[Congressional Record Volume 143, Number 4 (Tuesday, January 21, 1997)]
[Senate]
[Pages S176-S190]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ROTH (for himself and Mr. Lott):
  S. 2. A bill to amend the Internal Revenue Code of 1986 to provide 
tax relief for American families, and for other purposes; to the 
Committee on Finance.


                   the american family tax relief act

  Mr. ROTH. Mr. President, the comedian Henny Youngman told a joke that 
highlights America's family friendly tax system.
  ``The people who make our taxes are very nice,'' he said. ``They're 
letting me keep my mother.''
  Certainly, our tax laws were never quite this bad, but the humor 
hinted at the fact that the laws were not altogether family friendly. 
The family, in fact, has taken it right in the pocketbook. More and 
more, we are hearing that oft-quoted fact that today the average 
American family spends more on taxes than it spends on food, clothing 
and shelter combined. Today, many families need a second earner to make 
ends meet, because too much of their income is taken by Government.
  At the end of World War II, the median income for a family of four 
was $3,468. At the time, the first $2,667 of income for such families 
were tax exempt, meaning that three-quarters of median family income 
was exempt from taxation.
  Over the years, inflation ate away at the value of the standard 
deduction and personal exemptions. The result was that average families 
paid more and more of their income in taxes.
  In 1983, the median family income for a family of four was $29,184, 
but only the first $8,783 of income was exempt from tax--less than one-
third. As my good friend and distinguished colleague, Daniel Patrick 
Moynihan, has

[[Page S177]]

pointed out with these statistics, Government tax policies have 
adversely affected family life.
  In 1948, a family of four at the median income level paid 2 percent--
2 percent--of its income in Federal taxes. Today, a family of four pays 
24 percent.
  The time has come to address this disturbing trend. Our tax policies 
must be changed in light of current realities and critical needs. The 
American family has been shackled with the excess burden of taxes, I 
believe, in part because family was such a constant and stable 
foundation for our society, an enduring unit that could be depended on 
to carry the burden. But the consequences of that burden and other 
economic and social factors have succeeded in ravaging the family. 
Indeed, in society today, the family is under assault, and too many of 
the policies that are coming out of Washington are increasing the 
problem rather than providing the solution.
  As chairman of the Senate Finance Committee, I intend to work with my 
colleagues to address these policies and trends, and I laud the spirit 
of the tax bill introduced today and believe that we can build 
bipartisan support to advance its overall objectives. The American 
Family Tax Relief Act is a strong first step towards restoring a sense 
of economic equilibrium to our families and offers a $500-per-child tax 
credit, a capital gains tax cut, estate and gift tax relief, and 
expanded individual retirement accounts.
  At one time or another, each of these proposals has found bipartisan 
support, and I believe Senators on both sides of the aisle will see 
this bill as a strong first step toward achieving a mutually shared 
objective. This legislation sets the spirit for debate. It has the 
welfare and future of the family at heart.
  As introduced, this bill calls for a permanent $500-per-child tax 
credit for children under 18 years of age. The capital gains tax cut 
allows individuals to deduct 50 percent of their capital gains and 
allows families that sell their homes at a loss to treat it as a 
capital loss for purposes of a tax deduction. This bill allows an 
individual to pass up to $1 million tax free as a gift during life or 
at the time of death. It excludes from estate taxes the first $1.5 
million in value of certain qualified family-owned businesses or farm 
interests and 50 percent of the value in excess of $1.5 million.
  The American Family Tax Relief Act expands the power and availability 
of IRAs by permitting homemakers to have IRAs, regardless of their 
spouse's participation in a pension program, and by raising income 
limits to include more families. It also creates a backloaded IRA that 
permits after-tax contribution and tax-free withdrawals of earnings 
after the taxpayer reaches age 59\1/2\. This is a provision I have 
sought for some time, along with allowing for penalty-free withdrawal 
for education expenses, which is also included in the package.
  Again, Mr. President, this is a strong place to start. I appreciate 
the leadership--particularly our majority leader Trent Lott--for 
working with us to establish this foundation. Now we must go about the 
legislative process, building the consensus we need to see it 
implemented and achieving the real tax relief American families not 
only desire but need.
  Mr. President, I ask unanimous consent that additional material be 
printed in the Record.
  There being no objection, the materials were ordered to be printed in 
the Record, as follows:

                                  S. 2

       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

[[Page S178]]

     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

[[Page S179]]

     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--

[[Page S180]]

       ``(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

[[Page S181]]

       (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 decedentThe applicable 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-

[[Page S182]]

     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 folThe applicable
                                                material 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

[[Page S183]]

       ``(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, profit-sharing, 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.--

[[Page S184]]

       ``(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

[[Page S185]]

     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.

          Description of S. 2--American Family Tax Relief Act


                              introduction

       This document,\1\ prepared by the staff of the Joint 
     Committee on Taxation, provides a description of S. 2 
     (``American Family Tax Relief Act''). S. 2 was introduced on 
     January 21, 1997, by Senators Roth and Lott.
---------------------------------------------------------------------------
     \1\ This document may be cited as follows: Joint Committee on 
     Taxation, Description of S. 2 (``American Family Tax Relief 
     Act'') (JCX-2-97), January 21, 1997.
---------------------------------------------------------------------------
       Part I of the document is a summary of the bill. Part II is 
     a description of the provisions of the bill: Title I of the 
     bill provides a child tax credit for children under age 18; 
     Title II relates to capital gains and loss provisions; Title 
     III relates to estate and gift tax provisions; and Title IV 
     relates to individual retirement account (``IRA'') 
     provisions.
       The document (Part III) also provides estimated revenue 
     effects of the bill for fiscal years 1997-2007.


        i. summary of s. 2 (``american family tax relief act'')

                       Child tax credit (title I)

       The bill would allow taxpayers a nonrefundable tax credit 
     of $500 for each qualifying child under the age of 18. The 
     credit amount would not be indexed for inflation. For 
     taxpayers with AGI in excess of certain thresholds, the 
     allowable child credit would be reduced by $25 for each 
     $1,000 of AGI (or fraction thereof) in excess of the 
     threshold. For married taxpayers filing joint returns, the 
     threshold would be $110,000. For taxpayers filing single or 
     head of household returns, the threshold would be $75,000. 
     For married taxpayers filing separate returns, the threshold 
     would be $55,000. These thresholds are not indexed for 
     inflation. The provision would be effective for taxable years 
     beginning after December 31, 1996.

                  Capital gains provisions (title II)

       This bill would allow individuals a deduction equal to 50 
     percent of net capital gain for the taxable year. The bill 
     repeals the present-law maximum 28-percent rate. Thus, the 
     effective rate under the regular tax on the net capital gain 
     of an individual in the highest (i.e., 39.6 percent) marginal 
     rate bracket would be 19.8 percent. In addition, the bill 
     would provide an alternative tax of 28 percent on the net 
     capital gain of a corporation if that rate is less than the 
     corporation's regular tax rate.
       The bill generally would provide for an inflation 
     adjustment to (i.e., indexing of) the adjusted basis of 
     certain assets for purposes of determining gain (but not 
     loss) upon a sale or other disposition of such assets by a 
     taxpayer other than a C corporation. To be eligible for 
     indexing, an asset must be held by the taxpayer for more than 
     three years.
       In addition, the bill would make certain modifications 
     related to the present-law exclusion for gain from certain 
     small business stock. The bill would repeal the minimum tax 
     preference applicable to such gain, increase the size of an 
     eligible corporation from gross assets of $50 million to 
     gross assets of $100 million, repeal the limitation on the 
     amount of gain an individual can exclude with respect to the 
     stock of any corporation, modify the working capital 
     requirements, and provide corporate taxpayers an alternative 
     rate of 21 percent on the gain from the sale or exchange of 
     qualified small business stock (other than stock of a 
     subsidiary corporation).
       The bill would provide that losses recognized by a taxpayer 
     on the sale of his or her personal residence may be deducted 
     as capital losses rather than be treated as nondeductible 
     personal losses.
       The changes generally would be effective for dispositions 
     occurring after December 31, 1996. In the case of the 
     indexing of the basis of assets, the bill would be effective 
     for dispositions occurring after December 31, 1996, with 
     respect to assets the holding period of which begins after 
     December 31, 1996.

               Estate and gift tax provisions (title III)

            Increases in Estate and Gift Tax Unified Credit

       The bill would increase ratably the present-law unified 
     estate and gift tax credit over an 8-year period beginning in 
     1997, from an effective exemption of $600,000 to an effective 
     exemption of $1,000,000. The full $1,000,000 effective 
     exemption would be available for decedents dying, and gifts 
     made, after December 31, 2003.

       Estate Tax Exclusion for Qualified Family-Owned Businesses

       The bill would provide special estate tax treatment for 
     qualified ``family-owned business interests'' if such 
     interests comprise more than 50 percent of a decedent's 
     estate. Subject to certain requirements, the bill would 
     exclude the first $1,500,000 in value of qualified family-
     owned business interests from the decedent's estate and would 
     also exclude 50 percent of the remaining value of qualified 
     family-owned business interests. In general, a qualified 
     family-owned business interest would be any nonpublicly-
     traded interest in a trade or business (regardless of

[[Page S186]]

     the form in which it is held) with a principal place of 
     business in the United States if ownership of the trade or 
     business is held at least 50 percent by one family, 70 
     percent by two families, or 90 percent by three families, as 
     long as the decedent's family owns at least 30 percent of the 
     trade or business. To qualify for the beneficial treatment, 
     the decedent (or a member of the decedent's family) must have 
     owned and materially participated in the trade or business 
     for at least five of the eight years preceding the decedent's 
     death, and each qualified heir (or a member of the qualified 
     heir's family) would be required to materially participate in 
     the trade or business for at least five years of each eight-
     year period ending within ten years after the decedent's 
     death.
       The provision would be effective for decedents dying after 
     December 31, 1996.

    Installment Payments of Estate Tax Attributable to Closely Held 
                                Business

       The bill would extend the period for which Federal estate 
     tax installments could be made under section 6166 to a 
     maximum period of 24 years. If the election were made, the 
     estate would pay only interest for the first four years, 
     followed by up to 20 annual installments of principal and 
     interest. Under the bill, there would be no interest imposed 
     on the amount of deferred estate tax attributable to the 
     first $1,000,000 in value of the closely held business. The 
     interest rate imposed on the amount of deferred estate tax 
     attributable to the value of the closely held business in 
     excess of $1,000,000 would remain as under present law (i.e., 
     the rate applicable to underpayments of tax under section 
     6621, which is the Federal short-term rate plus 3 percentage 
     points). The provision would be effective for decedents dying 
     after December 31, 1996.

                       IRA provisions (title IV)

             Restoration of IRA Deduction for All Taxpayers

       The bill would increase the AGI limits applicable to 
     deductible IRA contributions for active participants in 1997, 
     1998, 1999, and 2000. Thereafter, the bill would repeal the 
     limits on IRA deductions for active participants in employer-
     sponsored retirement plans. Thus, under the bill, after 2000, 
     an individual would be entitled to make a $2,000 deductible 
     IRA contribution without regard to whether the individual was 
     an active participant in an employer-sponsored retirement 
     plan. The bill would be effective for taxable years beginning 
     after December 31, 1996.

        Allow Full Spousal IRA Deduction for Nonworking Spouses

       The bill would permit nonworking spouses to make a full 
     deductible IRA contribution, effective for taxable years 
     beginning after December 31, 1996.

       Nondeductible Contributions to Tax-Free IRA Plus Accounts

       The bill would permit taxpayers to make nondeductible 
     contributions to new IRA Plus accounts. Generally, IRA Plus 
     accounts would be treated in the same manner as and be 
     subject to the same rules applicable to deductible IRAs.
       Under the bill, any qualified distribution from an IRA Plus 
     account would not be included in gross income and would not 
     be subject to the 10-percent additional income tax on early 
     withdrawals. A qualified distribution from an IRA Plus 
     account would include any payment or distribution (1) made on 
     or after the date the IRA Plus owner attains age 59\1/2\, (2) 
     made to a beneficiary of the IRA Plus owner after death, (3) 
     on account of disability of the IRA Plus owner, or (4) which 
     is a qualified special purpose distribution (i.e., a 
     distribution for medical expenses, the costs of starting a 
     business of the IRA Plus owner or the owner's spouse, long-
     term unemployment, and higher education expenses).
       The bill would permit amounts withdrawn from IRAs to be 
     transferred into an IRA Plus. The amount transferred would be 
     includible in gross income in the year the withdrawal was 
     made, except that amounts transferred to an IRA Plus before 
     January 1, 1999, would be includible in income rapidly over a 
     4-year period. The 10-percent early withdrawal tax would not 
     apply to amounts transferred from an IRA to an IRA Plus 
     account.
       The provisions of the bill relating to IRA Plus accounts 
     would be effective for taxable years beginning after December 
     31, 1996.

    Penalty-Free IRA Withdrawals for Starting a Business, Long-Term 
          Unemployment, and Post Secondary Education Expenses

       The bill would permit penalty-free and tax-free withdrawals 
     from an individual retirement arrangement (IRA) for starting 
     a business of the IRA owner, starting a business of the 
     spouse of the IRA owner, in the case of long-term 
     unemployment of the IRA owner, for any reason, and for the 
     post-secondary education expenses of the IRA owner, the 
     spouse of the IRA owner, or a dependent child of the IRA 
     owner or spouse. The provision would be effective for 
     distributions after December 31, 1996.


                      ii. description of the bill

        A. Child tax credit for children under age 18 (title I)

                              Present Law

       Present law does not provide tax credits based solely on 
     the taxpayer's number of dependent children. Taxpayers with 
     dependent children, however, generally are able to claim a 
     personal exemption for each of these dependents. The total 
     amount of personal exemptions is subtracted (along with 
     certain other items) from adjusted gross income (AGI) in 
     arriving at taxable income. The amount of each personal 
     exemption is $2,650 for 1997, and is adjusted annually for 
     inflation. In 1997, the amount of the personal exemption is 
     phased out for taxpayers with AGI in excess of $121,200 for 
     single taxpayers, $151,500 for heads of household, and 
     $181,800 for married couples filing joint returns. These 
     phaseout thresholds are adjusted annually for inflation.

                        Description of the Bill

       The bill would allow taxpayers a nonrefundable tax credit 
     of $500 for each qualifying child under the age of 18. The 
     credit amount would not be indexed for inflation.
       For taxpayers with AGI in excess of certain thresholds, the 
     allowable child credit would be reduced by $25 for each 
     $1,000 of AGI (or fraction thereof) in excess of the 
     threshold. For married taxpayers filing joint returns, the 
     threshold would be $110,000. For taxpayers filing single or 
     head of household returns, the threshold would be $75,000. 
     For married taxpayers filing separate returns, the threshold 
     would be $55,000. These thresholds would not be indexed for 
     inflation.

                             Effective Date

       The provision would be effective for taxable years 
     beginning after December 31, 1996.

                 B. Capital gains provisions (title II)

1. 50-Percent Capital Gains Deduction for Individuals (Sec. 201 of the 
                                 Bill)

                              Present Law

       In general, gain or loss reflected in the value of an asset 
     is not recognized for income tax purposes until a taxpayer 
     disposes of the asset. On the sale or exchange of capital 
     assets, the net capital gain is taxed at the same rate as 
     ordinary income, except that individuals are subject to a 
     maximum marginal rate of 28 percent of the net capital gain. 
     Net capital gain is the excess of the net long-term capital 
     gain for the taxable year over the net short-term capital 
     loss for the year. Gain or loss is treated as long-term if 
     the asset is held for more than one year.
       A capital asset generally means any property except (1) 
     inventory, stock in trade, or property held primarily for 
     sale to customers in the ordinary course of the taxpayer's 
     trade or business, (2) depreciable or real property used in 
     the taxpayer's trade or business, (3) specified literary or 
     artistic property, (4) business accounts or notes receivable, 
     or (5) certain U.S. publications. In addition, the net gain 
     from the disposition of certain property used in the 
     taxpayer's trade or business is treated as long-term capital 
     gain. However, gain is not treated as capital gain to the 
     extent of previous depreciation allowances (in the case of 
     real property, generally one to the extent in excess of the 
     allowances that would have been available under the straight-
     line method).
       Prior to the enactment of the Tax Reform Act of 1986, 
     individuals were allowed a deduction equal to 60 percent of 
     net capital gain. The deduction resulted in a maximum 
     effective tax rate of 20 percent on such gains.
       Capital losses are generally deductible in full against 
     capital gains. In addition, individuals may deduct capital 
     losses against up to $3,000 of ordinary income in each year. 
     Capital losses in excess of the amount deductible are carried 
     forward indefinitely. Prior to the Tax Reform Act of 1986, 
     individuals were required to use two dollars of long-term 
     capital loss to offset each dollar of ordinary income.

                        Description of the Bill

       The bill would allow individuals a deduction equal to 50 
     percent of net capital gain for the taxable year. The bill 
     would repeal the present-law maximum 28-percent rate. Thus, 
     under the bill, the effective rate under the regular tax on 
     the net capital gain of an individual in the highest (i.e., 
     39.6 percent) marginal rate bracket would be 19.8 percent.
       Collectibles would not be allowed the capital gains 
     deduction; instead a maximum rate of 28 percent would apply 
     to the gain of an individual from the sale or exchange of 
     collectibles held for more than one year.
       The bill would reinstate the rule in effect prior to the 
     1986 Tax Reform Act that required two dollars of the long-
     term capital loss of an individual to offset one dollar of 
     ordinary income. The $3,000 limitation on the deduction of 
     capital losses against ordinary income would continue to 
     apply.

                             Effective Date

       The provision would generally apply to taxable years ending 
     after December 31, 1996.
       For a taxpayer's taxable year that includes January 1, 
     1997, the 50-percent capital gains deduction would not apply 
     to any amount properly taken into account before January 1, 
     1997. In the case of gain taken into account by a pass-
     through entity (i.e., a RIC, a REIT, a partnership, an estate 
     or trust, or a common trust fund), the date taken into 
     account by the entity would be the appropriate date for 
     applying this rule.
       The capital loss rule would apply to taxable years 
     beginning after December 31, 1997, but would not apply to the 
     carryover of capital losses sustained in taxable years 
     beginning before January 1, 1998.
       The bill would not affect the capital gains treatment of 
     lump sum distributions grandfathered by the Tax Reform Act of 
     1986.

2. Indexing of Basis of Certain Assets for Purposes of Determining Gain 
                         (Sec. 202 of the Bill)

                              Present Law

       Under present law, gain or loss from the disposition of any 
     asset generally is the sales

[[Page S187]]

     price of the asset reduced by the taxpayer's adjusted basis 
     in that asset. The taxpayer's adjusted basis generally is the 
     taxpayer's cost in the asset adjusted for depreciation, 
     depletion, and certain other amounts. No adjustment is 
     allowed for inflation.

                        Description of the Bill

                               In general

       The bill generally would provide for an inflation 
     adjustment to (i.e., indexing of) the adjusted basis of 
     certain assets (called ``indexed assets'') for purposes of 
     determining gain (but not loss) upon a sale or other 
     disposition of such assets by a taxpayer other than a C 
     corporation. Assets held by trusts, estates, S corporations, 
     regulated investment companies (``RICs''), real estate 
     investment trusts (``REITs''), and partnerships are eligible 
     for indexing, to the extent gain on such assets is taken into 
     account by taxpayers other than C corporations.

                             Indexed assets

       Assets eligible for the inflation adjustment generally 
     would include common (but not preferred) stock of C 
     corporations and tangible property that are capital assets or 
     property used in a trade or business. To be eligible for 
     indexing, an asset must be held by the taxpayer for more than 
     three years.

                  Computation of inflation adjustment

       The inflation adjustment under the provision would be 
     computed by multiplying the taxpayer's adjusted basis in the 
     indexed asset by an inflation adjustment percentage. The 
     inflation adjustment percentage would be the percentage by 
     which the gross domestic product deflator for the last 
     calendar quarter ending before the disposition exceeds the 
     gross domestic product deflator for the last calendar quarter 
     ending before the asset was acquired by the taxpayer. The 
     inflation adjustment percentage would be rounded to the 
     nearest one-tenth of a percent. No adjustment would be made 
     if the inflation adjustment is one or less.

                            Special entities

                             RICs and REITs

       In the case of a RIC or a REIT, the indexing adjustments 
     generally would apply in computing the taxable income and the 
     earnings and profits of the RIC or REIT. The indexing 
     adjustments, however, would not be applicable in determining 
     whether a corporation qualifies as a RIC or REIT.
       In the case of shares held in a RIC or REIT, partial 
     indexing generally would be provided by the provision based 
     on the ratio of the value of indexed assets held by the 
     entity to the value of all its assets. The ratio of indexed 
     assets to total assets would be determined quarterly (for 
     RICs, the quarterly ratio would be based on a three-month 
     average). If the ratio of indexed assets to total assets 
     exceeds 80 percent in any quarter, full indexing of the 
     shares would be allowed for that quarter. If less than 20 
     percent of the assets are indexed assets in any quarter, no 
     indexing would be allowed for that quarter for the shares. 
     Partnership interests held by a RIC or REIT would be subject 
     to a look-through test for purposes of determining whether, 
     and to what degree, the shares in the RIC or REIT are 
     indexed.
       A return of capital distribution by a RIC or REIT generally 
     would be treated by a shareholder as allocable to stock 
     acquired by the shareholder in the order in which the stock 
     was acquired.

                  Partnership and S corporations, etc.

       Under the bill, stock in an S corporation or an interest in 
     a partnership or common trust fund would not be an indexed 
     asset. Under the provision, the individual owner would 
     receive the benefit of the indexing adjustment when the S 
     corporation, partnership, or common trust fund disposes of 
     indexed assets. Under the provision, any inflation 
     adjustments at the entity level would flow through to the 
     holders and result in a corresponding increase in the 
     basis of the holder's interest in the entity. Where a 
     partnership has a section 754 election in effect, a 
     partner transferring his interest in the partnership would 
     be entitled to any indexing adjustment that has accrued at 
     the partnership level with respect to the partner and the 
     transferee partner is entitled to the benefits of indexing 
     for inflation occurring after the transfer.
       The indexing adjustment would be disregarded in determining 
     any loss on the sale of an interest in a partnership, S 
     corporation or common trust fund.

                          Foreign corporations

       Common stock of a foreign corporation generally would be an 
     indexed asset if the stock is regularly traded on an 
     established securities market. Indexed assets, however, would 
     not include stock in a foreign investment company, a passive 
     foreign investment company (including a qualified electing 
     fund), a foreign personal holding company, or, in the hands 
     of a shareholder who meets the requirements of section 
     1248(a)(2) (generally pertaining to 10-percent shareholders 
     of controlled foreign corporations), any other foreign 
     corporation. An American Depository Receipt (ADR) for common 
     stock in a foreign corporation would be treated as common 
     stock in the foreign corporation and, therefore, the basis in 
     an ADR for common stock generally would be indexed.

                              Other rules

               Improvements and contributions to capital

       No indexing would be provided for improvements or 
     contributions to capital if the aggregate amount of the 
     improvements or contributions to capital during the taxable 
     year with respect to the property or stock is less than 
     $1,000. If the aggregate amount of such improvements or 
     contributions to capital is $1,000 or more, each addition 
     would be treated as a separate asset acquired at the close of 
     the taxable year.

                      Suspension of holding period

       No indexing adjustment would be allowed during any period 
     during which there is a substantial diminution of the 
     taxpayer's risk of loss from holding the indexed asset by 
     reason of any transaction entered into by that taxpayer, or a 
     related party.

                              Short sales

       In the case of a short sale of an indexed asset with a 
     short sale period in excess of three years, the bill would 
     require that the amount realized be indexed for inflation for 
     the short sale period.

                            Related parties

       The bill would not index the basis of property for sales or 
     dispositions between related persons, except to the extent 
     the adjusted basis of property in the hands of the transferee 
     is a substituted basis (e.g. gifts).

                        Collapsible corporations

       Under the bill, indexing would not reduce the amount of 
     ordinary gain that would be recognized in cases where a 
     corporation is treated as a collapsible corporation (under 
     Code sec. 341) with respect to a distribution or sale of 
     stock.

                             Effective Date

       The provision would apply to dispositions of property the 
     holding period of which begins after December 31, 1996. The 
     provision also would apply to a principal residence held by 
     the taxpayer on January 1, 1997 (as if the holding period 
     began on that date). An individual holding any indexed asset 
     (other than a personal residence) on January 1, 1997, may 
     elect to treat the indexed asset as having been sold and 
     reacquired for its fair market value.

             3. Small Business Stock (Sec. 203 of the Bill)

                              Present Law

       The Revenue Reconciliation Act of 1993 provided individuals 
     a 50-percent exclusion for the sale of certain small business 
     stock acquired at original issue and held for at least five 
     years. One-half of the excluded gain is a minimum tax 
     preference.
       The amount of gain eligible for the 50-percent exclusion by 
     an individual with respect to any corporation is the greater 
     of (1) ten times the taxpayer's basis in the stock or (2) $10 
     million.
       In order to qualify as a small business, when the stock is 
     issued, the gross assets of the corporation may not exceed 
     $50 million. The corporation also must meet an active trade 
     or business requirement.

                        Description of the Bill

       Under the bill, the maximum rate of regular tax on the 
     qualifying gain from the sale of small business stock by a 
     taxpayer other than a corporation would remain at 14 percent. 
     The minimum tax preference would be repealed.
       The bill would increase the size of an eligible corporation 
     from gross assets of $50 million to gross assets of $100 
     million. The bill would also repeal the limitation on the 
     amount of gain an individual can exclude with respect to the 
     stock of any corporation.
       The bill would provide that certain working capital must be 
     expended within 5 years (rather than two years) in order to 
     be treated as used in the active conduct of a trade or 
     business. No limit on the percent of the corporation's assets 
     that are working capital would be imposed.
       The bill would provide that if the corporation establishes 
     a business purpose for a redemption of its stock, the 
     redemption is disregarded in determining whether other newly 
     issued stock could qualify as eligible stock.

                             Effective Date

       The increase in the size of corporations whose stock is 
     eligible for the exclusion would apply to stock issued after 
     the date of the enactment of the bill. The remaining 
     provisions would apply to stock issued after August 10, 1993 
     (the original effective date of the small business stock 
     provision).

4. 28-Percent Corporate Alternative Tax for Capital Gains (Sec. 204 of 
                               the Bill)

                              Present Law

       Under present law, the net capital gain of a corporation is 
     taxed at the same rate as ordinary income, and subject to tax 
     at graduated rates up to 35 percent. Prior to the Tax Reform 
     Act of 1986, the net capital gain of a corporation was 
     subject to a maximum effective tax rate of 28 percent.

                        Description of the Bill

       The bill would provide an alternative tax of 28 percent on 
     the net capital gain of a corporation if that rate is less 
     than the corporation's regular tax rate.
       The bill would also provide an alternative rate of 21 
     percent on the gain from the sale or exchange of qualified 
     small business stock (other than stock of a subsidiary 
     corporation) held more than 5 years.

                             Effective Date

       The provision would generally apply to taxable years ending 
     after December 31, 1996. For a taxable year which includes 
     January 1, 1997, the 28-percent rate would apply to the 
     lesser of (1) the net capital gain for the taxable year or 
     (2) the net capital gain taking into account only gain or 
     loss properly taken into account for the portion of the 
     taxable year after December 31, 1996.

[[Page S188]]

       The small business stock provision would apply to stock 
     issued after the date of enactment.

   5. Capital Loss Deduction on the Sale or Exchange of a Principal 
                    Residence (Sec. 205 of the Bill)

                              Present Law

       Under present law, the sale or exchange of a principal 
     residence is treated as a nondeductible personal loss.

                        Description of the Bill

       The bill would provide that a loss from the sale or 
     exchange of a principal residence would be treated as a 
     deductible capital loss.

                             Effective Date

       The provision would apply to sales and exchanges after 
     December 31, 1996.

             C. Estate and gift tax provisions (title III)

 1. Increase Estate and Gift Tax Unified Credit (Sec. 301 of the Bill)

                              Present Law

       A unified credit is available with respect to taxable 
     transfers by gift and at death. Since 1987, the unified 
     credit amount has been fixed at $192,800, which effectively 
     exempts a total of $600,000 in cumulative taxable transfers 
     from the estate and gift tax. The benefits of the unified 
     credit (and the graduated estate and gift tax rates) are 
     phased out by a 5-percent surtax imposed upon cumulative 
     taxable transfers over $10 million and not exceeding 
     $21,040,000.\2\
---------------------------------------------------------------------------
     \2\ Thus, if a taxpayer has made cumulative taxable transfers 
     exceeding $21,040,000, his or her effective transfer tax rate 
     is 55 percent under present law.
---------------------------------------------------------------------------
       The unified credit was originally enacted in the Tax Reform 
     Act of 1976. The unified credit has not been increased since 
     1987.

                        Description of the Bill

       The bill would increase the present-law unified credit over 
     an eight-year period beginning in 1997, from an effective 
     exemption of $600,000 to an effective exemption of 
     $1,000,000. The increase would be phased in as follows:


                       Decedents Dying and Gifts


        Made in                                     Effective exemption
1997...........................................................$650,000
1998............................................................700,000
1999............................................................750,000
2000............................................................800,000
2001............................................................850,000
2002............................................................900,000
2003............................................................950,000
2004 and thereafter...........................................1,000,000

       Conforming amendments to reflect the increased unified 
     credit are made (1) to the general filing requirements for an 
     estate tax return under section 6018(a), and (2) to the 
     amount of the unified credit allowed under section 2102(c)(3) 
     with respect to nonresident aliens with U.S. situs property 
     who are residents of certain treaty countries.

                             Effective Date

       The provision would apply to the estates of decedents 
     dying, and gifts made, after December 31, 1996.

2. Estate Tax Exclusion for Qualified Family-Owned Businesses (Sec. 302 
                              of the Bill)

                              Present Law

       There are no special estate tax rules for qualified family-
     owned businesses. All taxpayers are allowed a unified credit 
     in computing the taxpayer's estate and gift tax, which 
     effectively exempts a total of $600,000 in cumulative taxable 
     transfers from the estate and gift tax (sec. 2010). An 
     executor also may elect, under section 2032A, to value 
     certain qualified real property used in farming or another 
     qualifying closely-held trade or business at its current use 
     value, rather than its highest and best use value (up to a 
     maximum reduction of $750,000). In addition, an executor may 
     elect to pay the Federal estate tax attributable to a 
     qualified closely-held business in installments over, at 
     most, a 14-year period (sec. 6166). The tax attributable to 
     the first $1,000,000 in value of a closely-held business is 
     eligible for a special 4-percent interest rate (sec. 
     6601(j)).

                        Description of the Bill

       The bill would provide special estate tax treatment for 
     qualified ``family-owned business interests'' if such 
     interests comprise more than 50 percent of a decedent's 
     estate. Subject to certain requirements, the bill would 
     exclude the first $1.5 million of value in qualified family-
     owned business interests from a decedent's estate, and also 
     would exclude 50 percent of the remaining value of qualified 
     family-owned business interests. This new exclusion for 
     qualified family-owned business interests would be provided 
     in addition to the unified credit.
       A qualified family-owned business interest would be defined 
     as any interest in a trade or business (regardless of the 
     form in which it is held) with a principal place of business 
     in the United States if one family owns at least 50 percent 
     of the trade or business, two families own 70 percent, or 
     three families own 90 percent, as long as the decedent's 
     family owns at lest 30 percent of the trade or business. An 
     interest in a trade or business would not qualify if any 
     interest in the business (or a related entity) was publicly-
     traded at any time within three years of the decedent's 
     death. An interest in a trade or business also would not 
     qualify if more than 35 percent of the adjusted ordinary 
     gross income of the business for the year of the decedent's 
     death was personal holding company income (as defined in sec. 
     543). In the case of a trade or business that owns an 
     interest in another trade or business (i.e., ``tiered 
     entities''), special look-through rules would apply. The 
     value of a trade or business qualifying as a family-owned 
     business interest would be reduced to the extent the business 
     holds passive assets or excess cash or marketable securities.
       To qualify for the beneficial treatment provided under the 
     bill the decedent (or a member of the decedent's family) must 
     have owned and materially participated in the trade or 
     business for at least five of the eight years preceding the 
     decedent's date of death. In addition, each qualified heir 
     (or a member of the qualified heir's family) would be 
     required to materially participate in the trade or business 
     for at least five years of each eight-year period ending 
     within ten years following the decedent's death.
       The benefit of the exclusion for qualified family-owned 
     business interests would be subject to recapture if, within 
     10 years of the decedent's death and before the qualified 
     heir's death, one of the following ``recapture events'' 
     occurs: (1) the qualified heir ceases to meet the material 
     participation requirements; (2) the qualified heir disposes 
     of any portion of his or her interest in the family-owned 
     business, other than by a disposition to a member of the 
     qualified heir's family or through a qualified conservation 
     contribution; (3) the principal place of business of the 
     trade or business ceases to be located in the United States; 
     or (4) the qualified heir loses U.S. citizenship.
       The portion of the reduction in estate taxes that is 
     recaptured would depend upon the number of years that the 
     qualified heir (or members of the qualified heir's family) 
     materially participated in the trade or business between the 
     date of the decedent's death and the date of the recapture 
     event. If the qualified heir (or his or her family members) 
     materially participated in the trade or business after the 
     decedent's death for less than six years, 100 percent of the 
     reduction in estate taxes attributable to that heir's 
     interest would be recaptured; if the participation was for at 
     least six years but less than seven years, 80 percent of the 
     reduction in estate taxes would be recaptured; if the 
     participation was for at least seven years but less than 
     eight years, 60 percent would be recaptured; if the 
     participation was for at least eight years but less than nine 
     years, 40 percent would be recaptured; and if the 
     participation was for at least nine years but less than ten 
     years, 20 percent of the reduction in estate taxes would be 
     recaptured. In general, there would be no requirement that 
     the qualified heir (or members of his or her family) continue 
     to hold or participate in the trade or business more than 10 
     years after the decedent's death. As under present-law 
     section 2032A, however, the 10-year recapture period could be 
     extended for a period of up to two years if the qualified 
     heir did not begin to use the property for a period of up to 
     two years after the decedent's death.
       In addition, the bill would coordinate the benefit for 
     qualified family-owned business interests with the present-
     law benefits relating to special-use valuation (sec. 2032A) 
     and the special 4-percent interest rate available for 
     closely-held businesses (sec. 6601(j)). The bill would 
     provide that any amount excluded from a decedent's estate 
     under the qualified family-owned business provision would 
     reduce the ceilings with respect to both section 2032A and 
     section 6601(j). Thus, for example, if a decedent had 
     $100,000 of qualified family-owned business interests, the 
     entire value of his qualified family-owned business property 
     would be excluded from the estate; if the decedent's estate 
     also qualified for treatment under 2032A or 6601(j), the 
     executor could take a maximum reduction under section 2032A 
     of $650,000 (i.e., $750,000 less $100,000), and/or could use 
     the special 4-percent rate provided in section 6601(j) with 
     respect to the Federal estate tax liability attributable to 
     the first $900,000 in value of a qualifying business (i.e., 
     $1,000,000 less $100,000).

                             Effective Date

       The provision would be effective with respect to the 
     estates of decedents dying after December 31, 1996.

  3. Installment Payments of Estate Tax Attributable to Closely Held 
                 Businesses (Secs. 303-304 of the Bill)

                              Present Law

       In general, the Federal estate tax is due within nine 
     months of a decedent's death. Under Code section 6166, an 
     executor generally may elect to pay the estate tax 
     attributable to an interest in a closely held business in 
     installments over, at most, a 14-year period. If the election 
     is made, the estate may pay only interest for the first four 
     years, followed by up to 10 annual installments of principal 
     and interest. Interest generally is imposed at the rate 
     applicable to underpayments of tax under section 6621 (i.e., 
     the Federal short-term rate plus 3 percentage points). Under 
     section 6601(j), however, a special 4-percent interest rate 
     applies to the amount of deferred estate tax attributable to 
     the first $1,000,000 in value of the closely-held business.
       To qualify for the installment payment election, the 
     business must be an active trade or business and the value of 
     the decedent's interest in the closely held business must 
     exceed 35 percent of the decedent's adjusted gross estate. An 
     interest in a closely held business includes: (1) any 
     interest as a proprietor in a business carried on as a 
     proprietorship; (2) any interest in a partnership carrying on 
     a trade or business if the partnership has 15 or fewer 
     partners, or if at least

[[Page S189]]

     20 percent of the partnership's assets are included in 
     determining the decedent's gross estate; or (3) stock in a 
     corporation if the corporation has 15 or fewer shareholders, 
     of if at least 20 percent of the value of the voting stock is 
     included in determining the decedent's gross estate.

                        Description of the Bill

       The bill would extend the period for which Federal estate 
     tax installments could be made under section 6166 to a 
     maximum period of 24 years. If the election were made, the 
     estate could pay only interest for the first four years, 
     followed by up to 20 annual installments of principal and 
     interest. Under the bill, there would be no interest imposed 
     on the amount of deferred estate tax attributable to the 
     first $1,000,000 in value of the closely held business. The 
     interest rate imposed on the amount of deferred estate tax 
     attributable to the value of the closely held business in 
     excess of $1,000,000 would remain as under present law (i.e., 
     the Federal short-term rate plus 3 percentage points).

                             Effective Date

       The provision would be effective for decedents dying after 
     December 31, 1996.

                      D. IRA provisions (title IV)

  1. Restoration of IRA Deduction for All Taxpayers (Sec. 401 of the 
                                 Bill)

                              Present Law

       Under present law, under certain circumstances, an 
     individual is allowed to deduct contributions up to the 
     lesser of $2,000 or 100 percent of the individual's 
     compensation (or earned income) to an individual retirement 
     arrangement (IRA). The amounts held in an IRA, including 
     earnings on contributions, generally are not included in 
     taxable income until withdrawn.
       The $2,000 deduction limit is phased out over certain 
     adjusted gross income (AGI) levels if the individual or the 
     individual's spouse is an active participant in an employer-
     sponsored retirement plan. The phaseout is between $25,000 
     and $35,000 of AGI for single taxpayers and between $40,000 
     and $50,000 of AGI for married taxpayers. There is no 
     phaseout of the deduction limit if the individual and the 
     individual's spouse are not active participants in an 
     employer-sponsored retirement plan.

                        Description of the Bill

       The bill would increase the AGI limits applicable to 
     deductible IRA contributions for active participants in 1997, 
     1998, 1999, and 2000. Thereafter, the bill would repeal the 
     limits on IRA deductions for active participants in employer-
     sponsored retirement plans. Thus, under the bill, after 2000, 
     an individual would be entitled to make a $2,000 deductible 
     IRA contribution without regard to whether the individual was 
     an active participant in an employer-sponsored retirement 
     plan.
       In the case of married taxpayers filing a joint return, for 
     years before 2001, the IRA deduction for active participants 
     would be phased out between the following AGI amounts: for 
     1997, $65,000 and $75,000; for 1998, $90,000 and $100,000; 
     for 1999, $115,000 and $125,000; and for 2000, $140,000 and 
     $150,000.
       In the case of single taxpayers, for years before 2001, the 
     IRA deduction for active participants would be phased out 
     between the following AGI amounts: for 1997, $50,000 and 
     $60,000; for 1998, $75,000 and $85,000; for 1999, $100,000 
     and $110,000; and for 2000, $125,000 and $135,000.
       The bill would provide that the IRA deduction limit for any 
     individual is coordinated with the limit on elective 
     deferrals. Thus, an individual's deductible contributions to 
     an IRA and elective deferrals could not exceed the annual 
     limit on elective deferrals.

                             Effective Date

       The provision would be effective for taxable years 
     beginning after December 31, 1996.

    2. Deductible IRAs for Nonworking Spouses (Sec. 402 of the Bill)

                              Present Law

       Within limits, an individual is allowed a deduction for 
     contributions to an individual retirement arrangement 
     (``IRA''). An individual generally is not subject to income 
     tax on amounts held in an IRA, including earnings on 
     contributions, until the amounts are withdrawn from the IRA.
       The maximum deductible contribution that can be made to an 
     IRA generally is the lesser of $2,000 or 100 percent of an 
     individual's compensation (earned income in the case of a 
     self-employed individual). In the case of a married 
     individual, a deductible contribution of up to $2,000 may be 
     made for each spouse (including, for example, a homemaker who 
     does not work outside the home) if the combined compensation 
     of both spouses is at least equal to the contributed amount.
       The maximum permitted IRA deduction is phased out if the 
     individual (or the individual's spouse) is an active 
     participant in an employer-sponsored retirement plan. The 
     phase-out range is from $25,000 to $35,000 of adjusted gross 
     income for single taxpayers and from $40,000 to $50,000 for 
     married taxpayers filing a joint return.

                        Description of the Bill

       Under the bill, an individual would not be considered an 
     active participant in an employer-sponsored retirement plan 
     merely because the individual's spouse is such an active 
     participant. Thus, the bill would permit a nonworking spouse 
     to make a deductible IRA contribution of up to $2,000 without 
     regard to the present-law income phaseouts.

                             Effective Date

       The provision would be effective for taxable years 
     beginning after December 31, 1996.

3. Nondeductible Contributions to Tax-Free IRA Plus Accounts (Sec. 403 
                              of the Bill)

                              Present Law

       Under present law, under certain circumstances, an 
     individual is allowed to deduct contributions up to the 
     lesser of $2,000 or 100 percent of the individual's 
     compensation (or earned income) to an individual retirement 
     arrangement (IRA). The amounts held in an IRA, including 
     earnings on contributions, generally are not included in 
     taxable income until withdrawn.
       An individual may make nondeductible contributions (up to 
     the $2,000 or 100 percent of compensation limit) to an IRA to 
     the extent the individual is not permitted to make deductible 
     IRA contributions. Nondeductible contributions provide the 
     same tax benefits as deferred annuities, that is, earnings 
     are not includible in income until withdrawn. However, 
     deferred annuities are not subject to contribution limits.
       Distributions from IRAs are generally includible in income 
     when withdrawn. Distributions prior to death, disability, or 
     attainment of age 59\1/2\ are subject to an additional 10-
     percent tax. The 10-percent tax does not apply to 
     distributions made in the form of an annuity.

                        Description of the Bill

       The bill would permit taxpayers to make nondeductible 
     contributions to new IRA Plus accounts. Generally, IRA Plus 
     accounts would be treated in the same manner as and be 
     subject to the same rules applicable to deductible IRAs. 
     However, a number of special rules would apply.
       Contributions to an IRA Plus would be nondeductible. The 
     amount of nondeductible contributions to an IRA Plus that 
     could be made for any taxable year would be tied to the 
     limits for deductible IRAs, so that the aggregate amount of 
     contributions to an IRA Plus could not exceed the excess of 
     (1) the IRA deduction limit for the year (determined without 
     regard to the rule coordinating the IRA deduction limit with 
     the elective deferral limit) over (2) the amount of IRA 
     contributions actually deducted for the year.
       Under the bill, any qualified distribution from an IRA Plus 
     account would not be included in gross income and would not 
     be subject to the 10-percent additional income tax on early 
     withdrawals. A qualified distribution from an IRA Plus would 
     include any payment or distribution (1) made on or after the 
     date the IRA Plus owner attains age 59\1/2\, (2) made to a 
     beneficiary of the IRA Plus owner after death, (3) on account 
     of disability of the IRA Plus owner, or (4) which is a 
     qualified special purpose distribution (i.e., a distribution 
     for medical expenses; the costs of starting a business of the 
     IRA Plus owner or the owner's spouse, long-term unemployment, 
     and higher education expenses)
       The bill provides that a distribution would not be treated 
     as a qualified distribution if it is made within the 5-
     taxable year period beginning with the first 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). In addition, the bill provides that a 
     distribution would not be treated as a qualified distribution 
     if, in the case of a distribution attributable to a qualified 
     rollover contribution, the distribution is made within the 5-
     taxable year period beginning with the taxable year in which 
     the rollover contribution was made.
       In the case of a distribution from an IRA Plus account that 
     is not a qualified distribution, in applying the rules of 
     section 72, the distribution would 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. Thus, nonqualified 
     distributions from an IRA Plus account would not be included 
     in income (and subject to the additional 10-percent tax on 
     early withdrawals) until the IRA owner had withdrawn amounts 
     in excess of all contributions to the IRA Plus account.
       Rollover contributions would be permitted to an IRA Plus 
     only to the extent such contributions consist of a payment or 
     distribution from another IRA Plus or from an individual 
     retirement plan. Such rollover contributions would not be 
     taken into account in determining the contribution limit for 
     a taxable year. The normal IRA rollover rules would otherwise 
     govern the eligibility of withdrawals from IRA Plus accounts 
     to be rolled over.
       The bill would permit amounts withdrawn from IRAs to be 
     transferred into an IRA Plus. The amount transferred would be 
     includible in gross income in the year the withdrawal was 
     made, except that amounts transferred to an IRA Plus before 
     January 1, 1999, would be includible in income ratably over a 
     4-year period. The 10-percent early withdrawal tax would not 
     apply to amounts transferred from an IRA to an IRA Plus 
     account.
       Under the bill, the excise tax on excess distributions from 
     qualified retirement plans (sec. 4980A) would not apply to 
     distributions from the IRA Plus account or to any qualified 
     rollover contribution from an individual retirement plan to 
     an IRA Plus account.

                             Effective Date

       The provisions of the bill relating to IRA Plus accounts 
     would be effective for taxable years beginning after December 
     31, 1996.

[[Page S190]]

 4. IRA Withdrawals for Business Startup, Long-Term Unemployment, and 
     Post-Secondary Education Expenses (Secs. 404-406 of the Bill)

                              Present Law

       Amounts withdrawn from an individual retirement arrangement 
     (``IRA'') are includible in income (except to the extent of 
     any nondeductible contributions). In addition, a 10-percent 
     additional tax applies to withdrawals from IRAs made before 
     age 59\1/2\, unless the withdrawal is made on account of 
     death or disability or is made in the form of annuity 
     payments or is made for medical expenses that exceed 7.5 
     percent of adjusted gross income (``AGI'') or is made for 
     medical insurance (without regard to the 7.5 percent of AGI 
     floor) if the individual has received unemployment 
     compensation for at least 12 weeks, and the withdrawal is 
     made in the year such unemployment compensation is received 
     or the following year. If a self-employed individual is not 
     eligible for unemployment compensation under applicable law, 
     then, to the extent provided in regulations, a self-employed 
     individual is treated as having received unemployment 
     compensation for at least 12 weeks if the individual would 
     have received unemployment compensation but for the fact that 
     the individual was self-employed. The exception to the 
     additional tax ceases to apply if the individual has been 
     reemployed for at least 60 days.

                        Description of the Bill

       The bill would permit withdrawals to be made income tax 
     free and exempt from the 10-percent additional tax if made 
     (1) for the business start-up expenses of the individual or 
     the spouse of the individual; (2) in the event of long-term 
     unemployment, for any reason; or (3) for the post-secondary 
     education expenses of the individual, the spouse of the 
     individual, or a dependent child of the individual or the 
     individual's spouse.
       For purposes of this provision, business start-up expenses 
     include expenses associated with the establishment of the 
     business that are incurred on or before the business start 
     date and on or before the date which is one year after the 
     business start date, such as start-up expenditures within the 
     meaning of section 195(c), organizational expenses within the 
     meaning of sections 248(b) and 709(b) and other expenses 
     related to starting a business (e.g., purchasing a computer, 
     software, inventory, etc.). No deduction otherwise allowable 
     with respect to any business start-up expense will be allowed 
     to the extent this provision applies to such expense. In 
     addition, to the extent this provision applies to any portion 
     of business start-up expenses which are properly chargeable 
     to capital account, the basis of the property to which such 
     expenses are chargeable will be reduced by the amount taken 
     into account under this provision.
       For purposes of this provision, long-term unemployment has 
     the same meaning as under present law (i.e., the individual 
     has received unemployment compensation for at least 12 
     weeks).
       For purposes of this provision, post-secondary education 
     expenses would be defined as the student's cost of attendance 
     as defined in section 472 of the Higher Education Act of 1965 
     (generally, tuition, fees, room and board, and related 
     expenses).

                             Effective Date

       The provision would be effective for distributions after 
     December 31, 1996.
                                 ______