[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 1299 Introduced in Senate (IS)]


104th CONGRESS
  1st Session
                                S. 1299

  To amend the Internal Revenue Code of 1986 to bring opportunity to 
                     small business and taxpayers.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            October 10, 1995

   Mr. Pryor introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to bring opportunity to 
                     small business and taxpayers.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Bringing 
Opportunity to Our Small Business and Taxpayers (BOOST) Act''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.
                   TITLE I--TAXPAYER BILL OF RIGHTS 2

Sec. 1001. Short title.
                     Subtitle A--Taxpayer Advocate

Sec. 1011. Establishment of position of Taxpayer Advocate within 
                            Internal Revenue Service.
Sec. 1012. Expansion of authority to issue taxpayer assistance orders.
     Subtitle B--Modifications to Installment Agreement Provisions

Sec. 1021. Taxpayer's right to installment agreement.
Sec. 1022. Running of failure to pay penalty suspended during period 
                            installment agreement in effect.
Sec. 1023. Notification of reasons for termination or denial of 
                            installment agreements.
Sec. 1024. Administrative review of denial of request for, or 
                            termination of, installment agreement.
                          Subtitle C--Interest

Sec. 1031. Expansion of authority to abate interest.
Sec. 1032. Extension of interest-free period for payment of tax after 
                            notice and demand.
                       Subtitle D--Joint Returns

Sec. 1041. Disclosure of collection activities.
Sec. 1042. Joint return may be made after separate returns without full 
                            payment of tax.
                   Subtitle E--Collection Activities

Sec. 1051. Modifications to lien and levy provisions.
Sec. 1052. Offers-in-compromise.
Sec. 1053. Notification of examination.
Sec. 1054. Increase in limit on recovery of civil damages for 
                            unauthorized collection actions.
Sec. 1055. Safeguards relating to designated summons.
                    Subtitle F--Information Returns

Sec. 1061. Phone number of person providing payee statements required 
                            to be shown on such statement.
Sec. 1062. Civil damages for fraudulent filing of information returns.
Sec. 1063. Requirement to conduct reasonable investigations of 
                            information returns.
  Subtitle G--Modifications to Penalty for Failure To Collect and Pay 
                                Over Tax

Sec. 1071. Preliminary notice requirement.
Sec. 1072. Disclosure of certain information where more than 1 person 
                            subject to penalty.
Sec. 1073. Penalties under section 6672.
             Subtitle H--Awarding of Costs and Certain Fees

Sec. 1081. Motion for disclosure of information.
Sec. 1082. Increased limit on attorney fees.
Sec. 1083. Failure to agree to extension not taken into account.
Sec. 1084. Authority for court to award reasonable administrative 
                            costs.
Sec. 1085. Effective date.
                      Subtitle I--Other Provisions

Sec. 1091. Required content of certain notices.
Sec. 1092. Treatment of substitute returns under section 6651.
Sec. 1093. Relief from retroactive application of Treasury Department 
                            regulations.
Sec. 1094. Required notice of certain payments.
Sec. 1095. Unauthorized enticement of information disclosure.
                Subtitle J--Form Modifications; Studies

Sec. 1100. Definitions.
                     Chapter 1--Form Modifications

Sec. 1101. Explanation of certain provisions.
Sec. 1102. Improved procedures for notifying service of change of 
                            address or name.
Sec. 1103. Rights and responsibilities of divorced individuals.
                           Chapter 2--Studies

Sec. 1111. Pilot program for appeal of enforcement actions.
Sec. 1112. Study on taxpayers with special needs.
Sec. 1113. Reports on taxpayer-rights education program.
Sec. 1114. Biennial reports on misconduct by Internal Revenue Service 
                            employees.
Sec. 1115. Study of notices of deficiency.
Sec. 1116. Notice and form accuracy study.
  TITLE II--INCREASE OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
                          EMPLOYED INDIVIDUALS

Sec. 2001. Increase of deduction for health insurance costs of self-
                            employed individuals.
              TITLE III--S CORPORATION REFORM ACT OF 1995

Sec. 3001. Short title.
           Subtitle A--Eligible Shareholders of S Corporation

                   Chapter 1--Number of Shareholders

Sec. 3101. S corporations permitted to have 50 shareholders.
Sec. 3102. Members of family treated as 1 shareholder.
               Chapter 2--Persons Allowed as Shareholders

Sec. 3111. Certain exempt organizations.
Sec. 3112. Financial institutions.
Sec. 3113. Nonresident aliens.
Sec. 3114. Electing small business trusts.
                      Chapter 3--Other Provisions

Sec. 3121. Expansion of post-death qualification for certain trusts.
     Subtitle B--Qualification and Eligibility Requirements for S 
                              Corporations

                     Chapter 1--One Class of Stock

Sec. 3201. Issuance of preferred stock permitted.
Sec. 3202. Financial institutions permitted to hold safe harbor debt.
                 Chapter 2--Elections And Terminations

Sec. 3211. Rules relating to inadvertent terminations and invalid 
                            elections.
Sec. 3212. Agreement to terminate year.
Sec. 3213. Expansion of post-termination transition period.
Sec. 3214. Repeal of excessive passive investment income as a 
                            termination event.
                      Chapter 3--Other Provisions

Sec. 3221. S corporations permitted to hold subsidiaries.
Sec. 3222. Treatment of distributions during loss years.
Sec. 3223. Consent dividend for AAA bypass election.
Sec. 3224. Treatment of S corporations under subchapter C.
Sec. 3225. Elimination of pre-1983 earnings and profits.
Sec. 3226. Allowance of charitable contributions of inventory and 
                            scientific property.
Sec. 3227. C corporation rules to apply for fringe benefit purposes.
           Subtitle C--Taxation of S Corporation Shareholders

Sec. 3301. Uniform treatment of owner-employees under prohibited 
                            transaction rules.
Sec. 3302. Treatment of losses to shareholders.
                       Subtitle D--Effective Date

Sec. 3401. Effective date.
                    TITLE IV--PENSION SIMPLIFICATION

       Subtitle A--Simplification of Nondiscrimination Provisions

Sec. 4000. Short title.
Sec. 4001. Definition of highly compensated employees; repeal of family 
                            aggregation.
    Subtitle B--Targeted Access to Pension Plans for Small Employers

Sec. 4011. Credit for pension plan start-up costs of small employers.
Sec. 4012. Modifications of simplified employee pensions.
Sec. 4013. Exemption from top-heavy plan requirements.
Sec. 4014. Regulatory treatment of small employers.
        TITLE V--ESTATE TAX EXCLUSION FOR FAMILY-OWNED BUSINESS

Sec. 5001. Short title.
Sec. 5002. Family-owned business exclusion.
                     TITLE VI--SPENDING REDUCTIONS

Sec. 6001. Short title.
Sec. 6002. Service contracts.
Sec. 6003. Federally funded research and development centers.
Sec. 6004. Foreign military financing.

                   TITLE I--TAXPAYER BILL OF RIGHTS 2

SEC. 1001. SHORT TITLE.

    This title may be cited as the ``Taxpayer Bill of Rights 2''.

                     Subtitle A--Taxpayer Advocate

SEC. 1011. ESTABLISHMENT OF POSITION OF TAXPAYER ADVOCATE WITHIN 
              INTERNAL REVENUE SERVICE.

    (a) General Rule.--Section 7802 (relating to Commissioner of 
Internal Revenue; Assistant Commissioner (Employee Plans and Exempt 
Organizations)) is amended by adding at the end the following new 
subsection:
    ``(d) Office of Taxpayer Advocate.--
            ``(1) In general.--There is established in the Internal 
        Revenue Service an office to be known as the `Office of the 
        Taxpayer Advocate'. Such office, including all problem 
        resolution officers, shall be under the supervision and 
        direction of an official to be known as the `Taxpayer Advocate' 
        who shall report directly to the Commissioner of Internal 
        Revenue. The Taxpayer Advocate shall be entitled to 
        compensation at the same rate as the Chief Counsel for the 
        Internal Revenue Service.
            ``(2) Functions of office.--
                    ``(A) In general.--It shall be the function of the 
                Office of Taxpayer Advocate to--
                            ``(i) assist taxpayers in resolving 
                        problems with the Internal Revenue Service,
                            ``(ii) identify areas in which taxpayers 
                        have problems in dealings with the Internal 
                        Revenue Service,
                            ``(iii) to the extent possible, propose 
                        changes in the administrative practices of the 
                        Internal Revenue Service to mitigate problems 
                        identified under clause (ii), and
                            ``(iv) identify potential legislative 
                        changes which may be appropriate to mitigate 
                        such problems.
                    ``(B) Annual reports.--
                            ``(i) Objectives.--Not later than June 30 
                        of each calendar year after 1995, the Taxpayer 
                        Advocate shall report to the Committee on Ways 
                        and Means of the House of Representatives and 
                        the Committee on Finance of the Senate on the 
                        objectives of the Taxpayer Advocate for the 
                        fiscal year beginning in such calendar year. 
                        Any such report shall contain full and 
                        substantive analysis, in addition to 
                        statistical information.
                            ``(ii) Activities.--Not later than December 
                        31 of each calendar year after 1995, the 
                        Taxpayer Advocate shall report to the Committee 
                        on Ways and Means of the House of 
                        Representatives and the Committee on Finance of 
                        the Senate on the activities of the Taxpayer 
                        Advocate during the fiscal year ending during 
                        such calendar year. Any such report shall 
                        contain full and substantive analysis, in 
                        addition to statistical information, and 
                        shall--
                                    ``(I) identify the initiatives the 
                                Taxpayer Advocate has taken on 
                                improving taxpayer services and 
                                Internal Revenue Service 
                                responsiveness,
                                    ``(II) contain recommendations 
                                received from individuals with the 
                                authority to issue taxpayer assistance 
                                orders under section 7811,
                                    ``(III) contain a summary of at 
                                least 20 of the most serious problems 
                                encountered by taxpayers, including a 
                                description of the nature of such 
                                problems,
                                    ``(IV) contain an inventory of the 
                                items described in subclauses (I), 
                                (II), and (III) for which action has 
                                been taken and the result of such 
                                action,
                                    ``(V) contain an inventory of the 
                                items described in subclauses (I), 
                                (II), and (III) for which action 
                                remains to be completed and the period 
                                during which each item has remained on 
                                such inventory,
                                    ``(VI) contain an inventory of the 
                                items described in subclauses (II) and 
                                (III) for which no action has been 
                                taken, the period during which each 
                                item has remained on such inventory, 
                                the reasons for the inaction, and 
                                identify any Internal Revenue Service 
                                official who is responsible for such 
                                inaction,
                                    ``(VII) identify any Taxpayer 
                                Assistance Order which was not honored 
                                by the Internal Revenue Service in a 
                                timely manner, as specified under 
                                section 7811(b),
                                    ``(VIII) contain recommendations 
                                for such administrative and legislative 
                                action as may be appropriate to resolve 
                                problems encountered by taxpayers, and
                                    ``(IX) include such other 
                                information as the Taxpayer Advocate 
                                may deem advisable.
                            ``(iii) Report to be submitted directly.--
                        Each report required under this subparagraph 
                        shall be provided directly to the Committees 
                        referred to in clauses (i) and (ii) without any 
                        prior review or comment from the Commissioner 
                        of the Internal Revenue Service, the Secretary 
                        of the Treasury, any other officer or employee 
                        of the Department of the Treasury, or the 
                        Office of Management and Budget.
            ``(3) Responsibilities of commissioner of internal revenue 
        service.--The Commissioner of Internal Revenue shall establish 
        procedures requiring a formal response to all recommendations 
        submitted to the Commissioner by the Taxpayer Advocate.''
    (b) Conforming Amendments.--
            (1) Section 7811 (relating to taxpayer assistance orders) 
        is amended--
                    (A) by striking ``the Office of Ombudsman'' in 
                subsection (a) and inserting ``the Office of the 
                Taxpayer Advocate'', and
                    (B) by striking ``Ombudsman'' each place it appears 
                (including in the headings of subsections (e) and (f)) 
                and inserting ``Taxpayer Advocate''.
            (2) The heading for section 7802 is amended to read as 
        follows:

``SEC. 7802. COMMISSIONER OF INTERNAL REVENUE; ASSISTANT COMMISSIONERS; 
              TAXPAYER ADVOCATE.''

            (3) The table of sections for subchapter A of chapter 80 of 
        subtitle F is amended by striking the item relating to section 
        7802 and inserting the following new item:

                              ``Sec. 7802. Commissioner of Internal 
                                        Revenue; Assistant 
                                        Commissioners; Taxpayer 
                                        Advocate.''
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 1012. EXPANSION OF AUTHORITY TO ISSUE TAXPAYER ASSISTANCE ORDERS.

    (a) Taxpayer's Hardship.--Section 7811(a) (relating to authority to 
issue) is amended by striking ``significant''.
    (b) Terms of Orders.--Subsection (b) of section 7811 (relating to 
terms of taxpayer assistance orders) is amended--
            (1) by inserting ``within a specified time period'' after 
        ``the Secretary'', and
            (2) by inserting ``take any action as permitted by law,'' 
        after ``cease any action,''.
    (c) Limitation on Authority To Modify or Rescind.--Section 7811(c) 
(relating to authority to modify or rescind) is amended to read as 
follows:
    ``(c) Authority To Modify or Rescind.--Any Taxpayer Assistance 
Order issued by the Taxpayer Advocate under this section may be 
modified or rescinded only by the Taxpayer Advocate, the Commissioner, 
or any superior of either.''
    (d) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

     Subtitle B--Modifications to Installment Agreement Provisions

SEC. 1021. TAXPAYER'S RIGHT TO INSTALLMENT AGREEMENT.

    (a) In General.--Subsection (a) of section 6159 (relating to 
agreements for payment of tax liability in installments) is amended to 
read as follows:
    ``(a) In General.--
            ``(1) Authorization of agreements.--The Secretary is 
        authorized to enter into written agreements with any taxpayer 
        under which such taxpayer is allowed to satisfy liability for 
        payment of any tax in installment payments if the Secretary 
        determines that such agreement will facilitate collection of 
        such liability.
            ``(2) Agreement as a matter of right.--In the case of any 
        taxpayer other than a corporation, the Secretary shall enter 
        into such an agreement if--
                    ``(A) the taxpayer requests such an agreement,
                    ``(B) the tax liability is attributable to the tax 
                imposed under chapter 1 and is less than $10,000, and
                    ``(C) the taxpayer has paid any tax liability for 
                the 3 preceding taxable years at the time such 
                liability was due.
            ``(3) Notice.--The Secretary shall include in the 
        instructions for returns of the tax imposed under chapter 1 the 
        rights of taxpayers under this subsection and the steps 
        necessary to exercise those rights.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect on the date of the enactment of this Act.

SEC. 1022. RUNNING OF FAILURE TO PAY PENALTY SUSPENDED DURING PERIOD 
              INSTALLMENT AGREEMENT IN EFFECT.

    (a) General Rule.--Section 6651 (relating to penalty for failure to 
file tax return or to pay tax) is amended by adding at the end the 
following new subsection:
    ``(g) Treatment of Installment Agreements Under Section 6159.--If--
            ``(1) an agreement is entered into under section 6159 for 
        the payment of any tax in installments, and
            ``(2) the taxpayer requested the Secretary to enter into 
        the agreement on or before the due date (including extensions) 
        for the return of the tax,
the period during which such agreement is in effect shall be 
disregarded in determining the amount of any addition under paragraph 
(2) or (3) of subsection (a) with respect to such tax.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to installment agreements entered into after the date of the 
enactment of this Act.

SEC. 1023. NOTIFICATION OF REASONS FOR TERMINATION OR DENIAL OF 
              INSTALLMENT AGREEMENTS.

    (a) Terminations.--Subsection (b) of section 6159 (relating to 
extent to which agreements remain in effect) is amended by adding at 
the end the following new paragraph:
            ``(5) Notice requirements.--The Secretary may not take any 
        action under paragraph (2), (3), or (4) unless--
                    ``(A) a notice of such action is provided to the 
                taxpayer not later than the day 30 days before the date 
                of such action, and
                    ``(B) such notice includes an explanation why the 
                Secretary intends to take such action.
        The preceding sentence shall not apply in any case in which the 
        Secretary believes that collection of any tax to which an 
        agreement under this section relates is in jeopardy.''
    (b) Denials.--Section 6159 (relating to agreements for payment of 
tax liability in installments) is amended by adding at the end the 
following new subsection:
    ``(c) Notice Requirements for Denials.--The Secretary may not deny 
any request for an installment agreement under this section unless--
            ``(1) a notice of the proposed denial is provided to the 
        taxpayer not later than the day 30 days before the date of such 
        denial,
            ``(2) such notice includes an explanation why the Secretary 
        intends to deny such request, and
            ``(3) such notice includes a statement of the taxpayer's 
        right to administrative review under subsection (d).
The preceding sentence shall not apply in any case in which the 
Secretary believes that collection of any tax to which a request for an 
agreement under this section relates is in jeopardy.''
    (c) Conforming Amendment.--Paragraph (3) of section 6159(b) is 
amended to read as follows:
            ``(3) Subsequent change in financial conditions.--If the 
        Secretary makes a determination that the financial condition of 
        a taxpayer with whom the Secretary has entered into an 
        agreement under subsection (a) has significantly changed, the 
        Secretary may alter, modify, or terminate such agreement.''
    (d) Effective Date.--The amendments made by this section shall take 
effect on the date 6 months after the date of the enactment of this 
Act.

SEC. 1024. ADMINISTRATIVE REVIEW OF DENIAL OF REQUEST FOR, OR 
              TERMINATION OF, INSTALLMENT AGREEMENT.

    (a) General Rule.--Section 6159 (relating to agreements for payment 
of tax liability in installments), as amended by section 1023(b), is 
amended by adding at the end the following new subsection:
    ``(d) Administrative Review.--The Secretary shall establish 
procedures for an independent administrative review of denials of 
requests for, or terminations of, installment agreements under this 
section.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect on January 1, 1996.

                          Subtitle C--Interest

SEC. 1031. EXPANSION OF AUTHORITY TO ABATE INTEREST.

    (a) General Rule.--Paragraph (1) of section 6404(e) (relating to 
abatement of interest in certain cases) is amended--
            (1) by inserting ``unreasonable'' before ``error'' each 
        place it appears in subparagraphs (A) and (B), and
            (2) by striking ``in performing a ministerial act'' each 
        place it appears.
    (b) Mandatory Abatement for Small Taxpayers.--The first sentence of 
section 6404(e)(1) is amended by inserting ``in the case of a taxpayer 
not described in section 7430(c)(4)(A)(iii) and shall abate the 
assessment of such interest until the date demand for payment is made 
in the case of a taxpayer described in section 7430(c)(4)(A)(iii)'' 
before the period at the end.
    (c) Clerical Amendment.--The subsection heading for subsection (e) 
of section 6404 is amended by striking ``Assessments'' and inserting 
``Abatement''.
    (d) Effective Date.--The amendments made by this section shall 
apply to interest accruing with respect to deficiencies or payments for 
taxable years beginning after the date of the enactment of this Act.

SEC. 1032. EXTENSION OF INTEREST-FREE PERIOD FOR PAYMENT OF TAX AFTER 
              NOTICE AND DEMAND.

    (a) General Rule.--Paragraph (3) of section 6601(e) (relating to 
payments made within 10 days after notice and demand) is amended to 
read as follows:
            ``(3) Payments made within specified period after notice 
        and demand.--If notice and demand is made for payment of any 
        amount and if such amount is paid within 21 days (10 days if 
        the amount for which such notice and demand is made equals or 
        exceeds $100,000) after the date of such notice and demand, 
        interest under this section on the amount so paid shall not be 
        imposed for the period after the date of such notice and 
        demand.''
    (b) Conforming Amendment.--Paragraph (3) of section 6651(a) 
(relating to addition to tax for failure to file tax return or pay tax) 
is amended by striking ``10 days'' and inserting ``21 days (10 days if 
the amount for which such notice and demand is made equals or exceeds 
$100,000)''.
    (c) Effective Date.--The amendments made by this section shall 
apply in the case of any notice and demand given after December 31, 
1995.

                       Subtitle D--Joint Returns

SEC. 1041. DISCLOSURE OF COLLECTION ACTIVITIES.

    (a) General Rule.--Subsection (e) of section 6103 (relating to 
disclosure to persons having material interest) is amended by adding at 
the end the following new paragraph:
            ``(8) Disclosure of collection activities with respect to 
        joint return.--If any deficiency of tax with respect to a joint 
        return is assessed and the individuals filing such return are 
        no longer married or no longer reside in the same household, 
        upon request in writing of either of such individuals, the 
        Secretary may disclose in writing to the individual making the 
        request whether the Secretary has attempted to collect such 
        deficiency from such other individual, the general nature of 
        such collection activities, and the amount collected.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect on the date of the enactment of this Act.

SEC. 1042. JOINT RETURN MAY BE MADE AFTER SEPARATE RETURNS WITHOUT FULL 
              PAYMENT OF TAX.

    (a) General Rule.--Paragraph (2) of section 6013(b) (relating to 
limitations on filing of joint return after filing separate returns) is 
amended by striking subparagraph (A) and redesignating the following 
subparagraphs accordingly.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

                   Subtitle E--Collection Activities

SEC. 1051. MODIFICATIONS TO LIEN AND LEVY PROVISIONS.

    (a) Withdrawal of Certain Notices.--Section 6323 (relating to 
validity and priority against certain persons) is amended by adding at 
the end the following new subsection:
    ``(j) Withdrawal of Notice in Certain Circumstances.--
            ``(1) In general.--The Secretary may withdraw a notice of a 
        lien filed under this section and this chapter shall be applied 
        as if the withdrawn notice had not been filed, if the Secretary 
        determines that--
                    ``(A) the filing of such notice was premature or 
                otherwise not in accordance with administrative 
                procedures of the Secretary,
                    ``(B) the taxpayer has entered into an agreement 
                under section 6159 to satisfy the tax liability for 
                which the lien was imposed by means of installment 
payments, unless such agreement provides otherwise,
                    ``(C) the withdrawal of such notice will facilitate 
                the collection of the tax liability, or
                    ``(D) with the consent of the taxpayer or the 
                Taxpayer Advocate, the withdrawal of such notice would 
                be in the best interests of the taxpayer (as determined 
                by the Taxpayer Advocate) and the United States.
        Any such withdrawal shall be made by filing notice at the same 
        office as the withdrawn notice. A copy of such notice of 
        withdrawal shall be provided to the taxpayer.
            ``(2) Notice to credit agencies, etc.--Upon written request 
        by the taxpayer with respect to whom a notice of a lien was 
        withdrawn under paragraph (1), the Secretary shall promptly 
        make reasonable efforts to notify credit reporting agencies, 
        and any financial institution or creditor whose name and 
        address is specified in such request, of the withdrawal of such 
        notice. Any such request shall be in such form as the Secretary 
        may prescribe.''
    (b) Return of Levied Property in Certain Cases.--Section 6343 
(relating to authority to release levy and return property) is amended 
by adding at the end the following new subsection:
    ``(d) Return of Property in Certain Cases.--If--
            ``(1) any property has been levied upon, and
            ``(2) the Secretary determines that--
                    ``(A) the levy on such property was premature or 
                otherwise not in accordance with administrative 
                procedures of the Secretary,
                    ``(B) the taxpayer has entered into an agreement 
                under section 6159 to satisfy the tax liability for 
                which the levy was imposed by means of installment 
                payments, unless such agreement provides otherwise,
                    ``(C) the return of such property will facilitate 
                the collection of the tax liability, or
                    ``(D) with the consent of the taxpayer or the 
                Taxpayer Advocate, the return of such property would be 
                in the best interests of the taxpayer (as determined by 
                the Taxpayer Advocate) and the United States,
the provisions of subsection (b) shall apply in the same manner as if 
such property had been wrongly levied upon, except that no interest 
shall be allowed under subsection (c).''
    (c) Modifications in Certain Levy Exemption Amounts.--
            (1) Fuel, etc.--Paragraph (2) of section 6334(a) (relating 
        to fuel, provisions, furniture, and personal effects exempt 
        from levy) is amended--
                    (A) by striking ``If the taxpayer is the head of a 
                family, so'' and inserting ``So'', and
                    (B) by striking ``$1,650 ($1,550 in the case of 
                levies issued during 1989)'' and inserting ``$1,750''.
            (2) Books, etc.--Paragraph (3) of section 6334(a) (relating 
        to books and tools of a trade, business, or profession exempt 
        from levy) is amended by striking ``$1,100 ($1,050 in the case 
        of levies issued during 1989)'' and inserting ``$1,250''.
            (3) Indexed for inflation.--Section 6334 (relating to 
        property exempt from levy) is amended by adding at the end the 
        following new subsection:
    ``(f) Inflation Adjustments.--
            ``(1) In general.--In the case of any calendar year 
        beginning after 1996, each dollar amount referred to in 
        paragraphs (2) and (3) of subsection (a) 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 such calendar year, by 
                substituting `calendar year 1995' for `calendar year 
                1992' in subparagraph (B) thereof.
            ``(2) Rounding.--If any dollar amount after being increased 
        under paragraph (1) is not a multiple of $10, such dollar 
        amount shall be rounded to the nearest multiple of $10 (or, if 
        such dollar amount is a multiple of $5, such dollar amount 
        shall be increased to the next higher multiple of $10).''
    (d) Effective Dates.--
            (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) Exempt amounts.--The amendments made by subsection (c) 
        shall take effect with respect to levies issued after December 
        31, 1995.

SEC. 1052. OFFERS-IN-COMPROMISE.

    (a) General Rule.--Subsection (a) of section 7122 (relating to 
compromises) is amended by adding at the end the following new 
sentence: ``The Secretary may make such a compromise in any case where 
the Secretary determines that such compromise would be in the best 
interests of the United States.''
    (b) Review Requirements.--Subsection (b) of section 7122 (relating 
to records) is amended by striking ``$500.'' and inserting ``$50,000. 
However, such compromise shall be subject to continuing quality review 
by the Secretary.''
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 1053. NOTIFICATION OF EXAMINATION.

    (a) In General.--Section 7605 (relating to restrictions on 
examination of taxpayer) is amended by redesignating subsection (c) as 
subsection (d) and by inserting after subsection (b) the following new 
subsection:
    ``(c) Notification Requirement.--No examination described in 
subsection (a) shall be made unless the Secretary notifies the taxpayer 
in writing by mail to an address determined under section 6212(b) that 
the taxpayer is under examination and provides the taxpayer with an 
explanation of the process as described in section 7521(b)(1). The 
preceding sentence shall not apply in the case of any examination if 
the Secretary determines that--
            ``(1) such examination is in connection with a criminal 
        investigation or is with respect to a tax the collection of 
        which is in jeopardy, or
            ``(2) the application of the preceding sentence would be 
        inconsistent with national security needs or would interfere 
        with the effective conduct of a confidential law enforcement or 
        foreign counterintelligence activity.''
    (b) Conforming Amendment.--Paragraph (1) of section 7521(b) 
(relating to safeguards) is amended by striking ``or at''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 1054. INCREASE IN LIMIT ON RECOVERY OF CIVIL DAMAGES FOR 
              UNAUTHORIZED COLLECTION ACTIONS.

    (a) General Rule.--Subsection (b) of section 7433 (relating to 
damages) is amended by striking ``$100,000'' and inserting 
``$1,000,000''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to actions by officers or employees of the Internal Revenue 
Service after the date of the enactment of this Act.

SEC. 1055. SAFEGUARDS RELATING TO DESIGNATED SUMMONS.

    (a) Standard of Review.--Subparagraph (A) of section 6503(k)(2) 
(defining designated summons) is amended by redesignating clauses (i) 
and (ii) as clauses (ii) and (iii), respectively, and by inserting 
before clause (ii) (as so redesignated) the following new clause:
                            ``(i) the issuance of such summons is 
                        preceded by a review of such issuance by the 
                        regional counsel of the Office of Chief Counsel 
                        for the region in which the examination of the 
                        corporation is being conducted,''.
    (b) Notice Requirements for Issuance.--Section 6503(k) is amended 
by adding at the end the following new paragraph:
            ``(4) Notice requirements.--With respect to any summons 
        referred to in paragraph (1)(A) issued to any person other than 
        the corporation, the Secretary shall promptly notify the 
        corporation, in writing, that such summons has been issued with 
        respect to such corporation's return of tax.''
    (c) Effective Date.--The amendments made by this section shall 
apply to summons issued after the date of the enactment of this Act.

                    Subtitle F--Information Returns

SEC. 1061. PHONE NUMBER OF PERSON PROVIDING PAYEE STATEMENTS REQUIRED 
              TO BE SHOWN ON SUCH STATEMENT.

    (a) General Rule.--The following provisions are each amended by 
striking ``name and address'' and inserting ``name, address, and phone 
number of the information contact'':
            (1) Section 6041(d)(1).
            (2) Section 6041A(e)(1).
            (3) Section 6042(c)(1).
            (4) Section 6044(e)(1).
            (5) Section 6045(b)(1).
            (6) Section 6049(c)(1)(A).
            (7) Section 6050B(b)(1).
            (8) Section 6050H(d)(1).
            (9) Section 6050I(e)(1).
            (10) Section 6050J(e).
            (11) Section 6050K(b)(1).
            (12) Section 6050N(b)(1).
    (b) Effective Date.--The amendments made by subsection (a) shall 
apply to statements required to be furnished after December 31, 1995 
(determined without regard to any extension).

SEC. 1062. CIVIL DAMAGES FOR FRAUDULENT FILING OF INFORMATION RETURNS.

    (a) General Rule.--Subchapter B of chapter 76 (relating to 
proceedings by taxpayers and third parties) is amended by redesignating 
section 7434 as section 7435 and by inserting after section 7433 the 
following new section:

``SEC. 7434. CIVIL DAMAGES FOR FRAUDULENT FILING OF INFORMATION 
              RETURNS.

    ``(a) In General.--If any person willfully files a false or 
fraudulent information return with respect to payments purported to be 
made to any other person, such other person may bring a civil action 
for damages against the person so filing such return.
    ``(b) Damages.--In any action brought under subsection (a), upon a 
finding of liability on the part of the defendant, the defendant shall 
be liable to the plaintiff in an amount equal to the greater of $5,000 
or the sum of--
            ``(1) any actual damages sustained by the plaintiff as a 
        proximate result of the filing of the false or fraudulent 
        information return (including any costs attributable to 
        resolving deficiencies asserted as a result of such filing), 
        and
            ``(2) the costs of the action.
    ``(c) Period for Bringing Action.--Notwithstanding any other 
provision of law, an action to enforce the liability created under this 
section may be brought without regard to the amount in controversy and 
may be brought only within the later of--
            ``(1) 6 years after the date of the filing of the false or 
        fraudulent information return, or
            ``(2) 1 year after the date such false or fraudulent 
        information return would have been discovered by exercise of 
        reasonable care.
    ``(d) Copy of Complaint Filed With IRS.--Any person bringing an 
action under subsection (a) shall provide a copy of the complaint to 
the Internal Revenue Service upon the filing of such complaint with the 
court.
    ``(e) Finding of Court To Include Correct Amount of Payment.--The 
judgment of the court in an action brought under subsection (a) shall 
include a finding of the correct amount which should have been reported 
in the information return.
    ``(f) Information Return.--For purposes of this section, the term 
`information return' means any statement described in section 
6724(d)(1)(A).''
    (b) Clerical Amendment.--The table of sections for subchapter B of 
chapter 76 is amended by striking the item relating to section 7434 and 
inserting the following:

                              ``Sec. 7434. Civil damages for fraudulent 
                                        filing of information returns.
                              ``Sec. 7435. Cross references.''
    (c) Effective Date.--The amendments made by this section shall 
apply to false or fraudulent information returns filed after the date 
of the enactment of this Act.

SEC. 1063. REQUIREMENT TO CONDUCT REASONABLE INVESTIGATIONS OF 
              INFORMATION RETURNS.

    (a) General Rule.--Section 6201 (relating to assessment authority) 
is amended by redesignating subsection (d) as subsection (e) and by 
inserting after subsection (c) the following new subsection:
    ``(d) Required Reasonable Investigation of Information Returns.--If 
a taxpayer asserts a reasonable dispute with respect to any item of 
income reported on an information return filed with the Secretary under 
chapter 61 by a third party, the Secretary, when making a determination 
of a deficiency based on such information return, shall have the burden 
of proof with respect to such determination unless the Secretary has 
conducted a reasonable investigation to corroborate the accuracy of 
such information return.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect on the date of the enactment of this Act.

  Subtitle G--Modifications to Penalty for Failure To Collect and Pay 
                                Over Tax

SEC. 1071. PRELIMINARY NOTICE REQUIREMENT.

    (a) In General.--Section 6672 (relating to failure to collect and 
pay over tax, or attempt to evade or defeat tax) is amended by 
redesignating subsection (b) as subsection (c) and by inserting after 
subsection (a) the following new subsection:
    ``(b) Preliminary Notice Requirement.--
            ``(1) In general.--No penalty shall be imposed under 
        subsection (a) unless the Secretary notifies the taxpayer in 
        writing by mail to an address as determined under section 
        6212(b) that the taxpayer shall be subject to an assessment of 
        such penalty.
            ``(2) Timing of notice.--The mailing of the notice 
        described in paragraph (1) shall precede any notice and demand 
        of any penalty under subsection (a) by at least 60 days.
            ``(3) Statute of limitations.--If a notice described in 
        paragraph (1) with respect to any penalty is mailed before the 
        expiration of the period provided by section 6501 for the 
        assessment of such penalty (determined without regard to this 
        paragraph), the period provided by such section for the 
        assessment of such penalty shall not expire before the date 90 
        days after the date on which such notice was mailed.
            ``(4) Exception for jeopardy.--This subsection shall not 
        apply if the Secretary finds that the collection of the penalty 
        is in jeopardy.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to assessments made after December 31, 1995.

SEC. 1072. DISCLOSURE OF CERTAIN INFORMATION WHERE MORE THAN 1 PERSON 
              SUBJECT TO PENALTY.

    (a) In General.--Subsection (e) of section 6103 (relating to 
disclosure to persons having material interest), as amended by section 
1041(a), is amended by adding at the end the following new paragraph:
            ``(9) Disclosure of certain information where more than 1 
        person subject to penalty under section 6672.--If the Secretary 
        determines that a person is liable for a penalty under section 
        6672(a) with respect to any failure, upon request in writing of 
        such person, the Secretary shall disclose in writing to such 
        person--
                    ``(A) the name of any other person whom the 
                Secretary has determined to be liable for such penalty 
                with respect to such failure, and
                    ``(B) whether the Secretary has attempted to 
                collect such penalty from such other person, the 
                general nature of such collection activities, and the 
                amount collected.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect on the date of the enactment of this Act.

SEC. 1073. PENALTIES UNDER SECTION 6672.

    (a) Public Information Requirements.--The Secretary of the Treasury 
or the Secretary's delegate (hereafter in this section referred to as 
the ``Secretary'') shall take such actions as may be appropriate to 
ensure that employees are aware of their responsibilities under the 
Federal tax depository system, the circumstances under which employees 
may be liable for the penalty imposed by section 6672 of the Internal 
Revenue Code of 1986, and the responsibility to promptly report to the 
Internal Revenue Service any failure referred to in subsection (a) of 
such section 6672. Such actions shall include--
            (1) printing of a warning on deposit coupon booklets and 
        the appropriate tax returns that certain employees may be 
liable for the penalty imposed by such section 6672, and
            (2) the development of a special information packet.
    (b) Board Members of Tax-Exempt Organizations.--
            (1) Voluntary board members.--
                    (A) In general.--The penalty under section 6672 of 
                the Internal Revenue Code of 1986 shall not be imposed 
                on unpaid, volunteer members of any board of trustees 
                or directors of an organization referred to in section 
                501 of such Code to the extent such members are solely 
                serving in an honorary capacity, do not participate in 
                the day-to-day or financial operations of the 
                organization, and do not have actual knowledge of the 
                failure on which such penalty is imposed.
                    (B) Application of paragraph.--This paragraph shall 
                not apply if it results in no person being held liable 
                for the penalty described in section 6672(a) of the 
                Internal Revenue Code of 1986.
            (2) Development of explanatory materials.--The Secretary 
        shall develop materials explaining the circumstances under 
        which board members of tax-exempt organizations (including 
        voluntary and honorary members) may be subject to penalty under 
        section 6672 of such Code. Such materials shall be made 
        available to tax-exempt organizations.
            (3) IRS instructions.--The Secretary shall clarify the 
        instructions to Internal Revenue Service employees on the 
        application of the penalty under section 6672 of such Code with 
        regard to voluntary members of boards of trustees or directors 
        of tax- exempt organizations.
    (c) Prompt Notification.--To the maximum extent practicable, the 
Secretary shall notify all persons who have failed to make timely and 
complete deposit of any taxes described in section 6672 of the Internal 
Revenue Code of 1986 of such failure within 30 days after the return 
was filed reflecting such failure or after the date on which the 
Secretary is first aware of such failure. If the person failing to make 
the deposit is not an individual, the Secretary shall notify the entity 
subject to such deposit requirement and that entity shall notify, 
within 15 days of the notification by the Secretary, all officers, 
general partners, trustees, or other managers of the failure.

             Subtitle H--Awarding of Costs and Certain Fees

SEC. 1081. MOTION FOR DISCLOSURE OF INFORMATION.

    Paragraph (4) of section 7430(c) (defining prevailing party) is 
amended by adding at the end the following new subparagraph:
                    ``(C) Motion for disclosure of information.--Once a 
                taxpayer substantially prevails as described in 
                subparagraph (A)(ii), the taxpayer may file a motion 
                for an order requiring the disclosure (within a 
                reasonable period of time specified by the court) of 
                all information and copies of relevant records in the 
                possession of the Internal Revenue Service with respect 
                to such taxpayer's case and the substantial 
                justification for the position taken by the Internal 
                Revenue Service.''

SEC. 1082. INCREASED LIMIT ON ATTORNEY FEES.

    Paragraph (1) of section 7430(c) (defining reasonable litigation 
costs) is amended--
            (1) by striking ``$75'' in clause (iii) of subparagraph (B) 
        and inserting ``$110'',
            (2) by striking ``an increase in the cost of living or'' in 
        clause (iii) of subparagraph (B), and
            (3) by adding after clause (iii) the following:
        ``In the case of any calendar year beginning after 1995, the 
        dollar amount referred to in clause (iii) shall be increased by 
        an amount equal to such dollar amount multiplied by the cost-
        of-living adjustment determined under section 1(f)(3) for such 
        calendar year, by substituting `calendar year 1994' for 
        `calendar year 1992' in subparagraph (B) thereof. If any dollar 
        amount after being increased under the preceding sentence is 
        not a multiple of $10, such dollar amount shall be rounded to 
        the nearest multiple of $10 (or, if such dollar amount is a 
        multiple of $5, such dollar amount shall be increased to the 
        next higher multiple of $10).''

SEC. 1083. FAILURE TO AGREE TO EXTENSION NOT TAKEN INTO ACCOUNT.

    Paragraph (1) of section 7430(b) (relating to requirement that 
administrative remedies be exhausted) is amended by adding at the end 
the following new sentence: ``Any failure to agree to an extension of 
the time for the assessment of any tax shall not be taken into account 
for purposes of determining whether the prevailing party meets the 
requirements of the preceding sentence.''

SEC. 1084. AUTHORITY FOR COURT TO AWARD REASONABLE ADMINISTRATIVE 
              COSTS.

    Section 7430(c)(7)(B) is amended to read as follows:
                    ``(B) the position taken in an administrative 
                proceeding to which subsection (a) applies.''

SEC. 1085. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply in the case of 
proceedings commenced after the date of the enactment of this Act.

                      Subtitle I--Other Provisions

SEC. 1091. REQUIRED CONTENT OF CERTAIN NOTICES.

    (a) General Rule.--Subsection (a) of section 7522 (relating to 
content of tax due, deficiency, and other notices) is amended by 
striking ``shall describe the basis for, and identify'' and inserting 
``shall set forth the adjustments which are the basis for, and shall 
identify''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to notices sent after the date 6 months after the date of the 
enactment of this Act.

SEC. 1092. TREATMENT OF SUBSTITUTE RETURNS UNDER SECTION 6651.

    (a) General Rule.--Section 6651 (relating to failure to file tax 
return or to pay tax), as amended by section 1022(a), is amended by 
adding at the end the following new subsection:
    ``(h) Treatment of Returns Prepared by Secretary Under Section 
6020(b).--In the case of any return made by the Secretary under section 
6020(b)--
            ``(1) such return shall be disregarded for purposes of 
        determining the amount of the addition under paragraph (1) of 
        subsection (a), but
            ``(2) such return shall be treated as the return filed by 
        the taxpayer for purposes of determining the amount of the 
        addition under paragraphs (2) and (3) of subsection (a).''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply in the case of any return the due date for which (determined 
without regard to extensions) is after the date of the enactment of 
this Act.

SEC. 1093. RELIEF FROM RETROACTIVE APPLICATION OF TREASURY DEPARTMENT 
              REGULATIONS.

    (a) In General.--Subsection (b) of section 7805 (relating to rules 
and regulations) is amended to read as follows:
    ``(b) Retroactivity of Regulations.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, no temporary, proposed, or final regulation 
        relating to the internal revenue laws shall apply to any 
        taxable period ending before the earliest of the following 
        dates:
                    ``(A) The date on which such regulation is filed 
                with the Federal Register.
                    ``(B) In the case of any final regulation, the date 
                on which any proposed or temporary regulation to which 
                such final regulation relates was filed with the 
                Federal Register.
                    ``(C) The date on which any notice substantially 
                describing the expected contents of any temporary, 
                proposed, or final regulation is issued to the public.
            ``(2) Prevention of abuse.--The Secretary may provide that 
        any regulation may take effect or apply retroactively to 
        prevent abuse of a statute to which the regulation relates.
            ``(3) Correction of procedural defects.--The Secretary may 
        provide that any regulation may apply retroactively to correct 
        a procedural defect in the issuance of any prior regulation.
            ``(4) Internal regulations.--The limitation of paragraph 
        (1) shall not apply to any regulation relating to internal 
        Treasury Department policies, practices, or procedures.
            ``(5) Congressional authorization.--The limitation of 
        paragraph (1) may be superseded by a legislative grant from 
        Congress authorizing the Secretary to prescribe the effective 
        date with respect to any regulation.
            ``(6) Election to apply retroactively.--The Secretary may 
        provide for any taxpayer to elect to apply any regulation 
        before the dates specified in paragraph (1).
            ``(7) Application to rulings.--The Secretary may prescribe 
        the extent, if any, to which any ruling (including any judicial 
        decision or any administrative determination other than by 
        regulation) relating to the internal revenue laws shall be 
        applied without retroactive effect.''
    (b) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendment made by subsection (a) shall apply with respect to--
                    (A) any temporary or proposed regulation filed on 
                or after January 5, 1993, and
                    (B) any temporary or proposed regulation filed 
                before January 5, 1993, and filed as a final regulation 
                after such date.
            (2) Special rule.--Section 7805(b)(2) of the Internal 
        Revenue Code of 1986 (as added by subsection (a)) shall apply 
        only to statutes enacted on or after the date of the enactment 
        of this Act.

SEC. 1094. REQUIRED NOTICE OF CERTAIN PAYMENTS.

    If any payment is received by the Secretary of the Treasury or the 
Secretary's delegate (hereafter in this section referred to as the 
``Secretary'') from any taxpayer and the Secretary cannot associate 
such payment with any outstanding tax liability of such taxpayer, the 
Secretary shall make reasonable efforts to notify the taxpayer of such 
inability within 60 days after the receipt of such payment.

SEC. 1095. UNAUTHORIZED ENTICEMENT OF INFORMATION DISCLOSURE.

    (a) In General.--Subchapter B of chapter 76 (relating to 
proceedings by taxpayers and third parties), as amended by section 
1062(a), is amended by redesignating section 7435 as section 7436 and 
by inserting after section 7434 the following new section:

``SEC. 7435. CIVIL DAMAGES FOR UNAUTHORIZED ENTICEMENT OF INFORMATION 
              DISCLOSURE.

    ``(a) In General.--If any officer or employee of the United States 
intentionally compromises the determination or collection of any tax 
due from an attorney, certified public accountant, or enrolled agent 
representing a taxpayer in exchange for information conveyed by the 
taxpayer to the attorney, certified public accountant, or enrolled 
agent for purposes of obtaining advice concerning the taxpayer's tax 
liability, such taxpayer may bring a civil action for damages against 
the United States in a district court of the United States. Such civil 
action shall be the exclusive remedy for recovering damages resulting 
from such actions.
    ``(b) Damages.--In any action brought under subsection (a), upon a 
finding of liability on the part of the defendant, the defendant shall 
be liable to the plaintiff in an amount equal to the lesser of $500,000 
or the sum of--
            ``(1) actual, direct economic damages sustained by the 
        plaintiff as a proximate result of the information disclosure, 
        and
            ``(2) the costs of the action.
Damages shall not include the taxpayer's liability for any civil or 
criminal penalties, or other losses attributable to incarceration or 
the imposition of other criminal sanctions.
    ``(c) Payment Authority.--Claims pursuant to this section shall be 
payable out of funds appropriated under section 1304 of title 31, 
United States Code.
    ``(d) Period for Bringing Action.--Notwithstanding any other 
provision of law, an action to enforce liability created under this 
section may be brought without regard to the amount in controversy and 
may be brought only within 2 years after the date the actions creating 
such liability would have been discovered by exercise of reasonable 
care.
    ``(e) Mandatory Stay.--Upon a certification by the Commissioner or 
the Commissioner's delegate that there is an ongoing investigation or 
prosecution of the taxpayer, the district court before which an action 
under this section is pending, shall stay all proceedings with respect 
to such action pending the conclusion of the investigation or 
prosecution.
    ``(f) Crime-Fraud Exception.--Subsection (a) shall not apply to 
information conveyed to an attorney, certified public accountant, or 
enrolled agent for the purpose of perpetrating a fraud or crime.''
    (b) Clerical Amendment.--The table of sections for subchapter B of 
chapter 76, as amended by section 1062(b), is amended by striking the 
item relating to section 7435 and by adding at the end the following 
new items:

                              ``Sec. 7435. Civil damages for 
                                        unauthorized enticement of 
                                        information disclosure.
                              ``Sec. 7436. Cross references.''
    (c) Effective Date.--The amendments made by this section shall 
apply to actions after the date of the enactment of this Act.

                Subtitle J--Form Modifications; Studies

SEC. 1100. DEFINITIONS.

    For purposes of this subtitle:
            (1) Secretary.--The term ``Secretary'' means the Secretary 
        of the Treasury or his delegate.
            (2) 1986 code.--The term ``1986 Code'' means the Internal 
        Revenue Code of 1986.
            (3) Tax-writing committees.--The term ``tax-writing 
        Committees'' means the Committee on Ways and Means of the House 
        of Representatives and the Committee on Finance of the Senate.

                     CHAPTER 1--FORM MODIFICATIONS

SEC. 1101. EXPLANATION OF CERTAIN PROVISIONS.

    (a) General Rule.--The Secretary shall take such actions as may be 
appropriate to ensure that taxpayers are aware of the provisions of the 
1986 Code permitting payment of tax in installments, extensions of time 
for payment of tax, and compromises of tax liability. Such actions 
shall include revising the instructions for filing income tax returns 
so that such instructions include an explanation of--
            (1) the procedures for requesting the benefits of such 
        provisions, and
            (2) the terms and conditions under which the benefits of 
        such provisions are available.
    (b) Collection Notices.--In any notice of an underpayment of tax or 
proposed underpayment of tax sent by the Secretary to any taxpayer, the 
Secretary shall include a notification of the availability of the 
provisions of sections 6159, 6161, and 7122 of the 1986 Code.

SEC. 1102. IMPROVED PROCEDURES FOR NOTIFYING SERVICE OF CHANGE OF 
              ADDRESS OR NAME.

    The Secretary shall provide improved procedures for taxpayers to 
notify the Secretary of changes in names and addresses. Not later than 
June 30, 1997, the Secretary shall institute procedures for timely 
updating all Internal Revenue Service records with change-of-address 
information provided to the Secretary by taxpayers.

SEC. 1103. RIGHTS AND RESPONSIBILITIES OF DIVORCED INDIVIDUALS.

    The Secretary shall include in the Internal Revenue Service 
publication entitled ``Your Rights As A Taxpayer'' a section on the 
rights and responsibilities of divorced individuals.

                           CHAPTER 2--STUDIES

SEC. 1111. PILOT PROGRAM FOR APPEAL OF ENFORCEMENT ACTIONS.

    (a) General Rule.--The Secretary shall establish a 1-year pilot 
program for appeals of enforcement actions (including lien, levy, and 
seizure actions) to the Appeals Division of the Internal Revenue 
Service--
            (1) where the deficiency was assessed without actual 
        knowledge of the taxpayer,
            (2) where the deficiency was assessed without an 
        opportunity for administrative appeal, and
            (3) in other appropriate circumstances.
    (b) Report.--Not later than June 30, 1997, the Secretary shall 
submit to the tax-writing Committees a report on the pilot program 
established under subsection (a), together with such recommendations as 
he may deem advisable.

SEC. 1112. STUDY ON TAXPAYERS WITH SPECIAL NEEDS.

    (a) General Rule.--The Secretary shall conduct a study on ways to 
assist the elderly, physically impaired, foreign-language speaking, and 
other taxpayers with special needs to comply with the internal revenue 
laws.
    (b) Report.--Not later than June 30, 1996, the Secretary shall 
submit to the tax-writing Committees a report on the study conducted 
under subsection (a), together with such recommendations as he may deem 
advisable.

SEC. 1113. REPORTS ON TAXPAYER-RIGHTS EDUCATION PROGRAM.

    Not later than April 1, 1996, the Secretary shall submit a report 
to the tax-writing Committees on the scope and content of the Internal 
Revenue Service's taxpayer-rights education program for its officers 
and employees. Not later than June 30, 1996, the Secretary shall submit 
a report to the tax-writing Committees on the effectiveness of the 
program referred to in the preceding sentence.

SEC. 1114. BIENNIAL REPORTS ON MISCONDUCT BY INTERNAL REVENUE SERVICE 
              EMPLOYEES.

    Not later than June 30, 1996, and during June of each second 
calendar year thereafter, the Secretary shall report to the tax-writing 
Committees on all cases involving complaints about misconduct of 
Internal Revenue Service employees and the disposition of such 
complaints.

SEC. 1115. STUDY OF NOTICES OF DEFICIENCY.

    (a) General Rule.--The Comptroller General shall conduct a study 
on--
            (1) the effectiveness of current Internal Revenue Service 
        efforts to notify taxpayers with regard to tax deficiencies 
        under section 6212 of the 1986 Code,
            (2) the number of registered or certified letters and other 
        notices returned to the Internal Revenue Service as 
        undeliverable,
            (3) any followup action taken by the Internal Revenue 
        Service to locate taxpayers who did not receive actual notice,
            (4) the effect that failures to receive notice of such 
        deficiencies have on taxpayers, and
            (5) recommendations to improve Internal Revenue Service 
        notification of taxpayers.
    (b) Report.--Not later than June 30, 1996, the Comptroller General 
shall submit to the tax-writing Committees a report on the study 
conducted under subsection (a), together with such recommendations as 
he may deem advisable.

SEC. 1116. NOTICE AND FORM ACCURACY STUDY.

    (a) General Rule.--The Comptroller General shall conduct annual 
studies of the accuracy of 25 of the most commonly used Internal 
Revenue Service forms, notices, and publications. In conducting any 
such study, the Comptroller General shall examine the suitability and 
usefulness of Internal Revenue Service telephone numbers on Internal 
Revenue Service notices and shall solicit and consider the comments of 
organizations representing taxpayers, employers, and tax professionals.
    (b) Reports.--The Comptroller General shall submit to the tax-
writing Committees a report on each study conducted under subsection 
(a), together with such recommendations as he may deem advisable. The 
first such report shall be submitted not later than June 30, 1996.

  TITLE II--INCREASE OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
                          EMPLOYED INDIVIDUALS

SEC. 2001. INCREASE OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
              EMPLOYED INDIVIDUALS.

    (a) Increase in Deduction.--Section 162(l) is amended--
            (1) by striking ``30 percent'' in paragraph (1) and 
        inserting ``the applicable percentage'', and
            (2) by adding at the end the following new paragraph:
            ``(6) Applicable percentage.--For purposes of paragraph 
        (1), the applicable percentage shall be determined as follows:

                ``For taxable years
                                                         The applicable
                  beginning in:
                                                         percentage is:
                    1996.............................         75       
                    1997 and thereafter..............      100.''      
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

              TITLE III--S CORPORATION REFORM ACT OF 1995

SEC. 3001. SHORT TITLE.

    This title may be cited as the ``S Corporation Reform Act of 
1995''.

           Subtitle A--Eligible Shareholders of S Corporation

                   CHAPTER 1--NUMBER OF SHAREHOLDERS

SEC. 3101. S CORPORATIONS PERMITTED TO HAVE 50 SHAREHOLDERS.

    Subparagraph (A) of section 1361(b)(1) (defining small business 
corporation) is amended by striking ``35 shareholders'' and inserting 
``50 shareholders''.

SEC. 3102. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

    Paragraph (1) of section 1361(c) (relating to special rules for 
applying subsection (b)) is amended to read as follows:
            ``(1) Members of family treated as 1 shareholder.--
                    ``(A) In general.--For purposes of subsection 
                (b)(1)(A)--
                            ``(i) except as provided in clause (ii), a 
                        husband and wife (and their estates) shall be 
                        treated as 1 shareholder, and
                            ``(ii) in the case of a family with respect 
                        to which an election is in effect under 
                        subparagraph (E), all members of the family 
                        shall be treated as 1 shareholder.
                    ``(B) Members of the family.--For purposes of 
                subparagraph (A)(ii), the term `members of the family' 
                means the lineal descendants of the common ancestor and 
                the spouses (or former spouses) of such lineal 
                descendants or common ancestor.
                    ``(C) Common ancestor.--For purposes of this 
                paragraph, an individual shall not be considered a 
                common ancestor if, as of the later of the effective 
                date of this paragraph or the time the election under 
                section 1362(a) is made, the individual is more than 6 
                generations removed from the youngest generation of 
                shareholders.
                    ``(D) Effect of adoption, etc.--In determining 
                whether any relationship specified in subparagraph (B) 
                or (C) exists, the rules of section 152(b)(2) shall 
                apply.
                    ``(E) Election.--An election under subparagraph 
                (A)(ii)--
                            ``(i) must be made with the consent of all 
                        shareholders,
                            ``(ii) shall remain in effect until 
                        terminated, and
                            ``(iii) shall apply only with respect to 1 
                        family in any corporation.''

               CHAPTER 2--PERSONS ALLOWED AS SHAREHOLDERS

SEC. 3111. CERTAIN EXEMPT ORGANIZATIONS.

    (a) Certain Exempt Organizations Allowed To Be Shareholders.--
            (1) In general.--Subparagraph (B) of section 1361(b)(1) 
        (defining small business corporation) is amended to read as 
        follows:
                    ``(B) have as a shareholder a person (other than an 
                estate, a trust described in subsection (c)(2), or an 
                organization described in subsection (c)(7)) who is not 
                an individual,''.
            (2) Eligible exempt organizations.--Section 1361(c) 
        (relating to special rules for applying subsection (b)) is 
        amended by adding at the end the following new paragraph:
            ``(7) Certain exempt organizations permitted as 
        shareholders.--For purposes of subsection (b)(1)(B), an 
        organization described in section 401(a) or 501(c)(3) may be a 
        shareholder in an S corporation.''
    (b) Contributions of S Corporation Stock.--Section 170(e)(1) 
(relating to certain contributions of ordinary income and capital gain 
property) is amended by adding at the end the following sentence: ``For 
purposes of applying this paragraph in the case of a charitable 
contribution of stock in an S corporation, rules similar to the rules 
of section 751 shall apply in determining whether gain on such stock 
would have been long-term capital gain if such stock were sold by the 
taxpayer.''
    (c) Special Rules Applicable to Partnerships and S Corporations.--
            (1) In general.--Subsection (c) of section 512 (relating to 
        unrelated business tax income) is amended--
                    (A) by inserting ``or S corporation'' after 
                ``partnership'' each place it appears in paragraphs (1) 
                and (3),
                    (B) by inserting ``or shareholder'' after 
                ``member'' in paragraph (1), and
                    (C) by inserting ``and S Corporations'' after 
                ``Partnerships'' in the heading.
            (2) Reporting requirement.--Section 6037 (relating to 
        return of S corporation) is amended by adding at the end the 
        following new subsection:
    ``(c) Separate Statement of Items of Unrelated Business Taxable 
Income.--In the case of any S corporation regularly carrying on a trade 
or business (within the meaning of section 512(c)(1)), the information 
required under subsection (b) to be furnished to any shareholder 
described in section 1361(c)(7) shall include such information as is 
necessary to enable the shareholder to compute its pro rata share of 
the corporation's income or loss from the trade or business in 
accordance with section 512(a)(1), but without regard to the 
modifications described in paragraphs (8) through (15) of section 
512(b).''

SEC. 3112. FINANCIAL INSTITUTIONS.

    Subparagraph (B) of section 1361(b)(2) (defining ineligible 
corporation) is amended to read as follows:
                    ``(B) a financial institution which uses the 
                reserve method of accounting for bad debts described in 
                section 585 or 593,''.

SEC. 3113. NONRESIDENT ALIENS.

    (a) Nonresident Aliens Allowed To Be Shareholders.--
            (1) In general.--Paragraph (1) of section 1361(b) (defining 
        small business corporation) is amended--
                    (A) by adding ``and'' at the end of subparagraph 
                (B),
                    (B) by striking subparagraph (C), and
                    (C) by redesignating subparagraph (D) as 
                subparagraph (C).
            (2) Conforming amendments.--Paragraphs (4) and (5)(A) of 
        section 1361(c) (relating to special rules for applying 
        subsection (b)) are each amended by striking ``subsection 
        (b)(1)(D)'' and inserting ``subsection (b)(1)(C)''.
    (b) Nonresident Alien Shareholder Treated as Engaged in Trade or 
Business Within United States.--
            (1) In general.--Section 875 is amended--
                    (A) by striking ``and'' at the end of paragraph 
                (1),
                    (B) by striking the period at the end of paragraph 
                (2) and inserting ``, and'', and
                    (C) by adding at the end the following new 
                paragraph:
            ``(3) a nonresident alien individual shall be considered as 
        being engaged in a trade or business within the United States 
        if the S corporation of which such individual is a shareholder 
        is so engaged.''
            (2) Application of withholding tax on nonresident alien 
        shareholders.--Section 1446 (relating to withholding tax on 
        foreign partners' share of effectively connected income) is 
        amended by redesignating subsection (f) as subsection (g) and 
        by inserting after subsection (e) the following new subsection:
    ``(f) S Corporation Treated as Partnership, Etc.--For purposes of 
this section--
            ``(1) an S corporation shall be treated as a partnership,
            ``(2) the shareholders of such corporation shall be treated 
        as partners of such partnership, and
            ``(3) any reference to section 704 shall be treated as a 
        reference to section 1366.''
            (3) Conforming amendments.--
                    (A) The heading of section 875 is amended to read 
                as follows:

``SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND TRUSTS; S 
              CORPORATIONS.''

                    (B) The heading of section 1446 is amended to read 
                as follows:

``SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS' AND S CORPORATE 
              SHAREHOLDERS' SHARE OF EFFECTIVELY CONNECTED INCOME.''

            (4) Clerical amendments.--
                    (A) The item relating to section 875 in the table 
                of sections for subpart A of part II of subchapter N of 
                chapter 1 is amended to read as follows:

``Sec. 875. Partnerships; beneficiaries of estates and trusts; S 
                            corporations.''
                    (B) The item relating to section 1446 in the table 
                of sections for subchapter A of chapter 3 is amended to 
                read as follows:

``Sec. 1446. Withholding tax on foreign partners' and S corporate 
                            shareholders' share of effectively 
                            connected income.''
    (c) Permanent Establishment of Partners and S Corporation 
Shareholders.--Section 894 (relating to income affected by treaty) is 
amended by adding at the end the following new subsection:
    ``(c) Permanent Establishment of Partners and S Corporation 
Shareholders.--If a partnership or S corporation has a permanent 
establishment in the United States (within the meaning of a treaty to 
which the United States is a party) at any time during a taxable year 
of such entity, a nonresident alien individual or foreign corporation 
which is a partner in such partnership, or a nonresident alien 
individual who is a shareholder in such S corporation, shall be treated 
as having a permanent establishment in the United States for purposes 
of such treaty.''

SEC. 3114. ELECTING SMALL BUSINESS TRUSTS.

    (a) General Rule.--Subparagraph (A) of section 1361(c)(2) (relating 
to certain trusts permitted as shareholders) is amended by inserting 
after clause (iv) the following new clause:
                            ``(v) An electing small business trust.''
    (b) Current Beneficiaries Treated as Shareholders.--Subparagraph 
(B) of section 1361(c)(2) is amended by adding at the end the following 
new clause:
                            ``(v) In the case of a trust described in 
                        clause (v) of subparagraph (A), each potential 
                        current beneficiary of such trust shall be 
                        treated as a shareholder; except that, if for 
                        any period there is no potential current 
                        beneficiary of such trust, such trust shall be 
                        treated as the shareholder during such 
                        period.''
    (c) Electing Small Business Trust Defined.--Section 1361 (defining 
S corporation) is amended by adding at the end the following new 
subsection:
    ``(e) Electing Small Business Trust Defined.--
            ``(1) Electing small business trust.--For purposes of this 
        section--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `electing small business 
                trust' means any trust if--
                            ``(i) such trust does not have as a 
                        beneficiary any person other than an 
                        individual, an estate, or an organization 
                        described in section 401(a) or 501(c)(3),
                            ``(ii) no interest in such trust was 
                        acquired by purchase, and
                            ``(iii) an election under this subsection 
                        applies to such trust.
                    ``(B) Certain trusts not eligible.--The term 
                `electing small business trust' shall not include--
                            ``(i) any qualified subchapter S trust (as 
                        defined in subsection (d)(3)) if an election 
                        under subsection (d)(2) applies to any 
                        corporation the stock of which is held by such 
                        trust, and
                            ``(ii) any trust exempt from tax under this 
                        subtitle.
                    ``(C) Purchase.--For purposes of subparagraph (A), 
                the term `purchase' means any acquisition if the basis 
                of the property acquired is determined under section 
                1012.
            ``(2) Potential current beneficiary.--For purposes of this 
        section, the term `potential current beneficiary' means, with 
        respect to any period, any person who at any time during such 
        period is entitled to, or at the discretion of any person may 
        receive, a distribution from the principal or income of the 
        trust. If a trust disposes of all of the stock which it holds 
        in an S corporation, then, with respect to such corporation, 
        the term `potential current beneficiary' does not include any 
        person who first met the requirements of the preceding sentence 
        during the 60-day period ending on the date of such 
        disposition.
            ``(3) Election.--An election under this subsection shall be 
        made by the trustee in such manner and form, and at such time, 
        as the Secretary may prescribe. Any such election shall apply 
        to the taxable year of the trust for which made and all 
        subsequent taxable years of such trust unless revoked with the 
        consent of the Secretary.
            ``(4) Cross reference.--

                                ``For special treatment of electing 
small business trusts, see section 641(d).''
    (d) Taxation of Electing Small Business Trusts.--Section 641 
(relating to imposition of tax on trusts) is amended by adding at the 
end the following new subsection:
    ``(d) Special Rules for Taxation of Electing Small Business 
Trusts.--
            ``(1) In general.--For purposes of this chapter--
                    ``(A) the portion of any electing small business 
                trust which consists of stock in 1 or more S 
                corporations shall be treated as a separate trust, and
                    ``(B) the amount of the tax imposed by this chapter 
                on such separate trust shall be determined with the 
                modifications of paragraph (2).
            ``(2) Modifications.--For purposes of paragraph (1), the 
        modifications of this paragraph are the following:
                    ``(A) Except as provided in section 1(h), the 
                amount of the tax imposed by section 1(e) shall be 
                determined by using the highest rate of tax set forth 
                in section 1(e).
                    ``(B) The exemption amount under section 55(d) 
                shall be zero.
                    ``(C) The only items of income, loss, deduction, or 
                credit to be taken into account are the following:
                            ``(i) The items required to be taken into 
                        account under section 1366.
                            ``(ii) Any gain or loss from the 
                        disposition of stock in an S corporation.
                            ``(iii) To the extent provided in 
                        regulations, State or local income taxes or 
                        administrative expenses to the extent allocable 
                        to items described in clauses (i) and (ii).
                No deduction or credit shall be allowed for any amount 
                not described in this paragraph, and no item described 
                in this paragraph shall be apportioned to any 
                beneficiary.
                    ``(D) No amount shall be allowed under paragraph 
                (1) or (2) of section 1211(b).
            ``(3) Treatment of remainder of trust and distributions.--
        For purposes of determining--
                    ``(A) the amount of the tax imposed by this chapter 
                on the portion of any electing small business trust not 
                treated as a separate trust under paragraph (1), and
                    ``(B) the distributable net income of the entire 
                trust,
        the items referred to in paragraph (2)(C) shall be excluded. 
        Except as provided in the preceding sentence, this subsection 
        shall not affect the taxation of any distribution from the 
        trust.
            ``(4) Treatment of unused deductions where termination of 
        separate trust.--If a portion of an electing small business 
        trust ceases to be treated as a separate trust under paragraph 
        (1), any carryover or excess deduction of the separate trust 
        which is referred to in section 642(h) shall be taken into 
        account by the entire trust.
            ``(5) Electing small business trust.--For purposes of this 
        subsection, the term `electing small business trust' has the 
        meaning given such term by section 1361(e)(1).''

                      CHAPTER 3--OTHER PROVISIONS

SEC. 3121. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN TRUSTS.

    Subparagraph (A) of section 1361(c)(2) (relating to certain trusts 
permitted as shareholders) is amended--
            (1) by striking ``60-day period'' each place it appears in 
        clauses (ii) and (iii) and inserting ``2-year period'', and
            (2) by striking the last sentence in clause (ii).

     Subtitle B--Qualification and Eligibility Requirements for S 
                              Corporations

                     CHAPTER 1--ONE CLASS OF STOCK

SEC. 3201. ISSUANCE OF PREFERRED STOCK PERMITTED.

    (a) In General.--Section 1361(c), as amended by section 3111(a)(2), 
is amended by adding at the end the following new paragraph:
            ``(8) Treatment of qualified preferred stock.--
                    ``(A) In general.--Notwithstanding subsection 
                (b)(1)(D), an S corporation may issue qualified 
                preferred stock.
                    ``(B) Qualified preferred stock defined.--For 
                purposes of this paragraph, the term `qualified 
                preferred stock' means stock described in section 
                1504(a)(4) which is issued to a person eligible to hold 
                common stock of an S corporation.
                    ``(C) Distributions.--A distribution (not in part 
                or full payment in exchange for stock) made by the 
                corporation with respect to qualified preferred stock 
                shall be includible as interest income of the holder 
                and deductible to the corporation as interest expense 
                in computing taxable income under section 1363(b) in 
                the year such distribution is received.''
    (b) Conforming Amendments.--
            (1) Subparagraph (C) of section 1361(b)(1), as redesignated 
        by section 3113(a)(1)(C), is amended by inserting ``except as 
        provided in paragraph (8),'' before ``have''.
            (2) Subsection (a) of section 1366 is amended by adding at 
        the end the following new paragraph:
            ``(3) Allocation with respect to qualified preferred 
        stock.--The holders of qualified preferred stock shall not, 
        with respect to such stock, be allocated any of the items 
        described in paragraph (1).''

SEC. 3202. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE HARBOR DEBT.

    Subparagraph (B) of section 1361(c)(5) (defining straight debt) is 
amended by adding ``and'' at the end of clause (i) and by striking 
clauses (ii) and (iii) and inserting the following:
                            ``(ii) in any case in which the terms of 
                        such promise include a provision under which 
                        the obligation to pay may be converted 
                        (directly or indirectly) into stock of the 
                        corporation, such terms, taken as a whole, are 
                        substantially the same as the terms which could 
                        have been obtained on the effective date of the 
                        promise from a person which is not a related 
                        person (within the meaning of section 
                        465(b)(3)(C)) to the S corporation or its 
                        shareholders, and
                            ``(iii) the creditor is--
                                    ``(I) an individual,
                                    ``(II) an estate,
                                    ``(III) a trust described in 
                                paragraph (2), or
                                    ``(IV) a person which is actively 
                                and regularly engaged in the business 
                                of lending money.''

                 CHAPTER 2--ELECTIONS AND TERMINATIONS

SEC. 3211. RULES RELATING TO INADVERTENT TERMINATIONS AND INVALID 
              ELECTIONS.

    (a) General Rule.--Subsection (f) of section 1362 (relating to 
inadvertent terminations) is amended to read as follows:
    ``(f) Inadvertent Invalid Elections or Terminations.--If--
            ``(1) an election under subsection (a) by any corporation--
                    ``(A) was not effective for the taxable year for 
                which made (determined without regard to subsection 
                (b)(2)) by reason of a failure to meet the requirements 
                of section 1361(b) or to obtain shareholder consents, 
                or
                    ``(B) was terminated under paragraph (2) of 
                subsection (d),
            ``(2) the Secretary determines that the circumstances 
        resulting in such ineffectiveness or termination were 
        inadvertent,
            ``(3) no later than a reasonable period of time after 
        discovery of the circumstances resulting in such 
        ineffectiveness or termination, steps were taken--
                    ``(A) so that the corporation is a small business 
                corporation, or
                    ``(B) to acquire the required shareholder consents, 
                and
            ``(4) the corporation, and each person who was a 
        shareholder in the corporation at any time during the period 
        specified pursuant to this subsection, agrees to make such 
        adjustments (consistent with the treatment of the corporation 
        as an S corporation) as may be required by the Secretary with 
        respect to such period,
then, notwithstanding the circumstances resulting in such 
ineffectiveness or termination, such corporation shall be treated as an 
S corporation during the period specified by the Secretary.''
    (b) Late Elections.--Subsection (b) of section 1362 is amended by 
adding at the end the following new paragraph:
            ``(5) Authority to treat late elections as timely.--If--
                    ``(A) an election under subsection (a) is made for 
                any taxable year (determined without regard to 
                paragraph (3)) after the date prescribed by this 
                subsection for making such election for such taxable 
                year, and
                    ``(B) the Secretary determines that there was 
                reasonable cause for the failure to timely make such 
                election,
        the Secretary may treat such election as timely made for such 
        taxable year (and paragraph (3) shall not apply).''
    (c) Automatic Waivers.--The Secretary of the Treasury shall provide 
for an automatic waiver procedure under section 1362(f) of the Internal 
Revenue Code of 1986 in cases in which the Secretary determines 
appropriate.
    (d) Effective Date.--The amendments made by subsection (a) and (b) 
shall apply with respect to elections for taxable years beginning after 
December 31, 1982.

SEC. 3212. AGREEMENT TO TERMINATE YEAR.

    Paragraph (2) of section 1377(a) (relating to pro rata share) is 
amended to read as follows:
            ``(2) Election to terminate year.--
                    ``(A) In general.--Under regulations prescribed by 
                the Secretary, if any shareholder terminates the 
                shareholder's interest in the corporation during the 
                taxable year and all affected shareholders agree to the 
                application of this paragraph, paragraph (1) shall be 
                applied to the affected shareholders as if the taxable 
                year consisted of 2 taxable years the first of which 
                ends on the date of the termination.
                    ``(B) Affected shareholders.--For purposes of 
                subparagraph (A), the term `affected shareholders' 
                means the shareholder whose interest is terminated and 
                all shareholders to whom such shareholder has 
                transferred shares during the taxable year. If such 
                shareholder has transferred shares to the corporation, 
                the term `affected shareholders' shall include all 
                persons who are shareholders during the taxable year.''

SEC. 3213. EXPANSION OF POST-TERMINATION TRANSITION PERIOD.

    (a) In General.--Paragraph (1) of section 1377(b) (relating to 
post-termination transition period) is amended by striking ``and'' at 
the end of subparagraph (A), by redesignating subparagraph (B) as 
subparagraph (C), and by inserting after subparagraph (A) the following 
new subparagraph:
                    ``(B) the 120-day period beginning on the date of 
                any determination pursuant to an audit of the taxpayer 
                which follows the termination of the corporation's 
                election and which adjusts a subchapter S item of 
                income, loss, or deduction of the corporation arising 
                during the S period (as defined in section 1368(e)(2)), 
                and''.
    (b) Determination Defined.--Paragraph (2) of section 1377(b) is 
amended by striking subparagraphs (A) and (B), by redesignating 
subparagraph (C) as subparagraph (B), and by inserting before 
subparagraph (B) (as so redesignated) the following new subparagraph:
                    ``(A) a determination as defined in section 
                1313(a), or''.
    (c) Repeal of Special Audit Provisions for Subchapter S Items.--
            (1) General rule.--Subchapter D of chapter 63 (relating to 
        tax treatment of subchapter S items) is hereby repealed.
            (2) Consistent treatment required.--Section 6037 (relating 
        to return of S corporation), as amended by section 3111(c)(2), 
        is amended by adding at the end the following new subsection:
    ``(d) Shareholder's Return Must Be Consistent With Corporate Return 
or Secretary Notified of Inconsistency.--
            ``(1) In general.--A shareholder of an S corporation shall, 
        on such shareholder's return, treat a subchapter S item in a 
        manner which is consistent with the treatment of such item on 
the corporate return.
            ``(2) Notification of inconsistent treatment.--
                    ``(A) In general.--In the case of any subchapter S 
                item, if--
                            ``(i)(I) the corporation has filed a return 
                        but the shareholder's treatment on his return 
                        is (or may be) inconsistent with the treatment 
                        of the item on the corporate return, or
                            ``(II) the corporation has not filed a 
                        return, and
                            ``(ii) the shareholder files with the 
                        Secretary a statement identifying the 
                        inconsistency,
                paragraph (1) shall not apply to such item.
                    ``(B) Shareholder receiving incorrect 
                information.--A shareholder shall be treated as having 
                complied with clause (ii) of subparagraph (A) with 
                respect to a subchapter S item if the shareholder--
                            ``(i) demonstrates to the satisfaction of 
                        the Secretary that the treatment of the 
                        subchapter S item on the shareholder's return 
                        is consistent with the treatment of the item on 
                        the schedule furnished to the shareholder by 
                        the corporation, and
                            ``(ii) elects to have this paragraph apply 
                        with respect to that item.
            ``(3) Effect of failure to notify.--In any case--
                    ``(A) described in subparagraph (A)(i)(I) of 
                paragraph (2), and
                    ``(B) in which the shareholder does not comply with 
                subparagraph (A)(ii) of paragraph (2),
        any adjustment required to make the treatment of the items by 
        such shareholder consistent with the treatment of the items on 
        the corporate return shall be treated as arising out of 
        mathematical or clerical errors and assessed according to 
        section 6213(b)(1). Paragraph (2) of section 6213(b) shall not 
        apply to any assessment referred to in the preceding sentence.
            ``(4) Subchapter s item.--For purposes of this subsection, 
        the term `subchapter S item' means any item of an S corporation 
        to the extent that regulations prescribed by the Secretary 
        provide that, for purposes of this subtitle, such item is more 
        appropriately determined at the corporation level than at the 
        shareholder level.
            ``(5) Addition to tax for failure to comply with section.--

                                ``For addition to tax in the case of a 
shareholder's negligence in connection with, or disregard of, the 
requirements of this section, see part II of subchapter A of chapter 
68.''
            (3) Conforming amendments.--
                    (A) Section 1366 is amended by striking subsection 
                (g).
                    (B) Subsection (b) of section 6233 is amended to 
                read as follows:
    ``(b) Similar Rules in Certain Cases.--If a partnership return is 
filed for any taxable year but it is determined that there is no entity 
for such taxable year, to the extent provided in regulations, rules 
similar to the rules of subsection (a) shall apply.''
                    (C) The table of subchapters for chapter 63 is 
                amended by striking the item relating to subchapter D.

SEC. 3214. REPEAL OF EXCESSIVE PASSIVE INVESTMENT INCOME AS A 
              TERMINATION EVENT.

    (a) In General.--Section 1362(d) (relating to termination) is 
amended by striking paragraph (3).
    (b) Modification of Tax Imposed on Excessive Passive Investment 
Income.--
            (1) Increase in threshold.--Subsections (a)(2) and 
        (b)(1)(A)(i) of section 1375 (relating to tax imposed when 
        passive investment income of a corporation having subchapter C 
        earnings and profits exceeds 25 percent of gross receipts) are 
        each amended by striking ``25 percent'' and inserting ``50 
        percent''.
            (2) Tax rate increase after third consecutive year.--
        Section 1375 is amended by redesignating subsections (c) and 
        (d) as subsections (d) and (e), respectively, and by inserting 
        after subsection (b) the following new subsection:
    ``(c) Tax Rate Increase After Third Consecutive Year.--
            ``(1) In general.--If an S corporation is described in 
        subsection (a) for more than 3 consecutive taxable years, then 
        the rate of tax imposed under subsection (a) with respect to 
        each succeeding consecutive taxable year (if any) shall be 
        determined under the following table:

                                    The rate of tax imposed under
                                        subsection (a) shall be
                                        equal to such rate of tax for
                                        the 3rd taxable year, plus
                                        the following percentage
``In the case of the--                  points:
    4th taxable year..............................                  10 
    5th taxable year..............................                  20 
    6th taxable year..............................                  30 
    7th taxable year..............................                  40 
    8th taxable year and thereafter...............                  50.
            ``(2) Years taken into account.--No tax shall be increased 
        under paragraph (1) for any taxable year beginning before 
        January 1, 1996.''
    (c) Conforming Amendments.--
            (1) Section 1362(f)(1) is amended by striking ``or (3)''.
            (2) Subsection (b) of section 1375 is amended by striking 
        paragraphs (3) and (4) and inserting the following new 
        paragraphs:
            ``(3) Subchapter c earnings and profits.--The term 
        `subchapter C earnings and profits' means earnings and profits 
        of any corporation for any taxable year with respect to which 
        an election under section 1362(a) (or under section 1372 of 
        prior law) was not in effect.
            ``(4) Gross receipts from sales of capital assets (other 
        than stock and securities).--In the case of dispositions of 
        capital assets (other than stock and securities), gross 
        receipts from such dispositions shall be taken into account 
        only to the extent of the capital gain net income therefrom.
            ``(5) Passive investment income defined.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the term `passive investment income' 
                means gross receipts derived from royalties, rents, 
                dividends, interest, and annuities.
                    ``(B) 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(1).
                    ``(C) 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)).
                    ``(D) Special rule for options and commodity 
                dealings.--
                            ``(i) In general.--In the case of any 
                        options dealer or commodities dealer, passive 
                        investment income shall be determined by not 
                        taking into account any gain or loss (in the 
                        normal course of the taxpayer's activity of 
                        dealing in or trading section 1256 contracts) 
                        from any section 1256 contract or property 
                        related to such a contract.
                            ``(ii) Definitions.--For purposes of this 
                        subparagraph--
                                    ``(I) Options dealer.--The term 
                                `options dealer' has the meaning given 
                                such term by section 1256(g)(8).
                                    ``(II) Commodities dealer.--The 
                                term `commodities dealer' means a 
                                person who is actively engaged in 
                                trading section 1256 contracts and is 
                                registered with a domestic board of 
                                trade which is designated as a contract 
                                market by the Commodities Futures 
                                Trading Commission.
                                    ``(III) Section 1256 contract.--The 
                                term `section 1256 contract' has the 
                                meaning given to such term by section 
                                1256(b).
                    ``(E) Coordination with section 1374.--The amount 
                of passive investment income shall be determined by not 
                taking into account any recognized built-in gain or 
                loss of the S corporation for any taxable year in the 
                recognition period. Terms used in the preceding 
                sentence shall have the same respective meaning as when 
                used in section 1374.''
            (3) The heading for section 1375 is amended by striking 
        ``25'' and inserting ``50''.
            (4) The table of sections for part III of subchapter S of 
        chapter 1 is amended by striking ``25'' in the item relating to 
        section 1375 and inserting ``50''.
            (5) Clause (i) of section 1042(c)(4)(A) is amended by 
        striking ``section 1362(d)(3)(D)'' and inserting ``section 
        1375(b)(5)''.

                      CHAPTER 3--OTHER PROVISIONS

SEC. 3221. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.

    (a) In General.--Paragraph (2) of section 1361(b) (defining 
ineligible corporation), as amended by section 3112, is amended by 
striking subparagraph (A) and by redesignating subparagraphs (B), (C), 
(D), and (E) as subparagraphs (A), (B), (C), and (D), respectively.
    (b) Treatment of Certain Wholly Owned S Corporation Subsidiaries.--
Section 1361(b) (defining small business corporation) is amended by 
adding at the end the following new subsection:
            ``(3) Treatment of certain wholly owned subsidiaries.--
                    ``(A) In general.--For purposes of this title--
                            ``(i) a corporation which is a qualified 
                        subchapter S subsidiary shall not be treated as 
                        a separate corporation, and
                            ``(ii) all assets, liabilities, and items 
                        of income, deduction, and credit of a qualified 
                        subchapter S subsidiary shall be treated as 
                        assets, liabilities, and such items (as the 
                        case may be) of the S corporation.
                    ``(B) Qualified subchapter s subsidiary.--For 
                purposes of this subsection, the term `qualified 
                subchapter S subsidiary' means any corporation 100 
                percent of the stock of which is held by an S 
                corporation as of the later of the effective date of 
                the S election of the S corporation or the acquisition 
                of the subsidiary, and at all times thereafter.
                    ``(C) Treatment of terminations of qualified 
                subchapter s subsidiary status.--For purposes of this 
                subtitle, if any corporation which was a qualified 
                subchapter S subsidiary ceases to meet the requirements 
                of subparagraph (B), such corporation shall be treated 
                as a new corporation acquiring all of its assets (and 
                assuming all of its liabilities) immediately before 
                such cessation from the S corporation in exchange for 
                its stock.''.
    (c) Certain Dividends Not Treated as Passive Investment Income.--
Section 1375(b)(5) (defining passive investment income), as added by 
section 3214(c)(2), is amended by adding at the end the following new 
subparagraph:
                    ``(F) 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.''
    (d) Conforming Amendments.--
            (1) Subsection (c) of section 1361, as amended by sections 
        3111(a)(2) and 3201(a), is amended by striking paragraph (6) 
        and redesignating paragraphs (7) and (8) as paragraphs (6) and 
        (7), respectively.
            (2) Subsection (b) of section 1504 (defining includible 
        corporation) is amended by adding at the end the following new 
        paragraph:
            ``(8) An S corporation.''

SEC. 3222. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS.

    (a) Adjustments for Distributions Taken Into Account Before 
Losses.--
            (1) Subparagraph (A) of section 1366(d)(1) (relating to 
        losses and deductions cannot exceed shareholder's basis in 
        stock and debt) is amended by striking ``paragraph (1)'' and 
        inserting ``paragraphs (1) and (2)(A)''.
            (2) Subsection (d) of section 1368 (relating to certain 
        adjustments taken into account) is amended by adding at the end 
        the following new sentence:
``In the case of any distribution made during any taxable year, the 
adjusted basis of the stock shall be determined with regard to the 
adjustments provided in paragraph (1) of section 1367(a) for the 
taxable year.''
    (b) Accumulated Adjustments Account.--Paragraph (1) of section 
1368(e) (relating to accumulated adjustments account) is amended by 
adding at the end the following new subparagraph:
            ``(C) Net loss for year disregarded.--
                    ``(i) In general.--In applying this section to 
                distributions made during any taxable year, the amount 
                in the accumulated adjustments account as of the close 
                of such taxable year shall be determined without regard 
                to any net negative adjustment for such taxable year.
                    ``(ii) Net negative adjustment.--For purposes of 
                clause (i), the term `net negative adjustment' means, 
                with respect to any taxable year, the excess (if any) 
                of--
                            ``(I) the reductions in the account for the 
                        taxable year (other than for distributions), 
                        over
                            ``(II) the increases in such account for 
                        such taxable year.''
    (c) Conforming Amendments.--Subparagraph (A) of section 1368(e)(1) 
is amended--
            (1) by striking ``as provided in subparagraph (B)'' and 
        inserting ``as otherwise provided in this paragraph'', and
            (2) by striking ``section 1367(b)(2)(A)'' and inserting 
        ``section 1367(a)(2)''.

SEC. 3223. CONSENT DIVIDEND FOR AAA BYPASS ELECTION.

    Section 1368(e)(3) (relating to election to distribute earnings 
first) is amended by adding at the end the following new subparagraph:
                    ``(C) Consent dividend.--Under regulations 
                prescribed by the Secretary, an S corporation may, 
                subject to the election under this paragraph, consent 
                to treat as a distribution the amount specified in such 
                consent, to the extent such amount does not exceed the 
                accumulated earnings and profits of such corporation. 
                The amount so specified shall be considered--
                            ``(i) as distributed in money by the 
                        corporation to its shareholders on the last day 
                        of the taxable year of the corporation and as 
                        contributed to the capital of the corporation 
                        by the shareholders on such day, and
                            ``(ii) if any such shareholder is an 
                        organization described in section 511(a)(2), as 
                        unrelated business taxable income (as defined 
                        in section 512) to such shareholder.''

SEC. 3224. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER C.

    Subsection (a) of section 1371 (relating to application of 
subchapter C rules) is amended to read as follows:
    ``(a) Application of Subchapter C Rules.--Except as otherwise 
provided in this title, and except to the extent inconsistent with this 
subchapter, subchapter C shall apply to an S corporation and its 
shareholders.''

SEC. 3225. ELIMINATION OF PRE-1983 EARNINGS AND PROFITS.

    (a) In General.--If--
            (1) a corporation was an electing small business 
        corporation under subchapter S of chapter 1 of the Internal 
        Revenue Code of 1986 for any taxable year beginning before 
        January 1, 1983, and
            (2) such corporation is an S corporation under subchapter S 
        of chapter 1 of such Code for its first taxable year beginning 
        after December 31, 1995,
the amount of such corporation's accumulated earnings and profits (as 
of the beginning of such first taxable year) 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 such subchapter S.
    (b) Conforming Amendments.--
            (1)(A) Subsection (a) of section 1375 is amended by 
        striking ``subchapter C'' in paragraph (1) and inserting 
        ``accumulated''.
            (B) Subsection (b) of section 1375, as amended by section 
        3214(c)(2), is amended by striking paragraph (3) and by 
        redesignating paragraphs (4) and (5) as paragraphs (3) and (4), 
        respectively.
            (C) The section heading for section 1375 is amended by 
        striking ``subchapter c'' and inserting ``accumulated''.
            (D) The table of sections for part III of subchapter S of 
        chapter 1 is amended by striking ``subchapter C'' in the item 
        relating to section 1375 and inserting ``accumulated''.
            (2) Clause (i) of section 1042(c)(4)(A), as amended by 
        section 3214(c)(5), is amended by striking ``section 
        1375(b)(5)'' and inserting ``section 1375(b)(4)''.

SEC. 3226. ALLOWANCE OF CHARITABLE CONTRIBUTIONS OF INVENTORY AND 
              SCIENTIFIC PROPERTY.

    (a) In General.--Section 170(e) (relating to certain contributions 
of ordinary income and capital gain property) is amended--
            (1) by striking ``(other than a corporation which is an S 
        corporation)'' in paragraph (3)(A), and
            (2) by striking clause (i) of paragraph (4)(D) and by 
        redesignating clauses (ii) and (iii) of such paragraph as 
        clauses (i) and (ii), respectively.
    (b) Stock Basis Adjustment.--Paragraph (1) of section 1367(a) 
(relating to adjustments to basis of stock of shareholders, etc.) is 
amended by striking ``and'' at the end of subparagraph (B), by striking 
the period at the end of subparagraph (C) and inserting ``, and'', and 
by adding at the end the following new subparagraph:
                    ``(D) the excess of the deductions for charitable 
                contributions over the basis of the property 
                contributed.''

SEC. 3227. C CORPORATION RULES TO APPLY FOR FRINGE BENEFIT PURPOSES.

    (a) In General.--Section 1372 (relating to partnership rules to 
apply for fringe benefit purposes) is repealed.
    (b) Partnership Rules To Apply For Health Insurance Costs of 
Certain S Corporation Shareholders.--Paragraph (5) of section 162(l) is 
amended to read as follows:
            ``(5) Treatment of certain s corporation shareholders.--
                    ``(A) In general.--This subsection shall apply in 
                the case of any 2-percent shareholder of an S 
                corporation, except that--
                            ``(i) for purposes of this subsection, such 
                        shareholder's wages (as defined in section 
                        3121) from the S corporation shall be treated 
                        as such shareholder's earned income (within the 
                        meaning of section 401(c)(1)), and
                            ``(ii) there shall be such adjustments in 
                        the application of this subsection as the 
                        Secretary may by regulations prescribe.
                    ``(B) 2-percent shareholder defined.--For purposes 
                of this paragraph, the term `2-percent shareholder' 
                means any person who owns (or is considered as owning 
                within the meaning of section 318) on any day during 
                the taxable year of the S corporation more than 2 
                percent of the outstanding stock of such corporation or 
                stock possessing more than 2 percent of the total 
                combined voting power of all stock of such 
                corporation.''
    (b) Conforming Amendment.--The table of sections for part III of 
subchapter S of chapter 1 is amended by striking the item relating to 
section 1372.

           Subtitle C--Taxation of S Corporation Shareholders

SEC. 3301. UNIFORM TREATMENT OF OWNER-EMPLOYEES UNDER PROHIBITED 
              TRANSACTION RULES.

    The last sentence of section 4975(d) (relating to exemptions from 
prohibited transactions) is amended by striking ``a shareholder-
employee (as defined in section 1379, as in effect on the day before 
the date of the enactment of the Subchapter S Revision Act of 1982),''.

SEC. 3302. TREATMENT OF LOSSES TO SHAREHOLDERS.

    (a) Treatment of Losses in Liquidations.--Section 331 (relating to 
gain or loss to shareholders in corporate liquidations) is amended by 
redesignating subsection (c) as subsection (d) and by inserting after 
subsection (b) the following new subsection:
    ``(c) Losses on Liquidations of S Corporation.--
            ``(1) In general.--The portion of any loss recognized by a 
        shareholder of an S corporation (as defined in section 
        1361(a)(1)) on amounts received by such shareholder in a 
        distribution in complete liquidation of such S corporation 
        which does not exceed the ordinary income basis of stock of 
        such S corporation in the hands of such shareholder shall not 
        be treated as a loss from the sale or exchange of a capital 
        asset but shall be treated as an ordinary loss.
            ``(2) Ordinary income basis.--For purposes of this 
        subsection, the ordinary income basis of stock of an S 
        corporation in the hands of a shareholder of such S corporation 
        shall be an amount equal to the portion of such shareholder's 
        basis in such stock which is equal to the aggregate increases 
        in such basis under section 1367(a)(1) resulting from such 
        shareholder's pro rata share of ordinary income of such S 
        corporation attributable to the complete liquidation.''
    (b) Carryover of Disallowed Losses and Deductions Under At-Risk 
Rules Allowed.--Paragraph (3) of section 1366(d) (relating to carryover 
of disallowed losses and deductions to post-termination transition 
period) is amended by adding at the end the following new subparagraph:
                    ``(D) At-risk limitations.--To the extent that any 
                increase in adjusted basis described in subparagraph 
                (B) would have increased the shareholder's amount at 
                risk under section 465 if such increase had occurred on 
                the day preceding the commencement of the post-
                termination transition period, rules similar to the 
                rules described in subparagraphs (A) through (C) shall 
                apply to any losses disallowed by reason of section 
                465(a).''

                       Subtitle D--Effective Date

SEC. 3401. EFFECTIVE DATE.

    (a) In General.--Except as otherwise provided in this title, the 
amendments made by this title shall apply to taxable years beginning 
after December 31, 1995.
    (b) Treatment of Certain Elections Under Prior Law.--For purposes 
of section 1362(g) of the Internal Revenue Code of 1986 (relating to 
election after termination), any termination under section 1362(d) of 
such Code (as in effect on the day before the date of the enactment of 
this Act) shall not be taken into account.

                    TITLE IV--PENSION SIMPLIFICATION

       Subtitle A--Simplification of Nondiscrimination Provisions

SEC. 4000. SHORT TITLE.

    This title may be cited as the ``Pension Simplification Act of 
1995''.

SEC. 4001. DEFINITION OF HIGHLY COMPENSATED EMPLOYEES; REPEAL OF FAMILY 
              AGGREGATION.

    (a) In General.--Paragraph (1) of section 414(q) (defining highly 
compensated employee) is amended to read as follows:
            ``(1) In general.--The term `highly compensated employee' 
        means any employee who--
                    ``(A) was a 5-percent owner at any time during the 
                year or the preceding year,
                    ``(B) had compensation for the preceding year from 
                the employer in excess of $80,000, or
                    ``(C) was the most highly compensated officer of 
                the employer for the preceding year.
        The Secretary shall adjust the $80,000 amount under 
        subparagraph (B) at the same time and in the same manner as 
        under section 415(d), except that the base period shall be the 
        calendar quarter beginning October 1, 1995.''
    (b) Special Rule Where No Employee Has Compensation Over Specified 
Amount.--Paragraph (2) of section 414(q) is amended to read as follows:
            ``(2) Special rule if no employee has compensation over 
        specified amount.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), if a defined benefit plan or a 
                defined contribution plan meets the requirements of 
                sections 401(a)(4) and 410(b) with respect to the 
                availability of contributions, benefits, and other plan 
                features, then for all other purposes, subparagraphs 
                (A) and (C) of paragraph (1) shall not apply to such 
                plan.
                    ``(B) Exception.--Subparagraph (A) shall not apply 
                to a plan to the extent provided in regulations that 
                are prescribed by the Secretary to prevent the evasion 
                of the purposes of this paragraph.''
    (c) Repeal of Family Aggregation Rules.--
            (1) In general.--Paragraph (6) of section 414(q) is hereby 
        repealed.
            (2) Compensation limit.--Paragraph (17)(A) of section 
        401(a) is amended by striking the last sentence.
            (3) Deduction.--Subsection (l) of section 404 is amended by 
        striking the last sentence.
    (d) Conforming Amendments.--
            (1) Paragraphs (4), (5), (8), and (12) of section 414(q) 
        are hereby repealed.
            (2)(A) Section 414(r) is amended by adding at the end the 
        following new paragraph:
            ``(9) Excluded employees.--For purposes of this subsection, 
        the following employees shall be excluded:
                    ``(A) Employees who have not completed 6 months of 
                service.
                    ``(B) Employees who normally work less than 17\1/2\ 
                hours per week.
                    ``(C) Employees who normally work not more than 6 
                months during any year.
                    ``(D) Employees who have not attained the age of 
                21.
                    ``(E) Except to the extent provided in regulations, 
                employees who are included in a unit of employees 
                covered by an agreement which the Secretary of Labor 
                finds to be a collective bargaining agreement between 
                employee representatives and the employer.
        Except as provided by the Secretary, the employer may elect to 
        apply subparagraph (A), (B), (C), or (D) by substituting a 
        shorter period of service, smaller number of hours or months, 
        or lower age for the period of service, number of hours or 
        months, or age (as the case may be) specified in such 
        subparagraph.''
            (B) Subparagraph (A) of section 414(r)(2) is amended by 
        striking ``subsection (q)(8)'' and inserting ``paragraph (9)''.
            (3) Section 1114(c)(4) of the Tax Reform Act of 1986 is 
        amended by adding at the end the following new sentence: ``Any 
        reference in this paragraph to section 414(q) shall be treated 
        as a reference to such section as in effect before the Pension 
        Simplification Act of 1995.''
    (e) Effective Date.--The amendments made by this section shall 
apply to years beginning after December 31, 1995, except that in 
determining whether an employee is a highly compensated employee for 
years beginning in 1996, such amendments shall be treated as having 
been in effect for years beginning in 1995.

    Subtitle B--Targeted Access to Pension Plans for Small Employers

SEC. 4011. CREDIT FOR PENSION PLAN START-UP COSTS OF SMALL EMPLOYERS.

    (a) Allowance of Credit.--Section 38(b) (defining current year 
business credit) is amended by striking ``plus'' at the end of 
paragraph (10), by striking the period at the end of paragraph (11) and 
inserting ``, plus'', and by adding at the end the following new 
paragraph:
            ``(12) the small employer pension plan start-up cost 
        credit.''
    (b) Small Employer Pension Plan Start-Up Cost Credit.--Subpart D of 
part IV of subchapter A of chapter 1 (relating to business related 
credits) is amended by adding at the end the following new section:

``SEC. 45C. SMALL EMPLOYER PENSION PLAN START-UP COST CREDIT.

    ``(a) Amount of Credit.--For purposes of section 38--
            ``(1) In general.--The small employer pension plan start-up 
        cost credit for any taxable year is an amount equal to the 
        qualified start-up costs of an eligible employer in 
        establishing a qualified pension plan.
            ``(2) Aggregate limitation.--The amount of the credit under 
        paragraph (1) for any taxable year shall not exceed $1,000, 
        reduced by the aggregate amount determined under this section 
        for all preceding taxable years of the taxpayer.
    ``(b) Qualified Start-Up Costs; Qualified Pension Plan.--For 
purposes of this section--
            ``(1) Qualified start-up costs.--The term `qualified start-
        up costs' means any ordinary and necessary expenses of an 
        eligible employer which--
                    ``(A) are paid or incurred in connection with the 
                establishment of a qualified pension plan, and
                    ``(B) are of a nonrecurring nature.
            ``(2) Qualified pension plan.--The term `qualified pension 
        plan' means--
                    ``(A) a plan described in section 401(a) which 
                includes a trust exempt from tax under section 501(a), 
                or
                    ``(B) a simplified employee pension (as defined in 
                section 408(k)).
    ``(c) Eligible Employer.--For purposes of this section--
            ``(1) In general.--The term `eligible employer' means an 
        employer which--
                    ``(A) had an average daily number of employees 
                during the preceding taxable year not in excess of 50, 
                and
                    ``(B) did not make any contributions on behalf of 
                any employee to a qualified pension plan during the 2 
                taxable years immediately preceding the taxable year.
            ``(2) Professional service employers excluded.--Such term 
        shall not include an employer substantially all of the 
        activities of which involve the performance of services in the 
        fields of health, law, engineering, architecture, accounting, 
        actuarial science, performing arts, or consulting.
    ``(d) Special Rules.--For purposes of this section--
            ``(1) Aggregation rules.--All persons treated as a single 
        employer under subsection (a) or (b) of section 52 or 
        subsection (n) or (o) of section 414 shall be treated as one 
        person.
            ``(2) Disallowance of deduction.--No deduction shall be 
        allowable under this chapter for any qualified start-up costs 
        for which a credit is allowable under subsection (a).''
    (c) Conforming Amendments.--
            (1) Section 39(d) is amended by adding at the end the 
        following new paragraph:
            ``(7) No carryback of pension credit.--No portion of the 
        unused business credit for any taxable year which is 
        attributable to the small employer pension plan start-up cost 
        credit determined under section 45C may be carried back to a 
        taxable year ending before the date of the enactment of section 
        45C.''
            (2) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1 is amended by adding at the end the 
        following new item:

``Sec. 45C. Small employer pension plan start-up cost credit.''
    (d) Effective Date.--The amendments made by this section shall 
apply to costs incurred after the date of the enactment of this Act in 
taxable years ending after such date.

SEC. 4012. MODIFICATIONS OF SIMPLIFIED EMPLOYEE PENSIONS.

    (a) Increase in Number of Allowable Participants for Salary 
Reduction Arrangements.--Section 408(k)(6)(B) is amended by striking 
``25'' each place it appears in the text and heading thereof and 
inserting ``100''.
    (b) Repeal of Participation Requirement.--
            (1) In general.--Section 408(k)(6)(A) is amended by 
        striking clause (ii) and by redesignating clauses (iii) and 
        (iv) as clauses (ii) and (iii), respectively.
            (2) Conforming amendments.--Clause (ii) of section 
        408(k)(6)(C) and clause (ii) of section 408(k)(6)(F) are each 
        amended by striking ``subparagraph (A)(iii)'' and inserting 
        ``subparagraph (A)(ii)''.
    (c) Alternative Test.--Clause (ii) of section 408(k)(6)(A), as 
redesignated by subsection (b)(1), is amended by adding at the end the 
following new flush sentence:
                        ``The requirements of the preceding sentence 
                        are met if the employer makes contributions to 
                        the simplified employee pension meeting the 
                        requirements of sections 401(k)(11) (B) or (C), 
                        401(k)(11)(D), and 401(m)(10)(B).''
    (d) Effective Date.--The amendments made by this section shall 
apply to years beginning after December 31, 1995.

SEC. 4013. EXEMPTION FROM TOP-HEAVY PLAN REQUIREMENTS.

    (a) Exemption From Top-Heavy Plan Requirements.--Section 416(g) 
(defining top-heavy plans) is amended by adding at the end the 
following new paragraph:
            ``(3) Exemption for certain plans.--A plan shall not be 
        treated as a top-heavy plan if, for such plan year, the 
        employer has no highly compensated employees (as defined in 
        section 414(q)) by reason of section 414(q)(2).''
    (b) Effective Date.--The amendment made by this section shall apply 
to years beginning after December 31, 1995.

SEC. 4014. REGULATORY TREATMENT OF SMALL EMPLOYERS.

    (a) In General.--Section 7805(f) (relating to review of impact of 
regulations on small business) is amended by adding at the end the 
following new subparagraph:
            ``(4) Special rule for pension regulations.--
                    ``(A) In general.--Any regulation proposed to be 
                issued by the Secretary which relates to qualified 
                pension plans shall not take effect unless the 
                Secretary includes provisions to address any special 
                needs of the small employers.
                    ``(B) Qualified pension plan.--For purposes of this 
                paragraph, the term `qualified pension plan' means--
                            ``(i) any plan which includes a trust 
                        described in section 401(a) which is exempt 
                        from tax under section 501(a), or
                            ``(ii) any simplified employee pension (as 
                        defined in section 408(k)).''
    (b) Effective Date.--The amendment made by this section shall apply 
to regulations issued after the date of the enactment of this Act.

        TITLE V--ESTATE TAX EXCLUSION FOR FAMILY-OWNED BUSINESS

SEC. 5001. SHORT TITLE.

    This title may be cited as the ``American Family-Owned Business 
Act''.

SEC. 5002. FAMILY-OWNED BUSINESS EXCLUSION.

    (a) In General.--Part III of subchapter A of chapter 11 (relating 
to gross estate) is amended by inserting after section 2033 the 
following new section:

``SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.

    ``(a) In General.--In the case of an estate of a decedent to which 
this section applies, the value of the gross estate shall not include 
the lesser of--
            ``(1) the adjusted value of the qualified family-owned 
        business interests of the decedent otherwise includible in the 
        estate, or
            ``(2) the sum of--
                    ``(A) $1,500,000, plus
                    ``(B) 50 percent of the excess (if any) of the 
                adjusted value of such interests over $1,500,000.
    ``(b) Estates to Which Section Applies.--This section shall apply 
to an estate if--
            ``(1) the decedent was (at the date of the decedent's 
        death) a citizen or resident of the United States,
            ``(2) the excess of--
                    ``(A) the sum of--
                            ``(i) the adjusted value of the qualified 
                        family-owned business interests which--
                                    ``(I) are included in determining 
                                the value of the gross estate (without 
                                regard to this section), and
                                    ``(II) are acquired by a qualified 
                                heir from, or passed to a qualified 
                                heir from, the decedent (within the 
                                meaning of section 2032A(e)(9)), plus
                            ``(ii) the amount of the adjusted taxable 
                        gifts of such interests from the decedent to 
                        members of the decedent's family taken into 
                        account under subsection 2001(b)(1)(B), to the 
                        extent such interests are continuously held by 
                        such members between the date of the gift and 
                        the date of the decedent's death, over
                    ``(B) the amount included in the gross estate under 
                section 2035,
        exceeds 50 percent of the adjusted gross estate, and
            ``(3) during the 8-year period ending on the date of the 
        decedent's death there have been periods aggregating 5 years or 
        more during which--
                    ``(A) such interests were owned by the decedent or 
                a member of the decedent's family, and
                    ``(B) there was material participation (within the 
                meaning of section 2032A(e)(6)) by the decedent or a 
                member of the decedent's family in the operation of the 
                business to which such interests relate.
    ``(c) Adjusted Gross Estate.--For purposes of this section, the 
term `adjusted gross estate' means the value of the gross estate 
(determined without regard to this section)--
            ``(1) reduced by any amount deductible under section 
        2053(a)(4), and
            ``(2) increased by the excess of--
                    ``(A) the sum of--
                            ``(i) the amount taken into account under 
                        subsection (b)(2)(B)), plus
                            ``(ii) the amount of other gifts from the 
                        decedent to the decedent's spouse (at the time 
                        of the gift) within 10 years of the date of the 
                        decedent's death, plus
                            ``(iii) the amount of other gifts (not 
                        included under clause (i) or (ii)) from the 
                        decedent within 3 years of such date, over
                    ``(B) the amount included in the gross estate under 
                section 2035.
    ``(d) Adjusted Value of the Qualified Family-Owned Business 
Interests.--For purposes of this section, the adjusted value of any 
qualified family-owned business interest is the value of such interest 
for purposes of this chapter (determined without regard to this 
section), reduced by the excess of--
            ``(1) any amount deductible under section 2053(a)(4), over
            ``(2) the sum of--
                    ``(A) any indebtedness on any qualified residence 
                of the decedent the interest on which is deductible 
                under section 163(h)(3), plus
                    ``(B) any indebtedness to the extent the taxpayer 
                establishes that the proceeds of such indebtedness were 
                used for the payment of educational and medical 
                expenses of the decedent, the decedent's spouse, or the 
                decedent's dependents (within the meaning of section 
                152), plus
                    ``(C) any indebtedness not described in 
                subparagraph (A) or (B), to the extent such 
                indebtedness does not exceed $10,000.
    ``(e) Qualified Family-Owned Business Interest.--
            ``(1) In general.--For purposes of this section, the term 
        `qualified family-owned business interest' means--
                    ``(A) an interest as a proprietor in a trade or 
                business carried on as a proprietorship, or
                    ``(B) an interest as a partner in a partnership, or 
                stock in a corporation, carrying on a trade or 
                business, if--
                            ``(i) at least--
                                    ``(I) 50 percent of such 
                                partnership or corporation is owned 
                                (directly or indirectly) by the 
                                decedent or members of the decedent's 
                                family,
                                    ``(II) 70 percent of such 
                                partnership or corporation is so owned 
                                by 2 families (including the decedent's 
                                family), or
                                    ``(III) 90 percent of such 
                                partnership or corporation is so owned 
                                by 3 families (including the decedent's 
                                family), and
                            ``(ii) at least 30 percent of such 
                        partnership or corporation is so owned by each 
                        family described in subclause (II) or (III) of 
                        clause (i).
            ``(2) Limitation.--Such term shall not include--
                    ``(A) any interest in a trade or business the 
                principal place of business of which is not located in 
                the United States,
                    ``(B) any interest in--
                            ``(i) an entity which had, or
                            ``(ii) an entity which is a member of a 
                        controlled group (as defined in section 
                        267(f)(1)) which had,
                readily tradable stock or debt on an established 
                securities market or secondary market (as defined by 
                the Secretary) within 3 years of the date of the 
                decedent's death,
                    ``(C) any interest in a trade or business not 
                described in section 542(c)(2), if more than 35 percent 
                of the adjusted ordinary gross income of such trade or 
                business for the taxable year which includes the date 
                of the decedent's death would qualify as personal 
                holding company income (as defined in section 543(a)), 
                and
                    ``(D) that portion of an interest in a trade or 
                business that is attributable to cash or marketable 
                securities, or both, in excess of the reasonably 
                expected day-to-day working capital needs of such trade 
                or business.
            ``(3) Ownership rules.--
                    ``(A) Indirect ownership.--For purposes of 
                determining indirect ownership under paragraph (1), 
                rules similar to the rules of paragraphs (2) and (3) of 
                section 447(e) shall apply.
                    ``(B) Tiered entities.--For purposes of this 
                section, if--
                            ``(i) a qualified family-owned business 
                        holds an interest in another trade or business, 
                        and
                            ``(ii) such interest would be a qualified 
                        family-owned business interest if held directly 
                        by the family (or families) holding interests 
                        in the qualified family-owned business meeting 
                        the requirements of paragraph (1)(B),
                then the value of the qualified family-owned business 
                shall include the portion attributable to the interest 
                in the other trade or business.
    ``(f) Tax Treatment of Failure To Materially Participate in 
Business or Dispositions of Interests.--
            ``(1) In general.--There is imposed an additional estate 
        tax if, within 10 years after the date of the decedent's death 
        and before the date of the qualified heir's death--
                    ``(A) the qualified heir ceases to use for the 
                qualified use (within the meaning of section 
                2032A(c)(6)(B)) the qualified family-owned business 
                interest which was acquired (or passed) from the 
                decedent, or
                    ``(B) the qualified heir disposes of any portion of 
                a qualified family-owned business interest (other than 
                by a disposition to a member of the qualified heir's 
                family or through a qualified conservation contribution 
                under section 170(h)).
            ``(2) Additional estate tax.--The amount of the additional 
        estate tax imposed by paragraph (1) shall be equal to--
                    ``(A) the adjusted tax difference attributable to 
                the qualified family-owned business interest (as 
                determined under rules similar to the rules of section 
                2032A(c)(2)(B)), plus
                    ``(B) interest on the amount determined under 
                subparagraph (A) at the annual rate of 4 percent for 
                the period beginning on the date the estate tax 
                liability was due under this chapter and ending on the 
                date such additional estate tax is due.
    ``(g) Other Definitions and Applicable Rules.--For purposes of this 
section--
            ``(1) Qualified heir.--The term `qualified heir'--
                    ``(A) has the meaning given to such term by section 
                2032A(e)(1), and
                    ``(B) includes any active employee of the trade or 
                business to which the qualified family-owned business 
                interest relates if such employee has been employed by 
                such trade or business for a period of at least 10 
                years before the date of the decedent's death.
            ``(2) Member of the family.--The term `member of the 
        family' has the meaning given to such term by section 
        2032A(e)(2).
            ``(3) Applicable rules.--Rules similar to the following 
        rules shall apply:
                    ``(A) Section 2032A(b)(4) (relating to decedents 
                who are retired or disabled).
                    ``(B) Section 2032A(b)(5) (relating to special 
                rules for surviving spouses).
                    ``(C) Section 2032A(c)(2)(D) (relating to partial 
                dispositions).
                    ``(D) Section 2032A(c)(3) (relating to only 1 
                additional tax imposed with respect to any 1 portion).
                    ``(E) Section 2032A(c)(4) (relating to due date).
                    ``(F) Section 2032A(c)(5) (relating to liability 
                for tax; furnishing of bond).
                    ``(G) Section 2032A(c)(7) (relating to no tax if 
                use begins within 2 years; active management by 
                eligible qualified heir treatment as material 
                participation).
                    ``(H) Section 2032A(e)(10) (relating to community 
                property).
                    ``(I) Section 2032A(e)(14) (relating to treatment 
                of replacement property acquired in section 1031 or 
                1033 transactions).
                    ``(J) Section 2032A(f) (relating to statute of 
                limitations).
                    ``(K) Section 6166(b)(3) (relating to farmhouses 
                and certain other structures taken into account).
                    ``(L) Subparagraphs (B), (C), and (D) of section 
                6166(g)(1) (relating to acceleration of payment).''
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter A of chapter 11 is amended by inserting after the item 
relating to section 2033 the following new item:

                              ``Sec. 2033A. Family-owned business 
                                        exclusion.''
    (c) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying after December 31, 1995.

                     TITLE VI--SPENDING REDUCTIONS

SEC. 6001. SHORT TITLE.

    This title may be cited as the ``Spending Reductions Act of 1995''.

SEC. 6002. SERVICE CONTRACTS.

    Notwithstanding any other provision of law, of the funds available 
for fiscal year 1996, the total amount available for service contracts 
shall not exceed $105,000,000,000.

SEC. 6003. FEDERALLY FUNDED RESEARCH AND DEVELOPMENT CENTERS.

    Notwithstanding any other provision of law, of the funds available 
for the Department of Defense for fiscal year 1996, the total amount 
available for procurement of work from federally funded research and 
development centers shall not exceed $1,000,000,000.

SEC. 6004. FOREIGN MILITARY FINANCING.

    Notwithstanding any other provision of law, of the funds available 
for fiscal year 1996, the total amount available for the Foreign 
Military Financing Program under section 23 of the Arms Export Control 
Act shall not exceed $3,500,000,000.
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