To amend the Internal Revenue Code of 1986 to protect American jobs.

February 25, 2004

Mr. RANGEL introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to protect American jobs.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE, ETC.

(a) SHORT TITLE- This Act may be cited as the `Job Protection Act of 2004'.

(b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

(c) TABLE OF CONTENTS-

Sec. 1. Short title, etc.

TITLE I--TRANSITION FROM FSC/ETI BENEFITS TO UNITED STATES PRODUCTION BENEFITS

Sec. 101. Repeal of exclusion for extraterritorial income.

Sec. 102. Deduction relating to income attributable to United States production activities.

TITLE II--EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS

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

TITLE III--ENRON-RELATED TAX SHELTER PROVISIONS

Sec. 301. Limitation on transfer or importation of built-in losses.

Sec. 302. No reduction of basis under section 734 in stock held by partnership in corporate partner.

Sec. 303. Repeal of special rules for FASITS, etc.

Sec. 304. Expanded disallowance of deduction for interest on convertible debt.

Sec. 305. Expanded authority to disallow tax benefits under section 269.

Sec. 306. Modifications of certain rules relating to controlled foreign corporations.

TITLE IV--EXTENSION OF COBRA FEES

Sec. 401. Cobra fees.

TITLE I--TRANSITION FROM FSC/ETI BENEFITS TO UNITED STATES PRODUCTION BENEFITS

SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

(a) IN GENERAL- Section 114 of the Internal Revenue Code of 1986 is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1)(A) Subpart E of part III of subchapter N of chapter 1 (relating to qualifying foreign trade income) is hereby repealed.

(B) The table of subparts for such part III is amended by striking the item relating to subpart E.

(2) The table of sections for part III of subchapter B of chapter 1 is amended by striking the item relating to section 114.

(3) The second sentence of section 56(g)(4)(B)(i) is amended by striking `or under section 114'.

(4) Section 275(a) is amended--

(A) by inserting `or' at the end of paragraph (4)(A), by striking `or' at the end of paragraph (4)(B) and inserting a period, and by striking subparagraph (C), and

(B) by striking the last sentence.

(5) Paragraph (3) of section 864(e) is amended--

(A) by striking:

`(3) TAX-EXEMPT ASSETS NOT TAKEN INTO ACCOUNT-

`(A) IN GENERAL- For purposes of'; and inserting:

`(3) TAX-EXEMPT ASSETS NOT TAKEN INTO ACCOUNT- For purposes of', and

(B) by striking subparagraph (B).

(6) Section 903 is amended by striking `114, 164(a),' and inserting `164(a)'.

(7) Section 999(c)(1) is amended by striking `941(a)(5),'.

(c) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to transactions occurring after the date of the enactment of this Act.

(2) BINDING CONTRACTS- The amendments made by this section shall not apply to any transaction in the ordinary course of a trade or business which occurs pursuant to a binding contract--

(A) which is between the taxpayer and a person who is not a related person (as defined in section 943(b)(3) of such Code, as in effect on the day before the date of the enactment of this Act), and

(B) which is in effect on September 17, 2003, and at all times thereafter.

(d) REVOCATION OF SECTION 943(e) ELECTIONS-

(1) IN GENERAL- In the case of a corporation that elected to be treated as a domestic corporation under section 943(e) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act)--

(A) the corporation may revoke such election, effective as of the date of the enactment of this Act, and

(B) if the corporation does revoke such election--

(i) such corporation shall be treated as a domestic corporation transferring (as of the date of the enactment of this Act) all of its property to a foreign corporation in connection with an exchange described in section 354 of the Internal Revenue Code of 1986, and

(ii) no gain or loss shall be recognized on such transfer.

(2) EXCEPTION- Subparagraph (B)(ii) of paragraph (1) shall not apply to gain on any asset held by the revoking corporation if--

(A) the basis of such asset is determined in whole or in part by reference to the basis of such asset in the hands of the person from whom the revoking corporation acquired such asset,

(B) the asset was acquired by transfer (not as a result of the election under section 943(e) of such Code) occurring on or after the 1st day on which its election under section 943(e) of such Code was effective, and

(C) a principal purpose of the acquisition was the reduction or avoidance of tax (other than a reduction in tax under section 114 of such Code, as in effect on the day before the date of the enactment of this Act).

(e) GENERAL TRANSITION-

(1) IN GENERAL- In the case of a taxable year ending after the date of the enactment of this Act and beginning before January 1, 2007, for purposes of chapter 1 of such Code, each current FSC/ETI beneficiary shall be allowed a deduction equal to the transition amount determined under this subsection with respect to such beneficiary for such year.

(2) CURRENT FSC/ETI BENEFICIARY- The term `current FSC/ETI beneficiary' means any corporation which entered into one or more transactions during its taxable year beginning in calendar year 2001 with respect to which FSC/ETI benefits were allowable.

(3) TRANSITION AMOUNT- For purposes of this subsection--

(A) IN GENERAL- The transition amount applicable to any current FSC/ETI beneficiary for any taxable year is the phaseout percentage of the base period amount.

(B) PHASEOUT PERCENTAGE-

(i) IN GENERAL- In the case of a taxpayer using the calendar year as its taxable year, the phaseout percentage shall be determined under the following table:

2004 and 2005

--80

2006

--60

2007 and thereafter

--0.

(ii) SPECIAL RULE FOR 2004- The phaseout percentage for 2004 shall be the amount that bears the same ratio to 80 percent as the number of days after the date of the enactment of this Act bears to 365.

(iii) SPECIAL RULE FOR FISCAL YEAR TAXPAYERS- In the case of a taxpayer not using the calendar year as its taxable year, the phaseout percentage is the weighted average of the phaseout percentages determined under the preceding provisions of this paragraph with respect to calendar years any portion of which is included in the taxpayer's taxable year. The weighted average shall be determined on the basis of the respective portions of the taxable year in each calendar year.

(4) BASE PERIOD AMOUNT- For purposes of this subsection, the base period amount is the aggregate FSC/ETI benefits for the taxpayer's taxable year beginning in calendar year 2001.

(5) FSC/ETI BENEFIT- For purposes of this subsection, the term `FSC/ETI benefit' means--

(A) amounts excludable from gross income under section 114 of such Code, and

(B) the exempt foreign trade income of related foreign sales corporations from property acquired from the taxpayer (determined without regard to section 923(a)(5) of such Code (relating to special rule for military property), as in effect on the day before the date of the enactment of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000).

In determining the FSC/ETI benefit there shall be excluded any amount attributable to a transaction with respect to which the taxpayer is the lessor unless the leased property was manufactured or produced in whole or in significant part by the taxpayer.

(6) SPECIAL RULE FOR FARM AND HORTICULTURAL COOPERATIVES- Determinations under this subsection with respect to an organization described in section 943(g)(1) of such Code, as in effect on the day before the date of the enactment of this Act, shall be made at the cooperative level and the purposes of this subsection shall be carried out in a manner similar to section 199(h)(2) of such Code, as added by this Act. Such determinations shall be in accordance with such requirements and procedures as the Secretary may prescribe.

(7) CERTAIN RULES TO APPLY- Rules similar to the rules of section 41(f) of such Code shall apply for purposes of this subsection.

(8) COORDINATION WITH BINDING CONTRACT RULE- The deduction determined under paragraph (1) for any taxable year shall be reduced by the phaseout percentage of any FSC/ETI benefit realized for the taxable year by reason of subsection (c)(2) or section 5(c)(1)(B) of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.

(9) SPECIAL RULE FOR TAXABLE YEAR WHICH INCLUDES DATE OF ENACTMENT- In the case of a taxable year which includes the date of the enactment of this Act, the deduction allowed under this subsection to any current FSC/ETI beneficiary shall in no event exceed--

(A) 100 percent of such beneficiary's base period amount, reduced by

(B) the aggregate FSC/ETI benefits of such beneficiary with respect to transactions occurring during the portion of the taxable year ending on the date of the enactment of this Act.

SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO UNITED STATES PRODUCTION ACTIVITIES.

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

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

`(a) IN GENERAL- There shall be allowed as a deduction an amount equal to 10 percent of the qualified production activities income of the taxpayer for the taxable year.

`(b) PHASEIN- In the case of taxable years beginning in 2004, 2005, 2006, or 2007, subsection (a) shall be applied by substituting for the percentage contained therein the transition percentage determined under the following table:

2004

--1

2005

--3

2006

--6

2007

--9.

`(c) QUALIFIED PRODUCTION ACTIVITIES INCOME- For purposes of this section, the term `qualified production activities income' means the product of--

`(1) the portion of the modified taxable income of the taxpayer which is attributable to domestic production activities, and

`(2) the domestic/worldwide fraction.

`(d) DETERMINATION OF INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES- For purposes of this section--

`(1) IN GENERAL- The portion of the modified taxable income which is attributable to domestic production activities is so much of the modified taxable income for the taxable year as does not exceed--

`(A) the taxpayer's domestic production gross receipts for such taxable year, reduced by

`(B) the sum of--

`(i) the costs of goods sold that are allocable to such receipts,

`(ii) other deductions, expenses, or losses directly allocable to such receipts, and

`(iii) a proper share of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income.

`(2) ALLOCATION METHOD- The Secretary shall prescribe rules for the proper allocation of items of income, deduction, expense, and loss for purposes of determining income attributable to domestic production activities.

`(3) SPECIAL RULE FOR DETERMINING COSTS-

`(A) For purposes of determining costs under clause (i) of paragraph (1)(B), any item or service brought into the United States shall be treated as acquired by purchase, and its cost shall be treated as not less than its value in the United States, determined immediately after it was brought into the United States. A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to domestic production gross receipts.

`(B) In the case of any property described in subparagraph (A) that had been exported by the taxpayer for further manufacture, the increase in cost (or adjusted basis) under subparagraph (A) shall not exceed the difference between the value of the property when exported and the value of the property when brought back into the United States after the further manufacture.

`(4) MODIFIED TAXABLE INCOME- The term `modified taxable income' means taxable income computed without regard to the deduction allowable under this section.

`(e) DOMESTIC PRODUCTION GROSS RECEIPTS- For purposes of this section--

`(1) IN GENERAL- The term `domestic production gross receipts' means the gross receipts of the taxpayer which are derived from--

`(A) any sale, exchange, or other disposition of, or

`(B) any lease, rental or license of--

qualifying production property which was manufactured, produced, grown, or extracted in whole or in significant part by the taxpayer within the United States.

`(2) SPECIAL RULES FOR CERTAIN PROPERTY- In the case of any qualifying production property described in subsection (f)(1)(C)--

(A) such property shall be treated for purposes of paragraph (1) as produced in significant part by the taxpayer within the United States if more than 50 percent of the aggregate development and production costs are incurred by the taxpayer within the United States, and

(B) if a taxpayer acquires such property before such property begins to generate substantial gross receipts, any development or production costs incurred before the acquisition shall be treated as incurred by the taxpayer for purposes of subparagraph (A) and paragraph (1).

`(f) QUALIFYING PRODUCTION PROPERTY- For purposes of this section--

`(1) IN GENERAL- Except as otherwise provided in this subsection, the term `qualifying production property' means--

`(A) any tangible personal property,

`(B) any computer software, and

`(C) any property described in paragraph (3) or (4) of section 168(f), including any underlying copyright or trademark.

Subparagraph (C) shall not apply to any property with respect to which records are required to be maintained under section 2257 of title 18, United States Code.

`(2) EXCLUSIONS FROM QUALIFYING PRODUCTION PROPERTY- The term `qualifying production property' shall not include--

`(A) consumable property that is sold, leased, or licensed by the taxpayer as an integral part of the provision of services,

`(B) oil or gas (or any primary product thereof),

`(C) electricity,

`(D) water supplied by pipeline to the consumer,

`(E) utility services, or

`(F) any property (not described in paragraph (1)(B)) which is a film, tape, recording, book, magazine, newspaper, or similar property the market for which is primarily topical or otherwise essentially transitory in nature.

`(3) SPECIAL RULE FOR NONCORPORATE TAXPAYERS- In the case of a taxpayer other than a corporation subject to tax under section 11, the term `qualifying production property' only includes--

`(A) agricultural or horticultural products, including timber, and

`(B) other tangible personal property not described in subparagraph (B) or (C) of paragraph (1) and not described in section 1221(a)(3).

`(g) DOMESTIC/WORLDWIDE FRACTION- For purposes of this section--

`(1) IN GENERAL- The term `domestic/worldwide fraction' means a fraction (not greater than 1)--

`(A) the numerator of which is the value of the domestic production of the taxpayer, and

`(B) the denominator of which is the value of the worldwide production of the taxpayer.

`(2) VALUE OF DOMESTIC PRODUCTION- The value of domestic production is the excess (if any) of--

`(A) the domestic production gross receipts, over

`(B) the cost of purchased inputs allocable to such receipts that are deductible under this chapter for the taxable year.

`(3) PURCHASED INPUTS-

`(A) IN GENERAL- Purchased inputs are any of the following items acquired by purchase:

`(i) Services (other than services of employees) used in manufacture, production, growth, or extraction activities.

`(ii) Items consumed in connection with such activities.

`(iii) Items incorporated as part of the property being manufactured, produced, grown, or extracted.

`(B) SPECIAL RULE- Rules similar to the rules of subsection (d)(3) shall apply for purposes of this subsection.

`(4) VALUE OF WORLDWIDE PRODUCTION-

`(A) IN GENERAL- The value of worldwide production shall be determined under the principles of paragraph (2), except that--

`(i) worldwide production gross receipts shall be taken into account, and

`(ii) paragraph (3)(B) shall not apply.

`(B) WORLDWIDE PRODUCTION GROSS RECEIPTS- The worldwide production gross receipts is the amount that would be determined under subsection (e) if such subsection were applied without any reference to the United States.

`(h) DEFINITIONS AND SPECIAL RULES-

`(1) UNITED STATES- For purposes of this section, the term `United States' includes the Commonwealth of Puerto Rico and any other possession of the United States.

`(2) EXCLUSION FOR PATRONS OF AGRICULTURAL AND HORTICULTURAL COOPERATIVES-

`(A) IN GENERAL- If any amount described in paragraph (1) or (3) of section 1385 (a)--

`(i) is received by a person from an organization to which part I of subchapter T applies which is engaged in the marketing of agricultural or horticultural products, and

`(ii) is allocable to the portion of the qualified production activities income of the organization which is deductible under subsection (a) (determined as if the organization were a corporation if it is not) and designated as such by the organization in a written notice mailed to its patrons during the payment period described in section 1382(a),

then such person shall be allowed an exclusion from gross income with respect to such amount. The taxable income of the organization shall not be reduced under section 1382 by the portion of any such amount with respect to which an exclusion is allowable to a person by reason of this paragraph.

`(B) SPECIAL RULES- For purposes of applying subparagraph (A), in determining the qualified production activities income of the organization under this section--

`(i) there shall not be taken into account in computing the organization's modified taxable income any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions), and

`(ii) the organization shall be treated as having manufactured, produced, grown, or extracted in whole or significant part any qualifying production property marketed by the organization which its patrons have so manufactured, produced, grown, or extracted.

`(3) SPECIAL RULES FOR PARTNERSHIPS AND S CORPORATIONS- For purposes of this section, a partner's distributive share of any partnership item shall be taken into account as if directly realized by the partner. A rule similar to the rule of the preceding sentence shall apply in the case of a shareholder in an S Corporation.

`(4) SPECIAL RULE FOR AFFILIATED GROUPS-

`(A) IN GENERAL- All members of an expanded affiliated group shall be treated as a single corporation for purposes of this section.

`(B) EXPANDED AFFILIATED GROUP- The term `expanded affiliated group' means an affiliated group as defined in section 1504(a), determined--

`(i) by substituting `50 percent' for `80 percent' each place it appears, and

`(ii) without regard to paragraphs (2) and (4) of section 1504(b).

For purposes of determining the domestic/worldwide fraction under subsection (g), clause (ii) shall be applied by also disregarding paragraphs (3) and (8) of section 1504(b).

`(5) COORDINATION WITH MINIMUM TAX- The deduction under this section shall be allowed for purposes of the tax imposed by section 55; except that for purposes of section 55, alternative minimum taxable income shall be taken into account in determining the deduction under this section.

`(6) ORDERING RULE- The amount of any other deduction allowable under this chapter shall be determined as if this section had not been enacted.

`(7) TRADE OR BUSINESS REQUIREMENT- This section shall be applied by only taking into account items which are attributable to the actual conduct of a trade or business.

`(8) COORDINATION WITH TRANSITION RULES- For purposes of this section--

`(A) domestic production gross receipts shall not include gross receipts from any transaction if the binding contract transition relief of section 2(c)(2) of the Job Protection Act of 2003 applies to such transaction, and

`(B) any deduction allowed under section 2(e) of such Act shall be disregarded in determining the portion of the taxable income which is attributable to domestic production gross receipts.'.

(b) CLERICAL AMENDMENT- The table of sections for part VII of subchapter B of chapter 1 is amended by adding at the end the following new item:

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

(c) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to taxable years ending after 2003.

(2) APPLICATION OF SECTION 15- Section 15 of the Internal Revenue Code of 1986 shall apply to the amendments made by this section as if they were changes in a rate of tax.

TITLE II--EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS

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

Subsections (b), (c), and (d) of section 179 (as amended by the Jobs and Growth Tax Relief Reconciliation Act of 2003) are each amended by striking `2006' each place it appears and inserting `2008'.

TITLE III--ENRON-RELATED TAX SHELTER PROVISIONS

SEC. 301. 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 the date of the enactment of this Act.

SEC. 302. 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 the date of the enactment of this Act.

SEC. 303. REPEAL OF SPECIAL RULES FOR FASITS, ETC.

(a) IN GENERAL- Part V of subchapter M of chapter 1 (relating to financial asset securitization investment trusts) is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1) Paragraph (6) of section 56(g) is amended by striking `REMIC, or FASIT' and inserting `or REMIC'.

(2) Clause (ii) of section 382(l)(4)(B) is amended by striking `a REMIC to which part IV of subchapter M applies, or a FASIT to which part V of subchapter M applies,' and inserting `or a REMIC to which part IV of subchapter M applies,'.

(3) Paragraph (1) of section 582(c) is amended by striking `, and any regular interest in a FASIT,'.

(4) Subparagraph (E) of section 856(c)(5) is amended by striking the last sentence.

(5)(A) Section 860G(a)(1) is amended by adding at the end the following new sentence: `An interest shall not fail to qualify as a regular interest solely because the specified principal amount of the regular interest (or the amount of interest accrued on the regular interest) can be reduced as a result of the nonoccurrence of 1 or more contingent payments with respect to any reverse mortgage loan held by the REMIC if, on the startup day for the REMIC, the sponsor reasonably believes that all principal and interest due under the regular interest will be paid at or prior to the liquidation of the REMIC.'.

(B) The last sentence of section 860G(a)(3) is amended by inserting `, and any reverse mortgage loan (and each balance increase on such loan meeting the requirements of subparagraph (A)(iii)) shall be treated as an obligation secured by an interest in real property' before the period at the end.

(6) Paragraph (3) of section 860G(a) is amended by adding `and' at the end of subparagraph (B), by striking `, and' at the end of subparagraph (C) and inserting a period, and by striking subparagraph (D).

(7) Section 860G(a)(3), as amended by paragraph (6), is amended by adding at the end the following new sentence: `For purposes of subparagraph (A), if more than 50 percent of the obligations transferred to, or purchased by, the REMIC are originated by the United States or any State (or any political subdivision, agency, or instrumentality of the United States or any State) and are principally secured by an interest in real property, then each obligation transferred to, or purchased by, the REMIC shall be treated as secured by an interest in real property.'.

(8)(A) Section 860G(a)(3)(A) is amended by striking `or' at the end of clause (i), by inserting `or' at the end of clause (ii), and by inserting after clause (ii) the following new clause:

`(iii) represents an increase in the principal amount under the original terms of an obligation described in clause (i) or (ii) if such increase--

`(I) is attributable to an advance made to the obligor pursuant to the original terms of the obligation,

`(II) occurs after the startup day, and

`(III) is purchased by the REMIC pursuant to a fixed price contract in effect on the startup day.'.

(B) Section 860G(a)(7)(B) is amended to read as follows:

`(B) QUALIFIED RESERVE FUND- For purposes of subparagraph (A), the term `qualified reserve fund' means any reasonably required reserve to--

`(i) provide for full payment of expenses of the REMIC or amounts due on regular interests in the event of defaults on qualified mortgages or lower than expected returns on cash flow investments, or

`(ii) provide a source of funds for the purchase of obligations described in clause (ii) or (iii) of paragraph (3)(A).

The aggregate fair market value of the assets held in any such reserve shall not exceed 50 percent of the aggregate fair market value of all of the assets of the REMIC on the startup day, and the amount of any such reserve shall be promptly and appropriately reduced to the extent the amount held in such reserve is no longer reasonably required for purposes specified in clause (i) or (ii) of paragraph (3)(A).'.

(9) Subparagraph (C) of section 1202(e)(4) is amended by striking `REMIC, or FASIT' and inserting `or REMIC'.

(10) Section 1272(a)(6)(B) is amended by adding at the end the following new flush sentence:

`For purposes of clause (iii), the Secretary shall prescribe regulations permitting the use of a current prepayment assumption, determined as of the close of the accrual period (or such other time as the Secretary may prescribe during the taxable year in which the accrual period ends).'.

(11) Subparagraph (C) of section 7701(a)(19) is amended by adding `and' at the end of clause (ix), by striking `, and' at the end of clause (x) and inserting a period, and by striking clause (xi).

(12) The table of parts for subchapter M of chapter 1 is amended by striking the item relating to part V.

(c) EFFECTIVE DATE-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall take effect on the date of the enactment of this Act.

(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. 304. 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) CAPITALIZATION ALLOWED WITH RESPECT TO EQUITY OF PERSONS OTHER THAN ISSUER AND RELATED PARTIES- Section 163(l) is amended by redesignating paragraphs (4) and (5) as paragraphs (5) and (6) and by inserting after paragraph (3) the following new paragraph:

`(4) CAPITALIZATION ALLOWED WITH RESPECT TO EQUITY OF PERSONS OTHER THAN ISSUER AND RELATED PARTIES- If the disqualified debt instrument of a corporation is payable in equity held by the issuer (or any related party) in any other person (other than a related party), the basis of such equity shall be increased by the amount not allowed as a deduction by reason of paragraph (1) with respect to the instrument.'.

(c) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED BY DEALERS IN SECURITIES- Section 163(l), as amended by subsection (b), is amended by redesignating paragraphs (5) and (6) as paragraphs (6) and (7) and by inserting after paragraph (4) the following new paragraph:

`(5) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED BY DEALERS IN SECURITIES- For purposes of this subsection, the term `disqualified debt instrument' does not include indebtedness issued by a dealer in securities (or a related party) which is payable in, or by reference to, equity (other than equity of the issuer or a related party) held by such dealer in its capacity as a dealer in securities. For purposes of this paragraph, the term `dealer in securities' has the meaning given such term by section 475.'.

(c) CONFORMING AMENDMENTS- Paragraph (3) of section 163(l) is amended--

(1) by striking `or a related party' in the material preceding subparagraph (A) and inserting `or any other person', and

(2) by striking `or interest' each place it appears.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to debt instruments issued after the date of the enactment of this Act.

SEC. 305. 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 the date of the enactment of this Act.

SEC. 306. 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 the date of the enactment of this Act, and to taxable years of United States shareholder in which or with which such taxable years of controlled foreign corporations end.

TITLE IV--EXTENSION OF COBRA FEES

SEC. 401. COBRA FEES.

(a) USE OF MERCHANDISE PROCESSING FEE- Section 13031(f) of the Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(f)) is amended--

(1) in paragraph (1), by aligning subparagraph (B) with subparagraph (A); and

(2) in paragraph (2), by striking `commercial operations' and all that follows through `processing' and inserting `customs revenue functions as defined in section 415 of the Homeland Security Act of 2002 (other than functions performed by the Office of International Affairs referred to in section 415(8) of that Act), and for automation (including the Automation Commercial Environment computer system), and for no other purpose. To the extent that funds in the Customs User Fee Account are insufficient to pay the costs of such customs revenue functions, customs duties in an amount equal to the amount of such insufficiency shall be available, to the extent provided for in appropriations Acts, to pay the costs of such customs revenue functions in the amount of such insufficiency, and shall be available for no other purpose. The provisions of the first and second sentences of this paragraph specifying the purposes for which amounts in the Customs User Fee Account may be made available shall not be superseded except by a provision of law which specifically modifies or supersedes such provisions.'.

(b) REIMBURSEMENT OF APPROPRIATIONS FROM COBRA FEES- Section 13031(f)(3) of the Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(f)(3)) is amended by adding at the end the following:

`(E) Nothing in this paragraph shall be construed to preclude the use of appropriated funds, from sources other than the fees collected under subsection (a), to pay the costs set forth in clauses (i), (ii), and (iii) of subparagraph (A).'.

(c) SENSE OF CONGRESS; EFFECTIVE PERIOD FOR COLLECTING FEES; STANDARD FOR SETTING FEES-

(1) SENSE OF CONGRESS- The Congress finds that--

(A) the fees set forth in paragraphs (1) through (8) of subsection (a) of section 13031 of the Consolidated Omnibus Budget Reconciliation Act of 1985 have been reasonably related to the costs of providing customs services in connection with the activities or items for which the fees have been charged under such paragraphs; and

(B) the fees collected under such paragraphs have not exceeded, in the aggregate, the amounts paid for the costs described in subsection (f)(3)(A) incurred in providing customs services in connection with the activities or items for which the fees were charged under such paragraphs.

(2) EFFECTIVE PERIOD; STANDARD FOR SETTING FEES- Section 13031(j)(3) of the Consolidated Omnibus Budget Reconciliation Act of 1985 is amended to read as follows:

`(3)(A) Fees may not be charged under paragraphs (9) and (10) of subsection (a) after September 30, 2013.

`(B)(i) Subject to clause (ii), fees may not be charged under paragraphs (1) through (8) of subsection (a) after September 30, 2006.

`(ii) In fiscal year 2006 and in each succeeding fiscal year for which fees under paragraphs (1) through (8) of subsection (a) are authorized--

`(I) the Secretary of the Treasury shall charge fees under each such paragraph in amounts that are reasonably related to the costs of providing customs services in connection with the activity or item for which the fee is charged under such paragraph;

`(II) the amount of fees collected under such paragraphs may not exceed, in the aggregate, the amounts paid in that fiscal year for the costs described in subsection (f)(3)(A) incurred in providing customs services in connection with the activity or item for which the fees are charged under such paragraphs;

`(III) a fee may not be collected under any such paragraph except to the extent such fee will be expended to pay the costs described in subsection (f)(3)(A) incurred in providing customs services in connection with the activity or item for which the fee is charged under such paragraph; and

`(IV) any fee collected under any such paragraph shall be available for expenditure only to pay the costs described in subsection (f)(3)(A) incurred in providing customs services in connection with the activity or item for which the fee is charged under such paragraph.'.

(d) CLERICAL AMENDMENTS- Section 13031 of the Consolidated Omnibus Budget Reconciliation Act of 1985 is amended--

(1) in subsection (a)(5)(B), by striking `$1.75' and inserting `$1.75.';

(2) in subsection (b)--

(A) in paragraph (1)(A), by aligning clause (iii) with clause (ii);

(B) in paragraph (7), by striking `paragraphs' and inserting `paragraph'; and

(C) in paragraph (9), by aligning subparagraph (B) with subparagraph (A); and

(3) in subsection (e)(2), by aligning subparagraph (B) with subparagraph (A).

END