[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 312 Introduced in Senate (IS)]







107th CONGRESS
  1st Session
                                 S. 312

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


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           February 13, 2001

  Mr. Grassley (for himself, Mr. Baucus, Mr. Roberts, Mr. Conrad, Mr. 
Brownback, Mrs. Lincoln, Mr. Burns, Mr. Craig, Mr. Lugar, Mr. Enzi, Mr. 
  Nelson of Nebraska, and Mr. Stevens) 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 
             farmers and fishermen, 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; ETC.

    (a) Short Title.--This Act may be cited as the ``Tax Empowerment 
and Relief for Farmers and Fishermen (TERFF) 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.--

Sec. 1. Short title; etc.
Sec. 2. Farm, fishing, and ranch risk management accounts.
Sec. 3. Written agreement relating to exclusion of certain farm rental 
                            income from net earnings from self-
                            employment.
Sec. 4. Treatment of conservation reserve program payments as rentals 
                            from real estate.
Sec. 5. Exemption of agricultural bonds from State volume cap.
Sec. 6. Modifications to section 512(b)(13).
Sec. 7. Charitable deduction for contributions of food inventory.
Sec. 8. Income averaging for farmers and fishermen not to increase 
                            alternative minimum tax liability.
Sec. 9. Cooperative marketing includes value-added processing through 
                            animals.
Sec. 10. Declaratory judgment relief for section 521 cooperatives.
Sec. 11. Small ethanol producer credit.
Sec. 12. Payment of dividends on stock of cooperatives without reducing 
                            patronage dividends.

SEC. 2. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

    (a) In General.--Subpart C of part II of subchapter E of chapter 1 
(relating to taxable year for which deductions taken) is amended by 
inserting after section 468B the following new section:

``SEC. 468C. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual engaged in 
an eligible farming business or commercial fishing, there shall be 
allowed as a deduction for any taxable year the amount paid in cash by 
the taxpayer during the taxable year to a Farm, Fishing, and Ranch Risk 
Management Account (hereinafter referred to as the `FFARRM Account').
    ``(b) Limitation.--
            ``(1) Contributions.--The amount which a taxpayer may pay 
        into the FFARRM Account for any taxable year shall not exceed 
        20 percent of so much of the taxable income of the taxpayer 
        (determined without regard to this section) which is 
        attributable (determined in the manner applicable under section 
        1301) to any eligible farming business or commercial fishing.
            ``(2) Distributions.--Distributions from a FFARRM Account 
        may not be used to purchase, lease, or finance any new fishing 
        vessel, add capacity to any fishery, or otherwise contribute to 
        the overcapitalization of any fishery. The Secretary of 
        Commerce shall implement regulations to enforce this paragraph.
    ``(c) Eligible Businesses.--For purposes of this section--
            ``(1) Eligible farming business.--The term `eligible 
        farming business' means any farming business (as defined in 
        section 263A(e)(4)) which is not a passive activity (within the 
        meaning of section 469(c)) of the taxpayer.
            ``(2) Commercial fishing.--The term `commercial fishing' 
        has the meaning given such term by section (3) of the Magnuson-
        Stevens Fishery Conservation and Management Act (16 U.S.C. 
        1802) but only if such fishing is not a passive activity 
        (within the meaning of section 469(c)) of the taxpayer.
    ``(d) FFARRM Account.--For purposes of this section--
            ``(1) In general.--The term `FFARRM Account' means a trust 
        created or organized in the United States for the exclusive 
        benefit of the taxpayer, but only if the written governing 
        instrument creating the trust meets the following requirements:
                    ``(A) No contribution will be accepted for any 
                taxable year in excess of the amount allowed as a 
                deduction under subsection (a) for such year.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) The assets of the trust consist entirely of 
                cash or of obligations which have adequate stated 
                interest (as defined in section 1274(c)(2)) and which 
                pay such interest not less often than annually.
                    ``(D) All income of the trust is distributed 
                currently to the grantor.
                    ``(E) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
            ``(2) Account taxed as grantor trust.--The grantor of a 
        FFARRM Account shall be treated for purposes of this title as 
        the owner of such Account and shall be subject to tax thereon 
        in accordance with subpart E of part I of subchapter J of this 
        chapter (relating to grantors and others treated as substantial 
        owners).
    ``(e) Inclusion of Amounts Distributed.--
            ``(1) In general.--Except as provided in paragraph (2), 
        there shall be includible in the gross income of the taxpayer 
        for any taxable year--
                    ``(A) any amount distributed from a FFARRM Account 
                of the taxpayer during such taxable year, and
                    ``(B) any deemed distribution under--
                            ``(i) subsection (f)(1) (relating to 
                        deposits not distributed within 5 years),
                            ``(ii) subsection (f)(2) (relating to 
                        cessation in eligible farming business), and
                            ``(iii) subparagraph (B) or (C) of 
                        subsection (f)(3) (relating to prohibited 
                        transactions and pledging account as security).
            ``(2) Exceptions.--Paragraph (1)(A) shall not apply to--
                    ``(A) any distribution to the extent attributable 
                to income of the Account, and
                    ``(B) the distribution of any contribution paid 
                during a taxable year to a FFARRM Account to the extent 
                that such contribution exceeds the limitation 
                applicable under subsection (b) if requirements similar 
                to the requirements of section 408(d)(4) are met.
        For purposes of subparagraph (A), distributions shall be 
        treated as first attributable to income and then to other 
        amounts.
    ``(f) Special Rules.--
            ``(1) Tax on deposits in account which are not distributed 
        within 5 years.--
                    ``(A) In general.--If, at the close of any taxable 
                year, there is a nonqualified balance in any FFARRM 
                Account--
                            ``(i) there shall be deemed distributed 
                        from such Account during such taxable year an 
                        amount equal to such balance, and
                            ``(ii) the taxpayer's tax imposed by this 
                        chapter for such taxable year shall be 
                        increased by 10 percent of such deemed 
                        distribution.
                The preceding sentence shall not apply if an amount 
                equal to such nonqualified balance is distributed from 
                such Account to the taxpayer before the due date 
                (including extensions) for filing the return of tax 
                imposed by this chapter for such year (or, if earlier, 
                the date the taxpayer files such return for such year).
                    ``(B) Nonqualified balance.--For purposes of 
                subparagraph (A), the term `nonqualified balance' means 
                any balance in the Account on the last day of the 
                taxable year which is attributable to amounts deposited 
                in such Account before the 4th preceding taxable year.
                    ``(C) Ordering rule.--For purposes of this 
                paragraph, distributions from a FFARRM Account (other 
                than distributions of current income) shall be treated 
                as made from deposits in the order in which such 
                deposits were made, beginning with the earliest 
                deposits.
            ``(2) Cessation in eligible business.--At the close of the 
        first disqualification period after a period for which the 
        taxpayer was engaged in an eligible farming business or 
        commercial fishing, there shall be deemed distributed from the 
        FFARRM Account of the taxpayer an amount equal to the balance 
        in such Account (if any) at the close of such disqualification 
        period. For purposes of the preceding sentence, the term 
        `disqualification period' means any period of 2 consecutive 
        taxable years for which the taxpayer is not engaged in an 
        eligible farming business or commercial fishing.
            ``(3) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this section:
                    ``(A) Section 220(f)(8) (relating to treatment on 
                death).
                    ``(B) Section 408(e)(2) (relating to loss of 
                exemption of account where individual engages in 
                prohibited transaction).
                    ``(C) Section 408(e)(4) (relating to effect of 
                pledging account as security).
                    ``(D) Section 408(g) (relating to community 
                property laws).
                    ``(E) Section 408(h) (relating to custodial 
                accounts).
            ``(4) Time when payments deemed made.--For purposes of this 
        section, a taxpayer shall be deemed to have made a payment to a 
        FFARRM Account on the last day of a taxable year if such 
        payment is made on account of such taxable year and is made on 
        or before the due date (without regard to extensions) for 
        filing the return of tax for such taxable year.
            ``(5) Individual.--For purposes of this section, the term 
        `individual' shall not include an estate or trust.
            ``(6) Deduction not allowed for self-employment tax.--The 
        deduction allowable by reason of subsection (a) shall not be 
        taken into account in determining an individual's net earnings 
        from self-employment (within the meaning of section 1402(a)) 
        for purposes of chapter 2.
    ``(g) Reports.--The trustee of a FFARRM Account shall make such 
reports regarding such Account to the Secretary and to the person for 
whose benefit the Account is maintained with respect to contributions, 
distributions, and such other matters as the Secretary may require 
under regulations. The reports required by this subsection shall be 
filed at such time and in such manner and furnished to such persons at 
such time and in such manner as may be required by such regulations.''.
    (b) Tax on Excess Contributions.--
            (1) Subsection (a) of section 4973 (relating to tax on 
        excess contributions to certain tax-favored accounts and 
        annuities) is amended by striking ``or'' at the end of 
        paragraph (3), by redesignating paragraph (4) as paragraph (5), 
        and by inserting after paragraph (3) the following new 
        paragraph:
            ``(4) a FFARRM Account (within the meaning of section 
        468C(d)), or''.
            (2) Section 4973 is amended by adding at the end the 
        following new subsection:
    ``(g) Excess Contributions to FFARRM Accounts.--For purposes of 
this section, in the case of a FFARRM Account (within the meaning of 
section 468C(d)), the term `excess contributions' means the amount by 
which the amount contributed for the taxable year to the Account 
exceeds the amount which may be contributed to the Account under 
section 468C(b) for such taxable year. For purposes of this subsection, 
any contribution which is distributed out of the FFARRM Account in a 
distribution to which section 468C(e)(2)(B) applies shall be treated as 
an amount not contributed.''.
            (3) The section heading for section 4973 is amended to read 
        as follows:

``SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN ACCOUNTS, ANNUITIES, 
              ETC.''.

            (4) The table of sections for chapter 43 is amended by 
        striking the item relating to section 4973 and inserting the 
        following new item:

                              ``Sec. 4973. Excess contributions to 
                                        certain accounts, annuities, 
                                        etc.''.
    (c) Tax on Prohibited Transactions.--
            (1) Subsection (c) of section 4975 (relating to tax on 
        prohibited transactions) is amended by adding at the end the 
        following new paragraph:
            ``(6) Special rule for ffarrm accounts.--A person for whose 
        benefit a FFARRM Account (within the meaning of section 
        468C(d)) is established shall be exempt from the tax imposed by 
        this section with respect to any transaction concerning such 
        account (which would otherwise be taxable under this section) 
        if, with respect to such transaction, the account ceases to be 
        a FFARRM Account by reason of the application of section 
        468C(f)(3)(A) to such account.''.
            (2) Paragraph (1) of section 4975(e) is amended by 
        redesignating subparagraphs (E) and (F) as subparagraphs (F) 
        and (G), respectively, and by inserting after subparagraph (D) 
        the following new subparagraph:
                    ``(E) a FFARRM Account described in section 
                468C(d),''.
    (d) Failure To Provide Reports on FFARRM Accounts.--Paragraph (2) 
of section 6693(a) (relating to failure to provide reports on certain 
tax-favored accounts or annuities) is amended by redesignating 
subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively, 
and by inserting after subparagraph (B) the following new subparagraph:
                    ``(C) section 468C(g) (relating to FFARRM 
                Accounts),''.
    (e) Clerical Amendment.--The table of sections for subpart C of 
part II of subchapter E of chapter 1 is amended by inserting after the 
item relating to section 468B the following new item:

                              ``Sec. 468C. Farm, Fishing and Ranch Risk 
                                        Management Accounts.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 3. WRITTEN AGREEMENT RELATING TO EXCLUSION OF CERTAIN FARM RENTAL 
              INCOME FROM NET EARNINGS FROM SELF-EMPLOYMENT.

    (a) Internal Revenue Code.--Section 1402(a)(1)(A) (relating to net 
earnings from self-employment) is amended by striking ``an 
arrangement'' and inserting ``a lease agreement''.
    (b) Social Security Act.--Section 211(a)(1)(A) of the Social 
Security Act is amended by striking ``an arrangement'' and inserting 
``a lease agreement''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 4. TREATMENT OF CONSERVATION RESERVE PROGRAM PAYMENTS AS RENTALS 
              FROM REAL ESTATE.

    (a) In General.--Section 1402(a)(1) (defining net earnings from 
self-employment) is amended by inserting ``and including payments under 
section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2))'' 
after ``crop shares''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2001.

SEC. 5. EXEMPTION OF AGRICULTURAL BONDS FROM STATE VOLUME CAP.

    (a) In General.--Section 146(g) (relating to exception for certain 
bonds) is amended by striking ``and'' at the end of paragraph (3), by 
striking the period at the end of paragraph (4) and inserting ``, 
and'', and by inserting after paragraph (4) the following new 
paragraph:
            ``(5) any qualified small issue bond described in section 
        144(a)(12)(B)(ii).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to bonds issued after December 31, 2001.

SEC. 6. MODIFICATIONS TO SECTION 512(B)(13).

    (a) In General.--Paragraph (13) of section 512(b) is amended by 
redesignating subparagraph (E) as subparagraph (F) and by inserting 
after subparagraph (D) the following new paragraph:
                    ``(E) Paragraph to apply only to excess payments.--
                            ``(i) In general.--Subparagraph (A) shall 
                        apply only to the portion of a specified 
                        payment received by the controlling 
                        organization that exceeds the amount which 
                        would have been paid if such payment met the 
                        requirements prescribed under section 482.
                            ``(ii) Addition to tax for valuation 
                        misstatements.--The tax imposed by this chapter 
                        on the controlling organization shall be 
                        increased by an amount equal to 20 percent of 
                        such excess.''.
    (b) Effective Date.--
            (1) In general.--The amendment made by this section shall 
        apply to payments received or accrued after December 31, 2000.
            (2) Payments subject to binding contract transition rule.--
        If the amendments made by section 1041 of the Taxpayer Relief 
        Act of 1997 did not apply to any amount received or accrued in 
        the first 2 taxable years beginning on or after the date of the 
        enactment of this Act under any contract described in 
        subsection (b)(2) of such section, such amendments also shall 
        not apply to amounts received or accrued under such contract 
        before January 1, 2001.

SEC. 7. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY.

    (a) In General.--Subsection (e) of section 170 (relating to certain 
contributions of ordinary income and capital gain property) is amended 
by adding at the end the following new paragraph:
            ``(7) Special rule for contributions of food inventory.--
        For purposes of this section--
                    ``(A) Contributions by non-corporate taxpayers.--In 
                the case of a charitable contribution of food by a 
                taxpayer, paragraph (3)(A) shall be applied without 
                regard to whether or not the contribution is made by a 
                corporation.
                    ``(B) Limit on reduction.--In the case of a 
                charitable contribution of food which is a qualified 
                contribution (within the meaning of paragraph (3)(A), 
                as modified by subparagraph (A) of this paragraph)--
                            ``(i) paragraph (3)(B) shall not apply, and
                            ``(ii) the reduction under paragraph (1)(A) 
                        for such contribution shall be no greater than 
                        the amount (if any) by which the amount of such 
                        contribution exceeds twice the basis of such 
                        food.
                    ``(C) Determination of basis.--For purposes of this 
                paragraph, if a taxpayer uses the cash method of 
                accounting, the basis of any qualified contribution of 
                such taxpayer shall be deemed to be 50 percent of the 
                fair market value of such contribution.
                    ``(D) Determination of fair market value.--In the 
                case of a charitable contribution of food which is a 
                qualified contribution (within the meaning of paragraph 
                (3), as modified by subparagraphs (A) and (B) of this 
                paragraph) and which, solely by reason of internal 
                standards of the taxpayer, lack of market, or similar 
                circumstances, or which is produced by the taxpayer 
                exclusively for the purposes of transferring the food 
                to an organization described in paragraph (3)(A), 
                cannot or will not be sold, the fair market value of 
                such contribution shall be determined--
                            ``(i) without regard to such internal 
                        standards, such lack of market, such 
                        circumstances, or such exclusive purpose, and
                            ``(ii) if applicable, by taking into 
                        account the price at which the same or similar 
                        food items are sold by the taxpayer at the time 
                        of the contribution (or, if not so sold at such 
                        time, in the recent past).
                    ``(E) Termination.--This paragraph shall not apply 
                to any contribution made during any taxable year 
                beginning after December 31, 2004.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2001.

SEC. 8. INCOME AVERAGING FOR FARMERS AND FISHERMEN NOT TO INCREASE 
              ALTERNATIVE MINIMUM TAX LIABILITY.

    (a) In General.--Section 55(c) (defining regular tax) is amended by 
redesignating paragraph (2) as paragraph (3) and by inserting after 
paragraph (1) the following new paragraph:
            ``(2) Coordination with income averaging for farmers and 
        fishermen.--Solely for purposes of this section, section 1301 
        (relating to averaging of farm and fishing income) shall not 
        apply in computing the regular tax.''.
    (b) Allowing Income Averaging for Fishermen.--
            (1) In general.--Section 1301(a) is amended by striking 
        ``farming business'' and inserting ``farming business or 
        fishing business''.
            (2) Definition of elected farm income.--
                    (A) In general.--Clause (i) of section 
                1301(b)(1)(A) is amended by inserting ``or fishing 
                business'' before the semicolon.
                    (B) Conforming amendment.--Subparagraph (B) of 
                section 1301(b)(1) is amended by inserting ``or fishing 
                business'' after ``farming business'' both places it 
                occurs.
            (3) Definition of fishing business.--Section 1301(b) is 
        amended by adding at the end the following new paragraph:
            ``(4) Fishing business.--The term `fishing business' means 
        the conduct of commercial fishing as defined in section 3 of 
        the Magnuson-Stevens Fishery Conservation and Management Act 
        (16 U.S.C. 1802).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 9. COOPERATIVE MARKETING INCLUDES VALUE-ADDED PROCESSING THROUGH 
              ANIMALS.

    (a) In General.--Section 1388 (relating to definitions and special 
rules) is amended by adding at the end the following new subsection:
    ``(k) Cooperative Marketing Includes Value-Added Processing Through 
Animals.--For purposes of section 521 and this subchapter, the term 
`marketing the products of members or other producers' includes feeding 
the products of members or other producers to cattle, hogs, fish, 
chickens, or other animals and selling the resulting animals or animal 
products.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 10. DECLARATORY JUDGMENT RELIEF FOR SECTION 521 COOPERATIVES.

    (a) In General.--Section 7428(a)(1) (relating to declaratory 
judgments of tax exempt organizations) is amended by striking ``or'' at 
the end of subparagraph (B) and by adding at the end the following new 
subparagraph:
                    ``(D) with respect to the initial qualification or 
                continuing qualification of a cooperative as described 
                in section 521(b) which is exempt from tax under 
                section 521(a), or''.
    (b) Effective Date.--The amendments made by this section shall 
apply with respect to pleadings filed after the date of the enactment 
of this Act but only with respect to determinations (or requests for 
determinations) made after January 1, 2001.

SEC. 11. SMALL ETHANOL PRODUCER CREDIT.

    (a) Allocation of Alcohol Fuels Credit to Patrons of a 
Cooperative.--Section 40(g) (relating to alcohol used as fuel) is 
amended by adding at the end the following new paragraph:
            ``(6) Allocation of small ethanol producer credit to 
        patrons of cooperative.--
                    ``(A) Election to allocate.--
                            ``(i) In general.--In the case of a 
                        cooperative organization described in section 
                        1381(a), any portion of the credit determined 
                        under subsection (a)(3) for the taxable year 
                        may, at the election of the organization, be 
                        apportioned pro rata among patrons of the 
                        organization on the basis of the quantity or 
                        value of business done with or for such patrons 
                        for the taxable year.
                            ``(ii) Form and effect of election.--An 
                        election under clause (i) for any taxable year 
                        shall be made on a timely filed return for such 
                        year. Such election, once made, shall be 
                        irrevocable for such taxable year.
                    ``(B) Treatment of organizations and patrons.--The 
                amount of the credit apportioned to patrons under 
                subparagraph (A)--
                            ``(i) shall not be included in the amount 
                        determined under subsection (a) with respect to 
                        the organization for the taxable year,
                            ``(ii) shall be included in the amount 
                        determined under subsection (a) for the taxable 
                        year of each patron for which the patronage 
                        dividends for the taxable year described in 
                        subparagraph (A) are included in gross income, 
                        and
                            ``(iii) shall be included in gross income 
                        of such patrons for the taxable year in the 
                        manner and to the extent provided in section 
                        87.
                    ``(C) Special rules for decrease in credits for 
                taxable year.--If the amount of the credit of a 
                cooperative organization determined under subsection 
                (a)(3) for a taxable year is less than the amount of 
                such credit shown on the return of the cooperative 
                organization for such year, an amount equal to the 
                excess of--
                            ``(i) such reduction, over
                            ``(ii) the amount not apportioned to such 
                        patrons under subparagraph (A) for the taxable 
                        year,
                shall be treated as an increase in tax imposed by this 
                chapter on the organization. Such increase shall not be 
                treated as tax imposed by this chapter for purposes of 
                determining the amount of any credit under this subpart 
                or subpart A, B, E, or G.''.
    (b) Improvements to Small Ethanol Producer Credit.--
            (1) Definition of small ethanol producer.--Section 40(g) 
        (relating to definitions and special rules for eligible small 
        ethanol producer credit) is amended by striking ``30,000,000'' 
        each place it appears and inserting ``60,000,000''.
            (2) Small ethanol producer credit not a passive activity 
        credit.--Clause (i) of section 469(d)(2)(A) is amended by 
        striking ``subpart D'' and inserting ``subpart D, other than 
        section 40(a)(3),''.
            (3) Allowing credit against minimum tax.--
                    (A) In general.--Subsection (c) of section 38 
                (relating to limitation based on amount of tax) is 
amended by redesignating paragraph (3) as paragraph (4) and by 
inserting after paragraph (2) the following new paragraph:
            ``(3) Special rules for small ethanol producer credit.--
                    ``(A) In general.--In the case of the small ethanol 
                producer credit--
                            ``(i) this section and section 39 shall be 
                        applied separately with respect to the credit, 
                        and
                            ``(ii) in applying paragraph (1) to the 
                        credit--
                                    ``(I) subparagraphs (A) and (B) 
                                thereof shall not apply, and
                                    ``(II) the limitation under 
                                paragraph (1) (as modified by subclause 
                                (I)) shall be reduced by the credit 
                                allowed under subsection (a) for the 
                                taxable year (other than the small 
                                ethanol producer credit).
                    ``(B) Small ethanol producer credit.--For purposes 
                of this subsection, the term `small ethanol producer 
                credit' means the credit allowable under subsection (a) 
                by reason of section 40(a)(3).''.
                    (B) Conforming amendment.--Subclause (II) of 
                section 38(c)(2)(A)(ii) is amended by striking 
                ``(other'' and all that follows through ``credit)'' and 
                inserting ``(other than the empowerment zone employment 
                credit or the small ethanol producer credit)''.
            (4) Small ethanol producer credit not added back to income 
        under section 87.--Section 87 (relating to income inclusion of 
        alcohol fuel credit) is amended to read as follows:

``SEC. 87. ALCOHOL FUEL CREDIT.

    ``Gross income includes an amount equal to the sum of--
            ``(1) the amount of the alcohol mixture credit determined 
        with respect to the taxpayer for the taxable year under section 
        40(a)(1), and
            ``(2) the alcohol credit determined with respect to the 
        taxpayer for the taxable year under section 40(a)(2).''.
    (c) Conforming Amendment.--Section 1388 (relating to definitions 
and special rules for cooperative organizations), as amended by section 
9, is amended by adding at the end the following new subsection:
    ``(l) Cross Reference.--For provisions relating to the 
apportionment of the alcohol fuels credit between cooperative 
organizations and their patrons, see section 40(g)(6).''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 12. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT REDUCING 
              PATRONAGE DIVIDENDS.

    (a) In General.--Subsection (a) of section 1388 (relating to 
patronage dividend defined) is amended by adding at the end the 
following new sentence: ``For purposes of paragraph (3), net earnings 
shall not be reduced by amounts paid during the year as dividends on 
capital stock or other proprietary capital interests of the 
organization to the extent that the articles of incorporation or bylaws 
of such organization or other contract with patrons provide that such 
dividends are in addition to amounts otherwise payable to patrons which 
are derived from business done with or for patrons during the taxable 
year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions in taxable years beginning after the date of the 
enactment of this Act.
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