[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 2 Introduced in Senate (IS)]







105th CONGRESS
  1st Session
                                  S. 2

 To amend the Internal Revenue Code of 1986 to provide tax relief for 
               American families, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 21, 1997

    Mr. Roth  (for himself, Mr. Lott, Mr. Abraham, Mr. Allard, Mr. 
   Ashcroft, Mr. Brownback, Mr. Craig, Mr. D'Amato, Mr. DeWine, Mr. 
 Domenici, Mr. Enzi, Mr. Faircloth, Mr. Gorton, Mr. Grams, Mr. Hagel, 
   Mr. Hatch, Mr. Helms, Mrs. Hutchison, Mr. Kyl, Mr. Murkowski, Mr. 
  Nickles, Mr. Roberts, Mr. Santorum, Mr. Sessions, Mr. Smith of New 
 Hampshire, Mr. Smith of Oregon, Mr. Thomas, Mr. Thurmond, Mr. Warner, 
Mr. Coverdell, Mr. Coats, and Mr. Kempthorne) 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 provide tax relief for 
               American families, 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; TABLE OF CONTENTS.

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

Sec. 1. Short title; amendment of 1986 Code; table of contents.
                       TITLE I--CHILD TAX CREDIT

Sec. 101. Child tax credit.
                     TITLE II--CAPITAL GAINS REFORM

             Subtitle A--Taxpayers Other Than Corporations

Sec. 201. Capital gains deduction.
Sec. 202. Indexing of certain assets acquired after December 31, 1996, 
                            for purposes of determining gain.
Sec. 203. Modifications to exclusion of gain on certain small business 
                            stock.
                  Subtitle B--Corporate Capital Gains

Sec. 211. Reduction of alternative capital gain tax for corporations.
  Subtitle C--Capital Loss Deduction Allowed With Respect to Sale or 
                    Exchange of Principal Residence

Sec. 221. Capital loss deduction allowed with respect to sale or 
                            exchange of principal residence.
                 TITLE III--ESTATE AND GIFT PROVISIONS

Sec. 301. Increase in unified estate and gift tax credit.
Sec. 302. Family-owned business exclusion.
Sec. 303. 20-year installment payment where estate consists largely of 
                            interest in closely held business.
Sec. 304. No interest on certain portion of estate tax extended under 
                            6166.
                      TITLE IV--SAVINGS INCENTIVES

Sec. 401. Restoration of IRA deduction.
Sec. 402. IRA allowed for spouses who are not active plan participants.
Sec. 403. Establishment of nondeductible tax-free individual retirement 
                            accounts.
Sec. 404. Tax-free withdrawals from individual retirement plans for 
                            business startups.
Sec. 405. Tax-free withdrawals from individual retirement plans for 
                            long-term unemployed.
Sec. 406. Distributions from certain plans may be used without penalty 
                            to pay higher education expenses.

                       TITLE I--CHILD TAX CREDIT

SEC. 101. CHILD TAX CREDIT.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
(relating to nonrefundable personal credits) is amended by inserting 
after section 23 the following new section:

``SEC. 24. CHILD TAX CREDIT.

    ``(a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an amount 
equal to $500 multiplied by the number of qualifying children of the 
taxpayer.
    ``(b) Limitation.--
            ``(1) In general.--The amount of the credit which would 
        (but for this subsection) be allowed by subsection (a) shall be 
        reduced (but not below zero) by $25 for each $1,000 (or 
        fraction thereof) by which the taxpayer's adjusted gross income 
        exceeds the threshold amount.
            ``(2) Threshold amount.--For purposes of paragraph (1), the 
        term `threshold amount' means--
                    ``(A) $110,000 in the case of a joint return,
                    ``(B) $75,000 in the case of an individual who is 
                not married, and
                    ``(C) $55,000 in the case of a married individual 
                filing a separate return.
        For purposes of this paragraph, marital status shall be 
        determined under section 7703.
    ``(c) Qualifying Child.--For purposes of this section--
            ``(1) In general.--The term `qualifying child' means any 
        individual if--
                    ``(A) the taxpayer is allowed a deduction under 
                section 151 with respect to such individual for such 
                taxable year,
                    ``(B) such individual has not attained the age of 
                18 as of the close of the calendar year in which the 
                taxable year of the taxpayer begins, and
                    ``(C) such individual bears a relationship to the 
                taxpayer described in section 32(c)(3)(B) (determined 
                without regard to clause (ii) thereof).
            ``(2) Exception for certain noncitizens.--The term 
        `qualifying child' shall not include any individual who would 
        not be a dependent if the first sentence of section 152(b)(3) 
        were applied without regard to all that follows `resident of 
        the United States'.
    ``(d) Taxable Year Must Be Full Taxable Year.--Except in the case 
of a taxable year closed by reason of the death of the taxpayer, no 
credit shall be allowable under this section in the case of a taxable 
year covering a period of less than 12 months.''
    (b) Conforming Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1 is amended by inserting after the 
item relating to section 23 the following new item:

                              ``Sec. 24. Child tax credit.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

                     TITLE II--CAPITAL GAINS REFORM

             Subtitle A--Taxpayers Other Than Corporations

SEC. 201. CAPITAL GAINS DEDUCTION.

    (a) In General.--Part I of subchapter P of chapter 1 (relating to 
treatment of capital gains) is amended by redesignating section 1202 as 
section 1203 and by inserting after section 1201 the following new 
section:

``SEC. 1202. CAPITAL GAINS DEDUCTION.

    ``(a) General Rule.--If for any taxable year a taxpayer other than 
a corporation has a net capital gain, 50 percent of such gain shall be 
a deduction from gross income.
    ``(b) Estates and Trusts.--In the case of an estate or trust, the 
deduction shall be computed by excluding the portion (if any) of the 
gains for the taxable year from sales or exchanges of capital assets 
which, under sections 652 and 662 (relating to inclusions of amounts in 
gross income of beneficiaries of trusts), is includible by the income 
beneficiaries as gain derived from the sale or exchange of capital 
assets.
    ``(c) Coordination With Treatment of Capital Gain Under Limitation 
on Investment Interest.--For purposes of this section, the net capital 
gain for any taxable year shall be reduced (but not below zero) by the 
amount which the taxpayer takes into account as investment income under 
section 163(d)(4)(B)(iii).
    ``(d) Adjustments to Net Capital Gain.--For purposes of subsection 
(a)--
            ``(1) Collectibles.--
                    ``(A) In general.--Net capital gain shall be 
                computed without regard to collectibles gain.
                    ``(B) Collectibles gain.--
                            ``(i) In general.--The term `collectibles 
                        gain' means gain from the sale or exchange of a 
                        collectible (as defined in section 408(m) 
                        without regard to paragraph (3) thereof) which 
                        is a capital asset held for more than 1 year 
                        but only to the extent such gain is taken into 
                        account in computing gross income.
                            ``(ii) Coordination with section 1022.--
                        Gain from the disposition of a collectible 
                        which is an indexed asset to which section 
                        1022(a) applies shall be disregarded for 
                        purposes of this section. A taxpayer may elect 
                        to treat any collectible specified in such 
                        election as not being an indexed asset for 
                        purposes of section 1022. Any such election 
                        (and specification) once made, shall be 
                        irrevocable.
                            ``(iii) Partnerships, etc.--For purposes of 
                        clause (i), any gain from the sale of an 
                        interest in a partnership, S corporation, or 
                        trust which is attributable to unrealized 
                        appreciation in the value of collectibles shall 
                        be treated as gain from the sale or exchange of 
                        a collectible. Rules similar to the rules of 
                        section 751 shall apply for purposes of the 
                        preceding sentence.
            ``(2) Gain from small business stock.--Net capital gain 
        shall be computed without regard to any gain from the sale or 
        exchange of any qualified small business stock (within the 
        meaning of section 1203(b)) held more than 5 years which is 
        taken into account in computing gross income.
            ``(3) Pre-1997 gain.--
                    ``(A) In general.--In the case of a taxable year 
                which includes January 1, 1997, net capital gain shall 
                be computed without regard to pre-1997 gain.
                    ``(B) Pre-1997 gain.--The term `pre-1997 gain' 
                means the amount which would be net capital gain under 
                subsection (a) for a taxable year if such net capital 
                gain were determined by taking into account only gain 
                or loss properly taken into account for the portion of 
                the taxable year before January 1, 1997.
                    ``(C) Special rules for pass-thru entities.--
                            ``(i) In general.--In applying subparagraph 
                        (A) with respect to any pass-thru entity, the 
                        determination of when gains and losses are 
                        properly taken into account shall be made at 
                        the entity level.
                            ``(ii) Pass-thru entity defined.--For 
                        purposes of clause (i), the term `pass-thru 
                        entity' means--
                                    ``(I) a regulated investment 
                                company,
                                    ``(II) a real estate investment 
                                trust,
                                    ``(III) an S corporation,
                                    ``(IV) a partnership,
                                    ``(V) an estate or trust, and
                                    ``(VI) a common trust fund.
    ``(e) Maximum Rate on Nondeductible Capital Gain.--
            ``(1) In general.--If a taxpayer other than a corporation 
        has a nondeductible net capital gain for any taxable year, then 
        the tax imposed by section 1 for the taxable year shall not 
        exceed the sum of--
                    ``(A) a tax computed on the taxable income reduced 
                by the amount of the nondeductible net capital gain, at 
                the same rates and in the same manner as if this 
                subsection had not been enacted, plus
                    ``(B) a tax of 28 percent of the nondeductible net 
                capital gain.
            ``(2) Nondeductible net capital gain.--For purposes of 
        paragraph (1), the term `nondeductible net capital gain' means 
        an amount equal to the amount of the reduction in net capital 
        gain under subsection (a) by reason of subsection (d).''
    (b) Deduction Allowable in Computing Adjusted Gross Income.--
Subsection (a) of section 62 is amended by inserting after paragraph 
(16) the following new paragraph:
            ``(17) Long-term capital gains.--The deduction allowed by 
        section 1202.''
    (c) Technical and Conforming Changes.--
            (1)(A) Section 1 is amended by striking subsection (h).
            (B)(i) Section 641(d)(2)(A) is amended by striking ``Except 
        as provided in section 1(h), the'' and inserting ``The''.
            (ii) Section 641(d)(2)(C) is amended by inserting after 
        clause (iii) the following new clause:
                            ``(iv) The deduction under section 1202.''
            (2) Paragraph (1) of section 170(e) is amended by striking 
        ``the amount of gain'' in the material following subparagraph 
        (B)(ii) and inserting ``50 percent (80 percent in the case of a 
        corporation) of the amount of gain''.
            (3) Subparagraph (B) of section 172(d)(2) is amended to 
        read as follows:
                    ``(B) the deduction under section 1202 shall not be 
                allowed.''
            (4) The last sentence of section 453A(c)(3) is amended by 
        striking all that follows ``long-term capital gain,'' and 
        inserting ``the maximum rate on net capital gain under section 
        1201 or the deduction under section 1202 (whichever is 
        appropriate) shall be taken into account.''
            (5) 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 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any deduction 
        allowable to the estate or trust under section 1202 (relating 
        to capital gains deduction). In the case of a trust, the 
        deduction allowed by this subsection shall be subject to 
        section 681 (relating to unrelated business income).''
            (6) The last sentence of section 643(a)(3) is amended to 
        read as follows: ``The deduction under section 1202 (relating 
        to capital gains deduction) shall not be taken into account.''
            (7) Subparagraph (C) of section 643(a)(6) is amended by 
        inserting ``(i)'' before ``there shall'' and by inserting 
        before the period ``, and (ii) the deduction under section 1202 
        (relating to capital gains deduction) shall not be taken into 
        account''.
            (8)(A) Paragraph (2) of section 904(b) is amended by 
        striking subparagraph (A), by redesignating subparagraph (B) as 
        subparagraph (A), and by inserting after subparagraph (A) (as 
        so redesignated) the following new subparagraph:
                    ``(B) Other taxpayers.--In the case of a taxpayer 
                other than a corporation, taxable income from sources 
                outside the United States shall include gain from the 
                sale or exchange of capital assets only to the extent 
                of foreign source capital gain net income.''
            (B) Subparagraph (A) of section 904(b)(2), as so 
        redesignated, is amended--
                    (i) by striking all that precedes clause (i) and 
                inserting the following:
                    ``(A) Corporations.--In the case of a corporation--
                '', and
                    (ii) by striking in clause (i) ``in lieu of 
                applying subparagraph (A),''.
            (C) Paragraph (3) of section 904(b) is amended by striking 
        subparagraphs (D) and (E) and inserting the following new 
        subparagraph:
                    ``(D) Rate differential portion.--The rate 
                differential portion of foreign source net capital 
                gain, net capital gain, or the excess of net capital 
                gain from sources within the United States over net 
                capital gain, as the case may be, is the same 
                proportion of such amount as the excess of the highest 
                rate of tax specified in section 11(b) over the 
                alternative rate of tax under section 1201(a) bears to 
                the highest rate of tax specified in section 11(b).''
            (D) Clause (v) of section 593(b)(2)(D) is amended--
                    (i) by striking ``if there is a capital gain rate 
                differential (as defined in section 904(b)(3)(D)) for 
                the taxable year,'', and
                    (ii) by striking ``section 904(b)(3)(E)'' and 
                inserting ``section 904(b)(3)(D)''.
            (9) The last sentence of section 1044(d) is amended by 
        striking ``1202'' and inserting ``1201(b) or 1203''.
            (10)(A) Paragraph (2) of section 1211(b) is amended to read 
        as follows:
            ``(2) the sum of--
                    ``(A) the excess of the net short-term capital loss 
                over the net long-term capital gain, and
                    ``(B) one-half of the excess of the net long-term 
                capital loss over the net short-term capital gain.''
            (B) So much of paragraph (2) of section 1212(b) as precedes 
        subparagraph (B) thereof is amended to read as follows:
            ``(2) Special rules.--
                    ``(A) Adjustments.--
                            ``(i) For purposes of determining the 
                        excess referred to in paragraph (1)(A), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the lesser 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b), or
                                    ``(II) the adjusted taxable income 
                                for such taxable year.
                            ``(ii) For purposes of determining the 
                        excess referred to in paragraph (1)(B), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the sum 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b) or the adjusted 
                                taxable income for such taxable year, 
                                whichever is the least, plus
                                    ``(II) the excess of the amount 
                                described in subclause (I) over the net 
                                short-term capital loss (determined 
                                without regard to this subsection) for 
                                such year.''
            (C) Subsection (b) of section 1212 is amended by adding at 
        the end the following new paragraph:
            ``(3) Transitional rule.--
                    ``(A) In general.--The amount determined under 
                subclause (II) of paragraph (2)(A)(ii) for any taxable 
                year shall be reduced (but not below zero) by the 
                excess of--
                            ``(i) the amount of the unused pre-1998 
                        long-term capital loss for such year, over
                            ``(ii) the sum of the long-term capital 
                        gain and the net short-term capital gain for 
                        such taxable year.
                Section 1211(b)(2)(B) shall be applied without regard 
                to `one-half of' with respect to such excess for such 
                taxable year.
                    ``(B) Unused pre-1998 long-term capital loss.--For 
                purposes of this paragraph, the term `unused pre-1998 
                long-term capital loss' means, with respect to a 
                taxable year, the excess of--
                            ``(i) the amount which under paragraph 
                        (1)(B) (as in effect for taxable years 
                        beginning before January 1, 1998) is treated as 
                        a long-term capital loss for the taxpayer's 
                        first taxable year beginning after December 31, 
                        1997, over
                            ``(ii) the sum of--
                                    ``(I) the aggregate amount 
                                determined under subparagraph (A)(ii) 
                                for all prior taxable years beginning 
                                after December 31, 1997, and
                                    ``(II) the aggregate reductions 
                                under subparagraph (A) for all such 
                                prior taxable years.''
            (11) Paragraph (1) of section 1402(i) is amended by 
        inserting ``, and the deduction provided by section 1202 shall 
        not apply'' before the period at the end thereof.
            (12) Subsection (e) of section 1445 is amended--
                    (A) in paragraph (1) by striking ``35 percent (or, 
                to the extent provided in regulations, 28 percent)'' 
                and inserting ``28 percent (or, to the extent provided 
                in regulations, 19.8 percent)'', and
                    (B) in paragraph (2) by striking ``35 percent'' and 
                inserting ``28 percent''.
            (13)(A) The second sentence of section 7518(g)(6)(A) is 
        amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (28 percent''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936 is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) of such Code applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (28 percent''.
    (d) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by striking the item relating to 
section 1202 and by inserting after the item relating to section 1201 
the following new items:

                              ``Sec. 1202. Capital gains deduction.
                              ``Sec. 1203. 50-percent exclusion for 
                                        gain from certain small 
                                        business stock.''
    (e) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after December 31, 1996.
            (2) Contributions.--The amendment made by subsection (c)(2) 
        shall apply to contributions after December 31, 1996.
            (3) Use of long-term losses.--The amendments made by 
        subsection (c)(10) shall apply to taxable years beginning after 
        December 31, 1997.
            (4) Withholding.--The amendments made by subsection (c)(12) 
        shall apply only to amounts paid after the date of the 
        enactment of this Act.

SEC. 202. 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 (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 \1/10\ 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 
                includible 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 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 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, 1997.
Subsection (d) shall not apply to property to which this subsection 
applies.

SEC. 203. MODIFICATIONS TO EXCLUSION OF GAIN ON CERTAIN SMALL BUSINESS 
              STOCK.

    (a) Repeal of Minimum Tax Preference.--
            (1) Subsection (a) of section 57 is amended by striking 
        paragraph (7).
            (2) Subclause (II) of section 53(d)(1)(B)(ii) is amended by 
        striking ``, (5), and (7)'' and inserting ``and (5)''.
    (b) Stock of Larger Businesses Eligible for Reduced Rates.--
Paragraph (1) of section 1203(d), as redesignated by section 201, is 
amended by striking ``$50,000,000'' each place it appears and inserting 
``$100,000,000''.
    (c) Repeal of Per-Issuer Limitation.--Section 1203, as so 
redesignated, is amended by striking subsection (b).
    (d) Other Modifications.--
            (1) Repeal of working capital limitation.--Paragraph (6) of 
        section 1203(e), as so redesignated, is amended--
                    (A) by striking ``2 years'' in subparagraph (B) and 
                inserting ``5 years'', and
                    (B) by striking the last sentence.
            (2) Exception from redemption rules where business 
        purpose.--Paragraph (3) of section 1203(c), as so redesignated, 
        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 
                limitations of this section.''
    (e) Conforming Amendments.--
            (1) Subsection (c) of section 1203, as so redesignated, is 
        amended by striking ``subsections (f) and (h)'' and inserting 
        ``subsections (e) and (g)''.
            (2) Paragraph (2) of section 1203(c), as so redesignated, 
        is amended--
                    (A) by striking ``subsection (e)'' each place it 
                appears and inserting ``subsection (d)'', and
                    (B) by striking ``subsection (e)(4) in subparagraph 
                (B)(ii) and inserting ``subsection (d)(4)''.
            (3) Paragraph (1) of section 1203(e), as so redesignated, 
        is amended by striking ``subsection (c)(2)'' and inserting 
        ``subsection (b)(2)''.
            (4) Paragraph (1) of section 1203(g), as so redesignated, 
        is amended to read as follows:
            ``(1) In general.--If any amount included in gross income 
        by reason of holding an interest in a pass-thru entity meets 
        the requirements of paragraph (2), such amount shall be treated 
        as gain from the sale or exchange of any qualified small 
        business stock held for more than 5 years.''
            (5) Section 1203, as so redesignated, as amended by the 
        preceding provisions of this section, is amended by 
        redesignating subsections (c) through (k) as subsections (b) 
        through (j), respectively.
    (f) Clerical Amendment.--Section 1203, as so redesignated, is 
amended by adding at the end the following new subsection:
    ``(k) Cross Reference.--

                                ``For reduced rates on gain of 
qualified small business stock held more than 5 years, see sections 
1201(b) and 1202(e).''
    (g) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to stock issued 
        after August 10, 1993.
            (2) Increase in size.--The amendment made by subsection (b) 
        shall apply to stock issued after the date of the enactment of 
        this Act.

                  Subtitle B--Corporate Capital Gains

SEC. 211. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX FOR CORPORATIONS.

    (a) In General.--Section 1201 is amended to read as follows:

``SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

    ``(a) General Rule.--If for any taxable year a corporation has a 
net capital gain, then, in lieu of the tax imposed by sections 11, 511, 
and 831 (a) and (b) (whichever is applicable), there is hereby imposed 
a tax (if such tax is less than the tax imposed by such sections) which 
shall consist of the sum of--
            ``(1) a tax computed on the taxable income reduced by the 
        amount of the net capital gain, at the rates and in the manner 
        as if this subsection had not been enacted, plus
            ``(2) a tax of 28 percent of the net capital gain.
    ``(b) Special Rules for Qualified Small Business Gain.--
            ``(1) In general.--If for any taxable year a corporation 
        has gain from the sale or exchange of any qualified small 
        business stock held for more than 5 years, the amount 
        determined under subsection (a)(2) for such taxable year shall 
        be equal to the sum of--
                    ``(A) 21 percent of the lesser of such gain or the 
                corporation's net capital gain, plus
                    ``(B) 28 percent of the net capital gain reduced by 
                the gain taken into account under subparagraph (A).
            ``(2) Qualified small business stock.--For purposes of 
        paragraph (1), the term `qualified small business stock' has 
        the meaning given such term by section 1203(b), except that 
        stock shall not be treated as qualified small business stock if 
        such stock was at any time held by a member of the parent-
        subsidiary controlled group (as defined in section 1203(c)(3)) 
        which includes the qualified small business.
    ``(c) Transitional Rule.--
            ``(1) In general.--In applying this section, net capital 
        gain for any taxable year shall not exceed the net capital gain 
        determined by taking into account only gains and losses 
        properly taken into account for the portion of the taxable year 
        after December 31, 1996.
            ``(2) Special rule for pass-thru entities.--Section 
        1202(d)(3)(C) shall apply for purposes of paragraph (1).
    ``(d) Cross References.--

                                ``For computation of the alternative 
tax--
                                  ``(1) in the case of life insurance 
companies, see section 801(a)(2),
                                  ``(2) in the case of regulated 
investment companies and their shareholders, see section 852(b)(3) (A) 
and (D), and
                                  ``(3) in the case of real estate 
investment trusts, see section 857(b)(3)(A).''
    (b) Technical Amendment.--Clause (iii) of section 852(b)(3)(D) is 
amended by striking ``65 percent'' and inserting ``72 percent''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years ending after December 31, 1996.
            (2) Qualified small business stock.--Section 1201(b) of the 
        Internal Revenue Code of 1986 (as added by subsection (a)) 
        shall apply to gain from qualified small business stock 
        acquired on or after the date of the enactment of this Act.

  Subtitle C--Capital Loss Deduction Allowed With Respect to Sale or 
                    Exchange of Principal Residence

SEC. 221. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE OR 
              EXCHANGE OF PRINCIPAL RESIDENCE.

    (a) In General.--Subsection (c) of section 165 (relating to 
limitation on losses of individuals) is amended by striking ``and'' at 
the end of paragraph (2), by striking the period at the end of 
paragraph (3) and inserting ``; and'', and by adding at the end the 
following new paragraph:
            ``(4) losses arising from the sale or exchange of the 
        principal residence (within the meaning of section 1034) of the 
        taxpayer.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to sales and exchanges after December 31, 1996, in taxable years 
ending after such date.

                 TITLE III--ESTATE AND GIFT PROVISIONS

SEC. 301. INCREASE IN UNIFIED ESTATE AND GIFT TAX CREDIT.

    (a) Estate Tax Credit.--
            (1) In general.--Section 2010(a) (relating to unified 
        credit against estate tax) is amended by striking ``$192,800'' 
        and inserting ``the applicable credit amount''.
            (2) Applicable credit amount.--Section 2010 is amended by 
        redesignating subsection (c) as subsection (d) and by inserting 
        after subsection (b) the following new subsection:
    ``(c) Applicable Credit Amount.--For purposes of this section, the 
applicable credit amount is the amount of the tentative tax which would 
be determined under the rate schedule set forth in section 2001(c) if 
the amount with respect to which such tentative tax is to be computed 
were the applicable exclusion amount determined in accordance with the 
following table:

        ``In the case of estates of decedents
                                                         The applicable
          dying, and gifts made, during:
                                                   exclusion amount is:
                  1997...............................         $650,000 
                  1998...............................         $700,000 
                  1999...............................         $750,000 
                  2000...............................         $800,000 
                  2001...............................         $850,000 
                  2002...............................         $900,000 
                  2003...............................         $950,000 
                  2004 or thereafter.................     $1,000,000.''
            (3) Conforming amendments.--
                    (A) Section 6018(a)(1) is amended by striking 
                ``$600,000'' and inserting ``the applicable exclusion 
                amount in effect under section 2010(c) for the calendar 
                year which includes the date of death''.
                    (B) Section 2001(c)(2) is amended by striking 
                ``$21,040,000'' and inserting ``the amount at which the 
                average tax rate under this section is 55 percent''.
                    (C) Section 2102(c)(3)(A) is amended by striking 
                ``$192,800'' and inserting ``the applicable credit 
                amount in effect under section 2010(c) for the calendar 
                year which includes the date of death''.
    (b) Unified Gift Tax Credit.--Section 2505(a)(1) (relating to 
unified credit against gift tax) is amended by striking ``$192,800'' 
and inserting ``the applicable credit amount in effect under section 
2010(c) for such calendar year''.
    (c) Effective Date.--The amendments made by this section shall 
apply to the estates of decedents dying, and gifts made, after December 
31, 1996.

SEC. 302. FAMILY-OWNED BUSINESS EXCLUSION.

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

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

    ``(a) In General.--In the case of an estate of a decedent to which 
this section applies, the value of the gross estate shall not include 
the lesser of--
            ``(1) the adjusted value of the qualified family-owned 
        business interests of the decedent otherwise includible in the 
        estate, or
            ``(2) the sum of--
                    ``(A) $1,500,000, plus
                    ``(B) 50 percent of the excess (if any) of the 
                adjusted value of such interests over $1,500,000.
    ``(b) Estates to Which Section Applies.--
            ``(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).
            ``(4) Coordination with other estate tax benefits.--If 
        there is a reduction in the value of the gross estate under 
        this section--
                    ``(A) the dollar limitation applicable under 
                section 2032A(a)(2), and
                    ``(B) the $1,000,000 amount under section 
                6601(j)(3) (as adjusted),
        shall each be reduced (but not below zero) by the amount of 
        such reduction.''
    (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. 303. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE CONSISTS LARGELY OF 
              INTEREST IN CLOSELY HELD BUSINESS.

    (a) In General.--Section 6166(a) (relating to extension of time for 
payment of estate tax where estate consists largely of interest in 
closely held business) is amended by striking ``10'' in paragraph (1) 
and the heading thereof and inserting ``20''.
    (b) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying after December 31, 1996.

SEC. 304. NO INTEREST ON CERTAIN PORTION OF ESTATE TAX EXTENDED UNDER 
              6166.

    (a) In General.--Section 6601(j) (relating to 4-percent rate on 
certain portion of estate tax extended under section 6166) is amended--
            (1) by striking the first sentence of paragraph (1) and 
        inserting the following new sentence: ``If the time for payment 
        of an amount of tax imposed by chapter 11 is extended as 
        provided in section 6166, no interest on the no-interest 
        portion of such amount shall (in lieu of the annual rate 
        provided by subsection (a)) be paid.'',
            (2) by striking ``4-percent'' each place it appears in 
        paragraphs (2) and (3) and inserting ``no-interest'',
            (3) by striking ``4-percent'' in the heading of paragraph 
        (2) and inserting ``No interest'', and
            (4) by striking ``4-Percent Rate'' in the heading thereof 
        and inserting ``No Interest''.
    (b) Conforming Amendments.--
            (1) Section 6166(b)(7)(A)(iii) is amended by striking ``4-
        percent rate of interest'' and inserting ``no-interest 
        portion''.
            (2) Section 6166(b)(8)(A)(iii) is amended to read as 
        follows:
                            ``(iii) No-interest portion not to apply.--
                        Section 6601(j) (relating to no-interest 
                        portion) shall not apply.''
    (c) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying after December 31, 1996.

                      TITLE IV--SAVINGS INCENTIVES

SEC. 401. RESTORATION OF IRA DEDUCTION.

    (a) Modifications of Restrictions on Active Participants.--
Subparagraph (B) of section 219(g)(3) (relating to applicable dollar 
amount) is amended to read as follows:
                    ``(B) Applicable dollar amount.--The term 
                `applicable dollar amount' means the following:
                            ``(i) In the case of a taxpayer filing a 
                        joint return:

                                                         The applicable
``For taxable years beginning in:                     dollar amount is:
    1997..........................................             $65,000 
    1998..........................................             $90,000 
    1999..........................................            $115,000 
    2000..........................................            $140,000.
                            ``(ii) In the case of any other taxpayer 
                        (other than a married individual filing a 
                        separate return):

                                                         The applicable
``For taxable years beginning in:                     dollar amount is:
    1997..........................................             $50,000 
    1998..........................................             $75,000 
    1999..........................................            $100,000 
    2000..........................................            $125,000.
                            ``(iii) In the case of a married individual 
                        filing a separate return, zero.''.
    (b) Repeal of Restrictions on Active Participants.--
            (1) In general.--Section 219 (relating to deduction for 
        retirement savings), as amended by section 402, is amended by 
        striking subsection (g) and by redesignating subsection (h) as 
        subsection (g).
            (2) Technical and conforming amendments.--
                    (A) Subsection (f) of section 219 is amended by 
                striking paragraph (7).
                    (B) Paragraph (5) of section 408(d) is amended by 
                striking the last sentence.
                    (C) Section 408(o) 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, 2000.''.
                    (D) Sections 408A(c)(2)(A) and 4973(b)(2)(B)(ii), 
                as added by section 403, are each amended by striking 
                ``(computed without regard to subsection (g) of such 
                section)''.
    (c) Coordination of IRA Deduction Limit With Elective Deferral 
Limit.--Section 219(b) (relating to maximum amount of deduction) is 
amended by adding at the end the following new paragraph:
            ``(5) Coordination with elective deferral limit.--The 
        amount determined under paragraph (1) with respect to any 
        individual for any taxable year shall not exceed the excess (if 
        any) of--
                    ``(A) the limitation applicable for the taxable 
                year under section 402(g)(1), over
                    ``(B) the elective deferrals (as defined in section 
                402(g)(3)) of such individual for such taxable year.''.
    (d) Effective Dates.--
            (1) In general.--The amendments made by subsections (a) and 
        (c) shall apply to taxable years beginning after December 31, 
        1996.
            (2) Termination.--The amendments made by subsection (b) 
        shall apply to taxable years beginning after December 31, 2000.

SEC. 402. IRA ALLOWED FOR SPOUSES WHO ARE NOT ACTIVE PLAN PARTICIPANTS.

    (a) In General.--Section 219(g)(1) of the Internal Revenue Code of 
1986 is amended by striking ``or the individual's spouse''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 403. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE INDIVIDUAL RETIREMENT 
              ACCOUNTS.

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

``SEC. 408A. IRA PLUS ACCOUNTS.

    ``(a) General Rule.--Except as provided in this section, an IRA 
Plus account shall be treated for purposes of this title in the same 
manner as an individual retirement plan.
    ``(b) IRA Plus Account.--For purposes of this title, the term `IRA 
Plus account' means an individual retirement plan (as defined in 
section 7701(a)(37)) which is designated (in such manner as the 
Secretary may prescribe) at the time of establishment of the plan as an 
IRA Plus account.
    ``(c) Treatment of Contributions.--
            ``(1) No deduction allowed.--No deduction shall be allowed 
        under section 219 for a contribution to an IRA Plus account.
            ``(2) Contribution limit.--The aggregate amount of 
        contributions for any taxable year to all IRA Plus accounts 
        maintained for the benefit of an individual shall not exceed 
        the excess (if any) of--
                    ``(A) the maximum amount allowable as a deduction 
                under section 219 with respect to such individual for 
                such taxable year (computed without regard to 
                subsection (g) of such section), over
                    ``(B) the amount so allowed.
            ``(3) Contributions permitted after age 70\1/2\.--
        Contributions to an IRA Plus 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 IRA Plus 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) Rollover contributions.--
                    ``(A) In general.--No rollover contribution may be 
                made to an IRA Plus account unless it is a qualified 
                rollover contribution.
                    ``(B) Coordination with limit.--A qualified 
                rollover contribution shall not be taken into account 
                for purposes of paragraph (2).
            ``(6) Time when contributions made.--For purposes of this 
        section, the rule of section 219(f)(3) shall apply.
    ``(d) Distribution Rules.--For purposes of this title--
            ``(1) General rules.--
                    ``(A) Exclusions from gross income.--Any qualified 
                distribution from an IRA Plus account shall not be 
                includible in gross income.
                    ``(B) Nonqualified distributions.--In applying 
                section 72 to any distribution from an IRA Plus account 
                which is not a qualified distribution, such 
                distribution shall be treated as made from 
                contributions to the IRA Plus account to the extent 
                that such distribution, when added to all previous 
                distributions from the IRA Plus account, does not 
                exceed the aggregate amount of contributions to the IRA 
                Plus account. For purposes of the preceding sentence, 
                all IRA Plus accounts maintained for the benefit of an 
                individual shall be treated as 1 account.
                    ``(C) Exception from penalty tax.--Section 72(t) 
                shall not apply to any qualified distribution from an 
                IRA Plus 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) Certain distributions within 5 years.--A 
                payment or distribution shall not be treated as a 
                qualified distribution under clause (i) of subparagraph 
                (A) 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 
                        IRA Plus account (or such individual's spouse 
                        made a contribution to an IRA Plus account) 
                        established for such individual, or
                            ``(ii) in the case of a payment or 
                        distribution properly allocable (as determined 
                        in the manner prescribed by the Secretary) to a 
                        qualified rollover contribution (or income 
                        allocable thereto), it is made within the 5-
                        taxable year period beginning with the taxable 
                        year in which the rollover contribution was 
                        made.
                Clause (ii) shall not apply to a qualified rollover 
                contribution from an IRA plus account.
            ``(3) Rollovers.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any distribution which is transferred in a qualified 
                rollover contribution to an IRA Plus account.
                    ``(B) Income inclusion for rollovers from non-plus 
                iras.--In the case of any qualified rollover 
                contribution from an individual retirement plan (other 
                than an IRA Plus account) to an IRA Plus account 
                established for the benefit of the payee or 
                distributee, as the case may be--
                            ``(i) sections 72(t) and 408(d)(3) shall 
                        not apply, and
                            ``(ii) in any case where such contribution 
                        is made before January 1, 1999, 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.
                    ``(C) Additional reporting requirements.--The 
                Secretary shall require that trustees of IRA Plus 
                accounts, trustees of individual retirement plans, or 
                both, whichever is appropriate, shall include such 
                additional information in reports required under 
                section 408(i) as is necessary to ensure that amounts 
                required to be included in gross income under 
                subparagraph (B) are so included.
            ``(4) Qualified special purpose distribution.--For purposes 
        of this section, the term `qualified special purpose 
        distribution' means any distribution to which subparagraph (B), 
        (D), (E), or (F) of section 72(t)(2) applies.
    ``(e) Qualified Rollover Contribution.--For purposes of this 
section--
            ``(1) In general.--The term `qualified rollover 
        contribution' means a rollover contribution to an IRA Plus 
        account from another such account, or from an individual 
        retirement plan, but only if such rollover contribution meets 
        the requirements of section 408(d)(3). For purposes of section 
        408(d)(3)(B), there shall be disregarded any qualified rollover 
        contribution from an individual retirement plan to an IRA Plus 
        account.
            ``(2) Conversions.--The conversion of an individual 
        retirement plan to an IRA Plus account shall be treated as if 
        it were a qualified rollover contribution.''
    (b) Excess Distributions Tax Not To Apply.--
            (1) Subparagraph (A) of section 4980A(d)(3) is amended by 
        inserting ``(other than IRA Plus accounts described in section 
        408A(b))'' after ``retirement plans''.
            (2) Section 4980A(e)(1) is amended by adding at the end the 
        following flush sentence:
        ``Such term shall not include any amount distributed from an 
        IRA Plus account or any qualified rollover contribution (as 
        defined in section 408A(e)) from an individual retirement plan 
        to an IRA Plus account.''
    (c) Excess Contributions.--Section 4973(b) is amended to read as 
follows:
    ``(b) Excess Contributions.--For purposes of this section--
            ``(1) In general.--In the case of individual retirement 
        accounts or individual retirement annuities, the term `excess 
        contributions' means the sum of--
                    ``(A) the amount determined under paragraph (2) for 
                the taxable year, plus
                    ``(B) the carryover amount determined under 
                paragraph (3) for the taxable year.
            ``(2) Current year.--The amount determined under this 
        paragraph for any taxable year is an amount equal to the sum 
        of--
                    ``(A) the excess (if any) of--
                            ``(i) the amount contributed for the 
                        taxable year to the accounts or for the 
                        annuities or bonds (other than IRA Plus 
                        accounts), over
                            ``(ii) the amount allowable as a deduction 
                        under section 219 for the taxable year, plus
                    ``(B) the excess (if any) of--
                            ``(i) the amount described in clause (i) 
                        (taking into account contributions to IRA Plus 
                        accounts) contributed for the taxable year, 
                        over
                            ``(ii) the amount allowable as a deduction 
                        under section 219 for the taxable year 
                        (computed without regard to subsection (g) of 
                        such section).
            ``(3) Carryover amount.--The carryover amount determined 
        under this paragraph for any taxable year is the amount 
        determined under paragraph (2) for the preceding taxable year, 
        reduced by the sum of--
                    ``(A) the distributions out of the account for the 
                taxable year which were included in the gross income of 
                the payee under section 408(d)(1),
                    ``(B) the distributions out of the account for the 
                taxable year to which section 408(d)(5) applies, and
                    ``(C) the excess (if any) of the amount determined 
                under paragraph (2)(B)(ii) over the amount determined 
                under paragraph (2)(B)(i).
            ``(4) Special rules.--For purposes of this subsection--
                    ``(A) Rollover contributions.--Rollover 
                distributions described in sections 402(c), 403(a)(4), 
                403(b)(8), 408(d)(3), and 408A(e) shall not be taken 
                into account.
                    ``(B) Contributions returned before due date.--Any 
                contribution which is distributed from an individual 
                retirement plan in a distribution to which section 
                408(d)(4) applies shall not be taken into account.
                    ``(C) Excess contributions treated as 
                contributions.--In applying paragraph (3)(C), the 
                determination as to amounts contributed for a taxable 
                year shall be made without regard to section 
                219(f)(6).''
    (d) Spousal IRA.--Clause (ii) of section 219(c)(1)(B) is amended to 
read as follows:
                            ``(ii) the compensation includible in the 
                        gross income of such individual's spouse for 
                        the taxable year reduced by--
                                    ``(I) the amount allowed as a 
                                deduction under subsection (a) to such 
                                spouse for such taxable year, and
                                    ``(II) the amount of any 
                                contribution on behalf of such spouse 
                                to an IRA Plus account under section 
                                408A for such taxable year.''
    (e) Conforming Amendment.--The table of sections for subpart A of 
part I of subchapter D of chapter 1 is amended by inserting after the 
item relating to section 408 the following new item:

                              ``Sec. 408A. IRA Plus accounts.''
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 404. TAX-FREE WITHDRAWALS FROM INDIVIDUAL RETIREMENT PLANS FOR 
              BUSINESS STARTUPS.

    (a) Exclusion.--Section 408(d) is amended by adding at the end the 
following new paragraph:
            ``(8) Distributions used for business start-up expenses.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any payments or distributions from an individual 
                retirement plan during any taxable year to the extent 
                the aggregate amount of such payments and distributions 
                does not exceed the business start-up costs of the 
                taxpayer for the taxable year.
                    ``(B) Business start-up costs.--For purposes of 
                this paragraph--
                            ``(i) In general.--The term `business 
                        start-up costs' means any amount which is paid 
                        or incurred--
                                    ``(I) in connection with a trade or 
                                business with respect to which the 
                                taxpayer is a 50-percent owner, and
                                    ``(II) on or before the date which 
                                is one year after the date on which the 
                                active conduct of such trade or 
                                business began (as determined under 
                                section 195(c)).
                            ``(ii) Certain costs included.--The term 
                        `business start-up costs' shall include--
                                    ``(I) any start-up expenditures (as 
                                defined in section 195(c)), and
                                    ``(II) any organizational expenses 
                                (as defined in section 709(b)).
                    ``(C) Denial of double benefit.--
                            ``(i) Deductions.--No deduction otherwise 
                        allowable under this chapter with respect to 
                        any business start-up costs taken into account 
                        under subparagraph (A) shall be allowed to the 
                        extent of the amount which would have been 
                        includible in gross income but for the 
                        application of this paragraph.
                            ``(ii) Basis reductions.--If any portion of 
                        the business start-up costs taken into account 
                        under subparagraph (A) are properly chargeable 
                        to capital account, the basis of the property 
                        to which such costs are chargeable shall be 
                        reduced by the amount which would have been 
                        includible in gross income but for the 
                        application of this paragraph.
                            ``(iii) Allocation.--The Secretary shall 
                        provide rules for the allocation of amounts 
                        excluded from gross income by reason of this 
                        paragraph to business start-up costs for 
                        purposes for applying this subparagraph.
                    ``(D) 50-percent owner.--For purposes of clause 
                (i), the term `50-percent owner' means any individual 
                if the individual--
                            ``(i) in the case of a corporation, own 
                        more than 50 percent of the value of the 
                        outstanding stock of the corporation or stock 
                        possessing more than 50 percent of the total 
                        combined voting power of all stock of the 
                        corporation, or
                            ``(ii) in the case of a trade or business 
                        other than a corporation, own more than 50 
                        percent of the capital or profits interest in 
                        the trade or business.
                For purposes of this subparagraph, an individual shall 
                be treated as owning stock and capital or profits 
                interests owned by the individual's spouse.''
    (b) Exemption From Additional Tax.--
            (1) In general.--Section 72(t)(2) is amended by adding at 
        the end the following new subparagraph:
                    ``(E) Distributions used for business start-up 
                expenses.--Distributions from an individual retirement 
                plan to the extent such distributions do not exceed the 
                business start-up costs (as defined in section 
                408(d)(8)) of the taxpayer for the taxable year.''
            (2) Conforming amendment.--Section 72(t)(2)(B) is amended 
        by striking ``(C) or (D)'' and inserting ``(C), (D), or (E)''.
    (c) Exemption From Prohibited Transaction.--Section 4975(d) is 
amended by striking ``or'' at the end of paragraph (14), by striking 
the period at the end of paragraph (15) and inserting ``; or'', and by 
adding after paragraph (15) the following new paragraph:
            ``(16) any distribution from an individual retirement plan 
        which is used for the payment of any business start-up costs 
        (as defined in section 408(d)(8)) of the distributee.''
    (d) Effective Date.--The amendments made by this section shall 
apply to distributions after December 31, 1996.

SEC. 405. TAX-FREE WITHDRAWALS FROM INDIVIDUAL RETIREMENT PLANS FOR 
              LONG-TERM UNEMPLOYED.

    (a) Exclusion.--Section 408(d), as amended by section 404, is 
amended by adding at the end the following new paragraph:
            ``(9) Distributions to long-term unemployed.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any payments or distributions from an individual 
                retirement plan during any taxable year to an 
                individual if--
                            ``(i) such individual has received 
                        unemployment compensation for 12 consecutive 
                        weeks under any Federal or State unemployment 
                        compensation law by reason of such separation, 
                        and
                            ``(ii) such payments and distributions are 
                        made during the taxable year in which such 
                        unemployment compensation was paid or the 
                        succeeding taxable year.
                    ``(B) Distributions after reemployment.--
                Subparagraph (A) shall not apply to any distribution or 
                payment made after the individual has been employed for 
                at least 60 days after the separation from employment 
                to which subparagraph (A) applies.
                    ``(C) Self-employed individuals.--To the extent 
                provided in regulations, a self-employed individual 
                shall be treated as meeting the requirements of 
                subparagraph (A)(i) if, under Federal or State law, the 
                individual would have received unemployment 
                compensation but for the fact the individual was self-
                employed.''
    (b) Exemption From Additional Tax.--Section 72(t)(2)(D) is amended 
to read as follows:
                    ``(D) Distributions to unemployed individuals.--
                Distributions from an individual retirement plan which 
                are described in section 408(d)(9).''
    (c) Effective Date.--The amendments made by this section shall 
apply to distributions after December 31, 1996.

SEC. 406. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED WITHOUT PENALTY 
              TO PAY HIGHER EDUCATION EXPENSES.

    (a) Exclusion.--Section 408(d), as amended by sections 404 and 405, 
is amended by adding at the end the following new paragraph:
            ``(10) Distributions used for qualified higher education 
        expenses.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any payments or distributions from an individual 
                retirement plan during any taxable year to the extent 
                the aggregate amount of such payments and distributions 
                does not exceed the qualified higher education expenses 
                of the taxpayer for the taxable year.
                    ``(B) Qualified higher education expenses.--For 
                purposes of subparagraph (A)--
                            ``(i) In general.--The term `qualified 
                        higher education expenses' means the cost of 
                        attendance (within the meaning of section 472 
                        of the Higher Education Act of 1965 (20 U.S.C. 
                        1087ll)) of--
                                    ``(I) the taxpayer,
                                    ``(II) the taxpayer's spouse, or
                                    ``(III) any child (as defined in 
                                section 151(c)(3)), grandchild, or 
                                ancestor of the taxpayer or the 
                                taxpayer's spouse,
                        at an eligible educational institution (as 
                        defined in section 135(c)(3)).
                            ``(ii) Coordination with other 
                        provisions.--The amount of qualified higher 
                        education expenses for any taxable year shall 
                        be reduced by--
                                    ``(I) any amount excludable from 
                                gross income under section 135, and
                                    ``(II) any amount described in 
                                section 135(d)(1) (relating to certain 
                                scholarships and veterans benefits).''
    (b) Exemption From Additional Tax.--
            (1) In general.--Paragraph (2) of section 72(t) (relating 
        to exceptions to 10-percent additional tax on early 
        distributions from qualified retirement plans), as amended by 
        section 402, is amended by adding at the end the following new 
        subparagraph:
                    ``(F) Distributions from individual retirement 
                plans for educational expenses.--Distributions to an 
                individual from an individual retirement plan to the 
                extent such distributions do not exceed the qualified 
                higher education expenses (as defined in section 
                408(d)(10)(B)) of the taxpayer for the taxable year.''
            (2) Conforming amendment.--Section 72(t)(2)(B), as amended 
        by section 402, is amended by striking ``or (E)'' and inserting 
        ``, (E), or (F)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.
                                 <all>