule is available only to the extent the taxpayer has not 
obtained a new ruling amount incorporating the repeal of the limitation 
that a qualified fund only accumulate an amount sufficient to pay for 
decommissioning costs of a nuclear powerplant incurred during the 
period that the fund is in existence (generally post-1984 
decommissioning costs).
    \416\ A taxpayer recognizes no gain or loss on the contribution of 
property to a qualified fund under this special rule. The qualified 
fund will take a transferred (carryover) basis in such property. 
Correspondingly, a taxpayer's deduction (over the estimated life of the 
nuclear powerplant) is to be based on the adjusted tax basis of the 
property contributed rather than the fair market value of such 
property.
---------------------------------------------------------------------------
Contributions to a qualified fund after useful life of powerplant
      The Senate amendment also allows deductible contributions 
to a qualified fund subsequent to the end of a nuclear 
powerplant's estimated useful life. Such payments are permitted 
to the extent they do not cause the assets of the qualified 
fund to exceed the present value of the taxpayer's allocable 
share (current or former) of the nuclear decommissioning costs 
of such nuclear powerplant.
Clarify treatment of transfers of qualified funds
      The Senate amendment clarifies the Federal income tax 
treatment of the transfer of a qualified fund. No gain or loss 
would be recognized to the transferor or the transferee as a 
result of the transfer of a qualified fund in connection with 
the transfer of the power plant with respect to which such fund 
was established.
Effective date.
      The Senate amendment is effective for taxable years 
beginning after December 31, 2002.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Treatment of certain income of electric cooperatives (sec. 856 of 
        the Senate amendment and sec. 501 of the Code)

                              PRESENT LAW

In general
      Under present law, an entity must be operated on a 
cooperative basis in order to be treated as a cooperative for 
Federal income tax purposes. Although not defined by statute or 
regulation, the two principal criteria for determining whether 
an entity is operating on a cooperative basis are: (1) 
ownership of the cooperative by persons who patronize the 
cooperative; and (2) return of earnings to patrons in 
proportion to their patronage. The Internal Revenue Service 
requires that cooperatives must operate under the following 
principles: (1) subordination of capital in control over the 
cooperative undertaking and in ownership of the financial 
benefits from ownership; (2) democratic control by the members 
of the cooperative; (3) vesting in and allocation among the 
members of all excess of operating revenues over the expenses 
incurred to generate revenues in proportion to their 
participation in the cooperative (patronage); and (4) operation 
at cost (not operating for profit or below cost).\417\
---------------------------------------------------------------------------
    \417\ Announcement 96-24, ``Proposed Examination Guidelines 
Regarding Rural Electric Cooperatives,'' 1996-16 I.R.B. 35.
---------------------------------------------------------------------------
      In general, cooperative members are those who participate 
in the management of the cooperative and who share in patronage 
capital. As described below, income from the sale of electric 
energy by an electric cooperative may be member or non-member 
income to the cooperative, depending on the membership status 
of the purchaser. A municipal corporation may be a member of a 
cooperative.
      For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception-the cooperative may exclude from its taxable 
income distributions of patronage dividends. In general, 
patronage dividends are the profits of the cooperative that are 
rebated to its patrons pursuant to a pre-existing obligation of 
the cooperative to do so. The rebate must be made in some 
equitable fashion on the basis of the quantity or value of 
business done with the cooperative.
      Except for tax-exempt farmers' cooperatives, cooperatives 
that are subject to the cooperative tax rules of subchapter T 
of the Code (sec. 1381, et seq.) are permitted a deduction for 
patronage dividends from their taxable income only to the 
extent of net income that is derived from transactions with 
patrons who are members of the cooperative (sec. 1382). The 
availability of such deductions from taxable income has the 
effect of allowing the cooperative to be treated like a conduit 
with respect to profits derived from transactions with patrons 
who are members of the cooperative.
      Cooperatives that qualify as tax-exempt farmers' 
cooperatives are permitted to exclude patronage dividends from 
their taxable income to the extent of all net income, including 
net income that is derived from transactions with patrons who 
are not members of the cooperative, provided the value of 
transactions with patrons who are not members of the 
cooperative does not exceed the value of transactions with 
patrons who are members of the cooperative (sec. 521).
Taxation of electric cooperatives exempt from subchapter T
      In general, the cooperative tax rules of subchapter T 
apply to any corporation operating on a cooperative basis 
(except mutual savings banks, insurance companies, other tax-
exempt organizations, and certain utilities), including tax-
exempt farmers' cooperatives (described in sec. 521(b)). 
However, subchapter T does not apply to an organization that is 
``engaged in furnishing electric energy, or providing telephone 
service, to persons in rural areas'' (sec. 1381(a)(2)(C)). 
Instead, electric cooperatives are taxed under rules that were 
generally applicable to cooperatives prior to the enactment of 
subchapter T in 1962. Under these rules, an electric 
cooperative can exclude patronage dividends from taxable income 
to the extent of all net income of the cooperative, including 
net income derived from transactions with patrons who are not 
members of the cooperative.\418\
---------------------------------------------------------------------------
    \418\ See Rev. Rul. 83-135, 1983-2 C.B. 149.
---------------------------------------------------------------------------
Tax exemption of rural electric cooperatives
      Section 501(c)(12) provides an income tax exemption for 
rural electric cooperatives if at least 85 percent of the 
cooperative's income consists of amounts collected from members 
for the sole purpose of meeting losses and expenses of 
providing service to its members. The IRS takes the position 
that rural electric cooperatives also must comply with the 
fundamental cooperative principles described above in order to 
qualify for tax exemption under section 501(c)(12).\419\ The 
85-percent test is determined without taking into account any 
income from qualified pole rentals and cancellation of 
indebtedness income from the prepayment of a loan under 
sections 306A, 306B, or 311 of the Rural Electrification Act of 
1936 (as in effect on January 1, 1987). The exclusion for 
cancellation of indebtedness income applies to such income 
arising in 1987, 1988, or 1989 on debt that either originated 
with, or is guaranteed by, the Federal Government.
---------------------------------------------------------------------------
    \419\ Rev. Rul. 72-36, 1972-1 C.B. 151.
---------------------------------------------------------------------------
      The receipt by a rural electric cooperative of 
contributions in aid of construction and connection charges is 
taken into account for purposes of applying the 85-percent 
test.
      Rural electric cooperatives generally are subject to the 
tax on unrelated trade or business income under section 511.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Treatment of income from open access transactions
      The Senate amendment provides that income received or 
accrued by a rural electric cooperative from any ``open access 
transaction'' (other than income received or accrued directly 
or indirectly from a member of the cooperative) is excluded in 
determining whether a rural electric cooperative satisfies the 
85-percent test for tax exemption under section 501(c)(12). The 
term ``open access transaction'' is defined as
            (1) The provision or sale of electric energy 
        transmission services or ancillary services on a 
        nondiscriminatory open access basis: (i) pursuant to an 
        open access transmission tariff filed with and approved 
        by the Federal Energy Regulatory Commission (``FERC'') 
        (including acceptable reciprocity tariffs), but only if 
        (in the case of a voluntarily filed tariff) the 
        cooperative files a report with FERC within 90 days of 
        enactment of this provision relating to whether or not 
        the cooperative will join a regional transmission 
        organization (``RTO''); or (ii) under an RTO agreement 
        approved by FERC (including an agreement providing for 
        the transfer of control-but not ownership-of 
        transmission facilities); \420\
---------------------------------------------------------------------------
    \420\ Under the Senate amendment, references to FERC are treated as 
including references to the Public Utility Commission of Texas or the 
Rural Utilities Service.
---------------------------------------------------------------------------
      (2) The provision or sale of electric energy distribution 
services or ancillary services on a nondiscriminatory open 
access basis to end-users served by distribution facilities 
owned by the cooperative or its members; or (3) The delivery or 
sale of electric energy on a nondiscriminatory open access 
basis, provided that such electric energy is generated by a 
generation facility that is directly connected to distribution 
facilities owned by the cooperative (or its members) which owns 
the generation facility.
      For purposes of the 85-percent test, the Senate amendment 
also provides that income received or accrued by a rural 
electric cooperative from any ``open access transaction'' is 
treated as an amount collected from members for the sole 
purpose of meeting losses and expenses if the income is 
received or accrued indirectly from a member of the 
cooperative.
Treatment of income from nuclear decommissioning transactions
      The Senate amendment provides that income received or 
accrued by a rural electric cooperative from any ``nuclear 
decommissioning transaction'' also is excluded in determining 
whether a rural electric cooperative satisfies the 85-percent 
test for tax exemption under section 501(c)(12). The term 
``nuclear decommissioning transaction'' is defined as--
            (1) Any transfer into a trust, fund, or instrument 
        established to pay any nuclear decommissioning costs if 
        the transfer is in connection with the transfer of the 
        cooperative's interest in a nuclear powerplant or 
        nuclear powerplant unit;
            (2) Any distribution from a trust, fund, or 
        instrument established to pay any nuclear 
        decommissioning costs; or
            (3) Any earnings from a trust, fund, or instrument 
        established to pay any nuclear decommissioning costs.
Treatment of income from asset exchange or conversion transactions
      The Senate amendment provides that gain realized by a 
tax-exempt rural electric cooperative from a voluntary exchange 
or involuntary conversion of certain property is excluded in 
determining whether a rural electric cooperative satisfies the 
85-percent test for tax exemption under section 501(c)(12). 
This provision only applies to the extent that: (1) the gain 
would qualify for deferred recognition under section 1031 
(relating to exchanges of property held for productive use or 
investment) or section 1033 (relating to involuntary 
conversions); and (2) the replacement property that is acquired 
by the cooperative pursuant to section 1031 or section 1033 (as 
the case may be) constitutes property that is used, or to be 
used, for the purpose of generating, transmitting, 
distributing, or selling electricity or natural gas.
Treatment of cancellation of indebtedness income from prepayment of 
        certain loans
      The Senate amendment provides that income from the 
prepayment of any loan, debt, or obligation of a tax-exempt 
rural electric cooperative that is originated, insured, or 
guaranteed by the Federal Government under the Rural 
Electrification Act of 1936 is excluded in determining whether 
the cooperative satisfies the 85-percent test for tax exemption 
under section 501(c)(12).
Treatment of income from load loss transactions
      Tax-exempt rural electric cooperatives.--The Senate 
amendment provides that income received or accrued by a tax-
exempt rural electric cooperative from a ``load loss 
transaction'' is treated under 501(c)(12) as income collected 
from members for the sole purpose of meeting losses and 
expenses of providing service to its members. Therefore, income 
from load loss transactions is treated as member income in 
determining whether a rural electric cooperative satisfies the 
85-percent test for tax exemption under section 501(c)(12). The 
bill also provides that income from load loss transactions does 
not cause a tax-exempt electric cooperative to fail to be 
treated for Federal income tax purposes as a mutual or 
cooperative company under the fundamental cooperative 
principles described above.
      The term ``load loss transaction'' is generally defined 
as any wholesale or retail sale of electric energy (other than 
to a member of the cooperative) to the extent that the 
aggregate amount of such sales during a seven-year period 
beginning with the ``start-up year'' does not exceed the 
reduction in the amount of sales of electric energy during such 
period by the cooperative to members. The ``start-up year'' is 
defined as the calendar year which includes the date of 
enactment of this provision or, if later, at the election of 
the cooperative: (1) the first year that the cooperative offers 
nondiscriminatory open access; or (2) the first year in which 
at least 10 percent of the cooperative's sales of electric 
energy are to patrons who are not members of the cooperative.
      The Senate amendment also excludes income received or 
accrued by rural electric cooperatives from load loss 
transactions from the tax on unrelated trade or business 
income.
      Taxable electric cooperatives.--The Senate amendment 
provides that the receipt or accrual of income from load loss 
transactions by taxable electric cooperatives is treated as 
income from patrons who are members of the cooperative. Thus, 
income from a load loss transaction is excludible from the 
taxable income of a taxable electric cooperative if the 
cooperative distributes such income pursuant to a pre-existing 
contract to distribute the income to a patron who is not a 
member of the cooperative. The Senate amendment also provides 
that income from load loss transactions does not cause a 
taxable electric cooperative to fail to be treated for Federal 
income tax purposes as a mutual or cooperative company under 
the fundamental cooperative principles described above.
Effective date
      The Senate amendment provision is effective for taxable 
years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with the following modifications.
Treatment of income from open access transactions
      Income received or accrued by a rural electric 
cooperative (other than income received or accrued directly or 
indirectly from a member of the cooperative) from the provision 
or sale of electric energy transmission services or ancillary 
services on a nondiscriminatory open access basis under an open 
access transmission tariff approved or accepted by FERC or 
under an independent transmission provider agreement approved 
or accepted by FERC (including an agreement providing for the 
transfer of control--but not ownership--of transmission 
facilities) \421\ is excluded in determining whether a rural 
electric cooperative satisfies the 85-percent test for tax 
exemption under section 501(c)(12).
---------------------------------------------------------------------------
    \421\ Under the conference agreement, references to FERC are 
treated as including references to the Public Utility Commission of 
Texas.
---------------------------------------------------------------------------
      In addition, income is excluded for purposes of the 85-
percent test if it is received or accrued by a rural electric 
cooperative (other than income received or accrued directly or 
indirectly from a member of the cooperative) from the provision 
or sale of electric energy distribution services or ancillary 
services, provided such services are provided on a 
nondiscriminatory open access basis to distribute electric 
energy not owned by the cooperative: (1) to end-users who are 
served by distribution facilities not owned by the cooperative 
or any of its members; or (2) generated by a generation 
facility that is not owned or leased by the cooperative or any 
of its members and that is directly connected to distribution 
facilities owned by the cooperative or any of its members.
Treatment of cancellation of indebtedness income from prepayment of 
        certain loans
      The conference agreement does not include this provision.
Treatment of income from load loss transactions
      For purposes of this provision, the ``start-up year'' is 
defined in the conference agreement as the first year that the 
cooperative offers nondiscriminatory open access or, if later 
and at the election of the cooperative, the calendar year that 
includes the date of enactment of this provision.
Effective date
      The conference agreement provision is effective for 
taxable years beginning after the date of enactment and before 
January 1, 2007.
3. Dispositions of transmission property to implement Federal Energy 
        Regulatory Commission restructuring policy (no reinvestment 
        obligation) (sec. 857 of the Senate amendment and sec. 451 of 
        the Code)

                              PRESENT LAW

      Generally, a taxpayer recognizes gain to the extent the 
sales price (and any other consideration received) exceeds the 
seller's basis in the property. The recognized gain is subject 
to current income tax unless the gain is deferred or not 
recognized under a special tax provision.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment permits a taxpayer to elect to 
recognize gain from a qualifying electric transmission 
transaction ratably over an eight-year period beginning in the 
year of sale.
      A qualifying electric transmission transaction is the 
sale or other disposition of property used by the taxpayer in 
the trade or business of providing electric transmission 
services, or any stock or partnership interest in a corporation 
or partnership whose principal trade or business consists of 
providing electrical services. In order to qualify, the 
transaction must occur before January 1, 2008 and the sale or 
disposition must be to an independent transmission company.
      In general, an independent transmission company is 
defined as: (1) a regional transmission organization approved 
by the Federal Energy Regulatory Commission (``FERC''); (2) a 
person (i) who the FERC determines under section 203 of the 
Federal Power Act (or by declaratory order) is not a ``market 
participant'' and (ii) whose transmission facilities are placed 
under the operational control of a FERC-approved independent 
transmission provider before the close of the period specified 
in such authorization, but not later than January 1, 2008; or 
(3) in the case of facilities subject to the jurisdiction of 
the Public Utility Commission of Texas, a person which is 
approved by that Commission as consistent with Texas State law 
regarding an independent transmission organization.
      An electing taxpayer is required to attach a statement to 
that effect in the tax return for the taxable year in which the 
transaction takes place in such manner as the Secretary shall 
prescribe. The election shall be binding for that taxable year 
and all subsequent taxable years. Finally, the provision 
provides that the installment sale rules shall not apply to any 
qualifying electric transmission transaction for which a 
taxpayer elects the application of this provision.
      Effective date.--The Senate amendment is effective for 
transactions occurring after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with the following modifications. The provision permits 
taxpayers to elect to recognize gain from qualifying electric 
transmission transactions ratably over an eight-year period 
beginning in the year of sale if the amount realized from such 
sale is used to purchase exempt utility property within the 
applicable period \422\ (the ``reinvestment property''). If the 
amount realized exceeds the amount used to purchase 
reinvestment property, any realized gain shall be recognized to 
the extent of such excess in the year of the qualifying 
electric transmission transaction. Any remaining realized gain 
is recognized ratably over the eight-year period.
---------------------------------------------------------------------------
    \422\ The applicable period for a taxpayer to reinvest the proceeds 
is four years after the close of the taxable year in which the 
qualifying electric transmission transaction occurs.
---------------------------------------------------------------------------
      A qualifying electric transmission transaction is the 
sale or other disposition of property used by the taxpayer in 
the trade or business of providing electric transmission 
services, or an ownership interest in such an entity, to an 
independent transmission company prior to January 1, 2007. In 
general, an independent transmission company is defined as: (1) 
an independent transmission provider \423\ approved by the 
FERC; (2) a person (i) who the FERC determines under section 
203 of the Federal Power Act (or by declaratory order) is not a 
``market participant'' and (ii) whose transmission facilities 
are placed under the operational control of a FERC-approved 
independent transmission provider before the close of the 
period specified in such authorization, but not later than 
January 1, 2007; or (3) in the case of facilities subject to 
the jurisdiction of the Public Utility Commission of Texas, (i) 
a person which is approved by that Commission as consistent 
with Texas State law regarding an independent transmission 
organization, or (ii) a political subdivision, or affiliate 
thereof, whose transmission facilities are under the 
operational control of an organization described in (i).
---------------------------------------------------------------------------
    \423\ For example, a regional transmission organization, an 
independent system operator, or an independent transmission company.
---------------------------------------------------------------------------
      Exempt utility property is defined as: (1) property used 
in the trade or business of generating, transmitting, 
distributing, or selling electricity or producing, 
transmitting, distributing, or selling natural gas, or (2) 
stock in a controlled corporation whose principal trade or 
business consists of the activities described in (1).
      If a taxpayer is a member of an affiliated group of 
corporations filing a consolidated return, the proposal permits 
the reinvestment property to be purchased by any member of the 
affiliated group (in lieu of the taxpayer).
      If a taxpayer elects the application of the provision, 
then the statutory period for the assessment of any deficiency, 
for any taxable year in which any part of the gain eligible for 
the provision is realized, attributable to such gain shall not 
expire prior to the expiration of three years from the date the 
Secretary of the Treasury is notified by the taxpayer of the 
reinvestment property or an intention not to reinvest.
      An electing taxpayer is required to attach a statement to 
that effect in the tax return for the taxable year in which the 
transaction takes place in the manner as the Secretary shall 
prescribe. The election shall be binding for that taxable year 
and all subsequent taxable years.\424\ In addition, an electing 
taxpayer is required to attach a statement that identifies the 
reinvestment property in the manner as the Secretary shall 
prescribe.
---------------------------------------------------------------------------
    \424\ The provision also provides that the installment sale rules 
shall not apply to any qualifying electric transmission transaction for 
which a taxpayer elects the application of this provision.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for 
transactions occurring after the date of enactment, in taxable 
years ending after such date.

                        G. Additional Provisions

1. GAO Study (sec. 897 of the Senate amendment)

                              PRESENT LAW

      Present law does not require study of the present law 
provisions relating to clean fuel vehicles and electric 
vehicles.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment directs the Comptroller General to 
undertake an ongoing analysis of the (1) effectiveness of the 
amendment's alternative motor vehicles, fuel incentives, and 
conservation and energy efficiency provisions and (2) the 
recipients of the tax benefits contained in those provisions, 
including an identification of the recipients by income and 
other appropriate measurements. The analysis must quantify the 
effectiveness of the provisions by examining and comparing the 
Federal Government's forgone revenue to the aggregate amount of 
energy actually conserved and tangible environmental benefits 
gained as a result of the provisions.
      The Senate amendment directs the Comptroller General to 
report the required analysis to Congress not later than 
December 31, 2004 and annually thereafter.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Repeal certain excise taxes on rail diesel fuel and inland waterway 
        barge fuels (sec. 898 of the Senate amendment and secs. 4041, 
        4042, 6421, and 6427 of the Code)

                              PRESENT LAW

      Under present law, diesel fuel used in trains is subject 
to a 4.4-cents-per gallon excise tax. Revenues from 4.3 cents 
per gallon of this excise tax are retained in the General Fund 
of the Treasury. The remaining 0.1 cent per gallon is deposited 
in the Leaking Underground Storage Tank (``LUST'') Trust Fund.
      Similarly, fuels used in barges operating on the 
designated inland waterways system are subject to a 4.3-cents-
per-gallon General Fund excise tax. This tax is in addition to 
the 20.1-cents-per-gallon tax rates that are imposed on fuels 
used in these barges to fund the Inland Waterways Trust Fund 
and the Leaking Underground Storage Tank Trust Fund.
      In both cases, the 4.3-cents-per-gallon excise tax rates 
are permanent. The LUST Trust Fund tax is scheduled to expire 
after March 31, 2005.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The 4.3-cents-per-gallon General Fund excise tax rate on 
diesel fuel used in trains and fuels used in barges operating 
on the designated inland waterways system is repealed. The 0.1 
cent per gallon tax for the LUST Trust Fund is unchanged by the 
provision.
      Effective date.--The Senate amendment is effective on 
October 1, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement repeals the 4.3-cents-per-gallon 
General Fund excise tax rates on diesel fuel used in trains and 
fuels used in barges operating on the designated inland 
waterways system over a prescribed phase-out period. The 4.30-
cent-per-gallon tax is reduced by 1 cent per gallon for the 
first six months of calendar year 2005 (January 1, 2005 through 
June 30, 2005). The reduction is 2 cents per gallon from July 
1, 2005 through December 31, 2006, and 4.3 cents/gallon 
thereafter. Thus, the tax would be fully repealed effective 
January 1, 2007. The 0.1 cent per gallon tax for the LUST Trust 
Fund is unchanged by the provision.
      Effective date.--The provision is effective on January 1, 
2005.
3. Increase tax limitation on use of business energy credits (secs. 
        851(c) and 899A of the Senate amendment, and sec. 38 of the 
        Code)

                              PRESENT LAW

    Generally, business tax credits may not exceed the excess 
of the taxpayer's income tax liability over the tentative 
minimum tax (or, if greater, 25 percent of the regular tax 
liability). Credits in excess of the limitation may be carried 
back one year and carried over for up to 20 years.
    The tentative minimum tax is an amount equal to specified 
rates of tax imposed on the excess of the alternative minimum 
taxable income over an exemption amount. To the extent the 
tentative minimum tax exceeds the regular tax, a taxpayer is 
subject to the alternative minimum tax.

                               HOUSE BILL

    No provision.

                            SENATE AMENDMENT

    The Senate amendment treats the tentative minimum tax as 
being zero for purposes of determining the tax liability 
limitation with respect to (1) the Alaska natural gas credit, 
(2) for taxable years beginning after December 31, 2004, the 
alcohol fuels credit determined under section 40; and (3) the 
section 45 credit for electricity produced from a facility 
(placed in service after the date of enactment) during the 
first four years of production beginning on the date the 
facility is placed in service.
    Effective date.--The provision is effective for taxable 
years ending after the date of enactment of the Act.

                          CONFERENCE AGREEMENT

    The conference agreement includes the provision in the 
Senate amendment relating to the credits under sections 40 and 
45.
4. Transmission property treated as fifteen-year property (sec. 899C of 
        the Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

      The applicable recovery period for assets placed in 
service under the Modified Accelerated Cost Recovery System is 
based on the ``class life of the property.'' The class lives of 
assets placed in service after 1986 are generally set forth in 
Revenue Procedure 87-56. Assets used in the transmission and 
distribution of electricity for sale and related land 
improvements are assigned a 20-year recovery period and a class 
life of 30 years.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment establishes a statutory 15-year 
recovery period and a class life of 30 years for certain assets 
used in the transmission of electricity for sale and related 
land improvements. For purposes of the provision, section 1245 
property used in the transmission of electricity for sale at 69 
kilovolts and above, the original use \425\ of which commences 
after the date of enactment, will qualify for the new recovery 
period.
---------------------------------------------------------------------------
    \425\ The term ``original use'' means the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer. It is intended that, when evaluating whether 
property qualifies as ``original use,'' the factors used to determine 
whether property qualified as ``new section 38 property'' for purposes 
of the investment tax credit would apply. See Treasury Regulation 1.48-
2. Thus, it is intended that additional capital expenditures incurred 
to recondition or rebuild acquired property (or owned property) would 
satisfy the ``original use'' requirement. However, the cost of 
reconditioned or rebuilt property acquired by the taxpayer would not 
satisfy the ``original use'' requirement. For example, if on August 11, 
2005, a taxpayer buys from RCM for $200,000 transmission lines that 
have been previously used by RCM. Subsequent to the purchase, the 
taxpayer makes an expenditure on the property of $50,000 of the type 
that must be capitalized. Regardless of whether the $50,000 is added to 
the basis of such property or is capitalized as a separate asset, such 
amount would be treated as satisfying the ``original use'' requirement 
and would be eligible for the reduced recovery period. No part of the 
$200,000 purchase price qualifies for the reduced recovery period.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is effective for 
property placed in service after the date of enactment and 
prior to July 1, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Qualifying pollution control equipment credit (sec. 899B of the 
        Senate amendment)

                              PRESENT LAW

      The investment credit is the sum of three credits: (1) 
the rehabilitation credit, (2) the energy credit, and (3) the 
reforestation credit.\426\ The investment credit is part of the 
general business credit.\427\
---------------------------------------------------------------------------
    \426\ Sec. 46.
    \427\ Sec. 38(b)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment adds a credit for qualifying 
pollution control equipment to the investment credit. The 
qualifying pollution control equipment credit provides a 15-
percent tax credit for qualifying pollution control equipment 
placed-in-service at a qualifying facility during the taxable 
year. Qualifying pollution control equipment means any 
technology that is installed in or on a qualifying facility to 
reduce air emissions of any pollutant regulated by the 
Environmental Protection Agency under the Clean Air Act. A 
qualifying facility is a facility that produces not less than 
1,000,000 gallons of ethanol during the taxable year. A 
qualifying facility includes any facility that produces 
ethanol. For depreciation purposes, the basis of qualifying 
pollution control equipment would be reduced by 50 percent of 
the value of the credit.
      Effective date.--The credit would be available for 
property placed-in-service after December 31, 2003, in taxable 
years ending after such date.\428\
---------------------------------------------------------------------------
    \428\ Rules similar to the rules of section 48(m) of the Internal 
Revenue Code of 1986 (as in effect on the day before the date of 
enactment of the Revenue Reconciliation Act of 1990) apply.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.

                      TITLE X--REVENUE PROVISIONS

A. Provisions to Reduce Tax Avoidance Through Individual and Corporate 
                              Expatriation

1. Tax treatment of expatriated entities and their foreign parents 
        (sec. 601 of the House bill, sec. 441 of the Senate amendment, 
        and new sec. 7874 of the Code)

                              PRESENT LAW

Determination of corporate residence
      The U.S. tax treatment of a multinational corporate group 
depends significantly on whether the parent corporation of the 
group is domestic or foreign. For purposes of U.S. tax law, a 
corporation is treated as domestic if it is incorporated under 
the law of the United States or of any State. All other 
corporations (i.e., those incorporated under the laws of 
foreign countries) are treated as foreign.
U.S. taxation of domestic corporations
      The United States employs a ``worldwide'' tax system, 
under which domestic corporations generally are taxed on all 
income, whether derived in the United States or abroad. In 
order to mitigate the double taxation that may arise from 
taxing the foreign-source income of a domestic corporation, a 
foreign tax credit for income taxes paid to foreign countries 
is provided to reduce or eliminate the U.S. tax owed on such 
income, subject to certain limitations.
      Income earned by a domestic parent corporation from 
foreign operations conducted by foreign corporate subsidiaries 
generally is subject to U.S. tax when the income is distributed 
as a dividend to the domestic corporation. Until such 
repatriation, the U.S. tax on such income generally is 
deferred, and U.S. tax is imposed on such income when 
repatriated. However, certain anti-deferral regimes may cause 
the domestic parent corporation to be taxed on a current basis 
in the United States with respect to certain categories of 
passive or highly mobile income earned by its foreign 
subsidiaries, regardless of whether the income has been 
distributed as a dividend to the domestic parent corporation. 
The main anti-deferral regimes in this context are the 
controlled foreign corporation rules of subpart F (secs. 951-
964) and the passive foreign investment company rules (secs. 
1291-1298). A foreign tax credit is generally available to 
offset, in whole or in part, the U.S. tax owed on this foreign-
source income, whether repatriated as an actual dividend or 
included under one of the anti-deferral regimes.
U.S. taxation of foreign corporations
      The United States taxes foreign corporations only on 
income that has a sufficient nexus to the United States. Thus, 
a foreign corporation is generally subject to U.S. tax only on 
income that is ``effectively connected'' with the conduct of a 
trade or business in the United States. Such ``effectively 
connected income'' generally is taxed in the same manner and at 
the same rates as the income of a U.S. corporation. An 
applicable tax treaty may limit the imposition of U.S. tax on 
business operations of a foreign corporation to cases in which 
the business is conducted through a ``permanent establishment'' 
in the United States.
      In addition, foreign corporations generally are subject 
to a gross-basis U.S. tax at a flat 30-percent rate on the 
receipt of interest, dividends, rents, royalties, and certain 
similar types of income derived from U.S. sources, subject to 
certain exceptions. The tax generally is collected by means of 
withholding by the person making the payment. This tax may be 
reduced or eliminated under an applicable tax treaty.
U.S. tax treatment of inversion transactions
      Under present law, a U.S. corporation may reincorporate 
in a foreign jurisdiction and thereby replace the U.S. parent 
corporation of a multinational corporate group with a foreign 
parent corporation. These transactions are commonly referred to 
as inversion transactions. Inversion transactions may take many 
different forms, including stock inversions, asset inversions, 
and various combinations of and variations on the two. Most of 
the known transactions to date have been stock inversions. In 
one example of a stock inversion, a U.S. corporation forms a 
foreign corporation, which in turn forms a domestic merger 
subsidiary. The domestic merger subsidiary then merges into the 
U.S. corporation, with the U.S. corporation surviving, now as a 
subsidiary of the new foreign corporation. The U.S. 
corporation's shareholders receive shares of the foreign 
corporation and are treated as having exchanged their U.S. 
corporation shares for the foreign corporation shares. An asset 
inversion reaches a similar result, but through a direct merger 
of the top-tier U.S. corporation into a new foreign 
corporation, among other possible forms. An inversion 
transaction may be accompanied or followed by further 
restructuring of the corporate group. For example, in the case 
of a stock inversion, in order to remove income from foreign 
operations from the U.S. taxing jurisdiction, the U.S. 
corporation may transfer some or all of its foreign 
subsidiaries directly to the new foreign parent corporation or 
other related foreign corporations.
      In addition to removing foreign operations from the U.S. 
taxing jurisdiction, the corporate group may derive further 
advantage from the inverted structure by reducing U.S. tax on 
U.S.-source income through various earnings stripping or other 
transactions. This may include earnings stripping through 
payment by a U.S. corporation of deductible amounts such as 
interest, royalties, rents, or management service fees to the 
new foreign parent or other foreign affiliates. In this 
respect, the post-inversion structure enables the group to 
employ the same tax-reduction strategies that are available to 
other multinational corporate groups with foreign parents and 
U.S. subsidiaries, subject to the same limitations (e.g., secs. 
163(j) and 482).
      Inversion transactions may give rise to immediate U.S. 
tax consequences at the shareholder and/or the corporate level, 
depending on the type of inversion. In stock inversions, the 
U.S. shareholders generally recognize gain (but not loss) under 
section 367(a), based on the difference between the fair market 
value of the foreign corporation shares received and the 
adjusted basis of the domestic corporation stock exchanged. To 
the extent that a corporation's share value has declined, and/
or it has many foreign or tax-exempt shareholders, the impact 
of this section 367(a) ``toll charge'' is reduced. The transfer 
of foreign subsidiaries or other assets to the foreign parent 
corporation also may give rise to U.S. tax consequences at the 
corporate level (e.g., gain recognition and earnings and 
profits inclusions under secs. 1001, 311(b), 304, 367, 1248 or 
other provisions). The tax on any income recognized as a result 
of these restructurings may be reduced or eliminated through 
the use of net operating losses, foreign tax credits, and other 
tax attributes.
      In asset inversions, the U.S. corporation generally 
recognizes gain (but not loss) under section 367(a) as though 
it had sold all of its assets, but the shareholders generally 
do not recognize gain or loss, assuming the transaction meets 
the requirements of a reorganization under section 368.

                               HOUSE BILL

      The bill applies special tax rules to corporations that 
undertake certain defined inversion transactions. For this 
purpose, an inversion is a transaction in which, pursuant to a 
plan or a series of related transactions: (1) a U.S. 
corporation becomes a subsidiary of a foreign-incorporated 
entity or otherwise transfers substantially all of its 
properties to such an entity after March 4, 2003; (2) the 
former shareholders of the U.S. corporation hold (by reason of 
holding stock in the U.S. corporation) 60 percent or more (by 
vote or value) of the stock of the foreign-incorporated entity 
after the transaction; and (3) the foreign-incorporated entity, 
considered together with all companies connected to it by a 
chain of greater than 50-percent ownership (i.e., the 
``expanded affiliated group'') does not conduct substantial 
business activities in the entity's country of incorporation 
compared to the total worldwide business activities of the 
expanded affiliated group.
      In such a case, any applicable corporate-level ``toll 
charges'' for establishing the inverted structure are not 
offset by tax attributes such as net operating losses or 
foreign tax credits. Specifically, any applicable corporate-
level income or gain required to be recognized under sections 
304, 311(b), 367, 1001, 1248, or any other provision with 
respect to the transfer of controlled foreign corporation stock 
or the transfer or license of other assets by a U.S. 
corporation as part of the inversion transaction or after such 
transaction to a related foreign person is taxable, without 
offset by any tax attributes (e.g., net operating losses or 
foreign tax credits). This rule does not apply to certain 
transfers of inventory and similar property. These measures 
generally apply for a 10-year period following the inversion 
transaction.
      In determining whether a transaction meets the definition 
of an inversion under the provision, stock held by members of 
the expanded affiliated group that includes the foreign 
incorporated entity is disregarded. For example, if the former 
top-tier U.S. corporation receives stock of the foreign 
incorporated entity (e.g., so-called ``hook'' stock), the stock 
would not be considered in determining whether the transaction 
meets the definition. Similarly, if a U.S. parent corporation 
converts an existing wholly owned U.S. subsidiary into a new 
wholly owned controlled foreign corporation, the stock of the 
new foreign corporation would be disregarded. Stock sold in a 
public offering related to the transaction also is disregarded 
for these purposes.
      Transfers of properties or liabilities as part of a plan 
a principal purpose of which is to avoid the purposes of the 
provision are disregarded. In addition, the Treasury Secretary 
is granted authority to prevent the avoidance of the purposes 
of the provision, including avoidance through the use of 
related persons, pass-through or other noncorporate entities, 
or other intermediaries, and through transactions designed to 
qualify or disqualify a person as a related person or a member 
of an expanded affiliated group. Similarly, the Treasury 
Secretary is granted authority to treat certain non-stock 
instruments as stock, and certain stock as not stock, where 
necessary to carry out the purposes of the provision.
      Under the provision, inversion transactions include 
certain partnership transactions. Specifically, the provision 
applies to transactions in which a foreign-incorporated entity 
acquires substantially all of the properties constituting a 
trade or business of a domestic partnership, if after the 
acquisition at least 60 percent of the stock of the entity is 
held by former partners of the partnership (by reason of 
holding their partnership interests), provided that the other 
terms of the basic definition are met. For purposes of applying 
this test, all partnerships that are under common control 
within the meaning of section 482 are treated as one 
partnership, except as provided otherwise in regulations. In 
addition, the modified ``toll charge'' provisions apply at the 
partner level.
      A transaction otherwise meeting the definition of an 
inversion transaction is not treated as an inversion 
transaction if, on or before March 4, 2003, the foreign-
incorporated entity had acquired directly or indirectly more 
than half of the properties held directly or indirectly by the 
domestic corporation, or more than half of the properties 
constituting the partnership trade or business, as the case may 
be.
      Effective date.--The provision applies to taxable years 
ending after March 4, 2003.

                            SENATE AMENDMENT

In general
      The provision defines two different types of corporate 
inversion transactions and establishes a different set of 
consequences for each type. Certain partnership transactions 
also are covered.
Transactions involving at least 80 percent identity of stock ownership
      The first type of inversion is a transaction in which, 
pursuant to a plan or a series of related transactions: (1) a 
U.S. corporation becomes a subsidiary of a foreign-incorporated 
entity or otherwise transfers substantially all of its 
properties to such an entity; \429\ (2) the former shareholders 
of the U.S. corporation hold (by reason of holding stock in the 
U.S. corporation) 80 percent or more (by vote or value) of the 
stock of the foreign-incorporated entity after the transaction; 
and (3) the foreign-incorporated entity, considered together 
with all companies connected to it by a chain of greater than 
50 percent ownership (i.e., the ``expanded affiliated group''), 
does not have substantial business activities in the entity's 
country of incorporation, compared to the total worldwide 
business activities of the expanded affiliated group. The 
provision denies the intended tax benefits of this type of 
inversion by deeming the top-tier foreign corporation to be a 
domestic corporation for all purposes of the Code.\430\
---------------------------------------------------------------------------
    \429\ It is expected that the Treasury Secretary will issue 
regulations applying the term ``substantially all'' in this context and 
will not be bound in this regard by interpretations of the term in 
other contexts under the Code.
    \430\ Since the top-tier foreign corporation is treated for all 
purposes of the Code as domestic, the shareholder-level ``toll charge'' 
of sec. 367(a) does not apply to these inversion transactions. However, 
with respect to inversion transactions completed before 2004, regulated 
investment companies and certain similar entities are allowed to elect 
to recognize gain as if sec. 367(a) did apply.
---------------------------------------------------------------------------
      Except as otherwise provided in regulations, the 
provision does not apply to a direct or indirect acquisition of 
the properties of a U.S. corporation no class of the stock of 
which was traded on an established securities market at any 
time within the four-year period preceding the acquisition. In 
determining whether a transaction would meet the definition of 
an inversion under the provision, stock held by members of the 
expanded affiliated group that includes the foreign 
incorporated entity is disregarded. For example, if the former 
top-tier U.S. corporation receives stock of the foreign 
incorporated entity (e.g., so-called ``hook'' stock), the stock 
would not be considered in determining whether the transaction 
meets the definition. Stock sold in a public offering (whether 
initial or secondary) or private placement related to the 
transaction also is disregarded for these purposes. 
Acquisitions with respect to a domestic corporation or 
partnership are deemed to be ``pursuant to a plan'' if they 
occur within the four-year period beginning on the date which 
is two years before the ownership threshold under the provision 
is met with respect to such corporation or partnership.
      Transfers of properties or liabilities as part of a plan 
a principal purpose of which is to avoid the purposes of the 
provision are disregarded. In addition, the Treasury Secretary 
is granted authority to prevent the avoidance of the purposes 
of the provision, including avoidance through the use of 
related persons, pass-through or other noncorporate entities, 
or other intermediaries, and through transactions designed to 
qualify or disqualify a person as a related person, a member of 
an expanded affiliated group, or a publicly traded corporation. 
Similarly, the Treasury Secretary is granted authority to treat 
certain non-stock instruments as stock, and certain stock as 
not stock, where necessary to carry out the purposes of the 
provision.
Transactions involving greater than 50 percent but less than 80 percent 
        identity of stock ownership
      The second type of inversion is a transaction that would 
meet the definition of an inversion transaction described 
above, except that the 80-percent ownership threshold is not 
met. In such a case, if a greater-than-50-percent ownership 
threshold is met, then a second set of rules applies to the 
inversion. Under these rules, the inversion transaction is 
respected (i.e., the foreign corporation is treated as 
foreign), but: (1) any applicable corporate-level ``toll 
charges'' for establishing the inverted structure may not be 
offset by tax attributes such as net operating losses or 
foreign tax credits; (2) the accuracy-related penalty is 
increased; and (3) section 163(j), relating to ``earnings 
stripping'' through related-party debt, is strengthened. These 
measures generally apply for a 10-year period following the 
inversion transaction. In addition, inverting entities are 
required to provide information to shareholders or partners and 
the IRS with respect to the inversion transaction.
      With respect to ``toll charges,'' any applicable 
corporate-level income or gain required to be recognized under 
sections 304, 311(b), 367, 1001, 1248, or any other provision 
with respect to the transfer of controlled foreign corporation 
stock or other assets by a U.S. corporation as part of the 
inversion transaction or after such transaction to a related 
foreign person is taxable, without offset by any tax attributes 
(e.g., net operating losses or foreign tax credits). To the 
extent provided in regulations, this rule will not apply to 
certain transfers of inventory and similar transactions 
conducted in the ordinary course of the taxpayer's business.
      The 20-percent penalty for negligence or disregard of 
rules or regulations, substantial understatement of income tax, 
and substantial valuation misstatement is increased to 30 
percent with respect to taxpayers related to the inverted 
entity. In addition, the 40-percent penalty for gross valuation 
misstatement is increased to 50 percent with respect to such 
taxpayers.
      The ``earnings stripping'' rules of section 163(j), which 
deny or defer deductions for certain interest paid to foreign 
related parties, are strengthened for inverted corporations. 
With respect to such corporations, the provision eliminates the 
debt-equity threshold generally applicable under section 163(j) 
and reduces the 50-percent thresholds for ``excess interest 
expense'' and ``excess limitation'' to 25 percent.
      In cases in which a U.S. corporate group acquires 
subsidiaries or other assets from an unrelated inverted 
corporate group, the provisions described above generally do 
not apply to the acquiring U.S. corporate group or its related 
parties (including the newly acquired subsidiaries or assets) 
by reason of acquiring the subsidiaries or assets that were 
connected with the inversion transaction. The Treasury 
Secretary is given authority to issue regulations appropriate 
to carry out the purposes of this provision and to prevent its 
abuse.
Partnership transactions
      Under the provision, both types of inversion transactions 
include certain partnership transactions. Specifically, both 
parts of the provision apply to transactions in which a 
foreign-incorporated entity acquires substantially all of the 
properties constituting a trade or business of a domestic 
partnership (whether or not publicly traded), if after the 
acquisition at least 80 percent (or more than 50 percent but 
less than 80 percent, as the case may be) of the stock of the 
entity is held by former partners of the partnership (by reason 
of holding their partnership interests), and the ``substantial 
business activities'' test is not met. For purposes of 
determining whether these tests are met, all partnerships that 
are under common control within the meaning of section 482 are 
treated as one partnership, except as provided otherwise in 
regulations. In addition, the modified ``toll charge'' 
provisions apply at the partner level.
Effective date
      The regime applicable to transactions involving at least 
80 percent identity of ownership applies to inversion 
transactions completed after March 20, 2002. The rules for 
inversion transactions involving greater-than-50-percent 
identity of ownership apply to inversion transactions completed 
after 1996 that meet the 50-percent test and to inversion 
transactions completed after 1996 that would have met the 80-
percent test but for the March 20, 2002 date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and 
Senate amendment with modifications.
In general
      The provision defines two different types of corporate 
inversion transactions and establishes a different set of 
consequences for each type. Certain partnership transactions 
also are covered.
Transactions involving at least 80 percent identity of stock ownership
      The first type of inversion is a transaction in which, 
pursuant to a plan \431\ or a series of related transactions: 
(1) a U.S. corporation becomes a subsidiary of a foreign-
incorporated entity or otherwise transfers substantially all of 
its properties to such an entity in a transaction completed 
after March 4, 2003; (2) the former shareholders of the U.S. 
corporation hold (by reason of holding stock in the U.S. 
corporation) 80 percent or more (by vote or value) of the stock 
of the foreign-incorporated entity after the transaction; and 
(3) the foreign-incorporated entity, considered together with 
all companies connected to it by a chain of greater than 50 
percent ownership (i.e., the ``expanded affiliated group''), 
does not have substantial business activities in the entity's 
country of incorporation, compared to the total worldwide 
business activities of the expanded affiliated group. The 
provision denies the intended tax benefits of this type of 
inversion by deeming the top-tier foreign corporation to be a 
domestic corporation for all purposes of the Code.\432\
---------------------------------------------------------------------------
    \431\ Acquisitions with respect to a domestic corporation or 
partnership are deemed to be ``pursuant to a plan'' if they occur 
within the four-year period beginning on the date which is two years 
before the ownership threshold under the provision is met with respect 
to such corporation or partnership.
    \432\ Since the top-tier foreign corporation is treated for all 
purposes of the Code as domestic, the shareholder-level ``toll charge'' 
of sec. 367(a) does not apply to these inversion transactions.
---------------------------------------------------------------------------
      In determining whether a transaction meets the definition 
of an inversion under the proposal, stock held by members of 
the expanded affiliated group that includes the foreign 
incorporated entity is disregarded. For example, if the former 
top-tier U.S. corporation receives stock of the foreign 
incorporated entity (e.g., so-called ``hook'' stock), the stock 
would not be considered in determining whether the transaction 
meets the definition. Similarly, if a U.S. parent corporation 
converts an existing wholly owned U.S. subsidiary into a new 
wholly owned controlled foreign corporation, the stock of the 
new foreign corporation would be disregarded. Stock sold in a 
public offering related to the transaction also is disregarded 
for these purposes.
      Transfers of properties or liabilities as part of a plan 
a principal purpose of which is to avoid the purposes of the 
proposal are disregarded. In addition, the Treasury Secretary 
is granted authority to prevent the avoidance of the purposes 
of the proposal, including avoidance through the use of related 
persons, pass-through or other noncorporate entities, or other 
intermediaries, and through transactions designed to qualify or 
disqualify a person as a related person or a member of an 
expanded affiliated group. Similarly, the Treasury Secretary is 
granted authority to treat certain non-stock instruments as 
stock, and certain stock as not stock, where necessary to carry 
out the purposes of the proposal.
Transactions involving at least 60 percent but less than 80 percent 
        identity of stock ownership
      The second type of inversion is a transaction that would 
meet the definition of an inversion transaction described 
above, except that the 80-percent ownership threshold is not 
met. In such a case, if at least a 60-percent ownership 
threshold is met, then a second set of rules applies to the 
inversion. Under these rules, the inversion transaction is 
respected (i.e., the foreign corporation is treated as 
foreign), but any applicable corporate-level ``toll charges'' 
for establishing the inverted structure are not offset by tax 
attributes such as net operating losses or foreign tax credits. 
Specifically, any applicable corporate-level income or gain 
required to be recognized under sections 304, 311(b), 367, 
1001, 1248, or any other provision with respect to the transfer 
of controlled foreign corporation stock or the transfer or 
license of other assets by a U.S. corporation as part of the 
inversion transaction or after such transaction to a related 
foreign person is taxable, without offset by any tax attributes 
(e.g., net operating losses or foreign tax credits). This rule 
does not apply to certain transfers of inventory and similar 
property. These measures generally apply for a 10-year period 
following the inversion transaction.
      Under the proposal, inversion transactions include 
certain partnership transactions. Specifically, the proposal 
applies to transactions in which a foreign-incorporated entity 
acquires substantially all of the properties constituting a 
trade or business of a domestic partnership, if after the 
acquisition at least 60 percent of the stock of the entity is 
held by former partners of the partnership (by reason of 
holding their partnership interests), provided that the other 
terms of the basic definition are met. For purposes of applying 
this test, all partnerships that are under common control 
within the meaning of section 482 are treated as one 
partnership, except as provided otherwise in regulations. In 
addition, the modified ``toll charge'' proposals apply at the 
partner level.
      A transaction otherwise meeting the definition of an 
inversion transaction is not treated as an inversion 
transaction if, on or before March 4, 2003, the foreign-
incorporated entity had acquired directly or indirectly more 
than half of the properties held directly or indirectly by the 
domestic corporation, or more than half of the properties 
constituting the partnership trade or business, as the case may 
be.
Effective date
      The provision applies to taxable years ending after March 
4, 2003.
2. Excise tax on stock compensation of insiders in expatriated 
        corporations (sec. 602 of the House bill, sec. 443 of the 
        Senate amendment, and secs. 162(m), 275(a), and new sec. 4985 
        of the Code)

                              PRESENT LAW

      The income taxation of a nonstatutory \433\ compensatory 
stock option is determined under the rules that apply to 
property transferred in connection with the performance of 
services (sec. 83). If a nonstatutory stock option does not 
have a readily ascertainable fair market value at the time of 
grant, which is generally the case unless the option is 
actively traded on an established market, no amount is included 
in the gross income of the recipient with respect to the option 
until the recipient exercises the option.\434\ Upon exercise of 
such an option, the excess of the fair market value of the 
stock purchased over the option price is generally included in 
the recipient's gross income as ordinary income in such taxable 
year.\435\
---------------------------------------------------------------------------
    \433\ Nonstatutory stock options refer to stock options other than 
incentive stock options and employee stock purchase plans, the taxation 
of which is determined under sections 421-424.
    \434\ If an individual receives a grant of a nonstatutory option 
that has a readily ascertainable fair market value at the time the 
option is granted, the excess of the fair market value of the option 
over the amount paid for the option is included in the recipient's 
gross income as ordinary income in the first taxable year in which the 
option is either transferable or not subject to a substantial risk of 
forfeiture.
    \435\ Under section 83, such amount is includable in gross income 
in the first taxable year in which the rights to the stock are 
transferable or are not subject to substantial risk of forfeiture.
---------------------------------------------------------------------------
      The tax treatment of other forms of stock-based 
compensation (e.g., restricted stock and stock appreciation 
rights) is also determined under section 83. The excess of the 
fair market value over the amount paid (if any) for such 
property is generally includable in gross income in the first 
taxable year in which the rights to the property are 
transferable or are not subject to substantial risk of 
forfeiture.
      Shareholders are generally required to recognize gain 
upon stock inversion transactions. An inversion transaction is 
generally not a taxable event for holders of stock options and 
other stock-based compensation.

                               HOUSE BILL

In general
      Under the House bill, specified holders of stock options 
and other stock-based compensation are subject to an excise tax 
upon certain inversion transactions. The provision imposes a 
15-percent excise tax on the value of specified stock 
compensation held (directly or indirectly) by or for the 
benefit of a disqualified individual, or a member of such 
individual's family, at any time during the 12-month period 
beginning six months before the corporation's expatriation 
date. Specified stock compensation is treated as held for the 
benefit of a disqualified individual if such compensation is 
held by an entity, e.g., a partnership or trust, in which the 
individual, or a member of the individual's family, has an 
ownership interest.
Disqualified individuals
      A disqualified individual is any individual who, with 
respect to a corporation, is, at any time during the 12-month 
period beginning on the date which is six months before the 
expatriation date, subject to the requirements of section 16(a) 
of the Securities and Exchange Act of 1934 with respect to the 
corporation, or any member of the corporation's expanded 
affiliated group,\436\ or would be subject to such requirements 
if the corporation (or member) were an issuer of equity 
securities referred to in section 16(a). Disqualified 
individuals generally include officers (as defined by section 
16(a)),\437\ directors, and 10-percent-or-greater owners of 
private and publicly-held corporations.
---------------------------------------------------------------------------
    \436\ An expanded affiliated group is an affiliated group (under 
section 1504) except that such group is determined without regard to 
the exceptions for certain corporations and is determined applying a 
greater than 50 percent threshold, in lieu of the 80-percent test.
    \437\ An officer is defined as the president, principal financial 
officer, principal accounting officer (or, if there is no such 
accounting officer, the controller), any vice-president in charge of a 
principal business unit, division or function (such as sales, 
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making 
functions.
---------------------------------------------------------------------------
Application of excise tax
      The excise tax is imposed on a disqualified individual of 
an expatriated corporation (as defined in the bill) only if 
gain (if any) is recognized in whole or part by any shareholder 
by reason of a corporate inversion transaction as previously 
defined in the bill.
Specified stock compensation
      Specified stock compensation subject to the excise tax 
includes any payment \438\ (or right to payment) granted by the 
expatriated corporation (or any member of the corporation's 
expanded affiliated group) to any person in connection with the 
performance of services by a disqualified individual for such 
corporation (or member of the corporation's expanded affiliated 
group) if the value of the payment or right is based on, or 
determined by reference to, the value or change in value of 
stock of such corporation (or any member of the corporation's 
expanded affiliated group). In determining whether such 
compensation exists and valuing such compensation, all 
restrictions, other than a non-lapse restriction, are ignored. 
Thus, the excise tax applies, and the value subject to the tax 
is determined, without regard to whether the specified stock 
compensation is subject to a substantial risk of forfeiture or 
is exercisable at the time of the inversion transaction.
---------------------------------------------------------------------------
    \438\ Under the provision, any transfer of property is treated as a 
payment and any right to a transfer of property is treated as a right 
to a payment.
---------------------------------------------------------------------------
      Specified stock compensation includes compensatory stock 
and restricted stock grants, compensatory stock options, and 
other forms of stock-based compensation, including stock 
appreciation rights, phantom stock, and phantom stock options. 
Specified stock compensation also includes nonqualified 
deferred compensation that is treated as though it were 
invested in stock or stock options of the expatriating 
corporation (or member). For example, the provision applies to 
a disqualified individual's nonqualified deferred compensation 
if company stock is one of the actual or deemed investment 
options under the nonqualified deferred compensation plan.
      Specified stock compensation includes a compensation 
arrangement that gives the disqualified individual an economic 
stake substantially similar to that of a corporate shareholder. 
A payment directly tied to the value of the stock is specified 
stock compensation. The excise tax does not apply if a payment 
is simply triggered by a target value of the corporation's 
stock or where a payment depends on a performance measure other 
than the value of the corporation's stock. Similarly, the tax 
does not apply if the amount of the payment is not directly 
measured by the value of the stock or an increase in the value 
of the stock. For example, an arrangement under which a 
disqualified individual would be paid a cash bonus equal to 
$10,000 for every $1 increase in the share price of the 
corporation's stock is subject to the provision because the 
direct connection between the compensation amount and the value 
of the corporation's stock gives the disqualified individual an 
economic stake substantially similar to that of a shareholder. 
By contrast, an arrangement under which a disqualified 
individual would be paid a cash bonus of $500,000 if the 
corporation's stock increased in value by 25 percent over two 
years or $1,000,000 if the stock increased by 33 percent over 
two years is not specified stock compensation, even though the 
amount of the bonus generally is keyed to an increase in the 
value of the stock.
      The excise tax applies to any specified stock 
compensation previously granted to a disqualified individual 
but cancelled or cashed-out within the six-month period ending 
with the expatriation date, and to any specified stock 
compensation awarded in the six-month period beginning with the 
expatriation date. As a result, for example, if a corporation 
cancels outstanding options three months before the inversion 
transaction and then reissues comparable options three months 
after the transaction, the tax applies both to the cancelled 
options and the newly granted options. It is intended that the 
Secretary issue guidance to avoid double counting with respect 
to specified stock compensation that is cancelled and then 
regranted during the applicable 12-month period.
      Specified stock compensation subject to the tax does not 
include a statutory stock option or any payment or right from a 
qualified retirement plan or annuity, tax-sheltered annuity, 
simplified employee pension, or SIMPLE. In addition, under the 
provision, the excise tax does not apply to any stock option 
that is exercised during the six-month period before the 
expatriation date or to any stock acquired pursuant to such 
exercise, if income is recognized under section 83 on or before 
the expatriation date with respect to the stock acquired 
pursuant to such exercise. The excise tax also does not apply 
to any specified stock compensation that is exercised, sold, 
exchanged, distributed, cashed out, or otherwise paid during 
such period in a transaction in which income, gain, or loss is 
recognized in full.
Determination of amount subject to tax
      For specified stock compensation held on the expatriation 
date, the amount of the tax is determined based on the value of 
the compensation on such date. The tax imposed on specified 
stock compensation cancelled during the six-month period before 
the expatriation date is determined based on the value of the 
compensation on the day before such cancellation, while 
specified stock compensation granted after the expatriation 
date is valued on the date granted. Under the provision, the 
cancellation of a non-lapse restriction is treated as a grant.
      The value of the specified stock compensation on which 
the excise tax is imposed is the fair value in the case of 
stock options (including warrants or other similar rights to 
acquire stock) and stock appreciation rights and the fair 
market value for all other forms of compensation. For purposes 
of the tax, the fair value of an option (or a warrant or other 
similar right to acquire stock) or a stock appreciation right 
is determined using an appropriate option-pricing model, as 
specified or permitted by the Secretary, that takes into 
account (1) the stock price at the valuation date; (2) the 
exercise price under the option; (3) the remaining term of the 
option; (4) the volatility of the underlying stock and the 
expected dividends on it; and (5) the risk-free interest rate 
over the remaining term of the option. Options that have no 
intrinsic value (or ``spread'') because the exercise price 
under the option equals or exceeds the fair market value of the 
stock at valuation nevertheless have a fair value and are 
subject to tax under the provision. The value of other forms of 
compensation, such as phantom stock or restricted stock, is the 
fair market value of the stock as of the date of the 
expatriation transaction. The value of any deferred 
compensation that can be valued by reference to stock is the 
amount that the disqualified individual would receive if the 
plan were to distribute all such deferred compensation in a 
single sum on the date of the expatriation transaction (or the 
date of cancellation or grant, if applicable). It is expected 
that the Secretary issue guidance on valuation of specified 
stock compensation, including guidance similar to the guidance 
issued under section 280G, except that the guidance would not 
permit the use of a term other than the full remaining term and 
would be modified as necessary or appropriate to carry out the 
purposes of the provision. Pending the issuance of guidance, it 
is intended that taxpayers can rely on the guidance issued 
under section 280G (except that the full remaining term must be 
used and recalculation is not permitted).
Other rules
      The excise tax also applies to any payment by the 
expatriated corporation or any member of the expanded 
affiliated group made to an individual, directly or indirectly, 
in respect of the tax. Whether a payment is made in respect of 
the tax is determined under all of the facts and circumstances. 
Any payment made to keep the individual in the same after-tax 
position that the individual would have been in had the tax not 
applied is a payment made in respect of the tax. This includes 
direct payments of the tax and payments to reimburse the 
individual for payment of the tax. It is expected that the 
Secretary issue guidance on determining when a payment is made 
in respect of the tax and that such guidance include certain 
factors that give rise to a rebuttable presumption that a 
payment is made in respect of the tax, including a rebuttable 
presumption that if the payment is contingent on the inversion 
transaction, it is made in respect to the tax. Any payment made 
in respect of the tax is includible in the income of the 
individual, but is not deductible by the corporation.
      To the extent that a disqualified individual is also a 
covered employee under section 162(m), the $1,000,000 limit on 
the deduction allowed for employee remuneration for such 
employee is reduced by the amount of any payment (including 
reimbursements) made in respect of the tax under the provision. 
As discussed above, this includes direct payments of the tax 
and payments to reimburse the individual for payment of the 
tax.
      The payment of the excise tax has no effect on the 
subsequent tax treatment of any specified stock compensation. 
Thus, the payment of the tax has no effect on the individual's 
basis in any specified stock compensation and no effect on the 
tax treatment for the individual at the time of exercise of an 
option or payment of any specified stock compensation, or at 
the time of any lapse or forfeiture of such specified stock 
compensation. The payment of the tax is not deductible and has 
no effect on any deduction that might be allowed at the time of 
any future exercise or payment.
      Under the provision, the Secretary is authorized to issue 
regulations as may be necessary or appropriate to carry out the 
purposes of the provision.
Effective date
      The provision is effective as of March 4, 2003, except 
that periods before March 4, 2003, are not taken into account 
in applying the excise tax to specified stock compensation held 
or cancelled during the six-month period before the 
expatriation date.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill except that 
excise tax is equal to 20 percent of the value of the specified 
stock compensation. Under the Senate amendment, the excise tax 
does not apply to executives of the expanded affiliated group.
      Effective date.--The Senate amendment is effective as of 
July 11, 2002, except that periods before July 11, 2002, are 
not taken into account in applying the excise tax to specified 
stock compensation held or cancelled during the six-month 
period before the expatriation date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill except 
that the excise tax is imposed at a rate equal to the maximum 
rate of tax on the adjusted net capital gain of an individual 
(i.e., the rate of the excise tax would be 15 percent for 2005 
through 2008 and 20 percent for taxable years beginning after 
December 31, 2008).
3. Reinsurance of U.S. risks in foreign jurisdictions (sec. 603 of the 
        House bill, sec. 444 of the Senate amendment, and sec. 845(a) 
        of the Code)

                              PRESENT LAW

      In the case of a reinsurance agreement between two or 
more related persons, present law provides the Treasury 
Secretary with authority to allocate among the parties or 
recharacterize income (whether investment income, premium or 
otherwise), deductions, assets, reserves, credits and any other 
items related to the reinsurance agreement, or make any other 
adjustment, in order to reflect the proper source and character 
of the items for each party.\439\ For this purpose, related 
persons are defined as in section 482. Thus, persons are 
related if they are organizations, trades or businesses 
(whether or not incorporated, whether or not organized in the 
United States, and whether or not affiliated) that are owned or 
controlled directly or indirectly by the same interests. The 
provision may apply to a contract even if one of the related 
parties is not a domestic company.\440\ In addition, the 
provision also permits such allocation, recharacterization, or 
other adjustments in a case in which one of the parties to a 
reinsurance agreement is, with respect to any contract covered 
by the agreement, in effect an agent of another party to the 
agreement, or a conduit between related persons.
---------------------------------------------------------------------------
    \439\ Sec. 845(a).
    \440\ See S. Rep. No. 97-494, 97th Cong., 2d Sess., 337 (1982) 
(describing provisions relating to the repeal of modified coinsurance 
provisions).
---------------------------------------------------------------------------

                               HOUSE BILL

      The bill clarifies the rules of section 845, relating to 
authority for the Treasury Secretary to allocate items among 
the parties to a reinsurance agreement, recharacterize items, 
or make any other adjustment, in order to reflect the proper 
source and character of the items for each party. The bill 
authorizes such allocation, recharacterization, or other 
adjustment, in order to reflect the proper source, character or 
amount of the item. It is intended that this authority \441\ be 
exercised in a manner similar to the authority under section 
482 for the Treasury Secretary to make adjustments between 
related parties. It is intended that this authority be applied 
in situations in which the related persons (or agents or 
conduits) are engaged in cross-border transactions that require 
allocation, recharacterization, or other adjustments in order 
to reflect the proper source, character or amount of the item 
or items. No inference is intended that present law does not 
provide this authority with respect to reinsurance agreements.
---------------------------------------------------------------------------
    \441\ The authority to allocate, recharacterize or make other 
adjustments was granted in connection with the repeal of provisions 
relating to modified coinsurance transactions.
---------------------------------------------------------------------------
      No regulations have been issued under section 845(a). It 
is expected that the Treasury Secretary will issue regulations 
under section 845(a) to address effectively the allocation of 
income (whether investment income, premium or otherwise) and 
other items, the recharacterization of such items, or any other 
adjustment necessary to reflect the proper amount, source or 
character of the item.
      Effective date.--The provision is effective for any risk 
reinsured after the date of enactment of the provision.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The provision is effective for any risk 
reinsured after April 11, 2002.

                          CONFERENCE AGREEMENT

      The Conference agreement follows the House bill.
4. Revision of tax rules on expatriation of individuals (sec. 604 of 
        the House bill, sec. 442 of the Senate amendment, and secs. 
        877, 2107, 2501 and 6039G of the Code)

                              PRESENT LAW

In general
      U.S. citizens and residents generally are subject to U.S. 
income taxation on their worldwide income. The U.S. tax may be 
reduced or offset by a credit allowed for foreign income taxes 
paid with respect to foreign source income. Nonresident aliens 
are taxed at a flat rate of 30 percent (or a lower treaty rate) 
on certain types of passive income derived from U.S. sources, 
and at regular graduated rates on net profits derived from a 
U.S. trade or business. The estates of nonresident aliens 
generally are subject to estate tax on U.S.-situated property 
(e.g., real estate and tangible property located within the 
United States and stock in a U.S. corporation). Nonresident 
aliens generally are subject to gift tax on transfers by gift 
of U.S.-situated property (e.g., real estate and tangible 
property located within the United States, but excluding 
intangibles, such as stock, regardless of where they are 
located).
Income tax rules with respect to expatriates 
      For the 10 taxable years after an individual relinquishes 
his or her U.S. citizenship or terminates his or her U.S. 
residency \442\ with a principal purpose of avoiding U.S. 
taxes, the individuals is subject to an alternative method of 
income taxation than that generally applicable to nonresident 
aliens (the ``alternative tax regime''). Generally, the 
individual is subject to income tax only on U.S.-source income 
\443\ at the rates applicable to U.S. citizens for the 10-year 
period.
---------------------------------------------------------------------------
    \442\ Under present law, an individual's U.S. residency is 
considered terminated for U.S. Federal tax purposes when the individual 
ceases to be a lawful permanent resident under the immigration law (or 
is treated as a resident of another country under a tax treaty and does 
not waive the benefits of such treaty).
    \443\ For this purpose, however, U.S.-source income has a broader 
scope than it does typically in the Code.
---------------------------------------------------------------------------
      An individual who relinquishes citizenship or terminates 
residency is treated as having done so with a principal purpose 
of tax avoidance and is generally subject to the alternative 
tax regime if: (1) the individual's average annual U.S. Federal 
income tax liability for the five taxable years preceding 
citizenship relinquishment or residency termination exceeds 
$100,000; or (2) the individual's net worth on the date of 
citizenship relinquishment or residency termination equals or 
exceeds $500,000. These amounts are adjusted annually for 
inflation.\444\ Certain categories of individuals (e.g., dual 
residents) may avoid being deemed to have a tax avoidance 
purpose for relinquishing citizenship or terminating residency 
by submitting a ruling request to the IRS regarding whether the 
individual relinquished citizenship or terminated residency 
principally for tax reasons.
---------------------------------------------------------------------------
    \444\ The income tax liability and net worth thresholds under 
section 877(a)(2) for 2004 are $124,000 and $622,000, respectively. See 
Rev. Proc. 2003-85, 2003-49 I.R.B. 1184.
---------------------------------------------------------------------------
      Anti-abuse rules are provided to prevent the 
circumvention of the alternative tax regime.
Estate tax rules with respect to expatriates
      Special estate tax rules apply to individual's who 
relinquish their citizenship or long-term residency within the 
10 years prior to the date of death, unless he or she did not 
have a tax avoidance purpose (as determined under the test 
above). Under these special rules, certain closely-held foreign 
stock owned by the former citizen or former long-term resident 
is includible in his or her gross estate to the extent that the 
foreign corporation owns U.S.-situated assets.
Gift tax rules with respect to expatriates
      Special gift tax rules apply to individual's who 
relinquish their citizenship or long-term residency within the 
10 years prior to the date of death, unless he or she did not 
have a tax avoidance purpose (as determined under the rules 
above). The individual is subject to gift tax on gifts of U.S.-
situated intangibles made during the 10 years following 
citizenship relinquishment or residency termination.
Information reporting
      Under present law, U.S. citizens who relinquish 
citizenship and long-term residents who terminate residency 
generally are required to provide information about their 
assets held at the time of expatriation. However, this 
information is only required once.

                               HOUSE BILL

In general
      The bill provides: (1) objective standards for 
determining whether former citizens or former long-term 
residents are subject to the alternative tax regime; (2) tax-
based (instead of immigration-based) rules for determining when 
an individual is no longer a U.S. citizen or long-term resident 
for U.S. Federal tax purposes; (3) the imposition of full U.S. 
taxation for individuals who are subject to the alternative tax 
regime and who return to the United States for extended 
periods; (4) imposition of U.S. gift tax on gifts of stock of 
certain closely-held foreign corporations that hold U.S.-
situated property; and (5) an annual return-filing requirement 
for individuals who are subject to the alternative tax regime, 
for each of the 10 years following citizenship relinquishment 
or residency termination.\445\
---------------------------------------------------------------------------
    \445\ These provisions reflect recommendations contained in Joint 
Committee on Taxation, Review of the Present Law Tax and Immigration 
Treatment of Relinquishment of Citizenship and Termination of Long-Term 
Residency, (JCS-2-03), February 2003.
---------------------------------------------------------------------------
Objective rules for the alternative tax regime
      The bill replaces the subjective determination of tax 
avoidance as a principal purpose for citizenship relinquishment 
or residency termination under present law with objective 
rules. Under the bill, a former citizen or former long-term 
resident would be subject to the alternative tax regime for a 
10-year period following citizenship relinquishment or 
residency termination, unless the former citizen or former 
long-term resident: (1) establishes that his or her average 
annual net income tax liability for the five preceding years 
does not exceed $124,000 (adjusted for inflation after 2004) 
and his or her net worth does not exceed $2 million, or 
alternatively satisfies limited, objective exceptions for dual 
citizens and minors who have had no substantial contact with 
the United States; and (2) certifies under penalties of perjury 
that he or she has complied with all U.S. Federal tax 
obligations for the preceding five years and provides such 
evidence of compliance as the Secretary of the Treasury may 
require.
      The monetary thresholds under the bill replace the 
present-law inquiry into the taxpayer's intent. In addition, 
the bill eliminates the present-law process of IRS ruling 
requests.
      If a former citizen exceeds the monetary thresholds, that 
person is excluded from the alternative tax regime if he or she 
falls within the exceptions for certain dual citizens and 
minors (provided that the requirement of certification and 
proof of compliance with Federal tax obligations is met). These 
exceptions provide relief to individuals who have never had 
substantial connections with the United States, as measured by 
certain objective criteria, and eliminate IRS inquiries as to 
the subjective intent of such taxpayers.
      In order to be excepted from the application of the 
alternative tax regime under the bill, whether by reason of 
falling below the net worth and income tax liability thresholds 
or qualifying for the dual-citizen or minor exceptions, the 
former citizen or former long-term resident also is required to 
certify, under penalties of perjury, that he or she has 
complied with all U.S. Federal tax obligations for the five 
years preceding the relinquishment of citizenship or 
termination of residency and to provide such documentation as 
the Secretary of the Treasury may require evidencing such 
compliance (e.g., tax returns, proof of tax payments). Until 
such time, the individual remains subject to the alternative 
tax regime. It is intended that the IRS will continue to verify 
that the information submitted was accurate, and it is intended 
that the IRS will randomly audit such persons to assess 
compliance.
Termination of U.S. citizenship or long-term resident status for U.S. 
        Federal income tax purposes
      Under the bill, an individual continues to be treated as 
a U.S. citizen or long-term resident for U.S. Federal tax 
purposes, including for purposes of section 7701(b)(10), until 
the individual: (1) gives notice of an expatriating act or 
termination of residency (with the requisite intent to 
relinquish citizenship or terminate residency) to the Secretary 
of State or the Secretary of Homeland Security, respectively; 
and (2) provides a statement in accordance with section 6039G.
Sanction for individuals subject to the individual tax regime who 
        return to the United States for extended periods
      The alternative tax regime does not apply to any 
individual for any taxable year during the 10-year period 
following citizenship relinquishment or residency termination 
if such individual is present in the United States for more 
than 30 days in the calendar year ending in such taxable year. 
Such individual is treated as a U.S. citizen or resident for 
such taxable year and therefore is taxed on his or her 
worldwide income.
      Similarly, if an individual subject to the alternative 
tax regime is present in the United States for more than 30 
days in any calendar year ending during the 10-year period 
following citizenship relinquishment or residency termination, 
and the individual dies during that year, he or she is treated 
as a U.S. resident, and the individual's worldwide estate is 
subject to U.S. estate tax. Likewise, if an individual subject 
to the alternative tax regime is present in the United States 
for more than 30 days in any year during the 10-year period 
following citizenship relinquishment or residency termination, 
the individual is subject to U.S. gift tax on any transfer of 
his or her worldwide assets by gift during that taxable year.
      For purposes of these rules, an individual is treated as 
present in the United States on any day if such individual is 
physically present in the United States at any time during that 
day. The present-law exceptions from being treated as present 
in the United States for residency purposes \446\ generally do 
not apply for this purpose. However, for individuals with 
certain ties to countries other than the United States \447\ 
and individuals with minimal prior physical presence in the 
United States,\448\ a day of physical presence in the United 
States is disregarded if the individual is performing services 
in the United States on such day for an unrelated employer 
(within the meaning of sections 267 and 707(b)), who meets the 
requirements the Secretary of the Treasury may prescribe in 
regulations. No more than 30 days may be disregarded during any 
calendar year under this rule.
---------------------------------------------------------------------------
    \446\ Secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
    \447\ An individual has such a relationship to a foreign country if 
the individual becomes a citizen or resident of the country in which 
(1) the individual becomes fully liable for income tax or (2) the 
individual was born, such individual's spouse was born, or either of 
the individual's parents was born.
    \448\ An individual has a minimal prior physical presence in the 
United States if the individual was physically present for no more than 
30 days during each year in the ten-year period ending on the date of 
loss of United States citizenship or termination of residency. However, 
an individual is not treated as being present in the United States on a 
day if (1) the individual is a teacher or trainee, a student, a 
professional athlete in certain circumstances, or a foreign government-
related individual or (2) the individual remained in the United States 
because of a medical condition that arose while the individual was in 
the United States. Sec. 7701(b)(3)(D)(ii).
---------------------------------------------------------------------------
Imposition of gift tax with respect to stock of certain closely held 
        foreign corporations
      Gifts of stock of certain closely-held foreign 
corporations by a former citizen or former long-term resident 
who is subject to the alternative tax regime are subject to 
gift tax under this bill, if the gift is made within the 10-
year period after citizenship relinquishment or residency 
termination. The gift tax rule applies if: (1) the former 
citizen or former long-term resident, before making the gift, 
directly or indirectly owns 10 percent or more of the total 
combined voting power of all classes of stock entitled to vote 
of the foreign corporation; and (2) directly or indirectly, is 
considered to own more than 50 percent of (a) the total 
combined voting power of all classes of stock entitled to vote 
in the foreign corporation, or (b) the total value of the stock 
of such corporation. If this stock ownership test is met, then 
taxable gifts of the former citizen or former long-term 
resident include that proportion of the fair market value of 
the foreign stock transferred by the individual, at the time of 
the gift, which the fair market value of any assets owned by 
such foreign corporation and situated in the United States (at 
the time of the gift) bears to the total fair market value of 
all assets owned by such foreign corporation (at the time of 
the gift).
      This gift tax rule applies to a former citizen or former 
long-term resident who is subject to the alternative tax regime 
and who owns stock in a foreign corporation at the time of the 
gift, regardless of how such stock was acquired (e.g., whether 
issued originally to the donor, purchased, or received as a 
gift or bequest).
Annual return
      The bill requires former citizens and former long-term 
residents to file an annual return for each year following 
citizenship relinquishment or residency termination in which 
they are subject to the alternative tax regime. The annual 
return is required even if no U.S. Federal income tax is due. 
The annual return requires certain information, including 
information on the permanent home of the individual, the 
individual's country of residence, the number of days the 
individual was present in the United States for the year, and 
detailed information about the individual's income and assets 
that are subject to the alternative tax regime. This 
requirement includes information relating to foreign stock 
potentially subject to the special estate tax rule of section 
2107(b) and the gift tax rules of this bill.
      If the individual fails to file the statement in a timely 
manner or fails correctly to include all the required 
information, the individual is required to pay a penalty of 
$5,000. The $5,000 penalty does not apply if it is shown that 
the failure is due to reasonable cause and not to willful 
neglect.
Effective date
      The provision applies to individuals who relinquish 
citizenship or terminate long-term residency after June 3, 
2004.

                            SENATE AMENDMENT

In general
      The provision generally subjects certain U.S. citizens 
who relinquish their U.S. citizenship and certain long-term 
U.S. residents who terminate their U.S. residence to tax on the 
net unrealized gain in their property as if such property were 
sold for fair market value on the day before the expatriation 
or residency termination. Gain from the deemed sale is taken 
into account at that time without regard to other Code 
provisions; any loss from the deemed sale generally would be 
taken into account to the extent otherwise provided in the 
Code. Any net gain on the deemed sale is recognized to the 
extent it exceeds $600,000 ($1.2 million in the case of married 
individuals filing a joint return, both of whom relinquish 
citizenship or terminate residency). The $600,000 amount is 
increased by a cost of living adjustment factor for calendar 
years after 2002.
Individuals covered
      Under the provision, the mark-to-market tax applies to 
U.S. citizens who relinquish citizenship and long-term 
residents who terminate U.S. residency. An individual is a 
long-term resident if he or she was a lawful permanent resident 
for at least eight out of the 15 taxable years ending with the 
year in which the termination of residency occurs. An 
individual is considered to terminate long-term residency when 
either the individual ceases to be a lawful permanent resident 
(i.e., loses his or her green card status), or the individual 
is treated as a resident of another country under a tax treaty 
and the individual does not waive the benefits of the treaty.
      Exceptions from the mark-to-market tax are provided in 
two situations. The first exception applies to an individual 
who was born with citizenship both in the United States and in 
another country; provided that (1) as of the expatriation date 
the individual continues to be a citizen of, and is taxed as a 
resident of, such other country, and (2) the individual was not 
a resident of the United States for the five taxable years 
ending with the year of expatriation. The second exception 
applies to a U.S. citizen who relinquishes U.S. citizenship 
before reaching age 18 and a half, provided that the individual 
was a resident of the United States for no more than five 
taxable years before such relinquishment.
Election to be treated as a U.S. citizen
      Under the provision, an individual is permitted to make 
an irrevocable election to continue to be taxed as a U.S. 
citizen with respect to all property that otherwise is covered 
by the expatriation tax. This election is an ``all or nothing'' 
election; an individual is not permitted to elect this 
treatment for some property but not for other property. The 
election, if made, would apply to all property that would be 
subject to the expatriation tax and to any property the basis 
of which is determined by reference to such property. Under 
this election, the individual would continue to pay U.S. income 
taxes at the rates applicable to U.S. citizens following 
expatriation on any income generated by the property and on any 
gain realized on the disposition of the property. In addition, 
the property would continue to be subject to U.S. gift, estate, 
and generation-skipping transfer taxes. In order to make this 
election, the taxpayer would be required to waive any treaty 
rights that would preclude the collection of the tax.
      The individual also would be required to provide security 
to ensure payment of the tax under this election in such form, 
manner, and amount as the Secretary of the Treasury requires. 
The amount of mark-to-market tax that would have been owed but 
for this election (including any interest, penalties, and 
certain other items) shall be a lien in favor of the United 
States on all U.S.-situs property owned by the individual. This 
lien shall arise on the expatriation date and shall continue 
until the tax liability is satisfied, the tax liability has 
become unenforceable by reason of lapse of time, or the 
Secretary is satisfied that no further tax liability may arise 
by reason of this provision. The rules of section 6324A(d)(1), 
(3), and (4) (relating to liens arising in connection with the 
deferral of estate tax under section 6166) apply to liens 
arising under this provision.
Date of relinquishment of citizenship
      Under the provision, an individual is treated as having 
relinquished U.S. citizenship on the earliest of four possible 
dates: (1) the date that the individual renounces U.S. 
nationality before a diplomatic or consular officer of the 
United States (provided that the voluntary relinquishment is 
later confirmed by the issuance of a certificate of loss of 
nationality); (2) the date that the individual furnishes to the 
State Department a signed statement of voluntary relinquishment 
of U.S. nationality confirming the performance of an 
expatriating act (again, provided that the voluntary 
relinquishment is later confirmed by the issuance of a 
certificate of loss of nationality); (3) the date that the 
State Department issues a certificate of loss of nationality; 
or (4) the date that a U.S. court cancels a naturalized 
citizen's certificate of naturalization.
Deemed sale of property upon expatriation or residency termination
      The deemed sale rule of the provision generally applies 
to all property interests held by the individual on the date of 
relinquishment of citizenship or termination of residency. 
Special rules apply in the case of trust interests, as 
described below. U.S. real property interests, which remain 
subject to U.S. tax in the hands of nonresident noncitizens, 
generally are excepted from the provision. Regulatory authority 
is granted to the Treasury to except other types of property 
from the provision.
      Under the provision, an individual who is subject to the 
mark-to-market tax is required to pay a tentative tax equal to 
the amount of tax that would be due for a hypothetical short 
tax year ending on the date the individual relinquished 
citizenship or terminated residency. Thus, the tentative tax is 
based on all income, gain, deductions, loss, and credits of the 
individual for the year through such date, including amounts 
realized from the deemed sale of property. The tentative tax is 
due on the 90th day after the date of relinquishment of 
citizenship or termination of residency.
Retirement plans and similar arrangements
      Subject to certain exceptions, the provision applies to 
all property interests held by the individual at the time of 
relinquishment of citizenship or termination of residency. 
Accordingly, such property includes an interest in an employer-
sponsored retirement plan or deferred compensation arrangement 
as well as an interest in an individual retirement account or 
annuity (i.e., an IRA).\449\ However, the provision contains a 
special rule for an interest in a ``qualified retirement 
plan.'' For purposes of the provision, a ``qualified retirement 
plan'' includes an employer-sponsored qualified plan (sec. 
401(a)), a qualified annuity (sec. 403(a)), a tax-sheltered 
annuity (sec. 403(b)), an eligible deferred compensation plan 
of a governmental employer (sec. 457(b)), or an IRA (sec. 408). 
The special retirement plan rule applies also, to the extent 
provided in regulations, to any foreign plan or similar 
retirement arrangement or program. An interest in a trust that 
is part of a qualified retirement plan or other arrangement 
that is subject to the special retirement plan rule is not 
subject to the rules for interests in trusts (discussed below).
---------------------------------------------------------------------------
    \449\ Application of the provision is not limited to an interest 
that meets the definition of property under section 83 (relating to 
property transferred in connection with the performance of services).
---------------------------------------------------------------------------
      Under the special rule, an amount equal to the present 
value of the individual's vested, accrued benefit under a 
qualified retirement plan is treated as having been received by 
the individual as a distribution under the plan on the day 
before the individual's relinquishment of citizenship or 
termination of residency. It is not intended that the plan 
would be deemed to have made a distribution for purposes of the 
tax-favored status of the plan, such as whether a plan may 
permit distributions before a participant has severed 
employment. In the case of any later distribution to the 
individual from the plan, the amount otherwise includible in 
the individual's income as a result of the distribution is 
reduced to reflect the amount previously included in income 
under the special retirement plan rule. The amount of the 
reduction applied to a distribution is the excess of: (1) the 
amount included in income under the special retirement plan 
rule over (2) the total reductions applied to any prior 
distributions. However, under the provision, the retirement 
plan, and any person acting on the plan's behalf, will treat 
any later distribution in the same manner as the distribution 
would be treated without regard to the special retirement plan 
rule.
      It is expected that the Treasury Department will provide 
guidance for determining the present value of an individual's 
vested, accrued benefit under a qualified retirement plan, such 
as the individual's account balance in the case of a defined 
contribution plan or an IRA, or present value determined under 
the qualified joint and survivor annuity rules applicable to a 
defined benefit plan (sec. 417(e)).
Deferral of payment of tax
      Under the provision, an individual is permitted to elect 
to defer payment of the mark-to-market tax imposed on the 
deemed sale of the property. Interest is charged for the period 
the tax is deferred at a rate two percentage points higher than 
the rate normally applicable to individual underpayments. Under 
this election, the mark-to-market tax attributable to a 
particular property is due when the property is disposed of 
(or, if the property is disposed of in whole or in part in a 
nonrecognition transaction, at such other time as the Secretary 
may prescribe). The mark-to-market tax attributable to a 
particular property is an amount that bears the same ratio to 
the total mark-to-market tax for the year as the gain taken 
into account with respect to such property bears to the total 
gain taken into account under these rules for the year. The 
deferral of the mark-to-market tax may not be extended beyond 
the individual's death.
      In order to elect deferral of the mark-to-market tax, the 
individual is required to provide adequate security to the 
Treasury to ensure that the deferred tax and interest will be 
paid. Other security mechanisms are permitted provided that the 
individual establishes to the satisfaction of the Secretary 
that the security is adequate. In the event that the security 
provided with respect to a particular property subsequently 
becomes inadequate and the individual fails to correct the 
situation, the deferred tax and the interest with respect to 
such property will become due. As a further condition to making 
the election, the individual is required to consent to the 
waiver of any treaty rights that would preclude the collection 
of the tax.
      The deferred amount (including any interest, penalties, 
and certain other items) shall be a lien in favor of the United 
States on all U.S.-situs property owned by the individual. This 
lien shall arise on the expatriation date and shall continue 
until the tax liability is satisfied, the tax liability has 
become unenforceable by reason of lapse of time, or the 
Secretary is satisfied that no further tax liability may arise 
by reason of this provision. The rules of section 6324A(d)(1), 
(3), and (4) (relating to liens arising in connection with the 
deferral of estate tax under section 6166) apply to liens 
arising under this provision.
Interests in trusts
      Under the provision, detailed rules apply to trust 
interests held by an individual at the time of relinquishment 
of citizenship or termination of residency. The treatment of 
trust interests depends on whether the trust is a qualified 
trust. A trust is a qualified trust if a court within the 
United States is able to exercise primary supervision over the 
administration of the trust and one or more U.S. persons have 
the authority to control all substantial decisions of the 
trust.
      Constructive ownership rules apply to a trust beneficiary 
that is a corporation, partnership, trust, or estate. In such 
cases, the shareholders, partners, or beneficiaries of the 
entity are deemed to be the direct beneficiaries of the trust 
for purposes of applying these provision. In addition, an 
individual who holds (or who is treated as holding) a trust 
instrument at the time of relinquishment of citizenship or 
termination of residency is required to disclose on his or her 
tax return the methodology used to determine his or her 
interest in the trust, and whether such individual knows (or 
has reason to know) that any other beneficiary of the trust 
uses a different method.
      Nonqualified trusts.--If an individual holds an interest 
in a trust that is not a qualified trust, a special rule 
applies for purposes of determining the amount of the mark-to-
market tax due with respect to such trust interest. The 
individual's interest in the trust is treated as a separate 
trust consisting of the trust assets allocable to such 
interest. Such separate trust is treated as having sold its net 
assets as of the date of relinquishment of citizenship or 
termination of residency and having distributed the assets to 
the individual, who then is treated as having recontributed the 
assets to the trust. The individual is subject to the mark-to-
market tax with respect to any net income or gain arising from 
the deemed distribution from the trust.
      The election to defer payment is available for the mark-
to-market tax attributable to a nonqualified trust interest. 
Interest is charged for the period the tax is deferred at a 
rate two percentage points higher than the rate normally 
applicable to individual underpayments. A beneficiary's 
interest in a nonqualified trust is determined under all the 
facts and circumstances, including the trust instrument, 
letters of wishes, and historical patterns of trust 
distributions.
      Qualified trusts.--If an individual has an interest in a 
qualified trust, the amount of unrealized gain allocable to the 
individual's trust interest is calculated at the time of 
expatriation or residency termination. In determining this 
amount, all contingencies and discretionary interests are 
assumed to be resolved in the individual's favor (i.e., the 
individual is allocated the maximum amount that he or she could 
receive). The mark-to-market tax imposed on such gains is 
collected when the individual receives distributions from the 
trust, or if earlier, upon the individual's death. Interest is 
charged for the period the tax is deferred at a rate two 
percentage points higher than the rate normally applicable to 
individual underpayments.
      If an individual has an interest in a qualified trust, 
the individual is subject to the mark-to-market tax upon the 
receipt of distributions from the trust. These distributions 
also may be subject to other U.S. income taxes. If a 
distribution from a qualified trust is made after the 
individual relinquishes citizenship or terminates residency, 
the mark-to-market tax is imposed in an amount equal to the 
amount of the distribution multiplied by the highest tax rate 
generally applicable to trusts and estates, but in no event 
will the tax imposed exceed the deferred tax amount with 
respect to the trust interest. For this purpose, the deferred 
tax amount is equal to (1) the tax calculated with respect to 
the unrealized gain allocable to the trust interest at the time 
of expatriation or residency termination, (2) increased by 
interest thereon, and (3) reduced by any mark-to-market tax 
imposed on prior trust distributions to the individual.
      If any individual's interest in a trust is vested as of 
the expatriation date (e.g., if the individual's interest in 
the trust is non-contingent and non-discretionary), the gain 
allocable to the individual's trust interest is determined 
based on the trust assets allocable to his or her trust 
interest. If the individual's interest in the trust is not 
vested as of the expatriation date (e.g., if the individual's 
trust interest is a contingent or discretionary interest), the 
gain allocable to his or her trust interest is determined based 
on all of the trust assets that could be allocable to his or 
her trust interest, determined by resolving all contingencies 
and discretionary powers in the individual's favor. In the case 
where more than one trust beneficiary is subject to the 
expatriation tax with respect to trust interests that are not 
vested, the rules are intended to apply so that the same 
unrealized gain with respect to assets in the trust is not 
taxed to both individuals.
      Mark-to-market taxes become due if the trust ceases to be 
a qualified trust, the individual disposes of his or her 
qualified trust interest, or the individual dies. In such 
cases, the amount of mark-to-market tax equals the lesser of 
(1) the tax calculated under the rules for nonqualified trust 
interests as of the date of the triggering event, or (2) the 
deferred tax amount with respect to the trust interest as of 
that date.
      The tax that is imposed on distributions from a qualified 
trust generally is deducted and withheld by the trustees. If 
the individual does not agree to waive treaty rights that would 
preclude collection of the tax, the tax with respect to such 
distributions is imposed on the trust, the trustee is 
personally liable for the tax, and any other beneficiary has a 
right of contribution against such individual with respect to 
the tax. Similar rules apply when the qualified trust interest 
is disposed of, the trust ceases to be a qualified trust, or 
the individual dies.
Coordination with present-law alternative tax regime
      The provision provides a coordination rule with the 
present-law alternative tax regime. Under the provision, the 
expatriation income tax rules under section 877, and the 
expatriation estate and gift tax rules under sections 2107 and 
2501(a)(3) (described above), do not apply to a former citizen 
or former long-term resident whose expatriation or residency 
termination occurs on or after February 5, 2003.
Treatment of gifts and inheritances from a former citizen or former 
        long-term resident
      Under the provision, the exclusion from income provided 
in section 102 (relating to exclusions from income for the 
value of property acquired by gift or inheritance) does not 
apply to the value of any property received by gift or 
inheritance from a former citizen or former long-term resident 
(i.e., an individual who relinquished U.S. citizenship or 
terminated U.S. residency), subject to the exceptions described 
above relating to certain dual citizens and minors. 
Accordingly, a U.S. taxpayer who receives a gift or inheritance 
from such an individual is required to include the value of 
such gift or inheritance in gross income and is subject to U.S. 
tax on such amount. Having included the value of the property 
in income, the recipient would then take a basis in the 
property equal to that value. The tax does not apply to 
property that is shown on a timely filed gift tax return and 
that is a taxable gift by the former citizen or former long-
term resident, or property that is shown on a timely filed 
estate tax return and included in the gross U.S. estate of the 
former citizen or former long-term resident (regardless of 
whether the tax liability shown on such a return is reduced by 
credits, deductions, or exclusions available under the estate 
and gift tax rules). In addition, the tax does not apply to 
property in cases in which no estate or gift tax return is 
required to be filed, where no such return would have been 
required to be filed if the former citizen or former long-term 
resident had not relinquished citizenship or terminated 
residency, as the case may be. Applicable gifts or bequests 
that are made in trust are treated as made to the beneficiaries 
of the trust in proportion to their respective interests in the 
trust.
Information reporting
      The provision provides that certain information reporting 
requirements under present law (sec. 6039G) applicable to 
former citizens and former long-term residents also apply for 
purposes of the provision.
Immigration rules
      The provision amends the immigration rules that deny tax-
motivated expatriates reentry into the United States by 
removing the requirement that the expatriation be tax-
motivated, and instead denies former citizens reentry into the 
United States if the individual is determined not to be in 
compliance with his or her tax obligations under the 
provision's expatriation tax provisions (regardless of the 
subjective motive for expatriating). For this purpose, the 
provision permits the IRS to disclose certain items of return 
information of an individual, upon written request of the 
Attorney General or his delegate, as is necessary for making a 
determination under section 212(a)(10)(E) of the Immigration 
and Nationality Act. Specifically, the provision would permit 
the IRS to disclose to the agency administering section 
212(a)(10)(E) whether such taxpayer is in compliance with 
section 877A and identify the items of noncompliance. 
Recordkeeping requirements, safeguards, and civil and criminal 
penalties for unauthorized disclosure or inspection would apply 
to return information disclosed under this provision.
Effective date
      The provision generally is effective for U.S. citizens 
who relinquish citizenship or long-term residents who terminate 
their residency on or after February 5, 2003. The provisions 
relating to gifts and inheritances are effective for gifts and 
inheritances received from former citizens and former long-term 
residents on or after February 5, 2003, whose expatriation or 
residency termination occurs on or after such date. The 
provisions relating to former citizens under U.S. immigration 
laws are effective on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
5. Reporting of taxable mergers and acquisitions (sec. 605 of the House 
        bill, sec. 445 of the Senate amendment, and new sec. 6043A of 
        the Code)

                              PRESENT LAW

      Under section 6045 and the regulations thereunder, 
brokers (defined to include stock transfer agents) are required 
to make information returns and to provide corresponding payee 
statements as to sales made on behalf of their customers, 
subject to the penalty provisions of sections 6721-6724. Under 
the regulations issued under section 6045, this requirement 
generally does not apply with respect to taxable transactions 
other than exchanges for cash (e.g., stock inversion 
transactions taxable to shareholders by reason of section 
367(a)).\450\
---------------------------------------------------------------------------
    \450\ Recently issued temporary regulations under section 6043 
(relating to information reporting with respect to liquidations, 
recapitalizations, and changes in control) impose information reporting 
requirements with respect to certain taxable inversion transactions, 
and proposed regulations would expand these requirements more generally 
to taxable transactions occurring after the proposed regulations are 
finalized.
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the bill, if gain or loss is recognized in whole or 
in part by shareholders of a corporation by reason of a second 
corporation's acquisition of the stock or assets of the first 
corporation, then the acquiring corporation (or the acquired 
corporation, if so prescribed by the Treasury Secretary) is 
required to make a return containing:
            (1) A description of the transaction;
            (2) The name and address of each shareholder of the 
        acquired corporation that recognizes gain as a result 
        of the transaction (or would recognize gain, if there 
        was a built-in gain on the shareholder's shares);
            (3) The amount of money and the value of stock or 
        other consideration paid to each shareholder described 
        above; and
            (4) Such other information as the Treasury 
        Secretary may prescribe.
      Alternatively, a stock transfer agent who records 
transfers of stock in such transaction may make the return 
described above in lieu of the second corporation.
      In addition, every person required to make a return 
described above is required to furnish to each shareholder (or 
the shareholder's nominee \451\) whose name is required to be 
set forth in such return a written statement showing:
---------------------------------------------------------------------------
    \451\ In the case of a nominee, the nominee must furnish the 
information to the shareholder in the manner prescribed by the Treasury 
Secretary.
---------------------------------------------------------------------------
            (1) The name, address, and phone number of the 
        information contact of the person required to make such 
        return;
            (2) The information required to be shown on that 
        return; and
            (3) Such other information as the Treasury 
        Secretary may prescribe.
      This written statement is required to be furnished to the 
shareholder on or before January 31 of the year following the 
calendar year during which the transaction occurred.
      The present-law penalties for failure to comply with 
information reporting requirements are extended to failures to 
comply with the requirements set forth under this bill.
      Effective date.--The provision is effective for 
acquisitions after the date of enactment.

                            SENATE AMENDMENT

      Same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows both the House bill and 
the Senate amendment.
6. Studies (sec. 606 of the House bill)

                              PRESENT LAW

      Due to the variation in tax rates and tax systems among 
countries, a multinational enterprise, whether U.S.-based or 
foreign-based, may have an incentive to shift income, 
deductions, or tax credits in order to arrive at a reduced 
overall tax burden. Such a shifting of items could be 
accomplished by establishing artificial, non-arm's-length 
prices for transactions between group members.
      Under section 482, the Treasury Secretary is authorized 
to reallocate income, deductions, or credits between or among 
two or more organizations, trades, or businesses under common 
control if he determines that such a reallocation is necessary 
to prevent tax evasion or to clearly reflect income. Treasury 
regulations adopt the arm's-length standard as the standard for 
determining whether such reallocations are appropriate. Thus, 
the regulations provide rules to identify the respective 
amounts of taxable income of the related parties that would 
have resulted if the parties had been uncontrolled parties 
dealing at arm's length. Transactions involving intangible 
property and certain services may present particular challenges 
to the administration of the arm's-length standard, because the 
nature of these transactions may make it difficult or 
impossible to compare them with third-party transactions.
      In addition to the statutory rules governing the taxation 
of foreign income of U.S. persons and U.S. income of foreign 
persons, bilateral income tax treaties limit the amount of 
income tax that may be imposed by one treaty partner on 
residents of the other treaty partner. For example, treaties 
often reduce or eliminate withholding taxes imposed by a treaty 
country on certain types of income (e.g., dividends, interest 
and royalties) paid to residents of the other treaty country. 
Treaties also contain provisions governing the creditability of 
taxes imposed by the treaty country in which income was earned 
in computing the amount of tax owed to the other country by its 
residents with respect to such income. Treaties further provide 
procedures under which inconsistent positions taken by the 
treaty countries with respect to a single item of income or 
deduction may be mutually resolved by the two countries.

                               HOUSE BILL

      The bill requires the Treasury Secretary to conduct and 
submit to the Congress three studies. The first study will 
examine the effectiveness of the transfer pricing rules of 
section 482, with an emphasis on transactions involving 
intangible property. The second study will examine income tax 
treaties to which the United States is a party, with a view 
toward identifying any inappropriate reductions in withholding 
tax or opportunities for abuse that may exist. The third study 
will examine the impact of the provisions of this bill on 
inversion transactions.
      Effective date.--The tax treaty study required under the 
provision is due no later than June 30, 2005. The transfer 
pricing study required under the provision is due no later than 
June 30, 2005. The inversions study required under the 
provision is due no later than December 31, 2005.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, except 
the inversions study required under the provision is due no 
later than December 31, 2006.

                 B. Provisions Relating to Tax Shelters

1. Penalty for failure to disclose reportable transactions (sec. 611 of 
        the House bill, sec. 402 of the Senate amendment, and new sec. 
        6707A of the Code)

                              PRESENT LAW

      Regulations under section 6011 require a taxpayer to 
disclose with its tax return certain information with respect 
to each ``reportable transaction'' in which the taxpayer 
participates.\452\
---------------------------------------------------------------------------
    \452\ On February 27, 2003, the Treasury Department and the IRS 
released final regulations regarding the disclosure of reportable 
transactions. In general, the regulations are effective for 
transactions entered into on or after February 28, 2003.
    The discussion of present law refers to the new regulations. The 
rules that apply with respect to transactions entered into on or before 
February 28, 2003, are contained in Treas. Reg. sec. 1.6011-4T in 
effect on the date the transaction was entered into.
---------------------------------------------------------------------------
      There are six categories of reportable transactions. The 
first category is any transaction that is the same as (or 
substantially similar to) \453\ a transaction that is specified 
by the Treasury Department as a tax avoidance transaction whose 
tax benefits are subject to disallowance under present law 
(referred to as a ``listed transaction'').\454\
---------------------------------------------------------------------------
    \453\ The regulations clarify that the term ``substantially 
similar'' includes any transaction that is expected to obtain the same 
or similar types of tax consequences and that is either factually 
similar or based on the same or similar tax strategy. Further, the term 
must be broadly construed in favor of disclosure. Treas. Reg. sec. 
1.6011-4(c)(4).
    \454\ Treas. Reg. sec. 1.6011-4(b)(2).
---------------------------------------------------------------------------
      The second category is any transaction that is offered 
under conditions of confidentiality. In general, a transaction 
is considered to be offered to a taxpayer under conditions of 
confidentiality if the advisor who is paid a minimum fee places 
a limitation on disclosure by the taxpayer of the tax treatment 
or tax structure of the transaction and the limitation on 
disclosure protects the confidentiality of that advisor's tax 
strategies (irrespective if such terms are legally 
binding).\455\
---------------------------------------------------------------------------
    \455\ Treas. Reg. sec. 1.6011-4(b)(3).
---------------------------------------------------------------------------
      The third category of reportable transactions is any 
transaction for which (1) the taxpayer has the right to a full 
or partial refund of fees if the intended tax consequences from 
the transaction are not sustained or, (2) the fees are 
contingent on the intended tax consequences from the 
transaction being sustained.\456\
---------------------------------------------------------------------------
    \456\ Treas. Reg. sec. 1.6011-4(b)(4).
---------------------------------------------------------------------------
      The fourth category of reportable transactions relates to 
any transaction resulting in a taxpayer claiming a loss (under 
section 165) of at least (1) $10 million in any single year or 
$20 million in any combination of years by a corporate taxpayer 
or a partnership with only corporate partners; (2) $2 million 
in any single year or $4 million in any combination of years by 
all other partnerships, S corporations, trusts, and 
individuals; or (3) $50,000 in any single year for individuals 
or trusts if the loss arises with respect to foreign currency 
translation losses.\457\
---------------------------------------------------------------------------
    \457\ Treas. Reg. sec. 1.6011-4(b)(5). Rev. Proc. 2003-24, 2003-11 
I.R.B. 599, exempts certain types of losses from this reportable 
transaction category.
---------------------------------------------------------------------------
      The fifth category of reportable transactions refers to 
any transaction done by certain taxpayers \458\ in which the 
tax treatment of the transaction differs (or is expected to 
differ) by more than $10 million from its treatment for book 
purposes (using generally accepted accounting principles) in 
any year.\459\
---------------------------------------------------------------------------
    \458\ The significant book-tax category applies only to taxpayers 
that are reporting companies under the Securities Exchange Act of 1934 
or business entities that have $250 million or more in gross assets.
    \459\ Treas. Reg. sec. 1.6011-4(b)(6). Rev. Proc. 2003-25, 2003-11 
I.R.B. 601, exempts certain types of transactions from this reportable 
transaction category.
---------------------------------------------------------------------------
      The final category of reportable transactions is any 
transaction that results in a tax credit exceeding $250,000 
(including a foreign tax credit) if the taxpayer holds the 
underlying asset for less than 45 days.\460\
---------------------------------------------------------------------------
    \460\ Treas. Reg. sec. 1.6011-4(b)(7).
---------------------------------------------------------------------------
      Under present law, there is no specific penalty for 
failing to disclose a reportable transaction; however, such a 
failure can jeopardize a taxpayer's ability to claim that any 
income tax understatement attributable to such undisclosed 
transaction is due to reasonable cause, and that the taxpayer 
acted in good faith.\461\
---------------------------------------------------------------------------
    \461\ Section 6664(c) provides that a taxpayer can avoid the 
imposition of a section 6662 accuracy-related penalty in cases where 
the taxpayer can demonstrate that there was reasonable cause for the 
underpayment and that the taxpayer acted in good faith. Regulations 
under sections 6662 and 6664 provide that a taxpayer's failure to 
disclose a reportable transaction is a strong indication that the 
taxpayer failed to act in good faith, which would bar relief under 
section 6664(c).
---------------------------------------------------------------------------

                               HOUSE BILL

In general
      The House bill creates a new penalty for any person who 
fails to include with any return or statement any required 
information with respect to a reportable transaction. The new 
penalty applies without regard to whether the transaction 
ultimately results in an understatement of tax, and applies in 
addition to any accuracy-related penalty that may be imposed.
Transactions to be disclosed
      The House bill does not define the terms ``listed 
transaction'' \462\ or ``reportable transaction,'' nor does it 
explain the type of information that must be disclosed in order 
to avoid the imposition of a penalty. Rather, the House bill 
authorizes the Treasury Department to define a ``listed 
transaction'' and a ``reportable transaction'' under section 
6011.
---------------------------------------------------------------------------
    \462\ The House bill provides that, except as provided in 
regulations, a listed transaction means a reportable transaction, which 
is the same as, or substantially similar to, a transaction specifically 
identified by the Secretary as a tax avoidance transaction for purposes 
of section 6011. For this purpose, it is expected that the definition 
of ``substantially similar'' will be the definition used in Treas. Reg. 
sec. 1.6011-4(c)(4). However, the Secretary may modify this definition 
(as well as the definitions of ``listed transaction'' and ``reportable 
transactions'') as appropriate.
---------------------------------------------------------------------------
Penalty rate
      The penalty for failing to disclose a reportable 
transaction is $10,000 in the case of a natural person and 
$50,000 in any other case. The amount is increased to $100,000 
and $200,000, respectively, if the failure is with respect to a 
listed transaction. The penalty cannot be waived with respect 
to a listed transaction. As to reportable transactions, the IRS 
Commissioner or his delegate can rescind (or abate) the penalty 
only if rescinding the penalty would promote compliance with 
the tax laws and effective tax administration. The decision to 
rescind a penalty must be accompanied by a record describing 
the facts and reasons for the action and the amount rescinded. 
There will be no taxpayer right to judicially appeal a refusal 
to rescind a penalty.\463\ The IRS also is required to submit 
an annual report to Congress summarizing the application of the 
disclosure penalties and providing a description of each 
penalty rescinded under this provision and the reasons for the 
rescission.
---------------------------------------------------------------------------
    \463\ This does not limit the ability of a taxpayer to challenge 
whether a penalty is appropriate (e.g., a taxpayer may litigate the 
issue of whether a transaction is a reportable transaction (and thus 
subject to the penalty if not disclosed) or not a reportable 
transaction (and thus not subject to the penalty)).
---------------------------------------------------------------------------
Effective date
      The House bill provision is effective for returns and 
statements the due date for which is after the date of 
enactment.

                            SENATE AMENDMENT

In general
      The Senate amendment is the same as the House bill, with 
certain modifications.
Transactions to be disclosed
      Like the House bill, the Senate amendment does not define 
the terms ``listed transaction'' or ``reportable transaction'' 
but, rather, authorizes the Treasury Department to define a 
``listed transaction'' and a ``reportable transaction'' under 
section 6011.
Penalty rate
      Under the Senate amendment, the penalty for failing to 
disclose a reportable transaction generally is $50,000. The 
amount is increased to $100,000 if the failure is with respect 
to a listed transaction. For large entities and high net worth 
individuals, the penalty amount is doubled (i.e., $100,000 for 
a reportable transaction and $200,000 for a listed 
transaction).
      The penalty cannot be waived with respect to a listed 
transaction. As to reportable transactions, the penalty can be 
rescinded (or abated) only if: (1) the taxpayer on whom the 
penalty is imposed has a history of complying with the Federal 
tax laws, (2) it is shown that the violation is due to an 
unintentional mistake of fact, (3) imposing the penalty would 
be against equity and good conscience, and (4) rescinding the 
penalty would promote compliance with the tax laws and 
effective tax administration. The authority to rescind the 
penalty can only be exercised by the IRS Commissioner 
personally or the head of the Office of Tax Shelter Analysis. 
Thus, the penalty cannot be rescinded by a revenue agent, an 
Appeals officer, or any other IRS personnel. The decision to 
rescind a penalty must be accompanied by a record describing 
the facts and reasons for the action and the amount rescinded. 
There will be no taxpayer right to appeal a refusal to rescind 
a penalty. The IRS also is required to submit an annual report 
to Congress summarizing the application of the disclosure 
penalties and providing a description of each penalty rescinded 
under this provision and the reasons for the rescission.
      A ``large entity'' is defined as any entity with gross 
receipts in excess of $10 million in the year of the 
transaction or in the preceding year. A ``high net worth 
individual'' is defined as any individual whose net worth 
exceeds $2 million, based on the fair market value of the 
individual's assets and liabilities immediately before entering 
into the transaction.
      A public entity that is required to pay a penalty for 
failing to disclose a listed transaction (or is subject to an 
understatement penalty attributable to a non-disclosed listed 
transaction, a non-disclosed reportable avoidance 
transaction,\464\ or a transaction that lacks economic 
substance) must disclose the imposition of the penalty in 
reports to the Securities and Exchange Commission for such 
period as the Secretary shall specify. The provision applies 
without regard to whether the taxpayer determines the amount of 
the penalty to be material to the reports in which the penalty 
must appear, and treats any failure to disclose a transaction 
in such reports as a failure to disclose a listed transaction. 
A taxpayer must disclose a penalty in reports to the Securities 
and Exchange Commission once the taxpayer has exhausted its 
administrative and judicial remedies with respect to the 
penalty (or if earlier, when paid). In addition, the Secretary 
is required to make public the name of any person that is 
required to pay a penalty for failing to disclose a listed 
transaction (or is subject to an understatement penalty 
attributable to a non-disclosed listed transaction, a non-
disclosed reportable avoidance transaction, or a transaction 
that lacks economic substance), as well as the amount of such 
penalty.
---------------------------------------------------------------------------
    \464\ A reportable avoidance transaction is a reportable 
transaction with a significant tax avoidance purpose.
---------------------------------------------------------------------------
Effective date
      The Senate amendment provision is effective for returns 
and statements the due date for which is after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, with the 
following modifications.
      In determining whether to rescind (or abate) the penalty 
for failing to disclose a reportable transaction on the grounds 
that doing so would promote compliance with the tax laws and 
effective tax administration, the conferees intend that the IRS 
Commissioner take into account whether: (1) the person on whom 
the penalty is imposed has a history of complying with the tax 
laws; (2) the violation is due to an unintentional mistake of 
fact; and (3) imposing the penalty would be against equity and 
good conscience.
      In addition, the conference agreement provides that a 
public entity that is required to pay a penalty for failing to 
disclose a listed transaction (or is subject to an 
understatement penalty attributable to a non-disclosed listed 
transaction or a non-disclosed reportable avoidance 
transaction) must disclose the imposition of the penalty in 
reports to the Securities and Exchange Commission for such 
period as the Secretary shall specify. This requirement applies 
without regard to whether the taxpayer determines the amount of 
the penalty to be material to the reports in which the penalty 
must appear, and treats any failure to disclose a transaction 
in such reports as a failure to disclose a listed transaction. 
A taxpayer must disclose a penalty in reports to the Securities 
and Exchange Commission once the taxpayer has exhausted its 
administrative and judicial remedies with respect to the 
penalty (or if earlier, when paid). However, the taxpayer is 
only required to report the penalty one time. The conference 
agreement further provides that this requirement also applies 
to a public entity that is subject to a gross valuation 
misstatement penalty under section 6662(h) attributable to a 
non-disclosed listed transaction or non-disclosed reportable 
avoidance transaction.
2. Modifications to the accuracy-related penalties for listed 
        transactions and reportable transactions having a significant 
        tax avoidance purpose (sec. 612 of the House bill, sec. 403 of 
        the Senate amendment, and new sec. 6662A of the Code)

                              PRESENT LAW

      The accuracy-related penalty applies to the portion of 
any underpayment that is attributable to (1) negligence, (2) 
any substantial understatement of income tax, (3) any 
substantial valuation misstatement, (4) any substantial 
overstatement of pension liabilities, or (5) any substantial 
estate or gift tax valuation understatement. If the correct 
income tax liability exceeds that reported by the taxpayer by 
the greater of 10 percent of the correct tax or $5,000 ($10,000 
in the case of corporations), then a substantial understatement 
exists and a penalty may be imposed equal to 20 percent of the 
underpayment of tax attributable to the understatement.\465\ 
The amount of any understatement generally is reduced by any 
portion attributable to an item if (1) the treatment of the 
item is or was supported by substantial authority, or (2) facts 
relevant to the tax treatment of the item were adequately 
disclosed and there was a reasonable basis for its tax 
treatment.\466\
---------------------------------------------------------------------------
    \465\ Sec. 6662.
    \466\ Sec. 6662(d)(2)(B).
---------------------------------------------------------------------------
      Special rules apply with respect to tax shelters.\467\ 
For understatements by non-corporate taxpayers attributable to 
tax shelters, the penalty may be avoided only if the taxpayer 
establishes that, in addition to having substantial authority 
for the position, the taxpayer reasonably believed that the 
treatment claimed was more likely than not the proper treatment 
of the item. This reduction in the penalty is unavailable to 
corporate tax shelters.
---------------------------------------------------------------------------
    \467\ Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
      The understatement penalty generally is abated (even with 
respect to tax shelters) in cases in which the taxpayer can 
demonstrate that there was ``reasonable cause'' for the 
underpayment and that the taxpayer acted in good faith.\468\ 
The relevant regulations provide that reasonable cause exists 
where the taxpayer ``reasonably relies in good faith on an 
opinion based on a professional tax advisor's analysis of the 
pertinent facts and authorities [that] . . . unambiguously 
concludes that there is a greater than 50-percent likelihood 
that the tax treatment of the item will be upheld if 
challenged'' by the IRS.\469\
---------------------------------------------------------------------------
    \468\ Sec. 6664(c).
    \469\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
1.6664-4(c).
---------------------------------------------------------------------------

                               HOUSE BILL

In general
      The House bill modifies the present-law accuracy related 
penalty by replacing the rules applicable to tax shelters with 
a new accuracy-related penalty that applies to listed 
transactions and reportable transactions with a significant tax 
avoidance purpose (hereinafter referred to as a ``reportable 
avoidance transaction'').\470\ The penalty rate and defenses 
available to avoid the penalty vary depending on whether the 
transaction was adequately disclosed.
---------------------------------------------------------------------------
    \470\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meanings as used for purposes of the 
penalty for failing to disclose reportable transactions.
---------------------------------------------------------------------------
            Disclosed transactions
      In general, a 20-percent accuracy-related penalty is 
imposed on any understatement attributable to an adequately 
disclosed listed transaction or reportable avoidance 
transaction. The only exception to the penalty is if the 
taxpayer satisfies a more stringent reasonable cause and good 
faith exception (hereinafter referred to as the ``strengthened 
reasonable cause exception''), which is described below. The 
strengthened reasonable cause exception is available only if 
the relevant facts affecting the tax treatment are adequately 
disclosed, there is or was substantial authority for the 
claimed tax treatment, and the taxpayer reasonably believed 
that the claimed tax treatment was more likely than not the 
proper treatment.
            Undisclosed transactions
      If the taxpayer does not adequately disclose the 
transaction, the strengthened reasonable cause exception is not 
available (i.e., a strict-liability penalty applies), and the 
taxpayer is subject to an increased penalty equal to 30 percent 
of the understatement.
Determination of the understatement amount
      The penalty is applied to the amount of any 
understatement attributable to the listed or reportable 
avoidance transaction without regard to other items on the tax 
return. For purposes of this provision, the amount of the 
understatement is determined as the sum of (1) the product of 
the highest corporate or individual tax rate (as appropriate) 
and the increase in taxable income resulting from the 
difference between the taxpayer's treatment of the item and the 
proper treatment of the item (without regard to other items on 
the tax return),\471\ and (2) the amount of any decrease in the 
aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item.
---------------------------------------------------------------------------
    \471\ For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses which would (without regard 
to section 1211) be allowed for such year, shall be treated as an 
increase in taxable income.
---------------------------------------------------------------------------
      Except as provided in regulations, a taxpayer's treatment 
of an item shall not take into account any amendment or 
supplement to a return if the amendment or supplement is filed 
after the earlier of when the taxpayer is first contacted 
regarding an examination of the return or such other date as 
specified by the Secretary.
Strengthened reasonable cause exception
      A penalty is not imposed under the provision with respect 
to any portion of an understatement if it shown that there was 
reasonable cause for such portion and the taxpayer acted in 
good faith. Such a showing requires (1) adequate disclosure of 
the facts affecting the transaction in accordance with the 
regulations under section 6011,\472\ (2) that there is or was 
substantial authority for such treatment, and (3) that the 
taxpayer reasonably believed that such treatment was more 
likely than not the proper treatment. For this purpose, a 
taxpayer will be treated as having a reasonable belief with 
respect to the tax treatment of an item only if such belief (1) 
is based on the facts and law that exist at the time the tax 
return (that includes the item) is filed, and (2) relates 
solely to the taxpayer's chances of success on the merits and 
does not take into account the possibility that (a) a return 
will not be audited, (b) the treatment will not be raised on 
audit, or (c) the treatment will be resolved through settlement 
if raised.
---------------------------------------------------------------------------
    \472\ See the previous discussion regarding the penalty for failing 
to disclose a reportable transaction.
---------------------------------------------------------------------------
      A taxpayer may (but is not required to) rely on an 
opinion of a tax advisor in establishing its reasonable belief 
with respect to the tax treatment of the item. However, a 
taxpayer may not rely on an opinion of a tax advisor for this 
purpose if the opinion (1) is provided by a ``disqualified tax 
advisor,'' or (2) is a ``disqualified opinion.''
            Disqualified tax advisor
      A disqualified tax advisor is any advisor who (1) is a 
material advisor \473\ and who participates in the 
organization, management, promotion or sale of the transaction 
or is related (within the meaning of section 267(b) or 
707(b)(1)) to any person who so participates, (2) is 
compensated directly or indirectly \474\ by a material advisor 
with respect to the transaction, (3) has a fee arrangement with 
respect to the transaction that is contingent on all or part of 
the intended tax benefits from the transaction being sustained, 
or (4) as determined under regulations prescribed by the 
Secretary, has a disqualifying financial interest with respect 
to the transaction.
---------------------------------------------------------------------------
    \473\ Under the House bill, the term ``material advisor'' (defined 
below in connection with the new information filing requirements for 
material advisors) means any person who provides any material aid, 
assistance, or advice with respect to organizing, managing, promoting, 
selling, implementing, or carrying out any reportable transaction, and 
who derives gross income in excess of $50,000 in the case of a 
reportable transaction substantially all of the tax benefits from which 
are provided to natural persons ($250,000 in any other case).
    \474\ This situation could arise, for example, when an advisor has 
an arrangement or understanding (oral or written) with an organizer, 
manager, or promoter of a reportable transaction that such party will 
recommend or refer potential participants to the advisor for an opinion 
regarding the tax treatment of the transaction.
---------------------------------------------------------------------------
      Organization, management, promotion or sale of a 
transaction.--A material advisor is considered as participating 
in the ``organization'' of a transaction if the advisor 
performs acts relating to the development of the transaction. 
This may include, for example, preparing documents (1) 
establishing a structure used in connection with the 
transaction (such as a partnership agreement), (2) describing 
the transaction (such as an offering memorandum or other 
statement describing the transaction), or (3) relating to the 
registration of the transaction with any federal, state or 
local government body.\475\ Participation in the ``management'' 
of a transaction means involvement in the decision-making 
process regarding any business activity with respect to the 
transaction. Participation in the ``promotion or sale'' of a 
transaction means involvement in the marketing or solicitation 
of the transaction to others. Thus, an advisor who provides 
information about the transaction to a potential participant is 
involved in the promotion or sale of a transaction, as is any 
advisor who recommends the transaction to a potential 
participant.
---------------------------------------------------------------------------
    \475\ An advisor should not be treated as participating in the 
organization of a transaction if the advisor's only involvement with 
respect to the organization of the transaction is the rendering of an 
opinion regarding the tax consequences of such transaction. However, 
such an advisor may be a ``disqualified tax advisor'' with respect to 
the transaction if the advisor participates in the management, 
promotion or sale of the transaction (or if the advisor is compensated 
by a material advisor, has a fee arrangement that is contingent on the 
tax benefits of the transaction, or as determined by the Secretary, has 
a continuing financial interest with respect to the transaction).
---------------------------------------------------------------------------
            Disqualified opinion
      An opinion may not be relied upon if the opinion (1) is 
based on unreasonable factual or legal assumptions (including 
assumptions as to future events), (2) unreasonably relies upon 
representations, statements, finding or agreements of the 
taxpayer or any other person, (3) does not identify and 
consider all relevant facts, or (4) fails to meet any other 
requirement prescribed by the Secretary.
Coordination with other penalties
      Any understatement upon which a penalty is imposed under 
the House bill is not subject to the accuracy-related penalty 
under section 6662. However, such understatement is included 
for purposes of determining whether any understatement (as 
defined in sec. 6662(d)(2)) is a substantial understatement as 
defined under section 6662(d)(1).
      The penalty imposed under the House bill shall not apply 
to any portion of an understatement to which a fraud penalty is 
applied under section 6663.
Effective date
      The House bill provision is effective for taxable years 
ending after the date of enactment.

                            SENATE AMENDMENT

In general
      The Senate amendment is the same as the House bill, with 
certain modifications.
            Disclosed transactions
      The Senate amendment is the same as the House bill with 
regard to accuracy-related penalties for understatements 
attributable to an adequately disclosed listed transaction or 
reportable avoidance transaction.
            Undisclosed transactions
      Like the House bill, the Senate amendment provides that a 
taxpayer is subject to an increased accuracy-related penalty 
equal to 30 percent of the understatement, and the strengthened 
reasonable cause exception is not available (i.e., a strict-
liability penalty applies), if the taxpayer does not adequately 
disclose the transaction.
      Under the Senate amendment, a public entity that is 
required to pay the 30-percent penalty also must disclose the 
imposition of the penalty in reports to the SEC for such 
periods as the Secretary shall specify. The disclosure to the 
SEC applies without regard to whether the taxpayer determines 
the amount of the penalty to be material to the reports in 
which the penalty must appear, and any failure to disclose such 
penalty in the reports is treated as a failure to disclose a 
listed transaction. A taxpayer must disclose a penalty in 
reports to the SEC once the taxpayer has exhausted its 
administrative and judicial remedies with respect to the 
penalty (or if earlier, when paid).
      The Senate amendment also provides that, once the 30-
percent penalty has been included in the Revenue Agent Report, 
the penalty cannot be compromised for purposes of a settlement 
without approval of the Commissioner personally or the head of 
the Office of Tax Shelter Analysis. Furthermore, the IRS is 
required to submit an annual report to Congress summarizing the 
application of this penalty and providing a description of each 
penalty compromised under this provision and the reasons for 
the compromise.
Disqualified tax advisor
      The Senate amendment provides that a disqualified tax 
advisor also includes ad advisor who has an arrangement with 
respect to the transaction which provides that contractual 
disputes between the taxpayer and the advisor are to be settled 
by arbitration or which limits damages by reference to fees 
paid to the advisor for such transaction.
Determination of the understatement amount
      The Senate amendment is the same as the House bill with 
regard to determining the amount of an understatement that is 
subject to this provision.
Strengthened reasonable cause exception
      The Senate amendment is the same as the House bill with 
regard to the reasonable cause exception to accuracy-related 
penalties under this provision.\476\
---------------------------------------------------------------------------
    \476\ Under the Senate amendment, the term ``material advisor'' 
(defined below in connection with the new information filing 
requirements for material advisors) means any person who provides any 
material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, insuring or carrying out 
any reportable transaction, and who derives gross income in excess of 
$50,000 in the case of a reportable transaction substantially all of 
the tax benefits from which are provided to natural persons ($250,000 
in any other case).
---------------------------------------------------------------------------
Coordination with other penalties
      The Senate amendment is the same as the House bill with 
regard to coordination between the penalty imposed under this 
provision and other penalties.
Effective date
      The Senate amendment provision is effective for taxable 
years ending after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, except 
the conference agreement also provides that any understatement 
upon which a penalty is imposed under the conference agreement 
is not subject to the valuation misstatement penalties under 
sections 6662(e) or 6662(h).
3. Tax shelter exception to confidentiality privileges relating to 
        taxpayer communications (sec. 613 of the House bill, sec. 406 
        of the Senate amendment, and sec. 7525 of the Code)

                              PRESENT LAW

      In general, a common law privilege of confidentiality 
exists for communications between an attorney and client with 
respect to the legal advice the attorney gives the client. The 
Code provides that, with respect to tax advice, the same common 
law protections of confidentiality that apply to a 
communication between a taxpayer and an attorney also apply to 
a communication between a taxpayer and a federally authorized 
tax practitioner to the extent the communication would be 
considered a privileged communication if it were between a 
taxpayer and an attorney. This rule is inapplicable to 
communications regarding corporate tax shelters.

                               HOUSE BILL

      The House bill modifies the rule relating to corporate 
tax shelters by making it applicable to all tax shelters, 
whether entered into by corporations, individuals, 
partnerships, tax-exempt entities, or any other entity. 
Accordingly, communications with respect to tax shelters are 
not subject to the confidentiality provision of the Code that 
otherwise applies to a communication between a taxpayer and a 
federally authorized tax practitioner.
      Effective date.--The House bill provision is effective 
with respect to communications made on or after the date of 
enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
4. Statute of limitations for unreported listed transactions (sec. 614 
        of the House bill, sec. 416 of the Senate amendment, and sec. 
        6501 of the Code)

                              PRESENT LAW

      In general, the Code requires that taxes be assessed 
within three years \477\ after the date a return is filed.\478\ 
If there has been a substantial omission of items of gross 
income that totals more than 25 percent of the amount of gross 
income shown on the return, the period during which an 
assessment must be made is extended to six years.\479\ If an 
assessment is not made within the required time periods, the 
tax generally cannot be assessed or collected at any future 
time. Tax may be assessed at any time if the taxpayer files a 
false or fraudulent return with the intent to evade tax or if 
the taxpayer does not file a tax return at all.\480\
---------------------------------------------------------------------------
    \477\ Sec. 6501(a).
    \478\ For this purpose, a return that is filed before the date on 
which it is due is considered to be filed on the required due date 
(sec. 6501(b)(1)).
    \479\ Sec. 6501(e).
    \480\ Sec. 6501(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill extends the statute of limitations with 
respect to a listed transaction if a taxpayer fails to include 
on any return or statement for any taxable year any information 
with respect to a listed transaction \481\ which is required to 
be included (under section 6011) with such return or statement. 
The statute of limitations with respect to such a transaction 
will not expire before the date which is one year after the 
earlier of (1) the date on which the Secretary is furnished the 
information so required, or (2) the date that a material 
advisor (as defined in 6111) satisfies the list maintenance 
requirements (as defined by section 6112) with respect to a 
request by the Secretary. For example, if a taxpayer engaged in 
a transaction in 2005 that becomes a listed transaction in 2007 
and the taxpayer fails to disclose such transaction in the 
manner required by Treasury regulations, then the transaction 
is subject to the extended statute of limitations.\482\
---------------------------------------------------------------------------
    \481\ The term ``listed transaction'' has the same meaning as 
described in a previous provision regarding the penalty for failure to 
disclose reportable transactions.
    \482\ If the Treasury Department lists a transaction in a year 
subsequent to the year in which a taxpayer entered into such 
transaction and the taxpayer's tax return for the year the transaction 
was entered into is closed by the statute of limitations prior to the 
date the transaction became a listed transaction, this provision does 
not re-open the statute of limitations with respect to such transaction 
for such year. However, if the purported tax benefits of the 
transaction are recognized over multiple tax years, the provision's 
extension of the statute of limitations shall apply to such tax 
benefits in any subsequent tax year in which the statute of limitations 
had not closed prior to the date the transaction became a listed 
transaction.
---------------------------------------------------------------------------
      Effective date.--The House bill provision is effective 
for taxable years with respect to which the period for 
assessing a deficiency did not expire before the date of 
enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
5. Disclosure of reportable transactions by material advisors (secs. 
        615 and 616 of the House bill, secs. 407 and 408 of the Senate 
        amendment, and secs. 6111 and 6707 of the Code)

                              PRESENT LAW

Registration of tax shelter arrangements
      An organizer of a tax shelter is required to register the 
shelter with the Secretary not later than the day on which the 
shelter is first offered for sale.\483\ A ``tax shelter'' means 
any investment with respect to which the tax shelter ratio 
\484\ for any investor as of the close of any of the first five 
years ending after the investment is offered for sale may be 
greater than two to one and which is: (1) required to be 
registered under Federal or State securities laws, (2) sold 
pursuant to an exemption from registration requiring the filing 
of a notice with a Federal or State securities agency, or (3) a 
substantial investment (greater than $250,000 and involving at 
least five investors).\485\
---------------------------------------------------------------------------
    \483\ Sec. 6111(a).
    \484\ The tax shelter ratio is, with respect to any year, the ratio 
that the aggregate amount of the deductions and 350 percent of the 
credits, which are represented to be potentially allowable to any 
investor, bears to the investment base (money plus basis of assets 
contributed) as of the close of the tax year.
    \485\ Sec. 6111(c).
---------------------------------------------------------------------------
      Other promoted arrangements are treated as tax shelters 
for purposes of the registration requirement if: (1) a 
significant purpose of the arrangement is the avoidance or 
evasion of Federal income tax by a corporate participant; (2) 
the arrangement is offered under conditions of confidentiality; 
and (3) the promoter may receive fees in excess of $100,000 in 
the aggregate.\486\
---------------------------------------------------------------------------
    \486\ Sec. 6111(d).
---------------------------------------------------------------------------
      In general, a transaction has a ``significant purpose of 
avoiding or evading Federal income tax'' if the transaction: 
(1) is the same as or substantially similar to a ``listed 
transaction,'' \487\ or (2) is structured to produce tax 
benefits that constitute an important part of the intended 
results of the arrangement and the promoter reasonably expects 
to present the arrangement to more than one taxpayer.\488\ 
Certain exceptions are provided with respect to the second 
category of transactions.\489\
---------------------------------------------------------------------------
    \487\ Treas. Reg. sec. 301.6111-2(b)(2).
    \488\ Treas. Reg. sec. 301.6111-2(b)(3).
    \489\ Treas. Reg. sec. 301.6111-2(b)(4).
---------------------------------------------------------------------------
      An arrangement is offered under conditions of 
confidentiality if: (1) an offeree has an understanding or 
agreement to limit the disclosure of the transaction or any 
significant tax features of the transaction; or (2) the 
promoter knows, or has reason to know, that the offeree's use 
or disclosure of information relating to the transaction is 
limited in any other manner.\490\
---------------------------------------------------------------------------
    \490\ The regulations provide that the determination of whether an 
arrangement is offered under conditions of confidentiality is based on 
all the facts and circumstances surrounding the offer. If an offeree's 
disclosure of the structure or tax aspects of the transaction are 
limited in any way by an express or implied understanding or agreement 
with or for the benefit of a tax shelter promoter, an offer is 
considered made under conditions of confidentiality, whether or not 
such understanding or agreement is legally binding. Treas. Reg. sec. 
301.6111-2(c)(1).
---------------------------------------------------------------------------
Failure to register tax shelter
      The penalty for failing to timely register a tax shelter 
(or for filing false or incomplete information with respect to 
the tax shelter registration) generally is the greater of one 
percent of the aggregate amount invested in the shelter or 
$500.\491\ However, if the tax shelter involves an arrangement 
offered to a corporation under conditions of confidentiality, 
the penalty is the greater of $10,000 or 50 percent of the fees 
payable to any promoter with respect to offerings prior to the 
date of late registration. Intentional disregard of the 
requirement to register increases the penalty to 75 percent of 
the applicable fees.
---------------------------------------------------------------------------
    \491\ Sec. 6707.
---------------------------------------------------------------------------
      Section 6707 also imposes (1) a $100 penalty on the 
promoter for each failure to furnish the investor with the 
required tax shelter identification number, and (2) a $250 
penalty on the investor for each failure to include the tax 
shelter identification number on a return.

                               HOUSE BILL

Disclosure of reportable transactions by material advisors
      The House bill repeals the present law rules with respect 
to registration of tax shelters. Instead, the House bill 
requires each material advisor with respect to any reportable 
transaction (including any listed transaction) \492\ to timely 
file an information return with the Secretary (in such form and 
manner as the Secretary may prescribe). The return must be 
filed on such date as specified by the Secretary.
---------------------------------------------------------------------------
    \492\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meaning as previously described in 
connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
      The information return will include (1) information 
identifying and describing the transaction, (2) information 
describing any potential tax benefits expected to result from 
the transaction, and (3) such other information as the 
Secretary may prescribe. It is expected that the Secretary may 
seek from the material advisor the same type of information 
that the Secretary may request from a taxpayer in connection 
with a reportable transaction.\493\
---------------------------------------------------------------------------
    \493\ See the previous discussion regarding the disclosure 
requirements under new section 6707A.
---------------------------------------------------------------------------
      A ``material advisor'' means any person (1) who provides 
material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, or carrying out any 
reportable transaction, and (2) who directly or indirectly 
derives gross income for such assistance or advice in excess of 
$250,000 ($50,000 in the case of a reportable transaction 
substantially all of the tax benefits from which are provided 
to natural persons) or such other amount as may be prescribed 
by the Secretary.
      The Secretary may prescribe regulations which provide (1) 
that only one material advisor has to file an information 
return in cases in which two or more material advisors would 
otherwise be required to file information returns with respect 
to a particular reportable transaction, (2) exemptions from the 
requirements of this section, and (3) other rules as may be 
necessary or appropriate to carry out the purposes of this 
section (including, for example, rules regarding the 
aggregation of fees in appropriate circumstances).
Penalty for failing to furnish information regarding reportable 
        transactions
      The House bill repeals the present-law penalty for 
failure to register tax shelters. Instead, the House bill 
imposes a penalty on any material advisor who fails to file an 
information return, or who files a false or incomplete 
information return, with respect to a reportable transaction 
(including a listed transaction).\494\ The amount of the 
penalty is $50,000. If the penalty is with respect to a listed 
transaction, the amount of the penalty is increased to the 
greater of (1) $200,000, or (2) 50 percent of the gross income 
of such person with respect to aid, assistance, or advice which 
is provided with respect to the transaction before the date the 
information return that includes the transaction is filed. 
Intentional disregard by a material advisor of the requirement 
to disclose a listed transaction increases the penalty to 75 
percent of the gross income.
---------------------------------------------------------------------------
    \494\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meaning as previously described in 
connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
      The penalty cannot be waived with respect to a listed 
transaction. As to reportable transactions, the penalty can be 
rescinded (or abated) only in exceptional circumstances.\495\ 
All or part of the penalty may be rescinded only if rescinding 
the penalty would promote compliance with the tax laws and 
effective tax administration. The decision to rescind a penalty 
must be accompanied by a record describing the facts and 
reasons for the action and the amount rescinded. There will be 
no right to judicially appeal a refusal to rescind a penalty. 
The IRS also is required to submit an annual report to Congress 
summarizing the application of the disclosure penalties and 
providing a description of each penalty rescinded under this 
provision and the reasons for the rescission.
---------------------------------------------------------------------------
    \495\ The Secretary's present-law authority to postpone certain 
tax-related deadlines because of Presidentially-declared disasters 
(sec. 7508A) will also encompass the authority to postpone the 
reporting deadlines established by the provision.
---------------------------------------------------------------------------
Effective date
      The House bill provision requiring disclosure of 
reportable transactions by material advisors applies to 
transactions with respect to which material aid, assistance or 
advice is provided after the date of enactment.
      The House bill provision imposing a penalty for failing 
to disclose reportable transactions applies to returns the due 
date for which is after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except the Senate amendment also includes in the definition of 
a ``material advisor'' any person who provides material aid, 
assistance, or advice with respect to insuring any reportable 
transaction (and who derives gross income for such assistance 
or advice in excess of the amounts specified in the House 
bill).

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
6. Investor lists and modification of penalty for failure to maintain 
        investor lists (secs. 615 and 617 of the House bill, secs. 407 
        and 409 of the Senate amendment, and secs. 6112 and 6708 of the 
        Code)

                              PRESENT LAW

Investor lists
      Any organizer or seller of a potentially abusive tax 
shelter must maintain a list identifying each person who was 
sold an interest in any such tax shelter with respect to which 
registration was required under section 6111 (even though the 
particular party may not have been subject to confidentiality 
restrictions).\496\ Recently issued regulations under section 
6112 contain rules regarding the list maintenance 
requirements.\497\ In general, the regulations apply to 
transactions that are potentially abusive tax shelters entered 
into, or acquired after, February 28, 2003.\498\
---------------------------------------------------------------------------
    \496\ Sec. 6112.
    \497\ Treas. Reg. sec. 301.6112-1.
    \498\ A special rule applies the list maintenance requirements to 
transactions entered into after February 28, 2000 if the transaction 
becomes a listed transaction (as defined in Treas. Reg. 1.6011-4) after 
February 28, 2003.
---------------------------------------------------------------------------
      The regulations provide that a person is an organizer or 
seller of a potentially abusive tax shelter if the person is a 
material advisor with respect to that transaction.\499\ A 
material advisor is defined as any person who is required to 
register the transaction under section 6111, or expects to 
receive a minimum fee of (1) $250,000 for a transaction that is 
a potentially abusive tax shelter if all participants are 
corporations, or (2) $50,000 for any other transaction that is 
a potentially abusive tax shelter.\500\ For listed transactions 
(as defined in the regulations under section 6011), the minimum 
fees are reduced to $25,000 and $10,000, respectively.
---------------------------------------------------------------------------
    \499\ Treas. Reg. sec. 301.6112-1(c)(1).
    \500\ Treas. Reg. sec. 301.6112-1(c)(2) and (3).
---------------------------------------------------------------------------
      A potentially abusive tax shelter is any transaction that 
(1) is required to be registered under section 6111, (2) is a 
listed transaction (as defined under the regulations under 
section 6011), or (3) any transaction that a potential material 
advisor, at the time the transaction is entered into, knows is 
or reasonably expects will become a reportable transaction (as 
defined under the new regulations under section 6011).\501\
---------------------------------------------------------------------------
    \501\ Treas. Reg. sec. 301.6112-1(b).
---------------------------------------------------------------------------
      The Secretary is required to prescribe regulations which 
provide that, in cases in which two or more persons are 
required to maintain the same list, only one person would be 
required to maintain the list.\502\
---------------------------------------------------------------------------
    \502\ Sec. 6112(c)(2).
---------------------------------------------------------------------------
Penalty for failing to maintain investor lists
      Under section 6708, the penalty for failing to maintain 
the list required under section 6112 is $50 for each name 
omitted from the list (with a maximum penalty of $100,000 per 
year).

                               HOUSE BILL

Investor lists
      Each material advisor \503\ with respect to a reportable 
transaction (including a listed transaction) \504\ is required 
to maintain a list that (1) identifies each person with respect 
to whom the advisor acted as a material advisor with respect to 
the reportable transaction, and (2) contains other information 
as may be required by the Secretary. In addition, the provision 
authorizes (but does not require) the Secretary to prescribe 
regulations which provide that, in cases in which two or more 
persons are required to maintain the same list, only one person 
would be required to maintain the list.
---------------------------------------------------------------------------
    \503\ The term ``material advisor'' has the same meaning as when 
used in connection with the requirement to file an information return 
under section 6111.
    \504\ The terms ``reportable transaction'' and ``listed 
transaction'' have the same meaning as previously described in 
connection with the taxpayer-related provisions.
---------------------------------------------------------------------------
Penalty for failing to maintain investor lists
      The provision modifies the penalty for failing to 
maintain the required list by making it a time-sensitive 
penalty. Thus, a material advisor who is required to maintain 
an investor list and who fails to make the list available upon 
written request by the Secretary within 20 business days after 
the request will be subject to a $10,000 per day penalty. The 
penalty applies to a person who fails to maintain a list, 
maintains an incomplete list, or has in fact maintained a list 
but does not make the list available to the Secretary. The 
penalty can be waived if the failure to make the list available 
is due to reasonable cause.\505\
---------------------------------------------------------------------------
    \505\ In no event will failure to maintain a list be considered 
reasonable cause for failing to make a list available to the Secretary.
---------------------------------------------------------------------------
Effective date
      The House bill provision requiring a material advisor to 
maintain an investor list applies to transactions with respect 
to which material aid, assistance or advice is provided after 
the date of enactment. The House bill provision imposing a 
penalty for failing to maintain investor lists applies to 
requests made after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill. In 
addition, the Senate amendment clarifies that, for purposes of 
section 6112, the identity of any person is not privileged 
under the common law attorney-client privilege (or, 
consequently, the section 7525 federally authorized tax 
practitioner confidentiality provision).
      Effective date.--The Senate amendment provision 
clarifying that the identity of any person is not privileged 
for purposes of section 6112 is effective as if included in the 
amendments made by section 142 of the Deficit Reduction Act of 
1984.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
7. Penalty on promoters of tax shelters (sec. 618 of the House bill, 
        sec. 415 of the Senate amendment, and sec. 6700 of the Code)

                              PRESENT LAW

      A penalty is imposed on any person who organizes, assists 
in the organization of, or participates in the sale of any 
interest in, a partnership or other entity, any investment plan 
or arrangement, or any other plan or arrangement, if in 
connection with such activity the person makes or furnishes a 
qualifying false or fraudulent statement or a gross valuation 
overstatement.\506\ A qualified false or fraudulent statement 
is any statement with respect to the allowability of any 
deduction or credit, the excludability of any income, or the 
securing of any other tax benefit by reason of holding an 
interest in the entity or participating in the plan or 
arrangement which the person knows or has reason to know is 
false or fraudulent as to any material matter. A ``gross 
valuation overstatement'' means any statement as to the value 
of any property or services if the stated value exceeds 200 
percent of the correct valuation, and the value is directly 
related to the amount of any allowable income tax deduction or 
credit.
---------------------------------------------------------------------------
    \506\ Sec. 6700.
---------------------------------------------------------------------------
      The amount of the penalty is $1,000 (or, if the person 
establishes that it is less, 100 percent of the gross income 
derived or to be derived by the person from such activity). A 
penalty attributable to a gross valuation misstatement can be 
waived on a showing that there was a reasonable basis for the 
valuation and it was made in good faith.

                               HOUSE BILL

      The House bill modifies the penalty amount to equal 50 
percent of the gross income derived by the person from the 
activity for which the penalty is imposed. The new penalty rate 
applies to any activity that involves a statement regarding the 
tax benefits of participating in a plan or arrangement if the 
person knows or has reason to know that such statement is false 
or fraudulent as to any material matter. The enhanced penalty 
does not apply to a gross valuation overstatement.
      Effective date.--The House bill provision is effective 
for activities occurring after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment modifies the penalty amount to equal 
100 percent of the gross income derived by the person from the 
activity for which the penalty is imposed. The new penalty rate 
applies to (1) each instance of any activity that involves a 
statement (including a gross valuation overstatement) regarding 
the tax benefits of participating in a plan or arrangement if 
the person knows or has reason to know that such statement is 
false or fraudulent as to any material matter, (2) each 
instance in which income was derived from such activity, and 
(3) each person who participated in such activity. In addition, 
the Senate amendment imposes joint and several liability upon 
all persons who are subject to a penalty for such activity. The 
Senate amendment also provides that the payment of a penalty 
under this provision, or the payment of any amount to settle or 
avoid the imposition of such a penalty, is not deductible for 
tax purposes.
      Effective date.--The Senate amendment provision is 
effective for activities occurring after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
8. Penalty for aiding and abetting the understatement of tax liability 
        (sec. 419 of the Senate amendment and sec. 6701 of the Code)

                              PRESENT LAW

      A penalty is imposed on a person who: (1) aids or assists 
in or advises with respect to a tax return or other document; 
(2) knows (or has reason to believe) that such document will be 
used in connection with a material tax matter; and (3) knows 
that this would result in an understatement of tax of another 
person. In general, the amount of the penalty is $1,000. If the 
document relates to the tax return of a corporation, the amount 
of the penalty is $10,000.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment expands the scope of this penalty in 
several ways. First, it applies the penalty to aiding or 
assisting with respect to tax liability. Second, it applies the 
penalty to each instance of aiding or abetting. Third, it 
increases the amount of the penalty to a maximum of 100 percent 
of the gross income derived (or to be derived) from the aiding 
or abetting. Fourth, if more than one person is liable for the 
penalty, all such persons are jointly and severally liable for 
the penalty. Fifth, the penalty, as well as amounts paid to 
settle or avoid the imposition of the penalty, is not 
deductible for tax purposes.
      Effective date.--The Senate amendment provision is 
effective for activities after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
9. Modifications of substantial understatement penalty for 
        nonreportable transactions (sec. 619 of the House bill, sec. 
        405 of the Senate amendment, and sec. 6662 of the Code)

                              PRESENT LAW

      An accuracy-related penalty equal to 20 percent applies 
to any substantial understatement of tax. A ``substantial 
understatement'' exists if the correct income tax liability for 
a taxable year exceeds that reported by the taxpayer by the 
greater of 10 percent of the correct tax or $5,000 ($10,000 in 
the case of most corporations).\507\
---------------------------------------------------------------------------
    \507\ Sec. 6662(a) and (d)(1)(A).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill modifies the definition of ``substantial'' 
for corporate taxpayers. Under the House bill, a corporate 
taxpayer has a substantial understatement if the amount of the 
understatement for the taxable year exceeds the lesser of (1) 
10 percent of the tax required to be shown on the return for 
the taxable year (or, if greater, $10,000), or (2) $10 million.
      Effective date.--The House bill provision is effective 
for taxable years beginning after date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill with 
regard to modifying the definition of ``substantial'' for 
corporate taxpayers.
      In addition, the Senate amendment elevates the standard 
that a taxpayer must satisfy in order to reduce the amount of 
an understatement for undisclosed items. With respect to the 
treatment of an item whose facts are not adequately disclosed, 
a resulting understatement is reduced only if the taxpayer had 
a reasonable belief that the tax treatment was more likely than 
not the proper treatment.
      The Senate amendment also authorizes (but does not 
require) the Secretary to publish a list of positions for which 
it believes there is not substantial authority or there is no 
reasonable belief that the tax treatment is more likely than 
not the proper treatment (without regard to whether such 
positions affect a significant number of taxpayers). The list 
shall be published in the Federal Register or the Internal 
Revenue Bulletin.
      Effective date.--The Senate amendment provision is 
effective for taxable years beginning after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, except 
the conference agreement also modifies the requirement of the 
Secretary to prescribe a list of positions that do not have 
substantial authority, and authorizes (but does not require) 
the Secretary to publish such list.
10. Modification of actions to enjoin certain conduct related to tax 
        shelters and reportable transactions (sec. 620 of the House 
        bill, sec. 410 of the Senate amendment, and sec. 7408 of the 
        Code)

                              PRESENT LAW

      The Code authorizes civil actions to enjoin any person 
from promoting abusive tax shelters or aiding or abetting the 
understatement of tax liability.\508\
---------------------------------------------------------------------------
    \508\ Sec. 7408.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill expands this rule so that injunctions may 
also be sought with respect to the requirements relating to the 
reporting of reportable transactions \509\ and the keeping of 
lists of investors by material advisors.\510\ Thus, under the 
House bill, an injunction may be sought against a material 
advisor to enjoin the advisor from (1) failing to file an 
information return with respect to a reportable transaction, or 
(2) failing to maintain, or to timely furnish upon written 
request by the Secretary, a list of investors with respect to 
each reportable transaction.
---------------------------------------------------------------------------
    \509\ Sec. 6707, as amended by other provisions of this bill.
    \510\ Sec. 6708, as amended by other provisions of this bill.
---------------------------------------------------------------------------
      Effective date.--The House bill provision is effective on 
the day after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except the Senate amendment also permits injunctions to be 
sought with respect to violations of any of the rules under 
Circular 230, which regulates the practice of representatives 
of persons before the Department of the Treasury.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
11. Penalty on failure to report interests in foreign financial 
        accounts (sec. 621 of the House bill, sec. 412 of the Senate 
        amendment, and sec. 5321 of Title 31, United States Code)

                              PRESENT LAW

      The Secretary must require citizens, residents, or 
persons doing business in the United States to keep records and 
file reports when that person makes a transaction or maintains 
an account with a foreign financial entity.\511\ In general, 
individuals must fulfill this requirement by answering 
questions regarding foreign accounts or foreign trusts that are 
contained in Part III of Schedule B of the IRS Form 1040. 
Taxpayers who answer ``yes'' in response to the question 
regarding foreign accounts must then file Treasury Department 
Form TD F 90-22.1. This form must be filed with the Department 
of the Treasury, and not as part of the tax return that is 
filed with the IRS.
---------------------------------------------------------------------------
    \511\ 31 U.S.C. sec. 5314.
---------------------------------------------------------------------------
      The Secretary may impose a civil penalty on any person 
who willfully violates this reporting requirement. The civil 
penalty is the amount of the transaction or the value of the 
account, up to a maximum of $100,000; the minimum amount of the 
penalty is $25,000.\512\ In addition, any person who willfully 
violates this reporting requirement is subject to a criminal 
penalty. The criminal penalty is a fine of not more than 
$250,000 or imprisonment for not more than five years (or 
both); if the violation is part of a pattern of illegal 
activity, the maximum amount of the fine is increased to 
$500,000 and the maximum length of imprisonment is increased to 
10 years.\513\
---------------------------------------------------------------------------
    \512\ 31 U.S.C. sec. 5321(a)(5).
    \513\ 31 U.S.C. sec. 5322.
---------------------------------------------------------------------------
      On April 26, 2002, the Secretary submitted to the 
Congress a report on these reporting requirements.\514\ This 
report, which was statutorily required,\515\ studies methods 
for improving compliance with these reporting requirements. It 
makes several administrative recommendations, but no 
legislative recommendations. A further report was required to 
be submitted by the Secretary to the Congress by October 26, 
2002.
---------------------------------------------------------------------------
    \514\ A Report to Congress in Accordance with Sec. 361(b) of the 
Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism Act of 2001, April 26, 
2002.
    \515\ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 107-56).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill adds an additional civil penalty that may 
be imposed on any person who violates this reporting 
requirement (without regard to willfulness). This new civil 
penalty is up to $5,000. The penalty may be waived if any 
income from the account was properly reported on the income tax 
return and there was reasonable cause for the failure to 
report.
      Effective date.--The House bill provision is effective 
with respect to failures to report occurring on or after the 
date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except the maximum additional civil penalty for a non-willful 
act is up to $10,000. In addition, the Senate amendment 
increases the present-law penalty for willful behavior to the 
greater of $100,000 or 50 percent of the amount of the 
transaction or account.
      Effective date.--The Senate amendment provision is 
effective with respect to failures to report occurring on or 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
12. Regulation of individuals practicing before the Department of the 
        Treasury (sec. 622 of the House bill, sec. 414 of the Senate 
        amendment, and sec. 330 of Title 31, United States Code)

                              PRESENT LAW

      The Secretary is authorized to regulate the practice of 
representatives of persons before the Department of the 
Treasury.\516\ The Secretary is also authorized to suspend or 
disbar from practice before the Department a representative who 
is incompetent, who is disreputable, who violates the rules 
regulating practice before the Department, or who (with intent 
to defraud) willfully and knowingly misleads or threatens the 
person being represented (or a person who may be represented). 
The rules promulgated by the Secretary pursuant to this 
provision are contained in Circular 230.
---------------------------------------------------------------------------
    \516\ 31 U.S.C. sec. 330.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill makes two modifications to expand the 
sanctions that the Secretary may impose pursuant to these 
statutory provisions. First, the House bill expressly permits 
censure as a sanction. Second, the House bill permits the 
imposition of a monetary penalty as a sanction. If the 
representative is acting on behalf of an employer or other 
entity, the Secretary may impose a monetary penalty on the 
employer or other entity if it knew, or reasonably should have 
known, of the conduct. This monetary penalty on the employer or 
other entity may be imposed in addition to any monetary penalty 
imposed directly on the representative. These monetary 
penalties are not to exceed the gross income derived (or to be 
derived) from the conduct giving rise to the penalty. These 
monetary penalties may be in addition to, or in lieu of, any 
suspension, disbarment, or censure of such individual.
      The House bill also confirms the present-law authority of 
the Secretary to impose standards applicable to written advice 
with respect to an entity, plan, or arrangement that is of a 
type that the Secretary determines as having a potential for 
tax avoidance or evasion.
      Effective date.--The House bill modifications to expand 
the sanctions that the Secretary may impose are effective for 
actions taken after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill 
(except for several technical drafting modifications).
      Effective date.--The Senate amendment modifications to 
expand the sanctions that the Secretary may impose are 
effective for actions taken after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
13. Treatment of stripped bonds to apply to stripped interests in bond 
        and preferred stock funds (sec. 631 of the House bill, sec. 461 
        of the Senate amendment, and secs. 305 and 1286 of the Code)

                              PRESENT LAW

Assignment of income in general
      In general, an ``income stripping'' transaction involves 
a transaction in which the right to receive future income from 
income-producing property is separated from the property 
itself. In such transactions, it may be possible to generate 
artificial losses from the disposition of certain property or 
to defer the recognition of taxable income associated with such 
property.
      Common law has developed a rule (referred to as the 
``assignment of income'' doctrine) whereby if the right to 
receive income is transferred without an accompanying transfer 
of the underlying property, the transfer is not respected. A 
leading judicial decision relating to the assignment of income 
doctrine involved a case in which a taxpayer made a gift of 
detachable interest coupons before their due date while 
retaining the bearer bond. The U.S. Supreme Court ruled that 
the donor was taxable on the entire amount of interest when 
paid to the donee on the grounds that the transferor had 
``assigned'' to the donee the right to receive the income.\517\
---------------------------------------------------------------------------
    \517\ Helvering v. Horst, 311 U.S. 112 (1940).
---------------------------------------------------------------------------
      In addition to general common law assignment of income 
principles, specific statutory rules have been enacted to 
address certain specific types of stripping transactions, such 
as transactions involving stripped bonds and stripped preferred 
stock (which are discussed below).\518\ However, there are no 
specific statutory rules that address stripping transactions 
with respect to common stock or other equity interests (other 
than preferred stock).\519\
---------------------------------------------------------------------------
    \518\ Depending on the facts, the IRS also could determine that a 
variety of other Code-based and common law-based authorities could 
apply to income stripping transactions, including: (1) sections 269, 
382, 446(b), 482, 701, or 704 and the regulations thereunder; (2) 
authorities that recharacterize certain assignments or accelerations of 
future payments as financings; (3) business purpose, economic 
substance, and sham transaction doctrines; (4) the step transaction 
doctrine; and (5) the substance-over-form doctrine. See Notice 95-53, 
1995-2 C.B. 334 (accounting for lease strips and other stripping 
transactions).
    \519\ However, in Estate of Stranahan v. Commissioner, 472 F.2d 867 
(6th Cir. 1973), the court held that where a taxpayer sold a carved-out 
interest of stock dividends, with no personal obligation to produce the 
income, the transaction was treated as a sale of an income interest.
---------------------------------------------------------------------------
Stripped bonds
      Special rules are provided with respect to the purchaser 
and ``stripper'' of stripped bonds.\520\ A ``stripped bond'' is 
defined as a debt instrument in which there has been a 
separation in ownership between the underlying debt instrument 
and any interest coupon that has not yet become payable.\521\ 
In general, upon the disposition of either the stripped bond or 
the detached interest coupons, the retained portion and the 
portion that is disposed of each is treated as a new bond that 
is purchased at a discount and is payable at a fixed amount on 
a future date. Accordingly, section 1286 treats both the 
stripped bond and the detached interest coupons as individual 
bonds that are newly issued with original issue discount 
(``OID'') on the date of disposition. Consequently, section 
1286 effectively subjects the stripped bond and the detached 
interest coupons to the general OID periodic income inclusion 
rules.
---------------------------------------------------------------------------
    \520\ Sec. 1286.
    \521\ Sec. 1286(e).
---------------------------------------------------------------------------
      A taxpayer who purchases a stripped bond or one or more 
stripped coupons is treated as holding a new bond that is 
issued on the purchase date with OID in an amount that is equal 
to the excess of the stated redemption price at maturity (or in 
the case of a coupon, the amount payable on the due date) over 
the ratable share of the purchase price of the stripped bond or 
coupon, determined on the basis of the respective fair market 
values of the stripped bond and coupons on the purchase 
date.\522\ The OID on the stripped bond or coupon is includible 
in gross income under the general OID periodic income inclusion 
rules.
---------------------------------------------------------------------------
    \522\ Sec. 1286(a).
---------------------------------------------------------------------------
      A taxpayer who strips a bond and disposes of either the 
stripped bond or one or more stripped coupons must allocate the 
taxpayer's basis, immediately before the disposition, in the 
bond (with the coupons attached) between the retained and 
disposed items.\523\ Special rules apply to require that 
interest or market discount accrued on the bond prior to such 
disposition must be included in the taxpayer's gross income (to 
the extent that it had not been previously included in income) 
at the time the stripping occurs, and the taxpayer increases 
the basis in the bond by the amount of such accrued interest or 
market discount. The adjusted basis (as increased by any 
accrued interest or market discount) is then allocated between 
the stripped bond and the stripped interest coupons in relation 
to their respective fair market values. Amounts realized from 
the sale of stripped coupons or bonds constitute income to the 
taxpayer only to the extent such amounts exceed the basis 
allocated to the stripped coupons or bond. With respect to 
retained items (either the detached coupons or stripped bond), 
to the extent that the price payable on maturity, or on the due 
date of the coupons, exceeds the portion of the taxpayer's 
basis allocable to such retained items, the difference is 
treated as OID that is required to be included under the 
general OID periodic income inclusion rules.\524\
---------------------------------------------------------------------------
    \523\ Sec. 1286(b). Similar rules apply in the case of any person 
whose basis in any bond or coupon is determined by reference to the 
basis in the hands of a person who strips the bond.
    \524\ Special rules are provided with respect to stripping 
transactions involving tax-exempt obligations that treat OID (computed 
under the stripping rules) in excess of OID computed on the basis of 
the bond's coupon rate (or higher rate if originally issued at a 
discount) as income from a non-tax-exempt debt instrument (sec. 
1286(d)).
---------------------------------------------------------------------------
Stripped preferred stock
      ``Stripped preferred stock'' is defined as preferred 
stock in which there has been a separation in ownership between 
such stock and any dividend on such stock that has not become 
payable.\525\ A taxpayer who purchases stripped preferred stock 
is required to include in gross income, as ordinary income, the 
amounts that would have been includible if the stripped 
preferred stock was a bond issued on the purchase date with OID 
equal to the excess of the redemption price of the stock over 
the purchase price.\526\ This treatment is extended to any 
taxpayer whose basis in the stock is determined by reference to 
the basis in the hands of the purchaser. A taxpayer who strips 
and disposes the future dividends is treated as having 
purchased the stripped preferred stock on the date of such 
disposition for a purchase price equal to the taxpayer's 
adjusted basis in the stripped preferred stock.\527\
---------------------------------------------------------------------------
    \525\ Sec. 305(e)(5).
    \526\ Sec. 305(e)(1).
    \527\ Sec. 305(e)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill authorizes the Treasury Department to 
promulgate regulations that, in appropriate cases, apply rules 
that are similar to the present-law rules for stripped bonds 
and stripped preferred stock to direct or indirect interests in 
an entity or account substantially all of the assets of which 
consist of bonds (as defined in section 1286(e)(1)), preferred 
stock (as defined in section 305(e)(5)(B)), or any combination 
thereof. The House bill applies only to cases in which the 
present-law rules for stripped bonds and stripped preferred 
stock do not already apply to such interests.
      For example, such Treasury regulations could apply to a 
transaction in which a person effectively strips future 
dividends from shares in a money market mutual fund (and 
disposes either the stripped shares or stripped future 
dividends) by contributing the shares (with the future 
dividends) to a custodial account through which another person 
purchases rights to either the stripped shares or the stripped 
future dividends. However, it is intended that Treasury 
regulations issued under the House bill would not apply to 
certain transactions involving direct or indirect interests in 
an entity or account substantially all the assets of which 
consist of tax-exempt obligations (as defined in section 
1275(a)(3)), such as a tax-exempt bond partnership described in 
Rev. Proc. 2002-68,\528\ modifying and superceeding Rev. Proc. 
2002-16.\529\
---------------------------------------------------------------------------
    \528\ 2002-43 I.R.B. 753.
    \529\ 2002-9 I.R.B. 572.
---------------------------------------------------------------------------
      No inference is intended as to the treatment under the 
present-law rules for stripped bonds and stripped preferred 
stock, or under any other provisions or doctrines of present 
law, of interests in an entity or account substantially all of 
the assets of which consist of bonds, preferred stock, or any 
combination thereof. The Treasury regulations, when issued, 
would be applied prospectively, except in cases to prevent 
abuse.
      Effective date.--The House bill provision is effective 
for purchases and dispositions occurring after the date of 
enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
14. Minimum holding period for foreign tax credit with respect to 
        withholding taxes on income other than dividends (sec. 632 of 
        the House bill, sec. 456 of the Senate amendment, and sec. 901 
        of the Code)

                              PRESENT LAW

      In general, U.S. persons may credit foreign taxes against 
U.S. tax on foreign-source income. The amount of foreign tax 
credits that may be claimed in a year is subject to a 
limitation that prevents taxpayers from using foreign tax 
credits to offset U.S. tax on U.S.-source income. Separate 
limitations are applied to specific categories of income.
      As a consequence of the foreign tax credit limitations of 
the Code, certain taxpayers are unable to utilize their 
creditable foreign taxes to reduce their U.S. tax liability. 
U.S. taxpayers that are tax-exempt receive no U.S. tax benefit 
for foreign taxes paid on income that they receive.
      Present law denies a U.S. shareholder the foreign tax 
credits normally available with respect to a dividend from a 
corporation or a regulated investment company (``RIC'') if the 
shareholder has not held the stock for more than 15 days 
(within a 30-day testing period) in the case of common stock or 
more than 45 days (within a 90-day testing period) in the case 
of preferred stock (sec. 901(k)). The disallowance applies both 
to foreign tax credits for foreign withholding taxes that are 
paid on the dividend where the dividend-paying stock is held 
for less than these holding periods, and to indirect foreign 
tax credits for taxes paid by a lower-tier foreign corporation 
or a RIC where any of the required stock in the chain of 
ownership is held for less than these holding periods. Periods 
during which a taxpayer is protected from risk of loss (e.g., 
by purchasing a put option or entering into a short sale with 
respect to the stock) generally are not counted toward the 
holding period requirement. In the case of a bona fide contract 
to sell stock, a special rule applies for purposes of indirect 
foreign tax credits. The disallowance does not apply to foreign 
tax credits with respect to certain dividends received by 
active dealers in securities. If a taxpayer is denied foreign 
tax credits because the applicable holding period is not 
satisfied, the taxpayer is entitled to a deduction for the 
foreign taxes for which the credit is disallowed.

                               HOUSE BILL

      The House bill expands the present-law disallowance of 
foreign tax credits to include credits for gross-basis foreign 
withholding taxes with respect to any item of income or gain 
from property if the taxpayer who receives the income or gain 
has not held the property for more than 15 days (within a 30-
day testing period), exclusive of periods during which the 
taxpayer is protected from risk of loss. The House bill does 
not apply to foreign tax credits that are subject to the 
present-law disallowance with respect to dividends. The House 
bill also does not apply to certain income or gain that is 
received with respect to property held by active dealers. Rules 
similar to the present-law disallowance for foreign tax credits 
with respect to dividends apply to foreign tax credits that are 
subject to the House bill. In addition, the House bill 
authorizes the Treasury Department to issue regulations 
providing that the House bill does not apply in appropriate 
cases.
      Effective date.--The House bill provision is effective 
for amounts that are paid or accrued more than 30 days after 
the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment provision, except the 30-day testing period is 
changed to a 31-day testing period.
      In addition, the conferees intend that the Secretary will 
prescribe regulations to adapt the holding period and hedging 
rules of section 901(k) to property other than stock. It is 
anticipated that such regulations will provide that credits are 
not disallowed merely because a taxpayer eliminates its risk of 
loss from interest rate or currency fluctuations. In addition, 
it is intended that such regulations might permit other hedging 
activities, such as hedging of credit risk, provided that the 
taxpayer does not hedge most of its risk of loss with respect 
to the property unless there has been a meaningful and 
unanticipated change in circumstances.
15. Treatment of partnership loss transfers and partnership basis 
        adjustments (sec. 633 of the House bill, sec. 469 of the Senate 
        amendment, and secs. 704, 734, 743, and 754 of the Code)

                              PRESENT LAW

Contributions of property
      Under present law, if a partner contributes property to a 
partnership, generally no gain or loss is recognized to the 
contributing partner at the time of contribution.\530\ The 
partnership takes the property at an adjusted basis equal to 
the contributing partner's adjusted basis in the property.\531\ 
The contributing partner increases its basis in its partnership 
interest by the adjusted basis of the contributed 
property.\532\ Any items of partnership income, gain, loss and 
deduction with respect to the contributed property are 
allocated among the partners to take into account any built-in 
gain or loss at the time of the contribution.\533\ This rule is 
intended to prevent the transfer of built-in gain or loss from 
the contributing partner to the other partners by generally 
allocating items to the noncontributing partners based on the 
value of their contributions and by allocating to the 
contributing partner the remainder of each item.\534\
---------------------------------------------------------------------------
    \530\ Sec. 721.
    \531\ Sec. 723.
    \532\ Sec. 722.
    \533\ Sec. 704(c)(1)(A).
    \534\If there is an insufficient amount of an item to allocate to 
the noncontributing partners, Treasury regulations allow for curative 
or remedial allocations to remedy this insufficiency. Treas. Reg. sec. 
1.704-3(c) and (d).
---------------------------------------------------------------------------
      If the contributing partner transfers its partnership 
interest, the built-in gain or loss will be allocated to the 
transferee partner as it would have been allocated to the 
contributing partner.\535\ If the contributing partner's 
interest is liquidated, there is no specific guidance 
preventing the allocation of the built-in loss to the remaining 
partners. Thus, it appears that losses can be ``transferred'' 
to other partners where the contributing partner no longer 
remains a partner.
---------------------------------------------------------------------------
    \535\ Treas. Reg. sec. 1.704-3(a)(7).
---------------------------------------------------------------------------
Transfers of partnership interests
      Under present law, a partnership does not adjust the 
basis of partnership property following the transfer of a 
partnership interest unless the partnership has made a one-time 
election under section 754 to make basis adjustments.\536\ If 
an election is in effect, adjustments are made with respect to 
the transferee partner to account for the difference between 
the transferee partner's proportionate share of the adjusted 
basis of the partnership property and the transferee's basis in 
its partnership interest.\537\ These adjustments are intended 
to adjust the basis of partnership property to approximate the 
result of a direct purchase of the property by the transferee 
partner. Under these rules, if a partner purchases an interest 
in a partnership with an existing built-in loss and no election 
under section 754 is in effect, the transferee partner may be 
allocated a share of the loss when the partnership disposes of 
the property (or depreciates the property).
---------------------------------------------------------------------------
    \536\ Sec. 743(a).
    \537\ Sec. 743(b).
---------------------------------------------------------------------------
Distributions of partnership property
      With certain exceptions, partners may receive 
distributions of partnership property without recognition of 
gain or loss by either the partner or the partnership.\538\ In 
the case of a distribution in liquidation of a partner's 
interest, the basis of the property distributed in the 
liquidation is equal to the partner's adjusted basis in its 
partnership interest (reduced by any money distributed in the 
transaction).\539\ In a distribution other than in liquidation 
of a partner's interest, the distributee partner's basis in the 
distributed property is equal to the partnership's adjusted 
basis in the property immediately before the distribution, but 
not to exceed the partner's adjusted basis in the partnership 
interest (reduced by any money distributed in the same 
transaction).\540\
---------------------------------------------------------------------------
    \538\ Sec. 731(a) and (b).
    \539\ Sec. 732(b).
    \540\ Sec. 732(a).
---------------------------------------------------------------------------
      The determination of the basis of individual properties 
distributed by a partnership is dependent on the adjusted basis 
of the properties in the hands of the partnership.\541\ If a 
partnership interest is transferred to a partner and the 
partnership has not elected to adjust the basis of partnership 
property, a special basis rule provides for the determination 
of the transferee partner's basis of properties that are later 
distributed by the partnership.\542\ Under this rule, in 
determining the basis of property distributed by a partnership 
within 2 years following the transfer of the partnership 
interest, the transferee may elect to determine its basis as if 
the partnership had adjusted the basis of the distributed 
property under section 743(b) on the transfer. The special 
basis rule also applies to distributed property if, at the time 
of the transfer, the fair market value of partnership property 
other than money exceeds 110 percent of the partnership's basis 
in such property and a liquidation of the partnership interest 
immediately after the transfer would have resulted in a shift 
of basis to property subject to an allowance of depreciation, 
depletion or amortization.\543\
---------------------------------------------------------------------------
    \541\ Sec. 732 (a)(1) and (c).
    \542\ Sec. 732(d).
    \543\ Treas. Reg. sec. 1.732-1(d)(4).
---------------------------------------------------------------------------
      Adjustments to the basis of the partnership's 
undistributed properties are not required unless the 
partnership has made the election under section 754 to make 
basis adjustments.\544\ If an election is in effect under 
section 754, adjustments are made by a partnership to increase 
or decrease the remaining partnership assets to reflect any 
increase or decrease in the adjusted basis of the distributed 
properties in the hands of the distributee partner (or gain or 
loss recognized by the distributee partner).\545\ To the extent 
the adjusted basis of the distributed properties increases (or 
loss is recognized) the partnership's adjusted basis in its 
properties is decreased by a like amount; likewise, to the 
extent the adjusted basis of the distributed properties 
decrease (or gain is recognized), the partnership's adjusted 
basis in its properties is increased by a like amount. Under 
these rules, a partnership with no election in effect under 
section 754 may distribute property with an adjusted basis 
lower than the distributee partner's proportionate share of the 
adjusted basis of all partnership property and leave the 
remaining partners with a smaller net built-in gain or a larger 
net built-in loss than before the distribution.
---------------------------------------------------------------------------
    \544\ Sec. 734(a).
    \545\ Sec. 734(b).
---------------------------------------------------------------------------

                               HOUSE BILL

Contributions of property
      Under the provision, a built-in loss may be taken into 
account only by the contributing partner and not by other 
partners. Except as provided in regulations, in determining the 
amount of items allocated to partners other than the 
contributing partner, the basis of the contributed property is 
treated as the fair market value at the time of contribution. 
Thus, if the contributing partner's partnership interest is 
transferred or liquidated, the partnership's adjusted basis in 
the property is based on its fair market value at the time of 
contribution, and the built-in loss is eliminated.\546\
---------------------------------------------------------------------------
    \546\ It is intended that a corporation succeeding to attributes of 
the contributing corporate partner under section 381 shall be treated 
in the same manner as the contributing partner.
---------------------------------------------------------------------------
Transfers of partnership interests
      The provision provides generally that the basis 
adjustment rules under section 743 are mandatory in the case of 
the transfer of a partnership interest with respect to which 
there is a substantial built-in loss (rather than being 
elective as under present law). For this purpose, a substantial 
built-in loss exists if the partnership's adjusted basis in its 
property exceeds by more than $250,000 the fair market value of 
the partnership property.
      Thus, for example, assume that partner A sells his 25-
percent partnership interest to B for its fair market value of 
$1 million. Also assume that, immediately after the transfer, 
the fair market value of partnership assets is $4 million and 
the partnership's adjusted basis in the partnership assets is 
$4.3 million. Under the bill, section 743(b) applies, so that 
an adjustment is required to the adjusted basis of the 
partnership assets with respect to B. As a result, B would 
recognize no gain or loss if the partnership immediately sold 
all its assets for their fair market value.
      The bill provides that an electing investment partnership 
is not treated as having a substantial built-in loss, and thus 
is not required to make basis adjustments to partnership 
property, in the case of a transfer of a partnership interest. 
In lieu of the partnership basis adjustments, a partner-level 
loss limitation rule applies. Under this rule, the transferee 
partner's distributive share of losses (determined without 
regard to gains) from the sale or exchange of partnership 
property is not allowed, except to the extent it is established 
that the partner's share of such losses exceeds the loss 
recognized by the transferor partner. In the event of 
successive transfers, the transferee partner's distributive 
share of such losses is not allowed, except to the extent that 
it is established that such losses exceed the loss recognized 
by the transferor (or any prior transferor to the extent not 
fully offset by a prior disallowance under this rule). Losses 
disallowed under this rule do not decrease the transferee 
partner's basis in its partnership interest. Thus, on 
subsequent disposition of its partnership interest, the 
partner's gain is reduced (or loss increased) because the basis 
of the partnership interest has not been reduced by such 
losses. The provision is applied without regard to any 
termination of a partnership under section 708(b)(1)(B). In the 
case of a basis reduction to property distributed to the 
transferee partner in a nonliquidating distribution, the amount 
of the transferor's loss taken into account under this rule is 
reduced by the amount of the basis reduction.
      For this purpose, an electing investment partnership 
means a partnership that satisfies the following requirements: 
(1) it makes an election under the provision that is 
irrevocable except with the consent of the Secretary; (2) it 
would be an investment company under section 3(a)(1)(A) of the 
Investment Company Act of 1940 \547\ but for an exemption under 
paragraph (1) or (7) of section 3(c) of that Act; (3) it has 
never been engaged in a trade or business; (4) substantially 
all of its assets are held for investment; (5) at least 95 
percent of the assets contributed to it consist of money; (6) 
no assets contributed to it had an adjusted basis in excess of 
fair market value at the time of contribution; (7) all 
partnership interests are issued by the partnership pursuant to 
a private offering and during the 24-month period beginning on 
the date of the first capital contribution to the partnership; 
(8) the partnership agreement has substantive restrictions on 
each partner's ability to cause a redemption of the partner's 
interest, and (9) the partnership agreement provides for a term 
that is not in excess of 15 years.
---------------------------------------------------------------------------
    \547\ Section 3(a)(1)(A) of the Act provides, "when used in this 
title, `investment company' means any issuer which is or hold itself 
out as being engaged primarily, or proposes to engage primarily, in the 
business of investing, reinvesting, or trading in securities."
---------------------------------------------------------------------------
      The provision requires an electing investment partnership 
to furnish to any transferee partner the information necessary 
to enable the partner to compute the amount of losses 
disallowed under this rule.
Distributions of partnership property
      The provision provides that a basis adjustment under 
section 734(b) is required in the case of a distribution with 
respect to which there is a substantial basis reduction. A 
substantial basis reduction means a downward adjustment of more 
than $250,000 that would be made to the basis of partnership 
assets if a section 754 election were in effect.
      Thus, for example, assume that A and B each contributed 
$2.5 million to a newly formed partnership and C contributed $5 
million, and that the partnership purchased LMN stock for $3 
million and XYZ stock for $7 million. Assume that the value of 
each stock declined to $1 million. Assume LMN stock is 
distributed to C in liquidation of its partnership interest. 
Under present law, the basis of LMN stock in C's hands is $5 
million. Under present law, C would recognize a loss of $4 
million if the LMN stock were sold for $1 million.
      Under the provision, there is a substantial basis 
adjustment because the $2 million increase in the adjusted 
basis of LMN stock (described in section 734(b)(2)(B)) is 
greater than $250,000. Thus, the partnership is required to 
decrease the basis of XYZ stock (under section 734(b)(2)) by $2 
million (the amount by which the basis of LMN stock was 
increased), leaving a basis of $5 million. If the XYZ stock 
were then sold by the partnership for $1 million, A and B would 
each recognize a loss of $2 million.
Effective date
      The provision applies to contributions, distributions and 
transfers (as the case may be) after the date of enactment.
      In the case of an electing investment partnership in 
existence on June 4, 2004, the requirement that the partnership 
agreement have substantive restrictions on redemptions does not 
apply, and the requirement that the partnership agreement 
provide for a term not exceeding 15 years is modified to permit 
a term not exceeding 20 years.

                            SENATE AMENDMENT

      Under the provision, adjustments to the basis of 
partnership property in the event of a partnership distribution 
or the transfer of a partnership interest are required, not 
elective as under present law. However, the basis adjustments 
are elective, as under present law, in the case of the transfer 
of a partnership interest by reason of the partner's death. Any 
election made by a partnership under section 754 that is in 
effect when the provision becomes effective is treated as an 
election to adjust the basis of partnership property with 
respect to the transferee partner in the case of a transfer of 
a partnership interest upon the death of a partner. The 
provision repeals the special rule of section 732(d) for 
determining the transferee partner's basis in property that is 
later distributed by the partnership in cases in which the 
partnership did not have a section 754 election in effect with 
respect to the transfer of the partnership interest.
      Effective date.--The provision requiring partnership 
basis adjustments applies to transfers and distributions after 
the date of enactment.
      The provision repealing section 732(d) applies generally 
to transfers after the date of enactment, except that it 
applies to distributions made after the date which is 2 years 
following the date of enactment in the case of any transfer to 
which section 732(d) applies that is made on or before the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement generally follows the House 
bill, with modifications.
      The conference agreement modifies the qualification 
requirements for electing investment partnerships that are 
subject to a partner-level loss limitation rule in lieu of the 
requirement of partnership basis adjustments following certain 
transfers of partnership interests. Specifically, the 
conference agreement requires that all partnership interests be 
issued by such a partnership pursuant to a private offering 
prior to the date that is 24 months after the date of the first 
capital contribution to the partnership. The conferees intend 
that ``dry'' closings in which partnership interests are issued 
without the contribution of capital not start the running of 
the 24-month period.
      It is intended that in applying the requirement (with 
respect electing investment partnerships) that the partnership 
agreement have substantive restrictions on each partner's 
ability to cause a redemption, the following are illustrative 
examples of substantive restrictions: a violation of Federal or 
State law (such as ERISA or the Bank Holding Company Act); and 
imposition of a Federal excise tax on, or a change in the 
Federal tax-exempt status of, a tax-exempt partner.
      The conferees understand that electing investment 
partnerships will generally include venture capital funds, 
buyout funds, and funds of funds. These funds are formed to 
raise capital from investors pursuant to a private offering and 
to make investments during the limited term of the partnership 
with the intention of holding the investments for capital 
appreciation.
      With respect to the requirement that an electing 
investment partnership furnish to any transferee partner the 
information necessary to enable the partner to compute the 
amount of losses disallowed under this rule, it is expected 
that in some cases the transferor of the partnership interest 
will furnish information relating to the amount of its loss to 
the transferee partner. It is intended that the requirement 
that the electing investment partnership furnish necessary 
information to the transferee partner be administered by the 
Treasury Secretary in a manner that (to the greatest extent 
feasible) minimizes the need for the partnership to furnish 
information to the transferee partner that the transferee 
partner has obtained from the transferor.
      The conference agreement adds an exception for 
securitization partnerships to the rules requiring partnership 
basis adjustments in the case of transfers of partnership 
interests and distributions of property to a partner. The 
exceptions provide that a securitization partnership is not 
treated as having a substantial built-in loss in the case of a 
transfer of a partnership interest, or as having a substantial 
basis reduction in the case of a partnership distribution, and 
thus is not required to make basis adjustments to partnership 
property. Partnership basis adjustments remain elective for 
such a partnership. Unlike in the case of an electing 
investment partnership, the partner-level loss limitation rule 
does not apply in the case of a securitization partnership. For 
this purpose, a securitization partnership is any partnership 
the sole business activity of which is to issue securities that 
provide for a fixed principal (or similar) amount and that are 
primarily serviced by the cash flows of a discrete pool (either 
fixed or revolving) of receivables or other financial assets 
that by their terms convert into cash in a finite period, but 
only if the sponsor of the pool reasonably believes that the 
receivables and other financial assets comprising the pool are 
not acquired so as to be disposed of. It is intended that rules 
similar to those applicable to sponsors of REMICs apply in 
determining whether the sponsor's belief is reasonable.\548\ It 
is not intended that the rules requiring partnership basis 
adjustments on transfers or distributions be avoided through 
dispositions of pool assets.
---------------------------------------------------------------------------
    \548\ See Treas. Reg. sec. 1.860G-2(a)(3), providing that a 
sponsor's belief is not reasonable if the sponsor actually knows or has 
reason to know that the requirement is not met, or if the requirement 
is later discovered not to have been met.
---------------------------------------------------------------------------
      It is intended that an electing investment partnership or 
securitization partnership that subsequently fails to meet the 
definition of an electing investment partnership or of a 
securitization partnership will be subject to the partnership 
basis adjustment rules of the provision with respect to the 
first transfer of a partnership interest (and, in the case of a 
securitization partnership, the first distribution) that occurs 
after the partnership ceases to meet the applicable definition 
and to each subsequent transfer (and distribution, in the case 
of a securitization partnership).
      It is not intended that the rules of the conference 
agreement provisions be avoided through the use of tiered 
partnerships.
      It is not intended that the provision relating to 
contributions of built-in loss property limit the ability of 
master-feeder structures to apply an aggregate method for 
making allocations under section 704(c) to the extent the 
aggregate method is permitted under present law.\549\
---------------------------------------------------------------------------
    \549\ See Rev. Proc. 2001-36, 2001-1 C.B. 1326. Definitional 
requirements of a master-feeder structure include that there is a 
portfolio of assets that is treated as a partnership for Federal tax 
purposes and that is registered as an investment company under the 
Investment Company Act of 1940, each partner of which is a feeder fund 
that is a registered investment company (RIC) for Federal tax purposes, 
or is an investment advisor, principal underwriter, or manager of the 
portfolio. The conferees believe that these restrictions (and other 
applicable restrictions) serve to limit potential avoidance of the 
section 704(c) provision of the conference agreement through use of the 
aggregate method in the case of master-feeder structures.
---------------------------------------------------------------------------
      Effective date.--The conference agreement follows the 
House bill.
16. No reduction of basis under section 734 in stock held by 
        partnership in corporate partner (sec. 634 of the House bill, 
        sec. 432 of the Senate amendment, and sec. 755 of the Code)

                              PRESENT LAW

In general
      Generally, a partner and the partnership do not recognize 
gain or loss on a contribution of property to the 
partnership.\550\ Similarly, a partner and the partnership 
generally do not recognize gain or loss on the distribution of 
partnership property.\551\ This includes current distributions 
and distributions in liquidation of a partner's interest.
---------------------------------------------------------------------------
    \550\ Sec. 721(a).
    \551\ Sec. 731(a) and (b).
---------------------------------------------------------------------------
Basis of property distributed in liquidation
      The basis of property distributed in liquidation of a 
partner's interest is equal to the partner's tax basis in its 
partnership interest (reduced by any money distributed in the 
same transaction).\552\ Thus, the partnership's tax basis in 
the distributed property is adjusted (increased or decreased) 
to reflect the partner's tax basis in the partnership interest.
---------------------------------------------------------------------------
    \552\ Sec. 732(b).
---------------------------------------------------------------------------
Election to adjust basis of partnership property
      When a partnership distributes partnership property, the 
basis of partnership property generally is not adjusted to 
reflect the effects of the distribution or transfer. However, 
the partnership is permitted to make an election (referred to 
as a 754 election) to adjust the basis of partnership property 
in the case of a distribution of partnership property.\553\ The 
effect of the 754 election is that the partnership adjusts the 
basis of its remaining property to reflect any change in basis 
of the distributed property in the hands of the distributee 
partner resulting from the distribution transaction. Such a 
change could be a basis increase due to gain recognition, or a 
basis decrease due to the partner's adjusted basis in its 
partnership interest exceeding the adjusted basis of the 
property received. If the 754 election is made, it applies to 
the taxable year with respect to which such election was filed 
and all subsequent taxable years.
---------------------------------------------------------------------------
    \553\ Sec. 754.
---------------------------------------------------------------------------
      In the case of a distribution of partnership property to 
a partner with respect to which the 754 election is in effect, 
the partnership increases the basis of partnership property by 
(1) any gain recognized by the distributee partner and (2) the 
excess of the adjusted basis of the distributed property to the 
partnership immediately before its distribution over the basis 
of the property to the distributee partner, and decreases the 
basis of partnership property by (1) any loss recognized by the 
distributee partner and (2) the excess of the basis of the 
property to the distributee partner over the adjusted basis of 
the distributed property to the partnership immediately before 
the distribution.
      The allocation of the increase or decrease in basis of 
partnership property is made in a manner that has the effect of 
reducing the difference between the fair market value and the 
adjusted basis of partnership properties.\554\ In addition, the 
allocation rules require that any increase or decrease in basis 
be allocated to partnership property of a like character to the 
property distributed. For this purpose, the two categories of 
assets are (1) capital assets and depreciable and real property 
used in the trade or business held for more than one year, and 
(2) any other property.\555\
---------------------------------------------------------------------------
    \554\ Sec. 755(a).
    \555\ Sec. 755(b).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision provides that in applying the basis 
allocation rules to a distribution in liquidation of a 
partner's interest, a partnership is precluded from decreasing 
the basis of corporate stock of a partner or a related person. 
Any decrease in basis that, absent the provision, would have 
been allocated to the stock is allocated to other partnership 
assets. If the decrease in basis exceeds the basis of the other 
partnership assets, then gain is recognized by the partnership 
in the amount of the excess.
      Effective date.--The provision applies to distributions 
after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except for the effective date.
      Effective date.--The provision applies to distributions 
after February 13, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
      Effective date.--The conference agreement follows the 
House bill.
17. Repeal of special rules for FASITs (sec. 635 of the House bill, 
        sec. 433 of the Senate amendment, and secs. 860H through 860L 
        of the Code)

                              PRESENT LAW

Financial asset securitization investment trusts
      In 1996 Congress created a new type of statutory entity 
called a ``financial asset securitization trust'' (``FASIT'') 
that facilitates the securitization of debt obligations such as 
credit card receivables, home equity loans, and auto 
loans.\556\ A FASIT generally is not taxable; the FASIT's 
taxable income or net loss flows through to the owner of the 
FASIT.
---------------------------------------------------------------------------
    \556\ Sections 860H through 860L.
---------------------------------------------------------------------------
      The ownership interest of a FASIT generally is required 
to be entirely held by a single domestic C corporation. In 
addition, a FASIT generally may hold only qualified debt 
obligations, and certain other specified assets, and is subject 
to certain restrictions on its activities. An entity that 
qualifies as a FASIT can issue one or more classes of 
instruments that meet certain specified requirements and treat 
those instruments as debt for Federal income tax purposes. 
Instruments issued by a FASIT bearing yields to maturity over 
five percentage points above the yield to maturity on specified 
United States government obligations (i.e., ``high-yield 
interests'') must be held, directly or indirectly, only by 
domestic C corporations that are not exempt from income tax.
            Qualification as a FASIT
      To qualify as a FASIT, an entity must: (1) make an 
election to be treated as a FASIT for the year of the election 
and all subsequent years; \557\ (2) have assets substantially 
all of which (including assets that the FASIT is treated as 
owning because they support regular interests) are specified 
types called ``permitted assets;'' (3) have non-ownership 
interests be certain specified types of debt instruments called 
``regular interests''; (4) have a single ownership interest 
which is held by an ``eligible holder''; and (5) not qualify as 
a regulated investment company (``RIC''). Any entity, including 
a corporation, partnership, or trust may be treated as a FASIT. 
In addition, a segregated pool of assets may qualify as a 
FASIT.
---------------------------------------------------------------------------
    \557\ Once an election to be a FASIT is made, the election applies 
from the date specified in the election and all subsequent years until 
the entity ceases to be a FASIT. If an election to be a FASIT is made 
after the initial year of an entity, all of the assets in the entity at 
the time of the FASIT election are deemed contributed to the FASIT at 
that time and, accordingly, any gain (but not loss) on such assets will 
be recognized at that time.
---------------------------------------------------------------------------
      An entity ceases qualifying as a FASIT if the entity's 
owner ceases being an eligible corporation. Loss of FASIT 
status is treated as if all of the regular interests of the 
FASIT were retired and then reissued without the application of 
the rule that deems regular interests of a FASIT to be debt.
            Permitted assets
      For an entity or arrangement to qualify as a FASIT, 
substantially all of its assets must consist of the following 
``permitted assets'': (1) cash and cash equivalents; (2) 
certain permitted debt instruments; (3) certain foreclosure 
property; (4) certain instruments or contracts that represent a 
hedge or guarantee of debt held or issued by the FASIT; (5) 
contract rights to acquire permitted debt instruments or 
hedges; and (6) a regular interest in another FASIT. Permitted 
assets may be acquired at any time by a FASIT, including any 
time after its formation.
            ``Regular interests'' of a FASIT
      ``Regular interests'' of a FASIT are treated as debt for 
Federal income tax purposes, regardless of whether instruments 
with similar terms issued by non-FASITs might be characterized 
as equity under general tax principles. To be treated as a 
``regular interest'', an instrument must have fixed terms and 
must: (1) unconditionally entitle the holder to receive a 
specified principal amount; (2) pay interest that is based on 
(a) fixed rates, or (b) except as provided by regulations 
issued by the Treasury Secretary, variable rates permitted with 
respect to REMIC interests under section 860G(a)(1)(B)(i); (3) 
have a term to maturity of no more than 30 years, except as 
permitted by Treasury regulations; (4) be issued to the public 
with a premium of not more than 25 percent of its stated 
principal amount; and (5) have a yield to maturity determined 
on the date of issue of less than five percentage points above 
the applicable Federal rate (``AFR'') for the calendar month in 
which the instrument is issued.
            Permitted ownership holder
      A permitted holder of the ownership interest in a FASIT 
generally is a non-exempt (i.e., taxable) domestic C 
corporation, other than a corporation that qualifies as a RIC, 
REIT, REMIC, or cooperative.
            Transfers to FASITs
      In general, gain (but not loss) is recognized immediately 
by the owner of the FASIT upon the transfer of assets to a 
FASIT. Where property is acquired by a FASIT from someone other 
than the FASIT's owner (or a person related to the FASIT's 
owner), the property is treated as being first acquired by the 
FASIT's owner for the FASIT's cost in acquiring the asset from 
the non-owner and then transferred by the owner to the FASIT.
      Valuation rules.--In general, except in the case of debt 
instruments, the value of FASIT assets is their fair market 
value. Similarly, in the case of debt instruments that are 
traded on an established securities market, the market price is 
used for purposes of determining the amount of gain realized 
upon contribution of such assets to a FASIT. However, in the 
case of debt instruments that are not traded on an established 
securities market, special valuation rules apply for purposes 
of computing gain on the transfer of such debt instruments to a 
FASIT. Under these rules, the value of such debt instruments is 
the sum of the present values of the reasonably expected cash 
flows from such obligations discounted over the weighted 
average life of such assets. The discount rate is 120 percent 
of the AFR, compounded semiannually, or such other rate that 
the Treasury Secretary shall prescribe by regulations.
            Taxation of a FASIT
      A FASIT generally is not subject to tax. Instead, all of 
the FASIT's assets and liabilities are treated as assets and 
liabilities of the FASIT's owner and any income, gain, 
deduction or loss of the FASIT is allocable directly to its 
owner. Accordingly, income tax rules applicable to a FASIT 
(e.g., related party rules, sec. 871(h), sec. 165(g)(2)) are to 
be applied in the same manner as they apply to the FASIT's 
owner. The taxable income of a FASIT is calculated using an 
accrual method of accounting. The constant yield method and 
principles that apply for purposes of determining original 
issue discount (``OID'') accrual on debt obligations whose 
principal is subject to acceleration apply to all debt 
obligations held by a FASIT to calculate the FASIT's interest 
and discount income and premium deductions or adjustments.
            Taxation of holders of FASIT regular interests
      In general, a holder of a regular interest is taxed in 
the same manner as a holder of any other debt instrument, 
except that the regular interest holder is required to account 
for income relating to the interest on an accrual method of 
accounting, regardless of the method of accounting otherwise 
used by the holder.
            Taxation of holders of FASIT ownership interests
      Because all of the assets and liabilities of a FASIT are 
treated as assets and liabilities of the holder of a FASIT 
ownership interest, the ownership interest holder takes into 
account all of the FASIT's income, gain, deduction, or loss in 
computing its taxable income or net loss for the taxable year. 
The character of the income to the holder of an ownership 
interest is the same as its character to the FASIT, except tax-
exempt interest is included in the income of the holder as 
ordinary income.
      Although the recognition of losses on assets contributed 
to the FASIT is not allowed upon contribution of the assets, 
such losses may be allowed to the FASIT owner upon their 
disposition by the FASIT. Furthermore, the holder of a FASIT 
ownership interest is not permitted to offset taxable income 
from the FASIT ownership interest (including gain or loss from 
the sale of the ownership interest in the FASIT) with other 
losses of the holder. In addition, any net operating loss 
carryover of the FASIT owner shall be computed by disregarding 
any income arising by reason of a disallowed loss. Where the 
holder of a FASIT ownership interest is a member of a 
consolidated group, this rule applies to the consolidated group 
of corporations of which the holder is a member as if the group 
were a single taxpayer.

                               HOUSE BILL

      The House bill repeals the special rules for FASITs. The 
House bill provides a transition period for existing FASITs, 
pursuant to which the repeal of the FASIT rules generally does 
not apply to any FASIT in existence on the date of enactment to 
the extent that regular interests issued by the FASIT prior to 
such date continue to remain outstanding in accordance with 
their original terms.
      For purposes of the REMIC rules, the House bill also 
modifies the definitions of REMIC regular interests, qualified 
mortgages, and permitted investments so that certain types of 
real estate loans and loan pools can be transferred to, or 
purchased by, a REMIC. Specifically, the provision modifies the 
present-law definition of a REMIC ``regular interest'' to 
provide that an interest in a REMIC does not fail to qualify as 
a regular interest solely because the specified principal 
amount of such interest or the amount of interest accrued on 
such interest could be reduced as a result of the nonoccurrence 
of one or more contingent payments with respect to one or more 
reverse mortgages loans, as defined below, that are held by the 
REMIC, provided that on the startup day for the REMIC, the 
REMIC sponsor reasonably believes that all principal and 
interest due under the interest will be paid at or prior to the 
liquidation of the REMIC. For this purpose, a reasonable belief 
concerning ultimate payment of all amounts due under an 
interest is presumed to exist if, as of the startup day, the 
interest receives an investment grade rating from at least one 
nationally recognized statistical rating agency.
      In addition, the provision makes three modifications to 
the present-law definition of a ``qualified mortgage.'' First, 
the provision modifies the definition to include an obligation 
principally secured by real property which represents an 
increase in the principal amount under the original terms of an 
obligation, provided such increase: (1) is attributable to an 
advance made to the obligor pursuant to the original terms of 
the obligation; (2) occurs after the REMIC startup day; and (3) 
is purchased by the REMIC pursuant to a fixed price contract in 
effect on the startup day. Second, the provision modifies the 
definition to generally include reverse mortgage loans and the 
periodic advances made to obligors on such loans. For this 
purpose, a ``reverse mortgage loan'' is defined as a loan that: 
(1) is secured by an interest in real property; (2) provides 
for one or more advances of principal to the obligor (each such 
advance giving rise to a ``balance increase''), provided such 
advances are principally secured by an interest in the same 
real property as that which secures the loan; (3) may provide 
for a contingent payment at maturity based upon the value or 
appreciation in value of the real property securing the loan; 
(4) provides for an amount due at maturity that cannot exceed 
the value, or a specified fraction of the value, of the real 
property securing the loan; (5) provides that all payments 
under the loan are due only upon the maturity of the loan; and 
(6) matures after a fixed term or at the time the obligor 
ceases to use as a personal residence the real property 
securing the loan. Third, the provision modifies the definition 
to provide that, if more than 50 percent of the obligations 
transferred to, or purchased by, the REMIC are (1) originated 
by the United States or any State (or any political 
subdivision, agency, or instrumentality of the United States or 
any State) and (2) principally secured by an interest in real 
property, then each obligation transferred to, or purchased by, 
the REMIC shall be treated as secured by an interest in real 
property.
      In addition, the provision modifies the present-law 
definition of a ``permitted investment'' to include intangible 
investment property held as part of a reasonably required 
reserve to provide a source of funds for the purchase of 
obligations described above as part of the modified definition 
of a ``qualified mortgage.''
      Effective date.--Except as provided by the transition 
period for existing FASITs, the House bill is effective January 
1, 2005.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except for the effective date.
      Effective date.--Except as provided by the transition 
period for existing FASITs, the Senate amendment is effective 
on February 14, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill 
provision.
18. Limitation on transfer and importation of built-in losses (sec. 636 
        of the House bill, sec. 431 of the Senate amendment, and secs. 
        362 and 334 of the Code)

                              PRESENT LAW

      Generally, no gain or loss is recognized when one or more 
persons transfer property to a corporation in exchange for 
stock and immediately after the exchange such person or persons 
control the corporation.\558\ The transferor's basis in the 
stock of the controlled corporation is the same as the basis of 
the property contributed to the controlled corporation, 
increased by the amount of any gain (or dividend) recognized by 
the transferor on the exchange, and reduced by the amount of 
any money or property received, and by the amount of any loss 
recognized by the transferor.\559\
---------------------------------------------------------------------------
    \558\ Sec. 351.
    \559\ Sec. 358.
---------------------------------------------------------------------------
      The basis of property received by a corporation, whether 
from domestic or foreign transferors, in a tax-free 
incorporation, reorganization, or liquidation of a subsidiary 
corporation is the same as the adjusted basis in the hands of 
the transferor, adjusted for gain or loss recognized by the 
transferor.\560\
---------------------------------------------------------------------------
    \560\ Secs. 334(b) and 362(a) and (b).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill provides that if a residual interest (as 
defined in section 860G(a)(2)) in a real estate mortgage 
investment conduit (``REMIC'') is contributed to a corporation 
and the transferee corporation's adjusted basis in the REMIC 
residual interest would (but for the provision) exceed the fair 
market value of the REMIC residual interest immediately after 
the contribution, the transferee corporation's adjusted basis 
in the REMIC residual interest is limited to the fair market 
value of the REMIC residual interest immediately after the 
contribution, regardless of whether the fair market value of 
the REMIC residual interest is less than, equal to, or greater 
than zero (i.e., the provision may result in the transferee 
corporation having a negative adjusted basis in the REMIC 
residual interest).
      Effective date.--The House bill provision applies to 
transactions after the date of enactment.

                            SENATE AMENDMENT

Importation of built-in losses
      The Senate Amendment provides that if a net built-in loss 
is imported into the U.S in a tax-free organization or 
reorganization from persons not subject to U.S. tax, the basis 
of each property so transferred is its fair market value.\561\ 
A similar rule applies in the case of the tax-free liquidation 
by a domestic corporation of its foreign subsidiary.
---------------------------------------------------------------------------
    \561\ The Senate amendment also applies to transfers from a tax-
exempt organization where gain or loss would not be subject to tax if 
the property were sold by the organization.
---------------------------------------------------------------------------
      Under the Senate amendment, a net built-in loss is 
treated as imported into the U.S. if the aggregate adjusted 
bases of property received by a transferee corporation exceed 
the fair market value of the properties transferred. Thus, for 
example, if in a tax-free incorporation, some properties are 
received by a corporation from U.S. persons subject to tax, and 
some properties are received from foreign persons not subject 
to U.S. tax, this provision applies to limit the adjusted basis 
of each property received from the foreign persons to the fair 
market value of the property. In the case of a transfer by a 
partnership (either domestic or foreign), this provision 
applies as if the properties had been transferred by each of 
the partners in proportion to their interests in the 
partnership.
Limitation on transfer of built-in losses in section 351 transactions
      The Senate amendment provides that if the aggregate 
adjusted bases of property contributed by a transferor (or by a 
control group of which the transferor is a member) to a 
corporation exceed the aggregate fair market value of the 
property transferred in a tax-free incorporation, the 
transferee's aggregate basis of the properties is limited to 
the aggregate fair market value of the transferred property. 
Under the Senate Amendment, any required basis reduction is 
allocated among the transferred properties in proportion to 
their built-in-loss immediately before the transaction. In the 
case of a transfer in which the transferor owns at least 80 
percent of the vote and value of the stock of the transferee 
corporation, any basis reduction required by the provision is 
made to the stock received by the transferor and not to the 
assets transferred.
Effective date
      The Senate amendment provision applies to transactions 
after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
with modifications to the limitation on transfer of built-in 
losses in section 351 transactions. The conference agreement 
eliminates the provision that requires a basis reduction to be 
made to stock received by the transferor (rather than to the 
assets transferred) in the case of a transfer in which the 
transferor owns at least 80 percent of the vote and value of 
the stock of the transferee corporation. Thus, the provision 
that limits the transferee's aggregate basis in the transferred 
property to the aggregate fair market value of the transferred 
property generally applies, regardless of the ownership 
percentage of the transferor in the stock of the transferee 
corporation.
      In addition, the conference agreement permits the 
transferor and transferee to elect to limit the basis in the 
stock received by the transferor to the aggregate fair market 
value of the transferred property, in lieu of limiting the 
basis in the assets transferred. Such election shall be 
included with the tax returns of the transferor and transferee 
for the taxable year in which the transaction occurs and, once 
made, shall be irrevocable.
19. Clarification of banking business for purposes of determining 
        investment of earnings in U.S. property (sec. 637 of the House 
        bill, sec. 451 of the Senate amendment, and sec. 956 of the 
        Code)

                              PRESENT LAW

      In general, the subpart F rules \562\ require the U.S. 
10-percent shareholders of a controlled foreign corporation to 
include in income currently their pro rata shares of certain 
income of the controlled foreign corporation (referred to as 
``subpart F income''), whether or not such earnings are 
distributed currently to the shareholders. In addition, the 
U.S. 10-percent shareholders of a controlled foreign 
corporation are subject to U.S. tax currently on their pro rata 
shares of the controlled foreign corporation's earnings to the 
extent invested by the controlled foreign corporation in 
certain U.S. property.\563\
---------------------------------------------------------------------------
    \562\ Secs. 951-964.
    \563\ Sec. 951(a)(1)(B).
---------------------------------------------------------------------------
      A shareholder's current income inclusion with respect to 
a controlled foreign corporation's investment in U.S. property 
for a taxable year is based on the controlled foreign 
corporation's average investment in U.S. property for such 
year. For this purpose, the U.S. property held (directly or 
indirectly) by the controlled foreign corporation must be 
measured as of the close of each quarter in the taxable 
year.\564\ The amount taken into account with respect to any 
property is the property's adjusted basis as determined for 
purposes of reporting the controlled foreign corporation's 
earnings and profits, reduced by any liability to which the 
property is subject. The amount determined for current 
inclusion is the shareholder's pro rata share of an amount 
equal to the lesser of: (1) the controlled foreign 
corporation's average investment in U.S. property as of the end 
of each quarter of such taxable year, to the extent that such 
investment exceeds the foreign corporation's earnings and 
profits that were previously taxed on that basis; or (2) the 
controlled foreign corporation's current or accumulated 
earnings and profits (but not including a deficit), reduced by 
distributions during the year and by earnings that have been 
taxed previously as earnings invested in U.S. property.\565\ An 
income inclusion is required only to the extent that the amount 
so calculated exceeds the amount of the controlled foreign 
corporation's earnings that have been previously taxed as 
subpart F income.\566\
---------------------------------------------------------------------------
    \564\ Sec. 956(a).
    \565\ Secs. 956 and 959.
    \566\ Secs. 951(a)(1)(B) and 959.
---------------------------------------------------------------------------
      For purposes of section 956, U.S. property generally is 
defined to include tangible property located in the United 
States, stock of a U.S. corporation, an obligation of a U.S. 
person, and certain intangible assets including a patent or 
copyright, an invention, model or design, a secret formula or 
process or similar property right which is acquired or 
developed by the controlled foreign corporation for use in the 
United States.\567\
---------------------------------------------------------------------------
    \567\ Sec. 956(c)(1).
---------------------------------------------------------------------------
      Specified exceptions from the definition of U.S. property 
are provided for: (1) obligations of the United States, money, 
or deposits with persons carrying on the banking business; (2) 
certain export property; (3) certain trade or business 
obligations; (4) aircraft, railroad rolling stock, vessels, 
motor vehicles or containers used in transportation in foreign 
commerce and used predominantly outside of the United States; 
(5) certain insurance company reserves and unearned premiums 
related to insurance of foreign risks; (6) stock or debt of 
certain unrelated U.S. corporations; (7) moveable property 
(other than a vessel or aircraft) used for the purpose of 
exploring, developing, or certain other activities in 
connection with the ocean waters of the U.S. Continental Shelf; 
(8) an amount of assets equal to the controlled foreign 
corporation's accumulated earnings and profits attributable to 
income effectively connected with a U.S. trade or business; (9) 
property (to the extent provided in regulations) held by a 
foreign sales corporation and related to its export activities; 
(10) certain deposits or receipts of collateral or margin by a 
securities or commodities dealer, if such deposit is made or 
received on commercial terms in the ordinary course of the 
dealer's business as a securities or commodities dealer; and 
(11) certain repurchase and reverse repurchase agreement 
transactions entered into by or with a dealer in securities or 
commodities in the ordinary course of its business as a 
securities or commodities dealer.\568\
---------------------------------------------------------------------------
    \568\ Sec. 956(c)(2).
---------------------------------------------------------------------------
      With regard to the exception for deposits with persons 
carrying on the banking business, the U.S. Court of Appeals for 
the Sixth Circuit in The Limited, Inc. v. Commissioner \569\ 
concluded that a U.S. subsidiary of a U.S. shareholder was 
``carrying on the banking business'' even though its operations 
were limited to the administration of the private label credit 
card program of the U.S. shareholder. Therefore, the court held 
that a controlled foreign corporation of the U.S. shareholder 
could make deposits with the subsidiary (e.g., through the 
purchase of certificates of deposit) under this exception, and 
avoid taxation of the deposits under section 956 as an 
investment in U.S. property.
---------------------------------------------------------------------------
    \569\ 286 F.3d 324 (6th Cir. 2002), rev'g 113 T.C. 169 (1999).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill provides that the exception from the 
definition of U.S. property under section 956 for deposits with 
persons carrying on the banking business is limited to deposits 
with persons at least 80-percent of the gross income of which 
is derived in the active conduct of a banking business from 
unrelated persons. For purposes of applying the House bill, the 
deposit recipient and all persons related to the deposit 
recipient are treated as one person in applying the 80-percent 
test.
      No inference is intended as to the meaning of the phrase 
``carrying on the banking business'' under present law.
      Effective date.--The House bill provision is effective on 
the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except the Senate amendment applies the 80-percent test by 
reference to financial services income (as defined in section 
904(d)(2)(C)(ii) rather than the active conduct of a banking 
business.
      Effective date.--The Senate amendment provision is 
effective on the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement provides that the exception from 
the definition of U.S. property under section 956 for deposits 
with persons carrying on the banking business is limited to 
deposits with: (1) any bank (as defined by section 2(c) of the 
Bank Holding Company Act of 1956 (12 U.S.C. 1841(c), without 
regard to paragraphs (C) and (G) of paragraph (2) of such 
section); or (2) any other corporation with respect to which a 
bank holding company (as defined by section 2(a) of such Act) 
or financial holding company (as defined by section 2(p) of 
such Act) owns directly or indirectly more than 80 percent by 
vote or value of the stock of such corporation.
      No inference is intended as to the meaning of the phrase 
``carrying on the banking business'' under present law.
      Effective date.--The conference agreement provision is 
effective on the date of enactment.
20. Alternative tax for small insurance companies and modification of 
        exemption from tax for small property and casualty insurance 
        companies (sec. 638 of the House bill, sec. 493 of the Senate 
        amendment, and secs. 501(c)(15) and 831(b) of the Code)

                              PRESENT LAW

      A property and casualty insurance company generally is 
subject to tax on its taxable income (sec. 831(a)). The taxable 
income of a property and casualty insurance company is 
determined as the sum of its underwriting income and investment 
income (as well as gains and other income items), reduced by 
allowable deductions (sec. 832).
      A property and casualty insurance company may elect to be 
taxed only on taxable investment income if its net written 
premiums or direct written premiums (whichever is greater) do 
not exceed $1.2 million (sec. 831(b)). For purposes of 
determining the amount of a company's net written premiums or 
direct written premiums under this rule, premiums received by 
all members of a controlled group of corporations (as defined 
in section 831(b)) of which the company is a part are taken 
into account (including foreign and tax-exempt corporations).
      A property and casualty insurance company is eligible to 
be exempt from Federal income tax if (a) its gross receipts for 
the taxable year do not exceed $600,000, and (b) the premiums 
received for the taxable year are greater than 50 percent of 
its gross receipts.\570\ For purposes of determining gross 
receipts, the gross receipts of all members of a controlled 
group of corporations of which the company is a part are taken 
into account (including gross receipts of foreign and tax-
exempt corporations).
---------------------------------------------------------------------------
    \570\ A special rule provides that a mutual property and casualty 
insurance company is eligible to be exempt from Federal income tax 
under the provision if (a) its gross receipts for the taxable year do 
not exceed $150,000, and (b) the premiums received for the taxable year 
are greater than 35 percent of its gross receipts, provided certain 
requirements are met. The requirements are that no employee of the 
company or member of the employee's family is an employee of another 
company that is exempt from tax under section 501(c)(15) (or would be, 
but for this rule).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, the $1.2 million ceiling on net 
written premiums or direct written premiums for purposes of the 
election to be taxed only on taxable investment income is 
increased to $1.89 million, and is indexed for taxable years 
beginning in a calendar year after 2004.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill, except that 
the $1.89 million amount is indexed for taxable years beginning 
in a calendar year after 2005. In addition, the Senate 
amendment modifies one of the present-law requirements for a 
property and casualty insurance company to eligible to be 
exempt from Federal income tax by requiring that the premiums 
received for the taxable year be greater than 60 percent of its 
gross receipts (rather than 50 percent as under present law).
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2004.\571\
---------------------------------------------------------------------------
    \571\ The provision preserves the transition rule that was provided 
under section 206(e) of the Pension Funding Equity Act of 2004 (Pub. L. 
No. 108-218) relating to companies in receivership or liquidation.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.
21. Denial of deduction for interest on underpayments attributable to 
        nondisclosed reportable transactions (sec. 639 of the House 
        bill, sec. 417 of the Senate amendment, and sec. 163 of the 
        Code)

                              PRESENT LAW

      In general, corporations may deduct interest paid or 
accrued within a taxable year on indebtedness.\572\ Interest on 
indebtedness to the Federal government attributable to an 
underpayment of tax generally may be deducted pursuant to this 
provision.
---------------------------------------------------------------------------
    \572\ Sec. 163(a).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill disallows any deduction for interest paid 
or accrued within a taxable year on any portion of an 
underpayment of tax that is attributable to an understatement 
arising from an undisclosed listed transaction or from an 
undisclosed reportable avoidance transaction (other than a 
listed transaction).\573\
---------------------------------------------------------------------------
    \573\ The definitions of these transactions are the same as those 
previously described in connection with the provision elsewhere in this 
bill to modify the accuracy-related penalty for listed and certain 
reportable transactions.
---------------------------------------------------------------------------
      Effective date.--The House bill provision is effective 
for underpayments attributable to transactions entered into in 
taxable years beginning after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except the Senate amendment also disallows any deduction for 
interest paid or accrued within a taxable year on any portion 
of an underpayment of tax that is attributable to an 
understatement arising from a transaction that lacks economic 
substance.
      Effective date.--The Senate amendment provision is 
effective for underpayments attributable to transactions 
entered into in taxable years beginning after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
22. Clarification of rules for payment of estimated tax for certain 
        deemed asset sales (sec. 640 of the House bill, sec. 481 of the 
        Senate amendment, and sec. 338 of the Code)

                              PRESENT LAW

      In certain circumstances, taxpayers can make an election 
under section 338(h)(10) to treat a qualifying purchase of 80 
percent of the stock of a target corporation by a corporation 
from a corporation that is a member of an affiliated group (or 
a qualifying purchase of 80 percent of the stock of an S 
corporation by a corporation from S corporation shareholders) 
as a sale of the assets of the target corporation, rather than 
as a stock sale. The election must be made jointly by the buyer 
and seller of the stock and is due by the 15th day of the ninth 
month beginning after the month in which the acquisition date 
occurs. An agreement for the purchase and sale of stock often 
may contain an agreement of the parties to make a section 
338(h)(10) election.
      Section 338(a) also permits a unilateral election by a 
buyer corporation to treat a qualified stock purchase of a 
corporation as a deemed asset acquisition, whether or not the 
seller of the stock is a corporation (or an S corporation is 
the target). In such a case, the seller or sellers recognize 
gain or loss on the stock sale (including any estimated taxes 
with respect to the stock sale), and the target corporation 
recognizes gain or loss on the deemed asset sale.
      Section 338(h)(13) provides that, for purposes of section 
6655 (relating to additions to tax for failure by a corporation 
to pay estimated income tax), tax attributable to a deemed 
asset sale under section 338(a)(1) shall not be taken into 
account.

                               HOUSE BILL

      The bill clarifies section 338(h)(13) to provide that the 
exception for estimated tax purposes with respect to tax 
attributable to a deemed asset sale does not apply with respect 
to a qualified stock purchase for which an election is made 
under section 338(h)(10).
      Under the bill if a transaction eligible for the election 
under section 338(h)(10) occurs, estimated tax would be 
determined based on the stock sale unless and until there is an 
agreement of the parties to make a section 338(h)(10) election.
      If at the time of the sale there is an agreement of the 
parties to make a section 338(h)(10) election, then estimated 
tax is computed based on an asset sale, computed from the date 
of the sale.
      If the agreement to make a section 338(h)(10) election is 
concluded after the stock sale, such that the original 
computation was based on a stock sale, estimated tax is 
recomputed based on the asset sale election.
      No inference is intended as to present law.
      Effective date.--The bill is effective for qualified 
stock purchase transactions that occur after the date of 
enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The Conference agreement follows the House bill and the 
Senate amendment.
23. Exclusion of like-kind exchange property from nonrecognition 
        treatment on the sale or exchange of a principal residence 
        (sec. 641 of the House bill and sec. 492 of the Senate 
        amendment)

                              PRESENT LAW

      A taxpayer may exclude up to $250,000 ($500,000 if 
married filing a joint return) of gain realized on the sale or 
exchange of a principal residence. There are no special rules 
relating to the sale or exchange of a principal residence that 
was acquired in a like-kind exchange within the prior five 
years.

                               HOUSE BILL

      The House bill provides that the exclusion for gain on 
the sale or exchange of a principal residence does not apply if 
the principal residence was acquired in a like-kind exchange in 
which any gain was not recognized within the prior five years.
      Effective date.--Sales or exchanges of principal 
residences after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
24. Prevention of mismatching of interest and original issue discount 
        deductions and income inclusions in transactions with related 
        foreign persons (sec. 642 of the House bill, sec. 453 of the 
        Senate amendment, and secs. 163 and 267 of the Code)

                              PRESENT LAW

      Income earned by a foreign corporation from its foreign 
operations generally is subject to U.S. tax only when such 
income is distributed to any U.S. person that holds stock in 
such corporation. Accordingly, a U.S. person that conducts 
foreign operations through a foreign corporation generally is 
subject to U.S. tax on the income from such operations when the 
income is repatriated to the United States through a dividend 
distribution to the U.S. person. The income is reported on the 
U.S. person's tax return for the year the distribution is 
received, and the United States imposes tax on such income at 
that time. However, certain anti-deferral regimes may cause the 
U.S. person to be taxed on a current basis in the United States 
with respect to certain categories of passive or highly mobile 
income earned by the foreign corporations in which the U.S. 
person holds stock. The main anti-deferral regimes are the 
controlled foreign corporation rules of subpart F (secs. 951-
964), the passive foreign investment company rules (secs. 1291-
1298), and the foreign personal holding company rules (secs. 
551-558).
      As a general rule, there is allowed as a deduction all 
interest paid or accrued within the taxable year with respect 
to indebtedness, including the aggregate daily portions of 
original issue discount (``OID'') of the issuer for the days 
during such taxable year.\574\ However, if a debt instrument is 
held by a related foreign person, any portion of such OID is 
not allowable as a deduction to the payor of such instrument 
until paid (``related-foreign-person rule''). This related-
foreign-person rule does not apply to the extent that the OID 
is effectively connected with the conduct by such foreign 
related person of a trade or business within the United States 
(unless such OID is exempt from taxation or is subject to a 
reduced rate of taxation under a treaty obligation).\575\ 
Treasury regulations further modify the related-foreign-person 
rule by providing that in the case of a debt owed to a foreign 
personal holding company (``FPHC''), controlled foreign 
corporation (``CFC'') or passive foreign investment company 
(``PFIC''), a deduction is allowed for OID as of the day on 
which the amount is includible in the income of the FPHC, CFC 
or PFIC, respectively.\576\
---------------------------------------------------------------------------
    \574\ Sec. 163(e)(1).
    \575\ Sec. 163(e)(3).
    \576\ Treas. Reg. sec. 1.163-12(b)(3). In the case of a PFIC, the 
regulations further require that the person owing the amount at issue 
have in effect a qualified electing fund election pursuant to section 
1295 with respect to the PFIC.
---------------------------------------------------------------------------
      In the case of unpaid stated interest and expenses of 
related persons, where, by reason of a payee's method of 
accounting, an amount is not includible in the payee's gross 
income until it is paid but the unpaid amounts are deductible 
currently by the payor, the amount generally is allowable as a 
deduction when such amount is includible in the gross income of 
the payee.\577\ With respect to stated interest and other 
expenses owed to related foreign corporations, Treasury 
regulations provide a general rule that requires a taxpayer to 
use the cash method of accounting with respect to the deduction 
of amounts owed to such related foreign persons (with an 
exception for income of a related foreign person that is 
effectively connected with the conduct of a U.S. trade or 
business and that is not exempt from taxation or subject to a 
reduced rate of taxation under a treaty obligation).\578\ As in 
the case of OID, the Treasury regulations additionally provide 
that in the case of stated interest owed to a FPHC, CFC, or 
PFIC, a deduction is allowed as of the day on which the amount 
is includible in the income of the FPHC, CFC or PFIC.\579\
---------------------------------------------------------------------------
    \577\ Sec. 267(a)(2).
    \578\ Treas. Reg. sec. 1.267(a)-3(b)(1), -3(c).
    \579\ Treas. Reg. sec. 1.267(a)-3(c)(4).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision provides that deductions for amounts 
accrued but unpaid (whether by U.S. or foreign persons) to 
related FPHCs, CFCs, or PFICs are allowable only to the extent 
that the amounts accrued by the payor are, for U.S. tax 
purposes, currently includible in the income of the direct or 
indirect U.S. owners of the related foreign corporation under 
the relevant inclusion rules.\580\ Deductions that have accrued 
but are not allowable under this provision are allowed when the 
amounts are paid.
---------------------------------------------------------------------------
    \580\ Section 413 of the conference agreement repeals the foreign 
personal holding company regime, effective for taxable years of foreign 
corporations beginning after December 31, 2004, and taxable years of 
U.S. shareholders with or within which such taxable years of foreign 
corporations end.
---------------------------------------------------------------------------
      For purposes of determining the amount of the deduction 
allowable, the extent that an amount attributable to OID or an 
item is includible in the income of a U.S. person is determined 
without regard to (1) properly allocable deductions of the 
related foreign corporation, and (2) qualified deficits of the 
related foreign corporation under section 952(c)(1)(B). 
Properly allocable deductions of the related foreign 
corporation are those expenses, losses, and other deductible 
amounts of the related foreign corporation that are properly 
allocated or apportioned, under the principles of section 
954(b)(5), to the relevant income item of the related foreign 
corporation.
      The provision grants the Secretary regulatory authority 
to exempt transactions from these rules, including any 
transactions entered into by the payor in the ordinary course 
of a trade or business in which the payor is predominantly 
engaged, and (in the case of items other than OID) in which the 
payment of the accrued amounts occurs shortly after its 
accrual.
      Effective date.--The provision is effective for payments 
accrued on or after date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
      The following examples illustrate the operation of this 
provision. Assume the following facts. A U.S. parent 
corporation owns 60 percent of the stock of a CFC. An unrelated 
foreign corporation owns the remaining 40 percent interest in 
the CFC. The U.S. parent accrues an expense item of 100 to the 
CFC. The parent would be entitled to a current deduction of 100 
for the accrued amount, before taking into account this 
provision. The item constitutes gross foreign base company 
income in the hands of the CFC. The item is the only gross 
income item of the CFC that has the potential to result in the 
CFC having subpart F income, and has not been paid by the end 
of the taxable year of the parent. The CFC has deductions of 60 
that are properly allocated or apportioned to the 100 of gross 
foreign base company income under the principles of section 
954(b)(5), resulting in 40 (100 - 60) of net foreign base 
company income. The CFC has earnings and profits for its 
taxable year in excess of 40, and has 40 of subpart F income. 
Under these facts, the U.S. parent is allowed a current 
deduction of 60 (100  60%) under the provision.
      If, in the example above, the CFC has deductions of 100 
(or more) properly allocated or apportioned to the sole item of 
100 of gross foreign base company income under the principles 
of section 954(b)(5), and has no other income or deductions, 
the same deduction is allowed to the U.S. parent. Under these 
circumstances, the parent is allowed a deduction of 60, whether 
the CFC has positive earnings and profits for its taxable year 
or has a deficit in earnings and profits for such year.
      If the CFC's item of net foreign base company income is 
positive, and the earnings and profits limitation of section 
952(c)(1)(A) reduces what would otherwise be a U.S. 
shareholder's pro rata share of the CFC's subpart F income, 
then the deduction will also be reduced under the provision. 
For example, assume the facts in the first example above, in 
which the CFC has deductions of 60 that are properly allocated 
or apportioned to the item of 100 of gross foreign base company 
income under the principles of section 954(b)(5), resulting in 
40 of net foreign base company income. Further assume that, due 
solely to other losses, the CFC's earnings and profits for its 
taxable year are 10 instead of 40. In that case, the CFC's 
subpart F income is limited to 10, and only six is includible 
in the gross income of the U.S. parent as its pro rata share of 
subpart F income. Under the provision, the U.S. parent is 
allowed a current deduction in that case of 42 ((10 + 60) 
 60%). The conferees intend that, if as a result of 
such other losses, the CFC has no earnings and profits for its 
taxable year or has a deficit in earnings and profits for such 
year, the U.S. parent is instead allowed a current deduction of 
36 ((0 + 60)  60%).
25. Exclusion from gross income for interest on overpayments of income 
        tax by individuals (sec. 643 of the House bill)

                              PRESENT LAW

Overpayment interest
      Interest is included in the list of items that are 
required to be included in gross income (sec. 61(a)(4)). 
Interest on overpayments of Federal income tax is required to 
be included in taxable income in the same manner as any other 
interest that is received by the taxpayer.
      Cash basis taxpayers are required to report overpayment 
interest as income in the period the interest is received. 
Accrual basis taxpayers are required to report overpayment 
interest as income when all events fixing the right to the 
receipt of the overpayment interest have occurred and the 
amount can be estimated with reasonable accuracy. Generally, 
this occurs on the date the appropriate IRS official signs the 
pertinent schedule of overassessments.
Underpayment interest
      A corporate taxpayer is allowed to currently take into 
account interest paid on underpayments of Federal income tax as 
an ordinary and necessary business expense. Typically, this 
results in a current deduction. However, the deduction may be 
deferred if the interest is required to be capitalized or may 
be disallowed if and to the extent it is determined to be a 
cost of earning tax exempt income under section 265.
      Section 163(h) of the Code prohibits the deduction of 
personal interest by taxpayers other than corporations. 
Noncorporate taxpayers, including individuals, generally are 
not allowed to deduct interest on the underpayment of Federal 
income taxes.
      Temporary regulations provide that personal interest 
includes interest paid on underpayments of individual Federal, 
State or local income taxes, regardless of the source of the 
income generating the tax liability. This is consistent with 
the statement in the General Explanation of the Tax Reform Act 
of 1986 that ``(p)ersonal interest also includes interest on 
underpayments of individual Federal, State, or local income 
taxes notwithstanding that all or a portion of the income may 
have arisen in a trade or business, because such taxes are not 
considered derived from conduct of a trade or business.'' The 
validity of the temporary regulation has been upheld in those 
Circuits that have considered the issue, including the Fourth, 
Sixth, Eighth, and Ninth Circuits.
      Personal interest also includes interest that is paid by 
a trust, S corporation, or other pass-through entity on 
underpayments of State or local income taxes. Personal interest 
does not include interest that is paid with respect to sales, 
excise or similar taxes that are incurred in connection with a 
trade or business or an investment activity.

                               HOUSE BILL

      The bill excludes overpayment interest that is paid to 
individual taxpayers on overpayments of Federal income tax from 
gross income. Interest excluded under the provision is not 
considered disqualified income that could limit the earned 
income credit. Interest excluded under the provision also is 
not considered in determining what portion of a taxpayer's 
social security or tier 1 railroad retirement benefits are 
subject to tax (sec. 86), whether a taxpayer has sufficient 
taxable income to be required to file a return (sec. 6012(d)), 
or for any other computation in which interest exempt from tax 
is otherwise required to be added to adjusted gross income.
      The exclusion from income of overpayment interest does 
not apply if the Secretary determines that the taxpayer's 
principal purpose for overpaying his or her tax is to take 
advantage of the exclusion.
      For example, a taxpayer prepares his return without 
taking into account significant itemized deductions of which he 
is, or should be, aware. Before the expiration of the statute 
of limitations, the taxpayer files an amended return claiming 
these itemized deductions and requesting a refund with 
interest. Unless the taxpayer can establish a principal purpose 
for originally overpaying the tax other than collecting 
excludible interest, the Secretary may determine that the 
principal purpose of waiting to claim the deductions on an 
amended return was to earn interest that would be excluded from 
income. In that case, the interest on the overpayment could not 
be excluded from income.
      It is expected that the Secretary will indicate whether 
the interest is eligible to be excluded from income on the Form 
1099 it provides that taxpayer for taxable year in which the 
underpayment interest is paid.
      Effective date.--Interest received in calendar years 
beginning after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
26. Deposits made to suspend the running of interest on potential 
        underpayments (sec. 644 of the House bill, sec. 486 of the 
        Senate amendment, and new sec. 6603 of the Code))

                              PRESENT LAW

      Generally, interest on underpayments and overpayments 
continues to accrue during the period that a taxpayer and the 
IRS dispute a liability. The accrual of interest on an 
underpayment is suspended if the IRS fails to notify an 
individual taxpayer in a timely manner, but interest will begin 
to accrue once the taxpayer is properly notified. No similar 
suspension is available for other taxpayers.
      A taxpayer that wants to limit its exposure to 
underpayment interest has a limited number of options. The 
taxpayer can continue to dispute the amount owed and risk 
paying a significant amount of interest. If the taxpayer 
continues to dispute the amount and ultimately loses, the 
taxpayer will be required to pay interest on the underpayment 
from the original due date of the return until the date of 
payment.
      In order to avoid the accrual of underpayment interest, 
the taxpayer may choose to pay the disputed amount and 
immediately file a claim for refund. Payment of the disputed 
amount will prevent further interest from accruing if the 
taxpayer loses (since there is no longer any underpayment) and 
the taxpayer will earn interest on the resultant overpayment if 
the taxpayer wins. However, the taxpayer will generally lose 
access to the Tax Court if it follows this alternative. Amounts 
paid generally cannot be recovered by the taxpayer on demand, 
but must await final determination of the taxpayer's liability. 
Even if an overpayment is ultimately determined, overpaid 
amounts may not be refunded if they are eligible to be offset 
against other liabilities of the taxpayer.
      The taxpayer may also make a deposit in the nature of a 
cash bond. The procedures for making a deposit in the nature of 
a cash bond are provided in Rev. Proc. 84-58.
      A deposit in the nature of a cash bond will stop the 
running of interest on an amount of underpayment equal to the 
deposit, but the deposit does not itself earn interest. A 
deposit in the nature of a cash bond is not a payment of tax 
and is not subject to a claim for credit or refund. A deposit 
in the nature of a cash bond may be made for all or part of the 
disputed liability and generally may be recovered by the 
taxpayer prior to a final determination. However, a deposit in 
the nature of a cash bond need not be refunded to the extent 
the Secretary determines that the assessment or collection of 
the tax determined would be in jeopardy, or that the deposit 
should be applied against another liability of the taxpayer in 
the same manner as an overpayment of tax. If the taxpayer 
recovers the deposit prior to final determination and a 
deficiency is later determined, the taxpayer will not receive 
credit for the period in which the funds were held as a 
deposit. The taxable year to which the deposit in the nature of 
a cash bond relates must be designated, but the taxpayer may 
request that the deposit be applied to a different year under 
certain circumstances.

                               HOUSE BILL

In general
      The provision allows a taxpayer to deposit cash with the 
IRS that may subsequently be used to pay an underpayment of 
income, gift, estate, generation-skipping, or certain excise 
taxes. Interest will not be charged on the portion of the 
underpayment that is deposited for the period that the amount 
is on deposit. Generally, deposited amounts that have not been 
used to pay a tax may be withdrawn at any time if the taxpayer 
so requests in writing. The withdrawn amounts will earn 
interest at the applicable Federal rate to the extent they are 
attributable to a disputable tax.
      The Secretary may issue rules relating to the making, 
use, and return of the deposits.
Use of a deposit to offset underpayments of tax
      Any amount on deposit may be used to pay an underpayment 
of tax that is ultimately assessed. If an underpayment is paid 
in this manner, the taxpayer will not be charged underpayment 
interest on the portion of the underpayment that is so paid for 
the period the funds were on deposit.
      For example, assume a calendar year individual taxpayer 
deposits $20,000 on May 15, 2005, with respect to a disputable 
item on its 2004 income tax return. On April 15, 2007, an 
examination of the taxpayer's year 2004 income tax return is 
completed, and the taxpayer and the IRS agree that the taxable 
year 2004 taxes were underpaid by $25,000. The $20,000 on 
deposit is used to pay $20,000 of the underpayment, and the 
taxpayer also pays the remaining $5,000. In this case, the 
taxpayer will owe underpayment interest from April 15, 2005 
(the original due date of the return) to the date of payment 
(April 15, 2007) only with respect to the $5,000 of the 
underpayment that is not paid by the deposit. The taxpayer will 
owe underpayment interest on the remaining $20,000 of the 
underpayment only from April 15, 2005, to May 15, 2005, the 
date the $20,000 was deposited.
Withdrawal of amounts
      A taxpayer may request the withdrawal of any amount of 
deposit at any time. The Secretary must comply with the 
withdrawal request unless the amount has already been used to 
pay tax or the Secretary properly determines that collection of 
tax is in jeopardy. Interest will be paid on deposited amounts 
that are withdrawn at a rate equal to the short-term applicable 
Federal rate for the period from the date of deposit to a date 
not more than 30 days preceding the date of the check paying 
the withdrawal. Interest is not payable to the extent the 
deposit was not attributable to a disputable tax.
      For example, assume a calendar year individual taxpayer 
receives a 30-day letter showing a deficiency of $20,000 for 
taxable year 2004 and deposits $20,000 on May 15, 2006. On 
April 15, 2007, an administrative appeal is completed, and the 
taxpayer and the IRS agree that the 2004 taxes were underpaid 
by $15,000. $15,000 of the deposit is used to pay the 
underpayment. In this case, the taxpayer will owe underpayment 
interest from April 15, 2005 (the original due date of the 
return) to May 15, 2006, the date the $20,000 was deposited. 
Simultaneously with the use of the $15,000 to offset the 
underpayment, the taxpayer requests the return of the remaining 
amount of the deposit (after reduction for the underpayment 
interest owed by the taxpayer from April 15, 2005, to May 15, 
2006). This amount must be returned to the taxpayer with 
interest determined at the short-term applicable Federal rate 
from the May 15, 2006, to a date not more than 30 days 
preceding the date of the check repaying the deposit to the 
taxpayer.
Limitation on amounts for which interest may be allowed
      Interest on a deposit that is returned to a taxpayer 
shall be allowed for any period only to the extent attributable 
to a disputable item for that period. A disputable item is any 
item for which the taxpayer (1) has a reasonable basis for the 
treatment used on its return and (2) reasonably believes that 
the Secretary also has a reasonable basis for disallowing the 
taxpayer's treatment of such item.
      All items included in a 30-day letter to a taxpayer are 
deemed disputable for this purpose. Thus, once a 30-day letter 
has been issued, the disputable amount cannot be less than the 
amount of the deficiency shown in the 30-day letter. A 30-day 
letter is the first letter of proposed deficiency that allows 
the taxpayer an opportunity for administrative review in the 
Internal Revenue Service Office of Appeals.
Deposits are not payments of tax
      A deposit is not a payment of tax prior to the time the 
deposited amount is used to pay a tax. Similarly, withdrawal of 
a deposit will not establish a period for which interest was 
allowable at the short-term applicable Federal rate for the 
purpose of establishing a net zero interest rate on a similar 
amount of underpayment for the same period.
      Effective date.--Deposits made after date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
27. Authorize IRS to enter into installment agreements that provide for 
        partial payment (sec. 645 of the House bill, sec. 484 of the 
        Senate amendment, and sec. 6159 of the Code)

                              PRESENT LAW

      The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments if the IRS determines that doing so 
will facilitate collection of the amounts owed (sec. 6159). An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
      Prior to 1998, the IRS administratively entered into 
installment agreements that provided for partial payment 
(rather than full payment) of the total amount owed over the 
period of the agreement. In that year, the IRS Chief Counsel 
issued a memorandum concluding that partial payment installment 
agreements were not permitted.

                               HOUSE BILL

      The provision clarifies that the IRS is authorized to 
enter into installment agreements with taxpayers which do not 
provide for full payment of the taxpayer's liability over the 
life of the agreement. The provision also requires the IRS to 
review partial payment installment agreements at least every 
two years. The primary purpose of this review is to determine 
whether the financial condition of the taxpayer has 
significantly changed so as to warrant an increase in the value 
of the payments being made.
      Effective date.--Installment agreements entered into on 
or after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
28. Affirmation of consolidated return regulation authority (sec. 646 
        of the House bill, sec. 421 of the Senate amendment, and sec. 
        1502 of the Code)

                              PRESENT LAW

      An affiliated group of corporations may elect to file a 
consolidated return in lieu of separate returns. A condition of 
electing to file a consolidated return is that all corporations 
that are members of the consolidated group must consent to all 
the consolidated return regulations prescribed under section 
1502 prior to the last day prescribed by law for filing such 
return.\581\
---------------------------------------------------------------------------
    \581\ Sec. 1501.
---------------------------------------------------------------------------
      Section 1502 states: ``The Secretary shall prescribe such 
regulations as he may deem necessary in order that the tax 
liability of any affiliated group of corporations making a 
consolidated return and of each corporation in the group, both 
during and after the period of affiliation, may be returned, 
determined, computed, assessed, collected, and adjusted, in 
such manner as clearly to reflect the income-tax liability and 
the various factors necessary for the determination of such 
liability, and in order to prevent the avoidance of such tax 
liability.'' \582\
---------------------------------------------------------------------------
    \582\ Sec. 1502.
---------------------------------------------------------------------------
      Under this authority, the Treasury Department has issued 
extensive consolidated return regulations.\583\
---------------------------------------------------------------------------
    \583\ Regulations issued under the authority of section 1502 are 
considered to be ``legislative'' regulations rather than 
``interpretative'' regulations, and as such are usually given greater 
deference by courts in case of a taxpayer challenge to such a 
regulation. See, S. Rep. No. 960, 70th Cong., 1st Sess. at 15 (1928), 
describing the consolidated return regulations as ``legislative in 
character''. The Supreme Court has stated that ``. . . legislative 
regulations are given controlling weight unless they are arbitrary, 
capricious, or manifestly contrary to the statute.'' Chevron, U.S.A., 
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 
(1984) (involving an environmental protection regulation). For examples 
involving consolidated return regulations, see, e.g., Wolter 
Construction Company v. Commissioner, 634 F.2d 1029 (6th Cir. 1980); 
Garvey, Inc. v. United States, 1 Ct. Cl. 108 (1983), aff'd 726 F.2d 
1569 (Fed. Cir. 1984), cert. denied, 469 U.S. 823 (1984). Compare, 
e.g., Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), describing 
different standards of review. The case did not involve a consolidated 
return regulation.
---------------------------------------------------------------------------
      In the recent case of Rite Aid Corp. v. United States, 
\584\ the Federal Circuit Court of Appeals addressed the 
application of a particular provision of certain consolidated 
return loss disallowance regulations, and concluded that the 
provision was invalid.\585\ The particular provision, known as 
the ``duplicated loss'' provision, \586\ would have denied a 
loss on the sale of stock of a subsidiary by a parent 
corporation that had filed a consolidated return with the 
subsidiary, to the extent the subsidiary corporation had assets 
that had a built-in loss, or had a net operating loss, that 
could be recognized or used later.\587\
---------------------------------------------------------------------------
    \584\ 255 F.3d 1357 (Fed. Cir. 2001), reh'g denied, 2001 U.S. App. 
LEXIS 23207 (Fed. Cir. Oct. 3, 2001).
    \585\ Prior to this decision, there had been a few instances 
involving prior laws in which certain consolidated return regulations 
were held to be invalid. See, e.g., American Standard, Inc. v. United 
States, 602 F.2d 256 (Ct. Cl. 1979), discussed in the text infra. See 
also Union Carbide Corp. v. United States, 612 F.2d 558 (Ct. Cl. 1979), 
and Allied Corporation v. United States, 685 F. 2d 396 (Ct. Cl. 1982), 
all three cases involving the allocation of income and loss within a 
consolidated group for purposes of computation of a deduction allowed 
under prior law by the Code for Western Hemisphere Trading 
Corporations. See also Joseph Weidenhoff v. Commissioner, 32 T.C. 1222, 
1242-1244 (1959), involving the application of certain regulations to 
the excess profits tax credit allowed under prior law, and concluding 
that the Commissioner had applied a particular regulation in an 
arbitrary manner inconsistent with the wording of the regulation and 
inconsistent with even a consolidated group computation. Cf. Kanawha 
Gas & Utilities Co. v. Commissioner, 214 F.2d 685 (1954), concluding 
that the substance of a transaction was an acquisition of assets rather 
than stock. Thus, a regulation governing basis of the assets of 
consolidated subsidiaries did not apply to the case. See also General 
Machinery Corporation v. Commissioner, 33 B.T.A. 1215 (1936); Lefcourt 
Realty Corporation, 31 B.T.A. 978 (1935); Helvering v. Morgans, Inc., 
293 U.S. 121 (1934), interpreting the term ``taxable year.''
    \586\ Treas. Reg. sec. 1.1502-20(c)(1)(iii).
    \587\ Treasury Regulation section 1.1502-20, generally imposing 
certain ``loss disallowance'' rules on the disposition of subsidiary 
stock, contained other limitations besides the ``duplicated loss'' rule 
that could limit the loss available to the group on a disposition of a 
subsidiary's stock. Treasury Regulation section 1.1502-20 as a whole 
was promulgated in connection with regulations issued under section 
337(d), principally in connection with the so-called General Utilities 
repeal of 1986 (referring to the case of General Utilities & Operating 
Company v. Helvering, 296 U.S. 200 (1935)). Such repeal generally 
required a liquidating corporation, or a corporation acquired in a 
stock acquisition treated as a sale of assets, to pay corporate level 
tax on the excess of the value of its assets over the basis. Treasury 
regulation section 1.1502-20 principally reflected an attempt to 
prevent corporations filing consolidated returns from offsetting income 
with a loss on the sale of subsidiary stock. Such a loss could result 
from the unique upward adjustment of a subsidiary's stock basis 
required under the consolidated return regulations for subsidiary 
income earned in consolidation, an adjustment intended to prevent 
taxation of both the subsidiary and the parent on the same income or 
gain. As one example, absent a denial of certain losses on a sale of 
subsidiary stock, a consolidated group could obtain a loss deduction 
with respect to subsidiary stock, the basis of which originally 
reflected the subsidiary's value at the time of the purchase of the 
stock, and that had then been adjusted upward on recognition of any 
built-in income or gain of the subsidiary reflected in that value. The 
regulations also contained the duplicated loss factor addressed by the 
court in Rite Aid. The preamble to the regulations stated: ``it is not 
administratively feasible to differentiate between loss attributable to 
built-in gain and duplicated loss.'' T.D. 8364, 1991-2 C.B. 43, 46 
(Sept. 13, 1991). The government also argued in the Rite Aid case that 
duplicated loss was a separate concern of the regulations. 255 F.3d at 
1360.
---------------------------------------------------------------------------
      The Federal Circuit Court opinion contained language 
discussing the fact that the regulation produced a result 
different than the result that would have obtained if the 
corporations had filed separate returns rather than 
consolidated returns.\588\
---------------------------------------------------------------------------
    \588\ For example, the court stated: ``The duplicated loss factor . 
. . addresses a situation that arises from the sale of stock regardless 
of whether corporations file separate or consolidated returns. With 
I.R.C. secs. 382 and 383, Congress has addressed this situation by 
limiting the subsidiary's potential future deduction, not the parent's 
loss on the sale of stock under I.R.C. sec. 165.'' 255 F.3d 1357, 1360 
(Fed. Cir. 2001).
---------------------------------------------------------------------------
      The Federal Circuit Court opinion cited a 1928 Senate 
Finance Committee Report to legislation that authorized 
consolidated return regulations, which stated that ``many 
difficult and complicated problems, . . . have arisen in the 
administration of the provisions permitting the filing of 
consolidated returns'' and that the committee ``found it 
necessary to delegate power to the commissioner to prescribe 
regulations legislative in character covering them.'' \589\ The 
Court's opinion also cited a previous decision of the Court of 
Claims for the proposition, interpreting this legislative 
history, that section 1502 grants the Secretary ``the power to 
conform the applicable income tax law of the Code to the 
special, myriad problems resulting from the filing of 
consolidated income tax returns;'' but that section 1502 ``does 
not authorize the Secretary to choose a method that imposes a 
tax on income that would not otherwise be taxed.'' \590\
---------------------------------------------------------------------------
    \589\ S. Rep. No. 960, 70th Cong., 1st Sess. 15 (1928). Though not 
quoted by the court in Rite Aid, the same Senate report also indicated 
that one purpose of the consolidated return authority was to permit 
treatment of the separate corporations as if they were a single unit, 
stating ``The mere fact that by legal fiction several corporations 
owned by the same shareholders are separate entities should not obscure 
the fact that they are in reality one and the same business owned by 
the same individuals and operated as a unit.'' S. Rep. No. 960, 70th 
Cong., 1st Sess. 29 (1928).
    \590\ American Standard, Inc. v. United States, 602 F.2d 256, 261 
(Ct. Cl. 1979). That case did not involve the question of separate 
returns as compared to a single return approach. It involved the 
computation of a Western Hemisphere Trade Corporation (``WHTC'') 
deduction under prior law (which deduction would have been computed as 
a percentage of each WHTC's taxable income if the corporations had 
filed separate returns), in a case where a consolidated group included 
several WHTCs as well as other corporations. The question was how to 
apportion income and losses of the admittedly consolidated WHTCs and 
how to combine that computation with the rest of the group's 
consolidated income or losses. The court noted that the new, changed 
regulations approach varied from the approach taken to a similar 
problem involving public utilities within a group and previously 
allowed for WHTCs. The court objected that the allocation method 
adopted by the regulation allowed non-WHTC losses to reduce WHTC 
income. However, the court did not disallow a method that would net 
WHTC income of one WHTC with losses of another WHTC, a result that 
would not have occurred under separate returns. Nor did the court 
expressly disallow a different fractional method that would net both 
income and losses of the WHTCs with those of other corporations in the 
consolidated group. The court also found that the regulation had been 
adopted without proper notice.
---------------------------------------------------------------------------
      The Federal Circuit Court construed these authorities and 
applied them to invalidate Treas. Reg. Sec. 1.1502-
20(c)(1)(iii), stating that: ``The loss realized on the sale of 
a former subsidiary's assets after the consolidated group sells 
the subsidiary's stock is not a problem resulting from the 
filing of consolidated income tax returns. The scenario also 
arises where a corporate shareholder sells the stock of a non-
consolidated subsidiary. The corporate shareholder could 
realize a loss under I.R.C. sec. 1001, and deduct the loss 
under I.R.C. sec. 165. The subsidiary could then deduct any 
losses from a later sale of assets. The duplicated loss factor, 
therefore, addresses a situation that arises from the sale of 
stock regardless of whether corporations file separate or 
consolidated returns. With I.R.C. secs. 382 and 383, Congress 
has addressed this situation by limiting the subsidiary's 
potential future deduction, not the parent's loss on the sale 
of stock under I.R.C. sec. 165.'' \591\
---------------------------------------------------------------------------
    \591\ Rite Aid, 255 F.3d at 1360.
---------------------------------------------------------------------------
      The Treasury Department has announced that it will not 
continue to litigate the validity of the duplicated loss 
provision of the regulations, and has issued interim 
regulations that permit taxpayers for all years to elect a 
different treatment, though they may apply the provision for 
the past if they wish.\592\
---------------------------------------------------------------------------
    \592\ See Temp. Reg. Sec. 1.1502-20T(i)(2), Temp. Reg. Sec. 
1.337(d)-2T, and Temp. Reg. Sec. 1.1502-35T. The Treasury Department 
has also indicated its intention to continue to study all the issues 
that the original loss disallowance regulations addressed (including 
issues of furthering single entity principles) and possibly issue 
different regulations (not including the particular approach of Treas. 
Reg. Sec. 1.1502-20(c)(1)(iii)) on the issues in the future. See, e.g. 
Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 F.R. 
11034 (March 12, 2002); REG-102740-02, 67 F.R. 11070 (March 12, 2002); 
see also Notice 2002-18, 2002-12 I.R.B. 644 (March 25, 2002); REG-
131478-02, 67 F.R. 65060 (October 18, 2002); T.D. 9048, 68 F.R. 12287 
(March 14, 2003); and T.D. 9118, REG-153172-03 (March 17, 2004).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision confirms that, in exercising its authority 
under section 1502 to issue consolidated return regulations, 
the Treasury Department may provide rules treating corporations 
filing consolidated returns differently from corporations 
filing separate returns.
      Thus, under the statutory authority of section 1502, the 
Treasury Department is authorized to issue consolidated return 
regulations utilizing either a single taxpayer or separate 
taxpayer approach or a combination of the two approaches, as 
Treasury deems necessary in order that the tax liability of any 
affiliated group of corporations making a consolidated return, 
and of each corporation in the group, both during and after the 
period of affiliation, may be determined and adjusted in such 
manner as clearly to reflect the income-tax liability and the 
various factors necessary for the determination of such 
liability, and in order to prevent avoidance of such liability.
      Rite Aid is thus overruled to the extent it suggests that 
the Secretary is required to identify a problem created from 
the filing of consolidated returns in order to issue 
regulations that change the application of a Code provision. 
The Secretary may promulgate consolidated return regulations to 
change the application of a tax code provision to members of a 
consolidated group, provided that such regulations are 
necessary to clearly reflect the income tax liability of the 
group and each corporation in the group, both during and after 
the period of affiliation.
      The provision nevertheless allows the result of the Rite 
Aid case to stand with respect to the type of factual situation 
presented in the case. That is, the bill provides for the 
override of the regulatory provision that took the approach of 
denying a loss on a deconsolidating disposition of stock of a 
consolidated subsidiary \593\ to the extent the subsidiary had 
net operating losses or built in losses that could be used 
later outside the group.\594\
---------------------------------------------------------------------------
    \593\ Treas. Reg. sec. 1.1502-20(c)(1)(iii).
    \594\ The provision is not intended to overrule the current 
Treasury Department regulations, which allow taxpayers in certain 
circumstances for the past to follow Treasury Regulations Section 
1.1502-20(c)(1)(iii), if they choose to do so. Temp. Reg. Sec. 1.1502-
20T(i)(2).
---------------------------------------------------------------------------
      Retaining the result in the Rite Aid case with respect to 
the particular regulation section 1.1502-20(c)(1)(iii) as 
applied to the factual situation of the case does not in any 
way prevent or invalidate the various approaches Treasury has 
announced it will apply or that it intends to consider in lieu 
of the approach of that regulation, including, for example, the 
denial of a loss on a stock sale if inside losses of a 
subsidiary may also be used by the consolidated group, and the 
possible requirement that inside attributes be adjusted when a 
subsidiary leaves a group.\595\
---------------------------------------------------------------------------
    \595\ See, e.g., Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); 
Temp. Reg. Sec. 1.337(d)-2T, (T.D. 8984, 67 F.R. 11034 (March 12, 2002) 
and T.D. 8998, 67 F.R. 37998 (May 31, 2002)); REG-102740-02, 67 F.R. 
11070 (March 12, 2002); see also Notice 2002-18, 2002-12 I.R.B. 644 
(March 25, 2002); REG-131478-02, 67 F.R. 65060 (October 18, 2002); 
Temp. Reg. Sec. 1.1502-35T (T.D. 9048, 68 F.R. 12287 (March 14, 2003)); 
and T.D. 9118, REG-153172-03 (March 17, 2004). In exercising its 
authority under section 1502, the Secretary is also authorized to 
prescribe rules that protect the purpose of General Utilities repeal 
using presumptions and other simplifying conventions.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for all 
years, whether beginning before, on, or after the date of 
enactment of the provision. No inference is intended that the 
results following from this provision are not the same as the 
results under present law.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The Conference agreement follows the House bill and the 
Senate Amendment.
29. Reform of tax treatment of certain leasing arrangements and 
        limitation on deductions allocable to property used by 
        governments or other tax-exempt entities (secs. 647 through 649 
        of the bill, secs. 475 and 476 of the Senate amendment, secs. 
        167 and 168 of the Code, and new sec. 470 of the Code)

                              PRESENT LAW

Overview of depreciation
      A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods based on such 
property's class life. The recovery periods applicable to most 
tangible personal property (generally tangible property other 
than residential rental property and nonresidential real 
property) range from 3 to 25 years and are significantly 
shorter than the property's class life, which is intended to 
approximate the economic useful life of the property. In 
addition, the depreciation methods generally applicable to 
tangible personal property are the 200-percent and 150-percent 
declining balance methods, switching to the straight-line 
method for the taxable year in which the depreciation deduction 
would be maximized.
Characterization of leases for tax purposes
      In general, a taxpayer is treated as the tax owner and is 
entitled to depreciate property leased to another party if the 
taxpayer acquires and retains significant and genuine 
attributes of a traditional owner of the property, including 
the benefits and burdens of ownership. No single factor is 
determinative of whether a lessor will be treated as the owner 
of the property. Rather, the determination is based on all the 
facts and circumstances surrounding the leasing transaction.
      A sale-leaseback transaction is respected for Federal tax 
purposes if ``there is a genuine multiple-party transaction 
with economic substance which is compelled or encouraged by 
business or regulatory realities, is imbued with tax-
independent considerations, and is not shaped solely by tax-
avoidance features that have meaningless labels attached.'' 
\596\
---------------------------------------------------------------------------
    \596\ Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978).
---------------------------------------------------------------------------
Recovery period for tax-exempt use property
      Under present law, ``tax-exempt use property'' must be 
depreciated on a straight-line basis over a recovery period 
equal to the longer of the property's class life or 125 percent 
of the lease term.\597\ For purposes of this rule, ``tax-exempt 
use property'' is tangible property that is leased (other than 
under a short-term lease) to a tax-exempt entity.\598\ For this 
purpose, the term ``tax-exempt entity'' includes Federal, State 
and local governmental units, charities, and, foreign entities 
or persons.\599\
---------------------------------------------------------------------------
    \597\ Sec. 168(g)(3)(A). Under present law, section 168(g)(3)(C) 
states that the recovery period of ``qualified technological 
equipment'' is five years.
    \598\ Sec. 168(h)(1).
    \599\ Sec. 168(h)(2).
---------------------------------------------------------------------------
      In determining the length of the lease term for purposes 
of the 125-percent calculation, several special rules apply. In 
addition to the stated term of the lease, the lease term 
includes options to renew the lease or other periods of time 
during which the lessee could be obligated to make rent 
payments or assume a risk of loss related to the leased 
property.
      Tax-exempt use property does not include property that is 
used by a taxpayer to provide a service to a tax-exempt entity. 
So long as the relationship between the parties is a bona fide 
service contract, the taxpayer will be allowed to depreciate 
the property used in satisfying the contract under normal MACRS 
rules, rather than the rules applicable to tax-exempt use 
property.\600\ In addition, property is not treated as tax-
exempt use property merely by reason of a short-term lease. In 
general, a short-term lease means any lease the term of which 
is less than three years and less than the greater of one year 
or 30 percent of the property's class life.\601\
---------------------------------------------------------------------------
    \600\ Sec. 7701(e) provides that a service contract will not be 
respected, and instead will be treated as a lease of property, if such 
contract is properly treated as a lease taking into account all 
relevant factors. The relevant factors include, among others, the 
service recipient controls the property, the service recipient is in 
physical possession of the property, the service provider does not bear 
significant risk of diminished receipts or increased costs if there is 
nonperformance, the property is not used to concurrently provide 
services to other entities, and the contract price does not 
substantially exceed the rental value of the property.
    \601\ Sec. 168(h)(1)(C).
---------------------------------------------------------------------------
      Also, tax-exempt use property generally does not include 
qualified technological equipment that meets the exception for 
leases of high technology equipment to tax-exempt entities with 
lease terms of five years or less.\602\ The recovery period for 
qualified technological equipment that is treated as tax-exempt 
use property, but is not subject to the high technology 
equipment exception, is five years.\603\
---------------------------------------------------------------------------
    \602\ Sec. 168(h)(3). However, the exception does not apply if part 
or all of the qualified technological equipment is financed by a tax-
exempt obligation, is sold by the tax-exempt entity (or related party) 
and leased back to the tax-exempt entity (or related party), or the 
tax-exempt entity is the United States or any agency or instrumentality 
of the United States.
    \603\ Sec. 168(g)(3)(C).
---------------------------------------------------------------------------
      The term ``qualified technological equipment'' is defined 
as computers and related peripheral equipment, high technology 
telephone station equipment installed on a customer's premises, 
and high technology medical equipment.\604\ In addition, tax-
exempt use property does not include computer software because 
it is intangible property.
---------------------------------------------------------------------------
    \604\ Sec. 168(i)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

Overview
      The House bill modifies the recovery period of certain 
property leased to a tax-exempt entity, alters the definition 
of lease term for all property leased to a tax-exempt entity, 
expands the short-term lease exception for qualified 
technological equipment, and establishes rules to limit 
deductions associated with leases to tax-exempt entities if the 
leases do not satisfy specified criteria.
Modify the recovery period of certain property leased to a tax-exempt 
        entity
      The House bill modifies the recovery period for qualified 
technological equipment and computer software leased to a tax-
exempt entity \605\ to be the longer of the property's assigned 
class life (or assigned useful life in the case of computer 
software) or 125 percent of the lease term. The House bill does 
not apply to short-term leases, as defined under present law 
with a modification described below for short-term leases of 
qualified technological equipment.
---------------------------------------------------------------------------
    \605\ The House bill defines a tax-exempt entity as under present 
law. Thus, it includes Federal, State, local, and foreign governmental 
units, charities, foreign entities or persons.
---------------------------------------------------------------------------
Modify definition of lease term
      In determining the length of the lease term for purposes 
of the 125-percent calculation, the House bill provides that 
the lease term includes all service contracts (whether or not 
treated as a lease under section 7701(e)) and other similar 
arrangements that follow a lease of property to a tax-exempt 
entity and that are part of the same transaction (or series of 
transactions) as the lease.\606\
---------------------------------------------------------------------------
    \606\ A service contract involving property that previously was 
leased to the tax-exempt entity is not part of the same transaction as 
the preceding leasing arrangement (and, thus, is not included in the 
lease term of such arrangement) if the service contract was not 
included in the terms and conditions, or contemplated at the inception, 
of the preceding leasing arrangement.
---------------------------------------------------------------------------
      Under the House bill, service contracts and other similar 
arrangements include arrangements by which services are 
provided using the property in exchange for fees that provide a 
source of repayment of the capital investment in the 
property.\607\
---------------------------------------------------------------------------
    \607\ For purposes of the House bill, a service contract does not 
include an arrangement for the provision of services if the leased 
property or substantially similar property is not utilized to provide 
such services. For example, if at the conclusion of a lease term, a 
tax-exempt lessee purchases property from the taxpayer and enters into 
an agreement pursuant to which the taxpayer maintains the property, the 
maintenance agreement will not be included in the lease term for 
purposes of the 125-percent computation.
---------------------------------------------------------------------------
      This requirement applies to all leases of property to a 
tax-exempt entity.
Expand short-term lease exception for qualified technological equipment
      For purposes of determining whether a lease of qualified 
technological equipment to a tax-exempt entity satisfies the 
present-law 5-year short-term lease exception for leases of 
qualified technological equipment, the House bill provides that 
the term of the lease does not include an option or options of 
the lessee to renew or extend the lease, provided the rents 
under the renewal or extension are based upon fair market value 
determined at the time of the renewal or extension. The 
aggregate period of such renewals or extensions not included in 
the lease term under this provision may not exceed 24 months. 
In addition, this provision does not apply to any period 
following the failure of a tax-exempt lessee to exercise a 
purchase option if the result of such failure is that the lease 
renews automatically at fair market value rents.
Limit deductions for certain leases of property to tax-exempt parties
      The House bill also provides that if a taxpayer leases 
property to a tax-exempt entity, the taxpayer may not claim 
deductions for a taxable year from the lease transaction in 
excess of the taxpayer's gross income from the lease for that 
taxable year. This provision does not apply to certain 
transactions involving property with respect to which the low-
income housing credit or the rehabilitation credit is 
allowable.
      This provision applies to deductions or losses related to 
a lease to a tax-exempt entity and the leased property.\608\ 
Any disallowed deductions are carried forward and treated as 
deductions related to the lease in the following taxable year 
subject to the same limitations. Under rules similar to those 
applicable to passive activity losses (including the treatment 
of dispositions of property in which less than all of the gain 
or loss from the disposition is recognized),\609\ a taxpayer 
generally is permitted to deduct previously disallowed 
deductions and losses when the taxpayer completely disposes of 
its interest in the property.
---------------------------------------------------------------------------
    \608\ Deductions related to a lease of tax-exempt use property 
include any depreciation or amortization expense, maintenance expense, 
taxes or the cost of acquiring an interest in, or lease of, property. 
In addition, this provision applies to interest that is properly 
allocable to tax-exempt use property, including interest on any 
borrowing by a related person, the proceeds of which were used to 
acquire an interest in the property, whether or not the borrowing is 
secured by the leased property or any other property.
    \609\ See Sec. 469(g).
---------------------------------------------------------------------------
      A lease of property to a tax-exempt party is not subject 
to the deduction limitations of this provision if the lease 
satisfies all of the following requirements: \610\
---------------------------------------------------------------------------
    \610\ Even if a transaction satisfies each of the following 
requirements, the taxpayer will be treated as the owner of the leased 
property only if the taxpayer acquires and retains significant and 
genuine attributes of an owner of the property under the present-law 
tax rules, including the benefits and burdens of ownership.
---------------------------------------------------------------------------
      (1) Tax-exempt lessee does not monetize its lease 
obligations
      In general, the tax-exempt lessee may not monetize its 
lease obligations (including any purchase option) in an amount 
that exceeds 20 percent of the taxpayer's adjusted basis \611\ 
in the leased property at the time the lease is entered 
into.\612\ Specifically, a lease does not satisfy this 
requirement if the tax-exempt lessee monetizes such excess 
amount pursuant to an arrangement, set-aside, or expected set-
aside, that is to or for the benefit of the taxpayer or any 
lender, or is to or for the benefit of the tax-exempt lessee, 
in order to satisfy the lessee's obligations or options under 
the lease. This determination shall be made at all times during 
the lease term and shall include the amount of any interest or 
other income or gain earned on any amount set aside or subject 
to an arrangement described in this provision. For purposes of 
determining whether amounts have been set aside or are expected 
to be set aside, amounts are treated as set aside or expected 
to be set aside only if a reasonable person would conclude that 
the facts and circumstances indicate that such amounts are set 
aside or expected to be set aside.\613\
---------------------------------------------------------------------------
    \611\ For purposes of this requirement, the adjusted basis of 
property acquired by the taxpayer in a like-kind exchange or 
involuntary conversion to which section 1031 or section 1033 applies is 
equal to the lesser of (1) the fair market value of the property as of 
the beginning of the lease term, or (2) the amount that would be the 
taxpayer's adjusted basis if section 1031 or section 1033 did not apply 
to such acquisition.
    \612\ Arrangements to monetize lease obligations include defeasance 
arrangements, loans by the tax-exempt entity (or an affiliate) to the 
taxpayer (or an affiliate) or any lender, deposit agreements, letters 
of credit collateralized with cash or cash equivalents, payment 
undertaking agreements, prepaid rent (within the meaning of the 
regulations under section 467), sinking fund arrangements, guaranteed 
investment contracts, financial guaranty insurance, or any similar 
arrangements.
    \613\ It is anticipated under the House bill that the customary and 
budgeted funding by tax-exempt entities of current obligations under a 
lease through unrestricted accounts or funds for general working 
capital needs will not be considered arrangements, set-asides, or 
expected set-asides under this requirement.
---------------------------------------------------------------------------
      The Secretary may provide by regulations that this 
requirement is satisfied, even if a tax-exempt lessee monetizes 
its lease obligations or options in an amount that exceeds 20 
percent of the taxpayer's adjusted basis in the leased 
property, in cases in which the creditworthiness of the tax-
exempt lessee would not otherwise satisfy the taxpayer's 
customary underwriting standards. Such credit support would not 
be permitted to exceed 50 percent of the taxpayer's adjusted 
basis in the property. In addition, if the lease provides the 
tax-exempt lessee an option to purchase the property for a 
fixed purchase price (or for other than the fair market value 
of the property determined at the time of exercise of the 
option), such credit support at the time that such option may 
be exercised would not be permitted to exceed 50 percent of the 
purchase option price.
      Certain lease arrangements that involve circular cash 
flows or insulation of the taxpayer's equity investment from 
the risk of loss fail this requirement without regard to the 
amount in which the tax-exempt lessee monetizes its lease 
obligations or options. Thus, a lease does not satisfy this 
requirement if the tax-exempt lessee enters into an arrangement 
to monetize in any amount its lease obligations or options if 
such arrangement involves (1) a loan (other than an amount 
treated as a loan under section 467 with respect to a section 
467 rental agreement) from the tax-exempt lessee to the 
taxpayer or a lender, (2) a deposit that is received, a letter 
of credit that is issued, or a payment undertaking agreement 
that is entered into by a lender otherwise involved in the 
transaction, or (3) in the case of a transaction that involves 
a lender, any credit support made available to the taxpayer in 
which any such lender does not have a claim that is senior to 
the taxpayer.
      (2) Taxpayer makes and maintains a substantial equity 
investment in the leased property
      The taxpayer must make and maintain a substantial equity 
investment in the leased property. For this purpose, a taxpayer 
generally does not make or maintain a substantial equity 
investment unless (1) at the time the lease is entered into, 
the taxpayer initially makes an unconditional at-risk equity 
investment in the property of at least 20 percent of the 
taxpayer's adjusted basis \614\ in the leased property at that 
time,\615\ (2) the taxpayer maintains such equity investment 
throughout the lease term, and (3) at all times during the 
lease term, the fair market value of the property at the end of 
the lease term is reasonably expected to be equal to at least 
20 percent of such basis.\616\ For this purpose, the fair 
market value of the property at the end of the lease term is 
reduced to the extent that a person other than the taxpayer 
bears a risk of loss in the value of the property.
---------------------------------------------------------------------------
    \614\ For purposes of this requirement, the adjusted basis of 
property acquired by the taxpayer in a like-kind exchange or 
involuntary conversion to which section 1031 or section 1033 applies is 
equal to the lesser of (1) the fair market value of the property as of 
the beginning of the lease term, or (2) the amount that would be the 
taxpayer's adjusted basis if section 1031 or section 1033 did not apply 
to such acquisition.
    \615\ The taxpayer's at-risk equity investment shall include only 
consideration paid, and personal liability incurred, by the taxpayer to 
acquire the property. Cf. Rev. Proc. 2001-28, 2001-2 C.B. 1156.
    \616\ Cf. Rev. Proc. 2001-28, sec. 4.01(2), 2001-1 C.B. 1156. The 
fair market value of the property must be determined without regard to 
inflation or deflation during the lease term and after subtracting the 
cost of removing the property.
---------------------------------------------------------------------------
      This requirement does not apply to leases with lease 
terms of 5 years or less.
      (3) Tax-exempt lessee does not bear more than a minimal 
risk of loss
      The tax-exempt lessee generally may not assume or retain 
more than a minimal risk of loss, other than the obligation to 
pay rent and insurance premiums, to maintain the property, or 
other similar conventional obligations of a net lease.\617\ For 
this purpose, a tax-exempt lessee assumes or retains more than 
a minimal risk of loss if, as a result of obligations assumed 
or retained by, on behalf of, or pursuant to an agreement with 
the tax-exempt lessee, the taxpayer is protected from either 
(1) any portion of the loss that would occur if the fair market 
value of the leased property were 25 percent less than the 
leased property's reasonably expected fair market value at the 
time the lease is terminated, or (2) an aggregate loss that is 
greater than 50 percent of the loss that would occur if the 
fair market value of the leased property were zero at lease 
termination.\618\ In addition, the Secretary may provide by 
regulations that this requirement is not satisfied where the 
tax-exempt lessee otherwise retains or assumes more than a 
minimal risk of loss. Such regulations shall be prospective 
only.
---------------------------------------------------------------------------
    \617\ Examples of arrangements by which a tax-exempt lessee might 
assume or retain a risk of loss include put options, residual value 
guarantees, residual value insurance, and service contracts. However, 
leases do not fail to satisfy this requirement solely by reason of 
lease provisions that require the tax-exempt lessee to pay a 
contractually stipulated loss value to the taxpayer in the event of an 
early termination due to a casualty loss, a material default by the 
tax-exempt lessee (excluding the failure by the tax-exempt lessee to 
enter into an arrangement described above), or other similar 
extraordinary events that are not reasonably expected to occur at lease 
inception.
    \618\ For purposes of this requirement, residual value protection 
provided to the taxpayer by a manufacturer or dealer of the leased 
property is not treated as borne by the tax-exempt lessee if the 
manufacturer or dealer provides such residual value protection to 
customers in the ordinary course of its business.
---------------------------------------------------------------------------
      This requirement does not apply to leases with lease 
terms of 5 years or less.
            Coordination with like-kind exchange and involuntary 
                    conversion rules
      Under this provision, neither the like-kind exchange 
rules (sec. 1031) nor the involuntary conversion rules (sec. 
1033) apply if either (1) the exchanged or converted property 
is tax-exempt use property subject to a lease that was entered 
into prior to the effective date of this provision and the 
lease would not have satisfied the requirements of this 
provision had such requirements been in effect when the lease 
was entered into, or (2) the replacement property is tax-exempt 
use property subject to a lease that does not meet the 
requirements of this provision.
            Other rules
      This provision continues to apply throughout the lease 
term to property that initially was tax-exempt use property, 
even if the property ceases to be tax-exempt use property 
during the lease term.\619\ In addition, this provision is 
applied before the application of the passive activity loss 
rules under section 469.
---------------------------------------------------------------------------
    \619\ Conversely, however, a lease of property that is not tax-
exempt use property does not become subject to this provision solely by 
reason of requisition or seizure by the Federal government in national 
emergency circumstances.
---------------------------------------------------------------------------
      This provision does not alter the treatment of any 
Qualified Motor Vehicle Operating Agreement within the meaning 
of section 7701(h). In the case of any such agreement, the 
second and third requirements provided by this provision 
(relating to taxpayer equity investment and tax-exempt lessee 
risk of loss, respectively) shall be applied without regard to 
any terminal rental adjustment clause.
Effective date
      The House bill provision generally is effective for 
leases entered into after March 12, 2004.\620\ However, the 
House bill provision does not apply to property located in the 
United States that is subject to a lease with respect to which 
a formal application (1) was submitted for approval to the 
Federal Transit Administration (an agency of the Department of 
Transportation) after June 30, 2003, and before March 13, 2004, 
(2) is approved by the Federal Transit Administration before 
January 1, 2005, and (3) includes a description and the fair 
market value of such property.
---------------------------------------------------------------------------
    \620\ If a lease entered into on or before March 12, 2004, is 
transferred in a transaction that does not materially alter the terms 
of such lease, the bill shall not apply to the lease as a result of 
such transfer.
---------------------------------------------------------------------------
      The House bill provisions relating to coordination with 
the like-kind exchange and involuntary conversion rules are 
effective with respect to property that is exchanged or 
converted after the date of enactment.
      No inference is intended regarding the appropriate 
present-law tax treatment of transactions entered into prior to 
the effective date of the House bill provision. In addition, it 
is intended that the House bill provision shall not be 
construed as altering or supplanting the present-law tax rules 
providing that a taxpayer is treated as the owner of leased 
property only if the taxpayer acquires and retains significant 
and genuine attributes of an owner of the property, including 
the benefits and burdens of ownership. The House bill provision 
also is not intended to affect the scope of any other present-
law tax rules or doctrines applicable to purported leasing 
transactions.

                            SENATE AMENDMENT

Overview
      The Senate amendment is similar to the House bill in that 
it modifies the recovery period of certain property leased to a 
tax-exempt entity, alters the definition of lease term for all 
property leased to a tax-exempt entity, and establishes rules 
to limit deductions associated with leases to tax-exempt 
entities if the leases do not satisfy specified criteria.
Modify the recovery period of certain property leased to a tax-exempt 
        entity
      The Senate amendment provision that modifies the recovery 
period for qualified technological equipment and computer 
software leased to a tax-exempt entity is the same as the House 
bill provision.
Modify definition of lease term
      The Senate amendment provision that modifies the 
definition of a lease term is the same as the House bill 
provision.
Expand short-term lease exception for qualified technological equipment
      The Senate amendment does not include the House bill 
provision that excludes certain renewals and extensions of up 
to 24 months from the determination of whether a lease of 
qualified technological equipment to a tax-exempt entity 
satisfies the present-law 5-year short-term lease exception for 
leases of qualified technological equipment.
Limit deductions for certain leases of property to tax-exempt parties
      The Senate amendment is similar to the House bill in that 
it limits a taxpayer's deductions for a taxable year from a 
lease transaction with a tax-exempt entity to the taxpayer's 
gross income from the lease for that taxable year. However, the 
Senate amendment does not exclude transactions involving 
property with respect to which the rehabilitation credit is 
allowable.
      Like the House bill, the Senate amendment provides that a 
lease of property to a tax-exempt party is not subject to the 
deduction limitations of this provision if the lease satisfies 
a series of requirements similar to that provided in the House 
bill, with the following modifications:
            (1) Leased property is not financed with tax-exempt 
        bonds or Federal funds
      The Senate amendment provides that the leased property 
must not have been directly or indirectly financed with tax-
exempt bonds that are outstanding when the lease is entered 
into, or with Federal funds. This requirement is not included 
in the House bill.
      For example, a lease of rolling stock to a municipality 
would be subject to the Senate amendment if the proceeds of the 
municipality's general obligation bond were used to finance the 
acquisition of the rolling stock (in whole or part) and the 
bond is outstanding when the lease is entered into.
      The Senate amendment permits the Secretary to provide a 
de minimis exception from this requirement.
            (2) Tax-exempt lessee does not monetize its lease 
        obligations
      The Senate amendment is similar to the House bill in that 
it provides that the tax-exempt lessee may not monetize its 
lease obligations in an amount that exceeds 20 percent of the 
taxpayer's adjusted basis in the leased property at the time 
the lease is entered into. However, the Senate amendment also 
permits the Secretary to identify arrangements (in addition to 
those specified in the provision) to which the requirement 
applies.
            (3) Taxpayer makes and maintains a substantial 
        equity investment in the leased property
      The Senate amendment is similar to the House bill in that 
it requires the taxpayer to make and maintain a substantial 
equity investment in the leased property. However, the Senate 
amendment does not generally exclude from the application of 
this requirement leases with lease terms of 5 years or less. 
Instead, the Senate amendment provides that, with respect to 
short-term leases as defined under present law, the taxpayer is 
required to make a substantial equity investment, but is not 
required to maintain a substantial equity investment, and the 
leased property is not required to be reasonably expected to 
equal 20 percent of the taxpayer's adjusted basis at the time 
the lease is entered into.
            (4) Tax-exempt lessee does not bear more than a 
        minimal risk of loss
      The Senate amendment is similar to the House bill in that 
it provides that the tax-exempt lessee generally may not assume 
or retain more than a minimal risk of loss with respect to the 
lease. However, the Senate amendment does not exclude from the 
application of this requirement leases with lease terms of 5 
years or less.
            (5) Lease of certain property does not include a 
        fixed-price purchase option of the tax-exempt lessee
      The Senate amendment provides that the tax-exempt lessee 
may not have an option to purchase the leased property for any 
stated purchase price other than the fair market value of the 
property (as determined at the time of exercise of the option). 
This requirement does not apply to property with a class life 
(as defined in section 168(i)(1)) of seven years or less. This 
requirement is not included in the House bill.
            (6) Lease meets any other requirement prescribed in 
        regulations
      The Senate amendment requires the lease to meet any other 
requirements that the Secretary prescribes by regulations. This 
requirement is not included in the House bill.
            Coordination with like-kind exchange and involuntary 
                    conversion rules
      The Senate amendment does not include the House bill 
provisions that coordinate the like-kind exchange and 
involuntary conversion rules with the deduction limitation 
provision.
Effective date
      The Senate amendment provision generally is effective for 
leases entered into after November 18, 2003. However, with 
respect to tax-exempt use property that is leased to a foreign 
tax-exempt entity or person in a transaction entered into on or 
before November 18, 2003, the Senate amendment provision is 
effective for taxable years beginning after January 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, with the 
following modifications.
Definition of tax-exempt entity
      The conference agreement expands the present-law 
definition of tax-exempt entity for this purpose to include 
certain Indian tribal governments in addition to Federal, 
State, local, and foreign governmental units, charities, 
foreign entities or persons.
Modify the recovery period of certain property leased to a tax-exempt 
        entity
      The conference agreement also modifies the recovery 
period for certain intangibles leased to a tax-exempt entity to 
be the no less than 125 percent of the lease term.\621\ The 
conference agreement modification does not apply to short-term 
leases, as defined under present law with a modification 
described below for short-term leases of qualified 
technological equipment.
---------------------------------------------------------------------------
    \621\ In the case of computer software and intangible assets, this 
rule is applied by substituting useful life and amortization period, 
respectively, for class life.
---------------------------------------------------------------------------
Limit deductions for leases of property to tax-exempt parties
      The conference agreement provides an additional 
requirement that must be satisfied to avoid the deduction 
limitations for certain leases of property to tax-exempt 
parties. This requirement provides that the tax-exempt lessee 
may not have an option to purchase the leased property for any 
stated purchase price other than the fair market value of the 
property (as determined at the time of exercise of the option). 
This requirement does not apply to (1) property with a class 
life (as defined in section 168(i)(1)) of seven years or less, 
or (2) any fixed-wing aircraft or vessels (i.e., ships).
Effective date
      The conference agreement modifies the Federal Transit 
Administration approval deadline to January 1, 2006.
      In addition, the conference agreement provides that the 
provisions relating to intangible assets and Indian tribal 
governments are effective for leases entered into after October 
3, 2004.
30. Clarification of the economic substance doctrine (sec. 401 of the 
        Senate amendment and sec. 7701 of the Code)

                              PRESENT LAW

In general
      The Code provides specific rules regarding the 
computation of taxable income, including the amount, timing, 
source, and character of items of income, gain, loss and 
deduction. These rules are designed to provide for the 
computation of taxable income in a manner that provides for a 
degree of specificity to both taxpayers and the government. 
Taxpayers generally may plan their transactions in reliance on 
these rules to determine the federal income tax consequences 
arising from the transactions.
      In addition to the statutory provisions, courts have 
developed several doctrines that can be applied to deny the tax 
benefits of tax motivated transactions, notwithstanding that 
the transaction may satisfy the literal requirements of a 
specific tax provision. The common-law doctrines are not 
entirely distinguishable, and their application to a given set 
of facts is often blurred by the courts and the IRS. Although 
these doctrines serve an important role in the administration 
of the tax system, invocation of these doctrines can be seen as 
at odds with an objective, ``rule-based'' system of taxation. 
Nonetheless, courts have applied the doctrines to deny tax 
benefits arising from certain transactions.\622\
---------------------------------------------------------------------------
    \622\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d 
Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 
1017 (1999).
---------------------------------------------------------------------------
      A common-law doctrine applied with increasing frequency 
is the ``economic substance'' doctrine. In general, this 
doctrine denies tax benefits arising from transactions that do 
not result in a meaningful change to the taxpayer's economic 
position other than a purported reduction in federal income 
tax.\623\
---------------------------------------------------------------------------
    \623\ Closely related doctrines also applied by the courts 
(sometimes interchangeable with the economic substance doctrine) 
include the ``sham transaction doctrine'' and the ``business purpose 
doctrine''. See, e.g., Knetsch v. United States, 364 U.S. 361 (1960) 
(denying interest deductions on a ``sham transaction'' whose only 
purpose was to create the deductions).
---------------------------------------------------------------------------
            Economic substance doctrine
      Courts generally deny claimed tax benefits if the 
transaction that gives rise to those benefits lacks economic 
substance independent of tax considerations--notwithstanding 
that the purported activity actually occurred. The tax court 
has described the doctrine as follows: ``The tax law . . . 
requires that the intended transactions have economic substance 
separate and distinct from economic benefit achieved solely by 
tax reduction. The doctrine of economic substance becomes 
applicable, and a judicial remedy is warranted, where a 
taxpayer seeks to claim tax benefits, unintended by Congress, 
by means of transactions that serve no economic purpose other 
than tax savings.'' \624\
---------------------------------------------------------------------------
    \624\ ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
---------------------------------------------------------------------------
            Business purpose doctrine
      Another common law doctrine that overlays and is often 
considered together with (if not part and parcel of) the 
economic substance doctrine is the business purpose doctrine. 
The business purpose test is a subjective inquiry into the 
motives of the taxpayer--that is, whether the taxpayer intended 
the transaction to serve some useful non-tax purpose. In making 
this determination, some courts have bifurcated a transaction 
in which independent activities with non-tax objectives have 
been combined with an unrelated item having only tax-avoidance 
objectives in order to disallow the tax benefits of the overall 
transaction.\625\
---------------------------------------------------------------------------
    \625\ ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
---------------------------------------------------------------------------
Application by the courts
            Elements of the doctrine
      There is a lack of uniformity regarding the proper 
application of the economic substance doctrine.\626\ Some 
courts apply a conjunctive test that requires a taxpayer to 
establish the presence of both economic substance (i.e., the 
objective component) and business purpose (i.e., the subjective 
component) in order for the transaction to survive judicial 
scrutiny.\627\ A narrower approach used by some courts is to 
conclude that either a business purpose or economic substance 
is sufficient to respect the transaction).\628\ A third 
approach regards economic substance and business purpose as 
``simply more precise factors to consider'' in determining 
whether a transaction has any practical economic effects other 
than the creation of tax benefits.\629\
---------------------------------------------------------------------------
    \626\ ``The casebooks are glutted with [economic substance] tests. 
Many such tests proliferate because they give the comforting illusion 
of consistency and precision. They often obscure rather than clarify.'' 
Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988).
    \627\ See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th 
Cir. 1993) (``The threshold question is whether the transaction has 
economic substance. If the answer is yes, the question becomes whether 
the taxpayer was motivated by profit to participate in the 
transaction.'')
    \628\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 
91-92 (4th Cir. 1985) (``To treat a transaction as a sham, the court 
must find that the taxpayer was motivated by no business purposes other 
than obtaining tax benefits in entering the transaction, and, second, 
that the transaction has no economic substance because no reasonable 
possibility of a profit exists.''); IES Industries v. United States, 
253 F.3d 350, 358 (8th Cir. 2001) (``In determining whether a 
transaction is a sham for tax purposes [under the Eighth Circuit test], 
a transaction will be characterized as a sham if it is not motivated by 
any economic purpose out of tax considerations (the business purpose 
test), and if it is without economic substance because no real 
potential for profit exists'' (the economic substance test).'') As 
noted earlier, the economic substance doctrine and the sham transaction 
doctrine are similar and sometimes are applied interchangeably. For a 
more detailed discussion of the sham transaction doctrine, see, e.g., 
Joint Committee on Taxation, Study of Present-Law Penalty and Interest 
Provisions as Required by Section 3801 of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (including Provisions Relating to 
Corporate Tax Shelters) (JCS-3-99) at 182.
    \629\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247; 
James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 1995); Sacks v. 
Commissioner, 69 F.3d 982, 985 (9th Cir. 1995) (``Instead, the 
consideration of business purpose and economic substance are simply 
more precise factors to consider. . . . We have repeatedly and 
carefully noted that this formulation cannot be used as a `rigid two-
step analysis'.'').
---------------------------------------------------------------------------
            Profit potential
      There also is a lack of uniformity regarding the 
necessity and level of profit potential necessary to establish 
economic substance. Since the time of Gregory v. 
Helvering,\630\ several courts have denied tax benefits on the 
grounds that the subject transactions lacked profit 
potential.\631\ In addition, some courts have applied the 
economic substance doctrine to disallow tax benefits in 
transactions in which a taxpayer was exposed to risk and the 
transaction had a profit potential, but the court concluded 
that the economic risks and profit potential were insignificant 
when compared to the tax benefits.\632\ Under this analysis, 
the taxpayer's profit potential must be more than nominal. 
Conversely, other courts view the application of the economic 
substance doctrine as requiring an objective determination of 
whether a ``reasonable possibility of profit'' from the 
transaction existed apart from the tax benefits.\633\ In these 
cases, in assessing whether a reasonable possibility of profit 
exists, it is sufficient if there is a nominal amount of pre-
tax profit as measured against expected net tax benefits.
---------------------------------------------------------------------------
    \630\ 293 U.S. 465 (1935).
    \631\ See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. 
Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an 
unprofitable, leveraged acquisition of Treasury bills, and accompanying 
prepaid interest deduction, lacked economic substance); Ginsburg v. 
Commissioner, 35 T.C.M. (CCH) 860 (1976) (holding that a leveraged 
cattle-breeding program lacked economic substance).
    \632\ See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 
(disallowing deduction even though taxpayer had a possibility of small 
gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94 
T.C. 738, 768 (1990) (stating, ``potential for gain . . . is 
infinitesimally nominal and vastly insignificant when considered in 
comparison with the claimed deductions'').
    \633\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d at 
94 (the economic substance inquiry requires an objective determination 
of whether a reasonable possibility of profit from the transaction 
existed apart from tax benefits); Compaq Computer Corp. v. 
Commissioner, 277 F.3d at 781 (applied the same test, citing Rice's 
Toyota World); IES Industries v. United States, 253 F.3d at 354 (the 
application of the objective economic substance test involves 
determining whether there was a ``reasonable possibility of profit . . 
. apart from tax benefits.'').
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment clarifies and enhances the 
application of the economic substance doctrine. The Senate 
amendment provides that, in a case in which a court determines 
that the economic substance doctrine is relevant to a 
transaction (or a series of transactions), such transaction (or 
series of transactions) has economic substance (and thus 
satisfies the economic substance doctrine) only if the taxpayer 
establishes that (1) the transaction changes in a meaningful 
way (apart from Federal income tax consequences) the taxpayer's 
economic position, and (2) the taxpayer has a substantial non-
tax purpose for entering into such transaction and the 
transaction is a reasonable means of accomplishing such 
purpose.\634\
---------------------------------------------------------------------------
    \634\ If the tax benefits are clearly contemplated and expected by 
the language and purpose of the relevant authority, it is not intended 
that such tax benefits be disallowed if the only reason for such 
disallowance is that the transaction fails the economic substance 
doctrine as defined in this provision.
---------------------------------------------------------------------------
      The Senate amendment does not change current law 
standards used by courts in determining when to utilize an 
economic substance analysis.\635\ Also, the Senate amendment 
does not alter the court's ability to aggregate, disaggregate 
or otherwise recharacterize a transaction when applying the 
doctrine.\636\ The Senate amendment provides a uniform 
definition of economic substance, but does not alter the 
flexibility of the courts in other respects.
---------------------------------------------------------------------------
    \635\ See, e.g., Treas. Reg. 1.269-2, stating that characteristic 
of circumstances in which a deduction otherwise allowed will be 
disallowed are those in which the effect of the deduction, credit, or 
other allowance would be to distort the liability of the particular 
taxpayer when the essential nature of the transaction or situation is 
examined in the light of the basic purpose or plan which the deduction, 
credit, or other allowance was designed by the Congress to effectuate.
    \636\ See, e.g., Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 
(1938) (``A given result at the end of a straight path is not made a 
different result because reached by following a devious path.'').
---------------------------------------------------------------------------
Conjunctive analysis
      The Senate amendment clarifies that the economic 
substance doctrine involves a conjunctive analysis--there must 
be an objective inquiry regarding the effects of the 
transaction on the taxpayer's economic position, as well as a 
subjective inquiry regarding the taxpayer's motives for 
engaging in the transaction. Under the Senate amendment, a 
transaction must satisfy both tests--i.e., it must change in a 
meaningful way (apart from Federal income tax consequences) the 
taxpayer's economic position, and the taxpayer must have a 
substantial non-tax purpose for entering into such transaction 
(and the transaction is a reasonable means of accomplishing 
such purpose)--in order to satisfy the economic substance 
doctrine. This clarification eliminates the disparity that 
exists among the circuits regarding the application of the 
doctrine, and modifies its application in those circuits in 
which either a change in economic position or a non-tax 
business purpose (without having both) is sufficient to satisfy 
the economic substance doctrine.
Non-tax business purpose
      The Senate amendment provides that a taxpayer's non-tax 
purpose for entering into a transaction (the second prong in 
the analysis) must be ``substantial,'' and that the transaction 
must be ``a reasonable means'' of accomplishing such purpose. 
Under this formulation, the non-tax purpose for the transaction 
must bear a reasonable relationship to the taxpayer's normal 
business operations or investment activities.\637\
---------------------------------------------------------------------------
    \637\ See, e.g., Treas. reg. sec. 1.269-2(b) (stating that a 
distortion of tax liability indicating the principal purpose of tax 
evasion or avoidance might be evidenced by the fact that ``the 
transaction was not undertaken for reasons germane to the conduct of 
the business of the taxpayer''). Similarly, in ACM Partnership v. 
Commissioner, 73 T.C.M. (CCH) 2189 (1997), the court stated: ``Key to 
[the determination of whether a transaction has economic substance] is 
that the transaction must be rationally related to a useful nontax 
purpose that is plausible in light of the taxpayer's conduct and useful 
in light of the taxpayer's economic situation and intentions. Both the 
utility of the stated purpose and the rationality of the means chosen 
to effectuate it must be evaluated in accordance with commercial 
practices in the relevant industry. A rational relationship between 
purpose and means ordinarily will not be found unless there was a 
reasonable expectation that the nontax benefits would be at least 
commensurate with the transaction costs.'' [citations omitted]
    See also Martin McMahon Jr., Economic Substance, Purposive 
Activity, and Corporate Tax Shelters, 94 Tax Notes 1017, 1023 (Feb. 25, 
2002) (advocates ``confining the most rigorous application of business 
purpose, economic substance, and purposive activity tests to 
transactions outside the ordinary course of the taxpayer's business--
those transactions that do not appear to contribute to any business 
activity or objective that the taxpayer may have had apart from tax 
planning but are merely loss generators.''); Mark P. Gergen, The Common 
Knowledge of Tax Abuse, 54 SMU L. Rev. 131, 140 (Winter 2001) (``The 
message is that you can pick up tax gold if you find it in the street 
while going about your business, but you cannot go hunting for it.'').
---------------------------------------------------------------------------
      In determining whether a taxpayer has a substantial non-
tax business purpose, an objective of achieving a favorable 
accounting treatment for financial reporting purposes will not 
be treated as having a substantial non-tax purpose.\638\ 
Furthermore, a transaction that is expected to increase 
financial accounting income as a result of generating tax 
deductions or losses without a corresponding financial 
accounting charge (i.e., a permanent book-tax difference) \639\ 
should not be considered to have a substantial non-tax purpose 
unless a substantial non-tax purpose exists apart from the 
financial accounting benefits.\640\
---------------------------------------------------------------------------
    \638\ However, if the tax benefits are clearly contemplated and 
expected by the language and purpose of the relevant authority, such 
tax benefits should not be disallowed solely because the transaction 
results in a favorable accounting treatment. An example is the repealed 
foreign sales corporation rules.
    \639\ This includes tax deductions or losses that are anticipated 
to be recognized in a period subsequent to the period the financial 
accounting benefit is recognized. For example, FAS 109 in some cases 
permits the recognition of financial accounting benefits prior to the 
period in which the tax benefits are recognized for income tax 
purposes.
    \640\ Claiming that a financial accounting benefit constitutes a 
substantial non-tax purpose fails to consider the origin of the 
accounting benefit (i.e., reduction of taxes) and significantly 
diminishes the purpose for having a substantial non-tax purpose 
requirement. See, e.g., American Electric Power, Inc. v. U.S., 136 F. 
Supp. 2d 762, 791-92 (S.D. Ohio, 2001) (``AEP's intended use of the 
cash flows generated by the [corporate-owned life insurance] plan is 
irrelevant to the subjective prong of the economic substance analysis. 
If a legitimate business purpose for the use of the tax savings `were 
sufficient to breathe substance into a transaction whose only purpose 
was to reduce taxes, [then] every sham tax-shelter device might 
succeed,' '' citing Winn-Dixie v. Commissioner, 113 T.C. 254, 287 
(1999)).
---------------------------------------------------------------------------
      By requiring that a transaction be a ``reasonable means'' 
of accomplishing its non-tax purpose, the Senate amendment 
reiterates the present-law ability of the courts to bifurcate a 
transaction in which independent activities with non-tax 
objectives are combined with an unrelated item having only tax-
avoidance objectives in order to disallow the tax benefits of 
the overall transaction.\641\
---------------------------------------------------------------------------
    \641\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 256 
n.48.
---------------------------------------------------------------------------
Profit potential
      Under the Senate amendment, a taxpayer may rely on 
factors other than profit potential to demonstrate that a 
transaction results in a meaningful change in the taxpayer's 
economic position; the Senate amendment merely sets forth a 
minimum threshold of profit potential if that test is relied on 
to demonstrate a meaningful change in economic position. If a 
taxpayer relies on a profit potential, however, the present 
value of the reasonably expected pre-tax profit must be 
substantial in relation to the present value of the expected 
net tax benefits that would be allowed if the transaction were 
respected.\642\ Moreover, the profit potential must exceed a 
risk-free rate of return. In addition, in determining pre-tax 
profit, fees and other transaction expenses and foreign taxes 
are treated as expenses.
---------------------------------------------------------------------------
    \642\ Thus, a ``reasonable possibility of profit'' will not be 
sufficient to establish that a transaction has economic substance.
---------------------------------------------------------------------------
      In applying the profit potential test to a lessor of 
tangible property, depreciation, applicable tax credits (such 
as the rehabilitation tax credit and the low income housing tax 
credit), and any other deduction as provided in guidance by the 
Secretary are not taken into account in measuring tax benefits.
Transactions with tax-indifferent parties
      The Senate amendment also provides special rules for 
transactions with tax-indifferent parties. For this purpose, a 
tax-indifferent party means any person or entity not subject to 
Federal income tax, or any person to whom an item would have no 
substantial impact on its income tax liability. Under these 
rules, the form of a financing transaction will not be 
respected if the present value of the tax deductions to be 
claimed is substantially in excess of the present value of the 
anticipated economic returns to the lender. Also, the form of a 
transaction with a tax-indifferent party will not be respected 
if it results in an allocation of income or gain to the tax-
indifferent party in excess of the tax-indifferent party's 
economic gain or income or if the transaction results in the 
shifting of basis on account of overstating the income or gain 
of the tax-indifferent party.
Other rules
      The Secretary may prescribe regulations which provide (1) 
exemptions from the application of the Senate amendment, and 
(2) other rules as may be necessary or appropriate to carry out 
the purposes of the Senate amendment.
      No inference is intended as to the proper application of 
the economic substance doctrine under present law. In addition, 
except with respect to the economic substance doctrine, the 
Senate amendment shall not be construed as altering or 
supplanting any other common law doctrine (including the sham 
transaction doctrine), and the Senate amendment shall be 
construed as being additive to any such other doctrine.
Effective date
      The Senate amendment provision applies to transactions 
entered into after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
31. Penalty for understatements attributable to transactions lacking 
        economic substance, etc. (sec. 404 of the Senate amendment and 
        sec. 6662B of the Code)

                              PRESENT LAW

      An accuracy-related penalty applies to the portion of any 
underpayment that is attributable to (1) negligence, (2) any 
substantial understatement of income tax, (3) any substantial 
valuation misstatement, (4) any substantial overstatement of 
pension liabilities, or (5) any substantial estate or gift tax 
valuation understatement. If the correct income tax liability 
exceeds that reported by the taxpayer by the greater of 10 
percent of the correct tax or $5,000 ($10,000 in the case of 
corporations), then a substantial understatement exists and a 
penalty may be imposed equal to 20 percent of the underpayment 
of tax attributable to the understatement.\643\ The amount of 
any understatement is reduced by any portion attributable to an 
item if (1) the treatment of the item is supported by 
substantial authority, or (2) facts relevant to the tax 
treatment of the item were adequately disclosed and there was a 
reasonable basis for its tax treatment.
---------------------------------------------------------------------------
    \643\ Sec. 6662.
---------------------------------------------------------------------------
      Special rules apply with respect to tax shelters.\644\ 
For understatements by non-corporate taxpayers attributable to 
tax shelters, the penalty may be avoided only if the taxpayer 
establishes that, in addition to having substantial authority 
for the position, the taxpayer reasonably believed that the 
treatment claimed was more likely than not the proper treatment 
of the item. This reduction in the penalty is unavailable to 
corporate tax shelters.
---------------------------------------------------------------------------
    \644\ Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
      The penalty generally is abated (even with respect to tax 
shelters) in cases in which the taxpayer can demonstrate that 
there was ``reasonable cause'' for the underpayment and that 
the taxpayer acted in good faith.\645\ The relevant regulations 
provide that reasonable cause exists where the taxpayer 
``reasonably relies in good faith on an opinion based on a 
professional tax advisor's analysis of the pertinent facts and 
authorities [that] . . . unambiguously concludes that there is 
a greater than 50-percent likelihood that the tax treatment of 
the item will be upheld if challenged'' by the IRS.\646\
---------------------------------------------------------------------------
    \645\ Sec. 6664(c).
    \646\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
1.6664-4(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment imposes a penalty for an 
understatement attributable to any transaction that lacks 
economic substance (referred to in the statute as a ``non-
economic substance transaction understatement'').\647\ The 
penalty rate is 40 percent (reduced to 20 percent if the 
taxpayer adequately discloses the relevant facts in accordance 
with regulations prescribed under section 6011). No exceptions 
(including the reasonable cause or rescission rules) to the 
penalty would be available under the Senate amendment (i.e., 
the penalty is a strict-liability penalty).
---------------------------------------------------------------------------
    \647\ Thus, unlike the new accuracy-related penalty under section 
6662A (which applies only to listed and reportable avoidance 
transactions), the new penalty under this provision applies to any 
transaction that lacks economic substance.
---------------------------------------------------------------------------
      A ``non-economic substance transaction'' means any 
transaction if (1) the transaction lacks economic substance (as 
defined in the earlier Senate amendment provision regarding the 
economic substance doctrine),\648\ (2) the transaction was not 
respected under the rules relating to transactions with tax-
indifferent parties (as described in the earlier Senate 
amendment provision regarding the economic substance 
doctrine),\649\ or (3) any similar rule of law. For this 
purpose, a similar rule of law would include, for example, an 
understatement attributable to a transaction that is determined 
to be a sham transaction.
---------------------------------------------------------------------------
    \648\ The provision provides that a transaction has economic 
substance only if: (1) the transaction changes in a meaningful way 
(apart from Federal income tax effects) the taxpayer's economic 
position, and (2) the transaction has a substantial non-tax purpose for 
entering into such transaction and is a reasonable means of 
accomplishing such purpose.
    \649\ The provision provides that the form of a transaction that 
involves a tax-indifferent party will not be respected in certain 
circumstances.
---------------------------------------------------------------------------
      For purposes of the Senate amendment, the calculation of 
an ``understatement'' is made in the same manner as in the 
separate Senate amendment provision relating to accuracy-
related penalties for listed and reportable avoidance 
transactions (new sec. 6662A). Thus, the amount of the 
understatement under the Senate amendment provision would be 
determined as the sum of (1) the product of the highest 
corporate or individual tax rate (as appropriate) and the 
increase in taxable income resulting from the difference 
between the taxpayer's treatment of the item and the proper 
treatment of the item (without regard to other items on the tax 
return),\650\ and (2) the amount of any decrease in the 
aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item. In essence, the penalty will apply to 
the amount of any understatement attributable solely to a non-
economic substance transaction.
---------------------------------------------------------------------------
    \650\ For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses that would (without regard to 
section 1211) be allowed for such year, would be treated as an increase 
in taxable income.
---------------------------------------------------------------------------
      Except as provided in regulations, the taxpayer's 
treatment of an item will not take into account any amendment 
or supplement to a return if the amendment or supplement is 
filed after the earlier of the date the taxpayer is first 
contacted regarding an examination of such return or such other 
date as specified by the Secretary.
      A public entity that is required to pay a penalty under 
the Senate amendment (regardless of whether the transaction was 
disclosed) must disclose the imposition of the penalty in 
reports to the SEC for such periods as the Secretary shall 
specify. The disclosure to the SEC applies without regard to 
whether the taxpayer determines the amount of the penalty to be 
material to the reports in which the penalty must appear, and 
any failure to disclose such penalty in the reports is treated 
as a failure to disclose a listed transaction. A taxpayer must 
disclose a penalty in reports to the SEC once the taxpayer has 
exhausted its administrative and judicial remedies with respect 
to the penalty (or if earlier, when paid).
      Prior to this penalty being asserted in the first letter 
of proposed deficiency that allows the taxpayer an opportunity 
for administrative review in the IRS Office of Appeals (e.g., a 
Revenue Agent Report), the IRS Chief Counsel or his delegate at 
the IRS National Office must approve the inclusion in writing. 
Once a penalty (regardless of whether the transaction was 
disclosed) has been included in the Revenue Agent Report, the 
penalty cannot be compromised for purposes of a settlement 
without approval of the Commissioner personally or the head of 
the Office of Tax Shelter Analysis. Furthermore, the IRS is 
required to submit an annual report to Congress summarizing the 
application of this penalty and providing a description of each 
penalty compromised under the Senate amendment and the reasons 
for the compromise.
      Any understatement to which a penalty is imposed under 
the Senate amendment will not be subject to the accuracy-
related penalty under section 6662 or under new 6662A 
(accuracy-related penalties for listed and reportable avoidance 
transactions). However, an understatement under the Senate 
amendment would be taken into account for purposes of 
determining whether any understatement (as defined in sec. 
6662(d)(2)) is a substantial understatement as defined under 
section 6662(d)(1). The penalty imposed under the Senate 
amendment will not apply to any portion of an understatement to 
which a fraud penalty is applied under section 6663.
      Effective date.--The Senate amendment provision applies 
to transactions entered into after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
32. Understatement of taxpayer's liability by income tax return 
        preparer (sec. 411 of the Senate amendment)

                              PRESENT LAW

      An income tax return preparer who prepares a return with 
respect to which there is an understatement of tax that is due 
to an undisclosed position for which there was not a realistic 
possibility of being sustained on its merits, or a frivolous 
position, is liable for a penalty of $250, provided the 
preparer knew or reasonably should have known of the position. 
An income tax return preparer who prepares a return and engages 
in specified willful or reckless conduct with respect to 
preparing such a return is liable for a penalty of $1,000.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment alters the standards of conduct that 
must be met to avoid imposition of the first penalty by 
replacing the realistic possibility standard with a requirement 
that there be a reasonable belief that the tax treatment of the 
position was more likely than not the proper treatment. The 
Senate amendment also replaces the not frivolous standard with 
the requirement that there be a reasonable basis for the tax 
treatment of the position, increases the present-law $250 
penalty to $1,000, and increases the present-law $1,000 penalty 
to $5,000.
      Effective date.--Documents prepared after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
33. Frivolous tax submissions (sec. 413 of the Senate amendment and 
        sec. 6702 of the Code)

                              PRESENT LAW

      The Code provides that an individual who files a 
frivolous income tax return is subject to a penalty of $500 
imposed by the IRS (sec. 6702). The Code also permits the Tax 
Court \651\ to impose a penalty of up to $25,000 if a taxpayer 
has instituted or maintained proceedings primarily for delay or 
if the taxpayer's position in the proceeding is frivolous or 
groundless (sec. 6673(a)).
---------------------------------------------------------------------------
    \651\ Because in general the Tax Court is the only pre-payment 
forum available to taxpayers, it deals with most of the frivolous, 
groundless, or dilatory arguments raised in tax cases.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the IRS-imposed penalty by 
increasing the amount of the penalty to up to $5,000 and by 
applying it to all taxpayers and to all types of Federal taxes.
      The provision also modifies present law with respect to 
certain submissions that raise frivolous arguments or that are 
intended to delay or impede tax administration. The submissions 
to which this provision applies are requests for a collection 
due process hearing, installment agreements, offers-in-
compromise, and taxpayer assistance orders. First, the 
provision permits the IRS to dismiss such requests. Second, the 
provision permits the IRS to impose a penalty of up to $5,000 
for such requests, unless the taxpayer withdraws the request 
after being given an opportunity to do so.
      The provision requires the IRS to publish a list of 
positions, arguments, requests, and submissions determined to 
be frivolous for purposes of these provisions.
      Effective date.--Submissions made and issues raised after 
the date on which the Secretary first prescribes the required 
list of frivolous positions.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
34. Authorization of appropriations for tax law enforcement (sec. 418 
        of the Senate amendment)

                              PRESENT LAW

      There is no explicit authorization of appropriations to 
the IRS to be used to combat abusive tax avoidance 
transactions.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision includes an authorization of an additional 
$300 million to the IRS to be used to combat abusive tax 
avoidance transactions.
      Effective date.--Date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
35. Declaration by chief executive officer relating to Federal annual 
        corporate income tax return (sec. 422 of the Senate amendment)

                              PRESENT LAW

      The Code requires \652\ that the income tax return of a 
corporation must be signed by either the president, the vice-
president, the treasurer, the assistant treasurer, the chief 
accounting officer, or any other officer of the corporation 
authorized by the corporation to sign the return.
---------------------------------------------------------------------------
    \652\ Sec. 6062.
---------------------------------------------------------------------------
      The Code also imposes \653\ a criminal penalty on any 
person who willfully signs any tax return under penalties of 
perjury that that person does not believe to be true and 
correct with respect to every material matter at the time of 
filing. If convicted, the person is guilty of a felony; the 
Code imposes a fine of not more than $100,000 \654\ ($500,000 
in the case of a corporation) or imprisonment of not more than 
three years, or both, together with the costs of prosecution.
---------------------------------------------------------------------------
    \653\ Sec. 7206.
    \654\ Pursuant to 18 U.S.C. 3571, the maximum fine for an 
individual convicted of a felony is $250,000.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision requires that a corporation's Federal 
income tax return include a declaration signed under penalties 
of perjury by the chief executive officer of the corporation 
that the corporation has in place processes and procedures to 
ensure that the return complies with the Internal Revenue Code 
and that the CEO was provided reasonable assurance of the 
accuracy of all material aspects of the return. This 
declaration is part of the income tax return. The provision is 
in addition to the requirement of present law as to the signing 
of the income tax return itself. Because a CEO's duties 
generally do not require a detailed or technical understanding 
of the corporation's tax return, it is anticipated that this 
declaration of the CEO will be more limited in scope than the 
declaration of the officer required to sign the return itself.
      The Secretary of the Treasury shall prescribe the matters 
to which the declaration of the CEO applies. It is intended 
that the declaration help insure that the preparation and 
completion of the corporation's tax return be given an 
appropriate level of care. For example, it is anticipated that 
the CEO would declare that processes and procedures have been 
implemented to ensure that the return complies with the 
Internal Revenue Code and all regulations and rules promulgated 
thereunder. Although appropriate processes and procedures can 
vary for each taxpayer depending on the size and nature of the 
taxpayer's business, in every case the CEO should be briefed on 
all material aspects of the corporation's tax return by the 
corporation's chief financial officer (or another person 
authorized to sign the return under present law).
      If the corporation does not have a chief executive 
officer, the IRS may designate another officer of the 
corporation; otherwise, no other person is permitted to sign 
the declaration. It is intended that the IRS issue general 
guidance, such as a revenue procedure, to: (1) address 
situations when a corporation does not have a chief executive 
officer; and (2) define who the chief executive officer is, in 
situations (for example) when the primary official bears a 
different title, when a corporation has multiple chief 
executive officers, or when the corporation is a foreign 
corporation and the CEO is not a U.S. resident.\655\ It is 
intended that, in every instance, the highest ranking corporate 
officer (regardless of title) sign this declaration.
---------------------------------------------------------------------------
    \655\ With respect to foreign corporations, it is intended that the 
rules for signing this declaration generally parallel the present-law 
rules for signing the return. See Treas. Reg. sec. 1.6062-1(a)(3).
---------------------------------------------------------------------------
      The provision does not apply to the income tax returns of 
mutual funds; \656\ they are required to be signed as under 
present law.
---------------------------------------------------------------------------
    \656\ The provision does, however, apply to the income tax returns 
of mutual fund management companies and advisors.
---------------------------------------------------------------------------
      Effective date.--Federal tax returns for taxable years 
ending after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.
36. Denial of deduction for certain fines, penalties, and other amounts 
        (sec. 423 of the Senate amendment and sec. 162 of the Code)

                              PRESENT LAW

      Under present law, no deduction is allowed as a trade or 
business expense under section 162(a) for the payment of a fine 
or similar penalty to a government for the violation of any law 
(sec. 162(f)). The enactment of section 162(f) in 1969 codified 
existing case law that denied the deductibility of fines as 
ordinary and necessary business expenses on the grounds that 
``allowance of the deduction would frustrate sharply defined 
national or State policies proscribing the particular types of 
conduct evidenced by some governmental declaration thereof.'' 
\657\
---------------------------------------------------------------------------
    \657\ S. Rep. 91-552, 91st Cong, 1st Sess., 273-74 (1969), 
referring to Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 
(1958).
---------------------------------------------------------------------------
      Treasury regulation section 1.162-21(b)(1) provides that 
a fine or similar penalty includes an amount: (1) paid pursuant 
to conviction or a plea of guilty or nolo contendere for a 
crime (felony or misdemeanor) in a criminal proceeding; (2) 
paid as a civil penalty imposed by Federal, State, or local 
law, including additions to tax and additional amounts and 
assessable penalties imposed by chapter 68 of the Code; (3) 
paid in settlement of the taxpayer's actual or potential 
liability for a fine or penalty (civil or criminal); or (4) 
forfeited as collateral posted in connection with a proceeding 
which could result in imposition of such a fine or penalty. 
Treasury regulation section 1.162-21(b)(2) provides, among 
other things, that compensatory damages (including damages 
under section 4A of the Clayton Act (15 U.S.C. 15a), as 
amended) paid to a government do not constitute a fine or 
penalty.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The bill modifies the rules regarding the determination 
whether payments are nondeductible payments of fines or 
penalties under section 162(f). In particular, the bill 
generally provides that amounts paid or incurred (whether by 
suit, agreement, or otherwise) to, or at the direction of, a 
government in relation to the violation of any law or the 
investigation or inquiry into the potential violation of any 
law \658\ are nondeductible under any provision of the income 
tax provisions.\659\ The bill applies to deny a deduction for 
any such payments, including those where there is no admission 
of guilt or liability and those made for the purpose of 
avoiding further investigation or litigation. An exception 
applies to payments that the taxpayer establishes are 
restitution.\660\
---------------------------------------------------------------------------
    \658\ The bill does not affect amounts paid or incurred in 
performing routine audits or reviews such as annual audits that are 
required of all organizations or individuals in a similar business 
sector, or profession, as a requirement for being allowed to conduct 
business. However, if the government or regulator raised an issue of 
compliance and a payment is required in settlement of such issue, the 
bill would affect that payment.
    \659\ The bill provides that such amounts are nondeductible under 
chapter 1 of the Internal Revenue Code.
    \660\ The bill does not affect the treatment of antitrust payments 
made under section 4 of the Clayton Act, which will continue to be 
governed by the provisions of section 162(g).
---------------------------------------------------------------------------
      The bill is intended to apply only where a government (or 
other entity treated in a manner similar to a government under 
the bill) is a complainant or investigator with respect to the 
violation or potential violation of any law.\661\
---------------------------------------------------------------------------
    \661\ Thus, for example, the bill would not apply to payments made 
by one private party to another in a lawsuit between private parties, 
merely because a judge or jury acting in the capacity as a court 
directs the payment to be made. The mere fact that a court enters a 
judgement or directs a result in a private dispute does not cause a 
payment to be made ``at the direction of a government'' for purposes of 
the provision.
---------------------------------------------------------------------------
      It is intended that a payment will be treated as 
restitution only if substantially all of the payment is 
required to be paid to the specific persons, or in relation to 
the specific property, actually harmed by the conduct of the 
taxpayer that resulted in the payment. Thus, a payment to or 
with respect to a class substantially broader than the specific 
persons or property that were actually harmed (e.g., to a class 
including similarly situated persons or property) does not 
qualify as restitution.\662\ Restitution is limited to the 
amount that bears a substantial quantitative relationship to 
the harm caused by the past conduct or actions of the taxpayer 
that resulted in the payment in question. If the party harmed 
is a government or other entity, then restitution includes 
payment to such harmed government or entity, provided the 
payment bears a substantial quantitative relationship to the 
harm. However, restitution does not include reimbursement of 
government investigative or litigation costs, or payments to 
whistleblowers.
---------------------------------------------------------------------------
    \662\ Similarly, a payment to a charitable organization benefitting 
a broader class than the persons or property actually harmed, or to be 
paid out without a substantial quantitative relationship to the harm 
caused, would not qualify as restitution. Under the provision, such a 
payment not deductible under section 162 would also not be deductible 
under section 170.
---------------------------------------------------------------------------
      Amounts paid or incurred (whether by suit, agreement, or 
otherwise) to, or at the direction of, any self-regulatory 
entity that regulates a financial market or other market that 
is a qualified board or exchange under section 1256(g)(7), and 
that is authorized to impose sanctions (e.g., the National 
Association of Securities Dealers) are likewise subject to the 
provision if paid in relation to a violation, or investigation 
or inquiry into a potential violation, of any law (or any rule 
or other requirement of such entity). To the extent provided in 
regulations, amounts paid or incurred to, or at the direction 
of, any other nongovernmental entity that exercises self-
regulatory powers as part of performing an essential 
governmental function are similarly subject to the provision. 
The exception for payments that the taxpayer establishes are 
restitution likewise applies in these cases.
      No inference is intended as to the treatment of payments 
as nondeductible fines or penalties under present law. In 
particular, the Senate amendment is not intended to limit the 
scope of present-law section 162(f) or the regulations 
thereunder.
      Effective date.--The bill is effective for amounts paid 
or incurred on or after April 28, 2003; however the proposal 
does not apply to amounts paid or incurred under any binding 
order or agreement entered into before such date. Any order or 
agreement requiring court approval is not a binding order or 
agreement for this purpose unless such approval was obtained on 
or before April 27, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
37. Denial of deduction for punitive damages (sec. 424 of the Senate 
        amendment and sec. 162 of the Code)

                              PRESENT LAW

      In general, a deduction is allowed for all ordinary and 
necessary expenses that are paid or incurred by the taxpayer 
during the taxable year in carrying on any trade or 
business.\663\ However, no deduction is allowed for any payment 
that is made to an official of any governmental agency if the 
payment constitutes an illegal bribe or kickback or if the 
payment is to an official or employee of a foreign government 
and is illegal under Federal law.\664\ In addition, no 
deduction is allowed under present law for any fine or similar 
payment made to a government for violation of any law.\665\ 
Furthermore, no deduction is permitted for two-thirds of any 
damage payments made by a taxpayer who is convicted of a 
violation of the Clayton antitrust law or any related antitrust 
law.\666\
---------------------------------------------------------------------------
    \663\ Sec. 162(a).
    \664\ Sec. 162(c).
    \665\ Sec. 162(f).
    \666\ Sec. 162(g).
---------------------------------------------------------------------------
      In general, gross income does not include amounts 
received on account of personal physical injuries and physical 
sickness.\667\ However, this exclusion does not apply to 
punitive damages.\668\
---------------------------------------------------------------------------
    \667\ Sec. 104(a).
    \668\ Sec. 104(a)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment denies any deduction for punitive 
damages that are paid or incurred by the taxpayer as a result 
of a judgment or in settlement of a claim. If the liability for 
punitive damages is covered by insurance, any such punitive 
damages paid by the insurer are included in gross income of the 
insured person and the insurer is required to report such 
amounts to both the insured person and the IRS.
      Effective date.--The Senate amendment provision is 
effective for punitive damages that are paid or incurred on or 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
38. Increase in criminal monetary penalty limitation for the 
        underpayment or overpayment of tax due to fraud (sec. 425 of 
        the Senate amendment)

                              PRESENT LAW

Attempt to evade or defeat tax
      In general, section 7201 imposes a criminal penalty on 
persons who willfully attempt to evade or defeat any tax 
imposed by the Code. Upon conviction, the Code provides that 
the penalty is up to $100,000 or imprisonment of not more than 
five years (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $500,000.
Willful failure to file return, supply information, or pay tax
      In general, section 7203 imposes a criminal penalty on 
persons required to make estimated tax payments, pay taxes, 
keep records, or supply information under the Code who 
willfully fails to do so. Upon conviction, the Code provides 
that the penalty is up to $25,000 or imprisonment of not more 
than one year (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $100,000.
Fraud and false statements
      In general, section 7206 imposes a criminal penalty on 
persons who make fraudulent or false statements under the Code. 
Upon conviction, the Code provides that the penalty is up to 
$100,000 or imprisonment of not more than three years (or 
both). In the case of a corporation, the Code increases the 
monetary penalty to a maximum of $500,000.
Uniform sentencing guidelines
      Under the uniform sentencing guidelines established by 18 
U.S.C. 3571, a defendant found guilty of a criminal offense is 
subject to a maximum fine that is the greatest of: (a) the 
amount specified in the underlying provision, (b) for a felony 
\669\ $250,000 for an individual or $500,000 for an 
organization, or (c) twice the gross gain if a person derives 
pecuniary gain from the offense. This Title 18 provision 
applies to all criminal provisions in the United States Code, 
including those in the Internal Revenue Code. For example, for 
an individual, the maximum fine under present law upon 
conviction of violating section 7206 is $250,000 or, if 
greater, twice the amount of gross gain from the offense.
---------------------------------------------------------------------------
    \669\ Section 7206 states that making fraudulent or false 
statements under the Code is a felony. In addition, this offense is a 
felony pursuant to the classification guidelines of 18 U.S.C. 
3559(a)(5).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Attempt to evade or defeat tax
      The bill increases the criminal penalty under section 
7201 of the Code for individuals to $250,000 and for 
corporations to $1,000,000. The bill increases the maximum 
prison sentence to ten years.
Willful failure to file return, supply information, or pay tax
      The bill increases the criminal penalty under section 
7203 of the Code from a misdemeanor to a felony and increases 
the maximum prison sentence to ten years.
Fraud and false statements
      The bill increases the criminal penalty under section 
7206 of the Code for individuals to $250,000 and for 
corporations to $1,000,000. Increases the maximum prison 
sentence to five years. The bill provides that in no event 
shall the amount of the monetary penalty under this provision 
be less than the amount of the underpayment or overpayment 
attributable to fraud.
Effective date
      Underpayments and overpayments attributable to actions 
occurring after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
39. Expanded disallowance of deduction for interest on convertible debt 
        (sec. 434 of the Senate amendment and sec. 163 of the Code)

                              PRESENT LAW

      Whether an instrument qualifies for tax purposes as debt 
or equity is determined under all the facts and circumstances 
based on principles developed in case law. If an instrument 
qualifies as equity, the issuer generally does not receive a 
deduction for dividends paid and the holder generally includes 
such dividends in income (although corporate holders generally 
may obtain a dividends-received deduction of at least 70 
percent of the amount of the dividend). If an instrument 
qualifies as debt, the issuer may receive a deduction for 
accrued interest and the holder generally includes interest in 
income, subject to certain limitations.
      Original issue discount (``OID'') on a debt instrument is 
the excess of the stated redemption price at maturity over the 
issue price of the instrument. An issuer of a debt instrument 
with OID generally accrues and deducts the discount as interest 
over the life of the instrument even though interest may not be 
paid until the instrument matures. The holder of such a debt 
instrument also generally includes the OID in income as it 
accrues.
      Under present law, no deduction is allowed for interest 
or OID on a debt instrument issued by a corporation (or issued 
by a partnership to the extent of its corporate partners) that 
is payable in equity of the issuer or a related party (within 
the meaning of sections 267(b) and 707(b)), including a debt 
instrument a substantial portion of which is mandatorily 
convertible or convertible at the issuer's option into equity 
of the issuer or a related party.\670\ In addition, a debt 
instrument is treated as payable in equity if a substantial 
portion of the principal or interest is required to be 
determined, or may be determined at the option of the issuer or 
related party, by reference to the value of equity of the 
issuer or related party.\671\ A debt instrument also is treated 
as payable in equity if it is part of an arrangement that is 
designed to result in the payment of the debt instrument with 
or by reference to such equity, such as in the case of certain 
issuances of a forward contract in connection with the issuance 
of debt, nonrecourse debt that is secured principally by such 
equity, or certain debt instruments that are paid in, converted 
to, or determined with reference to the value of equity if it 
may be so required at the option of the holder or a related 
party and there is a substantial certainty that option will be 
exercised.\672\
---------------------------------------------------------------------------
    \670\ Sec. 163(l), enacted in the Taxpayer Relief Act of 1997, Pub. 
L. No. 105-34, sec. 1005(a).
    \671\ Sec. 163(l)(3)(B).
    \672\ Sec. 163(l)(3)(C).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment expands the present-law disallowance 
of interest deductions on certain convertible or equity-linked 
corporate debt that is payable in, or by reference to the value 
of, equity. Under the Senate amendment, the disallowance is 
expanded to include interest on corporate debt that is payable 
in, or by reference to the value of, any equity held by the 
issuer (or by any related party) in any other person, without 
regard to whether such equity represents more than a 50-percent 
ownership interest in such person. However, the Senate 
amendment does not apply to debt that is issued by an active 
dealer in securities (or by a related party) if the debt is 
payable in, or by reference to the value of, equity that is 
held by the securities dealer in its capacity as a dealer in 
securities.
      Effective date.--The Senate amendment provision applies 
to debt instruments that are issued after February 13, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except the conference agreement applies to debt instruments 
that are issued after October 3, 2004.
40. Expand authority to disallow tax benefits under section 269 (sec. 
        435 of the Senate amendment and sec. 269 of the Code)

                              PRESENT LAW

      Section 269 provides that if a taxpayer acquires, 
directly or indirectly, control (defined as at least 50 percent 
of vote or value) of a corporation, and the principal purpose 
of the acquisition is the evasion or avoidance of Federal 
income tax by securing the benefit of a deduction, credit, or 
other allowance that would not otherwise have been available, 
the Secretary may disallow the tax benefits.\673\ Similarly, if 
a corporation acquires, directly or indirectly, property of 
another corporation (not controlled, directly or indirectly, by 
the acquiring corporation or its stockholders immediately 
before the acquisition), the basis of such property is 
determined by reference to the basis in the hands of the 
transferor corporation, and the principal purpose of the 
acquisition is the evasion or avoidance of Federal income tax 
by securing a tax benefit that would not otherwise have been 
available, the Secretary may disallow such tax benefits.\674\
---------------------------------------------------------------------------
    \673\ Sec. 269(a)(1).
    \674\ Sec. 269(a)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment expands section 269 by repealing the 
requirement that the acquisition of property be from a 
corporation not controlled by the acquirer. Thus, under the 
Senate amendment, section 269 disallows the tax benefits of (1) 
any acquisition of stock sufficient to obtain control of a 
corporation (as under present law), and (2) any acquisition by 
a corporation of property from a corporation in which the basis 
of such property is determined by reference to the basis in the 
hands of the transferor corporation, if the principal purpose 
of such acquisition is the evasion or avoidance of Federal 
income tax.
      Effective date.--The Senate amendment applies to stock 
and property acquired after February 13, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
41. Modification of coordination rules for controlled foreign 
        corporation and passive foreign investment company regimes 
        (sec. 436 of the Senate amendment and sec. 1297 of the Code)

                              PRESENT LAW

      The United States employs a ``worldwide'' tax system, 
under which domestic corporations generally are taxed on all 
income, whether derived in the United States or abroad. Income 
earned by a domestic parent corporation from foreign operations 
conducted by foreign corporate subsidiaries generally is 
subject to U.S. tax when the income is distributed as a 
dividend to the domestic corporation. Until such repatriation, 
the U.S. tax on such income generally is deferred. However, 
certain anti-deferral regimes may cause the domestic parent 
corporation to be taxed on a current basis in the United States 
with respect to certain categories of passive or highly mobile 
income earned by its foreign subsidiaries, regardless of 
whether the income has been distributed as a dividend to the 
domestic parent corporation. The main anti-deferral regimes in 
this context are the controlled foreign corporation rules of 
subpart F \675\ and the passive foreign investment company 
rules.\676\ Deferral of U.S. tax is considered appropriate, on 
the other hand, with respect to most types of active business 
income earned abroad. A foreign tax credit generally is 
available to offset, in whole or in part, the U.S. tax owed on 
foreign-source income, whether earned directly by the domestic 
corporation, repatriated as an actual dividend, or included 
under one of the anti-deferral regimes.\677\
---------------------------------------------------------------------------
    \675\ Secs. 951-964.
    \676\ Secs. 1291-1298.
    \677\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
      Subpart F,\678\ applicable to controlled foreign 
corporations and their shareholders, is the main anti-deferral 
regime of relevance to a U.S.-based multinational corporate 
group. A controlled foreign corporation generally is defined as 
any foreign corporation if U.S. persons own (directly, 
indirectly, or constructively) more than 50 percent of the 
corporation's stock (measured by vote or value), taking into 
account only those U.S. persons that own at least 10 percent of 
the stock (measured by vote only).\679\ Under the subpart F 
rules, the United States generally taxes the U.S. 10-percent 
shareholders of a controlled foreign corporation on their pro 
rata shares of certain income of the controlled foreign 
corporation (referred to as ``subpart F income''), without 
regard to whether the income is distributed to the 
shareholders.\680\
---------------------------------------------------------------------------
    \678\ Secs. 951-964.
    \679\ Secs. 951(b), 957, 958.
    \680\ Sec. 951(a).
---------------------------------------------------------------------------
      Subpart F income generally includes passive income and 
other income that is readily movable from one taxing 
jurisdiction to another. Subpart F income consists of foreign 
base company income,\681\ insurance income,\682\ and certain 
income relating to international boycotts and other violations 
of public policy.\683\ Foreign base company income consists of 
foreign personal holding company income, which includes passive 
income (e.g., dividends, interest, rents, and royalties), as 
well as a number of categories of non-passive income, including 
foreign base company sales income, foreign base company 
services income, foreign base company shipping income and 
foreign base company oil-related income.\684\
---------------------------------------------------------------------------
    \681\ Sec. 954.
    \682\ Sec. 953.
    \683\ Sec. 952(a)(3)-(5).
    \684\ Sec. 954.
---------------------------------------------------------------------------
      In effect, the United States treats the U.S. 10-percent 
shareholders of a controlled foreign corporation as having 
received a current distribution out of the corporation's 
subpart F income. In addition, the U.S. 10-percent shareholders 
of a controlled foreign corporation are required to include 
currently in income for U.S. tax purposes their pro rata shares 
of the corporation's earnings invested in U.S. property.\685\
---------------------------------------------------------------------------
    \685\ Secs. 951(a)(1)(B), 956.
---------------------------------------------------------------------------
      The Tax Reform Act of 1986 established an additional 
anti-deferral regime, for passive foreign investment companies. 
A passive foreign investment company generally is defined as 
any foreign corporation if 75 percent or more of its gross 
income for the taxable year consists of passive income, or 50 
percent or more of its assets consists of assets that produce, 
or are held for the production of, passive income.\686\ 
Alternative sets of income inclusion rules apply to U.S. 
persons that are shareholders in a passive foreign investment 
company, regardless of their percentage ownership in the 
company. One set of rules applies to passive foreign investment 
companies that are ``qualified electing funds,'' under which 
electing U.S. shareholders currently include in gross income 
their respective shares of the company's earnings, with a 
separate election to defer payment of tax, subject to an 
interest charge, on income not currently received.\687\ A 
second set of rules applies to passive foreign investment 
companies that are not qualified electing funds, under which 
U.S. shareholders pay tax on certain income or gain realized 
through the company, plus an interest charge that is 
attributable to the value of deferral.\688\ A third set of 
rules applies to passive foreign investment company stock that 
is marketable, under which electing U.S. shareholders currently 
take into account as income (or loss) the difference between 
the fair market value of the stock as of the close of the 
taxable year and their adjusted basis in such stock (subject to 
certain limitations), often referred to as ``marking to 
market.'' \689\
---------------------------------------------------------------------------
    \686\ Sec. 1297.
    \687\ Sec. 1293-1295.
    \688\ Sec. 1291.
    \689\ Sec. 1296.
---------------------------------------------------------------------------
      Under section 1297(e), which was enacted in 1997 to 
address the overlap of the passive foreign investment company 
rules and subpart F, a controlled foreign corporation generally 
is not also treated as a passive foreign investment company 
with respect to a U.S. shareholder of the corporation. This 
exception applies regardless of the likelihood that the U.S. 
shareholder would actually be taxed under subpart F in the 
event that the controlled foreign corporation earns subpart F 
income. Thus, even in a case in which a controlled foreign 
corporation's subpart F income would be allocated to a 
different shareholder under the subpart F allocation rules, a 
U.S. shareholder would still qualify for the exception from the 
passive foreign investment company rules under section 1297(e).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision adds an exception to section 1297(e) for 
U.S. shareholders that face only a remote likelihood of 
incurring a subpart F inclusion in the event that a controlled 
foreign corporation earns subpart F income, thus preserving the 
potential application of the passive foreign investment company 
rules in such cases.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after February 13, 
2003, and for taxable years of U.S. shareholders with or within 
which such taxable years of such foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                    C. Reduction of Fuel Tax Evasion

1. Exemption from certain excise taxes for mobile machinery vehicles 
        and modification of definition of offhighway vehicle (sec. 651 
        of the House bill, sec. 896 of the Senate amendment, and secs. 
        4053, 4072, 4082, 4483, 6421, and 7701 of the Code)

                              PRESENT LAW

      Under present law, the definition of a ``highway 
vehicle'' affects the application of the retail tax on heavy 
vehicles, the heavy vehicle use tax, the tax on tires, and fuel 
taxes.\690\ Section 4051 of the Code provides for a 12-percent 
retail sales tax on tractors, heavy trucks with a gross vehicle 
weight (``GVW'') over 33,000 pounds, and trailers with a GVW 
over 26,000 pounds. Section 4071 provides for a tax on highway 
vehicle tires that weigh more than 40 pounds, with higher rates 
of tax for heavier tires. Section 4481 provides for an annual 
use tax on heavy vehicles with a GVW of 55,000 pounds or more, 
with higher rates of tax on heavier vehicles. All of these 
excise taxes are paid into the Highway Trust Fund.
---------------------------------------------------------------------------
    \690\ Secs. 4051, 4071, 4481, 4041 and 4081.
---------------------------------------------------------------------------
      Federal excise taxes are also levied on the motor fuels 
used in highway vehicles. Gasoline is subject to a tax of 18.4 
cents per gallon, of which 18.3 cents per gallon is paid into 
the Highway Trust Fund and 0.1 cent per gallon is paid into the 
Leaking Underground Storage Tank (``LUST'') Trust Fund. Highway 
diesel fuel is subject to a tax of 24.4 cents per gallon, of 
which 24.3 cents per gallon is paid into the Highway Trust Fund 
and 0.1 cent per gallon is paid into the LUST Trust Fund.
      The Code does not define a ``highway vehicle.'' For 
purposes of these taxes, Treasury regulations define a highway 
vehicle as any self-propelled vehicle or trailer or semitrailer 
designed to perform a function of transporting a load over the 
public highway, whether or not also designed to perform other 
functions. Excluded from the definition of highway vehicle are 
(1) certain specially designed mobile machinery vehicles for 
non-transportation functions (the ``mobile machinery 
exception''); (2) certain vehicles specially designed for off-
highway transportation for which the special design 
substantially limits or impairs the use of such vehicle to 
transport loads over the highway (the ``off-highway 
transportation vehicle'' exception); and (3) certain trailers 
and semi-trailers specially designed to function only as an 
enclosed stationary shelter for the performance of non-
transportation functions off the public highways.\691\
---------------------------------------------------------------------------
    \691\ See Treas. Reg. sec. 48.4061-1(d)).
---------------------------------------------------------------------------
      The mobile machinery exception applies if three tests are 
met: (1) the vehicle consists of a chassis to which jobsite 
machinery (unrelated to transportation) has been permanently 
mounted; (2) the chassis has been specially designed to serve 
only as a mobile carriage and mount for the particular 
machinery; and (3) by reason of such special design, the 
chassis could not, without substantial structural modification, 
be used to transport a load other than the particular 
machinery. An example of a mobile machinery vehicle is a crane 
mounted on a truck chassis that meets the forgoing factors.
      On June 6, 2002, the Treasury Department put forth 
proposed regulations that would eliminate the mobile machinery 
exception.\692\ The other exceptions from the definition of 
highway vehicle would continue to apply with some 
modifications. Under the proposed regulations, the chassis of a 
mobile machinery vehicle would be subject to the retail sales 
tax on heavy vehicles unless the vehicle qualified under the 
off-highway transportation vehicle exception. Also, under the 
proposed regulations, mobile machinery vehicles may be subject 
to the heavy vehicle use tax. In addition, the tax credits, 
refunds, and exemptions from tax may not be available for the 
fuel used in these vehicles.
---------------------------------------------------------------------------
    \692\ Prop. Treas. Reg. sec. 48.4051-1(a), 67 Fed. Reg. 38913, 
38914-38915 (2002).
---------------------------------------------------------------------------
      On June 6, 2002, the Treasury Department put forth 
proposed regulations that would modify the off-highway 
transportation vehicle exception.\693\ Under the proposed 
regulations, a vehicle is not treated as a highway vehicle if 
it is specially designed for the primary function of 
transporting a particular type of load other than over the 
public highway and because of this special design its 
capability to transport a load over the public highway is 
substantially limited or impaired. A vehicle's design is 
determined solely on the basis of its physical characteristics. 
In determining whether substantial limitation or impairment 
exists, account may be taken of factors such as the size of the 
vehicle, whether it is subject to the licensing, safety, and 
other requirements applicable to highway vehicles, and whether 
it can transport a load at a sustained speed of at least 25 
miles per hour. Under the proposed regulation, it is not 
material that a vehicle can transport a greater load off the 
public highway than it is permitted to transport over the 
public highway.
---------------------------------------------------------------------------
    \693\ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(i).
---------------------------------------------------------------------------
      The proposed regulation provides an exception to the 
definition of a highway vehicle for nontransportation trailers 
and semitrailers.\694\ Under the proposed regulation, a trailer 
or semitrailer is not treated as a highway vehicle if it is 
specially designed to function only as an enclosed stationary 
shelter for the carrying on of an offhighway function at an 
offhighway site. For example, a trailer that is capable only of 
functioning as an office for an offhighway construction 
operation is not a highway vehicle.
---------------------------------------------------------------------------
    \694\ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(ii).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision codifies the present-law mobile machinery 
exemption for purposes of three taxes: the retail tax on heavy 
vehicles, the heavy vehicle use tax, and the tax on tires. 
Thus, if a vehicle can satisfy the three-part test, it will not 
be treated as a highway vehicle and will be exempt from these 
taxes.
      For purposes of the fuel excise tax, the three-part 
design test is codified and a use test is added by the 
provision. Specifically, in addition to the three-part design 
test, the vehicle must not have traveled more than 7,500 miles 
over public highways during the owner's taxable year. Refunds 
of fuel taxes are permitted on an annual basis only. For 
purposes of this rule, a person's taxable year is his taxable 
year for income tax purposes.
      Effective date.--The provision generally is effective 
after the date of enactment. As to the fuel taxes, the 
provision is effective for taxable years beginning after the 
date of enactment.

                            SENATE AMENDMENT

      The Senate amendment provides that mobile machinery 
vehicles are subject to tax as highway vehicles. The provision 
provides for the recovery of taxes paid (other than fuel taxes) 
over a two-year period if such vehicle travels less than 5,000 
miles per year. Fuel taxes for mobile machinery vehicles must 
be paid and then a refund sought if the mileage requirement is 
met. Refunds of fuel taxes are permitted on an annual basis 
only. Like the House bill, for purposes of this rule, a 
person's taxable year is his taxable year for income tax 
purposes. Vehicles owned by an organization described in 
section 501(c), exempt from tax under section 501(a), need only 
satisfy the three-part design test to recover taxes paid with 
respect to such vehicles.
      Effective date.--The provision generally is effective 
after the date of enactment. As to the fuel taxes, the 
provision is effective for taxable years beginning after the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill. Vehicles 
owned by an organization described in section 501(c), exempt 
from tax under section 501(a), need only satisfy the three-part 
design test to recover taxes paid with respect to such 
vehicles.
      The conference agreement adopts the definition of an 
offhighway transportation vehicle and a nontransportation 
trailer and semitrailer described in Proposed Treasury 
Regulation section 48.4051-1(a)(2).
      For example, as provided in the proposed 
regulations,\695\ Vehicle C consists of a truck chassis on 
which an oversize body designed to transport and apply liquid 
agricultural chemicals on farms has been installed. It is 
capable of transporting a load over the public highway. It is 
132 inches in width, which is considerably in excess of 
standard highway vehicle width. For travel on uneven and soft 
terrain, it is equipped with oversize wheels with high-
flotation tires, and nonstandard axles, brakes, and 
transmission. It has a special fuel and carburetor air 
filtration system that enable it to perform efficiently in an 
environment of dirt and dust. It is not able to maintain a 
speed of 25 miles per hour for more than one mile while fully 
loaded. Because Vehicle C is a self-propelled vehicle capable 
of transporting a load over the public highway, it would meet 
the general definition of a highway vehicle. However, its 
considerable physical characteristics for transporting its load 
other than over the public highway, when compared with its 
physical characteristics for transporting the load over the 
public highway, establish that it is specially designed for the 
primary function of transporting its load other than over the 
public highway. Further, the physical characteristics for 
transporting its load other than over the public highway 
substantially limit its capability to transport a load over the 
public highway. Therefore, Vehicle C is an offhighway vehicle 
and is not treated as a highway vehicle.
---------------------------------------------------------------------------
    \695\ Prop. Treas. Reg. sec. 48.4051-1(c), Example (3).
---------------------------------------------------------------------------
      Effective date.--Generally effective after the date of 
enactment. As to the fuel taxes, effective for taxable years 
beginning after the date of enactment.
2. Taxation of aviation-grade kerosene (sec. 652 of the House bill, 
        sec. 871 of the Senate amendment, and secs. 4041, 4081, 4082, 
        4083, 4091, 4092, 4093, 4101, and 6427 of the Code)

                              PRESENT LAW

In general
      Aviation fuel is kerosene and any liquid (other than any 
product taxable under section 4081) that is suitable for use as 
a fuel in an aircraft.\696\ Unlike other fuels that generally 
are taxed upon removal from a terminal rack,\697\ aviation fuel 
is taxed upon sale of the fuel by a producer or importer.\698\ 
Sales by a registered producer to another registered producer 
are exempt from tax, with the result that, as a practical 
matter, aviation fuel is not taxed until the fuel is used at 
the airport (or sold to an unregistered person). Use of untaxed 
aviation fuel by a producer is treated as a taxable sale.\699\ 
The producer or importer is liable for the tax. The rate of tax 
on aviation fuel is 21.9 cents per gallon.\700\
---------------------------------------------------------------------------
    \696\ Sec. 4093(a).
    \697\ A rack is a mechanism capable of delivering taxable fuel into 
a means of transport other than a pipeline or vessel. Treas. Reg. sec. 
48.4081-1(b).
    \698\ Sec. 4091(a)(1).
    \699\ Sec. 4091(a)(2).
    \700\ Sec. 4091(b). This rate includes a 0.1 cent per gallon 
Leaking Underground Storage Tank (``LUST'') Trust Fund tax. The LUST 
Trust Fund tax is set to expire after March 31, 2005, with the result 
that on April 1, 2005, the tax rate is scheduled to be 21.8 cents per 
gallon. Secs. 4091(b)(3)(B) and 4081(d)(3). Beginning on October 1, 
2007, the rate of tax is reduced to 4.3 cents per gallon. Sec. 
4091(b)(3)(A).
---------------------------------------------------------------------------
      The tax on aviation fuel is reported by filing Form 720--
Quarterly Federal Excise Tax Return. Generally, semi-monthly 
deposits are required using Form 8109B--Federal Tax Deposit 
Coupon or by depositing the tax by electronic funds transfer.
Partial exemptions
      In general, aviation fuel sold for use or used in 
commercial aviation is taxed at a reduced rate of 4.4 cents per 
gallon.\701\ Commercial aviation means any use of an aircraft 
in a business of transporting persons or property for 
compensation or hire by air (unless the use is allocable to any 
transportation exempt from certain excise taxes).\702\
---------------------------------------------------------------------------
    \701\ Sec. 4092(b). The 4.4 cent rate includes 0.1 cent per gallon 
that is attributable to the LUST Trust Fund financing rate. A full 
exemption, discussed below, applies to aviation fuel that is sold for 
use in commercial aviation as fuel supplies for vessels or aircraft, 
which includes use by certain foreign air carriers and for the 
international flights of domestic carriers. Secs. 4092(a), 4092(b), and 
4221(d)(3).
    \702\ Secs. 4092(b) and 4041(c)(2).
---------------------------------------------------------------------------
      In order to qualify for the 4.4 cents per gallon rate, 
the person engaged in commercial aviation must be registered 
with the Secretary \703\ and provide the seller with a written 
exemption certificate stating the airline's name, address, 
taxpayer identification number, registration number, and 
intended use of the fuel. A person that is registered as a 
buyer of aviation fuel for use in commercial aviation generally 
is assigned a registration number with a ``Y'' suffix (a ``Y'' 
registrant), which entitles the registrant to purchase aviation 
fuel at the 4.4 cents per gallon rate.
---------------------------------------------------------------------------
    \703\ Notice 88-132, sec. III(D). See also, Form 637--Application 
for Registration (For Certain Excise Tax Activities). A bond may be 
required as a condition of registration.
---------------------------------------------------------------------------
      Large commercial airlines that also are producers of 
aviation fuel qualify for registration numbers with an ``H'' 
suffix. As producers of aviation fuel, ``H'' registrants may 
buy aviation fuel tax free pursuant to a full exemption that 
applies to sales of aviation fuel by a registered producer to a 
registered producer. If the ``H'' registrant ultimately uses 
such untaxed fuel in domestic commercial aviation, the H 
registrant is liable for the aviation fuel tax at the 4.4 cents 
per gallon rate.
Exemptions
      Aviation fuel sold by a producer or importer for use by 
the buyer in a nontaxable use is exempt from the excise tax on 
sales of aviation fuel.\704\ To qualify for the exemption, the 
buyer must provide the seller with a written exemption 
certificate stating the buyer's name, address, taxpayer 
identification number, registration number (if applicable), and 
intended use of the fuel.
---------------------------------------------------------------------------
    \704\ Sec. 4092(a).
---------------------------------------------------------------------------
      Nontaxable uses include: (1) use other than as fuel in an 
aircraft (such as use in heating oil); (2) use on a farm for 
farming purposes; (3) use in a military aircraft owned by the 
United States or a foreign country; (4) use in a domestic air 
carrier engaged in foreign trade or trade between the United 
States and any of its possessions;\705\ (5) use in a foreign 
air carrier engaged in foreign trade or trade between the 
United States and any of its possessions (but only if the 
foreign carrier's country of registration provides similar 
privileges to United States carriers); (6) exclusive use of a 
State or local government; (7) sales for export, or shipment to 
a United States possession; (8) exclusive use by a nonprofit 
educational organization; (9) use by an aircraft museum 
exclusively for the procurement, care, or exhibition of 
aircraft of the type used for combat or transport in World War 
II, and (10) use as a fuel in a helicopter or a fixed-wing 
aircraft for purposes of providing transportation with respect 
to which certain requirements are met.\706\
---------------------------------------------------------------------------
    \705\ ``Trade'' includes the transportation of persons or property 
for hire. Treas. Reg. sec. 48.4221-4(b)(8).
    \706\ Secs. 4041(f)(2), 4041(g), 4041(h), 4041(l), and 4092.
---------------------------------------------------------------------------
      A producer that is registered with the Secretary may sell 
aviation fuel tax-free to another registered producer.\707\ 
Producers include refiners, blenders, wholesale distributors of 
aviation fuel, dealers selling aviation fuel exclusively to 
producers of aviation fuel, the actual producer of the aviation 
fuel, and with respect to fuel purchased at a reduced rate, the 
purchaser of such fuel.
---------------------------------------------------------------------------
    \707\ Sec. 4092(c).
---------------------------------------------------------------------------
Refunds and credits
      A claim for refund of taxed aviation fuel held by a 
registered aviation fuel producer is allowed \708\ (without 
interest) if: (1) the aviation fuel tax was paid by an importer 
or producer (the ``first producer'') and the tax has not 
otherwise been credited or refunded; (2) the aviation fuel was 
acquired by a registered aviation fuel producer (the ``second 
producer'') after the tax was paid; (3) the second producer 
files a timely refund claim with the proper information; and 
(4) the first producer and any other person that owns the fuel 
after its sale by the first producer and before its purchase by 
the second producer have met certain reporting 
requirements.\709\ Refund claims should contain the volume and 
type of aviation fuel, the date on which the second producer 
acquired the fuel, the amount of tax that the first producer 
paid, a statement by the claimant that the amount of tax was 
not collected nor included in the sales price of the fuel by 
the claimant when the fuel was sold to a subsequent purchaser, 
the name, address, and employer identification number of the 
first producer, and a copy of any required statement of a 
subsequent seller (subsequent to the first producer but prior 
to the second producer) that the second producer received. A 
claim for refund is filed on Form 8849, Claim for Refund of 
Excise Taxes, and may not be combined with any other 
refunds.\710\
---------------------------------------------------------------------------
    \708\ Sec. 4091(d).
    \709\ Treas. Reg. sec. 48.4091-3(b).
    \710\ Treas. Reg. sec. 48.4091-3(d)(1).
---------------------------------------------------------------------------
      A payment is allowable to the ultimate purchaser of taxed 
aviation fuel if the aviation fuel is used in a nontaxable 
use.\711\ A claim for payment may be made on Form 8849 or on 
Form 720, Schedule C. A claim made on Form 720, Schedule C, may 
be netted against the claimant's excise tax liability.\712\ 
Claims for payment not so taken may be allowable as income tax 
credits \713\ on Form 4136, Credit for Federal Tax Paid on 
Fuels.
---------------------------------------------------------------------------
    \711\ Sec. 6427(l)(1).
    \712\ Treas. Reg. sec. 40.6302(c)-1(a)(3).
    \713\ Sec. 34.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision changes the incidence of taxation of 
aviation fuel from the sale of aviation fuel to the removal of 
aviation fuel from a refinery or terminal, or the entry into 
the United States of aviation fuel. Sales of not previously 
taxed aviation fuel to an unregistered person also are subject 
to tax.
      Under the provision, the full rate of tax--21.9 cents per 
gallon--is imposed upon removal of aviation fuel from a 
refinery or terminal (or entry into the United States). 
Aviation fuel may be removed at a reduced rate--either 4.4 or 
zero cents per gallon--only if the aviation fuel is: (1) 
removed directly into the wing of an aircraft (i) that is 
registered with the Secretary as a buyer of aviation fuel for 
use in commercial aviation (e.g., a ``Y'' registrant under 
current law), (ii) that is a foreign airline entitled to the 
present law exemption for aviation fuel used in foreign trade, 
or (iii) for a tax-exempt use; or (2) removed or entered as 
part of an exempt bulk transfer.\714\ An exempt bulk transfer 
is a removal or entry of aviation fuel transferred in bulk by 
pipeline or vessel to a terminal or refinery if the person 
removing or entering the aviation fuel, the operator of such 
pipeline or vessel, and the operator of such terminal or 
refinery are registered with the Secretary.
---------------------------------------------------------------------------
    \714\ See sec. 4081(a)(1)(B).
---------------------------------------------------------------------------
      Under a special rule, the provision treats certain 
refueler trucks, tankers, and tank wagons as a terminal if 
certain requirements are met. For the special rule to apply, a 
qualifying truck, tanker, or tank wagon must be loaded with 
aviation fuel from a terminal: (1) that is located within an 
airport, and (2) from which no vehicle licensed for highway use 
is loaded with aviation fuel, except in exigent circumstances 
identified by the Secretary in regulations. It is intended that 
a terminal is located within an airport if the terminal is 
located in a secure facility on airport grounds. For example, 
if an access road runs between a terminal and an airport's 
runways, and the terminal, like the runways, is physically 
located on airport grounds and is part of a secure facility, it 
is intended that under the provision the terminal is located 
within the airport. It is intended that an exigent circumstance 
under which loading a vehicle registered for highway use with 
fuel would not disqualify a terminal under the special rule 
would include, for example, the unloading of fuel from bulk 
storage tanks into highway vehicles in order to repair the 
storage tanks.
      In order to qualify for the special rule, a refueler 
truck, tanker, or tank wagon must: (1) deliver the aviation 
fuel directly into the wing of the aircraft at the airport 
where the terminal is located; (2) have storage tanks, hose, 
and coupling equipment designed and used for the purposes of 
fueling aircraft; (3) not be registered for highway use; and 
(4) be operated by the terminal operator (who operates the 
terminal rack from which the fuel is unloaded) or by a person 
that makes a daily accounting to such terminal operator of each 
delivery of fuel from such truck, tanker, or tank wagon.\715\
---------------------------------------------------------------------------
    \715\ The provision requires that if such delivery of information 
is provided to a terminal operator (or if a terminal operator collects 
such information), that the terminal operator provide such information 
to the Secretary.
---------------------------------------------------------------------------
      The provision does not change the applicable rates of tax 
under present law, 21.9 cents per gallon for use in 
noncommercial aviation, 4.4 cents per gallon for use in 
commercial aviation, and zero cents per gallon for use by 
domestic airlines in an international flight, by foreign 
airlines, or other nontaxable use. The provision imposes 
liability for the tax on aviation fuel removed from a refinery 
or terminal directly into the wing of an aircraft for use in 
commercial aviation on the person receiving the fuel, in which 
case, such person self-assesses the tax on a return. The 
provision does not change present-law nontaxable uses of 
aviation fuel, or change the persons or the qualifications of 
persons who are entitled to purchase fuel at a reduced rate, 
except that a producer is not permitted to purchase aviation 
fuel at a reduced rate by reason of such persons' status as a 
producer.
      Under the provision, a refund is allowable to the 
ultimate vendor of aviation fuel if such ultimate vendor 
purchases fuel tax paid and subsequently sells the fuel to a 
person qualified to purchase at a reduced rate and who waives 
the right to a refund. In such a case, the provision permits an 
ultimate vendor to net refund claims against any excise tax 
liability of the ultimate vendor, in a manner similar to the 
present law treatment of ultimate purchaser payment 
claims.\716\
---------------------------------------------------------------------------
    \716\ For example, X is a commercial airline subsidiary of airline 
Y. If Y sells fuel to X, X can waive its right to a refund to Y as the 
ultimate vendor. Y would then be entitled to file for a refund or net 
the refund against its excise tax liability.
---------------------------------------------------------------------------
      As under present law, if previously taxed aviation fuel 
is used for a nontaxable use, the ultimate purchaser may claim 
a refund for the tax previously paid. If previously taxed 
aviation fuel is used for a taxable non aircraft use, the fuel 
is subject to the tax imposed on kerosene (24.4 cents per 
gallon) and a refund of the previously paid aviation fuel tax 
is allowed. Claims by the ultimate vendor or the purchaser that 
are not taken as refund claims may be allowable as income tax 
credits.
      For example, for an airport that is not served by a 
pipeline, aviation fuel generally is removed from a terminal 
and transported to an airport storage facility for eventual use 
at the airport. In such a case, the aviation fuel will be taxed 
at 21.9 cents per gallon upon removal from the terminal. At the 
airport, if the fuel is purchased from a vendor by a person 
registered with the Secretary to use fuel in commercial 
aviation, the purchaser may buy the fuel at a reduced rate 
(generally, 4.4 cents per gallon for domestic flights and zero 
cents per gallon for international flights) and waive the right 
to a refund. The ultimate vendor generally may claim a refund 
for the difference between 21.9 cents per gallon of tax paid 
upon removal and the rate of tax paid to the vendor by the 
purchaser. To obtain a zero rate upon purchase, a registered 
domestic airline must certify to the vendor at the time of 
purchase that the fuel is for use in an international flight; 
otherwise, the airline must pay the 4.4 cents per gallon rate 
and file a claim for refund to the Secretary if the fuel is 
used for international aviation. If a zero rate is paid and the 
fuel subsequently is used in domestic and not international 
travel, the domestic airline is liable for tax at 4.4 cents per 
gallon. A foreign airline eligible under present law to 
purchase aviation fuel tax-free would continue to purchase such 
fuel tax-free.
      As another example, for an airport that is served by a 
pipeline, aviation fuel generally is delivered to the wing of 
an aircraft either by a refueling truck or by a ``hydrant'' 
that runs directly from the pipeline to the airplane wing. If a 
refueling truck that is not licensed for highway use loads fuel 
from a terminal located within the airport (and the other 
requirements of the provision for such truck and terminal are 
met), and delivers the fuel directly to the wing of an aircraft 
for use in commercial aviation, the aviation fuel is taxed at 
4.4 cents per gallon upon delivery to the wing and the person 
receiving the fuel is liable for the tax, which such person 
would be able to self-assess on a return.\717\ If fuel is 
loaded into a refueling truck that does not meet the 
requirements of the provision, then the fuel is treated as 
removed from the terminal into the refueling truck and tax of 
21.9 cents per gallon is paid on such removal. The ultimate 
vendor is entitled to a refund of the difference between 21.9 
cents per gallon paid on removal and the rate paid by a 
commercial airline purchaser (assuming the purchaser waived the 
refund right). If fuel is removed from a terminal directly to 
the wing of an aircraft registered to use fuel in commercial 
aviation by a hydrant or similar device, the person removing 
the aviation fuel is liable for a tax of 4.4 cents per gallon 
(or zero in the case of an international flight or qualified 
foreign airline) and may self-assess such tax on a return.
---------------------------------------------------------------------------
    \717\ Alternatively, if the aviation fuel in the example is for use 
in noncommercial aviation, the fuel is taxed at 21.9 cents per gallon 
upon delivery into the wing. Self-assessment of the tax would not apply 
in such case.
---------------------------------------------------------------------------
      Under the provision, a floor stocks tax applies to 
aviation fuel held by a person (if title for such fuel has 
passed to such person) on October 1, 2004. The tax is equal to 
the amount of tax that would have been imposed before October 
1, 2004, if the provision was in effect at all times before 
such date, reduced by the tax imposed by section 4091, as in 
effect on the day before the date of enactment. The Secretary 
shall determine the time and manner for payment of the tax, 
including the nonapplication of the tax on de minimis amounts 
of aviation fuel. Under the provision, 0.1 cents per gallon of 
such tax is transferred to the LUST Trust Fund. The remainder 
is transferred to the Airport and Airway Trust Fund.
      Effective date.--Effective for aviation fuel removed, 
entered, or sold after September 30, 2004.

                            SENATE AMENDMENT

      The Senate amendment is similar to the House bill, except 
that refueler trucks, tankers, and tank wagons are not subject 
to special rules, and there is no provision for liability for, 
and self-assessment of, tax by the person receiving fuel 
removed from a refinery or terminal directly into the wing of 
an aircraft (whether by refueling vehicle or otherwise).
      Effective date.--Effective for aviation fuel removed, 
entered, or sold after September 30, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, with the 
following modifications. The rule that permits certain refueler 
trucks to be treated as a terminal for purposes of the 
provision is modified to require that, in addition to the 
requirements specified in the House bill, a qualifying truck, 
tanker, or tank wagon must be loaded with aviation fuel from a 
terminal that is located within a secured area of an airport. 
The Secretary is required to publish, by December 15, 2004, and 
maintain a list of airports that include a secured area in 
which a terminal is located.\718\ In addition, the conference 
agreement modifes the requirement that in order to qualify for 
the special rule, a refueler truck, tanker, or tank wagon must 
deliver the aviation fuel directly into the wing of the 
aircraft at the airport where the terminal is located to a 
requirement that a refueler truck, tanker, or tank wagon be 
loaded with aviation fuel for delivery into aircraft at the 
airport where the terminal is located.
---------------------------------------------------------------------------
    \718\ The conferees intend that the following airports, subject to 
verification by the Secretary, be included on the Secretary's initial 
list of airports that include a secured area in which a terminal is 
located. The airports are listed by airport name, and the terminal with 
respect to the airport is identified by terminal control number. In 
maintaining the list of qualified airports, the Secretary has the 
discretion to add or remove airports from the list. Ted Stevens 
International Airport, T-91-AK-4520; William B. Hartsfield Atlanta 
International Airport, T-58-GA-2512; William B. Hartsfield Atlanta 
International Airport, T-58-GA-2513; William B. Hartsfield Atlanta 
International Airport, T-58-GA-2536; Bradley International Airport, T-
06-CT-1271; Nashville Metropolitan Airport, T-62-TN-2222; Logan 
International Airport, T-04-MA-1171; Baltimore/Washington International 
Airport, T-52-MD-1569; Cleveland Hopkins International Airport, T-31-
OH-3109; Charlotte/Douglas International Airport, T-56-NC-2032; 
Colorado Springs Airport, T-84-CO-4108; Cincinnati/Northern Kentucky 
International Airport, T-61-KY-3277; Dallas Love Field Airport, T-75-
TX-2663; Ronald Reagan National Airport, T-54-VA-1686; Denver 
International Airport, T-84-CO-4111; Dallas Fort Worth International 
Airport, T-75-TX-2673; Wayne County Metropolitan Airport, T-38-MI-3018; 
Newark Liberty International Airport, T-22-NJ-1532; Fort Lauderdale/
Hollywood International Airport; T-65-FL-2158; Piedmont Triad 
International Airport, T-56-NC-2038; Honolulu International Airport, T-
91-HI-4570; Dulles International Airport, T-54-VA-1676; George Bush 
Intercontinental Airport, T-76-TX-2818; Mid Continent Airport, T-43-KS-
3653; John F. Kennedy International Airport, T-11-NY-1334; McCarren 
International Airport, T-86-NV-4355; Kansas City International Airport, 
T-43-MO-3723; Orlando International Airport, T-59-FL-2111; Midway 
Airport, T-36-IL-3376; Memphis International Airport, T-62-TN-2212; 
General Mitchell International Airport, T-39-WI-3092; Minneapolis-St. 
Paul International Airport, T-41-MN-3419; Minneapolis-St. Paul 
International Airport, T-41-MN-3420; Minneapolis-St. Paul International 
Airport, T-41-MN-3421; Louis Armstrong New Orleans International 
Airport, T-72-LA-2356; Oakland International Airport, T-94-CA-4702; 
Eppley Airfield, T-47-NE-3608; Ontario International Airport, T-33-CA-
4792; O'Hare International Airport, T-36-IL-3325; Portland 
International Airport, T-91-OR-4450; Philadelphia International 
Airport, T-23-PA-1770; Sky Harbor International Airport, T-86-AZ-4302; 
Pittsburgh International Airport, T-23-PA-1766; Raleigh/Durham 
International, T-56-NC-2045; Reno Cannon International Airport, T-86-
NV-4352; San Diego International Airport, T-33-CA-4788; San Antonio 
International Airport, pending; Seattle Tacoma International Airport, 
T-91-WA-4425; San Francisco International Airport, T-94-CA-4701; San 
Jose Municipal Airport, T-77-CA-4650; Salt Lake City International 
Airport, T-84-UT-4207; John Wayne Airport/Orange County, T-33-CA-4772; 
Lambert International Airport, T-43-MO-3722; Tampa/St. Petersburg 
International Airport, T-59-FL-2110.
---------------------------------------------------------------------------
      The conference agreement modifies the floor stocks tax. 
Under the conference agreement, a floor stocks tax applies to 
aviation fuel held by a person (if title for such fuel has 
passed to such person) on January 1, 2005. The tax is equal to 
the amount of tax that would have been imposed before January 
1, 2005, if the proposal was in effect at all times before such 
date, reduced by (1) the tax imposed by section 4091, as in 
effect on the day before such date and, (2) in the case of 
kerosene held exclusively for the holder's own use, the amount 
which such holder would reasonably expect under the proposal to 
be paid as a refund for a nontaxable use with respect to the 
kerosene. The tax does not apply to kerosene held in the fuel 
tank of an aircraft on January 1, 2005. The Secretary shall 
determine the time and manner for payment of the tax, including 
the nonapplication of the tax on de minimis amounts of aviation 
fuel. Under the conference agreement, 0.1 cents per gallon of 
such tax is transferred to the LUST Trust Fund. The remainder 
is transferred to the Airport and Airway Trust Fund.
      The conferees expect the Secretary to delay the due date 
of the excise tax return with respect to aviation fuel for the 
quarter beginning on January 1, 2005. It is intended that the 
requirement of semi-monthly deposits of aviation fuel taxes 
continue unchanged.
      Effective date.--Effective for aviation-grade kerosene 
removed, entered, or sold after December 31, 2004.
3. Provide for transfer from Airport and Airway Trust Fund to Highway 
        Trust Fund to adjust for continued highway use of aviation fuel 
        (sec. 872 of the Senate amendment and secs. 9502 and 9503 of 
        the Code)

                              PRESENT LAW

      Aviation fuel is kerosene and any liquid (other than any 
product taxable under section 4081) that is suitable for use as 
a fuel in an aircraft.\719\ In general, the rate of tax on 
aviation fuel is 21.9 cents per gallon.\720\ Aviation fuel sold 
for use or used in commercial aviation is taxed at a reduced 
rate of 4.4 cents per gallon.\721\ Certain sales of aviation 
fuel are exempt from tax.\722\
---------------------------------------------------------------------------
    \719\ Sec. 4093(a).
    \720\ Sec. 4091(b). This rate includes a 0.1 cent per gallon 
Leaking Underground Storage Tank (``LUST'') Trust Fund tax. The LUST 
Trust Fund tax is set to expire after March 31, 2005, with the result 
that on April 1, 2005, the tax rate is scheduled to be 21.8 cents per 
gallon. Secs. 4091(b)(3)(B) & 4081(d)(3). Beginning on October 1, 2007, 
the rate of tax is reduced to 4.3 cents per gallon. Sec. 4091(b)(3)(A).
    \721\ Sec. 4092(b). The 4.4 cent rate includes 0.1 cent per gallon 
that is attributable to the LUST Trust Fund financing rate. A full 
exemption, discussed below, applies to aviation fuel that is sold for 
use in commercial aviation as fuel supplies for vessels or aircraft, 
which includes use by certain foreign air carriers and for the 
international flights of domestic carriers. Secs. 4092(a), 4092(b), & 
4221(d)(3).
    \722\  Sec. 4092.
---------------------------------------------------------------------------
      Taxes received for aviation fuel, except for the LUST 
Trust Fund financing rate, are appropriated to the Airport and 
Airway Trust Fund.\723\ Such appropriation occurs even if 
aviation fuel is used for non aviation purposes.
---------------------------------------------------------------------------
    \723\ Sec. 9502(b).
---------------------------------------------------------------------------
      Taxes received on taxable fuel for transportation 
purposes generally are appropriated to the Highway Trust 
Fund.\724\
---------------------------------------------------------------------------
    \724\ Sec. 9503(b).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision directs the Secretary to transfer from the 
Airport and Airway Trust Fund to the Highway Trust Fund 
annually an amount equivalent to amounts received in the 
Airport and Airway Trust Fund which are attributable to fuel 
that is used primarily for highway transportation purposes. The 
Secretary is directed to transfer 11 percent of such amount to 
the Mass Transit Account.
      Effective date.--Effective on October 1, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Mechanical dye injection and related penalties (sec. 653 of the 
        House bill, secs. 873, 874 and 875 of the Senate amendment and 
        secs. 4082 and 6715 and new sec. 6715A of the Code)

                              PRESENT LAW

Statutory rules
      Gasoline, diesel fuel and kerosene are generally subject 
to excise tax upon removal from a refinery or terminal, upon 
importation into the United States, and upon sale to 
unregistered persons unless there was a prior taxable removal 
or importation of such fuels.\725\ However, a tax is not 
imposed upon diesel fuel or kerosene if all of the following 
are met: (1) the Secretary determines that the fuel is destined 
for a nontaxable use, (2) the fuel is indelibly dyed in 
accordance with regulations prescribed by the Secretary,\726\ 
and (3) the fuel meets marking requirements prescribed by the 
Secretary.\727\ A nontaxable use is defined as (1) any use that 
is exempt from the tax imposed by section 4041(a)(1) other than 
by reason of a prior imposition of tax, (2) any use in a train, 
or (3) certain uses in buses for public and school 
transportation, as described in section 6427(b)(1) (after 
application of section 6427(b)(3)).\728\
---------------------------------------------------------------------------
    \725\ Sec. 4081(a)(1)(A). If such fuel is used for a nontaxable 
purpose, the purchaser is entitled to a refund of tax paid, or in some 
cases, an income tax credit. See sec. 6427.
    \726\ Dyeing is not a requirement, however, for certain fuels under 
certain conditions, i.e., diesel fuel or kerosene exempted from dyeing 
in certain States by the EPA under the Clean Air Act, aviation-grade 
kerosene as determined under regulations prescribed by the Secretary, 
kerosene received by pipeline or vessel and used by a registered 
recipient to produce substances (other than gasoline, diesel fuel or 
special fuels), kerosene removed or entered by a registrant to produce 
such substances or for resale, and (under regulations) kerosene sold by 
a registered distributor who sells kerosene exclusively to ultimate 
vendors that resell it (1) from a pump that is not suitable for fueling 
any diesel-powered highway vehicle or train, or (2) for blending with 
heating oil to be used during periods of extreme or unseasonable cold. 
Sec. 4082(c), (d).
    \727\ Sec. 4082(a).
    \728\ Sec. 4082(b)
---------------------------------------------------------------------------
      The Secretary is required to prescribe necessary 
regulations relating to dyeing, including specifically the 
labeling of retail diesel fuel and kerosene pumps.\729\
---------------------------------------------------------------------------
    \729\ Sec. 4082(e).
---------------------------------------------------------------------------
      A person who sells dyed fuel (or holds dyed fuel for 
sale) for any use that such person knows (or has reason to 
know) is a taxable use, or who willfully alters or attempts to 
alter the dye in any dyed fuel, is subject to a penalty.\730\ 
The penalty also applies to any person who uses dyed fuel for a 
taxable use (or holds dyed fuel for such a use) and who knows 
(or has reason to know) that the fuel is dyed.\731\ The penalty 
is the greater of $1,000 per act or $10 per gallon of dyed fuel 
involved. In determining the amount of the penalty, the $1,000 
is increased by the product of $1,000 and the number of prior 
penalties imposed upon such person (or a related person or 
predecessor of such person or related person).\732\ The penalty 
may be imposed jointly and severally on any business entity, 
each officer, employee, or agent of such entity who willfully 
participated in any act giving rise to such penalty.\733\ For 
purposes of the penalty, the term ``dyed fuel'' means any dyed 
diesel fuel or kerosene, whether or not the fuel was dyed 
pursuant to section 4082.\734\
---------------------------------------------------------------------------
    \730\ Sec. 6715(a).
    \731\ Sec. 6715(a).
    \732\ Sec. 6715(b).
    \733\ Sec. 6715(d).
    \734\ Sec. 6715(c)(1).
---------------------------------------------------------------------------
Regulations
      The Secretary has prescribed certain regulations under 
this provision, including regulations that specify the 
allowable types and concentration of dye, that the person 
claiming the exemption must be a taxable fuel registrant, that 
the terminal must be an approved terminal (in the case of a 
removal from a terminal rack), and the contents of the notice 
to be posted on diesel fuel and kerosene pumps.\735\ However, 
the regulations do not prescribe the time or method of adding 
the dye to taxable fuel.\736\ Diesel fuel is usually dyed at a 
terminal rack by either manual dyeing or mechanical injection. 
The regulations also provide that a terminal operator is 
jointly and severally liable for unpaid tax if undyed diesel 
fuel or kerosene is removed and the terminal operator provides 
any person with documentation that such fuel is dyed.\737\
---------------------------------------------------------------------------
    \735\ Treas. Reg. secs. 48.4082-1, -2.
    \736\ In March 2000, the IRS withdrew its Notice of Proposed 
Rulemaking PS-6-95 (61 F.R. 10490 (1996)) relating to dye injection 
systems. Announcement 2000-42, 2000-1 C.B. 949. The proposed regulation 
established standards for mechanical dye injection equipment and 
required terminal operators to report nonconforming dyeing to the IRS. 
See also Treas. Reg. sec. 48.4082-1(c), (d).
    \737\ Treas. Reg. sec. 48.4081-2(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      With respect to terminals that offer dyed fuel, the 
provision eliminates manual dyeing of fuel and requires dyeing 
by a mechanical system. Not later than 180 days after enactment 
of this provision, the Secretary of the Treasury is to 
prescribe regulations establishing standards for tamper 
resistant mechanical injector dyeing. Such standards shall be 
reasonable, cost-effective, and establish levels of security 
commensurate with the applicable facility.
      The provision adds an additional set of penalties for 
violation of the new rules. A penalty, equal to the greater of 
$25,000 or $10 for each gallon of fuel involved, applies to 
each act of tampering with a mechanical dye injection system. 
The person committing the act is also responsible for any 
unpaid tax on removed undyed fuel. A penalty of $1,000 is 
imposed upon the operator of a mechanical dye injection system 
for each failure to maintain the security standards for such 
system.\738\ An additional penalty of $1,000 is imposed upon 
such operator for each day any such violation remains 
uncorrected after the first day such violation has been or 
reasonably should have been discovered. For purposes of the 
daily penalty, a violation may be corrected by shutting down 
the portion of the system causing the violation. If any of 
these penalties are imposed on any business entity, each 
officer, employee, or agent of such entity or other contracting 
party who willfully participated in any act giving rise to such 
penalty shall be jointly and severally liable with such entity 
for such penalty. If such business entity is part of an 
affiliated group, the parent corporation of such entity shall 
be jointly and severally liable with such entity for the 
penalty.
---------------------------------------------------------------------------
    \738\ The operator remains liable under current Treas. Reg. sec. 
48.4081-2(c) for any unpaid tax on removed undyed fuel.
---------------------------------------------------------------------------
      Effective date.--The provision is effective 180 days 
after the date that the Secretary issues the required 
regulations. The Secretary must issue such regulations no later 
than 180 days after enactment.

                            SENATE AMENDMENT

      The Senate amendment contains a mechanical dyeing 
provision similar to the provision in the House bill, except 
that the Secretary of the Treasury is to prescribe regulations 
establishing standards by June 30, 2004.
      The Senate amendment also contains two additional 
provisions not in the House bill.
      The Senate amendment denies administrative appeal or 
review for repeat offenders (more than two violations) of 
present law after a chemical analysis of the fuel, except in 
the case of a claim regarding fraud or mistake in the chemical 
analysis or error in the mathematical calculation of the amount 
of penalty.
      The Senate amendment also extends present-law penalties 
to any person who knows that the strength or composition of any 
dye or marking in any dyed fuel has been altered, chemically or 
otherwise, and who sells (or holds for sale) such fuel for any 
use that the person knows or has reason to know is a taxable 
use of such fuel.
      Effective date.--Penalties relating to mechanical dyeing 
systems are effective 180 days after the regulations are 
issued. The prohibition of certain administrative review is 
effective for penalties assessed after date of enactment. The 
extension of present law penalties is effective on date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with 
respect to mechanical dye injection systems and related 
penalties. The conference agreement follows the Senate 
amendment with respect to denying administrative review to 
repeat offenders and extending present law penalties to any 
person who knows that the strength or composition of any dye or 
marking in any dyed fuel has been altered, chemically or 
otherwise, and who sells (or holds for sale) such fuel for any 
use that the person knows or has reason to know is a taxable 
use of such fuel.
5. Terminate dyed diesel use by intercity buses (sec. 876 of the Senate 
        amendment and secs. 4082 and 6427 of the Code)

                              PRESENT LAW

    A manufacturer's tax of 24.4 cents per gallon applies to 
diesel fuel.\739\ Diesel fuel that is to be used for a 
nontaxable purpose will not be taxed upon removal from the 
terminal if it is dyed to indicate its nontaxable purpose. Use 
in an intercity bus is a nontaxable use for purposes of the 
manufacturers tax on diesel fuel. However, diesel fuel is 
subject to a retail backup tax. The retail tax is 7.4 cents per 
gallon for intercity buses, but only applies if no tax was 
imposed on the diesel under the manufacturers tax.\739a\ Thus, 
dyed diesel removed from the terminal is exempt from the 
manufacturers tax but a tax of 7.3 cents per gallon (plus .1 
for LUST) is imposed on the delivery of the dyed fuel into the 
fuel supply tank of the intercity bus. The operator of the bus 
is liable for the tax.
---------------------------------------------------------------------------
    \739\ Sec. 4081.
    \739a\ Sec. 4041(a)(1)(B) and sec. 4041(a)(1)(C)(III)(i).
---------------------------------------------------------------------------
    Under present law, intercity bus operators also may buy 
fully taxed undyed diesel and seek a refund of the difference 
between the 24.4 cents per gallon rate and the 7.3 cents per 
gallon rate.

                               HOUSE BILL

    No provision.

                            SENATE AMENDMENT

    The Senate amendment eliminates the ability of intercity 
buses to buy dyed diesel and self-assess the 7.4 cents per 
gallon. Under the provision, operators of such buses must buy 
clear fuel and seek a refund of the difference between 24.4 and 
7.4 cents per gallon of tax on diesel fuel. The provision 
permits refund claimants to obtain interest if they file their 
refund claims electronically and the Secretary does not pay 
such claims within 20 days. The provision also permits ultimate 
vendors to make such refund claims if the bus operator assigns 
its right to claim a refund to the ultimate vendor.
    Effective date.--The provision is effective for fuel sold 
after September 30, 2004.

                          CONFERENCE AGREEMENT

    The conference agreement follows the Senate amendment, 
except the conference agreement does not include the provision 
that deems credit card issuers the ultimate vendor for 
purchases made by credit card.
    Effective date.--The provision is effective for fuel sold 
after January 1, 2005.
6. Authority to inspect on-site records (sec. 654 of the House bill, 
        sec. 877 of the Senate amendment, and sec. 4083 of the Code)

                              PRESENT LAW

      The IRS is authorized to inspect any place where taxable 
fuel \739b\ is produced or stored (or may be stored). The 
inspection is authorized to: (1) examine the equipment used to 
determine the amount or composition of the taxable fuel and the 
equipment used to store the fuel; and (2) take and remove 
samples of taxable fuel. Places of inspection include, but are 
not limited to, terminals, fuel storage facilities, retail fuel 
facilities or any designated inspection site.\740\
---------------------------------------------------------------------------
    \739b\ ``Taxable fuel'' means gasoline, diesel fuel, and kerosene. 
Sec. 4083(a).
    \740\ Sec. 4083(c)(1)(A).
---------------------------------------------------------------------------
      In conducting the inspection, the IRS may detain any 
receptacle that contains or may contain any taxable fuel, or 
detain any vehicle or train to inspect its fuel tanks and 
storage tanks. The scope of the inspection includes the book 
and records kept at the place of inspection to determine the 
excise tax liability under section 4081.\741\
---------------------------------------------------------------------------
    \741\ Treas. Reg. sec. 48.4083-1(c)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision expands the scope of the inspection to 
include any books, records, or shipping papers pertaining to 
taxable fuel located in any authorized inspection location.
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and 
Senate amendment.
7. Assessable penalty for refusal of entry (sec. 878 of the Senate 
        amendment and new sec. 6717 of the Code)

                              PRESENT LAW

      The Internal Revenue Service is authorized to inspect any 
place where taxable fuel is produced or stored (or may be 
stored). As part of the inspection, the Internal Revenue 
Service is authorized to: (1) examine the equipment used to 
determine the amount or composition of the taxable fuel and the 
equipment used to store the fuel; and (2) take and remove 
samples of taxable fuel. Places of inspection, include, but are 
not limited to, terminals, fuel storage facilities, retail fuel 
facilities or any designated inspection site.\742\
---------------------------------------------------------------------------
    \742\ Sec. 4083(c)(1)(A).
---------------------------------------------------------------------------
      In conducting the inspection, the Internal Revenue 
Service may detain any receptacle that contains or may contain 
any taxable fuel, or detain any vehicle or train to inspect its 
fuel tanks and storage tanks. The scope of the inspection 
includes the book and records kept to determine the excise tax 
liability under section 4081.\743\ The Internal Revenue Service 
is authorized to establish inspection sites. A designated 
inspection site includes any State highway inspection station, 
weigh station, agricultural inspection station, mobile station 
or other location designated by the Internal Revenue 
Service.\744\
---------------------------------------------------------------------------
    \743\ Treas. Reg. sec. 48.4083-1(b)(2).
    \744\ Sec. 4083(c); Treas. Reg. sec. 48.4083-1(b)(1).
---------------------------------------------------------------------------
      Any person that refuses to allow an inspection is subject 
to a penalty in the amount of $1,000 for each refusal.\745\ The 
IRS is not able to assess this penalty in the same manner as it 
would a tax. It must first seek the assistance of the 
Department of Justice to obtain a judgment. Assessable 
penalties are payable upon notice and demand by the Secretary 
and are assessed and collected in the same manner as 
taxes.\746\
---------------------------------------------------------------------------
    \745\ Sec. 4083(c)(3) and 7342.
    \746\ Sec. 6671.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      In addition to the $1,000 penalty under present law, the 
Senate amendment imposes an assessable penalty with respect to 
the refusal of entry. The assessable penalty is $1,000 for such 
refusal. The penalty will not apply if it is shown that such 
failure is due to reasonable cause. If the penalty is imposed 
on a business entity, the proposal provides for joint and 
several liability with respect to each officer, employee, or 
agent of such entity or other contracting party who willfully 
participated in the act giving rise to the penalty. If the 
business entity is part of an affiliated group, the parent 
corporation also will be jointly and severally liable for the 
penalty.
      Effective date.--The provision is effective on October 1, 
2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except for effective date.
      Effective date.--The provision is effective on January 1, 
2005.
8. Registration of pipeline or vessel operators required for exemption 
        of bulk transfers to registered terminals or refineries (sec. 
        655 of the House bill, sec. 879 of the Senate amendment, and 
        sec. 4081 of the Code)

                              PRESENT LAW

      In general, gasoline, diesel fuel, and kerosene 
(``taxable fuel'') are taxed upon removal from a refinery or a 
terminal.\747\ Tax also is imposed on the entry into the United 
States of any taxable fuel for consumption, use, or 
warehousing. The tax does not apply to any removal or entry of 
a taxable fuel transferred in bulk (a ``bulk transfer'') to a 
terminal or refinery if both the person removing or entering 
the taxable fuel and the operator of such terminal or refinery 
are registered with the Secretary.\748\
---------------------------------------------------------------------------
    \747\ Sec. 4081(a)(1)(A).
    \748\ Sec. 4081(a)(1)(B). The sale of a taxable fuel to an 
unregistered person prior to a taxable removal or entry of the fuel is 
subject to tax. Sec. 4081(a)(1)(A).
---------------------------------------------------------------------------
      Present law does not require that the vessel or pipeline 
operator that transfers fuel as part of a bulk transfer be 
registered in order for the transfer to be exempt. For example, 
a registered refiner may transfer fuel to an unregistered 
vessel or pipeline operator who in turn transfers fuel to a 
registered terminal operator. The transfer is exempt despite 
the intermediate transfer to an unregistered person.
      In general, the owner of the fuel is liable for payment 
of tax with respect to bulk transfers not received at an 
approved terminal or refinery.\749\ The refiner is liable for 
payment of tax with respect to certain taxable removals from 
the refinery.\750\
---------------------------------------------------------------------------
    \749\ Treas. Reg. sec. 48.4081-3(e)(2).
    \750\ Treas. Reg. sec. 48.4081-3(b).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision requires that for a bulk transfer of a 
taxable fuel to be exempt from tax, any pipeline or vessel 
operator that is a party to the bulk transfer be registered 
with the Secretary. Transfer to an unregistered party will 
subject the transfer to tax.
      The Secretary is required to publish periodically a list 
of all registered persons that are required to register.
      Effective date.--(Effective on October 1, 2004, except 
that the Secretary is required to publish the list of 
registered persons beginning on July 1, 2004.

                            SENATE AMENDMENT

      Similar to the House bill, except that with respect to a 
bulk transfer on which no tax is paid, the Senate amendment 
imposes a penalty on any person who knowingly transfers taxable 
fuel in bulk to an unregistered person. The penalty is the 
greater of $10,000 or $1 per gallon and is increased for 
multiple prior violations. No penalty is imposed upon a showing 
by the taxpayer of reasonable cause.
      Effective date.--Effective on October 1, 2004, except 
that the Secretary is required to publish the list of persons 
required to register by June 30, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, modified 
to provide that the Secretary shall periodically publish a 
current list of persons required to register under the 
authority of section 6103(k)(7).
      Effective date.--(Effective on March 1, 2005, except that 
the Secretary is required to publish the list of persons 
required to register beginning on January 1, 2005.
9. Display of registration and penalties for failure to display 
        registration and to register (secs. 656 and 657 of the House 
        bill, secs. 880 and 882 of the Senate amendment, and secs. 
        4101, 7232, 7272 and new secs. 6718 and 6719 of the Code)

                              PRESENT LAW

      Blenders, enterers, pipeline operators, position holders, 
refiners, terminal operators, and vessel operators are required 
to register with the Secretary with respect to fuels taxes 
imposed by sections 4041(a)(1) and 4081.\751\ A non-assessable 
penalty for failure to register is $50.\752\ A criminal penalty 
of $5,000, or imprisonment of not more than five years, or 
both, together with the costs of prosecution also applies to a 
failure to register and to certain false statements made in 
connection with a registration application.\753\
---------------------------------------------------------------------------
    \751\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1).
    \752\ Sec. 7272(a).
    \753\ Sec. 7232.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision requires that every operator of a vessel 
who is required to register with the Secretary display on each 
vessel used by the operator to transport fuel, proof of 
registration through an electronic identification device 
prescribed by the Secretary. A failure to display such proof of 
registration results in a penalty of $500 per month per vessel. 
The amount of the penalty is increased for multiple prior 
violations. No penalty is imposed upon a showing by the 
taxpayer of reasonable cause.
      The provision imposes a new assessable penalty for 
failure to register of $10,000 for each initial failure, plus 
$1,000 per day that the failure continues. No penalty is 
imposed upon a showing by the taxpayer of reasonable cause. In 
addition, the provision increases the present-law non-
assessable penalty for failure to register from $50 to $10,000 
and the present law criminal penalty for failure to register 
from $5,000 to $10,000.
      Effective date.--(The provision requiring display of 
registration is effective on October 1, 2004. The provision 
relating to penalties is effective for penalties imposed after 
September 30, 2004.

                            SENATE AMENDMENT

      The Senate amendment is similar to House bill, except 
that the increase in the penalty for multiple prior violations 
for failure to display proof of registration is determined 
differently.
      Effective date.--Effective on October 1, 2004, except 
that the penalties for failure to register are effective for 
failures pending or occurring after September 30, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill except 
that the identification device is not required to be 
electronic.
      Effective date.--The provision requiring display of 
registration is effective on January 1, 2005. The provision 
relating to penalties is effective for penalties imposed after 
December 31, 2004.
10. Registration of persons within foreign trade zones (sec. 881 of the 
        Senate amendment and sec. 4101 of the Code)

                              PRESENT LAW

      Blenders, enterers, pipeline operators, position holders, 
refiners, terminal operators, and vessel operators are required 
to register with the Secretary with respect to fuels taxes 
imposed by sections 4041(a)(1) and 4081.\754\
---------------------------------------------------------------------------
    \754\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) & (c)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Secretary shall require registration by any person 
that operates a terminal or refinery within a foreign trade 
zone or within a customs bonded storage facility, or holds an 
inventory position with respect to a taxable fuel in such a 
terminal.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment. It 
is intended that the Secretary shall establish a date by which 
persons required to register under the provision must be 
registered.
      Effective date.--Effective on January 1, 2005.
11. Penalties for failure to report (sec. 657 of the House bill, sec. 
        882 of the Senate amendment, and new sec. 6725 of the Code)

                              PRESENT LAW

      A fuel information reporting program, the Excise Summary 
Terminal Activity Reporting System (``ExSTARS''), requires 
terminal operators and bulk transport carriers to report 
monthly on the movement of any liquid product into or out of an 
approved terminal.\755\ Terminal operators file Form 720-TO--
Terminal Operator Report, which shows the monthly receipts and 
disbursements of all liquid products to and from an approved 
terminal.\756\ Bulk transport carriers (barges, vessels, and 
pipelines) that receive liquid product from an approved 
terminal or deliver liquid product to an approved terminal file 
Form 720-CS--Carrier Summary Report, which details such 
receipts and disbursements. In general, the penalty for failure 
to file a report or a failure to furnish all of the required 
information in a report is $50 per report.\757\
---------------------------------------------------------------------------
    \755\ Sec. 4010(d); Treas. Reg. sec. 48.4101-2. The reports are 
required to be filed by the end of the month following the month to 
which the report relates.
    \756\ An approved terminal is a terminal that is operated by a 
taxable fuel registrant that is a terminal operator. Treas. Reg. sec. 
48.4081-1(b).
    \757\ Sec. 6721(a).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision imposes a new assessable penalty for 
failure to file a report or to furnish information required in 
a report required by the ExSTARS system. The penalty is $10,000 
per failure with respect to each vessel or facility (e.g., a 
terminal or other facility) for which information is required 
to be furnished. No penalty is imposed upon a showing by the 
taxpayer of reasonable cause.
      Effective date.--Effective for penalties imposed after 
September 30, 2004.

                            SENATE AMENDMENT

      Similar to House bill, except for technical wording 
differences.
      Effective date.--Effective for failures pending or 
occurring after September 30, 2004. The electronic reporting 
provision is effective on October 1, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
      Effective date.--Effective for penalties imposed after 
December 31, 2004.
12. Electronic filing of required information reports (sec. 895 of the 
        Senate amendment and sec. 4010 of the Code)

                              PRESENT LAW

      A fuel information reporting program, the Excise Summary 
Terminal Activity Reporting System (``ExSTARS''), requires 
terminal operators and bulk transport carriers to report 
monthly on the movement of any liquid product into or out of an 
approved terminal.\758\ Terminal operators file Form 720-TO--
Terminal Operator Report, which shows the monthly receipts and 
disbursements of all liquid products to and from an approved 
terminal.\759\ Bulk transport carriers (barges, vessels, and 
pipelines) that receive liquid product from an approved 
terminal or deliver liquid product to an approved terminal file 
Form 720-CS--Carrier Summary Report, which details such 
receipts and disbursements.
---------------------------------------------------------------------------
    \758\ Sec. 4101(d); Treas. Reg. sec. 48.4101-2. The reports are 
required to be filed by the end of the month following the month to 
which the report relates.
    \759\ An approved terminal is a terminal that is operated by a 
taxable fuel registrant that is a terminal operator. Treas. Reg. sec. 
48.4081-1(b).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment requires information reporting with 
respect to taxable fuels removed, entered, or transferred from 
any refinery, pipeline, or vessel that is registered. The 
proposal also requires that any person who must report under 
the ExSTARs systems and who has 25 or more reportable 
transactions in a month to report in electronic format.
      Effective date.--Effective on October 1, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
except that the conference agreement does not adopt the 
information reporting requirement with respect to taxable fuels 
removed, entered, or transferred from any refinery, pipeline, 
or vessel that is registered.
      Effective date.--Effective on January 1, 2006.
13. Information reporting for persons claiming certain tax benefits 
        (sec. 883 of the Senate amendment and new sec. 4104 of the 
        Code)

                              PRESENT LAW

      The Code provides an income tax credit for each gallon of 
ethanol and methanol derived from renewable sources (e.g., 
biomass) used or sold as a fuel, or used to produce a qualified 
alcohol fuel mixture, such as gasohol. The amount of the credit 
is equal to 52 cents per gallon (ethanol) \760\ and 60 cents 
per gallon (methanol).\761\ This tax credit is provided to 
blenders of the alcohols with other taxable fuels, or to the 
retail sellers of unblended alcohol fuels. Part or all of the 
benefits of the income tax credit may be claimed through 
reduced excise taxes paid, either in reduced-tax sales or by 
expedited blender refunds on fully taxed sales of gasoline to 
obtain the benefit of the reduced rates. The amount of the 
income tax credit determined with respect to any alcohol is 
reduced to take into account any benefit provided by the 
reduced excise tax rates. To obtain a partial refund on fully 
taxed gasoline, the following requirements apply: (1) the claim 
must be for gasohol sold or used during a period of at least 
one week, (2) the claim must be for at least $200, and (3) the 
claim must be filed by the last day of the first quarter 
following the earliest quarter included in the claim. If the 
blender cannot meet these requirements, the blender must claim 
a credit on the blender's income tax return.
---------------------------------------------------------------------------
    \760\ The 52-cents-per-gallon credit is scheduled to decline to 51 
cents per gallon beginning in calendar year 2005. The credit is 
scheduled to expire after the earlier of (1) expiration of the Highway 
Trust Fund excise taxes or (2) December 31, 2007.
    \761\ Ethanol produced by certain ``small producers'' is eligible 
for an additional producer tax credit of 10 cents per gallon. Eligible 
small producers are defined as persons whose production capacity does 
not exceed 30 million gallons and whose annual production does not 
exceed 15 million gallons.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment requires persons claiming the Code 
benefits related to alcohol fuels and biodiesel fuels to 
provide such information related to such benefits and the 
coordination of such benefits as the Secretary may require to 
ensure the proper administration and use of such benefits. The 
Secretary may deny, revoke or suspend the registration of any 
person to enforce this requirement.
      Effective date.--The provision is effective October 1, 
2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment. 
Persons claiming excise tax benefits are to file quarterly 
information returns, rather than monthly.
      Effective date.--The provision is effective January 1, 
2004.
14. Collection from Customs bond where importer not registered (sec. 
        658 of the House bill and sec. 884 of Senate amendment)

                              PRESENT LAW

      Typically, gasoline, diesel fuel, and kerosene are 
transferred by pipeline or barge in large quantities (``bulk'') 
to terminal storage facilities that geographically are located 
closer to destination retail markets. A fuel is taxed when it 
``breaks bulk,'' i.e., when it is removed from the refinery or 
terminal, typically by truck or rail car, for delivery to a 
smaller wholesale facility or a retail outlet. The party liable 
for payment of the taxes is the ``position holder,'' i.e., the 
person shown on the records of the terminal facility as owning 
the fuel.
      Tax is also imposed on the entry into the United States 
of any taxable fuel for consumption, use, or warehousing.\762\ 
This tax does not apply to any entry of a taxable fuel 
transferred in bulk to a terminal or refinery if the person 
entering the taxable fuel and the operator of such terminal or 
refinery are registered. The ``enterer'' is liable for the tax. 
An enterer generally means the importer of record (under 
customs law) with respect to the taxable fuel. However, if the 
importer of record is acting as an agent (a broker for 
example), the person for whom the agent is acting is the 
enterer. If there is no importer of record for taxable fuel 
entered into the United States, the owner of the taxable fuel 
at the time it is brought into the United States is the 
enterer. An importer's liability for Customs duties includes a 
liability for any internal revenue taxes that attach upon the 
importation of merchandise unless otherwise provided by law or 
regulation.\763\
---------------------------------------------------------------------------
    \762\ Sec. 4081(a)(1)(A)(iii).
    \763\ 19 C.F.R. sec. 141.3 (2004).
---------------------------------------------------------------------------
      As a part of the entry documentation, the importer, 
consignee, or an authorized agent usually is required to file a 
bond with Customs. The bond, among other things, guarantees 
that proper entry summary, with payment of estimated duties and 
taxes when due, will be made for imported merchandise and that 
any additional duties and taxes subsequently found to be due 
will be paid.
      As a condition of permitting anyone to be registered with 
the IRS, under section 4101 of the Code, the Secretary may 
require that such person give a bond in such sum as the 
Secretary determines appropriate.
      On July 31, 2004, the Department of Treasury issued 
regulations providing that effective September 28, 2004, 
importers and enterers are jointly and severally liable for the 
tax on imported fuel if the importer is not the enterer and the 
enterer is not registered with the Secretary.

                               HOUSE BILL

      Under the provision, the importer of record is jointly 
and severally liable for the tax imposed upon entry of fuel 
into the United States if, under regulations, any other person 
that is not registered with the Secretary as a taxable fuel 
registrant is liable for such tax. If the importer of record is 
liable for the tax and such tax is not paid on or before the 
last date prescribed for payment, the Secretary may collect 
such tax from the Customs bond posted with respect to the 
importation of the taxable fuel to which the tax relates.
      For purposes of determining the jurisdiction of any court 
of the United States or any agency of the United States, any 
action by the Secretary to collect the tax from the Customs 
bond is treated as an action to collect tax from a bond 
authorized by section 4101 of the Code, not as an action to 
collect from a bond relating to the importation of merchandise.
      Effective date.--The provision is effective for fuel 
entered after September 30, 2004.

                            SENATE AMENDMENT

      Under the Senate amendment, for fuel entering the United 
States (other than transfers in bulk) for consumption, use, or 
warehousing, the proposal provides that the tax is immediately 
due and payable at the time of entry, if the enterer is not 
registered with the IRS. Upon the failure to pay tax or post 
bond, the Customs Service is authorized under the proposal to 
deny entry of the shipment into the United States. The 
Secretary also may seize the fuel on which the tax is due or 
detain the vehicle transporting such fuel until such tax is 
paid. If no tax has been paid or bond filed within five days of 
the seizure, the Secretary may sell the fuel.
      Effective date.--The provision is effective upon date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the House bill 
or Senate amendment provisions.
15. Reconciliation of on-loaded cargo to entered cargo (sec. 885 of the 
        Senate amendment)

                              PRESENT LAW

      The Trade Act of 2002 directed the Secretary to 
promulgate regulations pertaining to the electronic 
transmission to the Bureau of Customs and Border Patrol 
(``Customs'') of information pertaining to cargo destined for 
importation into the United States or exportation from the 
United States, prior to such importation or exportation.\764\ 
The Department of the Treasury issued final regulations on 
October 31, 2002. The regulations require the advance and 
accurate presentation of certain manifest information prior to 
lading at the foreign port and encourage the presentation of 
this information electronically. Customs must receive from the 
carrier the vessel's Cargo Declaration (Customs Form 1302) or 
the electronic equivalent within 24 hours before such cargo is 
laden aboard the vessel at the foreign port.\765\ Certain 
carriers of bulk cargo, however, are exempt from these filing 
requirements. Such bulk cargo includes that composed of free 
flowing articles such as oil, grain, coal, ore and the like, 
which can be pumped or run through a chute or handled by 
dumping.\766\ Thus, taxable fuels are not covered by the Cargo 
Declaration requirement.
---------------------------------------------------------------------------
    \764\ Sec. 343(a) of Pub. L. No. 107-210 (2002).
    \765\ 19 CFR sec. 4.7(b)(2).
    \766\ 19 CFR sec. 4.7(b)(4)(i)(A).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment requires that, not later than one 
year after the date of enactment, the Secretary of Homeland 
Security, together with the Secretary, promulgate regulations 
providing for the transmission to the Internal Revenue Service 
of information pertaining to cargo of taxable fuels destined 
for importation into the United States, prior to such 
importations. The provision requires that imports of taxable 
fuels be subject to the Cargo Declaration and electronic 
reporting requirements.
      Effective date.--The provision is effective upon date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
16. Modification of the use tax on heavy highway vehicles (sec. 659 of 
        the House bill, sec. 890 of the Senate amendment, and secs. 
        4481, 4483 and 6165 of the Code)

                              PRESENT LAW

      An annual use tax is imposed on heavy highway vehicles, 
at the rates below.\767\
---------------------------------------------------------------------------
    \767\ Sec. 4481.

------------------------------------------------------------------------

------------------------------------------------------------------------
Under 55,000 pounds.......................  No tax.
55,000-75,000 pounds......................  $100 plus $22 per 1,000
                                             pounds over 55,000.
Over 75,000 pounds........................  $550.
------------------------------------------------------------------------

      The annual use tax is imposed for a taxable period of 
July 1 through June 30. Generally, the tax is paid by the 
person in whose name the vehicle is registered. In certain 
cases, taxpayers are allowed to pay the tax in 
installments.\768\ State governments are required to receive 
proof of payment of the use tax as a condition of vehicle 
registration.
---------------------------------------------------------------------------
    \768\ Sec. 6156.
---------------------------------------------------------------------------
      Exemptions and reduced rates are provided for certain 
``transit-type buses,'' trucks used for fewer than 5,000 miles 
on public highways (7,500 miles for agricultural vehicles), and 
logging trucks.\769\ Any highway motor vehicle that is issued a 
base plate by Canada or Mexico and is operated on U.S. highways 
is subject to the highway use tax whether or not the vehicles 
are required to be registered in the United States. The tax 
rate for Canadian and Mexican vehicles is 75 percent of the 
rate that would otherwise be imposed.\770\
---------------------------------------------------------------------------
    \769\ See generally, sec. 4483.
    \770\ Sec. 4483(f): Treas. Reg. sec. 41.4483-7(a).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill eliminates the ability to pay the tax in 
installments. It also eliminates the reduced rates for Canadian 
and Mexican vehicles. The provision requires taxpayers with 25 
or more vehicles for any taxable period to file their returns 
electronically. Finally, the provision permits proration of tax 
for vehicles sold during the taxable period.
      Effective date.--The provision is effective for taxable 
periods beginning after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment eliminates the ability to pay the 
tax in installments and allows no proration of the tax unless 
the vehicle is destroyed, stolen, or sold. It also eliminates 
the reduced rates for Canadian and Mexican vehicles. In 
addition, under regulations to be prescribed by the Secretary, 
every taxpayer that pays the heavy highway vehicle use tax to 
receive and display on the vehicle an electronic identification 
device as prescribed by the Secretary. The device is to be 
received and displayed not later than one month after the due 
date of the return of tax with respect to each taxable period.
      Effective date.--The Senate amendment is generally 
effective for taxable periods beginning after the date of 
enactment. Requires the Secretary to issue regulations 
regarding electronic identification devices no later than 
October 1, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
17. Modification of ultimate vendor refund claims with respect to 
        farming (sec. 660 of the House bill, sec. 887 of the Senate 
        amendment, and sec. 6427 of the Code)

                              PRESENT LAW

      In general, the Code provides that, if diesel fuel, 
kerosene, or aviation fuel on which tax has been imposed is 
used by any person in a nontaxable use, the Secretary is to 
refund (without interest) the amount of tax imposed. The refund 
is made to the ultimate purchaser of the taxed fuel. However, 
in the case of diesel fuel or kerosene used on a farm for 
farming purposes or by a State or local government, refund 
payments are paid to the ultimate, registered vendors 
(``ultimate vendors'') of such fuels.

                               HOUSE BILL

      In the case of diesel fuel or kerosene used on a farm for 
farming purposes, the House bill provision limits ultimate 
vendor claims for refund to sales of such fuel in amounts less 
than 250 gallons per farmer per claim.
      Effective date.--The provision is effective for fuels 
sold for nontaxable use after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment provision is the same as the House 
bill except the limit on ultimate vendor claims is amounts less 
than 500 gallons per farmer per claim.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.
18. Dedication of revenue from certain penalties to the Highway Trust 
        Fund (sec. 661 of the House bill, sec. 891 of the Senate 
        amendment, and sec. 9503 of the Code)

                              PRESENT LAW

      Present law does not dedicate to the Highway Trust Fund 
any penalties assessed and collected by the Secretary.

                               HOUSE BILL

      The provision dedicates to the Highway Trust Fund amounts 
equivalent to the penalties paid under sections 6715 (relating 
to dyed fuel sold for use or used in taxable use), 6715A 
(penalty for tampering or failing to maintain security 
requirements for mechanical dye injection systems), 6717 
(penalty for failing to display tax registration on vessels), 
6718 (penalty for failing to register under section 4101), 6725 
(penalty for failing to report information required by the 
Secretary), 7232 (penalty for failing to register and false 
representations of registration status), and 7272 (but only 
with regard to penalties related to failure to register under 
section 4101).
      Effective date.--The provision is effective for penalties 
assessed after October 1, 2004.

                            SENATE AMENDMENT

      The Senate amendment similarly dedicates certain 
penalties to the Highway Trust Fund.
      Effective date.--The provision is effective for penalties 
assessed after October 1, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement generally follows the House bill 
and the Senate amendment by dedicating certain penalties to the 
Highway Trust Fund. The conference agreement dedicates to the 
Highway Trust Fund amounts equivalent to the penalties paid 
under sections 6715 (relating to dyed fuel sold for use or used 
in taxable use), 6715A (penalty for tampering with or failing 
to maintain security requirements for mechanical dye injection 
systems), 6717 (assessable penalty for refusal of entry), 6718 
(penalty for failing to display tax registration on vessels), 
6719 (assessable penalty for failure to register), 6725 
(penalty for failing to report information required by the 
Secretary), 7232 (penalty for failing to register and false 
representations of registration status), and 7272 (but only 
with regard to penalties related to failure to register under 
section 4101).
      Effective date.--The provision is effective for penalties 
assessed on or after the date of enactment.
19. Taxable fuel refunds for certain ultimate vendors (sec. 662 of the 
        House bill, sec. 888 of the Senate amendment, and secs. 6416 
        and 6427 of the Code)

                              PRESENT LAW

      The Code provides that, in the case of gasoline on which 
tax has been paid and sold to a State or local government, to a 
nonprofit educational organization, for supplies for vessels or 
aircraft, for export, or for the production of special fuels, a 
wholesale distributor that sells the gasoline for such exempt 
purposes is treated as the person who paid the tax and thereby 
is the proper claimant for a credit or refund of the tax paid. 
In the case of undyed diesel fuel or kerosene used on a farm 
for farming purposes or by a State or local government, a 
credit or payment is allowable only to the ultimate, registered 
vendors (``ultimate vendors'') of such fuels.
      In general, refunds are paid without interest. However, 
in the case of overpayments of tax on gasoline, diesel fuel, or 
kerosene that is used to produce a qualified alcohol mixture 
and for refunds due ultimate vendors of diesel fuel or kerosene 
used on a farm for farming purposes or by a State or local 
government, the Secretary is required to pay interest on 
certain refunds. The Secretary must pay interest on refunds of 
$200 or more ($100 or more in the case of kerosene) due to the 
taxpayer arising from sales over any period of a week or more, 
if the Secretary does not make payment of the refund within 20 
days.

                               HOUSE BILL

      The provision provides that for sales of gasoline to a 
State or local government or to a nonprofit educational 
organization for its exclusive use on which tax has been 
imposed, the provision conforms the payment of refunds to that 
procedure established under present law in the case of diesel 
fuel or kerosene. That is, the ultimate vendor claims the 
refund.
      For claims for refund of tax paid on diesel fuel or 
kerosene sold to State and local governments and for claims for 
refund of tax paid on gasoline sold to State and local 
governments or to a nonprofit educational organization and for 
which the ultimate purchaser utilized a credit card, the 
provision deems the person extending the credit to the ultimate 
purchaser to be the ultimate vendor. That is, the credit card 
company administers claims for refund and is responsible for 
supplying documentation required from ultimate vendors.
      Effective date.--The provision is effective October 1, 
2004.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and 
Senate amendment, with modifications. For sales of gasoline to 
a State or local government for the exclusive use of a State or 
local government or to a nonprofit educational organization for 
its exclusive use on which tax has been imposed, claims for 
credits or refund are made by the ultimate vendor.
      The conference agreement provides that the rules for 
vendor refunds apply to claims made under this provision, 
except that the rules regarding electronic claims shall not 
apply unless the ultimate vendor has certified to the Secretary 
for the most recent quarter of the taxable year that all 
ultimate purchasers of the vendor are State or local 
governments or to a nonprofit educational organizations.\771\
---------------------------------------------------------------------------
    \771\ Sec. 6416(b)(2)(C) or (D).
---------------------------------------------------------------------------
      The conference agreement does not include the House bill 
or Senate amendment provisions that deem the person extending 
credit via a credit card to the ultimate purchaser to be the 
ultimate vendor for purposes of refund claims.
      Effective date.--The provision is effective on January 1, 
2005.
20. Two party exchanges (sec. 663 of the bill and new sec. 4105 of the 
        Code)

                              PRESENT LAW

      Most fuel is taxed when it is removed from a registered 
terminal.\772\ The party liable for payment of this tax is the 
``position holder.'' The position holder is the person 
reflected on the records of the terminal operator as holding 
the inventory position in the fuel.\773\
---------------------------------------------------------------------------
    \772\ A ``terminal'' is a storage and distribution facility that is 
supplied by pipeline or vessel, and from which fuel may be removed at a 
rack. A ``rack'' is a mechanism capable of delivering taxable fuel into 
a means of transport other than a pipeline or vessel.
    \773\ Such person has a contractual agreement with the terminal 
operator to store and provide services with respect to the fuel. A 
``terminal operator'' is any person who owns, operates, or otherwise 
controls a terminal. A terminal operator can also be a position holder 
if that person owns fuel in its terminal.
---------------------------------------------------------------------------
      It is common industry practice for oil companies to serve 
customers of other oil companies under exchange agreements, 
e.g., where Company A's terminal is more conveniently located 
for wholesale or retail customers of Company B. In such cases, 
the exchange agreement party (Company B in the example) owns 
the fuel when the motor fuel is removed from the terminal and 
sold to B's customer.

                               HOUSE BILL

      The provision permits two registered parties to switch 
position holder status in fuel within a registered terminal 
(thereby relieving the person originally owning the fuel\774\ 
of tax liability as the position holder) if all of the 
following occur:
---------------------------------------------------------------------------
    \774\ In the provision, this person is referred to as the 
``delivering person.''
---------------------------------------------------------------------------
            (1) The transaction includes a transfer from the 
        original owner, i.e., the person who holds the original 
        inventory position for taxable fuel in the terminal as 
        reflected in the records of the terminal operator prior 
        to the transaction.
            (2) The exchange transaction occurs before or at 
        the same time as completion of removal across the rack 
        from the terminal by the receiving person or its 
        customer.
            (3) The terminal operator in its books and records 
        treats the receiving person as the person that removes 
        the product across a terminal rack for purposes of 
        reporting the transaction to the Internal Revenue 
        Service.
            (4) The transaction is the subject of a written 
        contract.
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and 
Senate amendment.
21. Simplification of tax on tires (sec. 664 of the House bill and sec. 
        4071 of the Code)

                              PRESENT LAW

      A graduated excise tax is imposed on the sale by a 
manufacturer (or importer) of tires designed for use on highway 
vehicles (sec. 4071). The tire tax rates are as follows:

------------------------------------------------------------------------
                Tire Weight                           Tax Rate
------------------------------------------------------------------------
Not more than 40 lbs......................  No tax.
More than 40 lbs., but not more than 70     15 cents/lb. in excess of 40
 lbs.                                        lbs.
More than 70 lbs., but not more than 90     $4.50 plus 30 cents/lb. in
 lbs.                                        excess of 70 lbs.
More than 90 lbs..........................  $10.50 plus 50 cents/lb. in
                                             excess of 90 lbs.
------------------------------------------------------------------------

      No tax is imposed on the recapping of a tire that 
previously has been subject to tax. Tires of extruded tiring 
with internal wire fastening also are exempt.
      The tax expires after September 30, 2005.

                               HOUSE BILL

      The House bill modifies the excise tax applicable to 
tires. The House bill replaces the present-law tax rates based 
on the weight of the tire with a tax rate based on the load 
capacity of the tire. In general, the tax is 9.4 cents for each 
10 pounds of tire load capacity in excess of 3,500 pounds. In 
the case of a biasply tire, the tax rate is 4.7 cents for each 
10 pounds of tire load capacity in excess of 3,500 pounds.
      The House bill modifies the definition of tires for use 
on highway vehicles to include any tire marked for highway use 
pursuant to certain regulations promulgated by the Secretary of 
Transportation. The provision also exempts from tax any tire 
sold for the exclusive use of the United States Department of 
Defense or the United States Coast Guard.
      Tire load capacity is the maximum load rating labeled on 
the tire pursuant to regulations promulgated by the Secretary 
of Transportation. A biasply tire is any tire manufactured 
primarily for use on piggyback trailers.
      Effective date.--The provision is effective for sales in 
calendar years beginning more than 30 days after the date of 
enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with the 
following modifications. The conference agreement modifies the 
rate of tax applicable to 9.45 cents for each 10 pounds of tire 
load capacity in excess of 3,500 pounds. In the case of a 
biasply tire, the conference agreement modifies the tax rate is 
4.725 cents for each 10 pounds of tire load capacity in excess 
of 3,500 pounds. The conference agreement also imposes tax at a 
rate of is 4.725 cents for each 10 pounds of tire load capacity 
in excess of 3,500 pounds an any super single tire. A super 
single tire is a single tire greater than 13 inches in cross 
section width designed to replace two tires in a dual fitment. 
The conference agreement provides that a biasply tire means a 
pneumatic tire on which the ply cords that extend to the beads 
are laid at alternate angles substantially less than 90 degrees 
to the centerline of the tread.
      Nothing in the amendments made by this section shall be 
construed to have any effect on subsection (d) of section 
48.4701-1 of Title 26, Code of Federal Regulations (relating to 
recapped and retreaded tires). The conferees expect that the 
Secretary will prescribe regulations implementing the amendment 
to section 4071 but that such regulations will not affect 
subsection (d). The conferees believe no tax should be imposed 
on the recapping of a tire that previously has been subject to 
tax.
      Effective date.--The provision is effective for sales in 
calendar years beginning more than 30 days after the date of 
enactment.
22. Tax on sale of diesel fuel whether suitable for use or not in a 
        diesel-powered vehicle or train (sec. 886 of the Senate 
        amendment)

                              PRESENT LAW

      Under section 4081(a)(1), an excise tax is imposed upon 
(1) the removal of any taxable fuel from a refinery or 
terminal, (2) the entry of any taxable fuel into the United 
States, or (3) the sale of any taxable fuel to any person who 
is not a taxable fuel registrant under section 4101, unless 
there was a prior taxable removal or entry.
      Under section 4083(a), taxable fuel includes diesel fuel. 
Diesel fuel includes any liquid, other than gasoline, that 
without further processing or blending, is suitable for use as 
a fuel in a diesel-powered highway vehicle or train.\775\ A 
liquid is suitable for this use if the liquid has practical and 
commercial fitness for use in the propulsion engine of a 
diesel-powered highway vehicle or diesel-powered train. A 
liquid may possess this practical and commercial fitness even 
though the specified use is not the liquid's predominant use. 
However, a liquid does not possess this practical and 
commercial fitness solely by reason of its possible or rare use 
as a fuel in the propulsion engine of a diesel-powered highway 
vehicle or diesel-powered train.
---------------------------------------------------------------------------
    \775\ Sec. 4083(a)(3).
---------------------------------------------------------------------------
      A tax is imposed on the removal or sale of blended 
taxable fuel by the blender thereof.\776\ Tax is computed on 
the difference between the total number of gallons of blended 
taxable fuel removed or sold and the number of gallons of 
previously taxed taxable fuel used to produce the blended 
taxable fuel.\777\ Blended taxable fuel means any taxable fuel 
that is produced outside the bulk transfer/terminal system by 
mixing (1) taxable fuel with respect to which tax has been 
imposed under section 4041(a)(1) or 4081(a) (other than taxable 
fuel for which a credit or payment has been allowed); and (2) 
any other liquid on which tax has not been imposed under 
section 4081.\778\
---------------------------------------------------------------------------
    \776\ Sec. 4081(b).
    \777\ Treas. Reg. sec. 48.4081-3(g)(1).
    \778\ Treas. Reg. sec. 48.4081-1(c)(1)(i).
---------------------------------------------------------------------------
      The blender (the person making the blended taxable fuel) 
is liable for the tax on the increased volume. In addition, on 
and after April 2, 2003, a person that sells any liquid that is 
used to produce blended taxable fuel is jointly and severally 
liable for the tax on the removal or sale of that blended 
taxable fuel if the liquid is a liquid on which tax has not 
been imposed under section 4081; and is sold by that person as 
gasoline, diesel fuel, or kerosene that has been taxed under 
section 4081.\779\
---------------------------------------------------------------------------
    \779\ Treas. Reg. sec. 48.4081-3(g)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the definition of diesel fuel to 
include any liquid which is sold as or offered for sale as a 
fuel in a diesel-powered highway vehicle or diesel-powered 
train.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
23. Nonapplication of export exemption to delivery of fuel to motor 
        vehicles removed from United States (sec. 892 of the Senate 
        amendment)

                              PRESENT LAW

      A manufacturer's excise tax is imposed upon
            (1) The removal of any taxable fuel from a refinery 
        or terminal;
            (2) The entry of any taxable fuel into the United 
        States for consumption, use or warehousing; or
            (3) The sale of any taxable fuel to any person who 
        is not registered, unless there was a prior taxable 
        removal or entry.\780\
---------------------------------------------------------------------------
    \780\ Sec. 4081(a)(1).
---------------------------------------------------------------------------
The term ``taxable fuel'' means gasoline, diesel fuel and 
kerosene.
      Special provisions under the Code provide for a refund of 
tax to any person who sells gasoline to another for 
exportation.\781\ Section 6421(c) provides ``If gasoline is 
sold to any person for any purpose described in paragraph (2), 
(3), (4), or (5) of section 4221(a), the Secretary shall pay 
(without interest) to such person an amount equal to the 
product of the number of gallons so sold multiplied by the rate 
at which tax was imposed on such gasoline by section 4081.'' 
Section 4221 provides, in pertinent part, ``Under regulations 
prescribed by the Secretary, no tax shall be imposed under this 
chapter . . . on the sale by the manufacturer . . . of an 
article--. . . for export, or for resale by the purchaser to a 
second purchaser for export . . . but only if such exportation 
or use is to occur before any other use . . .''
---------------------------------------------------------------------------
    \781\ Secs. 6421(c) and 4221(a)(2).
---------------------------------------------------------------------------
      It is the IRS administrative position that the exemption 
from manufacturers excise tax by reason of exportation does not 
apply to the sale of motor fuel pumped into a fuel tank of a 
vehicle that is to be driven, or shipped, directly out of the 
United States.\782\
---------------------------------------------------------------------------
    \782\ Rev. Rul. 69-150.
---------------------------------------------------------------------------
      A duty-free sales facility that meets certain conditions 
may sell and deliver for export from the customs territory of 
the United States duty-free merchandise. Duty-free merchandise 
is merchandise sold by a duty-free sales facility on which 
neither Federal duty nor Federal tax has been assessed pending 
exportation from the customs territory of the United States. 
The statutes covering duty-free facilities do not contain any 
limitation on what goods may qualify for duty-free treatment.
      The United States Court of Federal Claims (``Claims 
Court'') and a District Court in Michigan have taken different 
positions on whether fuel sold from a duty-free facility and 
placed into the tank of an automobile that is then driven out 
of the country is exported fuel.\783\ Both cases involved the 
same duty-free facility, which is near the Canadian border and 
is configured in such a way that anyone leaving the facility 
must depart the United States and enter into Canada. The 
District Court agreed with the IRS position that such fuel is 
not exported, while the Claims Court reached the opposite 
conclusion. The Claims Court concluded that the act of 
exportation began with the consumer's purchase and that the 
fuel necessarily enters into the stream of exportation at the 
moment it is placed into the fuel supply tank and the customer 
drives into Canada.
---------------------------------------------------------------------------
    \783\ See, Ammex Inc. v. United States, 52 Fed. Cl. 303 (2002) (on 
cross-motions for summary judgment, the court found that plaintiff 
established standing to proceed to trial pursuant to sec. 6421(c) 
respecting its gasoline purchases only); and Ammex Inc. v. United 
States, 2002 U.S. Dist. LEXIS 25771 (E.D. Mich. July 31, 2002) 
(granting defendant's motion for summary judgment), reconsideration 
denied, Ammex, Inc. v. United States, 2002 U.S. Dist. LEXIS 22893 (E.D. 
Mich. Oct. 22, 2002). Although the Claims Court ruled that Ammex had 
standing to challenge the excise tax on gasoline, it subsequently held 
that Ammex was not entitled to a payment pursuant to sec. 6421(c) 
because it failed to prove at trial that it did not pass the tax on to 
its customers. Ammex Inc. v. United States, 2003 U.S. Claims LEXIS 63 
(Fed. Cl. Mar. 26, 2003).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision reaffirms the long-standing IRS position 
taken in Rev. Rul. 69-150 and restates present law by amending 
the Code definition of export to exclude the delivery of a 
taxable fuel into a fuel tank of a motor vehicle that is 
shipped or driven out of the United States. It also imposes a 
tax on the sale of taxable fuel at a duty-free sales enterprise 
unless there was a prior taxable removal, or entry of such 
fuel.
      Effective date.--The provision applies to sales or 
deliveries made after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
24. Taxation of transmix and diesel fuel blend stocks and Treasury 
        study on fuel tax compliance (secs. 893, 894 and 895 of the 
        Senate amendment and sec. 4083 of the Code)

                              PRESENT LAW

Definition of taxable fuels
      A ``taxable fuel'' is gasoline, diesel fuel (including 
any liquid, other than gasoline, which is suitable for use as a 
fuel in a diesel-powered highway vehicle or train), and 
kerosene.\784\
---------------------------------------------------------------------------
    \784\ Sec. 4083(a).
---------------------------------------------------------------------------
      Under the regulations, ``gasoline'' includes all products 
commonly or commercially known or sold as gasoline and suited 
for use as a motor fuel, and that have an octane rating of 75 
or more. Gasoline also includes, to the extent provided in 
regulations, gasoline blendstocks and products commonly used as 
additives in gasoline. The term ``gasoline blendstocks'' does 
not include any product that cannot be blended into gasoline 
without further processing or fractionation (``off-spec 
gasoline'').\785\
---------------------------------------------------------------------------
    \785\ Treas. Reg. sec. 48.4081-1(c)(3)(ii). The term ``gasoline 
blendstocks'' means alkylate; butane; catalytically cracked gasoline; 
coker gasoline; ethyl tertiary butyl ether (ETBE); hexane; 
hydrocrackate; isomerate; methyl tertiary butyl ether (MTBE); mixed 
xylene (not including any separated isomer of xylene); natural 
gasoline; pentane; pentane mixture; polymer gasoline; raffinate; 
reformate; straight-run gasoline; straight-run naphtha; tertiary amyl 
methyl ether (TAME); tertiary butyl alcohol (gasoline grade) (TBA); 
thermally cracked gasoline; toluene; and transmix containing gasoline. 
Treas. Reg. sec. 48.4081-1(c)(3)(i).
---------------------------------------------------------------------------
      Diesel fuel is any liquid (other than gasoline) that is 
suitable for use as a fuel in a diesel-powered highway vehicle 
or diesel-powered train.\786\ By regulation, diesel fuel does 
not include kerosene, gasoline, No. 5 and No. 6 fuel oils (as 
described in ASTM Specification D 396), or F-76 (Fuel Naval 
Distillates MIL-F-16884) any liquid that contains less than 
four percent normal parafins, or any liquid that has a 
distillation range of 125 degrees Fahrenheit or less, sulfur 
content of 10 ppm or less and minimum color of +27 Saybolt 
(these are known as ``excluded liquids'').\787\
---------------------------------------------------------------------------
    \786\ Sec. 4083(a)(3).
    \787\ Treas. Reg. sec. 48.4081-1(c)(2)(ii).
---------------------------------------------------------------------------
      By regulation, kerosene is defined as the kerosene 
described in ASTM Specification D 3699 (No. 1-K and No. 2-K), 
ASTM Specification D 1655 (kerosene-type jet fuel), and 
military specifications MIL-DTL-5624T (Grade JP-5) and MIL-DTL-
83133E (Grade JP-8). Kerosene does not include any liquid that 
is an excluded liquid.\788\
---------------------------------------------------------------------------
    \788\ Treas. Reg. sec. 48.4081-1(b).
---------------------------------------------------------------------------
Taxable events and exemptions
      An excise tax is imposed upon (1) the removal of any 
taxable fuel from a refinery or terminal, (2) the entry of any 
taxable fuel into the United States, or (3) the sale of any 
taxable fuel to any person who is not registered with the IRS 
to receive untaxed fuel, unless there was a prior taxable 
removal or entry.\789\ The tax does not apply to any removal or 
entry of taxable fuel transferred in bulk to a terminal or 
refinery if the person removing or entering the taxable fuel 
and the operator of such terminal or refinery are registered 
with the Secretary.\790\
---------------------------------------------------------------------------
    \789\ Sec. 4081(a)(1).
    \790\ Sec. 4081(a)(1)(B).
---------------------------------------------------------------------------
            Gasoline exemptions
      If certain conditions are met, the removal, entry, or 
sale of gasoline blendstocks is not taxable. Generally, the 
exemption from tax applies if a gasoline blendstock is not used 
to produce finished gasoline or is received at an approved 
terminal or refinery. No tax is imposed on nonbulk removals 
from a terminal or refinery, or nonbulk entries into the United 
States or on any gasoline blendstocks if the person liable for 
the tax is a gasoline registrant, has an unexpired notification 
certificate, knows of no false information in the certificate, 
and has verified the accuracy of the notification certificate. 
The sale of a gasoline blendstock that was not subject to tax 
on nonbulk removal or entry is taxable unless the seller has an 
unexpired certificate from the buyer and has no reason to 
believe that any information in the certificate is false. No 
tax is imposed on, or purchaser certification required for, 
off-spec gasoline.
            Diesel fuel and kerosene exemptions
      Diesel fuel and kerosene that is to be used for a 
nontaxable purpose will not be taxed upon removal from the 
terminal if it is dyed to indicate its nontaxable purpose. 
Undyed aviation-grade kerosene also is exempt from tax at the 
rack if it is destined for use as a fuel in an aircraft. The 
tax does not apply to diesel fuel asserted to be ``not suitable 
for use'' or kerosene asserted to qualify as an excluded 
liquid.
      Feedstock kerosene that a registered industrial user 
receives by pipeline or vessel also is exempt from the dyeing 
requirement. A kerosene feedstock user is defined as a person 
that receives kerosene by bulk transfer for its own use in the 
manufacture or production of any substance (other than 
gasoline, diesel fuel or special fuels subject to tax). Thus, 
for example, kerosene is used for a feedstock purpose when it 
is used as an ingredient in the production of paint and is not 
used for a feedstock purpose when it is used to power machinery 
at a factory where paint is produced. The person receiving the 
kerosene must be registered with the IRS and provide a 
certificate noting that the kerosene will be used for a 
feedstock purpose in order for the exemption to apply.
            Information and tax return reporting
      The IRS collects data under the ExSTARS reporting system 
that tracks all removals across the terminal rack regardless of 
whether or not the product is technically excluded from the 
definition of gasoline, diesel or blendstocks. ExSTARS 
reporting identifies the position holder at the time of 
removal. Below the rack, no information is gathered for exempt 
or excluded products or uses.
      Taxpayers file quarterly excise tax returns showing only 
net taxable gallons.\791\ Taxpayers do not account for gallons 
they claim to be exempt on such returns. Although the return is 
a quarterly return, the excise taxes are paid in semimonthly 
deposits.\792\ If deposits are not made as required, a taxpayer 
may be required to file returns on a monthly or semimonthly 
basis instead of quarterly.\793\
---------------------------------------------------------------------------
    \791\ Treas. Reg. sec. 406011(a)-1(a); Form 720, Quarterly Federal 
Excise Tax Return.
    \792\ Treas. Reg. 40.6302(c)-1(a).
    \793\ Treas. Reg. 40.6011(a)-1(b).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment creates a new category of taxable 
liquids, ``reportable liquids''. A reportable liquid is any 
petroleum-based liquid other than a taxable fuel. For purposes 
of the imposition of tax, the provision treats ``reportable 
liquids'' in a manner similar to taxable fuels. Tax is imposed 
upon the removal, entry, or sale of such liquids, unless the 
removal, entry, or sale is (1) to a registered person who 
certifies that such liquid will not be used as a fuel or in the 
production of a fuel, or (2) the sale is to the ultimate 
purchaser of such liquid. Under the provision, the current 
exclusions for distillates not suitable for use in a highway 
vehicle, excluded liquids, and gasoline blendstocks requiring 
further processing (off-spec gasoline) are eliminated. The 
provision also provides that dyed diesel (a taxable fuel) also 
is taxable unless removed by a taxable fuel registrant (a 
person registered with the Secretary under section 4101).
      The provision authorizes the Secretary to pay (without 
interest) an amount equal to the tax imposed, if a person 
establishes that the ultimate use of a gasoline blendstock, or 
additive, was not to produce gasoline. Similarly, if tax is 
imposed on a reportable liquid and the person establishes that 
the liquid was not used to produce a taxable, fuel, the 
Secretary is authorized to pay (without interest) an amount 
equal to the tax imposed on such person with respect to the 
reportable liquid.
      Taxpayers are to file a monthly fuel excise tax return. 
Not earlier than January 1, 2005, such filings shall be in 
electronic form as prescribed by the Secretary. In addition, 
under the provision, the Secretary is to require that all 
persons removing refined product, whether a taxable product or 
an untaxed product, over the terminal rack to report such 
products on an excise tax return. The return is to specifically 
identify the class of product and its quantity.\794\
---------------------------------------------------------------------------
    \794\ Persons not liable for tax, will make their reports in the 
same manner as taxpayers who file fuel excise tax returns as described 
above.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for fuel sold 
or used after September 30, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement adds two new categories to the 
definition of diesel fuel. Under the conference agreement, 
diesel fuel means: (1) any liquid (other than gasoline) which 
is suitable for use as a fuel in a diesel-powered highway 
vehicle, or a diesel-powered train; (2) transmix; and (3) 
diesel fuel blend stocks as identified by the Secretary. 
Transmix means a by-product of refined products pipeline 
operations created by the mixing of different specification 
products during pipeline transportation. Transmix generally 
results when one fuel, such as diesel fuel, is placed in a 
pipeline followed by another taxable fuel, such as kerosene. 
The mixture created between the two fuels when it is neither 
all diesel fuel nor all kerosene, is an example of a transmix. 
Under the conference agreement, all transmix is taxable as 
diesel fuel, regardless of whether it contains gasoline.
      Under the conference agreement, it is intended that the 
re-refining of tax-paid transmix into gasoline, diesel fuel or 
kerosene qualify as a nontaxable off-highway business use of 
such transmix, for purposes of the refund and payment 
provisions relating to nontaxable uses of diesel fuel.
      Not later than January 31, 2005, the Secretary shall 
submit to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives a 
report regarding fuel tax compliance, which shall include 
information, and analysis as specified below, and 
recommendations to address the issues identified.
      The Secretary is to identify chemical products that 
should be added to the list of blendstocks. The Secretary is to 
identify those chemical products, as identified by lab analysis 
of fuel samples taken by the IRS, that have been blended with 
taxable fuel but are not currently treated as a blendstock. The 
report should indicate, to the extent possible, any statistics 
as to the frequency in which such chemical product has been 
discovered, and whether the samples contained above-normal 
concentrations of such chemical product. The report also shall 
include a discussion of IRS findings regarding the addition of 
waste products to taxable fuel and any recommendations to 
address the taxation of such products. The report shall include 
a discussion of IRS findings regarding sales of taxable fuel to 
entities claiming exempt status as a State or local government. 
Such discussion shall include the frequency of erroneous 
certifications as to exempt status determined on audit. The 
Secretary shall consult with representatives of State and local 
governments in providing recommendations to address this issue, 
including the feasibility of State maintained lists of their 
exempt governmental entities.
      Effective date.--The provision regarding the taxation of 
transmix and diesel fuel blendstocks is effective for fuel 
removed, sold, or used after December 31, 2004. The requirement 
for a Treasury study is effective on the date of enactment.

              D. Nonqualified Deferred Compensation Plans

1. Treatment of nonqualified deferred compensation plans (sec. 671 of 
        the House bill, section 671 of the Senate amendment, and new 
        sec. 409A and secs. 6040 and 6051 of the Code)

                              PRESENT LAW

In general
      The determination of when amounts deferred under a 
nonqualified deferred compensation arrangement are includible 
in the gross income of the individual earning the compensation 
depends on the facts and circumstances of the arrangement. A 
variety of tax principles and Code provisions may be relevant 
in making this determination, including the doctrine of 
constructive receipt, the economic benefit doctrine,\795\ the 
provisions of section 83 relating generally to transfers of 
property in connection with the performance of services, and 
provisions relating specifically to nonexempt employee trusts 
(sec. 402(b)) and nonqualified annuities (sec. 403(c)).
---------------------------------------------------------------------------
    \795\ See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd 
per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-31, 1960-1 C.B. 
174.
---------------------------------------------------------------------------
      In general, the time for income inclusion of nonqualified 
deferred compensation depends on whether the arrangement is 
unfunded or funded. If the arrangement is unfunded, then the 
compensation is generally includible in income when it is 
actually or constructively received. If the arrangement is 
funded, then income is includible for the year in which the 
individual's rights are transferable or not subject to a 
substantial risk of forfeiture.
      Nonqualified deferred compensation is generally subject 
to social security and Medicare taxes when the compensation is 
earned (i.e., when services are performed), unless the 
nonqualified deferred compensation is subject to a substantial 
risk of forfeiture. If nonqualified deferred compensation is 
subject to a substantial risk of forfeiture, it is subject to 
social security and Medicare tax when the risk of forfeiture is 
removed (i.e., when the right to the nonqualified deferred 
compensation vests). Amounts deferred under a nonaccount 
balance plan that are not reasonably ascertainable are not 
required to be taken into account as wages subject to social 
security and Medicare taxes until the first date that such 
amounts are reasonably ascertainable. Social security and 
Medicare tax treatment is not affected by whether the 
arrangement is funded or unfunded, which is relevant in 
determining when amounts are includible in income (and subject 
to income tax withholding).
      In general, an arrangement is considered funded if there 
has been a transfer of property under section 83. Under that 
section, a transfer of property occurs when a person acquires a 
beneficial ownership interest in such property. The term 
``property'' is defined very broadly for purposes of section 
83.\796\ Property includes real and personal property other 
than money or an unfunded and unsecured promise to pay money in 
the future. Property also includes a beneficial interest in 
assets (including money) that are transferred or set aside from 
claims of the creditors of the transferor, for example, in a 
trust or escrow account. Accordingly, if, in connection with 
the performance of services, vested contributions are made to a 
trust on an individual's behalf and the trust assets may be 
used solely to provide future payments to the individual, the 
payment of the contributions to the trust constitutes a 
transfer of property to the individual that is taxable under 
section 83. On the other hand, deferred amounts are generally 
not includible in income if nonqualified deferred compensation 
is payable from general corporate funds that are subject to the 
claims of general creditors, as such amounts are treated as 
unfunded and unsecured promises to pay money or property in the 
future.
---------------------------------------------------------------------------
    \796\ Treas. Reg. sec. 1.83-3(e). This definition in part reflects 
previous IRS rulings on nonqualified deferred compensation.
---------------------------------------------------------------------------
      As discussed above, if the arrangement is unfunded, then 
the compensation is generally includible in income when it is 
actually or constructively received under section 451.\797\ 
Income is constructively received when it is credited to an 
individual's account, set apart, or otherwise made available so 
that it may be drawn on at any time. Income is not 
constructively received if the taxpayer's control of its 
receipt is subject to substantial limitations or restrictions. 
A requirement to relinquish a valuable right in order to make 
withdrawals is generally treated as a substantial limitation or 
restriction.
---------------------------------------------------------------------------
    \797\ Treas. Reg. secs. 1.451-1 and 1.451-2.
---------------------------------------------------------------------------
Rabbi trusts
      Arrangements have developed in an effort to provide 
employees with security for nonqualified deferred compensation, 
while still allowing deferral of income inclusion. A ``rabbi 
trust'' is a trust or other fund established by the employer to 
hold assets from which nonqualified deferred compensation 
payments will be made. The trust or fund is generally 
irrevocable and does not permit the employer to use the assets 
for purposes other than to provide nonqualified deferred 
compensation, except that the terms of the trust or fund 
provide that the assets are subject to the claims of the 
employer's creditors in the case of insolvency or bankruptcy.
      As discussed above, for purposes of section 83, property 
includes a beneficial interest in assets set aside from the 
claims of creditors, such as in a trust or fund, but does not 
include an unfunded and unsecured promise to pay money in the 
future. In the case of a rabbi trust, terms providing that the 
assets are subject to the claims of creditors of the employer 
in the case of insolvency or bankruptcy have been the basis for 
the conclusion that the creation of a rabbi trust does not 
cause the related nonqualified deferred compensation 
arrangement to be funded for income tax purposes.\798\ As a 
result, no amount is included in income by reason of the rabbi 
trust; generally income inclusion occurs as payments are made 
from the trust.
---------------------------------------------------------------------------
    \798\ This conclusion was first provided in a 1980 private ruling 
issued by the IRS with respect to an arrangement covering a rabbi; 
hence the popular name ``rabbi trust.'' Priv. Ltr. Rul. 8113107 (Dec. 
31, 1980).
---------------------------------------------------------------------------
      The IRS has issued guidance setting forth model rabbi 
trust provisions.\799\ Revenue Procedure 92-64 provides a safe 
harbor for taxpayers who adopt and maintain grantor trusts in 
connection with unfunded deferred compensation arrangements. 
The model trust language requires that the trust provide that 
all assets of the trust are subject to the claims of the 
general creditors of the company in the event of the company's 
insolvency or bankruptcy.
---------------------------------------------------------------------------
    \799\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by Notice 
2000-56, 2000-2 C.B. 393.
---------------------------------------------------------------------------
      Since the concept of rabbi trusts was developed, 
arrangements have developed which attempt to protect the assets 
from creditors despite the terms of the trust. Arrangements 
also have developed which attempt to allow deferred amounts to 
be available to individuals, while still purporting to meet the 
safe harbor requirements set forth by the IRS.

                               HOUSE BILL

      Under the House bill, all amounts deferred under a 
nonqualified deferred compensation plan \800\ for all taxable 
years are currently includible in gross income to the extent 
not subject to a substantial risk of forfeiture \801\ and not 
previously included in gross income, unless certain 
requirements are satisfied. If the requirements of the 
provision are not satisfied, in addition to current income 
inclusion, interest at the underpayment rate plus one 
percentage point is imposed on the underpayments that would 
have occurred had the compensation been includible in income 
when first deferred, or if later, when not subject to a 
substantial risk of forfeiture. Actual or notional earnings on 
amounts deferred are also subject to the provision.
---------------------------------------------------------------------------
    \800\ A plan includes an agreement or arrangement, including an 
agreement or arrangement that includes one person.
    \801\ As under section 83, the rights of a person to compensation 
are subject to a substantial risk of forfeiture if the person's rights 
to such compensation are conditioned upon the performance of 
substantial services by any individual.
---------------------------------------------------------------------------
      Under the provision, distributions from a nonqualified 
deferred compensation plan may be allowed only upon separation 
from service (as determined by the Secretary), death, a 
specified time (or pursuant to a fixed schedule), change in 
control in a corporation (to the extent provided by the 
Secretary), occurrence of an unforeseeable emergency, or if the 
participant becomes disabled. A nonqualified deferred 
compensation plan may not allow distributions other than upon 
the permissible distribution events and may not permit 
acceleration of a distribution, except as provided in 
regulations by the Secretary.
      In the case of a specified employee, distributions upon 
separation from service may not be made earlier than six months 
after the date of the separation from service. Specified 
employees are key employees \802\ of publicly-traded 
corporations.
---------------------------------------------------------------------------
    \802\ Key employees are defined in section 416(i) and generally 
include officers having annual compensation greater than $130,000 
(adjusted for inflation and limited to 50 employees), five percent 
owners, and one percent owners having annual compensation from the 
employer greater than $150,000.
---------------------------------------------------------------------------
      Amounts payable at a specified time or pursuant to a 
fixed schedule must be specified under the plan at the time of 
deferral. Amounts payable upon the occurrence of an event are 
not treated as amounts payable at a specified time. For 
example, amounts payable when an individual attains age 65 are 
payable at a specified time, while amounts payable when an 
individual's child begins college are payable upon the 
occurrence of an event.
      Distributions upon a change in the ownership or effective 
control of a corporation, or in the ownership of a substantial 
portion of the assets of a corporation, may only be made to the 
extent provided by the Secretary. It is intended that the 
Secretary use a similar, but more restrictive, definition of 
change in control as is used for purposes of the golden 
parachute provisions of section 280G consistent with the 
purposes of the provision. The provision requires the Secretary 
to issue guidance defining change of control within 90 days 
after the date of enactment.
      An unforeseeable emergency is defined as a severe 
financial hardship to the participant resulting from a sudden 
and unexpected illness or accident of the participant, the 
participant's spouse, or a dependent (as defined in 152(a)) of 
the participant; loss of the participant's property due to 
casualty; or other similar extraordinary and unforeseeable 
circumstances arising as a result of events beyond the control 
of the participant. The amount of the distribution must be 
limited to the amount needed to satisfy the emergency plus 
taxes reasonably anticipated as a result of the distribution. 
Distributions may not be allowed to the extent that the 
hardship may be relieved through reimbursement or compensation 
by insurance or otherwise, or by liquidation of the 
participant's assets (to the extent such liquidation would not 
itself cause a severe financial hardship).
      A participant is considered disabled if he or she (i) is 
unable to engage in any substantial gainful activity by reason 
of any medically determinable physical or mental impairment 
which can be expected to result in death or can be expected to 
last for a continuous period of not less than 12 months; or 
(ii) is, by reason on any medically determinable physical or 
mental impairment which can be expected to result in death or 
can be expected to last for a continuous period of not less 
than 12 months, receiving income replacement benefits for a 
period of not less than three months under an accident and 
health plan covering employees of the participant's employer.
      As previously discussed, except as provided in 
regulations by the Secretary, no accelerations of distributions 
may be allowed. For example, changes in the form of a 
distribution from an annuity to a lump sum are not permitted. 
The provision provides the Secretary authority to provide, 
through regulations, limited exceptions to the general rule 
that no accelerations can be permitted. It is intended that 
exceptions be provided only in limited cases where the 
accelerated distribution is required for reasons beyond the 
control of the participant. For example, it is anticipated that 
an exception could be provided in order to comply with Federal 
conflict of interest requirements or court-approved 
settlements.
      The provision requires that the plan must provide that 
compensation for services performed during a taxable year may 
be deferred at the participant's election only if the election 
to defer is made no later than the close of the preceding 
taxable year, or at such other time as provided in Treasury 
regulations. For example, it is expected that Treasury 
regulations provide that, in appropriate circumstances, 
elections to defer incentive bonuses earned over a period of 
several years may be made after the beginning of the service 
period, as long as such elections may in no event be made later 
than 12 months before the earliest date on which such incentive 
bonus is initially payable. The Secretary may consider other 
factors in determining the appropriate election period, such as 
when the amount of the bonus payment is determinable. It is 
expected that Treasury regulations will not permit any election 
to defer any bonus or other compensation if the timing of such 
election would be inconsistent with the purposes of the 
provision. Under the provision, in the first year that an 
employee becomes eligible for participation in a nonqualified 
deferred compensation plan, the election may be made within 30 
days after the date that the employee is initially eligible.
      The time and form of distributions must be specified at 
the time of initial deferral. A plan could specify the time and 
form of payments that are to be made as a result of a 
distribution event (e.g., a plan could specify that payments 
upon separation of service will be paid in lump sum within 30 
days of separation from service) or could allow participants to 
elect the time and form of payment at the time of the initial 
deferral election. If a plan allows participants to elect the 
time and form of payment, such election is subject to the rules 
regarding initial deferral elections under the provision.
      Under the provision, a plan may allow changes in the time 
and form of distributions subject to certain requirements. A 
nonqualified deferred compensation plan may allow a subsequent 
election to delay the timing or form of distributions only if: 
(1) the plan requires that such election cannot be effective 
for at least 12 months after the date on which the election is 
made; (2) except in the case of elections relating to 
distributions on account of death, disability or unforeseeable 
emergency, the plan requires that the additional deferral with 
respect to which such election is made is for a period of not 
less than five years from the date such payment would otherwise 
have been made; and (3) the plan requires that an election 
related to a distribution to be made upon a specified time may 
not be made less than 12 months prior to the date of the first 
scheduled payment. It is expected that in limited cases, the 
Secretary will issue guidance, consistent with the purposes of 
the provision, regarding to what extent elections to change a 
stream of payments are permissible.
      If impermissible distributions or elections are made, or 
if the nonqualified deferred compensation plan allows 
impermissible distributions or elections, all amounts deferred 
under the plan (including amounts deferred in prior years) are 
currently includible in income to the extent not subject to a 
substantial risk of forfeiture and not previously included in 
income. In addition, interest at the underpayment rate plus one 
percentage point is imposed on the underpayments that would 
have occurred had the compensation been includible in income 
when first deferred, or if later, when not subject to a 
substantial risk of forfeiture.
      Under the provision, in the case of assets set aside 
(directly or indirectly) in a trust (or other arrangement 
determined by the Secretary) for purposes of paying 
nonqualified deferred compensation, such assets are treated as 
property transferred in connection with the performance of 
services under section 83 (whether or not such assets are 
available to satisfy the claims of general creditors) at the 
time set aside if such assets are located outside of the United 
States or at the time transferred if such assets are 
subsequently transferred outside of the United States. Any 
subsequent increases in the value of, or any earnings with 
respect to, such assets are treated as additional transfers of 
property. Interest at the underpayment rate plus one percentage 
point is imposed on the underpayments that would have occurred 
had the amounts been includible in income for the taxable year 
in which first deferred or, if later, the first taxable year 
not subject to a substantial risk of forfeiture. It is expected 
that the Secretary will provide rules for identifying the 
deferrals to which assets set aside are attributable, for 
situations in which assets equal to less than the full amount 
of deferrals are set aside. The Secretary has authority to 
exempt arrangements from the provision if the arrangements do 
not result in an improper deferral of U.S. tax and will not 
result in assets being effectively beyond the reach of 
creditors.
      Under the provision, a transfer of property in connection 
with the performance of services under section 83 also occurs 
with respect to compensation deferred under a nonqualified 
deferred compensation plan if the plan provides that upon a 
change in the employer's financial health, assets will be 
restricted to the payment of nonqualified deferred 
compensation. The transfer of property occurs as of the earlier 
of when the assets are so restricted or when the plan provides 
that assets will be restricted. It is intended that the 
transfer of property occurs to the extent that assets are 
restricted or will be restricted with respect to such 
compensation. For example, in the case of a plan that provides 
that upon a change in the employer's financial health, a trust 
will become funded to the extent of all deferrals, all amounts 
deferred under the plan are treated as property transferred 
under section 83. If a plan provides that deferrals of certain 
individuals will be funded upon a change in financial health, 
the transfer of property would occur with respect to 
compensation deferred by such individuals. Any subsequent 
increases in the value of, or any earnings with respect to, 
such assets are treated as additional transfers of property. 
Interest at the underpayment rate plus one percentage point is 
imposed on the underpayments that would have occurred had the 
amounts been includible in income for the taxable year in which 
first deferred or, if later, the first taxable year not subject 
to a substantial risk of forfeiture.
      A nonqualified deferred compensation plan is any plan 
that provides for the deferral of compensation other than a 
qualified employer plan or any bona fide vacation leave, sick 
leave, compensatory time, disability pay, or death benefit 
plan. A qualified employer plan means a qualified retirement 
plan, tax-deferred annuity, simplified employee pension, and 
SIMPLE.\803\ A governmental eligible deferred compensation plan 
(sec. 457) is also a qualified employer plan under the 
provision.\804\ Plans subject to section 457, other than 
governmental eligible deferred compensation plans, are subject 
to both the requirements of section 457 and the provision. For 
example, in addition to the requirements of the provision, an 
eligible deferred compensation plan of a tax-exempt employer 
would still be required to meet the applicable dollar limits 
under section 457.
---------------------------------------------------------------------------
    \803\ A qualified employer plan also includes a section 501(c)(18) 
trust.
    \804\ A governmental deferred compensation plan that is not an 
eligible deferred compensation plan is not a qualified employer plan.
---------------------------------------------------------------------------
      Interest imposed under the provision is treated as 
interest on an underpayment of tax. Income (whether actual or 
notional) attributable to nonqualified deferred compensation is 
treated as additional deferred compensation and is subject to 
the provision. The provision is not intended to prevent the 
inclusion of amounts in gross income under any provision or 
rule of law earlier than the time provided in the provision. 
Any amount included in gross income under the provision is not 
required to be included in gross income under any provision of 
law later than the time provided in the provision. The 
provision does not affect the rules regarding the timing of an 
employer's deduction for nonqualified deferred compensation.
      The provision requires annual reporting to the Internal 
Revenue Service of amounts deferred. Such amounts are required 
to be reported on an individual's Form W-2 for the year 
deferred even if the amount is not currently includible in 
income for that taxable year. Under the provision, the 
Secretary is authorized, through regulations, to establish a 
minimum amount of deferrals below which the reporting 
requirement does not apply. The Secretary may also provide that 
the reporting requirement does not apply with respect to 
amounts of deferrals that are not reasonably ascertainable. It 
is intended that the exception for amounts not reasonably 
ascertainable only apply to nonaccount balance plans and that 
amounts be required to be reported when they first become 
reasonably ascertainable.\805\
---------------------------------------------------------------------------
    \805\ It is intended that the exception be similar to that under 
Treas. Reg. sec. 31.3121(v)(2)-1(e)(4).
---------------------------------------------------------------------------
      The provision provides the Secretary authority to 
prescribe regulations as are necessary to carry out the 
purposes of provision, including regulations: (1) providing for 
the determination of amounts of deferral in the case of defined 
benefit plans; (2) relating to changes in the ownership and 
control of a corporation or assets of a corporation; (3) 
exempting from the provisions providing for transfers of 
property arrangements that will not result in an improper 
deferral of U.S. tax and will not result in assets being 
effectively beyond the reach of creditors; (4) defining 
financial health; and (5) disregarding a substantial risk of 
forfeiture.
      It is intended that substantial risk of forfeitures may 
not be used to manipulate the timing of income inclusion. It is 
intended that substantial risks of forfeiture should be 
disregarded in cases in which they are illusory or are used 
inconsistent with the purposes of the provision. For example, 
if an executive is effectively able to control the acceleration 
of the lapse of a substantial risk of forfeiture, such risk of 
forfeiture should be disregarded and income inclusion should 
not be postponed on account of such restriction.
      Effective date.--The House bill is effective for amounts 
deferred after June 3, 2004. The provision does not apply to 
amounts deferred after June 3, 2004, and before January 1, 
2005, pursuant to an irrevocable election or binding 
arrangement made before June 4, 2004. Earnings on amounts 
deferred before the effective date are subject to the provision 
to the extent that such amounts deferred are subject to the 
provision.
      It is intended that amounts further deferred under a 
subsequent election with respect to amounts originally deferred 
before June 4, 2004, are subject to the requirements of the 
provision.
      No later than 90 days after the date of enactment, the 
Secretary shall issue guidance providing a limited period of 
time during which an individual participating in a nonqualified 
deferred compensation plan adopted before June 4, 2004, may, 
without violating the requirements of the provision, terminate 
participation or cancel an outstanding deferral election with 
regard to amounts earned after June 3, 2004, if such amounts 
are includible in income as earned.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill with the 
following modifications.
      Under the Senate amendment, if the requirements of the 
provision are not satisfied, in addition to current income 
inclusion, interest at the underpayment rate is imposed on the 
underpayments that would have occurred had the compensation 
been includible in income when first deferred, or if later, 
when not subject to a substantial risk of forfeiture. The 
amount required to be included in income is also subject to an 
additional 10-percent tax.
      Under the Senate amendment, in the case of an individual 
who, with respect to a corporation, is subject to the 
requirements of section 16(a) of the Securities Act of 1934, 
distributions upon a change in control may not be made earlier 
than one year after the date of the change in control of the 
corporation. Such individuals include officers (as defined by 
section 16(a)),\806\ directors, or 10-percent owners of 
publicly-held corporations. Under the provision, distributions 
made to such individuals within one year of the change in 
control (``applicable payments'') are treated as excess 
parachute payments under section 280G (even if the payment 
would not otherwise be treated as an excess parachute payment) 
and therefore subject to the excise tax under section 4999. As 
under present law, no deduction is allowed for any amount 
treated as an excess parachute payment.
---------------------------------------------------------------------------
    \806\ An officer is defined as the president, principal financial 
officer, principal accounting officer (or, if there is no such 
accounting officer, the controller), any vice-president in charge of a 
principal business unit, division or function (such as sales, 
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making 
functions.
---------------------------------------------------------------------------
      If, absent the provision, an applicable payment is a 
payment in the nature of compensation contingent on a change in 
control, section 280G is applied as if the provision had not 
been enacted (i.e., the applicable payments continue to be 
taken into account under section 280G). Any resulting excess 
parachute payment is also subject to the excise tax under 
section 4999 (in addition to the tax imposed by the provision). 
Under the provision, an applicable payment that, absent the 
provision, is not a payment in the nature of compensation 
contingent on a change in control is required to be taken into 
account in determining if the present value of the payments in 
the nature of compensation contingent on a change in control 
equal or exceed three times the base amount. Any resulting 
excess parachute payment is also subject to the excise tax 
under section 4999 (in addition to the tax imposed by the 
provision). Applicable payments do not include payments made 
upon death or if the participant becomes disabled. Treasury 
regulations shall prescribe rules to prevent a deduction from 
being disallowed more than once.
      Under the Senate amendment, unforeseeable emergency also 
includes hardship of a beneficiary. Unforeseeable emergency is 
defined as severe financial hardship of the participant or 
beneficiary resulting from a sudden and unexpected illness or 
accident of the participant or beneficiary, the participant's 
or beneficiary's spouse or the participant's or beneficiary's 
dependent (as defined in 152(a)); loss of the participant's or 
beneficiary's property due to casualty; or other similar 
extraordinary and unforeseeable circumstances arising as a 
result of events beyond the control of the participant or 
beneficiary. Distributions are not allowed to the extent that 
the hardship may be relieved by liquidation of the 
participant's or beneficiary's assets.
      Under the Senate amendment, participants must be limited 
to one subsequent election.
      The Senate amendment includes restrictions on investment 
options. Under the Senate amendment, investment options 
(including phantom or notional investment options) which a 
participant may elect under the nonqualified deferred 
compensation plan must be comparable to those which may be 
elected by participants of the qualified defined contribution 
plan of the employer that has the fewest investment options. It 
is intended that the investment options of the nonqualified 
deferred compensation plan may be less favorable or more 
limited than those of the qualified defined contribution 
employer plan. The Committee intends that open brokerage 
windows, hedge funds, and investments in which the employer 
guarantees a rate of return above what is commercially 
available are prohibited. If there is no qualified defined 
contribution employer plan, the investment options of the 
nonqualified deferred compensation plan must meet the 
requirements prescribed by the Secretary regarding permissible 
investment options. It is intended that in cases where there is 
no such qualified defined contribution employer plan, the 
Secretary issue rules limiting the available investment 
options.
      The Senate amendment includes an exception to the 
provision requiring assets set aside outside of the U.S. for 
purposes of paying deferred compensation to be treated as 
property transferred in connection with the performance of 
services. The provision does not apply to assets located in a 
foreign jurisdiction if substantially all of the services to 
which the nonqualified deferred compensation relates are 
performed in such foreign jurisdiction. The provision is 
specifically intended to apply to foreign trusts and 
arrangements that effectively shield from the claims of general 
creditors any assets intended to satisfy nonqualified deferred 
compensation arrangements.
      The Senate amendment does not apply to a plan meeting the 
requirements of section 457(e)(12) if the plan was in existence 
as of May 1, 2004, and was providing nonelective deferred 
compensation described in section 457(e)(12) on such date. If 
the plan has a material change in the class of individuals 
eligible to participate in the plan after May 1, 2004, the 
exception does not apply to compensation provided under the 
plan after the date of such change.
      The Senate amendment does not include an exception from 
the reporting requirement for deferrals that are not reasonable 
ascertainable.
      Effective date.--The provision is effective for amounts 
deferred in taxable years beginning after December 31, 2004.
      Not later than 90 days after the date of enactment, the 
Secretary is directed to issue guidance providing a limited 
period during which an individual participating in a 
nonqualified deferred compensation plan adopted on or before 
December 31, 2004, may, without violating the provision, 
terminate participation or cancel an outstanding deferral 
election with regard to amounts earned after December 31, 2004, 
if such amounts are includible in income as earned.

                          CONFERENCE AGREEMENT

In general
      The conference agreement follows the House bill with the 
following modifications. Under the conference agreement, all 
amounts deferred under a nonqualified deferred compensation 
plan \807\ for all taxable years are currently includible in 
gross income to the extent not subject to a substantial risk of 
forfeiture \808\ and not previously included in gross income, 
unless certain requirements are satisfied.\809\ If the 
requirements of the provision are not satisfied, in addition to 
current income inclusion, interest at the underpayment rate 
plus one percentage point is imposed on the underpayments that 
would have occurred had the compensation been includible in 
income when first deferred, or if later, when not subject to a 
substantial risk of forfeiture. The amount required to be 
included in income is also subject to a 20-percent additional 
tax.\810\
---------------------------------------------------------------------------
    \807\ A plan includes an agreement or arrangement, including an 
agreement or arrangement that includes one person. Amounts deferred 
also include actual or notional earnings.
    \808\ As under section 83, the rights of a person to compensation 
are subject to a substantial risk of forefeiture if the person's rights 
to such compensation are conditioned upon the performance of 
substantial services by any individual.
    \809\ It is intended that Treasury regulations will provide 
guidance regarding when an amount is deferred. It is intended that 
timing of an election to defer is not determinative of when the 
deferral is made.
    \810\ These consequences apply under the provision to amounts 
deferred after the effective date of the provision.
---------------------------------------------------------------------------
      Current income inclusion, interest, and the additional 
tax apply only with respect to the participants with respect to 
whom the requirements of the provision are not met. For 
example, suppose a plan covering all executives of an employer 
(including those subject to section 16(a) of the Securities and 
Exchange Act of 1934) allows distributions to individuals 
subject to section 16(a) upon a distribution event that is not 
permitted under the provision. The individuals subject to 
section 16(a), rather than all participants of the plan, would 
be required to include amounts deferred in income and would be 
subject to interest and the 20-percent additional tax.
Permissible distributions
            In general
      Under the provision, distributions from a nonqualified 
deferred compensation plan may be allowed only upon separation 
from service (as determined by the Secretary), death, a 
specified time (or pursuant to a fixed schedule), change in 
control of a corporation (to the extent provided by the 
Secretary), occurrence of an unforeseeable emergency, or if the 
participant becomes disabled. A nonqualified deferred 
compensation plan may not allow distributions other than upon 
the permissible distribution events and, except as provided in 
regulations by the Secretary, may not permit acceleration of a 
distribution.
            Separation from service
      In the case of a specified employee who separates from 
service, distributions may not be made earlier than six months 
after the date of the separation from service or upon death. 
Specified employees are key employees \811\ of publicly-traded 
corporations.
---------------------------------------------------------------------------
    \811\ Key employees are defined in section 416(i) and generally 
include officers having annual compensation greater than $130,000 
(adjusted for inflation and limited to 50 employees), five percent 
owners, and one percent owners having annual compensation from the 
employer greater than $150,000.
---------------------------------------------------------------------------
            Specified time
      Amounts payable at a specified time or pursuant to a 
fixed schedule must be specified under the plan at the time of 
deferral. Amounts payable upon the occurrence of an event are 
not treated as amounts payable at a specified time. For 
example, amounts payable when an individual attains age 65 are 
payable at a specified time, while amounts payable when an 
individual's child begins college are payable upon the 
occurrence of an event.
            Change in control
      Distributions upon a change in the ownership or effective 
control of a corporation, or in the ownership of a substantial 
portion of the assets of a corporation, may only be made to the 
extent provided by the Secretary. It is intended that the 
Secretary use a similar, but more restrictive, definition of 
change in control as is used for purposes of the golden 
parachute provisions of section 280G consistent with the 
purposes of the provision. The provision requires the Secretary 
to issue guidance defining change of control within 90 days 
after the date of enactment.
            Unforeseeable emergency
      An unforeseeable emergency is defined as a severe 
financial hardship to the participant: (1) resulting from an 
illness or accident of the participant, the participant's 
spouse, or a dependent (as defined in sec. 152(a)); (2) loss of 
the participant's property due to casualty; or (3) other 
similar extraordinary and unforeseeable circumstances arising 
as a result of events beyond the control of the participant. 
The amount of the distribution must be limited to the amount 
needed to satisfy the emergency plus taxes reasonably 
anticipated as a result of the distribution. Distributions may 
not be allowed to the extent that the hardship may be relieved 
through reimbursement or compensation by insurance or 
otherwise, or by liquidation of the participant's assets (to 
the extent such liquidation would not itself cause a severe 
financial hardship).
            Disability
      A participant is considered disabled if he or she (1) is 
unable to engage in any substantial gainful activity by reason 
of any medically determinable physical or mental impairment 
which can be expected to result in death or can be expected to 
last for a continuous period of not less than 12 months; or (2) 
is, by reason of any medically determinable physical or mental 
impairment which can be expected to result in death or can be 
expected to last for a continuous period of not less than 12 
months, receiving income replacement benefits for a period of 
not less than three months under an accident and health plan 
covering employees of the participant's employer.
            Prohibition on acceleration of distributions
      As mentioned above, except as provided in regulations by 
the Secretary, no accelerations of distributions may be 
allowed. In general, changes in the form of distribution that 
accelerate payments are subject to the rule prohibiting 
acceleration of distributions. However, it is intended that the 
rule against accelerations is not violated merely because a 
plan provides a choice between cash and taxable property if the 
timing and amount of income inclusion is the same regardless of 
the medium of distribution. For example, the choice between a 
fully taxable annuity contract and a lump-sum payment may be 
permitted. It is also intended that the Secretary provide rules 
under which the choice between different forms of actuarially 
equivalent life annuity payments is permitted.
      It is intended that the Secretary will provide other, 
limited, exceptions to the prohibition on accelerated 
distributions, such as when the accelerated distribution is 
required for reasons beyond the control of the participant and 
the distribution is not elective. For example, it is 
anticipated that an exception could be provided if a 
distribution is needed in order to comply with Federal conflict 
of interest requirements or a court-approved settlement 
incident to divorce. It is intended that Treasury regulations 
provide that a plan would not violate the prohibition on 
accelerations by providing that withholding of an employee's 
share of employment taxes will be made from the employee's 
interest in the nonqualified deferred compensation plan. It is 
also intended that Treasury regulations provide that a plan 
would not violate the prohibition on accelerations by providing 
for a distribution to a participant to pay income taxes due 
upon a vesting event subject to section 457(f), provided that 
such amount is not more than an amount equal to the income tax 
withholding that would have been remitted by the employer if 
there had been a payment of wages equal to the income 
includible by the participant under section 457(f). It is also 
intended that Treasury regulations provide that a plan would 
not violate the prohibition on accelerations by providing for 
automatic distributions of minimal interests in a deferred 
compensation plan upon permissible distribution events for 
purposes of administrative convenience. For example, a plan 
could provide that upon separation from service of a 
participant, account balances less than $10,000 will be 
automatically distributed (except in the case of specified 
employees).
Requirements with respect to elections
      The provision requires that a plan must provide that 
compensation for services performed during a taxable year may 
be deferred at the participant's election only if the election 
to defer is made no later than the close of the preceding 
taxable year, or at such other time as provided in Treasury 
regulations.\812\ In the case of any performance-based 
compensation based on services performed over a period of at 
least 12 months, such election may be made no later than six 
months before the end of the service period. It is not intended 
that the provision override the constructive receipt doctrine, 
as constructive receipt rules continue to apply. It is intended 
that the term ``performance-based compensation'' will be 
defined by the Secretary to include compensation to the extent 
that an amount is: (1) variable and contingent on the 
satisfaction of preestablished organizational or individual 
performance criteria and (2) not readily ascertainable at the 
time of the election. For the purposes of the provision, it is 
intended that performance-based compensation may be required to 
meet certain requirements similar to those under section 
162(m), but would not be required to meet all requirements 
under that section. For example, it is expected that the 
Secretary will provide that performance criteria would be 
considered preestablished if it is established in writing no 
later than 90 days after the commencement of the service 
period, but the requirement of determination by the 
compensation committee of the board of directors would not be 
required. It is expected that the Secretary will issue guidance 
providing coordination rules, as appropriate, regarding the 
timing of elections in the case when the fiscal year of the 
employer and the taxable year of the individual are different. 
It is expected that Treasury regulations will not permit any 
election to defer any bonus or other compensation if the timing 
of such election would be inconsistent with the purposes of the 
provision.
---------------------------------------------------------------------------
    \812\ Under the provision, in the first year that an employee 
becomes eligible for participation in a nonqualified deferred 
compensation plan, the election may be made within 30 days after the 
date that the employee is initially eligible.
---------------------------------------------------------------------------
      The time and form of distributions must be specified at 
the time of initial deferral. A plan could specify the time and 
form of payments that are to be made as a result of a 
distribution event (e.g., a plan could specify that payments 
upon separation of service will be paid in lump sum within 30 
days of separation from service) or could allow participants to 
elect the time and form of payment at the time of the initial 
deferral election. If a plan allows participants to elect the 
time and form of payment, such election is subject to the rules 
regarding initial deferral elections under the provision. It is 
intended that multiple payout events are permissible. For 
example, a participant could elect to receive 25 percent of 
their account balance at age 50 and the remaining 75 percent at 
age 60. A plan could also allow participants to elect different 
forms of payment for different permissible distribution events. 
For example, a participant could elect to receive a lump-sum 
distribution upon disability, but an annuity at age 65.
      Under the provision, a plan may allow changes in the time 
and form of distributions subject to certain requirements. A 
nonqualified deferred compensation plan may allow a subsequent 
election to delay the timing or form of distributions only if: 
(1) the plan requires that such election cannot be effective 
for at least 12 months after the date on which the election is 
made; (2) except in the case of elections relating to 
distributions on account of death, disability or unforeseeable 
emergency, the plan requires that the additional deferral with 
respect to which such election is made is for a period of not 
less than five years from the date such payment would otherwise 
have been made; and (3) the plan requires that an election 
related to a distribution to be made upon a specified time may 
not be made less than 12 months prior to the date of the first 
scheduled payment. It is expected that in limited cases, the 
Secretary will issue guidance, consistent with the purposes of 
the provision, regarding to what extent elections to change a 
stream of payments are permissible. The Secretary may issue 
regulations regarding elections with respect to payments under 
nonelective, supplemental retirement plans.
Foreign trusts
      Under the provision, in the case of assets set aside 
(directly or indirectly) in a trust (or other arrangement 
determined by the Secretary) for purposes of paying 
nonqualified deferred compensation, such assets are treated as 
property transferred in connection with the performance of 
services under section 83 (whether or not such assets are 
available to satisfy the claims of general creditors) at the 
time set aside if such assets (or trust or other arrangement) 
are located outside of the United States or at the time 
transferred if such assets (or trust or other arrangement) are 
subsequently transferred outside of the United States. Any 
subsequent increases in the value of, or any earnings with 
respect to, such assets are treated as additional transfers of 
property. Interest at the underpayment rate plus one percentage 
point is imposed on the underpayments that would have occurred 
had the amounts set aside been includible in income for the 
taxable year in which first deferred or, if later, the first 
taxable year not subject to a substantial risk of forfeiture. 
The amount required to be included in income is also subject to 
an additional 20-percent tax.
      It is expected that the Secretary will provide rules for 
identifying the deferrals to which assets set aside are 
attributable, for situations in which assets equal to less than 
the full amount of deferrals are set aside. The provision does 
not apply to assets located in a foreign jurisdiction if 
substantially all of the services to which the nonqualified 
deferred compensation relates are performed in such foreign 
jurisdiction. The provision is specifically intended to apply 
to foreign trusts and arrangements that effectively shield from 
the claims of general creditors any assets intended to satisfy 
nonqualified deferred compensation arrangements. The Secretary 
has authority to exempt arrangements from the provision if the 
arrangements do not result in an improper deferral of U.S. tax 
and will not result in assets being effectively beyond the 
reach of creditors.
Triggers upon financial health
      Under the provision, a transfer of property in connection 
with the performance of services under section 83 also occurs 
with respect to compensation deferred under a nonqualified 
deferred compensation plan if the plan provides that upon a 
change in the employer's financial health, assets will be 
restricted to the payment of nonqualified deferred 
compensation. An amount is treated as restricted even if the 
assets are available to satisfy the claims of general 
creditors. For example, the provision applies in the case of a 
plan that provides that upon a change in financial health, 
assets will be transferred to a rabbi trust.
      The transfer of property occurs as of the earlier of when 
the assets are so restricted or when the plan provides that 
assets will be restricted. It is intended that the transfer of 
property occurs to the extent that assets are restricted or 
will be restricted with respect to such compensation. For 
example, in the case of a plan that provides that upon a change 
in the employer's financial health, a trust will become funded 
to the extent of all deferrals, all amounts deferred under the 
plan are treated as property transferred under section 83. If a 
plan provides that deferrals of certain individuals will be 
funded upon a change in financial health, the transfer of 
property would occur with respect to compensation deferred by 
such individuals. The provision is not intended to apply when 
assets are restricted for a reason other than change in 
financial health (e.g., upon a change in control) or if assets 
are periodically restricted under a structured schedule and 
scheduled restrictions happen to coincide with a change in 
financial status. Any subsequent increases in the value of, or 
any earnings with respect to, restricted assets are treated as 
additional transfers of property. Interest at the underpayment 
rate plus one percentage point is imposed on the underpayments 
that would have occurred had the amounts been includible in 
income for the taxable year in which first deferred or, if 
later, the first taxable year not subject to a substantial risk 
of forfeiture. The amount required to be included in income is 
also subject to an additional 20-percent tax.
Definition of nonqualified deferred compensation plan
      A nonqualified deferred compensation plan is any plan 
that provides for the deferral of compensation other than a 
qualified employer plan or any bona fide vacation leave, sick 
leave, compensatory time, disability pay, or death benefit 
plan.\813\ A qualified employer plan means a qualified 
retirement plan, tax-deferred annuity, simplified employee 
pension, and SIMPLE.\814\ A qualified governmental excess 
benefit arrangement (sec. 415(m)) is a qualified employer plan. 
An eligible deferred compensation plan (sec. 457(b)) is also a 
qualified employer plan under the provision. A tax-exempt or 
governmental deferred compensation plan that is not an eligible 
deferred compensation plan is not a qualified employer plan. 
The application of the provision is not limited to arrangements 
between an employer and employee.
---------------------------------------------------------------------------
    \813\ The provision does not apply to a plan meeting the 
requirements of section 457(e)(12) if the plan was in existence as of 
May 1, 2004, was providing nonelective deferred compensation described 
in section 457(e)(12) on such date, and is established or maintained by 
an organization incorporated on July 2, 1974. If the plan has a 
material change in the class of individuals eligible to participate in 
the plan after May 1, 2004, the provision applies to compensation 
provided under the plan after the date of such change.
    \814\ A qualified employer plan also includes a section 501(c)(18) 
trust.
---------------------------------------------------------------------------
      For purposes of the provision, it is not intended that 
the term ``nonqualified deferred compensation plan'' include an 
arrangement taxable under section 83 providing for the grant of 
an option on employer stock with an exercise price that is not 
less than the fair market value of the underlying stock on the 
date of grant if such arrangement does not include a deferral 
feature other than the feature that the option holder has the 
right to exercise the option in the future. The provision is 
not intended to change the tax treatment of incentive stock 
options meeting the requirements of 422 or options granted 
under an employee stock purchase plan meeting the requirements 
of section 423.
      It is intended that the provision does not apply to 
annual bonuses or other annual compensation amounts paid within 
2\1/2\ months after the close of the taxable year in which the 
relevant services required for payment have been performed.
Other rules
      Interest imposed under the provision is treated as 
interest on an underpayment of tax. Income (whether actual or 
notional) attributable to nonqualified deferred compensation is 
treated as additional deferred compensation and is subject to 
the provision. The provision is not intended to prevent the 
inclusion of amounts in gross income under any provision or 
rule of law earlier than the time provided in the provision. 
Any amount included in gross income under the provision is not 
be required to be included in gross income under any provision 
of law later than the time provided in the provision. The 
provision does not affect the rules regarding the timing of an 
employer's deduction for nonqualified deferred compensation.
Treasury regulations
      The provision provides the Secretary authority to 
prescribe regulations as are necessary to carry out the 
purposes of provision, including regulations: (1) providing for 
the determination of amounts of deferral in the case of defined 
benefit plans; (2) relating to changes in the ownership and 
control of a corporation or assets of a corporation; (3) 
exempting from the provisions providing for transfers of 
property arrangements that will not result in an improper 
deferral of U.S. tax and will not result in assets being 
effectively beyond the reach of creditors; (4) defining 
financial health; and (5) disregarding a substantial risk of 
forfeiture. It is intended that substantial risk of forfeitures 
may not be used to manipulate the timing of income inclusion. 
It is intended that substantial risks of forfeiture should be 
disregarded in cases in which they are illusory or are used in 
a manner inconsistent with the purposes of the provision. For 
example, if an executive is effectively able to control the 
acceleration of the lapse of a substantial risk of forfeiture, 
such risk of forfeiture should be disregarded and income 
inclusion should not be postponed on account of such 
restriction. The Secretary may also address in regulations 
issues relating to stock appreciation rights.
Aggregation rules
      Under the provision, except as provided by the Secretary, 
employer aggregation rules apply. It is intended that the 
Secretary issue guidance providing aggregation rules as are 
necessary to carry out the purposes of the provision. For 
example, it is intended that aggregation rules would apply in 
the case of separation from service so that the separation from 
service from one entity within a controlled group, but 
continued service for another entity within the group, would 
not be a permissible distribution event. It is also intended 
that aggregation rules would not apply in the case of change in 
control so that the change in control of one member of a 
controlled group would not be a permissible distribution event 
for participants of a deferred compensation plan of another 
member of the group.
Reporting requirements
      Amounts required to be included in income under the 
provision are subject to reporting and Federal income tax 
withholding requirements. Amounts required to be includible in 
income are required to be reported on an individual's Form W-2 
(or Form 1099) for the year includible in income.
      The provision also requires annual reporting to the 
Internal Revenue Service of amounts deferred. Such amounts are 
required to be reported on an individual's Form W-2 (or Form 
1099) for the year deferred even if the amount is not currently 
includible in income for that taxable year. It is expected that 
annual reporting of annual amounts deferred will provide the 
IRS greater information regarding such arrangements for 
enforcement purposes. It is intended that the information 
reported would provide an indication of what arrangements 
should be examined and challenged. Under the provision, the 
Secretary is authorized, through regulations, to establish a 
minimum amount of deferrals below which the reporting 
requirement does not apply. The Secretary may also provide that 
the reporting requirement does not apply with respect to 
amounts of deferrals that are not reasonably ascertainable. It 
is intended that the exception for amounts not reasonably 
ascertainable only apply to nonaccount balance plans and that 
amounts be required to be reported when they first become 
reasonably ascertainable.\815\
---------------------------------------------------------------------------
    \815\ It is intended that the exception be similar to that under 
Treas. Reg. sec. 31.3121(v)(2)-1(e)(4).
---------------------------------------------------------------------------
Effective date
      The provision is effective for amounts deferred in 
taxable years beginning after December 31, 2004. Earnings on 
amounts deferred before the effective date are subject to the 
provision to the extent that such amounts deferred are subject 
to the provision.
      Amounts deferred in taxable years beginning before 
January 1, 2005, are subject to the provision if the plan under 
which the deferral is made is materially modified after October 
3, 2004. The addition of any benefit, right or feature is a 
material modification. The exercise or reduction of an existing 
benefit, right, or feature is not a material modification. For 
example, an amendment to a plan on November 1, 2004, to add a 
provision that distributions may be allowed upon request if 
participants are required to forfeit 10 percent of the amount 
of the distribution (i.e., a ``haircut'') would be a material 
modification to the plan so that the rules of the provision 
would apply to the plan. Similarly, accelerating vesting under 
a plan after October 3, 2004, would be a material modification. 
A change in the plan administrator would not be a material 
modification. As another example, amending a plan to remove a 
distribution provision (e.g., to remove a ``haircut'') would 
not be considered a material modification.
      Operating under the terms of a deferred compensation 
arrangement that complies with current law and is not 
materially modified after October 3, 2004, with respect to 
amounts deferred before January 1, 2005, is permissible, as 
such amounts would not be subject to the requirements of the 
provision. For example, subsequent deferrals with respect to 
amounts deferred before January 1, 2005, under a plan that is 
not materially modified after October 3, 2004, would be subject 
to present law and would not be subject to the provision.\816\ 
No inference is intended that all deferrals before the 
effective date are permissible under present law. It is 
expected that the IRS will challenge pre-effective date 
deferral arrangements that do not comply with present law.
---------------------------------------------------------------------------
    \816\ There is no inference that all subsequent deferral elections 
under plans that are not materially modified are permissible under 
present law.
---------------------------------------------------------------------------
      For purposes of the effective date, an amount is 
considered deferred before January 1, 2005, if the amount is 
earned and vested before such date. To the extent there is no 
material modification after October 3, 2004, present law 
applies with respect to vested rights.
      No later than 60 days after the date of enactment, the 
Secretary shall issue guidance providing a limited period of 
time during which a nonqualified deferred compensation plan 
adopted before December 31, 2004, may, without violating the 
requirements of the provision relating to distributions, 
accelerations, and elections be amended (1) to provide that a 
participant may terminate participation in the plan, or cancel 
an outstanding deferral election with respect to amounts 
deferred after December 31, 2004, if such amounts are 
includible in income of the participant as earned, or if later, 
when not subject to a substantial risk of forfeiture, and (2) 
to conform with the provision with respect to amounts deferred 
after December 31, 2004. It is expected that the Secretary may 
provide exceptions to certain requirements of the provision 
during the transition period (e.g., the rules regarding timing 
of elections) for plans coming into compliance with the 
provision. Moreover, it is expected that the Secretary will 
provide a reasonable time, during the transition period but 
after the issuance of guidance, for plans to be amended and 
approved by the appropriate parties in accordance with this 
provision.
2. Denial of deferral of certain stock option and restricted stock 
        gains (sec. 672 of the Senate amendment and sec. 83 of the 
        Code)

                              PRESENT LAW

      Section 83 applies to transfers of property in connection 
with the performance of services. Under section 83, if, in 
connection with the performance of services, property is 
transferred to any person other than the person for whom such 
services are performed, the excess of the fair market value of 
such property over the amount (if any) paid for the property is 
includible in income at the first time that the property is 
transferable or not subject to substantial risk of forfeiture.
      Stock granted to an employee (or other service provider) 
is subject to the rules that apply under section 83. When stock 
is vested and transferred to an employee, the excess of the 
fair market value of the stock over the amount, if any, the 
employee pays for the stock is includible in the employee's 
income for the year in which the transfer occurs.
      The income taxation of a nonqualified stock option is 
determined under section 83 and depends on whether the option 
has a readily ascertainable fair market value. If the 
nonqualified option does not have a readily ascertainable fair 
market value at the time of grant, no amount is includible in 
the gross income of the recipient with respect to the option 
until the recipient exercises the option. The transfer of stock 
on exercise of the option is subject to the general rules of 
section 83. That is, if vested stock is received on exercise of 
the option, the excess of the fair market value of the stock 
over the option price is includible in the recipient's gross 
income as ordinary income in the taxable year in which the 
option is exercised. If the stock received on exercise of the 
option is not vested, the excess of the fair market value of 
the stock at the time of vesting over the option price is 
includible in the recipient's income for the year in which 
vesting occurs unless the recipient elects to apply section 83 
at the time of exercise.
      Other forms of stock-based compensation are also subject 
to the rules of section 83.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, gains attributable to stock 
options (including exercises of stock options), vesting of 
restricted stock, and other compensation based on employer 
securities (including employer securities) cannot be deferred 
by exchanging such amounts for a right to receive a future 
payment. Except as provided by the Secretary, if a taxpayer 
exchanges (1) an option to purchase employer securities, (2) 
employer securities, or (3) any other property based on 
employer securities for a right to receive future payments, an 
amount equal to the present value of such right (or such other 
amount as the Secretary specifies) is required to be included 
in gross income for the taxable year of the exchange. The 
provision applies even if the future right to payment is 
treated as an unfunded and unsecured promise to pay. The 
provision applies when there is in substance an exchange, even 
if the transaction is not formally structured as an exchange.
      The provision is not intended to imply that such 
practices result in permissive deferral of income under present 
law.
      Effective date.--The Senate amendment applies to 
exchanges after December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment.

                      E. Other Revenue Provisions

1. Permit private sector debt collection companies to collect tax debts 
        (sec. 681 of the House bill, sec. 487 of the Senate amendment, 
        and new sec. 6306 of the Code)

                              PRESENT LAW

      In fiscal years 1996 and 1997, the Congress earmarked $13 
million for IRS to test the use of private debt collection 
companies. There were several constraints on this pilot 
project. First, because both IRS and OMB considered the 
collection of taxes to be an inherently governmental function, 
only government employees were permitted to collect the 
taxes.\817\ The private debt collection companies were utilized 
to assist the IRS in locating and contacting taxpayers, 
reminding them of their outstanding tax liability, and 
suggesting payment options. If the taxpayer agreed at that 
point to make a payment, the taxpayer was transferred from the 
private debt collection company to the IRS. Second, the private 
debt collection companies were paid a flat fee for services 
rendered; the amount that was ultimately collected by the IRS 
was not taken into account in the payment mechanism.
---------------------------------------------------------------------------
    \817\ Sec. 7801(a).
---------------------------------------------------------------------------
      The pilot program was discontinued because of 
disappointing results. GAO reported \818\ that IRS collected 
$3.1 million attributable to the private debt collection 
company efforts; expenses were also $3.1 million. In addition, 
there were lost opportunity costs of $17 million to the IRS 
because collection personnel were diverted from their usual 
collection responsibilities to work on the pilot. The pilot 
program results were disappointing because ``IRS' efforts to 
design and implement the private debt collection pilot program 
were hindered by limitations that affected the program's 
results.'' The limitations included the scope of work permitted 
to the private debt collection companies, the number and type 
of cases referred to the private debt collection companies, and 
the ability of IRS' computer systems to identify, select, and 
transmit collection cases to the private debt collectors.
---------------------------------------------------------------------------
    \818\ GAO/GGD-97-129R Issues Affecting IRS' Collection Pilot (July 
18, 1997).
---------------------------------------------------------------------------
      The IRS has in the last several years expressed renewed 
interest in the possible use of private debt collection 
companies; for example, IRS recently revised its extensive 
Request for Information concerning its possible use of private 
debt collection companies.\819\ GAO recently reviewed IRS' 
planning and preparation for the use of private debt collection 
companies.\820\ GAO identified five broad factors critical to 
the success of using private debt collection companies to 
collect taxes. GAO concluded: ``If Congress does authorize PCA 
\821\ use, IRS's planning and preparations to address the 
critical success factors for PCA contracting provide greater 
assurance that the PCA program is headed in the right direction 
to meet its goals and achieve desired results. Nevertheless, 
much work and many challenges remain in addressing the critical 
success factors and helping to maximize the likelihood that a 
PCA program would be successful.'' \822\
---------------------------------------------------------------------------
    \819\ TIRNO-03-H-0001 (February 14, 2003), at 
www.procurement.irs.treas.gov. The basic request for information is 104 
pages, and there are 16 additional attachments.
    \820\ GAO-04-492 Tax Debt Collection: IRS Is Addressing Critical 
Success Factors for Contracting Out but Will Need to Study the Best Use 
of Resources (May 2004).
    \821\ Private collection agencies.
    \822\ Page 19 of the May 2004 GAO report.
---------------------------------------------------------------------------
      In general, Federal agencies are permitted to enter into 
contracts with private debt collection companies for collection 
services to recover indebtedness owed to the United 
States.\823\ That provision does not apply to the collection of 
debts under the Internal Revenue Code.\824\
---------------------------------------------------------------------------
    \823\ 31 U.S.C. sec. 3718.
    \824\ 31 U.S.C. sec. 3718(f).
---------------------------------------------------------------------------
      The President's fiscal year 2004 and 2005 budget 
proposals proposed the use of private debt collection companies 
to collect Federal tax debts.

                               HOUSE BILL

      The bill permits the IRS to use private debt collection 
companies to locate and contact taxpayers owing outstanding tax 
liabilities of any type \825\ and to arrange payment of those 
taxes by the taxpayers. There must be an assessment pursuant to 
section 6201 in order for there to be an outstanding tax 
liability. An assessment is the formal recording of the 
taxpayer's tax liability that fixes the amount payable. An 
assessment must be made before the IRS is permitted to commence 
enforcement actions to collect the amount payable. In general, 
an assessment is made at the conclusion of all examination and 
appeals processes within the IRS.\826\
---------------------------------------------------------------------------
    \825\ The provision generally applies to any type of tax imposed 
under the Internal Revenue Code. It is anticipated that the focus in 
implementing the provision will be: (a) taxpayers who have filed a 
return showing a balance due but who have failed to pay that balance in 
full; and (b) taxpayers who have been assessed additional tax by the 
IRS and who have made several voluntary payments toward satisfying 
their obligation but have not paid in full.
    \826\ An amount of tax reported as due on the taxpayer's tax return 
is considered to be self-assessed. If the IRS determines that the 
assessment or collection of tax will be jeopardized by delay, it has 
the authority to assess the amount immediately (sec. 6861), subject to 
several procedural safeguards.
---------------------------------------------------------------------------
      Several steps are involved in the deployment of private 
debt collection companies. First, the private debt collection 
company contacts the taxpayer by letter.\827\ If the taxpayer's 
last known address is incorrect, the private debt collection 
company searches for the correct address. Second, the private 
debt collection company telephones the taxpayer to request full 
payment.\828\ If the taxpayer cannot pay in full immediately, 
the private debt collection company offers the taxpayer an 
installment agreement providing for full payment of the taxes 
over a period of as long as five years. If the taxpayer is 
unable to pay the outstanding tax liability in full over a 
five-year period, the private debt collection company obtains 
financial information from the taxpayer and will provide this 
information to the IRS for further processing and action by the 
IRS.
---------------------------------------------------------------------------
    \827\ Several portions of the provision require that the IRS 
disclose confidential taxpayer information to the private debt 
collection company. Section 6103(n) permits disclosure for ``the 
providing of other services . . . for purposes of tax administration.'' 
Accordingly, no amendment to section 6103 is necessary to implement the 
provision. It is intended, however, that the IRS vigorously protect the 
privacy of confidential taxpayer information by disclosing the least 
amount of information possible to contractors consistent with the 
effective operation of the provision.
    \828\ The private debt collection company is not permitted to 
accept payment directly. Payments are required to be processed by IRS 
employees.
---------------------------------------------------------------------------
      The bill specifies several procedural conditions under 
which the provision would operate. First, provisions of the 
Fair Debt Collection Practices Act apply to the private debt 
collection company. Second, taxpayer protections that are 
statutorily applicable to the IRS are also made statutorily 
applicable to the private sector debt collection companies. In 
addition, taxpayer protections that are statutorily applicable 
to IRS employees are also made statutorily applicable to 
employees of private sector debt collection companies. Third, 
subcontractors are prohibited from having contact with 
taxpayers, providing quality assurance services, and composing 
debt collection notices; any other service provided by a 
subcontractor must receive prior approval from the IRS. In 
addition, it is intended that the IRS require the private 
sector debt collection companies to inform every taxpayer they 
contact of the availability of assistance from the Taxpayer 
Advocate.
      The bill creates a revolving fund from the amounts 
collected by the private debt collection companies. The private 
debt collection companies will be paid out of this fund. The 
bill prohibits the payment of fees for all services in excess 
of 25 percent of the amount collected under a tax collection 
contract.\829\
---------------------------------------------------------------------------
    \829\ It is assumed that there will be competitive bidding for 
these contracts by private sector tax collection agencies and that 
vigorous bidding will drive the overhead costs down.
---------------------------------------------------------------------------
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except that it: (1) sunsets the provision in five years; (2) 
provides that, if the taxpayer cannot pay in full immediately, 
the private debt collection company may offer the taxpayer an 
installment agreement providing for full payment of the taxes 
over three years; (3) provides that up to 25 percent of amount 
collected may be used for IRS collection enforcement 
activities; (4) and requires Treasury to provide a biennial 
report to Congress.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, with the 
addition of two provisions from the Senate amendment: (1) the 
conference agreement provides that up to 25 percent of amount 
collected may be used for IRS collection enforcement 
activities; and (2) the conference agreement requires Treasury 
to provide a biennial report to Congress. The conferees expect 
that, consistent with best management practices and sound tax 
administration principles, the Secretary will utilize this new 
debt collection provision to the maximum extent feasible.
      The conferees expect that activities conducted by any 
person under a qualified tax collection contract will be in 
compliance with the Fair Debt Collection Practices Act, as 
required by new section 6306(e) of the Code. Accordingly, the 
conferees anticipate that the Secretary will not impose 
requirements that would violate this provision of the Code. The 
conferees believe that this new debt collection provision will 
protect both taxpayers' rights and the confidentiality of tax 
information.
2. Modify charitable contribution rules for donations of patents and 
        other intellectual property (sec. 682 of the House bill, sec. 
        494 of the Senate amendment, and secs. 170 and 6050L of the 
        Code)

                              PRESENT LAW

      In general, a deduction is permitted for charitable 
contributions, subject to certain limitations that depend on 
the type of taxpayer, the property contributed, and the donee 
organization.\830\ In the case of non-cash contributions, the 
amount of the deduction generally equals the fair market value 
of the contributed property on the date of the contribution.
---------------------------------------------------------------------------
    \830\ Charitable deductions are provided for income, estate, and 
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
      For certain contributions of property, the taxpayer is 
required to reduce the deduction amount by any gain, generally 
resulting in a deduction equal to the taxpayer's basis. This 
rule applies to contributions of: (1) property that, at the 
time of contribution, would not have resulted in long-term 
capital gain if the property was sold by the taxpayer on the 
contribution date; (2) tangible personal property that is used 
by the donee in a manner unrelated to the donee's exempt (or 
governmental) purpose; and (3) property to or for the use of a 
private foundation (other than a foundation defined in section 
170(b)(1)(E)).
      Charitable contributions of capital gain property 
generally are deductible at fair market value. Capital gain 
property means any capital asset or property used in the 
taxpayer's trade or business the sale of which at its fair 
market value, at the time of contribution, would have resulted 
in gain that would have been long-term capital gain. 
Contributions of capital gain property are subject to different 
percentage limitations than other contributions of property. 
Under present law, certain copyrights are not considered 
capital assets, in which case the charitable deduction for such 
copyrights generally is limited to the taxpayer's basis.\831\
---------------------------------------------------------------------------
    \831\ See sec. 1221(a)(3), 1231(b)(1)(C).
---------------------------------------------------------------------------
      In general, a charitable contribution deduction is 
allowed only for contributions of the donor's entire interest 
in the contributed property, and not for contributions of a 
partial interest.\832\ If a taxpayer sells property to a 
charitable organization for less than the property's fair 
market value, the amount of any charitable contribution 
deduction is determined in accordance with the bargain sale 
rules.\833\ In general, if a donor receives a benefit or quid 
pro quo in return for a contribution, any charitable 
contribution deduction is reduced by the amount of the benefit 
received. For contributions of $250 or more, no charitable 
contribution deduction is allowed unless the donee organization 
provides a contemporaneous written acknowledgement of the 
contribution that describes and provides a good faith estimate 
of the value of any goods or services provided by the donee 
organization in exchange for the contribution.\834\
---------------------------------------------------------------------------
    \832\ Sec. 170(f)(3).
    \833\ Sec. 1011(b) and Treas. Reg. sec. 1.1011-2.
    \834\ Sec. 170(f)(8).
---------------------------------------------------------------------------
      Taxpayers are required to obtain a qualified appraisal 
for donated property with a value of $5,000 or more, and to 
attach the appraisal to the tax return in certain cases.\835\ 
Under Treasury regulations, a qualified appraisal means an 
appraisal document that, among other things, (1) relates to an 
appraisal that is made not earlier than 60 days prior to the 
date of contribution of the appraised property and not later 
than the due date (including extensions) of the return on which 
a deduction is first claimed under section 170; \836\ (2) is 
prepared, signed, and dated by a qualified appraiser; (3) 
includes (a) a description of the property appraised; (b) the 
fair market value of such property on the date of contribution 
and the specific basis for the valuation; (c) a statement that 
such appraisal was prepared for income tax purposes; (d) the 
qualifications of the qualified appraiser; and (e) the 
signature and taxpayer identification number (``TIN'') of such 
appraiser; and (4) does not involve an appraisal fee that 
violates certain prescribed rules.\837\
---------------------------------------------------------------------------
    \835\ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984) 
(providing that not later than December 31, 1984, the Secretary shall 
prescribe regulations requiring an individual, a closely held 
corporation, or a personal service corporation claiming a charitable 
deduction for property (other than publicly traded securities) to 
obtain a qualified appraisal of the property contributed and attach an 
appraisal summary to the taxpayer's return if the claimed value of such 
property (plus the claimed value of all similar items of property 
donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-
369, a qualified appraisal means an appraisal prepared by a qualified 
appraiser that includes, among other things, (1) a description of the 
property appraised; (2) the fair market value of such property on the 
date of contribution and the specific basis for the valuation; (3) a 
statement that such appraisal was prepared for income tax purposes; (4) 
the qualifications of the qualified appraiser; (5) the signature and 
TIN of such appraiser; and (6) such additional information as the 
Secretary prescribes in such regulations.
    \836\ In the case of a deduction first claimed or reported on an 
amended return, the deadline is the date on which the amended return is 
filed.
    \837\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision provides that if a taxpayer contributes a 
patent or other intellectual property (other than certain 
copyrights or inventory) to a charitable organization, the 
taxpayer's initial charitable deduction is limited to the 
lesser of the taxpayer's basis in the contributed property or 
the fair market value of the property. In addition, the 
taxpayer is permitted to deduct, as a charitable deduction, 
certain additional amounts in the year of contribution or in 
subsequent taxable years based on a specified percentage of the 
qualified donee income received or accrued by the charitable 
donee with respect to the contributed property. For this 
purpose, ``qualified donee income'' includes net income 
received or accrued by the donee that properly is allocable to 
the intellectual property itself (as opposed to the activity in 
which the intellectual property is used).
      The amount of any additional charitable deduction is 
calculated as a sliding-scale percentage of qualified donee 
income received or accrued by the charitable donee that 
properly is allocable to the contributed property to the 
applicable taxable year of the donor, determined as follows:

------------------------------------------------------------------------
                                           Deduction permitted for such
         Taxable year of donor                     taxable year
------------------------------------------------------------------------
1st year ending on or after              100 percent of qualified donee
 contribution.                            income
2nd year ending on or after              100 percent of qualified donee
 contribution.                            income
3rd year ending on or after              90 percent of qualified donee
 contribution.                            income
4th year ending on or after              80 percent of qualified donee
 contribution.                            income
5th year ending on or after              70 percent of qualified donee
 contribution.                            income
6th year ending on or after              60 percent of qualified donee
 contribution.                            income
7th year ending on or after              50 percent of qualified donee
 contribution.                            income
8th year ending on or after              40 percent of qualified donee
 contribution.                            income
9th year ending on or after              30 percent of qualified donee
 contribution.                            income
10th year ending on or after             20 percent of qualified donee
 contribution.                            income
11th year ending on or after             10 percent of qualified donee
 contribution.                            income
12th year ending on or after             10 percent of qualified donee
 contribution.                            income
Taxable years thereafter...............  No deduction permitted
------------------------------------------------------------------------

      An additional charitable deduction is allowed only to the 
extent that the aggregate of the amounts that are calculated 
pursuant to the sliding-scale exceed the amount of the 
deduction claimed upon the contribution of the patent or 
intellectual property.
      No charitable deduction is permitted with respect to any 
revenues or income received or accrued by the charitable donee 
after the expiration of the legal life of the patent or 
intellectual property, or after the tenth anniversary of the 
date the contribution was made by the donor.
      The taxpayer is required to inform the donee at the time 
of the contribution that the taxpayer intends to treat the 
contribution as a contribution subject to the additional 
charitable deduction provisions of the provision. In addition, 
the taxpayer must obtain written substantiation from the donee 
of the amount of any qualified donee income properly allocable 
to the contributed property during the charity's taxable 
year.\838\ The donee is required to file an annual information 
return that reports the qualified donee income and other 
specified information relating to the contribution. In 
instances where the donor's taxable year differs from the 
donee's taxable year, the donor bases its additional charitable 
deduction on the qualified donee income of the charitable donee 
properly allocable to the donee's taxable year that ends within 
the donor's taxable year.
---------------------------------------------------------------------------
    \838\ The net income taken into account by the taxpayer may not 
exceed the amount of qualified donee income reported by the donee to 
the taxpayer and the IRS under the provision's substantiation and 
reporting requirements.
---------------------------------------------------------------------------
      Under the provision, additional charitable deductions are 
not available for patents or other intellectual property 
contributed to a private foundation (other than a private 
operating foundation or certain other private foundations 
described in section 170(b)(1)(E)).
      Under the provision, the Secretary may prescribe 
regulations or other guidance to carry out the purposes of the 
provision, including providing for the determination of amounts 
to be treated as qualified donee income in certain cases where 
the donee uses the donated property to further its exempt 
activities or functions, or as may be necessary or appropriate 
to prevent the avoidance of the purposes of the provision.
      Effective date.--Effective for contributions made after 
June 3, 2004.

                            SENATE AMENDMENT

      The Senate amendment is similar to the House bill, except 
that the taxpayer's initial deduction is equal to: the lesser 
of the taxpayer's basis in the contributed property or the fair 
market value of the property (as in the House bill) or, if 
greater, the lesser of 5 percent of the fair market value of 
the contributed property or $1 million. Additional charitable 
deductions are available as in the House bill, except that such 
additional deductions are not required to be offset by the 
initial deductible amount.
      The Senate amendment imposes a processing fee (credited 
to the Exempt Organizations unit with the IRS) equal to 1 
percent of the claimed deductible amount for contributions of 
applicable intellectual property.
      With respect to applicable intellectual property 
contributions, the Senate amendment increases the present law 
thresholds that trigger application of penalties for 
substantial and gross valuation misstatements. The substantial 
misstatement penalty applies if the taxpayer's claimed value 
exceeds the correct amount by 50 percent or more; the gross 
misstatement penalty applies if the taxpayer's claimed value 
exceeds the correct amount by 100 percent or more.
      The Senate amendment requires that the Secretary shall 
prescribe guidance on appraisal standards for charitable 
contributions of intellectual property.
      Effective date.--Contributions after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
      Effective date.--Effective for contributions made after 
June 3, 2004.
3. Require increased reporting for noncash charitable contributions 
        (sec. 683 of the House bill and sec. 170 of the Code)

                              PRESENT LAW

      In general, a deduction is permitted for charitable 
contributions, subject to certain limitations that depend on 
the type of taxpayer, the property contributed, and the donee 
organization.\839\ In the case of non-cash contributions, the 
amount of the deduction generally equals the fair market value 
of the contributed property on the date of the contribution.
---------------------------------------------------------------------------
    \839\ Charitable deductions are provided for income, estate, and 
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
      In general, if the total charitable deduction claimed for 
non-cash property exceeds $500, the taxpayer must file IRS Form 
8283 (Noncash Charitable Contributions) with the IRS. C 
corporations (other than personal service corporations and 
closely-held corporations) are required to file Form 8283 only 
if the deduction claimed exceeds $5,000.
      Taxpayers are required to obtain a qualified appraisal 
for donated property (other than money and publicly traded 
securities) with a value of more than $5,000.\840\ Corporations 
(other than a closely-held corporation, a personal service 
corporation, or an S corporation) are not required to obtain a 
qualified appraisal. Taxpayers are not required to attach a 
qualified appraisal to the taxpayer's return, except in the 
case of contributed art-work valued at more than $20,000. Under 
Treasury regulations, a qualified appraisal means an appraisal 
document that, among other things, (1) relates to an appraisal 
that is made not earlier than 60 days prior to the date of 
contribution of the appraised property and not later than the 
due date (including extensions) of the return on which a 
deduction is first claimed under section 170; \841\ (2) is 
prepared, signed, and dated by a qualified appraiser; (3) 
includes (a) a description of the property appraised; (b) the 
fair market value of such property on the date of contribution 
and the specific basis for the valuation; (c) a statement that 
such appraisal was prepared for income tax purposes; (d) the 
qualifications of the qualified appraiser; and (e) the 
signature and taxpayer identification number of such appraiser; 
and (4) does not involve an appraisal fee that violates certain 
prescribed rules.\842\
---------------------------------------------------------------------------
    \840\ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984) 
(providing that not later than December 31, 1984, the Secretary shall 
prescribe regulations requiring an individual, a closely held 
corporation, or a personal service corporation claiming a charitable 
deduction for property (other than publicly tranded securities) to 
obtain a qualified appraisal of the property contributed and attach an 
appraisal summary to the taxpayer's return if the claimed value of such 
property (plus the claimed value of all similar items of property 
donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-
369, a qualified appraisal means an appraisal prepared by a qualified 
appraiser that includes, among other things, (1) a description of the 
property appraised; (2) the fair market value of such property on the 
date of contribution and the specific basis for the valuation; (3) a 
statement that such appraisal was prepared for income tax purposes; (4) 
the qualifications of the qualified appraiser; (5) the signature and 
taxpayer identification number of such appraiser; and (6) such 
additional information as the Secretary prescribes in such regulations.
    \841\ In the case of a deduction first claimed or reported on an 
amended return, the deadline is the date on which the amended return is 
filed.
    \842\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision requires increased donor reporting for 
certain charitable contributions of property other than cash, 
inventory, or publicly traded securities. The provision extends 
to all C corporations the present law requirement, applicable 
to an individual, closely-held corporation, personal service 
corporation, partnership, or S corporation, that the donor must 
obtain a qualified appraisal of the property if the amount of 
the deduction claimed exceeds $5,000. The provision also 
provides that if the amount of the contribution of property 
other than cash, inventory, or publicly traded securities 
exceeds $500,000, then the donor (whether an individual, 
partnership, or corporation) must attach the qualified 
appraisal to the donor's tax return. For purposes of the dollar 
thresholds under the provision, property and all similar items 
of property donated to one or more donees are treated as one 
property.
      The provision provides that a donor that fails to 
substantiate a charitable contribution of property, as required 
by the Secretary, is denied a charitable contribution 
deduction. If the donor is a partnership or S corporation, the 
deduction is denied at the partner or shareholder level. The 
denial of the deduction does not apply if it is shown that such 
failure is due to reasonable cause and not to willful neglect.
      The provision provides that the Secretary may prescribe 
such regulations as may be necessary or appropriate to carry 
out the purposes of the provision, including regulations that 
may provide that some or all of the requirements of the 
provision do not apply in appropriate cases.
      Effective date.--Effective for contributions made after 
June 3, 2004.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill, except 
that appraisals are not required for charitable contributions 
of certain vehicles that are sold by the donee organization 
without a significant intervening use or material improvement 
of the vehicle by such organization, and for which the 
organization provides an acknowledgement to the donor 
containing a certification that the vehicle was sold in an 
arm's length transaction between unrelated parties, and 
providing the gross sales proceeds from the sale, and a 
statement that the donor's deductible amount may not exceed the 
amount of such gross proceeds.
      Effective date.--Effective for contributions made after 
June 3, 2004.
4. Limit deduction for charitable contributions of vehicles (sec. 684 
        of the House bill, sec. 731 of the Senate amendment, and new 
        sec. 6720 and sec. 170 of the Code)

                              PRESENT LAW

      In general, a deduction is permitted for charitable 
contributions, subject to certain limitations that depend on 
the type of taxpayer, the property contributed, and the donee 
organization.\843\ In the case of non-cash contributions, the 
amount of the deduction generally equals the fair market value 
of the contributed property on the date of the contribution.
---------------------------------------------------------------------------
    \843\ Charitable deductions are provided for income, estate, and 
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
      For certain contributions of property, the taxpayer is 
required to determine the deductible amount by subtracting any 
gain from fair market value, generally resulting in a deduction 
equal to the taxpayer's basis. This rule applies to 
contributions of: (1) property that, at the time of 
contribution, would not have resulted in long-term capital gain 
if the property was sold by the taxpayer on the contribution 
date; (2) tangible personal property that is used by the donee 
in a manner unrelated to the donee's exempt (or governmental) 
purpose; and (3) property to or for the use of a private 
foundation (other than a foundation defined in section 
170(b)(1)(E)).
      Charitable contributions of capital gain property 
generally are deductible at fair market value. Capital gain 
property means any capital asset or property used in the 
taxpayer's trade or business the sale of which at its fair 
market value, at the time of contribution, would have resulted 
in gain that would have been long-term capital gain. 
Contributions of capital gain property are subject to different 
percentage limitations than other contributions of property.
      A taxpayer who donates a used automobile to a charitable 
donee generally deducts the fair market value (rather than the 
taxpayer's basis) of the automobile. A taxpayer who donates a 
used automobile generally is permitted to use an established 
used car pricing guide to determine the fair market value of 
the automobile, but only if the guide lists a sales price for 
an automobile of the same make, model and year, sold in the 
same area, and in the same condition as the donated automobile. 
Similar rules apply to contributions of other types of vehicles 
and property, such as boats.
      Charities are required to provide donors with written 
substantiation of donations of $250 or more. Taxpayers are 
required to report non-cash contributions totaling $500 or more 
and the method used for determining fair market value.
      Taxpayers are required to obtain a qualified appraisal 
for donated property with a value of $5,000 or more, and to 
attach the appraisal to the tax return in certain cases.\844\ 
Under Treasury regulations, a qualified appraisal means an 
appraisal document that, among other things, (1) relates to an 
appraisal that is made not earlier than 60 days prior to the 
date of contribution of the appraised property and not later 
than the due date (including extensions) of the return on which 
a deduction is first claimed under section 170; \845\ (2) is 
prepared, signed, and dated by a qualified appraiser; (3) 
includes (a) a description of the property appraised; (b) the 
fair market value of such property on the date of contribution 
and the specific basis for the valuation; (c) a statement that 
such appraisal was prepared for income tax purposes; (d) the 
qualifications of the qualified appraiser; and (e) the 
signature and taxpayer identification number (``TIN'') of such 
appraiser; and (4) does not involve an appraisal fee that 
violates certain prescribed rules.\846\
---------------------------------------------------------------------------
    \844\ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984) 
(providing that not later than December 31, 1984, the Secretary shall 
prescribe regulations requiring an individual, a closely held 
corporation, or a personal service corporation claiming a charitable 
deduction for property (other than publicly traded securities) to 
obtain a qualified appraisal of the property contributed and attach an 
appraisal summary to the taxpayer's return if the claimed value of such 
property (plus the claimed value of all similar items of property 
donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-
369, a qualified appraisal means an appraisal prepared by a qualified 
appraiser that includes, among other things, (1) a description of the 
property appraised; (2) the fair market value of such property on the 
date of contribution and the specific basis for the valuation; (3) a 
statement that such appraisal was prepared for income tax purposes; (4) 
the qualifications of the qualified appraiser; (5) the signature and 
TIN of such appraiser; and (6) such additional information as the 
Secretary prescribes in such regulations.
    \845\ In the case of a deduction first claimed or reported on an 
amended return, the deadline is the date on which the amended return is 
filed.
    \846\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------
      Appraisal fees paid by an individual to determine the 
fair market value of donated property are deductible as 
miscellaneous expenses subject to the 2 percent of adjusted 
gross income limit.\847\
---------------------------------------------------------------------------
    \847\ Rev. Rul. 67-461, 1967-2 C.B. 125.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision allows a charitable deduction for 
contributions of vehicles for which the taxpayer claims a 
deduction of more than $250 only if the taxpayer obtains a 
qualified appraisal of the vehicle. The provision applies to 
automobiles and other types of motor vehicles manufactured 
primarily for use on public streets, roads, and highways; 
boats; and aircraft. The provision does not affect 
contributions of inventory property. The definition of 
qualified appraisal generally follows the definition contained 
in present law, subject to additional regulations or guidance 
provided by the Secretary. The qualified appraisal of a donated 
vehicle must be obtained by the taxpayer by the time the 
contribution is made. Under the provision, the Secretary shall 
prescribe such regulations or other guidance as may be 
necessary to carry out the purposes of the provision.
      Effective date.--Effective for contributions made after 
June 3, 2004.

                            SENATE AMENDMENT

      Under the Senate amendment, the amount of deduction for 
charitable contributions of vehicles (generally including 
automobiles, boats, and airplanes for which the claimed value 
exceeds $500 and excluding inventory property) depends upon the 
use of the vehicle by the donee organization. If the donee 
organization sells the vehicle without any significant 
intervening use or material improvement of such vehicle by the 
organization, the amount of the deduction shall not exceed the 
gross proceeds received from the sale.
      The proposal imposes new substantiation requirements for 
contributions of vehicles for which the claimed value exceeds 
$500 (excluding inventory). A deduction is not allowed unless 
the taxpayer substantiates the contribution by a 
contemporaneous written acknowledgement by the donee. The 
acknowledgement must contain the name and taxpayer 
identification number of the donor and the vehicle 
identification number (or similar number) of the vehicle. In 
addition, if the donee sells the vehicle without performing a 
significant intervening use or material improvement of such 
vehicle, the acknowledgement must provide a certification that 
the vehicle was sold in an arm's length transaction between 
unrelated parties, and state the gross proceeds from the sale 
and that the deductible amount may not exceed such gross 
proceeds. In all other cases, the acknowledgement must contain 
a certification of the intended use or material improvement of 
the vehicle and the intended duration of such use, and a 
certification that the vehicle will not be transferred in 
exchange for money, other property, or services before 
completion of such use or improvement. The donee must notify 
the Secretary of the information contained in an 
acknowledgement, in a time and manner provided by the 
Secretary. An acknowledgement is considered contemporaneous if 
provided within 30 days of sale of a vehicle that is not 
significantly improved or materially used by the donee, or, in 
all other cases, within 30 days of the contribution.
      A penalty applies if a donee organization knowingly 
furnishes a false or fraudulent acknowledgement, or knowingly 
fails to furnish an acknowledgement in the manner, at the time, 
and showing the required information. In the case of an 
acknowledgement provided within 30 days of sale of a vehicle 
which is not significantly used or materially improved by the 
donee, the penalty is the greater of the value of the tax 
benefit to the donor or the gross proceeds from the sale of the 
vehicle. For all other acknowledgements, the penalty is the 
greater of the value of the tax benefit to the donor or the 
claimed value of the vehicle or $5,000.
      The Senate amendment provides that the Secretary shall 
prescribe such regulations or other guidance as may be 
necessary to carry out the purposes of the proposal.
      Effective date.--Contributions after June 30, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except that the penalty on the donee organization for knowingly 
furnishing a false or fraudulent acknowledgement is determined 
differently. With respect to a qualified vehicle sold without a 
significant intervening use or material improvement, the 
penalty is the greater of the gross proceeds from the sale of 
the vehicle or the product of the highest rate of tax specified 
in section 1 and the sales price stated on the acknowledgement. 
For all other acknowledgements, the penalty is the greater of 
$5,000 or the product of the highest rate of tax specified in 
section 1 and the claimed value of the vehicle.
      The conference agreement also provides that the Secretary 
may prescribe regulations or other guidance that exempts sales 
of vehicles that are in direct furtherance of the donee's 
charitable purposes from the requirement that the donor may not 
deduct an amount in excess of the gross proceeds from the sale, 
and the requirement that the donee certify that the vehicle 
will not be transferred in exchange for money, other property, 
or services before completion of a significant use or material 
improvement by the donee. The conferees intend that such 
guidance may be appropriate, for example, if an organization 
directly furthers its charitable purposes by selling 
automobiles to needy persons at a price significantly below 
fair market value.
      The conferees intend that in providing guidance on the 
provision, the Secretary shall strictly construe the 
requirement of significant use or material improvement. To meet 
the significant use test, an organization must actually use the 
vehicle to substantially further the organization's regularly 
conducted activities and the use must be significant. A donee 
will not be considered to significantly use a qualified vehicle 
if, under the facts and circumstances, the use is incidental or 
not intended at the time of the contribution. Whether a use is 
significant also depends on the frequency and duration of use. 
With respect to the material improvement test, the conferees 
intend that a material improvement would include major repairs 
to a vehicle, or other improvements to the vehicle that improve 
the condition of the vehicle in a manner that significantly 
increases the vehicle's value. Cleaning the vehicle, minor 
repairs, and routine maintenance are not considered a material 
improvement.
      Example 1.--As part of its regularly conducted 
activities, an organization delivers meals to needy 
individuals. The use requirement would be met if the 
organization actually used a donated qualified vehicle to 
deliver food to the needy. Use of the vehicle to deliver meals 
substantially furthers a regularly conducted activity of the 
organization. However, the use also must be significant, which 
depends on the nature, extent, and frequency of the use. If the 
organization used the vehicle only once or a few times to 
deliver meals, the use would not be considered significant. If 
the organization used the vehicle to deliver meals every day 
for one year the use would be considered significant. If the 
organization drove the vehicle 10,000 miles while delivering 
meals, such use likely would be considered significant. 
However, use of a vehicle in such an activity for one week or 
for several hundreds of miles generally would not be considered 
a significant use.
      Example 2.--An organization uses a donated qualified 
vehicle to transport its volunteers. The use would not be 
significant merely because a volunteer used the vehicle over a 
brief period of time to drive to or from the organization's 
premises. On the other hand, if at the time the organization 
accepts the contribution of a qualified vehicle, the 
organization intends to use the vehicle as a regular and 
ongoing means of transport for volunteers of the organization, 
and such vehicle is so used, then the significant use test 
likely would be met.
      Example 3.--The following example is a general 
illustration of the provision. A taxpayer makes a charitable 
contribution of a used automobile in good running condition and 
that needs no immediate repairs to a charitable organization 
that operates an elder care facility. The donee organization 
accepts the vehicle and immediately provides the donor a 
written acknowledgment containing the name and TIN of the 
donor, the vehicle identification number, a certification that 
the donee intends to retain the vehicle for a year or longer to 
transport the facility's residents to community and social 
events and deliver meals to the needy, and a certification that 
the vehicle will not be transferred in exchange for money, 
other property, or services before completion of such use by 
the organization. A few days after receiving the vehicle, the 
donee organization commences to use the vehicle three times a 
week to transport some of its residents to various community 
events, and twice a week to deliver food to needy individuals. 
The organization continues to regularly use the vehicle for 
these purposes for approximately one year and then sells the 
vehicle. Under the provision, the donee's use of the vehicle 
constitutes a significant intervening use prior to the sale by 
the organization, and the donor's deduction is not limited to 
the gross proceeds received by the organization.
      Effective date.--Effective for contributions made after 
December 31, 2004.
5. Extend the present-law intangible amortization provisions to 
        acquisitions of sports franchises (sec. 685 of the House bill, 
        sec. 471 of the Senate amendment, and sec. 197 of the Code)

                              PRESENT LAW

      The purchase price allocated to intangible assets 
(including franchise rights) acquired in connection with the 
acquisition of a trade or business generally must be 
capitalized and amortized over a 15-year period.\848\ These 
rules were enacted in 1993 to minimize disputes regarding the 
proper treatment of acquired intangible assets. The rules do 
not apply to a franchise to engage in professional sports and 
any intangible asset acquired in connection with such a 
franchise.\849\ However, other special rules apply to certain 
of these intangible assets.
---------------------------------------------------------------------------
    \848\ Sec. 197.
    \849\ Sec. 197(e)(6).
---------------------------------------------------------------------------
      Under section 1056, when a franchise to conduct a sports 
enterprise is sold or exchanged, the basis of a player contract 
acquired as part of the transaction is generally limited to the 
adjusted basis of such contract in the hands of the transferor, 
increased by the amount of gain, if any, recognized by the 
transferor on the transfer of the contract. Moreover, not more 
than 50 percent of the consideration from the transaction may 
be allocated to player contracts unless the transferee 
establishes to the satisfaction of the Commissioner that a 
specific allocation in excess of 50 percent is proper. However, 
these basis rules may not apply if a sale or exchange of a 
franchise to conduct a sports enterprise is effected through a 
partnership.\850\ Basis allocated to the franchise or to other 
valuable intangible assets acquired with the franchise may not 
be amortizable if these assets lack a determinable useful life.
---------------------------------------------------------------------------
    \850\ P.D.B. Sports, Ltd. v. Comm., 109 T.C. 423 (1997).
---------------------------------------------------------------------------
      In general, section 1245 provides that gain from the sale 
of certain property is treated as ordinary income to the extent 
depreciation or amortization was allowed on such property. 
Section 1245(a)(4) provides special rules for recapture of 
depreciation and deductions for losses taken with respect to 
player contracts. The special recapture rules apply in the case 
of the sale, exchange, or other disposition of a sports 
franchise. Under the special recapture rules, the amount 
recaptured as ordinary income is the amount of gain not to 
exceed the greater of (1) the sum of the depreciation taken 
plus any deductions taken for losses (i.e., abandonment losses) 
with respect to those player contracts which are initially 
acquired as a part of the original acquisition of the franchise 
or (2) the amount of depreciation taken with respect to those 
player contracts which are owned by the seller at the time of 
the sale of the sports franchise.

                               HOUSE BILL

      The House bill extends the 15-year recovery period for 
intangible assets to franchises to engage in professional 
sports and any intangible asset acquired in connection with the 
acquisition of such a franchise (including player contracts). 
Thus, the same rules for amortization of intangibles that apply 
to other acquisitions under present law will apply to 
acquisitions of sports franchises. The provision also repeals 
the special rules under section 1245(a)(4) and makes other 
conforming changes.
      Effective date.--The House bill is effective for property 
acquired after the date of enactment. The amendment to section 
1245(a)(4) applies to franchises acquired after the date of 
enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
6. Increase continuous levy for certain federal payments (sec. 686 of 
        the House bill, sec. 734 of the Senate amendment, and sec. 
        6331(h) of the Code)

                              PRESENT LAW

      If any person is liable for any internal revenue tax and 
does not pay it within 10 days after notice and demand \851\ by 
the IRS, the IRS may then collect the tax by levy upon all 
property and rights to property belonging to the person,\852\ 
unless there is an explicit statutory restriction on doing so. 
A levy is the seizure of the person's property or rights to 
property. Property that is not cash is sold pursuant to 
statutory requirements.\853\
---------------------------------------------------------------------------
    \851\ Notice and demand is the notice given to a person liable for 
tax stating that the tax has been assessed and demanding that payment 
be made. The notice and demand must be mailed to the person's last 
known address or left at the person's dwelling or usual place of 
business (Code sec. 6303).
    \852\ Code sec. 6331.
    \853\ Code secs. 6335-6343.
---------------------------------------------------------------------------
      A continuous levy is applicable to specified Federal 
payments.\854\ This includes any Federal payment for which 
eligibility is not based on the income and/or assets of a 
payee. Thus, a Federal payment to a vendor of goods or services 
to the government is subject to continuous levy. This 
continuous levy attaches up to 15 percent of any specified 
payment due the taxpayer.
---------------------------------------------------------------------------
    \854\ Code sec. 6331(h).
---------------------------------------------------------------------------

                               HOUSE BILL

      The bill permits a levy of up to 100 percent of a Federal 
payment to a vendor of goods or services to the Federal 
Government.
      Effective date.--Date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
7. Modification of straddle rules (sec. 687 of the House bill, sec. 464 
        of the Senate amendment, and sec. 1092 of the Code)

                              PRESENT LAW

Straddle rules
            In general
      A ``straddle'' generally refers to offsetting positions 
(sometimes referred to as ``legs'' of the straddle) with 
respect to actively traded personal property. Positions are 
offsetting if there is a substantial diminution in the risk of 
loss from holding one position by reason of holding one or more 
other positions in personal property. A ``position'' is an 
interest (including a futures or forward contract or option) in 
personal property. When a taxpayer realizes a loss with respect 
to a position in a straddle, the taxpayer may recognize that 
loss for any taxable year only to the extent that the loss 
exceeds the unrecognized gain (if any) with respect to 
offsetting positions in the straddle.\855\ Deferred losses are 
carried forward to the succeeding taxable year and are subject 
to the same limitation with respect to unrecognized gain in 
offsetting positions.
---------------------------------------------------------------------------
    \855\ Sec. 1092.
---------------------------------------------------------------------------
            Positions in stock
      The straddle rules generally do not apply to positions in 
stock. However, the straddle rules apply where one of the 
positions is stock and at least one of the offsetting positions 
is: (1) an option with respect to the stock, (2) a securities 
futures contract (as defined in section 1234B) with respect to 
the stock, or (3) a position with respect to substantially 
similar or related property (other than stock) as defined in 
Treasury regulations. In addition, the straddle rules apply to 
stock of a corporation formed or availed of to take positions 
in personal property that offset positions taken by any 
shareholder.
      Although the straddle rules apply to offsetting positions 
that consist of stock and an option with respect to stock, the 
straddle rules generally do not apply if the option is a 
``qualified covered call option'' written by the taxpayer.\856\ 
In general, a qualified covered call option is defined as an 
exchange-listed option that is not deep-in-the-money and is 
written by a non-dealer more than 30 days before expiration of 
the option.
---------------------------------------------------------------------------
    \856\ However, if the option written by the taxpayer is a qualified 
covered call option that is in-the-money, then (1) any loss with 
respect to such option is treated as long-term capital loss if, at the 
time such loss is realized, gain on the sale or exchange of the 
offsetting stock held by the taxpayer would be treated as long-term 
capital gain, and (2) the holding period of such stock does not include 
any period during which the taxpayer is the grantor of the option (sec. 
1092(f)).
---------------------------------------------------------------------------
      The stock exception from the straddle rules has been 
largely curtailed by statutory amendment and regulatory 
interpretation. Under proposed Treasury regulations, the 
application of the stock exception essentially would be limited 
to offsetting positions involving direct ownership of stock and 
short sales of stock.\857\
---------------------------------------------------------------------------
    \857\ Prop. Treas. Reg. sec. 1.1092(d)-2(c).
---------------------------------------------------------------------------
            Unbalanced straddles
      When one position with respect to personal property 
offsets only a portion of one or more other positions 
(``unbalanced straddles''), the Secretary is directed to 
prescribe by regulations the method for determining the portion 
of such other positions that is to be taken into account for 
purposes of the straddle rules.\858\ To date, no such 
regulations have been promulgated.
---------------------------------------------------------------------------
    \858\ Sec. 1092(c)(2)(B).
---------------------------------------------------------------------------
      Unbalanced straddles can be illustrated with the 
following example: Assume the taxpayer holds two shares of 
stock (i.e., is long) in XYZ corporation--share A with a $30 
basis and share B with a $40 basis. When the value of the XYZ 
stock is $45 per share, the taxpayer pays a $5 premium to 
purchase a put option on one share of the XYZ stock with an 
exercise price of $40. The issue arises as to whether the 
purchase of the put option creates a straddle with respect to 
share A, share B, or both. Assume that, when the value of the 
XYZ stock is $100, the put option expires unexercised. Taxpayer 
incurs a loss of $5 on the expiration of the put option, and 
sells share B for a $60 gain. On a literal reading of the 
straddle rules, the $5 loss would be deferred because the loss 
($5) does not exceed the unrecognized gain ($70) in share A, 
which is also an offsetting position to the put option--
notwithstanding that the taxpayer recognized more gain than the 
loss through the sale of share B. This problem is exacerbated 
when the taxpayer has a large portfolio of actively traded 
personal property that may be offsetting the loss leg of the 
straddle.
      Although Treasury has not issued regulations to address 
unbalanced straddles, the IRS issued a private letter ruling in 
1999 that addressed an unbalanced straddle situation.\859\ 
Under the facts of the ruling, a taxpayer entered into a 
costless collar with respect to a portion of the shares of a 
particular stock held by the taxpayer.\860\ Other shares were 
held in an account as collateral for a loan and still other 
shares were held in excess of the shares used as collateral and 
the number of shares specified in the collar. The ruling 
concluded that the collar offset only a portion of the stock 
(i.e., the number of shares specified in the costless collar) 
because that number of shares determined the payoff under each 
option comprising the collar. The ruling further concluded 
that: ``In the absence of regulations under section 
1092(c)(2)(B), we conclude that it is permissible for Taxpayer 
to identify which shares of Corporation stock are part of the 
straddles and which shares are used as collateral for the loans 
using appropriately modified versions of the methods of section 
1.1012-1(c)(2) and (3) [providing rules for adequate 
identification of shares of stock sold or transferred by a 
taxpayer] or section 1.1092(b)-3T(d)(4) [providing requirements 
and methods for identification of positions that are part of a 
section 1092(b)(2) identified mixed straddle]''.
---------------------------------------------------------------------------
    \859\ Priv. Ltr. Rul. 199925044 (Feb. 3, 1999).
    \860\ A costless collar generally is comprised of the purchase of a 
put option and the sale of a call option with the same trade dates and 
maturity dates and set such that the premium paid substantially equals 
the premium received. The collar can be considered as economically 
similar to a short position in the stock.
---------------------------------------------------------------------------
Holding period for dividends-received deduction
      If an instrument issued by a U.S. corporation is 
classified for tax purposes as stock, a corporate holder of the 
instrument generally is entitled to a dividends-received 
deduction for dividends received on that instrument.\861\ The 
dividends-received deduction is allowed to a corporate 
shareholder only if the shareholder satisfies a 46-day holding 
period for the dividend-paying stock (or a 91-day holding 
period for certain dividends on preferred stock).\862\ The 
holding period must be satisfied for each dividend over a 
period that is immediately before and immediately after the 
taxpayer becomes entitled to receive the dividend. The 46- or 
91-day holding period generally does not include any time 
during which the shareholder is protected (other than by 
writing a qualified covered call) from the risk of loss that is 
otherwise inherent in the ownership of any equity 
interest.\863\
---------------------------------------------------------------------------
    \861\ Sec. 243. The amount of the deduction is 70 percent of 
dividends received if the recipient owns less than 20 percent (by vote 
and value) of stock of the payor. If the recipient owns 20 percent or 
more of the stock, the deduction is increased to 80 percent. If the 
recipient owns 80 percent or more of the stock, the deduction is 
further increased to 100 percent for qualifying dividends.
    \862\ Sec. 246(c).
    \863\ Sec. 246(c)(4).
---------------------------------------------------------------------------

                               HOUSE BILL

Straddle rules
      The House bill modifies the straddle rules in three 
respects: (1) permits taxpayers to identify offsetting 
positions of a straddle; (2) provides a special rule to clarify 
the present-law treatment of certain physically settled 
positions of a straddle; and (3) repeals the stock exception 
from the straddle rules.
            Identified straddles
      Under the House bill, taxpayers generally are permitted 
to identify the offsetting positions that are components of a 
straddle at the time the taxpayer enters into a transaction 
that creates a straddle, including an unbalanced straddle.\864\ 
If there is a loss with respect to any identified position that 
is part of an identified straddle, the general straddle loss 
deferral rules do not apply to such loss. Instead, the basis of 
each of the identified positions that offset the loss position 
in the identified straddle is increased by an amount that bears 
the same ratio to the loss as the unrecognized gain (if any) 
with respect to such offsetting position bears to the aggregate 
unrecognized gain with respect to all positions that offset the 
loss position in the identified straddle.\865\ Any loss with 
respect to an identified position that is part of an identified 
straddle cannot otherwise be taken into account by the taxpayer 
or any other person to the extent that the loss increases the 
basis of any identified positions that offset the loss position 
in the identified straddle.
---------------------------------------------------------------------------
    \864\ However, to the extent provided by Treasury regulations, 
taxpayers are not permitted to identify offsetting positions of a 
straddle if the fair market value of the straddle position already held 
by the taxpayer at the creation of the straddle is less than its 
adjusted basis in the hands of the taxpayer.
    \865\ For this purpose, ``unrecognized gain'' is the excess of the 
fair market value of an identified position that is part of an 
identified straddle at the time the taxpayer incurs a loss with respect 
to another identified position in the identified straddle, over the 
fair market value of such position when the taxpayer identified the 
position as a position in the identified straddle.
---------------------------------------------------------------------------
      In addition, the provision provides the Secretary 
authority to issue regulations that would specify (1) the 
proper methods for clearly identifying a straddle as an 
identified straddle (and identifying positions as positions in 
an identified straddle), (2) the application of the identified 
straddle rules for a taxpayer that fails to properly identify 
the positions of an identified straddle,\866\ and (3) provide 
an ordering rule for dispositions of less than an entire 
position that is part of an identified straddle.
---------------------------------------------------------------------------
    \866\ For example, although the provision does not require 
taxpayers to identify any positions of a straddle as an identified 
straddle, it may be necessary to provide rules requiring all balanced 
offsetting positions to be included in an identified straddle if a 
taxpayer elects to identify any of the offsetting positions as an 
identified straddle.
---------------------------------------------------------------------------
            Physically settled straddle positions
      The House bill also clarifies the present-law straddle 
rules with respect to taxpayers that settle a position that is 
part of a straddle by delivering property to which the position 
relates. Specifically, the provision clarifies that the 
present-law straddle loss deferral rules treat as a two-step 
transaction the physical settlement of a straddle position 
that, if terminated, would result in the realization of a loss. 
With respect to the physical settlement of such a position, the 
taxpayer is treated as having terminated the position for its 
fair market value immediately before the settlement. The 
taxpayer then is treated as having sold at fair market value 
the property used to physically settle the position.
            Stock exception repeal
      The House bill also eliminates the exception from the 
straddle rules for stock (other than the exception relating to 
qualified covered call options). Thus, offsetting positions 
comprised of actively traded stock and a position with respect 
to substantially similar or related property generally 
constitute a straddle.\867\
---------------------------------------------------------------------------
    \867\ It is intended that Treasury regulations defining 
substantially similar or related property for this purpose will 
continue to apply subsequent to repeal of the stock exception and 
generally will constitute the exclusive definition of a straddle with 
respect to offsetting positions involving stock. See Prop. Treas. Reg. 
sec. 1.1092(d)-2(b). However, the general straddles rules regarding 
substantial diminution in risk of loss will continue to apply to stock 
of corporations formed or availed of to take positions in personal 
property that offset positions taken by the shareholder.
---------------------------------------------------------------------------
Dividends-received deduction holding period
      The House bill also modifies the required 46- or 91-day 
holding period for the dividends-received deduction by 
providing that the holding period does not include any time 
during which the shareholder is protected from the risk of loss 
otherwise inherent in the ownership of any equity interest if 
the shareholder obtains such protection by writing an in-the-
money call option on the dividend-paying stock.
Effective date
      The House bill provision is effective for positions 
established on or after the date of enactment that 
substantially diminish the risk of loss from holding offsetting 
positions (regardless of when such offsetting position was 
established).

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except the Senate amendment also limits the present-law 
qualified covered call option exception to options traded on a 
national securities exchange that is registered with the 
Securities and Exchange Commission.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
8. Add vaccines against Hepatitis A to the list of taxable vaccines 
        (sec. 688 of the House bill, sec. 491 of the Senate amendment, 
        and sec. 4132 of the Code)

                              PRESENT LAW

      A manufacturer's excise tax is imposed at the rate of 75 
cents per dose \868\ on the following vaccines routinely 
recommended for administration to children: diphtheria, 
pertussis, tetanus, measles, mumps, rubella, polio, HIB 
(haemophilus influenza type B), hepatitis B, varicella (chicken 
pox), rotavirus gastroenteritis, and streptococcus pneumoniae. 
The tax applied to any vaccine that is a combination of vaccine 
components equals 75 cents times the number of components in 
the combined vaccine.
---------------------------------------------------------------------------
    \868\ Sec. 4131.
---------------------------------------------------------------------------
      Amounts equal to net revenues from this excise tax are 
deposited in the Vaccine Injury Compensation Trust Fund to 
finance compensation awards under the Federal Vaccine Injury 
Compensation Program for individuals who suffer certain 
injuries following administration of the taxable vaccines. This 
program provides a substitute Federal, ``no fault'' insurance 
system for the State-law tort and private liability insurance 
systems otherwise applicable to vaccine manufacturers. All 
persons immunized after September 30, 1988, with covered 
vaccines must pursue compensation under this Federal program 
before bringing civil tort actions under State law.

                               HOUSE BILL

      The House bill adds any vaccine against hepatitis A to 
the list of taxable vaccines.
      Effective date.--The provision is effective for vaccines 
sold beginning on the first day of the first month beginning 
more than four weeks after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment adds any vaccine against hepatitis A 
to the list of taxable vaccines. The Senate amendment also 
makes a conforming amendment to the trust fund expenditure 
purposes.
      Effective date.--The provision is effective for vaccines 
sold beginning on the first day of the first month beginning 
more than four weeks after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.
9. Add vaccines against influenza to the list of taxable vaccines (sec. 
        689 of the House bill, sec. 732 of the Senate amendment, and 
        sec. 4132 of the Code)

                              PRESENT LAW

      A manufacturer's excise tax is imposed at the rate of 75 
cents per dose \869\ on the following vaccines routinely 
recommended for administration to children: diphtheria, 
pertussis, tetanus, measles, mumps, rubella, polio, HIB 
(haemophilus influenza type B), hepatitis B, varicella (chicken 
pox), rotavirus gastroenteritis, and streptococcus pneumoniae. 
The tax applied to any vaccine that is a combination of vaccine 
components equals 75 cents times the number of components in 
the combined vaccine.
---------------------------------------------------------------------------
    \869\ Sec. 4131.
---------------------------------------------------------------------------
      Amounts equal to net revenues from this excise tax are 
deposited in the Vaccine Injury Compensation Trust Fund to 
finance compensation awards under the Federal Vaccine Injury 
Compensation Program for individuals who suffer certain 
injuries following administration of the taxable vaccines. This 
program provides a substitute Federal, ``no fault'' insurance 
system for the State-law tort and private liability insurance 
systems otherwise applicable to vaccine manufacturers. All 
persons immunized after September 30, 1988, with covered 
vaccines must pursue compensation under this Federal program 
before bringing civil tort actions under State law.

                               HOUSE BILL

      The House bill adds any trivalent vaccine against 
influenza to the list of taxable vaccines.
      Effective date.--The provision is effective for vaccines 
sold or used beginning on the later of the first day of the 
first month beginning more than four weeks after the date of 
enactment or the date on which the Secretary of Health and 
Human Services lists any such vaccine for purpose of 
compensation for any vaccine-related injury or death through 
the Vaccine Injury Compensation Trust Fund.

                            SENATE AMENDMENT

      The Senate amendment is identical to the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision of the 
House bill and the Senate amendment.
10. Extension of IRS user fees (sec. 690 of the House bill, sec. 482 of 
        the Senate amendment, and sec. 7528 of the Code)

                              PRESENT LAW

      The IRS generally charges a fee for requests for a letter 
ruling, determination letter, opinion letter, or other similar 
ruling or determination.\870\ These user fees are authorized by 
statute through December 31, 2004.
---------------------------------------------------------------------------
    \870\ Sec. 7528.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill extends the statutory authorization for 
these user fees through September 30, 2014.
      Effective date.--Requests made after the date of 
enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except that it extends the statutory authorization for these 
user fees through September 30, 2013.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
11. Extension of Customs user fees (sec. 691 of the House bill and sec. 
        485 of the Senate amendment)

                              PRESENT LAW

      Section 13031 of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (``COBRA'') \871\ authorized the 
Secretary of the Treasury to collect certain service fees. 
Section 412 of the Homeland Security Act of 2002 \872\ 
authorized the Secretary of the Treasury to delegate such 
authority to the Secretary of Homeland Security. Provided for 
under 19 U.S.C. 58c, these fees include: processing fees for 
air and sea passengers, commercial trucks, rail cars, private 
aircraft and vessels, commercial vessels, dutiable mail 
packages, barges and bulk carriers, merchandise, and Customs 
broker permits. COBRA was amended on several occasions but most 
recently by P.L. No. 108-121, which extended authorization for 
the collection of these fees through March 1, 2005.\873\
---------------------------------------------------------------------------
    \871\ Pub. L. No. 99-272.
    \872\ Pub. L. No. 107-296.
    \873\ Sec. 201, 117 Stat. 1335.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill extends the passenger and conveyance 
processing fees and the merchandise processing fees authorized 
under COBRA through September 30, 2014. For fiscal years after 
September 30, 2005, the Secretary is to charge fees in amounts 
that are reasonably related to the costs of providing customs 
services in connection with the activity or item for which the 
fee is charged.
      The House bill also includes a sense of the Congress 
regarding the extent to which fees are related to the costs of 
providing customs services in connection with the activities or 
items for which the fees have been charged under such 
paragraphs. The House bill further provides that the Secretary 
conduct a study of all the fees collected by the Department of 
Homeland Security.
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      The Senate amendment extends the fees authorized under 
the COBRA through September 30, 2013.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill 
provision.
12. Prohibition on nonrecognition of gain through complete liquidation 
        of holding company (sec. 452 of the Senate amendment and sec. 
        332 of the Code)

                              PRESENT LAW

      A U.S. corporation owned by foreign persons is subject to 
U.S. income tax on its net income. In addition, the earnings of 
the U.S. corporation are subject to a second tax, when 
dividends are paid to the corporation's shareholders.
      In general, dividends paid by a U.S. corporation to 
nonresident alien individuals and foreign corporations that are 
not effectively connected with a U.S. trade or business are 
subject to a U.S. withholding tax on the gross amount of such 
income at a rate of 30 percent. The 30-percent withholding tax 
may be reduced pursuant to an income tax treaty between the 
United States and the foreign country where the foreign person 
is resident.
      In addition, the United States imposes a branch profits 
tax on U.S. earnings of a foreign corporation that are shifted 
out of a U.S. branch of the foreign corporation. The branch 
profits tax is comparable to the second-level taxes imposed on 
dividends paid by a U.S. corporation to foreign shareholders. 
The branch profits tax is 30 percent (subject to possible 
income tax treaty reduction) of a foreign corporation's 
dividend equivalent amount. The ``dividend equivalent amount'' 
generally is the earnings and profits of a U.S. branch of a 
foreign corporation attributable to its income effectively 
connected with a U.S. trade or business.
      In general, U.S. withholding tax is not imposed with 
respect to a distribution of a U.S. corporation's earnings to a 
foreign corporation in complete liquidation of the subsidiary, 
because the distribution is treated as made in exchange for 
stock and not as a dividend. In addition, detailed rules apply 
for purposes of exempting foreign corporations from the branch 
profits tax for the year in which it completely terminates its 
U.S. business conducted in branch form. The exemption from the 
branch profits tax generally applies if, among other things, 
for three years after the termination of the U.S. branch, the 
foreign corporation has no income effectively connected with a 
U.S. trade or business, and the U.S. assets of the terminated 
branch are not used by the foreign corporation or a related 
corporation in a U.S. trade or business.
      Regulations under section 367(e) provide that the 
Commissioner may require a domestic liquidating corporation to 
recognize gain on distributions in liquidation made to a 
foreign corporation if a principal purpose of the liquidation 
is the avoidance of U.S. tax. Avoidance of U.S. tax for this 
purpose includes, but is not limited to, the distribution of a 
liquidating corporation's earnings and profits with a principal 
purpose of avoiding U.S. tax.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision treats as a dividend any distribution of 
earnings by a U.S. holding company to a foreign corporation in 
a complete liquidation, if the U.S. holding company was in 
existence for less than five years.
      Effective date.--The provision is effective for 
distributions occurring on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
13. Effectively connected income to include certain foreign source 
        income (sec. 454 of the Senate amendment and sec. 864 of the 
        Code)

                              PRESENT LAW

      Nonresident alien individuals and foreign corporations 
(collectively, foreign persons) are subject to U.S. tax on 
income that is effectively connected with the conduct of a U.S. 
trade or business; the U.S. tax on such income is calculated in 
the same manner and at the same graduated rates as the tax on 
U.S. persons.\874\ Foreign persons also are subject to a 30-
percent gross-basis tax, collected by withholding, on certain 
U.S.-source income, such as interest, dividends and other fixed 
or determinable annual or periodical (``FDAP'') income, that is 
not effectively connected with a U.S. trade or business. This 
30-percent withholding tax may be reduced or eliminated 
pursuant to an applicable tax treaty. Foreign persons generally 
are not subject to U.S. tax on foreign-source income that is 
not effectively connected with a U.S. trade or business.
---------------------------------------------------------------------------
    \874\ Secs. 871(b) and 882.
---------------------------------------------------------------------------
      Detailed rules apply for purposes of determining whether 
income is treated as effectively connected with a U.S. trade or 
business (so-called ``U.S.-effectively connected 
income'').\875\ The rules differ depending on whether the 
income at issue is U.S.-source or foreign-source income. Under 
these rules, U.S.-source FDAP income, such as U.S.-source 
interest and dividends, and U.S.-source capital gains are 
treated as U.S.-effectively connected income if such income is 
derived from assets used in or held for use in the active 
conduct of a U.S. trade or business, or from business 
activities conducted in the United States. All other types of 
U.S.-source income are treated as U.S.-effectively connected 
income (sometimes referred to as the ``force of attraction 
rule'').
---------------------------------------------------------------------------
    \875\ Sec. 864(c).
---------------------------------------------------------------------------
      In general, foreign-source income is not treated as U.S.-
effectively connected income.\876\ However, foreign-source 
income, gain, deduction, or loss generally is considered to be 
effectively connected with a U.S. business only if the person 
has an office or other fixed place of business within the 
United States to which such income, gain, deduction, or loss is 
attributable and such income falls into one of three categories 
described below.\877\ For these purposes, income generally is 
not considered attributable to an office or other fixed place 
of business within the United States unless such office or 
fixed place of business is a material factor in the production 
of the income, and such office or fixed place of business 
regularly carries on activities of the type that generate such 
income.\878\
---------------------------------------------------------------------------
    \876\ Sec. 864(c)(4).
    \877\ Sec. 864(c)(4)(B).
    \878\ Sec. 864(c)(5).
---------------------------------------------------------------------------
      The first category consists of rents or royalties for the 
use of patents, copyrights, secret processes, or formulas, good 
will, trademarks, trade brands, franchises, or other similar 
intangible properties derived in the active conduct of the U.S. 
trade or business.\879\ The second category consists of 
interest or dividends derived in the active conduct of a 
banking, financing, or similar business within the United 
States, or received by a corporation whose principal business 
is trading in stocks or securities for its own account.\880\ 
Notwithstanding the foregoing, foreign-source income consisting 
of dividends, interest, or royalties is not treated as 
effectively connected if the items are paid by a foreign 
corporation in which the recipient owns, directly, indirectly, 
or constructively, more than 50 percent of the total combined 
voting power of the stock.\881\ The third category consists of 
income, gain, deduction, or loss derived from the sale or 
exchange of inventory or property held by the taxpayer 
primarily for sale to customers in the ordinary course of the 
trade or business where the property is sold or exchanged 
outside the United States through the foreign person's U.S. 
office or other fixed place of business.\882\ Such amounts are 
not treated as effectively connected if the property is sold or 
exchanged for use, consumption, or disposition outside the 
United States and an office or other fixed place of business of 
the taxpayer in a foreign country materially participated in 
the sale or exchange.
---------------------------------------------------------------------------
    \879\ Sec. 864(c)(4)(B)(i).
    \880\ Sec. 864(c)(4)(B)(ii).
    \881\ Sec. 864(c)(4)(D)(i).
    \882\ Sec. 864(c)(4)(B)(iii).
---------------------------------------------------------------------------
      The Code provides sourcing rules for enumerated types of 
income, including interest, dividends, rents, royalties, and 
personal services income.\883\ For example, interest income 
generally is sourced based on the residence of the obligor. 
Dividend income generally is sourced based on the residence of 
the corporation paying the dividend. Thus, interest paid on 
obligations of foreign persons and dividends paid by foreign 
corporations generally are treated as foreign-source income.
---------------------------------------------------------------------------
    \883\ Secs. 861-865.
---------------------------------------------------------------------------
      Other types of income are not specifically covered by the 
Code's sourcing rules. For example, fees for accepting or 
confirming letters of credit have been sourced under principles 
analogous to the interest sourcing rules.\884\ In addition, 
under regulations, payments in lieu of dividends and interest 
derived from securities lending transactions are sourced in the 
same manner as interest and dividends, including for purposes 
of determining whether such income is effectively connected 
with a U.S. trade or business.\885\ Moreover, income from 
notional principal contracts (such as interest rate swaps) 
generally is sourced based on the residence of the recipient of 
the income, but is treated as U.S.-source effectively connected 
income if it arises from the conduct of a United States trade 
or business.\886\
---------------------------------------------------------------------------
    \884\ See Bank of America v. United States, 680 F.2d 142 (Ct. Cl. 
1982).
    \885\ Treas. Reg. sec. 1.864-5(b)(2)(ii).
    \886\ Treas. Reg. sec. 1.863-7(b)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, each category of foreign-source 
income that is treated as effectively connected with a U.S. 
trade or business is expanded to include economic equivalents 
of such income (i.e., economic equivalents of certain foreign-
source (1) rents and royalties, (2) dividends and interest, and 
(3) income on sales or exchanges of goods in the ordinary 
course of business). Thus, such economic equivalents are 
treated as U.S.-effectively connected income in the same 
circumstances that foreign-source rents, royalties, dividends, 
interest, or certain inventory sales are treated as U.S.-
effectively connected income. For example, foreign-source 
interest and dividend equivalents are treated as U.S.-
effectively connected income if the income is attributable to a 
U.S. office of the foreign person, and such income is derived 
by such foreign person in the active conduct of a banking, 
financing, or similar business within the United States, or the 
foreign person is a corporation whose principal business is 
trading in stocks or securities for its own account.
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
14. Recapture of overall foreign losses on sale of controlled foreign 
        corporation stock (sec. 455 of the Senate amendment and sec. 
        904 of the Code)

                              PRESENT LAW

      U.S. persons may credit foreign taxes against U.S. tax on 
foreign-source income. The amount of foreign tax credits that 
may be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S.-source income. The amount of foreign tax 
credits generally is limited to a portion of the taxpayer's 
U.S. tax which portion is calculated by multiplying the 
taxpayer's total U.S. tax by a fraction, the numerator of which 
is the taxpayer's foreign-source taxable income (i.e., foreign-
source gross income less allocable expenses or deductions) and 
the denominator of which is the taxpayer's worldwide taxable 
income for the year.\887\ Separate limitations are applied to 
specific categories of income.
---------------------------------------------------------------------------
    \887\ Sec. 904(a).
---------------------------------------------------------------------------
      Special recapture rules apply in the case of foreign 
losses for purposes of applying the foreign tax credit 
limitation.\888\ Under these rules, losses for any taxable year 
in a limitation category which exceed the aggregate amount of 
foreign income earned in other limitation categories (a so-
called ``overall foreign loss'') are recaptured by resourcing 
foreign-source income earned in a subsequent year as U.S.-
source income.\889\ The amount resourced as U.S.-source income 
generally is limited to the lesser of the amount of the overall 
foreign losses not previously recaptured, or 50 percent of the 
taxpayer's foreign-source income in a given year (the ``50-
percent limit''). Taxpayers may elect to recapture a larger 
percentage of such losses.
---------------------------------------------------------------------------
    \888\ Sec. 904(f).
    \889\ Sec. 904(f)(1).
---------------------------------------------------------------------------
      A special recapture rule applies to ensure the recapture 
of an overall foreign loss where property which was used in a 
trade or business predominantly outside the United States is 
disposed of prior to the time the loss has been 
recaptured.\890\ In this regard, dispositions of trade or 
business property used predominantly outside the United States 
are treated as resulting in the recognition of foreign-source 
income (regardless of whether gain would otherwise be 
recognized upon disposition of the assets), in an amount equal 
to the lesser of the excess of the fair market value of such 
property over its adjusted basis, or the amount of unrecaptured 
overall foreign losses. Such foreign-source income is resourced 
as U.S.-source income without regard to the 50-percent limit. 
For example, if a U.S. corporation transfers its foreign branch 
business assets to a foreign corporation in a nontaxable 
section 351 transaction, the taxpayer would be treated for 
purposes of the recapture rules as having recognized foreign-
source income in the year of the transfer in an amount equal to 
the excess of the fair market value of the property disposed 
over its adjusted basis (or the amount of unrecaptured foreign 
losses, if smaller). Such income would be recaptured as U.S.-
source income to the extent of any prior unrecaptured overall 
foreign losses.\891\
---------------------------------------------------------------------------
    \890\ Sec. 904(f)(3).
    \891\ Coordination rules apply in the case of losses recaptured 
under the branch loss recapture rules. Sec. 367(a)(3)(C).
---------------------------------------------------------------------------
      Detailed rules apply in allocating and apportioning 
deductions and losses for foreign tax credit limitation 
purposes. In the case of interest expense, such amounts 
generally are apportioned to all gross income under an asset 
method, under which the taxpayer's assets are characterized as 
producing income in statutory or residual groupings (i.e., 
foreign-source income in the various limitation categories or 
U.S.-source income).\892\ Interest expense is apportioned among 
these groupings based on the relative asset values in each. 
Taxpayers may elect to value assets based on either tax book 
value or fair market value.
---------------------------------------------------------------------------
    \892\ Sec. 864(e) and Temp. Treas. Reg. sec. 1.861-9T.
---------------------------------------------------------------------------
      Each corporation that is a member of an affiliated group 
is required to apportion its interest expense using 
apportionment fractions determined by reference to all assets 
of the affiliated group. For this purpose, an affiliated group 
generally is defined to include only domestic corporations. 
Stock in a foreign subsidiary, however, is treated as a foreign 
asset that may attract the allocation of U.S. interest expense 
for these purposes. If tax basis is used to value assets, the 
adjusted basis of the stock of certain 10-percent or greater 
owned foreign corporations or other non-affiliated corporations 
must be increased by the amount of earnings and profits of such 
corporation accumulated during the period the U.S. shareholder 
held the stock, for purposes of the interest apportionment.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, the special recapture rule for 
overall foreign losses that currently applies to dispositions 
of foreign trade or business assets applies to the disposition 
of stock in a controlled foreign corporation controlled by the 
taxpayer. Thus, a disposition of controlled foreign corporation 
stock by a controlling shareholder results in the recognition 
of foreign-source income in an amount equal to the lesser of 
the fair market value of the stock over its adjusted basis, or 
the amount of prior unrecaptured overall foreign losses. Such 
income is resourced as U.S.-source income for foreign tax 
credit limitation purposes without regard to the 50-percent 
limit.
      Although the provision generally extends to all 
dispositions of such stock, regardless of whether gain or loss 
is recognized on the transfer, exceptions are made for certain 
internal restructurings. Contributions to corporations or 
partnerships under sections 351 and 721, respectively, and 
certain stock and asset reorganizations do not trigger 
recapture of overall foreign losses, provided that the 
transferor's underlying indirect interest in the disposed 
controlled foreign corporation does not change. However, any 
gain recognized in connection with a transaction meeting any of 
these exceptions, such as boot, triggers recapture of overall 
foreign losses to the extent of such gain.
      Effective date.--The provision applies to dispositions 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications. Under the provision as modified, a 
disposition of controlled foreign corporation stock in a 
transaction in which the taxpayer or a member of its 
consolidated group acquires the assets of the controlled 
foreign corporation in a liquidation under section 332 or a 
reorganization does not trigger the recapture of overall 
foreign losses. Any gain recognized in connection with a 
transaction meeting this exception triggers recapture of 
overall foreign losses to the extent of such gain.
15. Application of earnings-stripping rules to partnerships and S 
        corporations (sec. 462 of the Senate amendment and sec. 163 of 
        the Code)

                              PRESENT LAW

      Present law provides rules to limit the ability of U.S. 
corporations to reduce the U.S. tax on their U.S.-source income 
through earnings stripping transactions. Section 163(j) 
specifically addresses earnings stripping involving interest 
payments, by limiting the deductibility of interest paid to 
certain related parties (``disqualified interest''),\893\ if 
the payor's debt-equity ratio exceeds 1.5 to 1 and the payor's 
net interest expense exceeds 50 percent of its ``adjusted 
taxable income'' (generally taxable income computed without 
regard to deductions for net interest expense, net operating 
losses, and depreciation, amortization, and depletion). 
Disallowed interest amounts can be carried forward 
indefinitely. In addition, excess limitation (i.e., any excess 
of the 50-percent limit over a company's net interest expense 
for a given year) can be carried forward three years.
---------------------------------------------------------------------------
    \893\ This interest also may include interest paid to unrelated 
parties in certain cases in which a related party guarantees the debt.
---------------------------------------------------------------------------
      The present-law earnings stripping provision does not 
apply to partnerships. Proposed Treasury regulations provide 
that a corporate partner's proportionate share of the 
liabilities of a partnership is treated as debt of the 
corporate partner for purposes of applying the earnings 
stripping limitation to its own interest payments.\894\ In 
addition, interest paid or accrued by a partnership is treated 
as interest expense of a corporate partner, with the result 
that a deduction for the interest expense may be disallowed if 
that expense would be disallowed under the earnings stripping 
rules if paid by the corporate partner itself.\895\ The 
proposed regulations also provide that the earnings stripping 
rules do not apply to subchapter S corporations.\896\ Thus, 
under present law and the proposed regulations, a partnership 
or S corporation generally is allowed a deduction for interest 
paid or accrued on indebtedness that it issues that otherwise 
would be disallowed under the earnings stripping rules in the 
case of a subchapter C corporation.
---------------------------------------------------------------------------
    \894\ Prop. Treas. reg. sec. 1.163(j)-3(b)(3).
    \895\ Prop. Treas. reg. sec. 1.163(j)-2(c)(5).
    \896\ Prop. Treas. reg. sec. 1.163(j)-1(a)(i).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment incorporates a rule attributing 
partnership debt to a corporate partner for purposes of 
applying the earnings stripping rules to the corporation.\897\
---------------------------------------------------------------------------
    \897\ This rule currently is contained in Prop. Treas. reg. sec. 
1.163(j)-2(c)(5).
---------------------------------------------------------------------------
      Effective date.--The Senate amendment provision generally 
is effective for taxable years beginning on or after the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
16. Recognition of cancellation of indebtedness income realized on 
        satisfaction of debt with partnership interest (sec. 463 of the 
        Senate amendment and sec. 108 of the Code)

                              PRESENT LAW

      Under present law, a corporation that transfers shares of 
its stock in satisfaction of its debt must recognize 
cancellation of indebtedness income in the amount that would be 
realized if the debt were satisfied with money equal to the 
fair market value of the stock.\898\ Prior to enactment of this 
present-law provision in 1993, case law provided that a 
corporation did not recognize cancellation of indebtedness 
income when it transferred stock to a creditor in satisfaction 
of debt (referred to as the ``stock-for-debt exception'').\899\
---------------------------------------------------------------------------
    \898\ Sec. 108(e)(8).
    \899\ E.g., Motor Mart Trust v. Commissioner, 4 T.C. 931 (1945), 
aff'd, 156 F.2d 122 (1st Cir. 1946), acq. 1947-1 C.B. 3; Capento Sec. 
Corp. v. Commissioner, 47 B.T.A. 691 (1942), nonacq. 1943 C.B. 28, 
aff'd, 140 F.2d 382 (1st Cir. 1944); Tower Bldg. Corp. v. Commissioner, 
6 T.C. 125 (1946), acq. 1947-1 C.B. 4; Alcazar Hotel, Inc. v. 
Commissioner, 1 T.C. 872 (1943), acq. 1943 C.B. 1.
---------------------------------------------------------------------------
      When cancellation of indebtedness income is realized by a 
partnership, it generally is allocated among the partners in 
accordance with the partnership agreement, provided the 
allocations under the agreement have substantial economic 
effect. A partner who is allocated cancellation of indebtedness 
income is entitled to exclude it if the partner qualifies for 
one of the various exceptions to recognition of such income, 
including the exception for insolvent taxpayers or that for 
qualified real property indebtedness of taxpayers other than 
subchapter C corporations.\900\ The availability of each of 
these exceptions is determined at the partner, rather than the 
partnership, level.
---------------------------------------------------------------------------
    \900\ Sec. 108(a).
---------------------------------------------------------------------------
      In the case of a partnership that transfers to a creditor 
a capital or profits interest in the partnership in 
satisfaction of its debt, no Code provision expressly requires 
the partnership to realize cancellation of indebtedness income. 
Thus, it is unclear whether the partnership is required to 
recognize cancellation of indebtedness income under either the 
case law that established the stock-for-debt exception or the 
present-law statutory repeal of the stock-for-debt exception. 
It also is unclear whether any requirement to recognize 
cancellation of indebtedness income is affected if the 
cancelled debt is nonrecourse indebtedness.\901\
---------------------------------------------------------------------------
    \901\ See, e.g., Fulton Gold Corp. v. Commissioner, 31 B.T.A. 519 
(1934); American Seating Co. v. Commissioner, 14 B.T.A. 328, aff'd in 
part and rev'd in part, 50 F.2d 681 (7th Cir. 1931); Hiatt v. 
Commissioner, 35 B.T.A. 292 (1937); Hotel Astoria, Inc. v. 
Commissioner, 42 B.T.A. 759 (1940); Rev. Rul. 91-31, 1991-1 C.B. 19.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that when a partnership 
transfers a capital or profits interest in the partnership to a 
creditor in satisfaction of partnership debt, the partnership 
generally recognizes cancellation of indebtedness income in the 
amount that would be recognized if the debt were satisfied with 
money equal to the fair market value of the partnership 
interest. The Senate amendment applies without regard to 
whether the cancelled debt is recourse or nonrecourse 
indebtedness. Any cancellation of indebtedness income 
recognized under the Senate amendment is allocated solely among 
the partners who held interests in the partnership immediately 
prior to the satisfaction of the debt.
      Under the Senate amendment, no inference is intended as 
to the treatment under present law of the transfer of a 
partnership interest in satisfaction of partnership debt.
      Effective date.--The Senate amendment is effective for 
cancellations of indebtedness occurring on or after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment.
17. Denial of installment sale treatment for all readily tradable debt 
        (Sec. 465 of the Senate amendment and sec. 453 of the Code)

                              PRESENT LAW

      Under present law, taxpayers are permitted to recognize 
as gain on a disposition of property only that proportion of 
payments received in a taxable year which is the same as the 
proportion that the gross profit bears to the total contract 
price (the ``installment method'').\902\ However, the 
installment method is not available if the taxpayer sells 
property in exchange for a readily tradable evidence of 
indebtedness that is issued by a corporation or a government or 
political subdivision.\903\
---------------------------------------------------------------------------
    \902\ Sec. 453.
    \903\ Sec. 453(f)(3). Instead, the receipt of such indebtedness is 
treated as a receipt of payment.
---------------------------------------------------------------------------
      No similar provision under present law prohibits the use 
of the installment method where the taxpayer sells property in 
exchange for readily tradable indebtedness issued by a 
partnership or an individual.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment denies installment sale treatment 
with respect to all sales in which the taxpayer receives 
indebtedness that is readily tradable under present-law rules, 
regardless of the nature of the issuer. For example, if the 
taxpayer receives readily tradable debt of a partnership in a 
sale, the partnership debt is treated as payment on the 
installment note, and the installment method is unavailable to 
the taxpayer.
      Effective date.--The Senate amendment provision is 
effective for sales occurring on or after date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment.
18. Modify treatment of transfers to creditors in divisive 
        reorganizations (sec. 466 of the Senate amendment and secs. 357 
        and 361 of the Code)

                              PRESENT LAW

      Section 355 of the Code permits a corporation 
(``distributing'') to separate its businesses by distributing a 
controlled subsidiary (``controlled'') tax-free, if certain 
conditions are met. In cases where the distributing corporation 
contributes property to the controlled corporation that is to 
be distributed, no gain or loss is recognized if the property 
is contributed solely in exchange for stock or securities of 
the controlled corporation (which are subsequently distributed 
to distributing's shareholders). The contribution of property 
to a controlled corporation that is followed by a distribution 
of its stock and securities may qualify as a reorganization 
described in section 368(a)(1)(D). That section also applies to 
certain transactions that do not involve a distribution under 
section 355 and that are considered ``acquisitive'' rather than 
``divisive'' reorganizations.
      The contribution in the course of a divisive section 
368(a)(1)(D) reorganization is also subject to the rules of 
section 357(c). That section provides that the transferor 
corporation will recognize gain if the amount of liabilities 
assumed by controlled exceeds the basis of the property 
transferred to it.
      Because the contribution transaction in connection with a 
section 355 distribution is a reorganization under section 
368(a)(1)(D), it is also subject to certain rules applicable to 
both divisive and acquisitive reorganizations. One such rule, 
in section 361(b), states that a transferor corporation will 
not recognize gain if it receives money or other property and 
distributes that money or other property to its shareholders or 
creditors. The amount of property that may be distributed to 
creditors without gain recognition is unlimited under this 
provision.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The bill limits the amount of money plus the fair market 
value of other property that a distributing corporation can 
distribute to its creditors without gain recognition under 
section 361(b) to the amount of the basis of the assets 
contributed to a controlled corporation in a divisive 
reorganization. In addition, the bill provides that acquisitive 
reorganizations under section 368(a)(1)(D) are no longer 
subject to the liabilities assumption rules of section 357(c).
      Effective date.--The bill is effective for transactions 
on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
19. Clarify definition of nonqualified preferred stock (sec. 467 of the 
        Senate amendment and sec. 351(g) of the Code)

                              PRESENT LAW

      The Taxpayer Relief Act of 1997 amended sections 351, 
354, 355, 356, and 1036 to treat ``nonqualified preferred 
stock'' as boot in corporate transactions, subject to certain 
exceptions. For this purpose, preferred stock is defined as 
stock that is ``limited and preferred as to dividends and does 
not participate in corporate growth to any significant 
extent.'' Nonqualified preferred stock is defined as any 
preferred stock if (1) the holder has the right to require the 
issuer or a related person to redeem or purchase the stock, (2) 
the issuer or a related person is required to redeem or 
purchase, (3) the issuer or a related person has the right to 
redeem or repurchase, and, as of the issue date, it is more 
likely than not that such right will be exercised, or (4) the 
dividend rate varies in whole or in part (directly or 
indirectly) with reference to interest rates, commodity prices, 
or similar indices, regardless of whether such varying rate is 
provided as an express term of the stock (as in the case of an 
adjustable rate stock) or as a practical result of other 
aspects of the stock (as in the case of auction stock). For 
this purpose, clauses (1), (2), and (3) apply if the right or 
obligation may be exercised within 20 years of the issue date 
and is not subject to a contingency which, as of the issue 
date, makes remote the likelihood of the redemption or 
purchase.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision clarifies the definition of nonqualified 
preferred stock to ensure that stock for which there is not a 
real and meaningful likelihood of actually participating in the 
earnings and profits of the corporation is not considered to be 
outside the definition of stock that is limited and preferred 
as to dividends and does not participate in corporate growth to 
any significant extent.
      As one example, instruments that are preferred on 
liquidation and that are entitled to the same dividends as may 
be declared on common stock do not escape being nonqualified 
preferred stock by reason of that right if the corporation does 
not in fact pay dividends either to its common or preferred 
stockholders. As another example, stock that entitles the 
holder to a dividend that is the greater of seven percent or 
the dividends common shareholders receive does not avoid being 
preferred stock if the common shareholders are not expected to 
receive dividends greater than seven percent.
      No inference is intended as to the characterization of 
stock under present law that has terms providing for unlimited 
dividends or participation rights but, based on all the facts 
and circumstances, is limited and preferred as to dividends and 
does not participate in corporate growth to any significant 
extent.
      Effective date.--The provision is effective for 
transactions after May 14, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
20. Modify definition of controlled group of corporations (sec. 468 of 
        the Senate amendment and sec. 1563 of the Code)

                              PRESENT LAW

      Under present law, a tax is imposed on the taxable income 
of corporations. The rates are as follows:

               MARGINAL FEDERAL CORPORATE INCOME TAX RATES
------------------------------------------------------------------------
           If taxable income is:            Then the income tax rate is:
------------------------------------------------------------------------
$0-$50,000................................  15 percent of taxable
                                             income.
$50,001-$75,000...........................  25 percent of taxable
                                             income.
$75,001-$10,000,000.......................  34 percent of taxable
                                             income.
Over $10,000,000..........................  35 percent of taxable
                                             income.
------------------------------------------------------------------------

      The first two graduated rates described above are phased 
out by a five-percent surcharge for corporations with taxable 
income between $100,000 and $335,000. Also, the application of 
the 34-percent rate is phased out by a three-percent surcharge 
for corporations with taxable income between $15 million and 
$18,333,333.
      The component members of a controlled group of 
corporations are limited to one amount in each of the taxable 
income brackets shown above.\904\ For this purpose, a 
controlled group of corporations means a parent-subsidiary 
controlled group and a brother-sister controlled group.
---------------------------------------------------------------------------
    \904\ Component members are also limited to one alternative minimum 
tax exemption and one accumulated earnings credit.
---------------------------------------------------------------------------
      A brother-sister controlled group means two or more 
corporations if five or fewer persons who are individuals, 
estates or trusts own (or constructively own) stock possessing 
(1) at least 80 percent of the total combined voting power of 
all classes of stock entitled to vote and at least 80 percent 
of the total value of all stock, and (2) more than 50 percent 
of percent of the total combined voting power of all classes of 
stock entitled to vote or more than 50 percent of the total 
value of all stock, taking into account the stock ownership of 
each person only to the extent the stock ownership is identical 
with respect to each corporation.\905\
---------------------------------------------------------------------------
    \905\ Sec. 1563(a)(2). The Supreme Court held in United States v. 
Vogel Fertilizer, 455 US 16 (1982), that Treas. Reg. Sec. 1.1563-
1(a)(3), as it was then written, was invalid insofar as it would 
require an individual's stock to be taken into account, for purposes of 
the 80-percent brother-sister corporation ownership test, where that 
individual did not own stock in each of the corporations in the 
asserted controlled group. In that case, one corporation was owned 
77.49 percent by one shareholder and 22.51 by an unrelated shareholder. 
The 77.49 percent shareholder of that first corporation also owned 87.5 
percent of the voting stock and more than 90 percent of the value of 
the stock of a second corporation. The Supreme Court held the 
corporations were not a controlled group, even though they would have 
been one had the then applicable Treasury regulations been considered 
valid in their application to the case. The Treasury regulations were 
subsequently changed to conform to the Supreme Court decision. T.D. 
8179, 53 F.R. 6603 (March 2, 1988).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, a brother-sister controlled group 
means two or more corporations if five or fewer persons who are 
individuals, estates or trusts own (or constructively own) 
stock possessing more than 50 percent of the total combined 
voting power of all classes of stock entitled to vote, or more 
than 50 percent of the total value of all stock, taking into 
account the stock ownership of each person only to the extent 
the stock ownership is identical with respect to each 
corporation.
      The provision applies only for purposes of section 1561, 
currently relating to corporate tax brackets, the accumulated 
earnings credit, and the minimum tax. The provision does not 
affect other Code sections or other provisions that utilize or 
refer to the section 1563 brother-sister corporation controlled 
group test for other purposes.\906\
---------------------------------------------------------------------------
    \906\ As one example, the provision does not change the present law 
standards relating to deferred compensation, contained in subchapter D 
of the Code, that refer to section 1563.
---------------------------------------------------------------------------
      Effective date.--The provision applies to taxable years 
beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
21. Establish specific class lives for utility grading costs (sec. 472 
        of the Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

      A taxpayer is allowed a depreciation deduction for the 
exhaustion, wear and tear, and obsolescence of property that is 
used in a trade or business or held for the production of 
income. For most tangible property placed in service after 
1986, the amount of the depreciation deduction is determined 
under the modified accelerated cost recovery system (``MACRS'') 
using a statutorily prescribed depreciation method, recovery 
period, and placed in service convention. For some assets, the 
recovery period for the asset is provided in section 168. In 
other cases, the recovery period of an asset is determined by 
reference to its class life. The class lives of assets placed 
in service after 1986 are generally set forth in Revenue 
Procedure 87-56.\907\ If no class life is provided, the asset 
is allowed a 7-year recovery period under MACRS.
---------------------------------------------------------------------------
    \907\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
      Assets that are used in the transmission and distribution 
of electricity for sale are included in asset class 49.14, with 
a class life of 30 years and a MACRS recovery period of 20 
years. The cost of initially clearing and grading land 
improvements are specifically excluded from asset class 49.14. 
Prior to adoption of the accelerated cost recovery system, the 
IRS ruled that an average useful life of 84 years for the 
initial clearing and grading relating to electric transmission 
lines and 46 years for the initial clearing and grading 
relating to electric distribution lines, would be accepted. 
However, the result in this ruling was not incorporated in the 
asset classes included in Rev. Proc. 87-56 or its predecessors. 
Accordingly such costs are depreciated over a 7-year recovery 
period under MACRS as assets for which no class life is 
provided.
      A similar situation exists with regard to gas utility 
pipelines and related storage facilities. Such assets are 
included in asset class 49.24, with a class life of 22 years 
and a MACRS recovery period of 15 years. Initial clearing and 
grade improvements are specifically excluded from the asset 
class, and no separate asset class is provided for such costs. 
Accordingly such costs are depreciated over a 7-year recovery 
period under MACRS as assets for which no class life is 
provided.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment assigns a class life to depreciable 
electric and gas utility clearing and grading costs incurred to 
locate transmission and distribution lines and pipelines. The 
provision includes these assets in the asset classes of the 
property to which the clearing and grading costs relate 
(generally, asset class 49.14 for electric utilities and asset 
class 49.24 for gas utilities, giving these assets a recovery 
period of 20 years and 15 years, respectively).
      Effective date.--The Senate amendment is effective for 
property placed in service after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
22. Expansion of limitation on expensing of certain passenger 
        automobiles (sec. 473 of the Senate amendment and sec. 179 of 
        the Code)

                              PRESENT LAW

      A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
passenger automobiles generally are recovered over five years. 
However, section 280F limits the annual depreciation deduction 
with respect to certain passenger automobiles.\908\
---------------------------------------------------------------------------
    \908\ The limitation is commonly referred to as the ``luxury 
automobile depreciation limitation.'' For passenger automobiles 
(subject to the such limitation) placed in service in 2002, the maximum 
amount of allowable depreciation is $7,660 for the year in which the 
vehicle was placed in service, $4,900 for the second year, $2,950 for 
the third year, and $1,775 for the fourth and later years. This 
limitation applies to the combined depreciation deduction provided 
under present law for depreciation, including section 179 expensing and 
the temporary 30 percent additional first year depreciation allowance. 
For luxury automobiles eligible for the 50% additional first 
depreciation allowance, the first year limitation is increased by an 
additional $3,050.
---------------------------------------------------------------------------
      For purposes of the depreciation limitation, passenger 
automobiles are defined broadly to include any 4-wheeled 
vehicles that are manufactured primarily for use on public 
streets, roads, and highways and which are rated at 6,000 
pounds unloaded gross vehicle weight or less.\909\ In the case 
of a truck or a van, the depreciation limitation applies to 
vehicles that are rated at 6,000 pounds gross vehicle weight or 
less. Sports utility vehicles are treated as a truck for the 
purpose of applying the section 280F limitation.
---------------------------------------------------------------------------
    \909\ Sec. 280F(d)(5). Exceptions are provided for any ambulance, 
hearse, or any vehicle used by the taxpayer directly in the trade or 
business of transporting persons or property for compensation or hire.
---------------------------------------------------------------------------
      In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to expense such 
investment (sec. 179). The Jobs and Growth Tax Relief 
Reconciliation Act (JGTRRA) of 2003 \910\ increased the amount 
a taxpayer may deduct, for taxable years beginning in 2003 
through 2005, to $100,000 of the cost of qualifying property 
placed in service for the taxable year.\911\ In general, 
qualifying property is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business. The $100,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$400,000. Prior to the enactment of JGTRRA (and for taxable 
years beginning in 2006 and thereafter) a taxpayer with a 
sufficiently small amount of annual investment may elect to 
deduct up to $25,000 of the cost of qualifying property placed 
in service for the taxable year. The $25,000 amount is reduced 
(but not below zero) by the amount by which the cost of 
qualifying property placed in service during the taxable year 
exceeds $200,000. Passenger automobiles subject to section 280F 
are eligible for section 179 expensing only to the extent of 
the applicable limits contained in section 280F.
---------------------------------------------------------------------------
    \910\ Pub. L. No. 108-27, sec. 202 (2003).
    \911\ Additional section 179 incentives are provided with respect 
to a qualified property used by a business in the New York Liberty Zone 
(sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal 
community (sec. 1400J).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment limits the ability of taxpayers to 
claim deductions under section 179 for certain vehicles not 
subject to section 280F to $25,000. The provision applies to 
sport utility vehicles rated at 14,000 pounds gross vehicle 
weight or less (in place of the present law 6,000 pound 
rating). For this purpose, a sport utility vehicle is defined 
to exclude any vehicle that: (1) is designed for more than nine 
individuals in seating rearward of the driver's seat; (2) is 
equipped with an open cargo area, or a covered box not readily 
accessible from the passenger compartment, of at least six feet 
in interior length; or (3) has an integral enclosure, fully 
enclosing the driver compartment and load carrying device, does 
not have seating rearward of the driver's seat, and has no body 
section protruding more than 30 inches ahead of the leading 
edge of the windshield.
      The following example illustrates the operation of the 
provision.
      Example.--Assume that during 2004, on a date which is 
after the date of enactment a calendar year taxpayer acquires 
and places in service a sport utility vehicle subject to the 
provision that costs $70,000. In addition, assume that the 
property otherwise qualifies for the expensing election under 
section 179. Under the provision, the taxpayer is first allowed 
a $25,000 deduction under section 179. The taxpayer is also 
allowed an additional first-year depreciation deduction (sec. 
168(k)) of $22,500 based on $45,000 ($70,000 original cost less 
the section 179 deduction of $25,000) of adjusted basis. 
Finally, the remaining adjusted basis of $22,500 ($45,000 
adjusted basis less $22,500 additional first-year depreciation) 
is eligible for an additional depreciation deduction of $4,500 
under the general depreciation rules (automobiles are five-year 
recovery property). The remaining $18,000 of cost ($70,000 
original cost less $52,000 deductible currently) would be 
recovered in 2006 and subsequent years pursuant to the general 
depreciation rules.
      Effective date.--The Senate amendment is effective for 
property placed in service after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
23. Provide consistent amortization period for intangibles (sec. 474 of 
        the Senate amendment and secs. 195, 248, and 709 of the Code)

                              PRESENT LAW

      At the election of the taxpayer, start-up 
expenditures\912\ and organizational expenditures\913\ may be 
amortized over a period of not less than 60 months, beginning 
with the month in which the trade or business begins. Start-up 
expenditures are amounts that would have been deductible as 
trade or business expenses, had they not been paid or incurred 
before business began. Organizational expenditures are 
expenditures that are incident to the creation of a corporation 
(sec. 248) or the organization of a partnership (sec. 709), are 
chargeable to capital, and that would be eligible for 
amortization had they been paid or incurred in connection with 
the organization of a corporation or partnership with a limited 
or ascertainable life.
---------------------------------------------------------------------------
    \912\ Sec. 195
    \913\ Secs. 248 and 709.
---------------------------------------------------------------------------
      Treasury regulations\914\ require that a taxpayer file an 
election to amortize start-up expenditures no later than the 
due date for the taxable year in which the trade or business 
begins. The election must describe the trade or business, 
indicate the period of amortization (not less than 60 months), 
describe each start-up expenditure incurred, and indicate the 
month in which the trade or business began. Similar 
requirements apply to the election to amortize organizational 
expenditures. A revised statement may be filed to include 
start-up and organizational expenditures that were not included 
on the original statement, but a taxpayer may not include as a 
start-up expenditure any amount that was previously claimed as 
a deduction.
---------------------------------------------------------------------------
    \914\ Treas. Reg. sec. 1.195-1.
---------------------------------------------------------------------------
      Section 197 requires most acquired intangible assets 
(such as goodwill, trademarks, franchises, and patents) that 
are held in connection with the conduct of a trade or business 
or an activity for the production of income to be amortized 
over 15 years beginning with the month in which the intangible 
was acquired.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the treatment of start-up 
and organizational expenditures. A taxpayer would be allowed to 
elect to deduct up to $5,000 of start-up and $5,000 of 
organizational expenditures in the taxable year in which the 
trade or business begins. However, each $5,000 amount is 
reduced (but not below zero) by the amount by which the 
cumulative cost of start-up or organizational expenditures 
exceeds $50,000, respectively. Start-up and organizational 
expenditures that are not deductible in the year in which the 
trade or business begins would be amortized over a 15-year 
period consistent with the amortization period for section 197 
intangibles.
      Effective date.--The Senate amendment is effective for 
start-up and organizational expenditures incurred after the 
date of enactment. Start-up and organizational expenditures 
that are incurred on or before the date of enactment would 
continue to be eligible to be amortized over a period not to 
exceed 60 months. However, all start-up and organizational 
expenditures related to a particular trade or business, whether 
incurred before or after the date of enactment, would be 
considered in determining whether the cumulative cost of start-
up or organizational expenditures exceeds $50,000.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
24. Doubling of certain penalties, fines, and interest on underpayments 
        related to certain offshore financial arrangements (sec. 483 of 
        the Senate amendment)

                              PRESENT LAW

      The Code contains numerous civil penalties, such as the 
delinquency, accuracy-related and fraud penalties. These civil 
penalties are in addition to any interest that may be due.
      In January 2003, Treasury announced the Offshore 
Voluntary Compliance Initiative (``OVCI'') running through 
April 15, 2003, to encourage the voluntary disclosure of 
previously unreported income placed by taxpayers in offshore 
accounts and accessed through credit card or other financial 
arrangements. The taxpayer will pay back taxes, interest and 
certain accuracy-related and delinquency penalties.
      A taxpayer's timely, voluntary disclosure of a 
substantial unreported tax liability has long been an important 
factor in deciding whether the taxpayer's case should 
ultimately be referred for criminal prosecution. The voluntary 
disclosure must be truthful, timely, and complete. A voluntary 
disclosure does not guarantee immunity from prosecution.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Increases by a factor of two the total amount of civil 
penalties, interest and fines applicable for taxpayers who 
would have been eligible to participate in either the OVCI or 
the Treasury Department's voluntary disclosure initiative but 
did not participate in either program.
      Effective date.--Taxpayers' open tax years on or after 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
25. Whistleblower reforms (sec. 488 of the Senate amendment)

                              PRESENT LAW

      Under section 7623, the IRS is authorized to pay such 
sums as deemed necessary for: ``(1) detecting underpayments of 
tax; and (2) detecting and bringing to trial and punishment 
persons guilty of violating the internal revenue laws or 
conniving at the same.'' Amounts are paid based on a percentage 
of tax, fines, and penalties (but not interest) actually 
collected based on the information provided. For specific 
information that caused the investigation and resulted in 
recovery, the IRS administratively has set the reward in an 
amount not to exceed 15 percent of the amounts recovered. For 
information, although not specific, that nonetheless caused the 
investigation and was of value in the determination of tax 
liabilities, the reward is not to exceed 10 percent of the 
amount recovered. For information that caused the 
investigation, but had no direct relationship to the 
determination of tax liabilities, the reward is not to exceed 
one percent of the amount recovered. The reward ceiling is $10 
million (for payments made after November 7, 2002), and the 
reward floor is $100. No reward will be paid if the recovery 
was so small as to call for payment of less than $100 under the 
above formulas. Both the ceiling and percentages can be 
increased with a Special Agreement. The Code permits the IRS to 
disclose return information pursuant to a contract for tax 
administration services (sec. 6103(n)).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment creates a reward program for actions 
in which the tax, penalties, interest, additions to tax, and 
additional amounts in dispute exceed $20,000, and, if the 
taxpayer is an individual, the individual's gross income 
exceeds $200,000 for any taxable year.
      Generally, the Senate amendment establishes a reward 
floor of 15 percent of the collected proceeds (including 
penalties, interest, additions to tax and additional amounts) 
if the IRS proceeds with an administrative or judicial action 
based on information brought to the IRS's attention by an 
individual. The Senate amendment permits awards of lesser 
amounts (but no less than 10 percent) if the action was based 
principally on allegations (other than information provided by 
the individual) resulting from a judicial or administrative 
hearing, government report, hearing, audit, investigation, or 
from the news media. The Senate amendment caps the available 
reward at 30 percent of the collected proceeds. Any 
determination regarding a reward may be appealed to the U.S. 
Tax Court.
      The Senate amendment creates a Whistleblower Office 
within the IRS to administer this reward program. The 
Whistleblower Office is funded with amounts equal to rewards 
made. The Whistleblower Office may seek the assistance from the 
individual providing information or from his legal 
representative, and may reimburse the costs incurred by any 
legal representative out of the funds of the Whistleblower 
Office. To the extent the disclosure of returns or return 
information is required to render such assistance, the 
disclosure must be pursuant to an IRS tax administration 
contract.
      Effective date.--Information provided on or after the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
26. Increase in age of minor children whose unearned income is taxed as 
        if parent's income (sec. 495 of the Senate amendment and sec. 1 
        of the Code)

                              PRESENT LAW

Filing requirements for children
      A single unmarried individual eligible to be claimed as a 
dependent on another taxpayer's return generally must file an 
individual income tax return if he or she has: (1) earned 
income only over $4,850 (for 2004); (2) unearned income only 
over the minimum standard deduction amount for dependents ($800 
in 2004); or (3) both earned income and unearned income 
totaling more than the smaller of (a) $4,850 (for 2004) or (b) 
the larger of (i) $800 (for 2004), or (ii) earned income plus 
$250.\915\ Thus, if a dependent child has less than $800 in 
gross income, the child does not have to file an individual 
income tax return for 2004.\916\
---------------------------------------------------------------------------
    \915\ Sec. 6012(a)(1)(C). Other filing requirements apply to 
dependents who are married, elderly, or blind. See, Internal Revenue 
Service, Publication 929, Tax Rules for Children and Dependents, at 3, 
Table 1 (2003).
    \916\ A taxpayer generally need not file a return if he or she has 
gross income in an amount less than the standard dedcution (and, if 
allowable to the taxpyer, the personal exemption amount). An individual 
who may be claimed as a dependent of another taxpyaer is not eligible 
to claim the dependency exemption relating to that individual. Sec. 
151(d)(2). For taxable years beginning in 2004, the standard deduction 
amount for an individual who may be claimed as a dependent by another 
taxpyer may not exceed the greater of $800 or the sum of $250 and the 
individual's earned income.
---------------------------------------------------------------------------
      A child who cannot be claimed as a dependent on another 
person's tax return (e.g., because the support test is not 
satisfied by any other person) is subject to the generally 
applicable filing requirements. That is, such an individual 
generally must file a return if the individual's gross income 
exceeds the sum of the standard deduction and the personal 
exemption amounts applicable to the individual.
Taxation of unearned income under section 1(g)
      Special rules (generally referred to as the ``kiddie 
tax'') apply to the unearned income of a child who is under age 
14.\917\ The kiddie tax applies if: (1) the child has not 
reached the age of 14 by the close of the taxable year; (2) the 
child's unearned income was more than $1,600 (for 2004); and 
(3) the child is required to file a return for the year. The 
kiddie tax applies regardless of whether the child may be 
claimed as a dependent on the parent's return.
---------------------------------------------------------------------------
    \917\ Sec. 1(g).
---------------------------------------------------------------------------
      For these purposes, unearned income is income other than 
wages, salaries, professional fees, or other amounts received 
as compensation for personal services actually rendered.\918\ 
For children under age 14, net unearned income (for 2004, 
generally unearned income over $1,600) is taxed at the parent's 
rate if the parent's rate is higher than the child's rate. The 
remainder of a child's taxable income (i.e., earned income, 
plus unearned income up to $1,600 (for 2004), less the child's 
standard deduction) is taxed at the child's rates, regardless 
of whether the kiddie tax applies to the child. In general, a 
child is eligible to use the preferential tax rates for 
qualified dividends and capital gains.\919\
---------------------------------------------------------------------------
    \918\ Sec. 1(g)(4) and sec. 911(d)(2).
    \919\ Sec. 1(h)
---------------------------------------------------------------------------
      The kiddie tax is calculated by computing the ``allocable 
parental tax.'' This involves adding the net unearned income of 
the child to the parent's income and then applying the parent's 
tax rate. A child's ``net unearned income'' is the child's 
unearned income less the sum of (1) the minimum standard 
deduction allowed to dependents ($800 for 2004), and (2) the 
greater of (a) such minimum standard deduction amount or (b) 
the amount of allowable itemized deductions that are directly 
connected with the production of the unearned income.\920\ A 
child's net unearned income cannot exceed the child's taxable 
income.
---------------------------------------------------------------------------
    \920\ Sec. 1(g)(4).
---------------------------------------------------------------------------
      The allocable parental tax equals the hypothetical 
increase in tax to the parent that results from adding the 
child's net unearned income to the parent's taxable income. If 
a parent has more than one child subject to the kiddie tax, the 
net unearned income of all children is combined, and a single 
kiddie tax is calculated. Each child is then allocated a 
proportionate share of the hypothetical increase, based upon 
the child's net unearned income relative to the aggregate net 
unearned income of all of the parent's children subject to the 
tax.
      Special rules apply to determine which parent's tax 
return and rate is used to calculate the kiddie tax. If the 
parents file a joint return, the allocable parental tax is 
calculated using the income reported on the joint return. In 
the case of parents who are married but file separate returns, 
the allocable parental tax is calculated using the income of 
the parent with the greater amount of taxable income. In the 
case of unmarried parents, the child's custodial parent is the 
parent whose taxable income is taken into account in 
determining the child's liability. If the custodial parent has 
remarried, the stepparent is treated as the child's other 
parent. Thus, if the custodial parent and stepparent file a 
joint return, the kiddie tax is calculated using that joint 
return. If the custodial parent and stepparent file separate 
returns, the return of the one with the greater taxable income 
is used. If the parents are unmarried but lived together all 
year, the return of the parent with the greater taxable income 
is used.\921\
---------------------------------------------------------------------------
    \921\ Sec. 1(g)(5); Internal Revenue Service, Publication 929, Tax 
Rules for Children and Dependents, at 6 (2003).
---------------------------------------------------------------------------
      Unless the parent elects to include the child's income on 
the parent's return (as described below) the child files a 
separate return to report the child's income.\922\ In this 
case, items on the parent's return are not affected by the 
child's income. The total tax due from a child is the greater 
of:
---------------------------------------------------------------------------
    \922\ The child must attach to the return Form 8615, Tax for 
Children Under Age 14 With Investment Income of More Than $1,500 
(2003).
---------------------------------------------------------------------------
            (1) The sum of (a) the tax payable by the child on 
        the child's earned income plus (b) the allocable 
        parental tax on the child's unearned income, or
            (2) The tax on the child's income without regard to 
        the kiddie tax provisions.
Parental election to include child's dividends and interest on parent's 
        return
      Under certain circumstances, a parent may elect to report 
a child's dividends and interest on the parent's return. If the 
election is made, the child is treated as having no income for 
the year and the child does not have to file a return. The 
parent makes the election on Form 8814, Parents' Election To 
Report Child's Interest and Dividends. The requirements for the 
parent's election are that:
            (1) The child has gross income only from interest 
        and dividends (including capital gains distributions 
        and Alaska Permanent Fund Dividends); \923\
---------------------------------------------------------------------------
    \923\ Internal Revenue Service, Publication 929, Tax Rules
---------------------------------------------------------------------------
            (2) Such income is more than the minimum standard 
        deduction amount for dependents ($800 in 2004) and less 
        than 10 times that amount ($8000 in 2004);
            (3) No estimated tax payments for the year were 
        made in the child's name and taxpayer identification 
        number;
            (4) No backup withholding occurred; and
            (5) The child is required to file a return if the 
        parent does not make the election.
      Only the parent whose return must be used when 
calculating the kiddie tax may make the election. The parent 
includes in income the child's gross income in excess of twice 
the minimum standard deduction amount for dependents (i.e., the 
child's gross income in excess of $1,600 for 2004). This amount 
is taxed at the parent's rate. The parent also must report an 
additional tax liability equal to the lesser of: (1) $80 (in 
2004), or (2) 10 percent of the child's gross income exceeding 
the child's standard deduction ($800 in 2004).
      Including the child's income on the parent's return can 
affect the parent's deductions and credits that are based on 
adjusted gross income, as well as income-based phaseouts, 
limitations, and floors.\924\ In addition, certain deductions 
that the child would have been entitled to take on his or her 
own return are lost.\925\ Further, if the child received tax-
exempt interest from a private activity bond, that item is 
considered a tax preference of the parent for alternative 
minimum tax purposes.\926\
---------------------------------------------------------------------------
    \924\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 7 (2003).
    \925\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 7 (2003).
    \926\ Sec. 1(g)(7)(B).
---------------------------------------------------------------------------
Taxation of compensation for services under section 1(g)
      Compensation for a child's services is considered the 
gross income of the child, not the parent, even if the 
compensation is not received or retained by the child (e.g., is 
the parent's income under local law).\927\ If the child's 
income tax is not paid, however, an assessment against the 
child will be considered as also made against the parent to the 
extent the assessment is attributable to amounts received for 
the child's services.\928\
---------------------------------------------------------------------------
    \927\ Sec. 73(a).
    \928\ Sec. 6201(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment increases the age of minors to which 
the kiddie tax provisions apply from under 14 to under 18.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
27. Modify holding period requirement for qualification for reduced tax 
        rate on dividends on preferred stock (sec. 496 of the Senate 
        amendment and sec. 1 of the Code)

                              PRESENT LAW

      Section 1(h)(11) provides that if a taxpayer receives 
``qualified dividend income,'' the dividend income is taxed as 
net capital gain. The maximum rate of tax on qualified dividend 
income therefore generally is 15 percent.\929\ Dividends are 
treated as qualified dividend income only if certain 
conditions, including holding period requirements, are 
satisfied. The holding period requirements under section 
1(h)(11) are defined by reference, with modifications, to the 
holding period requirements under section 246(c) for 
qualification for the dividends received deduction. A dividend 
paid on a share of common stock is qualified dividend income 
only if, among other requirements, the recipient holds the 
share for more than 60 days during the 121-day period beginning 
on the date that is 60 days before the date on which the share 
becomes ex-dividend with respect to the dividend.\930\ A 
dividend paid on a share of preferred stock is qualified 
dividend income only if the recipient holds the share for more 
than 90 days during the 181-day period beginning 90 days before 
the ex-dividend date.\931\
---------------------------------------------------------------------------
    \929\ Sec. 1(h)(1)(C).
    \930\ Secs. 1(h)(11)(B)(iii)(I), 246(c)(1)(A).
    \931\ Secs. 1(h)(11)(B)(iii)(I), 246(c)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                         SENATE AMENDMENT \932\

      The Senate amendment changes the holding period 
requirement for treatment as qualified dividend income for 
dividends paid on preferred stock. Under the Senate amendment, 
stock must be held for more than 120 days during the 240-day 
period beginning 120 days before the ex-dividend date.
---------------------------------------------------------------------------
    \932\ The Senate amendment predated the enactment of H.R. 1308, 
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), 
which included a technical correction to the holding period 
requirements under sections 1(h)(11) and 246(c) (increasing from 120 to 
121 days and from 180 to 181 days the periods during which the stock 
holding requirements are tested).
---------------------------------------------------------------------------
      Effective date.--The Senate amendment provision applies 
to taxable years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
28. Grant Treasury regulatory authority to address foreign tax credit 
        transactions involving inappropriate separation of foreign 
        taxes from related foreign income (sec. 661A of Senate 
        amendment and sec. 901 of the Code)

                              PRESENT LAW

      The United States provides a credit for foreign income 
taxes paid or accrued. For purposes of the foreign tax credit, 
the taxpayer ``is the person on whom foreign law imposes legal 
liability for such tax.'' Treas. Reg. sec. 1.901-2(f)(1). Thus, 
if a U.S. corporation owns a foreign partnership, the U.S. 
corporation can claim foreign tax credits for the tax that is 
imposed on it as a partner in the foreign entity. This is true 
even if the U.S. corporation elects to treat the foreign entity 
as a corporation for U.S. tax purposes. If the foreign entity 
does not meet the definition of a controlled foreign 
corporation or does not generate income that is subject to 
current inclusion under the rules of an anti-deferral regime, 
the income generated by the foreign entity may never be 
reported on a U.S. return, despite the fact that the U.S. 
corporation can claim credits for taxes imposed on that income.
      The Treasury Department and the IRS have expressed 
concern about transactions that involve inappropriate foreign 
tax credit results, including the second class of transactions 
described in Notice 98-5.\933\ The tax benefits claimed in 
these transactions are inconsistent with the purposes of the 
foreign tax credit provisions.\934\
---------------------------------------------------------------------------
    \933\ 1998-1 C.B. 334.
    \934\ Notice 2004-19, 2004-11 I.R.B. 606.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision expands existing regulatory authority to 
provide Treasury and the IRS additional mechanisms to address 
the second class of transactions described in Notice 98-5 as 
well as other abusive foreign tax credit schemes that involve 
the inappropriate separation of foreign taxes from the related 
foreign income in cases where foreign taxes are imposed on any 
person with respect to income of an entity.
      The regulations may provide for: (1) the disallowance of 
a credit for all or a portion of the foreign taxes; or (2) for 
the allocation of the foreign taxes among the participants in 
the transaction in a manner that is more consistent with the 
underlying economics of the transaction.
      Effective date.--The provision is effective for 
transactions entered into after the date of enactment.

                          CONFERENCE AGREEMENT

      No provision.
29. Freeze of provision regarding suspension of interest where 
        Secretary fails to contact taxpayer (sec. 662B of the Senate 
        amendment and sec. 6404(g) of the Code)

                              PRESENT LAW

      In general, interest and penalties accrue during periods 
for which taxes were unpaid without regard to whether the 
taxpayer was aware that there was tax due. The Code suspends 
the accrual of certain penalties and interest after 1 year 
after the filing of the tax return \935\ if the IRS has not 
sent the taxpayer a notice specifically stating the taxpayer's 
liability and the basis for the liability within the specified 
period.\936\ With respect to taxable years beginning before 
January 1, 2004, the one-year period is increased to 18 months. 
Interest and penalties resume 21 days after the IRS sends the 
required notice to the taxpayer. The provision is applied 
separately with respect to each item or adjustment. The 
provision does not apply where a taxpayer has self-assessed the 
tax. The suspension only applies to taxpayers who file a timely 
tax return. The provision applies only to individuals and does 
not apply to the failure to pay penalty, in the case of fraud, 
or with respect to criminal penalties.
---------------------------------------------------------------------------
    \935\ If the return is filed before the due date, for this purpose 
it is considered to have been filed on the due date.
    \936\ Sec. 6404(g). This provision was added to the Code by sec. 
3305 of the IRS Restructuring and Reform Act of 1998 (Pub. L. No. 105-
206, July 22, 1998).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment makes the 18-month rule the 
permanent rule. The Senate amendment also adds gross 
misstatements \937\ and listed and reportable transactions to 
the list of provisions to which the suspension of interest 
rules do not apply.
---------------------------------------------------------------------------
    \937\ This includes any substantial omission of items to which the 
six-year statute of limitations applies (sec. 6051(e)), gross valuation 
misstatements (sec. 6662(h)), and similar provisions.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 2003,\938\ except 
that the addition of listed and reportable transactions applies 
to interest accruing after May 5, 2004.
---------------------------------------------------------------------------
    \938\ It is intended that this provision apply retroactively to the 
period beginning January 1, 2004 and ending on the date of enactment. 
The due date for returns for the taxable period beginning January 1, 
2004 is generally April 15, 2005; April 15, 2005 is therefore the date 
from which the 12-month period that must pass under present-law prior 
to the commencement of suspension is calculated. Consequently, 
suspension of interest would generally not begin until April 15, 2006. 
Accordingly, the provision has no actual retroactive effect.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except: (1) the provision relating to reportable transactions 
is made applicable only to reportable avoidance transactions; 
\939\ and (2) that the addition of listed and reportable 
avoidance transactions applies to interest accruing after 
October 3, 2004.
---------------------------------------------------------------------------
    \939\ A reportable avoidance transaction is a reportable 
transaction with a significant tax avoidance purpose.
---------------------------------------------------------------------------
30. Increase in withholding from supplemental wage payments in excess 
        of $1 million (sec. 673 of the Senate amendment and sec. 13273 
        of the Revenue Reconciliation Act of 1993)

                              PRESENT LAW

      An employer must withhold income taxes from wages paid to 
employees; there are several possible methods for determining 
the amount of income tax to be withheld. The IRS publishes 
tables (Publication 15, ``Circular E'') to be used in 
determining the amount of income tax to be withheld. The tables 
generally reflect the income tax rates under the Code so that 
withholding approximates the ultimate tax liability with 
respect to the wage payments. In some cases, ``supplemental'' 
wage payments (e.g., bonuses or commissions) may be subject to 
withholding at a flat rate,\940\ based on the third lowest 
income tax rate under the Code (25 percent for 2005).\941\
---------------------------------------------------------------------------
    \940\ Sec. 13273 of the Revenue Reconciliation Act of 1993.
    \941\ Sec. 101(c)(11) of the Economic Growth and Tax Relief 
Reconciliation Act of 2001.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, once annual supplemental wage 
payments to an employee exceed $1 million, any additional 
supplemental wage payments to the employee in that year are 
subject to withholding at the highest income tax rate (35 
percent for 2004 and 2005), regardless of any other withholding 
rules and regardless of the employee's Form W-4.
      This rule applies only for purposes of wage withholding; 
other types of withholding (such as pension withholding and 
backup withholding) are not affected.
      Effective date.--The provision is effective with respect 
to payments made after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
except that the conference agreement is effective for payments 
made after December 31, 2004.
31. Capital gain treatment on sale of stock acquired from exercise of 
        statutory stock options to comply with conflict of interest 
        requirements (sec. 674 of the Senate amendment and sec. 421 of 
        the Code)

                              PRESENT LAW

Statutory stock options
      Generally, when an employee exercises a compensatory 
option on employer stock, the difference between the option 
price and the fair market value of the stock (i.e., the 
``spread'') is includible in income as compensation. Upon such 
exercise, an employer is allowed a corresponding compensation 
deduction. In the case of an incentive stock option or an 
option to purchase stock under an employee stock purchase plan 
(collectively referred to as ``statutory stock options''), the 
spread is not included in income at the time of exercise.\942\
---------------------------------------------------------------------------
    \942\ Sec. 421.
---------------------------------------------------------------------------
      If an employee disposes of stock acquired upon the 
exercise of a statutory option, the employee generally is taxed 
at capital gains rates with respect to the excess of the fair 
market value of the stock on the date of disposition over the 
option price, and no compensation expense deduction is 
allowable to the employer, unless the employee fails to meet a 
holding period requirement. The employee fails to meet this 
holding period requirement if the disposition occurs within two 
years after the date the option is granted or one year after 
the date the option is exercised. The gain upon a disposition 
that occurs prior to the expiration of the applicable holding 
period(s) (a ``disqualifying disposition'') does not qualify 
for capital gains treatment. In the event of a disqualifying 
disposition, the income attributable to the disposition is 
treated by the employee as income received in the taxable year 
in which the disposition occurs, and a corresponding deduction 
is allowable to the employer for the taxable year in which the 
disposition occurs.
Sale of property to comply with conflict of interest requirements
      The Code provides special rules for recognizing gain on 
sales of property which are required in order to comply with 
certain conflict of interest requirements imposed by the 
Federal Government.\943\ Certain executive branch Federal 
employees (and their spouses and minor or dependent children) 
who are required to divest property in order to comply with 
conflict of interest requirements may elect to postpone the 
recognition of resulting gains by investing in certain 
replacement property within a 60-day period. The basis of the 
replacement property is reduced by the amount of the gain not 
recognized. Permitted replacement property is limited to any 
obligation of the United States or any diversified investment 
fund approved by regulations issued by the Office of Government 
Ethics. The rule applies only to sales under certificates of 
divestiture issued by the President or the Director of the 
Office of Government Ethics.
---------------------------------------------------------------------------
    \943\ Sec. 1043.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, an eligible person who, in 
order to comply with Federal conflict of interest requirements, 
is required to sell shares of stock acquired pursuant to the 
exercise of a statutory stock option is treated as satisfying 
the statutory holding period requirements, regardless of how 
long the stock was actually held. An eligible person generally 
includes an officer or employee of the executive branch of the 
Federal Government (and any spouse or minor or dependent 
children whose ownership in property is attributable to the 
officer or employee). Because the sale is not treated as a 
disqualifying disposition, the individual is afforded capital 
gain treatment on any resulting gains. Such gains are eligible 
for deferral treatment under section 1043.
      The employer granting the option is not allowed a 
deduction upon the sale of the stock by the individual.
      Effective date.--The Senate amendment is effective for 
sales after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
32. Application of basis rules to nonresident aliens (sec. 675 of the 
        Senate amendment and new sec. 72(w) and sec. 83 of the Code)

                              PRESENT LAW

Distributions from retirement plans
      Distributions from retirement plans are includible in 
gross income under the rules relating to annuities \944\ and, 
thus, are generally includible in income, except to the extent 
the amount received represents investment in the contract 
(i.e., the participant's basis). The participant's basis 
includes amounts contributed by the participant on an after-tax 
basis, together with certain amounts contributed by the 
employer, minus the aggregate amount (if any) previously 
distributed to the extent that such amount was excludable from 
gross income. Amounts contributed by the employer are included 
in the calculation of the participant's basis only to the 
extent that such amounts were includible in the gross income of 
the participant, or to the extent that such amounts would have 
been excludable from the participant's gross income if they had 
been paid directly to the participant at the time they were 
contributed.\945\
---------------------------------------------------------------------------
    \944\ Secs. 72 and 402.
    \945\ Sec. 72(f).
---------------------------------------------------------------------------
      Employer contributions to retirement plans and other 
payments for labor or personal services performed outside the 
United States by a nonresident alien generally are not treated 
as U.S. source income. Such contributions, therefore, generally 
would not be includible in the nonresident alien's gross income 
if they had been paid directly to the nonresident alien at the 
time they were contributed. Consequently, the amounts of such 
contributions generally are includible in the employee's basis 
and are not taxed by the United States if a distribution is 
made when the employee is a U.S. citizen or resident.\946\
---------------------------------------------------------------------------
    \946\ Rev. Rul. 58-236, 1958-1 C.B. 37.
---------------------------------------------------------------------------
      Earnings on contributions are not included in basis 
unless previously includible in income. In general, in the case 
of a nonexempt trust, earnings are includible in income when 
distributed or made available.\947\ In the case of highly 
compensated employees, the amount of the vested accrued benefit 
under the trust (other than the employee's investment in the 
contract) is generally required to be included in income 
annually (to the extent not previously includible). That is, 
earnings, as well as contributions, that are part of the vested 
accrued benefit are currently includible in income.\948\
---------------------------------------------------------------------------
    \947\ Sec. 402(b)(2).
    \948\ Sec. 402(b)(4).
---------------------------------------------------------------------------
Property transferred in connection with the performance of services
      The Code contains rules governing the amount and timing 
of income and deductions attributable to transfers of property 
in connection with the performance of services. If, in 
connection with the performance of services, property is 
transferred to any person other than the person for whom such 
services are performed, in general, an amount is includible in 
the gross income of the person performing the services (the 
``service provider'') for the taxable year in which the 
property is first vested (i.e., transferable or not subject to 
a substantial risk of forfeiture).\949\ The amount includible 
in the service provider's income is the excess of the fair 
market value of the property over the amount (if any) paid for 
the property. Basis in such property includes any amount that 
is included in income as a result of the transfer.\950\
---------------------------------------------------------------------------
    \949\ Sec. 83(a).
    \950\ Treas. Reg. sec. 1.61-2(d)(i).
---------------------------------------------------------------------------
U.S. income tax treaties
      Under the 1996 U.S. Model Income Tax Treaty (``U.S. 
Model'') and some U.S. income tax treaties in force, retirement 
plan distributions beneficially owned by a resident of a treaty 
country in consideration for past employment generally are 
taxable only by the individual recipient's country of 
residence. Under the U.S. Model treaty and some U.S. income tax 
treaties, this exclusive residence-based taxation rule is 
limited to the taxation of amounts that were not previously 
included in taxable income in the other country. For example, 
if a treaty country had imposed tax on a resident individual 
with respect to some portion of a retirement plan's earnings, 
subsequent distributions to that person while a resident of the 
United States would not be taxable in the United States to the 
extent the distributions were attributable to such previously 
taxed amounts.
Compensation of employees of foreign governments or international 
        organizations
      Under section 893, wages, fees, and salaries of any 
employee of a foreign government or international organization 
(including a consular or other officer or a nondiplomatic 
representative) received as compensation for official services 
to the foreign government or international organization 
generally are excluded from gross income when (1) the employee 
is not a citizen of the United States, or is a citizen of the 
Republic of the Philippines (whether or not a citizen of the 
United States); (2) in the case of an employee of a foreign 
government, the services are of a character similar to those 
performed by employees of the United States in foreign 
countries; and (3) in the case of an employee of a foreign 
government, the foreign government grants an equivalent 
exemption to employees of the United States performing similar 
services in such foreign country. The Secretary of State 
certifies the names of the foreign countries which grant an 
equivalent exclusion to employees of the United States 
performing services in those countries, and the character of 
those services.
      The exclusion does not apply to employees of controlled 
commercial entities or employees of foreign governments whose 
services are primarily in connection with commercial activity 
(whether within or outside the United States) of the foreign 
government.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the present-law rules under 
which certain contributions and earnings that have not been 
previously taxed are treated as basis (under sec. 72). Under 
the Senate amendment, employee or employer contributions are 
not included in basis if: (1) the employee was a nonresident 
alien at the time the services were performed with respect to 
which the contribution was made; (2) the contribution is with 
respect to compensation for labor or personal services from 
sources without the United States; and (3) the contribution was 
not subject to income tax under the laws of the United States 
or any foreign country.
      The Senate amendment authorizes the Secretary of the 
Treasury to issue regulations to carry out the purposes of the 
Senate amendment, including regulations treating contributions 
as not subject to income tax under the laws of any foreign 
country under appropriate circumstances.
      Effective date.--The Senate amendment is effective for 
distributions occurring on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications.
      Under the conference agreement, employee or employer 
contributions are not included in basis (under sec. 72) if: (1) 
the employee was a nonresident alien at the time the services 
were performed with respect to which the contribution was made; 
(2) the contribution is with respect to compensation for labor 
or personal services from sources without the United States; 
and (3) the contribution was not subject to income tax (and 
would have been subject to income tax if paid as cash 
compensation when the services were rendered) under the laws of 
the United States or any foreign country.
      Additionally, earnings on employer or employee 
contributions are not included in basis if: (1) the earnings 
are paid or accrued with respect to any employer or employee 
contributions which were made with respect to compensation for 
labor or personal services; (2) the employee was a nonresident 
alien at the time the earnings were paid or accrued; and (3) 
the earnings were not subject to income tax under the laws of 
the United States or any foreign country.
      The conference agreement does not change the rules 
applicable to calculation of basis with respect to 
contributions or earnings while an employee is a U.S. resident.
      There is no inference that this conference agreement 
applies in any case to create tax jurisdiction with respect to 
wages, fees, and salaries otherwise exempt under section 893. 
Similarly, there is no inference that the conference agreement 
applies where contrary to an agreement of the United States 
that has been validly authorized by Congress (or in the case of 
a treaty, ratified by the Senate), and which provides an 
exemption for income.
      Most U.S. tax treaties specifically address the taxation 
of pension distributions. The U.S. Model treaty provides for 
exclusive residence-based taxation of pension distributions to 
the extent such distributions were not previously included in 
taxable income in the other country. For purposes of the U.S. 
Model treaty, the United States treats any amount that has 
increased the recipient's basis (as defined in section 72) as 
having been previously included in taxable income. The 
following example illustrates how the conference agreement 
could affect the amount of a distribution that may be taxed by 
the United States pursuant to a tax treaty.
      Assume the following facts. A, a nonresident alien 
individual, performs services outside the United States, in A's 
country of residence, country Z. A's employer makes 
contributions on behalf of A to a pension plan established in 
country Z. For U.S. tax purposes, no portion of the 
contributions or earnings are included in A's income (and would 
not be included in income if the amounts were paid as cash 
compensation when the services were performed) because such 
amounts relate to services performed without the United 
States.\951\ Later in time, A retires and becomes a permanent 
resident of the United States.
---------------------------------------------------------------------------
    \951\ Sec. 872.
---------------------------------------------------------------------------
      Under the conference agreement, the employer 
contributions to the pension plan would not be taken into 
account in determining A's basis if A was not subject to income 
tax on the contributions by a foreign country and the 
contributions would have been subject to tax by a foreign 
country if the contributions had been paid to A as cash 
compensation when the services were performed. Thus, in those 
circumstances, A would be subject to U.S. tax on the 
distribution of all of the contributions, as such distributions 
are made. However, if the contributions would not have been 
subject to tax in the foreign country if they had been paid to 
A as cash compensation when the services were performed, under 
the conference agreement, the contributions would be included 
in A's basis. Earnings that accrued while A was a nonresident 
alien would not result in basis if not taxed under U.S. or 
foreign law. Earnings that accrued while A was a permanent 
resident of the United States would be subject to present-law 
rules. This result generally is consistent with the treatment 
of pension distributions under the U.S. Model treaty.
      The conference agreement authorizes the Secretary of the 
Treasury to issue regulations to carry out the purposes of the 
conference agreement, including regulations treating 
contributions as not subject to income tax under the laws of 
any foreign country under appropriate circumstances. For 
example, Treasury could provide that foreign income tax that 
was merely nominal would not satisfy the ``subject to income 
tax'' requirement.
      The conference agreement also changes the rules for 
determining basis in property received in connection for the 
performance of services in the case of an individual who was a 
nonresident alien at the time of the performance of services, 
if the property is treated as income from sources outside the 
United States. In that case, the individual's basis in the 
property does not include any amount that was not subject to 
income tax (and would have been subject to income tax if paid 
as cash compensation when the services were performed) under 
the laws of the United States or any foreign country.
      Effective date.--The conference agreement is effective 
for distributions occurring on or after the date of enactment. 
No inference is intended that the earnings subject to the 
conference agreement are included in basis under present law.
33. Residence and source rules related to a United States possession 
        (sec. 497 of the Senate amendment and new sec. 937 of the Code)

                              PRESENT LAW

In general
      Generally, U.S. citizens are subject to U.S. income 
taxation on their worldwide income. Thus, all income earned by 
U.S. citizens is subject to U.S. income tax, regardless of its 
source.
      The U.S. income taxation of alien individuals varies 
depending on whether they are resident or non-resident aliens. 
A resident alien is generally taxed in the same manner as a 
U.S. citizen.\952\ In contrast, a nonresident alien is 
generally subject to U.S. tax only on certain gross U.S. source 
income at a flat 30 percent rate (unless such rate is 
eliminated or reduced by treaty) and on net income that has a 
sufficient nexus to the United States at the graduated rates 
applicable to U.S. citizens and residents under section 1.
---------------------------------------------------------------------------
    \952\ Section 7701(a)(30) defines a citizen or resident of the 
United States as ``U.S. persons.''
---------------------------------------------------------------------------
      An alien is considered a resident of the United States if 
the individual: (1) has entered the United States as a lawful 
permanent resident and is such a resident at any time during 
the calendar year, (2) is present in the United States for a 
substantial period of time (the so-called ``substantial 
presence test''), or (3) makes an election to be treated as a 
resident of the United States (sec. 7701(b)). An alien who does 
not meet the definition of a ``resident alien'' is considered 
to be a non-resident alien for U.S. income tax purposes.
      Under the substantial presence test, an alien individual 
is generally treated as a resident alien if he or she is 
present in the United States for 31 days during the taxable 
year and the sum of the number of days on which such individual 
was present in the United States (when multiplied by the 
applicable multiplier) during the current year and the 
preceding two calendar years equals or exceeds 183 days. The 
applicable multiplier for: the current year is one; the first 
preceding year is one-third; and the second preceding year is 
one-sixth.
      An alien individual who meets the above test may 
nevertheless be a nonresident if he or she (1) is present in 
the United States for fewer than 183 days during the current 
year; (2) has a tax home in a foreign country during the year; 
and (3) has a closer connection to that country than to the 
United States.
      For purposes of the substantial presence test, the United 
States includes the states and the District of Columbia, but 
does not include U.S. possessions. An individual is present in 
the United States for a particular day if he or she is 
physically present in the United States during any time during 
such day. However, in certain circumstances an individual's 
presence in the United States is ignored, including presence in 
the United States as a result of certain medical emergencies.
U.S. income taxation of residents of U.S. possessions
      Generally, special U.S. income tax rules apply with 
respect to U.S. persons who are bona fide residents of certain 
U.S. possessions (i.e., Puerto Rico, Virgins Islands, Guam, 
Northern Mariana Islands and American Samoa) and who have 
possession source income or income effectively connected to the 
conduct of a trade or business within a possession.
      Generally, a bona fide resident of a U.S. possession 
(regardless of whether the individual is a U.S. citizen or 
alien) is determined using the principles of a subjective, 
facts-and-circumstances test set forth in the regulations under 
section 871. Prior to the adoption of present-law section 
7701(b), this subjective test was used to determine whether an 
alien individual was a resident of the United States. Under 
these rules, an individual is generally a resident of the 
United States if an individual (1) is actually present in the 
United States, and (2) is not a mere transient or 
sojourner.\953\ Whether individuals are transients is 
determined by their intentions with regard to the length and 
nature of their stay. However, the regulations provide that 
section 7701(b) (discussed above) provides the basis for 
determining whether an alien individual is a resident of a U.S. 
possession with a mirror income tax code.\954\
---------------------------------------------------------------------------
    \953\ Treas. Reg. sec. 1.871-2(b).
    \954\ A U.S. possession with a mirror income tax code is ``a United 
States possession * * * that administers income tax laws that are 
identifical (except for the substitution of the name of the possession 
or territory for the term `United States' where appropriate) to those 
in the United States.'' Treas. Reg. sec. 7701(b)-1(d)(1).
---------------------------------------------------------------------------
      Pursuant to regulations, the principles that generally 
apply for determining income from sources within and without 
the United States also generally apply in determining income 
from sources within and without a U.S. possession.\955\ The 
Code and regulations do not indicate how to determine whether 
income is effectively connected with the conduct of a trade or 
business within a U.S. possession. However, section 864(c) 
provides rules for determining whether income is effectively 
connected to a trade or business conducted within the United 
States.
---------------------------------------------------------------------------
    \955\ Treas. Reg. sec. 1.863-6.
---------------------------------------------------------------------------
Information reporting
      Section 7654(e) provides that Treasury may require 
information reporting with respect to individuals that may take 
advantage of certain special U.S. income tax rules with respect 
to U.S. possessions. Section 6688 provides that an individual 
may be subject to a $100 penalty if the individual fails to 
furnish the information required by regulations issued pursuant 
to section 7654(e).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides the term ``bona fide resident'' 
means a person who satisfies a test, determined by the 
Secretary, similar to the substantial presence test of section 
7701(b)(3) with respect to Guam, American Samoa, the Northern 
Mariana Islands, Puerto Rico, or the Virgin Islands.
      The provision also requires bona fide residents of the 
Virgin Islands to file an informational income tax return with 
the United States and imposes a penalty for the failure to file 
such a return.
      Effective date.--The provision is effective for taxable 
years ending after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications.
      The conferees understand that certain U.S. citizens and 
residents are claiming that they are exempt from U.S. income 
tax on their worldwide income based on a position that they are 
bona fide residents of the Virgin Islands or another 
possession. However, these individuals often do not spend a 
significant amount of time in the particular possession during 
a taxable year and, in some cases, continue to live and work in 
the United States. Under the Virgin Island's Economic 
Development Program, many of these same individuals secure a 
reduction of up to 90 percent of their Virgin Islands income 
tax liability on income they take the position is Virgin 
Islands source or effectively connected with the conduct of a 
Virgin Islands trade or business. The conferees are also aware 
that taxpayers are taking the position that income earned for 
services performed in the United States is Virgin Islands 
source or that their U.S. activities generate income 
effectively connected with the conduct of a Virgin Islands 
trade or business.
      The conferees believe that the various exemptions from 
U.S. tax provided to residents of possessions should not be 
available to individuals who continue to live and work in the 
United States. The conferees also believe that the special U.S. 
income tax rules applicable to residents in a possession need 
to be rationalized. The conferees are further concerned that 
the general rules for determining whether income is effectively 
connected with the conduct of a trade or business in a 
possession present numerous opportunities for erosion of the 
U.S. tax base.
      Generally, the provision provides that the term ``bona 
fide resident'' means a person who meets a two-part test with 
respect to Guam, American Samoa, the Northern Mariana Islands, 
Puerto Rico, or the Virgin Islands, as the case may be, for the 
taxable year. First, an individual must be present in the 
possession for at least 183 days in the taxable year. Second, 
an individual must (i) not have a tax home outside such 
possession during the taxable year and (ii) not have a closer 
connection to the United States or a foreign country during 
such year.
      The provision also grants authority to Treasury to create 
exceptions to these general rules as appropriate. The conferees 
intend for such exceptions to cover, in particular, persons 
whose presence outside a possession for extended periods of 
time lacks a tax avoidance purpose, such as military personnel, 
workers in the fisheries trade, and retirees who travel outside 
the possession for certain personal reasons.
      An individual is present in a possession for a particular 
day if he is physically present in such possession during any 
time during such day. In certain circumstances an individual's 
presence outside a possession is ignored (e.g., certain medical 
emergencies) as provided under the principles of section 
7701(b).
      The provision provides that a taxpayer must file a notice 
in the first taxable year they claim bona fide residence in a 
possession. The provision imposes a penalty of $1000 for the 
failure to file such notice or to comply with any filing 
required by regulation under section 7654(e).
      The provision generally codifies the existing rules for 
determining when income is considered to be from sources within 
a possession by providing that, as a general rule, for all 
purposes of the Code, the principles for determining whether 
income is U.S. source are applicable for purposes of 
determining whether income is possession source. In addition, 
the provision provides that the principles for determining 
whether income is effectively connected with the conduct of a 
U.S. trade or business are applicable for purposes of 
determining whether income is effectively connected to the 
conduct of a possession trade or business. However, the 
provision further provides that except as provided in 
regulations any income treated as U.S. source income or as 
effectively connected with the conduct of a U.S. trade or 
business is not treated as income from within any possession or 
as effectively connected with a trade or business within any 
such possession.
      The provision also grants authority to the Secretary of 
the Treasury to create exceptions to these general rules 
regarding possession source income and income effectively 
connected with a possession trade or business as appropriate. 
The conferees anticipate that this authority will be used to 
continue the existing treatment of income from the sale of 
goods manufactured in a possession. The conferees also intend 
for this authority to be used to prevent abuse, for example, to 
prevent U.S. persons from avoiding U.S. tax on appreciated 
property by acquiring residence in a possession prior to its 
disposition.
      No inference is intended as to the present-law rules for 
determining (1) bona fide residence in a possession, (2) 
whether income is possession source, and (3) whether income is 
effectively connected with the conduct of a trade or business 
within a possession.
      Effective date.--Generally, the provision is effective 
for taxable years ending after the date of enactment. The first 
prong of the two-part residency test (i.e., the 183-day test) 
is effective for taxable years beginning after date of 
enactment. The general effective date applies with respect to 
the second prong of such test. The rule providing that income 
treated as U.S. source income or as effectively connected with 
the conduct of a U.S. trade or business is not treated as 
income from within any possession or as effectively connected 
with the conduct of a trade or business within any such 
possession is effective for income earned after date of 
enactment.
34. Include employer provided housing under foreign earned income 
        exclusion cap (sec. 632 of the Senate amendment and sec. 911 of 
        the Code)

                              PRESENT LAW

      U.S. citizens generally are subject to U.S. income tax on 
all their income, whether derived in the United States or 
elsewhere. A U.S. citizen who earns income in a foreign country 
also may be taxed on such income by that foreign country. 
However, the United States generally cedes the primary right to 
tax income derived by a U.S. citizen from sources outside the 
United States to the foreign country where such income is 
derived. Accordingly, a credit against the U.S. income tax 
imposed on foreign source income is generally available for 
foreign taxes paid on that income, to the extent of the U.S. 
tax otherwise owed on such income. If the foreign income tax 
rate is lower than the U.S. income tax rate, then the United 
States generally provides a credit up to the amount of the 
foreign tax and imposes a residual tax to the extent of the 
difference.
      U.S. citizens living abroad may be eligible to exclude 
from their income for U.S. tax purposes certain foreign earned 
income and foreign housing costs, in which case no residual 
U.S. tax is imposed to the extent of such exclusion, regardless 
of the foreign tax rate. In order to qualify for these 
exclusions, an individual must be either: (1) a U.S. citizen 
who is a bona fide resident of a foreign country for an 
uninterrupted period that includes an entire taxable year; 
\956\ or (2) a U.S. citizen or resident present overseas for 
330 days out of any 12-consecutive-month period. In addition, 
the taxpayer must have his or her tax home in a foreign 
country.
---------------------------------------------------------------------------
    \956\ Only U.S. citizens may qualify under the bona fide residence 
test. However, resident aliens of the United States who are citizens of 
foreign countries that have a treaty with the United States may qualify 
for section 911 exclusions under the bona fide residence test by 
application of a nondiscrimination provision.
---------------------------------------------------------------------------
      The foreign earned income exclusion generally applies to 
income earned from sources outside the United States as 
compensation for personal services rendered by the taxpayer. 
The maximum exclusion amount for foreign earned income is 
$80,000 per taxable year for 2002 and thereafter. For taxable 
years beginning after 2007, the maximum exclusion amount is 
indexed for inflation.
      The exclusion for housing costs applies to reasonable 
expenses, other than deductible interest and taxes, paid or 
incurred by or on behalf of the taxpayer for housing in a 
foreign country but only to the extent the housing costs exceed 
a base housing amount. The base housing amount is equal to 16 
percent of the annual salary earned by a GS-14, Step 1 U.S. 
government employee. In the case of housing costs that are not 
paid or reimbursed by the taxpayer's employer, the amount that 
would be excludible is treated instead as a deduction.
      The combined foreign earned income exclusion and housing 
cost exclusion may not exceed the taxpayer's total foreign 
earned income for the taxable year. The taxpayer's foreign tax 
credit is reduced by the amount of such credit that is 
attributable to excluded income.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision applies the annual foreign earned income 
exclusion cap to the combined value of foreign earned income 
and employer-provided housing amounts.
      The present-law provision providing indexation for 
inflation for tax years beginning after 2007 remains unchanged. 
The present law provision imposing an additional foreign earned 
income cap on exclusions and deductions also remains unchanged.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2003.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
35. Deduction for personal use of company aircraft and other 
        entertainment expenses (sec. 103(b) of the Senate amendment and 
        sec. 274(e) of the Code)

                              PRESENT LAW

      Under present law, no deduction is allowed with respect 
to (1) an activity generally considered to be entertainment, 
amusement or recreation, unless the taxpayer establishes that 
the item was directly related to (or, in certain cases, 
associated with) the active conduct of the taxpayer's trade or 
business, or (2) a facility (e.g., an airplane) used in 
connection with such activity.\957\ The Code includes a number 
of exceptions to the general rule disallowing deductions of 
entertainment expenses. Under one exception, the deduction 
disallowance rule does not apply to expenses for goods, 
services, and facilities to the extent that the expenses are 
reported by the taxpayer as compensation and wages to an 
employee.\958\ The deduction disallowance rule also does not 
apply to expenses paid or incurred by the taxpayer for goods, 
services, and facilities to the extent that the expenses are 
includible in the gross income of a recipient who is not an 
employee (e.g., a nonemployee director) as compensation for 
services rendered or as a prize or award.\959\ The exceptions 
apply only to the extent that amounts are properly reported by 
the company as compensation and wages or otherwise includible 
in income. In no event can the amount of the deduction exceed 
the amount of the actual cost, even if a greater amount is 
includible in income.
---------------------------------------------------------------------------
    \957\ Sec. 274(a).
    \958\ Sec. 274(e)(2).
    \959\ Sec. 274(e)(9).
---------------------------------------------------------------------------
      Except as otherwise provided, gross income includes 
compensation for services, including fees, commissions, fringe 
benefits, and similar items. In general, an employee or other 
service provider must include in gross income the amount by 
which the fair value of a fringe benefit exceeds the amount 
paid by the individual. Treasury regulations provide rules 
regarding the valuation of fringe benefits, including flights 
on an employer-provided aircraft.\960\ In general, the value of 
a non-commercial flight is determined under the base aircraft 
valuation formula, also known as the Standard Industry Fare 
Level formula or ``SIFL''.\961\ If the SIFL valuation rules do 
not apply, the value of a flight on a company-provided aircraft 
is generally equal to the amount that an individual would have 
to pay in an arm's-length transaction to charter the same or a 
comparable aircraft for that period for the same or a 
comparable flight.\962\
---------------------------------------------------------------------------
    \960\ Treas. Reg. sec. 1.61-21.
    \961\ Treas. Reg. sec. 1.61-21(g).
    \962\ Treas. Reg. sec. 1.61-21(b)(6).
---------------------------------------------------------------------------
      In the context of an employer providing an aircraft to 
employees for nonbusiness (e.g., vacation) flights, the 
exception for expenses treated as compensation has been 
interpreted as not limiting the company's deduction for 
operation of the aircraft to the amount of compensation 
reportable to its employees,\963\ which can result in a 
deduction multiple times larger than the amount required to be 
included in income. In many cases, the individual including 
amounts attributable to personal travel in income directly 
benefits from the enhanced deduction, resulting in a net 
deduction for the personal use of the company aircraft.
---------------------------------------------------------------------------
    \963\ Sutherland Lumber-Southwest, Inc. v. Comm., 114 T.C. 197 
(2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq., AOD 2002-02 (Feb. 
11, 2002).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, in the case of covered 
employees, the exceptions to the general entertainment expense 
disallowance rule for expenses treated as compensation or 
includible in income apply only to the extent of the amount of 
expenses treated as compensation or includible in income. 
Covered employees are defined as under section 162(m)(3) and 
include the chief executive officer (or individual acting in 
such capacity) and the four highest-compensated officers of 
publicly-traded corporations. No deduction is allowed with 
respect to expenses for (1) a nonbusiness activity generally 
considered to be entertainment, amusement or recreation, or (2) 
a facility (e.g., an airplane) used in connection with such 
activity to the extent that such expenses exceed the amount 
treated as compensation or includible in income to the covered 
employee. For example, a company's deduction attributable to 
aircraft operating costs for a covered employee's vacation use 
of a company aircraft is limited to the amount reported as 
compensation to the employee. As under present law, the amount 
of the deduction cannot exceed the actual cost.
      The provision is intended to overturn Sutherland Lumber-
Southwest, Inc. v. Commissioner with respect to covered 
employees. As under present law, the exceptions apply only if 
amounts are properly reported by the company as compensation 
and wages or otherwise includible in income.
      Effective date.--The Senate amendment is effective for 
expenses incurred after the date of enactment and before 
January 1, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
except that the provision applies with respect to individuals 
who, with respect to an employer or other service recipient, 
are subject to the requirements of section 16(a) of the 
Securities and Exchange Act of 1934, or would be subject to 
such requirements if the employer or service recipient were an 
issuer of equity securities referred to in section 16(a). Such 
individuals generally include officers (as defined by section 
16(a)),\964\ directors, and 10-percent-or-greater owners of 
private and publicly-held companies.
---------------------------------------------------------------------------
    \964\ An officer is defined as the president, principal financial 
officer, principal accounting officer (or, if there is no such 
accounting officer, the controller), any vice-president in charge of a 
principal business unit, division or function (such as sales, 
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making 
functions.
---------------------------------------------------------------------------
      Effective date.--The conference agreement is effective 
for amounts deferred after the date of enactment.
36. Treatment of contingent payment convertible debt instruments (sec. 
        733 of the Senate Amendment and sec. 1275 of the Code)

                              PRESENT LAW

      Under present law, a taxpayer generally deducts the 
amount of interest paid or accrued within the taxable year on 
indebtedness issued by the taxpayer. In the case of original 
issue discount (``OID''), the issuer of a debt instrument 
generally accrues and deducts, as interest, the OID over the 
life of the obligation, even though the amount of the OID may 
not be paid until the maturity of the instrument.
      The amount of OID with respect to a debt instrument is 
equal to the excess of the stated redemption price at maturity 
over the issue price of the debt instrument. The stated 
redemption price at maturity includes all amounts that are 
payable on the debt instrument by maturity. The amount of OID 
with respect to a debt instrument is allocated over the life of 
the instrument through a series of adjustments to the issue 
price for each accrual period. The adjustment to the issue 
price is determined by multiplying the adjusted issue price 
(i.e., the issue price increased or decreased by adjustments 
prior to the accrual period) by the instrument's yield to 
maturity, and then subtracting any payments on the debt 
instrument (other than non-OID stated interest) during the 
accrual period. Thus, in order to compute the amount of OID and 
the portion of OID allocable to a particular period, the stated 
redemption price at maturity and the time of maturity must be 
known. Issuers of debt instruments with OID accrue and deduct 
the amount of OID as interest expense in the same manner as the 
holders of such instruments accrue and include in gross income 
the amount of OID as interest income.
      Treasury regulations provide special rules for 
determining the amount of OID allocated to a period with 
respect to certain debt instruments that provide for one or 
more contingent payments of principal or interest.\965\ The 
regulations provide that a debt instrument does not provide for 
contingent payments merely because it provides for an option to 
convert the debt instrument into the stock of the issuer, into 
the stock or debt of a related party, or into cash or other 
property in an amount equal to the approximate value of such 
stock or debt.\966\ The regulations also provide that a payment 
is not a contingent payment merely because of a contingency 
that, as of the issue date of the debt instrument, is either 
remote or incidental.\967\
---------------------------------------------------------------------------
    \965\ Treas. reg. sec. 1.1275-4.
    \966\ Treas. reg. sec. 1.1275-4(a)(4).
    \967\ Treas. reg. sec. 1.1275-4(a)(5).
---------------------------------------------------------------------------
      In the case of contingent payment debt instruments that 
are issued for money or publicly traded property,\968\ the 
regulations provide that interest on a debt instrument must be 
taken into account (as OID) whether or not the amount of any 
payment is fixed or determinable in the taxable year. The 
amount of OID that is taken into account for each accrual 
period is determined by constructing a comparable yield and a 
projected payment schedule for the debt instrument, and then 
accruing the OID on the basis of the comparable yield and 
projected payment schedule by applying rules similar to those 
for accruing OID on a noncontingent debt instrument (the 
``noncontingent bond method''). If the actual amount of a 
contingent payment is not equal to the projected amount, 
appropriate adjustments are made to reflect the difference. The 
comparable yield for a debt instrument is the yield at which 
the issuer would be able to issue a fixed-rate noncontingent 
debt instrument with terms and conditions similar to those of 
the contingent payment debt instrument (i.e., the comparable 
fixed-rate debt instrument), including the level of 
subordination, term, timing of payments, and general market 
conditions.\969\
---------------------------------------------------------------------------
    \968\ Treas. reg. sec. 1.1275-4(b).
    \969\ Treas. reg. sec. 1.1275-4(b)(4)(i)(A).
---------------------------------------------------------------------------
      With respect to certain debt instruments that are 
convertible into the common stock of the issuer and that also 
provide for contingent payments (other than the conversion 
feature)--often referred to as ``contingent convertible'' debt 
instruments--the IRS has stated that the noncontingent bond 
method applies in computing the accrual of OID on the debt 
instrument.\970\ In applying the noncontingent bond method, the 
IRS has stated that the comparable yield for a contingent 
convertible debt instrument is determined by reference to a 
comparable fixed-rate nonconvertible debt instrument, and the 
projected payment schedule is determined by treating the issuer 
stock received upon a conversion of the debt instrument as a 
contingent payment.
---------------------------------------------------------------------------
    \970\ Rev. Rul. 2002-31, 2002-1 C.B. 1023.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that, in the case of a 
contingent convertible debt instrument,\971\ any Treasury 
regulations which require OID to be determined by reference to 
the comparable yield of a noncontingent fixed-rate debt 
instrument shall be applied as requiring that such comparable 
yield be determined by reference to a noncontingent fixed-rate 
debt instrument which is convertible into stock. For purposes 
of applying the Senate amendment, the comparable yield shall be 
determined without taking into account the yield resulting from 
the conversion of a debt instrument into stock. Thus, the 
noncontingent bond method in the Treasury regulations shall be 
applied in a manner such that the comparable yield for 
contingent convertible debt instruments shall be determined by 
reference to comparable noncontingent fixed-rate convertible 
(rather than nonconvertible) debt instruments.
---------------------------------------------------------------------------
    \971\ Under the bill, a contingent convertible debt instrument is 
defined as a debt instrument that: (1) is convertible into stock of the 
issuing corporation, or a corporation in control of, or controlled by, 
the issuing corporation; and (2) provides for contingent payments.
---------------------------------------------------------------------------
      Effective date.--The Senate amendment provision is 
effective for debt instruments issued on or after date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                       TITLE XI--TRADE PROVISIONS

                A. Suspension of Duties on Ceiling Fans

(Sec. 801 of the House bill and Chapter 99, II of the Harmonized Tariff 
        Schedule of the United States)

                              PRESENT LAW

      A 4.7-percent ad valorem customs duty is collected on 
imported ceiling fans from all sources.

                               HOUSE BILL

      The House bill suspends the present customs duty 
applicable to ceiling fans through December 31, 2006.
      Effective date.--The provision is effective on the 
fifteenth day after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

           B. Temporary Suspension of Certain Customs Duties

1. Suspension of duties on nuclear steam generators (sec. 802(a) of the 
        House bill and Chapter 99, II of the Harmonized Tariff Schedule 
        of the United States)

                              PRESENT LAW

      Nuclear steam generators, as classified under heading 
9902.84.02 of the Harmonized Tariff Schedule of the United 
States, enter the United States duty free until December 31, 
2006. After December 31, 2006, the duty on nuclear steam 
generators returns to the column 1 rate of 5.2 percent under 
subheading 8402.11.00 of the Harmonized Tariff Schedule of the 
United States.

                               HOUSE BILL

      The House bill extends the present-law suspension of 
customs duty applicable to nuclear steam generators through 
December 31, 2008.
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.
2. Suspension of duties on nuclear reactor vessel heads (sec. 802(b) of 
        the House bill and Chapter 99, II of the Harmonized Tariff 
        Schedule of the United States)

                              PRESENT LAW

      According to section 5202 of the Trade Act of 2002, 
nuclear reactor vessel heads are classified under subheading 
8401.40.00 of the Harmonized Tariff Schedule of the United 
States and enter the United States with a column 1 duty rate of 
3.3 percent.

                               HOUSE BILL

      The House bill temporarily suspends the present customs 
duty applicable to nuclear reactor vessel heads for column 1 
countries through December 31, 2008.
      Effective date.--The provision is effective on the 
fifteenth day after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision with a modification. The conference agreement also 
temporarily suspends the customs duty applicable to nuclear 
reactor pressurizers.

                      XII. TAX COMPLEXITY ANALYSIS

      The following tax complexity analysis is provided 
pursuant to section 4022(b) of the Internal Revenue Service 
Reform and Restructuring Act of 1998, which requires the staff 
of the Joint Committee on Taxation (in consultation with the 
Internal Revenue Service (``IRS'') and the Treasury Department) 
to provide a complexity analysis of tax legislation reported by 
the House Committee on Ways and Means, the Senate Committee on 
Finance, or a Conference Report containing tax provisions. The 
complexity analysis is required to report on the complexity and 
administrative issues raised by provisions that directly or 
indirectly amend the Internal Revenue Code and that have 
widespread applicability to individuals or small businesses. 
For each such provision identified by the staff of the Joint 
Committee on Taxation, a summary description of the provision 
is provided along with an estimate of the number and type of 
affected taxpayers, and a discussion regarding the relevant 
complexity and administrative issues.
      Following the analysis of the staff of the Joint 
Committee on Taxation are the comments of the IRS and the 
Treasury Department regarding each of the provisions included 
in the complexity analysis, including a discussion of the 
likely effect on IRS forms and any expected impact on the IRS.
1. Deduction relating to income attributable to United States 
        production activities (sec. 102 of the House bill, secs. 102 
        and 103 of the Senate amendment, and sec. 11 of the Code)
Summary description of provision
      The conference agreement provides a deduction 
attributable to certain qualified production activities in the 
United States of a C corporation, S corporation, partnership, 
or sole proprietorship. Such activities generally include: (1) 
manufacturing, production, growth or extraction of certain 
tangible personal property, computer software, property 
described in section 168(f)(3) or (4) of the Code, and 
electricity, natural gas, or potable water produced by the 
taxpayer; (2) construction; and (3) engineering or 
architectural services.
      The amount of the deduction in taxable years beginning in 
2005, 2006, 2007, 2008, 2009, and 2010 and thereafter generally 
is three, three, six, six, six, and nine percent, respectively. 
The deduction is limited for a taxable year to 50 percent of 
the wages paid by the taxpayer during such taxable year. In 
addition, the deduction cannot exceed the lesser of the 
taxpayer's taxable income (computed without regard to the 
deduction) or the taxpayer's qualified production activities 
income.
      The bill is effective for taxable years beginning after 
2004.
Number of affected taxpayers
      It is estimated that the provision will affect more than 
10 percent of small businesses.
Discussion
      It is anticipated that small businesses engaged in 
qualified production activities will need to keep additional 
records due to this provision, and that extensive additional 
regulatory guidance will be necessary to effectively implement 
the provision. It is anticipated that the provision will result 
in an increase in disputes between small businesses and the 
IRS. Reasons for such disputes include the complexity of the 
provision and the inherent incentive for small businesses and 
other taxpayers to characterize their activities as qualified 
production activities to claim the deduction under the 
provision.
      The provision likely will increase the tax preparation 
costs for most small businesses that are, or may be, engaged in 
qualified production activities. Small businesses will have to 
perform additional analysis and make subjective determinations 
concerning whether their activities constitute qualified 
production activities and, thus, whether income attributable to 
such activities qualifies for the deduction allowed under the 
provision. In this regard, the provision does not provide 
detailed definitions of the activities that produce income 
eligible for the deduction, and it will be difficult for the 
Treasury Secretary to define qualified production activities 
administratively. It should be noted that a similar provision 
in the Canadian tax laws was found to be highly complex and 
difficult to administer, which led to numerous disputes and 
litigation between affected taxpayers and the Canadian tax 
authorities. Canada recently repealed the provision and 
provided a general reduction in corporate tax rates.
      For income that is determined to be eligible for the 
deduction under the provision, small businesses will be 
required to perform additional and complex calculations to 
determine the amount of the deduction under the provision. 
Because the deduction is based upon modified taxable income 
rather than gross income, small businesses will be required to 
undertake complicated calculations to determine the amount of 
costs that are allocable to gross income from qualified 
production activities. In many cases, small businesses would 
not have been required otherwise to perform these calculations 
but for the provision.
      The wage limitation on the deduction is likely to impact 
small businesses disproportionately. After undertaking the 
calculations and analyses to determine the amount of their 
potential deduction, many small business will find that such 
amount is significantly reduced, or eliminated together, by the 
wage limitation.
      Under the provision, it may be necessary for small 
businesses to make certain allocations of income that are not 
required under present law, particularly with respect to 
businesses that have both income that is directly attributable 
to qualified production activities and income that is 
attributable to processes associated with qualified production 
activities (e.g., vertically integrated manufacturers that also 
engage in the selling, storage, and installation of 
manufactured goods). To the extent the reduction under the 
provision is not based upon income from processes associated 
with qualified production activities, taxpayers that engage in 
such processes will be required to allocate their aggregate 
income between qualified production activities and processes 
associated with qualified production activities. In general, it 
is expected that the multiple calculations and analyses 
required by this provision will lead to intentional or 
inadvertent noncompliance among small businesses, as well as 
other taxpayers.
      Due to the detailed calculations required by the pvosion, 
it is anticipated that the Secretary of the Treasury will have 
to make appropriate revisions to several types of income tax 
forms, schedules, spreadsheets and instructions.



                From the Committee on Ways and Means, for 
                consideration of the House bill and the Senate 
                amendment, and modifications committed to 
                conference:
                                   William M. Thomas,
                                   Phil Crane,
                                   Jim McCrery,
                From the Committee on Agriculture, for 
                consideration of Title VII of the House bill, 
                and subtitle B of Title XI of the Senate 
                amendment, and modifications committed to 
                conference:
                                   Bob Goodlatte,
                                   John Boehner,
                                   Charlie Stenholm,
                From the Committee on Education and the 
                Workforce, for consideration of sections 489, 
                490, 616, 701, and 719 of the Senate amendment, 
                and modifications committed to conference:
                                   John Boehner,
                                   Sam Johnson,
                From the Committee on Energy and Commerce, for 
                consideration of section 662 and subtitle A of 
                Title XI of the Senate amendment, and 
                modifications committed to conference:
                                   Joe Barton,
                                   Richard Burr,
                From the Committee on the Judiciary, for 
                consideration of sections 422, 442, 1111, 1151, 
                and 1161 of the Senate amendment, and 
                modifications committed to conference:
                                   Lamar Smith,
                For consideration of the House bill and the 
                Senate amendment, and modifications committed 
                to conference:
                                   Tom DeLay,
                                 Managers on the Part of the House.

                                   Chuck Grassley,
                                   Orrin Hatch,
                                   Don Nickles,
                                   Trent Lott,
                                   Olympia Snowe,
                                   Jon Kyl,
                                   Craig Thomas,
                                   Rick Santorum,
                                   Gordon Smith,
                                   Jim Bunning,
                                   Mitch McConnell,
                                   Max Baucus,
                                   Tom Daschle,
                                   John Breaux,
                                   Kent Conrad,
                                   Jeff Bingaman,
                                   Blanche L. Lincoln,
                                Managers on the Part of the Senate.

                                  
