Sales Tax Equity Act of 2003 - Amends the Internal Revenue Code to permit taxpayers an election to deduct State and local sales taxes in lieu of State and local income taxes.
Sets forth rules for use in applying the economic substance doctrine, including defining economic substance doctrine.
Establishes and modifies penalties concerning tax shelters.
Revises provisions concerning corporate governance and executive compensation.
Revises expatriation provisions.
Revises other provisions concerning: (1) foreign source income and foreign pension plans; (2) partnership loss transfers; and (3) tax-exempt insurance companies.
[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1436 Introduced in Senate (IS)]
108th CONGRESS
1st Session
S. 1436
To amend the Internal Revenue Code of 1986 to allow a deduction for
State and local sales taxes in lieu of State and local income taxes,
and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
July 21, 2003
Mr. Nelson of Florida (for himself, Mr. Graham of Florida, Mr. Daschle,
and Mr. Johnson) introduced the following bill; which was read twice
and referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to allow a deduction for
State and local sales taxes in lieu of State and local income taxes,
and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Sales Tax Equity
Act of 2003''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
(c) Table of Contents.--The table of contents of this Act is as
follows:
Sec. 1. Short title; references; table of contents.
TITLE I--SALES TAX DEDUCTION
Sec. 101. Deduction of State and local general sales taxes in lieu of
State and local income taxes.
TITLE II--REVENUE PROVISIONS
Subtitle A--Provisions Designed To Curtail Tax Shelters
Sec. 201. Clarification of economic substance doctrine.
Sec. 202. Penalty for failing to disclose reportable transaction.
Sec. 203. Accuracy-related penalty for listed transactions and other
reportable transactions having a
significant tax avoidance purpose.
Sec. 204. Penalty for understatements attributable to transactions
lacking economic substance, etc.
Sec. 205. Modifications of substantial understatement penalty for
nonreportable transactions.
Sec. 206. Tax shelter exception to confidentiality privileges relating
to taxpayer communications.
Sec. 207. Disclosure of reportable transactions.
Sec. 208. Modifications to penalty for failure to register tax
shelters.
Sec. 209. Modification of penalty for failure to maintain lists of
investors.
Sec. 210. Modification of actions to enjoin certain conduct related to
tax shelters and reportable transactions.
Sec. 211. Understatement of taxpayer's liability by income tax return
preparer.
Sec. 212. Penalty on failure to report interests in foreign financial
accounts.
Sec. 213. Frivolous tax submissions.
Sec. 214. Penalty on promoters of tax shelters.
Sec. 215. Statute of limitations for taxable years for which listed
transactions not reported.
Sec. 216. Denial of deduction for interest on underpayments
attributable to nondisclosed reportable and
noneconomic substance transactions.
Subtitle B--Enron-Related Tax Shelter Provisions
Sec. 221. Limitation on transfer or importation of built-in losses.
Sec. 222. No reduction of basis under section 734 in stock held by
partnership in corporate partner.
Sec. 223. Repeal of special rules for FASITs.
Sec. 224. Expanded disallowance of deduction for interest on
convertible debt.
Sec. 225. Expanded authority to disallow tax benefits under section
269.
Sec. 226. Modifications of certain rules relating to controlled foreign
corporations.
Sec. 227. Controlled entities ineligible for REIT status.
Subtitle C--Other Corporate Governance Provisions
Part I--General Provisions
Sec. 231. Denial of deduction for certain fines, penalties, and other
amounts.
Sec. 232. Disallowance of deduction for punitive damages.
Part II--Executive Compensation Reform
Sec. 235. Treatment of nonqualified deferred compensation funded with
assets located outside the United States.
Sec. 236. Inclusion in gross income of funded deferred compensation of
corporate insiders.
Sec. 237. Prohibition on deferral of gain from the exercise of stock
options and restricted stock gains through
deferred compensation arrangements.
Sec. 238. Increase in withholding from supplemental wage payments in
excess of $1,000,000.
Subtitle D--International Provisions
Part I--Provisions to Discourage Expatriation
Sec. 241. Revision of tax rules on expatriation.
Sec. 242. Tax treatment of inverted corporate entities.
Sec. 243. Excise tax on stock compensation of insiders in inverted
corporations.
Part II--Other Provisions
Sec. 245. Effectively connected income to include certain foreign
source income.
Sec. 246. Determination of basis of amounts paid from foreign pension
plans.
Sec. 247. Prevention of mismatching of interest and original issue
discount deductions and income inclusions
in transactions with related foreign
persons.
Subtitle E--Other Revenue Provisions
Sec. 251. Disallowance of certain partnership loss transfers.
Sec. 252. Clarification of exemption from tax for small property and
casualty insurance companies.
TITLE I--SALES TAX DEDUCTION
SEC. 101. 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,
``(II) as if State and local
general sales taxes were referred to in
a paragraph thereof, and
``(III) without regard to the last
sentence.
``(B) Definition of general sales tax.--The term
`general sales tax' means a tax imposed at one rate
with respect to the sale at retail of a broad range of
classes of items.
``(C) Special rules for food, etc.--In the case of
items of food, clothing, medical supplies, and motor
vehicles--
``(i) the fact that the tax does not apply
with respect to some or all of such items shall
not be taken into account in determining
whether the tax applies with respect to a broad
range of classes of items, and
``(ii) the fact that the rate of tax
applicable with respect to some or all of such
items is lower than the general rate of tax
shall not be taken into account in determining
whether the tax is imposed at one rate.
``(D) Items taxed at different rates.--Except in
the case of a lower rate of tax applicable with respect
to an item described in subparagraph (C), no deduction
shall be allowed under this paragraph for any general
sales tax imposed with respect to an item at a rate
other than the general rate of tax.
``(E) Compensating use taxes.--A compensating use
tax with respect to an item shall be treated as a
general sales tax. For purposes of the preceding
sentence, the term `compensating use tax' means, with
respect to any item, a tax which--
``(i) is imposed on the use, storage, or
consumption of such item, and
``(ii) is complementary to a general sales
tax, but only if a deduction is allowable under
this paragraph with respect to items sold at
retail in the taxing jurisdiction which are
similar to such item.
``(F) Special rule for motor vehicles.--In the case
of motor vehicles, if the rate of tax exceeds the
general rate, such excess shall be disregarded and the
general rate shall be treated as the rate of tax.
``(G) Separately stated general sales taxes.--If
the amount of any general sales tax is separately
stated, then, to the extent that the amount so stated
is paid by the consumer (other than in connection with
the consumer's trade or business) to the seller, such
amount shall be treated as a tax imposed on, and paid
by, such consumer.
``(H) Amount of deduction to be determined under
tables.--
``(i) In general.--The amount of the
deduction allowed under this paragraph shall be
determined under tables prescribed by the
Secretary.
``(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, 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)).''.
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
TITLE II--REVENUE PROVISIONS
Subtitle A--Provisions Designed To Curtail Tax Shelters
SEC. 201. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.
(a) In General.--Section 7701 is amended by redesignating
subsection (n) as subsection (o) and by inserting after subsection (m)
the following new subsection:
``(n) Clarification of Economic Substance Doctrine; Etc.--
``(1) General rules.--
``(A) In general.--In applying the economic
substance doctrine, the determination of whether a
transaction has economic substance shall be made as
provided in this paragraph.
``(B) Definition of economic substance.--For
purposes of subparagraph (A)--
``(i) In general.--A transaction has
economic substance only if--
``(I) the transaction changes in a
meaningful way (apart from Federal tax
effects) the taxpayer's economic
position, and
``(II) the taxpayer has a
substantial nontax purpose for entering
into such transaction and the
transaction is a reasonable means of
accomplishing such purpose.
In applying subclause (II), a purpose of
achieving a financial accounting benefit shall
not be taken into account in determining
whether a transaction has a substantial nontax
purpose if the origin of such financial
accounting benefit is a reduction of income
tax.
``(ii) Special rule where taxpayer relies
on profit potential.--A transaction shall not
be treated as having economic substance by
reason of having a potential for profit
unless--
``(I) the present value of the
reasonably expected pre-tax profit from
the transaction is substantial in
relation to the present value of the
expected net tax benefits that would be
allowed if the transaction were
respected, and
``(II) the reasonably expected pre-
tax profit from the transaction exceeds
a risk-free rate of return.
``(C) Treatment of fees and foreign taxes.--Fees
and other transaction expenses and foreign taxes shall
be taken into account as expenses in determining pre-
tax profit under subparagraph (B)(ii).
``(2) Special rules for transactions with tax-indifferent
parties.--
``(A) Special rules for financing transactions.--
The form of a transaction which is in substance the
borrowing of money or the acquisition of financial
capital directly or indirectly from a tax-indifferent
party shall not be respected if the present value of
the deductions to be claimed with respect to the
transaction is substantially in excess of the present
value of the anticipated economic returns of the person
lending the money or providing the financial capital. A
public offering shall be treated as a borrowing, or an
acquisition of financial capital, from a tax-
indifferent party if it is reasonably expected that at
least 50 percent of the offering will be placed with
tax-indifferent parties.
``(B) Artificial income shifting and basis
adjustments.--The form of a transaction with a tax-
indifferent party shall not be respected if--
``(i) it results in an allocation of income
or gain to the tax-indifferent party in excess
of such party's economic income or gain, or
``(ii) it results in a basis adjustment or
shifting of basis on account of overstating the
income or gain of the tax-indifferent party.
``(3) Definitions and special rules.--For purposes of this
subsection--
``(A) Economic substance doctrine.--The term
`economic substance doctrine' means the common law
doctrine under which tax benefits under subtitle A with
respect to a transaction are not allowable if the
transaction does not have economic substance or lacks a
business purpose.
``(B) Tax-indifferent party.--The term `tax-
indifferent party' means any person or entity not
subject to tax imposed by subtitle A. A person shall be
treated as a tax-indifferent party with respect to a
transaction if the items taken into account with
respect to the transaction have no substantial impact
on such person's liability under subtitle A.
``(C) Exception for personal transactions of
individuals.--In the case of an individual, this
subsection shall apply only to transactions entered
into in connection with a trade or business or an
activity engaged in for the production of income.
``(D) Treatment of lessors.--A lessor of tangible
property subject to a lease shall be treated as
satisfying the requirements of paragraph (1)(B)(ii)
with respect to the leased property if such lease
satisfies such requirements as provided by the
Secretary.
``(4) Other common law doctrines not affected.--Except as
specifically provided in this subsection, the provisions of
this subsection shall not be construed as altering or
supplanting any other rule of law, and the requirements of this
subsection shall be construed as being in addition to any such
other rule of law.
``(5) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection. Such regulations may include
exemptions from the application of this subsection.''.
(b) Effective Date.--The amendments made by this section shall
apply to transactions entered into on or after May 8, 2003.
SEC. 202. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.
(a) In General.--Part I of subchapter B of chapter 68 (relating to
assessable penalties) is amended by inserting after section 6707 the
following new section:
``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION
INFORMATION WITH RETURN OR STATEMENT.
``(a) Imposition of Penalty.--Any person who fails to include on
any return or statement any information with respect to a reportable
transaction which is required under section 6011 to be included with
such return or statement shall pay a penalty in the amount determined
under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraphs (2) and
(3), the amount of the penalty under subsection (a) shall be
$50,000.
``(2) Listed transaction.--The amount of the penalty under
subsection (a) with respect to a listed transaction shall be
$100,000.
``(3) Increase in penalty for large entities and high net
worth individuals.--
``(A) In general.--In the case of a failure under
subsection (a) by--
``(i) a large entity, or
``(ii) a high net worth individual,
the penalty under paragraph (1) or (2) shall be twice
the amount determined without regard to this paragraph.
``(B) Large entity.--For purposes of subparagraph
(A), the term `large entity' means, with respect to any
taxable year, a person (other than a natural person)
with gross receipts in excess of $10,000,000 for the
taxable year in which the reportable transaction occurs
or the preceding taxable year. Rules similar to the
rules of paragraph (2) and subparagraphs (B), (C), and
(D) of paragraph (3) of section 448(c) shall apply for
purposes of this subparagraph.
``(C) High net worth individual.--For purposes of
subparagraph (A), the term `high net worth individual'
means, with respect to a reportable transaction, a
natural person whose net worth exceeds $2,000,000
immediately before the transaction.
``(c) Definitions.--For purposes of this section--
``(1) Reportable transaction.--The term `reportable
transaction' means any transaction with respect to which
information is required to be included with a return or
statement because, as determined under regulations prescribed
under section 6011, such transaction is of a type which the
Secretary determines as having a potential for tax avoidance or
evasion.
``(2) Listed transaction.--Except as provided in
regulations, the term `listed transaction' means a reportable
transaction which is the same as, or substantially similar to,
a transaction specifically identified by the Secretary as a tax
avoidance transaction for purposes of section 6011.
``(d) Authority To Rescind Penalty.--
``(1) In general.--The Commissioner of Internal Revenue may
rescind all or any portion of any penalty imposed by this
section with respect to any violation if--
``(A) the violation is with respect to a reportable
transaction other than a listed transaction,
``(B) the person on whom the penalty is imposed has
a history of complying with the requirements of this
title,
``(C) it is shown that the violation is due to an
unintentional mistake of fact;
``(D) imposing the penalty would be against equity
and good conscience, and
``(E) rescinding the penalty would promote
compliance with the requirements of this title and
effective tax administration.
``(2) Discretion.--The exercise of authority under
paragraph (1) shall be at the sole discretion of the
Commissioner and may be delegated only to the head of the
Office of Tax Shelter Analysis. The Commissioner, in the
Commissioner's sole discretion, may establish a procedure to
determine if a penalty should be referred to the Commissioner
or the head of such Office for a determination under paragraph
(1).
``(3) No appeal.--Notwithstanding any other provision of
law, any determination under this subsection may not be
reviewed in any administrative or judicial proceeding.
``(4) Records.--If a penalty is rescinded under paragraph
(1), the Commissioner shall place in the file in the Office of
the Commissioner the opinion of the Commissioner or the head of
the Office of Tax Shelter Analysis with respect to the
determination, including--
``(A) the facts and circumstances of the
transaction,
``(B) the reasons for the rescission, and
``(C) the amount of the penalty rescinded.
``(5) Report.--The Commissioner shall each year report to
the Committee on Ways and Means of the House of Representatives
and the Committee on Finance of the Senate--
``(A) a summary of the total number and aggregate
amount of penalties imposed, and rescinded, under this
section, and
``(B) a description of each penalty rescinded under
this subsection and the reasons therefor.
``(e) Penalty Reported to SEC.--In the case of a person--
``(1) which is required to file periodic reports under
section 13 or 15(d) of the Securities Exchange Act of 1934 or
is required to be consolidated with another person for purposes
of such reports, and
``(2) which--
``(A) is required to pay a penalty under this
section with respect to a listed transaction,
``(B) is required to pay a penalty under section
6662A with respect to any reportable transaction at a
rate prescribed under section 6662A(c), or
``(C) is required to pay a penalty under section
6662B with respect to any noneconomic substance
transaction,
the requirement to pay such penalty shall be disclosed in such reports
filed by such person for such periods as the Secretary shall specify.
Failure to make a disclosure in accordance with the preceding sentence
shall be treated as a failure to which the penalty under subsection
(b)(2) applies.
``(f) Coordination With Other Penalties.--The penalty imposed by
this section is in addition to any penalty imposed under this title.''.
(b) Conforming Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by inserting after the item
relating to section 6707 the following:
``Sec. 6707A. Penalty for failure to
include reportable transaction
information with return or
statement.''.
(c) Effective Date.--The amendments made by this section shall
apply to returns and statements the due date for which is after the
date of the enactment of this Act.
SEC. 203. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER
REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX
AVOIDANCE PURPOSE.
(a) In General.--Subchapter A of chapter 68 is amended by inserting
after section 6662 the following new section:
``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS
WITH RESPECT TO REPORTABLE TRANSACTIONS.
``(a) Imposition of Penalty.--If a taxpayer has a reportable
transaction understatement for any taxable year, there shall be added
to the tax an amount equal to 20 percent of the amount of such
understatement.
``(b) Reportable Transaction Understatement.--For purposes of this
section--
``(1) In general.--The term `reportable transaction
understatement' means the sum of--
``(A) the product of--
``(i) the amount of the increase (if any)
in taxable income which results from a
difference between the proper tax treatment of
an item to which this section applies and the
taxpayer's treatment of such item (as shown on
the taxpayer's return of tax), and
``(ii) the highest rate of tax imposed by
section 1 (section 11 in the case of a taxpayer
which is a corporation), and
``(B) the amount of the decrease (if any) in the
aggregate amount of credits determined under subtitle A
which results from a difference between the taxpayer's
treatment of an item to which this section applies (as
shown on the taxpayer's return of tax) and the proper
tax treatment of such item.
For purposes of subparagraph (A), any reduction of the excess
of deductions allowed for the taxable year over gross income
for such year, and any reduction in the amount of capital
losses which would (without regard to section 1211) be allowed
for such year, shall be treated as an increase in taxable income.
``(2) Items to which section applies.--This section shall
apply to any item which is attributable to--
``(A) any listed transaction, and
``(B) any reportable transaction (other than a
listed transaction) if a significant purpose of such
transaction is the avoidance or evasion of Federal
income tax.
``(c) Higher Penalty for Nondisclosed Listed and Other Avoidance
Transactions.--
``(1) In general.--Subsection (a) shall be applied by
substituting `30 percent' for `20 percent' with respect to the
portion of any reportable transaction understatement with
respect to which the requirement of section 6664(d)(2)(A) is
not met.
``(2) Rules applicable to compromise of penalty.--
``(A) In general.--If the 1st letter of proposed
deficiency which allows the taxpayer an opportunity for
administrative review in the Internal Revenue Service
Office of Appeals has been sent with respect to a
penalty to which paragraph (1) applies, only the
Commissioner of Internal Revenue may compromise all or
any portion of such penalty.
``(B) Applicable rules.--The rules of paragraphs
(2), (3), (4), and (5) of section 6707A(d) shall apply
for purposes of subparagraph (A).
``(d) Definitions of Reportable and Listed Transactions.--For
purposes of this section, the terms `reportable transaction' and
`listed transaction' have the respective meanings given to such terms
by section 6707A(c).
``(e) Special Rules.--
``(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as defined
in section 6662(d)(2))--
``(A) the amount of such understatement (determined
without regard to this paragraph) shall be increased by
the aggregate amount of reportable transaction
understatements and noneconomic substance transaction
understatements for purposes of determining whether
such understatement is a substantial understatement
under section 6662(d)(1), and
``(B) the addition to tax under section 6662(a)
shall apply only to the excess of the amount of the
substantial understatement (if any) after the
application of subparagraph (A) over the aggregate
amount of reportable transaction understatements and
noneconomic substance transaction understatements.
``(2) Coordination with other penalties.--
``(A) Application of fraud penalty.--References to
an underpayment in section 6663 shall be treated as
including references to a reportable transaction
understatement and a noneconomic substance transaction
understatement.
``(B) No double penalty.--This section shall not
apply to any portion of an understatement on which a
penalty is imposed under section 6662B or 6663.
``(3) Special rule for amended returns.--Except as provided
in regulations, in no event shall any tax treatment included
with an amendment or supplement to a return of tax be taken
into account in determining the amount of any reportable
transaction understatement or noneconomic substance transaction
understatement if the amendment or supplement is filed after
the earlier of the date the taxpayer is first contacted by the
Secretary regarding the examination of the return or such other
date as is specified by the Secretary.
``(4) Noneconomic substance transaction
understatement.--For purposes of this subsection, the
term `noneconomic substance transaction understatement'
has the meaning given such term by section 6662B(c).
``(5) Cross reference.--
``For reporting of section 6662A(c)
penalty to the Securities and Exchange Commission, see section
6707A(e).''.
(b) Determination of Other Understatements.--Subparagraph (A) of
section 6662(d)(2) is amended by adding at the end the following flush
sentence:
``The excess under the preceding sentence shall be
determined without regard to items to which section
6662A applies and without regard to items with respect
to which a penalty is imposed by section 6662B.''.
(c) Reasonable Cause Exception.--
(1) In general.--Section 6664 is amended by adding at the
end the following new subsection:
``(d) Reasonable Cause Exception for Reportable Transaction
Understatements.--
``(1) In general.--No penalty shall be imposed under
section 6662A with respect to any portion of a reportable
transaction understatement if it is shown that there was a
reasonable cause for such portion and that the taxpayer acted
in good faith with respect to such portion.
``(2) Special rules.--Paragraph (1) shall not apply to any
reportable transaction understatement unless--
``(A) the relevant facts affecting the tax
treatment of the item are adequately disclosed in
accordance with the regulations prescribed under
section 6011,
``(B) there is or was substantial authority for
such treatment, and
``(C) the taxpayer reasonably believed that such
treatment was more likely than not the proper
treatment.
A taxpayer failing to adequately disclose in accordance with
section 6011 shall be treated as meeting the requirements of
subparagraph (A) if the penalty for such failure was rescinded
under section 6707A(d).
``(3) Rules relating to reasonable belief.--For purposes of
paragraph (2)(C)--
``(A) In general.--A taxpayer shall be treated as
having a reasonable belief with respect to the tax
treatment of an item only if such belief--
``(i) is based on the facts and law that
exist at the time the return of tax which
includes such tax treatment is filed, and
``(ii) relates solely to the taxpayer's
chances of success on the merits of such
treatment and does not take into account the
possibility that a return will not be audited,
such treatment will not be raised on audit, or
such treatment will be resolved through
settlement if it is raised.
``(B) Certain opinions may not be relied upon.--
``(i) In general.--An opinion of a tax
advisor may not be relied upon to establish the
reasonable belief of a taxpayer if--
``(I) the tax advisor is described
in clause (ii), or
``(II) the opinion is described in
clause (iii).
``(ii) Disqualified tax advisors.--A tax
advisor is described in this clause if the tax
advisor--
``(I) is a material advisor (within
the meaning of section 6111(b)(1)) who
participates in the organization,
management, promotion, or sale of the
transaction or who is related (within
the meaning of section 267(b) or
707(b)(1)) to any person who so
participates,
``(II) is compensated directly or
indirectly by a material advisor with
respect to the transaction,
``(III) has a fee arrangement with
respect to the transaction which is
contingent on all or part of the
intended tax benefits from the
transaction being sustained, or
``(IV) as determined under
regulations prescribed by the
Secretary, has a continuing 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 amendment.--The heading for subsection (c)
of section 6664 is amended by inserting ``for Underpayments''
after ``Exception''.
(d) Conforming Amendments.--
(1) Subparagraph (C) of section 461(i)(3) is amended by
striking ``section 6662(d)(2)(C)(iii)'' and inserting ``section
1274(b)(3)(C)''.
(2) Paragraph (3) of section 1274(b) is amended--
(A) by striking ``(as defined in section
6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
(B) by adding at the end the following new
subparagraph:
``(C) Tax shelter.--For purposes of subparagraph
(B), the term `tax shelter' means--
``(i) a partnership or other entity,
``(ii) any investment plan or arrangement,
or
``(iii) any other plan or arrangement,
if a significant purpose of such partnership, entity,
plan, or arrangement is the avoidance or evasion of
Federal income tax.''.
(3) Section 6662(d)(2) is amended by striking subparagraphs
(C) and (D).
(4) Section 6664(c)(1) is amended by striking ``this part''
and inserting ``section 6662 or 6663''.
(5) Subsection (b) of section 7525 is amended by striking
``section 6662(d)(2)(C)(iii)'' and inserting ``section
1274(b)(3)(C)''.
(6)(A) The heading for section 6662 is amended to read as
follows:
``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON
UNDERPAYMENTS.''.
(B) The table of sections for part II of subchapter A of
chapter 68 is amended by striking the item relating to section
6662 and inserting the following new items:
``Sec. 6662. Imposition of accuracy-
related penalty on
underpayments.
``Sec. 6662A. Imposition of accuracy-
related penalty on
understatements with respect to
reportable transactions.''.
(e) Effective Date.--The amendments made by this section shall
apply to taxable years ending after the date of the enactment of this
Act.
SEC. 204. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS
LACKING ECONOMIC SUBSTANCE, ETC.
(a) In General.--Subchapter A of chapter 68 is amended by inserting
after section 6662A the following new section:
``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS
LACKING ECONOMIC SUBSTANCE, ETC.
``(a) Imposition of Penalty.--If a taxpayer has an noneconomic
substance transaction understatement for any taxable year, there shall
be added to the tax an amount equal to 40 percent of the amount of such
understatement.
``(b) Reduction of Penalty for Disclosed Transactions.--Subsection
(a) shall be applied by substituting `20 percent' for `40 percent' with
respect to the portion of any noneconomic substance transaction
understatement with respect to which the relevant facts affecting the
tax treatment of the item are adequately disclosed in the return or a
statement attached to the return.
``(c) Noneconomic Substance Transaction Understatement.--For
purposes of this section--
``(1) In general.--The term `noneconomic substance
transaction understatement' means any amount which would be an
understatement under section 6662A(b)(1) if section 6662A were
applied by taking into account items attributable to
noneconomic substance transactions rather than items to which
section 6662A would apply without regard to this paragraph.
``(2) Noneconomic substance transaction.--The term
`noneconomic substance transaction' means any transaction if--
``(A) there is a lack of economic substance (within
the meaning of section 7701(n)(1)) for the transaction
giving rise to the claimed benefit or the transaction
was not respected under section 7701(n)(2), or
``(B) the transaction fails to meet the
requirements of any similar rule of law.
``(d) Rules Applicable to Compromise of Penalty.--
``(1) In general.--If the 1st letter of proposed deficiency
which allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of Appeals has
been sent with respect to a penalty to which this section
applies, only the Commissioner of Internal Revenue may
compromise all or any portion of such penalty.
``(2) Applicable rules.--The rules of paragraphs (2), (3),
(4), and (5) of section 6707A(d) shall apply for purposes of
paragraph (1).
``(e) Coordination With Other Penalties.--Except as otherwise
provided in this part, the penalty imposed by this section shall be in
addition to any other penalty imposed by this title.
``(f) Cross References.--
``(1) For coordination of penalty with
understatements under section 6662 and other special rules, see section
6662A(e).
``(2) For reporting of penalty imposed
under this section to the Securities and Exchange Commission, see
section 6707A(e).''.
(b) Clerical Amendment.--The table of sections for part II of
subchapter A of chapter 68 is amended by inserting after the item
relating to section 6662A the following new item:
``Sec. 6662B. Penalty for understatements
attributable to transactions
lacking economic substance,
etc.''.
(c) Effective Date.--The amendments made by this section shall
apply to transactions entered into on or after May 8, 2003.
SEC. 205. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR
NONREPORTABLE TRANSACTIONS.
(a) Substantial Understatement of Corporations.--Section
6662(d)(1)(B) (relating to special rule for corporations) is amended to
read as follows:
``(B) Special rule for corporations.--In the case
of a corporation other than an S corporation or a
personal holding company (as defined in section 542),
there is a substantial understatement of income tax for
any taxable year if the amount of the understatement
for the taxable year exceeds the lesser of--
``(i) 10 percent of the tax required to be
shown on the return for the taxable year (or,
if greater, $10,000), or
``(ii) $10,000,000.''.
(b) Reduction for Understatement of Taxpayer Due to Position of
Taxpayer or Disclosed Item.--
(1) In general.--Section 6662(d)(2)(B)(i) (relating to
substantial authority) is amended to read as follows:
``(i) the tax treatment of any item by the
taxpayer if the taxpayer had reasonable belief
that the tax treatment was more likely than not
the proper treatment, or''.
(2) Conforming amendment.--Section 6662(d) is amended by
adding at the end the following new paragraph:
``(3) Secretarial list.--For purposes of this subsection,
section 6664(d)(2), and section 6694(a)(1), the Secretary may
prescribe a list of positions for which the Secretary believes
there is not substantial authority or there is no reasonable
belief that the tax treatment is more likely than not the
proper tax treatment. Such list (and any revisions thereof)
shall be published in the Federal Register or the Internal
Revenue Bulletin.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after the date of the enactment of
this Act.
SEC. 206. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING
TO TAXPAYER COMMUNICATIONS.
(a) In General.--Section 7525(b) (relating to section not to apply
to communications regarding corporate tax shelters) is amended to read
as follows:
``(b) Section Not To Apply to Communications Regarding Tax
Shelters.--The privilege under subsection (a) shall not apply to any
written communication which is--
``(1) between a federally authorized tax practitioner and--
``(A) any person,
``(B) any director, officer, employee, agent, or
representative of the person, or
``(C) any other person holding a capital or profits
interest in the person, and
``(2) in connection with the promotion of the direct or
indirect participation of the person in any tax shelter (as
defined in section 1274(b)(3)(C)).''.
(b) Effective Date.--The amendment made by this section shall apply
to communications made on or after the date of the enactment of this
Act.
SEC. 207. DISCLOSURE OF REPORTABLE TRANSACTIONS.
(a) In General.--Section 6111 (relating to registration of tax
shelters) is amended to read as follows:
``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.
``(a) In General.--Each material advisor with respect to any
reportable transaction shall make a return (in such form as the
Secretary may prescribe) setting forth--
``(1) information identifying and describing the
transaction,
``(2) information describing any potential tax benefits
expected to result from the transaction, and
``(3) such other information as the Secretary may
prescribe.
Such return shall be filed not later than the date specified by the
Secretary.
``(b) Definitions.--For purposes of this section--
``(1) Material advisor.--
``(A) In general.--The term `material advisor'
means any person--
``(i) who provides any material aid,
assistance, or advice with respect to
organizing, promoting, selling, implementing,
or carrying out any reportable transaction, and
``(ii) who directly or indirectly derives
gross income in excess of the threshold amount
for such aid, assistance, or advice.
``(B) Threshold amount.--For purposes of
subparagraph (A), the threshold amount is--
``(i) $50,000 in the case of a reportable
transaction substantially all of the tax
benefits from which are provided to natural
persons, and
``(ii) $250,000 in any other case.
``(2) Reportable transaction.--The term `reportable
transaction' has the meaning given to such term by section
6707A(c).
``(c) Regulations.--The Secretary may prescribe regulations which
provide--
``(1) that only 1 person shall be required to meet the
requirements of subsection (a) in cases in which 2 or more
persons would otherwise be required to meet such requirements,
``(2) exemptions from the requirements of this section, and
``(3) such rules as may be necessary or appropriate to
carry out the purposes of this section.''.
(b) Conforming Amendments.--
(1) The item relating to section 6111 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6111. Disclosure of reportable
transactions.''.
(2)(A) So much of section 6112 as precedes subsection (c)
thereof is amended to read as follows:
``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP
LISTS OF ADVISEES.
``(a) In General.--Each material advisor (as defined in section
6111) with respect to any reportable transaction (as defined in section
6707A(c)) shall maintain, in such manner as the Secretary may by
regulations prescribe, a list--
``(1) identifying each person with respect to whom such
advisor acted as such a material advisor with respect to such
transaction, and
``(2) containing such other information as the Secretary
may by regulations require.
This section shall apply without regard to whether a material advisor
is required to file a return under section 6111 with respect to such
transaction.''.
(B) Section 6112 is amended by redesignating subsection (c)
as subsection (b).
(C) Section 6112(b), as redesignated by subparagraph (B),
is amended--
(i) by inserting ``written'' before ``request'' in
paragraph (1)(A), and
(ii) by striking ``shall prescribe'' in paragraph
(2) and inserting ``may prescribe''.
(D) The item relating to section 6112 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6112. Material advisors of
reportable transactions must
keep lists of advisees.''.
(3)(A) The heading for section 6708 is amended to read as
follows:
``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO
REPORTABLE TRANSACTIONS.''.
(B) The item relating to section 6708 in the table of
sections for part I of subchapter B of chapter 68 is amended to
read as follows:
``Sec. 6708. Failure to maintain lists of
advisees with respect to
reportable transactions.''.
(c) Effective Date.--The amendments made by this section shall
apply to transactions with respect to which material aid, assistance,
or advice referred to in section 6111(b)(1)(A)(i) of the Internal
Revenue Code of 1986 (as added by this section) is provided after the
date of the enactment of this Act.
SEC. 208. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER TAX
SHELTERS.
(a) In General.--Section 6707 (relating to failure to furnish
information regarding tax shelters) is amended to read as follows:
``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE
TRANSACTIONS.
``(a) In General.--If a person who is required to file a return
under section 6111(a) with respect to any reportable transaction--
``(1) fails to file such return on or before the date
prescribed therefor, or
``(2) files false or incomplete information with the
Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in the
amount determined under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraph (2), the
penalty imposed under subsection (a) with respect to any
failure shall be $50,000.
``(2) Listed transactions.--The penalty imposed under
subsection (a) with respect to any listed transaction shall be
an amount equal to the greater of--
``(A) $200,000, or
``(B) 50 percent of the gross income derived by
such person with respect to aid, assistance, or advice
which is provided with respect to the listed
transaction before the date the return including the
transaction is filed under section 6111.
Subparagraph (B) shall be applied by substituting `75 percent'
for `50 percent' in the case of an intentional failure or act
described in subsection (a).
``(c) Rescission Authority.--The provisions of section 6707A(d)
(relating to authority of Commissioner to rescind penalty) shall apply
to any penalty imposed under this section.
``(d) Reportable and Listed Transactions.--The terms `reportable
transaction' and `listed transaction' have the respective meanings
given to such terms by section 6707A(c).''.
(b) Clerical Amendment.--The item relating to section 6707 in the
table of sections for part I of subchapter B of chapter 68 is amended
by striking ``tax shelters'' and inserting ``reportable transactions''.
(c) Effective Date.--The amendments made by this section shall
apply to returns the due date for which is after the date of the
enactment of this Act.
SEC. 209. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF
INVESTORS.
(a) In General.--Subsection (a) of section 6708 is amended to read
as follows:
``(a) Imposition of Penalty.--
``(1) In general.--If any person who is required to
maintain a list under section 6112(a) fails to make such list
available upon written request to the Secretary in accordance
with section 6112(b)(1)(A) within 20 business days after the
date of the Secretary's request, such person shall pay a
penalty of $10,000 for each day of such failure after such 20th
day.
``(2) Reasonable cause exception.--No penalty shall be
imposed by paragraph (1) with respect to the failure on any day
if such failure is due to reasonable cause.''.
(b) Effective Date.--The amendment made by this section shall apply
to requests made after the date of the enactment of this Act.
SEC. 210. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO
TAX SHELTERS AND REPORTABLE TRANSACTIONS.
(a) In General.--Section 7408 (relating to action to enjoin
promoters of abusive tax shelters, etc.) is amended by redesignating
subsection (c) as subsection (d) and by striking subsections (a) and
(b) and inserting the following new subsections:
``(a) Authority To Seek Injunction.--A civil action in the name of
the United States to enjoin any person from further engaging in
specified conduct may be commenced at the request of the Secretary. Any
action under this section shall be brought in the district court of the
United States for the district in which such person resides, has his
principal place of business, or has engaged in specified conduct. The
court may exercise its jurisdiction over such action (as provided in
section 7402(a)) separate and apart from any other action brought by
the United States against such person.
``(b) Adjudication and Decree.--In any action under subsection (a),
if the court finds--
``(1) that the person has engaged in any specified conduct,
and
``(2) that injunctive relief is appropriate to prevent
recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in
any other activity subject to penalty under this title.
``(c) Specified Conduct.--For purposes of this section, the term
`specified conduct' means any action, or failure to take action,
subject to penalty under section 6700, 6701, 6707, or 6708.''.
(b) Conforming Amendments.--
(1) The heading for section 7408 is amended to read as
follows:
``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX
SHELTERS AND REPORTABLE TRANSACTIONS.''.
(2) The table of sections for subchapter A of chapter 67 is
amended by striking the item relating to section 7408 and
inserting the following new item:
``Sec. 7408. Actions to enjoin specified conduct related to tax
shelters and reportable transactions.''.
(c) Effective Date.--The amendment made by this section shall take
effect on the day after the date of the enactment of this Act.
SEC. 211. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME TAX RETURN
PREPARER.
(a) Standards Conformed to Taxpayer Standards.--Section 6694(a)
(relating to understatements due to unrealistic positions) is amended--
(1) by striking ``realistic possibility of being sustained
on its merits'' in paragraph (1) and inserting ``reasonable
belief that the tax treatment in such position was more likely
than not the proper treatment'',
(2) by striking ``or was frivolous'' in paragraph (3) and
inserting ``or there was no reasonable basis for the tax
treatment of such position'', and
(3) by striking ``Unrealistic'' in the heading and
inserting ``Improper''.
(b) Amount of Penalty.--Section 6694 is amended--
(1) by striking ``$250'' in subsection (a) and inserting
``$1,000'', and
(2) by striking ``$1,000'' in subsection (b) and inserting
``$5,000''.
(c) Effective Date.--The amendments made by this section shall
apply to documents prepared after the date of the enactment of this
Act.
SEC. 212. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL
ACCOUNTS.
(a) In General.--Section 5321(a)(5) of title 31, United States
Code, is amended to read as follows:
``(5) Foreign financial agency transaction violation.--
``(A) Penalty authorized.--The Secretary of the
Treasury may impose a civil money penalty on any person
who violates, or causes any violation of, any provision
of section 5314.
``(B) Amount of penalty.--
``(i) In general.--Except as provided in
subparagraph (C), the amount of any civil
penalty imposed under subparagraph (A) shall not exceed $5,000.
``(ii) Reasonable cause exception.--No
penalty shall be imposed under subparagraph (A)
with respect to any violation if--
``(I) such violation was due to
reasonable cause, and
``(II) the amount of the
transaction or the balance in the
account at the time of the transaction
was properly reported.
``(C) Willful violations.--In the case of any
person willfully violating, or willfully causing any
violation of, any provision of section 5314--
``(i) the maximum penalty under
subparagraph (B)(i) shall be increased to the
greater of--
``(I) $25,000, or
``(II) the amount (not exceeding
$100,000) determined under subparagraph
(D), and
``(ii) subparagraph (B)(ii) shall not
apply.
``(D) Amount.--The amount determined under this
subparagraph is--
``(i) in the case of a violation involving
a transaction, the amount of the transaction,
or
``(ii) in the case of a violation involving
a failure to report the existence of an account
or any identifying information required to be
provided with respect to an account, the
balance in the account at the time of the
violation.''.
(b) Effective Date.--The amendment made by this section shall apply
to violations occurring after the date of the enactment of this Act.
SEC. 213. FRIVOLOUS TAX SUBMISSIONS.
(a) Civil Penalties.--Section 6702 is amended to read as follows:
``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.
``(a) Civil Penalty for Frivolous Tax Returns.--A person shall pay
a penalty of $5,000 if--
``(1) such person files what purports to be a return of a
tax imposed by this title but which--
``(A) does not contain information on which the
substantial correctness of the self-assessment may be
judged, or
``(B) contains information that on its face
indicates that the self-assessment is substantially
incorrect; and
``(2) the conduct referred to in paragraph (1)--
``(A) is based on a position which the Secretary
has identified as frivolous under subsection (c), or
``(B) reflects a desire to delay or impede the
administration of Federal tax laws.
``(b) Civil Penalty for Specified Frivolous Submissions.--
``(1) Imposition of penalty.--Except as provided in
paragraph (3), any person who submits a specified frivolous
submission shall pay a penalty of $5,000.
``(2) Specified frivolous submission.--For purposes of this
section--
``(A) Specified frivolous submission.--The term
`specified frivolous submission' means a specified
submission if any portion of such submission--
``(i) is based on a position which the
Secretary has identified as frivolous under
subsection (c), or
``(ii) reflects a desire to delay or impede
the administration of Federal tax laws.
``(B) Specified submission.--The term `specified
submission' means--
``(i) a request for a hearing under--
``(I) section 6320 (relating to
notice and opportunity for hearing upon
filing of notice of lien), or
``(II) section 6330 (relating to
notice and opportunity for hearing
before levy), and
``(ii) an application under--
``(I) section 6159 (relating to
agreements for payment of tax liability
in installments),
``(II) section 7122 (relating to
compromises), or
``(III) section 7811 (relating to
taxpayer assistance orders).
``(3) Opportunity to withdraw submission.--If the Secretary
provides a person with notice that a submission is a specified
frivolous submission and such person withdraws such submission
within 30 days after such notice, the penalty imposed under
paragraph (1) shall not apply with respect to such submission.
``(c) Listing of Frivolous Positions.--The Secretary shall
prescribe (and periodically revise) a list of positions which the
Secretary has identified as being frivolous for purposes of this
subsection. The Secretary shall not include in such list any position
that the Secretary determines meets the requirement of section
6662(d)(2)(B)(ii)(II).
``(d) Reduction of Penalty.--The Secretary may reduce the amount of
any penalty imposed under this section if the Secretary determines that
such reduction would promote compliance with and administration of the
Federal tax laws.
``(e) Penalties in Addition to Other Penalties.--The penalties
imposed by this section shall be in addition to any other penalty
provided by law.''.
(b) Treatment of Frivolous Requests for Hearings Before Levy.--
(1) Frivolous requests disregarded.--Section 6330 (relating
to notice and opportunity for hearing before levy) is amended
by adding at the end the following new subsection:
``(g) Frivolous Requests for Hearing, Etc.--Notwithstanding any
other provision of this section, if the Secretary determines that any
portion of a request for a hearing under this section or section 6320
meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A),
then the Secretary may treat such portion as if it were never submitted
and such portion shall not be subject to any further administrative or
judicial review.''.
(2) Preclusion from raising frivolous issues at hearing.--
Section 6330(c)(4) is amended--
(A) by striking ``(A)'' and inserting ``(A)(i)'';
(B) by striking ``(B)'' and inserting ``(ii)'';
(C) by striking the period at the end of the first
sentence and inserting ``; or''; and
(D) by inserting after subparagraph (A)(ii) (as so
redesignated) the following:
``(B) the issue meets the requirement of clause (i)
or (ii) of section 6702(b)(2)(A).''.
(3) Statement of grounds.--Section 6330(b)(1) is amended by
striking ``under subsection (a)(3)(B)'' and inserting ``in
writing under subsection (a)(3)(B) and states the grounds for
the requested hearing''.
(c) Treatment of Frivolous Requests for Hearings Upon Filing of
Notice of Lien.--Section 6320 is amended--
(1) in subsection (b)(1), by striking ``under subsection
(a)(3)(B)'' and inserting ``in writing under subsection
(a)(3)(B) and states the grounds for the requested hearing'',
and
(2) in subsection (c), by striking ``and (e)'' and
inserting ``(e), and (g)''.
(d) Treatment of Frivolous Applications for Offers-in-Compromise
and Installment Agreements.--Section 7122 is amended by adding at the
end the following new subsection:
``(e) Frivolous Submissions, Etc.--Notwithstanding any other
provision of this section, if the Secretary determines that any portion
of an application for an offer-in-compromise or installment agreement
submitted under this section or section 6159 meets the requirement of
clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may
treat such portion as if it were never submitted and such portion shall
not be subject to any further administrative or judicial review.''.
(e) Clerical Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by striking the item relating to
section 6702 and inserting the following new item:
``Sec. 6702. Frivolous tax
submissions.''.
(f) Effective Date.--The amendments made by this section shall
apply to submissions made and issues raised after the date on which the
Secretary first prescribes a list under section 6702(c) of the Internal
Revenue Code of 1986, as amended by subsection (a).
SEC. 214. PENALTY ON PROMOTERS OF TAX SHELTERS.
(a) Penalty on Promoting Abusive Tax Shelters.--Section 6700(a) is
amended by adding at the end the following new sentence:
``Notwithstanding the first sentence, if an activity with respect to
which a penalty imposed under this subsection involves a statement
described in paragraph (2)(A), the amount of the penalty shall be equal
to 50 percent of the gross income derived (or to be derived) from such
activity by the person on which the penalty is imposed.''.
(b) Effective Date.--The amendment made by this section shall apply
to activities after the date of the enactment of this Act.
SEC. 215. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH LISTED
TRANSACTIONS NOT REPORTED.
(a) In General.--Section 6501(e)(1) (relating to substantial
omission of items for income taxes) is amended by adding at the end the
following new subparagraph:
``(C) 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 tax for such taxable year may be
assessed, or a proceeding in court for collection of
such tax may be begun without assessment, at any time
within 6 years after the time the return is filed. This
subparagraph shall not apply to any taxable year if the
time for assessment or beginning the proceeding in
court has expired before the time a transaction is
treated as a listed transaction under section 6011.''.
(b) Effective Date.--The amendment made by this section shall apply
to transactions in taxable years beginning after the date of the
enactment of this Act.
SEC. 216. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND NONECONOMIC
SUBSTANCE TRANSACTIONS.
(a) In General.--Section 163 (relating to deduction for interest)
is amended by redesignating subsection (m) as subsection (n) and by
inserting after subsection (l) the following new subsection:
``(m) Interest on Unpaid Taxes Attributable to Nondisclosed
Reportable Transactions and Noneconomic Substance Transactions.--No
deduction shall be allowed under this chapter for any interest paid or
accrued under section 6601 on any underpayment of tax which is
attributable to--
``(1) the portion of any reportable transaction
understatement (as defined in section 6662A(b)) with respect to
which the requirement of section 6664(d)(2)(A) is not met, or
``(2) any noneconomic substance transaction understatement
(as defined in section 6662B(c)).''.
(b) Effective Date.--The amendments made by this section shall
apply to transactions in taxable years beginning after the date of the
enactment of this Act.
Subtitle B--Enron-Related Tax Shelter Provisions
SEC. 221. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN LOSSES.
(a) In General.--Section 362 (relating to basis to corporations) is
amended by adding at the end the following new subsection:
``(e) Limitations on Built-in Losses.--
``(1) Limitation on importation of built-in losses.--
``(A) In general.--If in any transaction described
in subsection (a) or (b) there would (but for this
subsection) be an importation of a net built-in loss,
the basis of each property described in subparagraph
(B) which is acquired in such transaction shall
(notwithstanding subsections (a) and (b)) be its fair
market value immediately after such transaction.
``(B) Property described.--For purposes of
subparagraph (A), property is described in this
subparagraph if--
``(i) gain or loss with respect to such
property is not subject to tax under this
subtitle in the hands of the transferor
immediately before the transfer, and
``(ii) gain or loss with respect to such
property is subject to such tax in the hands of
the transferee immediately after such transfer.
In any case in which the transferor is a partnership,
the preceding sentence shall be applied by treating
each partner in such partnership as holding such
partner's proportionate share of the property of such
partnership.
``(C) Importation of net built-in loss.--For
purposes of subparagraph (A), there is an importation
of a net built-in loss in a transaction if the
transferee's aggregate adjusted bases of property
described in subparagraph (B) which is transferred in
such transaction would (but for this paragraph) exceed
the fair market value of such property immediately
after such transaction.''.
``(2) Limitation on transfer of built-in losses in section
351 transactions.--
``(A) In general.--If--
``(i) property is transferred by a
transferor in any transaction which is
described in subsection (a) and which is not
described in paragraph (1) of this subsection,
and
``(ii) the transferee's aggregate adjusted
bases of such property so transferred would
(but for this paragraph) exceed the fair market
value of such property immediately after such
transaction,
then, notwithstanding subsection (a), the transferee's
aggregate adjusted bases of the property so transferred
shall not exceed the fair market value of such property
immediately after such transaction.
``(B) Allocation of basis reduction.--The aggregate
reduction in basis by reason of subparagraph (A) shall
be allocated among the property so transferred in
proportion to their respective built-in losses
immediately before the transaction.
``(C) Exception for transfers within affiliated
group.--Subparagraph (A) shall not apply to any
transaction if the transferor owns stock in the
transferee meeting the requirements of section
1504(a)(2). In the case of property to which
subparagraph (A) does not apply by reason of the
preceding sentence, the transferor's basis in the stock
received for such property shall not exceed its fair
market value immediately after the transfer.''.
(b) Comparable Treatment Where Liquidation.--Paragraph (1) of
section 334(b) (relating to liquidation of subsidiary) is amended to
read as follows:
``(1) In general.--If property is received by a corporate
distributee in a distribution in a complete liquidation to
which section 332 applies (or in a transfer described in
section 337(b)(1)), the basis of such property in the hands of
such distributee shall be the same as it would be in the hands
of the transferor; except that the basis of such property in
the hands of such distributee shall be the fair market value of
the property at the time of the distribution--
``(A) in any case in which gain or loss is
recognized by the liquidating corporation with respect
to such property, or
``(B) in any case in which the liquidating
corporation is a foreign corporation, the corporate
distributee is a domestic corporation, and the
corporate distributee's aggregate adjusted bases of
property described in section 362(e)(1)(B) which is
distributed in such liquidation would (but for this
subparagraph) exceed the fair market value of such
property immediately after such liquidation.''.
(c) Effective Date.--The amendments made by this section shall
apply to transactions after February 13, 2003.
SEC. 222. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY
PARTNERSHIP IN CORPORATE PARTNER.
(a) In General.--Section 755 is amended by adding at the end the
following new subsection:
``(c) No Allocation of Basis Decrease to Stock of Corporate
Partner.--In making an allocation under subsection (a) of any decrease
in the adjusted basis of partnership property under section 734(b)--
``(1) no allocation may be made to stock in a corporation
(or any person which is related (within the meaning of section
267(b) or 707(b)(1)) to such corporation) which is a partner in
the partnership, and
``(2) any amount not allocable to stock by reason of
paragraph (1) shall be allocated under subsection (a) to other
partnership property.
Gain shall be recognized to the partnership to the extent that the
amount required to be allocated under paragraph (2) to other
partnership property exceeds the aggregate adjusted basis of such other
property immediately before the allocation required by paragraph
(2).''.
(b) Effective Date.--The amendment made by this section shall apply
to distributions after February 13, 2003.
SEC. 223. REPEAL OF SPECIAL RULES FOR FASITS.
(a) In General.--Part V of subchapter M of chapter 1 (relating to
financial asset securitization investment trusts) is hereby repealed.
(b) Conforming Amendments.--
(1) Paragraph (6) of section 56(g) is amended by striking
``REMIC, or FASIT'' and inserting ``or REMIC''.
(2) Clause (ii) of section 382(l)(4)(B) is amended by
striking ``a REMIC to which part IV of subchapter M applies, or
a FASIT to which part V of subchapter M applies,'' and
inserting ``or a REMIC to which part IV of subchapter M
applies,''.
(3) Paragraph (1) of section 582(c) is amended by striking
``, and any regular interest in a FASIT,''.
(4) Subparagraph (E) of section 856(c)(5) is amended by
striking the last sentence.
(5) Paragraph (5) 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).
(6) Subparagraph (C) of section 1202(e)(4) is amended by
striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
(7) Subparagraph (C) of section 7701(a)(19) is amended by
adding ``and'' at the end of clause (ix), by striking ``, and''
at the end of clause (x) and inserting a period, and by
striking clause (xi).
(8) The table of parts for subchapter M of chapter 1 is
amended by striking the item relating to part V.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall take effect on February
14, 2003.
(2) Exception for existing fasits.--
(A) In general.--Paragraph (1) shall not apply to
any FASIT in existence on the date of the enactment of
this Act to the extent that regular interests issued by
the FASIT before such date continue to remain
outstanding in accordance with the original terms of
issuance.
(B) Transfer of additional assets not permitted.--
Except as provided in regulations prescribed by the
Secretary of the Treasury or the Secretary's delegate,
subparagraph (A) shall cease to apply as of the
earliest date after the date of the enactment of this
Act that any property is transferred to the FASIT.
SEC. 224. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON
CONVERTIBLE DEBT.
(a) In General.--Paragraph (2) of section 163(l) is amended by
striking ``or a related party'' and inserting ``or equity held by the
issuer (or any related party) in any other person''.
(b) Exception for Certain Instruments Issued by Dealers in
Securities.--Section 163(l) is amended by redesignating paragraphs (4)
and (5) as paragraphs (5) and (6) and by inserting after paragraph (3)
the following new paragraph:
``(4) Exception for certain instruments issued by dealers
in securities.--For purposes of this subsection, the term
`disqualified debt instrument' does not include indebtedness
issued by a dealer in securities (or a related party) which is
payable in, or by reference to, equity (other than equity of
the issuer or a related party) held by such dealer in its
capacity as a dealer in securities. For purposes of this
paragraph, the term `dealer in securities' has the meaning
given such term by section 475.''.
(c) Conforming 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''.
(d) Effective Date.--The amendments made by this section shall
apply to debt instruments issued after February 13, 2003.
SEC. 225. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER SECTION
269.
(a) In General.--Subsection (a) of section 269 (relating to
acquisitions made to evade or avoid income tax) is amended to read as
follows:
``(a) In General.--If--
``(1)(A) any person acquires stock in a corporation, or
``(B) any corporation acquires, directly or indirectly,
property of another corporation and the basis of such property,
in the hands of the acquiring corporation, is determined by
reference to the basis in the hands of the transferor
corporation, and
``(2) the principal purpose for which such acquisition was
made is evasion or avoidance of Federal income tax by securing
the benefit of a deduction, credit, or other allowance,
then the Secretary may disallow such deduction, credit, or other
allowance.''.
(b) Effective Date.--The amendment made by this section shall apply
to stock and property acquired after February 13, 2003.
SEC. 226. MODIFICATIONS OF CERTAIN RULES RELATING TO CONTROLLED FOREIGN
CORPORATIONS.
(a) Limitation on Exception From PFIC Rules for United States
Shareholders of Controlled Foreign Corporations.--Paragraph (2) of
section 1297(e) (relating to passive investment company) is amended by
adding at the end the following flush sentence:
``Such term shall not include any period if there is only a
remote likelihood of an inclusion in gross income under section
951(a)(1)(A)(i) of subpart F income of such corporation for
such period.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years on controlled foreign corporation beginning after
February 13, 2003, and to taxable years of United States shareholder in
which or with which such taxable years of controlled foreign
corporations end.
SEC. 227. CONTROLLED ENTITIES INELIGIBLE FOR REIT STATUS.
(a) In General.--Subsection (a) of section 856 (relating to
definition of real estate investment trust) is amended by striking
``and'' at the end of paragraph (6), by redesignating paragraph (7) as
paragraph (8), and by inserting after paragraph (6) the following new
paragraph:
``(7) which is not a controlled entity (as defined in
subsection (l)); and''.
(b) Controlled Entity.--Section 856 is amended by adding at the end
the following new subsection:
``(l) Controlled Entity.--
``(1) In general.--For purposes of subsection (a)(7), an
entity is a controlled entity if, at any time during the
taxable year, one person (other than a qualified entity)--
``(A) in the case of a corporation, owns stock--
``(i) possessing at least 50 percent of the
total voting power of the stock of such
corporation, or
``(ii) having a value equal to at least 50
percent of the total value of the stock of such
corporation, or
``(B) in the case of a trust, owns beneficial
interests in the trust which would meet the
requirements of subparagraph (A) if such interests were
stock.
``(2) Qualified entity.--For purposes of paragraph (1), the
term `qualified entity' means--
``(A) any real estate investment trust, and
``(B) any partnership in which one real estate
investment trust owns at least 50 percent of the
capital and profits interests in the partnership.
``(3) Attribution rules.--For purposes of this paragraphs
(1) and (2)--
``(A) In general.--Rules similar to the rules of
subsections (d)(5) and (h)(3) shall apply; except that
section 318(a)(3)(C) shall not be applied under such
rules to treat stock owned by a qualified entity as
being owned by a person which is not a qualified
entity.
``(B) Stapled entities.--A group of entities which
are stapled entities (as defined in section 269B(c)(2))
shall be treated as one person.
``(4) Exception for certain new reits.--
``(A) In general.--The term `controlled entity'
shall not include an incubator REIT.
``(B) Incubator reit.--A corporation shall be
treated as an incubator REIT for any taxable year
during the eligibility period if it meets all the
following requirements for such year:
``(i) The corporation elects to be treated
as an incubator REIT.
``(ii) The corporation has only voting
common stock outstanding.
``(iii) Not more than 50 percent of the
corporation's real estate assets consist of
mortgages.
``(iv) From not later than the beginning of
the last half of the second taxable year, at
least 10 percent of the corporation's capital
is provided by lenders or equity investors who
are unrelated to the corporation's largest
shareholder.
``(v) The corporation annually increases
the value of its real estate assets by at least
10 percent.
``(vi) The directors of the corporation
adopt a resolution setting forth an intent to
engage in a going public transaction.
No election may be made with respect to any REIT if an
election under this subsection was in effect for any
predecessor of such REIT.
``(C) Eligibility period.--
``(i) In general.--The eligibility period
(for which an incubator REIT election can be
made) begins with the REIT's second taxable
year and ends at the close of the REIT's third
taxable year, except that the REIT may, subject
to clauses (ii), (iii), and (iv), elect to
extend such period for an additional 2 taxable
years.
``(ii) Going public transaction.--A REIT
may not elect to extend the eligibility period
under clause (i) unless it enters into an
agreement with the Secretary that if it does
not engage in a going public transaction by the
end of the extended eligibility period, it
shall pay Federal income taxes for the 2 years
of the extended eligibility period as if it had
not made an incubator REIT election and had
ceased to qualify as a REIT for those 2 taxable
years.
``(iii) Returns, interest, and notice.--
``(I) Returns.--In the event the
corporation ceases to be treated as a
REIT by operation of clause (ii), the
corporation shall file any appropriate
amended returns reflecting the change
in status within 3 months of the close
of the extended eligibility period.
``(II) Interest.--Interest shall be
payable on any tax imposed by reason of
clause (ii) for any taxable year but,
unless there was a finding under
subparagraph (D), no substantial
underpayment penalties shall be
imposed.
``(III) Notice.--The corporation
shall, at the same time it files its
returns under subclause (I), notify its
shareholders and any other
persons whose tax position is, or may reasonably be expected to be,
affected by the change in status so they also may file any appropriate
amended returns to conform their tax treatment consistent with the
corporation's loss of REIT status.
``(IV) Regulations.--The Secretary
shall provide appropriate regulations
setting forth transferee liability and
other provisions to ensure collection
of tax and the proper administration of
this provision.
``(iv) Clauses (ii) and (iii) shall not
apply if the corporation allows its incubator
REIT status to lapse at the end of the initial
2-year eligibility period without engaging in a
going public transaction if the corporation is
not a controlled entity as of the beginning of
its fourth taxable year. In such a case, the
corporation's directors may still be liable for
the penalties described in subparagraph (D)
during the eligibility period.
``(D) Special penalties.--If the Secretary
determines that an incubator REIT election was filed
for a principal purpose other than as part of a
reasonable plan to undertake a going public
transaction, an excise tax of $20,000 shall be imposed
on each of the corporation's directors for each taxable
year for which an election was in effect.
``(E) Going public transaction.--For purposes of
this paragraph, a going public transaction means--
``(i) a public offering of shares of the
stock of the incubator REIT;
``(ii) a transaction, or series of
transactions, that results in the stock of the
incubator REIT being regularly traded on an
established securities market and that results
in at least 50 percent of such stock being held
by shareholders who are unrelated to persons
who held such stock before it began to be so
regularly traded; or
``(iii) any transaction resulting in
ownership of the REIT by 200 or more persons
(excluding the largest single shareholder) who
in the aggregate own at least 50 percent of the
stock of the REIT.
For the purposes of this subparagraph, the rules of
paragraph (3) shall apply in determining the ownership
of stock.
``(F) Definitions.--The term `established
securities market' shall have the meaning set forth in
the regulations under section 897.''.
(c) Conforming Amendment.--Paragraph (2) of section 856(h) is
amended by striking ``and (6)'' each place it appears and inserting ``,
(6), and (7)''.
(d) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years ending after May 8, 2003.
(2) Exception for existing controlled entities.--The
amendments made by this section shall not apply to any entity
which is a controlled entity (as defined in section 856(l) of
the Internal Revenue Code of 1986, as added by this section) as
of May 8, 2003, which is a real estate investment trust for the
taxable year which includes such date, and which has
significant business assets or activities as of such date. For
purposes of the preceding sentence, an entity shall be treated
as such a controlled entity on May 8, 2003, if it becomes such
an entity after such date in a transaction--
(A) made pursuant to a written agreement which was
binding on such date and at all times thereafter, or
(B) described on or before such date in a filing
with the Securities and Exchange Commission required
solely by reason of the transaction.
Subtitle C--Other Corporate Governance Provisions
PART I--GENERAL PROVISIONS
SEC. 231. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER
AMOUNTS.
(a) In General.--Subsection (f) of section 162 (relating to trade
or business expenses) is amended to read as follows:
``(f) Fines, Penalties, and Other Amounts.--
``(1) In general.--Except as provided in paragraph (2), no
deduction otherwise allowable shall be allowed under this
chapter for any amount paid or incurred (whether by suit,
agreement, or otherwise) to, or at the direction of, a
government or entity described in paragraph (3) in relation to
the violation of any law or the investigation or inquiry into
the potential violation of any law.
``(2) Exception for amounts constituting restitution.--
Paragraph (1) shall not apply to any amount which the taxpayer
establishes constitutes restitution for damage or harm caused
by the violation of any law or the potential violation of any
law. This paragraph shall not apply to any amount paid or
incurred as reimbursement to the government or entity for the
costs of any investigation or litigation.
``(3) Certain nongovernmental regulatory entities.--An
entity is described in this paragraph if it is--
``(A) a nongovernmental entity which exercises
self-regulatory powers (including imposing sanctions)
in connection with a qualified board or exchange (as
defined in section 1256(g)(7)), or
``(B) to the extent provided in regulations, a
nongovernmental entity which exercises self-regulatory
powers (including imposing sanctions) as part of
performing an essential governmental function.''.
(b) Effective Date.--The amendment made by this section shall apply
to amounts paid or incurred after April 27, 2003, except that such
amendment shall not apply to amounts paid or incurred under any binding
order or agreement entered into on or before April 27, 2003. Such
exception shall not apply to an order or agreement requiring court
approval unless the approval was obtained on or before April 27, 2003.
SEC. 232. DISALLOWANCE OF DEDUCTION FOR PUNITIVE DAMAGES.
(a) Disallowance of Deduction.--
(1) In general.--Section 162(g) (relating to treble damage
payments under the antitrust laws) is amended by adding at the
end the following new paragraph:
``(2) Punitive damages.--No deduction shall be allowed
under this chapter for any amount paid or incurred for punitive
damages in connection with any judgment in, or settlement of,
any action. This paragraph shall not apply to punitive damages
described in section 104(c).''.
(2) Conforming amendments.--
(A) Section 162(g) is amended--
(i) by striking ``If'' and inserting:
``(1) Treble damages.--If'', and
(ii) by redesignating paragraphs (1) and
(2) as subparagraphs (A) and (B), respectively.
(B) The heading for section 162(g) is amended by
inserting ``or Punitive Damages'' after ``Laws''.
(b) Inclusion in Income of Punitive Damages Paid by Insurer or
Otherwise.--
(1) In general.--Part II of subchapter B of chapter 1
(relating to items specifically included in gross income) is
amended by adding at the end the following new section:
``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR OTHERWISE.
``Gross income shall include any amount paid to or on behalf of a
taxpayer as insurance or otherwise by reason of the taxpayer's
liability (or agreement) to pay punitive damages.''.
(2) Reporting requirements.--Section 6041 (relating to
information at source) is amended by adding at the end the
following new subsection:
``(f) Section To Apply to Punitive Damages Compensation.--This
section shall apply to payments by a person to or on behalf of another
person as insurance or otherwise by reason of the other person's
liability (or agreement) to pay punitive damages.''.
(3) Conforming amendment.--The table of sections for part
II of subchapter B of chapter 1 is amended by adding at the end
the following new item:
``Sec. 91. Punitive damages compensated by insurance or otherwise.''.
(c) Effective Date.--The amendments made by this section shall
apply to damages paid or incurred on or after the date of the enactment
of this Act.
PART II--EXECUTIVE COMPENSATION REFORM
SEC. 235. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION FUNDED WITH
ASSETS LOCATED OUTSIDE THE UNITED STATES.
(a) In General.--Section 83(c) (relating to special rules for
property transferred in connection with performance of services) is
amended by adding at the end the following new paragraph:
``(4) Foreign assets funding nonqualified deferred
compensation arrangements.--
``(A) In general.--In determining whether there is
a transfer of property for purposes of subsection (a),
if assets are--
``(i) designated or otherwise available for
the payment of nonqualified deferred
compensation, and
``(ii) located outside the United States,
such assets shall not be treated as subject to the
claims of creditors.
``(B) Compensation for services performed in
foreign jurisdiction.--Subparagraph (A) 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.
``(C) Regulations.--The Secretary shall prescribe
such regulations as are necessary to carry out the
provisions of this paragraph, including regulations to
exempt arrangements from the application of this
paragraph if--
``(i) the arrangement will not result in an
improper deferral of United States tax, and
``(ii) the assets involved in the
arrangement will be readily accessible in any
insolvency or bankruptcy proceeding.''.
(b) Effective Date.--The amendments made by this section shall
apply to amounts deferred in taxable years beginning after December 31,
2003.
SEC. 236. INCLUSION IN GROSS INCOME OF FUNDED DEFERRED COMPENSATION OF
CORPORATE INSIDERS.
(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 FUNDED DEFERRED COMPENSATION
OF CORPORATE INSIDERS.
``(a) In General.--If an employer maintains a funded deferred
compensation plan--
``(1) compensation of any disqualified individual which is
deferred under such funded deferred compensation plan shall be
included in the gross income of the disqualified individual or
beneficiary for the 1st taxable year in which there is no
substantial risk of forfeiture of the rights to such
compensation, and
``(2) the tax treatment of any amount made available under
the plan to a disqualified individual or beneficiary shall be
determined under section 72 (relating to annuities, etc.).
``(b) Funded Deferred Compensation Plan.--For purposes of this
section--
``(1) In general.--The term `funded deferred compensation
plan' means any plan providing for the deferral of compensation
unless--
``(A) the employee's rights to the compensation
deferred under the plan are no greater than the rights
of a general creditor of the employer, and
``(B) all amounts set aside (directly or
indirectly) for purposes of paying the deferred
compensation, and all income attributable to such
amounts, remain (until made available to the
participant or other beneficiary) solely the property
of the employer (without being restricted to the
provision of benefits under the plan),
``(C) the amounts referred to in subparagraph (B)
are available to satisfy the claims of the employer's
general creditors at all times (not merely after
bankruptcy or insolvency), and
``(D) the investment options which a participant
may elect under the plan are the same as the investment
options which a participant may elect under the
qualified employer plan of the employer which has the
fewest investment options.
Such term shall not include a qualified employer plan.
``(2) Special rules.--
``(A) Employee's rights.--A plan shall be treated
as failing to meet the requirements of paragraph (1)(A)
unless--
``(i) the compensation deferred under the
plan is payable only upon separation from
service, death, disability (within the meaning
of section 1614(a)(3) of the Social Security
Act (42 U.S.C. 1382c(a)(3))), or at a specified
time (or pursuant to a fixed schedule), and
``(ii) the plan does not permit the
acceleration of the time such deferred
compensation is payable by reason of any event.
If the employer and employee agree to a modification of
the plan that accelerates the time for payment of any
deferred compensation, then all compensation previously
deferred under the plan shall be includible in gross
income for the taxable year during which such
modification takes effect and the taxpayer shall pay
interest at the underpayment rate on the underpayments
that would have occurred had the deferred compensation
been includible in gross income on the earliest date
that there is no substantial risk of forfeiture of the
rights to such compensation.
``(B) Creditor's rights.--A plan shall be treated
as failing to meet the requirements of paragraph (1)(B)
with respect to amounts set aside in a trust unless--
``(i) the employee has no beneficial
interest in the trust,
``(ii) assets in the trust are available to
satisfy claims of general creditors at all
times (not merely after bankruptcy or
insolvency), and
``(iii) there is no factor that would make
it more difficult for general creditors to
reach the assets in the trust than it would be
if the trust assets were held directly by the
employer in the United States.
Except as provided in regulations prescribed by the
Secretary, such a factor shall include the location of
the trust outside the United States unless
substantially all of the services to which the
nonqualified deferred compensation relates are
performed outside the United States. Such regulations
may exempt any such trust if the trust will not result
in an improper deferral of United States tax, and the
assets involved in the trust will be readily accessible
in any insolvency or bankruptcy proceeding.
``(c) Disqualified Individual.--For purposes of this section, the
term `disqualified individual' means, with respect to a corporation,
any individual--
``(1) who is subject to the requirements of section 16(a)
of the Securities Exchange Act of 1934 with respect to such
corporation, or
``(2) who would be subject to such requirements if such
corporation were an issuer of equity securities referred to in
such section.
``(d) Other Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified employer plan.--The term `qualified
employer plan' means--
``(A) any plan, contract, pension, account, or
trust described in subparagraph (A) or (B) of section
219(g)(5), and
``(B) any other plan of an organization exempt from
tax under subtitle A.
``(2) Plan includes arrangements, etc.--The term `plan'
includes any agreement or arrangement.
``(3) 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.
``(4) Treatment of earnings.--References to deferred
compensation shall be treated as including references to income
attributable to such compensation or such income.''.
(b) Clerical Amendment.--The table of sections for such subpart A
is amended by adding at the end the following new item:
``Sec. 409A. Inclusion in gross income of
funded deferred compensation of
corporate insiders.''.
(c) Effective Date.--The amendments made by this section shall
apply to amounts deferred in taxable years beginning after December 31,
2003.
SEC. 237. PROHIBITION ON DEFERRAL OF GAIN FROM THE EXERCISE OF STOCK
OPTIONS AND RESTRICTED STOCK GAINS THROUGH DEFERRED
COMPENSATION ARRANGEMENTS.
(a) In General.--Section 83 (relating to property transferred in
connection with performance of services) is amending by adding at the
end the following new subsection:
``(i) Prohibition on Additional Deferral Through Deferred
Compensation Arrangements.--If a taxpayer elects to exchange an option
to purchase employer securities--
``(1) to which subsection (a) applies, or
``(2) which is described in subsection (e)(3),
or any other compensation based on employer securities, for a right to
receive future payments, then, notwithstanding any other provision of
this title, there shall be included in gross income for the taxable
year of the exchange an amount equal to the present value of such right
(or such other amount as the Secretary may by regulations specify). For
purposes of this subsection, the term `employer securities' has the
meaning given such term by section 409(l).''.
(b) Effective Date.--The amendment made by this section shall apply
to any exchange after December 31, 2003.
SEC. 238. INCREASE IN WITHHOLDING FROM SUPPLEMENTAL WAGE PAYMENTS IN
EXCESS OF $1,000,000.
(a) In General.--If an employer elects under Treasury Regulation
31.3402(g)-1 to determine the amount to be deducted and withheld from
any supplemental wage payment by using a flat percentage rate, the rate
to be used in determining the amount to be so deducted and withheld
shall not be less than 28 percent (or the corresponding rate in effect
under section 1(i)(2) of the Internal Revenue Code of 1986 for taxable
years beginning in the calendar year in which the payment is made).
(b) Special Rule for Large Payments.--
(1) In general.--Notwithstanding subsection (a), if the
supplemental wage payment, when added to all such payments
previously made by the employer to the employee during the
calendar year, exceeds $1,000,000, the rate used with respect
to such excess shall be equal to the maximum rate of tax in
effect under section 1 of such Code for taxable years beginning
in such calendar year.
(2) Aggregation.--All persons treated as a single employer
under subsection (a) or (b) of section 52 of the Internal
Revenue Code of 1986 shall be treated as a single employer for
purposes of this subsection.
(c) Conforming Amendment.--Section 13273 of the Revenue
Reconciliation Act of 1993 (Public Law 103-66) is repealed.
(d) Effective Date.--The provisions of, and the amendment made by,
this section shall apply to payments made after December 31, 2003.
Subtitle D--International Provisions
PART I--PROVISIONS TO DISCOURAGE EXPATRIATION
SEC. 241. REVISION OF TAX RULES ON EXPATRIATION.
(a) In General.--Subpart A of part II of subchapter N of chapter 1
is amended by inserting after section 877 the following new section:
``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
``(a) General Rules.--For purposes of this subtitle--
``(1) Mark to market.--Except as provided in subsections
(d) and (f), all property of a covered expatriate to whom this
section applies shall be treated as sold on the day before the
expatriation date for its fair market value.
``(2) Recognition of gain or loss.--In the case of any sale
under paragraph (1)--
``(A) notwithstanding any other provision of this
title, any gain arising from such sale shall be taken
into account for the taxable year of the sale, and
``(B) any loss arising from such sale shall be
taken into account for the taxable year of the sale to
the extent otherwise provided by this title, except
that section 1091 shall not apply to any such loss.
Proper adjustment shall be made in the amount of any gain or
loss subsequently realized for gain or loss taken into account
under the preceding sentence.
``(3) Exclusion for certain gain.--
``(A) In general.--The amount which, but for this
paragraph, would be includible in the gross income of
any individual by reason of this section shall be
reduced (but not below zero) by $600,000. For purposes
of this paragraph, allocable expatriation gain taken
into account under subsection (f)(2) shall be treated
in the same manner as an amount required to be
includible in gross income.
``(B) Cost-of-living adjustment.--
``(i) In general.--In the case of an
expatriation date occurring in any calendar
year after 2003, the $600,000 amount under
subparagraph (A) shall be increased by an
amount equal to--
``(I) such dollar amount,
multiplied by
``(II) the cost-of-living
adjustment determined under section
1(f)(3) for such calendar year,
determined by substituting `calendar
year 2002' for `calendar year 1992' in
subparagraph (B) thereof.
``(ii) Rounding rules.--If any amount after
adjustment under clause (i) is not a multiple
of $1,000, such amount shall be rounded to the
next lower multiple of $1,000.
``(4) Election to continue to be taxed as united states
citizen.--
``(A) In general.--If a covered expatriate elects
the application of this paragraph--
``(i) this section (other than this
paragraph and subsection (i)) shall not apply
to the expatriate, but
``(ii) in the case of property to which
this section would apply but for such election,
the expatriate shall be subject to tax under
this title in the same manner as if the
individual were a United States citizen.
``(B) Requirements.--Subparagraph (A) shall not
apply to an individual unless the individual--
``(i) provides security for payment of tax
in such form and manner, and in such amount, as
the Secretary may require,
``(ii) consents to the waiver of any right
of the individual under any treaty of the
United States which would preclude assessment
or collection of any tax which may be imposed
by reason of this paragraph, and
``(iii) complies with such other
requirements as the Secretary may prescribe.
``(C) Election.--An election under subparagraph (A)
shall apply to all property to which this section would
apply but for the election and, once made, shall be
irrevocable. Such election shall also apply to property
the basis of which is determined in whole or in part by
reference to the property with respect to which the
election was made.
``(b) Election To Defer Tax.--
``(1) In general.--If the taxpayer elects the application
of this subsection with respect to any property treated as sold
by reason of subsection (a), the payment of the additional tax
attributable to such property shall be postponed until the due
date of the return for the taxable year in which such property
is disposed of (or, in the case of property disposed of in a
transaction in which gain is not recognized in whole or in
part, until such other date as the Secretary may prescribe).
``(2) Determination of tax with respect to property.--For
purposes of paragraph (1), the additional tax attributable to
any property is an amount which bears the same ratio to the
additional tax imposed by this chapter for the taxable year
solely by reason of subsection (a) as the gain taken into
account under subsection (a) with respect to such property
bears to the total gain taken into account under subsection (a)
with respect to all property to which subsection (a) applies.
``(3) Termination of postponement.--No tax may be postponed
under this subsection later than the due date for the return of
tax imposed by this chapter for the taxable year which includes
the date of death of the expatriate (or, if earlier, the time
that the security provided with respect to the property fails
to meet the requirements of paragraph (4), unless the taxpayer
corrects such failure within the time specified by the
Secretary).
``(4) Security.--
``(A) In general.--No election may be made under
paragraph (1) with respect to any property unless
adequate security is provided to the Secretary with
respect to such property.
``(B) Adequate security.--For purposes of
subparagraph (A), security with respect to any property
shall be treated as adequate security if--
``(i) it is a bond in an amount equal to
the deferred tax amount under paragraph (2) for
the property, or
``(ii) the taxpayer otherwise establishes
to the satisfaction of the Secretary that the
security is adequate.
``(5) Waiver of certain rights.--No election may be made
under paragraph (1) unless the taxpayer consents to the waiver
of any right under any treaty of the United States which would
preclude assessment or collection of any tax imposed by reason
of this section.
``(6) Elections.--An election under paragraph (1) shall
only apply to property described in the election and, once
made, is irrevocable. An election may be made under paragraph
(1) with respect to an interest in a trust with respect to
which gain is required to be recognized under subsection
(f)(1).
``(7) Interest.--For purposes of section 6601--
``(A) the last date for the payment of tax shall be
determined without regard to the election under this
subsection, and
``(B) section 6621(a)(2) shall be applied by
substituting `5 percentage points' for `3 percentage
points' in subparagraph (B) thereof.
``(c) Covered Expatriate.--For purposes of this section--
``(1) In general.--Except as provided in paragraph (2), the
term `covered expatriate' means an expatriate.
``(2) Exceptions.--An individual shall not be treated as a
covered expatriate if--
``(A) the individual--
``(i) became at birth a citizen of the
United States and a citizen of another country
and, as of the expatriation date, continues to
be a citizen of, and is taxed as a resident of,
such other country, and
``(ii) has not been a resident of the
United States (as defined in section
7701(b)(1)(A)(ii)) during the 5 taxable years
ending with the taxable year during which the
expatriation date occurs, or
``(B)(i) the individual's relinquishment of United
States citizenship occurs before such individual
attains age 18\1/2\, and
``(ii) the individual has been a resident of the
United States (as so defined) for not more than 5
taxable years before the date of relinquishment.
``(d) Exempt Property; Special Rules for Pension Plans.--
``(1) Exempt property.--This section shall not apply to the
following:
``(A) United states real property interests.--Any
United States real property interest (as defined in
section 897(c)(1)), other than stock of a United States
real property holding corporation which does not, on
the day before the expatriation date, meet the
requirements of section 897(c)(2).
``(B) Specified property.--Any property or interest
in property not described in subparagraph (A) which the
Secretary specifies in regulations.
``(2) Special rules for certain retirement plans.--
``(A) In general.--If a covered expatriate holds on
the day before the expatriation date any interest in a
retirement plan to which this paragraph applies--
``(i) such interest shall not be treated as
sold for purposes of subsection (a)(1), but
``(ii) an amount equal to the present value
of the expatriate's nonforfeitable accrued
benefit shall be treated as having been
received by such individual on such date as a
distribution under the plan.
``(B) Treatment of subsequent distributions.--In
the case of any distribution on or after the
expatriation date to or on behalf of the covered
expatriate from a plan from which the expatriate was
treated as receiving a distribution under subparagraph
(A), the amount otherwise includible in gross income by
reason of the subsequent distribution shall be reduced
by the excess of the amount includible in gross income
under subparagraph (A) over any portion of such amount
to which this subparagraph previously applied.
``(C) Treatment of subsequent distributions by
plan.--For purposes of this title, a retirement plan to
which this paragraph applies, and any person acting on
the plan's behalf, shall treat any subsequent
distribution described in subparagraph (B) in the same
manner as such distribution would be treated without
regard to this paragraph.
``(D) Applicable plans.--This paragraph shall apply
to--
``(i) any qualified retirement plan (as
defined in section 4974(c)),
``(ii) an eligible deferred compensation
plan (as defined in section 457(b)) of an
eligible employer described in section
457(e)(1)(A), and
``(iii) to the extent provided in
regulations, any foreign pension plan or
similar retirement arrangements or programs.
``(e) Definitions.--For purposes of this section--
``(1) Expatriate.--The term `expatriate' means--
``(A) any United States citizen who relinquishes
citizenship, and
``(B) any long-term resident of the United States
who--
``(i) ceases to be a lawful permanent
resident of the United States (within the
meaning of section 7701(b)(6)), or
``(ii) commences to be treated as a
resident of a foreign country under the
provisions of a tax treaty between the United
States and the foreign country and who does not
waive the benefits of such treaty applicable to
residents of the foreign country.
``(2) Expatriation date.--The term `expatriation date'
means--
``(A) the date an individual relinquishes United
States citizenship, or
``(B) in the case of a long-term resident of the
United States, the date of the event described in
clause (i) or (ii) of paragraph (1)(B).
``(3) Relinquishment of citizenship.--A citizen shall be
treated as relinquishing United States citizenship on the
earliest of--
``(A) the date the individual renounces such
individual's United States nationality before a
diplomatic or consular officer of the United States
pursuant to paragraph (5) of section 349(a) of the
Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
``(B) the date the individual furnishes to the
United States Department of State a signed statement of
voluntary relinquishment of United States nationality
confirming the performance of an act of expatriation
specified in paragraph (1), (2), (3), or (4) of section
349(a) of the Immigration and Nationality Act (8 U.S.C.
1481(a)(1)-(4)),
``(C) the date the United States Department of
State issues to the individual a certificate of loss of
nationality, or
``(D) the date a court of the United States cancels
a naturalized citizen's certificate of naturalization.
Subparagraph (A) or (B) shall not apply to any individual
unless the renunciation or voluntary relinquishment is
subsequently approved by the issuance to the individual of a
certificate of loss of nationality by the United States
Department of State.
``(4) Long-term resident.--The term `long-term resident'
has the meaning given to such term by section 877(e)(2).
``(f) Special Rules Applicable to Beneficiaries' Interests in
Trust.--
``(1) In general.--Except as provided in paragraph (2), if
an individual is determined under paragraph (3) to hold an
interest in a trust on the day before the expatriation date--
``(A) the individual shall not be treated as having
sold such interest,
``(B) such interest shall be treated as a separate
share in the trust, and
``(C)(i) such separate share shall be treated as a
separate trust consisting of the assets allocable to
such share,
``(ii) the separate trust shall be treated as
having sold its assets on the day before the
expatriation date for their fair market value and as
having distributed all of its assets to the individual
as of such time, and
``(iii) the individual shall be treated as having
recontributed the assets to the separate trust.
Subsection (a)(2) shall apply to any income, gain, or loss of
the individual arising from a distribution described in
subparagraph (C)(ii). In determining the amount of such
distribution, proper adjustments shall be made for liabilities
of the trust allocable to an individual's share in the trust.
``(2) Special rules for interests in qualified trusts.--
``(A) In general.--If the trust interest described
in paragraph (1) is an interest in a qualified trust--
``(i) paragraph (1) and subsection (a)
shall not apply, and
``(ii) in addition to any other tax imposed
by this title, there is hereby imposed on each
distribution with respect to such interest a
tax in the amount determined under subparagraph
(B).
``(B) Amount of tax.--The amount of tax under
subparagraph (A)(ii) shall be equal to the lesser of--
``(i) the highest rate of tax imposed by
section 1(e) for the taxable year which
includes the day before the expatriation date,
multiplied by the amount of the distribution,
or
``(ii) the balance in the deferred tax
account immediately before the distribution
determined without regard to any increases
under subparagraph (C)(ii) after the 30th day
preceding the distribution.
``(C) Deferred tax account.--For purposes of
subparagraph (B)(ii)--
``(i) Opening balance.--The opening balance
in a deferred tax account with respect to any
trust interest is an amount equal to the tax
which would have been imposed on the allocable
expatriation gain with respect to the trust
interest if such gain had been included in
gross income under subsection (a).
``(ii) Increase for interest.--The balance
in the deferred tax account shall be increased
by the amount of interest determined (on the
balance in the account at the time the interest
accrues), for periods after the 90th day after
the expatriation date, by using the rates and
method applicable under section 6621 for
underpayments of tax for such periods, except
that section 6621(a)(2) shall be applied by
substituting `5 percentage points' for `3
percentage points' in subparagraph (B) thereof.
``(iii) Decrease for taxes previously
paid.--The balance in the tax deferred account
shall be reduced--
``(I) by the amount of taxes
imposed by subparagraph (A) on any
distribution to the person holding the
trust interest, and
``(II) in the case of a person
holding a nonvested interest, to the
extent provided in regulations, by the
amount of taxes imposed by subparagraph
(A) on distributions from the trust
with respect to nonvested interests not
held by such person.
``(D) Allocable expatriation gain.--For purposes of
this paragraph, the allocable expatriation gain with
respect to any beneficiary's interest in a trust is the
amount of gain which would be allocable to such
beneficiary's vested and nonvested interests in the
trust if the beneficiary held directly all assets
allocable to such interests.
``(E) Tax deducted and withheld.--
``(i) In general.--The tax imposed by
subparagraph (A)(ii) shall be deducted and
withheld by the trustees from the distribution
to which it relates.
``(ii) Exception where failure to waive
treaty rights.--If an amount may not be
deducted and withheld under clause (i) by
reason of the distributee failing to waive any
treaty right with respect to such
distribution--
``(I) the tax imposed by
subparagraph (A)(ii) shall be imposed
on the trust and each trustee shall be
personally liable for the amount of
such tax, and
``(II) any other beneficiary of the
trust shall be entitled to recover from
the distributee the amount of such tax
imposed on the other beneficiary.
``(F) Disposition.--If a trust ceases to be a
qualified trust at any time, a covered expatriate
disposes of an interest in a qualified trust, or a
covered expatriate holding an interest in a qualified
trust dies, then, in lieu of the tax imposed by
subparagraph (A)(ii), there is hereby imposed a tax
equal to the lesser of--
``(i) the tax determined under paragraph
(1) as if the day before the expatriation date
were the date of such cessation, disposition,
or death, whichever is applicable, or
``(ii) the balance in the tax deferred
account immediately before such date.
Such tax shall be imposed on the trust and each trustee
shall be personally liable for the amount of such tax
and any other beneficiary of the trust shall be
entitled to recover from the covered expatriate or the
estate the amount of such tax imposed on the other
beneficiary.
``(G) Definitions and special rules.--For purposes
of this paragraph--
``(i) Qualified trust.--The term `qualified
trust' means a trust which is described in
section 7701(a)(30)(E).
``(ii) Vested interest.--The term `vested
interest' means any interest which, as of the
day before the expatriation date, is vested in
the beneficiary.
``(iii) Nonvested interest.--The term
`nonvested interest' means, with respect to any
beneficiary, any interest in a trust which is
not a vested interest. Such interest shall be
determined by assuming the maximum exercise of
discretion in favor of the beneficiary and the
occurrence of all contingencies in favor of the
beneficiary.
``(iv) Adjustments.--The Secretary may
provide for such adjustments to the bases of
assets in a trust or a deferred tax account,
and the timing of such adjustments, in order to
ensure that gain is taxed only once.
``(v) Coordination with retirement plan
rules.--This subsection shall not apply to an
interest in a trust which is part of a
retirement plan to which subsection (d)(2)
applies.
``(3) Determination of beneficiaries' interest in trust.--
``(A) Determinations under paragraph (1).--For
purposes of paragraph (1), a beneficiary's interest in
a trust shall be based upon all relevant facts and
circumstances, including the terms of the trust
instrument and any letter of wishes or similar
document, historical patterns of trust distributions,
and the existence of and functions performed by a trust
protector or any similar adviser.
``(B) Other determinations.--For purposes of this
section--
``(i) Constructive ownership.--If a
beneficiary of a trust is a corporation,
partnership, trust, or estate, the
shareholders, partners, or beneficiaries shall
be deemed to be the trust beneficiaries for
purposes of this section.
``(ii) Taxpayer return position.--A
taxpayer shall clearly indicate on its income
tax return--
``(I) the methodology used to
determine that taxpayer's trust
interest under this section, and
``(II) if the taxpayer knows (or
has reason to know) that any other
beneficiary of such trust is using a
different methodology to determine such
beneficiary's trust interest under this
section.
``(g) Termination of Deferrals, Etc.--In the case of any covered
expatriate, notwithstanding any other provision of this title--
``(1) any period during which recognition of income or gain
is deferred shall terminate on the day before the expatriation
date, and
``(2) any extension of time for payment of tax shall cease
to apply on the day before the expatriation date and the unpaid
portion of such tax shall be due and payable at the time and in
the manner prescribed by the Secretary.
``(h) Imposition of Tentative Tax.--
``(1) In general.--If an individual is required to include
any amount in gross income under subsection (a) for any taxable
year, there is hereby imposed, immediately before the
expatriation date, a tax in an amount equal to the amount of
tax which would be imposed if the taxable year were a short
taxable year ending on the expatriation date.
``(2) Due date.--The due date for any tax imposed by
paragraph (1) shall be the 90th day after the expatriation
date.
``(3) Treatment of tax.--Any tax paid under paragraph (1)
shall be treated as a payment of the tax imposed by this
chapter for the taxable year to which subsection (a) applies.
``(4) Deferral of tax.--The provisions of subsection (b)
shall apply to the tax imposed by this subsection to the extent
attributable to gain includible in gross income by reason of
this section.
``(i) Special Liens for Deferred Tax Amounts.--
``(1) Imposition of lien.--
``(A) In general.--If a covered expatriate makes an
election under subsection (a)(4) or (b) which results
in the deferral of any tax imposed by reason of
subsection (a), the deferred amount (including any
interest, additional amount, addition to tax,
assessable penalty, and costs attributable to the
deferred amount) shall be a lien in favor of the United
States on all property of the expatriate located in the
United States (without regard to whether this section
applies to the property).
``(B) Deferred amount.--For purposes of this
subsection, the deferred amount is the amount of the
increase in the covered expatriate's income tax which,
but for the election under subsection (a)(4) or (b),
would have occurred by reason of this section for the
taxable year including the expatriation date.
``(2) Period of lien.--The lien imposed by this subsection
shall arise on the expatriation date and continue until--
``(A) the liability for tax by reason of this
section is satisfied or has become unenforceable by
reason of lapse of time, or
``(B) it is established to the satisfaction of the
Secretary that no further tax liability may arise by
reason of this section.
``(3) Certain rules apply.--The rules set forth in
paragraphs (1), (3), and (4) of section 6324A(d) shall apply
with respect to the lien imposed by this subsection as if it
were a lien imposed by section 6324A.
``(j) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section.''.
(b) Inclusion in Income of Gifts and Bequests Received by United
States Citizens and Residents From Expatriates.--Section 102 (relating
to gifts, etc. not included in gross income) is amended by adding at
the end the following new subsection:
``(d) Gifts and Inheritances From Covered Expatriates.--
``(1) In general.--Subsection (a) shall not exclude from
gross income the value of any property acquired by gift,
bequest, devise, or inheritance from a covered expatriate after
the expatriation date. For purposes of this subsection, any
term used in this subsection which is also used in section 877A
shall have the same meaning as when used in section 877A.
``(2) Exceptions for transfers otherwise subject to estate
or gift tax.--Paragraph (1) shall not apply to any property if
either--
``(A) the gift, bequest, devise, or inheritance
is--
``(i) shown on a timely filed return of tax
imposed by chapter 12 as a taxable gift by the
covered expatriate, or
``(ii) included in the gross estate of the
covered expatriate for purposes of chapter 11
and shown on a timely filed return of tax
imposed by chapter 11 of the estate of the
covered expatriate, or
``(B) no such return was timely filed but no such
return would have been required to be filed even if the
covered expatriate were a citizen or long-term resident
of the United States.''.
(c) Definition of Termination of United States Citizenship.--
Section 7701(a) is amended by adding at the end the following new
paragraph:
``(48) Termination of united states citizenship.--
``(A) In general.--An individual shall not cease to
be treated as a United States citizen before the date
on which the individual's citizenship is treated as
relinquished under section 877A(e)(3).
``(B) Dual citizens.--Under regulations prescribed
by the Secretary, subparagraph (A) shall not apply to
an individual who became at birth a citizen of the
United States and a citizen of another country.''.
(d) Ineligibility for Visa or Admission to United States.--
(1) In general.--Section 212(a)(10)(E) of the Immigration
and Nationality Act (8 U.S.C. 1182(a)(10)(E)) is amended to
read as follows:
``(E) Former citizens not in compliance with
expatriation revenue provisions.--Any alien who is a
former citizen of the United States who relinquishes
United States citizenship (within the meaning of
section 877A(e)(3) of the Internal Revenue Code of
1986) and who is not in compliance with section 877A of
such Code (relating to expatriation).''.
(2) Availability of information.--
(A) In general.--Section 6103(l) (relating to
disclosure of returns and return information for
purposes other than tax administration) is amended by
adding at the end the following new paragraph:
``(19) Disclosure to deny visa or admission to certain
expatriates.--Upon written request of the Attorney General or
the Attorney General's delegate, the Secretary shall disclose
whether an individual is in compliance with section 877A (and
if not in compliance, any items of noncompliance) to officers
and employees of the Federal agency responsible for
administering section 212(a)(10)(E) of the Immigration and
Nationality Act solely for the purpose of, and to the extent
necessary in, administering such section 212(a)(10)(E).''.
(B) Safeguards.--
(i) Technical amendments.--Paragraph (4) of
section 6103(p) of the Internal Revenue Code of
1986, as amended by section 202(b)(2)(B) of the
Trade Act of 2002 (Public Law 107-210; 116
Stat. 961), is amended by striking ``or (17)''
after ``any other person described in
subsection (l)(16)'' each place it appears and
inserting ``or (18)''.
(ii) Conforming amendments.--Section
6103(p)(4) (relating to safeguards), as amended
by clause (i), is amended by striking ``or
(18)'' after ``any other person described in
subsection (l)(16)'' each place it appears and
inserting ``(18), or (19)''.
(3) Effective dates.--
(A) In general.--Except as provided in subparagraph
(B), the amendments made by this subsection shall apply
to individuals who relinquish United States citizenship
on or after the date of the enactment of this Act.
(B) Technical amendments.--The amendments made by
paragraph (2)(B)(i) shall take effect as if included in
the amendments made by section 202(b)(2)(B) of the
Trade Act of 2002 (Public Law 107-210; 116 Stat. 961).
(e) Conforming Amendments.--
(1) Section 877 is amended by adding at the end the
following new subsection:
``(g) Application.--This section shall not apply to an expatriate
(as defined in section 877A(e)) whose expatriation date (as so defined)
occurs on or after February 5, 2003.''.
(2) Section 2107 is amended by adding at the end the
following new subsection:
``(f) Application.--This section shall not apply to any expatriate
subject to section 877A.''.
(3) Section 2501(a)(3) is amended by adding at the end the
following new subparagraph:
``(F) Application.--This paragraph shall not apply
to any expatriate subject to section 877A.''.
(4)(A) Paragraph (1) of section 6039G(d) is amended by
inserting ``or 877A'' after ``section 877''.
(B) The second sentence of section 6039G(e) is amended by
inserting ``or who relinquishes United States citizenship
(within the meaning of section 877A(e)(3))'' after ``877(a))''.
(C) Section 6039G(f) is amended by inserting ``or
877A(e)(2)(B)'' after ``877(e)(1)''.
(f) Clerical Amendment.--The table of sections for subpart A of
part II of subchapter N of chapter 1 is amended by inserting after the
item relating to section 877 the following new item:
``Sec. 877A. Tax responsibilities of
expatriation.''.
(g) Effective Date.--
(1) In general.--Except as provided in this subsection, the
amendments made by this section shall apply to expatriates
(within the meaning of section 877A(e) of the Internal Revenue
Code of 1986, as added by this section) whose expatriation date
(as so defined) occurs on or after February 5, 2003.
(2) Gifts and bequests.--Section 102(d) of the Internal
Revenue Code of 1986 (as added by subsection (b)) shall apply
to gifts and bequests received on or after February 5, 2003,
from an individual or the estate of an individual whose
expatriation date (as so defined) occurs after such date.
(3) Due date for tentative tax.--The due date under section
877A(h)(2) of the Internal Revenue Code of 1986, as added by
this section, shall in no event occur before the 90th day after
the date of the enactment of this Act.
SEC. 242. TAX TREATMENT OF INVERTED CORPORATE ENTITIES.
(a) In General.--Subchapter C of chapter 80 (relating to provisions
affecting more than one subtitle) is amended by adding at the end the
following new section:
``SEC. 7874. RULES RELATING TO INVERTED CORPORATE ENTITIES.
``(a) Inverted Corporations Treated as Domestic Corporations.--
``(1) In general.--If a foreign incorporated entity is
treated as an inverted domestic corporation, then,
notwithstanding section 7701(a)(4), such entity shall be
treated for purposes of this title as a domestic corporation.
``(2) Inverted domestic corporation.--For purposes of this
section, a foreign incorporated entity shall be treated as an
inverted domestic corporation if, pursuant to a plan (or a
series of related transactions)--
``(A) the entity completes after March 20, 2002,
the direct or indirect acquisition of substantially all
of the properties held directly or indirectly by a
domestic corporation or substantially all of the
properties constituting a trade or business of a
domestic partnership,
``(B) after the acquisition at least 80 percent of
the stock (by vote or value) of the entity is held--
``(i) in the case of an acquisition with
respect to a domestic corporation, by former
shareholders of the domestic corporation by
reason of holding stock in the domestic
corporation, or
``(ii) in the case of an acquisition with
respect to a domestic partnership, by former
partners of the domestic partnership by reason
of holding a capital or profits interest in the
domestic partnership, and
``(C) the expanded affiliated group which after the
acquisition includes the entity does not have
substantial business activities in the foreign country
in which or under the law of which the entity is
created or organized when compared to the total
business activities of such expanded affiliated group.
Except as provided in regulations, an acquisition of properties
of a domestic corporation shall not be treated as described in
subparagraph (A) if none of the corporation's stock was readily
tradeable on an established securities market at any time
during the 4-year period ending on the date of the acquisition.
``(b) Preservation of Domestic Tax Base In Certain Inversion
Transactions to Which Subsection (a) Does Not Apply.--
``(1) In general.--If a foreign incorporated entity would
be treated as an inverted domestic corporation with respect to
an acquired entity if either--
``(A) subsection (a)(2)(A) were applied by
substituting `after December 31, 1996, and on or before
March 20, 2002' for `after March 20, 2002' and
subsection (a)(2)(B) were applied by substituting `more
than 50 percent' for `at least 80 percent', or
``(B) subsection (a)(2)(B) were applied by
substituting `more than 50 percent' for `at least 80
percent',
then the rules of subsection (c) shall apply to any inversion
gain of the acquired entity during the applicable period and
the rules of subsection (d) shall apply to any related party
transaction of the acquired entity during the applicable
period. This subsection shall not apply for any taxable year if
subsection (a) applies to such foreign incorporated entity for
such taxable year.
``(2) Acquired entity.--For purposes of this section--
``(A) In general.--The term `acquired entity' means
the domestic corporation or partnership substantially
all of the properties of which are directly or
indirectly acquired in an acquisition described in
subsection (a)(2)(A) to which this subsection applies.
``(B) Aggregation rules.--Any domestic person
bearing a relationship described in section 267(b) or
707(b) to an acquired entity shall be treated as an
acquired entity with respect to the acquisition
described in subparagraph (A).
``(3) Applicable period.--For purposes of this section--
``(A) In general.--The term `applicable period'
means the period--
``(i) beginning on the first date
properties are acquired as part of the
acquisition described in subsection (a)(2)(A)
to which this subsection applies, and
``(ii) ending on the date which is 10 years
after the last date properties are acquired as
part of such acquisition.
``(B) Special rule for inversions occurring before
march 21, 2002.--In the case of any acquired entity to
which paragraph (1)(A) applies, the applicable period
shall be the 10-year period beginning on January 1,
2003.
``(c) Tax on Inversion Gains May Not Be Offset.--If subsection (b)
applies--
``(1) In general.--The taxable income of an acquired entity
(or any expanded affiliated group which includes such entity)
for any taxable year which includes any portion of the
applicable period shall in no event be less than the inversion
gain of the entity for the taxable year.
``(2) Credits not allowed against tax on inversion gain.--
Credits shall be allowed against the tax imposed by this
chapter on an acquired entity for any taxable year described in
paragraph (1) only to the extent such tax exceeds the product
of--
``(A) the amount of the inversion gain for the
taxable year, and
``(B) the highest rate of tax specified in section
11(b)(1).
For purposes of determining the credit allowed by section 901
inversion gain shall be treated as from sources within the
United States.
``(3) Special rules for partnerships.--In the case of an
acquired entity which is a partnership--
``(A) the limitations of this subsection shall
apply at the partner rather than the partnership level,
``(B) the inversion gain of any partner for any
taxable year shall be equal to the sum of--
``(i) the partner's distributive share of
inversion gain of the partnership for such
taxable year, plus
``(ii) income or gain required to be
recognized for the taxable year by the partner
under section 367(a), 741, or 1001, or under
any other provision of chapter 1, by reason of
the transfer during the applicable period of
any partnership interest of the partner in such
partnership to the foreign incorporated entity,
and
``(C) the highest rate of tax specified in the rate
schedule applicable to the partner under chapter 1
shall be substituted for the rate of tax under
paragraph (2)(B).
``(4) Inversion gain.--For purposes of this section, the
term `inversion gain' means any income or gain required to be
recognized under section 304, 311(b), 367, 1001, or 1248, or
under any other provision of chapter 1, by reason of the
transfer during the applicable period of stock or other
properties by an acquired entity--
``(A) as part of the acquisition described in
subsection (a)(2)(A) to which subsection (b) applies,
or
``(B) after such acquisition to a foreign related
person.
The Secretary may provide that income or gain from the sale of
inventories or other transactions in the ordinary course of a
trade or business shall not be treated as inversion gain under
subparagraph (B) to the extent the Secretary determines such
treatment would not be inconsistent with the purposes of this
section.
``(5) Coordination with section 172 and minimum tax.--Rules
similar to the rules of paragraphs (3) and (4) of section
860E(a) shall apply for purposes of this section.
``(6) Statute of limitations.--
``(A) In general.--The statutory period for the
assessment of any deficiency attributable to the
inversion gain of any taxpayer for any pre-inversion
year shall not expire before the expiration of 3 years
from the date the Secretary is notified by the taxpayer
(in such manner as the Secretary may prescribe) of the
acquisition described in subsection (a)(2)(A) to which
such gain relates and such deficiency may be assessed
before the expiration of such 3-year period
notwithstanding the provisions of any other law or rule
of law which would otherwise prevent such assessment.
``(B) Pre-inversion year.--For purposes of
subparagraph (A), the term `pre-inversion year' means
any taxable year if--
``(i) any portion of the applicable period
is included in such taxable year, and
``(ii) such year ends before the taxable
year in which the acquisition described in
subsection (a)(2)(A) is completed.
``(d) Special Rules Applicable to Related Party Transactions.--
``(1) Annual application for agreements on return
positions.--
``(A) In general.--Each acquired entity to which
subsection (b) applies shall file with the Secretary an
application for an approval agreement under
subparagraph (D) for each taxable year which includes a
portion of the applicable period. Such application
shall be filed at such time and manner, and shall
contain such information, as the Secretary may
prescribe.
``(B) Secretarial action.--Within 90 days of
receipt of an application under subparagraph (A) (or
such longer period as the Secretary and entity may
agree upon), the Secretary shall--
``(i) enter into an agreement described in
subparagraph (D) for the taxable year covered
by the application,
``(ii) notify the entity that the Secretary
has determined that the application was filed
in good faith and substantially complies with
the requirements for the application under
subparagraph (A), or
``(iii) notify the entity that the
Secretary has determined that the application
was not filed in good faith or does not
substantially comply with such requirements.
If the Secretary fails to act within the time
prescribed under the preceding sentence, the entity
shall be treated for purposes of this paragraph as
having received notice under clause (ii).
``(C) Failures to comply.--If an acquired entity
fails to file an application under subparagraph (A), or
the acquired entity receives a notice under
subparagraph (B)(iii), for any taxable year, then for
such taxable year--
``(i) there shall not be allowed any
deduction, or addition to basis or cost of
goods sold, for amounts paid or incurred, or
losses incurred, by reason of a transaction
between the acquired entity and a foreign
related person,
``(ii) any transfer or license of
intangible property (as defined in section
936(h)(3)(B)) between the acquired entity and a
foreign related person shall be disregarded,
and
``(iii) any cost-sharing arrangement
between the acquired entity and a foreign
related person shall be disregarded.
``(D) Approval agreement.--For purposes of
subparagraph (A), the term `approval agreement' means a
prefiling, advance pricing, or other agreement
specified by the Secretary which contains such
provisions as the Secretary determines necessary to
ensure that the requirements of sections 163(j),
267(a)(3), 482, and 845, and any other provision of
this title applicable to transactions between related
persons and specified by the Secretary, are met.
``(E) Tax court review.--
``(i) In general.--The Tax Court shall have
jurisdiction over any action brought by an
acquired entity receiving a notice under
subparagraph (B)(iii) to determine whether the
issuance of the notice was an abuse of
discretion, but only if the action is brought
within 30 days after the date of the mailing
(determined under rules similar to section
6213) of the notice.
``(ii) Court action.--The Tax Court shall
issue its decision within 30 days after the
filing of the action under clause (i) and may
order the Secretary to issue a notice described
in subparagraph (B)(ii).
``(iii) Review.--An order of the Tax Court
under this subparagraph shall be reviewable in
the same manner as any other decision of the
Tax Court.
``(2) Modifications of limitation on interest deduction.--
In the case of an acquired entity to which subsection (b)
applies, section 163(j) shall be applied--
``(A) without regard to paragraph (2)(A)(ii)
thereof, and
``(B) by substituting `25 percent' for `50 percent'
each place it appears in paragraph (2)(B) thereof.
``(e) Other Definitions and Special Rules.--For purposes of this
section--
``(1) Rules for application of subsection (a)(2).--In
applying subsection (a)(2) for purposes of subsections (a) and
(b), the following rules shall apply:
``(A) Certain stock disregarded.--There shall not
be taken into account in determining ownership for
purposes of subsection (a)(2)(B)--
``(i) stock held by members of the expanded
affiliated group which includes the foreign
incorporated entity, or
``(ii) stock of such entity which is sold
in a public offering or private placement
related to the acquisition described in
subsection (a)(2)(A).
``(B) Plan deemed in certain cases.--If a foreign
incorporated entity acquires directly or indirectly
substantially all of the properties of a domestic
corporation or partnership during the 4-year period
beginning on the date which is 2 years before the
ownership requirements of subsection (a)(2)(B) are met
with respect to such domestic corporation or
partnership, such actions shall be treated as pursuant
to a plan.
``(C) Certain transfers disregarded.--The transfer
of properties or liabilities (including by contribution
or distribution) shall be disregarded if such transfers
are part of a plan a principal purpose of which is to
avoid the purposes of this section.
``(D) Special rule for related partnerships.--For
purposes of applying subsection (a)(2) to the
acquisition of a domestic partnership, except as
provided in regulations, all partnerships which are
under common control (within the meaning of section
482) shall be treated as 1 partnership.
``(E) Treatment of certain rights.--The Secretary
shall prescribe such regulations as may be necessary--
``(i) to treat warrants, options, contracts
to acquire stock, convertible debt instruments,
and other similar interests as stock, and
``(ii) to treat stock as not stock.
``(2) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group as defined in
section 1504(a) but without regard to section 1504(b)(3),
except that section 1504(a) shall be applied by substituting
`more than 50 percent' for `at least 80 percent' each place it
appears.
``(3) Foreign incorporated entity.--The term `foreign
incorporated entity' means any entity which is, or but for
subsection (a)(1) would be, treated as a foreign corporation
for purposes of this title.
``(4) Foreign related person.--The term `foreign related
person' means, with respect to any acquired entity, a foreign
person which--
``(A) bears a relationship to such entity described
in section 267(b) or 707(b), or
``(B) is under the same common control (within the
meaning of section 482) as such entity.
``(5) Subsequent acquisitions by unrelated domestic
corporations.--
``(A) In general.--Subject to such conditions,
limitations, and exceptions as the Secretary may
prescribe, if, after an acquisition described in
subsection (a)(2)(A) to which subsection (b) applies, a
domestic corporation stock of which is traded on an
established securities market acquires directly or
indirectly any properties of one or more acquired
entities in a transaction with respect to which the
requirements of subparagraph (B) are met, this section
shall cease to apply to any such acquired entity with
respect to which such requirements are met.
``(B) Requirements.--The requirements of the
subparagraph are met with respect to a transaction
involving any acquisition described in subparagraph (A)
if--
``(i) before such transaction the domestic
corporation did not have a relationship
described in section 267(b) or 707(b), and was
not under common control (within the meaning of
section 482), with the acquired entity, or any
member of an expanded affiliated group
including such entity, and
``(ii) after such transaction, such
acquired entity--
``(I) is a member of the same
expanded affiliated group which
includes the domestic corporation or
has such a relationship or is under
such common control with any member of
such group, and
``(II) is not a member of, and does
not have such a relationship and is not
under such common control with any
member of, the expanded affiliated
group which before such acquisition
included such entity.
``(f) Regulations.--The Secretary shall provide such regulations as
are necessary to carry out this section, including regulations
providing for such adjustments to the application of this section as
are necessary to prevent the avoidance of the purposes of this section,
including the avoidance of such purposes through--
``(1) the use of related persons, pass-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) Treatment of Agreements.--
(1) Confidentiality.--
(A) Treatment as return information.--Section
6103(b)(2) (relating to return information) is amended
by striking ``and'' at the end of subparagraph (C), by
inserting ``and'' at the end of subparagraph (D), and
by inserting after subparagraph (D) the following new
subparagraph:
``(E) any approval agreement under section
7874(d)(1) to which any preceding subparagraph does not
apply and any background information related to the
agreement or any application for the agreement,''.
(B) Exception from public inspection as written
determination.--Section 6110(b)(1)(B) is amended by
striking ``or (D)'' and inserting ``, (D), or (E)''.
(2) Reporting.--The Secretary of the Treasury shall include
with any report on advance pricing agreements required to be
submitted after the date of the enactment of this Act under
section 521(b) of the Ticket to Work and Work Incentives
Improvement Act of 1999 (Public Law 106-170) a report regarding
approval agreements under section 7874(d)(1) of the Internal
Revenue Code of 1986. Such report shall include information
similar to the information required with respect to advance
pricing agreements and shall be treated for confidentiality
purposes in the same manner as the reports on advance pricing
agreements are treated under section 521(b)(3) of such Act.
(c) Information Reporting.--The Secretary of the Treasury shall
exercise the Secretary's authority under the Internal Revenue Code of
1986 to require entities involved in transactions to which section 7874
of such Code (as added by subsection (a)) applies to report to the
Secretary, shareholders, partners, and such other persons as the
Secretary may prescribe such information as is necessary to ensure the
proper tax treatment of such transactions.
(d) 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 inverted
corporate entities.''.
(e) Transition Rule for Certain Regulated Investment Companies and
Unit Investment Trusts.--Notwithstanding section 7874 of the Internal
Revenue Code of 1986 (as added by subsection (a)), a regulated
investment company, or other pooled fund or trust specified by the
Secretary of the Treasury, may elect to recognize gain by reason of
section 367(a) of such Code with respect to a transaction under which a
foreign incorporated entity is treated as an inverted domestic
corporation under section 7874(a) of such Code by reason of an
acquisition completed after March 20, 2002, and before January 1, 2004.
SEC. 243. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN INVERTED
CORPORATIONS.
(a) In General.--Subtitle D is amended by adding at the end the
following new chapter:
``CHAPTER 48--STOCK COMPENSATION OF INSIDERS IN INVERTED CORPORATIONS
``Sec. 5000A. Stock compensation of
insiders in inverted
corporations.
``SEC. 5000A. STOCK COMPENSATION OF INSIDERS IN INVERTED CORPORATIONS.
``(a) Imposition of Tax.--In the case of an individual who is a
disqualified individual with respect to any inverted corporation, there
is hereby imposed on such person a tax equal to 20 percent of the value
(determined under subsection (b)) of the specified stock compensation
held (directly or indirectly) by or for the benefit of such individual
or a member of such individual's family (as defined in section 267) at
any time during the 12-month period beginning on the date which is 6
months before the inversion date.
``(b) Value.--For purposes of subsection (a)--
``(1) In general.--The value of specified stock
compensation shall be--
``(A) in the case of a stock option (or other
similar right) or any stock appreciation right, the
fair value of such option or right, and
``(B) in any other case, the fair market value of
such compensation.
``(2) Date for determining value.--The determination of
value shall be made--
``(A) in the case of specified stock compensation
held on the inversion date, on such date,
``(B) in the case of such compensation which is
canceled during the 6 months before the inversion date,
on the day before such cancellation, and
``(C) in the case of such compensation which is
granted after the inversion date, on the date such
compensation is granted.
``(c) Tax To Apply Only if Shareholder Gain Recognized.--Subsection
(a) shall apply to any disqualified individual with respect to an
inverted corporation only if gain (if any) on any stock in such
corporation is recognized in whole or part by any shareholder by reason
of the acquisition referred to in section 7874(a)(2)(A) (determined by
substituting `July 10, 2002' for `March 20, 2002') with respect to such
corporation.
``(d) Exception Where Gain Recognized on Compensation.--Subsection
(a) shall not apply to--
``(1) any stock option which is exercised on the inversion
date or during the 6-month period before such date and to the
stock acquired in such exercise, and
``(2) any specified stock compensation which is sold,
exchanged, or distributed during such period in a transaction
in which gain or loss is recognized in full.
``(e) Definitions.--For purposes of this section--
``(1) Disqualified individual.--The term `disqualified
individual' means, with respect to a corporation, any
individual who, at any time during the 12-month period
beginning on the date which is 6 months before the inversion
date--
``(A) is subject to the requirements of section
16(a) of the Securities Exchange Act of 1934 with
respect to such corporation or 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) Inverted corporation; inversion date.--
``(A) Inverted corporation.--The term `inverted
corporation' means any corporation to which subsection
(a) or (b) of section 7874 applies determined--
``(i) by substituting `July 10, 2002' for
`March 20, 2002' in section 7874(a)(2)(A), and
``(ii) without regard to subsection
(b)(1)(A).
Such term includes any predecessor or successor of such
a corporation.
``(B) Inversion date.--The term `inversion date'
means, with respect to a corporation, the date on which
the corporation first becomes an inverted corporation.
``(3) Specified stock compensation.--
``(A) In general.--The term `specified stock
compensation' means payment (or right to payment)
granted by the inverted corporation (or by any member
of the expanded affiliated group which includes such
corporation) to any person in connection with the
performance of services by a disqualified individual
for such corporation or member if the value of such
payment or right is based on (or determined by
reference to) the value (or change in value) of stock
in such corporation (or any such member).
``(B) Exceptions.--Such term shall not include--
``(i) any option to which part II of
subchapter D of chapter 1 applies, or
``(ii) any payment or right to payment from
a plan referred to in section 280G(b)(6).
``(4) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group (as defined in
section 1504(a) without regard to section 1504(b)(3)); except
that section 1504(a) shall be applied by substituting `more
than 50 percent' for `at least 80 percent' each place it
appears.
``(f) Special Rules.--For purposes of this section--
``(1) Cancellation of restriction.--The cancellation of a
restriction which by its terms will never lapse shall be
treated as a grant.
``(2) Payment or reimbursement of tax by corporation
treated as specified stock compensation.--Any payment of the
tax imposed by this section directly or indirectly by the
inverted corporation or by any member of the expanded
affiliated group which includes such corporation--
``(A) shall be treated as specified stock
compensation, and
``(B) shall not be allowed as a deduction under any
provision of chapter 1.
``(3) Certain restrictions ignored.--Whether there is
specified stock compensation, and the value thereof, shall be
determined without regard to any restriction other than a
restriction which by its terms will never lapse.
``(4) Property transfers.--Any transfer of property shall
be treated as a payment and any right to a transfer of property
shall be treated as a right to a payment.
``(5) Other administrative provisions.--For purposes of
subtitle F, any tax imposed by this section shall be treated as
a tax imposed by subtitle A.
``(g) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section.''.
(b) Denial of Deduction.--
(1) In general.--Paragraph (6) of section 275(a) is amended
by inserting ``48,'' after ``46,''.
(2) $1,000,000 limit on deductible compensation reduced by
payment of excise tax on specified stock compensation.--
Paragraph (4) of section 162(m) is amended by adding at the end
the following new subparagraph:
``(G) Coordination with excise tax on specified
stock compensation.--The dollar limitation contained in
paragraph (1) with respect to any covered employee
shall be reduced (but not below zero) by the amount of
any payment (with respect to such employee) of the tax
imposed by section 5000A directly or indirectly by the
inverted corporation (as defined in such section) or by
any member of the expanded affiliated group (as defined
in such section) which includes such corporation.''.
(c) Conforming Amendments.--
(1) The last sentence of section 3121(v)(2)(A) is amended
by inserting before the period ``or to any specified stock
compensation (as defined in section 5000A) on which tax is
imposed by section 5000A''.
(2) The table of chapters for subtitle D is amended by
adding at the end the following new item:
``Chapter 48. Stock compensation of
insiders in inverted
corporations.''.
(d) Effective Date.--The amendments made by this section shall take
effect on July 11, 2002; except that periods before such date shall not
be taken into account in applying the periods in subsections (a) and
(e)(1) of section 5000A of the Internal Revenue Code of 1986, as added
by this section.
PART II--OTHER PROVISIONS
SEC. 245. EFFECTIVELY CONNECTED INCOME TO INCLUDE CERTAIN FOREIGN
SOURCE INCOME.
(a) In General.--Section 864(c)(4)(B) (relating to treatment of
income from sources without the United States as effectively connected
income) is amended by adding at the end the following new flush
sentence:
``Any income or gain which is equivalent to any item of
income or gain described in clause (i), (ii), or (iii)
shall be treated in the same manner as such item for
purposes of this subparagraph.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 246. DETERMINATION OF BASIS OF AMOUNTS PAID FROM FOREIGN PENSION
PLANS.
(a) In General.--Section 72 (relating to annuities and certain
proceeds of endowment and life insurance contracts) is amended by
redesignating subsection (w) as sub section (x) by inserting subsection
(v) the following new subsection:
``(w) Determination of Basis of Foreign Pension Plans.--
Notwithstanding any other provision of this section, for purposes of
determining the portion of any distribution from a foreign pension plan
which is includible in gross income of the distributee, the investment
in the contract with respect to the plan shall not include employer or
employee contributions to the plan (or any earnings on such
contributions) unless such contributions or earnings were subject to
taxation by the United States or any foreign government.''.
(b) Effective Date.--The amendments made by this section shall
apply to distributions on or after the date of the enactment of this
Act.
SEC. 247. 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.--
Notwithstanding subparagraph (A) (and any regulations
thereunder), in the case of any debt instrument having
original issue discount which is held by a related
foreign person which is a foreign personal holding
company (as defined in section 552), a controlled
foreign corporation (as defined in section 957), or a
passive foreign investment company (as defined in
section 1297), a deduction shall be allowable to the
issuer with respect to such original issue discount for
any taxable year only to the extent such original issue
discount is included during such taxable year in the
gross income of a United States person who owns (within
the meaning of section 958(a)) stock in such
corporation. For purposes of this subparagraph, the
determination as to the proper allocation of the
original issue discount to shareholders shall be made
in such manner as the Secretary may prescribe.''.
(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.--
Notwithstanding any regulations issued under
subparagraph (A), in the case of any amount payable to
a foreign personal holding company (as defined in
section 552), a controlled foreign corporation (as
defined in section 957), or a passive foreign
investment company (as defined in section 1297), a
deduction shall be allowable to the payor with respect
to such amount for any taxable year only to the extent
such amount is included during such taxable year in the
gross income of a United States person who owns (within
the meaning of section 958(a)) stock in such
corporation. For purposes of this subparagraph, the
determination as to the proper allocation of such
amount to shareholders shall be made in such manner as
the Secretary may prescribe.''.
(c) Effective Date.--The amendments made by this section shall
apply to payments accrued on or after May 8, 2003.
Subtitle E--Other Revenue Provisions
SEC. 251. 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 immediately after the 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 immediately after the contribution.''.
(b) Adjustment to Basis of Partnership Property on Transfer of
Partnership Interest if There Is Substantial Built-in Loss.--
(1) Adjustment required.--Subsection (a) of section 743
(relating to optional adjustment to basis of partnership
property) is amended by inserting before the period ``or unless
the partnership has a substantial built-in loss immediately
after such transfer''.
(2) Adjustment.--Subsection (b) of section 743 is amended
by inserting ``or with respect to which there is a substantial
built-in loss immediately after such transfer'' after ``section
754 is in effect''.
(3) Substantial built-in loss.--Section 743 is amended by
adding at the end the following new subsection:
``(d) Substantial Built-in Loss.--
``(1) In general.--For purposes of this section, a
partnership has a substantial built-in loss with respect to a
transfer of an interest in a partnership if the transferee
partner's proportionate share of the adjusted basis of the
partnership property exceeds by more than $250,000 the basis of
such partner's interest in the partnership.
``(2) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the purposes of
paragraph (1) and section 734(d), including regulations
aggregating related partnerships and disregarding property
acquired by the partnership in an attempt to avoid such
purposes.''.
(4) Clerical amendments.--
(A) The section heading for section 743 is amended
to read as follows:
``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION
754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.''.
(B) The table of sections for subpart C of part II
of subchapter K of chapter 1 is amended by striking the
item relating to section 743 and inserting the
following new item:
``Sec. 743. Adjustment to basis of
partnership property where
section 754 election or
substantial built-in loss.''.
(c) Adjustment to Basis of Undistributed Partnership Property if
There Is Substantial Basis Reduction.--
(1) Adjustment required.--Subsection (a) of section 734
(relating to optional adjustment to basis of undistributed
partnership property) is amended by inserting before the period
``or unless there is a substantial basis reduction''.
(2) Adjustment.--Subsection (b) of section 734 is amended
by inserting ``or unless there is a substantial basis
reduction'' after ``section 754 is in effect''.
(3) Substantial basis reduction.--Section 734 is amended by
adding at the end the following new subsection:
``(d) Substantial Basis Reduction.--
``(1) In general.--For purposes of this section, there is a
substantial basis reduction with respect to a distribution if
the sum of the amounts described in subparagraphs (A) and (B)
of subsection (b)(2) exceeds $250,000.
``(2) Regulations.--
``For regulations to carry out this
subsection, see section 743(d)(2).''.
(4) Clerical amendments.--
(A) The section heading for section 734 is amended
to read as follows:
``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY
WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS
REDUCTION.''.
(B) The table of sections for subpart B of part II
of subchapter K of chapter 1 is amended by striking the
item relating to section 734 and inserting the
following new item:
``Sec. 734. Adjustment to basis of
undistributed partnership
property where section 754
election or substantial basis
reduction.''.
(d) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to contributions made after the date of the
enactment of this Act.
(2) Subsection (b).--The amendments made by subsection (b)
shall apply to transfers after the date of the enactment of
this Act.
(3) Subsection (c).--The amendments made by subsection (c)
shall apply to distributions after the date of the enactment of
this Act.
SEC. 252. CLARIFICATION OF EXEMPTION FROM TAX FOR SMALL PROPERTY AND
CASUALTY INSURANCE COMPANIES.
(a) In General.--Section 501(c)(15)(A) is amended to read as
follows:
``(A) Insurance companies or associations other
than life (including interinsurers and reciprocal
underwriters) if--
``(i) the gross receipts for the taxable
year do not exceed $600,000, and
``(ii) more than 50 percent of such gross
receipts consist of premiums.''.
(b) Controlled Group Rule.--Section 501(c)(15)(C) is amended by
inserting ``, except that in applying section 1563 for purposes of
section 831(b)(2)(B)(ii), subparagraphs (B) and (C) of section
1563(b)(2) shall be disregarded'' before the period at the end.
(c) Conforming Amendment.--Clause (i) of section 831(b)(2)(A) is
amended by striking ``exceed $350,000 but''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
<all>
Introduced in Senate
Read twice and referred to the Committee on Finance.
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