[House Report 108-393]
[From the U.S. Government Publishing Office]
108th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 108-393
======================================================================
AMERICAN JOBS CREATION ACT OF 2003
_______
November 21, 2003.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Thomas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 2896]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 2896) 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
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
I. Summary and Background..........................................70
II. Explanation of the Bill.........................................70
Title I--Corporate Reform and Growth Incentives.................70
A. Reduction in Income Tax Corporate Rates............. 70
1. Reduced corporate income tax rate for domestic
production activities income (sec. 1001 of the
bill and sec. 11 of the Code).................. 70
2. Reduced corporate income tax rate for small
corporations (sec. 1002 of the bill and sec. 11
of the Code)................................... 72
B. Extension of Increased Section 179 Expensing (sec.
1011 of the bill and sec. 179 of the Code)......... 74
C. Recovery Period for Depreciation of Certain
Leasehold Improvements and Restaurant Property
(sec. 1021 of the bill and sec. 168 of the Code)... 76
D. Alternative Minimum Tax Relief...................... 79
1. Net operating losses and foreign tax credit;
expansion of small corporation exemption (secs.
1031-1032 of the bill and secs. 55-59 of the
Code).......................................... 79
2. Income averaging for farmers not to increase
alternative minimum tax (sec. 1033 of the bill
and sec. 55 of the Code)....................... 80
E. Provisions Relating to S Corporation Reform and
Simplification (secs. 1041-1051 of the bill and
secs. 1361-1379 and sec. 4975 of the Code)......... 81
1. Shareholders of an S corporation................ 82
2. Treatment of S corporation shareholders......... 84
3. Provisions relating to banks.................... 85
4. Qualified subchapter S subsidiaries............. 87
5. S corporation distributions to an employee stock
ownership plan................................. 87
F. Employee Benefits................................... 89
1. Treatment of nonqualified deferred compensation
plans (sec. 1061 of the bill and new sec. 409A
and sec. 6051 of the Code)..................... 89
2. Exclusion of incentive stock options and
employee stock purchase plan stock options from
wages (sec. 1062 of the bill and secs. 421(b),
423(c), 3121(a), 3231, and 3306(b) of the Code) 96
3. Extension of provision permitting qualified
transfers of excess pension assets to retiree
health accounts (sec. 1063 of the bill and sec.
420 of the Code)............................... 98
G. Treatment of Active Income.......................... 100
1. Treatment of European Union as one country for
purposes of the foreign base company sales and
services rules (sec. 1071 of the bill and sec.
954 of the Code)............................... 100
2. Look-through treatment of payments between
related controlled foreign corporations under
foreign personal holding company income rules
(sec. 1072 of the bill and sec. 954 of the
Code).......................................... 101
3. Look-through treatment for sales of partnership
interests (sec. 1073 of the bill and sec. 954
of the Code)................................... 102
4. Repeal of foreign personal holding company rules
and foreign investment company rules (sec. 1074
of the bill and secs. 542, 551-558, 954, 1246,
and 1247 of the Code).......................... 103
5. Subpart F treatment of pipeline transportation
income (sec. 1075 of the bill and sec. 954 of
the Code)...................................... 104
6. Determination of foreign personal holding
company income with respect to transactions in
commodities (sec. 1076 of the bill and sec. 954
of the Code)................................... 105
7. Repeal controlled foreign corporation rules for
foreign base company shipping income (sec. 1077
of the bill and sec. 954 of the Code).......... 108
8. Modification of subpart F exemption for active
financing (sec. 1078 of the bill and sec. 954
of the Code)................................... 110
9. Partial exclusion for qualified film income
(sec. 1079 of the bill and new sec. 139A of the
Code).......................................... 112
H. Reduction of Double Taxation of Earnings............ 115
1. Interest expense allocation rules (sec. 1081 of
the bill and sec. 864 of the Code)............. 115
2. Recharacterization of overall domestic loss
(sec. 1082 of the bill and sec. 904 of the
Code).......................................... 119
3. Reduction to two foreign tax credit baskets
(sec. 1083 of the bill and sec. 904 of the
Code).......................................... 121
4. Look-through rules to apply to dividends from
noncontrolled section 902 corporations (sec.
1084 of the bill and sec. 904 of the Code)..... 122
5. Attribution of stock ownership through
partnerships to apply in determining sections
902 and 960 credits (sec. 1085 of the bill and
secs. 901, 902, and 960 of the Code)........... 124
6. Clarification of treatment of certain transfers
of intangible property (sec. 1086 of the bill
and sec. 367(d) of the Code)................... 125
7. United States property not to include certain
assets acquired by dealers in ordinary course
of trade or business (sec. 1087 of the bill and
sec. 956 of the Code).......................... 127
8. Election not to use average exchange rate for
foreign tax paid other than in functional
currency (sec. 1088 of the bill and sec. 986 of
the Code)...................................... 128
9. Repeal of withholding tax on dividends from
certain foreign corporations (sec. 1089 of the
bill and sec. 871 of the Code)................. 129
10. Provide equal treatment for interest paid by
foreign partnerships and foreign corporations
(sec. 1090 of the bill and sec. 861 of the
Code).......................................... 131
11. Treatment of certain dividends of regulated
investment companies (sec. 1091 of the bill and
secs. 871 and 881 of the Code)................. 132
I. Other Provisions.................................... 138
1. Special rules for livestock sold on account of
weather-related conditions (sec. 1101 of the
bill and secs. 1033 and 451 of the Code)....... 138
2. Payment of dividends on stock of cooperatives
without reducing patronage dividends (sec. 1102
of the bill and sec. 1388 of the Code)......... 139
3. Add vaccines against hepatitis A to the list of
taxable vaccines (sec. 1103 of the bill and
sec. 4132 of the Code)......................... 140
4. Expand human clinical trials expenses
qualifying for the orphan drug tax credit (sec.
1104 of the bill and sec. 45C of the Code)..... 141
5. Distributions from publicly traded partnerships
treated as qualifying income of regulated
investment company (sec. 1105 of the bill and
secs. 851 and 469(k) of the Code).............. 142
6. REIT modification provisions (sec. 1106 of the
bill and secs. 856 and 857 of the Code)........ 145
7. Simplification of excise tax imposed on bows
and arrows (sec. 1107 of the bill and sec. 4161
of the Code)................................... 151
8. Repeal excise tax on fishing tackle boxes (sec.
1108 of the bill and sec. 4162 of the Code).... 152
9. Income tax credit for cost of carrying tax-paid
distilled spirits in wholesale inventories
(sec. 1109 of the bill and new sec. 5011 of the
Code).......................................... 152
10. Capital gains treatment to apply to outright
sales of timber by landowner (sec. 1110 of the
bill and sec. 631(b) of the Code).............. 154
11. Repeal of excise tax on sonar devices suitable
for finding fish (sec. 1111 of the bill and
secs. 4161 and 4162 of the Code)............... 154
12. Taxation of certain settlement funds (sec. 1112
of the bill and sec. 468B of the Code)......... 155
13. Suspension of occupational taxes relating to
distilled spirits, wine, and beer (sec. 1113 of
the bill and sec. 5148 of the Code)............ 156
Title II--Provisions To Reduce Tax Avoidance Through Corporate
Earnings Stripping and Expatriation............................158
1. Reduction in potential for earnings stripping by
further limiting deduction for interest on
certain indebtedness (sec. 2001 of the bill and
sec. 163(j) of the Code)....................... 158
2. Tax treatment of expatriated entities (sec. 2002
of the bill and new sec. 7874 of the Code)..... 161
3. Excise tax on stock compensation of insiders in
expatriated corporations (sec. 2003 of the bill
and secs. 162(m), 275(a), and new sec. 4985 of
the Code)...................................... 165
4. Reinsurance of U.S. risks in foreign
jurisdictions (sec. 2004 of the bill and sec.
845(a) of the Code)............................ 169
5. Modification of the tax treatment of individual
expatriates (sec. 2005 of the bill and secs.
877, 2107, 2501 and 6039G of the Code)......... 170
6. Reporting of taxable mergers and acquisitions
(sec. 2006 of the bill and new sec. 6043A of
the Code)...................................... 177
7. Studies (sec. 2007 of the bill)................. 178
Title III--Provisions Relating to Tax Shelters.................179
A. Taxpayer Related Provisions......................... 179
1. Penalty for failure to disclose reportable
transactions (sec. 3001 of the bill and new
sec. 6707A of the Code)........................ 179
2. Modifications to the accuracy-related penalties
for listed transactions and reportable
transactions having a significant tax avoidance
purpose (sec. 3002 of the bill and new sec.
6662A of the Code)............................. 182
3. Tax shelter exception to confidentiality
privileges relating to taxpayer communications
(sec. 3003 of the bill and sec. 7525 of the
Code).......................................... 186
4. Statute of limitations for unreported listed
transactions (sec. 3004 of the bill and sec.
6501 of the Code).............................. 186
5. Disclosure of reportable transactions by
material advisors (sec. 3005 of the bill and
secs. 6111 and 6707 of the Code)............... 187
6. Investor lists and modification of penalty for
failure to maintain investor lists (secs. 3006
and 3007 of the bill and secs. 6112 and 6708 of
the Code)...................................... 190
7. Penalty on promoters of tax shelters (sec. 3008
of the bill and sec. 6700 of the Code)......... 192
8. Modifications of substantial understatement
penalty for nonreportable transactions (sec.
3009 of the bill and sec. 6662 of the Code).... 193
9. Modification of actions to enjoin certain
conduct related to tax shelters and reportable
transactions (sec. 3010 of the bill and sec.
7408 of the Code).............................. 194
10. Penalty on failure to report interests in
foreign financial accounts (sec. 3011 of the
bill and sec. 5321 of Title 31, United States
Code).......................................... 194
11. Regulation of individuals practicing before the
Department of the Treasury (sec. 3012 of the
bill and sec. 330 of Title 31, United States
Code).......................................... 195
B. Other Provisions.................................... 196
1. Treatment of stripped interests in bond and
preferred stock funds, etc. (sec. 3021 of the
bill and secs. 305 and 1286 of the Code)....... 196
2. Minimum holding period for foreign tax credit
on withholding taxes on income other than
dividends (sec. 3022 of the bill and sec. 901
of the Code)................................... 199
3. Disallowance of certain partnership loss
transfers (sec. 3023 of the bill and secs. 704,
734, and 743 of the Code)...................... 201
4. No reduction of basis under section 734 in
stock held by partnership in corporate partner
(sec. 3024 of the bill and sec. 755 of the
Code).......................................... 204
5. Repeal of special rules for FASITs, etc. (sec.
3025 of the bill and secs. 860H through 860L of
the Code)...................................... 205
6. Limitation on transfer of built-in losses on
REMIC residuals (sec. 3026 of the bill and sec.
362 of the Code)............................... 211
7. Clarification of banking business for purposes
of determining investment of earnings in U.S.
property (sec. 3027 of the bill and sec. 956 of
the Code)...................................... 212
8. Modify rules related to certain small property
and casualty insurance companies (sec. 3028 of
the bill and secs. 501(c)(15) and 831(b) of the
Code).......................................... 214
9. Definition of insurance company for property
and casualty insurance company tax rules (sec.
3029 of the bill and sec. 831(c) of the Code).. 216
10. Denial of deduction for interest on
underpayments attributable to nondisclosed
reportable transactions (sec. 3030 of the bill
and sec. 163 of the Code)...................... 218
11. Clarification of rules for payment of estimated
tax for certain deemed asset sales (sec. 3031
of the bill and sec. 338 of the Code).......... 219
12. Exclusion of like-kind exchange property from
nonrecognition treatment on the sale or
exchange of a principal residence (sec. 3032 of
the bill and sec. 121 of the Code)............. 220
13. Prevention of mismatching of interest and
original issue discount deductions and income
inclusions in transactions with related foreign
persons (sec. 3033 of the bill and secs. 163
and 267 of the Code)........................... 221
14. Exclusion from gross income for interest on
overpayments of income tax by individuals (sec.
3034 of the bill and new sec. 139A of the Code) 223
15. Deposits made to suspend the running of
interest on potential underpayments (sec. 3035
of the bill and new sec. 6603 of the Code)..... 225
16. Authorize IRS to enter into installment
agreements that provide for partial payment
(sec. 3036 of the bill and sec. 6159 of the
Code).......................................... 228
17. Extension of IRS user fees (sec. 3037 of the
bill and sec. 7528 of the Code)................ 229
Title IV--Trade Enhancement and Compliance Provisions..........229
1. Repeal of exclusion for extraterritorial income
(sec. 4001 of the bill and secs. 114 and 941-
943 of the Code)............................... 229
2. Extension of customs user fees (sec. 4002 of the
bill).......................................... 231
III. Votes of the Committee.........................................232
IV. Budget Effects of the Bill.....................................234
V. Other Matters To Be Discussed Under the Rules of the House.....247
VI. Changes in Existing Law Made by the Bill, as Reported..........248
VII. Dissenting Views...............................................432
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``American Jobs
Creation Act of 2003''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
(c) Table of Contents.--
Sec. 1. Short title; etc.
TITLE I--CORPORATE REFORM AND GROWTH INCENTIVES
Subtitle A--Reduction in Corporate Income Tax Rates
Sec. 1001. Reduced corporate income tax rate for domestic production
activities income.
Sec. 1002. Reduced corporate income tax rate for small corporations.
Subtitle B--Small Business Expensing
Sec. 1011. 2-year extension of increased expensing for small business.
Subtitle C--Depreciation
Sec. 1021. Recovery period for depreciation of certain leasehold
improvements and restaurant property.
Subtitle D--Alternative Minimum Tax Relief
Sec. 1031. Net operating losses and foreign tax credit under
alternative minimum tax.
Sec. 1032. Expansion of exemption from alternative minimum tax for
small corporations.
Sec. 1033. Income averaging for farmers not to increase alternative
minimum tax.
Subtitle E--S Corporation Reform and Simplification
Sec. 1041. Members of family treated as 1 shareholder.
Sec. 1042. Increase in number of eligible shareholders to 100.
Sec. 1043. Expansion of bank S corporation eligible shareholders to
include IRAs.
Sec. 1044. Disregard of unexercised powers of appointment in
determining potential current beneficiaries of ESBT.
Sec. 1045. Transfer of suspended losses incident to divorce, etc.
Sec. 1046. Use of passive activity loss and at-risk amounts by
qualified subchapter S trust income beneficiaries.
Sec. 1047. Exclusion of investment securities income from passive
income test for bank S corporations.
Sec. 1048. Treatment of bank director shares.
Sec. 1049. Relief from inadvertently invalid qualified subchapter S
subsidiary elections and terminations.
Sec. 1050. Information returns for qualified subchapter S subsidiaries.
Sec. 1051. Repayment of loans for qualifying employer securities.
Subtitle F--Protecting Employee Benefits
Sec. 1061. Treatment of nonqualified deferred compensation plans.
Sec. 1062. Exclusion of incentive stock options and employee stock
purchase plan stock options from wages.
Sec. 1063. Extension of transfers of excess pension assets to retiree
health accounts.
Subtitle G--Treatment of Active Income
Sec. 1071. Member states of the European Union treated as a single
country for certain purposes
Sec. 1072. Look-thru treatment of payments between related controlled
foreign corporations under foreign personal holding company income
rules.
Sec. 1073. Look-thru treatment for sales of partnership interests.
Sec. 1074. Repeal of foreign personal holding company rules and foreign
investment company rules.
Sec. 1075. Clarification of treatment of pipeline transportation
income.
Sec. 1076. Determination of foreign personal holding company income
with respect to transactions in commodities.
Sec. 1077. Repeal of CFC rules on foreign base company shipping income.
Sec. 1078. Modification of subpart F exemption for active financing.
Sec. 1079. Partial exclusion for income attributable to films used
outside the United States.
Subtitle H--Reduction of Double Taxation of Earnings
Sec. 1081. Interest expense allocation rules.
Sec. 1082. Recharacterization of overall domestic loss.
Sec. 1083. Reduction to 2 foreign tax credit baskets.
Sec. 1084. Look-thru rules to apply to dividends from noncontrolled
section 902 corporations.
Sec. 1085. Attribution of stock ownership through partnerships to apply
in determining section 902 and 960 credits.
Sec. 1086. Clarification of treatment of certain transfers of
intangible property.
Sec. 1087. United States property not to include certain assets
acquired by dealers in ordinary course of trade or business.
Sec. 1088. Election not to use average exchange rate for foreign tax
paid other than in functional currency.
Sec. 1089. Repeal of withholding tax on dividends from certain foreign
corporations.
Sec. 1090. Provide equal treatment for interest paid by foreign
partnerships and foreign corporations.
Sec. 1091. Treatment of certain dividends of regulated investment
companies.
Subtitle I--Other Provisions
Sec. 1101. Special rules for livestock sold on account of weather-
related conditions.
Sec. 1102. Payment of dividends on stock of cooperatives without
reducing patronage dividends.
Sec. 1103. Vaccine tax to apply to Hepatitis A vaccine.
Sec. 1104. Expansion of human clinical trials qualifying for orphan
drug credit.
Sec. 1105. Distributions from publicly traded partnerships treated as
qualifying income of regulated investment companies.
Sec. 1106. Improvements related to real estate investment trusts.
Sec. 1107. Simplification of excise tax imposed on bows and arrows.
Sec. 1108. Repeal of excise tax on fishing tackle boxes.
Sec. 1109. Income tax credit to distilled spirits wholesalers for cost
of carrying Federal excise taxes on bottled distilled spirits.
Sec. 1110. Capital gain treatment under section 631(b) to apply to
outright sales by landowners.
Sec. 1111. Sonar devices suitable for finding fish.
Sec. 1112. Taxation of certain settlement funds.
Sec. 1113. Suspension of occupational taxes relating to distilled
spirits, wine, and beer.
TITLE II--PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH CORPORATE EARNINGS
STRIPPING AND EXPATRIATION
Sec. 2001. Reduction in potential for earnings stripping by further
limiting deduction for interest on certain indebtedness.
Sec. 2002. Tax treatment of expatriated entities and their foreign
parents.
Sec. 2003. Excise tax on stock compensation of insiders in expatriated
corporations.
Sec. 2004. Reinsurance of United States risks in foreign jurisdictions.
Sec. 2005. Revision of tax rules on expatriation of individuals.
Sec. 2006. Reporting of taxable mergers and acquisitions.
Sec. 2007. Studies.
TITLE III--PROVISIONS RELATING TO TAX SHELTERS
Subtitle A--Taxpayer-Related Provisions
Sec. 3001. Penalty for failing to disclose reportable transactions.
Sec. 3002. Accuracy-related penalty for listed transactions, other
reportable transactions having a significant tax avoidance purpose,
etc.
Sec. 3003. Tax shelter exception to confidentiality privileges relating
to taxpayer communications.
Sec. 3004. Statute of limitations for taxable years for which required
listed transactions not reported.
Sec. 3005. Disclosure of reportable transactions.
Sec. 3006. Failure to furnish information regarding reportable
transactions.
Sec. 3007. Modification of penalty for failure to maintain lists of
investors.
Sec. 3008. Penalty on promoters of tax shelters.
Sec. 3009. Modifications of substantial understatement penalty for
nonreportable transactions.
Sec. 3010. Modification of actions to enjoin certain conduct related to
tax shelters and reportable transactions.
Sec. 3011. Penalty on failure to report interests in foreign financial
accounts.
Sec. 3012. Regulation of individuals practicing before the Department
of the Treasury.
Subtitle B--Other Provisions
Sec. 3021. Treatment of stripped interests in bond and preferred stock
funds, etc.
Sec. 3022. Minimum holding period for foreign tax credit on withholding
taxes on income other than dividends.
Sec. 3023. Disallowance of certain partnership loss transfers.
Sec. 3024. No reduction of basis under section 734 in stock held by
partnership in corporate partner.
Sec. 3025. Repeal of special rules for FASITS.
Sec. 3026. Limitation on transfer of built-in losses on REMIC
residuals.
Sec. 3027. Clarification of banking business for purposes of
determining investment of earnings in United States property.
Sec. 3028. Modifications related to certain small insurance companies.
Sec. 3029. Definition of insurance company for section 831.
Sec. 3030. Denial of deduction for interest on underpayments
attributable to nondisclosed reportable transactions.
Sec. 3031. Clarification of rules for payment of estimated tax for
certain deemed asset sales.
Sec. 3032. Recognition of gain from the sale of a principal residence
acquired in a like-kind exchange within 5 years of sale.
Sec. 3033. Prevention of mismatching of interest and original issue
discount deductions and income inclusions in transactions with related
foreign persons.
Sec. 3034. Exclusion from gross income for interest on overpayments of
income tax by individuals.
Sec. 3035. Deposits made to suspend running of interest on potential
underpayments.
Sec. 3036. Partial payment of tax liability in installment agreements.
Sec. 3037. Extension of IRS user fees.
TITLE IV--TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS
Sec. 4001. Repeal of exclusion for extraterritorial income.
Sec. 4002. COBRA fees.
TITLE I--CORPORATE REFORM AND GROWTH INCENTIVES
Subtitle A--Reduction in Corporate Income Tax Rates
SEC. 1001. REDUCED CORPORATE INCOME TAX RATE FOR DOMESTIC PRODUCTION
ACTIVITIES INCOME.
(a) Limitation on Tax on Qualified Production Activities Income.--
Section 11 is amended by redesignating subsections (c) and (d) as
subsections (d) and (e), respectively, and by inserting after
subsection (b) the following new subsection:
``(c) Limitation on Tax on Qualified Production Activities
Income.--
``(1) In general.--If a corporation has qualified production
activities income for any taxable year, the tax imposed by this
section shall not exceed the sum of--
``(A) a tax computed at the rates and in the manner
as if this subsection had not been enacted on the
taxable income reduced by the amount of qualified
production activities income, plus
``(B) a tax equal to 32 percent (34 percent in the
case of taxable years beginning before January 1, 2007)
of the qualified production activities income (or, if
less, taxable income).
``(2) Qualified production activities income.--
``(A) In general.--The term `qualified production
activities income' for any taxable year means an amount
equal to the excess (if any) of--
``(i) the taxpayer's domestic production
gross receipts for such taxable year, over
``(ii) the sum of--
``(I) the cost of goods sold that are
allocable to such receipts,
``(II) other deductions, expenses, or
losses directly allocable to such
receipts, and
``(III) a ratable portion of other
deductions, expenses, and losses that
are not directly allocable to such
receipts or another class of income.
``(B) Allocation method.--The Secretary shall
prescribe rules for the proper allocation of items of
income, deduction, expense, and loss for purposes of
determining income attributable to domestic production
activities.
``(3) Domestic production gross receipts.--For purposes of
this subsection, the term `domestic production gross receipts'
means the gross receipts of the taxpayer which are derived
from--
``(A) any lease, rental, license, sale, exchange, or
other disposition of--
``(i) qualifying production property which
was manufactured, produced, grown, or extracted
in whole or in significant part by the taxpayer
within the United States, or
``(ii) any qualified film produced by the
taxpayer, or
``(B) construction, engineering, or architectural
services performed in the United States for
construction projects in the United States.
``(4) Qualifying production property.--For purposes of this
subsection, the term `qualifying production property' means--
``(A) tangible personal property,
``(B) any computer software, and
``(C) any property described in section 168(f)(4).
``(5) Qualified film.--For purposes of this subsection--
``(A) In general.--The term `qualified film' means
any property described in section 168(f)(3) if not less
than 50 percent of the total compensation relating to
the production of such property is compensation for
services performed in the United States by actors,
production personnel, directors, and producers.
``(B) Exception.--Such term does not include property
with respect to which records are required to be
maintained under section 2257 of title 18, United
States Code.
``(6) Related persons.--For purposes of this subsection--
``(A) In general.-- The term `domestic production
gross receipts' shall not include any gross receipts of
the taxpayer derived from property leased, licensed, or
rented by the taxpayer for use by any related person.
``(B) Related person.--For purposes of subparagraph
(A), a person shall be treated as related to another
person if such persons are treated as a single employer
under subsection (a) or (b) of section 52 or subsection
(m) or (o) of section 414, except that determinations
under subsections (a) and (b) of section 52 shall be
made without regard to section 1563(b).''.
(b) Special Rule Relating to Election to Treat Cutting of Timber as
a Sale or Exchange.--In the case of a corporation, any election under
section 631(a) of the Internal Revenue Code of 1986 made for a taxable
year ending on or before the date of the enactment of this Act may be
revoked by the taxpayer for any taxable year ending after such date.
For purposes of determining whether such taxpayer may make a further
election under such section, such election (and any revocation under
this section) shall not be taken into account.
(c) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 1002. REDUCED CORPORATE INCOME TAX RATE FOR SMALL CORPORATIONS.
(a) In General.--Subsection (b) of section 11 (relating to tax
imposed on corporations) is amended by redesignating paragraph (2) as
paragraph (6) and by striking paragraph (1) and inserting the following
new paragraphs:
``(1) For taxable years beginning after 2011.--In the case of
taxable years beginning after 2011, the amount of the tax
imposed by subsection (a) shall be determined in accordance
with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$20,000,000
$13,750, plus 32% of the excess
over $75,000.
Over $20,000,000
$6,389,750, plus 35% of the
excess over
$20,000,000.
``(2) For taxable years beginning in 2009, 2010, or 2011.--In
the case of taxable years beginning in 2009, 2010, or 2011, the
amount of the tax imposed by subsection (a) shall be determined
in accordance with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$5,000,000
$13,750, plus 32% of the excess
over $75,000.
Over $5,000,000 but not over
$10,000,000
$1,589,750, plus 34% of the
excess over $5,000,000.
Over $10,000,000
$3,289,750, plus 35% of the
excess over
$10,000,000.
``(3) For taxable years beginning in 2007 or 2008.--In the
case of taxable years beginning in 2007 or 2008, the amount of
the tax imposed by subsection (a) shall be determined in
accordance with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$1,000,000
$13,750, plus 32% of the excess
over $75,000.
Over $1,000,000 but not over
$10,000,000
$309,750, plus 34% of the
excess over $1,000,000.
Over $10,000,000
$3,369,750, plus 35% of the
excess over
$10,000,000.
``(4) For taxable years beginning in 2004, 2005, or 2006.--In
the case of taxable years beginning in 2004, 2005, or 2006, the
amount of the tax imposed by subsection (a) shall be determined
in accordance with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$1,000,000
$13,750, plus 33% of the excess
over $75,000.
Over $1,000,000 but not over
$10,000,000
$319,000, plus 34% of the
excess over $1,000,000.
Over $10,000,000
$3,379,000, plus 35% of the
excess over
$10,000,000.
``(5) Phaseout of lower rates for certain taxpayers.--
``(A) General rule for years before 2012.--
``(i) In general.--In the case of taxable
years beginning before 2012 with respect to a
corporation which has taxable income in excess
of the applicable amount for any taxable year,
the amount of tax determined under paragraph
(1), (2), (3) or (4) for such taxable year
shall be increased by the lesser of (I) 5
percent of such excess, or (II) the maximum
increase amount.
``(ii) Maximum increase amount.--For purposes
of clause (i)--
------------------------------------------------------------------------
``In the case of any taxable The maximum
year beginning during: The applicable increase amount
amount is: is:
------------------------------------------------------------------------
2004, 2005, or 2006............... $1,000,000 $21,000
2007 or 2008...................... $1,000,000 $30,250
2009, 2010, or 2011............... $5,000,000 $110,250.
------------------------------------------------------------------------
``(B) Higher income corporations.--In the case of a
corporation which has taxable income in excess of
$20,000,000 ($15,000,000 in the case of taxable years
beginning before 2012), the amount of the tax
determined under the foregoing provisions of this
subsection shall be increased by an additional amount
equal to the lesser of (i) 3 percent of such excess, or
(ii) $610,250 ($100,000 in the case of taxable years
beginning before 2012).''.
(b) Conforming Amendments.--
(1) Section 904(b)(3)(D)(ii) is amended to read as follows:
``(ii) in the case of a corporation, section
1201(a) applies to such taxable year.''.
(2) Section 1201(a) is amended by striking ``the last 2
sentences of section 11(b)(1)'' and inserting ``section
11(b)(5)''.
(3) Section 1561(a) is amended--
(A) by striking ``the last 2 sentences of section
11(b)(1)'' and inserting ``section 11(b)(5)'', and
(B) by striking ``such last 2 sentences'' and
inserting ``section 11(b)(5)''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
Subtitle B--Small Business Expensing
SEC. 1011. 2-YEAR EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS.
Subsections (b), (c), and (d) of section 179 (as amended by the
Jobs and Growth Tax Relief Reconciliation Act of 2003) are each amended
by striking ``2006'' each place it appears and inserting ``2008''.
Subtitle C--Depreciation
SEC. 1021. 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 D--Alternative Minimum Tax Relief
SEC. 1031. NET OPERATING LOSSES AND FOREIGN TAX CREDIT UNDER
ALTERNATIVE MINIMUM TAX.
(a) Net Operating Losses.--
(1) In general.--Subparagraph (A) of section 56(d)(1) is
amended to read as follows:
``(A) the amount of such deduction shall not exceed
the applicable percentage (determined under paragraph
(3)) of the alternative minimum taxable income
determined without regard to such deduction, and''.
(2) Applicable percentage.--Subsection (d) of section 56 is
amended by adding at the end the following new paragraph:
``(3) Applicable percentage.--For purposes of paragraph
(1)(A)--
``For taxable years beginning
The applicable
in calendar year--
percentage is--
2005, 2006, or 2007.............................. 92
2008 or 2009..................................... 94
2010............................................. 96
2011............................................. 98
2012 or thereafter............................... 100.''
(b) Foreign Tax Credit.--
(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''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2004.
SEC. 1032. EXPANSION OF EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR
SMALL CORPORATIONS.
(a) In General.--Subparagraphs (A) and (B) of section 55(e)(1) are
each amended by striking ``$7,500,000'' each place it appears and
inserting ``$20,000,000''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 1033. INCOME AVERAGING FOR FARMERS NOT TO INCREASE ALTERNATIVE
MINIMUM TAX.
(a) In General.--Subsection (c) of section 55 (defining regular
tax) is amended by redesignating paragraph (2) as paragraph (3) and by
inserting after paragraph (1) the following new paragraph:
``(2) Coordination with income averaging for farmers.--Solely
for purposes of this section, section 1301 (relating to
averaging of farm income) shall not apply in computing the
regular tax liability.''.
(b) Effective Date.--The amendment made by subsection (a) shall
apply to taxable years beginning after December 31, 2002.
Subtitle E--S Corporation Reform and Simplification
SEC. 1041. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.
(a) In General.--Paragraph (1) of section 1361(c) (relating to
special rules for applying subsection (b)) is amended to read as
follows:
``(1) Members of family treated as 1 shareholder.--
``(A) In general.--For purpose of subsection
(b)(1)(A)--
``(i) except as provided in clause (ii), a
husband and wife (and their estates) shall be
treated as 1 shareholder, and
``(ii) in the case of a family with respect
to which an election is in effect under
subparagraph (D), all members of the family
shall be treated as 1 shareholder.
``(B) Members of the family.--For purpose of
subparagraph (A)(ii)--
``(i) In general.--The term `members of the
family' means the common ancestor, lineal
descendants of the common ancestor, and the
spouses (or former spouses) of such lineal
descendants or common ancestor.
``(ii) Common Ancestor.--For purposes of this
paragraph, an individual shall not be
considered a common ancestor if, as of the
later of the effective date of this paragraph
or the time the election under section 1362(a)
is made, the individual is more than 3
generations removed from the youngest
generation of shareholders who would (but for
this clause) be members of the family. For
purposes of the preceding sentence, a spouse
(or former spouse) shall be treated as being of
the same generation as the individual to which
such spouse is (or was) married.
``(C) Effect of adoption, etc.--In determining
whether any relationship specified in subparagraph (B)
exists, the rules of section 152(b)(2) shall apply.
``(D) Election.--An election under subparagraph
(A)(ii)--
``(i) may, except as otherwise provided in
regulations prescribed by the Secretary, be
made by any member of the family, and
``(ii) shall remain in effect until
terminated as provided in regulations
prescribed by the Secretary.''.
(b) Relief From Inadvertent Invalid Election or Termination.--
Section 1362(f) (relating to inadvertent invalid elections or
terminations), as amended by section 1049, 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, 2003.
(2) Subsection (b).--The amendments made by subsection (b)
shall apply to elections and terminations made after December
31, 2003.
SEC. 1042. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.
(a) In General.--Section 1361(b)(1)(A) (defining small business
corporation) is amended by striking ``75'' and inserting ``100''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 1043. 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. 1044. 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, 2003.
SEC. 1045. 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, 2003.
SEC. 1046. 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, 2003.
SEC. 1047. 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, 2003.
SEC. 1048. TREATMENT OF BANK DIRECTOR SHARES.
(a) In General.--Section 1361 (defining S corporation) is amended
by adding at the end the following new subsection:
``(f) Restricted Bank Director Stock.--
``(1) In general.--Restricted bank director stock shall not
be taken into account as outstanding stock of the S corporation
in applying this subchapter (other than section 1368(f)).
``(2) Restricted bank director stock.--For purposes of this
subsection, the term `restricted bank director stock' means
stock in a bank (as defined in section 581), a bank holding
company (within the meaning of section 2(a) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841(a))), or a financial
holding company (within the meaning of section 2(p) of such
Act), registered with the Federal Reserve System if such
stock--
``(A) is required to be held by an individual under
applicable Federal or State law in order to permit such
individual to serve as a director, and
``(B) is subject to an agreement with such bank or
company (or a corporation which controls (within the
meaning of section 368(c)) such bank or company)
pursuant to which the holder is required to sell back
such stock (at the same price as the individual
acquired such stock) upon ceasing to hold the office of
director.
``(3) Cross reference.--
``For treatment of certain distributions with respect
to restricted bank director stock, see section 1368(f).''.
(b) Distributions.--Section 1368 (relating to distributions) is
amended by adding at the end the following new subsection:
``(f) Restricted Bank Director Stock.--If a director receives a
distribution (not in part or full payment in exchange for stock) from
an S corporation with respect to any restricted bank director stock (as
defined in section 1361(f)), the amount of such distribution--
``(1) shall be includible in gross income of the director,
and
``(2) shall be deductible by the corporation for the taxable
year of such corporation in which or with which ends the
taxable year in which such amount in included in the gross
income of the director.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 1049. RELIEF FROM INADVERTENTLY INVALID QUALIFIED SUBCHAPTER S
SUBSIDIARY ELECTIONS AND TERMINATIONS.
(a) In General.--Section 1362(f) (relating to inadvertent invalid
elections or terminations) is amended--
(1) by inserting ``, section 1361(b)(3)(B)(ii),'' after
``subsection (a)'' in paragraph (1),
(2) by inserting ``, section 1361(b)(3)(C),'' after
``subsection (d)'' in paragraph (1)(B),
(3) by amending paragraph (3)(A) to read as follows:
``(A) so that the corporation for which the election
was made is a small business corporation or a qualified
subchapter S subsidiary, as the case may be, or'',
(4) by amending paragraph (4) to read as follows:
``(4) the corporation for which the election was made, and
each person who was a shareholder in such corporation at any
time during the period specified pursuant to this subsection,
agrees to make such adjustments (consistent with the treatment
of such corporation as an S corporation or a qualified
subchapter S subsidiary, as the case may be) as may be required
by the Secretary with respect to such period,'', and
(5) by inserting ``or a qualified subchapter S subsidiary, as
the case may be'' after ``S corporation'' in the matter
following paragraph (4).
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 1050. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.
(a) In General.--Section 1361(b)(3)(A) (relating to treatment of
certain wholly owned subsidiaries) is amended by inserting ``and in the
case of information returns required under part III of subchapter A of
chapter 61'' after ``Secretary''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 1051. 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, 2003.
Subtitle F--Protecting Employee Benefits
SEC. 1061. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.
(a) In General.--Subpart A of part I of subchapter D of chapter 1
is amended by adding at the end the following new section:
``SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER
NONQUALIFIED DEFERRED COMPENSATION PLANS.
``(a) Rules Relating to Constructive Receipt.--
``(1) In general.--
``(A) Gross income inclusion.--In the case of a
nonqualified deferred compensation plan, all
compensation deferred under the plan for all taxable
years (to the extent not subject to a substantial risk
of forfeiture and not previously included in gross
income) shall be includible in gross income for the
taxable year unless at all times during the taxable
year the plan meets the requirements of paragraphs (2),
(3), and (4) and is operated in accordance with such
requirements.
``(B) Interest on tax liability payable with respect
to previously deferred compensation.--
``(i) In general.--If compensation is
required to be included in gross income under
subparagraph (A) for a taxable year, the tax
imposed by this chapter for such taxable year
shall be increased by the amount of interest
determined under clause (ii).
``(ii) Interest.--For purposes of clause (i),
the interest determined under this clause for
any taxable year is the amount of interest at
the underpayment rate plus 1 percentage point
on the underpayments that would have occurred
had the deferred compensation been includible
in gross income for the taxable year in which
first deferred or, if later, the first taxable
year in which such deferred compensation is not
subject to a substantial risk of forfeiture.
``(2) Distributions.--
``(A) In general.--The requirements of this paragraph
are met if the plan provides that compensation deferred
under the plan may not be distributed earlier than--
``(i) separation from service as determined
by the Secretary (except as provided in
subparagraph (B)(i)),
``(ii) disability (as defined by section
223(d) of the Social Security Act),
``(iii) death,
``(iv) a specified time (or pursuant to a
fixed schedule) specified under the plan at the
date of the deferral of such compensation,
``(v) to the extent provided by the
Secretary, a change in the ownership or
effective control of the corporation, or in the
ownership of a substantial portion of the
assets of the corporation, or
``(vi) the occurrence of an unforeseeable
emergency.
``(B) Special rules.--
``(i) Specified employees.--In the case of
specified employees, the requirement of
subparagraph (A)(i) is met only if
distributions may not be made earlier than 6
months after the date of separation from
service. For purposes of the preceding
sentence, a specified employee is a key
employee (as defined in section 416(i)) of a
corporation the stock in which is publicly
traded on an established securities market or
otherwise.
``(ii) Unforeseeable emergency.--For purposes
of subparagraph (A)(vi)--
``(I) In general.--The term
`unforeseeable emergency' means a
severe financial hardship to the
participant resulting from a sudden and
unexpected illness or accident of the
participant, the participant's spouse,
or a dependent (as defined in section
152(a)) of the participant, loss of the
participant's property due to casualty,
or other similar extraordinary and
unforeseeable circumstances arising as
a result of events beyond the control
of the participant.
``(II) Limitation on distributions.--
The requirement of subparagraph (A)(vi)
is met only if, as determined under
regulations of the Secretary, the
amounts distributed with respect to an
emergency do not exceed the amounts
necessary to satisfy such emergency
plus amounts necessary to pay taxes
reasonably anticipated as a result of
the distribution, after taking into
account the extent to which such
hardship is or may be relieved through
reimbursement or compensation by
insurance or otherwise or by
liquidation of the participant's assets
(to the extent the liquidation of such
assets would not itself cause severe
financial hardship).
``(3) Acceleration of benefits.--The requirements of this
paragraph are met if the plan does not permit the acceleration
of the time or schedule of any payment under the plan, except
as provided in regulations by the Secretary.
``(4) Elections.--
``(A) In general.--The requirements of this paragraph
are met if the requirements of subparagraphs (B) and
(C) are met.
``(B) Initial deferral decision.--The requirements of
this subparagraph are met if the plan provides that
compensation for services performed during a taxable
year may be deferred at the participant's election only
if the election to defer such compensation is made
during the preceding taxable year or at such other time
as provided in regulations. In the case of the first
year in which a participant becomes eligible to
participate in the plan, such election may be made with
respect to services to be performed subsequent to the
election within 30 days after the date the participant
becomes eligible to participate in such plan.
``(C) Changes in time and form of distribution.--The
requirements of this subparagraph are met if, in the
case of a plan which permits under a subsequent
election a delay in a payment or a change in the form
of payment--
``(i) the plan requires that such election
may not take effect until at least 12 months
after the date on which the election is made,
``(ii) in the case an election related to a
payment not described in clause (ii), (iii), or
(vi) of paragraph (2)(A), the plan requires
that the first payment with respect to which
such election is made be deferred for a period
of not less than 5 years from the date such
payment would otherwise have been made, and
``(iii) the plan requires that any election
related to a payment described in paragraph
(2)(A)(iv) may not be made less than 12 months
prior to the date of the first scheduled
payment under such paragraph.
``(b) Rules Relating to Funding.--
``(1) Offshore property in a trust.--In the case of assets
held in a trust or set aside (directly or indirectly) in
another arrangement, as determined by the Secretary, for
purposes of paying deferred compensation under a nonqualified
deferred compensation plan, for purposes of section 83 such
assets shall be treated as property transferred in connection
with the performance of services whether or not such assets are
available to satisfy claims of general creditors--
``(A) at the time set aside if such assets are
located outside of the United States, or
``(B) at the time transferred if such assets are
subsequently transferred outside of the United States.
``(2) Employer's financial health.--In the case of a
nonqualified deferred compensation plan, there is a transfer of
property within the meaning of section 83 as of the earlier
of--
``(A) the date on which the plan first provides that
assets will become restricted to the provision of
benefits under the plan in connection with a change in
the employer's financial health, or
``(B) the date on which assets are so restricted.
``(3) Income inclusion for offshore trusts and employer's
financial health.--For each taxable year that assets treated as
transferred under this subsection remain set aside in a trust
or other arrangement subject to paragraph (1) or (2), any
increase in value in, or earnings with respect to, such assets
shall be treated as an additional transfer of property under
this subsection (to the extent not previously included in
income).
``(4) Interest on tax liability payable with respect to
transferred property.--
``(A) In general.--If amounts are required to be
included in gross income by reason of paragraph (1) or
(2) for a taxable year, the tax imposed by this chapter
for such taxable year shall be increased by the amount
of interest determined under subparagraph (B).
``(B) Interest.--The interest determined under this
subparagraph for any taxable year is the amount of
interest at the underpayment rate plus 1 percentage
point on the underpayments that would have occurred had
the amounts so required to be included in gross income
by paragraph (1) or (2) been includible in gross income
for the taxable year in which such assets were first
set aside (directly or indirectly) in a trust (or other
arrangement determined by the Secretary) for purposes
of the nonqualified deferred compensation plan.
``(c) No Inference on Earlier Income Inclusion or Requirement of
Later Inclusion.--Nothing in this section shall be construed to prevent
the inclusion of amounts in gross income under any other provision of
this chapter or any other rule of law earlier than the time provided in
this section. Any amount included in gross income under this section
shall not be required to be included in gross income under any other
provision of this chapter or any other rule of law later than the time
provided in this section.
``(d) Other Definitions and Special Rules.--For purposes of this
section--
``(1) Nonqualified deferred compensation plan.--The term
`nonqualified deferred compensation plan' means any plan that
provides for the deferral of compensation, other than--
``(A) a qualified employer plan, and
``(B) any bona fide vacation leave, sick leave,
compensatory time, disability pay, or death benefit
plan.
``(2) Qualified employer plan.--The term `qualified employer
plan' means--
``(A) any plan, contract, pension, account, or trust
described in subparagraph (A) or (B) of section
219(g)(5), and
``(B) any eligible deferred compensation plan (within
the meaning of section 457(b)) of an employer described
in section 457(e)(1)(A).
``(3) Plan includes arrangements, etc.--The term `plan'
includes any agreement or arrangement, including an agreement
or arrangement that includes one person.
``(4) Substantial risk of forfeiture.--The rights of a person
to compensation are subject to a substantial risk of forfeiture
if such person's rights to such compensation are conditioned
upon the future performance of substantial services by any
individual.
``(5) Treatment of earnings.--References to deferred
compensation shall be treated as including references to income
(whether actual or notional) attributable to such compensation
or such income.
``(e) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section, including regulations--
``(1) providing for the determination of amounts of deferral
in the case of a nonqualified deferred compensation plan which
is a defined benefit plan,
``(2) relating to changes in the ownership and control of a
corporation or assets of a corporation for purposes of
subsection (a)(2)(A)(v),
``(3) exempting arrangements from the application of
subsection (b) if such arrangements will not result in an
improper deferral of United States tax and will not result in
assets being effectively beyond the reach of creditors,
``(4) defining financial health for purposes of subsection
(b)(2), and
``(5) disregarding a substantial risk of forfeiture in cases
where necessary to carry out the purposes of this section.''.
(b) W-2 Forms.--
(1) In general.--Subsection (a) of section 6051 (relating to
receipts for employees) is amended by striking ``and'' at the
end of paragraph (10), by striking the period at the end of
paragraph (11) and inserting ``, and'', and by inserting after
paragraph (11) the following new paragraph:
``(12) the total amount of deferrals under a nonqualified
deferred compensation plan (within the meaning of section
409A(d)).''.
(2) Threshold.--Subsection (a) of section 6051 is amended by
adding at the end the following: ``In the case of the amounts
required to be shown by paragraph (12), the Secretary (by
regulation) may establish a minimum amount of deferrals below
which paragraph (12) does not apply and may provide that
paragraph (12) does not apply with respect to amounts of
deferrals which are not reasonably ascertainable.''.
(c) Conforming and Clerical Amendments.--
(1) Section 414(b) is amended by inserting ``409A,'' after
``408(p),''.
(2) Section 414(c) is amended by inserting ``409A,'' after
``408(p),''.
(3) The table of sections for such subpart A of part I of
subchapter D of chapter 1 is amended by adding at the end the
following new item:
``Sec. 409A. Inclusion in gross income of
deferred compensation under
nonqualified deferred
compensation plans.''.
(d) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
amounts deferred in taxable years beginning after December 31,
2003.
(2) Amounts deferred in 2004 under certain irrevocable
elections and binding arrangements.--The amendments made by
this section shall not apply to amounts deferred in taxable
years beginning after December 31, 2003, and before January 1,
2005, pursuant to an irrevocable election or binding
arrangement made before October 24, 2003.
(3) Earnings attributable to amount previously deferred.--The
amendments made by this section shall apply to earnings on
deferred compensation only to the extent that such amendments
apply to such compensation.
(e) Guidance Relating to Change of Ownership or Control.--Not later
than 90 days after the date of the enactment of this Act, the Secretary
of the Treasury shall issue guidance on what constitutes a change in
ownership or effective control for purposes of section 409A of the
Internal Revenue Code of 1986, as added by this section.
(f) Guidance Relating to Termination of Certain Existing
Arrangements.--Not later than 90 days after the date of the enactment
of this Act, the Secretary of the Treasury shall issue guidance
providing a limited period during which an individual participating in
a nonqualified deferred compensation plan adopted on or before December
31, 2003, may, without violating the requirements of paragraphs (2),
(3), and (4) of section 409A(a)(2) of the Internal Revenue Code of 1986
(as added by this section), terminate participation or cancel an
outstanding deferral election with regard to amounts earned after
December 31, 2003, if such amounts are includible in income as earned.
SEC. 1062. 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:
``(11) 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 (16), by striking the period at the end of
paragraph (17) and inserting ``; or'', and by inserting after
paragraph (17) the following new paragraph:
``(18) 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.
SEC. 1063. EXTENSION OF TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE
HEALTH ACCOUNTS.
Paragraph (5) of section 420(b) (relating to expiration) is amended
by striking ``December 31, 2005'' and inserting ``December 31, 2013''.
Subtitle G--Treatment of Active Income
SEC. 1071. MEMBER STATES OF THE EUROPEAN UNION TREATED AS A SINGLE
COUNTRY FOR CERTAIN PURPOSES.
(a) In General.--Subsection (d) of section 954 is amended by adding
at the end the following new paragraph:
``(5) Treatment of member states of the european union.--For
purposes of this subsection and subsection (e), in the case of
a controlled foreign corporation which is created or organized
under the laws of a member state of the European Union, all
member states of the European Union shall be treated as 1
country.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2008, and to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
SEC. 1072. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED
FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING
COMPANY INCOME RULES.
(a) In General.--Subsection (c) of section 954 is amended by adding
after paragraph (3) the following new paragraph:
``(4) Look-thru in the case of related controlled foreign
corporations.--For purposes of this subsection, dividends,
interest, rents, and royalties received or accrued from a
controlled foreign corporation which is a related person (as
defined in subsection (d)(3)) shall not be treated as foreign
personal holding company income to the extent attributable or
properly allocable (determined under rules similar to the rules
of subparagraphs (C) and (D) of section 904(d)(3)) to income of
the related person which is not subpart F income (as defined in
section 952). The Secretary shall prescribe such regulations as
may be appropriate to prevent the abuse of the purposes of this
paragraph.''
(b) Effective Date.--The amendments made by this section shall
apply to taxable years of foreign corporations beginning after December
31, 2006, and to taxable years of United States shareholders with or
within which such taxable years of foreign corporations end.
SEC. 1073. 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 (4) the following
new paragraph:
``(5) 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.
``(B) 25-percent owner.--For purposes of this
paragraph, the term `25-percent owner' means a
controlled foreign corporation which owns (within the
meaning of section 958(a)) 25 percent or more of the
capital or profits interest in the partnership.''
(b) Effective Date.--The amendments made by this section shall
apply to taxable years of foreign corporations beginning after December
31, 2006, and to taxable years of United States shareholders with or
within which such taxable years of foreign corporations end.
SEC. 1074. 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:
``(H) 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) Clause (iii) of section 1(h)(11)(C) is amended by
striking ``a foreign personal holding company (as defined in
section 552), a foreign investment company (as defined in
section 1246(b)), or''.
(2) Paragraph (2) of section 171(c) is amended--
(A) by striking ``, or by a foreign personal holding
company, as defined in section 552'', and
(B) by striking ``or foreign personal holding
company''.
(3) Paragraph (2) of section 245(a) is amended by striking
``foreign personal holding company or''.
(4) Section 312 is amended by striking subsection (j).
(5) Subsection (m) of section 312 is amended by striking ``,
a foreign investment company (within the meaning of section
1246(b)), or a foreign personal holding company (within the
meaning of section 552)''.
(6) Subsection (e) of section 443 is amended by striking
paragraph (3) and by redesignating paragraphs (4) and (5) as
paragraphs (3) and (4), respectively.
(7) Subparagraph (B) of section 465(c)(7) is amended by
adding ``or'' at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(8) Paragraph (1) of section 543(b) is amended by inserting
``and'' at the end of subparagraph (A), by striking ``, and''
at the end of subparagraph (B) and inserting a period, and by
striking subparagraph (C).
(9) Paragraph (1) of section 562(b) is amended by striking
``or a foreign personal holding company described in section
552''.
(10) Section 563 is amended--
(A) by striking subsection (c),
(B) by redesignating subsection (d) as subsection
(c), and
(C) by striking ``subsection (a), (b), or (c)'' in
subsection (c) (as so redesignated) and inserting
``subsection (a) or (b)''.
(11) Subsection (d) of section 751 is amended by adding
``and'' at the end of paragraph (2), by striking paragraph (3),
by redesignating paragraph (4) as paragraph (3), and by
striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as so
redesignated) and inserting ``paragraph (1) or (2)''.
(12) Paragraph (2) of section 864(d) is amended by striking
subparagraph (A) and by redesignating subparagraphs (B) and (C)
as subparagraphs (A) and (B), respectively.
(13)(A) Subparagraph (A) of section 898(b)(1) is amended to
read as follows:
``(A) which is treated as a controlled foreign
corporation for any purpose under subpart F of part III
of this subchapter, and''.
(B) Subparagraph (B) of section 898(b)(2) is amended by
striking ``and sections 551(f) and 554, whichever are
applicable,''.
(C) Paragraph (3) of section 898(b) is amended to read as
follows:
``(3) United states shareholder.--The term `United States
shareholder' has the meaning given to such term by section
951(b), except that, in the case of a foreign corporation
having related person insurance income (as defined in section
953(c)(2)), the Secretary may treat any person as a United
States shareholder for purposes of this section if such person
is treated as a United States shareholder under section
953(c)(1).''
(D) Subsection (c) of section 898 is amended to read as
follows:
``(c) Determination of Required Year.--
``(1) In general.--The required year is--
``(A) the majority U.S. shareholder year, or
``(B) if there is no majority U.S. shareholder year,
the taxable year prescribed under regulations.
``(2) 1-month deferral allowed.--A specified foreign
corporation may elect, in lieu of the taxable year under
paragraph (1)(A), a taxable year beginning 1 month earlier than
the majority U.S. shareholder year.
``(3) Majority u.s. shareholder year.--
``(A) In general.--For purposes of this subsection,
the term `majority U.S. shareholder year' means the
taxable year (if any) which, on each testing day,
constituted the taxable year of--
``(i) each United States shareholder
described in subsection (b)(2)(A), and
``(ii) each United States shareholder not
described in clause (i) whose stock was treated
as owned under subsection (b)(2)(B) by any
shareholder described in such clause.
``(B) Testing day.--The testing days shall be--
``(i) the first day of the corporation's
taxable year (determined without regard to this
section), or
``(ii) the days during such representative
period as the Secretary may prescribe.''
(14) Clause (ii) of section 904(d)(2)(A) is amended to read
as follows:
``(ii) Certain amounts included.--Except as
provided in clause (iii), the term `passive
income' includes, except as provided in
subparagraph (E)(iii) or paragraph (3)(I), any
amount includible in gross income under section
1293 (relating to certain passive foreign
investment companies).''
(15)(A) Subparagraph (A) of section 904(g)(1) is amended by
adding ``or'' at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(B) The paragraph heading of paragraph (2) of section 904(g)
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, 2008,'' 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, 2006.
(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 2003)'' 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, or 6046A'' in paragraph
(1) and inserting ``6046 or 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.
(34) Sections 163(e)(3)(B)(i) and 267(a)(3)(B)(i) are each
amended by--
(A) striking ``a foreign personal holding company (as
defined in section 552),'', and
(B) striking the comma after ``(as defined in section
957)''.
(d) Effective Date.--Except as otherwise provided in this section,
the amendments made by this section shall apply to taxable years of
foreign corporations beginning after December 31, 2006, and to taxable
years of United States shareholders with or within which such taxable
years of foreign corporations end.
SEC. 1075. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION
INCOME.
(a) In General.--Section 954(g)(1) (defining foreign base company
oil related income) is amended by striking ``or'' at the end of
subparagraph (A), by striking the period at the end of subparagraph (B)
and inserting ``, or'', and by inserting after subparagraph (B) the
following new subparagraph:
``(C) the pipeline transportation of oil or gas
within such foreign country.''
(b) 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. 1076. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME
WITH RESPECT TO TRANSACTIONS IN COMMODITIES.
(a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C)
(relating to commodity transactions) are amended to read as follows:
``(i) arise out of commodity hedging
transactions (as defined in paragraph (6)(A)),
``(ii) are active business gains or losses
from the sale of commodities, but only if
substantially all of the controlled foreign
corporation's commodities are property
described in paragraph (1), (2), or (8) of
section 1221(a), or''.
(b) Definition and Special Rules.--Subsection (c) of section 954 is
amended by adding after paragraph (5) the following new paragraph:
``(6) Definition and special rules relating to commodity
transactions.--
``(A) Commodity hedging transactions.--For purposes
of paragraph (1)(C)(i), the term `commodity hedging
transaction' means any transaction with respect to a
commodity if such transaction--
``(i) is a hedging transaction as defined in
section 1221(b)(2), determined--
``(I) without regard to subparagraph
(A)(ii) thereof,
``(II) by applying subparagraph
(A)(i) thereof by substituting
`ordinary property or property
described in section 1231(b)' for
`ordinary property', and
``(III) by substituting `controlled
foreign corporation' for `taxpayer'
each place it appears, and
``(ii) is clearly identified as such in
accordance with section 1221(a)(7).
``(B) Regulations.--The Secretary shall prescribe
such regulations as are appropriate to carry out the
purposes of paragraph (1)(C) in the case of
transactions involving related persons.''
(c) Effective Date.--The amendments made by this section shall
apply to transactions entered into after December 31, 2004.
SEC. 1077. REPEAL OF CFC RULES ON FOREIGN BASE COMPANY 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. 1078. MODIFICATION OF SUBPART F EXEMPTION 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 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. 1079. PARTIAL EXCLUSION FOR INCOME ATTRIBUTABLE TO FILMS USED
OUTSIDE THE UNITED STATES.
(a) In General.--Part III of subchapter B of chapter 1 (relating to
items specifically excluded from gross income) is amended by inserting
after section 139 the following new section:
``SEC. 139A. INCOME ATTRIBUTABLE TO FILMS USED OUTSIDE THE UNITED
STATES.
``(a) Exclusion.--
``(1) In general.--There shall be excluded from gross income
an amount equal to the applicable percentage of qualified film
income.
``(2) Applicable percentage.--For purposes of paragraph (1),
the applicable percentage shall be determined in accordance
with the following table:
``For taxable years ending
The applicable
in calendar year--
percentage is--
2007..................................... 1
2008..................................... 2
2009..................................... 3
2010..................................... 5
2011..................................... 8
2012..................................... 9
2013 or thereafter....................... 10.
``(b) Qualified Film Income.--For purposes of this section--
``(1) In general.--The term `qualified film income' means
gross income from a license of a qualified film in the ordinary
course of a trade or business for the exploitation or direct
use outside the United States less any associated film costs.
``(2) Exceptions.--
``(A) Certain uses.--Such term does not include
exploitation of characters, soundtracks, designs,
scripts, scores, or any other ancillary intangibles
associated with the qualified film.
``(B) Related person license.--
``(i) In general.--Such term does not include
any amount from the license of a qualified film
to a related person.
``(ii) Exception.--Clause (i) shall not apply
if such film is held for license by such
related person to an unrelated person for the
direct use or exploitation by such unrelated
person outside the United States.
``(iii) Related person.--For purposes of this
subparagraph, a person shall be 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).
``(c) Other Definitions.--For purposes of this section--
``(1) Qualified Film.--The term `qualified film' means
property described in section 168(f)(3) the original use of
which commences after December 31, 2006, 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.
``(2) Associated film costs.--The term `associated film
costs' means any expense properly apportioned and allocated to
income taken into account under subsection (b)(1), determined
as provided under regulations prescribed by the Secretary.
``(d) Election.--The taxpayer may elect not to apply this section
to a qualified film. Such election shall be made by the due date
(including extensions of time) for filing the return for the taxable
year in which such film is placed in service, and, once made for such
film, such election shall be irrevocable.
``(e) Denial of Foreign Tax Credit.--
``(1) In general.--No credit shall be allowed under section
901 for any taxes paid or accrued (or treated as paid or
accrued) with respect to the excludable portion of any
qualified film income. No deduction shall be allowed under this
chapter for any tax for which credit is not allowable by reason
of the preceding sentence.
``(2) Excludable portion.--For purposes of paragraph (1), the
taxes paid or accrued (or treated as paid or accrued) with
respect to the excludable portion is the amount which bears the
same ratio to the amount of taxes paid or accrued (or treated
as paid or accrued) with respect to qualified film income as
the amount excluded under subsection (a) for the taxable year
bears to the qualified film income for such year.''.
(b) Clerical Amendment.--The table of sections for part III of
subchapter B of chapter 1 is amended by inserting after the item
relating to section 139 the following new item:
``Sec. 139A. Income attributable to films
used outside the United
States.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years ending after December 31, 2006.
Subtitle H--Reduction of Double Taxation of Earnings
SEC. 1081. INTEREST EXPENSE ALLOCATION RULES.
(a) Election To Allocate on Worldwide Basis.-- Section 864 is
amended by redesignating subsection (f) as subsection (g) and by
inserting after subsection (e) the following new subsection:
``(f) Election To Allocate Interest, Etc. on Worldwide Basis.--For
purposes of this subchapter, at the election of the worldwide
affiliated group--
``(1) Allocation and apportionment of interest expense.--
``(A) In general.--The taxable income of each
domestic corporation which is a member of a worldwide
affiliated group shall be determined by allocating and
apportioning interest expense of each member as if all
members of such group were a single corporation.
``(B) Treatment of worldwide affiliated group.--The
taxable income of the domestic members of a worldwide
affiliated group from sources outside the United States
shall be determined by allocating and apportioning the
interest expense of such domestic members to such
income in an amount equal to the excess (if any) of--
``(i) the total interest expense of the
worldwide affiliated group multiplied by the
ratio which the foreign assets of the worldwide
affiliated group bears to all the assets of the
worldwide affiliated group, over
``(ii) the interest expense of all foreign
corporations which are members of the worldwide
affiliated group to the extent such interest
expense of such foreign corporations would have
been allocated and apportioned to foreign
source income if this subsection were applied
to a group consisting of all the foreign
corporations in such worldwide affiliated
group.
``(C) Worldwide affiliated group.--For purposes of
this paragraph, the term `worldwide affiliated group'
means a group consisting of--
``(i) the includible members of an affiliated
group (as defined in section 1504(a),
determined without regard to paragraphs (2) and
(4) of section 1504(b)), and
``(ii) all controlled foreign corporations in
which such members in the aggregate meet the
ownership requirements of section 1504(a)(2)
either directly or indirectly through applying
paragraph (2) of section 958(a) or through
applying rules similar to the rules of such
paragraph to stock owned directly or indirectly
by domestic partnerships, trusts, or estates.
``(2) Allocation and apportionment of other expenses.--
Expenses other than interest which are not directly allocable
or apportioned to any specific income producing activity shall
be allocated and apportioned as if all members of the
affiliated group were a single corporation. For purposes of the
preceding sentence, the term `affiliated group' has the meaning
given such term by section 1504 (determined without regard to
paragraph (4) of section 1504(b)).
``(3) Treatment of tax-exempt assets; basis of stock in
nonaffiliated 10-percent owned corporations.--The rules of
paragraphs (3) and (4) of subsection (e) shall apply for
purposes of this subsection; except that paragraph (4) shall be
applied on worldwide affiliated group basis.
``(4) Treatment of certain financial institutions.--
``(A) In general.--For purposes of paragraph (1), any
corporation described in subparagraph (B) shall be
treated as an includible corporation for purposes of
section 1504 only for purposes of applying this
subsection separately to corporations so described.
``(B) Description.--A corporation is described in
this subparagraph if--
``(i) such corporation is a financial
institution described in section 581 or 591,
``(ii) the business of such financial
institution is predominantly with persons other
than related persons (within the meaning of
subsection (d)(4)) or their customers, and
``(iii) such financial institution is
required by State or Federal law to be operated
separately from any other entity which is not
such an institution.
``(C) Treatment of bank 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 such Act), and
``(iii) any subsidiary of a financial
institution described in section 581 or 591, or
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) Antiabuse rules.--In the case of a corporation
which is a member of an electing financial institution
group, to the extent that such corporation--
``(i) distributes dividends or makes other
distributions with respect to its stock after
the date of the enactment of this paragraph to
any member of the pre-election worldwide
affiliated group (other than to a member of the
electing financial institution group) in excess
of the greater of--
``(I) its average annual dividend
(expressed as a percentage of current
earnings and profits) during the 5-
taxable-year period ending with the
taxable year preceding the taxable
year, or
``(II) 25 percent of its average
annual earnings and profits for such 5-
taxable-year period, or
``(ii) deals with any person in any manner
not clearly reflecting the income of the
corporation (as determined under principles
similar to the principles of section 482),
an amount of indebtedness of the electing financial
institution group equal to the excess distribution or
the understatement or overstatement of income, as the
case may be, shall be recharacterized (for the taxable
year and subsequent taxable years) for purposes of this
paragraph as indebtedness of the worldwide affiliated
group (excluding the electing financial institution
group). If a corporation has not been in existence for
5 taxable years, this subparagraph shall be applied
with respect to the period it was in existence.
``(D) Election.--An election under this paragraph
with respect to any financial institution group may be
made only by the common parent of the pre-election
worldwide affiliated group and may be made only for the
first taxable year beginning after December 31, 2008,
in which such affiliated group includes 1 or more
financial corporations. Such an election, once made,
shall apply to all financial corporations which are
members of the electing financial institution group for
such taxable year and all subsequent years unless
revoked with the consent of the Secretary.
``(E) Definitions relating to groups.--For purposes
of this paragraph--
``(i) Pre-election worldwide affiliated
group.--The term `pre-election worldwide
affiliated group' means, with respect to a
corporation, the worldwide affiliated group of
which such corporation would (but for an
election under this paragraph) be a member for
purposes of applying paragraph (1).
``(ii) Electing financial institution
group.--The term `electing financial
institution group' means the group of
corporations to which this subsection applies
separately by reason of the application of
paragraph (4)(A) and which includes financial
corporations by reason of an election under
subparagraph (A).
``(F) Regulations.--The Secretary shall prescribe
such regulations as may be appropriate to carry out
this subsection, including regulations--
``(i) providing for the direct allocation of
interest expense in other circumstances where
such allocation would be appropriate to carry
out the purposes of this subsection,
``(ii) preventing assets or interest expense
from being taken into account more than once,
and
``(iii) dealing with changes in members of
any group (through acquisitions or otherwise)
treated under this paragraph as an affiliated
group for purposes of this subsection.
``(6) Election.--An election to have this subsection apply
with respect to any worldwide affiliated group may be made only
by the common parent of the domestic affiliated group referred
to in paragraph (1)(C) and may be made only for the first
taxable year beginning after December 31, 2008, in which a
worldwide affiliated group exists which includes such
affiliated group and at least one foreign corporation. Such an
election, once made, shall apply to such common parent and all
other corporations which are members of such worldwide
affiliated group for such taxable year and all subsequent years
unless revoked with the consent of the Secretary.''.
(b) Expansion of Regulatory Authority.--Paragraph (7) of section
864(e) is amended--
(1) by inserting before the comma at the end of subparagraph
(B) ``and in other circumstances where such allocation would be
appropriate to carry out the purposes of this subsection'', and
(2) by striking ``and'' at the end of subparagraph (E), by
redesignating subparagraph (F) as subparagraph (G), and by
inserting after subparagraph (E) the following new
subparagraph:
``(F) preventing assets or interest expense from
being taken into account more than once, and''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2008.
SEC. 1082. 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,
2005, 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 sustained for taxable years beginning after December
31, 2005.
SEC. 1083. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.
(a) In General.--Paragraph (1) of section 904(d) (relating to
separate application of section with respect to certain categories of
income) is amended to read as follows:
``(1) In general.--The provisions of subsections (a), (b),
and (c) and sections 902, 907, and 960 shall be applied
separately with respect to--
``(A) passive category income, and
``(B) general category income.''
(b) Categories.--Paragraph (2) of section 904(d) is amended by
striking subparagraph (B), by redesignating subparagraph (A) as
subparagraph (B), and by inserting before subparagraph (B) (as so
redesignated) the following new subparagraph:
``(A) Categories.--
``(i) Passive category income.--The term
`passive category income' means passive income
and specified passive category income.
``(ii) General category income.--The term
`general category income' means income other
than passive category income.''
(c) Specified Passive Category Income.--Subparagraph (B) of section
904(d)(2), as so redesignated, is amended by adding at the end the
following new clause:
``(v) Specified passive category income.--The
term `specified passive category income'
means--
``(I) dividends from a DISC or former
DISC (as defined in section 992(a)) to
the extent such dividends are treated
as income from sources without the
United States,
``(II) taxable income attributable to
foreign trade income (within the
meaning of section 923(b)), and
``(III) distributions from a FSC (or
a former FSC) out of earnings and
profits attributable to foreign trade
income (within the meaning of section
923(b)) or interest or carrying charges
(as defined in section 927(d)(1))
derived from a transaction which
results in foreign trade income (as
defined in section 923(b)).''
(d) Treatment of Financial Services.--Paragraph (2) of section
904(d) is amended by striking subparagraph (D), by redesignating
subparagraph (C) as subparagraph (D), and by inserting before
subparagraph (D) (as so redesignated) the following new subparagraph:
``(C) Treatment of financial services income and
companies.--
``(i) In general.--Financial services income
shall be treated as general category income in
the case of--
``(I) a member of a financial
services group, and
``(II) any other person if such
person is predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business.
``(ii) Financial services group.--The term
`financial services group' means any affiliated
group (as defined in section 1504(a) without
regard to paragraphs (2) and (3) of section
1504(b)) which is predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business. In determining
whether such a group is so engaged, there shall
be taken into account only the income of
members of the group that are--
``(I) United States corporations, or
``(II) controlled foreign
corporations in which such United
States corporations own, directly or
indirectly, at least 80 percent of the
total voting power and value of the
stock.
``(iii) Pass-thru entities.--The Secretary
shall by regulation specify for purposes of
this subparagraph the treatment of financial
services income received or accrued by
partnerships and by other pass-thru entities
which are not members of a financial services
group.''
(e) Conforming Amendments.--
(1) Clause (iii) of section 904(d)(2)(B) (relating to
exceptions from passive income), as so redesignated, is amended
by striking subclause (I) and by redesignating subclauses (II)
and (III) as subclauses (I) and (II), respectively.
(2) Clause (i) of section 904(d)(2)(D) (defining financial
services income), as so redesignated, is amended by adding
``or'' at the end of subclause (I) and by striking subclauses
(II) and (III) and inserting the following new subclause:
``(II) passive income (determined
without regard to subparagraph
(B)(iii)(II)).''
(3) Section 904(d)(2)(D) (defining financial services
income), as so redesignated, is amended by striking clause
(iii).
(4) Paragraph (3) of section 904(d) is amended to read as
follows:
``(3) Look-thru in case of controlled foreign corporations.--
``(A) In general.--Except as otherwise provided in
this paragraph, dividends, interest, rents, and
royalties received or accrued by the taxpayer from a
controlled foreign corporation in which the taxpayer is
a United States shareholder shall not be treated as
passive category income.
``(B) Subpart f inclusions.--Any amount included in
gross income under section 951(a)(1)(A) shall be
treated as passive category income to the extent the
amount so included is attributable to passive category
income.
``(C) Interest, rents, and royalties.--Any interest,
rent, or royalty which is received or accrued from a
controlled foreign corporation in which the taxpayer is
a United States shareholder shall be treated as passive
category income to the extent it is properly allocable
(under regulations prescribed by the Secretary) to
passive category income of the controlled foreign
corporation.
``(D) Dividends.--Any dividend paid out of the
earnings and profits of any controlled foreign
corporation in which the taxpayer is a United States
shareholder shall be treated as passive category income
in proportion to the ratio of--
``(i) the portion of the earnings and profits
attributable to passive category income, to
``(ii) the total amount of earnings and
profits.
``(E) Look-thru applies only where subpart f
applies.--If a controlled foreign corporation meets the
requirements of section 954(b)(3)(A) (relating to de
minimis rule) for any taxable year, for purposes of
this paragraph, none of its foreign base company income
(as defined in section 954(a) without regard to section
954(b)(5)) and none of its gross insurance income (as
defined in section 954(b)(3)(C)) for such taxable year
shall be treated as passive category income, except
that this sentence shall not apply to any income which
(without regard to this sentence) would be treated as
financial services income. Solely for purposes of
applying subparagraph (D), passive income of a
controlled foreign corporation shall not be treated as
passive category income if the requirements of section
954(b)(4) are met with respect to such income.
``(F) Coordination with high-taxed income
provisions.--
``(i) In determining whether any income of a
controlled foreign corporation is passive
category income, subclause (II) of paragraph
(2)(B)(iii) shall not apply.
``(ii) Any income of the taxpayer which is
treated as passive category income under this
paragraph shall be so treated notwithstanding
any provision of paragraph (2); except that the
determination of whether any amount is high-
taxed income shall be made after the
application of this paragraph.
``(G) Dividend.--For purposes of this paragraph, the
term `dividend' includes any amount included in gross
income in section 951(a)(1)(B). Any amount included in
gross income under section 78 to the extent
attributable to amounts included in gross income in
section 951(a)(1)(A) shall not be treated as a dividend
but shall be treated as included in gross income under
section 951(a)(1)(A).
``(H) Look-thru applies to passive foreign investment
company inclusion.--If--
``(i) a passive foreign investment company is
a controlled foreign corporation, and
``(ii) the taxpayer is a United States
shareholder in such controlled foreign
corporation,
any amount included in gross income under section 1293
shall be treated as income in a separate category to
the extent such amount is attributable to income in
such category.''
(5) Treatment of income tax base differences.--Paragraph (2)
of section 904(d) is amended by redesignating subparagraphs (H)
and (I) as subparagraphs (I) and (J), respectively, and by
inserting after subparagraph (G) the following new
subparagraph:
``(H) Treatment of income tax base differences.--Tax
imposed under the law of a foreign country or
possession of the United States on an amount which does
not constitute income under United States tax
principles shall be treated as imposed on income
described in paragraph (1)(B).''
(6) Paragraph (2) of section 904(d) is amended by adding at
the end the following new subparagraph:
``(K) Transitional rules for 2005 changes.--For
purposes of paragraph (1)--
``(i) taxes carried from any taxable year
beginning before January 1, 2005, to any
taxable year beginning on or after such date,
with respect to any item of income, shall be
treated as described in the subparagraph of
paragraph (1) in which such income would be
described were such taxes paid or accrued in a
taxable year beginning on or after such date,
and
``(ii) the Secretary may by regulations
provide for the allocation of any carryback of
taxes with respect to income to such a taxable
year for purposes of allocating such income
among the separate categories in effect for
such taxable year.''.
(7) Section 904(j)(3)(A)(i) is amended by striking
``subsection (d)(2)(A)'' and inserting ``subsection
(d)(2)(B)''.
(f) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2004.
SEC. 1084. 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) Special rules.--For purposes of this
paragraph--
``(i) Earnings and profits.--
``(I) In general.--The rules of
section 316 shall apply.
``(II) Regulations.--The Secretary
may prescribe regulations regarding the
treatment of distributions out of
earnings and profits for periods before
the taxpayer's acquisition of the stock
to which the distributions relate.
``(ii) Inadequate substantiation.--If the
Secretary determines that the proper
subparagraph of paragraph (1) in which a
dividend is described has not been
substantiated, such dividend shall be treated
as income described in paragraph (1)(A).
``(iii) Look-thru with respect to
carryforwards of credit.--Rules similar to
subparagraph (A) also shall apply to any
carryforward under subsection (c) from a
taxable year beginning before January 1, 2003,
of tax allocable to a dividend from a
noncontrolled section 902 corporation with
respect to the taxpayer. The Secretary may by
regulations provide for the allocation of any
carryback of tax allocable to a dividend from a
noncontrolled section 902 corporation to such a
taxable year for purposes of allocating such
dividend among the separate categories in
effect for such taxable year.
``(iv) Coordination with high-taxed income
provisions.--Rules similar to the rules of
paragraph (3)(F) shall apply for purposes of
this paragraph.''.
(b) Conforming Amendments.--
(1) Section 904(d)(2)(E) is amended--
(A) by inserting ``or (4)'' after ``paragraph (3)''
in clause (i), and
(B) by striking clauses (ii) and (iv) and by
redesignating clause (iii) as clause (ii).
(2) Clause (i) of section 864(d)(5)(A) is amended to read as
follows:
``(i) Subclause (I) of section
904(d)(2)(B)(iii).''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 1085. 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. 1086. 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. 1087. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS
ACQUIRED BY DEALERS IN ORDINARY COURSE OF TRADE OR
BUSINESS.
(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 ``; and'', and by adding at the
end the following new subparagraph:
``(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.''
(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. 1088. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX
PAID OTHER THAN IN FUNCTIONAL CURRENCY.
(a) In General.--Paragraph (1) of section 986(a) (relating to
determination of foreign taxes and foreign corporation's earnings and
profits) is amended by redesignating subparagraph (D) as subparagraph
(E) and by inserting after subparagraph (C) the following new
subparagraph:
``(D) Elective exception for taxes paid other than in
functional currency.--
``(i) In general.--At the election of the
taxpayer, subparagraph (A) shall not apply to
any foreign income taxes the liability for
which is denominated in any currency other than
in the taxpayer's functional currency.
``(ii) Application to qualified business
units.--An election under this subparagraph may
apply to foreign income taxes attributable to a
qualified business unit in accordance with
regulations prescribed by the Secretary.
``(iii) Election.--Any such election shall
apply to the taxable year for which made and
all subsequent taxable years unless revoked
with the consent of the Secretary.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 1089. 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. 1090. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY FOREIGN
PARTNERSHIPS AND FOREIGN CORPORATIONS.
(a) In General.--Paragraph (1) of section 861(a) is amended by
striking ``and'' at the end of subparagraph (A), by striking the period
at the end of subparagraph (B) and inserting ``, and'', and by adding
at the end the following new subparagraph:
``(C) in the case of a foreign partnership in which
United States persons do not hold directly or
indirectly 20 percent or more of either the capital or
profits interests, any interest not paid by a trade or
business engaged in by the partnership in the United
States and not allocable to income which is effectively
connected (or treated as effectively connected) with
the conduct of a trade or business in the United
States.''
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 1091. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT
COMPANIES.
(a) Treatment of Certain Dividends.--
(1) Nonresident alien individuals.--Section 871 (relating to
tax on nonresident alien individuals) is amended by
redesignating subsection (k) as subsection (l) and by inserting
after subsection (j) the following new subsection:
``(k) Exemption for Certain Dividends of Regulated Investment
Companies.--
``(1) Interest-related dividends.--
``(A) In general.--Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1)(A) of
subsection (a) on any interest-related dividend
received from a regulated investment company.
``(B) Exceptions.--Subparagraph (A) shall not apply--
``(i) to any interest-related dividend
received from a regulated investment company by
a person to the extent such dividend is
attributable to interest (other than interest
described in subparagraph (E) (i) or (iii))
received by such company on indebtedness issued
by such person or by any corporation or
partnership with respect to which such person
is a 10-percent shareholder,
``(ii) to any interest-related dividend with
respect to stock of a regulated investment
company unless the person who would otherwise
be required to deduct and withhold tax from
such dividend under chapter 3 receives a
statement (which meets requirements similar to
the requirements of subsection (h)(5)) that the
beneficial owner of such stock is not a United
States person, and
``(iii) to any interest-related dividend paid
to any person within a foreign country (or any
interest-related dividend payment addressed to,
or for the account of, persons within such
foreign country) during any period described in
subsection (h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with
respect to any stock which was acquired on or before
the date of the publication of the Secretary's
determination under subsection (h)(6).
``(C) Interest-related dividend.--For purposes of
this paragraph, an interest-related dividend is any
dividend (or part thereof) which is designated by the
regulated investment company as an interest-related
dividend in a written notice mailed to its shareholders
not later than 60 days after the close of its taxable
year. If the aggregate amount so designated with
respect to a taxable year of the company (including
amounts so designated with respect to dividends paid
after the close of the taxable year described in
section 855) is greater than the qualified net interest
income of the company for such taxable year, the
portion of each distribution which shall be an
interest-related dividend shall be only that portion of
the amounts so designated which such qualified net
interest income bears to the aggregate amount so
designated.
``(D) Qualified net interest income.--For purposes of
subparagraph (C), the term `qualified net interest
income' means the qualified interest income of the
regulated investment company reduced by the deductions
properly allocable to such income.
``(E) Qualified interest income.--For purposes of
subparagraph (D), the term `qualified interest income'
means the sum of the following amounts derived by the
regulated investment company from sources within the
United States:
``(i) Any amount includible in gross income
as original issue discount (within the meaning
of section 1273) on an obligation payable 183
days or less from the date of original issue
(without regard to the period held by the
company).
``(ii) Any interest includible in gross
income (including amounts recognized as
ordinary income in respect of original issue
discount or market discount or acquisition
discount under part V of subchapter P and such
other amounts as regulations may provide) on an
obligation which is in registered form; except
that this clause shall not apply to--
``(I) any interest on an obligation
issued by a corporation or partnership
if the regulated investment company is
a 10-percent shareholder in such
corporation or partnership, and
``(II) any interest which is treated
as not being portfolio interest under
the rules of subsection (h)(4).
``(iii) Any interest referred to in
subsection (i)(2)(A) (without regard to the
trade or business of the regulated investment
company).
``(iv) Any interest-related dividend
includable in gross income with respect to
stock of another regulated investment company.
``(F) 10-percent shareholder.--For purposes of this
paragraph, the term `10-percent shareholder' has the
meaning given such term by subsection (h)(3)(B).
``(2) Short-term capital gain dividends.--
``(A) In general.--Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1)(A) of
subsection (a) on any short-term capital gain dividend
received from a regulated investment company.
``(B) Exception for aliens taxable under subsection
(a)(2).--Subparagraph (A) shall not apply in the case
of any nonresident alien individual subject to tax
under subsection (a)(2).
``(C) Short-term capital gain dividend.--For purposes
of this paragraph, a short-term capital gain dividend
is any dividend (or part thereof) which is designated
by the regulated investment company as a short-term
capital gain dividend in a written notice mailed to its
shareholders not later than 60 days after the close of
its taxable year. If the aggregate amount so designated
with respect to a taxable year of the company
(including amounts so designated with respect to
dividends paid after the close of the taxable year
described in section 855) is greater than the qualified
short-term gain of the company for such taxable year,
the portion of each distribution which shall be a
short-term capital gain dividend shall be only that
portion of the amounts so designated which such
qualified short-term gain bears to the aggregate amount
so designated.
``(D) Qualified short-term gain.--For purposes of
subparagraph (C), the term `qualified short-term gain'
means the excess of the net short-term capital gain of
the regulated investment company for the taxable year
over the net long-term capital loss (if any) of such
company for such taxable year. For purposes of this
subparagraph--
``(i) the net short-term capital gain of the
regulated investment company shall be computed
by treating any short-term capital gain
dividend includible in gross income with
respect to stock of another regulated
investment company as a short-term capital
gain, and
``(ii) the excess of the net short-term
capital gain for a taxable year over the net
long-term capital loss for a taxable year (to
which an election under section 4982(e)(4) does
not apply) shall be determined without regard
to any net capital loss or net short-term
capital loss attributable to transactions after
October 31 of such year, and any such net
capital loss or net short-term capital loss
shall be treated as arising on the 1st day of
the next taxable year.
To the extent provided in regulations, clause (ii)
shall apply also for purposes of computing the taxable
income of the regulated investment company.''
(2) Foreign corporations.--Section 881 (relating to tax on
income of foreign corporations not connected with United States
business) is amended by redesignating subsection (e) as
subsection (f) and by inserting after subsection (d) the
following new subsection:
``(e) Tax Not To Apply to Certain Dividends of Regulated Investment
Companies.--
``(1) Interest-related dividends.--
``(A) In general.--Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1) of
subsection (a) on any interest-related dividend (as
defined in section 871(k)(1)) received from a regulated
investment company.
``(B) Exception.--Subparagraph (A) shall not apply--
``(i) to any dividend referred to in section
871(k)(1)(B), and
``(ii) to any interest-related dividend
received by a controlled foreign corporation
(within the meaning of section 957(a)) to the
extent such dividend is attributable to
interest received by the regulated investment
company from a person who is a related person
(within the meaning of section 864(d)(4)) with
respect to such controlled foreign corporation.
``(C) Treatment of dividends received by controlled
foreign corporations.--The rules of subsection
(c)(5)(A) shall apply to any interest-related dividend
received by a controlled foreign corporation (within
the meaning of section 957(a)) to the extent such
dividend is attributable to interest received by the
regulated investment company which is described in
clause (ii) of section 871(k)(1)(E) (and not described
in clause (i) or (iii) of such section).
``(2) Short-term capital gain dividends.--No tax shall be
imposed under paragraph (1) of subsection (a) on any short-term
capital gain dividend (as defined in section 871(k)(2))
received from a regulated investment company.''
(3) Withholding taxes.--
(A) Section 1441(c) (relating to exceptions) is
amended by adding at the end the following new
paragraph:
``(12) Certain dividends received from regulated investment
companies.--
``(A) In general.--No tax shall be required to be
deducted and withheld under subsection (a) from any
amount exempt from the tax imposed by section
871(a)(1)(A) by reason of section 871(k).
``(B) Special rule.--For purposes of subparagraph
(A), clause (i) of section 871(k)(1)(B) shall not apply
to any dividend unless the regulated investment company
knows that such dividend is a dividend referred to in
such clause. A similar rule shall apply with respect to
the exception contained in section 871(k)(2)(B).''
(B) Section 1442(a) (relating to withholding of tax
on foreign corporations) is amended--
(i) by striking ``and the reference in
section 1441(c)(10)'' and inserting ``the
reference in section 1441(c)(10)'', and
(ii) by inserting before the period at the
end the following: ``, and the references in
section 1441(c)(12) to sections 871(a) and
871(k) shall be treated as referring to
sections 881(a) and 881(e) (except that for
purposes of applying subparagraph (A) of
section 1441(c)(12), as so modified, clause
(ii) of section 881(e)(1)(B) shall not apply to
any dividend unless the regulated investment
company knows that such dividend is a dividend
referred to in such clause)''.
(b) Estate Tax Treatment of Interest in Certain Regulated
Investment Companies.--Section 2105 (relating to property without the
United States for estate tax purposes) is amended by adding at the end
the following new subsection:
``(d) Stock in a RIC.--
``(1) In general.--For purposes of this subchapter, stock in
a regulated investment company (as defined in section 851)
owned by a nonresident not a citizen of the United States shall
not be deemed property within the United States in the
proportion that, at the end of the quarter of such investment
company's taxable year immediately preceding a decedent's date
of death (or at such other time as the Secretary may designate
in regulations), the assets of the investment company that were
qualifying assets with respect to the decedent bore to the
total assets of the investment company.
``(2) Qualifying assets.--For purposes of this subsection,
qualifying assets with respect to a decedent are assets that,
if owned directly by the decedent, would have been--
``(A) amounts, deposits, or debt obligations
described in subsection (b) of this section,
``(B) debt obligations described in the last sentence
of section 2104(c), or
``(C) other property not within the United States.''
(c) Treatment of Regulated Investment Companies Under Section
897.--
(1) Paragraph (1) of section 897(h) is amended by striking
``REIT'' each place it appears and inserting ``qualified
investment entity''.
(2) Paragraphs (2) and (3) of section 897(h) are amended to
read as follows:
``(2) Sale of stock in domestically controlled entity not
taxed.--The term `United States real property interest' does
not include any interest in a domestically controlled qualified
investment entity.
``(3) Distributions by domestically controlled qualified
investment entities.--In the case of a domestically controlled
qualified investment entity, rules similar to the rules of
subsection (d) shall apply to the foreign ownership percentage
of any gain.''
(3) Subparagraphs (A) and (B) of section 897(h)(4) are
amended to read as follows:
``(A) Qualified investment entity.--The term
`qualified investment entity' means any real estate
investment trust and any regulated investment company.
``(B) Domestically controlled.--The term
`domestically controlled qualified investment entity'
means any qualified investment entity in which at all
times during the testing period less than 50 percent in
value of the stock was held directly or indirectly by
foreign persons.''
(4) Subparagraphs (C) and (D) of section 897(h)(4) are each
amended by striking ``REIT'' and inserting ``qualified
investment entity''.
(5) The subsection heading for subsection (h) of section 897
is amended by striking ``REITS'' and inserting ``Certain
Investment Entities''.
(d) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
dividends with respect to taxable years of regulated investment
companies beginning after the date of the enactment of this
Act.
(2) Estate tax treatment.--The amendment made by subsection
(b) shall apply to estates of decedents dying after the date of
the enactment of this Act.
(3) Certain other provisions.--The amendments made by
subsection (c) (other than paragraph (1) thereof) shall take
effect on the date of the enactment of this Act.
Subtitle I--Other Provisions
SEC. 1101. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
RELATED CONDITIONS.
(a) Rules for Replacement of Involuntarily Converted Livestock.--
Subsection (e) of section 1033 (relating to involuntary conversions) is
amended--
(1) by striking ``Conditions.--For purposes'' and inserting
``Conditions.--
``(1) In general.--For purposes'', and
(2) by adding at the end the following new paragraph:
``(2) Extension of replacement period.--
``(A) In general.--In the case of drought, flood, or
other weather-related conditions described in paragraph
(1) which result in the area being designated as
eligible for assistance by the Federal Government,
subsection (a)(2)(B) shall be applied with respect to
any converted property by substituting `4 years' for `2
years'.
``(B) Further extension by secretary.--The Secretary
may extend on a regional basis the period for
replacement under this section (after the application
of subparagraph (A)) for such additional time as the
Secretary determines appropriate if the weather-related
conditions which resulted in such application continue
for more than 3 years.''.
(b) Income Inclusion Rules.--Subsection (e) of section 451
(relating to special rule for proceeds from livestock sold on account
of drought, flood, or other weather-related conditions) is amended by
adding at the end the following new paragraph:
``(3) Special election rules.--If section 1033(e)(2) applies
to a sale or exchange of livestock described in paragraph (1),
the election under paragraph (1) shall be deemed valid if made
during the replacement period described in such section.''.
(c) Effective Date.--The amendments made by this section shall
apply to any taxable year with respect to which the due date (without
regard to extensions) for the return is after December 31, 2002.
SEC. 1102. 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. 1103. VACCINE TAX TO APPLY TO HEPATITIS A VACCINE.
(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. 1104. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR ORPHAN
DRUG CREDIT.
(a) In General.--Paragraph (2) of section 45C(b) (relating to
qualified clinical testing expenses) is amended by adding at the end
the following new subparagraph:
``(C) Treatment of certain expenses incurred before
designation.--For purposes of subparagraph (A)(ii)(I),
if a drug is designated under section 526 of the
Federal Food, Drug, and Cosmetic Act not later than the
due date (including extensions) for filing the return
of tax under this subtitle for the taxable year in
which the application for such designation of such drug
was filed, such drug shall be treated as having been
designated on the date that such application was
filed.''.
(b) Effective Date.--The amendment made by subsection (a) shall
apply to expenses incurred after the date of the enactment of this Act.
SEC. 1105. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS TREATED AS
QUALIFYING INCOME OF REGULATED INVESTMENT
COMPANIES.
(a) In General.--Paragraph (2) of section 851(b) (defining
regulated investment company) is amended to read as follows:
``(2) at least 90 percent of its gross income is derived
from--
``(A) dividends, interest, payments with respect to
securities loans (as defined in section 512(a)(5)), and
gains from the sale or other disposition of stock or
securities (as defined in section 2(a)(36) of the
Investment Company Act of 1940, as amended) or foreign
currencies, or other income (including but not limited
to gains from options, futures or forward contracts)
derived with respect to its business of investing in
such stock, securities, or currencies, and
``(B) distributions or other income derived from an
interest in a qualified publicly traded partnership (as
defined in subsection (h)); and''.
(b) Source Flow-Through Rule Not To Apply.--The last sentence of
section 851(b) is amended by inserting ``(other than a qualified
publicly traded partnership as defined in subsection (h))'' after
``derived from a partnership''.
(c) Limitation on Ownership.--Subsection (c) of section 851 is
amended by redesignating paragraph (5) as paragraph (6) and inserting
after paragraph (4) the following new paragraph:
``(5) The term `outstanding voting securities of such issuer'
shall include the equity securities of a qualified publicly
traded partnership (as defined in subsection (h)).''.
(d) Definition of Qualified Publicly Traded Partnership.--Section
851 is amended by adding at the end the following new subsection:
``(h) Qualified Publicly Traded Partnership.--For purposes of this
section, the term `qualified publicly traded partnership' means a
publicly traded partnership described in section 7704(b) other than a
partnership which would satisfy the gross income requirements of
section 7704(c)(2) if qualifying income included only income described
in subsection (b)(2)(A).''.
(e) Definition of Qualifying Income.--Section 7704(d)(4) is amended
by striking ``section 851(b)(2)'' and inserting ``section
851(b)(2)(A)''.
(f) Limitation on Composition of Assets.--Subparagraph (B) of
section 851(b)(3) is amended to read as follows:
``(B) not more than 25 percent of the value of its
total assets is invested in--
``(i) the securities (other than Government
securities or the securities of other regulated
investment companies) of any one issuer,
``(ii) the securities (other than the
securities of other regulated investment
companies) of two or more issuers which the
taxpayer controls and which are determined,
under regulations prescribed by the Secretary,
to be engaged in the same or similar trades or
businesses or related trades or businesses, or
``(iii) the securities of one or more
qualified publicly traded partnerships (as
defined in subsection (h)).''.
(g) Application of Special Passive Activity Rule to Regulated
Investment Companies.--Subsection (k) of section 469 (relating to
separate application of section in case of publicly traded
partnerships) is amended by adding at the end the following new
paragraph:
``(4) Application to regulated investment companies.--For
purposes of this section, a regulated investment company (as
defined in section 851) holding an interest in a qualified
publicly traded partnership (as defined in section 851(h))
shall be treated as a taxpayer described in subsection (a)(2)
with respect to items attributable to such interest.''.
(h) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after the date of the enactment of
this Act.
SEC. 1106. 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 the time of payment of such interest or
principal is subject to a contingency, but only if--
``(i) any such contingency does not have the
effect of changing the effective yield to
maturity, as determined under section 1272,
other than a change in the annual yield to
maturity which either--
``(I) does not exceed the greater of
\1/4\ of 1 percent or 5 percent of the
annual yield to maturity, or
``(II) results solely from a default
or the exercise of a prepayment right
by the issuer of the debt, or
``(ii) neither the aggregate issue price nor
the aggregate face amount of the issuer's debt
instruments held by the trust exceeds
$1,000,000 and not more than 12 months of
unaccrued interest can be required to be
prepaid thereunder.
``(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) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2000.
(2) Subparagraphs (c) through (e).--The amendments made by
subsections (c), (d), and (e) shall apply to taxable years
beginning after the date of the enactment of this Act.
SEC. 1107. 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
(3),
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.--The tax imposed by subparagraph (A)
on an arrow shall not apply if the arrow contains an
arrow shaft with respect to which tax was paid under
paragraph (2).
``(C) Arrow.--For purposes of this paragraph, the
term `arrow' means any shaft described in paragraph (2)
to which additional components are attached.''.
(c) Conforming Amendments.--(1) Section 4161(b)(2) is amended by
inserting ``(other than a broadhead)'' after ``point''.
(2) The heading of section 4161(b)(2) is amended by striking
``Arrows.--'' and inserting ``Arrow components.--''.
(d) Effective Date.--The amendments made by this section shall
apply to articles sold by the manufacturer, producer, or importer after
December 31, 2003.
SEC. 1108. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.
(a) Repeal.--Paragraph (6) of section 4162(a) (defining sport
fishing equipment) is amended by striking subparagraph (C) and by
redesignating subparagraphs (D) through (J) as subparagraphs (C)
through (I), respectively.
(b) Effective Date.--The amendments made this section shall apply
to articles sold by the manufacturer, producer, or importer after
December 31, 2003.
SEC. 1109. INCOME TAX CREDIT TO DISTILLED SPIRITS WHOLESALERS FOR COST
OF CARRYING FEDERAL EXCISE TAXES ON BOTTLED
DISTILLED SPIRITS.
(a) In General.--Subpart A of part I of subchapter A of chapter 51
(relating to gallonage and occupational taxes) is amended by adding at
the end the following new section:
``SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER'S AVERAGE COST OF
CARRYING EXCISE TAX.
``(a) In General.--For purposes of section 38, in the case of an
eligible wholesaler, the amount of the distilled spirits wholesalers
credit for any taxable year is the amount equal to the product of--
``(1) the number of cases of bottled distilled spirits--
``(A) which were bottled in the United States, and
``(B) which are purchased by such wholesaler during
the taxable year directly from the bottler of such
spirits, and
``(2) the average tax-financing cost per case for the most
recent calendar year ending before the beginning of such
taxable year.
``(b) Eligible Wholesaler.--For purposes of this section, the term
`eligible wholesaler' means any person who holds a permit under the
Federal Alcohol Administration Act as a wholesaler of distilled
spirits.
``(c) Average Tax-Financing Cost.--
``(1) In general.--For purposes of this section, the average
tax-financing cost per case for any calendar year is the amount
of interest which would accrue at the deemed financing rate
during a 60-day period on an amount equal to the deemed Federal
excise per case.
``(2) Deemed financing rate.--For purposes of paragraph (1),
the deemed financing rate for any calendar year is the average
of the corporate overpayment rates under paragraph (1) of
section 6621(a) (determined without regard to the last sentence
of such paragraph) for calendar quarters of such year.
``(3) Deemed federal excise tax based on case of 12 80-proof
750ml bottles.--For purposes of paragraph (1), the deemed
Federal excise tax per case is $22.83.
``(4) Number of cases in lot.--For purposes of this section,
the number of cases in any lot of distilled spirits shall be
determined by dividing the number of liters in such lot by 9.''
(b) Conforming Amendments.--
(1) Subsection (b) of section 38 is amended by striking
``plus'' at the end of paragraph (14), by striking the period
at the end of paragraph (15) and inserting ``, plus'', and by
adding at the end the following new paragraph:
``(16) in the case of an eligible wholesaler (as defined in
section 5011(b)), the distilled spirits wholesaler credit
determined under section 5011(a).''
(2) Subsection (d) of section 39 (relating to carryback and
carryforward of unused credits) is amended by adding at the end
the following new paragraph:
``(11) No carryback of section 5011 credit before january 1,
2004.--No portion of the unused business credit for any taxable
year which is attributable to the credit determined under
section 5011(a) may be carried back to a taxable year beginning
before January 1, 2004.''.
(3) The table of sections for subpart A of part I of
subchapter A of chapter 51 is amended by adding at the end the
following new item:
``Sec. 5011. Income tax credit for
wholesaler's average cost of
carrying excise tax.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 1110. 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, 2003.
SEC. 1111. 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, 2003.
SEC. 1112. TAXATION OF CERTAIN SETTLEMENT FUNDS.
(a) In General.--Subsection (g) of section 468B (relating to
clarification of taxation of certain funds) is amended to read as
follows:
``(g) Clarification of Taxation of Certain Funds.--
``(1) In general.--Except as provided in paragraph (2),
nothing in any provision of law shall be construed as providing
that an escrow account, settlement fund, or similar fund is not
subject to current income tax. The Secretary shall prescribe
regulations providing for the taxation of any such account or
fund whether as a grantor trust or otherwise.
``(2) Exemption from tax for certain settlement funds.--An
escrow account, settlement fund, or similar fund shall be
treated as beneficially owned by the United States and shall be
exempt from taxation under this subtitle if--
``(A) it is established pursuant to a consent decree
entered by a judge of a United States District Court,
``(B) it is created for the receipt of settlement
payments as directed by a government entity for the
sole purpose of resolving or satisfying one or more
claims asserting liability under the Comprehensive
Environmental Response, Compensation, and Liability Act
of 1980,
``(C) the authority and control over the expenditure
of funds therein (including the expenditure of
contributions thereto and any net earnings thereon) is
with such government entity, and
``(D) upon termination, any remaining funds will be
disbursed upon instructions by such government entity
in accordance with applicable law.
For purposes of this paragraph, the term `government entity'
means the United States, any State or political subdivision
thereof, the District of Columbia, any possession of the United
States, and any agency or instrumentality of any of the
foregoing.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 1113. SUSPENSION OF OCCUPATIONAL TAXES RELATING TO DISTILLED
SPIRITS, WINE, AND BEER.
(a) In General.--Subpart G of part II of subchapter A of chapter 51
is amended by redesignating section 5148 as section 5149 and by
inserting after section 5147 the following new section:
``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.
``(a) In General.--Notwithstanding sections 5081, 5091, 5111, 5121,
and 5131, the rate of tax imposed under such sections for the
suspension period shall be zero. During such period, persons engaged in
or carrying on a trade or business covered by such sections shall
register under section 5141 and shall comply with the recordkeeping
requirements under this part.
``(b) Suspension Period.--For purposes of subsection (a), the
suspension period is the period beginning on July 1, 2004, and ending
on June 30, 2007.''.
(b) Conforming Amendment.--Section 5117 is amended by adding at the
end the following new subsection:
``(d) Special Rule During Suspension Period.--Except as provided by
the Secretary, during the suspension period (as defined in section
5148) it shall be unlawful for any dealer to purchase distilled spirits
for resale from any person other than a wholesale dealer in liquors who
is required to keep records under section 5114.''.
(c) Clerical Amendment.--The table of sections for subpart G of
part II of subchapter A of chapter 51 is amended by striking the last
item and inserting the following new items:
``Sec. 5148. Suspension of occupational
tax.
``Sec. 5149. Cross references.''.
(d) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
TITLE II--PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH CORPORATE EARNINGS
STRIPPING AND EXPATRIATION
SEC. 2001. REDUCTION IN POTENTIAL FOR EARNINGS STRIPPING BY FURTHER
LIMITING DEDUCTION FOR INTEREST ON CERTAIN
INDEBTEDNESS.
(a) Reduction in Potential for Earnings Stripping.--
(1) In general.--Section 163(j) is amended by striking
paragraphs (1) and (2), by redesignating paragraphs (3) through
(8) as paragraphs (4) through (9), respectively, and by
inserting before paragraph (4), as so redesignated, the
following new paragraphs:
``(1) Limitation.--
``(A) In general.--In the case of a corporation, no
deduction shall be allowed under this chapter for
disqualified interest paid or accrued during the
taxable year.
``(B) Maximum disallowance.--The amount disallowed
under subparagraph (A) shall not exceed the sum of--
``(i) the corporation's excess interest
expense for the taxable year, and
``(ii) the corporation's excess related party
interest expense for such year.
In no event shall the disallowance under subparagraph
(A) reduce the deduction for interest below the sum of
the amount of interest includible in the gross income
of the taxpayer for such taxable year and an amount
equal to 25 percent of adjusted taxable income (35
percent in the case of the first taxable year beginning
after December 31, 2003).
``(C) Disallowed amount carried to succeeding taxable
year.--
``(i) In general.--Any amount disallowed
under subparagraph (A) for any taxable year
shall be treated as paid or accrued in the
succeeding taxable year and in the 2nd through
10th succeeding taxable years to the extent not
previously taken into account under this
subparagraph.
``(ii) Limitation on amount carried to
year.--A carryforward amount may not be taken
into account for any such succeeding taxable
year to the extent that such amount, when added
to amounts carried to such succeeding taxable
year from taxable years preceding the taxable
year from which the amount is being carried
forward, would result in (or increase) a
disallowance under subparagraph (A).
``(iii) Carryover applied separately to
categories of disqualified interest.--Clauses
(i) and (ii) shall be applied separately to
disqualified interest described in paragraph
(3)(A) and to disqualified interest described
in paragraph (3)(B). For purposes of this
subparagraph, any amount disallowed under
subparagraph (A) for any taxable year shall be
treated as disqualified interest described in
paragraph (3)(A) to the extent thereof and then
as disqualified interest described in paragraph
(3)(B).
``(2) Excess interest expense; excess related party interest
expense.--For purposes of this subsection--
``(A) Excess interest expense.--The term `excess
interest expense' means the excess (if any) of--
``(i) the corporation's net interest expense,
over
``(ii) 50 percent of the adjusted taxable
income of the corporation.
``(B) Excess related party interest expense.--The
term `excess related party interest expense' means the
excess (if any) of--
``(i) the lesser of--
``(I) the amount of disqualified
interest described in paragraph (3)(A),
or
``(II) the corporation's net interest
expense, over
``(ii) 25 percent (35 percent in the case of
the first taxable year beginning after December
31, 2003) of the adjusted taxable income of the
corporation.
``(3) Alternative maximum disallowance.--
``(A) In general.--In the case of a corporation with
respect to which an election is in effect under
subparagraph (B), the amount disallowed under paragraph
(1)(A) shall not exceed the excess (if any) of--
``(i) the corporation's net interest expense,
over
``(ii) 30 percent of the adjusted taxable
income of the corporation.
``(B) Election.--A corporation may make a one-time
irrevocable election to have the alternative maximum
disallowance described in subparagraph (A) apply for
purposes of this subsection in lieu of paragraph
(1)(B). An election under this subparagraph shall not
apply with respect to any taxable year beginning before
January 1, 2005.
``(C) Limitation.--Subparagraph (B) shall not apply
with respect to any corporation which is--
``(i) a surrogate foreign corporation (as
defined in section 7874(a)(2)(B)),
``(ii) a corporation which would be a
surrogate foreign corporation (as so defined)
if ``December 31, 1996'' were substituted for
``March 4, 2003'' in section 7874(a), or
``(iii) a corporation which is an expatriated
entity (as defined in section 7874(a)) with
respect to a corporation described in clause
(i) or (ii).''.
(2) Conforming amendment.--Paragraph (5)(B)(ii) of section
163(j), as redesignated by paragraph (1), is amended by
striking ``paragraph (5)(B)'' and inserting ``paragraph
(6)(B)''.
(b) Maintenance of Current Law for Interest Paid by Taxable REIT
Subsidiaries to REIT.--
(1) Exception from 163(j).--Paragraph (4) of section 163(j),
as redesignated by subsection (a), 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).
(2) Disallowance.--Section 856 is amended by adding at the
end the following new subsection:
``(n) Limitation on Deduction for Interest on Certain Indebtedness
of Taxable REIT Subsidiary.--
``(1) Limitation.--
``(A) In general.--If this subsection applies to any
taxable REIT subsidiary for any taxable year, no
deduction shall be allowed under this chapter for
disqualified interest paid or accrued by such
subsidiary during such taxable year. The amount
disallowed under the preceding sentence shall not
exceed the subsidiary's excess interest expense for the
taxable year.
``(B) Disallowed amount carried to succeeding taxable
year.--Any amount disallowed under subparagraph (A) for
any taxable year shall be treated as disqualified
interest paid or accrued in the succeeding taxable year
(and clause (ii) of paragraph (2)(A) shall not apply
for purposes of applying this subsection to the amount
so treated).
``(2) Subsidiaries to which subsection applies.--
``(A) In general.--This subsection shall apply to any
taxable REIT subsidiary for any taxable year if--
``(i) such subsidiary has excess interest
expense for such taxable year, and
``(ii) the ratio of debt to equity of such
subsidiary as of the close of such taxable year
(or on any other day during the taxable year as
the Secretary may by regulations prescribe)
exceeds 1.5 to 1.
``(B) Excess interest expense.--
``(i) In general.--For purposes of this
subsection, the term `excess interest expense'
means the excess (if any) of--
``(I) the taxable REIT subsidiary's
net interest expense, over
``(II) the sum of 50 percent of the
adjusted taxable income of the
subsidiary plus any excess limitation
carryforward under clause (ii).
``(ii) Excess limitation carryforward.--If a
taxable REIT subsidiary has an excess
limitation for any taxable year, the amount of
such excess limitation shall be an excess
limitation carryforward to the 1st succeeding
taxable year and to the 2nd and 3rd succeeding
taxable years to the extent not previously
taken into account under this clause. The
amount of such a carryforward taken into
account for any such succeeding taxable year
shall not exceed the excess interest expense
for such succeeding taxable year (determined
without regard to the carryforward from the
taxable year of such excess limitation).
``(iii) Excess limitation.--For purposes of
clause (ii), the term `excess limitation' means
the excess (if any) of--
``(I) 50 percent of the adjusted
taxable income of the subsidiary, over
``(II) the subsidiary's net interest
expense.
``(C) Ratio of debt to equity.--For purposes of this
paragraph, the term `ratio of debt to equity' means the
ratio which the total indebtedness of the subsidiary
bears to the sum of its money and all other assets
reduced (but not below zero) by such total
indebtedness. The rules of section 163(j)(6)(E) shall
apply for purposes of the preceding sentence.
``(3) Disqualified interest.--For purposes of this
subsection, the term `disqualified interest' means any interest
paid or accrued (directly or indirectly) by a taxable REIT
subsidiary of a real estate investment trust to such trust.
``(4) Other rules to apply.--Rules similar to the rules of
paragraphs (7), (8), and (9) of section 163(j) shall apply for
purposes of this subsection.''
(c) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2003.
(2) Earlier effective date with respect to expatriated
corporations, etc.--The amendments made by this section shall
apply to taxable years ending after March 4, 2003, in the case
of a taxpayer which is--
(A) a surrogate foreign corporation, as defined in
section 7874(a)(2)(B) of the Internal Revenue Code of
1986, as added by section 2002,
(B) a corporation which would be a surrogate foreign
corporation (as so defined) if ``December 31, 1996''
were substituted for ``March 4, 2003'' in such section
7874(a), or
(C) a corporation which is an expatriated entity (as
defined in such section 7874(a)) with respect to a
corporation described in subparagraph (A) or (B).
In applying such amendments to a taxpayer described in the
preceding sentence, subparagraph (B) of section 163(j)(2) of
such Code, as amended by this section, shall be applied by
substituting ``25 percent'' for ``35 percent''.
(3) Limitation on carryover of disallowed interest.--
(A) In general.--Except in the case of a taxpayer
described in paragraph (2), for purposes of applying
section 163(j)(1)(C) of the Internal Revenue Code of
1986 (as added by this section), amounts carried from a
taxable year beginning before January 1, 2004, to any
taxable year beginning after December 31, 2003, shall
be treated as disqualified interest described in
section 163(j)(3)(B) of such Code which is disallowed
for the most recent taxable year beginning before
January 1, 2004.
(B) Expatriated corporations.--In the case of a
taxpayer described in paragraph (2), a rule similar to
the rule of subparagraph (A) shall apply to amounts
carried from a taxable year ending on or before March
5, 2003.
SEC. 2002. TAX TREATMENT OF EXPATRIATED ENTITIES AND THEIR FOREIGN
PARENTS.
(a) In General.--Subchapter C of chapter 80 (relating to provisions
affecting more than one subtitle) is amended by adding at the end the
following new section:
``SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES AND THEIR FOREIGN
PARENTS.
``(a) Tax on Inversion Gain of Expatriated Entities.--
``(1) In general.--The taxable income of an expatriated
entity for any taxable year which includes any portion of the
applicable period shall in no event be less than the inversion
gain of the entity for the taxable year.
``(2) Expatriated entity.--For purposes of this subsection--
``(A) In general.--The term `expatriated entity'
means--
``(i) the domestic corporation or partnership
referred to in subparagraph (B)(i) with respect
to which a foreign corporation is a surrogate
foreign corporation, and
``(ii) any United States person who is
related (within the meaning of section 267(b)
or 707(b)(1)) to a domestic corporation or
partnership described in clause (i).
``(B) Surrogate foreign corporation.--A foreign
corporation shall be treated as a surrogate foreign
corporation if, pursuant to a plan (or a series of
related transactions)--
``(i) the entity completes after March 4,
2003, the direct or indirect acquisition of
substantially all of the properties held
directly or indirectly by a domestic
corporation or substantially all of the
properties constituting a trade or business of
a domestic partnership,
``(ii) after the acquisition at least 60
percent of the stock (by vote or value) of the
entity is held--
``(I) in the case of an acquisition
with respect to a domestic corporation,
by former shareholders of the domestic
corporation by reason of holding stock
in the domestic corporation, or
``(II) in the case of an acquisition
with respect to a domestic partnership,
by former partners of the domestic
partnership by reason of holding a
capital or profits interest in the
domestic partnership, and
``(iii) after the acquisition the expanded
affiliated group which includes the entity does
not have substantial business activities in the
foreign country in which, or under the law of
which, the entity is created or organized, when
compared to the total business activities of
such expanded affiliated group.
An entity otherwise described in clause (i) with
respect to any domestic corporation or partnership
trade or business shall be treated as not so described
if, on or before March 4, 2003, such entity acquired
directly or indirectly more than half of the properties
held directly or indirectly by such corporation or more
than half of the properties constituting such
partnership trade or business, as the case may be.
``(b) Definitions and Special Rules.--
``(1) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group as defined in
section 1504(a) but without regard to section 1504(b)(3),
except that section 1504(a) shall be applied by substituting
`more than 50 percent' for `at least 80 percent' each place it
appears.
``(2) Certain stock disregarded.--There shall not be taken
into account in determining ownership under subsection
(a)(2)(B)(ii)--
``(A) stock held by members of the expanded
affiliated group which includes the foreign
corporation, or
``(B) stock of such foreign corporation which is sold
in a public offering related to the acquisition
described in subsection (a)(2)(B)(i).
``(3) Plan deemed in certain cases.--If a foreign corporation
acquires directly or indirectly substantially all of the
properties of a domestic corporation or partnership during the
4-year period beginning on the date which is 2 years before the
ownership requirements of subsection (a)(2)(B)(ii) are met,
such actions shall be treated as pursuant to a plan.
``(4) Certain transfers disregarded.--The transfer of
properties or liabilities (including by contribution or
distribution) shall be disregarded if such transfers are part
of a plan a principal purpose of which is to avoid the purposes
of this section.
``(5) Special rule for related partnerships.--For purposes of
applying subsection (a)(2)(B)(ii) to the acquisition of a trade
or business of a domestic partnership, except as provided in
regulations, all partnerships which are under common control
(within the meaning of section 482) shall be treated as 1
partnership.
``(6) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to determine whether a
corporation is a surrogate foreign corporation, including
regulations--
``(A) to treat warrants, options, contracts to
acquire stock, convertible debt interests, and other
similar interests as stock, and
``(B) to treat stock as not stock.
``(c) Other Definitions.--For purposes of this section--
``(1) Applicable period.--The term `applicable period' means
the period--
``(A) beginning on the first date properties are
acquired as part of the acquisition described in
subsection (a)(2)(B)(i), and
``(B) ending on the date which is 10 years after the
last date properties are acquired as part of such
acquisition.
``(2) Inversion gain.--The term `inversion gain' means the
income or gain recognized by reason of the transfer during the
applicable period of stock or other properties by an
expatriated entity, and any income received or accrued during
the applicable period by reason of a license of any property by
an expatriated entity --
``(A) as part of the acquisition described in
subsection (a)(2)(B)(i), or
``(B) after such acquisition if the transfer or
license is to a foreign related person.
Subparagraph (B) shall not apply to property described in
section 1221(a)(1) in the hands of the expatriated entity.
``(3) Foreign related person.--The term `foreign related
person' means, with respect to any expatriated entity, a
foreign person which--
``(A) is related (within the meaning of section
267(b) or 707(b)(1)) to such entity, or
``(B) is under the same common control (within the
meaning of section 482) as such entity.
``(d) Special Rules.--
``(1) Credits not allowed against tax on inversion gain.--
Credits (other than the credit allowed by section 901) shall be
allowed against the tax imposed by this chapter on an
expatriated entity for any taxable year described in subsection
(a) only to the extent such tax exceeds the product of--
``(A) the amount of the inversion gain for the
taxable year, and
``(B) the highest rate of tax specified in section
11(b)(1).
For purposes of determining the credit allowed by section 901,
inversion gain shall be treated as from sources within the
United States.
``(2) Special rules for partnerships.--In the case of an
expatriated entity which is a partnership--
``(A) subsection (a)(1) shall apply at the partner
rather than the partnership level,
``(B) the inversion gain of any partner for any
taxable year shall be equal to the sum of--
``(i) the partner's distributive share of
inversion gain of the partnership for such
taxable year, plus
``(ii) gain recognized for the taxable year
by the partner by reason of the transfer during
the applicable period of any partnership
interest of the partner in such partnership to
the surrogate foreign corporation, and
``(C) the highest rate of tax specified in the rate
schedule applicable to the partner under this chapter
shall be substituted for the rate of tax referred to in
paragraph (1).
``(3) Coordination with section 172 and minimum tax.--Rules
similar to the rules of paragraphs (3) and (4) of section
860E(a) shall apply for purposes of subsection (a).
``(4) Statute of limitations.--
``(A) In general.--The statutory period for the
assessment of any deficiency attributable to the
inversion gain of any taxpayer for any pre-inversion
year shall not expire before the expiration of 3 years
from the date the Secretary is notified by the taxpayer
(in such manner as the Secretary may prescribe) of the
acquisition described in subsection (a)(2)(B)(i) to
which such gain relates and such deficiency may be
assessed before the expiration of such 3-year period
notwithstanding the provisions of any other law or rule
of law which would otherwise prevent such assessment.
``(B) Pre-inversion year.--For purposes of
subparagraph (A), the term `pre-inversion year' means
any taxable year if--
``(i) any portion of the applicable period is
included in such taxable year, and
``(ii) such year ends before the taxable year
in which the acquisition described in
subsection (a)(2)(B)(i) is completed.
``(e) Special Rule for Treaties.--Nothing in section 894 or 7852(d)
or in any other provision of law shall be construed as permitting an
exemption, by reason of any treaty obligation of the United States
heretofore or hereafter entered into, from the provisions of this
section.
``(f) Regulations.--The Secretary shall provide such regulations as
are necessary to carry out this section, including regulations
providing for such adjustments to the application of this section as
are necessary to prevent the avoidance of the purposes of this section,
including the avoidance of such purposes through--
``(1) the use of related persons, pass-through or other
noncorporate entities, or other intermediaries, or
``(2) transactions designed to have persons cease to be (or
not become) members of expanded affiliated groups or related
persons.''.
(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. 2003. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN EXPATRIATED
CORPORATIONS.
(a) In General.--Subtitle D is amended by inserting after chapter
44 end the following new chapter:
``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES
``Sec. 4985. Stock compensation of
insiders in expatriated
corporations.
``SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPATRIATED
CORPORATIONS.
``(a) Imposition of Tax.--In the case of an individual who is a
disqualified individual with respect to any expatriated corporation,
there is hereby imposed on such person a tax equal to 15 percent of the
value (determined under subsection (b)) of the specified stock
compensation held (directly or indirectly) by or for the benefit of
such individual or a member of such individual's family (as defined in
section 267) at any time during the 12-month period beginning on the
date which is 6 months before the expatriation date.
``(b) Value.--For purposes of subsection (a)--
``(1) In general.--The value of specified stock compensation
shall be--
``(A) in the case of a stock option (or other similar
right) or a stock appreciation right, the fair value of
such option or right, and
``(B) in any other case, the fair market value of
such compensation.
``(2) Date for determining value.--The determination of value
shall be made--
``(A) in the case of specified stock compensation
held on the expatriation date, on such date,
``(B) in the case of such compensation which is
canceled during the 6 months before the expatriation
date, on the day before such cancellation, and
``(C) in the case of such compensation which is
granted after the expatriation date, on the date such
compensation is granted.
``(c) Tax To Apply Only if Shareholder Gain Recognized.--Subsection
(a) shall apply to any disqualified individual with respect to an
expatriated corporation only if gain (if any) on any stock in such
corporation is recognized in whole or part by any shareholder by reason
of the acquisition referred to in section 7874(a)(2)(B)(i) with respect
to such corporation.
``(d) Exception Where Gain Recognized on Compensation.--Subsection
(a) shall not apply to--
``(1) any stock option which is exercised on the expatriation
date or during the 6-month period before such date and to the
stock acquired in such exercise, if income is recognized under
section 83 on or before the expatriation date with respect to
the stock acquired pursuant to such exercise, and
``(2) any other specified stock compensation which is
exercised, sold, exchanged, distributed, cashed-out, or
otherwise paid during such period in a transaction in which
income, gain, or loss is recognized in full.
``(e) Definitions.--For purposes of this section--
``(1) Disqualified individual.--The term `disqualified
individual' means, with respect to a corporation, any
individual who, at any time during the 12-month period
beginning on the date which is 6 months before the expatriation
date--
``(A) is subject to the requirements of section 16(a)
of the Securities Exchange Act of 1934 with respect to
such corporation or any member of the expanded
affiliated group which includes such corporation, or
``(B) would be subject to such requirements if such
corporation or member were an issuer of equity
securities referred to in such section.
``(2) Expatriated corporation; expatriation date.--
``(A) Expatriated corporation.--The term `expatriated
corporation' means any corporation which is an
expatriated entity (as defined in section 7874(a)(2)).
Such term includes any predecessor or successor of such
a corporation.
``(B) Expatriation date.--The term `expatriation
date' means, with respect to a corporation, the date on
which the corporation first becomes an expatriated
corporation.
``(3) Specified stock compensation.--
``(A) In general.--The term `specified stock
compensation' means payment (or right to payment)
granted by the expatriated corporation (or by any
member of the expanded affiliated group which includes
such corporation) to any person in connection with the
performance of services by a disqualified individual
for such corporation or member if the value of such
payment or right is based on (or determined by
reference to) the value (or change in value) of stock
in such corporation (or any such member).
``(B) Exceptions.--Such term shall not include--
``(i) any option to which part II of
subchapter D of chapter 1 applies, or
``(ii) any payment or right to payment from a
plan referred to in section 280G(b)(6).
``(4) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group (as defined in
section 1504(a) without regard to section 1504(b)(3)); except
that section 1504(a) shall be applied by substituting `more
than 50 percent' for `at least 80 percent' each place it
appears.
``(f) Special Rules.--For purposes of this section--
``(1) Cancellation of restriction.--The cancellation of a
restriction which by its terms will never lapse shall be
treated as a grant.
``(2) Payment or reimbursement of tax by corporation treated
as specified stock compensation.--Any payment of the tax
imposed by this section directly or indirectly by the
expatriated corporation or by any member of the expanded
affiliated group which includes such corporation--
``(A) shall be treated as specified stock
compensation, and
``(B) shall not be allowed as a deduction under any
provision of chapter 1.
``(3) Certain restrictions ignored.--Whether there is
specified stock compensation, and the value thereof, shall be
determined without regard to any restriction other than a
restriction which by its terms will never lapse.
``(4) Property transfers.--Any transfer of property shall be
treated as a payment and any right to a transfer of property
shall be treated as a right to a payment.
``(5) Other administrative provisions.--For purposes of
subtitle F, any tax imposed by this section shall be treated as
a tax imposed by subtitle A.
``(g) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section.''
(b) Denial of Deduction.--
(1) In general.--Paragraph (6) of section 275(a) is amended
by inserting ``45,'' before ``46,''.
(2) $1,000,000 limit on deductible compensation reduced by
payment of excise tax on specified stock compensation.--
Paragraph (4) of section 162(m) is amended by adding at the end
the following new subparagraph:
``(G) Coordination with excise tax on specified stock
compensation.--The dollar limitation contained in
paragraph (1) with respect to any covered employee
shall be reduced (but not below zero) by the amount of
any payment (with respect to such employee) of the tax
imposed by section 4985 directly or indirectly by the
expatriated corporation (as defined in such section) or
by any member of the expanded affiliated group (as
defined in such section) which includes such
corporation.''
(c) Conforming Amendments.--
(1) The last sentence of section 3121(v)(2)(A) is amended by
inserting before the period ``or to any specified stock
compensation (as defined in section 4985) on which tax is
imposed by section 4985''.
(2) The table of chapters for subtitle D is amended by
inserting after the item relating to chapter 44 the following
new item:
``Chapter 45. Provisions relating to
expatriated entities.''
(d) Effective Date.--The amendments made by this section shall take
effect on March 4, 2003; except that periods before such date shall not
be taken into account in applying the periods in subsections (a) and
(e)(1) of section 4985 of the Internal Revenue Code of 1986, as added
by this section.
SEC. 2004. 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. 2005. 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 $122,000,
``(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 2003, such $122,000 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 `2002' 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 February 27, 2003.
SEC. 2006. 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. 2007. 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, 2004, 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, 2004, such Secretary or delegate shall submit to
the Congress a report of such study.
(c) Impact of Corporate Expatriation Provisions.--The Secretary of
the Treasury or the Secretary's delegate shall conduct a study of the
impact of the provisions of this title on earnings stripping and
corporate expatriation. The study shall include such recommendations as
such Secretary or delegate may have to improve the impact of such
provisions in carrying out the purposes of this title. Not later than
December 31, 2005, such Secretary or delegate shall submit to the
Congress a report of such study.
TITLE III--PROVISIONS RELATING TO TAX SHELTERS
Subtitle A--Taxpayer-Related Provisions
SEC. 3001. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTIONS.
(a) In General.--Part I of subchapter B of chapter 68 (relating to
assessable penalties) is amended by inserting after section 6707 the
following new section:
``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION
INFORMATION WITH RETURN.
``(a) Imposition of Penalty.--Any person who fails to include on
any return or statement any information with respect to a reportable
transaction which is required under section 6011 to be included with
such return or statement shall pay a penalty in the amount determined
under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraph (2), the
amount of the penalty under subsection (a) shall be--
``(A) $10,000 in the case of a natural person, and
``(B) $50,000 in any other case.
``(2) Listed transaction.--The amount of the penalty under
subsection (a) with respect to a listed transaction shall be--
``(A) $100,000 in the case of a natural person, and
``(B) $200,000 in any other case.
``(c) Definitions.--For purposes of this section--
``(1) Reportable transaction.--The term `reportable
transaction' means any transaction with respect to which
information is required to be included with a return or
statement because, as determined under regulations prescribed
under section 6011, such transaction is of a type which the
Secretary determines as having a potential for tax avoidance or
evasion.
``(2) Listed transaction.--The term `listed transaction'
means a reportable transaction which is the same as, or
substantially similar to, a transaction specifically identified
by the Secretary as a tax avoidance transaction for purposes of
section 6011.
``(d) Authority To Rescind Penalty.--
``(1) In general.--The Commissioner of Internal Revenue may
rescind all or any portion of any penalty imposed by this
section with respect to any violation if--
``(A) the violation is with respect to a reportable
transaction other than a listed transaction, and
``(B) rescinding the penalty would promote compliance
with the requirements of this title and effective tax
administration.
``(2) No judicial appeal.--Notwithstanding any other
provision of law, any determination under this subsection may
not be reviewed in any judicial proceeding.
``(3) Records.--If a penalty is rescinded under paragraph
(1), the Commissioner shall place in the file in the Office of
the Commissioner the opinion of the Commissioner or the head of
the Office of Tax Shelter Analysis with respect to the
determination, including--
``(A) a statement of the facts and circumstances
relating to the violation,
``(B) the reasons for the rescission, and
``(C) the amount of the penalty rescinded.
``(e) Coordination With Other Penalties.--The penalty imposed by
this section shall be in addition to any other penalty imposed by this
title.''
(b) Conforming Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by inserting after the item
relating to section 6707 the following:
``Sec. 6707A. Penalty for failure to
include reportable transaction
information with return.''
(c) Effective Date.--The amendments made by this section shall
apply to returns and statements the due date for which is after the
date of the enactment of this Act.
(d) Report.--The Commissioner of Internal Revenue shall annually
report to the Committee on Ways and Means of the House of
Representatives and the Committee on Finance of the Senate--
(1) a summary of the total number and aggregate amount of
penalties imposed, and rescinded, under section 6707A of the
Internal Revenue Code of 1986, and
(2) a description of each penalty rescinded under section
6707(c) of such Code and the reasons therefor.
SEC. 3002. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, OTHER
REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX
AVOIDANCE PURPOSE, ETC.
(a) In General.--Subchapter A of chapter 68 is amended by inserting
after section 6662 the following new section:
``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS
WITH RESPECT TO REPORTABLE TRANSACTIONS.
``(a) Imposition of Penalty.--If a taxpayer has a reportable
transaction understatement for any taxable year, there shall be added
to the tax an amount equal to 20 percent of the amount of such
understatement.
``(b) Reportable Transaction Understatement.--For purposes of this
section--
``(1) In general.--The term `reportable transaction
understatement' means the sum of--
``(A) the product of--
``(i) the amount of the increase (if any) in
taxable income which results from a difference
between the proper tax treatment of an item to
which this section applies and the taxpayer's
treatment of such item (as shown on the
taxpayer's return of tax), and
``(ii) the highest rate of tax imposed by
section 1 (section 11 in the case of a taxpayer
which is a corporation), and
``(B) the amount of the decrease (if any) in the
aggregate amount of credits determined under subtitle A
which results from a difference between the taxpayer's
treatment of an item to which this section applies (as
shown on the taxpayer's return of tax) and the proper
tax treatment of such item.
For purposes of subparagraph (A), any reduction of the excess
of deductions allowed for the taxable year over gross income
for such year, and any reduction in the amount of capital
losses which would (without regard to section 1211) be allowed
for such year, shall be treated as an increase in taxable
income.
``(2) Items to which section applies.--This section shall
apply to any item which is attributable to--
``(A) any listed transaction, and
``(B) any reportable transaction (other than a listed
transaction) if a significant purpose of such
transaction is the avoidance or evasion of Federal
income tax.
``(c) Higher Penalty for Nondisclosed Transactions.--Subsection (a)
shall be applied by substituting `30 percent' for `20 percent' with
respect to the portion of any reportable transaction understatement
with respect to which the requirement of section 6664(d)(2)(A) is not
met.
``(d) Definitions of Reportable and Listed Transactions.--For
purposes of this section, the terms `reportable transaction' and
`listed transaction' have the respective meanings given to such terms
by section 6707A(c).
``(e) Special Rules.--
``(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as defined
in section 6662(d)(2))--
``(A) the amount of such understatement (determined
without regard to this paragraph) shall be increased by
the aggregate amount of reportable transaction
understatements for purposes of determining whether
such understatement is a substantial understatement
under section 6662(d)(1), and
``(B) the addition to tax under section 6662(a) shall
apply only to the excess of the amount of the
substantial understatement (if any) after the
application of subparagraph (A) over the aggregate
amount of reportable transaction understatements.
``(2) Coordination with other penalties.--
``(A) Application of fraud penalty.--References to an
underpayment in section 6663 shall be treated as
including references to a reportable transaction
understatement.
``(B) No double penalty.--This section shall not
apply to any portion of an understatement on which a
penalty is imposed under section 6663.
``(3) Special rule for amended returns.--Except as provided
in regulations, in no event shall any tax treatment included
with an amendment or supplement to a return of tax be taken
into account in determining the amount of any reportable
transaction understatement if the amendment or supplement is
filed after the earlier of the date the taxpayer is first
contacted by the Secretary regarding the examination of the
return or such other date as is specified by the Secretary.''
(b) Determination of Other Understatements.--Subparagraph (A) of
section 6662(d)(2) is amended by adding at the end the following flush
sentence:
``The excess under the preceding sentence shall be
determined without regard to items to which section
6662A applies.''
(c) Reasonable Cause Exception.--
(1) In general.--Section 6664 is amended by adding at the end
the following new subsection:
``(d) Reasonable Cause Exception for Reportable Transaction
Understatements.--
``(1) In general.--No penalty shall be imposed under section
6662A with respect to any portion of a reportable transaction
understatement if it is shown that there was a reasonable cause
for such portion and that the taxpayer acted in good faith with
respect to such portion.
``(2) Special rules.--Paragraph (1) shall not apply to any
reportable transaction understatement unless--
``(A) the relevant facts affecting the tax treatment
of the item are adequately disclosed in accordance with
the regulations prescribed under section 6011,
``(B) there is or was substantial authority for such
treatment, and
``(C) the taxpayer reasonably believed that such
treatment was more likely than not the proper
treatment.
A taxpayer failing to adequately disclose in accordance with
section 6011 shall be treated as meeting the requirements of
subparagraph (A) if the penalty for such failure was rescinded
under section 6707A(d).
``(3) Rules relating to reasonable belief.--For purposes of
paragraph (2)(C)--
``(A) In general.--A taxpayer shall be treated as
having a reasonable belief with respect to the tax
treatment of an item only if such belief--
``(i) is based on the facts and law that
exist at the time the return of tax which
includes such tax treatment is filed, and
``(ii) relates solely to the taxpayer's
chances of success on the merits of such
treatment and does not take into account the
possibility that a return will not be audited,
such treatment will not be raised on audit, or
such treatment will be resolved through
settlement if it is raised.
``(B) Certain opinions may not be relied upon.--
``(i) In general.--An opinion of a tax
advisor may not be relied upon to establish the
reasonable belief of a taxpayer if--
``(I) the tax advisor is described in
clause (ii), or
``(II) the opinion is described in
clause (iii).
``(ii) Disqualified tax advisors.--A tax
advisor is described in this clause if the tax
advisor--
``(I) is a material advisor (within
the meaning of section 6111(b)(1)) and
participates in the organization,
management, promotion, or sale of the
transaction or is related (within the
meaning of section 267(b) or 707(b)(1))
to any person who so participates,
``(II) is compensated directly or
indirectly by a material advisor with
respect to the transaction,
``(III) has a fee arrangement with
respect to the transaction which is
contingent on all or part of the
intended tax benefits from the
transaction being sustained, or
``(IV) as determined under
regulations prescribed by the
Secretary, has a disqualifying
financial interest with respect to the
transaction.
``(iii) Disqualified opinions.--For purposes
of clause (i), an opinion is disqualified if
the opinion--
``(I) is based on unreasonable
factual or legal assumptions (including
assumptions as to future events),
``(II) unreasonably relies on
representations, statements, findings,
or agreements of the taxpayer or any
other person,
``(III) does not identify and
consider all relevant facts, or
``(IV) fails to meet any other
requirement as the Secretary may
prescribe.''
(2) Conforming amendments.--
(A) Paragraph (1) of section 6664(c) is amended by
striking ``this part'' and inserting ``section 6662 or
6663''.
(B) The heading for subsection (c) of section 6664 is
amended by inserting ``for Underpayments'' after
``Exception''.
(d) Reduction in Penalty for Substantial Understatement of Income
Tax Not To Apply to Tax Shelters.--Subparagraph (C) of section
6662(d)(2) (relating to substantial understatement of income tax) is
amended to read as follows:
``(C) Reduction not to apply to tax shelters.--
``(i) In general.--Subparagraph (B) shall not
apply to any item attributable to a tax
shelter.
``(ii) Tax shelter.--For purposes of clause
(i), the term `tax shelter' means--
``(I) a partnership or other entity,
``(II) any investment plan or
arrangement, or
``(III) any other plan or
arrangement,
if a significant purpose of such partnership,
entity, plan, or arrangement is the avoidance
or evasion of Federal income tax.''
(e) Conforming Amendments.--
(1) Sections 461(i)(3)(C), 1274(b)(3), and 7525(b) are each
amended by striking ``section 6662(d)(2)(C)(iii)'' and
inserting ``section 6662(d)(2)(C)(ii)''.
(2) The heading for section 6662 is amended to read as
follows:
``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.''
(3) The table of sections for part II of subchapter A of
chapter 68 is amended by striking the item relating to section
6662 and inserting the following new items:
``Sec. 6662. Imposition of accuracy-
related penalty on
underpayments.
``Sec. 6662A. Imposition of accuracy-
related penalty on
understatements with respect to
reportable transactions.''
(f) Effective Date.--The amendments made by this section shall
apply to taxable years ending after the date of the enactment of this
Act.
SEC. 3003. 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. 3004. 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. 3005. DISCLOSURE OF REPORTABLE TRANSACTIONS.
(a) In General.--Section 6111 (relating to registration of tax
shelters) is amended to read as follows:
``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.
``(a) In General.--Each material advisor with respect to any
reportable transaction shall make a return (in such form as the
Secretary may prescribe) setting forth--
``(1) information identifying and describing the transaction,
``(2) information describing any potential tax benefits
expected to result from the transaction, and
``(3) such other information as the Secretary may prescribe.
Such return shall be filed not later than the date specified by the
Secretary.
``(b) Definitions.--For purposes of this section--
``(1) Material advisor.--
``(A) In general.--The term `material advisor' means
any person--
``(i) who provides any material aid,
assistance, or advice with respect to
organizing, managing, promoting, selling,
implementing, or carrying out any reportable
transaction, and
``(ii) who directly or indirectly derives
gross income in excess of the threshold amount
(or such other amount as may be prescribed by
the Secretary) for such advice or assistance.
``(B) Threshold amount.--For purposes of subparagraph
(A), the threshold amount is--
``(i) $50,000 in the case of a reportable
transaction substantially all of the tax
benefits from which are provided to natural
persons, and
``(ii) $250,000 in any other case.
``(2) Reportable transaction.--The term `reportable
transaction' has the meaning given to such term by section
6707A(c).
``(c) Regulations.--The Secretary may prescribe regulations which
provide--
``(1) that only 1 person shall be required to meet the
requirements of subsection (a) in cases in which 2 or more
persons would otherwise be required to meet such requirements,
``(2) exemptions from the requirements of this section, and
``(3) such rules as may be necessary or appropriate to carry
out the purposes of this section.''
(b) Conforming Amendments.--
(1) The item relating to section 6111 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6111. Disclosure of reportable
transactions.''
(2) So much of section 6112 as precedes subsection (c)
thereof is amended to read as follows:
``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP
LISTS OF ADVISEES, ETC.
``(a) In General.--Each material advisor (as defined in section
6111) with respect to any reportable transaction (as defined in section
6707A(c)) shall (whether or not required to file a return under section
6111 with respect to such transaction) maintain (in such manner as the
Secretary may by regulations prescribe) a list--
``(1) identifying each person with respect to whom such
advisor acted as a material advisor with respect to such
transaction, and
``(2) containing such other information as the Secretary may
by regulations require.''
(3) Section 6112 is amended--
(A) by redesignating subsection (c) as subsection
(b),
(B) by inserting ``written'' before ``request'' in
subsection (b)(1) (as so redesignated), and
(C) by striking ``shall prescribe'' in subsection
(b)(2) (as so redesignated) and inserting ``may
prescribe''.
(4) The item relating to section 6112 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6112. Material advisors of
reportable transactions must
keep lists of advisees, etc.''
(5)(A) The heading for section 6708 is amended to read as
follows:
``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO
REPORTABLE TRANSACTIONS.''
(B) The item relating to section 6708 in the table of
sections for part I of subchapter B of chapter 68 is amended to
read as follows:
``Sec. 6708. Failure to maintain lists of
advisees with respect to
reportable transactions.''
(c) Required Disclosure Not Subject to Claim of Confidentiality.--
Paragraph (1) of section 6112(b), as redesignated by subsection (b), is
amended by adding at the end the following new flush sentence:
``For purposes of this section, the identity of any person on
such list shall not be privileged.''.
(d) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to transactions
with respect to which material aid, assistance, or advice
referred to in section 6111(b)(1)(A)(i) of the Internal Revenue
Code of 1986 (as added by this section) is provided after the
date of the enactment of this Act.
(2) No claim of confidentiality against disclosure.--The
amendment made by subsection (c) shall take effect as if
included in the amendments made by section 142 of the Deficit
Reduction Act of 1984.
SEC. 3006. 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. 3007. 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. 3008. 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. 3009. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR
NONREPORTABLE TRANSACTIONS.
(a) Substantial Understatement of Corporations.--Section
6662(d)(1)(B) (relating to special rule for corporations) is amended to
read as follows:
``(B) Special rule for corporations.--In the case of
a corporation other than an S corporation or a personal
holding company (as defined in section 542), there is a
substantial understatement of income tax for any
taxable year if the amount of the understatement for
the taxable year exceeds the lesser of--
``(i) 10 percent of the tax required to be
shown on the return for the taxable year (or,
if greater, $10,000), or
``(ii) $10,000,000.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 3010. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO
TAX SHELTERS AND REPORTABLE TRANSACTIONS.
(a) In General.--Section 7408 (relating to action to enjoin
promoters of abusive tax shelters, etc.) is amended by redesignating
subsection (c) as subsection (d) and by striking subsections (a) and
(b) and inserting the following new subsections:
``(a) Authority To Seek Injunction.--A civil action in the name of
the United States to enjoin any person from further engaging in
specified conduct may be commenced at the request of the Secretary. Any
action under this section shall be brought in the district court of the
United States for the district in which such person resides, has his
principal place of business, or has engaged in specified conduct. The
court may exercise its jurisdiction over such action (as provided in
section 7402(a)) separate and apart from any other action brought by
the United States against such person.
``(b) Adjudication and Decree.--In any action under subsection (a),
if the court finds--
``(1) that the person has engaged in any specified conduct,
and
``(2) that injunctive relief is appropriate to prevent
recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in
any other activity subject to penalty under this title.
``(c) Specified Conduct.--For purposes of this section, the term
`specified conduct' means any action, or failure to take action,
subject to penalty under section 6700, 6701, 6707, or 6708.''
(b) Conforming Amendments.--
(1) The heading for section 7408 is amended to read as
follows:
``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX
SHELTERS AND REPORTABLE TRANSACTIONS.''
(2) The table of sections for subchapter A of chapter 76 is
amended by striking the item relating to section 7408 and
inserting the following new item:
``Sec. 7408. Actions to enjoin specified conduct related to tax
shelters and reportable transactions.''
(c) Effective Date.--The amendment made by this section shall take
effect on the day after the date of the enactment of this Act.
SEC. 3011. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL
ACCOUNTS.
(a) In General.--Section 5321(a)(5) of title 31, United States
Code, is amended to read as follows:
``(5) Foreign financial agency transaction violation.--
``(A) Penalty authorized.--The Secretary of the
Treasury may impose a civil money penalty on any person
who violates, or causes any violation of, any provision
of section 5314.
``(B) Amount of penalty.--
``(i) In general.--Except as provided in
subparagraph (C), the amount of any civil
penalty imposed under subparagraph (A) shall
not exceed $5,000.
``(ii) Reasonable cause exception.--No
penalty shall be imposed under subparagraph (A)
with respect to any violation if--
``(I) such violation was due to
reasonable cause, and
``(II) the amount of the transaction
or the balance in the account at the
time of the transaction was properly
reported.
``(C) Willful violations.--In the case of any person
willfully violating, or willfully causing any violation
of, any provision of section 5314--
``(i) the maximum penalty under subparagraph
(B)(i) shall be increased to the greater of--
``(I) $25,000, or
``(II) the amount (not exceeding
$100,000) determined under subparagraph
(D), and
``(ii) subparagraph (B)(ii) shall not apply.
``(D) Amount.--The amount determined under this
subparagraph is--
``(i) in the case of a violation involving a
transaction, the amount of the transaction, or
``(ii) in the case of a violation involving a
failure to report the existence of an account
or any identifying information required to be
provided with respect to an account, the
balance in the account at the time of the
violation.''
(b) Effective Date.--The amendment made by this section shall apply
to violations occurring after the date of the enactment of this Act.
SEC. 3012. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT
OF THE TREASURY.
(a) Censure; Imposition of Penalty.--
(1) In general.--Section 330(b) of title 31, United States
Code, is amended--
(A) by inserting ``, or censure,'' after
``Department'', and
(B) by adding at the end the following new flush
sentence:
``The Secretary may impose a monetary penalty on any representative
described in the preceding sentence. If the representative was acting
on behalf of an employer or any firm or other entity in connection with
the conduct giving rise to such penalty, the Secretary may impose a
monetary penalty on such employer, firm, or entity if it knew, or
reasonably should have known, of such conduct. Such penalty shall not
exceed the gross income derived (or to be derived) from the conduct
giving rise to the penalty. Any such penalty imposed on an individual
may be in addition to, or in lieu of, any suspension, disbarment, or
censure of such individual.''
(2) Effective date.--The amendments made by this subsection
shall apply to actions taken after the date of the enactment of
this Act.
(b) Tax Shelter Opinions, Etc.--Section 330 of such title 31 is
amended by adding at the end the following new subsection:
``(d) Nothing in this section or in any other provision of law
shall be construed to limit the authority of the Secretary of the
Treasury to impose standards applicable to the rendering of written
advice with respect to any entity, transaction plan or arrangement, or
other plan or arrangement, which is of a type which the Secretary
determines as having a potential for tax avoidance or evasion.''
Subtitle B--Other Provisions
SEC. 3021. 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. 3022. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON WITHHOLDING
TAXES ON INCOME OTHER THAN DIVIDENDS.
(a) In General.--Section 901 is amended by redesignating subsection
(l) as subsection (m) and by inserting after subsection (k) the
following new subsection:
``(l) Minimum Holding Period for Withholding Taxes on Gain and
Income Other Than Dividends Etc.--
``(1) In general.--In no event shall a credit be allowed
under subsection (a) for any withholding tax (as defined in
subsection (k)) on any item of income or gain with respect to
any property if--
``(A) such property is held by the recipient of the
item for 15 days or less during the 30-day period
beginning on the date which is 15 days before the date
on which the right to receive payment of such item
arises, or
``(B) to the extent that the recipient of the item is
under an obligation (whether pursuant to a short sale
or otherwise) to make related payments with respect to
positions in substantially similar or related property.
This paragraph shall not apply to any dividend to which
subsection (k) applies.
``(2) Exception for taxes paid by dealers.--
``(A) In general.--Paragraph (1) shall not apply to
any qualified tax with respect to any property held in
the active conduct in a foreign country of a business
as a dealer in such property.
``(B) Qualified tax.--For purposes of subparagraph
(A), the term `qualified tax' means a tax paid to a
foreign country (other than the foreign country
referred to in subparagraph (A)) if--
``(i) the item to which such tax is
attributable is subject to taxation on a net
basis by the country referred to in
subparagraph (A), and
``(ii) such country allows a credit against
its net basis tax for the full amount of the
tax paid to such other foreign country.
``(C) Dealer.--For purposes of subparagraph (A), the
term `dealer' means--
``(i) with respect to a security, any person
to whom paragraphs (1) and (2) of subsection
(k) would not apply by reason of paragraph (4)
thereof if such security were stock, and
``(ii) with respect to any other property,
any person with respect to whom such property
is described in section 1221(a)(1).
``(D) Regulations.--The Secretary may prescribe such
regulations as may be appropriate to carry out this
paragraph, including regulations to prevent the abuse
of the exception provided by this paragraph and to
treat other taxes as qualified taxes.
``(3) Exceptions.--The Secretary may by regulation provide
that paragraph (1) shall not apply to property where the
Secretary determines that the application of paragraph (1) to
such property is not necessary to carry out the purposes of
this subsection.
``(4) Certain rules to apply.--Rules similar to the rules of
paragraphs (5), (6), and (7) of subsection (k) shall apply for
purposes of this subsection.
``(5) Determination of holding period.--Holding periods shall
be determined for purposes of this subsection without regard to
section 1235 or any similar rule.''
(b) Conforming Amendment.--The heading of subsection (k) of section
901 is amended by inserting ``on Dividends'' after ``Taxes''.
(c) Effective Date.--The amendments made by this section shall
apply to amounts paid or accrued more than 30 days after the date of
the enactment of this Act.
SEC. 3023. 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) Adjustment to Basis of Partnership Property on Transfer of
Partnership Interest If There Is Substantial Built-In Loss.--
(1) Adjustment required.--Subsection (a) of section 743
(relating to optional adjustment to basis of partnership
property) is amended by inserting before the period ``or unless
the partnership has a substantial built-in loss immediately
after such transfer''.
(2) Adjustment.--Subsection (b) of section 743 is amended by
inserting ``or with respect to which there is a substantial
built-in loss immediately after such transfer'' after ``section
754 is in effect''.
(3) Substantial built-in loss.--Section 743 is amended by
adding at the end the following new subsection:
``(d) Substantial Built-In Loss.--
``(1) In general.--For purposes of this section, a
partnership has a substantial built-in loss with respect to a
transfer of an interest in a partnership if the 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) Clerical amendments.--
(A) The section heading for section 743 is amended to
read as follows:
``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION
754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.''
(B) The table of sections for subpart C of part II of
subchapter K of chapter 1 is amended by striking the
item relating to section 743 and inserting the
following new item:
``Sec. 743. Adjustment to basis of
partnership property where
section 754 election or
substantial built-in loss.''
(c) Adjustment to Basis of Undistributed Partnership Property if
There Is Substantial Basis Reduction.--
(1) Adjustment required.--Subsection (a) of section 734
(relating to optional adjustment to basis of undistributed
partnership property) is amended by inserting before the period
``or unless there is a substantial basis reduction''.
(2) Adjustment.--Subsection (b) of section 734 is amended by
inserting ``or unless there is a substantial basis reduction''
after ``section 754 is in effect''.
(3) Substantial basis reduction.--Section 734 is amended by
adding at the end the following new subsection:
``(d) Substantial Basis Reduction.--
``(1) In general.--For purposes of this section, there is a
substantial basis reduction with respect to a distribution if
the sum of the amounts described in subparagraphs (A) and (B)
of subsection (b)(2) exceeds $250,000.
``(2) Regulations.--
``For regulations to carry out this subsection, see
section 743(d)(2).''
(4) Clerical amendments.--
(A) The section heading for section 734 is amended to
read as follows:
``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY
WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS
REDUCTION.''
(B) The table of sections for subpart B of part II of
subchapter K of chapter 1 is amended by striking the
item relating to section 734 and inserting the
following new item:
``Sec. 734. Adjustment to basis of
undistributed partnership
property where section 754
election or substantial basis
reduction.''
(d) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to contributions made after the date of the
enactment of this Act.
(2) Subsection (b).--The amendments made by subsection (b)
shall apply to transfers after the date of the enactment of
this Act.
(3) Subsection (c).--The amendments made by subsection (c)
shall apply to distributions after the date of the enactment of
this Act.
SEC. 3024. 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. 3025. 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) 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--
``(I) such increase in the balance is
attributable to an advance made to the
obligor pursuant to the original terms
of the obligation,
``(II) such increase in the balance
occurs after the startup day, and
``(III) such increase in the balance
is purchased by the REMIC pursuant to a
fixed price contract in effect on the
startup day.''.
(B) Section 860G(a)(7)(B) is amended to read as follows:
``(B) Qualified reserve fund.--For purposes of
subparagraph (A), the term `qualified reserve fund'
means any reasonably required reserve to--
``(i) provide for full payment of expenses of
the REMIC or amounts due on regular interests
in the event of defaults on qualified mortgages
or lower than expected returns on cash flow
investments, or
``(ii) provide a source of funds for the
purchase of obligations described in clause
(ii) or (iii) of paragraph (3)(A).
The aggregate fair market value of the assets held in
any such reserve shall not exceed 50 percent of the
aggregate fair market value of all of the assets of the
REMIC on the startup day, and the amount of any such
reserve shall be promptly and appropriately reduced to
the extent the amount held in such reserve is no longer
reasonably required for purposes specified in clause
(i) or (ii) of paragraph (3)(A).''.
(9) Subparagraph (C) of section 1202(e)(4) is amended by
striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
(10) Section 1272(a)(6)(B) is amended by adding at the end
the following new flush sentence:
``For purposes of clause (iii), the Secretary shall
prescribe regulations permitting the use of a current
prepayment assumption, determined as of the close of
the accrual period (or such other time as the Secretary
may prescribe during the taxable year in which the
accrual period ends).''.
(11) Subparagraph (C) of section 7701(a)(19) is amended by
adding ``and'' at the end of clause (ix), by striking ``, and''
at the end of clause (x) and inserting a period, and by
striking clause (xi).
(12) The table of parts for subchapter M of chapter 1 is
amended by striking the item relating to part V.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2003.
(2) Exception for existing fasits.--
(A) In general.--Paragraph (1) shall not apply to any
FASIT in existence on the date of the enactment of this
Act to the extent that regular interests issued by the
FASIT before such date continue to remain outstanding
in accordance with the original terms of issuance.
(B) Transfer of additional assets not permitted.--
Except as provided in regulations prescribed by the
Secretary of the Treasury or the Secretary's delegate,
subparagraph (A) shall cease to apply as of the
earliest date after the date of the enactment of this
Act that any property is transferred to the FASIT.
SEC. 3026. LIMITATION ON TRANSFER OF BUILT-IN LOSSES ON REMIC
RESIDUALS.
(a) In General.--Section 362 (relating to basis to corporations) is
amended by adding at the end the following new subsection:
``(e) Limitation on Transfer of Built-in Losses on REMIC Residuals
in Section 351 Transactions.--If--
``(1) a residual interest (as defined in section 860G(a)(2))
in a REMIC is transferred in any transaction which is described
in subsection (a), and
``(2) the transferee's adjusted basis in such residual
interest would (but for this paragraph) exceed its fair market
value immediately after such transaction,
then, notwithstanding subsection (a), the transferee's adjusted basis
in such residual interest shall not exceed its fair market value
(whether or not greater than zero) immediately after such
transaction.''
(b) Effective Date.--The amendment made by this section shall apply
to transactions after the date of the enactment of this Act.
SEC. 3027. 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 any corporation with respect to which 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 financial holding company (within the
meaning of 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. 3028. MODIFICATIONS RELATED TO CERTAIN SMALL INSURANCE COMPANIES.
(a) Exemption for Small Property and Casualty Insurance
Companies.--
(1) In general.--Section 501(c)(15)(A) is amended to read as
follows:
``(A) Insurance companies (as defined in section
816(a)) other than life (including interinsurers and
reciprocal underwriters) if--
``(i) the gross receipts for the taxable year
do not exceed $600,000, and
``(ii) more than 50 percent of such gross
receipts consist of premiums.''.
(2) Controlled group rule.--Section 501(c)(15)(C) is amended
by inserting ``, except that in applying section 1563 for
purposes of section 831(b)(2)(B)(ii), subparagraphs (B) and (C)
of section 1563(b)(2) shall be disregarded'' before the period
at the end.
(3) Conforming amendment.--Clause (i) of section 831(b)(2)(A)
is amended by striking ``exceed $350,000 but''.
(b) Alternative Tax for Certain Small Insurance Companies.--
(1) Increased limitation.--Clause (i) of section 831(b)(2)(A)
is amended by striking ``$1,200,000'' and inserting
``$1,890,000''.
(2) Inflation adjustment.--Paragraph (2) of section 831(b) is
amended by adding at the end the following new subparagraph:
``(C) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after 2004,
the $1,890,000 amount in subparagraph (A) shall be
increased by an amount equal to--
``(i) $1,890,000, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year by substituting `calendar year
2003' for `calendar year 1992' in subparagraph
(B) thereof.
If the amount as adjusted under the preceding sentence
is not a multiple of $1,000, such amount shall be
rounded to the next lowest multiple of $1,000.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 3029. DEFINITION OF INSURANCE COMPANY FOR SECTION 831.
(a) In General.--Section 831 is amended by redesignating subsection
(c) as subsection (d) and by inserting after subsection (b) the
following new subsection:
``(c) Insurance Company Defined.--For purposes of this section, the
term `insurance company' has the meaning given to such term by section
816(a).''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 3030. 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. 3031. 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. 3032. 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. 3033. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL ISSUE
DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS IN
TRANSACTIONS WITH RELATED FOREIGN PERSONS.
(a) Original Issue Discount.--Section 163(e)(3) (relating to
special rule for original issue discount on obligation held by related
foreign person) is amended by redesignating subparagraph (B) as
subparagraph (C) and by inserting after subparagraph (A) the following
new subparagraph:
``(B) Special rule for certain foreign entities.--
``(i) In general.--In the case of any debt
instrument having original issue discount which
is held by a related foreign person which is a
foreign personal holding company (as defined in
section 552), a controlled foreign corporation
(as defined in section 957), or a passive
foreign investment company (as defined in
section 1297), a deduction shall be allowable
to the issuer with respect to such original
issue discount for any taxable year before the
taxable year in which paid only to the extent
such original issue discount is included during
such prior taxable year in the gross income of
a United States person who owns (within the
meaning of section 958(a)) stock in such
corporation.
``(ii) Secretarial authority.--The Secretary
may by regulation exempt transactions from the
application of clause (i), including any
transaction which is entered into by a payor in
the ordinary course of a trade or business in
which the payor is predominantly engaged.''.
(b) Interest and Other Deductible Amounts.--Section 267(a)(3) is
amended--
(1) by striking ``The Secretary'' and inserting:
``(A) In general.--The Secretary'', and
(2) by adding at the end the following new subparagraph:
``(B) Special rule for certain foreign entities.--
``(i) In general.--Notwithstanding
subparagraph (A), in the case of any amount
payable to a foreign personal holding company
(as defined in section 552), a controlled
foreign corporation (as defined in section
957), or a passive foreign investment company
(as defined in section 1297), a deduction shall
be allowable to the payor with respect to such
amount for any taxable year before the taxable
year in which paid only to the extent such
amount is included during such prior taxable
year in the gross income of a United States
person who owns (within the meaning of section
958(a)) stock in such corporation.
``(ii) Secretarial authority.--The Secretary
may by regulation exempt transactions from the
application of clause (i), including any
transaction which is entered into by a payor in
the ordinary course of a trade or business in
which the payor is predominantly engaged and in
which the payment of the accrued amounts occurs
within 8\1/2\ months after accrual or within
such other period as the Secretary may
prescribe.''.
(c) Effective Date.--The amendments made by this section shall
apply to payments accrued on or after the date of the enactment of this
Act.
SEC. 3034. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF
INCOME TAX BY INDIVIDUALS.
(a) In General.--Part III of subchapter B of chapter 1 (relating to
items specifically excluded from gross income) is amended by inserting
after section 139A the following new section:
``SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS
OF INCOME TAX BY INDIVIDUALS.
``(a) In General.--In the case of an individual, gross income shall
not include interest paid under section 6611 on any overpayment of tax
imposed by this subtitle.
``(b) Exception.--Subsection (a) shall not apply in the case of a
failure to claim items resulting in the overpayment on the original
return if the Secretary determines that the principal purpose of such
failure is to take advantage of subsection (a).
``(c) Special Rule for Determining Modified Adjusted Gross
Income.--For purposes of this title, interest not included in gross
income under subsection (a) shall not be treated as interest which is
exempt from tax for purposes of sections 32(i)(2)(B) and 6012(d) or any
computation in which interest exempt from tax under this title is added
to adjusted gross income.''.
(b) Clerical Amendment.--The table of sections for part III of
subchapter B of chapter 1 is amended by inserting after the item
relating to section 139A the following new item:
``Sec. 139B. Exclusion from gross income
for interest on overpayments of
income tax by individuals.''.
(c) Effective Date.--The amendments made by this section shall
apply to interest received in calendar years beginning after the date
of the enactment of this Act.
SEC. 3035. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS.
(a) In General.--Subchapter A of chapter 67 (relating to interest
on underpayments) is amended by adding at the end the following new
section:
``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS, ETC.
``(a) Authority To Make Deposits Other Than As Payment of Tax.--A
taxpayer may make a cash deposit with the Secretary which may be used
by the Secretary to pay any tax imposed under subtitle A or B or
chapter 41, 42, 43, or 44 which has not been assessed at the time of
the deposit. Such a deposit shall be made in such manner as the
Secretary shall prescribe.
``(b) No Interest Imposed.--To the extent that such deposit is used
by the Secretary to pay tax, for purposes of section 6601 (relating to
interest on underpayments), the tax shall be treated as paid when the
deposit is made.
``(c) Return of Deposit.--Except in a case where the Secretary
determines that collection of tax is in jeopardy, the Secretary shall
return to the taxpayer any amount of the deposit (to the extent not
used for a payment of tax) which the taxpayer requests in writing.
``(d) Payment of Interest.--
``(1) In general.--For purposes of section 6611 (relating to
interest on overpayments), a deposit which is returned to a
taxpayer shall be treated as a payment of tax for any period to
the extent (and only to the extent) attributable to a
disputable tax for such period. Under regulations prescribed by
the Secretary, rules similar to the rules of section 6611(b)(2)
shall apply.
``(2) Disputable tax.--
``(A) In general.--For purposes of this section, the
term `disputable tax' means the amount of tax specified
at the time of the deposit as the taxpayer's reasonable
estimate of the maximum amount of any tax attributable
to disputable items.
``(B) Safe harbor based on 30-day letter.--In the
case of a taxpayer who has been issued a 30-day letter,
the maximum amount of tax under subparagraph (A) shall
not be less than the amount of the proposed deficiency
specified in such letter.
``(3) Other definitions.--For purposes of paragraph (2)--
``(A) Disputable item.--The term `disputable item'
means any item of income, gain, loss, deduction, or
credit if the taxpayer--
``(i) has a reasonable basis for its
treatment of such item, and
``(ii) reasonably believes that the Secretary
also has a reasonable basis for disallowing the
taxpayer's treatment of such item.
``(B) 30-day letter.--The term `30-day letter' means
the first letter of proposed deficiency which allows
the taxpayer an opportunity for administrative review
in the Internal Revenue Service Office of Appeals.
``(4) Rate of interest.--The rate of interest allowable under
this subsection shall be the Federal short-term rate determined
under section 6621(b), compounded daily.
``(e) Use of Deposits.--
``(1) Payment of tax.--Except as otherwise provided by the
taxpayer, deposits shall be treated as used for the payment of
tax in the order deposited.
``(2) Returns of deposits.--Deposits shall be treated as
returned to the taxpayer on a last-in, first-out basis.''.
(b) Clerical Amendment.--The table of sections for subchapter A of
chapter 67 is amended by adding at the end the following new item:
``Sec. 6603. Deposits made to suspend
running of interest on
potential underpayments,
etc.''.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to deposits made after the date of the enactment of this
Act.
(2) Coordination with deposits made under revenue procedure
84-58.--In the case of an amount held by the Secretary of the
Treasury or his delegate on the date of the enactment of this
Act as a deposit in the nature of a cash bond deposit pursuant
to Revenue Procedure 84-58, the date that the taxpayer
identifies such amount as a deposit made pursuant to section
6603 of the Internal Revenue Code (as added by this Act) shall
be treated as the date such amount is deposited for purposes of
such section 6603.
SEC. 3036. 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. 3037. EXTENSION OF IRS USER FEES.
(a) In General.--Section 7528(c) (relating to termination) is
amended by striking ``December 31, 2004'' and inserting ``September 30,
2013''.
(b) Effective Date.--The amendment made by this section shall apply
to requests after the date of the enactment of this Act.
TITLE IV--TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS
SEC. 4001. 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.
(c) Effective Date.--Except as provided in subsection (d), the
amendments made by this section shall apply to transactions after
December 31, 2003.
(d) Transitional Rule for 2004, 2005, and 2006.--
(1) In general.--In the case of transactions during 2004,
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 2004, the applicable percentage shall be 20
percent.
(B) For 2005, the applicable percentage shall be 20
percent.
(C) For 2006, the applicable percentage shall be 40
percent.
(e) Revocation of Election To Be Treated as Domestic Corporation.--
If, during the 1-year period beginning on the date of the enactment of
this Act, a corporation for which an election is in effect under
section 943(e) of the Internal Revenue Code of 1986 revokes such
election, no gain or loss shall be recognized with respect to property
treated as transferred under clause (ii) of section 943(e)(4)(B) of
such Code to the extent such property--
(1) was treated as transferred under clause (i) thereof, or
(2) was acquired during a taxable year to which such election
applies and before May 1, 2003, in the ordinary course of its
trade or business.
The Secretary of the Treasury (or such Secretary's delegate) may
prescribe such regulations as may be necessary to prevent the abuse of
the purposes of this subsection.
(f) Binding Contracts.--The amendments made by this section shall
not apply to any transaction in the ordinary course of a trade or
business which occurs pursuant to a binding contract--
(1) which is between the taxpayer and a person who is not a
related person (as defined in section 943(b)(3) of such Code,
as in effect on the day before the date of the enactment of
this Act), and
(2) which is in effect on January 14, 2002, and at all times
thereafter.
For purposes of this subsection, a binding contract shall include a
purchase option, renewal option, or replacement option which is
included in such contract and which is enforceable against the seller
or lessor.
SEC. 4002. 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, 2013.
``(B)(i) Subject to clause (ii), Fees may not be charged under
paragraphs (1) through (8) of subsection (a) after September 30, 2013.
``(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.
I . SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill, H.R. 2896, as amended, (the ``American Jobs
Creation Act of 2003'') repeals the exclusion for
extraterritorial income, provides a reduced corporate income
tax rate for domestic production activities, makes U.S.
companies competitive in the United States and globally, and
provides other corporate reform and growth incentives.
The bill provides net tax reductions of over $21.136
billion over fiscal years 2004-2008.
B. Background and Need for Legislation
The provisions approved by the Committee bring U.S. tax law
into compliance with the WTO Appellate Body holding that the
ETI regime constitutes a prohibited export subsidy under the
relevant trade agreements. The provisions approved by the
Committee provide corporate reform and growth incentives that
will make U.S. businesses and workers more competitive and will
create jobs in the United States. The estimated revenue effects
of the provisions comply with the most recent Congressional
Budget Office revisions of budget surplus projections.
C. Legislative History
The Committee on Ways and Means marked up the American Jobs
Creation Act of 2003 on October 28, 2003, and ordered the bill,
as amended, favorably reported by a roll call vote of 24 yeas
and 15 nays (with a quorum being present).
II. EXPLANATION OF THE BILL
TITLE I--CORPORATE REFORM AND GROWTH INCENTIVES
A. Reduction in Income Tax Corporate Rates
1. Reduced corporate income tax rate for domestic production activities
income (sec. 1001 of the 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 2003
------------------------------------------------------------------------
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 are 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.
REASONS FOR CHANGE
The Committee believes that creating new jobs is an
essential element of economic recovery and expansion, and that
tax policies designed to foster job creation also must reverse
the recent declines in manufacturing sector employment levels.
To accomplish this objective, the Committee believes that
Congress should enact tax laws that enhance the ability of
domestic businesses, and domestic manufacturing firms in
particular, to compete in the global marketplace.
The Committee believes that a reduced tax burden on
domestic manufacturers will improve the cash flow of domestic
manufacturers and make investments in domestic manufacturing
facilities more attractive. Such investment will create and
preserve U.S. manufacturing jobs.
EXPLANATION OF PROVISION
In general
The 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.\1\
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\1\ 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).
---------------------------------------------------------------------------
Domestic production gross receipts
``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; \2\ (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.\3\
---------------------------------------------------------------------------
\2\ Domestic production gross receipts include gross receipts for 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.
\3\ 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 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 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 provision is effective for taxable years beginning
after December 31, 2003.
2. Reduced corporate income tax rate for small corporations (sec. 1002
of the 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 2003
------------------------------------------------------------------------
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 are phased out by a five-percent surcharge for
corporations with taxable income between $100,000 and $335,000.
Also, 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.
REASONS FOR CHANGE
The Committee believes that reducing the tax burden on
small and medium sized businesses will enable them to continue
to maintain and create new jobs in the United States. A reduced
tax burden on smaller businesses simultaneously makes
investments by small businesses more attractive and improves
the cash flow of such businesses, thus facilitating the
financing of investments. New investment by small business is
responsible for substantial job creation in the economy and
provides the foundation for new industries, new technology, and
the future of the U. S. economy.
EXPLANATION OF PROVISION
Under the provision, 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 2012 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 are
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 2007-2008
------------------------------------------------------------------------
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.
$5,000,000-$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 are phased out by a five-percent surcharge for
corporations with taxable income between $5,000,000 and
$7,480,000. 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 2007-2008
------------------------------------------------------------------------
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.
$1,000,000-$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 are 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 2004-2006
------------------------------------------------------------------------
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.
$1,000,000-$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 are 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 is effective for taxable years beginning
after December 31, 2003.
B. Extension of Increased Section 179 Expensing
(Sec. 1011 of the bill 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 4 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.5 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. For taxable years beginning
after 2002 and before 2006, 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 dollar limitations are indexed annually for
inflation for taxable years beginning in a calendar year after
2003 and before 2006. The provision also includes off-the-shelf
computer software placed in service in a taxable year beginning
in 2003 through 2005 as qualifying property.
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\4\ Pub. Law No. 108-27, sec. 202(2003).
\5\ Additional section 179 incentives are provided with respect to
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 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. 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.6 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.7
---------------------------------------------------------------------------
\6\ Sec. 179(c)(1).
\7\ Treas. Reg. sec. 1.179-5. Under these regulations, 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).
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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.8
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
2006.9
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\8\ Sec. 179(c)(2).
\9\ Id.
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REASONS FOR CHANGE
The Committee believes that section 179 expensing provides
two important benefits for small businesses. First, it lowers
the cost of capital for property used in a trade or business.
With a lower cost of capital, the Committee believes small
business will invest in more equipment and employ more workers.
Second, it eliminates depreciation recordkeeping requirements
with respect to expensed property. In the Jobs and Growth Tax
Relief Reconciliation Act of 2003, Congress acted to increase
the value of these benefits and to increase the number of
taxpayers eligible for taxable years through 2005. The
Committee believes that these changes to section 179 expensing
will continue to provide important benefits if extended, and
the bill therefore extends these changes for an additional two
years.
EXPLANATION OF PROVISION
The provision extends the increased amount that a taxpayer
may deduct, and other changes that were made by JGTRRA of 2003,
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 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.
C. Recovery Period for Depreciation of Certain Leasehold Improvements
and Restaurant Property
(Sec. 1021 of the 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.
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 (sec. 168(i)(8)).\10\ This rule applies regardless of
whether the lessor or the lessee places the leasehold
improvements in service.\11\ 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 (secs. 168(b)(3), (c),
(d)(2), and (i)(6)).\12\
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\10\ 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.
\11\ 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.
\12\ If the improvement is characterized as tangible personal
property, ACRS or MACRS depreciation is calculated using the shorter
recovery periods and accelerated methods 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(c)(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 (105h Cir. 1973); Mallinekrodt,
Inc. v. Commissioner, 778 F.2d 402 (8th Cir. 1985)(with respect to
various leasehold improvements).
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Qualified leasehold improvement property
The Job Creation and Worker Assistance Act of 2002\13\ as
amended by the Jobs and Growth Tax Relief Reconciliation Act of
2003\14\ 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.
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\13\ Pub. Law No. 107-147, sec 101 (2002).
\14\ Pub. Law No. 198-27, sec. 201 (2003).
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Treatment of dispositions of leasehold improvements
A lessor of leased property that disposes of a leasehold
improvement which 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.
REASONS FOR CHANGE
The Committee believes that taxpayers should not be
required to recover the costs of investments beyond the useful
life of the investment. The present law 39-year recovery period
for leasehold improvements extends well beyond the useful life
of such investments. Although lease terms differ, the Committee
believes that lease terms for commercial real estate typically
are shorter than the present-law 39-year recovery period. In
the interests of simplicity and administrability, a uniform
period for recovery of leasehold improvements is desirable. The
Committee bill therefore shortens the recovery period for
leasehold improvements to a more realistic 15 years.
The Committee also believes that unlike other commercial
buildings, restaurant buildings generally are more specialized
structures. Restaurants also experience considerably more
traffic, and remain open longer than most retail properties.
This daily assault causes rapid deterioration of restaurant
properties, and forces restaurateurs to constantly repair and
upgrade their facilities. As such, restaurant facilities have a
much shorter life span than other commercial establishments.
The Committee bill reduces the 39-year recovery period for
improvements made to restaurant buildings and more accurately
reflects the true economic life of the properties by reducing
the recovery period to 15 years.
EXPLANATION OF PROVISION
The provision provides a statutory 15-year recovery period
for qualified leasehold improvement property placed in service
before January 1, 2006.\15\ The provision requires that
qualified leasehold improvement property be recovered using the
straight-line method.
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\15\ Qualified leasehold improvement property continues to be
eligible for the additional first-year depreciation deduction under
sec. 168(k).
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Qualified leasehold improvement property is defined as
under present law for purposes of the additional first-year
depreciation deduction (sec. 168(k)), with the following
modification. If a lessor makes an improvement that qualifies
as qualified leasehold improvement property such improvement
shall 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.
The provision also provides a statutory 15-year recovery
period for qualified restaurant property placed in service
before January 1, 2006.\16\ For purposes of the provision,
qualified restaurant property means any improvement to a
building if such building has been in service more than three
years 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.
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\16\ Qualified restaurant property would become eligible for the
additional first-year depreciation deduction under sec. 168(k) by
virtue of the assigned 20-year recovery period.
---------------------------------------------------------------------------
EFFECTIVE DATE
The provision is effective for property placed in service
after the date of enactment.
D. Alternative Minimum Tax Relief
1. Net operating losses and foreign tax credit; expansion of small
corporation exemption (secs. 1031-1032 of the bill and secs.
55-59 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. The tax is imposed on the amount by
which the tentative minimum tax exceeds the regular tax
liability. In the case of corporations, the tentative minimum
tax is computed at a flat rate of 20 percent on alternative
minimum taxable income (``AMTI'') in excess of an exemption
amount that phases out.\17\ 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.
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\17\ In the case of individuals, the rates are 26 and 28 percent.
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Net operating loss
Taxpayers generally may use the net operating loss
deduction to offset 90 percent of AMTI (determined without
regard to the net operating loss deduction). A special rule
allows a net operating loss carryback from, or carryover to, a
taxable year ending during 2001 or 2002 to offset 100 percent
of AMTI.
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).
Small corporation exemption
Corporations with average gross receipts of less than $7.5
million for the prior three taxable years are exempt from the
corporate alternative minimum tax. The $7.5 million threshold
is reduced to $5 million for the corporation's first three-
taxable year period.
REASONS FOR CHANGE
The Committee believes that the alternative minimum tax is
merely a prepayment of tax. The corporate alternative minimum
tax requires businesses to prepay their taxes when they can
least afford it, during a business downturn. The Committee
believes that increasing the gross receipts cap for companies
exempt from corporate AMT from $7.5 million of gross receipts
to $20 million of gross receipts will relieve many taxpayers of
both the administrative burden of calculating their income tax
liability under two separate tax systems and the financial
burden of having to prepay their tax when they can least afford
it. The Committee also believes that taxpayers should be
permitted to more fully utilize net operating losses and
foreign tax credits in computing the alternative minimum tax
than is permitted under current law.
EXPLANATION OF PROVISION
The provision phases-out the 90-percent limitation on the
use of the net operating loss deduction in computing AMTI. The
limitation is increased to 92 percent for taxable years
beginning in 2005, 2006 and 2007; 94 percent for taxable years
beginning in 2008 and 2009; 96 percent for taxable years
beginning in 2010; 98 percent for taxable years beginning in
2011; and 100 percent for taxable years beginning in and after
2012.
The provision repeals the 90-percent limitation on the
utilization of the AMT foreign tax credit.
The provision increases the amount of average gross
receipts that an exempt corporation may receive from $7.5
million to $20 million.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2004.
2. Income averaging for farmers not to increase alternative minimum tax
(sec. 1033 of the bill and sec. 55 of the Code)
PRESENT LAW
An individual engaged in a farming business (as defined in
section 263A(e)(4)) may elect to compute his or her current
year income 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.\18\ The averaging election is
not available in computing the tentative minimum tax. As a
result, some farmers may become liable for the alternative
minimum tax as a result of the averaging election.
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\18\ Sec. 1301.
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REASONS FOR CHANGE
The Committee believes that farmer income averaging should
be coordinated with the alternative minimum tax so that a
farmer's alternative minimum tax liability is not increased
because he or she elects income averaging.
EXPLANATION OF PROVISION
The bill modifies the alternative minimum tax to allow
farmers the full benefit of income averaging. Under the bill, a
farmer owes alternative minimum tax only to the extent he or
she would owe alternative minimum tax had averaging not been
elected. This result is achieved by excluding the impact of the
election to average farm income from the calculation of regular
tax liability in computing the alternative minimum tax.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2002.
E. Provisions Relating to S Corporation Reform and Simplification
(Secs. 1041-1051 of the bill and secs. 1361-1379 sec. and 4975 of the
Code)
OVERVIEW
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
corporation. To the extent a loss is not allowed due to this
limitation, the loss generally is carried forward with respect
to the shareholder.
REASONS FOR CHANGE
The bill contains a number of general provisions relating
to S corporations. The Committee adopted these provisions that
modernize the S corporation rules and eliminate undue
restrictions on S corporations in order to expand the
application of the S corporation provisions so that more
corporations and their shareholders will be able to enjoy the
benefits of subchapter S status.
The Committee is aware of obstacles that have prevented
banks from electing subchapter S status.\19\ The bill contains
provisions that apply specifically to banks in order to remove
these obstacles and make S corporation status more readily
available to banks.
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\19\ See GAO/GGD-00-159, Banking Taxation, Implications of Proposed
Revisions Governing S-Corporations on Community Banks (June 23, 2000),
for discussion of issues relating to community banks electing
subchapter S.
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The bill also revises the prohibited transaction rules
applicable to employee stock ownership plans (``ESOPs'')
maintained by S corporations in order to expand the ability to
use distributions made with respect to S corporation stock held
by an ESOP to repay a loan used to purchase the stock, subject
to the same conditions that apply to C corporation dividends
used to repay such a loan.
1. Shareholders of an S corporation
PRESENT LAW
In general
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)\20\ 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.
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\20\ 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 an 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.
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Individual retirement accounts
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.
EXPLANATION OF PROVISION
In general
The bill provides that all family members can elect to be
treated as one shareholder for purposes of determining the
number of shareholders in the corporation. A family is defined
as the lineal descendants of a common ancestor (and their
spouses). The common ancestor cannot be more than three
generations removed from the youngest generation of shareholder
at the time the S election is made (or the effective date of
this provision, if later). Except as provided by Treasury
regulations, the election may be made by any family member and
the election remains in effect until terminated.
The bill increases the maximum number of eligible
shareholders from 75 to 100.
Individual retirement accounts
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.\21\
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\21\ 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.
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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 provisions generally apply to taxable years beginning
after December 31, 2003. The provision relating to IRAs takes
effect on the date of enactment of the bill.
2. Treatment of S corporation shareholders
(a) Electing small business trusts
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.
EXPLANATION OF PROVISION
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, 2003.
(b) Qualified subchapter S trusts
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.
EXPLANATION OF PROVISION
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 transfers made after December 31,
2003.
(c) Transfers of 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 corporation with
respect to that shareholder in the subsequent taxable year.
EXPLANATION OF PROVISION
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 taxable years beginning after
December 31, 2003.
3. Provisions relating to banks
(a) 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. In addition, an
S corporation election is terminated whenever the 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.
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.\22\
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\22\ IRS Notice 97-5, 1997-1 C.B. 352, sets forth guidance relating
to passive investment income on banking assets.
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EXPLANATION OF PROVISION
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 applying the excess net
passive income rules.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2003.
(b) 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.\23\
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\23\ Another provision of the bill increases the maximum number of
shareholders to 100.
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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.\24\
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\24\ Treas. Reg. sec. 1.1361-1(1). The 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.
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National banking law requires that a director of a national
bank own stock in the bank and that the bank have at least five
directors.\25\ A number of states have similar requirements for
state-chartered banks. Apparently, it is common for bank
directors to enter into agreements with the bank under which
the director will sell the stock back to the bank upon ceasing
to be a director at the price paid for the stock.\26\
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\25\ 12 U.S.C. secs. 71-72.
\26\ For example, see Private Letter Ruling 200217048 (January 24,
2002) describing such an agreement and holding that it creates a second
class of stock.
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EXPLANATION OF PROVISION
Under the bill, restricted bank director stock shall not be
taken into account as outstanding stock in applying the
provisions of subchapter S. Thus, for example, the stock will
not be treated as a second class of stock; the holder of the
stock will not be treated as a shareholder by reason of the
ownership of the stock; and the stock will be disregarded in
allocating items of income, loss, etc. among the shareholders.
Restricted bank director stock means shares 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) held by an individual solely by reason of
status as a director of the bank or company and which are
subject to an agreement with the bank or holding company (or
corporation in control of the bank or company) pursuant to
which the holder agrees to sell the stock back upon ceasing to
be a director at the same price the individual acquired the
stock.
Distributions (not in exchange for the stock) with respect
to the restricted shares are includible in the gross income of
the director and deductible by the corporation.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2003.
4. Qualified subchapter S subsidiaries
(a) 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.
EXPLANATION OF PROVISION
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, 2003.
(b) 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.
EXPLANATION OF PROVISION
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, 2003.
5. S corporation distributions to an employee stock ownership plan
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.\27\ Prohibited transactions include, among
other transactions, (1) the sale, exchange or leasing of
property, (2) the lending of money or other extension of
credit, and (3) the transfer to, or use by or for the benefit
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.\28\ 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 stock held by the ESOP
are used to repay the loan. The employer stock is held in a
suspense account and released for allocation to participants'
accounts as the loan is repaid.
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\27\ Sec. 4975.
\28\ Sec. 4975(d)(3). An ESOP that borrows money to purchase
employer stock is referred to as a ``leveraged'' ESOP.
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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).\29\ 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.
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\29\ Treas. reg. sec. 54.4975-7(b)(5).
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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).\30\ 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.\31\
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\30\ Sec. 404(k)(5)(B).
\31\ Sec. 404(k)(2)(B).
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EXPLANATION OF PROVISION
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
repay 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, 2003.
F. Employee Benefits
1. Treatment of nonqualified deferred compensation plans (sec. 1061 of
the bill and new sec. 409A and sec. 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,\32\ 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)).
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\32\ 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.
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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). This 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.\33\ 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.
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\33\ Treas. Reg. sec. 1.83-3(e). This definition in part reflects
previous IRS rulings on nonqualified deferred compensation.
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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.\34\
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.
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\34\ Treas. Reg. secs. 1.451-1 and 1.451-2.
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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.\35\ 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.
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\35\ 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).
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The IRS has issued guidance setting forth model rabbi trust
provisions.\36\ 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.
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\36\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by Notice
2000-56, 2000-2 C.B. 393.
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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 effectively allow deferred amounts to
be available to individuals, while still meeting the safe
harbor requirements set forth by the IRS.
REASONS FOR CHANGE
The Committee is aware of the popular use of deferred
compensation arrangements by executives to defer current
taxation of substantial amounts of income. The Committee
believes that many nonqualified deferred compensation
arrangements have developed which allow improper deferral of
income. Executives often use arrangements that allow deferral
of income, but also provide security of future payment and
control over amounts deferred. For example, nonqualified
deferred compensation arrangements often contain provisions
that allow participants to receive distributions upon request,
subject to forfeiture of a minimal amount (i.e., a ``haircut''
provision).
Since the concept of a rabbi trust was developed,
techniques have developed that attempt to protect the assets
from creditors despite the terms of the trust. For example, the
trust or fund may be located in a foreign jurisdiction, making
it difficult or impossible for creditors to reach the assets.
While the general tax principles governing deferred
compensation are well established, the determination whether a
particular arrangement effectively allows deferral of income is
generally made on a facts and circumstances basis. There is
limited specific guidance with respect to common deferral
arrangements. The Committee believes that it is appropriate to
provide specific rules regarding whether deferral of income
inclusion should be permitted.
The Committee believes that, consistent with the intent of
current law, certain arrangements that allow participants
inappropriate levels of control or access to amounts deferred
should not result in deferral of income inclusion. The
Committee also believes that certain arrangements, such as
offshore trusts, which effectively protect assets from
creditors, should be treated as funded and not result in
deferral of income inclusion.\37\
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\37\ The staff of the Joint Committee on Taxation made
recommendations similar to the new provision in the report on their
investigation of Enron Corporation, which detailed how executives
deferred millions of dollars in Federal income taxes through
nonqualified deferred compensation arrangements. See Joint Committee on
Taxation, ``Report of Investigation of Enron Corporation and Related
Entities Regarding Federal Tax and Compensation Issues, and Policy
Recommendations'' (JCS-3-03), February 2003.
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EXPLANATION OF PROVISION
Under the provision, all amounts deferred under a
nonqualified deferred compensation plan \38\ for all taxable
years are currently includible in gross income to the extent
not subject to a substantial risk of forfeiture \39\ 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.
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\38\ A plan includes an agreement or arrangement, including an
agreement or arrangement that includes one person.
\39\ 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.
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Under the provision, distributions from a nonqualified
deferred compensation plan may be allowed only upon separation
from service (as determined by the Secretary), disability,
death, a specified time (or pursuant to a fixed schedule),
change in control in a corporation (to the extent provided by
the Secretary), or occurrence of an unforeseeable emergency. 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\40\ of publicly-traded
corporations.
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\40\ 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.
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Disability is defined as under the Social Security Act.
Under such definition, an individual is considered to be
disabled if he or she 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 which has lasted or can be expected to last for a
continuous period of not less than twelve months. In
determining if a participant is disabled, a determination
letter from the Social Security Administration is not required.
It is intended that a nonqualified deferred compensation plan
provide that the determination of whether a participant is
disabled must be based on the Social Security Administration
statutory standard.
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).
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 during the preceding taxable year, or at such
other time as provided in Treasury regulations. 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.
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 the Secretary shall
issue guidance regarding to what extent elections to change a
steam 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 held in a trust
or set aside (directly or indirectly) in another arrangement,
as 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 at the time set aside or transferred
outside of the United States (whether or not such assets are
available to satisfy the claims of general creditors). Any
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 such
assets were first set aside for purposes of nonqualified
deferred compensation. 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
if a nonqualified deferred compensation 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. Any 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 such assets were first set aside
for purposes of nonqualified deferred compensation.
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.\41\ A governmental eligible deferred compensation plan
(sec. 457) is also a qualified employer plan under the
provision.
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\41\ A qualified employer plan also includes a section 501(c)(18)
trust.
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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 shall
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.
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.\42\
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\42\ It is intended that the exception be similar to that under
Treas. Regs. sec. 31.3121(v)(2)-1(e)(4).
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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
principally used to postpone the timing of income inclusion.
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 provision is effective for amounts deferred in taxable
years beginning after December 31, 2003.
The provision does not apply to amounts deferred in a
taxable year beginning after December 31, 2003, and before
January 1, 2005, pursuant to an irrevocable election or binding
arrangement made before October 24, 2003. Amounts deferred in
taxable years beginning after December 31, 2004, even if
pursuant to an election made before October 24, 2003, are
subject to the provision. 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.
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 on or before December 31,
2003, may, without violating the requirements of the provision,
terminate participation or cancel an outstanding deferral
election with regard to amounts earned after December 31, 2003,
if such amounts are includible in income as earned.
Existing nonqualified deferred compensation plans will have
to be amended to comply with the modifications made by this
provision. It is the intent of the Committee that, immediately
following the date of enactment, the Secretary shall issue
guidance providing that employers shall have a limited period
of time to amend the terms of existing plans relating to
amounts deferred pursuant to deferral elections made after
October 23, 2003, and before January 1, 2004.
2. Exclusion of incentive stock options and employee stock purchase
plan stock options from wages (sec. 1062 of the 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.\43\
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\43\ 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).
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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.\44\ The applicable Code provisions \45\
do not provide a specific exception from FICA and FUTA taxes
for wages paid to an employee arising from the exercise of a
statutory stock option, i.e., for the excess of the fair market
value of the stock at the time of exercise over the amount paid
for the stock by the individual.
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\44\ Secs. 3101, 3111 and 3301.
\45\ Secs. 3121 and 3306
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In January 2001, the Internal Revenue Service issued notice
of its intent to clarify, through future guidance, the
application of FICA, FUTA, and Federal income tax withholding
to statutory stock options.\46\ Proposed Treasury regulations
issued in November 2001 provided that the payment of FICA and
FUTA taxes upon the exercise of statutory stock options would
apply to the exercise of statutory stock options on or after
January 1, 2003.\47\ Federal income tax withholding was not
required under the proposed regulations.
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\46\ Notice 2001-14, 2001-6 I.R.B. 516.
\47\ 66 Fed. Reg. 57023 (Nov. 14, 2001).
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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.\48\
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\48\ Notice 2002-47, 2002-28 I.R.B. 97.
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REASONS FOR CHANGE
To provide taxpayers certainty, the Committee believes that
it is appropriate to clarify the treatment of statutory stock
options for employment tax and income tax withholding purposes.
The Committee believes that in the past, the IRS has been
inconsistent in its treatment of taxpayers with respect to this
issue and did not uniformly challenge taxpayers who did not
collect employment taxes and withhold income taxes on statutory
stock options.
Until January 2001, the IRS had not published guidance with
respect to the imposition of employment taxes and income tax
withholding on statutory stock options. Many taxpayers relied
on guidance published with respect to qualified stock options
(the predecessor to incentive stock options) to take the
position that no employment taxes or income tax withholding
were required with respect to statutory stock options. It is
the Committee's belief that a majority of taxpayers did not
withhold employment and income taxes with respect to statutory
stock options. Thus, the proposed IRS regulations would have
altered the treatment of statutory stock options for most
employers.
Because there is a specific income tax exclusion with
respect to statutory stock options, the Committee believes it
is appropriate to clarify that there is a conforming exclusion
for employment taxes and income tax withholding. Statutory
stock options are required to meet certain Code requirements
that do not apply to nonqualified stock options. The Committee
believes that such requirements are intended to make statutory
stock options a tool of employee ownership rather than a form
of compensation subject to employment taxes. Furthermore, this
clarification will ensure that, if further IRS guidance is
issued, employees will not be faced with a tax increase that
will reduce their net paychecks even though their total
compensation has not changed.
The clarification will also eliminate the administrative
burden and cost to employers who, in the absence of the
Committee bill, could be required to modify their payroll
systems to provide for the withholding of income and employment
taxes on statutory stock options that they are not currently
required to withhold.
EXPLANATION OF PROVISION
The provision 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 provision, FICA and FUTA taxes do not
apply upon the exercise of a statutory stock option.\49\ The
provision also provides that such remuneration is not taken
into account for purposes of determining Social Security
benefits.
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\49\ The provision also provides a similar exclusion under the
Railroad Retirement Tax Act.
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Additionally, the provision 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 provision is effective for stock acquired pursuant to
options exercised after the date of enactment.
3. Extension of provision permitting qualified transfers of excess
pension assets to retiree health accounts (sec. 1063 of the
bill 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 of plan assets
to the employer 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.\50\ 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.
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\50\ Sec. 420.
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Excess assets generally means the excess, if any, of the
value of the plan's assets \51\ 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),\52\ or (2) 125 percent of the plan's current
liability. 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).
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\51\ The value of plan assets for this purpose is the lesser of
fair market value or acturial value.
\52\ These amounts relate to the full funding limit for defined
benefit plans. The current liability full funding limit is repealed for
years beginning after 2003. Under the general sunset provision of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (``EGTRRA'')
the limit is reinstated for years after 2010.
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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 the 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 employer
generally must maintain retiree health benefit costs at the
same level for the taxable year of the transfer and the
following four years.
In addition, the Employee Retirement Income Security Act of
1974 (``ERISA'') provides that, at least 60 days before the
date of a qualified transfer, the employer must notify the
Secretary of Labor, the Secretary, employee representatives,
and the plan administrator of the transfer, and the plan
administrator must notify each plan participant and beneficiary
of the transfer.\53\
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\53\ ERISA sec. 101(e). ERISA also provides that a qualified
transfer is not a prohibited transaction under ERISA or a prohibited
reversion.
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No qualified transfers may be made after December 31, 2005.
REASONS FOR CHANGE
The Committee believes it is appropriate to extend the
ability of employers to fund retiree health benefits through
the transfer of excess pension assets.
EXPLANATION OF PROVISION
The provision allows qualified transfers of excess defined
benefit plan assets through December 31, 2013.
EFFECTIVE DATE
The provision is effective on the date of enactment.
G. Treatment of Active Income
1. Treatment of European Union as one country for purposes of the
foreign base company sales and services rules (sec. 1071 of the
bill 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 currently in income
for U.S. tax purposes certain passive and other income of the
controlled foreign corporation (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 controlled foreign
corporation as having received a current distribution of their
pro rata shares of the controlled foreign corporation's subpart
F income. The amounts included in income by the controlled
foreign corporation'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 encompasses certain categories of non-
passive income, including foreign base company sales and
services income (sec. 954(a)). Foreign base company sales
income generally consists of sales income of a controlled
foreign corporation located in a country that is neither the
origin nor the destination of the goods with respect to sales
of property purchased from or sold to a related person (sec.
954(d)). Foreign base company services income consists of
income from services performed outside the controlled foreign
corporation's country of incorporation for or on behalf of a
related party (sec. 954(e)).
A special branch rule applies only for purposes of
determining a controlled foreign corporation's foreign base
company sales income. Under this rule, a branch of a controlled
foreign corporation is treated as a separate corporation where
the activities of the controlled foreign corporation through
the branch outside the controlled foreign corporation's country
of incorporation have substantially the same effect as if such
branch were a subsidiary (sec. 954(d)(2)).
For purposes of the subpart F rules, a related person is
defined as any individual, corporation, trust, or estate that
controls or is controlled by the controlled foreign
corporation, or any individual, corporation, trust, or estate
that is controlled by the same person or persons that control
the controlled foreign corporation (sec. 954(d)(3)). Control
with respect to a corporation means ownership of more than 50
percent of the corporation's stock (by vote or value). Control
with respect to a partnership, trust, or estate means ownership
of more than 50 percent of the value of the beneficial
interests of the partnership, trust, or estate. Indirect and
constructive ownership rules apply.
The European Union (``EU'') is a union of independent
states founded with a goal to enhance political, economic and
social co-operation between its members. For example, the EU
member states have entered into a series of agreements,
including the Parent-Subsidiary Directive, that remove certain
intra-EU cross-border tax barriers between EU companies,
thereby providing a tax advantage to EU-based companies with EU
subsidiaries over U.S.-based companies with EU subsidiaries.
The current member states of the EU are Belgium, Denmark,
Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The
Netherlands, Austria, Portugal, Sweden, Finland and the United
Kingdom. As of January 1, 2004, the European Union will admit
Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Slovakia and Slovenia. Bulgaria, Romania and
Turkey have applied for admittance.
REASONS FOR CHANGE
Because the EU has taken steps to remove barriers to trade
between member states and to create a single market in which
goods, services and capital can move freely between members,
the Committee believes that the foreign base company sales and
foreign base company services rules should be revised to allow
U.S.-based companies to structure their operations in a way
that reflects these developments. The Committee further
believes that these changes are necessary to ensure that U.S.
companies can compete on a more even basis against their
foreign competitors. The Committee believes that this change
will increase U.S. company competitiveness in the EU and
increase exports from the United States, thus increasing U.S.
production and U.S. jobs.
The Committee notes the importance of continuing to examine
the operation of these rules, which were enacted over 40 years
ago. The Committee believes that it is important for Congress
and the Department of the Treasury to look closely at further
updating these outdated rules that, for example, include rules
that were developed before the dramatic evolution of the
service sector in the global economy.
DESCRIPTION OF PROVISION
The proposal treats all of the member states of the EU as
one country for purposes of the foreign base company sales and
foreign base company services rules.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2008, and taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
2. Look-through treatment of payments between related controlled
foreign corporations under foreign personal holding company
income rules (sec. 1072 of the bill 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.
REASONS FOR CHANGE
Most countries allow their companies to redeploy foreign
active earnings with no additional tax burden. In fact, many
countries, including several EU countries, do not impose a home
country tax on active income earned outside the home country's
borders. The Committee believes that this provision will make
U.S. companies and U.S. workers more competitive with respect
to such countries. By allowing U.S. companies to reinvest their
active foreign earnings where they are most needed without
incurring the immediate additional tax that companies based in
many other countries never incur, the Committee believes that
the provision will enable U.S. companies to make more sales
overseas, and thus, produce more goods in the United States.
EXPLANATION OF PROVISION
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 to non-subpart-F earnings 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, 2006, and taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
3. Look-through treatment for sales of partnership interests (sec. 1073
of the bill 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 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.
REASONS FOR CHANGE
The Committee believes that the sale of a partnership
interest by a controlled foreign corporation that owns a
significant interest in the partnership should constitute
subpart F income only to the extent that a proportionate sale
of the underlying partnership assets attributable to the
partnership interest would constitute subpart F income.
EXPLANATION OF PROVISION
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 or indirectly 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.
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 foreign corporations end.
4. Repeal of foreign personal holding company rules and foreign
investment company rules (sec. 1074 of the bill 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).
REASONS FOR CHANGE
The Committee believes that the overlap among the various
anti-deferral regimes results in significant complexity usually
with little or no ultimate tax consequences. These overlaps
require the application of specific rules of priority for
income inclusions among the regimes, as well as additional
coordination provisions pertaining to other operational
differences among the various regimes.
EXPLANATION OF PROVISION
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, 2006, and taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
5. Subpart F treatment of pipeline transportation income (sec. 1075 of
the bill and sec. 954 of the Code)
PRESENT LAW
Under the subpart F rules, U.S. 10-percent shareholders of
a controlled foreign corporation are subject to U.S. tax
currently on their shares of certain income earned by the
foreign corporation, whether or not such income is distributed
to the shareholders (referred to as ``subpart F income'').
Subpart F income includes foreign base company income, which in
turn includes foreign base company oil related income (sec.
954(a)).
Foreign base company oil related income is income derived
outside the United States from the processing of minerals
extracted from oil or gas wells into their primary products;
the transportation, distribution, or sale of such minerals or
primary products; the disposition of assets used by the
taxpayer in a trade or business involving the foregoing; or the
performance of any related services. However, foreign base
company oil related income does not include income derived from
a source within a foreign country in connection with: (1) oil
or gas which was extracted from a well located in such foreign
country or, (2), oil, gas, or a primary product of oil or gas
which is sold by the controlled foreign corporation or a
related person for use or consumption within such foreign
country or is loaded in such country as fuel on a vessel or
aircraft. An exclusion also is provided for income of a
controlled foreign corporation that is a small producer (i.e.,
a corporation whose average daily oil and natural gas
production, including production by related corporations, is
less than 1,000 barrels).
REASONS FOR CHANGE
The subpart F rules were designed to impose immediate U.S.
taxation on passive and certain other income earned outside the
borders of the United States. The construction of an oil or gas
pipeline and the movement of oil or gas through that pipeline
are not passive activities, and the Committee believes that the
income from these activities is not the kind of income that the
subpart F rules were designed to cover.
EXPLANATION OF PROVISION
The provision provides an additional exception to the
definition of foreign base company oil related income. Under
the provision, foreign base company oil related income does not
include income derived from a source within a foreign country
in connection with the pipeline transportation of oil or gas
within such foreign country. Thus, the exception applies
whether or not the controlled foreign corporation that owns the
pipeline also owns any interest in the oil or gas transported.
In addition, the exception applies to income earned from the
transportation of oil or gas by pipeline in a country in which
the oil or gas was neither extracted nor consumed within such
foreign country.
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.
6. Determination of foreign personal holding company income with
respect to transactions in commodities (sec. 1076 of the bill
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. 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.\54\
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\54\ 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 the sum of its gross
receipts from active sales of commodities in such capacity and
commodities hedging transactions that qualify for exclusion from the
definition of foreign personal holding company income, equals or
exceeds 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)).
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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).\55\ 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.\56\
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\55\ Sec. 1221(a)(7).
\56\ Sec. 121(b)(2)(A).
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REASONS FOR CHANGE
The Committee believes that the exceptions from subpart F
foreign personal holding company income for commodities hedging
transactions and active business sales of commodities should be
modified to better reflect current active business practices
and, in the case of hedging transactions, to simplify the
present-law rules by providing more consistency with the
generally applicable definition of a hedging transaction.
EXPLANATION OF PROVISION
The provision 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
provision, 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
this provision, 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).\57\
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\57\ Sec. 1221(a)(7) and (b)(2)(B).
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The provision 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 provision,
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.\58\
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\58\ 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 change
made by the proposal) continue to apply.
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EFFECTIVE DATE
The provision is effective with respect to transactions
entered into after December 31, 2004.
7. Repeal controlled foreign corporation rules for foreign base company
shipping income (sec. 1077 of the bill 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 currently in income
for U.S. tax purposes certain income of the controlled foreign
corporation (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 controlled foreign corporation as
having received a current distribution of their pro rata shares
of the controlled foreign corporation's subpart F income. The
amounts included in income by the controlled foreign
corporation'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 controlled foreign
corporation 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 controlled foreign corporation'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 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 the controlled foreign
corporation in the active conduct of a trade or business from
unrelated persons (sec. 954(c)(2)(A)). Also generally excluded
are dividends and interest received by the controlled foreign
corporation from a related corporation organized and operating
in the same foreign country in which the controlled foreign
corporation was organized, and rents and royalties received by
the controlled foreign corporation from a related corporation
for the use of property within the country in which the
controlled foreign corporation was organized (sec. 954(c)(3)).
However, interest, rent, and royalty payments do not qualify
for this exclusion to the extent that such payments reduce
subpart F income of the payor.
REASONS FOR CHANGE
In general, other countries do not tax foreign shipping
income, whereas the United States imposes immediate U.S. tax on
such income. The noncompetitive U.S. taxation of shipping
income has directly caused a steady and substantial decline of
the U.S. shipping industry. The Committee believes that this
provision will provide U.S. shippers the opportunity to be
competitive with their tax-advantaged foreign competitors.
EXPLANATION OF PROVISION
The provision repeals the subpart F rules relating to
foreign base company shipping income (sec. 954(f)). 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 (sec. 954(c)(2)(A)), 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 sec. 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 will be 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.
The Committee expects the Secretary of the Treasury to
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).
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.
8. Modification of subpart F exemption for active financing (sec. 1078
of the bill 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 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'').\59\
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\59\ 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 (P.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 (P.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.
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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.
REASONS FOR CHANGE
The Committee believes that the rules for determining
whether income earned by an eligible CFC or QBU is active
financing income should be more consistent with the rules for
determining whether a CFC or QBU is eligible to earn active
financing income.
EXPLANATION OF PROVISION
The provision 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
provision 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 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.
9. Partial exclusion for qualified film income (sec. 1079 of the bill
and new sec. 139A of the Code)
PRESENT LAW
In general
Present law provides that gross income for U.S. tax
purposes does not include extraterritorial income. Because the
exclusion of such extraterritorial income is a means of
avoiding double taxation, no foreign tax credit is allowed for
income taxes paid with respect to such excluded income.
Extraterritorial income is eligible for the exclusion to the
extent that it is ``qualifying foreign trade income.''
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, or (3) 30 percent
of the ``foreign sale and leasing income'' derived by the
taxpayer from the transaction. The amount of qualifying foreign
trade income determined using 1.2 percent of the foreign
trading gross receipts is limited to 200 percent of the
qualifying foreign trade income that would result using 15
percent of the foreign trade income. Although these
calculations are determined by reference to a reduction of
taxable income (a net income concept), qualifying foreign trade
income is an exclusion from gross income.
Foreign trading gross receipts
``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.
The threshold for determining if gross receipts will be treated
as foreign trading gross receipts is whether the gross receipts
are derived from a transaction involving ``qualifying foreign
trade property.''
Qualifying foreign trade property is property manufactured,
produced, grown, or extracted within or outside of 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 of the United States. In
addition, not 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 of the United
States, plus (2) the direct costs of labor performed outside of
the United States. Certain property is excluded from the
definition of qualifying foreign trade property, including
patents, inventions, models, designs, formulas, or processes
whether or not patented, copyrights (other than films, tapes,
records, or similar reproductions, and other than computer
software (whether or not patented), for commercial or home
use), goodwill, trademarks, trade brands, franchises, or other
like property. Consequently, gross receipts from the license of
films for reproduction abroad generally constitutes foreign
trading gross receipts.
Foreign trade income
``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. Certain dividends-paid deductions of
cooperatives are disregarded in determining foreign trade
income for this purpose.
Foreign sale and leasing income
``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.
REASONS FOR CHANGE
The Committee recognizes that the extraterritorial income
(``ETI'') regime must be repealed and that its repeal
constitutes a significant tax increase on the United States
motion picture and film industry. In addition, the Committee
understands that over the past decade, production of some
American film projects has moved to foreign locations, as a
number of foreign governments have offered tax and other
incentives designed to entice production of motion pictures and
television programs to their countries. Consequently, the
Committee believes that it is appropriate to provide tax relief
for motion pictures and films made in the United States.
EXPLANATION OF PROVISION
The provision provides an exclusion from gross income for
an amount equal to the applicable percentage of qualified film
income. ``Qualified film income'' is defined as a taxpayer's
gross income from the license of a qualified film for the
exploitation or direct use outside the United States less all
associated film costs.\60\ Qualified film income does not
include any gross income from the exploitation of characters,
soundtracks, designs, scripts, scores, or other ancillary
intangibles. For example, gross income from the foreign
theatrical, home video, digital video disc, and television
markets would be eligible for the provision, whereas gross
income from the foreign license of characters, scripts, video
and board games, and other ancillary intangibles of such film
would not be eligible for the provision. In addition, qualified
film income does not include any amount from the license of a
qualified film to a related person \61\ unless such film is
held for license by such related person to an unrelated person
for the exploitation or direct use by such unrelated person
outside the United States.
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\60\ Associated film costs is defined as any expense properly
apportioned and allocated to qualified film income, determined as
provided under regulations prescribed by the Secretary.
\61\ A person is 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 are made without regard to
section 1563(b).
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For purposes of the provision, the applicable percentage
for taxable years ending in 2007 is one percent, in 2008 is two
percent, in 2009 is three percent, in 2010 is five percent, in
2011 is eight percent, in 2012 is nine percent, and after 2012
is ten percent.
A ``qualified film'' is defined as property described in
section 168(f)(3) the original use of which commences after
December 31, 2006 if (excluding compensation in the form of
residuals and participations) 50 percent or more of the total
compensation relating to the production of such film
constitutes compensation for services performed in the United
States by actors, production personnel, directors, and
producers. However, a qualified film does not include sexually
explicit productions as defined by section 2257 of title 18 of
the U.S. Code.
The provision provides that no foreign tax credit or
deduction is allowed for foreign taxes paid or accrued with
respect to the excludible portion of any qualified film income.
In addition, the provision provides that a taxpayer may elect
not to apply the provision to a qualified film. Such election
shall be made by the due date (including extensions of time)
for filing the taxpayer's return for the taxable year in which
the qualified film is placed in service.
EFFECTIVE DATE
The provision is effective for taxable years ending after
December 31, 2006.
H. Reduction of Double Taxation of Earnings
1. Interest expense allocation rules (sec. 1081 of the bill 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. (Exceptions
to the fungibility concept are recognized or required, however,
in particular cases, some of which are described below). The
Code provides that for interest allocation purposes all members
of an affiliated group of corporations generally are to be
treated as a single corporation (the so-called ``one-taxpayer
rule''), and that allocation must be made on the basis of
assets rather than gross income.
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.\62\ 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.
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\62\ One such exception is that the affiliated group for interest
allocation purposes includes section 936 corporations that are excluded
from the consolidated group.
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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, subsidiaries of banks and bank 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.
REASONS FOR CHANGE
The Committee observes that the United States is the only
country that currently imposes harsh and anti-competitive
interest expense allocation rules on its businesses and
workers. The present-law interest expense allocation rules
result in U.S. companies allocating a portion of their U.S.
interest expense against foreign-source income, even when the
foreign operation has its own debt. The tax effect of this rule
is that U.S. companies end up paying double tax. The practical
effect is that the cost for U.S. companies to borrow in the
United States is increased and it becomes more expensive to
invest in the United States. The Committee believes that these
rules should be modified so that U.S. companies are not
discouraged from investing in the United States. To this end,
U.S. companies should not be required to allocate U.S. interest
expense against foreign-source income (and thereby incur double
taxation) unless their debt-to-asset ratio is higher in the
United States than in foreign countries.
EXPLANATION OF PROVISION
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 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 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, over (2) the
interest expense incurred by a foreign member 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.\63\
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\63\ Although the interest expense of a foreign subsidiary is taken
into account for purposes of allocating the interest 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.
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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) \64\ as
well as all controlled foreign corporations that in the
aggregate either directly or indirectly \65\ 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.
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\64\ 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)).
\65\ 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.
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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 ten-percent owned corporations
apply on a worldwide affiliated group basis.
The worldwide affiliated group election is to be made by
the common parent of the domestic affiliated group. The
election is to 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.
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,\66\ 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.\67\ 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.
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\66\ No inference is intended as to the treatment under present law
with respect to financial holding companies (within the meaning of
section 2(p) of the Bank Holding Company Act of 1956), as well as
subsidiaries of financial holding companies that are predominantly
engaged (directly or indirectly) in the active conduct of a banking,
financing, or similar business. With respect to financial holding
companies that make a financial institution group election under the
bill, no inference is intended as to the application of present law to
such taxpayers for taxable years prior to the taxable year for which
such an election is made.
\67\ See Treas. Reg. sec. 1.904-4(e)(2).
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The common parent of the pre-election worldwide affiliated
group is to 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 unless revoked
with the consent of the Treasury Secretary. In addition, the
provision provides anti-abuse rules under which certain
transfers from a 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
(and increasing the indebtedness of the worldwide affiliated
group outside the 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, and
addressing changes in members of any group (through
acquisitions or otherwise) treated as affiliated under this
provision.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2008.
2. Recharacterization of overall domestic loss (sec. 1082 of the bill
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.
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.
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. 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.
REASONS FOR CHANGE
The Committee believes that it is important to create
parity in the treatment of overall foreign losses and overall
domestic losses in order to prevent the double taxation of
income. The Committee believes that preventing double taxation
will make U.S. businesses more competitive and will lead to
increased export sales. The Committee believes that this
increase in export sales will increase production in the United
States and increase jobs in the United States to support the
increased exports.
EXPLANATION OF PROVISION
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 a prior 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 loss, 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
loss.
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 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, 2005.
3. Reduction to two foreign tax credit baskets (sec. 1083 of the bill
and sec. 904 of the Code)
PRESENT LAW
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''),\68\ (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).
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\68\ 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 (for pre-2003 earnings and profits). Under section 1115 of
the bill, these dividends are subject to a look-through approach,
irrespective of when the underlying earnings and profits arose.
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REASONS FOR CHANGE
Requiring taxpayers to separate income and tax credits into
nine separate tax baskets creates some of the most complex tax
reporting and compliance issues in the Code. The Committee
believes that reducing the number of foreign tax credit baskets
to two greatly simplifies the Code and undoes much of the
complexity created by the Tax Reform Act of 1986. The Committee
believes that simplifying these rules will reduce double
taxation, make U.S. businesses more competitive, and create
jobs in the United States.
EXPLANATION OF PROVISION
The provision provides for two foreign tax credit
limitation categories: passive category income and general
category income. Financial services income is treated as
general category income in the case of (1) a member of a
financial services group (i.e., any affiliated group \69\ that
is predominately engaged in the active conduct of a banking,
insurance, financing, or similar business) or (2) any other
person predominantly engaged in the active conduct of a
banking, insurance, financing, or similar business.\70\ 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. 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.
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\69\ The provision expands the definition of an affiliated group as
defined under section 1504(a) for these purposes to include certain
insurance companies (without regard to whether such companies are
covered by an election under 1504(c)(2)) and foreign corporations that
are generally excluded from an affiliated group under section
1504(b)(2) and section 1504(b)(3) respectively. In determining whether
an affiliated group is predominately 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 is taken into account.
\70\ The provision requires the 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.
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Taxes paid or accrued in a taxable year beginning before
January 1, 2005, 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 Secretary has the authority to provide
regulations relating to the allocation of income with respect
to taxes carried back to years in which more than two foreign
tax credit limitation categories were in existence.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2004.
4. Look-through rules to apply to dividends from noncontrolled section
902 corporations (sec. 1084 of the bill 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. Separate limitations are
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).\71\ 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 earnings and profits attributable to income in
such foreign tax credit limitation category to the total
earnings and profits (a ``look-through'' approach).
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\71\ 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.
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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.
REASONS FOR CHANGE
The Committee believes that significant simplification can
be achieved by eliminating the requirement that taxpayers
segregate the earnings and profits of 10/50 companies on the
basis of when such earnings and profits arose.
EXPLANATION OF PROVISION
The provision applies the look-through approach to all
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.\72\ If the Secretary determines that the
taxpayer has not substantiated which limitation category
applies under the look-through approach with respect to all or
a portion of the dividend, such portion is treated as passive
category income for foreign tax credit purposes.
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\72\ Section 1113 of the bill eliminates the separate basket for
dividends from 10/50 companies.
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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 provides
regulatory authority for the Secretary to address the carryback
of foreign tax credits associated with a dividend from a 10/50
company to pre-effective date years.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2002.
5. Attribution of stock ownership through partnerships to apply in
determining section 902 and 960 credits (sec. 1085 of the bill
and secs. 901, 902, and 960 of the Code)
PRESENT LAW
Under section 902, a domestic corporation that receives a
dividend from a foreign corporation in which it owns ten
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 ten
percent or more of the voting stock of a foreign corporation
through a partnership is entitled to a deemed-paid foreign tax
credit.\73\ In Rev. Rul. 71-141,\74\ 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.
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\73\ 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.
\74\ 1971-1 C.B. 211.
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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.'' \75\ 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 ten 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).
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\75\ T.D. 8708, 1997-1 C.B. 137.
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REASONS FOR CHANGE
The Committee believes that a clarification is appropriate
regarding the ability of a domestic corporation owning ten
percent or more of the voting stock of a foreign corporation
through a partnership to claim a deemed-paid foreign tax
credit.
EXPLANATION OF PROVISION
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) ten
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.
6. Clarification of treatment of certain transfers of intangible
property (sec. 1086 of the bill 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 repealed a rule of prior
law 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.\76\
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\76\ Secs. 865(d), 862(a).
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The Taxpayer Relief Act of 1997 did not address the
characterization of the deemed payments for purposes of
applying the foreign tax credit separate limitation
categories.\77\ 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).\78\
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\77\ Sec. 904(d).
\78\ Sec. 904(d)(3).
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REASONS FOR CHANGE
The Committee believes that it is appropriate to treat
payments under section 367(d) the same as royalties for
purposes of applying the separate limitation categories of the
foreign tax credit, and that this treatment should be effective
for all transactions subject to the underlying provision of the
1997 Act.
EXPLANATION OF PROVISION
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 Taxpayer Relief Act of 1997).
7. United States property not to include certain assets acquired by
dealers in ordinary course of trade or business (sec. 1087 of
the bill and sec. 956 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 (``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
(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
(sec. 956(a)). 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 (secs.
956 and 959). 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 (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 (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 (sec. 956(c)(2)).
REASONS FOR CHANGE
The Committee believes that the acquisition of securities
by a controlled foreign corporation in the ordinary course of
its business as a securities dealer generally should not give
rise to an income inclusion as an investment in U.S. property
under the provisions of subpart F.
EXPLANATION OF PROVISION
The provision adds a new exception 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
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.
EFFECTIVE DATE
The 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 foreign corporations end.
8. Election not to use average exchange rate for foreign tax paid other
than in functional currency (sec. 1088 of the bill 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.\79\ 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).
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\79\ Sec. 986(a)(1).
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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.\80\
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\80\ Sec. 986(a)(2).
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REASONS FOR CHANGE
The Committee believes that taxpayers generally should be
permitted to elect whether to translate foreign income tax
payments using an average exchange rate the taxable year or the
exchange rate when the taxes are paid, provided the elected
method continues to be applied consistently unless revoked with
the consent of the Treasury Secretary.
EXPLANATION OF PROVISION
For taxpayers that are required under present law to
translate foreign income tax payments at the average exchange
rate, the provision 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.\81\ 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 provision authorizes the Secretary to
issue regulations that apply the election to foreign income
taxes attributable to a qualified business unit.
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\81\ Electing taxpayers translate foreign income tax payments
pursuant to the same present-law that apply to taxpayers that are
required to translate foreign income taxes using the exchange rates as
of the time such taxes are paid.
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EFFECTIVE DATE
The provision is effective with respect to taxable years
beginning after December 31, 2004.
9. Repeal of withholding tax on dividends from certain foreign
corporations (sec. 1089 of the bill 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.
REASONS FOR CHANGE
The Committee observes that the secondary withholding tax
with respect to dividends paid by certain foreign corporations
has been largely superseded by the branch profits tax and
applicable income tax treaties. Accordingly, the Committee
believes that the tax should be repealed in the interest of
simplification.
EXPLANATION OF PROVISION
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.
10. Provide equal treatment for interest paid by foreign partnerships
and foreign corporations (sec. 1090 of the bill 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.\82\
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.\83\ Therefore, any
interest received from such a foreign partnership is U.S.-
source income.
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\82\ Sec. 861(a)(1).
\83\ Treas. Reg. sec. 1.861-2(a)(2).
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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).\84\
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\84\ Sec. 884(f)(1).
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REASONS FOR CHANGE
The Committee believes that the determination of the source
of interest income received from a foreign partnership or
foreign corporation should be consistent. The Committee
believes that interest payments from a foreign partnership
engaged in a trade or business in the United States should be
sourced in the same manner as interest payments from a foreign
corporation engaged in a trade or business in the United
States.
EXPLANATION OF PROVISION
The provision 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 provision applies only to foreign partnerships
that are principally owned by foreign persons. For this
purpose, a foreign partnership is principally owned by foreign
persons if, in the aggregate, U.S. citizens, resident aliens
and domestic corporations do not own, directly or indirectly,
20 percent (or more) of the capital or profits interests in the
partnership.
EFFECTIVE DATE
This provision is effective for taxable years beginning
after December 31, 2003.
11. Treatment of certain dividends of regulated investment companies
(sec. 1091 of the 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-percent 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-percent 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-percent
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.\85\ 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)).
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\85\ 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.
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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.
REASONS FOR CHANGE
Under present law, a disparity exists between foreign
persons who invest directly in certain interest-bearing and
other securities and a foreign person who invests in such
securities indirectly through U.S. mutual funds. In general,
certain amounts received by the direct foreign investor (or a
foreign investor through a foreign fund) may be exempt from the
U.S. gross-basis withholding tax. In contrast, distributions
from a RIC generally are treated as dividends subject to the
withholding tax, notwithstanding that the distributions may be
attributable to amounts that otherwise could qualify for an
exemption from withholding tax. U.S. financial institutions
often respond to this disparate treatment by forming ``mirror
funds'' outside the United States. The Committee believes that
such disparate treatment should be eliminated so that U.S.
financial institutions will be encouraged to form and operate
their mutual funds within the United States rather than outside
the United States.
Therefore, the Committee believes that, to the extent a RIC
distributes to a foreign person a dividend attributable to
amounts that would have been exempt from U.S. withholding tax
had the foreign person received it directly (such as portfolio
interest and capital gains, including short-term capital
gains), such dividend similarly should be exempt from the U.S.
gross-basis withholding tax. The Committee also believes that
comparable treatment should be afforded for estate tax purposes
to foreign persons who invest in certain assets through a RIC
to the extent that such assets would not be subject to the
estate tax if held directly.
EXPLANATION OF PROVISION
In general
Under the 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 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 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 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 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 bill also extends the special rules for
domestically-controlled REITs to domestically-controlled RICs.
Estate tax treatment
Under the 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 provision generally applies to dividends with respect
to taxable years of RICs beginning after the date of enactment.
With respect to the treatment of a RIC for estate tax purposes,
this provision applies to estates of decedents dying after the
date of enactment. With respect to the treatment of RICs under
section 897 (relating to U.S. real property interests), this
provision is effective on the date of enactment.
I. Other Provisions
1. Special rules for livestock sold on account of weather-related
conditions (sec. 1101 of the bill and secs. 1033 and 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.
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 principle 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.
REASONS FOR CHANGE
The Committee is aware of situations in which cattlemen
sold livestock in excess of their usual business practice as a
result of weather-related conditions, but have been unable to
purchase replacement property because the weather-related
conditions have continued. The Committee believes it is
appropriate to extend the time period for cattlemen to purchase
replacement property in such situations.
EXPLANATION OF PROVISION
The provision 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 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 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. 1102 of the bill 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'').86 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.
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\86\ Treas. Reg. sec. 1.1388-1(a)(1).
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REASONS FOR CHANGE
The Committee believes that the dividend allocation rule
should not apply to the extent that the organizational
documents of a cooperative provide that capital stock dividends
do not reduce the amounts owed to patrons as patronage
dividends. To the extent that capital stock dividends are in
addition to amounts paid under the cooperative's organizational
documents to patrons as patronage dividends, the Committee
believes that those capital stock dividends are not being paid
from earnings from patronage business.
In addition, the Committee believes cooperatives should be
able to raise needed equity capital by issuing capital stock
without dividends paid on such stock causing the cooperative to
be taxed on a portion of its patronage income, and without
preventing the cooperative from being treated as operating on a
cooperative basis.
EXPLANATION OF PROVISION
The provision 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 provision is effective for distributions made in
taxable years ending after the date of enactment.
3. Add vaccines against hepatitis A to the list of taxable vaccines
(sec. 1103 of the bill and sec. 4132 of the Code)
PRESENT LAW
A manufacturer's excise tax is imposed at the rate of 75
cents per dose 87 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.
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\87\ sec. 4131
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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.
REASONS FOR CHANGE
The Committee is aware that the Centers for Disease Control
and Prevention have recommended that children in 17 highly
endemic States be inoculated with a hepatitis A vaccine. The
population of children in the affected States exceeds 20
million. Several of the affected States mandate childhood
vaccination against hepatitis A. The Committee is aware that
the Advisory Commission on Childhood Vaccines has recommended
that the vaccine excise tax be extended to cover vaccines
against hepatitis A. For these reasons, the Committee believes
it is appropriate to include vaccines against hepatitis A as
part of the Vaccine Injury Compensation Program. Making the
hepatitis A vaccine taxable is a first step.88 In
the unfortunate event of an injury related to this vaccine,
families of injured children are eligible for the no-fault
arbitration system established under the Vaccine Injury
Compensation Program rather than going to Federal Court to seek
compensatory redress.
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\88\ The Committee recognizes that, to become covered under the
Vaccine Injury Compensation Program, the Secretary of Health and Human
Services also must list the hepatitis A vaccine on the Vaccine Injury
Table.
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EXPLANATION OF PROVISION
The bill adds any vaccine against hepatitis A to the list
of taxable vaccines. The bill also makes a conforming amendment
to the trust fund expenditure purposes.
EFFECTIVE DATE
The provision is effective for sales and uses of vaccines
beginning on the first day of the first month beginning more
than four weeks after the date of enactment.
4. Expand human clinical trials expenses qualifying for the orphan drug
tax credit (sec. 1104 of the 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.
REASONS FOR CHANGE
The Committee understands that approval for human clinical
testing and designation as a potential treatment for a rare
disease or disorder require separate reviews within the FDA. As
a result, in some cases, a taxpayer may be permitted to begin
human clinical testing prior to a drug being designated as a
potential treatment for a rare disease or disorder. If the
taxpayer delays human clinical testing in order to obtain the
benefits of the orphan drug tax credit, which currently may be
claimed only for expenses incurred after the drug is designated
as a potential treatment for a rare disease or disorder,
valuable time will have been lost and Congress's original
intent in enacting the orphan drug tax credit will have been
partially thwarted. Because taxpayers generally seek
designation of a potential drug as a treatment for a rare
disease or disorder at the time they seek approval to
clinically test such drugs, the Committee believes it is
appropriate to make such expenses related to human clinical
testing that the taxpayer incurs prior to FDA designation
eligible for the orphan drug tax credit to help speed cures to
such insidious diseases.
The Committee also observes that the staff of the Joint
Committee on Taxation identifies present law with respect to
the FDA review dates as a source of complexity and recommends
that the definition of qualifying expenses be expanded to
include those expenses related to human clinical testing
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.\89\
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\89\ Joint Committee on Taxation, Study of the Overall State of the
Federal Tax System and Recommendations for Simplification, Pursuant to
Section 8022(3)(B) of the Internal Revenue Code of 1986 (JCS-3-01),
volume II, April 2001, page 310
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EXPLANATION OF PROVISION
The bill expands qualifying expenses to include those
expenses related to human clinical testing 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. 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.
5. Distributions from publicly traded partnerships treated as
qualifying income of regulated investment company (sec. 1105 of
the bill and secs. 851 and 469(k) of the Code)
PRESENT LAW
Treatment of regulated investment companies
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 (sec. 852(b)). 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 (sec. 851(a)). In addition, the corporation must elect
RIC status, and must satisfy certain other requirements (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 (sec. 851(b)(2)). 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) (sec. 851(b)).
Under present law, no distinction is made under this rule
between a publicly traded partnership (that is treated as a
partnership for Federal tax purposes) and any other
partnership.
The RIC qualification rules include limitations on the
ownership of assets and on the composition of the RIC's assets
(sec. 851(b)(3)). 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 5 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 (sec. 851(d)).
Treatment of publicly traded partnerships
Under present law, a publicly traded partnership is defined
as 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 (sec. 7704(a)), 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 (sec. 7704(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 (sec. 469). 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 (sec. 469(k)). Thus, income or loss from the
publicly traded partnership is treated as separate from income
or loss from other passive activities.
REASONS FOR CHANGE
The Committee understands that publicly traded partnerships
generally are treated as corporations under rules enacted to
address Congress' view that publicly traded partnerships
resemble corporations in important respects.\90\ Publicly
traded partnerships with specified types of income are not
treated as corporations, however, for the reason that if the
income is from sources that are commonly considered to be
passive investments, then there is less reason to treat the
publicly traded partnership as a corporation.\91\ The Committee
understands that these types of publicly traded partnerships
may have improved access to capital markets if their interests
were permitted investments of mutual funds. Therefore, the bill
treats publicly traded partnership interests as permitted
investments for mutual funds (RICs).
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\90\ H.R. Rep. No. 100-391, pt. 2 of 2, at 1066 (1987).
\91\ Id.
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Nevertheless, the Committee believes that permitting mutual
funds to hold interests in a publicly traded partnership should
not give rise to avoidance of unrelated business income tax or
withholding of income tax that would apply if tax-exempt
organizations or foreign persons held publicly traded
partnership interests directly rather than through a mutual
fund. Therefore, the Committee bill requires that present-law
limitations on ownership and composition of assets of mutual
funds apply to any investment in a publicly traded partnership
by a mutual fund. The Committee believes that these limitations
will serve to limit the use of mutual funds as conduits for
avoidance of unrelated business income tax or withholding rules
that would otherwise apply with respect to publicly traded
partnership income.
EXPLANATION OF PROVISION
The provision modifies the 90 percent test with respect to
income of a RIC to include income derived from an interest in
certain publicly traded partnerships. The provision also
modifies the lookthrough rule for partnership income of a RIC
so that it applies only to income from a partnership other than
such publicly traded partnerships.
The provision 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 such
publicly traded partnership interests.
A publicly traded partnership to which the provision
applies is a publicly traded partnership described in section
7704(b) other than one that would satisfy the 90-percent gross
income requirements for publicly traded partnerships if
qualifying income included only income that is qualifying
income described in section 851(b)(2)(A) for a RIC (i.e.,
income that 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).
The provision 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
such a publicly traded partnership, with respect to items
attributable to the interest in the publicly traded
partnership.
The Committee intends that the provision not be used to
avoid tax on the partnership's income in the hands of the
mutual fund shareholders that would be subject to tax or to
withholding if they held the partnership interest directly. The
Committee expects that guidance issued by the Treasury
Department with respect to the provision will provide rules
that carry out this intent.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after the date of enactment.
6. REIT modification provisions (sec. 1106 of the bill and secs. 856
and 857 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 disqualified for any
year in which it does not 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.
Qualified rental income
Amounts received as impermissible ``tenant services
income'' are not treated as rents from real property.\92\ In
general, such amounts are for services rendered to tenants that
are not ``customarily furnished'' in connection with the rental
of real property.\93\ Special rules also permit amounts to be
received from certain ``foreclosure property'' treated as such
for 3 years after the property is acquired by the REIT in
foreclosure after a default (or imminent default) on a lease of
such property or an indebtedness which such property secured.
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\92\ 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.
\93\ Rents for certain personal property leased in connection 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.
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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.\94\ 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.\95\
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\94\ Section 856(d)(2)(B).
\95\ Section 856(d)(8).
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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 due to reasonable cause and
not willful neglect, then the REIT does not lose its REIT
status but instead pays a tax measured by the greater of the
amount by which 90 percent \96\ 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.\97\
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\96\ 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.
\97\ 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).
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Asset requirements
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) \98\ 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, or (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.
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\98\ Section 1361(c)(5), without regard to paragraph (B)(iii)
thereof.
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Straight debt 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.
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 \99\ 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, 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.\100\
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\99\ 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).
\100\ If the excise tax applies, the item is not also reallocated
back to the TRS under section 482.
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Rents subject to the 100 percent excise tax do not include
rents for services of a TRS that are for services customarily
furnished or rendered in connection with the rental of real
property.
They also do not include rents from a TRS that are for real
property or from incidental personal property provided with
such real property.
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. Both RICS and REITs can
make certain ``deficiency dividends'' after the close of the
taxable year, and have these treated as made before the end of
the year. 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.
REASONS FOR CHANGE
The Committee believes that the ``straight debt''
definition of present law may not fully accommodate certain
common REIT financing situations that should be permitted. The
Committee wishes to clarify certain situations that should not
cause loss of REIT status if the securities held by the REIT
should happen to exceed 10 percent of the value of the
borrower. Also, the Committee wishes to clarify the testing
dates for purposes of the provision permitting certain rental
income from a related party to be qualified rental income.
The Committee also believes that is it desirable to provide
express rules for testing a REIT's interest in partnership
assets for certain ``straight debt'' purposes, and to modify
certain other provisions, on a prospective basis.
EXPLANATION OF PROVISION
The provision makes several 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
``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 which either (i) does not
exceed the greater of \1/4\ of 1 percent or 5 percent of the
annual yield to maturity, or (ii) results solely from a default
or the exercise of a prepayment right by the issuer of the
debt.
The second type of contingency that is permitted is one
under which 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.
The provision eliminates the present law rule that allows a
REIT to use the safe harbor when it loans money to a
partnership in which it owns a 20 percent equity interest. The
provision 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 1 percent
of the issuer's outstanding securities (determined without
regard to the new ``look-through'' rules).
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; (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 related
party to be treated as qualified rental income for purposes of
the income tests.\101\
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\101\ The proposal does not modify any of the standards of section
482 as they apply to REITS and to taxable REIT subsidiaries.
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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 102 or are from a TRS and are
for the provision of certain incidental personal property.
Instead, such payments would be 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.
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\102\ Although a REIT could itself provide such services and
receive the income for them 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.
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Hedging rules
The rules governing the tax treatment of arrangements
engaged in by a REIT to reduce interest rate risks are
prospectively conformed to the rules included in section 1221.
95-percent 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.
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; and the rule modifying the treatment of
rents with respect to customary services.
7. Simplification of excise tax imposed on bows and arrows (sec. 1107
of the bill 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.103 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).104 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).105
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\103\ Sec. 4161(b)(1)(A).
\104\ Sec. 4161(b)(2).
\105\ Sec. 4161(b)(1)(B).
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REASONS FOR CHANGE
Under present law, foreign manufacturers and importers of
arrows avoid the 12.4 percent excise tax paid by domestic
manufacturers because the tax is placed on arrow components
rather than finished arrows. As a result, arrows assembled
outside of the United States have a price advantage over
domestically manufactured arrows. The Committee believes it is
appropriate to close this loophole. The Committee also believes
that adjusting the minimum draw weight for taxable bows from 10
pounds to 30 pounds will better target the excise tax to actual
hunting use by eliminating the excise tax on instructional
(``youth'') bows.
EXPLANATION OF PROVISION
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.106 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 provision. The
provision provides that the 12-percent excise tax on arrows
will not apply if the arrow contains an arrow shaft upon which
the tax imposed on arrow components has been paid. 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.
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\106\ 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.
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EFFECTIVE DATE
The provision is effective for articles sold by the
manufacturer, producer, or importer after December 31, 2003.
8. Repeal excise tax on fishing tackle boxes (sec. 1108 of the bill and
sec. 4162 of the Code)
PRESENT LAW
Under 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.
REASONS FOR CHANGE
The Committee observes that fishing ``tackle boxes'' are
little different in design and appearance from ``tool boxes,''
yet the former are subject to a Federal excise tax at a rate of
10 percent, while the latter are not subject to Federal excise
tax. This excise tax can create a sufficiently large price
difference that some fishermen will choose to use a ``tool
box'' to hold their hooks and lures rather than a traditional
``tackle box.'' The Committee finds that such a distortion of
consumer choice places an inappropriate burden on the
manufacturers and purchasers of traditional tackle boxes,
particularly in comparison to the modest amount of revenue
raised by the present-law provision, and that this burden
warrants repeal of the tax. The Committee also believes that
elimination of the excise tax on tackle boxes will provide some
modest simplification of the tax system for both taxpayers and
the Internal Revenue Service.
EXPLANATION OF PROVISION
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, 2003.
9. Income tax credit for cost of carrying tax-paid distilled spirits in
wholesale inventories (sec. 1109 of the bill and new sec. 5011
of the Code)
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.
REASONS FOR CHANGE
Under current law, wholesale importers of distilled spirits
are not required to pay the Federal excise tax on imported
spirits until after the product is removed from a bonded
warehouse for sale to a retailer. In contrast, the tax on
domestically produced spirits is included as part of the
purchase price and passed on from the supplier to wholesaler.
It is the Committee's understanding that in some instances,
wholesalers can carry this tax-paid inventory for an average of
60 days before selling it to a retailer. The Committee believes
it is appropriate to provide an income tax credit to
approximate the interest charge--more commonly referred to as
float--that results from carrying tax-paid distilled spirits in
inventory.
EXPLANATION OF PROVISION
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 107 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.
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\107\ Distilled spirits that are imported in bulk and then bottled
domestically qualify as domestically bottled distilled spirits.
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The credit cannot be carried back to a taxable year
beginning before January 1, 2004.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003.
10. Capital gains treatment to apply to outright sales of timber by
landowner (sec. 1110 of the bill 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)).
REASONS FOR CHANGE
The Committee believes that the requirement that the owner
of timber retain an economic interest in the timber in order to
obtain capital gain treatment under section 631(b) results in
poor timber management. Under present law, the buyer, when
cutting and removing timber, has no incentive to protect young
or other uncut trees because the buyer only pays for the timber
that is cut and removed. Therefore, the Committee bill
eliminates this requirement and provides for capital gain
treatment under section 631(b) in the case of outright sales of
timber.
EXPLANATION OF PROVISION
Under the provision, 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, 2003.
11. Repeal of excise tax on sonar devices suitable for finding fish
(sec. 1111 of the 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.\108\ A three-percent rate, however, applies
to the sale of electric outboard motors and sonar devices
suitable for finding fish.\109\ Further, the tax imposed on the
sale of electric outboard motors and 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.\110\
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\108\ Sec. 4161(a)(1).
\109\ Sec. 4161(a)(2).
\110\ Sec. 4162(b).
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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.
REASONS FOR CHANGE
The Committee observes that the current exemption for
certain forms of sonar devices has the effect of exempting
almost all of the devices currently on the market. The
Committee understands that only one form of sonar device is not
exempt from the tax, those units utilizing light-emitting diode
(``LED'') display technology. The Committee understands that
LED devices are not currently exempt from the tax because the
technology was developed after the exemption for the other
technologies was enacted. In the Committee's view, the
application of the tax to LED display devices and not to
devices performing the same function with a different
technology, creates an unfair advantage for the exempt devices.
Because most of the devices on the market already are exempt,
the Committee believes it is appropriate to level the playing
field by repealing the tax imposed on all sonar devices
suitable for finding fish. The Committee believes this is a
more suitable solution than exempting a device from the tax
based on the type of technology used.
EXPLANATION OF PROVISION
The provision repeals the excise tax on all sonar devices
suitable for finding fish.
EFFECTIVE DATE
The provision is effective articles sold by the
manufacturer, producer, or importer after December 31, 2003.
12. Taxation of certain settlement funds (sec. 1112 of the bill and
sec. 468B of the Code)
PRESENT LAW
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'').
In general, section 468(B) 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.
REASONS FOR CHANGE
The Committee believes that these environmental escrow
accounts, established under court consent decrees, are
essential for the EPA to resolve or satisfy claims under the
Comprehensive Environmental Response, Compensation and
Liability Act of 1980. Uncertainty as to the tax treatment of
these settlement funds may prevent taxpayers from entering into
prompt settlements with the EPA for the cleanup of Superfund
hazardous waste sites and reduce the ultimate amount of funds
available for the sites' cleanup. As these settlement funds are
controlled by the government, the Committee believes it is
appropriate to establish that these funds are to be treated as
beneficially owned by the United States.
EXPLANATION OF PROVISION
The provision 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 or
satisfying 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, disbursed to the government or an agency or
instrumentality thereof (e.g., the EPA).
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003.
13. Suspension of occupational taxes relating to distilled spirits,
wine, and beer (sec. 1113 of the bill and 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 regime 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: \111\
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\111\ A reduced rate of tax in the amount of $500.00 is imposed on
small proprietors (secs. 5081(b) and 5091(b)).
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Distilled spirits and wines (sec. 5081)--$1,000 per year, per
premise
Brewers (sec. 5091)--$1,000 per year, per premise
Wholesale dealers (sec. 5111): Liquors, wines, or beer--$500
per year
Retail dealers (sec. 5121): Liquors, wines, or beer--$250 per
year
Nonbeverage use of distilled spirits (sec. 5131): $500 per year
Industrial use of distilled spirits (sec. 5276): $250 per year
The Code requires every wholesale or retail dealer in
liquors, wine or beer to keep records of their
transactions.\112\ A delegate of the Secretary is authorized to
inspect the records of any dealer during business hours.\113\
There are penalties for failing to comply with the
recordkeeping requirements.\114\
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\112\ Secs. 5114 and 5124.
\113\ Sec. 5146.
\114\ Sec. 5603.
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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 of chapter 51 of the Code;
or
(3) A person who is not required to pay special
occupational tax as a wholesale dealer in liquors.\115\
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\115\ 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)).
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Violation of this restriction is punishable by $1,000 fine,
imprisonment of one year, or both.\116\ A violation also makes
the alcohol subject to seizure and forfeiture.\117\
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\116\ Sec. 5687.
\117\ Sec. 7302.
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REASONS FOR CHANGE
The special occupational tax is not a tax on alcoholic
products but rather operates as a license fee on businesses.
The Committee believes that this tax places an unfair burden on
business owners. However, the Committee recognizes that the
recordkeeping and registration authorities applicable to
wholesalers and retailers engaged in such businesses are
necessary enforcement tools to ensure the protection of the
revenue arising from the excise taxes on these products. Thus,
the Committee believes it appropriate to suspend the tax for a
three-year period, while retaining present-law recordkeeping
and registration requirements.
EXPLANATION OF 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 will 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.
EFFECTIVE DATE
The provision is effective on the date of enactment.
TITLE II--PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH CORPORATE EARNINGS
STRIPPING AND EXPATRIATION
1. Reduction in potential for earnings stripping by further limiting
deduction for interest on certain indebtedness (sec. 2001 of
the bill 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. Section 163(j)
specifically addresses earnings stripping involving interest
payments, by limiting the deductibility of interest paid to
certain related parties (``disqualified interest''),\118\ 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.
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\118\ This interest also may include interest paid to unrelated
parties in certain cases in which a related party guarantees the debt.
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REASONS FOR CHANGE
The Committee believes that it is necessary to tighten the
earnings stripping rules in order to: (1) prevent the erosion
of the U.S. tax base; (2) curtail corporate inversion
transactions; and (3) decrease the competitive advantage that
U.S. tax law conveys to foreign-based companies operating in
the United States.
As a matter of practice, foreign-based corporate groups may
lower their U.S. tax liability by having their U.S.
subsidiaries make tax-deductible interest payments to their
foreign parents or foreign affiliates. These interest payments
reduce the foreign-based group's U.S. income that is taxed at
35 percent, but the interest income received by the foreign
parent or foreign affiliate is often taxed at a very low rate
or is not taxed at all. This practice reduces the amount of tax
collected by the U.S. Treasury.
As a result of hearings on this issue, the Committee agrees
with the Treasury Department that the ability of foreign-based
companies to strip earnings out of the United States through
the use of related-party interest payments provides the
``juice,'' or immediate financial incentive, for a company to
invert (reincorporate in a foreign country). The current U.S.
earnings stripping rules and the significant tax advantages
that they give foreign companies often leave U.S. companies
with the undesirable choice of: (1) going out of business; (2)
being bought by their foreign competitor that enjoys
significant tax advantages that come with foreign ownership; or
(3) inverting and operating under the same rules as the foreign
competition.
The Committee also agrees with the findings of the Treasury
Department that abusive earnings stripping opportunities are
not limited to inverted companies, but rather are available to
foreign-based companies generally. The current earnings
stripping rules provide an advantage to foreign ownership over
U.S. ownership, even in the United States. This advantage comes
from the ability of foreign-based companies to ``strip'' or
``export'' their earnings from the United States, thus lowering
their net cost of doing business in the United States relative
to their U.S.-owned competitors. This advantage helps to
explain why more than 78 percent of recent acquisitions between
U.S. and foreign companies resulted in the foreign company
acquiring the U.S. company.
While foreign investment in the United States is generally
positive for the U.S. economy, the acquisition of U.S.-based
companies by their foreign competition eventually results in
the shift of jobs and research outside the United States. The
Committee believes that U.S. companies deserve the opportunity
to compete fairly against their foreign counterparts,
especially in the United States. The Committee believes that
tightening the current rules will provide a more level playing
field on which U.S. companies can compete.
EXPLANATION OF PROVISION
The bill strengthens the earnings stripping provisions of
section 163(j) in several respects. The debt-equity threshold
is eliminated, carryovers of excess limitation are eliminated,
and carryovers of disallowed interest are limited to 10 years.
In addition, the ``adjusted taxable income'' percentage
threshold is lowered from 50 percent to 25 percent with respect
to disqualified interest other than interest paid to unrelated
parties on debt that is subject to a related-party guarantee
(hereinafter referred to as ``guaranteed debt'').\119\ Interest
on guaranteed debt generally is not subject to the lowered
threshold under the bill.\120\ Disallowed interest is treated
as interest on related-party debt to the extent thereof, and
then as interest on guaranteed debt to the extent of any
excess, for purposes of determining whether a deduction is
allowable for such interest when carried forward to another
taxable year.
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\119\ This lowered threshold is phased in over two years. The
threshold is 35 percent for a taxpayer's first taxable year beginning
after 2003. The remainder of this discussion describes the provisions
of the bill as fully phased-in.
\120\ However, a taxpayer can make a one-time election to apply to
a 30-percent threshold for purposes of determining the disallowance
amount with respect to all of its disqualified interest, in which case
no distinction is made between guaranteed debt and other debt. This
election is not available to taxpayers involved in certain inversion
transactions completed after 1996.
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The bill applies the different percentage thresholds to
interest on related-party debt and interest on guaranteed debt
by disallowing all disqualified interest, subject to a cap
equal to the sum of ``excess interest expense'' and ``excess
related party interest expense.'' Excess interest expense is
defined as the excess of net interest expense over 50 percent
of adjusted taxable income. Excess related party interest
expense is determined by subtracting 25 percent of adjusted
taxable income from the lesser of: (1) interest on related-
party debt, or (2) net interest expense. In no event can the
disallowance under the provision reduce the taxpayer's
deduction for interest expense below the sum of: (1) the amount
of interest income included in the gross income of the
taxpayer, and (2) 25 percent of adjusted taxable income.
The following examples illustrate the basic operation of
the bill:
Example 1.--Foreign Parent owns all the stock of U.S.
Subsidiary (``U.S. Sub''). U.S. Sub has adjusted taxable income
of $100, incurs interest expense of $70 on debt owed to Foreign
Parent, incurs interest expense of $5 on non-guaranteed debt
owed to unrelated third parties, and has no interest income or
other interest expense. Under the bill, U.S. Sub has $70 of
disqualified interest, the disallowance of which is subject to
a cap equal to the sum of excess interest expense ($75 - $50 =
$25) and excess related party interest expense ($70 - $25 =
$45), or $70. Under the special disallowance limit, however,
the provision cannot cause U.S. Sub's interest expense
deduction to fall below $25. Thus, only $50 of interest is
disallowed, and U.S. Sub can deduct its $5 of unrelated-party
interest and $20 of its related-party interest.
Example 2.--Same as Example 1, except U.S. Sub incurs $25
of interest expense on non-guaranteed debt owed to unrelated
third parties and $30 of interest expense on debt owed to
Foreign Parent. Under the bill, U.S. Sub has $30 of
disqualified interest, the disallowance of which is subject to
a cap equal to the sum of excess interest expense ($55 - $50 =
$5) and excess related party interest expense ($30 - $25 = $5),
for $10 of disallowance.
Example 3.--Same as Example 2, except U.S. Sub also incurs
$20 of interest expense on debt owed to unrelated third
parties, subject to a guarantee by Foreign Parent. Under the
bill, U.S. Sub has $30 + $20 = $50 of disqualified interest,
the disallowance of which is subject to a cap equal to the sum
of excess interest expense ($75 - $50 = $25) and excess related
party interest expense ($30 - $25 = $5), for $30 of
disallowance. This example illustrates how the bill effectively
applies the present-law 50-percent threshold to interest on
guaranteed debt, subjecting only interest on debt owed to
related parties to the lowered threshold under the bill.
Example 4.--Same as Example 3, except U.S. Sub also earns
$10 of interest income. Under the bill, U.S. Sub has $30 + $20
= $50 of disqualified interest, the disallowance of which is
subject to a cap equal to the sum of excess interest expense
($65 - $50 = $15) and excess related party interest expense
($30 - $25 = $5), for $20 of disallowance.
Example 5.--Same as Example 4, except U.S. Sub earns $50 of
interest income. Under the bill, U.S. Sub has $30 + $20 = $50
of disqualified interest, the disallowance of which is subject
to a cap equal to the sum of excess interest expense ($25 - $50
= $0) and excess related party interest expense ($25 - $25 =
$0), thus yielding no disallowance. Examples 4 and 5 illustrate
the operation of the interest-income netting rules.
The bill continues the present-law rules in the case of
taxable REIT subsidiaries.
EFFECTIVE DATE
The provision generally is effective for taxable years
beginning after December 31, 2003. For purposes of applying the
ten-year limit on carryovers of interest, amounts carried to
any taxable year beginning after December 31, 2003 are treated
as having been first disallowed for the most recent taxable
year beginning before January 1, 2004. For taxpayers involved
in certain inversion transactions completed after 1996, the
provision is effective for taxable years ending after March 4,
2003, with a similar rule for carryovers. In addition, such
taxpayers are subject to the fully reduced 25-percent threshold
immediately, with no phase-in.
2. Tax treatment of expatriated entities (sec. 2002 of the bill 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 is generally
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 (sections 951-964) and the
passive foreign investment company rules (sections 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.,
sections 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 sections 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.
REASONS FOR CHANGE
The Committee believes that corporate inversion
transactions are a symptom of larger problems with our current
uncompetitive system for taxing U.S.-based global businesses
and are also indicative of the unfair advantages that our tax
laws convey to foreign ownership. The bill addresses the
underlying problems with the U.S. system for taxing its global
businesses and contains several provisions to remove the
incentives for entering into inversion transactions. Imposing
full U.S. tax on gains of companies undertaking an inversion
transaction is one such provision that helps to remove the
incentive to enter into an inversion transaction.
EXPLANATION OF PROVISION
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 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 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.
3. Excise tax on stock compensation of insiders in expatriated
corporations (sec. 2003 of the bill and secs. 162(m), 275(a),
and new sec. 4985 of the Code)
PRESENT LAW
The income taxation of a nonstatutory \121\ 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.\122\ 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.\123\
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\121\ 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.
\122\ 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 incomes as ordinary income in the first taxable year in which the
option is either transferable or not subject to a substantial risk of
forfeiture.
\123\ 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.
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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.
REASONS FOR CHANGE
The Committee is concerned that, while shareholders are
generally required to recognize gain upon stock inversion
transactions, executives holding stock options and certain
stock-based compensation are not taxed upon such transactions.
Since such executives are often instrumental in deciding
whether to engage in inversion transactions, the Committee
believes that, upon certain inversion transactions, it is
appropriate to impose an excise tax on certain executives
holding stock options and stock-based compensation. Because
shareholders are taxed at the capital gains rate upon inversion
transactions, the Committee believes that it is appropriate to
impose the excise tax at an equivalent rate.
EXPLANATION OF PROVISION
Under the provision, 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.
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,\124\ 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)),\125\ directors, and 10-percent-or-greater owners of
private and publicly-held corporations.
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\124\ 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.
\125\ 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.
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The excise tax is imposed on a disqualified individual of
an expatriated corporation (as previously 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
previously defined in the bill.
Specified stock compensation subject to the excise tax
includes any payment \126\ (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 such specified stock
compensation is subject to a substantial risk of forfeiture or
is exercisable at the time of the inversion transaction.
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 deferred compensation if company stock is one of
the actual or deemed investment options under the nonqualified
deferred compensation plan.
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\126\ 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.
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Specified stock compensation includes a compensation
arrangement that gives the disqualified individual an economic
stake substantially similar to that of a corporate shareholder.
Thus, 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 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. By contrast, 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.
The excise tax applies to any such 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 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 twelve-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.
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 the stock price at the valuation date; the exercise
price under the option; the remaining term of the option; the
volatility of the underlying stock and the expected dividends
on it; and 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 revenue procedures 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 revenue procedure
issued under section 280G (except that the full remaining term
must be used and recalculation is not permitted).
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.
4. Reinsurance of U.S. risks in foreign jurisdictions (sec. 2004 of the
bill 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 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.\127\ 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.\128\ 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.
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\127\ Sec. 845(a).
\128\ See S. Rep. No. 97-494, 99th Cong., 2d Sess., 337 (1982)
(describing provisions relating to the repeal of modified coinsurance
provisions).
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REASONS FOR CHANGE
The Committee is concerned that reinsurance transactions
are being used to allocate income, deductions, or other items
inappropriately among U.S. and foreign related persons. The
Committee is concerned that foreign related party reinsurance
arrangements may be a technique for eroding the U.S. tax base.
The Committee believes that the provision of present law
permitting the Treasury Secretary to allocate or recharacterize
items related to a reinsurance agreement should be applied to
prevent misallocation, improper characterization, or to make
any other adjustment in the case of such reinsurance
transactions between U.S. and foreign related persons (or
agents or conduits). The Committee also wishes to clarify that,
in applying the authority with respect to reinsurance
agreements, the amount, source or character of the items may be
allocated, recharacterized or adjusted.
EXPLANATION OF PROVISION
The bill clarifies the rules of section 845, relating to
authority for the 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 \129\ be exercised in a
manner similar to the authority under section 482 for the
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.
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\129\ The authority to allocate, recharacterize or make other
adjustments was granted in connection with the repeal of provisions
relating to modified coinsurance transactions.
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No regulations have been issued under section 845(a). It is
expected that the 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.
5. Modification of the tax treatment of individual expatriates (sec.
2005 of the bill and secs. 877, 2107, 2501 and 6039G of the
Code)
PRESENT LAW
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. Nonresidents who
are not U.S. citizens 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.
An individual who relinquishes his or her U.S. citizenship
or terminates his or her U.S. residency \130\ with a principal
purpose of avoiding U.S. taxes is subject to an alternative
method of income taxation for the 10 taxable years ending after
the citizenship relinquishment or residency termination (the
``alternative tax regime''). The alternative tax regime
modifies the rules generally applicable to the taxation of
nonresident noncitizens. For the 10-year period, the individual
is subject to tax only on U.S.-source income at the rates
applicable to U.S. citizens, rather than the rates applicable
to nonresident noncitizens. However, for this purpose, U.S.-
source income has a broader scope than it does for normal U.S.
Federal tax purposes and includes, for example, gain from the
sale of U.S. corporate stock or debt obligations. The
alternative tax regime applies only if it results in a higher
U.S. tax liability than the liability that would result if the
individual were taxed as a nonresident noncitizen.
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\130\ The alternative tax regime applies to long-term residents of
the United States that have terminated their residency with a principal
purpose of avoiding U.S. tax. A ``long-term resident'' is any
individual who was a lawful permanent resident of the United States for
at least 8 out of the 15 taxable years ending with the year in which
such termination occurs. In applying the 8-year test, an individual is
not considered to be a lawful permanent resident for any year in which
the individual is treated as a resident of another country under a
treaty tiebreaker rule (and the individual does not elect to waive the
benefits of such treaty).
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In addition, the alternative tax regime includes special
estate and gift tax rules. Under present law, estates of
nonresident noncitizens are subject to U.S. estate tax on U.S.-
situated property. For these purposes, stock in a foreign
corporation generally is not treated as U.S.-situated property,
even if the foreign corporation itself owns U.S.-situated
property. However, a special estate tax rule (sec. 2107)
applies to former citizens and former long-term residents who
are subject to the alternative tax regime. Under this rule,
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, if the former citizen or former long-term
resident dies within 10 years of citizenship relinquishment or
residency termination. This rule prevents former citizens and
former long-term residents who are subject to the alternative
tax regime from avoiding U.S. estate tax through the expedient
of transferring U.S.-situated assets to a foreign corporation
(subject to income tax on any appreciation under section 367).
In addition, under the alternative tax regime, the individual
is subject to gift tax on gifts of U.S.-situated intangibles,
such as U.S. stock, made during the 10 years following
citizenship relinquishment or residency termination.
Anti-abuse rules are provided to prevent the circumvention
of the alternative tax regime. Accordingly, the alternative tax
regime generally applies to an exchange of property that gives
rise to U.S.-source income for property that gives rise to
foreign source income. In addition, amounts earned by former
citizens and former long-term residents through controlled
foreign corporations are subject to the alternative tax regime,
and the 10-year liability period is suspended during any time a
former citizen's or former long-term resident's risk of loss
with respect to property subject to the alternative tax regime
is substantially diminished, among other measures.
A U.S. citizen who relinquishes citizenship or a long-term
resident who terminates residency is treated as having done so
with a principal purpose of tax avoidance (and, thus, generally
is subject to the alternative tax regime described above) 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.\131\ Certain categories of individuals 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.
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\131\ The income tax liability and net worth thresholds under
section 877(a)(2) for 2003 are $122,000 and $608,000, respectively. See
Rev. Proc. 2002-70, 2002-46 I.R.B. 845.
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Under present law, the Immigration and Nationality Act
governs the determination of when a U.S. citizen is treated for
U.S. Federal tax purposes as having relinquished citizenship.
Similarly, 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
laws (or is treated as a resident of another country under a
tax treaty and does not waive the benefits of such treaty). In
view of this reliance on immigration-law status, it is possible
in many instances for a U.S. citizen or resident to convert his
or her Federal tax status to that of a nonresident noncitizen
without notifying the IRS.
Individuals subject to the alternative tax regime are
required to provide certain tax information, including tax
identification numbers, upon relinquishment of citizenship or
termination of residency (on IRS Form 8854, Expatriation
Initial Information Statement). In the case of an individual
with a net worth of at least $500,000, the individual also must
provide detailed information about the individual's assets and
liabilities. The penalty for failure to provide the required
tax information is the greater of $1,000 or five percent of the
tax imposed under the alternative tax regime for the year.\132\
In addition, the U.S. Department of State and other
governmental agencies are required to provide this information
to the IRS.
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\132\ The penalty applies for each year of the 10-year period
beginning on the date the individual ceases to be a U.S. citizen or
resident.
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Former citizens and former long-term residents who are
subject to the alternative tax regime also are required to file
annual income tax returns, but only in the event that they owe
U.S. Federal income tax. If a tax return is required, the
former citizen or former long-term resident is required to
provide the IRS with a statement setting forth (generally by
category) all items of U.S.-source and foreign-source gross
income, but no detailed information with respect to all assets
held by the individual.
REASONS FOR CHANGE
The Committee believes there are several difficulties in
administering the present-law alternative tax regime. One such
difficulty is that the IRS is required to determine the
subjective intent of taxpayers who relinquish citizenship or
terminate residency. The present-law presumption of a tax-
avoidance purpose in cases in which objective income tax
liability or net worth thresholds are exceeded mitigates this
problem to some extent. However, the present-law rules still
require the IRS to make subjective determinations of intent in
cases involving taxpayers who fall below these thresholds, as
well for certain taxpayers who exceed these thresholds but are
nevertheless allowed to seek a ruling from the IRS to the
effect that they did not have a principal purpose of tax
avoidance. The Committee believes that the replacement of the
subjective determination of tax avoidance as a principal
purpose for citizenship relinquishment or residency termination
with objective rules will result in easier administration of
the tax regime for individuals who relinquish their citizenship
or terminate residency.
Similarly, present-law information-reporting and return-
filing provisions do not provide the IRS with the information
necessary to administer the alternative tax regime. Although
individuals are required to file tax information statements
upon the relinquishment of their citizenship or termination of
their residency, difficulties have been encountered in
enforcing this requirement. The Committee believes that the tax
benefits of citizenship relinquishment or residency termination
should be denied an individual until he or she provides the
information necessary for the IRS to enforce the alternative
tax regime. The Committee also believes an annual report
requirement and a penalty for the failure to comply with such
requirement are needed to provide the IRS with sufficient
information to monitor the compliance of former U.S. citizens
and long-term residents.
Individuals who relinquish citizenship or terminate
residency for tax reasons often do not want to fully sever
their ties with the United States; they hope to retain some of
the benefits of citizenship or residency without being subject
to the U.S. tax system as a U.S. citizen or resident. These
individuals generally may continue to spend significant amounts
of time in the United States following citizenship
relinquishment or residency termination--approximately four
months every year--without being treated as a U.S. resident.
The Committee believes that provisions in the bill that impose
full U.S. taxation if the individual is present in the United
States for more than 30 days in a calendar year will
substantially reduce the incentives to relinquish citizenship
or terminate residency for individuals who desire to maintain
significant ties to the United States.
With respect to the estate and gift tax rules, the
Committee is concerned that present-law does not adequately
address opportunities for the avoidance of tax on the value of
assets held by a foreign corporation whose stock the individual
transfers. Thus, the provision imposes gift tax under the
alternative tax regime in the case of gifts of certain stock of
a closely held foreign corporation.
EXPLANATION OF PROVISION
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.\133\
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\133\ These proposals 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.
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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 $122,000 (adjusted for inflation after 2003)
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 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 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 \134\ generally do
not apply for this purpose. However, for individuals with
certain ties to countries other than the United States \135\
and individuals with minimal prior physical presence in the
United States,\136\ 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), who meets the
requirements the Secretary may prescribe in regulations. No
more than 30 days may be disregarded during any calendar year
under this rule.
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\134\ Sections 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
\135\ 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.
\136\ 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. Section 7701(b)(3)(D)(ii).
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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 February 27,
2003.
6. Reporting of taxable mergers and acquisitions (sec. 2006 of the bill
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)).
REASONS FOR CHANGE
The Committee believes that administration of the tax laws
would be improved by greater information reporting with respect
to taxable non-cash transactions, and that the Secretary's
authority to require such enhanced reporting should be made
explicit in the Code.
EXPLANATION OF PROVISION
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 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 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 \137\) whose name is required to be
set forth in such return a written statement showing:
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\137\ In the case of a nominee, the nominee must furnish the
information to the shareholder in the manner prescribed by the
Secretary.
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(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 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 is 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.
7. Studies (sec. 2007 of the 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
(i.e., non-market) prices for transactions between group
members.
Under section 482, the 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 market
transactions.
Present law also 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''),\138\ 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.
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\138\ This interest also may include interest paid to unrelated
parties in certain cases in which a related party guarantees the debt.
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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.
REASONS FOR CHANGE
The Committee believes that it is important to evaluate the
effectiveness of the current transfer pricing rules and
compliance efforts with respect to related-party transactions
to ensure that income is not being shifted outside of the
United States. The Committee also believes that it is necessary
to review current U.S. income tax treaties to identify any
inappropriate reductions in withholding tax rates that may
create opportunities for shifting income outside the United
States. In addition, the Committee believes that the impact of
the provisions of this bill on earnings stripping and inversion
transactions should be studied.
EXPLANATION OF PROVISION
The bill requires the 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 earnings stripping and
inversion transactions.
EFFECTIVE DATE
The tax treaty study required under the provision is due no
later than June 30, 2004. The transfer pricing study required
under the provision is due no later than June 30, 2004. The
earnings stripping and inversions study required under the
provision is due no later than December 31, 2005.
TITLE III--PROVISIONS RELATING TO TAX SHELTERS
A. Taxpayer Related Provisions
1. Penalty for failure to disclose reportable transactions (sec. 3001
of the bill 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.\139\
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\139\ 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.
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There are six categories of reportable transactions. The
first category is any transaction that is the same as (or
substantially similar to) \140\ 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'').\141\
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\140\ 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).
\141\ Treas. Reg. sec. 1.6011-4(b)(2).
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The second category is any transaction that is offered
under conditions of confidentiality. In general, if a
taxpayer's disclosure of the structure or tax aspects of the
transaction is limited in any way by an express or implied
understanding or agreement with or for the benefit of any
person who makes or provides a statement, oral or written, as
to the potential tax consequences that may result from the
transaction, it is considered offered under conditions of
confidentiality (whether or not the understanding is legally
binding).\142\
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\142\ Treas. Reg. sec. 1.6011-4(b)(3).
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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.\143\
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\143\ Treas. Reg. sec. 1.6011-4(b)(4).
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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.\144\
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\144\ Treas. Reg. sec. 1.6011-4(b)(5). IRS Rev. Proc. 2003-24,
2003-11 I.R.B. 599, exempts certain types of losses from this
reportable transaction category.
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The fifth category of reportable transactions refers to any
transaction done by certain taxpayers \145\ 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.\146\
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\145\ 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.
\146\ Treas. Reg. sec. 1.6011-4(b)(6). IRS Rev. Proc. 2003-25,
2003-11 I.R.B. 601, exempts certain types of transactions from this
reportable transaction category.
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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.\147\
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\147\ Treas. Reg. sec. 1.6011-4(b)(7).
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Under present law, there is no specific penalty for failing
to disclose a reportable transaction; however, such a failure
may 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.\148\
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\148\ 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. On December 31,
2002, the Treasury Department and IRS issued proposed regulations under
sections 6662 and 6664 (REG-126016-01) that limit the defenses
available to the imposition of an accuracy-related penalty in
connection with a reportable transaction when the transaction is not
disclosed.
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REASONS FOR CHANGE
The Committee believes that the best way to combat tax
shelters is to be aware of them. The Treasury Department, using
the tools available, issued regulations requiring disclosure of
certain transactions and requiring organizers and promoters of
tax-engineered transactions to maintain customer lists and make
these lists available to the IRS. Nevertheless, the Committee
believes that additional legislation is needed to provide the
Treasury Department with additional tools to assist its efforts
to curtail abusive transactions. Moreover, the Committee
believes that a penalty for failing to make the required
disclosures, when the imposition of such penalty is not
dependent on the tax treatment of the underlying transaction
ultimately being sustained, will provide an additional
incentive for taxpayers to satisfy their reporting obligations
under the new disclosure provisions.
EXPLANATION OF PROVISION
In general
The provision 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 provision does not define the terms ``listed
transaction'' \149\ or ``reportable transaction,'' nor does the
provision explain the type of information that must be
disclosed in order to avoid the imposition of a penalty.
Rather, the provision authorizes the Treasury Department to
define a ``listed transaction'' and a ``reportable
transaction'' under section 6011.
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\149\ The provision states 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.
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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
penalty can be rescinded (or abated) only if 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. Thus, a revenue agent, an Appeals officer, or any
other IRS personnel cannot rescind the penalty. 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.\150\ 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.
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\150\ 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)).
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EFFECTIVE DATE
The provision is effective for returns and statements the
due date for which is after the date of enactment.
2. Modifications to the accuracy-related penalties for listed
transactions and reportable transactions having a significant
tax avoidance purpose (sec. 3002 of the bill 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.\151\ 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.\152\
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\151\ Sec. 6662.
\152\ Sec. 6662(d)(2)(B).
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Special rules apply with respect to tax shelters.\153\ 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.
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\153\ Sec. 6662(d)(2)(C).
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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.154 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.155
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\154\ Sec. 6664(c).
\155\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec.
1.6664-4(c).
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REASONS FOR CHANGE
Because disclosure is so vital to combating abusive tax
avoidance transactions, the Committee believes that taxpayers
should be subject to a strict liability penalty on an
understatement of tax that is attributable to non-disclosed
listed transactions or non-disclosed reportable transactions
that have a significant purpose of tax avoidance. Furthermore,
in order to deter taxpayers from entering into tax avoidance
transactions, the Committee believes that a more meaningful
(but not a strict liability) accuracy-related penalty should
apply to such transactions even when disclosed.
EXPLANATION OF PROVISION
In general
The provision 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'').156 The penalty rate and
defenses available to avoid the penalty vary depending on
whether the transaction was adequately disclosed.
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\156\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meanings as used for purposes of the
penalty for failing to disclose reportable transactions.
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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 rate 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),157 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.
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\157\ 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.
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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 6011,158 (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.
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\158\ See the previous discussion regarding the penalty for failing
to disclose a reportable transaction.
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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 159 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 160 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.
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\159\ 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).
\160\ 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.
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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.161 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.
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\161\ 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).
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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
this provision 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 this provision shall not apply to
any portion of an understatement to which a fraud penalty is
applied under section 6663.
EFFECTIVE DATE
The provision is effective for taxable years ending after
the date of enactment.
3. Tax shelter exception to confidentiality privileges relating to
taxpayer communications (sec. 3003 of the bill 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.
REASONS FOR CHANGE
The Committee believes that the rule currently applicable
to corporate tax shelters should be applied to all tax
shelters, regardless of whether or not the participant is a
corporation.
EXPLANATION OF PROVISION
The provision 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 provision is effective with respect to communications
made on or after the date of enactment.
4. Statute of limitations for unreported listed transactions (sec. 3004
of the bill and sec. 6501 of the Code)
PRESENT LAW
In general, the Code requires that taxes be assessed within
three years 162 after the date a return is
filed.163 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.164 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.165
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\162\ Sec. 6501(a).
\163\ 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)).
\164\ Sec. 6501(e).
\165\ Sec. 6501(c).
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REASONS FOR CHANGE
The Committee has noted that some taxpayers and their
advisors have been employing dilatory tactics and failing to
cooperate with the IRS in an attempt to avoid liability because
of the expiration of the statute of limitations. The Committee
accordingly believes that it is appropriate to extend the
statute of limitations for unreported listed transactions.
EXPLANATION OF PROVISION
The provision 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 166 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.167
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\166\ The term ``listed transaction'' has the same meaning as
described in a previous provision regarding the penalty for failure to
disclose reportable transactions.
\167\ 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.
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EFFECTIVE DATE
The provision is effective for taxable years with respect
to which the period for assessing a deficiency did not expire
before the date of enactment.
5. Disclosure of reportable transactions by material advisors (sec.
3005 of the bill 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.168 A ``tax
shelter'' means any investment with respect to which the tax
shelter ratio 169 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).170
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\168\ Sec. 6111(a).
\169\ 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.
\170\ Sec. 6111(c).
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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.171
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\171\ Sec. 6111(d).
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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,'' 172 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.173 Certain exceptions are provided with
respect to the second category of transactions.174
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\172\ Treas. Reg. sec. 301.6111-2(b)(2).
\173\ Treas. Reg. sec. 301.6111-2(b)(3).
\174\ Treas. Reg. sec. 301.6111-2(b)(4).
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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.175
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\175\ 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).
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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
$500.176 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.
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\176\ Sec. 6707.
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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.
REASONS FOR CHANGE
The Committee believes that providing a single, clear
definition regarding the types of transactions that must be
disclosed by taxpayers and material advisors, coupled with more
meaningful penalties for failing to disclose such transactions,
are necessary tools if the effort to curb the use of abusive
tax avoidance transactions is to be effective.
EXPLANATION OF PROVISION
Disclosure of reportable transactions by material advisors
The provision repeals the present law rules with respect to
registration of tax shelters. Instead, the provision requires
each material advisor with respect to any reportable
transaction (including any listed transaction) 177
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.
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\177\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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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.178
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\178}\See the previous discussion regarding the disclosure
requirements under new section 6707A.
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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 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 for such
advice or assistance.
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 provision repeals the present-law penalty for failure
to register tax shelters. Instead, the provision 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).179 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.
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\179\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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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.180 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 authority to rescind the penalty can only be exercised by
the Commissioner personally. Thus, a revenue agent, an Appeals
officer, or other IRS personnel cannot rescind the penalty. 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 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.
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\180\ 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.
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EFFECTIVE DATE
The 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 provision imposing a penalty for failing to disclose
reportable transactions applies to returns the due date for
which is after the date of enactment.
6. Investor lists and modification of penalty for failure to maintain
investor lists (secs. 3006 and 3007 of the bill 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).181 Recently issued regulations under
section 6112 contain rules regarding the list maintenance
requirements.182 In general, the regulations apply
to transactions that are potentially abusive tax shelters
entered into, or acquired after, February 28,
2003.183
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\181\ Sec. 6112.
\182\ Treas. Reg. sec. 301-6112-1.
\183\ 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.
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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.184 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.185 For listed transactions (as defined in
the regulations under section 6011), the minimum fees are
reduced to $25,000 and $10,000, respectively.
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\184\ Treas. Reg. sec. 301.6112-1(c)(1).
\185\ Treas. Reg. sec. 301.6112-1(c)(2) and (3).
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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).186
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\186\ Treas. Reg. sec. 301.6112-1(b).
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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.187
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\187\ Sec. 6112(c)(2).
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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).
REASONS FOR CHANGE
The Committee has been advised that the present-law
penalties for failure to maintain customer lists are not
meaningful and that promoters often have refused to provide
requested information to the IRS. The Committee believes that
requiring material advisors to maintain a list of advisees with
respect to each reportable transaction, coupled with more
meaningful penalties for failing to maintain an investor list,
are important tools in the ongoing efforts to curb the use of
abusive tax avoidance transactions.
EXPLANATION OF PROVISION
Investor lists
Each material advisor \188\ with respect to a reportable
transaction (including a listed transaction) \189\ 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.
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\188\ The term ``material advisor'' has the same meaning as when
used in connection with the requirement to file an information return
under section 6111.
\189\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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The provision also 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).
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.\190\
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\190\ In no event will failure to maintain a list be considered
reasonable cause for failing to make a list available to the Secretary.
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EFFECTIVE DATE
The 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 provision imposing a penalty for failing to maintain
investor lists applies to requests made after the date of
enactment.
The 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.
7. Penalty on promoters of tax shelters (sec. 3008 of the bill 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.\191\ 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.
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\191\ Sec. 6700.
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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.
REASONS FOR CHANGE
The Committee believes that the current law $1,000 penalty
for tax shelter promoters is insufficient to deter tax shelter
activities. The Committee believes that the increased penalties
for tax shelter promoters are meaningful and will help deter
the promotion of tax shelters.
EXPLANATION OF PROVISION
The provision 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 provision is effective for activities after the date of
enactment.
8. Modifications of substantial understatement penalty for
nonreportable transactions (sec. 3009 of the bill 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).\192\
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\192\ Sec. 6662(a) and (d)(1)(A).
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REASONS FOR CHANGE
The Committee believes that the present-law definition of
substantial understatement allows large corporate taxpayers to
avoid the accuracy-related penalty on questionable transactions
of a significant size. The Committee believes that an
understatement of more than $10 million is substantial in and
of itself, regardless of the proportion it represents of the
taxpayer's total tax liability.
EXPLANATION OF PROVISION
The provision modifies the definition of ``substantial''
for corporate taxpayers. Under the provision, 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 provision is effective for taxable years beginning
after date of enactment.
9. Modification of actions to enjoin certain conduct related to tax
shelters and reportable transactions (sec. 3010 of the bill 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.\193\
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\193\ Sec. 7408.
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REASONS FOR CHANGE
The Committee believes that expanding the authority to
obtain injunctions against promoters and material advisors that
(1) fail to file an information return with respect to a
reportable transaction or (2) fail to maintain, or to timely
furnish upon written request by the Secretary, a list of
investors with respect to reportable transactions will
discourage tax shelter activity and encourage compliance with
the tax shelter disclosure requirements.
EXPLANATION OF PROVISION
The provision expands this rule so that injunctions may
also be sought with respect to the requirements relating to the
reporting of reportable transactions \194\ and the keeping of
lists of investors by material advisors.\195\ Thus, under the
provision, 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.
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\194\ Sec. 6707, as amended by other provisions of this bill.
\195\ Sec. 6708, as amended by other provisions of this bill.
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EFFECTIVE DATE
The provision is effective on the day after the date of
enactment.
10. Penalty on failure to report interests in foreign financial
accounts (sec. 3011 of the bill 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.\196\ 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.
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\196\ 31 U.S.C. 5314.
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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.\197\ 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.\198\
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\197\ 31 U.S.C. 5321(a)(5).
\198\ 31 U.S.C. 5322.
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On April 26, 2002, the Secretary submitted to the Congress
a report on these reporting requirements.\199\ This report,
which was statutorily required,\200\ 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.
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\199\ 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.
\200\ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 107-56).
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REASONS FOR CHANGE
The Committee believes that imposing a new civil penalty
for failure to report an interest in foreign financial accounts
that applies (without regard to willfulness) will increase the
reporting of foreign financial accounts.
EXPLANATION OF PROVISION
The provision 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 provision is effective with respect to failures to
report occurring on or after the date of enactment.
11. Regulation of individuals practicing before the Department of the
Treasury (sec. 3012 of the bill 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.\201\ 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.
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\201\ 31 U.S.C. 330.
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REASONS FOR CHANGE
The Committee believes that it is critical that the
Secretary have the authority to censure tax advisors as well as
to impose monetary sanctions against tax advisors because of
the important role of tax advisors in our tax system. Use of
these sanctions is expected to curb the participation of tax
advisors in both tax shelter activity and any other activity
that is contrary to Circular 230 standards.
EXPLANATION OF PROVISION
The provision makes two modifications to expand the
sanctions that the Secretary may impose pursuant to these
statutory provisions. First, the provision expressly permits
censure as a sanction. Second, the provision 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 provision 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 modifications to expand the sanctions that the
Secretary may impose are effective for actions taken after the
date of enactment.
B. Other Provisions
1. Treatment of stripped interests in bond and preferred stock funds,
etc. (sec. 3021 of the bill 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) that income may not be
transferred without also transferring the underlying property.
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.\202\
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\202\ Helvering v. Horst, 311 U.S. 112 (1940).
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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).\203\ However, there are no
specific statutory rules that address stripping transactions
with respect to common stock or other equity interests (other
than preferred stock).\204\
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\203\ 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).
\204\ 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.
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Stripped bonds
Special rules are provided with respect to the purchaser
and ``stripper'' of stripped bonds.\205\ 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.\206\
In general, upon the disposition of either the stripped bond or
the detached interest coupons each of the retained portion and
the portion that is disposed 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.
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\205\ Sec. 1286.
\206\ Sec. 1286(e).
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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.\207\ The OID on the stripped bond or coupon is includible
in gross income under the general OID periodic income inclusion
rules.
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\207\ Sec. 1286(a).
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A taxpayer who strips a bond and disposes of either the
stripped bond or one or more stripped coupons must allocate his
basis, immediately before the disposition, in the bond (with
the coupons attached) between the retained and disposed
items.\208\ 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 his 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.\209\
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\208\ 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.
\209\ 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)).
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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.\210\ 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.\211\ 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.\212\
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\210\ Sec. 305(e)(5).
\211\ Sec. 305(e)(1).
\212\ Sec. 305(e)(3).
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REASONS FOR CHANGE
The Committee is concerned that taxpayers are entering into
tax avoidance transactions to generate artificial losses, or
defer the recognition of ordinary income and convert such
income into capital gains, by selling or purchasing stripped
interests that are not subject to the present-law rules
relating to stripped bonds and preferred stock but that
represent interests in bonds or preferred stock. Therefore, the
Committee believes that it is appropriate to provide Treasury
with regulatory authority to apply such rules to interests that
do not constitute bonds or preferred stock but nevertheless
derive their economic value and characteristics exclusively
from underlying bonds or preferred stock.
EXPLANATION OF PROVISION
The provision 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 provision 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 this provision 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,\213\ modifying and superceding Rev. Proc.
2002-16.\214\
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\213\ 2002-43 I.R.B. 753.
\214\ 2002-9 I.R.B. 572.
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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 provision is effective for purchases and dispositions
occurring after the date of enactment.
2. Minimum holding period for foreign tax credit on withholding taxes
on income other than dividends (sec. 3022 of the bill 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.
REASONS FOR CHANGE
The Committee believes that the present-law holding period
requirement for claiming foreign tax credits with respect to
dividends is too narrow in scope and, in general, should be
extended to apply to items of income or gain other than
dividends, such as interest.
EXPLANATION OF PROVISION
The provision 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 provision does not
apply to foreign tax credits that are subject to the present-
law disallowance with respect to dividends. The provision 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 provision. In addition, the provision authorizes
the Treasury Department to issue regulations providing that the
provision does not apply in appropriate cases.
EFFECTIVE DATE
The provision is effective for amounts that are paid or
accrued more than 30 days after the date of enactment.
3. Disallowance of certain partnership loss transfers (sec. 3023 of the
bill and secs. 704, 734, and 743 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.215
The partnership takes the property at an adjusted basis equal
to the contributing partner's adjusted basis in the
property.216 The contributing partner increases its
basis in its partnership interest by the adjusted basis of the
contributed property.217 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.218 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.219
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\215\ Sec. 721.
\216\ Sec. 723.
\217\ Sec. 722.
\218\ 704(c)(1)(A).
\219\ If there is an insufficient amount of an item to allocate to
the noncontributing partners, Treasury regulations allow for reasonable
allocations to remedy this insufficiency. Treas. Reg. sec. 1.704-3(c)
and (d).
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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.220 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.
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\220\ Treas. Reg. 1.704-3(a)(7).
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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.221 If
an election is in effect, adjustments are made with respect to
the transferee partner in order 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.222 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 in effect, the
transferee partner may be allocated a share of the loss when
the partnership disposes of the property (or depreciates the
property).
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\221\ Sec. 743(a).
\222\ Sec. 743(b).
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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.223 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).224 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).225
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\223\ Sec. 731(a) and (b).
\224\ Sec. 732(b).
\225\ Sec. 732(a).
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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.226 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).227 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.
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\226\ Sec. 734(a).
\227\ Sec. 734(b).
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REASONS FOR CHANGE
The Committee believes that the partnership rules currently
allow for the inappropriate transfer of losses among partners.
This has allowed partnerships to be created and used to aid
tax-shelter transactions.
The bill limits the ability to transfer losses among
partners, while preserving the simplification aspects of the
current partnership rules for transactions involving smaller
amounts.
EXPLANATION OF PROVISION
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.228
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\228\ 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.
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Transfers of partnership interests
The provision provides 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 a
$300,000 decrease 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.
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, however, 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, transfers, and
distributions (as the case may be) after the date of enactment.
4. No reduction of basis under section 734 in stock held by partnership
in corporate partner (sec. 3024 of the bill 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 a
partnership.229 Similarly, a partner and the
partnership generally do not recognize gain or loss on the
distribution of partnership property.230 This
includes current distributions and distributions in liquidation
of a partner's interest.
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\229\ Sec. 721(a).
\230\ Sec. 731(a) and (b).
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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).231 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.
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\231\ Sec. 732(b).
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Election to adjust basis of partnership property
When a partnership distributes partnership property,
generally, the basis of partnership property is not adjusted to
reflect the effects of the distribution or transfer. The
partnership is permitted, however, 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.232 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.
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\232\ Sec. 754.
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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 (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.233 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.234
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\233\ Sec. 755(a).
\234\ Sec. 755(b).
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REASONS FOR CHANGE
The Joint Committee on Taxation staff's investigative
report of Enron Corporation 235 revealed that
certain transactions were being undertaken that purported to
use the interaction of the partnership basis adjustment rules
and the rules protecting a corporation from recognizing gain on
its stock to obtain unintended tax results. These transactions
generally purported to increase the tax basis of depreciable
assets and to decrease, by a corresponding amount, the tax
basis of the stock of a partner. Because the tax rules protect
a corporation from gain on the sale of its stock (including
through a partnership), the transactions enable taxpayers to
duplicate tax deductions at no economic cost. The provision
precludes the ability to reduce the basis of corporate stock of
a partner (or related party) in certain transactions.
---------------------------------------------------------------------------
\235\ See Joint Committee on Taxation, Report of Investigation of
Enron Corporation and Related Entities Regarding Federal Tax and
Compensation Issues, and Policy Recommendations (JCS-3-03), February
2003.
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EXPLANATION OF PROVISION
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 date of
enactment.
5. Repeal of special rules for FASITs, etc. (sec. 3025 of the bill 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.236 A FASIT generally is not taxable. Instead,
the FASIT's taxable income or net loss flows through to the
owner of the FASIT. The ownership interest of a FASIT generally
is required to be held entirely 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.
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\236\ Sections 860H through 860L.
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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; 237 (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.
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\237\ 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.
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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 generally 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 Secretary, variable rates permitted
with respect to real estate mortgage investment conduit
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. Instruments that do not satisfy
certain of these general requirements nevertheless may be
treated as regular interests if they are held by a domestic
taxable C corporation that is not a RIC, real estate investment
trust (``REIT''), FASIT, 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 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.
Real estate mortgage investment conduits
In general, a real estate mortgage investment conduit
(``REMIC'') is a self-liquidating entity that holds a fixed
pool of mortgages and issues multiple classes of investor
interests. A REMIC is not treated as a separate taxable entity.
Rather, the income of the REMIC is allocated to, and taken into
account by, the holders of the interests in the REMIC under
detailed rules.238 In order to qualify as a REMIC,
substantially all of the assets of the entity must consist of
qualified mortgages and permitted investments as of the close
of the third month beginning after the startup day of the
entity. A ``qualified mortgage'' generally includes any
obligation which is principally secured by an interest in real
property, and which is either transferred to the REMIC on the
startup day of the REMIC in exchange for regular or residual
interests in the REMIC or purchased by the REMIC within three
months after the startup day pursuant to a fixed-price contract
in effect on the startup day. A ``permitted investment''
generally includes any intangible property that is held for
investment and is part of a reasonably required reserve to
provide for full payment of certain expenses of the REMIC or
amounts due on regular interests.
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\238\ See sections 860A through 860G.
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All of the interests in the REMIC must consist of one or
more classes of regular interests and a single class of
residual interests. A ``regular interest'' is an interest in a
REMIC that is issued with a fixed term, designated as a regular
interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount) with
interest payments that are either based on a fixed rate (or, to
the extent provided in regulations, a variable rate) or consist
of a specified portion of the interest payments on qualified
mortgages that does not vary during the period such interest is
outstanding. In general, a ``residual interest'' is any
interest in the REMIC other than a regular interest, and which
is so designated by the REMIC, provided that there is only one
class of such interest and that all distributions (if any) with
respect to such interests are pro rata. Holders of residual
REMIC interests are subject to tax on the portion of the income
of the REMIC that is not allocated to the regular interest
holders.
Original issue discount accruals with respect to debt
instruments and pools of debt instruments subject
to acceleration of principal payment
The holder of a debt instrument with original issue
discount (``OID'') generally accrues and includes in gross
income, as interest, the OID over the life of the obligation,
even though the amount of the interest may not be received
until the maturity of the instrument.\239\ In general, issuers
of debt instruments with OID accrue and deduct the amount of
OID as interest expense in the same manner as the holder.
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\239\ The amount of OID with respect to a debt instrument is 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 payable at maturity. The amount of OID in 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 by adjustments prior to
the accrual period) by the instrument's yield to maturity, and then
subtracting the interest payable during the accrual period.
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Special rules for determining the amount of OID allocated
to a period apply to certain instruments and pools of
instruments that may be subject to prepayment. First, if a
borrower can reduce the yield on a debt by exercising a
prepayment option, the OID rules assume that the borrower will
prepay the debt. In addition, in the case of (1) any regular
interest in a REMIC or qualified mortgage held by a REMIC, (2)
any other debt instrument if payments under the instrument may
be accelerated by reason of prepayments of other obligations
securing the instrument, or (3) any pool of debt instruments
the yield on which may be affected by reason of prepayments,
the daily portions of the OID on such debt instruments and
pools of debt instruments generally are determined by taking
into account an assumption regarding the prepayment of
principal for such instruments. The prepayment assumption to be
used for this purpose is that which the parties use in pricing
the particular transaction.
REASONS FOR CHANGE
The Joint Committee on Taxation staff's investigative
report of Enron Corporation \240\ described two structured tax-
motivated transactions--Projects Apache and Renegade--that
Enron undertook in which the use of a FASIT was a key component
in the structure of the transactions. The Committee is aware
that FASITs are not being used widely in the manner envisioned
by the Congress and, consequently, the FASIT rules have not
served the purpose for which they originally were intended.
Moreover, the Joint Committee's report indicates that FASITs
are particularly prone to abuse and likely are being used
primarily to facilitate tax avoidance transactions. Therefore,
the Committee believes that the potential for abuse that is
inherent in FASITs far outweighs any beneficial purpose that
the FASIT rules may serve. Accordingly, the Committee believes
that these rules should be repealed, with appropriate
transition relief for existing FASITs and appropriate
modifications to the present-law REMIC rules to permit the use
of REMICs by taxpayers that have relied upon FASITs to
securitize certain obligations secured by an interest in real
property.
---------------------------------------------------------------------------
\240\ See Joint Committee on Taxation, Report of Investigation of
Enron Corporation and Related Entities Regarding Federal Tax and
Compensation Issues, and Policy Recommendations (JCS-3-03), February
2003.
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EXPLANATION OF PROVISION
The provision repeals the special rules for FASITs. The
provision provides a transition period for existing FASITs,
pursuant to which the repeal of the FASIT rules would 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 provision 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.''
The provision also modifies the OID rules with respect to
certain instruments and pools of instruments that may be
subject to principal prepayment by directing the Secretary to
prescribe regulations permitting the use of a current
prepayment assumption determined as of the close of the accrual
period (or such other time as the Secretary may prescribe
during the taxable year in which the accrual period ends).
EFFECTIVE DATE
Except as provided by the transition period for existing
FASITs, the provision is effective for taxable years beginning
after December 31, 2003.
6. Limitation on transfer of built-in losses on REMIC residuals (sec.
3026 of the bill and sec. 362 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.\241\ 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.\242\
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\241\ Sec. 351.
\242\ Sec. 358.
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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.\243\
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\243\ Secs. 334(b) and 362(a) and (b).
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REASONS FOR CHANGE
The Joint Committee on Taxation staff's investigative
report of Enron Corporation \244\ revealed that Enron was using
REMIC residual interests in tax motivated transactions to
purportedly duplicate a single economic loss and deduct the
loss more than once. The Committee understands that, under the
statutory rules regarding the taxation of REMICS, phantom
income is allocated to REMIC residual interest holders. Because
of the associated basis increases in the REMIC residual
interests, the phantom income allocation inevitably creates
built-in losses to the holders of the REMIC residual interests,
thus making such interests a natural component of transactions
designed to duplicate a single economic loss. Congress did not
intend REMIC residual interests to be used in this manner.
Therefore, the Committee believes that a corporation's basis in
REMIC residual interests acquired in a tax-free transfer should
be limited to the fair market value of such interests.
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\244\ See Joint Committee on Taxation, Report of Investigation of
Enron Corporation and Related Entities Regarding Federal Tax and
Compensation Issues, and Policy Recommendations (JCS-3-03), February
2003.
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EXPLANATION OF PROVISION
The provision 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 provision applies to transactions after the date of
enactment.
7. Clarification of banking business for purposes of determining
investment of earnings in U.S. property (sec. 3027 of the bill
and sec. 956 of the Code)
PRESENT LAW
In general, the subpart F rules \245\ 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.\246\
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\245\ Secs. 951-964.
\246\ Sec. 951(a)(1)(B).
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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.\247\ 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.\248\ 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.\249\
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\247\ Sec. 956(a).
\248\ Secs. 956 and 959.
\249\ Secs. 951(a)(1)(B) and 959.
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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.\250\
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\250\ Sec. 956(c)(1).
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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.\251\
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\251\ Sec. 956(c)(2).
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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 \252\
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.
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\252\ 286 F.3d 324 (6th Cir. 2002), rev'g 113 T.C. 169 (1999).
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REASONS FOR CHANGE
The Committee believes that further guidance is necessary
under the U.S. property investment provisions of subpart F with
regard to the treatment of deposits with persons carrying on
the banking business. In particular, the Committee believes
that the transaction at issue in The Limited case was not
contemplated or intended by Congress when it excepted from the
definition of U.S. property deposits with persons carrying on
the banking business. Therefore, the Committee believes that it
is appropriate and necessary to clarify the scope of this
exception so that it applies only to deposits with regulated
banking businesses and their affiliates.
EXPLANATION OF PROVISION
The provision 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 corporations with respect to which a bank holding company
(as defined by section 2(a) of the Bank Holding Company Act of
1956 (12 U.S.C. 1841(c)) 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 or
whether this phrase was correctly interpreted by the Sixth
Circuit in The Limited.
EFFECTIVE DATE
This provision is effective on the date of enactment.
8. Modify rules related to certain small property and casualty
insurance companies (sec. 3028 of the bill 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 is eligible to be
exempt from Federal income tax if its net written premiums or
direct written premiums (whichever is greater) for the taxable
year do not exceed $350,000 (sec. 501(c)(15)).
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) for
the taxable year exceed $350,000, but 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 these rules,
premiums received by all members of a controlled group of
corporations of which the company is a part are taken into
account. For this purpose, a more-than-50-percent threshhold
applies under the vote and value requirements with respect to
stock ownership for determining a controlled group, and rules
treating a life insurance company as part of a separate
controlled group or as an excluded member of a group do not
apply (secs. 501(c)(15), 831(b)(2)(B) and 1563).
REASONS FOR CHANGE
The Committee has become aware of abuses in the area of
tax-exempt insurance companies.\253\ The Committee believes
that the use of these organizations as vehicles for sheltering
income was never contemplated by Congress. The Committee
believes it is necessary to limit the availability of tax-
exempt status under the provision so that it cannot be abused.
To that end, the bill applies a gross receipts test and
requires that premiums received for the taxable year be greater
than 50 percent of gross receipts.
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\253\ See Janet Novack, Are You a Chump?, Forbes, Mar. 5, 2001;
David Cay Johnston, Insurance Loophole Helps Rich, N.Y. Times, April 1,
2003; David Cay Johnston, Tiny Insurers Face Scrutiny as Tax Shields,
N.Y. Times, April 4, 2003, at C1.
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The bill correspondingly expands the availability of the
present-law election of a property and casualty insurer to be
taxed only on taxable investment income to companies with
premiums below $350,000, and also increases the upper limit on
premiums to $1.89 million (indexed for inflation) for purposes
of the election. This provision of present law provides a
relatively simple tax calculation for small property and
casualty insurers, and because the election results in the
taxation of taxable investment income, the Committee does not
believe that it is abused to avoid tax on investment income.
Thus, the bill provides that a company whose net written
premiums (or if greater, direct written premiums) do not exceed
the indexed $1.89 million amount (without regard to the
$350,000 threshhold of present law), is eligible for the
simplification benefit of this election.
EXPLANATION OF PROVISION
The provision modifies the requirements for a property and
casualty insurance company to be eligible for tax-exempt
status, and to elect to be taxed only on taxable investment
income.
Under the provision, 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. 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. The provision expands the present-
law controlled group rule so that it also takes into account
gross receipts of foreign and tax-exempt corporations.
A company that does not meet the definition of an insurance
company is not eligible to be exempt from Federal income tax
under the bill. For this purpose, the term ``insurance
company'' means any company, more than half of the business of
which during the taxable year is the issuing of insurance or
annuity contracts or the reinsuring of risks underwritten by
insurance companies (sec. 816(a) and new sec. 831(c)). A
company whose investment activities outweigh its insurance
activities is not considered to be an insurance company for
this purpose.\254\ It is intended that IRS enforcement
activities address the misuse of present-law section
501(c)(15).
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\254\ See, e.g., Inter-American Life Insurance Co. v. Comm'r, 56
T.C. 497, aff'd per curiam, 469 F.2d 697 (9th Cir. 1972).
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The provision also provides that 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 a specified
amount (without regard to whether such premiums exceed
$350,000) (sec. 831(b)). The provision increases from $1.2
million to $1.89 million the upper limit on net (or direct)
written premiums for purposes of such election. The $1.89
million amount is indexed for inflation for taxable years
beginning in calendar years after 2004. As under present law,
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.
It is intended that regulations or other Treasury guidance
provide for anti-abuse rules so as to prevent improper use of
the provision, including, for example, by attempts to
characterize as premiums any income that is other than premium
income.
EFFECTIVE DATE
The provisions are effective for taxable years beginning
after December 31, 2003.
9. Definition of insurance company for property and casualty insurance
company tax rules (sec. 3029 of the bill and sec. 831(c) of the
Code)
PRESENT LAW
Present law provides specific rules for taxation of the
life insurance company taxable income of a life insurance
company (sec. 801), and for taxation of the taxable income of a
company other than a life insurance company (sec. 831)
(generally referred to as a property and casualty insurance
company). For Federal income tax purposes, a life insurance
company means an insurance company that is engaged in the
business of issuing life insurance and annuity contracts, or
noncancellable health and accident insurance contracts, and
that meets a 50-percent test with respect to its reserves (sec.
816(a)). This statutory provision applicable to life insurance
companies explicitly defines the term ``insurance company'' to
mean any company, more than half of the business of which
during the taxable year is the issuing of insurance or annuity
contracts or the reinsuring of risks underwritten by insurance
companies (sec. 816(a)).
The life insurance company statutory definition of an
insurance company does not explicitly apply to property and
casualty insurance companies, although a long-standing Treasury
regulation\255\ that is applied to property and casualty
companies provides a somewhat similar definition of an
``insurance company'' based on the company's ``primary and
predominant business activity.'' \256\
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\255\ The Treasury regulation provides that ``the term `insurance
company' means a company whose primary and predominant business
activity during the taxable year is the issuing of insurance or annuity
contracts or the reinsuring of risks underwritten by insurance
companies. Thus, though its name, charter powers, and subjection to
State insurance laws are significant in determining the business which
a company is authorized and intends to carry on, it is the character of
the business actually done in the taxable year which determines whether
a company is taxable as an insurance company under the Internal Revenue
Code.'' Treas. Reg. section 1.801-3(a)(1).
\256\ Court cases involving a determination of whether a company is
an insurance company for Federal tax purposes have examined all of the
business and other activities of the company. In considering whether a
company is an insurance company for such purposes, courts have
considered, among other factors, the amount and source of income
received by the company from its different activities. See Bowers v.
Lawyers Mortgage Co., 285 U.S. 182 (1932); United States v. Home Title
Insurance Co., 285 U.S. 191 (1932). See also Inter-American Life
Insurance Co. v. Comm'r, 56 T.C. 497, aff'd per curiam, 469 F.2d 697
(9th Cir. 1972), in which the court concluded that the company was not
an insurance company: ``The * * * financial data clearly indicates that
petitioner's primary and predominant source of income was from its
investments and not from issuing insurance contracts or reinsuring
risks underwritten by insurance companies. During each of the years in
issue, petitioner's investment income far exceeded its premiums and the
amounts of earned premiums were de minimis during those years. It is
equally as clear that petitioner's primary and predominant efforts were
not expended in issuing insurance contracts or in reinsurance. Of the
relatively few policies directly written by petitioner, nearly all were
issued to [family members]. Also, Investment Life, in which [family
members] each owned a substantial stock interest, was the source of
nearly all of the policies reinsured by petitioner. These facts,
coupled with the fact that petitioner did not maintain an active sales
staff soliciting or selling insurance policies * * *, indicate a lack
of concentrated effort on petitioner's behalf toward its chartered
purpose of engaging in the insurance business. * * * For the above
reasons, we hold that during the years in issue, petitioner was not `an
insurance company * * * engaged in the business of issuing life
insurance' and hence, that petitioner was not a life insurance company
within the meaning of section 801.'' 56 T.C. 497, 507-508.
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When enacting the statutory definition of an insurance
company in 1984, Congress stated, ``[b]y requiring [that] more
than half rather than the `primary and predominant business
activity' be insurance activity, the bill adopts a stricter and
more precise standard for a company to be taxed as a life
insurance company than does the general regulatory definition
of an insurance company applicable for both life and nonlife
insurance companies * * * Whether more than half of the
business activity is related to the issuing of insurance or
annuity contracts will depend on the facts and circumstances
and factors to be considered will include the relative
distribution of the number of employees assigned to, the amount
of space allocated to, and the net income derived from, the
various business activities.'' \257\
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\257\ H.R. Rep. 98-432, part 2, at 1402-1403 (1984); S. Prt. No.
98-169, vol. I, at 525-526 (1984); see also H.R. Rep. No. 98-861 at
1043-1044 (1985) (Conference Report).
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REASONS FOR CHANGE
The Committee believes that this change will clarify the
tax rules and improve the administration of those rules by
conforming the definition of an insurance company for purposes
of the property and casualty insurance rules and the life
insurance rules. Further, the Committee expects that IRS
enforcement activities to prevent abuse of the provision
relating to tax-exempt insurance companies will be simplified
and improved by this provision of the bill.
EXPLANATION OF PROVISION
The bill provides that, for purposes of determining whether
a company is a property and casualty insurance company, the
term ``insurance company'' is defined to mean any company, more
than half of the business of which during the taxable year is
the issuing of insurance or annuity contracts or the reinsuring
of risks underwritten by insurance companies. Thus, the bill
conforms the definition of an insurance company for purposes of
the rules taxing property and casualty insurance companies to
the rules taxing life insurance companies, so that the
definition is uniform. The provision adopts a stricter and more
precise standard than the ``primary and predominant business
activity'' test contained in Treasury Regulations. A company
whose investment activities outweigh its insurance activities
is not considered to be an insurance company under the
provision.\258\ It is not intended that a company whose sole
activity is the run-off of risks under the company's insurance
contracts be treated as a company other than an insurance
company, even if the company has little or no premium income.
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\258\ See Inter-American Life Insurance Co. v. Comm'r, supra.
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EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2003.
10. Denial of deduction for interest on underpayments attributable to
nondisclosed reportable transactions (sec. 3030 of the bill and
sec. 163 of the Code)
PRESENT LAW
In general, corporations may deduct interest paid or
accrued within a taxable year on indebtedness.\259\ Interest on
indebtedness to the Federal government attributable to an
underpayment of tax generally may be deducted pursuant to this
provision.
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\259\ Sec. 163(a).
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REASONS FOR CHANGE
The Committee believes that it is inappropriate for
corporations to deduct interest paid to the Government with
respect to certain tax shelter transactions.
EXPLANATION OF PROVISION
The provision 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 transaction (other than a listed transaction) if a
significant purpose of such transaction is the avoidance or
evasion of Federal income tax.\260\
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\260\ 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.
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EFFECTIVE DATE
The provision is effective for underpayments attributable
to transactions entered into in taxable years beginning after
the date of enactment.
11. Clarification of rules for payment of estimated tax for certain
deemed asset sales (sec. 3031 of the bill 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.
REASONS FOR CHANGE
The Committee is concerned that some taxpayers may
inappropriately be taking the position that estimated tax and
the penalty (computed in the amount of an interest charge)
under section 6655 applies neither to the stock sale nor to the
asset sale in the case of a section 338(h)(10) election. The
Committee believes that estimated tax should not be avoided
merely because an election may be made under section
338(h)(10). Furthermore, the Committee understands that parties
typically negotiate a sale with an understanding as to whether
or not an election under section 338(h)(10) will be made. In
the event there is a contingency in this regard, the parties
would typically provide for adjustments to the price to reflect
the effect of the election.
EXPLANATION OF PROVISION
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.
12. Exclusion of like-kind exchange property from nonrecognition
treatment on the sale or exchange of a principal residence
(sec. 3032 of the bill and sec. 121 of the Code)
PRESENT LAW
Under 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.\261\ To be
eligible for the exclusion, the taxpayer must have owned and
used the residence as a principal residence for at least two of
the five years prior to the sale or exchange. A taxpayer who
fails to meet these requirements by reason of a change of place
of employment, health, or, to the extent provided under
regulations, unforeseen circumstances is able to exclude an
amount equal to the fraction of the $250,000 ($500,000 if
married filing a joint return) that is equal to the fraction of
the two years that the ownership and use requirements are met.
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.
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\261\ Sec. 121.
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REASONS FOR CHANGE
The Committee believes that the present-law exclusion of
gain allowable upon the sale or exchange of principal
residences serves an important role in encouraging home
ownership. The Committee does not believe that this exclusion
is appropriate for properties that were recently acquired in
like-kind exchanges. Under the like-kind exchange rules, a
taxpayer that exchanges property that was held for productive
use or investment for like-kind property may acquire the
replacement property on a tax-free basis. Because the
replacement property generally has a low carry-over tax basis,
the taxpayer will have taxable gain upon the sale or exchange
of the replacement property. However, when the taxpayer
converts the replacement property into the taxpayer's principal
residence, the taxpayer may shelter some or all of this gain
from income taxation. The Committee believes that this proposal
balances the concerns associated with these provisions to
reduce this tax shelter concern without unduly limiting the
exclusion on sales or exchanges of principal residences.
EXPLANATION OF PROVISION
The 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
The provision is effective for sales or exchanges of
principal residences after the date of enactment.
13. Prevention of mismatching of interest and original issue discount
deductions and income inclusions in transactions with related
foreign persons (sec. 3033 of the bill 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 (sections
951-964), the passive foreign investment company rules
(sections 1291-1298), and the foreign personal holding company
rules (sections 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.\262\ 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).\263\
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.\264\
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\262\ Section 163(e)(1).
\263\ Section 163(e)(3).
\264\ 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
has in effect a qualified electing fund election pursuant to section
1295 with respect to the PFIC.
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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.\265\ 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).\266\ 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.\267\
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\265\ Section 267(a)(2).
\266\ Treas. Reg. sec. 1.267(a)-3(b)(1), (c).
\267\ Treas. Reg. sec. 1.267(a)-3(c)(4).
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REASONS FOR CHANGE
The special rules in the Treasury regulations for FPHCs,
CFCs and PFICs are an exception to the general rule that OID
and unpaid interest owed to a related foreign person are
deductible when paid (i.e., under a cash method). These special
rules were deemed appropriate in the case of FPHCs, CFCs and
PFICs because it was thought that there would be little
material distortion in matching of income and deductions with
respect to amounts owed to a related foreign corporation that
is required to determine its taxable income and earnings and
profits for U.S. tax purposes pursuant to the FPHC, subpart F
or PFIC provisions. The Committee believes that this premise
fails to take into account the situation where amounts owed to
the related foreign corporation are included in the income of
the related foreign corporation but are not currently included
in the income of the related foreign corporation's U.S.
shareholder. Consequently, under the Treasury regulations, both
the U.S. payors and U.S.-owned foreign payors may be able to
accrue deductions for amounts owed to related FPHCs, CFCs or
PFICs without the U.S. owners of such related entities taking
into account for U.S. tax purposes a corresponding amount of
income. These deductions can be used to reduce U.S. income or,
in the case of a U.S.-owned foreign payor, to reduce earnings
and profits which could reduce a CFC's income that would be
currently taxable to its U.S. shareholders under subpart F.
EXPLANATION OF PROVISION
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 included in the income of all of the direct or
indirect U.S. owners of the related foreign person under the
relevant inclusion rules. Deductions that have accrued but are
not allowable under this proposal are allowed when the amounts
are paid. The provision grants the Secretary regulatory
authority to provide exceptions to these rules, including an
exception for amounts accrued where payment of the amount
accrued occurs within a short period after accrual, and the
transaction giving rise to the payment is entered into by the
payor in the ordinary course of a business in which the payor
is predominantly engaged.
EFFECTIVE DATE
The provision is effective for payments accrued on or after
date of enactment.
14. Exclusion from gross income for interest on overpayments of income
tax by individuals (sec. 3034 of the bill and new sec. 139A of
the Code)
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.
REASONS FOR CHANGE
The Committee believes that there should be consistency in
the treatment of interest paid by the Federal government to an
individual taxpayer and interest paid by an individual taxpayer
to the Federal government. Allowing individual taxpayers to
exclude interest on overpayments will treat all individual
taxpayers consistently, whether or not they itemize deductions.
EXPLANATION OF PROVISION
The provision 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
The provision is effective for interest received in
calendar years beginning after the date of enactment.
15. Deposits made to suspend the running of interest on potential
underpayments (sec. 3035 of the bill 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.
REASONS FOR CHANGE
The Committee believes that an improved deposit system that
allows for the payment of interest on amounts that are not
ultimately needed to offset tax liability when the taxpayer's
position is upheld, as well as allowing for the offset of tax
liability when the taxpayer's position fails, will provide an
effective way for taxpayers to manage their exposure to
underpayment interest. However, the Committee believes that
such an improved deposit system should be reserved for the
issues that are known to both parties, either through IRS
examination or voluntary taxpayer disclosure.
EXPLANATION OF PROVISION
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. Thus, the interest
received on withdrawn deposits will not be eligible for the
proposed exclusion from income of an individual. 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
The provision applies to deposits made after the date of
enactment. Amounts already on deposit as of the date of
enactment are treated as deposited (for purposes of applying
this provision) on the date the taxpayer identifies the amount
as a deposit made pursuant to this provision.
16. Authorize IRS to enter into installment agreements that provide for
partial payment (sec. 3036 of the bill 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.
REASONS FOR CHANGE
The Committee believes that clarifying 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 will improve effective
tax administration.
The Committee recognizes that some taxpayers are unable to
enter into a realistic offer in compromise. The Committee
believes that these taxpayers should be encouraged to make
partial payments toward resolving their tax liability, and that
providing for partial payment installment agreements will help
facilitate this. The Committee also believes, however, that the
offer in compromise program should remain the sole avenue via
which taxpayers fully resolve their tax liabilities and attain
a fresh start.
EXPLANATION OF PROVISION
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
The provision is effective for installment agreements
entered into on or after the date of enactment.
17. Extension of IRS user fees (sec. 3037 of the bill and sec. 7528 of
the Code)
PRESENT LAW
The IRS provides written responses to questions of
individuals, corporations, and organizations relating to their
tax status or the effects of particular transactions for tax
purposes. The IRS generally charges a fee for requests for a
letter ruling, determination letter, opinion letter, or other
similar ruling or determination.\268\ Public Law 108-89 \269\
extended the statutory authorization for these user fees
through December 31, 2004, and moved the statutory
authorization for these fees into the Code.\270\
---------------------------------------------------------------------------
\268\ These user fees were originally enacted in section 10511 of
the Revenue Act of 1987 (Pub. Law No. 100-203, December 22, 1987).
Public Law 104-117 (An Act to provide that members of the Armed Forces
performing services for the peacekeeping efforts in Bosnia and
Herzegovina, Croatia, and Macedonia shall be entitled to tax benefits
in the same manner as if such services were performed in a combat zone,
and for other purposes (March 20, 1996)) extended the statutory
authorization for these user fees through September 30, 2003.
\269\ 117 Stat. 1131; H.R. 3146, signed by the President on October
1, 2003.
\270\ That Public Law also moved into the Code the user fee
provision relating to pension plans that was enacted in section 620 of
the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L.
107-16, June 7, 2001).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that it is appropriate to provide a
further extension of these user fees.
EXPLANATION OF PROVISION
The provision extends the statutory authorization for these
user fees through September 30, 2013.
EFFECTIVE DATE
The provision is effective for requests made after the date
of enactment.
TITLE IV--TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS
1. Repeal of exclusion for extraterritorial income (sec. 4001 of the
bill and secs. 114 and 941-943 of the Code)
PRESENT LAW
The United States has long provided export-related benefits
under a series of tax regimes, including the domestic
international sales corporation (``DISC'') regime, the foreign
sales corporation (``FSC'') regime, and the extraterritorial
income (``ETI'') regime. Each of these regimes has been found
to violate U.S. obligations under international trade
agreements. In 2000, the European Union (``EU'') succeeded in
having the FSC regime declared a prohibited export subsidy by
the WTO. In response to this WTO ruling, the United States
repealed the FSC rules and enacted a new regime under the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000. The
EU immediately challenged the ETI regime in the WTO, and in
January of 2002 a WTO Appellate Body held that the ETI regime
also constituted a prohibited export subsidy under the relevant
trade agreements.
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; \271\ or (3) 30
percent of the ``foreign sale and leasing income'' derived by
the taxpayer from the transaction.\272\
---------------------------------------------------------------------------
\271\ ``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.
\272\ ``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.
REASONS FOR CHANGE
The Committee believes it is important that the United
States, and all members of the WTO, comply with WTO decisions
and honor their obligations under WTO agreements. Therefore,
the Committee believes that the ETI regime should be repealed.
The Committee believes that it is necessary and appropriate to
provide transition relief comparable to that which has been
included in the past in measures taken by WTO members to bring
their laws into compliance with WTO decisions and obligations.
The Committee also believes that it is important to use the
opportunity afforded by the repeal of the ETI regime to reform
the U.S. tax system in a manner that makes U.S. businesses and
workers more productive and competitive than they are today. To
this end, the Committee believes that it is important to
provide tax cuts to U.S. domestic manufacturers and to update
the U.S. international tax rules, which are over 40 years old
and make U.S. companies uncompetitive in the United States and
abroad.
EXPLANATION OF PROVISION
The bill repeals the ETI exclusion. Pursuant to transition
rules, taxpayers retain a portion of their otherwise-applicable
ETI benefits for transactions during a three-year transition
period (80 percent for 2004 and 2005, and 60 percent for 2006).
The bill also 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 \273\ between the taxpayer and an unrelated person and
such contract is in effect on January 14, 2002, and at all
times thereafter.
---------------------------------------------------------------------------
\273\ This rule also applies to a purchase option, renewal option,
or replacement option that is included in such contract.
---------------------------------------------------------------------------
In addition, foreign corporations that elected to be
treated for all Federal tax purposes as domestic corporations
pursuant to an election available under the ETI rules are
allowed to revoke such elections within one year of the date of
enactment of the bill without recognition of gain or loss,
subject to anti-abuse rules.
EFFECTIVE DATE
The provision is effective for transactions after December
31, 2003.
2. Extension of customs user fees (sec. 4002 of the bill)
PRESENT LAW
Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA) (P.L. 99-272), authorized
the Secretary to collect certain service fees. Section 412 (P.L
107-296) of the Homeland Security Act of 2002 authorized the
Secretary 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. 108-89, which
extended authorization for the collection of these fees through
March 31, 2004.
REASONS FOR CHANGE
The Committee believes it is important to extend these fees
to cover the expenses of the services provided. However, the
Committee also believes it is important that any fee imposed be
a true user fee. That is, the Committee believes that when the
Congress authorizes the executive branch to assess user fees,
those fees must be determined to reflect only the cost of
providing the service for which the fee is assessed.
EXPLANATION OF PROVISION
The bill extends the certain merchandise processing fees
authorized under the Consolidated Omnibus Budget Reconciliation
Act of 1985 through September 30, 2013. Certain other fees, the
so-called ``COBRA fees'' related to overtime and premium
services, also are extended through September 30, 2013. For
fiscal years after September 30, 2005, the Secretary is to
charge fees in amount 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 bill also includes a Sense of the Congress that 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. The Sense of Congress also states that 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.
The bill further provides that the Secretary 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 what fees should be eliminated, what the rate
of fees retains should be, and any other recommendations with
respect to the fees that the Secretary considers appropriate.
EFFECTIVE DATE
The provisions are effective upon the date of enactment.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statements are made
concerning the votes of the Committee on Ways and Means in its
consideration of the bill, H.R. 2896.
MOTION TO REPORT THE BILL
The bill, H.R. 2896, as amended, was ordered favorably
reported by a rollcall vote of 24 yeas to 15 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... X ........ ......... Mr. Rangel....... ........ X .........
Mr. Crane...................... X ........ ......... Mr. Stark........ ........ X .........
Mr. Shaw....................... X ........ ......... Mr. Matsui....... ........ ........ .........
Mrs. Johnson................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Houghton................... X ........ ......... Mr. Cardin....... ........ X .........
Mr. Herger..................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. McCrery.................... X ........ ......... Mr. Kleczka...... ........ X .........
Mr. Camp....................... X ........ ......... Mr. Lewis (GA)... ........ X .........
Mr. Ramstad.................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Nussle..................... X ........ ......... Mr. McNulty...... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Jefferson.... ........ X .........
Ms. Dunn....................... X ........ ......... Mr. Tanner....... ........ ........ .........
Mr. Collins.................... X ........ ......... Mr. Becerra...... ........ X .........
Mr. Portman.................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. English.................... X ........ ......... Mr. Pomeroy...... ........ X .........
Mr. Hayworth................... X ........ ......... Mr. Sandlin...... ........ X .........
Mr. Weller..................... X ........ ......... Ms. Tubbs Jones.. ........ X .........
Mr. Hulshof.................... X ........ .........
Mr. McInnis.................... X ........ .........
Mr. Lewis (KY)................. X ........ .........
Mr. Foley...................... X ........ .........
Mr. Brady...................... X ........ .........
Mr. Ryan....................... X ........ .........
Mr. Cantor..................... X ........ .........
----------------------------------------------------------------------------------------------------------------
VOTES ON AMENDMENTS
A rollcall vote was conducted on the following amendments
to the Chairman's amendment in the nature of a substitute.
An amendment by Mr. Doggett, which would codify the
economic substance doctrine and impose penalties for
understatements attributable to transactions lacking economic
substance, was defeated by a rollcall vote of 14 yeas to 24
nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... ........ X ......... Mr. Rangel....... X ........ .........
Mr. Crane...................... ........ X ......... Mr. Stark........ X ........ .........
Mr. Shaw....................... ........ X ......... Mr. Matsui....... X ........ .........
Mrs. Johnson................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Houghton................... ........ X ......... Mr. Cardin....... X ........ .........
Mr. Herger..................... ........ X ......... Mr. McDermott.... X ........ .........
Mr. McCrery.................... ........ X ......... Mr. Kleczka...... X ........ .........
Mr. Camp....................... ........ X ......... Mr. Lewis (GA)... X ........ .........
Mr. Ramstad.................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Nussle..................... ........ X ......... Mr. McNulty...... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Jefferson.... X ........ .........
Ms. Dunn....................... ........ X ......... Mr. Tanner....... X ........ .........
Mr. Collins.................... ........ X ......... Mr. Becerra...... X ........ .........
Mr. Portman.................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. English.................... ........ X ......... Mr. Pomeroy...... X ........ .........
Mr. Hayworth................... ........ X ......... Mr. Sandlin...... X ........ .........
Mr. Weller..................... ........ X ......... Ms. Tubbs Jones.. X ........ .........
Mr. Hulshof.................... ........ X .........
Mr. McInnis.................... ........ X .........
Mr. Lewis (KY)................. ........ X .........
Mr. Foley...................... ........ X .........
Mr. Brady...................... ........ X .........
Mr. Ryan....................... ........ X .........
Mr. Cantor..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. Doggett, which would override certain
U.S. income tax treaties in certain circumstances, was defeated
by a rollcall vote of 13 yeas to 24 nays. The vote was as
follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... X ........ ......... Mr. Rangel....... X ........ .........
Mr. Crane...................... ........ X ......... Mr. Stark........ X ........ .........
Mr. Shaw....................... ........ X ......... Mr. Matsui....... ........ ........ .........
Mrs. Johnson................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Houghton................... ........ X ......... Mr. Cardin....... X ........ .........
Mr. Herger..................... X ........ ......... Mr. McDermott.... X ........ .........
Mr. McCrery.................... X ........ ......... Mr. Kleczka...... X ........ .........
Mr. Camp....................... X ........ ......... Mr. Lewis (GA)... ........ ........ .........
Mr. Ramstad.................... X ........ ......... Mr. Neal......... X ........ .........
Mr. Nussle..................... X ........ ......... Mr. McNulty...... X ........ .........
Mr. Johnson.................... X ........ ......... Mr. Jefferson.... X ........ .........
Ms. Dunn....................... X ........ ......... Mr. Tanner....... ........ ........ .........
Mr. Collins.................... X ........ ......... Mr. Becerra...... X ........ .........
Mr. Portman.................... X ........ ......... Mr. Doggett...... X ........ .........
Mr. English.................... X ........ ......... Mr. Pomeroy...... ........ ........ .........
Mr. Hayworth................... X ........ ......... Mr. Sandlin...... X ........ .........
Mr. Weller..................... X ........ ......... Ms. Tubbs Jones.. X ........ .........
Mr. Hulshof.................... X ........ .........
Mr. McInnis.................... X ........ .........
Mr. Lewis (KY)................. X ........ .........
Mr. Foley...................... X ........ .........
Mr. Brady...................... X ........ .........
Mr. Ryan....................... X ........ .........
Mr. Cantor..................... X ........ .........
----------------------------------------------------------------------------------------------------------------
A substitute amendment by Mr. Rangel was defeated by a
rollcall vote of 13 yeas to 24 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... X ........ ......... Mr. Rangel....... X ........ .........
Mr. Crane...................... X ........ ......... Mr. Stark........ ........ ........ .........
Mr. Shaw....................... X ........ ......... Mr. Matsui....... ........ ........ .........
Mrs. Johnson................... X ........ ......... Mr. Levin........ X ........ .........
Mr. Houghton................... X ........ ......... Mr. Cardin....... X ........ .........
Mr. Herger..................... X ........ ......... Mr. McDermott.... X ........ .........
Mr. McCrery.................... X ........ ......... Mr. Kleczka...... X ........ .........
Mr. Camp....................... X ........ ......... Mr. Lewis (GA)... X ........ .........
Mr. Ramstad.................... X ........ ......... Mr. Neal......... X ........ .........
Mr. Nussle..................... X ........ ......... Mr. McNulty...... X ........ .........
Mr. Johnson.................... X ........ ......... Mr. Jefferson.... X ........ .........
Ms. Dunn....................... X ........ ......... Mr. Tanner....... ........ ........ .........
Mr. Collins.................... X ........ ......... Mr. Becerra...... X ........ .........
Mr. Portman.................... X ........ ......... Mr. Doggett...... ........ ........ .........
Mr. English.................... X ........ ......... Mr. Pomeroy...... X ........ .........
Mr. Hayworth................... X ........ ......... Mr. Sandlin...... X ........ .........
Mr. Weller..................... X ........ ......... Ms. Tubbs Jones.. X ........ .........
Mr. Hulshof.................... X ........ .........
Mr. McInnis.................... X ........ .........
Mr. Lewis (KY)................. X ........ .........
Mr. Foley...................... X ........ .........
Mr. Brady...................... X ........ .........
Mr. Ryan....................... X ........ .........
Mr. Cantor..................... X ........ .........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d)(2) of the rule XIII of the
Rules of the House of Representatives, the following statement
is made concerning the effects on the budget of the revenue
provisions of the bill, H.R. 2896 as reported.
The bill is estimated to have the following effects on
budget receipts for fiscal years 2003-2008:
ESTIMATED BUDGET EFFECTS OF H.R. 2896, THE ``AMERICAN JOBS CREATION ACT OF 2003,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS
[Fiscal years 2004-2008, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2004 2005 2006 2007 2008 2004-08
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corporate Reform and Growth Incentive
Provisions
A. Reduction in Corporate Income Tax Rates:
1. Corporate tax rate reductions for tyba 12/31/03..................... -1,378 -2,112 -3,600 -5,658 -6,253 -19,001
manufacturing and other specified
income, including maximum 34% rate for
2004 through 2006, and 32% for 2007 and
thereafter \1\..
2. 33% corporate income tax rate applies tyba 12/31/03..................... -353 -627 -757 -1,030 -1,150 -3,917
to taxable income over $75,000 and
under $1 million in 2004 through 2006;
32% corporate income tax rate applies
to taxable income over $75,000 and
under: $1 million in 2007 and 2008, $5
million in 2009 through 2011, and $20
million thereafter for non-
manufacturing income \1\.
B. Two-Year Extension of Increased Expensing tyba 12/31/05..................... .......... .......... -3,833 -6,832 -899 -11,564
for Small Business--increase section 179
expensing from $25,000 to $100,000 and
increase the phaseout threshold amount from
$200,000 to $400,000; include software in
section 179 property; and extend indexing
of both the deduction limit and the
phaseout threshold (sunset after 2007).
C. Recovery Period for Depreciation of
Certain Leasehold Improvements and
Restaurant Property:
1. 15-year straight-line cost recovery ppisa DOE......................... -59 -148 -245 -276 -267 -995
for qualified leasehold improvements
(sunset after 2005).
2. 15-year straight-line cost recovery ppisa DOE......................... -300 -174 -28 -33 -33 -568
for qualified restaurant improvements
(sunset after 2005).
D. Alternative Minimum Tax Relief:
1. Repeal the 90% limitation on the use tyba 12/31/04..................... .......... -236 -355 -338 -334 -1,263
of foreign tax credits against the AMT.
2. Phaseout 90% limitation on use of net tyba 12/31/04..................... .......... -116 -175 -171 -310 -773
operating losses (92% in 2005 through
2007, 94% in 2008 and 2009, 96% in
2010, 98% in 2011, and 100% in 2012 and
thereafter).
3. Expansion of exemption from tyba 12/31/04..................... .......... -105 -136 -118 -113 -472
alternative minimum tax for small
corporations to $20 million.
4. Coordinate farmer income averaging tyba 12/31/02..................... -2 -2 -2 -3 -4 -13
and the alternative minimum tax.
E. S Corporation Reform and Simplification:
1. Treat members of family as one generally......................... -1 -3 -4 -6 -7 -21
shareholder (3 generations, without tyba 12/31/03.....................
limit) (includes interaction with line
2 below).
2. Increase in number of eligible tyba 12/31/03..................... -17 -42 -54 -64 -72 -250
shareholders to 100.
3. Expansion of bank S corporation DOE............................... -16 -33 -34 -36 -37 -156
eligible shareholders to include IRAs.
4. Disregard unexercised powers of tyba 12/31/03..................... Negligible Revenue Effect
appointment in determining potential
current beneficiaries of ESBT.
5. Use of passive activity loss by tma 12/31/03...................... -1 -1 -1 -1 -1 -4
subchapter S trust income beneficiaries.
6. Transfer of suspended losses incident tyba 12/31/03..................... -1 -2 -2 -2 -2 -10
to divorce.
7. Exclusion of investment securities ................................ Negligible Revenue Effect
income from passive income test for
bank S corporations.
8. Treatment of bank director shares.... tyba 12/31/03..................... -4 -10 -13 14 -15 -56
9. Relief from inadvertently invalid tyba 12/31/03..................... -1 -1 -1 -1 -1 -7
qualified subchapter S subsidiary
elections and terminations.
10. Information retiurns for qualified tyba 12/31/03..................... No Revenue Effect
subchapter S subsidiaries.
11. Repayment of loan for qualifying dma 12/31/03...................... (\2\) (\2\) (\2\) (\2\) (\2\) -2
employer securities.
F. Employee Benefits:
1. treatment of nonqualified deferred (\3\)............................. 137 160 91 31 15 433
compensation plans.
2. Exclusion of incentive stock options saptoea DOE....................... No Revenue Effect
and employee stock purchase plan stock
options from wages.
3. Extend provision under section 420 DOE............................... .......... .......... 18 38 40 97
permitting qualified transfers of
excess defined benefit permitting
qualified transfers of excess defined
pension plan assets to section 401(h)
accounts (through 12/31/13.
G. Treatment of Active Income:
1. Treat European Union as one country (\4\)............................. .......... .......... .......... .......... .......... ..........
for certain purposes of subpart F.
2. Look-through treatment of payments (\5\)............................. .......... .......... .......... -83 -235 -318
between related CFCs under foreign
personal holding company income rules.
3. Look-through treatment for sales of (\5\)............................. .......... .......... .......... -43 -101 -144
partnership interests.
4. Repeal of foreign personal holding (\5\)............................. .......... .......... .......... -31 -81 -112
company rules and foreign investment
company rules.
5. Treatment of pipeline transportation (\6\)............................. .......... -1 -7 -9 -11 -28
income.
6. Determination of foreign personal teia 12/31/04..................... .......... -4 -10 -10 -10 -34
holding company income with respect to
transactions in commodities.
7. Repeal of CFC rules on foreign base (\6\)............................. .......... -6 -42 -52 -64 -164
company shipping income \7\.
8. Modification of exceptions under (\6\)............................. Negligible Revenue Effect
subpart F for active financing income.
9. Partial exclusion for foreign-source tyea 12/31/06..................... .......... .......... (\2\) -2 -14 -16
royalties from certain film-related
intangibles.
H. Reduction in Double Taxation of Corporate
Earnings:
1. Interest expense allocation rules.... tyba 12/31/08..................... .......... .......... .......... .......... .......... ..........
2. Recharacterization of overall isf tyba 12/31/05................. .......... .......... -54 -647 -680 -1,381
domestic loss.
3. Reduction to 2 foreign tax credit tyba 12/31/04..................... .......... -557 -749 -824 -900 -3,030
baskets \8\.
4. Look-through rules to apply to tyba 12/31/02..................... -585 -77 -51 -23 -6 -742
dividends from noncontrolled section
902 corporations.
5. Attribution of stock ownership tyba DOE.......................... .......... -1 -3 -3 -3 -10
through partnerships to apply in
determining section 902 and 960 credits.
6. Clarification of treatment of certain aro/a 8/5/97...................... -22 -4 -5 -5 -5 -41
transfers of intangible property.
7. United States property not to include (\6\)............................. .......... -1 -12 -12 -12 -37
certain assets acquired by dealers in
ordinary course of trade or business.
8. Election not to use average exchange tyb 12/31/04...................... Negligible Revenue Effect
rate for foreign tax paid other than in
functional currency.
9. Repeal of withholding tax on pma 12/31/04...................... .......... (\2\) -3 -3 -3 -11
dividends from certain foreign
corporations.
10. Provide equal treatment for interest tyba 12/31/03..................... -1 -2 -2 -2 -2 -9
paid by foreign partnerships and
foreign corporations doing business in
the U.S..
11. Treatment of certain dividends of (\9\)............................. -14 -38 -59 -61 -63 -235
regulated investment companies.
12. Interaction......................... .................................. .......... 217 238 263 313 1,031
I. Other Provisions:
1. Special rules for livestock sold on trda 12/31/02..................... .......... -18 -7 -4 -3 -32
account of weather-related conditions--
increase reinvestment period from 2 to
4 years for involuntary conversion of
livestock due to drought, flood, or
other weather-related conditions.
2. Payment of dividends on stock of dmi tyba DOE...................... (\2\) (\2\) -1 -1 -1 -3
cooperatives without reducing patronage
dividends.
3. Add hepatitis A to the list of (\10\)............................ 6 9 9 9 9 42
taxable vaccines.
4. Expand human clinical trials expenses eia DOE........................... -10 -16 -16 -17 -18 -77
qualifying for the orphan drug tax
credit.
5. Distributions from publicly traded tyba DOE.......................... -1 -3 -4 -5 -6 -19
partnerships treated as qualifying
income for regulated investment company.
6. Real estate investment trust tyba 12/31/00 &................... Negligible Revenue Effect
modification provisions. tyba DOE..........................
7. Simplification of excise tax imposed asbmpoia 12/31/03................. -1 -1 -1 -1 -1 -3
on bows and arrows [11].
8. Repeal excise tax on fishing tackle asbmpoia 12/31/03................. -3 -3 -3 -3 -3 -12
boxes [11].
9. Income tax credit for cost of tyba 12/31/03..................... -12 -18 -19 -19 -20 -88
carrying tax-paid distilled spirits in
wholesale inventories.
10. Capital gains treatment to apply to sota 12/31/03..................... Negligible Revenue Effect
outright sales of timber by landowner.
11. Repeal excise tax on sonar devices asbmpoia 12/31/03................. (\2\) (\2\) (\2\) (\2\) (\2\) -2
suitable for finding fish [11].
12. Taxation of certain settlement funds tyba 12/31/03..................... -4 -6 -6 -6 -7 -29
13. Suspension of the occupational taxes DOE............................... -66 -78 -78 -12 -234
relating to distilled spirits, wine,
and beer (sunset 6/30/07).
-----------------------------------------------------------------------
Total of Corporate Reform and Growth .................................. -2,709 -4,062 -10,016 -16,120 -11,370 -44,280
Incentive Provisions.
=======================================================================
Provisions to Reduce Tax Avoidance Through
Corporate Earnings Stripping and
Expatriation
1. Reduction in potential for earnings (\12\)............................ 61 65 142 288 318 874
stripping by further limiting deduction for
interest on certain indebtedness (eliminate
debt/equity safe harbor, use 35% generally
for pre-2005 and 25% for post-2004 debt and
50% for guaranteed debt, or elect 30% for
all post-2004 debt, eliminate excess limit
carryforward, and change excess interest
carryforward period for net interest
expense/ATI test to 10 years).
2. Tax treatment of expatriated entities.... tyea 3/4/03....................... 27 19 24 28 30 128
3. 15% excise tax on stock compensation of (\13\)............................ 11 7 7 7 7 38
insiders in expatriated corporations.
4. Reinsurance of United States risks in rra DOE........................... (\14\) (\14\) (\14\) (\14\) (\14\) 2
foreign jurisdictions.
5. Revision of tax rules for individuals who iwea 2/27/03...................... 19 18 21 24 28 110
expatriate.
6. Reporting of taxable mergers and aaDOE............................. 1 2 3 3 3 12
acquisitions.
7. Studies.................................. DOE............................... No Revenue Effect
-----------------------------------------------------------------------
Total of Provisions to Reduce Tax .................................. 119 111 197 350 386 1,164
Avoidance Through Corporate Earnings
Stripping and Expatriation.
=======================================================================
Provisions Relating to Tax Shelters and
Miscellaneous Other Provisions:
A. Tax Shelter Provisions:
1. Provisions relating to reportable various dates..................... 92 115 119 120 124 570
transactions and tax shelters. after DOE \15\....................
2. Modifications to the substantial tyba DOE.......................... .......... 4 11 19 23 57
understatement penalty for
nonreportable transactions.
3. Modification of actions to enjoin da DOE............................ Negligible Revenue Effect
certain conduct related to tax shelters
and reportable transactions.
4. Impose a civil penalty (of up to voa DOE........................... .......... (\14\) (\14\) (\14\) (\14\) 1
$5,000) on failure to report interest
in foreign financial accounts.
5. Regulation of individuals practicing ata DOE........................... No Revenue Effect
before the Department of Treasury.
B. Other Provisions:
1. Treatment of stripped interest in pada DOE.......................... 2 13 11 8 5 39
bond and preferred stock funds.
2. Minimum holding period for foreign apoamt 30da DOE................... (\14\) 3 3 3 3 12
tax credit on withholding tax on income
other than dividends.
3. Disallowance of certain partnership ctada DOE......................... 18 39 57 70 79 264
loss transfers.
4. No reduction of basis under section Da DOE............................ 5 13 20 28 36 101
734 in stock held by partnership in
corporate partner.
5. Repeal of special rules for FASITs... tyba 12/31/03..................... Negligible Revenue Effect
6. Limitation on transfer of built-in ta DOE............................ (\14\) 2 4 6 8 20
losses on REMIC residuals.
7. Clarification of banking business for DOE............................... .......... 7 13 14 16 50
purposes of determining investment of
earnings in United States property.
8. Modify rules related to certain small tyba 12/31/03..................... 45 98 111 117 122 492
property and casualty insurance
companies--reform of section 501(c)(15)
to apply to organizations with gross
receipts not exceeding $600,000 and
premiums greater than 50% of gross
receipts; increase the net-written-
premium threshold permitting certain
small insurance companies to be taxed
on investment income to $1.89 million
and index for inflation.
9. Modification of definition of tyba 12/31/03..................... 1 2 2 2 2 11
insurance companies other than life
insurance companies.
10. Deny deduction for interest paid to tyba DOE.......................... .......... .......... 1 1 3 5
the IRS on underpayments involving
certain tax motivated transactions.
11. Clarification of rules for payment toa DOE........................... 51 37 10 3 3 104
of estimated tax for certain deemed
asset sales.
12. Exclusion of like-kind exchange sopra DOE......................... (\14\) 11 13 15 17 56
property from nonrecognition treatment
on the sale or exchange of a principal
residence.
13. Prevent mismatching of deductions pao/a DOE......................... 12 41 84 79 33 249
and income inclusions in transactions
with related foreign persons.
14. Exclusion from gross income for iri cyba DOE...................... .......... 1,034 -103 -106 -109 716
interests on overpayments of income tax
by individuals.
15. Deposits made to suspend the running Dma DOE........................... 157 -5 -6 -6 -6 134
of interest on potential underpayments.
16. Authorize IRS to enter into iaeio/a DOE....................... 48 14 5 (\16\) (\16\) 67
installment agreements that provide for
partial payment.
17. Extension of IRS user fees (through DOE............................... .......... 25 35 36 38 135
9/30/13).
-----------------------------------------------------------------------
Provisions Relating to Tax Shelters .................................. 431 1,453 390 409 397 3,083
and Miscellaneous Other Provisions.
=======================================================================
Trade Enhancement and Compliance Provisions
1. Repeal of exclusion for extraterritorial (\17\)............................ 453 880 1,436 3,636 5,490 11,895
income.
2. Extend Customs User Fees:................ .................................. .......... .......... .......... .......... .......... ..........
a. Passenger and conveyance processing DOE............................... .......... 108 329 346 363 1,146
fee (through 12/31/13) \18\ \19\.
b. Merchandise processing fee (through DOE............................... .......... 671 1,216 1,286 1,359 4,532
12.31.13) \18\ \19\.
-----------------------------------------------------------------------
Total of Trade Enhancement and .................................. 453 1,659 2,981 5,268 7,212 17,573
Compliance Provisions.
=======================================================================
Net Total............................. .................................. -1,706 -839 -6,448 -10,093 -3,375 -22,460
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Overlap between the two rate reduction proposals (items A.1. and A.2.) is reflected in A.1.
\2\ Loss of less than $500,000.
\3\ Effective for amounts in taxable years beginning after December 31, 2003, except for amounts deferred in 2004 pursuant to an irrevocable election
made prior to October 24, 2003.
\4\ Effective for taxable years of foreign corporations beginning after December 31, 2008, and for taxable years of U.S. shareholders with or within
which such taxable years of foreign corporations end.
\5\ Effective for taxable years of foreign corporations beginning after December 31, 2006, and for taxable years of U.S. shareholders with or within
which such taxable years of foreign corporations end.
\6\ Effective for taxable years of foreign corporations beginning after December 31, 2004, and for taxable years of U.S. shareholders with or within
which such taxable years of foreign corporations end.
\7\ Estimate accounts for interaction with reduction to 2 foreign tax credit baskets in item H.3.
\8\ Pre-effective date excess credits carried forward to new basket that would apply under new system.
\9\ Effective for dividends with respect to taxable years of regulated investment companies beginning after the date of enactment.
\10\ Effective for vaccines sold beginning on the first day of the first month beginning more than four weeks after the date of enactment.
\11\ Provision will have partially offsetting effects on outlays which will be provided by the Congressional Budget Office.
\12\ Effective for taxable years beginning after 2003, and taxable years ending after March 4, 2003, for ``surrogate'' corporations with lookback to
December 31, 1996.
\13\ Generally effective March 4, 2003.
\14\ Gain of less than $1 million.
\15\ Effective dates for provisions relating to reportable transactions and tax shelters: the penalty for failure to disclose reportable transactions is
effective for returns and statements the due date of which is after the date of enactment; the modification to the accuracy-related penalty for listed
or reportable transactions is effective for taxable years ending after the date of enactment; the tax shelter exception to confidentiality privileges
is effective for communications made on or after the date of enactment; the statute of limitations for unreported listed transactions applies to all
taxable years for which the statute of limitations under section 6501 has not run as of the date of enactment; the disclosure of reportable
transactions by material advisors is effective for transactions with respect to which material aid, assistance or advice is provided after the date of
enactment; the investor list penalty is effective for returns the due date for which is after the date of enactment; the modification of penalty for
failure to maintain investor lists is effective for requests made after the date of enactment; and the penalty on promoters of tax shelters is
effective for activities after the date of enactment.
\16\ Gain of less than $500,000.
\17\ Generally effective for transactions after 2003, with transition for transactions during 2004 through 2006.
\18\ Estimate is subject to review by the Congressional Budget Office.
\19\ Estimate reflects enactment of H.R. 3365, the ``Military Family Tax Relief Act of 2003.''
Legend for ``Effective'' column: aa=acquisitions after; apoamt=amounts paid or accrued more than; aro/a=amounts received on or after; asbmpoia=articles
sold by the manufacturer, producer, or importer after; ata=actions taken after; ctada=contributions, transfers, and distributions after; cyba=calendar
years beginning after; da=day after; Da=distributions after; dma=distributions made after; Dma=deposits made after; DOE=date of enactment;
dmi=distributions made in; iwea=individuals who expatriate after; eia=expenses incurred after; iaeio/a=installment agreements entered into on or
after; iri=interest received in; Isf=losses sustained for; pa=periods after; pada=purchases and dispositions after; pao/a=payments accrued on or
after; pma=payments made after; ppisa=property placed in service after; rra=risk reinsured after; saptoea=stock acquired pursuant to options exercised
after; sopra=sales of principal residences after; sota=sales of timber after; ta=transactions after; teia=transactions entered into after;
tma=transfers made after; toa=transactions occurring after; trda=tax returns due after; tyba=taxable years beginning after; tyea=taxable years ending
after; voa=violations occurring after; and 30da=30 days after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue reducing income tax
provisions involve increased tax expenditures, and the revenue
increasing provisions involve reduced tax expenditures (See
amounts in table in Part IV.A., above.)
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 5, 2003.
Hon. William ``Bill'' M. Thomas,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2896, the American
Jobs Creation Act of 2003.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Annabelle
Bartsch.
Sincerely,
Elizabeth M. Robinson
(For Douglas Holtz-Eakin, Director).
Enclosure.
H.R. 2896--American Jobs Creation Act of 2003
Summary: H.R. 2896 would repeal the exclusion for
extraterritorial income, institute a reduced tax rate on
certain corporate income, and make numerous other changes to
existing tax law relating to corporations. In addition, H.R.
2896 would extend IRS and customs user fees. The tax provisions
of the bill would generally take effect after December 31,
2003.
The Congressional Budget Office (CBO) and the Joint
Committee on Taxation (JCT) estimate that enacting the bill
would reduce federal revenues by about $1.7 billion in 2004,
$28.2 billion over the 2004-2008 period, and $76.6 billion over
the 2004-2013 period. CBO estimates that the bill would
decrease direct spending by $614 million in 2004, about $7
billion over the 2004-2008 period, and about $17.1 billion over
the 2004-2013 period.
JCT has determined that the following tax provisions of
H.R. 2896 contain private-sector mandates as defined in the
Unfunded Mandates Reform Act (UMRA): (1) the provisions to
reduce the potential for earnings stripping by further limiting
the deduction for interest on certain indebtedness; (2) the
provisions relating to reportable transactions and tax
shelters; (3) the provision relating to the modification of the
rules for certain property and casualty insurance companies;
and (4) the provision to repeal the exclusion for
extraterritorial income. CBO has reviewed the non-tax
provisions and determined that the extension of the customs
user fees is a private-sector mandate as defined in UMRA. In
aggregate, the costs of those mandates would greatly exceed the
annual threshold established by UMRA for private-sector
mandates ($120 million in 2004, adjusted annually for
inflation) in each of the first five years the mandates are in
effect. JCT and CBO have determined that H.R. 2896 contains no
intergovernmental mandates as defined in UMRA.
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 2896 is shown in the following table.
The costs of the legislation fall within budget functions 300
(natural resources and environment), 550 (health), 750
(administration of justice), and 800 (general government).
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Title I: Tax Provisions Relating to -2,709 -4,062 -10,016 -16,120 -11,370 -9,931 -15,467 -17,175 -20,031 -21,841
Corporate Tax Rates, Depreciation Rules,
and to Other Changes.....................
Title II: Provisions to Relating to 119 111 197 350 386 429 445 466 487 508
Corporate Earnings Stripping and
Expatriation.............................
Title III: Provisions Relating to Tax 441 1,448 382 401 392 428 459 492 525 556
Shelters and Other Miscellaneous
Provisions...............................
Title IV: Trade and Compliance Provisions. 453 880 1,436 3,636 5,490 5,714 5,983 6,253 6,515 6,787
-------------------------------------------------------------------------------------------------------------
Estimated Revenues.................. -1,696 -1,623 -8,001 -11,733 -5,102 -3,360 -8,580 -9,964 -12,504 -13,990
CHANGES IN DIRECT SPENDING
Taxation of Hepatitis A Vaccine:
Estimated Budget Authority............ 5 7 7 7 7 7 7 7 7 7
Estimated Outlays..................... 5 7 7 7 7 7 7 7 7 7
Reduction of Certain Excise Taxes:
Estimated Budget Authority............ 0 -4 -4 -4 -4 -4 -4 -5 -5 -5
Estimated Outlays..................... 0 -1 -2 -4 -4 -4 -4 -4 -5 -5
Installment Agreements for Tax Payments:
Estimated Budget Authority............ * * * * * * * * * *
Estimated Outlays..................... * * * * * * * * * *
Extension of Customs User Fees:
Estimated Budget Authority............ -619 -1,464 -1,546 -1,632 -1,722 -1,818 -1,919 -2,025 -2,138 -2,257
Estimated Outlays..................... -619 -1,464 -1,546 -1,632 -1,722 -1,818 -1,919 -2,025 -2,138 -2,257
Total Changes in Direct Spending:
Estimated Budget Authority............ -614 -1,461 -1,543 -1,629 -1,719 -1,815 -1,916 -2,023 -2,136 -2,255
Estimated Outlays..................... -614 -1,458 -1,541 -1,629 -1,719 -1,815 -1,916 -2,022 -2,136 -2,255
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Extension of IRS User Fees:
Estimated Authorization Level......... 0 3 4 4 4 4 4 4 4
Estimated Outlays..................... 0 3 4 4 4 4 4 4 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:--Positive (negative) changes in revenues correspond to decreases (increases) in budget deficits. Positive (negative) changes in direct spending
correspond to increases (decreases) in budget deficits.
* = increase of less than $500,000.
Sources: CBO and the Joint Committee on Taxation.
Basis of estimate
Revenues
With the exception of the extension of IRS user fees, JCT
provided all the revenue estimates. All together, CBO and JCT
estimate that the provisions contained in H.R. 2896 would
reduce federal revenues by about $1.7 billion in 2004, $28.2
billion over the 2004-2008 period, and $76.6 billion over the
2004-2013 period. The largest budgetary effects would result
from repealing the exclusion for extraterritorial income and
instituting a reduced tax rate on certain corporate income.
Title I of H.R. 2896 would alter numerous provisions of tax
law for corporations. In total, JCT estimates enacting the
provisions of title I would reduce federal revenues by about
$2.7 billion in 2004, $44.3 billion over the 2004-2008 period,
and $128.7 billion over the 2004-2013 period. A large portion
of this reduction would come from lowering the tax rate on
corporations for income from certain manufacturing and
nonmanufacturing activities, which JCT estimates would decrease
governmental receipts by about $1.7 billion in 2004, $22.9
billion over the 2004-2008 period, and $77.5 billion over the
2004-2013 period. Some of the other provisions in title I would
extend increased expensing for small businesses for two years,
alter depreciation rules, and modify the alternative minimum
tax. Title I also would add Hepatitis A to the list of taxable
vaccines, which would also affect direct spending (see ``Direct
Spending'' section).
The provisions of title II would increase federal revenues
by reducing tax avoidance through corporate earnings stripping
and expatriation. In total, JCT estimates that these provisions
would raise governmental receipts by $119 million in 2004,
about $1.2 billion over the 2004-2008 period, and about $3.5
billion over the 2004-2013 period. Over half of the total
increase would result from further limiting interest deductions
on certain indebtedness in order to curb corporate earnings
stripping.
The provisions of title III also would raise federal
revenues over the next ten years. JCT estimates that modifying
existing tax law relating to tax shelters and reportable and
nonreportable transactions would increase revenues by $92
million in 2004, $628 million over the 2004-2008 period, and
about $1.6 billion over the 2004-2013 period. Another provision
of title III would extend IRS user fees through September 30,
2013. Currently, the fees are set to expire on December 31,
2004. CBO estimates this would increase revenues by $135
million over the 2005-2008 period and $345 million over the
2005-2013 period. In addition, the provisions include
authorizing the IRS to enter into installment agreements for
tax payments, which also would affect direct spending (see
``Direct Spending'' section). In total, CBO and JCT estimate
that title III would increase governmental receipts by $441
million in 2004, about $3.1 billion over the 2004-2008 period,
and about $5.5 billion over the 2004-2013 period.
Title IV of the bill would repeal the exclusion for
extraterritorial income, including a transition period through
2006. JCT estimates doing so would increase federal revenues by
about $453 million in 2004, by about $11.9 billion over the
2004-2008 period, and by about $43.1 billion over the 2004-2013
period.
Direct spending
In total, CBO estimates that the bill would decrease direct
spending by $614 million in 2004, by about $7 billion over the
2004-2008 period, and by about $17.1 billion over the 2004-2013
period. In addition, CBO estimates H.R. 2896 would increase
spending by $15 million over the 2004-2008 period and $36
million over the 2004-2013 period, subject to the appropriation
of the estimated amounts.
Taxation of Hepatitis A Vaccine. The Hepatitis A vaccine
tax provision (section 1103) would require vaccine buyers to
pay an excise tax on each dose purchased. Medicaid is a major
purchaser of vaccines through the Vaccines for Children
program, administered through the Centers for Disease Control
and Prevention (CDC). CBO assumes that Medicaid purchases
approximately half of the Hepatitis A vaccines sold annually.
Based on estimates provided by JCT, CBO expects that
implementing section 1103 would cost the Medicaid program about
$47 million over the 2004-2013 period.
Receipts from the tax would go to the Vaccine Injury
Compensation Fund (VICF), which is administered by the Health
Resources and Services Administration (HRSA). The fund uses tax
revenues to pay compensation to claimants injured by vaccines.
Once a vaccine becomes taxable, injuries attributed to its use
become compensable through this fund. Based on information
provided by HRSA and CDC, we assume there will be few
compensable claims related to the Hepatitis A vaccine. CBO
estimates the provision would increase outlays from the VICF by
$21 million over the 2004-2013 period.
Reducing Certain Excise Taxes. Reducing excise taxes on
certain hunting and fishing equipment would reduce deposits to
the federal aid-wildlife fund and the aquatic resources trust
fund. The loss of this income (and related interest earnings to
the two funds) would result in lower spending for fish and
wildlife conservation projects beginning in fiscal year 2005.
CBO estimates that the resulting savings would be about $33
million over the 2005-2013 period.
Installment Agreements for Tax Payments. Section 3036 would
allow the IRS to enter into agreements for the partial payment
of tax liabilities. Under current law taxpayers can elect to
pay their full tax liability through installments. The IRS
charges a fee of $43 for each installment agreement, which it
can retain and spend without further appropriation action. CBO
estimates that allowing for the partial payment of tax
liabilities would increase direct spending by about $1 million
over the 2004-2013 period.
Extension of Customs User Fees. Under current law, customs
user fees expire after March 31, 2004. H.R. 2896 would extend
these fees through September 30, 2013. CBO estimates that this
would increase offsetting receipts by about $17.1 billion over
the 2004-2013 period.
Spending subject to appropriation
Extension of IRS User Fees. Section 3037 would extend the
authority of the IRS to charge taxpayers fees for certain
rulings, opinion letters, and determinations through September
30, 2013. The bill would authorize the IRS to retain and spend
a portion of the fees collected, subject to appropriation.
Based on the historical level of fees spent, CBO estimates that
implementing this provision would cost $15 million over the
2005-2008 period and $36 million over the 2005-2013 period,
subject to the appropriation of the estimated amounts.
Estimated impact on state, local, and tribal governments:
JCT and CBO have reviewed the provisions of H.R. 2896 and have
determined that the bill contains no intergovernmental mandates
as defined in UMRA and would not affect the budgets of state,
local, and tribal governments.
Estimated impact on the private sector: JCT has determined
that the following tax provisions of H.R. 2896 contain private-
sector mandates as defined in UMRA: (1) the provisions to
reduce the potential for earnings stripping by further limiting
the deduction for interest on certain indebtedness; (2) the
provisions relating to reportable transactions and tax
shelters; (3) the provision relating to the modification of the
rules for certain property and casualty insurance companies;
and (4) the provision to repeal the exclusion for
extraterritorial income. In aggregate, the costs of those
mandates would greatly exceed the annual threshold established
by UMRA for private-sector mandates ($120 million in 2004,
adjusted annually for inflation).
CBO has reviewed the non-tax provisions of H.R. 2896 and
determined that the extension of the customs user fees is a
private-sector mandate as defined in UMRA. H.R. 2896 would
extend through 2013 customs user fees that are scheduled to
expire at the end of March 2004 under current law. CBO cannot
determine the direct cost of this provision, however, because
UMRA does not clearly specify how to calculate the cost
associated with extending an existing mandate that has not yet
expired. Under one interpretation, UMRA requires the direct
cost to be measured relative to a case that assumes that the
current mandate will not exist beyond its current expiration
date. Under that interpretation, CBO estimates that the direct
cost of the mandate would be more than $600 million in 2004 and
larger in later years. Under the other interpretation, UMRA
requires the direct cost to be measured relative to the mandate
currently in effect. Under that interpretation, the direct cost
of this provision would be zero.
Estimate prepared by: Federal Revenues: Annabelle Bartsch.
Federal Spending: Excise Taxes on Fishing and Hunting
Equipment: Deborah Reis; Installment Agreements and IRS User
Fees: Matthew Pickford; Hepatitis A Vaccine: Tom Bradley; and
Customs User Fees: Mark Grabowicz. Impact on State, Local, and
Tribal Governments: Melissa Merrell. Impact on the Private
Sector: Patrice Gordon and Paige Piper/Bach.
Estimate approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis and Peter H. Fontaine, Deputy
Assistant Director for Budget Analysis.
D. Macroeconomic Impact Analysis
In compliance with clause 3(h)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made by the Joint Committee on Taxation with respect to the
provisions of the bill amending the Internal Revenue Code of
1986: the effects of the bill on total economic activity within
the ten-year budget horizon are so small as to be incalculable
within the context of a model of the aggregate economy.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was a result of the Committee's
oversight review concerning the tax burden on American
taxpayers that the Committee concluded that it is appropriate
and timely to enact the revenue provisions included in the bill
as reported.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Constitutional Authority Statement
With respect to clause 3(d)(1) of the rule XIII of the
Rules of the House of Representatives (relating to
Constitutional Authority), the Committee states that the
Committee's action in reporting this bill is derived from
Article I of the Constitution, Section 8 (``The Congress shall
have Power To lay and collect Taxes, Duties, Imposts and
Excises * * *''), and from the 16th Amendment to the
Constitution.
D. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the bill contains four
Federal mandates on the private sector: (1) the provision to
reduce the potential for earnings stripping by further limiting
the deduction for interest on certain indebtedness; (2) the
provision relating to reportable transactions and tax shelters;
(3) the provision relating to modification of the rules for
certain property and casualty insurance companies; and (4) the
provision to repeal the exclusion for extraterritorial income.
The costs required to comply with each Federal private sector
mandate generally are no greater than the aggregate estimated
budget effects of the provision. Benefits from the provision
include improved administration of the tax laws and a more
accurate measurement of income for Federal tax purposes.
The Committee has determined that the bill does not impose
a Federal intergovernmental mandate on State, local, or tribal
governments.
E. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the provisions of the bill, and states that
the provisions of the bill do not involve any Federal income
tax rate increases within the meaning of the rule.
F. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the House Committee on Ways and
Means, the Senate Committee on Finance, or any committee of
conference if the legislation includes a provision that
directly or indirectly amends the Internal Revenue Code and has
widespread applicability to individuals or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small
businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
PART I--TAX ON INDIVIDUALS
* * * * * * *
SEC. 1. TAX IMPOSED.
(a) * * *
* * * * * * *
(h) Maximum Capital Gains Rate.--
(1) * * *
* * * * * * *
(11) Dividends taxed as net capital gain.--
(A) * * *
* * * * * * *
(C) Qualified foreign corporations.--
(i) * * *
* * * * * * *
(iii) Exclusion of dividends of
certain foreign corporations.--Such
term shall not include any foreign
corporation which for the taxable year
of the corporation in which the
dividend was paid, or the preceding
taxable year, is [a foreign personal
holding company (as defined in section
552), a foreign investment company (as
defined in section 1246(b)), or] a
passive foreign investment company (as
defined in section 1297).
* * * * * * *
PART II--TAX ON CORPORATIONS
* * * * * * *
SEC. 11. TAX IMPOSED.
(a) * * *
(b) Amount of Tax.--
[(1) In general.--The amount of the tax imposed by
subsection (a) shall be the sum of--
[(A) 15 percent of so much of the taxable
income as does not exceed $50,000,
[(B) 25 percent of so much of the taxable
income as exceeds $50,000 but does not exceed
$75,000,
[(C) 34 percent of so much of the taxable
income as exceeds $75,000 but does not exceed
$10,000,000, and
[(D) 35 percent of so much of the taxable
income as exceeds $10,000,000.
In the case of a corporation which has taxable income
in excess of $100,000 for any taxable year, the amount
of tax determined under the preceding sentence for such
taxable year shall be increased by the lesser of (i) 5
percent of such excess, or (ii) $11,750. In the case of
a corporation which has taxable income in excess of
$15,000,000, the amount of the tax determined under the
foregoing provisions of this paragraph shall be
increased by an additional amount equal to the lesser
of (i) 3 percent of such excess, or (ii) $100,000.]
(1) For taxable years beginning after 2011.--In the
case of taxable years beginning after 2011, the amount
of the tax imposed by subsection (a) shall be
determined in accordance with the following table:
If taxable income isThe tax is:
Not over $50,000..15% of taxable income...............................
Over $50,000 but n$7,500, plus 25% of the excess over $50,000.........
Over $75,000 but n$13,750, plus 32% of the excess over $75,000........
Over $20,000,000..$6,389,750, plus 35% of the excess over $20,000,000.
(2) For taxable years beginning in 2009, 2010, or
2011.--In the case of taxable years beginning in 2009,
2010, or 2011, the amount of the tax imposed by
subsection (a) shall be determined in accordance with
the following table:
If taxable income isThe tax is:
Not over $50,000..15% of taxable income...............................
Over $50,000 but n$7,500, plus 25% of the excess over $50,000.........
Over $75,000 but n$13,750, plus 32% of the excess over $75,000........
Over $5,000,000 bu$1,589,750, plus 34% of the excess over $5,000,000..
Over $10,000,000..$3,289,750, plus 35% of the excess over $10,000,000.
(3) For taxable years beginning in 2007 or 2008.--In
the case of taxable years beginning in 2007 or 2008,
the amount of the tax imposed by subsection (a) shall
be determined in accordance with the following table:
If taxable income isThe tax is:
Not over $50,000..15% of taxable income...............................
Over $50,000 but n$7,500, plus 25% of the excess over $50,000.........
Over $75,000 but n$13,750, plus 32% of the excess over $75,000........
Over $1,000,000 bu$309,750, plus 34% of the excess over $1,000,000....
Over $10,000,000..$3,369,750, plus 35% of the excess over $10,000,000.
(4) For taxable years beginning in 2004, 2005, or
2006.--In the case of taxable years beginning in 2004,
2005, or 2006, the amount of the tax imposed by
subsection (a) shall be determined in accordance with
the following table:
If taxable income isThe tax is:
Not over $50,000..15% of taxable income...............................
Over $50,000 but n$7,500, plus 25% of the excess over $50,000.........
Over $75,000 but n$13,750, plus 33% of the excess over $75,000........
Over $1,000,000 bu$319,000, plus 34% of the excess over $1,000,000....
Over $10,000,000..$3,379,000, plus 35% of the excess over $10,000,000.
(5) Phaseout of lower rates for certain taxpayers.--
(A) General rule for years before 2012.--
(i) In general.--In the case of
taxable years beginning before 2012
with respect to a corporation which has
taxable income in excess of the
applicable amount for any taxable year,
the amount of tax determined under
paragraph (1), (2), (3) or (4) for such
taxable year shall be increased by the
lesser of (I) 5 percent of such excess,
or (II) the maximum increase amount.
(ii) Maximum increase amount.--For
purposes of clause (i)--
------------------------------------------------------------------------
In the case of any taxable year The maximum
beginning during: The applicable increase amount
amount is: is:
------------------------------------------------------------------------
2004, 2005, or 2006............... $1,000,000 $21,000
2007 or 2008...................... $1,000,000 $30,250
2009, 2010, or 2011............... $5,000,000 $110,250.
------------------------------------------------------------------------
(B) Higher income corporations.--In the case
of a corporation which has taxable income in
excess of $20,000,000 ($15,000,000 in the case
of taxable years beginning before 2012), the
amount of the tax determined under the
foregoing provisions of this subsection shall
be increased by an additional amount equal to
the lesser of (i) 3 percent of such excess, or
(ii) $610,250 ($100,000 in the case of taxable
years beginning before 2012).
[(2)] (6) Certain personal service corporations not
eligible for graduated rates.--Notwithstanding
paragraph (1), the amount of the tax imposed by
subsection (a) on the taxable income of a qualified
personal service corporation (as defined in section
448(d)(2) shall be equal to 35 percent of the taxable
income.
(c) Limitation on Tax on Qualified Production Activities
Income.--
(1) In general.--If a corporation has qualified
production activities income for any taxable year, the
tax imposed by this section shall not exceed the sum
of--
(A) a tax computed at the rates and in the
manner as if this subsection had not been
enacted on the taxable income reduced by the
amount of qualified production activities
income, plus
(B) a tax equal to 32 percent (34 percent in
the case of taxable years beginning before
January 1, 2007) of the qualified production
activities income (or, if less, taxable
income).
(2) Qualified production activities income.--
(A) In general.--The term ``qualified
production activities income'' for any taxable
year means an amount equal to the excess (if
any) of--
(i) the taxpayer's domestic
production gross receipts for such
taxable year, over
(ii) the sum of--
(I) the cost of goods sold
that are allocable to such
receipts,
(II) other deductions,
expenses, or losses directly
allocable to such receipts, and
(III) a ratable portion of
other deductions, expenses, and
losses that are not directly
allocable to such receipts or
another class of income.
(B) Allocation method.--The Secretary shall
prescribe rules for the proper allocation of
items of income, deduction, expense, and loss
for purposes of determining income attributable
to domestic production activities.
(3) Domestic production gross receipts.--For purposes
of this subsection, the term ``domestic production
gross receipts'' means the gross receipts of the
taxpayer which are derived from--
(A) any lease, rental, license, sale,
exchange, or other disposition of--
(i) qualifying production property
which was manufactured, produced,
grown, or extracted in whole or in
significant part by the taxpayer within
the United States, or
(ii) any qualified film produced by
the taxpayer, or
(B) construction, engineering, or
architectural services performed in the United
States for construction projects in the United
States.
(4) Qualifying production property.--For purposes of
this subsection, the term ``qualifying production
property'' means--
(A) tangible personal property,
(B) any computer software, and
(C) any property described in section
168(f)(4).
(5) Qualified film.--For purposes of this
subsection--
(A) In general.--The term ``qualified film''
means any property described in section
168(f)(3) if not less than 50 percent of the
total compensation relating to the production
of such property is compensation for services
performed in the United States by actors,
production personnel, directors, and producers.
(B) Exception.--Such term does not include
property with respect to which records are
required to be maintained under section 2257 of
title 18, United States Code.
(6) Related persons.--For purposes of this
subsection--
(A) In general.-- The term ``domestic
production gross receipts'' shall not include
any gross receipts of the taxpayer derived from
property leased, licensed, or rented by the
taxpayer for use by any related person.
(B) Related person.--For purposes of
subparagraph (A), a person shall be treated as
related to another person if such persons are
treated as a single employer under subsection
(a) or (b) of section 52 or subsection (m) or
(o) of section 414, except that determinations
under subsections (a) and (b) of section 52
shall be made without regard to section
1563(b).
[(c)] (d) Exceptions.--Subsection (a) shall not apply to a
corporation subject to a tax imposed by--
(1) * * *
* * * * * * *
[(d)] (e) Foreign Corporations.--In the case of a foreign
corporation, the taxes imposed by subsection (a) and section 55
shall apply only as provided by section 882.
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart D--Business Related Credits
* * * * * * *
SEC. 38. GENERAL BUSINESS CREDIT.
(a) * * *
(b) Current Year Business Credit.--For purposes of this
subpart, the amount of the current year business credit is the
sum of the following credits determined for the taxable year:
(1) * * *
* * * * * * *
(14) in the case of an eligible employer (as defined
in section 45E(c)), the small employer pension plan
startup cost credit determined under section 45E(a),
[plus]
(15) the employer-provided child care credit
determined under section 45F(a)[.], plus
(16) in the case of an eligible wholesaler (as
defined in section 5011(b)), the distilled spirits
wholesaler credit determined under section 5011(a).
* * * * * * *
SEC. 39. CARRYBACK AND CARRYFORWARD OF UNUSED CREDITS.
(a) * * *
* * * * * * *
(d) Transitional Rules.--
(1) * * *
* * * * * * *
(11) No carryback of section 5011 credit before
january 1, 2004.--No portion of the unused business
credit for any taxable year which is attributable to
the credit determined under section 5011(a) may be
carried back to a taxable year beginning before January
1, 2004.
* * * * * * *
SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES
OR CONDITIONS.
(a) * * *
(b) Qualified Clinical Testing Expenses.--For purposes of
this section--
(1) * * *
(2) Clinical testing.--
(A) * * *
* * * * * * *
(C) Treatment of certain expenses incurred
before designation.--For purposes of
subparagraph (A)(ii)(I), if a drug is
designated under section 526 of the Federal
Food, Drug, and Cosmetic Act not later than the
due date (including extensions) for filing the
return of tax under this subtitle for the
taxable year in which the application for such
designation of such drug was filed, such drug
shall be treated as having been designated on
the date that such application was filed.
* * * * * * *
Subpart G--Credit Against Regular Tax for Prior Year Minimum Tax
Liability
* * * * * * *
SEC. 53. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this section--
(1) Net minimum tax.--
(A) * * *
(B) Credit not allowed for exclusion
preferences.--
(i) Adjusted net minimum tax.--The
adjusted net minimum tax for any
taxable year is--
(I) * * *
(II) the amount which would
be the net minimum tax for such
taxable year if the only
adjustments and items of tax
preference taken into account
were those specified in clause
(ii) [and if section 59(a)(2)
did not apply].
* * * * * * *
PART VI--MINIMUM TAX FOR TAX PREFERENCES
* * * * * * *
SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED.
(a) * * *
* * * * * * *
(c) Regular tax.--
(1) * * *
(2) Coordination with income averaging for farmers.--
Solely for purposes of this section, section 1301
(relating to averaging of farm income) shall not apply
in computing the regular tax liability.
[(2)] (3) Cross references.--
For provisions providing that certain credits are not
allowable against the tax imposed by this section, see sections
26(a), 29(b)(6), 30(b)(3) and 38(c).
* * * * * * *
(e) Exemption for Small Corporations.--
(1) In general.--
(A) [$7,500,000] $20,000,000 Gross receipts
test.--The tentative minimum tax of a
corporation shall be zero for any taxable year
if the corporation's average annual gross
receipts for all 3-taxable-year periods ending
before such taxable year does not exceed
[$7,500,000] $20,000,000. For purposes of the
preceding sentence, only taxable years
beginning after December 31, 1993, shall be
taken into account.
(B) $5,000,000 Gross receipts test for first
3-year period.--Subparagraph (A) shall be
applied by substituting ``$5,000,000'' for
``[$7,500,000] $20,000,000'' for the first 3-
taxable-year period (or portion thereof) of the
corporation which is taken into account under
subparagraph (A).
* * * * * * *
SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.
(a) * * *
* * * * * * *
(d) Alternative Tax Net Operating Loss Deduction Defined.--
(1) In general.--For purposes of subsection (a)(4),
the term ``alternative tax net operating loss
deduction'' means the net operating loss deduction
allowable for the taxable year under section 172,
except that--
[(A) the amount of such deduction shall not
exceed the sum of--
[(i) the lesser of--
[(I) the amount of such
deduction attributable to net
operating losses (other than
the deduction attributable to
carryovers described in clause
(ii)(I)), or
[(II) 90 percent of
alternative minimum taxable
income determined without
regard to such deduction, plus
[(ii) the lesser of--
[(I) the amount of such
deduction attributable to the
sum of carrybacks of net
operating losses for taxable
years ending during 2001 or
2002 and carryforwards of net
operating losses to taxable
years ending during 2001 and
2002, or
[(II) alternative minimum
taxable income determined
without regard to such
deduction reduced by the amount
determined under clause (i),
and]
(A) the amount of such deduction shall not
exceed the applicable percentage (determined
under paragraph (3)) of the alternative minimum
taxable income determined without regard to
such deduction, and
* * * * * * *
(3) Applicable percentage.--For purposes of paragraph
(1)(A)--
For taxable years beginning The applicable
in calendar year-- percentage is--
2005, 2006, or 2007..................................... 92
2008 or 2009............................................ 94
2010.................................................... 96
2011.................................................... 98
100.2012 or thereafter......................................
* * * * * * *
(g) Adjustments Based on Adjusted Current Earnings.--
(1) * * *
* * * * * * *
(6) Exception for certain corporations.--This
subsection shall not apply to any S corporation,
regulated investment company, real estate investment
trust, [REMIC, or FASIT] or REMIC.
* * * * * * *
SEC. 59. OTHER DEFINITIONS AND SPECIAL RULES.
(a) Alternative Minimum Tax Foreign Tax Credit.--For purposes
of this part--
(1) * * *
[(2) Limitation to 90 percent of tax.--
[(A) In general.--The alternative minimum tax
foreign tax credit for any taxable year shall
not exceed the excess (if any) of--
[(i) the pre-credit tentative minimum
tax for the taxable year, over
[(ii) 10 percent of the amount which
would be the pre-credit tentative
minimum tax without regard to the
alternative tax net operating loss
deduction and section 57(a)(2)(E).
[(B) Carryback and carryforward.--If the
alternative minimum tax foreign tax credit
exceeds the amount determined under
subparagraph (A), such excess shall, for
purposes of this part, be treated as an amount
to which section 904(c) applies.]
[(3)] (2) Pre-credit tentative minimum tax.--For
purposes of this subsection, the term ``pre-credit
tentative minimum tax'' means--
(A) * * *
* * * * * * *
[(4)] (3) Election to use simplified section 904
limitation.--
(A) * * *
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
Sec. 101. Certain death benefits.
* * * * * * *
[Sec. 114. Extraterritorial income.]
* * * * * * *
Sec. 139A. Income attributable to films used outside the United
States.
Sec. 139B. Exclusion from gross income for interest on
overpayments of income tax by individuals.
* * * * * * *
PART III--ITEMS SPECIALLY EXCLUDED FROM GROSS INCOME
* * * * * * *
[SEC. 114. EXTRATERRITORIAL INCOME.
[(a) Exclusion.--Gross income does not include
extraterritorial income.
[(b) Exception.--Subsection (a) shall not apply to
extraterritorial income which is not qualifying foreign trade
income as determined under subpart E of part III of subchapter
N.
[(c) Disallowance of deductions.--
[(1) In general.--Any deduction of a taxpayer
allocated under paragraph (2) to extraterritorial
income of the taxpayer excluded from gross income under
subsection (a) shall not be allowed.
[(2) Allocation.--Any deduction of the taxpayer
properly apportioned and allocated to the
extraterritorial income derived by the taxpayer from
any transaction shall be allocated on a proportionate
basis between--
[(A) the extraterritorial income derived from
such transaction which is excluded from gross
income under subsection (a), and
[(B) the extraterritorial income derived from
such transaction which is not so excluded.
[(d) Denial of Credits for Certain Foreign Taxes.--
Notwithstanding any other provision of this chapter, no credit
shall be allowed under this chapter for any income, war
profits, and excess profits taxes paid or accrued to any
foreign country or possession of the United States with respect
to extraterritorial income which is excluded from gross income
under subsection (a).
[(e) Extraterritorial Income.--For purposes of this section,
the term ``extraterritorial income'' means the gross income of
the taxpayer attributable to foreign trading gross receipts (as
defined in section 942) of the taxpayer.]
SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
(a) * * *
* * * * * * *
(d) Special Rules.--
(1) * * *
* * * * * * *
(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.
* * * * * * *
SEC. 139A. INCOME ATTRIBUTABLE TO FILMS USED OUTSIDE THE UNITED STATES.
(a) Exclusion.--
(1) In general.--There shall be excluded from gross
income an amount equal to the applicable percentage of
qualified film income.
(2) Applicable percentage.--For purposes of paragraph
(1), the applicable percentage shall be determined in
accordance with the following table:
For taxable years ending The applicable
in calendar year-- percentage is--
2007................................................ 1
2008................................................ 2
2009................................................ 3
2010................................................ 5
2011................................................ 8
2012................................................ 9
2013 or thereafter.................................. 10.
(b) Qualified Film Income.--For purposes of this section--
(1) In general.--The term ``qualified film income''
means gross income from a license of a qualified film
in the ordinary course of a trade or business for the
exploitation or direct use outside the United States
less any associated film costs.
(2) Exceptions.--
(A) Certain uses.--Such term does not include
exploitation of characters, soundtracks,
designs, scripts, scores, or any other
ancillary intangibles associated with the
qualified film.
(B) Related person license.--
(i) In general.--Such term does not
include any amount from the license of
a qualified film to a related person.
(ii) Exception.--Clause (i) shall not
apply if such film is held for license
by such related person to an unrelated
person for the direct use or
exploitation by such unrelated person
outside the United States.
(iii) Related person.--For purposes
of this subparagraph, a person shall be
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).
(c) Other Definitions.--For purposes of this section--
(1) Qualified Film.--The term ``qualified film''
means property described in section 168(f)(3) the
original use of which commences after December 31,
2006, 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.
(2) Associated film costs.--The term ``associated
film costs'' means any expense properly apportioned and
allocated to income taken into account under subsection
(b)(1), determined as provided under regulations
prescribed by the Secretary.
(d) Election.--The taxpayer may elect not to apply this
section to a qualified film. Such election shall be made by the
due date (including extensions of time) for filing the return
for the taxable year in which such film is placed in service,
and, once made for such film, such election shall be
irrevocable.
(e) Denial of Foreign Tax Credit.--
(1) In general.--No credit shall be allowed under
section 901 for any taxes paid or accrued (or treated
as paid or accrued) with respect to the excludable
portion of any qualified film income. No deduction
shall be allowed under this chapter for any tax for
which credit is not allowable by reason of the
preceding sentence.
(2) Excludable portion.--For purposes of paragraph
(1), the taxes paid or accrued (or treated as paid or
accrued) with respect to the excludable portion is the
amount which bears the same ratio to the amount of
taxes paid or accrued (or treated as paid or accrued)
with respect to qualified film income as the amount
excluded under subsection (a) for the taxable year
bears to the qualified film income for such year.
SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF
INCOME TAX BY INDIVIDUALS.
(a) In General.--In the case of an individual, gross income
shall not include interest paid under section 6611 on any
overpayment of tax imposed by this subtitle.
(b) Exception.--Subsection (a) shall not apply in the case of
a failure to claim items resulting in the overpayment on the
original return if the Secretary determines that the principal
purpose of such failure is to take advantage of subsection (a).
(c) Special Rule for Determining Modified Adjusted Gross
Income.--For purposes of this title, interest not included in
gross income under subsection (a) shall not be treated as
interest which is exempt from tax for purposes of sections
32(i)(2)(B) and 6012(d) or any computation in which interest
exempt from tax under this title is added to adjusted gross
income.
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) * * *
* * * * * * *
(m) Certain Excessive Employee Remuneration.--
(1) * * *
* * * * * * *
(4) Applicable employee remuneration.--For purposes
of this subsection--
(A) * * *
* * * * * * *
(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.
* * * * * * *
SEC. 163. INTEREST.
(a) * * *
* * * * * * *
(e) Original Issue Discount.--
(1) * * *
* * * * * * *
(3) Special rule for original issue discount on
obligation held by related foreign person.--
(A) * * *
(B) Special rule for certain foreign
entities.--
(i) In general.--In the case of any
debt instrument having original issue
discount which is held by a related
foreign person which is a foreign
personal holding company (as defined in
section 552), a controlled foreign
corporation (as defined in section
957), or a passive foreign investment
company (as defined in section 1297), a
deduction shall be allowable to the
issuer with respect to such original
issue discount for any taxable year
before the taxable year in which paid
only to the extent such original issue
discount is included during such prior
taxable year in the gross income of a
United States person who owns (within
the meaning of section 958(a)) stock in
such corporation.
(ii) Secretarial authority.--The
Secretary may by regulation exempt
transactions from the application of
clause (i), including any transaction
which is entered into by a payor in the
ordinary course of a trade or business
in which the payor is predominantly
engaged.
[(B)] (C) Related foreign person.--For
purposes of subparagraph (A), the term
``related foreign person'' means any person--
(i) who is not a United States
person, and
(ii) who is related (within the
meaning of section 267(b)) to the
issuer.
[Note: The amendment made by section 1074(c)(34) of H.R. 2896 to
section 163(e)(3)(B) (shown below) applies to taxable years of foreign
corporations beginning after December 31, 2006, and to taxable years of
United States shareholders with or within which such taxable years of
foreign corporations end.]
(e) Original Issue Discount.--
(1) * * *
* * * * * * *
(3) Special rule for original issue discount on
obligation held by related foreign person.--
(A) * * *
(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 included
during such prior taxable year in the
gross income of a United States person
who owns (within the meaning of section
958(a)) stock in such corporation.
(ii) Secretarial authority.--The
Secretary may by regulation exempt
transactions from the application of
clause (i), including any transaction
which is entered into by a payor in the
ordinary course of a trade or business
in which the payor is predominantly
engaged.
* * * * * * *
(j) Limitation on Deduction for Interest on Certain
Indebtedness.--
[(1) Limitation.--
[(A) In general.--If this subsection applies
to any corporation for any taxable year, no
deduction shall be allowed under this chapter
for disqualified interest paid or accrued by
such corporation during such taxable year. The
amount disallowed under the preceding sentence
shall not exceed the corporation's excess
interest expense for the taxable year.
[(B) Disallowed amount carried to succeeding
taxable year.--Any amount disallowed under
subparagraph (A) for any taxable year shall be
treated as disqualified interest paid or
accrued in the succeeding taxable year (and
clause (ii) of paragraph (2)(A) shall not apply
for purposes of applying this subsection to the
amount so treated).
[(2) Corporations to which subsection applies.--
[(A) In general.--This subsection shall apply
to any corporation for any taxable year if--
[(i) such corporation has excess
interest expense for such taxable year,
and
[(ii) the ratio of debt to equity of
such corporation as of the close of
such taxable year (or on any other day
during the taxable year as the
Secretary may by regulations prescribe)
exceeds 1.5 to 1.
[(B) Excess interest expense.--
[(i) In general.--For purposes of
this subsection, the term ``excess
interest expense'' means the excess (if
any) of--
[(I) the corporation's net
interest expense, over
[(II) the sum of 50 percent
of the adjusted taxable income
of the corporation plus any
excess limitation carryforward
under clause (ii).
[(ii) Excess limitation
carryforward.--If a corporation has an
excess limitation for any taxable year,
the amount of such excess limitation
shall be an excess limitation
carryforward to the 1st succeeding
taxable year and to the 2nd and 3rd
succeeding taxable years to the extent
not previously taken into account under
this clause. The amount of such a
carryforward taken into account for any
such succeeding taxable year shall not
exceed the excess interest expense for
such succeeding taxable year
(determined without regard to the
carryforward from the taxable year of
such excess limitation).
[(iii) Excess limitation.--For
purposes of clause (ii), the term
``excess limitation'' means the excess
(if any) of--
[(I) 50 percent of the
adjusted taxable income of the
corporation, over
[(II) the corporation's net
interest expense.
[(C) Ratio of debt to equity.--For purposes
of this paragraph, the term ``ratio of debt to
equity'' means the ratio which the total
indebtedness of the corporation bears to the
sum of its money and all other assets reduced
(but not below zero) by such total
indebtedness. For purposes of the preceding
sentence--
[(i) the amount taken into account
with respect to any asset shall be the
adjusted basis thereof for purposes of
determining gain,
[(ii) the amount taken into account
with respect to any indebtedness with
original issue discount shall be its
issue price plus the portion of the
original issue discount previously
accrued as determined under the rules
of section 1272 (determined without
regard to subsection (a)(7) or (b)(4)
thereof), and
[(iii) there shall be such other
adjustments as the Secretary may by
regulations prescribe.]
(1) Limitation.--
(A) In general.--In the case of a
corporation, no deduction shall be allowed
under this chapter for disqualified interest
paid or accrued during the taxable year.
(B) Maximum disallowance.--The amount
disallowed under subparagraph (A) shall not
exceed the sum of--
(i) the corporation's excess interest
expense for the taxable year, and
(ii) the corporation's excess related
party interest expense for such year.
In no event shall the disallowance under
subparagraph (A) reduce the deduction for
interest below the sum of the amount of
interest includible in the gross income of the
taxpayer for such taxable year and an amount
equal to 25 percent of adjusted taxable income
(35 percent in the case of the first taxable
year beginning after December 31, 2003).
(C) Disallowed amount carried to succeeding
taxable year.--
(i) In general.--Any amount
disallowed under subparagraph (A) for
any taxable year shall be treated as
paid or accrued in the succeeding
taxable year and in the 2nd through
10th succeeding taxable years to the
extent not previously taken into
account under this subparagraph.
(ii) Limitation on amount carried to
year.--A carryforward amount may not be
taken into account for any such
succeeding taxable year to the extent
that such amount, when added to amounts
carried to such succeeding taxable year
from taxable years preceding the
taxable year from which the amount is
being carried forward, would result in
(or increase) a disallowance under
subparagraph (A).
(iii) Carryover applied separately to
categories of disqualified interest.--
Clauses (i) and (ii) shall be applied
separately to disqualified interest
described in paragraph (3)(A) and to
disqualified interest described in
paragraph (3)(B). For purposes of this
subparagraph, any amount disallowed
under subparagraph (A) for any taxable
year shall be treated as disqualified
interest described in paragraph (3)(A)
to the extent thereof and then as
disqualified interest described in
paragraph (3)(B).
(2) Excess interest expense; excess related party
interest expense.--For purposes of this subsection--
(A) Excess interest expense.--The term
``excess interest expense'' means the excess
(if any) of--
(i) the corporation's net interest
expense, over
(ii) 50 percent of the adjusted
taxable income of the corporation.
(B) Excess related party interest expense.--
The term ``excess related party interest
expense'' means the excess (if any) of--
(i) the lesser of--
(I) the amount of
disqualified interest described
in paragraph (3)(A), or
(II) the corporation's net
interest expense, over
(ii) 25 percent (35 percent in the
case of the first taxable year
beginning after December 31, 2003) of
the adjusted taxable income of the
corporation.
(3) Alternative maximum disallowance.--
(A) In general.--In the case of a corporation
with respect to which an election is in effect
under subparagraph (B), the amount disallowed
under paragraph (1)(A) shall not exceed the
excess (if any) of--
(i) the corporation's net interest
expense, over
(ii) 30 percent of the adjusted
taxable income of the corporation.
(B) Election.--A corporation may make a one-
time irrevocable election to have the
alternative maximum disallowance described in
subparagraph (A) apply for purposes of this
subsection in lieu of paragraph (1)(B). An
election under this subparagraph shall not
apply with respect to any taxable year
beginning before January 1, 2005.
(C) Limitation.--Subparagraph (B) shall not
apply with respect to any corporation which
is--
(i) a surrogate foreign corporation
(as defined in section 7874(a)(2)(B)),
(ii) a corporation which would be a
surrogate foreign corporation (as so
defined) if ``December 31, 1996'' were
substituted for ``March 4, 2003'' in
section 7874(a), or
(iii) a corporation which is an
expatriated entity (as defined in
section 7874(a)) with respect to a
corporation described in clause (i) or
(ii).
[(3)] (4) Disqualified interest.--For purposes of
this subsection, the term ``disqualified interest''
means--
(A) any interest paid or accrued by the
taxpayer (directly or indirectly) to a related
person if no tax is imposed by this subtitle
with respect to such interest, and
(B) any interest paid or accrued by the
taxpayer with respect to any indebtedness to a
person who is not a related person if--
(i) * * *
(ii) no gross basis tax is imposed by
this subtitle with respect to such
interest[, and].
[(C) any interest paid or accrued (directly
or indirectly) by a taxable REIT subsidiary (as
defined in section 856(l)) of a real estate
investment trust to such trust.]
[(4)] (5) Related person.--For purposes of this
subsection--
(A) * * *
(B) Special rule for certain partnerships.--
(i) * * *
(ii) Special rule where treaty
reduction.--If any treaty between the
United States and any foreign country
reduces the rate of tax imposed by this
subtitle on a partner's share of any
interest paid or accrued to a
partnership, such partner's interests
in such partnership shall, for purposes
of clause (i), be treated as held in
part by a tax-exempt person and in part
by a taxable person under rules similar
to the rules of paragraph [(5)(B)]
(6)(B).
* * * * * * *
[(5)] (6) Special rules for determining whether
interest is subject to tax.--
(A) * * *
* * * * * * *
[(6)] (7) Other definitions and special rules.--For
purposes of this subsection--
(A) * * *
* * * * * * *
[(7)] (8) Coordination with passive loss rules,
etc.--This subsection shall be applied before sections
465 and 469.
[(8)] (9) Regulations.--The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this subsection, including--
(A) * * *
* * * * * * *
(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.
[(m)] (n) Cross References.--
(1) * * *
* * * * * * *
SEC. 168. ACCELERATED COST RECOVERY SYSTEM.
(a) * * *
(b) Applicable Depreciation Method.--For purposes of this
section--
(1) * * *
(2) 150 percent declining balance method in certain
cases
Paragraph (1) shall be applied by substituting ``150 percent''
for ``200 percent'' in the case of--
(A) any 15-year or 20-year property not
referred to in paragraph (3),
* * * * * * *
(3) Property to which straight line method applies.--
The applicable depreciation method shall be the
straight line method in the case of the following
property:
(A) * * *
* * * * * * *
(G) Qualified leasehold improvement property
described in subsection (e)(6).
(H) Qualified restaurant property described
in subsection (e)(7).
* * * * * * *
(e) Classification of Property.--For purposes of this
section--
(1) * * *
* * * * * * *
(3) Classification of certain property.--
(A) * * *
* * * * * * *
(E) 15-year property.--The term ``15-year
property'' includes--
(i) * * *
(ii) any telephone distribution plant
and comparable equipment used for 2-way
exchange of voice and data
communications, [and]
(iii) any section 1250 property which
is a retail motor fuels outlet (whether
or not food or other convenience items
are sold at the outlet)[.],
(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.
* * * * * * *
(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.
(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.
* * * * * * *
(g) Alternative Depreciation System for Certain Property.--
(1) * * *
* * * * * * *
(3) Special rules for determining class life.--
(A) * * *
(B) Special rule for certain property
assigned to classes.--For purposes of paragraph
(2), in the case of property described in any
of the following subparagraphs of subsection
(e)(3), the class life shall be determined as
follows:
If property
is described The class
in subparagraph: life is:
(A)(iii).............................................. 4
(B)(ii)............................................... 5
(B)(iii).............................................. 9.5
(C)(i)................................................ 10
(D)(i)................................................ 15
(D)(ii)............................................... 20
(E)(i)................................................ 24
(E)(ii)............................................... 24
(E)(iii).............................................. 20
(E)(iv)............................................... 39
39)(v)................................................
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) * * *
* * * * * * *
(f) Disallowance of Deduction in Certain Cases and Special
Rules.--
(1) * * *
* * * * * * *
(10) Split-dollar life insurance, annuity, and
endowment contracts.--
(A) In general.--Nothing in this section or
in section 545(b)(2), [556(b)(2),] 642(c),
2055, 2106(a)(2), or 2522 shall be construed to
allow a deduction, and no deduction shall be
allowed, for any transfer to or for the use of
an organization described in subsection (c) if
in connection with such transfer--
(i) * * *
* * * * * * *
SEC. 171. AMORTIZABLE BOND PREMIUM.
(a) * * *
* * * * * * *
(c) Election as to Taxable Bonds.--
(1) * * *
(2) Manner and effect of election.--The election
authorized under this subsection shall be made in
accordance with such regulations as the Secretary shall
prescribe. If such election is made with respect to any
bond (described in paragraph (1)) of the taxpayer, it
shall also apply to all such bonds held by the taxpayer
at the beginning of the first taxable year to which the
election applies and to all such bonds thereafter
acquired by him and shall be binding for all subsequent
taxable years with respect to all such bonds of the
taxpayer, unless, on application by the taxpayer, the
Secretary permits him, subject to such conditions as
the Secretary deems necessary, to revoke such election.
In the case of bonds held by a common trust fund, as
defined in section 584(a)[, or by a foreign personal
holding company, as defined in section 552], the
election authorized under this subsection shall be
exercisable with respect to such bonds only by the
common trust fund [or foreign personal holding
company]. In case of bonds held by an estate or trust,
the election authorized under this subsection shall be
exercisable with respect to such bonds only by the
fiduciary.
* * * * * * *
SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.
(a) * * *
(b) Limitations.--
(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed $25,000 ($100,000 in the
case of taxable years beginning after 2002 and before
[2006] 2008).
(2) Reduction in limitation.--The limitation under
paragraph (1) for any taxable year shall be reduced
(but not below zero) by the amount by which the cost of
section 179 property placed in service during such
taxable year exceeds $200,000 ($400,000 in the case of
taxable years beginning after 2002 and before [2006]
2008).
* * * * * * *
(5) Inflation adjustments.--
(A) In general.--In the case of any taxable
year beginning in a calendar year after 2003
and before [2006] 2008, the $100,000 and
$400,000 amounts in paragraphs (1) and (2)
shall each be increased by an amount equal to--
(i) * * *
* * * * * * *
(c) Election.--
(1) * * *
(2) Election irrevocable.--Any election made under
this section, and any specification contained in any
such election, may not be revoked except with the
consent of the Secretary. Any such election or
specification with respect to any taxable year
beginning after 2002 and before [2006] 2008 may be
revoked by the taxpayer with respect to any property,
and such revocation, once made, shall be irrevocable.
(d) Definitions and Special Rules.--
(1) Section 179 property.--For purposes of this
section, the term ``section 179 property'' means
property--
(A) which is--
(i) * * *
(ii) computer software (as defined in
section 197(e)(3)(B)) which is
described in section 197(e)(3)(A)(i),
to which section 167 applies, and which
is placed in service in a taxable year
beginning after 2002 and before [2006]
2008,
* * * * * * *
PART VIII--SPECIAL DEDUCTION FOR CORPORATIONS
* * * * * * *
SEC. 245. DIVIDENDS RECEIVED FROM CERTAIN FOREIGN CORPORATIONS
(a) Dividends From 10-Percent Owned Foreign Corporations.--
(1) * * *
(2) Qualified 10-percent owned foreign corporation.--
For purposes of this subsection, the term ``qualified
10-percent owned foreign corporation'' means any
foreign corporation (other than a [foreign personal
holding company or] passive foreign investment company)
if at least 10 percent of the stock of such corporation
(by vote and value) is owned by the taxpayer.
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS
BETWEEN RELATED TAXPAYERS.
(a) In General.--
(1) * * *
* * * * * * *
(3) Payments to foreign persons.--[The Secretary]
(A) In general.--The Secretary shall by
regulations apply the matching principle of
paragraph (2) in cases in which the person to
whom the payment is to be made is not a United
States person.
(B) Special rule for certain foreign
entities.--
(i) In general.--Notwithstanding
subparagraph (A), in the case of any
amount payable to a foreign personal
holding company (as defined in section
552), a controlled foreign corporation
(as defined in section 957), or a
passive foreign investment company (as
defined in section 1297), a deduction
shall be allowable to the payor with
respect to such amount for any taxable
year before the taxable year in which
paid only to the extent such amount is
included during such prior taxable year
in the gross income of a United States
person who owns (within the meaning of
section 958(a)) stock in such
corporation.
(ii) Secretarial authority.--The
Secretary may by regulation exempt
transactions from the application of
clause (i), including any transaction
which is entered into by a payor in the
ordinary course of a trade or business
in which the payor is predominantly
engaged and in which the payment of the
accrued amounts occurs within 8\1/2\
months after accrual or within such
other period as the Secretary may
prescribe.
[Note: The amendment made by section 1074(c)(34) of H.R. 2896 to
section 267(a)(3)(B)(i) (shown below) applies to taxable years of
foreign corporations beginning after December 31, 2006, and to taxable
years of United States shareholders with or within which such taxable
years of foreign corporations end.]
SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS
BETWEEN RELATED TAXPAYERS.
(a) In General.--
(1) * * *
* * * * * * *
(3) Payments to foreign persons.--
(A) * * *
(B) Special rule for certain foreign
entities.--
(i) In general.--Notwithstanding
subparagraph (A), in the case of any
amount 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
such amount is included during such
prior taxable year in the gross income
of a United States person who owns
(within the meaning of section 958(a))
stock in such corporation.
* * * * * * *
SEC. 275. CERTAIN TAXES.
(a) General Rule.--No deduction shall be allowed for the
following taxes:
(1) * * *
* * * * * * *
(6) Taxes imposed by chapters 41, 42, 43, 44, 45, 46,
and 54.--Paragraph (1) shall not apply to any taxes to
the extent such taxes are allowable as a deduction
under section 164(f). Paragraph (1) shall not apply to
the tax imposed by section 59A.
* * * * * * *
Subchapter C--Corporate Distributions and Adjustments
* * * * * * *
PART I--DISTRIBUTIONS BY CORPORATIONS
* * * * * * *
Subpart B--Effects on Corporation
* * * * * * *
SEC. 312. EFFECT ON EARNINGS AND PROFITS.
(a) * * *
* * * * * * *
[(j) Earnings and Profits of Foreign Investment Companies.--
[(1) Allocation within affiliated group.--In the case
of a sale or exchange of stock in a foreign investment
company (as defined in section 1246(b)) by a United
States person (as defined in section 7701(a)(30)), if
such company is a member of an affiliated group, then
the accumulated earnings and profits of all members of
such affiliated group shall be allocated, under
regulations prescribed by the Secretary, in such manner
as is proper to carry out the purposes of section 1246.
[(2) Affiliated group defined.--For purposes of
paragraph (1) of this subsection, the term ``affiliated
group'' has the meaning assigned to such term by
section 1504(a); except that (A) ``more than 50
percent'' shall be substituted for ``80 percent or
more'', and (B) all corporations shall be treated as
includible corporations (without regard to the
provisions of section 1504(b)).]
* * * * * * *
(m) No Adjustment for Interest Paid on Certain Registration-
Required Obligations Not in Registered Form.--The earnings and
profits of any corporation shall not be decreased by any
interest with respect to which a deduction is not or would not
be allowable by reason of section 163(f), unless at the time of
issuance the issuer is a foreign corporation that is not a
controlled foreign corporation (within the meaning of section
957[, a foreign investment company (within the meaning of
section 1246(b)), or a foreign personal holding company (within
the meaning of section 552)] and the issuance did not have as a
purpose the avoidance of section 163(f) or this subsection.
* * * * * * *
PART II--CORPORATE LIQUIDATIONS
* * * * * * *
Subpart B--Effects on Corporation
* * * * * * *
SEC. 338. CERTAIN STOCK PURCHASES TREATED AS ASSET ACQUISITIONS.
(a) * * *
* * * * * * *
(h) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(13) Tax on deemed sale not taken into account for
estimated tax purposes.--For purposes of section 6655,
tax attributable to the sale described in subsection
(a)(1) shall not be taken into account. The preceding
sentence shall not apply with respect to a qualified
stock purchase for which an election is made under
paragraph (10).
* * * * * * *
PART III--CORPORATE ORGANIZATIONS AND REORGANIZATIONS
* * * * * * *
Subpart C--Effects on Corporations
* * * * * * *
SEC. 362. BASIS TO CORPORATIONS.
(a) * * *
* * * * * * *
(e) Limitation on Transfer of Built-in Losses on REMIC
Residuals in Section 351 Transactions.--If--
(1) a residual interest (as defined in section
860G(a)(2)) in a REMIC is transferred in any
transaction which is described in subsection (a), and
(2) the transferee's adjusted basis in such residual
interest would (but for this paragraph) exceed its fair
market value immediately after such transaction,
then, notwithstanding subsection (a), the transferee's adjusted
basis in such residual interest shall not exceed its fair
market value (whether or not greater than zero) immediately
after such transaction.
* * * * * * *
Subpart D--Special Rule; Definitions
* * * * * * *
SEC. 367. FOREIGN CORPORATIONS
(a) * * *
* * * * * * *
(d) Special Rules Relating to Transfers of Intangibles.--
(1) * * *
(2) Transfer of intangibles treated as transfer
pursuant to sale of contingent payments.--
(A) * * *
* * * * * * *
(C) Amounts received treated as ordinary
income.--For purposes of this chapter, any
amount included in gross income by reason of
this subsection shall be treated as ordinary
income. For purposes of applying section
904(d), any such amount shall be treated in the
same manner as if such amount were a royalty.
* * * * * * *
PART V--CARRYOVERS
* * * * * * *
SEC. 382. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS AND CERTAIN
BUILT-IN LOSSES FOLLOWING OWNERSHIP CHANGE.
(a) * * *
* * * * * * *
(l) Certain Additional Operating Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(4) Reduction in value where substantial nonbusiness
assets.--
(A) * * *
(B) Corporation having substantial
nonbusiness assets.--For purposes of
subparagraph (A)--
(i) * * *
(ii) Exception for certain investment
entities.--A regulated investment
company to which part I of subchapter M
applies, a real estate investment trust
to which part II of subchapter M
applies, [a REMIC to which part IV of
subchapter M applies, or a FASIT to
which part V of subchapter M applies,]
or a REMIC to which part IV of
subchapter M applies, shall not be
treated as a new loss corporation
having substantial nonbusiness assets.
* * * * * * *
Subchapter D--Deffered Compensation, Etc.
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.
* * * * * * *
Subpart A--General Rule
Sec. 401. Qualified pension, profit-sharing, and stock bonus
plans.
* * * * * * *
Sec. 409A. Inclusion in gross income of deferred compensation
under nonqualified deferred compensation plans.
* * * * * * *
SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER
NONQUALIFIED DEFERRED COMPENSATION PLANS.
(a) Rules Relating to Constructive Receipt.--
(1) In general.--
(A) Gross income inclusion.--In the case of a
nonqualified deferred compensation plan, all
compensation deferred under the plan for all
taxable years (to the extent not subject to a
substantial risk of forfeiture and not
previously included in gross income) shall be
includible in gross income for the taxable year
unless at all times during the taxable year the
plan meets the requirements of paragraphs (2),
(3), and (4) and is operated in accordance with
such requirements.
(B) Interest on tax liability payable with
respect to previously deferred compensation.--
(i) In general.--If compensation is
required to be included in gross income
under subparagraph (A) for a taxable
year, the tax imposed by this chapter
for such taxable year shall be
increased by the amount of interest
determined under clause (ii).
(ii) Interest.--For purposes of
clause (i), the interest determined
under this clause for any taxable year
is the amount of interest at the
underpayment rate plus 1 percentage
point on the underpayments that would
have occurred had the deferred
compensation been includible in gross
income for the taxable year in which
first deferred or, if later, the first
taxable year in which such deferred
compensation is not subject to a
substantial risk of forfeiture.
(2) Distributions.--
(A) In general.--The requirements of this
paragraph are met if the plan provides that
compensation deferred under the plan may not be
distributed earlier than--
(i) separation from service as
determined by the Secretary (except as
provided in subparagraph (B)(i)),
(ii) disability (as defined by
section 223(d) of the Social Security
Act),
(iii) death,
(iv) a specified time (or pursuant to
a fixed schedule) specified under the
plan at the date of the deferral of
such compensation,
(v) to the extent provided by the
Secretary, a change in the ownership or
effective control of the corporation,
or in the ownership of a substantial
portion of the assets of the
corporation, or
(vi) the occurrence of an
unforeseeable emergency.
(B) Special rules.--
(i) Specified employees.--In the case
of specified employees, the requirement
of subparagraph (A)(i) is met only if
distributions may not be made earlier
than 6 months after the date of
separation from service. For purposes
of the preceding sentence, a specified
employee is a key employee (as defined
in section 416(i)) of a corporation the
stock in which is publicly traded on an
established securities market or
otherwise.
(ii) Unforeseeable emergency.--For
purposes of subparagraph (A)(vi)--
(I) In general.--The term
``unforeseeable emergency''
means a severe financial
hardship to the participant
resulting from a sudden and
unexpected illness or accident
of the participant, the
participant's spouse, or a
dependent (as defined in
section 152(a)) of the
participant, loss of the
participant's property due to
casualty, or other similar
extraordinary and unforeseeable
circumstances arising as a
result of events beyond the
control of the participant.
(II) Limitation on
distributions.--The requirement
of subparagraph (A)(vi) is met
only if, as determined under
regulations of the Secretary,
the amounts distributed with
respect to an emergency do not
exceed the amounts necessary to
satisfy such emergency plus
amounts necessary to pay taxes
reasonably anticipated as a
result of the distribution,
after taking into account the
extent to which such hardship
is or may be relieved through
reimbursement or compensation
by insurance or otherwise or by
liquidation of the
participant's assets (to the
extent the liquidation of such
assets would not itself cause
severe financial hardship).
(3) Acceleration of benefits.--The requirements of
this paragraph are met if the plan does not permit the
acceleration of the time or schedule of any payment
under the plan, except as provided in regulations by
the Secretary.
(4) Elections.--
(A) In general.--The requirements of this
paragraph are met if the requirements of
subparagraphs (B) and (C) are met.
(B) Initial deferral decision.--The
requirements of this subparagraph are met if
the plan provides that compensation for
services performed during a taxable year may be
deferred at the participant's election only if
the election to defer such compensation is made
during the preceding taxable year or at such
other time as provided in regulations. In the
case of the first year in which a participant
becomes eligible to participate in the plan,
such election may be made with respect to
services to be performed subsequent to the
election within 30 days after the date the
participant becomes eligible to participate in
such plan.
(C) Changes in time and form of
distribution.--The requirements of this
subparagraph are met if, in the case of a plan
which permits under a subsequent election a
delay in a payment or a change in the form of
payment--
(i) the plan requires that such
election may not take effect until at
least 12 months after the date on which
the election is made,
(ii) in the case an election related
to a payment not described in clause
(ii), (iii), or (vi) of paragraph
(2)(A), the plan requires that the
first payment with respect to which
such election is made be deferred for a
period of not less than 5 years from
the date such payment would otherwise
have been made, and
(iii) the plan requires that any
election related to a payment described
in paragraph (2)(A)(iv) may not be made
less than 12 months prior to the date
of the first scheduled payment under
such paragraph.
(b) Rules Relating to Funding.--
(1) Offshore property in a trust.--In the case of
assets held in a trust or set aside (directly or
indirectly) in another arrangement, as determined by
the Secretary, for purposes of paying deferred
compensation under a nonqualified deferred compensation
plan, for purposes of section 83 such assets shall be
treated as property transferred in connection with the
performance of services whether or not such assets are
available to satisfy claims of general creditors--
(A) at the time set aside if such assets are
located outside of the United States, or
(B) at the time transferred if such assets
are subsequently transferred outside of the
United States.
(2) Employer's financial health.--In the case of a
nonqualified deferred compensation plan, there is a
transfer of property within the meaning of section 83
as of the earlier of--
(A) the date on which the plan first provides
that assets will become restricted to the
provision of benefits under the plan in
connection with a change in the employer's
financial health, or
(B) the date on which assets are so
restricted.
(3) Income inclusion for offshore trusts and
employer's financial health.--For each taxable year
that assets treated as transferred under this
subsection remain set aside in a trust or other
arrangement subject to paragraph (1) or (2), any
increase in value in, or earnings with respect to, such
assets shall be treated as an additional transfer of
property under this subsection (to the extent not
previously included in income).
(4) Interest on tax liability payable with respect to
transferred property.--
(A) In general.--If amounts are required to
be included in gross income by reason of
paragraph (1) or (2) for a taxable year, the
tax imposed by this chapter for such taxable
year shall be increased by the amount of
interest determined under subparagraph (B).
(B) Interest.--The interest determined under
this subparagraph for any taxable year is the
amount of interest at the underpayment rate
plus 1 percentage point on the underpayments
that would have occurred had the amounts so
required to be included in gross income by
paragraph (1) or (2) been includible in gross
income for the taxable year in which such
assets were first set aside (directly or
indirectly) in a trust (or other arrangement
determined by the Secretary) for purposes of
the nonqualified deferred compensation plan.
(c) No Inference on Earlier Income Inclusion or Requirement
of Later Inclusion.--Nothing in this section shall be construed
to prevent the inclusion of amounts in gross income under any
other provision of this chapter or any other rule of law
earlier than the time provided in this section. Any amount
included in gross income under this section shall not be
required to be included in gross income under any other
provision of this chapter or any other rule of law later than
the time provided in this section.
(d) Other Definitions and Special Rules.--For purposes of
this section--
(1) Nonqualified deferred compensation plan.--The
term ``nonqualified deferred compensation plan'' means
any plan that provides for the deferral of
compensation, other than--
(A) a qualified employer plan, and
(B) any bona fide vacation leave, sick leave,
compensatory time, disability pay, or death
benefit plan.
(2) Qualified employer plan.--The term ``qualified
employer plan'' means--
(A) any plan, contract, pension, account, or
trust described in subparagraph (A) or (B) of
section 219(g)(5), and
(B) any eligible deferred compensation plan
(within the meaning of section 457(b)) of an
employer described in section 457(e)(1)(A).
(3) Plan includes arrangements, etc.--The term
``plan'' includes any agreement or arrangement,
including an agreement or arrangement that includes one
person.
(4) Substantial risk of forfeiture.--The rights of a
person to compensation are subject to a substantial
risk of forfeiture if such person's rights to such
compensation are conditioned upon the future
performance of substantial services by any individual.
(5) Treatment of earnings.--References to deferred
compensation shall be treated as including references
to income (whether actual or notional) attributable to
such compensation or such income.
(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including regulations--
(1) providing for the determination of amounts of
deferral in the case of a nonqualified deferred
compensation plan which is a defined benefit plan,
(2) relating to changes in the ownership and control
of a corporation or assets of a corporation for
purposes of subsection (a)(2)(A)(v),
(3) exempting arrangements from the application of
subsection (b) if such arrangements will not result in
an improper deferral of United States tax and will not
result in assets being effectively beyond the reach of
creditors,
(4) defining financial health for purposes of
subsection (b)(2), and
(5) disregarding a substantial risk of forfeiture in
cases where necessary to carry out the purposes of this
section.
* * * * * * *
Subpart B--Special Rules
* * * * * * *
SEC. 414. DEFINITIONS AND SPECIAL RULES.
(a) * * *
(b) Employees of Controlled Group of Corporations.--For
purposes of sections 401, 408(k), 408(p), 409A, 410, 411, 415,
and 416, all employees of all corporations which are members of
a controlled group of corporations (within the meaning of
section 1563(a), determined without regard to section
1563(a)(4) and (e)(3)(C)) shall be treated as employed by a
single employer. With respect to a plan adopted by more than
one such corporation, the applicable limitations provided by
section 404(a) shall be determined as if all such employers
were a single employer, and allocated to each employer in
accordance with regulations prescribed by the Secretary.
(c) Employees of Partnerships, Proprietorships, Etc., Which
Are Under Common Control.--For purposes of sections 401,
408(k), 408(p), 409A, 410, 411, 415, and 416, under regulations
prescribed by the Secretary, all employees of trades or
businesses (whether or not incorporated) which are under common
control shall be treated as employed by a single employer. The
regulations prescribed under this subsection shall be based on
principles similar to the principles which apply in the case of
subsection (b).
* * * * * * *
Subpart E--Transfer of Excess Pension Assets to Retiree Health Accounts
* * * * * * *
SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE HEALTH
ACCOUNTS.
(a) * * *
(b) Qualified transfer.--For purposes of this section--
(1) * * *
* * * * * * *
(5) Expiration.--No transfer made after December 31,
[2005] 2013, shall be treated as a qualified transfer.
* * * * * * *
PART II--CERTAIN STOCK OPTIONS
* * * * * * *
SEC. 421. GENERAL RULES.
(a) * * *
(b) Effect of Disqualifying Disposition.--If the transfer of
a share of stock to an individual pursuant to his exercise of
an option would otherwise meet the requirements of section
422(a) or 423(a) except that there is a failure to meet any of
the holding period requirements of section 422(a)(1) or
423(a)(1), then any increase in the income of such individual
or deduction from the income of his employer corporation for
the taxable year in which such exercise occurred attributable
to such disposition, shall be treated as an increase in income
or a deduction from income in the taxable year of such
individual or of such employer corporation in which such
disposition occurred. 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.
* * * * * * *
SEC. 423. EMPLOYEE STOCK PURCHASE PLANS.
(a) * * *
* * * * * * *
(c) Special Rule Where Option Price is Between 85 percent and
100 percent of value of stock.--If the option price of a share
of stock acquired by an individual pursuant to a transfer to
which subsection (a) applies was less than 100 percent of the
fair market value of such share at the time such option was
granted, then, in the event of any disposition of such share by
him which meets the holding period requirements of subsection
(a), or in the event of his death (whenever occurring) while
owning such share, there shall be included as compensation (and
not as gain upon the sale or exchange of a capital asset) in
his gross income, for the taxable year in which falls the date
of such disposition or for the taxable year closing with his
death, whichever applies, an amount equal to the lesser of--
(1) * * *
* * * * * * *
No amount shall be required to be deducted and withheld under
chapter 24 with respect to any amount treated as compensation
under this subsection.
* * * * * * *
Subchapter E--Accounting Period and Methods of Accounting
* * * * * * *
PART I--ACCOUNTING PERIODS
* * * * * * *
SEC. 443. RETURNS FOR A PERIOD OF LESS THAN 12 MONTHS.
(a) * * *
* * * * * * *
(e) Cross References.--
For inapplicability of subsection (b) in computing--
(1) * * *
* * * * * * *
[(3) Undistributed foreign personal holding company income,
see section 557.]
[(4)] (3) The taxable income of a regulated investment
company, see section 852(b)(2)(E).
[(5)] (4) The taxable income of a real estate investment
trust, see section 857(b)(2)(C).
* * * * * * *
PART II--METHODS OF ACCOUNTING IN GENERAL
* * * * * * *
Subpart B--Taxable Year for Which Items of Gross Income Included
* * * * * * *
SEC. 451. GENERAL RULE FOR TAXABLE YEAR OF INCLUSION.
(a) * * *
* * * * * * *
(e) Special Rule for Proceeds from Livestock Sold on Account
of Drought, Flood, or Other Weather-Related Conditions.--
(1) * * *
* * * * * * *
(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.
* * * * * * *
Subpart C--Taxable Year for Which Deductions Taken
* * * * * * *
SEC. 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION.
(a) * * *
* * * * * * *
(i) Special Rules for Tax Shelters.--
(1) * * *
* * * * * * *
(3) Tax shelter defined.--For purposes of this
subsection, the term ``tax shelter'' means--
(A) * * *
* * * * * * *
(C) any tax shelter (as defined in [section
6662(d)(2)(C)(iii)] section 6662(d)(2)(C)(ii)).
* * * * * * *
SEC. 465. DEDUCTIONS LIMITED TO AMOUNT AT RISK.
(a) * * *
* * * * * * *
(c) Activities to Which Section Applies.--
(1) * * *
* * * * * * *
(7) Exclusion of active businesses of qualified C
corporations.--
(A) * * *
(B) Qualified C corporation.--For purposes of
subparagraph (A), the term ``qualified C
corporation'' means any corporation described
in subparagraph (B) of subsection (a)(1) which
is not--
(i) a personal holding company (as
defined in section 542(a)), or
[(ii) a foreign personal holding
company (as defined in section 552(a)),
or]
[(iii)] (ii) a personal service
corporation (as defined in section
269A(b) but determined by substituting
`5 percent' for `10 percent' in section
269A(b)(2)).
* * * * * * *
SEC. 468B. SPECIAL RULES FOR DESIGNATED SETTLEMENT FUNDS.
(a) * * *
* * * * * * *
[(g) Clarification of Taxation of Certain Funds.--Nothing in
any provision of law shall be construed as providing that an
escrow account, settlement fund, or similar fund is not subject
to current income tax. The Secretary shall prescribe
regulations providing for the taxation of any such account or
fund whether as a grantor trust or otherwise.]
(g) Clarification of Taxation of Certain Funds.--
(1) In general.--Except as provided in paragraph (2),
nothing in any provision of law shall be construed as
providing that an escrow account, settlement fund, or
similar fund is not subject to current income tax. The
Secretary shall prescribe regulations providing for the
taxation of any such account or fund whether as a
grantor trust or otherwise.
(2) Exemption from tax for certain settlement
funds.--An escrow account, settlement fund, or similar
fund shall be treated as beneficially owned by the
United States and shall be exempt from taxation under
this subtitle if--
(A) it is established pursuant to a consent
decree entered by a judge of a United States
District Court,
(B) it is created for the receipt of
settlement payments as directed by a government
entity for the sole purpose of resolving or
satisfying one or more claims asserting
liability under the Comprehensive Environmental
Response, Compensation, and Liability Act of
1980,
(C) the authority and control over the
expenditure of funds therein (including the
expenditure of contributions thereto and any
net earnings thereon) is with such government
entity, and
(D) upon termination, any remaining funds
will be disbursed upon instructions by such
government entity in accordance with applicable
law.
For purposes of this paragraph, the term ``government
entity'' means the United States, any State or
political subdivision thereof, the District of
Columbia, any possession of the United States, and any
agency or instrumentality of any of the foregoing.
* * * * * * *
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
(a) * * *
* * * * * * *
(k) Separate Application of Section in Case of Publicly
Traded Partnerships.--
(1) * * *
* * * * * * *
(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.
* * * * * * *
Subchapter F--Exempt Organizations
* * * * * * *
PART I--GENERAL RULE
* * * * * * *
SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.
(a) * * *
* * * * * * *
(c) List of Exempt Organizations.--The following
organizations are referred to in subsection (a):
(1) * * *
* * * * * * *
(15)[(A) Insurance companies or associations other
than life (including interinsurers and reciprocal
underwriters) if the net written premiums (or, if
greater, direct written premiums) for the taxable year
do not exceed $350,000.]
(A) Insurance companies (as defined in
section 816(a)) other than life (including
interinsurers and reciprocal underwriters) if--
(i) the gross receipts for the
taxable year do not exceed $600,000,
and
(ii) more than 50 percent of such
gross receipts consist of premiums.
* * * * * * *
(C) For purposes of subparagraph (B), the
term ``controlled group'' has the meaning given
such term by section 831(b)(2)(B)(ii), except
that in applying section 1563 for purposes of
section 831(b)(2)(B)(ii), subparagraphs (B) and
(C) of section 1563(b)(2) shall be disregarded.
* * * * * * *
PART II--PRIVATE FOUNDATIONS
* * * * * * *
SEC. 508. SPECIAL RULES WITH RESPECT TO SECTION 501(C)(3)ORGANIZATIONS.
(a) * * *
* * * * * * *
(d) Disallowance of Certain Charitable, Etc., Deductions.--
(1) Gift or bequest to organizations subject to
section 507(c) tax.--No gift or bequest made to an
organization upon which the tax provided by section
507(c) has been imposed shall be allowed as a deduction
under section 170, 545(b)(2), [556(b)(2),] 642(c),
2055, 2106(a)(2), or 2522, if such gift or bequest is
made--
(A) * * *
* * * * * * *
(2) Gift or bequest to taxable private foundation,
section 4947 trust, etc.--No gift or bequest made to an
organization shall be allowed as a deduction under
section 170, 545(b)(2), [556(b)(2),] 642(c), 2055,
2106(a)(2), or 2522, if such gift or bequest is made--
(A) * * *
* * * * * * *
PART III--TAXATION OF BUSINESS INCOME OF CERTAIN EXEMPT ORGANIZATIONS
* * * * * * *
SEC. 512. UNRELATED BUSINESS TAXABLE INCOME.
(a) * * *
* * * * * * *
(e) Special Rules Applicable to S Corporations.--
(1) In general.--If an organization described in
section 1361(c)(2)(A)(vi) or 1361(c)(6) holds stock in
an S corporation--
(A) * * *
* * * * * * *
Subchapter G--Corporations Used to Avoid Income Tax on Shareholders
Part I. Corporations Improperly accumulating surplus.
* * * * * * *
[Part III. Foreign personal holding companies.]
* * * * * * *
PART I--CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
* * * * * * *
SEC. 535. ACCUMULATED TAXABLE INCOME.
(a) * * *
* * * * * * *
(d) Income Distributed to United States-Owned Foreign
Corporation Retains United States Connection.--
(1) * * *
(2) United States-owned foreign corporation.--The
term ``United States-owned foreign corporation'' has
the meaning given to such term by [section 904(g)(6)]
section 904(h)(6).
* * * * * * *
PART II--PERSONAL HOLDING COMPANIES
* * * * * * *
SEC. 542. DEFINITION OF PERSONAL HOLDING COMPANY.
(a) * * *
* * * * * * *
(c) Exceptions.--The term ``personal holding company'' as
defined in subsection (a) does not include--
(1) * * *
* * * * * * *
[(5) a foreign personal holding company as defined in
section 552;]
(5) a foreign corporation,
* * * * * * *
[(7) a foreign corporation (other than a corporation
which has income to which section 543(a)(7) applies for
the taxable year), if all of its stock outstanding
during the last half of the taxable year is owned by
nonresident alien individuals, whether directly or
indirectly through foreign estates, foreign trusts,
foreign partnerships, or other foreign corporations;]
[(8)] (7) a small business investment company which
is licensed by the Small Business Administration and
operating under the Small Business Investment Act of
1958 (15 U.S.C. 661 and following) and which is
actively engaged in the business of providing funds to
small business concerns under that Act. This paragraph
shall not apply if any shareholder of the small
business investment company owns at any time during the
taxable year directly or indirectly (including, in the
case of an individual, ownership by the members of his
family as defined in section 544(a)(2) a 5 per centum
or more proprietary interest in a small business
concern to which funds are provided by the investment
company or 5 per centum or more in value of the
outstanding stock of such concern; and
[(9)] (8) a corporation which is subject to the
jurisdiction of the court in a title 11 or similar case
(within the meaning of section 368(a)(3)(A)) unless a
major purpose of instituting or continuing such case is
the avoidance of the tax imposed by section 541[; and].
[(10) a passive foreign investment company (as
defined in section 1297.]
* * * * * * *
SEC. 543. PERSONAL HOLDING COMPANY INCOME
(a) * * *
(b) Definitions.--For purposes of this part--
(1) * * *
(A) all gains from the sale or other
disposition of capital assets, and
(B) all gains (other than those referred to
in subparagraph (A)) from the sale or other
disposition of property described in section
1231(b)[, and].
[(C) in the case of a foreign corporation all
of the outstanding stock of which during the
last half of the taxable year is owned by
nonresident alien individuals (whether directly
or indirectly through foreign estates, foreign
trusts, foreign partnerships, or other foreign
corporations), all items of income which would,
but for this subparagraph, constitute personal
holding company income under any paragraph of
subsection (a) other than paragraph (7)
thereof.]
* * * * * * *
[PART III--FOREIGN PERSONAL HOLDING COMPANIES
[Sec. 551. Foreign personal holding company income taxed to
United States shareholders.
[Sec. 552. Definition of foreign personal holding company.
[Sec. 553. Foreign personal holding company income.
[Sec. 554. Stock ownership.
[Sec. 555. Gross income of foreign personal holding companies.
[Sec. 556. Undistributed foreign personal holding company
income.
[Sec. 557. Income not placed on annual basis.
[Sec. 558. Returns of officers, directors, and shareholders of
foreign personal holding companies.
[SEC. 551. FOREIGN PERSONAL HOLDING COMPANY INCOME TAXED TO UNITED
STATES SHAREHOLDERS.
[(a) General Rule.--The undistributed foreign personal
holding company income of a foreign personal holding company
shall be included in the gross income of the citizens or
residents of the United States, domestic corporations, domestic
partnerships, and estates or trusts (other than foreign estates
or trusts), who are shareholders in such foreign personal
holding company (hereinafter called ``United States
shareholders'') in the manner and to the extent set forth in
this part.
[(b) Amount Included in Gross Income.--Each United States
shareholder, who was a shareholder on the day in the taxable
year of the company which was the last day on which a United
States group (as defined in section 552(a)(2)) existed with
respect to the company, shall include in his gross income, as a
dividend, for the taxable year in which or with which the
taxable year of the company ends, the amount he would have
received as a dividend (determined as if any distribution in
liquidation actually made in such taxable year had not been
made) if on such last day there had been distributed by the
company, and received by the shareholders, an amount which
bears the same ratio to the undistributed foreign personal
holding company income of the company for the taxable year as
the portion of such taxable year up to and including such last
day bears to the entire taxable year.
[(c) Information in Return.--Every United States shareholder
who is required under subsection (b) to include in his gross
income any amount with respect to the undistributed foreign
personal holding company income of a foreign personal holding
company and who, on the last day on which a United States group
existed with respect to the company, owned 5 percent or more in
value of the outstanding stock of such company, shall set forth
in his return in complete detail the gross income, deductions
and credits, taxable income, foreign personal holding company
income, and undistributed foreign personal holding company
income of such company.
[(d) Effect on Capital Account of Foreign Personal Holding
Company.--An amount which bears the same ratio to the
undistributed foreign personal holding company income of the
foreign personal holding company for its taxable year as the
portion of such taxable year up to and including the last day
on which a United States group existed with respect to the
company bears to the entire taxable year, shall, for the
purpose of determining the effect of distributions in
subsequent taxable years by the corporation, be considered as
paid-in surplus or as a contribution to capital, and the
accumulated earnings and profits as of the close of the taxable
year shall be correspondingly reduced, if such amount or any
portion thereof is required to be included as a dividend,
directly or indirectly, in the gross income of United States
shareholders.
[(e) Basis of Stock in Hands of Shareholders.--The amount
required to be included in the gross income of a United States
shareholder under subsection (b) shall, for the purpose of
adjusting the basis of his stock with respect to which the
distribution would have been made (if it had been made), be
treated as having been reinvested by the shareholder as a
contribution to the capital of the corporation; but only to the
extent to which such amount is included in his gross income in
his return, increased or decreased by any adjustment of such
amount in the last determination of the shareholder's tax
liability, made before the expiration of 6 years after the date
prescribed by law for filing the return.
[(f) Stock Held Through Foreign Entity.--For purposes of this
section, stock of a foreign personal holding company owned
(directly or through the application of this subsection) by--
[(1) a foreign partnership or an estate or trust
which is a foreign estate or trust, or
[(2) a foreign corporation which is not a foreign
personal holding company,
shall be considered as being owned proportionately by its
partners, beneficiaries, or shareholders. In any case to which
the preceding sentence applies, the Secretary may by
regulations provide that rules similar to the rules of section
1298(b)(5) shall apply, and provide for such other adjustments
in the application of this subchapter as may be necessary to
carry out the purposes of this subsection.
[(g) Coordination with Passive Foreign Investment Company
Provisions.--If, but for this subsection, an amount would be
included in the gross income of any person under subsection (a)
and under section 1293 (relating to current taxation of income
from certain passive foreign investment companies), such amount
shall be included in the gross income of such person only under
subsection (a).
[(h) Cross References.--
[(1) For basis of stock or securities in a foreign personal
holding company acquired from a decedent, see section
1014(b)(5).
[(2) For period of limitation on assessment and collection
without assessment, in case of failure to include in gross
income the amount properly includible therein under subsection
(b), see section 6501.
[SEC. 552. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY.
[(a) General Rule.--For purposes of this subtitle, the term
``foreign personal holding company'' means any foreign
corporation if--
[(1) Gross income requirement.--At least 60 percent
of its gross income (as defined in section 555(a)) for
the taxable year is foreign personal holding company
income as defined in section 553; but if the
corporation is a foreign personal holding company with
respect to any taxable year ending after August 26,
1937, then, for each subsequent taxable year, the
minimum percentage shall be 50 percent in lieu of 60
percent, until a taxable year during the whole of which
the stock ownership required by paragraph (2) does not
exist, or until the expiration of three consecutive
taxable years in each of which less than 50 percent of
the gross income is foreign personal holding company
income. For purposes of this paragraph, there shall be
included in the gross income the amount includible
therein as a dividend by reason of the application of
section 555(c)(2); and
[(2) Stock ownership requirement.--At any time during
the taxable year more than 50 percent of--
[(A) the total combined voting power of all
classes of stock of such corporation entitled
to vote, or
[(B) the total value of the stock of such
corporation,is owned (directly or indirectly)
by or for not more than 5 individuals who are
citizens or residents of the United States
(hereinafter in this part referred to as the
``United States group'').
[(b) Exceptions.--The term ``foreign personal holding
company'' does not include--
[(1) a corporation exempt from tax under subchapter F
(sec. 501 and following); and
[(2) a corporation organized and doing business under
the banking and credit laws of a foreign country if it
is established (annually or at other periodic
intervals) to the satisfaction of the Secretary that
such corporation is not formed or availed of for the
purpose of evading or avoiding United States income
taxes which would otherwise be imposed upon its
shareholders. If the Secretary is satisfied that such
corporation is not so formed or availed of, he shall
issue to such corporation annually or at other periodic
intervals a certification that the corporation is not a
foreign personal holding company.
Each United States shareholder of a foreign corporation which
would, except for the provisions of paragraph (2), be a foreign
personal holding company, shall attach to and file with his
income tax return for the taxable year a copy of the
certification by the Secretary made pursuant to paragraph (2).
Such copy shall be filed with the taxpayer's return for the
taxable year if he has been a shareholder of such corporation
for any part of such year.
[(c) Look-Thru for Certain Dividends and Interest.--
[(1) In general.--For purposes of this part, any
related person dividend or interest shall be treated as
foreign personal holding company income only to the
extent such dividend or interest is attributable
(determined under rules similar to the rules of
subparagraphs (C) and (D) of section 904(d)(3)) to
income of the related person which would be foreign
personal holding company income.
[(2) Related person dividend or interest.--For
purposes of paragraph (1), the term ``related person
dividend or interest'' means any dividend or interest
which--
[(A) is described in subparagraph (A) of
section 954(c)(3), and
[(B) is received from a related person which
is not a foreign personal holding company
(determined without regard to this subsection).
For purposes of the preceding sentence, the term ``related
person'' has the meaning given such term by section 954(d)(3)
(determined by substituting ``foreign personal holding
company'' for ``controlled foreign corporation'' each place it
appears).
[SEC. 553. FOREIGN PERSONAL HOLDING COMPANY INCOME.
[(a) Foreign Personal Holding Company Income.--For purposes
of this subtitle, the term ``foreign personal holding company
income'' means that portion of the gross income, determined for
purposes of section 552, which consists of:
[(1) Dividends, etc.--Dividends, interest, royalties,
and annuities. This paragraph shall not apply to active
business computer software royalties (as defined in
section 543(d)).
[(2) Stock and securities transactions.--Except in
the case of regular dealers in stock or securities,
gains from the sale or exchange of stock or securities.
[(3) Commodities transactions.--Gains from futures
transactions in any commodity on or subject to the
rules of a board of trade or commodity exchange. This
paragraph shall not apply to gains by a producer,
processor, merchant, or handler of the commodity which
arise out of bona fide hedging transactions reasonably
necessary to the conduct of its business in the manner
in which such business is customarily and usually
conducted by others.
[(4) Estates and trusts.--Amounts includible in
computing the taxable income of the corporation under
part I of subchapter J (sec. 641 and following,
relating to estates, trusts, and beneficiaries); and
gains from the sale or other disposition of any
interest in an estate or trust.
[(5) Personal service contracts.--
[(A) Amounts received under a contract under
which the corporation is to furnish personal
services; if 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 if the individual who
is to perform the services is designated (by
name or by description) in the contract; and
[(B) amounts received from the sale or other
disposition of such a contract.
This paragraph 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.
[(6) Use of corporation property by shareholder.--
Amounts received as compensation (however designated
and from whomsoever received) for the use of, or right
to use, property of the corporation in any case where,
at any 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 an individual
entitled to the use of the property; whether such right
is obtained directly from the corporation or by means
of a sublease or other arrangement. This paragraph
shall apply only to a corporation which has foreign
personal holding company income for the taxable year,
computed without regard to this paragraph and paragraph
(7), in excess of 10 percent of its gross income.
[(7) Rents.--Rents, unless constituting 50 percent or
more of the gross income. For purposes of this
paragraph, the term ``rents'' means compensation,
however designated, for the use of, or right to use,
property, but does not include amounts constituting
foreign personal holding company income under paragraph
(6).
[(b) Limitation on Gross Income in Certain Transactions.--For
purposes of this part--
[(1) gross income and foreign personal holding
company income determined with respect to transactions
described in subsection (a)(2) (relating to gains from
stock and security transactions) shall include only the
excess of gains over losses from such transactions, and
[(2) gross income and foreign personal holding
company income determined with respect to transactions
described in subsection (a)(3) (relating to gains from
commodity transactions) shall include only the excess
of gains over losses from such transactions.
[SEC. 554. STOCK OWNERSHIP.
[(a) Constructive Ownership.--For purposes of determining
whether a corporation is a foreign personal holding company,
insofar as such determination is based on stock ownership under
section 552(a)(2), section 553(a)(5), or section 553(a)(6)--
[(1) Stock not owned by individual.--Stock owned,
directly or indirectly, by or for a corporation,
partnership, estate, or trust shall be considered as
being owned proportionately by its shareholders,
partners, or beneficiaries.
[(2) Family and partnership ownership.--An individual
shall be considered as owning the stock owned, directly
or indirectly, by or for his family or by or for his
partner. For purposes of this paragraph, the family of
an individual includes only his brothers and sisters
(whether by the whole or half blood), spouse,
ancestors, and lineal descendants.
[(3) Options.--If any person has an option to acquire
stock, such stock shall be considered as owned by such
person. For purposes of this paragraph, an option to
acquire such an option, and each one of a series of
such options, shall be considered as an option to
acquire such stock.
[(4) Application of family-partnership and option
rules.--Paragraphs (2) and (3) shall be applied--
[(A) for purposes of the stock ownership
requirement provided in section 552(a)(2), if,
but only if, the effect is to make the
corporation a foreign personal holding company;
[(B) for purposes of section 553(a)(5)
(relating to personal service contracts) or of
section 553(a)(6) (relating to the use of
property by shareholders), if, but only if, the
effect is to make the amounts therein referred
to includible under such paragraph as foreign
personal holding company income.
[(5) Constructive ownership as actual ownership.--
Stock constructively owned by a person by reason of the
application of paragraph (1) or (3) shall, for purposes
of applying paragraph (1) or (2), be treated as
actually owned by such person; but stock constructively
owned by an individual by reason of the application of
paragraph (2) shall not be treated as owned by him for
purposes of again applying such paragraph in order to
make another the constructive owner of such stock.
[(6) Option rule in lieu of family and partnership
rule.--If stock may be considered as owned by an
individual under either paragraph (2) or (3) it shall
be considered as owned by him under paragraph (3).
[(b) Convertible Securities.--Outstanding securities
convertible into stock (whether or not convertible during the
taxable year) shall be considered as outstanding stock--
[(1) for purposes of the stock ownership requirement
provided in section 552(a)(2), but only if the effect
of the inclusion of all such securities is to make the
corporation a foreign personal holding company;
[(2) for purposes of section 553(a)(5) (relating to
personal service contracts), but only if the effect of
the inclusion of all such securities is to make the
amounts therein referred to includible under such
paragraph as foreign personal holding company income;
and
[(3) for purposes of section 553(a)(6) (relating to
the use of property by shareholders), but only if the
effect of the inclusion of all such securities is to
make the amounts therein referred to includible under
such paragraph as foreign personal holding company
income.
The requirement in paragraphs (1), (2), and (3) that all
convertible securities must be included if any are to be
included shall be subject to the exception that, where some of
the outstanding securities are convertible only after a later
date than in the case of others, the class having the earlier
conversion date may be included although the others are not
included, but no convertible securities shall be included
unless all outstanding securities having a prior conversion
date are also included.
[(c) Special Rules for Application of Subsection (a)(2).--For
purposes of the stock ownership requirement provided in section
552(a)(2)--
[(1) stock owned by a nonresident alien individual
(other than a foreign trust or foreign estate) shall
not be considered by reason of so much of subsection
(a)(2) as relates to attribution through family
membership as owned by a citizen or by a resident alien
individual who is not the spouse of the nonresident
individual and who does not otherwise own stock in such
corporation (determined after the application of
subsection (a), other than attribution through family
membership), and
[(2) stock of a corporation owned by any foreign
person shall not be considered by reason of so much of
subsection (a)(2) as relates to attribution through
partners as owned by a citizen or resident of the
United States who does not otherwise own stock in such
corporation (determined after application of subsection
(a) and paragraph (1), other than attribution through
partners).
[SEC. 555. GROSS INCOME OF FOREIGN PERSONAL HOLDING COMPANIES.
[(a) General Rule.--For purposes of this part, the term
``gross income'' means, with respect to a foreign corporation,
gross income computed (without regard to the provisions of
subchapter N (sec. 861 and following)) as if the foreign
corporation were a domestic corporation which is a personal
holding company.
[(b) Additions to Gross Income.--In the case of a foreign
personal holding company (whether or not a United States group,
as defined in section 552(a)(2), existed with respect to such
company on the last day of its taxable year) which was a
shareholder in another foreign personal holding company on the
day in the taxable year of the second company which was the
last day on which a United States group existed with respect to
the second company, there shall be included, as a dividend, in
the gross income of the first company, for the taxable year in
which or with which the taxable year of the second company
ends, the amount the first company would have received as a
dividend if on such last day there had been distributed by the
second company, and received by the shareholders, an amount
which bears the same ratio to the undistributed foreign
personal holding company income of the second company for its
taxable year as the portion of such taxable year up to and
including such last day bears to the entire taxable year.
[(c) Application of Subsection (b).--The rule provided in
subsection (b)--
[(1) shall be applied in the case of a foreign
personal holding company for the purpose of determining
its undistributed foreign personal holding company
income which, or a part of which, is to be included in
the gross income of its shareholders, whether United
States shareholders or other foreign personal holding
companies;
[(2) shall be applied in the case of every foreign
corporation with respect to which a United States group
exists on some day of its taxable year, for the purpose
of determining whether such corporation meets the gross
income requirements of section 552(a)(1).
[SEC. 556. UNDISTRIBUTED FOREIGN PERSONAL HOLDING COMPANY INCOME.
[(a) Definition.--For purposes of this part, the term
``undistributed foreign personal holding company income'' means
the taxable income of a foreign personal holding company
adjusted in the manner provided in subsection (b), minus the
dividends paid deduction (as defined in section 561).
[(b) Adjustments to Taxable Income.--For the purposes of
subsection (a), the taxable income shall be adjusted as
follows:
[(1) Taxes.--There shall be allowed as a deduction
Federal income and excess profits taxes and income, war
profits, and excess-profits taxes of foreign countries
and possessions of the United States (to the extent not
allowable as a deduction under section 275(a)(4)),
accrued during the taxable year, but not including the
accumulated earnings tax imposed by section 531, the
personal holding company tax imposed by section 541, or
the taxes imposed by corresponding sections of a prior
income tax law.
[(2) Charitable contributions.--The deduction for
charitable contributions provided under section 170
shall be allowed, but in computing such deduction the
limitations in section 170(b)(1)(A), (B), and (D) shall
apply, and section 170(b)(2) and (d)(1) shall not
apply. For purposes of this paragraph, the term
``contribution base'' when used in section 170(b)(1)
means the taxable income computed with the adjustments
(other than the 10-percent limitation) provided in
section 170(b)(2) and (d)(1) and without the deduction
of the amounts disallowed under paragraphs (5) and (6)
of this subsection or the inclusion in gross income of
the amounts includible therein as dividends by reason
of the application of the provisions of section 555(b)
(relating to the inclusion in gross income of a foreign
personal holding company of its distributive share of
the undistributed foreign personal holding company
income of another company in which it is a
shareholder).
[(3) Special deductions disallowed.--The special
deductions for corporations provided in part VIII
(except section 248) of subchapter B (section 241 and
following, relating to the deduction for dividends
received by corporations, etc.) shall not be allowed.
[(4) Net operating loss.--The net operating loss
deduction provided in section 172 shall not be allowed,
but there shall be allowed as a deduction the amount of
the net operating loss (as defined in section 172(c))
for the preceding taxable year computed without the
deductions provided in part VIII (except section 248)
of subchapter B.
[(5) Expenses and depreciation applicable to property
of the taxpayer.--The aggregate of the deductions
allowed under section 162 (relating to trade or
business expenses) and section 167 (relating to
depreciation) which are allocable to the operation and
maintenance of property owned or operated by the
company, shall be allowed only in an amount equal to
the rent or other compensation received for the use of,
or the right to use, the property, unless it is
established (under regulations prescribed by the
Secretary) to the satisfaction of the Secretary--
[(A) that the rent or other compensation
received was the highest obtainable, or, if
none was received, that none was obtainable;
[(B) that the property was held in the course
of a business carried on bona fide for profit;
and
[(C) either that there was reasonable
expectation that the operation of the property
would result in a profit, or that the property
was necessary to the conduct of the business.
[(6) Taxes and contributions to pension trusts.--The
deductions provided in section 164(e) (relating to
taxes of a shareholder paid by the corporation) and in
section 404 (relating to pension, etc., trusts) shall
not be allowed.
[SEC. 557. INCOME NOT PLACED ON ANNUAL BASIS.
[Section 443(b) (relating to computation of tax on change of
annual accounting period) shall not apply in the computation of
the undistributed foreign personal holding company income under
section 556.
[SEC. 558. RETURNS OF OFFICERS, DIRECTORS, AND SHAREHOLDERS OF FOREIGN
PERSONAL HOLDING COMPANIES.
[For provisions relating to returns of officers, directors,
and shareholders of foreign personal holding companies, see
section 6035.]
PART IV--DEDUCTION FOR DIVIDENDS PAID
* * * * * * *
SEC. 562. RULES APPLICABLE IN DETERMINING DIVIDENDS ELIGIBLE FOR
DIVIDENDS PAID DEDUCTION.
(a) * * *
(b) Distributions in Liquidation.--
(1) Except in the case of a personal holding company
described in section 542 [or a foreign personal holding
company described in section 552]--
(A) * * *
* * * * * * *
SEC. 563. RULES RELATING TO DIVIDENDS PAID AFTER CLOSE OF TAXABLE YEAR.
(a) * * *
* * * * * * *
[(c) Foreign Personal Holding Company Tax.--
[(1) In general.--In the determination of the
dividends paid deduction for purposes of part III, a
dividend paid after the close of any taxable year and
on or before the 15th day of the 3rd month following
the close of such taxable year shall, to the extent the
company designates such dividend as being taken into
account under this subsection, be considered as paid
during such taxable year. The amount allowed as a
deduction by reason of the application of this
subsection with respect to any taxable year shall not
exceed the undistributed foreign personal holding
company income of the corporation for the taxable year
computed without regard to this subsection.
[(2) Special rules.--In the case of any distribution
referred to in paragraph (1)--
[(A) paragraph (1) shall apply only if such
distribution is to the person who was the
shareholder of record (as of the last day of
the taxable year of the foreign personal
holding company) with respect to the stock for
which such distribution is made,
[(B) the determination of the person required
to include such distribution in gross income
shall be made under the principles of section
551(f), and
[(C) any person required to include such
distribution in gross or distributable net
income shall include such distribution in
income for such person's taxable year in which
the taxable year of the foreign personal
holding company ends.]
[(d)] (c) Dividends Considered as Paid on Last Day of Taxable
Year.--For the purpose of applying section 562(a), with respect
to distributions under [subsection (a), (b) or (c)] subsection
(a) or (b) of this section, a distribution made after the close
of a taxable year and on or before the 15th day of the third
month following the close of the taxable year shall be
considered as made on the last day of such taxable year.
* * * * * * *
Subchapter H--Banking Institutions
* * * * * * *
PART I--RULES OF GENERAL APPLICATION TO BANKING INSTITUTIONS
* * * * * * *
SEC. 582. BAD DEBTS, LOSSES, AND GAINS WITH RESPECT TO SECURITIES HELD
BY FINANCIAL INSTITUTIONS.
(a) * * *
* * * * * * *
(c) Bond, Etc., Losses and Gains of Financial Institutions.--
(1) General rule.--For purposes of this subtitle, in
the case of a financial institution referred to in
paragraph (2), the sale or exchange of a bond,
debenture, note, or certificate or other evidence of
indebtedness shall not be considered a sale or exchange
of a capital asset. For purposes of the preceding
sentence, any regular or residual interest in a REMIC[,
and any regular interest in a FASIT,] shall be treated
as an evidence of indebtedness.
* * * * * * *
Subchapter I--Natural Resources
* * * * * * *
PART III--SALES AND EXCHANGES
* * * * * * *
SEC. 631. GAIN OR LOSS IN THE CASE OF TIMBER, COAL, OR DOMESTIC IRON
ORE.
(a) * * *
(b) Disposal of Timber [With a Retained Economic Interest].--
In the case of the disposal of timber held for more than 1 year
before such disposal, by the owner thereof under any form or
type of contract by virtue of which such owner [retains an
economic interest in such timber] either retains an economic
interest in such timber or makes an outright sale of such
timber, the difference between the amount realized from the
disposal of such timber and the adjusted depletion basis
thereof, shall be considered as though it were a gain or loss,
as the case may be, on the sale of such timber. In determining
the gross income, the adjusted gross income, or the taxable
income of the lessee, the deductions allowable with respect to
rents and royalties shall be determined without regard to the
provisions of this subsection. [The date of disposal] In the
case of disposal of timber with a retained economic interest,
the date of disposal of such timber shall be deemed to be the
date such timber is cut, but if payment is made to the owner
under the contract before such timber is cut the owner may
elect to treat the date of such payment as the date of disposal
of such timber. For purposes of this subsection, the term
``owner'' means any person who owns an interest in such timber,
including a sublessor and a holder of a contract to cut timber.
* * * * * * *
Subchapter K--Partners and Partnerships
* * * * * * *
PART I--DETERMINATION OF TAX LIABILITY
* * * * * * *
SEC. 704. PARTNER'S DISTRIBUTIVE SHARE.
(a) * * *
* * * * * * *
(c) Contributed Property.--
(1) In general.--Under regulations prescribed by the
Secretary--
(A) income, gain, loss, and deduction with
respect to property contributed to the
partnership by a partner shall be shared among
the partners so as to take account of the
variation between the basis of the property to
the partnership and its fair market value at
the time of contribution, [and]
(B) if any property so contributed is
distributed (directly or indirectly) by the
partnership (other than to the contributing
partner) within 7 years of being contributed--
(i) * * *
* * * * * * *
(iii) appropriate adjustments shall
be made to the adjusted basis of the
contributing partner's interest in the
partnership and to the adjusted basis
of the property distributed to reflect
any gain or loss recognized under this
subparagraph[.], and
(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.
* * * * * * *
PART II--CONTRIBUTIONS, DISTRIBUTIONS, AND TRANSFERS
* * * * * * *
Subpart B--Distributions by a Partnership
Sec. 731. Extent of recognition of gain or loss on distribution.
* * * * * * *
[Sec. 734. Optional adjustment to basis of undistributed
partnership property.]
Sec. 734. Adjustment to basis of undistributed partnership
property where section 754 election or substantial
basis reduction.
* * * * * * *
[SEC. 734. OPTIONAL ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP
PROPERTY.]
SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY
WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS
REDUCTION.
(a) General Rule.--The basis of partnership property shall
not be adjusted as the result of a distribution of property to
a partner unless the election, provided in section 754
(relating to optional adjustment to basis of partnership
property), is in effect with respect to such partnership or
unless there is a substantial basis reduction.
(b) Method of Adjustment.--In the case of a distribution of
property to a partner, a partnership, with respect to which the
election provided in section 754 is in effect or unless there
is a substantial basis reduction, shall--
(1) * * *
* * * * * * *
(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).
* * * * * * *
Subpart C--Transfers of Interests in a Partnership
Sec. 741. Recognition and character of gain or loss on sale or
exchange.
* * * * * * *
[Sec. 743. Optional adjustment to basis of partnership
property.]
Sec. 743. Adjustment to basis of partnership property where
section 754 election or substantial built-in loss.
* * * * * * *
[SEC. 743. OPTIONAL ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY.]
SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION 754
ELECTION OR SUBSTANTIAL BUILT-IN LOSS.
(a) General Rule.--The basis of partnership property shall
not be adjusted as the result of a transfer of an interest in a
partnership by sale or exchange or on the death of a partner
unless the election provided by section 754 (relating to
optional adjustment to basis of partnership property) is in
effect with respect to such partnership or unless the
partnership has a substantial built-in loss immediately after
such transfer.
(b) Adjustment to Basis of Partnership Property.--In the case
of a transfer of an interest in a partnership by sale or
exchange or upon the death of a partner, a partnership with
respect to which the election provided in section 754 is in
effect or with respect to which there is a substantial built-in
loss immediately after such transfer shall--
(1) * * *
* * * * * * *
(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.
* * * * * * *
Subpart D--Provisions Common to Other Subparts
* * * * * * *
SEC. 751. UNREALIZED RECEIVABLES AND INVENTORY ITEMS.
(a) * * *
* * * * * * *
(d) Inventory Items.--For purposes of this subchapter, the
term ``inventory items'' means--
(1) * * *
(2) any other property of the partnership which, on
sale or exchange by the partnership, would be
considered property other than a capital asset and
other than property described in section 1231, and
[(3) any other property of the partnership which, if
sold or exchanged by the partnership, would result in a
gain taxable under subsection (a) of section 1246
(relating to gain on foreign investment company stock),
and]
[(4)] (3) any other property held by the partnership
which, if held by the selling or distributee partner,
would be considered property of the type described in
[paragraph (1), (2), or (3)] paragraph (1) or (2).
* * * * * * *
SEC. 755. RULES FOR ALLOCATION OF BASIS.
(a) * * *
* * * * * * *
(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).
* * * * * * *
Subchapter L--Insurance Companies
* * * * * * *
PART II--OTHER INSURANCE COMPANIES
* * * * * * *
SEC. 831. TAX ON INSURANCE COMPANIES OTHER THAN LIFE INSURANCE
COMPANIES.
(a) * * *
(b) Alternative Tax for Certain Small Companies.--
(1) * * *
(2) Companies to which this subsection applies.--
(A) In general.--This subsection shall apply
to every insurance company other than life
(including interinsurers and reciprocal
underwriters) if--
(i) the net written premiums (or, if
greater, direct written premiums) for
the taxable year [exceed $350,000 but]
do not exceed [$1,200,000] $1,890,000,
and
* * * * * * *
(C) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after
2004, the $1,890,000 amount in subparagraph (A)
shall be increased by an amount equal to--
(i) $1,890,000, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year by substituting
``calendar year 2003'' for ``calendar
year 1992'' in subparagraph (B)
thereof.
If the amount as adjusted under the preceding
sentence is not a multiple of $1,000, such
amount shall be rounded to the next lowest
multiple of $1,000.
* * * * * * *
(c) Insurance Company Defined.--For purposes of this section,
the term ``insurance company'' has the meaning given to such
term by section 816(a).
[(c)] (d) Cross References.--
(1) * * *
* * * * * * *
PART III--PROVISIONS OF GENERAL APPLICATION
* * * * * * *
SEC. 845. CERTAIN REINSURANCE AGREEMENTS.
(a) Allocation in Case of Reinsurance Agreement Involving Tax
Avoidance or Evasion.--In the case of 2 or more related persons
(within the meaning of section 482) who are parties to a
reinsurance agreement (or where 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 such
agreement or a conduit between related persons), the Secretary
may--
(1) * * *
* * * * * * *
if he determines that such allocation, recharacterization, or
adjustment is necessary to reflect the proper [source and
character] amount, source, or character of the taxable income
(or any item described in paragraph (1) relating to such
taxable income) of each such person.
* * * * * * *
Subchapter M--Regulated Investment Companies and Real Estate Investment
Trusts
Part I. Regulated investment companies.
* * * * * * *
[Part V. Financial asset securitization investment trusts.]
* * * * * * *
PART I--REGULATED INVESTMENT COMPANIES
* * * * * * *
SEC. 851. DEFINITION OF REGULATED INVESTMENT COMPANY.
(a) * * *
(b) Limitations.--A corporation shall not be considered a
regulated investment company for any taxable year unless--
(1) * * *
[(2) at least 90 percent of its gross income is
derived from 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]
(2) at least 90 percent of its gross income is
derived from--
(A) dividends, interest, payments with
respect to securities loans (as defined in
section 512(a)(5)), and gains from the sale or
other disposition of stock or securities (as
defined in section 2(a)(36) of the Investment
Company Act of 1940, as amended) or foreign
currencies, or other income (including but not
limited to gains from options, futures or
forward contracts) derived with respect to its
business of investing in such stock,
securities, or currencies, and
(B) distributions or other income derived
from an interest in a qualified publicly traded
partnership (as defined in subsection (h)); and
(3) at the close of each quarter of the taxable
year--
(A) * * *
[(B) not more than 25 percent of the value of
its total assets is invested in the securities
(other than Government securities or the
securities of other regulated investment
companies) of any one issuer, or 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.]
(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)).
For purposes of paragraph (2), there shall be treated as
dividends amounts included in gross income under section
951(a)(1)(A)(i) or 1293(a) for the taxable year to the extent
that, under section 959(a)(1) or 1293(c) (as the case may be),
there is a distribution out of the earnings and profits of the
taxable year which are attributable to the amounts so included.
For purposes of paragraph (2), the Secretary may by regulation
exclude from qualifying income foreign currency gains which are
not directly related to the company's principal business of
investing in stock or securities (or options and futures with
respect to stock or securities). For purposes of paragraph (2),
amounts excludable from gross income under section 103(a) shall
be treated as included in gross income. Income derived from a
partnership (other than a qualified publicly traded partnership
as defined in subsection (h)) or trust shall be treated as
described in paragraph (2) only to the extent such income is
attributable to items of income of the partnership or trust (as
the case may be) which would be described in paragraph (2) if
realized by the regulated investment company in the same manner
as realized by the partnership or trust.
(c) Rules applicable to subsection (b)(3).--For purposes of
subsection (b)(3) and this subsection--
(1) * * *
* * * * * * *
(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)).
[(5)] (6) All other terms shall have the same meaning
as when used in the Investment Company Act of 1940, as
amended.
* * * * * * *
(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).
* * * * * * *
PART II--REAL ESTATE INVESTMENT TRUSTS
* * * * * * *
SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.
(a) * * *
* * * * * * *
(c) Limitations.--A corporation, trust, or association shall
not be considered a real estate investment trust for any
taxable year unless--
(1) * * *
* * * * * * *
(5) For purposes of this part--
(A) * * *
* * * * * * *
(E) A regular or residual interest in a REMIC
shall be treated as a real estate asset, and
any amount includible in gross income with
respect to such an interest shall be treated as
interest on an obligation secured by a mortgage
on real property; except that, if less than 95
percent of the assets of such REMIC are real
estate assets (determined as if the real estate
investment trust held such assets), such real
estate investment trust shall be treated as
holding directly (and as receiving directly)
its proportionate share of the assets and
income of the REMIC. For purposes of
determining whether any interest in a REMIC
qualifies under the preceding sentence, any
interest held by such REMIC in another REMIC
shall be treated as a real estate asset under
principles similar to the principles of the
preceding sentence, except that, if such
REMIC's are part of a tiered structure, they
shall be treated as one REMIC for purposes of
this subparagraph. [The principles of the
preceding provisions of this subparagraph shall
apply to regular interests in a FASIT.]
* * * * * * *
[(G) Treatment of certain hedging
instruments.--Except to the extent provided by
regulations, any--
[(i) payment to a real estate
investment trust 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 trust
to acquire or carry real estate assets,
and
[(ii) gain from the sale or other
disposition of any such investment,
shall be treated as income qualifying under
paragraph (2).]
(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.
* * * * * * *
[(7) Straight debt safe harbor in applying paragraph
(4).--Securities of an issuer which are straight debt
(as defined in section 1361(c)(5) without regard to
subparagraph (B)(iii) thereof) shall not be taken into
account in applying paragraph (4)(B)(iii)(III) if--
[(A) the issuer is an individual, or
[(B) the only securities of such issuer which
are held by the trust or a taxable REIT
subsidiary of the trust are straight debt (as
so defined), or
[(C) the issuer is a partnership and the
trust holds at least a 20 percent profits
interest in the partnership.]
(d) Rents From Real Property Defined.--
(1) * * *
* * * * * * *
(8) Special rule for taxable REIT subsidiaries.--For
purposes of this subsection, amounts paid to a real
estate investment trust by a taxable REIT subsidiary of
such trust shall not be excluded from rents from real
property by reason of paragraph (2)(B) if the
requirements of either of the following subparagraphs
are met:
[(A) Limited rental exception.--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 section 856(d)(2)(B). The preceding sentence
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 made by
the other tenants of the trust's property for
comparable space.]
(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.
* * * * * * *
(m) Safe Harbor in Applying Subsection (c)(4).--
(1) In general.--In applying subclause (III) of
subsection (c)(4)(B)(iii), except as otherwise
determined by the Secretary in regulations, the
following shall not be considered securities held by
the trust:
(A) Straight debt securities of an issuer
which meet the requirements of paragraph (2).
(B) Any loan to an individual or an estate.
(C) Any section 467 rental agreement (as
defined in section 467(d)), other than with a
person described in subsection (d)(2)(B).
(D) Any obligation to pay rents from real
property (as defined in subsection (d)(1)).
(E) Any security issued by a State or any
political subdivision thereof, the District of
Columbia, a foreign government or any political
subdivision thereof, or the Commonwealth of
Puerto Rico, but only if the determination of
any payment received or accrued under such
security does not depend in whole or in part on
the profits of any entity not described in this
subparagraph or payments on any obligation
issued by such an entity,
(F) Any security issued by a real estate
investment trust.
(G) Any other arrangement as determined by
the Secretary.
(2) Special rules relating to straight debt
securities.--
(A) In general.--For purposes of paragraph
(1)(A), securities meet the requirements of
this paragraph if such securities are straight
debt, as defined in section 1361(c)(5) (without
regard to subparagraph (B)(iii) thereof).
(B) Special rules relating to certain
contingencies.--For purposes of subparagraph
(A), any interest or principal shall not be
treated as failing to satisfy section
1361(c)(5)(B)(i) solely by reason of the fact
that the time of payment of such interest or
principal is subject to a contingency, but only
if--
(i) any such contingency does not
have the effect of changing the
effective yield to maturity, as
determined under section 1272, other
than a change in the annual yield to
maturity which either--
(I) does not exceed the
greater of \1/4\ of 1 percent
or 5 percent of the annual
yield to maturity, or
(II) results solely from a
default or the exercise of a
prepayment right by the issuer
of the debt, or
(ii) neither the aggregate issue
price nor the aggregate face amount of
the issuer's debt instruments held by
the trust exceeds $1,000,000 and not
more than 12 months of unaccrued
interest can be required to be prepaid
thereunder.
(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).
(n) Limitation on Deduction for Interest on Certain
Indebtedness of Taxable REIT Subsidiary.--
(1) Limitation.--
(A) In general.--If this subsection applies
to any taxable REIT subsidiary for any taxable
year, no deduction shall be allowed under this
chapter for disqualified interest paid or
accrued by such subsidiary during such taxable
year. The amount disallowed under the preceding
sentence shall not exceed the subsidiary's
excess interest expense for the taxable year.
(B) Disallowed amount carried to succeeding
taxable year.--Any amount disallowed under
subparagraph (A) for any taxable year shall be
treated as disqualified interest paid or
accrued in the succeeding taxable year (and
clause (ii) of paragraph (2)(A) shall not apply
for purposes of applying this subsection to the
amount so treated).
(2) Subsidiaries to which subsection applies.--
(A) In general.--This subsection shall apply
to any taxable REIT subsidiary for any taxable
year if--
(i) such subsidiary has excess
interest expense for such taxable year,
and
(ii) the ratio of debt to equity of
such subsidiary as of the close of such
taxable year (or on any other day
during the taxable year as the
Secretary may by regulations prescribe)
exceeds 1.5 to 1.
(B) Excess interest expense.--
(i) In general.--For purposes of this
subsection, the term ``excess interest
expense'' means the excess (if any)
of--
(I) the taxable REIT
subsidiary's net interest
expense, over
(II) the sum of 50 percent of
the adjusted taxable income of
the subsidiary plus any excess
limitation carryforward under
clause (ii).
(ii) Excess limitation
carryforward.--If a taxable REIT
subsidiary has an excess limitation for
any taxable year, the amount of such
excess limitation shall be an excess
limitation carryforward to the 1st
succeeding taxable year and to the 2nd
and 3rd succeeding taxable years to the
extent not previously taken into
account under this clause. The amount
of such a carryforward taken into
account for any such succeeding taxable
year shall not exceed the excess
interest expense for such succeeding
taxable year (determined without regard
to the carryforward from the taxable
year of such excess limitation).
(iii) Excess limitation.--For
purposes of clause (ii), the term
``excess limitation'' means the excess
(if any) of--
(I) 50 percent of the
adjusted taxable income of the
subsidiary, over
(II) the subsidiary's net
interest expense.
(C) Ratio of debt to equity.--For purposes of
this paragraph, the term ``ratio of debt to
equity'' means the ratio which the total
indebtedness of the subsidiary bears to the sum
of its money and all other assets reduced (but
not below zero) by such total indebtedness. The
rules of section 163(j)(6)(E) shall apply for
purposes of the preceding sentence.
(3) Disqualified interest.--For purposes of this
subsection, the term ``disqualified interest'' means
any interest paid or accrued (directly or indirectly)
by a taxable REIT subsidiary of a real estate
investment trust to such trust.
(4) Other rules to apply.--Rules similar to the rules
of paragraphs (7), (8), and (9) of section 163(j) shall
apply for purposes of this subsection.
SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND THEIR
BENEFICIARIES.
(a) * * *
(b) Method of Taxation of Real Estate Investment Trusts and
Holders of Shares or Certificates of Beneficial Interest.--
(1) * * *
* * * * * * *
(5) Imposition of tax in case of failure to meet
certain requirements.--If section 856(c)(6) applies to
a real estate investment trust for any taxable year,
there is hereby imposed on such trust a tax in an
amount equal to the greater of--
(A) the excess of--
(i) [90 percent] 95 percent of the
gross income (excluding gross income
from prohibited transactions) of the
real estate investment trust, over
* * * * * * *
(7) Income from redetermined rents, redetermined
deductions, and excess interest.--
(A) * * *
(B) Redetermined rents.--
(i) * * *
[(ii) Exception for certain
amounts.--Clause (i) shall not apply to
amounts received directly or indirectly
by a real estate investment trust--
[(I) for services furnished
or rendered by a taxable REIT
subsidiary that are described
in paragraph (1)(B) of section
856(d), or
[(II) from a taxable REIT
subsidiary that are described
in paragraph (7)(C)(ii) of such
section.]
[(iii)] (ii) Exception for de minimis
amounts.--Clause (i) shall not apply to
amounts described in section
856(d)(7)(A) with respect to a property
to the extent such amounts do not
exceed the one percent threshold
described in section 856(d)(7)(B) with
respect to such property.
[(iv)] (iii) Exception for comparably
priced services.--Clause (i) shall not
apply to any service rendered by a
taxable REIT subsidiary of a real
estate investment trust to a tenant of
such trust if--
(I) * * *
* * * * * * *
[(v)] (iv) Exception for certain
separately charged services.--Clause
(i) shall not apply to any service
rendered by a taxable REIT subsidiary
of a real estate investment trust to a
tenant of such trust if--
(I) * * *
* * * * * * *
[(vi)] (v) Exception for certain
services based on subsidiary's income
from the services.--Clause (i) shall
not apply to any service rendered by a
taxable REIT subsidiary of a real
estate investment trust to a tenant of
such trust if the gross income of such
subsidiary from such service is not
less than 150 percent of such
subsidiary's direct cost in furnishing
or rendering the service.
[(vii)] (vi) Exceptions granted by
secretary.--The Secretary may waive the
tax otherwise imposed by subparagraph
(A) if the trust establishes to the
satisfaction of the Secretary that
rents charged to tenants were
established on an arms' length basis
even though a taxable REIT subsidiary
of the trust provided services to such
tenants.
* * * * * * *
PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS
* * * * * * *
SEC. 860G. OTHER DEFINITIONS AND SPECIAL RULES.
(a) Definitions.--For purposes of this part--
(1) Regular interest.--The term ``regular interest''
means any interest in a REMIC which is issued on the
startup day with fixed terms and which is designated as
a regular interest if--
(A) * * *
* * * * * * *
The interest shall not fail to meet the
requirements of subparagraph (A) merely because
the timing (but not the amount) of the
principal payments (or other similar amounts)
may be contingent on the extent of prepayments
on qualified mortgages and the amount of income
from permitted investments. 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.
* * * * * * *
(3) Qualified mortgage.--The term ``qualified
mortgage'' means--
(A) any obligation (including any
participation or certificate of beneficial
ownership therein) which is principally secured
by an interest in real property and which--
(i) is transferred to the REMIC on
the startup day in exchange for regular
or residual interests in the REMIC,
[or]
(ii) is purchased by the REMIC within
the 3-month period beginning on the
startup day if, except as provided in
regulations, such purchase is pursuant
to a fixed-price contract in effect on
the startup day, or
(iii) represents an increase in the
principal amount under the original
terms of an obligation described in
clause (i) or (ii) if--
(I) such increase in the
balance is attributable to an
advance made to the obligor
pursuant to the original terms
of the obligation,
(II) such increase in the
balance occurs after the
startup day, and
(III) such increase in the
balance is purchased by the
REMIC pursuant to a fixed price
contract in effect on the
startup day.
(B) any qualified replacement mortgage, and
(C) any regular interest in another REMIC
transferred to the REMIC on the startup day in
exchange for regular or residual interests in
the REMIC[, and].
[(D) any regular interest in a FASIT which is
transferred to, or purchased by, the REMIC as
described in clauses (i) and (ii) of
subparagraph (A) but only if 95 percent or more
of the value of the assets of such FASIT is at
all times attributable to obligations described
in subparagraph (A) (without regard to such
clauses).]
For purposes of subparagraph (A) any obligation secured
by stock held by a person as a tenant-stockholder (as
defined in section 216) in a cooperative housing
corporation (as so defined) shall be treated as secured
by an interest in real property, 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. 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.
* * * * * * *
(7) Qualified reserve asset.--
(A) * * *
[(B) Qualified reserve fund.--For purposes of
subparagraph (A), the term `qualified reserve
fund` means any reasonably required reserve to
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. The amount of any such reserve
shall be promptly and appropriately reduced as
payments of qualified mortgages are received.]
(B) Qualified reserve fund.--For purposes of
subparagraph (A), the term ``qualified reserve
fund'' means any reasonably required reserve
to--
(i) provide for full payment of
expenses of the REMIC or amounts due on
regular interests in the event of
defaults on qualified mortgages or
lower than expected returns on cash
flow investments, or
(ii) provide a source of funds for
the purchase of obligations described
in clause (ii) or (iii) of paragraph
(3)(A).
The aggregate fair market value of the assets
held in any such reserve shall not exceed 50
percent of the aggregate fair market value of
all of the assets of the REMIC on the startup
day, and the amount of any such reserve shall
be promptly and appropriately reduced to the
extent the amount held in such reserve is no
longer reasonably required for purposes
specified in clause (i) or (ii) of paragraph
(3)(A).
* * * * * * *
[PART V--FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS
[Sec. 860H. Taxation of a fasit; other general rules.
[Sec. 860I. Gain recognition on contributions to a fasit and in
other cases.
[Sec. 860J. Non-Fasit losses not to offset certain fasit
inclusions.
[Sec. 860K. Treatment of transfers of high-yield interests to
disqualified holders.
[Sec. 860L. Definitions and other special rules.
[SEC. 860H. TAXATION OF A FASIT; OTHER GENERAL RULES.
[(a) Taxation of FASIT.--A FASIT as such shall not be subject
to taxation under this subtitle (and shall not be treated as a
trust, partnership, corporation, or taxable mortgage pool).
[(b) Taxation of Holder of the Ownership Interest.--In
determining the taxable income of the holder of the ownership
interest in a FASIT--
[(1) all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT shall be
treated as assets, liabilities, and such items (as the
case may be) of such holder,
[(2) the constant yield method (including the rules
of section 1272(a)(6)) shall be applied under an
accrual method of accounting in determining all
interest, acquisition discount, original issue
discount, and market discount and all premium
deductions or adjustments with respect to each debt
instrument of the FASIT,
[(3) there shall not be taken into account any item
of income, gain, or deduction allocable to a prohibited
transaction, and
[(4) interest accrued by the FASIT which is exempt
from tax imposed by this subtitle shall, when taken
into account by such holder, be treated as ordinary
income.
[(c) Treatment of Regular Interests.--For purposes of this
title--
[(1) a regular interest in a FASIT, if not otherwise
a debt instrument, shall be treated as a debt
instrument,
[(2) section 163(e)(5) shall not apply to such an
interest, and
[(3) amounts includible in gross income with respect
to such an interest shall be determined under an
accrual method of accounting.
[SEC. 860I. GAIN RECOGNITION ON CONTRIBUTIONS TO A FASIT AND IN OTHER
CASES.
[(a) Treatment of Property Acquired by FASIT.--
[(1) Property acquired from holder of ownership
interest or related person.--If property is sold or
contributed to a FASIT by the holder of the ownership
interest in such FASIT (or by a related person) gain
(if any) shall be recognized to such holder (or person)
in an amount equal to the excess (if any) of such
property's value under subsection (d) on the date of
such sale or contribution over its adjusted basis on
such date.
[(2) Property acquired other than from holder of the
ownership interest or related person.--Property which
is acquired by a FASIT other than in a transaction to
which paragraph (1) applies shall be treated--
[(A) as having been acquired by the holder of
the ownership interest in the FASIT for an
amount equal to the FASIT's cost of acquiring
such property, and
[(B) as having been sold by such holder to
the FASIT at its value under subsection (d) on
such date.
[(b) Gain Recognition on Property Outside FASIT Which
Supports Regular Interests.--If property held by the holder of
the ownership interest in a FASIT (or by any person related to
such holder) supports any regular interest in such FASIT--
[(1) gain shall be recognized to such holder (or
person) in the same manner as if such holder (or
person) had sold such property at its value under
subsection (d) on the earliest date such property
supports such an interest, and
[(2) such property shall be treated as held by such
FASIT for purposes of this part.
[(c) Deferral of Gain Recognition.--The Secretary may
prescribe regulations which--
[(1) provide that gain otherwise recognized under
subsection (a) or (b) shall not be recognized before
the earliest date on which such property supports any
regular interest in such FASIT or any indebtedness of
the holder of the ownership interest (or of any person
related to such holder), and
[(2) provide such adjustments to the other provisions
of this part to the extent appropriate in the context
of the treatment provided under paragraph (1).
[(d) Valuation.--For purposes of this section--
[(1) In general.--The value of any property under
this subsection shall be--
[(A) in the case of a debt instrument which
is not traded on an established securities
market, the sum of the present values of the
reasonably expected payments under such
instrument determined (in the manner provided
by regulations prescribed by the Secretary)--
[(i) as of the date of the event
resulting in the gain recognition under
this section, and
[(ii) by using a discount rate equal
to 120 percent of the applicable
Federal rate (as defined in section
1274(d)), or such other discount rate
specified in such regulations,
compounded semiannually, and
[(B) in the case of any other property, its
fair market value.
[(2) Special rule for revolving loan accounts.--For
purposes of paragraph (1)--
[(A) each extension of credit (other than the
accrual of interest) on a revolving loan
account shall be treated as a separate debt
instrument, and
[(B) payments on such extensions of credit
having substantially the same terms shall be
applied to such extensions beginning with the
earliest such extension.
[(e) Special Rules.--
[(1) Nonrecognition rules rules not to apply.--Gain
required to be recognized under this section shall be
recognized notwithstanding any other provision of this
subtitle.
[(2) Basis adjustments.--The basis of any property on
which gain is recognized under this section shall be
increased by the amount of gain so recognized.
[SEC. 860J. NON-FASIT LOSSES NOT TO OFFSET CERTAIN FASIT INCLUSIONS.
[(a) In General.--The taxable income of the holder of the
ownership interest or any high-yield interest in a FASIT for
any taxable year shall in no event be less than the sum of--
[(1) such holder's taxable income determined solely
with respect to such interests (including gains and
losses from sales and exchanges of such interests), and
[(2) the excess inclusion (if any) under section
860E(a)(1) for such taxable year.
[(b) Coordination With Section 172.--Any increase in the
taxable income of any holder of the ownership interest or a
high- yield interest in a FASIT for any taxable year by reason
of subsection (a) shall be disregarded--
[(1) in determining under section 172 the amount of
any net operating loss for such taxable year, and
[(2) in determining taxable income for such taxable
year for purposes of the second sentence of section
172(b)(2).
[(c) Coordination With Minimum Tax.--For purposes of part VI
of subchapter A of this chapter--
[(1) the reference in section 55(b)(2) to taxable
income shall be treated as a reference to taxable
income determined without regard to this section,
[(2) the alternative minimum taxable income of any
holder of the ownership interest or a high-yield
interest in a FASIT for any taxable year shall in no
event be less than such holder's taxable income
determined solely with respect to such interests, and
[(3) any increase in taxable income under this
section shall be disregarded for purposes of computing
the alternative tax net operating loss deduction.
[(d) Affiliated Groups.--All members of an affiliated group
filing a consolidated return shall be treated as one taxpayer
for purposes of this section.
[SEC. 860K. TREATMENT OF TRANSFERS OF HIGH-YIELD INTERESTS TO
DISQUALIFIED HOLDERS.
[(a) General Rule.--In the case of any high-yield interest
which is held by a disqualified holder--
[(1) the gross income of such holder shall not
include any income (other than gain) attributable to
such interest, and
[(2) amounts not includible in the gross income of
such holder by reason of paragraph (1) shall be
included (at the time otherwise includible under
paragraph (1)) in the gross income of the most recent
holder of such interest which is not a disqualified
holder.
[(b) Exceptions.--Rules similar to the rules of paragraphs
(4) and (7) of section 860E(e) shall apply to the tax imposed
by reason of the inclusion in gross income under subsection
(a).
[(c) Disqualified Holder.--For purposes of this section, the
term ``disqualified holder'' means any holder other than--
[(1) an eligible corporation (as defined in section
860L(a)(2)), or
[(2) a FASIT.
[(d) Treatment of Interests Held by Securities Dealers.--
[(1) In general.--Subsection (a) shall not apply to
any high-yield interest held by a disqualified holder
if such holder is a dealer in securities who acquired
such interest exclusively for sale to customers in the
ordinary course of business (and not for investment).
[(2) Change in dealer status.--
[(A) In general.--In the case of a dealer in
securities which is not an eligible corporation
(as defined in section 860L(a)(2)), if--
[(i) such dealer ceases to be a
dealer in securities, or
[(ii) such dealer commences holding
the high-yield interest for investment,
there is hereby imposed (in addition to other
taxes) an excise tax equal to the product of
the highest rate of tax specified in section
11(b)(1) and the income of such dealer
attributable to such interest for periods after
the date of such cessation or commencement.
[(B) Holding for 31 days or less.--For
purposes of subparagraph (A)(ii), a dealer
shall not be treated as holding an interest for
investment before the thirty-second day after
the date such dealer acquired such interest
unless such interest is so held as part of a
plan to avoid the purposes of this paragraph.
[(C) Administrative provisions.--The
deficiency procedures of subtitle F shall apply
to the tax imposed by this paragraph.
[(e) Treatment of High-Yield Interests in Pass-Thru
Entities.--
[(1) In general.--If a pass-thru entity (as defined
in section 860E(e)(6)) issues a debt or equity
interest--
[(A) which is supported by any regular
interest in a FASIT, and
[(B) which has an original yield to maturity
which is greater than each of--
[(i) the sum determined under clauses
(i) and (ii) of section 163(i)(1)(B)
with respect to such debt or equity
interest, and
[(ii) the yield to maturity to such
entity on such regular interest
(determined as of the date such entity
acquired such interest),
there is hereby imposed on the pass-thru entity
a tax (in addition to other taxes) equal to the
product of the highest rate of tax specified in
section 11(b)(1) and the income of the holder
of such debt or equity interest which is
properly attributable to such regular interest.
For purposes of the preceding sentence, the
yield to maturity of any equity interest shall
be determined under regulations prescribed by
the Secretary.
[(2) Exception.--Paragraph (1) shall not apply to
arrangements not having as a principal purpose the
avoidance of the purposes of this subsection.
[SEC. 860L. DEFINITIONS AND OTHER SPECIAL RULES.
[(a) FASIT.--
[(1) In general.--For purposes of this title, the
terms ``financial asset securitization investment
trust'' and ``FASIT'' mean any entity--
[(A) for which an election to be treated as a
FASIT applies for the taxable year,
[(B) all of the interests in which are
regular interests or the ownership interest,
[(C) which has only one ownership interest
and such ownership interest is held directly by
an eligible corporation,
[(D) as of the close of the third month
beginning after the day of its formation and at
all times thereafter, substantially all of the
assets of which (including assets treated as
held by the entity under section 860I(b)(2))
consist of permitted assets, and
[(E) which is not described in section
851(a).
A rule similar to the rule of the last sentence of
section 860D(a) shall apply for purposes of this
paragraph.
[(2) Eligible corporation.--For purposes of paragraph
(1)(C), the term ``eligible corporation'' means any
domestic C corporation other than--
[(A) a corporation which is exempt from, or
is not subject to, tax under this chapter,
[(B) an entity described in section 851(a) or
856(a),
[(C) a REMIC, and
[(D) an organization to which part I of
subchapter T applies.
[(3) Election.--An entity (otherwise meeting the
requirements of paragraph (1)) may elect to be treated
as a FASIT. Except as provided in paragraph (5), such
an election shall apply to the taxable year for which
made and all subsequent taxable years unless revoked
with the consent of the Secretary.
[(4) Termination.--If any entity ceases to be a FASIT
at any time during the taxable year, such entity shall
not be treated as a FASIT after the date of such
cessation.
[(5) Inadvertent terminations, etc.--Rules similar to
the rules of section 860D(b)(2)(B) shall apply to
inadvertent failures to qualify or remain qualified as
a FASIT.
[(6) Permitted assets not treated as interest in
FASIT.--Except as provided in regulations prescribed by
the Secretary, any asset which is a permitted asset at
the time acquired by a FASIT shall not be treated at
any time as an interest in such FASIT.
[(b) Interests in FASIT.--For purposes of this part--
[(1) Regular interest.--
[(A) In general.--The term ``regular
interest'' means any interest which is issued
by a FASIT on or after the startup date with
fixed terms and which is designated as a
regular interest if--
[(i) such interest unconditionally
entitles the holder to receive a
specified principal amount (or other
similar amount),
[(ii) interest payments (or other
similar amounts), if any, with respect
to such interest are determined based
on a fixed rate, or, except as
otherwise provided by the Secretary, at
a variable rate permitted under section
860G(a)(1)(B)(i),
[(iii) such interest does not have a
stated maturity (including options to
renew) greater than 30 years (or such
longer period as may be permitted by
regulations),
[(iv) the issue price of such
interest does not exceed 125 percent of
its stated principal amount, and
[(v) the yield to maturity on such
interest is less than the sum
determined under section 163(i)(1)(B)
with respect to such interest.
An interest shall not fail to meet the
requirements of clause (i) merely because the
timing (but not the amount) of the principal
payments (or other similar amounts) may be
contingent on the extent that payments on debt
instruments held by the FASIT are made in
advance of anticipated payments and on the
amount of income from permitted assets.
[(B) High-yield interests.--
[(i) In general.--The term ``regular
interest'' includes any high-yield
interest.
[(ii) High-yield interest.--The term
``high-yield interest'' means any
interest which would be described in
subparagraph (A) but for--
[(I) failing to meet the
requirements of one or more of
clauses (i), (iv), or (v)
thereof, or
[(II) failing to meet the
requirement of clause (ii)
thereof but only if interest
payments (or other similar
amounts), if any, with respect
to such interest consist of a
specified portion of the
interest payments on permitted
assets and such portion does
not vary during the period such
interest is outstanding.
[(2) Ownership interest.--The term ``ownership
interest'' means the interest issued by a FASIT after
the startup day which is designated as an ownership
interest and which is not a regular interest.
[(c) Permitted Assets.--For purposes of this part--
[(1) In general.--The term ``permitted asset''
means--
[(A) cash or cash equivalents,
[(B) any debt instrument (as defined in
section 1275(a)(1)) under which interest
payments (or other similar amounts), if any, at
or before maturity meet the requirements
applicable under clause (i) or (ii) of section
860G(a)(1)(B),
[(C) foreclosure property,
[(D) any asset--
[(i) which is an interest rate or
foreign currency notional principal
contract, letter of credit, insurance,
guarantee against payment defaults, or
other similar instrument permitted by
the Secretary, and
[(ii) which is reasonably required to
guarantee or hedge against the FASIT's
risks associated with being the obligor
on interests issued by the FASIT,
[(E) contract rights to acquire debt
instruments described in subparagraph (B) or
assets described in subparagraph (D),
[(F) any regular interest in another FASIT,
and
[(G) any regular interest in a REMIC.
[(2) Debt issued by holder of ownership interest not
permitted asset.--The term ``permitted asset'' shall
not include any debt instrument issued by the holder of
the ownership interest in the FASIT or by any person
related to such holder or any direct or indirect
interest in such a debt instrument. The preceding
sentence shall not apply to cash equivalents and to any
other investment specified in regulations prescribed by
the Secretary.
[(3) Foreclosure property.--
[(A) In general.--The term ``foreclosure
property'' means property--
[(i) which would be foreclosure
property under section 856(e)
(determined without regard to paragraph
(5) thereof) if such property were real
property acquired by a real estate
investment trust, and
[(ii) which is acquired in connection
with the default or imminent default of
a debt instrument held by the FASIT
unless the security interest in such
property was created for the principal
purpose of permitting the FASIT to
invest in such property.
Solely for purposes of subsection (a)(1), the
determination of whether any property is
foreclosure property shall be made without
regard to section 856(e)(4).
[(B) Authority to reduce grace period.--In
the case of property other than real property
and other than personal property incident to
real property, the Secretary may by regulation
reduce for purposes of subparagraph (A) the
periods otherwise applicable under paragraphs
(2) and (3) of section 856(e).
[(d) Startup Day.--For purposes of this part--
[(1) In general.--The term ``startup day'' means the
date designated in the election under subsection (a)(3)
as the startup day of the FASIT. Such day shall be the
beginning of the first taxable year of the FASIT.
[(2) Treatment of property held on startup day.--All
property held (or treated as held under section
860I(b)(2)) by an entity as of the startup day shall be
treated as contributed to such entity on such day by
the holder of the ownership interest in such entity.
[(e) Tax on Prohibited Transactions.--
[(1) In general.--There is hereby imposed for each
taxable year of a FASIT a tax equal to 100 percent of
the net income derived from prohibited transactions.
Such tax shall be paid by the holder of the ownership
interest in the FASIT.
[(2) Prohibited transaction.--For purposes of this
part, the term ``prohibited transaction'' means--
[(A) except as provided in paragraph (3), the
receipt of any income derived from any asset
that is not a permitted asset,
[(B) except as provided in paragraph (3), the
disposition of any permitted asset other than
foreclosure property,
[(C) the receipt of any income derived from
any loan originated by the FASIT, and
[(D) the receipt of any income representing a
fee or other compensation for services (other
than any fee received as compensation for a
waiver, amendment, or consent under permitted
assets (other than foreclosure property) held
by the FASIT).
[(3) Exception for income from certain
dispositions.--
[(A) In general.--Paragraph (2)(B) shall not
apply to a disposition which would not be a
prohibited transaction (as defined in section
860F(a)(2)) by reason of--
[(i) clause (ii), (iii), or
[(iv) of section 860F(a)(2)(A), or
[(ii) section 860F(a)(5),
if the FASIT were treated as a REMIC and
permitted assets (other than cash or cash
equivalents) were treated as qualified
mortgages.
[(B) Substitution of debt instruments;
reduction of overcollaterization.--Paragraph
(2)(B) shall not apply to--
[(i) the substitution of a debt
instrument described in subsection
(c)(1)(B) for another debt instrument
which is a permitted asset, or
[(ii) the distribution of a debt
instrument contributed by the holder of
the ownership interest to such holder
in order to reduce over-
collateralization of the FASIT,but only
if a principal purpose of acquiring the
debt instrument which is disposed of
was not the recognition of gain (or the
reduction of a loss) as a result of an
increase in the market value of the
debt instrument after its acquisition
by the FASIT.
[(C) Liquidation of regular interests.--
Paragraph (2)(B) shall not apply to the
complete liquidation of any class of regular
interests.
[(D) Income from dispositions of former hedge
assets.--Paragraph (2)(A) shall not apply to
income derived from the disposition of--
[(i) an asset which was described in
subsection (c)(1)(D) when first
acquired by the FASIT but on the date
of such disposition was no longer
described in subsection (c)(1)(D)(ii),
or
[(ii) a contract right to acquire an
asset described in clause (i).
[(4) Net income.--For purposes of this subsection,
net income shall be determined in accordance with
section 860F(a)(3).
[(f) Coordination With Other Provisions.--
[(1) Wash sales rules.--Rules similar to the rules of
section 860F(d) shall apply to the ownership interest
in a FASIT.
[(2) Section 475.--Except as provided by the
Secretary by regulations, if any security which is sold
or contributed to a FASIT by the holder of the
ownership interest in such FASIT was required to be
marked-to-market under section 475 by such holder,
section 475 shall continue to apply to such security;
except that in applying section 475 while such security
is held by the FASIT, the fair market value of such
security for purposes of section 475 shall not be less
than its value under section 860I(d).
[(g) Related Person.--For purposes of this part, a person
(hereinafter in this subsection referred to as the ``related
person'') is related to any person if--
[(1) the related person bears a relationship to such
person specified in section 267(b) or section
707(b)(1), or
[(2) the related person and such person are engaged
in trades or businesses under common control (within
the meaning of subsections (a) and (b) of section 52).
For purposes of paragraph (1), in applying section 267(b) or
707(b)(1), ``20 percent'' shall be substituted for ``50
percent'.
[(h) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this part, including regulations to prevent the
abuse of the purposes of this part through transactions which
are not primarily related to securitization of debt instruments
by a FASIT.]
* * * * * * *
Subchapter N--Tax Based on Income From Sources Within or Without the
United States
* * * * * * *
PART I--SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME
* * * * * * *
SEC. 861. INCOME FROM SOURCES WITHIN THE UNITED STATES.
(a) Gross Income From Sources Within United States.--The
following items of gross income shall be treated as income from
sources within the United States:
(1) * * *
(A) interest from a resident alien individual
or domestic corporation, if such individual or
corporation meets the 80-percent foreign
business requirements of subsection (c)(1),
[and]
(B) interest--
(i) * * *
(ii) on amounts satisfying the
requirements of subparagraph (B) of
section 871(i)(3) which are paid by a
foreign branch of a domestic
corporation or a domestic
partnership[.], and
(C) in the case of a foreign partnership in
which United States persons do not hold
directly or indirectly 20 percent or more of
either the capital or profits interests, any
interest not paid by a trade or business
engaged in by the partnership in the United
States and not allocable to income which is
effectively connected (or treated as
effectively connected) with the conduct of a
trade or business in the United States.
* * * * * * *
SEC. 864. DEFINITIONS AND SPECIAL RULES.
(a) * * *
* * * * * * *
(d) Treatment of Related Person Factoring Income.--
(1) * * *
(2) Provisions to which paragraph (1) applies.--The
provisions set forth in this paragraph are as follows:
[(A) Part III of subchapter G of this chapter
(relating to foreign personal holding
companies).]
[(B)] (A) Section 904 (relating to limitation
on foreign tax credit).
[(C)] (B) Subpart F of part III of this
subchapter (relating to controlled foreign
corporations).
* * * * * * *
(5) Certain provisions not to apply.--
(A) Certain exceptions.--The following
provisions shall not apply to any amount
treated as interest under paragraph (1) or (6):
[(i) Subparagraphs (A)(iii)(II),
(B)(ii), and (C)(iii)(III) of section
904(d)(2) (relating to exceptions for
export financing interest).]
(i) Subclause (I) of section
904(d)(2)(B)(iii).
* * * * * * *
(e) Rules for Allocating Interest, Etc.--For purposes of this
subchapter--
(1) * * *
* * * * * * *
(7) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this section, including regulations
providing--
(A) * * *
(B) for direct allocation of interest expense
incurred to carry out an integrated financial
transaction to any interest (or interest-type
income) derived from such transaction and in
other circumstances where such allocation would
be appropriate to carry out the purposes of
this subsection,
* * * * * * *
(E) for appropriate adjustments in the
application of paragraph (3) in the case of an
insurance company, [and]
(F) preventing assets or interest expense
from being taken into account more than once,
and
[(F)] (G) that this subsection shall not
apply for purposes of any provision of this
subchapter to the extent the Secretary
determines that the application of this
subsection for such purposes would not be
appropriate.
(f) Election To Allocate Interest, Etc. on Worldwide Basis.--
For purposes of this subchapter, at the election of the
worldwide affiliated group--
(1) Allocation and apportionment of interest
expense.--
(A) In general.--The taxable income of each
domestic corporation which is a member of a
worldwide affiliated group shall be determined
by allocating and apportioning interest expense
of each member as if all members of such group
were a single corporation.
(B) Treatment of worldwide affiliated
group.--The taxable income of the domestic
members of a worldwide affiliated group from
sources outside the United States shall be
determined by allocating and apportioning the
interest expense of such domestic members to
such income in an amount equal to the excess
(if any) of--
(i) the total interest expense of the
worldwide affiliated group multiplied
by the ratio which the foreign assets
of the worldwide affiliated group bears
to all the assets of the worldwide
affiliated group, over
(ii) the interest expense of all
foreign corporations which are members
of the worldwide affiliated group to
the extent such interest expense of
such foreign corporations would have
been allocated and apportioned to
foreign source income if this
subsection were applied to a group
consisting of all the foreign
corporations in such worldwide
affiliated group.
(C) Worldwide affiliated group.--For purposes
of this paragraph, the term ``worldwide
affiliated group'' means a group consisting
of--
(i) the includible members of an
affiliated group (as defined in section
1504(a), determined without regard to
paragraphs (2) and (4) of section
1504(b)), and
(ii) all controlled foreign
corporations in which such members in
the aggregate meet the ownership
requirements of section 1504(a)(2)
either directly or indirectly through
applying paragraph (2) of section
958(a) or through applying rules
similar to the rules of such paragraph
to stock owned directly or indirectly
by domestic partnerships, trusts, or
estates.
(2) Allocation and apportionment of other expenses.--
Expenses other than interest which are not directly
allocable or apportioned to any specific income
producing activity shall be allocated and apportioned
as if all members of the affiliated group were a single
corporation. For purposes of the preceding sentence,
the term ``affiliated group'' has the meaning given
such term by section 1504 (determined without regard to
paragraph (4) of section 1504(b)).
(3) Treatment of tax-exempt assets; basis of stock in
nonaffiliated 10-percent owned corporations.--The rules
of paragraphs (3) and (4) of subsection (e) shall apply
for purposes of this subsection; except that paragraph
(4) shall be applied on worldwide affiliated group
basis.
(4) Treatment of certain financial institutions.--
(A) In general.--For purposes of paragraph
(1), any corporation described in subparagraph
(B) shall be treated as an includible
corporation for purposes of section 1504 only
for purposes of applying this subsection
separately to corporations so described.
(B) Description.--A corporation is described
in this subparagraph if--
(i) such corporation is a financial
institution described in section 581 or
591,
(ii) the business of such financial
institution is predominantly with
persons other than related persons
(within the meaning of subsection
(d)(4)) or their customers, and
(iii) such financial institution is
required by State or Federal law to be
operated separately from any other
entity which is not such an
institution.
(C) Treatment of bank 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
such Act), and
(iii) any subsidiary of a financial
institution described in section 581 or
591, or 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) Antiabuse rules.--In the case of a
corporation which is a member of an electing
financial institution group, to the extent that
such corporation--
(i) distributes dividends or makes
other distributions with respect to its
stock after the date of the enactment
of this paragraph to any member of the
pre-election worldwide affiliated group
(other than to a member of the electing
financial institution group) in excess
of the greater of--
(I) its average annual
dividend (expressed as a
percentage of current earnings
and profits) during the 5-
taxable-year period ending with
the taxable year preceding the
taxable year, or
(II) 25 percent of its
average annual earnings and
profits for such 5-taxable-year
period, or
(ii) deals with any person in any
manner not clearly reflecting the
income of the corporation (as
determined under principles similar to
the principles of section 482),
an amount of indebtedness of the electing
financial institution group equal to the excess
distribution or the understatement or
overstatement of income, as the case may be,
shall be recharacterized (for the taxable year
and subsequent taxable years) for purposes of
this paragraph as indebtedness of the worldwide
affiliated group (excluding the electing
financial institution group). If a corporation
has not been in existence for 5 taxable years,
this subparagraph shall be applied with respect
to the period it was in existence.
(D) Election.--An election under this
paragraph with respect to any financial
institution group may be made only by the
common parent of the pre-election worldwide
affiliated group and may be made only for the
first taxable year beginning after December 31,
2008, in which such affiliated group includes 1
or more financial corporations. Such an
election, once made, shall apply to all
financial corporations which are members of the
electing financial institution group for such
taxable year and all subsequent years unless
revoked with the consent of the Secretary.
(E) Definitions relating to groups.--For
purposes of this paragraph--
(i) Pre-election worldwide affiliated
group.--The term ``pre-election
worldwide affiliated group'' means,
with respect to a corporation, the
worldwide affiliated group of which
such corporation would (but for an
election under this paragraph) be a
member for purposes of applying
paragraph (1).
(ii) Electing financial institution
group.--The term ``electing financial
institution group'' means the group of
corporations to which this subsection
applies separately by reason of the
application of paragraph (4)(A) and
which includes financial corporations
by reason of an election under
subparagraph (A).
(F) Regulations.--The Secretary shall
prescribe such regulations as may be
appropriate to carry out this subsection,
including regulations--
(i) providing for the direct
allocation of interest expense in other
circumstances where such allocation
would be appropriate to carry out the
purposes of this subsection,
(ii) preventing assets or interest
expense from being taken into account
more than once, and
(iii) dealing with changes in members
of any group (through acquisitions or
otherwise) treated under this paragraph
as an affiliated group for purposes of
this subsection.
(6) Election.--An election to have this subsection
apply with respect to any worldwide affiliated group
may be made only by the common parent of the domestic
affiliated group referred to in paragraph (1)(C) and
may be made only for the first taxable year beginning
after December 31, 2008, in which a worldwide
affiliated group exists which includes such affiliated
group and at least one foreign corporation. Such an
election, once made, shall apply to such common parent
and all other corporations which are members of such
worldwide affiliated group for such taxable year and
all subsequent years unless revoked with the consent of
the Secretary.
[(f)] (g) Allocation of Research and Experimental
Expenditures.--
(1) * * *
* * * * * * *
PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
* * * * * * *
Subpart A--Nonresident Alien Individuals
* * * * * * *
SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS.
(a) * * *
* * * * * * *
(i) Tax Not to Apply to Certain Interest and Dividends.--
(1) In general.--No tax shall be imposed under
paragraph (1)(A) or (1)(C) of subsection (a) on any
amount described in paragraph (2).
(2) Amounts to which paragraph (1) applies.--The
amounts described in this paragraph are as follows:
(A) * * *
* * * * * * *
(D) Dividends paid by a foreign corporation
which are treated under section 861(a)(2)(B) as
income from sources within the United States.
* * * * * * *
(k) Exemption for Certain Dividends of Regulated Investment
Companies.--
(1) Interest-related dividends.--
(A) In general.--Except as provided in
subparagraph (B), no tax shall be imposed under
paragraph (1)(A) of subsection (a) on any
interest-related dividend received from a
regulated investment company.
(B) Exceptions.--Subparagraph (A) shall not
apply--
(i) to any interest-related dividend
received from a regulated investment
company by a person to the extent such
dividend is attributable to interest
(other than interest described in
subparagraph (E) (i) or (iii)) received
by such company on indebtedness issued
by such person or by any corporation or
partnership with respect to which such
person is a 10-percent shareholder,
(ii) to any interest-related dividend
with respect to stock of a regulated
investment company unless the person
who would otherwise be required to
deduct and withhold tax from such
dividend under chapter 3 receives a
statement (which meets requirements
similar to the requirements of
subsection (h)(5)) that the beneficial
owner of such stock is not a United
States person, and
(iii) to any interest-related
dividend paid to any person within a
foreign country (or any interest-
related dividend payment addressed to,
or for the account of, persons within
such foreign country) during any period
described in subsection (h)(6) with
respect to such country.
Clause (iii) shall not apply to any dividend
with respect to any stock which was acquired on
or before the date of the publication of the
Secretary's determination under subsection
(h)(6).
(C) Interest-related dividend.--For purposes
of this paragraph, an interest-related dividend
is any dividend (or part thereof) which is
designated by the regulated investment company
as an interest-related dividend in a written
notice mailed to its shareholders not later
than 60 days after the close of its taxable
year. If the aggregate amount so designated
with respect to a taxable year of the company
(including amounts so designated with respect
to dividends paid after the close of the
taxable year described in section 855) is
greater than the qualified net interest income
of the company for such taxable year, the
portion of each distribution which shall be an
interest-related dividend shall be only that
portion of the amounts so designated which such
qualified net interest income bears to the
aggregate amount so designated.
(D) Qualified net interest income.--For
purposes of subparagraph (C), the term
``qualified net interest income'' means the
qualified interest income of the regulated
investment company reduced by the deductions
properly allocable to such income.
(E) Qualified interest income.--For purposes
of subparagraph (D), the term ``qualified
interest income'' means the sum of the
following amounts derived by the regulated
investment company from sources within the
United States:
(i) Any amount includible in gross
income as original issue discount
(within the meaning of section 1273) on
an obligation payable 183 days or less
from the date of original issue
(without regard to the period held by
the company).
(ii) Any interest includible in gross
income (including amounts recognized as
ordinary income in respect of original
issue discount or market discount or
acquisition discount under part V of
subchapter P and such other amounts as
regulations may provide) on an
obligation which is in registered form;
except that this clause shall not apply
to--
(I) any interest on an
obligation issued by a
corporation or partnership if
the regulated investment
company is a 10-percent
shareholder in such corporation
or partnership, and
(II) any interest which is
treated as not being portfolio
interest under the rules of
subsection (h)(4).
(iii) Any interest referred to in
subsection (i)(2)(A) (without regard to
the trade or business of the regulated
investment company).
(iv) Any interest-related dividend
includable in gross income with respect
to stock of another regulated
investment company.
(F) 10-percent shareholder.--For purposes of
this paragraph, the term ``10-percent
shareholder'' has the meaning given such term
by subsection (h)(3)(B).
(2) Short-term capital gain dividends.--
(A) In general.--Except as provided in
subparagraph (B), no tax shall be imposed under
paragraph (1)(A) of subsection (a) on any
short-term capital gain dividend received from
a regulated investment company.
(B) Exception for aliens taxable under
subsection (a)(2).--Subparagraph (A) shall not
apply in the case of any nonresident alien
individual subject to tax under subsection
(a)(2).
(C) Short-term capital gain dividend.--For
purposes of this paragraph, a short-term
capital gain dividend is any dividend (or part
thereof) which is designated by the regulated
investment company as a short-term capital gain
dividend in a written notice mailed to its
shareholders not later than 60 days after the
close of its taxable year. If the aggregate
amount so designated with respect to a taxable
year of the company (including amounts so
designated with respect to dividends paid after
the close of the taxable year described in
section 855) is greater than the qualified
short-term gain of the company for such taxable
year, the portion of each distribution which
shall be a short-term capital gain dividend
shall be only that portion of the amounts so
designated which such qualified short-term gain
bears to the aggregate amount so designated.
(D) Qualified short-term gain.--For purposes
of subparagraph (C), the term ``qualified
short-term gain'' means the excess of the net
short-term capital gain of the regulated
investment company for the taxable year over
the net long-term capital loss (if any) of such
company for such taxable year. For purposes of
this subparagraph--
(i) the net short-term capital gain
of the regulated investment company
shall be computed by treating any
short-term capital gain dividend
includible in gross income with respect
to stock of another regulated
investment company as a short-term
capital gain, and
(ii) the excess of the net short-term
capital gain for a taxable year over
the net long-term capital loss for a
taxable year (to which an election
under section 4982(e)(4) does not
apply) shall be determined without
regard to any net capital loss or net
short-term capital loss attributable to
transactions after October 31 of such
year, and any such net capital loss or
net short-term capital loss shall be
treated as arising on the 1st day of
the next taxable year.
To the extent provided in regulations, clause
(ii) shall apply also for purposes of computing
the taxable income of the regulated investment
company.
[(k)] (l) Cross References.--
(1) For tax treatment of certain amounts distributed by the
United States to nonresident alien individuals, see section
402(e)(2).
* * * * * * *
SEC. 877. EXPATRIATION TO AVOID TAX.
[(a) Treatment of Expatriates.--
[(1) In general.--Every nonresident alien individual
who, within the 10-year period immediately preceding
the close of the taxable year, lost United States
citizenship, unless such loss did not have for one of
its principal purposes the avoidance of taxes under
this subtitle or subtitle B, 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) Certain individuals treated as having tax
avoidance purpose.--For purposes of paragraph (1), an
individual shall be treated as having a principal
purpose to avoid such taxes 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 $100,000, or
[(B) the net worth of the individual as of
such date is $500,000 or more.
In the case of the loss of United States citizenship in
any calendar year after 1996, such $100,000 and
$500,000 amounts 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 ``1994'' for ``1992'' in
subparagraph (B) thereof. Any increase under the
preceding sentence shall be rounded to the nearest
multiple of $1,000.]
(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 $122,000,
(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 2003, such $122,000 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 ``2002'' for ``1992'' in subparagraph
(B) thereof. Any increase under the preceding sentence
shall be rounded to the nearest multiple of $1,000.
* * * * * * *
[(c) Tax Avoidance Not Presumed in Certain Cases.--
[(1) In general.--Subsection (a)(2) shall not apply
to an individual if--
[(A) such individual is described in a
subparagraph of paragraph (2) of this
subsection, and
[(B) within the 1-year period beginning on
the date of the loss of United States
citizenship, such individual submits a ruling
request for the Secretary's determination as to
whether such loss has for one of its principal
purposes the avoidance of taxes under this
subtitle or subtitle B.
[(2) Individuals described.--
[(A) Dual citizenship, etc.--An individual is
described in this subparagraph 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, or
[(ii) the individual becomes (not
later than the close of a reasonable
period after loss of United States
citizenship) a citizen 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.
[(B) Long-term foreign residents.--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, the individual was 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.
[(C) Renunciation upon reaching age of
majority.--An individual is described in this
subparagraph if the individual's loss of United
States citizenship occurs before such
individual attains age 18-1/2.
[(D) Individuals specified in regulations.--
An individual is described in this subparagraph
if the individual is described in a category of
individuals prescribed by regulation by the
Secretary.]
(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.
* * * * * * *
(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.
* * * * * * *
Subpart B--Foreign Corporations
* * * * * * *
SEC. 881. TAX ON INCOME OF FOREIGN CORPORATIONS NOT CONNECTED WITH
UNITED STATES BUSINESS.
(a) * * *
* * * * * * *
(e) Tax Not To Apply to Certain Dividends of Regulated
Investment Companies.--
(1) Interest-related dividends.--
(A) In general.--Except as provided in
subparagraph (B), no tax shall be imposed under
paragraph (1) of subsection (a) on any
interest-related dividend (as defined in
section 871(k)(1)) received from a regulated
investment company.
(B) Exception.--Subparagraph (A) shall not
apply--
(i) to any dividend referred to in
section 871(k)(1)(B), and
(ii) to any interest-related dividend
received by a controlled foreign
corporation (within the meaning of
section 957(a)) to the extent such
dividend is attributable to interest
received by the regulated investment
company from a person who is a related
person (within the meaning of section
864(d)(4)) with respect to such
controlled foreign corporation.
(C) Treatment of dividends received by
controlled foreign corporations.--The rules of
subsection (c)(5)(A) shall apply to any
interest-related dividend received by a
controlled foreign corporation (within the
meaning of section 957(a)) to the extent such
dividend is attributable to interest received
by the regulated investment company which is
described in clause (ii) of section
871(k)(1)(E) (and not described in clause (i)
or (iii) of such section).
(2) Short-term capital gain dividends.--No tax shall
be imposed under paragraph (1) of subsection (a) on any
short-term capital gain dividend (as defined in section
871(k)(2)) received from a regulated investment
company.
[(e)] (f) Cross Reference.--
For doubling of tax on corporations of certain foreign
countries, see section 891.
For special rules for original issue discount, see section
871(g).
* * * * * * *
Subpart D--Miscellaneous Provisions
* * * * * * *
SEC. 897. DISPOSITION OF INVESTMENT IN UNITED STATES REAL PROPERTY.
(a) * * *
* * * * * * *
(h) Special Rules for [REITS] Certain Investment Entities.--
For purposes of this section--
(1) Look-through of distributions.--Any distribution
by a [REIT] qualified investment entity to a
nonresident alien individual or a foreign corporation
shall, to the extent attributable to gain from sales or
exchanges by the [REIT] qualified investment entity of
United States real property interests, be treated as
gain recognized by such nonresident alien individual or
foreign corporation from the sale or exchange of a
United States real property interest.
[(2) Sale of stock in domestically-controlled REIT
not taxed.--The term ``United States real property
interest'' does not include any interest in a
domestically-controlled REIT.
[(3) Distributions by domestically-controlled
REITS.--In the case of a domestically-controlled REIT,
rules similar to the rules of subsection (d) shall
apply to the foreign ownership percentage of any gain.]
(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.
(4) Definitions.--
[(A) Reit.--The term ``REIT'' means a real
estate investment trust.
[(B) Domestically-controlled REIT.--The term
``domestically-controlled REIT'' means a REIT
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.]
(A) Qualified investment entity.--The term
``qualified investment entity'' means any real
estate investment trust and any regulated
investment company.
(B) Domestically controlled.--The term
``domestically controlled qualified investment
entity'' means any qualified investment entity
in which at all times during the testing period
less than 50 percent in value of the stock was
held directly or indirectly by foreign persons.
(C) Foreign ownership percentage.--The term
``foreign ownership percentage'' means that
percentage of the stock of the [REIT] qualified
investment entity which was held (directly or
indirectly) by foreign persons at the time
during the testing period during which the
direct and indirect ownership of stock by
foreign persons was greatest.
(D) Testing period.--The term ``testing
period'' means whichever of the following
periods is the shortest:
(i) * * *
* * * * * * *
(iii) the period during which the
[REIT] qualified investment entity was
in existence.
* * * * * * *
SEC. 898. TAXABLE YEAR OF CERTAIN FOREIGN CORPORATIONS.
(a) * * *
(b) Specified Foreign Corporation.--For purposes of this
section--
(1) In general.--The term ``specified foreign
corporation'' means any foreign corporation--
[(A) which is--
[(i) treated as a controlled foreign
corporation for any purpose under
subpart F of part III of this
subchapter, or
[(ii) a foreign personal holding
company (as defined in section 552),
and]
(A) which is treated as a controlled foreign
corporation for any purpose under subpart F of
part III of this subchapter, and
* * * * * * *
(2) Ownership requirements.--
(A) * * *
(B) Ownership.--For purposes of subparagraph
(A), the rules of subsections (a) and (b) of
section 958 [and sections 551(f) and 554,
whichever are applicable,] shall apply in
determining ownership.
[(3) United States shareholder.--
[(A) In general.--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).
[(B) Foreign personal holding companies.--In
the case of any foreign personal holding
company (as defined in section 552) which is
not a specified foreign corporation by reason
of paragraph (1)(A)(i), the term ``United
States shareholder'' means any person who is
treated as a United States shareholder under
section 551.]
(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).
[(c) Determination of Required Year.--
[(1) Controlled foreign corporations.--
[(A) In general.--In the case of a specified
foreign corporation described in subsection
(b)(1)(A)(i), the required year is--
[(i) the majority U.S. shareholder
year, or
[(ii) if there is no majority U.S.
shareholder year, the taxable year
prescribed under regulations.
[(B) 1-month deferral allowed.--A specified
foreign corporation may elect, in lieu of the
taxable year under subparagraph (A)(i), a
taxable year beginning 1 month earlier than the
majority U.S. shareholder year.
[(C) Majority U.S. shareholder year.--
[(i) 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
subclause (I) whose stock was
treated as owned under
subsection (b)(2)(B) by any
shareholder described in such
subclause.
[(ii) 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.
[(2) Foreign personal holding companies.--In the case
of a foreign personal holding company described in
subsection (b)(3)(B), the required year shall be
determined under paragraph (1), except that
subparagraph (B) of paragraph (1) shall not apply.]
(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.
* * * * * * *
PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES
Subpart A. Foreign tax credit.
* * * * * * *
[Subpart E. Qualifying foreign trade income.]
* * * * * * *
Subpart A--Foreign Tax Credit
* * * * * * *
SEC. 901. TAXES OF FOREIGN COUNTRIES AND OF POSSESSIONS OF UNITED
STATES.
(a) * * *
(b) Amount Allowed.--Subject to the limitation of section
904, the following amounts shall be allowed as the credit under
subsection (a):
(1) * * *
* * * * * * *
(5) Partnerships and estates.--In the case of [any
individual] any person described in paragraph (1), (2),
(3), or (4), who is a member of a partnership or a
beneficiary of an estate or trust, the amount of his
proportionate share of the taxes (described in such
paragraph) of the partnership or the estate or trust
paid or accrued during the taxable year to a foreign
country or to any possession of the United States, as
the case may be. Under rules or regulations prescribed
by the Secretary, in the case of any foreign trust of
which the settlor or another person would be treated as
owner of any portion of the trust under subpart E but
for section 672(f), the allocable amount of any income,
war profits, and excess profits taxes imposed by any
foreign country or possession of the United States on
the settlor or such other person in respect of trust
income.
* * * * * * *
(k) Minimum Holding Period for Certain Taxes on Dividends.--
(1) * * *
* * * * * * *
(l) Minimum Holding Period for Withholding Taxes on Gain and
Income Other Than Dividends Etc.--
(1) In general.--In no event shall a credit be
allowed under subsection (a) for any withholding tax
(as defined in subsection (k)) on any item of income or
gain with respect to any property if--
(A) such property is held by the recipient of
the item for 15 days or less during the 30-day
period beginning on the date which is 15 days
before the date on which the right to receive
payment of such item arises, or
(B) to the extent that the recipient of the
item is under an obligation (whether pursuant
to a short sale or otherwise) to make related
payments with respect to positions in
substantially similar or related property.
This paragraph shall not apply to any dividend to which
subsection (k) applies.
(2) Exception for taxes paid by dealers.--
(A) In general.--Paragraph (1) shall not
apply to any qualified tax with respect to any
property held in the active conduct in a
foreign country of a business as a dealer in
such property.
(B) Qualified tax.--For purposes of
subparagraph (A), the term ``qualified tax''
means a tax paid to a foreign country (other
than the foreign country referred to in
subparagraph (A)) if--
(i) the item to which such tax is
attributable is subject to taxation on
a net basis by the country referred to
in subparagraph (A), and
(ii) such country allows a credit
against its net basis tax for the full
amount of the tax paid to such other
foreign country.
(C) Dealer.--For purposes of subparagraph
(A), the term ``dealer'' means--
(i) with respect to a security, any
person to whom paragraphs (1) and (2)
of subsection (k) would not apply by
reason of paragraph (4) thereof if such
security were stock, and
(ii) with respect to any other
property, any person with respect to
whom such property is described in
section 1221(a)(1).
(D) Regulations.--The Secretary may prescribe
such regulations as may be appropriate to carry
out this paragraph, including regulations to
prevent the abuse of the exception provided by
this paragraph and to treat other taxes as
qualified taxes.
(3) Exceptions.--The Secretary may by regulation
provide that paragraph (1) shall not apply to property
where the Secretary determines that the application of
paragraph (1) to such property is not necessary to
carry out the purposes of this subsection.
(4) Certain rules to apply.--Rules similar to the
rules of paragraphs (5), (6), and (7) of subsection (k)
shall apply for purposes of this subsection.
(5) Determination of holding period.--Holding periods
shall be determined for purposes of this subsection
without regard to section 1235 or any similar rule.
[(l)] (m) Cross Reference.--
(1) * * *
* * * * * * *
SEC. 902. DEEMED PAID CREDIT WHERE DOMESTIC CORPORATION OWNS 10 PERCENT
OR MORE OF VOTING STOCK OF FOREIGN CORPORATION.
(a) * * *
* * * * * * *
(c) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(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.
[(7)] (8) Regulations.--The Secretary shall provide
such regulations as may be necessary or appropriate to
carry out the provisions of this section and section
960, including provisions which provide for the
separate application of this section and section 960 to
reflect the separate application of section 904 to
separate types of income and loss.
* * * * * * *
SEC. 904. LIMITATION ON CREDIT.
(a) * * *
(b) Taxable Income for Purpose of Computing Limitation.--
(1) * * *
* * * * * * *
(3) Definitions.--For purposes of this subsection--
(A) * * *
* * * * * * *
(D) Capital gain rate differential.--There is
a capital gain rate differential for any
taxable year if--
(i) * * *
[(ii) in the case of a corporation,
any rate of tax imposed by section 11,
511, or 831(a) or (b) (whichever
applies) exceeds the alternative rate
of tax under section 1201(a)
(determined without regard to the last
sentence of section 11(b)(1)).]
(ii) in the case of a corporation,
section 1201(a) applies to such taxable
year.
* * * * * * *
(d) Separate Application of Section with Respect to Certain
Categories of Income.--
[(1) In general.--The provisions of subsections (a),
(b), and (c) and sections 902, 907, and 960 shall be
applied separately with respect to each of the
following items of income:
[(A) passive income,
[(B) high withholding tax interest,
[(C) financial services income,
[(D) shipping income,
[(E) in the case of a corporation, dividends
from noncontrolled section 902 corporations out
of earnings and profits accumulated in taxable
years beginning before January 1, 2003,
[(F) 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,
[(G) taxable income attributable to foreign
trade income (within the meaning of section
923(b)),
[(H) 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)), and
[(I) income other than income described in
any of the preceding subparagraphs.]
(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.
(2) Definitions and special rules.--For purposes of
this subsection--
(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.
[(A)] (B) Passive income.--
(i) * * *
* * * * * * *
(iii) Exceptions.--The term ``passive
income'' shall not include--
[(I) any income described in
a subparagraph of paragraph (1)
other than subparagraph (A),]
[(II)] (I) any export
financing interest, and
[(III)] (II) any high-taxed
income.
* * * * * * *
(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)).
[(B) High withholding tax interest.--
[(i) In general.--Except as otherwise
provided in this subparagraph, the term
``high withholding tax interest'' means
any interest if--
[(I) such interest is subject
to a withholding tax of a
foreign country or possession
of the United States (or other
tax determined on a gross
basis), and
[(II) the rate of such tax
applicable to such interest is
at least 5 percent.
[(ii) Exception for export
financing.--The term ``high withholding
tax interest'' shall not include any
export financing interest.
[(iii) Regulations.--The Secretary
may by regulations provide that--
[(I) amounts (not otherwise
high withholding tax interest)
shall be treated as high
withholding tax interest where
necessary to prevent avoidance
of the purposes of this
subparagraph, and
[(II) a tax shall not be
treated as a withholding tax or
other tax imposed on a gross
basis if such tax is in the
nature of a prepayment of a tax
imposed on a net basis.]
(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.
[(C)] (D) Financial services income.--
(i) In general.--Except as otherwise
provided in this subparagraph, the term
``financial services income'' means any
income which is received or accrued by
any person predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business, and
which is--
(I) described in clause (ii),
or
[(II) passive income
(determined without regard to
subclauses (I) and (III) of
subparagraph (A)(iii)), or
[(III) export financing
interest which (but for
subparagraph (B)(ii)) would be
high withholding tax interest.]
(II) passive income
(determined without regard to
subparagraph (B)(iii)(II)).
* * * * * * *
[(iii) Exceptions.--The term
``financial services income'' does not
include--
[(I) any high withholding tax
interest,
[(II) any dividend from a
noncontrolled section 902
corporation out of earnings and
profits accumulated in taxable
years beginning before January
1, 2003, and
[(III) any export financing
interest not described in
clause (i)(III).
[(D) Shipping income.--The term ``shipping
income'' means any income received or accrued
by any person which is of a kind which would be
foreign base company shipping income (as
defined in section 954(f)). Such term does not
include any dividend from a noncontrolled
section 902 corporation out of earnings and
profits accumulated in taxable years beginning
before January 1, 2003 and does not include any
financial services income.]
(E) Noncontrolled section 902 corporation.--
(i) In general.--The term
``noncontrolled section 902
corporation'' means any foreign
corporation with respect to which the
taxpayer meets the stock ownership
requirements of section 902(a) (or, for
purposes of applying paragraph (3) or
(4), the requirements of section
902(b)). A controlled foreign
corporation shall not be treated as a
noncontrolled section 902 corporation
with respect to any distribution out of
its earnings and profits for periods
during which it was a controlled
foreign corporation.
[(ii) Special rule for taxes on high-
withholding tax interest.--If a foreign
corporation is a noncontrolled section
902 corporation with respect to the
taxpayer, taxes on high withholding tax
interest (to the extent imposed at a
rate in excess of 5 percent) shall not
be treated as foreign taxes for
purposes of determining the amount of
foreign taxes deemed paid by the
taxpayer under section 902.]
[(iii)] (ii) Treatment of inclusions
under section 1293.--If any foreign
corporation is a non-controlled section
902 corporation with respect to the
taxpayer, any inclusion under section
1293 with respect to such corporation
shall be treated as a dividend from
such corporation.
[(iv) All non-PFICS treated as one.--
All noncontrolled section 902
corporations which are not passive
foreign investment companies (as
defined in section 1297) shall be
treated as one noncontrolled section
902 corporation for purposes of
paragraph (1).]
(H) Treatment of income tax base
differences.--Tax imposed under the law of a
foreign country or possession of the United
States on an amount which does not constitute
income under United States tax principles shall
be treated as imposed on income described in
paragraph (1)(B).
[(H)] (I) Related person.--For purposes of
this paragraph, the term ``related person'' has
the meaning given such term by section
954(d)(3), except that such section shall be
applied by substituting ``the person with
respect to whom the determination is being
made'' for ``controlled foreign corporation''
each place it appears.
[(I)] (J) Transitional rule.--For purposes of
paragraph (1)--
(i) * * *
* * * * * * *
(K) Transitional rules for 2005 changes.--For
purposes of paragraph (1)--
(i) taxes carried from any taxable
year beginning before January 1, 2005,
to any taxable year beginning on or
after such date, with respect to any
item of income, shall be treated as
described in the subparagraph of
paragraph (1) in which such income
would be described were such taxes paid
or accrued in a taxable year beginning
on or after such date, and
(ii) the Secretary may by regulations
provide for the allocation of any
carryback of taxes with respect to
income to such a taxable year for
purposes of allocating such income
among the separate categories in effect
for such taxable year.
[Note: The amendment made by section 1074(c)(14) of H.R. 2896 to
section 904(d)(2)(A) (shown below) applies to taxable years of foreign
corporations beginning after December 31, 2006, and to taxable years of
United States shareholders with or within which such taxable years of
foreign corporations end.]
SEC. 904. LIMITATION ON CREDIT.
(a) * * *
* * * * * * *
(d) Separate Application of Section with Respect to Certain
Categories of Income.--
(1) * * *
(2) Definitions and special rules.--For purposes of
this subsection--
(A) Categories.--
(i) Passive category income.--The
term ``passive category income'' means
passive income and specified passive
category income.
(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).
[(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 income in a separate category.
[(B) Subpart F inclusions.--Any amount
included in gross income under section
951(a)(1)(A) shall be treated as income in a
separate category to the extent the amount so
included is attributable to income in such
category.
[(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 income in a
separate category to the extent it is properly
allocable (under regulations prescribed by the
Secretary) to income of the controlled foreign
corporation in such category.
[(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 income
in a separate category in proportion to the
ratio of--
[(i) the portion of the earnings and
profits attributable to income in such
category, 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 income in
a separate category, 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 income in a separate category if the
requirements of section 954(b)(4) are met with
respect to such income.
[(F) Separate category.--For purposes of this
paragraph--
[(i) In general.--Except as provided
in clause (ii), the term ``separate
category'' means any category of income
described in subparagraph (A), (B),
(C), (D), or (E) of paragraph (1).
[(ii) Coordination with high-taxed
income provisions.--
[(I) In determining whether
any income of a controlled
foreign corporation is in a
separate category, subclause
(III) of paragraph (2)(A)(iii)
shall not apply.
[(II) Any income of the
taxpayer which is treated as
income in a separate category
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) Exception for certain high withholding
tax interest.--This paragraph shall not apply
to any amount which--
[(i) without regard to this
paragraph, is high withholding tax
interest (including any amount treated
as high withholding tax interest under
paragraph (2)(B)(iii)), and
[(ii) would (but for this
subparagraph) be treated as financial
services income under this paragraph.
The amount to which this paragraph does not
apply by reason of the preceding sentence shall
not exceed the interest or equivalent income of
the controlled foreign corporation taken into
account in determining financial services
income without regard to this subparagraph.
[(I) 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.
[(4) Look-thru applies to dividends from
noncontrolled section 902 corporations.--
[(A) In general.--For purposes of this
subsection, any applicable dividend shall be
treated as income in a separate category in
proportion to the ratio of--
[(i) the portion of the earnings and
profits described in subparagraph
(B)(ii) attributable to income in such
category, to
[(ii) the total amount of such
earnings and profits.
[(B) Applicable dividend.--For purposes of
subparagraph (A), the term ``applicable
dividend'' means any dividend--
[(i) from a noncontrolled section 902
corporation with respect to the
taxpayer, and
[(ii) paid out of earnings and
profits accumulated in taxable years
beginning after December 31, 2002.
[(C) Special rules.--
[(i) In general.--Rules similar to
the rules of paragraph (3)(F) shall
apply for purposes of this paragraph.
[(ii) Earnings and profits.--For
purposes of this paragraph and
paragraph (1)(E)--
[(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 prior to the taxpayer's
acquisition of such stock.]
(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.
(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) Special rules.--For purposes of this
paragraph--
(i) Earnings and profits.--
(I) In general.--The rules of
section 316 shall apply.
(II) Regulations.--The
Secretary may prescribe
regulations regarding the
treatment of distributions out
of earnings and profits for
periods before the taxpayer's
acquisition of the stock to
which the distributions relate.
(ii) Inadequate substantiation.--If
the Secretary determines that the
proper subparagraph of paragraph (1) in
which a dividend is described has not
been substantiated, such dividend shall
be treated as income described in
paragraph (1)(A).
(iii) Look-thru with respect to
carryforwards of credit.--Rules similar
to subparagraph (A) also shall apply to
any carryforward under subsection (c)
from a taxable year beginning before
January 1, 2003, of tax allocable to a
dividend from a noncontrolled section
902 corporation with respect to the
taxpayer. The Secretary may by
regulations provide for the allocation
of any carryback of tax allocable to a
dividend from a noncontrolled section
902 corporation to such a taxable year
for purposes of allocating such
dividend among the separate categories
in effect for such taxable year.
(iv) Coordination with high-taxed
income provisions.--Rules similar to
the rules of paragraph (3)(F) shall
apply for purposes of this paragraph.
(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, 2005, 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).
[(g)] (h) Source Rules in Case of United States-Owned Foreign
Corporations.--
(1) In general.--The following amounts which are
derived from a United States-owned foreign corporation
and which would be treated as derived from sources
outside the United States without regard to this
subsection shall, for purposes of this section, be
treated as derived from sources within the United
States to the extent provided in this subsection:
(A) Any amount included in gross income
under--
(i) section 951(a) (relating to
amounts included in gross income of
United States shareholders), or
[(ii) section 551 (relating to
foreign personal holding company income
taxed to United States shareholders),
or]
[(iii)] (ii) section 1293 (relating
to current taxation of income from
qualified funds).
* * * * * * *
(2) Subpart F and [foreign personal holding or]
passive foreign investment company inclusions.--Any
amount described in subparagraph (A) of paragraph (1)
shall be treated as derived from sources within the
United States to the extent such amount is attributable
to income of the United States-owned foreign
corporation from sources within the United States.
[(h)] (i) Coordination with Nonrefundable Personal Credits.--
In the case of an individual, for purposes of subsection (a),
the tax against which the credit is taken is such tax reduced
by the sum of the credits allowable under subpart A of part IV
of subchapter A of this chapter. This subsection shall not
apply to taxable years beginning during 2000, 2001, 2002, or
2003.
[(i)] (j) Limitation on Use of Deconsolidation to Avoid
Foreign Tax Credit Limitations.--If 2 or more domestic
corporations would be members of the same affiliated group if--
(1) * * *
* * * * * * *
[(j)] (k) Certain Individuals Exempt.--
(1) * * *
* * * * * * *
(3) Definitions.--For purposes of this subsection--
(A) Qualified passive income.--The term
``qualified passive income'' means any item of
gross income if--
(i) such item of income is passive
income (as defined in [subsection
(d)(2)(A)] subsection (d)(2)(B) without
regard to clause (iii) thereof), and
[(k)] (l) Cross references
(1) * * *
* * * * * * *
Subpart D--Possessions of the United States
* * * * * * *
SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT.
(a) Allowance of Credit.--
(1) * * *
(2) Conditions which must be satisfied.--The
conditions referred to in paragraph (1) are:
(A) 3-year period.--If 80 percent or more of
the gross income of such domestic corporation
for the 3-year period immediately preceding the
close of the taxable year (or for such part of
such period immediately preceding the close of
such taxable year as may be applicable) was
derived from sources within a possession of the
United States (determined without regard to
[section 904(f)] subsections (f) and (g) of
section 904); and
* * * * * * *
[Subpart E--Qualifying Foreign Trade Income
[Sec. 941. Qualifying foreign trade income.
[Sec. 942. Foreign trading gross receipts.
[Sec. 943. Other definitions and special rules.
[SEC. 941. QUALIFYING FOREIGN TRADE INCOME.
[(a) Qualifying Foreign Trade Income.--For purposes of this
subpart and section 114--
[(1) In general.--The term ``qualifying foreign trade
income'' means, with respect to any transaction, the
amount of gross income which, if excluded, will result
in a reduction of the taxable income of the taxpayer
from such transaction equal to the greatest of--
[(A) 30 percent of the foreign sale and
leasing income derived by the taxpayer from
such transaction,
[(B) 1.2 percent of the foreign trading gross
receipts derived by the taxpayer from the
transaction, or
[(C) 15 percent of the foreign trade income
derived by the taxpayer from the transaction.
In no event shall the amount determined under
subparagraph (B) exceed 200 percent of the amount
determined under subparagraph (C).
[(2) Alternative computation.--A taxpayer may compute
its qualifying foreign trade income under a
subparagraph of paragraph (1) other than the
subparagraph which results in the greatest amount of
such income.
[(3) Limitation on use of foreign trading gross
receipts method.--If any person computes its qualifying
foreign trade income from any transaction with respect
to any property under paragraph (1)(B), the qualifying
foreign trade income of such person (or any related
person) with respect to any other transaction involving
such property shall be zero.
[(4) Rules for marginal costing.--The Secretary shall
prescribe regulations setting forth rules for the
allocation of expenditures in computing foreign trade
income under paragraph (1)(C) in those cases where a
taxpayer is seeking to establish or maintain a market
for qualifying foreign trade property.
[(5) Participation in international boycotts, etc.--
Under regulations prescribed by the Secretary, the
qualifying foreign trade income of a taxpayer for any
taxable year shall be reduced (but not below zero) by
the sum of--
[(A) an amount equal to such income
multiplied by the international boycott factor
determined under section 999, and
[(B) any illegal bribe, kickback, or other
payment (within the meaning of section 162(c))
paid by or on behalf of the taxpayer directly
or indirectly to an official, employee, or
agent in fact of a government.
[(b) Foreign Trade Income.--For purposes of this subpart--
[(1) In general.--The term ``foreign trade income''
means the taxable income of the taxpayer attributable
to foreign trading gross receipts of the taxpayer.
[(2) Special rule for cooperatives.--In any case in
which an organization to which part I of subchapter T
applies which is engaged in the marketing of
agricultural or horticultural products sells qualifying
foreign trade property, in computing the taxable income
of such cooperative, there shall not be taken into
account any deduction allowable under subsection (b) or
(c) of section 1382 (relating to patronage dividends,
per-unit retain allocations, and nonpatronage
distributions).
[(c) Foreign Sale and Leasing Income.--For purposes of this
section--
[(1) In general.--The term ``foreign sale and leasing
income'' means, with respect to any transaction--
[(A) foreign trade income properly allocable
to activities which--
[(i) are described in paragraph
(2)(A)(i) or (3) of section 942(b), and
[(ii) are performed by the taxpayer
(or any person acting under a contract
with such taxpayer) outside the United
States, or
[(B) 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.
[(2) Special rules for leased property.--
[(A) Sales income.--The term ``foreign sale
and leasing income'' includes any foreign trade
income derived by the taxpayer from the sale of
property described in paragraph (1)(B).
[(B) Limitation in certain cases.--Except as
provided in regulations, in the case of
property which--
[(i) was manufactured, produced,
grown, or extracted by the taxpayer, or
[(ii) was acquired by the taxpayer
from a related person for a price which
was not determined in accordance with
the rules of section 482,
the amount of foreign trade income which may be
treated as foreign sale and leasing income
under paragraph (1)(B) or subparagraph (A) of
this paragraph with respect to any transaction
involving such property shall not exceed the
amount which would have been determined if the
taxpayer had acquired such property for the
price determined in accordance with the rules
of section 482.
[(3) Special rules.--
[(A) Excluded property.--Foreign sale and
leasing income shall not include any income
properly allocable to excluded property
described in subparagraph (B) of section
943(a)(3) (relating to intangibles).
[(B) Only direct expenses taken into
account.--For purposes of this subsection, any
expense other than a directly allocable expense
shall not be taken into account in computing
foreign trade income.
[SEC. 942. FOREIGN TRADING GROSS RECEIPTS.
[(a) Foreign Trading Gross Receipts.--
[(1) In general.--Except as otherwise provided in
this section, for purposes of this subpart, the term
``foreign trading gross receipts'' means the gross
receipts of the taxpayer which are--
[(A) from the sale, exchange, or other
disposition of qualifying foreign trade
property,
[(B) from the lease or rental of qualifying
foreign trade property for use by the lessee
outside the United States,
[(C) for services which are related and
subsidiary to--
[(i) any sale, exchange, or other
disposition of qualifying foreign trade
property by such taxpayer, or
[(ii) any lease or rental of
qualifying foreign trade property
described in subparagraph (B) by such
taxpayer,
[(D) for engineering or architectural
services for construction projects located (or
proposed for location) outside the United
States, or
[(E) for the performance of managerial
services for a person other than a related
person in furtherance of the production of
foreign trading gross receipts described in
subparagraph (A), (B), or (C).
Subparagraph (E) shall not apply to a taxpayer for any
taxable year unless at least 50 percent of its foreign
trading gross receipts (determined without regard to
this sentence) for such taxable year is derived from
activities described in subparagraph (A), (B), or (C).
[(2) Certain receipts excluded on basis of use;
subsidized receipts excluded.--The term ``foreign
trading gross receipts'' shall not include receipts of
a taxpayer from a transaction if--
[(A) the qualifying foreign trade property or
services--
[(i) are for ultimate use in the
United States, or
[(ii) are for use by the United
States or any instrumentality thereof
and such use of qualifying foreign
trade property or services is required
by law or regulation, or
[(B) such transaction is accomplished by a
subsidy granted by the government (or any
instrumentality thereof) of the country or
possession in which the property is
manufactured, produced, grown, or extracted.
[(3) Election to exclude certain receipts.--The term
``foreign trading gross receipts'' shall not include
gross receipts of a taxpayer from a transaction if the
taxpayer elects not to have such receipts taken into
account for purposes of this subpart.
[(b) Foreign Economic Process Requirements.--
[(1) In general.--Except as provided in subsection
(c), a taxpayer shall be treated as having foreign
trading gross receipts from any transaction only if
economic processes with respect to such transaction
take place outside the United States as required by
paragraph (2).
[(2) Requirement.--
[(A) In general.--The requirements of this
paragraph are met with respect to the gross
receipts of a taxpayer derived from any
transaction if--
[(i) such taxpayer (or any person
acting under a contract with such
taxpayer) has participated outside the
United States in the solicitation
(other than advertising), the
negotiation, or the making of the
contract relating to such transaction,
and
[(ii) the foreign direct costs
incurred by the taxpayer attributable
to the transaction equal or exceed 50
percent of the total direct costs
attributable to the transaction.
[(B) Alternative 85-percent test.--A taxpayer
shall be treated as satisfying the requirements
of subparagraph (A)(ii) with respect to any
transaction if, with respect to each of at
least two subparagraphs of paragraph (3), the
foreign direct costs incurred by such taxpayer
attributable to activities described in such
subparagraph equal or exceed 85 percent of the
total direct costs attributable to activities
described in such subparagraph.
[(C) Definitions.--For purposes of this
paragraph--
[(i) Total direct costs.--The term
``total direct costs'' means, with
respect to any transaction, the total
direct costs incurred by the taxpayer
attributable to activities described in
paragraph (3) performed at any location
by the taxpayer or any person acting
under a contract with such taxpayer.
[(ii) Foreign direct costs.--The term
``foreign direct costs'' means, with
respect to any transaction, the portion
of the total direct costs which are
attributable to activities performed
outside the United States.
[(3) Activities relating to qualifying foreign trade
property.--The activities described in this paragraph
are any of the following with respect to qualifying
foreign trade property--
[(A) advertising and sales promotion,
[(B) the processing of customer orders and
the arranging for delivery,
[(C) transportation outside the United States
in connection with delivery to the customer,
[(D) the determination and transmittal of a
final invoice or statement of account or the
receipt of payment, and
[(E) the assumption of credit risk.
[(4) Economic processes performed by related
persons.--A taxpayer shall be treated as meeting the
requirements of this subsection with respect to any
sales transaction involving any property if any related
person has met such requirements in such transaction or
any other sales transaction involving such property.
[(c) Exception from Foreign Economic Process Requirement.--
[(1) In general.--The requirements of subsection (b)
shall be treated as met for any taxable year if the
foreign trading gross receipts of the taxpayer for such
year do not exceed $5,000,000.
[(2) Receipts of related persons aggregated.--All
related persons shall be treated as one person for
purposes of paragraph (1), and the limitation under
paragraph (1) shall be allocated among such persons in
a manner provided in regulations prescribed by the
Secretary.
[(3) Special rule for pass-thru entities.--In the
case of a partnership, S corporation, or other pass-
thru entity, the limitation under paragraph (1) shall
apply with respect to the partnership, S corporation,
or entity and with respect to each partner,
shareholder, or other owner.
[SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.
[(a) Qualifying Foreign Trade Property.--For purposes of this
subpart--
[(1) In general.--The term ``qualifying foreign trade
property'' means property--
[(A) manufactured, produced, grown, or
extracted within or outside the United States,
[(B) held primarily for sale, lease, or
rental, in the ordinary course of trade or
business for direct use, consumption, or
disposition outside the United States, and
[(C) not more than 50 percent of the fair
market value of which is attributable to--
[(i) articles manufactured, produced,
grown, or extracted outside the United
States, and
[(ii) direct costs for labor
(determined under the principles of
section 263A) performed outside the
United States.
For purposes of subparagraph (C), the fair market value
of any article imported into the United States shall be
its appraised value, as determined by the Secretary
under section 402 of the Tariff Act of 1930 (19 U.S.C.
1401a) in connection with its importation, and the
direct costs for labor under clause (ii) do not include
costs that would be treated under the principles of
section 263A as direct labor costs attributable to
articles described in clause (i).
[(2) U.S. taxation to ensure consistent treatment.--
Property which (without regard to this paragraph) is
qualifying foreign trade property and which is
manufactured, produced, grown, or extracted outside the
United States shall be treated as qualifying foreign
trade property only if it is manufactured, produced,
grown, or extracted by--
[(A) a domestic corporation,
[(B) an individual who is a citizen or
resident of the United States,
[(C) a foreign corporation with respect to
which an election under subsection (e)
(relating to foreign corporations electing to
be subject to United States taxation) is in
effect, or
[(D) a partnership or other pass-thru entity
all of the partners or owners of which are
described in subparagraph (A), (B), or (C).
Except as otherwise provided by the Secretary, tiered
partnerships or pass-thru entities shall be treated as
described in subparagraph (D) if each of the
partnerships or entities is directly or indirectly
wholly owned by persons described in subparagraph (A),
(B), or (C).
[(3) Excluded property.--The term ``qualifying
foreign trade property'' shall not include--
[(A) property leased or rented by the
taxpayer for use by any related person,
[(B) patents, inventions, models, designs,
formulas, or processes whether or not patented,
copyrights (other than films, tapes, records,
or similar reproductions, and other than
computer software (whether or not patented),
for commercial or home use), goodwill,
trademarks, trade brands, franchises, or other
like property,
[(C) oil or gas (or any primary product
thereof),
[(D) products the transfer of which is
prohibited or curtailed to effectuate the
policy set forth in paragraph (2)(C) of section
3 of Public Law 96-72, or
[(E) any unprocessed timber which is a
softwood.
For purposes of subparagraph (E), the term
``unprocessed timber'' means any log, cant, or similar
form of timber.
[(4) Property in short supply.--If the President
determines that the supply of any property described in
paragraph (1) is insufficient to meet the requirements
of the domestic economy, the President may by Executive
order designate the property as in short supply. Any
property so designated shall not be treated as
qualifying foreign trade property during the period
beginning with the date specified in the Executive
order and ending with the date specified in an
Executive order setting forth the President's
determination that the property is no longer in short
supply.
[(b) Other Definitions and Rules.--For purposes of this
subpart--
[(1) Transaction.--
[(A) In general.--The term ``transaction''
means--
[(i) any sale, exchange, or other
disposition,
[(ii) any lease or rental, and
[(iii) any furnishing of services.
[(B) Grouping of transactions.--To the extent
provided in regulations, any provision of this
subpart which, but for this subparagraph, would
be applied on a transaction-by-transaction
basis may be applied by the taxpayer on the
basis of groups of transactions based on
product lines or recognized industry or trade
usage. Such regulations may permit different
groupings for different purposes.
[(2) United States defined.--The term ``United
States'' includes the Commonwealth of Puerto Rico. The
preceding sentence shall not apply for purposes of
determining whether a corporation is a domestic
corporation.
[(3) Related person.--A person shall be 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).
[(4) Gross and taxable income.--Section 114 shall not
be taken into account in determining the amount of
gross income or foreign trade income from any
transaction.
[(c) Source Rule.--Under regulations, in the case of
qualifying foreign trade property manufactured, produced,
grown, or extracted within the United States, the amount of
income of a taxpayer from any sales transaction with respect to
such property which is treated as from sources without the
United States shall not exceed--
[(1) in the case of a taxpayer computing its
qualifying foreign trade income under section
941(a)(1)(B), the amount of the taxpayer's foreign
trade income which would (but for this subsection) be
treated as from sources without the United States if
the foreign trade income were reduced by an amount
equal to 4 percent of the foreign trading gross
receipts with respect to the transaction, and
[(2) in the case of a taxpayer computing its
qualifying foreign trade income under section
941(a)(1)(C), 50 percent of the amount of the
taxpayer's foreign trade income which would (but for
this subsection) be treated as from sources without the
United States.
[(d) Treatment of Withholding Taxes.--
[(1) In general.--For purposes of section 114(d), any
withholding tax shall not be treated as paid or accrued
with respect to extraterritorial income which is
excluded from gross income under section 114(a). For
purposes of this paragraph, the term ``withholding
tax'' means any tax which is imposed on a basis other
than residence and for which credit is allowable under
section 901 or 903.
[(2) Exception.--Paragraph (1) shall not apply to any
taxpayer with respect to extraterritorial income from
any transaction if the taxpayer computes its qualifying
foreign trade income with respect to the transaction
under section 941(a)(1)(A).
[(e) Election to be Treated as Domestic Corporation.--
[(1) In general.--An applicable foreign corporation
may elect to be treated as a domestic corporation for
all purposes of this title if such corporation waives
all benefits to such corporation granted by the United
States under any treaty. No election under section
1362(a) may be made with respect to such corporation.
[(2) Applicable foreign corporation.--For purposes of
paragraph (1), the term ``applicable foreign
corporation'' means any foreign corporation if--
[(A) such corporation manufactures, produces,
grows, or extracts property in the ordinary
course of such corporation's trade or business,
or
[(B) substantially all of the gross receipts
of such corporation are foreign trading gross
receipts.
[(3) Period of election.--
[(A) In general.--Except as otherwise
provided in this paragraph, an election under
paragraph (1) shall apply to the taxable year
for which made and all subsequent taxable years
unless revoked by the taxpayer. Any revocation
of such election shall apply to taxable years
beginning after such revocation.
[(B) Termination.--If a corporation which
made an election under paragraph (1) for any
taxable year fails to meet the requirements of
subparagraph (A) or (B) of paragraph (2) for
any subsequent taxable year, such election
shall not apply to any taxable year beginning
after such subsequent taxable year.
[(C) Effect of revocation or termination.--If
a corporation which made an election under
paragraph (1) revokes such election or such
election is terminated under subparagraph (B),
such corporation (and any successor
corporation) may not make such election for any
of the 5 taxable years beginning with the first
taxable year for which such election is not in
effect as a result of such revocation or
termination.
[(4) Special rules.--
[(A) Requirements.--This subsection shall not
apply to an applicable foreign corporation if
such corporation fails to meet the requirements
(if any) which the Secretary may prescribe to
ensure that the taxes imposed by this chapter
on such corporation are paid.
[(B) Effect of election, revocation, and
termination.--
[(i) Election.--For purposes of
section 367, a foreign corporation
making an election under this
subsection shall be treated as
transferring (as of the first day of
the first taxable year to which the
election applies) all of its assets to
a domestic corporation in connection
with an exchange to which section 354
applies.
[(ii) Revocation and termination.--
For purposes of section 367, if--
[(I) an election is made by a
corporation under paragraph (1)
for any taxable year, and
[(II) such election ceases to
apply for any subsequent
taxable year,
such corporation shall be treated as a
domestic corporation transferring (as
of the 1st day of the first such
subsequent taxable year to which such
election ceases to apply) all of its
property to a foreign corporation in
connection with an exchange to which
section 354 applies.
[(C) Eligibility for election.--The Secretary
may by regulation designate one or more classes
of corporations which may not make the election
under this subsection.
[(f) Rules Relating to Allocations of Qualifying Foreign
Trade Income from Shared Partnerships.--
[(1) In general.--If--
[(A) a partnership maintains a separate
account for transactions (to which this subpart
applies) with each partner,
[(B) distributions to each partner with
respect to such transactions are based on the
amounts in the separate account maintained with
respect to such partner, and
[(C) such partnership meets such other
requirements as the Secretary may by
regulations prescribe,then such partnership
shall allocate to each partner items of income,
gain, loss, and deduction (including qualifying
foreign trade income) from any transaction to
which this subpart applies on the basis of such
separate account.
[(2) Special rules.--For purposes of this subpart, in
the case of a partnership to which paragraph (1)
applies--
[(A) any partner's interest in the
partnership shall not be taken into account in
determining whether such partner is a related
person with respect to any other partner, and
[(B) the election under section 942(a)(3)
shall be made separately by each partner with
respect to any transaction for which the
partnership maintains separate accounts for
each partner.
[(g) Exclusion for Patrons of Agricultural and Horticultural
Cooperatives.--Any amount described in paragraph (1) or (3) of
section 1385(a)--
[(1) which is received by a person from an
organization to which part I of subchapter T applies
which is engaged in the marketing of agricultural or
horticultural products, and
[(2) which is allocable to qualifying foreign trade
income and designated as such by the organization in a
written notice mailed to its patrons during the payment
period described in section 1382(d),shall be treated as
qualifying foreign trade income of such person for
purposes of section 114. The taxable income of the
organization shall not be reduced under section 1382 by
reason of any amount to which the preceding sentence
applies.
[(h) Special Rule for DISCs.--Section 114 shall not apply to
any taxpayer for any taxable year if, at any time during the
taxable year, the taxpayer is a member of any controlled group
of corporations (as defined in section 927(d)(4), as in effect
before the date of the enactment of this subsection) of which a
DISC is a member.]
Subpart F--Controlled Foreign Corporations
* * * * * * *
SEC. 951. AMOUNTS INCLUDED IN GROSS INCOME OF UNITED STATES
SHAREHOLDERS
(a) * * *
* * * * * * *
[(c) Coordination with Election of a Foreign Investment
Company to Distribute Income.--A United States shareholder who,
for his taxable year, is a qualified shareholder (within the
meaning of section 1247(c)) of a foreign investment company
with respect to which an election under section 1247 is in
effect shall not be required to include in gross income, for
such taxable year, any amount under subsection (a) with respect
to such company.
[(d) Coordination with Foreign Personal Holding Company
Provisions.--If, but for this subsection, an amount would be
included in the gross income of a United States shareholder for
any taxable year both under subsection (a)(1)(A)(i) and under
section 551(b) (relating to foreign personal holding company
income included in gross income of United States shareholder),
such amount shall be included in the gross income of such
shareholder only under subsection (a)(1)(A).]
[(e)] (c) Foreign Trade Income Not Taken into Account.--
(1) * * *
* * * * * * *
[(f)] (d) Coordination with Passive Foreign Investment
Company Provisions.--If, but for this subsection, an amount
would be included in the gross income of a United States
shareholder for any taxable year both under subsection
(a)(1)(A)(i) and under section 1293 (relating to current
taxation of income from certain passive foreign investment
companies), such amount shall be included in the gross income
of such shareholder only under subsection (a)(1)(A).
* * * * * * *
SEC. 952. SUBPART F INCOME DEFINED.
(a) * * *
* * * * * * *
(c) Limitation.--
(1) In general.--
(A) * * *
(B) Certain prior year deficits may be taken
into account.--
(i) * * *
* * * * * * *
(iii) Qualified activity.--For
purposes of this paragraph, the term
``qualified activity'' means any
activity giving rise to--
[(I) foreign base company
shipping income,]
[(II)] (I) foreign base
company oil related income,
[(III)] (II) foreign base
company sales income,
[(IV)] (III) foreign base
company services income,
[(V)] (IV) in the case of a
qualified insurance company,
insurance income or foreign
personal holding company
income, or
[(VI)] (V) in the case of a
qualified financial
institution, foreign personal
holding company income.
* * * * * * *
SEC. 954. FOREIGN BASE COMPANY INCOME.
(a) Foreign Base Company Income.--For purposes of section
952(a)(2), the term ``foreign base company income'' means for
any taxable year the sum of--
(1) * * *
* * * * * * *
[(4) the foreign base company shipping income for the
taxable year (determined under subsection (f) and
reduced as provided in subsection (b)(5)), and]
* * * * * * *
(b) Exclusions and Special Rules.--
(1) * * *
* * * * * * *
(5) Deductions to be taken into account.--For
purposes of subsection (a), the foreign personal
holding company income, the foreign base company sales
income, the foreign base company services income, [the
foreign base company shipping income,] and the foreign
base company oil related income shall be reduced, under
regulations prescribed by the Secretary so as to take
into account deductions (including taxes) properly
allocable to such income. Except to the extent provided
in regulations prescribed by the Secretary, any
interest which is paid or accrued by the controlled
foreign corporation to any United States shareholder in
such corporation (or any controlled foreign corporation
related to such a shareholder) shall be allocated first
to foreign personal holding company income which is
passive income (within the meaning of section 904(d)(2)
of such corporation to the extent thereof. The
Secretary may, by regulations, provide that the
preceding sentence shall apply also to interest paid or
accrued to other persons.
[(6) Special rules for foreign base company shipping
income.--Income of a corporation which is foreign base
company shipping income under paragraph (4) of
subsection (a)--
[(A) shall not be considered foreign base
company income of such corporation under any
other paragraph of subsection (a) and
[(B) if distributed through a chain of
ownership described under section 958(a), shall
not be included in foreign base company income
of another controlled foreign corporation in
such chain.
[(7) Special exclusion for foreign base company
shipping income.--Income of a corporation which is
foreign base company shipping income under paragraph
(4) of subsection (a) shall be excluded from foreign
base company income if derived by a controlled foreign
corporation from, or in connection with, the use (or
hiring or leasing for use) of an aircraft or vessel in
foreign commerce between two points within the foreign
country in which such corporation is created or
organized and such aircraft or vessel is registered.]
[(8)] (6) Foreign base company oil related income not
treated as another kind of base company income.--Income
of a corporation which is foreign base company oil
related income shall not be considered foreign base
company income of such corporation under paragraph (2),
or (3) of subsection (a).
(c) Foreign Personal Holding Company Income.--
(1) In general.--For purposes of subsection (a)(1),
the term ``foreign personal holding company income''
means the portion of the gross income which consists
of:
(A) * * *
* * * * * * *
(C) Commodities transactions.--The excess of
gains over losses from transactions (including
futures, forward, and similar transactions) in
any commodities. This subparagraph shall not
apply to gains or losses which--
[(i) arise out of bona fide hedging
transactions 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,
[(ii) are 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, or]
(i) arise out of commodity hedging
transactions (as defined in paragraph
(6)(A)),
(ii) are active business gains or
losses from the sale of commodities,
but only if substantially all of the
controlled foreign corporation's
commodities are property described in
paragraph (1), (2), or (8) of section
1221(a), or
* * * * * * *
(H) 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.
(2) Exception for certain amounts.--
(A) Rents and royalties derived in active
business.--Foreign personal holding company
income shall not include rents and royalties
which are derived in the active conduct of a
trade or business and which are received from a
person other than a related person (within the
meaning of subsection (d)(3)). 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.
* * * * * * *
(4) Look-thru in the case of related controlled
foreign corporations.--For purposes of this subsection,
dividends, interest, rents, and royalties received or
accrued from a controlled foreign corporation which is
a related person (as defined in subsection (d)(3))
shall not be treated as foreign personal holding
company income to the extent attributable or properly
allocable (determined under rules similar to the rules
of subparagraphs (C) and (D) of section 904(d)(3)) to
income of the related person which is not subpart F
income (as defined in section 952). The Secretary shall
prescribe such regulations as may be appropriate to
prevent the abuse of the purposes of this paragraph.
(5) 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.
(B) 25-percent owner.--For purposes of this
paragraph, the term ``25-percent owner'' means
a controlled foreign corporation which owns
(within the meaning of section 958(a)) 25
percent or more of the capital or profits
interest in the partnership.
(6) Definition and special rules relating to
commodity transactions.--
(A) Commodity hedging transactions.--For
purposes of paragraph (1)(C)(i), the term
``commodity hedging transaction'' means any
transaction with respect to a commodity if such
transaction--
(i) is a hedging transaction as
defined in section 1221(b)(2),
determined--
(I) without regard to
subparagraph (A)(ii) thereof,
(II) by applying subparagraph
(A)(i) thereof by substituting
``ordinary property or property
described in section 1231(b)''
for ``ordinary property'', and
(III) by substituting
``controlled foreign
corporation'' for ``taxpayer''
each place it appears, and
(ii) is clearly identified as such in
accordance with section 1221(a)(7).
(B) Regulations.--The Secretary shall
prescribe such regulations as are appropriate
to carry out the purposes of paragraph (1)(C)
in the case of transactions involving related
persons.
(d) Foreign Base Company Sales Income.--
(1) * * *
* * * * * * *
(5) Treatment of member states of the european
union.--For purposes of this subsection and subsection
(e), in the case of a controlled foreign corporation
which is created or organized under the laws of a
member state of the European Union, all member states
of the European Union shall be treated as 1 country.
* * * * * * *
[(f) Foreign Base Company Shipping Income.--For purposes of
subsection (a)(4), the term ``foreign base company shipping
income'' means income derived from, or in connection with, the
use (or hiring or leasing for use) of any aircraft or vessel in
foreign commerce, or from, or in connection with the
performance of services directly related to the use of any such
aircraft, or vessel, or from the sale, exchange, or other
disposition of any such aircraft or vessel. Such term includes,
but is not limited to--
[(1) dividends and interest received from a foreign
corporation in respect of which taxes are deemed paid
under section 902, and gain from the sale, exchange, or
other disposition of stock or obligations of such a
foreign corporation to the extent that such dividends,
interest, and gains are attributable to foreign base
company shipping income, and
[(2) that portion of the distributive share of the
income of a partnership attributable to foreign base
company shipping income.
Such term includes any income derived from a space or ocean
activity (as defined in section 863(d)(2)). Except as provided
in paragraph (1), such term shall not include any dividend or
interest income which is foreign personal holding company
income (as defined in subsection (c)).]
(g) Foreign Base Company Oil Related Income.--For purposes of
this section--
(1) In general.--Except as otherwise provided in this
subsection, the term ``foreign base company oil related
income'' means foreign oil related income (within the
meaning of paragraphs (2) and (3) of section 907(c))
other than income derived from a source within a
foreign country in connection with--
(A) oil or gas which was extracted from an
oil or gas well located in such foreign
country, [or]
(B) oil, gas, or a primary product of oil or
gas which is sold by the foreign corporation or
a related person for use or consumption within
such country or is loaded in such country on a
vessel or aircraft as fuel for such vessel or
aircraft[.], or
(C) the pipeline transportation of oil or gas
within such foreign country.
Such term shall not include any foreign personal
holding company income (as defined in subsection (c)).
* * * * * * *
(h) Special Rule for Income Derived in the Active Conduct of
Banking, Financing, or Similar Businesses.--
(1) * * *
* * * * * * *
(3) Qualified banking or financing income.--For
purposes of this subsection--
(A) * * *
* * * * * * *
(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.
* * * * * * *
SEC. 956. INVESTMENT OF EARNINGS IN UNITED STATES PROPERTY.
(a) * * *
* * * * * * *
(c) United States Property Defined.--
(1) * * *
(2) Exceptions.--For purposes of subsection (a), the
term ``United States property'' does not include--
[(A) obligations of the United States, money,
or deposits with persons carrying on the
banking business;]
(A) obligations of the United States, money,
or deposits with any corporation with respect
to which 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
financial holding company (within the meaning
of section 2(p) of such Act) owns directly or
indirectly more than 80 percent by vote or
value of the stock of such corporation;
* * * * * * *
(J) deposits of cash or securities made or
received on commercial terms in the ordinary
course of a United States or foreign person's
business as a dealer in securities or in
commodities, but only to the extent such
deposits are made or received as collateral or
margin for (i) a securities loan, notional
principal contract, options contract, forward
contract, or futures contract, or (ii) any
other financial transaction in which the
Secretary determines that it is customary to
post collateral or margin; [and]
(K) an obligation of a United States person
to the extent the principal amount of the
obligation does not exceed the fair market
value of readily marketable securities sold or
purchased pursuant to a sale and repurchase
agreement or otherwise posted or received as
collateral for the obligation in the ordinary
course of its business by a United States or
foreign person which is a dealer in securities
or commodities[.]; and
(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.
For purposes of subparagraphs (J) [and (K)], (K), and
(L), the term ``dealer in securities'' has the meaning
given such term by section 475(c)(1), and the term
``dealer in commodities'' has the meaning given such
term by section 475(e), except that such term shall
include a futures commission merchant.
* * * * * * *
Subpart J--Foreign Currency Transactions
* * * * * * *
SEC. 986. DETERMINATION OF FOREIGN TAXES AND FOREIGN CORPORATION'S
EARNINGS AND PROFITS.
(a) Foreign Income Taxes.--
(1) Translation of accrued taxes.--
(A) * * *
* * * * * * *
(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.
[(D)] (E) Cross reference.--
For adjustments where tax is not paid within 2 years, see
section 905(c).
* * * * * * *
SEC. 989. OTHER DEFINITIONS AND SPECIAL RULES.
(a) * * *
(b) Appropriate Exchange Rate.--Except as provided in
regulations, for purposes of this subpart, the term
``appropriate exchange rate'' means--
(1) * * *
* * * * * * *
(3) in the case of any amounts included in income
under section 951(a)(1)(A)[, 551(a),] or 1293(a), the
average exchange rate for the taxable year of the
foreign corporation, or
* * * * * * *
Subchapter O--Gain or Loss on Disposition of Property
* * * * * * *
PART II--BASIS RULES OF GENERAL APPLICATION
* * * * * * *
SEC. 1014. BASIS OF PROPERTY ACQUIRED FROM A DECEDENT.
(a) * * *
(b) Property Acquired From the Decedent.--For purposes of
subsection (a), the following property shall be considered to
have been acquired from or to have passed from the decedent:
(1) * * *
* * * * * * *
(5) In the case of decedents dying after August 26,
1937, and before January 1, 2008, property acquired by
bequest, devise, or inheritance or by the decedent's
estate from the decedent, if the property consists of
stock or securities of a foreign corporation, which
with respect to its taxable year next preceding the
date of the decedent's death was, under the law
applicable to such year, a foreign personal holding
company. In such case, the basis shall be the fair
market value of such property at the date of the
decedent's death or the basis in the hands of the
decedent, whichever is lower;
* * * * * * *
SEC. 1016. ADJUSTMENTS TO BASIS.
(a) General Rule.--Proper adjustment in respect of the
property shall in all cases be made--
(1) * * *
* * * * * * *
[(13) to the extent provided in section 551(e) in the
case of the stock of United States shareholders in a
foreign personal holding company;]
* * * * * * *
PART III--COMMON NONTAXABLE EXCHANGES
* * * * * * *
SEC. 1033. INVOLUNTARY CONVERSIONS.
(a) * * *
* * * * * * *
(e) Livestock Sold on Account of Drought, Flood, or Other
Weather-Related [Conditions.--For purposes] Conditions.--
(1) In general.--For purposes of this subtitle, the
sale or exchange of livestock (other than poultry) held
by a taxpayer for draft, breeding, or dairy purposes in
excess of the number the taxpayer would sell if he
followed his usual business practices shall be treated
as an involuntary conversion to which this section
applies if such livestock are sold or exchanged by the
taxpayer solely on account of drought, flood, or other
weather-related conditions.
(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.
* * * * * * *
Subchapter P--Capital Gains and Losses
* * * * * * *
PART I--TREATMENT OF CAPITAL GAINS
* * * * * * *
SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
(a) General Rule.--If for any taxable year a corporation has
a net capital gain and any rate of tax imposed by section 11,
511, or 831(a) or (b) (whichever is applicable) exceeds 35
percent (determined without regard to [the last 2 sentences of
section 11(b)(1)] section 11(b)(5), then, in lieu of any such
tax, there is hereby imposed a tax (if such tax is less than
the tax imposed by such sections) which shall consist of the
sum of--
(1) * * *
* * * * * * *
SEC. 1202. PARTIAL EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS
STOCK.
(a) * * *
* * * * * * *
(e) Active Business Requirement.--
(1) * * *
* * * * * * *
(4) Eligible corporation.--For purposes of this
subsection, the term ``eligible corporation'' means any
domestic corporation; except that such term shall not
include--
(A) * * *
* * * * * * *
(C) a regulated investment company, real
estate investment trust, [REMIC, or FASIT] or
REMIC, and
* * * * * * *
PART II--TREATMENT OF CAPITAL LOSSES
* * * * * * *
SEC. 1212. CAPITAL LOSS CARRYBACKS AND CARRYOVERS.
(a) Corporations.--
(1) * * *
* * * * * * *
[(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 foreign personal
holding company (as defined in section 552);
[(B) for which it is a regulated investment
company (as defined in section 851);
[(C) for which it is a real estate investment
trust (as defined in section 856); or
[(D) for which an election made by it under
section 1247 is applicable (relating to
election by foreign investment companies to
distribute income currently).]
(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).
* * * * * * *
PART III--GENERAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1223. HOLDING PERIOD OF PROPERTY.
For purposes of this subtitle--
(1) * * *
* * * * * * *
[(10) In determining the period for which the
taxpayer has held trust certificates of a trust to
which subsection (d) of section 1246 applies, or the
period for which the taxpayer has held stock in a
corporation to which subsection (d) of section 1246
applies, there shall be included the period for which
the trust or corporation (as the case may be) held the
stock of foreign investment companies.]
[(11)] (10) In the case of a person acquiring
property from a decedent or to whom property passed
from a decedent (within the meaning of section
1014(b)), if--
(A) * * *
* * * * * * *
[(12)] (11) If--
(A) * * *
* * * * * * *
[(13)] (12) In determining the period for which the
taxpayer has held qualified replacement property
(within the meaning of section 1042(b)) the acquisition
of which resulted under section 1042 in the
nonrecognition of any part of the gain realized on the
sale of qualified securities (within the meaning of
section 1042(b)), there shall be included the period
for which such qualified securities had been held by
the taxpayer.
[(14)] (13) In determining the period for which the
taxpayer has held property the acquisition of which
resulted under section 1043 in the nonrecognition of
any part of the gain realized on the sale of other
property, there shall be included the period for which
such other property had been held as of the date of
such sale.
[(15)] (14) Except for purposes of sections
1202(a)(2), 1202(c)(2)(A), 1400B(b), and 1400F(b), in
determining the period for which the taxpayer has held
property the acquisition of which resulted under
section 1045 or 1397B in the nonrecognition of any part
of the gain realized on the sale of other property,
there shall be included the period for which such other
property has been held as of the date of such sale.
[(16)] (15) If the security to which a securities
futures contract (as defined in section 1234B) relates
(other than a contract to which section 1256 applies)
is acquired in satisfaction of such contract, in
determining the period for which the taxpayer has held
such security, there shall be included the period for
which the taxpayer held such contract if such contract
was a capital asset in the hands of the taxpayer.
[(17)] (16) Cross reference.--
For special holding period provision relating to certain
partnership distributions, see section 735(b).
* * * * * * *
PART IV--SPECIAL RULES FOR DETERMINING CAPITALGAINS AND LOSSES
Sec. 1231.Property used in the trade or business and involuntary
conversions.
* * * * * * *
[Sec. 1246.Gain on foreign investment company stock.
[Sec. 1247.Election by foreign investment companies to
distribute income currently.]
* * * * * * *
[SEC. 1246. GAIN ON FOREIGN INVESTMENT COMPANY STOCK.
[(a) Treatment of Gain as Ordinary Income.--
[(1) General rule.--In the case of a sale or exchange
(or a distribution which, under section 302 or 331, is
treated as an exchange of stock) after December 31,
1962, of stock in a foreign corporation which was a
foreign investment company (as defined in subsection
(b)) at any time during the period during which the
taxpayer held such stock, any gain shall be treated as
ordinary income, to the extent of the taxpayer's
ratable share of the earnings and profits of such
corporation accumulated for taxable years beginning
after December 31, 1962.
[(2) Ratable share.--For purposes of this section,
the taxpayer's ratable share shall be determined under
regulations prescribed by the Secretary, but shall
include only his ratable share of the accumulated
earnings and profits of such corporation--
[(A) for the period during which the taxpayer
held such stock, but
[(B) excluding such earnings and profits
attributable to--
[(i) any amount previously included
in the gross income of such taxpayer
under section 951 (but only to the
extent the inclusion of such amount did
not result in an exclusion of any other
amount from gross income under section
959), or
[(ii) any taxable year during which
such corporation was not a foreign
investment company but only if--
[(I) such corporation was not
a foreign investment company at
any time before such taxable
year, and
[(II) such corporation was
treated as a foreign investment
company solely by reason of
subsection (b)(2).
[(3) Taxpayer to establish earnings and profits.--
Unless the taxpayer establishes the amount of the
accumulated earnings and profits of the foreign
investment company and the ratable share thereof for
the period during which the taxpayer held such stock,
all the gain from the sale or exchange of stock in such
company shall be considered as ordinary income.
[(4) Holding period of stock must be more than 1
year.--This section shall not apply with respect to the
sale or exchange of stock where the holding period of
such stock as of the date of such sale or exchange is 1
year or less.
[(b) Definition of Foreign Investment Company.--For purposes
of this section, the term ``foreign investment company'' means
any foreign corporation which, for any taxable year beginning
after December 31, 1962, is--
[(1) registered under the Investment Company Act of
1940, as amended (15 U.S.C. 80a-1 to 80b-2), either as
a management company or as a unit investment trust, or
[(2) engaged (or holding itself out as being engaged)
primarily in the business of investing, reinvesting, or
trading in--
[(A) securities (as defined in section
2(a)(36) of the Investment Company Act of 1940,
as amended),
[(B) commodities, or
[(C) any interest (including a futures or
forward contract or option) in property
described in subparagraph (A) or (B),
at a time when 50 percent or more of the total combined voting
power of all classes of stock entitled to vote, or the total
value of all classes of stock, was held directly (or indirectly
through applying paragraphs (2) and (3) of section 958(a) and
paragraph (4) of section 318(a)) by United States persons (as
defined in section 7701(a)(30)).
[(c) Stock Having Transferred or Substituted Basis.--To the
extent provided in regulations prescribed by the Secretary,
stock in a foreign corporation, the basis of which (in the
hands of the taxpayer selling or exchanging such stock) is
determined by reference to the basis (in the hands of such
taxpayer or any other person) of stock in a foreign investment
company, shall be treated as stock of a foreign investment
company and held by the taxpayer throughout the holding period
for such stock (determined under section 1223).
[(d) Rules Relating to Entities Holding Foreign Investment
Company Stock.--To the extent provided in regulations
prescribed by the Secretary--
[(1) trust certificates of a trust to which section
677 (relating to income for benefit of grantor)
applies, and
[(2) stock of a domestic corporation,shall be treated
as stock of a foreign investment company and held by
the taxpayer throughout the holding period for such
certificates or stock (determined under section 1223)
in the same proportion that the investment in stock in
a foreign investment company by the trust or domestic
corporation bears to the total assets of such trust or
corporation.
[(e) Rules Relating to Stock Acquired From a Decedent.--
[(1) Basis.--In the case of stock of a foreign
investment company acquired by bequest, devise, or
inheritance (or by the decedent's estate) from a
decedent dying after December 31, 1962, the basis
determined under section 1014 shall be reduced (but not
below the adjusted basis of such stock in the hands of
the decedent immediately before his death) by the
amount of the decedent's ratable share of the earnings
and profits of such company accumulated after December
31, 1962. Any stock so acquired shall be treated as
stock described in subsection (c).
[(2) Deduction for estate tax.--If stock to which
subsection (a) applies is acquired from a decedent, the
taxpayer shall, under regulations prescribed by the
Secretary, be allowed (for the taxable year of the sale
or exchange) a deduction from gross income equal to
that portion of the decedent's estate tax deemed paid
which is attributable to the excess of (A) the value at
which such stock was taken into account for purposes of
determining the value of the decedent's gross estate,
over (B) the value at which it would have been so taken
into account if such value had been reduced by the
amount described in paragraph (1).
[(f) Information with Respect to Certain Foreign Investment
Companies.--Every United States person who, on the last day of
the taxable year of a foreign investment company, owns 5
percent or more in value of the stock of such company shall
furnish with respect to such company such information as the
Secretary shall by regulations prescribe.
[(g) Coordination with Section 1248.--This section shall not
apply to any gain to the extent such gain is treated as
ordinary income under section 1248 (determined without regard
to section 1248(g)(2)).
[(h) Cross Reference.--
For special rules relating to the earnings and profits of
foreign investment companies, see section 312(j).
[SEC. 1247. ELECTION BY FOREIGN INVESTMENT COMPANIES TO DISTRIBUTE
INCOME CURRENTLY.
[(a) Election by Foreign Investment Company.--
[(1) In general.--If a foreign investment company
which is described in section 1246(b)(1) elects (in the
manner provided in regulations prescribed by the
Secretary) on or before December 31, 1962, with respect
to each taxable year beginning after December 31, 1962,
to--
[(A) distribute to its shareholders 90
percent or more of what its taxable income
would be if it were a domestic corporation;
[(B) designate in a written notice mailed to
its shareholders at any time before the
expiration of 45 days after the close of its
taxable year the pro rata amount of the amount
(determined as if such corporation were a
domestic corporation) of the net capital gain
of the taxable year; and the portion thereof
which is being distributed; and
[(C) provide such information as the
Secretary deems necessary to carry out the
purposes of this section,then section 1246
shall not apply with respect to the qualified
shareholders of such company during any taxable
year to which such election applies.
[(2) Special rules.--
[(A) Computation of taxable income.--For
purposes of paragraph (1)(A), the taxable
income of the company shall be computed without
regard to--
[(i) the net capital gain referred to
in paragraph (1)(B),
[(ii) section 172 (relating to net
operating losses), and
[(iii) any deduction provided by part
VIII of subchapter B (other than the
deduction provided by section 248,
relating to organizational
expenditures).
[(B) Distributions after the close of the
taxable year.--For purposes of paragraph
(1)(A), a distribution made after the close of
the taxable year and on or before the 15th day
of the third month of the next taxable year
shall be treated as distributed during the
taxable year to the extent elected by the
company (in accordance with regulations
prescribed by the Secretary) on or before the
15th day of such third month.
[(C) Carryover of capital losses from
nonelection years denied.--In computing the net
capital gain referred to in paragraph (1)(B),
section 1212 shall not apply to losses incurred
in or with respect to taxable years before the
first taxable year to which the election
applies.
[(b) Years to Which Election Applies.--The election of any
foreign investment company under this section shall terminate
as of the close of the taxable year preceding its first taxable
year in which any of the following occurs:
[(1) the company fails to comply with the provisions
of subparagraph (A), (B), or
[(C) of subsection (a)(1), unless it is shown
that such failure is due to reasonable cause
and not due to willful neglect,
[(2) the company is a foreign personal holding
company, or
[(3) the company is not a foreign investment company
which is described in section 1246(b)(1).
[(c) Qualified Shareholders.--For purposes of this section--
[(1) In general.--The term ``qualified shareholder''
means any shareholder who is a United States person (as
defined in section 7701(a)(30)), other than a
shareholder described in paragraph (2).
[(2) Certain United States persons excluded from
definition.--A United States person shall not be
treated as a qualified shareholder for the taxable year
if for such taxable year (or for any prior taxable
year) he did not include, in computing his long-term
capital gains in his return for such taxable year, the
amount designated by such company pursuant to
subsection (a)(1)(B) as his share of the undistributed
capital gains of such company for its taxable year
ending within or with such taxable year of the
taxpayer. The preceding sentence shall not apply with
respect to any failure by the taxpayer to treat an
amount as provided therein if the taxpayer shows that
such failure was due to reasonable cause and not due to
willful neglect.
[(d) Treatment of Distributed and Undistributed Capital Gains
by a Qualified Shareholder.--Every qualified shareholder of a
foreign investment company for any taxable year of such company
with respect to which an election pursuant to subsection (a) is
in effect shall include, in computing his long-term capital
gains--
[(1) for his taxable year in which received, his pro
rata share of the distributed portion of the net
capital gain for such taxable year of such company, and
[(2) for his taxable year in which or with which the
taxable year of such company ends, his pro rata share
of the undistributed portion of the net capital gain
for such taxable year of such company.
[(e) Adjustments.--Under regulations prescribed by the
Secretary, proper adjustment shall be made--
[(1) in the earnings and profits of the electing
foreign investment company and a qualified
shareholder's ratable share thereof, and
[(2) in the adjusted basis of stock of such company
held by such shareholder,to reflect such shareholder's
inclusion in gross income of undistributed capital
gains.
[(f) Election by Foreign Investment Company with Respect to
Foreign Tax Credit.--A foreign investment company with respect
to which an election pursuant to subsection (a) is in effect
and more than 50 percent of the value (as defined in section
851(c)(4)) of whose total assets at the close of the taxable
year consists of stock or securities in foreign corporations
may, for such taxable year, elect the application of this
subsection with respect to income, war profits, and excess
profits taxes described in section 901(b)(1) which are paid by
the foreign investment company during such taxable year to
foreign countries and possessions of the United States. If such
election is made--
[(1) the foreign investment company--
[(A) shall compute its taxable income, for
purposes of subsection (a)(1)(A), without any
deductions for income, war profits, or excess
profits taxes paid to foreign countries or
possessions of the United States, and
[(B) shall treat the amount of such taxes,
for purposes of subsection (a)(1)(A), as
distributed to its shareholders;
[(2) each qualified shareholder of such foreign
investment company--
[(A) shall include in gross income and treat
as paid by him his proportionate share of such
taxes, and
[(B) shall treat, for purposes of applying
subpart A of part III of subchapter N, his
proportionate share of such taxes as having
been paid to the country in which the foreign
investment company is incorporated, and
[(C) shall treat as gross income from sources
within the country in which the foreign
investment company is incorporated, for
purposes of applying subpart A of part III of
subchapter N, the sum of his proportionate
share of such taxes and any dividend paid to
him by such foreign investment company.
[(g) Notice to Shareholders.--The amounts to be treated by
qualified shareholders, for purposes of subsection (f)(2), as
their proportionate share of the taxes described in subsection
(f)(1)(A) paid by a foreign investment company shall not exceed
the amounts so designated by the foreign investment company in
a written notice mailed to its shareholders not later than 45
days after the close of its taxable year.
[(h) Manner of Making Election and Notifying Shareholders.--
The election provided in subsection (f) and the notice to
shareholders required by subsection (g) shall be made in such
manner as the Secretary may prescribe by regulations.
[(i) Loss on Sale or Exchange of Certain Stock Held Less than
1 year.--If--
[(1) under this section, any qualified shareholder
treats any amount designated under subsection (a)(1)(B)
with respect to a share of stock as long-term capital
gain, and
[(2) such share is held by the taxpayer for less than
1 year, then any loss on the sale or exchange of such
share shall, to the extent of the amount described in
paragraph (1), be treated as loss from the sale or
exchange of a capital asset held for more than 1 year.]
* * * * * * *
SEC. 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN
FOREIGN CORPORATIONS.
(a) * * *
* * * * * * *
(d) Exclusions from Earnings and Profits.--For purposes of
this section, the following amounts shall be excluded, with
respect to any United States person, from the earnings and
profits of a foreign corporation:
(1) * * *
* * * * * * *
[(5) Amounts included in gross income under section
1247.--If the United States person whose stock is sold
or exchanged was a qualified shareholder (as defined in
section 1247(c)) of a foreign corporation which was a
foreign investment company (as described in section
1246(b)(1)), the earnings and profits of the foreign
corporation for taxable years in which such person was
a qualified shareholder.]
[(6)] (5) Foreign trade income.--Earnings and profits
of the foreign corporation attributable to foreign
trade income of a FSC other than foreign trade income
which--
(A) * * *
* * * * * * *
[(7)] (6) Amounts included in gross income under
section 1293.--Earnings and profits of the foreign
corporation attributable to any amount previously
included in the gross income of such person under
section 1293 with respect to the stock sold or
exchanged, but only to the extent the inclusion of such
amount did not result in an exclusion of an amount
under section 1293(c).
* * * * * * *
SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.
(a) * * *
* * * * * * *
(c) Financial Asset.--For purposes of this section--
(1) * * *
(2) Pass-thru entity.--For purposes of paragraph (1),
the term ``pass-thru entity'' means--
(A) * * *
* * * * * * *
[(H) a foreign personal holding company,
[(I) a foreign investment company (as defined
in section 1246(b)), and]
[(J)] (H) a REMIC.
* * * * * * *
PART V--SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS
* * * * * * *
Subpart A--Original Issue Discount
* * * * * * *
SEC. 1272. CURRENT INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT.
(a) Original Issue Discount on Debt Instruments Issued After
July 1, 1982, Included in Income on Basis of Constant Interest
Rate.--
(1) * * *
* * * * * * *
(6) Determination of daily portions where principal
subject to acceleration.--
(A) * * *
(B) Determination of present value.--For
purposes of subparagraph (A), the present value
shall be determined on the basis of--
(i) * * *
* * * * * * *
For purposes of clause (iii), the Secretary
shall prescribe regulations permitting the use
of a current prepayment assumption, determined
as of the close of the accrual period (or such
other time as the Secretary may prescribe
during the taxable year in which the accrual
period ends).
* * * * * * *
SEC. 1274. DETERMINATION OF ISSUE PRICE IN THE CASE OF CERTAIN DEBT
INSTRUMENTS ISSUED FOR PROPERTY.
(a) * * *
(b) Imputed Principal Amount.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Fair market value rule in potentially abusive
situations.--
(A) * * *
(B) Potentially abusive situation defined.--
For purposes of subparagraph (A), the term
``potentially abusive situation'' means--
(i) a tax shelter (as defined in
[section 6662(d)(2)(C)(iii)] section
6662(d)(2)(C)(ii)), and
* * * * * * *
Subpart D--Miscellaneous Provisions
* * * * * * *
SEC. 1286. TAX TREATMENT OF STRIPPED BONDS.
(a) * * *
* * * * * * *
(e) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(7) Cross reference.--
For treatment of stripped interests in certain accounts or
entities holding preferred stock, see section 1286(f).
* * * * * * *
(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.
[(f)] (g) Regulation Authority.--The Secretary may prescribe
regulations providing that where, by reason of varying rates of
interest, put or call options, or other circumstances, the tax
treatment under this section does not accurately reflect the
income of the holder of a stripped coupon or stripped bond, or
of the person disposing of such bond or coupon, as the case may
be, for any period, such treatment shall be modified to require
that the proper amount of income be included for such period.
* * * * * * *
PART VI--TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT COMPANIES
* * * * * * *
Subpart A--Interest on Tax Deferral
* * * * * * *
SEC. 1291. INTEREST ON TAX DEFERRAL.
(a) * * *
* * * * * * *
(b) Excess Distribution.--
(1) * * *
* * * * * * *
(3) Adjustments.--Under regulations prescribed by the
Secretary--
(A) * * *
* * * * * * *
(F) proper adjustment shall be made for
amounts not includible in gross income by
reason of section [551(d), 959(a),] 959(a) or
1293(c), and
* * * * * * *
(e) Certain basis, etc., rules made applicableExcept to the
extent inconsistent with the regulations prescribed under
subsection (f), rules similar to the rules of subsections (c),
(d), (e), and (f) of section 1246 (as in effect on the day
before the date of the enactment of the American Jobs Creation
Act of 2003) shall apply for purposes of this section; except
that--
(1) * * *
* * * * * * *
Subpart B--Treatment of Qualified Electing Funds
* * * * * * *
SEC. 1294. ELECTION TO EXTEND TIME FOR PAYMENT OF TAX ON UNDISTRIBUTED
EARNINGS.
(a) Extension Allowed by Election.--
(1) * * *
[(2) Election not permitted where amounts otherwise
includible under section 551 or 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--
[(A) any amount is includible in the gross
income of the taxpayer under section 551 with
respect to such fund for such taxable year, or
[(B) any amount is includible in the gross
income of the taxpayer under section 951 with
respect to such fund for such taxable year.]
(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.
* * * * * * *
Subchapter S--Tax Treatment of S Corporations and Their Shareholders
* * * * * * *
PART I--IN GENERAL
* * * * * * *
SEC. 1361. S CORPORATION DEFINED
(a) * * *
(b) Small Business Corporation.--
(1) In general.--For purposes of this subchapter, the
term ``small business corporation'' means a domestic
corporation which is not an ineligible corporation and
which does not--
(A) have more than [75] 100 shareholders,
* * * * * * *
(3) Treatment of certain wholly owned subsidiaries.--
(A) In general.--Except as provided in
regulations prescribed by the Secretary and in
the case of information returns required under
part III of subchapter A of chapter 61, for
purposes of this title--
(i) * * *
* * * * * * *
(c) Special Rules for Applying Subsection (b).--
[(1) Husband and wife treated as 1 shareholder.--For
purposes of subsection (b)(1)(A), a husband and wife
(and their estates) shall be treated as 1 shareholder.]
(1) Members of family treated as 1 shareholder.--
(A) In general.--For purpose of subsection
(b)(1)(A)--
i) except as provided in clause (ii),
a husband and wife (and their estates)
shall be treated as 1 shareholder, and
(ii) in the case of a family with
respect to which an election is in
effect under subparagraph (D), all
members of the family shall be treated
as 1 shareholder.
(B) Members of the family.--For purpose of
subparagraph (A)(ii)--
(i) In general.--The term ``members
of the family'' means the common
ancestor, lineal descendants of the
common ancestor, and the spouses (or
former spouses) of such lineal
descendants or common ancestor.
(ii) Common Ancestor.--For purposes
of this paragraph, an individual shall
not be considered a common ancestor if,
as of the later of the effective date
of this paragraph or the time the
election under section 1362(a) is made,
the individual is more than 3
generations removed from the youngest
generation of shareholders who would
(but for this clause) be members of the
family. For purposes of the preceding
sentence, a spouse (or former spouse)
shall be treated as being of the same
generation as the individual to which
such spouse is (or was) married.
(C) Effect of adoption, etc.--In determining
whether any relationship specified in
subparagraph (B) exists, the rules of section
152(b)(2) shall apply.
(D) Election.--An election under subparagraph
(A)(ii)--
(i) may, except as otherwise provided
in regulations prescribed by the
Secretary, be made by any member of the
family, and
(ii) shall remain in effect until
terminated as provided in regulations
prescribed by the Secretary.
(2) Certain trusts permitted as shareholders.--
(A) In general.--For purposes of subsection
(b)(1)(B), the following trusts may be
shareholders:
(i) * * *
* * * * * * *
(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 shareholders.--For purposes
of subsection (b)(1)--
(i) * * *
* * * * * * *
(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.
(d) Special Rule for Qualified Subchapter S Trust.--
(1) In general.--In the case of a qualified
subchapter S trust with respect to which a beneficiary
makes an election under paragraph (2)--
(A) such trust shall be treated as a trust
described in subsection (c)(2)(A)(i), [and]
(B) for purposes of section 678(a), the
beneficiary of such trust shall be treated as
the owner of that portion of the trust which
consists of stock in an S corporation with
respect to which the election under paragraph
(2) is made[.], and
(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.
* * * * * * *
(e) Electing Small Business Trust Defined.--
(1) * * *
(2) Potential current beneficiary.--For purposes of
this section, the term ``potential current
beneficiary'' means, with respect to any period, any
person who at any time during such period is entitled
to, or at the discretion of any person may receive, a
distribution from the principal or income of the trust
(determined without regard to any power of appointment
to the extent such power remains unexercised at the end
of such period). If a trust disposes of all of the
stock which it holds in an S corporation, then, with
respect to such corporation, the term ``potential
current beneficiary'' does not include any person who
first met the requirements of the preceding sentence
during the [60-day] 1-year period ending on the date of
such disposition.
(f) Restricted Bank Director Stock.--
(1) In general.--Restricted bank director stock shall
not be taken into account as outstanding stock of the S
corporation in applying this subchapter (other than
section 1368(f)).
(2) Restricted bank director stock.--For purposes of
this subsection, the term ``restricted bank director
stock'' means stock in a bank (as defined in section
581), a bank holding company (within the meaning of
section 2(a) of the Bank Holding Company Act of 1956
(12 U.S.C. 1841(a))), or a financial holding company
(within the meaning of section 2(p) of such Act),
registered with the Federal Reserve System if such
stock--
(A) is required to be held by an individual
under applicable Federal or State law in order
to permit such individual to serve as a
director, and
(B) is subject to an agreement with such bank
or company (or a corporation which controls
(within the meaning of section 368(c)) such
bank or company) pursuant to which the holder
is required to sell back such stock (at the
same price as the individual acquired such
stock) upon ceasing to hold the office of
director.
(3) Cross reference.--
For treatment of certain distributions with respect to
restricted bank director stock, see section 1368(f).
* * * * * * *
SEC. 1362. ELECTION; REVOCATION; TERMINATION.
(a) * * *
* * * * * * *
(d) Termination.--
(1) * * *
* * * * * * *
(3) Where passive investment income exceeds 25
percent of gross receipts for 3 consecutive taxable
years and corporation has accumulated earnings and
profits.--
(A) * * *
* * * * * * *
(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.
* * * * * * *
(f) Inadvertent invalid elections or terminations.--If--
(1) an election under subsection (a), section
1361(b)(3)(B)(ii), or section 1361(c)(1)(A)(ii) by any
corporation--
(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to
meet the requirements of section 1361(b) or to
obtain shareholder consents, or
(B) was terminated under paragraph (2) or (3)
of subsection (d), section 1361(b)(3)(C), or
section 1361(c)(1)(D)(iii),
* * * * * * *
(3) no later than a reasonable period of time after
discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken--
[(A) so that the corporation is a small
business corporation, or]
(A) so that the corporation for which the
election was made is a small business
corporation or a qualified subchapter S
subsidiary, as the case may be, or
* * * * * * *
[(4) the corporation, and each person who was a
shareholder in the corporation at any time during the
period specified pursuant to this subsection, agrees to
make such adjustments (consistent with the treatment of
the corporation as an S corporation) as may be required
by the Secretary with respect to such period,]
(4) the corporation for which the election was made,
and each person who was a shareholder in such
corporation at any time during the period specified
pursuant to this subsection, agrees to make such
adjustments (consistent with the treatment of such
corporation as an S corporation or a qualified
subchapter S subsidiary, as the case may be) as may be
required by the Secretary with respect to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation or a qualified subchapter S
subsidiary, as the case may be during the period specified by
the Secretary.
* * * * * * *
PART II--TAX TREATMENT OF SHAREHOLDERS
* * * * * * *
SEC. 1366. PASS-THRU OF ITEMS TO SHAREHOLDERS.
(a) Determination of shareholder's tax liability
(1) * * *
* * * * * * *
(d) Special rules for losses and deductions
(1) * * *
[(2) Indefinite carryover of disallowed losses and
deductionsAny 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.]
(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.
SEC. 1368. DISTRIBUTIONS.
(a) * * *
* * * * * * *
(f) Restricted Bank Director Stock.--If a director receives a
distribution (not in part or full payment in exchange for
stock) from an S corporation with respect to any restricted
bank director stock (as defined in section 1361(f)), the amount
of such distribution--
(1) shall be includible in gross income of the
director, and
(2) shall be deductible by the corporation for the
taxable year of such corporation in which or with which
ends the taxable year in which such amount in included
in the gross income of the director.
* * * * * * *
Subchapter T--Cooperatives and Their Patrons
* * * * * * *
PART III--DEFINITIONS; SPECIAL RULES
* * * * * * *
SEC. 1388. DEFINITIONS; SPECIAL RULES.
(a) Patronage Dividend.--For purposes of this subchapter, the
term ``patronage dividend'' means an amount paid to a patron by
an organization to which part I of this subchapter applies--
(1) * * *
* * * * * * *
Such term does not include any amount paid to a patron to the
extent that (A) such amount is out of earnings other than from
business done with or for patrons, or (B) such amount is out of
earnings from business done with or for other patrons to whom
no amounts are paid, or to whom smaller amounts are paid, with
respect to substantially identical transactions. 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.
* * * * * * *
CHAPTER 3--WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN
CORPORATIONS
* * * * * * *
Subchapter A--Nonresident Aliens and Foreign Corporations
* * * * * * *
SEC. 1441. WITHHOLDING OF TAX ON NONRESIDENT ALIENS.
(a) * * *
* * * * * * *
(c) Exceptions.--
(1) * * *
* * * * * * *
(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).
* * * * * * *
SEC. 1442. WITHHOLDING OF TAX ON FOREIGN CORPORATIONS.
(a) General Rule.--In the case of foreign corporations
subject to taxation under this subtitle, there shall be
deducted and withheld at the source in the same manner and on
the same items of income as is provided in section 1441 a tax
equal to 30 percent thereof. For purposes of the preceding
sentence, the references in section 1441(b) to sections
871(a)(1)(C) and (D) shall be treated as referring to sections
881(a)(3) and (4), the reference in section 1441(c)(1) to
section 871(b)(2) shall be treated as referring to section 842
or section 882(a)(2), as the case may be, the reference in
section 1441(c)(5) to section 871(a)(1)(D) shall be treated as
referring to section 881(a)(4), the reference in section
1441(c)(8) to section 871(a)(1)(C) shall be treated as
referring to section 881(a)(3), the references in section
1441(c)(9) to sections 871(h) and 871(h)(3) or (4) shall be
treated as referring to sections 881(c) and 881(c)(3) or (4),
[and the reference in section 1441(c)(10)] the reference in
section 1441(c)(10) to section 871(i)(2) shall be treated as
referring to section 881(d), 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).
* * * * * * *
CHAPTER 6--CONSOLIDATED RETURNS
* * * * * * *
Subchapter B--Related Rules
* * * * * * *
PART II--CERTAIN CONTROLLED CORPORATIONS
* * * * * * *
SEC. 1561. LIMITATIONS ON CERTAIN MULTIPLE TAX BENEFITS IN THE CASE OF
CERTAIN CONTROLLED CORPORATIONS.
(a) General Rule.--The component members of a controlled
group of corporations on a December 31 shall, for their taxable
years which include such December 31, be limited for purposes
of this subtitle to--
(1) * * *
* * * * * * *
The amounts specified in paragraph (1), the amount specified in
paragraph (3), and the amount specified in paragraph (4) shall
be divided equally among the component members of such group on
such December 31 unless all of such component members consent
(at such time and in such manner as the Secretary shall by
regulations prescribe) to an apportionment plan providing for
an unequal allocation of such amounts. The amounts specified in
paragraph (2) shall be divided equally among the component
members of such group on such December 31 unless the Secretary
prescribes regulations permitting an unequal allocation of such
amounts. Notwithstanding paragraph (1), in applying [the last 2
sentences of section 11(b)(1)] section 11(b)(5) to such
component members, the taxable income of all such component
members shall be taken into account and any increase in tax
under [such last 2 sentences] section 11(b)(5) shall be divided
among such component members in the same manner as amounts
under paragraph (1). In applying section 55(d)(3), the
alternative minimum taxable income of all component members
shall be taken into account and any decrease in the exemption
amount shall be allocated to the component members in the same
manner as under paragraph (3).
* * * * * * *
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter B--Estates of Nonresidents Not Citizens
* * * * * * *
SEC. 2105. PROPERTY WITHOUT THE UNITED STATES.
(a) * * *
* * * * * * *
(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.
* * * * * * *
SEC. 2107. EXPATRIATION TO AVOID TAX
[(a) Treatment of Expatriates.--
[(1) Rate of tax.--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, within the 10-
year period ending with the date of death, such
decedent lost United States citizenship, unless such
loss did not have for one of its principal purposes the
avoidance of taxes under this subtitle or subtitle A--
[(2) Certain individuals treated as having tax
avoidance purpose.--
[(A) In general.--For purposes of paragraph
(1), an individual shall be treated as having a
principal purpose to avoid such taxes if such
individual is so treated under section
877(a)(2).
[(B) Exception.--Subparagraph (A) shall not
apply to a decedent meeting the requirements of
section 877(c)(1).]
(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).
* * * * * * *
CHAPTER 12--GIFT TAX
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
SEC. 2501. IMPOSITION OF TAX.
(a) Taxable Transfers.--
(1) * * *
* * * * * * *
[(3) Exception.--
[(A) Certain individuals.--Paragraph (2)
shall not apply in the case of a donor who,
within the 10-year period ending with the date
of transfer, lost United States citizenship,
unless such loss did not have for one of its
principal purposes the avoidance of taxes under
this subtitle or subtitle A.
[(B) Certain individuals treated as having
tax avoidance purpose.--For purposes of
subparagraph (A), an individual shall be
treated as having a principal purpose to avoid
such taxes if such individual is so treated
under section 877(a)(2).
[(C) Exception for certain individuals.--
Subparagraph (B) shall not apply to a donor
meeting the requirements of section 877(c)(1).
[(D) 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.
[(E) Cross reference.--
[For comparable treatment of long-term lawful permanent
residents who ceased to be taxed as residents, see section
877(e).
[(4) Burden of proof.--If the Secretary establishes
that it is reasonable to believe that an individual's
loss of United States citizenship would, but for
paragraph (3), result in a substantial reduction for
the calendar year in the taxes on the transfer of
property by gift, the burden of proving that such loss
of citizenship did not have for one of its principal
purposes the avoidance of taxes under this subtitle or
subtitle A shall be on such individual.]
(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.
[(5)] (4) Transfers to political organizations.--
Paragraph (1) shall not apply to the transfer of money
or other property to a political organization (within
the meaning of section 527(e)(1)) for the use of such
organization.
(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.
* * * * * * *
Subtitle C--Employment Taxes
* * * * * * *
CHAPTER 21--FEDERAL INSURANCE CONTRIBUTIONS ACT
* * * * * * *
Subchapter C--General Provisions
* * * * * * *
SEC. 3121. DEFINITIONS.
(a) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration for employment, including the cash value
of all remuneration (including benefits) paid in any medium
other than cash; except that such term shall not include--
(1) * * *
* * * * * * *
(20) any benefit provided to or on behalf of an
employee if at the time such benefit is provided it is
reasonable to believe that the employee will be able to
exclude such benefit from income under section 74(c),
117, or 132; [or]
(21) in the case of a member of an Indian tribe, any
remuneration on which no tax is imposed by this chapter
by reason of section 7873 (relating to income derived
by Indians from exercise of fishing rights)[.]; or
(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.
* * * * * * *
(v) Treatment of Certain Deferred Compensation and Salary
Reduction Arrangements.--
(1) * * *
(2) Treatment of certain nonqualified deferred
compensation plans.--
(A) In general.--Any amount deferred under a
nonqualified deferred compensation plan shall
be taken into account for purposes of this
chapter as of the later of--
(i) when the services are performed,
or
(ii) when there is no substantial
risk of forfeiture of the rights to
such amount.
The preceding sentence shall not apply to any
excess parachute payment (as defined in section
280G(b)) or to any specified stock compensation
(as defined in section 4985) on which tax is
imposed by section 4985.
* * * * * * *
CHAPTER 22--RAILROAD RETIREMENT TAX ACT
* * * * * * *
Subchapter D--General Provisions
* * * * * * *
SEC. 3231. DEFINITIONS.
(a) * * *
* * * * * * *
(e) Compensation.--For purposes of this chapter--
(1) * * *
* * * * * * *
(11) 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.
* * * * * * *
CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT
* * * * * * *
SEC. 3306. DEFINITIONS.
(a) * * *
(b) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration for employment, including the cash value
of all remuneration (including benefits) paid in any medium
other than cash; except that such term shall not include--
(1) * * *
* * * * * * *
(16) any benefit provided to or on behalf of an
employee if at the time such benefit is provided it is
reasonable to believe that the employee will be able to
exclude such benefit from income under section 74(c),
117, or 132; [or]
(17) any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section
106(b)[.]; or
(18) 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.
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
Chapter 31. Retail excise taxes.
* * * * * * *
Chapter 45. Provisions relating to expatriated entities.
* * * * * * *
CHAPTER 32--MANUFACTURERS EXCISE TAXES
* * * * * * *
Subchapter C--Certain Vaccines
* * * * * * *
SEC. 4132. DEFINITIONS AND SPECIAL RULES.
(a) Definitions Relating to Taxable Vaccines.--For purposes
of this subchapter--
(1) Taxable vaccine.--The term ``taxable vaccine''
means any of the following vaccines which are
manufactured or produced in the United States or
entered into the United States for consumption, use, or
warehousing:
(A) * * *
* * * * * * *
(I) Any vaccine against hepatitis A.
[(I)] (J) Any vaccine against hepatitis B.
[(J)] (K) Any vaccine against chicken pox.
[(K)] (L) Any vaccine against rotavirus
gastroenteritis.
[(L)] (M) Any conjugate vaccine against
streptococcus pneumoniae.
* * * * * * *
Subchapter D--Recreational Equipment
* * * * * * *
PART I--SPORTING GOODS
* * * * * * *
SEC. 4161. IMPOSITION OF TAX.
(a) * * *
(b) Bows and Arrows, Etc.--
[(1) Bows.--
[(A) In general.--There is hereby imposed on
the sale by the manufacturer, producer, or
importer of any bow which has a draw weight of
10 pounds or more, a tax equal to 11 percent of
the price for which so sold.
[(B) Parts and accessories.--There is hereby
imposed upon the sale by the manufacturer,
producer, or importer--
[(i) of any part of accessory
suitable for inclusion in or attachment
to a bow described in subparagraph (A),
and
[(ii) of any quiver suitable for use
with arrows described in paragraph (2),
a tax equivalent to 11 percent of the
price for which so sold.]
(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 (3),
a tax equal to 11 percent of the price for
which so sold.
(2) [Arrows.--] Arrow components.--There is hereby
imposed on the sale by the manufacturer, producer, or
importer of any shaft, point (other than a broadhead),
nock, or vane of a type used in the manufacture of any
arrow which after its assembly--
(A) * * *
* * * * * * *
(3) Arrows.--
(A) In general.--There is hereby imposed on
the sale by the manufacturer, producer, or
importer of any arrow, a tax equal to 12
percent of the price for which so sold.
(B) Exception.--The tax imposed by
subparagraph (A) on an arrow shall not apply if
the arrow contains an arrow shaft with respect
to which tax was paid under paragraph (2).
(C) Arrow.--For purposes of this paragraph,
the term ``arrow'' means any shaft described in
paragraph (2) to which additional components
are attached.
[(3)] (4) Coordination with subsection (a).--No tax
shall be imposed under this subsection with respect to
any article taxable under subsection (a).
* * * * * * *
SEC. 4162. DEFINITIONS; TREATMENT OF CERTAIN RESALES.
(a) Sport Fishing Equipment Defined.--For purposes of this
part, the term ``sport fishing equipment'' means--
(1) * * *
* * * * * * *
(6) the following items of fishing supplies and
accessories--
(A) * * *
* * * * * * *
[(C) tackle boxes,]
[(D)] (C) bags, baskets, and other containers
designed to hold fish,
[(E)] (D) portable bait containers,
[(F)] (E) fishing vests,
[(G)] (F) landing nets,
[(H)] (G) gaff hooks,
[(I)] (H) fishing hook disgorgers, and
[(J)] (I) dressing for fishing lines and
artificial flies,
* * * * * * *
(8) fishing rod belts, fishing rodholders, fishing
harnesses, fish fighting chairs, fishing outriggers,
and fishing downriggers, and
(9) electric outboard boat motors[, and].
[(10) sonar devices suitable for finding fish.]
[(b) Sonar Device Suitable for Finding Fish.--For purposes of
this part, the term ``sonar device suitable for finding fish''
shall not include any sonar device which is--
[(1) a graph recorder,
[(2) a digital type,
[(3) a meter readout, or
[(4) a combination graph recorder or combination
meter readout.]
[(c)] (b) Treatment of Certain Resales.--
(1) * * *
* * * * * * *
CHAPTER 42--PRIVATE FOUNDATIONS AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
* * * * * * *
Subchapter A--Private Foundations
* * * * * * *
SEC. 4947. APPLICATION OF TAXES TO CERTAIN NONEXEMPT TRUSTS.
(a) Application of Tax.--
(1) Charitable trusts.--For purposes of part II of
subchapter F of chapter 1 (other than section 508(a),
(b), and (c)) and for purposes of this chapter, a trust
which is not exempt from taxation under section 501(a),
all of the unexpired interests in which are devoted to
one or more of the purposes described in section
170(c)(2)(B), and for which a deduction was allowed
under section 170, 545(b)(2), [556(b)(2),] 642(c),
2055, 2106(a)(2), or 2522 (or the corresponding
provisions of prior law), shall be treated as an
organization described in section 501(c)(3). For
purposes of section 509(a)(3)(A), such a trust shall be
treated as if organized on the day on which it first
becomes subject to this paragraph.
(2) Split-interest trusts.--In the case of a trust
which is not exempt from tax under section 501(a), not
all of the unexpired interests in which are devoted to
one or more of the purposes described in section
170(c)(2)(B), and which has amounts in trust for which
a deduction was allowed under section 170, 545(b)(2),
[556(b)(2), 642(c),] 2055, 2106(a)(2), or 2522, section
507 (relating to termination of private foundation
status), section 508(e) (relating to governing
instruments) to the extent applicable to a trust
described in this paragraph, section 4941 (relating to
taxes on self-dealing), section 4943 (relating to taxes
on excess business holdings) except as provided in
subsection (b)(3), section 4944 (relating to
investments which jeopardize charitable purpose) except
as provided in subsection (b)(3), and section 4945
(relating to taxes on taxable expenditures) shall apply
as if such trust were a private foundation. This
paragraph shall not apply with respect to--
(A) * * *
(B) any amounts in trust other than amounts
for which a deduction was allowed under section
170, 545(b)(2), [556(b)(2),] 642(c), 2055,
2106(a)(2), or 2522, if such other amounts are
segregated from amounts for which no deduction
was allowable, or
* * * * * * *
(b) Special Rules.--
(1) * * *
* * * * * * *
(3) Sections 4943 and 4944.--Sections 4943 and 4944
shall not apply to a trust which is described in
subsection (a)(2) if--
(A) all the income interest (and none of the
remainder interest) of such trust is devoted
solely to one or more of the purposes described
in section 170(c)(2)(B), and all amounts in
such trust for which a deduction was allowed
under section 170, 545(b)(2), [556(b)(2),]
642(c), 2055, 2106(a)(2), or 2522 have an
aggregate value not more than 60 percent of the
aggregate fair market value of all amounts in
such trusts, or
(B) a deduction was allowed under section
170, 545(b)(2), [556(b)(2),] 642(c), 2055,
2106(a)(2), or 2522 for amounts payable under
the terms of such trust to every remainder
beneficiary but not to any income beneficiary.
* * * * * * *
SEC. 4948. APPLICATION OF TAXES AND DENIAL OF EXEMPTION WITH RESPECT TO
CERTAIN FOREIGN ORGANIZATIONS.
(a) * * *
* * * * * * *
(c) Denial of Exemption to Foreign Organizations Engaged in
Prohibited Transactions.--
(1) * * *
* * * * * * *
(4) Disallowance of certain charitable deductions.--
No gift or bequest shall be allowed as a deduction
under section 170, 545(b)(2), [556(b)(2),] 642(c),
2055, 2106(a)(2), or 2522, if made--
(A) * * *
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) * * *
* * * * * * *
(d) Exemptions.--Except as provided in subsection (f)(6), the
prohibitions provided in subsection (c) shall not apply to--
(1) * * *
* * * * * * *
(14) any transaction required or permitted under part
1 of subtitle E of title IV or section 4223 of the
Employee Retirement Income Security Act of 1974, but
this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F); [or]
(15) a merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231 of such Act,
but this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F)[.]; or
(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.
* * * * * * *
(f) Other Definitions and Special Rules.--For purposes of
this section--
(1) * * *
* * * * * * *
(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.
* * * * * * *
CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES
Sec. 4985. Stock compensation of insiders in expatriated
corporations.
SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPATRIATED CORPORATIONS.
(a) Imposition of Tax.--In the case of an individual who is a
disqualified individual with respect to any expatriated
corporation, there is hereby imposed on such person a tax equal
to 15 percent of the value (determined under subsection (b)) of
the specified stock compensation held (directly or indirectly)
by or for the benefit of such individual or a member of such
individual's family (as defined in section 267) at any time
during the 12-month period beginning on the date which is 6
months before the expatriation date.
(b) Value.--For purposes of subsection (a)--
(1) In general.--The value of specified stock
compensation shall be--
(A) in the case of a stock option (or other
similar right) or a stock appreciation right,
the fair value of such option or right, and
(B) in any other case, the fair market value
of such compensation.
(2) Date for determining value.--The determination of
value shall be made--
(A) in the case of specified stock
compensation held on the expatriation date, on
such date,
(B) in the case of such compensation which is
canceled during the 6 months before the
expatriation date, on the day before such
cancellation, and
(C) in the case of such compensation which is
granted after the expatriation date, on the
date such compensation is granted.
(c) Tax To Apply Only if Shareholder Gain Recognized.--
Subsection (a) shall apply to any disqualified individual with
respect to an expatriated corporation only if gain (if any) on
any stock in such corporation is recognized in whole or part by
any shareholder by reason of the acquisition referred to in
section 7874(a)(2)(B)(i) with respect to such corporation.
(d) Exception Where Gain Recognized on Compensation.--
Subsection (a) shall not apply to--
(1) any stock option which is exercised on the
expatriation date or during the 6-month period before
such date and to the stock acquired in such exercise,
if income is recognized under section 83 on or before
the expatriation date with respect to the stock
acquired pursuant to such exercise, and
(2) any other specified stock compensation which is
exercised, sold, exchanged, distributed, cashed-out, or
otherwise paid during such period in a transaction in
which income, gain, or loss is recognized in full.
(e) Definitions.--For purposes of this section--
(1) Disqualified individual.--The term ``disqualified
individual'' means, with respect to a corporation, any
individual who, at any time during the 12-month period
beginning on the date which is 6 months before the
expatriation date--
(A) is subject to the requirements of section
16(a) of the Securities Exchange Act of 1934
with respect to such corporation or any member
of the expanded affiliated group which includes
such corporation, or
(B) would be subject to such requirements if
such corporation or member were an issuer of
equity securities referred to in such section.
(2) Expatriated corporation; expatriation date.--
(A) Expatriated corporation.--The term
``expatriated corporation'' means any
corporation which is an expatriated entity (as
defined in section 7874(a)(2)). Such term
includes any predecessor or successor of such a
corporation.
(B) Expatriation date.--The term
``expatriation date'' means, with respect to a
corporation, the date on which the corporation
first becomes an expatriated corporation.
(3) Specified stock compensation.--
(A) In general.--The term ``specified stock
compensation'' means payment (or right to
payment) granted by the expatriated corporation
(or by any member of the expanded affiliated
group which includes such corporation) to any
person in connection with the performance of
services by a disqualified individual for such
corporation or member if the value of such
payment or right is based on (or determined by
reference to) the value (or change in value) of
stock in such corporation (or any such member).
(B) Exceptions.--Such term shall not
include--
(i) any option to which part II of
subchapter D of chapter 1 applies, or
(ii) any payment or right to payment
from a plan referred to in section
280G(b)(6).
(4) Expanded affiliated group.--The term ``expanded
affiliated group'' means an affiliated group (as
defined in section 1504(a) without regard to section
1504(b)(3)); except that section 1504(a) shall be
applied by substituting ``more than 50 percent'' for
``at least 80 percent'' each place it appears.
(f) Special Rules.--For purposes of this section--
(1) Cancellation of restriction.--The cancellation of
a restriction which by its terms will never lapse shall
be treated as a grant.
(2) Payment or reimbursement of tax by corporation
treated as specified stock compensation.--Any payment
of the tax imposed by this section directly or
indirectly by the expatriated corporation or by any
member of the expanded affiliated group which includes
such corporation--
(A) shall be treated as specified stock
compensation, and
(B) shall not be allowed as a deduction under
any provision of chapter 1.
(3) Certain restrictions ignored.--Whether there is
specified stock compensation, and the value thereof,
shall be determined without regard to any restriction
other than a restriction which by its terms will never
lapse.
(4) Property transfers.--Any transfer of property
shall be treated as a payment and any right to a
transfer of property shall be treated as a right to a
payment.
(5) Other administrative provisions.--For purposes of
subtitle F, any tax imposed by this section shall be
treated as a tax imposed by subtitle A.
(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section.
* * * * * * *
Subtitle E--Alcohol, Tobacco, and Certain Other Excise Taxes
* * * * * * *
CHAPTER 51--DISTILLED SPIRITS, WINES, AND BEER
* * * * * * *
Subchapter A--Gallonage and Occupational Taxes
* * * * * * *
PART I--GALLONAGE TAXES
* * * * * * *
Subpart A--Distilled Spirits
Sec. 5001. Imposition, rate, and attachment of tax.
* * * * * * *
Sec. 5011. Income tax credit for wholesaler's average cost of
carrying excise tax.
* * * * * * *
SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER'S AVERAGE COST OF CARRYING
EXCISE TAX.
(a) In General.--For purposes of section 38, in the case of
an eligible wholesaler, the amount of the distilled spirits
wholesalers credit for any taxable year is the amount equal to
the product of--
(1) the number of cases of bottled distilled
spirits--
(A) which were bottled in the United States,
and
(B) which are purchased by such wholesaler
during the taxable year directly from the
bottler of such spirits, and
(2) the average tax-financing cost per case for the
most recent calendar year ending before the beginning
of such taxable year.
(b) Eligible Wholesaler.--For purposes of this section, the
term ``eligible wholesaler'' means any person who holds a
permit under the Federal Alcohol Administration Act as a
wholesaler of distilled spirits.
(c) Average Tax-Financing Cost.--
(1) In general.--For purposes of this section, the
average tax-financing cost per case for any calendar
year is the amount of interest which would accrue at
the deemed financing rate during a 60-day period on an
amount equal to the deemed Federal excise per case.
(2) Deemed financing rate.--For purposes of paragraph
(1), the deemed financing rate for any calendar year is
the average of the corporate overpayment rates under
paragraph (1) of section 6621(a) (determined without
regard to the last sentence of such paragraph) for
calendar quarters of such year.
(3) Deemed federal excise tax based on case of 12 80-
proof 750ml bottles.--For purposes of paragraph (1),
the deemed Federal excise tax per case is $22.83.
(4) Number of cases in lot.--For purposes of this
section, the number of cases in any lot of distilled
spirits shall be determined by dividing the number of
liters in such lot by 9.
* * * * * * *
PART II--OCCUPATIONAL TAX
* * * * * * *
Subpart D--Wholesale Dealers
* * * * * * *
SEC. 5117. PROHIBITED PURCHASES BY DEALERS.
(a) * * *
* * * * * * *
(d) Special Rule During Suspension Period.--Except as
provided by the Secretary, during the suspension period (as
defined in section 5148) it shall be unlawful for any dealer to
purchase distilled spirits for resale from any person other
than a wholesale dealer in liquors who is required to keep
records under section 5114.
* * * * * * *
Subpart G--General Provisions
Sec. 5141. Registration.
* * * * * * *
[Sec. 5148. Cross references.]
Sec. 5148. Suspension of occupational tax.
Sec. 5149. Cross references.
* * * * * * *
SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.
(a) In General.--Notwithstanding sections 5081, 5091, 5111,
5121, and 5131, the rate of tax imposed under such sections for
the suspension period shall be zero. During such period,
persons engaged in or carrying on a trade or business covered
by such sections shall register under section 5141 and shall
comply with the recordkeeping requirements under this part.
(b) Suspension Period.--For purposes of subsection (a), the
suspension period is the period beginning on July 1, 2004, and
ending on June 30, 2007.
SEC. [5148.] 5149. CROSS REFERENCES.
(1) For penalties for willful nonpayment of special taxes, see
section 5691.
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
PART III--INFORMATION RETURNS
* * * * * * *
Subpart A--Information Concerning Persons Subject to Special Provisions
Sec. 6031. Return of partnership income.
* * * * * * *
[Sec. 6035. Returns of officers, directors, and shareholders of
foreign personal holding companies.]
* * * * * * *
[SEC. 6035. RETURNS OF OFFICERS, DIRECTORS, AND SHAREHOLDERS OF FOREIGN
PERSONAL HOLDING COMPANIES.
[(a) General Rule.--Each United States citizen or resident
who is an officer, director, or 10-percent shareholder of a
corporation which was a foreign personal holding company (as
defined in section 552) for any taxable year shall file a
return with respect to such taxable year setting forth--
[(1) the shareholder information required by
subsection (b),
[(2) the income information required by subsection
(c), and
[(3) such other information with respect to such
corporation as the Secretary shall by forms or
regulations prescribe as necessary for carrying out the
purposes of this title.
[(b) Shareholder Information.--The shareholder information
required by this subsection with respect to any taxable year
shall be--
[(1) the name and address of each person who at any
time during such taxable year held any share in the
corporation,
[(2) a description of each class of shares and the
total number of shares of such class outstanding at the
close of the taxable year,
[(3) the number of shares of each class held by each
person, and
[(4) any changes in the holdings of shares during the
taxable year.
For purposes of paragraphs (1), (3), and (4), the term
``share'' includes any security convertible into a share in the
corporation and any option granted by the corporation with
respect to any share in the corporation.
[(c) Income Information.--The income information required by
this subsection for any taxable year shall be the gross income,
deductions, credits, taxable income, and undistributed foreign
personal holding company income of the corporation for the
taxable year.
[(d) Time and Manner for Furnishing Information.--The
information required under subsection (a) shall be furnished at
such time and in such manner as the Secretary shall by forms
and regulations prescribe.
[(e) Definition and Special Rules.--
[(1) 10-percent shareholder.--For purposes of this
section, the term ``10-percent shareholder'' means any
individual who owns directly or indirectly (within the
meaning of section 554) 10 percent or more in value of
the outstanding stock of a foreign corporation.
[(2) Time for making determinations.--
[(A) In general.--Except as provided in
subparagraph (B), the determination of whether
any person is an officer, director, or 10-
percent shareholder with respect to any foreign
corporation shall be made as of the date on
which the return is required to be filed.
[(B) Special rule.--If after the application
of subparagraph (A) no person is required to
file a return under subsection (a) with respect
to any foreign corporation for any taxable
year, the determination of whether any person
is an officer, director, or 10-percent
shareholder with respect to such foreign
corporation shall be made on the last day of
such taxable year on which there was such a
person who was a United States citizen or
resident.
[(3) 2 or more persons required to furnish
information with respect to same foreign corporation.--
If, but for this paragraph, 2 or more persons would be
required to furnish information under subsection (a)
with respect to the same foreign corporation for the
same taxable year, the Secretary may by regulations
provide that such information shall be required only
from 1 person.]
* * * * * * *
SEC. 6039G. INFORMATION ON INDIVIDUALS LOSING UNITED STATES
CITIZENSHIP.
[(a) In General.--Notwithstanding any other provision of law,
any individual who loses United States citizenship (within the
meaning of section 877(a) shall provide a statement which
includes the information described in subsection (b). Such
statement shall be--
[(1) provided not later than the earliest date of any
act referred to in subsection (c), and
[(2) provided to the person or court referred to in
subsection (c) with respect to such act.
[(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) in the case of an individual having a net worth
of at least the dollar amount applicable under section
877(a)(2)(B), information detailing the assets and
liabilities of such individual, and
[(6) such other information as the Secretary may
prescribe.
[(c) Acts Described.--For purposes of this section, the acts
referred to in this subsection are--
[(1) the individual's renunciation of his United
States nationality before a diplomatic or consular
officer of the United States pursuant to paragraph (5)
of section 349(a) of the Immigration and Nationality
Act (8 U.S.C. 1481(a)(5)),
[(2) the individual's furnishing to the United States
Department of State a signed statement of voluntary
relinquishment of United States nationality confirming
the performance of an act of expatriation specified in
paragraph (1), (2), (3), or
[(4) of section 349(a) of the immigration and
Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
[(3) the issuance by the United States Department of
State of a certificate of loss of nationality to the
individual, or
[(4) the cancellation by a court of the United States
of a naturalized citizen's certificate of
naturalization.
[(d) Penalty.--Any individual failing to provide a statement
required under subsection (a) shall be subject to a penalty for
each year (of the 10-year period beginning on the date of loss
of United States citizenship) during any portion of which such
failure continues in an amount equal to the greater of--
[(1) 5 percent of the tax required to be paid under
section 877 for the taxable year ending during such
year, or
[(2) $1,000,unless it is shown that such failure is
due to reasonable cause and not to willful neglect.]
(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).
(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.
(c) 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.
[(e)] (d) Information to be Provided to Secretary.--
Notwithstanding any other provision of law--
(1) * * *
* * * * * * *
[(f) Reporting by Long-Term Lawful Permanent Residents who
Cease to be Taxed as Residents.--In lieu of applying the last
sentence of subsection (a), any individual who is required to
provide a statement under this section by reason of section
877(e)(1) shall provide such statement with the return of tax
imposed by chapter 1 for the taxable year during which the
event described in such section occurs.
[(g) Exemption.--The Secretary may by regulations exempt any
class of individuals from the requirements of this section if
he determines that applying this section to such individuals is
not necessary to carry out the purposes of this section.]
* * * * * * *
Subpart B--Information Concerning Transactions With Other Persons
Sec. 6041. Information at source.
* * * * * * *
Sec. 6043A. Returns relating to taxable mergers and
acquisitions.
* * * * * * *
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.
* * * * * * *
Subpart C--Information Regarding Wages Paid Employees
* * * * * * *
SEC. 6051. RECEIPTS FOR EMPLOYEES,
(a) Requirement.--Every person required to deduct and
withhold from an employee a tax under section 3101 or 3402, or
who would have been required to deduct and withhold a tax under
section 3402 (determined without regard to subsection (n)) if
the employee had claimed no more than one withholding
exemption, or every employer engaged in a trade or business who
pays remuneration for services performed by an employee,
including the cash value of such remuneration paid in any
medium other than cash, shall furnish to each such employee in
respect of the remuneration paid by such person to such
employee during the calendar year, on or before January 31 of
the succeeding year, or, if his employment is terminated before
the close of such calendar year, within 30 days after the date
of receipt of a written request from the employee if such 30-
day period ends before January 31, a written statement showing
the following:
(1) * * *
* * * * * * *
(10) in the case of an employee who is a member of
the Armed Forces of the United States, such employee's
earned income as determined for purposes of section 32
(relating to earned income credit), [and]
(11) the amount contributed to any Archer MSA (as
defined in section 220(d) of such employee or such
employee's spouse[.], and
(12) the total amount of deferrals under a
nonqualified deferred compensation plan (within the
meaning of section 409A(d)).
In the case of compensation paid for service as a member of a
uniformed service, the statement shall show, in lieu of the
amount required to be shown by paragraph (5), the total amount
of wages as defined in section 3121(a), computed in accordance
with such section and section 3121(i)(2). In the case of
compensation paid for service as a volunteer or volunteer
leader within the meaning of the Peace Corps Act, the statement
shall show, in lieu of the amount required to be shown by
paragraph (5), the total amount of wages as defined in section
3121(a), computed in accordance with such section and section
3121(i)(3). In the case of tips received by an employee in the
course of his employment, the amounts required to be shown by
paragraphs (3) and (5) shall include only such tips as are
included in statements furnished to the employer pursuant to
section 6053(a). The amounts required to be shown by paragraph
(5) shall not include wages which are exempted pursuant to
sections 3101(c) and 3111(c) from the taxes imposed by sections
3101 and 3111. In the case of the amounts required to be shown
by paragraph (12), the Secretary (by regulation) may establish
a minimum amount of deferrals below which paragraph (12) does
not apply and may provide that paragraph (12) does not apply
with respect to amounts of deferrals which are not reasonably
ascertainable.
* * * * * * *
Subchapter B--Miscellaneous Provisions
Sec. 6101. Period covered by returns or other documents.
* * * * * * *
[Sec. 6111. Registration of tax shelters.
[Sec. 6112. Organizers and sellers of potentially abusive tax
shelters must keep lists of investors.]
Sec. 6111. Disclosure of reportable transactions.
Sec. 6112. Material advisors of reportable transactions must
keep lists of advisees, etc.
* * * * * * *
SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
INFORMATION.
(a) * * *
* * * * * * *
(e) Disclosure to Persons Having Material Interest.--
(1) In general.--The return of a person shall, upon
written request, be open to inspection by or disclosure
to--
(A) * * *
* * * * * * *
(D) in the case of the return of a
corporation or a subsidiary thereof--
(i) * * *
* * * * * * *
[(iv) if the corporation was a
foreign personal holding company, as
defined by section 552, any person who
was a shareholder during any part of a
period covered by such return if with
respect to that period, or any part
thereof, such shareholder was required
under section 551 to include in his
gross income undistributed foreign
personal holding company income of such
company,]
[(v)] (iv) if the corporation was an
S corporation, any person who was a
shareholder during any part of the
period covered by such return during
which an election under section 1362(a)
was in effect, or
[(vi)] (v) if the corporation has
been dissolved, any person authorized
by applicable State law to act for the
corporation or any person who the
Secretary finds to have a material
interest which will be affected by
information contained therein;
* * * * * * *
[SEC. 6111. REGISTRATION OF TAX SHELTERS.
[(a) Registration.--
[(1) In general.--Any tax shelter organizer shall
register the tax shelter with the Secretary (in such
form and in such manner as the Secretary may prescribe)
not later than the day on which the first offering for
sale of interests in such tax shelter occurs.
[(2) Information included in registration.--Any
registration under paragraph (1) shall include--
[(A) information identifying and describing
the tax shelter,
[(B) information describing the tax benefits
of the tax shelter represented (or to be
represented) to investors, and
[(C) such other information as the Secretary
may prescribe.
[(b) Furnishing of Tax Shelter Identification Number;
Inclusion on Return.--
[(1) Sellers, etc.--Any person who sells (or
otherwise transfers) an interest in a tax shelter shall
(at such times and in such manner as the Secretary
shall prescribe) furnish to each investor who purchases
(or otherwise acquires) an interest in such tax shelter
from such person the identification number assigned by
the Secretary to such tax shelter.
[(2) Inclusion of number on return.--Any person
claiming any deduction, credit, or other tax benefit by
reason of a tax shelter shall include (in such manner
as the Secretary may prescribe) on the return of tax on
which such deduction, credit, or other benefit is
claimed the identification number assigned by the
Secretary to such tax shelter.
[(c) Tax Shelter.--For purposes of this section--
[(1) In general.--The term ``tax shelter'' means any
investment--
[(A) with respect to which any person could
reasonably infer from the representations made,
or to be made, in connection with the offering
for sale of interests in the investment that
the tax shelter ratio for any investor as of
the close of any of the first 5 years ending
after the date on which such investment is
offered for sale may be greater than 2 to 1,
and
[(B) which is--
[(i) required to be registered under
a Federal or State law regulating
securities,
[(ii) sold pursuant to an exemption
from registration requiring the filing
of a notice with a Federal or State
agency regulating the offering or sale
of securities, or
[(iii) a substantial investment.
[(2) Tax shelter ratio defined.--For purposes of this
subsection, the term ``tax shelter ratio'' means, with
respect to any year, the ratio which--
[(A) the aggregate amount of the deductions
and 350 percent of the credits which are
represented to be potentially allowable to any
investor under subtitle A for all periods up to
(and including) the close of such year, bears
to
[(B) the investment base as of the close of
such year.
[(3) Investment base.--
[(A) In general.--Except as provided in this
paragraph, the term ``investment base'' means,
with respect to any year, the amount of money
and the adjusted basis of other property
(reduced by any liability to which such other
property is subject) contributed by the
investor as of the close of such year.
[(B) Certain borrowed amounts excluded.--For
purposes of subparagraph (A), there shall not
be taken into account any amount borrowed from
any person--
[(i) who participated in the
organization, sale, or management of
the investment, or
[(ii) who is a related person (as
defined in section 465(b)(3)(C)) to any
person described in clause (i),unless
such amount is unconditionally required
to be repaid by the investor before the
close of the year for which the
determination is being made.
[(C) Certain other amounts included or
excluded.--
[(i) Amounts held in cash
equivalents, etc.--No amount shall be
taken into account under subparagraph
(A) which is to be held in cash
equivalent or marketable securities.
[(ii) Amounts included or excluded by
secretary.--The Secretary may by
regulation--
[(I) exclude from the
investment base any amount
described in subparagraph (A),
or
[(II) include in the
investment base any amount not
described in subparagraph
(A),if the Secretary determines
that such exclusion or
inclusion is necessary to carry
out the purposes of this
section.
[(4) Substantial investment.--An investment is a
substantial investment if--
[(A) the aggregate amount which may be
offered for sale exceeds $250,000, and
[(B) there are expected to be 5 or more
investors.
[(d) Certain Confidential Arrangements Treated as Tax
Shelters.--
[(1) In general.--For purposes of this section, the
term ``tax shelter'' includes any entity, plan,
arrangement, or transaction--
[(A) a significant purpose of the structure
of which is the avoidance or evasion of Federal
income tax for a direct or indirect participant
which is a corporation,
[(B) which is offered to any potential
participant under conditions of
confidentiality, and
[(C) for which the tax shelter promoters may
receive fees in excess of $100,000 in the
aggregate.
[(2) Conditions of confidentiality.--For purposes of
paragraph (1)(B), an offer is under conditions of
confidentiality if--
[(A) the potential participant to whom the
offer is made (or any other person acting on
behalf of such participant) has an
understanding or agreement with or for the
benefit of any promoter of the tax shelter that
such participant (or such other person) will
limit disclosure of the tax shelter or any
significant tax features of the tax shelter, or
[(B) any promoter of the tax shelter--
[(i) claims, knows, or has reason to
know,
[(ii) knows or has reason to know
that any other person (other than the
potential participant) claims, or
[(iii) causes another person to
claim,that the tax shelter (or any
aspect thereof) is proprietary to any
person other than the potential
participant or is otherwise protected
from disclosure to or use by others.
For purposes of this subsection, the term ``promoter''
means any person or any related person (within the
meaning of section 267 or 707) who participates in the
organization, management, or sale of the tax shelter.
[(3) Persons other than promoter required to register
in certain cases.--
[(A) In general.--If--
[(i) the requirements of subsection
(a) are not met with respect to any tax
shelter (as defined in paragraph (1))
by any tax shelter promoter, and
[(ii) no tax shelter promoter is a
United States person,then each United
States person who discussed
participation in such shelter shall
register such shelter under subsection
(a).
[(B) Exception.--Subparagraph (A) shall not
apply to a United States person who discussed
participation in a tax shelter if--
[(i) such person notified the
promoter in writing (not later than the
close of the 90th day after the day on
which such discussions began) that such
person would not participate in such
shelter, and
[(ii) such person does not
participate in such shelter.
[(4) Offer to participate treated as offer for
sale.--For purposes of subsections (a) and (b), an
offer to participate in a tax shelter (as defined in
paragraph (1)) shall be treated as an offer for sale.
[(e) Other Definitions.--For purposes of this section--
[(1) Tax shelter organizer.--The term ``tax shelter
organizer'' means--
[(A) the person principally responsible for
organizing the tax shelter,
[(B) if the requirements of subsection (a)
are not met by a person described in
subparagraph (A) at the time prescribed
therefor, any other person who participated in
the organization of the tax shelter, and
[(C) if the requirements of subsection (a)
are not met by a person described in
subparagraph (A) or (B) at the time prescribed
therefor, any person participating in the sale
or management of the investment at a time when
the tax shelter was not registered under
subsection (a).
[(2) Year.--The term ``year'' means--
[(A) the taxable year of the tax shelter, or
[(B) if the tax shelter has no taxable year,
the calendar year.
[(f) Regulations.--The Secretary may prescribe regulations
which provide--
[(1) rules for the aggregation of similar investments
offered by the same person or persons for purposes of
applying subsection (c)(4),
[(2) 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,
[(3) exemptions from the requirements of this
section, and
[(4) such rules as may be necessary or appropriate to
carry out the purposes of this section in the case of
foreign tax shelters.
[SEC. 6112. ORGANIZERS AND SELLERS OF POTENTIALLY ABUSIVE TAX SHELTERS
MUST KEEP LISTS OF INVESTORS.
[(a) In General.--Any person who--
[(1) organizes any potentially abusive tax shelter,
or
[(2) sells any interest in such a shelter,shall
maintain (in such manner as the Secretary may by
regulations prescribe) a list identifying each person
who was sold an interest in such shelter and containing
such other information as the Secretary may by
regulations require.
[(b) Potentially Abusive Tax Shelter.--For purposes of this
section, the term ``potentially abusive tax shelter'' means--
[(1) any tax shelter (as defined in section 6111)
with respect to which registration is required under
section 6111, and
[(2) any entity, investment plan or arrangement, or
other plan or arrangement which is of a type which the
Secretary determines by regulations as having a
potential for tax avoidance or evasion.]
SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.
(a) In General.--Each material advisor with respect to any
reportable transaction shall make a return (in such form as the
Secretary may prescribe) setting forth--
(1) information identifying and describing the
transaction,
(2) information describing any potential tax benefits
expected to result from the transaction, and
(3) such other information as the Secretary may
prescribe.
Such return shall be filed not later than the date specified by
the Secretary.
(b) Definitions.--For purposes of this section--
(1) Material advisor.--
(A) In general.--The term ``material
advisor'' means any person--
(i) who provides any material aid,
assistance, or advice with respect to
organizing, managing, promoting,
selling, implementing, or carrying out
any reportable transaction, and
(ii) who directly or indirectly
derives gross income in excess of the
threshold amount (or such other amount
as may be prescribed by the Secretary)
for such advice or assistance.
(B) Threshold amount.--For purposes of
subparagraph (A), the threshold amount is--
(i) $50,000 in the case of a
reportable transaction substantially
all of the tax benefits from which are
provided to natural persons, and
(ii) $250,000 in any other case.
(2) Reportable transaction.--The term ``reportable
transaction'' has the meaning given to such term by
section 6707A(c).
(c) Regulations.--The Secretary may prescribe regulations
which provide--
(1) that only 1 person shall be required to meet the
requirements of subsection (a) in cases in which 2 or
more persons would otherwise be required to meet such
requirements,
(2) exemptions from the requirements of this section,
and
(3) such rules as may be necessary or appropriate to
carry out the purposes of this section.
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.
[(c)] (b) Special Rules.--
(1) Availability for inspection; retention of
information on list.--Any person who is required to
maintain a list under subsection (a)--
(A) shall make such list available to the
Secretary for inspection upon written request
by the Secretary, and
(B) except as otherwise provided under
regulations prescribed by the Secretary, shall
retain any information which is required to be
included on such list for 7 years.
For purposes of this section, the identity of any
person on such list shall not be privileged.
(2) Lists which would be required to be maintained by
2 or more persons.--The Secretary [shall] may prescribe
regulations which provide that, in cases in which 2 or
more persons are required under subsection (a) to
maintain the same list (or portion thereof), only 1
person shall be required to maintain such list (or
portion).
* * * * * * *
CHAPTER 62--TIME AND PLACE FOR PAYING TAX
* * * * * * *
Subchapter A--Place and Due Date for Payment of Tax
* * * * * * *
SEC. 6159. AGREEMENTS FOR PAYMENT OF TAX LIABILITY IN INSTALLMENTS.
(a) Authorization of Agreements.--The Secretary is authorized
to enter into written agreements with any taxpayer under which
such taxpayer is allowed to [satisfy liability for payment of]
make payment on any tax in installment payments if the
Secretary determines that such agreement will facilitate full
or partial collection of such liability.
* * * * * * *
(c) Secretary Required to Enter into Installment Agreements
in Certain Cases.--In the case of a liability for tax of an
individual under subtitle A, the Secretary shall enter into an
agreement to accept the full payment of such tax in
installments if, as of the date the individual offers to enter
into the agreement--
(1) * * *
* * * * * * *
(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.
[(d)] (e) Administrative Review.--The Secretary shall
establish procedures for an independent administrative review
of terminations of installment agreements under this section
for taxpayers who request such a review.
[(e)] (f) Cross Reference.--
For rights to administrative review and appeal, see section
7122(d).
CHAPTER 66--LIMITATIONS
* * * * * * *
Subchapter A--Limitations on Assessment and Collection
* * * * * * *
SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.
(a) * * *
* * * * * * *
(c) Exceptions.--
(1) * * *
* * * * * * *
(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.
* * * * * * *
(e) Substantial Omission of Items.--Except as otherwise
provided in subsection (c)--
(1) Income taxes.--In the case of any tax imposed by
subtitle A--
(A) * * *
[(B) Constructive dividends.--If the taxpayer
omits from gross income an amount properly
includible therein under section 551(b)
(relating to the inclusion in the gross income
of United States shareholders of their
distributive shares of the undistributed
foreign personal holding company income), the
tax may be assessed, or a proceeding in court
for the collection of such tax may be begun
without assessment, at any time within 6 years
after the return was filed.]
(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.
* * * * * * *
CHAPTER 67--INTEREST
* * * * * * *
Subchapter A--Interest on Underpayments
Sec. 6601. Interest on underpayment, nonpayment, or extensions
of time for payment, of tax.
* * * * * * *
Sec. 6603. Deposits made to suspend running of interest on
potential underpayments, etc.
* * * * * * *
SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS, ETC.
(a) Authority To Make Deposits Other Than As Payment of
Tax.--A taxpayer may make a cash deposit with the Secretary
which may be used by the Secretary to pay any tax imposed under
subtitle A or B or chapter 41, 42, 43, or 44 which has not been
assessed at the time of the deposit. Such a deposit shall be
made in such manner as the Secretary shall prescribe.
(b) No Interest Imposed.--To the extent that such deposit is
used by the Secretary to pay tax, for purposes of section 6601
(relating to interest on underpayments), the tax shall be
treated as paid when the deposit is made.
(c) Return of Deposit.--Except in a case where the Secretary
determines that collection of tax is in jeopardy, the Secretary
shall return to the taxpayer any amount of the deposit (to the
extent not used for a payment of tax) which the taxpayer
requests in writing.
(d) Payment of Interest.--
(1) In general.--For purposes of section 6611
(relating to interest on overpayments), a deposit which
is returned to a taxpayer shall be treated as a payment
of tax for any period to the extent (and only to the
extent) attributable to a disputable tax for such
period. Under regulations prescribed by the Secretary,
rules similar to the rules of section 6611(b)(2) shall
apply.
(2) Disputable tax.--
(A) In general.--For purposes of this
section, the term ``disputable tax'' means the
amount of tax specified at the time of the
deposit as the taxpayer's reasonable estimate
of the maximum amount of any tax attributable
to disputable items.
(B) Safe harbor based on 30-day letter.--In
the case of a taxpayer who has been issued a
30-day letter, the maximum amount of tax under
subparagraph (A) shall not be less than the
amount of the proposed deficiency specified in
such letter.
(3) Other definitions.--For purposes of paragraph
(2)--
(A) Disputable item.--The term ``disputable
item'' means any item of income, gain, loss,
deduction, or credit if the taxpayer--
(i) has a reasonable basis for its
treatment of such item, and
(ii) reasonably believes that the
Secretary also has a reasonable basis
for disallowing the taxpayer's
treatment of such item.
(B) 30-day letter.--The term ``30-day
letter'' means the first letter of proposed
deficiency which allows the taxpayer an
opportunity for administrative review in the
Internal Revenue Service Office of Appeals.
(4) Rate of interest.--The rate of interest allowable
under this subsection shall be the Federal short-term
rate determined under section 6621(b), compounded
daily.
(e) Use of Deposits.--
(1) Payment of tax.--Except as otherwise provided by
the taxpayer, deposits shall be treated as used for the
payment of tax in the order deposited.
(2) Returns of deposits.--Deposits shall be treated
as returned to the taxpayer on a last-in, first-out
basis.
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter A--Additions to the Tax and Additional Amounts
* * * * * * *
PART II--ACCURACY-RELATED AND FRAUD PENALTIES
[Sec. 6662. Imposition of accuracy-related penalty.]
Sec. 6662. Imposition of accuracy-related penalty on
underpayments.
Sec. 6662A. Imposition of accuracy-related penalty on
understatements with respect to reportable
transactions.
* * * * * * *
[SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY.]
SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.
(a) * * *
* * * * * * *
(d) Substantial Understatement of Income Tax.--
(1) Substantial understatement.--
(A) * * *
[(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), paragraph (1) shall be
applied by substituting ``$10,000'' for
``$5,000''.]
(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.
(2) Understatement.--
(A) In general.--For purposes of paragraph
(1), the term ``understatement'' means the
excess of--
(i) * * *
* * * * * * *
The excess under the preceding sentence shall
be determined without regard to items to which
section 6662A applies.
* * * * * * *
[(C) Special rules in cases involving tax
shelters.--
[(i) In general.--In the case of any
item of a taxpayer other than a
corporation which is attributable to a
tax shelter--
[(I) subparagraph (B)(ii)
shall not apply, and
[(II) subparagraph (B)(i)
shall not apply unless (in
addition to meeting the
requirements of such
subparagraph) the taxpayer
reasonably believed that the
tax treatment of such item by
the taxpayer was more likely
than not the proper treatment.
[(ii) Subparagraph (b) not to apply
to corporations.--Subparagraph (B)
shall not apply to any item of a
corporation which is attributable to a
tax shelter.
[(iii) Tax shelter.--For purposes of
this subparagraph, 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.]
(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.
* * * * * * *
SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS
WITH RESPECT TO REPORTABLE TRANSACTIONS.
(a) Imposition of Penalty.--If a taxpayer has a reportable
transaction understatement for any taxable year, there shall be
added to the tax an amount equal to 20 percent of the amount of
such understatement.
(b) Reportable Transaction Understatement.--For purposes of
this section--
(1) In general.--The term ``reportable transaction
understatement'' means the sum of--
(A) the product of--
(i) the amount of the increase (if
any) in taxable income which results
from a difference between the proper
tax treatment of an item to which this
section applies and the taxpayer's
treatment of such item (as shown on the
taxpayer's return of tax), and
(ii) the highest rate of tax imposed
by section 1 (section 11 in the case of
a taxpayer which is a corporation), and
(B) the amount of the decrease (if any) in
the aggregate amount of credits determined
under subtitle A which results from a
difference between the taxpayer's treatment of
an item to which this section applies (as shown
on the taxpayer's return of tax) and the proper
tax treatment of such item.
For purposes of subparagraph (A), any reduction of the
excess of deductions allowed for the taxable year over
gross income for such year, and any reduction in the
amount of capital losses which would (without regard to
section 1211) be allowed for such year, shall be
treated as an increase in taxable income.
(2) Items to which section applies.--This section
shall apply to any item which is attributable to--
(A) any listed transaction, and
(B) any reportable transaction (other than a
listed transaction) if a significant purpose of
such transaction is the avoidance or evasion of
Federal income tax.
(c) Higher Penalty for Nondisclosed Transactions.--Subsection
(a) shall be applied by substituting ``30 percent'' for ``20
percent'' with respect to the portion of any reportable
transaction understatement with respect to which the
requirement of section 6664(d)(2)(A) is not met.
(d) Definitions of Reportable and Listed Transactions.--For
purposes of this section, the terms ``reportable transaction''
and ``listed transaction'' have the respective meanings given
to such terms by section 6707A(c).
(e) Special Rules.--
(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as
defined in section 6662(d)(2))--
(A) the amount of such understatement
(determined without regard to this paragraph)
shall be increased by the aggregate amount of
reportable transaction understatements for
purposes of determining whether such
understatement is a substantial understatement
under section 6662(d)(1), and
(B) the addition to tax under section 6662(a)
shall apply only to the excess of the amount of
the substantial understatement (if any) after
the application of subparagraph (A) over the
aggregate amount of reportable transaction
understatements.
(2) Coordination with other penalties.--
(A) Application of fraud penalty.--References
to an underpayment in section 6663 shall be
treated as including references to a reportable
transaction understatement.
(B) No double penalty.--This section shall
not apply to any portion of an understatement
on which a penalty is imposed under section
6663.
(3) Special rule for amended returns.--Except as
provided in regulations, in no event shall any tax
treatment included with an amendment or supplement to a
return of tax be taken into account in determining the
amount of any reportable transaction understatement if
the amendment or supplement is filed after the earlier
of the date the taxpayer is first contacted by the
Secretary regarding the examination of the return or
such other date as is specified by the Secretary.
* * * * * * *
SEC. 6664. DEFINITIONS AND SPECIAL RULES.
(a) * * *
* * * * * * *
(c) Reasonable Cause Exception for Underpayments.--
(1) In general.--No penalty shall be imposed under
[this part] section 6662 or 6663 with respect to any
portion of an underpayment 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.
* * * * * * *
(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.
Subchapter B--Assessable Penalties
* * * * * * *
PART I--GENERAL PROVISIONS
Sec. 6671. Rules for application of assessable penalties.
* * * * * * *
Sec. 6707. Failure to furnish information regarding [tax
shelters] reportable transactions.
Sec. 6707A. Penalty for failure to include reportable
transaction information with return.
[Sec. 6708. Failure to maintain lists of investors in
potentially abusive tax shelters.]
Sec. 6708. Failure to maintain lists of advisees with respect to
reportable transactions.
* * * * * * *
SEC. 6679. FAILURE TO FILE RETURNS, ETC., WITH RESPECT TO FOREIGN
CORPORATIONS OR FOREIGN PARTNERSHIPS.
(a) Civil Penalty.--
(1) In general.--In addition to any criminal penalty
provided by law, any person required to file a return
under section [6035, 6046, or 6046A] 6046 or 6046A who
fails to file such return at the time provided in such
section, or who files a return which does not show the
information required pursuant to such section, shall
pay a penalty of $10,000, unless it is shown that such
failure is due to reasonable cause.
* * * * * * *
[(3) Reduced penalty for returns relating to foreign
personal holding companies.--In the case of a return
required under section 6035, paragraph (1) shall be
applied by substituting ``$1,000'' for ``$10,000'', and
paragraph (2) shall not apply.]
* * * * * * *
SEC. 6700. PROMOTING ABUSIVE TAX SHELTERS, ETC.
(a) Imposition of Penalty.--Any person who--
(1) * * *
* * * * * * *
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.
* * * * * * *
[SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING TAX SHELTERS.
[(a) Failure to Register Tax Shelter.--
[(1) Imposition of penalty.--If a person who is
required to register a tax shelter under section
6111(a)--
[(A) fails to register such tax shelter on or
before the date described in section
6111(a)(1), or
[(B) files false or incomplete information
with the Secretary with respect to such
registration,
such person shall pay a penalty with respect to such
registration in the amount determined under paragraph
(2). No penalty shall be imposed under the preceding
sentence with respect to any failure which is due to
reasonable cause.
[(2) Amount of penalty.--Except as provided in
paragraph (3), the penalty imposed under paragraph (1)
with respect to any tax shelter shall be an amount
equal to the greater of--
[(A) 1 percent of the aggregate amount
invested in such tax shelter, or
[(B) $500.
[(3) Confidential arrangements.--
[(A) In general.--In the case of a tax
shelter (as defined in section 6111(d)), the
penalty imposed under paragraph (1) shall be an
amount equal to the greater of--
[(i) 50 percent of the fees paid to
all promoters of the tax shelter with
respect to offerings made before the
date such shelter is registered under
section 6111, or
[(ii) $10,000.
Clause (i) shall be applied by substituting
``75 percent'' for ``50 percent'' in the case
of an intentional failure or act described in
paragraph (1).
[(B) Special rule for participants required
to register shelter.--In the case of a person
required to register such a tax shelter by
reason of section 6111(d)(3)--
[(i) such person shall be required to
pay the penalty under paragraph (1)
only if such person actually
participated in such shelter,
[(ii) the amount of such penalty
shall be determined by taking into
account under subparagraph (A)(i) only
the fees paid by such person, and
[(iii) such penalty shall be in
addition to the penalty imposed on any
other person for failing to register
such shelter.
[(b) Failure to Furnish Tax Shelter Identification Number.--
[(1) Sellers, etc.--Any person who fails to furnish
the identification number of a tax shelter which such
person is required to furnish under section 6111(b)(1)
shall pay a penalty of $100 for each such failure.
[(2) Failure to include number on return.--Any person
who fails to include an identification number on a
return on which such number is required to be included
under section 6111(b)(2) shall pay a penalty of $250
for each such failure, unless such failure is due to
reasonable cause.]
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).
SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION
INFORMATION WITH RETURN.
(a) Imposition of Penalty.--Any person who fails to include
on any return or statement any information with respect to a
reportable transaction which is required under section 6011 to
be included with such return or statement shall pay a penalty
in the amount determined under subsection (b).
(b) Amount of Penalty.--
(1) In general.--Except as provided in paragraph (2),
the amount of the penalty under subsection (a) shall
be--
(A) $10,000 in the case of a natural person,
and
(B) $50,000 in any other case.
(2) Listed transaction.--The amount of the penalty
under subsection (a) with respect to a listed
transaction shall be--
(A) $100,000 in the case of a natural person,
and
(B) $200,000 in any other case.
(c) Definitions.--For purposes of this section--
(1) Reportable transaction.--The term ``reportable
transaction'' means any transaction with respect to
which information is required to be included with a
return or statement because, as determined under
regulations prescribed under section 6011, such
transaction is of a type which the Secretary determines
as having a potential for tax avoidance or evasion.
(2) Listed transaction.--The term ``listed
transaction'' means a reportable transaction which is
the same as, or substantially similar to, a transaction
specifically identified by the Secretary as a tax
avoidance transaction for purposes of section 6011.
(d) Authority To Rescind Penalty.--
(1) In general.--The Commissioner of Internal Revenue
may rescind all or any portion of any penalty imposed
by this section with respect to any violation if--
(A) the violation is with respect to a
reportable transaction other than a listed
transaction, and
(B) rescinding the penalty would promote
compliance with the requirements of this title
and effective tax administration.
(2) No judicial appeal.--Notwithstanding any other
provision of law, any determination under this
subsection may not be reviewed in any judicial
proceeding.
(3) Records.--If a penalty is rescinded under
paragraph (1), the Commissioner shall place in the file
in the Office of the Commissioner the opinion of the
Commissioner or the head of the Office of Tax Shelter
Analysis with respect to the determination, including--
(A) a statement of the facts and
circumstances relating to the violation,
(B) the reasons for the rescission, and
(C) the amount of the penalty rescinded.
(e) Coordination With Other Penalties.--The penalty imposed
by this section shall be in addition to any other penalty
imposed by this title.
[SEC. 6708. FAILURE TO MAINTAIN LISTS OF INVESTORS IN POTENTIALLY
ABUSIVE TAX SHELTERS.
[(a) In General.--Any person who fails to meet any
requirement imposed by section 6112 shall pay a penalty of $50
for each person with respect to whom there is such a failure,
unless it is shown that such failure is due to reasonable cause
and not due to willful neglect. The maximum penalty imposed
under this subsection for any calendar year shall not exceed
$100,000.]
SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO
REPORTABLE TRANSACTIONS.
(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.
* * * * * * *
PART II--FAILURE TO COMPLY WITH CERTIAN INFORMATION REPORTING
REQUIREMENTS
* * * * * * *
SEC. 6724. WAIVER; DEFINITIONS AND SPECIAL RULES.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this part--
(1) Information return.--The term ``information
return'' means--
(A) * * *
(B) any return required by--
(i) section 6041A(a) or (b) (relating
to returns of direct sellers),
(ii) section 6043A(a) (relating to
returns relating to taxable mergers and
acquisitions),
[(ii)] (iii) section 6045(a) or (d)
(relating to returns of brokers),
[(iii)] (iv) section 6050H(a)
(relating to mortgage interest received
in trade or business from individuals),
[(iv)] (v) section 6050I(a) or (g)(1)
(relating to cash received in trade or
business, etc.),
[(v)] (vi) section 6050J(a) (relating
to foreclosures and abandonments of
security),
[(vi)] (vii) section 6050K(a)
(relating to exchanges of certain
partnership interests),
[(vii)] (viii) section 6050L(a)
(relating to returns relating to
certain dispositions of donated
property),
[(viii)] (ix) section 6050P (relating
to returns relating to the cancellation
of indebtedness by certain financial
entities),
[(ix)] (x) section 6050S (relating to
returns relating to payments for
qualified tuition and related
expenses),
[(x)] (xi) section 6050S (relating to
returns relating to payments for
qualified tuition and related
expenses),
[(xi)] (xii) section 6050T (relating
to returns relating to credit for
health insurance costs of eligible
individuals),
[(xii)] (xiii) section 6052(a)
(relating to reporting payment of wages
in the form of term-life insurance),
[(xiii)] (xiv) section 6053(c)(1)
(relating to reporting with respect to
certain tips),
[(xiv)] (xv) subsection (b) or (e) of
section 1060 (relating to reporting
requirements of transferors and
transferees in certain asset
acquisitions),
[(xv)] (xvi) subparagraph (A) or (C)
of subsection (c)(4) of section 4093
(relating to information reporting with
respect to tax on diesel and aviation
fuels),
[(xvi)] (xvii) section 4101(d)
(relating to information reporting with
respect to fuels taxes),
[(xvii)] (xviii) subparagraph (C) of
section 338(h)(10) (relating to
information required to be furnished to
the Secretary in case of elective
recognition of gain or loss), or
[(xviii)] (xix) ssection
264(f)(5)(A)(iv) (relating to reporting
with respect to certain life insurance
and annuity contracts), and
(2) Payee statement.--The term ``payee statement''
means any statement required to be furnished under--
(A) * * *
* * * * * * *
(F) subsections (b) and (d) of section 6043A
(relating to returns relating to taxable
mergers and acquisitions).
[(F)] (G) section 6044(e) (relating to
returns regarding payments of patronage
dividends),
[(G)] (H) section 6045(b) or (d) (relating to
returns of brokers),
[(H)] (I) section 6049(c) (relating to
returns regarding payments of interest),
[(I)] (J) section 6050A(b) (relating to
reporting requirements of certain fishing boat
operators),
[(J)] (K) section 6050H(d) (relating to
returns relating to mortgage interest received
in trade or business from individuals),
[(K)] (L) section 6050I(e) or paragraph (4)
or (5) of section 6050I(g) (relating to cash
received in trade or business, etc.),
[(L)] (M) section 6050J(e) (relating to
returns relating to foreclosures and
abandonments of security),
[(M)] (N) section 6050K(b) (relating to
returns relating to exchanges of certain
partnership interests),
[(N)] (O) section 6050L(c) (relating to
returns relating to certain dispositions of
donated property),
[(O)] (P) section 6050N(b) (relating to
returns regarding payments of royalties),
[(P)] (Q) section 6050P(d) (relating to
returns relating to the cancellation of
indebtedness by certain financial entities),
[(Q)] (R) section 6050Q(b) (relating to
certain long-term care benefits),
[(R)] (S) section 6050R(c) (relating to
returns relating to certain purchases of fish),
[(S)] (T) section 6051 (relating to receipts
for employees),
[(T)] (U) section 6052(b) (relating to
returns regarding payment of wages in the form
of group-term life insurance),
[(U)] (V) section 6053(b) or (c) (relating to
reports of tips),
[(V)] (W) section 6048(b)(1)(B) (relating to
foreign trust reporting requirements),
[(W)] (X) section 4093(c)(4)(B) (relating to
certain purchasers of diesel and aviation
fuels),
[(X)] (Y) section 408(i) (relating to reports
with respect to individual retirement plans) to
any person other than the Secretary with
respect to the amount of payments made to such
person,
[(Y)] (Z) section 6047(d) (relating to
reports by plan administrators) to any person
other than the Secretary with respect to the
amount of payments made to such person,
[(Z)] (AA) section 6050S(d) (relating to
returns relating to qualified tuition and
related expenses),
[(AA)] (BB) section 264(f)(5)(A)(iv)
(relating to reporting with respect to certain
life insurance and annuity contracts), or
[(BB)] (CC) section 6050T (relating to
returns relating to credit for health insurance
costs of eligible individuals).
* * * * * * *
CHAPTER 76--JUDICIAL PROCEEDINGS
* * * * * * *
Subchapter A--Civil Actions by the United States
Sec. 7401. Authorization.
* * * * * * *
[Sec. 7408. Action to enjoin promoters of abusive tax shelters,
etc.]
Sec. 7408. Actions to enjoin specified conduct related to tax
shelters and reportable transactions.
* * * * * * *
[SEC. 7408. ACTION TO ENJOIN PROMOTERS OF ABUSIVE TAX SHELTERS, ETC.
[(a) Authority to Seek Injunction.--A civil action in the
name of the United States to enjoin any person from further
engaging in conduct subject to penalty under section 6700
(relating to penalty for promoting abusive tax shelters, etc.)
or section 6701 (relating to penalties for aiding and abetting
understatement of tax liability) 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 conduct subject to penalty under
section 6700 or section 6701. 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 conduct
subject to penalty under section 6700 (relating to
penalty for promoting abusive tax shelters, etc.) or
section 6701 (relating to penalties for aiding and
abetting understatement of tax liability), 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 section 6700 or
section 6701.]
SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX SHELTERS
AND REPORTABLE TRANSACTIONS.
(a) Authority To Seek Injunction.--A civil action in the name
of the United States to enjoin any person from further engaging
in specified conduct may be commenced at the request of the
Secretary. Any action under this section shall be brought in
the district court of the United States for the district in
which such person resides, has his principal place of business,
or has engaged in specified conduct. The court may exercise its
jurisdiction over such action (as provided in section 7402(a))
separate and apart from any other action brought by the United
States against such person.
(b) Adjudication and Decree.--In any action under subsection
(a), if the court finds--
(1) that the person has engaged in any specified
conduct, and
(2) that injunctive relief is appropriate to prevent
recurrence of such conduct,
the court may enjoin such person from engaging in such conduct
or in any other activity subject to penalty under this title.
(c) Specified Conduct.--For purposes of this section, the
term ``specified conduct'' means any action, or failure to take
action, subject to penalty under section 6700, 6701, 6707, or
6708.
[(c)] (d) Citizens and Residents Outside the United States.--
If any citizen or resident of the United States does not reside
in, and does not have his principal place of business in, any
United States judicial district, such citizen or resident shall
be treated for purposes of this section as residing in the
District of Columbia.
* * * * * * *
CHAPTER 77--MISCELLANEOUS PROVISIONS
* * * * * * *
SEC. 7525. CONFIDENTIALITY PRIVILEGES RELATING TO TAXPAYER
COMMUNICATIONS.
(a) * * *
[(b) Section Not to Apply to Communications Regarding
Corporate Tax Shelters.--The privilege under subsection (a)
shall not apply to any written communication between a
federally authorized tax practitioner and a director,
shareholder, officer, or employee, agent, or representative of
a corporation in connection with the promotion of the direct or
indirect participation of such corporation in any tax shelter
(as defined in section 6662(d)(2)(C)(iii)).]
(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)).
* * * * * * *
SEC. 7528. INTERNAL REVENUE SERVICE USER FEES.
(a) * * *
* * * * * * *
(c) Termination.--No fee shall be imposed under this section
with respect to requests made after [December 31, 2004]
September 30, 2013.
* * * * * * *
CHAPTER 79--DEFINITIONS
* * * * * * *
SEC. 7701. DEFINITIONS.
(a) When Used in this Title, Where Not Otherwise Distinctly
Expressed or Manifestly Incompatible With the Intent Thereof.--
(1) * * *
* * * * * * *
(19) Domestic building and loan association.--The
term ``domestic building and loan association'' means a
domestic building and loan association, a domestic
savings and loan association, and a Federal savings and
loan association--
(A) * * *
* * * * * * *
(C) at least 60 percent of the amount of the
total assets of which (at the close of the
taxable year) consists of--
(i) * * *
* * * * * * *
(ix) loans made for the payment of
expenses of college or university
education or vocational training, in
accordance with such regulations as may
be prescribed by the Secretary, and
(x) property used by the association
in the conduct of the business
described in subparagraph (B)[, and].
[(xi) any regular or residual
interest in a REMIC, and any regular
interest in a FASIT, but only in the
proportion which the assets of such
REMIC or FASIT consist of property
described in any of the preceding
clauses of this subparagraph; except
that if 95 percent or more of the
assets of such REMIC or FASIT are
assets described in clauses (i) through
(x), the entire interest in the REMIC
or FASIT shall qualify.]
* * * * * * *
(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.
[(n)] (o) Cross References.--
(1) * * *
* * * * * * *
SEC. 7704. CERTAIN PUBLICLY TRADED PARTNERSHIPS TREATED AS
CORPORATIONS.
(a) * * *
* * * * * * *
(d) Qualifying Income.--For purposes of this section--
(1) * * *
* * * * * * *
(4) Certain income qualifying under regulated
investment company or real estate trust provisions.--
The term ``qualifying income'' also includes any income
which would qualify under section [851(b)(2)]
851(b)(2)(A) or 856(c)(2).
* * * * * * *
CHAPTER 80--GENERAL RULES
* * * * * * *
Subchapter C--Provisions Affecting More Than One Subtitle
Sec. 7871. Indian tribal governments treated as States for
certain purposes.
* * * * * * *
Sec. 7874. Rules relating to expatriated entities and their
foreign parents.
* * * * * * *
SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES AND THEIR FOREIGN
PARENTS.
(a) Tax on Inversion Gain of Expatriated Entities.--
(1) In general.--The taxable income of an expatriated
entity for any taxable year which includes any portion
of the applicable period shall in no event be less than
the inversion gain of the entity for the taxable year.
(2) Expatriated entity.--For purposes of this
subsection--
(A) In general.--The term ``expatriated
entity'' means--
(i) the domestic corporation or
partnership referred to in subparagraph
(B)(i) with respect to which a foreign
corporation is a surrogate foreign
corporation, and
(ii) any United States person who is
related (within the meaning of section
267(b) or 707(b)(1)) to a domestic
corporation or partnership described in
clause (i).
(B) Surrogate foreign corporation.--A foreign
corporation shall be treated as a surrogate
foreign corporation if, pursuant to a plan (or
a series of related transactions)--
(i) the entity completes after March
4, 2003, the direct or indirect
acquisition of substantially all of the
properties held directly or indirectly
by a domestic corporation or
substantially all of the properties
constituting a trade or business of a
domestic partnership,
(ii) after the acquisition at least
60 percent of the stock (by vote or
value) of the entity is held--
(I) in the case of an
acquisition with respect to a
domestic corporation, by former
shareholders of the domestic
corporation by reason of
holding stock in the domestic
corporation, or
(II) in the case of an
acquisition with respect to a
domestic partnership, by former
partners of the domestic
partnership by reason of
holding a capital or profits
interest in the domestic
partnership, and
(iii) after the acquisition the
expanded affiliated group which
includes the entity does not have
substantial business activities in the
foreign country in which, or under the
law of which, the entity is created or
organized, when compared to the total
business activities of such expanded
affiliated group.
An entity otherwise described in clause (i)
with respect to any domestic corporation or
partnership trade or business shall be treated
as not so described if, on or before March 4,
2003, such entity acquired directly or
indirectly more than half of the properties
held directly or indirectly by such corporation
or more than half of the properties
constituting such partnership trade or
business, as the case may be.
(b) Definitions and Special Rules.--
(1) Expanded affiliated group.--The term ``expanded
affiliated group'' means an affiliated group as defined
in section 1504(a) but without regard to section
1504(b)(3), except that section 1504(a) shall be
applied by substituting ``more than 50 percent'' for
``at least 80 percent'' each place it appears.
(2) Certain stock disregarded.--There shall not be
taken into account in determining ownership under
subsection (a)(2)(B)(ii)--
(A) stock held by members of the expanded
affiliated group which includes the foreign
corporation, or
(B) stock of such foreign corporation which
is sold in a public offering related to the
acquisition described in subsection
(a)(2)(B)(i).
(3) Plan deemed in certain cases.--If a foreign
corporation acquires directly or indirectly
substantially all of the properties of a domestic
corporation or partnership during the 4-year period
beginning on the date which is 2 years before the
ownership requirements of subsection (a)(2)(B)(ii) are
met, such actions shall be treated as pursuant to a
plan.
(4) Certain transfers disregarded.--The transfer of
properties or liabilities (including by contribution or
distribution) shall be disregarded if such transfers
are part of a plan a principal purpose of which is to
avoid the purposes of this section.
(5) Special rule for related partnerships.--For
purposes of applying subsection (a)(2)(B)(ii) to the
acquisition of a trade or business of a domestic
partnership, except as provided in regulations, all
partnerships which are under common control (within the
meaning of section 482) shall be treated as 1
partnership.
(6) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to determine whether
a corporation is a surrogate foreign corporation,
including regulations--
(A) to treat warrants, options, contracts to
acquire stock, convertible debt interests, and
other similar interests as stock, and
(B) to treat stock as not stock.
(c) Other Definitions.--For purposes of this section--
(1) Applicable period.--The term ``applicable
period'' means the period--
(A) beginning on the first date properties
are acquired as part of the acquisition
described in subsection (a)(2)(B)(i), and
(B) ending on the date which is 10 years
after the last date properties are acquired as
part of such acquisition.
(2) Inversion gain.--The term ``inversion gain''
means the income or gain recognized by reason of the
transfer during the applicable period of stock or other
properties by an expatriated entity, and any income
received or accrued during the applicable period by
reason of a license of any property by an expatriated
entity --
(A) as part of the acquisition described in
subsection (a)(2)(B)(i), or
(B) after such acquisition if the transfer or
license is to a foreign related person.
Subparagraph (B) shall not apply to property described
in section 1221(a)(1) in the hands of the expatriated
entity.
(3) Foreign related person.--The term ``foreign
related person'' means, with respect to any expatriated
entity, a foreign person which--
(A) is related (within the meaning of section
267(b) or 707(b)(1)) to such entity, or
(B) is under the same common control (within
the meaning of section 482) as such entity.
(d) Special Rules.--
(1) Credits not allowed against tax on inversion
gain.--Credits (other than the credit allowed by
section 901) shall be allowed against the tax imposed
by this chapter on an expatriated entity for any
taxable year described in subsection (a) only to the
extent such tax exceeds the product of--
(A) the amount of the inversion gain for the
taxable year, and
(B) the highest rate of tax specified in
section 11(b)(1).
For purposes of determining the credit allowed by
section 901, inversion gain shall be treated as from
sources within the United States.
(2) Special rules for partnerships.--In the case of
an expatriated entity which is a partnership--
(A) subsection (a)(1) shall apply at the
partner rather than the partnership level,
(B) the inversion gain of any partner for any
taxable year shall be equal to the sum of--
(i) the partner's distributive share
of inversion gain of the partnership
for such taxable year, plus
(ii) gain recognized for the taxable
year by the partner by reason of the
transfer during the applicable period
of any partnership interest of the
partner in such partnership to the
surrogate foreign corporation, and
(C) the highest rate of tax specified in the
rate schedule applicable to the partner under
this chapter shall be substituted for the rate
of tax referred to in paragraph (1).
(3) Coordination with section 172 and minimum tax.--
Rules similar to the rules of paragraphs (3) and (4) of
section 860E(a) shall apply for purposes of subsection
(a).
(4) Statute of limitations.--
(A) In general.--The statutory period for the
assessment of any deficiency attributable to
the inversion gain of any taxpayer for any pre-
inversion year shall not expire before the
expiration of 3 years from the date the
Secretary is notified by the taxpayer (in such
manner as the Secretary may prescribe) of the
acquisition described in subsection
(a)(2)(B)(i) to which such gain relates and
such deficiency may be assessed before the
expiration of such 3-year period
notwithstanding the provisions of any other law
or rule of law which would otherwise prevent
such assessment.
(B) Pre-inversion year.--For purposes of
subparagraph (A), the term ``pre-inversion
year'' means any taxable year if--
(i) any portion of the applicable
period is included in such taxable
year, and
(ii) such year ends before the
taxable year in which the acquisition
described in subsection (a)(2)(B)(i) is
completed.
(e) Special Rule for Treaties.--Nothing in section 894 or
7852(d) or in any other provision of law shall be construed as
permitting an exemption, by reason of any treaty obligation of
the United States heretofore or hereafter entered into, from
the provisions of this section.
(f) Regulations.--The Secretary shall provide such
regulations as are necessary to carry out this section,
including regulations providing for such adjustments to the
application of this section as are necessary to prevent the
avoidance of the purposes of this section, including the
avoidance of such purposes through--
(1) the use of related persons, pass-through or other
noncorporate entities, or other intermediaries, or
(2) transactions designed to have persons cease to be
(or not become) members of expanded affiliated groups
or related persons.
* * * * * * *
----------
SECTION 209 OF THE SOCIAL SECURITY ACT
DEFINITION OF WAGES
Sec. 209. (a) For the purposes of this title, the term
``wages'' means remuneration paid prior to 1951 which was wages
for the purposes of this title under the law applicable to the
payment of such remuneration, and remuneration paid after 1950
for employment, including the cash value of all remuneration
(including benefits) paid in any medium other than cash; except
that, in the case of remuneration paid after 1950, such term
shall not include--
(1)(A) * * *
* * * * * * *
(17) Any benefit provided to or on behalf of an
employee if at the time such benefit is provided it is
reasonable to believe that the employee will be able to
exclude such benefit from income under section 74(c),
117, or 132 of the Internal Revenue Code of 1986; [or]
(18) Remuneration consisting of income excluded from
taxation under section 7873 of the Internal Revenue
Code of 1986 (relating to income derived by Indians
from exercise of fishing rights)[.]; or
(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.
* * * * * * *
----------
TITLE 31, UNITED STATES CODE
* * * * * * *
CHAPTER 3--DEPARTMENT OF THE TREASURY
* * * * * * *
SUBCHAPTER II--ADMINISTRATIVE
* * * * * * *
Sec. 330. Practice before the Department
(a) * * *
* * * * * * *
(b) After notice and opportunity for a proceeding, the
Secretary may suspend or disbar from practice before the
Department, or censure, a representative who--
(1) * * *
* * * * * * *
The Secretary may impose a monetary penalty on any
representative described in the preceding sentence. If the
representative was acting on behalf of an employer or any firm
or other entity in connection with the conduct giving rise to
such penalty, the Secretary may impose a monetary penalty on
such employer, firm, or entity if it knew, or reasonably should
have known, of such conduct. Such penalty shall not exceed the
gross income derived (or to be derived) from the conduct giving
rise to the penalty. Any such penalty imposed on an individual
may be in addition to, or in lieu of, any suspension,
disbarment, or censure of such individual.
* * * * * * *
(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.
* * * * * * *
CHAPTER 53--MONETARY TRANSACTIONS
* * * * * * *
SUBCHAPTER II--RECORDS AND REPORTS ON MONETARY INSTRUMENTS TRANSACTIONS
* * * * * * *
Sec. 5321. Civil penalties
(a)(1) * * *
* * * * * * *
[(5) Foreign Financial Agency Transaction Violation.--
[(A) Penalty authorized.--The Secretary of the
Treasury may impose a civil money penalty on any person
who willfully violates or any person willfully causing
any violation of any violation of any provision of
section 5314.
[(B) Maximum amount limitation.--The amount of any
civil money penalty imposed under subparagraph (A)
shall not exceed--
[(i) in the case of violation of such section
involving a transaction, the greater of--
[(I) the amount (not to exceed
$100,000) of the transaction; or
[(II) $25,000; and
[(ii) in the case of violation of such
section involving a failure to report the
existence of an account or any identifying
information required to be provided with
respect to such account, the greater of--
[(I) an amount (not to exceed
$100,000) equal to the balance in the
account at the time of the violation;
or
[(II) $25,000.]
(5) Foreign financial agency transaction violation.--
(A) Penalty authorized.--The Secretary of the
Treasury may impose a civil money penalty on
any person who violates, or causes any
violation of, any provision of section 5314.
(B) Amount of penalty.--
(i) In general.--Except as provided
in subparagraph (C), the amount of any
civil penalty imposed under
subparagraph (A) shall not exceed
$5,000.
(ii) Reasonable cause exception.--No
penalty shall be imposed under
subparagraph (A) with respect to any
violation if--
(I) such violation was due to
reasonable cause, and
(II) the amount of the
transaction or the balance in
the account at the time of the
transaction was properly
reported.
(C) Willful violations.--In the case of any
person willfully violating, or willfully
causing any violation of, any provision of
section 5314--
(i) the maximum penalty under
subparagraph (B)(i) shall be increased
to the greater of--
(I) $25,000, or
(II) the amount (not
exceeding $100,000) determined
under subparagraph (D), and
(ii) subparagraph (B)(ii) shall not
apply.
(D) Amount.--The amount determined under this
subparagraph is--
(i) in the case of a violation
involving a transaction, the amount of
the transaction, or
(ii) in the case of a violation
involving a failure to report the
existence of an account or any
identifying information required to be
provided with respect to an account,
the balance in the account at the time
of the violation.
* * * * * * *
----------
SECTION 13031 OF THE CONSOLIDATED OMNIBUS BUDGET RECONCILIATION ACT OF
1985
SEC. 13031. FEES FOR CERTAIN CUSTOMS SERVICES.
(a) Schedule of Fees.--In addition to any other fee
authorized by law, the Secretary of the Treasury shall charge
and collect the following fees for the provision of customs
services in connection with the following:
(1) * * *
* * * * * * *
(5)(A) * * *
(B) For the arrival of each passenger aboard a
commercial vessel from a place referred to in
subsection (b)(1)(A)(i) of this section, [$1.75] $1.75.
(b) Limitations on Fees.--(1)(A) Except as provided in
subsection (a)(5)(B) of this section, no fee may be charged
under subsection (a) of this section for customs services
provided in connection with--
(i) * * *
* * * * * * *
(iii) the arrival of a ferry, except for a ferry
whose operations begin on or after August 1, 1999, and
that operates south of 27 degrees latitude and east of
89 degrees longitude; or
* * * * * * *
(7) No fee may be charged under [paragraphs] paragraph (2),
(3), or (4) of subsection (a) for the arrival of any--
(A) * * *
* * * * * * *
(9)(A) * * *
* * * * * * *
(B)(i) Beginning in fiscal year 2004, the Secretary of the
Treasury may adjust (not more than once per fiscal year) the
amount described in subparagraph (A)(ii) to an amount that is
not less than $.35 and not more than $1.00 per individual
airway bill or bill of lading. The Secretary shall provide
notice in the Federal Register of a proposed adjustment under
the preceding sentence and the reasons therefor and shall allow
for public comment on the proposed adjustment.
(ii) Notwithstanding section 451 of the Tariff Act of 1930,
the payment required by subparagraph (A)(ii) shall be the only
payment required for reimbursement of the Customs Service in
connection with the processing of an individual airway bill or
bill of lading in accordance with such subparagraph and for
providing services at express consignment carrier facilities or
centralized hub facilities, except that the Customs Service may
require such facilities to cover expenses of the Customs
Service for adequate office space, equipment, furnishings,
supplies, and security.
(iii)(I) The payment required by subparagraph (A)(ii) and
clause (ii) of this subparagraph shall be paid on a quarterly
basis by the carrier using the facility to the Customs Service
in accordance with regulations prescribed by the Secretary of
the Treasury.
(II) 50 percent of the amount of payments received under
subparagraph (A)(ii) and clause (ii) of this subparagraph
shall, in accordance with section 524 of the Tariff Act of
1930, be deposited in the Customs User Fee Account and shall be
used to directly reimburse each appropriation for the amount
paid out of that appropriation for the costs incurred in
providing services to express consignment carrier facilities or
centralized hub facilities. Amounts deposited in accordance
with the preceding sentence shall be available until expended
for the provision of customs services to express consignment
carrier facilities or centralized hub facilities.
(III) Notwithstanding section 524 of the Tariff Act of 1930,
the remaining 50 percent of the amount of payments received
under subparagraph (A)(ii) and clause (ii) of this subparagraph
shall be paid to the Secretary of the Treasury, which is in
lieu of the payment of fees under subsection (a)(10) of this
section.
* * * * * * *
(e) Provision of Customs Services.--
(1) * * *
(2)(A) * * *
(B) Subparagraph (C) of paragraph (6) shall not apply with
respect to any foreign trade zone or subzone that is located
at, or in the vicinity of, an airport to which section 236 of
the Trade and Tariff Act of 1984 applies.
* * * * * * *
(f) Disposition of Fees.--(1) There is established in the
general fund of the Treasury a separate account which shall be
known as the ``Customs User Fee Account''. Notwithstanding
section 524 of the Tariff Act of 1930 (19 U.S.C. 1524), there
shall be deposited as offsetting receipts into the Customs User
Fee Account all fees collected under subsection (a) except--
(A) * * *
(B) amounts deposited into the Customs Commercial and
Homeland Security Automation Account under paragraph
(5).
(2) Except as otherwise provided in this subsection, all
funds in the Customs User Fee Account shall be available, to
the extent provided for in appropriations Acts, to pay the
costs (other than costs for which direct reimbursement under
paragraph (3) is required) incurred by the United States
Customs Service in conducting [commercial operations,
including, but not limited to, all costs associated with
commercial passenger, vessel, vehicle, aircraft, and cargo
processing.] 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. So long as there is a surplus of funds in the
Customs User Fee Account, the Secretary of the Treasury may not
reduce personnel staffing levels for providing commercial
clearance and preclearance services.
(3)(A) * * *
* * * * * * *
(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).
* * * * * * *
(j) Effective Dates.--(1) * * *
* * * * * * *
[(3) Fees may not be charged under subsection (a) after March
1, 2005.]
(3)(A) Fees may not be charged under paragraphs (9) and (10)
of subsection (a) after September 30, 2013.
(B)(i) Subject to clause (ii), Fees may not be charged under
paragraphs (1) through (8) of subsection (a) after September
30, 2013.
(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.
* * * * * * *
VII. DISSENTING VIEWS
There are many issues that deeply divide the two parties in
Congress. Issues like privatization of Medicare and Social
Security, unemployment benefits, health insurance for the
uninsured, funding of education programs, and fiscally
irresponsible tax cuts define the differences between the two
parties. We welcome an energetic, partisan dispute on those
issues.
However, we do not believe that the issue of how to respond
to the European challenge to our export-related tax benefits,
called Foreign Sales Corporations/Extra-Territorial Income
(FSC/ETI), should be the subject of a partisan dispute. There
should not be a Democratic or Republican response to a
challenge from our foreign competitors. There should be an
American position to respond to the European position.
This is not the first time that our export-related tax
benefits have been subject to a challenge by our foreign
competitors. In the past, such challenges were met with a
bipartisan, unified American response. We did not show our
divisions, nor did Americans share legal briefs, with our
opponents.
Unfortunately, there was a unilateral choice made last year
to use this issue to enact an unrelated, partisan agenda. That
agenda involved a long list of liberalizations to the tax rules
that apply to the overseas operations of our multinationals.
Essentially, the choice last year was to increase taxes on
domestic manufacturers (through repeal of FSC/ETI) and use the
money to subsidize offshore operations of U.S. multinationals.
As a country, we have paid a heavy price for that
unilateral decision. It has delayed our response to the World
Trade Organization (WTO) ruling by over a year, creating the
potential for imposition of trade sanctions on our exports.
During that one-year period, there has been an unrelenting
attack on the substance of many of the provisions that have now
been included in the Committee bill. Those attacks, in effect,
have shared legal briefs and arguments that our European
competitors now can use to challenge the U.S. response.
It need not have been handled that way. Congressmen Crane,
Rangel, Manzullo and Levin introduced legislation (H.R. 1769)
which demonstrates that a bipartisan, unified American response
to the WTO challenge is possible. That legislation has
approximately 150 cosponsors, equally divided between parties.
We had been hopeful that we could at least support the
domestic manufacturing part of the Chairman's bill.
Unfortunately, the Chairman decided not to include the
substance of H.R. 1769. Instead, he included a deeply flawed
provision that provides special interest benefits to large
architectural and engineering companies like Bechtel and
Halliburton.
Even if the Committee bill had included H.R. 1769, we could
not support it because it includes many other provisions
unrelated to the FSC/ETI issues. It is another fiscally
irresponsible tax cut that threatens U.S. jobs. It is a bill
that is dead on arrival in the Senate, creating the possibility
of an impasse that could result in trade sanctions. It
continues to use this trade dispute to enact an unrelated
agenda, an agenda that threatens U.S. jobs. Following is an
elaboration of our reasons for opposition.
1. BUDGET IMPACT
The Committee bill is another in a series of reckless tax
bills that have resulted in unprecedented deficits. The
Committee bill is estimated to add at least another $60 billion
to projected Federal deficits over the next 10 years. However,
the real cost of the bill will be far larger. The Committee
bill resorts to long phase-ins, delayed effective dates, and
temporary provisions to reduce its official score.
The tricks that have been used to hide the true cost of the
bill are evident when one reviews the Joint Committee on
Taxation revenue table that estimates a revenue loss of almost
$12 billion in fiscal year 2013, a loss that is growing year-
by-year. More than half of the revenue losses would occur in
the last three years of the 10 year budget window. In addition,
outyear costs will be even higher because some of the offsets
in the bill are slated to expire at the end of 2013, while the
tax cuts are permanent.
All this gimmickry is occurring at a time when the
Congressional Budget Office (CBO) projects unprecedented
deficits. The most recent CBO budget projections make it clear
that the deficits are not temporary. Instead, they are
structural and will not fade away even if we experience good
economic growth. The official projections of $1.4 trillion in
deficits over the next 10 years ignore the fact that the
deficits would be $3.8 trillion if the Administration had not
abandoned its commitment to wall-off the Social Security
surpluses. Most private estimators suggest that the deficits
will be in the range of $4-5 trillion over the next 10 years.
Those projections would be in the range of $6.4-7.4 trillion if
Social Security surpluses were walled off.
As a result of the last two years of Republican tax policy,
our tax laws are gimmick-ridden. To artificially reduce the
official cost of their bills, Republicans have resorted to a
vast assortment of gimmicks, such as long phase-ins, temporary
provisions, delayed effective dates, and sunsets. As a result,
we have a tax law that is extraordinarily unstable. It is
difficult to predict exactly what our law will be in the
future. Since businesses and other taxpayers cannot make plans
on the basis of an unstable tax law, it is doubtful that many
of the tax incentives enacted by the Congress will have any
real positive effect. The Committee bill makes a bad situation
worse.
2. SUBSIDIES FOR OFFSHORE OPERATIONS
The Committee bill provides approximately $40 billion in
net tax cuts for the overseas operations of U.S.
multinationals. That amount represents approximately two-thirds
of the total cost of the bill.
These additional tax benefits for the offshore operations
of U.S. multinationals are being considered at a time when the
manufacturing sector of our economy is in a crisis of historic
proportions. Over the last year, our economy has lost nearly
700,000 manufacturing jobs. Of the 2.7 million jobs the economy
has lost during this Bush presidency, 2.5 million of those were
in manufacturing. For 38 straight months, the manufacturing
sector of our economy has lost jobs, the longest such stretch
since the Great Depression.
The Committee bill responds to the loss of domestic
manufacturing jobs by expanding tax benefits for the offshore
operations of U.S. multinationals. The Committee bill ignores
the fact that FSC/ETI, and their predecessor, Domestic
International Sales Corporations (DISC), were enacted because
our foreign tax rules already were so generous that they
operated to disadvantage U.S. producers. The following excerpt
from the 1971 House Committee report makes this clear.
This [i.e., the DISC provision] is important not only
because of its stimulative effect but also remove a
present disadvantage of U.S. companies engaged in
export activities through domestic corporations.
Presently, they are treated less favorably than those
which manufacture abroad through the use of foreign
subsidiary corporations.
Our international tax rules have long been one of our most
contentious tax issues. Optimally, our foreign tax rules should
be a balance between a desire to ensure that U.S.
multinationals are competitive overseas and the desire not to
create incentives for U.S. companies to move operations out of
the United States. Unfortunately, our rules are sadly out of
balance, and they now contribute to the growing flight of
manufacturing jobs from the United States.
In 2001, the American Enterprise Institute published an
article by two economists (one of whom is a Treasury economist)
that analyzed the impact of adopting a territorial tax system
in the United States, similar to the system used by some
foreign countries. Under a territorial system, the foreign
active business earnings of our multinationals would be totally
exempt from federal income tax. Surprisingly, the article
concluded that providing such a total exemption would increase,
not decrease, the U.S. taxes paid by our multinationals. The
classic definition of a negative income tax is a tax system
which provides greater benefits than a total exemption from tax
would provide. Using that definition, there is an overall
negative tax on the overseas business operations of U.S.
companies.
The surprising conclusion of the 2001 article was validated
in 2002 when a group of 32 large U.S. multinationals published
a study on whether the U.S. should adopt a territorial system.
Those multinationals concluded that ``on balance'' providing
them with a total exemption from tax on their foreign business
operations would be unwise. The only logical assumption is that
those companies, like the two Treasury economists, concluded
that an exemption system would provide fewer benefits than the
current tax system provides.
Again, it is worth emphasizing that our export-related tax
benefits (currently the FSC/ETI provisions) were enacted by the
Congress because our tax laws disadvantage U.S. producers
because the rules are much more generous overseas. Currently,
there is an overall negative tax on the active business
operations of our multinationals. Increasing the size of that
negative tax, as proposed by the Committee bill, will simply
accelerate the movement of manufacturing jobs out of the United
States.
3. SMALL NET BENEFITS FOR U.S. MANUFACTURERS
The main benefit in the Committee bill for U.S.
manufacturers is a $61 billion rate adjustment if one assumes
that all of that rate reduction really goes to profits from
manufacturing actually taking place in the United States.
However, the bill also repeals FSC/ETI, a benefit that is
almost exclusively enjoyed by U.S. manufacturers. Therefore,
the net benefit for U.S. manufacturers in the bill is $18
billion, less than one-third of its $60 billion cost.
The share of the cost enjoyed by U.S. manufacturers shrinks
over time. In 2013, U.S. manufacturers receive a net tax cut of
$2.5 billion, slightly more than 20% of the total net cut
provided by the bill.
4. BILL UNLIKELY TO PASS SENATE
The Committee bill does not even accomplish the goal of
bringing our tax laws into compliance with the WTO ruling. The
Senate has made it quite clear that any legislation on this
issue will be revenue neutral. Therefore, it is unlikely that
the House bill will receive serious consideration in the
Senate. Some have suggested that the House is not bound by the
Senate views and should exercise its prerogative. Individuals
making that argument have also argued strenuously that we must
respect the views of the European Union. We would suggest that
we should treat the views of the Senate with the same respect
that we accord the views of foreign countries. The bill will
have to be revenue neutral to pass the United States Senate
and, therefore, it is important for the House to develop
revenue neutral legislation.
Our opposition to the Committee bill is made easy by the
fact that there is a simple, revenue-neutral alternative that
could resolve the trade dispute and protect U.S. jobs. Rep.
Rangel offered that alternative in Committee. It is based on
the Senate Finance Committee bill and would facilitate Senate
action. His alternative contains the following elements.
(1) The alternative would contain a rate reduction for all
U.S. manufacturers, including subchapter S corporations,
partnerships and proprietorships. The rate adjustment would be
3.5 points.
(2) The alternative would be revenue neutral, using the
money from repeal of FSC/ETI, customs user fees extension, and
Enron-related tax shelter provisions. This is essentially the
approach followed by the Senate Finance Committee. The
alternative is structured so that it does not have large,
growing out-year costs.
(3) The alternative would provide farms, and other small
business manufacturers with a permanent tax benefit worth
approximately $15 billion over 10 years. The only benefit for
non-corporate taxpayers in the Committee bill is a temporary
extension of an existing provision. The alternative would also
extend that provision.
(4) The alternative includes provisions that reward
companies for keeping jobs in the United States. It contains
none of the provisions from the Committee bill that reward
companies for moving jobs offshore.
The Republicans who opposed the Rangel substitute in the
Committee voted for a bill that would provide fewer benefits
for most taxable corporations operating in the United States
and voted for a bill that would provide fewer benefits for all
subchapter S corporations, farmers, farm cooperatives, and
other unincorporated U.S. businesses. They voted for a bill
that would create a partisan impasse that could threaten trade
sanctions. They may wish to reconsider that decision on the
Floor.
FACTUAL COMPARISON OF FSC/ETI RANGEL SUBSTITUTE TO THOMAS BILL
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
1. Effect on deficit................. Substitute is revenue neutral with no Thomas bill officially is
ballooning out-year revenue cost. scored as costing about $60
Substitute is consistent with Bush billion. True cost of bill
Administration position that FSC/ETI is far higher. Bill contains
legislation should be revenue neutral long phase ins and temporary
tax provisions to hide true
costs. Even with those
gimmicks, Thomas bill has
large ballooning out-year
revenue costs, approximately
$12 billion per year. Thomas
bill is inconsistent with
Bush Administration position
that FSC/ETI legislation
should be revenue neutral
2. Subsidies for companies that move Substitute includes no provisions that Thomas bill contains an
jobs offshore. provide additional tax benefits for additional $40 billion of
companies with offshore business tax benefits for the
operations. Corporate rate reduction in offshore business operations
substitute is structured to reward of U.S. multinationals. Bill
companies that keep their jobs in the substantially liberalizes
United States current law rules limiting
cross-crediting of foreign
taxes, in effect providing
tax credits for moving
business operations
offshore. Thomas bill
corporate rate reduction is
not designed to reward
companies keeping jobs in
U.S.
3. Rate reductions for manufacturing Substitute provides a ten percent across- Thomas bill provides 3 point
activities of taxable corporations. the-board corporate rate reduction for rate reduction for large
income from U.S. manufacturing corporations (from 35% to
activities. Large corporations receive 32%) and a 2 point reduction
3.5 point reduction, from 35% to 31.5%. for small corporations from
Smaller corporations receive 3.4 point 34% to 32%. Benefits for
reduction from 34% to 30.6%. Benefits for large corporations phasein
large and small corporations are phased much more rapidly than for
in at the same pace. Rate reductions are small corporations. Rate
adjusted to reward companies keeping jobs reductions for large
in U.S. None of the benefits of the rate corporations fully take
reductions in Rangel substitute are taken effect in 2007. Rate
back through imposition of new corporate reductions for small
surtaxes corporations do not fully
take effect until 2012.
Benefits for small
corporations are taken back
through imposition of new
corporate surtax. Rate
reductions are not
structured to reward
companies for keeping jobs
in U.S.
4. Benefits for subchapter S A. Substitute includes 2-year extension of A. Thomas bill includes 2-
corporations and other non-corporate current law small business expensing year extension of current
taxpayers. benefits law small business expensing
benefits.
B. Substitute provides 3.5 point rate B. Thomas bill includes no
reduction for shareholders of subchapter rate adjustment for
S corporations and other non-corporate subchapter S corporations
taxpayers engaged in farming business or and other non-corporate
in other businesses involving the taxpayers. The only rate
production of tangible goods reductions in the Thomas
bill are for taxable
corporations, with biggest
benefit for large
corporations.
5. Benefits for farmers.............. Under substitute, farmers are eligible for Thomas bill provides no rate
a 3.5 point rate reduction, and farmer reduction for farmers and no
cooperatives receive benefits consistent benefits for farm coops
with their treatment under ETI other than a small $14
million provision.
6. Repeal of FSC/ETI................. Substitute repeals FSC/ETI with binding Thomas bill provides binding
contract transition rules and 3-year contract relief and three-
general transition relief. General year general transition. The
transition relief structured to be WTO general transition is not
compatible WTO compatible.
7. Special interest provisions....... A. Substitute provides benefits only for A. Thomas bill provides rate
manufacturers. Service companies are not reduction for companies like
eligible Halliburton and Bechtel that
provide engineering and
architectural services. No
other service companies are
eligible.
B. Substitute contains no miscellaneous B. Thomas bill contains
tax benefits numerous miscellaneous tax
benefits.
----------------------------------------------------------------------------------------------------------------
Charles B. Rangel.
Max Sandlin.
Jim McDermott.
Michael R. McNulty.
Stephanie Tubbs Jones.
Ben Cardin.
Jerry Kleczka.
John Tanner.
Earl Pomeroy.
Xavier Becerra.
John Lewis.
Richard E. Neal.
William J. Jefferson.
Sander Levin.
Robert T. Matsui.