[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1266 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 1266

   To amend the Internal Revenue Code of 1986 to index the basis of 
  certain assets for purposes of determining gain, to provide for the 
  establishment of American Dream Savings Accounts, and to repeal the 
     increase enacted in 1993 in taxes on Social Security benefits.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             April 9, 1997

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

_______________________________________________________________________

                                 A BILL


 
   To amend the Internal Revenue Code of 1986 to index the basis of 
  certain assets for purposes of determining gain, to provide for the 
  establishment of American Dream Savings Accounts, and to repeal the 
     increase enacted in 1993 in taxes on Social Security benefits.

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

SECTION 1. THIS ACT MAY BE CITED AS THE ``BUDGET NEUTRAL AMERICAN TAX 
              RELIEF ACT''.

SEC. 2. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 1996, 
              FOR PURPOSES OF DETERMINING GAIN.

    (a) In General.--Part II of subchapter O of chapter 1 of the 
Internal Revenue Code of 1986 (relating to basis rules of general 
application) is amended by inserting after section 1021 the following 
new section:

``SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 
              1996, FOR PURPOSES OF DETERMINING GAIN.

    ``(a) General Rule.--
            ``(1) Indexed basis substituted for adjusted basis.--Solely 
        for purposes of determining gain on the sale or other 
        disposition by a taxpayer (other than a corporation) of an 
        indexed asset which has been held for more than 3 years, the 
        indexed basis of the asset shall be substituted for its 
        adjusted basis.
            ``(2) Exception for depreciation, etc.--The deductions for 
        depreciation, depletion, and amortization shall be determined 
        without regard to the application of paragraph (1) to the 
        taxpayer or any other person.
    ``(b) Indexed Asset.--
            ``(1) In general.--For purposes of this section, the term 
        `indexed asset' means--
                    ``(A) common stock in a C corporation (other than a 
                foreign corporation), and
                    ``(B) tangible property,
        which is a capital asset or property used in the trade or 
        business (as defined in section 1231(b)).
            ``(2) Stock in certain foreign corporations included.--For 
        purposes of this section--
                    ``(A) In general.--The term `indexed asset' 
                includes common stock in a foreign corporation which is 
                regularly traded on an established securities market.
                    ``(B) Exception.--Subparagraph (A) shall not apply 
                to--
                            ``(i) stock of a foreign investment company 
                        (within the meaning of section 1246(b)),
                            ``(ii) stock in a passive foreign 
                        investment company (as defined in section 
                        1296),
                            ``(iii) stock in a foreign corporation held 
                        by a United States person who meets the 
                        requirements of section 1248(a)(2), and
                            ``(iv) stock in a foreign personal holding 
                        company (as defined in section 552).
                    ``(C) Treatment of american depository receipts.--
                An American depository receipt for common stock in a 
                foreign corporation shall be treated as common stock in 
                such corporation.
    ``(c) Indexed Basis.--For purposes of this section--
            ``(1) General rule.--The indexed basis for any asset is--
                    ``(A) the adjusted basis of the asset, increased by
                    ``(B) the applicable inflation adjustment.
            ``(2) Applicable inflation adjustment.--The applicable 
        inflation adjustment for any asset is an amount equal to--
                    ``(A) the adjusted basis of the asset, multiplied 
                by
                    ``(B) the percentage (if any) by which--
                            ``(i) the gross domestic product deflator 
                        for the last calendar quarter ending before the 
                        asset is disposed of, exceeds
                            ``(ii) the gross domestic product deflator 
                        for the last calendar quarter ending before the 
                        asset was acquired by the taxpayer.
        The percentage under subparagraph (B) shall be rounded to the 
        nearest one-tenth of 1 percentage point.
            ``(3) Gross domestic product deflator.--The gross domestic 
        product deflator for any calendar quarter is the implicit price 
        deflator for the gross domestic product for such quarter (as 
        shown in the last revision thereof released by the Secretary of 
        Commerce before the close of the following calendar quarter).
    ``(d) Suspension of Holding Period Where Diminished Risk of Loss; 
Treatment of Short Sales.--
            ``(1) In general.--If the taxpayer (or a related person) 
        enters into any transaction which substantially reduces the 
        risk of loss from holding any asset, such asset shall not be 
        treated as an indexed asset for the period of such reduced 
        risk.
            ``(2) Short sales.--
                    ``(A) In general.--In the case of a short sale of 
                an indexed asset with a short sale period in excess of 
                3 years, for purposes of this title, the amount 
                realized shall be an amount equal to the amount 
                realized (determined without regard to this paragraph) 
                increased by the applicable inflation adjustment. In 
                applying subsection (c)(2) for purposes of the 
                preceding sentence, the date on which the property is 
                sold short shall be treated as the date of acquisition 
                and the closing date for the sale shall be treated as 
                the date of disposition.
                    ``(B) Short sale period.--For purposes of 
                subparagraph (A), the short sale period begins on the 
                day that the property is sold and ends on the closing 
                date for the sale.
    ``(e) Treatment of Regulated Investment Companies and Real Estate 
Investment Trusts.--
            ``(1) Adjustments at entity level.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the adjustment under subsection (a) 
                shall be allowed to any qualified investment entity 
                (including for purposes of determining the earnings and 
                profits of such entity).
                    ``(B) Exception for corporate shareholders.--Under 
                regulations--
                            ``(i) in the case of a distribution by a 
                        qualified investment entity (directly or 
                        indirectly) to a corporation--
                                    ``(I) the determination of whether 
                                such distribution is a dividend shall 
                                be made without regard to this section, 
                                and
                                    ``(II) the amount treated as gain 
                                by reason of the receipt of any capital 
                                gain dividend shall be increased by the 
                                percentage by which the entity's net 
                                capital gain for the taxable year 
                                (determined without regard to this 
                                section) exceeds the entity's net 
                                capital gain for such year determined 
                                with regard to this section, and
                            ``(ii) there shall be other appropriate 
                        adjustments (including deemed distributions) so 
                        as to ensure that the benefits of this section 
                        are not allowed (directly or indirectly) to 
                        corporate shareholders of qualified investment 
                        entities.
                For purposes of the preceding sentence, any amount 
                includable in gross income under section 852(b)(3)(D) 
                shall be treated as a capital gain dividend and an S 
                corporation shall not be treated as a corporation.
                    ``(C) Exception for qualification purposes.--This 
                section shall not apply for purposes of sections 851(b) 
                and 856(c).
                    ``(D) Exception for certain taxes imposed at entity 
                level.--
                            ``(i) Tax on failure to distribute entire 
                        gain.--If any amount is subject to tax under 
                        section 852(b)(3)(A) for any taxable year, the 
                        amount on which tax is imposed under such 
                        section shall be increased by the percentage 
                        determined under subparagraph (B)(i)(II). A 
                        similar rule shall apply in the case of any 
                        amount subject to tax under paragraph (2) or 
                        (3) of section 857(b) to the extent 
                        attributable to the excess of the net capital 
                        gain over the deduction for dividends paid 
                        determined with reference to capital gain 
                        dividends only. The first sentence of this 
                        clause shall not apply to so much of the amount 
                        subject to tax under section 852(b)(3)(A) as is 
                        designated by the company under section 
                        852(b)(3)(D).
                            ``(ii) Other taxes.--This section shall not 
                        apply for purposes of determining the amount of 
                        any tax imposed by paragraph (4), (5), or (6) 
                        of section 857(b).
            ``(2) Adjustments to interests held in entity.--
                    ``(A) Regulated investment companies.--Stock in a 
                regulated investment company (within the meaning of 
                section 851) shall be an indexed asset for any calendar 
                quarter in the same ratio as--
                            ``(i) the average of the fair market values 
                        of the indexed assets held by such company at 
                        the close of each month during such quarter, 
                        bears to
                            ``(ii) the average of the fair market 
                        values of all assets held by such company at 
                        the close of each such month.
                    ``(B) Real estate investment trusts.--Stock in a 
                real estate investment trust (within the meaning of 
                section 856) shall be an indexed asset for any calendar 
                quarter in the same ratio as--
                            ``(i) the fair market value of the indexed 
                        assets held by such trust at the close of such 
                        quarter, bears to
                            ``(ii) the fair market value of all assets 
                        held by such trust at the close of such 
                        quarter.
                    ``(C) Ratio of 80 percent or more.--If the ratio 
                for any calendar quarter determined under subparagraph 
                (A) or (B) would (but for this subparagraph) be 80 
                percent or more, such ratio for such quarter shall be 
                100 percent.
                    ``(D) Ratio of 20 percent or less.--If the ratio 
                for any calendar quarter determined under subparagraph 
                (A) or (B) would (but for this subparagraph) be 20 
                percent or less, such ratio for such quarter shall be 
                zero.
                    ``(E) Look-thru of partnerships.--For purposes of 
                this paragraph, a qualified investment entity which 
                holds a partnership interest shall be treated (in lieu 
                of holding a partnership interest) as holding its 
                proportionate share of the assets held by the 
                partnership.
            ``(3) Treatment of return of capital distributions.--Except 
        as otherwise provided by the Secretary, a distribution with 
        respect to stock in a qualified investment entity which is not 
        a dividend and which results in a reduction in the adjusted 
        basis of such stock shall not be treated as allocable to stock 
        acquired by the taxpayer in the order in which such stock was 
        acquired.
            ``(4) Qualified investment entity.--For purposes of this 
        subsection, the term `qualified investment entity' means--
                    ``(A) a regulated investment company (within the 
                meaning of section 851), and
                    ``(B) a real estate investment trust (within the 
                meaning of section 856).
    ``(f) Other Pass-Thru Entities.--
            ``(1) Partnerships.--
                    ``(A) In general.--In the case of a partnership, 
                the adjustment made under subsection (a) at the 
                partnership level shall be passed through to the 
                partners.
                    ``(B) Special rule in the case of section 754 
                elections.--In the case of a transfer of an interest in 
                a partnership with respect to which the election 
                provided in section 754 is in effect--
                            ``(i) the adjustment under section 
                        743(b)(1) shall, with respect to the transferor 
                        partner, be treated as a sale of the 
                        partnership assets for purposes of applying 
                        this section, and
                            ``(ii) with respect to the transferee 
                        partner, the partnership's holding period for 
                        purposes of this section in such assets shall 
                        be treated as beginning on the date of such 
                        adjustment.
            ``(2) S corporations.--In the case of an S corporation, the 
        adjustment made under subsection (a) at the corporate level 
        shall be passed through to the shareholders. This section shall 
        not apply for purposes of determining the amount of any tax 
        imposed by section 1374 or 1375.
            ``(3) Common trust funds.--In the case of a common trust 
        fund, the adjustment made under subsection (a) at the trust 
        level shall be passed through to the participants.
            ``(4) Indexing adjustment disregarded in determining loss 
        on sale of interest in entity.--Notwithstanding the preceding 
        provisions of this subsection, for purposes of determining the 
        amount of any loss on a sale or exchange of an interest in a 
        partnership, S corporation, or common trust fund, the 
        adjustment made under subsection (a) shall not be taken into 
        account in determining the adjusted basis of such interest.
    ``(g) Dispositions Between Related Persons.--
            ``(1) In general.--This section shall not apply to any sale 
        or other disposition of property between related persons except 
        to the extent that the basis of such property in the hands of 
        the transferee is a substituted basis.
            ``(2) Related persons defined.--For purposes of this 
        section, the term `related persons' means--
                    ``(A) persons bearing a relationship set forth in 
                section 267(b), and
                    ``(B) persons treated as single employer under 
                subsection (b) or (c) of section 414.
    ``(h) Transfers To Increase Indexing Adjustment.--If any person 
transfers cash, debt, or any other property to another person and the 
principal purpose of such transfer is to secure or increase an 
adjustment under subsection (a), the Secretary may disallow part or all 
of such adjustment or increase.
    ``(i) Special Rules.--For purposes of this section--
            ``(1) Treatment of improvements, etc.--If there is an 
        addition to the adjusted basis of any tangible property or of 
        any stock in a corporation during the taxable year by reason of 
        an improvement to such property or a contribution to capital of 
        such corporation--
                    ``(A) such addition shall never be taken into 
                account under subsection (c)(1)(A) if the aggregate 
                amount thereof during the taxable year with respect to 
                such property or stock is less than $1,000, and
                    ``(B) such addition shall be treated as a separate 
                asset acquired at the close of such taxable year if the 
                aggregate amount thereof during the taxable year with 
                respect to such property or stock is $1,000 or more.
        A rule similar to the rule of the preceding sentence shall 
        apply to any other portion of an asset to the extent that 
        separate treatment of such portion is appropriate to carry out 
        the purposes of this section.
            ``(2) Assets which are not indexed assets throughout 
        holding period.--The applicable inflation adjustment shall be 
        appropriately reduced for periods during which the asset was 
        not an indexed asset.
            ``(3) Treatment of certain distributions.--A distribution 
        with respect to stock in a corporation which is not a dividend 
        shall be treated as a disposition.
            ``(4) Acquisition date where there has been prior 
        application of subsection (a)(1) with respect to the 
        taxpayer.--If there has been a prior application of subsection 
        (a)(1) to an asset while such asset was held by the taxpayer, 
        the date of acquisition of such asset by the taxpayer shall be 
        treated as not earlier than the date of the most recent such 
        prior application.
            ``(5) Collapsible corporations.--The application of section 
        341(a) (relating to collapsible corporations) shall be 
        determined without regard to this section.
    ``(j) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Clerical Amendment.--The table of sections for part II of 
subchapter O of chapter 1 of such Code is amended by inserting after 
the item relating to section 1021 the following new item:

                              ``Sec. 1022. Indexing of certain assets 
                                        acquired after December 31, 
                                        1996, for purposes of 
                                        determining gain.''
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to the disposition of any property the holding period of 
        which begins after December 31, 1996.
            (2) Certain transactions between related persons.--The 
        amendments made by this section shall not apply to the 
        disposition of any property acquired after December 31, 1996, 
        from a related person (as defined in section 1022(g)(2) of the 
        Internal Revenue Code of 1986, as added by this section) if--
                    (A) such property was so acquired for a price less 
                than the property's fair market value, and
                    (B) the amendments made by this section did not 
                apply to such property in the hands of such related 
                person.
    (d) Election To Recognize Gain on Assets Held on January 1, 1997.--
For purposes of the Internal Revenue Code of 1986--
            (1) In general.--A taxpayer other than a corporation may 
        elect to treat--
                    (A) any readily tradable stock (which is an indexed 
                asset) held by such taxpayer on January 1, 1997, and 
                not sold before the next business day after such date, 
                as having been sold on such next business day for an 
                amount equal to its closing market price on such next 
                business day (and as having been reacquired on such 
                next business day for an amount equal to such closing 
                market price), and
                    (B) any other indexed asset held by the taxpayer on 
                January 1, 1997, as having been sold on such date for 
                an amount equal to its fair market value on such date 
                (and as having been reacquired on such date for an 
                amount equal to such fair market value).
            (2) Treatment of gain or loss.--
                    (A) Any gain resulting from an election under 
                paragraph (1) shall be treated as received or accrued 
                on the date the asset is treated as sold under 
                paragraph (1) and shall be recognized notwithstanding 
                any provision of the Internal Revenue Code of 1986.
                    (B) Any loss resulting from an election under 
                paragraph (1) shall not be allowed for any taxable 
                year.
            (3) Election.--An election under paragraph (1) shall be 
        made in such manner as the Secretary of the Treasury or his 
        delegate may prescribe and shall specify the assets for which 
        such election is made. Such an election, once made with respect 
        to any asset, shall be irrevocable.
            (4) Readily tradable stock.--For purposes of this 
        subsection, the term ``readily tradable stock'' means any stock 
        which, as of January 1, 1997, is readily tradable on an 
        established securities market or otherwise.
    (e) Treatment of Principal Residences.--Property held and used by 
the taxpayer on January 1, 1997, as his principal residence (within the 
meaning of section 1034 of the Internal Revenue Code of 1986) shall be 
treated--
            (1) for purposes of subsection (c)(1) of this section and 
        section 1022 of such Code, as having a holding period which 
        begins on January 1, 1997, and
            (2) for purposes of section 1022(c)(2)(B)(ii) of such Code, 
        as having been acquired on January 1, 1996.
Subsection (d) shall not apply to property to which this subsection 
applies.

SEC. 3. ESTABLISHMENT OF AMERICAN DREAM SAVINGS ACCOUNTS.

    (a) In General.--Subpart A of part I of subchapter D of chapter 1 
of the Internal Revenue Code of 1986 (relating to pension, profit-
sharing, stock bonus plans, etc.) is amended by inserting after section 
408 the following new section:

``SEC. 408A. AMERICAN DREAM SAVINGS ACCOUNTS.

    ``(a) General Rule.--Except as provided in this section, an 
American Dream Savings Account shall be treated for purposes of this 
title in the same manner as an individual retirement plan.
    ``(b) American Dream Savings Account.--For purposes of this title, 
the term `American Dream Savings Account' or `ADS account' means an 
individual retirement plan which is designated at the time of the 
establishment of the plan as an American Dream Savings Account. Such 
designation shall be made in such manner as the Secretary may 
prescribe.
    ``(c) Contribution Rules.--
            ``(1) No deduction allowed.--No deduction shall be allowed 
        under section 219 for a contribution to an ADS account.
            ``(2) Contribution limit.--
                    ``(A) In general.--The aggregate amount of 
                contributions (other than rollover contributions) for 
                any taxable year to all ADS accounts maintained for the 
                benefit of an individual shall not exceed the lesser 
                of--
                            ``(i) $2,000, or
                            ``(ii) an amount equal to the compensation 
                        includible in the individual's gross income for 
                        such taxable year.
                    ``(B) $4,000 limitation for certain additional 
                married individuals.--
                            ``(i) In general.--In the case of an 
                        individual to whom this subparagraph applies 
                        for the taxable year, the limitation of 
                        subparagraph (A)(ii) shall be equal to the sum 
                        of--
                                    ``(I) the compensation includible 
                                in such individual's gross income for 
                                the taxable year, plus
                                    ``(II) the compensation includible 
                                in the gross income of such 
                                individual's spouse for the taxable 
                                year reduced by the amount of the 
                                limitation under subparagraph (A) 
                                applicable to such spouse for such 
                                taxable year.
                            ``(II) Individuals to whom clause (i) 
                        applies.--Clause (i) shall apply to any 
                        individual if--
                                    ``(I) such individual files a joint 
                                return for the taxable year, and
                                    ``(II) the amount of compensation 
                                (if any) includible in such 
                                individual's gross income for the 
                                taxable year is less than the 
                                compensation includible in the gross 
                                income of such individual's spouse for 
                                the taxable year.
                    ``(C) Adjustment for inflation.--
                            ``(i) In general.--In the case of a taxable 
                        year beginning in a calendar year after 1998, 
                        the $2,000 amount contained in subparagraph (A) 
                        shall be increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment under section 1(f)(3) for 
                                the calendar year in which the taxable 
                                year begins, determined by substituting 
                                `calendar year 1996' for `calendar year 
                                1992' in subparagraph (B) thereof.
                            ``(ii) Rounding.--If any amount as adjusted 
                        under clause (i) is not a multiple of $50, such 
                        amount shall be rounded to the nearest multiple 
                        of $50.
                    ``(D) Tax on excess contributions.--Section 4973 
                shall be applied separately with respect to individual 
                retirement plans which are ADS accounts and individual 
                retirement plans which are not ADS accounts; except 
                that, for purposes of applying such section with 
                respect to individual retirement plans which are ADS 
                accounts, excess contributions shall be considered to 
                be any amounts in excess of the limitation under 
                subsection (c)(2)(A).
            ``(3) Contributions permitted after age 70\1/2\.--
        Contributions to an ADS account may be made even after the 
        individual for whom the account is maintained has attained age 
        70\1/2\.
            ``(4) Mandatory distribution rules not to apply, etc.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), subsections (a)(6) and (b)(3) of 
                section 408 (relating to required distributions) and 
                section 4974 (relating to excise tax on certain 
                accumulations in qualified retirement plans) shall not 
                apply to any ADS account.
                    ``(B) Post-death distributions.--Rules similar to 
                the rules of section 401(a)(9) (other than subparagraph 
                (A) thereof) shall apply for purposes of this section.
            ``(5) Limitations on rollover contributions.--No rollover 
        contribution may be made to an ADS account unless--
                    ``(A) such contribution is from another ADS 
                account, or
                    ``(B) such contribution is from an individual 
                retirement plan (other than an ADS account) and is made 
                before January 1, 1998.
    ``(d) Distribution Rules.--For purposes of this title--
            ``(1) General rules.--
                    ``(A) Exclusion from gross income.-- No portion of 
                a qualified distribution from an ADS account shall be 
                includible in gross income.
                    ``(B) Exception from penalty tax.-- Section 72(t) 
                shall not apply to--
                            ``(i) any qualified distribution from an 
                        ADS account, and
                            ``(ii) any qualified special purpose 
                        distribution (whether or not a qualified 
                        distribution) from an ADS account.
            ``(2) Qualified distribution.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `qualified 
                distribution' means any payment or distribution--
                            ``(i) made on or after the date on which 
                        the individual attains age 59\1/2\,
                            ``(ii) made to a beneficiary (or to the 
                        estate of the individual) on or after the death 
                        of the individual,
                            ``(iii) attributable to the individual's 
                        being disabled (within the meaning of section 
                        72(m)(7)), or
                            ``(iv) which is a qualified special purpose 
                        distribution.
                    ``(B) Distributions within 5 years.--No payment or 
                distribution shall be treated as a qualified 
                distribution if--
                            ``(i) it is made within the 5-taxable year 
                        period beginning with the 1st taxable year for 
                        which the individual made a contribution to an 
                        ADS account (or such individual's spouse made a 
                        contribution to an ADS account) established for 
                        such individual, or
                            ``(ii) in the case of a payment or 
                        distribution properly allocable to a rollover 
                        contribution (or income allocable thereto), it 
                        is made within 5 years after the date on which 
                        such rollover contribution was made, as 
                        determined under regulations prescribed by the 
                        Secretary.
                Clause (ii) shall not apply to a rollover contribution 
                from an ADS account.
            ``(3) Income inclusion for rollovers from non-ads 
        accounts.--In the case of any amount paid or distributed out of 
        an individual retirement plan (other than an ADS account) which 
        is paid into an ADS account (established for the benefit of the 
        payee or distributee, as the case may be) before the close of 
        the 60th day after the day on which the payment or distribution 
        is received--
                    ``(A) sections 72(t) and 408(d)(3) shall not apply, 
                and
                    ``(B) any amount required to be included in gross 
                income by reason of this paragraph shall be so included 
                ratably over the 4-taxable year period beginning with 
                the taxable year in which the payment or distribution 
                is made.
    ``(e) Qualified Special Purpose Distribution.--
            ``(1) In general.--For purposes of this section, the term 
        `qualified special purpose distribution' means any payments or 
        distributions from an ADS account to the individual for whose 
        benefit such account is established--
                    ``(A) if such payments or distributions are 
                qualified first-time homebuyer distributions, or
                    ``(B) to the extent such payments or distributions 
                do not exceed--
                            ``(i) the qualified higher education 
                        expenses of the taxpayer for the taxable year 
                        in which received, and
                            ``(ii) the qualified medical expenses of 
                        the taxpayer for the taxable year in which 
                        received.
            ``(2) Qualified first-time homebuyer distributions.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `qualified first-time home-buyer distribution' 
                means any payment or distribution received by an 
                individual to the extent such payment or distribution 
                is used by the individual before the close of the 60th 
                day after the day on which such payment or distribution 
                is received to pay qualified acquisition costs with 
                respect to a principal residence for such individual as 
                a first-time homebuyer.
                    ``(B) Qualified acquisition costs.--For purposes of 
                this paragraph, the term `qualified acquisition costs' 
                means the costs of acquiring, constructing, or 
                reconstructing a residence. Such term includes any 
                usual or reasonable settlement, financing, or other 
                closing costs.
                    ``(C) First-time homebuyer; other definitions.--For 
                purposes of this paragraph--
                            ``(i) First-time homebuyer.--The term 
                        `first-time homebuyer' means any individual if 
                        such individual (and, if married, such 
                        individual's spouse) had no present ownership 
                        interest in a principal residence during the 3-
                        year period ending on the date of acquisition 
                        of the principal residence to which this 
                        paragraph applies.
                            ``(ii) Principal residence.--The term 
                        `principal residence' has the same meaning as 
                        when used in section 1034.
                            ``(iii) Date of acquisition.--The term 
                        `date of acquisition' means the date--
                                    ``(I) on which a binding contract 
                                to acquire the principal residence to 
                                which subparagraph (A) applies is 
                                entered into, or
                                    ``(II) on which a binding contract 
                                to construct or reconstruct such a 
                                principal residence is entered into.
                    ``(D) Special rule where delay in acquisition.--If 
                any payment or distribution out of an ADS account fails 
                to meet the requirements of subparagraph (A) solely by 
                reason of a delay or cancellation of the purchase, 
                construction, or reconstruction of the residence, the 
                amount of the payment or distribution may be 
                contributed to an ADS account as provided in subsection 
                (d)(3)(A)(i) of section 408 (determined by substituting 
                `120th day' for `60th day' in such subsection), except 
                that--
                            ``(i) subsection (d)(3)(B) of such section 
                        shall not be applied to such contribution, and
                            ``(ii) such amount shall not be taken into 
                        account in determining whether subsection 
                        (d)(3)(A)(i) of such section applies to any 
                        other amount.
            ``(3) Qualified higher education expenses.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means tuition, fees, books, 
                supplies, and equipment required for the enrollment or 
                attendance of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) the taxpayer's child (as defined in 
                        section 151(c)(3)) or grandchild,
                at an eligible educational institution (as defined in 
                section 135(c)(3)).
                    ``(B) Coordination with savings bond provisions.--
                The amount of qualified higher education expenses for 
                any taxable year shall be reduced by any amount 
                excludable from gross income under section 135.
            ``(4) Qualified medical expenses.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `qualified medical expenses' means any amounts 
                paid during the taxable year, not compensated for by 
                insurance or otherwise, for medical care (as defined in 
                section 213(d)) of the taxpayer, his spouse, or a 
                dependent (as defined in section 152).
                    ``(B) Long-term care insurance premiums treated as 
                medical expenses.--For purposes of subparagraph (A), 
                the term `qualified medical expenses' shall include 
                premiums for long-term care insurance for coverage of 
                the taxpayer or his spouse.
    ``(f) Other Definitions.--For purposes of this section--
            ``(1) Rollover contributions.--The term `rollover 
        contributions' means contributions described in sections 
        402(c), 403(a)(4), 403(b)(8), or 408(d)(3).
            ``(2) Compensation.--The term `compensation' has the 
        meaning given such term by section 219(f).''
    (b) Termination of Nondeductible IRA Contributions.--
            (1) Section 408(o) of such Code is amended by adding at the 
        end the following new paragraph:
            ``(5) Termination.--This subsection shall not apply to any 
        designated nondeductible contribution for any taxable year 
        beginning after December 31, 1996.''
            (2) Section 219(f) of such Code is amended by striking 
        paragraph (7).
    (c) Excess Distributions Tax Not To Apply.--Subparagraph (B) of 
section 4980A(e)(1) of such Code is amended by inserting ``other than 
an ADS account (as defined in section 408A(b))'' after ``retirement 
plan''.
    (d) Clerical Amendment.--The table of sections for subpart A of 
part I of subchapter D of chapter 1 of such Code is amended by 
inserting after the item relating to section 408 the following new 
item:

                              ``Sec. 408A. American Dream Savings 
                                        Accounts.''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997.

SEC. 4. REPEAL OF INCREASE IN TAX ON SOCIAL SECURITY BENEFITS.

    (a) In General.--Subsection (a) of section 86 of the Internal 
Revenue Code of 1986 (relating to Social Security and tier 1 railroad 
retirement benefits) is amended by adding at the end the following new 
paragraph:
            ``(3) Phaseout of additional amount.--In the case of any 
        taxable year beginning in a calendar year after 1997 and before 
        2002, paragraph (2) shall be applied by substituting the 
        percentage determined under the following table for `85 
        percent' each place it appears:

        ``In the case of a taxable year
                                                                       
            beginning in calendar year:
                                                     The percentage is:
        1998.........................................       75 percent 
        1999.........................................       65 percent 
        2000.........................................       60 percent 
        2001.........................................     55 percent.''
    (b) Termination of Additional Amount.--Paragraph (2) of section 
86(a) of such Code is amended by adding at the end the following new 
flush sentence:
        ``This paragraph shall not apply to any taxable year beginning 
        after December 31, 2001.''
    (c) Conforming Amendments.--
            (1) Paragraph (3) of section 871(a) of such Code is 
        amended--
                    (A) by striking ``85 percent'' in subparagraph (A) 
                and inserting ``50 percent'', and
                    (B) by inserting before the last sentence the 
                following new flush sentence:
        ``In the case of any taxable year beginning in a calendar year 
        after 1997 and before 2002, subparagraph (A) shall be applied 
        by substituting the percentage determined for such calendar 
        year under section 86(a)(3) for `50 percent'.''
            (2)(A) Subparagraph (A) of section 121(e)(1) of the Social 
        Security Amendments of 1983 (Public Law 98-21) is amended--
                    (i) by striking ``(A) There'' and inserting 
                ``There'';
                    (ii) by striking ``(i)'' immediately following 
                ``amounts equivalent to''; and
                    (iii) by striking ``, less (ii)'' and all that 
                follows and inserting a period.
            (B) Paragraph (1) of section 121(e) of such Act is amended 
        by striking subparagraph (B).
            (C) Paragraph (3) of section 121(e) of such Act is amended 
        by striking subparagraph (B) and by redesignating subparagraph 
        (C) as subparagraph (B).
            (D) Paragraph (2) of section 121(e) of such Act is amended 
        in the first sentence by striking ``paragraph (1)(A)'' and 
        inserting ``paragraph (1)''.
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 1997.
            (2) Subsection (c)(2).--The amendments made by subsection 
        (c)(2) shall apply to tax liabilities for taxable years 
        beginning after December 31, 1995.

SEC. 5. REVENUE REDUCTIONS OFFSET BY REDUCTIONS IN FUNDING FOR 
              DEPARTMENT OF COMMERCE AND DEPARTMENT OF ENERGY.

    Any reduction in revenues to the Federal Government by reason of 
the amendments made by this Act should be offset by reductions in the 
funds available for the Department of Commerce and the Department of 
Energy.
                                 <all>