American Jobs Creation Act of 2004

(This measure has not been amended since the Conference Report was filed in the House on October 7, 2004. The summary of that version is repeated here.)

American Jobs Creation Act of 2004 - Title I: Provisions Relating to Repeal of Exclusion for Extraterritorial Income - (Sec. 101) Amends the Internal Revenue Code to repeal the tax exclusion for extraterritorial income. Provides transitional relief for taxpayers subject to the repeal by allowing a tax exclusion for extraterritorial income of 80 percent in 2005 and 60 percent in 2006.

Permits foreign corporations to revoke elections to be treated as U.S. corporations for purposes of the extraterritorial income tax exclusion without recognition of gain or loss. Authorizes the Secretary of the Treasury to prescribe regulations to prevent abuse resulting from revoked elections.

Exempts from the repeal transactions in the ordinary course of a trade or business pursuant to certain binding contracts (including purchase, renewal, or replacement options) in effect on September 17, 2003, and thereafter.

(Sec. 102) Allows a tax deduction of nine percent of the lesser of a taxpayer's qualified production activities income or taxable income for the taxable year, beginning in 2010. Phases in the deduction at the rate of three percent in 2005 and 2006 and six percent for 2007, 2008, and 2009. Limits the amount of the deduction to 50 percent of W-2 wages (reportable gross employee wages) paid in a taxable year.

Defines "qualified production activities income" as the excess (if any) of domestic production gross receipts over the sum of the cost of goods sold allocable to such receipts, other deductions, expenses, or losses directly allocable to such receipts, and a ratable portion of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income. Includes within the definition of domestic production gross receipts qualifying production property (i.e., tangible personal property, any computer software, and certain sound recordings), any qualified film produced by the taxpayer, electricity, natural gas, or potable water produced by the taxpayer in the United States, construction performed in the United States, or engineering or architectural services for projects in the United States, but excludes the sale of certain food and beverages sold at retail and the transmission or distribution of electricity, natural gas, or potable water.

Sets forth special rules and definitions for qualified production activities income of passthrough entities and agricultural and horticultural cooperatives.

Allows the tax deduction for qualified production activities income for purposes of computing alternative minimum taxable income

Permits the revocation of a prior election to treat the cutting of timber as a sale or exchange.

Title II: Business Tax Incentives - Subtitle A: Small Business Expensing - (Sec. 201) Extends for two additional years (until 2008): (1) the increased expensing (full deduction of expenses in the taxable year in which the expenses are incurred) of small business assets (up to $100,000); (2) the increase (to $400,000) in the cost limitation for small business assets eligible for expensing; (3) the inflation adjustments for the increased expensing amount and the cost limitation amount; and (4) the eligibility period for the expensing of certain computer software.

Subtitle B: Depreciation - (Sec. 211) Allows a 15-year recovery period for the depreciation of certain leasehold improvements and restaurant property placed in service before January 1, 2006.

Subtitle C: Community Revitalization - (Sec. 221) Directs the Secretary of the Treasury to prescribe regulations designating certain targeted populations as low-income communities for purposes of the new markets tax credit. Treats a population census tract with a population of less than 2,000 as a low-income community if such tract is within an empowerment zone and is contiguous to one or more low-income communities.

(Sec. 222) Authorizes the Secretary of Housing and Urban Development to expand an area designated as a renewal community, for purposes of the tax incentives available to such communities, using specified criteria, including increased poverty rates based on 2000 census data.

(Sec. 223) Modifies the low-income test (85 percent, rather than 80 percent, of statewide median family income) for families in high migration (out-migration of at least ten percent of the population) rural counties, for purposes of the new markets tax credit.

Subtitle D: S Corporation Reform and Simplification - (Sec. 231) Allows a taxpayer election to treat members of a family as one shareholder for purposes of determining the number of shareholders in an S corporation.

(Sec. 232) Increases the allowable number of S corporation shareholders from 75 to 100.

(Sec. 233) Allows an individual retirement account (IRA), including a Roth IRA, to be a shareholder of a bank that is an S corporation. Exempts, under certain circumstances, the sale of bank stock held by an IRA from rules against prohibited retirement plan transactions.

(Sec. 234) Permits a disregard of unexercised powers of appointment for determining potential current beneficiaries of an electing small business trust (ESBT). Extends from 60 days to one year the period during which an ESBT can dispose of S corporation stock after an ineligible shareholder becomes a potential current beneficiary.

(Sec. 235) Allows a carryover of disallowed losses on S corporation stock resulting from transfers of such stock to a spouse incident to divorce.

(Sec. 236) Allows beneficiaries of a qualified subchapter S trust to deduct certain losses under the at-risk and passive loss rules when such trust sells S corporation stock.

(Sec. 237) Excludes certain interest and dividend income on assets held by a bank S corporation from passive investment income for purposes of applying the excess net passive income rules.

(Sec. 238) Allows the waiver of inadvertent invalid qualified subchapter S subsidiary elections and terminations made after December 31, 2004.

(Sec. 239) Expands the authority of the Secretary of the Treasury to require informational returns for qualified subchapter S subsidiaries.

(Sec. 240) Permits an employee stock ownership plan (ESOP) maintained by an S corporation to make distributions for repayments of loans used to purchase employer securities without incurring tax penalties. Makes this change effective for distributions made after December 31, 1997.

Subtitle E: Other Business Incentives - (Sec. 241) Phases out between 2005 and 2007 and repeals, effective January 1, 2007, the 4.3-cents-per-gallon General Fund excise tax on diesel fuel used in trains and fuels used in barges operating on the designated inland waterways system.

(Sec. 242) Allows the inclusion of participations and residuals in the adjusted basis of property for the taxable year in which such property is placed in service, for purposes of computing the allowable depreciation deduction for such property under the forecast method of depreciation. Requires such participations and residuals to relate to income estimated to be earned in connection with the property before the close of the tenth taxable year after the property is placed in service. Defines "participations and residuals" as costs the amount of which by contract varies with the amount of income earned in connection with such property.

(Sec. 243) Revises or repeals certain real estate investment trust (REIT) provisions relating to: (1) straight debt securities; (2) the limited rental exception; (3) the customary services exception; and (4) the treatment of certain hedging instruments. Increases from 90 to 95 the percentage of gross income test used to impose an additional tax for failure to meet certain REIT requirements.

(Sec. 244) Allows an election until 2009 to expense qualified film or television production costs up to $15 million ($20 million for costs incurred in certain low-income or distressed areas).

(Sec. 245) Allows a tax credit after 2004 and before 2008 for 50 percent of expenditures for railroad track maintenance. Limits the amount of such credit to the product of $3,500 and the number of miles of railroad track owned or leased by a taxpayer.

(Sec. 246) Suspends from July 1, 2005, until June 30, 2008, the occupational tax on distilled spirits, wine, and beer.

(Sec. 247) Excludes from treatment as acquisition indebtedness, for purposes of determining unrelated business taxable income, certain indebtedness incurred by a small business investment company licensed under the Small Business Investment Act of 1958.

(Sec. 248) Allows certain corporations engaged in international shipping activities to elect an alternative system of corporate income taxation based upon the net tonnage of the corporation's vessels.

Subtitle F: Stock Options and Employee Stock Purchase Plan Stock Options - (Sec. 251) Excludes from social security, unemployment, and railroad retirement taxes wages earned from the transfer of stock pursuant to the exercise of an incentive stock option or under an employee stock purchase plan or from any disposition of such stock. Eliminates withholding of tax requirements for certain dispositions of stock options.

Title III: Tax Relief for Agriculture and Small Manufacturers - Subtitle A: Volumetric Ethanol Excise Tax Credit - (Sec. 301) Eliminates reduced rates of excise tax for gasoline and certain alcohol-blended fuels. Allows a refundable credit against the gasoline excise tax for the sum of the alcohol fuel mixture credit and the biodiesel mixture credit. Defines "alcohol" to include methanol and ethanol, but not alcohol produced from petroleum, natural gas or coal (including peat), or alcohol with a proof of less than 190. Terminates the credit for the alcohol fuel mixture credit after 2010 and the biodiesel mixture credit after 2006.

Requires the Secretary of the Treasury to make refunds to taxpayers whose alcohol fuel mixture credit exceeds their gasoline excise tax liability within 45 days or pay interest on refund amounts. Allows electronic filing for certain refund claims.

Provides for the direct payment of excise tax receipts to the Highway Trust Fund (current law requires the retention of certain amounts of excise tax in the General Fund of the Treasury).

Requires the registration of taxpayers producing or importing biodiesel or alcohol.

Extends through 2010 the tax credit for alcohol used as fuel.

(Sec. 302) Allows a business tax credit for biodiesel used as fuel in the trade or business of a taxpayer. Terminates such credit after 2006.

(Sec. 303) Directs the Secretary to require any individual claiming benefits under the tax credits for alcohol and biodiesel used as fuel to file informational returns.

Subtitle B: Agricultural Incentives - (Sec. 311) Modifies involuntary conversion tax rules to extend from two to four years the replacement period for livestock sold due to drought, flood, or other weather-related conditions. Allows the Secretary to extend the replacement period on a regional basis if weather-related conditions continue for more than three years.

(Sec. 312) Provides that dividends on the capital stock or other proprietary capital interests of certain tax-exempt cooperatives shall not reduce the net earnings of such cooperatives.

(Sec. 313) Allows the apportionment of the small ethanol producer tax credit among patrons of a tax-exempt cooperative.

(Sec. 314) Revises rules for the computation of the regular tax liability of farmers and fishermen to exclude income averaging in computing alternative minimum tax liability.

(Sec. 315) Qualifies the outright sale of timber by landowners for capital gains treatment.

(Sec. 316) Revises the rule for marketing activities by tax-exempt farmer cooperatives to provide that the marketing of products of cooperative members and other producers shall include the feeding of such products to cattle, hogs, fish, chickens, or other animals and the sale of the resulting animal or animal products.

(Sec. 317) Permits farmers' cooperative organizations to seek declaratory judgments with respect to their initial or continuing qualification as tax-exempt organizations.

(Sec. 318) Allows rural letter carriers a miscellaneous tax deduction (subject to the two percent threshold) for their actual employment-related expenses in excess of their employer's reimbursement.

(Sec. 319) Excludes income received by a mutual or cooperative rural electric company from any open access transaction, any nuclear decommissioning transaction, or any asset exchange or conversion transaction, for purposes of determining whether such cooperative meets the income test for tax-exempt status (i.e., 85 percent of income collected from members of cooperatives for sole purpose of meeting losses and expenses of providing services to members). Includes in the income of such cooperatives income from load loss transactions for purposes of meeting the income test for tax-exempt status. Terminates these provisions for taxable years beginning after December 31, 2006.

(Sec. 320) Excludes from gross income and social security taxes payments under the National Health Service Corps loan repayment program and certain State repayment programs.

(Sec. 321) Modifies safe harbor rules relating to timber real estate investment trusts to provide that the sale of a real estate asset shall not be deemed a prohibited transaction if specified requirements are met.

(Sec. 322) Allows for the expensing of certain reforestation expenditures up to $10,000 and the amortization of expenditures over $10,000. Repeals the investment tax credit for reforestation.

Subtitle C: Incentives for Small Manufacturers - (Sec. 331) Modifies the 90 percent of gross income test for income of a regulated investment company (RIC) to include distributions or other income derived from an interest in a publicly traded partnership.

(Sec. 332) Increases the draw weight for a taxable bow from ten to 30 pounds or more for purposes of the 11 percent excise tax on bows and arrows. Reduces to 11 percent the excise tax on archery equipment, including quivers or broadheads. Imposes an excise tax of 12 percent on arrows.

(Sec. 333) Reduces the excise tax on fishing tackle boxes from ten to three percent.

(Sec. 334) Repeals the excise tax on sonar devices suitable for finding fish.

(Sec. 335) Allows whaling captains recognized by the Alaska Eskimo Whaling Commission to claim a charitable income tax deduction up to $10,000 for certain expenses incurred in support of Native Alaskan subsistence whaling. Directs the Secretary to issue guidance for the substantiation of this tax deduction.

(Sec. 336) Qualifies certain noncommercial aircraft for the 50 percent bonus depreciation allowance.

(Sec. 337) Sets forth a special placed-in-service rule for certain bonus depreciation property.

(Sec. 338) Allows small business refiners: (1) a current year tax deduction for up to 75 percent of the capital costs incurred in complying with Environmental Protection Agency sulfur regulations; and (2) a business tax credit (five cents per gallon) for the production of low sulfur diesel fuel.

(Sec. 340) Allows an additional $10 million in capital expenditures under the qualified small-issue bond program for bonds issued after September 30, 2009.

(Sec. 341) Allows a business tax credit for producing oil and gas from marginal wells.

Title IV: Tax Reform and Simplification for United States Businesses - (Sec. 401) Permits, in general, a worldwide affiliated group to elect to have the taxable income of each domestic corporation in such group determined by allocating and apportioning the interest expense of each member as if all members of such group were a single corporation. Provides that if a group makes this election, the taxable income of the domestic members of the worldwide affiliated group from sources outside the Untied States will be determined by allocating and apportioning the interest expenses of domestic members to foreign source income in accordance with a specified formula. Provides that non-interest expenses 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.

(Sec. 402) Treats as income from sources without the United States, in the case of any taxpayer who sustains an overall domestic loss for any taxable year beginning after December 31, 2006, that portion of the taxpayer's taxable income from sources within the United States for each succeeding taxable year which is equal to the lesser of: (1) the amount of such loss (to the extent not used in prior taxable years); or (2) 50 percent of the taxpayer's taxable income from sources within the United States for such succeeding taxable year.

(Sec. 403) Revises rules for the tax treatment of dividends paid by a section 902 corporation (a foreign corporation in which the taxpayer owns at least ten percent of the stock by vote and which is not a controlled foreign corporation).

(Sec. 404) Reduces the limitation on the foreign tax credit to two basic categories: (1) passive category income; and (2) general category income.

(Sec. 405) Modifies attribution rules for stock ownership through partnerships to provide that stock owned, directly or indirectly, by or for a partnership shall be considered as being owned proportionately by its partners, for purposes of determining deemed-paid foreign tax credits of domestic corporations that own ten percent or more of the voting stock of a foreign corporation.

(Sec. 406) Specifies that certain deemed payments relating to the transfer of intangibles shall be treated as royalties for purposes of applying the separate limitation categories of the foreign tax credit.

(Sec. 407) Adds certain exceptions from the definition of U.S. property relating to securities acquired and held by a controlled foreign corporation and certain bonds, for determining current income inclusion by a U.S. ten percent shareholder with respect to an investment in U.S. property by a controlled foreign corporation.

(Sec. 408) Permits taxpayers required to translate foreign income tax payments at the average exchange rate to elect 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. Denies such election to regulated investment companies that account for income on an accrual basis.

(Sec. 409) Exempts from withholding of tax requirements certain dividends paid by a foreign corporation.

(Sec. 410) Excludes from U.S. source income certain interest paid by a foreign partnership that is predominantly engaged in the active conduct of a trade of business outside the United States.

(Sec. 411) Allows a tax exemption for certain interest-related dividends of regulated investment companies (RICs) that are paid after 2005 and before 2008.

(Sec. 412) Treats the sale by a controlled foreign corporation of a partnership interest (in which the corporation has a 25 percent ownership 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.

(Sec. 413) Repeals rules relating to foreign personal holding companies and foreign investment companies. Excludes foreign corporations from the application of the personal holding company rules. Includes as subpart F foreign personal holding company income personal services company income that is subject to the present law foreign personal holding company rules.

(Sec. 414) Modifies the definition of subpart F (Controlled Foreign Corporations) foreign personal holding company income with respect to gains or losses from a commodities hedging transaction.

(Sec. 415) Repeals subpart F rules relating to foreign base company shipping income. Establishes a safe harbor rule for the exclusion of rents derived from leasing an aircraft or vessel from foreign personal holding income (i.e., active leasing expenses must comprise at least ten percent of the profit on the lease).

(Sec. 416) Modifies certain exceptions from subpart F foreign personal holding company income and foreign base company services income for income derived in the active conduct of a bank, financing, or similar business.

(Sec. 417) Extends the excess foreign tax credit carry forward period to ten years and limits the carry back period to one year.

(Sec. 418) Removes from treatment as effectively connected income for a foreign investor a capital gain distribution from a real estate investment trust (REIT), if: (1) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States; and (2) the foreign investor does not own more than five percent of the class of stock at any time during the taxable year within which the distribution is received.

(Sec. 419) Excludes from gross income winnings paid to a nonresident alien resulting from a legal wager initiated outside the United States in a pari-mutuel pool on a live horse or dog race in the United States.

(Sec. 420) Lowers the withholding income tax rate on U.S. source dividends paid to a corporation created or organized in Puerto Rico from 30 percent to ten percent as long as Puerto Rico does not increase its ten percent tax rate.

(Sec. 421) Repeals the 90 percent limitation on the utilization of the alternative minimum tax foreign tax credit.

(Sec. 422) Allows certain U.S. corporations to deduct up to 85 percent of cash dividends received during a specified period from a controlled foreign corporation. Sets forth limitations on such deduction, including a dollar limit of the greater of $500 million or a specified amount of earnings permanently reinvested outside the United States. Requires dividends received to be reinvested in the United States pursuant to an approved domestic reinvestment plan.

(Sec. 423) Provides that final Treasury regulations relating to income derived by certain foreign corporations from the international operation of ships or aircraft shall apply to taxable years of a foreign corporation beginning after September 24, 2004.

(Sec. 424) Directs the Secretary of the Treasury to study and report to Congress by June 30, 2005, on the effectiveness of earnings stripping rules.

Title V: Deduction of State and Local General Sales Taxes - (Sec. 501) Allows taxpayers to elect to deduct State and local sales taxes in lieu of State and local income taxes for taxable years beginning in 2004 and 2005. Permits taxpayers to elect to base their sales tax deduction on their own sales tax receipts or upon sales tax tables published by the Internal Revenue Service (IRS).

Title VI: Fair and Equitable Tobacco Reform - Fair and Equitable Tobacco Reform Act of 2004 - Subtitle A: Termination of Federal Tobacco Quota and Price Support Programs - (Sec. 611) Amends and repeals specified agricultural Acts to eliminate tobacco quota and price support programs, including no net cost provisions.

(Sec. 612) Amends the Agricultural Act of 1949 to eliminate tobacco from the definition of "basic agricultural commodity."

(Sec. 614) Provides for the continuation of liability for 2004 and earlier tobacco crop years.

Subtitle B: Transitional Payments to Tobacco Quota Holders and Producers of Tobacco - (Sec. 622) Authorizes the Secretary of Agriculture to make transitional FY 2005 through 2014 payments to: (1) eligible tobacco quota holders at $7 per pound; and (2) eligible quota tobacco producers at $3 per pound. (Provides a right of survivorship for such payments upon a quota holder's or producer's death.)

(Sec. 624) Provides for county committee resolution of eligibility and payment disputes.

(Sec. 625) Imposes a quarterly assessment on each tobacco product manufacturer and tobacco product importer that sells tobacco products in domestic U.S. commerce. Sets forth assessment provisions. Terminates assessment authority on September 30, 2014.

(Sec. 626) Establishes in the Commodity Credit Corporation a revolving Tobacco Trust Fund to carry out this title. Caps total Fund expenditures.

Subtitle C: Implementation and Transition - (Sec. 641) Sets forth tobacco stocks and no net cost provisions.

(Sec. 643) Applies the provisions of this title to the 2005 and subsequent tobacco crops.

Title VII: Miscellaneous Provisions - (Sec. 701) Authorizes the issuance of tax-exempt facility bonds for certain green building and sustainable design projects (projects) designated by the Secretary of the Treasury. Limits the amount of bonds that may be issued to $2 billion. Requires designated projects to: (1) register at least 75 percent of the square footage of the structures included in a project for certification by the U.S. Green Building Council's Leadership in Energy and Environmental Design; (2) include a brownfield site; (3) identify other State or local financial contributions that will be provided to support a project; (4) include at least one million square feet of building or 20 acres of land; and (5) provide at least 1,500 full time jobs (150 in rural States) when completed and at least 1,000 full time jobs (100 in rural States) during construction. Prohibits more than one project in a single State and requires at least one project in an empowerment zone and one project in a rural State. Terminates the authority for issuing bonds after FY 2009.

(Sec. 702) Excludes from the unrelated business taxable income of certain tax-exempt organizations gain or loss on the sale or exchange of certain brownfield sites acquired, remediated, and sold by such organizations. Terminates this exclusion after 2009.

(Sec. 703) Allows a tax deduction from gross income (whether or not the taxpayer itemizes deductions) for attorney fees and court costs paid in connection with a claim of unlawful discrimination under specified Federal, State or local statutes.

(Sec. 704) Allows a seven-year recovery period for the depreciation of any motorsports entertainment complex placed in service before January 1, 2008. Defines "motorsports entertainment complex" as a racing track facility which is permanently situated on land and which hosts one or more automobile racing events open to the general public in a specified 36-month period.

(Sec. 705) Suspends for the taxable years of a stock life insurance company beginning in 2005 and 2006 the application of rules imposing income tax on distributions to shareholders from the policyholders' surplus account of a life insurance company.

(Sec. 706) Allows a seven-year recovery period for the depreciation of any Alaska natural gas pipeline that has a capacity of more than 500 billion British thermal units of natural gas per day and that is placed in service after December 31, 2013.

(Sec. 707) Allows a tax credit for enhanced oil recovery for expenses to construct a natural gas treatment plant located in U.S. territory (lying north of 64 degrees north latitude) that prepares Alaska natural gas for transportation through a pipeline with a capacity of at least $2 trillion British thermal units of natural gas on a daily basis and that produces carbon dioxide which is injected into hydrocarbon-bearing geological formations.

(Sec. 708) Allows shipbuilders holding a contract to build a ship or submarine for the Federal Government to use a certain method of accounting authorized by the Revenue Act of 1987 to report taxable income.

(Sec. 709) Amends the Employee Retirement Income Security Act of 1974 (ERISA) to permit employers with current retiree health liabilities of at least five percent of gross receipts to make certain cost reductions in retiree health coverage.

(Sec. 710) Modifies the tax credit for electricity produced from certain renewable resources to include the following resources as eligible for the credit until January 1, 2006: (1) open-loop biomass; (2) geothermal energy; (3) solar energy; (4) small irrigation power; and (5) municipal solid waste.

(Sec. 711) Provides for the refundability of the tax credits for alcohol fuels and for the production of electricity.

(Sec. 712) Amends title XIX (Medicaid) of the Social Security Act to include as an optional Medicaid benefit primary and secondary medical strategies, treatment, and services for individuals with sickle cell disease.

Includes as Federal reimbursement to States 50 percent of costs for services to identify and educate eligible Medicaid recipients who have sickle cell disease or who are carriers of the sickle cell gene, and for education regarding the risks of stroke and other medical complications.

Directs the Administrator of the Health Resources and Services Administration to: (1) conduct a demonstration program by making grants to up to 40 federally-qualified and nonprofit health care providers for the development and establishment of systemic mechanisms to improve the prevention and treatment of sickle cell disease; and (2) contract with an entity to serve as the National Coordinating Center for the demonstration program. Sets forth requirements for awarding grants to establish the demonstration program. Authorizes appropriations for FY 2005 through 2009.

(Sec. 713) Amends the Harmonized Tariff Schedule of the United States to: (1) suspend duties on ceiling fans through December 31, 2006; (2) extend duty free entry of nuclear steam generators through December 31, 2008; and (3) and suspend duties on nuclear reactor vessel heads and pressurizers through December 31, 2008.

Title VIII: Revenue Provisions - Subtitle A: Provisions to Reduce Tax Avoidance Through Individual and Corporation Expatriation - (Sec. 801) Sets forth rules for the tax treatment of expatriated entities and foreign corporations acquiring such entities through inversion transactions (corporate stock transactions structured to avoid or evade U.S. taxation).

Defines "expatriated entity" as a domestic corporation which is acquired in an inversion transaction by a surrogate foreign corporation after March 4, 2003, and after such acquisition, the shareholders or owners of which own at least 60 percent of the stock or value of the foreign corporation, where the expanded affiliated group that includes the domestic corporation does not have substantial business activities in the foreign jurisdiction under whose laws it was created compared to the total business activities of its affiliated group. Sets forth a similar definition for domestic partnerships.

Provides that the taxable income of an expatriated entity shall not be less than its inversion gain for any taxable year. Defines "inversion gain" as income or gain resulting from a transfer of stock or other property by an expatriated entity to a foreign corporation. Denies certain tax credits and loss deductions to expatriated entities.

Treats a foreign corporation engaged in an inversion transaction as a domestic corporation for U.S. tax purposes, if at least 80 percent of the stock of such foreign corporation was purchased in the inversion transaction.

Direct the Secretary of the Treasury to issue regulations to define foreign surrogate corporations and to prevent tax avoidance through individual and corporate expatriation.

(Sec. 802) Imposes an excise tax on certain holders of stock options and other stock-based compensation (i.e., disqualified individuals) equal to 15 percent (20 percent after 2008) of the value of such compensation held, directly or indirectly, by or for the benefit of the holders of such stock or their family members at any time during the 12-month period beginning on the date which is six months before an corporate inversion transaction.

(Sec. 803) Modifies the authority of the Secretary of the Treasury to allocate tax incidents between the parties to a reinsurance agreement involving tax avoidance or evasion.

(Sec. 804) Revises tax rules on the expatriation of individuals. Provides that expatriated individuals shall be subject to an alternative tax for a ten-year period following expatriation unless such individuals show: (1) an average annual net income not exceeding $124,000; (2) a net worth of less than $2 million; and (3) compliance with applicable tax requirements for the five preceding taxable years. Exempts taxpayers with dual citizenship in the United States and another country with no substantial contact with the United States from the net income and net worth requirements. Sets forth rules for determining when a U.S. citizen or resident becomes expatriated.

Requires an expatriated individual to file an annual informational return, disclosing such individual's country of residence, the number of days such individual was present in the United States, and information on such individual's income, assets, and liabilities. Imposes a $10,000 penalty for failure to provide required information, but allows a waiver of such penalty if failure to comply is due to reasonable cause and not to willful neglect.

(Sec. 805) Imposes certain reporting requirements on an acquiring corporation in a taxable acquisition of another corporation. Imposes a penalty for failure to report required information.

(Sec. 806) Requires the Secretary to conduct studies and report to Congress on: (1) the effectiveness of current transfer pricing rules and compliance efforts in ensuring that cross-border transfers and other related-party transactions cannot be used improperly to shift income out of the United States; (2) any inappropriate reductions in U.S. withholding tax, as a result of U.S. income tax treaties, that provide opportunities for shifting income outside the United States; and (3) the effectiveness of the provisions of this title on corporate expatriation.

Subtitle B: Provisions Relating to Tax Shelters - Part I: Taxpayer-Related Provisions - (Sec. 811) Imposes new penalties for failing to report tax shelter transactions that have a potential for tax avoidance or evasion (reportable transaction) and transactions specifically identified as tax avoidance transactions (listed transactions). Authorizes the Commissioner of Internal Revenue to rescind all or a portion of such penalties, but requires the Commissioner to enter on record a statement of the the facts and circumstances relating to the violations, the reasons for the rescission, and the amount of the penalty rescinded. Requires taxpayers subject to certain Securities and Exchange Commission reporting requirements to report tax shelter penalties. Requires the Commissioner to report to the House Ways and Means Committee and the Senate Finance Committee a summary of the total number and aggregate amount of tax shelter penalties imposed and a description of penalties rescinded.

(Sec. 812) Imposes a 20 percent penalty for understatements of tax resulting from tax shelter activities reported by the taxpayer and increases such penalty to 30 percent for undisclosed tax shelter transactions. Allows a waiver of the 20 percent penalty if the taxpayer shows reasonable cause for the understatement of tax and has acted in good faith.

(Sec. 813) Expands the denial of privilege for communications between a tax practitioner and a corporate client pertaining to tax shelter activity to include any individual engaged in tax shelter activity.

(Sec. 814) Extends the statute of limitations for assessing underpayments of tax resulting from undisclosed tax shelter transactions to one year after required disclosures are made.

(Sec. 815) Requires material advisors of reportable tax shelter transactions to file informational returns identifying and describing such transactions and the potential tax benefit expected to result from such transactions. Defines "material advisor" as any person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable tax shelter transaction, and who directly or indirectly derives certain levels of compensation for such advice or assistance. Requires material advisors to maintain lists identifying tax shelter clients.

(Sec. 816) Revises provisions for registration of tax shelters to impose a penalty on material advisors for failure to file required informational returns or for filing false or incomplete information.

(Sec. 817) Imposes a daily penalty of $10,000 on material advisors who fail to disclose lists of tax shelter clients. Allows a waiver of such penalty for reasonable cause.

(Sec. 818) Imposes an additional penalty on promoters of abusive tax shelters of 50 percent of the gross income derived from such tax shelter activity.

(Sec. 819) Modifies the definition of substantial understatement of tax for corporations, other than an S corporation or a personal holding company, to mean the lesser of ten percent of the tax required to be shown (or, if greater, $10,000) or $10 million.

(Sec. 820) Expands the authority of the Secretary of the Treasury to seek an injunction against participants in abusive tax shelter activities.

(Sec. 821) Increases the penalty for failure to report interests in foreign financial accounts. Allows a waiver of the penalty if the failure to report was due to reasonable cause and the amount of the transaction was properly reported.

(Sec. 822) Authorizes the Secretary to: (1) censure and fine an incompetent or disreputable tax advisor who practices before the Department of the Treasury; and (2) impose standards applicable to the rendering of written advice for tax transactions having a potential for tax avoidance or evasion.

Part II: Other Provisions - (Sec. 831) Permits the application of stripped preferred stock rules and stripped bond rules in the case of an account or entity substantially all of the assets of which consist of bonds, preferred stock, or a combination thereof.

(Sec. 832) Expands the disallowance of the foreign tax credit to deny a credit for certain foreign withholding tax relating to an item of income or gain from property unless such property is held by the taxpayer for a specified period.

(Sec. 833) Revises rules relating to contributions of property with built-in losses to a partnership to limit recognition of losses to the contributing partner.

(Sec. 834) Prohibits an allocation of any decrease in the adjusted basis of partnership property to stock in a corporation that is a partner in a partnership.

(Sec. 835) Repeals part V (Financial Asset Securitization Investment Trusts - FASITS) of subchapter M (Regulated Investment Companies and Real Estate Investment Trusts).

(Sec. 836) Limits the basis of certain corporate property acquired by the issuance of stock or as paid-in surplus and for which there is the importation of net-built-in loss to the property's fair market value immediately after the transfer of such property.

(Sec. 837) Revises the definition of "banking business" for purposes of the exemption of investment of earnings in U.S. property.

(Sec. 838) Denies a tax deduction for interest paid on an underpayment of tax resulting from an unreported tax shelter transaction.

(Sec. 839) Applies estimated tax requirements to deemed asset sales between certain U.S. corporations and consolidated groups.

(Sec. 840) Denies a tax exclusion of the gain from the sale or exchange of a principal residence acquired in a like-kind exchange if no gain was recognized during the five-year period beginning with the date of acquisition.

(Sec. 841) Allows a tax deduction for a debt instrument having original issue discount which is held by a controlled foreign corporation or passive foreign investment company only to the extent such original issue discount is includible in the gross income of the U.S. owners of the foreign corporation or investment company.

(Sec. 842) Permits taxpayers to make a cash deposit to suspend the running of interest on potential underpayments of tax.

(Sec. 843) Authorizes the IRS to enter into partial payment installment agreements with taxpayers (current law requires agreements to provide for the entire liability). Requires a review of such agreements at least every two years.

(Sec. 844) Authorizes the Secretary to issue consolidated return regulations that treat corporations filing consolidated returns differently than corporations filing separate returns.

(Sec. 845) Expands the disallowance of tax deductions for interest paid on disqualified debt instruments of corporations to provide that if such instruments are payable in equity held by the issuer (or any related party) in any other person (other than a related party), the basis of such equity shall be increased by the amount disallowed as a deduction.

Part III: Leasing - (Sec. 847) Modifies the depreciation recovery period for qualified technological equipment and computer software leased to a tax-exempt organization.

(Sec. 848) Disallows losses from the leasing of property to tax-exempt organizations, including Indian tribal governments (tax-exempt use losses). Allows a carryover of a disallowed loss to the next taxable year.

Allows tax-exempt use losses with respect to property: (1) that is not financed with tax-exempt bonds or Federal funds; (2) in which the lessor makes an equity investment of at least 20 percent of the lessor's adjusted basis; (3) in which the lessee does not bear more than a minimal risk of loss; and (4) that grants the lessee a fair market purchase option (applicable only to property with a seven-year class life).

(Sec. 849) Applies the amendments made by this part to leases entered into after March 12, 2004. Exempts from such amendments qualified transportation property. Defines "qualified transportation property" as domestic property subject to a lease for which a formal application: (1) was submitted for approval to the Federal Transit Administration after June 30, 2003, and before March 13, 2004; (2) is approved by the Federal Transit Administration before January 1, 2006, and (3) includes a description of such property and the value of such property.

Subtitle C: Reduction of Fuel Tax Evasion - (Sec. 851) Exempts mobile machinery from the excise tax on heavy trucks sold at retail, the use tax on highway vehicles, and the tax on tires. Establishes a design-based test and a use-based test (less than 7,500 miles use on public highways per year) to determine whether certain equipment qualifies as mobile machinery for purposes of the tax exemption. Allows refunds for taxes paid on mobile machinery on an annual basis only.

(Sec. 852) Defines "off-highway vehicles" for excise tax purposes.

(Sec. 853) Revises rules for the taxation of aviation-grade kerosene to impose a tax on such fuel upon its removal from a refinery or terminal or its entry into the United States (current law imposes the tax upon the sale of aviation fuel).

(Sec. 854) Changes the dyeing process for the diesel fuel and kerosene tax exemption from manual to mechanical injection. Requires the Secretary to issue regulations on mechanical dye injection systems, including rules for making such systems tamper-resistant. Imposes a penalty for: (1) tampering with a mechanical dye injection system (the greater of $25,000 or $10 for each gallon of fuel involved); and (2) failure by an operator of a mechanical dye injection system to maintain security standards ($1,000 for each failure and $1,000 for each day such operator fails to correct a violation).

(Sec. 855) Denies an administrative appeal for taxpayers who have two prior violations for selling dyed fuel for a taxable use.

(Sec. 856) Imposes a penalty for the sale, for a taxable use, of dyed fuel that has been altered.

(Sec. 857) Revises excise tax exemptions and refund procedures for intercity buses using dyed fuel.

(Sec. 858) Authorizes IRS agents to inspect any books, records, and shipping papers pertaining to taxable fuels at locations where such fuels are produced or stored. Imposes a penalty for refusing IRS agents entry for inspection.

(Sec. 860) Extends the bulk transfer exemption from taxable fuels to registered pipeline or vessel operators. Directs the Secretary of the Treasury to periodically publish a current list of persons who are registered.

(Sec. 861) Requires every operator of a vessel who is required to register for the bulk transfer exemption to display proof of registration through a prescribed electronic identification device on each vessel used to transport any taxable fuel. Imposes a $500 penalty on an operator for each failure to display proof of registration, with increased penalties for multiple violations. Allows penalties to be waived upon a showing that failure to register was due to reasonable cause.

(Sec. 862) Requires registration of operators of terminals or refineries within a foreign trade zone or within a customs bonded storage facility.

(Sec. 863) Increases to $10,000 certain civil and criminal penalties for failure to register or for falsely representing registration status with respect to a taxable fuel (i.e., gasoline, diesel fuel, and kerosene). Imposes additional penalties for failure to register and to report required information with respect to the excise tax on special fuels, petroleum products, and aviation fuels.

(Sec. 864) Requires taxpayers with 25 or more reportable transactions in a month relating to gasoline excise taxes to file reports in an electronic format.

(Sec. 865) Provides that a registered ultimate vendor of taxable fuels on which excise tax has been paid shall be treated as the ultimate vendor for purposes of claiming credits and refunds of tax.

(Sec. 866) Exempts the delivering person from liability for fuel excise tax in two-party exchanges. Defines "two-party exchanges" for purposes of such exemption.

(Sec. 867) Allows for the proration of the use tax on heavy vehicles (weighing more than 55,000 pounds) that are sold before the end of the taxable period. Repeals provisions allowing installment payments of such use tax. Requires a taxpayer with 25 or more heavy vehicles to file tax returns electronically. Repeals the reduced tax rate for Canadian and Mexican heavy vehicles.

(Sec. 868) Dedicates penalties added or increased by this Act to the Highway Trust Fund.

(Sec. 869) Revises the excise tax on tires to impose a 9.45 cents (4.725 cents in the case of a biasply tire or super single tire) for each ten pounds of tire load capacity in excess of 3,500 pounds. Exempts from such tax tires sold for the exclusive use of the Department of Defense or Coast Guard.

(Sec. 870) Treats transmix and diesel fuel blend stocks as diesel fuel for excise tax purposes.

(Sec. 871) Directs the Secretary to report to the House Committee on Ways and Means and the Senate Committee on Finance not later than January 31, 2005, on compliance with the excise tax on special fuels and petroleum products. Requires the report to identify taxable fuel blendstocks and include a discussion of waste products added to taxable fuels and erroneous claims of fuel tax exemption.

Subtitle D: Other Revenue Provisions - (Sec. 881) Authorizes the Secretary of the Treasury to: (1) enter into qualified tax collection contracts with private collection agencies to locate and contact taxpayers owing Federal taxes, to request full payment of taxes owed by such taxpayers, and to obtain financial information from such taxpayers; and (2) retain and use up to 25 percent of any amounts collected to pay for collection services and IRS collection enforcement activities.

Exempts the United States from liability for any act or omission of any person performing services under a qualified tax collection contract. Applies the Fair Debt Collection Practices Act to such qualified tax collection contracts, with specified exceptions. Permits a civil action against a collection agency performing services under a qualified tax collection contract, but not against the United States, for unauthorized collection actions.

Subjects any collection agency performing services under a qualified tax collection contract to orders of the National Taxpayer Advocate. Disqualifies collection agencies which are guilty of misconduct from receiving a qualified tax collection contract.

Requires the Secretary to report biennially (beginning in 2005) to the House Ways and Means Committee and the Senate Finance Committee on qualified tax collection contracts.

(Sec. 882) Applies tax rules for the charitable contribution of ordinary income and capital gain property to patents and similar intellectual property. Allows donors of patents and similar intellectual property an additional tax deduction for a percentage of income received by the donees of such property, with specified limitations. Revises rules for reporting donee income and authorizes the Secretary to prescribe regulations to prevent abuse of the tax deduction of patents or similar intellectual property.

(Sec. 883) Revises reporting requirements for noncash charitable contributions in excess of $500. Requires a qualified appraisal for noncash charitable contributions in excess of $5,000. Requires charitable organizations receiving contributions of used motor vehicles, boats, and airplanes valued at more than $500 to provide donors with a contemporaneous acknowledgment of a donation that includes the name and taxpayer identification number of the donor and the vehicle identification number. Limits the amount of any charitable deduction of a used motor vehicle, boat, or airplane to the gross proceeds which the charitable organization receives from the sale of such vehicle. Imposes a penalty upon charitable organizations that provide donors with false or fraudulent acknowledgments.

(Sec. 885) Sets forth rules for determining the includibility in gross income of deferred compensation under nonqualified deferred compensation plans based on whether such compensation is subject to a substantial risk of forfeiture and was previously included in gross income. Allows distributions from nonqualified deferred compensation plans for certain reasons, including separation from service, death, change in control of a corporation, occurrence of an unforeseeable emergency, or disability of a plan participant. Directs the Secretary to prescribe regulations and issue guidance for compliance with nonqualified deferred compensation plan requirements.

(Sec. 886) Permits (current law prohibits) the amortization of intangibles by sport franchises.

(Sec. 887) Increases from 15 to 100 percent the allowable amount of the continuing levy on payments to Federal vendors for unpaid taxes.

(Sec. 888) Modifies straddle rules to: (1) permit taxpayers to identify offsetting positions of a straddle; (2) revise the tax treatment of certain physically settled positions of a straddle; and (3) repeal the stock and qualified covered call exceptions from the straddle rules.

(Sec. 889) Includes any vaccine against hepatitis A and any trivalent vaccine against influenza under the 75 cents-per-dose manufacturer's excise tax.

(Sec. 891) Extends the authority for certain IRS user fees until September 30, 2014.

(Sec. 892) Amends the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) to extend the passenger and conveyance processing fees and the merchandise processing fees through September 30, 2014.

Expresses the sense of Congress that certain custom fees have been reasonably related to the costs of providing customs services.

Directs the Secretary to: (1) charge fees in FY 2006 and succeeding fiscal years 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; and (2) study all fees collected by the Department of Homeland Security and report to Congress by September 30, 2005, on what fees should be eliminated, what the rate of fees retained should be, and on other appropriate recommendations.

(Sec. 893) Treats as a dividend any distribution of earnings by a U.S. holding company to a foreign corporation of earnings in a complete liquidation, if the U.S. holding company was in existence for less than five years.

(Sec. 894) Includes certain economic equivalents of foreign source income as income effectively connected with a U.S. trade or business.

(Sec. 895) Requires the recapture of overall foreign losses upon the sale of controlled foreign corporation stock, with exceptions for certain corporate reorganizations and liquidations.

(Sec. 896) Revises the tax rules for recognition of income from cancellation of indebtedness to provide that partnerships that transfer a capital or profits interest in the partnership to a creditor in satisfaction of partnership recourse or nonrecourse indebtedness must recognize cancellation of indebtedness income in the amount that would be recognized if the debt were satisfied with money equal to the fair market value of the partnership interest. Includes a discharge of indebtedness in the distributive shares of taxpayers who were partners in a partnership immediately before the discharge.

(Sec. 897) Denies installment sales treatment for all debt instruments that are readily tradable.

(Sec. 898) Limits the amount of assets that a corporation can distribute to its creditors without recognition of gain to the amount of the basis of the assets contributed to a controlled corporation in a divisive reorganization.

(Sec. 899) Modifies the definition of nonqualified preferred stock to add a provision stating that stock shall not be treated as participating in corporate growth to any significant extent unless there is a real and meaningful likelihood of the shareholder actually participating in the earnings and growth of the corporation.

(Sec. 900) Modifies the definition of a brother-sister controlled group of corporations for certain tax purposes.

(Sec. 901) Allows a 15-year recovery period for the depreciation of initial clearing and grading land improvements for gas utility property and a 20-year period for any electric utility transmission and distribution plant.

(Sec. 902) Revises rules for the deductibility of startup expenditures to allow a tax deduction for up to $5,000 of the startup expenditures for an active trade or business and for the organizational expenditures of a corporation or partnership in the year such businesses begin. Provides for the amortization over a 180-month period of expenditures exceeding the $5,000 limit.

(Sec. 903) Makes permanent provisions suspending interest and penalties on unpaid tax where the Secretary fails to send a notice of taxpayer liability within 18 months of a timely-filed tax return. Renders the suspension inapplicable to gross misstatements of tax liability and to certain listed and reportable tax shelter transactions.

(Sec. 904) Requires a withholding of tax rate of 35 percent for supplemental wage payments exceeding $1 million made after 2004.

(Sec. 905) Provides for capital gains tax treatment of stock acquired by the exercise of stock options made to comply with Federal conflict of interest requirements.

(Sec. 906) Sets forth basis rules applicable to nonresident aliens for purposes of determining the tax treatment of contributions and earnings for tax-exempt pension or retirement plans.

(Sec. 907) Allows a tax deduction for the entertainment expenses of certain directors, officers, or owners of companies to the extent that compensation for such expenses is includible in the gross income of such individuals.

(Sec. 908) Defines "bona fide resident" for purposes of determining income tax liability of residents of U.S. possessions to mean a person who: (1) is present for at least 183 days in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands; and (2) does not have a tax home outside such U.S. possession and does not have a closer connection with the United States or a foreign country. Requires taxpayers to file a notice with the Secretary in the first year in which residence in a U.S. possession is claimed. Imposes a $1,000 penalty for failure to file a notice and increases from $100 to $1,000 the penalty for failure to file required information relating to the coordination of U.S. and U.S. possessions income tax.

(Sec. 909) Sets forth a special rule for the recognition of gain from the sale of a qualifying electric transmission transaction. Allows a taxpayer election to recognize gain from such sale ratably over an eight-year period if gain from the sale is reinvested in certain exempt utility property. Defines "qualifying electric transmission transaction" as the sale or other disposition before January 1, 2007, to an independent transmission company of: (1) property used in the trade or business of providing electric transmission services, or (2) any stock or partnership interest in such a trade or business.

(Sec. 910) Limits the cost basis of sport utility vehicles that may be taken into account for depreciation purposes to $25,000. Defines "sport utility vehicle" to mean any 4-wheeled vehicle which is primarily designed to carry passengers, is not subject to the limitation on depreciation for luxury automobiles, and is rated at not more than 14,000 pounds gross vehicle weight, but excludes certain large vehicles, including vehicles designed to have a seating capacity of more than nine persons behind the driver's seat and a cargo area of at least six feet in interior length.

[108th Congress Public Law 357]
[From the U.S. Government Publishing Office]


[DOCID: f:publ357.108]

[[Page 1417]]

                   AMERICAN JOBS CREATION ACT OF 2004

[[Page 118 STAT. 1418]]

Public Law 108-357
108th Congress

                                 An Act


 
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 <<NOTE: Oct. 22, 
                 2004 -  [H.R. 4520]>> home and abroad.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress <<NOTE: American Jobs Creation Act 
of 2004.>> assembled,

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This <<NOTE: 26 USC 1 note.>> Act may be cited as 
the ``American Jobs Creation Act of 2004''.

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

Sec. 1. Short title; etc.

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

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

                    TITLE II--BUSINESS TAX INCENTIVES

                  Subtitle A--Small Business Expensing

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

                        Subtitle B--Depreciation

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

                  Subtitle C--Community Revitalization

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

           Subtitle D--S Corporation Reform and Simplification

Sec. 231. Members of family treated as 1 shareholder.
Sec. 232. Increase in number of eligible shareholders to 100.
Sec. 233. Expansion of bank S corporation eligible shareholders to 
           include IRAs.
Sec. 234. Disregard of unexercised powers of appointment in determining 
           potential current beneficiaries of ESBT.
Sec. 235. Transfer of suspended losses incident to divorce, etc.
Sec. 236. Use of passive activity loss and at-risk amounts by qualified 
           subchapter S trust income beneficiaries.

[[Page 118 STAT. 1419]]

Sec. 237. Exclusion of investment securities income from passive income 
           test for bank S corporations.
Sec. 238. Relief from inadvertently invalid qualified subchapter S 
           subsidiary elections and terminations.
Sec. 239. Information returns for qualified subchapter S subsidiaries.
Sec. 240. Repayment of loans for qualifying employer securities.

                  Subtitle E--Other Business Incentives

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

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

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

      TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS

            Subtitle A--Volumetric Ethanol Excise Tax Credit

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

                   Subtitle B--Agricultural Incentives

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

             Subtitle C--Incentives for Small Manufacturers

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

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

Sec. 401. Interest expense allocation rules.

[[Page 118 STAT. 1420]]

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

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

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

               TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM

Sec. 601. Short title.

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

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

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

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

                Subtitle C--Implementation and Transition

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

                   TITLE VII--MISCELLANEOUS PROVISIONS

Sec. 701. Brownfields demonstration program for qualified green building 
           and sustainable design projects.
Sec. 702. Exclusion of gain or loss on sale or exchange of certain 
           brownfield sites from unrelated business taxable income.
Sec. 703. Civil rights tax relief.
Sec. 704. Modification of class life for certain track facilities.
Sec. 705. Suspension of policyholders surplus account provisions.
Sec. 706. Certain Alaska natural gas pipeline property treated as 7-year 
           property.

[[Page 118 STAT. 1421]]

Sec. 707. Extension of enhanced oil recovery credit to certain Alaska 
           facilities.
Sec. 708. Method of accounting for naval shipbuilders.
Sec. 709. Modification of minimum cost requirement for transfer of 
           excess pension assets.
Sec. 710. Expansion of credit for electricity produced from certain 
           renewable resources.
Sec. 711. Certain business credits allowed against regular and minimum 
           tax.
Sec. 712. Inclusion of primary and secondary medical strategies for 
           children and adults with sickle cell disease as medical 
           assistance under the Medicaid program.
Sec. 713. Ceiling fans.
Sec. 714. Certain steam generators, and certain reactor vessel heads and 
           pressurizers, used in nuclear facilities.

                     TITLE VIII--REVENUE PROVISIONS

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

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

             Subtitle B--Provisions Relating to Tax Shelters

                   Part I--Taxpayer-Related Provisions

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

                        Part II--Other Provisions

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

[[Page 118 STAT. 1422]]

                            Part III--Leasing

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

                Subtitle C--Reduction of Fuel Tax Evasion

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

                  Subtitle D--Other Revenue Provisions

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

[[Page 118 STAT. 1423]]

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

SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

    (a) In General.--Section 114 is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subpart E of part III of subchapter N of chapter 1 
        (relating to qualifying foreign trade income) <<NOTE: 26 USC 
        941-943.>> is hereby repealed.
            (2) The table of subparts for such part III is amended by 
        striking the item relating to subpart E.
            (3) The table of sections for part III of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        114.
            (4) The second sentence of section 56(g)(4)(B)(i) is amended 
        by striking ``114 or''.
            (5) Section 275(a) is amended--
                    (A) by inserting ``or'' at the end of paragraph 
                (4)(A), by striking ``or'' at the end of paragraph 
                (4)(B) and inserting a period, and by striking 
                subparagraph (C), and
                    (B) by striking the last sentence.
            (6) Paragraph (3) of section 864(e) is amended--
                    (A) by striking:
            ``(3) Tax-exempt assets not taken into account.--
                    ``(A) In general.--For purposes of''; and inserting:
            ``(3) Tax-exempt assets not taken into account.--For 
        purposes of'', and
                    (B) by striking subparagraph (B).
            (7) Section 903 is amended by striking ``114, 164(a),'' and 
        inserting ``164(a)''.
            (8) Section 999(c)(1) is amended by striking ``941(a)(5),''.

    (c) Effective Date.--The <<NOTE: 26 USC 56 note.>> amendments made 
by this section shall apply to transactions after December 31, 2004.

    (d) Transitional <<NOTE: 26 USC 114 note.>> Rule for 2005 and 
2006.--
            (1) In general.--In the case of transactions during 2005 or 
        2006, the amount includible in gross income by reason of the 
        amendments made by this section shall not exceed the applicable 
        percentage of the amount which would have been so included but 
        for this subsection.
            (2) Applicable percentage.--For purposes of paragraph (1), 
        the applicable percentage shall be as follows:
                    (A) For 2005, the applicable percentage shall be 20 
                percent.
                    (B) For 2006, the applicable percentage shall be 40 
                percent.

    (e) Revocation of Election To Be Treated as Domestic Corporation.--
If, during the 1-year period beginning on the date of the enactment of 
this Act, a corporation for which an election is in effect under section 
943(e) of the Internal Revenue Code of 1986 revokes such election, no 
gain or loss shall be recognized with respect to property treated as 
transferred under clause (ii) of section 943(e)(4)(B) of such Code to 
the extent such property--
            (1) was treated as transferred under clause (i) thereof, or

[[Page 118 STAT. 1424]]

            (2) was acquired during a taxable year to which such 
        election applies and before May 1, 2003, in the ordinary course 
        of its trade or business.

The Secretary of the Treasury (or such Secretary's delegate) may 
prescribe such regulations as may be necessary to prevent the abuse of 
the purposes of this subsection.
    (f) Binding Contracts.--The amendments made by this section shall 
not apply to any transaction in the ordinary course of a trade or 
business which occurs pursuant to a binding contract--
            (1) which is between the taxpayer and a person who is not a 
        related person (as defined in section 943(b)(3) of such Code, as 
        in effect on the day before the date of the enactment of this 
        Act), and
            (2) which is in effect on September 17, 2003, and at all 
        times thereafter.

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

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

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

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

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

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

    ``(b) Deduction Limited to Wages Paid.--
            ``(1) In general.--The amount of the deduction allowable 
        under subsection (a) for any taxable year shall not exceed 50 
        percent of the W-2 wages of the employer for the taxable year.
            ``(2) W-2 wages.--For purposes of paragraph (1), the term 
        `W-2 wages' means the sum of the aggregate amounts the taxpayer 
        is required to include on statements under paragraphs (3) and 
        (8) of section 6051(a) with respect to employment of employees 
        of the taxpayer during the calendar year ending during the 
        taxpayer's taxable year.
            ``(3) Acquisitions and dispositions.--The Secretary shall 
        provide for the application of this subsection in cases where

[[Page 118 STAT. 1425]]

        the taxpayer acquires, or disposes of, the major portion of a 
        trade or business or the major portion of a separate unit of a 
        trade or business during the taxable year.

    ``(c) Qualified Production Activities Income.--For purposes of this 
section--
            ``(1) In general.--The term `qualified production activities 
        income' for any taxable year means an amount equal to the excess 
        (if any) of--
                    ``(A) the taxpayer's domestic production gross 
                receipts for such taxable year, over
                    ``(B) the sum of--
                          ``(i) the cost of goods sold that are 
                      allocable to such receipts,
                          ``(ii) other deductions, expenses, or losses 
                      directly allocable to such receipts, and
                          ``(iii) a ratable portion of other deductions, 
                      expenses, and losses that are not directly 
                      allocable to such receipts or another class of 
                      income.
            ``(2) Allocation method.--
        The <<NOTE: Regulations.>> Secretary shall prescribe rules for 
        the proper allocation of items of income, deduction, expense, 
        and loss for purposes of determining income attributable to 
        domestic production activities.
            ``(3) Special rules for determining costs.--
                    ``(A) In general.--For purposes of determining costs 
                under clause (i) of paragraph (1)(B), any item or 
                service brought into the United States shall be treated 
                as acquired by purchase, and its cost shall be treated 
                as not less than its value immediately after it entered 
                the United States. <<NOTE: Applicability.>> A similar 
                rule shall apply in determining the adjusted basis of 
                leased or rented property where the lease or rental 
                gives rise to domestic production gross receipts.
                    ``(B) Exports for further manufacture.--In the case 
                of any property described in subparagraph (A) that had 
                been exported by the taxpayer for further manufacture, 
                the increase in cost or adjusted basis under 
                subparagraph (A) shall not exceed the difference between 
                the value of the property when exported and the value of 
                the property when brought back into the United States 
                after the further manufacture.
            ``(4) Domestic production gross receipts.--
                    ``(A) In general.--The term `domestic production 
                gross receipts' means the gross receipts of the taxpayer 
                which are derived from--
                          ``(i) any lease, rental, license, sale, 
                      exchange, or other disposition of--
                                    ``(I) qualifying production property 
                                which was manufactured, produced, grown, 
                                or extracted by the taxpayer in whole or 
                                in significant part within the United 
                                States,
                                    ``(II) any qualified film produced 
                                by the taxpayer, or
                                    ``(III) electricity, natural gas, or 
                                potable water produced by the taxpayer 
                                in the United States,
                          ``(ii) construction performed in the United 
                      States, or

[[Page 118 STAT. 1426]]

                          ``(iii) engineering or architectural services 
                      performed in the United States for construction 
                      projects in the United States.
                    ``(B) Exceptions.--Such term shall not include gross 
                receipts of the taxpayer which are derived from--
                          ``(i) the sale of food and beverages prepared 
                      by the taxpayer at a retail establishment, and
                          ``(ii) the transmission or distribution of 
                      electricity, natural gas, or potable water.
            ``(5) Qualifying production property.--The term `qualifying 
        production property' means--
                    ``(A) tangible personal property,
                    ``(B) any computer software, and
                    ``(C) any property described in section 168(f)(4).
            ``(6) Qualified film.--The term `qualified film' means any 
        property described in section 168(f)(3) if not less than 50 
        percent of the total compensation relating to the production of 
        such property is compensation for services performed in the 
        United States by actors, production personnel, directors, and 
        producers. Such term does not include property with respect to 
        which records are required to be maintained under section 2257 
        of title 18, United States Code.
            ``(7) Related persons.--
                    ``(A) In general.--The term `domestic production 
                gross receipts' shall not include any gross receipts of 
                the taxpayer derived from property leased, licensed, or 
                rented by the taxpayer for use by any related person.
                    ``(B) Related person.--For purposes of subparagraph 
                (A), a person shall be treated as related to another 
                person if such persons are treated as a single employer 
                under subsection (a) or (b) of section 52 or subsection 
                (m) or (o) of section 414, except that determinations 
                under subsections (a) and (b) of section 52 shall be 
                made without regard to section 1563(b).

    ``(d) Definitions and Special Rules.--
            ``(1) Application of section to pass-thru entities.--
                    ``(A) In general.--In the case of an S corporation, 
                partnership, estate or trust, or other pass-thru 
                entity--
                          ``(i) subject to the provisions of paragraphs 
                      (2) and (3), this section shall be applied at the 
                      shareholder, partner, or similar level, and
                          ``(ii) the Secretary shall prescribe rules for 
                      the application of this section, including rules 
                      relating to--
                                    ``(I) restrictions on the allocation 
                                of the deduction to taxpayers at the 
                                partner or similar level, and
                                    ``(II) additional reporting 
                                requirements.
                    ``(B) Application of wage limitation.--
                Notwithstanding subparagraph (A)(i), for purposes of 
                applying subsection (b), a shareholder, partner, or 
                similar person which is allocated qualified production 
                activities income from an S corporation, partnership, 
                estate, trust, or other pass-thru entity shall also be 
                treated as having been allocated W-2 wages from such 
                entity in an amount equal to the lesser of--

[[Page 118 STAT. 1427]]

                          ``(i) such person's allocable share of such 
                      wages (without regard to this subparagraph), as 
                      determined under regulations prescribed by the 
                      Secretary, or
                          ``(ii) 2 times 9 percent of the qualified 
                      production activities income allocated to such 
                      person for the taxable year.
            ``(2) Application to individuals.--In the case of an 
        individual, subsection (a)(1)(B) shall be applied by 
        substituting `adjusted gross income' for `taxable income'. For 
        purposes of the preceding sentence, adjusted gross income shall 
        be determined--
                    ``(A) after application of sections 86, 135, 137, 
                219, 221, 222, and 469, and
                    ``(B) without regard to this section.
            ``(3) Patrons of agricultural and horticultural 
        cooperatives.--
                    ``(A) In general.--If any amount described in 
                paragraph (1) or (3) of section 1385(a)--
                          ``(i) is received by a person from an 
                      organization to which part I of subchapter T 
                      applies which is engaged--
                                    ``(I) in the manufacturing, 
                                production, growth, or extraction in 
                                whole or significant part of any 
                                agricultural or horticultural product, 
                                or
                                    ``(II) in the marketing of 
                                agricultural or horticultural products, 
                                and
                          ``(ii) is allocable to the portion of the 
                      qualified production activities income of the 
                      organization which, but for this paragraph, would 
                      be deductible under subsection (a) by the 
                      organization and is designated as such by the 
                      organization in a written notice mailed to its 
                      patrons during the payment period described in 
                      section 1382(d),
                then such person shall be allowed a deduction under 
                subsection (a) with respect to such amount. The taxable 
                income of the organization shall not be reduced under 
                section 1382 by reason of any amount to which the 
                preceding sentence applies.
                    ``(B) Special rules.--For purposes of applying 
                subparagraph (A), in determining the qualified 
                production activities income which would be deductible 
                by the organization under subsection (a)--
                          ``(i) there shall not be taken into account in 
                      computing the organization's taxable income any 
                      deduction allowable under subsection (b) or (c) of 
                      section 1382 (relating to patronage dividends, 
                      per-unit retain allocations, and nonpatronage 
                      distributions), and
                          ``(ii) in the case of an organization 
                      described in subparagraph (A)(i)(II), the 
                      organization shall be treated as having 
                      manufactured, produced, grown, or extracted in 
                      whole or significant part any qualifying 
                      production property marketed by the organization 
                      which its patrons have so manufactured, produced, 
                      grown, or extracted.
            ``(4) Special rule for affiliated groups.--

[[Page 118 STAT. 1428]]

                    ``(A) In general.--All members of an expanded 
                affiliated group shall be treated as a single 
                corporation for purposes of this section.
                    ``(B) Expanded affiliated group.--For purposes of 
                this section, the term `expanded affiliated group' means 
                an affiliated group as defined in section 1504(a), 
                determined--
                          ``(i) by substituting `50 percent' for `80 
                      percent' each place it appears, and
                          ``(ii) without regard to paragraphs (2) and 
                      (4) of section 1504(b).
                    ``(C) Allocation of deduction.--Except as provided 
                in regulations, the deduction under subsection (a) shall 
                be allocated among the members of the expanded 
                affiliated group in proportion to each member's 
                respective amount (if any) of qualified production 
                activities income.
            ``(5) Trade or business requirement.--This section shall be 
        applied by only taking into account items which are attributable 
        to the actual conduct of a trade or business.
            ``(6) Coordination with minimum tax.--The deduction under 
        this section shall be allowed for purposes of the tax imposed by 
        section 55; except that for purposes of section 55, the 
        deduction under subsection (a) shall be 9 percent of the lesser 
        of--
                    ``(A) qualified production activities income 
                (determined without regard to part IV of subchapter A), 
                or
                    ``(B) alternative minimum taxable income (determined 
                without regard to this section) for the taxable year.
        In the case of an individual, subparagraph (B) shall be applied 
        by substituting `adjusted gross income' for `alternative minimum 
        taxable income'. For purposes of the preceding sentence, 
        adjusted gross income shall be determined in the same manner as 
        provided in paragraph (2).
            ``(7) Regulations.--The Secretary shall prescribe such 
        regulations as are necessary to carry out the purposes of this 
        section.''.

    (b) Minimum Tax.--Section 56(g)(4)(C) (relating to disallowance of 
items not deductible in computing earnings and profits) is amended by 
adding at the end the following new clause:
                          ``(v) Deduction for domestic production.--
                      Clause (i) shall not apply to any amount allowable 
                      as a deduction under section 199.''.

    (c) Special <<NOTE: 26 USC 631 note.>> Rule Relating to Election To 
Treat Cutting of Timber as a Sale or Exchange.--Any election under 
section 631(a) of the Internal Revenue Code of 1986 made for a taxable 
year ending on or before the date of the enactment of this Act may be 
revoked by the taxpayer for any taxable year ending after such date. For 
purposes of determining whether such taxpayer may make a further 
election under such section, such election (and any revocation under 
this section) shall not be taken into account.

    (d) Technical Amendments.--
            (1) Sections 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), and 
        219(g)(3)(A)(ii) are each amended by inserting ``199,'' before 
        ``221''.
            (2) Clause (i) of section 221(b)(2)(C) is amended by 
        inserting by inserting ``199,'' before ``222''.

[[Page 118 STAT. 1429]]

            (3) Clause (i) of section 222(b)(2)(C) is amended by 
        inserting ``199,'' before ``911''.
            (4) Paragraph (1) of section 246(b) is amended by inserting 
        ``199,'' after ``172,''.
            (5) Clause (iii) of section 469(i)(3)(F) is amended by 
        inserting ``199,'' before ``219,''.
            (6) Subsection (a) of section 613 is amended by inserting 
        ``and without the deduction under section 199'' after ``without 
        allowances for depletion''.
            (7) Subsection (a) of section 1402 is amended by striking 
        ``and'' at the end of paragraph (14), by striking the period at 
        the end of paragraph (15) and inserting ``, and'', and by 
        inserting after paragraph (15) the following new paragraph:
            ``(16) the deduction provided by section 199 shall not be 
        allowed.''.
            (8) The table of sections for part VI of subchapter B of 
        chapter 1 is amended by adding at the end the following new 
        item:

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

    (e) Effective Date.--The <<NOTE: 26 USC 56 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2004.

                    TITLE II--BUSINESS TAX INCENTIVES

                  Subtitle A--Small Business Expensing

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

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

                        Subtitle B--Depreciation

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

    (a) 15-Year Recovery Period.--Subparagraph (E) of section 168(e)(3) 
(relating to classification of certain property) is amended by striking 
``and'' at the end of clause (ii), by striking the period at the end of 
clause (iii) and inserting a comma, and by adding at the end the 
following new clauses:
                          ``(iv) any qualified leasehold improvement 
                      property placed in service before January 1, 2006, 
                      and
                          ``(v) any qualified restaurant property placed 
                      in service before January 1, 2006.''.

    (b) Qualified Leasehold Improvement Property.--Subsection (e) of 
section 168 is amended by adding at the end the following new paragraph:
            ``(6) Qualified leasehold improvement property.--The term 
        `qualified leasehold improvement property' has the meaning given 
        such term in section 168(k)(3) except that the following special 
        rules shall apply:
                    ``(A) Improvements made by lessor.--In the case of 
                an improvement made by the person who was the lessor of 
                such improvement when such improvement was placed

[[Page 118 STAT. 1430]]

                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 <<NOTE: 26 USC 168 note.>> amendments made 
by this section shall apply to property placed in service after the date 
of the enactment of this Act.

[[Page 118 STAT. 1431]]

                  Subtitle C--Community Revitalization

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

    (a) Targeted areas.--Paragraph (2) of section 45D(e) (relating to 
targeted areas) is amended to read as follows:
            ``(2) Targeted populations.--
        The <<NOTE: Regulations.>> Secretary shall prescribe regulations 
        under which 1 or more targeted populations (within the meaning 
        of section 103(20) of the Riegle Community Development and 
        Regulatory Improvement Act of 1994 (12 U.S.C. 4702(20))) may be 
        treated as low-income communities. Such regulations shall 
        include procedures for determining which entities are qualified 
        active low-income community businesses with respect to such 
        populations.''.

    (b) Tracts with Low Population.--Subsection (e) of section 45D 
(defining low-income community) is amended by adding at the end the 
following:
            ``(4) Tracts with low population.--A population census tract 
        with a population of less than 2,000 shall be treated as a low-
        income community for purposes of this section if such tract--
                    ``(A) is within an empowerment zone the designation 
                of which is in effect under section 1391, and
                    ``(B) is contiguous to 1 or more low-income 
                communities (determined without regard to this 
                paragraph).''.

    (c) Effective <<NOTE: 26 USC 45D note.>> Dates.--
            (1) Targeted areas.--The amendment made by subsection (a) 
        shall apply to designations made by the Secretary of the 
        Treasury after the date of the enactment of this Act.
            (2) Tracts with low population.--The amendment made by 
        subsection (b) shall apply to investments made after the date of 
        the enactment of this Act.

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

    (a) In General.--Section 1400E (relating to designation of renewal 
communities) is amended by adding at the end the following new 
subsection:
    ``(g) Expansion of Designated Area Based on 2000 Census.--
            ``(1) In general.--At the request of all governments which 
        nominated an area as a renewal community, the Secretary of 
        Housing and Urban Development may expand the area of such 
        community to include any census tract if--
                    ``(A)(i) at the time such community was nominated, 
                such community would have met the requirements of this 
                section using 1990 census data even if such tract had 
                been included in such community, and
                    ``(ii) such tract has a poverty rate using 2000 
                census data which exceeds the poverty rate for such 
                tract using 1990 census data, or
                    ``(B)(i) such community would be described in 
                subparagraph (A)(i) but for the failure to meet one or 
                more of the requirements of paragraphs (2)(C)(i), 
                (3)(C), and (3)(D) of subsection (c) using 1990 census 
                data,

[[Page 118 STAT. 1432]]

                    ``(ii) such community, including such tract, has a 
                population of not more than 200,000 using either 1990 
                census data or 2000 census data,
                    ``(iii) such tract meets the requirement of 
                subsection (c)(3)(C) using 2000 census data, and
                    ``(iv) such tract meets the requirement of 
                subparagraph (A)(ii).
            ``(2) Exception for certain census tracts with low 
        population in 1990.--In the case of any census tract which did 
        not have a poverty rate determined by the Bureau of the Census 
        using 1990 census data, paragraph (1)(B) shall be applied 
        without regard to clause (iv) thereof.
            ``(3) Special rule for certain census tracts with low 
        population in 2000.--At the request of all governments which 
        nominated an area as a renewal community, the Secretary of 
        Housing and Urban Development may expand the area of such 
        community to include any census tract if--
                    ``(A) either--
                          ``(i) such tract has no population using 2000 
                      census data, or
                          ``(ii) no poverty rate for such tract is 
                      determined by the Bureau of the Census using 2000 
                      census data,
                    ``(B) such tract is one of general distress, and
                    ``(C) such community, including such tract, meets 
                the requirements of subparagraphs (A) and (B) of 
                subsection (c)(2).
            ``(4) Period in effect.--Any expansion under this subsection 
        shall take effect as provided in subsection (b).''.

    (b) Effective Date.--The <<NOTE: 26 USC 1400E note.>> amendment made 
by subsection (a) shall take effect as if included in the amendments 
made by section 101 of the Community Renewal Tax Relief Act of 2000.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 45D note.>> amendment made 
by this section shall take effect as if included in the amendment made 
by section 121(a) of the Community Renewal Tax Relief Act of 2000.

[[Page 118 STAT. 1433]]

           Subtitle D--S Corporation Reform and Simplification

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

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

    (b) Relief From Inadvertent Invalid Election or Termination.--
Section 1362(f) (relating to inadvertent invalid elections or 
terminations), as amended by this Act, is amended--
            (1) by inserting ``or section 1361(c)(1)(A)(ii)'' after 
        ``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
            (2) by inserting ``or section 1361(c)(1)(D)(iii)'' after 
        ``section 1361(b)(3)(C),'' in paragraph (1)(B).

    (c) Effective Dates.--
            (1) Subsection (a).--The <<NOTE: 26 USC 1361 
        note.>> amendment made by subsection (a) shall apply to taxable 
        years beginning after December 31, 2004.

[[Page 118 STAT. 1434]]

            (2) Subsection (b).--The <<NOTE: 26 USC 1362 
        note.>> amendments made by subsection (b) shall apply to 
        elections and terminations made after December 31, 2004.

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

    (a) In General.--Section 1361(b)(1)(A) (defining small business 
corporation) is amended by striking ``75'' and inserting ``100''.
    (b) Effective Date.--The <<NOTE: 26 USC 1361 note.>> amendment made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

    (a) In General.--Section 1361(c)(2)(A) (relating to certain trusts 
permitted as shareholders) is amended by inserting after clause (v) the 
following new clause:
                          ``(vi) In the case of a corporation which is a 
                      bank (as defined in section 581), a trust which 
                      constitutes an individual retirement account under 
                      section 408(a), including one designated as a Roth 
                      IRA under section 408A, but only to the extent of 
                      the stock held by such trust in such bank as of 
                      the date of the enactment of this clause.''.

    (b) Treatment as Shareholder.--Section 1361(c)(2)(B) (relating to 
treatment as shareholders) is amended by adding at the end the following 
new clause:
                          ``(vi) In the case of a trust described in 
                      clause (vi) of subparagraph (A), the individual 
                      for whose benefit the trust was created shall be 
                      treated as a shareholder.''.

    (c) Sale of Bank Stock in IRA Relating to S Corporation Election 
Exempt From Prohibited Transaction Rules.--Section 4975(d) (relating to 
exemptions) is amended by striking ``or'' at the end of paragraph (14), 
by striking the period at the end of paragraph (15) and inserting ``; 
or'', and by adding at the end the following new paragraph:
            ``(16) a sale of stock held by a trust which constitutes an 
        individual retirement account under section 408(a) to the 
        individual for whose benefit such account is established if--
                    ``(A) such stock is in a bank (as defined in section 
                581),
                    ``(B) such stock is held by such trust as of the 
                date of the enactment of this paragraph,
                    ``(C) such sale is pursuant to an election under 
                section 1362(a) by such bank,
                    ``(D) such sale is for fair market value at the time 
                of sale (as established by an independent appraiser) and 
                the terms of the sale are otherwise at least as 
                favorable to such trust as the terms that would apply on 
                a sale to an unrelated party,
                    ``(E) such trust does not pay any commissions, 
                costs, or other expenses in connection with the sale, 
                and
                    ``(F) the stock is sold in a single transaction for 
                cash not later than 120 days after the S corporation 
                election is made.''.

    (d) Conforming Amendment.--Section 512(e)(1) is amended by inserting 
``1361(c)(2)(A)(vi) or'' before ``1361(c)(6)''.

[[Page 118 STAT. 1435]]

    (e) Effective Date.--The <<NOTE: 26 USC 512 note.>> amendments made 
by this section shall take effect on the date of the enactment of this 
Act.

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

    (a) In General.--Section 1361(e)(2) (defining potential current 
beneficiary) is amended--
            (1) by inserting ``(determined without regard to any power 
        of appointment to the extent such power remains unexercised at 
        the end of such period)'' after ``of the trust'' in the first 
        sentence, and
            (2) by striking ``60-day'' in the second sentence and 
        inserting ``1-year''.

    (b) Effective Date.--The <<NOTE: 26 USC 1361 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 1366 note.>> amendment made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 1361 note.>> amendments made 
by this section shall apply to transfers made after December 31, 2004.

[[Page 118 STAT. 1436]]

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 1362 note.>> amendment made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 1362 note.>> amendments made 
by this section shall apply to elections made and terminations made 
after December 31, 2004.

[[Page 118 STAT. 1437]]

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

    (a) In General.--Section 1361(b)(3)(A) (relating to treatment of 
certain wholly owned subsidiaries) is amended by inserting ``and in the 
case of information returns required under part III of subchapter A of 
chapter 61'' after ``Secretary''.
    (b) Effective Date.--The <<NOTE: 26 USC 1361 note.>> amendment made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 4975 note.>> amendment made 
by this section shall apply to distributions with respect to S 
corporation stock made after December 31, 1997.

                  Subtitle E--Other Business Incentives

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

    (a) Taxes on Trains.--
            (1) In general.--Clause (ii) of section 4041(a)(1)(C) is 
        amended by striking subclauses (I), (II), and (III) and 
        inserting the following new subclauses:
                                    ``(I) 3.3 cents per gallon after 
                                December 31, 2004, and before July 1, 
                                2005,
                                    ``(II) 2.3 cents per gallon after 
                                June 30, 2005, and before January 1, 
                                2007, and
                                    ``(III) 0 after December 31, 
                                2006.''.
            (2) Conforming amendments.--
                    (A) Subsection (d) of section 4041 is amended by 
                redesignating paragraph (3) as paragraph (4) and by 
                inserting after paragraph (2) the following new 
                paragraph:
            ``(3) Diesel fuel used in trains.--In the case of any sale 
        for use or use after December 31, 2006, there is hereby

[[Page 118 STAT. 1438]]

        imposed a tax of 0.1 cent per gallon on any liquid other than 
        gasoline (as defined in section 4083)--
                    ``(A) sold by any person to an owner, lessee, or 
                other operator of a diesel-powered train for use as a 
                fuel in such train, or
                    ``(B) used by any person as a fuel in a diesel-
                powered train unless there was a taxable sale of such 
                fuel under subparagraph (A).
        No tax shall be imposed by this paragraph on the sale or use of 
        any liquid if tax was imposed on such liquid under section 
        4081.''.
                    (B) Subsection (f) of section 4082 is amended by 
                striking ``section 4041(a)(1)'' and inserting 
                ``subsections (a)(1) and (d)(3) of section 4041''.
                    (C) Subparagraph (B) of section 6421(f)(3) is 
                amended to read as follows:
                    ``(B) so much of the rate specified in section 
                4081(a)(2)(A) as does not exceed the rate applicable 
                under section 4041(a)(1)(C)(ii).''.
                    (D) Subparagraph (B) of section 6427(l)(3) is 
                amended to read as follows:
                    ``(B) so much of the rate specified in section 
                4081(a)(2)(A) as does not exceed the rate applicable 
                under section 4041(a)(1)(C)(ii).''.

    (b) Fuel Used on Inland Waterways.--Subparagraph (C) of section 
4042(b)(2) is amended to read as follows:
                    ``(C) The deficit reduction rate is--
                          ``(i) 3.3 cents per gallon after December 31, 
                      2004, and before July 1, 2005,
                          ``(ii) 2.3 cents per gallon after June 30, 
                      2005, and before January 1, 2007, and
                          ``(iii) 0 after December 31, 2006.''.

    (c) Effective Date.--The <<NOTE: 26 USC 4041 note.>> amendments made 
by this section shall take effect on January 1, 2005.

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

    (a) In General.--Section 167(g) (relating to depreciation under 
income forecast method) is amended by adding at the end the following 
new paragraph:
            ``(7) Treatment of participations and residuals.--
                    ``(A) In general.--For purposes of determining the 
                depreciation deduction allowable with respect to a 
                property under this subsection, the taxpayer may include 
                participations and residuals with respect to such 
                property in the adjusted basis of such property for the 
                taxable year in which the property is placed in service, 
                but only to the extent that such participations and 
                residuals relate to income estimated (for purposes of 
                this subsection) to be earned in connection with the 
                property before the close of the 10th taxable year 
                referred to in paragraph (1)(A).
                    ``(B) Participations and residuals.--For purposes of 
                this paragraph, the term `participations and residuals' 
                means, with respect to any property, costs the amount of 
                which by contract varies with the amount of income 
                earned in connection with such property.

[[Page 118 STAT. 1439]]

                    ``(C) Special rules relating to recomputation 
                years.--If the adjusted basis of any property is 
                determined under this paragraph, paragraph (4) shall be 
                applied by substituting `for each taxable year in such 
                period' for `for such period'.
                    ``(D) Other special rules.--
                          ``(i) Participations and residuals.--
                      Notwithstanding subparagraph (A), the taxpayer may 
                      exclude participations and residuals from the 
                      adjusted basis of such property and deduct such 
                      participations and residuals in the taxable year 
                      that such participations and residuals are paid.
                          ``(ii) Coordination with other rules.--
                      Deductions computed in accordance with this 
                      paragraph shall be allowable notwithstanding 
                      paragraph (1)(B), section 263, 263A, 404, 419, or 
                      461(h).
                    ``(E) Authority to make adjustments.--The Secretary 
                shall prescribe appropriate adjustments to the basis of 
                property and to the look-back method for the additional 
                amounts allowable as a deduction solely by reason of 
                this paragraph.''.

    (b) Determination of Income.--Section 167(g)(5) (relating to special 
rules) is amended by redesignating subparagraphs (E) and (F) as 
subparagraphs (F) and (G), respectively, and inserting after 
subparagraph (D) the following new subparagraph:
                    ``(E) Treatment of distribution costs.--For purposes 
                of this subsection, the income with respect to any 
                property shall be the taxpayer's gross income from such 
                property.''.

    (c) Effective Date.--The <<NOTE: 26 USC 167 note.>> amendments made 
by this section shall apply to property placed in service after the date 
of the enactment of this Act.

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

    (a) Expansion of Straight Debt Safe Harbor.--Section 856 (defining 
real estate investment trust) is amended--
            (1) in subsection (c) by striking paragraph (7), and
            (2) by adding at the end the following new subsection:

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

[[Page 118 STAT. 1440]]

                any entity not described in this subparagraph or 
                payments on any obligation issued by such an entity,
                    ``(F) Any security issued by a real estate 
                investment trust.
                    ``(G) Any other arrangement as determined by the 
                Secretary.
            ``(2) Special rules relating to straight debt securities.--
                    ``(A) In general.--For purposes of paragraph (1)(A), 
                securities meet the requirements of this paragraph if 
                such securities are straight debt, as defined in section 
                1361(c)(5) (without regard to subparagraph (B)(iii) 
                thereof).
                    ``(B) Special rules relating to certain 
                contingencies.--For purposes of subparagraph (A), any 
                interest or principal shall not be treated as failing to 
                satisfy section 1361(c)(5)(B)(i) solely by reason of the 
                fact that--
                          ``(i) the time of payment of such interest or 
                      principal is subject to a contingency, but only 
                      if--
                                    ``(I) any such contingency does not 
                                have the effect of changing the 
                                effective yield to maturity, as 
                                determined under section 1272, other 
                                than a change in the annual yield to 
                                maturity which does not exceed the 
                                greater of \1/4\ of 1 percent or 5 
                                percent of the annual yield to maturity, 
                                or
                                    ``(II) neither the aggregate issue 
                                price nor the aggregate face amount of 
                                the issuer's debt instruments held by 
                                the trust exceeds $1,000,000 and not 
                                more than 12 months of unaccrued 
                                interest can be required to be prepaid 
                                thereunder, or
                          ``(ii) the time or amount of payment is 
                      subject to a contingency upon a default or the 
                      exercise of a prepayment right by the issuer of 
                      the debt, but only if such contingency is 
                      consistent with customary commercial practice.
                    ``(C) Special rules relating to corporate or 
                partnership issuers.--In the case of an issuer which is 
                a corporation or a partnership, securities that 
                otherwise would be described in paragraph (1)(A) shall 
                be considered not to be so described if the trust 
                holding such securities and any of its controlled 
                taxable REIT subsidiaries (as defined in subsection 
                (d)(8)(A)(iv)) hold any securities of the issuer which--
                          ``(i) are not described in paragraph (1) 
                      (prior to the application of this subparagraph), 
                      and
                          ``(ii) have an aggregate value greater than 1 
                      percent of the issuer's outstanding securities 
                      determined without regard to paragraph (3)(A)(i).
            ``(3) Look-through rule for partnership securities.--
                    ``(A) In general.--For purposes of applying 
                subclause (III) of subsection (c)(4)(B)(iii)--
                          ``(i) a trust's interest as a partner in a 
                      partnership (as defined in section 7701(a)(2)) 
                      shall not be considered a security, and
                          ``(ii) the trust shall be deemed to own its 
                      proportionate share of each of the assets of the 
                      partnership.
                    ``(B) Determination of trust's interest in 
                partnership assets.--For purposes of subparagraph (A), 
                with

[[Page 118 STAT. 1441]]

                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,

[[Page 118 STAT. 1442]]

                                    ``(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

[[Page 118 STAT. 1443]]

of tax in case of failure to meet certain requirements) is amended by 
striking ``90 percent'' and inserting ``95 percent''.
    (f) Savings Provisions.--
            (1) Rules of application for failure to satisfy section 
        856(c)(4).--Section 856(c) (relating to definition of real 
        estate investment trust) is amended by inserting after paragraph 
        (6) the following new paragraph:
            ``(7) Rules of application for failure to satisfy paragraph 
        (4).--
                    ``(A) De minimis failure.--A corporation, trust, or 
                association that fails to meet the requirements of 
                paragraph (4)(B)(iii) for a particular quarter shall 
                nevertheless be considered to have satisfied the 
                requirements of such paragraph for such quarter if--
                          ``(i) such failure is due to the ownership of 
                      assets the total value of which does not exceed 
                      the lesser of--
                                    ``(I) 1 percent of the total value 
                                of the trust's assets at the end of the 
                                quarter for which such measurement is 
                                done, and
                                    ``(II) $10,000,000, and
                          ``(ii)(I) the corporation, trust, or 
                      association, following the identification of such 
                      failure, disposes of assets in order to meet the 
                      requirements of such paragraph within 6 months 
                      after the last day of the quarter in which the 
                      corporation, trust or association's identification 
                      of the failure to satisfy the requirements of such 
                      paragraph occurred or such other time period 
                      prescribed by the Secretary and in the manner 
                      prescribed by the Secretary, or
                          ``(II) the requirements of such paragraph are 
                      otherwise met within the time period specified in 
                      subclause (I).
                    ``(B) Failures exceeding de minimis amount.--A 
                corporation, trust, or association that fails to meet 
                the requirements of paragraph (4) for a particular 
                quarter shall nevertheless be considered to have 
                satisfied the requirements of such paragraph for such 
                quarter if--
                          ``(i) such failure involves the ownership of 
                      assets the total value of which exceeds the de 
                      minimis standard described in subparagraph (A)(i) 
                      at the end of the quarter for which such 
                      measurement is done,
                          ``(ii) following the corporation, trust, or 
                      association's identification of the failure to 
                      satisfy the requirements of such paragraph for a 
                      particular quarter, a description of each asset 
                      that causes the corporation, trust, or association 
                      to fail to satisfy the requirements of such 
                      paragraph at the close of such quarter of any 
                      taxable year is set forth in a schedule for such 
                      quarter filed in accordance with regulations 
                      prescribed by the Secretary,
                          ``(iii) the failure to meet the requirements 
                      of such paragraph for a particular quarter is due 
                      to reasonable cause and not due to willful 
                      neglect,
                          ``(iv) the corporation, trust, or association 
                      pays a tax computed under subparagraph (C), and

[[Page 118 STAT. 1444]]

                          ``(v)(I) the corporation, trust, or 
                      association disposes of the assets set forth on 
                      the schedule specified in clause (ii) within 6 
                      months after the last day of the quarter in which 
                      the corporation, trust or association's 
                      identification of the failure to satisfy the 
                      requirements of such paragraph occurred or such 
                      other time period prescribed by the Secretary and 
                      in the manner prescribed by the Secretary, or
                          ``(II) the requirements of such paragraph are 
                      otherwise met within the time period specified in 
                      subclause (I).
                    ``(C) Tax.--For purposes of subparagraph (B)(iv)--
                          ``(i) Tax imposed.--If a corporation, trust, 
                      or association elects the application of this 
                      subparagraph, there is hereby imposed a tax on the 
                      failure described in subparagraph (B) of such 
                      corporation, trust, or association. Such tax shall 
                      be paid by the corporation, trust, or association.
                          ``(ii) Tax computed.--The amount of the tax 
                      imposed by clause (i) shall be the greater of--
                                    ``(I) $50,000, or
                                    ``(II) the amount determined 
                                (pursuant to regulations promulgated by 
                                the Secretary) by multiplying the net 
                                income generated by the assets described 
                                in the schedule specified in 
                                subparagraph (B)(ii) for the period 
                                specified in clause (iii) by the highest 
                                rate of tax specified in section 11.
                          ``(iii) Period.--For purposes of clause 
                      (ii)(II), the period described in this clause is 
                      the period beginning on the first date that the 
                      failure to satisfy the requirements of such 
                      paragraph (4) occurs as a result of the ownership 
                      of such assets and ending on the earlier of the 
                      date on which the trust disposes of such assets or 
                      the end of the first quarter when there is no 
                      longer a failure to satisfy such paragraph (4).
                          ``(iv) Administrative provisions.--For 
                      purposes of subtitle F, the taxes imposed by this 
                      subparagraph shall be treated as excise taxes with 
                      respect to which the deficiency procedures of such 
                      subtitle apply.''.
            (2) Modification of rules of application for failure to 
        satisfy sections 856(c)(2) or 856(c)(3).--Paragraph (6) of 
        section 856(c) (relating to definition of real estate investment 
        trust) is amended by striking subparagraphs (A) and (B), by 
        redesignating subparagraph (C) as subparagraph (B), and by 
        inserting before subparagraph (B) (as so redesignated) the 
        following new subparagraph:
                    ``(A) following the corporation, trust, or 
                association's identification of the failure to meet the 
                requirements of paragraph (2) or (3), or of both such 
                paragraphs, for any taxable year, a description of each 
                item of its gross income described in such paragraphs is 
                set forth in a schedule for such taxable year filed in 
                accordance with regulations prescribed by the Secretary, 
                and''.
            (3) Reasonable cause exception to loss of reit status if 
        failure to satisfy requirements.--Subsection (g) of section 856 
        (relating to termination of election) is amended--

[[Page 118 STAT. 1445]]

                    (A) in paragraph (1) by inserting before the period 
                at the end of the first sentence the following: ``unless 
                paragraph (5) applies'', and
                    (B) by adding at the end the following new 
                paragraph:
            ``(5) Entities to which paragraph applies.--This paragraph 
        applies to a corporation, trust, or association--
                    ``(A) which is not a real estate investment trust to 
                which the provisions of this part apply for the taxable 
                year due to one or more failures to comply with one or 
                more of the provisions of this part (other than 
                subsection (c)(6) or (c)(7) of section 856),
                    ``(B) such failures are due to reasonable cause and 
                not due to willful neglect, and
                    ``(C) if such corporation, trust, or association 
                pays (as prescribed by the Secretary in regulations and 
                in the same manner as tax) a penalty of $50,000 for each 
                failure to satisfy a provision of this part due to 
                reasonable cause and not willful neglect.''.
            (4) Deduction of tax paid from amount required to be 
        distributed.--Subparagraph (E) of section 857(b)(2) is amended 
        by striking ``(7)'' and inserting ``(7) of this subsection, 
        section 856(c)(7)(B)(iii), and section 856(g)(1).''.
            (5) Expansion of deficiency dividend procedure.--Subsection 
        (e) of section 860 is amended by striking ``or'' at the end of 
        paragraph (2), by striking the period at the end of paragraph 
        (3) and inserting ``; or'', and by adding at the end the 
        following new paragraph:
            ``(4) a statement by the taxpayer attached to its amendment 
        or supplement to a return of tax for the relevant tax year.''.

    (g) Effective <<NOTE: 26 USC 856 note.>> Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2000.
            (2) Subsections (c) through  (f).--The amendments made by 
        subsections (c), (d), (e), and (f) shall apply to taxable years 
        beginning after the date of the enactment of this Act.

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

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

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

    ``(a) Election To Treat Costs as Expenses.--
            ``(1) In general.--A taxpayer may elect to treat the cost of 
        any qualified film or television production as an expense which 
        is not chargeable to capital account. Any cost so treated shall 
        be allowed as a deduction.
            ``(2) Dollar limitation.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any qualified film or television production the 
                aggregate cost of which exceeds $15,000,000.
                    ``(B) Higher dollar limitation for productions in 
                certain areas.--In the case of any qualified film or 
                television production the aggregate cost of which is 
                significantly incurred in an area eligible for 
                designation as--

[[Page 118 STAT. 1446]]

                          ``(i) a low-income community under section 
                      45D, or
                          ``(ii) a distressed county or isolated area of 
                      distress by the Delta Regional Authority 
                      established under section 2009aa-1 of title 7, 
                      United States Code,
                subparagraph (A) shall be applied by substituting 
                `$20,000,000' for `$15,000,000'.

    ``(b) No Other Deduction or Amortization Deduction Allowable.--With 
respect to the basis of any qualified film or television production to 
which an election is made under subsection (a), no other depreciation or 
amortization deduction shall be allowable.
    ``(c) Election.--
            ``(1) In general.--An election under this section with 
        respect to any qualified film or television production shall be 
        made in such manner as prescribed by the Secretary and by the 
        due date (including extensions) for filing the taxpayer's return 
        of tax under this chapter for the taxable year in which costs of 
        the production are first incurred.
            ``(2) Revocation of election.--Any election made under this 
        section may not be revoked without the consent of the Secretary.

    ``(d) Qualified Film or Television Production.--For purposes of this 
section--
            ``(1) In general.--The term `qualified film or television 
        production' means any production described in paragraph (2) if 
        75 percent of the total compensation of the production is 
        qualified compensation.
            ``(2) Production.--
                    ``(A) In general.--A production is described in this 
                paragraph if such production is property described in 
                section 168(f)(3). For purposes of a television series, 
                only the first 44 episodes of such series may be taken 
                into account.
                    ``(B) Exception.--A production is not described in 
                this paragraph if records are required under section 
                2257 of title 18, United States Code, to be maintained 
                with respect to any performer in such production.
            ``(3) Qualified compensation.--For purposes of paragraph 
        (1)--
                    ``(A) In general.--The term `qualified compensation' 
                means compensation for services performed in the United 
                States by actors, directors, producers, and other 
                relevant production personnel.
                    ``(B) Participations and residuals excluded.--The 
                term `compensation' does not include participations and 
                residuals (as defined in section 167(g)(7)(B)).

    ``(e) Application of Certain Other Rules.--For purposes of this 
section, rules similar to the rules of subsections (b)(2) and (c)(4) of 
section 194 shall apply.
    ``(f) Termination.--This section shall not apply to qualified film 
and television productions commencing after December 31, 2008.''.
    (b) Conforming Amendment.--The table of sections for part VI of 
subchapter B of chapter 1 is amended by inserting after the item 
relating to section 180 the following new item:

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


[[Page 118 STAT. 1447]]



    (c) Effective Date.--The <<NOTE: 26 USC 181 note.>> amendments made 
by this section shall apply to qualified film and television productions 
(as defined in section 181(d)(1) of the Internal Revenue Code of 1986, 
as added by this section) commencing after the date of the enactment of 
this Act.

SEC. 245. CREDIT FOR MAINTENANCE OF RAILROAD TRACK.

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

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

    ``(a) General Rule.--For purposes of section 38, the railroad track 
maintenance credit determined under this section for the taxable year is 
an amount equal to 50 percent of the qualified railroad track 
maintenance expenditures paid or incurred by an eligible taxpayer during 
the taxable year.
    ``(b) Limitation.--The credit allowed under subsection (a) for any 
taxable year shall not exceed the product of--
            ``(1) $3,500, and
            ``(2) the number of miles of railroad track owned or leased 
        by the eligible taxpayer as of the close of the taxable year.

A mile of railroad track may be taken into account by a person other 
than the owner only if such mile is assigned to such person by the owner 
for purposes of this subsection. Any mile which is so assigned may not 
be taken into account by the owner for purposes of this subsection.
    ``(c) Eligible Taxpayer.--For purposes of this section, the term 
`eligible taxpayer' means--
            ``(1) any Class II or Class III railroad, and
            ``(2) any person who transports property using the rail 
        facilities of a person described in paragraph (1) or who 
        furnishes railroad-related property or services to such a 
        person.

    ``(d) Qualified Railroad Track Maintenance Expenditures.--For 
purposes of this section, the term `qualified railroad track maintenance 
expenditures' means expenditures (whether or not otherwise chargeable to 
capital account) for maintaining railroad track (including roadbed, 
bridges, and related track structures) owned or leased as of January 1, 
2005, by a Class II or Class III railroad.
    ``(e) Other Definitions and Special Rules.--
            ``(1) Class ii or Class iii railroad.--For purposes of this 
        section, the terms `Class II railroad' and `Class III railroad' 
        have the respective meanings given such terms by the Surface 
        Transportation Board.
            ``(2) Controlled groups.--Rules similar to the rules of 
        paragraph (1) of section 41(f) shall apply for purposes of this 
        section.
            ``(3) Basis adjustment.--For purposes of this subtitle, if a 
        credit is allowed under this section with respect to any 
        railroad track, the basis of such track shall be reduced by the 
        amount of the credit so allowed.

    ``(f) Application of Section.--This section shall apply to qualified 
railroad track maintenance expenditures paid or incurred during taxable 
years beginning after December 31, 2004, and before January 1, 2008.''.
    (b) Limitation on Carryback.--

[[Page 118 STAT. 1448]]

            (1) In general.--Subsection (d) of section 39 is amended to 
        read as follows:

    ``(d) Transitional Rule.--No portion of the unused business credit 
for any taxable year which is attributable to a credit specified in 
section 38(b) or any portion thereof may be carried back to any taxable 
year before the first taxable year for which such specified credit or 
such portion is allowable (without regard to subsection (a)).''.
            (2) Effective date.--The <<NOTE: 26 USC 39 note.>> amendment 
        made by paragraph (1) shall apply with respect to taxable years 
        ending after December 31, 2003.

    (c) Conforming Amendments.--
            (1) Section 38(b) (relating to general business credit) is 
        amended by striking ``plus'' at the end of paragraph (14), by 
        striking the period at the end of paragraph (15) and inserting 
        ``, plus'', and by adding at the end the following new 
        paragraph:
            ``(16) the railroad track maintenance credit determined 
        under section 45G(a).''.
            (2) Subsection (a) of section 1016 is amended by striking 
        ``and'' at the end of paragraph (27), by striking the period at 
        the end of paragraph (28) and inserting ``, and'', and by 
        inserting after paragraph (28) the following new paragraph:
            ``(29) in the case of railroad track with respect to which a 
        credit was allowed under section 45G, to the extent provided in 
        section 45G(e)(3).''.

    (d) Clerical Amendment.--The table of sections for subpart D of part 
IV of subchapter A of chapter 1 is amended by inserting after the item 
relating to section 45F the following new item:

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

    (e) Effective Date.--The <<NOTE: 26 USC 38 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

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

``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.

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

[[Page 118 STAT. 1449]]

    (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 <<NOTE: 26 USC 5117 note.>> amendments made 
by this section shall take effect on the date of the enactment of this 
Act.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 514 note.>> amendment made 
by this section shall apply to indebtedness incurred after the date of 
the enactment of this Act by a small business investment company 
licensed after the date of the enactment of this Act.

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

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

[[Page 118 STAT. 1450]]

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

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

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

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

``SEC. 1353. NOTIONAL SHIPPING INCOME.

    ``(a) In General.--For purposes of this subchapter, the notional 
shipping income of an electing corporation shall be the sum of the 
amounts determined under subsection (b) for each qualifying vessel 
operated by such electing corporation.
    ``(b) Amounts.--
            ``(1) In general.--For purposes of subsection (a), the 
        amount of notional shipping income of an electing corporation 
        for each qualifying vessel for the taxable year shall equal the 
        product of--
                    ``(A) the daily notional shipping income, and
                    ``(B) the number of days during the taxable year 
                that the electing corporation operated such vessel as a 
                qualifying vessel in United States foreign trade.
            ``(2) Treatment of vessels the income from which is not 
        otherwise subject to tax.--In the case of a qualifying vessel 
        any of the income from which is not included in gross income by 
        reason of section 883 or otherwise, the amount of notional 
        shipping income from such vessel for the taxable year shall be 
        the amount which bears the same ratio to such shipping income 
        (determined without regard to this paragraph) as the gross 
        income from the operation of such vessel in the United States 
        foreign trade bears to the sum of such gross income and the 
        income so excluded.

    ``(c) Daily Notional Shipping Income.--For purposes of subsection 
(b), the daily notional shipping income from the operation of a 
qualifying vessel is--
            ``(1) 40 cents for each 100 tons of so much of the net 
        tonnage of the vessel as does not exceed 25,000 net tons, and
            ``(2) 20 cents for each 100 tons of so much of the net 
        tonnage of the vessel as exceeds 25,000 net tons.

    ``(d) Multiple Operators of Vessel.--If for any period 2 or more 
persons are operators of a qualifying vessel, the notional shipping 
income from the operation of such vessel for such period

[[Page 118 STAT. 1451]]

shall be allocated among such persons on the basis of their respective 
ownership and charter interests in such vessel or on such other basis as 
the Secretary may prescribe by regulations.

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

    ``(a) In General.--A qualifying vessel operator may elect the 
application of this subchapter.
    ``(b) Time and Manner; Years for Which Effective.--An election under 
this subchapter--
            ``(1) shall be made in such form as prescribed by the 
        Secretary, and
            ``(2) shall be effective for the taxable year for which made 
        and all succeeding taxable years until terminated under 
        subsection (d).

Such election may be effective for any taxable year only if made before 
the due date (including extensions) for filing the corporation's return 
for such taxable year.
    ``(c) Consistent <<NOTE: Applicability.>> Elections By Members of 
Controlled Groups.--An election under subsection (a) by a member of a 
controlled group shall apply to all qualifying vessel operators that are 
members of such group.

    ``(d) Termination.--
            ``(1) By revocation.--
                    ``(A) In general.--An election under subsection (a) 
                may be terminated by revocation.
                    ``(B) When effective.--Except as provided in 
                subparagraph (C)--
                          ``(i) a revocation made during the taxable 
                      year and on or before the 15th day of the 3d month 
                      thereof shall be effective on the 1st day of such 
                      taxable year, and
                          ``(ii) a revocation made during the taxable 
                      year but after such 15th day shall be effective on 
                      the 1st day of the following taxable year.
                    ``(C) Revocation may specify prospective date.--If 
                the revocation specifies a date for revocation which is 
                on or after the day on which the revocation is made, the 
                revocation shall be effective for taxable years 
                beginning on and after the date so specified.
            ``(2) By person ceasing to be qualifying vessel operator.--
                    ``(A) In general.--An election under subsection (a) 
                shall be terminated whenever (at any time on or after 
                the 1st day of the 1st taxable year for which the 
                corporation is an electing corporation) such corporation 
                ceases to be a qualifying vessel operator.
                    ``(B) When effective.--Any termination under this 
                paragraph shall be effective on and after the date of 
                cessation.
                    ``(C) Annualization.--The Secretary shall prescribe 
                such annualization and other rules as are appropriate in 
                the case of a termination under this paragraph.

    ``(e) Election After Termination.--If a qualifying vessel operator 
has made an election under subsection (a) and if such election has been 
terminated under subsection (d), such operator (and any successor 
operator) shall not be eligible to make an election under

[[Page 118 STAT. 1452]]

subsection (a) for any taxable year before its 5th taxable year which 
begins after the 1st taxable year for which such termination is 
effective, unless the Secretary consents to such election.

``SEC. 1355. DEFINITIONS AND SPECIAL RULES.

    ``(a) Definitions.--For purposes of this subchapter--
            ``(1) Electing corporation.--The term `electing corporation' 
        means any corporation for which an election is in effect under 
        this subchapter.
            ``(2) Electing group; controlled group.--
                    ``(A) Electing group.--The term `electing group' 
                means a controlled group of which one or more members is 
                an electing corporation.
                    ``(B) Controlled group.--The term `controlled group' 
                means any group which would be treated as a single 
                employer under subsection (a) or (b) of section 52 if 
                paragraphs (1) and (2) of section 52(a) did not apply.
            ``(3) Qualifying vessel operator.--The term `qualifying 
        vessel operator' means any corporation--
                    ``(A) who operates one or more qualifying vessels, 
                and
                    ``(B) who meets the shipping activity requirement in 
                subsection (c).
            ``(4) Qualifying vessel.--The term `qualifying vessel' means 
        a self-propelled (or a combination self-propelled and non-self-
        propelled) United States flag vessel of not less than 10,000 
        deadweight tons used exclusively in the United States foreign 
        trade during the period that the election under this subchapter 
        is in effect.
            ``(5) United states flag vessel.--The term `United States 
        flag vessel' means any vessel documented under the laws of the 
        United States.
            ``(6) United states domestic trade.--The term `United States 
        domestic trade' means the transportation of goods or passengers 
        between places in the United States.
            ``(7) United states foreign trade.--The term `United States 
        foreign trade' means the transportation of goods or passengers 
        between a place in the United States and a foreign place or 
        between foreign places.
            ``(8) Charter.--The term `charter' includes an operating 
        agreement.

    ``(b) Operating a Vessel.--For purposes of this subchapter--
            ``(1) In general.--Except as provided in paragraph (2), a 
        person is treated as operating any vessel during any period if 
        such vessel is--
                    ``(A) owned by, or chartered (including a time 
                charter) to, the person, and
                    ``(B) is in use as a qualifying vessel during such 
                period.
            ``(2) Bareboat charters.--A person is treated as operating 
        and using a vessel that it has chartered out on bareboat charter 
        terms only if--
                    ``(A)(i) the vessel is temporarily surplus to the 
                person's requirements and the term of the charter does 
                not exceed 3 years, or
                    ``(ii) the vessel is bareboat chartered to a member 
                of a controlled group which includes such person or to 
                an unrelated person who sub-bareboats or time charters 
                the

[[Page 118 STAT. 1453]]

                vessel to such a member (including the owner of the 
                vessel), and
                    ``(B) the vessel is used as a qualifying vessel by 
                the person to whom ultimately chartered.

    ``(c) Shipping Activity Requirement.--For purposes of this section--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, a corporation meets the shipping activity 
        requirement of this subsection for any taxable year only if the 
        requirement of paragraph (4) is met for each of the 2 preceding 
        taxable years.
            ``(2) Special rule for 1st year of election.--A corporation 
        meets the shipping activity requirement of this subsection for 
        the first taxable year for which the election under section 
        1354(a) is in effect only if the requirement of paragraph (4) is 
        met for the preceding taxable year.
            ``(3) Controlled groups.--A corporation who is a member of a 
        controlled group meets the shipping activity requirement of this 
        subsection only if such requirement is met determined--
                    ``(A) by treating all members of such group as 1 
                person, and
                    ``(B) by disregarding vessel charters between 
                members of such group.
            ``(4) Requirement.--The requirement of this paragraph is met 
        for any taxable year if, on average during such year, at least 
        25 percent of the aggregate tonnage of qualifying vessels used 
        by the corporation were owned by such corporation or chartered 
        to such corporation on bareboat charter terms.

    ``(d) Activities Carried on Partnerships, Etc.--In applying this 
subchapter to a partner in a partnership--
            ``(1) each partner shall be treated as operating vessels 
        operated by the partnership,
            ``(2) each partner shall be treated as conducting the 
        activities conducted by the partnership, and
            ``(3) the extent of a partner's ownership or charter 
        interest in any vessel owned by or chartered to the partnership 
        shall be determined on the basis of the partner's interest in 
        the partnership.

A similar <<NOTE: Applicability.>> rule shall apply with respect to 
other pass-thru entities.

    ``(e) Effect of Temporarily Ceasing To Operate a Qualifying 
Vessel.--
            ``(1) In general.--For purposes of subsections (b) and (c), 
        an electing corporation shall be treated as continuing to use a 
        qualifying vessel during any period of temporary cessation if 
        the electing corporation gives timely notice to the Secretary 
        stating--
                    ``(A) that it has temporarily ceased to operate the 
                qualifying vessel, and
                    ``(B) its intention to resume operating the 
                qualifying vessel.
            ``(2) Notice.--Notice shall be deemed timely if given not 
        later than the due date (including extensions) for the 
        corporation's tax return for the taxable year in which the 
        temporary cessation begins.
            ``(3) Period disregard in effect.--The period of temporary 
        cessation under paragraph (1) shall continue until the earlier 
        of the date on which--

[[Page 118 STAT. 1454]]

                    ``(A) the electing corporation abandons its 
                intention to resume operation of the qualifying vessel, 
                or
                    ``(B) the electing corporation resumes operation of 
                the qualifying vessel.

    ``(f) Effect of Temporarily Operating a Qualifying Vessel in the 
United States Domestic Trade.--
            ``(1) In general.--For purposes of this subchapter, an 
        electing corporation shall be treated as continuing to use a 
        qualifying vessel in the United States foreign trade during any 
        period of temporary use in the United States domestic trade if 
        the electing corporation gives timely notice to the Secretary 
        stating--
                    ``(A) that it temporarily operates or has operated 
                in the United States domestic trade a qualifying vessel 
                which had been used in the United States foreign trade, 
                and
                    ``(B) its intention to resume operation of the 
                vessel in the United States foreign trade.
            ``(2) Notice.--Notice shall be deemed timely if given not 
        later than the due date (including extensions) for the 
        corporation's tax return for the taxable year in which the 
        temporary cessation begins.
            ``(3) Period disregard in effect.--The period of temporary 
        use under paragraph (1) continues until the earlier of the date 
        of which--
                    ``(A) the electing corporation abandons its 
                intention to resume operations of the vessel in the 
                United States foreign trade, or
                    ``(B) the electing corporation resumes operation of 
                the vessel in the United States foreign trade.
            ``(4) No disregard if domestic trade use exceeds 30 days.--
        Paragraph (1) shall not apply to any qualifying vessel which is 
        operated in the United States domestic trade for more than 30 
        days during the taxable year.

    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.

``SEC. 1356. QUALIFYING SHIPPING ACTIVITIES.

    ``(a) Qualifying Shipping Activities.--For purposes of this 
subchapter, the term `qualifying shipping activities' means--
            ``(1) core qualifying activities,
            ``(2) qualifying secondary activities, and
            ``(3) qualifying incidental activities.

    ``(b) Core Qualifying Activities.--For purposes of this subchapter, 
the term `core qualifying activities' means activities in operating 
qualifying vessels in United States foreign trade.
    ``(c) Qualifying Secondary Activities.--For purposes of this 
section--
            ``(1) In general.--The term `qualifying secondary 
        activities' means secondary activities but only to the extent 
        that, without regard to this subchapter, the gross income 
        derived by such corporation from such activities does not exceed 
        20 percent of the gross income derived by the corporation from 
        its core qualifying activities.
            ``(2) Secondary activities.--The term `secondary activities' 
        means--

[[Page 118 STAT. 1455]]

                    ``(A) the active management or operation of vessels 
                other than qualifying vessels in the United States 
                foreign trade,
                    ``(B) the provision of vessel, barge, container, or 
                cargo-related facilities or services to any person,
                    ``(C) other activities of the electing corporation 
                and other members of its electing group that are an 
                integral part of its business of operating qualifying 
                vessels in United States foreign trade, including--
                          ``(i) ownership or operation of barges, 
                      containers, chassis, and other equipment that are 
                      the complement of, or used in connection with, a 
                      qualifying vessel in United States foreign trade,
                          ``(ii) the inland haulage of cargo shipped, or 
                      to be shipped, on qualifying vessels in United 
                      States foreign trade, and
                          ``(iii) the provision of terminal, 
                      maintenance, repair, logistical, or other vessel, 
                      barge, container, or cargo-related services that 
                      are an integral part of operating qualifying 
                      vessels in United States foreign trade, and
                    ``(D) such other activities as may be prescribed by 
                the Secretary pursuant to regulations.
            ``(3) Coordination with core activities.--
                    ``(A) In general.--Such term shall not include any 
                core qualifying activities.
                    ``(B) Nonelecting corporations.--In the case of a 
                corporation (other than an electing corporation) which 
                is a member of an electing group, any core qualifying 
                activities of the corporation shall be treated as 
                qualifying secondary activities (and not as core 
                qualifying activities).

    ``(d) Qualifying Incidental Activities.--For purposes of this 
section, the term `qualified incidental activities' means shipping-
related activities if--
            ``(1) they are incidental to the corporation's core 
        qualifying activities,
            ``(2) they are not qualifying secondary activities, and
            ``(3) without regard to this subchapter, the gross income 
        derived by such corporation from such activities does not exceed 
        0.1 percent of the corporation's gross income from its core 
        qualifying activities.

    ``(e) Application of Gross Income Tests in Case of Electing Group.--
In the case of an electing group, subsections (c)(1) and (d)(3) shall be 
applied as if such group were 1 entity, and the limitations under such 
subsections shall be allocated among the corporations in such group.

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

    ``(a) Exclusion From Gross Income.--Gross income of an electing 
corporation shall not include its income from qualifying shipping 
activities.
    ``(b) Electing Group Member.--Gross income of a corporation (other 
than an electing corporation) which is a member of an electing group 
shall not include its income from qualifying shipping activities 
conducted by such member.
    ``(c) Denial of Losses, Deductions, and Credits.--

[[Page 118 STAT. 1456]]

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

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

    ``(a) Qualifying Shipping Activities.--For purposes of this chapter, 
the qualifying shipping activities of an electing corporation shall be 
treated as a separate trade or business activity distinct from all other 
activities conducted by such corporation.
    ``(b) Exclusion of Credits or Deductions.--
            ``(1) No deduction shall be allowed against the notional 
        shipping income of an electing corporation, and no credit shall 
        be allowed against the tax imposed by section 1352(a)(2).
            ``(2) No deduction shall be allowed for any net operating 
        loss attributable to the qualifying shipping activities of any 
        person to the extent that such loss is carried forward by such 
        person from a taxable year preceding the first taxable year for 
        which such person was an electing corporation.

    ``(c) Transactions <<NOTE: Applicability.>> Not at Arm's Length.--
Section 482 applies in accordance with this subsection to a transaction 
or series of transactions--
            ``(1) as between an electing corporation and another person, 
        or
            ``(2) as between an person's qualifying shipping activities 
        and other activities carried on by it.

``SEC. 1359. DISPOSITION OF QUALIFYING VESSELS.

    ``(a) In General.--If any qualifying vessel operator sells or 
disposes of any qualifying vessel in an otherwise taxable transaction, 
at the election of such operator, no gain shall be recognized

[[Page 118 STAT. 1457]]

if any replacement qualifying vessel is acquired during the period 
specified in subsection (b), except to the extent that the amount 
realized upon such sale or disposition exceeds the cost of the 
replacement qualifying vessel.
    ``(b) Period Within Which Property Must Be Replaced.--The period 
referred to in subsection (a) shall be the period beginning one year 
prior to the disposition of the qualifying vessel and ending--
            ``(1) 3 years after the close of the first taxable year in 
        which the gain is realized, or
            ``(2) subject to such terms and conditions as may be 
        specified by the Secretary, on such later date as the Secretary 
        may designate on application by the taxpayer.

Such application shall be made at such time and in such manner as the 
Secretary may by regulations prescribe.
    ``(c) Application of Section to Noncorporate Operators.--For 
purposes of this section, the term `qualifying vessel operator' includes 
any person who would be a qualifying vessel operator were such person a 
corporation.
    ``(d) Time for Assessment of Deficiency Attributable to Gain.--If a 
qualifying vessel operator has made the election provided in subsection 
(a), then--
            ``(1) the statutory period for the assessment of any 
        deficiency, for any taxable year in which any part of the gain 
        is realized, attributable to such gain shall not expire prior to 
        the expiration of 3 years from the date the Secretary is 
        notified by such operator (in such manner as the Secretary may 
        by regulations prescribe) of the replacement qualifying vessel 
        or of an intention not to replace, and
            ``(2) such deficiency may be assessed before the expiration 
        of such 3-year period notwithstanding the provisions of section 
        6212(c) or the provisions of any other law or rule of law which 
        would otherwise prevent such assessment.

    ``(e) Basis of Replacement Qualifying Vessel.--In the case of any 
replacement qualifying vessel purchased by the qualifying vessel 
operator which resulted in the nonrecognition of any part of the gain 
realized as the result of a sale or other disposition of a qualifying 
vessel, the basis shall be the cost of the replacement qualifying vessel 
decreased in the amount of the gain not so recognized; and if the 
property purchased consists of more than one piece of property, the 
basis determined under this sentence shall be allocated to the purchased 
properties in proportion to their respective costs.''.
    (b) Technical Amendments.--
            (1) The second sentence of section 56(g)(4)(B)(i), as 
        amended by this Act, is further amended by inserting ``or 1357'' 
        after ``section 139A''.
            (2) The table of subchapters for chapter 1 is amended by 
        inserting after the item relating to subchapter S the following 
        new item:

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

    (c) Effective Date.--The <<NOTE: 26 USC 56 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

[[Page 118 STAT. 1458]]

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

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

    (a) Exclusion From Employment Taxes.--
            (1) Social security taxes.--
                    (A) Section 3121(a) (relating to definition of 
                wages) is amended by striking ``or'' at the end of 
                paragraph (20), by striking the period at the end of 
                paragraph (21) and inserting ``; or'', and by inserting 
                after paragraph (21) the following new paragraph:
            ``(22) remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive stock 
                option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
                    (B) Section 209(a) of the <<NOTE: 42 USC 
                409.>> Social Security Act is amended by striking ``or'' 
                at the end of paragraph (17), by striking the period at 
                the end of paragraph (18) and inserting ``; or'', and by 
                inserting after paragraph (18) the following new 
                paragraph:
            ``(19) Remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive stock 
                option (as defined in section 422(b) of the Internal 
                Revenue Code of 1986) or under an employee stock 
                purchase plan (as defined in section 423(b) of such 
                Code), or
                    ``(B) any disposition by the individual of such 
                stock.''.
            (2) Railroad retirement taxes.--Subsection (e) of section 
        3231 is amended by adding at the end the following new 
        paragraph:
            ``(12) Qualified stock options.--The term `compensation' 
        shall not include any remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive stock 
                option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
            (3) Unemployment taxes.--Section 3306(b) (relating to 
        definition of wages) is amended by striking ``or'' at the end of 
        paragraph (17), by striking the period at the end of paragraph 
        (18) and inserting ``; or'', and by inserting after paragraph 
        (18) the following new paragraph:
            ``(19) remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive stock 
                option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.

    (b) Wage Withholding Not Required on Disqualifying Dispositions.--
Section 421(b) (relating to effect of disqualifying dispositions) is 
amended by adding at the end the following new sentence: ``No amount 
shall be required to be deducted and withheld

[[Page 118 STAT. 1459]]

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 <<NOTE: 26 USC 421 note.>> amendments made 
by this section shall apply to stock acquired pursuant to options 
exercised after the date of the enactment of this Act.

      TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS

            Subtitle A--Volumetric Ethanol Excise Tax Credit

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

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

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

    ``(a) Allowance of Credits.--There shall be allowed as a credit 
against the tax imposed by section 4081 an amount equal to the sum of--
            ``(1) the alcohol fuel mixture credit, plus
            ``(2) the biodiesel mixture credit.

    ``(b) Alcohol Fuel Mixture Credit.--
            ``(1) In general.--For purposes of this section, the alcohol 
        fuel mixture credit is the product of the applicable amount and 
        the number of gallons of alcohol used by the taxpayer in 
        producing any alcohol fuel mixture for sale or use in a trade or 
        business of the taxpayer.
            ``(2) Applicable amount.--For purposes of this subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the applicable amount is 51 cents.
                    ``(B) Mixtures not containing ethanol.--In the case 
                of an alcohol fuel mixture in which none of the alcohol 
                consists of ethanol, the applicable amount is 60 cents.
            ``(3) Alcohol fuel mixture.--For purposes of this 
        subsection, the term `alcohol fuel mixture' means a mixture of 
        alcohol and a taxable fuel which--
                    ``(A) is sold by the taxpayer producing such mixture 
                to any person for use as a fuel, or
                    ``(B) is used as a fuel by the taxpayer producing 
                such mixture.

[[Page 118 STAT. 1460]]

        For purposes of subparagraph (A), a mixture produced by any 
        person at a refinery prior to a taxable event which includes 
        ethyl tertiary butyl ether or other ethers produced from alcohol 
        shall be treated as sold at the time of its removal from the 
        refinery (and only at such time) to another person for use as a 
        fuel.
            ``(4) Other definitions.--For purposes of this subsection--
                    ``(A) Alcohol.--The term `alcohol' includes methanol 
                and ethanol but does not include--
                          ``(i) alcohol produced from petroleum, natural 
                      gas, or coal (including peat), or
                          ``(ii) alcohol with a proof of less than 190 
                      (determined without regard to any added 
                      denaturants).
                Such term also includes an alcohol gallon equivalent of 
                ethyl tertiary butyl ether or other ethers produced from 
                such alcohol.
                    ``(B) Taxable fuel.--The term `taxable fuel' has the 
                meaning given such term by section 4083(a)(1).
            ``(5) Termination.--This subsection shall not apply to any 
        sale, use, or removal for any period after December 31, 2010.

    ``(c) Biodiesel Mixture Credit.--
            ``(1) In general.--For purposes of this section, the 
        biodiesel mixture credit is the product of the applicable amount 
        and the number of gallons of biodiesel used by the taxpayer in 
        producing any biodiesel mixture for sale or use in a trade or 
        business of the taxpayer.
            ``(2) Applicable amount.--For purposes of this subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the applicable amount is 50 cents.
                    ``(B) Amount for agri-biodiesel.--In the case of any 
                biodiesel which is agri-biodiesel, the applicable amount 
                is $1.00.
            ``(3) Biodiesel mixture.--For purposes of this section, the 
        term `biodiesel mixture' means a mixture of biodiesel and diesel 
        fuel (as defined in section 4083(a)(3)), determined without 
        regard to any use of kerosene, which--
                    ``(A) is sold by the taxpayer producing such mixture 
                to any person for use as a fuel, or
                    ``(B) is used as a fuel by the taxpayer producing 
                such mixture.
            ``(4) Certification for biodiesel.--No credit shall be 
        allowed under this subsection unless the taxpayer obtains a 
        certification (in such form and manner as prescribed by the 
        Secretary) from the producer of the biodiesel which identifies 
        the product produced and the percentage of biodiesel and agri-
        biodiesel in the product.
            ``(5) Other definitions.--Any term used in this subsection 
        which is also used in section 40A shall have the meaning given 
        such term by section 40A.
            ``(6) Termination.--This subsection shall not apply to any 
        sale, use, or removal for any period after December 31, 2006.

    ``(d) Mixture Not Used As a Fuel, Etc.--
            ``(1) Imposition of tax.--If--
                    ``(A) any credit was determined under this section 
                with respect to alcohol or biodiesel used in the 
                production of

[[Page 118 STAT. 1461]]

                any alcohol fuel mixture or biodiesel mixture, 
                respectively, and
                    ``(B) any person--
                          ``(i) separates the alcohol or biodiesel from 
                      the mixture, or
                          ``(ii) without separation, uses the mixture 
                      other than as a fuel,
                then there is hereby imposed on such person a tax equal 
                to the product of the applicable amount and the number 
                of gallons of such alcohol or biodiesel.
            ``(2) Applicable laws.--All provisions of law, including 
        penalties, shall, insofar as applicable and not inconsistent 
        with this section, apply in respect of any tax imposed under 
        paragraph (1) as if such tax were imposed by section 4081 and 
        not by this section.

    ``(e) Coordination With Exemption From Excise Tax.--Rules similar to 
the rules under section 40(c) shall apply for purposes of this 
section.''.
    (b) Registration Requirement.--Section 4101(a)(1) (relating to 
registration), as amended by section 861, is amended by inserting ``and 
every person producing or importing biodiesel (as defined in section 
40A(d)(1)) or alcohol (as defined in section 6426(b)(4)(A))'' before 
``shall register with the Secretary''.
    (c) Additional Amendments.--
            (1) Section 40(c) is amended by striking ``subsection 
        (b)(2), (k), or (m) of section 4041, section 4081(c), or section 
        4091(c)'' and inserting ``section 4041(b)(2), section 6426, or 
        section 6427(e)''.
            (2) Paragraph (4) of section 40(d) is amended to read as 
        follows:
            ``(4) Volume of alcohol.--For purposes of determining under 
        subsection (a) the number of gallons of alcohol with respect to 
        which a credit is allowable under subsection (a), the volume of 
        alcohol shall include the volume of any denaturant (including 
        gasoline) which is added under any formulas approved by the 
        Secretary to the extent that such denaturants do not exceed 5 
        percent of the volume of such alcohol (including 
        denaturants).''.
            (3) Section 40(e)(1) is amended--
                    (A) by striking ``2007'' in subparagraph (A) and 
                inserting ``2010'', and
                    (B) by striking ``2008'' in subparagraph (B) and 
                inserting ``2011''.
            (4) Section 40(h) is amended--
                    (A) by striking ``2007'' in paragraph (1) and 
                inserting ``2010'', and
                    (B) by striking ``, 2006, or 2007'' in the table 
                contained in paragraph (2) and inserting ``through 
                2010''.
            (5) Section 4041(b)(2)(B) is amended by striking ``a 
        substance other than petroleum or natural gas'' and inserting 
        ``coal (including peat)''.
            (6) Section 4041 is amended by striking subsection (k).
            (7) Section 4081 is amended by striking subsection (c).
            (8) Paragraph (2) of section 4083(a) is amended to read as 
        follows:
            ``(2) Gasoline.--The term `gasoline'--

[[Page 118 STAT. 1462]]

                    ``(A) includes any gasoline blend, other than 
                qualified methanol or ethanol fuel (as defined in 
                section 4041(b)(2)(B)), partially exempt methanol or 
                ethanol fuel (as defined in section 4041(m)(2)), or a 
                denatured alcohol, and
                    ``(B) includes, to the extent prescribed in 
                regulations--
                          ``(i) any gasoline blend stock, and
                          ``(ii) any product commonly used as an 
                      additive in gasoline (other than alcohol).
        For purposes of subparagraph (B)(i), the term `gasoline blend 
        stock' means any petroleum product component of gasoline.''.
            (9) Section 6427 is amended by inserting after subsection 
        (d) the following new subsection:

    ``(e) Alcohol or Biodiesel Used To Produce Alcohol Fuel and 
Biodiesel Mixtures.--Except as provided in subsection (k)--
            ``(1) Used to produce a mixture.--If any person produces a 
        mixture described in section 6426 in such person's trade or 
        business, the Secretary shall pay (without interest) to such 
        person an amount equal to the alcohol fuel mixture credit or the 
        biodiesel mixture credit with respect to such mixture.
            ``(2) Coordination with other repayment provisions.--No 
        amount shall be payable under paragraph (1) with respect to any 
        mixture with respect to which an amount is allowed as a credit 
        under section 6426.
            ``(3) Termination.--This subsection shall not apply with 
        respect to--
                    ``(A) any alcohol fuel mixture (as defined in 
                section 6426(b)(3)) sold or used after December 31, 
                2010, and
                    ``(B) any biodiesel mixture (as defined in section 
                6426(c)(3)) sold or used after December 31, 2006.''.
            (10) Section 6427(i)(3) is amended--
                    (A) by striking ``subsection (f)'' both places it 
                appears in subparagraph (A) and inserting ``subsection 
                (e)(1)'',
                    (B) by striking ``gasoline, diesel fuel, or kerosene 
                used to produce a qualified alcohol mixture (as defined 
                in section 4081(c)(3))'' in subparagraph (A) and 
                inserting ``a mixture described in section 6426'',
                    (C) by adding at the end of subparagraph (A) the 
                following new flush sentence:
                ``In the case of an electronic claim, this subparagraph 
                shall be applied without regard to clause (i).'',
                    (D) by striking ``subsection (f)(1)'' in 
                subparagraph (B) and inserting ``subsection (e)(1)'',
                    (E) by striking ``20 days of the date of the filing 
                of such claim'' in subparagraph (B) and inserting ``45 
                days of the date of the filing of such claim (20 days in 
                the case of an electronic claim)'', and
                    (F) by striking ``alcohol mixture'' in the heading 
                and inserting ``alcohol fuel and biodiesel mixture''.
            (11) Section 9503(b)(1) is amended by adding at the end the 
        following new flush sentence:
        ``For purposes of this paragraph, taxes received under sections 
        4041 and 4081 shall be determined without reduction for credits 
        under section 6426.''.
            (12) Section 9503(b)(4) is amended--
                    (A) by adding ``or'' at the end of subparagraph (C),

[[Page 118 STAT. 1463]]

                    (B) by striking the comma at the end of subparagraph 
                (D)(iii) and inserting a period, and
                    (C) by striking subparagraphs (E) and (F).
            (13) Section 9503(c)(2)(A) is amended by adding at the end 
        the following: ``Clauses (i)(III) and (ii) shall not apply to 
        claims under section 6427(e).''.
            (14) The table of sections for subchapter B of chapter 65 is 
        amended by inserting after the item relating to section 6425 the 
        following new item:

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

    (d) Effective <<NOTE: 26 USC 40 note.>> Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        fuel sold or used after December 31, 2004.
            (2) Registration requirement.--The amendment made by 
        subsection (b) shall take effect on April 1, 2005.
            (3) Extension of alcohol fuels credit.--The amendments made 
        by paragraphs (3), (4), and (14) of subsection (c) shall take 
        effect on the date of the enactment of this Act.
            (4) Repeal <<NOTE: Applicability.>> of general fund 
        retention of certain alcohol fuels taxes.--The amendments made 
        by subsection (c)(12) shall apply to fuel sold or used after 
        September 30, 2004.

    (e) Format for Filing.--The <<NOTE: Deadline. 26 USC 6427 
note.>> Secretary of the Treasury shall describe the electronic format 
for filing claims described in section 6427(i)(3)(B) of the Internal 
Revenue Code of 1986 (as amended by subsection (c)(10)(C)) not later 
than December 31, 2004.

SEC. 302. BIODIESEL INCOME TAX CREDIT.

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

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

    ``(a) General Rule.--For purposes of section 38, the biodiesel fuels 
credit determined under this section for the taxable year is an amount 
equal to the sum of--
            ``(1) the biodiesel mixture credit, plus
            ``(2) the biodiesel credit.

    ``(b) Definition of Biodiesel Mixture Credit and Biodiesel Credit.--
For purposes of this section--
            ``(1) Biodiesel mixture credit.--
                    ``(A) In general.--The biodiesel mixture credit of 
                any taxpayer for any taxable year is 50 cents for each 
                gallon of biodiesel used by the taxpayer in the 
                production of a qualified biodiesel mixture.
                    ``(B) Qualified biodiesel mixture.--The term 
                `qualified biodiesel mixture' means a mixture of 
                biodiesel and diesel fuel (as defined in section 
                4083(a)(3)), determined without regard to any use of 
                kerosene, which--
                          ``(i) is sold by the taxpayer producing such 
                      mixture to any person for use as a fuel, or
                          ``(ii) is used as a fuel by the taxpayer 
                      producing such mixture.
                    ``(C) Sale or use must be in trade or business, 
                etc.--Biodiesel used in the production of a qualified 
                biodiesel mixture shall be taken into account--

[[Page 118 STAT. 1464]]

                          ``(i) only if the sale or use described in 
                      subparagraph (B) is in a trade or business of the 
                      taxpayer, and
                          ``(ii) for the taxable year in which such sale 
                      or use occurs.
                    ``(D) Casual off-farm production not eligible.--No 
                credit shall be allowed under this section with respect 
                to any casual off-farm production of a qualified 
                biodiesel mixture.
            ``(2) Biodiesel credit.--
                    ``(A) In general.--The biodiesel credit of any 
                taxpayer for any taxable year is 50 cents for each 
                gallon of biodiesel which is not in a mixture with 
                diesel fuel and which during the taxable year--
                          ``(i) is used by the taxpayer as a fuel in a 
                      trade or business, or
                          ``(ii) is sold by the taxpayer at retail to a 
                      person and placed in the fuel tank of such 
                      person's vehicle.
                    ``(B) User credit not to apply to biodiesel sold at 
                retail.--No credit shall be allowed under subparagraph 
                (A)(i) with respect to any biodiesel which was sold in a 
                retail sale described in subparagraph (A)(ii).
            ``(3) Credit for agri-biodiesel.--
        In <<NOTE: Applicability.>> the case of any biodiesel which is 
        agri-biodiesel, paragraphs (1)(A) and (2)(A) shall be applied by 
        substituting `$1.00' for `50 cents'.
            ``(4) Certification for biodiesel.--No credit shall be 
        allowed under this section unless the taxpayer obtains a 
        certification (in such form and manner as prescribed by the 
        Secretary) from the producer or importer of the biodiesel which 
        identifies the product produced and the percentage of biodiesel 
        and agri-biodiesel in the product.

    ``(c) Coordination With Credit Against Excise Tax.--The amount of 
the credit determined under this section with respect to any biodiesel 
shall be properly reduced to take into account any benefit provided with 
respect to such biodiesel solely by reason of the application of section 
6426 or 6427(e).
    ``(d) Definitions and Special Rules.--For purposes of this section--
            ``(1) Biodiesel.--The term `biodiesel' means the monoalkyl 
        esters of long chain fatty acids derived from plant or animal 
        matter which meet--
                    ``(A) the registration requirements for fuels and 
                fuel additives established by the Environmental 
                Protection Agency under section 211 of the Clean Air Act 
                (42 U.S.C. 7545), and
                    ``(B) the requirements of the American Society of 
                Testing and Materials D6751.
            ``(2) Agri-biodiesel.--The term `agri-biodiesel' means 
        biodiesel derived solely from virgin oils, including esters 
        derived from virgin vegetable oils from corn, soybeans, 
        sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
        safflowers, flaxseeds, rice bran, and mustard seeds, and from 
        animal fats.
            ``(3) Mixture or biodiesel not used as a fuel, etc.--
                    ``(A) Mixtures.--If--
                          ``(i) any credit was determined under this 
                      section with respect to biodiesel used in the 
                      production of any qualified biodiesel mixture, and

[[Page 118 STAT. 1465]]

                          ``(ii) any person--
                                    ``(I) separates the biodiesel from 
                                the mixture, or
                                    ``(II) without separation, uses the 
                                mixture other than as a fuel,
                then there is hereby imposed on such person a tax equal 
                to the product of the rate applicable under subsection 
                (b)(1)(A) and the number of gallons of such biodiesel in 
                such mixture.
                    ``(B) Biodiesel.--If--
                          ``(i) any credit was determined under this 
                      section with respect to the retail sale of any 
                      biodiesel, and
                          ``(ii) any person mixes such biodiesel or uses 
                      such biodiesel other than as a fuel,
                then there is hereby imposed on such person a tax equal 
                to the product of the rate applicable under subsection 
                (b)(2)(A) and the number of gallons of such biodiesel.
                    ``(C) Applicable laws.--All provisions of law, 
                including penalties, shall, insofar as applicable and 
                not inconsistent with this section, apply in respect of 
                any tax imposed under subparagraph (A) or (B) as if such 
                tax were imposed by section 4081 and not by this 
                chapter.
            ``(4) Pass-thru <<NOTE: Regulations. Applicability.>> in the 
        case of estates and trusts.--Under regulations prescribed by the 
        Secretary, rules similar to the rules of subsection (d) of 
        section 52 shall apply.

    ``(e) Termination.--This section shall not apply to any sale or use 
after December 31, 2006.''.
    (b) Credit Treated as Part of General Business Credit.--Section 
38(b) (relating to current year business credit), as amended by this 
Act, is amended by striking ``plus'' at the end of paragraph (15), by 
striking the period at the end of paragraph (16) and inserting ``, 
plus'', and by inserting after paragraph (16) the following new 
paragraph:
            ``(17) the biodiesel fuels credit determined under section 
        40A(a).''.

    (c) Conforming Amendments.--
            (1)(A) Section 87 is amended to read as follows:

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

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

[[Page 118 STAT. 1466]]

            (3) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1 is amended by adding after the item 
        relating to section 40 the following new item:

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

    (d) Effective Date.--The <<NOTE: 26 USC 38 note.>> amendments made 
by this section shall apply to fuel produced, and sold or used, after 
December 31, 2004, in taxable years ending after such date.

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

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

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

    ``(a) In General.--The Secretary shall require any person claiming 
tax benefits--
            ``(1) under the provisions of section 34, 40, and 40A, to 
        file a return at the time such person claims such benefits (in 
        such manner as the Secretary may prescribe), and
            ``(2) under the provisions of section 4041(b)(2), 6426, or 
        6427(e) to file a quarterly return (in such manner as the 
        Secretary may prescribe).

    ``(b) Contents of Return.--Any return filed under this section shall 
provide such information relating to such benefits and the coordination 
of such benefits as the Secretary may require to ensure the proper 
administration and use of such benefits.
    ``(c) Enforcement.--With <<NOTE: Applicability.>> respect to any 
person described in subsection (a) and subject to registration 
requirements under this title, rules similar to rules of section 4222(c) 
shall apply with respect to any requirement under this section.''.

    (b) Conforming Amendment.--The table of sections for subpart C of 
part III of subchapter A of chapter 32 is amended by adding at the end 
the following new item:

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

    (c) Effective Date.--The <<NOTE: 26 USC 4104 note.>> amendments made 
by this section shall take effect on January 1, 2005.

                   Subtitle B--Agricultural Incentives

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

    (a) Replacement of Livestock With Other Farm Property.--Subsection 
(f) of section 1033 (relating to involuntary conversions) is amended--
            (1) by inserting ``drought, flood, or other weather-related 
        conditions, or'' after ``because of'',
            (2) by inserting ``in the case of soil contamination or 
        other environmental contamination'' after ``including real 
        property'', and
            (3) by striking ``Where There Has Been Environmental 
        Contamination'' in the heading and inserting ``in Certain 
        Cases''.

[[Page 118 STAT. 1467]]

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

    (c) Income Inclusion Rules.--Section 451(e) (relating to special 
rule for proceeds from livestock sold on account of drought, flood, or 
other weather-related conditions) is amended by adding at the end the 
following new paragraph:
            ``(3) Special election rules.--If section 1033(e)(2) applies 
        to a sale or exchange of livestock described in paragraph (1), 
        the election under paragraph (1) shall be deemed valid if made 
        during the replacement period described in such section.''.

    (d) Effective Date.--The <<NOTE: 26 USC 451 note.>> amendments made 
by this section shall apply to any taxable year with respect to which 
the due date (without regard to extensions) for the return is after 
December 31, 2002.

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

    (a) In General.--Subsection (a) of section 1388 (relating to 
patronage dividend defined) is amended by adding at the end the 
following: ``For purposes of paragraph (3), net earnings shall not be 
reduced by amounts paid during the year as dividends on capital stock or 
other proprietary capital interests of the organization to the extent 
that the articles of incorporation or bylaws of such organization or 
other contract with patrons provide that such dividends are in addition 
to amounts otherwise payable to patrons which are derived from business 
done with or for patrons during the taxable year.''.
    (b) Effective Date.--The <<NOTE: 26 USC 1388 note.>> amendment made 
by this section shall apply to distributions in taxable years beginning 
after the date of the enactment of this Act.

SEC. 313. APPORTIONMENT OF SMALL ETHANOL PRODUCER CREDIT.

    (a) Allocation of Alcohol Fuels Credit to Patrons of a 
Cooperative.--Section 40(g) (relating to definitions and special rules 
for eligible small ethanol producer credit) is amended by adding at the 
end the following new paragraph:
            ``(6) Allocation of small ethanol producer credit to patrons 
        of cooperative.--
                    ``(A) Election to allocate.--

[[Page 118 STAT. 1468]]

                          ``(i) In general.--In the case of a 
                      cooperative organization described in section 
                      1381(a), any portion of the credit determined 
                      under subsection (a)(3) for the taxable year may, 
                      at the election of the organization, be 
                      apportioned pro rata among patrons of the 
                      organization on the basis of the quantity or value 
                      of business done with or for such patrons for the 
                      taxable year.
                          ``(ii) Form and effect of election.--An 
                      election under clause (i) for any taxable year 
                      shall be made on a timely filed return for such 
                      year. Such election, once made, shall be 
                      irrevocable for such taxable year.
                    ``(B) Treatment of organizations and patrons.--
                          ``(i) Organizations.--The amount of the credit 
                      not apportioned to patrons pursuant to 
                      subparagraph (A) shall be included in the amount 
                      determined under subsection (a)(3) for the taxable 
                      year of the organization.
                          ``(ii) Patrons.--The amount of the credit 
                      apportioned to patrons pursuant to subparagraph 
                      (A) shall be included in the amount determined 
                      under such subsection for the first taxable year 
                      of each patron ending on or after the last day of 
                      the payment period (as defined in section 1382(d)) 
                      for the taxable year of the organization or, if 
                      earlier, for the taxable year of each patron 
                      ending on or after the date on which the patron 
                      receives notice from the cooperative of the 
                      apportionment.
                          ``(iii) Special rules for decrease in credits 
                      for taxable year.--If the amount of the credit of 
                      the organization determined under such subsection 
                      for a taxable year is less than the amount of such 
                      credit shown on the return of the organization for 
                      such year, an amount equal to the excess of--
                                    ``(I) such reduction, over
                                    ``(II) the amount not apportioned to 
                                such patrons under subparagraph (A) for 
                                the taxable year,
                      shall be treated as an increase in tax imposed by 
                      this chapter on the organization. Such increase 
                      shall not be treated as tax imposed by this 
                      chapter for purposes of determining the amount of 
                      any credit under this chapter or for purposes of 
                      section 55.''.

    (b) Effective Date.--The <<NOTE: 26 USC 40 note.>> amendment made by 
this section shall apply to taxable years ending after the date of the 
enactment of this Act.

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

    (a) In General.--Section 55(c) (defining regular tax) is amended by 
redesignating paragraph (2) as paragraph (3) and by inserting after 
paragraph (1) the following new paragraph:
            ``(2) Coordination with income averaging for farmers and 
        fishermen.--Solely for purposes of this section, section 1301 
        (relating to averaging of farm and fishing income) shall not 
        apply in computing the regular tax.''.

    (b) Allowing Income Averaging for Fishermen.--

[[Page 118 STAT. 1469]]

            (1) In general.--Section 1301(a) is amended by striking 
        ``farming business'' and inserting ``farming business or fishing 
        business''.
            (2) Definition of elected farm income.--
                    (A) In general.--Clause (i) of section 1301(b)(1)(A) 
                is amended by inserting ``or fishing business'' before 
                the semicolon.
                    (B) Conforming amendment.--Subparagraph (B) of 
                section 1301(b)(1) is amended by inserting ``or fishing 
                business'' after ``farming business'' both places it 
                occurs.
            (3) Definition of fishing business.--Section 1301(b) is 
        amended by adding at the end the following new paragraph:
            ``(4) Fishing business.--The term `fishing business' means 
        the conduct of commercial fishing as defined in section 3 of the 
        Magnuson-Stevens Fishery Conservation and Management Act (16 
        U.S.C. 1802).''.

    (c) Effective Date.--The <<NOTE: 26 USC 55 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2003.

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

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

    (c) Effective Date.--The <<NOTE: 26 USC 631 note.>> amendments made 
by this section shall apply to sales after December 31, 2004.

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

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

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

    (c) Effective Date.--The <<NOTE: 26 USC 521 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

[[Page 118 STAT. 1470]]

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

    (a) In General.--Section 7428(a)(1) (relating to declaratory 
judgments of tax exempt organizations) is amended by striking ``or'' at 
the end of subparagraph (B) and by adding at the end the following new 
subparagraph:
                    ``(D) with respect to the initial classification or 
                continuing classification of a cooperative as an 
                organization described in section 521(b) which is exempt 
                from tax under section 521(a), or''.

    (b) Effective Date.--The <<NOTE: 26 USC 7428 note.>> amendments made 
by this section shall apply with respect to pleadings filed after the 
date of the enactment of this Act.

SEC. 318. CERTAIN EXPENSES OF RURAL LETTER CARRIERS.

    (a) In General.--Section 162(o) (relating to treatment of certain 
reimbursed expenses of rural mail carriers) is amended by redesignating 
paragraph (2) as paragraph (3) and by inserting after paragraph (1) the 
following:
            ``(2) Special rule where expenses exceed reimbursements.--
        Notwithstanding paragraph (1)(A), if the expenses incurred by an 
        employee for the use of a vehicle in performing services 
        described in paragraph (1) exceed the qualified reimbursements 
        for such expenses, such excess shall be taken into account in 
        computing the miscellaneous itemized deductions of the employee 
        under section 67.''.

    (b) Conforming Amendment.--The heading for section 162(o) is amended 
by striking ``Reimbursed''.
    (c) Effective Date.--The <<NOTE: 26 USC 162 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2003.

SEC. 319. TREATMENT OF CERTAIN INCOME OF COOPERATIVES.

    (a) Income From Open Access and Nuclear Decommissioning 
Transactions.--
            (1) In general.--Subparagraph (C) of section 501(c)(12) is 
        amended by striking clause (ii) and adding at the end the 
        following:
                          ``(ii) from any provision or sale of electric 
                      energy transmission services or ancillary services 
                      if such services are provided on a 
                      nondiscriminatory open access basis under an open 
                      access transmission tariff approved or accepted by 
                      FERC or under an independent transmission provider 
                      agreement approved or accepted by FERC (other than 
                      income received or accrued directly or indirectly 
                      from a member),
                          ``(iii) from the provision or sale of electric 
                      energy distribution services or ancillary services 
                      if such services are provided on a 
                      nondiscriminatory open access basis to distribute 
                      electric energy not owned by the mutual or 
                      electric cooperative company--
                                    ``(I) to end-users who are served by 
                                distribution facilities not owned by 
                                such company or any of its members 
                                (other than income received or accrued 
                                directly or indirectly from a member), 
                                or
                                    ``(II) generated by a generation 
                                facility not owned or leased by such 
                                company or any of its

[[Page 118 STAT. 1471]]

                                members and which is directly connected 
                                to distribution facilities owned by such 
                                company or any of its members (other 
                                than income received or accrued directly 
                                or indirectly from a member),
                          ``(iv) from any nuclear decommissioning 
                      transaction, or
                          ``(v) from any asset exchange or conversion 
                      transaction.
                Clauses (ii) through (v) shall not apply to taxable 
                years beginning after December 31, 2006.''.
            (2) Definitions and special rules.--Paragraph (12) of 
        section 501(c) is amended by adding at the end the following new 
        subparagraphs:
                    ``(E) For purposes of subparagraph (C)(ii), the term 
                `FERC' means the Federal Energy Regulatory Commission 
                and references to such term shall be treated as 
                including the Public Utility Commission of Texas with 
                respect to any ERCOT utility (as defined in section 
                212(k)(2)(B) of the Federal Power Act (16 U.S.C. 
                824k(k)(2)(B))).
                    ``(F) For purposes of subparagraph (C)(iii), the 
                term `nuclear decommissioning transaction' means--
                          ``(i) any transfer into a trust, fund, or 
                      instrument established to pay any nuclear 
                      decommissioning costs if the transfer is in 
                      connection with the transfer of the mutual or 
                      cooperative electric company's interest in a 
                      nuclear power plant or nuclear power plant unit,
                          ``(ii) any distribution from any trust, fund, 
                      or instrument established to pay any nuclear 
                      decommissioning costs, or
                          ``(iii) any earnings from any trust, fund, or 
                      instrument established to pay any nuclear 
                      decommissioning costs.
                    ``(G) For purposes of subparagraph (C)(iv), the term 
                `asset exchange or conversion transaction' means any 
                voluntary exchange or involuntary conversion of any 
                property related to generating, transmitting, 
                distributing, or selling electric energy by a mutual or 
                cooperative electric company, the gain from which 
                qualifies for deferred recognition under section 1031 or 
                1033, but only if the replacement property acquired by 
                such company pursuant to such section constitutes 
                property which is used, or to be used, for--
                          ``(i) generating, transmitting, distributing, 
                      or selling electric energy, or
                          ``(ii) producing, transmitting, distributing, 
                      or selling natural gas.''.

    (b) Treatment of Income From Load Loss Transactions, Etc.--Paragraph 
(12) of section 501(c), as amended by subsection (a)(2), is amended by 
adding after subparagraph (G) the following new subparagraph:
                    ``(H)(i) In the case of a mutual or cooperative 
                electric company described in this paragraph or an 
                organization described in section 1381(a)(2)(C), income 
                received or accrued from a load loss transaction shall 
                be treated as an amount collected from members for the 
                sole purpose of meeting losses and expenses.
                    ``(ii) For purposes of clause (i), the term `load 
                loss transaction' means any wholesale or retail sale of 
                electric

[[Page 118 STAT. 1472]]

                energy (other than to members) to the extent that the 
                aggregate sales during the recovery period do not exceed 
                the load loss mitigation sales limit for such period.
                    ``(iii) For purposes of clause (ii), the load loss 
                mitigation sales limit for the recovery period is the 
                sum of the annual load losses for each year of such 
                period.
                    ``(iv) For purposes of clause (iii), a mutual or 
                cooperative electric company's annual load loss for each 
                year of the recovery period is the amount (if any) by 
                which--
                          ``(I) the megawatt hours of electric energy 
                      sold during such year to members of such electric 
                      company are less than
                          ``(II) the megawatt hours of electric energy 
                      sold during the base year to such members.
                    ``(v) For purposes of clause (iv)(II), the term 
                `base year' means--
                          ``(I) the calendar year preceding the start-up 
                      year, or
                          ``(II) at the election of the mutual or 
                      cooperative electric company, the second or third 
                      calendar years preceding the start-up year.
                    ``(vi) For purposes of this subparagraph, the 
                recovery period is the 7-year period beginning with the 
                start-up year.
                    ``(vii) For purposes of this subparagraph, the 
                start-up year is the first year that the mutual or 
                cooperative electric company offers nondiscriminatory 
                open access or the calendar year which includes the date 
                of the enactment of this subparagraph, if later, at the 
                election of such company.
                    ``(viii) A company shall not fail to be treated as a 
                mutual or cooperative electric company for purposes of 
                this paragraph or as a corporation operating on a 
                cooperative basis for purposes of section 1381(a)(2)(C) 
                by reason of the treatment under clause (i).
                    ``(ix) For purposes of subparagraph (A), in the case 
                of a mutual or cooperative electric company, income 
                received, or accrued, indirectly from a member shall be 
                treated as an amount collected from members for the sole 
                purpose of meeting losses and expenses.
                    ``(x) This subparagraph shall not apply to taxable 
                years beginning after December 31, 2006.''.

    (c) Exception From Unrelated Business Taxable Income.--Subsection 
(b) of section 512 (relating to modifications) is amended by adding at 
the end the following new paragraph:
            ``(18) Treatment of mutual or cooperative electric 
        companies.--In the case of a mutual or cooperative electric 
        company described in section 501(c)(12), there shall be excluded 
        income which is treated as member income under subparagraph (H) 
        thereof.''.

    (d) Cross Reference.--Section 1381 is amended by adding at the end 
the following new subsection:

[[Page 118 STAT. 1473]]

    ``(c) Cross Reference.--

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

    (e) Effective Date.--The <<NOTE: 26 USC 501 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

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

    (a) In General.--Section 108(f) (relating to student loans) is 
amended by adding at the end the following new paragraph:
            ``(4) Payments under national health service corps loan 
        repayment program and certain state loan repayment programs.--In 
        the case of an individual, gross income shall not include any 
        amount received under section 338B(g) of the Public Health 
        Service Act or under a State program described in section 338I 
        of such Act.''.

    (b) Treatment for Purposes of Employment Taxes.--Each of the 
following provisions is amended by inserting ``108(f)(4),'' after 
``74(c),'':
            (1) Section 3121(a)(20).
            (2) Section 3231(e)(5).
            (3) Section 3306(b)(16).
            (4) Section 3401(a)(19).
            (5) Section 209(a)(17) <<NOTE: 42 USC 409.>> of the Social 
        Security Act.

    (c) Effective Date.--The <<NOTE: 26 USC 108 note.>> amendments made 
by this section shall apply to amounts received by an individual in 
taxable years beginning after December 31, 2003.

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

    (a) Expansion of Prohibited Transaction Safe Harbor.--Section 
857(b)(6) (relating to income from prohibited transactions) is amended 
by redesignating subparagraphs (D) and (E) as subparagraphs (E) and (F), 
respectively, and by inserting after subparagraph (C) the following new 
subparagraph:
                    ``(D) Certain sales not to constitute prohibited 
                transactions.--For purposes of this part, the term 
                `prohibited transaction' does not include a sale of 
                property which is a real estate asset (as defined in 
                section 856(c)(5)(B)) if--
                          ``(i) the trust held the property for not less 
                      than 4 years in connection with the trade or 
                      business of producing timber,
                          ``(ii) the aggregate expenditures made by the 
                      trust, or a partner of the trust, during the 4-
                      year period preceding the date of sale which--
                                    ``(I) are includible in the basis of 
                                the property (other than timberland 
                                acquisition expenditures), and
                                    ``(II) are directly related to 
                                operation of the property for the 
                                production of timber or for the 
                                preservation of the property for use as 
                                timberland,
                      do not exceed 30 percent of the net selling price 
                      of the property,

[[Page 118 STAT. 1474]]

                          ``(iii) the aggregate expenditures made by the 
                      trust, or a partner of the trust, during the 4-
                      year period preceding the date of sale which--
                                    ``(I) are includible in the basis of 
                                the property (other than timberland 
                                acquisition expenditures), and
                                    ``(II) are not directly related to 
                                operation of the property for the 
                                production of timber, or for the 
                                preservation of the property for use as 
                                timberland,
                      do not exceed 5 percent of the net selling price 
                      of the property,
                          ``(iv)(I) during the taxable year the trust 
                      does not make more than 7 sales of property (other 
                      than sales of foreclosure property or sales to 
                      which section 1033 applies), or
                          ``(II) the aggregate adjusted bases (as 
                      determined for purposes of computing earnings and 
                      profits) of property (other than sales of 
                      foreclosure property or sales to which section 
                      1033 applies) sold during the taxable year does 
                      not exceed 10 percent of the aggregate bases (as 
                      so determined) of all of the assets of the trust 
                      as of the beginning of the taxable year,
                          ``(v) in the case that the requirement of 
                      clause (iv)(I) is not satisfied, substantially all 
                      of the marketing expenditures with respect to the 
                      property were made through an independent 
                      contractor (as defined in section 856(d)(3)) from 
                      whom the trust itself does not derive or receive 
                      any income, and
                          ``(vi) the sales price of the property sold by 
                      the trust is not based in whole or in part on 
                      income or profits, including income or profits 
                      derived from the sale or operation of such 
                      property.''.

    (b) Effective Date.--The <<NOTE: 26 USC 857 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

SEC. 322. EXPENSING OF CERTAIN REFORESTATION EXPENDITURES.

    (a) In General.--So much of subsection (b) of section 194 (relating 
to amortization of reforestation expenditures) as precedes paragraph (2) 
is amended to read as follows:
    ``(b) Treatment as Expenses.--
            ``(1) Election to treat certain reforestation expenditures 
        as expenses.--
                    ``(A) In general.--In the case of any qualified 
                timber property with respect to which the taxpayer has 
                made (in accordance with regulations prescribed by the 
                Secretary) an election under this subsection, the 
                taxpayer shall treat reforestation expenditures which 
                are paid or incurred during the taxable year with 
                respect to such property as an expense which is not 
                chargeable to capital account. The reforestation 
                expenditures so treated shall be allowed as a deduction.
                    ``(B) Dollar limitation.--The aggregate amount of 
                reforestation expenditures which may be taken into 
                account under subparagraph (A) with respect to each 
                qualified timber property for any taxable year shall not 
                exceed

[[Page 118 STAT. 1475]]

                $10,000 ($5,000 in the case of a separate return by a 
                married individual (as defined in section 7703)).''.

    (b) Net Amortizable Basis.--Section 194(c)(2) (defining amortizable 
basis) is amended by inserting ``which have not been taken into account 
under subsection (b)'' after ``expenditures''.
    (c) Conforming Amendments.--
            (1) Section 194(b) is amended by striking paragraphs (3) and 
        (4).
            (2) Section 194(b)(2) is amended by striking ``paragraph 
        (1)'' both places it appears and inserting ``paragraph (1)(B)''.
            (3) Section 194(c) is amended by striking paragraph (4) and 
        inserting the following new paragraphs:
            ``(4) Treatment of trusts and estates.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), this section shall not apply to trusts 
                and estates.
                    ``(B) Amortization deduction allowed to estates.--
                The benefit of the deduction for amortization provided 
                by subsection (a) shall be allowed to estates in the 
                same manner as in the case of an individual. The 
                allowable deduction shall be apportioned between the 
                income beneficiary and the fiduciary under regulations 
                prescribed by the Secretary. Any amount so apportioned 
                to a beneficiary shall be taken into account for 
                purposes of determining the amount allowable as a 
                deduction under subsection (a) to such beneficiary.
            ``(5) Application with other deductions.--No deduction shall 
        be allowed under any other provision of this chapter with 
        respect to any expenditure with respect to which a deduction is 
        allowed or allowable under this section to the taxpayer.''.
            (4) The heading for section 194 is amended by striking 
        ``amortization'' and inserting ``treatment''.
            (5) The item relating to section 194 in the table of 
        sections for part VI of subchapter B of chapter 1 is amended by 
        striking ``Amortization'' and inserting ``Treatment''.

    (d) Repeal of Reforestation Credit.--
            (1) In general.--Section 46 (relating to amount of credit) 
        is amended--
                    (A) by adding ``and'' at the end of paragraph (1),
                    (B) by striking ``, and'' at the end of paragraph 
                (2) and inserting a period, and
                    (C) by striking paragraph (3).
            (2) Conforming amendments.--
                    (A) Section 48 is amended--
                          (i) by striking subsection (b),
                          (ii) by striking ``this subsection'' in 
                      paragraph (5) of subsection (a) and inserting 
                      ``subsection (a)'', and
                          (iii) by redesignating such paragraph (5) as 
                      subsection (b).
                    (B) The heading for section 48 is amended by 
                striking ``; reforestation credit''.
                    (C) The item relating to section 48 in the table of 
                sections for subpart E of part IV of subchapter A of 
                chapter 1 is amended by striking ``, reforestation 
                credit''.
                    (D) Section 50(c)(3) is amended by striking ``or 
                reforestation credit''.

[[Page 118 STAT. 1476]]

    (e) Effective Date.--The amendments made by this section shall apply 
with respect to expenditures paid or incurred after the date of the 
enactment of this Act.

             Subtitle C--Incentives for Small Manufacturers

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

    (a) In General.--Paragraph (2) of section 851(b) (defining regulated 
investment company) is amended to read as follows:
            ``(2) at least 90 percent of its gross income is derived 
        from--
                    ``(A) dividends, interest, payments with respect to 
                securities loans (as defined in section 512(a)(5)), and 
                gains from the sale or other disposition of stock or 
                securities (as defined in section 2(a)(36) of the 
                Investment Company Act of 1940, as amended) or foreign 
                currencies, or other income (including but not limited 
                to gains from options, futures or forward contracts) 
                derived with respect to its business of investing in 
                such stock, securities, or currencies, and
                    ``(B) net income derived from an interest in a 
                qualified publicly traded partnership (as defined in 
                subsection (h)); and''.

    (b) Source Flow-Through Rule Not To Apply.--The last sentence of 
section 851(b) is amended by inserting ``(other than a qualified 
publicly traded partnership as defined in subsection (h))'' after 
``derived from a partnership''.
    (c) Limitation on Ownership.--Subsection (c) of section 851 is 
amended by redesignating paragraph (5) as paragraph (6) and inserting 
after paragraph (4) the following new paragraph:
            ``(5) The term `outstanding voting securities of such 
        issuer' shall include the equity securities of a qualified 
        publicly traded partnership (as defined in subsection (h)).''.

    (d) Definition of Qualified Publicly Traded Partnership.--Section 
851 is amended by adding at the end the following new subsection:
    ``(h) Qualified Publicly Traded Partnership.--For purposes of this 
section, the term `qualified publicly traded partnership' means a 
publicly traded partnership described in section 7704(b) other than a 
partnership which would satisfy the gross income requirements of section 
7704(c)(2) if qualifying income included only income described in 
subsection (b)(2)(A).''.
    (e) Definition of Qualifying Income.--Section 7704(d)(4) is amended 
by striking ``section 851(b)(2)'' and inserting ``section 
851(b)(2)(A)''.
    (f) Limitation on Composition of Assets.--Subparagraph (B) of 
section 851(b)(3) is amended to read as follows:
                    ``(B) not more than 25 percent of the value of its 
                total assets is invested in--
                          ``(i) the securities (other than Government 
                      securities or the securities of other regulated 
                      investment companies) of any one issuer,

[[Page 118 STAT. 1477]]

                          ``(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 <<NOTE: 26 USC 469 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

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

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

    (b) Arrows.--Subsection (b) of section 4161 (relating to bows and 
arrows, etc.) is amended by redesignating paragraph (3) as paragraph (4) 
and inserting after paragraph (2) the following:
            ``(3) Arrows.--
                    ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                arrow, a tax equal to 12 percent of the price for which 
                so sold.
                    ``(B) Exception.--In the case of any arrow of which 
                the shaft or any other component has been previously 
                taxed under paragraph (1) or (2)--
                          ``(i) section 6416(b)(3) shall not apply, and
                          ``(ii) the tax imposed by subparagraph (A) 
                      shall be an amount equal to the excess (if any) 
                      of--
                                    ``(I) the amount of tax imposed by 
                                this paragraph (determined without 
                                regard to this subparagraph), over

[[Page 118 STAT. 1478]]

                                    ``(II) the amount of tax paid with 
                                respect to the tax imposed under 
                                paragraph (1) or (2) on such shaft or 
                                component.
                    ``(C) Arrow.--For purposes of this paragraph, the 
                term `arrow' means any shaft described in paragraph (2) 
                to which additional components are attached.''.

    (c) Conforming Amendments.--Section 4161(b)(2) is amended--
            (1) by inserting ``(other than broadheads)'' after 
        ``point'', and
            (2) by striking ``Arrows.--'' in the heading and inserting 
        ``Arrow components.--''.

    (d) Effective Date.--The <<NOTE: 26 USC 4161 note.>> amendments made 
by this section shall apply to articles sold by the manufacturer, 
producer, or importer after the date which is 30 days after the date of 
the enactment of this Act.

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

    (a) In General.--Subsection (a) of section 4161 (relating to sport 
fishing equipment) is amended by redesignating paragraph (3) as 
paragraph (4) and by inserting after paragraph (2) the following new 
paragraph:
            ``(3) 3 percent <<NOTE: Applicability.>> rate of tax for 
        tackle boxes.--In the case of fishing tackle boxes, paragraph 
        (1) shall be applied by substituting `3 percent' for `10 
        percent'.''.

    (b) Effective Date.--The <<NOTE: 26 USC 4161 note.>> amendments made 
this section shall apply to articles sold by the manufacturer, producer, 
or importer after December 31, 2004.

SEC. 334. SONAR DEVICES SUITABLE FOR FINDING FISH.

    (a) Not Treated as Sport Fishing Equipment.--Subsection (a) of 
section 4162 (relating to sport fishing equipment defined) is amended by 
inserting ``and'' at the end of paragraph (8), by striking ``, and'' at 
the end of paragraph (9) and inserting a period, and by striking 
paragraph (10).
    (b) Conforming Amendment.--Section 4162 is amended by striking 
subsection (b) and by redesignating subsection (c) as subsection (b).
    (c) Effective Date.--The <<NOTE: 26 USC 4162 note.>> amendments made 
this section shall apply to articles sold by the manufacturer, producer, 
or importer after December 31, 2004.

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

    (a) In General.--Section 170 (relating to charitable, etc., 
contributions and gifts), as amended by this Act, is amended by 
redesignating subsection (n) as subsection (o) and by inserting after 
subsection (m) the following new subsection:
    ``(n) Expenses Paid by Certain Whaling Captains in Support of Native 
Alaskan Subsistence Whaling.--
            ``(1) In general.--In the case of an individual who is 
        recognized by the Alaska Eskimo Whaling Commission as a whaling 
        captain charged with the responsibility of maintaining and 
        carrying out sanctioned whaling activities and who engages in 
        such activities during the taxable year, the amount described in 
        paragraph (2) (to the extent such amount does not exceed

[[Page 118 STAT. 1479]]

        $10,000 for the taxable year) shall be treated for purposes of 
        this section as a charitable contribution.
            ``(2) Amount described.--
                    ``(A) In general.--The amount described in this 
                paragraph is the aggregate of the reasonable and 
                necessary whaling expenses paid by the taxpayer during 
                the taxable year in carrying out sanctioned whaling 
                activities.
                    ``(B) Whaling expenses.--For purposes of 
                subparagraph (A), the term `whaling expenses' includes 
                expenses for--
                          ``(i) the acquisition and maintenance of 
                      whaling boats, weapons, and gear used in 
                      sanctioned whaling activities,
                          ``(ii) the supplying of food for the crew and 
                      other provisions for carrying out such activities, 
                      and
                          ``(iii) storage and distribution of the catch 
                      from such activities.
            ``(3) Sanctioned whaling activities.--For purposes of this 
        subsection, the term `sanctioned whaling activities' means 
        subsistence bowhead whale hunting activities conducted pursuant 
        to the management plan of the Alaska Eskimo Whaling Commission.
            ``(4) Substantiation of expenses.--
        The <<NOTE: Regulations.>> Secretary shall issue guidance 
        requiring that the taxpayer substantiate the whaling expenses 
        for which a deduction is claimed under this subsection, 
        including by maintaining appropriate written records with 
        respect to the time, place, date, amount, and nature of the 
        expense, as well as the taxpayer's eligibility for such 
        deduction, and that (to the extent provided by the Secretary) 
        such substantiation be provided as part of the taxpayer's return 
        of tax.''.

    (b) Effective Date.--The <<NOTE: 26 USC 170 note.>> amendments made 
by subsection (a) shall apply to contributions made after December 31, 
2004.

SEC. 336. MODIFICATION OF DEPRECIATION ALLOWANCE FOR AIRCRAFT.

    (a) Aircraft Treated as Qualified Property.--
            (1) In general.--Paragraph (2) of section 168(k) is amended 
        by redesignating subparagraphs (C) through (F) as subparagraphs 
        (D) through (G), respectively, and by inserting after 
        subparagraph (B) the following new subparagraph:
                    ``(C) Certain aircraft.--The term `qualified 
                property' includes property--
                          ``(i) which meets the requirements of clauses 
                      (ii) and (iii) of subparagraph (A),
                          ``(ii) which is an aircraft which is not a 
                      transportation property (as defined in 
                      subparagraph (B)(iii)) other than for agricultural 
                      or firefighting purposes,
                          ``(iii) which is purchased and on which such 
                      purchaser, at the time of the contract for 
                      purchase, has made a nonrefundable deposit of the 
                      lesser of--
                                    ``(I) 10 percent of the cost, or
                                    ``(II) $100,000, and
                          ``(iv) which has--
                                    ``(I) an estimated production period 
                                exceeding 4 months, and
                                    ``(II) a cost exceeding $200,000.''.

[[Page 118 STAT. 1480]]

            (2) Placed in service date.--Clause (iv) of section 
        168(k)(2)(A) is amended by striking ``subparagraph (B)'' and 
        inserting ``subparagraphs (B) and (C)''.

    (b) Conforming Amendments.--
            (1) Section 168(k)(2)(B) is amended by adding at the end the 
        following new clause:
                          ``(iv) Application of subparagraph.--This 
                      subparagraph shall not apply to any property which 
                      is described in subparagraph (C).''.
            (2) Section 168(k)(4)(A)(ii) is amended by striking 
        ``paragraph (2)(C)'' and inserting ``paragraph (2)(D)''.
            (3) Section 168(k)(4)(B)(iii) is amended by inserting ``and 
        paragraph (2)(C)'' after ``of this paragraph)''.
            (4) Section 168(k)(4)(C) is amended by striking 
        ``subparagraphs (B) and (D)'' and inserting ``subparagraphs (B), 
        (C), and (E)''.
            (5) Section 168(k)(4)(D) is amended by striking ``Paragraph 
        (2)(E)'' and inserting ``Paragraph (2)(F)''.

    (c) Effective Date.--The <<NOTE: 26 USC 168 note.>> amendments made 
by this section shall take effect as if included in the amendments made 
by section 101 of the Job Creation and Worker Assistance Act of 2002.

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

    (a) In General.--Subclause (II) of section 168(k)(2)(E)(iii) 
(relating to syndication), as amended by the Working Families Tax Relief 
Act of 2004 and as redesignated by this Act, is amended by inserting 
before the comma at the end the following: ``(or, in the case of 
multiple units of property subject to the same lease, within 3 months 
after the date the final unit is placed in service, so long as the 
period between the time the first unit is placed in service and the time 
the last unit is placed in service does not exceed 12 months)''.
    (b) Effective Date.--The <<NOTE: 26 USC 168 note.>> amendment made 
by this section shall apply to property sold after June 4, 2004.

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

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

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

    ``(a) Allowance of Deduction.--In the case of a small business 
refiner (as defined in section 45H(c)(1)) which elects the application 
of this section, there shall be allowed as a deduction an amount equal 
to 75 percent of qualified capital costs (as defined in section 
45H(c)(2)) which are paid or incurred by the taxpayer during the taxable 
year.
    ``(b) Reduced Percentage.--In the case of a small business refiner 
with average daily domestic refinery runs for the 1-year period ending 
on December 31, 2002, in excess of 155,000 barrels, the number of 
percentage points described in subsection (a) shall be reduced (not 
below zero) by the product of such number (before

[[Page 118 STAT. 1481]]

the application of this subsection) and the ratio of such excess to 
50,000 barrels.
    ``(c) Basis Reduction.--
            ``(1) In general.--For purposes of this title, the basis of 
        any property shall be reduced by the portion of the cost of such 
        property taken into account under subsection (a).
            ``(2) Ordinary income recapture.--For purposes of section 
        1245, the amount of the deduction allowable under subsection (a) 
        with respect to any property which is of a character subject to 
        the allowance for depreciation shall be treated as a deduction 
        allowed for depreciation under section 167.''.

    ``(d) Coordination With Other Provisions.--Section 280B shall not 
apply to amounts which are treated as expenses under this section.''.
    (b) Conforming Amendments.--
            (1) Section 263(a)(1), as amended by this Act, is amended by 
        striking ``or'' at the end of subparagraph (G), by striking the 
        period at the end of subparagraph (H) and inserting ``, or'', 
        and by adding at the end the following new subparagraph:
                    ``(I) expenditures for which a deduction is allowed 
                under section 179B.''.
            (2) Section 263A(c)(3) is amended by inserting ``179B,'' 
        after ``section''.
            (3) Section 312(k)(3)(B) is amended by striking ``or 179A'' 
        each place it appears in the heading and text and inserting 
        ``179A, or 179B''.
            (4) Section 1016(a) is amended by striking ``and'' at the 
        end of paragraph (28), by striking the period at the end of 
        paragraph (29) and inserting ``, and'', and by inserting after 
        paragraph (29) the following new paragraph:
            ``(30) to the extent provided in section 179B(c).''.
            (5) Paragraphs (2)(C) and (3)(C) of section 1245(a) are each 
        amended by inserting ``179B,'' after ``179A,''.
            (6) The table of sections for part VI of subchapter B of 
        chapter 1, as amended by this Act, is amended by inserting after 
        the item relating to section 179A the following new item:

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

    (c) Effective Date.--The <<NOTE: 26 USC 179B note.>> amendment made 
by this section shall apply to expenses paid or incurred after December 
31, 2002, in taxable years ending after such date.

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

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

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

    ``(a) In General.--For purposes of section 38, the amount of the low 
sulfur diesel fuel production credit determined under this section with 
respect to any facility of a small business refiner is an amount equal 
to 5 cents for each gallon of low sulfur diesel fuel produced during the 
taxable year by such small business refiner at such facility.
    ``(b) Maximum Credit.--

[[Page 118 STAT. 1482]]

            ``(1) In general.--The aggregate credit determined under 
        subsection (a) for any taxable year with respect to any facility 
        shall not exceed--
                    ``(A) 25 percent of the qualified capital costs 
                incurred by the small business refiner with respect to 
                such facility, reduced by
                    ``(B) the aggregate credits determined under this 
                section for all prior taxable years with respect to such 
                facility.
            ``(2) Reduced percentage.--In the case of a small business 
        refiner with average daily domestic refinery runs for the 1-year 
        period ending on December 31, 2002, in excess of 155,000 
        barrels, the number of percentage points described in paragraph 
        (1) shall be reduced (not below zero) by the product of such 
        number (before the application of this paragraph) and the ratio 
        of such excess to 50,000 barrels.

    ``(c) Definitions and Special Rule.--For purposes of this section--
            ``(1) Small business refiner.--The term `small business 
        refiner' means, with respect to any taxable year, a refiner of 
        crude oil--
                    ``(A) with respect to which not more than 1,500 
                individuals are engaged in the refinery operations of 
                the business on any day during such taxable year, and
                    ``(B) the average daily domestic refinery run or 
                average retained production of which for all facilities 
                of the taxpayer for the 1-year period ending on December 
                31, 2002, did not exceed 205,000 barrels.
            ``(2) Qualified capital costs.--The term `qualified capital 
        costs' means, with respect to any facility, those costs paid or 
        incurred during the applicable period for compliance with the 
        applicable EPA regulations with respect to such facility, 
        including expenditures for the construction of new process 
        operation units or the dismantling and reconstruction of 
        existing process units to be used in the production of low 
        sulfur diesel fuel, associated adjacent or offsite equipment 
        (including tankage, catalyst, and power supply), engineering, 
        construction period interest, and sitework.
            ``(3) Applicable epa regulations.--The term `applicable EPA 
        regulations' means the Highway Diesel Fuel Sulfur Control 
        Requirements of the Environmental Protection Agency.
            ``(4) Applicable period.--The term `applicable period' 
        means, with respect to any facility, the period beginning on 
        January 1, 2003, and ending on the earlier of the date which is 
        1 year after the date on which the taxpayer must comply with the 
        applicable EPA regulations with respect to such facility or 
        December 31, 2009.
            ``(5) Low sulfur diesel fuel.--The term `low sulfur diesel 
        fuel' means diesel fuel with a sulfur content of 15 parts per 
        million or less.

    ``(d) Reduction in Basis.--For purposes of this subtitle, if a 
credit is determined under this section for any expenditure with respect 
to any property, the increase in basis of such property which would (but 
for this subsection) result from such expenditure shall be reduced by 
the amount of the credit so determined.
    ``(e) Special Rule for Determination of Refinery Runs.--For purposes 
this section and section 179B(b), in the calculation of average daily 
domestic refinery run or retained production, only

[[Page 118 STAT. 1483]]

refineries which on April 1, 2003, were refineries of the refiner or a 
related person (within the meaning of section 613A(d)(3)), shall be 
taken into account.
    ``(f) Certification.--
            ``(1) Required.--No <<NOTE: Deadline.>> credit shall be 
        allowed unless, not later than the date which is 30 months after 
        the first day of the first taxable year in which the low sulfur 
        diesel fuel production credit is determined with respect to a 
        facility, the small business refiner obtains certification from 
        the Secretary, after consultation with the Administrator of the 
        Environmental Protection Agency, that the taxpayer's qualified 
        capital costs with respect to such facility will result in 
        compliance with the applicable EPA regulations.
            ``(2) Contents of application.--An application for 
        certification shall include relevant information regarding unit 
        capacities and operating characteristics sufficient for the 
        Secretary, after consultation with the Administrator of the 
        Environmental Protection Agency, to determine that such 
        qualified capital costs are necessary for compliance with the 
        applicable EPA regulations.
            ``(3) Review period.--Any <<NOTE: Deadline.>> application 
        shall be reviewed and notice of certification, if applicable, 
        shall be made within 60 days of receipt of such application. In 
        the event the Secretary does not notify the taxpayer of the 
        results of such certification within such period, the taxpayer 
        may presume the certification to be issued until so notified.
            ``(4) Statute of limitations.--With respect to the credit 
        allowed under this section--
                    ``(A) the statutory period for the assessment of any 
                deficiency attributable to such credit shall not expire 
                before the end of the 3-year period ending on the date 
                that the review period described in paragraph (3) ends 
                with respect to the taxpayer, and
                    ``(B) such deficiency may be assessed before the 
                expiration of such 3-year period notwithstanding the 
                provisions of any other law or rule of law which would 
                otherwise prevent such assessment.

    ``(g) Cooperative Organizations.--
            ``(1) Apportionment of credit.--
                    ``(A) In general.--In the case of a cooperative 
                organization described in section 1381(a), any portion 
                of the credit determined under subsection (a) for the 
                taxable year may, at the election of the organization, 
                be apportioned among patrons eligible to share in 
                patronage dividends on the basis of the quantity or 
                value of business done with or for such patrons for the 
                taxable year.
                    ``(B) Form and effect of election.--An election 
                under subparagraph (A) for any taxable year shall be 
                made on a timely filed return for such year. Such 
                election, once made, shall be irrevocable for such 
                taxable year.
            ``(2) Treatment of organizations and patrons.--
                    ``(A) Organizations.--The amount of the credit not 
                apportioned to patrons pursuant to paragraph (1) shall 
                be included in the amount determined under subsection 
                (a) for the taxable year of the organization.
                    ``(B) Patrons.--The amount of the credit apportioned 
                to patrons pursuant to paragraph (1) shall be included

[[Page 118 STAT. 1484]]

                in the amount determined under subsection (a) for the 
                first taxable year of each patron ending on or after the 
                last day of the payment period (as defined in section 
                1382(d)) for the taxable year of the organization or, if 
                earlier, for the taxable year of each patron ending on 
                or after the date on which the patron receives notice 
                from the cooperative of the apportionment.
            ``(3) Special rule.--If the amount of a credit which has 
        been apportioned to any patron under this subsection is 
        decreased for any reason--
                    ``(A) such amount shall not increase the tax imposed 
                on such patron, and
                    ``(B) the tax imposed by this chapter on such 
                organization shall be increased by such amount.
        The increase under subparagraph (B) shall not be treated as tax 
        imposed by this chapter for purposes of determining the amount 
        of any credit under this chapter or for purposes of section 
        55.''.

    (b) Credit Made Part of General Business Credit.--Subsection (b) of 
section 38 (relating to general business credit), as amended by this 
Act, is amended by striking ``plus'' at the end of paragraph (16), by 
striking the period at the end of paragraph (17) and inserting ``, 
plus'', and by inserting after paragraph (17) the following new 
paragraph:
            ``(18) the low sulfur diesel fuel production credit 
        determined under section 45H(a).''.

    (c) Denial of Double Benefit.--Section 280C (relating to certain 
expenses for which credits are allowable) is amended by adding at the 
end the following new subsection:
    ``(d) Low Sulfur Diesel Fuel Production Credit.--No deduction shall 
be allowed for that portion of the expenses otherwise allowable as a 
deduction for the taxable year which is equal to the amount of the 
credit determined for the taxable year under section 45H(a).''.
    (d) Basis Adjustment.--Section 1016(a) (relating to adjustments to 
basis), as amended by this Act, is amended by striking ``and'' at the 
end of paragraph (29), by striking the period at the end of paragraph 
(30) and inserting ``, and'', and by inserting after paragraph (30) the 
following new paragraph:
            ``(31) in the case of a facility with respect to which a 
        credit was allowed under section 45H, to the extent provided in 
        section 45H(d).''.

    (e) Deduction for Certain Unused Business Credits.--Section 196(c) 
(defining qualified business credits), as amended by this Act, is 
amended by striking ``and'' at the end of paragraph (10), by striking 
the period at the end of paragraph (11) and inserting ``, and'', and by 
adding after paragraph (11) the following new paragraph:
            ``(12) the low sulfur diesel fuel production credit 
        determined under section 45H(a).''.

    (e) Clerical Amendment.--The table of sections for subpart D of part 
IV of subchapter A of chapter 1, as amended by this Act, is amended by 
inserting after the item relating to section 45G the following new item:

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


[[Page 118 STAT. 1485]]



    (f) Effective Date.--The <<NOTE: 26 USC 38 note.>> amendments made 
by this section shall apply to expenses paid or incurred after December 
31, 2002, in taxable years ending after such date.

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

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

    (b) Conforming Amendment.--Subparagraph (F) of section 144(a)(4) is 
amended by adding at the end the following new sentence: ``This 
subparagraph shall not apply to bonds issued after September 30, 
2009.''.

SEC. 341. OIL AND GAS FROM MARGINAL WELLS.

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

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

    ``(a) General Rule.--For purposes of section 38, the marginal well 
production credit for any taxable year is an amount equal to the product 
of--
            ``(1) the credit amount, and
            ``(2) the qualified credit oil production and the qualified 
        natural gas production which is attributable to the taxpayer.

    ``(b) Credit Amount.--For purposes of this section--
            ``(1) In general.--The credit amount is--
                    ``(A) $3 per barrel of qualified crude oil 
                production, and
                    ``(B) 50 cents per 1,000 cubic feet of qualified 
                natural gas production.
            ``(2) Reduction as oil and gas prices increase.--
                    ``(A) In general.--The $3 and 50 cents amounts under 
                paragraph (1) shall each be reduced (but not below zero) 
                by an amount which bears the same ratio to such amount 
                (determined without regard to this paragraph) as--
                          ``(i) the excess (if any) of the applicable 
                      reference price over $15 ($1.67 for qualified 
                      natural gas production), bears to
                          ``(ii) $3 ($0.33 for qualified natural gas 
                      production).
                The applicable reference price for a taxable year is the 
                reference price of the calendar year preceding the 
                calendar year in which the taxable year begins.
                    ``(B) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 2005, 
                each of the dollar amounts contained in subparagraph (A) 
                shall be increased to an amount equal to such dollar 
                amount multiplied by the inflation adjustment factor for 
                such calendar year (determined under section 43(b)(3)(B) 
                by substituting `2004' for `1990').

[[Page 118 STAT. 1486]]

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

    ``(c) Qualified Crude Oil and Natural Gas Production.--For purposes 
of this section--
            ``(1) In general.--The terms `qualified crude oil 
        production' and `qualified natural gas production' mean domestic 
        crude oil or natural gas which is produced from a qualified 
        marginal well.
            ``(2) Limitation on amount of production which may 
        qualify.--
                    ``(A) In general.--Crude oil or natural gas produced 
                during any taxable year from any well shall not be 
                treated as qualified crude oil production or qualified 
                natural gas production to the extent production from the 
                well during the taxable year exceeds 1,095 barrels or 
                barrel-of-oil equivalents (as defined in section 
                29(d)(5)).
                    ``(B) Proportionate reductions.--
                          ``(i) Short taxable years.--In the case of a 
                      short taxable year, the limitations under this 
                      paragraph shall be proportionately reduced to 
                      reflect the ratio which the number of days in such 
                      taxable year bears to 365.
                          ``(ii) Wells not in production entire year.--
                      In the case of a well which is not capable of 
                      production during each day of a taxable year, the 
                      limitations under this paragraph applicable to the 
                      well shall be proportionately reduced to reflect 
                      the ratio which the number of days of production 
                      bears to the total number of days in the taxable 
                      year.
            ``(3) Definitions.--
                    ``(A) Qualified marginal well.--The term `qualified 
                marginal well' means a domestic well--
                          ``(i) the production from which during the 
                      taxable year is treated as marginal production 
                      under section 613A(c)(6), or
                          ``(ii) which, during the taxable year--
                                    ``(I) has average daily production 
                                of not more than 25 barrel-of-oil 
                                equivalents (as so defined), and
                                    ``(II) produces water at a rate not 
                                less than 95 percent of total well 
                                effluent.
                    ``(B) Crude oil, etc.--The terms `crude oil', 
                `natural gas', `domestic', and `barrel' have the 
                meanings given such terms by section 613A(e).

    ``(d) Other Rules.--
            ``(1) Production attributable to the taxpayer.--In the case 
        of a qualified marginal well in which there is more than one 
        owner of operating interests in the well and the crude

[[Page 118 STAT. 1487]]

        oil or natural gas production exceeds the limitation under 
        subsection (c)(2), qualifying crude oil production or qualifying 
        natural gas production attributable to the taxpayer shall be 
        determined on the basis of the ratio which taxpayer's revenue 
        interest in the production bears to the aggregate of the revenue 
        interests of all operating interest owners in the production.
            ``(2) Operating interest required.--Any credit under this 
        section may be claimed only on production which is attributable 
        to the holder of an operating interest.
            ``(3) Production from nonconventional sources excluded.--In 
        the case of production from a qualified marginal well which is 
        eligible for the credit allowed under section 29 for the taxable 
        year, no credit shall be allowable under this section unless the 
        taxpayer elects not to claim the credit under section 29 with 
        respect to the well.''.

    (b) Credit Treated as Business Credit.--Section 38(b), as amended by 
this Act, is amended by striking ``plus'' at the end of paragraph (17), 
by striking the period at the end of paragraph (18) and inserting ``, 
plus'', and by inserting after paragraph (18) the following:
            ``(19) the marginal oil and gas well production credit 
        determined under section 45I(a).''.

    (c) Carryback.--Subsection (a) of section 39 (relating to carryback 
and carryforward of unused credits generally) is amended by adding at 
the end the following:
            ``(3) 5-year <<NOTE: Applicability.>> carryback for marginal 
        oil and gas well production credit.--Notwithstanding subsection 
        (d), in the case of the marginal oil and gas well production 
        credit--
                    ``(A) this section shall be applied separately from 
                the business credit (other than the marginal oil and gas 
                well production credit),
                    ``(B) paragraph (1) shall be applied by substituting 
                `5 taxable years' for `1 taxable years' in subparagraph 
                (A) thereof, and
                    ``(C) paragraph (2) shall be applied--
                          ``(i) by substituting `25 taxable years' for 
                      `21 taxable years' in subparagraph (A) thereof, 
                      and
                          ``(ii) by substituting `24 taxable years' for 
                      `20 taxable years' in subparagraph (B) thereof.''.

    (d) Clerical Amendment.--The table of sections for subpart D of part 
IV of subchapter A of chapter 1, as amended by this Act, is amended by 
inserting after section 45H the following:

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

    (e) Effective Date.--The <<NOTE: 26 USC 38 note.>> amendments made 
by this section shall apply to production in taxable years beginning 
after December 31, 2004.

[[Page 118 STAT. 1488]]

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

SEC. 401. INTEREST EXPENSE ALLOCATION RULES.

    (a) Election To Allocate on Worldwide Basis.--Section 864 is amended 
by redesignating subsection (f) as subsection (g) and by inserting after 
subsection (e) the following new subsection:
    ``(f) Election To Allocate Interest, etc. on Worldwide Basis.--For 
purposes of this subchapter, at the election of the worldwide affiliated 
group--
            ``(1) Allocation and apportionment of interest expense.--
                    ``(A) In general.--The taxable income of each 
                domestic corporation which is a member of a worldwide 
                affiliated group shall be determined by allocating and 
                apportioning interest expense of each member as if all 
                members of such group were a single corporation.
                    ``(B) Treatment of worldwide affiliated group.--The 
                taxable income of the domestic members of a worldwide 
                affiliated group from sources outside the United States 
                shall be determined by allocating and apportioning the 
                interest expense of such domestic members to such income 
                in an amount equal to the excess (if any) of--
                          ``(i) the total interest expense of the 
                      worldwide affiliated group multiplied by the ratio 
                      which the foreign assets of the worldwide 
                      affiliated group bears to all the assets of the 
                      worldwide affiliated group, over
                          ``(ii) the interest expense of all foreign 
                      corporations which are members of the worldwide 
                      affiliated group to the extent such interest 
                      expense of such foreign corporations would have 
                      been allocated and apportioned to foreign source 
                      income if this subsection were applied to a group 
                      consisting of all the foreign corporations in such 
                      worldwide affiliated group.
                    ``(C) Worldwide affiliated group.--For purposes of 
                this paragraph, the term `worldwide affiliated group' 
                means a group consisting of--
                          ``(i) the includible members of an affiliated 
                      group (as defined in section 1504(a), determined 
                      without regard to paragraphs (2) and (4) of 
                      section 1504(b)), and
                          ``(ii) all controlled foreign corporations in 
                      which such members in the aggregate meet the 
                      ownership requirements of section 1504(a)(2) 
                      either directly or indirectly through applying 
                      paragraph (2) of section 958(a) or through 
                      applying rules similar to the rules of such 
                      paragraph to stock owned directly or indirectly by 
                      domestic partnerships, trusts, or estates.
            ``(2) Allocation and apportionment of other expenses.--
        Expenses other than interest which are not directly allocable or 
        apportioned to any specific income producing activity shall be 
        allocated and apportioned as if all members of the affiliated 
        group were a single corporation. For purposes

[[Page 118 STAT. 1489]]

        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 <<NOTE: Applicability.>> of tax-exempt 
        assets; basis of stock in nonaffiliated 10-percent owned 
        corporations.--The rules of paragraphs (3) and (4) of subsection 
        (e) shall apply for purposes of this subsection, except that 
        paragraph (4) shall be applied on a worldwide affiliated group 
        basis.
            ``(4) Treatment of certain financial institutions.--
                    ``(A) In general.--For purposes of paragraph (1), 
                any corporation described in subparagraph (B) shall be 
                treated as an includible corporation for purposes of 
                section 1504 only for purposes of applying this 
                subsection separately to corporations so described.
                    ``(B) Description.--A corporation is described in 
                this subparagraph if--
                          ``(i) such corporation is a financial 
                      institution described in section 581 or 591,
                          ``(ii) the business of such financial 
                      institution is predominantly with persons other 
                      than related persons (within the meaning of 
                      subsection (d)(4)) or their customers, and
                          ``(iii) such financial institution is required 
                      by State or Federal law to be operated separately 
                      from any other entity which is not such an 
                      institution.
                    ``(C) Treatment of bank and financial holding 
                companies.--To the extent provided in regulations--
                          ``(i) a bank holding company (within the 
                      meaning of section 2(a) of the Bank Holding 
                      Company Act of 1956 (12 U.S.C. 1841(a)),
                          ``(ii) a financial holding company (within the 
                      meaning of section 2(p) of the Bank Holding 
                      Company Act of 1956 (12 U.S.C. 1841(p)), and
                          ``(iii) any subsidiary of a financial 
                      institution described in section 581 or 591, or of 
                      any such bank or financial holding company, if 
                      such subsidiary is predominantly engaged (directly 
                      or indirectly) in the active conduct of a banking, 
                      financing, or similar business,
                shall be treated as a corporation described in 
                subparagraph (B).
            ``(5) Election to expand financial institution group of 
        worldwide group.--
                    ``(A) In general.--If a worldwide affiliated group 
                elects the application of this subsection, all financial 
                corporations which--
                          ``(i) are members of such worldwide affiliated 
                      group, but
                          ``(ii) are not corporations described in 
                      paragraph (4)(B),
                shall be treated as described in paragraph (4)(B) for 
                purposes of applying paragraph 
                (4)(A). <<NOTE: Applicability.>> 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.

[[Page 118 STAT. 1490]]

                    ``(B) Financial corporation.--For purposes of this 
                paragraph, the term `financial corporation' means any 
                corporation if at least 80 percent of its gross income 
                is income described in section 904(d)(2)(D)(ii) and the 
                regulations thereunder which is derived from 
                transactions with persons who are not related (within 
                the meaning of section 267(b) or 707(b)(1)) to the 
                corporation. For purposes of the preceding sentence, 
                there shall be disregarded any item of income or gain 
                from a transaction or series of transactions a principal 
                purpose of which is the qualification of any corporation 
                as a financial corporation.
                    ``(C) Anti-abuse rules.--In the case of a 
                corporation which is a member of an electing financial 
                institution group, to the extent that such corporation--
                          ``(i) distributes dividends or makes other 
                      distributions with respect to its stock after the 
                      date of the enactment of this paragraph to any 
                      member of the pre-election worldwide affiliated 
                      group (other than to a member of the electing 
                      financial institution group) in excess of the 
                      greater of--
                                    ``(I) its average annual dividend 
                                (expressed as a percentage of current 
                                earnings and profits) during the 5-
                                taxable-year period ending with the 
                                taxable year preceding the taxable year, 
                                or
                                    ``(II) 25 percent of its average 
                                annual earnings and profits for such 5-
                                taxable-year period, or
                          ``(ii) deals with any person in any manner not 
                      clearly reflecting the income of the corporation 
                      (as determined under principles similar to the 
                      principles of section 482),
                an amount of indebtedness of the electing financial 
                institution group equal to the excess distribution or 
                the understatement or overstatement of income, as the 
                case may be, shall be recharacterized (for the taxable 
                year and subsequent taxable years) for purposes of this 
                paragraph as indebtedness of the worldwide affiliated 
                group (excluding the electing financial institution 
                group). If a corporation has not been in existence for 5 
                taxable years, this subparagraph shall be applied with 
                respect to the period it was in existence.
                    ``(D) Election.--An election under this paragraph 
                with respect to any financial institution group may be 
                made only by the common parent of the pre-election 
                worldwide affiliated group and may be made only for the 
                first taxable year beginning after December 31, 2008, in 
                which such affiliated group includes 1 or more financial 
                corporations. Such an 
                election, <<NOTE: Applicability.>> 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

[[Page 118 STAT. 1491]]

                      (but for an election under this paragraph) be a 
                      member for purposes of applying paragraph (1).
                          ``(ii) Electing financial institution group.--
                      The term `electing financial institution group' 
                      means the group of corporations to which this 
                      subsection applies separately by reason of the 
                      application of paragraph (4)(A) and which includes 
                      financial corporations by reason of an election 
                      under subparagraph (A).
                    ``(F) Regulations.--The Secretary shall prescribe 
                such regulations as may be appropriate to carry out this 
                subsection, including regulations--
                          ``(i) providing for the direct allocation of 
                      interest expense in other circumstances where such 
                      allocation would be appropriate to carry out the 
                      purposes of this subsection,
                          ``(ii) preventing assets or interest expense 
                      from being taken into account more than once, and
                          ``(iii) dealing with changes in members of any 
                      group (through acquisitions or otherwise) treated 
                      under this paragraph as an affiliated group for 
                      purposes of this subsection.
            ``(6) Election.--An election to have this subsection apply 
        with respect to any worldwide affiliated group may be made only 
        by the common parent of the domestic affiliated group referred 
        to in paragraph (1)(C) and may be made only for the first 
        taxable year beginning after December 31, 2008, in which a 
        worldwide affiliated group exists which includes such affiliated 
        group and at least 1 <<NOTE: Applicability.>> 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 <<NOTE: 26 USC 864 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2008.

SEC. 402. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

    (a) General Rule.--Section 904 is amended by redesignating 
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), 
(k), and (l) respectively, and by inserting after subsection (f) the 
following new subsection:
    ``(g) Recharacterization of Overall Domestic Loss.--
            ``(1) General rule.--For purposes of this subpart and 
        section 936, in the case of any taxpayer who sustains an overall 
        domestic loss for any taxable year beginning after December 31, 
        2006, that portion of the taxpayer's taxable income from

[[Page 118 STAT. 1492]]

        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 <<NOTE: Regulations.>> 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 <<NOTE: 26 USC 535 note.>> amendments made 
by this section shall apply to losses for taxable years beginning after 
December 31, 2006.

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

    (a) In General.--Section 904(d)(4) (relating to look-thru rules 
apply to dividends from noncontrolled section 902 corporations) is 
amended to read as follows:

[[Page 118 STAT. 1493]]

            ``(4) Look-thru applies to dividends from noncontrolled 
        section 902 corporations.--
                    ``(A) In general.--For purposes of this subsection, 
                any dividend from a noncontrolled section 902 
                corporation with respect to the taxpayer shall be 
                treated as income described in a subparagraph of 
                paragraph (1) in proportion to the ratio of--
                          ``(i) the portion of earnings and profits 
                      attributable to income described in such 
                      subparagraph, to
                          ``(ii) the total amount of earnings and 
                      profits.
                    ``(B) Earnings and profits of controlled foreign 
                corporations.--In the case of any distribution from a 
                controlled foreign corporation to a United States 
                shareholder, rules similar to the rules of subparagraph 
                (A) shall apply in determining the extent to which 
                earnings and profits of the controlled foreign 
                corporation which are attributable to dividends received 
                from a noncontrolled section 902 corporation may be 
                treated as income in a separate category.
                    ``(C) Special rules.--For purposes of this 
                paragraph--
                          ``(i) Earnings and profits.--
                                    ``(I) In general.--The rules of 
                                section 316 shall apply.
                                    ``(II) Regulations.--The Secretary 
                                may prescribe regulations regarding the 
                                treatment of distributions out of 
                                earnings and profits for periods before 
                                the taxpayer's acquisition of the stock 
                                to which the distributions relate.
                          ``(ii) Inadequate substantiation.--If the 
                      Secretary determines that the proper subparagraph 
                      of paragraph (1) in which a dividend is described 
                      has not been substantiated, such dividend shall be 
                      treated as income described in paragraph (1)(A).
                          ``(iii) Coordination with high-taxed income 
                      provisions.--Rules similar to the rules of 
                      paragraph (3)(F) shall apply for purposes of this 
                      paragraph.
                          ``(iv) Look-thru with respect to carryover of 
                      credit.--Rules similar to subparagraph (A) also 
                      shall apply to any carryforward under subsection 
                      (c) from a taxable year beginning before January 
                      1, 2003, of tax allocable to a dividend from a 
                      noncontrolled section 902 corporation with respect 
                      to the taxpayer. The Secretary may by regulations 
                      provide for the allocation of any carryback of tax 
                      allocable to a dividend from a noncontrolled 
                      section 902 corporation from a taxable year 
                      beginning on or after January 1, 2003, to a 
                      taxable year beginning before such date for 
                      purposes of allocating such dividend among the 
                      separate categories in effect for the taxable year 
                      to which carried.''.

    (b) Conforming Amendments.--
            (1) Subparagraph (E) of section 904(d)(1) is hereby 
        repealed.
            (2) Section 904(d)(2)(C)(iii) is amended by adding ``and'' 
        at the end of subclause (I), by striking subclause (II), and by 
        redesignating subclause (III) as subclause (II).
            (3) The last sentence of section 904(d)(2)(D) is amended to 
        read as follows: ``Such term does not include any financial 
        services income.''.

[[Page 118 STAT. 1494]]

            (4) Section 904(d)(2)(E) is amended--
                    (A) by inserting ``or (4)'' after ``paragraph (3)'' 
                in clause (i), and
                    (B) by striking clauses (ii) and (iv) and by 
                redesignating clause (iii) as clause (ii).
            (5) Section 904(d)(3)(F) is amended by striking ``(D), or 
        (E)'' and inserting ``or (D)''.
            (6) Section 864(d)(5)(A)(i) is amended by striking 
        ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.

    (c) Effective Date.--The <<NOTE: 26 USC 864 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2002.

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

    (a) In General.--Paragraph (1) of section 904(d) (relating to 
separate application of section with respect to certain categories of 
income) is amended to read as follows:
            ``(1) In general.--The <<NOTE: Applicability.>> provisions 
        of subsections (a), (b), and (c) and sections 902, 907, and 960 
        shall be applied separately with respect to--
                    ``(A) passive category income, and
                    ``(B) general category income.''.

    (b) Categories.--Paragraph (2) of section 904(d) is amended by 
striking subparagraph (B), by redesignating subparagraph (A) as 
subparagraph (B), and by inserting before subparagraph (B) (as so 
redesignated) the following new subparagraph:
                    ``(A) Categories.--
                          ``(i) Passive category income.--The term 
                      `passive category income' means passive income and 
                      specified passive category income.
                          ``(ii) General category income.--The term 
                      `general category income' means income other than 
                      passive category income.''.

    (c) Specified Passive Category Income.--Subparagraph (B) of section 
904(d)(2), as so redesignated, is amended by adding at the end the 
following new clause:
                          ``(v) Specified passive category income.--The 
                      term `specified passive category income' means--
                                    ``(I) dividends from a DISC or 
                                former DISC (as defined in section 
                                992(a)) to the extent such dividends are 
                                treated as income from sources without 
                                the United States,
                                    ``(II) taxable income attributable 
                                to foreign trade income (within the 
                                meaning of section 923(b)), and
                                    ``(III) distributions from a FSC (or 
                                a former FSC) out of earnings and 
                                profits attributable to foreign trade 
                                income (within the meaning of section 
                                923(b)) or interest or carrying charges 
                                (as defined in section 927(d)(1)) 
                                derived from a transaction which results 
                                in foreign trade income (as defined in 
                                section 923(b)).''.

    (d) Treatment of Financial Services.--Paragraph (2) of section 
904(d), as amended by section 403(b)(3), is amended by striking 
subparagraph (D), by redesignating subparagraph (C) as subparagraph (D), 
and by inserting before subparagraph (D) (as so redesignated) the 
following new subparagraph:

[[Page 118 STAT. 1495]]

                    ``(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 <<NOTE: Regulations.>> Secretary shall by 
                      regulation specify for purposes of this 
                      subparagraph the treatment of financial services 
                      income received or accrued by partnerships and by 
                      other pass-thru entities which are not members of 
                      a financial services group.''.

    (e) Treatment of Income Tax Base Differences.--Paragraph (2) of 
section 904(d) is amended by redesignating subparagraphs (H) and (I) as 
subparagraphs (I) and (J), respectively, and by inserting after 
subparagraph (G) the following new subparagraph:
                    ``(H) Treatment of income tax base differences.--
                          ``(i) In general.--In the case of taxable 
                      years beginning after December 31, 2006, tax 
                      imposed under the law of a foreign country or 
                      possession of the United States on an amount which 
                      does not constitute income under United States tax 
                      principles shall be treated as imposed on income 
                      described in paragraph (1)(B).
                          ``(ii) Special rule for years before 2007.--
                                    ``(I) In general.--In the case of 
                                taxes paid or accrued in taxable years 
                                beginning after December 31, 2004, and 
                                before January 1, 2007, a taxpayer may 
                                elect to treat tax imposed under the law 
                                of a foreign country or possession of 
                                the United States on an amount which 
                                does not constitute income under United 
                                States tax principles as tax imposed on 
                                income described in subparagraph (C) or 
                                (I) of paragraph (1).
                                    ``(II) Election irrevocable.--
                                Any <<NOTE: Applicability.>> such 
                                election shall apply to the taxable year 
                                for which made and all subsequent 
                                taxable years described in subclause (I) 
                                unless revoked with the consent of the 
                                Secretary.''.

    (f) Conforming Amendments.--

[[Page 118 STAT. 1496]]

            (1) Clause (iii) of section 904(d)(2)(B) (relating to 
        exceptions from passive income), as so redesignated, is amended 
        by striking subclause (I) and by redesignating subclauses (II) 
        and (III) as subclauses (I) and (II), respectively.
            (2) Clause (i) of section 904(d)(2)(D) (defining financial 
        services income), as so redesignated, is amended by adding 
        ``or'' at the end of subclause (I) and by striking subclauses 
        (II) and (III) and inserting the following new subclause:
                                    ``(II) passive income (determined 
                                without regard to subparagraph 
                                (B)(iii)(II)).''.
            (3) Section 904(d)(2)(D) (defining financial services 
        income), as so redesignated and amended by section 404(b)(3), is 
        amended by striking clause (iii).
            (4) Paragraph (3) of section 904(d) is amended to read as 
        follows:
            ``(3) Look-thru in case of controlled foreign 
        corporations.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, dividends, interest, rents, and 
                royalties received or accrued by the taxpayer from a 
                controlled foreign corporation in which the taxpayer is 
                a United States shareholder shall not be treated as 
                passive category income.
                    ``(B) Subpart f inclusions.--Any amount included in 
                gross income under section 951(a)(1)(A) shall be treated 
                as passive category income to the extent the amount so 
                included is attributable to passive category income.
                    ``(C) Interest, <<NOTE: Regulations.>> 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.--

[[Page 118 STAT. 1497]]

                          ``(i) In determining whether any income of a 
                      controlled foreign corporation is passive category 
                      income, subclause (II) of paragraph (2)(B)(iii) 
                      shall not apply.
                          ``(ii) Any income of the taxpayer which is 
                      treated as passive category income under this 
                      paragraph shall be so treated notwithstanding any 
                      provision of paragraph (2); except that the 
                      determination of whether any amount is high-taxed 
                      income shall be made after the application of this 
                      paragraph.
                    ``(G) Dividend.--For purposes of this paragraph, the 
                term `dividend' includes any amount included in gross 
                income in section 951(a)(1)(B). Any amount included in 
                gross income under section 78 to the extent attributable 
                to amounts included in gross income in section 
                951(a)(1)(A) shall not be treated as a dividend but 
                shall be treated as included in gross income under 
                section 951(a)(1)(A).
                    ``(H) Look-thru applies to passive foreign 
                investment company inclusion.--If--
                          ``(i) a passive foreign investment company is 
                      a controlled foreign corporation, and
                          ``(ii) the taxpayer is a United States 
                      shareholder in such controlled foreign 
                      corporation,
                any amount included in gross income under section 1293 
                shall be treated as income in a separate category to the 
                extent such amount is attributable to income in such 
                category.''.
            (5) Paragraph (2) of section 904(d) is amended by adding at 
        the end the following new subparagraph:
                    ``(K) Transitional rules for 2007 changes.--For 
                purposes of paragraph (1)--
                          ``(i) taxes carried from any taxable year 
                      beginning before January 1, 2007, to any taxable 
                      year beginning on or after such date, with respect 
                      to any item of income, shall be treated as 
                      described in the subparagraph of paragraph (1) in 
                      which such income would be described were such 
                      taxes paid or accrued in a taxable year beginning 
                      on or after such date, and
                          ``(ii) the Secretary may by regulations 
                      provide for the allocation of any carryback of 
                      taxes with respect to income from a taxable year 
                      beginning on or after January 1, 2007, to a 
                      taxable year beginning before such date for 
                      purposes of allocating such income among the 
                      separate categories in effect for the taxable year 
                      to which carried.''.
            (6) Section 904(j)(3)(A)(i) is amended by striking 
        ``subsection (d)(2)(A)'' and inserting ``subsection (d)(2)(B)''.

    (g) Effective <<NOTE: 26 USC 904 note.>> Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2006.
            (2) Transitional rule relating to income tax base 
        difference.--Section 904(d)(2)(H)(ii) of the Internal Revenue 
        Code of 1986, as added by subsection (e), shall apply to taxable 
        years beginning after December 31, 2004.

[[Page 118 STAT. 1498]]

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

    (a) In General.--Subsection (c) of section 902 is amended by 
redesignating paragraph (7) as paragraph (8) and by inserting after 
paragraph (6) the following new paragraph:
            ``(7) Constructive ownership through partnerships.--Stock 
        owned, directly or indirectly, by or for a partnership shall be 
        considered as being owned proportionately by its partners. Stock 
        considered to be owned by a person by reason of the preceding 
        sentence shall, for purposes of applying such sentence, be 
        treated as actually owned by such person. The Secretary may 
        prescribe such regulations as may be necessary to carry out the 
        purposes of this paragraph, including rules to account for 
        special partnership allocations of dividends, credits, and other 
        incidents of ownership of stock in determining proportionate 
        ownership.''.

    (b) Clarification of Comparable Attribution Under Section 
901(b)(5).--Paragraph (5) of section 901(b) is amended by striking ``any 
individual'' and inserting ``any person''.
    (c) Effective Date.--The <<NOTE: 26 USC 901 note.>> amendments made 
by this section shall apply to taxes of foreign corporations for taxable 
years of such corporations beginning after the date of the enactment of 
this Act.

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

    (a) In General.--Subparagraph (C) of section 367(d)(2) is amended by 
adding at the end the following new sentence: ``For purposes of applying 
section 904(d), any such amount shall be treated in the same manner as 
if such amount were a royalty.''.
    (b) Effective Date.--The <<NOTE: 26 USC 367 note.>> amendment made 
by this section shall apply to amounts treated as received pursuant to 
section 367(d)(2) of the Internal Revenue Code of 1986 on or after 
August 5, 1997.

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

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

[[Page 118 STAT. 1499]]

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

    (b) Conforming Amendment.--Section 956(c)(2) is amended by striking 
``and (K)'' in the last sentence and inserting ``, (K), and (L)''.
    (c) Effective Date.--The <<NOTE: 26 USC 956 note.>> amendments made 
by this section shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

SEC. 408. TRANSLATION OF FOREIGN TAXES.

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

    (b) Special Rule for Regulated Investment Companies.--
            (1) In general.--Section 986(a)(1), as amended by subsection 
        (a), is amended by redesignating subparagraph (E) as 
        subparagraph (F) and by inserting after subparagraph (D) the 
        following:
                    ``(E) Special rule for regulated investment 
                companies.--In the case of a regulated investment 
                company which takes into account income on an accrual 
                basis, subparagraphs (A) through (D) shall not apply and 
                foreign income taxes paid or accrued with respect to 
                such income shall be translated into dollars using the 
                exchange rate as of the date the income accrues.''.
            (2) Conforming amendment.--Section 986(a)(2) is amended by 
        inserting ``or (E)'' after ``subparagraph (A)''.

[[Page 118 STAT. 1500]]

    (c) Effective Date.--The <<NOTE: 26 USC 986 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

    (a) In General.--Paragraph (2) of section 871(i) (relating to tax 
not to apply to certain interest and dividends) is amended by adding at 
the end the following new subparagraph:
                    ``(D) Dividends paid by a foreign corporation which 
                are treated under section 861(a)(2)(B) as income from 
                sources within the United States.''.

    (b) Effective Date.--The <<NOTE: 26 USC 871 note.>> amendment made 
by this section shall apply to payments made after December 31, 2004.

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

    (a) In General.--Paragraph (1) of section 861(a) is amended by 
striking ``and'' at the end of subparagraph (A), by striking the period 
at the end of subparagraph (B) and inserting ``, and'', and by adding at 
the end the following new subparagraph:
                    ``(C) in the case of a foreign partnership, which is 
                predominantly engaged in the active conduct of a trade 
                or business outside the United States, any interest not 
                paid by a trade or business engaged in by the 
                partnership in the United States and not allocable to 
                income which is effectively connected (or treated as 
                effectively connected) with the conduct of a trade or 
                business in the United States.''.

    (b) Effective Date.--The <<NOTE: 26 USC 861 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2003.

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

    (a) Treatment of Certain Dividends.--
            (1) Nonresident alien individuals.--Section 871 (relating to 
        tax on nonresident alien individuals) is amended by 
        redesignating subsection (k) as subsection (l) and by inserting 
        after subsection (j) the following new subsection:

    ``(k) Exemption for Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any interest-
                related dividend received from a regulated investment 
                company.
                    ``(B) Exceptions.--Subparagraph (A) shall not 
                apply--
                          ``(i) to any interest-related dividend 
                      received from a regulated investment company by a 
                      person to the extent such dividend is attributable 
                      to interest (other than interest described in 
                      subparagraph (E) (i) or (iii)) received by such 
                      company on indebtedness issued by such person or 
                      by any corporation or partnership with respect to 
                      which such person is a 10-percent shareholder,
                          ``(ii) to any interest-related dividend with 
                      respect to stock of a regulated investment company 
                      unless the person who would otherwise be required 
                      to deduct and withhold tax from such dividend 
                      under chapter

[[Page 118 STAT. 1501]]

                      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 <<NOTE: Deadline.>> purposes of this paragraph, the 
                term `interest-related dividend' means any dividend (or 
                part thereof) which is designated by the regulated 
                investment company as an interest-related dividend in a 
                written notice mailed to its shareholders not later than 
                60 days after the close of its taxable year. If the 
                aggregate amount so designated with respect to a taxable 
                year of the company (including amounts so designated 
                with respect to dividends paid after the close of the 
                taxable year described in section 855) is greater than 
                the qualified net interest income of the company for 
                such taxable year, the portion of each distribution 
                which shall be an interest-related dividend shall be 
                only that portion of the amounts so designated which 
                such qualified net interest income bears to the 
                aggregate amount so designated. Such term shall not 
                include any dividend with respect to any taxable year of 
                the company beginning after December 31, 2007.
                    ``(D) Qualified net interest income.--For purposes 
                of subparagraph (C), the term `qualified net interest 
                income' means the qualified interest income of the 
                regulated investment company reduced by the deductions 
                properly allocable to such income.
                    ``(E) Qualified interest income.--For purposes of 
                subparagraph (D), the term `qualified interest income' 
                means the sum of the following amounts derived by the 
                regulated investment company from sources within the 
                United States:
                          ``(i) Any amount includible in gross income as 
                      original issue discount (within the meaning of 
                      section 1273) on an obligation payable 183 days or 
                      less from the date of original issue (without 
                      regard to the period held by the company).
                          ``(ii) Any interest includible in gross income 
                      (including amounts recognized as ordinary income 
                      in respect of original issue discount or market 
                      discount or acquisition discount under part V of 
                      subchapter P and such other amounts as regulations 
                      may provide) on an obligation which is in 
                      registered form; except that this clause shall not 
                      apply to--
                                    ``(I) any interest on an obligation 
                                issued by a corporation or partnership 
                                if the regulated

[[Page 118 STAT. 1502]]

                                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 <<NOTE: Notice. Deadline.>> capital 
                gain dividend.--For purposes of this paragraph, the term 
                `short-term capital gain dividend' means any dividend 
                (or part thereof) which is designated by the regulated 
                investment company as a short-term capital gain dividend 
                in a written notice mailed to its shareholders not later 
                than 60 days after the close of its taxable year. If the 
                aggregate amount so designated with respect to a taxable 
                year of the company (including amounts so designated 
                with respect to dividends paid after the close of the 
                taxable year described in section 855) is greater than 
                the qualified short-term gain of the company for such 
                taxable year, the portion of each distribution which 
                shall be a short-term capital gain dividend shall be 
                only that portion of the amounts so designated which 
                such qualified short-term gain bears to the aggregate 
                amount so designated. Such term shall not include any 
                dividend with respect to any taxable year of the company 
                beginning after December 31, 2007.
                    ``(D) Qualified short-term gain.--For purposes of 
                subparagraph (C), the term `qualified short-term gain' 
                means the excess of the net short-term capital gain of 
                the regulated investment company for the taxable year 
                over the net long-term capital loss (if any) of such 
                company for such taxable year. For purposes of this 
                subparagraph--
                          ``(i) the net short-term capital gain of the 
                      regulated investment company shall be computed by 
                      treating any short-term capital gain dividend 
                      includible in gross income with respect to stock 
                      of another regulated investment company as a 
                      short-term capital gain, and
                          ``(ii) the excess of the net short-term 
                      capital gain for a taxable year over the net long-
                      term capital loss for a taxable year (to which an 
                      election under section 4982(e)(4) does not apply) 
                      shall be determined without regard to any net 
                      capital loss or net short-term capital

[[Page 118 STAT. 1503]]

                      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 <<NOTE: Applicability.>> of 
                dividends received by controlled foreign corporations.--
                The rules of subsection (c)(5)(A) shall apply to any 
                (within the meaning of section 957(a)) to the extent 
                such dividend is attributable to interest received by 
                the regulated investment company which is described in 
                clause (ii) of section 871(k)(1)(E) (and not described 
                in clause (i) or (iii) of such section).
            ``(2) Short-term capital gain dividends.--No tax shall be 
        imposed under paragraph (1) of subsection (a) on any short-term 
        capital gain dividend (as defined in section 871(k)(2)) received 
        from a regulated investment company.''.
            (3) Withholding taxes.--
                    (A) Section 1441(c) (relating to exceptions) is 
                amended by adding at the end the following new 
                paragraph:
            ``(12) Certain dividends received from regulated investment 
        companies.--
                    ``(A) In general.--No tax shall be required to be 
                deducted and withheld under subsection (a) from any 
                amount exempt from the tax imposed by section 
                871(a)(1)(A) by reason of section 871(k).
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), clause (i) of section 871(k)(1)(B) shall not apply 
                to any dividend unless the regulated investment company 
                knows that such dividend is a dividend referred to in 
                such clause. A similar 
                rule <<NOTE: Applicability.>> shall apply with respect 
                to the exception contained in section 871(k)(2)(B).''.

[[Page 118 STAT. 1504]]

                    (B) Section 1442(a) (relating to withholding of tax 
                on foreign corporations) is amended--
                          (i) by striking ``and the reference in section 
                      1441(c)(10)'' and inserting ``the reference in 
                      section 1441(c)(10)'', and
                          (ii) by inserting before the period at the end 
                      the following: ``, and the references in section 
                      1441(c)(12) to sections 871(a) and 871(k) shall be 
                      treated as referring to sections 881(a) and 881(e) 
                      (except that for purposes of applying subparagraph 
                      (A) of section 1441(c)(12), as so modified, clause 
                      (ii) of section 881(e)(1)(B) shall not apply to 
                      any dividend unless the regulated investment 
                      company knows that such dividend is a dividend 
                      referred to in such clause)''.

    (b) Estate Tax Treatment of Interest in Certain Regulated Investment 
Companies.--Section 2105 (relating to property without the United States 
for estate tax purposes) is amended by adding at the end the following 
new subsection:
    ``(d) Stock in a RIC.--
            ``(1) In general.--For purposes of this subchapter, stock in 
        a regulated investment company (as defined in section 851) owned 
        by a nonresident not a citizen of the United States shall not be 
        deemed property within the United States in the proportion that, 
        at the end of the quarter of such investment company's taxable 
        year immediately preceding a decedent's date of death (or at 
        such other time as the Secretary may designate in regulations), 
        the assets of the investment company that were qualifying assets 
        with respect to the decedent bore to the total assets of the 
        investment company.
            ``(2) Qualifying assets.--For purposes of this subsection, 
        qualifying assets with respect to a decedent are assets that, if 
        owned directly by the decedent, would have been--
                    ``(A) amounts, deposits, or debt obligations 
                described in subsection (b) of this section,
                    ``(B) debt obligations described in the last 
                sentence of section 2104(c), or
                    ``(C) other property not within the United States.
            ``(3) Termination.--This subsection shall not apply to 
        estates of decedents dying after December 31, 2007.''.

    (c) Treatment of Regulated Investment Companies Under Section 897.--
            (1) Paragraph (1) of section 897(h) is amended by striking 
        ``REIT'' each place it appears and inserting ``qualified 
        investment entity''.
            (2) Paragraphs (2) and (3) of section 897(h) are amended to 
        read as follows:
            ``(2) Sale of stock in domestically controlled entity not 
        taxed.--The term `United States real property interest' does not 
        include any interest in a domestically controlled qualified 
        investment entity.
            ``(3) Distributions by <<NOTE: Applicability.>> 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:

[[Page 118 STAT. 1505]]

                    ``(A) Qualified investment entity.--
                          ``(i) In general.--The term `qualified 
                      investment entity' means--
                                    ``(I) any real estate investment 
                                trust, and
                                    ``(II) any regulated investment 
                                company.
                          ``(ii) Termination.--Clause (i)(II) shall not 
                      apply after December 31, 2007.
                    ``(B) Domestically controlled.--The term 
                `domestically controlled qualified investment entity' 
                means any qualified investment entity in which at all 
                times during the testing period less than 50 percent in 
                value of the stock was held directly or indirectly by 
                foreign persons.''.
            (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
        amended by striking ``REIT'' and inserting ``qualified 
        investment entity''.
            (5) The subsection heading for subsection (h) of section 897 
        is amended by striking ``REITS'' and inserting ``Certain 
        Investment Entities''.

    (d) Effective <<NOTE: 26 USC 871 note.>> Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        dividends with respect to taxable years of regulated investment 
        companies beginning after December 31, 2004.
            (2) Estate tax treatment.--The amendment made by subsection 
        (b) shall apply to estates of decedents dying after December 31, 
        2004.
            (3) Certain other provisions.--The amendments made by 
        subsection (c) (other than paragraph (1) thereof) shall take 
        effect after December 31, 2004.

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

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

[[Page 118 STAT. 1506]]

    (b) Effective Date.--The <<NOTE: 26 USC 954 note.>> amendment made 
by this section shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

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

    (a) General Rule.--The following provisions are hereby repealed:
            (1) <<NOTE: 26 USC 551-558.>> Part III of subchapter G of 
        chapter 1 (relating to foreign personal holding companies).
            (2) Section 1246 (relating to gain on foreign investment 
        company stock).
            (3) Section 1247 (relating to election by foreign investment 
        companies to distribute income currently).

    (b) Exemption of Foreign Corporations From Personal Holding Company 
Rules.--
            (1) In general.--Subsection (c) of section 542 (relating to 
        exceptions) is amended--
                    (A) by striking paragraph (5) and inserting the 
                following:
            ``(5) a foreign corporation,'',
                    (B) by striking paragraphs (7) and (10) and by 
                redesignating paragraphs (8) and (9) as paragraphs (7) 
                and (8), respectively,
                    (C) by inserting ``and'' at the end of paragraph (7) 
                (as so redesignated), and
                    (D) by striking ``; and'' at the end of paragraph 
                (8) (as so redesignated) and inserting a period.
            (2) Treatment of income from personal service contracts.--
        Paragraph (1) of section 954(c) is amended by adding at the end 
        the following new subparagraph:
                    ``(I) Personal service contracts.--
                          ``(i) Amounts received under a contract under 
                      which the corporation is to furnish personal 
                      services if--
                                    ``(I) some person other than the 
                                corporation has the right to designate 
                                (by name or by description) the 
                                individual who is to perform the 
                                services, or
                                    ``(II) the individual who is to 
                                perform the services is designated (by 
                                name or by description) in the contract, 
                                and
                          ``(ii) amounts received from the sale or other 
                      disposition of such a contract.
                This subparagraph <<NOTE: Applicability.>> shall apply 
                with respect to amounts received for services under a 
                particular contract only if at some time during the 
                taxable year 25 percent or more in value of the 
                outstanding stock of the corporation is owned, directly 
                or indirectly, by or for the individual who has 
                performed, is to perform, or may be designated (by name 
                or by description) as the one to perform, such 
                services.''.

    (c) Conforming Amendments.--
            (1) Section 1(h) is amended--

[[Page 118 STAT. 1507]]

                    (A) in paragraph (10), by inserting ``and'' at the 
                end of subparagraph (F), by striking subparagraph (G), 
                and by redesignating subparagraph (H) as subparagraph 
                (G), and
                    (B) by striking ``a foreign personal holding company 
                (as defined in section 552), a foreign investment 
                company (as defined in section 1246(b)), or'' in 
                paragraph (11)(C)(iii).
            (2) Paragraph (2) of section 171(c) is amended--
                    (A) by striking ``, or by a foreign personal holding 
                company, as defined in section 552'', and
                    (B) by striking ``, or foreign personal holding 
                company''.
            (3) Paragraph (2) of section 245(a) is amended by striking 
        ``foreign personal holding company or''.
            (4) Section 312 is amended by striking subsection (j).
            (5) Subsection (m) of section 312 is amended by striking ``, 
        a foreign investment company (within the meaning of section 
        1246(b)), or a foreign personal holding company (within the 
        meaning of section 552)''.
            (6) Subsection (e) of section 443 is amended by striking 
        paragraph (3) and by redesignating paragraphs (4) and (5) as 
        paragraphs (3) and (4), respectively.
            (7) Subparagraph (B) of section 465(c)(7) is amended by 
        adding ``or'' at the end of clause (i), by striking clause (ii), 
        and by redesignating clause (iii) as clause (ii).
            (8) Paragraph (1) of section 543(b) is amended by inserting 
        ``and'' at the end of subparagraph (A), by striking ``, and'' at 
        the end of subparagraph (B) and inserting a period, and by 
        striking subparagraph (C).
            (9) Paragraph (1) of section 562(b) is amended by striking 
        ``or a foreign personal holding company described in section 
        552''.
            (10) Section 563 is amended--
                    (A) by striking subsection (c),
                    (B) by redesignating subsection (d) as subsection 
                (c), and
                    (C) by striking ``subsection (a), (b), or (c)'' in 
                subsection (c) (as so redesignated) and inserting 
                ``subsection (a) or (b)''.
            (11) Subsection (d) of section 751 is amended by adding 
        ``and'' at the end of paragraph (2), by striking paragraph (3), 
        by redesignating paragraph (4) as paragraph (3), and by striking 
        ``paragraph (1), (2), or (3)'' in paragraph (3) (as so 
        redesignated) and inserting ``paragraph (1) or (2)''.
            (12) Paragraph (2) of section 864(d) is amended by striking 
        subparagraph (A) and by redesignating subparagraphs (B) and (C) 
        as subparagraphs (A) and (B), respectively.
            (13)(A) Subparagraph (A) of section 898(b)(1) is amended to 
        read as follows:
                    ``(A) which is treated as a controlled foreign 
                corporation for any purpose under subpart F of part III 
                of this subchapter, and''.
            (B) Subparagraph (B) of section 898(b)(2) is amended by 
        striking ``and sections 551(f) and 554, whichever are 
        applicable,''.
            (C) Paragraph (3) of section 898(b) is amended to read as 
        follows:

[[Page 118 STAT. 1508]]

            ``(3) United states shareholder.--The term `United States 
        shareholder' has the meaning given to such term by section 
        951(b), except that, in the case of a foreign corporation having 
        related person insurance income (as defined in section 
        953(c)(2)), the Secretary may treat any person as a United 
        States shareholder for purposes of this section if such person 
        is treated as a United States shareholder under section 
        953(c)(1).''.
            (D) Subsection (c) of section 898 is amended to read as 
        follows:

    ``(c) Determination of Required Year.--
            ``(1) In general.--The required year is--
                    ``(A) the majority U.S. shareholder year, or
                    ``(B) if there is no majority U.S. shareholder year, 
                the taxable year prescribed under regulations.
            ``(2) 1-month deferral allowed.--A specified foreign 
        corporation may elect, in lieu of the taxable year under 
        paragraph (1)(A), a taxable year beginning 1 month earlier than 
        the majority U.S. shareholder year.
            ``(3) Majority u.s. shareholder year.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `majority U.S. shareholder year' means the 
                taxable year (if any) which, on each testing day, 
                constituted the taxable year of--
                          ``(i) each United States shareholder described 
                      in subsection (b)(2)(A), and
                          ``(ii) each United States shareholder not 
                      described in clause (i) whose stock was treated as 
                      owned under subsection (b)(2)(B) by any 
                      shareholder described in such clause.
                    ``(B) Testing day.--The testing days shall be--
                          ``(i) the first day of the corporation's 
                      taxable year (determined without regard to this 
                      section), or
                          ``(ii) the days during such representative 
                      period as the Secretary may prescribe.''.
            (14) Clause (ii) of section 904(d)(2)(A) is amended to read 
        as follows:
                          ``(ii) Certain amounts included.--Except as 
                      provided in clause (iii), the term `passive 
                      income' includes, except as provided in 
                      subparagraph (E)(iii) or paragraph (3)(I), any 
                      amount includible in gross income under section 
                      1293 (relating to certain passive foreign 
                      investment companies).''.
            (15)(A) Subparagraph (A) of section 904(h)(1), as 
        redesignated by this Act, is amended by adding ``or'' at the end 
        of clause (i), by striking clause (ii), and by redesignating 
        clause (iii) as clause (ii).
            (B) The paragraph heading of paragraph (2) of section 
        904(h), as so redesignated, is amended by striking ``foreign 
        personal holding or''.
            (16) Section 951 is amended by striking subsections (c) and 
        (d) and by redesignating subsections (e) and (f) as subsections 
        (c) and (d), respectively.
            (17) Paragraph (3) of section 989(b) is amended by striking 
        ``, 551(a),''.
            (18) Paragraph (5) of section 1014(b) is amended by 
        inserting ``and before January 1, 2005,'' after ``August 26, 
        1937,''.

[[Page 118 STAT. 1509]]

            (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 <<NOTE: Applicability.>> made by 
        subparagraph (A) shall apply to taxable years beginning after 
        December 31, 2004.
            (21) Section 1223 is amended by striking paragraph (10) and 
        by redesignating the following paragraphs accordingly.
            (22) Subsection (d) of section 1248 is amended by striking 
        paragraph (5) and by redesignating paragraphs (6) and (7) as 
        paragraphs (5) and (6), respectively.
            (23) Paragraph (2) of section 1260(c) is amended by striking 
        subparagraphs (H) and (I) and by redesignating subparagraph (J) 
        as subparagraph (H).
            (24)(A) Subparagraph (F) of section 1291(b)(3) is amended by 
        striking ``551(d), 959(a),'' and inserting ``959(a)''.
            (B) Subsection (e) of section 1291 is amended by inserting 
        ``(as in effect on the day before the date of the enactment of 
        the American Jobs Creation Act of 2004)'' after ``section 
        1246''.
            (25) Paragraph (2) of section 1294(a) is amended to read as 
        follows:
            ``(2) Election not permitted where amounts otherwise 
        includible under section 951.--The taxpayer may not make an 
        election under paragraph (1) with respect to the undistributed 
        PFIC earnings tax liability attributable to a qualified electing 
        fund for the taxable year if any amount is includible in the 
        gross income of the taxpayer under section 951 with respect to 
        such fund for such taxable year.''.
            (26) Section 6035 is hereby repealed.
            (27) Subparagraph (D) of section 6103(e)(1) is amended by 
        striking clause (iv) and redesignating clauses (v) and (vi) as 
        clauses (iv) and (v), respectively.
            (28) Subparagraph (B) of section 6501(e)(1) is amended to 
        read as follows:
                    ``(B) Constructive dividends.--If the taxpayer omits 
                from gross income an amount properly includible therein 
                under section 951(a), the tax may be assessed, or a 
                proceeding in court for the collection of such tax may 
                be done without assessing, at any time within 6 years 
                after the return was filed.''.
            (29) Subsection (a) of section 6679 is amended--
                    (A) by striking ``6035, 6046, and 6046A'' in 
                paragraph (1) and inserting ``6046 and 6046A'', and
                    (B) by striking paragraph (3).
            (30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
        are each amended by striking ``556(b)(2),'' each place it 
        appears.
            (31) The table of parts for subchapter G of chapter 1 is 
        amended by striking the item relating to part III.

[[Page 118 STAT. 1510]]

            (32) The table of sections for part IV of subchapter P of 
        chapter 1 is amended by striking the items relating to sections 
        1246 and 1247.
            (33) The table of sections for subpart A of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6035.

    (d) Effective <<NOTE: 26 USC 1 note.>> Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years of 
        foreign corporations beginning after December 31, 2004, and to 
        taxable years of United States shareholders with or within which 
        such taxable years of foreign corporations end.
            (2) Subsection (c)(27).--The amendments made by subsection 
        (c)(27) shall apply to disclosures of return or return 
        information with respect to taxable years beginning after 
        December 31, 2004.

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

    (a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C) 
(relating to commodity transactions) are amended to read as follows:
                          ``(i) arise out of commodity hedging 
                      transactions (as defined in paragraph (4)(A)),
                          ``(ii) are active business gains or losses 
                      from the sale of commodities, but only if 
                      substantially all of the controlled foreign 
                      corporation's commodities are property described 
                      in paragraph (1), (2), or (8) of section 1221(a), 
                      or''.

    (b) Definition and Special Rules.--Subsection (c) of section 954, as 
amended by this Act, is amended by adding after paragraph (4) the 
following new paragraph:
            ``(5) Definition and special rules relating to commodity 
        transactions.--
                    ``(A) Commodity hedging transactions.--For purposes 
                of paragraph (1)(C)(i), the term `commodity hedging 
                transaction' means any transaction with respect to a 
                commodity if such transaction--
                          ``(i) is a hedging transaction as defined in 
                      section 1221(b)(2), determined--
                                    ``(I) without regard to subparagraph 
                                (A)(ii) thereof,
                                    ``(II) by applying subparagraph 
                                (A)(i) thereof by substituting `ordinary 
                                property or property described in 
                                section 1231(b)' for `ordinary 
                                property', and
                                    ``(III) by substituting `controlled 
                                foreign corporation' for `taxpayer' each 
                                place it appears, and
                          ``(ii) is clearly identified as such in 
                      accordance with section 1221(a)(7).
                    ``(B) Treatment of dealer activities under paragraph 
                (1)(C).--Commodities with respect to which gains and 
                losses are not taken into account under paragraph (2)(C) 
                in computing a controlled foreign corporation's foreign 
                personal holding company income shall not be taken into 
                account in applying the substantially all test under 
                paragraph (1)(C)(ii) to such corporation.

[[Page 118 STAT. 1511]]

                    ``(C) Regulations.--The Secretary shall prescribe 
                such regulations as are appropriate to carry out the 
                purposes of paragraph (1)(C) in the case of transactions 
                involving related parties.''.

    (c) Modification of Exception for Dealers.--Clause (i) of section 
954(c)(2)(C) is amended by inserting ``and transactions involving 
physical settlement'' after ``(including hedging transactions''.
    (d) Effective Date.--The <<NOTE: 26 USC 954 note.>> amendments made 
by this section shall apply to transactions entered into after December 
31, 2004.

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

    (a) Elimination of Foreign Base Company Shipping Income.--Section 
954 (relating to foreign base company income) is amended--
            (1) by striking paragraph (4) of subsection (a) (relating to 
        foreign base company shipping income), and
            (2) by striking subsection (f) (relating to foreign base 
        company shipping income).

    (b) Safe Harbor for Certain Leasing Activities.--Subparagraph (A) of 
section 954(c)(2) is amended by adding at the end the following new 
sentence: ``For purposes of the preceding sentence, rents derived from 
leasing an aircraft or vessel in foreign commerce shall not fail to be 
treated as derived in the active conduct of a trade or business if, as 
determined under regulations prescribed by the Secretary, the active 
leasing expenses are not less than 10 percent of the profit on the 
lease.''.
    (c) Conforming Amendments.--
            (1) Section 952(c)(1)(B)(iii) is amended by striking 
        subclause (I) and redesignating subclauses (II) through (VI) as 
        subclauses (I) through (V), respectively.
            (2) Subsection (b) of section 954 is amended--
                    (A) by striking ``the foreign base company shipping 
                income,'' in paragraph (5),
                    (B) by striking paragraphs (6) and (7), and
                    (C) by redesignating paragraph (8) as paragraph (6).

    (d) Effective Date.--The <<NOTE: 26 USC 952 note.>> amendments made 
by this section shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

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

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

[[Page 118 STAT. 1512]]

                          ``(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 <<NOTE: 26 USC 954 note.>> amendment made 
by this section shall apply to taxable years of such foreign 
corporations beginning after December 31, 2004, and to taxable years of 
United States shareholders with or within which such taxable years of 
such foreign corporations end.

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

    (a) General Rule.--Section 904(c) (relating to carryback and 
carryover of excess tax paid) is amended--
            (1) by striking ``in the second preceding taxable year,'', 
        and
            (2) by striking ``, and in the first, second, third, fourth, 
        or fifth'' and inserting ``and in any of the first 10''.

    (b) Excess Extraction Taxes.--Paragraph (1) of section 907(f) is 
amended--
            (1) by striking ``in the second preceding taxable year,'',
            (2) by striking ``, and in the first, second, third, fourth, 
        or fifth'' and inserting ``and in any of the first 10'', and
            (3) by striking the last sentence.

    (c) Effective <<NOTE: 26 USC 904 note.>> Date.--
            (1) Carryback.--The amendments made by subsections (a)(1) 
        and (b)(1) shall apply to excess foreign taxes arising in 
        taxable years beginning after the date of the enactment of this 
        Act.
            (2) Carryover.--The amendments made by subsections (a)(2) 
        and (b)(2) shall apply to excess foreign taxes which (without 
        regard to the amendments made by this section) may be carried to 
        any taxable year ending after the date of the enactment of this 
        Act.

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

    (a) In General.--Paragraph (1) of section 897(h) (relating to look-
through of distributions) is amended by adding at the end the following 
new sentence: ``Notwithstanding the preceding sentence, any distribution 
by a REIT with respect to any class of stock which is regularly traded 
on an established securities market located in the United States shall 
not be treated as gain recognized from the sale or exchange of a United 
States real property interest if the shareholder did not own more than 5 
percent of such class of stock at any time during the taxable year.''.
    (b) Conforming Amendment.--Paragraph (3) of section 857(b) (relating 
to capital gains) is amended by adding at the end the following new 
subparagraph:
                    ``(F) Certain distributions.--In the case of a 
                shareholder of a real estate investment trust to whom 
                section 897 does not apply by reason of the second 
                sentence of section 897(h)(1), the amount which would be 
                included

[[Page 118 STAT. 1513]]

                in computing long-term capital gains for such 
                shareholder under subparagraph (B) or (D) (without 
                regard to this subparagraph)--
                          ``(i) shall not be included in computing such 
                      shareholder's long-term capital gains, and
                          ``(ii) shall be included in such shareholder's 
                      gross income as a dividend from the real estate 
                      investment trust.''.

    (c) Effective Date.--The <<NOTE: 26 USC 857 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

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

    (a) In General.--Subsection (b) of section 872 (relating to 
exclusions) is amended by redesignating paragraphs (5), (6), and (7) as 
paragraphs (6), (7), and (8), respectively, and inserting after 
paragraph (4) the following new paragraph:
            ``(5) Income derived from wagering transactions in certain 
        parimutuel pools.--Gross income derived by a nonresident alien 
        individual from a legal wagering transaction initiated outside 
        the United States in a parimutuel pool with respect to a live 
        horse race or dog race in the United States.''.

    (b) Conforming Amendment.--Section 883(a)(4) is amended by striking 
``(5), (6), and (7)'' and inserting ``(6), (7), and (8)''.
    (c) Effective Date.--The <<NOTE: 26 USC 872 note.>> amendments made 
by this section shall apply to wagers made after the date of the 
enactment of this Act.

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

    (a) In General.--Subsection (b) of section 881 is amended by 
redesignating paragraph (2) as paragraph (3) and by inserting after 
paragraph (1) the following new paragraph:
            ``(2) Commonwealth of puerto rico.--
                    ``(A) In general.--If dividends are received during 
                a taxable year by a corporation--
                          ``(i) created or organized in, or under the 
                      law of, the Commonwealth of Puerto Rico, and
                          ``(ii) with respect to which the requirements 
                      of subparagraphs (A), (B), and (C) of paragraph 
                      (1) are met for the taxable year,
                subsection (a) shall be applied for such taxable year by 
                substituting `10 percent' for `30 percent'.
                    ``(B) Applicability.--If, on or after the date of 
                the enactment of this paragraph, an increase in the rate 
                of the Commonwealth of Puerto Rico's withholding tax 
                which is generally applicable to dividends paid to 
                United States corporations not engaged in a trade or 
                business in the Commonwealth to a rate greater than 10 
                percent takes effect, this paragraph shall not apply to 
                dividends received on or after the effective date of the 
                increase.''.

    (b) Withholding.--Subsection (c) of section 1442 (relating to 
withholding of tax on foreign corporations) is amended--
            (1) by striking ``For purposes'' and inserting the 
        following:
            ``(1) Guam, american samoa, the northern mariana islands, 
        and the virgin islands.--For purposes'', and

[[Page 118 STAT. 1514]]

            (2) by adding at the end the following new paragraph:
            ``(2) Commonwealth of puerto rico.--
                    ``(A) In general.--If dividends are received during 
                a taxable year by a corporation--
                          ``(i) created or organized in, or under the 
                      law of, the Commonwealth of Puerto Rico, and
                          ``(ii) with respect to which the requirements 
                      of subparagraphs (A), (B), and (C) of section 
                      881(b)(1) are met for the taxable year,
                subsection (a) shall be applied for such taxable year by 
                substituting `10 percent' for `30 percent'.
                    ``(B) Applicability.--If, on or after the date of 
                the enactment of this paragraph, an increase in the rate 
                of the Commonwealth of Puerto Rico's withholding tax 
                which is generally applicable to dividends paid to 
                United States corporations not engaged in a trade or 
                business in the Commonwealth to a rate greater than 10 
                percent takes effect, this paragraph shall not apply to 
                dividends received on or after the effective date of the 
                increase.''.

    (c) Conforming Amendments.--
            (1) Subsection (b) of section 881 is amended by striking 
        ``Guam and Virgin Islands Corporations'' in the heading and 
        inserting ``Possessions''.
            (2) Paragraph (1) of section 881(b) is amended by striking 
        ``In general'' in the heading and inserting ``Guam, american 
        samoa, the northern mariana islands, and the virgin islands''.

    (d) Effective Date.--The <<NOTE: 26 USC 881 note.>> amendments made 
by this section shall apply to dividends paid after the date of the 
enactment of this Act.

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

    (a) In General.--
            (1) Subsection (a) of section 59 is amended by striking 
        paragraph (2) and by redesignating paragraphs (3) and (4) as 
        paragraphs (2) and (3), respectively.
            (2) Section 53(d)(1)(B)(i)(II) is amended by striking ``and 
        if section 59(a)(2) did not apply''.

    (b) Effective Date.--The <<NOTE: 26 USC 53 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

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

``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.

    ``(a) Deduction.--
            ``(1) In general.--In the case of a corporation which is a 
        United States shareholder and for which the election under this 
        section is in effect for the taxable year, there shall be 
        allowed as a deduction an amount equal to 85 percent of the cash 
        dividends which are received during such taxable year by such 
        shareholder from controlled foreign corporations.
            ``(2) Dividends paid indirectly from controlled foreign 
        corporations.--If, within the taxable year for which the 
        election under this section is in effect, a United States

[[Page 118 STAT. 1515]]

        shareholder receives a cash distribution from a controlled 
        foreign corporation which is excluded from gross income under 
        section 959(a), such distribution shall be treated for purposes 
        of this section as a cash dividend to the extent of any amount 
        included in income by such United States shareholder under 
        section 951(a)(1)(A) as a result of any cash dividend during 
        such taxable year to--
                    ``(A) such controlled foreign corporation from 
                another controlled foreign corporation that is in a 
                chain of ownership described in section 958(a), or
                    ``(B) any other controlled foreign corporation in 
                such chain of ownership, but only to the extent of cash 
                distributions described in section 959(b) which are made 
                during such taxable year to the controlled foreign 
                corporation from which such United States shareholder 
                received such distribution.

    ``(b) Limitations.--
            ``(1) In general.--The amount of dividends taken into 
        account under subsection (a) shall not exceed the greater of--
                    ``(A) $500,000,000,
                    ``(B) the amount shown on the applicable financial 
                statement as earnings permanently reinvested outside the 
                United States, or
                    ``(C) in the case of an applicable financial 
                statement which fails to show a specific amount of 
                earnings permanently reinvested outside the United 
                States and which shows a specific amount of tax 
                liability attributable to such earnings, the amount 
                equal to the amount of such liability divided by 0.35.
        The amounts described in subparagraphs (B) and (C) shall be 
        treated as being zero if there is no such statement or such 
        statement fails to show a specific amount of such earnings or 
        liability, as the case may be.
            ``(2) Dividends must be extraordinary.--The amount of 
        dividends taken into account under subsection (a) shall not 
        exceed the excess (if any) of--
                    ``(A) the dividends received during the taxable year 
                by such shareholder from controlled foreign 
                corporations, over
                    ``(B) the annual average for the base period years 
                of--
                          ``(i) the dividends received during each base 
                      period year by such shareholder from controlled 
                      foreign corporations,
                          ``(ii) the amounts includible in such 
                      shareholder's gross income for each base period 
                      year under section 951(a)(1)(B) with respect to 
                      controlled foreign corporations, and
                          ``(iii) the amounts that would have been 
                      included for each base period year but for section 
                      959(a) with respect to controlled foreign 
                      corporations.
                The amount taken into account under clause (iii) for any 
                base period year shall not include any amount which is 
                not includible in gross income by reason of an amount 
                described in clause (ii) with respect to a prior taxable 
                year. Amounts described in subparagraph (B) for any base 
                period year shall be such amounts as shown on the most 
                recent return filed for such year; except that amended

[[Page 118 STAT. 1516]]

                returns filed after June 30, 2003, shall not be taken 
                into account.
            ``(3) Reduction of benefit if increase in related party 
        indebtedness.--The amount of dividends which would (but for this 
        paragraph) be taken into account under subsection (a) shall be 
        reduced by the excess (if any) of--
                    ``(A) the amount of indebtedness of the controlled 
                foreign corporation to any related person (as defined in 
                section 954(d)(3)) as of the close of the taxable year 
                for which the election under this section is in effect, 
                over
                    ``(B) the amount of indebtedness of the controlled 
                foreign corporation to any related person (as so 
                defined) as of the close of October 3, 2004.
        All controlled foreign corporations with respect to which the 
        taxpayer is a United States shareholder shall be treated as 1 
        controlled foreign corporation for purposes of this paragraph.
            ``(4) Requirement to invest in united states.--Subsection 
        (a) shall not apply to any dividend received by a United States 
        shareholder unless the amount of the dividend is invested in the 
        United States pursuant to a domestic reinvestment plan which--
                    ``(A) is approved by the taxpayer's president, chief 
                executive officer, or comparable official before the 
                payment of such dividend and subsequently approved by 
                the taxpayer's board of directors, management committee, 
                executive committee, or similar body, and
                    ``(B) provides for the reinvestment of such dividend 
                in the United States (other than as payment for 
                executive compensation), including as a source for the 
                funding of worker hiring and training, infrastructure, 
                research and development, capital investments, or the 
                financial stabilization of the corporation for the 
                purposes of job retention or creation.

    ``(c) Definitions and Special Rules.--For purposes of this section--
            ``(1) Applicable financial statement.--The term `applicable 
        financial statement' means, with respect to a United States 
        shareholder, the most recently audited financial statement 
        (including notes and other documents which accompany such 
        statement) which includes such shareholder--
                    ``(A) which is certified on or before June 30, 2003, 
                as being prepared in accordance with generally accepted 
                accounting principles, and
                    ``(B) which is used for the purposes of a statement 
                or report--
                          ``(i) to creditors,
                          ``(ii) to shareholders, or
                          ``(iii) for any other substantial nontax 
                      purpose.
        In the case of a corporation required to file a financial 
        statement with the Securities and Exchange Commission, such term 
        means the most recent such statement filed on or before June 30, 
        2003.
            ``(2) Base period years.--
                    ``(A) In general.--The base period years are the 3 
                taxable years--
                          ``(i) which are among the 5 most recent 
                      taxable years ending on or before June 30, 2003, 
                      and

[[Page 118 STAT. 1517]]

                          ``(ii) which are determined by disregarding--
                                    ``(I) 1 taxable year for which the 
                                sum of the amounts described in clauses 
                                (i), (ii), and (iii) of subsection 
                                (b)(2)(B) is the largest, and
                                    ``(II) 1 taxable year for which such 
                                sum is the smallest.
                    ``(B) Shorter period.--If the taxpayer has fewer 
                than 5 taxable years ending on or before June 30, 2003, 
                then in lieu of applying subparagraph (A), the base 
                period years shall include all the taxable years of the 
                taxpayer ending on or before June 30, 2003.
                    ``(C) Mergers, acquisitions, etc.--
                          ``(i) In general.--
                      Rules <<NOTE: Applicability.>> similar to the 
                      rules of subparagraphs (A) and (B) of section 
                      41(f)(3) shall apply for purposes of this 
                      paragraph.
                          ``(ii) Spin-offs, etc.--If there is a 
                      distribution to which section 355 (or so much of 
                      section 356 as relates to section 355) applies 
                      during the 5-year period referred to in 
                      subparagraph (A)(i) and the controlled corporation 
                      (within the meaning of section 355) is a United 
                      States shareholder--
                                    ``(I) the controlled corporation 
                                shall be treated as being in existence 
                                during the period that the distributing 
                                corporation (within the meaning of 
                                section 355) is in existence, and
                                    ``(II) for purposes of applying 
                                subsection (b)(2) to the controlled 
                                corporation and the distributing 
                                corporation, amounts described in 
                                subsection (b)(2)(B) which are received 
                                or includible by the distributing 
                                corporation or controlled corporation 
                                (as the case may be) before the 
                                distribution referred to in subclause 
                                (I) from a controlled foreign 
                                corporation shall be allocated between 
                                such corporations in proportion to their 
                                respective interests as United States 
                                shareholders of such controlled foreign 
                                corporation immediately after such 
                                distribution.
                      Subclause (II) shall not apply if neither the 
                      controlled corporation nor the distributing 
                      corporation is a United States shareholder of such 
                      controlled foreign corporation immediately after 
                      such distribution.
            ``(3) Dividend.--The term `dividend' shall not include 
        amounts includible in gross income as a dividend under section 
        78, 367, or 1248. In the case of a liquidation under section 332 
        to which section 367(b) applies, the preceding sentence shall 
        not apply to the extent the United States shareholder actually 
        receives cash as part of the liquidation.
            ``(4) Coordination with dividends received deduction.--No 
        deduction shall be allowed under section 243 or 245 for any 
        dividend for which a deduction is allowed under this section.
            ``(5) Controlled groups.--
                    ``(A) In general.--All United States shareholders 
                which are members of an affiliated group filing a 
                consolidated return under section 1501 shall be treated 
                as one United States shareholder.

[[Page 118 STAT. 1518]]

                    ``(B) Application of $500,000,000 limit.--All 
                corporations which are treated as a single employer 
                under section 52(a) shall be limited to one $500,000,000 
                amount in subsection (b)(1)(A), and such amount shall be 
                divided among such corporations under regulations 
                prescribed by the Secretary.
                    ``(C) Permanently reinvested earnings.--If a 
                financial statement is an applicable financial statement 
                for more than 1 United States shareholder, the amount 
                applicable under subparagraph (B) or (C) of subsection 
                (b)(1) shall be divided among such shareholders under 
                regulations prescribed by the Secretary.

    ``(d) Denial of Foreign Tax Credit; Denial of Certain Expenses.--
            ``(1) Foreign tax credit.--No credit shall be allowed under 
        section 901 for any taxes paid or accrued (or treated as paid or 
        accrued) with respect to the deductible portion of--
                    ``(A) any dividend, or
                    ``(B) any amount described in subsection (a)(2) 
                which is included in income under section 951(a)(1)(A).
        No deduction shall be allowed under this chapter for any tax for 
        which credit is not allowable by reason of the preceding 
        sentence.
            ``(2) Expenses.--No deduction shall be allowed for expenses 
        properly allocated and apportioned to the deductible portion 
        described in paragraph (1).
            ``(3) Deductible portion.--For purposes of paragraph (1), 
        unless the taxpayer otherwise specifies, the deductible portion 
        of any dividend or other amount is the amount which bears the 
        same ratio to the amount of such dividend or other amount as the 
        amount allowed as a deduction under subsection (a) for the 
        taxable year bears to the amount described in subsection 
        (b)(2)(A) for such year.

    ``(e) Increase in Tax on Included Amounts Not Reduced by Credits, 
Etc.--
            ``(1) In general.--Any tax under this chapter by reason of 
        nondeductible CFC dividends shall not be treated as tax imposed 
        by this chapter for purposes of determining--
                    ``(A) the amount of any credit allowable under this 
                chapter, or
                    ``(B) the amount of the tax imposed by section 55.
        Subparagraph (A) shall not apply to the credit under section 53 
        or to the credit under section 27(a) with respect to taxes 
        attributable to such dividends.
            ``(2) Limitation on reduction in taxable income, etc.--
                    ``(A) In general.--The taxable income of any United 
                States shareholder for any taxable year shall in no 
                event be less than the amount of nondeductible CFC 
                dividends received during such year.
                    ``(B) Coordination with section 172.--The 
                nondeductible CFC dividends for any taxable year shall 
                not be taken into account--
                          ``(i) in determining under section 172 the 
                      amount of any net operating loss for such taxable 
                      year, and
                          ``(ii) in determining taxable income for such 
                      taxable year for purposes of the 2nd sentence of 
                      section 172(b)(2).

[[Page 118 STAT. 1519]]

            ``(3) Nondeductible cfc dividends.--For purposes of this 
        subsection, the term `nondeductible CFC dividends' means the 
        excess of the amount of dividends taken into account under 
        subsection (a) over the deduction allowed under subsection (a) 
        for such dividends.

    ``(f) Election.--The taxpayer may elect to apply this section to--
            ``(1) the taxpayer's last taxable year which begins before 
        the date of the enactment of this section, or
            ``(2) the taxpayer's first taxable year which begins during 
        the 1-year period beginning on such date.

Such election may be made for a taxable year only if made before the due 
date (including extensions) for filing the return of tax for such 
taxable year.''.
    (b) Alternative Minimum Tax.--Subparagraph (C) of section 56(g)(4) 
is amended by inserting after clause (v) the following new clause:
                          ``(vi) Special rule for certain distributions 
                      from controlled foreign corporations.--Clause (i) 
                      shall not apply to any deduction allowable under 
                      section 965.''.

    (c) Clerical Amendment.--The table of sections for subpart F of part 
III of subchapter N of chapter 1 is amended by adding at the end the 
following new item:

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

    (d) Effective Date.--The <<NOTE: 26 USC 56 note.>> amendments made 
by this section shall apply to taxable years ending on or after the date 
of the enactment of this Act.

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

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

SEC. 424. STUDY OF EARNINGS STRIPPING PROVISIONS.

    (a) In General.--The Secretary of the Treasury or the Secretary's 
delegate shall conduct a study of the effectiveness of the provisions of 
the Internal Revenue Code of 1986 applicable to earnings stripping, 
including a study of--
            (1) the effectiveness of section 163(j) of such Code in 
        preventing the shifting of income outside the United States,
            (2) whether any deficiencies of such provisions place United 
        States-based businesses at a competitive disadvantage relative 
        to foreign-based businesses,
            (3) the impact of earnings stripping activities on the 
        United States tax base,
            (4) whether laws of foreign countries facilitate stripping 
        of earnings out of the United States, and
            (5) whether changes to the earning stripping rules would 
        affect jobs in the United States.

[[Page 118 STAT. 1520]]

    (b) Report.--Not later than June 30, 2005, the Secretary shall 
submit to the Congress a report of the study conducted under this 
section, including specific recommendations as to how to improve the 
provisions of such Code applicable to earnings stripping.

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

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

    (a) In General.--Subsection (b) of section 164 (relating to 
definitions and special rules) is amended by adding at the end the 
following:
            ``(5) General sales taxes.--For purposes of subsection (a)--
                    ``(A) Election to deduct state and local sales taxes 
                in lieu of state and local income taxes.--
                          ``(i) In general.--At the election of the 
                      taxpayer for the taxable year, subsection (a) 
                      shall be applied--
                                    ``(I) without regard to the 
                                reference to State and local income 
                                taxes, and
                                    ``(II) as if State and local general 
                                sales taxes were referred to in a 
                                paragraph thereof.
                    ``(B) Definition of general sales tax.--The term 
                `general sales tax' means a tax imposed at one rate with 
                respect to the sale at retail of a broad range of 
                classes of items.
                    ``(C) Special rules for food, etc.--In the case of 
                items of food, clothing, medical supplies, and motor 
                vehicles--
                          ``(i) the fact that the tax does not apply 
                      with respect to some or all of such items shall 
                      not be taken into account in determining whether 
                      the tax applies with respect to a broad range of 
                      classes of items, and
                          ``(ii) the fact that the rate of tax 
                      applicable with respect to some or all of such 
                      items is lower than the general rate of tax shall 
                      not be taken into account in determining whether 
                      the tax is imposed at one rate.
                    ``(D) Items taxed at different rates.--Except in the 
                case of a lower rate of tax applicable with respect to 
                an item described in subparagraph (C), no deduction 
                shall be allowed under this paragraph for any general 
                sales tax imposed with respect to an item at a rate 
                other than the general rate of tax.
                    ``(E) Compensating use taxes.--A compensating use 
                tax with respect to an item shall be treated as a 
                general sales tax. For purposes of the preceding 
                sentence, the term `compensating use tax' means, with 
                respect to any item, a tax which--
                          ``(i) is imposed on the use, storage, or 
                      consumption of such item, and
                          ``(ii) is complementary to a general sales 
                      tax, but only if a deduction is allowable under 
                      this paragraph

[[Page 118 STAT. 1521]]

                      with respect to items sold at retail in the taxing 
                      jurisdiction which are similar to such item.
                    ``(F) Special rule for motor vehicles.--In the case 
                of motor vehicles, if the rate of tax exceeds the 
                general rate, such excess shall be disregarded and the 
                general rate shall be treated as the rate of tax.
                    ``(G) Separately stated general sales taxes.--If the 
                amount of any general sales tax is separately stated, 
                then, to the extent that the amount so stated is paid by 
                the consumer (other than in connection with the 
                consumer's trade or business) to the seller, such amount 
                shall be treated as a tax imposed on, and paid by, such 
                consumer.
                    ``(H) Amount of deduction may be determined under 
                tables.--
                          ``(i) In general.--At the election of the 
                      taxpayer for the taxable year, the amount of the 
                      deduction allowed under this paragraph for such 
                      year shall be--
                                    ``(I) the amount determined under 
                                this paragraph (without regard to this 
                                subparagraph) with respect to motor 
                                vehicles, boats, and other items 
                                specified by the Secretary, and
                                    ``(II) the amount determined under 
                                tables prescribed by the Secretary with 
                                respect to items to which subclause (I) 
                                does not apply.
                          ``(ii) Requirements for tables.--The tables 
                      prescribed under clause (i)--
                                    ``(I) shall reflect the provisions 
                                of this paragraph,
                                    ``(II) shall be based on the average 
                                consumption by taxpayers on a State-by-
                                State basis (as determined by the 
                                Secretary) of items to which clause 
                                (i)(I) does not apply, taking into 
                                account filing status, number of 
                                dependents, adjusted gross income, and 
                                rates of State and local general sales 
                                taxation, and
                                    ``(III) need only be determined with 
                                respect to adjusted gross incomes up to 
                                the applicable amount (as determined 
                                under section 68(b)).
                    ``(I) Application of paragraph.--This paragraph 
                shall apply to taxable years beginning after December 
                31, 2003, and before January 1, 2006.''.

    (b) Effective Date.--The <<NOTE: 26 USC 164 note.>> amendments made 
by this section shall apply to taxable years beginning after December 
31, 2003.

    TITLE VI--FAIR <<NOTE: Fair and Equitable Tobacco Reform Act of 
2004.>> AND EQUITABLE TOBACCO REFORM

SEC. 601. <<NOTE: 7 USC 518 note.>> SHORT TITLE.

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

[[Page 118 STAT. 1522]]

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

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

    (a) Marketing Quotas.--Part I of subtitle B of title III of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et seq.) is repealed.
    (b) Tobacco Inspections.--Section 213 of the Tobacco Adjustment Act 
of 1983 (7 U.S.C. 511r) is repealed.
    (c) Tobacco Control.--The Act of April 25, 1936 (commonly known as 
the Tobacco Control Act; 7 U.S.C. 515 et seq.), is repealed.
    (d) Processing Tax.--Section 9(b) of the Agricultural Adjustment Act 
(7 U.S.C. 609(b)), reenacted with amendments by the Agricultural 
Marketing Agreement Act of 1937, is amended--
            (1) in paragraph (2), by striking ``tobacco,''; and
            (2) in paragraph (6)(B)(i), by striking ``, or, in the case 
        of tobacco, is less than the fair exchange value by not more 
        than 10 per centum,''.

    (e) Declaration of Policy.--Section 2 of the Agricultural Adjustment 
Act of 1938 (7 U.S.C. 1282) is amended by striking ``tobacco,''.
    (f) Definitions.--Section 301(b) of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1301(b)) is amended--
            (1) in paragraph (3)--
                    (A) by striking subparagraph (C); and
                    (B) by redesignating subparagraph (D) as 
                subparagraph (C);
            (2) in paragraph (6)(A), by striking ``tobacco,'';
            (3) in paragraph (10)--
                    (A) by striking subparagraph (B); and
                    (B) by redesignating subparagraph (C) as 
                subparagraph (B);
            (4) in paragraph (11)(B), by striking ``and tobacco'';
            (5) in paragraph (12), by striking ``tobacco,'';
            (6) in paragraph (14)--
                    (A) in subparagraph (A), by striking ``(A)''; and
                    (B) by striking subparagraphs (B), (C), and (D);
            (7) by striking paragraph (15);
            (8) in paragraph (16)--
                    (A) by striking subparagraph (B); and
                    (B) by redesignating subparagraph (C) as 
                subparagraph (B);
            (9) by striking paragraph (17); and
            (10) by redesignating paragraph (16) as paragraph (15).

    (g) Parity Payments.--Section 303 of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1303) is amended in the first sentence by striking 
``rice, or tobacco,'' and inserting ``or rice,''.
    (h) Administrative Provisions.--Section 361 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1361) is amended by striking 
``tobacco,''.
    (i) Adjustment of Quotas.--Section 371 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1371) is amended--

[[Page 118 STAT. 1523]]

            (1) in the first sentence of subsection (a), by striking 
        ``rice, or tobacco'' and inserting ``or rice''; and
            (2) in the first sentence of subsection (b), by striking 
        ``rice, or tobacco'' and inserting ``or rice''.

    (j) Reports and Records.--Section 373 of the Agricultural Adjustment 
Act of 1938 (7 U.S.C. 1373) is amended--
            (1) by striking ``rice, or tobacco'' each place it appears 
        in subsections (a) and (b) and inserting ``or rice''; and
            (2) in subsection (a)--
                    (A) in the first sentence, by striking ``all persons 
                engaged in the business of redrying, prizing, or 
                stemming tobacco for producers,''; and
                    (B) in the last sentence, by striking ``$500;'' and 
                all that follows through the period at the end of the 
                sentence and inserting ``$500.''.

    (k) Regulations.--Section 375 of the Agricultural Adjustment Act of 
1938 (7 U.S.C. 1375) is amended--
            (1) in subsection (a), by striking ``peanuts, or tobacco'' 
        and inserting ``or peanuts''; and
            (2) by striking subsection (c).

    (l) Eminent Domain.--Section 378 of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1378) is amended--
            (1) in the first sentence of subsection (c), by striking 
        ``cotton, and tobacco'' and inserting ``and cotton''; and
            (2) by striking subsections (d), (e), and (f).

    (m) Burley Tobacco Farm Reconstitution.--Section 379 of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is amended--
            (1) in subsection (a)--
                    (A) by striking ``(a)''; and
                    (B) in paragraph (6), by striking ``, but this 
                clause (6) shall not be applicable in the case of burley 
                tobacco''; and
            (2) by striking subsections (b) and (c).

    (n) Acreage-Poundage Quotas.--Section 4 of the Act of April 16, 1955 
(Public Law 89-12; 7 U.S.C. 1314c note), is repealed.
    (o) Burley Tobacco Acreage Allotments.--The Act of July 12, 1952 (7 
U.S.C. 1315), is repealed.
    (p) Transfer of Allotments.--Section 703 of the Food and Agriculture 
Act of 1965 (7 U.S.C. 1316) is repealed.
    (q) Advance Recourse Loans.--Section 13(a)(2)(B) of the Food 
Security Improvements Act of 1986 (7 U.S.C. 1433c-1(a)(2)(B)) is amended 
by striking ``tobacco and''.
    (r) Tobacco Field Measurement.--Section 1112 of the Omnibus Budget 
Reconciliation Act of 1987 (Public Law 100-203; 101 Stat. 1330-8) is 
amended by striking subsection (c).
    (s) Burley Tobacco Import Review.--Section 3 of Public Law 98-59 (7 
U.S.C. 625) is repealed.

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

    (a) Termination of Tobacco Price Support and No Net Cost 
Provisions.--Sections 106, 106A, and 106B of the Agricultural Act of 
1949 (7 U.S.C. 1445, 1445-1, 1445-2) are repealed.
    (b) Parity Price Support.--Section 101 of the Agricultural Act of 
1949 (7 U.S.C. 1441) is amended--

[[Page 118 STAT. 1524]]

            (1) in the first sentence of subsection (a), by striking 
        ``tobacco (except as otherwise provided herein), corn,'' and 
        inserting ``corn'';
            (2) by striking subsections (c), (g), (h), and (i);
            (3) in subsection (d)(3)--
                    (A) by striking ``, except tobacco,''; and
                    (B) by striking ``and no price support shall be made 
                available for any crop of tobacco for which marketing 
                quotas have been disapproved by producers;''; and
            (4) by redesignating subsections (d) and (e) as subsections 
        (c) and (d), respectively.

    (c) Definition of Basic Agricultural Commodity.--Section 408(c) of 
the Agricultural Act of 1949 (7 U.S.C. 1428(c)) is amended by striking 
``tobacco,''.
    (d) Powers of Commodity Credit Corporation.--Section 5 of the 
Commodity Credit Corporation Charter Act (15 U.S.C. 714c) is amended by 
inserting ``(other than tobacco)'' after ``agricultural commodities'' 
each place it appears.

SEC. 613. CONFORMING AMENDMENTS.

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

SEC. 614. <<NOTE: 7 USC 515 note.>> CONTINUATION OF LIABILITY FOR 2004 
            AND EARLIER CROP YEARS.

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

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

SEC. 621. <<NOTE: 7 USC 518.>> DEFINITIONS.

    In this subtitle and subtitle C:
            (1) Agricultural act of 1949.--The term ``Agricultural Act 
        of 1949'' means the Agricultural Act of 1949 (7 U.S.C. 1421 et 
        seq.), as in effect on the day before the date of the enactment 
        of this title.
            (2) Agricultural adjustment act of 1938.--The term 
        ``Agricultural Adjustment Act of 1938'' means the Agricultural 
        Adjustment Act of 1938 (7 U.S.C. 1281 et seq.), as in effect on 
        the day before the date of the enactment of this title.
            (3) Considered planted.--The term ``considered planted'' 
        means tobacco that was planted, but failed to be produced as a 
        result of a natural disaster, as determined by the Secretary.
            (4) Contract.--The term ``contract'' means a contract 
        entered into under section 622 or 623.

[[Page 118 STAT. 1525]]

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

SEC. 622. <<NOTE: 7 USC 518a.>> CONTRACT PAYMENTS TO TOBACCO QUOTA 
            HOLDERS.

    (a) Contract Offered.--The Secretary shall offer to enter into a 
contract with each tobacco quota holder under which the tobacco quota 
holder shall be entitled to receive payments under this section in 
exchange for the termination of tobacco marketing quotas and related 
price support under the amendments made by sections 611 and 612. The 
contract payments shall constitute full and fair consideration for the 
termination of such tobacco marketing quotas and related price support.
    (b) Eligibility.--To be eligible to enter into a contract to receive 
a contract payment under this section, a person shall submit to the 
Secretary an application containing such information as the Secretary 
may require to demonstrate to the satisfaction of the Secretary that the 
person is a tobacco quota holder. The application shall be submitted 
within such time, in such form, and in such manner as the Secretary may 
require.
    (c) Base Quota Level.--

[[Page 118 STAT. 1526]]

            (1) Establishment.--The Secretary shall establish a base 
        quota level applicable to each tobacco quota holder identified 
        under subsection (b).
            (2) Poundage quotas.--Subject to adjustment under subsection 
        (d), for each kind of tobacco for which the marketing quota is 
        expressed in pounds, the base quota level for each tobacco quota 
        holder shall be equal to the basic quota for quota tobacco 
        established for the 2002 tobacco marketing year under a 
        marketing quota program established under part I of subtitle B 
        of title III of the Agriculture Adjustment Act of 1938 on the 
        farm owned by the tobacco quota holder.
            (3) Marketing quotas other than poundage quotas.--Subject to 
        adjustment under subsection (d), for each kind of tobacco for 
        which there is marketing quota or allotment on an acreage basis, 
        the base quota level for each tobacco quota holder shall be the 
        quantity equal to the product obtained by multiplying--
                    (A) the basic tobacco farm marketing quota or 
                allotment for the 2002 marketing year established by the 
                Secretary for quota tobacco owned by the tobacco quota 
                holder; by
                    (B) the average production yield, per acre, for the 
                period covering the 2001, 2002, and 2003 crop years for 
                that kind of tobacco in the county in which the quota 
                tobacco is located.

    (d) Treatment of Certain Contracts and Agreements.--
            (1) Effect of purchase contract.--If there was an agreement 
        for the purchase of all or part of a farm described in 
        subsection (c) as of the date of the enactment of this title, 
        and the parties to the sale are unable to agree to the 
        disposition of eligibility for contract payments, the Secretary, 
        taking into account any transfer of quota that has been agreed 
        to, shall provide for the equitable division of the contract 
        payments among the parties by adjusting the determination of who 
        is the tobacco quota holder with respect to particular pounds or 
        allotment of the quota.
            (2) Effect of agreement for permanent quota transfer.--If 
        the Secretary determines that there was in existence, as of the 
        day before the date of the enactment of this title, an agreement 
        for the permanent transfer of quota, but that the transfer was 
        not completed by that date, the Secretary shall consider the 
        tobacco quota holder to be the party to the agreement that, as 
        of that date, was the owner of the farm to which the quota was 
        to be transferred.

    (e) Contract Payments.--
            (1) Calculation of total payment amount.--The total amount 
        of contract payments to which an eligible tobacco quota holder 
        is entitled under this section, with respect to a kind of 
        tobacco, shall be equal to the product obtained by multiplying--
                    (A) $7.00 per pound; by
                    (B) the base quota level of the tobacco quota holder 
                determined under subsection (c) with respect to that 
                kind of tobacco.
            (2) Annual payment.--During each of fiscal years 2005 
        through 2014, the Secretary shall make a contract payment under 
        this section to each eligible tobacco quota holder, with

[[Page 118 STAT. 1527]]

        respect to a kind of tobacco, in an amount equal to \1/10\ of 
        the amount determined under paragraph (1) for the tobacco quota 
        holder for that kind of tobacco.

    (f) Death of Tobacco Quota Holder.--If a tobacco quota holder who is 
entitled to contract payments under this section dies and is survived by 
a spouse or one or more dependents, the right to receive the payments 
shall transfer to the surviving spouse or, if there is no surviving 
spouse, to the estate of the tobacco quota holder.

SEC. 623. <<NOTE: 7 USC 518b.>> CONTRACT PAYMENTS FOR PRODUCERS OF QUOTA 
            TOBACCO.

    (a) Contract Offered.--The Secretary shall offer to enter into a 
contract with each producer of quota tobacco under which the producer of 
quota tobacco shall be entitled to receive payments under this section 
in exchange for the termination of tobacco marketing quotas and related 
price support under the amendments made by sections 611 and 612. The 
contract payments shall constitute full and fair consideration for the 
termination of such tobacco marketing quotas and related price support.
    (b) Eligibility.--
            (1) Application and determination.--To be eligible to enter 
        into a contract to receive a contract payment under this 
        section, a person shall submit to the Secretary an application 
        containing such information as the Secretary may require to 
        demonstrate to the satisfaction of the Secretary that the person 
        is a producer of quota tobacco. The application shall be 
        submitted within such time, in such form, and in such manner as 
        the Secretary may require.
            (2) Effect of Multiple Producers for Same Quota Tobacco.--
        If, on the basis of the applications submitted under paragraph 
        (1) or other information, the Secretary determines that two or 
        more persons are a producer of the same quota tobacco, the 
        Secretary shall provide for an equitable distribution among the 
        persons of the contract payments made under this section with 
        respect to that quota tobacco, based on relative share of such 
        persons in the risk of producing the quota tobacco and such 
        other factors as the Secretary considers appropriate.

    (c) Base Quota Level.--
            (1) Establishment.--The Secretary shall establish a base 
        quota level applicable to each producer of quota tobacco, as 
        determined under this subsection.
            (2) Flue-cured and burley tobacco.--In the case of Flue-
        cured tobacco (types 11, 12, 13, and 14) and Burley tobacco 
        (type 31), the base quota level for each producer of quota 
        tobacco shall be equal to the effective tobacco marketing quota 
        (irrespective of disaster lease and transfers) under part I of 
        subtitle B of title III of the Agriculture Adjustment Act of 
        1938 for the 2002 marketing year for quota tobacco produced on 
        the farm.
            (3) Other kinds of tobacco.--In the case of each kind of 
        tobacco (other than tobacco covered by paragraph (2)), for the 
        purpose of calculating a contract payment to a producer of quota 
        tobacco, the base quota level for the producer of quota tobacco 
        shall be the quantity obtained by multiplying--

[[Page 118 STAT. 1528]]

                    (A) the basic tobacco farm acreage allotment for the 
                2002 marketing year established by the Secretary for 
                quota tobacco produced on the farm; by
                    (B) the average annual yield, per acre, of quota 
                tobacco produced on the farm for the period covering the 
                2001, 2002, and 2003 crop years.

    (d) Contract Payments.--
            (1) Calculation of total payment amount.--Subject to 
        subsection (b)(2), the total amount of contract payments to 
        which an eligible producer of quota tobacco is entitled under 
        this section, with respect to a kind of tobacco, shall be equal 
        to the product obtained by multiplying--
                    (A) subject to paragraph (2), $3.00 per pound; by
                    (B) the base quota level of the producer of quota 
                tobacco determined under subsection (c) with respect to 
                that kind of tobacco.
            (2) Annual payment.--During each of fiscal years 2005 
        through 2014, the Secretary shall make a contract payment under 
        this section to each eligible producer of tobacco, with respect 
        to a kind of tobacco, in an amount equal to \1/10\ of the amount 
        determined under paragraph (1) for the producer for that kind of 
        tobacco.
            (3) Variable payment rates.--The rate for payments to a 
        producer of quota tobacco under paragraph (1)(A) shall be equal 
        to--
                    (A) in the case of a producer of quota tobacco that 
                produced quota tobacco marketed, or considered planted, 
                under a marketing quota in all three of the 2002, 2003, 
                or 2004 tobacco marketing years, the rate prescribed 
                under paragraph (1)(A);
                    (B) in the case of a producer of quota tobacco that 
                produced quota tobacco marketed, or considered planted, 
                under a marketing quota in only two of those tobacco 
                marketing years, \2/3\ of the rate prescribed under 
                paragraph (1)(A);
                    (C) in the case of a producer of quota tobacco that 
                produced quota tobacco marketed, or considered planted, 
                under a marketing quota in only one of those tobacco 
                marketing years, \1/3\ of the rate prescribed under 
                paragraph (1)(A).

    (e) Death of Tobacco Producer.--If a producer of quota tobacco who 
is entitled to contract payments under this section dies and is survived 
by a spouse or one or more dependents, the right to receive the contract 
payments shall transfer to the surviving spouse or, if there is no 
surviving spouse, to the estate of the producer.

SEC. 624. <<NOTE: 7 USC 518c.>> ADMINISTRATION.

    (a) Time for Payment of Contract Payments.--Contract payments 
required to be made for a fiscal year shall be made by the Secretary as 
soon as practicable.
    (b) Use of County Committees to Resolve Disputes.--Any dispute 
regarding the eligibility of a person to enter into a contract or to 
receive contract payments, and any dispute regarding the amount of a 
contract payment, may be appealed to the county committee established 
under section 8 of the Soil Conservation

[[Page 118 STAT. 1529]]

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

SEC. 625. <<NOTE: 7 USC 518d.>> USE OF ASSESSMENTS AS SOURCE OF FUNDS 
            FOR PAYMENTS.

    (a) Definitions.--In this section:
            (1) Base period.--The term ``base period' means the one-year 
        period ending the June 30 before the beginning of a fiscal year.
            (2) Gross domestic volume.--The term ``gross domestic 
        volume'' means the volume of tobacco products--
                    (A) removed (as defined by section 5702 of the 
                Internal Revenue Code of 1986); and
                    (B) not exempt from tax under chapter 52 of the 
                Internal Revenue Code of 1986 at the time of their 
                removal under that chapter or the Harmonized Tariff 
                Schedule of the United States (19 U.S.C. 1202).
            (3) Market share.--The term ``market share'' means the share 
        of each manufacturer or importer of a class of tobacco product 
        (expressed as a decimal to the fourth place) of the total volume 
        of domestic sales of the class of tobacco product during the 
        base period for a fiscal year for an assessment under this 
        section.

    (b) Quarterly Assessments.--
            (1) Imposition of assessment.--The Secretary, acting through 
        the Commodity Credit Corporation, shall impose quarterly 
        assessments during each of fiscal years 2005 through 2014, 
        calculated in accordance with this section, on each tobacco 
        product manufacturer and tobacco product importer that sells 
        tobacco products in domestic commerce in the United States 
        during that fiscal year.
            (2) Amounts.--Beginning with the calendar quarter ending on 
        December 31 of each of fiscal years 2005 through 2014, the 
        assessment payments over each four-calendar quarter period shall 
        be sufficient to cover--
                    (A) the contract payments made under sections 622 
                and 623 during that period; and

[[Page 118 STAT. 1530]]

                    (B) other expenditures from the Tobacco Trust Fund 
                made during the base quarter periods corresponding to 
                the four calendar quarters of that period.
            (3) Deposit.--Assessments collected under this section shall 
        be deposited in the Tobacco Trust Fund.

    (c) Assessments for Classes of Tobacco Products.--
            (1) Initial allocation.--The percentage of the total amount 
        required by subsection (b) to be assessed against, and paid by, 
        the manufacturers and importers of each class of tobacco product 
        in fiscal year 2005 shall be as follows:
                    (A) For cigarette manufacturers and importers, 
                96.331 percent.
                    (B) For cigar manufacturers and importers, 2.783 
                percent.
                    (C) For snuff manufacturers and importers, 0.539 
                percent.
                    (D) For roll-your-own tobacco manufacturers and 
                importers, 0.171 percent.
                    (E) For chewing tobacco manufacturers and importers, 
                0.111 percent.
                    (F) For pipe tobacco manufacturers and importers, 
                0.066 percent.
            (2) Subsequent allocations.--For subsequent fiscal years, 
        the Secretary shall periodically adjust the percentage of the 
        total amount required under subsection (b) to be assessed 
        against, and paid by, the manufacturers and importers of each 
        class of tobacco product specified in paragraph (1) to reflect 
        changes in the share of gross domestic volume held by that class 
        of tobacco product.
            (3) Effect of insufficient amounts.--If the Secretary 
        determines that the assessment imposed under subsection (b) will 
        result in insufficient amounts to carry out this subtitle during 
        a fiscal year, the Secretary shall assess such additional 
        amounts as the Secretary determines to be necessary to carry out 
        this subtitle during that fiscal year. The additional amount 
        shall be allocated to manufacturers and importers of each class 
        of tobacco product specified in paragraph (1) in the same manner 
        and based on the same percentages applicable under paragraph (1) 
        or (2) for that fiscal year.

    (d) Notification and Timing of Assessments.--
            (1) Notification of assessments.--The Secretary shall 
        provide each manufacturer or importer subject to an assessment 
        under subsection (b) with written notice setting forth the 
        amount to be assessed against the manufacturer or importer for 
        each quarterly payment period. <<NOTE: Deadline.>> The notice 
        for a quarterly period shall be provided not later than 30 days 
        before the date payment is due under paragraph (3).
            (2) Content.--The notice shall include the following 
        information with respect to the quarterly period used by the 
        Secretary in calculating the amount:
                    (A) The total combined assessment for all 
                manufacturers and importers of tobacco products.
                    (B) The total assessment with respect to the class 
                of tobacco products manufactured or imported by the 
                manufacturer or importer.

[[Page 118 STAT. 1531]]

                    (C) Any adjustments to the percentage allocations 
                among the classes of tobacco products made pursuant to 
                paragraph (2) or (3) of subsection (c).
                    (D) The volume of gross sales of the applicable 
                class of tobacco product treated as made by the 
                manufacturer or importer for purposes of calculating the 
                manufacturer's or importer's market share under 
                subsection (f).
                    (E) The total volume of gross sales of the 
                applicable class of tobacco product that the Secretary 
                treated as made by all manufacturers and importers for 
                purposes of calculating the manufacturer's or importer's 
                market share under subsection (f).
                    (F) The manufacturer's or importer's market share of 
                the applicable class of tobacco product, as determined 
                by the Secretary under subsection (f).
                    (G) The market share, as determined by the Secretary 
                under subsection (f), of each other manufacturer and 
                importer, for each applicable class of tobacco product.
            (3) Timing of assessment payments.--
                    (A) Collection date.--
                Assessments <<NOTE: Deadline.>> shall be collected at 
                the end of each calendar year quarter, except that the 
                Secretary shall ensure that the final assessment due 
                under this section is collected not later than September 
                30, 2014.
                    (B) Base period quarter.--The assessment for a 
                calendar year quarter shall correspond to the base 
                period quarter that ended at the end of the preceding 
                calendar year quarter.

    (e) Allocation of Assessment Within Each Class of Tobacco Product.--
            (1) Pro rata basis.--The assessment for each class of 
        tobacco product specified in subsection (c)(1) shall be 
        allocated on a pro rata basis among manufacturers and importers 
        based on each manufacturer's or importer's share of gross 
        domestic volume.
            (2) Limitation.--No manufacturer or importer shall be 
        required to pay an assessment that is based on a share that is 
        in excess of the manufacturer's or importer's share of domestic 
        volume.

    (f) Allocation of Total Assessments by Market Share.--The amount of 
the assessment for each class of tobacco product specified in subsection 
(c)(1) to be paid by each manufacturer or importer of that class of 
tobacco product shall be determined for each quarterly payment period by 
multiplying--
            (1) the market share of the manufacturer or importer, as 
        calculated with respect to that payment period, of the class of 
        tobacco product; by
            (2) the total amount of the assessment for that quarterly 
        payment period under subsection (c), for the class of tobacco 
        product.

    (g) Determination of Volume of Domestic Sales.--
            (1) In general.--The calculation of the volume of domestic 
        sales of a class of tobacco product by a manufacturer or 
        importer, and by all manufacturers and importers as a group, 
        shall be made by the Secretary based on information provided by 
        the manufacturers and importers pursuant to subsection (h), as 
        well as any other relevant information provided to or obtained 
        by the Secretary.

[[Page 118 STAT. 1532]]

            (2) Gross domestic volume.--The volume of domestic sales 
        shall be calculated based on gross domestic volume.
            (3) Measurement.--For purposes of the calculations under 
        this subsection and the certifications under subsection (h) by 
        the Secretary, the volumes of domestic sales shall be measured 
        by--
                    (A) in the case of cigarettes and cigars, the number 
                of cigarettes and cigars; and
                    (B) in the case of the other classes of tobacco 
                products specified in subsection (c)(1), in terms of 
                number of pounds, or fraction thereof, of those 
                products.

    (h) Measurement of Volume of Domestic Sales.--
            (1) Submission of information.--
        Each <<NOTE: Certification.>> manufacturer and importer of 
        tobacco products shall submit to the Secretary a certified copy 
        of each of the returns or forms described by paragraph (2) that 
        are required to be filed with a Federal agency on the same date 
        that those returns or forms are filed, or required to be filed, 
        with the agency.
            (2) Returns and forms.--The returns and forms described by 
        this paragraph are those returns and forms that relate to--
                    (A) the removal of tobacco products into domestic 
                commerce (as defined by section 5702 of the Internal 
                Revenue Code of 1986); and
                    (B) the payment of the taxes imposed under charter 
                52 of the Internal Revenue Code of 1986, including AFT 
                Form 5000.24 and United States Customs Form 7501 under 
                currently applicable regulations.
            (3) Effect of failure to provide required information.--Any 
        person that knowingly fails to provide information required 
        under this subsection or that provides false information under 
        this subsection shall be subject to the penalties described in 
        section 1003 of title 18, United States Code. The Secretary may 
        also assess against the person a civil penalty in an amount not 
        to exceed two percent of the value of the kind of tobacco 
        products manufactured or imported by the person during the 
        fiscal year in which the violation occurred, as determined by 
        the Secretary.

    (i) Challenge to Assessment.--
            (1) Appeal to secretary.--A <<NOTE: Deadline.>> manufacturer 
        or importer subject to this section may contest an assessment 
        imposed on the manufacturer or importer under this section by 
        notifying the Secretary, not later than 30 business days after 
        receiving the assessment notification required by subsection 
        (d), that the manufacturer or importer intends to contest the 
        assessment.
            (2) Information.--Not <<NOTE: Deadline. Regulations.>> later 
        than 180 days after the date of the enactment of this title, the 
        Secretary shall establish by regulation a procedure under which 
        a manufacturer or importer contesting an assessment under this 
        subsection may present information to the Secretary to 
        demonstrate that the assessment applicable to the manufacturer 
        or importer is incorrect. In challenging the assessment, the 
        manufacturer or importer may use any information that is 
        available, including third party data on industry or individual 
        company sales volumes.
            (3) Revision.--If a manufacturer or importer establishes 
        that the initial determination of the amount of an assessment

[[Page 118 STAT. 1533]]

        is incorrect, the Secretary shall revise the amount of the 
        assessment so that the manufacturer or importer is required to 
        pay only the amount correctly determined.
            (4) Time for review.--Not <<NOTE: Deadline.>> later than 30 
        days after receiving notice from a manufacturer or importer 
        under paragraph (1), the Secretary shall--
                    (A) decide whether the information provided to the 
                Secretary under paragraph (2), and any other information 
                that the Secretary determines is appropriate, is 
                sufficient to establish that the original assessment was 
                incorrect; and
                    (B) make any revisions necessary to ensure that each 
                manufacturer and importer pays only its correct pro rata 
                share of total gross domestic volume from all sources.
            (5) Immediate payment of undisputed amounts.--The 
        regulations promulgated by the Secretary under paragraph (2) 
        shall provide for the immediate payment by a manufacturer or 
        importer challenging an assessment of that portion of the 
        assessment that is not in dispute. The manufacturer and importer 
        may place into escrow, in accordance with such regulations, only 
        the portion of the assessment being challenged in good faith 
        pending final determination of the claim.

    (j) Judicial Review.--
            (1) In general.--Any manufacturer or importer aggrieved by a 
        determination of the Secretary with respect to the amount of any 
        assessment may seek review of the determination in the United 
        States District Court for the District of Columbia or for the 
        district in which the manufacturer or importer resides or has 
        its principal place of business at any time following exhaustion 
        of the administrative remedies available under subsection (i).
            (2) Time limits.--Administrative remedies shall be deemed 
        exhausted if no decision by the Secretary is made within the 
        time limits established under subsection (i)(4).
            (3) Excessive assessments.--The court shall restrain 
        collection of the excessive portion of any assessment or order a 
        refund of excessive assessments already paid, along with 
        interest calculated at the rate prescribed in section 3717 of 
        title 31, United States Code, if it finds that the Secretary's 
        determination is not supported by a preponderance of the 
        information available to the Secretary.

    (k) Termination Date.--The authority provided by this section to 
impose assessments terminates on September 30, 2014.

SEC. 626. <<NOTE: 7 USC 518e.>> TOBACCO TRUST FUND.

    (a) Establishment.--There is established in the Commodity Credit 
Corporation a revolving trust fund, to be known as the ``Tobacco Trust 
Fund'', which shall be used in carrying out this subtitle. The Tobacco 
Trust Fund shall consist of the following:
            (1) Assessments collected under section 625.
            (2) Such amounts as are necessary from the Commodity Credit 
        Corporation.
            (3) Any interest earned on investment of amounts in the 
        Tobacco Trust Fund under subsection (c).

    (b) Expenditures.--
            (1) Authorized expenditures.--Subject to paragraph (2), and 
        notwithstanding any other provision of law, the Secretary

[[Page 118 STAT. 1534]]

        shall use amounts in the Tobacco Trust Fund, in such amounts as 
        the Secretary determines are necessary--
                    (A) to make payments under sections 622 and 623;
                    (B) to provide reimbursement under section 641(c);
                    (C) to reimburse the Commodity Credit Corporation 
                for costs incurred by the Commodity Credit Corporation 
                under paragraph (2); and
                    (D) to make payments to financial institutions to 
                satisfy contractual obligations under section 622 or 
                623.
            (2) Expenditures by commodity credit corporation.--
        Notwithstanding any other provision of law, the Secretary shall 
        use the funds, facilities, and authorities of the Commodity 
        Credit Corporation to make payments described in paragraph (1). 
        Not later <<NOTE: Deadline.>> than January 1, 2015, the 
        Secretary shall use amounts in the Tobacco Trust Fund to fully 
        reimburse, with interest, the Commodity Credit Corporation for 
        all funds of the Commodity Credit Corporation expended under the 
        authority of this paragraph. Administrative costs incurred by 
        the Secretary or the Commodity Credit Corporation to carry out 
        this title may not be paid using amounts in the Tobacco Trust 
        Fund.

    (c) Investment of Amounts.--
            (1) In general.--The Commodity Credit Corporation shall 
        invest such portion of the amounts in the Tobacco Trust Fund as 
        are not, in the judgment of the Commodity Credit Corporation, 
        required to meet current expenditures.
            (2) Interest-bearing obligations.--Investments may be made 
        only in interest-bearing obligations of the United States.
            (3) Acquisition of obligations.--For the purpose of 
        investments under paragraph (1), obligations may be acquired--
                    (A) on original issue at the issue price; or
                    (B) by purchase of outstanding obligations at the 
                market price.
            (4) Sale of obligations.--Any obligation acquired by the 
        Tobacco Trust Fund may be sold by the Commodity Credit 
        Corporation at the market price.
            (5) Credits to fund.--The interest on, and the proceeds from 
        the sale or redemption of, any obligations held in the Tobacco 
        Trust Fund shall be credited to and form a part of the Fund.

SEC. 627. <<NOTE: 7 USC 518f.>> LIMITATION ON TOTAL EXPENDITURES.

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

                Subtitle C--Implementation and Transition

SEC. 641. <<NOTE: 7 USC 519.>> TREATMENT OF TOBACCO LOAN POOL STOCKS AND 
            OUTSTANDING LOAN COSTS.

    (a) Disposal of Stocks.--To provide for the orderly disposition of 
quota tobacco held by an association that has entered into a loan 
agreement with the Commodity Credit Corporation under section 106A or 
106B of the Agricultural Act of 1949 (7 U.S.C. 1445-

[[Page 118 STAT. 1535]]

1, 1445-2) (referred to in this section as an ``association''), loan 
pool stocks for each kind of tobacco held by the association shall be 
disposed of in accordance with this section.
    (b) Disposal by Associations.--For each kind of tobacco held by an 
association, the association shall be responsible for the disposal of a 
specific quantity of the loan pool stocks for that kind of tobacco held 
by the association. The quantity transferred to the association for 
disposal shall be equal to the quantity determined by dividing--
            (1) the amount of funds held by the association in the No 
        Net Cost Tobacco Fund and the No Net Cost Tobacco Account 
        established under sections 106A and 106B of the Agricultural Act 
        of 1949 (7 U.S.C. 1445-1, 1445-2) for the kind of tobacco; by
            (2) the average list price per pound for the kind of 
        tobacco, as determined by the Secretary.

    (c) Disposal of Remainder by Commodity Credit Corporation.--
            (1) Disposal.--Any loan pool stocks of a kind of tobacco of 
        an association that are not transferred to the association under 
        subsection (b) for disposal shall be disposed of by Commodity 
        Credit Corporation in a manner determined by the Secretary.
            (2) Reimbursement.--As required by section 626(b)(1)(B), the 
        Secretary shall transfer from the Tobacco Trust Fund to the No 
        Net Cost Tobacco Fund or the No Net Cost Tobacco Account of an 
        association established under section 106A or 106B of the 
        Agricultural Act of 1949 (7 U.S.C. 1445-1, 1445-2) such amounts 
        as the Secretary determines will be adequate to reimburse the 
        Commodity Credit Corporation for any net losses that the 
        Corporation may sustain under its loan agreements with the 
        association.

    (d) Transfer of Remaining No Net Cost Funds.--Any funds in the No 
Net Cost Tobacco Fund or the No Net Cost Tobacco Account of an 
association established under sections 106A and 106B of the Agricultural 
Act of 1949 (7 U.S.C. 1445-1, 1445-2) that remain after the application 
of subsections (b) and (c) shall be transferred to the association for 
distribution to producers of quota tobacco in accordance with a plan 
approved by the Secretary.

SEC. 642. <<NOTE: 7 USC 519a.>> REGULATIONS.

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

[[Page 118 STAT. 1536]]

    (c) Congressional Review of Agency Rulemaking.--In carrying out this 
section, the Secretary shall use the authority provided under section 
808 of title 5, United States Code.

SEC. 643. <<NOTE: 7 USC 518 note.>> EFFECTIVE DATE.

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

                   TITLE VII--MISCELLANEOUS PROVISIONS

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

    (a) Treatment as Exempt Facility Bond.--Subsection (a) of section 
142 (relating to the definition of exempt facility bond) is amended by 
striking ``or'' at the end of paragraph (12), by striking the period at 
the end of paragraph (13) and inserting ``, or'', and by inserting at 
the end the following new paragraph:
            ``(14) qualified green building and sustainable design 
        projects.''.

    (b) Qualified Green Building and Sustainable Design Projects.--
Section 142 (relating to exempt facility bonds) is amended by adding at 
the end thereof the following new subsection:
    ``(l) Qualified Green Building and Sustainable Design Projects.--
            ``(1) In general.--For purposes of subsection (a)(14), the 
        term `qualified green building and sustainable design project' 
        means any project which is designated by the Secretary, after 
        consultation with the Administrator of the Environmental 
        Protection Agency, as a qualified green building and sustainable 
        design project and which meets the requirements of clauses (i), 
        (ii), (iii), and (iv) of paragraph (4)(A).
            ``(2) Designations.--
                    ``(A) In general.--Within <<NOTE: Deadline.>> 60 
                days after the end of the application period described 
                in paragraph (3)(A), the Secretary, after consultation 
                with the Administrator of the Environmental Protection 
                Agency, shall designate qualified green building and 
                sustainable design projects. At least one of the 
                projects designated shall be located in, or within a 10-
                mile radius of, an empowerment zone as designated 
                pursuant to section 1391, and at least one of the 
                projects designated shall be located in a rural State. 
                No more than one project shall be designated in a State. 
                A project shall not be designated if such project 
                includes a stadium or arena for professional sports 
                exhibitions or games.
                    ``(B) Minimum conservation and technology innovation 
                objectives.--The Secretary, after consultation with the 
                Administrator of the Environmental Protection Agency, 
                shall ensure that, in the aggregate, the projects 
                designated shall--
                          ``(i) reduce electric consumption by more than 
                      150 megawatts annually as compared to conventional 
                      generation,
                          ``(ii) reduce daily sulfur dioxide emissions 
                      by at least 10 tons compared to coal generation 
                      power,

[[Page 118 STAT. 1537]]

                          ``(iii) expand by 75 percent the domestic 
                      solar photovoltaic market in the United States 
                      (measured in megawatts) as compared to the 
                      expansion of that market from 2001 to 2002, and
                          ``(iv) use at least 25 megawatts of fuel cell 
                      energy generation.
            ``(3) Limited designations.--A project may not be designated 
        under this subsection unless--
                    ``(A) the <<NOTE: Deadline.>> project is nominated 
                by a State or local government within 180 days of the 
                enactment of this subsection, and
                    ``(B) such State or local government provides 
                written assurances that the project will satisfy the 
                eligibility criteria described in paragraph (4).
            ``(4) Application.--
                    ``(A) In general.--A project may not be designated 
                under this subsection unless the application for such 
                designation includes a project proposal which describes 
                the energy efficiency, renewable energy, and sustainable 
                design features of the project and demonstrates that the 
                project satisfies the following eligibility criteria:
                          ``(i) Green building and sustainable design.--
                      At least 75 percent of the square footage of 
                      commercial buildings which are part of the project 
                      is registered for United States Green Building 
                      Council's LEED certification and is reasonably 
                      expected (at the time of the designation) to 
                      receive such certification. For purposes of 
                      determining LEED certification as required under 
                      this clause, points shall be credited by using the 
                      following:
                                    ``(I) For wood products, 
                                certification under the Sustainable 
                                Forestry Initiative Program and the 
                                American Tree Farm System.
                                    ``(II) For renewable wood products, 
                                as credited for recycled content 
                                otherwise provided under LEED 
                                certification.
                                    ``(III) For composite wood products, 
                                certification under standards 
                                established by the American National 
                                Standards Institute, or such other 
                                voluntary standards as published in the 
                                Federal Register by the Administrator of 
                                the Environmental Protection Agency.
                          ``(ii) Brownfield redevelopment.--The project 
                      includes a brownfield site as defined by section 
                      101(39) of the Comprehensive Environmental 
                      Response, Compensation, and Liability Act of 1980 
                      (42 U.S.C. 9601), including a site described in 
                      subparagraph (D)(ii)(II)(aa) thereof.
                          ``(iii) State and local support.--The project 
                      receives specific State or local government 
                      resources which will support the project in an 
                      amount equal to at least $5,000,000. For purposes 
                      of the preceding sentence, the term `resources' 
                      includes tax abatement benefits and contributions 
                      in kind.
                          ``(iv) Size.--The project includes at least 
                      one of the following:
                                    ``(I) At least 1,000,000 square feet 
                                of building.

[[Page 118 STAT. 1538]]

                                    ``(II) At least 20 acres.
                          ``(v) Use of tax benefit.--The project 
                      proposal includes a description of the net benefit 
                      of the tax-exempt financing provided under this 
                      subsection which will be allocated for financing 
                      of one or more of the following:
                                    ``(I) The purchase, construction, 
                                integration, or other use of energy 
                                efficiency, renewable energy, and 
                                sustainable design features of the 
                                project.
                                    ``(II) Compliance with certification 
                                standards cited under clause (i).
                                    ``(III) The purchase, remediation, 
                                and foundation construction and 
                                preparation of the brownfields site.
                          ``(vi) Prohibited facilities.--An issue shall 
                      not be treated as an issue described in subsection 
                      (a)(14) if any proceeds of such issue are used to 
                      provide any facility the principal business of 
                      which is the sale of food or alcoholic beverages 
                      for consumption on the premises.
                          ``(vii) Employment.--The project is projected 
                      to provide permanent employment of at least 1,500 
                      full time equivalents (150 full time equivalents 
                      in rural States) when completed and construction 
                      employment of at least 1,000 full time equivalents 
                      (100 full time equivalents in rural States).
                The application shall include an independent analysis 
                which describes the project's economic impact, including 
                the amount of projected employment.
                    ``(B) Project description.--Each application 
                described in subparagraph (A) shall contain for each 
                project a description of--
                          ``(i) the amount of electric consumption 
                      reduced as compared to conventional construction,
                          ``(ii) the amount of sulfur dioxide daily 
                      emissions reduced compared to coal generation,
                          ``(iii) the amount of the gross installed 
                      capacity of the project's solar photovoltaic 
                      capacity measured in megawatts, and
                          ``(iv) the amount, in megawatts, of the 
                      project's fuel cell energy generation.
            ``(5) Certification of <<NOTE: Deadline.>> use of tax 
        benefit.--No later than 30 days after the completion of the 
        project, each project must certify to the Secretary that the net 
        benefit of the tax-exempt financing was used for the purposes 
        described in paragraph (4).
            ``(6) Definitions.--For purposes of this subsection--
                    ``(A) Rural state.--The term `rural State' means any 
                State which has--
                          ``(i) a population of less than 4,500,000 
                      according to the 2000 census,
                          ``(ii) a population density of less than 150 
                      people per square mile according to the 2000 
                      census, and
                          ``(iii) increased in population by less than 
                      half the rate of the national increase between the 
                      1990 and 2000 censuses.

[[Page 118 STAT. 1539]]

                    ``(B) Local government.--The term `local government' 
                has the meaning given such term by section 1393(a)(5).
                    ``(C) Net benefit of tax-exempt financing.--The term 
                `net benefit of tax-exempt financing' means the present 
                value of the interest savings (determined by a 
                calculation established by the Secretary) which result 
                from the tax-exempt status of the bonds.
            ``(7) Aggregate face amount of tax-exempt financing.--
                    ``(A) In general.--An issue shall not be treated as 
                an issue described in subsection (a)(14) if the 
                aggregate face amount of bonds issued by the State or 
                local government pursuant thereto for a project (when 
                added to the aggregate face amount of bonds previously 
                so issued for such project) exceeds an amount designated 
                by the Secretary as part of the designation.
                    ``(B) Limitation on amount of bonds.--The Secretary 
                may not allocate authority to issue qualified green 
                building and sustainable design project bonds in an 
                aggregate face amount exceeding $2,000,000,000.
            ``(8) Termination.--Subsection (a)(14) shall not apply with 
        respect to any bond issued after September 30, 2009.
            ``(9) Treatment of current refunding bonds.--Paragraphs 
        (7)(B) and (8) shall not apply to any bond (or series of bonds) 
        issued to refund a bond issued under subsection (a)(14) before 
        October 1, 2009, if--
                    ``(A) the average maturity date of the issue of 
                which the refunding bond is a part is not later than the 
                average maturity date of the bonds to be refunded by 
                such issue,
                    ``(B) the amount of the refunding bond does not 
                exceed the outstanding amount of the refunded bond, and
                    ``(C) the net proceeds of the refunding bond are 
                used to redeem the refunded bond not later than 90 days 
                after the date of the issuance of the refunding bond.
        For purposes of subparagraph (A), average maturity shall be 
        determined in accordance with section 147(b)(2)(A).''.

    (c) Exemption From General State Volume Caps.--Paragraph (3) of 
section 146(g) (relating to exception for certain bonds) is amended--
            (1) by striking ``or (13)'' and inserting ``(13), or (14)'', 
        and
            (2) by striking ``and qualified public educational 
        facilities'' and inserting ``qualified public educational 
        facilities, and qualified green building and sustainable design 
        projects''.

    (d) Accountability.--Each <<NOTE: 26 USC 142 note.>> issuer shall 
maintain, on behalf of each project, an interest bearing reserve account 
equal to 1 percent of the net proceeds of any bond issued under this 
section for such project. <<NOTE: Deadline.>> Not later than 5 years 
after the date of issuance, the Secretary of the Treasury, after 
consultation with the Administrator of the Environmental Protection 
Agency, shall determine whether the project financed with such bonds has 
substantially complied with the terms and conditions described in 
section 142(l)(4) of the Internal Revenue Code of 1986 (as added by this 
section). If the Secretary, after such consultation, certifies that the 
project has substantially complied with such terms and conditions and 
meets the commitments set forth in the application for such project 
described in section 142(l)(4) of such Code, amounts in the reserve 
account, including all interest, shall be released to the project. If 
the Secretary determines that the project has not substantially

[[Page 118 STAT. 1540]]

complied with such terms and conditions, amounts in the reserve account, 
including all interest, shall be paid to the United States Treasury.
    (e) Effective Date.--The <<NOTE: 26 USC 142 note.>> amendments made 
by this section shall apply to bonds issued after December 31, 2004.

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

    (a) In General.--Subsection (b) of section 512 (relating to 
unrelated business taxable income) is amended by adding at the end the 
following new paragraph:
            ``(18) Treatment of gain or loss on sale or exchange of 
        certain brownfield sites.--
                    ``(A) In general.--Notwithstanding paragraph (5)(B), 
                there shall be excluded any gain or loss from the 
                qualified sale, exchange, or other disposition of any 
                qualifying brownfield property by an eligible taxpayer.
                    ``(B) Eligible taxpayer.--For purposes of this 
                paragraph--
                          ``(i) In general.--The term `eligible 
                      taxpayer' means, with respect to a property, any 
                      organization exempt from tax under section 501(a) 
                      which--
                                    ``(I) acquires from an unrelated 
                                person a qualifying brownfield property, 
                                and
                                    ``(II) pays or incurs eligible 
                                remediation expenditures with respect to 
                                such property in an amount which exceeds 
                                the greater of $550,000 or 12 percent of 
                                the fair market value of the property at 
                                the time such property was acquired by 
                                the eligible taxpayer, determined as if 
                                there was not a presence of a hazardous 
                                substance, pollutant, or contaminant on 
                                the property which is complicating the 
                                expansion, redevelopment, or reuse of 
                                the property.
                          ``(ii) Exception.--Such term shall not include 
                      any organization which is--
                                    ``(I) potentially liable under 
                                section 107 of the Comprehensive 
                                Environmental Response, Compensation, 
                                and Liability Act of 1980 with respect 
                                to the qualifying brownfield property,
                                    ``(II) affiliated with any other 
                                person which is so potentially liable 
                                through any direct or indirect familial 
                                relationship or any contractual, 
                                corporate, or financial relationship 
                                (other than a contractual, corporate, or 
                                financial relationship which is created 
                                by the instruments by which title to any 
                                qualifying brownfield property is 
                                conveyed or financed or by a contract of 
                                sale of goods or services), or
                                    ``(III) the result of a 
                                reorganization of a business entity 
                                which was so potentially liable.
                    ``(C) Qualifying brownfield property.--For purposes 
                of this paragraph--
                          ``(i) In general.--The term `qualifying 
                      brownfield property' means any real property which 
                      is certified, before the taxpayer incurs any 
                      eligible remediation

[[Page 118 STAT. 1541]]

                      expenditures (other than to obtain a Phase I 
                      environmental site assessment), by an appropriate 
                      State agency (within the meaning of section 
                      198(c)(4)) in the State in which such property is 
                      located as a brownfield site within the meaning of 
                      section 101(39) of the Comprehensive Environmental 
                      Response, Compensation, and Liability Act of 1980 
                      (as in effect on the date of the enactment of this 
                      paragraph).
                          ``(ii) Request for certification.--Any request 
                      by an eligible taxpayer for a certification 
                      described in clause (i) shall include a sworn 
                      statement by the eligible taxpayer and supporting 
                      documentation of the presence of a hazardous 
                      substance, pollutant, or contaminant on the 
                      property which is complicating the expansion, 
                      redevelopment, or reuse of the property given the 
                      property's reasonably anticipated future land uses 
                      or capacity for uses of the property (including a 
                      Phase I environmental site assessment and, if 
                      applicable, evidence of the property's presence on 
                      a local, State, or Federal list of brownfields or 
                      contaminated property) and other environmental 
                      assessments prepared or obtained by the taxpayer.
                    ``(D) Qualified sale, exchange, or other 
                disposition.--For purposes of this paragraph--
                          ``(i) In general.--A sale, exchange, or other 
                      disposition of property shall be considered as 
                      qualified if--
                                    ``(I) such property is transferred 
                                by the eligible taxpayer to an unrelated 
                                person, and
                                    ``(II) within 1 year of such 
                                transfer the eligible taxpayer has 
                                received a certification from the 
                                Environmental Protection Agency or an 
                                appropriate State agency (within the 
                                meaning of section 198(c)(4)) in the 
                                State in which such property is located 
                                that, as a result of the eligible 
                                taxpayer's remediation actions, such 
                                property would not be treated as a 
                                qualifying brownfield property in the 
                                hands of the transferee.
                      For purposes of subclause (II), before issuing 
                      such certification, the Environmental Protection 
                      Agency or appropriate State agency shall respond 
                      to comments received pursuant to clause (ii)(V) in 
                      the same form and manner as required under section 
                      117(b) of the Comprehensive Environmental 
                      Response, Compensation, and Liability Act of 1980 
                      (as in effect on the date of the enactment of this 
                      paragraph).
                          ``(ii) Request 
                      for <<NOTE: Deadline.>> certification.--Any 
                      request by an eligible taxpayer for a 
                      certification described in clause (i) shall be 
                      made not later than the date of the transfer and 
                      shall include a sworn statement by the eligible 
                      taxpayer certifying the following:
                                    ``(I) Remedial actions which comply 
                                with all applicable or relevant and 
                                appropriate requirements (consistent 
                                with section 121(d) of the Comprehensive 
                                Environmental Response, Compensation, 
                                and Liability Act of 1980) have been 
                                substantially completed, such that there 
                                are no hazardous

[[Page 118 STAT. 1542]]

                                substances, pollutants, or contaminants 
                                which complicate the expansion, 
                                redevelopment, or reuse of the property 
                                given the property's reasonably 
                                anticipated future land uses or capacity 
                                for uses of the property.
                                    ``(II) The reasonably anticipated 
                                future land uses or capacity for uses of 
                                the property are more economically 
                                productive or environmentally beneficial 
                                than the uses of the property in 
                                existence on the date of the 
                                certification described in subparagraph 
                                (C)(i). For purposes of the preceding 
                                sentence, use of property as a landfill 
                                or other hazardous waste facility shall 
                                not be considered more economically 
                                productive or environmentally 
                                beneficial.
                                    ``(III) A remediation plan has been 
                                implemented to bring the property into 
                                compliance with all applicable local, 
                                State, and Federal environmental laws, 
                                regulations, and standards and to ensure 
                                that the remediation protects human 
                                health and the environment.
                                    ``(IV) The remediation plan 
                                described in subclause (III), including 
                                any physical improvements required to 
                                remediate the property, is either 
                                complete or substantially complete, and, 
                                if substantially complete, sufficient 
                                monitoring, funding, institutional 
                                controls, and financial assurances have 
                                been put in place to ensure the complete 
                                remediation of the property in 
                                accordance with the remediation plan as 
                                soon as is reasonably practicable after 
                                the sale, exchange, or other disposition 
                                of such property.
                                    ``(V) Public 
                                notice <<NOTE: Notice.>> and the 
                                opportunity for comment on the request 
                                for certification was completed before 
                                the date of such request. Such notice 
                                and opportunity for comment shall be in 
                                the same form and manner as required for 
                                public participation required under 
                                section 117(a) of the Comprehensive 
                                Environmental Response, Compensation, 
                                and Liability Act of 1980 (as in effect 
                                on the date of the enactment of this 
                                paragraph). For purposes of this 
                                subclause, public notice shall include, 
                                at a minimum, publication in a major 
                                local newspaper of general circulation.
                          ``(iii) Attachment to tax returns.--A copy of 
                      each of the requests for certification described 
                      in clause (ii) of subparagraph (C) and this 
                      subparagraph shall be included in the tax return 
                      of the eligible taxpayer (and, where applicable, 
                      of the qualifying partnership) for the taxable 
                      year during which the transfer occurs.
                          ``(iv) Substantial completion.--For purposes 
                      of this subparagraph, a remedial action is 
                      substantially complete when any necessary physical 
                      construction is complete, all immediate threats 
                      have been eliminated, and all long-term threats 
                      are under control.
                    ``(E) Eligible remediation expenditures.--For 
                purposes of this paragraph--

[[Page 118 STAT. 1543]]

                          ``(i) In general.--The term `eligible 
                      remediation expenditures' means, with respect to 
                      any qualifying brownfield property, any amount 
                      paid or incurred by the eligible taxpayer to an 
                      unrelated third person to obtain a Phase I 
                      environmental site assessment of the property, and 
                      any amount so paid or incurred after the date of 
                      the certification described in subparagraph (C)(i) 
                      for goods and services necessary to obtain a 
                      certification described in subparagraph (D)(i) 
                      with respect to such property, including 
                      expenditures--
                                    ``(I) to manage, remove, control, 
                                contain, abate, or otherwise remediate a 
                                hazardous substance, pollutant, or 
                                contaminant on the property,
                                    ``(II) to obtain a Phase II 
                                environmental site assessment of the 
                                property, including any expenditure to 
                                monitor, sample, study, assess, or 
                                otherwise evaluate the release, threat 
                                of release, or presence of a hazardous 
                                substance, pollutant, or contaminant on 
                                the property,
                                    ``(III) to obtain environmental 
                                regulatory certifications and approvals 
                                required to manage the remediation and 
                                monitoring of the hazardous substance, 
                                pollutant, or contaminant on the 
                                property, and
                                    ``(IV) regardless of whether it is 
                                necessary to obtain a certification 
                                described in subparagraph (D)(i)(II), to 
                                obtain remediation cost-cap or stop-loss 
                                coverage, re-opener or regulatory action 
                                coverage, or similar coverage under 
                                environmental insurance policies, or 
                                financial guarantees required to manage 
                                such remediation and monitoring.
                          ``(ii) Exceptions.--Such term shall not 
                      include--
                                    ``(I) any portion of the purchase 
                                price paid or incurred by the eligible 
                                taxpayer to acquire the qualifying 
                                brownfield property,
                                    ``(II) environmental insurance costs 
                                paid or incurred to obtain legal defense 
                                coverage, owner/operator liability 
                                coverage, lender liability coverage, 
                                professional liability coverage, or 
                                similar types of coverage,
                                    ``(III) any amount paid or incurred 
                                to the extent such amount is reimbursed, 
                                funded, or otherwise subsidized by 
                                grants provided by the United States, a 
                                State, or a political subdivision of a 
                                State for use in connection with the 
                                property, proceeds of an issue of State 
                                or local government obligations used to 
                                provide financing for the property the 
                                interest of which is exempt from tax 
                                under section 103, or subsidized 
                                financing provided (directly or 
                                indirectly) under a Federal, State, or 
                                local program provided in connection 
                                with the property, or
                                    ``(IV) any expenditure paid or 
                                incurred before the date of the 
                                enactment of this paragraph.

[[Page 118 STAT. 1544]]

                      For purposes of subclause (III), the Secretary may 
                      issue guidance regarding the treatment of 
                      government-provided funds for purposes of 
                      determining eligible remediation expenditures.
                    ``(F) Determination of gain or loss.--For purposes 
                of this paragraph, the determination of gain or loss 
                shall not include an amount treated as gain which is 
                ordinary income with respect to section 1245 or section 
                1250 property, including amounts deducted as section 198 
                expenses which are subject to the recapture rules of 
                section 198(e), if the taxpayer had deducted such 
                amounts in the computation of its unrelated business 
                taxable income.
                    ``(G) Special rules for partnerships.--
                          ``(i) In general.--In the case of an eligible 
                      taxpayer which is a partner of a qualifying 
                      partnership which acquires, remediates, and sells, 
                      exchanges, or otherwise disposes of a qualifying 
                      brownfield property, this paragraph shall apply to 
                      the eligible taxpayer's distributive share of the 
                      qualifying partnership's gain or loss from the 
                      sale, exchange, or other disposition of such 
                      property.
                          ``(ii) Qualifying partnership.--The term 
                      `qualifying partnership' means a partnership 
                      which--
                                    ``(I) has a partnership agreement 
                                which satisfies the requirements of 
                                section 514(c)(9)(B)(vi) at all times 
                                beginning on the date of the first 
                                certification received by the 
                                partnership under subparagraph (C)(i),
                                    ``(II) satisfies the requirements of 
                                subparagraphs (B)(i), (C), (D), and (E), 
                                if `qualified partnership' is 
                                substituted for `eligible taxpayer' each 
                                place it appears therein (except 
                                subparagraph (D)(iii)), and
                                    ``(III) is not an organization which 
                                would be prevented from constituting an 
                                eligible taxpayer by reason of 
                                subparagraph (B)(ii).
                          ``(iii) Requirement 
                      that <<NOTE: Applicability.>> tax-exempt partner 
                      be a partner since first certification.--This 
                      paragraph shall apply with respect to any eligible 
                      taxpayer which is a partner of a partnership which 
                      acquires, remediates, and sells, exchanges, or 
                      otherwise disposes of a qualifying brownfield 
                      property only if such eligible taxpayer was a 
                      partner of the qualifying partnership at all times 
                      beginning on the date of the first certification 
                      received by the partnership under subparagraph 
                      (C)(i) and ending on the date of the sale, 
                      exchange, or other disposition of the property by 
                      the partnership.
                          ``(iv) Regulations.--The Secretary shall 
                      prescribe such regulations as are necessary to 
                      prevent abuse of the requirements of this 
                      subparagraph, including abuse through--
                                    ``(I) the use of special allocations 
                                of gains or losses, or
                                    ``(II) changes in ownership of 
                                partnership interests held by eligible 
                                taxpayers.
                    ``(H) Special rules for multiple properties.--

[[Page 118 STAT. 1545]]

                          ``(i) In general.--An eligible taxpayer or a 
                      qualifying partnership of which the eligible 
                      taxpayer is a partner may make a 1-time election 
                      to apply this paragraph to more than 1 qualifying 
                      brownfield property by averaging the eligible 
                      remediation expenditures for all such properties 
                      acquired during the election period. If the 
                      eligible taxpayer or qualifying partnership makes 
                      such an election, the election shall apply to all 
                      qualified sales, exchanges, or other dispositions 
                      of qualifying brownfield properties the 
                      acquisition and transfer of which occur during the 
                      period for which the election remains in effect.
                          ``(ii) Election.--An election under clause (i) 
                      shall be made with the eligible taxpayer's or 
                      qualifying partnership's timely filed tax return 
                      (including extensions) for the first taxable year 
                      for which the taxpayer or qualifying partnership 
                      intends to have the election apply. An election 
                      under clause (i) is effective for the period--
                                    ``(I) beginning on the date which is 
                                the first day of the taxable year of the 
                                return in which the election is included 
                                or a later day in such taxable year 
                                selected by the eligible taxpayer or 
                                qualifying partnership, and
                                    ``(II) ending on the date which is 
                                the earliest of a date of revocation 
                                selected by the eligible taxpayer or 
                                qualifying partnership, the date which 
                                is 8 years after the date described in 
                                subclause (I), or, in the case of an 
                                election by a qualifying partnership of 
                                which the eligible taxpayer is a 
                                partner, the date of the termination of 
                                the qualifying partnership.
                          ``(iii) Revocation.--An eligible taxpayer or 
                      qualifying partnership may revoke an election 
                      under clause (i)(II) by filing a statement of 
                      revocation with a timely filed tax return 
                      (including extensions). A revocation is effective 
                      as of the first day of the taxable year of the 
                      return in which the revocation is included or a 
                      later day in such taxable year selected by the 
                      eligible taxpayer or qualifying partnership. Once 
                      an eligible taxpayer or qualifying partnership 
                      revokes the election, the eligible taxpayer or 
                      qualifying partnership is ineligible to make 
                      another election under clause (i) with respect to 
                      any qualifying brownfield property subject to the 
                      revoked election.
                    ``(I) Recapture.--If an eligible taxpayer excludes 
                gain or loss from a sale, exchange, or other disposition 
                of property to which an election under subparagraph (H) 
                applies, and such property fails to satisfy the 
                requirements of this paragraph, the unrelated business 
                taxable income of the eligible taxpayer for the taxable 
                year in which such failure occurs shall be determined by 
                including any previously excluded gain or loss from such 
                sale, exchange, or other disposition allocable to such 
                taxpayer, and interest shall be determined at the 
                overpayment rate established under section 6621 on any 
                resulting tax for the period beginning with the due date 
                of the return for the taxable year during

[[Page 118 STAT. 1546]]

                which such sale, exchange, or other disposition 
                occurred, and ending on the date of payment of the tax.
                    ``(J) Related persons.--For purposes of this 
                paragraph, a person shall be treated as related to 
                another person if--
                          ``(i) such person bears a relationship to such 
                      other person described in section 267(b) 
                      (determined without regard to paragraph (9) 
                      thereof), or section 707(b)(1), determined by 
                      substituting `25 percent' for `50 percent' each 
                      place it appears therein, and
                          ``(ii) in the case such other person is a 
                      nonprofit organization, if such person controls 
                      directly or indirectly more than 25 percent of the 
                      governing body of such organization.
                    ``(K) Termination.--Except for purposes of 
                determining the average eligible remediation 
                expenditures for properties acquired during the election 
                period under subparagraph (H), this paragraph shall not 
                apply to any property acquired by the eligible taxpayer 
                or qualifying partnership after December 31, 2009.''.

    (b) Exclusion From Definition of Debt-Financed Property.--Section 
514(b)(1) (defining debt-financed property) is amended by striking 
``or'' at the end of subparagraph (C), by striking the period at the end 
of subparagraph (D) and inserting ``; or'', and by inserting after 
subparagraph (D) the following new subparagraph:
                    ``(E) any property the gain or loss from the sale, 
                exchange, or other disposition of which would be 
                excluded by reason of the provisions of section 
                512(b)(18) in computing the gross income of any 
                unrelated trade or business.''.

    (c) Savings Clause.--Nothing in the amendments made by this section 
shall affect any duty, liability, or other requirement imposed under any 
other Federal or State law. Notwithstanding section 128(b) of the 
Comprehensive Environmental Response, Compensation, and Liability Act of 
1980, a certification provided by the Environmental Protection Agency or 
an appropriate State agency (within the meaning of section 198(c)(4) of 
the Internal Revenue Code of 1986) shall not affect the liability of any 
person under section 107(a) of such Act.
    (d) Effective Date.--The amendments made by this section shall apply 
to any gain or loss on the sale, exchange, or other disposition of any 
property acquired by the taxpayer after December 31, 2004.

SEC. 703. CIVIL RIGHTS TAX RELIEF.

    (a) Deduction Allowed Whether or Not Taxpayer Itemizes Other 
Deductions.--Subsection (a) of section 62 (defining adjusted gross 
income) is amended by inserting after paragraph (18) the following new 
item:
            ``(19) Costs involving discrimination suits, etc.--Any 
        deduction allowable under this chapter for attorney fees and 
        court costs paid by, or on behalf of, the taxpayer in connection 
        with any action involving a claim of unlawful discrimination (as 
        defined in subsection (e)) or a claim of a violation of 
        subchapter III of chapter 37 of title 31, United States Code or 
        a claim made under section 1862(b)(3)(A) of the Social Security

[[Page 118 STAT. 1547]]

        Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not 
        apply to any deduction in excess of the amount includible in the 
        taxpayer's gross income for the taxable year on account of a 
        judgment or settlement (whether by suit or agreement and whether 
        as lump sum or periodic payments) resulting from such claim.''.

    (b) Unlawful Discrimination Defined.--Section 62 is amended by 
adding at the end the following new subsection:
    ``(e) Unlawful Discrimination Defined.--For purposes of subsection 
(a)(19), the term `unlawful discrimination' means an act that is 
unlawful under any of the following:
            ``(1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 
        1202).
            ``(2) Section 201, 202, 203, 204, 205, 206, or 207 of the 
        Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 
        1313, 1314, 1315, 1316, or 1317).
            ``(3) The National Labor Relations Act (29 U.S.C. 151 et 
        seq.).
            ``(4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et 
        seq.).
            ``(5) Section 4 or 15 of the Age Discrimination in 
        Employment Act of 1967 (29 U.S.C. 623 or 633a).
            ``(6) Section 501 or 504 of the Rehabilitation Act of 1973 
        (29 U.S.C. 791 or 794).
            ``(7) Section 510 of the Employee Retirement Income Security 
        Act of 1974 (29 U.S.C. 1140).
            ``(8) Title IX of the Education Amendments of 1972 (20 
        U.S.C. 1681 et seq.).
            ``(9) The Employee Polygraph Protection Act of 1988 (29 
        U.S.C. 2001 et seq.).
            ``(10) The Worker Adjustment and Retraining Notification Act 
        (29 U.S.C. 2102 et seq.).
            ``(11) Section 105 of the Family and Medical Leave Act of 
        1993 (29 U.S.C. 2615).
            ``(12) Chapter 43 of title 38, United States Code (relating 
        to employment and reemployment rights of members of the 
        uniformed services).
            ``(13) Section 1977, 1979, or 1980 of the Revised Statutes 
        (42 U.S.C. 1981, 1983, or 1985).
            ``(14) Section 703, 704, or 717 of the Civil Rights Act of 
        1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
            ``(15) Section 804, 805, 806, 808, or 818 of the Fair 
        Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).
            ``(16) Section 102, 202, 302, or 503 of the Americans with 
        Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 
        12203).
            ``(17) Any provision of Federal law (popularly known as 
        whistleblower protection provisions) prohibiting the discharge 
        of an employee, the discrimination against an employee, or any 
        other form of retaliation or reprisal against an employee for 
        asserting rights or taking other actions permitted under Federal 
        law.
            ``(18) Any provision of Federal, State, or local law, or 
        common law claims permitted under Federal, State, or local law--
                          ``(i) providing for the enforcement of civil 
                      rights, or

[[Page 118 STAT. 1548]]

                          ``(ii) regulating any aspect of the employment 
                      relationship, including claims for wages, 
                      compensation, or benefits, or prohibiting the 
                      discharge of an employee, the discrimination 
                      against an employee, or any other form of 
                      retaliation or reprisal against an employee for 
                      asserting rights or taking other actions permitted 
                      by law.''.

    (c) Effective Date.--The <<NOTE: 26 USC 62 note.>> amendments made 
by this section shall apply to fees and costs paid after the date of the 
enactment of this Act with respect to any judgment or settlement 
occurring after such date.

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

    (a) 7-Year Property.--Subparagraph (C) of section 168(e)(3) 
(relating to classification of certain property) is amended by 
redesignating clause (ii) as clause (iii) and by inserting after clause 
(i) the following new clause:
                          ``(ii) any motorsports entertainment complex, 
                      and''.

    (b) Definition.--Section 168(i) (relating to definitions and special 
rules) is amended by adding at the end the following new paragraph:
            ``(15) Motorsports entertainment complex.--
                    ``(A) In general.--The term `motorsports 
                entertainment complex' means a racing track facility 
                which--
                          ``(i) is permanently situated on land, and
                          ``(ii) during the 36-month period following 
                      the first day of the month in which the asset is 
                      placed in service, hosts 1 or more racing events 
                      for automobiles (of any type), trucks, or 
                      motorcycles which are open to the public for the 
                      price of admission.
                    ``(B) Ancillary and support facilities.--Such term 
                shall include, if owned by the taxpayer who owns the 
                complex and provided for the benefit of patrons of the 
                complex--
                          ``(i) ancillary facilities and land 
                      improvements in support of the complex's 
                      activities (including parking lots, sidewalks, 
                      waterways, bridges, fences, and landscaping),
                          ``(ii) support facilities (including food and 
                      beverage retailing, souvenir vending, and other 
                      nonlodging accommodations), and
                          ``(iii) appurtenances associated with such 
                      facilities and related attractions and amusements 
                      (including ticket booths, race track surfaces, 
                      suites and hospitality facilities, grandstands and 
                      viewing structures, props, walls, facilities that 
                      support the delivery of entertainment services, 
                      other special purpose structures, facades, shop 
                      interiors, and buildings).
                    ``(C) Exception.--Such term shall not include any 
                transportation equipment, administrative services 
                assets, warehouses, administrative buildings, hotels, or 
                motels.
                    ``(D) Termination.--This paragraph shall not apply 
                to any property placed in service after December 31, 
                2007.''.

    (c) Effective <<NOTE: 26 USC 168 note.>> Date.--

[[Page 118 STAT. 1549]]

            (1) In general.--The amendments made by this section shall 
        apply to any property placed in service after the date of the 
        enactment of this Act.
            (2) Special rule for asset class 80.0.--In the case of race 
        track facilities placed in service after the date of the 
        enactment of this Act, such facilities shall not be treated as 
        theme and amusement facilities classified under asset class 
        80.0.
            (3) No inference.--Nothing in this section or the amendments 
        made by this section shall be construed to affect the treatment 
        of property placed in service on or before the date of the 
        enactment of this Act.

SEC. 705. SUSPENSION OF POLICYHOLDERS SURPLUS ACCOUNT PROVISIONS.

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

    (b) Effective Date.--The <<NOTE: 26 USC 815 note.>> amendment made 
by this section shall apply to taxable years beginning after December 
31, 2004.

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

    (a) In General.--Section 168(e)(3)(C) (defining 7-year property), as 
amended by this Act, is amended by striking ``and'' at the end of clause 
(ii), by redesignating clause (iii) as clause (iv), and by inserting 
after clause (ii) the following new clause:
                          ``(iii) any Alaska natural gas pipeline, 
                      and''.

    (b) Alaska Natural Gas Pipeline.--Section 168(i) (relating to 
definitions and special rules), as amended by this Act, is amended by 
inserting after paragraph (15) the following new paragraph:
            ``(16) Alaska natural gas pipeline.--The term `Alaska 
        natural gas pipeline' means the natural gas pipeline system 
        located in the State of Alaska which--
                    ``(A) has a capacity of more than 500,000,000,000 
                Btu of natural gas per day, and
                    ``(B) is--
                          ``(i) placed in service after December 31, 
                      2013, or
                          ``(ii) treated as placed in service on January 
                      1, 2014, if the taxpayer who places such system in 
                      service before January 1, 2014, elects such 
                      treatment.
        Such term includes the pipe, trunk lines, related equipment, and 
        appurtenances used to carry natural gas, but does not include 
        any gas processing plant.''.

[[Page 118 STAT. 1550]]

    (c) Alternative System.--The table contained in section 168(g)(3)(B) 
(relating to special rule for certain property assigned to classes) is 
amended by inserting after the item relating to subparagraph (C)(ii) the 
following new item:

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

    (d) Effective Date.--The <<NOTE: 26 USC 168 note.>> amendments made 
by this section shall apply to property placed in service after December 
31, 2004.

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

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

    (b) Alaska Natural Gas.--Section 43(c) is amended by adding at the 
end the following new paragraph:
            ``(5) Alaska natural gas.--For purposes of paragraph 
        (1)(D)--
            ``(1) In general.--The term `Alaska natural gas' means 
        natural gas entering the Alaska natural gas pipeline (as defined 
        in section 168(i)(16) (determined without regard to subparagraph 
        (B) thereof)) which is produced from a well--
                    ``(A) located in the area of the State of Alaska 
                lying north of 64 degrees North latitude, determined by 
                excluding the area of the Alaska National Wildlife 
                Refuge (including the continental shelf thereof within 
                the meaning of section 638(1)), and
                    ``(B) pursuant to the applicable State and Federal 
                pollution prevention, control, and permit requirements 
                from such area (including the continental shelf thereof 
                within the meaning of section 638(1)).
            ``(2) Natural gas.--The term `natural gas' has the meaning 
        given such term by section 613A(e)(2).''.

    (c) Effective Date.--The <<NOTE: 26 USC 43 note.>> amendment made by 
this section shall apply to costs paid or incurred in taxable years 
beginning after December 31, 2004.

SEC. 708. <<NOTE: 26 USC 460 note.>> METHOD OF ACCOUNTING FOR NAVAL 
            SHIPBUILDERS.

    (a) In General.--In the case of a qualified naval ship contract, the 
taxable income of such contract during the 5-taxable year period 
beginning with the taxable year in which the contract commencement date 
occurs shall be determined under a method identical to the method used 
in the case of a qualified ship contract (as defined in section 
10203(b)(2)(B) of the Revenue Act of 1987).
    (b) Recapture of Tax Benefit.--In the case of a qualified naval ship 
contract to which subsection (a) applies, the taxpayer's tax imposed by 
chapter 1 of the Internal Revenue Code of 1986 for the first taxable 
year following the 5-taxable year period

[[Page 118 STAT. 1551]]

described in subsection (a) shall be increased by the excess (if any) 
of--
            (1) the amount of tax which would have been imposed during 
        such period if this section had not been enacted, over
            (2) the amount of tax so imposed during such period.

    (c) Qualified Naval Ship Contract.--For purposes of this section:
            (1) In general.--The term ``qualified naval ship contract'' 
        means any contract or portion thereof that is for the 
        construction in the United States of 1 ship or submarine for the 
        Federal Government if the taxpayer reasonably expects the 
        acceptance date will occur no later than 9 years after the 
        construction commencement date.
            (2) Acceptance date.--The term ``acceptance date'' means the 
        date 1 year after the date on which the Federal Government 
        issues a letter of acceptance or other similar document for the 
        ship or submarine.
            (3) Construction commencement date.--The term ``construction 
        commencement date'' means the date on which the physical 
        fabrication of any section or component of the ship or submarine 
        begins in the taxpayer's shipyard.

    (d) Effective Date.--This section shall apply to contracts for ships 
or submarines with respect to which the construction commencement date 
occurs after the date of the enactment of this Act.

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

    (a) Amendments of ERISA.--
            (1) Section 101(e)(3) of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1021(e)(3)) is amended by 
        striking ``Pension Funding Equity Act of 2004'' and inserting 
        ``American Jobs Creation Act of 2004''.
            (2) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is 
        amended by striking ``Pension Funding Equity Act of 2004'' and 
        inserting ``American Jobs Creation Act of 2004''.
            (3) Paragraph (13) of section 408(b) of such Act (29 U.S.C. 
        1108(b)(3)) is amended by striking ``Pension Funding Equity Act 
        of 2004'' and inserting ``American Jobs Creation Act of 2004''.

    (b) Minimum Cost Requirements.--
            (1) In general.--Section 420(c)(3)(E) is amended by adding 
        at the end the following new clause:
                          ``(ii) Insignificant cost reductions 
                      permitted.--
                                    ``(I) In general.--An eligible 
                                employer shall not be treated as failing 
                                to meet the requirements of this 
                                paragraph for any taxable year if, in 
                                lieu of any reduction of retiree health 
                                coverage permitted under the regulations 
                                prescribed under clause (i), the 
                                employer reduces applicable employer 
                                cost by an amount not in excess of the 
                                reduction in costs which would have 
                                occurred if the employer had made the 
                                maximum permissible reduction in retiree 
                                health coverage under such regulations. 
                                In applying such regulations to any 
                                subsequent taxable year, any reduction 
                                in applicable employer cost under this 
                                clause shall

[[Page 118 STAT. 1552]]

                                be treated as if it were an equivalent 
                                reduction in retiree health coverage.
                                    ``(II) Eligible employer.--For 
                                purposes of subclause (I), an employer 
                                shall be treated as an eligible employer 
                                for any taxable year if, for the 
                                preceding taxable year, the qualified 
                                current retiree health liabilities of 
                                the employer were at least 5 percent of 
                                the gross receipts of the employer. For 
                                purposes of this subclause, the rules of 
                                paragraphs (2), (3)(B), and (3)(C) of 
                                section 448(c) shall apply in 
                                determining the amount of an employer's 
                                gross receipts.''.
            (2) Conforming amendment.--Section <<NOTE: 26 USC 
        420.>> 420(c)(3)(E) is amended by striking ``The Secretary'' and 
        inserting:
                          ``(i) In general.--The Secretary''.
            (3) Effective date.--The <<NOTE: 26 USC 420 
        note.>> amendments made by this subsection shall apply to 
        taxable years ending after the date of the enactment of this 
        Act.

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

    (a) Expansion of Qualified Energy Resources.--Subsection (c) of 
section 45 (relating to electricity produced from certain renewable 
resources) is amended to read as follows:
    ``(c) Qualified Energy Resources and Refined Coal.--For purposes of 
this section:
            ``(1) In general.--The term `qualified energy resources' 
        means--
                    ``(A) wind,
                    ``(B) closed-loop biomass,
                    ``(C) open-loop biomass,
                    ``(D) geothermal energy,
                    ``(E) solar energy,
                    ``(F) small irrigation power, and
                    ``(G) municipal solid waste.
            ``(2) Closed-loop biomass.--The term `closed-loop biomass' 
        means any organic material from a plant which is planted 
        exclusively for purposes of being used at a qualified facility 
        to produce electricity.
            ``(3) Open-loop biomass.--
                    ``(A) In general.--The term `open-loop biomass' 
                means--
                          ``(i) any agricultural livestock waste 
                      nutrients, or
                          ``(ii) any solid, nonhazardous, cellulosic 
                      waste material which is segregated from other 
                      waste materials and which is derived from--
                                    ``(I) any of the following forest-
                                related resources: mill and harvesting 
                                residues, precommercial thinnings, 
                                slash, and brush,
                                    ``(II) solid wood waste materials, 
                                including waste pallets, crates, 
                                dunnage, manufacturing and construction 
                                wood wastes (other than pressure-
                                treated, chemically-treated, or painted 
                                wood wastes), and landscape or right-of-
                                way tree trimmings, but not including 
                                municipal solid waste, gas derived from 
                                the biodegradation of solid waste, or 
                                paper which is commonly recycled, or

[[Page 118 STAT. 1553]]

                                    ``(III) agriculture sources, 
                                including orchard tree crops, vineyard, 
                                grain, legumes, sugar, and other crop 
                                by-products or residues.
                Such term shall not include closed-loop biomass or 
                biomass burned in conjunction with fossil fuel 
                (cofiring) beyond such fossil fuel required for startup 
                and flame stabilization.
                    ``(B) Agricultural livestock waste nutrients.--
                          ``(i) In general.--The term `agricultural 
                      livestock waste nutrients' means agricultural 
                      livestock manure and litter, including wood 
                      shavings, straw, rice hulls, and other bedding 
                      material for the disposition of manure.
                          ``(ii) Agricultural livestock.--The term 
                      `agricultural livestock' includes bovine, swine, 
                      poultry, and sheep.
            ``(4) Geothermal energy.--The term `geothermal energy' means 
        energy derived from a geothermal deposit (within the meaning of 
        section 613(e)(2)).
            ``(5) Small irrigation power.--The term `small irrigation 
        power' means power--
                    ``(A) generated without any dam or impoundment of 
                water through an irrigation system canal or ditch, and
                    ``(B) the nameplate capacity rating of which is not 
                less than 150 kilowatts but is less than 5 megawatts.
            ``(6) Municipal solid waste.--The term `municipal solid 
        waste' has the meaning given the term `solid waste' under 
        section 2(27) of the Solid Waste Disposal Act (42 U.S.C. 6903).
            ``(7) Refined coal.--
                    ``(A) In general.--The term `refined coal' means a 
                fuel which--
                          ``(i) is a liquid, gaseous, or solid synthetic 
                      fuel produced from coal (including lignite) or 
                      high carbon fly ash, including such fuel used as a 
                      feedstock,
                          ``(ii) is sold by the taxpayer with the 
                      reasonable expectation that it will be used for 
                      purpose of producing steam,
                          ``(iii) is certified by the taxpayer as 
                      resulting (when used in the production of steam) 
                      in a qualified emission reduction, and
                          ``(iv) is produced in such a manner as to 
                      result in an increase of at least 50 percent in 
                      the market value of the refined coal (excluding 
                      any increase caused by materials combined or added 
                      during the production process), as compared to the 
                      value of the feedstock coal.
                    ``(B) Qualified emission reduction.--The term 
                `qualified emission reduction' means a reduction of at 
                least 20 percent of the emissions of nitrogen oxide and 
                either sulfur dioxide or mercury released when burning 
                the refined coal (excluding any dilution caused by 
                materials combined or added during the production 
                process), as compared to the emissions released when 
                burning the feedstock coal or comparable coal 
                predominantly available in the marketplace as of January 
                1, 2003.''.

    (b) Expansion of Qualified Facilities.--

[[Page 118 STAT. 1554]]

            (1) In general.--Section 45 is amended by redesignating 
        subsection (d) as subsection (e) and by inserting after 
        subsection (c) the following new subsection:

    ``(d) Qualified Facilities.--For purposes of this section:
            ``(1) Wind facility.--In the case of a facility using wind 
        to produce electricity, the term `qualified facility' means any 
        facility owned by the taxpayer which is originally placed in 
        service after December 31, 1993, and before January 1, 2006.
            ``(2) Closed-loop biomass facility.--
                    ``(A) In general.--In the case of a facility using 
                closed-loop biomass to produce electricity, the term 
                `qualified facility' means any facility--
                          ``(i) owned by the taxpayer which is 
                      originally placed in service after December 31, 
                      1992, and before January 1, 2006, or
                          ``(ii) owned by the taxpayer which before 
                      January 1, 2006, is originally placed in service 
                      and modified to use closed-loop biomass to co-fire 
                      with coal, with other biomass, or with both, but 
                      only if the modification is approved under the 
                      Biomass Power for Rural Development Programs or is 
                      part of a pilot project of the Commodity Credit 
                      Corporation as described in 65 Fed. Reg. 63052.
                    ``(B) Special rules.--In the case of a qualified 
                facility described in subparagraph (A)(ii)--
                          ``(i) the 10-year period referred to in 
                      subsection (a) shall be treated as beginning no 
                      earlier than the date of the enactment of this 
                      clause,
                          ``(ii) the amount of the credit determined 
                      under subsection (a) with respect to the facility 
                      shall be an amount equal to the amount determined 
                      without regard to this clause multiplied by the 
                      ratio of the thermal content of the closed-loop 
                      biomass used in such facility to the thermal 
                      content of all fuels used in such facility, and
                          ``(iii) if the owner of such facility is not 
                      the producer of the electricity, the person 
                      eligible for the credit allowable under subsection 
                      (a) shall be the lessee or the operator of such 
                      facility.
            ``(3) Open-loop biomass facilities.--
                    ``(A) In general.--In the case of a facility using 
                open-loop biomass to produce electricity, the term 
                `qualified facility' means any facility owned by the 
                taxpayer which--
                          ``(i) in the case of a facility using 
                      agricultural livestock waste nutrients--
                                    ``(I) is originally placed in 
                                service after the date of the enactment 
                                of this subclause and before January 1, 
                                2006, and
                                    ``(II) the nameplate capacity rating 
                                of which is not less than 150 kilowatts, 
                                and
                          ``(ii) in the case of any other facility, is 
                      originally placed in service before January 1, 
                      2006.
                    ``(B) Credit eligibility.--In the case of any 
                facility described in subparagraph (A), if the owner of 
                such facility is not the producer of the electricity, 
                the person eligible for the credit allowable under 
                subsection (a) shall be the lessee or the operator of 
                such facility.

[[Page 118 STAT. 1555]]

            ``(4) Geothermal or solar energy facility.--In the case of a 
        facility using geothermal or solar energy to produce 
        electricity, the term `qualified facility' means any facility 
        owned by the taxpayer which is originally placed in service 
        after the date of the enactment of this paragraph and before 
        January 1, 2006. Such term shall not include any property 
        described in section 48(a)(3) the basis of which is taken into 
        account by the taxpayer for purposes of determining the energy 
        credit under section 48.
            ``(5) Small irrigation power facility.--In the case of a 
        facility using small irrigation power to produce electricity, 
        the term `qualified facility' means any facility owned by the 
        taxpayer which is originally placed in service after the date of 
        the enactment of this paragraph and before January 1, 2006.
            ``(6) Landfill gas facilities.--In the case of a facility 
        producing electricity from gas derived from the biodegradation 
        of municipal solid waste, the term `qualified facility' means 
        any facility owned by the taxpayer which is originally placed in 
        service after the date of the enactment of this paragraph and 
        before January 1, 2006.
            ``(7) Trash combustion facilities.--In the case of a 
        facility which burns municipal solid waste to produce 
        electricity, the term `qualified facility' means any facility 
        owned by the taxpayer which is originally placed in service 
        after the date of the enactment of this paragraph and before 
        January 1, 2006.
            ``(8) Refined coal production facility.--The term `refined 
        coal production facility' means a facility which is placed in 
        service after the date of the enactment of this paragraph and 
        before January 1, 2009.''.
            (2) Rules for refined coal production facilities.--
        Subsection (e) of section 45, as so redesignated, is amended by 
        adding at the end the following new paragraph:
            ``(8) Refined coal production facilities.--
                    ``(A) Determination of credit amount.--In the case 
                of a producer of refined coal, the credit determined 
                under this section (without regard to this paragraph) 
                for any taxable year shall be increased by an amount 
                equal to $4.375 per ton of qualified refined coal--
                          ``(i) produced by the taxpayer at a refined 
                      coal production facility during the 10-year period 
                      beginning on the date the facility was originally 
                      placed in service, and
                          ``(ii) sold by the taxpayer--
                                    ``(I) to an unrelated person, and
                                    ``(II) during such 10-year period 
                                and such taxable year.
                    ``(B) Phaseout of credit.--The amount of the 
                increase determined under subparagraph (A) shall be 
                reduced by an amount which bears the same ratio to the 
                amount of the increase (determined without regard to 
                this subparagraph) as--
                          ``(i) the amount by which the reference price 
                      of fuel used as a feedstock (within the meaning of 
                      subsection (c)(7)(A)) for the calendar year in 
                      which the sale occurs exceeds an amount equal to 
                      1.7 multiplied

[[Page 118 STAT. 1556]]

                      by the reference price for such fuel in 2002, 
                      bears to
                          ``(ii) $8.75.
                    ``(C) Application of rules.--Rules similar to the 
                rules of the subsection (b)(3) and paragraphs (1) 
                through (5) and (9) of this subsection shall apply for 
                purposes of determining the amount of any increase under 
                this paragraph.''.
            (3) Conforming amendments.--
                    (A) Section 45(e), as so redesignated, is amended by 
                striking ``subsection (c)(3)(A)'' in paragraph (7)(A)(i) 
                and inserting ``subsection (d)(1)''.
                    (B) The heading of section 45 and the item relating 
                to such section in the table of sections for subpart D 
                of part IV of subchapter A of chapter 1 are each amended 
                by inserting before the period at the end ``, etc''.
                    (C) Paragraph (2) of section 45(b) is amended by 
                striking ``The 1.5 cent amount'' and all that follows 
                through ``paragraph (1)'' and inserting ``The 1.5 cent 
                amount in subsection (a), the 8 cent amount in paragraph 
                (1), the $4.375 amount in subsection (e)(8)(A), and in 
                subsection (e)(8)(B)(i) the reference price of fuel used 
                as a feedstock (within the meaning of subsection 
                (c)(7)(A)) in 2002''.

    (c) Special Credit Rate and Period for Electricity Produced and Sold 
After Enactment Date.--Section 45(b) is amended by adding at the end the 
following new paragraph:
            ``(4) Credit rate and period for electricity produced and 
        sold from certain facilities.--
                    ``(A) Credit rate.--In the case of electricity 
                produced and sold in any calendar year after 2003 at any 
                qualified facility described in paragraph (3), (5), (6), 
                or (7) of subsection (d), the amount in effect under 
                subsection (a)(1) for such calendar year (determined 
                before the application of the last sentence of paragraph 
                (2) of this subsection) shall be reduced by one-half.
                    ``(B) Credit period.--
                          ``(i) In general.--Except as provided in 
                      clause (ii), in the case of any facility described 
                      in paragraph (3), (4), (5), (6), or (7) of 
                      subsection (d), the 5-year period beginning on the 
                      date the facility was originally placed in service 
                      shall be substituted for the 10-year period in 
                      subsection (a)(2)(A)(ii).
                          ``(ii) Certain open-loop biomass facilities.--
                      In the case of any facility described in 
                      subsection (d)(3)(A)(ii) placed in service before 
                      the date of the enactment of this paragraph, the 
                      5-year period beginning on the date of the 
                      enactment of this Act shall be substituted for the 
                      10-year period in subsection (a)(2)(A)(ii).''.

    (d) Coordination With Other Credits.--Section 45(e), as redesignated 
and amended by this section, is amended by inserting after paragraph (8) 
the following new paragraph:
            ``(9) Coordination with credit for producing fuel from a 
        nonconventional source.--The term `qualified facility' shall not 
        include any facility the production from which is allowed as a 
        credit under section 29 for the taxable year or any prior 
        taxable year.''.

[[Page 118 STAT. 1557]]

    (e) Coordination With Section 48.--Section 48(a)(3) (defining energy 
property) is amended by adding at the end the following new sentence: 
``Such term shall not include any property which is part of a facility 
the production from which is allowed as a credit under section 45 for 
the taxable year or any prior taxable year.''.
    (f) Elimination of Certain Credit Reductions.--Section 45(b)(3) 
(relating to credit reduced for grants, tax-exempt bonds, subsidized 
energy financing, and other credits) is amended--
            (1) by inserting ``the lesser of \1/2\ or'' before ``a 
        fraction'' in the matter preceding subparagraph (A), and
            (2) by adding at the end the following new sentence: ``This 
        paragraph shall not apply with respect to any facility described 
        in subsection (d)(2)(A)(ii).''.

    (g) Effective <<NOTE: 26 USC 45 note.>> Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        electricity produced and sold after the date of the enactment of 
        this Act, in taxable years ending after such date.
            (2) Certain biomass facilities.--With respect to any 
        facility described in section 45(d)(3)(A)(ii) of the Internal 
        Revenue Code of 1986, as added by subsection (b)(1), which is 
        placed in service before the date of the enactment of this Act, 
        the amendments made by this section shall apply to electricity 
        produced and sold after December 31, 2004, in taxable years 
        ending after such date.
            (3) Credit rate and period for new facilities.--The 
        amendments made by subsection (c) shall apply to electricity 
        produced and sold after December 31, 2004, in taxable years 
        ending after such date.
            (4) Nonapplication of amendments to preeffective date 
        poultry waste facilities.--The amendments made by this section 
        shall not apply with respect to any poultry waste facility 
        (within the meaning of section 45(c)(3)(C), as in effect on the 
        day before the date of the enactment of this Act) placed in 
        service before January 1, 2004.
            (5) Refined coal production facilities.--Section 45(e)(8) of 
        the Internal Revenue Code of 1986, as added by this section, 
        shall apply to refined coal produced and sold after the date of 
        the enactment of this Act.

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

    (a) In General.--Subsection (c) of section 38 (relating to 
limitation based on amount of tax) is amended by redesignating paragraph 
(4) as paragraph (5) and by inserting after paragraph (3) the following 
new paragraph:
            ``(4) Special rules for specified credits.--
                    ``(A) In general.--In the case of specified 
                credits--
                          ``(i) this section and section 39 shall be 
                      applied separately with respect to such credits, 
                      and
                          ``(ii) in applying paragraph (1) to such 
                      credits--
                                    ``(I) the tentative minimum tax 
                                shall be treated as being zero, and
                                    ``(II) the limitation under 
                                paragraph (1) (as modified by subclause 
                                (I)) shall be reduced by the

[[Page 118 STAT. 1558]]

                                credit allowed under subsection (a) for 
                                the taxable year (other than the 
                                specified credits).
                    ``(B) Specified credits.--For purposes of this 
                subsection, the term `specified credits' includes--
                          ``(i) for taxable years beginning after 
                      December 31, 2004, the credit determined under 
                      section 40,
                          ``(ii) the credit determined under section 45 
                      to the extent that such credit is attributable to 
                      electricity or refined coal produced--
                                    ``(I) at a facility which is 
                                originally placed in service after the 
                                date of the enactment of this paragraph, 
                                and
                                    ``(II) during the 4-year period 
                                beginning on the date that such facility 
                                was originally placed in service''.

    (b) Conforming Amendments.--Paragraph (2)(A)(ii)(II) and 
(3)(A)(ii)(II) of section 38(c) are each amended by inserting ``or the 
specified credits'' after ``employee credit''.
    (c) Effective Date.--Except <<NOTE: 26 USC 38 note.>> as otherwise 
provided, the amendments made by this section shall apply to taxable 
years ending after the date of the enactment of this Act.

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

    (a) Optional Medical Assistance.--
            (1) In general.--Section 1905 of the Social Security Act (42 
        U.S.C. 1396d) is amended--
                    (A) in subsection (a)--
                          (i) by striking ``and'' at the end of 
                      paragraph (26);
                          (ii) by redesignating paragraph (27) as 
                      paragraph (28); and
                          (iii) by inserting after paragraph (26), the 
                      following:
            ``(27) subject to subsection (x), primary and secondary 
        medical strategies and treatment and services for individuals 
        who have Sickle Cell Disease; and''; and
                    (B) by adding at the end the following:

    ``(x) For purposes of subsection (a)(27), the strategies, treatment, 
and services described in that subsection include the following:
            ``(1) Chronic blood transfusion (with deferoxamine 
        chelation) to prevent stroke in individuals with Sickle Cell 
        Disease who have been identified as being at high risk for 
        stroke.
            ``(2) Genetic counseling and testing for individuals with 
        Sickle Cell Disease or the sickle cell trait to allow health 
        care professionals to treat such individuals and to prevent 
        symptoms of Sickle Cell Disease.
            ``(3) Other treatment and services to prevent individuals 
        who have Sickle Cell Disease and who have had a stroke from 
        having another stroke.''.
            (2) Rule of construction.--Nothing <<NOTE: 42 USC 1396d 
        note.>> in subsections (a)(27) or (x) of section 1905 of the 
        Social Security Act (42 U.S.C. 1396d), as added by paragraph 
        (1), shall be construed as implying that a State medicaid 
        program under title XIX of such Act could not have treated, 
        prior to the date of enactment of this Act, any of the primary 
        and secondary medical strategies

[[Page 118 STAT. 1559]]

        and treatment and services described in such subsections as 
        medical assistance under such program, including as early and 
        periodic screening, diagnostic, and treatment services under 
        section 1905(r) of such Act.

    (b) Federal Reimbursement for Education and Other Services Related 
to the Prevention and Treatment of Sickle Cell Disease.--Section 
1903(a)(3) of the Social Security Act (42 U.S.C. 1396b(a)(3)) is 
amended--
            (1) in subparagraph (D), by striking ``plus'' at the end and 
        inserting ``and''; and
            (2) by adding at the end the following:
                    ``(E) 50 percent of the sums expended with respect 
                to costs incurred during such quarter as are 
                attributable to providing--
                          ``(i) services to identify and educate 
                      individuals who are likely to be eligible for 
                      medical assistance under this title and who have 
                      Sickle Cell Disease or who are carriers of the 
                      sickle cell gene, including education regarding 
                      how to identify such individuals; or
                          ``(ii) education regarding the risks of stroke 
                      and other complications, as well as the prevention 
                      of stroke and other complications, in individuals 
                      who are likely to be eligible for medical 
                      assistance under this title and who have Sickle 
                      Cell Disease; plus''.

    (c) Demonstration Program <<NOTE: 42 USC 300b-1 note.>> for the 
Development and Establishment of Systemic Mechanisms for the Prevention 
and Treatment of Sickle Cell Disease.--
            (1) Authority to conduct demonstration program.--
                    (A) In general.--The Administrator, through the 
                Bureau of Primary Health Care and the Maternal and Child 
                Health Bureau, shall conduct a demonstration program by 
                making grants to up to 40 eligible entities for each 
                fiscal year in which the program is conducted under this 
                section for the purpose of developing and establishing 
                systemic mechanisms to improve the prevention and 
                treatment of Sickle Cell Disease, including through--
                          (i) the coordination of service delivery for 
                      individuals with Sickle Cell Disease;
                          (ii) genetic counseling and testing;
                          (iii) bundling of technical services related 
                      to the prevention and treatment of Sickle Cell 
                      Disease;
                          (iv) training of health professionals; and
                          (v) identifying and establishing other efforts 
                      related to the expansion and coordination of 
                      education, treatment, and continuity of care 
                      programs for individuals with Sickle Cell Disease.
                    (B) Grant award requirements.--
                          (i) Geographic diversity.--The Administrator 
                      shall, to the extent practicable, award grants 
                      under this section to eligible entities located in 
                      different regions of the United States.
                          (ii) Priority.--In awarding grants under this 
                      subsection, the Administrator shall give priority 
                      to awarding grants to eligible entities that are--
                                    (I) Federally-qualified health 
                                centers that have a partnership or other 
                                arrangement with a comprehensive Sickle 
                                Cell Disease treatment center

[[Page 118 STAT. 1560]]

                                that does not receive funds from the 
                                National Institutes of Health; or
                                    (II) Federally-qualified health 
                                centers that intend to develop a 
                                partnership or other arrangement with a 
                                comprehensive Sickle Cell Disease 
                                treatment center that does not receive 
                                funds from the National Institutes of 
                                Health.
            (2) Additional requirements.--An eligible entity awarded a 
        grant under this subsection shall use funds made available under 
        the grant to carry out, in addition to the activities described 
        in paragraph (1)(A), the following activities:
                    (A) To facilitate and coordinate the delivery of 
                education, treatment, and continuity of care for 
                individuals with Sickle Cell Disease under--
                          (i) the entity's collaborative agreement with 
                      a community-based Sickle Cell Disease organization 
                      or a nonprofit entity that works with individuals 
                      who have Sickle Cell Disease;
                          (ii) the Sickle Cell Disease newborn screening 
                      program for the State in which the entity is 
                      located; and
                          (iii) the maternal and child health program 
                      under title V of the Social Security Act (42 
                      U.S.C. 701 et seq.) for the State in which the 
                      entity is located.
                    (B) To train nursing and other health staff who 
                provide care for individuals with Sickle Cell Disease.
                    (C) To enter into a partnership with adult or 
                pediatric hematologists in the region and other regional 
                experts in Sickle Cell Disease at tertiary and academic 
                health centers and State and county health offices.
                    (D) To identify and secure resources for ensuring 
                reimbursement under the medicaid program, State 
                children's health insurance program, and other health 
                programs for the prevention and treatment of Sickle Cell 
                Disease.
            (3) National coordinating center.--
                    (A) Establishment.--
                The <<NOTE: Contracts.>> Administrator shall enter into 
                a contract with an entity to serve as the National 
                Coordinating Center for the demonstration program 
                conducted under this subsection.
                    (B) Activities described.--The National Coordinating 
                Center shall--
                          (i) collect, coordinate, monitor, and 
                      distribute data, best practices, and findings 
                      regarding the activities funded under grants made 
                      to eligible entities under the demonstration 
                      program;
                          (ii) develop a model protocol for eligible 
                      entities with respect to the prevention and 
                      treatment of Sickle Cell Disease;
                          (iii) develop educational materials regarding 
                      the prevention and treatment of Sickle Cell 
                      Disease; and
                          (iv) prepare and submit to Congress a final 
                      report that includes recommendations regarding the 
                      effectiveness of the demonstration program 
                      conducted under this subsection and such direct 
                      outcome measures as--
                                    (I) the number and type of health 
                                care resources utilized (such as 
                                emergency room visits,

[[Page 118 STAT. 1561]]

                                hospital visits, length of stay, and 
                                physician visits for individuals with 
                                Sickle Cell Disease); and
                                    (II) the number of individuals that 
                                were tested and subsequently received 
                                genetic counseling for the sickle cell 
                                trait.
            (4) Application.--An eligible entity desiring a grant under 
        this subsection shall submit an application to the Administrator 
        at such time, in such manner, and containing such information as 
        the Administrator may require.
            (5) Definitions.--In this subsection:
                    (A) Administrator.--The term ``Administrator'' means 
                the Administrator of the Health Resources and Services 
                Administration.
                    (B) Eligible entity.--The term ``eligible entity'' 
                means a Federally-qualified health center, a nonprofit 
                hospital or clinic, or a university health center that 
                provides primary health care, that--
                          (i) has a collaborative agreement with a 
                      community-based Sickle Cell Disease organization 
                      or a nonprofit entity with experience in working 
                      with individuals who have Sickle Cell Disease; and
                          (ii) demonstrates to the Administrator that 
                      either the Federally-qualified health center, the 
                      nonprofit hospital or clinic, the university 
                      health center, the organization or entity 
                      described in clause (i), or the experts described 
                      in paragraph (2)(C), has at least 5 years of 
                      experience in working with individuals who have 
                      Sickle Cell Disease.
                    (C) Federally-qualified health center.--The term 
                ``Federally-qualified health center'' has the meaning 
                given that term in section 1905(l)(2)(B) of the Social 
                Security Act (42 U.S.C. 1396d(l)(2)(B)).
            (6) Authorization of appropriations.--There is authorized to 
        be appropriated to carry out this subsection, $10,000,000 for 
        each of fiscal years 2005 through 2009.

    (d) Effective Date.--The <<NOTE: 42 USC 1396b note.>> amendments 
made by subsections (a) and (b) take effect on the date of enactment of 
this Act and apply to medical assistance and services provided under 
title XIX of the Social Security Act (42 U.S.C. 1396 et seq.) on or 
after that date.

SEC. 713. CEILING FANS.

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

      

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

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

[[Page 118 STAT. 1562]]

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

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

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

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

                     TITLE VIII--REVENUE PROVISIONS

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

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

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

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

    ``(a) Tax on Inversion Gain of Expatriated Entities.--
            ``(1) In general.--The taxable income of an expatriated 
        entity for any taxable year which includes any portion of the 
        applicable period shall in no event be less than the inversion 
        gain of the entity for the taxable year.
            ``(2) Expatriated entity.--For purposes of this subsection--
                    ``(A) In general.--The term `expatriated entity' 
                means--
                          ``(i) the domestic corporation or partnership 
                      referred to in subparagraph (B)(i) with respect to 
                      which a foreign corporation is a surrogate foreign 
                      corporation, and
                          ``(ii) any United States person who is related 
                      (within the meaning of section 267(b) or 
                      707(b)(1)) to a domestic corporation or 
                      partnership described in clause (i).

[[Page 118 STAT. 1563]]

                    ``(B) Surrogate foreign corporation.--A foreign 
                corporation shall be treated as a surrogate foreign 
                corporation if, pursuant to a plan (or a series of 
                related transactions)--
                          ``(i) the entity completes after March 4, 
                      2003, the direct or indirect acquisition of 
                      substantially all of the properties held directly 
                      or indirectly by a domestic corporation or 
                      substantially all of the properties constituting a 
                      trade or business of a domestic partnership,
                          ``(ii) after the acquisition at least 60 
                      percent of the stock (by vote or value) of the 
                      entity is held--
                                    ``(I) in the case of an acquisition 
                                with respect to a domestic corporation, 
                                by former shareholders of the domestic 
                                corporation by reason of holding stock 
                                in the domestic corporation, or
                                    ``(II) in the case of an acquisition 
                                with respect to a domestic partnership, 
                                by former partners of the domestic 
                                partnership by reason of holding a 
                                capital or profits interest in the 
                                domestic partnership, and
                          ``(iii) after the acquisition the expanded 
                      affiliated group which includes the entity does 
                      not have substantial business activities in the 
                      foreign country in which, or under the law of 
                      which, the entity is created or organized, when 
                      compared to the total business activities of such 
                      expanded affiliated group.
                An entity otherwise described in clause (i) with respect 
                to any domestic corporation or partnership trade or 
                business shall be treated as not so described if, on or 
                before March 4, 2003, such entity acquired directly or 
                indirectly more than half of the properties held 
                directly or indirectly by such corporation or more than 
                half of the properties constituting such partnership 
                trade or business, as the case may be.
            ``(3) Coordination with subsection (b).--Paragraph (1) shall 
        not apply to any entity which is treated as a domestic 
        corporation under subsection (b).

    ``(b) Inverted Corporations Treated as Domestic Corporations.--
Notwithstanding section 7701(a)(4), a foreign corporation shall be 
treated for purposes of this title as a domestic corporation if such 
corporation would be a surrogate foreign corporation if subsection 
(a)(2) were applied by substituting `80 percent' for `60 percent'.
    ``(c) Definitions and Special Rules.--
            ``(1) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group as defined in 
        section 1504(a) but without regard to section 1504(b)(3), except 
        that section 1504(a) shall be applied by substituting `more than 
        50 percent' for `at least 80 percent' each place it appears.
            ``(2) Certain stock disregarded.--There shall not be taken 
        into account in determining ownership under subsection 
        (a)(2)(B)(ii)--
                    ``(A) stock held by members of the expanded 
                affiliated group which includes the foreign corporation, 
                or
                    ``(B) stock of such foreign corporation which is 
                sold in a public offering related to the acquisition 
                described in subsection (a)(2)(B)(i).

[[Page 118 STAT. 1564]]

            ``(3) Plan deemed in certain cases.--If a foreign 
        corporation acquires directly or indirectly substantially all of 
        the properties of a domestic corporation or partnership during 
        the 4-year period beginning on the date which is 2 years before 
        the ownership requirements of subsection (a)(2)(B)(ii) are met, 
        such actions shall be treated as pursuant to a plan.
            ``(4) Certain transfers disregarded.--The transfer of 
        properties or liabilities (including by contribution or 
        distribution) shall be disregarded if such transfers are part of 
        a plan a principal purpose of which is to avoid the purposes of 
        this section.
            ``(5) Special rule for related partnerships.--For purposes 
        of applying subsection (a)(2)(B)(ii) to the acquisition of a 
        trade or business of a domestic partnership, except as provided 
        in regulations, all partnerships which are under common control 
        (within the meaning of section 482) shall be treated as 1 
        partnership.
            ``(6) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to determine whether a 
        corporation is a surrogate foreign corporation, including 
        regulations--
                    ``(A) to treat warrants, options, contracts to 
                acquire stock, convertible debt interests, and other 
                similar interests as stock, and
                    ``(B) to treat stock as not stock.

    ``(d) Other Definitions.--For purposes of this section--
            ``(1) Applicable period.--The term `applicable period' means 
        the period--
                    ``(A) beginning on the first date properties are 
                acquired as part of the acquisition described in 
                subsection (a)(2)(B)(i), and
                    ``(B) ending on the date which is 10 years after the 
                last date properties are acquired as part of such 
                acquisition.
            ``(2) Inversion gain.--The term `inversion gain' means the 
        income or gain recognized by reason of the transfer during the 
        applicable period of stock or other properties by an expatriated 
        entity, and any income received or accrued during the applicable 
        period by reason of a license of any property by an expatriated 
        entity--
                    ``(A) as part of the acquisition described in 
                subsection (a)(2)(B)(i), or
                    ``(B) after such acquisition if the transfer or 
                license is to a foreign related person.
        Subparagraph (B) shall not apply to property described in 
        section 1221(a)(1) in the hands of the expatriated entity.
            ``(3) Foreign related person.--The term `foreign related 
        person' means, with respect to any expatriated entity, a foreign 
        person which--
                    ``(A) is related (within the meaning of section 
                267(b) or 707(b)(1)) to such entity, or
                    ``(B) is under the same common control (within the 
                meaning of section 482) as such entity.

    ``(e) Special Rules.--
            ``(1) Credits not allowed against tax on inversion gain.--
        Credits (other than the credit allowed by section 901) shall be 
        allowed against the tax imposed by this chapter on

[[Page 118 STAT. 1565]]

        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) <<NOTE: Applicability.>> 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 <<NOTE: Applicability.>> section 172 
        and minimum tax.--Rules similar to the rules of paragraphs (3) 
        and (4) of section 860E(a) shall apply for purposes of 
        subsection (a).
            ``(4) Statute of limitations.--
                    ``(A) In general.--The statutory period for the 
                assessment of any deficiency attributable to the 
                inversion gain of any taxpayer for any pre-inversion 
                year shall not expire before the expiration of 3 years 
                from the date the Secretary is notified by the taxpayer 
                (in such manner as the Secretary may prescribe) of the 
                acquisition described in subsection (a)(2)(B)(i) to 
                which such gain relates and such deficiency may be 
                assessed before the expiration of such 3-year period 
                notwithstanding the provisions of any other law or rule 
                of law which would otherwise prevent such assessment.
                    ``(B) Pre-inversion year.--For purposes of 
                subparagraph (A), the term `pre-inversion year' means 
                any taxable year if--
                          ``(i) any portion of the applicable period is 
                      included in such taxable year, and
                          ``(ii) such year ends before the taxable year 
                      in which the acquisition described in subsection 
                      (a)(2)(B)(i) is completed.

    ``(f) Special Rule for Treaties.--Nothing in section 894 or 7852(d) 
or in any other provision of law shall be construed as permitting an 
exemption, by reason of any treaty obligation of the United States 
heretofore or hereafter entered into, from the provisions of this 
section.
    ``(g) Regulations.--The Secretary shall provide such regulations as 
are necessary to carry out this section, including regulations providing 
for such adjustments to the application of this section

[[Page 118 STAT. 1566]]

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 <<NOTE: 26 USC 7874 note.>> amendments made 
by this section shall apply to taxable years ending after March 4, 2003.

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

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

        ``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES

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

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

    ``(a) Imposition of Tax.--In the case of an individual who is a 
disqualified individual with respect to any expatriated corporation, 
there is hereby imposed on such person a tax equal to--
            ``(1) the rate of tax specified in section 1(h)(1)(C), 
        multiplied by
            ``(2) the value (determined under subsection (b)) of the 
        specified stock compensation held (directly or indirectly) by or 
        for the benefit of such individual or a member of such 
        individual's family (as defined in section 267) at any time 
        during the 12-month period beginning on the date which is 6 
        months before the expatriation date.

    ``(b) Value.--For purposes of subsection (a)--
            ``(1) In general.--The value of specified stock compensation 
        shall be--
                    ``(A) in the case of a stock option (or other 
                similar right) or a stock appreciation right, the fair 
                value of such option or right, and
                    ``(B) in any other case, the fair market value of 
                such compensation.
            ``(2) Date for determining value.--The determination of 
        value shall be made--
                    ``(A) in the case of specified stock compensation 
                held on the expatriation date, on such date,
                    ``(B) in the case of such compensation which is 
                canceled during the 6 months before the expatriation 
                date, on the day before such cancellation, and
                    ``(C) in the case of such compensation which is 
                granted after the expatriation date, on the date such 
                compensation is granted.

[[Page 118 STAT. 1567]]

    ``(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 <<NOTE: Applicability.>> term `expanded affiliated group' 
        means an affiliated group (as defined in section 1504(a) without 
        regard to section 1504(b)(3)); except that section

[[Page 118 STAT. 1568]]

        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 <<NOTE: 26 USC 4985 note.>> 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

[[Page 118 STAT. 1569]]

in subsections (a) and (e)(1) of section 4985 of the Internal Revenue 
Code of 1986, as added by this section.

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

    (a) In General.--Section 845(a) (relating to allocation in case of 
reinsurance agreement involving tax avoidance or evasion) is amended by 
striking ``source and character'' and inserting ``amount, source, or 
character''.
    (b) Effective Date.--The <<NOTE: 26 USC 845 note.>> amendments made 
by this section shall apply to any risk reinsured after the date of the 
enactment of this Act.

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

    (a) Expatriation To Avoid Tax.--
            (1) In general.--Subsection (a) of section 877 (relating to 
        treatment of expatriates) is amended to read as follows:

    ``(a) Treatment of Expatriates.--
            ``(1) In general.--Every nonresident alien individual to 
        whom this section applies and who, within the 10-year period 
        immediately preceding the close of the taxable year, lost United 
        States citizenship shall be taxable for such taxable year in the 
        manner provided in subsection (b) if the tax imposed pursuant to 
        such subsection (after any reduction in such tax under the last 
        sentence of such subsection) exceeds the tax which, without 
        regard to this section, is imposed pursuant to section 871.
            ``(2) Individuals <<NOTE: Applicability.>> subject to this 
        section.--This section shall apply to any individual if--
                    ``(A) the average annual net income tax (as defined 
                in section 38(c)(1)) of such individual for the period 
                of 5 taxable years ending before the date of the loss of 
                United States citizenship is greater than $124,000,
                    ``(B) the net worth of the individual as of such 
                date is $2,000,000 or more, or
                    ``(C) such individual fails to certify under penalty 
                of perjury that he has met the requirements of this 
                title for the 5 preceding taxable years or fails to 
                submit such evidence of such compliance as the Secretary 
                may require.
        In the case of the loss of United States citizenship in any 
        calendar year after 2004, such $124,000 amount shall be 
        increased by an amount equal to such dollar amount multiplied by 
        the cost-of-living adjustment determined under section 1(f)(3) 
        for such calendar year by substituting `2003' for `1992' in 
        subparagraph (B) thereof. Any increase under the preceding 
        sentence shall be rounded to the nearest multiple of $1,000.''.
            (2) Revision of exceptions from alternative tax.--Subsection 
        (c) of section 877 (relating to tax avoidance not presumed in 
        certain cases) is amended to read as follows:

    ``(c) Exceptions.--
            ``(1) In general.--Subparagraphs (A) and (B) of subsection 
        (a)(2) shall not apply to an individual described in paragraph 
        (2) or (3).
            ``(2) Dual citizens.--
                    ``(A) In general.--An individual is described in 
                this paragraph if--
                          ``(i) the individual became at birth a citizen 
                      of the United States and a citizen of another 
                      country

[[Page 118 STAT. 1570]]

                      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.--

[[Page 118 STAT. 1571]]

            ``(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. <<NOTE: Applicability.>> 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

[[Page 118 STAT. 1572]]

                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) <<NOTE: Applicability.>> 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,

[[Page 118 STAT. 1573]]

            ``(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 <<NOTE: 26 USC 877 note.>> amendments made 
by this section shall apply to individuals who expatriate after June 3, 
2004.

SEC. 805. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

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

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

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

To the extent provided by the Secretary, the requirements of this 
section applicable to the acquiring corporation shall be applicable to 
the acquired corporation and not to the acquiring corporation.
    ``(b) Nominees.--According to the forms or regulations prescribed by 
the Secretary:
            ``(1) Reporting.--Any person who holds stock as a nominee 
        for another person shall furnish in the manner prescribed by the 
        Secretary to such other person the information provided by the 
        corporation under subsection (d).
            ``(2) Reporting to nominees.--In the case of stock held by 
        any person as a nominee, references in this section (other

[[Page 118 STAT. 1574]]

        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 <<NOTE: 26 USC 6043A note.>> amendments 
made by this section shall apply to acquisitions after the date of the 
enactment of this Act.

SEC. 806. <<NOTE: Deadlines. Reports.>> 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

[[Page 118 STAT. 1575]]

recommendations to address all abuses identified in the study. Not later 
than June 30, 2005, such Secretary or delegate shall submit to the 
Congress a report of such study.
    (b) Income Tax Treaties.--The Secretary of the Treasury or the 
Secretary's delegate shall conduct a study of United States income tax 
treaties to identify any inappropriate reductions in United States 
withholding tax that provide opportunities for shifting income out of 
the United States, and to evaluate whether existing anti-abuse 
mechanisms are operating properly. The study shall include specific 
recommendations to address all inappropriate uses of tax treaties. Not 
later than June 30, 2005, such Secretary or delegate shall submit to the 
Congress a report of such study.
    (c) Effectiveness of Corporate Expatriation Provisions.--The 
Secretary of the Treasury or the Secretary's delegate shall conduct a 
study of the effectiveness of the provisions of this title on corporate 
expatriation. The study shall include such recommendations as such 
Secretary or delegate may have to improve the effectiveness of such 
provisions in carrying out the purposes of this title. Not later than 
December 31, 2006, such Secretary or delegate shall submit to the 
Congress a report of such study.

             Subtitle B--Provisions Relating to Tax Shelters

                   Part I--Taxpayer-Related Provisions

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

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

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

    ``(a) Imposition of Penalty.--Any person who fails to include on any 
return or statement any information with respect to a reportable 
transaction which is required under section 6011 to be included with 
such return or statement shall pay a penalty in the amount determined 
under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        amount of the penalty under subsection (a) shall be--
                    ``(A) $10,000 in the case of a natural person, and
                    ``(B) $50,000 in any other case.
            ``(2) Listed transaction.--The amount of the penalty under 
        subsection (a) with respect to a listed transaction shall be--
                    ``(A) $100,000 in the case of a natural person, and
                    ``(B) $200,000 in any other case.

    ``(c) Definitions.--For purposes of this section:
            ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to which 
        information is required to be included with a return or 
        statement because, as determined under regulations prescribed 
        under section 6011, such transaction is of a type which the

[[Page 118 STAT. 1576]]

        Secretary determines as having a potential for tax avoidance or 
        evasion.
            ``(2) Listed transaction.--The term `listed transaction' 
        means a reportable transaction which is the same as, or 
        substantially similar to, a transaction specifically identified 
        by the Secretary as a tax avoidance transaction for purposes of 
        section 6011.

    ``(d) Authority To Rescind Penalty.--
            ``(1) In general.--The Commissioner of Internal Revenue may 
        rescind all or any portion of any penalty imposed by this 
        section with respect to any violation if--
                    ``(A) the violation is with respect to a reportable 
                transaction other than a listed transaction, and
                    ``(B) rescinding the penalty would promote 
                compliance with the requirements of this title and 
                effective tax administration.
            ``(2) No judicial appeal.--Notwithstanding any other 
        provision of law, any determination under this subsection may 
        not be reviewed in any judicial proceeding.
            ``(3) Records.--If a penalty is rescinded under paragraph 
        (1), the Commissioner shall place in the file in the Office of 
        the Commissioner the opinion of the Commissioner with respect to 
        the determination, including--
                    ``(A) a statement of the facts and circumstances 
                relating to the violation,
                    ``(B) the reasons for the rescission, and
                    ``(C) the amount of the penalty rescinded.

    ``(e) Penalty Reported to SEC.--In the case of a person--
            ``(1) which is required to file periodic reports under 
        section 13 or 15(d) of the Securities Exchange Act of 1934 or is 
        required to be consolidated with another person for purposes of 
        such reports, and
            ``(2) which--
                    ``(A) is required to pay a penalty under this 
                section with respect to a listed transaction,
                    ``(B) is required to pay a penalty under section 
                6662A with respect to any reportable transaction at a 
                rate prescribed under section 6662A(c), or
                    ``(C) is required to pay a penalty under section 
                6662(h) with respect to any reportable transaction and 
                would (but for section 6662A(e)(2)(C)) have been subject 
                to penalty under section 6662A at a rate prescribed 
                under section 6662A(c),

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

[[Page 118 STAT. 1577]]

    (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 <<NOTE: 26 USC 6707A note.>> 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 <<NOTE: 26 USC 6707A note.>> Commissioner of 
Internal Revenue shall annually report to the Committee on Ways and 
Means of the House of Representatives and the Committee on Finance of 
the Senate--
            (1) a summary of the total number and aggregate amount of 
        penalties imposed, and rescinded, under section 6707A of the 
        Internal Revenue Code of 1986, and
            (2) a description of each penalty rescinded under section 
        6707(c) of such Code and the reasons therefor.

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

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

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

    ``(a) Imposition of Penalty.--If a taxpayer has a reportable 
transaction understatement for any taxable year, there shall be added to 
the tax an amount equal to 20 percent of the amount of such 
understatement.
    ``(b) Reportable Transaction Understatement.--For purposes of this 
section--
            ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                    ``(A) the product of--
                          ``(i) the amount of the increase (if any) in 
                      taxable income which results from a difference 
                      between the proper tax treatment of an item to 
                      which this section applies and the taxpayer's 
                      treatment of such item (as shown on the taxpayer's 
                      return of tax), and
                          ``(ii) the highest rate of tax imposed by 
                      section 1 (section 11 in the case of a taxpayer 
                      which is a corporation), and
                    ``(B) the amount of the decrease (if any) in the 
                aggregate amount of credits determined under subtitle A 
                which results from a difference between the taxpayer's 
                treatment of an item to which this section applies (as 
                shown on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of the excess of 
        deductions allowed for the taxable year over gross income for 
        such year, and any reduction in the amount of capital losses 
        which would (without regard to section 1211) be allowed for such 
        year, shall be treated as an increase in taxable income.
            ``(2) Items to which section applies.--This section shall 
        apply to any item which is attributable to--

[[Page 118 STAT. 1578]]

                    ``(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 <<NOTE: Applicability.>> Nondisclosed 
Listed and Other Avoidance Transactions.--Subsection (a) shall be 
applied by substituting `30 percent' for `20 percent' with respect to 
the portion of any reportable transaction understatement with respect to 
which the requirement of section 6664(d)(2)(A) is not met.

    ``(d) Definitions of Reportable and Listed Transactions.--For 
purposes of this section, the terms `reportable transaction' and `listed 
transaction' have the respective meanings given to such terms by section 
6707A(c).
    ``(e) Special Rules.--
            ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as defined 
        in section 6662(d)(2))--
                    ``(A) the amount of such understatement (determined 
                without regard to this paragraph) shall be increased by 
                the aggregate amount of reportable transaction 
                understatements for purposes of determining whether such 
                understatement is a substantial understatement under 
                section 6662(d)(1), and
                    ``(B) the <<NOTE: Applicability.>> addition to tax 
                under section 6662(a) shall apply only to the excess of 
                the amount of the substantial understatement (if any) 
                after the application of subparagraph (A) over the 
                aggregate amount of reportable transaction 
                understatements.
            ``(2) Coordination with other penalties.--
                    ``(A) Application of fraud penalty.--References to 
                an underpayment in section 6663 shall be treated as 
                including references to a reportable transaction 
                understatement.
                    ``(B) No double penalty.--This section shall not 
                apply to any portion of an understatement on which a 
                penalty is imposed under section 6663.
                    ``(C) Coordination with valuation penalties.--
                          ``(i) Section 6662(e).--Section 6662(e) shall 
                      not apply to any portion of an understatement on 
                      which a penalty is imposed under this section.
                          ``(ii) Section 6662(h).--This section shall 
                      not apply to any portion of an understatement on 
                      which a penalty is imposed under section 6662(h).
            ``(3) Special rule for amended returns.--Except as provided 
        in regulations, in no event shall any tax treatment included 
        with an amendment or supplement to a return of tax be taken into 
        account in determining the amount of any reportable transaction 
        understatement if the amendment or supplement is filed after the 
        earlier of the date the taxpayer is first contacted by the 
        Secretary regarding the examination of the return or such other 
        date as is specified by the Secretary.''.

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

[[Page 118 STAT. 1579]]

                ``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,

[[Page 118 STAT. 1580]]

                                    ``(III) has a fee arrangement with 
                                respect to the transaction which is 
                                contingent on all or part of the 
                                intended tax benefits from the 
                                transaction being sustained, or
                                    ``(IV) as determined under 
                                regulations prescribed by the Secretary, 
                                has a disqualifying financial interest 
                                with respect to the transaction.
                          ``(iii) Disqualified opinions.--For purposes 
                      of clause (i), an opinion is disqualified if the 
                      opinion--
                                    ``(I) is based on unreasonable 
                                factual or legal assumptions (including 
                                assumptions as to future events),
                                    ``(II) unreasonably relies on 
                                representations, statements, findings, 
                                or agreements of the taxpayer or any 
                                other person,
                                    ``(III) does not identify and 
                                consider all relevant facts, or
                                    ``(IV) fails to meet any other 
                                requirement as the Secretary may 
                                prescribe.''.
            (2) Conforming amendments.--
                    (A) Paragraph (1) of section 6664(c) is amended by 
                striking ``this part'' and inserting ``section 6662 or 
                6663''.
                    (B) The heading for subsection (c) of section 6664 
                is amended by inserting ``for Underpayments'' after 
                ``Exception''.

    (d) Reduction in Penalty for Substantial Understatement of Income 
Tax Not To Apply to Tax Shelters.--Subparagraph (C) of section 
6662(d)(2) (relating to substantial understatement of income tax) is 
amended to read as follows:
                    ``(C) Reduction not to apply to tax shelters.--
                          ``(i) In general.--Subparagraph (B) shall not 
                      apply to any item attributable to a tax shelter.
                          ``(ii) Tax shelter.--For purposes of clause 
                      (i), the term `tax shelter' means--
                                    ``(I) a partnership or other entity,
                                    ``(II) any investment plan or 
                                arrangement, or
                                    ``(III) any other plan or 
                                arrangement,
                      if a significant purpose of such partnership, 
                      entity, plan, or arrangement is the avoidance or 
                      evasion of Federal income tax.''.

    (e) Clerical Amendments.--
            (1) The heading for section 6662 is amended to read as 
        follows:

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

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

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

    (f) Effective Date.--The <<NOTE: 26 USC 6662 note.>> amendments made 
by this section shall apply to taxable years ending after the date of 
the enactment of this Act.

[[Page 118 STAT. 1581]]

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 7525 note.>> amendment made 
by this section shall apply to communications made on or after the date 
of the enactment of this Act.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 6501 note.>> amendment made 
by this section shall apply to taxable years with respect to which the 
period for assessing a deficiency did not expire before the date of the 
enactment of this Act.

SEC. 815. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

Such return shall be filed not later than the date specified by the 
Secretary.

[[Page 118 STAT. 1582]]

    ``(b) Definitions.--For purposes of this section:
            ``(1) Material advisor.--
                    ``(A) In general.--The term `material advisor' means 
                any person--
                          ``(i) who provides any material aid, 
                      assistance, or advice with respect to organizing, 
                      managing, promoting, selling, implementing, 
                      insuring, or carrying out any reportable 
                      transaction, and
                          ``(ii) who directly or indirectly derives 
                      gross income in excess of the threshold amount (or 
                      such other amount as may be prescribed by the 
                      Secretary) for such advice or assistance.
                    ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the threshold amount is--
                          ``(i) $50,000 in the case of a reportable 
                      transaction substantially all of the tax benefits 
                      from which are provided to natural persons, and
                          ``(ii) $250,000 in any other case.
            ``(2) Reportable transaction.--The term `reportable 
        transaction' has the meaning given to such term by section 
        6707A(c).

    ``(c) Regulations.--The Secretary may prescribe regulations which 
provide--
            ``(1) that only 1 person shall be required to meet the 
        requirements of subsection (a) in cases in which 2 or more 
        persons would otherwise be required to meet such requirements,
            ``(2) exemptions from the requirements of this section, and
            ``(3) such rules as may be necessary or appropriate to carry 
        out the purposes of this section.''.

    (b) Conforming Amendments.--(1) The item relating to section 6111 in 
the table of sections for subchapter B of chapter 61 is amended to read 
as follows:

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

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

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

    ``(a) In General.--Each material advisor (as defined in section 
6111) with respect to any reportable transaction (as defined in section 
6707A(c)) shall (whether or not required to file a return under section 
6111 with respect to such transaction) maintain (in such manner as the 
Secretary may by regulations prescribe) a list--
            ``(1) identifying each person with respect to whom such 
        advisor acted as a material advisor with respect to such 
        transaction, and
            ``(2) containing such other information as the Secretary may 
        by regulations require.''.

    (3) Section 6112 is amended--
            (A) by redesignating subsection (c) as subsection (b),
            (B) by inserting ``written'' before ``request'' in 
        subsection (b)(1) (as so redesignated), and
            (C) by striking ``shall prescribe'' in subsection (b)(2) (as 
        so redesignated) and inserting ``may prescribe''.

[[Page 118 STAT. 1583]]

    (4) The item relating to section 6112 in the table of sections for 
subchapter B of chapter 61 is amended to read as follows:

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

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

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

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

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

    (c) Effective Date.--The <<NOTE: 26 USC 6111 note.>> amendments made 
by this section shall apply to transactions with respect to which 
material aid, assistance, or advice referred to in section 
6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 (as added by this 
section) is provided after the date of the enactment of this Act.

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

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

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

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

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

[[Page 118 STAT. 1584]]

    (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 <<NOTE: 26 USC 6707 note.>> amendments made 
by this section shall apply to returns the due date for which is after 
the date of the enactment of this Act.

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

    (a) In General.--Subsection (a) of section 6708 is amended to read 
as follows:
    ``(a) Imposition of Penalty.--
            ``(1) In general.--If <<NOTE: Deadline.>> 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 <<NOTE: 26 USC 6708 note.>> amendment made 
by this section shall apply to requests made after the date of the 
enactment of this Act.

SEC. 818. PENALTY ON PROMOTERS OF TAX SHELTERS.

    (a) Penalty on Promoting Abusive Tax Shelters.--Section 6700(a) is 
amended by adding at the end the following new sentence: 
``Notwithstanding the first sentence, if an activity with respect to 
which a penalty imposed under this subsection involves a statement 
described in paragraph (2)(A), the amount of the penalty shall be equal 
to 50 percent of the gross income derived (or to be derived) from such 
activity by the person on which the penalty is imposed.''.
    (b) Effective Date.--The <<NOTE: 26 USC 6700 note.>> amendment made 
by this section shall apply to activities after the date of the 
enactment of this Act.

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

    (a) Substantial Understatement of Corporations.--Section 
6662(d)(1)(B) (relating to special rule for corporations) is amended to 
read as follows:
                    ``(B) Special rule for corporations.--In the case of 
                a corporation other than an S corporation or a personal 
                holding company (as defined in section 542), there is a 
                substantial understatement of income tax for any taxable 
                year if the amount of the understatement for the taxable 
                year exceeds the lesser of--
                          ``(i) 10 percent of the tax required to be 
                      shown on the return for the taxable year (or, if 
                      greater, $10,000), or
                          ``(ii) $10,000,000.''.

    (b) Secretarial List.--
            (1) In general.--Section 6662(d) is amended by adding at the 
        end the following new paragraph:

[[Page 118 STAT. 1585]]

            ``(3) Secretarial list.--The Secretary may prescribe a list 
        of positions which the Secretary believes do not meet the 1 or 
        more of the standards specified in paragraph (2)(B)(i), section 
        6664(d)(2), and section 6694(a)(1). Such <<NOTE: Federal 
        Register, publication.>> list (and any revisions thereof) shall 
        be published in the Federal Register or the Internal Revenue 
        Bulletin.''.
            (2) Conforming amendment.--Paragraph (2) of section 6662(d) 
        is amended by striking subparagraph (D).

    (c) Effective Date.--The <<NOTE: 26 USC 6662 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

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

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

the court may enjoin such person from engaging in such conduct or in any 
other activity subject to penalty under this title.
    ``(c) Specified Conduct.--For purposes of this section, the term 
`specified conduct' means any action, or failure to take action, which 
is--
            ``(1) subject to penalty under section 6700, 6701, 6707, or 
        6708, or
            ``(2) in violation of any requirement under regulations 
        issued under section 330 of title 31, United States Code.''.

    (b) Conforming Amendments.--(1) The heading for section 7408 is 
amended to read as follows:

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

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

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

    (c) Effective Date.--The <<NOTE: 26 USC 7408 note.>> amendment made 
by this section shall take effect on the day after the date of the 
enactment of this Act.

[[Page 118 STAT. 1586]]

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

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

    (b) Effective Date.--The <<NOTE: 31 USC 5321 note.>> amendment made 
by this section shall apply to violations occurring after the date of 
the enactment of this Act.

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

[[Page 118 STAT. 1587]]

or entity if it knew, or reasonably should have known, of such conduct. 
Such penalty shall not exceed the gross income derived (or to be 
derived) from the conduct giving rise to the penalty and may be in 
addition to, or in lieu of, any suspension, disbarment, or censure of 
the representative.''.
            (2) Effective date.--The <<NOTE: 31 USC 330 
        note.>> amendments made by this subsection shall apply to 
        actions taken after the date of the enactment of this Act.

    (b) Tax Shelter Opinions, Etc.--Section 330 of such title 31 is 
amended by adding at the end the following new subsection:
    ``(d) Nothing in this section or in any other provision of law shall 
be construed to limit the authority of the Secretary of the Treasury to 
impose standards applicable to the rendering of written advice with 
respect to any entity, transaction plan or arrangement, or other plan or 
arrangement, which is of a type which the Secretary determines as having 
a potential for tax avoidance or evasion.''.

                        Part II--Other Provisions

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

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

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

    (c) Effective Date.--The <<NOTE: 26 USC 305 note.>> amendments made 
by this section shall apply to purchases and dispositions after the date 
of the enactment of this Act.

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

    (a) In General.--Section 901 is amended by redesignating subsection 
(l) as subsection (m) and by inserting after subsection (k) the 
following new subsection:
    ``(l) Minimum Holding Period for Withholding Taxes on Gain and 
Income Other Than Dividends Etc.--
            ``(1) In general.--In no event shall a credit be allowed 
        under subsection (a) for any withholding tax (as defined in 
        subsection (k)) on any item of income or gain with respect to 
        any property if--
                    ``(A) such property is held by the recipient of the 
                item for 15 days or less during the 31-day period 
                beginning

[[Page 118 STAT. 1588]]

                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 <<NOTE: 26 USC 901 note.>> amendments made 
by this section shall apply to amounts paid or accrued more than 30 days 
after the date of the enactment of this Act.

[[Page 118 STAT. 1589]]

SEC. 833. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

    (a) Treatment of Contributed Property With Built-In Loss.--Paragraph 
(1) of section 704(c) is amended by striking ``and'' at the end of 
subparagraph (A), by striking the period at the end of subparagraph (B) 
and inserting ``, and'', and by adding at the end the following:
                    ``(C) if any property so contributed has a built-in 
                loss--
                          ``(i) such built-in loss shall be taken into 
                      account only in determining the amount of items 
                      allocated to the contributing partner, and
                          ``(ii) except as provided in regulations, in 
                      determining the amount of items allocated to other 
                      partners, the basis of the contributed property in 
                      the hands of the partnership shall be treated as 
                      being equal to its fair market value at the time 
                      of contribution.
        For purposes of subparagraph (C), the term `built-in loss' means 
        the excess of the adjusted basis of the property (determined 
        without regard to subparagraph (C)(ii)) over its fair market 
        value at the time of contribution.''.

    (b) Special Rules for Transfers of Partnership Interest if There Is 
Substantial Built-In Loss.--
            (1) Adjustment of partnership basis required.--Subsection 
        (a) of section 743 (relating to optional adjustment to basis of 
        partnership property) is amended by inserting before the period 
        ``or unless the partnership has a substantial built-in loss 
        immediately after such transfer''.
            (2) Adjustment.--Subsection (b) of section 743 is amended by 
        inserting ``or which has a substantial built-in loss immediately 
        after such transfer'' after ``section 754 is in effect''.
            (3) Substantial built-in loss.--Section 743 is amended by 
        adding at the end the following new subsection:

    ``(d) Substantial Built-In Loss.--
            ``(1) In general.--For purposes of this section, a 
        partnership has a substantial built-in loss with respect to a 
        transfer of an interest in a partnership if the partnership's 
        adjusted basis in the partnership property exceeds by more than 
        $250,000 the fair market value of such property.
            ``(2) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        paragraph (1) and section 734(d), including regulations 
        aggregating related partnerships and disregarding property 
        acquired by the partnership in an attempt to avoid such 
        purposes.''.
            (4) Alternative rules for electing investment 
        partnerships.--
                    (A) In general.--Section 743 is amended by adding 
                after subsection (d) the following new subsection:

    ``(e) Alternative Rules for Electing Investment Partnerships.--
            ``(1) No adjustment of partnership basis.--For purposes of 
        this section, an electing investment partnership shall not be 
        treated as having a substantial built-in loss with respect to 
        any transfer occurring while the election under paragraph (6)(A) 
        is in effect.

[[Page 118 STAT. 1590]]

            ``(2) Loss deferral for transferee partner.--In the case of 
        a transfer of an interest in an electing investment partnership, 
        the transferee partner's distributive share of losses (without 
        regard to gains) from the sale or exchange of partnership 
        property shall not be allowed except to the extent that it is 
        established that such losses exceed the loss (if any) recognized 
        by the transferor (or any prior transferor to the extent not 
        fully offset by a prior disallowance under this paragraph) on 
        the transfer of the partnership interest.
            ``(3) No reduction in partnership basis.--Losses disallowed 
        under paragraph (2) shall not decrease the transferee partner's 
        basis in the partnership interest.
            ``(4) Effect of <<NOTE: Applicability.>> termination of 
        partnership.--This subsection shall be applied without regard to 
        any termination of a partnership under section 708(b)(1)(B).
            ``(5) Certain basis reductions treated as losses.--In the 
        case of a transferee partner whose basis in property distributed 
        by the partnership is reduced under section 732(a)(2), the 
        amount of the loss recognized by the transferor on the transfer 
        of the partnership interest which is taken into account under 
        paragraph (2) shall be reduced by the amount of such basis 
        reduction.
            ``(6) Electing investment partnership.--For purposes of this 
        subsection, the term `electing investment partnership' means any 
        partnership if--
                    ``(A) the partnership makes an election to have this 
                subsection apply,
                    ``(B) the partnership would be an investment company 
                under section 3(a)(1)(A) of the Investment Company Act 
                of 1940 but for an exemption under paragraph (1) or (7) 
                of section 3(c) of such Act,
                    ``(C) such partnership has never been engaged in a 
                trade or business,
                    ``(D) substantially all of the assets of such 
                partnership are held for investment,
                    ``(E) at least 95 percent of the assets contributed 
                to such partnership consist of money,
                    ``(F) no assets contributed to such partnership had 
                an adjusted basis in excess of fair market value at the 
                time of contribution,
                    ``(G) all partnership interests of such partnership 
                are issued by such partnership pursuant to a private 
                offering before the date which is 24 months after the 
                date of the first capital contribution to such 
                partnership,
                    ``(H) the partnership agreement of such partnership 
                has substantive restrictions on each partner's ability 
                to cause a redemption of the partner's interest, and
                    ``(I) the partnership agreement of such partnership 
                provides for a term that is not in excess of 15 years.
        The election described in subparagraph (A), once made, shall be 
        irrevocable except with the consent of the Secretary.
            ``(7) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        this subsection, including regulations for applying this 
        subsection to tiered partnerships.''.
                    (B) Information reporting.--Section 6031 is amended 
                by adding at the end the following new subsection:

[[Page 118 STAT. 1591]]

    ``(f) Electing Investment Partnerships.--In the case of any electing 
investment partnership (as defined in section 743(e)(6)), the 
information required under subsection (b) to be furnished to any partner 
to whom section 743(e)(2) applies shall include such information as is 
necessary to enable the partner to compute the amount of losses 
disallowed under section 743(e).''.
            (5) Special rule for securitization partnerships.--Section 
        743 is amended by adding after subsection (e) the following new 
        subsection:

    ``(f) Exception for Securitization Partnerships.--
            ``(1) No adjustment of partnership basis.--For purposes of 
        this section, a securitization partnership shall not be treated 
        as having a substantial built-in loss with respect to any 
        transfer.
            ``(2) Securitization partnership.--For purposes of paragraph 
        (1), the term `securitization partnership' means any partnership 
        the sole business activity of which is to issue securities which 
        provide for a fixed principal (or similar) amount and which are 
        primarily serviced by the cash flows of a discrete pool (either 
        fixed or revolving) of receivables or other financial assets 
        that by their terms convert into cash in a finite period, but 
        only if the sponsor of the pool reasonably believes that the 
        receivables and other financial assets comprising the pool are 
        not acquired so as to be disposed of.''.
            (6) Clerical amendments.--(A) The section heading for 
        section 743 is amended to read as follows:

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

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

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

    (c) Adjustment to Basis of Undistributed Partnership Property if 
There Is Substantial Basis Reduction.--
            (1) Adjustment required.--Subsection (a) of section 734 
        (relating to optional adjustment to basis of undistributed 
        partnership property) is amended by inserting before the period 
        the following: ``or unless there is a substantial basis 
        reduction''.
            (2) Adjustment.--Subsection (b) of section 734 is amended by 
        inserting ``or unless there is a substantial basis reduction'' 
        after ``section 754 is in effect''.
            (3) Substantial basis reduction.--Section 734 is amended by 
        adding at the end the following new subsection:

    ``(d) Substantial Basis Reduction.--
            ``(1) In general.--For purposes of this section, there is a 
        substantial basis reduction with respect to a distribution if 
        the sum of the amounts described in subparagraphs (A) and (B) of 
        subsection (b)(2) exceeds $250,000.
            ``(2) Regulations.--

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

            (4) Exception for securitization partnerships.--Section 734 
        is amended by inserting after subsection (d) the following new 
        subsection:

[[Page 118 STAT. 1592]]

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

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

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

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

    (d) Effective Dates.--
            (1) Subsection (a).--The <<NOTE: 26 USC 704 
        note.>> amendment made by subsection (a) shall apply to 
        contributions made after the date of the enactment of this Act.
            (2) Subsection <<NOTE: 26 USC 743 note.>> (b).--
                    (A) In general.--Except as provided in subparagraph 
                (B), the amendments made by subsection (b) shall apply 
                to transfers after the date of the enactment of this 
                Act.
                    (B) Transition rule.--In the case of an electing 
                investment partnership which is in existence on June 4, 
                2004, section 743(e)(6)(H) of the Internal Revenue Code 
                of 1986, as added by this section, shall not apply to 
                such partnership and section 743(e)(6)(I) of such Code, 
                as so added, shall be applied by substituting ``20 
                years'' for ``15 years''.
            (3) Subsection (c).--The <<NOTE: 26 USC 734 
        note.>> amendments made by subsection (c) shall apply to 
        distributions after the date of the enactment of this Act.

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

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

Gain shall be recognized to the partnership to the extent that the 
amount required to be allocated under paragraph (2) to other partnership 
property exceeds the aggregate adjusted basis of such other property 
immediately before the allocation required by paragraph (2).''.
    (b) Effective Date.--The <<NOTE: 26 USC 755 note.>> amendment made 
by this section shall apply to distributions after the date of the 
enactment of this Act.

[[Page 118 STAT. 1593]]

SEC. 835. REPEAL OF SPECIAL RULES FOR FASITS.

    (a) In General.--Part V of <<NOTE: 26 USC 860H-860L.>> subchapter M 
of chapter 1 (relating to financial asset securitization investment 
trusts) is hereby repealed.

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

[[Page 118 STAT. 1594]]

                                    ``(III) is purchased by the REMIC 
                                pursuant to a fixed price contract in 
                                effect on the startup day.''.
            (B) Section 860G(a)(7)(B) is amended to read as follows:
                    ``(B) Qualified reserve fund.--For purposes of 
                subparagraph (A), the term `qualified reserve fund' 
                means any reasonably required reserve to--
                          ``(i) provide for full payment of expenses of 
                      the REMIC or amounts due on regular interests in 
                      the event of defaults on qualified mortgages or 
                      lower than expected returns on cash flow 
                      investments, or
                          ``(ii) provide a source of funds for the 
                      purchase of obligations described in clause (ii) 
                      or (iii) of paragraph (3)(A).
                The aggregate fair market value of the assets held in 
                any such reserve shall not exceed 50 percent of the 
                aggregate fair market value of all of the assets of the 
                REMIC on the startup day, and the amount of any such 
                reserve shall be promptly and appropriately reduced to 
                the extent the amount held in such reserve is no longer 
                reasonably required for purposes specified in clause (i) 
                or (ii) of this subparagraph.''.
            (9) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (10) Clause (xi) of section 7701(a)(19)(C) is amended--
                    (A) by striking ``and any regular interest in a 
                FASIT,'', and
                    (B) by striking ``or FASIT'' each place it appears.
            (11) Subparagraph (A) of section 7701(i)(2) is amended by 
        striking ``or a FASIT''.
            (12) The table of parts for subchapter M of chapter 1 is 
        amended by striking the item relating to part V.

    (c) Effective <<NOTE: 26 USC 56 note.>> Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall take effect on January 1, 
        2005.
            (2) Exception for existing fasits.--Paragraph (1) shall not 
        apply to any FASIT in existence on the date of the enactment of 
        this Act to the extent that regular interests issued by the 
        FASIT before such date continue to remain outstanding in 
        accordance with the original terms of issuance.

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

    (a) In General.--Section 362 (relating to basis to corporations) is 
amended by adding at the end the following new subsection:
    ``(e) Limitations on Built-In Losses.--
            ``(1) Limitation on importation of built-in losses.--
                    ``(A) In general.--If in any transaction described 
                in subsection (a) or (b) there would (but for this 
                subsection) be an importation of a net built-in loss, 
                the basis of each property described in subparagraph (B) 
                which is acquired in such transaction shall 
                (notwithstanding subsections (a) and (b)) be its fair 
                market value immediately after such transaction.
                    ``(B) Property described.--For purposes of 
                subparagraph (A), property is described in this 
                subparagraph if--

[[Page 118 STAT. 1595]]

                          ``(i) gain or loss with respect to such 
                      property is not subject to tax under this subtitle 
                      in the hands of the transferor immediately before 
                      the transfer, and
                          ``(ii) gain or loss with respect to such 
                      property is subject to such tax in the hands of 
                      the transferee immediately after such transfer.
                In any case in which the transferor is a partnership, 
                the preceding sentence shall be applied by treating each 
                partner in such partnership as holding such partner's 
                proportionate share of the property of such partnership.
                    ``(C) Importation of net built-in loss.--For 
                purposes of subparagraph (A), there is an importation of 
                a net built-in loss in a transaction if the transferee's 
                aggregate adjusted bases of property described in 
                subparagraph (B) which is transferred in such 
                transaction would (but for this paragraph) exceed the 
                fair market value of such property immediately after 
                such transaction.
            ``(2) Limitation on transfer of built-in losses in section 
        351 transactions.--
                    ``(A) In general.--If--
                          ``(i) property is transferred by a transferor 
                      in any transaction which is described in 
                      subsection (a) and which is not described in 
                      paragraph (1) of this subsection, and
                          ``(ii) the transferee's aggregate adjusted 
                      bases of such property so transferred would (but 
                      for this paragraph) exceed the fair market value 
                      of such property immediately after such 
                      transaction,
                then, notwithstanding subsection (a), the transferee's 
                aggregate adjusted bases of the property so transferred 
                shall not exceed the fair market value of such property 
                immediately after such transaction.
                    ``(B) Allocation of basis reduction.--The aggregate 
                reduction in basis by reason of subparagraph (A) shall 
                be allocated among the property so transferred in 
                proportion to their respective built-in losses 
                immediately before the transaction.
                    ``(C) Election to apply limitation to transferor's 
                stock basis.--
                          ``(i) In general.--If the transferor and 
                      transferee of a transaction described in 
                      subparagraph (A) both elect the application of 
                      this subparagraph--
                                    ``(I) subparagraph (A) shall not 
                                apply, and
                                    ``(II) the transferor's basis in the 
                                stock received for property to which 
                                subparagraph (A) does not apply by 
                                reason of the election shall not exceed 
                                its fair market value immediately after 
                                the transfer.
                          ``(ii) Election.--An election under clause (i) 
                      shall be included with the return of tax for the 
                      taxable year in which the transaction occurred, 
                      shall be in such form and manner as the Secretary 
                      may prescribe, and, once made, shall be 
                      irrevocable.''.

    (b) Comparable Treatment Where Liquidation.--Paragraph (1) of 
section 334(b) (relating to liquidation of subsidiary) is amended to 
read as follows:

[[Page 118 STAT. 1596]]

            ``(1) In general.--If property is received by a corporate 
        distributee in a distribution in a complete liquidation to which 
        section 332 applies (or in a transfer described in section 
        337(b)(1)), the basis of such property in the hands of such 
        distributee shall be the same as it would be in the hands of the 
        transferor; except that the basis of such property in the hands 
        of such distributee shall be the fair market value of the 
        property at the time of the distribution--
                    ``(A) in any case in which gain or loss is 
                recognized by the liquidating corporation with respect 
                to such property, or
                    ``(B) in any case in which the liquidating 
                corporation is a foreign corporation, the corporate 
                distributee is a domestic corporation, and the corporate 
                distributee's aggregate adjusted bases of property 
                described in section 362(e)(1)(B) which is distributed 
                in such liquidation would (but for this subparagraph) 
                exceed the fair market value of such property 
                immediately after such liquidation.''.

    (c) Effective Dates.--
            (1) In general.--The <<NOTE: 26 USC 362 note.>> amendment 
        made by subsection (a) shall apply to transactions after the 
        date of the enactment of this Act.
            (2) Liquidations.--The <<NOTE: 26 USC 334 note.>> amendment 
        made by subsection (b) shall apply to liquidations after the 
        date of the enactment of this Act.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 956 note.>> amendment made 
by this section shall take effect on the date of the enactment of this 
Act.

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

    (a) In General.--Section 163 (relating to deduction for interest) is 
amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following new subsection:
    ``(m) Interest on Unpaid Taxes Attributable to Nondisclosed 
Reportable Transactions.--No deduction shall be allowed under this 
chapter for any interest paid or accrued under section 6601 on any 
underpayment of tax which is attributable to the portion of any 
reportable transaction understatement (as defined

[[Page 118 STAT. 1597]]

in section 6662A(b)) with respect to which the requirement of section 
6664(d)(2)(A) is not met.''.
    (b) Effective Date.--The <<NOTE: 26 USC 163 note.>> amendments made 
by this section shall apply to transactions in taxable years beginning 
after the date of the enactment of this Act.

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

    (a) In General.--Paragraph (13) of section 338(h) (relating to tax 
on deemed sale not taken into account for estimated tax purposes) is 
amended by adding at the end the following: ``The preceding sentence 
shall not apply with respect to a qualified stock purchase for which an 
election is made under paragraph (10).''.
    (b) Effective Date.--The <<NOTE: 26 USC 163 note.>> amendment made 
by subsection (a) shall apply to transactions occurring after the date 
of the enactment of this Act.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 121 note.>> amendment made 
by this section shall apply to sales or exchanges after the date of the 
enactment of this Act.

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

    (a) Original Issue Discount.--Section 163(e)(3) (relating to special 
rule for original issue discount on obligation held by related foreign 
person) is amended by redesignating subparagraph (B) as subparagraph (C) 
and by inserting after subparagraph (A) the following new subparagraph:
                    ``(B) Special rule for certain foreign entities.--
                          ``(i) In general.--In the case of any debt 
                      instrument having original issue discount which is 
                      held by a related foreign person which is a 
                      controlled foreign corporation (as defined in 
                      section 957) or a passive foreign investment 
                      company (as defined in section 1297), a deduction 
                      shall be allowable to the issuer with respect to 
                      such original issue discount for any taxable year 
                      before the taxable year in which paid only to the 
                      extent such original issue discount is includible 
                      (determined without regard to properly allocable 
                      deductions and qualified deficits under section 
                      952(c)(1)(B)) during such prior taxable year in 
                      the gross income of a United States person who 
                      owns (within the meaning of section 958(a)) stock 
                      in such corporation.
                          ``(ii) Secretarial authority.--The Secretary 
                      may by regulation exempt transactions from the 
                      application

[[Page 118 STAT. 1598]]

                      of clause (i), including any transaction which is 
                      entered into by a payor in the ordinary course of 
                      a trade or business in which the payor is 
                      predominantly engaged.''.

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

    (c) Effective Date.--The <<NOTE: 26 USC 163 note.>> amendments made 
by this section shall apply to payments accrued on or after the date of 
the enactment of this Act.

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

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

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

    ``(a) Authority To Make Deposits Other Than As Payment of Tax.--A 
taxpayer may make a cash deposit with the Secretary which may be used by 
the Secretary to pay any tax imposed under subtitle A or B or chapter 
41, 42, 43, or 44 which has not been assessed at the time of the 
deposit. Such a deposit shall be made in such manner as the Secretary 
shall prescribe.
    ``(b) No Interest Imposed.--To the extent that such deposit is used 
by the Secretary to pay tax, for purposes of section 6601 (relating to 
interest on underpayments), the tax shall be treated as paid when the 
deposit is made.
    ``(c) Return of Deposit.--Except in a case where the Secretary 
determines that collection of tax is in jeopardy, the Secretary shall 
return to the taxpayer any amount of the deposit (to the extent

[[Page 118 STAT. 1599]]

not used for a payment of tax) which the taxpayer requests in writing.
    ``(d) Payment of Interest.--
            ``(1) In general.--For purposes of section 6611 (relating to 
        interest on overpayments), except as provided in paragraph (4), 
        a deposit which is returned to a taxpayer shall be treated as a 
        payment of tax for any period to the extent (and only to the 
        extent) attributable to a disputable tax for such period. Under 
        regulations <<NOTE: Regulations. Applicability.>> prescribed by 
        the Secretary, rules similar to the rules of section 6611(b)(2) 
        shall apply.
            ``(2) Disputable tax.--
                    ``(A) In general.--For purposes of this section, the 
                term `disputable tax' means the amount of tax specified 
                at the time of the deposit as the taxpayer's reasonable 
                estimate of the maximum amount of any tax attributable 
                to disputable items.
                    ``(B) Safe harbor based on 30-day letter.--In the 
                case of a taxpayer who has been issued a 30-day letter, 
                the maximum amount of tax under subparagraph (A) shall 
                not be less than the amount of the proposed deficiency 
                specified in such letter.
            ``(3) Other definitions.--For purposes of paragraph (2)--
                    ``(A) Disputable item.--The term `disputable item' 
                means any item of income, gain, loss, deduction, or 
                credit if the taxpayer--
                          ``(i) has a reasonable basis for its treatment 
                      of such item, and
                          ``(ii) reasonably believes that the Secretary 
                      also has a reasonable basis for disallowing the 
                      taxpayer's treatment of such item.
                    ``(B) 30-day letter.--The term `30-day letter' means 
                the first letter of proposed deficiency which allows the 
                taxpayer an opportunity for administrative review in the 
                Internal Revenue Service Office of Appeals.
            ``(4) Rate of interest.--The rate of interest under this 
        subsection shall be the Federal short-term rate determined under 
        section 6621(b), compounded daily.

    ``(e) Use of Deposits.--
            ``(1) Payment of tax.--Except as otherwise provided by the 
        taxpayer, deposits shall be treated as used for the payment of 
        tax in the order deposited.
            ``(2) Returns of deposits.--Deposits shall be treated as 
        returned to the taxpayer on a last-in, first-out basis.''.

    (b) Clerical Amendment.--The table of sections for subchapter A of 
chapter 67 is amended by adding at the end the following new item:

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

    (c) Effective <<NOTE: 26 USC 6603 note.>> 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

[[Page 118 STAT. 1600]]

        that the taxpayer identifies such amount as a deposit made 
        pursuant to section 6603 of the Internal Revenue Code (as added 
        by this Act) shall be treated as the date such amount is 
        deposited for purposes of such section 6603.

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

    (a) In General.--
            (1) Section 6159(a) (relating to authorization of 
        agreements) is amended--
                    (A) by striking ``satisfy liability for payment of'' 
                and inserting ``make payment on'', and
                    (B) by inserting ``full or partial'' after 
                ``facilitate''.
            (2) Section 6159(c) (relating to Secretary required to enter 
        into installment agreements in certain cases) is amended in the 
        matter preceding paragraph (1) by inserting ``full'' before 
        ``payment''.

    (b) Requirement To Review Partial Payment Agreements Every Two 
Years.--Section 6159 is amended by redesignating subsections (d) and (e) 
as subsections (e) and (f), respectively, and inserting after subsection 
(c) the following new subsection:
    ``(d) Secretary Required To Review Installment Agreements for 
Partial Collection Every Two Years.--In the case of an agreement entered 
into by the Secretary under subsection (a) for partial collection of a 
tax liability, the Secretary shall review the agreement at least once 
every 2 years.''.
    (c) Effective Date.--The <<NOTE: 26 USC 6159 note.>> amendments made 
by this section shall apply to agreements entered into on or after the 
date of the enactment of this Act.

SEC. 844. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

    (a) In General.--Section 1502 is amended by adding at the end the 
following new sentence: ``In carrying out the preceding sentence, the 
Secretary may prescribe rules that are different from the provisions of 
chapter 1 that would apply if such corporations filed separate 
returns.''.
    (b) Result Not Overturned.--Notwithstanding the amendment made by 
subsection (a), the Internal Revenue Code of 1986 shall be construed by 
treating Treasury Regulation Sec. 1.1502-20(c)(1)(iii) (as in effect on 
January 1, 2001) as being inapplicable to the factual situation in Rite 
Aid Corporation and Subsidiary Corporations v. United States, 255 F.3d 
1357 (Fed. Cir. 2001).
    (c) Effective Date.--This <<NOTE: 26 USC 1502 note.>> section, and 
the amendment made by this section, shall apply to taxable years 
beginning before, on, or after the date of the enactment of this Act.

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

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

[[Page 118 STAT. 1601]]

            ``(4) Capitalization allowed with respect to equity of 
        persons other than issuer and related parties.--If the 
        disqualified debt instrument of a corporation is payable in 
        equity held by the issuer (or any related party) in any other 
        person (other than a related party), the basis of such equity 
        shall be increased by the amount not allowed as a deduction by 
        reason of paragraph (1) with respect to the instrument.''.

    (c) Exception for Certain Instruments Issued by Dealers in 
Securities.--Section 163(l), as amended by subsection (b), is amended by 
redesignating paragraphs (5) and (6) as paragraphs (6) and (7) and by 
inserting after paragraph (4) the following new paragraph:
            ``(5) Exception for certain instruments issued by dealers in 
        securities.--For purposes of this subsection, the term 
        `disqualified debt instrument' does not include indebtedness 
        issued by a dealer in securities (or a related party) which is 
        payable in, or by reference to, equity (other than equity of the 
        issuer or a related party) held by such dealer in its capacity 
        as a dealer in securities. For purposes of this paragraph, the 
        term `dealer in securities' has the meaning given such term by 
        section 475.''.

    (d) Conforming Amendment.--Paragraph (3) of section 163(l) is 
amended by striking ``or a related party'' in the material preceding 
subparagraph (A) and inserting ``or any other person''.
    (e) Effective Date.--The <<NOTE: 26 USC 163 note.>> amendments made 
by this section shall apply to debt instruments issued after October 3, 
2004.

                            Part III--Leasing

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

    (a) Clarification of Recovery Period for Tax-Exempt Use Property 
Subject to Lease.--Subparagraph (A) of section 168(g)(3) (relating to 
special rules for determining class life) is amended by inserting 
``(notwithstanding any other subparagraph of this paragraph)'' after 
``shall''.
    (b) Limitation on Depreciation and Amortization Periods for 
Intangibles Leased to Tax-Exempt Entity.--
            (1) Computer software.--Paragraph (1) of section 167(f) is 
        amended by adding at the end the following new subparagraph:
                    ``(C) Tax-exempt use property subject to lease.--In 
                the case of computer software which would be tax-exempt 
                use property as defined in subsection (h) of section 168 
                if such section applied to computer software, the useful 
                life under subparagraph (A) shall not be less than 125 
                percent of the lease term (within the meaning of section 
                168(i)(3)).''.
            (2) Certain interests or rights acquired separately.--
        Paragraph (2) of section 167(f) is amended by adding at the end 
        the following new sentence: ``If such property would be tax-
        exempt use property as defined in subsection (h) of section 168 
        if such section applied to such property, the useful life under 
        such regulations shall not be less than 125 percent of the lease 
        term (within the meaning of section 168(i)(3)).''.

[[Page 118 STAT. 1602]]

            (3) Section 197 intangibles.--Section 197(f) (relating to 
        special rules) is amended by adding at the end the following new 
        paragraph:
            ``(10) Tax-exempt use property subject to lease.--In the 
        case of any section 197 intangible which would be tax-exempt use 
        property as defined in subsection (h) of section 168 if such 
        section applied to such intangible, the amortization period 
        under this section shall not be less than 125 percent of the 
        lease term (within the meaning of section 168(i)(3)).''.

    (c) Lease Term To Include Related Service Contracts.--Subparagraph 
(A) of section 168(i)(3) (relating to lease term) is amended by striking 
``and'' at the end of clause (i), by redesignating clause (ii) as clause 
(iii), and by inserting after clause (i) the following new clause:
                          ``(ii) the term of a lease shall include the 
                      term of any service contract or similar 
                      arrangement (whether or not treated as a lease 
                      under section 7701(e))--
                                    ``(I) which is part of the same 
                                transaction (or series of related 
                                transactions) which includes the lease, 
                                and
                                    ``(II) which is with respect to the 
                                property subject to the lease or 
                                substantially similar property, and''.

    (d) Expansion of Short-Term Lease Exemption for Qualified 
Technological Equipment.--Subparagraph (A) of section 168(h)(3) is 
amended by adding at the end the following new sentence: 
``Notwithstanding subsection (i)(3)(A)(i), in determining a lease term 
for purposes of the preceding sentence, there shall not be taken into 
account any option of the lessee to renew at the fair market value rent 
determined at the time of renewal; except that the aggregate period not 
taken into account by reason of this sentence shall not exceed 24 
months.''.
    (e) Treatment of Certain Indian Tribal Governments As Tax-Exempt 
Entities.--Section 168(h)(2)(A) is amended by striking ``and'' at the 
end of clause (ii), by striking the period at the end of clause (iii) 
and inserting ``, and'', and by inserting at the end the following:
                          ``(iv) any Indian tribal government described 
                      in section 7701(a)(40).
                For purposes of applying this subsection, any Indian 
                tribal government referred to in clause (iv) shall be 
                treated in the same manner as a State.''.

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

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

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

    ``(a) Limitation on Losses.--Except as otherwise provided in this 
section, a tax-exempt use loss for any taxable year shall not be 
allowed.

[[Page 118 STAT. 1603]]

    ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt use loss 
with respect to any tax-exempt use property which is disallowed under 
subsection (a) for any taxable year shall be treated as a deduction with 
respect to such property in the next taxable year.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Tax-exempt use loss.--The term `tax-exempt use loss' 
        means, with respect to any taxable year, the amount (if any) by 
        which--
                    ``(A) the sum of--
                          ``(i) the aggregate deductions (other than 
                      interest) directly allocable to a tax-exempt use 
                      property, plus
                          ``(ii) the aggregate deductions for interest 
                      properly allocable to such property, exceed
                    ``(B) the aggregate income from such property.
            ``(2) Tax-exempt use property.--The term `tax-exempt use 
        property' has the meaning given to such term by section 168(h), 
        except that such section shall be applied--
                    ``(A) without regard to paragraphs (1)(C) and (3) 
                thereof, and
                    ``(B) as if property described in--
                          ``(i) section 167(f)(1)(B),
                          ``(ii) section 167(f)(2), and
                          ``(iii) section 197 intangible,
                were tangible property.
        Such term shall not include property which would (but for this 
        sentence) be tax-exempt use property solely by reason of section 
        168(h)(6) if any credit is allowable under section 42 or 47 with 
        respect to such property.

    ``(d) Exception for Certain Leases.--This section shall not apply to 
any lease of property which meets the requirements of all of the 
following paragraphs:
            ``(1) Availability of funds.--
                    ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if (at any time during 
                the lease term) not more than an allowable amount of 
                funds are--
                          ``(i) subject to any arrangement referred to 
                      in subparagraph (B), or
                          ``(ii) set aside or expected to be set aside,
                to or for the benefit of the lessor or any lender, or to 
                or for the benefit of the lessee to satisfy the lessee's 
                obligations or options under the lease. For purposes of 
                clause (ii), funds shall be treated as set aside or 
                expected to be set aside only if a reasonable person 
                would conclude, based on the facts and circumstances, 
                that such funds are set aside or expected to be set 
                aside.
                    ``(B) Arrangements.--The arrangements referred to in 
                this subparagraph include a defeasance arrangement, a 
                loan by the lessee to the lessor or any lender, a 
                deposit arrangement, a letter of credit collateralized 
                with cash or cash equivalents, a payment undertaking 
                agreement, prepaid rent (within the meaning of the 
                regulations under section 467), a sinking fund 
                arrangement, a guaranteed investment contract, financial 
                guaranty insurance, and any similar arrangement (whether 
                or not such arrangement provides credit support).

[[Page 118 STAT. 1604]]

                    ``(C) Allowable amount.--
                          ``(i) In general.--Except as otherwise 
                      provided in this subparagraph, the term `allowable 
                      amount' means an amount equal to 20 percent of the 
                      lessor's adjusted basis in the property at the 
                      time the lease is entered into.
                          ``(ii) Higher amount permitted in certain 
                      cases.--To the extent provided in regulations, a 
                      higher percentage shall be permitted under clause 
                      (i) where necessary because of the credit-
                      worthiness of the lessee. In no event may such 
                      regulations permit a percentage of more than 50 
                      percent.
                          ``(iii) Option to purchase.--If under the 
                      lease the lessee has the option to purchase the 
                      property for a fixed price or for other than the 
                      fair market value of the property (determined at 
                      the time of exercise), the allowable amount at the 
                      time such option may be exercised may not exceed 
                      50 percent of the price at which such option may 
                      be exercised.
                          ``(iv) No allowable amount for certain 
                      arrangements.--The allowable amount shall be zero 
                      with respect to any arrangement which involves--
                                    ``(I) a loan from the lessee to the 
                                lessor or a lender,
                                    ``(II) any deposit received, letter 
                                of credit issued, or payment undertaking 
                                agreement entered into by a lender 
                                otherwise involved in the transaction, 
                                or
                                    ``(III) in the case of a transaction 
                                which involves a lender, any credit 
                                support made available to the lessor in 
                                which any such lender does not have a 
                                claim that is senior to the lessor.
                      For purposes of subclause (I), the term `loan' 
                      shall not include any amount treated as a loan 
                      under section 467 with respect to a section 467 
                      rental agreement.
            ``(2) Lessor must make substantial equity investment.--
                    ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if--
                          ``(i) the lessor--
                                    ``(I) has at the time the lease is 
                                entered into an unconditional at-risk 
                                equity investment (as determined by the 
                                Secretary) in the property of at least 
                                20 percent of the lessor's adjusted 
                                basis in the property as of that time, 
                                and
                                    ``(II) maintains such investment 
                                throughout the term of the lease, and
                          ``(ii) the fair market value of the property 
                      at the end of the lease term is reasonably 
                      expected to be equal to at least 20 percent of 
                      such basis.
                    ``(B) Risk of loss.--For purposes of clause (ii), 
                the fair market value at the end of the lease term shall 
                be reduced to the extent that a person other than the 
                lessor bears a risk of loss in the value of the 
                property.
                    ``(C) Paragraph not to apply to short-term leases.--
                This paragraph shall not apply to any lease with a lease 
                term of 5 years or less.

[[Page 118 STAT. 1605]]

            ``(3) Lessee may not bear more than minimal risk of loss.--
                    ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if there is no 
                arrangement under which the lessee bears--
                          ``(i) any portion of the loss that would occur 
                      if the fair market value of the leased property 
                      were 25 percent less than its reasonably expected 
                      fair market value at the time the lease is 
                      terminated, or
                          ``(ii) more than 50 percent of the loss that 
                      would occur if the fair market value of the leased 
                      property at the time the lease is terminated were 
                      zero.
                    ``(B) Exception.--The Secretary may by regulations 
                provide that the requirements of this paragraph are not 
                met where the lessee bears more than a minimal risk of 
                loss.
                    ``(C) Paragraph not to apply to short-term leases.--
                This paragraph shall not apply to any lease with a lease 
                term of 5 years or less.
            ``(4) Property with more than 7-year class life.--In the 
        case of a lease--
                    ``(A) of property with a class life (as defined in 
                section 168(i)(1)) of more than 7 years, other than 
                fixed-wing aircraft and vessels, and
                    ``(B) under which the lessee has the option to 
                purchase the property,
        the lease meets the requirements of this paragraph only if the 
        purchase price under the option equals the fair market value of 
        the property (determined at the time of exercise).

    ``(e) Special Rules.--
            ``(1) Treatment of former tax-exempt use property.--
                    ``(A) In general.--In the case of any former tax-
                exempt use property--
                          ``(i) any deduction allowable under subsection 
                      (b) with respect to such property for any taxable 
                      year shall be allowed only to the extent of any 
                      net income (without regard to such deduction) from 
                      such property for such taxable year, and
                          ``(ii) any portion of such unused deduction 
                      remaining after application of clause (i) shall be 
                      treated as a deduction allowable under subsection 
                      (b) with respect to such property in the next 
                      taxable year.
                    ``(B) Former tax-exempt use property.--For purposes 
                of this subsection, the term `former tax-exempt use 
                property' means any property which--
                          ``(i) is not tax-exempt use property for the 
                      taxable year, but
                          ``(ii) was tax-exempt use property for any 
                      prior taxable year.
            ``(2) Disposition of entire interest in property.--If during 
        the taxable year a taxpayer disposes of the taxpayer's entire 
        interest in tax-exempt use property (or former tax-exempt use 
        property), rules similar to the rules of section 469(g) shall 
        apply for purposes of this section.
            ``(3) Coordination with <<NOTE: Applicability.>> section 
        469.--This section shall be applied before the application of 
        section 469.
            ``(4) Coordination with sections 1031 and 1033.--

[[Page 118 STAT. 1606]]

                    ``(A) In general.--Sections 1031(a) and 1033(a) 
                shall not apply if--
                          ``(i) the exchanged or converted property is 
                      tax-exempt use property subject to a lease which 
                      was entered into before March 13, 2004, and which 
                      would not have met the requirements of subsection 
                      (d) had such requirements been in effect when the 
                      lease was entered into, or
                          ``(ii) the replacement property is tax-exempt 
                      use property subject to a lease which does not 
                      meet the requirements of subsection (d).
                    ``(B) Adjusted basis.--In the case of property 
                acquired by the lessor in a transaction to which section 
                1031 or 1033 applies, the adjusted basis of such 
                property for purposes of this section shall be equal to 
                the lesser of--
                          ``(i) the fair market value of the property as 
                      of the beginning of the lease term, or
                          ``(ii) the amount which would be the lessor's 
                      adjusted basis if such sections did not apply to 
                      such transaction.

    ``(f) Other Definitions.--For purposes of this section--
            ``(1) Related parties.--The terms `lessor', `lessee', and 
        `lender' each include any related party (within the meaning of 
        section 197(f)(9)(C)(i)).
            ``(2) Lease term.--The term `lease term' has the meaning 
        given to such term by section 168(i)(3).
            ``(3) Lender.--The term `lender' means, with respect to any 
        lease, a person that makes a loan to the lessor which is secured 
        (or economically similar to being secured) by the lease or the 
        leased property.
            ``(4) Loan.--The term `loan' includes any similar 
        arrangement.

    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations which--
            ``(1) allow in appropriate cases the aggregation of property 
        subject to the same lease, and
            ``(2) provide for the determination of the allocation of 
        interest expense for purposes of this section.''.

    (b) Conforming Amendment.--The table of sections for subpart C of 
part II of subchapter E of chapter 1 is amended by adding at the end the 
following new item:

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

SEC. 849. <<NOTE: 26 USC 470 note.>> EFFECTIVE DATE.

    (a) In General.--Except as provided in this section, the amendments 
made by this part shall apply to leases entered into after March 12, 
2004.
    (b) Exception.--
            (1) In general.--The amendments made by this part shall not 
        apply to qualified transportation property.
            (2) Qualified transportation property.--For purposes of 
        paragraph (1), the term ``qualified transportation property'' 
        means domestic property subject to a lease with respect to which 
        a formal application--

[[Page 118 STAT. 1607]]

                    (A) was submitted for approval to the Federal 
                Transit Administration (an agency of the Department of 
                Transportation) after June 30, 2003, and before March 
                13, 2004,
                    (B) is approved by the Federal Transit 
                Administration before January 1, 2006, and
                    (C) includes a description of such property and the 
                value of such property.
            (3) Exchanges and <<NOTE: Applicability.>> conversion of 
        tax-exempt use property.--Section 470(e)(4) of the Internal 
        Revenue Code of 1986, as added by section 848, shall apply to 
        property exchanged or converted after the date of the enactment 
        of this Act.
            (4) Intangibles and <<NOTE: Applicability.>> indian tribal 
        governments.--The amendments made subsections (b)(2), (b)(3), 
        and (e) of section 847, and the treatment of property described 
        in clauses (ii) and (iii) of section 470(c)(2)(B) of the 
        Internal Revenue Code of 1986 (as added by section 848) as 
        tangible property, shall apply to leases entered into after 
        October 3, 2004.

                Subtitle C--Reduction of Fuel Tax Evasion

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

    (a) Exemption From Tax on Heavy Trucks and Trailers Sold at 
Retail.--
            (1) In general.--Section 4053 (relating to exemptions) is 
        amended by adding at the end the following new paragraph:
            ``(8) Mobile machinery.--Any vehicle which consists of a 
        chassis--
                    ``(A) to which there has been permanently mounted 
                (by welding, bolting, riveting, or other means) 
                machinery or equipment to perform a construction, 
                manufacturing, processing, farming, mining, drilling, 
                timbering, or similar operation if the operation of the 
                machinery or equipment is unrelated to transportation on 
                or off the public highways,
                    ``(B) which has been specially designed to serve 
                only as a mobile carriage and mount (and a power source, 
                where applicable) for the particular machinery or 
                equipment involved, whether or not such machinery or 
                equipment is in operation, and
                    ``(C) which, by reason of such special design, could 
                not, without substantial structural modification, be 
                used as a component of a vehicle designed to perform a 
                function of transporting any load other than that 
                particular machinery or equipment or similar machinery 
                or equipment requiring such a specially designed 
                chassis.''.
            (2) Effective date.--The <<NOTE: 26 USC 4053 
        note.>> amendment made by this subsection shall take effect on 
        the day after the date of the enactment of this Act.

    (b) Exemption From Tax on Use of Certain Vehicles.--
            (1) In general.--Section 4483 (relating to exemptions) is 
        amended by redesignating subsection (g) as subsection (h) and by 
        inserting after subsection (f) the following new subsection:

    ``(g) Exemption for Mobile Machinery.--No tax shall be imposed by 
section 4481 on the use of any vehicle described in section 4053(8).''.

[[Page 118 STAT. 1608]]

            (2) Effective date.--The <<NOTE: 26 USC 4483 
        note.>> amendments made by this subsection shall take effect on 
        the day after the date of the enactment of this Act.

    (c) Exemption From Tax on Tires.--
            (1) In General.--Section 4072(b)(2) is amended by adding at 
        the end the following flush sentence: ``Such term shall not 
        include tires of a type used exclusively on vehicles described 
        in section 4053(8).''.
            (2) Effective date.--The <<NOTE: 26 USC 4072 
        note.>> amendment made by this subsection shall take effect on 
        the day after the date of the enactment of this Act.

    (d) Refund of Fuel Taxes.--
            (1) In general.--Section 6421(e)(2) (defining off-highway 
        business use) is amended by adding at the end the following new 
        subparagraph:
                    ``(C) Uses in mobile machinery.--
                          ``(i) In general.--The term `off-highway 
                      business use' shall include any use in a vehicle 
                      which meets the requirements described in clause 
                      (ii).
                          ``(ii) Requirements for mobile machinery.--The 
                      requirements described in this clause are--
                                    ``(I) the design-based test, and
                                    ``(II) the use-based test.
                          ``(iii) Design-based test.--For purposes of 
                      clause (ii)(I), the design-based test is met if 
                      the vehicle consists of a chassis--
                                    ``(I) to which there has been 
                                permanently mounted (by welding, 
                                bolting, riveting, or other means) 
                                machinery or equipment to perform a 
                                construction, manufacturing, processing, 
                                farming, mining, drilling, timbering, or 
                                similar operation if the operation of 
                                the machinery or equipment is unrelated 
                                to transportation on or off the public 
                                highways,
                                    ``(II) which has been specially 
                                designed to serve only as a mobile 
                                carriage and mount (and a power source, 
                                where applicable) for the particular 
                                machinery or equipment involved, whether 
                                or not such machinery or equipment is in 
                                operation, and
                                    ``(III) which, by reason of such 
                                special design, could not, without 
                                substantial structural modification, be 
                                used as a component of a vehicle 
                                designed to perform a function of 
                                transporting any load other than that 
                                particular machinery or equipment or 
                                similar machinery or equipment requiring 
                                such a specially designed chassis.
                          ``(iv) Use-based test.--For purposes of clause 
                      (ii)(II), the use-based test is met if the use of 
                      the vehicle on public highways was less than 7,500 
                      miles during the taxpayer's taxable 
                      year. <<NOTE: Applicability.>> This clause shall 
                      be applied without regard to use of the vehicle by 
                      any organization which is described in section 
                      501(c) and exempt from tax under section 
                      501(a).''.
            (2) No tax-free sales.--Subsection (b) of section 4082 is 
        amended by inserting before the period at the end the following: 
        ``and such term shall not include any use described in section 
        6421(e)(2)(C)''.

[[Page 118 STAT. 1609]]

            (3) Annual refund of tax paid.--Section 6427(i)(2) (relating 
        to exceptions) is amended by adding at the end the following new 
        subparagraph:
                    ``(C) Nonapplication of paragraph.--This paragraph 
                shall not apply to any fuel used solely in any off-
                highway business use described in section 
                6421(e)(2)(C).''.
            (4) Effective date.--The <<NOTE: 26 USC 4082 
        note.>> amendments made by this subsection shall apply to 
        taxable years beginning after the date of the enactment of this 
        Act.

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

    (a) In General.--Section 7701(a) (relating to definitions) is 
amended by adding at the end the following new paragraph:
            ``(48) Off-highway vehicles.--
                    ``(A) Off-highway transportation vehicles.--
                          ``(i) In general.--A vehicle shall not be 
                      treated as a highway vehicle if such vehicle is 
                      specially designed for the primary function of 
                      transporting a particular type of load other than 
                      over the public highway and because of this 
                      special design such vehicle's capability to 
                      transport a load over the public highway is 
                      substantially limited or impaired.
                          ``(ii) Determination of vehicle's design.--For 
                      purposes of clause (i), a vehicle's design is 
                      determined solely on the basis of its physical 
                      characteristics.
                          ``(iii) Determination of substantial 
                      limitation or impairment.--For purposes of clause 
                      (i), in determining whether substantial limitation 
                      or impairment exists, account may be taken of 
                      factors such as the size of the vehicle, whether 
                      such vehicle is subject to the licensing, safety, 
                      and other requirements applicable to highway 
                      vehicles, and whether such vehicle can transport a 
                      load at a sustained speed of at least 25 miles per 
                      hour. It is immaterial that a vehicle can 
                      transport a greater load off the public highway 
                      than such vehicle is permitted to transport over 
                      the public highway.
                    ``(B) Nontransportation trailers and semitrailers.--
                A trailer or semitrailer shall not be treated as a 
                highway vehicle if it is specially designed to function 
                only as an enclosed stationary shelter for the carrying 
                on of an off-highway function at an off-highway site.''.

    (c) Effective <<NOTE: 26 USC 7701 note.>> Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendment made by this section shall take effect on the date of 
        the enactment of this Act.
            (2) Fuel taxes.--With respect to taxes imposed under 
        subchapter B of chapter 31 and part III of subchapter A of 
        chapter 32, the amendment made by this section shall apply to 
        taxable periods beginning after the date of the enactment of 
        this Act.

SEC. 853. TAXATION OF AVIATION-GRADE KEROSENE.

    (a) Rate of Tax.--
            (1) In general.--Subparagraph (A) of section 4081(a)(2) is 
        amended by striking ``and'' at the end of clause (ii), by 
        striking the period at the end of clause (iii) and inserting ``, 
        and'', and by adding at the end the following new clause:

[[Page 118 STAT. 1610]]

                          ``(iv) in the case of aviation-grade kerosene, 
                      21.8 cents per gallon.''.
            (2) Commercial aviation.--Paragraph (2) of section 4081(a) 
        is amended by adding at the end the following new subparagraph:
                    ``(C) Taxes imposed on fuel used in commercial 
                aviation.--In the case of aviation-grade kerosene which 
                is removed from any refinery or terminal directly into 
                the fuel tank of an aircraft for use in commercial 
                aviation, the rate of tax under subparagraph (A)(iv) 
                shall be 4.3 cents per gallon.''.
            (3) Certain refueler trucks, tankers, and tank wagons 
        treated as terminal.--
                    (A) In general.--Subsection (a) of section 4081 is 
                amended by adding at the end the following new 
                paragraph:
            ``(3) Certain refueler trucks, tankers, and tank wagons 
        treated as terminal.--
                    ``(A) In general.--For purposes of paragraph (2)(C), 
                a refueler truck, tanker, or tank wagon shall be treated 
                as part of a terminal if--
                          ``(i) such terminal is located within a 
                      secured area of an airport,
                          ``(ii) any aviation-grade kerosene which is 
                      loaded in such truck, tanker, or wagon at such 
                      terminal is for delivery only into aircraft at the 
                      airport in which such terminal is located,
                          ``(iii) such truck, tanker, or wagon meets the 
                      requirements of subparagraph (B) with respect to 
                      such terminal, and
                          ``(iv) except in the case of exigent 
                      circumstances identified by the Secretary in 
                      regulations, no vehicle registered for highway use 
                      is loaded with aviation-grade kerosene at such 
                      terminal.
                    ``(B) Requirements.--A refueler truck, tanker, or 
                tank wagon meets the requirements of this subparagraph 
                with respect to a terminal if such truck, tanker, or 
                wagon--
                          ``(i) has storage tanks, hose, and coupling 
                      equipment designed and used for the purposes of 
                      fueling aircraft,
                          ``(ii) is not registered for highway use, and
                          ``(iii) is operated by--
                                    ``(I) the terminal operator of such 
                                terminal, or
                                    ``(II) a person that makes a daily 
                                accounting to such terminal operator of 
                                each delivery of fuel from such truck, 
                                tanker, or wagon.
                    ``(C) Reporting.--The Secretary shall require under 
                section 4101(d) reporting by such terminal operator of--
                          ``(i) any information obtained under 
                      subparagraph (B)(iii)(II), and
                          ``(ii) any similar information maintained by 
                      such terminal operator with respect to deliveries 
                      of fuel made by trucks, tankers, or wagons 
                      operated by such terminal operator.''.
                    (B) List of airports 
                with <<NOTE: Deadline. Publication. Records. 26 USC 4081 
                note.>> secured terminals.--Not later than December 15, 
                2004, the Secretary of the Treasury shall publish and 
                maintain a list of airports which

[[Page 118 STAT. 1611]]

                include a secured area in which a terminal is located 
                (within the meaning of section 4081(a)(3)(A)(i) of the 
                Internal Revenue Code of 1986, as added by this 
                paragraph).
            (4) Liability for tax on aviation-grade kerosene used in 
        commercial aviation.--Subsection (a) of section 4081 is amended 
        by adding at the end the following new paragraph:
            ``(4) Liability for tax on aviation-grade kerosene used in 
        commercial aviation.--For purposes of paragraph (2)(C), the 
        person who uses the fuel for commercial aviation shall pay the 
        tax imposed under such paragraph. For purposes of the preceding 
        sentence, fuel shall be treated as used when such fuel is 
        removed into the fuel tank.''.
            (5) Nontaxable uses.--
                    (A) In general.--Section 4082 is amended by 
                redesignating subsections (e) and (f) as subsections (f) 
                and (g), respectively, and by inserting after subsection 
                (d) the following new subsection:

    ``(e) Aviation-Grade Kerosene.--In the case of aviation-grade 
kerosene which is exempt from the tax imposed by section 4041(c) (other 
than by reason of a prior imposition of tax) and which is removed from 
any refinery or terminal directly into the fuel tank of an aircraft, the 
rate of tax under section 4081(a)(2)(A)(iv) shall be zero.''.
                    (B) Conforming amendments.--(i) Subsection (b) of 
                section 4082 is amended by adding at the end the 
                following new flush sentence:

``The term `nontaxable use' does not include the use of aviation-grade 
kerosene in an aircraft.''.
                    (ii) Section 4082(d) is amended by striking 
                paragraph (1) and by redesignating paragraphs (2) and 
                (3) as paragraphs (1) and (2), respectively.
            (6) Nonaircraft use of aviation-grade kerosene.--
                    (A) In general.--Subparagraph (B) of section 
                4041(a)(1) is amended by adding at the end the following 
                new sentence: ``This subparagraph shall not apply to 
                aviation-grade kerosene.''.
                    (B) Conforming amendment.--The heading for paragraph 
                (1) of section 4041(a) is amended by inserting ``and 
                kerosene'' after ``diesel fuel''.

    (b) Commercial Aviation.--Section 4083 is amended by redesignating 
subsections (b) and (c) as subsections (c) and (d), respectively, and by 
inserting after subsection (a) the following new subsection:
    ``(b) Commercial Aviation.--For purposes of this subpart, the term 
`commercial aviation' means any use of an aircraft in a business of 
transporting persons or property for compensation or hire by air, unless 
properly allocable to any transportation exempt from the taxes imposed 
by sections 4261 and 4271 by reason of section 4281 or 4282 or by reason 
of section 4261(h).''.
    (c) Refunds.--
            (1) In general.--Paragraph (4) of section 6427(l) is amended 
        to read as follows:
            ``(4) Refunds for aviation-grade kerosene.--
                    ``(A) No refund of certain taxes on fuel used in 
                commercial aviation.--In the case of aviation-grade 
                kerosene used in commercial aviation (as defined in 
                section

[[Page 118 STAT. 1612]]

                4083(b)) (other than supplies for vessels or aircraft 
                within the meaning of section 4221(d)(3)), paragraph (1) 
                shall not apply to so much of the tax imposed by section 
                4081 as is attributable to--
                          ``(i) the Leaking Underground Storage Tank 
                      Trust Fund financing rate imposed by such section, 
                      and
                          ``(ii) so much of the rate of tax specified in 
                      section 4081(a)(2)(A)(iv) as does not exceed 4.3 
                      cents per gallon.
                    ``(B) Payment to ultimate, registered vendor.--With 
                respect to aviation-grade kerosene, if the ultimate 
                purchaser of such kerosene waives (at such time and in 
                such form and manner as the Secretary shall prescribe) 
                the right to payment under paragraph (1) and assigns 
                such right to the ultimate vendor, then the Secretary 
                shall pay the amount which would be paid under paragraph 
                (1) to such ultimate vendor, but only if such ultimate 
                vendor--
                          ``(i) is registered under section 4101, and
                          ``(ii) meets the requirements of subparagraph 
                      (A), (B), or (D) of section 6416(a)(1).''.
            (2) Time for filing claims.--Subparagraph (A) of section 
        6427(i)(4) is amended--
                    (A) by striking ``subsection (l)(5)'' both places it 
                appears and inserting ``paragraph (4)(B) or (5) of 
                subsection (l)'', and
                    (B) by striking ``the preceding sentence'' and 
                inserting ``subsection (l)(5)''.
            (3) Conforming amendment.--Subparagraph (B) of section 
        6427(l)(2) is amended to read as follows:
                    ``(B) in the case of aviation-grade kerosene--
                          ``(i) any use which is exempt from the tax 
                      imposed by section 4041(c) other than by reason of 
                      a prior imposition of tax, or
                          ``(ii) any use in commercial aviation (within 
                      the meaning of section 4083(b)).''.

    (d) Repeal of Prior Taxation of Aviation Fuel.--
            (1) In general.--Part III of <<NOTE: 26 USC 4091-
        4093.>> subchapter A of chapter 32 is amended by striking 
        subpart B and by redesignating subpart C as subpart B.
            (2) Conforming amendments.--
                    (A) Section 4041(c) is amended to read as follows:

    ``(c) Aviation-Grade Kerosene.--
            ``(1) In general.--There is hereby imposed a tax upon 
        aviation-grade kerosene--
                    ``(A) sold by any person to an owner, lessee, or 
                other operator of an aircraft for use in such aircraft, 
                or
                    ``(B) used by any person in an aircraft unless there 
                was a taxable sale of such fuel under subparagraph (A).
            ``(2) Exemption for previously taxed fuel.--No tax shall be 
        imposed by this subsection on the sale or use of any aviation-
        grade kerosene if tax was imposed on such liquid under section 
        4081 and the tax thereon was not credited or refunded.
            ``(3) Rate of tax.--The rate of tax imposed by this 
        subsection shall be the rate of tax applicable under section 
        4081(a)(2)(A)(iv) which is in effect at the time of such sale or 
        use.''.

[[Page 118 STAT. 1613]]

                    (B) Section 4041(d)(2) is amended by striking 
                ``section 4091'' and inserting ``section 4081''.
                    (C) Section 4041 is amended by striking subsection 
                (e).
                    (D) Section 4041 is amended by striking subsection 
                (i).
                    (E) Section 4041(m)(1) is amended to read as 
                follows:
            ``(1) In general.--In the case of the sale or use of any 
        partially exempt methanol or ethanol fuel the rate of the tax 
        imposed by subsection (a)(2) shall be--
                    ``(A) after September 30, 1997, and before October 
                1, 2005--
                          ``(i) in the case of fuel none of the alcohol 
                      in which consists of ethanol, 9.15 cents per 
                      gallon, and
                          ``(ii) in any other case, 11.3 cents per 
                      gallon, and
                    ``(B) after September 30, 2005--
                          ``(i) in the case of fuel none of the alcohol 
                      in which consists of ethanol, 2.15 cents per 
                      gallon, and
                          ``(ii) in any other case, 4.3 cents per 
                      gallon.''.
                    (F) Sections 4101(a), 4103, 4221(a), and 6206 are 
                each amended by striking ``, 4081, or 4091'' and 
                inserting ``or 4081''.
                    (G) Section 6416(b)(2) is amended by striking ``4091 
                or''.
                    (H) Section 6416(b)(3) is amended by striking ``or 
                4091'' each place it appears.
                    (I) Section 6416(d) is amended by striking ``or to 
                the tax imposed by section 4091 in the case of refunds 
                described in section 4091(d)''.
                    (J) Section 6427(j)(1) is amended by striking ``, 
                4081, and 4091'' and inserting ``and 4081''.
                    (K)(i) Section 6427(l)(1) is amended to read as 
                follows:
            ``(1) In general.--Except as otherwise provided in this 
        subsection and in subsection (k), if any diesel fuel or kerosene 
        on which tax has been imposed by section 4041 or 4081 is used by 
        any person in a nontaxable use, the Secretary shall pay (without 
        interest) to the ultimate purchaser of such fuel an amount equal 
        to the aggregate amount of tax imposed on such fuel under 
        section 4041 or 4081, as the case may be, reduced by any payment 
        made to the ultimate vendor under paragraph (4)(B).''.
                    (ii) Paragraph (5)(B) of section 6427(l) is amended 
                by striking ``Paragraph (1)(A) shall not apply to 
                kerosene'' and inserting ``Paragraph (1) shall not apply 
                to kerosene (other than aviation-grade kerosene)''.
                    (L) Subparagraph (B) of section 6724(d)(1), as 
                amended by section 805, is amended by striking clause 
                (xvi) and by redesignating the succeeding clauses 
                accordingly.
                    (M) Paragraph (2) of section 6724(d), as amended by 
                section 805, is amended by striking subparagraph (X) and 
                by redesignating the succeeding subparagraphs 
                accordingly.
                    (N) Paragraph (1) of section 9502(b) is amended by 
                adding ``and'' at the end of subparagraph (B) and by 
                striking subparagraphs (C) and (D) and inserting the 
                following new subparagraph:

[[Page 118 STAT. 1614]]

                    ``(C) section 4081 with respect to aviation gasoline 
                and aviation-grade kerosene, and''.
                    (O) The last sentence of section 9502(b) is amended 
                to read as follows:

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

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

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

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

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

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

    (e) Effective Date.--The <<NOTE: 26 USC 4041 note.>> amendments made 
by this section shall apply to aviation-grade kerosene removed, entered, 
or sold after December 31, 2004.

    (f) Floor <<NOTE: 26 USC 4081 note.>> Stocks Tax.--
            (1) In general.--There is hereby imposed on aviation-grade 
        kerosene held on January 1, 2005, by any person a tax equal to--
                    (A) the tax which would have been imposed before 
                such date on such kerosene had the amendments made by 
                this section been in effect at all times before such 
                date, reduced by
                    (B) the sum of--
                          (i) the tax imposed before such date on such 
                      kerosene under section 4091 of the Internal 
                      Revenue Code of 1986, as in effect on such date, 
                      and
                          (ii) in the case of kerosene held exclusively 
                      for such person's own use, the amount which such 
                      person would (but for this clause) reasonably 
                      expect (as of such date) to be paid as a refund 
                      under section 6427(l) of such Code with respect to 
                      such kerosene.
            (2) Exception for fuel held in aircraft fuel tank.--
        Paragraph (1) shall not apply to kerosene held in the fuel tank 
        of an aircraft on January 1, 2005.
            (3) Liability for tax and method of payment.--
                    (A) Liability for tax.--The person holding the 
                kerosene on January 1, 2005, to which the tax imposed by 
                paragraph (1) applies shall be liable for such tax.
                    (B) Method and time for payment.--The tax imposed by 
                paragraph (1) shall be paid at such time and in such

[[Page 118 STAT. 1615]]

                manner as the Secretary of the Treasury (or the 
                Secretary's delegate) shall prescribe, including the 
                nonapplication of such tax on de minimis amounts of 
                kerosene.
            (4) Transfer of floor stock tax revenues to trust funds.--
        For purposes of determining the amount transferred to any trust 
        fund, the tax imposed by this subsection shall be treated as 
        imposed by section 4081 of the Internal Revenue Code of 1986--
                    (A) in any case in which tax was not imposed by 
                section 4091 of such Code, at the Leaking Underground 
                Storage Tank Trust Fund financing rate under such 
                section to the extent of 0.1 cents per gallon, and
                    (B) at the rate under section 4081(a)(2)(A)(iv) of 
                such Code to the extent of the remainder.
            (5) Held by a person.--For purposes of this subsection, 
        kerosene shall be considered as held by a person if title 
        thereto has passed to such person (whether or not delivery to 
        the person has been made).
            (6) Other laws applicable.--All provisions of law, including 
        penalties, applicable with respect to the tax imposed by section 
        4081 of such Code shall, insofar as applicable and not 
        inconsistent with the provisions of this subsection, apply with 
        respect to the floor stock tax imposed by paragraph (1) to the 
        same extent as if such tax were imposed by such section.

SEC. 854. DYE INJECTION EQUIPMENT.

    (a) In General.--Section 4082(a)(2) (relating to exemptions for 
diesel fuel and kerosene) is amended by inserting ``by mechanical 
injection'' after ``indelibly dyed''.
    (b) Dye Injector Security.--Not <<NOTE: Deadline. Regulations. 26 
USC 4082 note.>> later than 180 days after the date of the enactment of 
this Act, the Secretary of the Treasury shall issue regulations 
regarding mechanical dye injection systems described in the amendment 
made by subsection (a), and such regulations shall include standards for 
making such systems tamper resistant.

    (c) Penalty for Tampering With or Failing To Maintain Security 
Requirements for Mechanical Dye Injection Systems.--
            (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by adding after 
        section 6715 the following new section:

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

    ``(a) Imposition of Penalty.--
            ``(1) Tampering.--If any person tampers with a mechanical 
        dye injection system used to indelibly dye fuel for purposes of 
        section 4082, such person shall pay a penalty in addition to the 
        tax (if any).
            ``(2) Failure to maintain security requirements.--If any 
        operator of a mechanical dye injection system used to indelibly 
        dye fuel for purposes of section 4082 fails to maintain the 
        security standards for such system as established by the 
        Secretary, then such operator shall pay a penalty in addition to 
        the tax (if any).

    ``(b) Amount of Penalty.--The amount of the penalty under subsection 
(a) shall be--

[[Page 118 STAT. 1616]]

            ``(1) for each violation described in paragraph (1), the 
        greater of--
                    ``(A) $25,000, or
                    ``(B) $10 for each gallon of fuel involved, and
            ``(2) for each--
                    ``(A) failure to maintain security standards 
                described in paragraph (2), $1,000, and
                    ``(B) failure to correct a violation described in 
                paragraph (2), $1,000 per day for each day after which 
                such violation was discovered or such person should have 
                reasonably known of such violation.

    ``(c) Joint and Several Liability.--
            ``(1) In general.--If a penalty is imposed under this 
        section on any business entity, each officer, employee, or agent 
        of such entity or other contracting party who willfully 
        participated in any act giving rise to such penalty shall be 
        jointly and severally liable with such entity for such penalty.
            ``(2) Affiliated groups.--If a business entity described in 
        paragraph (1) is part of an affiliated group (as defined in 
        section 1504(a)), the parent corporation of such entity shall be 
        jointly and severally liable with such entity for the penalty 
        imposed under this section.''.
            (2) Clerical amendment.--The table of sections for part I of 
        subchapter B of chapter 68 is amended by adding after the item 
        related to section 6715 the following new item:

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

    (d) Effective Date.--The <<NOTE: 26 USC 4082 note.>> amendments made 
by subsections (a) and (c) shall take effect on the 180th day after the 
date on which the Secretary issues the regulations described in 
subsection (b).

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 6715 note.>> amendment made 
by this section shall apply to penalties assessed after the date of the 
enactment of this Act.

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

    (a) In General.--Section 6715(a) (relating to dyed fuel sold for use 
or used in taxable use, etc.) is amended by striking ``or'' in paragraph 
(2), by inserting ``or'' at the end of paragraph (3), and by inserting 
after paragraph (3) the following new paragraph:

[[Page 118 STAT. 1617]]

            ``(4) any person who has knowledge that a dyed fuel which 
        has been altered as described in paragraph (3) sells or holds 
        for sale such fuel for any use which the person knows or has 
        reason to know is not a nontaxable use of such fuel,''.

    (b) Conforming Amendment.--Section 6715(a)(3) is amended by striking 
``alters, or attempts to alter,'' and inserting ``alters, chemically or 
otherwise, or attempts to so alter,''.
    (c) Effective Date.--The <<NOTE: 26 USC 6715 note.>> amendments made 
by this section shall take effect on the date of the enactment of this 
Act.

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

    (a) In General.--Paragraph (3) of section 4082(b) (relating to 
nontaxable use) is amended to read as follows:
            ``(3) any use described in section 
        4041(a)(1)(C)(iii)(II).''.

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

    (c) Payment of Refunds.--Subparagraph (A) of section 6427(i)(4), as 
amended by this Act, is amended by inserting ``subsections (b)(4) and'' 
after ``filed under''.
    (d) Effective Date.--The <<NOTE: 26 USC 4082 note.>> amendments made 
by this section shall apply to fuel sold after December 31, 2004.

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

    (a) In General.--Section 4083(d)(1)(A) (relating to administrative 
authority), as amended by this Act, is amended by striking ``and'' at 
the end of clause (i) and by inserting after clause (ii) the following 
new clause:
                          ``(iii) inspecting any books and records and 
                      any shipping papers pertaining to such fuel, 
                      and''.

    (b) Effective Date.--The <<NOTE: 26 USC 4083 note.>> amendments made 
by this section shall take effect on the date of the enactment of this 
Act.

SEC. 859. ASSESSABLE PENALTY FOR REFUSAL OF ENTRY.

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

``SEC. 6717. REFUSAL OF ENTRY.

    ``(a) In General.--In addition to any other penalty provided by law, 
any person who refuses to admit entry or refuses to permit any other 
action by the Secretary authorized by section 4083(d)(1) shall pay a 
penalty of $1,000 for such refusal.
    ``(b) Joint and Several Liability.--
            ``(1) In general.--If a penalty is imposed under this 
        section on any business entity, each officer, employee, or agent 
        of such entity or other contracting party who willfully 
        participated

[[Page 118 STAT. 1618]]

        in any act giving rise to such penalty shall be jointly and 
        severally liable with such entity for such penalty.
            ``(2) Affiliated groups.--If a business entity described in 
        paragraph (1) is part of an affiliated group (as defined in 
        section 1504(a)), the parent corporation of such entity shall be 
        jointly and severally liable with such entity for the penalty 
        imposed under this section.

    ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
    (b) Conforming Amendments.--(1) Section 4083(d)(3), as amended by 
this Act, is amended--
            (A) by striking ``entry.--The penalty'' and inserting: 
        ``entry.--
                    ``(A) Forfeiture.--The penalty'', and
            (B) by adding at the end the following new subparagraph:
                    ``(B) Assessable penalty.--For additional assessable 
                penalty for the refusal to admit entry or other refusal 
                to permit an action by the Secretary authorized by 
                paragraph (1), see section 6717.''.

    (2) The table of sections for part I of subchapter B of chapter 68, 
as amended by this Act, is amended by inserting after the item relating 
to section 6716 the following new item:

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

    (c) Effective Date.--The <<NOTE: 26 USC 4083 note.>> amendments made 
by this section shall take effect on January 1, 2005.

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

    (a) In General.--Section 4081(a)(1)(B) (relating to exemption for 
bulk transfers to registered terminals or refineries) is amended--
            (1) by inserting ``by pipeline or vessel'' after 
        ``transferred in bulk'', and
            (2) by inserting ``, the operator of such pipeline or 
        vessel,'' after ``the taxable fuel''.

    (b) Effective Date.--The <<NOTE: 26 USC 4081 note.>> amendments made 
by this section shall take effect on March 1, 2005.

    (c) Publication of <<NOTE: Effective date. 26 USC 4101 
note.>> Registered Persons.--Beginning on January 1, 2005, the Secretary 
of the Treasury (or the Secretary's delegate) shall periodically publish 
under section 6103(k)(7) of the Internal Revenue Code of 1986 a current 
list of persons registered under section 4101 of such Code who are 
required to register under such section.

SEC. 861. DISPLAY OF REGISTRATION.

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

    (b) Civil Penalty for Failure To Display Registration.--

[[Page 118 STAT. 1619]]

            (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties), as amended by this Act, is 
        amended by inserting after section 6717 the following new 
        section:

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

    ``(a) Failure To Display Registration.--Every operator of a vessel 
who fails to display proof of registration pursuant to section 
4101(a)(2) shall pay a penalty of $500 for each such failure. With 
respect to any vessel, only one penalty shall be imposed by this section 
during any calendar month.
    ``(b) Multiple Violations.--In <<NOTE: Applicability.>> determining 
the penalty under subsection (a) on any person, subsection (a) shall be 
applied by increasing the amount in subsection (a) by the product of 
such amount and the aggregate number of penalties (if any) imposed with 
respect to prior months by this section on such person (or a related 
person or any predecessor of such person or related person).

    ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
            (2) Clerical amendment.--The table of sections for part I of 
        subchapter B of chapter 68, as amended by this Act, is amended 
        by inserting after the item relating to section 6717 the 
        following new item:

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

    (c) Effective Dates.--
            (1) Subsection (a).--The <<NOTE: 26 USC 4101 
        note.>> amendments made by subsection (a) shall take effect on 
        January 1, 2005.
            (2) Subsection (b).--The <<NOTE: 26 USC 6718 
        note.>> amendments made by subsection (b) shall apply to 
        penalties imposed after December 31, 2004.

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

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

    (b) Technical Amendment.--Section 6718(a), as added by this Act, is 
amended by striking ``section 4101(a)(2)'' and inserting ``section 
4101(a)(3)''.
    (c) Effective Date.--The <<NOTE: 26 USC 4101 note.>> amendments made 
by this section shall take effect on January 1, 2005.

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

    (a) Increased Penalty.--Subsection (a) of section 7272 (relating to 
penalty for failure to register) is amended by inserting ``($10,000 in 
the case of a failure to register under section 4101)'' after ``$50''.

[[Page 118 STAT. 1620]]

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

``SEC. 6719. FAILURE TO REGISTER.

    ``(a) Failure to Register.--Every person who is required to register 
under section 4101 and fails to do so shall pay a penalty in addition to 
the tax (if any).
    ``(b) Amount of Penalty.--The amount of the penalty under subsection 
(a) shall be--
            ``(1) $10,000 for each initial failure to register, and
            ``(2) $1,000 for each day thereafter such person fails to 
        register.

    ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
            (2) Clerical amendment.--The table of sections for part I of 
        subchapter B of chapter 68, as amended by this Act, is amended 
        by inserting after the item relating to section 6718 the 
        following new item:

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

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

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

    ``(a) In General.--In the case of each failure described in 
subsection (b) by any person with respect to a vessel or facility, such 
person shall pay a penalty of $10,000 in addition to the tax (if any).
    ``(b) Failures Subject to Penalty.--For purposes of subsection (a), 
the failures described in this subsection are--
            ``(1) any failure to make a report under section 4101(d) on 
        or before the date prescribed therefor, and
            ``(2) any failure to include all of the information required 
        to be shown on such report or the inclusion of incorrect 
        information.

    ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
            (2) Clerical amendment.--The table of sections for part II 
        of subchapter B of chapter 68 is amended by adding at the end 
        the following new item:

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

    (e) Effective Date.--The <<NOTE: 26 USC 6719 note.>> amendments made 
by this section shall apply to penalties imposed after December 31, 
2004.

[[Page 118 STAT. 1621]]

SEC. 864. ELECTRONIC FILING OF REQUIRED INFORMATION REPORTS.

    (a) In General.--Section 4101(d) is amended by adding at the end the 
following new flush sentence:
``Any person who is required to report under this subsection and who has 
25 or more reportable transactions in a month shall file such report in 
electronic format.''.
    (b) Effective Date.--The <<NOTE: 26 USC 4101 note.>> amendment made 
by this section shall apply on January 1, 2006.

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

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

    (b) Effective Date.--The <<NOTE: 26 USC 6416 note.>> amendments made 
by this section shall take effect on January 1, 2005.

SEC. 866. TWO-PARTY EXCHANGES.

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

``SEC. 4105. TWO-PARTY EXCHANGES.

    ``(a) In General.--In a two-party exchange, the delivering person 
shall not be liable for the tax imposed under section 4081(a)(1)(A)(ii).
    ``(b) Two-Party Exchange.--The term `two-party exchange' means a 
transaction, other than a sale, in which taxable fuel is transferred 
from a delivering person registered under section 4101 as a taxable fuel 
registrant to a receiving person who is so registered where all of the 
following occur:
            ``(1) The transaction includes a transfer from the 
        delivering person, who holds the inventory position for taxable 
        fuel in the terminal as reflected in the records of the terminal 
        operator.
            ``(2) The exchange transaction occurs before or 
        contemporaneous with completion of removal across the rack from 
        the terminal by the receiving person.
            ``(3) The terminal operator in its books and records treats 
        the receiving person as the person that removes the product

[[Page 118 STAT. 1622]]

        across the terminal rack for purposes of reporting the 
        transaction to the Secretary.
            ``(4) The transaction is the subject of a written 
        contract.''.

    (b) Conforming Amendment.--The table of sections for subpart C of 
part III of subchapter A of chapter 32, as amended by this Act, is 
amended by adding after the last item the following new item:

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

    (c) Effective Date.--The <<NOTE: 26 USC 4105 note.>> amendment made 
by this section shall take effect on the date of the enactment of this 
Act.

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

    (a) Proration of Tax Where Vehicle Sold.--
            (1) In general.--Subparagraph (A) of section 4481(c)(2) 
        (relating to where vehicle destroyed or stolen) is amended by 
        striking ``destroyed or stolen'' both places it appears and 
        inserting ``sold, destroyed, or stolen''.
            (2) Conforming amendment.--The heading for section 
        4481(c)(2) is amended by striking ``destroyed or stolen'' and 
        inserting ``sold, destroyed, or stolen''.

    (b) Repeal of Installment Payment.--(1) Section 6156 (relating to 
installment payment of tax on use of highway motor vehicles) is 
repealed.
    (2) The table of sections for subchapter A of chapter 62 is amended 
by striking the item relating to section 6156.
    (c) Electronic Filing.--Section 4481 is amended by redesignating 
subsection (e) as subsection (f) and by inserting after subsection (d) 
the following new subsection:
    ``(e) Electronic Filing.--Any taxpayer who files a return under this 
section with respect to 25 or more vehicles for any taxable period shall 
file such return electronically.''.
    (d) Repeal of Reduction in Tax for Certain Trucks.--Section 4483 is 
amended by striking subsection (f).
    (e) Effective Date.--The <<NOTE: 26 USC 4481 note.>> amendments made 
by this section shall apply to taxable periods beginning after the date 
of the enactment of this Act.

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

    (a) In General.--Subsection (b) of section 9503 (relating to 
transfer to Highway Trust Fund of amounts equivalent to certain taxes) 
is amended by redesignating paragraph (5) as paragraph (6) and inserting 
after paragraph (4) the following new paragraph:
            ``(5) Certain penalties.--There are hereby appropriated to 
        the Highway Trust Fund amounts equivalent to the penalties paid 
        under sections 6715, 6715A, 6717, 6718, 6719, 6725, 7232, and 
        7272 (but only with regard to penalties under such section 
        related to failure to register under section 4101).''.

    (b) Conforming Amendments.--(1) The heading of subsection (b) of 
section 9503 is amended by inserting ``and Penalties'' after ``Taxes''.
    (2) The heading of paragraph (1) of section 9503(b) is amended by 
striking ``In general'' and inserting ``Certain taxes''.
    (c) Effective Date.--The <<NOTE: 26 USC 9503 note.>> amendments made 
by this section shall apply to penalties assessed on or after the date 
of the enactment of this Act.

[[Page 118 STAT. 1623]]

SEC. 869. SIMPLIFICATION OF TAX ON TIRES.

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

``SEC. 4073. EXEMPTIONS.

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

                ``Sec. 4073. Exemptions.''.

    (e) Effective Date.--The <<NOTE: 26 USC 4071 note.>> amendments made 
by this section shall apply to sales in calendar years beginning more 
than 30 days after the date of the enactment of this Act.

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

    (a) In General.--Paragraph (3) of section 4083(a) is amended to read 
as follows:
            ``(3) Diesel fuel.--
                    ``(A) In general.--The term `diesel fuel' means--
                          ``(i) any liquid (other than gasoline) which 
                      is suitable for use as a fuel in a diesel-powered 
                      highway vehicle, or a diesel-powered train,
                          ``(ii) transmix, and
                          ``(iii) diesel fuel blend stocks identified by 
                      the Secretary.

[[Page 118 STAT. 1624]]

                    ``(B) Transmix.--For purposes of subparagraph (A), 
                the term `transmix' means a byproduct of refined 
                products pipeline operations created by the mixing of 
                different specification products during pipeline 
                transportation.''.

    (b) Conforming Amendment.--Subsection (h) of section 6427 is amended 
to read as follows:
    ``(h) Blend Stocks Not Used for Producing Taxable Fuel.--
            ``(1) Gasoline blend stocks or additives not used for 
        producing gasoline.--Except as provided in subsection (k), if 
        any gasoline blend stock or additive (within the meaning of 
        section 4083(a)(2)) is not used by any person to produce 
        gasoline and such person establishes that the ultimate use of 
        such gasoline blend stock or additive is not to produce 
        gasoline, the Secretary shall pay (without interest) to such 
        person an amount equal to the aggregate amount of the tax 
        imposed on such person with respect to such gasoline blend stock 
        or additive.
            ``(2) Diesel fuel blend stocks or additives not used for 
        producing diesel.--Except as provided in subsection (k), if any 
        diesel fuel blend stock is not used by any person to produce 
        diesel fuel and such person establishes that the ultimate use of 
        such diesel fuel blend stock is not to produce diesel fuel, the 
        Secretary shall pay (without interest) to such person an amount 
        equal to the aggregate amount of the tax imposed on such person 
        with respect to such diesel fuel blend stock.''.

    (c) Effective Date.--The <<NOTE: 26 USC 4083 note.>> amendment made 
by this section shall apply to fuel removed, sold, or used after 
December 31, 2004.

SEC. 871. STUDY REGARDING FUEL TAX COMPLIANCE.

    (a) In General.--Not <<NOTE: Deadline. Reports.>> later than January 
31, 2005, the Secretary of the Treasury shall submit to the Committee on 
Finance of the Senate and the Committee on Ways and Means of the House 
of Representatives a report regarding compliance with the tax imposed 
under subchapter B of chapter 31 and part III of subchapter A of chapter 
32 of the Internal Revenue Code of 1986. Such report shall include the 
information, analysis, and recommendations specified in subsections (b), 
(c), and (d).

    (b) Taxable Fuel Blendstocks.--The Secretary shall identify chemical 
products to be added to the list of blendstocks from lab analysis of 
fuel samples collected by the Internal Revenue Service which have been 
blended with taxable fuel but are not treated as blendstocks. The 
Secretary shall include statistics regarding the frequency in which a 
chemical product has been collected, and whether the sample contained an 
above normal concentration of the chemical product.
    (c) Waste Products Added to Taxable Fuels.--The report shall include 
a discussion of Internal Revenue Service findings regarding the addition 
of waste products to taxable fuel and any recommendations to address the 
taxation of such products.
    (d) Erroneous Claims of Fuel Tax Exemptions.--The report shall 
include a discussion of Internal Revenue Service findings regarding 
sales of taxable fuel to entities claiming exempt status as a State or 
local government and the frequency of erroneous certifications of tax 
exempt status. The Secretary, in consultation with representatives of 
State and local governments, shall provide

[[Page 118 STAT. 1625]]

recommendations to address such erroneous claims, including 
recommendations on the feasibility of a State maintained list of exempt 
governmental entities within the State.

                  Subtitle D--Other Revenue Provisions

SEC. 881. QUALIFIED TAX COLLECTION CONTRACTS.

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

``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

    ``(a) In General.--Nothing in any provision of law shall be 
construed to prevent the Secretary from entering into a qualified tax 
collection contract.
    ``(b) Qualified Tax Collection Contract.--For purposes of this 
section, the term `qualified tax collection contract' means any contract 
which--
            ``(1) is for the services of any person (other than an 
        officer or employee of the Treasury Department)--
                    ``(A) to locate and contact any taxpayer specified 
                by the Secretary,
                    ``(B) to request full payment from such taxpayer of 
                an amount of Federal tax specified by the Secretary and, 
                if such request cannot be met by the taxpayer, to offer 
                the taxpayer an installment agreement providing for full 
                payment of such amount during a period not to exceed 5 
                years, and
                    ``(C) to obtain financial information specified by 
                the Secretary with respect to such taxpayer,
            ``(2) prohibits each person providing such services under 
        such contract from committing any act or omission which 
        employees of the Internal Revenue Service are prohibited from 
        committing in the performance of similar services,
            ``(3) prohibits subcontractors from--
                    ``(A) having contacts with taxpayers,
                    ``(B) providing quality assurance services, and
                    ``(C) composing debt collection notices, and
            ``(4) permits subcontractors to perform other services only 
        with the approval of the Secretary.

    ``(c) Fees.--The Secretary may retain and use--
            ``(1) an amount not in excess of 25 percent of the amount 
        collected under any qualified tax collection contract for the 
        costs of services performed under such contract, and
            ``(2) an amount not in excess of 25 percent of such amount 
        collected for collection enforcement activities of the Internal 
        Revenue Service.

The Secretary <<NOTE: Records.>> shall keep adequate records regarding 
amounts so retained and used. The amount credited as paid by any 
taxpayer shall be determined without regard to this subsection.

    ``(d) No Federal Liability.--The United States shall not be liable 
for any act or omission of any person performing services under a 
qualified tax collection contract.
    ``(e) Application of Fair Debt Collection Practices Act.--The 
provisions of the Fair Debt Collection Practices Act (15 U.S.C.

[[Page 118 STAT. 1626]]

1692 et seq.) shall apply to any qualified tax collection contract, 
except to the extent superseded by section 6304, section 7602(c), or by 
any other provision of this title.
    ``(f) Cross References.--

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

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

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

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

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

    ``(a) In General.--Subject to 
the <<NOTE: Applicability.>> modifications provided by subsection (b), 
section 7433 shall apply to the acts and omissions of any person 
performing services under a qualified tax collection contract (as 
defined in section 6306(b)) to the same extent and in the same manner as 
if such person were an employee of the Internal Revenue Service.

    ``(b) Modifications.--For purposes of subsection (a):
            ``(1) Any civil action brought under section 7433 by reason 
        of this section shall be brought against the person who entered 
        into the qualified tax collection contract with the Secretary 
        and shall not be brought against the United States.
            ``(2) Such person and not the United States shall be liable 
        for any damages and costs determined in such civil action.
            ``(3) Such civil action shall not be an exclusive remedy 
        with respect to such person.
            ``(4) Subsections (c), (d)(1), and (e) of section 7433 shall 
        not apply.''.
            (2) Clerical amendment.--The table of sections for 
        subchapter B of chapter 76 is amended by inserting after the 
        item relating to section 7433 the following new item:

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

    (c) Application of Taxpayer Assistance Orders to Persons Performing 
Services Under a Qualified Tax Collection Contract.--Section 7811 
(relating to taxpayer assistance orders) is amended by adding at the end 
the following new subsection:
    ``(g) Application to Persons Performing Services Under a Qualified 
Tax Collection Contract.--Any order issued or action taken by the 
National Taxpayer Advocate pursuant to this section shall apply to 
persons performing services under a qualified tax collection contract 
(as defined in section 6306(b)) to the same

[[Page 118 STAT. 1627]]

extent and in the same manner as such order or action applies to the 
Secretary.''.
    (d) Ineligibility of <<NOTE: 26 USC 7804 note.>> Individuals Who 
Commit Misconduct to Perform Under Contract.--Section 1203 of the 
Internal Revenue Service Restructuring Act of 1998 (relating to 
termination of employment for misconduct) is amended by adding at the 
end the following new subsection:

    ``(e) Individuals Performing Services Under a Qualified Tax 
Collection Contract.--An individual shall cease to be permitted to 
perform any services under any qualified tax collection contract (as 
defined in section 6306(b) of the Internal Revenue Code of 1986) if 
there is a final determination by the Secretary of the Treasury under 
such contract that such individual committed any act or omission 
described under subsection (b) in connection with the performance of 
such services.''.
    (e) Biennial Report.--The <<NOTE: 26 USC 6306 note.>> Secretary of 
the Treasury shall biennially submit (beginning in 2005) to the 
Committee on Finance of the Senate and the Committee on Ways and Means 
of the House of Representatives a report with respect to qualified tax 
collection contracts under section 6306 of the Internal Revenue Code of 
1986 (as added by this section) which includes--
            (1) a complete cost benefit analysis,
            (2) the impact of such contracts on collection enforcement 
        staff levels in the Internal Revenue Service,
            (3) the impact of such contracts on the total number and 
        amount of unpaid assessments, and on the number and amount of 
        assessments collected by Internal Revenue Service personnel 
        after initial contact by a contractor,
            (4) the amounts collected and the collection costs incurred 
        (directly and indirectly) by the Internal Revenue Service,
            (5) an evaluation of contractor performance,
            (6) a disclosure safeguard report in a form similar to that 
        required under section 6103(p)(5) of such Code, and
            (7) a measurement plan which includes a comparison of the 
        best practices used by the private collectors with the Internal 
        Revenue Service's own collection techniques and mechanisms to 
        identify and capture information on successful collection 
        techniques used by the contractors which could be adopted by the 
        Internal Revenue Service.

    (f) Effective Date.--The <<NOTE: 26 USC 6306 note.>> amendments made 
to this section shall take effect on the date of the enactment of this 
Act.

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

    (a) In General.--Subparagraph (B) of section 170(e)(1) is amended by 
striking ``or'' at the end of clause (i), by adding ``or'' at the end of 
clause (ii), and by inserting after clause (ii) the following new 
clause:
                          ``(iii) of any patent, copyright (other than a 
                      copyright described in section 1221(a)(3) or 
                      1231(b)(1)(C)), trademark, trade name, trade 
                      secret, know-how, software (other than software 
                      described in section 197(e)(3)(A)(i)), or similar 
                      property, or applications or registrations of such 
                      property,''.

    (b) Certain Donee Income From Intellectual Property Treated as an 
Additional Charitable Contribution.--Section

[[Page 118 STAT. 1628]]

170 is amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following new subsection:
    ``(m) Certain Donee Income From Intellectual Property Treated as an 
Additional Charitable Contribution.--
            ``(1) Treatment as additional contribution.--In the case of 
        a taxpayer who makes a qualified intellectual property 
        contribution, the deduction allowed under subsection (a) for 
        each taxable year of the taxpayer ending on or after the date of 
        such contribution shall be increased (subject to the limitations 
        under subsection (b)) by the applicable percentage of qualified 
        donee income with respect to such contribution which is properly 
        allocable to such year under this subsection.
            ``(2) Reduction in additional deductions to extent of 
        initial deduction.--With respect to any qualified intellectual 
        property contribution, the deduction allowed under subsection 
        (a) shall be increased under paragraph (1) only to the extent 
        that the aggregate amount of such increases with respect to such 
        contribution exceed the amount allowed as a deduction under 
        subsection (a) with respect to such contribution determined 
        without regard to this subsection.
            ``(3) Qualified donee income.--For purposes of this 
        subsection, the term `qualified donee income' means any net 
        income received by or accrued to the donee which is properly 
        allocable to the qualified intellectual property.
            ``(4) Allocation of qualified donee income to taxable years 
        of donor.--For purposes of this subsection, qualified donee 
        income shall be treated as properly allocable to a taxable year 
        of the donor if such income is received by or accrued to the 
        donee for the taxable year of the donee which ends within or 
        with such taxable year of the donor.
            ``(5) 10-year limitation.--Income shall not be treated as 
        properly allocable to qualified intellectual property for 
        purposes of this subsection if such income is received by or 
        accrued to the donee after the 10-year period beginning on the 
        date of the contribution of such property.
            ``(6) Benefit limited to life of intellectual property.--
        Income shall not be treated as properly allocable to qualified 
        intellectual property for purposes of this subsection if such 
        income is received by or accrued to the donee after the 
        expiration of the legal life of such property.
            ``(7) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means the 
        percentage determined under the following table which 
        corresponds to a taxable year of the donor ending on or after 
        the date of the qualified intellectual property contribution:

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


[[Page 118 STAT. 1629]]


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

    (c) Reporting Requirements.--
            (1) In general.--Section 6050L (relating to returns relating 
        to certain dispositions of donated property) is amended to read 
        as follows:

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

    ``(a) Dispositions of Donated Property.--

[[Page 118 STAT. 1630]]

            ``(1) In general.--If the donee of any charitable deduction 
        property sells, exchanges, or otherwise disposes of such 
        property within 2 years after its receipt, the donee shall make 
        a return (in accordance with forms and regulations prescribed by 
        the Secretary) showing--
                    ``(A) the name, address, and TIN of the donor,
                    ``(B) a description of the property,
                    ``(C) the date of the contribution,
                    ``(D) the amount received on the disposition, and
                    ``(E) the date of such disposition.
            ``(2) Definitions.--For purposes of this subsection:
                    ``(A) Charitable deduction property.--The term 
                `charitable deduction property' means any property 
                (other than publicly traded securities) contributed in a 
                contribution for which a deduction was claimed under 
                section 170 if the claimed value of such property (plus 
                the claimed value of all similar items of property 
                donated by the donor to 1 or more donees) exceeds 
                $5,000.
                    ``(B) Publicly traded securities.--The term 
                `publicly traded securities' means securities for which 
                (as of the date of the contribution) market quotations 
                are readily available on an established securities 
                market.

    ``(b) Qualified Intellectual Property Contributions.--
            ``(1) In general.--Each donee with respect to a qualified 
        intellectual property contribution shall make a return (at such 
        time and in such form and manner as the Secretary may by 
        regulations prescribe) with respect to each specified taxable 
        year of the donee showing--
                    ``(A) the name, address, and TIN of the donor,
                    ``(B) a description of the qualified intellectual 
                property contributed,
                    ``(C) the date of the contribution, and
                    ``(D) the amount of net income of the donee for the 
                taxable year which is properly allocable to the 
                qualified intellectual property (determined without 
                regard to paragraph (10)(B) of section 170(m) and with 
                the modifications described in paragraphs (5) and (6) of 
                such section).
            ``(2) Definitions.--For purposes of this subsection:
                    ``(A) In general.--Terms used in this subsection 
                which are also used in section 170(m) have the 
                respective meanings given such terms in such section.
                    ``(B) Specified taxable year.--The term `specified 
                taxable year' means, with respect to any qualified 
                intellectual property contribution, any taxable year of 
                the donee any portion of which is part of the 10-year 
                period beginning on the date of such contribution.

    ``(c) Statement To Be Furnished to Donors.--Every person making a 
return under subsection (a) or (b) shall furnish a copy of such return 
to the donor at such time and in such manner as the Secretary may by 
regulations prescribe.''.
            (2) Clerical amendment.--The table of sections for subpart A 
        of part II of subchapter A of chapter 61 is amended by striking 
        the item relating to section 6050L and inserting the following 
        new item:

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


[[Page 118 STAT. 1631]]



    (d) Coordination With Appraisal Requirements.--Subclause (I) of 
section 170(f)(11)(A)(ii), as added by this Act, is amended by inserting 
``subsection (e)(1)(B)(iii) or'' before ``section 1221(a)(1)''.
    (e) Anti-Abuse Rules.--The <<NOTE: 26 USC 170 note.>> Secretary of 
the Treasury may prescribe such regulations or other guidance as may be 
necessary or appropriate to prevent the avoidance of the purposes of 
section 170(e)(1)(B)(iii) of the Internal Revenue Code of 1986 (as added 
by subsection (a)), including preventing--
            (1) the circumvention of the reduction of the charitable 
        deduction by embedding or bundling the patent or similar 
        property as part of a charitable contribution of property that 
        includes the patent or similar property,
            (2) the manipulation of the basis of the property to 
        increase the amount of the charitable deduction through the use 
        of related persons, pass-thru entities, or other intermediaries, 
        or through the use of any provision of law or regulation 
        (including the consolidated return regulations), and
            (3) a donor from changing the form of the patent or similar 
        property to property of a form for which different deduction 
        rules would apply.

    (f) Effective Date.--The <<NOTE: 26 USC 170 note.>> amendments made 
by this section shall apply to contributions made after June 3, 2004.

SEC. 883. INCREASED REPORTING FOR NONCASH CHARITABLE CONTRIBUTIONS.

    (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules) is amended 
by adding after paragraph (10) the following new paragraph:
            ``(11) Qualified appraisal and other documentation for 
        certain contributions.--
                    ``(A) In general.--
                          ``(i) Denial of deduction.--In the case of an 
                      individual, partnership, or corporation, no 
                      deduction shall be allowed under subsection (a) 
                      for any contribution of property for which a 
                      deduction of more than $500 is claimed unless such 
                      person meets the requirements of subparagraphs 
                      (B), (C), and (D), as the case may be, with 
                      respect to such contribution.
                          ``(ii) Exceptions.--
                                    ``(I) Readily valued property.--
                                Subparagraphs (C) and (D) shall not 
                                apply to cash, property described in 
                                section 1221(a)(1), publicly traded 
                                securities (as defined in section 
                                6050L(a)(2)(B)), and any qualified 
                                vehicle described in paragraph 
                                (12)(A)(ii) for which an acknowledgement 
                                under paragraph (12)(B)(iii) is 
                                provided.
                                    ``(II) Reasonable cause.--Clause (i) 
                                shall not apply if it is shown that the 
                                failure to meet such requirements is due 
                                to reasonable cause and not to willful 
                                neglect.
                    ``(B) Property description for contributions of more 
                than $500.--In the case of contributions of property for 
                which a deduction of more than $500 is claimed, the 
                requirements of this subparagraph are met if the 
                individual, partnership or corporation includes with the 
                return for the taxable year in which the contribution is 
                made

[[Page 118 STAT. 1632]]

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

    (b) Effective Date.--The <<NOTE: 26 USC 170 note.>> amendment made 
by this section shall apply to contributions made after June 3, 2004.

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

    (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules), as 
amended by this Act, is amended by inserting after paragraph (11) the 
following new paragraph:
            ``(12) Contributions of used motor vehicles, boats, and 
        airplanes.--
                    ``(A) In general.--In the case of a contribution of 
                a qualified vehicle the claimed value of which exceeds 
                $500--
                          ``(i) paragraph (8) shall not apply and no 
                      deduction shall be allowed under subsection (a) 
                      for such contribution unless the taxpayer 
                      substantiates the contribution by a 
                      contemporaneous written acknowledgement of the 
                      contribution by the donee organization that meets 
                      the

[[Page 118 STAT. 1633]]

                      requirements of subparagraph (B) and includes the 
                      acknowledgement with the taxpayer's return of tax 
                      which includes the deduction, and
                          ``(ii) if the organization sells the vehicle 
                      without any significant intervening use or 
                      material improvement of such vehicle by the 
                      organization, the amount of the deduction allowed 
                      under subsection (a) shall not exceed the gross 
                      proceeds received from such sale.
                    ``(B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following information:
                          ``(i) The name and taxpayer identification 
                      number of the donor.
                          ``(ii) The vehicle identification number or 
                      similar number.
                          ``(iii) In the case of a qualified vehicle to 
                      which subparagraph (A)(ii) applies--
                                    ``(I) a certification that the 
                                vehicle was sold in an arm's length 
                                transaction between unrelated parties,
                                    ``(II) the gross proceeds from the 
                                sale, and
                                    ``(III) a statement that the 
                                deductible amount may not exceed the 
                                amount of such gross proceeds.
                          ``(iv) In the case of a qualified vehicle to 
                      which subparagraph (A)(ii) does not apply--
                                    ``(I) a certification of the 
                                intended use or material improvement of 
                                the vehicle and the intended duration of 
                                such use, and
                                    ``(II) a certification that the 
                                vehicle would not be transferred in 
                                exchange for money, other property, or 
                                services before completion of such use 
                                or improvement.
                    ``(C) Contemporaneous.--For purposes of subparagraph 
                (A), an acknowledgement shall be considered to be 
                contemporaneous if the donee organization provides it 
                within 30 days of--
                          ``(i) the sale of the qualified vehicle, or
                          ``(ii) in the case of an acknowledgement 
                      including a certification described in 
                      subparagraph (B)(iv), the contribution of the 
                      qualified vehicle.
                    ``(D) Information to secretary.--A donee 
                organization required to provide an acknowledgement 
                under this paragraph shall provide to the Secretary the 
                information contained in the acknowledgement. Such 
                information shall be provided at such time and in such 
                manner as the Secretary may prescribe.
                    ``(E) Qualified vehicle.--For purposes of this 
                paragraph, the term `qualified vehicle' means any--
                          ``(i) motor vehicle manufactured primarily for 
                      use on public streets, roads, and highways,
                          ``(ii) boat, or
                          ``(iii) airplane.
                Such term shall not include any property which is 
                described in section 1221(a)(1).
                    ``(F) Regulations or other guidance.--The Secretary 
                shall prescribe such regulations or other guidance as 
                may be necessary to carry out the purposes of this 
                paragraph.

[[Page 118 STAT. 1634]]

                The Secretary may prescribe regulations or other 
                guidance which exempts sales by the donee organization 
                which are in direct furtherance of such organization's 
                charitable purpose from the requirements of 
                subparagraphs (A)(ii) and (B)(iv)(II).''.

    (b) Penalty for Fraudulent Acknowledgments.--
            (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties), as amended by this Act, is 
        amended by inserting after section 6719 the following new 
        section:

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

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

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

    (c) Effective Date.--The <<NOTE: 26 USC 170 note.>> amendments made 
by this section shall apply to contributions made after December 31, 
2004.

SEC. 885. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.

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

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

    ``(a) Rules Relating to Constructive Receipt.--
            ``(1) Plan failures.--
                    ``(A) Gross income inclusion.--

[[Page 118 STAT. 1635]]

                          ``(i) In general.--If at any time during a 
                      taxable year a nonqualified deferred compensation 
                      plan--
                                    ``(I) fails to meet the requirements 
                                of paragraphs (2), (3), and (4), or
                                    ``(II) is not operated in accordance 
                                with such requirements,
                      all compensation deferred under the plan for the 
                      taxable year and all preceding taxable years shall 
                      be includible in gross income for the taxable year 
                      to the extent not subject to a substantial risk of 
                      forfeiture and not previously included in gross 
                      income.
                          ``(ii) Application only to affected 
                      participants.--Clause (i) shall only apply with 
                      respect to all compensation deferred under the 
                      plan for participants with respect to whom the 
                      failure relates.
                    ``(B) Interest and additional tax payable with 
                respect to previously deferred compensation.--
                          ``(i) In general.--If compensation is required 
                      to be included in gross income under subparagraph 
                      (A) for a taxable year, the tax imposed by this 
                      chapter for the taxable year shall be increased by 
                      the sum of--
                                    ``(I) the amount of interest 
                                determined under clause (ii), and
                                    ``(II) an amount equal to 20 percent 
                                of the compensation which is required to 
                                be included in gross income.
                          ``(ii) Interest.--For purposes of clause (i), 
                      the interest determined under this clause for any 
                      taxable year is the amount of interest at the 
                      underpayment rate plus 1 percentage point on the 
                      underpayments that would have occurred had the 
                      deferred compensation been includible in gross 
                      income for the taxable year in which first 
                      deferred or, if later, the first taxable year in 
                      which such deferred compensation is not subject to 
                      a substantial risk of forfeiture.
            ``(2) Distributions.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the plan provides that compensation 
                deferred under the plan may not be distributed earlier 
                than--
                          ``(i) separation from service as determined by 
                      the Secretary (except as provided in subparagraph 
                      (B)(i)),
                          ``(ii) the date the participant becomes 
                      disabled (within the meaning of subparagraph (C)),
                          ``(iii) death,
                          ``(iv) a specified time (or pursuant to a 
                      fixed schedule) specified under the plan at the 
                      date of the deferral of such compensation,
                          ``(v) to the extent provided by the Secretary, 
                      a change in the ownership or effective control of 
                      the corporation, or in the ownership of a 
                      substantial portion of the assets of the 
                      corporation, or
                          ``(vi) the occurrence of an unforeseeable 
                      emergency.
                    ``(B) Special rules.--
                          ``(i) Specified employees.--In the case of any 
                      specified employee, the requirement of 
                      subparagraph (A)(i) is met only if distributions 
                      may not be made

[[Page 118 STAT. 1636]]

                      before the date which is 6 months after the date 
                      of separation from service (or, if earlier, the 
                      date of death of the employee). For purposes of 
                      the preceding sentence, a specified employee is a 
                      key employee (as defined in section 416(i) without 
                      regard to paragraph (5) thereof) of a corporation 
                      any stock in which is publicly traded on an 
                      established securities market or otherwise.
                          ``(ii) Unforeseeable emergency.--For purposes 
                      of subparagraph (A)(vi)--
                                    ``(I) In general.--The term 
                                `unforeseeable emergency' means a severe 
                                financial hardship to the participant 
                                resulting from an illness or accident of 
                                the participant, the participant's 
                                spouse, or a dependent (as defined in 
                                section 152(a)) of the participant, loss 
                                of the participant's property due to 
                                casualty, or other similar extraordinary 
                                and unforeseeable circumstances arising 
                                as a result of events beyond the control 
                                of the participant.
                                    ``(II) Limitation on 
                                distributions.--The requirement of 
                                subparagraph (A)(vi) is met only if, as 
                                determined under regulations of the 
                                Secretary, the amounts distributed with 
                                respect to an emergency do not exceed 
                                the amounts necessary to satisfy such 
                                emergency plus amounts necessary to pay 
                                taxes reasonably anticipated as a result 
                                of the distribution, after taking into 
                                account the extent to which such 
                                hardship is or may be relieved through 
                                reimbursement or compensation by 
                                insurance or otherwise or by liquidation 
                                of the participant's assets (to the 
                                extent the liquidation of such assets 
                                would not itself cause severe financial 
                                hardship).
                    ``(C) Disabled.--For purposes of subparagraph 
                (A)(ii), a participant shall be considered disabled if 
                the participant--
                          ``(i) is unable to engage in any substantial 
                      gainful activity by reason of any medically 
                      determinable physical or mental impairment which 
                      can be expected to result in death or can be 
                      expected to last for a continuous period of not 
                      less than 12 months, or
                          ``(ii) is, by reason of any medically 
                      determinable physical or mental impairment which 
                      can be expected to result in death or can be 
                      expected to last for a continuous period of not 
                      less than 12 months, receiving income replacement 
                      benefits for a period of not less than 3 months 
                      under an accident and health plan covering 
                      employees of the participant's employer.
            ``(3) Acceleration of benefits.--The requirements of this 
        paragraph are met if the plan does not permit the acceleration 
        of the time or schedule of any payment under the plan, except as 
        provided in regulations by the Secretary.
            ``(4) Elections.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the requirements of subparagraphs 
                (B) and (C) are met.

[[Page 118 STAT. 1637]]

                    ``(B) Initial deferral decision.--
                          ``(i) In general.--The requirements of this 
                      subparagraph are met if the plan provides that 
                      compensation for services performed during a 
                      taxable year may be deferred at the participant's 
                      election only if the election to defer such 
                      compensation is made not later than the close of 
                      the preceding taxable year or at such other time 
                      as provided in regulations.
                          ``(ii) First year of eligibility.--In the case 
                      of the first year in which a participant becomes 
                      eligible to participate in the plan, such election 
                      may be made with respect to services to be 
                      performed subsequent to the election within 30 
                      days after the date the participant becomes 
                      eligible to participate in such plan.
                          ``(iii) Performance-
                      based <<NOTE: Deadline.>> compensation.--In the 
                      case of any performance-based compensation based 
                      on services performed over a period of at least 12 
                      months, such election may be made no later than 6 
                      months before the end of the period.
                    ``(C) Changes in time and form of distribution.--The 
                requirements of this subparagraph are met if, in the 
                case of a plan which permits under a subsequent election 
                a delay in a payment or a change in the form of 
                payment--
                          ``(i) the plan requires that such election may 
                      not take effect until at least 12 months after the 
                      date on which the election is made,
                          ``(ii) in the case of an election related to a 
                      payment not described in clause (ii), (iii), or 
                      (vi) of paragraph (2)(A), the plan requires that 
                      the first payment with respect to which such 
                      election is made be deferred for a period of not 
                      less than 5 years from the date such payment would 
                      otherwise have been made, and
                          ``(iii) the plan requires that any election 
                      related to a payment described in paragraph 
                      (2)(A)(iv) may not be made less than 12 months 
                      prior to the date of the first scheduled payment 
                      under such paragraph.

    ``(b) Rules Relating to Funding.--
            ``(1) Offshore property in a trust.--In the case of assets 
        set aside (directly or indirectly) in a trust (or other 
        arrangement determined by the Secretary) for purposes of paying 
        deferred compensation under a nonqualified deferred compensation 
        plan, for purposes of section 83 such assets shall be treated as 
        property transferred in connection with the performance of 
        services whether or not such assets are available to satisfy 
        claims of general creditors--
                    ``(A) at the time set aside if such assets (or such 
                trust or other arrangement) are located outside of the 
                United States, or
                    ``(B) at the time transferred if such assets (or 
                such trust or other arrangement) are subsequently 
                transferred outside of the United States.
        This paragraph shall not apply to assets located in a foreign 
        jurisdiction if substantially all of the services to which the 
        nonqualified deferred compensation relates are performed in such 
        jurisdiction.
            ``(2) Employer's financial health.--In the case of 
        compensation deferred under a nonqualified deferred compensation

[[Page 118 STAT. 1638]]

        plan, there is a transfer of property within the meaning of 
        section 83 with respect to such compensation as of the earlier 
        of--
                    ``(A) the date on which the plan first provides that 
                assets will become restricted to the provision of 
                benefits under the plan in connection with a change in 
                the employer's financial health, or
                    ``(B) the date on which assets are so restricted,
        whether or not such assets are available to satisfy claims of 
        general creditors.
            ``(3) Income inclusion for offshore trusts and employer's 
        financial health.--For each taxable year that assets treated as 
        transferred under this subsection remain set aside in a trust or 
        other arrangement subject to paragraph (1) or (2), any increase 
        in value in, or earnings with respect to, such assets shall be 
        treated as an additional transfer of property under this 
        subsection (to the extent not previously included in income).
            ``(4) Interest on tax liability payable with respect to 
        transferred property.--
                    ``(A) In general.--If amounts are required to be 
                included in gross income by reason of paragraph (1) or 
                (2) for a taxable year, the tax imposed by this chapter 
                for such taxable year shall be increased by the sum of--
                          ``(i) the amount of interest determined under 
                      subparagraph (B), and
                          ``(ii) an amount equal to 20 percent of the 
                      amounts required to be included in gross income.
                    ``(B) Interest.--For purposes of subparagraph (A), 
                the interest determined under this subparagraph for any 
                taxable year is the amount of interest at the 
                underpayment rate plus 1 percentage point on the 
                underpayments that would have occurred had the amounts 
                so required to be included in gross income by paragraph 
                (1) or (2) been includible in gross income for the 
                taxable year in which first deferred or, if later, the 
                first taxable year in which such amounts are not subject 
                to a substantial risk of forfeiture.

    ``(c) No Inference on Earlier Income Inclusion or Requirement of 
Later Inclusion.--Nothing in this section shall be construed to prevent 
the inclusion of amounts in gross income under any other provision of 
this chapter or any other rule of law earlier than the time provided in 
this section. Any amount included in gross income under this section 
shall not be required to be included in gross income under any other 
provision of this chapter or any other rule of law later than the time 
provided in this section.
    ``(d) Other Definitions and Special Rules.--For purposes of this 
section:
            ``(1) Nonqualified deferred compensation plan.--The term 
        `nonqualified deferred compensation plan' means any plan that 
        provides for the deferral of compensation, other than--
                    ``(A) a qualified employer plan, and
                    ``(B) any bona fide vacation leave, sick leave, 
                compensatory time, disability pay, or death benefit 
                plan.
            ``(2) Qualified employer plan.--The term `qualified employer 
        plan' means--

[[Page 118 STAT. 1639]]

                    ``(A) any plan, contract, pension, account, or trust 
                described in subparagraph (A) or (B) of section 
                219(g)(5) (without regard to subparagraph (A)(iii)),
                    ``(B) any eligible deferred compensation plan 
                (within the meaning of section 457(b)), and
                    ``(C) any plan described in section 415(m).
            ``(3) Plan includes arrangements, etc.--The term `plan' 
        includes any agreement or arrangement, including an agreement or 
        arrangement that includes one person.
            ``(4) Substantial risk of forfeiture.--The rights of a 
        person to compensation are subject to a substantial risk of 
        forfeiture if such person's rights to such compensation are 
        conditioned upon the future performance of substantial services 
        by any individual.
            ``(5) Treatment of earnings.--References to deferred 
        compensation shall be treated as including references to income 
        (whether actual or notional) attributable to such compensation 
        or such income.
            ``(6) Aggregation rules.--Except 
        as <<NOTE: Applicability.>> provided by the Secretary, rules 
        similar to the rules of subsections (b) and (c) of section 414 
        shall apply.

    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations--
            ``(1) providing for the determination of amounts of deferral 
        in the case of a nonqualified deferred compensation plan which 
        is a defined benefit plan,
            ``(2) relating to changes in the ownership and control of a 
        corporation or assets of a corporation for purposes of 
        subsection (a)(2)(A)(v),
            ``(3) exempting arrangements from the application of 
        subsection (b) if such arrangements will not result in an 
        improper deferral of United States tax and will not result in 
        assets being effectively beyond the reach of creditors,
            ``(4) defining financial health for purposes of subsection 
        (b)(2), and
            ``(5) disregarding a substantial risk of forfeiture in cases 
        where necessary to carry out the purposes of this section.''.

    (b) Treatment of Deferred Amounts.--
            (1) W-2 forms.--
                    (A) In general.--Subsection (a) of section 6051 
                (relating to receipts for employees) is amended by 
                striking ``and'' at the end of paragraph (11), by 
                striking the period at the end of paragraph (12) and 
                inserting ``, and'', and by inserting after paragraph 
                (12) the following new paragraph:
            ``(13) the total amount of deferrals for the year under a 
        nonqualified deferred compensation plan (within the meaning of 
        section 409A(d)).''.
                    (B) Threshold.--Subsection (a) of section 6051 is 
                amended by adding at the end the following: ``In the 
                case of the amounts required to be shown by paragraph 
                (13), the Secretary may (by regulation) establish a 
                minimum amount of deferrals below which paragraph (13) 
                does not apply.''.
            (2) Wage withholding.--Section 3401(a) (defining wages) is 
        amended by adding at the end the following flush sentence:

[[Page 118 STAT. 1640]]

        ``The term `wages' includes any amount includible in gross 
        income of an employee under section 409A and payment of such 
        amount shall be treated as having been made in the taxable year 
        in which the amount is so includible.''.
            (3) Other reporting.--Section <<NOTE: 26 USC 6041.>> 6041 
        (relating to information at source) is amended by adding at the 
        end the following new subsection:

    ``(g) Nonqualified Deferred <<NOTE: Applicability.>> Compensation.--
Subsection (a) shall apply to--
            ``(1) any deferrals for the year under a nonqualified 
        deferred compensation plan (within the meaning of section 
        409A(d)), whether or not paid, except that this paragraph shall 
        not apply to deferrals which are required to be reported under 
        section 6051(a)(13) (without regard to any de minimis 
        exception), and
            ``(2) any amount includible under section 409A and which is 
        not treated as wages under section 3401(a).''.

    (c) Clerical Amendment.--The table of sections for such subpart A of 
part I of subchapter D of chapter 1 is amended by adding at the end the 
following new item:

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

    (d) Effective <<NOTE: 26 USC 409A note.>> Date.--
            (1) In general.--The amendments made by this section shall 
        apply to amounts deferred after December 31, 2004.
            (2) Special rules.--
                    (A) Earnings.--The amendments made by this section 
                shall apply to earnings on deferred compensation only to 
                the extent that such amendments apply to such 
                compensation.
                    (B) Material modifications.--For purposes of this 
                subsection, amounts deferred in taxable years beginning 
                before January 1, 2005, shall be treated as amounts 
                deferred in a taxable year beginning on or after such 
                date if the plan under which the deferral is made is 
                materially modified after October 3, 2004, unless such 
                modification is pursuant to the guidance issued under 
                subsection (f).
            (3) Exception for nonelective deferred compensation.--The 
        amendments made by this section shall not apply to any 
        nonelective deferred compensation to which section 457 of the 
        Internal Revenue Code of 1986 does not apply by reason of 
        section 457(e)(12) of such Code, but only if such compensation 
        is provided under a nonqualified deferred compensation plan--
                    (A) which was in existence on May 1, 2004,
                    (B) which was providing nonelective deferred 
                compensation described in such section 457(e)(12) on 
                such date, and
                    (C) which is established or maintained by an 
                organization incorporated on July 2, 1974.
        If, after May 1, 2004, a plan described in the preceding 
        sentence adopts a plan amendment which provides a material 
        change in the classes of individuals eligible to participate in 
        the plan, this paragraph shall not apply to any nonelective 
        deferred compensation provided under the plan on or after the 
        date of the adoption of the amendment.

    (e) Guidance Relating to <<NOTE: Deadline. 26 USC 409A 
note.>> 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

[[Page 118 STAT. 1641]]

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 <<NOTE: Deadline. 26 USC 409A 
note.>> Termination of Certain Existing Arrangements.--Not later than 60 
days after the date of the enactment of this Act, the Secretary of the 
Treasury shall issue guidance providing a limited period during which a 
nonqualified deferred compensation plan adopted before December 31, 
2004, may, without violating the requirements of paragraphs (2), (3), 
and (4) of section 409A(a) of the Internal Revenue Code of 1986 (as 
added by this section), be amended--
            (1) to provide that a participant may terminate 
        participation in the plan, or cancel an outstanding deferral 
        election with regard to amounts deferred after December 31, 
        2004, but only if amounts subject to the termination or 
        cancellation are includible in income of the participant as 
        earned (or, if later, when no longer subject to substantial risk 
        of forfeiture), and
            (2) to conform to the requirements of such section 409A with 
        regard to amounts deferred after December 31, 2004.

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

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

    (c) Effective <<NOTE: 26 USC 197 note.>> Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to property acquired 
        after the date of the enactment of this Act.
            (2) Section 1245.--The amendment made by subsection (b)(2) 
        shall apply to franchises acquired after the date of the 
        enactment of this Act.

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

    (a) In General.--Section 6331(h) (relating to continuing levy on 
certain payments) is amended by adding at the end the following new 
paragraph:
            ``(3) Increase in levy for <<NOTE: Applicability.>> certain 
        payments.--Paragraph (1) shall be applied by substituting `100 
        percent' for `15 percent' in the case of any specified payment 
        due to a vendor of goods or services sold or leased to the 
        Federal Government.''.

[[Page 118 STAT. 1642]]

    (b) Effective Date.--The <<NOTE: 26 USC 6331 note.>> amendment made 
by this section shall take effect on the date of the enactment of this 
Act.

SEC. 888. MODIFICATION OF STRADDLE RULES.

    (a) Rules Relating to Identified Straddles.--
            (1) In general.--Subparagraph (A) of section 1092(a)(2) 
        (relating to special rule for identified straddles) is amended 
        to read as follows:
                    ``(A) In general.--In the case of any straddle which 
                is an identified straddle--
                          ``(i) paragraph (1) shall not apply with 
                      respect to identified positions comprising the 
                      identified straddle,
                          ``(ii) if there is any loss with respect to 
                      any identified position of the identified 
                      straddle, the basis of each of the identified 
                      offsetting positions in the identified straddle 
                      shall be increased by an amount which bears the 
                      same ratio to the loss as the unrecognized gain 
                      with respect to such offsetting position bears to 
                      the aggregate unrecognized gain with respect to 
                      all such offsetting positions, and
                          ``(iii) any loss described in clause (ii) 
                      shall not otherwise be taken into account for 
                      purposes of this title.''.
            (2) Identified straddle.--Section 1092(a)(2)(B) (defining 
        identified straddle) is amended--
                    (A) by striking clause (ii) and inserting the 
                following:
                          ``(ii) to the extent provided by regulations, 
                      the value of each position of which (in the hands 
                      of the taxpayer immediately before the creation of 
                      the straddle) is not less than the basis of such 
                      position in the hands of the taxpayer at the time 
                      the straddle is created, and'', and
                    (B) by adding at the end the following new flush 
                sentence:
                ``The Secretary shall <<NOTE: Regulations.>> prescribe 
                regulations which specify the proper methods for clearly 
                identifying a straddle as an identified straddle (and 
                the positions comprising such straddle), which specify 
                the rules for the application of this section for a 
                taxpayer which fails to properly identify the positions 
                of an identified straddle, and which specify the 
                ordering rules in cases where a taxpayer disposes of 
                less than an entire position which is part of an 
                identified straddle.''.
            (3) Unrecognized gain.--Section 1092(a)(3) (defining 
        unrecognized gain) is amended by redesignating subparagraph (B) 
        as subparagraph (C) and by inserting after subparagraph (A) the 
        following new subparagraph:
                    ``(B) Special rule for identified straddles.--For 
                purposes of paragraph (2)(A)(ii), the unrecognized gain 
                with respect to any identified offsetting position shall 
                be the excess of the fair market value of the position 
                at the time of the determination over the fair market 
                value of the position at the time the taxpayer 
                identified the position as a position in an identified 
                straddle.''.

[[Page 118 STAT. 1643]]

            (4) Conforming amendment.--Section 1092(c)(2) is amended by 
        striking subparagraph (B) and by redesignating subparagraph (C) 
        as subparagraph (B).

    (b) Physically Settled Positions.--Section 1092(d) (relating to 
definitions and special rules) is amended by adding at the end the 
following new paragraph:
            ``(8) Special rules for physically settled positions.--For 
        purposes of subsection (a), if a taxpayer settles a position 
        which is part of a straddle by delivering property to which the 
        position relates (and such position, if terminated, would result 
        in a realization of a loss), then such taxpayer shall be treated 
        as if such taxpayer--
                    ``(A) terminated the position for its fair market 
                value immediately before the settlement, and
                    ``(B) sold the property so delivered by the taxpayer 
                at its fair market value.''.

    (c) Repeal of Stock Exception.--
            (1) In general.--Paragraph (3) of section 1092(d) (relating 
        to definitions and special rules) is amended to read as follows:
            ``(3) Special rules for stock.--For purposes of paragraph 
        (1)--
                    ``(A) In general.--In the case of stock, the term 
                `personal property' includes stock only if--
                          ``(i) such stock is of a type which is 
                      actively traded and at least 1 of the positions 
                      offsetting such stock is a position with respect 
                      to such stock or substantially similar or related 
                      property, or
                          ``(ii) such stock is of a corporation formed 
                      or availed of to take positions in personal 
                      property which offset positions taken by any 
                      shareholder.
                    ``(B) Rule for application.--For purposes of 
                determining whether subsection (e) applies to any 
                transaction with respect to stock described in 
                subparagraph (A)(ii), all includible corporations of an 
                affiliated group (within the meaning of section 1504(a)) 
                shall be treated as 1 taxpayer.''.
            (2) Conforming amendment.--Section 1258(d)(1) is amended by 
        striking ``; except that the term `personal property' shall 
        include stock''.

    (d) Holding period for dividend exclusion.--The last sentence of 
section 246(c) is amended by inserting: ``, other than a qualified 
covered call option to which section 1092(f) applies'' before the period 
at the end.
    (e) Effective Date.--The <<NOTE: 26 USC 246 note.>> amendments made 
by this section shall apply to positions established on or after the 
date of the enactment of this Act.

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

    (a) In General.--Paragraph (1) of section 4132(a) (defining taxable 
vaccine) is amended by redesignating subparagraphs (I), (J), (K), and 
(L) as subparagraphs (J), (K), (L), and (M), respectively, and by 
inserting after subparagraph (H) the following new subparagraph:
                    ``(I) Any vaccine against hepatitis A.''.

    (b) Effective <<NOTE: 26 USC 4132 note.>> Date.--

[[Page 118 STAT. 1644]]

            (1) Sales, etc.--The <<NOTE: Applicability.>> amendments 
        made by subsection (a) shall apply to sales and uses on or after 
        the first day of the first month which begins more than 4 weeks 
        after the date of the enactment of this Act.
            (2) Deliveries.--For purposes of paragraph (1) and section 
        4131 of the Internal Revenue Code of 1986, in the case of sales 
        on or before the effective date described in such paragraph for 
        which delivery is made after such date, the delivery date shall 
        be considered the sale date.

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

    (a) In General.--Section 4132(a)(1) (defining taxable vaccine), as 
amended by this Act, is amended by adding at the end the following new 
subparagraph:
                    ``(N) Any trivalent vaccine against influenza.''.

    (b) Effective <<NOTE: 26 USC 4132 note.>> Date.--
            (1) Sales, etc.--The amendment made by this section shall 
        apply to sales and uses on or after the later of--
                    (A) the first day of the first month which begins 
                more than 4 weeks after the date of the enactment of 
                this Act, or
                    (B) the date on which the Secretary of Health and 
                Human Services lists any vaccine against influenza for 
                purposes of compensation for any vaccine-related injury 
                or death through the Vaccine Injury Compensation Trust 
                Fund.
            (2) Deliveries.--For purposes of paragraph (1) and section 
        4131 of the Internal Revenue Code of 1986, in the case of sales 
        on or before the effective date described in such paragraph for 
        which delivery is made after such date, the delivery date shall 
        be considered the sale date.

SEC. 891. EXTENSION OF IRS USER FEES.

    (a) In General.--Section 7528(c) (relating to termination) is 
amended by striking ``December 31, 2004'' and inserting ``September 30, 
2014''.
    (b) Effective Date.--The <<NOTE: 26 USC 7528 note.>> amendment made 
by this section shall apply to requests after the date of the enactment 
of this Act.

SEC. 892. COBRA FEES.

    (a) Use of Merchandise Processing Fee.--Section 13031(f) of the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 
58c(f)) is amended--
            (1) in paragraph (1), by aligning subparagraph (B) with 
        subparagraph (A); and
            (2) in paragraph (2), by striking ``commercial operations'' 
        and all that follows through ``processing.'' and inserting 
        ``customs revenue functions as defined in section 415 of the 
        Homeland Security Act of 2002 (other than functions performed by 
        the Office of International Affairs referred to in section 
        415(8) of that Act), and for automation (including the 
        Automation Commercial Environment computer system), and for no 
        other purpose. To the extent that funds in the Customs User Fee 
        Account are insufficient to pay the costs of such customs 
        revenue functions, customs duties in an amount equal to the 
        amount of such insufficiency shall be available, to the extent

[[Page 118 STAT. 1645]]

        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 <<NOTE: 19 USC 58c 
        note.>> 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 <<NOTE: 19 USC 58c.>> amended to read as follows:

    ``(3)(A) Fees may not be charged under paragraphs (9) and (10) of 
subsection (a) after September 30, 2014.
    ``(B)(i) Subject to clause (ii), Fees may not be charged under 
paragraphs (1) through (8) of subsection (a) after September 30, 2014.
    ``(ii) In fiscal year 2006 and in each succeeding fiscal year for 
which fees under paragraphs (1) through (8) of subsection (a) are 
authorized--
            ``(I) the Secretary of the Treasury shall charge fees under 
        each such paragraph in amounts that are reasonably related to 
        the costs of providing customs services in connection with the 
        activity or item for which the fee is charged under such 
        paragraph, except that in no case may the fee charged under any 
        such paragraph exceed by more than 10 percent the amount 
        otherwise prescribed by such paragraph;
            ``(II) the amount of fees collected under such paragraphs 
        may not exceed, in the aggregate, the amounts paid in that 
        fiscal year for the costs described in subsection (f)(3)(A) 
        incurred in providing customs services in connection with the 
        activity or item for which the fees are charged under such 
        paragraphs;
            ``(III) a fee may not be collected under any such paragraph 
        except to the extent such fee will be expended to pay the costs 
        described in subsection (f)(3)(A) incurred in providing

[[Page 118 STAT. 1646]]

        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 <<NOTE: 19 USC 58c.>> 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 <<NOTE: Deadline. Reports.>> Collected by 
Department of Homeland Security.--The Secretary of the Treasury shall 
conduct a study of all the fees collected by the Department of Homeland 
Security, and shall submit to the Congress, not later than September 30, 
2005, a report containing the recommendations of the Secretary on--
            (1) what fees should be eliminated;
            (2) what the rate of fees retained should be; and
            (3) any other recommendations with respect to the fees that 
        the Secretary considers appropriate.

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

    (a) In General.--Section 332 is amended by adding at the end the 
following new subsection:
    ``(d) Recognition of Gain on Liquidation of Certain Holding 
Companies.--
            ``(1) In general.--In the case of any distribution to a 
        foreign corporation in complete liquidation of an applicable 
        holding company--
                    ``(A) subsection (a) and section 331 shall not apply 
                to such distribution, and
                    ``(B) such distribution shall be treated as a 
                distribution to which section 301 applies.
            ``(2) Applicable holding company.--For purposes of this 
        subsection:
                    ``(A) In general.--The term `applicable holding 
                company' means any domestic corporation--
                          ``(i) which is a common parent of an 
                      affiliated group,
                          ``(ii) stock of which is directly owned by the 
                      distributee foreign corporation,
                          ``(iii) substantially all of the assets of 
                      which consist of stock in other members of such 
                      affiliated group, and

[[Page 118 STAT. 1647]]

                          ``(iv) which has not been in existence at all 
                      times during the 5 years immediately preceding the 
                      date of the liquidation.
                    ``(B) Affiliated group.--For purposes of this 
                subsection, the term `affiliated group' has the meaning 
                given such term by section 1504(a) (without regard to 
                paragraphs (2) and (4) of section 1504(b)).
            ``(3) Coordination with subpart f.--If the distributee of a 
        distribution described in paragraph (1) is a controlled foreign 
        corporation (as defined in section 957), then notwithstanding 
        paragraph (1) or subsection (a), such distribution shall be 
        treated as a distribution to which section 331 applies.
            ``(4) Regulations.--The Secretary shall provide such 
        regulations as appropriate to prevent the abuse of this 
        subsection, including regulations which provide, for the 
        purposes of clause (iv) of paragraph (2)(A), that a corporation 
        is not in existence for any period unless it is engaged in the 
        active conduct of a trade or business or owns a significant 
        ownership interest in another corporation so engaged.''.

    (b) Effective Date.--The <<NOTE: 26 USC 332 note.>> amendment made 
by this section shall apply to distributions in complete liquidation 
occurring on or after the date of the enactment of this Act.

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

    (a) In General.--Section 864(c)(4)(B) (relating to treatment of 
income from sources without the United States as effectively connected 
income) is amended by adding at the end the following new flush 
sentence:
                ``Any income or gain which is equivalent to any item of 
                income or gain described in clause (i), (ii), or (iii) 
                shall be treated in the same manner as such item for 
                purposes of this subparagraph.''.

    (b) Effective Date.--The <<NOTE: 26 USC 864 note.>> amendment made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

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

    (a) In General.--Section 904(f)(3) (relating to dispositions) is 
amending by adding at the end the following new subparagraph:
                    ``(D) Application to certain dispositions of stock 
                in controlled foreign corporation.--
                          ``(i) In general.--This paragraph shall apply 
                      to an applicable disposition in the same manner as 
                      if it were a disposition of property described in 
                      subparagraph (A), except that the exception 
                      contained in subparagraph (C)(i) shall not apply.
                          ``(ii) Applicable disposition.--For purposes 
                      of clause (i), the term `applicable disposition' 
                      means any disposition of any share of stock in a 
                      controlled foreign corporation in a transaction or 
                      series of transactions if, immediately before such 
                      transaction or series of transactions, the 
                      taxpayer owned more than 50 percent (by vote or 
                      value) of the stock of the controlled foreign 
                      corporation. Such term shall not include a 
                      disposition described in clause (iii) or (iv), 
                      except that clause (i)

[[Page 118 STAT. 1648]]

                      shall apply to any gain recognized on any such 
                      disposition.
                          ``(iii) Exception for certain exchanges where 
                      ownership percentage retained.--A disposition 
                      shall not be treated as an applicable disposition 
                      under clause (ii) if it is part of a transaction 
                      or series of transactions--
                                    ``(I) to which section 351 or 721 
                                applies, or under which the transferor 
                                receives stock in a foreign corporation 
                                in exchange for the stock in the 
                                controlled foreign corporation and the 
                                stock received is exchanged basis 
                                property (as defined in section 
                                7701(a)(44)), and
                                    ``(II) immediately after which, the 
                                transferor owns (by vote or value) at 
                                least the same percentage of stock in 
                                the controlled foreign corporation (or, 
                                if the controlled foreign corporation is 
                                not in existence after such transaction 
                                or series of transactions, in another 
                                foreign corporation stock in which was 
                                received by the transferor in exchange 
                                for stock in the controlled foreign 
                                corporation) as the percentage of stock 
                                in the controlled foreign corporation 
                                which the taxpayer owned immediately 
                                before such transaction or series of 
                                transactions.
                          ``(iv) Exception for certain asset 
                      acquisitions.--A disposition shall not be treated 
                      as an applicable disposition under clause (ii) if 
                      it is part of a transaction or series of 
                      transactions in which the taxpayer (or any member 
                      of a controlled group of corporations filing a 
                      consolidated return under section 1501 which 
                      includes the taxpayer) acquires the assets of a 
                      controlled foreign corporation in exchange for the 
                      shares of the controlled foreign corporation in a 
                      liquidation described in section 332 or a 
                      reorganization described in section 368(a)(1).
                          ``(v) Controlled foreign corporation.--For 
                      purposes of this subparagraph, the term 
                      `controlled foreign corporation' has the meaning 
                      given such term by section 957.
                          ``(vi) Stock ownership.--For purposes of this 
                      subparagraph, ownership of stock shall be 
                      determined under the rules of subsections (a) and 
                      (b) of section 958.''.

    (b) Effective Date.--The <<NOTE: 26 USC 904 note.>> amendment made 
by this section shall apply to dispositions after the date of the 
enactment of this Act.

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

    (a) In General.--Paragraph (8) of section 108(e) (relating to 
general rules for discharge of indebtedness (including discharges not in 
title 11 cases or insolvency)) is amended to read as follows:
            ``(8) Indebtedness satisfied by corporate stock or 
        partnership interest.--For purposes of determining income of a 
        debtor from discharge of indebtedness, if--
                    ``(A) a debtor corporation transfers stock, or

[[Page 118 STAT. 1649]]

                    ``(B) a debtor partnership transfers a capital or 
                profits interest in such partnership,
        to a creditor in satisfaction of its recourse or nonrecourse 
        indebtedness, such corporation or partnership shall be treated 
        as having satisfied the indebtedness with an amount of money 
        equal to the fair market value of the stock or interest. In the 
        case of any partnership, any discharge of indebtedness income 
        recognized under this paragraph shall be included in the 
        distributive shares of taxpayers which were the partners in the 
        partnership immediately before such discharge.''.

    (b) Effective Date.--The <<NOTE: 26 USC 108 note.>> amendment made 
by this section shall apply with respect to cancellations of 
indebtedness occurring on or after the date of the enactment of this 
Act.

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

    (a) In General.--Section 453(f)(4)(B) (relating to purchaser 
evidences of indebtedness payable on demand or readily tradable) is 
amended by striking ``is issued by a corporation or a government or 
political subdivision thereof and''.
    (b) Effective Date.--The <<NOTE: 26 USC 453 note.>> amendment made 
by this section shall apply to sales occurring on or after the date of 
the enactment of this Act.

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

    (a) In General.--Section 361(b)(3) (relating to treatment of 
transfers to creditors) is amended by adding at the end the following 
new sentence: ``In the case of a reorganization described in section 
368(a)(1)(D) with respect to which stock or securities of the 
corporation to which the assets are transferred are distributed in a 
transaction which qualifies under section 355, this paragraph shall 
apply only to the extent that the sum of the money and the fair market 
value of other property transferred to such creditors does not exceed 
the adjusted bases of such assets transferred.''.
    (b) Liabilities in Excess of Basis.--Section 357(c)(1)(B) is amended 
by inserting ``with respect to which stock or securities of the 
corporation to which the assets are transferred are distributed in a 
transaction which qualifies under section 355'' after ``section 
368(a)(1)(D)''.
    (c) Effective Date.--The <<NOTE: 26 USC 357 note.>> amendments made 
by this section shall apply to transfers of money or other property, or 
liabilities assumed, in connection with a reorganization occurring on or 
after the date of the enactment of this Act.

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

    (a) In General.--Section 351(g)(3)(A) is amended by adding at the 
end the following: ``Stock shall not be treated as participating in 
corporate growth to any significant extent unless there is a real and 
meaningful likelihood of the shareholder actually participating in the 
earnings and growth of the corporation.''.
    (b) Effective Date.--The <<NOTE: 26 USC 351 note.>> amendment made 
by this section shall apply to transactions after May 14, 2003.

[[Page 118 STAT. 1650]]

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

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

    (c) Effective Date.--The <<NOTE: 26 USC 1563 note.>> amendments made 
by this section shall apply to taxable years beginning after the date of 
the enactment of this Act.

SEC. 901. CLASS LIVES FOR UTILITY GRADING COSTS.

    (a) Gas Utility Property.--Section 168(e)(3)(E) (defining 15-year 
property), as amended by this Act, is amended by striking ``and'' at the 
end of clause (iv), by striking the period at the end of clause (v) and 
inserting ``, and'', and by adding at the end the following new clause:
                          ``(vi) initial clearing and grading land 
                      improvements with respect to gas utility 
                      property.''.

    (b) Electric Utility Property.--Section 168(e)(3) is amended by 
adding at the end the following new subparagraph:
                    ``(F) 20-year property.--The term `20-year property' 
                means initial clearing and grading land improvements 
                with respect to any electric utility transmission and 
                distribution plant.''.

    (c) Conforming Amendment.--The table contained in section 
168(g)(3)(B), as amended by this Act, is amended by inserting after the 
item relating to subparagraph (E)(v) the following new items:

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


[[Page 118 STAT. 1651]]



    (d) Effective Date.--The <<NOTE: 26 USC 168 note.>> amendments made 
by this section shall apply to property placed in service after the date 
of the enactment of this Act.

SEC. 902. CONSISTENT AMORTIZATION OF PERIODS FOR INTANGIBLES.

    (a) Start-Up Expenditures.--
            (1) Allowance of deduction.--Paragraph (1) of section 195(b) 
        (relating to start-up expenditures) is amended to read as 
        follows:
            ``(1) Allowance of deduction.--If a taxpayer elects the 
        application of this subsection with respect to any start-up 
        expenditures--
                    ``(A) the taxpayer shall be allowed a deduction for 
                the taxable year in which the active trade or business 
                begins in an amount equal to the lesser of--
                          ``(i) the amount of start-up expenditures with 
                      respect to the active trade or business, or
                          ``(ii) $5,000, reduced (but not below zero) by 
                      the amount by which such start-up expenditures 
                      exceed $50,000, and
                    ``(B) the remainder of such start-up expenditures 
                shall be allowed as a deduction ratably over the 180-
                month period beginning with the month in which the 
                active trade or business begins.''.
            (2) Conforming amendment.--Subsection (b) of section 195 is 
        amended by striking ``Amortize'' and inserting ``Deduct'' in the 
        heading.

    (b) Organizational Expenditures.--Subsection (a) of section 248 
(relating to organizational expenditures) is amended to read as follows:
    ``(a) Election to Deduct.--If a <<NOTE: Regulations.>> corporation 
elects the application of this subsection (in accordance with 
regulations prescribed by the Secretary) with respect to any 
organizational expenditures--
            ``(1) the corporation shall be allowed a deduction for the 
        taxable year in which the corporation begins business in an 
        amount equal to the lesser of--
                    ``(A) the amount of organizational expenditures with 
                respect to the taxpayer, or
                    ``(B) $5,000, reduced (but not below zero) by the 
                amount by which such organizational expenditures exceed 
                $50,000, and
            ``(2) the remainder of such organizational expenditures 
        shall be allowed as a deduction ratably over the 180-month 
        period beginning with the month in which the corporation begins 
        business.''.

    (c) Treatment of Organizational and Syndication Fees or 
Partnerships.--
            (1) In general.--Section 709(b) (relating to amortization of 
        organization fees) is amended by redesignating paragraph (2) as 
        paragraph (3) and by amending paragraph (1) to read as follows:
            ``(1) Allowance of deduction.--If a taxpayer elects the 
        application of this subsection (in accordance with regulations 
        prescribed by the Secretary) with respect to any organizational 
        expenses--

[[Page 118 STAT. 1652]]

                    ``(A) the taxpayer shall be allowed a deduction for 
                the taxable year in which the partnership begins 
                business in an amount equal to the lesser of--
                          ``(i) the amount of organizational expenses 
                      with respect to the partnership, or
                          ``(ii) $5,000, reduced (but not below zero) by 
                      the amount by which such organizational expenses 
                      exceed $50,000, and
                    ``(B) the remainder of such organizational expenses 
                shall be allowed as a deduction ratably over the 180-
                month period beginning with the month in which the 
                partnership begins business.
            ``(2) Dispositions before close of amortization period.--In 
        any case in which a partnership is liquidated before the end of 
        the period to which paragraph (1)(B) applies, any deferred 
        expenses attributable to the partnership which were not allowed 
        as a deduction by reason of this section may be deducted to the 
        extent allowable under section 165.''.
            (2) Conforming amendment.--Subsection (b) of section 709 is 
        amended by striking ``Amortization'' and inserting ``Deduction'' 
        in the heading.

    (d) Effective Date.--The <<NOTE: 26 USC 195 note.>> amendments made 
by this section shall apply to amounts paid or incurred after the date 
of the enactment of this Act.

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

    (a) In General.--Section 6404(g) (relating to suspension of interest 
and certain penalties where Secretary fails to contact taxpayer) is 
amended by striking ``1-year period (18-month period in the case of 
taxable years beginning before January 1, 2004)'' both places it appears 
and inserting ``18-month period''.
    (b) Exception for Gross Misstatement.--Section 6404(g)(2) (relating 
to exceptions) is amended by striking ``or'' at the end of subparagraph 
(C), by redesignating subparagraph (D) as subparagraph (E), and by 
inserting after subparagraph (C) the following new subparagraph:
                    ``(D) any interest, penalty, addition to tax, or 
                additional amount with respect to any gross 
                misstatement; or''.

    (c) Exception for Listed and Reportable Transactions.--Section 
6404(g)(2) (relating to exceptions), as amended by subsection (b), is 
amended by striking ``or'' at the end of subparagraph (D), by 
redesignating subparagraph (E) as subparagraph (F), and by inserting 
after subparagraph (D) the following new subparagraph:
                    ``(E) any interest, penalty, addition to tax, or 
                additional amount with respect to any reportable 
                transaction with respect to which the requirement of 
                section 6664(d)(2)(A) is not met and any listed 
                transaction (as defined in 6707A(c)); or''.

    (d) Effective <<NOTE: 26 USC 6404 note.>> Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2003.
            (2) Exception for reportable or listed transactions.--The 
        amendments made by subsection (c) shall apply with respect to 
        interest accruing after October 3, 2004.

[[Page 118 STAT. 1653]]

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

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

    (c) Conforming Amendment.--Section 13273 of the Revenue 
Reconciliation Act of 1993 (Public Law 103-66) <<NOTE: 107 Stat. 
542.>> is repealed.

    (d) Effective Date.--The provisions of, and the amendment made by, 
this section shall apply to payments made after December 31, 2004.

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

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

such disposition shall be treated as meeting the requirements of section 
422(a)(1) or 423(a)(1), whichever is applicable.''.
    (b) Effective Date.--The <<NOTE: 26 USC 421 note.>> amendment made 
by this section shall apply to sales after the date of the enactment of 
this Act.

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

    (a) In General.--Section 72 (relating to annuities and certain 
proceeds of endowment and life insurance contracts) is amended by 
redesignating subsection (w) as subsection (x) and by inserting after 
subsection (v) the following new subsection:
    ``(w) Application of Basis Rules to Nonresident Aliens.--
            ``(1) In general.--Notwithstanding any other provision of 
        this section, for purposes of determining the portion of any 
        distribution which is includible in gross income of a 
        distributee who is a citizen or resident of the United States, 
        the investment

[[Page 118 STAT. 1654]]

        in the contract shall not include any applicable nontaxable 
        contributions or applicable nontaxable earnings.
            ``(2) Applicable nontaxable contribution.--For purposes of 
        this subsection, the term `applicable nontaxable contribution' 
        means any employer or employee contribution--
                    ``(A) which was made with respect to compensation--
                          ``(i) for labor or personal services performed 
                      by an employee who, at the time the labor or 
                      services were performed, was a nonresident alien 
                      for purposes of the laws of the United States in 
                      effect at such time, and
                          ``(ii) which is treated as from sources 
                      without the United States, and
                    ``(B) which was not subject to income tax (and would 
                have been subject to income tax if paid as cash 
                compensation when the services were rendered) under the 
                laws of the United States or any foreign country.
            ``(3) Applicable nontaxable earnings.--For purposes of this 
        subsection, the term `applicable nontaxable earnings' means 
        earnings--
                    ``(A) which are paid or accrued with respect to any 
                employer or employee contribution which was made with 
                respect to compensation for labor or personal services 
                performed by an employee,
                    ``(B) with respect to which the employee was at the 
                time the earnings were paid or accrued a nonresident 
                alien for purposes of the laws of the United States, and
                    ``(C) which were not subject to income tax under the 
                laws of the United States or any foreign country.
            ``(4) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the provisions of 
        this subsection, including regulations treating contributions 
        and earnings as not subject to tax under the laws of any foreign 
        country where appropriate to carry out the purposes of this 
        subsection.''.

    (b) Basis.--Section 83 (relating to property transferred in 
connection with the performance of services is amended by adding after 
paragraph (3) of subsection (c) the following new paragraph:
            ``(4) For purposes of determining an individual's basis in 
        property transferred in connection with the performance of 
        services, rules similar to the rules of section 72(w) shall 
        apply.''.

    (c) Effective Date.--The <<NOTE: 26 USC 72 note.>> amendments made 
by this section shall apply to distributions on or after the date of the 
enactment of this Act.

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

    (a) In General.--Paragraph (2) of section 274(e) (relating to 
expenses treated as compensation) is amended to read as follows:
            ``(2) Expenses treated as compensation.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), expenses for goods, services, and 
                facilities, to the extent that the expenses are treated 
                by the taxpayer, with respect to the recipient of the 
                entertainment, amusement, or recreation, as compensation 
                to an employee on the taxpayer's return of tax under 
                this chapter and as wages to such

[[Page 118 STAT. 1655]]

                employee for purposes of chapter 24 (relating to 
                withholding of income tax at source on wages).
                    ``(B) Specified individuals.--
                          ``(i) In general.--
                      In <<NOTE: Applicability.>> the case of a 
                      recipient who is a specified individual, 
                      subparagraph (A) and paragraph (9) shall each be 
                      applied by substituting `to the extent that the 
                      expenses do not exceed the amount of the expenses 
                      which' for `to the extent that the expenses'.
                          ``(ii) Specified individual.--For purposes of 
                      clause (i), the term `specified individual' means 
                      any individual who--
                                    ``(I) is subject to the requirements 
                                of section 16(a) of the Securities 
                                Exchange Act of 1934 with respect to the 
                                taxpayer, or
                                    ``(II) would be subject to such 
                                requirements if the taxpayer were an 
                                issuer of equity securities referred to 
                                in such section.''.

    (b) Effective Date.--The <<NOTE: 26 USC 274 note.>> amendment made 
by this section shall apply to expenses incurred after the date of the 
enactment of this Act.

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

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

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

    ``(a) Bona Fide Resident.--For purposes of this subpart, section 
865(g)(3), section 876, section 881(b), paragraphs (2) and (3) of 
section 901(b), section 957(c), section 3401(a)(8)(C), and section 
7654(a), except as provided in regulations, the term `bona fide 
resident' means a person--
            ``(1) who is present for at least 183 days during the 
        taxable year in Guam, American Samoa, the Northern Mariana 
        Islands, Puerto Rico, or the Virgin Islands, as the case may be, 
        and
            ``(2) who does not have a tax home (determined under the 
        principles of section 911(d)(3) without regard to the second 
        sentence thereof) outside such specified possession during the 
        taxable year and does not have a closer connection (determined 
        under the principles of section 7701(b)(3)(B)(ii)) to the United 
        States or a foreign country than to such specified possession.

For purposes of paragraph (1), the determination as to whether a person 
is present for any day shall be made under the principles of section 
7701(b).
    ``(b) Source Rules.--Except as provided in regulations, for purposes 
of this title--
            ``(1) except as <<NOTE: Applicability.>> provided in 
        paragraph (2), rules similar to the rules for determining 
        whether income is income from sources within the United States 
        or is effectively connected with the conduct of a trade or 
        business within the United States shall apply for purposes of 
        determining whether income is from sources within a possession 
        specified in subsection (a)(1) or effectively connected with the 
        conduct of a trade or business within any such possession, and
            ``(2) any income treated as income from sources within the 
        United States or as effectively connected with the conduct

[[Page 118 STAT. 1656]]

        of a trade or business within the United States shall not be 
        treated as income from sources within any such possession or as 
        effectively connected with the conduct of a trade or business 
        within any such possession.

    ``(c) Reporting Requirement.--
            ``(1) In general.--If, for any taxable year, an individual 
        takes the position for United States income tax reporting 
        purposes that the individual became, or ceases to be, a bona 
        fide resident of a possession specified in subsection (a)(1), 
        such individual shall file with the Secretary, at such time and 
        in such manner as the Secretary may prescribe, notice of such 
        position.
            ``(2) Transition rule.--If, for any of an individual's 3 
        taxable years ending before the individual's first taxable year 
        ending after the date of the enactment of this subsection, the 
        individual took a position described in paragraph (1), the 
        individual shall file with the Secretary, at such time and in 
        such manner as the Secretary may prescribe, notice of such 
        position.''.

    (b) Penalty.--Section 6688 is amended--
            (1) by inserting ``under section 937(c) or'' before ``by 
        regulations'', and
            (2) by striking ``$100'' and inserting ``$1,000''.

    (c) Conforming and Clerical Amendments.--
            (1) Section 931(d) is amended to read as follows:

    ``(d) Employees of the United States.--Amounts paid for services 
performed as an employee of the United States (or any agency thereof) 
shall be treated as not described in paragraph (1) or (2) of subsection 
(a).''.
            (2) Section 932 is amended by striking ``at the close of the 
        taxable year'' and inserting ``during the entire taxable year'' 
        each place it appears.
            (3) Section 934(b)(4) is amended by striking ``the Virgin 
        Islands or'' each place it appears.
            (4) Section 935, as in effect before the effective date of 
        its repeal, is amended--
                    (A) by striking ``for the taxable year who'' in 
                subsection (a) and inserting ``who, during the entire 
                taxable year'',
                    (B) by inserting ``bona fide'' before ``resident'' 
                in subsection (a)(1),
                    (C) in subsection (b)(1)--
                          (i) by inserting ``(other a bona fide resident 
                      of Guam during the entire taxable year)'' after 
                      ``United States'' in subparagraph (A), and
                          (ii) by inserting ``bona fide'' before 
                      ``resident'' in subparagraph (B), and
                    (D) in subsection (b)(2) by striking ``residence 
                and''.
            (5) Section 957(c) is amended--
                    (A) in paragraph (2)(B) by striking ``conduct of an 
                active'' and inserting ``active conduct of a'', and
                    (B) in the last sentence by striking ``derived from 
                sources within a possession, was effectively connected 
                with the conduct of a trade or business within a 
                possession, or''.

[[Page 118 STAT. 1657]]

            (6) The table of sections of subpart D of part III of 
        subchapter N of chapter 1 is amended by adding at the end the 
        following new item:

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

    (d) Effective <<NOTE: 26 USC 937 note.>> Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after the date of the enactment of this 
        Act.
            (2) 183-day rule.--Section 937(a)(1) of the Internal Revenue 
        Code of 1986 (as added by this section) shall apply to taxable 
        years beginning after the date of the enactment of this Act.
            (3) Sourcing.--Section 937(b)(2) of such Code (as so added) 
        shall apply to income earned after the date of the enactment of 
        this Act.

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

    (a) In General.--Section 451 (relating to general rule for taxable 
year of inclusion) is amended by adding at the end the following new 
subsection:
    ``(i) Special Rule for Sales or Dispositions To Implement Federal 
Energy Regulatory Commission or State Electric Restructuring Policy.--
            ``(1) In general.--In the case of any qualifying electric 
        transmission transaction for which the taxpayer elects the 
        application of this section, qualified gain from such 
        transaction shall be recognized--
                    ``(A) in the taxable year which includes the date of 
                such transaction to the extent the amount realized from 
                such transaction exceeds--
                          ``(i) the cost of exempt utility property 
                      which is purchased by the taxpayer during the 4-
                      year period beginning on such date, reduced (but 
                      not below zero) by
                          ``(ii) any portion of such cost previously 
                      taken into account under this subsection, and
                    ``(B) ratably over the 8-taxable year period 
                beginning with the taxable year which includes the date 
                of such transaction, in the case of any such gain not 
                recognized under subparagraph (A).
            ``(2) Qualified gain.--For purposes of this subsection, the 
        term `qualified gain' means, with respect to any qualifying 
        electric transmission transaction in any taxable year--
                    ``(A) any ordinary income derived from such 
                transaction which would be required to be recognized 
                under section 1245 or 1250 for such taxable year 
                (determined without regard to this subsection), and
                    ``(B) any income derived from such transaction in 
                excess of the amount described in subparagraph (A) which 
                is required to be included in gross income for such 
                taxable year (determined without regard to this 
                subsection).
            ``(3) Qualifying electric transmission transaction.--For 
        purposes of this subsection, the term `qualifying electric

[[Page 118 STAT. 1658]]

        transmission transaction' means any sale or other disposition 
        before January 1, 2007, of--
                    ``(A) property used in the trade or business of 
                providing electric transmission services, or
                    ``(B) any stock or partnership interest in a 
                corporation or partnership, as the case may be, whose 
                principal trade or business consists of providing 
                electric transmission services,
        but only if such sale or disposition is to an independent 
        transmission company.
            ``(4) Independent transmission company.--For purposes of 
        this subsection, the term `independent transmission company' 
        means--
                    ``(A) an independent transmission provider approved 
                by the Federal Energy Regulatory Commission,
                    ``(B) a person--
                          ``(i) who the Federal Energy Regulatory 
                      Commission determines in its authorization of the 
                      transaction under section 203 of the Federal Power 
                      Act (16 U.S.C. 824b) or by declaratory order is 
                      not a market participant within the meaning of 
                      such Commission's rules applicable to independent 
                      transmission providers, and
                          ``(ii) whose transmission facilities to which 
                      the election under this subsection applies are 
                      under the operational control of a Federal Energy 
                      Regulatory Commission-approved independent 
                      transmission provider before the close of the 
                      period specified in such authorization, but not 
                      later than the close of the period applicable 
                      under subsection (a)(2)(B) as extended under 
                      paragraph (2), or
                    ``(C) in the case of facilities subject to the 
                jurisdiction of the Public Utility Commission of Texas--
                          ``(i) a person which is approved by that 
                      Commission as consistent with Texas State law 
                      regarding an independent transmission provider, or
                          ``(ii) a political subdivision or affiliate 
                      thereof whose transmission facilities are under 
                      the operational control of a person described in 
                      clause (i).
            ``(5) Exempt utility property.--For purposes of this 
        subsection:
                    ``(A) In general.--The term `exempt utility 
                property' means property used in the trade or business 
                of--
                          ``(i) generating, transmitting, distributing, 
                      or selling electricity, or
                          ``(ii) producing, transmitting, distributing, 
                      or selling natural gas.
                    ``(B) Nonrecognition of gain by reason of 
                acquisition of stock.--Acquisition of control of a 
                corporation shall be taken into account under this 
                subsection with respect to a qualifying electric 
                transmission transaction only if the principal trade or 
                business of such corporation is a trade or business 
                referred to in subparagraph (A).
            ``(6) Special rule for consolidated groups.--In the case of 
        a corporation which is a member of an affiliated group filing a 
        consolidated return, any exempt utility property purchased by 
        another member of such group shall be treated

[[Page 118 STAT. 1659]]

        as purchased by such corporation for purposes of applying 
        paragraph (1)(A).
            ``(7) Time for assessment of deficiencies.--If the taxpayer 
        has made the election under paragraph (1) and any gain is 
        recognized by such taxpayer as provided in paragraph (1)(B), 
        then--
                    ``(A) the statutory period for the assessment of any 
                deficiency, for any taxable year in which any part of 
                the gain on the transaction is realized, attributable to 
                such gain shall not expire prior to the expiration of 3 
                years from the date the Secretary is notified by the 
                taxpayer (in such manner as the Secretary may by 
                regulations prescribe) of the purchase of exempt utility 
                property or of an intention not to purchase such 
                property, and
                    ``(B) such deficiency may be assessed before the 
                expiration of such 3-year period notwithstanding any law 
                or rule of law which would otherwise prevent such 
                assessment.
            ``(8) Purchase.--For purposes of this subsection, the 
        taxpayer shall be considered to have purchased any property if 
        the unadjusted basis of such property is its cost within the 
        meaning of section 1012.
            ``(9) Election.--An election under paragraph (1) shall be 
        made at such time and in such manner as the Secretary may 
        require and, once made, shall be irrevocable.
            ``(10) Nonapplication of installment sales treatment.--
        Section 453 shall not apply to any qualifying electric 
        transmission transaction with respect to which an election to 
        apply this subsection is made.''.

    (b) Effective Date.--The <<NOTE: 26 USC 451 note.>> amendments made 
by this section shall apply to transactions occurring after the date of 
the enactment of this Act, in taxable years ending after such date.

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

    (a) In General.--Section 179(b) (relating to limitations) is amended 
by adding at the end the following new paragraph:
            ``(6) Limitation on cost taken into account for certain 
        passenger vehicles.--
                    ``(A) In general.--The cost of any sport utility 
                vehicle for any taxable year which may be taken into 
                account under this section shall not exceed $25,000.
                    ``(B) Sport utility vehicle.--For purposes of 
                subparagraph (A)--
                          ``(i) In general.--The term `sport utility 
                      vehicle' means any 4-wheeled vehicle--
                                    ``(I) which is primarily designed or 
                                which can be used to carry passengers 
                                over public streets, roads, or highways 
                                (except any vehicle operated exclusively 
                                on a rail or rails),
                                    ``(II) which is not subject to 
                                section 280F, and
                                    ``(III) which is rated at not more 
                                than 14,000 pounds gross vehicle weight.
                          ``(ii) Certain vehicles excluded.--Such term 
                      does not include any vehicle which--
                                    ``(I) is designed to have a seating 
                                capacity of more than 9 persons behind 
                                the driver's seat,

[[Page 118 STAT. 1660]]

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

    (b) Effective Date.--The <<NOTE: 26 USC 179 note.>> amendment made 
by this section shall apply to property placed in service after the date 
of the enactment of this Act.

    Approved October 22, 2004.

LEGISLATIVE HISTORY--H.R. 4520:
---------------------------------------------------------------------------

HOUSE REPORTS: Nos. 108-548, Pt. 1 (Comm. on Ways and Means) and 108-755 
(Comm. of Conference).
CONGRESSIONAL RECORD, Vol. 150 (2004):
            June 17, considered and passed House.
            July 15, considered and passed Senate, amended.
            Oct. 7, House agreed to conference report.
            Oct. 8-11, Senate considered and agreed to conference 
                report.

                                  <all>