American Business Competitiveness Act of 2010 - Amends the Internal Revenue Code to: (1) reduce to 23% the maximum income tax rate for corporations; (2) set forth rules for the allocation of foreign-related tax credits and deductions; (3) repeal rules for the application of the worldwide allocation of interest for purposes of computing the limitation on the foreign tax credit; (4) repeal the last-in, first-out (LIFO) and the lower of cost or market methods of inventory; (5) make permanent the increased ($250,000) expensing allowance for depreciable business assets; (6) increase from 15 to 20 years the amortization period for goodwill and other intangibles; (7) set forth rules for the application of the economic substance doctrine to tax transactions; (8) reduce the percentage of the deduction for dividends received; (9) require the recognition of ordinary income on the sale or exercise of a stock option in an S corporation with an employee stock ownership plan (ESOP); and (10) allow nonrecognition of gain in a corporate reorganization for corporations that exchange property solely for stock other than nonqualified preferred stock.
[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5962 Introduced in House (IH)]
111th CONGRESS
2d Session
H. R. 5962
To amend the Internal Revenue Code of 1986 to reduce the maximum
corporate income tax rate and to offset the revenue cost by repealing
certain corporate tax benefits.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
July 29, 2010
Mr. Maffei introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to reduce the maximum
corporate income tax rate and to offset the revenue cost by repealing
certain corporate tax benefits.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) Short Title.--This Act may be cited as the ``American Business
Competitiveness Act of 2010''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
(c) Table of Contents.--
Sec. 1. Short title; amendment of 1986 code.
TITLE I--CORPORATE INCOME TAX RATE REDUCTION
Sec. 101. Reduction in top corporate marginal rate.
TITLE II--PROVISIONS RELATED TO FOREIGN SOURCE INCOME
Sec. 201. Allocation of expenses and taxes on basis of repatriation of
foreign income.
Sec. 202. Repeal of worldwide allocation of interest.
Sec. 203. Limitation on treaty benefits for certain deductible
payments.
TITLE III--MODIFICATION OF ACCOUNTING RULES
Sec. 301. Repeal of last-in, first-out method of inventory.
Sec. 302. Repeal of lower of cost or market method of inventory.
Sec. 303. Special rule for service providers on accrual method not
applicable to C corporations.
TITLE IV--MODIFICATION TO EXPENSING AND DEPRECIATION RULES
Sec. 401. Small business expensing provisions made permanent.
Sec. 402. Amortization of goodwill and other intangibles.
TITLE V--CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE
Sec. 501. Codification of economic substance doctrine.
TITLE VI--MODIFICATIONS TO DEDUCTIONS FOR DIVIDENDS RECEIVED
Sec. 601. Modifications to deductions for dividends received.
TITLE VII--OTHER PROVISIONS
Sec. 701. Recognition of ordinary income on sale or exercise of stock
option in S corporation with an ESOP.
Sec. 702. Treatment of securities of a controlled corporation exchanged
for assets in certain reorganizations.
TITLE I--CORPORATE INCOME TAX RATE REDUCTION
SEC. 101. REDUCTION IN TOP CORPORATE MARGINAL RATE.
(a) General Rule.--Paragraph (1) of section 11(b) (relating to
amount of tax) is amended--
(1) by inserting ``and'' at the end of subparagraph (A),
(2) by striking subparagraphs (B), (C), and (D) and
inserting the following:
``(B) 23 percent of so much of the taxable income
as exceeds $50,000.'', and
(3) by striking ``$11,750'' and all that follows and
inserting ``$9,500.''.
(b) Personal Service Corporations.--Paragraph (2) of section 11(b)
is amended by striking ``35 percent'' and inserting ``23 percent''.
(c) Conforming Amendments.--
(1) Section 1201 is amended by striking ``35 percent'' each
place it appears and inserting ``23 percent''.
(2) Paragraphs (1) and (2) of section 1445(e) are each
amended by striking ``35 percent'' and inserting ``23
percent''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2010, except that
the amendments made by subsection (c) shall take effect on January 1,
2011.
TITLE II--PROVISIONS RELATED TO FOREIGN SOURCE INCOME
SEC. 201. ALLOCATION OF EXPENSES AND TAXES ON BASIS OF REPATRIATION OF
FOREIGN INCOME.
(a) In General.--Part III of subchapter N of chapter 1 is amended
by inserting after subpart G the following new subpart:
``Subpart H--Special Rules for Allocation of Foreign-Related Deductions
and Foreign Tax Credits
``Sec. 975. Deductions allocated to deferred foreign income may not
offset United States source income.
``Sec. 976. Amount of foreign taxes computed on overall basis.
``Sec. 977. Application of subpart.
``SEC. 975. DEDUCTIONS ALLOCATED TO DEFERRED FOREIGN INCOME MAY NOT
OFFSET UNITED STATES SOURCE INCOME.
``(a) Current Year Deductions.--For purposes of this chapter,
foreign-related deductions for any taxable year--
``(1) shall be taken into account for such taxable year
only to the extent that such deductions are allocable to
currently-taxed foreign income, and
``(2) to the extent not so allowed, shall be taken into
account in subsequent taxable years as provided in subsection
(b).
Foreign-related deductions shall be allocated to currently-taxed
foreign income in the same proportion which currently-taxed foreign
income bears to the sum of currently-taxed foreign income and deferred
foreign income.
``(b) Deductions Related to Repatriated Deferred Foreign Income.--
``(1) In general.--If there is repatriated foreign income
for a taxable year, the portion of the previously deferred
deductions allocated to the repatriated foreign income shall be
taken into account for the taxable year as a deduction
allocated to income from sources outside the United States. Any
such amount shall not be included in foreign-related deductions
for purposes of applying subsection (a) to such taxable year.
``(2) Portion of previously deferred deductions.--For
purposes of paragraph (1), the portion of the previously
deferred deductions allocated to repatriated foreign income
is--
``(A) the amount which bears the same proportion to
such deductions, as
``(B) the repatriated income bears to the
previously deferred foreign income.
``(c) Definitions and Special Rule.--For purposes of this section--
``(1) Foreign-related deductions.--The term `foreign-
related deductions' means the total amount of deductions and
expenses which would be allocated or apportioned to gross
income from sources without the United States for the taxable
year if both the currently-taxed foreign income and deferred
foreign income were taken into account.
``(2) Currently-taxed foreign income.--The term `currently-
taxed foreign income' means the amount of gross income from
sources without the United States for the taxable year
(determined without regard to repatriated foreign income for
such year).
``(3) Deferred foreign income.--The term `deferred foreign
income' means the excess of--
``(A) the amount that would be includible in gross
income under subpart F of this part for the taxable
year if--
``(i) all controlled foreign corporations
were treated as one controlled foreign
corporation, and
``(ii) all earnings and profits of all
controlled foreign corporations were subpart F
income (as defined in section 952), over
``(B) the sum of--
``(i) all dividends received during the
taxable year from controlled foreign
corporations, plus
``(ii) amounts includible in gross income
under section 951(a).
``(4) Previously deferred foreign income.--The term
`previously deferred foreign income' means the aggregate amount
of deferred foreign income for all prior taxable years to which
this part applies, determined as of the beginning of the
taxable year, reduced by the repatriated foreign income for all
such prior taxable years.
``(5) Repatriated foreign income.--The term `repatriated
foreign income' means the amount included in gross income on
account of distributions out of previously deferred foreign
income.
``(6) Previously deferred deductions.--The term `previously
deferred deductions' means the aggregate amount of foreign-
related deductions not taken into account under subsection (a)
for all prior taxable years (determined as of the beginning of
the taxable year), reduced by any amounts taken into account
under subsection (b) for such prior taxable years.
``(7) Treatment of certain foreign taxes.--
``(A) Paid by controlled foreign corporation.--
Section 78 shall not apply for purposes of determining
currently-taxed foreign income and deferred foreign
income.
``(B) Paid by taxpayer.--For purposes of
determining currently-taxed foreign income, gross
income from sources without the United States shall be
reduced by the aggregate amount of taxes described in
the applicable paragraph of section 901(b) which are
paid by the taxpayer (without regard to sections 902
and 960) during the taxable year.
``(8) Coordination with section 976.--In determining
currently-taxed foreign income and deferred foreign income, the
amount of deemed foreign tax credits shall be determined with
regard to section 976.
``SEC. 976. AMOUNT OF FOREIGN TAXES COMPUTED ON OVERALL BASIS.
``(a) Current Year Allowance.--For purposes of this chapter, the
amount taken into account as foreign income taxes for any taxable year
shall be an amount which bears the same ratio to the total foreign
income taxes for that taxable year as--
``(1) the currently-taxed foreign income for such taxable
year, bears to
``(2) the sum of the currently-taxed foreign income and
deferred foreign income for such year.
The portion of the total foreign income taxes for any taxable year not
taken into account under the preceding sentence for a taxable year
shall only be taken into account as provided in subsection (b) (and
shall not be taken into account for purposes of applying sections 902
and 960).
``(b) Allowance Related to Repatriated Deferred Foreign Income.--
``(1) In general.--If there is repatriated foreign income
for any taxable year, the portion of the previously deferred
foreign income taxes paid or accrued during such taxable year
shall be taken into account for the taxable year as foreign
taxes paid or accrued. Any such taxes so taken into account
shall not be included in foreign income taxes for purposes of
applying subsection (a) to such taxable year.
``(2) Portion of previously deferred foreign income
taxes.--For purposes of paragraph (1), the portion of the
previously deferred foreign income taxes allocated to
repatriated deferred foreign income is--
``(A) the amount which bears the same proportion to
such taxes, as
``(B) the repatriated deferred income bears to the
previously deferred foreign income.
``(c) Definitions and Special Rule.--For purposes of this section--
``(1) Previously deferred foreign income taxes.--The term
`previously deferred foreign income taxes' means the aggregate
amount of total foreign income taxes not taken into account
under subsection (a) for all prior taxable years (determined as
of the beginning of the taxable year), reduced by any amounts
taken into account under subsection (b) for such prior taxable
years.
``(2) Total foreign income taxes.--The term `total foreign
income taxes' means the sum of foreign income taxes paid or
accrued during the taxable year (determined without regard to
section 904(c)) plus the increase in foreign income taxes that
would be paid or accrued during the taxable year under sections
902 and 960 if--
``(A) all controlled foreign corporations were
treated as one controlled foreign corporation, and
``(B) all earnings and profits of all controlled
foreign corporations were subpart F income (as defined
in section 952).
``(3) Foreign income taxes.--The term `foreign income
taxes' means any income, war profits, or excess profits taxes
paid by the taxpayer to any foreign country or possession of
the United States.
``(4) Currently-taxed foreign income and deferred foreign
income.--The terms `currently-taxed foreign income' and
`deferred foreign income' have the meanings given such terms by
section 975(c).
``SEC. 977. APPLICATION OF SUBPART.
``This subpart--
``(1) shall be applied before subpart A, and
``(2) shall be applied separately with respect to the
categories of income specified in section 904(d)(1).''.
(b) Clerical Amendment.--The table of subparts for part III of
subpart N of chapter 1 is amended by inserting after the item relating
to subpart G the following new item:
``subpart h. special rules for allocation of foreign-related deductions
and foreign tax credits''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2010.
SEC. 202. REPEAL OF WORLDWIDE ALLOCATION OF INTEREST.
(a) In General.--Section 864 is amended by striking subsection (f)
and by redesignating subsection (g) as subsection (f).
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2010.
SEC. 203. LIMITATION ON TREATY BENEFITS FOR CERTAIN DEDUCTIBLE
PAYMENTS.
(a) In General.--Section 894 (relating to income affected by
treaty) is amended by adding at the end the following new subsection:
``(d) Limitation on Treaty Benefits for Certain Deductible
Payments.--
``(1) In general.--In the case of any deductible related-
party payment, any withholding tax imposed under chapter 3 (and
any tax imposed under subpart A or B of this part) with respect
to such payment may not be reduced under any treaty of the
United States unless any such withholding tax would be reduced
under a treaty of the United States if such payment were made
directly to the foreign parent corporation.
``(2) Deductible related-party payment.--For purposes of
this subsection, the term `deductible related-party payment'
means any payment made, directly or indirectly, by any person
to any other person if the payment is allowable as a deduction
under this chapter and both persons are members of the same
foreign controlled group of entities.
``(3) Foreign controlled group of entities.--For purposes
of this subsection--
``(A) In general.--The term `foreign controlled
group of entities' means a controlled group of entities
the common parent of which is a foreign corporation.
``(B) Controlled group of entities.--The term
`controlled group of entities' means a controlled group
of corporations as defined in section 1563(a)(1),
except that--
``(i) `more than 50 percent' shall be
substituted for `at least 80 percent' each
place it appears therein, and
``(ii) the determination shall be made
without regard to subsections (a)(4) and (b)(2)
of section 1563.
A partnership or any other entity (other than a
corporation) shall be treated as a member of a
controlled group of entities if such entity is
controlled (within the meaning of section 954(d)(3)) by
members of such group (including any entity treated as
a member of such group by reason of this sentence).
``(4) Foreign parent corporation.--For purposes of this
subsection, the term `foreign parent corporation' means, with
respect to any deductible related-party payment, the common
parent of the foreign controlled group of entities referred to
in paragraph (3)(A).
``(5) Regulations.--The Secretary may prescribe such
regulations or other guidance as are necessary or appropriate
to carry out the purposes of this subsection, including
regulations or other guidance which provide for--
``(A) the treatment of two or more persons as
members of a foreign controlled group of entities if
such persons would be the common parent of such group
if treated as one corporation, and
``(B) the treatment of any member of a foreign
controlled group of entities as the common parent of
such group if such treatment is appropriate taking into
account the economic relationships among such
entities.''.
(b) Effective Date.--The amendment made by this section shall apply
to payments made after the date of the enactment of this Act.
TITLE III--MODIFICATION OF ACCOUNTING RULES
SEC. 301. REPEAL OF LAST-IN, FIRST-OUT METHOD OF INVENTORY.
(a) In General.--Subpart D of part II of subchapter E of chapter 1
is amended by striking sections 472 (relating to last-in, first-out
inventories), 473 (relating to qualified liquidations of LIFO
inventories), and 474 (relating to simplified dollar-value LIFO method
for certain small businesses).
(b) Conforming Amendments.--
(1)(A) Section 312(n) is amended by striking paragraph (4)
and by redesignating paragraphs (5) through (8) as paragraphs
(4) through (7), respectively.
(B) Section 312(n)(7), as redesignated by subparagraph (A),
is amended--
(i) by striking ``paragraphs (4) and (6)'' in
subparagraph (A) and inserting ``paragraph (5)'', and
(ii) by striking ``paragraph (5)'' in subparagraph
(B) and inserting ``paragraph (4)''.
(C) Section 56(g)(4)(D) is amended by striking clause (iii)
and by redesignating clause (iv) as clause (iii).
(2) Section 1363 is amended by striking subsection (d).
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after the date of the
enactment of this Act.
(2) Change in method of accounting.--In the case of any
taxpayer required by the amendments made by this section to
change its method of accounting for its first taxable year
beginning after the date of the enactment of this Act--
(A) such change shall be treated as initiated by
the taxpayer,
(B) such change shall be treated as made with the
consent of the Secretary of the Treasury, and
(C) if the net amount of the adjustments required
to be taken into account by the taxpayer under section
481 of the Internal Revenue Code of 1986 is positive,
such amount shall be taken into account over a period
of 8 years beginning with such first taxable year.
SEC. 302. REPEAL OF LOWER OF COST OR MARKET METHOD OF INVENTORY.
(a) In General.--Section 471 is amended by redesignating subsection
(c) as subsection (d) and by inserting after subsection (b) the
following new subsection:
``(c) Inventories Taken Into Account at Cost.--A method of
determining inventories shall not be treated as clearly reflecting
income unless such method provides that inventories shall be taken into
account at cost.''.
(b) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after the date of the
enactment of this Act.
(2) Change in method of accounting.--In the case of any
taxpayer required by the amendments made by this section to
change its method of accounting for its first taxable year
beginning after the date of the enactment of this Act--
(A) such change shall be treated as initiated by
the taxpayer,
(B) such change shall be treated as made with the
consent of the Secretary of the Treasury, and
(C) if the net amount of the adjustments required
to be taken into account by the taxpayer under section
481 of the Internal Revenue Code of 1986 is positive,
such amount shall be taken into account over a period
of 8 years beginning with such first taxable year.
SEC. 303. SPECIAL RULE FOR SERVICE PROVIDERS ON ACCRUAL METHOD NOT
APPLICABLE TO C CORPORATIONS.
(a) In General.--Subparagraph (A) of section 448(d)(5) is amended
by inserting ``(other than a C corporation)'' after ``any person''.
(b) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after the date of the
enactment of this Act.
(2) Change in method of accounting.--In the case of any
taxpayer required by the amendments made by this section to
change its method of accounting for its first taxable year
beginning after the date of the enactment of this Act--
(A) such change shall be treated as initiated by
the taxpayer,
(B) such change shall be treated as made with the
consent of the Secretary of the Treasury, and
(C) if the net amount of the adjustments required
to be taken into account by the taxpayer under section
481 of the Internal Revenue Code of 1986 is positive,
such amount shall be taken into account over a period
of 8 years beginning with such first taxable year.
TITLE IV--MODIFICATION TO EXPENSING AND DEPRECIATION RULES
SEC. 401. SMALL BUSINESS EXPENSING PROVISIONS MADE PERMANENT.
(a) Increase in Small Business Expensing Made Permanent.--
Subsection (b) of section 179 is amended--
(1) by striking ``$25,000 ($250,000 in the case of taxable
years beginning after 2007 and before 2011)'' in paragraph (1)
and inserting ``$250,000'', and
(2) by striking ``$200,000 ($800,000 in the case of taxable
years beginning after 2007 and before 2011)'' in paragraph (2)
and inserting ``$800,000''.
(b) Expensing for Computer Software Made Permanent.--Clause (ii) of
section 179(d)(1)(A) is amended by striking ``and which is placed in
service in a taxable year beginning after 2002 and before 2011,''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after the date of the enactment of this Act.
(2) Computer software.--The amendment made by subsection
(b) shall apply to property placed in service after the date of
the enactment of this Act.
SEC. 402. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES.
(a) In General.--Subsection (a) of section 197 (relating to general
rule) is amended by striking ``15-year'' and inserting ``20-year''.
(b) Certain Interests or Rights Acquired Separately.--Clause (i) of
section 197(e)(4)(D) is amended by striking ``15 years'' and inserting
``20 years''.
(c) Effective Date.--The amendments made by this section shall
apply to property acquired after the date of the enactment of this Act.
TITLE V--CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE
SEC. 501. CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.
(a) In General.--Section 7701 is amended by redesignating
subsection (p) as subsection (q) and by inserting after subsection (o)
the following new subsection:
``(p) Clarification of Economic Substance Doctrine.--
``(1) Application of doctrine.--In the case of any
transaction to which the economic substance doctrine is
relevant, such transaction shall be treated as having economic
substance only if--
``(A) the transaction changes in a meaningful way
(apart from Federal income tax effects) the taxpayer's
economic position, and
``(B) the taxpayer has a substantial purpose (apart
from Federal income tax effects) for entering into such
transaction.
``(2) Special rule where taxpayer relies on profit
potential.--
``(A) In general.--The potential for profit of a
transaction shall be taken into account in determining
whether the requirements of subparagraphs (A) and (B)
of paragraph (1) are met with respect to the
transaction only if the present value of the reasonably
expected pre-tax profit from the transaction is
substantial in relation to the present value of the
expected net tax benefits that would be allowed if the
transaction were respected.
``(B) Treatment of fees and foreign taxes.--Fees
and other transaction expenses and foreign taxes shall
be taken into account as expenses in determining pre-
tax profit under subparagraph (A).
``(3) State and local tax benefits.--For purposes of
paragraph (1), any State or local income tax effect which is
related to a Federal income tax effect shall be treated in the
same manner as a Federal income tax effect.
``(4) Financial accounting benefits.--For purposes of
paragraph (1)(B), achieving a financial accounting benefit
shall not be taken into account as a purpose for entering into
a transaction if such transaction results in a Federal income
tax benefit.
``(5) Definitions and special rules.--For purposes of this
subsection--
``(A) Economic substance doctrine.--The term
`economic substance doctrine' means the common law
doctrine under which tax benefits under subtitle A with
respect to a transaction are not allowable if the
transaction does not have economic substance or lacks a
business purpose.
``(B) Exception for personal transactions of
individuals.--In the case of an individual, paragraph
(1) shall apply only to transactions entered into in
connection with a trade or business or an activity
engaged in for the production of income.
``(C) Other common law doctrines not affected.--
Except as specifically provided in this subsection, the
provisions of this subsection shall not be construed as
altering or supplanting any other rule of law, and the
requirements of this subsection shall be construed as
being in addition to any such other rule of law.
``(D) Determination of application of doctrine not
affected.--The determination of whether the economic
substance doctrine is relevant to a transaction shall
be made in the same manner as if this subsection had
never been enacted.
``(6) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection. Such regulations may include
exemptions from the application of this subsection.''.
(b) Effective Date.--The amendments made by this section shall
apply to transactions entered into after the date of the enactment of
this Act.
TITLE VI--MODIFICATIONS TO DEDUCTIONS FOR DIVIDENDS RECEIVED
SEC. 601. MODIFICATIONS TO DEDUCTIONS FOR DIVIDENDS RECEIVED.
(a) General Reduction in Percentage of Deduction.--
(1) In general.--Sections 243(a)(1), 243(c)(1), 244(a)(3),
244(b)(2), 245(c)(1)(B), 246(b)(3)(B), and 246A(a)(1), before
amendment by subsection (c), are each amended by striking ``70
percent'' and inserting ``60 percent''.
(2) Conforming amendments.--Paragraph (2) of section
861(a), before amendment by subsection (c), is amended by
striking ``100/70th'' both places it appears and inserting
``100/60th''.
(b) Reduction in Percentage for 20-Percent Owned Corporations.--
(1) In general.--Sections 243(c)(1), 245(c)(1)(B),
246(b)(3)(A), 246A(a)(1) is amended by striking ``80 percent''
and inserting ``70 percent''.
(2) Conforming amendment.--Paragraph (2) of section 861(a)
is amended by striking ``100/80th'' and inserting ``100/70th''.
(c) Repeal of NOL Exception to Limitation on Aggregate Deductions;
Establishment of Carryforward.--
(1) In general.--Paragraph (2) of section 246(b) is amended
to read as follows:
``(2) Carryforward.--The aggregate amount of deductions
disallowed under paragraph (1) for any taxable year shall be
treated as an increase in the amount allowable as a deduction
under section 243(a)(1) for the following taxable year (subject
to the application of paragraph (1) to such following taxable
year).''.
(2) Conforming amendments.--
(A) Subsection (d) of section 172 is amended by
striking paragraph (5) and by redesignating paragraph
(6) as paragraph (5).
(B) Subparagraph (A) of section 172(b)(2) is
amended by striking ``paragraphs (1), (4), and (5)''
and inserting ``paragraphs (1) and (4)''.
(C) Paragraph (1) of section 246(b) is amended by
striking ``Except as provided in paragraph (2), the''
and inserting ``The''.
(D) Paragraph (3) of section 246(b) is amended by
striking ``paragraph (1)'' and inserting ``paragraphs
(1) and (2)''.
(E) Subparagraph (B) of section 805(a)(4) is
amended by striking ``section 1212(a)(1),'' and all
that follows and inserting ``section 1212(a)(1).''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2008.
TITLE VII--OTHER PROVISIONS
SEC. 701. RECOGNITION OF ORDINARY INCOME ON SALE OR EXERCISE OF STOCK
OPTION IN S CORPORATION WITH AN ESOP.
(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. 409B. RECOGNITION OF ORDINARY INCOME ON SALE OR EXERCISE OF
STOCK OPTION IN S CORPORATION WITH AN ESOP.
``(a) In General.--If an S corporation in which an employee stock
ownership plan is a stockholder grants an option with respect to its
stock and such option is sold or exercised, there shall be included in
the gross income of the holder of such option (determined immediately
before such sale or exercise) as ordinary income an amount equal to the
income inclusion amount.
``(b) Income Inclusion Amount.--For purposes of this section, the
term `income inclusion amount' means, with respect to the holder of any
option, the excess (if any) of--
``(1) the sum of the net income amounts with respect to
such option for all taxable years of the S corporation ending
during the taxpayer's holding period, over
``(2) the sum of the net loss amounts with respect to such
option for all such taxable years.
``(c) Net Income and Loss Amounts.--For purposes of this section,
with respect to any taxable year of the S corporation--
``(1) Net income amount.--The term `net income amount'
means the excess (if any) of--
``(A) the pass-thru income share for such taxable
year, over
``(B) the pass-thru loss share for such taxable
year.
``(2) Net loss amount.--The term `net loss amount' means
the excess (if any) of the amount described in paragraph (1)(B)
over the amount described in paragraph (1)(A).
``(d) Pass-Thru Income and Loss Shares.--For purposes of this
section, with respect to any taxable year of the S corporation--
``(1) Pass-thru income share.--The term `pass-thru income
share' means the excess (if any) of--
``(A) the aggregate items of income taken into
account under section 1366 by the employee stock
ownership plan for such taxable year, over
``(B) the aggregate items of income which would
have been so taken into account if such option had been
exercised upon being granted.
``(2) Pass-thru loss share.--The term `pass-thru loss
share' means the excess (if any) of--
``(A) the aggregate items of deduction and loss
taken into account under section 1366 by the employee
stock ownership plan for such taxable year, over
``(B) the aggregate items of deduction and loss
which would have been so taken into account if such
option had been exercised upon being granted.
``(e) Interest at Underpayment Rate.--
``(1) In general.--In the case of any taxpayer who includes
any amount in gross income for any taxable year under
subsection (a), the tax imposed by this chapter on such
taxpayer for such taxable year shall be increased by interest
at the underpayment rate determined under section 6621 on the
underpayments that would have occurred had the net income
amounts with respect to each taxable year taken into account
under subsection (c) been includible in the taxpayer's gross
income for each of taxable year of the taxpayer in or with
which the taxable year so taken into account ends.
``(2) Reduction for previous net loss amounts.--For
purposes of paragraph (1), the net income amount for any
taxable year shall be reduced by the excess of--
``(A) the aggregate net loss amounts for taxable
years taken into account under subsection (c) with
respect to the taxpayer, over
``(B) the amount of such aggregate previously taken
into account under this paragraph to reduce any net
income amount.
``(f) Other Definitions and Special Rules.--For purposes of this
section--
``(1) Option.--The term `option' includes any synthetic
equity described in section 409(p)(6)(C).
``(2) Effect of starting or terminating an s corporation
election.--With respect to any option, a corporation which is
an S corporation for any taxable year which ends while such
option is outstanding shall be treated for purposes of this
section (other than subsection (d)) as an S corporation for all
taxable years which end while such option is outstanding.
``(3) Adjustments to basis.--
``(A) Increase in basis of acquired stock.--The
taxpayer's basis in any stock acquired pursuant to the
exercise of an option to which subsection (a) applies
shall be increased by the amount included in gross
income by the taxpayer under subsection (a) with
respect to such option.
``(B) Increase in basis of option on sale.--The
taxpayer's basis in any option shall be increased by
the amount included in gross income by the taxpayer
under subsection (a) with respect to such option.''.
(b) Conforming Amendments.--
(1) Section 26(b)(2) is amended by striking ``and'' at the
end of subparagraph (W), by striking the period at the end of
subparagraph (X) and inserting ``, and'', and by adding at the
end the following new subparagraph:
``(Y) subsection (e) of section 409B (relating to
interest on income recognized upon exercise of a stock
option in an S corporation with an ESOP).''.
(2) Section 1016(a) is amended by striking ``and'' at the
end of paragraph (36), by striking the period at the end of
paragraph (37) and inserting ``, and'', and by adding at the
end the following new paragraph:
``(38) to the extent provided in section 409B(f)(3).''.
(3) The table of sections for subpart A of part I of
subchapter D of chapter 1 is amended by adding at the end the
following new item:
``Sec. 409B. Recognition of ordinary income on sale or exercise of
stock option in S corporation with an
ESOP.''.
(c) Effective Date.--The amendments made by this section shall
apply to options granted after the date of the enactment of this Act.
SEC. 702. TREATMENT OF SECURITIES OF A CONTROLLED CORPORATION EXCHANGED
FOR ASSETS IN CERTAIN REORGANIZATIONS.
(a) In General.--Section 361 (relating to nonrecognition of gain or
loss to corporations; treatment of distributions) is amended by adding
at the end the following new subsection:
``(d) Receipt of Securities, etc., in Exchange for Assets in
Certain Reorganizations.--If--
``(1) property is transferred to a corporation (hereinafter
in this subsection referred to as the `controlled corporation')
pursuant to a plan of reorganization described in section
368(a)(1)(D), and
``(2) pursuant to such plan of reorganization, stock or
securities in the controlled corporation are distributed in a
transaction which qualifies under section 355,
then any securities and nonqualified preferred stock (as defined in
section 351(g)(2)) of the controlled corporation shall be treated as
other property for purposes of subsections (a) and (b).''.
(b) Effective Date.--The amendment made by subsection (a) shall
apply to distributions after the date of the enactment of this Act.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
Sponsor introductory remarks on measure. (CR H6461-6462, E1531)
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