Calendar No. 10
110th CONGRESS
1st Session
S. 349
[Report No. 110-1]
To amend the Internal Revenue Code of 1986 to provide additional
tax incentives to employers and employees of small businesses, and for other
purposes.
IN THE SENATE OF THE UNITED STATES
January 22, 2007
Mr. BAUCUS, from the Committee on Finance, reported the following original
bill; which was read twice and placed on the calendar
A BILL
To amend the Internal Revenue Code of 1986 to provide additional
tax incentives to employers and employees of small businesses, 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; AMENDMENT OF CODE; TABLE OF CONTENTS.
(a) Short Title- This Act may be cited as the `Small Business and Work Opportunity
Act of 2007'.
(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 for this Act is as follows:
Sec. 1. Short title; amendment of Code; table of contents.
TITLE I--SMALL BUSINESS TAX RELIEF PROVISIONS
Subtitle A--General Provisions
Sec. 101. Extension of increased expensing for small businesses.
Sec. 102. Extension and modification of 15-year straight-line cost recovery
for qualified leasehold improvements and qualified restaurant improvements;
15-year straight-line cost recovery for certain improvements to retail
space.
Sec. 103. Clarification of cash accounting rules for small business.
Sec. 104. Extension and modification of combined work opportunity tax
credit and welfare-to-work credit.
Sec. 105. Certified professional employer organizations.
Subtitle B--Subchapter S Provisions
Sec. 111. Capital gain of S corporation not treated as passive investment
income.
Sec. 112. Treatment of bank director shares.
Sec. 113. Special rule for bank required to change from the reserve method
of accounting on becoming S corporation.
Sec. 114. Treatment of the sale of interest in a qualified subchapter
S subsidiary.
Sec. 115. Elimination of all earnings and profits attributable to pre-1983
years for certain corporations.
Sec. 116. Expansion of qualifying beneficiaries of an electing small business
trust.
TITLE II--REVENUE PROVISIONS
Sec. 201. Modification of effective date of leasing provisions of the
American Jobs Creation Act of 2004.
Sec. 202. Application of rules treating inverted corporations as domestic
corporations to certain transactions occurring after March 20, 2002.
Sec. 203. Denial of deduction for punitive damages.
Sec. 204. Denial of deduction for certain fines, penalties, and other
amounts.
Sec. 205. Revision of tax rules on expatriation of individuals.
Sec. 206. Limitation on annual amounts which may be deferred under nonqualified
deferred compensation arrangements.
Sec. 207. Increase in criminal monetary penalty limitation for the underpayment
or overpayment of tax due to fraud.
Sec. 208. Doubling of certain penalties, fines, and interest on underpayments
related to certain offshore financial arrangements.
Sec. 209. Increase in penalty for bad checks and money orders.
Sec. 210. Treatment of contingent payment convertible debt instruments.
Sec. 211. Extension of IRS user fees.
Sec. 212. Modification of collection due process procedures for employment
tax liabilities.
Sec. 213. Modifications to whistleblower reforms.
Sec. 214. Modifications of definition of employees covered by denial of
deduction for excessive employee remuneration.
TITLE I--SMALL BUSINESS TAX RELIEF PROVISIONS
Subtitle A--General Provisions
SEC. 101. EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESSES.
Section 179 (relating to election to expense certain depreciable business
assets) is amended by striking `2010' each place it appears and inserting
`2011'.
SEC. 102. EXTENSION AND MODIFICATION OF 15-YEAR STRAIGHT-LINE COST RECOVERY
FOR QUALIFIED LEASEHOLD IMPROVEMENTS AND QUALIFIED RESTAURANT IMPROVEMENTS;
15-YEAR STRAIGHT-LINE COST RECOVERY FOR CERTAIN IMPROVEMENTS TO RETAIL SPACE.
(a) Extension of Leasehold and Restaurant Improvements-
(1) IN GENERAL- Clauses (iv) and (v) of section 168(e)(3)(E) (relating
to 15-year property) are each amended by striking `January 1, 2008' and
inserting `April 1, 2008'.
(2) EFFECTIVE DATE- The amendment made by this subsection shall apply
to property placed in service after December 31, 2007.
(b) Modification of Treatment of Qualified Restaurant Property as 15-Year
Property for Purposes of Depreciation Deduction-
(1) TREATMENT TO INCLUDE NEW CONSTRUCTION- Paragraph (7) of section 168(e)
(relating to classification of property) is amended to read as follows:
`(7) QUALIFIED RESTAURANT PROPERTY- The term `qualified restaurant property'
means any section 1250 property which is a building (or its structural
components) or an improvement to such building if more than 50 percent
of such building's square footage is devoted to preparation of, and seating
for on-premises consumption of, prepared meals.'.
(2) EFFECTIVE DATE- The amendment made by this subsection shall apply
to any property placed in service after the date of the enactment of this
Act, the original use of which begins with the taxpayer after such date.
(c) Recovery Period for Depreciation of Certain Improvements to Retail Space-
(1) 15-year RECOVERY PERIOD- Section 168(e)(3)(E) (relating to 15-year
property) is amended by striking `and' at the end of clause (vii), by
striking the period at the end of clause (viii) and inserting `, and',
and by adding at the end the following new clause:
`(ix) any qualified retail improvement property placed in service
before April 1, 2008.'.
(2) QUALIFIED RETAIL IMPROVEMENT PROPERTY- Section 168(e) is amended by
adding at the end the following new paragraph:
`(8) QUALIFIED RETAIL IMPROVEMENT PROPERTY-
`(A) IN GENERAL- The term `qualified retail improvement property' means
any improvement to an interior portion of a building which is nonresidential
real property if--
`(i) such portion is open to the general public and is used in the
retail trade or business of selling tangible personal property to
the general public, and
`(ii) such improvement is placed in service more than 3 years after
the date the building was first placed in service.
`(B) IMPROVEMENTS MADE BY OWNER- In the case of an improvement made
by the owner of such improvement, such improvement shall be qualified
retail improvement property (if at all) only so long as such improvement
is held by such owner. Rules similar to the rules under paragraph (6)(B)
shall apply for purposes of the preceding sentence.
`(C) CERTAIN IMPROVEMENTS NOT INCLUDED- Such term shall not include
any improvement for which the expenditure is attributable to--
`(i) the enlargement of the building,
`(ii) any elevator or escalator,
`(iii) any structural component benefitting a common area, or
`(iv) the internal structural framework of the building.'.
(3) REQUIREMENT TO USE STRAIGHT LINE METHOD- Section 168(b)(3) is amended
by adding at the end the following new subparagraph:
`(I) Qualified retail improvement property described in subsection (e)(8).'.
(4) ALTERNATIVE SYSTEM- The table contained in section 168(g)(3)(B) is
amended by inserting after the item relating to subparagraph (E)(viii)
the following new item:
--------------
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`(E)(ix) 39'.
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(5) EFFECTIVE DATE- The amendments made by this section shall apply to
property placed in service after the date of the enactment of this Act.
SEC. 103. CLARIFICATION OF CASH ACCOUNTING RULES FOR SMALL BUSINESS.
(a) Cash Accounting Permitted-
(1) IN GENERAL- Section 446 (relating to general rule for methods of accounting)
is amended by adding at the end the following new subsection:
`(g) Certain Small Business Taxpayers Permitted To Use Cash Accounting Method
Without Limitation-
`(1) IN GENERAL- An eligible taxpayer shall not be required to use an
accrual method of accounting for any taxable year.
`(2) ELIGIBLE TAXPAYER- For purposes of this subsection, a taxpayer is
an eligible taxpayer with respect to any taxable year if--
`(A) for each of the prior taxable years ending on or after the date
of the enactment of this subsection, the taxpayer (or any predecessor)
met the gross receipts test in effect under section 448(c) for such
taxable year, and
`(B) the taxpayer is not subject to section 447 or 448.'.
(2) EXPANSION OF GROSS RECEIPTS TEST-
(A) IN GENERAL- Paragraph (3) of section 448(b) (relating to entities
with gross receipts of not more than $5,000,000) is amended to read
as follows:
`(3) ENTITIES MEETING GROSS RECEIPTS TEST- Paragraphs (1) and (2) of subsection
(a) shall not apply to any corporation or partnership for any taxable
year if, for each of the prior taxable years ending on or after the date
of the enactment of the Small Business and Work Opportunity Act of 2007,
the entity (or any predecessor) met the gross receipts test in effect
under subsection (c) for such prior taxable year.'.
(B) CONFORMING AMENDMENTS- Section 448(c) of such Code is amended--
(i) by striking `$5,000,000' in the heading thereof,
(ii) by striking `$5,000,000' each place it appears in paragraph (1)
and inserting `$10,000,000', and
(iii) by adding at the end the following new paragraph:
`(4) INFLATION ADJUSTMENT- In the case of any taxable year beginning in
a calendar year after 2008, the dollar amount contained in paragraph (1)
shall be increased by an amount equal to--
`(A) such dollar amount, multiplied by
`(B) the cost-of-living adjustment determined under section 1(f)(3)
for the calendar year in which the taxable year begins, by substituting
`calendar year 2007' for `calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under this subparagraph is not a multiple of
$100,000, such amount shall be rounded to the nearest multiple of $100,000.'.
(b) Clarification of Inventory Rules for Small Business-
(1) IN GENERAL- Section 471 (relating to general rule for inventories)
is amended by redesignating subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:
`(c) Small Business Taxpayers Not Required To Use Inventories-
`(1) IN GENERAL- A qualified taxpayer shall not be required to use inventories
under this section for a taxable year.
`(2) TREATMENT OF TAXPAYERS NOT USING INVENTORIES- If a qualified taxpayer
does not use inventories with respect to any property for any taxable
year beginning after the date of the enactment of this subsection, such
property shall be treated as a material or supply which is not incidental.
`(3) QUALIFIED TAXPAYER- For purposes of this subsection, the term `qualified
taxpayer' means--
`(A) any eligible taxpayer (as defined in section 446(g)(2)), and
`(B) any taxpayer described in section 448(b)(3).'.
(2) CONFORMING AMENDMENTS-
(A) Subpart D of part II of subchapter E of chapter 1 is amended by
striking section 474.
(B) The table of sections for subpart D of part II of subchapter E of
chapter 1 is amended by striking the item relating to section 474.
(c) Effective Date and Special Rules-
(1) IN GENERAL- The amendments made by this section shall apply to taxable
years beginning after the date of the enactment of this Act.
(2) CHANGE IN METHOD OF ACCOUNTING- In the case of any taxpayer changing
the taxpayer's method of accounting for any taxable year under the amendments
made by this section--
(A) such change shall be treated as initiated by the taxpayer;
(B) such change shall be treated as made with the consent of the Secretary
of the Treasury; and
(C) the net amount of the adjustments required to be taken into account
by the taxpayer under section 481 of the Internal Revenue Code of 1986
shall be taken into account over a period (not greater than 4 taxable
years) beginning with such taxable year.
SEC. 104. EXTENSION AND MODIFICATION OF COMBINED WORK OPPORTUNITY TAX
CREDIT AND WELFARE-TO-WORK CREDIT.
(a) Extension- Section 51(c)(4)(B) (relating to termination) is amended
by striking `2007' and inserting `2012'.
(b) Increase in Maximum Age for Designated Community Residents-
(1) IN GENERAL- Paragraph (5) of section 51(d) is amended to read as follows:
`(5) DESIGNATED COMMUNITY RESIDENTS-
`(A) IN GENERAL- The term `designated community resident' means any
individual who is certified by the designated local agency--
`(i) as having attained age 18 but not age 40 on the hiring date,
and
`(ii) as having his principal place of abode within an empowerment
zone, enterprise community, or renewal community.
`(B) INDIVIDUAL MUST CONTINUE TO RESIDE IN ZONE OR COMMUNITY- In the
case of a designated community resident, the term `qualified wages'
shall not include wages paid or incurred for services performed while
the individual's principal place of abode is outside an empowerment
zone, enterprise community, or renewal community.'.
(2) CONFORMING AMENDMENT- Subparagraph (D) of section 51(d)(1) is amended
to read as follows:
`(D) a designated community resident,'.
(c) Clarification of Treatment of Individuals Under Individual Work Plans-
Subparagraph (B) of section 51(d)(6) (relating to vocational rehabilitation
referral) is amended by striking `or' at the end of clause (i), by striking
the period at the end of clause (ii) and inserting `, or', and by adding
at the end the following new clause:
`(iii) an individual work plan developed and implemented by an employment
network pursuant to subsection (g) of section 1148 of the Social Security
Act with respect to which the requirements of such subsection are
met.'.
(d) Treatment of Disabled Veterans Under the Work Opportunity Tax Credit-
(1) DISABLED VETERANS TREATED AS MEMBERS OF TARGETED GROUP-
(A) IN GENERAL- Subparagraph (A) of section 51(d)(3) (relating to qualified
veteran) is amended by striking `agency as being a member of a family'
and all that follows and inserting `agency as--
`(i) being a member of a family receiving assistance under a food
stamp program under the Food Stamp Act of 1977 for at least a 3-month
period ending during the 12-month period ending on the hiring date,
or
`(ii) entitled to compensation for a service-connected disability
incurred after September 10, 2001.'.
(B) DEFINITIONS- Paragraph (3) of section 51(d) is amended by adding
at the end the following new subparagraph:
`(C) OTHER DEFINITIONS- For purposes of subparagraph (A), the terms
`compensation' and `service-connected' have the meanings given such
terms under section 101 of title 38, United States Code.'.
(2) INCREASE IN AMOUNT OF WAGES TAKEN INTO ACCOUNT FOR DISABLED VETERANS-
Paragraph (3) of section 51(b) is amended--
(A) by inserting `($12,000 per year in the case of any individual who
is a qualified veteran by reason of subsection (d)(3)(A)(ii))' before
the period at the end, and
(B) by striking `ONLY FIRST $6,000 OF' in the heading and inserting
`LIMITATION ON'.
(e) Effective Date- The amendments made by this section shall apply to individuals
who begin work for the employer after the date of the enactment of this
Act, in taxable years ending after such date.
SEC. 105. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS.
(a) Employment Taxes- Chapter 25 (relating to general provisions relating
to employment taxes) is amended by adding at the end the following new section:
`SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS.
`(a) General Rules- For purposes of the taxes, and other obligations, imposed
by this subtitle--
`(1) a certified professional employer organization shall be treated as
the employer (and no other person shall be treated as the employer) of
any work site employee performing services for any customer of such organization,
but only with respect to remuneration remitted by such organization to
such work site employee, and
`(2) exclusions, definitions, and other rules which are based on the type
of employer and which would (but for paragraph (1)) apply shall apply
with respect to such taxes imposed on such remuneration.
`(b) Successor Employer Status- For purposes of sections 3121(a)(1), 3231(e)(2)(C),
and 3306(b)(1)--
`(1) a certified professional employer organization entering into a service
contract with a customer with respect to a work site employee shall be
treated as a successor employer and the customer shall be treated as a
predecessor employer during the term of such service contract, and
`(2) a customer whose service contract with a certified professional employer
organization is terminated with respect to a work site employee shall
be treated as a successor employer and the certified professional employer
organization shall be treated as a predecessor employer.
`(c) Liability of Certified Professional Employer Organization- Solely for
purposes of its liability for the taxes, and other obligations, imposed
by this subtitle--
`(1) a certified professional employer organization shall be treated as
the employer of any individual (other than a work site employee or a person
described in subsection (f)) who is performing services covered by a contract
meeting the requirements of section 7705(e)(2), but only with respect
to remuneration remitted by such organization to such individual, and
`(2) exclusions, definitions, and other rules which are based on the type
of employer and which would (but for paragraph (1)) apply shall apply
with respect to such taxes imposed on such remuneration.
`(d) Treatment of Credits-
`(1) IN GENERAL- For purposes of any credit specified in paragraph (2)--
`(A) such credit with respect to a work site employee performing services
for the customer applies to the customer, not the certified professional
employer organization,
`(B) the customer, and not the certified professional employer organization,
shall take into account wages and employment taxes--
`(i) paid by the certified professional employer organization with
respect to the work site employee, and
`(ii) for which the certified professional employer organization receives
payment from the customer, and
`(C) the certified professional employer organization shall furnish
the customer with any information necessary for the customer to claim
such credit.
`(2) CREDITS SPECIFIED- A credit is specified in this paragraph if such
credit is allowed under--
`(A) section 41 (credit for increasing research activity),
`(B) section 45A (Indian employment credit),
`(C) section 45B (credit for portion of employer social security taxes
paid with respect to employee cash tips),
`(D) section 45C (clinical testing expenses for certain drugs for rare
diseases or conditions),
`(E) section 51 (work opportunity credit),
`(F) section 51A (temporary incentives for employing long-term family
assistance recipients),
`(G) section 1396 (empowerment zone employment credit),
`(H) 1400(d) (DC Zone employment credit),
`(I) Section 1400H (renewal community employment credit), and
`(J) any other section as provided by the Secretary.
`(e) Special Rule for Related Party- This section shall not apply in the
case of a customer which bears a relationship to a certified professional
employer organization described in section 267(b) or 707(b). For purposes
of the preceding sentence, such sections shall be applied by substituting
`10 percent' for `50 percent'.
`(f) Special Rule for Certain Individuals- For purposes of the taxes imposed
under this subtitle, an individual with net earnings from self-employment
derived from the customer's trade or business is not a work site employee
with respect to remuneration paid by a certified professional employer organization.
`(g) Regulations- The Secretary shall prescribe such regulations as may
be necessary or appropriate to carry out the purposes of this section.'.
(b) Certified Professional Employer Organization Defined- Chapter 79 (relating
to definitions) is amended by adding at the end the following new section:
`SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS DEFINED.
`(a) In General- For purposes of this title, the term `certified professional
employer organization' means a person who has been certified by the Secretary
for purposes of section 3511 as meeting the requirements of subsection (b).
`(b) General Requirements- A person meets the requirements of this subsection
if such person--
`(1) demonstrates that such person (and any owner, officer, and such other
persons as may be specified in regulations) meets such requirements as
the Secretary shall establish with respect to tax status, background,
experience, business location, and annual financial audits,
`(2) computes its taxable income using an accrual method of accounting
unless the Secretary approves another method,
`(3) agrees that it will satisfy the bond and independent financial review
requirements of subsection (c) on an ongoing basis,
`(4) agrees that it will satisfy such reporting obligations as may be
imposed by the Secretary,
`(5) agrees to verify on such periodic basis as the Secretary may prescribe
that it continues to meet the requirements of this subsection, and
`(6) agrees to notify the Secretary in writing within such time as the
Secretary may prescribe of any change that materially affects whether
it continues to meet the requirements of this subsection.
`(c) Bond and Independent Financial Review Requirements-
`(1) IN GENERAL- An organization meets the requirements of this paragraph
if such organization--
`(A) meets the bond requirements of paragraph (2), and
`(B) meets the independent financial review requirements of paragraph
(3).
`(A) IN GENERAL- A certified professional employer organization meets
the requirements of this paragraph if the organization has posted a
bond for the payment of taxes under subtitle C (in a form acceptable
to the Secretary) in an amount at least equal to the amount specified
in subparagraph (B).
`(B) AMOUNT OF BOND- For the period April 1 of any calendar year through
March 31 of the following calendar year, the amount of the bond required
is equal to the greater of--
`(i) 5 percent of the organization's liability under section 3511
for taxes imposed by subtitle C during the preceding calendar year
(but not to exceed $1,000,000), or
`(3) INDEPENDENT FINANCIAL REVIEW REQUIREMENTS- A certified professional
employer organization meets the requirements of this paragraph if such
organization--
`(A) has, as of the most recent review date, caused to be prepared and
provided to the Secretary (in such manner as the Secretary may prescribe)
an opinion of an independent certified public accountant that the certified
professional employer organization's financial statements are presented
fairly in accordance with generally accepted accounting principles,
and
`(B) provides, not later than the last day of the second month beginning
after the end of each calendar quarter, to the Secretary from an independent
certified public accountant an assertion regarding Federal employment
tax payments and an examination level attestation on such assertion.
Such assertion shall state that the organization has withheld and made
deposits of all taxes imposed by chapters 21, 22, and 24 of the Internal
Revenue Code in accordance with regulations imposed by the Secretary for
such calendar quarter and such examination level attestation shall state
that such assertion is fairly stated, in all material respects.
`(4) CONTROLLED GROUP RULES- For purposes of the requirements of paragraphs
(2) and (3), all professional employer organizations that are members
of a controlled group within the meaning of sections 414(b) and (c) shall
be treated as a single organization.
`(5) FAILURE TO FILE ASSERTION AND ATTESTATION- If the certified professional
employer organization fails to file the assertion and attestation required
by paragraph (3) with respect to any calendar quarter, then the requirements
of paragraph (3) with respect to such failure shall be treated as not
satisfied for the period beginning on the due date for such attestation.
`(6) REVIEW DATE- For purposes of paragraph (3)(A), the review date shall
be 6 months after the completion of the organization's fiscal year.
`(d) Suspension and Revocation Authority- The Secretary may suspend or revoke
a certification of any person under subsection (b) for purposes of section
3511 if the Secretary determines that such person is not satisfying the
representations or requirements of subsections (b) or (c), or fails to satisfy
applicable accounting, reporting, payment, or deposit requirements.
`(e) Work Site Employee- For purposes of this title--
`(1) IN GENERAL- The term `work site employee' means, with respect to
a certified professional employer organization, an individual who--
`(A) performs services for a customer pursuant to a contract which is
between such customer and the certified professional employer organization
and which meets the requirements of paragraph (2), and
`(B) performs services at a work site meeting the requirements of paragraph
(3).
`(2) SERVICE CONTRACT REQUIREMENTS- A contract meets the requirements
of this paragraph with respect to an individual performing services for
a customer if such contract is in writing and provides that the certified
professional employer organization shall--
`(A) assume responsibility for payment of wages to such individual,
without regard to the receipt or adequacy of payment from the customer
for such services,
`(B) assume responsibility for reporting, withholding, and paying any
applicable taxes under subtitle C, with respect to such individual's
wages, without regard to the receipt or adequacy of payment from the
customer for such services,
`(C) assume responsibility for any employee benefits which the service
contract may require the organization to provide, without regard to
the receipt or adequacy of payment from the customer for such services,
`(D) assume responsibility for hiring, firing, and recruiting workers
in addition to the customer's responsibility for hiring, firing and
recruiting workers,
`(E) maintain employee records relating to such individual, and
`(F) agree to be treated as a certified professional employer organization
for purposes of section 3511 with respect to such individual.
`(3) WORK SITE COVERAGE REQUIREMENT- The requirements of this paragraph
are met with respect to an individual if at least 85 percent of the individuals
performing services for the customer at the work site where such individual
performs services are subject to 1 or more contracts with the certified
professional employer organization which meet the requirements of paragraph
(2) (but not taking into account those individuals who are excluded employees
within the meaning of section 414(q)(5)).
`(f) Determination of Employment Status- Except to the extent necessary
for purposes of section 3511, nothing in this section shall be construed
to affect the determination of who is an employee or employer for purposes
of this title.
`(g) Regulations- The Secretary shall prescribe such regulations as may
be necessary or appropriate to carry out the purposes of this section.'.
(c) Conforming Amendments-
(1) Section 3302 is amended by adding at the end the following new subsection:
`(h) Treatment of Certified Professional Employer Organizations- If a certified
professional employer organization (as defined in section 7705), or a customer
of such organization, makes a contribution to the State's unemployment fund
with respect to a work site employee, such organization shall be eligible
for the credits available under this section with respect to such contribution.'.
(2) Section 3303(a) is amended--
(A) by striking the period at the end of paragraph (3) and inserting
`; and' and by inserting after paragraph (3) the following new paragraph:
`(4) if the taxpayer is a certified professional employer organization
(as defined in section 7705) that is treated as the employer under section
3511, such certified professional employer organization is permitted to
collect and remit, in accordance with paragraphs (1), (2), and (3), contributions
during the taxable year to the State unemployment fund with respect to
a work site employee.', and
(B) in the last sentence--
(i) by striking `paragraphs (1), (2), and (3)' and inserting `paragraphs
(1), (2), (3), and (4)', and
(ii) by striking `paragraph (1), (2), or (3)' and inserting `paragraph
(1), (2), (3), or (4)'.
(3) Section 6053(c) (relating to reporting of tips) is amended by adding
at the end the following new paragraph:
`(8) CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS- For purposes of any
report required by this subsection, in the case of a certified professional
employer organization that is treated under section 3511 as the employer
of a work site employee, the customer with respect to whom a work site
employee performs services shall be the employer for purposes of reporting
under this section and the certified professional employer organization
shall furnish to the customer any information necessary to complete such
reporting no later than such time as the Secretary shall prescribe.'.
(1) The table of sections for chapter 25 is amended by adding at the end
the following new item:
`Sec. 3511. Certified professional employer organizations.'.
(2) The table of sections for chapter 79 is amended by inserting after
the item relating to section 7704 the following new item:
`Sec. 7705. Certified professional employer organizations defined.'.
(e) Reporting Requirements and Obligations- The Secretary of the Treasury
shall develop such reporting and recordkeeping rules, regulations, and procedures
as the Secretary determines necessary or appropriate to ensure compliance
with the amendments made by this section with respect to entities applying
for certification as certified professional employer organizations or entities
that have been so certified. Such rules shall be designed in a manner which
streamlines, to the extent possible, the application of requirements of
such amendments, the exchange of information between a certified professional
employer organization and its customers, and the reporting and recordkeeping
obligations of the certified professional employer organization.
(f) User Fees- Subsection (b) of section 7528 (relating to Internal Revenue
Service user fees) is amended by adding at the end the following new paragraph:
`(4) CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS- The fee charged under
the program in connection with the certification by the Secretary of a
professional employer organization under section 7705 shall not exceed
$500.'.
(1) IN GENERAL- The amendments made by this section shall apply with respect
to wages for services performed on or after January 1 of the first calendar
year beginning more than 12 months after the date of the enactment of
this Act.
(2) CERTIFICATION PROGRAM- The Secretary of the Treasury shall establish
the certification program described in section 7705(b) of the Internal
Revenue Code of 1986, as added by subsection (b), not later than 6 months
before the effective date determined under paragraph (1).
(h) No Inference- Nothing contained in this section or the amendments made
by this section shall be construed to create any inference with respect
to the determination of who is an employee or employer--
(1) for Federal tax purposes (other than the purposes set forth in the
amendments made by this section), or
(2) for purposes of any other provision of law.
Subtitle B--Subchapter S Provisions
SEC. 111. CAPITAL GAIN OF S CORPORATION NOT TREATED AS PASSIVE INVESTMENT
INCOME.
(a) In General- Section 1362(d)(3) is amended by striking subparagraphs
(B), (C), (D), (E), and (F) and inserting the following new subparagraph:
`(B) PASSIVE INVESTMENT INCOME DEFINED-
`(i) IN GENERAL- Except as otherwise provided in this subparagraph,
the term `passive investment income' means gross receipts derived
from royalties, rents, dividends, interest, and annuities.
`(ii) EXCEPTION FOR INTEREST ON NOTES FROM SALES OF INVENTORY- The
term `passive investment income' shall not include interest on any
obligation acquired in the ordinary course of the corporation's trade
or business from its sale of property described in section 1221(a)(1).
`(iii) TREATMENT OF CERTAIN LENDING OR FINANCE COMPANIES- If the S
corporation meets the requirements of section 542(c)(6) for the taxable
year, the term `passive investment income' shall not include gross
receipts for the taxable year which are derived directly from the
active and regular conduct of a lending or finance business (as defined
in section 542(d)(1)).
`(iv) TREATMENT OF CERTAIN DIVIDENDS- If an S corporation holds stock
in a C corporation meeting the requirements of section 1504(a)(2),
the term `passive investment income' shall not include dividends from
such C corporation to the extent such dividends are attributable to
the earnings and profits of such C corporation derived from the active
conduct of a trade or business.
`(v) EXCEPTION FOR BANKS, ETC- In the case of a bank (as defined in
section 581) or a depository institution holding company (as defined
in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1813(w)(1)), the term `passive investment income' shall not include--
`(I) interest income earned by such bank or company, or
`(II) dividends on assets required to be held by such bank or company,
including stock in the Federal Reserve Bank, the Federal Home Loan
Bank, or the Federal Agricultural Mortgage Bank or participation
certificates issued by a Federal Intermediate Credit Bank.'.
(b) Conforming Amendment- Clause (i) of section 1042(c)(4)(A) is amended
by striking `section 1362(d)(3)(C)' and inserting `section 1362(d)(3)(B)'.
(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. 112. TREATMENT OF BANK DIRECTOR SHARES.
(a) In General- Section 1361 (defining S corporation) is amended by adding
at the end the following new subsection:
`(f) Restricted Bank Director Stock-
`(1) IN GENERAL- Restricted bank director stock shall not be taken into
account as outstanding stock of the S corporation in applying this subchapter
(other than section 1368(f)).
`(2) RESTRICTED BANK DIRECTOR STOCK- For purposes of this subsection,
the term `restricted bank director stock' means stock in a bank (as defined
in section 581) or a depository institution holding company (as defined
in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)),
if such stock--
`(A) is required to be held by an individual under applicable Federal
or State law in order to permit such individual to serve as a director,
and
`(B) is subject to an agreement with such bank or company (or a corporation
which controls (within the meaning of section 368(c)) such bank or company)
pursuant to which the holder is required to sell back such stock (at
the same price as the individual acquired such stock) upon ceasing to
hold the office of director.
`For treatment of certain distributions with respect to restricted bank
director stock, see section 1368(f).'.
(b) Distributions- Section 1368 (relating to distributions) is amended by
adding at the end the following new subsection:
`(f) Restricted Bank Director Stock- If a director receives a distribution
(not in part or full payment in exchange for stock) from an S corporation
with respect to any restricted bank director stock (as defined in section
1361(f)), the amount of such distribution--
`(1) shall be includible in gross income of the director, and
`(2) shall be deductible by the corporation for the taxable year of such
corporation in which or with which ends the taxable year in which such
amount in included in the gross income of the director.'.
(1) IN GENERAL- The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.
(2) SPECIAL RULE FOR TREATMENT AS SECOND CLASS OF STOCK- In the case of
any taxable year beginning after December 31, 1996, restricted bank director
stock (as defined in section 1361(f) of the Internal Revenue Code of 1986,
as added by this section) shall not be taken into account in determining
whether an S corporation has more than 1 class of stock.
SEC. 113. SPECIAL RULE FOR BANK REQUIRED TO CHANGE FROM THE RESERVE METHOD
OF ACCOUNTING ON BECOMING S CORPORATION.
(a) In General- Section 1361, as amended by this Act, is amended by adding
at the end the following new subsection:
`(g) Special Rule for Bank Required To Change From the Reserve Method of
Accounting on Becoming S Corporation- In the case of a bank which changes
from the reserve method of accounting for bad debts described in section
585 or 593 for its first taxable year for which an election under section
1362(a) is in effect, the bank may elect to take into account any adjustments
under section 481 by reason of such change for the taxable year immediately
preceding such first taxable year.'.
(b) Effective Date- The amendments made by this section shall apply to taxable
years beginning after December 31, 2006.
SEC. 114. TREATMENT OF THE SALE OF INTEREST IN A QUALIFIED SUBCHAPTER
S SUBSIDIARY.
(a) In General- Subparagraph (C) of section 1361(b)(3) (relating to treatment
of terminations of qualified subchapter S subsidiary status) is amended--
(1) by striking `For purposes of this title,' and inserting the following:
`(i) IN GENERAL- For purposes of this title,', and
(2) by inserting at the end the following new clause:
`(ii) TERMINATION BY REASON OF SALE OF STOCK- If the failure to meet
the requirements of subparagraph (B) is by reason of the sale of stock
of a corporation which is a qualified subchapter S subsidiary, the
sale of such stock shall be treated as if--
`(I) the sale were a sale of an undivided interest in the assets
of such corporation (based on the percentage of the corporation's
stock sold), and
`(II) the sale were followed by an acquisition by such corporation
of all of its assets (and the assumption by such corporation of
all of its liabilities) in a transaction to which section 351 applies.'.
(b) Effective Date- The amendments made by this section shall apply to taxable
years beginning after December 31, 2006 .
SEC. 115. ELIMINATION OF ALL EARNINGS AND PROFITS ATTRIBUTABLE TO PRE-1983
YEARS FOR CERTAIN CORPORATIONS.
In the case of a corporation which is--
(1) described in section 1311(a)(1) of the Small Business Job Protection
Act of 1996, and
(2) not described in section 1311(a)(2) of such Act,
the amount of such corporation's accumulated earnings and profits (for the
first taxable year beginning after the date of the enactment of this Act)
shall be reduced by an amount equal to the portion (if any) of such accumulated
earnings and profits which were accumulated in any taxable year beginning
before January 1, 1983, for which such corporation was an electing small
business corporation under subchapter S of the Internal Revenue Code of
1986.
SEC. 116. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL BUSINESS
TRUST.
(a) No Look Through for Eligibility Purposes- Clause (v) of section 1361(c)(2)(B)
is amended by adding at the end the following new sentence: `This clause
shall not apply for purposes of subsection (b)(1)(C).'.
(b) Effective Date- The amendment made by this section shall take effect
on the date of the enactment of this Act.
TITLE II--REVENUE PROVISIONS
SEC. 201. MODIFICATION OF EFFECTIVE DATE OF LEASING PROVISIONS OF THE
AMERICAN JOBS CREATION ACT OF 2004.
(a) Leases to Foreign Entities- Section 849(b) of the American Jobs Creation
Act of 2004 is amended by adding at the end the following new paragraph:
`(5) LEASES TO FOREIGN ENTITIES- In the case of tax-exempt use property
leased to a tax-exempt entity which is a foreign person or entity, the
amendments made by this part shall apply to taxable years beginning after
December 31, 2006, with respect to leases entered into on or before March
12, 2004.'.
(b) Effective Date- The amendment made by this section shall take effect
as if included in the enactment of the American Jobs Creation Act of 2004.
SEC. 202. APPLICATION OF RULES TREATING INVERTED CORPORATIONS AS DOMESTIC
CORPORATIONS TO CERTAIN TRANSACTIONS OCCURRING AFTER MARCH 20, 2002.
(a) In General- Section 7874(b) (relating to inverted corporations treated
as domestic corporations) is amended to read as follows:
`(b) Inverted Corporations Treated as Domestic Corporations-
`(1) IN GENERAL- Notwithstanding section 7701(a)(4), a foreign corporation
shall be treated for purposes of this title as a domestic corporation
if such corporation would be a surrogate foreign corporation if subsection
(a)(2) were applied by substituting `80 percent' for `60 percent'.
`(2) SPECIAL RULE FOR CERTAIN TRANSACTIONS OCCURRING AFTER MARCH 20, 2002-
`(i) paragraph (1) does not apply to a foreign corporation, but
`(ii) paragraph (1) would apply to such corporation if, in addition
to the substitution under paragraph (1), subsection (a)(2) were applied
by substituting `March 20, 2002' for `March 4, 2003' each place it
appears,
then paragraph (1) shall apply to such corporation but only with respect
to taxable years of such corporation beginning after December 31, 2006.
`(B) SPECIAL RULES- Subject to such rules as the Secretary may prescribe,
in the case of a corporation to which paragraph (1) applies by reason
of this paragraph--
`(i) the corporation shall be treated, as of the close of its last
taxable year beginning before January 1, 2007, as having transferred
all of its assets, liabilities, and earnings and profits to a domestic
corporation in a transaction with respect to which no tax is imposed
under this title,
`(ii) the bases of the assets transferred in the transaction to the
domestic corporation shall be the same as the bases of the assets
in the hands of the foreign corporation, subject to any adjustments
under this title for built-in losses,
`(iii) the basis of the stock of any shareholder in the domestic corporation
shall be the same as the basis of the stock of the shareholder in
the foreign corporation for which it is treated as exchanged, and
`(iv) the transfer of any earnings and profits by reason of clause
(i) shall be disregarded in determining any deemed dividend or foreign
tax creditable to the domestic corporation with respect to such transfer.
`(C) REGULATIONS- The Secretary may prescribe such regulations as may
be necessary or appropriate to carry out this paragraph, including regulations
to prevent the avoidance of the purposes of this paragraph.'.
(b) Effective Date- The amendment made by this section shall apply to taxable
years beginning after December 31, 2006.
SEC. 203. DENIAL 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--
(A) by redesignating paragraphs (1) and (2) as subparagraphs (A) and
(B), respectively,
(B) by striking `If' and inserting:
`(1) TREBLE DAMAGES- If', and
(C) 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 AMENDMENT- 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:
`(h) 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.
SEC. 204. 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 (4) in relation to the violation
of any law or the investigation or inquiry by such government or entity
into the potential violation of any law.
`(2) EXCEPTION FOR AMOUNTS CONSTITUTING RESTITUTION OR PAID TO COME INTO
COMPLIANCE WITH LAW- Paragraph (1) shall not apply to any amount which--
`(A) the taxpayer establishes--
`(i) constitutes restitution (including remediation of property) for
damage or harm caused by or which may be caused by the violation of
any law or the potential violation of any law, or
`(ii) is paid to come into compliance with any law which was violated
or involved in the investigation or inquiry, and
`(B) is identified as restitution or as an amount paid to come into
compliance with the law, as the case may be, in the court order or settlement
agreement.
A taxpayer shall not meet the requirements of subparagraph (A) solely
by reason an identification under subparagraph (B). 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) EXCEPTION FOR AMOUNTS PAID OR INCURRED AS THE RESULT OF CERTAIN COURT
ORDERS- Paragraph (1) shall not apply to any amount paid or incurred by
order of a court in a suit in which no government or entity described
in paragraph (4) is a party.
`(4) 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.
`(5) EXCEPTION FOR TAXES DUE- Paragraph (1) shall not apply to any amount
paid or incurred as taxes due.'.
(b) Reporting of Deductible Amounts-
(1) IN GENERAL- Subpart B of part III of subchapter A of chapter 61 is
amended by inserting after section 6050V the following new section:
`SEC. 6050W. INFORMATION WITH RESPECT TO CERTAIN FINES, PENALTIES, AND
OTHER AMOUNTS.
`(a) Requirement of Reporting-
`(1) IN GENERAL- The appropriate official of any government or entity
which is described in section 162(f)(4) which is involved in a suit or
agreement described in paragraph (2) shall make a return in such form
as determined by the Secretary setting forth--
`(A) the amount required to be paid as a result of the suit or agreement
to which paragraph (1) of section 162(f) applies,
`(B) any amount required to be paid as a result of the suit or agreement
which constitutes restitution or remediation of property, and
`(C) any amount required to be paid as a result of the suit or agreement
for the purpose of coming into compliance with any law which was violated
or involved in the investigation or inquiry.
`(2) SUIT OR AGREEMENT DESCRIBED-
`(A) IN GENERAL- A suit or agreement is described in this paragraph
if--
`(I) a suit with respect to a violation of any law over which the
government or entity has authority and with respect to which there
has been a court order, or
`(II) an agreement which is entered into with respect to a violation
of any law over which the government or entity has authority, or
with respect to an investigation or inquiry by the government or
entity into the potential violation of any law over which such government
or entity has authority, and
`(ii) the aggregate amount involved in all court orders and agreements
with respect to the violation, investigation, or inquiry is $600 or
more.
`(B) ADJUSTMENT OF REPORTING THRESHOLD- The Secretary may adjust the
$600 amount in subparagraph (A)(ii) as necessary in order to ensure
the efficient administration of the internal revenue laws.
`(3) TIME OF FILING- The return required under this subsection shall be
filed not later than--
`(A) 30 days after the date on which a court order is issued with respect
to the suit or the date the agreement is entered into, as the case may
be, or
`(B) the date specified Secretary.
`(b) Statements To Be Furnished to Individuals Involved in the Settlement-
Every person required to make a return under subsection (a) shall furnish
to each person who is a party to the suit or agreement a written statement
showing--
`(1) the name of the government or entity, and
`(2) the information supplied to the Secretary under subsection (a)(1).
The written statement required under the preceding sentence shall be furnished
to the person at the same time the government or entity provides the Secretary
with the information required under subsection (a).
`(c) Appropriate Official Defined- For purposes of this section, the term
`appropriate official' means the officer or employee having control of the
suit, investigation, or inquiry or the person appropriately designated for
purposes of this section.'.
(2) CONFORMING AMENDMENT- The table of sections for subpart B of part
III of subchapter A of chapter 61 is amended by inserting after the item
relating to section 6050V the following new item:
`Sec. 6050W. Information with respect to certain fines, penalties, and
other amounts.'.
(c) Effective Date- The amendments made by this section shall apply to amounts
paid or incurred on or after the date of the enactment of this Act, except
that such amendments shall not apply to amounts paid or incurred under any
binding order or agreement entered into before such date. Such exception
shall not apply to an order or agreement requiring court approval unless
the approval was obtained before such date.
SEC. 205. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS.
(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 2007, 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
2006' 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).
`(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--
`(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-
`(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) TREATMENT OF GIFTS AND INHERITANCES-
`(A) 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.
`(B) DETERMINATION OF BASIS- Notwithstanding sections 1015 or 1022,
the basis of any property described in subparagraph (A) in the hands
of the donee or the person acquiring such property from the decedent
shall be equal to the fair market value of the property at the time
of the gift, bequest, devise, or inheritance.
`(2) EXCEPTIONS FOR TRANSFERS OTHERWISE SUBJECT TO ESTATE OR GIFT TAX-
Paragraph (1) shall not apply to
