[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 20 Introduced in Senate (IS)]







105th CONGRESS
  1st Session
                                 S. 20

  To amend the Internal Revenue Code of 1986 to increase the rate and 
     spread the benefits of economic growth and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 21, 1997

  Mr. Daschle (for himself, Mr. Reid, Mr. Lieberman, Mr. Dorgan, Mr. 
Breaux, Mr. Kohl, Mr. Wyden, and Mr. Bingaman) 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 increase the rate and 
     spread the benefits of economic growth and for other purposes.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Targeted 
Investment Incentive and Economic Growth Act of 1997''.
    (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.

             TITLE I--TAXATION OF CAPITAL GAINS AND LOSSES

SEC. 101. ROLLOVER OF CAPITAL GAINS ON CERTAIN SMALL BUSINESS 
              INVESTMENTS.

    (a) In General.--Part III of subchapter O of chapter 1 (relating to 
common nontaxable exchanges) is amended by adding at the end the 
following new section:

``SEC. 1045. ROLLOVER OF GAIN ON SMALL BUSINESS INVESTMENTS.

    ``(a) Nonrecognition of Gain.--In the case of the sale of any 
eligible small business investment with respect to which the taxpayer 
elects the application of this section, gain from such sale shall be 
recognized only to the extent that the amount realized on such sale 
exceeds--
            ``(1) the cost of any other eligible small business 
        investment purchased by the taxpayer during the 6-month period 
        beginning on the date of such sale, reduced by
            ``(2) any portion of such cost previously taken into 
        account under this section.
This section shall not apply to any gain which is treated as ordinary 
income for purposes of this subtitle.
    ``(b) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Purchase.--The term `purchase' has the meaning given 
        such term by section 1043(b)(4).
            ``(2) Eligible small business investment.--Except as 
        otherwise provided in this section, the term `eligible small 
        business investment' means any stock in a domestic corporation, 
        and any partnership interest in a domestic partnership, which 
        is originally issued after December 31, 1996, if--
                    ``(A) as of the date of issuance, such corporation 
                or partnership is a qualified small business entity,
                    ``(B) such stock or partnership interest is 
                acquired by the taxpayer at its original issue 
                (directly or through an underwriter)--
                            ``(i) in exchange for money or other 
                        property (not including stock), or
                            ``(ii) as compensation for services (other 
                        than services performed as an underwriter of 
                        such stock or partnership interest), and
                    ``(C) the taxpayer has held such stock or interest 
                at least 6 months as of the time of the sale described 
                in subsection (a).
        A rule similar to the rule of section 1202(c)(3) shall apply 
        for purposes of this section.
            ``(3) Active business requirement.--Stock in a corporation, 
        and a partnership interest in a partnership, shall not be 
        treated as an eligible small business investment unless, during 
        substantially all of the taxpayer's holding period for such 
        stock or partnership interest, such corporation or partnership 
        meets the active business requirements of subsection (c). A 
        rule similar to the rule of section 1202(c)(2)(B) shall apply 
        for purposes of this section.
            ``(4) Qualified small business entity.--
                    ``(A) In general.--The term `qualified small 
                business entity' means any domestic corporation or 
                partnership if--
                            ``(i) such entity (and any predecessor 
                        thereof) had aggregate gross assets (as defined 
                        in section 1202(d)(2)) of less than $25,000,000 
                        at all times before the issuance of the 
                        interest described in paragraph (2), and
                            ``(ii) the aggregate gross assets (as so 
                        defined) of the entity immediately after the 
                        issuance (determined by taking into account 
                        amounts received in the issuance) are less than 
                        $25,000,000.
                    ``(B) Aggregation rules.--Rules similar to the 
                rules of section 1202(d)(3) shall apply for purposes of 
                this paragraph.
    ``(c) Active Business Requirement.--
            ``(1) In general.--For purposes of subsection (b)(3), the 
        requirements of this subsection are met by a qualified small 
        business entity for any period if--
                    ``(A) the entity is engaged in the active conduct 
                of a trade or business, and
                    ``(B) at least 80 percent (by value) of the assets 
                of such entity are used in the active conduct of a 
                qualified trade or business (within the meaning of 
                section 1202(e)(3)).
        Such requirements shall not be treated as met for any period if 
        during such period the entity is described in subparagraph (A), 
        (B), (C), or (D) of section 1202(e)(4).
            ``(2) Special rule for certain activities.--For purposes of 
        paragraph (1), if, in connection with any future trade or 
        business, an entity is engaged in--
                    ``(A) startup activities described in section 
                195(c)(1)(A),
                    ``(B) activities resulting in the payment or 
                incurring of expenditures which may be treated as 
                research and experimental expenditures under section 
                174, or
                    ``(C) activities with respect to in-house research 
                expenses described in section 41(b)(4),
        such entity shall be treated with respect to such activities as 
        engaged in (and assets used in such activities shall be treated 
        as used in) the active conduct of a trade or business. Any 
        determination under this paragraph shall be made without regard 
        to whether the entity has any gross income from such activities 
        at the time of the determination.
            ``(3) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (5), (6), (7), and (8) of section 1202(e) shall 
        apply for purposes of this subsection.
    ``(d) Certain Other Rules To Apply.--Rules similar to the rules of 
subsections (f), (g), (h), and (j) of section 1202 shall apply for 
purposes of this section, except that a 6-month holding period shall be 
substituted for a 5-year holding period where applicable.
    ``(e) Basis Adjustments.--If gain from any sale is not recognized 
by reason of subsection (a), such gain shall be applied to reduce (in 
the order acquired) the basis for determining gain or loss of any 
eligible small business investment which is purchased by the taxpayer 
during the 6-month period described in subsection (a).
    ``(f) Statute of Limitations.--If any gain is realized by the 
taxpayer on the sale or exchange of any eligible small business 
investment and there is in effect an election under subsection (a) with 
respect to such gain, then--
            ``(1) the statutory period for the assessment of any 
        deficiency with respect to such gain shall not expire before 
        the expiration of 3 years from the date the Secretary is 
        notified by the taxpayer (in such manner as the Secretary may 
        by regulations prescribe) of--
                    ``(A) the taxpayer's cost of purchasing other 
                eligible small business investments which the taxpayer 
                claims results in nonrecognition of any part of such 
                gain,
                    ``(B) the taxpayer's intention not to purchase 
                other eligible small business investments within the 6-
                month period described in subsection (a), or
                    ``(C) a failure to make such purchase within such 
                6-month period, and
            ``(2) such deficiency may be assessed before the expiration 
        of such 3-year period notwithstanding the provisions of any 
        other law or rule of law which would otherwise prevent such 
        assessment.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be appropriate to carry out the purposes of this section, 
including regulations to prevent the avoidance of the purposes of this 
section through splitups, shell corporations, partnerships, or 
otherwise and regulations to modify the application of section 1202 to 
the extent necessary to apply such section to a partnership rather than 
a corporation.''
    (b) Conforming Amendment.--Paragraph (23) of section 1016(a) is 
amended--
            (1) by striking ``or 1044'' and inserting ``, 1044, or 
        1045'', and
            (2) by striking ``or 1044(d)'' and inserting ``, 1044(d), 
        or 1045(e)''.
    (c) Clerical Amendment.--The table of sections for part III of 
subchapter O of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 1045. Rollover of gain on small 
                                        business investments.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 1996.

SEC. 102. LOSSES ON ELIGIBLE SMALL BUSINESS INVESTMENTS.

    (a) Increase in Maximum Amount.--Section 1244(b) (relating to 
maximum amount for any taxable year) is amended--
            (1) by striking ``$50,000'' in paragraph (1) and inserting 
        ``$150,000'', and
            (2) by striking ``$100,000'' in paragraph (2) and inserting 
        ``$300,000''.
    (b) Extension of Application of Section 1244 to Partnership 
Interest and Increase in Value of Corporations Eligible for 
Application.--
            (1) Extension to partnerships.--So much of section 1244(c) 
        as precedes paragraph (2) is amended to read as follows:
    ``(c) Section 1244 Interest Defined.--
            ``(1) Section 1244 interest.--For purposes of this 
        section--
                    ``(A) In general.--The term `section 1244 interest' 
                means an eligible small business investment (as defined 
                in section 1045(b)(1)) in a qualified small business 
                entity (as defined in section 1045(b)(4)) if such 
                entity, during the period of its 5 most recent taxable 
                years ending before the date the loss on such 
                investment was sustained, derived more than 50 percent 
                of its aggregate gross receipts from sources other than 
                royalties, rents, dividends, interests, annuities, and 
                sales or exchanges of stocks or securities.
                    ``(B) Transition rule.--Any stock in a domestic 
                corporation issued before January 1, 1997, which was 
                section 1244 stock under this section on December 31, 
                1996 (determined under this section as in effect on 
                such date), shall be treated as a section 1244 interest 
                for purposes of this section.''
            (2) Conforming amendments.--
                    (A) Section 1244(a) is amended by striking 
                ``section 1244 stock'' and inserting ``a section 1244 
                interest''.
                    (B) Section 1244(c)(2) is amended--
                            (i) by striking ``paragraph (1)(c)'' in the 
                        heading and inserting ``paragraph (1)'',
                            (ii) by striking ``paragraph (1)(C)'' each 
                        place it appears and inserting ``paragraph 
                        (1)'',
                            (iii) by striking ``corporation'' each 
                        place it appears and inserting ``entity'', and
                            (iv) by striking ``Paragraph (1)(C)'' in 
                        subparagraph (C) and inserting ``Paragraph 
                        (1)''.
                    (C) Section 1244(c) is amended by striking 
                paragraph (3).
                    (D) Section 1244(d) is amended--
                            (i) by striking ``section 1244 stock'' each 
                        place it appears and inserting ``a section 1244 
                        interest'',
                            (ii) by striking ``stock'' each place it 
                        appears and inserting ``interest'',
                            (iii) by striking ``paragraphs (1)(C) and 
                        (3)(A) of subsection (c)'' in paragraph (2) and 
                        inserting ``subsection (c)(1)'', and
                            (iv) by striking ``(other than subparagraph 
                        (C) thereof)'' and inserting ``(other than the 
                        gross receipts test thereof)''.
                    (E)(i) The heading for section 1244 is amended by 
                striking ``stock'' and inserting ``interest''.
                    (ii) The item relating to section 1244 in the table 
                of sections for part IV of subchapter P of chapter 1 is 
                amended by striking ``stocks'' and inserting 
                ``interests''.
                    (F) Section 165(m)(5) is amended by striking 
                ``stock'' and inserting ``interests''.
                    (G) Section 1274(c)(3)(A)(i) is amended--
                            (i) by inserting ``, as in effect on the 
                        day before the date of enactment of subclause 
                        (IV)'' after ``section 1244(c)(3)'' in 
                        subclauses (II) and (III),
                            (ii) by striking ``or'' at the end of 
                        subclause (II),
                            (iii) by striking the period at the end of 
                        subclause (III) and inserting ``, or'', and
                            (iv) by adding at the end the following new 
                        subclause:
                                    ``(IV) by a section 1244 interest 
                                (as defined in section 1244(c)(1)).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 1996.

SEC. 103. MODIFICATIONS TO EXCLUSION OF GAIN ON CERTAIN SMALL BUSINESS 
              STOCK.

    (a) Exclusion Available to Corporations.--
            (1) In general.--Subsection (a) of section 1202 is amended 
        by striking ``other than a corporation''.
            (2) Technical amendment.--Subsection (c) of section 1202 is 
        amended by adding at the end the following new paragraph:
            ``(4) Stock held among members of controlled group not 
        eligible.--Stock shall not be treated as qualified small 
        business stock if such stock was at any time held by any member 
        of the parent-subsidiary controlled group (as defined in 
        subsection (d)(3)) which includes the qualified small 
        business.''
    (b) Repeal of Minimum Tax Preference.--
            (1) In general.--Section 57(a) is amended by striking 
        paragraph (7).
            (2) Technical amendment.--Section 53(d)(1)(B)(ii)(II) is 
        amended by striking ``, (5), and (7)'' and inserting ``and 
        (5)''.
    (c) Stock of Larger Businesses Eligible for Exclusion.--
            (1) Section 1202(d)(1) is amended by striking 
        ``$50,000,000'' each place it appears and inserting 
        ``$100,000,000''.
            (2) Section 1202(d) is amended by adding at the end the 
        following new paragraph:
            ``(4) Inflation adjustment of asset limitation.--In the 
        case of stock issued in any calendar year after 1997, the 
        $100,000,000 amount contained in paragraph (1) shall be 
        increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 1996' for `calendar year 1992' in 
                subparagraph (B) thereof.
        If any amount as adjusted under the preceding sentence is not a 
        multiple of $1,000,000, such amount shall be rounded to the 
        next lower multiple of $1,000,000.''
    (d) Per-Issuer Limitation.--Section 1202(b)(1)(A) is amended by 
striking ``$10,000,000'' and inserting ``$20,000,000''.
    (e) Other Modifications.--
            (1) Working capital limitation.--Section 1202(e)(6) is 
        amended by striking ``2 years'' each place it appears and 
        inserting ``5 years''.
            (2) Redemption rules.--Section 1203(c)(3) is amended by 
        adding at the end the following new subparagraph:
                    ``(D) Waiver where business purpose.--A purchase of 
                stock by the issuing corporation shall be disregarded 
                for purposes of subparagraph (B) if the issuing 
                corporation establishes that there was a business 
                purpose for such purchase and one of the principal 
                purposes of the purchase was not to avoid the 
                limitation of this section.''
    (f) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to stock issued after the date of the enactment of this 
        Act.
            (2) Special rule.--The amendments made by subsection (b), 
        (d), and (e) shall apply to stock issued after August 10, 1993.

SEC. 104. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE.

    (a) In General.--Section 121 (relating to one-time exclusion of 
gain from sale of principal residence by individual who has attained 
age 55) is amended to read as follows:

``SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.

    ``(a) Exclusion.--Gross income shall not include gain from the sale 
or exchange of property if, during the 5-year period ending on the date 
of the sale or exchange, such property has been owned and used by the 
taxpayer as the taxpayer's principal residence for periods aggregating 
2 years or more.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--The amount of gain excluded from 
        gross income under subsection (a) with respect to any sale or 
        exchange shall not exceed $250,000 ($500,000 in the case of a 
        joint return where both spouses meet the use requirement of 
        subsection (a)).
            ``(2) Application to only 1 sale or exchange every 2 
        years.--
                    ``(A) In general.--Subsection (a) shall not apply 
                to any sale or exchange by the taxpayer if, during the 
                2-year period ending on the date of such sale or 
                exchange, there was any other sale or exchange by the 
                taxpayer or his spouse to which subsection (a) applied.
                    ``(B) Premarriage sales by spouse not taken into 
                account.--If, but for this subparagraph, subsection (a) 
                would not apply to a sale or exchange by a married 
                individual by reason of a sale or exchange by such 
                individual's spouse before their marriage--
                            ``(i) subparagraph (A) shall be applied 
                        without regard to the sale or exchange by such 
                        individual's spouse, but
                            ``(ii) the amount of gain excluded from 
                        gross income under subsection (a) with respect 
                        to the sale or exchange by such individual 
                        shall not exceed $250,000.
                    ``(C) Pre-1997 sales not taken into account.--
                Subparagraph (A) shall be applied without regard to any 
                sale or exchange before January 1, 1997.
    ``(c) Exclusion for Taxpayers Failing To Meet Certain 
Requirements.--
            ``(1) In general.--In the case of a sale or exchange to 
        which this subsection applies, the ownership and use 
        requirements of subsection (a) shall not apply and subsection 
        (b)(2) shall not apply; but the amount of gain excluded from 
        gross income under subsection (a) with respect to such sale of 
        exchange shall not exceed--
                    ``(A) the amount which bears the same ratio to the 
                amount which would be so excluded if such requirements 
                had been met, as
                    ``(B) the shorter of--
                            ``(i) the aggregate periods, during the 5-
                        year period ending on the date of such sale or 
                        exchange, such property has been owned and used 
                        by the taxpayer as the taxpayer's principal 
                        residence, or
                            ``(ii) the period after the date of the 
                        most recent prior sale or exchange by the 
                        taxpayer or his spouse to which subsection (a) 
                        applied and before the date of such sale or 
                        exchange,
                bears to 2 years.
            ``(2) Sales and exchanges to which subsection applies.--
        This subsection shall apply to any sale or exchange if--
                    ``(A) subsection (a) would not (but for this 
                subsection) apply to such sale or exchange by reason 
                of--
                            ``(i) a failure to meet the ownership and 
                        use requirements of subsection (a), or
                            ``(ii) subsection (b)(2), and
                    ``(B) such sale or exchange is by reason of a 
                change in place of employment, health, or other 
                unforeseen circumstances.
    ``(d) Special Rules.--
            ``(1) Joint returns.--For purposes of this section, if a 
        husband and wife make a joint return for the taxable year of 
        the sale or exchange of property, subsection (a) shall, subject 
        to the provisions of subsection (b), apply if either spouse 
        meets the ownership and use requirements of subsection (a) with 
        respect to such property.
            ``(2) Property of deceased spouse.--For purposes of this 
        section, in the case of an unmarried individual whose spouse is 
        deceased on the date of the sale or exchange of property, the 
        period such unmarried individual owned such property shall 
        include the period such deceased spouse held such property 
        before death.
            ``(3) Tenant-stockholder in cooperative housing 
        corporation.--For purposes of this section, if the taxpayer 
        holds stock as a tenant-stockholder (as defined in section 216) 
        in a cooperative housing corporation (as defined in such 
        section), then--
                    ``(A) the holding requirements of subsection (a) 
                shall be applied to the holding of such stock, and
                    ``(B) the use requirements of subsection (a) shall 
                be applied to the house or apartment which the taxpayer 
                was entitled to occupy as such stockholder.
            ``(4) Involuntary conversions.--
                    ``(A) In general.--For purposes of this section, 
                the destruction, theft, seizure, requisition, or 
                condemnation of property shall be treated as the sale 
                of such property.
                    ``(B) Application of section 1033.--In applying 
                section 1033 (relating to involuntary conversions), the 
                amount realized from the sale or exchange of property 
                shall be treated as being the amount determined without 
                regard to this section, reduced by the amount of gain 
                not included in gross income pursuant to this section.
                    ``(C) Property acquired after involuntary 
                conversion.--If the basis of the property sold or 
                exchanged is determined (in whole or in part) under 
                section 1033(b) (relating to basis of property acquired 
                through involuntary conversion), then the holding and 
                use by the taxpayer of the converted property shall be 
                treated as holding and use by the taxpayer of the 
                property sold or exchanged.
            ``(5) Recognition of gain attributable to depreciation.--
        Subsection (a) shall not apply to so much of the gain from the 
        sale of any property as does not exceed the portion of the 
        depreciation adjustments (as defined in section 1250(b)(3)) 
        attributable to periods after December 31, 1996, in respect of 
        such property.
            ``(6) Determination of use during periods of out-of-
        residence care.--In the case of a taxpayer who--
                    ``(A) becomes physically or mentally incapable of 
                self-care, and
                    ``(B) owns property and uses such property as the 
                taxpayer's principal residence during the 5-year period 
                described in subsection (a) for periods aggregating at 
                least 1 year,
        then the taxpayer shall be treated as using such property as 
        the taxpayer's principal residence during any time during such 
        5-year period in which the taxpayer owns the property and 
        resides in any facility (including a nursing home) licensed by 
        a State or political subdivision to care for an individual in 
the taxpayer's condition.
            ``(7) Determination of marital status.--In the case of any 
        sale or exchange, for purposes of this section--
                    ``(A) the determination of whether an individual is 
                married shall be made as of the date of the sale or 
                exchange, and
                    ``(B) an individual legally separated from his 
                spouse under a decree of divorce or of separate 
                maintenance shall not be considered as married.
    ``(e) Denial of Exclusion for Expatriates.--This section shall not 
apply to any sale or exchange by an individual if the treatment 
provided by section 877(a)(1) applies to such individual.
    ``(f) Election To Have Section Not Apply.--This section shall not 
apply to any sale or exchange with respect to which the taxpayer elects 
not to have this section apply.
    ``(g) Residences Acquired in Rollovers Under Section 1034.--For 
purposes of this section, in the case of property the acquisition of 
which by the taxpayer resulted under section 1034 (as in effect on the 
day before the date of the enactment of this sentence) in the 
nonrecognition of any part of the gain realized on the sale or exchange 
of another residence, in determining the period for which the taxpayer 
has owned and used such property as the taxpayer's principal residence, 
there shall be included the aggregate periods for which such other 
residence (and each prior residence taken into account under section 
1223(7) in determining the holding period of such property) had been so 
owned and used.''
    (b) Repeal of Nonrecognition of Gain on Rollover of Principal 
Residence.--Section 1034 (relating to rollover of gain on sale of 
principal residence) is hereby repealed.
    (c) Conforming Amendments.--
            (1) The following provisions of the Internal Revenue Code 
        of 1986 are each amended by striking ``section 1034'' and 
        inserting ``section 121'': sections 25(e)(7), 56(e)(1)(A), 
        56(e)(3)(B)(i), 143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 
        280A(d)(4)(A), 464(f)(3)(B)(i), 1033(h)(3), 1274(c)(3)(B), 
        6334(a)(13), and 7872(f)(11)(A).
            (2) Paragraph (4) of section 32(c) is amended by striking 
        ``(as defined in section 1034(h)(3))'' and by adding at the end 
        the following new sentence: ``For purposes of the preceding 
        sentence, the term `extended active duty' means any period of 
        active duty pursuant to a call or order to such duty for a 
period in excess of 90 days or for an indefinite period.''
            (3) Subparagraph (A) of 143(m)(6) is amended by inserting 
        ``(as in effect on the day before the date of the enactment of 
        the Targeted Investment Incentive and Economic Growth Act of 
        1997)'' after ``1034(e)''.
            (4) Subsection (e) of section 216 is amended by striking 
        ``such exchange qualifies for nonrecognition of gain under 
        section 1034(f)'' and inserting ``such dwelling unit is used as 
        his principal residence (within the meaning of section 121)''.
            (5) Section 512(a)(3)(D) is amended by inserting ``(as in 
        effect on the day before the date of the enactment of the 
        Targeted Investment Incentive and Economic Growth Act of 
        1997)'' after ``1034''.
            (6) Paragraph (7) of section 1016(a) is amended by 
        inserting ``(as in effect on the day before the date of the 
        enactment of the Targeted Investment Incentive and Economic 
        Growth Act of 1997)'' after ``1034'' and by inserting ``(as so 
        in effect)'' after ``1034(e)''.
            (7) Paragraph (3) of section 1033(k) is amended to read as 
        follows:
            ``(3) For exclusion from gross income of gain from 
        involuntary conversion of principal residence, see section 
        121.''
            (8) Subsection (e) of section 1038 is amended to read as 
        follows:
    ``(e) Principal Residences.--If--
            ``(1) subsection (a) applies to a reacquisition of real 
        property with respect to the sale of which gain was not 
        recognized under section 121 (relating to gain on sale of 
        principal residence); and
            ``(2) within 1 year after the date of the reacquisition of 
        such property by the seller, such property is resold by him,
then, under regulations prescribed by the Secretary, subsections (b), 
(c), and (d) of this section shall not apply to the reacquisition of 
such property and, for purposes of applying section 121, the resale of 
such property shall be treated as a part of the transaction 
constituting the original sale of such property.''
            (9) Paragraph (7) of section 1223 is amended by inserting 
        ``(as in effect on the day before the date of the enactment of 
        the Targeted Investment Incentive and Economic Growth Act of 
        1997)'' after ``1034''.
            (10) Paragraph (7) of section 1250(d) is amended to read as 
        follows:
            ``(7) Disposition of principal residence.--Subsection (a) 
        shall not apply to a disposition of property to the extent used 
        by the taxpayer as his principal residence (within the meaning 
        of section 121, relating to gain on sale of principal 
        residence).''
            (11) Subsection (c) of section 6012 is amended by striking 
        ``(relating to one-time exclusion of gain from sale of 
        principal residence by individual who has attained age 55)'' 
        and inserting ``(relating to gain from sale of principal 
        residence)''.
            (12) Paragraph (2) of section 6212(c) is amended by 
        striking subparagraph (C) and by redesignating the succeeding 
        subparagraphs accordingly.
            (13) Section 6504 is amended by striking paragraph (4) and 
        by redesignating the succeeding paragraphs accordingly.
            (14) The item relating to section 121 in the table of 
        sections for part III of subchapter B of chapter 1 is amended 
        to read as follows:

                              ``Sec. 121. Exclusion of gain from sale 
                                        of principal residence.''
            (15) The table of sections for part III of subchapter O of 
        chapter 1 of such Code is amended by striking the item relating 
        to section 1034.
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to sales and exchanges after December 31, 1996.
            (2) Binding contracts, etc.--At the election of the 
        taxpayer, the amendments made by this section shall not apply 
        to a sale or exchange after December 31, 1996, if--
                    (A) such sale or exchange is pursuant to a contract 
                which was binding on the date of the enactment of this 
                Act, or
                    (B) without regard to such amendments, gain would 
                not be recognized under section 1034 of the Internal 
                Revenue Code of 1986 (as in effect on the day before 
                the date of the enactment of this Act) on such sale or 
                exchange by reason of a new residence acquired on or 
                before such date.
        This paragraph shall not apply to any sale or exchange by an 
        individual if the treatment provided by section 877(a)(1) of 
        the Internal Revenue Code of 1986 applies to such individual.

                      TITLE II--RETIREMENT SAVINGS

SEC. 201. INCREASE IN DEDUCTION FOR CONTRIBUTIONS TO INDIVIDUAL 
              RETIREMENT PLANS.

    (a) In General.--Section 219(b)(1)(A) is amended by striking 
``$2,000'' and inserting ``$2,500''.
    (b) Conforming Amendments.--Subsections (a)(1), (b), and (j) of 
section 408 are each amended by striking ``$2,000'' each place it 
appears and inserting ``$2,500''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 202. ROLLOVER OF GAIN FROM SALE OF FARM ASSETS TO INDIVIDUAL 
              RETIREMENT PLANS.

    (a) In General.--Part III of subchapter O of chapter 1 (relating to 
common nontaxable exchanges) is amended by inserting after section 1034 
the following new section:

``SEC. 1034A. ROLLOVER OF GAIN ON SALE OF FARM ASSETS INTO ASSET 
              ROLLOVER ACCOUNT.

    ``(a) Nonrecognition of Gain.--Subject to the limits of subsection 
(c), if a taxpayer has a qualified net farm gain from the sale of a 
qualified farm asset, then, at the election of the taxpayer, gain (if 
any) from such sale shall be recognized only to the extent such gain 
exceeds the contributions to 1 or more asset rollover accounts of the 
taxpayer for the taxable year in which such sale occurs.
    ``(b) Asset Rollover Account.--
            ``(1) General rule.--Except as provided in this section, an 
        asset rollover account shall be treated for purposes of this 
        title in the same manner as an individual retirement plan.
            ``(2) Asset rollover account.--For purposes of this title, 
        the term `asset rollover account' means an individual 
        retirement plan which is designated at the time of the 
        establishment of the plan as an asset rollover 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 asset rollover 
        account.
            ``(2) Aggregate contribution limitation.--Except in the 
        case of rollover contributions, the aggregate amount for all 
        taxable years which may be contributed to all asset rollover 
        accounts established on behalf of an individual shall not 
        exceed--
                    ``(A) $400,000 ($200,000 in the case of a separate 
                return by a married individual), reduced by
                    ``(B) the amount by which the aggregate value of 
                the assets held by the individual (and spouse) in 
                individual retirement plans (other than asset rollover 
                accounts) exceeds $100,000.
        The determination under subparagraph (B) shall be made as of 
        the close of the taxable year for which the determination is 
        being made.
            ``(3) Annual contribution limitations.--
                    ``(A) General rule.--The aggregate contribution 
                which may be made in any taxable year to all asset 
                rollover accounts shall not exceed the lesser of--
                            ``(i) the qualified net farm gain for the 
                        taxable year, or
                            ``(ii) an amount determined by multiplying 
                        the number of years the taxpayer is a qualified 
                        farmer by $10,000.
                    ``(B) Spouse.--In the case of a married couple 
                filing a joint return under section 6013 for the 
                taxable year, subparagraph (A) shall be applied by 
                substituting `$20,000' for `$10,000' for each year the 
                taxpayer's spouse is a qualified farmer.
            ``(4) Time when contribution deemed made.--For purposes of 
        this section, a taxpayer shall be deemed to have made a 
        contribution to an asset rollover account on the last day of 
        the preceding taxable year if the contribution is made on 
        account of such taxable year and is made not later than the 
        time prescribed by law for filing the return for such taxable 
        year (not including extensions thereof).
    ``(d) Qualified Net Farm Gain; Etc.--For purposes of this section--
            ``(1) Qualified net farm gain.--The term `qualified net 
        farm gain' means the lesser of--
                    ``(A) the net capital gain of the taxpayer for the 
                taxable year, or
                    ``(B) the net capital gain for the taxable year 
                determined by only taking into account gain (or loss) 
                in connection with a disposition of a qualified farm 
                asset.
            ``(2) Qualified farm asset.--The term `qualified farm 
        asset' means an asset used by a qualified farmer in the active 
        conduct of the trade or business of farming (as defined in 
        section 2032A(e)).
            ``(3) Qualified farmer.--
                    ``(A) In general.--The term `qualified farmer' 
                means a taxpayer who--
                            ``(i) during the 5-year period ending on 
                        the date of the disposition of a qualified farm 
                        asset materially participated in the trade or 
                        business of farming, and
                            ``(ii) owned (or who with the taxpayer's 
                        spouse owned) 50 percent or more of such trade 
                        or business during such 5-year period.
                    ``(B) Material participation.--For purposes of this 
                paragraph, a taxpayer shall be treated as materially 
                participating in a trade or business if the taxpayer 
                meets the requirements of section 2032A(e)(6).
            ``(4) Rollover contributions.--Rollover contributions to an 
        asset rollover account may be made only from other asset 
        rollover accounts.
    ``(e) Distribution Rules.--For purposes of this title, the rules of 
paragraphs (1) and (2) of section 408(d) shall apply to any 
distribution from an asset rollover account.
    ``(f) Individual Required To Report Qualified Contributions.--
            ``(1) In general.--Any individual who--
                    ``(A) makes a contribution to any asset rollover 
                account for any taxable year, or
                    ``(B) receives any amount from any asset rollover 
                account for any taxable year,
        shall include on the return of tax imposed by chapter 1 for 
        such taxable year and any succeeding taxable year (or on such 
        other form as the Secretary may prescribe) information 
        described in paragraph (2).
            ``(2) Information required to be supplied.--The information 
        described in this paragraph is information required by the 
        Secretary which is similar to the information described in 
        section 408(o)(4)(B).
            ``(3) Penalties.--For penalties relating to reports under 
        this paragraph, see section 6693(b).''
    (b) Contributions Not Deductible.--Section 219(d) (relating to 
other limitations and restrictions) is amended by adding at the end the 
following new paragraph:
            ``(5) Contributions to asset rollover accounts.--No 
        deduction shall be allowed under this section with respect to a 
        contribution under section 1034A.''
    (c) Excess Contributions.--
            (1) In general.--Section 4973 (relating to tax on excess 
        contributions to individual retirement accounts, certain 
        section 403(b) contracts, and certain individual retirement 
        annuities) is amended by adding at the end the following new 
        subsection:
    ``(e) Asset Rollover Accounts.--For purposes of this section, in 
the case of an asset rollover account referred to in subsection (a)(1), 
the term `excess contribution' means the excess (if any) of the amount 
contributed for the taxable year to such account over the amount which 
may be contributed under section 1034A.''
            (2) Conforming amendments.--
                    (A) Section 4973(a)(1) is amended by inserting ``an 
                asset rollover account (within the meaning of section 
                1034A),'' after the comma at the end.
                    (B) The heading for section 4973 is amended by 
                inserting ``asset rollover accounts,'' after 
                ``contracts''.
                    (C) The table of sections for chapter 43 is amended 
                by inserting ``asset rollover accounts,'' after 
                ``contracts'' in the item relating to section 4973.
    (d) Technical Amendments.--
            (1) Section 408(a)(1) (defining individual retirement 
        account) is amended by inserting ``or a qualified contribution 
        under section 1034A,'' before ``no contribution''.
            (2) Section 408(d)(5)(A) is amended by inserting ``or 
        qualified contributions under section 1034A'' after ``rollover 
        contributions''.
            (3)(A) Section 6693(b)(1)(A) is amended by inserting ``or 
        1034A(f)(1)'' after ``408(o)(4)''.
            (B) Section 6693(b)(2) is amended by inserting ``or 
        1034A(f)(1)'' after ``408(o)(4)''.
            (4) The table of sections for part III of subchapter O of 
        chapter 1 is amended by inserting after the item relating to 
        section 1034 the following new item:

                              ``Sec. 1034A. Rollover of gain on sale of 
                                        farm assets into asset rollover 
                                        account.''
    (e) Effective Date.--The amendments made by this section shall 
apply to sales and exchanges after the date of the enactment of this 
Act.

                  TITLE III--PERFORMANCE STOCK OPTIONS

SEC. 301. PERFORMANCE STOCK OPTIONS.

    (a) In General.--Part II of subchapter D of chapter 1 (relating to 
certain stock options) is amended by redesignating section 424 as 
section 425 and by inserting after section 423 the following new 
section:

``SEC. 424. PERFORMANCE STOCK OPTIONS.

    ``(a) In General.--Section 421(a) shall apply with respect to the 
transfer of a share of stock to any person pursuant to the exercise of 
a performance stock option if no disposition of such share is made by 
such person within 1 year after the transfer of such share to such 
person.
    ``(b) Performance Stock Option.--For purposes of this part--
            ``(1) In general.--The term `performance stock option' 
        means an option to purchase stock of any corporation described 
        in paragraph (4) which is granted to any person--
                    ``(A) in connection with the performance of 
                services for an entity described in paragraph (4), and
                    ``(B) upon the attainment of performance goals 
                established by the entity.
            ``(2) Additional requirements.--An option shall not be 
        treated as a performance stock option unless the following 
        requirements are met:
                    ``(A) Nondiscrimination.--Either--
                            ``(i) the option is granted to an employee 
                        who, at the time of the grant, is not a highly 
                        compensated employee, or
                            ``(ii) immediately after the grant of the 
                        option, employees who are not highly 
                        compensated employees hold performance share 
                        options which permit the acquisition of at 
                        least 50 percent of all shares which may be 
                        acquired pursuant to all performance stock 
                        options outstanding (whether or not 
                        exercisable) as of such time.
                For purposes of clause (ii), only that portion of the 
                options held by persons other than nonhighly 
                compensated employees which results in the requirements 
                of clause (ii) not being met shall be treated as 
                options which are not performance stock options, and 
                such portion shall be allocated among options held by 
                such persons in such manner as the Secretary may 
                prescribe.
                    ``(B) Specific number of options.--The option is 
                granted pursuant to a plan that includes either--
                            ``(i) the aggregate number of shares that 
                        may be issued under options granted under the 
                        plan, or
                            ``(ii) a method by which the aggregate 
                        number of shares that may be issued under 
                        options granted under the plan can be 
                        determined (without regard to whether such 
                        aggregate number may change under such method),
                and which is approved by the stockholders of the 
                granting corporation within 12 months before or after 
                the date such plan is adopted.
                    ``(C) Time when option granted.--The option is 
                granted within 10 years after the date the plan 
                described in subparagraph (B) is adopted, or the date 
                such plan is approved by the stockholders, whichever is 
                earlier.
                    ``(D) Time for exercising option.--The option by 
                its terms is not exercisable after the expiration of 10 
                years from the date such option is granted.
                    ``(E) Option price.--Except as provided in 
                paragraph (6) of subsection (c), the option price is 
                not less than the fair market value of the stock at the 
                time the option is granted.
                    ``(F) Transferability.--The option by its terms is 
                not transferable by the person holding the option, 
                other than--
                            ``(i) in the case of an individual, by will 
                        or the laws of descent and distribution, or 
                        pursuant to a qualified domestic relations 
                        order (as defined in subsection (p) of section 
                        414), and
                            ``(ii) in the case of any other person, by 
                        any transaction in which gain or loss is not 
                        recognized in whole or in part.
            ``(3) Election not to treat option as performance stock 
        option.--An option shall not be treated as a performance stock 
        option if--
                    ``(A) as of the time the option is granted the 
                terms of such option provide that it will not be 
                treated as a performance stock option, or
                    ``(B) as of the time such option is exercised the 
                grantor and holder agree that such option will not be 
                treated as a performance stock option.
            ``(4) Entities to which section applies.--This section 
        shall apply to an option granted to a person who performs 
        services for--
                    ``(A) the corporation issuing the option, or its 
                parent or subsidiary corporation,
                    ``(B) a partnership in which the corporation 
                issuing the option holds (at the time of the grant) a 
                capital or profits interest representing at least 20 
                percent of the total capital or profits interest of the 
                partnership, or
                    ``(C) a corporation or a parent or subsidiary 
                corporation of such corporation issuing or assuming a 
                stock option in a transaction to which section 425(a) 
                applies.
            ``(5) Highly compensated employee.--For purposes of this 
        subsection, the term `highly compensated employee' has the 
        meaning given such term by section 414(q).
    ``(c) Special Rules.--
            ``(1) Good faith efforts to value stock.--If a share of 
        stock is acquired pursuant to the exercise by any person of an 
        option which would fail to qualify as a performance stock 
        option under subsection (b) because there was a failure in an 
        attempt, made in good faith, to meet the requirement of 
        subparagraph (E) of subsection (b)(2), the requirement of 
        subparagraph (E) of subsection (b)(2) shall be considered to 
        have been met.
            ``(2) Permissible provisions.--An option that meets the 
        requirements of subsection (b) shall be treated as a 
        performance stock option even if--
                    ``(A) the option holder may pay for the stock with 
                stock of the corporation granting the option,
                    ``(B) the option holder has the right to receive 
                property at the time of the exercise of the option,
                    ``(C) the right to exercise all or any portion of a 
                performance stock option may be subject to any 
                condition, contingency or other criteria (including, 
                without limitation, the continued performance of 
                services, achievement of performance objectives, or the 
                occurrence of any event) which are determined in 
                accordance with the provisions of the plan or the terms 
                of such option, or
                    ``(D) the option is subject to any condition not 
                inconsistent with the provisions of subsection (b).
            ``(3) Fair market value.--For purposes of this section, the 
        fair market value of stock shall be determined without regard 
        to any restriction other than a restriction that, by its terms, 
        will never lapse.
            ``(4) Definition of parent and subsidiary corporations.--
        For purposes of this section, the terms `parent corporation' 
        and `subsidiary corporation' have the meanings given such terms 
        by subsections (e) and (f) of section 425 except that such 
        subsections shall be applied by substituting `20 percent' for 
        `50 percent' each place it appears.
            ``(5) Performance criteria.--In the case of a performance 
        stock option that provides that its exercise is subject to any 
        conditions or criteria described in subparagraph (C) of 
        paragraph (2), the date or time the option is granted with 
        respect to each share that may be acquired shall be the date or 
        time the original performance share option is granted and 
        subject to the provisions of section 425(h), no portion of the 
        option shall be treated as granted at any other time.
            ``(6) Conversion of options.--If--
                    ``(A) there is a transfer of an incentive stock 
                option in exchange for a performance stock option, and
                    ``(B) the number of shares that may be acquired 
                pursuant to such performance stock option and the 
                transferred incentive stock option are the same,
        then the option acquired shall qualify as a performance stock 
        option if the option price pursuant to the performance share 
        option is no less than the option price under the transferred 
        incentive stock option.''
    (b) Conforming Amendments.--
            (1) Section 421(a) is amended by striking ``or 423(a)'' and 
        inserting ``, 423(a), or 424(a)''.
            (2) Section 421(b) is amended--
                    (A) by striking ``or 423(a)'' and inserting ``, 
                423(a), or 424(a)'', and
                    (B) by striking ``or 423(a)(1)'' and inserting 
                ``423(a)(1), or 424(a)''.
            (3) Section 421(c)(1)(A) is amended by inserting ``and the 
        holding period requirement of section 424(a)'' after 
        ``423(a)''.
            (4)(A) Sections 421(a)(2), 422(a)(2), and 423(a)(2) are 
        each amended by striking ``424(a)'' and inserting ``425(a)''.
            (B) Clause (ii) of section 402(e)(4)(E) is amended by 
        striking ``424'' and inserting ``425''.
            (5) Section 423(b)(3) is amended by striking ``424(d)'' and 
        inserting ``425(d)''.
            (6) Section 425(a), as redesignated by subsection (a), is 
        amended by striking ``424(a)'' and inserting ``425(a)''.
            (7) Section 425(c)(3)(A)(ii), as redesignated by subsection 
        (a), is amended by striking ``or 423(a)(1)'' and inserting ``, 
        423(a)(1), or 424(a)''.
            (8) Section 425(g), as redesignated by subsection (a), is 
        amended by striking ``and 423(a)(2)'' and inserting ``, 
        423(a)(2) and 424(b)(4) (as modified by section 424(c)(4))''.
            (9) Section 425(j), as redesignated by subsection (a) 
        (relating to cross-references), is amended by inserting 
        ``performance stock option'' after ``employee stock purchase 
        plans,''.
            (10) Section 1042(c)(1)(B)(ii) is amended by striking ``or 
        423'' and inserting ``423, or 424''.
            (11)(A) Section 6039(a)(1) is amended by inserting ``or 
        performance stock option'' after ``incentive stock option''.
            (B) Section 6039(b)(1) is amended by inserting ``, 
        performance share option,'' after ``incentive stock option''.
            (C) Section 6039(c) is amended by striking ``and'' at the 
        end of paragraph (1), by striking the period at the end of 
        paragraph (2) and inserting ``, and'' and by adding at the end 
        the following new paragraph:
            ``(3) the term `performance share option', see 424(b).''
            (12) The table of sections for part II of subchapter D of 
        chapter 1 is amended by striking the item relating to section 
        424 and inserting the following new items:

                              ``Sec. 424. Performance stock options.
                              ``Sec. 425. Definitions and special 
                                        rules.''

SEC. 302. TAX TREATMENT OF GAIN ON PERFORMANCE SHARE OPTIONS.

    (a) Exclusion.--
            (1) In general.--Part I of subchapter P of chapter 1 
        (relating to capital gains and losses) is amended by adding at 
        the end the following new section:

``SEC. 1203. 50-PERCENT EXCLUSION FOR GAIN FROM STOCK ACQUIRED THROUGH 
              PERFORMANCE STOCK OPTIONS.

    ``(a) General Rule.--Gross income shall not include 50 percent of 
the gain from the disposition of any stock acquired pursuant to the 
exercise of a performance stock option if such disposition occurs more 
than 2 years after the date on which such option was exercised with 
respect to such stock.
    ``(b) Definitions and Rules.--For purposes of this section--
            ``(1) Performance stock option.--The term `performance 
        stock option' has the meaning given such term by section 
        424(b).
            ``(2) Certain acquisitions disregarded.--If stock described 
        in subsection (a) is disposed of and the basis of the person 
        acquiring the stock is determined by reference to the basis of 
        the stock in the hands of the person who acquired it through 
        exercise of the performance stock option, such person shall be 
        treated as acquiring such stock pursuant to such option on the 
        date such stock was acquired pursuant to the exercise of such 
        option.
            ``(3) Exercise by estate.--If a performance stock option is 
        exercised after the death of an individual holder by the estate 
        of the decedent, or by a person who acquired the right to 
        exercise such option by bequest or inheritance or by reason of 
        the death of the decedent, the 2-year holding requirement of 
        subsection (a) shall not apply to the disposition by such 
        estate or person.''
            (2) Conforming amendments.--
                    (A) Section 172(d)(2) (relating to modifications 
                with respect to net operating loss deduction) is 
                amended to read as follows:
            ``(2) Capital gains and losses of taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation--
                    ``(A) the amount deductible on account of losses 
                from sales or exchanges of capital assets shall not 
                exceed the amount includable on account of gains from 
                sales or exchanges of capital assets, and
                    ``(B) the exclusion provided by section 1202 shall 
                not be allowed.''
                    (B) Paragraph (4) of section 642(c) is amended to 
                read as follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        described in section 1202(a), proper adjustment shall be made 
        for any exclusion allowable to the estate or trust under 
        section 1202 or 1203. In the case of a trust, the deduction 
        allowed by this subsection shall be subject to section 681 
        (relating to unrelated business income).''
                    (C) Paragraph (3) of section 643(a) is amended by 
                adding at the end thereof the following new sentence: 
                ``The exclusion under section 1202 or 1203 shall not be 
                taken into account.''
                    (D) Paragraph (4) of section 691(c) is amended by 
                striking ``1202, and 1211'' and inserting ``1202, 1203, 
                and 1211''.
                    (E) The second sentence of paragraph (2) of section 
                871(a) is amended by inserting ``such gains and losses 
                shall be determined without regard to sections 1202 and 
                1203 and'' after ``except that''.
                    (F) The table of sections for part I of subchapter 
                P of chapter 1 is amended by adding after the item 
                relating to section 1202 the following new item:

                              ``Sec. 1203. 50-percent exclusion for 
                                        gain from stock acquired 
                                        through performance stock 
                                        options.''
    (b) Treatment for Wage Withholding and Employment Taxes.--
            (1) FICA taxes.--Section 3121(a) (defining wages) is 
        amended by striking ``or'' at the end of paragraph (20), by 
        striking the period at the end of paragraph (21) and inserting 
        ``, or'', and by adding after paragraph (21) the following new 
        paragraph:
            ``(22) any gain from the exercise of a performance stock 
        option (as defined in section 424(b)) or from the disposition 
        of stock acquired pursuant to the exercise of such a 
        performance stock option.''
            (2) FUTA taxes.--Section 3306(b) (defining wages) is 
        amended by striking ``or'' at the end of paragraph (16), by 
        striking the period at the end of paragraph (17) and inserting 
        ``, or'', and by adding after paragraph (17) the following new 
        paragraph:
            ``(18) any gain described in section 3121(a)(22).''
            (3) Wage withholding.--
                    (A) Section 3401(a) (defining wages) is amended by 
                striking ``or'' at the end of paragraph (20), by 
                striking the period at the end of paragraph (21) and 
                inserting ``, or'', and by adding at the end the 
                following new paragraph:
            ``(22) any gain from the exercise of a performance stock 
        option (as defined in section 424(b)) or from the disposition 
        of stock acquired pursuant to such a performance stock 
        option.''
                    (B) Section 421(b) (relating to effect of 
                disqualifying disposition) is amended by adding at the 
                end the following new sentence: ``A deduction to the 
                employer corporation in the case of a transfer pursuant 
                to an option described in section 422, 423, or 424 
                shall not be disallowed by reason of a failure to 
                withhold tax under chapter 24 with respect to gain on 
                stock acquired in the transfer.''

SEC. 303. EFFECTIVE DATE.

    The amendments made by this title shall apply to options granted 
after the date of the enactment of this Act.

                  TITLE IV--EMPLOYER-PROVIDED TRAINING

SEC. 401. EXTENSION OF EXCLUSION FOR EDUCATIONAL ASSISTANCE PROGRAMS.

    (a) In General.--Section 127 is amended by striking subsection (d) 
and by redesignating subsection (e) as subsection (d).
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 402. STUDY OF NONDISCRIMINATION RULES APPLICABLE TO EDUCATIONAL 
              ASSISTANCE PROGRAMS.

    (a) Study.--The Secretary of Labor, in consultation with the 
Secretary of the Treasury, shall conduct a study which examines--
            (1) the pattern in which taxpayers providing job-related 
        training and education assistance programs under section 127 of 
        the Internal Revenue Code of 1986 extend such benefits to 
        highly compensated employees and nonhighly compensated 
        employees;
            (2) the merits and administrative feasibility of applying 
        nondiscrimination rules to job-related training and educational 
        assistance programs under section 127 of the Internal Revenue 
        Code of 1986 which are similar to the nondiscrimination rules 
        applicable to employer-provided pension plans; and
            (3) the merits and administrative feasibility of 
        conditioning the exclusion for job-related training and section 
        127 assistance on an employee remaining with the employer for 
        at least 1 year after receiving the training or educational 
        assistance.
    (b) Report.--Not later than 9 months after the date of the 
enactment of this Act, the Secretary of Labor shall report to the 
Congress the results of the study conducted under subsection (a), 
including any recommendations for legislation as the Secretary 
determines appropriate.

                       TITLE V--ESTATE TAX RELIEF

SEC. 501. 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) $900,000, reduced by the amount of any exclusion 
        allowed under this section with respect to the estate of a 
        previously deceased spouse of the decedent.
    ``(b) Estates to Which Section Applies.--
            ``(1) In general.--This section shall apply to an estate 
        if--
                    ``(A) the decedent was (at the date of the 
                decedent's death) a citizen or resident of the United 
                States,
                    ``(B) the sum of--
                            ``(i) the adjusted value of the qualified 
                        family-owned business interests described in 
                        paragraph (2), plus
                            ``(ii) the amount of the gifts of such 
                        interests determined under paragraph (3),
                exceeds 50 percent of the adjusted gross estate, and
                    ``(C) 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--
                            ``(i) such interests were owned by the 
                        decedent or a member of the decedent's family, 
                        and
                            ``(ii) 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.
            ``(2) Includible qualified family-owned business 
        interests.--The qualified family-owned business interests 
        described in this paragraph are the interests which--
                    ``(A) are included in determining the value of the 
                gross estate (without regard to this section), and
                    ``(B) are acquired by any qualified heir from, or 
                passed to any qualified heir from, the decedent (within 
                the meaning of section 2032A(e)(9)).
            ``(3) Includible gifts of interests.--The amount of the 
        gifts of qualified family-owned business interests determined 
        under this paragraph is the excess of--
                    ``(A) the sum of--
                            ``(i) the amount of such gifts from the 
                        decedent to members of the decedent's family 
                        taken into account under subsection 
                        2001(b)(1)(B), plus
                            ``(ii) the amount of such gifts otherwise 
                        excluded under section 2503(b),
                to the extent such interests are continuously held by 
                members of such family (other than the decedent's 
                spouse) between the date of the gift and the date of 
                the decedent's death, over
                    ``(B) the amount of such gifts from the decedent to 
                members of the decedent's family otherwise included in 
                the gross estate.
    ``(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 paragraph (3) 
        or (4) of section 2053(a), and
            ``(2) increased by the excess of--
                    ``(A) the sum of--
                            ``(i) the amount of gifts determined under 
                        subsection (b)(3), plus
                            ``(ii) the amount (if more than de minimis) 
                        of other transfers from the decedent to the 
                        decedent's spouse (at the time of the transfer) 
                        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, other 
                        than gifts to members of the decedent's family 
                        otherwise excluded under section 2503(b), over
                    ``(B) the sum of the amounts described in clauses 
                (i), (ii), and (iii) of subparagraph (A) which are 
                otherwise includible in the gross estate.
For purposes of the preceding sentence, the Secretary may provide that 
de minimis gifts to persons other than members of the decedent's family 
shall not be taken into account.
    ``(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 paragraph (3) or (4) of 
        section 2053(a), 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 clause (i) 
                or (ii), 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 in an entity carrying on a trade 
                or business, if--
                            ``(i) at least--
                                    ``(I) 50 percent of such entity is 
                                owned (directly or indirectly) by the 
                                decedent and members of the decedent's 
                                family,
                                    ``(II) 70 percent of such entity is 
                                so owned by members of 2 families, or
                                    ``(III) 90 percent of such entity 
                                is so owned by members of 3 families, 
                                and
                            ``(ii) for purposes of subclause (II) or 
                        (III) of clause (i), at least 30 percent of 
                        such entity is so owned by the decedent and 
                        members of the decedent's family.
            ``(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 an entity, if the stock or 
                debt of such entity or a controlled group (as defined 
                in section 267(f)(1)) of which such entity was a member 
                was readily tradable on an established securities 
market or secondary market (as defined by the Secretary) at any time 
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)),
                    ``(D) that portion of an interest in a trade or 
                business that is attributable to--
                            ``(i) cash or marketable securities, or 
                        both, in excess of the reasonably expected day-
                        to-day working capital needs of such trade or 
                        business, and
                            ``(ii) any other assets of the trade or 
                        business (other than assets used in the active 
                        conduct of a trade or business described in 
                        section 542(c)(2)), the income of which is 
                        described in section 543(a) or in subparagraph 
                        (B), (C), (D), or (E) of section 954(c)(1) 
                        (determined by substituting `trade or business' 
for `controlled foreign corporation').
            ``(3) Rules regarding ownership.--
                    ``(A) Ownership of entities.--For purposes of 
                paragraph (1)(B)--
                            ``(i) Corporations.--Ownership of a 
                        corporation shall be determined by the holding 
                        of stock possessing the appropriate percentage 
                        of the total combined voting power of all 
                        classes of stock entitled to vote and the 
                        appropriate percentage of the total value of 
                        shares of all classes of stock.
                            ``(ii) Partnerships.--Ownership of a 
                        partnership shall be determined by the owning 
                        of the appropriate percentage of the capital 
                        interest in such partnership.
                    ``(B) Ownership of tiered entities.--For purposes 
                of this section, if by reason of holding an interest in 
                a trade or business, a decedent, any member of the 
                decedent's family, any qualified heir, or any member of 
                any qualified heir's family is treated as holding an 
                interest in any other trade or business--
                            ``(i) such ownership interest in the other 
                        trade or business shall be disregarded in 
                        determining if the ownership interest in the 
                        first trade or business is a qualified family-
                        owned business interest, and
                            ``(ii) this section shall be applied 
                        separately in determining if such interest in 
                        any other trade or business is a qualified 
                        family-owned business interest.
                    ``(C) Individual ownership rules.--For purposes of 
                this section, an interest owned, directly or 
                indirectly, by or for an entity described in paragraph 
                (1)(B) shall be considered as being owned 
                proportionately by or for the entity's shareholders, 
                partners, or beneficiaries. A person shall be treated 
                as a beneficiary of any trust only if such person has a 
                present interest in such trust.
    ``(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 material participation requirements 
                described in section 2032A(c)(6)(B) are not met with 
                respect to the qualified family-owned business interest 
                which was acquired (or passed) from the decedent,
                    ``(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)),
                    ``(C) the qualified heir loses United States 
                citizenship (within the meaning of section 877) or with 
                respect to whom an event described in subparagraph (A) 
                or (B) of section 877(e)(1) occurs, and such heir does 
                not comply with the requirements of subsection (g), or
                    ``(D) the principal place of business of a trade or 
                business of the qualified family-owned business 
                interest ceases to be located in the United States.
            ``(2) Additional estate tax.--
                    ``(A) In general.--The amount of the additional 
                estate tax imposed by paragraph (1) shall be equal to--
                            ``(i) the applicable percentage of 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
                            ``(ii) interest on the amount determined 
                        under clause (i) at the underpayment rate 
                        established under section 6621 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.
                    ``(B) Applicable percentage.--For purposes of this 
                paragraph, the applicable percentage shall be 
                determined under the following table:

        ``If the event described in

          paragraph (1) occurs in

          the following year of
                                                         The applicable
          material participation:
                                                         percentage is:
    1 through 6...................................                 100 
    7.............................................                  80 
    8.............................................                  60 
    9.............................................                  40 
    10............................................                  20.

    ``(g) Security Requirements for Noncitizen Qualified Heirs.--
            ``(1) In general.--Except upon the application of 
        subparagraph (F) or (M) of subsection (h)(3), if a qualified 
        heir is not a citizen of the United States, any interest under 
        this section passing to or acquired by such heir (including any 
        interest held by such heir at a time described in subsection 
        (f)(1)(C)) shall be treated as a qualified family-owned 
        business interest only if the interest passes or is acquired 
        (or is held) in a qualified trust.
            ``(2) Qualified trust.--The term `qualified trust' means a 
        trust--
                    ``(A) which is organized under, and governed by, 
                the laws of the United States or a State, and
                    ``(B) except as otherwise provided in regulations, 
                with respect to which the trust instrument requires 
                that at least 1 trustee of the trust be an individual 
                citizen of the United States or a domestic corporation.
    ``(h) 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 treated 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).
                    ``(M) Section 6324B (relating to special lien for 
                additional estate tax).''.
    (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, 1996.

SEC. 502. PORTION OF ESTATE TAX SUBJECT TO 4-PERCENT INTEREST RATE 
              INCREASED TO $1,600,000.

    (a) In General.--Subparagraph (B) of section 6601(j)(2) (defining 
4-percent portion) is amended by striking ``$345,800'' and inserting 
``$600,800''.
    (b) Effective Date.--The amendment made by this section shall apply 
to estates of decedents dying after December 31, 1996.

SEC. 503. CERTAIN CASH RENTALS OF FARMLAND NOT TO CAUSE RECAPTURE OF 
              SPECIAL ESTATE TAX VALUATION.

    (a) In General.--Subsection (c) of section 2032A (relating to tax 
treatment of dispositions and failures to use for qualified use) is 
amended by adding at the end the following new paragraph:
            ``(8) Certain cash rental not to cause recapture.--For 
        purposes of this subsection, a qualified heir shall not be 
        treated as failing to use property in a qualified use solely 
        because such heir rents such property on a net cash basis to a 
        member of the decedent's family, but only if, during the period 
        of the lease, such member of the decedent's family uses such 
        property in a qualified use.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply with respect to rentals occurring after December 31, 1976.

                  TITLE VI--TRANSPORTATION INVESTMENT

SEC. 601. FINDINGS.

    Congress finds that--
            (1) decaying roads and bridges are clogging the economic 
        lifelines and hampering growth of communities around the 
        country, costing nearly $40,000,000,000 in annual losses from 
        traffic congestion alone;
            (2) with ``just-in-time'' manufacturing a critical aspect 
        of our economic competitiveness, a modern, efficient 
        transportation system is more vital now than ever;
            (3) user fee revenues continue to flow into our 
        transportation trust funds for their intended purpose of 
        infrastructure investment;
            (4) Federal budget constraints have prevented States from 
        fully utilizing all amounts of the transportation trust fund 
        revenues made available to them;
            (5) at the same time, recent Federal initiatives have 
        equipped States with new infrastructure financing tools that 
        help attract private investment, stimulate the Nation's 
        economy, and create jobs; and
            (6) enabling States to use a portion of their unobligated 
        balances of apportioned Highway Trust Fund revenues via these 
        new financing tools will maximize the benefits of vitally 
        needed infrastructure investments.

SEC. 602. PROGRAM STRUCTURE.

    (a) In General.--The Secretary of Transportation (referred to in 
this title as the ``Secretary'') shall make available to a State a 
portion of the State's unobligated balance in accordance with section 
603.
    (b) Qualifying Project.--Federal funds made available under this 
title may be used only to provide assistance with respect to a project 
eligible for assistance under section 133(b) of title 23, United States 
Code.
    (c) Project Administration.--A project receiving assistance under 
this title shall be carried out in accordance with title 23, United 
States Code.

SEC. 603. FUNDING.

    (a) Unobligated Balances.--
            (1) In general.--For each fiscal year, upon the request of 
        a State, the Secretary shall make available to the State to 
        carry out projects eligible for assistance under this title an 
        aggregate amount not to exceed 10 percent, as of the last day 
        of the preceding fiscal year, of the funds that were 
        apportioned to the State under sections 104(b)(1), 104(b)(3), 
        104(b)(5), 144, and 160 of title 23, United States Code, and 
        are not obligated.
            (2) Urbanized areas over 200,000.--Funds that were 
        apportioned to a State under section 104(b)(3) or 160 of title 
        23, United States Code, and attributed to an urbanized area of 
        the State with an urbanized area population of over 200,000 
        under section 133(d)(3) of that title may be made available by 
        the Secretary under paragraph (1) only if the metropolitan 
        planning organization designated for the area concurs, in 
        writing, with that use.
    (b) Use of Funds.--
            (1) State infrastructure banks.--
                    (A) In general.--A State shall contribute the 
                amounts made available to the State under subsection 
                (a)(1) to the State infrastructure bank established by 
                the State in accordance with section 350 of the 
                National Highway System Designation Act of 1995 (23 
                U.S.C. 101 note; 109 Stat. 618). Federal funds 
                contributed to the bank under this subparagraph shall 
                constitute a capitalization grant for the 
                infrastructure bank.
                    (B) Disbursements.--The Secretary shall ensure that 
                the disbursements of the Federal funds referred to in 
                subparagraph (A) to the infrastructure bank shall be at 
                a rate consistent with historic rates for the Federal-
                aid highway program.
            (2) Grants.--In lieu of contributing the funds to an 
        infrastructure bank, and upon approval by the Secretary, a 
        State may obligate amounts made available to the State under 
        subsection (a)(1) for a project eligible for assistance under 
        section 602(b).
            (3) No obligation limitation.--No limitation shall apply to 
        obligations of amounts made available under subsection (a)(1).
                                 <all>